(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto.
Business Overview and Highlights
We are one of the world's leading pure-play infusion therapy companies with global operations and a wide-ranging product portfolio that includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and nondedicated 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 system transfer devices for preparing and administering hazardous IV drugs and cardiac monitoring systems for critically ill patients.
Acquisition of Smiths Medical 2020 Limited
During September 2021, we entered into a definitive agreement to acquire Smiths Medical 2020 Limited ("Smiths Medical"), the holding company of Smiths Group plc's global medical device business and, on January 6, 2022, the acquisition closed for a purchase price of $1.9 billion in cash, 2.5 million of fully paid and non-assessable shares of our common stock, par value $0.10 per share and a potential contingent earn-out payment of $100.0 million in cash, based on our common stock performance and other considerations. Results of operations of acquired companies are included in our consolidated financial results from the date of acquisition; accordingly, Smiths Medical will be consolidated beginning in the first quarter of 2022.
To partially finance the acquisition, on January 6, 2022 we entered into a credit agreement with Wells Fargo Bank, National Association and other lenders. The credit agreement provides for $2.2 billion of Senior Secured Credit Facilities, including a term loan A facility of $850.0 million, a term loan B facility of $850.0 million and a revolving credit facility of $500.0 million. See "Liquidity and Capital Resources" in the remainder of this item and Note 17 in our accompanying consolidated financial statements for additional information.
The novel coronavirus and its variants ("COVID-19") continues to have an impact on our business operations. Our manufacturing, distribution and pump service facilities continue to operate under our business continuity plan and our precautionary safety measures implemented to maximize the safety of our employees and to mitigate disruption to our business remain in effect.
While we continually monitor the ongoing and evolving impact of the effect of the COVID-19 pandemic on our operations the overall impact will not be fully reflected in our results of operations until future periods. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be fully predicted at this time, as such, the impact of the pandemic on our overall financial performance remains uncertain and cannot as yet be quantified. See "Part I. Item 1A. Risk Factors" for discussion of the risks and uncertainties associated with the COVID-19 pandemic.
Consolidated Results of Operations
The following table summarizes our total worldwide revenue by domestic and international markets by amount and as a percentage of total revenue (in millions, except percentages):
Year Ended December 31, 2021 2020 2019 $ % of Revenue $ % of Revenue $ % of Revenue Domestic $ 941.8 72 % $ 910.6 72 % $ 923.3 73 % International 374.5 28 % 360.4 28 % 342.9 27 % Total Revenue $ 1,316.3 100 % $ 1,271.0 100 % $ 1,266.2 100 %
The following table sets forth, for the periods indicated, total revenue by product line as a percentage of total revenue:
Year Ended December 31, Product line 2021 2020 2019 Infusion Consumables 42 % 37 % 37 % Infusion Systems 27 % 28 % 26 % IV Solutions 27 % 31 % 33 % Critical Care 4 % 4 % 4 % 100 % 100 % 100 %
As of December 31, 2021, we manage our product distribution in the U.S. through a network of two owned and one leased distribution facilities in combination with independent distributors and third-party fulfillment and logistics providers. Our end customers, which include healthcare providers and original equipment manufacturer suppliers, may order and receive our products directly from us or through an independent full-line distributor. Internationally, we manage distribution utilizing international regional hubs and through independent distributors.
In the U.S. a substantial amount of our products are sold to group purchasing organization ("GPO") 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 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.
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 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.
We present income statement data in Item 8. Financial Statements and Supplementary 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 2021 2020 2019 Total revenues 100 % 100 % 100 % Gross profit 37 % 36 % 37 % Selling, general and administrative expenses 23 % 22 % 22 % Research and development expenses 4 % 3 % 4 % Restructuring, strategic transaction and integration expenses 1 % 2 % 6 % Change in fair value of contingent earn-out - % 1 % (4) % Contract settlement - % - % - % Total operating expenses 28 % 28 % 28 % Income from operations 9 % 8 % 9 % Interest expense - % - % - % Other income, net - % - % 1 % Income before income taxes 9 % 8 % 10 % Provision for income taxes 1 % 1 % 1 % Net income 8 % 7 % 9 %
Total revenues were $1.3 billion, $1.3 billion and $1.3 billion for 2021, 2020 and 2019, respectively.
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. 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.
The following table summarizes our total Infusion Consumables revenue (in millions, except percentages):
Year Ended December 31, $ change % change $ change % change 2021 2020 2019 2021 over 2020 2020 over 2019 Infusion Consumables $ 555.2 $ 473.7 $ 477.6 $ 81.5 17.2 % $ (3.9) (0.8) %
Infusion Consumables revenue increased in 2021, as compared to 2020. The increase was due to lower hospital census in 2020 driven by the onset of the COVID-19 pandemic, growth in our global oncology, U.S. core infusion and renal products
and the impact from foreign exchange. On a constant currency basis, Infusion Consumables revenue would have been $546.3 million, an increase of $72.6 million or 15.3%, as compared to 2020.
Infusion Consumables revenue decreased in 2020, as compared to 2019. The decrease was mostly driven by overall lower demand for our products due to the COVID-19 pandemic, partially offset by sales from new customers and sales of our ClearGuard HD product, which we acquired in our fourth quarter 2019 acquisition of Pursuit. On a constant currency basis, Infusion Consumables revenue was comparable at $474.0 million for 2020, as the full year impact of foreign currency was negligible.
The following table summarizes our total Infusion Systems revenue (in millions, except percentages):
Year Ended December 31, $ change % change $ change % change 2021 2020 2019 2021 over 2020 2020 over 2019 Infusion Systems $ 352.3 $ 359.7 $ 328.3 $ (7.4) (2.1)% $ 31.4 9.6%
Infusion Systems revenue decreased in 2021, as compared to 2020. The decrease was primarily due to large volume pump sales driven by higher COVID-19-related purchases during the second and third quarters of 2020 and a decline in sales of our non-large volume pump business, which has been partially offset by higher dedicated set sales in 2021 as a result of higher hospital census and larger install base of large volume pump from new customer installations. On a constant currency basis, Infusion Systems revenue in 2021 would have been $351.4 million, a decrease of $8.3 million or 2.3%, as compared to 2020.
Infusion Systems revenue increased in 2020, as compared to 2019. The increase in revenue was primarily due to high demand for our infusion pumps during the COVID-19 pandemic, offset partially by lower demand for our dedicated infusion sets and losses of our non-core ambulatory pump business. On a constant currency basis Infusion Systems revenue in 2020 would have been $364.7 million, an increase of $36.4 million or 11.1%, as compared to 2019.
The following table summarizes our total IV Solutions revenue (in millions, except percentages):
Year Ended December 31, $ change % change $ change % change 2021 2020 2019 2021 over 2020 2020 over 2019 IV Solutions $ 359.5 $ 389.0 $ 415.0 $ (29.5) (7.6)% $ (26.0) (6.3)%
IV Solutions sales decreased in 2021, as compared to 2020, primarily due to lower contract manufacturing sales to Pfizer and lower production volumes due to supply constraints in the market.
IV Solutions sales decreased in 2020, as compared to 2019, due to lower contract manufacturing sales to Pfizer and higher sales in the first quarter of 2019 to non-contracted customers.
The following table summarizes our total Critical Care revenue (in millions, except percentages):
Year Ended December 31, $ change % change $ change % change 2021 2020 2019 2021 over 2020 2020 over 2019 Critical Care $ 49.3 $ 48.6 $ 45.3 $ 0.7 1.4 % $ 3.3 7.3 %
Critical Care revenue increased for 2021, as compared to 2020 due primarily to higher U.S. hospital census as a result of the COVID-19 pandemic.
Critical Care revenue increased in 2020, as compared to 2019, primarily as a result of growth in the Asia region and improved manufacturing capacity.
Gross margins were 37.3%, 36.3% and 37.3% for 2021, 2020 and 2019, respectively.
The increase in gross margin in 2021, as compared to 2020 was primarily due to product mix and increased plant volumes, partially offset by increased costs for raw materials, direct labor and freight.
The decrease in gross margin in 2020, as compared to 2019 was primarily due to lower IV Solutions manufacturing volumes and unfavorable product mix as a result of lower demand for our consumables products during the COVID-19 pandemic.
Selling, General and Administrative ("SG&A") Expenses
The following table summarizes our SG&A expenses (in millions, except percentages):
Year Ended December 31, $ change % change $ change % change 2021 2020 2019 2021 over 2020 2020 over 2019 SG&A $ 302.6 $ 284.0 $ 277.0 $ 18.6 6.5 % $ 7.0 2.5 %
Consolidated SG&A expenses increased in 2021, as compared to 2020. Compensation expense increased $7.9 million, dealer fees increased $5.7 million, stock compensation increased $2.9 million, legal expenses increased $2.3 million and computer expenses increased $1.5 million. Offsetting these increases was a $2.3 million decrease in bad debt expense and $1.6 million decrease in commissions. Compensation expense increased primarily due to increased headcount and annual compensation merit increases. Dealer fees increased due to an increase in revenue from U.S. distributors in the current year. Stock compensation increased due to a change during the current year in the number of performance shares expected to vest. Legal fees increased due to additional services performed in the current year related to various legal matters. Computer expenses increased due to increased maintenance costs as well as increased hardware, software and software subscriptions based on operational needs. Bad debt expense is adjusted quarterly, if deemed necessary, based on an assessment of our accounts receivables and our expectations regarding the collectability of those accounts. Commissions decreased due to the commission plan structure in the prior year, which included certain guaranteed payments.
Consolidated SG&A expenses increased in 2020, as compared to 2019. Dealer fees increased $9.3 million, depreciation and amortization expense increased $7.1 million, compensation expense increased $5.5 million, and stock compensation increased $2.0 million. Offsetting these expense increases was a $6.3 decrease in bad debt expense, a $6.3 million decrease in travel expenses, a $3.7 million decrease in consulting expenses, and a $2.8 million decrease in sales and marketing expenses. Dealer fees increased due to a change to a distribution model from a direct model in Canada and an increase in revenue from distributors. Depreciation and amortization expense increased primarily as a result of the increase in amortization base due to the November 2019 acquisition of Pursuit. Compensation expense increased as a result of lower incentive compensation recognized in the prior year due to results below performance targets. Stock compensation increased in the current year due to a change in the number of performance shares estimated to vest on one of our non-executive performance awards. Bad debt expense is estimated based on an analysis of the expected losses on the accounts receivables at the reporting date, which varies from period-to-period due to the quality of those receivables. Travel expenses decreased in the current year, as compared to prior year, due to travel restrictions in response to COVID-19. Consulting expense was higher in 2019 due to charges incurred related to tax compliance and IT infrastructure expenses. Sales and marketing expenses decreased due to the impact of COVID-19 on trade shows, conferences, and related expenses.
Research and Development ("R&D") Expenses
The following table summarizes our total R&D expenses (in millions, except percentages):
Year Ended December 31, $ change % change $ change % change 2021 2020 2019 2021 over 2020 2020 over 2019 R&D $ 47.5 $ 42.9 $ 48.6 $ 4.6 10.7 % $ (5.7) (11.7) %
R&D expenses increased in 2021, as compared to 2020, and decreased in 2020, as compared to 2019. Fluctuations in our R&D expenses are due to the timing and nature of various R&D projects. R&D expenses are primarily related to compensation and benefit expenses, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs incurred on our R&D projects in progress during each year.
Restructuring, Strategic Transaction and Integration Expenses
Restructuring, strategic transaction and integration expenses were $18.0 million, $28.4 million and $80.6 million in 2021, 2020 and 2019, respectively.
In 2021, we adjusted certain facility restructuring liabilities by $2.0 million to reflect actual amounts owed resulting in annual net restructuring credits of $(1.8) million.
In 2020, restructuring charges were $7.9 million. These charges were primarily related to severance and costs related to office and other facility closures.
In 2019, restructuring charges were $8.4 million. These charges were primarily related to a one-time charge to move our U.S. pump service depot to our existing Salt Lake City facility and other plant restructuring.
Strategic Transaction and Integration Expenses
In 2021, we incurred $19.8 million in strategic transaction and integration expenses primarily related to integration costs associated with acquisitions, the Hospira Infusion Systems ("HIS") earn-out dispute with Pfizer, one-time costs incurred to comply with regulatory initiatives and transaction expenses incurred in connection with entering into the definitive agreement to acquire Smiths Medical.
In 2020, we incurred $20.5 million in strategic transaction and integration expenses primarily related to the integration of HIS, which included the migration of IT systems at our Austin facility.
In 2019, we incurred $72.2 million in strategic transaction and integration expenses primarily related to the integration of the HIS business. Integration expenses included a one-time strategic supply chain restructuring charge of $22.1 million, which reduced our contracted commitments to our third party manufacturer and we incurred charges related to our final Pfizer separation costs and clean-up, which included a $12.7 million non-cash write-off of related assets.
Change in fair value of contingent earn-out
At the end of the second quarter of 2021, the measurement period related to the Pursuit earn-out liability ended and in October 2021 the $26.3 million earn-out was finalized and paid to Pursuit's former shareholders. There were no changes in the fair value of our earn-outs during 2021.
In 2020, the fair value revaluation of our Pursuit contingent earn-out liability resulted in an increase in value of $9.0 million.
In 2019, the fair value revaluation of our HIS contingent earn-out liability resulted in a change in value of $47.4 million reducing the liability balance to zero. The earn-out period ended on December 31, 2019 and as of that date we determined we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. Pfizer disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met, and the dispute entered into binding arbitration. In August 2021, the arbitrator concluded that the necessary performance targets that would require payout of the HIS earn-out were not met, and as a result Pfizer is not entitled to any payments in connection with the HIS earn-out liability.
In 2021, we recorded $0.1 million in contract settlement expense. In 2020, we recorded $1.0 million in contract settlement income related to the resolution of a dispute with one of our suppliers. In 2019, we incurred a $5.7 million charge related to the resolution of a dispute with a product partner, which resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement.
Interest expense was $0.9 million, $1.8 million and $0.5 million in 2021, 2020 and 2019, respectively.
In 2021 and 2019, interest expense primarily includes the per annum commitment fee charged on the unused portion of the revolver under our five-year Revolving Credit Facility ("Credit Facility") and the amortization of financing costs that were incurred in 2017 in connection with entering into the Credit Facility. The per annum commitment fee was based on the consolidated total leverage ratio in effect and ranged between 0.15% to 0.30% on the unused portion of the Credit Facility (see note 11:Long-Term Obligations in our accompanying consolidated financial statements for additional information).
In 2020, interest expense was primarily related to borrowings under our Credit Facility and the amortization of financing costs. Borrowing under the Credit Facility bore interest, at our option, based on the Base Rate (as defined in Note 11 in our accompanying consolidated financial statements) plus applicable margin or the London Interbank Offered Rate plus applicable margin (see Note 11:
In January 2022, we entered into senior secured credit facilities that refinanced our existing Credit Facility in full, see "Liquidity and Capital Resources" in the remainder of this item for additional information and the estimated impact to future interest expense.
Other Income, net
Other income, net was $0.8 million, $1.1 million and $7.9 million in 2021, 2020 and 2019, respectively. In 2021, other income, net was primarily related to $2.8 million of interest income and $0.7 million of miscellaneous income partially offset by $1.7 million of loss from disposed assets and $1.0 million in foreign exchange losses. In 2020, other income, net was primarily related to interest income of $3.7 million, miscellaneous income, net of $2.8 million and gain from the disposal of property, plant and equipment of $1.8 million, which was mostly offset by $7.2 million in foreign exchange losses incurred as a result of the strengthening of the U.S. dollar from the impact of COVID-19 during the first half of the year. In 2019, other income, net was primarily due to interest income of $6.8 million related to our banking and investment accounts.
Income taxes were accrued at an estimated annual effective tax rate of 16%, 11% and 12% in 2021, 2020 and 2019, respectively.
The effective tax rate in 2021 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII") and tax credits. The effective tax rate in 2021 included a tax benefit of $4.9 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for 2021 also included U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2020 of $0.9 million tax provision primarily due to changes in estimates for GILTI, FDII, subpart F, and related foreign tax credits along with other prior period adjustments.
The effective tax rate in 2020 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII") and tax credits. The effective tax rate in 2020 included a tax benefit of $5.3 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for 2020 also included U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2019 of $3.8 million tax benefit primarily due to . . .
Feb 25, 2022
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