UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

_________________________________________________________________________________

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

March 31, 2024

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission file number 1-4448

BAXTER INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________________________________

Delaware

36-0781620

(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer


Identification No.)

One Baxter Parkway, Deerfield, Illinois

Deerfield,

Illinois

60015

(Address of principal executive offices)

Principal Executive Offices)

(Zip Code)

224.948.2000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

224-948-2000

Name of each exchange on which registered

Common Stock, $1.00 par value

BAX (NYSE)

(Registrant’s telephone number, including area code)

New York Stock Exchange
NYSE Chicago
0.4% Global Notes due 2024

BAX 24

New York Stock Exchange
1.3% Global Notes due 2025BAX 25New York Stock Exchange
1.3% Global Notes due 2029BAX 29New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐

o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒x  No ☐

o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

x

Accelerated filer

☐

o

Non-accelerated filer

☐

o

(Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐   No ☒

x

The number of shares of the registrant’s Common Stock, par value $1.00 per share, outstanding as of October 27, 2017April 25, 2024 was 544,831,923509,580,190 shares.




BAXTER INTERNATIONAL INC.

FORM 10-Q

For the quarterly period ended September 30, 2017

March 31, 2024

TABLE OF CONTENTS

Page Number

2

2

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Income

2

3

Condensed Consolidated Statements of Comprehensive Income

(Loss)

3

4

Condensed Consolidated Balance SheetsStatements of Changes in Equity

4

5

Condensed Consolidated Statements of Cash Flows

5

6

6

7

26

27

39

42

40

43

Review by Independent Registered Public Accounting Firm

41

42

PART II.

43

44

43

44

Item 1A.

44

43

44

Item 6.

5.

Exhibits44

44

45

45

46






























PART I. FINANCIALFINANCIAL INFORMATION

Item 1.

Item 1.    Financial Statements

Baxter International Inc.

Condensed Consolidated Statements of IncomeBalance Sheets (unaudited)

(in millions, except per share data)

information)
March 31,
2024		December 31,
2023
Current assets:
Cash and cash equivalents$3,026 $3,194 
Accounts receivable, net of allowances of $121 in 2024 and $129 in 20232,521 2,690 
Inventories2,988 2,824 
Prepaid expenses and other current assets865 892 
Total current assets9,400 9,600 
Property, plant and equipment, net4,370 4,433 
Goodwill6,430 6,514 
Other intangible assets, net5,905 6,079 
Operating lease right-of-use assets531 524 
Other non-current assets1,152 1,126 
Total assets$27,788 $28,276 
Current liabilities:
Current maturities of long-term debt and finance lease obligations$2,634 $2,668 
Accounts payable1,329 1,241 
Accrued expenses and other current liabilities2,402 2,594 
Total current liabilities6,365 6,503 
Long-term debt and finance lease obligations, less current portion11,092 11,130 
Operating lease liabilities444 438 
Other non-current liabilities1,652 1,737 
Total liabilities19,553 19,808 
Commitments and contingencies
Equity:
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2024 and 2023683 683 
Common stock in treasury, at cost, 173,930,493 shares in 2024 and 175,861,893 shares in 2023(11,130)(11,230)
Additional contributed capital6,339 6,389 
Retained earnings16,003 16,114 
Accumulated other comprehensive loss(3,722)(3,554)
Total Baxter stockholders’ equity8,173 8,402 
Noncontrolling interests62 66 
Total equity8,235 8,468 
Total liabilities and equity$27,788 $28,276 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales

 

$

2,707

 

 

$

2,558

 

 

$

7,787

 

 

$

7,518

 

Cost of sales

 

 

1,579

 

 

 

1,487

 

 

 

4,487

 

 

 

4,510

 

Gross margin

 

 

1,128

 

 

 

1,071

 

 

 

3,300

 

 

 

3,008

 

Marketing and administrative expenses

 

 

685

 

 

 

726

 

 

 

1,890

 

 

 

2,076

 

Research and development expenses

 

 

151

 

 

 

159

 

 

 

435

 

 

 

490

 

Operating income

 

 

292

 

 

 

186

 

 

 

975

 

 

 

442

 

Net interest expense

 

 

14

 

 

 

14

 

 

 

41

 

 

 

53

 

Other (income) expense, net

 

 

(12

)

 

 

44

 

 

 

10

 

 

 

(4,286

)

Income from continuing operations before income taxes

 

 

290

 

 

 

128

 

 

 

924

 

 

 

4,675

 

Income tax expense (benefit)

 

 

42

 

 

 

1

 

 

 

139

 

 

 

(51

)

Income from continuing operations

 

 

248

 

 

 

127

 

 

 

785

 

 

 

4,726

 

Income (loss) from discontinued operations, net of tax

 

 

3

 

 

 

3

 

 

 

3

 

 

 

(4

)

Net income

 

$

251

 

 

$

130

 

 

$

788

 

 

$

4,722

 

Income from continuing operations per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

 

$

0.23

 

 

$

1.45

 

 

$

8.64

 

Diluted

 

$

0.45

 

 

$

0.23

 

 

$

1.42

 

 

$

8.56

 

Income (loss) from discontinued operations per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

—

 

 

$

0.01

 

 

$

—

 

 

$

(0.01

)

Diluted

 

$

—

 

 

$

0.01

 

 

$

—

 

 

$

(0.01

)

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

 

$

0.24

 

 

$

1.45

 

 

$

8.63

 

Diluted

 

$

0.45

 

 

$

0.24

 

 

$

1.42

 

 

$

8.55

 

Weighted-average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

545

 

 

 

544

 

 

 

543

 

 

 

547

 

Diluted

 

 

557

 

 

 

551

 

 

 

554

 

 

 

552

 

Cash dividends declared per common share

 

$

0.160

 

 

$

0.130

 

 

$

0.450

 

 

$

0.375

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


2


Baxter International Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(in millions)

millions, except per share data)
Three months ended
March 31,
20242023
Net sales$3,592 $3,513 
Cost of sales2,205 2,238 
Gross margin1,387 1,275 
Selling, general and administrative expenses1,027 995 
Research and development expenses176 164 
Other operating income, net(3)(13)
Operating income187 129 
Interest expense, net78 117 
Other income, net(7)(2)
Income from continuing operations before income taxes116 14 
Income tax expense77 14 
Income from continuing operations39 — 
Income from discontinued operations, net of tax— 45 
Net income39 45 
Net income attributable to noncontrolling interests2 1 
Net income attributable to Baxter stockholders$37 $44 
Income from continuing operations per common share
Basic$0.07 $0.00 
Diluted$0.07 $0.00 
Income from discontinued operations per common share
Basic$0.00 $0.09 
Diluted$0.00 $0.09 
Net income per common share
Basic$0.07 $0.09 
Diluted$0.07 $0.09 
Weighted-average number of shares outstanding
Basic508 505 
Diluted510 505 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

251

 

 

$

130

 

 

$

788

 

 

$

4,722

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments, net of tax expense (benefit) of $21 and ($2) for the three months ended September 30, 2017 and 2016, respectively, and $69 and ($12) for the nine months ended September 30, 2017 and 2016, respectively

 

 

181

 

 

 

10

 

 

 

530

 

 

 

(16

)

Pension and other employee benefits, net of tax expense of $6 and $11 for the three months ended September 30, 2017 and 2016, respectively, and $26 and $32 for the nine months ended September 30, 2017 and 2016, respectively

 

 

6

 

 

 

21

 

 

 

44

 

 

 

61

 

Hedging activities, net of tax benefit of ($2) and zero for the three months ended September 30, 2017 and 2016, respectively, and ($7) and ($5) for the nine months ended September 30, 2017 and 2016, respectively

 

 

(6

)

 

 

1

 

 

 

(16

)

 

 

(10

)

Available-for-sale securities, net of tax expense of zero for the three months ended September 30, 2017 and 2016,  and $1 and zero for the nine months ended September 30, 2017 and 2016, respectively

 

 

1

 

 

 

—

 

 

 

4

 

 

 

(4,431

)

Total other comprehensive income (loss), net of tax

 

 

182

 

 

 

32

 

 

 

562

 

 

 

(4,396

)

Comprehensive income

 

$

433

 

 

$

162

 

 

$

1,350

 

 

$

326

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


3


Baxter International Inc.

Condensed Consolidated Balance SheetsStatements of Comprehensive Income (Loss) (unaudited)

(in millions, except shares)

millions)

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 

2017

 

 

2016

 

Current assets

 

Cash and equivalents

 

$

3,517

 

 

$

2,801

 

 

 

Accounts and other current receivables, net

 

 

1,748

 

 

 

1,691

 

 

 

Inventories

 

 

1,550

 

 

 

1,430

 

 

 

Prepaid expenses and other

 

 

633

 

 

 

602

 

 

 

Current assets held for disposition

 

 

—

 

 

 

50

 

 

 

Total current assets

 

 

7,448

 

 

 

6,574

 

Property, plant and equipment, net

 

 

4,488

 

 

 

4,289

 

Other assets

 

Goodwill

 

 

3,117

 

 

 

2,595

 

 

 

Other intangible assets, net

 

 

1,371

 

 

 

1,111

 

 

 

Other

 

 

1,117

 

 

 

977

 

 

 

Total other assets

 

 

5,605

 

 

 

4,683

 

Total assets

 

 

 

$

17,541

 

 

$

15,546

 

Current liabilities

 

Current maturities of long-term debt and lease obligations

 

$

3

 

 

$

3

 

 

 

Accounts payable and accrued liabilities

 

 

2,572

 

 

 

2,612

 

 

 

Current income taxes payable

 

 

87

 

 

 

126

 

 

 

Current liabilities held for disposition

 

 

—

 

 

 

3

 

 

 

Total current liabilities

 

 

2,662

 

 

 

2,744

 

Long-term debt and lease obligations

 

 

3,495

 

 

 

2,779

 

Other long-term liabilities

 

 

1,925

 

 

 

1,743

 

Equity

 

Common stock, $1 par value, authorized 2,000,000,000

   shares, issued 683,494,944 shares in 2017 and 2016

 

 

683

 

 

 

683

 

 

 

Common stock in treasury, at cost, 138,870,075 shares

   in 2017 and 143,890,064 shares in 2016

 

 

(7,756

)

 

 

(7,995

)

 

 

Additional contributed capital

 

 

5,918

 

 

 

5,958

 

 

 

Retained earnings

 

 

14,615

 

 

 

14,200

 

 

 

Accumulated other comprehensive (loss) income

 

 

(3,994

)

 

 

(4,556

)

 

 

Total Baxter shareholders’ equity

 

 

9,466

 

 

 

8,290

 

 

 

Noncontrolling interests

 

 

(7

)

 

 

(10

)

 

 

Total equity

 

 

9,459

 

 

 

8,280

 

Total liabilities and equity

 

$

17,541

 

 

$

15,546

 

Three months ended
March 31,
20242023
Income from continuing operations$39 $— 
Other comprehensive income (loss) from continuing operations, net of tax:
Currency translation adjustments, net of tax expense (benefit) of $11 and $(13) for the three months ended March 31, 2024 and 2023, respectively.(184)81 
Pension and other postretirement benefits, net of tax expense (benefit) of $3 and ($1) for the three months ended March 31, 2024 and 2023, respectively.4 (6)
Hedging activities, net of tax expense (benefit) of $2 and ($1) for the three months ended March 31, 2024 and 2023, respectively.8 (2)
Total other comprehensive income (loss) from continuing operations, net of tax(172)73 
Comprehensive income (loss) from continuing operations(133)73 
Income from discontinued operations, net of tax— 45 
Other comprehensive income from discontinued operations, net of tax - currency translation adjustments— 21 
Comprehensive income from discontinued operations— 66 
Comprehensive income (loss)(133)139 
Less: Comprehensive income attributable to noncontrolling interests2 1 
Less: Other comprehensive income (loss) attributable to noncontrolling interests(4)— 
Comprehensive income (loss) attributable to Baxter stockholders$(131)$138 

The accompanying notes are an integral part of these condensed consolidated financial statements.


4


Baxter International Inc.

Condensed Consolidated Statements of Cash FlowsChanges in Equity (unaudited)

(in millions)

 

 

 

 

Nine months ended

 

 

 

 

 

September 30,

 

 

 

 

 

2017

 

 

2016

 

Cash flows from operations

 

Net income

 

$

788

 

 

$

4,722

 

 

 

Adjustments to reconcile income from continuing operations to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

Loss (income) from discontinued operations, net of tax

 

 

(3

)

 

 

4

 

 

 

Depreciation and amortization

 

 

562

 

 

 

599

 

 

 

Deferred income taxes

 

 

(30

)

 

 

(298

)

 

 

Stock compensation

 

 

77

 

 

 

84

 

 

 

Net periodic pension benefit and OPEB costs

 

 

93

 

 

 

90

 

 

 

Net realized gains on the Baxalta Retained Share transactions

 

 

—

 

 

 

(4,387

)

 

 

Other

 

 

69

 

 

 

437

 

 

 

Changes in balance sheet items

 

 

 

 

 

 

 

 

 

 

Accounts and other current receivables, net

 

 

32

 

 

 

22

 

 

 

Inventories

 

 

—

 

 

 

(11

)

 

 

Accounts payable and accrued liabilities

 

 

(36

)

 

 

(326

)

 

 

Business optimization and infusion pump payments

 

 

(116

)

 

 

(119

)

 

 

Other

 

 

(93

)

 

 

121

 

 

 

Cash flows from operations – continuing operations

 

 

1,343

 

 

 

938

 

 

 

Cash flows from operations – discontinued operations

 

 

(20

)

 

 

3

 

 

 

Cash flows from operations

 

 

1,323

 

 

 

941

 

Cash flows from investing activities

 

Capital expenditures

 

 

(410

)

 

 

(519

)

 

 

Acquisitions and investments, net of cash acquired

 

 

(680

)

 

 

(47

)

 

 

Divestitures and other investing activities, net

 

 

2

 

 

 

17

 

 

 

Cash flows from investing activities – continuing operations

 

 

(1,088

)

 

 

(549

)

 

 

Cash flows from investing activities – discontinued operations

 

 

—

 

 

 

13

 

 

 

Cash flows from investing activities

 

 

(1,088

)

 

 

(536

)

Cash flows from financing activities

 

Issuances of debt

 

 

633

 

 

 

1,641

 

 

 

Payments of obligations

 

 

—

 

 

 

(1,383

)

 

 

Debt extinguishment costs

 

 

—

 

 

 

(16

)

 

 

Increase (decrease) in debt with original maturities of three months or less, net

 

 

—

 

 

 

(300

)

 

 

Cash dividends on common stock

 

 

(228

)

 

 

(197

)

 

 

Proceeds  from stock issued under employee benefit plans

 

 

298

 

 

 

251

 

 

 

Purchases of treasury stock

 

 

(275

)

 

 

(45

)

 

 

Other

 

 

(37

)

 

 

5

 

 

 

Cash flows from financing activities

 

 

391

 

 

 

(44

)

Effect of foreign exchange rate changes on cash and equivalents

 

 

90

 

 

 

23

 

Increase in cash and equivalents

 

 

716

 

 

 

384

 

Cash and equivalents at beginning of period

 

 

2,801

 

 

 

2,213

 

Cash and equivalents at end of period

 

$

3,517

 

 

$

2,597

 

Supplemental Schedule of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

 

Net proceeds on the Baxalta Retained Share transactions

 

$

—

 

 

$

4,387

 

Payment of obligations in exchange for Baxalta Retained Shares

 

$

—

 

 

$

3,646

 

Exchange of Baxter shares with Baxalta Retained Shares

 

$

—

 

 

$

611

 

For the three months ended March 31, 2024
Baxter International Inc. stockholders' equity
Common stock sharesCommon stockCommon stock shares
in treasury		Common stock in
treasury		Additional contributed capitalRetained earningsAccumulated other comprehensive
income (loss)		Total Baxter stockholders' equityNoncontrolling interestsTotal equity
Balance as of January 1, 2024683 $683 176 $(11,230)$6,389 $16,114 $(3,554)$8,402 $66 $8,468 
Net income— — — — — 37 — 37 2 39 
Other comprehensive income (loss)— — — — — — (168)(168)(4)(172)
Stock issued under employee benefit plans and other— — (2)100 (50)— — 50 — 50 
Dividends declared on common stock— — — — — (148)— (148)— (148)
Change in noncontrolling interests— — — — — — — — (2)(2)
Balance as of March 31, 2024683 $683 174 $(11,130)$6,339 $16,003 $(3,722)$8,173 $62 $8,235 

For the three months ended March 31, 2023
Baxter International Inc. stockholders' equity
Common stock sharesCommon stockCommon stock shares in treasuryCommon stock in treasuryAdditional contributed capitalRetained earningsAccumulated other comprehensive income (loss)Total Baxter stockholders' equityNoncontrolling interestsTotal equity
Balance as of January 1, 2023683 $683 179 $(11,389)$6,322 $14,050 $(3,833)$5,833 $62 $5,895 
Net income— — — — —44 — 44 1 45 
Other comprehensive income (loss)— — — — — — 94 94 — 94 
Stock issued under employee benefit plans and other— — (1)65 (10)— — 55 — 55 
Dividends declared on common stock— — — — — (147)—(147)— (147)
Change in noncontrolling interests— — — — — — — — (1)(1)
Balance as of March 31, 2023683 $683 178 $(11,324)$6,312 $13,947 $(3,739)$5,879 $62 $5,941 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5


Baxter International Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
Three Months Ended March 31,
20242023
Cash flows from operations
Net income$39 $45 
Less: Income from discontinued operations, net of tax— 45 
Income from continuing operations39 — 
Adjustments to reconcile net income to cash flows from operations:
Depreciation and amortization335 313 
Deferred income taxes(69)(61)
Stock compensation25 25 
Net periodic pension and other postretirement costs(5)(4)
Other9 14 
Changes in balance sheet items:
Accounts receivable, net137 148 
Inventories(204)(163)
Prepaid expenses and other current assets(10)(31)
Accounts payable131 144 
Accrued expenses and other current liabilities(190)119 
Other(35)(35)
Cash flows from operations - continuing operations163 469 
Cash flows from operations - discontinued operations— 10 
Cash flows from operations163 479 
Cash flows from investing activities
Capital expenditures(176)(165)
Acquisitions of developed technology and investments(6)(3)
Proceeds from sale of marketable equity securities16 — 
Other investing activities, net— 5 
Cash flows from investing activities - continuing operations(166)(163)
Cash flows from investing activities - discontinued operations— (7)
Cash flows from investing activities(166)(170)
Cash flows from financing activities
Repayments of debt(15)(3)
Net (decreases) increases in debt with original maturities of three months or less— (249)
Cash dividends on common stock(147)(146)
Proceeds from stock issued under employee benefit plans40 36 
Other financing activities, net(18)(10)
Cash flows from financing activities(140)(372)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash(25)18 
Decrease in cash, cash equivalents and restricted cash(168)(45)
Cash, cash equivalents and restricted cash at beginning of period (1)
3,198 1,722 
Cash, cash equivalents and restricted cash at end of period (1)
$3,030 $1,677 
(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to the amounts reported within the condensed consolidated balance sheet as of March 31, 2024, December 31, 2023, and March 31, 2023 (in millions):
March 31, 2024December 31, 2023March 31, 2023
Cash and cash equivalents$3,026 $3,194 $1,673 
Restricted cash included in other non-current assets4 4 4 
Cash, cash equivalents and restricted cash$3,030 $3,198 $1,677 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

Baxter International Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (the company(we, our or Baxter) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). for interim financial reporting. Accordingly, certain information and footnotenote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP)(U.S. GAAP) in the United States have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the company’sour Annual Report on Form 10-K for the year ended December 31, 2016 (20162023 (2023 Annual Report).

In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair statement of the interim periods.financial position, results of operations and cash flows for the periods presented. All such adjustments, unless otherwise noted herein, are of a normal, recurring nature. The results of operations for the current interim period are not necessarily indicative of the results of operations to be expected for the full year.

Certain reclassifications

In January 2023, we announced our intention to separate our Kidney Care business into a new, publicly traded company. In March 2024, we announced that we have been madein recent discussions with select private equity investors to conformexplore a potential sale of our Kidney Care business in lieu of the prior period condensed consolidated statementsproposed spinoff. Regardless of the separation structure ultimately selected, the separation of our Kidney Care business is currently expected to be completed during the second half of 2024, subject to the current period presentation.

Accounting for Venezuelan Operations

Currency restrictions enactedsatisfaction of customary conditions.

Risks and Uncertainties
Supply Constraints and Global Economic Conditions
We have experienced significant challenges to our global supply chain in Venezuela require Baxter to obtain approvalrecent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices), and higher transportation costs, resulting from the Venezuelan governmentpandemic and other exogenous factors including significant weather events, elevated inflation levels, disruptions to exchange Venezuelan bolivars for U.S. dollarscertain ports of call and require such exchangeaccess to be made atshipping lanes around the official exchange rate established byworld, the government. Inwar in Ukraine, the first quarter of 2016,conflict in the Venezuelan government moved fromMiddle East (including attacks on merchant ships in the three-tier exchange rate system to a two-tiered exchange rate systemRed Sea), tensions amongst China, Taiwan, and the official rateU.S., and other geopolitical events. These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for food and medicine imports was adjusted from 6.3certain product categories due to 10 bolivars per U.S. dollar. Dueour inability to a recent decline in transactions settled at the official rate or the secondary rate and limitations on the company’s ability to repatriate funds generated by its Venezuela operations, the company concludedfully satisfy demand. While we have seen meaningful improvements in the second quarteravailability of 2017 that it no longer met the accounting criteria for control over its business in Venezuelacertain component parts and the company deconsolidated its Venezuelan operationsimproved pricing of certain raw materials and on June 30, 2017. Ascertain transportation costs, these challenges may have a result of deconsolidating the Venezuelan operations, the company recorded a pre-tax charge of $33 million in other (income) expense, net in the second quarter of 2017. This charge included the write-off of the company’s investment in its Venezuelan operations, related unrealized translation adjustments and elimination of intercompany amounts. Beginning in the third quarter of 2017, the company no longer included the results of its Venezuelan business in its consolidated financial statements.

Hurricane Maria

In September 2017, Hurricane Maria caused damage to certain of the company's assets in Puerto Rico and disrupted operations. Insurance, less applicable deductibles and subject to any coverage exclusions, covers the repair or replacement of the company's assets that suffered loss or damage, and the company is working closely with its insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to the company as a result of the damages and the loss the company suffered. The company's insurance policies also provide coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. In the third quarter of 2017, the Company recorded $21 million of pre-tax charges related to damages caused by the hurricane, including $11 million related to the impairment of damaged inventory and fixed assets as well as $10 million of idle facility and other costs. These amounts were recorded as a component of cost ofnegative impact on our sales in the condensed consolidated statementsfuture.

We expect that the challenges caused by global economic conditions, among other factors, may continue to have an adverse effect on our business.
2. DISCONTINUED OPERATIONS
On September 29, 2023, we sold our BioPharma Solutions (BPS) business to Advent International and Warburg Pincus (collectively, the "buyers").
The BPS business, which was historically reported within our former Americas segment, provided contract manufacturing and development services, which include sterile fill-finish manufacturing and support services across clinical and commercial applications, primarily serving customers in the pharmaceutical industry. BPS was historically operated through our former, wholly-owned subsidiaries Baxter Pharmaceutical Solutions LLC, a Delaware limited liability company, and Baxter Oncology GmbH, a German limited liability company (collectively, the divested entities).
We concluded that our BPS business met the criteria to be classified as held-for-sale in May 2023. A component of incomean entity is reported in discontinued operations after meeting the criteria for held-for-sale classification if the three and nine month periods ended September 30, 2017. At this time,disposition represents a strategic shift that has (or will have) a major effect on the full amount of combined property damage and business interruption costs and recoveries cannot be estimated, and accordingly, no additional amounts, including amounts for anticipated insurance recoveries, have been recorded as of September 30, 2017.

New accounting standards

Recently issued accounting standards not yet adopted

In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815, Derivatives and Hedging. The purpose of this ASU is to better align a company’s risk management activitiesentity's operations and financial reportingresults. We analyzed the quantitative and qualitative factors relevant to the divestiture of our BPS business, including its significance to our overall net income and earnings per share, and determined that those conditions for hedging relationships, simplifydiscontinued operations presentation had been met. As such, the hedge accounting requirements,financial position, results of operations and improve the disclosurescash flows of hedging arrangements. The effective date for this ASU is January 1, 2019, with early adoption permitted. The company is evaluating the potential effects on the consolidated financial statements.

that

7

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends ASC 715, Compensation – Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic postretirement benefit cost in operating expenses. The service cost component of net periodic postretirement benefit cost should be presented


business are reported as discontinued operations in the same operating expense line items as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest costs, expected return on assets, amortization of prior service cost/credit, and settlement and curtailment effects, are to be included separately and outside of any subtotal of operating income. The company intends to adopt the standard effective January 1, 2018.  This guidance will impact the presentation of the company’s consolidated statements of income with no impact on net income.  Upon adoption of the standard on January 1, 2018, operating income for the three and nine months ended September 30, 2017, will be recast to increase $8 million and $25 million, respectively, with a corresponding increase in other (income) expense, net.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU No. 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU No. 2014-09 will be effective for the company beginning on January 1, 2018. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.  The company has completed an assessment of the new standard and is currently executing its detailed implementation plan and developing processes for gathering information for required disclosures.  Based on the work performed to date, the company does not expect the adoption of the new standard to have a material impact on theaccompanying consolidated financial statements. The company expectsPrior period amounts have been adjusted to adoptreflect discontinued operations presentation.

At closing of the standard using the modified retrospective method.

Recently adopted accounting pronouncements

As of January 1, 2017, the company adopted ontransaction, Baxter entered into a prospective basis ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The updated guidance requires all tax effects related to share-based payments to be recorded in income tax expense in the consolidated statement of income. Previous guidance required that tax effects of deductions in excess of share-based compensation costs (windfall tax benefits) be recorded in additional paid-in capital,Transition Services Agreement (TSA) and tax deficiencies be recorded in additional paid-in capital to the extent of previously recognized windfall tax benefits,a Master Commercial Manufacturing and Supply Agreement (MSA) with the remainder recorded in income tax expense. The new guidance also requires the cash flows resulting from windfall tax benefits to be reported as operating activities in the consolidated statement of cash flows, rather than the previous requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. As a result of the adoption, net income and operating cash flow for the three and nine months ended September 30, 2017, increased by approximately $18 million and $48 million, respectively.  The prior periods have not been restated and therefore, windfall tax benefits of $8 million and $35 million, respectively, for the three and nine months ended September 30, 2016, were not included in net income and were included as an inflow from financing activities and an outflow from operating activities in the condensed consolidated statement of cash flows.

2. SEPARATION OF BAXALTA INCORPORATED

On July 1, 2015, Baxter completed the distribution of approximately 80.5% of the outstanding common stock of Baxalta Incorporated (Baxalta) to Baxter shareholders (the Distribution). After giving effect to the Distribution, the company retained 19.5% of the outstanding common stock, or 131,902,719 shares of Baxalta (Retained Shares).  The Distribution was made to Baxter’s shareholders of record as of the close of business on June 17, 2015 (Record Date), who received one share of Baxalta common stock for each Baxter common share held as of the Record Date. As a result of the Distribution, Baxalta became an independent public company trading under the symbol “BXLT” on the New York Stock Exchange.

On June 3, 2016, Baxalta became a wholly-owned subsidiary of Shire plc (Shire) through a merger of a wholly-owned Shire subsidiary with and into Baxalta, with Baxalta as the surviving subsidiary (the Merger). References in this report to Baxalta prior to the Merger closing date refer to Baxalta as a stand-alone public company. References in this report to Baxalta subsequent to the Merger closing date refer to Baxalta as a subsidiary of Shire.

For a portion of Baxalta’s operations, the legal transfer of Baxalta’s assets and liabilities did not occur with the separation of Baxalta on July 1, 2015 due to the time required to transfer marketing authorizations and other regulatory requirements in certain countries. Under the terms of the International Commercial Operations Agreement (ICOA), Baxalta is subject to the risks and entitled to the benefits generated by these operations and assets until legal transfer; therefore, the net economic benefit and any cash collected by these entities by Baxter are transferred to Baxalta. As of September 30, 2017, all countries have been separated.


Following is a summary of the operating results of Baxalta, which have been reflected as discontinued operations for the three and nine months ended September 30, 2017 and 2016. The assets and liabilities have been classified as held for disposition as of  December 31, 2016. All assets and liabilities have been transferred as of September 30, 2017.

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Major classes of line items constituting income from

   discontinued operations before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1

 

 

$

24

 

 

$

7

 

 

$

144

 

Cost of sales

 

 

—

 

 

 

(20

)

 

 

(5

)

 

 

(135

)

Marketing and administrative expenses

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

(20

)

Income (loss) from discontinued operations before income taxes

 

 

1

 

 

 

4

 

 

 

1

 

 

 

(11

)

Gain on disposal of discontinued operations

 

 

2

 

 

 

—

 

 

 

2

 

 

 

17

 

Income tax expense

 

 

—

 

 

 

1

 

 

 

—

 

 

 

10

 

Income (loss) from discontinued operations, net of tax

 

$

3

 

 

$

3

 

 

$

3

 

 

$

(4

)

 

 

December 31,

 

(in millions)

 

2016

 

Carrying amounts of major classes of assets included as

   part of discontinued operations

 

 

 

 

Accounts and other current receivables, net

 

$

48

 

Property, plant, and equipment, net

 

 

1

 

Other

 

 

1

 

Total assets of the disposal group

 

$

50

 

 

 

 

 

 

Carrying amounts of major classes of liabilities included as

   part of discontinued operations

 

 

 

 

Accounts payable and accrued liabilities

 

$

3

 

Total liabilities of the disposal group

 

$

3

 

As of December 31, 2016, Baxter recorded a liability of $47 million for its obligation to transfer these net assets to Baxalta.  

Baxter and Baxalta entered into several agreements in connection with the July 1, 2015 separation, including a transition services agreement (TSA), separation and distribution agreement, manufacturing and supply agreements (MSA), tax matters agreement, an employee matters agreement, a long-term services agreement, and a shareholder’s and registration rights agreement.

divested entities. Pursuant to the TSA, Baxter and Baxalta and their respective subsidiaries are providingthe divested entities will provide to each other, on an interim transitional basis, various services.specific transition services for up to 24 months post-closing to help ensure business continuity and minimize disruptions. Services beingto be provided by Baxterunder the TSA include among others, finance, information technology, human resources, qualityintegrated supply chain, and certain other administrative services. The services generally commenced on the Distribution date and are expected to terminate within 36 months of the Distribution date. Billings by Baxter under the TSA are recorded as a reduction of the costs to provide the respective service in the applicable expense category, primarily in marketing and administrative expenses, in the condensed consolidated statements of income. In the three and nine months ended September 30, 2017, the company recognized approximately $11 million and $47 million, respectively, as a reduction to marketing and administrative expenses related to the TSA. In the three and nine months ended September 30, 2016, the company recognized approximately $26 million and $79 million, respectively, as a reduction to marketing and administrative expenses related to the TSA.  

Pursuant to the MSA, Baxalta orthe divested entities will provide development, manufacturing, regulatory, and other related services for certain Baxter as the case may be, manufactures, labels, and packagespharmaceutical products for up to 5 years post-closing (with certain extension rights as provided therein).

Results of Discontinued Operations
The following table summarizes the other party. The termsmajor classes of the agreements rangeline items included in initial durationincome from five to 10 years. Indiscontinued operations, net of tax, for the three and nine months ended September 30, 2017, Baxter recognized approximately $6 million and $18 million, respectively, in sales to Baxalta. InMarch 31, 2023:
Three months ended
March 31,
(in millions)2023
Net sales$136 
Cost of sales64 
Gross margin72 
Selling, general and administrative expenses15 
Other income, net1 
Income from discontinued operations before income taxes56 
Income tax expense11 
Income from discontinued operations, net of tax45 
For the three and nine months ended September 30, 2016, Baxter recognized approximately $6March 31, 2023, selling, general and administrative expenses (SG&A) include $7 million and $31 million, respectively,of separation-related costs incurred in sales to Baxalta.  In addition, inconnection with the three and nine months ended September 30, 2017, Baxter recognized $35 million and $133 million, respectively, in costsale of sales related to purchases from Baxalta pursuant to the MSA. In the three and nine months ended September 30, 2016, Baxter recognized $47 million and $139 million, respectively, in cost of sales related to purchases from Baxalta pursuant to the MSA.  The cash flows associated with these agreements are included in cash flows from operations — continuing operations.

Cash outflows of $20 million and inflows of $3 million were reported in cash flows from operations – discontinued operations for the nine-month periods ending September 30, 2017 and 2016, respectively. These relate to non-assignable tenders whereby Baxter

BPS.

remains the seller of Baxalta products, transactions related to importation services Baxter provides in certain countries, in addition to trade payables settled post local separation on Baxalta’s behalf.

3. SUPPLEMENTAL FINANCIAL INFORMATION

Net interest expense

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Interest expense, net of capitalized interest

 

$

22

 

 

$

20

 

 

$

62

 

 

$

69

 

Interest income

 

 

(8

)

 

 

(6

)

 

 

(21

)

 

 

(16

)

Net interest expense

 

$

14

 

 

$

14

 

 

$

41

 

 

$

53

 

Other (income) expense, net

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Foreign exchange

 

$

(12

)

 

$

—

 

 

$

(27

)

 

$

(12

)

Net loss on debt extinguishment

 

 

—

 

 

 

52

 

 

 

—

 

 

 

153

 

Net realized gains on Baxalta Retained Shares transactions

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,387

)

Venezuela deconsolidation

 

 

—

 

 

 

—

 

 

 

33

 

 

 

—

 

All other

 

 

—

 

 

 

(8

)

 

 

4

 

 

 

(40

)

Other (income) expense, net

 

$

(12

)

 

$

44

 

 

$

10

 

 

$

(4,286

)

Inventories

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

Raw materials

 

$

351

 

 

$

319

 

Work in process

 

 

135

 

 

 

122

 

Finished goods

 

 

1,064

 

 

 

989

 

Inventories

 

$

1,550

 

 

$

1,430

 

Property, plant and equipment, net

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

Property, plant and equipment, at cost

 

$

9,954

 

 

$

9,162

 

Accumulated depreciation

 

 

(5,466

)

 

 

(4,873

)

Property, plant and equipment, net

 

$

4,488

 

 

$

4,289

 

4. EARNINGS PER SHARE

The numeratorAllowance for both basic and diluted earnings per share (EPS) is either net income, income from continuing operations, or income from discontinued operations. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The dilutive effect of outstanding stock options, restricted stock units (RSUs) and performance share units (PSUs) is reflected in the denominator for diluted EPS using the treasury stock method.

Doubtful Accounts

The following table is a summary of the changes in our allowance for doubtful accounts for the three months ended March 31, 2024 and 2023.

Three months ended
March 31,
(in millions)20242023
Balance at beginning of period$129 $114 
Charged to costs and expenses(1)7 
Write-offs(6)(1)
Currency translation adjustments(1)2 
Balance at end of period$121 $122 
8

Inventories
(in millions)March 31,
2024		December 31,
2023
Raw materials$750 $731 
Work in process316 285 
Finished goods1,922 1,808 
Inventories$2,988 $2,824 
Property, Plant and Equipment, Net
(in millions)March 31,
2024		December 31,
2023
Property, plant and equipment, at cost$11,197 $11,223 
Accumulated depreciation(6,827)(6,790)
Property, plant and equipment, net$4,370 $4,433 
Interest Expense, Net
Three months ended
March 31,
(in millions)20242023
Interest expense, net of capitalized interest$103 $127 
Interest income(25)(10)
Interest expense, net$78 $117 
Other Income, Net
Three months ended
March 31,
(in millions)20242023
Foreign exchange losses, net$14 $14 
Pension and other postretirement benefit plans(12)(10)
Change in fair value of marketable equity securities(4)(5)
Other, net(5)(1)
Other income, net$(7)$(2)
Non-Cash Operating and Investing Activities
Right-of-use operating lease assets obtained in exchange for lease obligations for the three months ended March 31, 2024 and 2023 were $20 million and $26 million, respectively.
Purchases of property, plant and equipment included in accounts payable as of March 31, 2024 and 2023 were $52 million and $70 million, respectively.
9

4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The following is a reconciliation of basic sharesgoodwill by segment.
(in millions)Medical Products and TherapiesHealthcare Systems and TechnologiesPharmaceuticalsKidney CareTotal
Balance as of December 31, 2023$1,241 $3,989 $563 $721 $6,514 
Currency translation(38)(7)(17)(22)(84)
Balance as of March 31, 2024$1,203 $3,982 $546 $699 $6,430 
For the periods ended March 31, 2024 and 2023, there were no reductions in goodwill relating to diluted shares.

impairment losses.

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic shares

 

 

545

 

 

 

544

 

 

 

543

 

 

 

547

 

Effect of dilutive securities

 

 

12

 

 

 

7

 

 

 

11

 

 

 

5

 

Diluted shares

 

 

557

 

 

 

551

 

 

 

554

 

 

 

552

 

Other intangible assets, net

The effectfollowing is a summary of dilutive securities included unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excluded 0.1our other intangible assets.
Indefinite-lived intangible assets
(in millions)Customer relationshipsDeveloped technology, including patentsTrade namesOther amortized intangible assetsTrade namesIn process Research and Development
Total
March 31, 2024
Gross other intangible assets$3,444 $3,807 $1,097 $118 $680 $157 $9,303 
Accumulated amortization(745)(2,366)(188)(99)— — (3,398)
Other intangible assets, net$2,699 $1,441 $909 $19 $680 $157 $5,905 
December 31, 2023
Gross other intangible assets$3,446 $3,823 $1,106 $120 $680 $157 $9,332 
Accumulated amortization(689)(2,285)(180)(99)— — (3,253)
Other intangible assets, net$2,757 $1,538 $926 $21 $680 $157 $6,079 
Intangible asset amortization expense was $166 million and 2.8$162 million for the three months ended March 31, 2024 and 2023, respectively.
5. FINANCING ARRANGEMENTS
Credit Facilities
In the first quarter of 2024, we amended the credit agreements governing our U.S. dollar-denominated term loan credit facility and revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to amend the net leverage ratio covenant to increase the maximum net leverage ratio for the six fiscal quarters ending June 30, 2024, September 30, 2024, December 31, 2024, March 31, 2025, June 30, 2025, and September 30, 2025. The amendment further provides for the reduction of the capacity under our U.S dollar-denominated revolving credit facility from $2.50 billion to $2.00 billion on the earlier of September 30, 2024 or the date of the sale or spinoff of our Kidney Care business. Costs incurred in connection with the amendment were not material.
Our U.S. dollar-denominated revolving credit facility currently has a capacity of $2.50 billion and our Euro-denominated revolving credit facility has a capacity of €200 million. Each of the facilities matures in 2026. There were no borrowings outstanding under these credit facilities as of March 31, 2024 or December 31, 2023.Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings. Based on our covenant calculations as of March 31, 2024 we have capacity to draw on the full amounts under our credit facilities.
In the first three months of 2024, we repaid $13 million of equity awardssenior notes at maturity.
10

6. COMMITMENTS AND CONTINGENCIES
We are involved in product liability, patent, commercial, and other legal matters that arise in the normal course of our business. We record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of March 31, 2024 and December 31, 2023, our total recorded reserves with respect to legal and environmental matters were $30 million and $31 million, respectively.
We have established reserves for certain of the matters discussed below. We are not able to estimate the amount or range of any loss for certain contingencies for which there is no reserve or additional loss for matters already reserved. While our liability in connection with these claims cannot be estimated and the resolution thereof in any reporting period could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in the matters set forth below, litigation is inherently uncertain, excessive verdicts do occur, and we may incur material judgments or enter into material settlements of claims.
In addition to the matters described below, we remain subject to the risk of future administrative and legal actions. With respect to governmental and regulatory matters, these actions may lead to product recalls, injunctions, and other restrictions on our operations (including our ability to launch new products) and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, we may be exposed to significant litigation concerning the scope of our and others’ rights. Such litigation could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations.
Environmental
We are involved as a potentially responsible party (PRP) for environmental clean-up costs at six Superfund sites. Under the U.S. Superfund statute and many state laws, generators of hazardous waste sent to a disposal or recycling site are liable for site cleanup if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Separate from these Superfund cases noted above, we are involved in ongoing environmental remediations associated with historic operations at certain of our facilities. As of March 31, 2024 and December 31, 2023, our environmental reserves, which are measured on an undiscounted basis, were $14 million and $15 million, respectively. After considering these reserves, the outcome of these matters is not expected to have a material adverse effect on our financial position or results of operations.
General Litigation
In March 2020, two lawsuits were filed against us in the Northern District of Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used in our manufacturing facility in Mountain Home, Arkansas to sterilize certain of our products. The plaintiffs sought damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief. The parties reached an agreement to settle these lawsuits in the third quarter of 2021 for amounts that were not material to our financial results, which were paid in the fourth quarter of 2021. We have since resolved, without litigation, additional claims of injuries from exposure to ethylene oxide at Mountain Home for amounts within accruals previously established as of December 31, 2021. On October 20, 2022, a lawsuit was filed against us in the Western District of Arkansas alleging injury as a result of exposure to ethylene oxide at Mountain Home. On December 16, 2022, we filed a motion to dismiss and nine months ended September 30, 2017, respectively, and 0.3 million and 10 million of equity awards for a more definite statement. In response, Plaintiffs filed a First Amended Complaint on January 6, 2023. We answered the First Amended Complaint on January 27, 2023. The parties reached an agreement to settle this lawsuit in the third quarter of 2023 for an amount that was not material to our financial results, which was paid in the fourth quarter of 2023. The case was dismissed on October 17, 2023. Starting in December 2023, a number of lawsuits have been filed against us in the Circuit Court of Cook County, Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used by several companies, including historic use by us for sterilization at our manufacturing facility in Round Lake, Illinois. The plaintiffs seek damages in an unspecified amount.
We acquired Hill-Rom Holdings, Inc. (Hillrom) on December 13, 2021. In July 2021, Hill-Rom, Inc., a wholly-owned subsidiary of Hillrom, received a subpoena from the United States Office of Inspector General for the Department of Health and nineHuman Services (the DHHS) requesting documents and information related to compliance with the False Claims Act and the Anti-Kickback Statute. The subpoena was related to a lawsuit brought under the qui tam provisions
11

of False Claims Act. The allegations included in the unsealed complaint relate to conduct prior to our acquisition of Hillrom, and the division involved is no longer operational. Hillrom voluntarily began a related internal review, and Hillrom and Baxter cooperated fully with the DHHS and the Department of Justice (DOJ) with respect to this matter. In January 2024, the parties reached an agreement to settle the allegations. We paid the settlement amounts, which were not material to our financial results, in January 2024 and the matter was dismissed in February 2024. In October 2022, the DOJ issued a separate Civil Investigative Demand (CID) addressed to Hillrom, requesting documents and information related to compliance with the False Claims Act and the Anti-Kickback Statute. Baxter is cooperating fully with the DOJ in responding to the CID. The DHHS and DOJ often issue these types of requests when investigating alleged violations of the False Claims Act.
On December 28, 2021, Linet Americas, Inc. (Linet) filed a complaint against Hill-Rom Holdings, Inc., Hill-Rom Company, Inc., and Hill-Rom Services, Inc. in the United States District Court for the Northern District of Illinois, captioned Linet Americas, Inc. v. Hill-Rom Holdings, Inc.; Hill-Rom Company, Inc.; Hill-Rom Services, Inc. Linet alleges that Hillrom violated Sections 1, 2 and 3 of The Sherman Antitrust Act of 1890 and the Illinois Antitrust Act by allegedly engaging in anti-competitive conduct in alleged markets for standard, ICU and birthing beds. Hillrom filed an answer to the complaint on January 28, 2022 and filed a motion challenging certain aspects of plaintiff's case on May 27, 2022, which was denied on January 17, 2024, subject to further discovery.
7. STOCKHOLDERS’ EQUITY
Cash Dividends
Cash dividends declared per share for the three months ended September 30, 2016, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 9 for additional information regarding items impacting basic shares.

March 31, 2024 and 2023 were $0.29.

Stock repurchases

Repurchase Programs

In July 2012, theour Board of Directors authorized a share repurchase program and the repurchaserelated authorization amount was subsequently increased a number of up to $2 billion of the company’s common stock. The board of directors increased this authority by an additional $1.5 billion in November 2016.times. During the first three quartersmonths of 2017, the company repurchased 4.7 million2024 and 2023 we did not repurchase any shares for $275 million in cash. The company has $1.4under this authority. We had $1.30 billion remaining available under the authorization as of September 30, 2017.

5. ACQUISITIONS ANDMarch 31, 2024.

8. ACCUMULATED OTHER ARRANGEMENTS

Claris Injectables Limited

On July 27, 2017, Baxter acquired 100 percentCOMPREHENSIVE INCOME (LOSS)

Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of Claris Injectables Limited (Claris)net income (loss), a wholly owned subsidiary of Claris Lifesciences Limited, for totalcumulative translation adjustments (CTA), certain gains and losses from pension and other postretirement employee benefit (OPEB) plans, gains and losses on cash consideration of approximately $629 million, net of cash acquired. Through the acquisition, Baxter added capabilities in production of essential generic injectable medicines, such as anesthesiaflow hedges, and analgesics, renal, anti-infectivesunrealized gains and critical care in a variety of presentations including bags, vials and ampoules.  losses on available-for-sale debt securities.
The following table summarizes the fair valueis a net-of-tax summary of the assets acquired and liabilities assumed as of the acquisition datechanges in accumulated other comprehensive income (loss) (AOCI) by component for the company’s acquisition of Claris:

(in millions)

 

 

 

 

Assets acquired and liabilities assumed

 

 

 

 

Cash

 

$

11

 

Accounts and other current receivables

 

 

16

 

Inventories

 

 

30

 

Prepaid expenses and other

 

 

16

 

Property, plant and equipment

 

 

132

 

Goodwill

 

 

310

 

Other intangible assets

 

 

235

 

Other

 

 

20

 

Accounts payable and accrued liabilities

 

 

(22

)

Other long-term liabilities

 

 

(108

)

Total assets acquired and liabilities assumed

 

$

640

 

The valuation of total assets acquired and liabilities assumed are preliminary and measurement period adjustments may be recorded in the future as the company finalizes its fair value estimates.  The results of operations of Claris have been included in the company’s condensed consolidated statement of income since the date the business was acquired and were not material. Acquisition and integration costs associated with the Claris acquisition were $15 million and $20 million in the three and nine months ended September 30, 2017, respectively,March 31, 2024 and were primarily included within marketing and administrative expenses on the condensed consolidated statements of income.

Baxter allocated $235 million of the total consideration to acquired intangible assets with the residual consideration of $310 million recorded as goodwill.  The acquired intangible assets include $115 million of developed technology with a weighted-average useful life of 8 years and $120 million of in-process research and development with an indefinite useful life. For the in-process research and development, additional R&D will be required prior to technological feasibility. The goodwill, which is not deductible2023.
Gains (losses)
(in millions)CTAPension and OPEB plansHedging activitiesAvailable-for-sale debt securitiesTotal
Balance as of December 31, 2023$(2,985)$(452)$(120)$3 $(3,554)
Other comprehensive income (loss) before reclassifications(180)5 6 — (169)
Amounts reclassified from AOCI (a)— (1)2 — 1 
Net other comprehensive income (loss)(180)4 8 — (168)
Balance as of March 31, 2024$(3,165)$(448)$(112)$3 $(3,722)

12

Gains (losses)
(in millions)CTAPension and OPEB plansHedging activitiesAvailable-for-sale debt securitiesTotal
Balance as of December 31, 2022$(3,386)$(331)$(119)$3 $(3,833)
Other comprehensive income (loss) before reclassifications102 (3)— — 99 
Amounts reclassified from AOCI (a)— (3)(2)— (5)
Net other comprehensive income (loss)102 (6)(2)— 94 
Balance as of March 31, 2023$(3,284)$(337)$(121)$3 $(3,739)
(a)    See table below for tax purposes, includes the value of potential future technologies as well as the overall strategic benefits to Baxter in the injectables market, and is included in the Hospital Products segment.

details about these reclassifications.

The fair value of intangible assets was determined using the income approach.  The income approach is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life, discounted to present value.  The discount rates used to measure the developed technology and in-process research and development intangible assets were 12% and 13%, respectively.  The company considers the fair value of each of the acquired intangible assets to be Level 3 assets due to the significant estimates and assumptions used by management in establishing the estimated fair values.  Refer to Note 10 within the 2016 Annual Report for additional information regarding fair value measurements.

Celerity Pharmaceuticals, LLC

In the third quarter of 2017, Baxter paid approximately $10 million to acquire the rights to Clindamycin Dextrose from Celerity Pharmaceuticals, LLC (Celerity).  Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years.  

In the second quarter of 2017, Baxter paid approximately $10 million to acquire the rights to Clindamycin Saline from Celerity.  Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years.

In the first quarter of 2016, Baxter paid approximately $23 million to acquire the rights to Vancomycin injection in 0.9% Sodium Chloride (Normal Saline) in 500mg, 750mg, and 1 gram presentations from Celerity. Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years. Refer to Note 5 within the 2016 Annual Report for additional information regarding the company’s agreement with Celerity.

Wound Care Technologies, Inc.

In April 2017, Baxter paid approximately $8 million to acquire Wound Care Technologies, Inc., a medical technology company that develops and markets external tissue expansion devices for the wound care market.  The purchase price allocation resulted in an amortizable intangible asset of $8 million that will be amortized over its estimated economic life of 8 years.

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by business segment.

(in millions)

 

Renal

 

 

Hospital Products

 

 

Total

 

Balance as of December 31, 2016

 

$

397

 

 

$

2,198

 

 

$

2,595

 

Additions

 

 

5

 

 

 

312

 

 

 

317

 

Currency translation adjustments

 

 

31

 

 

 

174

 

 

 

205

 

Balance as of September 30, 2017

 

$

433

 

 

$

2,684

 

 

$

3,117

 

As of September 30, 2017, there were no accumulated goodwill impairment losses.

Other intangible assets, net

The following is a summary of the company’s other intangible assets.

(in millions)

 

Developed technology,

including patents

 

 

Other amortized

intangible assets

 

 

Indefinite-lived

intangible assets

 

 

Total

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross other intangible assets

 

$

1,979

 

 

$

432

 

 

$

152

 

 

$

2,563

 

Accumulated amortization

 

 

(977

)

 

 

(215

)

 

 

—

 

 

 

(1,192

)

Other intangible assets, net

 

$

1,002

 

 

$

217

 

 

$

152

 

 

$

1,371

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross other intangible assets

 

$

1,690

 

 

$

384

 

 

$

57

 

 

$

2,131

 

Accumulated amortization

 

 

(855

)

 

 

(165

)

 

 

—

 

 

 

(1,020

)

Other intangible assets, net

 

$

835

 

 

$

219

 

 

$

57

 

 

$

1,111

 

Intangible asset amortization expense was $38 million and $42 million inamounts reclassified from AOCI to net income during the three months ended September 30, 2017March 31, 2024 and 2016, respectively,2023.
Amounts reclassified from AOCI (a)
(in millions)Three months ended March 31, 2024Three months ended March 31, 2023Location of impact in income statement
Pension and OPEB items
Amortization of net losses and prior service costs or credits$2 $5 Other income, net
Less: Tax effect(1)(2)Income tax expense
$1 $3 Net of tax
Gains (losses) on hedging activities
Foreign exchange contracts$2 $4 Cost of sales
Interest rate contracts(1)(1)Interest expense, net
Fair value hedges(3)— Other income, net
(2)3 Total before tax
Less: Tax effect— (1)Income tax expense
$(2)$2 Net of tax
Total reclassifications for the period$(1)$5 Total net of tax

(a)    Amounts in parentheses indicate reductions to net income
Refer to Note 11 for additional information regarding the amortization of pension and $112OPEB items and Note 14 for additional information regarding hedging activity.
9. REVENUES
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of our contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Our global payment terms are typically between 30-90 days.
Our primary customers are hospitals, healthcare distribution companies, dialysis providers, and government agencies that purchase healthcare products on behalf of providers. Most of our performance obligations are satisfied at a point in time. This includes sales of our broad portfolio of essential healthcare products across our business segments. We earn revenues from acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; surgical hemostat and sealant products; smart bed systems; patient monitoring and diagnostic technologies; respiratory health devices; and advanced equipment for the surgical space. For most of those offerings, our performance obligation is satisfied upon delivery to
13

the customer. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation.
To a lesser extent, we enter into arrangements for which revenue may be recognized over time. For example, we lease medical equipment to customers under operating lease arrangements and recognize the related revenues on a monthly basis over the lease term. Our Healthcare Systems and Technologies segment includes connected care solutions and collaboration tools that are implemented over time. We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services. We also earn revenue from contract manufacturing activities, which is recognized over time as the services are performed. Revenue is recognized over time when we are creating or enhancing an asset that the customer controls as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.
As of March 31, 2024, we had $5.78 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of more than one year, which are primarily included in the Medical Product and Therapies and Kidney Care segments. Some contracts in the United States included in this amount contain index-dependent price increases, which are not known at this time. We expect to recognize approximately 45% of this amount as revenue over the remainder of 2024, 30% in 2025, 15% in 2026, and 10% in 2027.
Significant Judgments
Revenues from product sales are recorded at the net sales price, which includes estimates of variable consideration primarily related to rebates and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in accrued expenses and other current liabilities and as reductions of accounts receivable, net on the condensed consolidated balance sheets. Management's estimates take into consideration historical experience, current contractual, and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract using the expected value method. The amount of variable consideration included in the net sales price is limited to the amount for which it is probable that a significant reversal in revenue will not occur when the related uncertainty is resolved. Revenue recognized during the three months ended March 31, 2024 and 2023 related to performance obligations satisfied in prior periods was not material. Additionally, our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately and determining the allocation of the transaction price may require significant judgement.
Contract Balances
The timing of revenue recognition, billings and cash collections results in the recognition of trade accounts receivable, unbilled receivables, contract assets and customer advances, and deposits (contract liabilities) on our condensed consolidated balance sheets. Net trade accounts receivable was $2.26 billion and $2.43 billion as of March 31, 2024 and December 31, 2023, respectively.
For contract manufacturing arrangements, revenue is primarily recognized throughout the production cycle, which typically lasts up to 90 days, resulting in the recognition of contract assets until the related services are completed and the customers are billed. Additionally, for certain arrangements containing a performance obligation to deliver software that can be used with medical devices, we recognize revenue upon delivery of the software, which results in the recognition of contract assets when customers are billed over time, generally over one to five years. For bundled contracts involving equipment delivered up-front and consumable medical products to be delivered over time, total contract revenue is allocated between the equipment and consumable medical products. In certain of those arrangements, a contract asset is created for the difference between the amount of equipment revenue recognized upon delivery and the amount of consideration initially receivable from the customer. In those arrangements, the contract asset becomes a trade account receivable as consumable medical products are delivered and billed, generally over one to seven years.
14

The following table summarizes our contract assets:
(in millions)March 31,
2024		December 31,
2023
Contract manufacturing services$7 $5 
Software sales41 44 
Bundled equipment and consumable medical products contracts108 117 
Contract assets$156 $166 
Contract liabilities represent deferred revenues that arise as a result of cash received from customers or where the timing of billing for services precedes satisfaction of our performance obligations. Such remaining performance obligations represent the portion of the contract price for which work has not been performed and are primarily related to our installation and service contracts. We expect to satisfy the majority of the remaining performance obligations and recognize revenue related to installation and service contracts within the next 12 months with most of the non-current performance obligations satisfied within 24 months.
The following table summarizes contract liability activity for the three months ended March 31, 2024 and 2023. The contract liability balance represents the transaction price allocated to the remaining performance obligations.
Three Months Ended March 31,
(in millions)20242023
Balance at beginning of period$194 $194 
New revenue deferrals116 115 
Revenue recognized upon satisfaction of performance obligations(114)(120)
Currency translation1 1 
Balance at end of period$197 $190 
For the three months ended March 31, 2024 and 2023, $48 million and $124$65 million of revenue was recognized that was included in contract liabilities as of December 31, 2023 and 2022, respectively.
The following table summarizes the classification of contract assets and contract liabilities as reported in the condensed consolidated balance sheets:
(in millions)March 31,
2024		December 31,
2023
Prepaid expenses and other current assets$53 $53 
Other non-current assets103 113 
Contract assets$156 $166 
Accrued expenses and other current liabilities$155 $148 
Other non-current liabilities42 46 
Contract liabilities$197 $194 
Disaggregation of Net Sales
Refer to Note 16 for additional information on our net sales including the disaggregation of net sales within each of our segments and net sales by geographic location.
15

Lease Revenue
We lease medical equipment, such as smart beds, renal dialysis equipment and infusion pumps, to customers, often in conjunction with arrangements to provide consumable medical products such as dialysis therapies, IV fluids and inhaled anesthetics. Certain of our equipment leases are classified as sales-type leases and the remainder are operating leases. The terms of the related contracts, including the proportion of fixed versus variable payments and any options to shorten or extend the lease term, vary by customer. We allocate revenue between equipment leases and medical products based on their standalone selling prices.
The components of lease revenue for the three months ended March 31, 2024 and 2023 were:
Three Months Ended March 31,
(in millions)20242023
Sales-type lease revenue$3 $4 
Operating lease revenue144 124 
Variable lease revenue16 15 
Total lease revenue$163 $143 
Our net investment in sales-type leases was $69 million as of March 31, 2024, of which $29 million originated in 2020 and prior, $16 million in the nine months ended September 30, 20172021, $12 million in 2022, $10 million in 2023, and 2016, respectively.


In the third quarter of 2016, the company recorded an impairment charge of $27$2 million related to an indefinite-lived intangible asset (acquired IPR&D) in the company’s Renal segment and its in-center hemodialysis program. The assets of the business were written down to estimated fair value and recorded in research and development expenses.

In the second quarter of 2016, the company recorded an impairment charge of $51 million, of which $41 million related to a developed technology asset, relating to the company’s Hospital Products segment synthetic bone repair products business which was acquired from ApaTech Limited in 2010. The assets of the business were written down to estimated fair value and recorded in cost of sales.

7. INFUSION PUMP AND2024.

10. BUSINESS OPTIMIZATION CHARGES

Infusion Pump Charges

The company has

In recent years, we have undertaken a field corrective action with respect to the SIGMA SPECTRUM infusion pump.  Remediation primarily includes inspection and repair charges as well as a temporary replacement pump in a limited number of cases.  In the third quarter of 2017, the company recorded a charge of $22 million related primarily to cash costs associated with remediation efforts and none of these charges have been utilized as of September 30, 2017.  

Business Optimization Charges

Beginning in the second half of 2015, the company initiated actions to transform itsour cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through September 30, 2017, the company has incurred cumulative pretaxThe related costs of $526 million related to these actions. The coststhose actions consisted primarily of employee termination costs, implementation costs, contract termination costs, and accelerated depreciation. The company expectsasset impairments. We currently expect to incur additional pretaxpre-tax costs, primarily related to implementation of business optimization programs, of approximately $285 million and capital expenditures of $90$15 million through the completion of these initiatives.  The company expectsinitiatives that are currently underway. We continue to complete these activities bypursue cost savings initiatives, including those related to our newly implemented operating model, intended to simplify and streamline our operations, and to the end of 2018. Theextent further cost savings opportunities are identified, we would incur additional restructuring charges and costs will primarily include employee termination costs, implementation costs, and accelerated depreciation. Of the total estimated cost, the company expects that approximately 5 percent of the charges will be non-cash.

to implement business optimization programs in future periods.


During the three and nine months ended September 30, 2017March 31, 2024 and 2016, the company2023, we recorded the following charges related to business optimization programs.

Three Months Ended March 31,
(in millions)20242023
Restructuring charges$47 $110 
Costs to implement business optimization programs10 24 
Total business optimization charges$57 $134 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Restructuring charges, net

 

$

31

 

 

$

130

 

 

$

50

 

 

$

237

 

Costs to implement business optimization programs

 

 

21

 

 

 

25

 

 

 

58

 

 

 

44

 

Gambro integration costs

 

 

—

 

 

 

5

 

 

 

—

 

 

 

19

 

Accelerated depreciation

 

 

—

 

 

 

11

 

 

 

8

 

 

 

25

 

Total business optimization charges

 

$

52

 

 

$

171

 

 

$

116

 

 

$

325

 

For segment reporting purposes, business optimization charges are unallocated expenses.

During the three and nine months ended September 30, 2017 and 2016, the company recorded the following restructuring charges.

 

 

Three months ended

 

 

 

September 30, 2017

 

(in millions)

 

COGS

 

 

SGA

 

 

R&D

 

 

Total

 

Employee termination costs

 

$

7

 

 

$

24

 

 

$

—

 

 

$

31

 

Total restructuring charges

 

$

7

 

 

$

24

 

 

$

—

 

 

$

31

 


 

 

Three months ended

 

 

 

September 30, 2016

 

(in millions)

 

COGS

 

 

SGA

 

 

R&D

 

 

Total

 

Employee termination costs

 

$

21

 

 

$

84

 

 

$

1

 

 

$

106

 

Asset impairments

 

 

6

 

 

—

 

 

 

27

 

 

 

33

 

Reserve adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

—

 

 

 

(3

)

 

 

(2

)

 

 

(5

)

Contract termination costs

 

 

(3

)

 

—

 

 

 

(1

)

 

 

(4

)

Total restructuring charges

 

$

24

 

 

$

81

 

 

$

25

 

 

$

130

 

 

 

Nine months ended

 

 

 

September 30, 2017

 

(in millions)

 

COGS

 

 

SGA

 

 

R&D

 

 

Total

 

Employee termination costs

 

$

21

 

 

$

33

 

 

$

—

 

 

$

54

 

Contract termination costs

 

 

—

 

 

 

5

 

 

 

—

 

 

 

5

 

Asset impairments

 

 

5

 

 

 

—

 

 

 

—

 

 

 

5

 

Reserve adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

 

(7

)

 

 

(5

)

 

 

(2

)

 

 

(14

)

Total restructuring charges

 

$

19

 

 

$

33

 

 

$

(2

)

 

$

50

 

 

 

Nine months ended

 

 

 

September 30, 2016

 

(in millions)

 

COGS

 

 

SGA

 

 

R&D

 

 

Total

 

Employee termination costs

 

$

52

 

 

$

94

 

 

$

13

 

 

$

159

 

Contract termination costs

 

 

9

 

 

 

2

 

 

 

13

 

 

 

24

 

Asset impairments

 

 

28

 

 

 

—

 

 

 

40

 

 

 

68

 

Reserve adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

 

(1

)

 

 

(11

)

 

 

(2

)

 

 

(14

)

Total restructuring charges

 

$

88

 

 

$

85

 

 

$

64

 

 

$

237

 

Costs to implement business optimization programs for the three and nine months ended September 30, 2017, were $21 millionMarch 31, 2024 and $58 million2023, respectively, and consisted primarily of external consulting and transition costs, as well asincluding employee salarycompensation and related costs. These costs were primarily included within cost of sales and marketing and administrativeSG&A expense.

Costs to implement business optimization programs for

16

During the three and nine months ended September 30, 2016, were $25March 31, 2024 and 2023, we recorded the following restructuring charges.
Three months ended March 31, 2024
(in millions)COGSSG&AR&DTotal
Employee termination costs$5 $15 $16 $36 
Contract termination and other costs1 5 — 6 
Asset impairments5 — — 5 
Total restructuring charges$11 $20 $16 $47 
Three months ended March 31, 2023
(in millions)COGSSG&AR&DTotal
Employee termination costs$17 $63 $7 $87 
Contract termination and other costs3 — — 3 
Asset impairments12 8 — 20 
Total restructuring charges$32 $71 $7 $110 
For the three months ended March 31, 2024, our most significant restructuring actions, reflecting $24 million and $44 million, respectively, andof the restructuring charges in the table above, were related primarily to external consulting costs. These costs were included within marketing and administrative anda program to centralize certain of our R&D expense.

Costsactivities into a new location and to our recent implementation of a new operating model intended to simplify and streamline our operations.

For the three months ended March 31, 2023, our most significant restructuring action, reflecting $78 million of the restructuring charges in the table above, was related to the integrationimplementation of Gambro AB (Gambro) were included within marketing and administrative expense for all referenced periods.

For the three and nine months ended September 30, 2017, the company recognized accelerated depreciation, primarily associated with facilities to be closed, of zero and $8 million, respectively. The costs were recorded within cost of sales, marketing and administrative and R&D expense.

For the three and nine months ended September 30, 2016, the company recognized $11 million and $25 million, respectively, of accelerated depreciation, primarily associated with facilities to be closed. The costs were recorded in cost of sales for all referenced periods.

our new operating model.

The following table summarizes activity in the reservesliability related to the company’s business optimizationour restructuring initiatives.

(in millions)

 

 

 

 

Reserves as of December 31, 2016

 

$

164

 

Charges

 

 

59

 

Reserve adjustments

 

 

(14

)

Utilization

 

 

(114

)

CTA

 

 

24

 

Reserves as of September 30, 2017

 

$

119

 

(in millions)
Liability balance as of December 31, 2023$128 
Charges42 
Payments(35)
Currency translation1 
Liability balance as of March 31, 2024$136 

Reserve adjustments primarily relate to employee termination cost reserves established in prior periods.

Approximately 80%Substantially all of the company’sour restructuring reservesliabilities as of September 30, 2017March 31, 2024 relate to employee termination costs, with the remaining reservesliabilities attributable to contract termination costs. The reservesSubstantially all of the cash payments for those liabilities are expected to be substantially utilizeddisbursed by the end of 2018.

8. DEBT, FINANCIAL INSTRUMENTS2024.

11. PENSION AND FAIR VALUE MEASUREMENTS

Debt Issuance

In May 2017, Baxter issued €600 million of senior notes at a fixed coupon rate of 1.30% due in May 2025.  The company has designated this debt as a non-derivative net investment hedge of its European operations for accounting purposes.

Debt Redemptions

In September 2016, Baxter redeemed an aggregate of approximately $1 billion in principal amount of its 1.850% Senior Notes due 2017, 1.850% Senior Notes due 2018, 5.375% Senior Notes due 2018, 4.500% Senior Notes due 2019, 4.250% Senior Notes due 2020, and 3.200% Senior Notes due 2023. Baxter paid approximately $1 billion, including accrued and unpaid interest and tender premium, to redeem such notes. As a result of the debt redemptions, the company recognized a loss on extinguishment of debt in the third quarter of 2016 of approximately $52 million, which is included in other (income) expense, net.

Debt-for-equity exchanges

On January 27, 2016, Baxter exchanged Baxalta Retained Shares for the extinguishment of $1.45 billion aggregate principal amount outstanding under its $1.8 billion U.S. dollar-denominated revolving credit facility. This exchange extinguished the indebtedness under the facility, which was terminated in connection with such debt-for-equity exchange. There were no material prepayment penalties or breakage costs associated with the termination of the facility. Baxter recognized a net realized gain of $1.25 billion related to the Baxalta Retained Shares exchanged, which was included in other (income) expense, net for the period ended September 30, 2016.

On March 16, 2016, the company exchanged Baxalta Retained Shares for the extinguishment of approximately $2.2 billion in aggregate principal amount of its 0.950% Notes due May 2016, 5.900% Notes due August 2016, 1.850% Notes due January 2017, 5.375% Notes due May 2018, 1.850% Notes due June 2018, 4.500% Notes due August 2019, and 4.250% Notes due February 2020 purchased by certain third party purchasers in the previously announced debt tender offers. As a result, the company recognized a net loss on extinguishment of debt totaling $101 million and a net realized gain of $2.0 billion on the Baxalta Retained Shares exchanged, which are included in other (income) expense, net for the period ended September 30, 2016.

Securitization arrangement

OTHER POSTRETIREMENT BENEFIT PROGRAMS

The following is a summary of the activitynet periodic benefit cost relating to our pension and OPEB plans.
Three months ended
March 31,
(in millions)20242023
Pension benefits
Service cost$7 $6 
Interest cost38 37 
Expected return on plan assets(50)(44)
Amortization of net losses and prior service costs3 1 
Net periodic pension cost$(2)$— 
OPEB
Interest cost$2 $2 
Amortization of net loss and prior service credit(5)(6)
Net periodic OPEB cost (income)$(3)$(4)
17

12. INCOME TAXES
Our effective income tax rate was 66.4% and 100.0% for the company’s securitization arrangementthree months ended March 31, 2024 and 2023, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, non-deductible expenses, non-taxable income, increases or decreases in Japan.

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Sold receivables at beginning of period

 

$

63

 

 

$

62

 

 

$

68

 

 

$

81

 

Proceeds from sales of receivables

 

 

69

 

 

 

75

 

 

 

198

 

 

 

272

 

Cash collections (remitted to the owners of the receivables)

 

 

(66

)

 

 

(71

)

 

 

(203

)

 

 

(299

)

Effect of currency exchange rate changes

 

 

—

 

 

 

2

 

 

 

3

 

 

 

14

 

Sold receivables at end of period

 

$

66

 

 

$

68

 

 

$

66

 

 

$

68

 

The impactsvaluation allowances, increases or decreases in liabilities for uncertain tax positions, and excess tax benefits or shortfalls on stock compensation awards.

For the condensed consolidated statementsthree months ended March 31, 2024, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily driven by $37 million of income relatingtax expense resulting from internal reorganization transactions related to the saleproposed separation of receivables were immaterialour Kidney Care segment, an increase in a valuation allowance in a foreign jurisdiction resulting from changes in future projected income, and an increase in our liabilities for eachvarious uncertain tax positions.
For the three months ended March 31, 2023, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to tax shortfalls on stock compensation awards and an increase in our liabilities for uncertain tax positions.
13. EARNINGS PER SHARE
The numerator for both basic and diluted earnings per share (EPS) is net income attributable to Baxter stockholders. The denominator for basic EPS is the weighted-average number of shares outstanding during the period. Refer to the 2016 Annual Report for further information regarding the company’s securitization agreements.

ConcentrationsThe dilutive effect of credit risk

The company invests excess cash in certificates of deposit or money market fundsoutstanding stock options, RSUs and diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss.


The company continues to do business with foreign governments in certain countries including Greece, Spain, Portugal and Italy that have experienced a deterioration in credit and economic conditions. As of September 30, 2017, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $151 million.

Global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delaysPSUs is reflected in the collectiondenominator for diluted EPS using the treasury stock method.

The following table is a reconciliation of receivablesincome from continuing operations to net income attributable to Baxter stockholders.
Three months ended
March 31,
(in millions)20242023
Income from continuing operations$39 $— 
Less: Net income attributable to noncontrolling interests2 1 
Income (loss) from continuing operations attributable to Baxter stockholders37 (1)
Income from discontinued operations— 45 
Net income attributable to Baxter stockholders$37 $44 

The following table is a reconciliation of basic shares and credit losses. Governmental actionsdiluted shares.
Three months ended
March 31,
(in millions)20242023
Basic shares508 505 
Effect of dilutive securities2 — 
Diluted shares510 505 
Basic and customer-specific factors may also requirediluted shares are the companysame for the three months ended March 31, 2023 due to re-evaluateour loss from continuing operations attributable to Baxter stockholders. The effect of dilutive securities includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excludes 16 million and 24 million shares issuable under equity awards for the collectability of its receivablesthree months ended March 31, 2024, and the company could potentially incur additional credit losses. These conditions may also impact the stability of the Euro.

Derivatives and hedging activities

The company operates2023, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS.

14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We operate on a global basis and isare exposed to the risk that itsour earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The company’sOur hedging policy attempts to manage these risks to an acceptable level based on the company’sour judgment of the appropriate trade-off between risk, opportunity and costs.

The company is

18


We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, British Pound, Chinese Yuan, Korean Won,Renminbi, Japanese Yen, Swedish Krona, Polish Zloty, Mexican Peso, Australian Dollar, Canadian Dollar, Japanese Yen,Korean Won, Colombian Peso, Brazilian Real, Mexican PesoTurkish Lira, and New Zealand Dollar. The company manages itsIndian Rupee. We manage our foreign currency exposures on a consolidated basis, which allows the companyus to net exposures and take advantage of any natural offsets. In addition, the company useswe use derivative and nonderivative instruments to further reduce the net exposure to foreign exchange.exchange risk. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from changes in foreign exchange.exchange rates. Financial market and currency volatility may limit the company’sour ability to cost-effectively hedge these exposures.

The company is

We are also exposed to the risk that itsour earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company’sOur policy is to manage interest costs using athe mix of fixed- and floating-rate debt that the company believeswe believe is appropriate.

appropriate at that time. To manage this mix in a cost-efficient manner, the companywe periodically entersenter into interest rate swaps in which the company agreeswe agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.

The company does

We do not hold any instruments for trading purposes and none of the company’sour outstanding derivative instruments contain credit-risk-related contingent features.

All derivative

Derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets and are classified as short-term or long-term based on the scheduled maturity of the instrument. Based upon the exposure being hedged, the company designates itsWe designate certain of our derivatives and foreign-currency denominated debt as hedging instruments asin cash flow, fair value or net investment hedges.

Cash Flow Hedges

The companyHedges

We may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities.

We periodically use treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt.

For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is accumulatedrecorded in accumulated other comprehensive income (AOCI)AOCI and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid are initially recorded as assets and reclassified to other comprehensive income (OCI) over the life of the option, and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in net sales, cost of sales netand interest expense, and other (income) expense, net, and are primarily relaterelated to forecasted third-party sales denominated in foreign currencies, forecasted intercompanyintra-company sales denominated in foreign currencies and forecasted interest payments on anticipated issuances of debt, respectively.

The notional amounts of foreign exchange contracts designated as cash flow hedges were $667$261 million and $561$340 million as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at March 31, 2024 is 12 months for foreign exchange contracts. There were no outstanding interest rate contracts designated as cash flow hedges as of September 30, 2017March 31, 2024 and December 31, 2016. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of September 30, 2017 is 15 months.

2023.

Fair Value Hedges

The company usesHedges

We periodically use interest rate swaps to convert a portion of itsour fixed-rate debt into variable-rate debt. These instruments hedge the company’sour earnings from changes in the fair value of debt due to fluctuations in the designated benchmark interest rate. For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets changes in fair value attributable to a particular risk, such as changes in interest rates, of the loss or gain onhedged item, which are also recognized in earnings. Changes in the underlying hedged item. Fairfair value of hedge instruments designated as fair value hedges are classified in net interest expense, net, as they hedge the interest rate risk associated with certain of the company’sour fixed-rate debt.

The total notional amount of

There were no outstanding interest rate contracts designated as fair value hedges was $200 million as of September 30, 2017March 31, 2024 and December 31, 2016.

2023.

In October 2023, we entered into a foreign currency forward contract with a notional amount of $798 million maturing in May 2024 and designated that derivative as a fair value hedge of our €750 million of 0.40% senior notes due May 2024.
19

Net Investment Hedges

Hedges

In May 2017, the companywe issued €600 million of 1.3% senior notes due May 2025. The company hasIn May 2019, we issued €750 million of 1.3% senior notes due May 2029. We have designated thisthese debt obligations as a hedgehedges of a portion of itsour net investment in itsour European operations and, as a result, mark to spot rate adjustments on the outstanding debt balances are recorded as a component of AOCI.
In May 2019, we issued €750 million of 0.40% senior notes due May 2024. We had designated these debt obligations as hedges of our investment in our European operations and, as a result, mark to spot rate adjustments of the outstanding debt balances have been and will bewere previously recorded as a component of AOCI. In October 2023, we dedesignated this previously designated net investment hedge and concurrently entered into a fair value hedging relationship as discussed in the "Fair Value Hedges" section above.
As of September 30, 2017, the companyMarch 31, 2024, we had an accumulated pre-tax unrealized translation lossgain in AOCI of $70$75 million related to the Euro-denominated senior notes.

Dedesignations

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinueswe discontinue hedge accounting prospectively. If the company removes the cash flow hedge designation because the hedged forecasted transactions are no longer probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions are still probable of occurring aregenerally continue to be deferred and are recognized consistent with the loss or income recognition of the underlying hedged items.

However, if it is probable that the hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings.

There were no cash flow hedge dedesignations in the first ninethree months of 20172024 or 20162023 resulting from changes in the company’sour assessment of the probability that the hedged forecasted transactions would occur.

The losses relating to these terminations continue to be deferred and are being recognized consistent with the underlying hedged item, interest expense on the issuance of debt.

If the company terminateswe terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged itemsitem at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated during the first ninethree months of 2017. In March 2016,2024 or 2023.
If we remove a net investment hedge designation, any gain or loss recognized in AOCI is not reclassified to earnings until we sell, liquidate, or deconsolidate the companyforeign investments that were being hedged. There were no net investment hedges terminated a total notional valueduring the first three months of $765 million of interest rate contracts in connection with the March debt tender offers, resulting in a $34 million reduction to the debt extinguishment loss. In September 2016, the company terminated a total notional value of $335 million of interest rate contracts in connection with the September debt redemptions, resulting in a $14 million reduction to the debt extinguishment loss.

2024 or 2023.

Undesignated Derivative Instruments

The company uses

We use forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the company’s intercompanyour intra-company and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges and the change in fair value, which substantially offsets the change in book value of the hedged items, is recorded directly to other (income) expense, net. The terms of these instruments generally do not exceed one month.

The total notional amount of undesignated derivative instruments was $807$707 million as of September 30, 2017March 31, 2024 and $822$709 million as of December 31, 2016.

2023.

Gains and Losses on Hedging Activities

Instruments and Undesignated Derivative Instruments

The following tables summarize the income statement locations and gains and losses on our hedging instruments and the company’s derivative instrumentsclassification of those gains and losses within our condensed consolidated financial statements for the three months ended September 30, 2017March 31, 2024 and 2016.

 

 

Gain (loss) recognized in OCI

 

 

Location of gain (loss)

 

Gain (loss) reclassified from AOCI

into income

 

(in millions)

 

2017

 

 

2016

 

 

in income statement

 

2017

 

 

2016

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

—

 

 

$

—

 

 

Other (income) expense, net

 

$

—

 

 

$

5

 

Foreign exchange contracts

 

 

(11

)

 

 

3

 

 

Cost of sales

 

 

(3

)

 

 

(2

)

Net investment hedge

 

 

(39

)

 

 

—

 

 

Other (income) expense, net

 

 

—

 

 

 

—

 

Total

 

$

(50

)

 

$

3

 

 

 

 

$

(3

)

 

$

3

 

20

 

 

 

 

Gain (loss) recognized in income

 

(in millions)

 

Location of gain (loss) in income statement

 

2017

 

 

2016

 

Fair value hedges

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Net interest expense

 

$

(1

)

 

$

(7

)

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other (income) expense, net

 

$

(3

)

 

$

9

 


The following tables summarize the income statement locations and gains and losses on the company’s derivative instruments for the nine months ended September 30, 2017 and 2016.

 

 

Gain (loss) recognized in OCI

 

 

Location of gain (loss)

 

Gain (loss) reclassified from AOCI

into income

 

(in millions)

 

2017

 

 

2016

 

 

in income statement

 

2017

 

 

2016

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

(3

)

 

$

—

 

 

Other (income) expense, net

 

$

—

 

 

$

9

 

Foreign exchange contracts

 

 

(24

)

 

 

(8

)

 

Cost of sales

 

 

(4

)

 

 

(3

)

Net investment hedge

 

 

(70

)

 

 

—

 

 

Other (income) expense, net

 

 

—

 

 

 

—

 

Total

 

$

(97

)

 

$

(8

)

 

 

 

$

(4

)

 

$

6

 

2023.
Gain (loss) recognized in OCILocation of gain (loss)
in income statement		Gain (loss) reclassified from AOCI into income
(in millions)2024202320242023
Cash flow hedges
Interest rate contracts$— $— Interest expense, net$(1)$(1)
Foreign exchange contracts10 — Cost of sales2 4 
Fair value hedges
Foreign exchange contracts(2)— Other income, net(3)— 
Net investment hedges38 (48)Other income, net— — 
Total$46 $(48)$(2)$3 

 

 

 

Gain (loss) recognized in income

 

Location of gain (loss) in income statementLocation of gain (loss) in income statementGain (loss) recognized in income

(in millions)

 

Location of gain (loss) in income statement

 

2017

 

 

2016

 

(in millions)20242023

Fair value hedges

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Net interest expense

 

$

(1

)

 

$

19

 

Foreign exchange contracts
Foreign exchange contracts
Foreign exchange contracts

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other (income) expense, net

 

$

(7

)

 

$

4

 

Foreign exchange contracts
Foreign exchange contracts
Total

For the company’s fair value hedges, an equal and offsetting gain of $1 million was recognized in net interest expense in the third quarter and first nine months of 2017, respectively, and an equal and offsetting gain of $7 million and loss of $19 million was recognized in net interest expense in the third quarter and first nine months of 2016, respectively, as adjustments to the underlying hedged item, fixed-rate debt. Ineffectiveness related to the company’s cash flow and fair value hedges for all periods presented were not material.

As of September 30, 2017, $10March 31, 2024, less than $1 million of deferred, net after-tax lossesgains on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.


Fair Values of Derivative Instruments

Assets and Liabilities

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of September 30, 2017.

March 31, 2024.
Derivatives in asset positionsDerivatives in liability positions
(in millions)Balance sheet locationFair valueBalance sheet locationFair value
Undesignated derivative instruments
Foreign exchange contractsPrepaid expenses and other current assets$13 Accrued expenses and other current liabilities$7
Derivative instruments designated as hedges
Foreign exchange contractsPrepaid expenses and other current assets6 Accrued expenses and other current liabilities1
Total derivative instruments$19 $8

 

 

Derivatives in asset positions

 

 

Derivatives in liability positions

 

(in millions)

 

Balance sheet location

 

Fair value

 

 

Balance sheet location

 

Fair value

 

Derivative instruments designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Other long-term assets

 

$

6

 

 

Other long-

term liabilities

 

$

—

 

Foreign exchange contracts

 

Prepaid expenses and other

 

 

11

 

 

Accounts payable and

accrued liabilities

 

 

 

4

 

Foreign exchange contracts

 

Other long-term assets

 

 

2

 

 

Other long-

term liabilities

 

 

—

 

Total derivative instruments designated as hedges

 

 

 

$

19

 

 

 

 

$

4

 

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Prepaid expenses and other

 

$

—

 

 

Accounts payable and

accrued liabilities

 

$

1

 

Total derivative instruments

 

 

 

$

19

 

 

 

 

$

5

 

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2016.

2023.
Derivatives in asset positionsDerivatives in liability positions
(in millions)Balance sheet locationFair valueBalance sheet locationFair value
Undesignated derivative instruments
Foreign exchange contractsPrepaid expenses and other current assets$47 Accrued expenses and other current liabilities$— 
Derivative instruments designated as hedges
Foreign exchange contractsPrepaid expenses and other current assets4 Accrued expenses and other current liabilities5 
Total derivative instruments$51 $5 

 

 

Derivatives in asset positions

 

 

Derivatives in liability positions

 

(in millions)

 

Balance sheet location

 

Fair value

 

 

Balance sheet location

 

Fair value

 

Derivative instruments designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Other long-term assets

 

$

7

 

 

Other long-

term liabilities

 

$

—

 

Foreign exchange contracts

 

Prepaid expenses and other

 

 

22

 

 

Accounts payable

and

accrued liabilities

 

 

1

 

Total derivative instruments designated as hedges

 

 

 

$

29

 

 

 

 

$

1

 

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Prepaid expenses and other

 

$

1

 

 

Accounts payable

and

accrued liabilities

 

$

2

 

Total derivative instruments

 

 

 

$

30

 

 

 

 

$

3

 

21


While the company’ssome of our derivatives are all subject to master netting arrangements, the company presents itswe present our assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, the company iswe are not required to post collateral for any of itsour outstanding derivatives.

The following table provides information on the company’sour derivative positions as if they were presented on a net basis, allowing for the right of offset by counterparty.

March 31, 2024December 31, 2023
(in millions)AssetLiabilityAssetLiability
Gross amounts recognized in the condensed consolidated balance sheets$19 $8 $51 $5 
Gross amount subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet(2)(2)(5)(5)
Total$17 $6 $46 $— 

 

 

September 30, 2017

 

 

December 31, 2016

 

(in millions)

 

Asset

 

 

Liability

 

 

Asset

 

 

Liability

 

Gross amounts recognized in the consolidated balance sheet

 

$

19

 

 

$

5

 

 

$

30

 

 

$

3

 

Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet

 

 

(5

)

 

 

(5

)

 

 

(3

)

 

 

(3

)

Total

 

$

14

 

 

$

—

 

 

$

27

 

 

$

—

 


FairThe following table presents the amounts recorded on the condensed consolidated balance sheet related to fair value measurements

hedges:
Carrying amount of hedged itemCumulative amount of fair value hedging adjustment included
 in the carrying amount of the hedged item (a)
(in millions)Balance as of March 31, 2024Balance as of December 31, 2023Balance as of March 31, 2024Balance as of December 31, 2023
Long-term debt$100 $100 $3 $3 

(a) These fair value hedges were terminated in 2018 and earlier periods.
15. FAIR VALUE MEASUREMENTS
The following tables summarize the bases used to measure financialour assets and liabilities that are carriedmeasured at fair value on a recurring basis in the condensed consolidated balance sheets.

basis.
Basis of fair value measurement
(in millions)Balance as of March 31, 2024Quoted prices in active markets for identical assets
(Level 1)		Significant other
observable inputs
(Level 2)		Significant
unobservable inputs
(Level 3)
Assets
Foreign exchange contracts$19 $— $19 $— 
Available-for-sale debt securities22 — — 22 
Marketable equity securities31 31 — — 
Total$72 $31 $19 $22 
Liabilities
Foreign exchange contracts$8 $— $8 $— 
Contingent payments related to acquisitions14 — — 14 
Total$22 $— $8 $14 

 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance as of

September 30, 2017

 

 

Quoted prices in

active markets for

identical assets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedges

 

$

13

 

 

$

—

 

 

$

13

 

 

$

—

 

Interest rate hedges

 

 

6

 

 

 

—

 

 

 

6

 

 

 

—

 

Available-for-sale securities

 

 

11

 

 

 

11

 

 

 

—

 

 

 

—

 

Total assets

 

$

30

 

 

$

11

 

 

$

19

 

 

$

—

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedges

 

$

5

 

 

$

—

 

 

$

5

 

 

$

—

 

Contingent payments related to acquisitions

 

 

10

 

 

 

—

 

 

 

—

 

 

 

10

 

Total liabilities

 

$

15

 

 

$

—

 

 

$

5

 

 

$

10

 

22

 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance as of

December 31, 2016

 

 

Quoted prices in

active markets for

identical assets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedges

 

$

23

 

 

$

—

 

 

$

23

 

 

$

—

 

Interest rate hedges

 

 

7

 

 

 

—

 

 

 

7

 

 

 

—

 

Available-for-sale securities

 

 

9

 

 

 

9

 

 

 

—

 

 

 

—

 

Total assets

 

$

39

 

 

$

9

 

 

$

30

 

 

$

—

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedges

 

$

3

 

 

$

—

 

 

$

3

 

 

$

—

 

Contingent payments related to acquisitions

 

 

19

 

 

 

—

 

 

 

—

 

 

 

19

 

Total liabilities

 

$

22

 

 

$

—

 

 

$

3

 

 

$

19

 


Basis of fair value measurement
(in millions)Balance as of December 31, 2023Quoted prices in active markets for identical assets
(Level 1)		Significant other
observable inputs
(Level 2)		Significant
unobservable inputs
(Level 3)
Assets
Foreign exchange contracts$51 $— $51 $— 
Available-for-sale debt securities22 — — 22 
Marketable equity securities44 44 — — 
Total$117 $44 $51 $22 
Liabilities
Foreign exchange contracts$5 $— $5 $— 
Contingent payments related to acquisitions14 — — 14 
Total$19 $— $5 $14 
As of September 30, 2017,March 31, 2024 and December 31, 2023, cash and cash equivalents of $3.5$3.03 billion and $3.19 billion, respectively, included money market funds of approximately $1$1.47 billion and as of December 31, 2016, cash and equivalents of $2.8$1.63 billion, included money market funds of approximately $1 billion. Money market funds would berespectively, which are considered Level 2 in the fair value hierarchy.

For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. TheA majority of the derivatives entered into by the companyus are valued using internal valuation techniques as no quoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholes models. The key inputs, which are considered observable and vary depending on the type of derivative, and include contractual terms, interest rate yield curves, foreign exchange rates and volatility.

Available-for-sale debt securities, which consist of convertible debt and convertible redeemable preferred shares issued by nonpublic entities, are measured using discounted cash flow and option pricing models. Those available-for-sale debt securities are classified as Level 3 fair value measurements when there are no observable transactions near the balance sheet date due to the lack of observable data over certain fair value inputs such as equity volatility. The fair values of available-for-sale debt securities increase when interest rates decrease, equity volatility increases, or the fair values of the equity shares underlying the conversion options increase.
Contingent payments related to acquisitions, which consist of commercial milestone payments and sales-based payments, and are valued using discounted cash flow techniques.techniques incorporating management's expectations of future outcomes. The fair value of commercial milestone payments reflects management’s expectations of probability of payment, and increases as the estimated probability of payment increases or expectation ofthe expected timing of payments is accelerated. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increaseincreases or expectation ofthe expected timing of payment is accelerated.
The change in thefollowing table is a reconciliation of recurring fair value of contingent payments related to Baxter’s acquisitions, whichmeasurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions and available-for-sale debt securities.
Three months ended March 31,
20242023
(in millions)Contingent payments related to acquisitionsAvailable-for-sale debt securitiesContingent payments related to acquisitionsAvailable-for-sale debt securities
Fair value at beginning of period$14 $22 $84 $47 
Change in fair value recognized in earnings— — (13)— 
Transfers out of Level 3— — — (5)
Payments— — (1)— 
Fair value at end of period$14 $22 $70 $42 
23

During the three months ended March 31, 2023, available-for-sale debt securities were reclassified from Level 3, upon conversion to marketable equity securities, which are classified as Level 1 in the fair value measurement, were primarily driven by payments of approximately $8 million in the first nine months of 2017.

The following table provides information relating to the company’s investments in available-for-sale equity securities.

(in millions)

 

Amortized cost

 

 

Unrealized gains

 

 

Unrealized losses

 

 

Fair value

 

September 30, 2017

 

$

9

 

 

$

3

 

 

$

1

 

 

$

11

 

December 31, 2016

 

$

13

 

 

$

—

 

 

$

4

 

 

$

9

 


In the first quarter of 2017, the company recorded a $4 million other-than-temporary impairment charge within other (income) expense, net based on the duration of losses related to onehierarchy, upon initial public offerings of the company’s investments. In the first nine months of 2016, the company recorded $4.4 billion of net realized gains within other (income) expense, net related to exchanges of available-for-sale equity securities, which represented gains from the Retained Share transactions.

Book Values andinvestees.

Financial Instruments Not Measured at Fair Values of Financial Instruments

Value

In addition to the financial instruments that the company iswe are required to recognize at fair value in the condensed consolidated balance sheets, the company haswe have certain financial instruments that are recognized at historicalamortized cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized in the condensed consolidated balance sheets and the approximateestimated fair values as of September 30, 2017March 31, 2024 and December 31, 2016.

2023.

 

 

Book values

 

 

Approximate fair values

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

42

 

 

$

31

 

 

$

42

 

 

$

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease obligations

 

$

3

 

 

$

3

 

 

$

3

 

 

$

3

 

Long-term debt and lease obligations

 

 

3,495

 

 

 

2,779

 

 

 

3,568

 

 

 

2,756

 

Book valuesFair values(a)
(in millions)2024202320242023
Liabilities
Current maturities of long-term debt and finance lease obligations$2,634 $2,668 $2,606 $2,621 
Long-term debt and finance lease obligations11,092 11,130 9,872 10,067 

The following tables summarize the bases used to measure the approximate

(a)    These fair value of the financial instrumentsamounts are classified as of September 30, 2017 and December 31, 2016.

 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance as of

September 30,

2017

 

 

Quoted prices in

active markets for

identical assets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant

unobservable inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

42

 

 

$

—

 

 

$

—

 

 

$

42

 

Total assets

 

$

42

 

 

$

—

 

 

$

—

 

 

$

42

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease obligations

 

$

3

 

 

 

 

 

 

$

3

 

 

 

 

 

Long-term debt and lease obligations

 

 

3,568

 

 

 

 

 

 

 

3,568

 

 

 

 

 

Total liabilities

 

$

3,571

 

 

$

—

 

 

$

3,571

 

 

$

—

 

 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance as of

December 31,

2016

 

 

Quoted prices in

active markets for

identical assets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant

unobservable inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

31

 

 

$

—

 

 

$

—

 

 

$

31

 

Total assets

 

$

31

 

 

$

—

 

 

$

—

 

 

$

31

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease obligations

 

$

3

 

 

$

—

 

 

$

3

 

 

$

—

 

Long-term debt and lease obligations

 

 

2,756

 

 

 

—

 

 

 

2,756

 

 

 

—

 

Total liabilities

 

$

2,759

 

 

$

—

 

 

$

2,759

 

 

$

—

 

Investments in 2017 and 2016 included certain cost method investments.

In determiningLevel 2 within the fair value of cost method investments, the company takes into consideration recent transactions,hierarchy as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement.

they are estimated based on observable inputs.

The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instrument.instruments. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with the


company’sour credit risk. The carrying values of the other financial instruments not presented in the above table, such as accounts receivable, and accounts payable, approximate their fair values due to the short-term maturities of most of thesethose assets and liabilities.

9. STOCK COMPENSATION

Stock compensation expense totaled $31

Investments Without Readily Determinable Fair Values
The carrying values of equity investments without readily determinable fair values that we measure at cost, less impairment were $67 million as of March 31, 2024 and $30$66 million as of December 31, 2023. When applicable, we also adjust the measurement of such equity investments for observable prices in orderly transactions for an identical or similar investment of the same issuer. Those investments are included in Other non-current assets on our condensed consolidated balance sheets.
16. SEGMENT INFORMATION
In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Under this new operating model, our business is comprised of four segments: Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals, and Kidney Care (which we are planning to divest during the second half of 2024 through either a sale or spinoff, as discussed above). Our segments were changed during the third quarter of 2023 to align with our new operating model and prior period segment disclosures have been revised to reflect the new segment presentation.
The Medical Products and Therapies segment includes sales of our sterile IV solutions, infusion systems, administration sets, parenteral nutrition therapies and surgical hemostat, sealant, and adhesion prevention products. The Healthcare Systems and Technologies segment includes sales of our connected care solutions and collaboration tools, including smart bed systems, patient monitoring systems and diagnostic technologies, respiratory health devices, and advanced equipment for the surgical space, including surgical video technologies, precision positioning devices, and other accessories. The Pharmaceuticals segment includes sales of specialty injectable pharmaceuticals, inhaled anesthesia, and drug compounding. The Kidney Care segment includes sales of chronic and acute dialysis therapies and services, including peritoneal dialysis, hemodialysis, continuous renal replacement therapies, and other organ support therapies. Other sales not allocated to a segment primarily include sales of products and services provided directly through certain of our manufacturing facilities and royalty income under a business development arrangement that ended in early 2023 when we acquired the related product rights.
24

Disaggregation of Net Sales
The following tables present our U.S. and International disaggregated net sales. Intersegment sales are eliminated in consolidation.
Three months ended March 31,
20242023
(in millions)U.S.InternationalTotalU.S.InternationalTotal
Infusion Therapies and Technologies$526 $440 $966 $514 $397 $911 
Advanced Surgery147 116 263 144 102 246 
Medical Products and Therapies673 556 1,229 658 499 1,157 
Care and Connectivity Solutions278 124 402 298 131 429 
Front Line Care195 70 265 221 81 302 
Healthcare Systems and Technologies473 194 667 519 212 731 
Injectables and Anesthesia191 137 328 173 132 305 
Drug Compounding— 250 250 — 218 218 
Pharmaceuticals191 387 578 173 350 523 
Chronic Therapies1
226 662 888 229 655 884 
Acute Therapies1
85 129 214 64 124 188 
Kidney Care311 791 1,102 293 779 1,072 
Other1
11 5 16 24 6 30 
Total Baxter$1,659 $1,933 $3,592 $1,667 $1,846 $3,513 
1     In connection with our segment change in the third quarter of 2017 and 2016, respectively, and $772023, we reclassified $8 million and $84 million for the nine months ended September 30, 2017 and 2016, respectively. Approximately 70% of stock compensation expense is classified in marketing and administrative expenses with the remainder classified in cost of sales and R&D expenses.

In March 2017,from the company awarded its annual stock compensation grants which consistedfirst quarter of 5.4 million stock options, 0.7 million RSUs and 0.6 million PSUs.

10. RETIREMENT AND OTHER BENEFIT PROGRAMS

The following is a summary of net periodic benefit cost relating2023 from Chronic Therapies to Acute Therapies to conform to the company’s pension and other postemployment benefit (OPEB) plans.

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Pension benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

23

 

 

$

23

 

 

$

68

 

 

$

70

 

Interest cost

 

 

46

 

 

 

46

 

 

 

136

 

 

 

138

 

Expected return on plan assets

 

 

(75

)

 

 

(76

)

 

 

(220

)

 

 

(227

)

Amortization of net losses and other deferred amounts

 

 

42

 

 

 

38

 

 

 

123

 

 

 

113

 

Net periodic pension benefit cost

 

$

36

 

 

$

31

 

 

$

107

 

 

$

94

 

OPEB

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

—

 

 

$

1

 

 

$

—

 

 

$

3

 

Interest cost

 

 

2

 

 

 

4

 

 

 

6

 

 

 

8

 

Amortization of net loss and prior service credit

 

 

(7

)

 

 

(7

)

 

 

(20

)

 

 

(15

)

Net periodic OPEB cost

 

$

(5

)

 

$

(2

)

 

$

(14

)

 

$

(4

)

11. ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income includes all changes in shareholders’ equity that do not arise from transactions with shareholders, and consists of net income, CTA, pension and other employee benefits, unrealized gains and losses on cash flow hedges and unrealized gains and losses on available-for-sale equity securities. The following table is a net-of-tax summary of the changes in AOCI by component for the nine months ended September 30, 2017 and 2016.

(in millions)

 

CTA

 

 

Pension and

other employee

benefits

 

 

Hedging

activities

 

 

Available-

for-sale

securities

 

 

Total

 

Gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

$

(3,438

)

 

$

(1,161

)

 

$

3

 

 

$

40

 

 

$

(4,556

)

Other comprehensive income before reclassifications

 

 

501

 

 

 

(25

)

 

 

(19

)

 

 

1

 

 

 

458

 

Amounts reclassified from AOCI (a)

 

 

29

 

 

 

69

 

 

 

3

 

 

 

3

 

 

 

104

 

Net other comprehensive income (loss)

 

 

530

 

 

 

44

 

 

 

(16

)

 

 

4

 

 

 

562

 

Balance as of September 30, 2017

 

$

(2,908

)

 

$

(1,117

)

 

$

(13

)

 

$

44

 

 

$

(3,994

)


(in millions)

 

CTA

 

 

Pension and

other employee

benefits

 

 

Hedging

activities

 

 

Available-

for-sale-

securities

 

 

Total

 

Gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

$

(3,191

)

 

$

(1,064

)

 

$

7

 

 

$

4,472

 

 

$

224

 

Other comprehensive income before reclassifications

 

 

(16

)

 

 

(6

)

 

 

(6

)

 

 

105

 

 

 

77

 

Amounts reclassified from AOCI (a)

 

 

—

 

 

 

67

 

 

 

(4

)

 

 

(4,536

)

 

 

(4,473

)

Net other comprehensive income (loss)

 

 

(16

)

 

 

61

 

 

 

(10

)

 

 

(4,431

)

 

 

(4,396

)

Balance as of September 30, 2016

 

$

(3,207

)

 

$

(1,003

)

 

$

(3

)

 

$

41

 

 

$

(4,172

)

(a)

See table below for details about these reclassifications.

The following is a summary of the amounts reclassified from AOCI to net income during the three and nine months ended September 30, 2017 and 2016.

 

 

Amounts reclassified from AOCI (a)

 

 

 

(in millions)

 

Three months ended

September 30, 2017

 

 

Nine months ended September 30, 2017

 

 

Location of impact in income statement

Translation adjustments

 

 

 

 

 

 

 

 

 

 

Loss on Venezuela deconsolidation

 

$

—

 

 

$

(29

)

 

Other (income) expense, net

 

 

 

—

 

 

 

(29

)

 

Total before tax

 

 

 

—

 

 

 

—

 

 

Income tax expense (benefit)

 

 

$

—

 

 

$

(29

)

 

Net of tax

Amortization of pension and other employee benefits items

 

 

 

 

 

 

 

 

 

 

Actuarial losses and other (b)

 

$

(35

)

 

$

(103

)

 

 

 

 

 

(35

)

 

 

(103

)

 

Total before tax

 

 

 

12

 

 

 

34

 

 

Income tax expense (benefit)

 

 

$

(23

)

 

$

(69

)

 

Net of tax

Losses on hedging activities

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

(3

)

 

$

(4

)

 

Cost of sales

 

 

 

(3

)

 

 

(4

)

 

Total before tax

 

 

 

1

 

 

 

1

 

 

Income tax expense (benefit)

 

 

$

(2

)

 

$

(3

)

 

Net of tax

Available-for-sale-securities

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment of equity securities

 

$

—

 

 

$

(4

)

 

Other (income) expense, net

 

 

 

—

 

 

 

(4

)

 

Total before tax

 

 

 

—

 

 

 

1

 

 

Income tax expense (benefit)

 

 

 

—

 

 

 

(3

)

 

Net of tax

Total reclassification for the period

 

$

(25

)

 

$

(104

)

 

Total net of tax


 

 

Amounts reclassified from AOCI (a)

 

 

 

(in millions)

 

Three months ended

September 30, 2016

 

 

Nine months ended

September 30, 2016

 

 

Location of impact in income statement

Amortization of pension and other employee benefits items

 

 

 

 

 

 

 

 

 

 

Actuarial losses and other (b)

 

$

(31

)

 

$

(98

)

 

 

 

 

 

(31

)

 

 

(98

)

 

Total before tax

 

 

 

11

 

 

 

31

 

 

Income tax expense (benefit)

 

 

$

(20

)

 

$

(67

)

 

Net of tax

Gains (losses) on hedging activities

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

5

 

 

$

9

 

 

Other (income) expense, net

Foreign exchange contracts

 

 

(2

)

 

 

(3

)

 

Cost of sales

 

 

 

3

 

 

 

6

 

 

Total before tax

 

 

 

(1

)

 

 

(2

)

 

Income tax expense (benefit)

 

 

$

2

 

 

$

4

 

 

Net of tax

Available-for-sale-securities

 

 

 

 

 

 

 

 

 

 

Gains on sale of equity securities

 

$

—

 

 

$

4,536

 

 

Other (income) expense, net

 

 

 

—

 

 

 

4,536

 

 

Total before tax

 

 

 

—

 

 

 

—

 

 

Income tax expense (benefit)

 

 

 

—

 

 

 

4,536

 

 

Net of tax

Total reclassification for the period

 

$

(18

)

 

$

4,473

 

 

Total net of tax

(a)

Amounts in parentheses indicate reductions to net income.

(b)

These AOCI components are included in the computation of net periodic benefit cost disclosed in Note 10.

Refer to Note 8 for additional information regarding hedging activity and Note 10 for additional information regarding the amortization of pension and other employee benefits items.

12. INCOME TAXES

Effective tax rate

The company’s effective income tax rate for continuing operations was 14.5% and 0.8% in the third quarters of 2017 and 2016, respectively, and 15.0% and (1.1%) in the nine months ended September 30, 2017 and 2016, respectively. The company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted eachcurrent period by discrete factors and events.

The effective income tax rate for continuing operations during the three months ended September 30, 2017 increased from the three months ended September 30, 2016, due to the inclusion in 2016 of restructuring and other charges incurred in higher tax rate jurisdictions as well as the favorable impact of discrete items including the partial settlement of an on-going income tax matter related to the company’s Turkish operations and the settlement of a transfer pricing audit related to the company’s Italian operations.  Windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the company’s stock compensation programs partially offset the increase from the prior period as such benefits are now reflected as a tax benefit as a result of the company’s adoption of ASU 2016-09 in 2017.  

The effective income tax rate for continuing operations increased during the nine months ended September 30, 2017 due to the items noted above as well as the absence in the current year of the tax-free net realized gains associated with the Baxalta Retained Share transactions, which included debt-for-equity exchanges, the contribution of Baxalta Retained Shares to the company’s U.S. pension plan and the exchange of Baxalta Retained Shares for shares of the company, as well as benefits attributable to closing an IRS and German income tax audit that were all reflected during the nine months ended September 30, 2016. The effective income tax rate for continuing operations during the nine months ended September 30, 2017 was favorably impacted by approximately 5.2 percentage points due to tax windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the company’s stock compensation programs.


13. LEGAL PROCEEDINGS

Baxter is involved in product liability, patent, commercial, and other legal matters that arise in the normal course of the company’s business. The company records a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is recorded. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of September 30, 2017, the company’s total recorded reserves with respect to legal matters were $15 million and there were no related receivables.

Baxter has established reserves for certain of the matters discussed below. The company is not able to estimate the amount or range of any loss for certain contingencies for which there is no reserve or additional loss for matters already reserved. While the liability of the companypresentation.Additionally, in connection with the claims cannot be estimated andreclassification of our BPS business to discontinued operations during the resolution thereof in any reporting period could have a significant impactsecond quarter of 2023, we reclassified $2 million of contract manufacturing revenues from the first quarter of 2023 from BPS to Other (within continuing operations), as the related manufacturing facility was not part of that divestiture transaction.

Geographic Sales Information
Our net sales are attributed to the following geographic regions based on the company’s results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on the company’s consolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may incur material judgments or enter into material settlements of claims.

In addition to the matters described below, the company remains subject to the risk of future administrative and legal actions. With respect to governmental and regulatory matters, these actions may lead to product recalls, injunctions, and other restrictions on the company’s operations and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, the company may be exposed to significant litigation concerning the scopelocation of the company’scustomer.

Three months ended March 31,
20242023
United States$1,659 $1,667 
Emerging markets1
778 757 
Rest of world2
1,155 1,089 
Total Baxter$3,592 $3,513 
1Emerging markets includes sales from our operations in Eastern Europe, the Middle East, Africa, Latin America, and others’ rights. Such litigation could resultAsia (except for Japan).
2 Rest of world includes sales from our operations in a lossWestern Europe, Canada, Japan, Australia, and New Zealand.
Segment Operating Income
We use segment operating income to evaluate the performance of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations.

General litigation

On July 31, 2015, Davita Healthcare Partners, Inc. filed suit against Baxter Healthcare Corporation in the District Court of the State of Colorado regarding an ongoing commercial dispute relating to the provision of peritoneal dialysis products. A bench trial concluded in third quarter 2016 and the parties were awaiting the court’s decision.  In October, 2017, the parties jointly requested a stay in the matter while they work to resolve the matter.  The court has granted the stay.

In November 2016, a purported antitrust class action complaint seeking monetary and injunctive relief was filed in the United States District Court for the Northern District of Illinois. The complaint alleges a conspiracy among manufacturers of IV solutions to restrict output and affect pricing in connection with a shortage of such solutions. Similar parallel actions subsequently were filed. In January 2017, a single consolidated complaint covering these matters was filed in the Northern District of Illinois. The company filed a motion to dismiss the consolidated complaint in February 2017.

In April 2017, the company became aware of a criminal investigation by the U.S. Department of Justice, Antitrust Division and a federal grand jury in the United States District Court for the Eastern District of Pennsylvania.   The company and an employee received subpoenas seeking production of documents and testimony regarding the manufacturing, selling, pricing and shortages of IV solutions and containers (including saline solutions and certain other injectable medicines sold by the company) and communications with competitors regarding the same.  The company is cooperating with the investigation.  As previously disclosed, the New York Attorney General has requested that Baxter provide information regarding business practices in the IV saline industry. The company is cooperating with the New York Attorney General.  

Other

In December 2016, the company received a civil investigative demand from the Commercial Litigation Branch of the United States Department of Justice primarily relating to contingent discount arrangements for, and other promotion of, the company’s TISSEEL and ARTIS products. The company is cooperating in this matter.



14 SEGMENT INFORMATION

Baxter’s two segments are strategic businesses that are managed separately because each business develops, manufactures and markets distinct products and services. Theour segments and a description of their products and services are as follows:

The Renal business provides products and services to treat end-stage renal disease, or irreversible kidney failure, along with other renal therapies. The Renal business offers a comprehensive portfolio to meet the needs of patients across the treatment continuum, including technologies and therapies for peritoneal dialysis (PD), hemodialysis (HD), continuous renal replacement therapy (CRRT) and additional dialysis services.

The Hospital Products business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, oncology injectable drugs, IV nutrition products, infusion pumps, inhalation anesthetics, and biosurgery products. The business also provides products and services related to pharmacy compounding, drug formulation and packaging technologies.

The company uses income from continuing operations before net interest expense, income tax expense, depreciation and amortization expense (Segment EBITDA), on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’s business segments. Intersegment sales are eliminated in consolidation.

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include most of the company’s debt and cash and equivalents and related netdecisions. Segment operating income represents income before income taxes, interest expense, foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, nonstrategic investments and related income and expense, certain employee benefit plan costs as well as certain nonrecurring gains, losses, and other charges (such as business optimization, integrationnon-operating income or expense, unallocated corporate costs, intangible asset amortization, and separation-related costs, and asset impairments). Financial information for the company’s segments is as follows.

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Renal

 

$

1,010

 

 

$

977

 

 

$

2,874

 

 

$

2,840

 

Hospital Products

 

 

1,697

 

 

 

1,581

 

 

 

4,913

 

 

 

4,678

 

Total net sales

 

$

2,707

 

 

$

2,558

 

 

$

7,787

 

 

$

7,518

 

EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Renal

 

$

226

 

 

$

214

 

 

$

649

 

 

$

494

 

Hospital Products

 

 

653

 

 

 

588

 

 

 

1,821

 

 

 

1,673

 

Total segment EBITDA

 

$

879

 

 

$

802

 

 

$

2,470

 

 

$

2,167

 

The following is a reconciliationother special items. Special items, which are presented below in our reconciliations of segment EBITDAoperating income to income from continuing operations before income taxes, per the condensed consolidated statements of income.

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Total segment EBITDA

 

$

879

 

 

$

802

 

 

$

2,470

 

 

$

2,167

 

Reconciling items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

(184

)

 

 

(204

)

 

 

(562

)

 

 

(599

)

Stock compensation

 

 

(31

)

 

 

(30

)

 

 

(77

)

 

 

(84

)

Net interest expense

 

 

(14

)

 

 

(14

)

 

 

(41

)

 

 

(53

)

Restructuring charges, net

 

 

(31

)

 

 

(130

)

 

 

(50

)

 

 

(237

)

Venezuela deconsolidation

 

 

—

 

 

 

—

 

 

 

(33

)

 

 

—

 

Net realized gains on Baxalta Retained Shares transactions

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,387

 

Net loss on debt extinguishment

 

 

—

 

 

 

(52

)

 

 

—

 

 

 

(153

)

Other Corporate items

 

 

(329

)

 

 

(244

)

 

 

(783

)

 

 

(753

)

Income from continuing operations before income taxes

 

$

290

 

 

$

128

 

 

$

924

 

 

$

4,675

 


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Annual Report) for management’s discussion and analysis of the financial condition and results of operations of the company. The following is management’s discussion and analysis of the financial condition and results of operations of the company for the three and nine months ended September 30, 2017.

RESULTS OF OPERATIONS

Baxter’sare excluded from segment operating income from continuing operations for the three and nine months ended September 30, 2017 totaled $248 million, or $0.45 per diluted share, and $785 million, or $1.42 per diluted share, compared to $127 million, or $0.23 per diluted share, and $4.7 billion, or $8.56 per diluted share for the three and nine months ended September 30, 2016. Income from continuing operations for the three and nine months ended September 30, 2017 included special items which decreased income from continuing operations by $108 million and $237 million, respectively, or $0.19 and $0.42 per diluted share, respectively, as further discussed below. Income from continuing operations for the three months ended September 30, 2016 included special items which reduced income from continuing operations by $184 million, or $0.33 per diluted share. Special items increased income from continuing operations by $4 billion, or $7.17 per diluted share, for the nine months ended September 30, 2016.

Special Items

The following table provides a summary of the company’s special items and the related impact by line item on the company’s results of continuing operations for the three and nine months ended September 30, 2017 and 2016.

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Gross Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible asset amortization expense

 

$

(38

)

 

$

(42

)

 

$

(112

)

 

$

(124

)

Business optimization items 1

 

 

(12

)

 

 

(35

)

 

 

(42

)

 

 

(113

)

Product-related items 2

 

 

(21

)

 

 

—

 

 

 

(17

)

 

 

12

 

Separation-related costs 4

 

 

—

 

 

 

(1

)

 

 

(1

)

 

 

(1

)

Claris acquisition and integration expenses 8

 

 

(4

)

 

 

 

 

 

 

(4

)

 

 

 

 

Hurricane Maria costs 10

 

 

(21

)

 

 

 

 

 

 

(21

)

 

 

 

 

Intangible asset impairment 3

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(51

)

Total Special Items

 

$

(96

)

 

$

(78

)

 

$

(197

)

 

$

(277

)

Impact on Gross Margin Ratio

 

(3.5 pts)

 

 

(3.0 pts)

 

 

(2.5 pts)

 

 

(3.7 pts)

 

Marketing and Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business optimization items 1

 

$

39

 

 

$

106

 

 

$

74

 

 

$

137

 

Separation-related costs 4

 

 

2

 

 

 

9

 

 

 

16

 

 

 

45

 

Claris acquisition and integration expenses 8

 

 

11

 

 

 

—

 

 

 

16

 

 

 

—

 

Historical reserve adjustments 5

 

 

—

 

 

 

—

 

 

 

(12

)

 

 

—

 

Total Special Items

 

$

52

 

 

$

115

 

 

$

94

 

 

$

182

 

Impact on Marketing and Administrative Expense Ratio

 

1.9 pts

 

 

4.5 pts

 

 

1.2 pts

 

 

2.4 pts

 

Research and Development Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business optimization items 1

 

$

1

 

 

$

30

 

 

$

—

 

 

$

75

 

Total Special Items

 

$

1

 

 

$

30

 

 

$

—

 

 

$

75

 

Other Expense (Income), Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on debt extinguishment 6

 

$

—

 

 

$

48

 

 

$

—

 

 

$

149

 

Net realized gains on Baxalta Retained Share transactions 7

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,391

)

Venezuela deconsolidation 9

 

 

—

 

 

 

—

 

 

 

33

 

 

 

—

 

Total Special Items

 

$

—

 

 

$

48

 

 

$

33

 

 

$

(4,242

)

Income Tax Expense (Benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of special items

 

$

(41

)

 

$

(87

)

 

$

(87

)

 

$

(252

)

Total Special Items

 

$

(41

)

 

$

(87

)

 

$

(87

)

 

$

(252

)

Impact on Effective Tax Rate

 

4.4 pts

 

 

21.3 pts

 

 

3.1 pts

 

 

21.9 pts

 


Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is similar to how management internally assesses performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact the company’sour reported results of operations for the period.

Most global functional support costs, overhead costs and other shared costs that benefit our segments are allocated to those segments. Corporate costs that are not allocated to our segments, as well as any differences between actual
25

corporate costs and the amounts allocated to our segments, are presented as unallocated corporate costs. The following table presents our segment operating income and reconciliations of segment operating income to income from continuing operations before income taxes.
Three months ended March 31,
(in millions)20242023
Medical Products and Therapies$227 $197 
Healthcare Systems and Technologies67 112 
Pharmaceuticals78 87 
Kidney Care159 57 
Other4 7 
Total535 460 
Unallocated corporate costs(20)(21)
Intangible asset amortization expense(166)(162)
Business optimization items(57)(134)
Acquisition and integration items(5)7 
Separation-related costs(92)(9)
European Medical Devices Regulation(8)(12)
Total operating income187 129 
Interest expense, net78 117 
Other income, net(7)(2)
Income from continuing operations before income taxes$116 $14 
Our chief operating decision maker does not receive any asset information by operating segment and, accordingly, we do not report asset information by operating segment.

26

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2023 for management’s discussion and analysis of our financial condition and results of operations. The following is management’s discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2024 and 2023.
RECENT STRATEGIC ACTIONS
In mid-2022, our Board of Directors authorized a period. Management believesstrategic review of our business portfolio, with the goal of increasing stockholder value. As part of that providingreview process, we identified and evaluated a range of potential strategic actions, including opportunities for sales and other separation transactions. In January 2023, following the separate impactcompletion of that review, we announced a number of planned strategic actions, as discussed below, which are intended to enhance our operational effectiveness, accelerate innovation and drive additional stockholder value.
Proposed Separation of Kidney Care Business
In January 2023, we announced a proposed spinoff of our Kidney Care business into an independent publicly traded company. In March 2024, we announced that we have been in recent discussions with select private equity investors to explore a potential sale of our Kidney Care business in lieu of the proposed spinoff. Regardless of the separation structure ultimately selected, the separation of our Kidney Care business is currently expected to be completed during the second half of 2024, subject to the satisfaction of customary conditions. During the first quarter of 2024 we generated $1.10 billion of net sales from our Kidney Care segment, representing approximately 31% of our consolidated net sales.
Since the initial announcement of the proposed separation of our Kidney Care business, we have incurred significant separation-related costs that have adversely impacted our earnings and cash flows. We expect to continue to incur significant separation costs, which will continue to adversely impact our earnings and cash flows, until the proposed separation is completed. Additionally, if the proposed separation is completed, we expect to incur some amount of dis-synergies due to the reduced size of our company and, as a result, we will need to undertake various actions to help ensure that our cost structure is appropriate to support our remaining businesses.
There can be no guarantees that the proposed separation will be completed in the manner or over the timeframe described above, itemsor at all.
Implementation of New Operating Model and Resulting Segment Change
In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Under this new operating model, our business is comprised of four segments: Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals, and Kidney Care (which we are currently planning to divest during the second half of 2024 through either a sale or spinoff, as discussed above). Our segments were changed during the third quarter of 2023 to align with our new operating model and prior period segment disclosures have been revised to reflect the new segment presentation. See Note 16 in Item 1 of this Quarterly Report on Form 10-Q for additional information.
Sale of BioPharma Solutions (BPS) Business
On September 29, 2023, we completed the company’ssale of our BioPharma Solutions (BPS) business and received cash proceeds of $3.96 billion from that transaction. The results of operations and cash flows of our BPS business for the three months ended March 31, 2023 are reported as discontinued operations in accordancethe accompanying condensed consolidated financial statements. We intend to use substantially all of the after-tax proceeds from this transaction to repay certain of our debt obligations, including $514 million of commercial paper borrowings and $2.28 billion of long-term debt that we repaid during the fourth quarter of 2023. See Note 2 in Item 1 of this Quarterly Report on Form 10-Q for additional information.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Supply Constraints, Global Economic Conditions, and Regulatory Matters
We have experienced significant challenges to our global supply chain in recent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and
27

electromechanical devices), and higher transportation costs, resulting from the COVID-19 pandemic and other exogenous factors including significant weather events, elevated inflation levels, increased interest rates, disruptions to certain ports of call and access to shipping ports around the world, the war in Ukraine, the conflict in the Middle East (including attacks on merchant ships in the Red Sea), tensions amongst China, Taiwan, and the U.S., and other geopolitical events. Due to the nature of our products, which include dense consumable medical products such as IV fluids, and the geographic locations of our manufacturing facilities, which often require us to transport our products long distances, we may be more susceptible to increases in freight costs and other supply chain challenges than certain of our industry peers. While we have seen meaningful improvements in the availability of certain component parts and improved pricing in certain raw materials and on certain transportation costs, these challenges may have a negative impact on our supply chain in future periods. These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for certain product categories (including those acquired in our December 2021 acquisition of Hill-Rom Holdings, Inc. (Hillrom)) due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future.

Our results of operations are also affected by macroeconomic conditions and levels of business confidence. The war in Ukraine, the conflict in the Middle East (including attacks on merchant ships in the Red Sea), tensions amongst China, Taiwan, and the U.S., and the sanctions and other measures being imposed in response to these conflicts (and the potential for escalation of these conflicts) have increased the levels of economic and political uncertainty and we continue to closely monitor the developing situations. While we have substantially completed our wind down efforts related to our business in Russia, a significant escalation or expansion of economic disruption or the current scope of the war in Ukraine could have an adverse effect on our operations (including our supply chain) in the region.

Our global operations expose us to risks associated with GAAPpublic health crises and epidemics/pandemics. COVID-19 had, and it or any other future public health crisis could in the future have an adverse impact on, among other things, our expenses, operations, supply chains, and distribution systems. Any resurgence of the pandemic or any new public health crisis could again impact healthcare priorities and cause volatility in the demand for our products.

The existence of high inflation rates in the United States may provide a more complete understandingand in many of the company’scountries where we conduct business has resulted in, and may continue to result in, higher interest rates, shipping costs, labor costs, and other costs and expenses. Additionally, adverse changes in foreign currency exchange rates have increased, and could continue to increase, our costs of sourcing certain raw materials in some jurisdictions. We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses and we may not be able to pass these cost increases on to our customers in a timely manner or at all, which could have a material adverse impact on our profitability and results of operations. Inflation and general macroeconomic factors have caused certain of our customers to reduce or delay orders for our products and services and could cause them to do so in the future, which could have a material adverse impact on our sales and results of operations.
As a medical products company, our operations and can facilitate a fuller analysismany of the company’sproducts manufactured or sold by us are subject to extensive regulation by numerous government agencies, both within and outside the United States. These regulations (as described in Item 1, Government Regulation, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023) require that we obtain specific approval from the Food and Drug Administration (FDA) or applicable non-U.S. regulatory authorities before we can market and sell most of our products in a particular country. Failure to obtain or maintain those approvals or clearances could have a material adverse impact on our business (including with respect to our ability to compete in the product markets in which we currently operate). Furthermore, the FDA in the United States, the European Medicines Agency in Europe, the China Food and Drug Administration in China, and other government agencies, inside and outside of the United States, administer requirements covering the testing, safety, effectiveness, manufacturing, labeling, promotion and advertising, pricing, distribution, and post-market surveillance of our products. Our failure to comply with these requirements may subject us to various actions, including warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses, and may have a material adverse impact on our results of operations, particularlyoperations.
28

For further discussion, please refer to Item 1A, "Risk Factors" in evaluating performance from one period to another. This information should be consideredour Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
NON-GAAP FINANCIAL MEASURES
Our presentation of percentage changes in addition to, and not as a substitute for, information prepared in accordance with GAAP.

1

The company's results in the third quarter of 2017 included a charge of $52 million related to business optimization initiatives. This included a charge of $31 million related to restructuring activities and $21 million of costs to implement business optimization programs which primarily included external consulting and project employee costs. The $31 million of restructuring charges were comprised of employee termination costs.

The company’s results in the first nine months of 2017 included a net charge of $116 million related to business optimization initiatives. This included a net charge of $50 million related to restructuring activities, $58 million of costs to implement business optimization programs which primarily included external consulting and project employee costs, and $8 million of accelerated depreciation associated with facilities to be closed. The $50 million of net restructuring charges included $40 million of employee termination costs, $5 million of contract termination costs, and $5 million of asset impairment charges primarily related to facility closures.

The company’s results in the third quarter of 2016 included a net charge of $171 million related to business optimization initiatives. This included a net charge of $130 million related to restructuring activities, $25 million of costs to implement business optimization programs which included external consulting and employee salary and related costs, $11 million of accelerated depreciation associated with facilities to be closed, and $5 million of Gambro integration costs. The $130 million of restructuring activities included $101 million of employee termination costs, $27 million of intangible asset impairment charges related to acquired in-process R&D, and $2 million of other exit costs.

The company’s results in the first nine months of 2016 included a net charge of $325 million related to business optimization initiatives. This included a net charge of $237 million related to restructuring activities, $44 million of costs to implement business optimization programs which included external consulting and employee salary and related costs, $25 million of accelerated depreciation associated with facilities to be closed, and $19 million of Gambro integration costs. The $237 million of restructuring activities included $144 million of employee termination costs, $54 million of costs related to the discontinuance of the VIVIA home hemodialysis development program, $27 million of intangible asset impairment charges related to acquired in-process R&D, and $12 million of other exit costs.

2

The company’s results in the third quarter and first nine months of 2017 included a net charge of $21 million and $17 million, respectively, related to SIGMA SPECTRUM infusion pump inspection and remediation activities, partially offset by a benefit related to an adjustment to historical product reserves. The company’s results in the first nine months of 2016 included a benefit of $12 million related to an adjustment to the SIGMA SPECTRUM infusion pump reserves.  

3

The company’s results in the first nine months of 2016 included a $51 million impairment primarily related to developed technology.

4

The company's results in 2017 and 2016 included costs incurred related to the Baxalta separation totaling $2 million and $10 million, respectively in the third quarter and $17 million and $46 million, respectively, in the first nine months.

5

The company's results in the first nine months of 2017 included a benefit of $12 million related to an adjustment to the company's historical rebates and discounts reserve.

6

The company’s results in the third quarter of 2016 included a net debt extinguishment loss of $48 million primarily related to certain debt redemptions.  The company’s results in 2016 included a net debt extinguishment loss totaling $149 million related to the March 2016 debt-for-equity exchange for certain company indebtedness and certain other debt redemptions. See Note 8 within Item 1 for additional details.

7

The company’s results in the first nine months of 2016 included net realized gains of $4.4 billion related to the debt-for-equity exchanges of Baxalta Retained Shares for certain company indebtedness and for the equity-for-equity exchange and pension contribution described above. Refer to Note 8 within Item 1 for additional details.

8

The company’s results in the third quarter and first nine months of 2017 include acquisition and integration costs of $15 million and $20 million, respectively, related to the company’s acquisition of Claris Injectables Limited (Claris).

9

The company’s results in 2017 included a charge of $33 million related to the deconsolidation of its Venezuelan operations.

10

The company’s results in 2017 included a charge of $21 million related to the impact of Hurricane Maria on the company’s operations in Puerto Rico.  The costs primarily include inventory and fixed asset impairments as well as idle facility costs.


NET SALES

 

 

Three months ended

September 30,

 

 

Percent change

 

(in millions)

 

2017

 

 

2016

 

 

At actual

currency rates

 

 

At constant

currency rates

 

 

U.S. Cyclophosphamide

 

 

Claris

 

 

Strategic Product Exits

 

Renal

 

$

1,010

 

 

$

977

 

 

 

3

%

 

 

3

%

 

 

0

%

 

 

0

%

 

 

(3

)%

Hospital Products

 

 

1,697

 

 

 

1,581

 

 

 

7

%

 

 

7

%

 

 

0

%

 

 

2

%

 

 

(1

)%

Total net sales

 

$

2,707

 

 

$

2,558

 

 

 

6

%

 

 

6

%

 

 

0

%

 

 

1

%

 

 

(1

)%

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Percent change

 

(in millions)

 

2017

 

 

2016

 

 

At actual

currency rates

 

 

At constant

currency rates

 

 

U.S. Cyclophosphamide

 

 

Claris

 

 

Strategic Product Exits

 

International

 

$

1,559

 

 

$

1,491

 

 

 

5

%

 

 

4

%

 

 

0

%

 

 

1

%

 

 

(3

)%

United States

 

 

1,148

 

 

 

1,067

 

 

 

8

%

 

 

8

%

 

 

0

%

 

 

1

%

 

 

0

%

Total net sales

 

$

2,707

 

 

$

2,558

 

 

 

6

%

 

 

6

%

 

 

0

%

 

 

1

%

 

 

(1

)%

 

 

Nine months ended

September 30,

 

 

Percent change

 

(in millions)

 

2017

 

 

2016

 

 

At actual

currency rates

 

 

At constant

currency rates

 

 

U.S. Cyclophosphamide

 

 

Claris

 

 

Strategic Product Exits

 

Renal

 

$

2,874

 

 

$

2,840

 

 

 

1

%

 

 

2

%

 

 

0

%

 

 

0

%

 

 

(2

)%

Hospital Products

 

 

4,913

 

 

 

4,678

 

 

 

5

%

 

 

5

%

 

 

0

%

 

 

0

%

 

 

(1

)%

Total net sales

 

$

7,787

 

 

$

7,518

 

 

 

4

%

 

 

4

%

 

 

0

%

 

 

0

%

 

 

(1

)%

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Percent change

 

(in millions)

 

2017

 

 

2016

 

 

At actual

currency rates

 

 

At constant

currency rates

 

 

U.S. Cyclophosphamide

 

 

Claris

 

 

Strategic Product Exits

 

International

 

$

4,405

 

 

$

4,376

 

 

 

1

%

 

 

2

%

 

 

0

%

 

 

0

%

 

 

(2

)%

United States

 

 

3,382

 

 

 

3,142

 

 

 

8

%

 

 

8

%

 

 

(1

)%

 

 

1

%

 

 

0

%

Total net sales

 

$

7,787

 

 

$

7,518

 

 

 

4

%

 

 

4

%

 

 

0

%

 

 

0

%

 

 

(1

)%

Foreign currency did not have an impact on consolidated net sales during the third quarter or the first nine months of 2017 compared to the prior periods.

The comparisons presented at constant currency rates, reflect comparativewhich is computed using current period local currency sales at the prior period’s foreign exchange rates.rates, is a non-GAAP financial measure. This measure provides information on the changeabout growth (or declines) in our net sales assuming thatas if foreign currency exchange rates havehad not changed between the prior period and the current period. The company believesWe believe that the non-GAAP measure of percent change in net sales at constant currency rates, when used in conjunction with the U.S. GAAP measure of percent change in net sales at actual currency rates, may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of the company’sour results of operations, particularly in evaluating performance from one period to another.

During 2016,

RESULTS OF OPERATIONS
For the company made a strategic decisionthree months ended March 31, 2024, net income attributable to exit select productsBaxter stockholders was $37 million, or $0.07 per diluted share. For the three months ended March 31, 2023, net loss from continuing operations attributable to Baxter stockholders was $1 million, or $0.00 per diluted share, and net income from discontinued operations was $45 million, or $0.09 per diluted share. For the three months ended March 31, 2024, our results included special items that decreased net income attributable to Baxter stockholders by $294 million, or $0.58 per diluted share. For the three months ended March 31, 2023, our results included special items that decreased income from continuing operations attributable to Baxter stockholders by $249 million, or $0.49 per diluted share, and decreased net income from discontinued operations by $4 million, or $0.01 per diluted share. See the subsection entitled “Special Items” for information about special items for all periods presented.
CONSOLIDATED NET SALES
Three Months Ended March 31,Percent change
(in millions)20242023At actual
currency rates
At constant currency rates 1
United States$1,659 $1,667 (0)%0 %
Emerging markets2
778 757 3 %4 %
Rest of world3
1,155 1,089 6 %6 %
Total net sales$3,592 $3,513 2 %3 %
1     Percent change in certain markets including Venezuela, India and Turkey.  Overall, these items had a negative impact to the company’s net sales growth rateat constant currency rates is a non-GAAP financial measure. See the section entitled “Non-GAAP Financial Measures” for additional information about our use of that measure.
2    Emerging markets includes sales from our operations in Eastern Europe, the Middle East, Africa, Latin America, and Asia (except for Japan).
3    Rest of world includes sales from our operations in Western Europe, Canada, Japan, Australia, and New Zealand.
Foreign currency adversely impacted net sales by 1 percentage point during the thirdfirst quarter and first nine months of 2017, respectively.  The company is also presenting the impact of generic competition for U.S. cyclophosphamide to enhance comparability between periods and better identify operating trends.  

On July 27, 2017, Baxter completed the acquisition of Claris, a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of $629 million, net of cash acquired. In the three and nine months ended September 30, 2017, consolidated Baxter results include $27 million of net sales related2024, compared to the Claris acquisition.


In September 2017, the company’s three Puerto Rico manufacturing sites sustained minimal structural damage from the impact of Hurricane Maria and limited production activities resumed soon thereafter.  Given the temporary disruptionsprior year period, primarily due to the company’s manufacturing facilities as a resultstrengthening of the storm,U.S. Dollar relative to the company expects net sales inTurkish Lira, Chinese Renminbi, Australian Dollar, and Japanese Yen, partially offset by the fourth quarterweakening of 2017the U.S. Dollar relative to be negatively impacted by approximately $70 million.  The company does not expect any material impact to net sales in 2018 or thereafter.

Franchise Net Sales Reporting

The Renalthe Colombian Peso, British Pound, Mexican Peso, and Euro.

NET SALES BY SEGMENT
Medical Products and Therapies
Our Medical Products and Therapies segment includes sales of our sterile IV solutions, infusion systems, administration sets, parenteral nutrition therapies and surgical hemostat, sealant, and adhesion prevention products.
29

Three Months Ended March 31,Percent change
(in millions)20242023At actual
currency rates
At constant currency rates 1
Infusion Therapies and Technologies$966 $911 6 %6 %
Advanced Surgery263 246 7 %8 %
Total Medical Product and Therapies net sales$1,229 $1,157 6 %6 %
1     Percent change in net sales at constant currency rates is a non-GAAP financial measure. See the company’ssection entitled “Non-GAAP Financial Measures” for additional information about our use of that measure.
Medical Product and Therapies segment net sales increased 6% in the first quarter of 2024, as compared to the prior year period.
Infusion Therapies and Technologies net sales increased 6% in the first quarter of 2024, as compared to the prior year period. Sales performance primarily reflected growth in IV solutions and, to a lesser extent, international nutrition product offerings. Growth in the current year period was primarily attributable to pricing initiatives with the remainder driven by volume.
In April 2024, we received U.S. Food and Drug Administration (FDA) 510(k) clearance of our Novum IQ large volume infusion pump (LVP), which is expected to favorably impact the net sales generated by our Infusion Therapies and Technologies business during the second half of 2024.
Advanced Surgery net sales increased 7% in the first quarter of 2024, as compared to the prior year period. Sales performance primarily reflected growth in hemostats and sealants and, to a lesser extent, adhesion prevention product offerings. Growth in the current year period was primarily attributable to increased sales volume. Foreign currency exchange rates adversely impacted sales growth by 1%, as compared to the prior year period.
Healthcare Systems and Technologies
Our Healthcare Systems and Technologies segment includes sales of our connected care solutions and collaboration tools, including smart bed systems, patient monitoring systems and diagnostic technologies, respiratory health devices, and advanced equipment for the surgical space, including surgical video technologies, precision positioning devices, and other accessories.
Three Months Ended March 31,Percent change
(in millions)20242023At actual
currency rates
At constant currency rates 1
Care and Connectivity Solutions$402 $429 (6)%(7)%
Front Line Care265 302 (12)%(12)%
Total Healthcare Systems and Technologies net sales$667 $731 (9)%(9)%
1     Percent change in net sales at constant currency rates is a non-GAAP financial measure. See the section entitled “Non-GAAP Financial Measures” for additional information about our use of that measure.
Healthcare Systems and Technologies segment net sales decreased 9% in the first quarter of 2024, as compared to the prior year period.
Care and Connectivity Solutions net sales decreased 6% in the first quarter of 2024, as compared to the prior year period, primarily driven by volume declines resulting from the timing of capital orders by our hospital customers, the phasing of installations, primarily with respect to care communications products, to future periods, and lower rental revenues. We were also impacted by challenges related to commercial execution that we are currently addressing in order to improve the performance of this business. Foreign currency exchange rates favorably impacted sales growth by 1% for the quarter, as compared to the prior year period.
Front Line Care net sales decreased 12% in the first quarter of 2024, as compared to the prior year period. Sales performance primarily reflected declines in our connected monitoring and intelligent diagnostics product offerings. The sales decline as compared to the prior year was primarily driven by an increased backlog in the current year period, compared with a backlog reduction in the prior year period, and softer demand in the primary care market.
We currently expect the growth rates for our Healthcare Systems and Technologies segment to meaningfully improve during the second half of 2024.
30

Pharmaceuticals
Our Pharmaceuticals segment includes sales of specialty injectable pharmaceuticals, inhaled anesthesia and drug compounding.
Three Months Ended March 31,Percent change
(in millions)20242023At actual
currency rates
At constant currency rates 1
Injectables and Anesthesia$328 $305 8 %8 %
Drug Compounding250 218 15 %15 %
Total Pharmaceuticals net sales$578 $523 11 %11 %
1     Percent change in net sales at constant currency rates is a non-GAAP financial measure. See the section entitled “Non-GAAP Financial Measures” for additional information about our use of that measure.
Pharmaceuticals segment net sales increased 11% in the first quarter of 2024 compared to the prior year period.
Injectables and Anesthesia net sales increased 8% in the first quarter of 2024 compared to the prior year period primarily due to growth in our U.S. specialty injectable products, driven by new product launches, including Zosyn, following the transfer of the related product rights to us in April 2023, Bendamustine, and Norepinephrine, partially offset by lower sales of inhaled anesthesia products.
Drug Compounding net sales increased 15% in the first quarter of 2024, as compared to the prior year period. The increase was driven by increased demand for our international pharmacy compounding services.
Kidney Care
Our Kidney Care segment includes Chronic Therapies, comprised of peritoneal dialysis (PD), and hemodialysis (HD),and Acute Therapies, comprised of continuous renal replacement therapies (CRRT) and additional dialysis services.

The Hospital Products segment includes four commercial franchises: Fluid Systems, Integrated Pharmacy Solutions, Surgical Care and Other.

other organ support therapies.
Three Months Ended March 31,Percent change
(in millions)20242023At actual
currency rates
At constant currency rates 1
Chronic Therapies$888 $884 0 %2 %
Acute Therapies214 188 14 %15 %
Total Kidney Care net sales$1,102 $1,072 3 %4 %

Fluid Systems includes1     Percent change in net sales of the company’s intravenous (IV) therapies, infusion pumps and IV administration sets.

Integrated Pharmacy Solutions includes sales of the company’s premixed and oncology drug platforms, nutrition products, pharmaceutical reconstitution devices and pharmacy compounding services.

Surgical Care includes sales of the company’s inhaled anesthesia products and critical care products as well as biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.

Other includes sales primarily from the company’s pharmaceutical partnering business.

The followingat constant currency rates is a summarynon-GAAP financial measure. See the section entitled “Non-GAAP Financial Measures” for additional information about our use of net sales by commercial franchise on a reported and constant currency basis along with the impact of significant non-operational items.

that measure.

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Percent change

 

(in millions)

 

2017

 

 

2016

 

 

At actual

currency rates

 

 

At constant

currency rates

 

 

U.S. Cyclo-

phosphamide

 

 

Claris

 

 

Strategic Product Exits

 

Total Renal net sales

 

$

1,010

 

 

$

977

 

 

 

3

%

 

 

3

%

 

 

0

%

 

 

0

%

 

 

(3

)%

Fluid Systems

 

$

610

 

 

$

576

 

 

 

6

%

 

 

6

%

 

 

0

%

 

 

0

%

 

 

(1

)%

Integrated Pharmacy Solutions

 

 

627

 

 

 

563

 

 

 

11

%

 

 

11

%

 

 

(2

)%

 

 

5

%

 

 

0

%

Surgical Care

 

 

338

 

 

 

320

 

 

 

6

%

 

 

5

%

 

 

0

%

 

 

0

%

 

 

(1

)%

Other

 

 

122

 

 

 

122

 

 

 

—

 

 

 

(2

)%

 

 

0

%

 

 

0

%

 

 

0

%

Total Hospital Products net sales

 

$

1,697

 

 

$

1,581

 

 

 

7

%

 

 

7

%

 

 

0

%

 

 

2

%

 

 

(1

)%

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Percent change

 

(in millions)

 

2017

 

 

2016

 

 

At actual

currency rates

 

 

At constant

currency rates

 

 

U.S. Cyclo-

phosphamide

 

 

Claris

 

 

Strategic Product Exits

 

Total Renal net sales

 

$

2,874

 

 

$

2,840

 

 

 

1

%

 

 

2

%

 

 

0

%

 

 

0

%

 

 

(2

)%

Fluid Systems

 

$

1,802

 

 

$

1,686

 

 

 

7

%

 

 

7

%

 

 

0

%

 

 

0

%

 

 

(2

)%

Integrated Pharmacy Solutions

 

 

1,747

 

 

 

1,682

 

 

 

4

%

 

 

5

%

 

 

(1

)%

 

 

1

%

 

 

0

%

Surgical Care

 

 

1,024

 

 

 

972

 

 

 

5

%

 

 

6

%

 

 

0

%

 

 

0

%

 

 

0

%

Other

 

 

340

 

 

 

338

 

 

 

1

%

 

 

1

%

 

 

0

%

 

 

0

%

 

 

0

%

Total Hospital Products net sales

 

$

4,913

 

 

$

4,678

 

 

 

5

%

 

 

5

%

 

 

0

%

 

 

0

%

 

 

(1

)%



Net sales in the RenalKidney Care segment during the third quarter and first nine months of 2017 increased 3% and 1%, respectively. Excluding the impact of foreign currency,net sales increased 3% and 2% in the third quarter and first nine months of 2017, respectively, driven by continued growth of PD patients and adoption of the company’s new Automated Peritoneal Dialysis Cyclers (APD) AMIA in the U.S. and HomeChoice CLARIA in international markets.  Increased sales globally of the company’s CRRT products also contributed to growth in the third quarter and first nine months of 2017.  Sales growth in the first nine monthsquarter of 20172024, as compared to the prior year period.

Chronic Therapies sales were flat in the first quarter of 2024, as compared to the prior year period. Sales performance in the current year period was primarily due to patient growth, pricing, and recent government tender awards, partially offset by lower sales of HD products internationally, driven by reduced volumes and increased pricing pressures.  Certain international strategic market exits negatively impacted the Renal segment’s net sales by 3% and 2% during the third quarter and first nine months of 2017, respectively, and are expected to negatively impact full year Renal segment net sales by approximately $50 million as compared to 2016.

Net sales in the Hospital Products segment increased 7% and 5%, respectively, during the third quarter and first nine months of 2017 compared to the prior period on both a reported basis and constant currency basis.  Certain international strategic market exits negatively impacted the Hospital Products segment net sales by 1% during the third quarter and first nine months of 2017 and are expected to negatively impact full year 2017 net sales by approximately $50 million as compared to 2016.  The company’s acquisition of Claris contributed $27 million of net sales during the third quarter and first nine months of 2017.  The principal drivers impacting net sales were the following:

In the Fluid Systems franchise, sales increased 6% in the third quarter and 7% in the first nine months of 2017 on a constant currency basis driven by select pricing and improved volumes for U.S. IV solutions.  This increase was also positively impacted by increased sales of the company’s IV access administrative sets, reflecting the on-going pull through from the company’s growing SPECTRUM infusion pump base.  

In the Integrated Pharmacy Solutions franchise, sales increased 11% in the third quarter and 5% in the first nine months of 2017 on a constant currency basis driven by improved volumes for the company’s nutritional therapies, increased sales of pre-mixed injectable drugs (as a result of recent product launches), the acquisition of Claris and a one-time benefit from an early contract settlement. These increases were offset by decreased U.S. sales of cyclophosphamide, a generic oncology drug,China, primarily due to government-based procurement initiatives and the entryimpact of competitors into the market. U.S.COVID-19 on that country’s renal patient population, and select product and market exits. Foreign currency exchange rates adversely impacted sales of cyclophosphamide declined from $163 million in the first nine months of 2016 to $143 million in the first nine months of 2017. The company expects U.S. sales of cyclophosphamide to continue to decline due to the entrance of additional competitors.

In the Surgical Care franchise, sales increased 5% in the third quarter and 6% in the first nine months of 2017 on a constant currency basis drivengrowth by improved volumes and pricing in the U.S. for the company’s portfolio of anesthetic and critical care products and positive demand for inhaled anesthetics internationally. The increase was principally due to pricing for BREVIBLOC, a fast-acting IV beta blocker, during the third quarter and first nine months of 2017 as well as volume for Transderm Scop during the first nine months.  The increased Transderm Scop volume was the result of a temporary supply disruption during the first half of the year related to an alternative product.      

In the Other franchise, sales decreased 2% in the third quarter and increased 1% in the first nine months of 2017 on a constant currency basis driven by unfavorable volumes in the third quarter and favorable volumes in the first nine months of 2017 for products manufactured by Baxter on behalf of its pharmaceutical partners. In addition, revenues related to the company’s manufacturing and supply agreement with Baxalta were lower in the third quarter and first nine months of 2017, as compared to the prior year.

year period.
Acute Therapies net sales increased 14% in the first quarter of 2024, as compared to the prior year period. The increase in the current year period was primarily driven by higher sales volume resulting from strong demand for our CRRT offerings, particularly in the United States. Foreign currency exchange rates adversely impacted sales growth by 1%, as compared to the prior year period.
Other
During the three months ended March 31, 2024 and 2023, we earned $16 million and $30 million, respectively, of revenues that were not attributable to our reportable segments. In the current and prior year periods, those other sales primarily represent revenues earned by certain of our manufacturing facilities from contract manufacturing activities. The prior year period also includes royalty income under a business development arrangement. The decrease in the current year as compared to the prior year period primarily reflects lower contract manufacturing
31


volume and, to a lesser extent, termination of the royalty arrangement following our acquisition of the rights to the underlying product.
COSTS AND EXPENSES
Special Items
The following table provides a summary of our special items from continuing operations and the related impact by line item on our results for the three months ended March 31, 2024 and 2023.
Three Months Ended March 31,
(in millions)20242023
Gross Margin
Intangible asset amortization expense$(114)$(110)
Business optimization items1
(14)(35)
Acquisition and integration items2
(1)— 
European medical devices regulation3
(8)(12)
Separation-related costs4
(4)(1)
Total Special Items$(141)$(158)
Impact on Gross Margin Ratio(3.9) pts(4.5) pts
Selling, General and Administrative (SG&A) Expenses
Intangible asset amortization expense$52 $52 
Business optimization items1
27 92 
Acquisition and integration items2
4 6 
Separation-related costs4
88 $8 
Total Special Items$171 $158 
Impact on SG&A Ratio4.8 pts4.5 pts
Research and Development (R&D) Expenses
Business optimization items1
$16 $7 
Total Special Items$16 $7 
Impact on R&D Ratio0.4 pts0.2 pts
Other Operating Income, net
Acquisition and integration items2
$— $(13)
Total Special Items$— $(13)
Income Tax Expense
Tax matters5
$37 $3 
Tax effects of special items6
(71)$(64)
Total Special Items$(34)$(61)
Impact on Effective Tax Rate41.4 pts76.9 pts
1Our results in 2024 and 2023 were impacted by costs associated with our execution of programs to optimize our organization and cost structure. These restructuring and other business optimization costs included actions related to our current implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities, rationalization of certain other manufacturing and distribution facilities, and transformation of certain general and administrative functions. Our results in 2024 and 2023 included business optimization charges of $57 million and $134 million, respectively. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.
2Our results in 2024 and 2023 reflected integration costs of $5 million and $6 million, respectively, which primarily included third party consulting costs related to our integration of Hillrom. In 2023, those costs were offset by $13 million of net gains from changes in the estimated fair values of contingent consideration liabilities.
3Our results in 2024 and 2023 included $8 million and $12 million, respectively, of incremental costs to comply with the European Union's medical device regulations for previously registered products, which primarily consist of contractor costs and other direct third-party costs. We consider the adoption of these regulations to be a significant one-time regulatory charge and believe that the costs of initial compliance for previously registered products over the implementation period are not indicative of our core operating results.
4Our results in 2024 and 2023 included separation-related costs of $92 million and $9 million, respectively, primarily reflecting costs of external advisors supporting our activities to prepare for the proposed separation of our Kidney Care segment. We also incurred $7 million of additional
32

separation-related costs in 2023 related to the sale of our BPS business that are reported in discontinued operations and are not presented in the table above.
5Our results in 2024 included $37 million of income tax expenses resulting from internal reorganization transactions related to the proposed separation of our Kidney Care segment. Our results in 2023 included a $3 million reallocation of income tax expense between discontinued operations and continuing operations resulting from the application of intraperiod tax allocation to our adjusted results in an interim period.
6This item reflects the income tax impact of the special items identified in this table. The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.
Gross Margin and Expense Ratios

Three months ended March 31,
2024% of net sales2023% of net sales$ change% change
Gross margin$1,387 38.6 %$1,275 36.3 %$112 8.8 %
SG&A$1,027 28.6 %$995 28.3 %$32 3.2 %
R&D$176 4.9 %$164 4.7 %$12 7.3 %

 

 

Three months ended

 

 

 

 

Nine months ended

 

 

 

 

 

September 30,

 

 

 

 

September 30,

 

 

 

(as a percentage of net sales)

 

2017

 

 

2016

 

 

Change

 

2017

 

 

2016

 

 

Change

Gross margin

 

 

41.7

%

 

 

41.9

%

 

(0.2 pts)

 

 

42.4

%

 

 

40.0

%

 

2.4 pts

Marketing and administrative expenses

 

 

25.3

%

 

 

28.4

%

 

(3.1 pts)

 

 

24.3

%

 

 

27.6

%

 

(3.3 pts)


Gross Margin

The gross margin ratio was 38.6% and 36.3% in the first quarter of 2024 and 2023, respectively. The special items identified aboveearlier in this section had an unfavorable impact of approximately 3.53.9 and 2.54.5 percentage points on the gross margin ratio in the thirdfirst quarter of 2024 and first nine months of 2017, respectively. The unfavorable impact was 3.0 and 3.7 percentage points in the third quarter and first nine months of 2016,2023, respectively. Refer to the Special Items caption above for additional detail.


Excluding the impact of the special items, the gross margin ratio increased 1.7 percentage points in the first quarter of 2024 compared to the prior year period, primarily due to select price increases, favorablepricing and initiatives to reduce our manufacturing performance and a benefit fromsupply chain costs.

SG&A
The SG&A expenses ratio was 28.6% and 28.3% in the company’s business transformation initiatives aimed at simplifying the portfolio to drive efficiencyfirst quarter of 2024 and reduce costs.

Marketing and Administrative Expenses

2023, respectively. The special items identified aboveearlier in this section had an unfavorable impact of approximately 1.94.8 and 1.24.5 percentage points on the marketing and administrative expenseSG&A expenses ratio in the thirdfirst quarter of 2024 and first nine months of 2017,2023, respectively. The unfavorable impact was 4.5 and 2.4 percentage points in the third quarter and first nine months of 2016. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the marketing and administrativeSG&A expenses ratio remained flat in the thirdfirst quarter and first nine months of 2017 declined due2024 compared to the actions taken by the company to rebase its cost structure and focus on expense management. These savings were partially offset by decreased benefits to the marketing and administrativeprior year period.
R&D
The R&D expenses ratio from lower transition service income aswas 4.9% and 4.7% in the agreement with Baxalta for these services continues to wind down.  

Researchfirst quarter of 2024 and Development

 

 

Three months ended

September 30,

 

 

Percent

 

 

Nine months ended

September 30,

 

 

Percent

 

(in millions)

 

2017

 

 

2016

 

 

change

 

 

2017

 

 

2016

 

 

change

 

Research and development expenses

 

$

151

 

 

$

159

 

 

 

(5

)%

 

$

435

 

 

$

490

 

 

 

(11

)%

As a percentage of net sales

 

 

5.6

%

 

 

6.2

%

 

 

 

 

 

 

5.6

%

 

 

6.5

%

 

 

 

 

2023, respectively. The special items identified aboveearlier in this section had an unfavorable impact of approximately 1.20.4 and 1.00.2 percentage points on the R&D expenses ratio in the thirdfirst quarter of 2024 and first nine months of 2016. Refer to the Special Items caption above for additional detail.

2023, respectively.

Excluding the impact of the special items, the research and developmentR&D expenses ratio increasedremained flat in the thirdfirst quarter and first nine months of 2017 as a result of2024 compared to the company’s increased investment in new product development.

prior year period.

Business Optimization Items

Beginning in the second half of 2015, the company initiated

In recent years, we have undertaken actions to transform its costsour cost structure and enhance operational efficiency. These efforts includehave included restructuring the organization, optimizing theour manufacturing footprint, R&D operations, and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through September 30, 2017, the company has incurred pretaxThe related costs of $526 million related to these actions. The costsactions consisted primarily of employee termination costs, implementation costs, contract termination costs, and accelerated depreciation. The company expectsasset impairments.
For the three months ended March 31, 2024, our most significant restructuring actions, reflecting $24 million of the restructuring charges in the current year period, were related to a program to centralize certain of our R&D activities into a new location and to our recent implementation of a new operating model intended to simplify and streamline our operations.
We currently expect to incur additional pretaxpre-tax costs, primarily related to the implementation of business optimization programs, of approximately $285$15 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives and, capital expenditures of $90 million related to these initiatives by the end of 2018. Theseextent further cost savings opportunities are identified, we would incur
33

additional restructuring charges and costs will primarily include employee termination costs, implementation costs, and accelerated depreciation. The company expects that approximately 5 percent of the remaining charges will be non-cash. These actionsto implement business optimization programs in the aggregate are expected to provide future annual pretax savings of approximately $950 million. The savings from these actions will impact cost of sales, marketing and administrative expenses, and research and development expenses.  Approximately 85 percent of the expected annual pretax savings are expected to be realized by the end of 2018, with the remainder by the end of 2020.

periods. Refer to Note 710 in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the company’sour business optimization initiatives.

programs.

Other Operating Income, Net Interest Expense

Net interest expense

Other operating income, net was $14$3 million and $41$13 million in the third quarter and first nine months of 2017, respectively, and $14 million and $53 million in the third quarter and first nine months of 2016, respectively. The decrease in the first nine months of 2017 was primarily driven by lower outstanding debt as a result of the first quarter 2016 debt-for-equity exchanges which extinguished $3.65 billion of debt as well as reduced coupon rates related to the third quarter 2016 debt issuance, partially offset by lower interest capitalized on assets under construction. See Note 8 within Item 1 for additional details about the debt extinguishments.

Other (Income) Expense, Net

Other (income) expense, net was income of $12 million and expense of $10 million in the third quarter and first nine months of 2017, respectively, and expense of $44 million and income of $4.3 billion in the third quarter and first nine months of 2016, respectively. Special items during the periods presented included the $4.4 billion net realized gain on the Baxalta Retained Shares transactions in


the first nine months of 2016, the $101 million debt extinguishment loss in the first quarter of 2016,2024 and 2023, respectively. In the $48 million debt extinguishment lossfirst quarter of 2024, this amount was comprised of income from transition services arrangements related to the divestiture of our BPS business. In the first quarter of 2023, this amount was comprised of gains from changes in the third quarterestimated fair value of 2016, and the $33 million loss on the deconsolidation of the company’s Venezuelan subsidiary in the second quarter of 2017.  Excluding the impact of special items, other (income)contingent consideration arrangements.

Interest Expense, Net
Interest expense, net had higher income in the third quarter of 2017was $78 million and lower income$117 million in the first nine months of 2017 as compared to 2016.  Higher income in the third quarter of 2017 was the result of foreign currency fluctuations principally related to intercompany receivables, payables2024 and monetary assets denominated in a foreign currency.  Lower income for the first nine months of 2017 was attributable to the absence of dividends on the Retained Shares received from Baxalta in 2016 and recognized investment impairment losses in 2017.

Segment EBITDA

The company uses income from continuing operations before net interest expense, income tax expense, depreciation and amortization expense (Segment EBITDA), on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’s business segments. Refer to Note 14 within Item 1 for a summary of financial results by segment. The following is a summary of significant factors impacting the segments’ financial results.

Renal

Segment EBITDA was $226 million and $649 million in the third quarter and first nine months of 2017, respectively, and $214 million and $494 million in the third quarter and first nine months of 2016,2023, respectively. The increasedecrease in 20172024 was driven by lower research and development costs as the company realigned allocations of research and development costs based on project spend attributable to segments, higher gross margins due to product mix and lower marketing and administrative expenses as the Renal segment benefited from the company’s business optimization programs and continued focus on reducing discretionary spending.  This growth was partially offset by unfavorable foreign currency.

Hospital Products

Segment EBITDA was $653 million and $1.821 billiondebt repayments in the thirdfourth quarter and first nine months of 2017, respectively, and $588 million and $1.673 billion in the third quarter and first nine months of 2016, respectively.  This increase was driven by higher net sales, and lower marketing and administrative expenses as cost savings were realized from the company’s business optimization programs and continued focus on reducing discretionary spending. This growth was2023, partially offset by higher research and development costs as the company realigned allocations of research and development costs based on project spend attributable to segments and unfavorable foreign currency.

Corporate and other

Certaininterest income and expense amounts are not allocateddue to a segment. These amounts are detailedhigher average cash balance and higher interest rates during the current year period.

Other Income, net
Other income, net was $7 million and $2 million in the tablefirst quarter of 2024 and 2023, respectively. In both the current and prior year periods, other income, net was primarily driven by pension and other postretirement benefits and increases in Note 14 within Item 1 and primarily include net interest expense,the fair value of marketable equity securities, partially offset by foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, non-strategic investments and related income and expense, certain employee benefit plan costs as well as certain nonrecurring gains and losses and other charges (such as business optimization, integration and separation-related costs and asset impairments).

losses.

Income Taxes

The company’s

Our effective income tax rate for continuing operations was 14.5%66.4% and 0.8%100.0% in the thirdfirst quarter of 2024 and 15.0% and (1.1%) for the first nine months of 2017 and 2016,2023, respectively. The company’sOur effective income tax rate differscan differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances, increases or decreases in liabilities for uncertain tax positions, and excess tax benefits or shortfalls on stock compensation awards. Our effective income tax rate during interim periods reflects our estimated annual effective tax rate and discrete items.
For the three months ended March 31, 2024, the difference between our effective income tax rate and the U.S. federal statutory rate each year duewas primarily driven by $37 million of income tax expense resulting from internal reorganization transactions related to certain operations that are subject tothe proposed separation of our Kidney Care segment, an increase in a valuation allowance in a foreign jurisdiction resulting from changes in future projected income, and an increase in our liabilities for various uncertain tax incentives, statepositions.
For the three months ended March 31, 2023, the difference between our effective income tax rate and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition,rate was primarily attributable to tax shortfalls on stock compensation awards and an increase in our liabilities for uncertain tax positions.
The Organization of Economic Co-operation and Development (OECD) and the effectiveG20 Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) has put forth two proposals—Pillar One and Pillar Two—that revise the existing profit allocation and nexus rules and ensure a minimal level of taxation, respectively. On December 12, 2022, the EU member states agreed to implement the Inclusive Framework’s global corporate minimum tax rate can be impacted each period by discrete factorsof 15%, and events.

various countries both within and outside the EU have enacted new laws implementing Pillar Two or have draft legislation proposed for adoption. The effectiveOECD continues to release additional guidance on the two-pillar framework, with widespread implementation occurring in 2024. We currently expect that the impact of the Pillar Two legislation on our income tax rateexpense for the year ending December 31, 2024 will be approximately $10 million to $15 million. We are continuing operations duringto evaluate the three months ended September 30, 2017 increased frompotential impacts of the three months ended September 30, 2016, due to the inclusionInclusive Framework for 2025 and future years, pending legislative adoption by individual countries, which could result in 2016 of restructuring and other charges incurred in higher tax rate jurisdictions as well as the favorable impact of discrete items including the partial settlement of an on-goingfurther adverse impacts on our income tax matter related toexpense and cash flows.

Discontinued Operations
On September 29, 2023, we completed the company’s Turkishsale of our BPS business. The results of operations and the settlementcash flows of a transfer pricing audit related to the company’s Italian operations.  Windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the company’s stock compensation programs partially offset the increase from the prior periodour BPS business are reported as such benefits are now reflected as a tax benefit as a result of the company’s adoption of ASU 2016-09 in 2017.  

The effective income tax rate for continuingdiscontinued operations increased during the nine months ended September 30, 2017 due to the items noted above as well as the absence in the current yearcondensed consolidated financial statements included in Item 1 of the tax-free net realized gains associated with the Baxalta Retained Share


transactions, which included debt-for-equity exchanges, the contribution of Baxalta Retained Sharesthis Quarterly Report on Form 10-Q. Prior period amounts have been adjusted to the company’s U.S. pension plan and the exchange of Baxalta Retained Shares for shares of the company, as well as benefits attributable to closing an IRS and German income tax audit that were all reflected during the nine months ended September 30, 2016.  The effective income tax rate for continuingreflect discontinued operations during the nine months ended September 30, 2017 was favorably impacted by approximately 5.2 percentage points due to tax windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the company’s stock compensation programs.  

Income from Continuing Operations and Earnings per Diluted Share

Income from continuing operations was $248 million and $127 million for the three months ended September 30, 2017 and 2016, respectively, and $785 million and $4.7 billion for the nine months ended September 30, 2017 and 2016, respectively. Income from continuing operations per diluted share was $0.45 and $0.23 for the three months ended September 30, 2017 and 2016, respectively, and $1.42 and $8.56 for the nine months ended September 30, 2017 and 2016, respectively. The significant factors and events contributing to the changes are discussed above.

Income (loss) from Discontinued Operations

Discontinued operations were insignificant for both periods presented.presentation. Refer to Note 2 within Item 1 for additional information regardinginformation.

34

SEGMENT OPERATING INCOME
The following is a summary of our operating income for our reportable segments.
Three months ended March 31,
(in millions)20242023
Medical Products and Therapies$227 $197 
% of Segment Net Sales18.5 %17.0 %
Healthcare Systems and Technologies67 112 
% of Segment Net Sales10.0 %15.3 %
Pharmaceuticals78 87 
% of Segment Net Sales13.5 %16.6 %
Kidney Care159 57 
% of Segment Net Sales14.4 %5.3 %
Other4 7 
Total535 460 
Unallocated corporate costs(20)(21)
Intangible asset amortization expense(166)(162)
Business optimization items(57)(134)
Acquisition and integration items(5)7 
Separation-related costs(92)(9)
European Medical Devices Regulation(8)(12)
Total operating income187 129 
Interest expense, net78 117 
Other income, net(7)(2)
Income from continuing operations before income taxes$116 $14 
Medical Products and Therapies
Segment operating income was $227 million and $197 million in the separationfirst quarter of Baxalta.

2024 and 2023, respectively. Segment operating income increased in the first quarter compared to the prior year period due to the increased gross profit from higher sales in the current year period.

Healthcare Systems and Technologies
Segment operating income was $67 million and $112 million in the first quarter of 2024 and 2023, respectively. Segment operating income decreased in the first quarter compared to the prior year period due to lower gross profit from lower sales in the current year period and, to a lesser extent, increased R&D expense, primarily related to our connected care portfolio.
Pharmaceuticals
Segment operating income was $78 million and $87 million in the first quarter of 2024 and 2023, respectively. Segment operating income decreased in the first quarter compared to the prior year period due to a lower gross margin percentage, reflecting increased costs of certain inventory manufactured by our former BPS business, which now incorporates a third-party mark-up following our divestiture of that business in September 2023, and increased SG&A expense, including marketing-related costs in connection with recent product launches.
Kidney Care
Segment operating income was $159 million and $57 million in the first quarter of 2024 and 2023, respectively. Segment operating income increased in the first quarter compared to the prior year period due to a higher gross margin, primarily driven by sales growth, initiatives to reduce our manufacturing and supply chain costs, a favorable product mix and, to a lesser extent, improved margins on dialyzers sold in the current period driven by higher
35

production volumes and better absorption in advance of our closure of a dialyzer manufacturing facility at the end of 2023.
Other
During the three months ended March 31, 2024 and 2023 we earned $4 million and $7 million, respectively, of operating income that was not attributable to our reportable segments. Operating income generated by activities not attributable to our reportable segments is presented as Other. In the current and prior year periods, other operating income primarily represents income from revenues earned by certain of our manufacturing facilities from contract manufacturing activities. The prior year period also includes royalty income under a business development arrangement. The decreases in the current year as compared to the prior year periods reflect lower contract manufacturing volume and, to a lesser extent, termination of the royalty arrangement following our acquisition of the rights to the underlying product.
Unallocated Corporate Costs
Under our new operating model, most global functional support costs, overhead costs and other shared costs that benefit our segments are allocated to those segments. Corporate costs that are not allocated to our segments, as well as any differences between actual corporate costs and the amounts allocated to our segments, are presented as unallocated corporate costs. Additionally, intangible asset amortization and other special items are not allocated to our segments. Prior to the implementation of our new operating model in the third quarter of 2023, more costs were maintained at corporate and were not allocated to our previous segments. Certain of the costs that were previously maintained at corporate under our prior segment structure that are now allocated to our segments include manufacturing variances and centrally managed supply chain costs, certain R&D costs, product category support costs, stock compensation expense, and certain employee benefit plan costs.
LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash flowflows for the nine monththree-month periods ended September 30, 2017March 31, 2024 and 2016.

2023.
Three months ended March 31,
(in millions)20242023
Cash flows from operations - continuing operations$163 $469 
Cash flows from investing activities - continuing operations(166)$(163)
Cash flows from financing activities(140)$(372)

 

Nine months ended

 

 

September 30,

 

(in millions)

2017

 

 

2016

 

Cash flows from operations - continuing operations

$

1,343

 

 

$

938

 

Cash flows from investing activities - continuing operations

 

(1,088

)

 

 

(549

)

Cash flows from financing activities

 

391

 

 

 

(44

)

Cash Flows from Operations —- Continuing Operations

For the three months ended March 31, 2024 and 2023, operating cash flows from continuing operations were $163 million and $469 million, respectively. Operating cash flows from continuing operations increased duringin the first nine months of 2017current year period were unfavorably impacted, as compared to the prior year period. The increase was drivenperiod, by higher annual payouts under our employee incentive compensation plans, which were determined based on our 2023 performance, payments for costs incurred in connection with the factors discussed below.

Net Income

Net income, as adjusted for certain non-cash items, such as depreciation and amortization, net periodic pension benefit and OPEB costs, stock compensation, deferred income taxes and other items increased in the nine months ended September 30, 2017 compared to 2016.  Additionally, non-cash items in the nine months ended September 30, 2016 included net realized gainsseparation of $4.4 billion related to the debt-for-equity exchanges of Baxalta Retained Shares for certain company indebtedness and for the equity-for-equity exchange.

Accounts Receivable

Cash inflows from accounts receivable were $32 million in the first nine months of 2017 compared to an inflow of $22 million in the prior year. Days sales outstanding in the current year were comparable to the prior year.  


Inventories

Cash outflows relating to inventories decreased in 2017 as compared to the prior-year period. The following isour Kidney Care business, a summary of inventories as of September 30, 2017 and December 31, 2016, as well as annualized inventory turns for the first nine months of 2017 and 2016, by segment.

 

 

Inventories

 

 

Annualized inventory

turns for the Nine

 

 

 

September 30,

 

 

December 31,

 

 

months ended September 30,

 

(in millions, except inventory turn data)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Renal

 

$

635

 

 

$

544

 

 

 

3.77

 

 

 

3.58

 

Hospital Products

 

 

915

 

 

 

885

 

 

 

3.97

 

 

 

3.61

 

Other

 

 

—

 

 

 

1

 

 

n/a

 

 

n/a

 

Total company

 

$

1,550

 

 

$

1,430

 

 

 

3.89

 

 

 

3.60

 

Thelarger increase in inventories was driven primarily by timing of purchasesinventory, and longer sourcing lead times for certain products within the Renal segment portfolio, coupled with the acquisition of Claris in the Hospital Products segment.

Other

The changes in accounts payable and accrued liabilities were a $36 million outflow in the first nine months of 2017 compared to a $326 million outflow in the first nine months of 2016. The changes were primarily driven by a first quarter 2016 non-recurring $303 million tax settlement payment to partially settle a U.S. Federal income tax audit as well as the timing of supplier payments.

Payments related to the execution of the company’s business optimization initiatives increased from $98 million in the first nine months of 2016 to $114 million in the first nine months of 2017. The company madehigher payments of $21 million in the first nine months of 2016 related to the execution of the COLLEAGUE infusion pump and SIGMA SPECTRUM infusion pump recalls. Refer to Note 7 within Item 1 for further information regarding the company’s business optimization initiatives.

Changes in other balance sheet items include an outflow of $93 million and an inflow of $121 million in the first nine months of 2017 and 2016, respectively, primarily driven by the collection of a tax receivable in the second quarter of 2016.

restructuring costs.

Cash Flows from Investing Activities —- Continuing Operations

Capital Expenditures

Capital expenditures were $410 million and $519 million in

For the first ninethree months of 2017 and 2016, respectively. The company’sended March 31, 2024, cash used in investing activities from continuing operations primarily included capital expenditures in 2017 were drivenof $176 million, partially offset by targeted investments in projects to support production$16 million of PD and IV solutions.

Acquisitions and Investments

Cash outflows relating to acquisitions and investmentsproceeds from sales of $680 million inmarketable securities. For the first ninethree months of 2017 were primarily driven by the $629 million acquisition of Claris, the acquisition of the rights to Clindamycin Saline and Clindamycin Dextrose from Celerity and the acquisition of Wound Care Technologies, Inc. Cash outflows relating to acquisitions and investments of $47 millionended March 31, 2023, cash used in the first nine months of 2016 were driven primarily by the acquisition of the rights to Vancomycin from Celerity.

Divestitures and Other Investing Activities

Cash inflows from divestitures and other investing activities in 2017 and 2016 were not significant.  

from continuing operations primarily included capital expenditures of $165 million.

Cash Flows from Financing Activities

Debt Issuances, Net of Payments of Obligations

Net cash inflows related to debt and other financing obligations totaled $633 million for

For the first ninethree months ended March 31, 2024, cash used in financing activities included dividend payments of 2017 primarily related to the issuance$147 million and debt repayments of €600$15 million, of senior notes at a fixed coupon rate of 1.30% due in May 2025.

Net cash outflows related to debt and other financing obligations totaled $58 million for the first nine months of 2016 primarily related to a $190 million repayment of the company’s 0.95% senior unsecured notes that matured in June 2016, a $130 million repayment of the company’s 5.9% senior unsecured notes that matured in September 2016, and the redemption of approximately $1 billion in


aggregate principal amount of senior notes in September 2016, as well as other short-term obligations. The company also had $300 million of net repayments related to its commercial paper program. This was partially offset by issuances of debt totaling $1.6 billion of senior notes in August 2016. See Note 8 within Item 1 for additional details regarding the debt transactions in the first nine months of 2016.

Other Financing Activities

Cash dividend payments totaled $228 million and $197 million in the first nine months of 2017 and 2016, respectively. The increase in cash dividend payments was primarily due to an increase in the quarterly dividend rate from $0.115 to $0.13 per share for quarterly dividends declared between May 2016 and May 2017. In addition, the company increased the quarterly dividend rate from $0.13 to $0.16 per share for quarterly dividends declared beginning in May 2017. Proceedsproceeds from stock issued under employee benefit plans increased from $251 million inof $40 million. In the first ninethree months of 2016 to $2982023, cash used for financing activities included a net decrease of commercial paper borrowings of $249 million in the first nine monthsand dividend payments of 2017, primarily due to increased option exercises in the first nine months$146 million, partially offset by proceeds from stock issued under employee benefit plans of 2017.

$36 million.

36

As authorized by theour Board of Directors, the company repurchases itswe repurchase our stock depending upon the company’sour cash flows, net debt levellevels and market conditions. In July 2012, theour Board of Directors authorized a share repurchase program and the related authorization was subsequently increased a number of times. We did not repurchase of up to $2.0 billion of the company’s common stock. The Board of Directors increased this authority by an additional $1.5 billion in November 2016. The company paid $275 million in cash to repurchase approximately 4.7 millionany shares pursuant tounder this authority in the first nine threemonths of 2017 and2024. We had $1.4$1.30 billion remaining available under this authorization as of September 30, 2017. In the first nine months of 2016, the company paid $45 million in cash to repurchase shares. In the first nine months of 2016, the company executed an equity-for-equity exchange of Baxalta Retained Shares for 11.5 million outstanding Baxter shares.

March 31, 2024.

Credit Facilities, Commercial Paper Program and Access to Capital and Credit Ratings

Credit Facilities

and Commercial Paper Program

As of September 30, 2017,March 31, 2024, we had a U.S. Dollar-denominated term loan credit facility, which had two tranches of term loans outstanding, a U.S. Dollar-denominated revolving credit facility and a Euro-denominated revolving credit facility.
As of March 31, 2024, we had $130 million outstanding under one tranche of our U.S. Dollar-denominated term loan credit facility that matures in 2024 and $1.64 billion outstanding under the company’sother tranche of our U.S. Dollar-denominated term loan credit facility that matures in 2026. Borrowings under the term loan credit facility bear interest on the principal amount outstanding at either Term SOFR plus an applicable margin plus a credit spread adjustment or a “base rate” plus an applicable margin. The term loan credit facility contains various covenants, including a maximum net leverage ratio. We have the option to prepay outstanding amounts under the term loan credit facility in whole or in part at any time.
As of March 31, 2024, our U.S. dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $1.5$2.50 billion and approximately €200 million, respectively. AsThere were no borrowings outstanding under these credit facilities as of March 31, 2024 or December 31, 2023. Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings.
In the first quarter of 2024, we amended the credit agreements governing our U.S. dollar-denominated term loan credit facility and revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to amend the net leverage ratio covenant to increase the maximum net leverage ratio for the six fiscal quarters ending June 30, 2024, September 30, 2024, December 31, 2024, March 31, 2025, June 30, 2025, and September 30, 2025. The amendment further provides for the reduction of the capacity under our U.S dollar-denominated revolving credit facility from $2.50 billion to $2.00 billion on the earlier of September 30, 2017,2024 or the company wasdate of the sale or spinoff of our Kidney Care business. As of March 31, 2024, we were in compliance with the financial covenants in these agreements. Based on our covenant calculations as of March 31, 2024, we had capacity to draw on the full amounts under our credit facilities. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by eachthe institution’s respective commitment.

Additionally, a deterioration in our financial performance may further reduce our ability to draw on our credit facilities.

We have a commercial paper program that currently enables us to borrow efficiently at short-term interest rates. Upon maturity of any commercial paper borrowings under this program, and to the extent old issuances are not repaid by cash on hand, we are exposed to the rollover risk of not being able to issue new commercial paper. Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our revolving credit facilities for an amount at least equal to our outstanding commercial paper borrowings. If we were not able to issue new commercial paper, we have the option of drawing on the revolving credit facilities; however, electing to do so would result in higher interest expense. We had no commercial paper borrowings outstanding as of March 31, 2024.
Access to Capital

The company intends and Credit Ratings

We intend to fund short-term and long-term obligations as they mature through cash on hand, including the proceeds from the recently completed sale of our BPS business, future cash flows from operations orand potentially by issuing additional debt. The companydebt, which could include commercial paper, bond issuances, or other financing arrangements. We had $3.5$3.03 billion of cash and cash equivalents as of September 30, 2017,March 31, 2024, with adequate cash available to meet operating requirements in each jurisdiction in which the company operates. The company invests itswe operate. We invest our excess cash in certificates of deposit and money market and other funds and diversifiesdiversify the concentration of cash among different financial institutions.

The company’s As of March 31, 2024, we had approximately $13.73 billion of long-term debt and finance lease obligations, including current maturities, and no short-term debt. We currently expect to use substantially all of the remaining net after-tax cash proceeds from the BPS divestiture to continue to repay indebtedness through the first half of 2024. Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure.

37

Our ability to generate cash flows from operations and issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for the company’sour products or in the solvency of itsour customers or suppliers, deterioration in the company’sour key financial ratios or credit ratings or other significantly unfavorable changes in market conditions. However, the company believes it haswe believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements, and attract long-term capital on acceptable terms to support the company’sour growth objectives.

The company continuesobjectives and reduce our post-Hillrom acquisition debt levels as we take actions consistent with our capital allocation priorities. In January 2024, Fitch revised our senior debt credit rating from BBB to do business with foreign governments in certain countries, including Greece, Spain, PortugalBBB-, our senior debt credit rating outlook rating from rating watch negative to stable and Italy, whichour short-term debt credit rating from F2 to F3. There have experienced a deterioration in credit and economic conditions. As of September 30, 2017, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $151 million.

While these economic conditions have not significantly impacted the company’s abilitybeen no changes to collect receivables, global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses.


Credit Ratings

The company’sour investment grade credit ratings at September 30, 2017 were as follows.

that we disclosed in our 2023 Annual Report.

Standard & Poor’s

Fitch

Moody’s

Ratings

Senior debt

A-

BBB+

Baa2

Short-term debt

A2

F2

P2

Outlook

Stable

Stable

Stable

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. A summary of the company’sour significant accounting policies is included in Note 1 to the company’sour consolidated financial statements in the 2016our 2023 Annual Report. Certain of the company’sour accounting policies are considered critical, as these policies are the most important to the depiction of the company’sour financial statements and require significant, difficult or complex judgments by us, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the 2016our 2023 Annual Report.
The valuation of goodwill and other long-lived assets is one of our critical accounting policies. In connection with our November 1, 2023 annual goodwill impairment tests, we determined that no goodwill impairments had occurred. The fair values of the Front Line Care reporting unit within our Healthcare Systems and Technologies segment and the Chronic Therapies reporting unit within our Kidney Care segment exceeded their carrying values by approximately 5% and 6%, respectively. While no triggering events were identified during the three months ended March 31, 2024, we are continuing to closely monitor the performance of those reporting units, and if there is a significant adverse change in our outlook for those businesses in the future, a goodwill impairment could arise at that time. As of March 31, 2024, the carrying amounts of goodwill for our Front Line Care and Chronic Therapies reporting units were $2.41 billion and $430 million, respectively.
There have been no significant changes in the company’s application of itsour critical accounting policies during the first ninethree months of 2017.

2024.

RECENT ACCOUNTING PRONOUNCEMENTS
In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires enhanced disclosures about segment expenses on an annual and interim basis. This standard is effective for our annual consolidated financial statements for the year ending December 31, 2024 and for interim periods beginning in 2025. We are currently evaluating the impact of this standard on our condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures, which requires (1) disclosure of specific categories in the rate reconciliation and (2) additional information for reconciling items that meet a quantitative threshold. Additionally, the amendment requires disclosure of certain disaggregated information about income taxes paid, income from continuing operations before income tax expense (benefit) and income tax expense (benefit). The standard is effective for our annual consolidated financial statements for the year ending December 31, 2025. We are currently evaluating the impact of this standard on our consolidated financial statements.
LEGAL CONTINGENCIES

Refer to Note 136 within Item 1 for a discussion of the company’sour legal contingencies. Upon resolution of any of these uncertainties, the companywe may incur charges in excess of presently established liabilities. While theour liability of the company in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on the company’sour results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on the company’sour consolidated financial position. While the company believeswe believe that it haswe have valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the companywe may in the future incur material judgments or enter into material settlements of claims.

38

CERTAIN REGULATORY MATTERS

The

In July 2017, immediately prior to the closing of our acquisition of Claris Injectables Limited (Claris), the U.S. Food and Drug Administration (FDA) commenced an inspection of the Claris’ facilities in Ahmedabad, India on July 27, 2017, immediately prior to the closing of the Claris acquisition.India. FDA completed the inspection on August 4, 2017, at which time FDAand subsequently issued a related Form-483 (Claris 483).  The Claris 483 includes a number ofWarning Letter based on observations across a variety of areas.  The company submitted its timely response to the Claris 483 and isidentified in the process2017 inspection (2017 Warning Letter).¹ FDA re-inspected the facilities and issued a Form FDA 483 on May 17, 2022. On September 1, 2022, FDA notified us that the inspection had been classified as voluntary action indicated. From January 19, 2023 to January 27, 2023, FDA performed an inspection at the Ahmedabad site, concluding with the issuance of implementinga Form FDA 483. On April 26, 2023, FDA notified us that the inspection had been classified as official action indicated. We received a Warning Letter on July 25, 2023 based on observations identified in the January 2023 inspection (2023 Warning Letter)2. Since the issuance of the 2017 Warning Letter, we have implemented corrective and preventive actions whichto address FDA's related observations, as well as other enhancements at the site. We have included product recalls that are financially immaterialfully responded to the company, to address FDA’s observations and other items identified in connection with integrating Claris into the company’s quality systems.

In January 2014, the company received a2023 Warning Letter, fromhave implemented additional corrective and preventive actions, and continue to engage with FDA primarily directed to quality systems forregarding the company’s Round Lake, Illinois, facility, particularly in that facility’s capacity as a specification developer for certainagency's observations. In addition, since the issuance of the company’s medical devices. This2017 Warning Letter, was liftedwe have secured other sites in February 2017.

The company received a Warning Letter in December 2013 that included observations related to the company’s ambulatory infuser business in Irvine, California, which previously had been subject to agency action.  This Warning Letter was lifted in May 2017.

In June 2013, the company received a Warning Letterour manufacturing network and have launched and distribute select products from FDA regarding operations and processes at its North Cove, North Carolina and Jayuya, Puerto Rico facilities.  The company attended Regulatory Meetings with the FDA in November 2015 (concerning the Jayuya facility).  The company also requested and participated in a Regulatory Meeting regarding both facilities in July 2017.  The Warning Letter addresses observations related to Current Good Manufacturing Practice violations at the two facilities.

In June 2010, the company received a Warning Letter from FDA in connection with an inspection of its McGaw Park, Illinois facility, which previously supported the Renal franchise. The company’s Round Lake facility now provides the related capacity for the Renal franchise. The Warning Letter pertains to the processes by which the company analyzes and addresses product complaints through corrective and preventative action, and reports relevant information to FDA. This Warning Letter was lifted in February 2017.


On October 9, 2014, the company had a Regulatory Meeting with FDA to discuss the Warning Letters described above. At the meeting, the company agreed to work closely with FDA to provide regular updates on its progress to meet all requirements and resolve all matters identifiedthose sites in the Warning Letters described above.

Please see Item 1A of the 2016 Annual Report and Item U.S.

1 of Part II of Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htm
2 Available online at https://www.fda.gov/inspections-compliance-enforcement-and-criminal-investigations/warning-letters/baxter-healthcare-corporation-654136-07252023
FORWARD-LOOKING INFORMATION
Certain statements contained in this quarterly report for additional discussionon Form 10-Q may constitute “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of regulatory1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. These statements by their nature address matters and how they may impact the company.

FORWARD-LOOKING INFORMATION

This quarterly report includes forward-looking statements.that are uncertain to different degrees. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended tomay identify forward-looking statements, that represent our current judgment about possible future events.although not all forward-looking statements contain such words. These forward-looking statements may include statements with respect to the proposed separation of our Kidney Care business and other portfolio management activities we may undertake in the future, the costs, structure, and timing associated with strategic initiatives including the proposed separation, the viability and accuracy of anticipated benefits of our strategic actions, accounting estimates and assumptions (including with respect to goodwill and other intangible asset impairments), global economic conditions, litigation-related matters, including outcomes, future regulatory filings (or the withdrawal or resubmission of any pending submissions) and the company’sour R&D pipeline strategic objectives,(including anticipated product approvals or clearances), sales from new product offerings, credit exposure to foreign governments, the adequacy of cash flows and credit facilities, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, the company’sour exposure to financial market volatility and foreign currency, and interest rate and credit risks, potential tax liability associatedour net interest expense, the separationimpact of the company’s biopharmaceuticals and medical products businesses (including the 2016 disposition of the company’s Retained Shares in Baxalta),inflation on our business, the impact of competition, future sales growth, business development activities, (including the recent acquisition of Claris Injectables in July 2017), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances manufacturing expansion, the sufficiency of the company’s facilities and financial flexibility,refinancings, the adequacy of credit facilities, tax provisions and reserves, the effective income tax rate, and all other statements that do not relate to historical facts.


These forward-looking statements are based on certain assumptions and analyses made in light of the company’sour experience and perception of historical trends, current conditions, and expected future developments as well as other factors that the company believeswe believe are appropriate in the circumstances. While these statements represent the company’s currentour judgment on what the future may hold, and the company believeswe believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:

•our ability to execute and complete strategic initiatives, asset dispositions, and other transactions, including the proposed separation of our Kidney Care business, our plans to simplify our manufacturing footprint and the timing for such transactions, the ability to satisfy any applicable conditions, and the expected proceeds, consideration, and benefits;

failure to achieve our long-term financial improvement goals;

39

demand for and market acceptance risks for and competitive pressures related to new and existing products,
•failure to accurately forecast or achieve our short-and long-term financial performance and goals (including with respect to our strategic initiatives and other actions) and related impacts on our liquidity;
•our ability to execute on our capital allocation plans, including our debt repayment plans, the timing and amount of any dividends, share repurchases and divestiture proceeds, and, if we proceed with the separation of the Kidney Care business in the form of a spinoff, the capital structure of the public company that would be formed (and the resulting capital structure for the remaining company);
•our ability to successfully integrate acquisitions;
•the impact of global economic conditions (including, among other things, inflation levels, interest rates, financial market volatility, banking crises, the potential for a recession, the war in Ukraine, the conflict in the Middle East (including recent attacks on merchant ships in the Red Sea), tensions amongst China, Taiwan, and the U.S. and the potential for escalation of these conflicts, the related economic sanctions being imposed globally in response to the conflicts and potential trade wars and global public health crises, pandemics and epidemics, such as the COVID-19 pandemic, or the anticipation of any of the foregoing, on our operations and our employees, customers, suppliers, and foreign governments in countries in which we operate;
•downgrades to our credit ratings or ratings outlooks, and the related impact on our funding costs and liquidity;
•product development risks, including satisfactory clinical performance and obtaining and maintaining required regulatory approvals (including as a result of evolving regulatory requirements or the withdrawal or resubmission of any pending applications), the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;
•product quality or patient safety issues leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales, including the focus on evaluating product portfolios for the potential presence or formation of nitrosamines;
•future actions of, or failures to act or delays in acting by FDA, the European Medicines Agency, or any other regulatory body or government authority (including the SEC, DOJ, or the Attorney General of any state) that could delay, limit, or suspend product development, manufacturing, or sale, or result in seizures, recalls, injunctions, monetary sanctions, or criminal or civil liabilities;
•demand and market acceptance risks for, and competitive pressures related to, new and existing products, challenges with accurately predicting changing customer preferences and future expenditures and inventory levels and with being able to monetize new and existing products and services, the impact of those products on quality and patient safety concerns, and the need for ongoing training and support for our products;
•breaches, including by cyber-attack, data leakage, unauthorized access or theft, or failures of or vulnerabilities in, our information technology systems, or products;
•the continuity, availability, and pricing of acceptable raw materials and component parts, our ability to pass some or all of these costs to our customers through price increases or otherwise, and the related continuity of our manufacturing and distribution and those of our suppliers;
•inability to create additional production capacity in a timely manner or the occurrence of other manufacturing, sterilization, or supply difficulties, including as a result of natural disaster, war, terrorism, global public health crises and epidemics/pandemics, regulatory actions, or otherwise;
•our ability to finance and develop new products or enhancements on commercially acceptable terms or at all;
•loss of key employees, the occurrence of labor disruptions (including as a result of labor disagreements under bargaining agreements or national trade union agreements or disputes with works councils) or the inability to attract, develop, retain, and engage employees;
•failures with respect to our quality, compliance, or ethics programs;
•future actions of third parties, including third-party payors and our customers and distributors (including GPOs and IDNs);

40

•changes to legislation and regulation and other governmental pressures in the United States and globally, including the cost of compliance and potential penalties for purported noncompliance thereof, including new or amended laws, rules, and regulations, as well as the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification, and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation, and rebate policies;
•the outcome of pending or future litigation;
•the impact of competitive products and pricing, including generic competition, drug reimportation, and disruptive technologies;
•global regulatory, trade, and tax policies, including with respect to climate change and other sustainability matters;
•the ability to protect or enforce our patents or other proprietary rights (including trademarks, copyrights, trade secrets, and know-how) or where the patents of third parties prevent or restrict our manufacture, sale, or use of affected products or technology;
•the impact of any goodwill, intangible asset, or other long-lived asset impairments on our operating results;
•fluctuations in foreign exchange and interest rates;
•any changes in law concerning the taxation of income (whether with respect to current or future tax reform);
•actions by tax authorities in connection with ongoing tax audits;
•other factors identified elsewhere in this report and other filings with the SEC, including those factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023, all of which are available on our website.

Actual results may differ materially from those products on quality and patient safety concerns;

product development risks, including satisfactory clinical performance, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;

product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales;

future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the U.S. Department of Justice or the New York Attorney General) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities;

failures with respect to the company’s quality, compliance and ethics programs;

future actions of third parties, including third-party payers, as healthcare reform and other similar measures are implemented, modified or repealedprojected in the United States and globally;

the impact of ongoing U.S. healthcare reform and other similar actions undertaken by foreign governments with respect to pricing, reimbursement, taxation and rebate policies;

additional legislation, regulation and other governmental pressuresforward-looking statements, which are more fully discussed in the United States or globally, which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of the company’s business;

the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies;


global regulatory, trade and tax policies;

the company’s ability to identify business development and growth opportunities and to successfully execute on business development strategies;

the company’s ability to finance and develop new products or enhancements, on commercially acceptable terms or at all;

the availability and pricing of acceptable raw materials and component supply;

inability to create additional production capacity in a timely manner or the occurrence of other manufacturing or supply difficulties (including as a result of natural disaster or otherwise);

the impact of any future tax liability with respect to the separation and distribution, including with respect to disposition of the Retained Shares;

any failure by Baxalta or Shire to satisfy its obligation under the separation agreements, including the tax matters agreement, or the company’s letter agreement with Shire and Baxalta;

the ability to protect or enforce the company’s owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, trade secrets and know-how) or patents of third parties preventing or restricting the company’s manufacture, sale or use of affected products or technology;

the impact of global economic conditions on the company and its customers and suppliers, including foreign governments in certain countries in which the company operates;

fluctuations in foreign exchange and interest rates;

any changes in law concerning the taxation of income, including income earned outside the United States, which may be a part of comprehensive tax reform;

actions by tax authorities in connection with ongoing tax audits;

breaches or failures of the company’s information technology systems;

loss of key employees or inability to identify and recruit new employees;

the outcome of pending or future litigation;

the adequacy of the company’s cash flows from operations to meet its ongoing cash obligations and fund its investment program; and

other factors identified elsewhere in this report and other filings with the Securities and Exchange Commission, including those factors described in Item 1A of the company’sour Annual Report on Form 10-K for the year ended December 31, 2016, all2023. These forward-looking statements are not exclusive and are in addition to other factors discussed elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2023. Further, other unknown or unpredictable factors could also have material adverse effects on future results. Any forward-looking statement in this Quarterly Report on Form 10-Q speaks only as of the date on which are available on the company’s website.

Actual results may differ materially from those projected in the forward-looking statements. The company does not undertakeit is made. Except as required by law, we assume no obligation, and expressly disclaim any obligation, to update itsor revise any forward-looking statements.


statements, whether as a result of new information or future events.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41


Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Currency Risk

The company is

We are primarily exposed to foreign exchange risk with respect to revenues generated outside of the United States denominated in the Euro, British Pound, Chinese Yuan,Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee, and New Zealand Dollar. The company manages itsSwedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows the companyus to net exposures and take advantage of any natural offsets. In addition, the company useswe use derivative and nonderivative financial instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and stockholders’ equity volatility relating to foreign exchange. However, we don't hedge our entire foreign exchange exposure and are still subject to earnings and stockholders' equity volatility relating to foreign exchange risk. Financial market and currency volatility may limit the company’sour ability to cost-effectively hedge these exposures.

The company may

We primarily use options, forwards and cross-currency swapsforward contracts to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities.liabilities denominated in foreign currencies. The maximum term over which the company haswe have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions as of September 30, 2017March 31, 2024 is 1512 months. The companyWe also entersenter into derivative instruments to hedge foreign exchange risk on certain intercompanyintra-company and third-party receivables and payables and debt denominated in foreign currencies.

As part of itsour risk-management program, the company performswe perform sensitivity analyses to assess potential changes in the fair value of itsour foreign exchange instruments relating to hypothetical and reasonably possible near-term movements in foreign exchange rates.

A sensitivity analysis of changes in the fair value of foreign exchange option and forward contracts outstanding at September 30, 2017,as of March 31, 2024, while not predictive in nature, indicated that if the U.S. Dollar uniformly weakened by 10% against all currencies, on a net-of-tax basis, the net pre-tax asset balance of $5$11 million with respect to those contracts would decreasechange by $23 million, resulting in a net liability position.

$127 million.

The sensitivity analysis model recalculates the fair value of the foreign exchange option and forward contracts outstanding at September 30, 2017as of March 31, 2024 by replacing the actual exchange rates at September 30, 2017as of March 31, 2024 with exchange rates that are 10% weaker compared to the actual exchange rates for each applicable currency. All other factors are held constant. TheThese sensitivity analysis disregardsanalyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analysisanalyses also disregardsdisregard the offsetting change in value of the underlying hedged transactions and balances.

In February 2022, the three-year cumulative inflation rate in Turkey exceeded 100 percent. As a result, on April 1, 2022, we began reporting the results of our subsidiary in that jurisdiction using highly inflationary accounting, which requires that the functional currency of the entity be changed to the reporting currency of its parent. As of March 31, 2024, our subsidiary in Turkey had net monetary assets of $16 million.
Interest Rate and Other Risks

Refer to the caption “Interest Rate and Other Risks” in the “Financial Instrument Market Risk” section of the 20162023 Annual Report. There were no significant changes during the quarter ended September 30, 2017.


March 31, 2024.

Item 4.

Controls and Procedures

42


Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures

Baxter carried out an evaluation, under the supervision and

Our management, with the participation of its Disclosure Committee and management, including theour Chief Executive Officer and our Chief Financial Officer, ofhas evaluated the effectiveness of Baxter’sour disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of September 30, 2017.March 31, 2024. Based on that evaluation, theour Chief Executive Officer and our Chief Financial Officer concluded that the company’sour disclosure controls and procedures were effective as of September 30, 2017.

ChangesMarch 31, 2024.

Changes in Internal Control over Financial Reporting

In the third quarter of 2017, related to its overall business optimization initiatives, the company began implementation of a business transformation project within the finance, human resources, purchasing and information technology functions which will further centralize and standardize business processes and systems across the company.  The company is transitioning some processes to its shared services centers while others are moving to outsourced providers.  This multi-year initiative will be conducted in phases and include modifications to the design and operation of controls over financial reporting.

With the exception of the above, there

There have been no changes in Baxter’sour internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2017March 31, 2024 that have materially affected, or are reasonably likely to materially affect, Baxter’sour internal control over financial reporting.


43

Review by Independent Registered Public Accounting Firm

A review of the interim condensed consolidated financial information included in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017 and 2016 has been performed by PricewaterhouseCoopers LLP, the company’s independent registered public accounting firm. Its report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and therefore, the independent accountants’ liability under Section 11 does not extend to it.


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Baxter International Inc.

We have reviewed the accompanying condensed consolidated balance sheet of Baxter International Inc. and its subsidiaries as of September 30, 2017, and the related condensed consolidated statements of income and of comprehensive income for the three-month and nine-month periods ended September 30, 2017 and 2016 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2017 and 2016. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income, of comprehensive income, of cash flows and of changes in equity for the year then ended (not presented herein), and in our report dated February 23, 2017, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

November 2, 2017


PART II. OTHER INFORMATION

Item 1.

Item 1.    Legal Proceedings

The information in Part I, Item 1, Note 136 is incorporated herein by reference.

Item 1A. Risk Factors

We do not believe that there have been any material changes to the risk factors previously disclosed in our 2023 Annual Report.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table includes information about the company’s common stock repurchases during the three-month period ended September 30, 2017.

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total number of shares purchased (1)

 

 

Average price paid per share

 

 

Total number of shares purchased as part of publicly announced program(1)

 

 

Approximate dollar value of shares that may yet be purchased under the program(1)

 

July 1, 2017 through July 31, 2017

 

—

 

 

$

—

 

 

—

 

 

 

 

 

August 1, 2017 through August 31, 2017

 

 

2,082,000

 

 

$

61.05

 

 

 

2,082,000

 

 

 

 

 

September 1, 2017 through September 30, 2017

 

 

834,700

 

 

$

62.78

 

 

 

834,700

 

 

 

 

 

Total

 

 

2,916,700

 

 

$

61.54

 

 

 

2,916,700

 

 

$

1,408,670,768

 

(1)In July 2012, the company announced that its boardBoard of directorsDirectors authorized a share repurchase program and the company to repurchase up to $2.0 billionrelated authorization was subsequently increased a number of its common stock on the open market or in private transactions. The board of directors increased this authority by an additional $1.5 billion in November 2016.times. During the thirdfirst quarter of 2017, the company repurchased 2.9 million2024, we did not repurchase any shares for $180 million under this program. $1.4authority. We had $1.30 billion remained availableremaining under this program as of September 30, 2017.March 31, 2024. This program does not have an expiration date.


Item 5. Other Information
Certain of our officers and directors have made elections to participate in, and are participating in, our employee stock purchase plan or have made, and may from time to time make, elections to have shares withheld to cover withholding taxes or pay the exercise price of options, which may constitute non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K).


44

Item 6.    Exhibits
Exhibit Index:

Item 6.

Exhibits

Exhibit Index:

Exhibit

Number

Description

Exhibit
Number

Description

15*

Letter Re Unaudited Interim Financial Information

10.1

31.1*

10.2

10.3
31.1*

31.2*

Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1*

*

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

*

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

104*Cover Page Interactive Data File (formatted as Inline XBRL and contained within the Inline XBRL Instance Document in Exhibit 101)

*

*    Filed herewith.


**    Furnished herewith. This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Signature

45

Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

BAXTER INTERNATIONAL INC.

(Registrant)

Date: May 2, 2024

By:

/s/ Joel T. Grade

Date: November 2, 2017

By:

/s/ James K. Saccaro

James K. Saccaro

Joel T. Grade
Executive Vice President and Chief Financial Officer,

(duly (duly authorized officer and principal financial officer)

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