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 (we or our) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (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included in our Current Report on Form 8-K filed with the SEC on April 29, 2021 (2020 Annual Report), which revised and superseded the corresponding sections of the Annual Report on Form 10-K for the year ended December 31, 2020.
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the 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 have been made to conform the prior period condensed consolidated statements to the current period presentation.
Risks and Uncertainties Related to COVID-19
Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 pandemic. COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and we expect will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments have taken and continue to take. Initial measures taken in 2020 led to unprecedented restrictions on, disruptions in, and other related impacts on business and personal activities, including a shift in healthcare priorities, which resulted in a significant decline in medical procedures in 2020. The pandemic has created significant volatility in the demand for our products. For further information about our revenues by product category, refer to Note 9 - Revenues. Significant uncertainty remains regarding the duration and overall impact of the COVID-19 pandemic. For example, concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Delta variant and other virus mutations as well as vaccine distribution and hesitancy. The U.S. and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to mandatory vaccinations for certain of our employees). Due to the uncertainty caused by the pandemic, our operating performance and financial results, particularly in the short term, may be subject to volatility. We have experienced significant challenges, including lengthy delays, shortages and interruptions, posed by the pandemic and other exogenous factors (including significant weather events and disruptions to certain ports of call around the world) to our global supply chain, including the cost and availability of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, and may experience these and other challenges in future periods. Many of our manufacturing plant and distribution center personnel are currently unvaccinated, and we may also experience employee resistance in complying with current and future government vaccine and testing mandates, which may cause labor shortages significantly impacting manufacturing production and distribution center productivity. We expect that these challenges as well as evolving governmental restrictions and requirements, among other factors, may continue to have an adverse effect on our business.
2. ACQUISITIONS AND OTHER ARRANGEMENTS
Proposed Acquisition of Hillrom
On September 2, 2021, we announced that we have entered into a definitive agreement to acquire all of the outstanding equity interests of Hill-Rom Holdings, Inc. (Hillrom) for total cash consideration of approximately $10.5 billion. Including the assumption of Hillrom's outstanding debt obligations, the enterprise value of the transaction will be approximately $12.4 billion. Under the terms of the transaction agreement, Hillrom shareholders will receive
$156.00 in cash for each Hillrom share. The transaction is expected to close in early 2022, subject to the approval of Hillrom shareholders and the satisfaction of customary closing conditions, including regulatory approvals.
Hillrom is a global medical technology leader whose products and services help enable earlier diagnosis and treatment, optimize surgical efficiency, and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. Hillrom makes those outcomes possible through digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.
In connection with the proposed acquisition of Hillrom, on September 1, 2021, we entered into a bridge facility commitment letter with JPMorgan Chase Bank, N.A. (JP Morgan) and Citigroup Global Markets Inc. (Citi) pursuant to which JP Morgan and Citi have committed to provide a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of $11.4 billion (the Bridge Facility) for the purpose of funding the consideration for the Hillrom acquisition, refinancing certain indebtedness of Hillrom, and paying fees and expenses related to the foregoing. Loans under the Bridge Facility will bear interest at variable rates, will be due 364 days after the loan is issued and contain various covenants, including a maximum net leverage ratio. The Bridge Facility included upfront fees of $40 million that will increase to $53 million if the Bridge Facility is not terminated within 120 days of the date the Bridge Facility was executed. The commitments in respect of the Bridge Facility were syndicated to additional financial institutions on September 30, 2021.
Undrawn commitments in respect of the Bridge Facility will be subject to a ticking fee commencing on the later of (x) the date that definitive documentation with respect to the Bridge Facility is executed and (y) November 30, 2021 at a rate per annum equal to 0.125%. Loans under the Bridge Facility, if funded, will bear interest at variable rates, will be due 364 days after the initial funding of such loans and contain various covenants, including a maximum net leverage ratio. In addition, loans drawn under the Bridge Facility will be subject to a duration fee equal to (i) 0.5% of the outstanding loans on the 90th day after the initial funding of such loans, (ii) 0.75% of the outstanding loans on the 180th day after the initial funding of such loans and (iii) 1% of the outstanding loans on the 270th day after the initial funding of such loans.
On September 30, 2021, we entered into a term loan credit agreement (the Term Loan Credit Agreement), pursuant to which a syndicate of financial institutions has committed to provide us with a senior unsecured term loan facility in an aggregate principal amount of $4.0 billion (the Term Loan Facility), consisting of a $2.0 billion three-year term loan and a $2.0 billion five-year term loan. Loans under the Term Loan Facility will be available on the closing date of the Hillrom acquisition to fund the consideration for the Hillrom acquisition, refinance certain indebtedness of Hillrom, and pay fees and expenses related to the foregoing. Loans under the Term Loan Facility will bear interest at variable rates, will be subject to amortization at an annual rate of 0.625% for the first year and 1.25% thereafter (with loans outstanding under the five-year tranche subject to amortization at an annual rate of 1.875% after the second anniversary of the commencement of amortization and 2.500% after the third anniversary of the commencement of amortization). The Term Loan Credit Agreement contains various covenants, including a maximum net leverage ratio. Undrawn commitments under the Term Loan Facility are subject to a ticking fee commencing on November 30, 2021 at a rate per annum equal to 0.125%.
The aggregate principal amount of the commitments under the Term Loan Facility have replaced a corresponding amount under the commitment letter in respect of the Bridge Facility, in accordance with the terms of the commitment letter. As a result, there are now $7.4 billion in bridge facility commitments remaining. We expect to replace these remaining commitments with cash on the balance sheet and/or permanent financing in the form of the issuance of debt securities prior to the closing of the proposed acquisition of Hillrom.
Transderm Scop
In March 2021, we acquired the rights to Transderm Scop (TDS) for the U.S. and specified territories outside of the U.S. from subsidiaries of GlaxoSmithKline for an upfront purchase price of $60 million including the cost of acquired inventory and the potential for additional cash consideration of $30 million, which had an acquisition-date fair value of $24 million, based upon regulatory approval of a new contract manufacturer by a specified date. We previously sold this product under a distribution license to the U.S. institutional market. TDS is indicated for post-operative nausea and vomiting in the U.S. and motion sickness in European markets. We concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. The fair value of the potential contingent consideration payment was estimated by applying a probability-
weighted expected payment model and is a Level 3 fair value measurement due to the significant estimates and assumptions used by management in establishing the estimated fair value.
The following table summarizes the fair value of the consideration transferred:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Cash
|
$
|
60
|
|
|
Contingent Consideration
|
24
|
|
|
Total Consideration
|
$
|
84
|
|
The following table summarizes the fair value of the assets acquired as of the acquisition date:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Assets acquired
|
|
|
Inventory
|
$
|
16
|
|
|
Goodwill
|
1
|
|
|
Other intangible assets
|
67
|
|
|
Total assets acquired
|
$
|
84
|
|
The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired and were not material for the three and nine months ended September 30, 2021.
We allocated $64 million of the total consideration to the TDS developed product rights with an estimated useful life of 9 years and $3 million to customer relationships with an estimated useful life of 7 years. The fair values of the intangible assets were determined using the income approach. The discount rates used to measure the intangible assets were 22.5% for developed product rights and 15.5% for customer relationships. We consider the fair values of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.
The goodwill, which is deductible for tax purposes, includes the value of overall strategic benefits provided to our pharmaceutical portfolio and is included in the Americas segment.
PerClot
In July 2021, we acquired certain assets related to PerClot Polysaccharide Hemostatic System (PerClot), including distribution rights for the U.S. and specified territories outside of the U.S., from CryoLife, Inc. for an upfront purchase price of $25 million and the potential for additional cash consideration of up to $36 million, which had an acquisition-date fair value of $28 million, based upon regulatory and commercial milestones. PerClot is an absorbable powder hemostat indicated for use in surgical procedures, including cardiac, vascular, orthopedic, spinal, neurological, gynecological, ENT and trauma surgery as an adjunct hemostat when control of bleeding from capillary, venous, or arteriolar vessels by pressure, ligature, and other conventional means is either ineffective or impractical. PerClot is approved for distribution in the European Union and other markets and is expected to be submitted for Pre-Market Approval (PMA) for distribution in the U.S. in the fourth quarter of 2021. We concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. The fair values of the potential contingent consideration payments were estimated by applying probability-weighted expected payment models and are Level 3 fair value measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.
The following table summarizes the fair value of the consideration transferred:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Cash
|
$
|
25
|
|
|
Contingent Consideration
|
28
|
|
|
Total Consideration
|
$
|
53
|
|
The following table summarizes the fair value of the assets acquired as of the acquisition date:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Assets acquired
|
|
|
Goodwill
|
$
|
4
|
|
|
Other intangible assets
|
$
|
49
|
|
|
Total assets acquired
|
$
|
53
|
|
The valuation of the assets acquired are preliminary and measurement period adjustments may be recorded in the future as we finalize our fair value estimates. The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired and were not material for the three and nine months ended September 30, 2021.
We allocated $39 million of the total consideration to an in-process research and development (IPR&D) asset with an indefinite useful life, $9 million to the approved PerClot developed product rights with an estimated useful life of 10 years and $1 million to customer relationships with an estimated useful life of 10 years. The fair values of the intangible assets were determined using the income approach. The discount rates used to measure the intangible assets were 18.7% for IPR&D, 16.0% for developed product rights and 15.0% for customer relationships. We consider the fair values of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.
The goodwill, which is deductible for tax purposes, includes the value of overall strategic benefits provided to our surgical portfolio of hemostats and sealants and is included in the Americas and EMEA segments.
We have not presented pro forma financial information for either of the 2021 business combinations because their results are not material to our consolidated financial statements.
Caelyx and Doxil
In February 2021, we acquired the rights to Caelyx and Doxil, the branded versions of liposomal doxorubicin, from a subsidiary of Johnson & Johnson for specified territories outside of the U.S. We previously acquired the U.S. rights to this product in 2019. Liposomal doxorubicin is a chemotherapy medicine used to treat various types of cancer. The transaction was accounted for as an asset acquisition, as substantially all of the fair value of the gross assets acquired was concentrated in the developed technology intangible asset. The purchase price of $325 million was allocated to the assets acquired, which included a $314 million developed-technology intangible asset with an estimated useful life of 9 years and an $11 million customer relationship intangible asset with an estimated useful life of 8 years. Net sales related to this acquisition were $32 million and $73 million, respectively, for the three and nine months ended September 30, 2021.
3. SUPPLEMENTAL FINANCIAL INFORMATION
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(in millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Interest expense, net of capitalized interest
|
$
|
54
|
|
$
|
42
|
|
|
$
|
128
|
|
$
|
112
|
|
|
Interest income
|
(4)
|
|
(3)
|
|
|
(10)
|
|
(16)
|
|
|
Interest expense, net
|
$
|
50
|
|
$
|
39
|
|
|
$
|
118
|
|
$
|
96
|
|
Other Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(in millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Foreign exchange (gains) losses, net
|
$
|
—
|
|
$
|
23
|
|
|
$
|
5
|
|
$
|
44
|
|
|
Pension and other postretirement benefit plans
|
4
|
|
—
|
|
|
11
|
|
(2)
|
|
|
Change in fair value of marketable equity securities
|
9
|
|
(9)
|
|
|
2
|
|
(9)
|
|
|
Other, net
|
(1)
|
|
2
|
|
|
(3)
|
|
(1)
|
|
|
Other expense, net
|
$
|
12
|
|
$
|
16
|
|
|
$
|
15
|
|
$
|
32
|
|
Allowance for Doubtful Accounts
The following table is a summary of the changes in our allowance for doubtful accounts for the three and nine months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|
(in millions)
|
2021
|
2020
|
2021
|
2020
|
|
Balance at beginning of period
|
$
|
117
|
|
$
|
120
|
|
$
|
125
|
|
$
|
112
|
|
|
Adoption of new accounting standard
|
—
|
|
—
|
|
—
|
|
4
|
|
|
Charged to costs and expenses
|
2
|
|
3
|
|
(1)
|
|
15
|
|
|
Write-offs
|
(2)
|
|
(3)
|
|
(3)
|
|
(4)
|
|
|
Currency translation adjustments
|
(2)
|
|
2
|
|
(6)
|
|
(5)
|
|
|
Balance at end of period
|
$
|
115
|
|
$
|
122
|
|
$
|
115
|
|
$
|
122
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
September 30,
2021
|
December 31,
2020
|
|
Raw materials
|
$
|
479
|
|
$
|
460
|
|
|
Work in process
|
219
|
|
196
|
|
|
Finished goods
|
1,327
|
|
1,260
|
|
|
Inventories
|
$
|
2,025
|
|
$
|
1,916
|
|
Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
September 30,
2021
|
December 31,
2020
|
|
Property, plant and equipment, at cost
|
$
|
11,171
|
|
$
|
11,271
|
|
|
Accumulated depreciation
|
(6,589)
|
|
(6,549)
|
|
|
Property, plant and equipment, net
|
$
|
4,582
|
|
$
|
4,722
|
|
Non-Cash Operating and Investing Activities
Right-of-use operating lease assets obtained in exchange for lease obligations for the nine months ended September 30, 2021 and 2020 were $69 million and $42 million, respectively. Right-of-use finance lease assets obtained in exchange for lease obligations for the nine months ended September 30, 2020 were $7 million.
Purchases of property, plant and equipment included in accounts payable as of September 30, 2021 and 2020 were $49 million and $48 million, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The following is a reconciliation of goodwill by business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Americas
|
EMEA
|
APAC
|
Total
|
|
Balance as of December 31, 2020
|
$
|
2,574
|
|
$
|
406
|
|
$
|
237
|
|
$
|
3,217
|
|
|
Reallocation of goodwill
|
81
|
|
(81)
|
|
—
|
|
—
|
|
|
Acquisitions
|
4
|
|
1
|
|
—
|
|
5
|
|
|
|
|
|
|
|
|
Currency translation
|
(103)
|
|
(12)
|
|
(9)
|
|
(124)
|
|
|
Balance as of September 30, 2021
|
$
|
2,556
|
|
$
|
314
|
|
$
|
228
|
|
$
|
3,098
|
|
As of September 30, 2021, there were no reductions in goodwill relating to impairment losses.
As discussed in Note 16 - Segment Information, we made a change to our reportable segments in the first quarter of 2021. As a result of this change, we reallocated goodwill from our EMEA segment to the Americas segment using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed.
Other intangible assets, net
The following is a summary of our other intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Developed technology, including patents
|
Other amortized intangible assets
|
Indefinite-lived intangible assets
|
Total
|
|
September 30, 2021
|
|
|
|
|
|
Gross other intangible assets
|
$
|
3,019
|
|
$
|
498
|
|
$
|
207
|
|
$
|
3,724
|
|
|
Accumulated amortization
|
(1,502)
|
|
(346)
|
|
—
|
|
(1,848)
|
|
|
Other intangible assets, net
|
$
|
1,517
|
|
$
|
152
|
|
$
|
207
|
|
$
|
1,876
|
|
|
December 31, 2020
|
|
|
|
|
|
Gross other intangible assets
|
$
|
2,713
|
|
$
|
495
|
|
$
|
169
|
|
$
|
3,377
|
|
|
Accumulated amortization
|
(1,374)
|
|
(332)
|
|
—
|
|
(1,706)
|
|
|
Other intangible assets, net
|
$
|
1,339
|
|
$
|
163
|
|
$
|
169
|
|
$
|
1,671
|
|
Intangible asset amortization expense was $68 million and $57 million for the three months ended September 30, 2021 and 2020, respectively, and $199 million and $165 million for the nine months ended September 30, 2021 and 2020, respectively.
In the second quarter of 2020, we recognized an impairment charge of $17 million related to a developed-technology intangible asset due to a decline in market expectations for the related product. The fair value of the intangible asset was measured using a discounted cash flow approach and the charge is classified within cost of sales in the accompanying condensed consolidated statement of income. We consider the fair value of the asset to be a Level 3 measurement due to the significant estimates and assumptions we used in establishing the estimated fair value.
5. FINANCING ARRANGEMENTS
Significant Debt Activity
In connection with the proposed acquisition of Hillrom, we entered into the Bridge Facility and the Term Loan Agreement that would provide for total debt commitments of $11.4 billion for the purpose of funding the consideration for the Hillrom acquisition, refinancing certain indebtedness of Hillrom, and paying fees and expenses related to the foregoing. Refer to Note 2 for additional information.
In 2020, we issued $500 million of 3.95% senior notes due in 2030 and $650 million of 1.73% senior notes due in 2031 (the Notes). In conjunction with the issuances of the Notes, we entered into registration rights agreements in which we agreed to file a registration statement with the SEC with respect to an offer to exchange the Notes for new issues of Notes with the same terms registered under the Securities Act of 1933. Those exchange offers with respect to the Notes were completed in May 2021.
In July 2021, Baxter redeemed $400 million in 1.7% Senior Notes due August 2021, which was partially funded by the issuance of commercial paper.
Credit Facilities
On September 30, 2021, we entered into a new U.S. dollar-denominated revolving credit facility (the USD Revolver), and on October 1, 2021, we amended our existing Euro-denominated revolving credit facility (as amended, the Euro Revolver). Our USD Revolver has a capacity of $2.5 billion and our Euro Revolver has a capacity of €200 million. Each of the facilities matures in 2026. The facilities enable us to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net leverage ratio. Fees under the credit facilities are 0.09% annually as of September 30, 2021 and are based on our credit ratings and the total capacity of the facility. Prior to entering into the USD Revolver and the Euro Revolver, our previous U.S. dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of $2.0 billion and €200 million, respectively. Fees under these credit facilities were 0.09% annually as of December 31, 2020 and were based on our credit ratings and the total capacity of the facility. There were no borrowings outstanding under these credit facilities as of September 30, 2021 or December 31, 2020.
Commercial Paper
As of September 30, 2021, we had $300 million of commercial paper outstanding with a weighted-average interest rate of 0.23% and an original weighted-average term of 90 days. There was no commercial paper outstanding as of December 31, 2020.
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, 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 September 30, 2021 and December 31, 2020, our total recorded reserves with respect to legal and environmental matters were $73 million and $40 million, respectively, and we had a $7 million insurance receivable as of September 30, 2021.
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 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, we are involved in an ongoing voluntary environmental remediation associated with historic operations at our Irvine, California, United States facility. As of September 30, 2021 and December 31, 2020, our environmental reserves, which are measured on an undiscounted basis, were $18 million and $20 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 November 2016, a putative 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. We filed a motion to dismiss the consolidated complaint in February 2017. The court granted our motion to dismiss the consolidated complaint without prejudice in July 2018. The plaintiffs filed an amended complaint, which we moved to dismiss on November 9, 2018. The court granted our motion to dismiss the amended complaint with prejudice on April 3, 2020. The plaintiffs did not file an appeal.
In April 2017, we became aware of a criminal investigation by the U.S. Department of Justice (DOJ), Antitrust Division and a federal grand jury in the United States District Court for the Eastern District of Pennsylvania. We 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 us) and communications with competitors regarding the same. On November 30, 2018, the DOJ notified us that it had closed the investigation. The New York Attorney General had also requested that we provide information regarding business practices in the IV saline industry. We cooperated with that request and have been advised that the matter has now been closed.
In August 2019, we were named in an amended complaint filed by Fayette County, Georgia in the MDL In re: National Prescription Opiate Litigation pending in the U.S. District Court, Northern District of Ohio. The complaint alleges that multiple manufacturers and distributors of opiate products improperly marketed and diverted these products, which caused harm to Fayette County. The complaint is limited in its allegations as to Baxter and does not distinguish between injectable opiate products and orally administered opiates. We manufactured generic injectable opiate products in our facility in Cherry Hill, NJ, which we divested in 2011.
In November 2019, we and certain of our officers were named in a class action complaint captioned Ethan E. Silverman et al. v. Baxter International Inc. et al. that was filed in the United States District Court for the Northern District of Illinois. The plaintiff, who allegedly purchased shares of our common stock during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter common stock between February 21, 2019 and October 23, 2019. The plaintiff alleges that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to certain intra-company transactions undertaken for the purpose of generating foreign exchange gains or avoiding foreign exchange losses, as well as our internal controls over financial reporting. On January 29, 2020, the Court appointed Varma Mutual Pension Insurance Company and Louisiana Municipal Police Employees Retirement System as lead plaintiffs in the case. Plaintiffs filed an amended complaint on June 25, 2020 containing substantially the same allegations. On August 24, 2020, we filed a motion to dismiss the amended complaint. On January 12, 2021, the Court granted our motion to dismiss the amended complaint but gave plaintiffs an opportunity to file a further-amended complaint. The parties reached an agreement to settle the case for $16 million, subject to the completion of confirmatory discovery and final approval by the Court. The Court granted final approval of the settlement on August 11, 2021. We were fully reserved for the settlement amount as of September 30, 2021.
In addition, we have received a stockholder request for inspection of our books and records in connection with the announcement made in our Form 8-K on October 24, 2019 that we had commenced an internal investigation into
certain intra-company transactions that impacted our previously reported non-operating foreign exchange gains and losses. As initially disclosed on October 24, 2019, we also voluntarily advised the staff of the SEC of our internal investigation and we are continuing to cooperate with the staff of the SEC.
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 agreement to settle these lawsuits in the third quarter of 2021 for amounts that are not material to our financial results. The settlement of these claims does not preclude potential future lawsuits on behalf of other plaintiffs.
7. STOCKHOLDERS’ EQUITY
Stock Options Award Modification
In the first quarter of 2020, we modified the terms of stock option awards granted to 123 employees. Specifically, we extended the term for certain stock options that were scheduled to expire in the first quarter of 2020 as applicable employees were not permitted to exercise these awards due to our announcement in February 2020 that our previously issued financial statements should no longer be relied upon. The stock options were extended in order to allow impacted employees to exercise their stock option awards for a brief period once we became current with our SEC reporting obligations, which occurred in March 2020. As a result of the modifications, we recognized an additional $8 million of stock compensation expense during the quarter ended March 31, 2020.
Cash Dividends
Cash dividends declared per share for the three and nine months ended September 30, 2021 were $0.280 and $0.805, respectively. Cash dividends declared per share for the three and nine months ended September 30, 2020 were $0.245 and $0.710, respectively.
Stock Repurchase Programs
In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. During the first nine months of 2021, we repurchased 7.3 million shares under this authority pursuant to Rule 10b5-1 plans. During the first nine months of 2020, we did not repurchase any shares under this authority. We had $1.3 billion remaining available under the authorization as of September 30, 2021.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of net income, currency translation adjustments (CTA), certain gains and losses from pension and other postretirement employee benefit (OPEB) plans and gains and losses on cash flow hedges.
The following table is a net-of-tax summary of the changes in accumulated other comprehensive (loss) income (AOCI) by component for the nine months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
CTA
|
Pension and OPEB plans
|
Hedging activities
|
Total
|
|
Gains (losses)
|
|
|
|
|
|
Balance as of December 31, 2020
|
$
|
(2,587)
|
|
$
|
(574)
|
|
$
|
(153)
|
|
$
|
(3,314)
|
|
|
Other comprehensive income (loss) before reclassifications
|
(257)
|
|
13
|
|
5
|
|
(239)
|
|
|
Amounts reclassified from AOCI (a)
|
—
|
|
50
|
|
21
|
|
71
|
|
|
Net other comprehensive income (loss)
|
(257)
|
|
63
|
|
26
|
|
(168)
|
|
|
Balance as of September 30, 2021
|
$
|
(2,844)
|
|
$
|
(511)
|
|
$
|
(127)
|
|
$
|
(3,482)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
CTA
|
Pension and OPEB plans
|
Hedging activities
|
Total
|
|
Gains (losses)
|
|
|
|
|
|
Balance as of December 31, 2019
|
$
|
(2,954)
|
|
$
|
(715)
|
|
$
|
(41)
|
|
$
|
(3,710)
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before
reclassifications
|
(43)
|
|
(9)
|
|
(110)
|
|
(162)
|
|
|
Amounts reclassified from AOCI (a)
|
—
|
|
35
|
|
(2)
|
|
33
|
|
|
Net other comprehensive income (loss)
|
(43)
|
|
26
|
|
(112)
|
|
(129)
|
|
|
Balance as of September 30, 2020
|
$
|
(2,997)
|
|
$
|
(689)
|
|
$
|
(153)
|
|
$
|
(3,839)
|
|
(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, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from AOCI (a)
|
|
|
(in millions)
|
Three months ended September 30, 2021
|
Nine months ended
September 30, 2021
|
Location of impact in income statement
|
|
Amortization of pension and OPEB items
|
|
|
|
|
Amortization of net losses and prior service costs or credits
|
$
|
(21)
|
|
$
|
(62)
|
|
Other expense, net
|
|
Less: Tax effect
|
4
|
|
12
|
|
Income tax expense
|
|
|
$
|
(17)
|
|
$
|
(50)
|
|
Net of tax
|
|
Gains (losses) on hedging activities
|
|
|
|
|
Foreign exchange contracts
|
$
|
(5)
|
|
$
|
(23)
|
|
Cost of sales
|
|
Interest rate contracts
|
(1)
|
|
(4)
|
|
Interest expense, net
|
|
|
(6)
|
|
(27)
|
|
Total before tax
|
|
Less: Tax effect
|
1
|
|
6
|
|
Income tax expense
|
|
|
$
|
(5)
|
|
$
|
(21)
|
|
Net of tax
|
|
Total reclassifications for the period
|
$
|
(22)
|
|
$
|
(71)
|
|
Total net of tax
|
(a) Amounts in parentheses indicate reductions to net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from AOCI (a)
|
|
|
(in millions)
|
Three months ended September 30, 2020
|
Nine months ended September 30, 2020
|
Location of impact in income statement
|
|
Amortization of pension and OPEB items
|
|
|
|
|
Amortization of net losses and prior service costs or credits
|
$
|
(14)
|
|
$
|
(44)
|
|
Other expense, net
|
|
Less: Tax effect
|
3
|
|
9
|
|
Income tax expense
|
|
|
$
|
(11)
|
|
$
|
(35)
|
|
Net of tax
|
|
Gains on hedging activities
|
|
|
|
|
Foreign exchange contracts
|
$
|
(2)
|
|
$
|
2
|
|
Cost of sales
|
|
Less: Tax effect
|
1
|
|
—
|
|
Income tax expense
|
|
|
$
|
(1)
|
|
$
|
2
|
|
Net of tax
|
|
Total reclassifications for the period
|
$
|
(12)
|
|
$
|
(33)
|
|
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 OPEB 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.
The majority of our performance obligations are satisfied at a point in time. This includes sales of our broad portfolio of essential healthcare products across our geographic segments including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. For a majority of these sales, our performance obligation is satisfied upon delivery to 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, in all of our segments, we enter into other types of contracts including contract manufacturing arrangements, equipment leases, and certain subscription software and licensing arrangements. 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. 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 September 30, 2021, we had $8.3 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of one year or more, which are primarily included in the Americas segment. 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 10% of this amount as revenue over the remainder of 2021, 30% in each of 2022 and 2023 and 15% in each of 2024 and 2025.
Significant Judgments
Revenues from product sales are recorded at the net sales price (transaction 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 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 and nine months ended September 30, 2021 and 2020 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 $1.8 billion and $1.7 billion as of September 30, 2021 and December 31, 2020, 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 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 provided and billed, generally over one to seven years.
The following table summarizes our contract assets:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
September 30,
2021
|
December 31,
2020
|
|
Contract manufacturing services
|
$
|
73
|
|
$
|
47
|
|
|
Software sales
|
38
|
|
40
|
|
|
Bundled equipment and consumable medical products contracts
|
82
|
|
47
|
|
|
Contract assets
|
$
|
193
|
|
$
|
134
|
|
The following table summarizes the classification of contract assets and contract liabilities as reported in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
September 30,
2021
|
December 31,
2020
|
|
Prepaid expenses and other current assets
|
$
|
104
|
|
$
|
70
|
|
|
Other non-current assets
|
89
|
|
64
|
|
|
Contract assets
|
$
|
193
|
|
$
|
134
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
39
|
|
$
|
32
|
|
|
Other non-current liabilities
|
52
|
|
34
|
|
|
Contract liabilities
|
$
|
91
|
|
$
|
66
|
|
Contract liabilities are recognized when a customer pays consideration before we transfer goods or provide services. During the nine months ended September 30, 2021 and 2020, the amount of revenue recognized that was included in contract liabilities as of December 31, 2020 and 2019 was not significant.
Disaggregation of Net Sales
Beginning in the first quarter of 2021, our product category net sales disclosures (previously referred to as global business units (GBUs)) separately present net sales from our BioPharma Solutions business, which was previously included within Other. Concurrent with that disaggregation of net sales from our BioPharma Solutions business, we have also allocated certain previously unallocated sales deductions from Other to various categories, primarily based on their respective net sales. Net sales for the three and nine months ended September 30, 2020 have been recast to conform to the current period presentation.
The following tables disaggregate our net sales from contracts with customers by product category between the U.S. and international:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2021
|
2020
|
|
(in millions)
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|
Renal Care 1
|
$
|
222
|
|
$
|
759
|
|
$
|
981
|
|
$
|
216
|
|
$
|
739
|
|
$
|
955
|
|
|
Medication Delivery 2
|
490
|
|
257
|
|
747
|
|
419
|
|
246
|
|
665
|
|
|
Pharmaceuticals 3
|
188
|
|
401
|
|
589
|
|
209
|
|
330
|
|
539
|
|
|
Clinical Nutrition 4
|
88
|
|
156
|
|
244
|
|
87
|
|
147
|
|
234
|
|
|
Advanced Surgery 5
|
135
|
|
114
|
|
249
|
|
138
|
|
97
|
|
235
|
|
|
Acute Therapies 6
|
69
|
|
116
|
|
185
|
|
72
|
|
105
|
|
177
|
|
|
BioPharma Solutions 7
|
109
|
|
97
|
|
206
|
|
84
|
|
57
|
|
141
|
|
|
Other 8
|
18
|
|
7
|
|
25
|
|
19
|
|
7
|
|
26
|
|
|
Total Baxter
|
$
|
1,319
|
|
$
|
1,907
|
|
$
|
3,226
|
|
$
|
1,244
|
|
$
|
1,728
|
|
$
|
2,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2021
|
2020
|
|
(in millions)
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|
Renal Care 1
|
$
|
655
|
|
$
|
2,212
|
|
$
|
2,867
|
|
$
|
629
|
|
$
|
2,115
|
|
$
|
2,744
|
|
|
Medication Delivery 2
|
1,345
|
|
751
|
|
2,096
|
|
1,262
|
|
686
|
|
1,948
|
|
|
Pharmaceuticals 3
|
550
|
|
1,137
|
|
1,687
|
|
637
|
|
899
|
|
1,536
|
|
|
Clinical Nutrition 4
|
255
|
|
460
|
|
715
|
|
241
|
|
426
|
|
667
|
|
|
Advanced Surgery 5
|
405
|
|
317
|
|
722
|
|
369
|
|
258
|
|
627
|
|
|
Acute Therapies 6
|
211
|
|
369
|
|
580
|
|
204
|
|
315
|
|
519
|
|
|
BioPharma Solutions 7
|
218
|
|
306
|
|
524
|
|
186
|
|
185
|
|
371
|
|
|
Other 8
|
58
|
|
21
|
|
79
|
|
60
|
|
20
|
|
80
|
|
|
Total Baxter
|
$
|
3,697
|
|
$
|
5,573
|
|
$
|
9,270
|
|
$
|
3,588
|
|
$
|
4,904
|
|
$
|
8,492
|
|
1Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.
2Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices.
3Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.
4Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.
5Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.
6Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).
7BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical and biopharmaceutical companies.
8Other includes sales of miscellaneous product and service offerings.
Lease Revenue
We lease medical equipment, such as renal dialysis equipment and infusion pumps, to customers, primarily 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 and nine months ended September 30, 2021 were:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Three months ended September 30, 2021
|
Nine months ended September 30, 2021
|
|
Sales-type lease revenue
|
$
|
3
|
|
$
|
19
|
|
|
Operating lease revenue
|
21
|
|
90
|
|
|
Variable lease revenue
|
27
|
|
59
|
|
|
Total lease revenue
|
$
|
51
|
|
$
|
168
|
|
The components of lease revenue for the three and nine months ended September 30, 2020 were:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Three months ended September 30, 2020
|
Nine months ended September 30, 2020
|
|
Sales-type lease revenue
|
$
|
11
|
|
$
|
27
|
|
|
Operating lease revenue
|
16
|
|
44
|
|
|
Variable lease revenue
|
19
|
|
57
|
|
|
Total lease revenue
|
$
|
46
|
|
$
|
128
|
|
Our net investment in sales-type leases was $119 million as of September 30, 2021, of which $16 million originated in 2017 and prior, $29 million in 2018, $26 million in 2019, $33 million in 2020 and $15 million in 2021.
10. BUSINESS OPTIMIZATION CHARGES
In recent years, we have undertaken actions to transform our 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. From the commencement of our business optimization activities in the second half of 2015 through September 30, 2021, we have incurred cumulative pre-tax costs of $1.2 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation. We currently expect to incur additional pre-tax costs of approximately $35 million through the completion of the initiatives that are currently underway, primarily related to implementation costs. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods.
During the three and nine months ended September 30, 2021 and 2020, we recorded the following charges related to business optimization programs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Restructuring charges
|
$
|
32
|
|
$
|
26
|
|
|
$
|
67
|
|
$
|
58
|
|
|
Costs to implement business optimization programs
|
4
|
|
6
|
|
|
14
|
|
19
|
|
|
|
|
|
|
|
|
|
Total business optimization charges
|
$
|
36
|
|
$
|
32
|
|
|
$
|
81
|
|
$
|
77
|
|
For segment reporting purposes, business optimization charges are unallocated expenses.
Costs to implement business optimization programs for the three and nine months ended September 30, 2021 and 2020, respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs. These costs were primarily included within cost of sales and SG&A expense.
During the three and nine months ended September 30, 2021 and 2020, we recorded the following restructuring charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2021
|
|
(in millions)
|
COGS
|
SG&A
|
R&D
|
Total
|
|
Employee termination costs
|
$
|
11
|
|
$
|
8
|
|
$
|
—
|
|
$
|
19
|
|
|
Contract termination and other costs
|
—
|
|
2
|
|
—
|
|
2
|
|
|
Asset impairments
|
11
|
|
—
|
|
—
|
|
11
|
|
|
Total restructuring charges
|
$
|
22
|
|
$
|
10
|
|
$
|
—
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
(in millions)
|
COGS
|
SG&A
|
R&D
|
Total
|
|
Employee termination costs
|
$
|
4
|
|
$
|
15
|
|
$
|
1
|
|
$
|
20
|
|
|
Contract termination and other costs
|
1
|
|
3
|
|
—
|
|
4
|
|
|
Asset impairments
|
—
|
|
2
|
|
—
|
|
2
|
|
|
Total restructuring charges
|
$
|
5
|
|
$
|
20
|
|
$
|
1
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2021
|
|
(in millions)
|
COGS
|
SG&A
|
R&D
|
Total
|
|
Employee termination costs
|
$
|
35
|
|
$
|
14
|
|
$
|
—
|
|
$
|
49
|
|
|
Contract termination and other costs
|
—
|
|
2
|
|
—
|
|
2
|
|
|
Asset impairments
|
16
|
|
—
|
|
—
|
|
16
|
|
|
Total restructuring charges
|
$
|
51
|
|
$
|
16
|
|
$
|
—
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
(in millions)
|
COGS
|
SG&A
|
R&D
|
Total
|
|
Employee termination costs
|
$
|
9
|
|
$
|
34
|
|
$
|
(1)
|
|
$
|
42
|
|
|
Contract termination and other costs
|
3
|
|
3
|
|
—
|
|
6
|
|
|
Asset impairments
|
8
|
|
2
|
|
—
|
|
10
|
|
|
Total restructuring charges
|
$
|
20
|
|
$
|
39
|
|
$
|
(1)
|
|
$
|
58
|
|
In conjunction with our business optimization initiatives in the first quarter of 2020, we sold property that resulted in a gain of $17 million. This gain is reflected within other operating expense (income), net in our condensed consolidated statement of income for the nine months ended September 30, 2020.
The following table summarizes activity in the liability related to our restructuring initiatives.
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Liability balance as of December 31, 2020
|
$
|
113
|
|
|
Charges
|
54
|
|
|
Payments
|
(62)
|
|
|
Reserve adjustments
|
(3)
|
|
|
Currency translation
|
(6)
|
|
|
Liability balance as of September 30, 2021
|
$
|
96
|
|
Substantially all of our restructuring liabilities as of September 30, 2021 relate to employee termination costs, with the remaining liabilities attributable to contract termination costs. Substantially all of the cash payments for those liabilities are expected to be disbursed by the end of 2022.
11. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS
The following is a summary of net periodic benefit cost relating to our pension and OPEB plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(in millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Pension benefits
|
|
|
|
|
|
|
Service cost
|
$
|
22
|
|
$
|
20
|
|
|
$
|
66
|
|
$
|
61
|
|
|
Interest cost
|
18
|
|
24
|
|
|
54
|
|
71
|
|
|
Expected return on plan assets
|
(36)
|
|
(40)
|
|
|
(108)
|
|
(121)
|
|
|
Amortization of net losses and prior service costs
|
23
|
|
19
|
|
|
69
|
|
57
|
|
|
Net periodic pension cost
|
$
|
27
|
|
$
|
23
|
|
|
$
|
81
|
|
$
|
68
|
|
|
OPEB
|
|
|
|
|
|
|
Interest cost
|
$
|
1
|
|
$
|
2
|
|
|
$
|
3
|
|
$
|
4
|
|
|
Amortization of net loss and prior service credit
|
(2)
|
|
(5)
|
|
|
(7)
|
|
(13)
|
|
|
Net periodic OPEB cost (income)
|
$
|
(1)
|
|
$
|
(3)
|
|
|
$
|
(4)
|
|
$
|
(9)
|
|
12. INCOME TAXES
Our effective income tax rate was (0.2)% and 13.5% for the three months ended September 30, 2021 and 2020, respectively, and 11.8% and 13.2% for the nine months ended September 30, 2021 and 2020, 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, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.
For the three months ended September 30, 2021, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.
For the nine months ended September 30, 2021, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as a favorable geographic earnings mix and changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.
For the three months ended September 30, 2020, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a favorable geographic earnings mix and changes related to our ability to realize foreign tax credits.
For the nine months ended September 30, 2020, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a favorable geographic earnings mix and excess tax benefits on stock compensation awards.
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. The dilutive effect of outstanding stock options, RSUs and PSUs is reflected in the denominator for diluted EPS using the treasury stock method.
The following table is a reconciliation of basic shares to diluted shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(in millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Basic shares
|
500
|
|
511
|
|
|
503
|
|
509
|
|
|
Effect of dilutive securities
|
6
|
|
7
|
|
|
6
|
|
8
|
|
|
Diluted shares
|
506
|
|
518
|
|
|
509
|
|
517
|
|
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 7 million equity awards for the three and nine months ended September 30, 2021, respectively, and 4 million and 3 million equity awards for the three and nine months ended September 30, 2020, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 7 for additional information regarding items impacting basic and diluted shares.
14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. Our hedging policy attempts to manage these risks to an acceptable level based on our judgment of the appropriate trade-off between risk, opportunity and costs.
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 Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative instruments to further reduce the net exposure to foreign 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 rates. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.
We are also exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates. Our policy is to manage interest costs using the mix of fixed- and floating-rate debt that we believe is appropriate at that time. To manage this mix in a cost-efficient manner, we periodically enter into interest rate swaps in which we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.
We do not hold any instruments for trading purposes and none of our outstanding derivative instruments contain credit-risk-related contingent features.
All 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. We designate certain of our derivatives and foreign-currency denominated debt as hedging instruments in cash flow, fair value, or net investment hedges.
Cash Flow Hedges
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 recorded in 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 cost of sales and interest expense, net, and are primarily related to forecasted third-party sales denominated in foreign currencies, forecasted intra-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 $365 million and $345 million as of September 30, 2021 and December 31, 2020, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at September 30, 2021 is 12 months for foreign exchange contracts. There were no outstanding interest rate contracts designated as cash flow hedges as of September 30, 2021 and December 31, 2020.
Fair Value Hedges
We periodically use interest rate swaps to convert a portion of our fixed-rate debt into variable-rate debt. These instruments hedge our 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 hedged item, which are also recognized in earnings. Changes in the fair value of hedge instruments designated as fair value hedges are classified in interest expense, net, as they hedge the interest rate risk associated with certain of our fixed-rate debt.
There were no outstanding interest rate contracts designated as fair value hedges as of September 30, 2021 and December 31, 2020.
Net Investment Hedges
In May 2017, we issued €600 million of senior notes due May 2025. In May 2019, we issued €750 million of senior notes due May 2024 and €750 million of senior notes due May 2029. We have designated these debt obligations as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments on the outstanding debt balances are recorded as a component of AOCI. As of September 30, 2021, we had an accumulated pre-tax unrealized translation loss in AOCI of $102 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, we discontinue hedge accounting prospectively. Gains or losses relating to terminations of effective cash flow hedges generally 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 hedge dedesignations in the first nine months of 2021 or 2020 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur.
If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged item 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 nine months of 2021 or 2020.
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 foreign investments that were being hedged. There were no net investment hedges terminated during the first nine months of 2021 or 2020.
Undesignated Derivative Instruments
We use forward contracts to hedge earnings from the effects of foreign exchange relating to certain of our 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 terms of these instruments generally do not exceed one month.
The total notional amount of undesignated derivative instruments was $1.0 billion as of September 30, 2021 and December 31, 2020.
Gains and Losses on Hedging Instruments and Undesignated Derivative Instruments
The following tables summarize the gains and losses on our hedging instruments and the classification of those gains and losses within our condensed consolidated financial statements for the three months ended September 30, 2021
and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in OCI
|
|
Location of gain (loss)
in income statement
|
Gain (loss) reclassified from AOCI into income
|
|
(in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
31
|
|
|
Interest expense, net
|
$
|
(1)
|
|
|
$
|
—
|
|
|
Foreign exchange contracts
|
6
|
|
|
(6)
|
|
|
Cost of sales
|
(5)
|
|
|
(2)
|
|
|
Net investment hedges
|
60
|
|
|
(103)
|
|
|
Other expense, net
|
—
|
|
|
—
|
|
|
Total
|
$
|
66
|
|
|
$
|
(78)
|
|
|
|
$
|
(6)
|
|
|
$
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of gain (loss) in income statement
|
Gain (loss) recognized in income
|
|
(in millions)
|
2021
|
|
2020
|
|
Undesignated derivative instruments
|
|
|
|
|
|
Foreign exchange contracts
|
Other expense, net
|
$
|
(7)
|
|
|
$
|
7
|
|
The following tables summarize the gains and losses on our hedging instruments and the classification of those gains and losses within our condensed consolidated financial statements for the nine months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in OCI
|
Location of gain (loss)
in income statement
|
Gain (loss) reclassified from AOCI
into income
|
|
(in millions)
|
2021
|
2020
|
2021
|
2020
|
|
Cash flow hedges
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
$
|
(144)
|
|
Interest expense, net
|
$
|
(4)
|
|
$
|
—
|
|
|
Foreign exchange contracts
|
7
|
|
1
|
|
Cost of sales
|
(23)
|
|
2
|
|
|
Net investment hedges
|
143
|
|
(104)
|
|
Other expense, net
|
—
|
|
—
|
|
|
Total
|
$
|
150
|
|
$
|
(247)
|
|
|
$
|
(27)
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of gain (loss)
in income statement
|
Gain (loss) recognized in income
|
|
(in millions)
|
2021
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
Undesignated derivative instruments
|
|
|
|
|
Foreign exchange contracts
|
Other expense, net
|
$
|
(26)
|
|
$
|
22
|
|
As of September 30, 2021, $1 million of deferred, net after-tax losses 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.
Derivative 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, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
$
|
7
|
|
|
Accrued expenses and other current liabilities
|
$
|
2
|
|
|
|
|
|
|
|
|
|
Total derivative instruments designated as hedges
|
|
7
|
|
|
|
2
|
|
|
Undesignated derivative instruments
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
2
|
|
|
Accrued expenses and other current liabilities
|
6
|
|
|
Total derivative instruments
|
|
$
|
9
|
|
|
|
$
|
8
|
|
The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
$
|
—
|
|
|
Accrued expenses and other current liabilities
|
$
|
17
|
|
|
|
|
|
|
|
|
|
Total derivative instruments designated as hedges
|
|
—
|
|
|
|
17
|
|
|
Undesignated derivative instruments
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
11
|
|
|
Accrued expenses and other current liabilities
|
2
|
|
|
Total derivative instruments
|
|
$
|
11
|
|
|
|
$
|
19
|
|
While some of our derivatives are subject to master netting arrangements, we present our assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, we are not required to post collateral for any of our outstanding derivatives.
The following table provides information on our derivative positions as if they were presented on a net basis, allowing for the right of offset by counterparty.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
(in millions)
|
Asset
|
Liability
|
|
Asset
|
Liability
|
|
Gross amounts recognized in the consolidated balance sheet
|
$
|
9
|
|
$
|
8
|
|
|
$
|
11
|
|
$
|
19
|
|
|
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet
|
(2)
|
|
(2)
|
|
|
(6)
|
|
(6)
|
|
|
Total
|
$
|
7
|
|
$
|
6
|
|
|
$
|
5
|
|
$
|
13
|
|
The following table presents the amounts recorded on the condensed consolidated balance sheet related to fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of hedged item
|
|
Cumulative amount of fair value hedging adjustment included
in the carrying amount of the hedged item (a)
|
|
(in millions)
|
Balance as of September 30, 2021
|
Balance as of December 31, 2020
|
|
Balance as of September 30, 2021
|
Balance as of December 31, 2020
|
|
Long-term debt
|
$
|
102
|
|
$
|
102
|
|
|
$
|
4
|
|
$
|
5
|
|
(a) These fair value hedges were terminated in 2018 and earlier periods.
15. FAIR VALUE MEASUREMENTS
The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
(in millions)
|
Balance as of September 30, 2021
|
Quoted prices in active markets for identical assets
(Level 1)
|
Significant other
observable inputs
(Level 2)
|
Significant
unobservable inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
9
|
|
$
|
—
|
|
$
|
9
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Debt securities
|
30
|
|
—
|
|
30
|
|
—
|
|
|
Marketable equity securities
|
15
|
|
15
|
|
—
|
|
—
|
|
|
Total
|
$
|
54
|
|
$
|
15
|
|
$
|
39
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
8
|
|
$
|
—
|
|
$
|
8
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Contingent payments related to acquisitions
|
61
|
|
—
|
|
—
|
|
61
|
|
|
Total
|
$
|
69
|
|
$
|
—
|
|
$
|
8
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
(in millions)
|
Balance as of December 31, 2020
|
Quoted prices in active markets for identical assets
(Level 1)
|
Significant other
observable inputs
(Level 2)
|
Significant
unobservable inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
11
|
|
$
|
—
|
|
$
|
11
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Debt securities
|
13
|
|
—
|
|
13
|
|
—
|
|
|
Marketable equity securities
|
17
|
|
17
|
|
—
|
|
—
|
|
|
Total
|
$
|
41
|
|
$
|
17
|
|
$
|
24
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
19
|
|
$
|
—
|
|
$
|
19
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Contingent payments related to acquisitions
|
30
|
|
—
|
|
—
|
|
30
|
|
|
Total
|
$
|
49
|
|
$
|
—
|
|
$
|
19
|
|
$
|
30
|
|
As of September 30, 2021 and December 31, 2020, cash and cash equivalents of $3.3 billion and $3.7 billion, respectively, included money market and other short-term funds of approximately $1.5 billion and $1.8 billion, respectively, 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. The majority of the derivatives entered into by us 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, include contractual terms, interest rate yield curves, foreign exchange rates and volatility.
Contingent payments related to acquisitions, which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques. The fair value of milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or the 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 increases or the expected timing of payment is accelerated. The following table is a reconciliation of recurring fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(in millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Fair value at beginning of period
|
$
|
34
|
|
$
|
39
|
|
|
$
|
30
|
|
$
|
39
|
|
|
Additions
|
28
|
|
—
|
|
|
52
|
|
4
|
|
|
|
|
|
|
|
|
|
Change in fair value recognized in earnings
|
(1)
|
|
1
|
|
|
(6)
|
|
(2)
|
|
|
Payments
|
—
|
|
(10)
|
|
|
(16)
|
|
(11)
|
|
|
Currency translation
|
—
|
|
—
|
|
|
1
|
|
—
|
|
|
Fair value at end of period
|
$
|
61
|
|
$
|
30
|
|
|
$
|
61
|
|
$
|
30
|
|
Financial Instruments Not Measured at Fair Value
In addition to the financial instruments that we are required to recognize at fair value in the condensed consolidated balance sheets, we have certain financial instruments that are recognized at amortized 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 estimated fair values as of September 30, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book values
|
|
Fair values(a)
|
|
(in millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Liabilities
|
|
|
|
|
|
|
Short-term debt
|
$
|
301
|
|
$
|
—
|
|
|
$
|
301
|
|
$
|
—
|
|
|
Current maturities of long-term debt and finance lease obligations
|
209
|
|
406
|
|
|
213
|
|
409
|
|
|
Long-term debt and finance lease obligations
|
5,446
|
|
5,786
|
|
|
5,950
|
|
6,471
|
|
(a) These fair value amounts are classified as Level 2 within the fair value hierarchy as they are estimated based on observable inputs.
The carrying value of short-term debt approximates its fair value due to the short-term maturities of the obligations. The estimated fair values of long-term debt were computed by multiplying price by the notional amount of the respective debt instruments. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with our credit risk. The carrying values of other financial instruments, such as accounts receivable and accounts payable, approximate their fair values due to the short-term maturities of most of those assets and liabilities.
Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $108 million at September 30, 2021 and $105 million at December 31, 2020. Those investments are included in Other non-current assets on our condensed consolidated balance sheets.
16. SEGMENT INFORMATION
We manage our business based on three geographical segments: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Our segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. In the first quarter of 2021, the information provided to our Chief Executive Officer for purposes of allocating resources and assessing performance was updated to reallocate contracted services activities performed at a German manufacturing facility from our EMEA segment to our Americas segment. The contracted services performed at that facility are part of our BioPharma Solutions business, which is managed as part of the Americas segment. Accordingly, the reported financial results of the Americas segment now include the contracted services activities performed at that facility. Segment results for the three and nine months ended September 30, 2020 have been recast to conform to the current period presentation.
We use operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our business segments. Intersegment sales are eliminated in consolidation.
Certain items are maintained at Corporate and are not allocated to a segment. They primarily include corporate headquarters costs, certain R&D costs, certain product category support costs, stock compensation expense, certain employee benefit plan costs, certain foreign currency hedging activities, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments). 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.
Financial information for our segments is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(in millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Net sales:
|
|
|
|
|
|
|
Americas
|
$
|
1,727
|
|
$
|
1,606
|
|
|
$
|
4,911
|
|
$
|
4,640
|
|
|
EMEA
|
779
|
|
720
|
|
|
2,300
|
|
2,077
|
|
|
APAC
|
720
|
|
646
|
|
|
2,059
|
|
1,775
|
|
|
Total net sales
|
$
|
3,226
|
|
$
|
2,972
|
|
|
$
|
9,270
|
|
$
|
8,492
|
|
|
Operating income:
|
|
|
|
|
|
|
Americas
|
$
|
676
|
|
$
|
611
|
|
|
$
|
1,907
|
|
$
|
1,726
|
|
|
EMEA
|
167
|
|
126
|
|
|
461
|
|
364
|
|
|
APAC
|
166
|
|
161
|
|
|
456
|
|
432
|
|
|
Total segment operating income
|
$
|
1,009
|
|
$
|
898
|
|
|
$
|
2,824
|
|
$
|
2,522
|
|
The following is a reconciliation of segment operating income to income before income taxes per the condensed consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(in millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Total segment operating income
|
$
|
1,009
|
|
$
|
898
|
|
|
$
|
2,824
|
|
$
|
2,522
|
|
|
Corporate and other
|
(496)
|
|
(428)
|
|
|
(1,497)
|
|
(1,312)
|
|
|
Total operating income
|
513
|
|
470
|
|
|
1,327
|
|
1,210
|
|
|
Interest expense, net
|
50
|
|
39
|
|
|
118
|
|
96
|
|
|
Other expense, net
|
12
|
|
16
|
|
|
15
|
|
32
|
|
|
Income before income taxes
|
$
|
451
|
|
$
|
415
|
|
|
$
|
1,194
|
|
$
|
1,082
|
|
Refer to Note 9 for additional information on Net Sales by product category.