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, 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 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 Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Annual Report).
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.
In January 2023, we announced our intention to separate our Renal Care and Acute Therapies product categories into a new, publicly traded company. While the completion of the proposed spinoff is subject to satisfaction of customary conditions, we are targeting completion of the planned separation by July 2024 or earlier. Additionally, we announced that we are pursuing strategic alternatives for our BioPharma Solutions (BPS) product category. In May 2023, we entered into a definitive agreement to sell that business. Closing of that transaction is subject to satisfaction of regulatory approvals and other customary conditions. See Note 2 for additional information.
Risks and Uncertainties
Supply Constraints and Global Economic Conditions
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 electromechanical devices) and higher transportation costs, resulting from the pandemic and other exogenous factors including significant weather events, elevated inflation levels, increased interest rates, disruptions to certain ports of call around the world, the war in Ukraine and other geopolitical events. We expect to experience some of these and other challenges related to 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 due to our inability to fully satisfy demand. While we have begun to see improvements in the availability of certain component parts and improved pricing in certain raw materials, these challenges have not completely subsided and may continue to have a negative impact on our sales in the future.
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
In May 2023, we entered into a definitive agreement to sell our BPS business. That business, which has historically been reported within our Americas segment, provides 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 has historically operated through our wholly-owned subsidiaries Baxter Pharmaceutical Solutions, LLC, a Delaware limited liability company, and Baxter Oncology GmbH, a German limited liability company. Under the related equity purchase agreement (EPA), we expect to sell those entities to Advent International and Warburg Pincus for $4.25 billion in cash, subject to certain adjustments specified in the EPA. After giving effect to those adjustments, we currently expect to receive approximately $3.92 billion of net pre-tax cash proceeds (approximately $3.40 billion after tax). The transaction is currently expected to close during the second half of 2023, subject to satisfaction of regulatory approvals and other customary conditions. We intend to use the net after-tax proceeds from this transaction to repay certain of our debt obligations.
We concluded that our BPS business met the criteria to be classified as held-for-sale in May 2023. A component of an entity is reported in discontinued operations after meeting the criteria for held-for-sale classification if the disposition
represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. We analyzed the quantitative and qualitative factors relevant to the pending divestiture of our BPS business, including its significance to our overall net income (loss) and earnings (loss) per share, and determined that those conditions for discontinued operations presentation have been met. As such, the financial position, results of operations and cash flows of that business are reported as discontinued operations in the accompanying consolidated financial statements. Prior period amounts have been adjusted to reflect discontinued operations presentation.
Baxter Pharmaceutical Solutions, LLC includes our BPS manufacturing facility in Bloomington Indiana and Baxter Oncology GmbH includes our manufacturing facilities in Halle and Bielefeld Germany. The Bielefeld site is not part of the BPS business, so it is not part of the pending divestiture transaction and its activities and net assets will be transferred to another Baxter subsidiary prior to closing. Accordingly, amounts related to the Bielefeld site continue to be presented as continuing operations in the accompanying condensed consolidated financial statements.
At closing of the transaction, Baxter will enter into a Transition Services Agreement (TSA) and a Master Commercial Manufacturing and Supply Agreement (MSA) with Baxter Pharmaceutical Solutions, LLC and Baxter Oncology GmbH. Pursuant to the TSA, Baxter on the one hand and Baxter Pharmaceutical Solutions, LLC and Baxter Oncology GmbH on the other hand will provide to each other, on an interim basis, specific transition services for up to 24 months post-closing to help ensure business continuity and minimized disruptions. Services to be provided by Baxter under the TSA include finance, information technology, human resources, integrated supply chain and certain other administrative services. Pursuant to the MSA, Baxter Pharmaceutical Solutions, LLC and Baxter Oncology GmbH will provide development, manufacturing, regulatory and other related services for certain Baxter pharmaceutical products for up to 5 years post-closing (with certain extension rights as provided therein).
Results of Discontinued Operations and Assets and Liabilities of Discontinued Operations
The following table summarizes the major classes of line items included in income from discontinued operations, net of tax, for the three and six months ended June 30, 2023 and 2022:
| | | | | | | | | | | | | | |
| Three months ended
June 30, | Six months ended
June 30, |
| (in millions) | 2023 | 2022 | 2023 | 2022 |
| Net sales | $ | 142 | | $ | 152 | | $ | 278 | | $ | 301 | |
| Cost of sales | 71 | | 70 | | 135 | | 133 | |
| Gross margin | 71 | | 82 | | 143 | | 168 | |
| Selling, general and administrative expenses | 14 | | 6 | | 29 | | 11 | |
| Research and development expenses | 1 | | — | | 1 | | 1 | |
| | | | |
| Other income, net | (1) | | — | | — | | — | |
| Income from discontinued operations before income taxes | 57 | | 76 | | 113 | | 156 | |
| Income tax expense | 3 | | 6 | | 14 | | 21 | |
| Income from discontinued operations, net of tax | $ | 54 | | $ | 70 | | $ | 99 | | $ | 135 | |
For the three and six months ended June 30, 2023, selling, general and administrative expenses include $8 million and $15 million, respectively, of separation-related costs incurred in connection with the pending sale of BPS.
The following table summarizes the carrying amounts of the major classes of assets and liabilities classified as discontinued operations in the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022:
| | | | | | | | |
| (in millions) | June 30,
2023 | December 31,
2022 |
| | |
| Accounts receivable, net of allowances | $ | 82 | | $ | 88 | |
| Inventories | 60 | | 39 | |
| Prepaid expenses and other current assets | 91 | | 59 | |
| Property, plant and equipment, net | 297 | | 284 | |
| Goodwill | 386 | | 391 | |
| Operating lease right-of-use assets | 9 | | 9 | |
| Other non-current assets | 6 | | 2 | |
| Assets of discontinued operations | $ | 931 | | $ | 872 | |
| Accounts payable | $ | 40 | | $ | 29 | |
| Accrued expenses and other current liabilities | 30 | | 32 | |
| Operating lease liabilities | 8 | | 9 | |
| Other non-current liabilities | 115 | | 111 | |
| Liabilities of discontinued operations | $ | 193 | | $ | 181 | |
3. SUPPLEMENTAL FINANCIAL INFORMATION
Allowance for Doubtful Accounts
The following table is a summary of the changes in our allowance for doubtful accounts for the three and six months ended June 30, 2023 and 2022. | | | | | | | | | | | | | | |
| Three months ended
June 30, | Six months ended
June 30, |
| (in millions) | 2023 | 2022 | 2023 | 2022 |
| Balance at beginning of period | $ | 122 | | $ | 129 | | $ | 114 | | $ | 122 | |
| | | | |
| Charged to costs and expenses | 9 | | 3 | | 16 | | 9 | |
| Write-offs | (5) | | (1) | | (6) | | (2) | |
| Currency translation adjustments | 2 | | (6) | | 4 | | (4) | |
| Balance at end of period | $ | 128 | | $ | 125 | | $ | 128 | | $ | 125 | |
Inventories | | | | | | | | |
| (in millions) | June 30,
2023 | December 31,
2022 |
| Raw materials | $ | 742 | | $ | 698 | |
| Work in process | 316 | | 294 | |
| Finished goods | 1,839 | | 1,687 | |
| Inventories | $ | 2,897 | | $ | 2,679 | |
Property, Plant and Equipment, Net | | | | | | | | |
| (in millions) | June 30,
2023 | December 31,
2022 |
| Property, plant and equipment, at cost | $ | 11,028 | | $ | 10,780 | |
| Accumulated depreciation | (6,534) | | (6,085) | |
| Property, plant and equipment, net | $ | 4,494 | | $ | 4,695 | |
Impairment of Manufacturing Facility
Our manufacturing facility in Opelika, Alabama is one of three Baxter manufacturing facilities that currently produce dialyzers used in hemodialysis (HD) treatments. The current competitive environment has increased the global supply of those products and, in connection with our initiatives to streamline our manufacturing footprint and improve our profitability, we have made the decision to cease production of dialyzers at the Opelika facility near the end of 2023. We believe that there is more than adequate availability of dialyzers in the United States and globally, and we intend to continue to manufacture those products at volumes aligned with the related market demand at our other manufacturing facilities that currently produce them.
We review the carrying amounts of long-lived assets used in operations, other than goodwill and intangible assets not subject to amortization, for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating recoverability, we group assets and liabilities at the lowest level such that the identified cash flows relating to the group are largely independent of other assets and liabilities. We then compare the carrying amounts of the assets (or asset groups) with the related estimated undiscounted future cash flows. In the event an asset (or asset group) is not recoverable, an impairment charge is recorded as the amount by which its carrying amount exceeds its fair value.
As a result of our decision to cease dialyzer production at this manufacturing facility, we performed a trigger-based recoverability assessment of its long-lived assets, which consist of a building and manufacturing equipment, including specialized equipment used in the production of dialyzers. The carrying amount of that asset group exceeded the estimated undiscounted cash flows expected to be generated, and we recognized an impairment charge of $243 million, classified within cost of sales in the accompanying condensed consolidated statements of income (loss), during the second quarter of 2023 to reduce the carrying amounts to their estimated fair values.
The fair values of the building and manufacturing equipment tested for impairment during the second quarter of 2023 were determined based on transaction prices of comparable assets (a market approach). Significant assumptions used in the determination of the fair values included the identification of representative comparable assets. Our long-lived asset fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.
Interest Expense, Net | | | | | | | | | | | | | | | | | |
| Three months ended
June 30, | | Six months ended
June 30, |
| (in millions) | 2023 | 2022 | | 2023 | 2022 |
| Interest expense, net of capitalized interest | $ | 132 | | $ | 93 | | | $ | 259 | | $ | 181 | |
| Interest income | (8) | | (4) | | | (18) | | (7) | |
| Interest expense, net | $ | 124 | | $ | 89 | | | $ | 241 | | $ | 174 | |
Other (Income) Expense, Net | | | | | | | | | | | | | | | | | |
| Three months ended
June 30, | | Six months ended
June 30, |
| (in millions) | 2023 | 2022 | | 2023 | 2022 |
| Foreign exchange (gains) losses, net | $ | 22 | | $ | (15) | | | $ | 36 | | $ | (26) | |
| Pension and other postretirement benefit plans | (11) | | (7) | | | (21) | | (12) | |
| Pension curtailment | — | | (11) | | | — | | (11) | |
| Change in fair value of marketable equity securities | 11 | | (8) | | | 6 | | (8) | |
| | | | | |
| Non-marketable investment impairments | 23 | | — | | | 23 | | — | |
| Other, net | (3) | | (3) | | | (4) | | (3) | |
| Other (income) expense, net | $ | 42 | | $ | (44) | | | $ | 40 | | $ | (60) | |
Non-Cash Operating and Investing Activities
Right-of-use operating lease assets obtained in exchange for lease obligations for the six months ended June 30, 2023 and 2022 were $45 million and $23 million, respectively.
Purchases of property, plant and equipment included in accounts payable as of June 30, 2023 and 2022 were $57 million and $62 million, respectively.
Unsettled share repurchases included in accrued expenses and other current liabilities as of June 30, 2022 were $8 million
4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The following is a reconciliation of goodwill by business segment. | | | | | | | | | | | | | | | | | |
| (in millions) | Americas | EMEA | APAC | Hillrom | Total |
| Balance as of December 31, 2022 | $ | 1,965 | | $ | 289 | | $ | 210 | | $ | 3,988 | | $ | 6,452 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Currency translation and other | (22) | | (3) | | (2) | | (7) | | (34) | |
| Balance as of June 30, 2023 | $ | 1,943 | | $ | 286 | | $ | 208 | | $ | 3,981 | | $ | 6,418 | |
For the periods ended June 30, 2023 and 2022, there were no reductions in goodwill relating to impairment losses.
Other intangible assets, net
The following is a summary of our other intangible assets. | | | | | | | | | | | | | | | | | | | | |
| | | | Indefinite-lived intangible assets | |
| (in millions) | Customer relationships | Developed technology, including patents | Other amortized intangible assets | Trade names | In process Research and Development |
Total |
| June 30, 2023 | | | | | | |
| Gross other intangible assets | $ | 3,444 | | $ | 3,863 | | $ | 320 | | $ | 1,570 | | $ | 163 | | $ | 9,360 | |
| Accumulated amortization | (574) | | (2,069) | | (247) | | — | | — | | (2,890) | |
| Other intangible assets, net | $ | 2,870 | | $ | 1,794 | | $ | 73 | | $ | 1,570 | | $ | 163 | | $ | 6,470 | |
| December 31, 2022 | | | | | | |
| Gross other intangible assets | $ | 3,442 | | $ | 3,836 | | $ | 325 | | $ | 1,571 | | $ | 202 | | $ | 9,376 | |
| Accumulated amortization | (460) | | (1,888) | | (235) | | — | | — | | (2,583) | |
| Other intangible assets, net | $ | 2,982 | | $ | 1,948 | | $ | 90 | | $ | 1,571 | | $ | 202 | | $ | 6,793 | |
Intangible asset amortization expense was $157 million and $193 million for the three months ended June 30, 2023 and 2022, respectively, and $319 million and $410 million for the six months ended June 30, 2023 and 2022, respectively.
5. FINANCING ARRANGEMENTS
Credit Facilities
In the first quarter of 2023, 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 four fiscal quarters ending March 31, 2023, June 30, 2023, September 30, 2023 and December 31, 2023.
Our U.S. dollar-denominated revolving credit facility 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 June 30, 2023 or December 31, 2022. 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 June 30, 2023 we have capacity to draw approximately $2.63 billion under our credit facilities, less commercial paper borrowings which were $249 million as of June 30, 2023.
In the second quarter of 2023, we repaid $140 million of our $2.00 billion three-year term loan facility. The loss from early extinguishment of this debt was not significant.
Commercial Paper
As of June 30, 2023, we had $249 million of commercial paper outstanding with a weighted-average interest rate of 5.52% and an original weighted-average term of 38 days. As of December 31, 2022, we had $299 million of commercial paper outstanding with a weighted-average interest rate of 4.75% and an original weighted-average term of 32 days.
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 June 30, 2023 and December 31, 2022, our total recorded reserves with respect to legal and environmental matters were $28 million.
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 noted above, we are involved in an ongoing environmental remediations associated with historic operations at certain of our facilities. As of June 30, 2023 and December 31, 2022, our environmental reserves, which are measured on an undiscounted basis, were $17 million and $19 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 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. On July 17, 2023, we were voluntarily dismissed from the litigation without prejudice.
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 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 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.
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 Human Services (the DHHS) requesting documents and information related to compliance with the False Claims Act and the Anti-Kickback Statute. Hillrom has been working with the DHHS and the Department of Justice (DOJ) to provide information responsive to the subpoena. Hillrom also voluntarily began a related internal review and Hillrom and now Baxter have been cooperating fully with the DHHS and the DOJ with respect to these matters. 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.
In July 2023, we and certain of our officers were named in a class action complaint captioned Grover J. Kelley 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 securities during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter securities on the public market between May 25, 2022, and February 8, 2023. The plaintiff alleges that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to supply chain and financial guidance.
7. STOCKHOLDERS’ EQUITY
Cash Dividends
Cash dividends declared per share for the three and six months ended June 30, 2023 were $0.29 and $0.58, respectively. Cash dividends declared per share for the three and six months ended June 30, 2022 were $0.29 and $0.57, respectively.
Stock Repurchase Programs
In July 2012, our Board of Directors authorized the repurchase of up to $2.00 billion of our common stock. Our Board of Directors increased this authority by an additional $1.50 billion in each of November 2016 and February 2018, by an additional $2.00 billion in November 2018 and by an additional $1.50 billion in October 2020. During the first half of 2023 we did not repurchase any shares under this authority. During the second quarter of 2022 we repurchased 0.1 million shares under this authority pursuant to Rule 10b5-1 plans. We had $1.30 billion remaining available under the authorization as of June 30, 2023.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of net income (loss), cumulative translation adjustments (CTA), certain gains and losses from pension and other postretirement employee benefit (OPEB) plans, gains and losses on cash flow hedges and unrealized gains and losses on available-for-sale debt securities.
The following table is a net-of-tax summary of the changes in accumulated other comprehensive income (loss) (AOCI) by component for the six months ended June 30, 2023 and 2022. | | | | | | | | | | | | | | | | | |
| Gains (losses) |
| (in millions) | CTA | Pension and OPEB plans | Hedging activities | Available-for-sale debt securities | Total |
| | | | | |
Balance as of December 31, 2022 | $ | (3,386) | | $ | (331) | | $ | (119) | | $ | 3 | | $ | (3,833) | |
| Other comprehensive income (loss) before reclassifications | 25 | | (4) | | 8 | | — | | 29 | |
| Amounts reclassified from AOCI (a) | — | | (7) | | (3) | | — | | (10) | |
| Net other comprehensive income (loss) from continuing operations | 25 | | (11) | | 5 | | — | | 19 | |
| Balance as of June 30, 2023 | $ | (3,361) | | $ | (342) | | $ | (114) | | $ | 3 | | $ | (3,814) | |
| | | | | | | | | | | | | | | | | |
| Gains (losses) |
| (in millions) | CTA | Pension and OPEB plans | Hedging activities | Available-for-sale debt securities | Total |
| | | | | |
| Balance as of December 31, 2021 | $ | (2,907) | | $ | (347) | | $ | (126) | | $ | — | | $ | (3,380) | |
| | | | | |
| Other comprehensive income (loss) before reclassifications | (432) | | 19 | | 13 | | 2 | | (398) | |
Amounts reclassified from AOCI (a) | — | | 13 | | (2) | | — | | 11 | |
| Net other comprehensive income (loss) from continuing operations | (432) | | 32 | | 11 | | 2 | | (387) | |
| Balance as of June 30, 2022 | $ | (3,339) | | $ | (315) | | $ | (115) | | $ | 2 | | $ | (3,767) | |
(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 six months ended June 30, 2023 and 2022. | | | | | | | | | | | |
| Amounts reclassified from AOCI (a) | |
| (in millions) | Three months ended June 30, 2023 | Six months ended June 30, 2023 | Location of impact in income statement |
| | | |
| | | |
| | | |
| | | |
| Pension and OPEB items | | | |
| Amortization of net losses and prior service costs or credits | $ | 5 | | $ | 10 | | Other (income) expense, net |
| Less: Tax effect | (1) | | (3) | | Income tax expense |
| $ | 4 | | $ | 7 | | Net of tax |
| Gains (losses) on hedging activities | | | |
| Foreign exchange contracts | $ | 3 | | $ | 7 | | Cost of sales |
| Interest rate contracts | (2) | | (3) | | Interest expense, net |
| 1 | | 4 | | Total before tax |
| Less: Tax effect | — | | (1) | | Income tax expense |
| $ | 1 | | $ | 3 | | Net of tax |
| Total reclassifications for the period | $ | 5 | | $ | 10 | | Total net of tax |
(a) Amounts in parentheses indicate reductions to net income
| | | | | | | | | | | |
| | | |
| Amounts reclassified from AOCI (a) | |
| (in millions) | Three months ended June 30, 2022 | Six months ended June 30, 2022 | Location of impact in income statement |
| Amortization of pension and OPEB items | | | |
| Amortization of net losses and prior service costs or credits | $ | (8) | | $ | (17) | | Other (income) expense, net |
| Less: Tax effect | 2 | | 4 | | Income tax expense |
| $ | (6) | | $ | (13) | | Net of tax |
| Gains on hedging activities | | | |
| Foreign exchange contracts | $ | 3 | | $ | 5 | | Cost of sales |
| Interest rate contracts | (2) | | (3) | | Interest expense, net |
| 1 | | 2 | | Total before tax |
| Less: Tax effect | — | | — | | Income tax expense |
| $ | 1 | | $ | 2 | | Net of tax |
| Total reclassifications for the period | $ | (5) | | $ | (11) | | Total net of tax |
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.
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. Our three legacy Baxter segments include 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. Our legacy Hillrom segment includes smart bed systems; patient monitoring and diagnostic technologies; respiratory health devices; and advanced equipment for the surgical space. For most of those 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, we enter into arrangements for which revenue may be recognized over time. For example, our Americas segment includes contract manufacturing arrangements, our Hillrom segment includes digital and connected care solutions and collaboration tools that are implemented over time and all of our segments include 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 June 30, 2023, we had $7.99 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 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 20% of this amount as revenue over the remainder of 2023, 40% in 2024, 20% in 2025, 10% in 2026 and 10% thereafter.
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 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 six months ended June 30, 2023 and 2022 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 $2.27 billion and $2.34 billion as of June 30, 2023 and December 31, 2022, 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.
The following table summarizes our contract assets: | | | | | | | | |
| (in millions) | June 30,
2023 | December 31,
2022 |
| Contract manufacturing services | $ | 4 | | $ | 10 | |
| Software sales | 43 | | 43 | |
| Bundled equipment and consumable medical products contracts | 116 | | 121 | |
| Contract assets | $ | 163 | | $ | 174 | |
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 six months ended June 30, 2023 and 2022. The contract liability balance represents the transaction price allocated to the remaining performance obligations.
| | | | | | | | |
| Six Months Ended June 30, |
| (in millions) | 2023 | 2022 |
| Balance at beginning of period | $ | 194 | | $ | 196 | |
| New revenue deferrals | 271 | | 282 | |
| Revenue recognized upon satisfaction of performance obligations | (267) | | (289) | |
| Currency translation | 1 | | (5) | |
| Balance at end of period | $ | 199 | | $ | 184 | |
For the six months ended June 30, 2023 and 2022, $64 million and $77 million of revenue was recognized that was included in contract liabilities as of December 31, 2022 and 2021, respectively.
The following table summarizes the classification of contract assets and contract liabilities as reported in the condensed consolidated balance sheets:
| | | | | | | | |
| (in millions) | June 30,
2023 | December 31,
2022 |
| Prepaid expenses and other current assets | $ | 49 | | $ | 52 | |
| Other non-current assets | 114 | | 122 | |
| Contract assets | $ | 163 | | $ | 174 | |
| | |
| Accrued expenses and other current liabilities | $ | 158 | | $ | 154 | |
| Other non-current liabilities | 41 | | 40 | |
| Contract liabilities | $ | 199 | | $ | 194 | |
Disaggregation of Net Sales
The following tables disaggregate our net sales from contracts with customers by product category between the U.S. and international: | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2023 | 2022 |
| (in millions) | U.S. | International | Total | U.S. | International | Total |
Renal Care 1 | $ | 234 | | $ | 702 | | $ | 936 | | $ | 225 | | $ | 706 | | $ | 931 | |
Medication Delivery 2 | 487 | | 274 | | 761 | | 459 | | 251 | | 710 | |
Pharmaceuticals 3 | 182 | | 368 | | 550 | | 164 | | 364 | | 528 | |
Clinical Nutrition 4 | 83 | | 160 | | 243 | | 90 | | 140 | | 230 | |
Advanced Surgery 5 | 150 | | 122 | | 272 | | 151 | | 112 | | 263 | |
Acute Therapies 6 | 60 | | 120 | | 180 | | 58 | | 115 | | 173 | |
| | | | | | |
Patient Support Systems 7 | 276 | | 83 | | 359 | | 284 | | 80 | | 364 | |
Front Line Care 8 | 227 | | 80 | | 307 | | 202 | | 80 | | 282 | |
Global Surgical Solutions 9 | 35 | | 42 | | 77 | | 36 | | 33 | | 69 | |
Other 10 | 17 | | 5 | | 22 | | 31 | | 13 | | 44 | |
| Total Baxter | $ | 1,751 | | $ | 1,956 | | $ | 3,707 | | $ | 1,700 | | $ | 1,894 | | $ | 3,594 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Six Months Ended June 30, |
| 2023 | 2022 |
| (in millions) | U.S. | International | Total | U.S. | International | Total |
Renal Care 1 | $ | 466 | | $ | 1,362 | | $ | 1,828 | | $ | 450 | | $ | 1,375 | | $ | 1,825 | |
Medication Delivery 2 | 923 | | 525 | | 1,448 | | 931 | | 485 | | 1,416 | |
Pharmaceuticals 3 | 355 | | 719 | | 1,074 | | 321 | | 728 | | 1,049 | |
Clinical Nutrition 4 | 161 | | 306 | | 467 | | 174 | | 283 | | 457 | |
Advanced Surgery 5 | 294 | | 224 | | 518 | | 287 | | 204 | | 491 | |
Acute Therapies 6 | 121 | | 239 | | 360 | | 126 | | 235 | | 361 | |
| | | | | | |
Patient Support Systems 7 | 536 | | 171 | | 707 | | 579 | | 168 | | 747 | |
Front Line Care 8 | 448 | | 161 | | 609 | | 409 | | 167 | | 576 | |
Global Surgical Solutions 9 | 73 | | 85 | | 158 | | 73 | | 74 | | 147 | |
Other 10 | 41 | | 10 | | 51 | | 62 | | 21 | | 83 | |
| Total Baxter | $ | 3,418 | | $ | 3,802 | | $ | 7,220 | | $ | 3,412 | | $ | 3,740 | | $ | 7,152 | |
1Renal Care includes sales of our peritoneal dialysis (PD), 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 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).
7Patient Support Systems includes sales of our connected care solutions: devices, software, communications and integration technologies and smart beds.
8Front Line Care includes sales of our integrated patient monitoring and diagnostic technologies to help diagnose, treat and manage a wide variety of illness and diseases, including respiratory therapy, cardiology, vision screening and physical assessment.
9Global Surgical Solutions includes sales of our surgical video technologies, tables, lights, pendants, precision positioning devices and other accessories.
10Other includes sales of miscellaneous product and service offerings. Contract manufacturing revenues earned by our manufacturing facility in Round Lake Illinois, which totaled $2 million for the six months ended June 30, 2023 and $11 million and $18 million for the three and six months ended June 30, 2022, respectively, were historically presented as BPS sales. Those sales transactions, which are not impacted by the pending divestiture of our BPS business, continue to be presented as continuing operations in the accompanying consolidated financial statements and have been reclassified to our Other product category for all periods presented.
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 and six months ended June 30, 2023 and 2022 were: | | | | | | | | |
| (in millions) | Three months ended June 30, 2023 | Six Months Ended June 30, 2023 |
| Sales-type lease revenue | $ | 3 | | $ | 7 | |
| Operating lease revenue | 132 | | 256 | |
| Variable lease revenue | 14 | | 29 | |
| Total lease revenue | $ | 149 | | $ | 292 | |
| | | | | | | | |
| | |
| (in millions) | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
| Sales-type lease revenue | $ | 5 | | $ | 8 | |
| Operating lease revenue | 113 | | 235 | |
| Variable lease revenue | 12 | | 32 | |
| Total lease revenue | $ | 130 | | $ | 275 | |
Our net investment in sales-type leases was $75 million as of June 30, 2023, of which $15 million originated in 2019 and prior, $21 million in 2020, $20 million in 2021, $14 million in 2022, and $5 million in 2023.
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 June 30, 2023, we have incurred cumulative pre-tax costs of $1.86 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, primarily related to implementation of business optimization programs, of approximately $20 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives, including those related the ongoing implementation of our previously announced new operating model intended to simplify and streamline our operations, and, to the extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs to implement business optimization programs in future periods.
During the three and six months ended June 30, 2023 and 2022, we recorded the following charges related to business optimization programs. | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions) | 2023 | 2022 | | 2023 | 2022 |
| Restructuring charges | $ | 287 | | $ | 26 | | | $ | 397 | | $ | 93 | |
| Costs to implement business optimization programs | 6 | | 16 | | | 30 | | 30 | |
| | | | | |
| Total business optimization charges | $ | 293 | | $ | 42 | | | $ | 427 | | $ | 123 | |
For segment reporting purposes, business optimization charges are unallocated expenses.
Costs to implement business optimization programs for the three and six months ended June 30, 2023 and 2022, 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 six months ended June 30, 2023 and 2022, we recorded the following restructuring charges. | | | | | | | | | | | | | | |
| Three months ended June 30, 2023 |
| (in millions) | COGS | SG&A | R&D | Total |
| Employee termination costs | $ | 9 | | $ | 19 | | $ | — | | $ | 28 | |
| Contract termination and other costs | — | | 2 | | — | | 2 | |
| Asset impairments | 257 | | — | | — | | 257 | |
| Total restructuring charges | $ | 266 | | $ | 21 | | $ | — | | $ | 287 | |
| | | | | | | | | | | | | | |
| Three months ended June 30, 2022 |
| (in millions) | COGS | SG&A | R&D | Total |
| Employee termination costs | $ | 4 | | $ | 16 | | $ | — | | $ | 20 | |
| Contract termination and other costs | — | | 5 | | — | | 5 | |
| Asset impairments | — | | 1 | | — | | 1 | |
| Total restructuring charges | $ | 4 | | $ | 22 | | $ | — | | $ | 26 | |
| | | | | | | | | | | | | | |
| | | | |
| Six months ended June 30, 2023 |
| (in millions) | COGS | SG&A | R&D | Total |
| Employee termination costs | $ | 26 | | $ | 82 | | $ | 7 | | $ | 115 | |
| Contract termination and other costs | 3 | | 2 | | — | | 5 | |
| Asset impairments | 269 | | 8 | | — | | 277 | |
| Total restructuring charges | $ | 298 | | $ | 92 | | $ | 7 | | $ | 397 | |
| | | | | | | | | | | | | | |
| | | | |
| Six months ended June 30, 2022 |
| (in millions) | COGS | SG&A | R&D | Total |
| Employee termination costs | $ | 6 | | $ | 63 | | $ | — | | $ | 69 | |
| Contract termination and other costs | — | | 17 | | — | | 17 | |
| Asset impairments | — | | 7 | | — | | 7 | |
| Total restructuring charges | $ | 6 | | $ | 87 | | $ | — | | $ | 93 | |
For the three months and six months ended June 30, 2023, $19 million and $97 million, respectively, of the restructuring charges reflected in the table above, consisting of employee termination costs, were related to the ongoing implementation of our previously announced new operating model intended to simplify and streamline our operations. For the three and six months ended June 30, 2023, $253 million of the restructuring charges reflected in the table above, consisting of $243 million of asset impairment charges and $10 million of employee termination costs, were related to our decision to cease production of dialyzers at one of our manufacturing facilities in connection with our initiatives to streamline our manufacturing footprint and improve our profitability. See Note 3 for additional information.
For the three months ended June 30, 2022, $27 million of the restructuring charges reflected in the table above were related to integration activities for the Hillrom acquisition, consisting of $21 million of employee termination costs, $5 million of contract termination and other costs and $1 million of asset impairments. For the six months ended June 30, 2022, $83 million of the restructuring charges reflected in the table above were related to integration activities for the Hillrom acquisition, consisting of $59 million of employee termination costs, $17 million of contract termination and other costs and $7 million of asset impairments.
The following table summarizes activity in the liability related to our restructuring initiatives. | | | | | |
| (in millions) | |
| Liability balance as of December 31, 2022 | $ | 107 | |
| Charges | 132 | |
| Payments | (63) | |
| Reserve adjustments | (12) | |
| Currency translation | (1) | |
| Liability balance as of June 30, 2023 | $ | 163 | |
Substantially all of our restructuring liabilities as of June 30, 2023 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 2024.
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
June 30, | | Six months ended
June 30, |
| (in millions) | 2023 | 2022 | | 2023 | 2022 |
| Pension benefits | | | | | |
| Service cost | $ | 7 | | $ | 21 | | | $ | 13 | | $ | 40 | |
| Interest cost | 35 | | 24 | | | 72 | | 48 | |
| Expected return on plan assets | (43) | | (40) | | | (87) | | (79) | |
| Amortization of net losses and prior service costs | 1 | | 11 | | | 2 | | 23 | |
| Net periodic pension cost | $ | — | | $ | 16 | | | $ | — | | $ | 32 | |
| OPEB | | | | | |
| Interest cost | $ | 2 | | $ | 1 | | | $ | 4 | | $ | 2 | |
| Amortization of net loss and prior service credit | (6) | | (3) | | | (12) | | (6) | |
| Net periodic OPEB cost (income) | $ | (4) | | $ | (2) | | | $ | (8) | | $ | (4) | |
12. INCOME TAXES
Our effective income tax rate was (5.5)% and 15.5% for the three months ended June 30, 2023 and 2022, respectively, and (14.2)% and 17.2% for the six months ended June 30, 2023 and 2022 , respectively. Our effective income tax rate can differ from the 21.0% 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.
For the three and six months ended June 30, 2023, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $30 million increase in the valuation allowance related to a deferred tax asset from a tax basis step-up that arose from previously enacted Swiss tax reform legislation and a favorable geographic earnings mix.
For the three and six months ended June 30, 2022, 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 discrete tax matters in various foreign jurisdictions, of which none were individually material, partially offset by 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 (loss) 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 net income (loss) attributable to Baxter stockholders.
| | | | | | | | | | | | | | | | | |
| Three months ended
June 30, | | Six months ended
June 30, |
| (in millions) | 2023 | 2022 | | 2023 | 2022 |
| Income (loss) from continuing operations | $ | (193) | | $ | 185 | | | $ | (193) | | $ | 193 | |
| Less: Net income attributable to noncontrolling interests | 2 | | 3 | | | 3 | | 5 | |
| Income (loss) from continuing operations attributable to Baxter stockholders | (195) | | 182 | | | (196) | | 188 | |
| Income from discontinued operations | 54 | | 70 | | | 99 | | 135 | |
| Net income (loss) attributable to Baxter stockholders | $ | (141) | | $ | 252 | | | $ | (97) | | $ | 323 | |
The following table is a reconciliation of basic shares to diluted shares. | | | | | | | | | | | | | | | | | |
| Three months ended
June 30, | | Six months ended
June 30, |
| (in millions) | 2023 | 2022 | | 2023 | 2022 |
| Basic shares | 506 | | 504 | | | 506 | | 503 | |
| Effect of dilutive securities | — | | 4 | | | — | | 5 | |
| Diluted shares | 506 | | 508 | | | 506 | | 508 | |
Basic and diluted shares are the same for the three and six months ended June 30, 2023 due to our net losses for the period. The effect of dilutive securities for the three and six months ended June 30, 2022 includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs.
Diluted EPS excludes 27 million and 25 million shares issuable under equity awards for the three and six months ended June 30, 2023, respectively, and 12 million and 8 million shares issuable under equity awards for the three and six months ended June 30, 2022, 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, Chinese Renminbi, Japanese Yen, Swedish Krona, British Pound, Polish Zloty, Mexican Peso, Australian Dollar, Canadian Dollar, Korean Won, Colombian Peso, Brazilian Real, Russian Ruble, Turkish Lira and Indian Rupee. 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 generally 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 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 $377 million and $398 million as of June 30, 2023 and December 31, 2022, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at June 30, 2023 is 12 months for foreign exchange contracts. There were no outstanding interest rate contracts designated as cash flow hedges as of June 30, 2023 and December 31, 2022.
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 June 30, 2023 and December 31, 2022.
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 June 30, 2023, we had an accumulated pre-tax unrealized translation gain in AOCI of $57 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 cash flow hedge dedesignations in the first six months of 2023 or 2022 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 six months of 2023 or 2022.
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 six months of 2023 or 2022.
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 $688 million as of June 30, 2023 and $753 million as of December 31, 2022.
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 June 30, 2023 and 2022. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain (loss) recognized in OCI | | Location of gain (loss)
in income statement | Gain (loss) reclassified from AOCI into income |
| (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Cash flow hedges | | | | | | | | |
| Interest rate contracts | $ | — | | | $ | — | | | Interest expense, net | $ | (2) | | | $ | (2) | |
| Foreign exchange contracts | 10 | | | 19 | | | Cost of sales | 3 | | | 3 | |
| Net investment hedges | 10 | | | 143 | | | Other (income) expense, net | — | | | — | |
| Total | $ | 20 | | | $ | 162 | | | | $ | 1 | | | $ | 1 | |
| | | | | | | | | | | | | | |
| Location of gain (loss) in income statement | Gain (loss) recognized in income |
| (in millions) | 2023 | | 2022 |
| Undesignated derivative instruments | | | | |
| Foreign exchange contracts | Other (income) expense, net | $ | (15) | | | $ | (26) | |
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 six months ended June 30, 2023 and 2022.
| | | | | | | | | | | | | | | | | |
| | | | | |
| Gain (loss) recognized in OCI | Location of gain (loss)
in income statement | Gain (loss) reclassified from AOCI
into income |
| (in millions) | 2023 | 2022 | 2023 | 2022 |
| Cash flow hedges | | | | | |
| Interest rate contracts | $ | — | | $ | — | | Interest expense, net | $ | (3) | | $ | (3) | |
| Foreign exchange contracts | 10 | | 16 | | Cost of sales | 7 | | 5 | |
| Net investment hedges | (38) | | 185 | | Other (income) expense, net | — | | — | |
| Total | $ | (28) | | $ | 201 | | | $ | 4 | | $ | 2 | |
| | | | | | | | | | | |
| | | |
| Location of gain (loss)
in income statement | Gain (loss) recognized in income |
| (in millions) | 2023 | 2022 |
| | | |
| | | |
| Undesignated derivative instruments | | | |
| Foreign exchange contracts | Other (income) expense, net | $ | (18) | | $ | (23) | |
As of June 30, 2023, $2 million of deferred, net after-tax gains 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 June 30, 2023. | | | | | | | | | | | | | | | | | |
| 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 | $ | 11 | | | Accrued expenses and other current liabilities | $ | 4 | |
| | | | | |
| Total derivative instruments designated as hedges | | 11 | | | | 4 | |
| Undesignated derivative instruments | | | | | |
| Foreign exchange contracts | Prepaid expenses and other current assets | 2 | | | Accrued expenses and other current liabilities | 2 | |
| Total derivative instruments | | $ | 13 | | | | $ | 6 | |
The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2022. | | | | | | | | | | | | | | | | | |
| 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 | $ | 8 | | | Accrued expenses and other current liabilities | $ | 5 | |
| | | | | |
| Total derivative instruments designated as hedges | | 8 | | | | 5 | |
| Undesignated derivative instruments | | | | | |
| Foreign exchange contracts | Prepaid expenses and other current assets | 6 | | | Accrued expenses and other current liabilities | 7 | |
| Total derivative instruments | | $ | 14 | | | | $ | 12 | |
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. | | | | | | | | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| (in millions) | Asset | Liability | | Asset | Liability |
| Gross amounts recognized in the condensed consolidated balance sheets | $ | 13 | | $ | 6 | | | $ | 14 | | $ | 12 | |
| Gross amount subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet | (1) | | (1) | | | (4) | | (4) | |
| Total | $ | 12 | | $ | 5 | | | $ | 10 | | $ | 8 | |
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 June 30, 2023 | Balance as of December 31, 2022 | | Balance as of June 30, 2023 | Balance as of December 31, 2022 |
| Long-term debt | $ | 101 | | $ | 101 | | | $ | 4 | | $ | 4 | |
(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 June 30, 2023 | 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 | $ | 13 | | $ | — | | $ | 13 | | $ | — | |
| | | | |
| Available-for-sale debt securities | 37 | | — | | — | | 37 | |
| Marketable equity securities | 37 | | 37 | | — | | — | |
| Total | $ | 87 | | $ | 37 | | $ | 13 | | $ | 37 | |
| Liabilities | | | | |
| Foreign exchange contracts | $ | 6 | | $ | — | | $ | 6 | | $ | — | |
| | | | |
| Contingent payments related to acquisitions | 21 | | — | | — | | 21 | |
| Total | $ | 27 | | $ | — | | $ | 6 | | $ | 21 | |
| | | | | | | | | | | | | | |
| | Basis of fair value measurement |
| (in millions) | Balance as of December 31, 2022 | 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 | $ | 14 | | $ | — | | $ | 14 | | $ | — | |
| | | | |
| Available-for-sale debt securities | 47 | | — | | — | | 47 | |
| Marketable equity securities | 32 | | 32 | | — | | — | |
| Total | $ | 93 | | $ | 32 | | $ | 14 | | $ | 47 | |
| Liabilities | | | | |
| Foreign exchange contracts | $ | 12 | | $ | — | | $ | 12 | | $ | — | |
| | | | |
| Contingent payments related to acquisitions | 84 | | — | | — | | 84 | |
| Total | $ | 96 | | $ | — | | $ | 12 | | $ | 84 | |
As of June 30, 2023 and December 31, 2022, cash and cash equivalents of $1.72 billion, included money market and other short-term funds of approximately $303 million and $341 million, 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.
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 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 and available-for-sale debt securities. | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| 2023 | | 2022 |
| (in millions) | Contingent payments related to acquisitions | Available-for-sale debt securities | | Contingent payments related to acquisitions | Available-for-sale debt securities |
| Fair value at beginning of period | $ | 70 | | $ | 42 | | | $ | 124 | | $ | 53 | |
| | | | | |
| Change in fair value recognized in earnings | (1) | | (5) | | | (11) | | — | |
| Change in fair value recognized in AOCI | — | | — | | | — | | 1 | |
| Transfers out of Level 3 | — | | — | | | — | | (10) | |
| Payments | (48) | | — | | | — | | — | |
| | | | | |
| Fair value at end of period | $ | 21 | | $ | 37 | | | $ | 113 | | $ | 44 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Six months ended June 30, |
| 2023 | | 2022 |
| (in millions) | Contingent payments related to acquisitions | Available-for-sale debt securities | | Contingent payments related to acquisitions | Available-for-sale debt securities |
| Fair value at beginning of period | $ | 84 | | $ | 47 | | | $ | 143 | | $ | 30 | |
| Additions | — | | — | | | — | | 21 | |
| Change in fair value recognized in earnings | (14) | | (5) | | | (28) | | — | |
| Change in fair value recognized in AOCI | — | | — | | | — | | 3 | |
| Transfers out of Level 3 | — | | (5) | | | — | | (10) | |
| Payments | (49) | | — | | | (2) | | — | |
| | | | | |
| Fair value at end of period | $ | 21 | | $ | 37 | | | $ | 113 | | $ | 44 | |
During the second quarter and first half of 2022, $8 million of available-for-sale debt securities that were previously classified as Level 3 converted to marketable equity securities, which are classified as Level 1 in the fair value hierarchy, upon the initial public offering of the investee.
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 June 30, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | |
| Book values | | Fair values(a) |
| (in millions) | 2023 | 2022 | | 2023 | 2022 |
| Liabilities | | | | | |
| | | | | |
| Current maturities of long-term debt and finance lease obligations | $ | 1,928 | | $ | 1,105 | | | $ | 1,894 | | $ | 1,079 | |
| Long-term debt and finance lease obligations | 14,306 | | 15,232 | | | 12,884 | | 13,657 | |
(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 current and 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 not presented in the above table, such as accounts receivable, short-term debt and accounts payable, approximate their fair values due to the short-term maturities of most of those assets and liabilities.
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 $88 million as of June 30, 2023 and $104 million as of December 31, 2022. 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. During the quarter ended June 30, 2023, several of our investees either completed or are in the process of undertaking new financing rounds at lower enterprise valuations as compared to their valuations at the time of our investments. As a result, we recognized $18 million of impairments of equity investments without readily determinable fair values in the current period. In addition, we recognized a $5 million impairment of a convertible debt investment, which is accounted for as an available-for-sale security, during the second quarter of 2023. The fair value measurements of investments in non-marketable equity and convertible debt securities are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.
16. SEGMENT INFORMATION
Our business is currently comprised of four segments, consisting of the following geographic segments related to our legacy Baxter business: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific), and a global segment for our Hillrom business. The Americas, EMEA and APAC 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. The Hillrom segment provides digital and connected care solutions and collaboration tools, including smart bed systems; patient monitoring and diagnostic technologies; respiratory health devices; and advanced equipment for the surgical space.
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, manufacturing variances and centrally managed supply chain costs, product category support costs, stock compensation expense, certain employee benefit plan costs, 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
June 30, | | Six months ended
June 30, |
| (in millions) | 2023 | 2022 | | 2023 | 2022 |
| Net sales: | | | | | |
| Americas | $ | 1,564 | | $ | 1,494 | | | $ | 3,030 | | $ | 2,971 | |
| EMEA | 762 | | 738 | | | 1,476 | | 1,437 | |
| APAC | 638 | | 647 | | | 1,240 | | 1,274 | |
| Hillrom | 743 | | 715 | | | 1,474 | | 1,470 | |
| Total net sales | $ | 3,707 | | $ | 3,594 | | | $ | 7,220 | | $ | 7,152 | |
Operating income: | | | | | |
| Americas | $ | 498 | | $ | 488 | | | $ | 918 | | $ | 1,008 | |
| EMEA | 112 | | 169 | | | 218 | | 288 | |
| APAC | 118 | | 156 | | | 225 | | 307 | |
| Hillrom | 147 | | 149 | | | 305 | | 349 | |
| Total segment operating income | $ | 875 | | $ | 962 | | | $ | 1,666 | | $ | 1,952 | |
The following is a reconciliation of segment operating income to income (loss) from continuing operations before income taxes per the condensed consolidated statements of income. | | | | | | | | | | | | | | | | | |
| Three months ended
June 30, | | Six months ended
June 30, |
| (in millions) | 2023 | 2022 | | 2023 | 2022 |
| Total segment operating income | $ | 875 | | $ | 962 | | | $ | 1,666 | | $ | 1,952 | |
| Corporate and other | (892) | | (698) | | | (1,554) | | (1,605) | |
| Total operating income (loss) | (17) | | 264 | | | 112 | | 347 | |
| Interest expense, net | 124 | | 89 | | | 241 | | 174 | |
| Other (income) expense, net | 42 | | (44) | | | 40 | | (60) | |
| Income (loss) from continuing operations before income taxes | $ | (183) | | $ | 219 | | | $ | (169) | | $ | 233 | |
We are implementing a new operating model intended to simplify and streamline our operations and we expect that our reportable segments will be changed to align with that new operating model when it is fully implemented, which is currently expected in the second half of 2023.
Exhibit 10.1