What changed in this filing

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Item 1. Financial Statements

2021-04-29 compared with 2020-10-29 · 241 added, 379 removed, 539 unchanged (53% of the section changed)

3 unchanged sentences

(in millions, except share information)

September 30,

2021 December 31,

12 unchanged sentences

Current liabilities:

Short-term debt $ — $ 226

Current maturities of long-term debt and finance lease obligations 407 406

Accounts payable and accrued liabilities 2,695 2,689

Accounts payable 1,023 1,043

Accrued expenses and other current liabilities 1,757 1,884

Total current liabilities 3,187 3,333

19 unchanged sentences

Three months ended

September 30, Nine months ended

September 30,

2020 2019 2020 2019

Net sales $ 2,946 $ 2,802

3 unchanged sentences

Research and development expenses 128 146

Other operating expense (income), net 1 ( 44 ) ( 19 ) ( 81 )

Other operating income, net — ( 20 )

Operating income 390 409

Interest expense, net 34 21

Other (income) expense, net 16 9 32 ( 8 )

Other expense, net 5 10

Income before income taxes 351 378

11 unchanged sentences

Baxter International Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(in millions)

Three months ended

September 30, Nine months ended

September 30,

2020 2019 2020 2019

Net income $ 300 $ 333

Other comprehensive income (loss), net of tax:

Currency translation adjustments, net of tax (benefit) expense of $ 18 and $( 13 ) for the three months ended September 30, 2020 and 2019, respectively, and $ 12 and ($ 11 ) for the nine months ended September 30, 2020 and 2019, respectively

127 ( 177 ) ( 43 ) ( 272 )

Pension and other postretirement benefits, net of tax expense of $ 0 and $ 3 for the three months ended September 30, 2020 and 2019, respectively, and $ 7 and $ 9 for the nine months ended September 30, 2020 and 2019, respectively

Hedging activities, net of tax (benefit) expense of $ 5 and ($ 13 ) for the three months ended September 30, 2020 and 2019, respectively, and ($ 33 ) and ($ 21 ) for the nine months ended September 30, 2020 and 2019, respectively

Currency translation adjustments, net of tax expense (benefit) of $ 17 and $( 8 ) for the three months ended March 31, 2021 and 2020, respectively

( 208 ) ( 359 )

Pension and other postretirement benefits, net of tax expense of $ 8 and $ 6 for the three months ended March 31, 2021 and 2020, respectively

Hedging activities, net of tax expense (benefit) of $ 3 and ($ 39 ) for the three months ended March 31, 2021 and 2020, respectively

Total other comprehensive income (loss), net of tax ( 166 ) ( 467 )

Comprehensive income 508 173 810 726

Comprehensive income (loss) 134 ( 134 )

Comprehensive income attributable to noncontrolling interests 2 1

Comprehensive income attributable to Baxter stockholders $ 505 $ 167 $ 805 $ 720

Comprehensive income (loss) attributable to Baxter stockholders $ 132 $ ( 135 )

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

2 unchanged sentences

(in millions)

For the three months ended September 30, 2020

For the three months ended March 31, 2021

Baxter International Inc.

4 unchanged sentences

income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity

Balance as of July 1, 2020 683 $ 683 173 $ ( 10,597 ) $ 5,975 $ 16,055 $ ( 3,988 ) $ 8,128 $ 32 $ 8,160

Net income — — — — — 356 — 356 3 359

Other comprehensive income (loss) — — — — — — 149 149 — 149

Stock issued under employee benefit plans and other — — — 26 34 — — 60 — 60

Dividends declared on common stock — — — — — ( 126 ) — ( 126 ) — ( 126 )

Balance as of September 30, 2020 683 $ 683 173 $ ( 10,571 ) $ 6,009 $ 16,285 $ ( 3,839 ) $ 8,567 $ 35 $ 8,602

For the nine months ended September 30, 2020

Baxter International Inc.

stockholders' equity

Common stock shares Common stock Common stock shares in treasury Common stock in treasury Additional contributed capital Retained earnings Accumulated other comprehensive income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity

Balance as of January 1, 2021 683 $ 683 179 $ ( 11,051 ) $ 6,043 $ 16,328 $ ( 3,314 ) $ 8,689 $ 37 $ 8,726

Adoption of new accounting standard — — — — — ( 4 ) — $ ( 4 ) — $ ( 4 )

Net income — — — — — 298 — 298 2 300

Other comprehensive income (loss) — — — — — — ( 166 ) ( 166 ) — ( 166 )

Stock issued under employee benefit plans and other — — ( 4 ) 193 54 — — 247 — 247

Dividends declared on common stock — — — — — ( 363 ) — ( 363 ) — ( 363 )

Balance as of September 30, 2020 683 $ 683 173 $ ( 10,571 ) $ 6,009 $ 16,285 $ ( 3,839 ) $ 8,567 $ 35 $ 8,602

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

Baxter International Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)

(in millions)

For the three months ended September 30, 2019

Baxter International Inc.

stockholders' equity

Balance as of July 1, 2019 683 $ 683 173 $ ( 10,322 ) $ 5,906 $ 15,598 $ ( 4,086 ) $ 7,779 $ 24 $ 7,803

Net income — — — — — 369 — 369 6 375

Other comprehensive income (loss) — — — — — — ( 202 ) ( 202 ) — ( 202 )

Purchases of treasury stock — — 4 ( 300 ) — — — ( 300 ) — ( 300 )

2 unchanged sentences

Change in noncontrolling interests — — — — — — — — ( 1 ) ( 1 )

Balance as of September 30, 2019 683 $ 683 175 $ ( 10,582 ) $ 5,926 $ 15,849 $ ( 4,288 ) $ 7,588 $ 29 $ 7,617

For the nine months ended September 30, 2019

Balance as of March 31, 2021 683 $ 683 181 $ ( 11,296 ) $ 6,043 $ 16,502 $ ( 3,480 ) $ 8,452 $ 38 $ 8,490

For the three months ended March 31, 2020

Baxter International Inc.

2 unchanged sentences

Balance as of January 1, 2020 683 $ 683 177 $ ( 10,764 ) $ 5,955 $ 15,718 $ ( 3,710 ) $ 7,882 $ 30 $ 7,912

Adoption of new accounting standards — — — — — 161 ( 161 ) — — —

Adoption of new accounting standard — — — — — ( 4 ) — ( 4 ) — ( 4 )

Net income — — — — — 332 — 332 1 333

Other comprehensive income (loss) — — — — — — ( 467 ) ( 467 ) — ( 467 )

Purchases of treasury stock — — 14 ( 1,089 ) 46 — — ( 1,043 ) — ( 1,043 )

Stock issued under employee benefit plans and other — — ( 2 ) 87 ( 20 ) — — 67 — 67

Dividends declared on common stock — — — — — ( 111 ) — ( 111 ) — ( 111 )

Change in noncontrolling interests — — — — — — — — 1 1

Balance as of September 30, 2019 683 $ 683 175 $ ( 10,582 ) $ 5,926 $ 15,849 $ ( 4,288 ) $ 7,588 $ 29 $ 7,617

Balance as of March 31, 2020 683 $ 683 175 $ ( 10,677 ) $ 5,935 $ 15,935 $ ( 4,177 ) $ 7,699 $ 31 $ 7,730

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

2 unchanged sentences

(in millions)

Nine months ended

September 30,

Three months ended

Cash flows from operations

5 unchanged sentences

Net periodic pension and other postretirement costs 26 20

Intangible asset impairments 17 31

Changes in balance sheet items:

1 unchanged sentence

Inventories ( 129 ) ( 83 )

Accounts payable and accrued liabilities 36 ( 249 )

Prepaid expenses and other current assets 2 ( 14 )

Accounts payable 22 82

Accrued expenses and other current liabilities ( 124 ) ( 192 )

Other 1 ( 39 )

9 unchanged sentences

Issuances of debt — 1,240

Net decreases in debt with original maturities of three months or less ( 226 ) —

Cash dividends on common stock ( 125 ) ( 111 )

4 unchanged sentences

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash ( 31 ) ( 63 )

Increase in cash, cash equivalents and restricted cash 1,031 1,171

Increase (decrease) in cash, cash equivalents and restricted cash ( 550 ) 775

Cash, cash equivalents and restricted cash at beginning of period 3,736 3,335

1 unchanged sentence

$ 3,186 $ 4,110

(1) We did not have any restricted cash balances as of December 31, 2019, September 30, 2019 or December 31, 2018.

The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to the amounts reported within the condensed consolidated balance sheet as of September 30, 2020 (in millions):

September 30, 2020

(1) We did not have any restricted cash balances as of March 31, 2020 or December 31, 2019.

March 31, 2021 December 31, 2020

Cash and cash equivalents $ 3,182 $ 3,730

14 unchanged sentences

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

4 unchanged sentences

We expect that these evolving restrictions and requirements, as well as the corresponding need to adapt to new methods of conducting business remotely, will continue to have an adverse effect on our business.

New Accounting Standards

Recently adopted accounting pronouncements

As of January 1, 2020, we adopted Accounting Standards Update (ASU) No.

2016-13, Financial Instruments - Credit Losses, which requires the measurement of expected lifetime credit losses, rather than incurred losses, for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts.

The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

We adopted this ASU using the modified retrospective approach.

The impact of the adoption of this ASU was an increase to our allowance for doubtful accounts and a decrease to retained earnings of $ 4 million .

The following table is a summary of the changes in our allowance for doubtful accounts for the three and nine months ended September 30, 2020:

(in millions) Three months ended

September 30, 2020 Nine months ended

September 30, 2020

Balance at beginning of period $ 120 $ 112

Adoption of new accounting standard — 4

Charged to costs and expenses 3 15

Write-offs ( 3 ) ( 4 )

Currency translation adjustments 2 ( 5 )

Balance at end of period $ 122 $ 122

ASU 2016-13 also requires disclosure by vintage year of origination for net investments in leases.

Our net investment in sales-type leases was $ 142 million as of September 30, 2020, of which $ 13 million originated in 2016 and prior, $ 19 million in 2017, $ 47 million in 2018, $ 36 million in 2019 and $ 27 million in 2020.

As of January 1, 2020, we adopted ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

Our policies for capitalizing implementation costs incurred in a hosting arrangement were not impacted by this ASU.

However, we have historically classified those capitalized costs within property, plant and equipment, net on our condensed consolidated balance sheets and as capital expenditures on our condensed consolidated statements of cash flows.

Under the new ASU, those capitalized costs are presented as other non-current assets on our condensed consolidated balance sheets and within operating cash flows on our condensed consolidated statements of cash flows.

We adopted this ASU on a prospective basis and capitalized $ 10 million and $ 30 million, respectively, of implementation costs related to hosting arrangements that are service contracts during the three and nine months ended September 30, 2020.

ACQUISITIONS AND OTHER ARRANGEMENTS

Seprafilm Adhesion Barrier

In February 2020, we completed the acquisition of the product rights to Seprafilm Adhesion Barrier (Seprafilm) from Sanofi for approximately $ 342 million in cash .

Seprafilm is indicated for use in patients undergoing abdominal or pelvic laparotomy as an adjunct intended to reduce the incidence, extent and severity of postoperative adhesions between the abdominal wall and the underlying viscera such as omentum, small bowel, bladder, and stomach, and between the uterus and surrounding structures such as tubes and ovaries, large bowel, and bladder.

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 following table summarizes the fair values of the assets acquired as of the acquisition date:

(in millions)

Assets acquired

Inventories $ 18

Other intangible assets 296

Total assets acquired $ 342

The valuations of the assets acquired are preliminary and measurement period adjustments may be recorded in the future as we finalize our fair value estimates.

In the three and nine months ended September 30, 2020, the results of operations of the acquired business have been included in our condensed consolidated statement of income since the date the business was acquired.

The acquisition contributed $ 30 million and $ 66 million, respectively, of net sales for the three and nine months ended September 30, 2020.

Net earnings from the acquisition were not significant during the three and nine months ended September 30, 2020.

Acquisition and integration costs, primarily incremental cost of sales relating to inventory fair value step-ups, associated with the acquisition were zero and $ 15 million, respectively, for the three and nine months ended September 30, 2020.

We allocated $ 286 million and $ 10 million of the total consideration to the Seprafilm developed product rights and customer relationships with useful lives of 10 and 7 years, respectively.

The fair values of the intangible assets were determined using the income approach.

The discount rates used to measure the developed product rights and customer relationship intangible assets were 14.8 % and 11.0 %, respectively.

We consider the fair values of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions we used in establishing the estimated fair values.

The goodwill, which is deductible for tax purposes, includes the value of the overall strategic benefits provided to our product portfolio of hemostats and sealants and is included in the Americas and APAC segments.

Cheetah Medical, Inc.

On October 25, 2019, we acquired 100 percent of Cheetah Medical, Inc.

(Cheetah) for total upfront cash consideration of $ 195 million, net of cash acquired, with the potential for additional cash consideration, up to $ 40 million, based on clinical and commercial milestones for which the acquisition date fair value was $ 18 million.

In the third quarter of 2020, we received $ 7 million from the sellers as a result of an acquisition price adjustment in accordance with the acquisition agreement.

Additionally, we recorded measurement period adjustments in the third quarter of 2020 to decrease the net deferred tax liabilities acquired by $ 20 million.

The measurement period adjustments did not impact our results of operations.

The following table summarizes the fair value of consideration transferred:

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.

W e 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 consideration transferred $ 190

Contingent Consideration 24

Total Consideration $ 84

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date:

The following table summarizes the fair value of the assets acquired as of the acquisition date:

(in millions)

Assets acquired and liabilities assumed

Accounts receivable, net 3

Inventories 1

Prepaid expenses and other current assets 1

Property, plant and equipment 1

Assets acquired

Inventory $ 14

Other intangible assets 67

Operating lease right-of-use assets 1

Accounts payable and other accrued liabilities ( 4 )

Other non-current liabilities ( 12 )

Total assets acquired and liabilities assumed $ 208

Other Business Combinations

We completed other individually immaterial acquisitions in the nine months ended September 30, 2020 for total consideration of $ 13 million in cash at closing plus aggregate future potential contingent consideration of up to

$ 12 million with an acquisition date fair value of $ 4 million.

The acquisitions primarily resulted in the recognition of goodwill and other intangible assets.

We have not presented pro forma financial information for any of our acquisitions because their results are not material to our condensed consolidated financial statements.

Other Business Development Activities

In January 2020, we acquired the U.S.

rights to an additional product for $ 60 million.

The purchase price was capitalized as a developed-technology intangible asset in the quarter ended March 31, 2020 and is being amortized over its estimated useful life of 11 years.

In the nine months ended September 30, 2020, we entered into distribution license arrangements for multiple products that have not yet obtained regulatory approval for upfront cash payments of $ 22 million.

The cash paid was treated as research and development (R&D) expenses on our condensed consolidated statement of income.

We could make additional payments of up to $ 44 million upon the achievement of certain development, regulatory or commercial milestones.

Total assets required $ 84

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 insignificant during the three months ended March 31, 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 value 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 and EMEA segments.

We have not presented pro forma financial information for the acquisition because its 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 from the acquisition date through March 31, 2021 were $ 13 million.

SUPPLEMENTAL FINANCIAL INFORMATION

1 unchanged sentence

Three months ended

September 30, Nine months ended

September 30,

(in millions) 2021 2020

2 unchanged sentences

Interest expense, net $ 34 $ 21

Other (Income) Expense, Net

Other Expense, Net

Three months ended

September 30, Nine months ended

September 30,

(in millions) 2021 2020

Foreign exchange losses, net $ 23 $ 30 $ 44 $ 44

Foreign exchange (gains) losses, net $ ( 3 ) $ 11

Pension and other postretirement benefit plans 4 ( 1 )

Other, net 4 —

Other (income) expense, net $ 16 $ 9 $ 32 $ ( 8 )

(in millions) September 30,

Other expense, net $ 5 $ 10

Allowance for Doubtful Accounts

The following table is a summary of the changes in our allowance for doubtful accounts for the three months ended March 31, 2021 and 2020.

Three months ended

(in millions) 2021 2020

Balance at beginning of period $ 125 $ 112

Adoption of new accounting standard — 4

Charged to costs and expenses 1 7

Currency translation adjustments ( 6 ) ( 9 )

Balance at end of period $ 120 $ 114

(in millions) March 31,

2021 December 31,

4 unchanged sentences

Property, Plant and Equipment, Net

(in millions) September 30,

(in millions) March 31,

2021 December 31,

3 unchanged sentences

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, 2020 and 2019 were $ 42 million and $ 164 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.

As of September 30,

2020, we have entered into lease agreements with aggregate future lease payments of approximately $ 45 million for facilities that have not yet commenced.

Purchases of property, plant and equipment included in accounts payable and accrued liabilities as of September 30, 2020 and 2019 was $ 48 million and $ 47 million, respectively.

Right-of-use operating lease assets obtained in exchange for lease obligations for the three months ended March 31, 2021 and 2020 were $ 5 million and $ 15 million, respectively.

As of March 31, 2021, we have entered into lease agreements with aggregate future lease payments of approximately $ 46 million for facilities and equipment that have not yet commenced.

Purchases of property, plant and equipment included in accounts payable as of March 31, 2021 and 2020 were $ 63 million and $ 49 million, respectively.

Unsettled share repurchases included in accrued expenses and other current liabilities were $ 47 million as of March 31, 2021.

There were no unsettled share repurchases as of March 31, 2020.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

2 unchanged sentences

Balance as of December 31, 2020 $ 2,574 $ 406 $ 237 $ 3,217

Reallocation of goodwill 81 ( 81 ) — —

Acquisitions 2 1 — 3

Acquisition accounting adjustments ( 24 ) ( 3 ) — ( 27 )

Currency translation and other adjustments 44 7 4 55

Balance as of September 30, 2020 $ 2,477 $ 389 $ 228 $ 3,094

As of September 30, 2020, there were no reductions in goodwill relating to impairment losses.

Currency translation ( 90 ) ( 11 ) ( 8 ) ( 109 )

Balance as of March 31, 2021 $ 2,567 $ 315 $ 229 $ 3,111

As of March 31, 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

1 unchanged sentence

(in millions) Developed technology, including patents Other amortized intangible assets Indefinite-lived intangible assets

September 30, 2020

March 31, 2021

Gross other intangible assets $ 3,023 $ 491 $ 169 $ 3,683

5 unchanged sentences

Other intangible assets, net $ 1,339 $ 163 $ 169 $ 1,671

Intangible asset amortization expense was $ 57 million and $ 48 million for the three months ended September 30, 2020 and 2019, respectively, and $ 165 million and $ 136 million for the nine months ended September 30, 2020 and 2019, respectively.

In the second quarters of 2020 and 2019, we recognized impairment charges of $ 17 million and $ 31 million, respectively, related to developed-technology intangible assets due to declines in market expectations for the related products.

The fair values of the intangible assets were measured using a discounted cash flow approach and the charges are classified within cost of sales in the accompanying condensed consolidated statements of income.

We consider the fair values of the assets to be Level 3 measurements due to the significant estimates and assumptions we used in establishing the estimated fair values.

Intangible asset amortization expense was $ 64 million and $ 52 million for the three months ended March 31, 2021 and 2020, respectively.

FINANCING ARRANGEMENTS

Debt Issuance

In March 2020, we issued $ 750 million of 3.75 % senior notes due in October 2025 and $ 500 million of 3.95 % senior notes due in April 2030 (collectively, the senior notes).

Pursuant to a registration rights agreement (the Registration Rights Agreement) with the initial purchasers of the senior notes, we agreed to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the senior notes for new notes with terms substantially identical in all material respects to the senior notes and to have such registration statement declared effective under the U.S.

Securities Act of 1933.

If we fail to have such registration statement declared

effective by September 17, 2021 (a registration default), the annual interest rate on the senior notes would increase by 0.25 % for the 90-day period immediately following such registration default and by an additional 0.25 % thereafter.

The maximum additional interest rate is 0.50 % per annum and if a registration default is corrected, the senior notes would revert to the original interest rates.

The payment of additional interest is the sole remedy for the holders of the senior notes in the event of a registration default.

Credit Facilities

As of September 30, 2020, there were no borrowings outstanding under our U.S.

dollar-denominated revolving credit facility has a capacity of $ 2.0 billion and our Euro-denominated revolving credit facility has a capacity of approximately € 200 million.

As of March 31, 2021 and December 31, 2020, there were no borrowings outstanding under our U.S.

dollar or Euro-denominated credit facilities.

As of December 31, 2019, we had € 200 million ($ 224 million) outstanding under our Euro-denominated credit facility at a 0.91 % interest rate and no borrowings outstanding under our U.S.

dollar-denominated credit facility.

COMMITMENTS AND CONTINGENCIES

3 unchanged sentences

If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded.

As of September 30, 2020 and December 31, 2019, our total recorded reserves with respect to legal and environmental matters were $ 39 million and $ 56 million, respectively, and there were no related receivables.

As of March 31, 2021 and December 31, 2020, our total recorded reserves with respect to legal and environmental matters were $ 53 million and $ 40 million, respectively, and there was a $ 7 million insurance receivable as of March 31, 2021.

We have established reserves for certain of the matters discussed below.

12 unchanged sentences

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, 2020 and December 31, 2019, our environmental reserves, which are measured on an undiscounted basis, were $ 17 million and $ 18 million, respectively.

As of March 31, 2021 and December 31, 2020, our environmental reserves, which are measured on an undiscounted basis, were $ 19 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.

13 unchanged sentences

On November 30, 2018, the DOJ notified us that it had closed the investigation.

The New York Attorney General has also requested that we provide information regarding business practices in the IV saline industry.

We have cooperated with the New York Attorney General.

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:

13 unchanged sentences

On August 24, 2020, we filed a motion to dismiss the amended complaint.

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.

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 preliminary approval of the settlement on April 20, 2021.

A final approval hearing is currently scheduled for August 10, 2021.

We are fully reserved for the settlement amount as of March 31, 2021.

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.

1 unchanged sentence

The plaintiffs seek damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief.

As previously disclosed, in 2008 we recalled our heparin sodium injection products in the United States.

Following the recall, more than 1,000 lawsuits alleging that plaintiffs suffered various reactions to a heparin contaminant, in some cases resulting in fatalities, were filed.

In January 2019, the last of these cases was settled.

In the first nine months of 2019, following the resolution of an insurance dispute, we received cash proceeds of $ 39 million for our allocation of the insurance proceeds under a settlement and cost-sharing agreement related to the defense of the heparin product liability cases.

We recognized a $ 37 million gain in connection with the resolution of the dispute with the insurer that is classified within other operating expense (income), net on the condensed consolidated statement of income for the nine months ended September 30, 2019.

In September 2017, Hurricane Maria caused damage to certain of our assets in Puerto Rico and disrupted operations.

As previously disclosed, we realized $ 42 million of insurance recoveries in 2018 related to the damages and losses from that hurricane.

In July 2019, an additional $ 40 million of claims were approved by our insurers and a gain was recognized within other operating expense (income), net on the condensed consolidated statements of income for the three and nine months ended September 30, 2019.

In October 2019, an additional $ 60 million of claims were approved by our insurers and a gain for that amount was recognized within other operating expense (income), net in the fourth quarter of 2019.

No further insurance recoveries are expected.

STOCKHOLDERS’ EQUITY

Stock-Based Compensation

Stock compensation expense totaled $ 22 million and $ 29 million in the first quarter of 2021 and 2020, respectively.

Approximately 75 % of stock compensation expense is classified within SG&A expense with the remainder classified in cost of sales and R&D expense.

We awarded stock compensation grants which consisted of 4.0 million stock options, 0.5 million restricted stock units (RSUs) and 0.3 million performance stock units (PSUs) during the first quarter of 2021.

The grant date fair values of stock options, RSUs and PSUs awarded in the first quarter of 2021 were $ 62 million, $ 40 million and $ 27 million, respectively.

Stock options and RSUs generally vest in one-third increments over a three-year period.

Approximately 12.5 % of the PSUs with a grant date in the current period related to the establishment of the adjusted operating margin vesting condition for awards issued in 2019.

The remainder of PSUs granted in the current period were awarded in March 2021, for which the vesting conditions are equally divided based on our compound annual sales growth rate performance, our adjusted return on invested capital performance and on our stock performance relative to a specified peer group.

All of the PSUs vest at the end of the applicable three-year service period.

Stock Options

The weighted-average Black-Scholes assumptions used in establishing the fair value of stock options granted during the period, along with weighted-average grant date fair values, were as follows:

Three months ended

Expected volatility 25 % 26 %

Expected life (in years) 5.5 5.5

Risk-free interest rate 0.8 % 0.6 %

Dividend yield 1.3 % 1.2 %

Fair value per stock option $ 16 $ 16

The total intrinsic value of stock options exercised was $ 21 million and $ 52 million during the first quarters of 2021 and 2020, respectively.

As of March 31, 2021, the unrecognized compensation cost related to all unvested stock options of $ 109 million is expected to be recognized as expense over a weighted-average period of 2.1 years.

As of March 31, 2021, the unrecognized compensation cost related to all unvested RSUs of $ 75 million is expected to be recognized as expense over a weighted-average period of 2.1 years.

As of March 31, 2021, the unrecognized compensation cost related to all unvested PSUs of $ 46 million is expected to be recognized as expense over a weighted-average period of 1.8 years.

Stock Options Award Modification

2 unchanged sentences

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 three months ended March 31, 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, 2020 were $ 0.245 and $ 0.710 , respectively.

Cash dividends declared per share for the three and nine months ended September 30, 2019 were $ 0.22 and $ 0.63 , respectively.

Cash dividends declared per share for the three months ended March 31, 2021 and March 31, 2020 were $ 0.245 and $ 0.22 , respectively.

Stock Repurchase Programs

1 unchanged sentence

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 2020, we did not repurchase any shares under this authority.

During the first nine months of 2019, we repurchased 13.5 million shares pursuant to Rule 10b5-1 plans and otherwise.

As of September 30, 2019, we recognized a liability within accounts payable and accrued liabilities of $ 37 million for share repurchases that settled in early October 2019.

We had $ 897 million remaining available under the authorization as of September 30, 2020.

After giving effect to the October 2020 approval, we had $ 2.4 billion remaining under this authority as of October 29, 2020.

During the first quarter of 2021, we repurchased 3.6 million shares under this authority pursuant to a Rule 10b5-1 plan.

During the first quarter of 2020, we did not repurchase any shares under this authority.

As of March 31, 2021, we recognized a liability within accrued expenses and other current liabilities of $ 47 million for share repurchases that settled in April 2021.

We had $ 1.6 billion remaining available under the authorization as of March 31, 2021.

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, 2020 and 2019.

The following table is a net-of-tax summary of the changes in accumulated other comprehensive (loss) income (AOCI) by component for the three months ended March 31, 2021 and 2020.

(in millions) CTA Pension and OPEB plans Hedging activities Total

1 unchanged sentence

Balance as of December 31, 2020

$ ( 2,587 ) $ ( 574 ) $ ( 153 ) $ ( 3,314 )

Other comprehensive income (loss) before reclassifications ( 208 ) 13 3 ( 192 )

Amounts reclassified from AOCI (a) — 17 9 26

Net other comprehensive (loss) income ( 43 ) 26 ( 112 ) ( 129 )

Balance as of September 30, 2020 $ ( 2,997 ) $ ( 689 ) $ ( 153 ) $ ( 3,839 )

Net other comprehensive income (loss) ( 208 ) 30 12 ( 166 )

Balance as of March 31, 2021 $ ( 2,795 ) $ ( 544 ) $ ( 141 ) $ ( 3,480 )

(in millions) CTA Pension and OPEB plans Hedging activities Total

1 unchanged sentence

Balance as of December 31, 2019 $ ( 2,954 ) $ ( 715 ) $ ( 41 ) $ ( 3,710 )

Adoption of new accounting standard 9 ( 169 ) ( 1 ) ( 161 )

Other comprehensive income (loss) before

1 unchanged sentence

Amounts reclassified from AOCI (a) — 12 1 13

Net other comprehensive (loss) income ( 272 ) 37 ( 69 ) ( 304 )

Balance as of September 30, 2019 $ ( 3,131 ) $ ( 1,086 ) $ ( 71 ) $ ( 4,288 )

Net other comprehensive income (loss) ( 359 ) 22 ( 130 ) ( 467 )

Balance as of March 31, 2020 $ ( 3,313 ) $ ( 693 ) $ ( 171 ) $ ( 4,177 )

(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, 2020 and 2019.

The following is a summary of the amounts reclassified from AOCI to net income during the three months ended March 31, 2021 and 2020.

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

(in millions) Three months ended March 31, 2021 Three Months Ended March 31, 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 (income) expense, net

Amortization of net losses and prior service costs or credits $ ( 21 ) $ ( 15 ) Other expense, net

Tax effect 4 3 Income tax expense

2 unchanged sentences

Foreign exchange contracts $ ( 10 ) $ ( 1 ) Cost of sales

Tax effect 1 — Income tax expense

$ ( 1 ) $ 2 Net of tax

Total reclassifications for the period $ ( 12 ) $ ( 33 ) Total net of tax

Amounts reclassified from AOCI (a)

(in millions) Three months ended September 30, 2019 Nine months ended September 30, 2019 Location of impact in income statement

Amortization of pension and OPEB items

Amortization of net losses and prior service costs or credits $ ( 8 ) $ ( 23 ) Other (income) expense, net

Tax effect 4 6 Income tax expense

$ ( 4 ) $ ( 17 ) Net of tax

Gains on hedging activities

Foreign exchange contracts $ 2 $ 3 Cost of sales

Interest rate contracts $ ( 1 ) — Interest expense, net

( 11 ) ( 1 ) Total before tax

Tax effect 2 — Income tax expense

4 unchanged sentences

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 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.

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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, 2020, we had $ 7.8 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.

As of March 31, 2021, we had $ 7.9 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 2020, 25 % in each of 2021 and 2022, 20 % in 2023, and 10 % in each of 2024 and 2025.

We expect to recognize approximately 25 % of this amount as revenue over the remainder of 2021, 30 % in 2022, 25 % in 2023, and 10 % 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 related to rebates, product returns, sales discounts 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 accounts receivable, net and accounts payable and accrued liabilities on the condensed consolidated balance sheets.

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 accounts receivable, net and accrued expenses and other current liabilities 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.

1 unchanged sentence

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, 2020 and 2019 related to performance obligations satisfied in prior periods was not material.

Revenue recognized during the three months ended March 31, 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 as of September 30, 2020 and December 31, 2019, respectively.

Net trade accounts receivable was $ 1.6 billion and $ 1.7 billion as of March 31, 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.

3 unchanged sentences

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 .

Our contract asset balances totaled $ 146 million as of September 30, 2020, of which $ 58 million related to contract manufacturing services, $ 39 million related to software sales and $ 49 million related to bundled equipment and consumable medical products contracts.

Our contract asset balances totaled $ 131

million as of December 31, 2019, of which $ 36 million related to contract manufacturing services, $ 43 million related to software sales and $ 52 million related to bundled equipment and consumable medical products contracts.

Contract assets are presented within accounts receivable, net ($ 81 million and $ 63 million as of September 30, 2020 and December 31, 2019, respectively) and other non-current assets ($ 65 million and $ 68 million as of September 30, 2020 and December 31, 2019, respectively) in the accompanying condensed consolidated balance sheets.

Contract liabilities as of September 30, 2020 and December 31, 2019 were $ 63 million and $ 12 million, respectively, and were included in accounts payable and other accrued liabilities ($ 31 million as of September 30, 2020) and other non-current liabilities ($ 32 million and $ 12 million as of September 30, 2020 and December 31, 2019, respectively) in the accompanying condensed consolidated balance sheets.

During the nine months ended September 30, 2020, the amount of revenue recognized that was included in contract liabilities as of December 31, 2019 was not significant.

The following table summarizes our contract assets:

(in millions) March 31,

2021 December 31,

Contract manufacturing services $ 49 $ 47

Software sales 41 40

Bundled equipment and consumable medical products contracts 46 47

Contract assets $ 136 $ 134

The following table summarizes the classification of contract assets and contract liabilities as reported in the condensed consolidated balance sheets:

(in millions) March 31,

2021 December 31,

Prepaid expenses and other current assets $ 74 $ 70

Other non-current assets 62 64

Contract assets $ 136 $ 134

Accrued expenses and other current liabilities $ 38 $ 32

Other non-current liabilities 42 34

Contract liabilities $ 80 $ 66

Contract liabilities are recognized when a customer pays consideration before we transfer goods or provide services.

During the three months ended March 31, 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

The following tables disaggregate our net sales by Global Business Unit (GBU) between the U.S.

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 first quarter of 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,

Three Months Ended March 31,

(in millions) U.S.

12 unchanged sentences

81 126 207 60 96 156

83 64 147 83 57 140

Total Baxter $ 1,244 $ 1,728 $ 2,972 $ 1,224 $ 1,627 $ 2,851

Nine months ended September 30,

(in millions) U.S.

International Total U.S.

International Total

$ 629 $ 2,115 $ 2,744 $ 587 $ 2,092 $ 2,679

Medication Delivery 2

1,296 686 1,982 1,308 716 2,024

Pharmaceuticals 3

653 899 1,552 690 885 1,575

Clinical Nutrition 4

250 426 676 236 403 639

Advanced Surgery 5

370 258 628 397 249 646

Acute Therapies 6

BioPharma Solutions 7

44 91 135 48 66 114

7 unchanged sentences

6 Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).

7 Other primarily includes sales of contract manufacturing services from our pharmaceutical partnering business.

7 BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical and biopharmaceutical companies.

8 Other includes sales of miscellaneous product and service offerings.

Lease Revenue

3 unchanged sentences

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, 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

The components of lease revenue for the three and nine months ended September 30, 2019 were:

(in millions) Three months ended September 30, 2019 Nine months ended September 30, 2019

The components of lease revenue for the three months ended March 31, 2021 and 2020 were:

Three Months Ended March 31,

(in millions) 2021 2020

Sales-type lease revenue $ 6 $ 6

2 unchanged sentences

Total lease revenue $ 57 $ 38

Our net investment in sales-type leases was $ 131 million as of March 31, 2021, of which $ 19 million originated in 2017 and prior, $ 32 million in 2018, $ 36 million in 2019, $ 38 million in 2020 and $ 6 million in 2021.

BUSINESS OPTIMIZATION CHARGES

1 unchanged sentence

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, 2020, we have incurred cumulative pre-tax costs of $ 1.1 billion related to these actions.

From the commencement of our business optimization activities through March 31, 2021, we have incurred cumulative pre-tax costs of $ 1.1 billion related to these actions.

The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation.

1 unchanged sentence

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, 2020 and 2019, we recorded the following charges related to business optimization programs.

Three months ended

September 30, Nine months ended

September 30,

During the three months ended March 31, 2021 and 2020, we recorded the following charges related to business optimization programs.

Three Months Ended March 31,

(in millions) 2021 2020

1 unchanged sentence

Costs to implement business optimization programs 2 7

Accelerated depreciation — 1 — 5

Total business optimization charges $ 27 $ 32

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, 2020 and 2019, respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs.

The costs were generally included within cost of sales, SG&A expense and R&D expense.

For the three and nine months ended September 30, 2019, respectively, we recognized accelerated depreciation, primarily associated with facilities to be closed.

The costs were recorded within cost of sales and SG&A expense.

During the three and nine months ended September 30, 2020 and 2019, we recorded the following restructuring charges.

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

Three months ended September 30, 2019

(in millions) COGS SG&A R&D Total

Employee termination costs $ 1 $ 2 $ 2 $ 5

Contract termination and other costs 1 — — 1

Asset impairments 7 — 4 11

Total restructuring charges $ 9 $ 2 $ 6 $ 17

Nine months ended September 30, 2020

Costs to implement business optimization programs for the three months ended March 31, 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 months ended March 31, 2021 and 2020, we recorded the following restructuring charges.

Three months ended March 31, 2021

(in millions) COGS SG&A R&D Total

Employee termination costs $ 16 $ 5 $ — $ 21

Contract termination and other costs 3 3 — 6

Asset impairments 4 — — 4

Total restructuring charges $ 20 $ 5 $ — $ 25

Nine months ended September 30, 2019

Three months ended March 31, 2020

(in millions) COGS SG&A R&D Total

Employee termination costs $ 2 $ 16 $ 1 $ 19

Contract termination and other costs 9 — — 9

Asset impairments 6 — — 6

Total restructuring charges $ 8 $ 16 $ 1 $ 25

In conjunction with our business optimization initiatives, we sold property that resulted in a gain of $ 17 million.

This benefit is reflected within other operating expense (income), net in our condensed consolidated statement of income for the nine months ended September 30, 2020

In conjunction with our business optimization initiatives in 2020, we sold property that resulted in a gain of $ 17 million.

This gain is reflected within other operating income, net in our condensed consolidated statement of income for the three months ended March 31, 2020.

The following table summarizes activity in the liability related to our restructuring initiatives.

2 unchanged sentences

Payments ( 24 )

Reserve adjustments ( 5 )

Currency translation ( 3 )

Liability balance as of September 30, 2020 $ 81

Substantially all of our restructuring liabilities as of September 30, 2020 relate to employee termination costs, with the remaining liabilities attributable to contract termination costs.

Liability balance as of March 31, 2021 $ 107

Substantially all of our restructuring liabilities as of March 31, 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.

2 unchanged sentences

Three months ended

September 30, Nine months ended

September 30,

(in millions) 2021 2020

8 unchanged sentences

Net periodic OPEB cost (income) $ ( 1 ) $ ( 3 )

In September 2020, we offered certain former U.S.

employees with a vested pension benefit a limited-time option to take a lump sum distribution in lieu of future monthly payments.

Those accepting the option will be paid from the assets of the pension plan in December 2020.

This action will accelerate the satisfaction of future pension obligations and could result in a non-cash pre-tax settlement loss in the fourth quarter of 2020, which will be determined based on the rate of acceptance.

The settlement loss, if triggered, would be recognized as a non-operating benefit cost.

Our effective income tax rate was 13.5 % and 22.0 % for the three months ended September 30, 2020 and 2019, respectively, and 13.2 % and 13.7 % for the nine months ended September 30, 2020 and 2019, respectively.

Our effective income tax rate was 14.5 % and 11.9 % for the three months ended March 31, 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, 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.

For the three months ended March 31, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to decreases in accrued withholding taxes in several foreign jurisdictions and a favorable geographic earnings mix.

As of March 31, 2021, we had an uncertain tax position under appeal in a foreign jurisdiction for which we did not record income tax expense because we believed that the position had a more-likely-than-not chance of being sustained based on its technical merits under the applicable tax laws.

On April 23, 2021, we received an unfavorable court decision related to this matter.

As a result of that decision, we will record a discrete income tax expense of $ 22 million to reflect the resolution of this tax matter in the second quarter of 2021.

For the three months ended March 31, 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.

For the three months ended September 30, 2019, our effective income tax rate was substantially consistent with the 21 % U.S.

federal statutory rate as unfavorable return-to-provision adjustments in various jurisdictions were offset by excess tax benefits on stock compensation awards.

For the nine months ended September 30, 2019, the difference between our effective tax rate and the U.S.

federal statutory rate was primarily attributable to excess tax benefits on stock compensation awards and the recognition of tax benefits associated with a favorable tax ruling.

EARNINGS PER SHARE

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The denominator for basic EPS is the weighted-average number of shares outstanding during the period.

The dilutive effect of outstanding stock options, restricted stock units (RSUs) and performance share units (PSUs) is reflected in the denominator for diluted EPS using the treasury stock method.

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

3 unchanged sentences

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 4 million and 3 million equity awards for the three and nine months ended September 30, 2020, respectively, and 4 million equity awards each for the three and nine months ended September 30, 2019, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS.

The computation of diluted EPS excludes 7 million and 1 million equity awards for the three months ended March 31, 2021, and 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.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

1 unchanged sentence

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 Yuan, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee and Swedish Krona.

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.

3 unchanged sentences

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 a mix of fixed- and floating-rate debt that we believe is appropriate.

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.

All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets and are generally 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.

4 unchanged sentences

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 anticipated issuances of debt, respectively.

The notional amounts of foreign exchange contracts designated as cash flow hedges were $ 334 million and $ 617 million as of September 30, 2020 and December 31, 2019, respectively.

The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at September 30, 2020 is 12 months for foreign exchange contracts.

The total notional amounts of interest rate contracts designated as cash flow hedges were $ 500 million and $ 550 million as of September 30, 2020 and December 31, 2019, respectively.

The interest rate contracts have maturity dates in 2022 and hedge the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt.

The notional amounts of foreign exchange contracts designated as cash flow hedges were $ 355 million and $ 345 million as of March 31, 2021 and December 31, 2020, respectively.

The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at March 31, 2021 is 12 months for foreign exchange contracts.

There were no outstanding interest rate contracts designated as cash flow hedges as of March 31, 2021 and December 31, 2020.

Fair Value Hed g es

2 unchanged sentences

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.

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 swap contracts designated as fair value hedges as of September 30, 2020 and December 31, 2019.

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 March 31, 2021 and December 31, 2020.

Net Investment Hed g es

2 unchanged sentences

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, 2020, we had an accumulated pre-tax unrealized translation loss in AOCI of $ 125 million related to the Euro-denominated senior notes.

In May 2019, we entered into forward contracts designated as net investment hedges to reduce exposure to changes in currency rates on € 1.2 billion of our net investment in our European operations.

Those hedges were entered into in advance of the issuance of our senior notes mentioned above, were settled in the second quarter of 2019 and resulted in an insignificant loss.

As of March 31, 2021, we had an accumulated pre-tax unrealized translation loss in AOCI of $ 131 million related to the Euro-denominated senior notes.

Dedesignations

2 unchanged sentences

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.

In the third quarter of 2020, we terminated an interest rate contract with a notional amount of $ 50 million for a $ 7 million cash payment.

In October 2020, we terminated additional interest rate contracts with a notional balance of $ 350 million and a liability fair value of $ 109 million as of September 30, 2020 for $ 100 million in cash payments.

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

There were no hedge dedesignations in the first nine months of 2020 or 2019 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur.

There were no hedge dedesignations in the first three 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 2020 or 2019.

If we remove a net investment hedge designation, any gains or losses recognized in AOCI are not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged.

In the second quarter of 2019, we dedesignated € 1.2 billion of forward contracts designated as a net investment hedge of our European operations.

There were no net investment hedges terminated during the first nine months of 2020.

There were no fair value hedges terminated during the first three 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 three months of 2021 or 2020.

Undesignated Derivative Instruments

1 unchanged sentence

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 $ 765 million as of September 30, 2020 and $ 619 million as of December 31, 2019.

Gains and Losses on Hedging 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, 2020 and 2019.

The total notional amount of undesignated derivative instruments was $ 780 million as of March 31, 2021 and $ 1.0 billion as of December 31, 2020.

Gains and Losses on Hedging Instruments and Undesignated Derivative Instruments

Gain (loss) recognized in OCI Location of gain (loss)

4 unchanged sentences

Foreign exchange contracts 4 14 Cost of sales ( 10 ) ( 1 )

Net investment hedges ( 103 ) 96 Other (income) expense, net — —

Net investment hedges 114 49 Other expense, net — —

Total $ 118 $ ( 121 ) $ ( 11 ) $ ( 1 )

2 unchanged sentences

Undesignated derivative instruments

Foreign exchange contracts Other (income) expense, net $ 7 $ ( 4 )

Gain (loss) recognized in OCI Location of gain (loss)

in income statement Gain (loss) reclassified from AOCI

(in millions) 2020 2019 2020 2019

Cash flow hedges

Interest rate contracts $ ( 144 ) $ ( 91 ) Interest expense, net $ — $ —

Foreign exchange contracts 1 4 Cost of sales 2 3

Net investment hedges ( 104 ) 74 Other (income) expense, net — —

Total $ ( 247 ) $ ( 13 ) $ 2 $ 3

Location of gain (loss)

in income statement Gain (loss) recognized in income

(in millions) 2020 2019

Undesignated derivative instruments

Foreign exchange contracts Other (income) expense, net $ 22 $ ( 16 )

As of September 30, 2020, $ 7 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.

Foreign exchange contracts Other expense, net $ ( 22 ) $ 2

As of March 31, 2021, $ 12 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, 2020.

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of March 31, 2021.

Derivatives in asset positions Derivatives in liability positions

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Derivative instruments designated as hedges

Interest rate contracts Other non-current assets $ — Other non-current liabilities $ 179

Foreign exchange contracts Prepaid expenses and other current assets 3 Accounts payable and accrued liabilities 3

Foreign exchange contracts Prepaid expenses and other current assets 2 Accrued expenses and other current liabilities 8

Total derivative instruments designated as hedges 2 8

Undesignated derivative instruments

Foreign exchange contracts Prepaid expenses and other current assets 12 Accounts payable and accrued liabilities 9

Foreign exchange contracts Prepaid expenses and other current assets 1 Accrued expenses and other current liabilities 7

Total derivative instruments $ 3 $ 15

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Derivative instruments designated as hedges

Interest rate contracts Other non-current assets $ 10 Other non-current liabilities $ 52

Foreign exchange contracts Prepaid expenses and other current assets 10 Accounts payable and accrued liabilities —

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 1 Accounts payable and accrued liabilities 2

Foreign exchange contracts Prepaid expenses and other current assets 11 Accrued expenses and other current liabilities 2

Total derivative instruments $ 11 $ 19

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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, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(in millions) Asset Liability Asset Liability

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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, 2020 Balance as of December 31, 2019 Balance as of September 30, 2020 Balance as of December 31, 2019

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 March 31, 2021 Balance as of December 31, 2020 Balance as of March 31, 2021 Balance as of December 31, 2020

Long-term debt $ 102 $ 102 $ 5 $ 5

(a) These fair value hedges were terminated prior to December 31, 2019.

(a) These fair value hedges were terminated in 2018 and earlier periods.

FAIR VALUE MEASUREMENTS

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Basis of fair value measurement

(in millions) Balance as of September 30, 2020 Quoted prices in active markets for identical assets

(in millions) Balance as of March 31, 2021 Quoted prices in active markets for identical assets

(Level 1) Significant other

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Foreign exchange contracts $ 15 $ — $ 15 $ —

Interest rate contracts 179 — 179 —

Contingent payments related to acquisitions 38 — — 38

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Foreign exchange contracts $ 11 $ — $ 11 $ —

Interest rate contracts 10 — 10 —

Debt securities 13 — 13 —

Marketable equity securities 17 17 — —

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Foreign exchange contracts $ 19 $ — $ 19 $ —

Interest rate contracts 52 — 52 —

Contingent payments related to acquisitions 30 — — 30

Total $ 49 $ — $ 19 $ 30

As of September 30, 2020 and December 31, 2019, cash and cash equivalents of $ 4.4 billion and $ 3.3 billion, respectively, included money market and other short-term funds of approximately $ 2.5 billion and $ 1.7 billion, respectively, which are considered Level 2 in the fair value hierarchy.

As of March 31, 2021 and December 31, 2020, cash and cash equivalents of $ 3.2 billion and $ 3.7 billion, respectively, included money market and other short-term funds of approximately $ 1.7 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

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 accounted for as business combinations, which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques.

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.

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

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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, 2020 and December 31, 2019.

For these financial instruments, the following table provides the values recognized in the condensed consolidated balance sheets and the estimated fair values as of March 31, 2021 and December 31, 2020.

Book values Fair values(a)

(in millions) 2021 2020 2021 2020

Short-term debt $ — $ 226 $ — $ 226

Current maturities of long-term debt and finance lease obligations 407 406 409 409

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(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.

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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 $ 92 million at September 30, 2020 and $ 73 million at December 31, 2019.

Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $ 98 million at March 31, 2021 and $ 105 million at December 31, 2020.

Those investments are included in Other non-current assets on our condensed consolidated balance sheets.

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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 first quarter of 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.

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Certain items are maintained at Corporate and are not allocated to a segment.

They primarily include the majority of foreign currency hedging activities, corporate headquarters costs, certain R&D costs, certain GBU 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).

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.

1 unchanged sentence

Three months ended

September 30, Nine months ended

September 30,

(in millions) 2021 2020

Americas $ 1,560 $ 1,565

EMEA 777 730 2,262 2,179

APAC 646 587 1,775 1,682

Total net sales $ 2,946 $ 2,802

1 unchanged sentence

Americas $ 599 $ 588

EMEA 160 162 480 465

APAC 161 138 432 394

Total segment operating income $ 872 $ 833

1 unchanged sentence

Three months ended

September 30, Nine months ended

September 30,

(in millions) 2021 2020

3 unchanged sentences

Net interest expense 34 21

Other (income) expense, net 16 9 32 ( 8 )

Other expense, net 5 10

Income before income taxes $ 351 $ 378

Refer to Note 9 for additional information on Net Sales by GBU.

Refer to Note 9 for additional information on Net Sales by product category.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements