BAXTER INTERNATIONAL INC 10-Q

Item 1. Financial Statements Baxter International Inc. Condensed Consolidated Balance Sheets (unaudited) (in millions, except share information) March 31, 2021 December 31, 2020 Current assets: Cash and cash equivalents $ 3,182 $ 3,730 Accounts receivable, net of allowances of $ 120 in 2021 and $ 125 in 2020 1,915 2,007 Inventories 2,017 1,916 Prepaid expenses and other current assets 742 758 Total current assets 7,856 8,411 Property, plant and equipment, net 4,614 4,722 Goodwill 3,111 3,217 Other intangible assets, net 1,962 1,671 Operating lease right-of-use assets 567 603 Other non-current assets 1,356 1,395 Total assets $ 19,466 $ 20,019 Current liabilities: Current maturities of long-term debt and finance lease obligations 407 406 Accounts payable 1,023 1,043 Accrued expenses and other current liabilities 1,757 1,884 Total current liabilities 3,187 3,333 Long-term debt and finance lease obligations 5,681 5,786 Operating lease liabilities 472 501 Other non-current liabilities 1,636 1,673 Total liabilities 10,976 11,293 Commitments and contingencies Equity: Common stock, $ 1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2021 and 2020 683 683 Common stock in treasury, at cost, 180,817,748 shares in 2021 and 178,580,208 shares in 2020 ( 11,296 ) ( 11,051 ) Additional contributed capital 6,043 6,043 Retained earnings 16,502 16,328 Accumulated other comprehensive (loss) income ( 3,480 ) ( 3,314 ) Total Baxter stockholders’ equity 8,452 8,689 Noncontrolling interests 38 37 Total equity 8,490 8,726 Total liabilities and equity $ 19,466 $ 20,019 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Baxter International Inc. Condensed Consolidated Statements of Income (unaudited) (in millions, except per share data) Three months ended March 31, 2021 2020 Net sales $ 2,946 $ 2,802 Cost of sales 1,801 1,639 Gross margin 1,145 1,163 Selling, general and administrative expenses 627 628 Research and development expenses 128 146 Other operating income, net — ( 20 ) Operating income 390 409 Interest expense, net 34 21 Other expense, net 5 10 Income before income taxes 351 378 Income tax expense 51 45 Net income 300 333 Net income attributable to noncontrolling interests 2 1 Net income attributable to Baxter stockholders $ 298 $ 332 Earnings per share Basic $ 0.59 $ 0.65 Diluted $ 0.58 $ 0.64 Weighted-average number of shares outstanding Basic 505 507 Diluted 511 516 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Baxter International Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) (in millions) Three months ended March 31, 2021 2020 Net income $ 300 $ 333 Other comprehensive income (loss), net of tax: 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 30 22 Hedging activities, net of tax expense (benefit) of $ 3 and ($ 39 ) for the three months ended March 31, 2021 and 2020, respectively 12 ( 130 ) Total other comprehensive income (loss), net of tax ( 166 ) ( 467 ) Comprehensive income (loss) 134 ( 134 ) Less: Comprehensive income attributable to noncontrolling interests 2 1 Comprehensive income (loss) attributable to Baxter stockholders $ 132 $ ( 135 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Baxter International Inc. Condensed Consolidated Statements of Changes in Equity (unaudited) (in millions) For the three months ended March 31, 2021 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 Net income — — — — — 298 — 298 2 300 Other comprehensive income (loss) — — — — — — ( 166 ) ( 166 ) — ( 166 ) Purchases of treasury stock — — 4 ( 300 ) — — — ( 300 ) — ( 300 ) Stock issued under employee benefit plans and other — — ( 2 ) 55 — — — 55 — 55 Dividends declared on common stock — — — — — ( 124 ) — ( 124 ) — ( 124 ) Change in noncontrolling interests — — — — — — — — ( 1 ) ( 1 ) 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. 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, 2020 683 $ 683 177 $ ( 10,764 ) $ 5,955 $ 15,718 $ ( 3,710 ) $ 7,882 $ 30 $ 7,912 Adoption of new accounting standard — — — — — ( 4 ) — ( 4 ) — ( 4 ) Net income — — — — — 332 — 332 1 333 Other comprehensive income (loss) — — — — — — ( 467 ) ( 467 ) — ( 467 ) Stock issued under employee benefit plans and other — — ( 2 ) 87 ( 20 ) — — 67 — 67 Dividends declared on common stock — — — — — ( 111 ) — ( 111 ) — ( 111 ) 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. 5 Baxter International Inc. Condensed Consolidated Statements of Cash Flows (unaudited) (in millions) Three months ended March 31, 2021 2020 Cash flows from operations Net income $ 300 $ 333 Adjustments to reconcile net income to cash flows from operations: Depreciation and amortization 217 199 Deferred income taxes ( 25 ) ( 17 ) Stock compensation 22 29 Net periodic pension and other postretirement costs 26 20 Other 14 13 Changes in balance sheet items: Accounts receivable, net 51 ( 57 ) Inventories ( 129 ) ( 83 ) Prepaid expenses and other current assets 2 ( 14 ) Accounts payable 22 82 Accrued expenses and other current liabilities ( 124 ) ( 192 ) Other 1 ( 39 ) Cash flows from operations – continuing operations 377 274 Cash flows from operations – discontinued operations — ( 2 ) Cash flows from operations 377 272 Cash flows from investing activities Capital expenditures ( 171 ) ( 172 ) Acquisitions, net of cash acquired, and investments ( 381 ) ( 443 ) Other investing activities, net 14 11 Cash flows from investing activities ( 538 ) ( 604 ) Cash flows from financing activities Issuances of debt — 1,240 Cash dividends on common stock ( 125 ) ( 111 ) Proceeds from stock issued under employee benefit plans 48 66 Purchases of treasury stock ( 253 ) — Other financing activities, net ( 28 ) ( 25 ) Cash flows from financing activities ( 358 ) 1,170 Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash ( 31 ) ( 63 ) 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 Cash, cash equivalents and restricted cash at end of period (1) $ 3,186 $ 4,110 (1) We did not have any restricted cash balances as of March 31, 2020 or December 31, 2019. The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to the amounts reported within the condensed consolidated balance sheet as of March 31, 2021 and December 31, 2020 (in millions): March 31, 2021 December 31, 2020 Cash and cash equivalents $ 3,182 $ 3,730 Restricted cash included in prepaid expenses and other current assets 4 6 Cash, cash equivalents and restricted cash $ 3,186 $ 3,736 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Baxter International Inc. Notes to Condensed Consolidated Financial Statements (unaudited) 1. BASIS OF PRESENTATION The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (we or our) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) in the United States have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2020 (2020 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. Certain reclassifications have been made to conform the prior period condensed consolidated statements to the current period presentation. Risks and Uncertainties Related to COVID-19 Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19). COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. These measures have led to unprecedented restrictions on, disruptions in, and other related impacts on businesses and personal activities. In addition to travel restrictions put in place in early 2020, governments have closed borders, imposed prolonged quarantines and may continue those measures or implement other restrictions and requirements in light of the continuing spread of the pandemic. 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. 2. ACQUISITIONS AND OTHER ARRANGEMENTS 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 $ 60 Contingent Consideration 24 Total Consideration $ 84 7 The following table summarizes the fair value of the assets acquired as of the acquisition date: (in millions) Assets acquired Inventory $ 14 Goodwill 3 Other intangible assets 67 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. 3. SUPPLEMENTAL FINANCIAL INFORMATION Interest Expense, Net Three months ended March 31, (in millions) 2021 2020 Interest expense, net of capitalized interest $ 37 $ 30 Interest income ( 3 ) ( 9 ) Interest expense, net $ 34 $ 21 Other Expense, Net Three months ended March 31, (in millions) 2021 2020 Foreign exchange (gains) losses, net $ ( 3 ) $ 11 Pension and other postretirement benefit plans 4 ( 1 ) Other, net 4 — Other expense, net $ 5 $ 10 8 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 March 31, (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 Inventories (in millions) March 31, 2021 December 31, 2020 Raw materials $ 457 $ 460 Work in process 221 196 Finished goods 1,339 1,260 Inventories $ 2,017 $ 1,916 Property, Plant and Equipment, Net (in millions) March 31, 2021 December 31, 2020 Property, plant and equipment, at cost $ 11,105 $ 11,271 Accumulated depreciation ( 6,491 ) ( 6,549 ) Property, plant and equipment, net $ 4,614 $ 4,722 Non-Cash Operating and Investing Activities Right-of-use operating lease assets obtained in exchange for lease obligations for the three months ended March 31, 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. 4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET Goodwill The following is a reconciliation of goodwill by business segment. (in millions) Americas EMEA APAC Total Balance as of December 31, 2020 $ 2,574 $ 406 $ 237 $ 3,217 Reallocation of goodwill 81 ( 81 ) — — Acquisitions 2 1 — 3 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. 9 As discussed in Note 16 - Segment Information, we made a change to our reportable segments in the first quarter of 2021. As a result of this change, we reallocated goodwill from our EMEA segment to the Americas segment using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed. Other intangible assets, net The following is a summary of our other intangible assets. (in millions) Developed technology, including patents Other amortized intangible assets Indefinite-lived intangible assets Total March 31, 2021 Gross other intangible assets $ 3,023 $ 491 $ 169 $ 3,683 Accumulated amortization ( 1,394 ) ( 327 ) — ( 1,721 ) Other intangible assets, net $ 1,629 $ 164 $ 169 $ 1,962 December 31, 2020 Gross other intangible assets $ 2,713 $ 495 $ 169 $ 3,377 Accumulated amortization ( 1,374 ) ( 332 ) — ( 1,706 ) Other intangible assets, net $ 1,339 $ 163 $ 169 $ 1,671 Intangible asset amortization expense was $ 64 million and $ 52 million for the three months ended March 31, 2021 and 2020, respectively. 5. FINANCING ARRANGEMENTS Credit Facilities 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. 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 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. 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. 10 Environmental We are involved as a potentially responsible party (PRP) for environmental clean-up costs at six Superfund sites. Under the U.S. Superfund statute and many state laws, generators of hazardous waste sent to a disposal or recycling site are liable for site cleanup if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Separate from these Superfund cases, we are involved in an ongoing voluntary environmental remediation associated with historic operations at our Irvine, California, United States facility. As of 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. General Litigation In November 2016, a putative antitrust class action complaint seeking monetary and injunctive relief was filed in the United States District Court for the Northern District of Illinois. The complaint alleges a conspiracy among manufacturers of IV solutions to restrict output and affect pricing in connection with a shortage of such solutions. Similar parallel actions subsequently were filed. In January 2017, a single consolidated complaint covering these matters was filed in the Northern District of Illinois. We filed a motion to dismiss the consolidated complaint in February 2017. The court granted our motion to dismiss the consolidated complaint without prejudice in July 2018. The plaintiffs filed an amended complaint, which we moved to dismiss on November 9, 2018. The court granted our motion to dismiss the amended complaint with prejudice on April 3, 2020. The plaintiffs did not file an appeal. In April 2017, we became aware of a criminal investigation by the U.S. Department of Justice (DOJ), Antitrust Division and a federal grand jury in the United States District Court for the Eastern District of Pennsylvania. We and an employee received subpoenas seeking production of documents and testimony regarding the manufacturing, selling, pricing and shortages of IV solutions and containers (including saline solutions and certain other injectable medicines sold by us) and communications with competitors regarding the same. On November 30, 2018, the DOJ notified us that it had closed the investigation. The New York Attorney General had also requested that we provide information regarding business practices in the IV saline industry. We cooperated with that request and have been advised that the matter has now been closed. In August 2019, we were named in an amended complaint filed by Fayette County, Georgia in the MDL In re: National Prescription Opiate Litigation pending in the U.S. District Court, Northern District of Ohio. The complaint alleges that multiple manufacturers and distributors of opiate products improperly marketed and diverted these products, which caused harm to Fayette County. The complaint is limited in its allegations as to Baxter and does not distinguish between injectable opiate products and orally administered opiates. We manufactured generic injectable opiate products in our facility in Cherry Hill, NJ, which we divested in 2011. In November 2019, we and certain of our officers were named in a class action complaint captioned Ethan E. Silverman et al. v. Baxter International Inc. et al. that was filed in the United States District Court for the Northern District of Illinois. The plaintiff, who allegedly purchased shares of our common stock during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter common stock between February 21, 2019 and October 23, 2019. The plaintiff alleges that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to certain intra-company transactions undertaken for the purpose of generating foreign exchange gains or avoiding foreign exchange losses, as well as our internal controls over financial reporting. On January 29, 2020, the Court appointed Varma Mutual Pension Insurance Company and Louisiana Municipal Police Employees Retirement System as lead plaintiffs in the case. Plaintiffs filed an amended complaint on June 25, 2020 containing substantially the same allegations. On August 24, 2020, we filed a motion to dismiss the amended complaint. On January 12, 2021, the Court granted our motion to dismiss the amended complaint but gave plaintiffs an opportunity to file a further-amended complaint. The parties reached an agreement to settle the case for $ 16 million, subject to the completion of confirmatory discovery and final approval by the Court. The Court granted 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. 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 11 losses. As initially disclosed on October 24, 2019, we also voluntarily advised the staff of the SEC of our internal investigation and we are continuing to cooperate with the staff of the SEC. In March 2020, two lawsuits were filed against us in the Northern District of Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used in our manufacturing facility in Mountain Home, Arkansas to sterilize certain of our products. The plaintiffs seek damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief. 7. 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 March 31, 2021 2020 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. RSUs 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. PSUs 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. 12 Stock Options Award Modification In the first quarter of 2020, we modified the terms of stock option awards granted to 123 employees. Specifically, we extended the term for certain stock options that were scheduled to expire in the first quarter of 2020 as applicable employees were not permitted to exercise these awards due to our announcement in February 2020 that our previously issued financial statements should no longer be relied upon. The stock options were extended in order to allow impacted employees to exercise their stock option awards for a brief period once we became current with our SEC reporting obligations, which occurred in March 2020. As a result of the modifications, we recognized an additional $ 8 million of stock compensation expense during the quarter ended March 31, 2020. Cash Dividends Cash dividends declared per share for the three months ended March 31, 2021 and March 31, 2020 were $ 0.245 and $ 0.22 , respectively. Stock Repurchase Programs In July 2012, the Board of Directors authorized the repurchase of up to $ 2.0 billion of our common stock. The Board of Directors increased this authority by an additional $ 1.5 billion in each of November 2016 and February 2018, by an additional $ 2.0 billion in November 2018 and by an additional $ 1.5 billion in October 2020. During the first 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. 8. ACCUMULATED OTHER COMPREHENSIVE INCOME Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of net income, currency translation adjustments (CTA), certain gains and losses from pension and other postretirement employee benefit (OPEB) plans and gains and losses on cash flow hedges. The following table is a net-of-tax summary of the changes in accumulated other comprehensive (loss) income (AOCI) by component for the three months ended March 31, 2021 and 2020. (in millions) CTA Pension and OPEB plans Hedging activities Total Gains (losses) Balance as of December 31, 2020 $ ( 2,587 ) $ ( 574 ) $ ( 153 ) $ ( 3,314 ) Other comprehensive income (loss) before reclassifications ( 208 ) 13 3 ( 192 ) Amounts reclassified from AOCI (a) — 17 9 26 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 Gains (losses) Balance as of December 31, 2019 $ ( 2,954 ) $ ( 715 ) $ ( 41 ) $ ( 3,710 ) Other comprehensive income (loss) before reclassifications ( 359 ) 10 ( 131 ) ( 480 ) Amounts reclassified from AOCI (a) — 12 1 13 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. 13 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 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 $ ( 21 ) $ ( 15 ) Other expense, net Less: Tax effect 4 3 Income tax expense $ ( 17 ) $ ( 12 ) Net of tax Gains (losses) on hedging activities Foreign exchange contracts $ ( 10 ) $ ( 1 ) Cost of sales Interest rate contracts $ ( 1 ) — Interest expense, net ( 11 ) ( 1 ) Total before tax Less: Tax effect 2 — Income tax expense $ ( 9 ) $ ( 1 ) Net of tax Total reclassifications for the period $ ( 26 ) $ ( 13 ) Total net of tax (a) Amounts in parentheses indicate reductions to net income. Refer to Note 11 for additional information regarding the amortization of pension and OPEB items and Note 14 for additional information regarding hedging activity. 9. REVENUES Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of our contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Our global payment terms are typically between 30 - 90 days. The majority of our performance obligations are satisfied at a point in time. This includes sales of our broad portfolio of essential healthcare products across our geographic segments including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. For a majority of these sales, our performance obligation is satisfied upon delivery to the customer. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. To a lesser extent, in all of our segments, we enter into other types of contracts including contract manufacturing arrangements, equipment leases, and certain subscription software and licensing arrangements. We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services. Revenue is recognized over time when we are creating or enhancing an asset that the customer controls as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed. As of 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 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. 14 Significant Judgments Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration primarily related to rebates and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in 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. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract using the expected value method. The amount of variable consideration included in the net sales price is limited to the amount for which it is probable that a significant reversal in revenue will not occur when the related uncertainty is resolved. Revenue recognized during the three months ended March 31, 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 $ 1.6 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. Additionally, for arrangements containing a performance obligation to deliver software that can be used with medical devices, we recognize revenue upon delivery of the software, which results in the recognition of contract assets when customers are billed over time, generally over one to five years . For bundled contracts involving equipment delivered up-front and consumable medical products to be delivered over time, total contract revenue is allocated between the equipment and consumable medical products. In certain of those arrangements, a contract asset is created for the difference between the amount of equipment revenue recognized upon delivery and the amount of consideration initially receivable from the customer. In those arrangements, the contract asset becomes a trade account receivable as consumable medical products are provided and billed, generally over one to seven years . The following table summarizes our contract assets: (in millions) March 31, 2021 December 31, 2020 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, 2020 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 15 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 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 March 31, 2021 2020 (in millions) U.S. International Total U.S. International Total Renal Care 1 $ 216 $ 706 $ 922 $ 204 $ 666 $ 870 Medication Delivery 2 411 241 652 449 229 678 Pharmaceuticals 3 200 352 552 220 296 516 Clinical Nutrition 4 83 151 234 79 138 217 Advanced Surgery 5 126 91 217 137 87 224 Acute Therapies 6 81 126 207 60 96 156 BioPharma Solutions 7 44 91 135 48 66 114 Other 8 19 8 27 20 7 27 Total Baxter $ 1,180 $ 1,766 $ 2,946 $ 1,217 $ 1,585 $ 2,802 1 Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services. 2 Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices. 3 Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services. 4 Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products. 5 Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention. 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 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 We lease medical equipment, such as renal dialysis equipment and infusion pumps, to customers, primarily in conjunction with arrangements to provide consumable medical products such as dialysis therapies, IV fluids and inhaled anesthetics. Certain of our equipment leases are classified as sales-type leases and the remainder are operating leases. The terms of the related contracts, including the proportion of fixed versus variable payments and any options to shorten or extend the lease term, vary by customer. We allocate revenue between equipment leases and medical products based on their standalone selling prices. 16 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 Operating lease revenue 34 14 Variable lease revenue 17 18 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. 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 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. We currently expect to incur additional pre-tax costs of approximately $ 12 million through the completion of the initiatives that are currently underway, primarily related to implementation costs. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods. During the three 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 Restructuring charges $ 25 $ 25 Costs to implement business optimization programs 2 7 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 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 Asset impairments 4 — — 4 Total restructuring charges $ 20 $ 5 $ — $ 25 Three months ended March 31, 2020 (in millions) COGS SG&A R&D Total Employee termination costs $ 2 $ 16 $ 1 $ 19 Asset impairments 6 — — 6 Total restructuring charges $ 8 $ 16 $ 1 $ 25 17 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. (in millions) Liability balance as of December 31, 2020 $ 113 Charges 21 Payments ( 24 ) Currency translation ( 3 ) 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. 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 March 31, (in millions) 2021 2020 Pension benefits Service cost $ 22 $ 21 Interest cost 18 24 Expected return on plan assets ( 36 ) ( 41 ) Amortization of net losses and prior service costs 23 19 Net periodic pension cost $ 27 $ 23 OPEB Interest cost $ 1 $ 1 Amortization of net loss and prior service credit ( 2 ) ( 4 ) Net periodic OPEB cost (income) $ ( 1 ) $ ( 3 ) 12. INCOME TAXES 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 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. 18 13. EARNINGS PER SHARE The numerator for both basic and diluted earnings per share (EPS) is net income attributable to Baxter stockholders. The denominator for basic EPS is the weighted-average number of shares outstanding during the period. The dilutive effect of outstanding stock options, RSUs and PSUs is reflected in the denominator for diluted EPS using the treasury stock method. The following table is a reconciliation of basic shares to diluted shares. Three months ended March 31, (in millions) 2021 2020 Basic shares 505 507 Effect of dilutive securities 6 9 Diluted shares 511 516 The effect of dilutive securities includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excludes 7 million 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. 19 14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. Our hedging policy attempts to manage these risks to an acceptable level based on our judgment of the appropriate trade-off between risk, opportunity and costs. We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, British Pound, Chinese Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative instruments to further reduce the net exposure to foreign exchange risk. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from changes in foreign exchange rates. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures. We are also exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates. Our policy is to manage interest costs using the mix of fixed- and floating-rate debt that we believe is appropriate at that time. To manage this mix in a cost-efficient manner, we periodically enter into interest rate swaps in which we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. We do not hold any instruments for trading purposes and none of our outstanding derivative instruments contain credit-risk-related contingent features. All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets and are 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. Cash Flow Hed g es We may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities. We periodically use treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt. For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is recorded in AOCI and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid are initially recorded as assets and reclassified to other comprehensive income (OCI) over the life of the option, and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in cost of sales and interest expense, net, and are primarily related to forecasted third-party sales denominated in foreign currencies, forecasted intra-company sales denominated in foreign currencies, and forecasted interest payments on anticipated issuances of debt, respectively. The notional amounts of foreign exchange contracts designated as cash flow hedges were $ 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 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. 20 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 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 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 If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, we discontinue hedge accounting prospectively. Gains or losses relating to terminations of effective cash flow hedges generally continue to be deferred and are recognized consistent with the loss or income recognition of the underlying hedged items. However, if it is probable that the hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings. There were no hedge dedesignations in the first 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 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 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 $ 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 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 March 31, 2021 and 2020. Gain (loss) recognized in OCI Location of gain (loss) in income statement Gain (loss) reclassified from AOCI into income (in millions) 2021 2020 2021 2020 Cash flow hedges Interest rate contracts $ — $ ( 184 ) Interest expense, net $ ( 1 ) $ — Foreign exchange contracts 4 14 Cost of sales ( 10 ) ( 1 ) Net investment hedges 114 49 Other expense, net — — Total $ 118 $ ( 121 ) $ ( 11 ) $ ( 1 ) 21 Location of gain (loss) in income statement Gain (loss) recognized in income (in millions) 2021 2020 Undesignated derivative instruments Foreign exchange contracts Other expense, net $ ( 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 March 31, 2021. Derivatives in asset positions Derivatives in liability positions (in millions) Balance sheet location Fair value Balance sheet location Fair value Derivative instruments designated as hedges Foreign exchange contracts Prepaid expenses and other current assets 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 1 Accrued expenses and other current liabilities 7 Total derivative instruments $ 3 $ 15 The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2020. Derivatives in asset positions Derivatives in liability positions (in millions) Balance sheet location Fair value Balance sheet location Fair value Derivative instruments designated as hedges Foreign exchange contracts Prepaid expenses and other current assets — Accrued expenses and other current liabilities 17 Total derivative instruments designated as hedges — 17 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other current assets 11 Accrued expenses and other current liabilities 2 Total derivative instruments $ 11 $ 19 While some of our derivatives are subject to master netting arrangements, we present our assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, we are not required to post collateral for any of our outstanding derivatives. 22 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. March 31, 2021 December 31, 2020 (in millions) Asset Liability Asset Liability Gross amounts recognized in the consolidated balance sheet $ 3 $ 15 $ 11 $ 19 Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet ( 3 ) ( 3 ) ( 6 ) ( 6 ) Total $ — $ 12 $ 5 $ 13 The following table presents the amounts recorded on the condensed consolidated balance sheet related to fair value hedges: Carrying amount of hedged item Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a) (in millions) Balance as of 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 in 2018 and earlier periods. 23 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 March 31, 2021 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets Foreign exchange contracts $ 3 $ — $ 3 $ — Debt securities 13 — 13 — Marketable equity securities 2 2 — — Total $ 18 $ 2 $ 16 $ — Liabilities Foreign exchange contracts $ 15 $ — $ 15 $ — Contingent payments related to acquisitions 38 — — 38 Total $ 53 $ — $ 15 $ 38 Basis of fair value measurement (in millions) Balance as of December 31, 2020 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets Foreign exchange contracts $ 11 $ — $ 11 $ — Debt securities 13 — 13 — Marketable equity securities 17 17 — — Total $ 41 $ 17 $ 24 $ — Liabilities Foreign exchange contracts $ 19 $ — $ 19 $ — Contingent payments related to acquisitions 30 — — 30 Total $ 49 $ — $ 19 $ 30 As of 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 models. The key inputs, which are considered observable and vary depending on the type of derivative, include contractual terms, interest rate yield curves, foreign exchange rates and volatility. Contingent payments related to acquisitions, which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques. The fair value of milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or the expected timing of payments is accelerated. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increases or the expected timing of payment is accelerated. The following table is a reconciliation of recurring fair 24 value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions. Three months ended March 31, (in millions) 2021 2020 Fair value at beginning of period $ 30 $ 39 Additions 24 4 Change in fair value recognized in earnings — ( 3 ) Payments ( 16 ) ( 1 ) Fair value at end of period $ 38 $ 39 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 March 31, 2021 and December 31, 2020. Book values Fair values(a) (in millions) 2021 2020 2021 2020 Liabilities Current maturities of long-term debt and finance lease obligations 407 406 409 409 Long-term debt and finance lease obligations 5,681 5,786 6,085 6,471 (a) These fair value amounts are classified as Level 2 within the fair value hierarchy as they are estimated based on observable inputs. The 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, 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 $ 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. 16. SEGMENT INFORMATION We manage our business based on three geographical segments: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Our segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. In the first quarter of 2021, the information provided to our Chief Executive Officer for purposes of allocating resources and assessing performance was updated to reallocate contracted services activities performed at a German manufacturing facility from our EMEA segment to our Americas segment. The contracted services performed at that facility are part of our BioPharma Solutions business, which is managed as part of the Americas segment. Accordingly, the reported financial results of the Americas segment now include the contracted services activities performed at that facility. Segment results for the 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. Intersegment sales are eliminated in consolidation. Certain items are maintained at Corporate and are not allocated to a segment. They primarily include corporate headquarters costs, certain R&D costs, certain product category support costs, stock compensation expense, certain employee benefit plan costs, certain foreign currency hedging activities, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset 25 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 March 31, (in millions) 2021 2020 Net sales: Americas $ 1,560 $ 1,565 EMEA 738 688 APAC 648 549 Total net sales $ 2,946 $ 2,802 Operating income : Americas $ 599 $ 588 EMEA 135 117 APAC 138 128 Total segment operating income $ 872 $ 833 The following is a reconciliation of segment operating income to income before income taxes per the condensed consolidated statements of income. Three months ended March 31, (in millions) 2021 2020 Total segment operating income $ 872 $ 833 Corporate and other ( 482 ) ( 424 ) Total operating income 390 409 Net interest expense 34 21 Other expense, net 5 10 Income before income taxes $ 351 $ 378 Refer to Note 9 for additional information on Net Sales by product category. 26