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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 172 added, 115 removed, 212 unchanged (58% of the section changed)

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

Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 (2020 Annual Report) for management’s discussion and analysis of our financial condition and results of operations.

The following is management’s discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2021 and 2020.

Refer to our Current Report on Form 8-K filed with the SEC on April 29, 2021 (2020 Annual Report), which revised and superseded the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Annual Report on Form 10-K for the year ended December 31, 2020, for management’s discussion and analysis of our financial condition and results of operations.

The following is management’s discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2021 and 2020.

RESULTS OF OPERATIONS

Net income attributable to Baxter stockholders for the three months ended March 31, 2021 totaled $298 million, or $0.58 per diluted share, compared to $332 million, or $0.64 per diluted share for the three months ended March 31, 2020.

Net income for the three months ended March 31, 2021 included special items which decreased net income by $88 million, or $0.18 per diluted share, as further discussed below.

Net income for the three months ended March 31, 2020 included special items which decreased net income by $93 million, or $0.18 per diluted share, as further discussed below.

Net income attributable to Baxter stockholders for the three and six months ended June 30, 2021 totaled $298 million, or $0.59 per diluted share, and $596 million, or $1.17 per diluted share, compared to $246 million, or $0.48 per diluted share, and $578 million, or $1.12 per diluted share, for the three and six months ended June 30, 2020.

Net income for the three and six months ended June 30, 2021 included special items which decreased net income by $111 million and $199 million, respectively, or $0.21 and $0.39 per diluted share, respectively, as further discussed below.

Net income for the three and six months ended June 30, 2020 included special items which decreased net income by $83 million and $176 million, respectively, or $0.16 and $0.34 per diluted share, respectively, as further discussed below.

Special Items

The following table provides a summary of our special items and the related impact by line item on our results for the three months ended March 31, 2021 and 2020.

The following table provides a summary of our special items and the related impact by line item on our results for the three and six months ended June 30, 2021 and 2020.

Three months ended

June 30, Six months ended

(in millions) 2021 2020 2021 2020

Intangible asset amortization expense $ (67) $ (56) $ (131) $ (108)

Intangible asset impairment 1

— (17) — (17)

Business optimization items 2

(10) (8) (31) (18)

Acquisition and integration expenses 3

European medical devices regulation 4

(11) (8) (19) (14)

Investigation and related costs 5

Total Special Items $ (88) $ (93) $ (181) $ (171)

Impact on Gross Margin Ratio (3.1 pts) (2.8 pts)

Impact on Gross Margin Ratio (2.8 pts) (3.4 pts) (3.0 pts) (3.1 pts)

Selling, General and Administrative (SG&A) Expenses

Business optimization items 2

$ 8 $ 7 $ 14 $ 28

Acquisition and integration expenses 3

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Total Special Items $ 26 $ 13 $ 44 $ 51

Impact on SG&A Ratio 0.6 pts 1.3 pts

Impact on SG&A Ratio 0.9 pts 0.5 pts 0.7 pts 1.0 pts

Research and Development (R&D) Expenses

Business optimization items 2

$ — $ (2) $ — $ (1)

Acquisition and integration expenses 3

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Total Special Items $ — $ (1) $ — $ 22

Impact on R&D Ratio 0.0 pts 0.8 pts

Impact on R&D Ratio 0.0 pts 0.0 pts 0.0 pts 0.4 pts

Other Operating Income, net

Business optimization items 2

$ — $ — $ — $ (17)

Acquisition and integration expenses 3

(5) — (5) (3)

Total Special Items $ (5) $ — $ (5) $ (20)

Income Tax Expense

$ 22 $ — $ 22 $ —

Tax effects of special items 7

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Total Special Items $ 2 $ (22) $ (21) $ (48)

Impact on Effective Tax Rate (1.5 pts) (2.4 pts)

Impact on Effective Tax Rate 5.2 pts (1.7 pts) 2.1 pts (2.2 pts)

Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is consistent with how management and our Board of Directors assess performance.

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Management believes that providing the separate impact of those items may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

1 In 2020, our results included a charge of $17 million for an asset impairment related to a developed-technology intangible asset.

Refer to Note 5 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding this asset impairment.

2 In 2021 and 2020, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure.

These actions included streamlining our international operations, rationalizing our manufacturing facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs.

Our results in 2021 and 2020 included business optimization charges of $27 million and $32 million, respectively.

Additionally, we recognized a gain of $17 million in 2020 for property we sold in conjunction with our business optimization initiatives.

These actions included streamlining our international operations,

rationalizing our manufacturing facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs.

Our results in 2021 included business optimization charges of $18 million in the second quarter and $45 million in the first half.

Our results in 2020 included business optimization charges of $13 million in the second quarter and $45 million in the first half.

Additionally, we recognized a gain of $17 million in the first half of 2020 for property we sold in conjunction with our business optimization initiatives.

Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.

2 Our results in 2021 included $1 million of integration expenses related to our acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S.

Our results in 2020 included $28 million of acquisition and integration expenses related to our acquisitions of Cheetah Medical Inc.

3 Our results in 2021 included $1 million in the second quarter and $2 million in the first half of integration expenses related to our acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S.

that was offset by a benefit of $5 million in the second quarter for the change in the estimated fair value of contingent consideration liabilities.

Our results in 2020 included $9 million in the second quarter and $37 million in the first half of acquisition and integration expenses related to our acquisitions of Cheetah Medical Inc.

(Cheetah), Seprafilm and in-process R&D assets, partially offset by the change in the estimated fair value of contingent consideration liabilities.

Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.

3 Our results in 2021 and 2020 included $8 million and $6 million, respectively, related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that are scheduled to become effective in stages beginning in 2021.

4 Our results in 2021 and 2020 included charges of $11 million and $18 million, respectively, for investigation and related costs.

This included $2 million in 2021 and $10 million in 2020 of costs related to our investigation of foreign exchange gains and losses associated with certain intra-company transactions and related legal matters.

We also recorded a charge of $9 million in the first quarter of 2021 for a proposed settlement of shareholder litigation related to that investigation.

Additionally, we recorded incremental stock compensation expense of $8 million in 2020 as we extended the term of certain stock options that were scheduled to expire in the first quarter of 2020.

Refer to Notes 6 and 7 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation and related legal charge and stock compensation expense.

4 Our results in 2021 included $11 million in the second quarter and $19 million in the first half of costs related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that become effective in stages beginning in 2021.

Our results in 2020 included $8 million in the second quarter and $14 million in the first half of costs related to these requirements.

5 Our results in 2021 included costs of $17 million in the second quarter and $28 million in the first half for investigation and related costs.

Those costs primarily included charges related to matters associated with our previously announced investigation of foreign exchange gains and losses.

Our results in 2020 included $2 million in the second quarter and $20 million in the first half for investigation and related costs.

Those costs primarily included professional fees for the investigation and related matters, as well as incremental stock compensation expense as we extended the terms of certain stock options that were scheduled to expire in the first quarter of 2020.

Refer to Notes 6 and 7 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation and related legal charges and stock compensation expense.

6 Our results in 2021 included a charge of $22 million related to an unfavorable court ruling for an uncertain tax position.

7 Reflected in this item is the income tax impact of the special items identified in this table.

The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.

Three Months Ended March 31, Percent change

Three Months Ended June 30, Percent change

(in millions) 2021 2020 At actual

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Total net sales $ 3,098 $ 2,718 14 % 9 %

Foreign currency favorably impacted net sales by 4 percentage points during the first quarter of 2021 compared to the prior-year period principally due to the weakening of the U.S.

Dollar relative to the Euro, Australian Dollar, British Pound and Chinese Renminbi.

Six Months Ended June 30, Percent change

(in millions) 2021 2020 At actual

currency rates At constant currency rates

United States $ 2,378 $ 2,344 1 % 1 %

International $ 3,666 3,176 15 % 7 %

Total net sales $ 6,044 $ 5,520 9 % 5 %

Foreign currency favorably impacted net sales by 5 and 4 percentage points, respectively, during the second quarter and first half of 2021 compared to the prior-year periods principally due to the weakening of the U.S.

Dollar relative to the Euro, Australian Dollar, British Pound, Chinese Renminbi and Canadian Dollar.

The comparisons presented at constant currency rates reflect local currency sales at the prior period’s foreign exchange rates.

This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period.

This measure provides information on the change in net sales assuming that foreign currency

exchange rates had not changed between the prior and the current period.

We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S.

GAAP measure of change in

net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 pandemic.

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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.

We expect that these evolving restrictions and requirements will continue to have an adverse effect on our business.

For further discussion, refer to the Product Category Net Sales Reporting section below and Item 1A.

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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.

Net sales for the second quarter and first half of 2020 have been recast to conform to the current period presentation.

Our product categories include the following:

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The following is a summary of net sales by product category:

Three Months Ended March 31, Percent change

Three Months Ended June 30, Percent change

(in millions) 2021 2020 At actual currency rates At constant currency rates

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Total Baxter $ 3,098 $ 2,718 14 % 9 %

Renal Care net sales increased 6% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by global patient growth in PD and a 4% positive impact from foreign exchange rate changes, as compared to the prior-year period.

Medication Delivery net sales decreased 4% in the first quarter of 2021, as compared to the prior-year period.

That decrease was primarily driven by lower demand for our infusion systems and related IV administration sets and solutions due to lower hospital admission rates and a reduction in elective surgeries resulting from the COVID-19 pandemic.

Additionally, the prior-year period benefited from additional sales as our customers prepared for the impact of COVID-19.

Those decreases were partially offset by changes in foreign exchange rates which had a favorable impact on Medication Delivery net sales of 2% in the first quarter of 2021, as compared to the prior-year period.

Pharmaceuticals net sales increased 7% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by a 6% positive impact from foreign exchange rate changes, compared to the prior-year period.

Six months ended June 30, Percent change

(in millions) 2021 2020 At actual currency rates At constant currency rates

$ 1,886 $ 1,789 5 % 1 %

Medication Delivery

1,349 1,283 5 % 3 %

Pharmaceuticals

1,098 997 10 % 3 %

Clinical Nutrition

471 433 9 % 3 %

Advanced Surgery

473 392 21 % 17 %

Acute Therapies

395 342 15 % 10 %

BioPharma Solutions 318 230 38 % 30 %

54 54 0 % 0 %

Total Baxter $ 6,044 $ 5,520 9 % 5 %

Renal Care net sales increased 5% in both the second quarter and first half of 2021, as compared to the prior-year periods driven by a 5% and 4%, respectively, positive impact from foreign exchange rate changes, as compared to the prior-year periods.

Additionally, global patient growth in PD was offset by lower in-center HD sales.

Medication Delivery net sales increased 15% in the second quarter and 5% in the first half of 2021, as compared to the prior-year periods.

The increase in the second quarter was due to a favorable comparison to the second quarter of 2020 which was more severely impacted from lower demand for our infusion systems and related IV administration sets and solutions due to lower hospital admission rates and a reduction in elective surgeries resulting from the COVID-19 pandemic.

The increase in the first half of 2021 reflects that increase in the second quarter and was partially offset by lower demand for our infusion systems and related IV administration sets and solutions in the first quarter of 2021 due to the COVID-19 pandemic.

Additionally, foreign exchange rates had a favorable impact on Medication Delivery net sales of 3% and 2%, respectively, in the second quarter and first half of 2021, as compared to the prior-year periods.

Pharmaceuticals net sales increased 14% in the second quarter and 10% in the first half of 2021, as compared to the prior-year periods.

The increase in the second quarter and first half was driven by a 9% and 7%, respectively, positive impact from foreign exchange rate changes, as compared to the prior-year periods.

Additionally, the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S.

contributed $13 million of net sales in the first quarter of 2021.

Those increases were partially offset by lower demand for inhaled anesthesia products resulting from the COVID-19 pandemic.

Additionally, the prior-year period benefited from additional sales as our customers prepared for the impact of COVID-19.

Clinical Nutrition net sales increased 8% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by a 5% positive impact from foreign exchange rate changes, compared to the prior-year period.

Additionally, Clinical Nutrition net sales increased due to higher demand for our PN therapies and related products.

Advanced Surgery net sales decreased 3% in the first quarter of 2021, as compared to the prior-year period.

That decrease was driven by the impact of the COVID-19 pandemic as many elective surgeries were postponed.

Additionally, contributing to the decrease compared to the prior-year period was increased demand for our hemostats and sealants in the first quarter of 2020 due, in part, to competitive supply disruptions.

Partially offsetting those decreases was the acquisition of Seprafilm in February of 2020, which contributed $8 million of incremental sales in the first quarter of 2021, and a 3% positive impact from foreign exchange rate changes, as compared to the prior-year period.

Acute Therapies net sales increased 33% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by increased global demand for our CRRT systems to treat acute kidney injury during the COVID-19 pandemic and a 5% positive impact from foreign exchange rate changes, as compared to the prior-year period.

BioPharma Solutions net sales increased 18% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by manufacturing services and supply packaging related to the production of COVID-19 vaccines on behalf of multiple pharmaceutical companies and a 7% positive impact from foreign exchange rate changes, as compared to the prior-year period.

contributed $28 million and $41 million of net sales during the second quarter and first half of 2021, respectively.

Clinical Nutrition net sales increased 10% in the second quarter and 9% in the first half of 2021, as compared to the prior-year periods.

The increase in the second quarter and first half was driven by a 7% and 6%, respectively, positive impact from foreign exchange rate changes, as compared to the prior-year periods.

Additionally, Clinical Nutrition net sales increased due to growth in the U.S.

for our PN therapies and related products, partially offset by lower international sales of vitamins resulting from supply constraints.

Advanced Surgery net sales increased 52% in the second quarter and 21% in the first half of 2021, as compared to the prior-year periods.

The increase in the second quarter and first half was driven by a recovery in elective surgeries, as many had been previously postponed due to the COVID-19 pandemic, and a 4% positive impact from foreign exchange rates as compared to the prior-year periods.

Additionally, the acquisition of Seprafilm in February of 2020 contributed $8 million of incremental sales in the first quarter of 2021.

Acute Therapies net sales increased 1% in the second quarter and 15% in the first half of 2021, as compared to the prior-year periods.

The increase in the second quarter was due to a 5% positive impact from foreign exchange rate changes, as compared to the prior-year period, partially offset by an unfavorable comparison to 2020, which included a 41% increase in net sales compared to 2019 due to a significant increase in demand for our CRRT systems to treat acute kidney injury during the COVID-19 pandemic.

The increase in the first half was driven by increased global demand in the first quarter of 2021 for our CRRT systems during the COVID-19 pandemic and a 5% positive impact from foreign exchange rate changes, as compared to the prior-year period.

BioPharma Solutions net sales increased 58% in the second quarter and 38% in the first half of 2021, as compared to the prior-year periods.

The increase in the second quarter and first half was driven by manufacturing services and supply packaging related to the production of COVID-19 vaccines on behalf of multiple pharmaceutical companies and a 9% and 8%, respectively, positive impact from foreign exchange rate changes, as compared to the prior-year periods.

Gross Margin and Expense Ratios

Three months ended March 31,

Three months ended June 30,

2021 % of net sales 2020 % of net sales $ change % change

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R&D $ 139 4.5 % $ 117 4.3 % $ 22 18.8 %

The gross margin ratio was 38.9% and 41.5% in the first quarter of 2021 and 2020, respectively.

The special items identified above had an unfavorable impact of approximately 3.1 and 2.8 percentage points on the gross margin ratio in the first quarter of 2021 and 2020, respectively.

Six months ended June 30,

2021 % of net sales 2020 % of net sales $ change % change

Gross margin $ 2,378 39.3 % $ 2,201 39.9 % $ 177 8.0 %

SG&A $ 1,302 21.5 % $ 1,218 22.1 % $ 84 6.9 %

R&D $ 267 4.4 % $ 263 4.8 % $ 4 1.5 %

The gross margin ratio was 39.8% and 39.3% in the second quarter and first half of 2021, respectively.

The special items identified above had an unfavorable impact of approximately 2.8 and 3.0 percentage points on the gross margin ratio in the second quarter and first half of 2021, respectively.

The gross margin ratio was 38.2% and 39.9% in the second quarter and first half of 2020, respectively.

The special items identified above had an unfavorable impact of approximately 3.4 and 3.1 percentage points on the gross margin ratio in the second quarter and first half of 2020, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the gross margin ratio decreased in the first quarter of 2021 compared to the prior-year period due to an unfavorable product mix and higher manufacturing and supply chain costs resulting from the COVID-19 pandemic.

The SG&A expenses ratio was 21.3% and 22.4% in the first quarter of 2021 and 2020, respectively.

The special items identified above had an unfavorable impact of approximately 0.6 and 1.3 percentage points on the SG&A expenses ratio in the first quarter of 2021 and 2020, respectively.

Excluding the impact of the special items, the gross margin ratio increased in the second quarter but decreased in the first half of 2021 compared to the prior-year periods.

The increase in the second quarter was due to a favorable product mix.

The decrease in the first half of 2021 was due to higher manufacturing and supply chain costs resulting from the COVID-19 pandemic.

The SG&A expenses ratio was 21.8% and 21.5% in the second quarter and first half of 2021, respectively.

The special items identified above had an unfavorable impact of approximately 0.9 and 0.7 percentage points on the SG&A expenses ratio in the second quarter and first half of 2021, respectively.

The SG&A expenses ratio was 21.7% and 22.1% in the second quarter and first half of 2020, respectively.

The special items identified above had an unfavorable impact of approximately 0.5 and 1.0 percentage points on the SG&A expenses ratio in the second quarter and first half of 2020, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the SG&A expenses ratio decreased in the first quarter of 2021 compared to the prior-year period primarily due to actions we took to restructure our cost position and focus on expense management and reduced travel and related expenses due to the COVID-19 pandemic.

The R&D expenses ratio was 4.3% and 5.2% in the first quarter of 2021 and 2020, respectively.

The special items identified above had no impact and an unfavorable impact of approximately 0.8 percentage points on the R&D expenses ratio in the first quarter of 2021 and 2020, respectively.

Excluding the impact of the special items, the SG&A expenses ratio decreased in the second quarter and first half of 2021 compared to the prior-year periods primarily due to actions we took to restructure our cost position and focus on

expense management, reduced travel and related expenses due to the COVID-19 pandemic and the impact of favorable foreign exchange rates as compared to the prior-year periods.

Those benefits were partially offset by higher bonus accruals under our annual employee incentive compensation plans.

The R&D expenses ratio was 4.5% and 4.4% in the second quarter and first half of 2021, respectively.

The R&D expenses ratio was 4.3% and 4.8% in the second quarter and first half of 2020, respectively.

The special items identified above had an unfavorable impact of approximately 0.0 and 0.4 percentage points on the R&D expenses ratio in the second quarter and first half of 2020, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the R&D expenses ratio decreased in the first quarter of 2021 compared to the prior-year period as a result of actions we took to restructure our cost position and focus on expense management and reduced travel and related expenses due to the COVID-19 pandemic.

Excluding the impact of the special items, the R&D expenses ratio increased in the second quarter and was flat in the first half of 2021 compared to the prior-year periods as a result of increased project-related expenditures and higher bonus accruals under our annual employee incentive compensation plans that were partially offset by the impact of favorable foreign exchange rates as compared to the prior-year periods.

Business Optimization Items

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These efforts include restructuring the organization, optimizing our 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 actions in the second half of 2015 through March 31, 2021, we have incurred cumulative pre-tax costs of $1.1 billion related to these actions.

From the commencement of our business optimization actions in the second half of 2015 through June 30, 2021, we have incurred cumulative pre-tax costs of $1.2 billion related to these actions.

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

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Other Operating Income, Net

Other operating income, net was $20 million in the first quarter of 2020 as we recognized a $17 million gain on the sale of property in conjunction with our business optimization initiatives and a $3 million gain as a result of a change in the estimated fair value of contingent consideration liabilities.

Other operating income, net was $5 million in the second quarter and first half of 2021 as a result of a change in the estimated fair value of contingent consideration liabilities.

Other operating income, net was $20 million in the first half of 2020 as we recognized a $17 million gain on the sale of property in conjunction with our business optimization initiatives and a $3 million gain as a result of a change in the estimated fair value of contingent consideration liabilities.

In September 2013, we entered into an agreement with Celerity Pharmaceutical, LLC (Celerity) to develop certain acute care generic injectable premix and oncolytic products through regulatory approval.

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Interest Expense, Net

Interest expense, net was $34 million and $21 million in the first quarter of 2021 and 2020, respectively.

The increase in 2021 was primarily driven by higher average debt outstanding and lower interest income due to lower interest rates.

Other Expense, Net

Other expense, net was $5 million and $10 million in the first quarter of 2021 and 2020, respectively.

The decrease in the first quarter of 2021 compared to the prior year was primarily due to a foreign exchange net gain in the current year compared to a net loss in the prior year, partially offset by an investment impairment in the current year.

Interest expense, net was $34 million and $68 million in the second quarter and first half of 2021, respectively, and $36 million and $57 million in the second quarter and first half of 2020.

The decrease in the second quarter was primarily driven by lower interest expense as a result of refinancing $750 million of 3.75% senior notes with $650 million of 1.73% senior notes and cash on hand in the fourth quarter of 2020.

The increase in the first half of 2021 was primarily driven by higher average debt outstanding and lower interest income due to lower interest rates.

Other (Income) Expense, Net

Other (income) expense, net was income of $2 million and expense of $3 million in the second quarter and first half of 2021, respectively, and expense of $6 million and $16 million in the second quarter and first half of 2020, respectively.

Results in the second quarter and first half of 2021 were driven by an unrealized gain recognized in the second quarter of 2021 on a marketable equity security that was offset by foreign exchange net losses and pension and OPEB plan net expenses.

Results in the second quarter and first half of 2020 were driven primarily by foreign exchange net losses.

In the first quarter of 2021, we began to wind down our operations in Argentina.

Upon substantial liquidation of those operations in the future, we expect to reclassify currency translation adjustments (CTA) from accumulated other comprehensive (loss) income to other expense, net and recognize a non-cash charge.

As of March 31, 2021, the CTA for our Argentina operations was in excess of $60 million.

Our effective income tax rate was 14.5% and 11.9% in the first quarter of 2021 and 2020, respectively.

As of June 30, 2021, the CTA for our Argentina operations was in excess of $60 million.

Our effective income tax rate was 23.2% and 14.5% in the second quarter and 19.1% and 13.0% in the first half of 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.

For the three months ended June 30, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.

For the six months ended June 30, 2021, 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 decreases in accrued withholding taxes in several foreign jurisdictions, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.

For the three and six months ended June 30, 2020, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a favorable geographic earnings mix and excess tax benefits on stock compensation awards.

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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.

Segment results for the second quarter and first half of 2020 have been recast to conform to the current period presentation.

The following is a summary of financial information for our reportable segments:

Net sales Operating income (loss)

Three months ended March 31, Three months ended March 31,

Three months ended June 30, Six months ended June 30, Three months ended June 30, Six months ended June 30,

(in millions) 2021 2020 2021 2020 2021 2020 2021 2020

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Total $ 3,098 $ 2,718 $ 6,044 $ 5,520 $ 424 $ 331 $ 814 $ 740

Segment net sales and operating income were $1.6 billion and $599 million, respectively, in the first quarter of 2021 and $1.6 billion and $588 million, respectively, in the first quarter of 2020.

The increase in operating profit in the first

quarter was due to favorable sales performance in our Acute Therapies, BioPharma Solutions, Renal Care and Clinical Nutrition product categories, partially offset by unfavorable performance in Pharmaceuticals, Advanced Surgery and Medication Delivery.

Segment net sales and operating income were $738 million and $135 million, respectively, in the first quarter of 2021 and $688 million and $117 million, respectively, in the first quarter of 2020.

The increase in operating profit in the first quarter was due to the favorable impact of foreign exchange rates on results in the first quarter of 2021 as compared to 2020 and the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S.

which contributed $10 million of net sales and operating profit to the region.

Segment net sales and operating income were $648 million and $138 million, respectively, in the first quarter of 2021 and were $549 million and $128 million, respectively, in the first quarter of 2020.

The increase in operating profit in the first quarter was due to the favorable impact of foreign exchange rates on results in the first quarter of 2021 as compared to 2020 and favorable sales performance in Acute Therapies.

Segment net sales and operating income were $1.6 billion and $632 million, respectively, in the second quarter and $3.2 billion and $1.2 billion, respectively, in the first half of 2021.

Segment net sales and operating income were $1.5 billion and $527 million, respectively, in the second quarter and $3.0 billion and $1.1 billion, respectively, in the first half of 2020.

The increase in operating profit in the second quarter and first half of 2021 was due to favorable sales performance in our Advanced Surgery, BioPharma Solutions and Medication Delivery product categories, partially offset by unfavorable performance in Pharmaceuticals.

Segment net sales and operating income were $783 million and $159 million, respectively, in the second quarter and $1.5 billion and $294 million, respectively, in the first half of 2021.

Segment net sales and operating income were $669 million and $121 million, respectively, in the second quarter and $1.4 billion and $238 million, respectively, in the first half of 2020.

The increase in operating profit in the second quarter and first half of 2021 was due to the favorable impact of foreign exchange rates on results in the second quarter and first half of 2021 as compared to the prior-year periods and the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S., which contributed $23 million and $33 million of net sales and operating profit to the region during the second quarter and first half of 2021, respectively.

Segment net sales and operating income were $691 million and $152 million, respectively, in the second quarter and $1.3 billion and $290 million, respectively, in the first half of 2021.

Segment net sales and operating income were $580 million and $143 million, respectively, in the second quarter and $1.1 billion and $271 million, respectively, in the first half of 2020.

The increase in operating profit in the second quarter and first half of 2021 was due to the favorable impact of foreign exchange rates on results in the second quarter and first half of 2021 as compared to 2020 and the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S., which contributed $5 million and $7 million of net sales and operating profit to the region during the second quarter and first half of 2021, respectively.

Corporate and Other

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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).

The operating loss in the first quarter of 2021 was higher than the prior-year period primarily due to higher intangible asset amortization expense, restructuring charges and employee benefits expenses in the current year that were partially offset by higher acquisition and integration expenses in the prior year.

The operating loss in the second quarter and first half of 2021 was higher than the prior-year periods primarily due to higher intangible asset amortization expense and higher bonus accruals under our annual employee incentive compensation plans in the current year that were partially offset by higher acquisition and integration expenses in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash flows for the three-month periods ended March 31, 2021 and 2020.

Three months ended March 31,

The following table is a summary of the statement of cash flows for the six-month periods ended June 30, 2021 and 2020.

Six months ended June 30,

(in millions) 2021 2020

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Cash Flows from Operations — Continuing Operations

In the first three months of 2021, cash provided by operating activities was $377 million, as compared to cash provided by operating activities of $274 million in the first three months of 2020, an increase of $103 million.

The increase was primarily due to favorable accounts receivable collections and lower employee incentive compensation payments in the current year compared to the prior year, partially offset by a higher increase in inventories in the current year and the timing of vendor payments.

In the first half of 2021, cash provided by operating activities was $854 million, as compared to cash provided by operating activities of $648 million in the first half of 2020, an increase of $206 million.

The increase was primarily due to a lower increase in inventories in 2021 compared to 2020, an increase in our operating income in 2021 and lower employee incentive compensation payments in 2021 compared to 2020.

Cash Flows from Investing Activities

In the first three months of 2021, cash used for investing activities included payments for acquisitions of $381 million, primarily related to Caelyx and Doxil and Transderm Scop, and capital expenditures of $171 million.

In the first three months of 2020, cash used for investing activities included payments for acquisitions of $443 million, primarily related to Seprafilm and rights to multiple products we acquired, and capital expenditures of $172 million.

In the first half of 2021, cash used for investing activities included payments for acquisitions and investments of $417 million, primarily related to Caelyx and Doxil and Transderm Scop, and capital expenditures of $329 million.

In the first half of 2020, cash used for investing activities included payments for acquisitions and investments of $453 million, primarily related to Seprafilm and rights to multiple products we acquired, and capital expenditures of $316 million.

In July 2021, we acquired certain assets related to PerClot Polysaccharide Hemostatic System (PerClot), including distribution rights for the U.S.

and specified territories outside of the U.S., from CryoLife, Inc.

for an upfront purchase price of $25 million and the potential for additional cash consideration of up to $36 million based upon regulatory and commercial milestones.

Cash Flows from Financing Activities

In the first three months of 2021, cash used in financing activities included payments for treasury stock repurchases of $253 million and dividend payments of $125 million, partially offset by proceeds from stock issued under employee benefit plans of $48 million.

In the first three months of 2020, cash generated from financing activities included $1.2

billion of net proceeds from the issuance of $1.25 billion of senior notes.

Financing activities in the three months ended March 31, 2020 also included receipts from stock issued under employee benefit plans of $66 million and dividend payments of $111 million.

In the first half of 2021, cash used in financing activities included payments for treasury stock repurchases of $565 million and dividend payments of $249 million, partially offset by stock issued under employee benefit plans of $93 million and the proceeds from commercial paper borrowings of $50 million.

In the first half of 2020, cash generated from financing activities included $1.2 billion of net proceeds from the issuance of senior notes.

Cash flows from financing activities in the six months ended June 30, 2020 also included receipts from stock issued under employee benefit plans of $151 million, repayments of borrowings under our Euro-denominated credit facility of €200 million ($225 million) and dividend payments of $223 million.

In July 2021, Baxter redeemed $400 million in 1.7% Senior Notes due August 2021, which was partially funded by the issuance of commercial paper.

As authorized by the Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions.

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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.

We paid $253 million in cash to repurchase approximately 3.6 million shares under this authority pursuant to a Rule 10b5-1 plan in the first three months of 2021 and 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 this authorization as of March 31, 2021.

We paid $565 million in cash to repurchase approximately 7.3 million shares under this authority pursuant to Rule 10b5-1 plans in the first six months of 2021 and recognized a liability within accrued expenses and other current liabilities of $35 million for share repurchases that settled in July 2021.

We had $1.3 billion remaining available under this authorization as of June 30, 2021.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of March 31, 2021, our U.S.

As of June 30, 2021, our U.S.

dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $2.0 billion and €200 million, respectively.

There were no borrowings outstanding under our U.S.

dollar-denominated and Euro-denominated credit facilities as of March 31, 2021 or December 31, 2020.

As of March 31, 2021, we were in compliance with the financial covenants in these agreements.

dollar-denominated and Euro-denominated credit facilities as of June 30, 2021 or December 31, 2020.

As of June 30, 2021, we were in compliance with the financial covenants in these agreements.

The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by the institution’s respective commitment.

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We intend to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations or by issuing additional debt.

We had $3.2 billion of cash and cash equivalents as of March 31, 2021, with adequate cash available to meet operating requirements in each jurisdiction in which we operate.

We had $3.1 billion of cash and cash equivalents as of June 30, 2021, with adequate cash available to meet operating requirements in each jurisdiction in which we operate.

We invest our excess cash in money market and other funds and diversify the concentration of cash among different financial institutions.

As of March 31, 2021, we had approximately $6.1 billion of long-term debt and finance lease obligations, including current maturities.

As of June 30, 2021, we had approximately $6.2 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt.

Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure.

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A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our 2020 Annual Report.

Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our

financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain.

Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain.

Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2020 Annual Report.

There have been no significant changes in the application of our critical accounting policies during the first three months of 2021.

There have been no significant changes in the application of our critical accounting policies during the first six months of 2021.

RECENT ACCOUNTING PRONOUNCEMENTS

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However, we are continuing to implement corrective and preventive actions to address FDA’s prior observations and other items we identified and management continues to pursue and implement other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S.

As December 31, 2020, we have secured alternative locations to produce a majority of the planned new products to be manufactured in Ahmedabad for distribution into the U.S.

As of December 31, 2020, we have secured alternative locations to produce a majority of the planned new products to be manufactured in Ahmedabad for distribution into the U.S.

1 Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htm

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This quarterly report on Form 10-Q includes forward-looking statements.

Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events.

These forward-looking statements may include statements with respect to accounting estimates and assumptions, impacts of the COVID-19 pandemic, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses and the material weakness identified as a result thereof, future regulatory filings and our R&D pipeline, strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, potential tax liabilities associated with the separation of our biopharmaceuticals business from our medical products businesses, the impact of competition, future sales growth, business development activities (including the acquisitions of Cheetah , Seprafilm, certain outside of the U.S.

identify forward-looking statements that represent our current judgment about possible future events.

These forward-looking statements may include statements with respect to accounting estimates and assumptions, impacts of the COVID-19 pandemic, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses, future regulatory filings and our R&D pipeline, strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, potential tax liabilities associated with the separation of our biopharmaceuticals business from our medical products businesses, the impact of competition, future sales growth, business development activities (including the acquisitions of Cheetah , Seprafilm, certain outside of the U.S.

(OUS) rights to Caelyx and Doxil, and full U.S.

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These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances.

While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or

financial results.

While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results.

Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:

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end stage renal disease market and demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures, which are difficult to estimate in advance);

the outcome of pending or future litigation, including the opioid litigation and litigation related to the investigation of foreign exchange gains and losses ;

the outcome of pending or future litigation, including the opioid litigation, ethylene oxide litigation and litigation related to the investigation of foreign exchange gains and losses ;

• failure to achieve our long-term financial improvement goals;

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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 2. Management’s Discussion and Analysis