BAXTER INTERNATIONAL INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Refer to our Current Report on Form 8-K filed with the SEC on April 29, 2021 (2020 Annual Report), which revised and superseded the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Annual Report on Form 10-K for the year ended December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 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. 29 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 and six months ended June 30, 2021 and 2020. Three months ended June 30, Six months ended June 30, (in millions) 2021 2020 2021 2020 Gross Margin 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 — (4) — (11) European medical devices regulation 4 (11) (8) (19) (14) Investigation and related costs 5 — — — (3) Total Special Items $ (88) $ (93) $ (181) $ (171) 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 1 4 2 7 Investigation and related costs 5 17 2 28 16 Total Special Items $ 26 $ 13 $ 44 $ 51 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 — 1 — 22 Investigation and related costs 5 — — — 1 Total Special Items $ — $ (1) $ — $ 22 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 Tax matter 6 $ 22 $ — $ 22 $ — Tax effects of special items 7 (20) (22) (43) (48) Total Special Items $ 2 $ (22) $ (21) $ (48) 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. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact our reported results of operations for the period. 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, 30 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. 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. 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. NET SALES Three Months Ended June 30, Percent change (in millions) 2021 2020 At actual currency rates At constant currency rates United States $ 1,198 $ 1,127 6 % 6 % International $ 1,900 1,591 19 % 10 % Total net sales $ 3,098 $ 2,718 14 % 9 % 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 31 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. Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 pandemic. COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and we expect will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments 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 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. Risk Factors in our 2020 Annual Report. Product Category Net Sales Reporting 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 second quarter and first half of 2020 have been recast to conform to the current period presentation. Our product categories include the following: • Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services. • Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices. • Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services. • Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products. • Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention. • Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU). • BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical and biopharmaceutical companies. • Other includes sales of other miscellaneous product and service offerings. 32 The following is a summary of net sales by product category: Three Months Ended June 30, Percent change (in millions) 2021 2020 At actual currency rates At constant currency rates Renal Care $ 964 $ 919 5 % (0) % Medication Delivery 697 605 15 % 12 % Pharmaceuticals 546 481 14 % 5 % Clinical Nutrition 237 216 10 % 3 % Advanced Surgery 256 168 52 % 48 % Acute Therapies 188 186 1 % (4) % BioPharma Solutions 183 116 58 % 49 % Other 27 27 0 % 4 % Total Baxter $ 3,098 $ 2,718 14 % 9 % Six months ended June 30, Percent change (in millions) 2021 2020 At actual currency rates At constant currency rates Renal Care $ 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 % Other 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 $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. 33 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 June 30, 2021 % of net sales 2020 % of net sales $ change % change Gross margin $ 1,233 39.8 % $ 1,038 38.2 % $ 195 18.8 % SG&A $ 675 21.8 % $ 590 21.7 % $ 85 14.4 % R&D $ 139 4.5 % $ 117 4.3 % $ 22 18.8 % 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 % Gross Margin 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 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. SG&A 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 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 34 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. R&D 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 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 In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. 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 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. We currently expect to incur additional pre-tax costs of approximately $16 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. The reductions in our cost base from these actions in the aggregate are expected to provide cumulative annual pre-tax savings of more than $1.2 billion once the remaining actions are complete. The savings from these actions will impact cost of sales, SG&A expenses, and R&D expenses. Approximately 99 percent of the expected annual pre-tax savings are expected to be realized by the end of 2021, with the remainder by the end of 2023. Other Operating Income, Net 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. We transferred our rights in these products to Celerity and Celerity assumed ownership and responsibility for development of the products. We are obligated to purchase the individual product rights from Celerity if the products obtain regulatory approval. In December 2020, we entered into an agreement with a third party to divest one of the products that is currently being developed by Celerity if that product receives regulatory approval in the U.S. and/or European Union. If regulatory approval is obtained, we would incur a loss ranging from $30 million to $60 million for the difference between our purchase price and the divestiture proceeds in connection with that transaction. Interest Expense, Net 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. 35 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 (income) expense, net and recognize a non-cash charge. As of June 30, 2021, the CTA for our Argentina operations was in excess of $60 million. Income Taxes 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 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. Segment Results We use net sales and operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our segments. 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 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 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 Americas $ 1,624 $ 1,469 $ 3,184 $ 3,034 $ 632 $ 527 $ 1,231 $ 1,115 EMEA 783 669 1,521 1,357 159 121 294 238 APAC 691 580 1,339 1,129 152 143 290 271 Total segments 3,098 2,718 6,044 5,520 943 791 1,815 1,624 Corporate and other — — — — (519) (460) (1,001) (884) Total $ 3,098 $ 2,718 $ 6,044 $ 5,520 $ 424 $ 331 $ 814 $ 740 36 Americas 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. EMEA 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. APAC 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 Certain items are maintained at Corporate and are not allocated to a segment. They primarily include corporate headquarters costs, certain R&D costs, certain product category support costs, stock compensation expense, certain employee benefit plan costs, certain foreign currency hedging activities, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments). 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 six-month periods ended June 30, 2021 and 2020. Six months ended June 30, (in millions) 2021 2020 Cash flows from operations - continuing operations $ 854 $ 648 Cash flows from investing activities (726) (758) Cash flows from financing activities (707) 909 Cash Flows from Operations — Continuing Operations 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. 37 Cash Flows from Investing Activities 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 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. 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. 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 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 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. Access to Capital and Credit Ratings 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 $3.1 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 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. Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives. There have been no changes to our investment grade credit ratings that we disclosed in our 2020 Annual Report. 38 In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR) and other interbank offered rates, which have been widely used as reference rates for various securities and financial contracts, including loans, debt and derivatives. This announcement indicates that the continuation of LIBOR on the current basis was not guaranteed after 2021. Regulators in the U.S. and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate (SOFR). In 2020, it was announced that certain U.S. dollar LIBOR tenors would not cease until 2023. Currently, our credit facilities reference LIBOR-based rates. The discontinuation of LIBOR will require these arrangements to be modified in order to replace LIBOR with an alternative reference interest rate, which could impact our cost of funds. Our credit facilities include a provision specifying that we and the lenders will negotiate in good faith for the determination of a successor LIBOR rate. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. 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. 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 six months of 2021. RECENT ACCOUNTING PRONOUNCEMENTS There are no accounting standards issued but not yet effective that we believe will have a material impact on our condensed consolidated financial statements. LEGAL CONTINGENCIES Refer to Note 6 within Item 1 for a discussion of our legal contingencies. Upon resolution of any of these uncertainties, we may incur charges in excess of presently established liabilities. While our liability in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters 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 these matters, litigation is inherently uncertain, excessive verdicts do occur, and we may in the future incur material judgments or enter into material settlements of claims. CERTAIN REGULATORY MATTERS Immediately prior to the closing of our acquisition of Claris Injectables Limited (Claris), the U.S. Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India in July 2017. FDA completed the inspection and subsequently issued a Warning Letter based on observations identified in the 2017 inspection (Claris Warning Letter). 1 FDA has not yet re-inspected the facilities and management cannot speculate on when the Claris Warning Letter will be lifted. 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 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 FORWARD-LOOKING INFORMATION 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 39 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. and specific OUS rights to Transderm Scop), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts. 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. 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: • demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with our ability to accurately predict these pressures and the resulting impact on customer inventory levels and the impact of reduced hospital admission rates and elective surgery volumes), and the impact of those products on quality and patient safety concerns; • product development risks, including satisfactory clinical performance, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle; • our ability to finance and develop new products or enhancements on commercially acceptable terms or at all; • our ability to identify business development and growth opportunities and to successfully execute on business development strategies; • product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales; • the impact of global economic conditions (including potential trade wars) and continuing public health crises, pandemics and epidemics, such as the COVID-19 pandemic, including related resurgences, on us and our customers and suppliers, including foreign governments in countries in which we operate; • the continuity, availability and pricing of acceptable raw materials and component supply, and the related continuity of our manufacturing and distribution; • inability to create additional production capacity in a timely manner or the occurrence of other manufacturing, sterilization or supply difficulties (including as a result of natural disaster, public health crises and epidemics/pandemics, regulatory actions or otherwise); • breaches or failures of our information technology systems or products, including by cyber-attack, data leakage, unauthorized access or theft (as a result of increased remote working arrangements or otherwise); 40 • future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the SEC, DOJ or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities, including the continued delay in lifting the warning letter at our Ahmedabad facility or proceedings related to the misstatements in previously reported non-operating income related to foreign exchange gains and losses; • developments that would require the correction of additional misstatements in our previously issued financial statements; • failures with respect to our quality, compliance or ethics programs; • future actions of third parties, including third-party payers, the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, the European Union’s General Data Protection Regulation and proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S. 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, ethylene oxide litigation and litigation related to the investigation of foreign exchange gains and losses ; • failure to achieve our long-term financial improvement goals; • the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies; • global regulatory, trade and tax policies; • the ability to protect or enforce our owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, trade secrets and know-how) or patents of third parties preventing or restricting our manufacture, sale or use of affected products or technology; • the impact of any goodwill or other intangible asset impairments on our operating results; • any failure by Baxalta or Shire to satisfy its obligations under the separation agreements, including the tax matters agreement, or that certain letter agreement entered into with Shire and Baxalta; • fluctuations in foreign exchange and interest rates; • any changes in law concerning the taxation of income (whether with respect to current or future tax reform), including income earned outside the United States and potential taxes associated with the Base Erosion and Anti-Abuse Tax; • actions by tax authorities in connection with ongoing tax audits; • loss of key employees or inability to identify and recruit new employees; • other factors identified elsewhere in this report and other filings with the SEC, including those factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, all of which are available on our website. 41 Actual results may differ materially from those projected in the forward-looking statements. We do not undertake to update our forward-looking statements. 42