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Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-02 · 277 added, 158 removed, 286 unchanged (60% 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, 2023 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, 2024 and 2023.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2023 (2023 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 and six months ended June 30, 2024 and 2023.

RECENT STRATEGIC ACTIONS

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In March 2024, we announced that we have been in recent discussions with select private equity investors to explore a potential sale of our Kidney Care business in lieu of the proposed spinoff.

Regardless of the separation structure ultimately selected, the separation of our Kidney Care business is currently expected to be completed during the second half of 2024, subject to the satisfaction of customary conditions.

During the first quarter of 2024 we generated $1.10 billion of net sales from our Kidney Care segment, representing approximately 31% of our consolidated net sales.

Regardless of the separation structure ultimately selected, the separation of our Kidney Care business is currently expected to be completed in late 2024 or early 2025, subject to the satisfaction of customary conditions.

During the three and six months ended June 30, 2024, we generated $1.12 billion and $2.22 billion, respectively, of net sales from our Kidney Care segment, representing approximately 29% and 30%, respectively, of our consolidated net sales.

Since the initial announcement of the proposed separation of our Kidney Care business, we have incurred significant separation-related costs that have adversely impacted our earnings and cash flows.

1 unchanged sentence

Additionally, if the proposed separation is completed, we expect to incur some amount of dis-synergies due to the reduced size of our company and, as a result, we will need to undertake various actions to help ensure that our cost structure is appropriate to support our remaining businesses.

There can be no guarantees that the proposed separation will be completed in the manner or over the timeframe described above, or at all.

There can be no guarantees that the proposed separation or our cost savings initiatives will be completed in the manner or over the timeframe described above, or at all.

Implementation of New Operating Model and Resulting Segment Change

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Under this new operating model, our business is comprised of four segments:

Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals, and Kidney Care (which we are currently planning to divest during the second half of 2024 through either a sale or spinoff, as discussed above).

Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals, and Kidney Care (which we are planning to divest through either a sale or spinoff, as discussed above).

Our segments were changed during the third quarter of 2023 to align with our new operating model and prior period segment disclosures have been revised to reflect the new segment presentation.

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On September 29, 2023, we completed the sale of our BioPharma Solutions (BPS) business and received cash proceeds of $3.96 billion from that transaction.

The results of operations and cash flows of our BPS business for the three months ended March 31, 2023 are reported as discontinued operations in the accompanying condensed consolidated financial statements.

We intend to use substantially all of the after-tax proceeds from this transaction to repay certain of our debt obligations, including $514 million of commercial paper borrowings and $2.28 billion of long-term debt that we repaid during the fourth quarter of 2023.

The results of operations and cash flows of our BPS business for the three and six months ended June 30, 2023 are reported as discontinued operations in the accompanying condensed consolidated financial statements.

See Note 2 in Item 1 of this Quarterly Report on Form 10-Q for additional information.

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Supply Constraints, Global Economic Conditions, and Regulatory Matters

We have experienced significant challenges to our global supply chain in recent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and

electromechanical devices), and higher transportation costs, resulting from the COVID-19 pandemic and other exogenous factors including significant weather events, elevated inflation levels, increased interest rates, disruptions to certain ports of call and access to shipping ports around the world, the war in Ukraine, the conflict in the Middle East (including attacks on merchant ships in the Red Sea), tensions amongst China, Taiwan, and the U.S., and other geopolitical events.

We have experienced significant challenges to our global supply chain (which we experienced most acutely in 2022), including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices), and higher transportation costs, resulting from the COVID-19 pandemic and other exogenous factors including significant weather events, elevated inflation levels, increased interest rates, disruptions to certain ports of call and access to shipping ports around the world, the war in Ukraine, the conflict in the Middle East (including attacks on merchant ships in the Red Sea), tensions amongst China, Taiwan, and the U.S., and other geopolitical events.

Due to the nature of our products, which include dense consumable medical products such as IV fluids, and the geographic locations of our manufacturing facilities, which often require us to transport our products long distances, we may be more susceptible to increases in freight costs and other supply chain challenges than certain of our industry peers.

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RESULTS OF OPERATIONS

For the three months ended March 31, 2024, net income attributable to Baxter stockholders was $37 million, or $0.07 per diluted share.

For the three months ended March 31, 2023, net loss from continuing operations attributable to Baxter stockholders was $1 million, or $0.00 per diluted share, and net income from discontinued operations was $45 million, or $0.09 per diluted share.

For the three months ended March 31, 2024, our results included special items that decreased net income attributable to Baxter stockholders by $294 million, or $0.58 per diluted share.

For the three months ended March 31, 2023, our results included special items that decreased income from continuing operations attributable to Baxter stockholders by $249 million, or $0.49 per diluted share, and decreased net income from discontinued operations by $4 million, or $0.01 per diluted share.

For the three months ended June 30, 2024, net loss attributable to Baxter stockholders was $314 million, or $0.62 per diluted share.

For the three months ended June 30, 2023, net loss from continuing operations attributable to Baxter stockholders was $195 million, or $0.39 per diluted share, and net income from discontinued operations was $54 million, or $0.11 per diluted share.

For the three months ended June 30, 2024, our results included special items that adversely impacted net loss attributable to Baxter stockholders by $659 million, or $1.30 per diluted share.

For the three months ended June 30, 2023, our results included special items that adversely impacted loss from continuing operations attributable to Baxter stockholders by $475 million, or $0.94 per diluted share, and decreased net income from discontinued operations by $1 million, or $0.00 per diluted share.

For the six months ended June 30, 2024, net loss attributable to Baxter stockholders was $277 million, or $0.54 per diluted share.

For the six months ended June 30, 2023, net loss from continuing operations attributable to Baxter stockholders was $196 million, or $0.39 per diluted share, and net income from discontinued operations was $99 million, or $0.20 per diluted share.

For the six months ended June 30, 2024, our results included special items that adversely impacted net loss attributable to Baxter stockholders by $953 million, or $1.87 per diluted share.

For the six months ended June 30, 2023, our results included special items that adversely impacted loss from continuing operations attributable to Baxter stockholders by $724 million, or $1.43 per diluted share, and decreased net income from discontinued operations by $5 million, or $0.01 per diluted share.

See the subsection entitled “Special Items” for information about special items for all periods presented.

CONSOLIDATED NET SALES

Three Months Ended March 31, Percent change

Three Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

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Total net sales $ 3,812 $ 3,707 3 % 4 %

Six Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

currency rates At constant currency rates 1

United States $ 3,456 $ 3,417 1 % 1 %

Emerging markets 2

1,622 1,596 2 % 4 %

Rest of world 3

2,326 2,207 5 % 6 %

Total net sales $ 7,404 $ 7,220 3 % 3 %

1 Percent change in net sales at constant currency rates is a non-GAAP financial measure.

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3 Rest of world includes sales from our operations in Western Europe, Canada, Japan, Australia, and New Zealand.

Foreign currency adversely impacted net sales by 1 percentage point during the first quarter of 2024, compared to the prior year period, primarily due to the strengthening of the U.S.

Dollar relative to the Turkish Lira, Chinese Renminbi, Australian Dollar, and Japanese Yen, partially offset by the weakening of the U.S.

Dollar relative to the Colombian Peso, British Pound, Mexican Peso, and Euro.

Foreign currency adversely impacted net sales by 1 percentage point during the three months ended June 30, 2024, compared to the prior year period, primarily due to the strengthening of the U.S.

Dollar relative to the Turkish Lira, Chinese Renminbi, Japanese Yen, and Euro, partially offset by the weakening of the U.S.

Dollar relative to the Colombian Peso, British Pound, and Mexican Peso.

NET SALES BY SEGMENT

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Our Medical Products and Therapies segment includes sales of our sterile IV solutions, infusion systems, administration sets, parenteral nutrition therapies and surgical hemostat, sealant, and adhesion prevention products.

Three Months Ended March 31, Percent change

Three Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

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Total Medical Product and Therapies net sales $ 1,322 $ 1,276 4 % 5 %

Six Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

currency rates At constant currency rates 1

Infusion Therapies and Technologies

$ 2,011 $ 1,915 5 % 5 %

Advanced Surgery 540 518 4 % 6 %

Total Medical Product and Therapies net sales $ 2,551 $ 2,433 5 % 5 %

1 Percent change in net sales at constant currency rates is a non-GAAP financial measure.

See the section entitled “Non-GAAP Financial Measures” for additional information about our use of that measure.

Medical Product and Therapies segment net sales increased 6% in the first quarter of 2024, as compared to the prior year period.

Infusion Therapies and Technologies net sales increased 6% in the first quarter of 2024, as compared to the prior year period.

Sales performance primarily reflected growth in IV solutions and, to a lesser extent, international nutrition product offerings.

Growth in the current year period was primarily attributable to pricing initiatives with the remainder driven by volume.

Medical Product and Therapies segment net sales increased 4% in the second quarter and increased 5% in the first six months of 2024, as compared to the prior year periods.

Infusion Therapies and Technologies net sales increased 4% in the second quarter and increased 5% in the first six months of 2024, as compared to the prior year periods.

Sales performance primarily reflected growth in IV solutions and nutrition product offerings and was attributable to both pricing initiatives and increased sales volume.

currency exchange rates adversely impacted sales growth by 1% for the second quarter of 2024, as compared to the prior year period.

In April 2024, we received U.S.

Food and Drug Administration (FDA) 510(k) clearance of our Novum IQ large volume infusion pump (LVP), which is expected to favorably impact the net sales generated by our Infusion Therapies and Technologies business during the second half of 2024.

Advanced Surgery net sales increased 7% in the first quarter of 2024, as compared to the prior year period.

Sales performance primarily reflected growth in hemostats and sealants and, to a lesser extent, adhesion prevention product offerings.

Growth in the current year period was primarily attributable to increased sales volume.

Foreign currency exchange rates adversely impacted sales growth by 1%, as compared to the prior year period.

Food and Drug Administration (FDA) 510(k) clearance of our Novum IQ large volume infusion pump (LVP) and we shipped our first Novum IQ LVP's in the United States in June 2024.

The launch of that product in the United States is expected to favorably impact the net sales generated by our Infusion Therapies and Technologies business during the second half of 2024.

Advanced Surgery net sales increased 2% in the second quarter and increased 4% in the first six months of 2024, as compared to the prior year periods.

Sales performance primarily reflected growth in hemostats and sealants and was primarily attributable to increased sales volume.

Foreign currency exchange rates adversely impacted sales growth by 2% for the second quarter and the first six months of 2024, as compared to the prior year periods.

Healthcare Systems and Technologies

Our Healthcare Systems and Technologies segment includes sales of our connected care solutions and collaboration tools, including smart bed systems, patient monitoring systems and diagnostic technologies, respiratory health devices, and advanced equipment for the surgical space, including surgical video technologies, precision positioning devices, and other accessories.

Three Months Ended March 31, Percent change

Our Healthcare Systems and Technologies segment includes sales of our connected care solutions and collaboration tools, including smart bed systems, patient monitoring systems and diagnostic technologies, respiratory health devices, and advanced equipment for the surgical space, including operating room integration technologies, precision positioning devices, and other accessories.

Three Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

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Total Healthcare Systems and Technologies net sales $ 748 $ 743 1 % 1 %

Six Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

currency rates At constant currency rates 1

Care and Connectivity Solutions $ 854 $ 865 (1) % (2) %

Front Line Care 561 609 (8) % (8) %

Total Healthcare Systems and Technologies net sales $ 1,415 $ 1,474 (4) % (4) %

1 Percent change in net sales at constant currency rates is a non-GAAP financial measure.

See the section entitled “Non-GAAP Financial Measures” for additional information about our use of that measure.

Healthcare Systems and Technologies segment net sales decreased 9% in the first quarter of 2024, as compared to the prior year period.

Care and Connectivity Solutions net sales decreased 6% in the first quarter of 2024, as compared to the prior year period, primarily driven by volume declines resulting from the timing of capital orders by our hospital customers, the phasing of installations, primarily with respect to care communications products, to future periods, and lower rental revenues.

We were also impacted by challenges related to commercial execution that we are currently addressing in order to improve the performance of this business.

Foreign currency exchange rates favorably impacted sales growth by 1% for the quarter, as compared to the prior year period.

Front Line Care net sales decreased 12% in the first quarter of 2024, as compared to the prior year period.

Sales performance primarily reflected declines in our connected monitoring and intelligent diagnostics product offerings.

The sales decline as compared to the prior year was primarily driven by an increased backlog in the current year period, compared with a backlog reduction in the prior year period, and softer demand in the primary care market.

We currently expect the growth rates for our Healthcare Systems and Technologies segment to meaningfully improve during the second half of 2024.

Healthcare Systems and Technologies segment net sales increased 1% in the second quarter and decreased 4% in the first six months of 2024, as compared to the prior year periods.

Care and Connectivity Solutions net sales increased 4% in the second quarter and decreased 1% in the first six months of 2024, as compared to the prior year periods.

The growth in the second quarter was primarily driven by increased order volume associated with capital spending as compared to the prior year quarterly period, partially offset by declines in care communications products driven by the shifting of installations to future periods and lower rental revenues.

The decline in the first six months of 2024 was primarily driven by declines in capital order volume during the first quarter, declines in sales of connected care products driven by the shifting of installations to future periods, and lower rental revenues.

We were also impacted by commercial execution challenges in the first quarter that we are continuing to address to improve the performance of this business.

Foreign currency exchange rates favorably impacted sales growth by 1% for the first six months of 2024, as compared to the prior year period.

Front Line Care net sales decreased 4% in the second quarter and decreased 8% in the first six months of 2024, as compared to the prior year periods.

Sales performance primarily reflected declines in our connected monitoring and intelligent diagnostics product offerings, partially offset by growth in our cardiology product offerings.

The sales decline as compared to the prior year was primarily driven by a backlog increase in the current year period, compared with a backlog reduction in the prior year period, as well as softer demand in the primary care market and lower government orders.

We currently expect the growth rate of our Healthcare Systems and Technologies segment to improve during the second half of 2024 as compared to growth rates during the first half of 2024.

Pharmaceuticals

Our Pharmaceuticals segment includes sales of specialty injectable pharmaceuticals, inhaled anesthesia and drug compounding.

Three Months Ended March 31, Percent change

Three Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

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Total Pharmaceuticals net sales $ 602 $ 550 9 % 11 %

Six Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

currency rates At constant currency rates 1

Injectables and Anesthesia

$ 669 $ 637 5 % 6 %

Drug Compounding 511 436 17 % 18 %

Total Pharmaceuticals net sales $ 1,180 $ 1,073 10 % 11 %

1 Percent change in net sales at constant currency rates is a non-GAAP financial measure.

See the section entitled “Non-GAAP Financial Measures” for additional information about our use of that measure.

Pharmaceuticals segment net sales increased 11% in the first quarter of 2024 compared to the prior year period.

Injectables and Anesthesia net sales increased 8% in the first quarter of 2024 compared to the prior year period primarily due to growth in our U.S.

specialty injectable products, driven by new product launches, including Zosyn, following the transfer of the related product rights to us in April 2023, Bendamustine, and Norepinephrine, partially offset by lower sales of inhaled anesthesia products.

Drug Compounding net sales increased 15% in the first quarter of 2024, as compared to the prior year period.

The increase was driven by increased demand for our international pharmacy compounding services.

Pharmaceuticals segment net sales increased 9% in the second quarter and increased 10% in the first six months of 2024, as compared to the prior year periods.

Injectables and Anesthesia net sales increased 3% in the second quarter and increased 5% for the first six months of 2024, as compared to the prior year periods, primarily due to growth in our U.S.

specialty injectable products, driven by strong sales volume in our core portfolio and, to a lesser extent, recent product launches, partially offset by lower sales of inhaled anesthesia products.

Foreign currency exchange rates adversely impacted sales growth by 1% for the second quarter and the first six months of 2024, as compared to the prior year periods.

Drug Compounding net sales increased 20% in the second quarter and increased 17% for the first six months of 2024, as compared to the prior year periods.

The increase in the current year periods was driven by increased demand for our international pharmacy compounding offerings due, in part, to customer capacity constraints that resulted in increased outsourcing of compounding activities, which is not currently expected to be as significant in the second half of the year.

Foreign currency exchange rates adversely impacted sales growth by 1% for the first six months of 2024, as compared to the prior year period.

Our Kidney Care segment includes Chronic Therapies, comprised of peritoneal dialysis (PD) and hemodialysis (HD), and Acute Therapies, comprised of continuous renal replacement therapies (CRRT) and other organ support therapies.

Three Months Ended March 31, Percent change

Three Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

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Total Kidney Care net sales $ 1,118 $ 1,116 0 % 3 %

Six Months Ended June 30, Percent change

(in millions) 2024 2023 At actual

currency rates At constant currency rates 1

Chronic Therapies

$ 1,805 $ 1,812 (0) % 1 %

Acute Therapies 415 376 10 % 12 %

Total Kidney Care net sales $ 2,220 $ 2,188 1 % 3 %

1 Percent change in net sales at constant currency rates is a non-GAAP financial measure.

See the section entitled “Non-GAAP Financial Measures” for additional information about our use of that measure.

Kidney Care segment net sales increased 3% in the first quarter of 2024, as compared to the prior year period.

Chronic Therapies sales were flat in the first quarter of 2024, as compared to the prior year period.

Sales performance in the current year period was primarily due to patient growth, pricing, and recent government tender awards, partially offset by lower sales in China, primarily due to government-based procurement initiatives and the impact of COVID-19 on that country’s renal patient population, and select product and market exits.

Foreign currency exchange rates adversely impacted sales growth by 2%, as compared to the prior year period.

Acute Therapies net sales increased 14% in the first quarter of 2024, as compared to the prior year period.

The increase in the current year period was primarily driven by higher sales volume resulting from strong demand for our CRRT offerings, particularly in the United States.

Foreign currency exchange rates adversely impacted sales growth by 1%, as compared to the prior year period.

During the three months ended March 31, 2024 and 2023, we earned $16 million and $30 million, respectively, of revenues that were not attributable to our reportable segments.

In the current and prior year periods, those other sales primarily represent revenues earned by certain of our manufacturing facilities from contract manufacturing activities.

The prior year period also includes royalty income under a business development arrangement.

The decrease in the current year as compared to the prior year period primarily reflects lower contract manufacturing

volume and, to a lesser extent, termination of the royalty arrangement following our acquisition of the rights to the underlying product.

Kidney Care segment net sales were flat in the second quarter and increased 1% in the first six months of 2024, as compared to the prior year periods.

Chronic Therapies net sales decreased 1% in the second quarter and were flat in the first six months of 2024, as compared to the prior year periods.

Sales performance in the current year periods was primarily due to lower sales in China, driven by government-based procurement initiatives and the impact of COVID-19 on that country’s renal patient population, and select product and market exits, including the closure of a dialyzer manufacturing facility in late 2023, partially offset by PD patient growth, particularly in the United States.

Foreign currency exchange rates adversely impacted sales growth by 2% for the second quarter and 1% for the first six months of 2024, as compared to the prior year periods.

Acute Therapies net sales increased 7% in the second quarter and increased 10% in the first six months of 2024, as compared to the prior year periods.

The increases in the current year periods were primarily driven by higher sales volume resulting from strong demand for our CRRT offerings, particularly in the United States.

Foreign currency exchange rates adversely impacted sales growth by 2% for the second quarter and the first six months of 2024, as compared to the prior year periods.

Other sales, which represent sales not attributable to our reportable segments, were $22 million for both the three months ended June 30, 2024 and 2023, and $38 million and $52 million for the six months ended June 30, 2024 and 2023, respectively.

In the current and prior year periods, Other sales primarily represent revenues earned by certain of our manufacturing facilities from contract manufacturing activities.

The six-month period ended June 30, 2023 also included royalty income under a business development arrangement.

The decrease in other sales for the six months ended June 30, 2024 as compared to the prior year period primarily reflects lower contract manufacturing volume and, to a lesser extent, termination of the royalty arrangement following our acquisition of the rights to the underlying product.

COSTS AND EXPENSES

Special Items

The following table provides a summary of our special items from continuing operations and the related impact by line item on our results for the three months ended March 31, 2024 and 2023.

Three Months Ended March 31,

The following table provides a summary of our special items from continuing operations and the related impact by line item on our results for the three and six months ended June 30, 2024 and 2023.

Three Months Ended June 30, Six Months Ended June 30,

(in millions) 2024 2023 2024 2023

1 unchanged sentence

Business optimization items 1

(12) (266) (26) (301)

Acquisition and integration items 2

European medical devices regulation 3

(10) (12) (18) (24)

Separation-related costs 4

(1) (4) (5) (5)

Total Special Items $ (138) $ (387) $ (279) $ (545)

Impact on Gross Margin Ratio (3.9) pts

Impact on Gross Margin Ratio (3.7) pts (10.4) pts (3.7) pts (7.6) pts

Selling, General and Administrative (SG&A) Expenses

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Separation-related costs 4

79 $ 33 167 41

Total Special Items $ 148 $ 120 $ 319 $ 278

Impact on SG&A Ratio 4.8 pts

Impact on SG&A Ratio 3.9 pts 3.2 pts 4.3 pts 3.8 pts

Research and Development (R&D) Expenses

Business optimization items 1

$ (3) $ — $ 13 $ 7

Separation-related costs 4

Total Special Items $ (2) $ — $ 14 $ 7

Impact on R&D Ratio 0.4 pts

Impact on R&D Ratio (0.1) pts 0.0 pts 0.2 pts 0.1 pts

Goodwill Impairment

Goodwill impairment 5

$ 430 $ — $ 430 $ —

Total Special Items $ 430 $ — $ 430 $ —

Other Operating Income, net

Acquisition and integration items 2

$ — $ (1) — (14)

Total Special Items $ — $ (1) $ — $ (14)

Other (Income) Expense, net

Investment impairments 6

Total Special Items $ — $ 20 $ — $ 20

Income Tax Expense

Tax matters 7

$ 5 $ 34 $ 42 $ 34

Tax effects of special items 8

(60) $ (85) (131) (146)

Total Special Items $ (55) $ (51) $ (89) $ (112)

Impact on Effective Tax Rate 41.4 pts 76.9 pts

1 Our results in 2024 and 2023 were impacted by costs associated with our execution of programs to optimize our organization and cost structure.

These restructuring and other business optimization costs included actions related to our current implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities, rationalization of certain other manufacturing and distribution facilities, and transformation of certain general and administrative functions.

Our results in 2024 and 2023 included business optimization charges of $57 million and $134 million, respectively.

Impact on Effective Tax Rate (44.9) pts (23.3) pts (117.3) pts (34.6) pts

1 Our results for second quarter of 2024 and 2023 included business optimization charges of $20 million and $293 million, respectively.

Our results for the first six months of 2024 and 2023 included business optimization charges of $77 million and $427 million, respectively.

These restructuring and other business optimization costs included third-party costs incurred to support the transformation of certain general and administrative functions, property, plant and equipment impairments in connection with the transfer of a manufacturing production line as part of our initiative to optimize our global manufacturing and supply chain organization, costs to centralize certain of our R&D activities, our implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities, our decision to close one of our U.S.-based manufacturing facilities in the second quarter of 2023, which resulted in a $243 million noncash impairment of property, plant and equipment and rationalization of certain other manufacturing and

distribution facilities.

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 2024 and 2023 reflected integration costs of $5 million and $6 million, respectively, which primarily included third party consulting costs related to our integration of Hillrom.

In 2023, those costs were offset by $13 million of net gains from changes in the estimated fair values of contingent consideration liabilities.

3 Our results in 2024 and 2023 included $8 million and $12 million, respectively, of incremental costs to comply with the European Union's medical device regulations for previously registered products, which primarily consist of contractor costs and other direct third-party costs.

2 Our results for the second quarter of 2024 and 2023 included $6 million and $8 million, respectively, and for the first six months of 2024 and 2023 included $11 million and $14 million, respectively, of integration costs which primarily reflected third party consulting costs related to our integration of Hillrom.

In 2023, those costs were partially offset by a $1 million benefit in the second quarter and fully offset by a $14 million benefit in the first six months related to changes in the estimated fair values of contingent consideration liabilities.

3 Our results for the second quarter of 2024 and 2023 included $10 million and $12 million, respectively, and for the first six months of 2024 and 2023 included $18 million and $24 million, respectively, of incremental costs to comply with the European Union's medical device regulations for previously registered products, which primarily consist of contractor costs and other direct third-party costs.

We consider the adoption of these regulations to be a significant one-time regulatory charge and believe that the costs of initial compliance for previously registered products over the implementation period are not indicative of our core operating results.

4 Our results in 2024 and 2023 included separation-related costs of $92 million and $9 million, respectively, primarily reflecting costs of external advisors supporting our activities to prepare for the proposed separation of our Kidney Care segment.

We also incurred $7 million of additional

separation-related costs in 2023 related to the sale of our BPS business that are reported in discontinued operations and are not presented in the table above.

5 Our results in 2024 included $37 million of income tax expenses resulting from internal reorganization transactions related to the proposed separation of our Kidney Care segment.

Our results in 2023 included a $3 million reallocation of income tax expense between discontinued operations and continuing operations resulting from the application of intraperiod tax allocation to our adjusted results in an interim period.

4 Our results for the second quarter of 2024 and 2023 included $81 million and $37 million, respectively, and for the first six months of 2024 and 2023 included $173 million and $46 million, respectively, of separation-related costs primarily reflecting costs of external advisors supporting our activities to prepare for the proposed separation of our Kidney Care segment.

We also incurred $8 million and $15 million of additional separation-related costs in the second quarter and first six months of 2023, respectively, related to the sale of our BPS business that are reported in discontinued operations and are not presented in the table above.

5 Our results in the second quarter and first six months of 2024 included charges of $430 million for a goodwill impairment of the Chronic Therapies reporting unit within our Kidney Care segment.

Refer to Note 4 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the impairment.

6 Our results in 2023 included $20 million of pre-tax losses from non-marketable investments in several early stage companies in the second quarter, consisting of $23 million of noncash impairment write-downs, partially offset by a $3 million gain from the sale of an investment.

7 Our results for the second quarter and first six months of 2024 included $5 million and $42 million, respectively, of income tax expenses resulting from internal reorganization transactions related to the proposed separation of our Kidney Care segment.

Our results in 2023 included a $30 million valuation allowance recorded to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to previously enacted Swiss tax reform legislation to reflect our current estimate of its recoverability and $4 million of tax costs from separation-related activities.

8 This item reflects the income tax impact of the special items identified in this table.

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Gross Margin and Expense Ratios

Three months ended March 31,

Three Months Ended June 30,

2024 % of net sales 2023 % of net sales $ change % change

2 unchanged sentences

R&D $ 173 4.5 % $ 165 4.5 % $ 8 4.8 %

The gross margin ratio was 38.6% and 36.3% in the first quarter of 2024 and 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 3.9 and 4.5 percentage points on the gross margin ratio in the first quarter of 2024 and 2023, respectively.

Six Months Ended June 30,

2024 % of net sales 2023 % of net sales $ change % change

Gross margin $ 2,818 38.1 % $ 2,386 33.0 % $ 432 18.1 %

SG&A $ 2,048 27.7 % $ 1,959 27.1 % $ 89 4.5 %

R&D $ 349 4.7 % $ 329 4.6 % $ 20 6.1 %

Our gross margin ratio was 37.5% and 30.0% for the three months ended June 30, 2024 and 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 3.7 and 10.4 percentage points on the gross margin ratio for the three months ended June 30, 2024 and 2023, respectively.

Our gross margin ratio was 38.1% and 33.0% for the six months ended June 30, 2024 and 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 3.7 and 7.6 percentage points on the gross margin ratio for the six months ended June 30, 2024 and 2023, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of special items, the gross margin ratio increased 1.7 percentage points in the first quarter of 2024 compared to the prior year period, primarily due to pricing and initiatives to reduce our manufacturing and supply chain costs.

The SG&A expenses ratio was 28.6% and 28.3% in the first quarter of 2024 and 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 4.8 and 4.5 percentage points on the SG&A expenses ratio in the first quarter of 2024 and 2023, respectively.

Excluding the impact of special items, the SG&A expenses ratio remained flat in the first quarter of 2024 compared to the prior year period.

The R&D expenses ratio was 4.9% and 4.7% in the first quarter of 2024 and 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 0.4 and 0.2 percentage points on the R&D expenses ratio in the first quarter of 2024 and 2023, respectively.

Excluding the impact of special items, the R&D expenses ratio remained flat in the first quarter of 2024 compared to the prior year period.

Excluding the impact of special items, the gross margin ratio increased by 0.8 and 1.2 percentage points in the second quarter and first six months of 2024, respectively, compared to the prior year periods.

Those gross margin improvements were primarily attributable to our Kidney Care segment, driven by initiatives to reduce our manufacturing and supply chain costs, a favorable product mix, reflecting select exits from lower margin products and markets, and Acute Therapies sales growth, partially offset by lower gross margins in the current year periods in our Pharmaceuticals and Medical Products and Therapies segments.

Our SG&A expenses ratio was 26.8% and 26.0% for the three months ended June 30, 2024 and 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 3.9 and 3.2 percentage points on the SG&A expenses ratio for the three months ended June 30, 2024 and 2023, respectively.

Our SG&A expenses ratio was 27.7% and 27.1% for the six months ended June 30, 2024 and 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 4.3 and 3.8 percentage points on the SG&A expenses ratio for the six months ended June 30, 2024 and 2023, respectively.

Excluding the impact of special items, the SG&A expenses ratio increased by 0.1 percentage point in the both second quarter and first six months of 2024, compared to the prior year periods.

SG&A for the current year periods reflected annual compensation increases and higher accruals under our annual employee incentive compensation plans.

Our R&D expenses ratio was 4.5% for the three months ended June 30, 2024 and 2023, respectively.

The special items identified earlier in this section had a favorable impact of 0.1 percentage points on the R&D expenses ratio in the second quarter of 2024.

The R&D expenses ratio was 4.7% and 4.6% for the six months ended June 30, 2024 and 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 0.2 and 0.1 percentage points on the R&D expenses ratio for the six months ended June 30, 2024 and 2023, respectively.

Excluding the impact of special items, the R&D expenses ratio increased by 0.1 percentage points and remained flat in the second quarter and first six months of 2024, respectively, compared to the prior year periods.

Business Optimization Items

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The related costs of these actions consisted primarily of employee termination costs, implementation costs, contract termination costs, and asset impairments.

For the three months ended March 31, 2024, our most significant restructuring actions, reflecting $24 million of the restructuring charges in the current year period, were related to a program to centralize certain of our R&D activities into a new location and to our recent implementation of a new operating model intended to simplify and streamline our operations.

For the three months ended months ended June 30, 2024, $6 million of the restructuring charges related to a transfer of a manufacturing production line as part of our initiatives to optimize our global manufacturing and supply chain organization.

For the six months ended June 30, 2024, $27 million of the restructuring charges related to a program to centralize certain of our R&D activities into a new location, and to our recent implementation of a new operating model intended to simplify and streamline our operations.

We currently expect to incur additional pre-tax costs, primarily related to the implementation of business optimization programs, of approximately $7 million through the completion of initiatives that are currently underway.

We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we would incur

additional restructuring charges and costs to implement business optimization programs in future periods.

We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified (including after the completion of the proposed Kidney Care separation), we would incur additional restructuring charges and costs to implement business optimization programs in future periods.

Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding our business optimization programs.

Goodwill Impairment

During the second quarter of 2024, we recognized a $430 million goodwill impairment related to our Chronic Therapies reporting unit within our Kidney Care segment.

See Note 4 for additional information.

Other Operating Income, Net

Other operating income, net was $3 million and $13 million in the first quarter of 2024 and 2023, respectively.

In the first quarter of 2024, this amount was comprised of income from transition services arrangements related to the divestiture of our BPS business.

In the first quarter of 2023, this amount was comprised of gains from changes in the estimated fair value of contingent consideration arrangements.

Other operating income, net was $1 million for the three months ended June 30, 2024 and 2023.

In the second quarter of 2024, this amount was comprised of income from transition services arrangements related to the divestiture of our BPS business.

In the second quarter of 2023, this amount was comprised of gains from changes in the estimated fair value of contingent consideration arrangements.

Other operating income, net was $4 million and $14 million for the six months ended June 30, 2024 and 2023, respectively.

In the first six months of 2024, this amount was comprised of income from transition services arrangements related to the divestiture of our BPS business.

first six months of 2023, this amount was comprised of gains from changes in the estimated fair value of contingent consideration arrangements.

Interest Expense, Net

Interest expense, net was $78 million and $117 million in the first quarter of 2024 and 2023, respectively.

The decrease in 2024 was driven by debt repayments in the fourth quarter of 2023, partially offset by higher interest income due to a higher average cash balance and higher interest rates during the current year period.

Other Income, net

Other income, net was $7 million and $2 million in the first quarter of 2024 and 2023, respectively.

In both the current and prior year periods, other income, net was primarily driven by pension and other postretirement benefits and increases in the fair value of marketable equity securities, partially offset by foreign exchange losses.

Our effective income tax rate was 66.4% and 100.0% in the first quarter of 2024 and 2023, respectively.

Interest expense, net was $85 million and $124 million in the second quarter of 2024 and 2023, respectively and $163 million and $241 million for the first six months of 2024 and 2023, respectively.

The decrease in 2024 was driven by debt repayments in the fourth quarter of 2023 and, to a lesser extent, higher interest income due to a higher average cash balance and higher interest rates during the current year period.

Other (Income) Expense, net

Other (income) expense, net was income of $20 million and expense of $42 million for the three months ended June 30, 2024 and 2023, respectively, and income of $27 million and expense of $40 million for the six months ended June 30, 2024 and 2023, respectively.

In the current year periods, other income, net was primarily driven by pension and other postretirement benefits, partially offset by foreign exchange losses.

In the prior year periods, other expense, net was primarily driven by foreign exchange losses, non-marketable investment impairments and decreases in the fair value of marketable equity securities, partially offset by pension and postretirement benefits.

Our effective income tax rate was (21.0)% and (5.5)% in the second quarter of 2024 and 2023, respectively, and (92.9)% and (14.2)% for the first six months of 2024 and 2023, respectively.

Our effective income tax rate can differ from the 21% U.S.

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Our effective income tax rate during interim periods reflects our estimated annual effective tax rate and discrete items.

For the three months ended March 31, 2024, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily driven by $37 million of income tax expense resulting from internal reorganization transactions related to the proposed separation of our Kidney Care segment, an increase in a valuation allowance in a foreign jurisdiction resulting from changes in future projected income, and an increase in our liabilities for various uncertain tax positions.

For the three months ended March 31, 2023, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to tax shortfalls on stock compensation awards and an increase in our liabilities for uncertain tax positions.

The Organization of Economic Co-operation and Development (OECD) and the G20 Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) has put forth two proposals—Pillar One and Pillar Two—that revise the existing profit allocation and nexus rules and ensure a minimal level of taxation, respectively.

For the three months ended June 30, 2024, the difference between our effective income tax rate and the U.S.

For the six months ended June 30, 2024, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily driven by a non-deductible goodwill impairment, an increase in income tax expense resulting from internal reorganization transactions related to the proposed separation of our Kidney Care segment, an increase in a valuation allowance in a foreign jurisdiction resulting from changes in future projected income, an increase in our liabilities for various uncertain tax positions, an unfavorable geographic earnings mix, and separation costs that are partially non-deductible.

For the three and six months ended June 30, 2023, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a $30 million increase in the valuation allowance related to a deferred tax asset basis step-up that arose from previously enacted Swiss tax reform legislation and a favorable geographic earnings mix.

The Organization of Economic Co-operation and Development (OECD) and the G20 Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) has put forth two proposals—Pillar One and Pillar Two—that (i) revise the existing profit allocation and nexus rules and (ii) ensure a minimal level of taxation, respectively.

On December 12, 2022, the EU member states agreed to implement the Inclusive Framework’s global corporate minimum tax rate of 15%, and various countries both within and outside the EU have enacted new laws implementing Pillar Two or have draft legislation proposed for adoption.

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The following is a summary of our operating income for our reportable segments.

Three months ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in millions) 2024 2023 2024 2023

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% of Segment Net Sales 7.4 % 4.9 % 10.9 % 5.1 %

Other 9 6 13 13

Total 525 514 1,060 974

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Intangible asset amortization expense (167) (157) (333) (319)

Goodwill impairment (430) — (430) —

Business optimization items (20) (293) (77) (427)

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Interest expense, net 85 124 163 241

Other income, net (7) (2)

Income from continuing operations before income taxes $ 116 $ 14

Other (income) expense, net (20) 42 (27) 40

Loss from continuing operations before income taxes $ (257) $ (183) $ (141) $ (169)

Medical Products and Therapies

Segment operating income was $227 million and $197 million in the first quarter of 2024 and 2023, respectively.

Segment operating income increased in the first quarter compared to the prior year period due to the increased gross profit from higher sales in the current year period.

Segment operating income was $238 million and $264 million for the second quarter of 2024 and 2023, respectively, and $465 million and $461 million for the first six months of 2024 and 2023, respectively.

The decrease in segment operating income in the second quarter compared to the prior year period was primarily due to increased allocations of Corporate shared costs, increased investments in R&D activities, increased shipping and fulfillment costs, annual compensation increases, and higher accruals under our annual employee incentive compensation plans, partially offset by higher sales in the current year period.

The increased segment operating income for the six months ended June 30, 2024 compared to the prior year period was primarily driven by higher sales in the current year period, partially offset by increased operating costs due to the factors described above.

Healthcare Systems and Technologies

Segment operating income was $67 million and $112 million in the first quarter of 2024 and 2023, respectively.

Segment operating income decreased in the first quarter compared to the prior year period due to lower gross profit from lower sales in the current year period and, to a lesser extent, increased R&D expense, primarily related to our connected care portfolio.

Segment operating income was $120 million and $100 million for the three months ended June 30, 2024 and 2023, respectively, and $187 million and $212 million for the six months ended June 30, 2024 and 2023, respectively.

Segment operating income increased in the second quarter compared to the prior year period primarily due to lower operating expenses from cost savings initiatives and increased gross profit from higher sales of Care and Connectivity Solutions product offerings, partially offset by lower sales of our Front Line Care product offerings.

Segment operating

income decreased in the six months ended June 30, 2024 compared to the prior year period primarily due to decreased gross profit from lower sales, partially offset by lower operating expenses from cost savings initiatives.

Pharmaceuticals

Segment operating income was $78 million and $87 million in the first quarter of 2024 and 2023, respectively.

Segment operating income decreased in the first quarter compared to the prior year period due to a lower gross margin percentage, reflecting increased costs of certain inventory manufactured by our former BPS business, which now incorporates a third-party mark-up following our divestiture of that business in September 2023, and increased SG&A expense, including marketing-related costs in connection with recent product launches.

Segment operating income was $159 million and $57 million in the first quarter of 2024 and 2023, respectively.

Segment operating income increased in the first quarter compared to the prior year period due to a higher gross margin, primarily driven by sales growth, initiatives to reduce our manufacturing and supply chain costs, a favorable product mix and, to a lesser extent, improved margins on dialyzers sold in the current period driven by higher

production volumes and better absorption in advance of our closure of a dialyzer manufacturing facility at the end of 2023.

During the three months ended March 31, 2024 and 2023 we earned $4 million and $7 million, respectively, of operating income that was not attributable to our reportable segments.

Operating income generated by activities not attributable to our reportable segments is presented as Other.

Segment operating income was $75 million and $89 million for the three months ended June 30, 2024 and 2023, respectively, and $153 million and $176 million for the six months ended June 30, 2024 and 2023, respectively.

The decreases in segment operating income for these periods were driven by lower gross margin percentages, reflecting the increased cost of certain inventory manufactured by our former BPS business, which now includes a third-party mark-up following our divestiture of that business in September 2023, and increased operating expenses, including marketing-related costs in connection with recent product launches.

Segment operating income was $83 million and $55 million for the three months ended June 30, 2024 and 2023, respectively, and $242 million and $112 million for the six months ended June 30, 2024 and 2023, respectively.

The increases in segment operating income for these periods were driven by higher gross margins, primarily as a result of initiatives to reduce our manufacturing and supply chain costs, a favorable product mix, reflecting select exits from lower margin products and markets, Acute Therapies sales growth, and, for the six-month period, improved margins on dialyzers sold in the first quarter of 2024 driven by higher production volumes and better absorption in advance of our closure of a dialyzer manufacturing facility at the end of 2023.

These gross margin improvements were partially offset by higher operating expenses, including annual compensation increases and higher accruals under our annual employee incentive compensation plans.

Other operating income, which represents operating income not attributable to our reportable segments, was $9 million and $6 million for the three months ended June 30, 2024 and 2023, respectively, and $13 million for both the six months ended June 30, 2024 and 2023.

In the current and prior year periods, other operating income primarily represents income from revenues earned by certain of our manufacturing facilities from contract manufacturing activities.

The prior year period also includes royalty income under a business development arrangement.

The decreases in the current year as compared to the prior year periods reflect lower contract manufacturing volume and, to a lesser extent, termination of the royalty arrangement following our acquisition of the rights to the underlying product.

The increase in the second quarter of 2024 as compared to the prior year period reflects improved gross margins from contract manufacturing.

Other operating income for the six months ended June 30, 2024 was flat to the prior year period, as improved gross margins from contract manufacturing were offset by termination of the royalty arrangement following our acquisition of the rights to the underlying product.

Unallocated Corporate Costs

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LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash flows for the three-month periods ended March 31, 2024 and 2023.

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, 2024 and 2023.

Six Months Ended June 30,

(in millions) 2024 2023

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Cash Flows from Operations - Continuing Operations

For the three months ended March 31, 2024 and 2023, operating cash flows from continuing operations were $163 million and $469 million, respectively.

Operating cash flows from continuing operations in the current year period were unfavorably impacted, as compared to the prior year period, by higher annual payouts under our employee incentive compensation plans, which were determined based on our 2023 performance, payments for costs incurred in connection with the separation of our Kidney Care business, a larger increase in inventory, and higher payments of restructuring costs.

For the six months ended June 30, 2024 and 2023, operating cash flows from continuing operations were $278 million and $780 million, respectively.

Operating cash flows from continuing operations in the current year period were unfavorably impacted, as compared to the prior year period, by higher annual payouts under our employee incentive compensation plans, which were determined based on our 2023 performance, payments for costs incurred in connection with the separation of our Kidney Care business, and by the timing of accounts receivable collections and accounts payable payments.

Cash Flows from Investing Activities - Continuing Operations

For the first three months ended March 31, 2024, cash used in investing activities from continuing operations primarily included capital expenditures of $176 million, partially offset by $16 million of proceeds from sales of marketable securities.

For the first three months ended March 31, 2023, cash used in investing activities from continuing operations primarily included capital expenditures of $165 million.

For the first six months ended June 30, 2024, cash used in investing activities from continuing operations primarily included capital expenditures of $292 million, partially offset by $34 million of proceeds from sales of marketable securities.

For the six months ended June 30, 2023 , cash used in investing activities from continuing operations primarily included capital expenditures of $328 million.

Cash Flows from Financing Activities

For the first three months ended March 31, 2024, cash used in financing activities included dividend payments of $147 million and debt repayments of $15 million, partially offset by proceeds from stock issued under employee benefit plans of $40 million.

In the first three months of 2023, cash used for financing activities included a net decrease of commercial paper borrowings of $249 million and dividend payments of $146 million, partially offset by proceeds from stock issued under employee benefit plans of $36 million.

For the first six months ended June 30, 2024, cash used in financing activities included debt repayments of $824 million and dividend payments of $295 million, partially offset by proceeds from stock issued under employee benefit plans of $52 million.

For the six months ended June 30, 2023 , cash used for financing activities included dividend payments of $292 million and debt repayments of $142 million and a net decrease in commercial paper borrowings of $51 million, partially offset by proceeds from stock issued under employee benefit plans of $54 million.

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

In July 2012, our Board of Directors authorized a share repurchase program and the related authorization was subsequently increased a number of times.

We did not repurchase any shares under this authority in the first three months of 2024.

We had $1.30 billion remaining available under this authorization as of March 31, 2024.

We did not repurchase any shares under this authority in the first six months of 2024.

We had $1.30 billion remaining available under this authorization as of June 30, 2024.

Credit Facilities, Commercial Paper Program and Access to Capital and Credit Ratings

Credit Facilities and Commercial Paper Program

As of March 31, 2024 , we had a U.S.

As of June 30, 2024 , we had a U.S.

dollar-denominated term loan credit facility, which had two tranches of term loans outstanding, a U.S.

dollar-denominated revolving credit facility and a Euro-denominated revolving credit facility.

As of March 31, 2024 , we had $130 million outstanding under one tranche of our U.S.

As of June 30, 2024 , we had $130 million outstanding under one tranche of our U.S.

dollar-denominated term loan credit facility that matures in 2024 and $1.64 billion outstanding under the other tranche of our U.S.

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We have the option to prepay outstanding amounts under the term loan credit facility in whole or in part at any time.

As of March 31, 2024, our U.S.

As of June 30, 2024, our U.S.

dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of $2.50 billion and €200 million, respectively.

There were no borrowings outstanding under these credit facilities as of March 31, 2024 or December 31, 2023.

There were no borrowings outstanding under these credit facilities as of June 30, 2024 or December 31, 2023.

Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings.

On July 17, 2024, we entered into a credit agreement in which a group of banks have committed to provide us senior unsecured term loans in an aggregate principal amount of up to $2.05 billion ("the bridge facility").

Borrowings under the bridge facility will be available in up to three drawings to fund (a) the refinancing of our 1.322% Senior Notes due November 29, 2024, our Floating Rate Notes due November 29, 2024, and certain borrowings under our existing term loan facility and (b) payment of certain U.S.

tax liabilities arising from internal reorganization transactions related to the proposed separation of our Kidney Care business.

Borrowings under the bridge facility will bear interest at a rate based on our long-term debt ratings in effect from time to time and the interest rate on any borrowings outstanding beyond December 31, 2024 would increase by 0.25%.

We will also incur a ticking fee on undrawn commitments at a rate based on our long-term debt ratings in effect from time to time.

The banks’ funding commitments under the bridge facility will terminate upon the earliest to occur of:

(i) our consummation of the debt repayments and tax payments described above without us having borrowed under the bridge facility, (ii) our election to terminate the commitments under the bridge facility, (iii) our receipt of net cash proceeds from certain transactions (including from the separation of our Kidney Care business), (iv) the occurrence of three drawings under the bridge facility, and (v) December 31, 2024.

Outstanding borrowings under the bridge facility will mature on the earlier of 364 days from the first funding date and November 24, 2025.

Additionally, we are required to use the net cash proceeds from certain transactions (including from the separation of our Kidney Care business) to repay any outstanding borrowings under the bridge facility.

The bridge facility contains financial and other covenants, including a net leverage covenant, and provides for customary events of default.

In the first quarter of 2024, we amended the credit agreements governing our U.S.

dollar-denominated term loan credit facility and revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to amend the net leverage ratio covenant to increase the maximum net leverage ratio for the six fiscal quarters ending June 30, 2024, September 30, 2024, December 31, 2024, March 31, 2025, June 30, 2025, and September 30, 2025.

dollar-denominated term loan credit facility and revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility to increase the maximum net leverage ratio covenant for the six fiscal quarters ending June 30, 2024, September 30, 2024, December 31, 2024, March 31, 2025, June 30, 2025, and September 30, 2025.

The amendment further provides for the reduction of the capacity under our U.S dollar-denominated revolving credit facility from $2.50 billion to $2.00 billion on the earlier of September 30, 2024 or the date of the sale or spinoff of our Kidney Care business.

As of March 31, 2024, we were in compliance with the financial covenants in these agreements.

Based on our covenant calculations as of March 31, 2024, we had capacity to draw on the full amounts under our credit facilities.

As of June 30, 2024, we were in compliance with the financial covenants in these agreements.

Based on our covenant calculations as of June 30, 2024, we had capacity to draw on the full amounts under our credit facilities.

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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however, electing to do so would result in higher interest expense.

We had no commercial paper borrowings outstanding as of March 31, 2024.

We had no commercial paper borrowings outstanding as of June 30, 2024.

Access to Capital and Credit Ratings

We intend to fund short-term and long-term obligations as they mature through cash on hand, including the proceeds from the recently completed sale of our BPS business, future cash flows from operations and potentially by issuing debt, which could include commercial paper, bond issuances, or other financing arrangements.

We had $3.03 billion of cash and cash equivalents as of March 31, 2024, with adequate cash available to meet operating requirements in each jurisdiction in which we operate.

We intend to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations, and potentially by issuing debt, which could include commercial paper, bond issuances, or other financing arrangements, including the bridge facility.

We had $2.10 billion of cash and cash equivalents as of June 30, 2024, 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, 2024, we had approximately $13.73 billion of long-term debt and finance lease obligations, including current maturities, and no short-term debt.

We currently expect to use substantially all of the remaining net after-tax cash proceeds from the BPS divestiture to continue to repay indebtedness through the first half of 2024.

As of June 30, 2024, we had approximately $12.90 billion of long-term debt and finance lease obligations, including current maturities, and no short-term debt.

We used substantially all of the remaining net after-tax cash proceeds from the BPS divestiture to repay indebtedness in the first half of 2024.

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

Our ability to generate cash flows from operations and issue debt 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 market 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 and reduce our post-Hillrom acquisition debt levels as we take actions consistent with our capital allocation priorities.

In January 2024, Fitch revised our senior debt credit rating from BBB to BBB-, our senior debt credit rating outlook rating from rating watch negative to stable and our short-term debt credit rating from F2 to F3.

There have been no changes to our investment grade credit ratings that we disclosed in our 2023 Annual Report.

Our ability to generate cash flows from operations and issue debt on acceptable terms or at all 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 market conditions.

In January 2024, Fitch revised our senior debt credit rating from BBB to BBB-, our senior debt credit rating outlook from rating watch negative to stable and our short-term debt credit rating from F2 to F3.

In May 2024, our contract with Fitch expired.

In June 2024, Fitch affirmed and withdrew ratings and coverage on us.

As a result they no longer maintain ratings on our senior debt or our short-term debt.

There have been no changes to our investment grade credit ratings from Standard & Poor's and Moody's that we disclosed in our 2023 Annual Report.

CRITICAL ACCOUNTING POLICIES

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Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2023 Annual Report.

The valuation of goodwill and other long-lived assets is one of our critical accounting policies.

In connection with our November 1, 2023 annual goodwill impairment tests, we determined that no goodwill impairments had occurred.

The fair values of the Front Line Care reporting unit within our Healthcare Systems and Technologies segment and the Chronic Therapies reporting unit within our Kidney Care segment exceeded their carrying values by approximately 5% and 6%, respectively.

While no triggering events were identified during the three months ended March 31, 2024, we are continuing to closely monitor the performance of those reporting units, and if there is a significant adverse change in our outlook for those businesses in the future, a goodwill impairment could arise at that time.

As of March 31, 2024, the carrying amounts of goodwill for our Front Line Care and Chronic Therapies reporting units were $2.41 billion and $430 million, respectively.

There have been no significant changes in the application of our critical accounting policies during the first three months of 2024.

Impairment of Goodwill and Other Long-Lived Assets

Chronic Therapies Reporting Unit

In March 2024, we announced that we had been in recent discussions with select private equity investors to explore a potential sale of our Kidney Care business in lieu of the previously announced proposed spinoff of that business.

While we have not finalized our decision with respect to the ultimate structure of the proposed Kidney Care separation at the time of this filing, we received bids from prospective buyers in June 2024 following the completion of a related due diligence process in connection with a potential sale transaction.

If we were to sell our overall Kidney Care business at a price consistent with the bid we received that we believe to be most representative of fair value, we would recognize a significant gain, although the expected net pre-tax proceeds would be less than the sum of the individual fair values that we previously estimated for the two reporting units within our Kidney Care segment in connection with our most recent goodwill impairment assessments.

Additionally, the fair value of our Chronic Therapies reporting unit within our Kidney Care segment exceeded its carrying value by only 6% as of November 1, 2023, the date of our most recent goodwill impairment test for that reporting unit.

As a result of those factors, we performed an interim goodwill impairment assessment of our Chronic Therapies reporting unit in the second quarter of 2024, which resulted in a pre-tax goodwill impairment charge of $430 million, representing all of the goodwill of that reporting unit.

The fair value of our Chronic Therapies reporting unit was determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach) based on the guideline public company method.

Significant assumptions used in the determination of the fair value of the reporting unit included forecasted cash flows, discount rates, terminal growth rates, and earnings multiples.

The discounted cash flow model used to determine the fair value of our Chronic Therapies reporting unit included our most recent cash flow projections, a 12.5% discount rate, and a 2.5% terminal growth rate, and multiples of forward-looking EBITDA ranged from 4.75 to 5.00.

Our Chronic Therapies reporting unit fair value measurement is classified as Level 3 in the fair value hierarchy because it involves significant unobservable inputs.

The fair value of the remaining reporting unit within our Kidney Care segment, Acute Therapies, significantly exceeded its carrying value as of its most recent goodwill impairment test and we determined that an interim goodwill impairment test of that reporting unit was not required.

However, in connection with the interim goodwill impairment test of our Chronic Therapies reporting unit during the second quarter of 2024, we also performed a fair value measurement of our Acute Therapies reporting unit and we calibrated the sum of the fair values of those two Kidney Care reporting units to the bid we received for the overall Kidney Care business that we believe to be most representative of fair value.

The discounted cash flow projections used in the valuation of our Chronic Therapies reporting unit for the goodwill impairment test as of June 30, 2024 did not change significantly from the projections used in connection with the November 1, 2023 test.

However, for purposes of the June 30, 2024 valuation, the discount rate used in the discounted cash flow model was increased and the earnings multiples used in the guideline public company model were decreased to reflect our current understanding, based on the bids received during the proposed sale process, of how market participants view the risks associated with the business.

We also evaluated whether to perform impairment testing for other long-lived assets within our Kidney Care segment, including property, plant, and equipment related to our HD business.

However, given the significant impairment that we recently recognized for the long-lived assets of the HD business during the third quarter of 2023, improvements in undiscounted cash flow projections for that business since that time, and the significant excess of fair value over carrying value for the remaining asset groups within our Kidney Care segment at the time of their most recent valuations during the second half of 2023, we determined that a quantitative impairment test of other long-lived assets was not required in the current period.

Front Line Care Reporting Unit

In connection with our November 1, 2023 annual goodwill impairment tests, we determined that the fair value of the Front Line Care reporting unit within our Healthcare Systems and Technologies segment exceeded its carrying value by approximately 5%.

While no triggering events were identified during the six months ended June 30, 2024, we are continuing to closely monitor the performance of this reporting unit, and if there is a significant adverse change in our outlook for this business in the future, a goodwill impairment could arise at that time.

As of June 30, 2024, the carrying amount of goodwill for our Front Line Care reporting unit was $2.42 billion.

There have been no significant changes in the application of our critical accounting policies during the first six months of 2024.

RECENT ACCOUNTING PRONOUNCEMENTS

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This standard is effective for our annual consolidated financial statements for the year ending December 31, 2024 and for interim periods beginning in 2025.

We are currently evaluating the impact of this standard on our condensed consolidated financial statements.

Upon adoption of this standard, we expect to disclose additional income statement information for our reportable segments.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

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Since the issuance of the 2017 Warning Letter, we have implemented corrective and preventive actions to address FDA's related observations, as well as other enhancements at the site.

We have fully responded to the 2023 Warning Letter, have implemented additional corrective and preventive actions, and continue to engage with FDA regarding the agency's observations.

We have fully responded to

the 2023 Warning Letter, have implemented additional corrective and preventive actions, and continue to engage with FDA regarding the agency's observations.

In addition, since the issuance of the 2017 Warning Letter, we have secured other sites in our manufacturing network and have launched and distribute select products from those sites in the U.S.

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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 may identify forward-looking statements, although not all forward-looking statements contain such words.

These forward-looking statements may include statements with respect to the proposed separation of our Kidney Care business and other portfolio management activities we may undertake in the future, the costs, structure, and timing associated with strategic initiatives including the proposed separation, the viability and accuracy of anticipated benefits of our strategic actions, accounting estimates and assumptions (including with respect to goodwill and other intangible asset impairments), global economic conditions, litigation-related matters, future regulatory filings (or the withdrawal or resubmission of any pending submissions) and our R&D pipeline (including anticipated product approvals or clearances), sales from new product offerings, credit exposure to foreign governments, the adequacy of cash flows and credit facilities, 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, interest rate and credit risks, our net interest expense, the impact of inflation on our business, the impact of competition, future sales growth, business development activities, cost saving initiatives, future capital and R&D expenditures, future debt issuances and refinancings, the adequacy of tax provisions and reserves, the effective income tax rate, and all other statements that do not relate to historical facts.

These forward-looking statements may include statements with respect to the proposed separation of our Kidney Care business and other portfolio management activities we may undertake in the future, the costs, structure, and timing associated with strategic initiatives including the proposed separation, the viability and accuracy of anticipated benefits of our strategic actions, the expected growth rates for our segments, accounting estimates and assumptions (including with respect to goodwill and other intangible asset impairments), global economic conditions, litigation-related matters, future regulatory filings (or the withdrawal or resubmission of any pending submissions) and our R&D pipeline (including anticipated product approvals or clearances), sales from new product offerings, credit exposure to foreign governments, the adequacy of cash flows and credit facilities, 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, interest rate and credit risks, our net interest expense, the impact of inflation on our business, the impact of competition, future sales growth, business development activities, cost saving initiatives, future capital and R&D expenditures, future debt issuances and refinancings, the adequacy of tax provisions and reserves, the effective income 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.

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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:

our ability to execute and complete strategic initiatives, asset dispositions, and other transactions, including the proposed separation of our Kidney Care business, our plans to simplify our manufacturing footprint and the timing for such transactions, the ability to satisfy any applicable conditions, and the expected proceeds, consideration, and benefits;

• our ability to execute and complete strategic initiatives, asset dispositions, and other transactions, including the proposed separation of our Kidney Care business, our plans to simplify our manufacturing footprint and the timing for such transactions, the ability of the parties to secure any required regulatory approvals or satisfy any applicable conditions, and our ability to realize the expected proceeds, consideration, and benefits of these transactions (including with respect to any post-separation arrangements or cost savings initiatives);

• failure to accurately forecast or achieve our short-and long-term financial performance and goals (including with respect to our strategic initiatives and other actions) and related impacts on our liquidity;

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• our ability to successfully integrate acquisitions;

the impact of global economic conditions (including, among other things, inflation levels, interest rates, financial market volatility, banking crises, the potential for a recession, the war in Ukraine, the conflict in the Middle East (including recent attacks on merchant ships in the Red Sea), tensions amongst China, Taiwan, and the U.S.

and the potential for escalation of these conflicts, the related economic sanctions being imposed globally in response to the conflicts and potential trade wars and global public health crises, pandemics and epidemics, such as the COVID-19 pandemic, or the anticipation of any of the foregoing, on our operations and our employees, customers, suppliers, and foreign governments in countries in which we operate;

downgrades to our credit ratings or ratings outlooks, and the related impact on our funding costs and liquidity;

• the impact of global economic conditions (including, among other things, inflation levels, interest rates, financial market volatility, banking crises, the potential for a recession, the war in Ukraine, the conflict in the

Middle East (including recent attacks on merchant ships in the Red Sea), tensions amongst China, Taiwan, and the U.S.

and the potential for escalation of these conflicts, the related economic sanctions being imposed globally in response to the conflicts and potential trade wars and global public health crises, pandemics and epidemics, or the anticipation of any of the foregoing, on our operations and our employees, customers, suppliers, and foreign governments in countries in which we operate;

• downgrades to our credit ratings or ratings outlooks, or withdrawals by rating agencies from rating us and our indebtedness, and the related impact on our funding costs and liquidity;

• the impact of any goodwill, intangible asset, or other long-lived asset impairments on our operating results;

• product development risks, including satisfactory clinical performance and obtaining and maintaining required regulatory approvals (including as a result of evolving regulatory requirements or the withdrawal or resubmission of any pending applications), the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;

product quality or patient safety issues leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales, including the focus on evaluating product portfolios for the potential presence or formation of nitrosamines;

• regulatory agency inspections, product quality or patient safety issues leading to product recalls, withdrawals, labeling changes, launch delays, warning letters, import bans, denial of import certifications, sanctions, seizures, litigation, or declining sales, including the focus on evaluating product portfolios for the potential presence or formation of nitrosamines;

• 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;

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• our ability to finance and develop new products or enhancements on commercially acceptable terms or at all;

loss of key employees, the occurrence of labor disruptions (including as a result of labor disagreements under bargaining agreements or national trade union agreements or disputes with works councils) or the inability to attract, develop, retain, and engage employees;

• loss of key employees (including those involved with any key strategic actions), the occurrence of labor disruptions (including as a result of labor disagreements under bargaining agreements or national trade union agreements or disputes with works councils) or the inability to attract, develop, retain, and engage employees;

• failures with respect to our quality, compliance, or ethics programs;

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• the ability to protect or enforce our patents or other proprietary rights (including trademarks, copyrights, trade secrets, and know-how) or where the patents of third parties prevent or restrict our manufacture, sale, or use of affected products or technology;

the impact of any goodwill, intangible asset, or other long-lived asset impairments on our operating results;

• fluctuations in foreign exchange and interest rates;

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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