Baxter(BAX) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Baxter International Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (unaudited) This section presents Baxter International Inc.'s unaudited condensed consolidated financial statements and comprehensive notes for the period Condensed Consolidated Balance Sheets This table provides a snapshot of Baxter's financial position, detailing assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheets (in millions): | Metric | September 30, 2023 | December 31, 2022 | | :------------------------------------------------ | :------------------- | :------------------ | | Cash and cash equivalents | $5,788 | $1,718 | | Total current assets | $12,034 | $8,011 | | Total assets | $30,656 | $28,287 | | Total current liabilities | $6,209 | $4,745 | | Total liabilities | $22,490 | $22,392 | | Total Baxter stockholders' equity | $8,101 | $5,833 | | Total equity | $8,166 | $5,895 | Condensed Consolidated Statements of Income (Loss) This table presents Baxter's financial performance, including net sales, gross margin, operating income, and net income (loss) for the specified periods Condensed Consolidated Statements of Income (Loss) (in millions, except per share data): | Metric (Three months ended Sep 30) | 2023 | 2022 | | :--------------------------------- | :--- | :--- | | Net sales | $3,708 | $3,609 | | Gross margin | $1,117 | $1,045 | | Operating income (loss) | $(51) | $(2,880) | | Loss from continuing operations before income taxes | $(172) | $(3,045) | | Income (loss) from continuing operations | $51 | $(2,991) | | Income from discontinued operations, net of tax | $2,460 | $57 | | Net income (loss) | $2,511 | $(2,934) | | Net income (loss) attributable to Baxter stockholders | $2,508 | $(2,937) | | Diluted EPS from continuing operations | $0.09 | $(5.94) | | Diluted EPS from discontinued operations | $4.83 | $0.11 | | Net income (loss) per common share - Diluted | $4.93 | $(5.83) | Condensed Consolidated Statements of Comprehensive Income (Loss) This table details Baxter's comprehensive income (loss), including other comprehensive income (loss) from continuing and discontinued operations Condensed Consolidated Statements of Comprehensive Income (Loss) (in millions): | Metric (Three months ended Sep 30) | 2023 | 2022 | | :--------------------------------- | :--- | :--- | | Income (loss) from continuing operations | $51 | $(2,991) | | Total other comprehensive loss from continuing operations, net of tax | $(63) | $(243) | | Comprehensive loss from continuing operations | $(12) | $(3,234) | | Income from discontinued operations, net of tax | $2,460 | $57 | | Total other comprehensive income (loss) from discontinued operations | $161 | $(44) | | Comprehensive income from discontinued operations | $2,621 | $13 | | Comprehensive income (loss) | $2,609 | $(3,221) | | Comprehensive income (loss) attributable to Baxter stockholders | $2,606 | $(3,224) | Condensed Consolidated Statements of Changes in Equity This table outlines the changes in Baxter's total equity, including net income, other comprehensive income, and dividends Condensed Consolidated Statements of Changes in Equity (in millions): | Metric (Nine months ended Sep 30, 2023) | Amount | | :-------------------------------------- | :----- | | Balance as of January 1, 2023 | $5,895 | | Net income | $2,417 | | Other comprehensive income (loss) | $117 | | Stock issued under employee benefit plans and other | $186 | | Dividends declared on common stock | $(446) | | Change in noncontrolling interests | $(3) | | Balance as of September 30, 2023 | $8,166 | Condensed Consolidated Statements of Cash Flows This table summarizes Baxter's cash flows from operating, investing, and financing activities for the specified periods Condensed Consolidated Statements of Cash Flows (in millions, Nine Months Ended September 30): | Metric | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Cash flows from operations - continuing operations | $1,097 | $594 | | Cash flows from operations - discontinued operations | $98 | $178 | | Cash flows from operations | $1,195 | $772 | | Cash flows from investing activities - continuing operations | $(489) | $(634) | | Cash flows from investing activities - discontinued operations | $3,932 | $(41) | | Cash flows from investing activities | $3,443 | $(675) | | Cash flows from financing activities | $(554) | $(1,319) | | Increase (decrease) in cash, cash equivalents and restricted cash | $4,070 | $(1,352) | | Cash, cash equivalents and restricted cash at end of period | $5,792 | $1,604 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. BASIS OF PRESENTATION The interim financial statements are unaudited and prepared under SEC rules, with Baxter planning a Kidney Care spinoff and having sold its BioPharma Solutions business - Baxter intends to separate its Kidney Care business into a new, publicly traded company, targeting completion by July 2024 or earlier[23] - Completed the sale of the BioPharma Solutions (BPS) business on September 29, 2023, receiving net pre-tax cash proceeds of $3.96 billion, with BPS reported as discontinued operations[24] - The company faces significant global supply chain challenges, including production delays, increased costs, and shortages of raw materials, exacerbated by global economic conditions and geopolitical events[25] 2. DISCONTINUED OPERATIONS Baxter completed the sale of its BioPharma Solutions (BPS) business for $3.96 billion, recognizing a $2.89 billion pre-tax gain, with results reclassified as discontinued operations - Sold BioPharma Solutions (BPS) business on September 29, 2023, to Advent International and Warburg Pincus[27] - Received cash proceeds of $3.96 billion from the BPS sale[27] - Recognized a pre-tax gain on the sale of $2.89 billion ($2.60 billion net of tax)[27] Income from Discontinued Operations, net of tax (in millions, Three months ended Sep 30): | Metric | 2023 | 2022 | | :----- | :--- | :--- | | Net sales | $191 | $164 | | Income from discontinued operations, net of tax | $2,460 | $57 | 3. SUPPLEMENTAL FINANCIAL INFORMATION This section details allowance for doubtful accounts, inventories, property, plant and equipment, and significant impairment charges Allowance for Doubtful Accounts (in millions): | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------ | :----------- | :----------- | | Balance at end of period | $132 | $114 | Inventories (in millions): | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------- | :----------- | :----------- | | Raw materials | $713 | $698 | | Work in process | $301 | $294 | | Finished goods | $1,859 | $1,687 | | Total Inventories | $2,873 | $2,679 | - Recognized an impairment charge of $243 million in Q2 2023 related to the decision to cease dialyzer production at the Opelika, Alabama manufacturing facility[41] - Recognized $267 million of long-lived asset impairment charges in Q3 2023 related to the HD business, including $190 million for manufacturing equipment/lease assets and $77 million for developed technology intangible assets[43] Interest Expense, Net (in millions, Three months ended Sep 30): | Metric | 2023 | 2022 | | :------------------ | :--- | :--- | | Interest expense, net | $128 | $104 | 4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET Goodwill remained stable at $6,407 million as of September 30, 2023, with no new impairments in 2023, following significant impairments in Q3 2022 Goodwill by Segment (in millions): | Segment | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Medical Products and Therapies | $1,193 | — | | Healthcare Systems and Technologies | $3,981 | $3,988 | | Pharmaceuticals | $541 | — | | Kidney Care | $692 | — | | Total Goodwill | $6,407 | $6,452 | - No goodwill impairments were identified in Q3 2023 after reallocating goodwill to new reporting units following a segment change[51] - Recognized total pre-tax goodwill impairment charges of $2.79 billion in Q3 2022, primarily related to the Hillrom acquisition, due to macroeconomic conditions and reduced earnings forecasts[52] Other Intangible Assets, Net (in millions): | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Gross other intangible assets | $9,274 | $9,376 | | Accumulated amortization | $(3,044) | $(2,583) | | Other intangible assets, net | $6,230 | $6,793 | - Recognized pre-tax impairment charges of $332 million in Q3 2022 for indefinite-lived intangible assets (Hillrom and Welch Allyn trade names) from the Hillrom acquisition[59] 5. FINANCING ARRANGEMENTS Baxter amended credit facilities in Q1 2023, had $514 million in commercial paper outstanding, and later repaid $950 million of term loan and all commercial paper using BPS sale proceeds - Amended credit agreements in Q1 2023 to increase the maximum net leverage ratio for the four fiscal quarters ending March 31, 2023, June 30, 2023, September 30, 2023, and December 31, 2023[61] - U.S. dollar-denominated revolving credit facility has a capacity of $2.50 billion and Euro-denominated revolving credit facility has a capacity of €200 million, with no outstanding borrowings as of September 30, 2023[62] Commercial Paper Outstanding (in millions): | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------ | :----------- | :----------- | | Commercial paper outstanding | $514 | $299 | | Weighted-average interest rate | 5.53% | 4.75% | | Original weighted-average term (days) | 13 | 32 | - In October 2023, repaid an additional $950 million under the term loan facility and the entire $514 million of outstanding commercial paper borrowings using proceeds from the sale of the BPS business[63] 6. COMMITMENTS AND CONTINGENCIES Baxter's total recorded reserves for legal and environmental matters were $33 million as of September 30, 2023, with recent settlements and ongoing investigations Total Recorded Reserves for Legal and Environmental Matters (in millions): | Date | Amount | | :---------------- | :----- | | September 30, 2023 | $33 | | December 31, 2022 | $28 | Environmental Reserves (in millions): | Date | Amount | | :---------------- | :----- | | September 30, 2023 | $16 | | December 31, 2022 | $19 | - Voluntarily dismissed from the MDL In re: National Prescription Opiate Litigation on July 17, 2023, without prejudice[70] - Settled a lawsuit in Q3 2023 related to ethylene oxide exposure at the Mountain Home, Arkansas manufacturing facility for an amount not material to financial results[71] - Cooperating with DHHS and DOJ investigations regarding alleged violations of the False Claims Act and Anti-Kickback Statute related to the Hillrom acquisition[72] - Named in a class action complaint in July 2023 alleging violations of the Securities Exchange Act of 1934 related to supply chain and financial guidance[74] 7. STOCKHOLDERS' EQUITY Cash dividends declared per share were $0.29 for Q3 2023, and Baxter did not repurchase shares, with $1.30 billion remaining under authorization Cash Dividends Declared per Share: | Period | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Three months ended September 30 | $0.29 | $0.29 | | Nine months ended September 30 | $0.87 | $0.86 | - Did not repurchase any shares under the share repurchase program during the first nine months of 2023[76] - Had $1.30 billion remaining available under the share repurchase authorization as of September 30, 2023[77] 8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income (loss) improved to $(3,716) million as of September 30, 2023, driven by net other comprehensive income and positive currency translation adjustments Accumulated Other Comprehensive Income (Loss) (AOCI) (in millions): | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Balance as of period end | $(3,716) | $(3,833) | | Net other comprehensive income (loss) (Nine months ended Sep 30, 2023) | $117 | - | - Reclassification of cumulative translation loss to earnings from BPS divestiture amounted to $(185) million (net of tax) for the nine months ended September 30, 2023[83] 9. REVENUES Baxter recognizes revenue primarily at a point in time, with $7.35 billion allocated to remaining performance obligations, 10% expected in 2023, and 45% in 2024 - As of September 30, 2023, $7.35 billion of transaction price was allocated to remaining performance obligations for contracts with an original duration of more than one year[88] - Approximately 10% of remaining performance obligations are expected to be recognized as revenue over the remainder of 2023, and 45% in 2024[88] Total Lease Revenue (in millions, Three months ended Sep 30): | Metric | 2023 | 2022 | | :---------------- | :--- | :--- | | Sales-type lease revenue | $2 | $3 | | Operating lease revenue | $124 | $145 | | Variable lease revenue | $12 | $9 | | Total lease revenue | $138 | $157 | 10. BUSINESS OPTIMIZATION CHARGES Baxter incurred $81 million in business optimization charges in Q3 2023 and $508 million for the first nine months, primarily for employee termination costs and asset impairments Total Business Optimization Charges (in millions): | Period | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Three months ended September 30 | $81 | $73 | | Nine months ended September 30 | $508 | $196 | - For the nine months ended September 30, 2023, restructuring charges included $111 million for employee termination costs related to the new operating model and $253 million (including $243 million asset impairment) for ceasing dialyzer production at a manufacturing facility[104] - Expects to incur additional pre-tax costs of approximately $25 million for the implementation of business optimization programs[100] 11. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS Net periodic pension cost was zero for Q3 and the first nine months of 2023, a decrease from 2022, with OPEB cost also showing improvement Net Periodic Pension Cost (in millions, Nine months ended Sep 30): | Metric | 2023 | 2022 | | :----------------------- | :--- | :--- | | Net periodic pension cost | $0 | $47 | Net Periodic OPEB Cost (Income) (in millions, Nine months ended Sep 30): | Metric | 2023 | 2022 | | :----------------------------- | :---- | :--- | | Net periodic OPEB cost (income) | $(12) | $(6) | 12. INCOME TAXES Baxter's effective income tax rate was 129.7% for Q3 2023 and 58.4% for the first nine months, significantly higher due to earnings mix, impairments, and a valuation allowance Effective Income Tax Rate: | Period | 2023 | 2022 | | :-------------------------------- | :----- | :--- | | Three months ended September 30 | 129.7% | 1.8% | | Nine months ended September 30 | 58.4% | 0.5% | - The higher effective tax rate in 2023 was primarily driven by the jurisdictional mix of global earnings, long-lived asset impairments, significance of non-deductible items, and a $30 million valuation allowance for a deferred tax asset related to Swiss tax legislation[112][113] - The effective tax rate in 2022 was primarily attributable to non-deductible goodwill impairments[114] 13. EARNINGS PER SHARE Diluted EPS from continuing operations improved to $0.09 for Q3 2023, with total diluted EPS of $4.93 largely driven by discontinued operations income Diluted EPS (Three months ended Sep 30): | Metric | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Income (loss) from continuing operations per common share | $0.09 | $(5.94) | | Income from discontinued operations per common share | $4.83 | $0.11 | | Net income (loss) per common share | $4.93 | $(5.83) | Weighted-Average Number of Shares Outstanding (in millions, Three months ended Sep 30): | Metric | 2023 | 2022 | | :------- | :--- | :--- | | Basic | 507 | 504 | | Diluted | 509 | 504 | 14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Baxter uses derivative instruments like options, forwards, and cross-currency swaps to manage foreign exchange and interest rate risks, with $437 million in cash flow hedges as of September 30, 2023 - Manages foreign exchange and interest rate risks using derivative and nonderivative instruments[119][120] - Uses options, forwards, and cross-currency swaps for foreign exchange risk, and interest rate swaps for interest rate risk[123][126] - Notional amounts of foreign exchange contracts designated as cash flow hedges were $437 million as of September 30, 2023[125] - Had an accumulated pre-tax unrealized translation gain in AOCI of $105 million related to Euro-denominated senior notes designated as net investment hedges as of September 30, 2023[128] Undesignated Derivative Instruments Notional Amount (in millions): | Date | Amount | | :---------------- | :----- | | September 30, 2023 | $626 | | December 31, 2022 | $753 | 15. FAIR VALUE MEASUREMENTS Baxter's assets and liabilities measured at fair value totaled $99 million and $22 million respectively as of September 30, 2023, with a significant portion classified as Level 2 or Level 3 Assets Measured at Fair Value (in millions, as of September 30, 2023): | Asset Type | Total Fair Value | Level 1 | Level 2 | Level 3 | | :-------------------------- | :--------------- | :------ | :------ | :------ | | Foreign exchange contracts | $21 | — | $21 | — | | Available-for-sale debt securities | $39 | — | — | $39 | | Marketable equity securities | $39 | $39 | — | — | | Total Assets | $99 | $39 | $21 | $39 | Liabilities Measured at Fair Value (in millions, as of September 30, 2023): | Liability Type | Total Fair Value | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :--------------- | :------ | :------ | :------ | | Foreign exchange contracts | $3 | — | $3 | — | | Contingent payments related to acquisitions | $19 | — | — | $19 | | Total Liabilities | $22 | — | $3 | $19 | - Recognized $18 million of impairments of equity investments without readily determinable fair values and a $5 million impairment of a convertible debt investment during the first nine months of 2023[156] 16. SEGMENT INFORMATION In Q3 2023, Baxter reorganized into four new segments, with total net sales increasing 3% to $3,708 million and segment operating income reaching $570 million - Implemented a new operating model in Q3 2023, creating four new segments: Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals, and Kidney Care[157] Total Baxter Net Sales (in millions, Three Months Ended September 30): | Metric | 2023 | 2022 | Percent change (actual) | Percent change (constant currency) | | :----------- | :--- | :--- | :---------------------- | :--------------------------------- | | United States | $1,766 | $1,758 | 0% | 0% | | Emerging markets | $852 | $820 | 4% | 3% | | Rest of world | $1,090 | $1,031 | 6% | 3% | | Total net sales | $3,708 | $3,609 | 3% | 2% | Segment Operating Income (in millions, Three months ended September 30, 2023): | Segment | Operating Income | % of Segment Net Sales | | :-------------------------------- | :--------------- | :--------------------- | | Medical Products and Therapies | $245 | 19.5% | | Healthcare Systems and Technologies | $115 | 15.5% | | Pharmaceuticals | $108 | 18.6% | | Kidney Care | $96 | 8.7% | | Other | $6 | - | | Total | $570 | - | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Baxter's financial condition and results of operations, covering strategic actions, operational factors, detailed financial results, liquidity, and accounting policies RECENT STRATEGIC ACTIONS Baxter is pursuing a Kidney Care spinoff by July 2024 and completed the BioPharma Solutions sale for $3.96 billion, aiming to enhance operational effectiveness and stockholder value - Announced a proposed spinoff of the Kidney Care business into an independent publicly traded company, expected by July 2024 or earlier[169][170] - Completed the sale of the BioPharma Solutions (BPS) business on September 29, 2023, receiving cash proceeds of $3.96 billion[171] - Implemented a new operating model in Q3 2023 to simplify operations and better align manufacturing and supply chain to commercial activities, resulting in new segments[173] - Expects to incur significant separation-related costs for the remainder of 2023 and the first half of 2024 in connection with the proposed spinoff[172] FACTORS AFFECTING OUR RESULTS OF OPERATIONS Baxter continues to face significant global supply chain challenges, macroeconomic pressures, and geopolitical uncertainties, which negatively impact sales and increase operating costs, while regulatory compliance remains critical - Experienced significant global supply chain challenges, including production delays, increased costs, and shortages of raw materials (resins, electromechanical devices), and higher transportation costs[174] - High inflation rates and global economic conditions have led to higher interest rates, shipping costs, labor costs, and other expenses, potentially impacting profitability and sales[178] - Geopolitical events, such as the wars in Ukraine, Israel, and Gaza, increase economic and political uncertainty, potentially affecting business[176] - Operations are subject to extensive regulation by government agencies, with non-compliance potentially leading to product recalls, injunctions, monetary sanctions, and restrictions on operations[179] RESULTS OF OPERATIONS Baxter reported a net income attributable to stockholders of $2.51 billion for Q3 2023, a significant improvement from a $(2.94) billion loss in Q3 2022, largely driven by a $2.89 billion pre-tax gain from the BPS divestiture Net Income (Loss) Attributable to Baxter Stockholders (in millions, Three months ended Sep 30): | Metric | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Net income (loss) attributable to Baxter stockholders | $2,508 | $(2,937) | | Diluted EPS | $4.93 | $(5.83) | Consolidated Net Sales (in millions, Three Months Ended September 30): | Geographic Region | 2023 | 2022 | Percent change (actual) | | :---------------- | :--- | :--- | :---------------------- | | United States | $1,766 | $1,758 | 0% | | Emerging markets | $852 | $820 | 4% | | Rest of world | $1,090 | $1,031 | 6% | | Total net sales | $3,708 | $3,609 | 3% | Gross Margin and Expense Ratios (Three months ended Sep 30): | Metric | 2023 | 2022 | | :---------- | :--- | :--- | | Gross margin | 30.1% | 29.0% | | SG&A | 27.0% | 26.1% | | R&D | 4.5% | 4.2% | - Income from discontinued operations, net of tax, was $2.46 billion in Q3 2023, primarily driven by the $2.89 billion pre-tax gain from the BPS business sale[233] Special Items This section details the impact of special items on gross margin, SG&A expenses, and income tax expense for the reported periods Special Items Impact on Gross Margin (in millions, Three months ended Sep 30): | Item | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Intangible asset amortization expense | $(111) | $(110) | | Business optimization items | $(26) | $(13) | | Long-lived asset impairments | $(267) | $(332) | | Total Special Items | $(429) | $(485) | | Impact on Gross Margin Ratio | (11.6 pts) | (13.4 pts) | Special Items Impact on SG&A Expenses (in millions, Three months ended Sep 30): | Item | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Intangible asset amortization expense | $51 | $58 | | Business optimization items | $50 | $57 | | Separation-related costs | $67 | — | | Legal matters | $13 | — | | Total Special Items | $182 | $126 | | Impact on SG&A Ratio | 4.9 pts | 3.5 pts | Special Items Impact on Income Tax Expense (in millions, Three months ended Sep 30): | Item | 2023 | 2022 | | :-------------------------- | :---- | :---- | | Tax matters | $(196) | $5 | | Tax effects of special items | $(124) | $(162) | | Total Special Items | $(320) | $(157) | | Impact on Effective Tax Rate | 107.9 pts | (20.2 pts) | CONSOLIDATED NET SALES This section provides a breakdown of Baxter's consolidated net sales by geographic region for the three and nine months ended September 30 Consolidated Net Sales (in millions, Three Months Ended September 30): | Geographic Region | 2023 | 2022 | Percent change (actual) | Percent change (constant currency) | | :---------------- | :--- | :--- | :---------------------- | :--------------------------------- | | United States | $1,766 | $1,758 | 0% | 0% | | Emerging markets | $852 | $820 | 4% | 3% | | Rest of world | $1,090 | $1,031 | 6% | 3% | | Total net sales | $3,708 | $3,609 | 3% | 2% | Consolidated Net Sales (in millions, Nine Months Ended September 30): | Geographic Region | 2023 | 2022 | Percent change (actual) | Percent change (constant currency) | | :---------------- | :---- | :---- | :---------------------- | :--------------------------------- | | United States | $5,183 | $5,170 | 0% | 0% | | Emerging markets | $2,447 | $2,355 | 4% | 6% | | Rest of world | $3,298 | $3,236 | 2% | 4% | | Total net sales | $10,928 | $10,761 | 2% | 3% | - Foreign currency favorably impacted net sales by 1 percentage point during Q3 2023, primarily due to the weakening of the U.S. Dollar relative to the Euro, British Pound, and Mexican Peso[191] NET SALES BY SEGMENT This section details Baxter's net sales performance across its newly organized segments: Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals, and Kidney Care Medical Products and Therapies This segment's net sales increased, driven by strong demand for infusion systems and advanced surgery products Medical Products and Therapies Net Sales (in millions, Three Months Ended September 30): | Product Category | 2023 | 2022 | Percent change (actual) | Percent change (constant currency) | | :-------------------------------- | :--- | :--- | :---------------------- | :--------------------------------- | | Infusion Therapies and Technologies | $1,003 | $956 | 5% | 4% | | Advanced Surgery | $255 | $247 | 3% | 3% | | Total Medical Product and Therapies | $1,258 | $1,203 | 5% | 4% | - Infusion Therapies and Technologies sales growth driven by strong demand for infusion systems and administration sets, and growth in IV solutions and international nutrition compounding[195] - Advanced Surgery sales growth driven by continued recovery in surgical procedures, partially offset by temporary supply constraints[196] Healthcare Systems and Technologies This segment experienced mixed sales, with growth in Front Line Care offsetting declines in Care and Connectivity Solutions Healthcare Systems and Technologies Net Sales (in millions, Three Months Ended September 30): | Product Category | 2023 | 2022 | Percent change (actual) | Percent change (constant currency) | | :-------------------------- | :--- | :--- | :---------------------- | :--------------------------------- | | Care and Connectivity Solutions | $443 | $456 | (3)% | (4)% | | Front Line Care | $301 | $279 | 8% | 8% | | Total Healthcare Systems and Technologies | $744 | $735 | 1% | 0% | - Care and Connectivity Solutions sales decreased due to lower demand for hospital beds and lower rental revenues, attributed to capital spending constraints at customers[200] - Front Line Care sales increased due to increased demand for physical assessment tools, respiratory health products, and cardiology products, benefiting from backlog reductions[201] Pharmaceuticals This segment's net sales grew significantly, primarily due to strong performance in injectables, anesthesia, and drug compounding services Pharmaceuticals Net Sales (in millions, Three Months Ended September 30): | Product Category | 2023 | 2022 | Percent change (actual) | Percent change (constant currency) | | :------------------------ | :--- | :--- | :---------------------- | :--------------------------------- | | Injectables and Anesthesia | $351 | $325 | 8% | 7% | | Drug Compounding | $229 | $200 | 15% | 13% | | Total Pharmaceuticals | $580 | $525 | 10% | 9% | - Injectables and Anesthesia sales growth driven by U.S. injectable products, including recent launches of Zosyn, Bendamustine, and Norepinephrine[204] - Drug Compounding sales increased due to increased demand for international pharmacy compounding services[205] Kidney Care This segment saw slight sales growth, with acute therapies offsetting a decline in chronic therapies due to market challenges Kidney Care Net Sales (in millions, Three Months Ended September 30): | Product Category | 2023 | 2022 | Percent change (actual) | Percent change (constant currency) | | :---------------- | :--- | :--- | :---------------------- | :--------------------------------- | | Chronic Therapies | $921 | $934 | (1)% | (3)% | | Acute Therapies | $188 | $166 | 13% | 12% | | Total Kidney Care | $1,109 | $1,100 | 1% | 0% | - Chronic Therapies sales decreased due to lower sales in China (government procurement, COVID-19 impact) and termination of a U.S. distribution agreement, partially offset by patient growth in PD and pricing initiatives[208] - Acute Therapies sales increased due to strong demand for CRRT offerings[209] Other This section reports on other revenues, which decreased due to lower contract manufacturing and a terminated royalty arrangement Other Revenues (in millions, Three Months Ended September 30): | Metric | 2023 | 2022 | | :----------- | :--- | :--- | | Other revenues | $17 | $46 | - Decrease in other revenues reflects lower contract manufacturing volume and the termination of a royalty arrangement[210] COSTS AND EXPENSES This section analyzes Baxter's gross margin, selling, general and administrative (SG&A), and research and development (R&D) expense ratios Gross Margin and Expense Ratios This table presents Baxter's gross margin, SG&A, and R&D expense ratios for the three months ended September 30 Gross Margin and Expense Ratios (Three months ended Sep 30): | Metric | 2023 | 2022 | | :---------- | :--- | :--- | | Gross margin | 30.1% | 29.0% | | SG&A | 27.0% | 26.1% | | R&D | 4.5% | 4.2% | Gross Margin Gross margin improved to 30.1% in Q3 2023, though adverse raw material inflation impacted the ratio excluding special items - Gross margin ratio was 30.1% in Q3 2023, with special items having an unfavorable impact of 11.6 percentage points[212] - Excluding special items, the gross margin ratio decreased in Q3 2023 primarily due to adverse cost impacts of raw materials inflation[213] SG&A SG&A expenses increased to 27.0% of net sales in Q3 2023, with special items contributing significantly to the rise - SG&A expenses ratio was 27.0% in Q3 2023, with special items having an unfavorable impact of 4.9 percentage points[214] - Excluding special items, the SG&A expenses ratio decreased in Q3 2023 due to savings from restructuring actions, partially offset by higher bonus accruals[215] R&D R&D expenses increased to 4.5% of net sales in Q3 2023, driven by higher project-related expenditures, especially in Healthcare Systems and Technology - R&D expenses ratio was 4.5% in Q3 2023, with special items having an unfavorable impact of 0.2 percentage points[216] - Excluding special items, the R&D expenses ratio increased in Q3 2023 due to increased project-related expenditures, particularly in the Healthcare Systems and Technology segment[217] Business Optimization Items This section details business optimization charges, including restructuring costs and expenses for implementing new operating models Business Optimization Charges (in millions, Nine months ended Sep 30): | Metric | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Restructuring charges | $461 | $150 | | Costs to implement business optimization programs | $47 | $46 | | Total business optimization charges | $508 | $196 | - Restructuring charges for the nine months ended September 30, 2023, included $111 million for employee termination costs related to the new operating model and $253 million (including $243 million asset impairment) for ceasing dialyzer production at a manufacturing facility[220] - Expects to incur additional pre-tax costs of approximately $25 million for ongoing business optimization programs[221] Goodwill Impairments This section discusses goodwill impairment charges, noting a significant $2.79 billion charge in Q3 2022 related to the Hillrom acquisition - Recognized total pre-tax goodwill impairment charges of $2.79 billion in Q3 2022, primarily related to the Hillrom acquisition, driven by macroeconomic conditions and reduced earnings forecasts[223] - Further adverse changes to macroeconomic conditions or earnings forecasts could lead to additional material goodwill or intangible asset impairment charges in future periods[224] Other Operating Expense (Income), Net This section reports on other operating expense (income), net, including gains from contingent consideration and losses from product divestitures Other Operating Expense (Income), Net (in millions): | Period | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Three months ended September 30 | $0 | $48 | | Nine months ended September 30 | $(14) | $20 | - Income in the first nine months of 2023 was comprised of gains from changes in the fair values of contingent consideration arrangements[225] - Expense in Q3 2022 included a $54 million loss on a product divestiture arrangement[225] Interest Expense, Net Interest expense increased in 2023 due to higher rates on floating rate debt, with future decreases expected from debt repayment Interest Expense, Net (in millions): | Period | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Three months ended September 30 | $128 | $104 | | Nine months ended September 30 | $369 | $278 | - The increase in interest expense in 2023 was driven by higher interest rates on floating rate debt, partially offset by net repayments[226] - Net interest expense is expected to decrease in future periods due to additional interest income and debt repayment from BPS sale proceeds[227] Other (Income) Expense, Net This section details other income (expense), net, influenced by pension benefits, marketable equity securities, and foreign exchange losses Other (Income) Expense, Net (in millions): | Period | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Three months ended September 30 | $(7) | $61 | | Nine months ended September 30 | $33 | $1 | - Q3 2023 net income was primarily driven by pension and other postretirement benefits and increases in marketable equity securities fair value, offset by foreign exchange losses[228] - Q3 2022 net expense was primarily due to the reclassification of a cumulative translation loss from AOCI to earnings due to the substantial liquidation of operations in Argentina[228] Income Taxes Baxter's effective income tax rate significantly increased in 2023 due to global earnings mix, asset impairments, and non-deductible items Effective Income Tax Rate: | Period | 2023 | 2022 | | :-------------------------------- | :----- | :--- | | Three months ended September 30 | 129.7% | 1.8% | | Nine months ended September 30 | 58.4% | 0.5% | - The higher effective tax rate in 2023 was primarily driven by the jurisdictional mix of global earnings, long-lived asset impairments, non-deductible items, and a $30 million valuation allowance for a deferred tax asset related to Swiss tax legislation[230] - The effective tax rate in 2022 was primarily attributable to non-deductible goodwill impairments[231] Discontinued Operations Income from discontinued operations significantly increased in 2023, primarily due to the pre-tax gain from the BPS business sale - Completed the sale of the BPS business on September 29, 2023, with financial results reported as discontinued operations[232] Income from Discontinued Operations, net of tax (in millions): | Period | 2023 | 2022 | | :-------------------------------- | :----- | :--- | | Three months ended September 30 | $2,460 | $57 | | Nine months ended September 30 | $2,559 | $192 | - The increase in current year periods was primarily driven by the $2.89 billion pre-tax gain from the sale of the BPS business ($2.60 billion net of tax)[233] SEGMENT OPERATING INCOME This section provides a breakdown of operating income across Baxter's four new segments for the three months ended September 30 Segment Operating Income (in millions, Three months ended September 30): | Segment | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Medical Products and Therapies | $245 | $257 | | Healthcare Systems and Technologies | $115 | $108 | | Pharmaceuticals | $108 | $82 | | Kidney Care | $96 | $103 | | Other | $6 | $17 | | Total | $570 | $567 | - Medical Products and Therapies segment operating income decreased in Q3 2023 due to higher SG&A and R&D expenses, partially offset by higher sales[238] - Healthcare Systems and Technologies segment operating income increased in Q3 2023 due to increased sales and improved gross margins from favorable product mix and component availability[239] - Pharmaceuticals segment operating income increased in Q3 2023 due to gross profit from higher sales driven by recent product launches[240] - Kidney Care segment operating income decreased in Q3 2023 due to lower gross margins (raw materials inflation), almost entirely offset by lower operating expenses[241] Unallocated Corporate Costs This section explains that most global functional support and shared costs are now allocated to segments, with remaining corporate costs unallocated - Under the new operating model, most global functional support costs, overhead costs, and other shared costs are allocated to segments, with unallocated corporate costs representing remaining corporate costs and differences between actual and allocated amounts[243] LIQUIDITY AND CAPITAL RESOURCES Cash from continuing operations increased to $1.10 billion, with investing activities generating $3.44 billion, primarily from the BPS sale, which will be used for debt repayment Cash Flows (in millions, Nine months ended Sep 30): | Metric | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Cash flows from operations - continuing operations | $1,097 | $594 | | Cash flows from investing activities - continuing operations | $(489) | $(634) | | Cash flows from financing activities | $(554) | $(1,319) | - Cash provided by investing activities - discontinued operations included $3.96 billion from the sale of the BPS business in the first nine months of 2023[249] - Had $5.79 billion of cash and cash equivalents as of September 30, 2023[7] - Expects to use substantially all of the $3.70 billion estimated net after-tax cash proceeds from the BPS divestiture to pay down or retire certain short- and long-term indebtedness[255] - As of September 30, 2023, had $1.30 billion remaining available under its share repurchase authorization[251] CRITICAL ACCOUNTING POLICIES The valuation of goodwill and intangible assets is a critical accounting policy, with management closely monitoring the Care and Connectivity Solutions reporting unit for future impairment risks - The valuation of goodwill and intangible assets is identified as a critical accounting policy[259] - No goodwill impairment occurred for the Care and Connectivity Solutions (CCS) reporting unit in Q3 2023, but management is closely monitoring its performance due to lower customer orders and potential future impairment risks[260] - No significant changes in the application of critical accounting policies occurred during the first nine months of 2023[261] RECENT ACCOUNTING PRONOUNCEMENTS There are no new accounting standards issued but not yet effective that are expected to have a material impact on Baxter's condensed consolidated financial statements - No accounting standards issued but not yet effective are believed to have a material impact on the condensed consolidated financial statements[262] LEGAL CONTINGENCIES Baxter's legal contingencies, as detailed in Note 6, are not expected to materially adversely affect its consolidated financial position, despite inherent uncertainties - The outcome of legal proceedings is not expected to have a material adverse effect on the consolidated financial position[263] - Litigation is inherently uncertain, and material judgments or settlements may occur[263] CERTAIN REGULATORY MATTERS Baxter received a Warning Letter from the FDA for its Ahmedabad facility in July 2023, to which the company has fully responded and implemented corrective actions - Received a Warning Letter from the U.S. Food and Drug Administration (FDA) on July 25, 2023, based on observations from a January 2023 inspection of the Ahmedabad facility[264] - Fully responded to the 2023 Warning Letter and implemented additional corrective and preventive actions, continuing to engage with the FDA[264] FORWARD-LOOKING INFORMATION This section highlights that the report contains forward-looking statements subject to various risks and uncertainties that could cause actual results to differ materially - The report includes forward-looking statements concerning strategic initiatives, financial performance, global economic conditions, regulatory matters, and other business aspects[265][266] - These statements are based on certain assumptions and analyses but are not guarantees of future events or financial results[267] - Actual future results and developments may differ materially due to various risks and uncertainties, many of which are beyond the company's control[267][268] Item 3. Quantitative and Qualitative Disclosures about Market Risk Baxter is exposed to currency risk from international revenues and uses derivative instruments to hedge these exposures, with a 10% U.S. Dollar weakening potentially changing foreign exchange contracts by $79 million - Primarily exposed to foreign exchange risk from revenues generated outside the United States, denominated in various foreign currencies[270] - Uses derivative and nonderivative financial instruments, mainly forward contracts, to hedge foreign exchange risk, but does not hedge the entire exposure[270][271] - A sensitivity analysis indicated that a uniform 10% weakening of the U.S. Dollar against all currencies would change the net pre-tax asset balance of foreign exchange contracts by $79 million as of September 30, 2023[273] - Began reporting the results of its Turkish subsidiary using highly inflationary accounting on April 1, 2022[275] Item 4. Controls and Procedures Management concluded that Baxter's disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting during the quarter - Management, with the participation of the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2023[278] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[279] PART II. OTHER INFORMATION This section provides additional information not included in the financial statements, covering legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note 6 in Part I, Item 1, which details Baxter's involvement in various legal matters, including environmental, general litigation, and ongoing investigations related to the Hillrom acquisition - Information on legal proceedings is incorporated by reference from Note 6 in Item 1[281] - The outcome of these legal proceedings is not expected to have a material adverse effect on the consolidated financial position[66] Item 1A. Risk Factors Management believes there have been no material changes to the risk factors previously disclosed in the 2022 Annual Report - No material changes to the risk factors previously disclosed in the 2022 Annual Report[282] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities Baxter did not repurchase any shares under its $1.30 billion remaining share repurchase authorization during Q3 2023 - No shares were repurchased under the share repurchase authority during the third quarter of 2023[282] - Had $1.30 billion remaining available under the share repurchase authorization as of September 30, 2023, with no expiration date[282] Item 5. Other Information This section notes that certain officers and directors participate in employee stock plans and may sell shares to cover taxes or exercise options - Jeanne Mason, Chief Human Resources Officer, modified her Rule 10b5-1(c) trading plan on September 6, 2023, to sell 218,731 shares[284] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including certifications from the CEO and CFO, XBRL documents, and an offer letter for Joel Grade - Includes certifications of the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2)[286] - Includes XBRL Instance Document and related taxonomy extension documents (Exhibits 101.INS, SCH, CAL, LAB, PRE, DEF)[286] - Includes Offer Letter for Joel Grade (Exhibit 10.1)[286] Signature This section confirms the report's signing by Joel T. Grade, Executive Vice President and Chief Financial Officer, on November 2, 2023 - The report was signed by Joel T. Grade, Executive Vice President and Chief Financial Officer, on November 2, 2023[290]