Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following commentary should be read in conjunction with the consolidated financial statements and accompanying notes.

EXECUTIVE OVERVIEW

Restatement of Previously Issued Consolidated Financial Statements

We have restated our previously issued consolidated financial statements contained in this Annual Report on Form 10-K. Refer to the “Explanatory Note” preceding Item 1, Business, for background on the restatement, the periods impacted, control considerations, and other information. In addition, we have restated certain previously reported financial information as of December 31, 2018 and for the fiscal years ended December 31, 2018 and December 31, 2017 in this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to information within the Results of Operations section. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our consolidated financial statements.

Description of the Company and Business Segments

We manage our business based on three geographic segments: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific). Each of our segments provides a broad portfolio of essential healthcare products including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. Our global footprint and the critical nature of our products and services play a key role in expanding access to healthcare in emerging and developed countries. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and patients at home under physician supervision.

For financial information about our segments, see Note 18 in Item 8 of this Annual Report on Form 10-K.

Recent Business Combinations and Asset Acquisitions

Cheetah Medical

In October 2019, we acquired 100 percent of Cheetah Medical, Inc. (Cheetah) for total upfront cash consideration of $195 million, net of cash acquired, with the potential for additional cash consideration, up to $40 million, based on clinical and commercial milestones for which the acquisition date fair value was $18 million. Cheetah is a leading provider of hemodynamic monitoring technologies. Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisition of Cheetah.

Recothrom and Preveleak

In March 2018, we acquired two hemostat and sealant products from Mallinckrodt plc: RECOTHROM Thrombin topical (Recombinant), the first and only stand-alone recombinant thrombin, and PREVELEAK Surgical Sealant, which is used in vascular reconstruction. The purchase price included an upfront payment of approximately $163 million and potential contingent payments in the future. Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisition of the RECOTHROM and PREVELEAK products.

Claris Injectables Limited

In July 2017, we acquired 100 percent of Claris Injectables Limited (Claris), a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of approximately $629 million, net of cash acquired. Through the acquisition, we added capabilities in production of essential generic injectable medicines, such as anesthesia and analgesics, renal, anti-infectives and critical care in a variety of presentations including bags, vials and ampoules. Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisition of Claris.

Seprafilm Adhesion Barrier

In December 2019, we entered into a definitive agreement to acquire Seprafilm Adhesion Barrier (Seprafilm) from Sanofi. The transaction closed in February 2020 and we paid approximately $345 million for the acquired assets, subject to a post-close adjustment. Seprafilm is indicated for use in patients undergoing abdominal or pelvic laparotomy as an adjunct intended to reduce the incidence, extent and severity of postoperative adhesions between the abdominal wall and the underlying viscera such as omentum, small bowel, bladder, and stomach, and between the uterus and surrounding structures such as tubes and ovaries, large bowel, and bladder. As the acquisition was completed after December 31, 2019, our consolidated financial statements do not include the financial condition or results of operations of Seprafilm in any of the periods presented herein.

Financial Results

Our global net sales totaled $11.4 billion in 2019, an increase of 2% over 2018 on a reported basis and 5% on a constant currency basis. International sales totaled $6.5 billion in 2019, an increase of 3% compared to 2018 on a reported basis and 7% on a constant currency basis. Sales in the United States totaled $4.8 billion in 2019, an increase of 2% compared to 2018. Refer to the Net Sales discussion in the Results of Operations section below for more information related to changes in net sales on a constant currency basis.

Our income from continuing operations totaled $1.0 billion, or $1.93 per diluted share, in 2019. Income from continuing operations in 2019 included special items which resulted in a net decrease to income from continuing operations of $716 million, or $1.38 per diluted share. Our special items are discussed in the Results of Operations section below.

Our financial results included R&D expenses totaling $595 million in 2019, which reflects our focus on balancing increased investments to support our new product pipeline with efforts to optimize overall R&D spending.

Our financial position remains strong, with operating cash flows from continuing operations totaling $2.1 billion in 2019. We have continued to execute on our disciplined capital allocation framework, which is designed to optimize stockholder value creation through reinvestment in our businesses, dividends and share repurchases, as well as acquisitions and other business development initiatives as discussed in the Strategic Objectives section below.

Capital expenditures totaled $696 million in 2019 as we continue to invest across our businesses to support future growth, including additional investments in support of new and existing product capacity expansions. Our investments in capital expenditures in 2019 were focused on projects that improve production efficiency and enhance manufacturing capabilities to support our strategy of geographic expansion with select investments in growing markets.

We also continued to return value to our stockholders in the form of dividends. During 2019, we paid cash dividends to our stockholders totaling $423 million. Additionally, in 2019 we repurchased 16.5 million shares through cash repurchases pursuant to Rule 10b5-1 repurchase plans, an accelerated share repurchase plan and otherwise. For information on our share repurchase plans, see Note 10 in Item 8 of this Annual Report on Form 10-K.

Strategic Objectives

We continue to focus on several key objectives to successfully execute our long-term strategy to achieve sustainable growth and deliver enhanced stockholder value. Our diversified and broad portfolio of medical products that treat life-threatening acute or chronic conditions and our global presence are core components of our strategy to achieve these objectives. We are focused on three strategic factors as part of our pursuit of industry leading performance: optimizing our core portfolio globally; operational excellence focused on streamlining our cost structure and enhancing operational efficiency; and maintaining a disciplined and balanced approach to capital allocation.

Optimizing the Core Portfolio Globally

Our global product portfolio optimization strategy identifies products that we believe to have characteristics of core growth, products that we expect to provide us with a core return on capital, products that we intend to maintain or manage differently and products that we consider to be strategic bets. For products with core growth characteristics, we look to invest for long-term, higher margin growth. For products that we expect to generate a core return on capital, we seek to optimize our return on investment and to maintain or enhance our market position. For products that we intend to maintain or manage differently, we look to sustain or reposition our underlying investment. Finally, we are evaluating our market position and investment strategy for products that we consider to be strategic bets.

As part of our portfolio management strategy, we seek to optimize our position in product areas where we have a stable, profitable business model, identify and alter investments in products that have reached the end of their life cycles or for which market positions have evolved unfavorably. In the course of doing so, we expect to continue to reallocate capital to more promising opportunities or business groupings, as described above.

As part of this strategy, we are shifting our investments to drive innovation in product areas where we have compelling opportunities to serve patients and healthcare professionals while advancing the business and we are accelerating the pace in which we bring these advances to market. We are in the midst of launching several new products, geographic expansions and line extensions by 2023 including in such areas as chronic and acute renal care, smart pump technology, hospital pharmaceuticals and nutritionals, surgical sealants, and more. These comprise a mix of entirely new offerings, improvements on existing technologies, and the expansion of current products into new geographies.

Operational Excellence

We have undertaken a comprehensive review of all aspects of our operations and are actively implementing changes in line with our business goals. As part of our pursuit of improved margin performance, we are working to optimize our cost structure and we are critically assessing optimal support levels in light of our ongoing portfolio optimization efforts. We intend to continue to actively manage our cost structure to help ensure that we are committing resources to the highest value uses. Such high value activities include supporting innovation, building out the portfolio, expanding patient access and accelerating growth for our stockholders.

Maintaining Disciplined and Balanced Capital Allocation

Our capital allocation strategies include the following:

  • reinvest in the business by funding opportunities that are positioned to deliver sustainable growth, support our innovation efforts and improve margin performance;

  • return capital to stockholders through dividends, which we expect to meaningfully increase with earnings growth;

  • share repurchases; and

  • identify and pursue accretive merger and acquisition (M&A) opportunities.

Responsible Corporate Citizen

We strive for continued growth and profitability, while furthering our focus on acting as a responsible corporate citizen. To us, sustainability means creating lasting social, environmental and economic value by addressing the needs of our wide-ranging stakeholder base. Our comprehensive sustainability program is focused on areas in which we are uniquely positioned to make a positive impact. Priorities include providing employees a safe, healthy and inclusive workplace, fostering a culture that drives integrity, strengthening access to healthcare, enhancing math and science education, and driving environmental performance across the product life cycle, including development, manufacturing and transport. Along with the Baxter International Foundation, we provide financial support and product donations in support of critical needs, from assisting underserved communities to providing emergency relief for countries experiencing natural disasters.

Throughout 2019, we continued to implement a range of water conservation strategies and facility-based energy saving initiatives. In the area of product stewardship and life cycle management, we are pursuing efforts such as sustainable design and reduced packaging. We are also responding to the challenges of climate change through innovative greenhouse gas emissions-reduction programs, such as shifting to less carbon-intensive energy sources in manufacturing and transport. Additionally, we developed new long-term goals to drive continued environmental stewardship while creating healthier, more sustainable communities where our employees work and live.

Risk Factors

Our ability to sustain long-term growth and successfully execute the strategies discussed above depends in part on our ability to manage within an increasingly competitive and regulated environment and to address the other risk factors described in Item 1A of this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Special Items

The following table provides a summary of our special items and the related impact by line item on our results of continuing operations for 2019, 2018 and 2017.

years ended December 31 (in millions)201920182017
Gross Margin
Intangible asset amortization expense$(183)$(169)$(154)
Intangible asset impairment1(31)——
Business optimization items2(69)(49)(53)
Separation-related costs3——(1)
Product-related items4—6(17)
Acquisition and integration expenses5(30)(27)(8)
Litigation and contractual disputes6—(8)—
Hurricane Maria insurance recoveries (costs)7—32(32)
European medical devices regulation8(25)(6)—
Total Special Items$(338)$(221)$(265)
Impact on Gross Margin Ratio(3.0 pts)(2.0 pts)(2.5 pts)
Selling, General and Administrative (SG&A) Expenses
Business optimization items2$70$145$116
Separation-related costs3——18
Acquisition and integration expenses5202320
Litigation and contractual disputes6—221
Investigation-related costs138——
Historical reserve adjustments9——(12)
Total Special Items$98$170$163
Impact on SG&A Expense Ratio0.9 pts1.5 pts1.5 pts
R&D Expenses
Business optimization items2$45$26$—
Acquisition and integration expenses587—
European medical devices regulation8—3—
Total Special Items$53$36$—
Impact on R&D Expense Ratio0.4 pts0.3 pts0.0 pts
Other Operating Income, net
Acquisition and integration expenses5$(4)$—$—
Hurricane Maria insurance recoveries7(100)(10)—
Claris Settlement10—(80)—
Insurance recoveries from a legacy product-related matter11(37)——
Total Special Items$(141)$(90)$—
Other (Income) Expense, Net
Acquisition and integration activities5$—$(24)$—
Pension settlement14755——
Venezuela deconsolidation12——33
Total Special Items$755$(24)$33
Income Tax Expense
Tax effects of special items and impact of U.S. Tax Reform15$(387)$(277)$191
Total Special Items$(387)$(277)$191
Impact on Effective Tax Rate(20.9 pts)(13.7) pts25.4 pts

Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is consistent with how management and our Board of Directors internally assess performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact our results of operations for a period. Management believes that providing the separate impact of the above items on our results in accordance with U.S. GAAP may provide a more complete understanding of our operations and can facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

1Our results in 2019 included a $31 million asset impairment related to a developed-technology intangible asset.

2In 2019, 2018 and 2017, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure on a global basis. These actions included streamlining our international operations, rationalizing our manufacturing facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and canceling certain R&D programs. Our results in 2019, 2018 and 2017 included business optimization charges of $184 million, $220 million and $169 million, respectively. Refer to Note 12 of this Annual Report on Form 10-K in Item 8 for further information regarding these charges and related liabilities.

3Our results in 2017 included costs related to the Baxalta separation of $19 million. Refer to Note 3 in Item 8 of this Annual Report on Form 10-K for further information related to the separation of Baxalta.

4Our results in 2018 included a net benefit of $6 million related to an adjustment to our accrual for SIGMA SPECTRUM infusion pump inspection and remediation activities. Our results in 2017 included a net charge of $17 million related to SIGMA SPECTRUM infusion pump inspection and remediation activities and other historical product reserves.

5Our results in 2019 included $54 million of acquisition and integration expenses. This included integration expenses relate to our acquisitions of Claris and the RECOTHROM and PREVELEAK products in prior periods, as well as the 2019 acquisitions of Cheetah and in-process R&D assets, partially offset by a benefit related to the change in the estimated fair value of contingent consideration liabilities. Our results in 2018 included $33 million of acquisition and integration costs related to our acquisitions of Claris and the RECOTHROM and PREVELEAK products, upfront payments related to R&D collaborations and license agreements, and a gain from remeasuring our previously held investment to fair value upon acquisition of a controlling interest in our joint venture in Saudi Arabia. Our results in 2017 included acquisition and integration expenses of $28 million related to our acquisition of Claris. Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for further information regarding business development activities.

6Our results in 2018 included charges of $10 million related to certain product litigation. Our results in 2017 included charges of $21 million related to litigation and contractual disputes for businesses or arrangements in which we are no longer engaged or a party thereto.

7Our results in 2019 and 2018 included benefits of $100 million and $42 million, respectively, related to insurance recoveries as a result of losses incurred due to Hurricane Maria. Our results in 2017 included a charge of $32 million related to the impact of Hurricane Maria on our operations in Puerto Rico. The costs primarily included inventory and fixed asset impairments as well as idle facility costs. Refer to Note 9 in Item 8 of this Annual Report on Form 10-K for further information regarding the impact of Hurricane Maria.

8Our results in 2019 and 2018 included costs of $25 million and $9 million, respectively, related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that will become effective in 2020.

9Our results in 2017 included a benefit of $12 million related to an adjustment to our historical rebates and discounts reserve.

10Our results in 2018 included a benefit of $80 million for the settlement of certain claims related to the acquired operations of Claris. Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for further information regarding the acquisition of Claris.

11Our results in 2019 included a benefit of $37 million for our allocation of insurance proceeds received pursuant to a settlement and cost-sharing arrangement for a legacy product-related matter. Refer to Note 9 in Item 8 of this Annual Report on Form 10-K for further information.

12Our results in 2017 included a charge of $33 million related to the deconsolidation of our Venezuelan operations. Refer to Note 1 in Item 8 of this Annual Report on Form 10-K for further information regarding the deconsolidation of our Venezuelan operations.

13Our results in 2019 included costs of $8 million related to our internal investigation of foreign exchange gains and losses associated with certain intra-company transactions. Refer to Note 9 in Item 8 of this Annual Report on Form 10-K for further information regarding the internal investigation.

14Our results in 2019 included a charge of $755 million related to the annuitization of a portion of our U.S. pension plan. Refer to Note 13 in Item 8 of this Annual Report on Form 10-K for further information regarding the pension annuitization.

15Reflected in this item is the income tax impact of the special items identified in this table. Additionally, our results in 2019 included a net tax benefit of $125 million related to income tax reform in Switzerland and India and an adjustment for U.S. federal tax reform. Our results in 2018 included a net tax benefit of $196 million related to updates to the estimated impact of U.S. federal tax reform previously made in 2017. Our results in 2017 included a net tax charge of $322 million related to the estimated impact of U.S. federal tax reform on our tax related assets and liabilities. The tax effect of each adjustment is based on the jurisdiction in which the adjustment is incurred and the tax laws in effect for each such jurisdiction.

Net Sales

As restatedPercent change
At actual currency ratesAt constant currency rates
years ended December 31 (in millions)2019201820172019201820192018
United States$4,826$4,723$4,5102%5%2%5%
International6,5366,3766,0743%5%7%4%
Total net sales$11,362$11,099$10,5842%5%5%4%

Net sales for the year ended December 31, 2019 increased 2% at actual rates and 5% at constant currency rates. Net sales for the year ended December 31, 2018 increased 5% at actual and 4% at constant currency rates.

Foreign currency exchange rates unfavorably impacted 2019 net sales growth by three percentage points principally due to the strengthening of the U.S Dollar relative to the Euro, Australian Dollar, British Pound, Chinese Yuan and Colombian Peso. Changes in foreign currency exchange rates favorably impacted 2018 net sales growth by one percentage point, principally due to the weakening of the U.S dollar relative to the Euro, British Pound and Chinese Yuan, partially offset by the strengthening of the U.S. Dollar relative to the Brazilian Real, Turkish Lira and Australian Dollar.

The comparisons presented at constant currency rates reflect current year local currency sales at the prior year’s foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S. GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

In 2019, the acquisition of Cheetah had an insignificant impact on reported revenues. The RECOTHROM and PREVELEAK products acquired in 2018 contributed $80 million and $52 million of revenues in 2019 and 2018, respectively. The acquisition of Claris contributed $140 million and $57 million of revenues in 2018 and 2017, respectively.

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus that recently originated in China (COVID-19). COVID-19 may have an adverse impact on our operations, supply chains and distribution systems and increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. Due to these impacts and measures, we may experience significant and unpredictable reductions or increases in demand for certain of our products as health care customers re-prioritize the treatment of patients. For example, elective surgeries are being de-prioritized which will negatively impact the usage of certain of our products, while other of our products are experiencing an increase in demand which we may not be able to meet in accordance with the customer’s desired timing. In addition to existing travel restrictions, countries may close borders, impose prolonged quarantines, and further restrict travel, which may significantly impact the ability of our employees to get to their places of work to produce products, or may significantly hamper our products from moving through the supply chain. As a result, while the financial impact on us has not been significant to date, given the rapid and evolving nature of the virus, COVID-19 could negatively affect our sales, and it is uncertain how COVID-19 will affect our global operations generally if these impacts persist or exacerbate over an extended period of time. For further discussion, refer to Item 1A of this Annual Report on Form 10-K.

Global Business Unit Net Sales Reporting

Our global business units (GBUs) include the following:

  • Renal Care** includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.

  • Medication Delivery** includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices.

  • Pharmaceuticals** includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.

  • Clinical Nutrition** includes sales of our parenteral nutrition (PN) therapies and related products.

  • Advanced Surgery** includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.

  • Acute Therapies** includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).

  • Other** primarily includes sales of contract manufacturing services from our pharmaceutical partnering business.

The following is a summary of net sales by GBU.

As restatedPercent change
At actual currency ratesAt constant currency rates
years ended December 31 (in millions)2019201820172019201820192018
Renal Care$3,639$3,651$3,491—%5%3%4%
Medication Delivery2,7992,6642,7005%(1)%7%(2)%
Pharmaceuticals2,1552,0871,8863%11%6%10%
Clinical Nutrition872875885—%(1)%3%(3)%
Advanced Surgery87779870810%13%12%12%
Acute Therapies5355154574%13%7%12%
Other485509457(5)%11%(2)%10%
Total Baxter$11,362$11,099$10,5842%5%5%4%

Foreign exchange rates unfavorably impacted Renal Care net sales 3% in 2019 and favorably impacted net sales 1% in 2018, respectively. Excluding the impact of foreign exchange rates, Renal Care net sales increased in 2019 and 2018. The increase in 2019 was driven by global patient growth in PD, partially offset by lower U.S. in-center HD sales. The increase in 2018 was primarily driven by global growth in the PD business as well as increased international sales in the HD business.

Foreign exchange rates unfavorably impacted Medication Delivery net sales 2% in 2019 and favorably impacted net sales 1% in 2018, respectively. Excluding the impact of foreign exchange rates, Medication Delivery net sales

increased in 2019 and decreased in 2018. The increase in 2019 was attributable to increased sales of our Spectrum IQ Infusion System in the U.S. and EVO IQ Infusion System internationally and related IV access administration sets. The decrease in 2018 was partially attributable to supply constraints associated with our small volume parenterals (SVPs) due to Hurricane Maria as well as lower international sales resulting from a reallocation of volume to the U.S.

Foreign exchange rates unfavorably impacted Pharmaceuticals net sales 3% in 2019 and favorably impacted net sales 1% in 2018, respectively. Excluding the impact of foreign exchange rates, Pharmaceuticals net sales increased in 2019 and 2018. The increase in 2019 was due to growth in international pharmacy compounding sales and increased sales of our generic injectables. Partially offsetting those increases were reduced sales of inhaled anesthetics as well as BREVIBLOC and U.S. cylophosphamide due to increased generic competition. The increase in 2018 was a result of the benefit from the acquisition of Claris, increased sales of our premixed injectables and inhaled anesthetics, as well as increased demand for pharmacy compounding services. The acquisition of Claris in 2017 contributed $140 million of net sales in 2018 compared to $57 million of net sales in 2017. Partially offsetting the increase in 2018 was reduced sales of U.S. cyclophosphamide.

Foreign exchange rates unfavorably impacted Clinical Nutrition net sales 3% in 2019 and favorably impacted net sales 2% in 2018, respectively. Excluding the impact of foreign exchange rates, Clinical Nutrition net sales increased in 2019 and decreased in 2018. The increase in 2019 was due to the launch of new products. The decrease in 2018 was driven by the impact of Hurricane Maria related supply constraints which resulted in some customers in the U.S. changing protocols for PN therapies or shifting to outsourced nutrition compounding centers and competitive products, partially offset by improved volumes internationally for our nutritional therapies.

Foreign exchange rates unfavorably impacted Advanced Surgery net sales 2% in 2019 and favorably impacted net sales 1% in 2018, respectively. Excluding the impact of foreign exchange rates, Advanced Surgery net sales increased in 2019 and 2018. The increase in 2019 was primarily driven by higher sales as a result of a temporary supply disruption of a competitor. The increase in 2018 was primarily driven by the acquisition of RECOTHROM and PREVELEAK from Mallinckrodt, which contributed $52 million of net sales in 2018, and improved sales for our core hemostats and sealants.

Foreign exchange rates unfavorably impacted Acute Therapies net sales 3% in 2019 and favorably impacted net sales 1% in 2018, respectively. Excluding the impact of foreign exchange rates, Acute Therapies net sales increased in 2019 and 2018. The increase in 2019 was due to higher global demand for our CRRT systems to treat acute kidney injuries, including the launch of PrisMax in several countries across the Americas, Europe and Asia. The increase in 2018 was due to higher demand for our CRRT systems to treat acute kidney injuries and higher demand for other products from an intense flu season.

Foreign exchange rates unfavorably impacted Other net sales 3% in 2019 and favorably impacted net sales 1% in 2018, respectively. Excluding the impact of foreign exchange rates, Other net sales decreased in 2019 in comparison to strong sales performance in the prior year. On a constant currency basis, Other net sales increased in 2018 due primarily to favorable volumes for products manufactured by us on behalf of our pharmaceutical partners, including the impact of those customers increasing safety stock levels of select products.

Gross Margin and Expense Ratios

As restated20192018
years ended December 312019% of net sales2018% of net sales2017% of net sales$ change% change$ change% change
Gross margin$4,76141.9%$4,75942.9%$4,47442.3%$2—%$2856.4%
SG&A$2,53522.3%$2,62023.6%$2,62724.8%$(85)(3.2)%$(7)(0.3)%
R&D$5955.2%$6545.9%$6155.8%$(59)(9.0)%$396.3%

Gross Margin

The gross margin ratio was 41.9%, 42.9% and 42.3% in 2019, 2018 and 2017, respectively. The special items identified above had an unfavorable impact of 3.0, 2.0 and 2.5 percentage points on the gross margin ratio in 2019, 2018 and 2017, respectively. Refer to the Special Items section above for additional detail.

Excluding the impact of the special items, the gross margin ratio was unchanged in 2019 compared to 2018. The gross margin ratio was impacted by an unfavorable product mix as well as inventory write-downs and incremental costs relating to improvements at a dialyzer facility in the U.S. that experienced manufacturing issues during the second quarter of 2019, offset by manufacturing efficiencies.

Excluding the impact of the special items, the gross margin ratio increased 0.1 percentage points in 2018. The gross margin ratio increased primarily due to a favorable product mix and manufacturing efficiencies, partially offset by the negative impact of foreign exchange rates, incremental supply chain costs and the impact of lost sales due to Hurricane Maria.

SG&A

The SG&A expenses ratio was 22.3%, 23.6% and 24.8% in 2019, 2018 and 2017, respectively. The special items identified above had an unfavorable impact of 0.9, 1.5 and 1.5 percentage points on the SG&A expenses ratio in 2019, 2018 and 2017, respectively. Refer to the Special Items section above for additional detail.

Excluding the impact of the special items, the SG&A expenses ratio decreased 0.7 percentage points in 2019 primarily due to actions we took to restructure our cost position and focus on expense management.

Excluding the impact of the special items, the SG&A expenses ratio decreased 1.2 percentage points in 2018 due to the actions taken by us to restructure our cost position and focus on expense management. These savings were partially offset by decreased benefits to the SG&A expenses ratio from increased freight expenses as we worked to ensure adequate product availability to meet customer needs. In addition, a change in the estimated useful life of our ERP systems in 2018 contributed to the reduction in the SG&A expenses ratio.

R&D

The R&D expenses ratio was 5.2%, 5.9% and 5.8% in 2019, 2018 and 2017, respectively. The special items identified above had an unfavorable impact of 0.4, 0.3 and 0.0 percentage points on the R&D expenses ratio in 2019, 2018 and 2017, respectively. Refer to the Special Items section above for additional detail.

Excluding the impact of the special items, the R&D expenses ratio decreased by 0.8 percentage points in 2019 as a result of reduced project-related expenditures compared to the prior year and actions we took to restructure our cost position and focus on expense management.

Excluding the impact of special items, the R&D expenses ratio decreased by 0.2 percentage points in 2018 as a result of actions we took to restructure our cost position and focus on expense management, partially offset by an increase in project-related expenditures.

Business Optimization Items

In recent years, we have undertaken actions to transform our cost structure and enhance our operational efficiency. These efforts include restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. From the commencement of our business optimization actions in the second half of 2015 through December 31, 2019, we have incurred cumulative pre-tax costs of $980 million related to these actions. The costs consisted primarily of employee termination costs, implementation costs, asset impairments, and accelerated depreciation. We currently expect to incur additional pre-tax costs of approximately $50 million related to these initiatives, primarily related to employee termination costs and implementation costs. To the extent further cost savings opportunities are identified, we may incur additional business optimization expenses. The reductions in our cost base from these actions in the aggregate are expected to provide cumulative annual pretax savings of approximately $1.2 billion once the remaining actions are complete. The savings from these actions will impact cost of sales, SG&A expenses, and R&D expenses. Approximately 95 percent of the expected annual pre-tax savings has been realized through December 31, 2019, with the remainder expected to be realized by the end of 2023. Refer to Note 12 in Item 8 of this Annual Report on Form 10-K for additional information regarding our business optimization programs.

Other Operating Income, Net

Other operating income, net was $141 million, $99 million and $56 million in 2019, 2018 and 2017, respectively. In 2019 and 2018, we recognized $100 million and $10 million, respectively, of insurance recoveries related to losses incurred due to Hurricane Maria within Other operating income, net. In 2019, we also recognized a benefit of $37 million when our share of the proceeds under a cost-sharing agreement became realizable following the resolution of a dispute with an insurer related to a legacy product-related matter. In 2018, we settled certain claims with the seller related to the acquired operations of Claris, which resulted in a benefit of $80 million. Additionally, included in other operating income in 2018 and 2017 was $9 million and $56 million, respectively, of transition service income earned in connection with our separation of Baxalta in 2015. The agreement for these services terminated as of July 1, 2018.

Interest Expense, Net

Interest expense, net was $71 million, $45 million and $55 million in 2019, 2018 and 2017, respectively. The increase in 2019 was primarily driven by higher average debt outstanding as a result of the issuance of €750 million of 0.40% senior notes due May 2024 and €750 million of 1.3% senior notes due May 2029. The decrease in 2018 was primarily driven by higher interest income earned as a result of favorable interest rates. Refer to Note 5 in Item 8 of this Annual Report on Form 10-K for a summary of the components of interest expense, net for 2019, 2018 and 2017.

Other (Income) Expense, Net

Other (income) expense, net was an expense of $731 million in 2019, income of $78 million in 2018 and an expense of $133 million in 2017. The increase in expense in 2019 was primarily driven by a $755 million pension settlement charge related to the transfer of U.S. pension plan liabilities to an insurance company and $37 million of foreign exchange net losses in the current year, partially offset by an impairment of an investment in the prior year. Favorable results in 2018 were primarily driven by $49 million of pension and other postretirement (OPEB) benefits resulting from the split and freeze of our U.S. pension plans announced in January 2018, a $24 million gain from remeasuring our previously held investment to fair value upon acquisition of a controlling interest in our joint venture in Saudi Arabia and $14 million of foreign exchange net gains.

We expect expenses from pension and OPEB plans to increase in 2020 primarily due to lower discount rates and a lower expected return on assets attributable to the transfer of U.S. pension plan liabilities to an insurance company. Refer to Note 13 in Item 8 of this Annual Report on Form 10-K for further information regarding pension and OPEB plan expenses.

The following unaudited quarterly financial information is presented to update our previous discussion and analysis giving effect to our restated results, which primarily impacted other (income) expense, net. The related misstatements are described in more detail in Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data.

As Restated
(in millions)For the six months ended June 30, 2019For the three months ended June 30, 2019For the three months ended March 31, 2019
Foreign exchange losses (gains)$14$15$(1)
Pension and other postretirement benefit plans(31)(15)(16)
Other—4(4)
Other (income) expense, net$(17)$4$(21)
As Restated
(in millions)For the six months ended June 30, 2018For the three months ended June 30, 2018For the three months ended March 31, 2018
Foreign exchange losses (gains)$(29)$(26)$(3)
Pension and other postretirement benefit plans(26)(14)(12)
Other1129
Other (income) expense, net$(44)$(38)$(6)
As Restated
(in millions)For the six months ended June 30, 2017For the three months ended June 30, 2017For the three months ended March 31, 2017
Foreign exchange losses (gains)$42$19$23
Pension and other postretirement benefit plans1789
Venezuela deconsolidation3333—
Other532
Other (income) expense, net$97$63$34

Other (income) expense, net was an expense of $4 million in the three months ended June 30, 2019 compared to income of $38 million in the three months ended June 30, 2018. The change was primarily due to $15 million of foreign exchange net losses in 2019 compared to $26 million of foreign exchange net gains in 2018. Other (income) expense, net was income of $21 million and $6 million in the three months ended March 31, 2019 and 2018, respectively. The increase in 2019 was primarily due to favorable fair value adjustments on marketable equity securities in 2019, an investment impairment in 2018, and higher pension benefits in 2019.

Other (income) expense, net was income of $38 million in the three months ended June 30, 2018 compared to expense of $63 million in the three months ended June 30, 2017. The change was primarily due to a $33 million charge related to the deconsolidation of our Venezuelan subsidiary in 2017 and $26 million of foreign exchange net gains in 2018 compared to $19 million of foreign exchange net losses in 2017. Other (income) expense was income of $6 million and expense of $34 million in the three months ended March 31, 2018 and 2017, respectively. The increase in 2018 was primarily due to $3 million of foreign exchange net gains in 2018 compared to $23 million of foreign exchange net losses in 2017. Additionally, we recognized a benefit related to pension and OPEB plans in 2018 compared to a charge in 2017 as a result of the split and freeze of our U.S. pension plans announced in January 2018.

Income Taxes

The effective income tax rate for continuing operations was (4.2%) in 2019, 4.0% in 2018, and 44.6% in 2017. The special items identified above had a favorable impact of 20.9 and 13.7 percentage points on the effective income tax rate in 2019 and 2018 and an unfavorable impact of 25.4 percentage points in 2017. Refer to the Special Items section above for additional detail.

Our provision for income taxes and our effective rate decreased in 2019 compared to 2018 primarily due to special items, the most significant of which was the impact of recently enacted tax reform in Switzerland and India. We recognized a deferred tax benefit of $90 million to reflect a tax basis step-up, net of a valuation allowance, partially offset by a $5 million deferred tax revaluation to reflect an increase in the statutory tax rate, under the newly enacted Swiss tax laws. We also recognized a net deferred tax benefit of $24 million associated with deferred tax revaluation in India to reflect a decrease in the statutory tax rate.

In addition to the Swiss and Indian tax reform impacts, our provision for income taxes and our effective rate decreased in 2019 compared to 2018 due to the recognition of tax benefits associated with a favorable tax ruling, a benefit related to a notional interest deduction on the share capital of a foreign subsidiary, and excess tax benefits on stock compensation awards. Partially offsetting the decrease in the effective tax rate was a partial valuation allowance release against our U.S. foreign deferred tax assets in 2018 which did not recur in 2019.

Our provision for income taxes and our effective rate decreased in 2018 compared to 2017 primarily due to special items, the most significant of which was our finalization of our provisional adjustments resulting from the 2017 Tax Act. SEC Staff Accounting Bulletin 118 (SAB 118) allowed a one-year measurement period from the December 22, 2017 Tax Act enactment date to refine the provisional amounts recognized in the 2017 financial statements.

We recorded several SAB 118 measurement period provisional adjustments in 2018. First, after further studying the 2017 Tax Act and related U.S. Treasury Regulations, we refined our provisional estimate of a full valuation allowance against our U.S. foreign tax credit deferred tax assets and released a $194 million valuation allowance due to our ability to utilize a portion of our U.S. foreign tax credit deferred tax assets. Second, the 2017 Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. In 2017, we recognized a provisional charge for our one-time transitional tax expense of $529 million, the majority of which was non-cash. During 2018, we refined our estimated one-time transition tax expense, recognizing a benefit of $5 million. Third, the 2017 Tax Act lowered the U.S. federal rate from 35% to 21% and generally exempts foreign income from U.S. taxation. We finalized our provisional revaluation of U.S. deferred tax assets, recording an additional $8 million benefit.

Our tax provisions for 2019 and 2018 do not include any tax charges related to either the Base Erosion and Anti-Abuse Tax (BEAT) or Global Intangible Low Taxed Income (GILTI) provisions, except for the inability to fully utilize foreign tax credits against such GILTI.

In addition to the 2017 Tax Act SAB 118 measurement period adjustments, our provision for income taxes and our effective rate decreased in 2018 compared to 2017 due to a settlement of a 2008 through 2010 transfer pricing Competent Authority proceeding between the U.S. and Germany, the reversal of a foreign valuation allowance as a result of continued profit improvements, and the receipt of tax-free income from the settlement of Claris contingent matters. Partially offsetting the decrease in the effective tax rate was a decrease in benefits related to deductions in excess of share-based compensation costs (windfall tax benefits), the revaluation of Swedish net deferred tax assets and miscellaneous transfer pricing-related income tax accruals. Refer to Note 14 in Item 8 of this Annual Report on Form 10-K for further information related to the 2017 Tax Act and the finalization of associated SAB 118 provisional adjustments.

We anticipate that our effective income tax rate from continuing operations, calculated in accordance with U.S. GAAP, will be approximately 17.5% in 2020. This rate may be further impacted by a number of factors including discrete items, such as tax windfalls or deficiencies attributable to stock compensation exercises as well as additional audit developments, or the tax effects of any future special items.

Income from Continuing Operations and Earnings per Diluted Share

Income from continuing operations was $1.0 billion in 2019, $1.6 billion in 2018 and $609 million in 2017. Earnings per share from continuing operations was $1.93 in 2019, $2.84 in 2018 and $1.10 in 2017. The significant factors and events causing the net changes from 2018 to 2019 and 2017 to 2018 are discussed above. Additionally, earnings per share from continuing operations was positively impacted by the repurchase of 35.8 million shares in 2018 through Rule 10b5-1 purchase plans, an accelerated share repurchase plan and otherwise and the repurchase of 16.5 million shares in 2019 through Rule 10b5-1 purchase plans, an accelerated share repurchase plan and otherwise. Refer to Note 10 in Item 8 of this Annual Report on Form 10-K for further information regarding our stock repurchases.

Loss from Discontinued Operations

Loss from discontinued operations, net of tax was $6 million in 2018 and $7 million in 2017. The operating results related to Baxalta, which have been reflected as discontinued operations, on a net of tax basis, were a loss of $6 million in 2018 and income of $3 million in 2017. Refer to Note 3 in Item 8 of this Annual Report on Form 10-K for additional information regarding the separation of Baxalta. In addition, we recognized an expense of $10 million, net of tax, within discontinued operations in 2017 related to environmental clean-up costs at a former location. Refer to Note 9 in Item 8 of this Annual Report on Form 10-K for additional information regarding environmental liabilities.

Segment results

We use operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our segments. Refer to Note 18 in Item 8 of this Annual Report on Form 10-K for additional details regarding our segments. The following is a summary of significant factors impacting our reportable segments’ financial results.

As restatedAs restated
Net salesOperating income
years ended December 31 (in millions)201920182017201920182017
Americas$6,094$5,951$5,718$2,374$2,411$2,238
EMEA2,9682,9462,752652666562
APAC2,3002,2022,114549532510
Corporate and other———(1,803)(2,025)(2,022)
Total$11,362$11,099$10,584$1,772$1,584$1,288

Americas

Segment operating income was $2,374 million, $2,411 million and $2,238 million in 2019, 2018 and 2017, respectively. The decrease in 2019 was primarily driven by lower sales and gross margin in Pharmaceuticals and lower U.S. in-center HD sales, partially offset by favorable performance in Medication Delivery and Advanced Surgery, primarily due to a temporary supply disruption of a competitor. Additionally, results in 2019 were adversely impacted by unfavorable foreign exchange rates. The increase in 2018 was primarily driven by increased net sales and gross margin as a result of the Claris and RECOTHROM and PREVELEAK acquisitions and higher net sales related to premix injectables. Also driving performance was improved performance in Renal Care, driven primarily by PD growth, and Acute Therapies. Negatively impacting performance in 2018 were the sales challenges in the Medication Delivery and Clinical Nutrition GBUs as previously described.

EMEA

Segment operating income was $652 million, $666 million and $562 million in 2019, 2018 and 2017, respectively. The decrease in 2019 was primarily driven by unfavorable foreign exchange rates, partially offset by increased local currency sales and gross margin in Renal Care and Pharmaceuticals. The increase in 2018 was primarily driven by higher net sales across multiple GBUs, and improved margins primarily as a result of product mix.

APAC

Segment operating income was $549 million, $532 million and $510 million in 2019, 2018 and 2017, respectively. Results in 2019 were driven by higher sales and gross margin, primarily from China and Australia, in Renal Care and Pharmaceuticals. Results in 2018 were driven by higher sales, primarily from China, in Renal Care and Clinical Nutrition.

Corporate and other

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include certain foreign currency hedging activities, corporate headquarters costs, certain R&D costs, certain GBU support costs, stock compensation expense, certain employee benefit plan costs, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments). The operating loss in 2019 decreased due to higher Hurricane Maria insurance recoveries in the current year, a benefit for our allocation of insurance proceeds received pursuant to a settlement and cost-sharing arrangement for a legacy product-related matter in the current year, lower SG&A and R&D expenses in the current year and lower business optimization charges in the current year, partially offset by an impairment of a developed-technology intangible asset in the current year and the benefit from the Claris settlement in the prior year. The operating loss in 2018 increased due to higher acquisition and integration costs, higher intangible asset amortization expense and higher business optimization charges, partially offset by Hurricane Maria insurance recoveries and a benefit from the Claris settlement.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows from Operations — Continuing Operations

In 2019, 2018 and 2017, cash provided by operating activities was $2.1 billion, $2.0 billion and $1.7 billion, respectively. Operating cash flows increased in 2019 primarily due to an increase in our operating income, which included the insurance recoveries related to Hurricane Maria and a legacy product-related matter. Operating cash flows increased in 2018 compared to 2017 primarily due to an increase in our operating income, which included the Claris settlement received in 2018, and due to lower pension contributions.

Cash Flows from Investing Activities

In 2019, cash used for investing activities included payments for acquisitions of $418 million, primarily related to Cheetah and multiple product acquisitions, and capital expenditures of $696 million. In 2018, cash used for investing activities included payments for acquisitions of $268 million, primarily related to RECOTHROM and PREVELEAK and certain molecules from Celerity Pharmaceuticals, LLC (Celerity), and capital expenditures of $659 million. In 2017, cash used in investing activities included payments for acquisitions of $686 million, primarily related to Claris and the rights to certain molecules from Celerity, and capital expenditures of $616 million.

In December 2019, we entered into a definitive agreement to acquire Seprafilm from Sanofi. The transaction closed in February 2020 and we paid approximately $345 million for the acquired assets, subject to a post-close adjustment. In January 2020, we acquired the U.S. rights to an additional product for $60 million.

We expect that our capital expenditures will increase in 2020 as we make investments in our manufacturing capacity in response to proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S. end stage renal disease market and demand for our peritoneal dialysis products.

Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for further information about our significant acquisitions and other arrangements.

Cash Flows from Financing Activities

In 2019, cash generated from financing activities included $1.7 billion in net proceeds from the issuance of €750 million of senior notes due in 2024 and €750 million of senior notes due in 2029, $222 million of borrowings under our Euro-denominated credit facility, and stock issued under employee benefit plans of $356 million, partially offset by payments for stock repurchases of $1.3 billion and dividend payments of $423 million. In 2018, cash used for financing activities included payments for stock repurchases of $2.5 billion and dividend payments of $376 million, partially offset by the proceeds from stock issued under employee benefit plans of $258 million. In 2017, cash generated from financing activities included $665 million in net proceeds from the issuance of €600 million of senior notes due in May 2025 along with stock issued under employee benefit plans of $347 million, partially offset by payments for stock repurchases of $564 million and dividend payments of $315 million.

As authorized by the Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018 and by an additional $2.0 billion in November 2018. We paid $1.3 billion in cash to repurchase approximately 16.5 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise in 2019 and had $897 million remaining available under this authorization as of December 31, 2019.

In December 2018, we entered into a $300 million accelerated share repurchase agreement (ASR Agreement) with an investment bank. We funded the ASR Agreement with available cash. Under the ASR Agreement, we received 3.6 million shares upon execution. Based on the volume-weighted average price of our common stock during the term of the ASR Agreement, we received an additional 0.6 million shares from the investment bank at settlement on May 7, 2019.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of December 31, 2019, our U.S. dollar-denominated revolving credit facility had capacity of $2.0 billion. As of December 31, 2019, our Euro-denominated senior revolving credit facility had a capacity of approximately €200 million. Each of the facilities matures in 2024. There was no amount outstanding under our U.S. dollar-denominated credit facility as of December 31, 2019 and €200 million ($224 million) outstanding at a 0.9% interest rate under our Euro-denominated credit facility as of December 31, 2019. There were no amounts outstanding under our credit facilities as of December 31, 2018. As of December 31, 2019, we were in compliance with the financial covenants in these agreements. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment.

We also maintain other credit arrangements, as described in Note 7 in Item 8 of this Annual Report on Form 10-K.

Access to Capital and Credit Ratings

We intend to fund short-term and long-term obligations as they mature through cash on hand and future cash flows from operations or by issuing additional debt. We had $3.3 billion of cash and cash equivalents as of December 31, 2019, with adequate cash available to meet operating requirements in each jurisdiction in which we operate. We invest our excess cash in money market funds and diversify the concentration of cash among different financial institutions.

Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives.

Our credit ratings at December 31, 2019 were as follows:

Standard & Poor’sFitchMoody’s
Ratings
Senior debtA-A-Baa1
Short-term debtA2F2P2
OutlookStableStableStable

Contractual Obligations

As of December 31, 2019, we had contractual obligations, excluding accounts payable and accrued liabilities, payable or maturing in the following periods.

(in millions)TotalLess than one yearOne to three yearsThree to five yearsMore than five years
Short-term debt$226$226$—$—$—
Long-term debt and finance lease obligations, including current maturities5,1603156098433,393
Interest on short- and long-term debt and finance lease obligations 11,436112209194921
Operating leases676112176121267
Other non-current liabilities2407—12750230
Purchase obligations3571311163907
Contractual obligations2$8,476$1,076$1,284$1,298$4,818

1.Interest payments on debt and finance lease obligations are calculated for future periods using interest rates in effect at the end of 2019. Certain of these projected interest payments may differ in the future based on changes in floating interest rates, foreign currency fluctuations or other factors or events. The projected interest payments only pertain to obligations and agreements outstanding at December 31, 2019. Refer to Note 7 and Note 8, respectively, in Item 8 of this Annual Report on Form 10-K for further discussion regarding our debt instruments outstanding and finance lease obligations at December 31, 2019.

2.The primary components of other non-current liabilities in our consolidated balance sheet as of December 31, 2019 are pension and other postretirement benefits, deferred tax liabilities, long-term tax liabilities, interest rate contracts, and litigation and environmental reserves. We projected the timing of the related future cash payments based on contractual maturity dates (where applicable) and estimates of the timing of payments (for liabilities with no contractual maturity dates). The actual timing of payments could differ from our estimates.

We contributed $69 million, $51 million, and $242 million to our defined benefit pension plans in 2019, 2018, and 2017, respectively. The timing of funding in future periods is uncertain and is dependent on future movements in interest rates, investment returns, changes in laws and regulations, and other variables. Therefore, the table above excludes cash outflows related to our pension plans. The amount included within other non-current liabilities (and excluded from the table above) related to our pension plan liabilities was $1.1 billion as of December 31, 2019. In 2020, we have no obligation to fund our principal plans in the United States and we expect to make contributions of at least $5 million to our Puerto Rico plans and $41 million to our foreign pension plans. Additionally, we have excluded long-term tax liabilities related to unrecognized tax positions and deferred tax liabilities from the table above because we are unable to estimate the timing of the related cash outflows. The amounts of long-term tax liabilities related to unrecognized tax positions and deferred tax liabilities included within other non-current liabilities (and excluded from the table above) were $81 million and $192 million, respectively, as of December 31, 2019.

3.Includes our significant contractual unconditional purchase obligations. For cancellable agreements, any penalty due upon cancellation is included. These commitments do not exceed our projected requirements and are in the normal course of business. Examples include firm commitments for raw material purchases, utility agreements and service contracts.

Off-Balance Sheet Arrangements

We periodically enter into off-balance sheet arrangements. Certain contingencies arise in the normal course of business and are not recorded in the consolidated balance sheets in accordance with U.S. GAAP (such as contingent joint development and commercialization arrangement payments). Also, upon resolution of uncertainties, we may incur charges in excess of presently established liabilities for certain matters (such as contractual indemnifications). For a discussion of our significant off-balance sheet arrangements, refer to Note 16 in Item 8 of this Annual Report on Form 10-K for information regarding receivable transactions, and Note 4 and Note 9 in Item 8 of this Annual Report on Form 10-K regarding joint development and commercialization arrangements, indemnifications and legal contingencies.

FINANCIAL INSTRUMENT MARKET RISK

We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. Our hedging policy attempts to manage these risks to an acceptable level based on our judgment of the appropriate trade-off between risk, opportunity and costs. Refer to Note 16 and Note 17 in Item 8 of this Annual Report on Form 10-K for further information regarding our financial instruments and hedging strategies.

Currency Risk

We are primarily exposed to foreign exchange risk with respect to revenues generated outside of the United States denominated in the Euro, British Pound, Chinese Yuan, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative financial instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and stockholders’ equity volatility relating to foreign exchange. However, we don't hedge our

entire foreign exchange exposure and are still subject to earnings and stockholders' equity volatility relating to foreign exchange risk. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.

We use options and forwards to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities. The maximum term over which we have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions as of December 31, 2019 is 12 months. We also enter into derivative instruments to hedge foreign exchange risk on certain intra-company and third-party receivables and payables and debt denominated in foreign currencies.

As part of our risk-management program, we perform sensitivity analyses to assess potential changes in the fair value of our foreign exchange instruments relating to hypothetical and reasonably possible near-term movements in foreign exchange rates.

A sensitivity analysis of changes in the fair value of foreign exchange option and forward contracts outstanding as of December 31, 2019, while not predictive in nature, indicated that if the U.S. Dollar uniformly weakened by 10% against all currencies, on a net-of-tax basis, the net asset balance of $7 million with respect to those contracts would decrease by $15 million, resulting in a net liability position. A similar analysis performed with respect to option and forward contracts outstanding as of December 31, 2018 indicated that, on a net-of-tax basis, the net asset balance of $16 million would decrease by $26 million, resulting in a net liability position.

The sensitivity analysis model recalculates the fair value of the foreign exchange option and forward contracts outstanding as of December 31, 2019 by replacing the actual exchange rates as of December 31, 2019 with exchange rates that are 10% weaker compared to the actual exchange rates for each applicable currency. All other factors are held constant. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

Our operations in Argentina are reported using highly inflationary accounting effective July 1, 2018. Changes in the value of the Argentine peso applied to our peso-denominated net monetary asset positions are recorded in income at the time of the change. As of December 31, 2019, our net monetary assets denominated in Argentine pesos are not significant.

Interest Rate and Other Risks

We are also exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates. Our policy is to manage interest costs using a mix of fixed- and floating-rate debt that we believe is appropriate. To manage this mix in a cost-efficient manner, we periodically enter into interest rate swaps in which we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. We also periodically use forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of term debt.

As of December 31, 2019, $4.8 billion of our outstanding debt obligations were at fixed interest rates, representing approximately 94 percent of our total debt. We had interest rate derivative instruments outstanding with a notional amount of $550 million and $150 million as of December 31, 2019 and 2018, respectively. A one percent change in interest rates would impact the fair value of our interest rate derivative contracts by approximately $116 million.

CHANGES IN ACCOUNTING STANDARDS

Refer to Note 1 in Item 8 of this Annual Report on Form 10-K for information on changes in accounting standards.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses, which requires the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held

by a reporting entity at each reporting date. The standard is effective for our financial statements beginning in 2020. The impact of the adoption of this ASU is not expected to have a material effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for our financial statements beginning in 2020. Our policies for capitalizing implementation costs incurred in a hosting arrangement are not expected to be impacted by this ASU. However, we have historically classified those capitalized costs within property, plant and equipment, net on our consolidated balance sheets and as capital expenditures on our consolidated statements of cash flows. Under the new ASU, those capitalized costs will be presented as other non-current assets on our consolidated balance sheets and within operating cash flows on our consolidated statements of cash flows. The impact of those classification changes following the adoption of this ASU is not expected to have a material effect on our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Note 1 in Item 8 of this Annual Report on Form 10-K. Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by us, often employing the use of estimates about the effects of matters that are inherently uncertain. Actual results that differ from our estimates could have an unfavorable effect on our results of operations and financial position. The following is a summary of accounting policies that we consider critical to the consolidated financial statements.

Revenue Recognition and Related Provisions and Allowances

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration related to rebates, product returns, sales discounts and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. Our estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration included in the net sales price is limited to the amount that is probable not to result in a significant reversal in the amount of the cumulative revenue recognized in a future period. Additionally, our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment.

The new standard related to revenue recognition that was effective January 1, 2018 has not had a material impact on our consolidated financial statements as compared to historical revenue recognition guidelines. Refer to Note 1 within Item 8 of this Annual Report on Form 10-K for further information.

Pension and OPEB Plans

We provide pension and other postretirement benefits to certain of our employees. The service component of employee benefit expenses is reported in the same line items in the consolidated income statements as the applicable employee’s compensation expense. All other components of these employee benefit expenses are reported in other (income) expense, net in our consolidated statements of income. The valuation of the funded status and net periodic benefit cost for the plans is calculated using actuarial assumptions. These assumptions are reviewed annually and revised if appropriate. The significant assumptions include the following:

  • interest rates used to discount pension and OPEB plan liabilities;

  • the long-term rate of return on pension plan assets;

  • rates of increases in employee compensation (used in estimating liabilities);

  • anticipated future healthcare trend rates (used in estimating the OPEB plan liability); and

  • other assumptions involving demographic factors such as retirement, mortality and turnover (used in estimating liabilities).

Selecting assumptions involves an analysis of both short-term and long-term historical trends and known economic and market conditions at the time of the valuation (also called the measurement date). The use of different assumptions would result in different measures of the funded status and net cost. Actual results in the future could differ from expected results.

Our key assumptions are listed in Note 13 in Item 8 of this Annual Report on Form 10-K. The most critical assumptions relate to the plans covering U.S. and Puerto Rico employees, because these plans are the most significant to our consolidated financial statements.

Discount Rate Assumption

Effective for the December 31, 2019 measurement date, we utilized discount rates of 3.44% and 3.16% to measure our benefit obligations for the U.S. and Puerto Rico pension plans and OPEB plan, respectively. We used a broad population of approximately 200 Aa-rated corporate bonds as of December 31, 2019 to determine the discount rate assumption. All bonds were denominated in U.S. dollars, with a minimum amount outstanding of $50 million. This population of bonds was narrowed from a broader universe of approximately 700 Moody’s Aa rated, non-callable (or callable with make-whole provisions) bonds by eliminating the top 10th percentile and bottom 40th percentile to adjust for any pricing anomalies and to represent the bonds we would most likely select if we were to actually annuitize our pension and OPEB plan liabilities. This portfolio of bonds was used to generate a yield curve and associated spot rate curve to discount the projected benefit payments for the U.S. and Puerto Rico plans. The discount rate is the single level rate that produces the same result as the spot rate curve.

For plans in Canada, Japan, the United Kingdom and other European countries, we use a method essentially the same as that described for the U.S. and Puerto Rico plans. For our other international plans, the discount rate is generally determined by reviewing country- and region-specific government and corporate bond interest rates.

To understand the impact of changes in discount rates on pension and OPEB plan cost, we perform a sensitivity analysis. Holding all other assumptions constant, for each 50 basis point (i.e., one-half of one percent) increase in the discount rate, global pre-tax pension and OPEB plan cost would decrease by approximately $22 million, and for each 50 basis point decrease in the discount rate, global pre-tax pension and OPEB plan cost would increase by approximately $28 million.

Return on Plan Assets Assumption

In measuring the net periodic cost for 2019, we used a long-term expected rate of return of 6.29% for the pension plans covering U.S. and Puerto Rico employees. This assumption will increase to 6.50% in 2020. This assumption is not applicable to our OPEB plan because it is not funded.

We establish the long-term asset return assumption based on a review of historical compound average asset returns, both company-specific and relating to the broad market (based on our asset allocation), as well as an analysis of current market and economic information and future expectations. The current asset return assumption is supported by historical market experience for both our actual and targeted asset allocation. In calculating net pension cost, the expected return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. The difference between this expected return and the actual return on plan assets is a component of the total net unrecognized gain or loss and is subject to amortization in the future.

To understand the impact of changes in the expected asset return assumption on net cost, we perform a sensitivity analysis. Holding all other assumptions constant, for each 50 basis point increase (decrease) in the asset return assumption, global pre-tax pension plan cost would decrease (increase) by approximately $13 million.

Other Assumptions

For the U.S. and Puerto Rico plans, beginning with the December 31, 2019 measurement date, we used the Pri-2012 combined mortality table with improvements projected using the MP-2019 projection scale adjusted to a

long-term improvement of 0.8%. For all other pension plans, we utilized country- and region-specific mortality tables to calculate the plans’ benefit obligations. We periodically analyze and update our assumptions concerning demographic factors such as retirement, mortality and turnover, considering historical experience as well as anticipated future trends.

The assumptions relating to employee compensation increases and future healthcare costs are based on historical experience, market trends, and anticipated future company actions. Refer to Note 13 in Item 8 of this Annual Report on Form 10-K for information regarding the sensitivity of the OPEB plan obligation and the total of the service and interest cost components of OPEB plan cost to potential changes in future healthcare trend rates.

Deferred Tax Asset Valuation Allowances, Reserves for Uncertain Tax Positions and Tax Reform

We maintain valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The realizability assessments made at a given balance sheet date are subject to change in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if we take operational or tax planning actions that could impact the future taxable earnings of a subsidiary.

In the normal course of business, we are audited by federal, state and foreign tax authorities, and are periodically challenged regarding the amount of taxes due. These challenges relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. We believe our tax positions comply with applicable tax law and we intend to defend our positions. In evaluating the exposure associated with various tax filing positions, we record reserves for uncertain tax positions in accordance with U.S. GAAP based on the technical support for the positions, our past audit experience with similar situations, and potential interest and penalties related to the matters. Our results of operations and effective tax rate in a given period could be impacted if, upon final resolution with taxing authorities, we prevail in positions for which reserves have been established, or we are required to pay amounts in excess of established reserves.

On December 22, 2017, the 2017 Tax Act was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the U.S. corporate income tax rate to 21% effective January 1, 2018, among others. We were required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities and reassessing the realizability of our deferred tax assets. In December 2017, the SEC staff issued SAB 118 which allowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We completed our analysis in accordance with SAB 118 and finalized the accounting for the initial impact of the 2017 Tax Act in 2018. Refer to Note 14 within Item 8 of this Annual Report on Form 10-K for further information.

Valuation of Intangible Assets, Including IPR&D

We record acquired intangible assets at fair value in business combinations and at cost in asset acquisitions. Valuations are generally completed for intangible assets acquired in business acquisitions using a discounted cash flow analysis, incorporating the stage of completion and consideration of market participant assumptions. The most significant estimates and assumptions inherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, and the competitive and other trends impacting the asset, including consideration of technical, legal, regulatory, economic and other factors. Each of these factors and assumptions can significantly affect the value of the intangible asset.

Acquired in-process R&D (IPR&D) is the value assigned to acquired technology or products under development which have not received regulatory approval and have no alternative future use. Acquired IPR&D included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the R&D project is abandoned, the indefinite-lived intangible asset is charged to expense.

IPR&D acquired in transactions that are not business combinations is expensed immediately. For such transactions, payments made to third parties on or after regulatory approval are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.

Due to the inherent uncertainty associated with R&D projects, there is no assurance that actual results will not differ materially from the underlying assumptions used to prepare discounted cash flow analyses, nor that the R&D project will result in a successful commercial product.

CERTAIN REGULATORY MATTERS

The U.S. Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India in July 2017, immediately prior to the closing of the Claris acquisition. FDA completed the inspection and subsequently issued a Warning Letter based on observations identified in the 2017 inspection (Claris Warning Letter).1 While FDA has not yet re-inspected the facilities, we are continuing to implement corrective and preventive actions to address FDA’s prior observations and other items identified in connection with integrating Claris into our quality systems.

While management cannot speculate on when the Claris Warning Letter will be lifted, management continues to pursue and implement other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S. in the meantime. As of December 31, 2019, we have secured alternative locations to produce a majority of the planned new products for distribution into the U.S.

On May 6, 2019, we received a Show Cause Notice under the Drugs & Cosmetics Act, 1940 and Rules thereunder (Show Cause Notice) from the Commissioner of the Food & Drugs Control Administration in the Gujarat State in Gandhinagar, India (Commissioner). The Show Cause Notice was issued regarding an April 9, 2019 inspection of our Claris facilities in Ahmedabad, India by the Commissioner. The Show Cause Notice contained a number of observations of alleged Good Manufacturing Practice related issues across a variety of areas, some of which overlap with the areas covered in the Claris 483 or the Claris Warning Letter. We responded to the Show Cause Notice and a follow up inspection occurred in July 2019. No further action has been undertaken by the Gujarat authorities.

In June 2013, we received a Warning Letter from FDA regarding operations and processes at our North Cove, North Carolina and Jayuya, Puerto Rico facilities. We attended Regulatory Meetings with FDA regarding one or both of these facilities in October 2014, November 2015, July 2017, April 2018 and October 2018. The Warning Letter addresses observations related to Current Good Manufacturing Practice violations at the two facilities. The Warning Letter was closed out in September 2019.

As previously disclosed, in the fourth quarter of 2012, we received two investigative demands from the United States Attorney for the Western District of North Carolina for information regarding our quality and manufacturing practices and procedures at our North Cove facility. In January 2017, the parties resolved the matter by entering into a deferred prosecution agreement and a civil settlement whereby we agreed to pay approximately $18 million and implement certain enhanced compliance measures. In July 2019, the deferred prosecution agreement expired and, based on our fulfillment of the terms of the agreement, the court dismissed the criminal information previously filed in the case with prejudice.

Refer to Item 1A of this Annual Report on Form 10-K for additional discussion of regulatory matters and how they may impact us.

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

FORWARD-LOOKING INFORMATION

This annual report includes forward-looking statements. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events. These forward-looking statements may include statements with respect to accounting estimates and assumptions, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses and the

material weakness identified as a result thereof, future regulatory filings and our R&D pipeline, strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, potential tax liability associated with the separation of our biopharmaceuticals and medical products businesses, the impact of competition, future sales growth, business development activities (including the acquisitions of Cheetah and Seprafilm from Sanofi), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the sufficiency of our facilities and financial flexibility, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.

These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:

•failure to achieve our long-term financial improvement goals;
•demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with our ability to accurately predict these pressures and the resulting impact on customer inventory levels), and the impact of those products on quality and patient safety concerns;
•product development risks, including satisfactory clinical performance, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;
•our ability to finance and develop new products or enhancements on commercially acceptable terms or at all;
•our ability to identify business development and growth opportunities and to successfully execute on business development strategies;
•product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales;
•the continuity, availability and pricing of acceptable raw materials and component supply, and the related continuity of our manufacturing and distribution;
•inability to create additional production capacity in a timely manner or the occurrence of other manufacturing, sterilization or supply difficulties (including as a result of natural disaster, public health crises and epidemics/pandemics, regulatory actions or otherwise);
•breaches or failures of our information technology systems or products, including by cyber-attack, data leakage, unauthorized access or theft;
•future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the SEC, DOJ or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities, including the continued delay in lifting the warning letter at our Ahmedabad facility or proceedings related to the misstatements in previously reported non-operating income related to foreign exchange gains and losses;
•the impacts of the material weakness identified as a result of the internal investigation related to foreign exchange gains and losses and our remediation efforts, including the risk that we may experience additional material weaknesses;
•developments that would require the correction of additional misstatements in our previously issued financial statements;
•failures with respect to our environmental, quality, compliance or ethics programs;
•future actions of third parties, including third-party payers, the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, the European Union’s General Data Protection Regulation and proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S. end stage renal disease market and demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures, which are difficult to estimate in advance, for example);
•the outcome of pending or future litigation or government investigations, including the opioid litigation and litigation related to our internal investigation of foreign exchange gains and losses;
•the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies;
•global regulatory, trade and tax policies;
•the ability to protect or enforce our owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, trade secrets and know-how) or patents of third parties preventing or restricting our manufacture, sale or use of affected products or technology;
•the impact of any goodwill or other intangible asset impairments on our operating results;
•any failure by Baxalta or Shire to satisfy its obligations under the separation agreements, including the tax matters agreement, or that certain letter agreement entered into with Shire and Baxalta;
•the impact of global economic conditions (including potential trade wars) and public health crises and epidemics, such as the novel strain of coronavirus that recently originated in China (COVID-19), on us and our customers and suppliers, including foreign governments in countries in which we operate;
•fluctuations in foreign exchange and interest rates;
•any changes in law concerning the taxation of income (whether with respect to current or future tax reform), including income earned outside the United States and potential taxes associated with the Base Erosion and Anti-Abuse Tax;
•actions by tax authorities in connection with ongoing tax audits;
•loss of key employees or inability to identify and recruit new employees;
•other factors identified elsewhere in this Annual Report on Form 10-K including those factors described in Item 1A and other filings with the SEC, all of which are available on our website.

Actual results may differ materially from those projected in the forward-looking statements. We do not undertake to update our forward-looking statements.

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