filings.toolsItem 8. Financial Statements and Supplementary Data.
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Item 8. Financial Statements and Supplementary Data.
CONSOLIDATED BALANCE SHEETS
| as of December 31 (in millions, except share information) | 2023 | 2022 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 3,194 | $ | 1,718 | |||||||
| Accounts receivable, net of allowance of $129 in 2023 and $114 in 2022 | 2,690 | 2,571 | |||||||||
| Inventories | 2,824 | 2,679 | |||||||||
| Prepaid expenses and other current assets | 892 | 857 | |||||||||
| Current assets of discontinued operations | — | 186 | |||||||||
| Total current assets | 9,600 | 8,011 | |||||||||
| Property, plant and equipment, net | 4,433 | 4,695 | |||||||||
| Goodwill | 6,514 | 6,452 | |||||||||
| Other intangible assets, net | 6,079 | 6,793 | |||||||||
| Operating lease right-of-use assets | 524 | 541 | |||||||||
| Other non-current assets | 1,126 | 1,109 | |||||||||
| Non-current assets of discontinued operations | — | 686 | |||||||||
| Total assets | $ | 28,276 | $ | 28,287 | |||||||
| Current liabilities: | |||||||||||
| Short-term debt | $ | — | $ | 299 | |||||||
| Current maturities of long-term debt and finance lease obligations | 2,668 | 1,105 | |||||||||
| Accounts payable | 1,241 | 1,110 | |||||||||
| Accrued expenses and other current liabilities | 2,594 | 2,170 | |||||||||
| Current liabilities of discontinued operations | — | 61 | |||||||||
| Total current liabilities | 6,503 | 4,745 | |||||||||
| Long-term debt and finance lease obligations, less current portion | 11,130 | 15,232 | |||||||||
| Operating lease liabilities | 438 | 447 | |||||||||
| Other non-current liabilities | 1,737 | 1,848 | |||||||||
| Non-current liabilities of discontinued operations | — | 120 | |||||||||
| Total liabilities | 19,808 | 22,392 | |||||||||
| Commitments and contingencies | |||||||||||
| Equity: | |||||||||||
| Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2023 and 2022 | 683 | 683 | |||||||||
| Common stock in treasury, at cost, 175,861,893 shares in 2023 and 179,062,594 shares in 2022 | (11,230) | (11,389) | |||||||||
| Additional contributed capital | 6,389 | 6,322 | |||||||||
| Retained earnings | 16,114 | 14,050 | |||||||||
| Accumulated other comprehensive income (loss) | (3,554) | (3,833) | |||||||||
| Total Baxter stockholders’ equity | 8,402 | 5,833 | |||||||||
| Noncontrolling interests | 66 | 62 | |||||||||
| Total equity | 8,468 | 5,895 | |||||||||
| Total liabilities and equity | $ | 28,276 | $ | 28,287 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
| years ended December 31 (in millions, except per share data) | 2023 | 2022 | 2021 | ||||||||
| Net sales | $ | 14,813 | $ | 14,506 | $ | 12,146 | |||||
| Cost of sales | 9,838 | 9,440 | 7,426 | ||||||||
| Gross margin | 4,975 | 5,066 | 4,720 | ||||||||
| Selling, general and administrative expenses | 3,946 | 3,859 | 2,845 | ||||||||
| Research and development expenses | 667 | 602 | 531 | ||||||||
| Goodwill impairments | — | 2,812 | — | ||||||||
| Other operating expense (income), net | (28) | 36 | (6) | ||||||||
| Operating income (loss) | 390 | (2,243) | 1,350 | ||||||||
| Interest expense, net | 442 | 395 | 193 | ||||||||
| Other (income) expense, net | 51 | 12 | 41 | ||||||||
| Income (loss) from continuing operations before income taxes | (103) | (2,650) | 1,116 | ||||||||
| Income tax (benefit) expense | (34) | 4 | 83 | ||||||||
| Income (loss) from continuing operations | (69) | (2,654) | 1,033 | ||||||||
| Income from discontinued operations, net of tax | 2,732 | 233 | 262 | ||||||||
| Net income (loss) | 2,663 | (2,421) | 1,295 | ||||||||
| Net income attributable to noncontrolling interests | 7 | 12 | 11 | ||||||||
| Net income (loss) attributable to Baxter stockholders | $ | 2,656 | $ | (2,433) | $ | 1,284 | |||||
| Income (loss) from continuing operations per common share | |||||||||||
| Basic | $ | (0.15) | $ | (5.29) | $ | 2.04 | |||||
| Diluted | $ | (0.15) | $ | (5.29) | $ | 2.01 | |||||
| Income from discontinued operations per common share | |||||||||||
| Basic | $ | 5.40 | $ | 0.46 | $ | 0.52 | |||||
| Diluted | $ | 5.40 | $ | 0.46 | $ | 0.52 | |||||
| Net Income (loss) per common share | |||||||||||
| Basic | $ | 5.25 | $ | (4.83) | $ | 2.56 | |||||
| Diluted | $ | 5.25 | $ | (4.83) | $ | 2.53 | |||||
| Weighted-average number of shares outstanding | |||||||||||
| Basic | 506 | 504 | 502 | ||||||||
| Diluted | 506 | 504 | 508 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Income (loss) from continuing operations | $ | (69) | $ | (2,654) | $ | 1,033 | |||||
| Other comprehensive income (loss) from continuing operations, net of tax: | |||||||||||
| Currency translation adjustments, net of tax expense (benefit) of ($18) in 2023, $41 in 2022 and $30 in 2021 | 213 | (445) | (264) | ||||||||
| Pension and other postretirement benefit plans, net of tax expense of $(27) in 2023, $12 in 2022 and $60 in 2021 | (117) | (2) | 218 | ||||||||
| Hedging activities, net of tax expense (benefit) of zero in 2023, $2 in 2022 and $7 in 2021 | (1) | 7 | 27 | ||||||||
| Available-for-sale debt securities, net of tax expense of zero in 2023, $1 in 2022 and zero in 2021 | — | 3 | — | ||||||||
| Total other comprehensive income (loss) from continuing operations, net of tax | 95 | (437) | (19) | ||||||||
| Comprehensive income (loss) from continuing operations | 26 | (3,091) | 1,014 | ||||||||
| Income from discontinued operations, net of tax | 2,732 | 233 | 262 | ||||||||
| Other comprehensive income (loss) from discontinued operations | |||||||||||
| Currency translation adjustments, net of tax expense (benefit) of zero in 2023, 2022 and 2021 | 185 | (34) | (56) | ||||||||
| Pension and other postretirement benefit plans, net of tax expense of zero in 2023, 2022 and 2021 | (4) | 18 | 9 | ||||||||
| Total other comprehensive income from discontinued operations | 181 | (16) | (47) | ||||||||
| Comprehensive income from discontinued operations | 2,913 | 217 | 215 | ||||||||
| Comprehensive income (loss) | 2,939 | (2,874) | 1,229 | ||||||||
| Less: Net income attributable to noncontrolling interests | 7 | 12 | 11 | ||||||||
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | (3) | (5) | — | ||||||||
| Comprehensive income (loss) attributable to Baxter stockholders | $ | 2,935 | $ | (2,881) | $ | 1,218 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| Baxter International Inc. stockholders' equity | ||||||||||||||||||||||||||||||||
| (in millions) | Common stock shares | Common stock | Common stock shares in treasury | Common stock in treasury | Additional contributed capital | Retained earnings | Accumulated other comprehensive income (loss) | Total Baxter stockholders' equity | Noncontrolling interests | Total equity | ||||||||||||||||||||||
| Balance as of January 1, 2021 | 683 | $ | 683 | 179 | $ | (11,051) | $ | 6,043 | $ | 16,328 | $ | (3,314) | $ | 8,689 | $ | 37 | $ | 8,726 | ||||||||||||||
| Net income (loss) | — | — | — | — | — | 1,284 | — | 1,284 | 11 | 1,295 | ||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | (66) | (66) | — | (66) | ||||||||||||||||||||||
| Purchases of treasury stock | — | — | 7 | (600) | — | — | — | (600) | — | (600) | ||||||||||||||||||||||
| Stock issued under employee benefit plans and other | — | — | (4) | 163 | 154 | — | — | 317 | — | 317 | ||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (547) | — | (547) | — | (547) | ||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | — | — | — | — | (4) | (4) | ||||||||||||||||||||||
| Balance as of December 31, 2021 | 683 | $ | 683 | 182 | $ | (11,488) | $ | 6,197 | $ | 17,065 | $ | (3,380) | $ | 9,077 | $ | 44 | $ | 9,121 | ||||||||||||||
| Net income (loss) | — | — | — | — | — | (2,433) | — | (2,433) | 12 | (2,421) | ||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | (453) | (453) | (5) | (458) | ||||||||||||||||||||||
| Purchases of treasury stock | — | — | — | (32) | — | — | — | (32) | — | (32) | ||||||||||||||||||||||
| Stock issued under employee benefit plans and other | — | — | (3) | 131 | 125 | — | — | 256 | — | 256 | ||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (582) | — | (582) | — | (582) | ||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | — | — | — | — | 11 | 11 | ||||||||||||||||||||||
| Balance as of December 31, 2022 | 683 | $ | 683 | 179 | $ | (11,389) | $ | 6,322 | $ | 14,050 | $ | (3,833) | $ | 5,833 | $ | 62 | $ | 5,895 | ||||||||||||||
| Net income (loss) | — | — | — | — | — | 2,656 | — | 2,656 | 7 | 2,663 | ||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | 279 | 279 | (3) | 276 | ||||||||||||||||||||||
| Stock issued under employee benefit plans and other | — | — | (3) | 159 | 67 | — | — | 226 | — | 226 | ||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (592) | — | (592) | — | (592) | ||||||||||||||||||||||
| Balance as of December 31, 2023 | 683 | $ | 683 | 176 | $ | (11,230) | $ | 6,389 | $ | 16,114 | $ | (3,554) | $ | 8,402 | $ | 66 | $ | 8,468 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Cash flows from operations | |||||||||||
| Net income (loss) | $ | 2,663 | $ | (2,421) | $ | 1,295 | |||||
| Less: Income from discontinued operations, net of tax | 2,732 | 233 | 262 | ||||||||
| Loss from continuing operations | (69) | (2,654) | 1,033 | ||||||||
| Adjustments to reconcile net income (loss) to cash flows operations: | |||||||||||
| Depreciation and amortization | 1,263 | 1,380 | 867 | ||||||||
| Pension settlement and curtailment (gains) losses | 1 | (12) | 2 | ||||||||
| Net periodic pension and other postretirement costs | (19) | 50 | 99 | ||||||||
| Deferred income taxes | (499) | (230) | (161) | ||||||||
| Stock compensation | 133 | 153 | 146 | ||||||||
| Losses on debt extinguishments | — | — | 5 | ||||||||
| Goodwill impairments | — | 2,812 | — | ||||||||
| Intangible asset impairments | 77 | 344 | — | ||||||||
| Other long-lived asset impairments | 470 | 9 | 11 | ||||||||
| Loss on product divestiture arrangement | — | 54 | — | ||||||||
| Reclassification of cumulative translation loss to earnings | — | 65 | — | ||||||||
| Loss on subsidiary liquidation | — | 21 | — | ||||||||
| Other | 77 | (20) | 81 | ||||||||
| Changes in balance sheet items: | |||||||||||
| Accounts receivable, net | (66) | (125) | (170) | ||||||||
| Inventories | (114) | (367) | (27) | ||||||||
| Prepaid expenses and other current assets | (40) | (49) | (35) | ||||||||
| Accounts payable | 107 | (73) | 105 | ||||||||
| Accrued expenses and other current liabilities | 412 | (221) | 207 | ||||||||
| Other | (31) | (106) | (137) | ||||||||
| Cash flows from operations – continuing operations | 1,702 | 1,031 | 2,026 | ||||||||
| Cash flows from operations – discontinued operations | 24 | 180 | 196 | ||||||||
| Cash flows from operations | 1,726 | 1,211 | 2,222 | ||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures | (692) | (620) | (691) | ||||||||
| Acquisitions, net of cash acquired, and investments | (6) | (263) | (10,502) | ||||||||
| Other investing activities, net | 26 | 11 | 45 | ||||||||
| Cash flows from investing activities - continuing operations | (672) | (872) | (11,148) | ||||||||
| Cash flows from investing activities - discontinued operations | 3,885 | (59) | (52) | ||||||||
| Cash flows from investing activities | 3,213 | (931) | (11,200) | ||||||||
| Cash flows from financing activities | |||||||||||
| Issuances of debt | — | — | 11,903 | ||||||||
| Repayments of debt | (2,634) | (954) | (2,823) | ||||||||
| Net (decreases) increases in debt with original maturities of three months or less | (299) | 55 | 246 | ||||||||
| Cash dividends on common stock | (586) | (573) | (530) | ||||||||
| Proceeds from stock issued under employee benefit plans | 95 | 127 | 187 | ||||||||
| Purchases of treasury stock | — | (32) | (600) | ||||||||
| Debt issuance costs | — | — | (98) | ||||||||
| Other financing activities, net | (65) | (61) | (40) | ||||||||
| Cash flows from financing activities | (3,489) | (1,438) | 8,245 | ||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | 26 | (76) | (47) | ||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 1,476 | (1,234) | (780) | ||||||||
| Cash, cash equivalents and restricted cash at beginning of year (1) | 1,722 | 2,956 | 3,736 | ||||||||
| Cash, cash equivalents and restricted cash at end of year (1) | $ | 3,198 | $ | 1,722 | $ | 2,956 |
(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash amounts as shown in the consolidated statement of cash flows to the amount reported in the consolidated balance sheet as of December 31, 2023, 2022, and 2021:
| As of December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Cash and cash equivalents | $ | 3,194 | $ | 1,718 | $ | 2,951 | |||||
| Restricted cash included in prepaid expenses and other current assets | 4 | 4 | 5 | ||||||||
| Cash, cash equivalents and restricted cash | $ | 3,198 | $ | 1,722 | $ | 2,956 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations
Baxter International Inc., through our subsidiaries (collectively, Baxter, we, our or us), provides a broad portfolio of essential healthcare products, including sterile intravenous (IV) solutions; infusion systems, administrative sets; parenteral nutrition therapies; surgical hemostat, sealant and adhesion prevention products; connected care solutions and collaboration tools, including smart bed systems, patient monitoring systems and diagnostic technologies; respiratory health devices; advanced equipment for the surgical space, including surgical video technologies, precision positioning devices and other accessories; injectable pharmaceuticals; inhaled anesthesia; drug compounding; chronic and acute dialysis therapies and services, including peritoneal dialysis (PD), hemodialysis (HD), continuous renal replacement therapies (CRRT) and other organ support therapies. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, ambulatory surgery centers, doctors’ offices and patients at home under physician supervision. 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. Our reportable segments were previously comprised of the following geographic segments related to our legacy Baxter business: Americas (North and South), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific), and a global segment for our Hillrom Business. In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Under this new operating model, our business is comprised of four segments under this new operating model: Medical Products and Therapies, Healthcare Systems and Technologies (formerly referred to as our Hillrom segment), Pharmaceuticals and Kidney Care which are described in Note 18. Our segments were changed during the third quarter of 2023 to align with our new operating model and prior period segment disclosures have been revised to reflect the new segment presentation.
In January 2023, we announced our intention to separate our Kidney Care business into a new, publicly traded company. While we continue to evaluate all strategic options in the interest of maximizing stockholder value, we continue to progress towards our current target of July 2024 for completion of the proposed spinoff of this business.
Risks and Uncertainties
Supply Constraints and Global Economic Conditions
We have experienced significant challenges to our global supply chain in recent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, resulting from the pandemic and other exogenous factors including significant weather events, elevated inflation levels, disruptions to certain ports of call and access to shipping lanes around the world, the war in Ukraine, the conflict in the Middle East (including recent attacks on merchant ships in the Red Sea), tensions between China and Taiwan and other geopolitical events. We expect to continue to experience some of these and other challenges related to our supply chain in future periods. These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for certain product categories due to our inability to fully satisfy demand. While we have seen improvements in the availability of certain component parts and improved pricing of certain raw materials, these challenges have not completely subsided and may continue to have a negative impact on our sales in the future.
We expect that the challenges caused by global economic conditions, among other factors, may continue to have an adverse effect on our business.
Use of Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amounts and related disclosures in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Baxter and our majority-owned subsidiaries that we control, after elimination of intra-company balances and transactions.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Revenue Recognition
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of our contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Our global payment terms are typically between 30-90 days.
Our primary customers are hospitals, healthcare distribution companies, dialysis providers and government agencies that purchase healthcare products on behalf of providers. Most of our performance obligations are satisfied at a point in time. This includes sales of our broad portfolio of essential healthcare products across our business segments. We earn revenues from acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; surgical hemostat and sealant products, smart bed systems; patient monitoring and diagnostic technologies; respiratory health devices; and advanced equipment for the surgical space. For most of those offerings, our performance obligation is satisfied upon delivery to the customer. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation.
To a lesser extent, we enter into arrangements for which revenue may be recognized over time. For example, we lease medical equipment to customers under operating lease arrangements and recognize the related revenues on a monthly basis over the lease term. Our Healthcare Systems and Technologies segment includes connected care solutions and collaboration tools that are implemented over time. We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services. We also earn revenue from contract manufacturing activities, which is recognized over time as the services are performed. Revenue is recognized over time when we are creating or enhancing an asset that the customer controls as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.
As of December 31, 2023, we had $6.51 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of more than one year, which are primarily included in the Medical Product and Therapies and Kidney Care segments. Some contracts in the United States included in this amount contain index-dependent price increases, which are not known at this time. We expect to recognize approximately 50% of this amount as revenue in 2024, 25% in 2025, 15% in 2026, 10% in 2027 and the remainder thereafter.
Significant Judgments
Revenues from product sales are recorded at the net sales price, which includes estimates of variable consideration, primarily related to rebates and distributor chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in accrued expenses and other current liabilities and as reductions of accounts receivable, net on the consolidated balance sheets. Management's 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 using the expected value method. The amount of variable consideration included in the net sales price is limited to the amount for which it is probable that a significant reversal in revenue will not occur when the related uncertainty is resolved. Revenue recognized in the years ended December 31, 2023, 2022 and 2021 related to performance obligations satisfied in prior periods was not material. 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 and determining the allocation of the transaction price may require significant judgment.
Practical Expedients
We apply a practical expedient to expense as incurred costs to obtain a contract with a customer when the amortization period would have been one year or less. We do not disclose the value of the transaction price that is allocated to unsatisfied performance obligations for contracts with an original expected length of less than one year. We have elected to use the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component if it is expected, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Additionally, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer are excluded from revenue.
Accounts Receivable and Allowance for Doubtful Accounts
In the normal course of business, we provide credit to our customers, perform credit evaluations of these customers and maintain reserves for potential credit losses. In determining the amount of the allowance for doubtful accounts, we consider, among other items, historical credit losses, the past-due status of receivables, payment histories, other customer-specific information, current economic conditions and reasonable and supportable future forecasts. Receivables are written off when we determine that they are uncollectible.
Shipping and Handling Costs
Shipping costs incurred to physically move product from our premises to the customer’s premises are classified as selling, general and administrative (SG&A) expenses. Handling costs, which are costs incurred to store, move and prepare products for shipment, are classified as cost of sales. Approximately $455 million in 2023, $493 million in 2022 and $380 million in 2021 of shipping costs were classified in SG&A expenses.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash, certificates of deposit and money market and other short-term funds with original maturities of three months or less. Restricted cash represents cash balances restricted as to withdrawal or use and are included in prepaid expenses and other current assets on the consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost or net realizable value determined by the first-in, first-out method. We review inventories on hand at least quarterly and record provisions for estimated excess, slow-moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value.
Property, Plant and Equipment, Net
Property, plant and equipment are stated at cost. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets, which range from 20 to 50 years for buildings and improvements and from 3 to 15 years for machinery and equipment. Leasehold improvements are amortized over the life of the related facility lease (including any renewal periods, if appropriate) or the asset, whichever is shorter. We capitalize certain computer software and software development costs incurred in connection with developing or obtaining software for internal use. Capitalized software costs are included within machinery and equipment and are amortized on a straight-line basis over the estimated useful lives of the software, which generally range from three to five years.
Research and Development
Research and development (R&D) costs, including R&D acquired in transactions that are not business combinations, are expensed as incurred. Pre-regulatory approval contingent milestone obligations to counterparties in collaborative arrangements, which include acquired R&D, are expensed when the milestone is probable to be achieved. Contingent milestone payments made to such counterparties on or after regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangible assets, net.
Acquired in-process R&D (IPR&D) is the value assigned to technology or products under development acquired in a business combination which have not received regulatory approval and have no alternative future use. Acquired IPR&D 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 accounted for as a finite-lived intangible asset and amortized on a straight-line basis over the estimated economic life of the related technology or product, subject to annual impairment reviews as discussed below. If the R&D project is abandoned, the indefinite-lived asset is charged to expense.
Collaborative Arrangements
We periodically enter into collaborative arrangements in the normal course of business. These collaborative arrangements take a number of forms and structures and are designed to enhance and expedite long-term sales and profitability growth. These arrangements may provide for us to obtain commercialization rights to a product under development, and require us to make upfront payments, contingent milestone payments, profit-sharing, and/or royalty payments. We may be responsible for ongoing costs associated with the arrangements, including R&D cost reimbursements to the counterparty. See the Research and Development section of this note regarding the accounting treatment of upfront and contingent milestone payments. Any royalty and profit-sharing payments during the commercialization phase are expensed as cost of sales when they become due and payable.
Restructuring Charges
We record liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. Employee termination costs are primarily recorded when actions are probable and estimable. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. Refer to the discussion below regarding the accounting for asset impairment charges.
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill is initially measured as the excess of the purchase price over the fair value (or other measurement attribute required by U.S. GAAP) of acquired assets and liabilities in a business combination. Goodwill is not amortized but is subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess goodwill for impairment by initially performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not required to be performed. If we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform a quantitative goodwill impairment test. In the quantitative impairment test, we calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the amount that its carrying amount, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. In a quantitative goodwill impairment test, the fair values of our reporting units are generally determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach). Significant assumptions in reporting unit fair value measurements generally include forecasted cash flows, discount rates, terminal growth rates and earnings multiples. Each of those assumptions can significantly affect the fair values of our reporting units.
Indefinite-lived intangible assets, such as IPR&D acquired in business combinations and certain trade names with indefinite lives, are subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess indefinite-lived intangible assets for impairment by first performing qualitative assessments to determine whether it is more-likely-than-not that the fair values of the indefinite-lived intangible assets are less than the carrying amounts. If we determine that it is more-likely-than-not that an indefinite-lived intangible asset is impaired, or if we elect not to perform an initial qualitative assessment, we then perform the quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds the fair value of the indefinite-lived intangible asset, we write the carrying amount down to the fair value.
We review the carrying amounts of long-lived assets used in operations, other than goodwill and intangible assets not subject to amortization, for potential impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating recoverability, we group assets and liabilities at the lowest level such that the identifiable cash flows relating to the group are largely independent of the cash flows
of other assets and liabilities. We then compare the carrying amounts of the assets or asset groups with the related estimated undiscounted future cash flows. In the event an asset (or asset group) is not recoverable, an impairment charge is recorded as the amount by which the carrying amount of the asset (or asset group) exceeds its fair value.
Long-lived assets are classified as held for sale when certain criteria are met, including when management has committed to sell the asset, the asset is available for sale in its present condition and the sale is probable of being completed within one year of the balance sheet date. Assets held for sale are no longer depreciated or amortized and they are reported at the lower of their carrying amount or fair value less cost to sell.
See Notes 4 and 5 for further information about impairments of goodwill and other long-lived assets recognized in the accompanying consolidated financial statements.
Investments in Debt and Equity Securities
Investments in debt securities classified as available-for-sale are measured at fair value with changes in fair value reported in other comprehensive (loss) income (OCI). Investments in marketable equity securities are classified as other non-current assets and are measured at fair value with gains and losses recognized in other (income) expense, net. We have elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, our non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. Gains and losses on non-marketable equity securities are also recognized in other (income) expense, net. Noncontrolling investments in common stock or in-substance common stock are accounted for under the equity method if we have the ability to exercise significant influence over the operating and financial policies of the investee. We review our investments in debt and equity securities for impairment and adjust impaired investments to fair value through earnings, as required.
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. We maintain valuation allowances unless it is more-likely-than-not that the deferred tax asset will be realized. With respect to uncertain tax positions, we determine whether the position is more-likely-than-not to be sustained upon examination based on the technical merits of the position. Any tax position that meets the more-likely-than-not recognition threshold is measured and recognized in the consolidated financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The liability relating to uncertain tax positions is classified as current in the consolidated balance sheets to the extent that we anticipate making a payment within one year. Interest and penalties associated with income taxes are classified in the income tax expense (benefit) line in the consolidated statements of income (loss).
Foreign Currency Translation
Cumulative translation adjustments (CTA) related to foreign operations are included in OCI. For foreign operations in highly inflationary economies, translation gains and losses are included in other (income) expense, net, and were not material in 2023, 2022 and 2021.
Derivatives and Hedging Activities
Derivative instruments are recognized as either assets or liabilities at fair value in the consolidated balance sheets and are classified as short-term or long-term based on the scheduled maturity of the instrument. We designate certain of our derivatives and foreign-currency denominated debt as hedging instruments in cash flow, fair value or net investment hedges.
For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is recorded in OCI and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid are initially recorded as assets and reclassified to OCI over the life of the option, and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in cost of sales and interest expense, net, and are primarily related to forecasted intra-company sales denominated in foreign currencies and forecasted interest payments on anticipated issuances of debt, respectively.
For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets changes in fair value attributable to a particular risk, such as changes in interest rates, of the hedged item, which are also recognized in earnings.
We have designated certain of our Euro-denominated senior notes as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments on the outstanding debt balances are recorded as a component of AOCI.
For derivative instruments that are not designated as hedges, the change in fair value is recorded directly to other (income) expense, net.
If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, we discontinue hedge accounting prospectively. Gains or losses relating to terminations of effective cash flow hedges generally continue to be deferred and are recognized consistent with the loss or income recognition of the underlying hedged items. However, if it is probable that the hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from accumulated other comprehensive income (loss) (AOCI) to earnings. If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged item at the date of termination is amortized to earnings over the remaining term of the hedged item. If we remove a net investment hedge designation, any gains or losses recognized in AOCI are not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged.
Cash flows related to the settlement of derivative instruments designated as net investment hedges of foreign operations are classified in the consolidated statements of cash flows within investing activities. Cash flows for all other derivatives, including those that are not designated as a hedge, are classified in the same line item as the cash flows of the related hedged item, which is generally within operating activities.
New Accounting Standards
Recently issued accounting standards not yet adopted
In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires enhanced disclosures about segment expenses on an annual and interim basis. This standard is effective for our annual consolidated financial statements for the year ending December 31, 2024 and for interim periods beginning in 2025. We are currently evaluating the impact of this standard on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures, which requires (1) disclosure of specific categories in the rate reconciliation and (2) additional information for reconciling items that meet a quantitative threshold. Additionally, the amendment requires disclosure of certain disaggregated information about income taxes paid, income from continuing operations before income tax expense (benefit) and income tax expense (benefit). The standard is effective for our annual consolidated financial statements for the year ending December 31, 2025. We are currently evaluating the impact of this standard on our consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sales Restrictions, which (1) clarifies the guidance in Topic 820 on the fair value measurement of an equity security that is subject to contractual restrictions that prohibit the sale of an equity security and (2) requires specific disclosures related to such an equity security. The standard is effective for our annual consolidated financial statements for the year ending December 31, 2024 and for interim periods beginning in 2025. The impact of the adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
Recently adopted accounting pronouncements
As of January 1, 2022, we adopted ASU 2021-05, Leases (Topic 842), which requires a lessor to classify a lease with variable lease payments (that do not depend on an index or rate) as an operating lease if (1) the lease would have been classified as a sales-type or direct financing lease, and (2) the lessor would have recognized a selling loss at lease commencement. These changes are intended to avoid recognizing a day-one loss for a lease with
variable payments even though the lessor expects the arrangement will be profitable overall. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In the fourth quarter of 2021, we adopted ASU 2021-08, Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with Customers). This ASU is expected to reduce diversity in practice and increase comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. In accordance with this ASU we recognized contract liabilities of $142 million as part of the Hillrom acquisition in December 2021. We did not acquire contract assets or liabilities in connection with other acquisitions completed since the adoption of this ASU.
NOTE 2****DISCONTINUED OPERATIONS
On September 29, 2023, we sold our BPS business to Advent International and Warburg Pincus (collectively, the buyers). Under the terms of the related Equity Purchase agreement entered into with the buyers in May 2023, we were entitled to aggregate consideration of $4.25 billion, subject to adjustment for specified items. After giving effect to those adjustments, we received cash proceeds of $3.96 billion. We recognized a pre-tax gain on the sale of $2.88 billion ($2.59 billion net of tax), which represents the excess of (a) the $3.91 billion in net consideration received, consisting of (i) $3.96 billion in cash proceeds from the buyers, less (ii) $47 million in transaction costs, over (b) the sum of (i) the $840 million net book value of the BPS business upon the closing of the transaction and (ii) BPS's $181 million other comprehensive loss, which was reclassified to earnings.
The BPS business, which was historically reported within our former Americas segment, provided contract manufacturing and development services, which include sterile fill-finish manufacturing and support services across clinical and commercial applications, primarily serving customers in the pharmaceutical industry. BPS was historically operated through our former, wholly-owned subsidiaries Baxter Pharmaceutical Solutions LLC, a Delaware limited liability company, and Baxter Oncology GmbH, a German limited liability company (collectively, the divested entities).
We concluded that our BPS business met the criteria to be classified as held-for-sale in May 2023. A component of an entity is reported in discontinued operations after meeting the criteria for held-for-sale classification if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. We analyzed the quantitative and qualitative factors relevant to the divestiture of our BPS business, including its significance to our overall net income (loss) and earnings (loss) per share, and determined that those conditions for discontinued operations presentation had been met. As such, the financial position, results of operations and cash flows of that business, including our gain from the sale of that business and the related cash proceeds received, are reported as discontinued operations in the accompanying consolidated financial statements. Prior period amounts have been adjusted to reflect discontinued operations presentation.
At closing of the transaction, Baxter Pharmaceutical Solutions LLC included a BPS manufacturing facility in Bloomington Indiana and Baxter Oncology GmbH included a manufacturing facility in Halle Germany. Previously, Baxter Oncology GmbH included an additional manufacturing site in Bielefeld Germany that was not part of the BPS business and was transferred to another Baxter entity prior to closing of the divestiture. Accordingly, amounts related to the Bielefeld site continue to be presented as continuing operations in the accompanying consolidated financial statements.
At closing of the transaction, Baxter entered into a Transition Services Agreement (TSA) and a Master Commercial Manufacturing and Supply Agreement (MSA) with the divested entities. Pursuant to the TSA, Baxter and the divested entities will provide to each other, on an interim basis, specific transition services for up to 24 months post-closing to help ensure business continuity and minimize disruptions. Services to be provided under the TSA include finance, information technology, human resources, integrated supply chain and certain other administrative services. Pursuant to the MSA, the divested entities will provide development, manufacturing, regulatory and other related services for certain Baxter pharmaceutical products for up to 5 years post-closing (with certain extension rights as provided therein).
Results of Discontinued Operations and Assets and Liabilities of Discontinued Operations
The following table summarizes the major classes of line items included in income from discontinued operations, net of tax, for the years ended December 31, 2023, 2022 and 2021:
| (in millions) | 2023 | 2022 | 2021 | ||||||||
| Net sales | $ | 469 | $ | 607 | $ | 638 | |||||
| Cost of sales | 216 | 276 | 253 | ||||||||
| Gross margin | 253 | 331 | 385 | ||||||||
| Selling, general and administrative expenses | 45 | 28 | 22 | ||||||||
| Research and development expenses | 1 | 3 | 3 | ||||||||
| Interest expense, net | (1) | — | (1) | ||||||||
| Other (income) expense, net | 1 | 3 | — | ||||||||
| Income from discontinued operations before gain on disposition and income taxes | 207 | 297 | 361 | ||||||||
| Gain on disposition | 2,882 | — | — | ||||||||
| Income tax expense | 357 | 64 | 99 | ||||||||
| Income from discontinued operations, net of tax | $ | 2,732 | $ | 233 | $ | 262 |
For the years ended December 31, 2023 and 2022, SG&A expenses include $17 million and $5 million, respectively, of separation-related costs incurred in connection with the sale of BPS.
The following table summarizes the carrying amounts of the major classes of assets and liabilities classified as discontinued operations in the consolidated balance sheets as of December 31, 2022:
| as of December 31 (in millions) | 2022 | ||||
| Accounts receivable, net of allowances | $ | 88 | |||
| Inventories | 39 | ||||
| Prepaid expenses and other current assets | 59 | ||||
| Property, plant and equipment, net | 284 | ||||
| Goodwill | 391 | ||||
| Operating lease right-of-use assets | 9 | ||||
| Other non-current assets | 2 | ||||
| Assets of discontinued operations | $ | 872 | |||
| Accounts payable | $ | 29 | |||
| Accrued expenses and other current liabilities | 32 | ||||
| Operating lease liabilities | 9 | ||||
| Other non-current liabilities | 111 | ||||
| Liabilities of discontinued operations | $ | 181 |
NOTE 3
| ACQUISITIONS AND OTHER ARRANGEMENTS |
Results of operations of acquired businesses are included in our results of operations beginning as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values (or other measurement attribute required under U.S. GAAP) at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill.
Contingent consideration related to business combinations is recognized at its estimated fair value on the acquisition date. Subsequent changes to the fair value of those contingent consideration arrangements are
recognized in earnings. Contingent consideration related to business acquisitions may consist of development, regulatory and commercial milestone payments, and sales or earnings-based payments, and are valued using discounted cash flow techniques. The fair value of development, regulatory and commercial milestone payments reflects management’s expectations of the probability of payment, and increases or decreases as the probability of payment or expectation of timing or amount of payments changes. The fair value of sales-based payments is based upon probability-weighted future revenue estimates and increases or decreases as revenue estimates or expectation of timing or amount of payments changes.
Hillrom
On December 13, 2021, we completed our acquisition of all outstanding equity interests of Hillrom for a purchase price of $10.48 billion. Including the assumption of Hillrom's outstanding debt obligations, the enterprise value of the transaction was approximately $12.84 billion. Under the terms of the transaction agreement, Hillrom shareholders received $156.00 in cash per each outstanding Hillrom common share.
Hillrom was a global medical technology leader whose products and services help enable earlier diagnosis and treatment, optimize surgical efficiency, and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. Hillrom made those outcomes possible through digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.
The following table summarizes the fair value of the total consideration paid:
| (in millions) | |||||
| Cash consideration paid to Hillrom shareholders(a) | $ | 10,474 | |||
| Fair value of equity awards issued to Hillrom equity award holders(b) | 2 | ||||
| Total Consideration | $ | 10,476 |
(a) Represents cash consideration transferred of $156.00 per outstanding Hillrom common share to existing shareholders and holders of equity awards that vested at closing pursuant to their original terms.
(b) Represents the pre-acquisition service portion of the fair value of 668 thousand replacement restricted stock units issued to Hillrom equity award holders at closing.
The valuation of assets acquired and liabilities assumed was finalized during the fourth quarter of 2022. The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date:
| (in millions) | |||||
| Assets acquired and liabilities assumed | |||||
| Cash and cash equivalents | $ | 399 | |||
| Accounts receivable | 561 | ||||
| Inventories | 559 | ||||
| Prepaid expenses and other current assets | 49 | ||||
| Property, plant and equipment | 506 | ||||
| Goodwill | 6,834 | ||||
| Other intangible assets | 6,029 | ||||
| Operating lease right-of-use assets | 74 | ||||
| Other non-current assets | 133 | ||||
| Short-term debt | (250) | ||||
| Accounts payable | (140) | ||||
| Accrued expenses and other current liabilities | (578) | ||||
| Long-term debt and finance lease obligations | (2,118) | ||||
| Operating lease liabilities | (57) | ||||
| Other non-current liabilities | (1,525) | ||||
| Total assets acquired and liabilities assumed | $ | 10,476 |
In the fourth quarter of 2022, we finalized our valuation of the acquisition date assets acquired and liabilities assumed. The measurement period adjustments recorded in 2022 primarily impacted accounts receivable, property plant and equipment, other intangible assets, accrued expenses and other current liabilities and deferred income tax liabilities. Individually, the measurement period adjustments were not material and in total increased goodwill by $49 million. The measurement period adjustments did not have a significant impact on our results of operations. We allocated $804 million of the total consideration to developed technology with a weighted-average useful life of 5 years, $1.91 billion to trade names with an indefinite useful life, $62 million to trade names with a weighted-average useful life of 7 years, $3.19 billion to customer relationships with a weighted-average useful life of 15 years and $30 million to IPR&D that is considered an indefinite lived intangible asset. The fair values of the intangible assets were determined using the income approach. We used a discount rate of 8.5% to value the developed technology, trade names and customer relationships and 9.0% to value the IPR&D. We consider the fair value of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair value. We also recognized $1.33 billion of deferred income tax liabilities in connection with the acquisition.
The goodwill, which is not deductible for tax purposes, includes the value of an assembled workforce as well as the overall strategic benefits provided to our product portfolio and is included in the Healthcare Systems and Technologies segment.
See Note 5 for additional information about the impairments recognized in the second half of 2022 related to goodwill and certain intangible assets acquired in the Hillrom acquisition.
The results of operations of the acquired business have been included in our consolidated statement of income (loss) since the date the business was acquired. The Hillrom acquisition contributed $212 million of net sales and a $96 million of pretax loss for the year ended December 31, 2021. Significant drivers of the acquired business's pretax loss for 2021, which reflects the period from the December 13, 2021 acquisition date through year-end, included intangible asset amortization expense, incremental cost of sales from fair value step-ups on acquired inventory, acquisition-related expenses and interest expense on the borrowings used to finance the acquisition.
For the year ended December 31, 2023, we incurred $19 million of integration-related costs related to the Hillrom acquisition. For the year ended December 31, 2022, we incurred $93 million of integration-related costs and $159 million of incremental cost of sales from the fair value step-ups on acquired Hillrom inventory that was sold in 2022.
We also incurred $85 million of restructuring charges in 2022 related to our integration of Hillrom. See Note 12 for additional information about our restructuring activities. For the year ended December 31, 2021, we incurred $139 million of acquisition and integration-related costs, $48 million of bridge facility fees and other pre-acquisition financing costs and $42 million of incremental cost of sales from the fair value step-ups on acquired Hillrom inventory that was sold in 2021. See Note 6 for additional information about financing arrangements related to the Hillrom acquisition.
The following table presents the unaudited pro forma combined results of Baxter and Hillrom for the year ended December 31, 2021 as if the acquisition of Hillrom had occurred on January 1, 2020:
| year ended December 31 (in millions) | 2021 | ||||
| Net sales | $ | 15,574 | |||
| Net income attributable to Baxter stockholders | 962 |
The acquisition has been accounted for in the unaudited pro forma combined financial information using the acquisition method of accounting with Baxter as the acquirer. In order to reflect the occurrence of the acquisition as if it occurred on January 1, 2020 as required, the unaudited pro forma combined financial information includes adjustments to reflect incremental depreciation and amortization expense based on the current preliminary fair values of the identifiable tangible and intangible assets acquired, additional interest expense associated with the issuance of debt to finance the acquisition, nonrecurring costs directly attributable to the acquisition and the income tax effects of the pro forma adjustments. The unaudited pro forma combined financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2020. In addition, the unaudited pro forma combined financial information is not a projection of future results of operations of the combined company nor does it reflect the expected realization of any potential synergies or cost savings associated with the acquisition.
PerClot
On July 29, 2021, we acquired certain assets related to PerClot Polysaccharide Hemostatic System (PerClot), including distribution rights for the U.S. and specified territories outside of the U.S., from CryoLife, Inc. for an upfront purchase price of $25 million and the potential for additional cash consideration of up to $36 million, which had an acquisition-date fair value of $28 million, based upon regulatory and commercial milestones. PerClot is an absorbable powder hemostat indicated for use in surgical procedures, including cardiac, vascular, orthopedic, spinal, neurological, gynecological, ENT and trauma surgery as an adjunct hemostat when control of bleeding from capillary, venous, or arteriolar vessels by pressure, ligature, and other conventional means is either ineffective or impractical. PerClot is approved for distribution in the European Union and other markets and was submitted for Pre-Market Approval for distribution in the U.S. in the fourth quarter of 2021, for which approval was subsequently received in May 2023. We concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. The fair values of the potential contingent consideration payments were estimated by applying probability-weighted expected payment models and are Level 3 fair value measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.
The following table summarizes the fair value of the consideration transferred:
| (in millions) | |||||
| Cash | $ | 25 | |||
| Contingent Consideration | 28 | ||||
| Total Consideration | $ | 53 |
The following table summarizes the fair value of the assets acquired as of the acquisition date:
| (in millions) | |||||
| Assets acquired | |||||
| Goodwill | $ | 4 | |||
| Other intangible assets | 49 | ||||
| Total assets acquired | $ | 53 |
The results of operations of the acquired business have been included in our consolidated statement of income (loss) since the date the business was acquired and were not material for the year ended December 31, 2021.
We allocated $39 million of the total consideration to an IPR&D asset with an indefinite useful life, $9 million to the approved PerClot developed product rights with an estimated useful life of 10 years and $1 million to customer relationships with an estimated useful life of 10 years. The fair values of the intangible assets were determined using the income approach. The discount rates used to measure the intangible assets were 18.7% for IPR&D, 16.0% for developed product rights and 15.0% for customer relationships. We consider the fair values of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.
The goodwill, which is deductible for tax purposes, includes the value of overall strategic benefits provided to our surgical portfolio of hemostats and sealants and is included in the Medical Products and Therapies segment.
Transderm Scop
On March 31, 2021, we acquired the rights to Transderm Scop (TDS) for the U.S. and specified territories outside of the U.S. from subsidiaries of GlaxoSmithKline for an upfront purchase price of $60 million including the cost of acquired inventory and the potential for additional cash consideration of $30 million, which had an acquisition-date fair value of $24 million, based upon regulatory approval of a new contract manufacturer by a specified date. We previously sold this product under a distribution license to the U.S. institutional market. TDS is indicated for post-operative nausea and vomiting in the U.S. and motion sickness in European markets. We concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. The fair value of the potential contingent consideration payment was estimated by applying a probability-weighted expected payment model and is a Level 3 fair value measurement due to the significant estimates and assumptions used by management in establishing the estimated fair value.
The following table summarizes the fair value of the consideration transferred:
| (in millions) | |||||
| Cash | $ | 60 | |||
| Contingent Consideration | 24 | ||||
| Total Consideration | $ | 84 |
The following table summarizes the fair value of the assets acquired as of the acquisition date:
| (in millions) | |||||
| Assets acquired | |||||
| Inventory | $ | 16 | |||
| Goodwill | 1 | ||||
| Other intangible assets | 67 | ||||
| Total assets acquired | $ | 84 |
The results of operations of the acquired business have been included in our consolidated statement of income (loss) since the date the business was acquired and were not material for the year ended December 31, 2021.
We allocated $64 million of the total consideration to the TDS developed product rights with an estimated useful life of 9 years and $3 million to customer relationships with an estimated useful life of 7 years. The fair values of the intangible assets were determined using the income approach. The discount rates used to measure the intangible assets were 22.5% for developed product rights and 15.5% for customer relationships. We consider the fair values
of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.
Other
Total consideration transferred for other acquisitions totaled $32 million and $21 million in 2022 and 2021, respectively, and primarily resulted in the recognition of goodwill and other intangible assets. These acquisitions did not materially affect our results of operations.
Except for Hillrom, we have not presented pro forma financial information for any of the 2023, 2022 or 2021 acquisitions because their results are not material to our consolidated financial statements.
Other Business Development Activities
Zosyn
In March 2022, we entered into an agreement with a subsidiary of Pfizer Inc. to acquire the rights to Zosyn, a premixed frozen piperacillin-tazobactam product, in the U.S. and Canada. Zosyn is used for the treatment of intra-abdominal infections, nosocomial pneumonia, skin and skin structure infections, female pelvic infections and community-acquired pneumonia. Under the terms of the acquisition, we paid the acquisition price of $122 million and received specified intellectual property, including patent rights, in the first quarter of 2022 and received additional intellectual property, including the product rights to Zosyn, in the first quarter of 2023. Under the arrangement, we received profit sharing payments from sales of Zosyn until the product rights transferred to us in April 2023. The related profit sharing payments that were earned during 2023 and 2022 were not material.
The transaction has been accounted for as an asset acquisition, as substantially all of the fair value of the assets acquired under the arrangement was concentrated in the product rights that we received, which we classify as a developed technology intangible asset. Accordingly, the $122 million purchase price was primarily allocated to the developed technology intangible asset class and is being amortized over an estimated useful life of 9 years.
Celerity Pharmaceuticals, LLC
In September 2013, we entered into an agreement with Celerity Pharmaceuticals, LLC (Celerity) to develop certain acute care generic injectable premix and oncolytic products through regulatory approval. We transferred our rights in these products to Celerity and Celerity assumed ownership and responsibility for development of the products. We were obligated to purchase the individual product rights from Celerity if the products obtained regulatory approval. In December 2020, we entered into an agreement with a third party to divest our rights to one of the products that was being developed by Celerity, a generic version of liposomal doxorubicin, for less than $1 million if that product were to receive regulatory approval in the U.S. and European Union in 2022. Liposomal doxorubicin is a chemotherapy medicine used to treat various types of cancer and we entered into this transaction to divest our rights to this generic version of that product after we had separately entered into a transaction to acquire the branded version.
The related regulatory approvals were subsequently obtained for the generic version of liposomal doxorubicin and we recognized a loss of approximately $54 million in the third quarter of 2022, representing the difference between the amount we owed Celerity following those regulatory approvals and the proceeds that we were entitled to receive from our divestiture of those product rights. That loss is reported within other operating expense (income), net in our consolidated statements of operations for the year ended December 31, 2022.
Caelyx and Doxil
On February 17, 2021, we acquired the rights to Caelyx and Doxil, the branded versions of liposomal doxorubicin, from a subsidiary of Johnson & Johnson for specified territories outside of the U.S. We previously acquired the U.S. rights to this product in 2019. Liposomal doxorubicin is a chemotherapy medicine used to treat various types of cancer. The transaction was accounted for as an asset acquisition, as substantially all of the fair value of the gross assets acquired was concentrated in the developed technology intangible asset. The purchase price of $325 million was allocated to the assets acquired, which included a $314 million developed-technology intangible asset with an estimated useful life of 9 years and an $11 million customer relationship intangible asset with an estimated useful life of 8 years. Net sales related to this acquisition were $108 million for the year ended December 31, 2021.
Other Asset Acquisitions
During 2021, we also entered into distribution license arrangements for multiple products that have not yet obtained regulatory approval for upfront cash payments of $3 million. The cash paid was treated as R&D expenses on our consolidated statements of income (loss). We could make additional payments of up to $32 million upon the achievement of certain development, regulatory or commercial milestones.
Other
In addition to the arrangements described above, we have entered into several other collaborative arrangements. We could make additional payments of up to $19 million upon the achievement of certain development and regulatory milestones, in addition to future payments related to contingent commercialization milestones, profit-sharing and royalties.
NOTE 4
| SUPPLEMENTAL FINANCIAL INFORMATION |
Allowance for Doubtful Accounts
The following table is a summary of changes in our allowance for doubtful accounts for the years ended December 31, 2023 and 2022.
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Balance at beginning of period | $ | 114 | $ | 122 | $ | 125 | |||||
| Acquisition | — | — | 13 | ||||||||
| Charged to costs and expenses | 16 | 7 | (2) | ||||||||
| Write-offs | (9) | (7) | (5) | ||||||||
| Currency translation adjustments | 8 | (8) | (9) | ||||||||
| Balance at end of period | $ | 129 | $ | 114 | $ | 122 |
Inventories
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Raw materials | $ | 731 | $ | 698 | ||||
| Work in process | 285 | 294 | ||||||
| Finished goods | 1,808 | 1,687 | ||||||
| Inventories | $ | 2,824 | $ | 2,679 |
Prepaid Expenses and Other Current Assets
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Prepaid value added taxes | $ | 190 | $ | 188 | ||||
| Prepaid income taxes | 211 | 185 | ||||||
| Contract assets | 53 | 52 | ||||||
| Assets held for sale | — | 50 | ||||||
| Derivative assets | 51 | 14 | ||||||
| Other | 387 | 368 | ||||||
| Prepaid expenses and other current assets | $ | 892 | $ | 857 |
In September 2022, we entered into a purchase agreement with a buyer to sell our corporate headquarters in Deerfield, Illinois for $52 million, which approximated its net book value. The related assets were classified as held for sale at that time and were presented within prepaid expenses and other current assets in the accompanying
consolidated balance sheet as of December 31, 2022. During 2023, the purchase agreement was terminated and the property was taken off the market. We currently intend to continue using the property as our corporate headquarters for the foreseeable future and the related assets, which became classified as assets held for use upon termination of the purchase agreement, are presented within property, plant and equipment, net in the accompanying consolidated balance sheet as of December 31, 2023.
Property, Plant and Equipment, Net
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Land and land improvements | $ | 149 | $ | 137 | ||||
| Buildings and leasehold improvements | 1,791 | 1,757 | ||||||
| Machinery and equipment | 6,693 | 6,364 | ||||||
| Equipment on lease with customers | 1,640 | 1,613 | ||||||
| Construction in progress | 950 | 909 | ||||||
| Total property, plant and equipment, at cost | 11,223 | 10,780 | ||||||
| Accumulated depreciation | (6,790) | (6,085) | ||||||
| Property, plant and equipment, net | $ | 4,433 | $ | 4,695 |
Depreciation expense was $611 million in 2023, $627 million in 2022 and $592 million in 2021.
Impairments of Property, Plant and Equipment and Certain Other Long-Lived Assets
We review the carrying amounts of long-lived assets used in operations for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating recoverability of long-lived assets other than goodwill and intangible assets not subject to amortization, we group assets and liabilities at the lowest level such that the identified cash flows relating to the group are largely independent of the cash flows of other assets and liabilities. If the carrying amount of an asset group is greater than the related estimated undiscounted future cash flows, the carrying value is not considered recoverable. In that case, an impairment charge is recorded if, and to the extent that, the amount by which the asset group's carrying amount exceeds its fair value. However, the portion of an impairment loss allocated to an individual long-lived asset within an asset group cannot reduce the carrying amount of that asset below its fair value if its fair value is determinable without undue cost and effort.
Impairment of Opelika, Alabama Manufacturing Facility
Our manufacturing facility in Opelika, Alabama was one of three Baxter manufacturing facilities that produced dialyzers used in hemodialysis (HD) treatments. The competitive environment has increased the global supply of those products and, in connection with our initiatives to streamline our manufacturing footprint and improve our profitability, we made the decision in the second quarter of 2023 to cease production of dialyzers at the Opelika facility near the end of 2023.
As a result of our decision to cease dialyzer production at this manufacturing facility, we performed a trigger-based recoverability assessment of its long-lived assets, which consist of a building and manufacturing equipment, including specialized equipment used in the production of dialyzers. The carrying amount of that asset group exceeded the estimated undiscounted cash flows expected to be generated, and we recognized an impairment charge of $243 million, classified within cost of sales in the accompanying consolidated statements of income (loss), during the second quarter of 2023 to reduce the carrying amounts to their estimated fair values.
The fair values of the building and manufacturing equipment tested for impairment during the second quarter of 2023 were determined based on transaction prices of comparable assets. Significant assumptions used in the determination of the fair values included the identification of representative comparable assets. Our long-lived asset fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.
Other Impairments of Long-Lived Assets Related to HD Business
In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Our segments were changed during the third quarter of 2023 to align with our new operating model. See further discussion in Note 18, Segment Information. In connection with that segment change, we identified new reporting units for impairment testing purposes and performed fair value measurements of our reporting units to reallocate goodwill to the new reporting units based on their relative fair values and to assess those reporting units for impairment. We identified our HD business within our Kidney Care segment as one of the new reporting units at that time. Based on the estimated fair value of our HD business, we allocated no goodwill to it, and we determined that a triggering event was present to review the carrying amounts of long-lived assets within the HD business, which include four manufacturing facilities that primarily manufacture HD products, HD equipment leased to customers under operating leases and developed technology intangible assets, for potential impairment. In connection with that evaluation, we determined that the carrying amount of the asset group represented by our HD business, which is the lowest level for which identifiable cash flows are largely independent of other assets and liabilities, exceeded its forecasted undiscounted cash flows. We then measured the excess of the carrying amount of that asset group over its fair value and allocated the resulting impairment to its long-lived assets, limiting the impairments of individual assets within the group to amounts that would not result in their carrying amounts being written down below their fair values. As a result, we recognized $267 million of long-lived asset impairment charges, comprised of (i) a $190 million impairment charge related to certain manufacturing equipment, operating lease right-of-use assets and HD equipment leased to customers and (ii) a $77 million impairment charge related to developed technology intangible assets. The impairments are classified within cost of sales in the accompanying consolidated statement of income (loss) for the year ended December 31, 2023.
The fair value of the HD asset group was based on a discounted cash flow model (an income approach). Significant assumptions used in the determination of its fair value include forecasted cash flows, discount rates and terminal growth rates. The discounted cash flow model used to determine the fair value of the HD asset group during the third quarter 2023 reflected our most recent cash flow projections, a discount rate of 8% and a terminal growth rate of 1.5%. We also measured the fair values of individual assets within that asset group to ensure that the allocation of the asset group’s impairment to the long-lived assets within that group would not reduce the carrying amount of any individual asset below its fair value. The fair values of the buildings within that asset group were determined based on a cost approach. Significant assumptions used in the determination of those fair values included replacement costs of assets with a similar age and condition. The fair values of manufacturing equipment and HD equipment leased to customers within that group were determined based on transaction prices of comparable assets. Significant assumptions used in the determination of those fair values included the identification of representative comparable assets. The fair value of the right-of-use asset within that group was determined based on market rents and discount rates. Our long-lived asset fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.
Other Non-Current Assets
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Deferred tax assets | $ | 384 | $ | 280 | ||||
| Non-current receivables, net | 67 | 89 | ||||||
| Contract assets | 113 | 122 | ||||||
| Capitalized implementation costs in hosting arrangements | 121 | 119 | ||||||
| Pension and other postretirement benefits | 129 | 123 | ||||||
| Investments | 194 | 247 | ||||||
| Other | 118 | 129 | ||||||
| Other non-current assets | $ | 1,126 | $ | 1,109 |
Accrued Expenses and Other Current Liabilities
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Common stock dividends payable | $ | 147 | $ | 146 | ||||
| Employee compensation and withholdings | 636 | 409 | ||||||
| Property, payroll and certain other taxes | 147 | 161 | ||||||
| Contract liabilities | 148 | 154 | ||||||
| Restructuring liabilities | 110 | 100 | ||||||
| Accrued rebates | 263 | 257 | ||||||
| Operating lease liabilities | 128 | 120 | ||||||
| Income taxes payable | 268 | 91 | ||||||
| Pension and other postretirement benefits | 49 | 48 | ||||||
| Contingent payments related to acquisitions | 3 | 34 | ||||||
| Other | 695 | 650 | ||||||
| Accrued expenses and other current liabilities | $ | 2,594 | $ | 2,170 |
Other Non-Current Liabilities
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Pension and other postretirement benefits | $ | 919 | $ | 846 | ||||
| Deferred tax liabilities | 447 | 661 | ||||||
| Long-term tax liabilities | 125 | 64 | ||||||
| Contingent payments related to acquisitions | 11 | 50 | ||||||
| Contract liabilities | 46 | 40 | ||||||
| Litigation and environmental reserves | 22 | 20 | ||||||
| Restructuring liabilities | 18 | 7 | ||||||
| Other | 149 | 160 | ||||||
| Other non-current liabilities | $ | 1,737 | $ | 1,848 |
Interest Expense, net
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Interest costs | $ | 527 | $ | 426 | $ | 217 | |||||
| Interest costs capitalized | (15) | (11) | (10) | ||||||||
| Interest expense | 512 | 415 | 207 | ||||||||
| Interest income | (70) | (20) | (14) | ||||||||
| Interest expense, net | $ | 442 | $ | 395 | $ | 193 |
Other (Income) Expense, net
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Foreign exchange (gains) losses, net | $ | 52 | $ | 1 | $ | 17 | |||||
| Change in fair value of marketable equity securities | (7) | (8) | 7 | ||||||||
| Loss on debt extinguishment | — | — | 5 | ||||||||
| Pension settlement and curtailment (gains) losses | 1 | (12) | 2 | ||||||||
| Pension and other postretirement benefit (gains) losses | (42) | (26) | 8 | ||||||||
| Reclassification of cumulative translation loss to earnings | — | 65 | — | ||||||||
| Non-marketable investment impairments | 52 | — | — | ||||||||
| Other, net | (5) | (8) | 2 | ||||||||
| Other (income) expense, net | $ | 51 | $ | 12 | $ | 41 |
Following the wind down of our operations in Argentina, we determined that the net assets of the related entities were substantially liquidated during the third quarter of 2022. As a result of that determination, we reclassified their $65 million cumulative translation loss from accumulated other comprehensive income (loss) to other (income) expense, net.
Supplemental Cash Flow Information
Non-Cash Investing Activities
Purchases of property, plant and equipment included in accounts payable and accrued liabilities as of December 31, 2023, 2022 and 2021 was $80 million, $91 million and $79 million, respectively.
Other Supplemental Information
| year ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Interest paid, net of portion capitalized | $ | 484 | $ | 355 | $ | 145 | |||||
| Income taxes paid | $ | 262 | $ | 273 | $ | 182 |
NOTE 5
| GOODWILL AND OTHER INTANGIBLE ASSETS, NET |
Goodwill
The following is a reconciliation of goodwill by business segment.
| (in millions) | Americas | EMEA | APAC | Medical Products and Therapies | Healthcare Systems and Technologies1 | Pharmaceuticals | Kidney Care | Total | ||||||||||||||||||
| December 31, 2021 | $ | 2,099 | $ | 309 | $ | 224 | $ | — | $ | 6,786 | $ | — | $ | — | $ | 9,418 | ||||||||||
| Impairments | — | — | — | — | (2,812) | — | — | (2,812) | ||||||||||||||||||
| Measurement period adjustments | — | — | — | — | 49 | — | — | 49 | ||||||||||||||||||
| Currency translation | (134) | (20) | (14) | — | (35) | — | — | (203) | ||||||||||||||||||
| December 31, 2022 | $ | 1,965 | $ | 289 | $ | 210 | $ | — | $ | 3,988 | $ | — | $ | — | $ | 6,452 | ||||||||||
| Currency translation and other | (27) | (4) | (3) | 46 | 1 | 21 | 28 | 62 | ||||||||||||||||||
| Reallocation of goodwill | (1,938) | (285) | (207) | 1,195 | — | 542 | 693 | — | ||||||||||||||||||
| December 31, 2023 | $ | — | $ | — | $ | — | $ | 1,241 | $ | 3,989 | $ | 563 | $ | 721 | $ | 6,514 |
1Prior to the third quarter of 2023, our Healthcare Systems and Technologies segment was referred to as our Hillrom segment.
Change in Reportable Segments
As discussed in Note 18, Segment Information, our reportable segments were previously comprised of the following geographic segments related to our legacy Baxter business: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific), and a global segment for our Hillrom business. In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Our segments were changed during the third quarter of 2023 to align with our new operating model. Under this new operating model, our business is comprised of four segments: Medical Products and Therapies, Healthcare Systems and Technologies (formerly referred to as our Hillrom segment), Pharmaceuticals and Kidney Care. As a result of this segment change, we reallocated the goodwill from our previous Americas, EMEA and APAC segments to the reporting units within our new Medical Products and Therapies, Pharmaceuticals and Kidney Care segments based on the relative fair values of those reporting units. We performed goodwill impairment assessments both before and after the reporting unit change and we did not identify any goodwill impairments.
In connection with our November 1, 2023 annual goodwill impairment tests, we determined that no goodwill impairments had occurred. The fair values of the Front Line Care reporting unit within our Healthcare Systems and Technologies segment and the Chronic Therapies reporting unit within our Kidney Care segment exceeded their
carrying values by approximately 5% and 6%, respectively. We are continuing to closely monitor the performance of those reporting units, and if there is a significant adverse change in our outlook for those businesses in the future, a goodwill impairment could arise at that time. As of December 31, 2023, the carrying amounts of goodwill for our Front Line Care and Chronic Therapies reporting units were $2.42 billion and $444 million, respectively.
Goodwill Impairments
As described in Note 3, we acquired Hillrom on December 13, 2021 and recognized $6.83 billion of goodwill and $6.03 billion of other intangible assets, including $1.91 billion of indefinite-lived intangible assets, in connection with that acquisition. During the third quarter of 2022, we performed trigger-based impairment tests of the goodwill of each of the reporting units within our Hillrom segment (currently referred to as our Healthcare Systems and Technologies segment), as well as the indefinite-lived intangible assets, consisting primarily of trade names, that we acquired in connection with the Hillrom acquisition. We performed those tests as of September 30, 2022 due to (a) current macroeconomic conditions, including the rising interest rate environment and broad declines in equity valuations, and (b) reduced earnings forecasts for our Hillrom reporting units, driven primarily by shortages of certain component parts used in our products, raw materials inflation and increased supply chain costs. Those impairment tests resulted in total pre-tax goodwill impairment charges of $2.79 billion in the third quarter of 2022. In connection with our annual goodwill impairment assessment in the fourth quarter of 2022, we performed quantitative impairment tests for all of our reporting units and recorded an additional $27 million goodwill impairment related to our Hillrom segment. No goodwill impairments were recorded for our remaining reporting units in connection with our annual goodwill impairment tests because the fair values of those reporting units exceeded their carrying amounts.
The fair values of the reporting units tested for impairment during 2022 were determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach) based on the guideline public company method. Significant assumptions used in the determination of the fair values of our reporting units generally include forecasted cash flows, discount rates, terminal growth rates and earnings multiples. The discounted cash flow models used to determine the fair values of our reporting units during 2022 reflected our most recent cash flow projections, discount rates ranging from 9% to 10% and terminal growth rates ranging from 2% to 3%. Our reporting unit fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.
See further discussion below for information regarding intangible asset impairment charges recognized during the third and fourth quarters of 2022.
Other Intangible Assets, Net
The following is a summary of our other intangible assets.
| Indefinite-lived intangible assets | |||||||||||||||||||||||
| (in millions) | Customer relationships | Developed technology, including patents | Trade Names | Other amortized intangible assets | Trade Names | In process Research and Development | Total | ||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Gross other intangible assets | $ | 3,446 | $ | 3,823 | $ | 1,106 | $ | 120 | $ | 680 | $ | 157 | $ | 9,332 | |||||||||
| Accumulated amortization | (689) | (2,285) | (180) | (99) | — | — | (3,253) | ||||||||||||||||
| Other intangible assets, net | $ | 2,757 | $ | 1,538 | $ | 926 | $ | 21 | $ | 680 | $ | 157 | $ | 6,079 | |||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Gross other intangible assets | $ | 3,442 | $ | 3,836 | $ | 209 | $ | 116 | $ | 1,571 | $ | 202 | $ | 9,376 | |||||||||
| Accumulated amortization | (460) | (1,888) | (147) | (88) | — | — | $ | (2,583) | |||||||||||||||
| Other intangible assets, net | $ | 2,982 | $ | 1,948 | $ | 62 | $ | 28 | $ | 1,571 | $ | 202 | $ | 6,793 |
Intangible asset amortization expense was $652 million in 2023, $753 million in 2022 and $298 million in 2021. The anticipated annual amortization expense for definite-lived intangible assets recorded as of December 31, 2023 is $665 million in 2024, $632 million in 2025, $602 million in 2026, $437 million in 2027 and $427 million in 2028.
As a result of an update to our long-term branding strategy, we reclassified two trade name intangible assets with carrying amounts of $870 million and $21 million from indefinite-lived intangible assets to amortizing intangible assets during the fourth quarter of 2023. The estimated useful lives assigned to those assets were 15 years and 5 years, respectively, and we recognized $10 million of amortization expense on those intangible assets from the date of reclassification through December 31, 2023.
Intangible Asset Impairments
Impairment of Developed Technology Intangible Asset Related to HD Business
In the third quarter of 2023, we reviewed the long-lived assets of our HD reporting unit for potential impairment and recognized a $77 million impairment of developed technology intangible assets, in addition to other impairments of property, plant and equipment and operating lease right-of-use assets.
See Note 4, Supplemental Financial Information, for information about the impairment of this intangible asset, impairments of other long-lived assets related to our HD business and related fair value measurements.
Impairment of Indefinite-Lived Intangible Assets from Our Hillrom Acquisition
In addition to the goodwill impairments discussed above, we recognized pre-tax impairment charges of $332 million in the third quarter of 2022 to reduce the carrying amounts of certain indefinite-lived intangible assets, which primarily related to the Hillrom and Welch Allyn trade names acquired in the Hillrom acquisition, to their estimated fair values. Those intangible asset impairment charges are classified within cost of sales in the accompanying consolidated statements of income (loss) for the year ended December 31, 2022.
The fair values of the trade name intangible assets were determined using the relief from royalty method. Significant assumptions used in the determination of the fair value of the trade name intangible assets included revenue growth rates, terminal growth rates, discount rates and royalty rates. The relief from royalty models used in the determination of the fair values of our trade name intangible assets during 2022 reflected our most recent revenue projections, a discount rate of 9.5%, royalty rates ranging from 3% to 5% and terminal growth rates ranging from 2% to 3%. Our trade name intangible asset fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.
In the fourth quarter of 2022, we recognized an impairment charge of $12 million related to developed-technology intangible assets due to declines in market expectations for the related products. The fair values of the intangible assets were measured using a discounted cash flow approach and the charge is classified within cost of sales in the accompanying consolidated statements of income (loss) for the year ended December 31, 2022. We consider the fair values of the assets to be Level 3 measurements due to the significant estimates and assumptions, including forecasted future cash flows, that we used in establishing the estimated fair values.
NOTE 6
| DEBT AND CREDIT FACILITIES |
Debt Outstanding
At December 31, 2023 and 2022, we had the following debt outstanding:
| as of December 31 (in millions) | Effective interest rate in 2023¹ | 20231 | 20221 | |||||||||||
| Commercial paper | — | % | $ | — | $ | 299 | ||||||||
| 0.868% notes due 2023 | — | % | — | 799 | ||||||||||
| Floating-rate notes due 2023 | — | % | — | 299 | ||||||||||
| 0.4% notes due 2024 | 0.3 | % | 828 | 799 | ||||||||||
| 1.322% notes due 2024 | 1.5 | % | 1,398 | 1,395 | ||||||||||
| 7.0% notes due 2024 | 7.0 | % | 13 | 13 | ||||||||||
| Floating-rate notes due 2024 | 5.7 | % | 300 | 299 | ||||||||||
| Term loan maturing 2024 | 6.9 | % | 130 | 1,664 | ||||||||||
| 1.3% notes due 2025 | 1.1 | % | 662 | 640 | ||||||||||
| 2.6% notes due 2026 | 2.7 | % | 748 | 748 | ||||||||||
| Term loan maturing 2026 | 6.5 | % | 1,643 | 1,643 | ||||||||||
| 7.65% debentures due 2027 | 8.3 | % | 5 | 5 | ||||||||||
| 1.915% notes due 2027 | 2.0 | % | 1,445 | 1,443 | ||||||||||
| 6.625% debentures due 2028 | 5.7 | % | 95 | 96 | ||||||||||
| 2.272% notes due 2028 | 2.4 | % | 1,244 | 1,242 | ||||||||||
| 1.3% notes due 2029 | 1.4 | % | 828 | 792 | ||||||||||
| 3.95% notes due 2030 | 4.1 | % | 496 | 496 | ||||||||||
| 1.73% notes due 2031 | 2.7 | % | 646 | 645 | ||||||||||
| 2.539% notes due 2032 | 2.6 | % | 1,540 | 1,538 | ||||||||||
| 6.25% notes due 2037 | 6.4 | % | 265 | 265 | ||||||||||
| 3.65% notes due 2042 | 3.8 | % | 6 | 7 | ||||||||||
| 4.5% notes due 2043 | 4.6 | % | 256 | 256 | ||||||||||
| 3.5% notes due 2046 | 3.7 | % | 440 | 441 | ||||||||||
| 3.132% notes due 2051 | 3.2 | % | 741 | 742 | ||||||||||
| Finance leases and other | 9.1 | % | 69 | 70 | ||||||||||
| Total debt and finance lease obligations | 13,798 | 16,636 | ||||||||||||
| Short-term debt | — | (299) | ||||||||||||
| Current maturities of long-term debt and finance lease obligations | (2,668) | (1,105) | ||||||||||||
| Long-term debt and finance lease obligations | $ | 11,130 | $ | 15,232 |
1Book values include any discounts, premiums and adjustments related to hedging instruments and effective interest rates reflect amortization of those items.
Significant Debt Activity
In 2023, we repaid our $800 million 0.868% notes due 2023, our $300 million floating rate notes due 2023 and $1.54 billion under our $2.00 billion three-year term loan facility maturing in 2024.
In 2022, we repaid our $203 million 2.4% notes due 2022, $335 million under our $2.00 billion three-year term loan facility maturing in 2024 and $355 million under our $2.00 billion five-year term loan facility maturing in 2026.
The losses from our early extinguishments of debt in 2023 and 2022 were not significant.
Credit Facilities
As of December 31, 2023, we had a U.S. Dollar-denominated term loan credit facility, which had two tranches of term loans outstanding, a U.S. Dollar-denominated revolving credit facility and a Euro-denominated revolving credit facility.
Borrowings under the term loan credit facility bear interest on the principal amount outstanding at either Term SOFR plus an applicable margin plus a credit spread adjustment or a “base rate” plus an applicable margin. The term loan credit facility contains various covenants, including a maximum net leverage ratio. We have the option to prepay outstanding amounts under the term loan credit facility in whole or in part at any time.
Our U.S. Dollar-denominated revolving credit facility has a capacity of $2.50 billion and our Euro-denominated revolving credit facility has a capacity of €200 million. Fees under the credit facilities are 0.125% annually as of December 31, 2023 and 2022, and are based on our credit ratings and the total capacity of the facility. There were no borrowings outstanding under the revolving credit facilities as of December 31, 2023 and 2022. Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our revolving credit facilities for an amount at least equal to our outstanding commercial paper borrowings. Each of the revolving credit facilities matures in 2026. The revolving credit facilities enable us to borrow funds on an unsecured basis at variable interest rates and contain various covenants, including a maximum net leverage ratio. In the first quarter of 2023, we amended the credit agreements governing our U.S. Dollar-denominated term loan credit facility and revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to amend the net leverage ratio covenant to increase the maximum net leverage ratio for the four fiscal quarters ending March 31, 2023, June 30, 2023, September 30, 2023 and December 31, 2023. In the third quarter of 2022, we previously amended the credit agreements governing our term loan facility and our U.S. Dollar-denominated revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to delay the commencement of our net leverage ratio covenant step-down schedule until June 30, 2024. We also amended the credit agreements governing our term loan facility and our U.S. Dollar-denominated revolving credit facility to transition the benchmark rate from LIBOR to the Secured Overnight Financing Rate (SOFR). Based on our covenant calculations as of December 31, 2023 we have capacity to draw on the full amounts under our revolving credit facilities.
We also maintain other credit arrangements, which totaled approximately $238 million and $230 million as of December 31, 2023 and 2022, respectively. There were no amounts outstanding under these arrangements as of December 31, 2023 and 2022.
As of December 31, 2023, we were in compliance with the financial covenants in these agreements. The non-performance of any financial institution supporting any of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment.
Commercial Paper
There was no commercial paper outstanding as of December 31, 2023. As of December 31, 2022, we had $299 million of commercial paper outstanding with a weighted-average interest rate of 4.75% and an original weighted-average term of 32 days.
Future Debt and Finance Lease Maturities
| as of and for the years ended December 31 (in millions) | Debt maturities | ||||
| 2024 | $ | 2,677 | |||
| 2025 | 668 | ||||
| 2026 | 2,401 | ||||
| 2027 | 1,460 | ||||
| 2028 | 1,347 | ||||
| Thereafter | 5,302 | ||||
| Total debt and finance lease maturities | 13,855 | ||||
| Discounts, premiums, and adjustments relating to hedging instruments | (57) | ||||
| Total debt and finance lease obligations | $ | 13,798 |
NOTE 7
| LEASES |
Lessee Activity
We have entered into operating and finance leases primarily for office, manufacturing, warehouse and R&D facilities, vehicles and equipment. Our leases have remaining terms from 1 to 39 years and some of those leases include options that provide us with the ability to extend the lease term for periods ranging from 1 to 12 years. Such options are included in the lease term when it is reasonably certain that the option will be exercised.
Certain of our leases include provisions for variable lease payments which are based on, but not limited to, maintenance, insurance, taxes, index escalations and usage-based amounts. For all asset classes, we have elected to apply a practical expedient to account for other services within lease contracts as components of the lease. We also have elected to apply a practical expedient for short-term leases whereby we do not recognize a lease liability and right-of-use asset for leases with a term of less than 12 months.
We classify our leases as operating or finance at the lease commencement date. Finance leases are generally those leases for which we will pay substantially all of the underlying asset’s fair value or will use the asset for all or a major part of its economic life, including circumstances in which we will ultimately own the asset. All other leases are operating leases. For finance leases, we recognize interest expense using the effective interest method and we recognize amortization expense on the right-of-use asset over the shorter of the lease term or the useful life of the asset. For operating leases, we recognize lease cost on a straight-line basis over the term of the lease.
Lease liabilities and right-of-use assets are recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. We determine the present value of payments under a lease based on our incremental borrowing rate as of the lease commencement date. The incremental borrowing rate is equal to the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.
The components of lease cost for the years ended December 31, 2023, 2022 and 2021 were:
| (in millions) | 2023 | 2022 | 2021 | ||||||||||||||
| Operating lease cost | $ | 127 | $ | 124 | $ | 112 | |||||||||||
| Finance lease cost | |||||||||||||||||
| Amortization of right-of-use assets | 6 | 6 | 6 | ||||||||||||||
| Interest on lease liabilities | 5 | 5 | 5 | ||||||||||||||
| Variable lease cost | 63 | 62 | 52 | ||||||||||||||
| Lease cost | $ | 201 | $ | 197 | $ | 175 |
The following table contains supplemental cash flow information related to leases for the years ended December 31, 2023, 2022 and 2021:
| (in millions) | 2023 | 2022 | 2021 | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||
| Operating cash flows from operating leases | $ | 154 | $ | 141 | $ | 123 | |||||||||||
| Operating cash flows from finance leases | 5 | 5 | 5 | ||||||||||||||
| Financing cash flows from finance leases | 4 | 4 | 4 | ||||||||||||||
| Right-of-use operating lease assets obtained in exchange for lease obligations | 90 | 73 | 71 | ||||||||||||||
| Right-of-use finance lease assets obtained in exchange for lease obligations | 15 | 3 | 4 |
Supplemental balance sheet information related to leases as of December 31, 2023 and 2022 include:
| (in millions) | 2023 | 2022 | |||||||||
| Operating leases | |||||||||||
| Operating lease right-of-use assets | $ | 524 | $ | 541 | |||||||
| Accrued expenses and other current liabilities | $ | 128 | $ | 120 | |||||||
| Operating lease liabilities | 438 | 447 | |||||||||
| Total operating lease liabilities | $ | 566 | $ | 567 | |||||||
| Finance leases | |||||||||||
| Property, plant and equipment, at cost | $ | 91 | $ | 82 | |||||||
| Accumulated depreciation | (39) | (34) | |||||||||
| Property, plant and equipment, net | $ | 52 | $ | 48 | |||||||
| Current maturities of long-term debt and finance lease obligations | $ | 3 | $ | 2 | |||||||
| Long-term debt and finance lease obligations | 66 | 62 | |||||||||
| Total finance lease liabilities | $ | 69 | $ | 64 |
Lease term and discount rates as of December 31, 2023 and 2022 were:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Weighted-average remaining lease term (years) | |||||||||||
| Operating leases | 7 | 7 | |||||||||
| Finance leases | 10 | 11 | |||||||||
| Weighted-average discount rate | |||||||||||
| Operating leases | 3.0 | % | 2.7 | % | |||||||
| Finance leases | 9.1 | % | 9.5 | % |
Maturities of operating and finance lease liabilities as of December 31, 2023 were:
| (in millions) | Finance Leases | Operating Leases | ||||||
| 2024 | $ | 11 | $ | 143 | ||||
| 2025 | 11 | 115 | ||||||
| 2026 | 11 | 94 | ||||||
| 2027 | 10 | 76 | ||||||
| 2028 | 10 | 55 | ||||||
| Thereafter | 63 | 139 | ||||||
| Total minimum lease payments | 116 | 622 | ||||||
| Less: imputed interest | (47) | (56) | ||||||
| Present value of lease liabilities | $ | 69 | $ | 566 |
Lessor Activity
We lease medical equipment, such as smart beds, renal dialysis equipment and infusion pumps, to customers, often in conjunction with arrangements to provide consumable medical products such as dialysis therapies, intravenous (IV) fluids and inhaled anesthetics. Certain of our equipment leases are classified as sales-type leases and the remainder are operating leases. The terms of the related contracts, including the proportion of fixed versus variable payments and any options to shorten or extend the lease term, vary by customer. We allocate revenue between equipment leases and medical products based on their standalone selling prices.
The components of lease revenue for the years ended December 31, 2023, 2022 and 2021 were:
| (in millions) | 2023 | 2022 | 2021 | ||||||||||||||
| Sales-type lease revenue | $ | 10 | $ | 15 | $ | 27 | |||||||||||
| Operating lease revenue | 518 | 513 | 135 | ||||||||||||||
| Variable lease revenue | 53 | 54 | 79 | ||||||||||||||
| Total lease revenue | $ | 581 | $ | 582 | $ | 241 |
The components of our net investment in sales-type leases as of December 31, 2023 and 2022 were:
| (in millions) | 2023 | 2022 | |||||||||
| Minimum lease payments | $ | 71 | $ | 87 | |||||||
| Unguaranteed residual values | — | 1 | |||||||||
| Net investment in leases | $ | 71 | $ | 88 |
Our net investment in sales-type leases is classified as follows in the accompanying consolidated balance sheets as of December 31, 2023 and 2022:
| (in millions) | 2023 | 2022 | |||||||||
| Accounts receivable, net | $ | 31 | $ | 35 | |||||||
| Other non-current assets | 40 | 53 | |||||||||
| Total | $ | 71 | $ | 88 |
Our net investment in sales-type leases was $71 million as of December 31, 2023, of which $14 million originated in 2019 and prior, $17 million in 2020, $17 million in 2021, $13 million in 2022 and $10 million in 2023.
Maturities of sales-type and operating leases as of December 31, 2023 were:
| (in millions) | Sales-type Leases1 | Operating Leases | ||||||
| 2024 | $ | 34 | $ | 80 | ||||
| 2025 | 18 | 75 | ||||||
| 2026 | 9 | 55 | ||||||
| 2027 | 4 | 39 | ||||||
| 2028 | 3 | 11 | ||||||
| Thereafter | 3 | — | ||||||
| Total minimum lease payments | $ | 71 | $ | 260 | ||||
1 Unamortized imputed interest on minimum lease payments was less than $1 million as of December 31, 2023.
In the third quarter of 2023, we recognized $267 million of long-lived asset impairments related to our HD business, which included impairments of $14 million of operating lease right-of-use assets and $58 million of equipment leased to customers. See Note 4 for additional information.
NOTE 8
| COMMITMENTS AND CONTINGENCIES |
Refer to Note 3 for information regarding contingent payments associated with collaborative and other arrangements.
Indemnifications
During the normal course of business, we make indemnities, commitments and guarantees pursuant to which we may be required to make payments related to specific transactions. Indemnifications include: (i) intellectual property indemnities to customers in connection with the use, sales or license of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises; (iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; (iv) indemnities involving the representations and warranties in certain contracts; and (v) contractual indemnities for our directors and certain of our executive officers for services provided to or at the request of us. In addition, under our Amended and Restated Certificate of Incorporation, and consistent with Delaware General Corporation Law, we have agreed to indemnify our directors and officers for certain losses and expenses upon the occurrence of certain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential for future payments that we could be obligated to make. To help address some of these risks, we maintain various insurance coverages. Based on historical experience and evaluation of the agreements, we do not believe that any payments related to our indemnities will have a material impact on our financial condition or results of operations.
Legal Contingencies
We are involved in product liability, patent, commercial, and other legal matters that arise in the normal course of our business. We record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better
estimate than any other amount, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of December 31, 2023 and 2022, our total recorded reserves with respect to legal and environmental matters were $31 million and $28 million, respectively.
We have established reserves for certain of the matters discussed below. We are not able to estimate the amount or range of any loss for certain contingencies for which there is no reserve or additional loss for matters already reserved. While our liability in connection with these claims cannot be estimated and the resolution thereof in any reporting period could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in the matters set forth below, litigation is inherently uncertain, excessive verdicts do occur, and we may incur material judgments or enter into material settlements of claims.
In addition to the matters described below, we remain subject to the risk of future administrative and legal actions. With respect to governmental and regulatory matters, these actions may lead to product recalls, injunctions, and other restrictions on our operations (including our ability to launch new products) and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, we may be exposed to significant litigation concerning the scope of our and others’ rights. Such litigation could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations.
Environmental
We are involved as a potentially responsible party (PRP) for environmental clean-up costs at six Superfund sites. Under the U.S. Superfund statute and many state laws, generators of hazardous waste sent to a disposal or recycling site are liable for site cleanup if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Separate from these Superfund cases noted above, we are involved in ongoing environmental remediations associated with historic operations at certain of our facilities. As of December 31, 2023 and 2022, our environmental reserves, which are measured on an undiscounted basis, were $15 million and $19 million, respectively. After considering these reserves, the outcome of these matters is not expected to have a material adverse effect on our financial position or results of operations.
General Litigation
In August 2019, we were named in an amended complaint filed by Fayette County, Georgia in the MDL In re: National Prescription Opiate Litigation pending in the U.S. District Court, Northern District of Ohio. The complaint alleges that multiple manufacturers and distributors of opiate products improperly marketed and diverted these products, which caused harm to Fayette County. The complaint is limited in its allegations as to Baxter and does not distinguish between injectable opiate products and orally administered opiates. We manufactured generic injectable opiate products in our facility in Cherry Hill, NJ, which we divested in 2011. On July 17, 2023, we were voluntarily dismissed from the litigation without prejudice.
In November 2019, we and certain of our officers were named in a class action complaint alleging that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to certain intra-company transactions undertaken for the purpose of generating foreign exchange gains or avoiding foreign exchange losses, as well as our internal controls over financial reporting. The parties reached an agreement to settle the case for $16 million, which became effective on September 13, 2021 and was paid in 2021. We also cooperated with the staff of the SEC in connection with its investigation into those matters and, on February 18, 2022, we reached a settlement with the SEC. Without admitting or denying the findings in the administrative order issued by the SEC, we agreed to pay a civil penalty of $18 million and to cease and desist from violations of specified provisions of the federal securities laws and related rules. In the order, the SEC acknowledged Baxter’s cooperation and we paid the penalty in the first quarter of 2022.
In March 2020, two lawsuits were filed against us in the Northern District of Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used in our manufacturing facility in Mountain Home, Arkansas to sterilize certain of our products. The plaintiffs sought damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief. The parties reached agreement to settle these lawsuits in the third quarter of 2021 for amounts that were not material to our financial results, which were paid in the fourth quarter of 2021. We have since resolved, without litigation, additional claims of injuries from exposure to
ethylene oxide at Mountain Home for amounts within accruals previously established as of December 31, 2021. On October 20, 2022, a lawsuit was filed against us in the Western District of Arkansas alleging injury as a result of exposure to ethylene oxide at Mountain Home. On December 16, 2022, we filed a motion to dismiss and for a more definite statement. In response, Plaintiffs filed a First Amended Complaint on January 6, 2023. We answered the First Amended Complaint on January 27, 2023. The parties reached agreement to settle this lawsuit in the third quarter of 2023 for an amount that was not material to our financial results, which was paid in the fourth quarter of 2023. The case was dismissed on October 17, 2023. In December 2023, five lawsuits were filed against us in the Circuit Court of Cook County, Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used by several companies, including us at our manufacturing facility in Round Lake, Illinois to sterilize certain of our products. The plaintiffs seek damages in an unspecified amount.
We acquired Hillrom on December 13, 2021. In July 2021, Hill-Rom, Inc., a wholly-owned subsidiary of Hillrom, received a subpoena from the United States Office of Inspector General for the Department of Health and Human Services (the DHHS) requesting documents and information related to compliance with the False Claims Act and the Anti-Kickback Statute. The subpoena was related to a lawsuit brought under the qui tam provisions of False Claims Act. The allegations included in the unsealed complaint relate to conduct prior to our acquisition of Hillrom, and the division involved is no longer operational. Hillrom voluntarily began a related internal review and Hillrom and Baxter cooperated fully with the DHHS and the Department of Justice (DOJ) with respect to this matter. In January 2024, the parties reached agreement to settle the allegations. We paid the settlement amounts, which were not material to our financial results, in January 2024. A stipulated request for dismissal has been filed and is pending before the court. In October 2022, the DOJ issued a separate Civil Investigative Demand (CID) addressed to Hillrom, requesting documents and information related to compliance with the False Claims Act and the Anti-Kickback Statute. Baxter is cooperating fully with the DOJ in responding to the CID. The DHHS and DOJ often issue these types of requests when investigating alleged violations of the False Claims Act.
On December 28, 2021, Linet Americas, Inc. (Linet) filed a complaint against Hill-Rom Holdings, Inc., Hill-Rom Company, Inc., and Hill-Rom Services, Inc. in the United States District Court for the Northern District of Illinois, captioned Linet Americas, Inc. v. Hill-Rom Holdings, Inc.; Hill-Rom Company, Inc.; Hill-Rom Services, Inc. Linet alleges that Hillrom violated Sections 1, 2 and 3 of The Sherman Antitrust Act of 1890 and the Illinois Antitrust Act by allegedly engaging in anti-competitive conduct in alleged markets for standard, ICU and birthing beds. Hillrom filed an answer to the complaint on January 28, 2022 and filed a motion challenging certain aspects of plaintiff's case on May 27, 2022, which was denied on January 17, 2024, subject to further discovery.
In July 2023, we and certain of our officers were named in a class action complaint captioned Grover J. Kelley et al. v. Baxter International Inc. et al. that was filed in the United States District Court for the Northern District of Illinois. The plaintiff, who allegedly purchased securities during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter securities on the public market between May 25, 2022, and February 8, 2023. The plaintiff alleged that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to supply chain and financial guidance. The Court appointed Kelley as lead plaintiff on September 20, 2023. This matter was voluntarily dismissed on December 3, 2023.
NOTE 9
| STOCKHOLDERS' EQUITY |
Stock-Based Compensation
Our stock-based compensation generally includes stock options, restricted stock units (RSUs), performance share units (PSUs) and purchases under our employee stock purchase plan. Shares issued relating to our stock-based plans are generally issued out of treasury stock.
As of December 31, 2023, approximately 20 million authorized shares are available for future awards under our stock-based compensation plans.
Stock Compensation Expense
Stock compensation expense was $133 million, $153 million and $146 million in 2023, 2022 and 2021, respectively. The related tax benefit recognized was $14 million in 2023, $34 million in 2022 and $36 million in 2021. Included in
the benefit in 2023 was tax expense for stock-based compensation shortfalls of $11 million. Included in the benefit in 2022 and 2021 were realized excess tax benefits for stock-based compensation of, $5 million and $13 million, respectively.
Approximately 70% of stock compensation expense is classified in SG&A expenses, with the remainder classified in cost of sales and R&D expenses. Costs capitalized in the consolidated balance sheets at December 31, 2023 and 2022 were not material.
Stock compensation expense is based on awards expected to vest, and therefore has been reduced by estimated forfeitures.
Stock Options
Stock options are granted to employees and non-employee directors with exercise prices equal to 100% of the market value on the date of grant. Stock options granted to employees generally vest in one-third increments over a three-year period. Stock options granted to non-employee directors generally vest immediately on the grant date and are issued with a six-month claw-back provision. Stock options typically have a contractual term of 10 years. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the substantive vesting period.
The fair value of stock options is determined using the Black-Scholes model. The weighted-average assumptions used in estimating the fair value of stock options granted during each year, along with the weighted-average grant-date fair values, were as follows:
| years ended December 31 | 2023 | 2022 | 2021 | ||||||||
| Expected volatility | 27 | % | 24 | % | 24 | % | |||||
| Expected life (in years) | 6.0 | 5.5 | 5.5 | ||||||||
| Risk-free interest rate | 4.2 | % | 1.8 | % | 0.8 | % | |||||
| Dividend yield | 3.0 | % | 1.3 | % | 1.3 | % | |||||
| Fair value per stock option | $ | 9 | $ | 18 | $ | 16 |
The following table summarizes stock option activity for the year ended December 31, 2023 and the outstanding stock options as of December 31, 2023.
| (options and aggregate intrinsic values in thousands) | Options | Weighted- average exercise price | Weighted- average remaining contractual term (in years) | Aggregate intrinsic value | ||||||||||
| Outstanding as of January 1, 2023 | 19,641 | $ | 63.51 | |||||||||||
| Granted | 4,361 | $ | 39.03 | |||||||||||
| Exercised | (1,204) | $ | 38.13 | |||||||||||
| Forfeited | (1,232) | $ | 57.33 | |||||||||||
| Expired | (2,099) | $ | 69.36 | |||||||||||
| Outstanding as of December 31, 2023 | 19,467 | $ | 59.35 | 5.29 | $ | 3,688 | ||||||||
| Vested or expected to vest as of December 31, 2023 | 18,994 | $ | 59.69 | 5.20 | $ | 3,635 | ||||||||
| Exercisable as of December 31, 2023 | 13,987 | $ | 61.93 | 4.02 | $ | 3,458 |
The aggregate intrinsic value in the table above represents the difference between the exercise price and our closing stock price on the last trading day of the year. The total intrinsic value of options exercised in 2023, 2022 and 2021 was $5 million, $38 million and $78 million, respectively.
As of December 31, 2023, $35 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of approximately 1.7 years.
RSUs
RSUs are granted to employees and non-employee directors. RSUs granted to employees generally vest in one-third increments over a three-year period. RSUs granted to non-employee directors generally vest immediately on the grant date and are issued with a six-month claw-back provision. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the substantive vesting period. The fair value of RSUs is determined based on the number of shares granted and the closing price of our common stock on the date of grant.
The following table summarizes nonvested RSU activity for the year ended December 31, 2023.
| (share units in thousands) | Share units | Weighted- average grant-date fair value | ||||||
| Nonvested RSUs as of January 1, 2023 | 1,912 | $ | 79.51 | |||||
| Granted | 3,443 | $ | 39.21 | |||||
| Vested | (752) | $ | 76.02 | |||||
| Forfeited | (597) | $ | 51.13 | |||||
| Nonvested RSUs as of December 31, 2023 | 4,006 | $ | 49.77 |
As of December 31, 2023, $121 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over a weighted-average period of approximately 1.9 years. The weighted-average grant-date fair value of RSUs granted in 2023, 2022 and 2021 was $39.21, $81.53 and $79.30, respectively. The fair value of RSUs vested in 2023, 2022 and 2021 was $30 million, $76 million and $47 million, respectively.
PSUs
Our annual equity awards stock compensation program for senior management includes the issuance of PSUs. PSUs awarded after 2019 were based on our compound annual sales growth rate (CAGR) performance, our adjusted return on invested capital (ROIC) performance and on our stock performance relative to our peer group. PSUs awarded between 2018 and 2019 were based on adjusted operating margin as well as stock performance relative to our peer group. The vesting condition for CAGR and ROIC PSUs is set at the beginning of the 3-year service period while the vesting condition for adjusted operating margin is set at the beginning of each year for each tranche of the award during the 3-year service period. Compensation cost for the CAGR, adjusted ROIC and adjusted operating margin PSUs is measured based on the fair value of the awards on the date that the specific vesting terms for each award are established and the fair value of the awards is determined based on the quoted price of our stock on the grant date of the award. The compensation cost for CAGR, adjusted ROIC and adjusted operating margin PSUs is adjusted at each reporting date to reflect the estimated vesting outcome.
The fair value for PSUs based on our stock performance relative to our peer group is determined using a Monte Carlo model. The assumptions used in estimating the fair value of these PSUs granted during the period, along with the grant-date fair values, were as follows:
| years ended December 31 | 2023 | 2022 | 2021 | ||||||||
| Baxter volatility | 27 | % | 27 | % | 28 | % | |||||
| Peer group volatility | 23%-54% | 24%-54% | 26%-81% | ||||||||
| Correlation of returns | 0.23-0.48 | 0.21-0.61 | 0.05-0.65 | ||||||||
| Risk-free interest rate | 4.6 | % | 1.6 | % | 0.3 | % | |||||
| Fair value per PSU | $ | 30 | $ | 102 | $ | 86 |
The following table summarizes nonvested PSU activity for the year ended December 31, 2023.
| (share units in thousands) | Share units | Weighted- average grant-date fair value | ||||||
| Nonvested PSUs as of January 1, 2023 | 698 | $ | 85.00 | |||||
| Granted | 451 | $ | 29.57 | |||||
| Vested | (80) | $ | 76.25 | |||||
| Forfeited | (340) | $ | 73.52 | |||||
| Nonvested PSUs as of December 31, 2023 | 729 | $ | 57.03 |
Unrecognized compensation cost related to all unvested PSUs of $17 million at December 31, 2023 is expected to be recognized as expense over a weighted-average period of 2.7 years.
Employee Stock Purchase Plan
Nearly all employees are eligible to participate in our employee stock purchase plan. The employee purchase price is 85% of the closing market price on the purchase date.
As of December 31, 2023, approximately 9 million shares of common stock were available for issuance to eligible participants.
During 2023, 2022, and 2021, we issued approximately 1.4 million, 0.9 million and 0.7 million shares, respectively, under the employee stock purchase plan.
Cash Dividends
Total cash dividends declared per share for 2023, 2022, and 2021 were $1.16, $1.15 and $1.085, respectively.
A quarterly dividend of $0.29 per share ($1.16 on an annualized basis) was declared in February, May and July of 2023 and was paid in April, July and October of 2023, respectively. Our Board of Directors declared a quarterly dividend of $0.29 per share in November of 2023, which was paid in January of 2024.
Stock Repurchase Programs
As authorized by the Board of Directors, we repurchase our stock depending on our cash flows, net debt level and market conditions. In July 2012, the Board of Directors authorized a share repurchase program and the related authorization was subsequently increased a number of times. We did not repurchase any shares under this authority in 2023. We repurchased 0.5 million shares under this authority pursuant to a Rule 10b5-1 plan for $32 million in cash in 2022 and 7.3 million shares under this authority pursuant to Rule 10b5-1 plans for $600 million in cash in 2021. We had $1.30 billion of purchase authority available as of December 31, 2023.
Other
In addition to common stock, our authorized capital structure includes 100 million shares of preferred stock, no par value. As of December 31, 2023 and 2022, no shares of preferred stock were outstanding.
NOTE 10
| ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
Comprehensive income (loss) includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of net income (loss), CTA, certain gains and losses from pension and other postretirement employee benefit (OPEB) plans, certain gains and losses from hedging activities and unrealized gains and losses on available-for-sale debt securities.
The following table is a net-of-tax summary of the changes in AOCI by component for the years ended December 31, 2023 and 2022.
| (in millions) | CTA | Pension and OPEB plans | Hedging activities | Available-for-sale debt securities | Total | ||||||||||||
| Gains (losses) | |||||||||||||||||
| Balance as of December 31, 2022 | $ | (3,386) | $ | (331) | $ | (119) | $ | 3 | $ | (3,833) | |||||||
| Other comprehensive income (loss) before reclassifications | 216 | (106) | 5 | — | 115 | ||||||||||||
| Amounts reclassified from AOCI (a) | 185 | (15) | (6) | — | 164 | ||||||||||||
| Net other comprehensive income (loss) | 401 | (121) | (1) | — | 279 | ||||||||||||
| Balance as of December 31, 2023 | $ | (2,985) | $ | (452) | $ | (120) | $ | 3 | $ | (3,554) |
| (in millions) | CTA | Pension and OPEB plans | Hedging activities | Available-for-sale debt securities | Total | ||||||||||||
| Gains (losses) | |||||||||||||||||
| Balance as of December 31, 2021 | $ | (2,907) | $ | (347) | $ | (126) | $ | — | $ | (3,380) | |||||||
| Other comprehensive income (loss) before reclassifications | (544) | (9) | 22 | 3 | (528) | ||||||||||||
| Amounts reclassified from AOCI (a) | 65 | 25 | (15) | — | 75 | ||||||||||||
| Net other comprehensive income (loss) | (479) | 16 | 7 | 3 | (453) | ||||||||||||
| Balance as of December 31, 2022 | $ | (3,386) | $ | (331) | $ | (119) | $ | 3 | $ | (3,833) |
(a) See table below for details about these reclassifications.
The following table is a summary of the amounts reclassified from AOCI to net income (loss) during the years ended December 31, 2023 and 2022.
| Amounts reclassified from AOCI (a) | |||||||||||
| (in millions) | 2023 | 2022 | Location of impact in income statement | ||||||||
| CTA | |||||||||||
| Reclassification of cumulative translation loss to earnings | $ | — | $ | (65) | Other (income) expense, net | ||||||
| Reclassification of cumulative translation loss to earnings from BPS divestiture | (185) | — | Income from discontinued operations, net of tax | ||||||||
| (185) | (65) | ||||||||||
| Less: Tax effect | — | — | Income tax expense (benefit) | ||||||||
| $ | (185) | $ | (65) | ||||||||
| Pension and OPEB items | |||||||||||
| Amortization of net losses and prior service costs or credits | $ | 18 | $ | (30) | Other (income) expense, net | ||||||
| Settlement charges | (2) | (1) | Other (income) expense, net | ||||||||
| Pension settlement from BPS divestiture | 4 | — | Income from discontinued operations, net of tax | ||||||||
| 20 | (31) | Total before tax | |||||||||
| Less: Tax effect | (5) | 6 | Income tax expense (benefit) | ||||||||
| $ | 15 | $ | (25) | Net of tax | |||||||
| Gains (losses) on hedging activities | |||||||||||
| Foreign exchange contracts | $ | 16 | $ | 26 | Cost of sales | ||||||
| Interest rate contracts | (6) | (6) | Interest expense, net | ||||||||
| Fair value hedges | (3) | — | Other (income) expense, net | ||||||||
| 7 | 20 | Total before tax | |||||||||
| Less: Tax effect | (1) | (5) | Income tax expense (benefit) | ||||||||
| $ | 6 | $ | 15 | Net of tax | |||||||
| Total reclassifications for the period | $ | (164) | $ | (75) | Total net of tax |
(a)Amounts in parentheses indicate reductions to net income.
Refer to Note 4 for additional information regarding the reclassification of a cumulative translation loss to earnings, Note 13 for additional information regarding the amortization of pension and OPEB items and Note 16 for additional information regarding hedging activity.
NOTE 11
| REVENUES |
Contract Balances
The timing of revenue recognition, billings and cash collections results in the recognition of trade accounts receivable, unbilled receivables, contract assets, and customer advances and deposits (contract liabilities) on our consolidated balance sheets. Net trade accounts receivable was $2.43 billion and $2.34 billion as of December 31, 2023 and 2022.
For contract manufacturing arrangements, revenue is primarily recognized throughout the production cycle, which typically lasts up to 90 days, resulting in the recognition of contract assets until the related services are completed and the customers are billed. Additionally, for certain arrangements containing a performance obligation to deliver software that can be used with medical devices, we recognize revenue upon delivery of the software, which results in the recognition of contract assets when customers are billed over time, generally over one to five years. For
bundled contracts involving equipment delivered up-front and consumable medical products to be delivered over time, total contract revenue is allocated between the equipment and consumable medical products. In certain of those arrangements, a contract asset is created for the difference between the amount of equipment revenue recognized upon delivery and the amount of consideration initially receivable from the customer. In those arrangements, the contract asset becomes a trade account receivable as consumable medical products are provided and billed, generally over one to seven years.
The following table summarizes our contract assets:
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Contract manufacturing services | $ | 5 | $ | 10 | ||||
| Software sales | 44 | 43 | ||||||
| Bundled equipment and consumable medical products contracts | 117 | 121 | ||||||
| Contract assets | $ | 166 | $ | 174 |
Contract liabilities represent deferred revenues that arise as a result of cash received from customers or where the timing of billing for services precedes satisfaction of our performance obligations. Such remaining performance obligations represent the portion of the contract price for which work has not been performed and are primarily related to our installation and service contracts. We expect to satisfy the majority of the remaining performance obligations and recognize revenue related to installation and service contracts within the next 12 months with most of the non-current performance obligations satisfied within 24 months.
The following table summarizes contract liability activity for the years ended December 31, 2023 and 2022. The contract liability balance represents the transaction price allocated to the remaining performance obligations.
| year ended December 31 (in millions) | 2023 | 2022 | ||||||
| Balance at beginning of period | $ | 194 | $ | 196 | ||||
| New revenue deferrals | 623 | 665 | ||||||
| Revenue recognized upon satisfaction of performance obligations | (625) | (661) | ||||||
| Currency translation | 2 | (6) | ||||||
| Balance at end of period | $ | 194 | $ | 194 |
In 2023 and 2022, $127 million and $115 million of revenue was recognized that was included in contract liabilities as of December 31, 2022 and 2021, respectively. In 2021, $17 million of revenue was recognized that was included in contract liabilities as of December 31, 2020.
The following table summarizes the classification of contract assets and contract liabilities as reported in the consolidated balance sheet:
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Prepaid expenses and other current assets | $ | 53 | $ | 52 | ||||
| Other non-current assets | 113 | 122 | ||||||
| Contract assets | $ | 166 | $ | 174 | ||||
| Accrued expenses and other current liabilities | $ | 148 | $ | 154 | ||||
| Other non-current liabilities | 46 | 40 | ||||||
| Contract liabilities | $ | 194 | $ | 194 |
Disaggregation of Net Sales
Refer to Note 18 for additional information on our net sales including the disaggregation of net sales within each of our segments and net sales by geographic location.
NOTE 12
| BUSINESS OPTIMIZATION CHARGES |
In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management and centralizing and streamlining certain support functions. We currently expect to incur additional pre-tax cash costs, primarily related to the implementation of business optimization programs, of approximately $50 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives, including those intended to mitigate a portion of the dis-synergies expected to arise as a result of the proposed spinoff of our Kidney Care business, and to the extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs to implement business optimization programs in future periods. For segment reporting, business optimization charges are unallocated expenses.
We recorded the following charges related to business optimization programs in 2023, 2022, and 2021:
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Restructuring charges | $ | 478 | $ | 163 | $ | 91 | |||||
| Costs to implement business optimization programs1 | 56 | 62 | 23 | ||||||||
| Total business optimization charges | $ | 534 | $ | 225 | $ | 114 |
1 Costs to implement business optimization programs for the years ended December 31, 2023, 2022 and 2021, respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs. The costs were primarily included within cost of sales and SG&A expenses.
The costs of restructuring actions consisted primarily of employee termination costs, contract termination costs and asset impairments. During the years ended December 31, 2023, 2022 and 2021, we recorded the following restructuring charges:
| 2023 | ||||||||||||||
| (in millions) | COGS | SG&A | R&D | Total | ||||||||||
| Employee termination costs | $ | 47 | $ | 115 | $ | 12 | $ | 174 | ||||||
| Contract termination and other costs | 6 | 2 | — | 8 | ||||||||||
| Asset impairments | 289 | 7 | — | 296 | ||||||||||
| Total restructuring charges | $ | 342 | $ | 124 | $ | 12 | $ | 478 | ||||||
| 2022 | ||||||||||||||
| (in millions) | COGS | SG&A | R&D | Total | ||||||||||
| Employee termination costs | $ | 24 | $ | 102 | $ | 3 | $ | 129 | ||||||
| Contract termination and other costs | — | 22 | — | 22 | ||||||||||
| Asset impairments | 2 | 10 | — | 12 | ||||||||||
| Total restructuring charges | $ | 26 | $ | 134 | $ | 3 | $ | 163 | ||||||
| 2021 | ||||||||||||||
| (in millions) | COGS | SG&A | R&D | Total | ||||||||||
| Employee termination costs | $ | 37 | $ | 35 | $ | 1 | $ | 73 | ||||||
| Contract termination and other costs | — | 2 | — | 2 | ||||||||||
| Asset impairments | 16 | — | — | 16 | ||||||||||
| Total restructuring charges | $ | 53 | $ | 37 | $ | 1 | $ | 91 |
For the year ended December 31, 2023, $111 million of the restructuring charges reflected above, consisting of employee termination costs, were related to the implementation of our previously announced new operating model intended to simplify and streamline our operations. For the year ended December 31, 2023, $267 million of the restructuring charges reflected in the table above, consisting of $243 million of long-lived asset impairment charges, $14 million of other asset write-downs related to inventory and spare parts and $10 million of employee termination costs, were related to our decision to cease production at one of our dialyzer manufacturing facilities in connection with our initiatives to streamline our manufacturing footprint and improve our profitability. See Note 4 for additional information.
For the year ended December 31, 2022, $85 million of the restructuring charges reflected in the table above were related to integration activities for the Hillrom acquisition, consisting of $55 million of employee termination costs, $22 million of contract terminations and other costs and $8 million of asset impairments.
For the year ended December 31, 2021, $37 million and $12 million, respectively, of restructuring charges reflected in the table above, consisting of employee termination costs, were related to global programs to simplify and streamline our supply chain and finance functions.
The following table summarizes activity in the liability related to our restructuring initiatives.
| (in millions) | |||||
| Liability balance as of December 31, 2020 | $ | 113 | |||
| Assumed in acquisition | 6 | ||||
| Charges | 94 | ||||
| Payments | (78) | ||||
| Reserve adjustments | (19) | ||||
| Currency translation | (7) | ||||
| Liability balance as of December 31, 2021 | 109 | ||||
| Charges | 172 | ||||
| Payments | (145) | ||||
| Reserve adjustments | (21) | ||||
| Currency translation | (8) | ||||
| Liability balance as of December 31, 2022 | 107 | ||||
| Charges | 212 | ||||
| Payments | (151) | ||||
| Reserve adjustments | (30) | ||||
| Currency translation | (10) | ||||
| Liability balance as of December 31, 2023 | $ | 128 |
Reserve adjustments primarily relate to employee termination cost reserves established in prior periods.
Substantially all of our restructuring liabilities as of December 31, 2023 relate to employee termination costs, with the remaining liabilities attributable to contract termination costs. Substantially all of the cash payments for those liabilities are expected to be disbursed by the end of 2024.
NOTE 13
| PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS |
We sponsor a number of qualified and nonqualified pension plans for eligible employees. We also sponsor certain unfunded contributory healthcare and life insurance benefits for substantially all domestic retired employees. Newly hired employees in the United States and Puerto Rico are not eligible to participate in the pension plans but receive a higher level of company contributions in our defined contribution plans.
Reconciliation of Pension and Other Postretirement Benefit Plan Obligations, Assets and Funded Status
The benefit plan information in the table below pertains to all of our pension and OPEB plans, both in the United States and in other countries.
| Pension benefits | OPEB | ||||||||||||||||
| as of and for the years ended December 31 (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Benefit obligations | |||||||||||||||||
| Beginning of period | $ | 3,112 | $ | 4,390 | $ | 160 | $ | 211 | |||||||||
| Service cost | 23 | 75 | — | 1 | |||||||||||||
| Interest cost | 155 | 97 | 8 | 4 | |||||||||||||
| Participant contributions | 4 | 4 | — | — | |||||||||||||
| Actuarial (gain) loss | 195 | (1,197) | 5 | (37) | |||||||||||||
| Benefit payments | (141) | (123) | (19) | (19) | |||||||||||||
| Settlements | (19) | (17) | — | — | |||||||||||||
| Curtailment | — | (13) | — | — | |||||||||||||
| Acquisitions | 2 | — | — | — | |||||||||||||
| Plan Amendments | 3 | 1 | — | — | |||||||||||||
| Foreign exchange and other | 44 | (105) | — | — | |||||||||||||
| End of period | 3,378 | 3,112 | 154 | 160 | |||||||||||||
| Fair value of plan assets | |||||||||||||||||
| Beginning of period | 2,501 | 3,784 | — | — | |||||||||||||
| Actual return on plan assets | 268 | (1,118) | — | — | |||||||||||||
| Employer contributions | 47 | 47 | 19 | 19 | |||||||||||||
| Participant contributions | 4 | 4 | — | — | |||||||||||||
| Benefit payments | (141) | (123) | (19) | (19) | |||||||||||||
| Settlements | (19) | (17) | — | — | |||||||||||||
| Acquisitions | — | — | — | — | |||||||||||||
| Foreign exchange and other | 33 | (76) | — | — | |||||||||||||
| End of period | 2,693 | 2,501 | — | — | |||||||||||||
| Funded status at December 31 | $ | (685) | $ | (611) | $ | (154) | $ | (160) | |||||||||
| Amounts recognized in the consolidated balance sheets | |||||||||||||||||
| Noncurrent asset | $ | 129 | $ | 123 | $ | — | $ | — | |||||||||
| Current liability | (32) | (30) | (17) | (18) | |||||||||||||
| Noncurrent liability | (782) | (704) | (137) | (142) | |||||||||||||
| Net liability recognized at December 31 | $ | (685) | $ | (611) | $ | (154) | $ | (160) |
Actuarial gains and losses result from changes in actuarial assumptions (such as changes in the discount rate and revised mortality rates). Actuarial losses in 2023 and gains in 2022 related to plan benefit obligations were primarily the result of changes in discount rates.
The pension obligation information in the table above represents the projected benefit obligation (PBO). The PBO incorporates assumptions relating to future compensation levels. The accumulated benefit obligation (ABO) is the same as the PBO except that it includes no assumptions relating to future compensation levels. The ABO for all of our pension plans was $3.28 billion and $3.01 billion at the 2023 and 2022 measurement dates, respectively.
The information in the funded status table above represents the totals for all of our pension plans. The following table is information relating to the individual plans in the funded status table above that have an ABO in excess of plan assets.
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| ABO | $ | 2,710 | $ | 2,561 | ||||
| Fair value of plan assets | $ | 1,932 | $ | 1,865 |
The following table presents information relating to the individual plans in the funded status table above that have a PBO in excess of plan assets (many of which also have an ABO in excess of assets and are therefore also included in the table directly above).
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| PBO | $ | 2,796 | $ | 2,740 | ||||
| Fair value of plan assets | $ | 1,982 | $ | 2,006 |
Expected Net Pension and OPEB Plan Payments for the Next 10 Years
| (in millions) | Pension benefits | OPEB | ||||||
| 2024 | $ | 161 | $ | 17 | ||||
| 2025 | 167 | 16 | ||||||
| 2026 | 178 | 15 | ||||||
| 2027 | 189 | 14 | ||||||
| 2028 | 199 | 14 | ||||||
| 2029 through 2033 | 1,092 | 59 | ||||||
| Total expected net benefit payments for next 10 years | $ | 1,986 | $ | 135 |
The expected net benefit payments above reflect the total net benefits expected to be paid from the plans’ assets (for funded plans) or from our assets (for unfunded plans). The federal subsidies relating to the Medicare Prescription Drug, Improvement and Modernization Act are not expected to be significant.
Amounts Recognized in AOCI
The pension and OPEB plans’ gains or losses, prior service costs or credits, and transition assets or obligations not yet recognized in net periodic benefit cost are recognized on a net-of-tax basis in AOCI and will be amortized from AOCI to net periodic benefit cost in the future. For active employees, we utilize the average future working lifetime as the amortization period for prior service. For inactive employees, we utilize the average remaining life expectancy as the amortization period for prior service.
The following table is a summary of the pre-tax losses included in AOCI at December 31, 2023 and December 31, 2022.
| (in millions) | Pension benefits | OPEB | ||||||
| Actuarial loss (gain) | $ | 626 | $ | (50) | ||||
| Prior service credit and transition obligation | 11 | (16) | ||||||
| Total pre-tax loss (gain) recognized in AOCI at December 31, 2023 | $ | 637 | $ | (66) | ||||
| Actuarial loss (gain) | $ | 513 | $ | (69) | ||||
| Prior service credit and transition obligation | 8 | (27) | ||||||
| Total pre-tax loss (gain) recognized in AOCI at December 31, 2022 | $ | 521 | $ | (96) |
Refer to Note 10 for the net-of-tax balances included in AOCI as of each of the year-end dates. The following table is a summary of the net-of-tax amounts recorded in OCI relating to pension and OPEB plans.
| Year ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Gain (loss) arising during the year, net of tax of $31 in 2023, $6 in 2022 and $43 in 2021 | $ | 132 | $ | (8) | $ | 161 | |||||
| Amortization of loss to earnings, net of tax of $(5) in 2023, $6 in 2022 and $16 in 2021 | (13) | 23 | 64 | ||||||||
| Settlement charges, net of tax of zero in 2023, 2022 and 2021 | 2 | 1 | 2 | ||||||||
| Pension and other employee benefits | $ | 121 | $ | 16 | $ | 227 |
In 2023, 2022 and 2021, OCI activity for pension and OPEB plans was primarily related to actuarial gains and losses.
Net Periodic Benefit Cost
| Year ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Pension benefits | |||||||||||
| Service cost | $ | 23 | $ | 75 | $ | 86 | |||||
| Interest cost | 155 | 97 | 71 | ||||||||
| Expected return on plan assets | (188) | (157) | (143) | ||||||||
| Amortization of net losses and other deferred amounts | 6 | 43 | 89 | ||||||||
| Curtailment gain | — | (13) | — | ||||||||
| Settlement charges | 2 | 1 | 2 | ||||||||
| Other | 1 | 1 | (4) | ||||||||
| Net periodic pension benefit cost | $ | (1) | $ | 47 | $ | 101 | |||||
| OPEB | |||||||||||
| Service cost | $ | — | $ | 1 | $ | 1 | |||||
| Interest cost | 8 | 4 | 4 | ||||||||
| Amortization of net losses and prior service credit | (24) | (14) | (9) | ||||||||
| Curtailment gain | (1) | — | — | ||||||||
| Net periodic OPEB cost | $ | (17) | $ | (9) | $ | (4) |
Weighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date
| Pension benefits | OPEB | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Discount rate | |||||||||||||||||
| U.S. and Puerto Rico plans | 5.20 | % | 5.55 | % | 5.11 | % | 5.46 | % | |||||||||
| International plans | 3.41 | % | 4.01 | % | n/a | n/a | |||||||||||
| Rate of compensation increase | |||||||||||||||||
| U.S. and Puerto Rico plans | 2.60 | % | 2.93 | % | n/a | n/a | |||||||||||
| International plans | 3.24 | % | 3.34 | % | n/a | n/a | |||||||||||
| Annual rate of increase in the per-capita cost | n/a | n/a | 6.25 | % | 6.50 | % | |||||||||||
| Rate decreased to | n/a | n/a | 5.00 | % | 5.00 | % | |||||||||||
| by the year ended | n/a | n/a | 2029 | 2029 |
The assumptions above, which were used in calculating the December 31, 2023 measurement date benefit obligations, will be used in the calculation of net periodic benefit cost in 2024.
Weighted-Average Assumptions Used in Determining Net Periodic Benefit Cost
| Pension benefits | OPEB | ||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | ||||||||||||||||||
| Discount rate | |||||||||||||||||||||||
| U.S. and Puerto Rico plans | 5.55 | % | 3.01 | % | 2.73 | % | 5.46 | % | 2.76 | % | 2.33 | % | |||||||||||
| International plans | 4.01 | % | 1.47 | % | 1.00 | % | n/a | n/a | n/a | ||||||||||||||
| Expected return on plan assets | |||||||||||||||||||||||
| U.S. and Puerto Rico plans | 6.43 | % | 5.00 | % | 5.50 | % | n/a | n/a | n/a | ||||||||||||||
| International plans | 5.00 | % | 3.82 | % | 3.58 | % | n/a | n/a | n/a | ||||||||||||||
| Rate of compensation increase | |||||||||||||||||||||||
| U.S. and Puerto Rico plans | 2.93 | % | 3.68 | % | 3.68 | % | n/a | n/a | n/a | ||||||||||||||
| International plans | 3.34 | % | 3.11 | % | 3.03 | % | n/a | n/a | n/a | ||||||||||||||
| Annual rate of increase in the per-capita cost | n/a | n/a | n/a | 6.25 | % | 6.50 | % | 6.25 | % | ||||||||||||||
| Rate decreased to | n/a | n/a | n/a | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||||
| by the year ended | n/a | n/a | n/a | 2029 | 2029 | 2027 |
We established the expected return on plan assets assumption primarily 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. We plan to use a 6.65% assumption for our U.S. and Puerto Rico plans for 2024.
Pension Plan Assets
An investment committee of members of senior management is responsible for supervising, monitoring and evaluating the invested assets of our funded pension plans. The investment committee, which meets at least quarterly, abides by documented policies and procedures relating to investment goals, targeted asset allocations, risk management practices, allowable and prohibited investment holdings, diversification, use of derivatives, the relationship between plan assets and benefit obligations, and other relevant factors and considerations.
The investment committee’s policies and procedures include the following:
-
Ability to pay all benefits when due;
-
Targeted long-term performance expectations relative to applicable market indices, such as Russell, MSCI EAFE, and other indices;
-
Targeted asset allocation percentage ranges (summarized below), and periodic reviews of these allocations;
-
Diversification of assets among third-party investment managers, and by geography, industry, stage of business cycle and other measures;
-
Specified investment holding and transaction prohibitions (for example, private placements or other restricted securities, securities that are not traded in a sufficiently active market, short sales, certain derivatives, commodities and margin transactions);
-
Specified portfolio percentage limits on holdings in a single corporate or other entity (generally 5% at time of purchase, except for holdings in U.S. government or agency securities);
-
Specified average credit quality for the fixed-income securities portfolio (at least A- by Standard & Poor’s or A3 by Moody’s);
-
Specified portfolio percentage limits on foreign holdings; and
-
Periodic monitoring of investment manager performance and adherence to the investment committee’s policies.
Plan assets are invested using a total return investment approach whereby a mix of equity securities, debt securities and other investments are used to preserve asset values, diversify risk and exceed the planned benchmark
investment return. Investment strategies and asset allocations are based on consideration of plan liabilities, the plans’ funded status and other factors, such as the plans’ demographics and liability durations. Investment performance is reviewed by the investment committee on a quarterly basis and asset allocations are reviewed at least annually.
Plan assets are managed in a balanced portfolio comprised of two major components: return-seeking investments and liability hedging investments. The target allocations for plan assets are 50% in return-seeking investments and 50% in liability hedging investments and other holdings. The documented policy includes an allocation range based on each individual investment type within the major components that allows for a variance from the target allocations depending on the investment type. Return-seeking investments primarily include common stock of U.S. and international companies, common/collective trust funds, mutual funds, hedge funds, and partnership investments. Liability hedging investments and other holdings primarily include cash, money market funds with an original maturity of three months or less, U.S. and foreign government and governmental agency issues, corporate bonds, municipal securities, derivative contracts and asset-backed securities.
While the investment committee provides oversight over plan assets for U.S. and international plans, the summary above is specific to the plans in the United States. The plan assets for international plans are managed and allocated by the entities in each country, with input and oversight provided by the investment committee. The plan assets for the U.S. and international plans are included in the table below.
The following tables summarize our pension plan financial instruments that are measured at fair value on a recurring basis.
| Basis of fair value measurement | |||||||||||||||||
| (in millions) | Balance at December 31, 2023 | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Measured at NAV (a) | ||||||||||||
| Assets | |||||||||||||||||
| Cash | $ | 63 | |||||||||||||||
| Fixed income securities | |||||||||||||||||
| Cash equivalents | $ | 399 | $ | — | $ | 399 | $ | — | $ | — | |||||||
| U.S. government and government agency issues | 96 | — | 96 | — | — | ||||||||||||
| Corporate bonds | 265 | — | 265 | — | — | ||||||||||||
| Equity securities | |||||||||||||||||
| Common stock | 345 | 345 | — | — | — | ||||||||||||
| Mutual funds | 211 | 211 | — | — | — | ||||||||||||
| Common/collective trust funds | 834 | — | 294 | — | 540 | ||||||||||||
| Partnership investments | 216 | — | — | — | 216 | ||||||||||||
| Other holdings | 264 | 13 | 94 | 157 | — | ||||||||||||
| Fair value of pension plan assets | $ | 2,693 | $ | 569 | $ | 1,148 | $ | 157 | $ | 756 |
(a) Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
| Basis of fair value measurement | |||||||||||||||||
| (in millions) | Balance at December 31, 2022 | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Measured at NAV (a) | ||||||||||||
| Assets | |||||||||||||||||
| Cash | $ | 74 | |||||||||||||||
| Fixed income securities | |||||||||||||||||
| Cash equivalents | $ | 297 | $ | — | $ | 297 | $ | — | $ | — | |||||||
| U.S. government and government agency issues | 46 | — | 46 | — | — | ||||||||||||
| Corporate bonds | 310 | — | 310 | — | — | ||||||||||||
| Equity securities | |||||||||||||||||
| Common stock | 296 | 296 | — | — | — | ||||||||||||
| Mutual funds | 340 | 184 | 156 | — | — | ||||||||||||
| Common/collective trust funds | 790 | — | 251 | — | 539 | ||||||||||||
| Partnership investments | 263 | — | — | — | 263 | ||||||||||||
| Other holdings | 85 | 21 | 56 | 8 | — | ||||||||||||
| Fair value of pension plan assets | $ | 2,501 | $ | 501 | $ | 1,116 | $ | 8 | $ | 802 |
(a) Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The following table is a reconciliation of changes in fair value measurements that used significant unobservable inputs (Level 3).
| (in millions) | Other holdings | ||||||||||||||||
| Balance at December 31, 2021 | $ | 9 | |||||||||||||||
| Transfers out | (1) | ||||||||||||||||
| Balance at December 31, 2022 | 8 | ||||||||||||||||
| Purchases1 | 149 | ||||||||||||||||
| Balance at December 31, 2023 | $ | 157 |
1 Purchases in 2023 included $148 million for an insurance contract buy-in related to our pension plan in the United Kingdom.
The assets and liabilities of our pension plans are valued using the following valuation methods:
| Investment category | Valuation methodology | ||||
| Cash equivalents | These largely consist of a short-term investment fund, U.S. Dollars and foreign currency. The fair value of the short-term investment fund is based on the net asset value. | ||||
| U.S. government and government agency issues | Values are based on reputable pricing vendors, who typically use pricing matrices or models that use observable inputs. | ||||
| Corporate bonds | Values are based on reputable pricing vendors, who typically use pricing matrices or models that use observable inputs. | ||||
| Common stock | Values are based on the closing prices on the valuation date in an active market on national and international stock exchanges. | ||||
| Mutual funds | Values are based on the net asset value of the units held in the respective fund which are obtained from national and international exchanges or based on the net asset value of the underlying assets of the fund provided by the fund manager. | ||||
| Common/collective trust funds | Values are based on the net asset value of the units held at year end. | ||||
| Partnership investments | Values are based on the net asset value of the participation by us in the investment as determined by the general partner or investment manager of the respective partnership. | ||||
| Other holdings | Other holdings includes assets valued by pricing vendors using pricing matrices or models that use observable inputs and an insurance contract held by our pension plan in the United Kingdom, which is measured using a discounted cash flow model. In addition to observable market inputs such as interest rates, the fair value measurement of the insurance contract also reflects unobservable inputs, such as qualitative judgments about pricing of similar contracts in the insurance market. | ||||
Expected Pension and OPEB Plan Funding
Our funding policy for our pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that we may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flows generated by us, and other factors. Volatility in the global financial markets could have an unfavorable impact on future funding requirements. In 2024, we have no obligation to fund our principal plans in the United States, but we regularly reassess the amount and timing of any discretionary contributions. Conversely, we do expect to make contributions of at least $18 million to our Puerto Rico plan and $48 million to our foreign pension plans in 2024. Additionally, we expect to have net cash outflows relating to our OPEB plans of approximately $17 million in 2024.
The following table details the funded status percentage of our pension plans as of December 31, 2023, including certain plans that are unfunded in accordance with the guidelines of our funding policy outlined above.
| United States and Puerto Rico | International | |||||||||||||||||||
| as of December 31, 2023 (in millions) | Qualified plans | Nonqualified plan | Funded plans | Unfunded plans | Total | |||||||||||||||
| Fair value of plan assets | $ | 1,846 | $ n/a | $ | 847 | $ n/a | $ | 2,693 | ||||||||||||
| PBO | 2,097 | 197 | 760 | 324 | 3,378 | |||||||||||||||
| Funded status percentage | 88 | % | n/a | 111 | % | n/a | 80 | % |
Pension Plan Amendments
In May 2022, we announced that the pay and service amounts used to calculate pension benefits for active non-bargaining participants in our U.S. Hillrom pension plan would freeze as of December 31, 2022. Years of additional service earned and eligible compensation received after December 31, 2022 will not be included in the determination of the benefits payable to those participants. This change resulted in an $11 million decline in the
projected benefit obligation (PBO) with an offsetting curtailment gain included within other (income) expense, net on the consolidated statements of income (loss) for the year ended December 31, 2022.
As of December 31, 2022, we transferred the assets and liabilities of the Baxter International Inc. and Subsidiaries Pension Plan II to the Baxter International Inc. and Subsidiaries Pension Plan, resulting in one qualified U.S. defined benefit plan.
U.S. Defined Contribution Plan
Most U.S. employees are eligible to participate in a qualified defined contribution plan. We recognized expense of $116 million in 2023, $96 million in 2022 and $59 million in 2021 related to contributions to this plan.
NOTE 14
| INCOME TAXES |
Income (Loss) Before Income Tax Expense (Benefit) by Category
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| United States | $ | (1,666) | $ | (3,831) | $ | (505) | |||||
| International | 1,563 | 1,181 | 1,621 | ||||||||
| Income (loss) from continuing operations before income taxes | $ | (103) | $ | (2,650) | $ | 1,116 |
Income Tax Expense (Benefit)
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Current | |||||||||||
| United States | |||||||||||
| Federal | $ | 9 | $ | 3 | $ | (11) | |||||
| State and local | (3) | — | 6 | ||||||||
| International | 459 | 231 | 249 | ||||||||
| Current income tax expense (benefit) | 465 | 234 | 244 | ||||||||
| Deferred | |||||||||||
| United States | |||||||||||
| Federal | (346) | (248) | (120) | ||||||||
| State and local | (41) | (52) | (7) | ||||||||
| International | (112) | 70 | (34) | ||||||||
| Deferred income tax expense (benefit) | (499) | (230) | (161) | ||||||||
| Income tax expense (benefit) | $ | (34) | $ | 4 | $ | 83 |
Deferred Tax Assets and Liabilities
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Deferred tax assets | ||||||||
| Accrued liabilities and other | $ | 326 | $ | 404 | ||||
| Pension and other postretirement benefits | 152 | 143 | ||||||
| Tax credit and net operating loss carryforwards | 800 | 1,143 | ||||||
| Swiss tax reform net asset basis step-up | 157 | 151 | ||||||
| Operating lease liabilities | 141 | 144 | ||||||
| Valuation allowances | (658) | (704) | ||||||
| Total deferred tax assets | 918 | 1,281 | ||||||
| Deferred tax liabilities | ||||||||
| Subsidiaries’ unremitted earnings | 81 | 55 | ||||||
| Long-lived assets and other | 769 | 1,470 | ||||||
| Operating lease right-of-use assets | 131 | 137 | ||||||
| Total deferred tax liabilities | 981 | 1,662 | ||||||
| Net deferred tax asset (liability) | $ | (63) | $ | (381) |
At December 31, 2023, we had U.S. state operating loss carryforwards totaling $756 million, U.S. federal operating loss carryforwards totaling $129 million and tax credit carryforwards totaling $299 million, which includes a U.S. foreign tax credit carryforward of $228 million. The U.S. federal and state operating loss and tax credit carryforwards expire between 2024 and 2043, with $165 million of the operating loss carryforwards having no expiration date.
At December 31, 2023, with respect to our operations outside the U.S., we had foreign operating loss carryforwards totaling $698 million and foreign tax credit carryforwards totaling $15 million. The foreign operating loss carryforwards expire between 2024 and 2040 with $432 million having no expiration date. All of the foreign tax credit carryforwards have no expiration date.
Realization of the U.S. and foreign operating loss and tax credit carryforwards depends on generating sufficient future earnings. A valuation allowance of $658 million and $704 million was recognized as of December 31, 2023 and 2022, respectively, to reduce the deferred tax assets associated with net operating loss and tax credit carryforwards because we do not believe it is more likely than not that these assets will be fully realized prior to expiration.
After evaluating relevant U.S. tax laws, any elections or other opportunities that may be available and the future expiration of certain U.S. tax provisions that will impact the utilization of our U.S. foreign tax credit carryforwards, management expects to be able to realize some, but not all, of the U.S. foreign tax credit deferred tax assets up to its recurring and non-recurring foreign inclusions. Therefore, a valuation allowance of $130 million and $119 million was recognized with respect to the foreign tax credit carryforwards as of December 31, 2023 and 2022, respectively. We will continue to evaluate the need for additional valuation allowances and, as circumstances change, the valuation allowance may change.
As a result of Swiss tax reform legislation enacted during 2019, we recognized an $863 million net asset tax basis step-up that is amortizable as a tax deduction ratably over tax years 2025 through 2029. A deferred tax asset of $157 million and $151 million for the tax basis step-up was recognized as of December 31, 2023 and 2022, respectively. We expect to realize some, but not all, of the Swiss deferred tax assets for that tax basis step-up based on expected future earnings generated by our Swiss subsidiary during the period in which the tax basis will be amortized. Therefore, a valuation allowance of $90 million and $84 million was recognized on the Swiss deferred tax assets for the tax basis step-up as of December 31, 2023 and 2022, respectively. For the year ended December 31, 2023, we recognized $9 million of deferred tax expense to increase our valuation allowance to reflect our current estimate of its recoverability.
The following table is a summary of changes in our deferred tax valuation allowance for the years ended December 31, 2023, 2022 and 2021.
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Balance at beginning of period | $ | 704 | $ | 401 | $ | 454 | |||||
| Acquisition | — | — | 38 | ||||||||
| Divestiture | (5) | — | — | ||||||||
| Charged to income tax expense | 90 | 315 | 37 | ||||||||
| Deductions | (135) | (1) | (98) | ||||||||
| Currency translation adjustments | 4 | (11) | (30) | ||||||||
| Balance at end of period | $ | 658 | $ | 704 | $ | 401 |
Income Tax Expense (Benefit) Reconciliation
| years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Income tax expense (benefit) at U.S. statutory rate | $ | (22) | $ | (557) | $ | 234 | |||||
| Tax incentives | (209) | (157) | (193) | ||||||||
| State and local taxes, net of federal benefit | (36) | (26) | 8 | ||||||||
| Impact of foreign taxes | 189 | 89 | 180 | ||||||||
| Tax-deductible foreign statutory loss on an investment in a foreign subsidiary | — | — | (58) | ||||||||
| Unfavorable court decision in a foreign jurisdiction related to an uncertain tax position | — | — | 22 | ||||||||
| Non-deductible goodwill impairments | — | 591 | — | ||||||||
| Non-deductible separation-related costs | 26 | — | — | ||||||||
| Notional interest deduction expense (benefit) | 31 | (306) | (97) | ||||||||
| Valuation allowances | (45) | 314 | (61) | ||||||||
| Stock compensation (windfall) shortfall tax expense (benefit) | 11 | (5) | (13) | ||||||||
| Research and development tax credits | (21) | (10) | (4) | ||||||||
| Uncertain tax positions | 5 | (13) | 14 | ||||||||
| Unutilized foreign tax credits | 20 | 43 | 13 | ||||||||
| Subpart F income | 26 | 11 | 10 | ||||||||
| Foreign tax credits | (9) | 6 | (2) | ||||||||
| Other, net | — | 24 | 30 | ||||||||
| Income tax expense (benefit) | $ | (34) | $ | 4 | $ | 83 |
Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including tax incentives, foreign rate differences, state income taxes, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances and liabilities for uncertain tax positions, excess tax benefits or shortfalls on stock compensation awards, audit developments and legislative changes.
In 2023, our effective income tax rate was impacted favorably by geographic earnings mix, which was impacted by the long-lived asset impairments we recognized during 2023, a $50 million net tax benefit after related valuation allowances from notional interest deductions that are received by certain wholly-owned foreign subsidiaries that have financed their operations with equity capital and a $21 million tax benefit related to research and development tax credits, partially offset by non-deductible separation-related costs and tax shortfalls on stock compensation awards.
In 2022, our effective income tax rate was adversely impacted by non-deductible impairments of goodwill acquired in the Hillrom acquisition and valuation allowance increases, including the increase described above related to deferred tax assets from a tax basis step-up that arose from Swiss tax reform legislation in 2019. Those items were partially offset by a $47 million net tax benefit after related valuation allowances from notional interest deductions.
In 2021, our effective income tax rate was impacted favorably by geographic earnings mix, including a $50 million net tax benefit after related valuation allowances from notional interest deductions, a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, a tax benefit related to a change in U.S. foreign tax credit regulations, which is reflected in the valuation allowances item in the table above, and excess tax benefits on stock compensation awards, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.
We plan to repatriate our foreign earnings with the exception of approximately $505 million of accumulated earnings that are indefinitely reinvested as of December 31, 2023 related to two of our foreign operations. Additional withholding and capital gain taxes of $61 million would be incurred if such earnings were remitted currently.
Our tax provisions for 2023, 2022 and 2021 do not include any significant 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. Our accounting policy is to recognize any GILTI charge as a period cost.
Unrecognized Tax Benefits
We classify interest and penalties associated with income taxes in income tax expense (benefit) within the consolidated statements of income (loss). Net interest and penalties recognized were not significant during 2023, 2022 and 2021. The liability recognized related to interest and penalties was $23 million and $16 million as of December 31, 2023 and 2022, respectively. The total amount of gross unrecognized tax benefits that, if recognized, would impact the effective tax rate are $57 million, $33 million and $39 million as of December 31, 2023, 2022 and 2021, respectively. We believe that it is reasonably possible that our gross unrecognized tax benefits will be reduced within the next 12 months by $11 million.
The following table is a reconciliation of our unrecognized tax benefits for the years ended December 31, 2023, 2022 and 2021.
| as of and for the years ended (in millions) | 2023 | 2022 | 2021 | ||||||||
| Balance at beginning of the year | $ | 89 | $ | 111 | $ | 90 | |||||
| Increase due to acquisition | — | — | 11 | ||||||||
| Increase associated with tax positions taken during the current year | 77 | 11 | 31 | ||||||||
| Increase (decrease) associated with tax positions taken during a prior year | 12 | 11 | (3) | ||||||||
| Settlements | (3) | (7) | (2) | ||||||||
| Decrease associated with lapses in statutes of limitations | (8) | (37) | (16) | ||||||||
| Balance at end of the year | $ | 167 | $ | 89 | $ | 111 |
Of the gross unrecognized tax benefits, $83 million and $35 million were recognized as liabilities in the consolidated balance sheets as of December 31, 2023 and 2022, respectively.
Tax Incentives
We have received tax incentives in Puerto Rico, Switzerland, Dominican Republic, Costa Rica and Thailand. The financial impact of the reductions as compared to the statutory tax rates is indicated in the income tax expense (benefit) reconciliation table above. The tax reductions as compared to the local statutory rate favorably impacted earnings (loss) per diluted share by $0.41 in 2023, $0.31 in 2022 and $0.38 in 2021. The above grants provide that our manufacturing operations are and will be partially exempt from local taxes with varying expirations from 2024 to 2034.
Examinations of Tax Returns
As of December 31, 2023, we had ongoing audits in the United States, Germany, Italy and other jurisdictions. During 2022, we closed U.S. tax years 2017-2018 with the IRS with no material adjustments to our financial statements. Tax years 2019 and 2020 remain under examination by the IRS and tax years 2012 and forward remain
under examination by various foreign taxing authorities. While the final outcome of these matters is inherently uncertain, we believe we have made adequate tax provisions for all years subject to examination.
NOTE 15
| EARNINGS (LOSS) PER SHARE |
The numerator for both basic and diluted earnings (loss) per share (EPS) is net income (loss) attributable to Baxter stockholders. The denominator for basic EPS is the weighted-average number of shares outstanding during the period. The dilutive effect of outstanding stock options, RSUs and PSUs is reflected in the denominator for diluted EPS using the treasury stock method.
The following table is a reconciliation of net income (loss) attributable to Baxter stockholders.
| years ended December 31(in millions) | 2023 | 2022 | 2021 | ||||||||
| Income (loss) from continuing operations | $ | (69) | $ | (2,654) | $ | 1,033 | |||||
| Less: Net income attributable to noncontrolling interests | 7 | 12 | 11 | ||||||||
| Income (loss) from continuing operations attributable to Baxter stockholders | (76) | (2,666) | 1,022 | ||||||||
| Income from discontinued operations | 2,732 | 233 | 262 | ||||||||
| Net income (loss) attributable to Baxter stockholders | $ | 2,656 | $ | (2,433) | $ | 1,284 |
The following table is a reconciliation of basic shares to diluted shares.
| years ended December 31(in millions) | 2023 | 2022 | 2021 | ||||||||
| Basic shares | 506 | 504 | 502 | ||||||||
| Effect of dilutive securities | — | — | 6 | ||||||||
| Diluted shares | 506 | 504 | 508 |
Basic and diluted shares are the same for the years ended December 31, 2023 and 2022 due to our net losses from continuing operations for those periods. The effect of dilutive securities for the year ended December 31, 2021 includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excluded 25 million, 22 million, and 7 million equity awards in 2023, 2022, and 2021, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 9 for additional information regarding items impacting basic shares.
NOTE 16
| FINANCIAL INSTRUMENTS, DERIVATIVES AND HEDGING ACTIVITIES |
Accounts Receivable Sales
For accounts receivable originated in Japan, we have entered into agreements with a financial institution in which the entire interest in and ownership of the receivable is sold. We continue to service the receivables in this arrangement.
The following is a summary of the activity relating to the arrangement.
| as of and for the years ended December 31 (in millions) | 2023 | 2022 | 2021 | |||||||||||
| Sold receivables at beginning of year | $ | 71 | $ | 81 | $ | 96 | ||||||||
| Proceeds from sales of receivables | 274 | 291 | 339 | |||||||||||
| Cash collections (remitted to the owners of the receivables) | (275) | (293) | (346) | |||||||||||
| Effect of foreign exchange rate changes | (4) | (8) | (8) | |||||||||||
| Sold receivables at end of year | $ | 66 | $ | 71 | $ | 81 |
The net gains or losses relating to the sales of accounts receivable were immaterial for each year.
Concentrations of Credit Risk
We invest excess cash in certificates of deposit or money market or other funds and diversify the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, we have diversified our selection of counterparties, and have arranged collateralization and master-netting agreements to minimize the risk of loss.
Global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. Global economic conditions, governmental actions and customer-specific factors may require us to re-evaluate the collectability of our receivables and we could potentially incur additional credit losses.
Foreign Currency and Interest Rate Risk Management
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.
We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, British Pound, Chinese Renminbi, Japanese Yen, Swedish Krona, British Pound, Polish Zloty, Mexican Peso, Australian Dollar, Canadian Dollar, Korean Won, Colombian Peso, Brazilian Real, Russian Ruble, Turkish Lira and Indian Rupee. 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 instruments to further reduce the net exposure to foreign exchange risk. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from changes in foreign exchange rates. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.
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 the mix of fixed- and floating-rate debt that we believe is appropriate at that time. 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 do not hold any instruments for trading purposes and none of our outstanding derivative instruments contain credit-risk-related contingent features.
Cash Flow Hedges
We may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities. We periodically use treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt.
The notional amounts of foreign exchange contracts designated as cash flow hedges were $340 million and $398 million as of December 31, 2023 and 2022, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at December 31, 2023 is 12 months for foreign exchange contracts. There were no outstanding interest rate contracts designated as cash flow hedges as of December 31, 2023 and 2022.
Fair Value Hedges
We periodically use interest rate swaps to convert a portion of our fixed-rate debt into variable-rate debt. These instruments hedge our earnings from changes in the fair value of debt due to fluctuations in the designated benchmark interest rate.
There were no outstanding interest rate contracts designated as fair value hedges as of December 31, 2023 and 2022.
In October 2023, we entered into a foreign currency forward contract with a notional amount of $798 million maturing in May 2024 and designated that derivative as a fair value hedge of our €750 million of 0.40% senior notes due May 2024.
Net Investment Hedges
In May 2017, we issued €600 million of 1.3% senior notes due May 2025. In May 2019, we issued €750 million of 1.3% senior notes due May 2029. We have designated these debt obligations as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments of the outstanding debt balances are recorded as a component of AOCI.
In May 2019, we issued €750 million of 0.40% senior notes due May 2024. We had designated these debt obligations as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments of the outstanding debt balances were previously recorded as a component of AOCI. In October 2023, we dedesignated this previously designated net investment hedge and concurrently entered into a fair value hedging relationship as discussed in the “Fair Value Hedges” section above.
As of December 31, 2023, we had an accumulated pre-tax unrealized translation gain in AOCI of $37 million related to the Euro-denominated senior notes.
Dedesignations
If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, we discontinue hedge accounting prospectively. Gains or losses relating to terminations of effective cash flow hedges generally continue to be deferred and are recognized consistent with the loss or income recognition of the underlying hedged items. However, if it is probable that hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings. There were no cash flow hedge dedesignations in 2023, 2022 or 2021 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur. The losses relating to these terminations continue to be deferred and are being recognized consistent with the underlying hedged item, interest expense on the issuance of debt.
If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged item at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated in 2023, 2022 or 2021.
If we remove a net investment hedge designation, any gain or loss recognized in AOCI is not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged. In October 2023, we dedesignated one of our net investment hedges as discussed in the "Net Investment Hedges" section above. There were no net investment hedges terminated in 2022 or 2021.
Undesignated Derivative Instruments
We use forward contracts to hedge earnings from the effects of foreign exchange relating to certain of our intra-company and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges and the terms of these instruments generally do not exceed one month.
The total notional amount of undesignated derivative instruments was $709 million and $753 million as of December 31, 2023 and 2022, respectively.
Gains and Losses on Hedging Instruments and Undesignated Derivative Instruments
The following tables summarize the gains and losses on our hedging instruments and the classification of those gains and losses within our consolidated financial statements for the years ended December 31, 2023, 2022 and
| (in millions) | Gain (loss) recognized in OCI | Location of gain (loss) in income statement | Gain (loss) reclassified from AOCI into income | ||||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | ||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||
| Interest rate contracts | $ | — | $ | — | $ | — | Interest expense, net | $ | (6) | $ | (6) | $ | (6) | ||||||||||
| Foreign exchange contracts | 16 | 28 | 5 | Cost of sales | 16 | 26 | (23) | ||||||||||||||||
| Fair value hedges | |||||||||||||||||||||||
| Foreign exchange contracts | (4) | — | — | Other (income) expense, net | (3) | — | — | ||||||||||||||||
| Net investment hedges | (58) | 141 | 200 | Other (income) expense, net | — | — | — | ||||||||||||||||
| Total | $ | (46) | $ | 169 | $ | 205 | $ | 7 | $ | 20 | $ | (29) |
| Location of gain (loss) in income statement | Gain (loss) recognized in income | ||||||||||||||||
| (in millions) | 2023 | 2022 | 2021 | ||||||||||||||
| Fair value hedges | |||||||||||||||||
| Foreign exchange contracts | Other (income) expense, net | $ | 38 | $ | — | $ | — | ||||||||||
| Undesignated derivative instruments | |||||||||||||||||
| Foreign exchange contracts | Other (income) expense, net | 2 | (30) | (36) | |||||||||||||
| Total | $ | 40 | $ | (30) | $ | (36) |
The following table summarizes net-of-tax activity in AOCI, a component of stockholders’ equity, related to our cash flow hedges.
| as of and for the year ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Accumulated other comprehensive income (loss) balance at beginning of year | $ | (119) | $ | (126) | $ | (153) | |||||
| (Loss) gain in fair value of derivatives during the year | 5 | 22 | 4 | ||||||||
| Amount reclassified to earnings during the year | (6) | (15) | 23 | ||||||||
| Accumulated other comprehensive income (loss) balance at end of year | $ | (120) | $ | (119) | $ | (126) |
As of December 31, 2023, $6 million of deferred, net after-tax losses on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.
Derivative Assets and Liabilities
The following table summarizes the classification and fair values of derivative instruments reported in the consolidated balance sheet as of December 31, 2023.
| Derivatives in asset positions | Derivatives in liability positions | ||||||||||||||||
| (in millions) | Balance sheet location | Fair value | Balance sheet location | Fair value | |||||||||||||
| Derivative instruments designated as hedges | |||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | $ | 47 | Accrued expenses and other current liabilities | $ | — | |||||||||||
| Undesignated derivative instruments | |||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | 4 | Accrued expenses and other current liabilities | 5 | |||||||||||||
| Total derivative instruments | $ | 51 | $ | 5 |
The following table summarizes the classification and fair values of derivative instruments reported in the consolidated balance sheet as of December 31, 2022.
| Derivatives in asset positions | Derivatives in liability positions | ||||||||||||||||
| (in millions) | Balance sheet location | Fair value | Balance sheet location | Fair value | |||||||||||||
| Derivative instruments designated as hedges | |||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | $ | 8 | Accrued expenses and other current liabilities | $ | 5 | |||||||||||
| Undesignated derivative instruments | |||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | 6 | Accrued expenses and other current liabilities | 7 | |||||||||||||
| Total derivative instruments | $ | 14 | $ | 12 |
While some of our derivatives are subject to master netting arrangements, we present our assets and liabilities related to derivative instruments on a gross basis within the consolidated balance sheets. Additionally, we are not required to post collateral for any of our outstanding derivatives.
The following table provides information on our derivative positions as if they were presented on a net basis, allowing for the right of offset by counterparty.
| December 31, 2023 | December 31, 2022 | ||||||||||||||||
| (in millions) | Asset | Liability | Asset | Liability | |||||||||||||
| Gross amounts recognized in the consolidated balance sheets | $ | 51 | $ | 5 | $ | 14 | $ | 12 | |||||||||
| Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheets | (5) | (5) | (4) | (4) | |||||||||||||
| Total | $ | 46 | $ | — | $ | 10 | $ | 8 |
The following table presents the amounts recorded on the consolidated balance sheets related to fair value hedges:
| Carrying amount of hedged items | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged items (a) | ||||||||||||||||
| (in millions) | Balance as of December 31, 2023 | Balance as of December 31, 2022 | Balance as of December 31, 2023 | Balance as of December 31, 2022 | |||||||||||||
| Long-term debt | $ | 100 | $ | 101 | $ | 3 | $ | 4 |
(a) These fair value hedges were terminated in 2018 and earlier periods.
NOTE 17
| FAIR VALUE MEASUREMENTS |
The fair value hierarchy consists of the following three levels:
-
Level 1 — Quoted prices in active markets that we have the ability to access for identical assets or liabilities;
-
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and
-
Level 3 — Valuations using significant inputs that are unobservable in the market and include the use of judgment by management about the assumptions market participants would use in pricing the asset or liability.
The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis.
| Basis of fair value measurement | ||||||||||||||
| (in millions) | Balance as of December 31, 2023 | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
| Assets | ||||||||||||||
| Foreign exchange contracts | $ | 51 | $ | — | $ | 51 | $ | — | ||||||
| Available-for-sale debt securities | 22 | — | — | 22 | ||||||||||
| Marketable equity securities | 44 | 44 | — | — | ||||||||||
| Total | $ | 117 | $ | 44 | $ | 51 | $ | 22 | ||||||
| Liabilities | ||||||||||||||
| Foreign exchange contracts | $ | 5 | $ | — | $ | 5 | $ | — | ||||||
| Contingent payments related to acquisitions | 14 | — | — | 14 | ||||||||||
| Total | $ | 19 | $ | — | $ | 5 | $ | 14 |
| Basis of fair value measurement | |||||||||||||||||
| (in millions) | Balance as of December 31, 2022 | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Assets | |||||||||||||||||
| Foreign exchange contracts | $ | 14 | $ | — | $ | 14 | $ | — | |||||||||
| Available-for-sale debt securities | 47 | — | — | 47 | |||||||||||||
| Marketable equity securities | 32 | 32 | — | — | |||||||||||||
| Total | $ | 93 | $ | 32 | $ | 14 | $ | 47 | |||||||||
| Liabilities | |||||||||||||||||
| Foreign exchange contracts | $ | 12 | $ | — | $ | 12 | $ | — | |||||||||
| Contingent payments related to acquisitions | 84 | — | — | 84 | |||||||||||||
| Total | $ | 96 | $ | — | $ | 12 | $ | 84 |
As of December 31, 2023 and 2022, cash and cash equivalents of $3.19 billion and $1.72 billion, respectively, included money market and other short-term funds of approximately $1.63 billion and $341 million, respectively, that are considered Level 2 in the fair value hierarchy.
For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. A majority of the derivatives entered into by us are valued using internal valuation techniques as no quoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholes
models. The key inputs, which are considered observable and vary depending on the type of derivative, include contractual terms, interest rate yield curves, foreign exchange rates and volatility.
Available-for-sale debt securities, which consist of convertible debt and convertible redeemable preferred shares issued by nonpublic entities, are measured using discounted cash flow and option pricing models. Those available-for-sale debt securities are classified as Level 3 fair value measurements when there are no observable transactions near the balance sheet date due to the lack of observable data over certain fair value inputs such as equity volatility. The fair values of available-for-sale debt securities increase when interest rates decrease, equity volatility increases, or the fair values of the equity shares underlying the conversion options increase.
Contingent payments related to acquisitions, which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques incorporating management's expectations of future outcomes. The fair value of milestone payments increases as the estimated probability of payment increases or the expected timing of payments is accelerated. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increases or the expected timing of payment is accelerated.
The following table is a reconciliation of recurring fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions and available-for-sale debt securities.
| 2023 | 2022 | ||||||||||||||||
| as of and for the years ended December 31 (in millions) | Contingent payments related to acquisitions | Available-for-sale debt securities | Contingent payments related to acquisitions | Available-for-sale debt securities | |||||||||||||
| Fair value at beginning of period | $ | 84 | $ | 47 | $ | 143 | $ | 30 | |||||||||
| Additions | — | 2 | — | 23 | |||||||||||||
| Change in fair value recognized in earnings | (19) | (22) | (39) | — | |||||||||||||
| Change in fair value recognized in AOCI | — | — | — | 4 | |||||||||||||
| Payments | (51) | — | (20) | — | |||||||||||||
| Transfers out of Level 3 | — | (5) | — | (10) | |||||||||||||
| Fair value at end of period | $ | 14 | $ | 22 | $ | 84 | $ | 47 |
During the years ended December 31, 2023 and 2022, available-for-sale debt securities were reclassified from Level 3, upon conversion to marketable equity securities, which are classified as Level 1 in the fair value hierarchy, upon initial public offerings of the investees.
Financial Instruments Not Measured at Fair Value
In addition to the financial instruments that we are required to recognize at fair value in the consolidated balance sheets, we have certain financial instruments that are recognized at amortized cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized in the consolidated balance sheets and the estimated fair values.
| Book values | Fair values(a) | ||||||||||||||||
| as of December 31 (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Liabilities | |||||||||||||||||
| Short-term debt | $ | — | $ | 299 | $ | — | $ | 299 | |||||||||
| Current maturities of long-term debt and finance lease obligations | 2,668 | 1,105 | 2,621 | 1,079 | |||||||||||||
| Long-term debt and finance lease obligations | 11,130 | 15,232 | 10,067 | 13,657 |
(a) These fair value amounts are classified as Level 2 within the fair value hierarchy as they are estimated based on observable inputs.
The carrying value of short-term debt approximates its fair value due to the short-term maturities of the obligations. The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instruments. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with our credit risk. The carrying values of other financial instruments not presented in the table above, such as accounts receivable and accounts payable, approximate their fair values due to the short-term maturities of most of those assets and liabilities.
The carrying values of equity investments without readily determinable fair values that we measure at cost, less impairment were $66 million and $104 million at December 31, 2023 and 2022, respectively. When applicable, we also adjust the measurement of such equity investments for observable prices in orderly transactions for an identical or similar investment of the same issuer. These investments are included in Other non-current assets on our consolidated balance sheets.
NOTE 18
| SEGMENT INFORMATION |
Our reportable segments were previously comprised of the following geographic segments related to our legacy Baxter business: Americas, EMEA and APAC, and a global segment for our Hillrom business. In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Under this new operating model, our business is comprised of four segments: Medical Products and Therapies, Healthcare Systems and Technologies (formerly referred to as our Hillrom segment), Pharmaceuticals and Kidney Care. Our segments were changed during the third quarter of 2023 to align with our new operating model and prior period segment disclosures have been revised to reflect the new segment presentation.
The Medical Products and Therapies segment includes sales of our sterile IV solutions, infusion systems, administration sets, parenteral nutrition therapies and surgical hemostat, sealant and adhesion prevention products. The Healthcare Systems and Technologies segment includes sales of our connected care solutions and collaboration tools, including smart bed systems, patient monitoring systems and diagnostic technologies, respiratory health devices and advanced equipment for the surgical space, including surgical video technologies, precision positioning devices and other accessories. The Pharmaceuticals segment includes sales of specialty injectable pharmaceuticals, inhaled anesthesia and drug compounding. The Kidney Care segment includes sales of chronic and acute dialysis therapies and services, including PD, HD, CRRT and other organ support therapies. Other sales not allocated to a segment primarily include sales of products and services provided directly through certain of our manufacturing facilities and royalty income under a business development arrangement that ended in early 2023 when we acquired the related product rights.
Disaggregation of Net Sales
The following tables present our U.S. and International disaggregated net sales. Intersegment sales are eliminated in consolidation.
| for the years ended December 31 | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||
| (in millions) | U.S. | International | Total | U.S. | International | Total | U.S. | International | Total | ||||||||||||||||||||||||||
| Infusion Therapies and Technologies | $ | 2,227 | $ | 1,733 | $ | 3,960 | $ | 2,241 | $ | 1,576 | $ | 3,817 | $ | 2,202 | $ | 1,642 | $ | 3,844 | |||||||||||||||||
| Advanced Surgery | 582 | 469 | 1,051 | 574 | 424 | 998 | 545 | 432 | 977 | ||||||||||||||||||||||||||
| Medical Products and Therapies | 2,809 | 2,202 | 5,011 | 2,815 | 2,000 | 4,815 | 2,747 | 2,074 | 4,821 | ||||||||||||||||||||||||||
| Care and Connectivity Solutions | 1,263 | 537 | 1,800 | 1,295 | 496 | 1,791 | 98 | 44 | 142 | ||||||||||||||||||||||||||
| Front Line Care | 905 | 308 | 1,213 | 840 | 308 | 1,148 | 51 | 19 | 70 | ||||||||||||||||||||||||||
| Healthcare Systems and Technologies | 2,168 | 845 | 3,013 | 2,135 | 804 | 2,939 | 149 | 63 | 212 | ||||||||||||||||||||||||||
| Injectables and Anesthesia | 759 | 588 | 1,347 | 682 | 623 | 1,305 | 753 | 637 | 1,390 | ||||||||||||||||||||||||||
| Drug Compounding | — | 902 | 902 | — | 821 | 821 | — | 901 | 901 | ||||||||||||||||||||||||||
| Pharmaceuticals | 759 | 1,490 | 2,249 | 682 | 1,444 | 2,126 | 753 | 1,538 | 2,291 | ||||||||||||||||||||||||||
| Chronic Therapies1 | 927 | 2,756 | 3,683 | 923 | 2,791 | 3,714 | 869 | 2,993 | 3,862 | ||||||||||||||||||||||||||
| Acute Therapies1 | 271 | 499 | 770 | 263 | 472 | 735 | 308 | 512 | 820 | ||||||||||||||||||||||||||
| Kidney Care | 1,198 | 3,255 | 4,453 | 1,186 | 3,263 | 4,449 | 1,177 | 3,505 | 4,682 | ||||||||||||||||||||||||||
| Other1 | 66 | 21 | 87 | 137 | 40 | 177 | 112 | 28 | 140 | ||||||||||||||||||||||||||
| Total Baxter | $ | 7,000 | $ | 7,813 | $ | 14,813 | $ | 6,955 | $ | 7,551 | $ | 14,506 | $ | 4,938 | $ | 7,208 | $ | 12,146 |
1In connection with our segment change in the third quarter of 2023, we reclassified $16 million of sales from the first half of 2023, $34 million of sales for the year ended December 31, 2022 and $38 million of sales for the year ended December 31, 2021 from Chronic Therapies to Acute Therapies to conform to the current period presentation. Additionally, in connection with the reclassification of our BPS business to discontinued operations during the second quarter of 2023, we reclassified $2 million of contract manufacturing revenues from the first quarter of 2023, $37 million of sales for the year ended December 31, 2022 and $31 million of sales for the year ended December 31, 2021 from BPS to Other (within continuing operations), as the related manufacturing facility was not part of that divestiture transaction.
Geographic Information
Our net sales are attributed to the following geographic regions based on the location of the customer.
| for the years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Net sales: | |||||||||||
| United States | $ | 7,000 | $ | 6,955 | $ | 4,938 | |||||
| Emerging markets1 | 3,319 | 3,222 | 3,012 | ||||||||
| Rest of world 2 | 4,494 | 4,329 | 4,196 | ||||||||
| Total net sales | $ | 14,813 | $ | 14,506 | $ | 12,146 |
1 Emerging markets include sales from our operations in Eastern Europe, the Middle East, Africa, Latin America and Asia (except for Japan).
2 Rest of world includes sales from our operations in Western Europe, Canada, Japan, Australia and New Zealand.
Our property, plant and equipment and operating lease right-of-use assets, net are attributed to the following geographic regions.
| as of December 31 (in millions) | 2023 | 2022 | ||||||
| Property, plant and equipment and operating lease right-of-use assets, net: | ||||||||
| United States | $ | 1,995 | $ | 2,011 | ||||
| Emerging markets | 1,485 | 1,492 | ||||||
| Rest of world | 1,477 | 1,733 | ||||||
| Total property, plant and equipment and operating lease right-of-use assets, net | $ | 4,957 | $ | 5,236 |
Segment Operating Income
We use segment operating income to evaluate the performance of our segments and to make resource allocation decisions. Segment operating income represents income before income taxes, interest and other non-operating income or expense, unallocated corporate costs, intangible asset amortization and other special items. Special items, which are presented below in our reconciliations of segment operating income to income (loss) from continuing operations before income taxes, are excluded from segment operating income because they are highly variable, difficult to predict and of a size that may substantially impact our reported results of operations for the period.
Under our new operating model, most global functional support costs, overhead costs and other shared costs that benefit our segments are allocated to those segments. Corporate costs that are not allocated to our segments, as well as any differences between actual corporate costs and the amounts allocated to our segments, are presented
as unallocated corporate costs. The following table presents our segment operating income and reconciliations of segment operating income to income (loss) from continuing operations before income taxes.
| for the years ended December 31 (in millions) | 2023 | 2022 | 2021 | ||||||||
| Medical Products and Therapies | $ | 972 | $ | 962 | $ | 955 | |||||
| Healthcare Systems and Technologies | 483 | 494 | 60 | ||||||||
| Pharmaceuticals | 401 | 391 | 523 | ||||||||
| Kidney Care | 300 | 408 | 488 | ||||||||
| Other | 18 | 77 | 59 | ||||||||
| Total | 2,174 | 2,332 | 2,085 | ||||||||
| Unallocated corporate costs | (51) | (54) | (49) | ||||||||
| Intangible asset amortization expense | (652) | (753) | (298) | ||||||||
| Business optimization items | (534) | (225) | (114) | ||||||||
| European Medical Devices Regulation | (48) | (48) | (42) | ||||||||
| Long-lived asset impairments | (267) | (344) | — | ||||||||
| Separation-related costs | (225) | (7) | — | ||||||||
| Legal matters | (7) | — | (13) | ||||||||
| Acquisition and integration items | — | (213) | (188) | ||||||||
| Product-related items | — | (44) | — | ||||||||
| Loss on product divestiture arrangement | — | (54) | — | ||||||||
| Goodwill impairments | — | (2,812) | — | ||||||||
| Loss on subsidiary liquidation | — | (21) | — | ||||||||
| Investigation and related costs | — | — | (31) | ||||||||
| Total operating income (loss) | 390 | (2,243) | 1,350 | ||||||||
| Interest expense, net | 442 | 395 | 193 | ||||||||
| Other (income) expense, net | 51 | 12 | 41 | ||||||||
| Loss from continuing operations before income taxes | $ | (103) | $ | (2,650) | $ | 1,116 |
Additional financial information for our segments is as follows:
| for the years ended December 31 (in millions) | 2023 | 2022 | 2021 | |||||||||||
| Depreciation Expense1: | ||||||||||||||
| Medical Products and Therapies | $ | 202 | $ | 204 | $ | 213 | ||||||||
| Healthcare Systems and Technologies | 91 | 95 | 3 | |||||||||||
| Pharmaceuticals | 41 | 57 | 71 | |||||||||||
| Kidney Care | 277 | 271 | 282 | |||||||||||
| Total depreciation expense | $ | 611 | $ | 627 | $ | 569 |
1 Depreciation expense related to Corporate property, plant and equipment has been fully allocated to our segments and those allocations are reflected in the depreciation amounts presented herein.
Our chief operating decision maker does not receive asset or capital expenditure information by segment and, accordingly, we do not report that information for our segments.
NOTE 19
| QUARTERLY FINANCIAL DATA (UNAUDITED) |
The following table represents data from our unaudited consolidated statements of operations for the most recent eight quarters. This quarterly information has been prepared on the same basis as the consolidated financial statements and includes all normal recurring adjustments necessary to fairly state the information for the periods
presented. The results of operations of any quarter are not necessarily indicative of the results that may be expected for any future period.
| 2023 | |||||||||||||||||
| (in millions, except per share data) | First Quarter | Second Quarter2 | Third Quarter3 | Fourth Quarter | Full Year 1 | ||||||||||||
| Net sales | $ | 3,513 | $ | 3,707 | $ | 3,708 | $ | 3,885 | $ | 14,813 | |||||||
| Gross margin | 1,275 | 1,111 | 1,117 | 1,472 | 4,975 | ||||||||||||
| Income (loss) from continuing operations | — | (193) | 51 | 73 | (69) | ||||||||||||
| Income (loss) from discontinued operations | 45 | 54 | 2,460 | 173 | 2,732 | ||||||||||||
| Net income (loss) | 45 | (139) | 2,511 | 246 | 2,663 | ||||||||||||
| Net income (loss) attributable to Baxter stockholders | 44 | (141) | 2,508 | 245 | 2,656 | ||||||||||||
| Income (loss) from continuing operations per common share | |||||||||||||||||
| Basic | $ | 0.00 | $ | (0.39) | $ | 0.09 | $ | 0.14 | $ | (0.15) | |||||||
| Diluted | $ | 0.00 | $ | (0.39) | $ | 0.09 | $ | 0.14 | $ | (0.15) | |||||||
| Income (loss) from discontinued operations per common share | |||||||||||||||||
| Basic | $ | 0.09 | $ | 0.11 | $ | 4.85 | $ | 0.34 | $ | 5.40 | |||||||
| Diluted | $ | 0.09 | $ | 0.11 | $ | 4.83 | $ | 0.34 | $ | 5.40 | |||||||
| Net Income (loss) per common share | |||||||||||||||||
| Basic | $ | 0.09 | $ | (0.28) | $ | 4.95 | $ | 0.48 | $ | 5.25 | |||||||
| Diluted | $ | 0.09 | $ | (0.28) | $ | 4.93 | $ | 0.48 | $ | 5.25 |
| 2022 | |||||||||||||||||
| (in millions, except per share data) | First Quarter | Second Quarter | Third Quarter4 | Fourth Quarter | Full Year 1 | ||||||||||||
| Net sales | $ | 3,558 | $ | 3,594 | $ | 3,609 | $ | 3,745 | $ | 14,506 | |||||||
| Gross margin | 1,262 | 1,371 | 1,045 | 1,388 | 5,066 | ||||||||||||
| Income (loss) from continuing operations | 8 | 185 | (2,991) | 144 | (2,654) | ||||||||||||
| Income from discontinued operations | 65 | 70 | 57 | 41 | 233 | ||||||||||||
| Net income (loss) | 73 | 255 | (2,934) | 185 | (2,421) | ||||||||||||
| Net income (loss) attributable to Baxter stockholders | 71 | 252 | (2,937) | 181 | (2,433) | ||||||||||||
| Income (loss) from continuing operations per common share | |||||||||||||||||
| Basic | $ | 0.01 | $ | 0.36 | $ | (5.94) | $ | 0.28 | $ | (5.29) | |||||||
| Diluted | $ | 0.01 | $ | 0.36 | $ | (5.94) | $ | 0.28 | $ | (5.29) | |||||||
| Income from discontinued operations per common share | |||||||||||||||||
| Basic | $ | 0.13 | $ | 0.14 | $ | 0.11 | $ | 0.08 | $ | 0.46 | |||||||
| Diluted | $ | 0.13 | $ | 0.14 | $ | 0.11 | $ | 0.08 | $ | 0.46 | |||||||
| Net Income (loss) per common share | |||||||||||||||||
| Basic | $ | 0.14 | $ | 0.50 | $ | (5.83) | $ | 0.36 | $ | (4.83) | |||||||
| Diluted | $ | 0.14 | $ | 0.50 | $ | (5.83) | $ | 0.36 | $ | (4.83) |
1The sum of per share amounts for quarterly periods may not equal full year amounts due to rounding.
2Our results from continuing operations for the quarter ended June 30, 2023 included $243 million of long-lived asset impairment charges resulting from our decision to cease production at one of our dialyzer manufacturing facilities.
3Our results from continuing operations for the quarter ended September 30, 2023 included $267 million of long-lived asset impairment charges related to our HD business and our results from discontinued operations for that quarterly period included a gain of $2.88 billion from the sale of our BPS business.
4Our results from continuing operations for the quarter ended September 30, 2022 included $2.79 billion of goodwill impairments and $332 million of long-lived asset impairments related to assets acquired in connection with our December 2021 acquisition of Hillrom.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Baxter International Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Baxter International Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of income (loss), of comprehensive income (loss), of changes in equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Assessment of Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessments – Front Line Care and Chronic Therapies Reporting Units
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated goodwill balance as of December 31, 2023 was $6,514 million. Goodwill is not amortized but is subject to an impairment review annually and whenever indicators of impairment exist. In the third quarter of 2023, the Company completed the implementation of a new operating model and the Company’s segments were changed to align with the new operating model. As disclosed by management, the Company identified new reporting units as a result of the segment change and performed goodwill impairment assessments both before and after the reporting unit change and did not identify any goodwill impairments. As disclosed by management, in connection with the Company’s November 1, 2023 annual goodwill impairment tests, the fair values of the Front Line Care reporting unit within the Company’s Healthcare Systems and Technologies segment and the Chronic Therapies reporting unit within the Company’s Kidney Care segment exceeded their carrying values. As of December 31, 2023, the carrying amounts of goodwill for the Front Line Care and Chronic Therapies reporting units were $2.42 billion and $444 million, respectively. The fair values of the Company’s reporting units are generally determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach). Significant assumptions in reporting unit fair value measurements generally include forecasted cash flows, discount rates, terminal growth rates and earnings multiples.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments of the Front Line Care and Chronic Therapies reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of these reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the forecasted cash flows, discount rates, terminal growth rates, and earnings multiples; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s reporting units. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of the Front Line Care and Chronic Therapies reporting units; (ii) evaluating the appropriateness of the income approach and market approach; (iii) testing the completeness and accuracy of underlying data used in the income approach and market approach; (iv) and evaluating the reasonableness of the significant assumptions used by management related to the forecasted cash flows, discount rates, terminal growth rates, and earnings multiples. Evaluating management’s significant assumption related to the forecasted cash flows involved evaluating whether the assumption used was reasonable considering (i) the current and past performance of the Front Line Care and Chronic Therapies reporting units; (ii) the consistency with external market and industry data; and (iii) whether the assumption was consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the income approach and market approach and the reasonableness of the discount rate, terminal growth rate and earnings multiple assumptions.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 8, 2024
We have served as the Company’s auditor since 1985.
Previous: Item 7A. Quantitative and Qualitative Disclosures About Market Risk. · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.