filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
Baxter International Inc.
Condensed Consolidated Balance Sheets (unaudited)
(in millions, except share information)
| March 31, 2022 | December 31, 2021 | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,294 | $ | 2,951 | ||||
| Accounts receivable, net of allowances of $129 in 2022 and $122 in 2021 | 2,471 | 2,629 | ||||||
| Inventories | 2,548 | 2,453 | ||||||
| Prepaid expenses and other current assets | 860 | 839 | ||||||
| Total current assets | 8,173 | 8,872 | ||||||
| Property, plant and equipment, net | 5,114 | 5,178 | ||||||
| Goodwill | 9,816 | 9,836 | ||||||
| Other intangible assets, net | 7,693 | 7,792 | ||||||
| Operating lease right-of-use assets | 609 | 630 | ||||||
| Other non-current assets | 1,311 | 1,213 | ||||||
| Total assets | $ | 32,716 | $ | 33,521 | ||||
| Current liabilities: | ||||||||
| Short-term debt | $ | 200 | $ | 301 | ||||
| Current maturities of long-term debt and finance lease obligations | 209 | 210 | ||||||
| Accounts payable | 1,223 | 1,246 | ||||||
| Accrued expenses and other current liabilities | 2,258 | 2,479 | ||||||
| Total current liabilities | 3,890 | 4,236 | ||||||
| Long-term debt and finance lease obligations, less current portion | 16,765 | 17,149 | ||||||
| Operating lease liabilities | 508 | 522 | ||||||
| Other non-current liabilities | 2,434 | 2,493 | ||||||
| Total liabilities | 23,597 | 24,400 | ||||||
| Commitments and contingencies | ||||||||
| Equity: | ||||||||
| Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2022 and 2021 | 683 | 683 | ||||||
| Common stock in treasury, at cost,180,058,105 shares in 2022 and 181,879,516 shares in 2021 | (11,422) | (11,488) | ||||||
| Additional contributed capital | 6,207 | 6,197 | ||||||
| Retained earnings | 16,994 | 17,065 | ||||||
| Accumulated other comprehensive (loss) income | (3,387) | (3,380) | ||||||
| Total Baxter stockholders’ equity | 9,075 | 9,077 | ||||||
| Noncontrolling interests | 44 | 44 | ||||||
| Total equity | 9,119 | 9,121 | ||||||
| Total liabilities and equity | $ | 32,716 | $ | 33,521 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Baxter International Inc.
Condensed Consolidated Statements of Income (unaudited)
(in millions, except per share data)
| Three months ended March 31, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Net sales | $ | 3,707 | $ | 2,946 | |||||||||||||
| Cost of sales | 2,359 | 1,801 | |||||||||||||||
| Gross margin | 1,348 | 1,145 | |||||||||||||||
| Selling, general and administrative expenses | 1,052 | 627 | |||||||||||||||
| Research and development expenses | 150 | 128 | |||||||||||||||
| Other operating income, net | (17) | — | |||||||||||||||
| Operating income | 163 | 390 | |||||||||||||||
| Interest expense, net | 85 | 34 | |||||||||||||||
| Other (income) expense, net | (16) | 5 | |||||||||||||||
| Income before income taxes | 94 | 351 | |||||||||||||||
| Income tax expense | 21 | 51 | |||||||||||||||
| Net income | 73 | 300 | |||||||||||||||
| Net income attributable to noncontrolling interests | 2 | 2 | |||||||||||||||
| Net income attributable to Baxter stockholders | $ | 71 | $ | 298 | |||||||||||||
| Earnings per share | |||||||||||||||||
| Basic | $ | 0.14 | $ | 0.59 | |||||||||||||
| Diluted | $ | 0.14 | $ | 0.58 | |||||||||||||
| Weighted-average number of shares outstanding | |||||||||||||||||
| Basic | 503 | 505 | |||||||||||||||
| Diluted | 509 | 511 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Baxter International Inc.
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(in millions)
| Three months ended March 31, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Net income | $ | 73 | $ | 300 | |||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Currency translation adjustments, net of tax expense (benefit) of ($11) and $17 for the three months ended March 31, 2022 and 2021, respectively. | (15) | (208) | |||||||||||||||
| Pension and other postretirement benefits, net of tax expense of $3 and $8 for the three months ended March 31, 2022 and 2021, respectively. | 9 | 30 | |||||||||||||||
| Hedging activities, net of tax expense (benefit) of ($1) and $3 for the three months ended March 31, 2022 and 2021, respectively. | (2) | 12 | |||||||||||||||
| Debt securities, net of tax expense of $1 and zero for the three months ended March 31, 2022 and 2021, respectively | 1 | — | |||||||||||||||
| Total other comprehensive loss, net of tax | (7) | (166) | |||||||||||||||
| Comprehensive income | 66 | 134 | |||||||||||||||
| Less: Comprehensive income attributable to noncontrolling interests | 2 | 2 | |||||||||||||||
| Comprehensive income attributable to Baxter stockholders | $ | 64 | $ | 132 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Baxter International Inc.
Condensed Consolidated Statements of Changes in Equity (unaudited)
(in millions)
| For the three months ended March 31, 2022 | ||||||||||||||||||||||||||||||||
| Baxter International Inc. stockholders' equity | ||||||||||||||||||||||||||||||||
| 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, 2022 | 683 | $ | 683 | 182 | $ | (11,488) | $ | 6,197 | $ | 17,065 | $ | (3,380) | $ | 9,077 | $ | 44 | $ | 9,121 | ||||||||||||||
| Net income | — | — | — | — | — | 71 | — | 71 | 2 | 73 | ||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | (7) | (7) | — | (7) | ||||||||||||||||||||||
| Stock issued under employee benefit plans and other | — | — | (2) | 66 | 10 | — | — | 76 | — | 76 | ||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (142) | — | (142) | — | (142) | ||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | — | — | — | — | (2) | (2) | ||||||||||||||||||||||
| Balance as of March 31, 2022 | 683 | $ | 683 | 180 | $ | (11,422) | $ | 6,207 | $ | 16,994 | $ | (3,387) | $ | 9,075 | $ | 44 | $ | 9,119 |
| For the three months ended March 31, 2021 | ||||||||||||||||||||||||||||||||
| Baxter International Inc. stockholders' equity | ||||||||||||||||||||||||||||||||
| 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 | — | — | — | — | — | 298 | — | 298 | 2 | 300 | ||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | (166) | (166) | — | (166) | ||||||||||||||||||||||
| Purchases of treasury stock | — | — | 4 | (300) | — | — | — | (300) | — | (300) | ||||||||||||||||||||||
| Stock issued under employee benefit plans and other | — | — | (2) | 55 | — | — | — | 55 | — | 55 | ||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (124) | — | (124) | — | (124) | ||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | — | — | — | — | (1) | (1) | ||||||||||||||||||||||
| Balance as of March 31, 2021 | 683 | $ | 683 | 181 | $ | (11,296) | $ | 6,043 | $ | 16,502 | $ | (3,480) | $ | 8,452 | $ | 38 | $ | 8,490 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Baxter International Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operations | ||||||||
| Net income | $ | 73 | $ | 300 | ||||
| Adjustments to reconcile net income to cash flows from operations: | ||||||||
| Depreciation and amortization | 380 | 217 | ||||||
| Deferred income taxes | (55) | (25) | ||||||
| Stock compensation | 32 | 22 | ||||||
| Net periodic pension and other postretirement costs | 14 | 26 | ||||||
| Other | (12) | 14 | ||||||
| Changes in balance sheet items: | ||||||||
| Accounts receivable, net | 153 | 51 | ||||||
| Inventories | (105) | (129) | ||||||
| Prepaid expenses and other current assets | (13) | 2 | ||||||
| Accounts payable | 5 | 22 | ||||||
| Accrued expenses and other current liabilities | (221) | (124) | ||||||
| Other | (43) | 1 | ||||||
| Cash flows from operations | 208 | 377 | ||||||
| Cash flows from investing activities | ||||||||
| Capital expenditures | (140) | (171) | ||||||
| Acquisitions, net of cash acquired, and investments | (174) | (381) | ||||||
| Other investing activities, net | 10 | 14 | ||||||
| Cash flows from investing activities | (304) | (538) | ||||||
| Cash flows from financing activities | ||||||||
| Repayments of debt | (404) | — | ||||||
| Net decreases in debt with original maturities of three months or less | (45) | — | ||||||
| Cash dividends on common stock | (140) | (125) | ||||||
| Proceeds from stock issued under employee benefit plans | 66 | 48 | ||||||
| Purchases of treasury stock | — | (253) | ||||||
| Other financing activities, net | (25) | (28) | ||||||
| Cash flows from financing activities | (548) | (358) | ||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (13) | (31) | ||||||
| Decrease in cash, cash equivalents and restricted cash | (657) | (550) | ||||||
| Cash, cash equivalents and restricted cash at beginning of period (1) | 2,956 | 3,736 | ||||||
| Cash, cash equivalents and restricted cash at end of period (1) | $ | 2,299 | $ | 3,186 |
(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to the amounts reported within the condensed consolidated balance sheet as of March 31, 2022, December 31, 2021, and March 31, 2021 (in millions):
| March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||
| Cash and cash equivalents | $ | 2,294 | $ | 2,951 | $ | 3,182 | |||||
| Restricted cash included in prepaid expenses and other current assets | 5 | 5 | 4 | ||||||||
| Cash, cash equivalents and restricted cash | $ | 2,299 | $ | 2,956 | $ | 3,186 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Baxter International Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (we or our) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) in the United States have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Annual Report).
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. All such adjustments, unless otherwise noted herein, are of a normal, recurring nature. The results of operations for the current interim period are not necessarily indicative of the results of operations to be expected for the full year.
Risks and Uncertainties Related to COVID-19 and Global Economic Conditions
Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19). COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and we expect will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments have taken and continue to take. Initial measures taken in 2020 led to unprecedented restrictions on, disruptions in, and other related impacts on business and personal activities, including a shift in healthcare priorities, which resulted in a significant decline in medical procedures in 2020. The pandemic has created significant volatility in the demand for our products. For further information about our revenues by product category, refer to Note 9. Significant uncertainty remains regarding the duration and overall impact of the COVID-19 pandemic. For example, concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Omicron variants, subvariants and other virus mutations as well as vaccine distribution and hesitancy. The U.S. and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to mandatory vaccinations for certain of our employees, moratoriums on elective procedures and mandatory quarantines and travel restrictions). Due to the uncertainty caused by the pandemic, our operating performance and financial results, particularly in the short term, may be subject to volatility. We have experienced significant challenges, including lengthy delays, shortages and interruptions, posed by the pandemic and other exogenous factors (including significant weather events, disruptions to certain ports of call around the world and certain geopolitical events) to our global supply chain, including the cost and availability of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, and may experience these and other challenges in future periods. Many of our manufacturing plant and distribution center personnel are currently unvaccinated, and we may also experience employee resistance in complying with current and future government vaccine and testing mandates, which may cause labor shortages significantly impacting manufacturing production and distribution center productivity. We expect that these challenges as well as evolving governmental restrictions and requirements, among other factors, may continue to have an adverse effect on our business.
New Accounting Standards
Recently adopted accounting pronouncements
As of January 1, 2022, we adopted Accounting Standards Update (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 condensed consolidated financial statements.
2. ACQUISITIONS AND OTHER ARRANGEMENTS
Hillrom
On December 13, 2021, we completed our acquisition of all outstanding equity interests of Hill-Rom Holdings, Inc. (Hillrom) for a purchase price of $10.5 billion. Including the assumption of Hillrom's outstanding debt, the enterprise value of the transaction was approximately $12.8 billion. Under the terms of the transaction agreement, Hillrom shareholders received $156.00 in cash per outstanding Hillrom common share.
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 has not yet been finalized as of March 31, 2022. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for acquired intangible assets, goodwill and income taxes among other items. The completion of the valuation will occur no later than one year from the acquisition date.The following table summarizes the preliminary 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 | 590 | ||||
| Inventories | 557 | ||||
| Prepaid expenses and other current assets | 49 | ||||
| Property, plant and equipment | 502 | ||||
| Goodwill | 6,795 | ||||
| Other intangible assets | 6,029 | ||||
| Operating lease right-of-use assets | 74 | ||||
| Other non-current assets | 125 | ||||
| Short-term debt | (250) | ||||
| Accounts payable | (140) | ||||
| Accrued expenses and other current liabilities | (552) | ||||
| Long-term debt and finance lease obligations | (2,118) | ||||
| Operating lease liabilities | (57) | ||||
| Other non-current liabilities | (1,527) | ||||
| Total assets acquired and liabilities assumed | $ | 10,476 |
In the first quarter of 2022, we recorded measurement period adjustments to increase other intangible assets of $7 million, increase deferred income tax liabilities of $11 million, other individually insignificant adjustments for a net
decrease to assets acquired and liabilities assumed of $6 million and a corresponding increase to goodwill of $10 million. The measurement period adjustments did not have a significant impact our results of operations.
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 Hillrom segment.
For the three months ended March 31, 2022, we recognized $159 million of incremental costs of sales from the fair value step-ups on acquired Hillrom inventory that was sold in the current period.
Other Business Development Activities
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 currently, received specified intellectual property, including patent rights, in the current period and will receive additional intellectual property, including the product rights to Zosyn, in one year. Under the arrangement, we are entitled to receive profit sharing payments from sales of Zosyn until the product rights transfer to us in March 2023.
The transaction has been accounted for as an asset acquisition, as substantially all of the fair value of the assets being acquired under the arrangement was concentrated in the product rights that we will receive, 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 will be amortized over an estimated useful life of 9 years.
3. SUPPLEMENTAL FINANCIAL INFORMATION
Allowance for Doubtful Accounts
The following table is a summary of the changes in our allowance for doubtful accounts for the three months ended March 31, 2022 and 2021.
| Three months ended March 31, | ||||||||||||||
| (in millions) | 2022 | 2021 | ||||||||||||
| Balance at beginning of period | $ | 122 | $ | 125 | ||||||||||
| Charged to costs and expenses | 6 | 1 | ||||||||||||
| Write-offs | (1) | — | ||||||||||||
| Currency translation adjustments | 2 | (6) | ||||||||||||
| Balance at end of period | $ | 129 | $ | 120 |
Inventories
| (in millions) | March 31, 2022 | December 31, 2021 | ||||||
| Raw materials | $ | 656 | $ | 591 | ||||
| Work in process | 285 | 300 | ||||||
| Finished goods | 1,607 | 1,562 | ||||||
| Inventories | $ | 2,548 | $ | 2,453 |
Property, Plant and Equipment, Net
| (in millions) | March 31, 2022 | December 31, 2021 | ||||||
| Property, plant and equipment, at cost | $ | 11,757 | $ | 11,728 | ||||
| Accumulated depreciation | (6,643) | (6,550) | ||||||
| Property, plant and equipment, net | $ | 5,114 | $ | 5,178 |
Interest Expense, Net
| Three months ended March 31, | |||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||
| Interest expense, net of capitalized interest | $ | 88 | $ | 37 | |||||||||||||
| Interest income | (3) | (3) | |||||||||||||||
| Interest expense, net | $ | 85 | $ | 34 |
Other (Income) Expense, Net
| Three months ended March 31, | |||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||
| Foreign exchange (gains) losses, net | $ | (11) | $ | (3) | |||||||||||||
| Pension and other postretirement benefit plans | (5) | 4 | |||||||||||||||
| Other, net | — | 4 | |||||||||||||||
| Other (income) expense, net | $ | (16) | $ | 5 |
Non-Cash Operating and Investing Activities
Right-of-use operating lease assets obtained in exchange for lease obligations for the three months ended March 31, 2022 and 2021 were $14 million and $5 million, respectively.
Purchases of property, plant and equipment included in accounts payable as of March 31, 2022 and 2021 were $53 million and $63 million, respectively.
There were no unsettled share repurchases as of March 31, 2022. Unsettled share repurchases included in accrued expenses and other current liabilities were $47 million as of March 31, 2021.
4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The following is a reconciliation of goodwill by business segment.
| (in millions) | Americas | EMEA | APAC | Hillrom | Total | ||||||||||||
| Balance as of December 31, 2021 | $ | 2,517 | $ | 309 | $ | 224 | $ | 6,786 | $ | 9,836 | |||||||
| Acquisition accounting adjustments | — | — | — | 10 | 10 | ||||||||||||
| Currency translation | (29) | (3) | (3) | 5 | (30) | ||||||||||||
| Balance as of March 31, 2022 | $ | 2,488 | $ | 306 | $ | 221 | $ | 6,801 | $ | 9,816 |
As of March 31, 2022, there were no reductions in goodwill relating to impairment losses.
Other intangible assets, net
The following is a summary of our other intangible assets.
| (in millions) | Customer relationships | Developed technology, including patents | Other amortized intangible assets | Indefinite-lived intangible assets | Total | ||||||||||||
| March 31, 2022 | |||||||||||||||||
| Gross other intangible assets | $ | 3,457 | $ | 3,883 | $ | 340 | $ | 2,140 | $ | 9,820 | |||||||
| Accumulated amortization | (262) | (1,638) | (227) | — | (2,127) | ||||||||||||
| Other intangible assets, net | $ | 3,195 | $ | 2,245 | $ | 113 | $ | 2,140 | $ | 7,693 | |||||||
| December 31, 2021 | |||||||||||||||||
| Gross other intangible assets | $ | 3,437 | $ | 3,801 | $ | 344 | $ | 2,140 | $ | 9,722 | |||||||
| Accumulated amortization | (162) | (1,556) | (212) | — | (1,930) | ||||||||||||
| Other intangible assets, net | $ | 3,275 | $ | 2,245 | $ | 132 | $ | 2,140 | $ | 7,792 |
Intangible asset amortization expense was $217 million and $64 million for the three months ended March 31, 2022 and 2021, respectively.
5. FINANCING ARRANGEMENTS
Significant Debt Activity
In March 2022, we repaid $170 million of our $2.0 billion three-year term loan facility and $175 million of our $2.0 billion five-year term loan facility. The loss from the early extinguishment of this debt was not significant.
Credit Facilities
Our U.S. dollar-denominated revolving credit facility has a capacity of $2.5 billion and our Euro-denominated revolving credit facility has a capacity of €200 million. Each of the facilities matures in 2026. There were no borrowings outstanding under these credit facilities as of March 31, 2022 or December 31, 2021.
Commercial Paper
As of March 31, 2022, we had $200 million of commercial paper outstanding with a weighted-average interest rate of 0.5% and an original weighted-average term of 89 days. As of December 31, 2021, we had $300 million of commercial paper outstanding with a weighted-average interest rate of 0.27% and an original weighted-average term of 88 days.
6. COMMITMENTS AND 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, 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 March 31, 2022 and December 31, 2021, our total recorded reserves with respect to legal and environmental matters were $57 million and $72 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 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 an ongoing environmental remediations associated with historic operations at certain of our facilities. As of March 31, 2022 and December 31, 2021, our environmental reserves, which are measured on an undiscounted basis, were $18 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.
In November 2019, we and certain of our officers were named in a class action complaint captioned Ethan E. Silverman 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 shares of our common stock during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter common stock between February 21, 2019 and October 23, 2019. The plaintiff alleged 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. On January 29, 2020, the Court appointed Varma Mutual Pension Insurance Company and Louisiana Municipal Police Employees Retirement System as lead plaintiffs in the case. Plaintiffs filed an amended complaint on June 25, 2020 containing substantially the same allegations. On August 24, 2020, we filed a motion to dismiss the amended complaint. On January 12, 2021, the Court granted our motion to dismiss the amended complaint but gave plaintiffs an opportunity to file a further-amended complaint. The parties reached an agreement to settle the case for $16 million, subject to the completion of confirmatory discovery and final approval by the Court. The Court granted final approval of the settlement on August 11, 2021 and the settlement became effective on September 13, 2021.
As initially disclosed in our Form 8-K on October 24, 2019, we voluntarily advised the staff of the SEC of an internal investigation into certain intra-company transactions that impacted our previously reported non-operating foreign exchanges gains and losses. We also received a stockholder request for inspection of our books and records in connection with the October 24, 2019 announcement. The Company has cooperated with the staff of the SEC in its investigation into related 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 the Company’s cooperation. 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 are not material to our financial results, which were paid in the fourth quarter of 2021. The settlement of these claims does not preclude potential future lawsuits.
In July 2021, Hill-Rom, Inc. 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. Hillrom has been working with the DHHS and the DOJ to provide information responsive to the subpoena. Hillrom also voluntarily began a related internal review and Hillrom and now Baxter have been cooperating fully with the DHHS and the DOJ with respect to these matters.
The DHHS often issues this type of subpoena 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.
7. STOCKHOLDERS’ EQUITY
Stock-Based Compensation
Stock compensation expense totaled $32 million and $22 million in the first quarter of 2022 and 2021, respectively. Approximately 75% of stock compensation expense is classified within selling, general and administrative (SG&A) expense with the remainder classified in cost of sales and research and development (R&D) expense.
We awarded stock compensation grants which consisted of 1.8 million stock options, 1.2 million restricted stock units (RSUs) and 0.4 million performance stock units (PSUs) during the first quarter of 2022. The grant date fair values of stock options, RSUs and PSUs awarded in the first quarter of 2022 were $33 million, $102 million and $34 million, respectively. Stock options and RSUs generally vest in one-third increments over a three-year period. The vesting conditions for PSUs granted are equally divided based on our compound annual sales growth rate performance, our adjusted return on invested capital performance and on our stock performance relative to a specified peer group. All of the PSUs vest at the end of the applicable three-year service period.
Stock Options
The weighted-average Black-Scholes assumptions used in establishing the fair value of stock options granted during the period, along with weighted-average grant date fair values, were as follows:
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Expected volatility | 24 | % | 25 | % | ||||
| Expected life (in years) | 5.5 | 5.5 | ||||||
| Risk-free interest rate | 1.8 | % | 0.8 | % | ||||
| Dividend yield | 1.3 | % | 1.3 | % | ||||
| Fair value per stock option | $ | 18 | $ | 16 |
The total intrinsic value of stock options exercised was $27 million and $21 million during the first quarters of 2022 and 2021, respectively.
As of March 31, 2022, the unrecognized compensation cost related to all unvested stock options of $80 million is expected to be recognized as expense over a weighted-average period of 1.9 years.
RSUs
As of March 31, 2022, the unrecognized compensation cost related to all unvested RSUs of $163 million is expected to be recognized as expense over a weighted-average period of 2.2 years.
PSUs
As of March 31, 2022, the unrecognized compensation cost related to all unvested PSUs of $50 million is expected to be recognized as expense over a weighted-average period of 1.9 years.
Cash Dividends
Cash dividends declared per share for the three months ended March 31, 2022 and 2021 were $0.28 and $0.245, respectively.
Stock Repurchase Programs
In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. During the first quarter of 2022, we did not repurchase any shares under this authority. During the first quarter of 2021, we repurchased 3.6 million shares under this authority pursuant to a Rule 10b5-1 plan. We had $1.3 billion remaining available under the authorization as of March 31, 2022.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of net income, currency translation adjustments (CTA), certain gains and losses from pension and other postretirement employee benefit (OPEB) plans and gains and losses on cash flow hedges.
The following table is a net-of-tax summary of the changes in accumulated other comprehensive (loss) income (AOCI) by component for the three months ended March 31, 2022 and 2021.
| (in millions) | CTA | Pension and OPEB plans | Hedging activities | Debt securities | Total | ||||||||||||
| Gains (losses) | |||||||||||||||||
| Balance as of December 31, 2021 | $ | (2,907) | $ | (347) | $ | (126) | $ | — | $ | (3,380) | |||||||
| Other comprehensive income (loss) before reclassifications | (15) | 2 | (1) | 1 | (13) | ||||||||||||
| Amounts reclassified from AOCI (a) | — | 7 | (1) | — | 6 | ||||||||||||
| Net other comprehensive income (loss) | (15) | 9 | (2) | 1 | (7) | ||||||||||||
| Balance as of March 31, 2022 | $ | (2,922) | $ | (338) | $ | (128) | $ | 1 | $ | (3,387) |
| (in millions) | CTA | Pension and OPEB plans | Hedging activities | Total | ||||||||||
| Gains (losses) | ||||||||||||||
| Balance as of December 31, 2020 | $ | (2,587) | $ | (574) | $ | (153) | $ | (3,314) | ||||||
| Other comprehensive income (loss) before reclassifications | (208) | 13 | 3 | (192) | ||||||||||
| Amounts reclassified from AOCI (a) | — | 17 | 9 | 26 | ||||||||||
| Net other comprehensive income (loss) | (208) | 30 | 12 | (166) | ||||||||||
| Balance as of March 31, 2021 | $ | (2,795) | $ | (544) | $ | (141) | $ | (3,480) |
(a) See table below for details about these reclassifications.
The following is a summary of the amounts reclassified from AOCI to net income during the three months ended March 31, 2022 and 2021.
| Amounts reclassified from AOCI (a) | |||||||||||
| (in millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | Location of impact in income statement | ||||||||
| Pension and OPEB items | |||||||||||
| Amortization of net losses and prior service costs or credits | $ | (9) | $ | (21) | Other (income) expense, net | ||||||
| Less: Tax effect | 2 | 4 | Income tax expense | ||||||||
| $ | (7) | $ | (17) | Net of tax | |||||||
| Gains (losses) on hedging activities | |||||||||||
| Foreign exchange contracts | $ | 2 | $ | (10) | Cost of sales | ||||||
| Interest rate contracts | (1) | (1) | Interest expense, net | ||||||||
| 1 | (11) | Total before tax | |||||||||
| Less: Tax effect | — | 2 | Income tax expense | ||||||||
| $ | 1 | $ | (9) | Net of tax | |||||||
| Total reclassifications for the period | $ | (6) | $ | (26) | Total net of tax |
(a) Amounts in parentheses indicate reductions to net income
Refer to Note 11 for additional information regarding the amortization of pension and OPEB items and Note 14 for additional information regarding hedging activity.
9. REVENUES
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.
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 geographic segments including 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; hospital beds and services; surgical tables, lights and pendants; and patient monitoring and diagnostic technologies. For most of those sales, 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, in all of our segments, we enter into other types of contracts including contract manufacturing arrangements, equipment leases, and certain subscription software and licensing arrangements. 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. 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 March 31, 2022, we had $8.2 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of one year or more, which are primarily included in the Americas segment. 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 30% of this amount as revenue over the remainder of 2022, 30% in 2023, 20% in 2024, 15% in 2025 and 5% thereafter.
Significant Judgments
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration primarily related to rebates and wholesaler 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 accounts receivable, net on the condensed 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 during the three months ended March 31, 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 judgement.
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 condensed consolidated balance sheets. Net trade accounts receivable was $2.3 billion and $2.4 billion as of March 31, 2022 and December 31, 2021, respectively.
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 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:
| (in millions) | March 31, 2022 | December 31, 2021 | ||||||
| Contract manufacturing services | $ | 47 | $ | 50 | ||||
| Software sales | 42 | 45 | ||||||
| Bundled equipment and consumable medical products contracts | 111 | 100 | ||||||
| Contract assets | $ | 200 | $ | 195 |
The following table summarizes the classification of contract assets and contract liabilities as reported in the condensed consolidated balance sheets:
| (in millions) | March 31, 2022 | December 31, 2021 | ||||||
| Prepaid expenses and other current assets | $ | 84 | $ | 84 | ||||
| Other non-current assets | 116 | 111 | ||||||
| Contract assets | $ | 200 | $ | 195 | ||||
| Accrued expenses and other current liabilities | $ | 166 | $ | 162 | ||||
| Other non-current liabilities | 74 | 84 | ||||||
| Contract liabilities | $ | 240 | $ | 246 |
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 three months ended March 31, 2022. The contract liability balance represents the transaction price allocated to the remaining performance obligations.
| Three Months Ended March 31, 2022 | |||||
| Balance at beginning of period | $ | 246 | |||
| New revenue deferrals | 116 | ||||
| Revenue recognized upon satisfaction of performance obligations | (122) | ||||
| Balance at end of period | $ | 240 |
During the three months ended March 31, 2021, the amount of revenue recognized that was included in contract liabilities as of December 31, 2020 was not significant.
Disaggregation of Net Sales
In connection with our acquisition of Hillrom in December 2021, we have added three new product categories: Patient Support Systems, Front Line Care and Surgical Solutions.
The following tables disaggregate our net sales from contracts with customers by product category between the U.S. and international:
| Three Months Ended March 31, | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| (in millions) | U.S. | International | Total | U.S. | International | Total | ||||||||||||||
| Renal Care 1 | $ | 225 | $ | 669 | $ | 894 | $ | 216 | $ | 706 | $ | 922 | ||||||||
| Medication Delivery 2 | 472 | 234 | 706 | 411 | 241 | 652 | ||||||||||||||
| Pharmaceuticals 3 | 157 | 364 | 521 | 200 | 352 | 552 | ||||||||||||||
| Clinical Nutrition 4 | 84 | 143 | 227 | 83 | 151 | 234 | ||||||||||||||
| Advanced Surgery 5 | 136 | 92 | 228 | 126 | 91 | 217 | ||||||||||||||
| Acute Therapies 6 | 68 | 120 | 188 | 81 | 126 | 207 | ||||||||||||||
| BioPharma Solutions 7 | 52 | 104 | 156 | 44 | 91 | 135 | ||||||||||||||
| Patient Support Systems 8 | 295 | 88 | 383 | — | — | — | ||||||||||||||
| Front Line Care 9 | 207 | 87 | 294 | — | — | — | ||||||||||||||
| Surgical Solutions 10 | 37 | 41 | 78 | — | — | — | ||||||||||||||
| Other 11 | 24 | 8 | 32 | 19 | 8 | 27 | ||||||||||||||
| Total Baxter | $ | 1,757 | $ | 1,950 | $ | 3,707 | $ | 1,180 | $ | 1,766 | $ | 2,946 |
1Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.
2Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices.
3Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.
4Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.
5Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.
6Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).
7BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical and biopharmaceutical companies.
8Patient Support Systems includes sales of our connected care solutions: devices, software, communications and integration technologies.
9Front Line Care includes sales of our integrated patient monitoring and diagnostic technologies to help diagnose, treat and manage a wide variety of illness and diseases, including respiratory therapy, cardiology vision screening and physical assessment.
10Surgical Solutions includes sales of our surgical video technologies, tables, lights, pendants, precision positioning devices and other accessories.
11Other includes sales of miscellaneous product and service offerings.
Lease Revenue
We lease smart beds, such as bariatric, critical care, maternal, and home care beds, as well as other surfaces, to customers during periods of peak demand or for specialty purposes. We also lease medical equipment, such as renal dialysis equipment and infusion pumps, to customers, primarily in conjunction with arrangements to provide consumable medical products such as dialysis therapies, 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 three months ended March 31, 2022 and 2021 were:
| (in millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||
| Sales-type lease revenue | $ | 3 | $ | 6 | ||||
| Operating lease revenue | 122 | 34 | ||||||
| Variable lease revenue | 20 | 17 | ||||||
| Total lease revenue | $ | 145 | $ | 57 |
Our net investment in sales-type leases was $109 million as of March 31, 2022, of which $38 million originated in 2018 and prior, $16 million in 2019, $28 million in 2020, $25 million in 2021, and $2 million in 2022.
10. 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. In the current period, restructuring charges include actions taken in connection with our integration of Hillrom. From the commencement of our business optimization activities in the second half of 2015 through March 31, 2022, we have incurred cumulative pre-tax costs of $1.3 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation. We currently expect to incur additional pre-tax costs of approximately $25 million through the completion of the initiatives that are currently underway, primarily related to implementation costs. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods.
During the three months ended March 31, 2022 and 2021, we recorded the following charges related to business optimization programs.
| Three Months Ended March 31, | |||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||
| Restructuring charges | $ | 67 | $ | 25 | |||||||||||||
| Costs to implement business optimization programs | 14 | 2 | |||||||||||||||
| Total business optimization charges | $ | 81 | $ | 27 |
For segment reporting purposes, business optimization charges are unallocated expenses.
Costs to implement business optimization programs for the three months ended March 31, 2022 and 2021, respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs. These costs were primarily included within cost of sales and SG&A expense.
During the three months ended March 31, 2022 and 2021, we recorded the following restructuring charges.
| Three months ended March 31, 2022 | ||||||||||||||
| (in millions) | COGS | SG&A | R&D | Total | ||||||||||
| Employee termination costs | $ | 2 | $ | 47 | $ | — | $ | 49 | ||||||
| Contract termination and other costs | — | 12 | — | 12 | ||||||||||
| Asset impairments | — | 6 | — | 6 | ||||||||||
| Total restructuring charges | $ | 2 | $ | 65 | $ | — | $ | 67 |
| Three months ended March 31, 2021 | ||||||||||||||
| (in millions) | COGS | SG&A | R&D | Total | ||||||||||
| Employee termination costs | $ | 16 | $ | 5 | $ | — | $ | 21 | ||||||
| Asset impairments | 4 | — | — | 4 | ||||||||||
| Total restructuring charges | $ | 20 | $ | 5 | $ | — | $ | 25 |
The following table summarizes activity in the liability related to our restructuring initiatives.
| (in millions) | |||||
| Liability balance as of December 31, 2021 | $ | 109 | |||
| Charges | 61 | ||||
| Payments | (31) | ||||
| Currency translation | (2) | ||||
| Liability balance as of March 31, 2022 | $ | 137 |
Substantially all of our restructuring liabilities as of March 31, 2022 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 2023.
11. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS
The following is a summary of net periodic benefit cost relating to our pension and OPEB plans.
| Three months ended March 31, | |||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||
| Pension benefits | |||||||||||||||||
| Service cost | $ | 19 | $ | 22 | |||||||||||||
| Interest cost | 24 | 18 | |||||||||||||||
| Expected return on plan assets | (39) | (36) | |||||||||||||||
| Amortization of net losses and prior service costs | 12 | 23 | |||||||||||||||
| Net periodic pension cost | $ | 16 | $ | 27 | |||||||||||||
| OPEB | |||||||||||||||||
| Interest cost | $ | 1 | $ | 1 | |||||||||||||
| Amortization of net loss and prior service credit | (3) | (2) | |||||||||||||||
| Net periodic OPEB cost (income) | $ | (2) | $ | (1) |
12. INCOME TAXES
Our effective income tax rate was 22.3% and 14.5% for the three months ended March 31, 2022 and 2021, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.
For the three months ended March 31, 2022, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to discrete tax matters in various foreign jurisdictions, of which none are individually material, and an increase in our liabilities for uncertain tax positions, partially offset by excess tax benefits on stock compensation awards and a favorable geographic earnings mix.
For the three months ended March 31, 2021, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to decreases in accrued withholding taxes in several foreign jurisdictions and a favorable geographic earnings mix.
13. EARNINGS PER SHARE
The numerator for both basic and diluted earnings per share (EPS) is net income 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 basic shares to diluted shares.
| Three months ended March 31, | |||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||
| Basic shares | 503 | 505 | |||||||||||||||
| Effect of dilutive securities | 6 | 6 | |||||||||||||||
| Diluted shares | 509 | 511 |
The effect of dilutive securities includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excludes 4 million and 7 million equity awards for the three months ended March 31, 2022 and 2021, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 7 for additional information regarding items impacting basic and diluted shares.
14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Turkish Lira, Indian Rupee and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative 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.
All derivative instruments are generally recognized as either assets or liabilities at fair value in the condensed 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.
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.
For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is recorded in AOCI 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 other comprehensive income (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.
The notional amounts of foreign exchange contracts designated as cash flow hedges were $402 million and $377 million as of March 31, 2022 and December 31, 2021, respectively. The maximum term over which we have cash flow
hedge contracts in place related to forecasted transactions at March 31, 2022 is 12 months for foreign exchange contracts. There were no outstanding interest rate contracts designated as cash flow hedges as of March 31, 2022 and December 31, 2021.
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. 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. Changes in the fair value of hedge instruments designated as fair value hedges are classified in interest expense, net, as they hedge the interest rate risk associated with certain of our fixed-rate debt.
There were no outstanding interest rate contracts designated as fair value hedges as of March 31, 2022 and December 31, 2021.
Net Investment Hedges
In May 2017, we issued €600 million of senior notes due May 2025. In May 2019, we issued €750 million of senior notes due May 2024 and €750 million of 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 on the outstanding debt balances are recorded as a component of AOCI. As of March 31, 2022, we had an accumulated pre-tax unrealized translation loss in AOCI of $4 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 the hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings.
There were no hedge dedesignations in the first three months of 2022 or 2021 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur.
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 during the first three months of 2022 or 2021.
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. There were no net investment hedges terminated during the first three months of 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 $940 million as of March 31, 2022 and $851 million as of December 31, 2021.
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 condensed consolidated financial statements for the three months ended March 31, 2022 and
| Gain (loss) recognized in OCI | Location of gain (loss) in income statement | Gain (loss) reclassified from AOCI into income | ||||||||||||||||||||||||
| (in millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Cash flow hedges | ||||||||||||||||||||||||||
| Interest rate contracts | $ | — | $ | — | Interest expense, net | $ | (1) | $ | (1) | |||||||||||||||||
| Foreign exchange contracts | (3) | 4 | Cost of sales | 2 | (10) | |||||||||||||||||||||
| Net investment hedges | 42 | 114 | Other (income) expense, net | — | — | |||||||||||||||||||||
| Total | $ | 39 | $ | 118 | $ | 1 | $ | (11) |
| Location of gain (loss) in income statement | Gain (loss) recognized in income | |||||||||||||
| (in millions) | 2022 | 2021 | ||||||||||||
| Undesignated derivative instruments | ||||||||||||||
| Foreign exchange contracts | Other (income) expense, net | $ | 3 | $ | (22) |
As of March 31, 2022, $5 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 condensed consolidated balance sheet as of March 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 | $ | 12 | Accrued expenses and other current liabilities | $ | 2 | |||||||||||
| Total derivative instruments designated as hedges | 12 | 2 | |||||||||||||||
| Undesignated derivative instruments | |||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | 4 | Accrued expenses and other current liabilities | 5 | |||||||||||||
| Total derivative instruments | $ | 16 | $ | 7 |
The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2021.
| 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 | $ | 6 | Accrued expenses and other current liabilities | $ | 3 | |||||||||||
| Total derivative instruments designated as hedges | 6 | 3 | |||||||||||||||
| Undesignated derivative instruments | |||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | 2 | Accrued expenses and other current liabilities | 2 | |||||||||||||
| Total derivative instruments | $ | 8 | $ | 5 |
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 condensed 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.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||
| (in millions) | Asset | Liability | Asset | Liability | |||||||||||||
| Gross amounts recognized in the condensed consolidated balance sheets | $ | 16 | $ | 7 | $ | 8 | $ | 5 | |||||||||
| Gross amount subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet | (3) | (3) | (2) | (2) | |||||||||||||
| Total | $ | 13 | $ | 4 | $ | 6 | $ | 3 |
The following table presents the amounts recorded on the condensed consolidated balance sheet related to fair value hedges:
| Carrying amount of hedged item | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a) | ||||||||||||||||
| (in millions) | Balance as of March 31, 2022 | Balance as of December 31, 2021 | Balance as of March 31, 2022 | Balance as of December 31, 2021 | |||||||||||||
| Long-term debt | $ | 101 | $ | 101 | $ | 4 | $ | 4 |
(a) These fair value hedges were terminated in 2018 and earlier periods.
15. FAIR VALUE MEASUREMENTS
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 March 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 | $ | 16 | $ | — | $ | 16 | $ | — | ||||||
| Debt securities | 53 | — | — | 53 | ||||||||||
| Marketable equity securities | 8 | 8 | — | — | ||||||||||
| Total | $ | 77 | $ | 8 | $ | 16 | $ | 53 | ||||||
| Liabilities | ||||||||||||||
| Foreign exchange contracts | $ | 7 | $ | — | $ | 7 | $ | — | ||||||
| Contingent payments related to acquisitions | 124 | — | — | 124 | ||||||||||
| Total | $ | 131 | $ | — | $ | 7 | $ | 124 |
| Basis of fair value measurement | ||||||||||||||
| (in millions) | Balance as of December 31, 2021 | 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 | $ | 8 | $ | — | $ | 8 | $ | — | ||||||
| Debt securities | 30 | — | — | 30 | ||||||||||
| Marketable equity securities | 10 | 10 | — | — | ||||||||||
| Total | $ | 48 | $ | 10 | $ | 8 | $ | 30 | ||||||
| Liabilities | ||||||||||||||
| Foreign exchange contracts | $ | 5 | $ | — | $ | 5 | $ | — | ||||||
| Contingent payments related to acquisitions | 143 | — | — | 143 | ||||||||||
| Total | $ | 148 | $ | — | $ | 5 | $ | 143 |
As of March 31, 2022 and December 31, 2021, cash and cash equivalents of $2.3 billion and $3.0 billion, respectively, included money market and other short-term funds of approximately $426 million and $816 million, respectively, which 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. The 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.
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 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 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. The fair value of milestone payments reflects management’s expectations of probability of payment, and increases as the 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 debt securities.
| Three months ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (in millions) | Contingent payments related to acquisitions | Debt securities | Contingent payments related to acquisitions | ||||||||||||||||||||
| Fair value at beginning of period | $ | 143 | $ | 30 | $ | 30 | |||||||||||||||||
| Additions | — | 21 | 24 | ||||||||||||||||||||
| Change in fair value recognized in earnings | (17) | — | — | ||||||||||||||||||||
| Change in fair value recognized in AOCI | — | 2 | — | ||||||||||||||||||||
| Payments | (2) | — | (16) | ||||||||||||||||||||
| Fair value at end of period | $ | 124 | $ | 53 | $ | 38 |
Financial Instruments Not Measured at Fair Value
In addition to the financial instruments that we are required to recognize at fair value in the condensed 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 condensed consolidated balance sheets and the estimated fair values as of March 31, 2022 and December 31, 2021.
| Book values | Fair values(a) | ||||||||||||||||
| (in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Liabilities | |||||||||||||||||
| Short-term debt | $ | 200 | $ | 301 | $ | 200 | $ | 301 | |||||||||
| Current maturities of long-term debt and finance lease obligations | 209 | 210 | 209 | 212 | |||||||||||||
| Long-term debt and finance lease obligations | 16,765 | 17,149 | 16,221 | 17,568 |
(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, such as accounts receivable and accounts payable, approximate their fair values due to the short-term maturities of most of those assets and liabilities.
Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $110 million at March 31, 2022 and $114 million at December 31, 2021. Those investments are included in Other non-current assets on our condensed consolidated balance sheets.
16. SEGMENT INFORMATION
We manage our business based on four segments, consisting 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 new global segment for the acquired Hillrom business. The Americas, EMEA and APAC segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. The Hillrom segment provides digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, and advanced equipment for the surgical space.
We use operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our business segments. Intersegment sales are eliminated in consolidation.
Certain items are maintained at Corporate and are not allocated to a segment. They primarily include corporate headquarters costs, certain R&D costs, certain product category support costs, stock compensation expense, certain employee benefit plan costs, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments). For the period from our acquisition of Hillrom on December 13, 2021 through December 31, 2021, we previously included all costs incurred by the Hillrom business within that segment, including the types of costs described in the preceding sentence that are maintained at Corporate for our legacy Baxter segments. In connection with our ongoing integration activities, beginning in the first quarter 2022, we have updated the measure of profitability for our Hillrom segment by excluding such unallocated costs, consistent with our legacy Baxter segments. Those unallocated costs related to Hillrom, which totaled $219 million for the three months ended March 31, 2022, are now presented within Corporate as well.
Our chief operating decision maker does not receive any asset information by operating segment and, accordingly, we do not report asset information by operating segment.
Financial information for our segments is as follows.
| Three months ended March 31, | |||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||
| Net sales: | |||||||||||||||||
| Americas | $ | 1,626 | $ | 1,560 | |||||||||||||
| EMEA | 699 | 738 | |||||||||||||||
| APAC | 627 | 648 | |||||||||||||||
| Hillrom | 755 | — | |||||||||||||||
| Total net sales | $ | 3,707 | $ | 2,946 | |||||||||||||
| Operating income: | |||||||||||||||||
| Americas | $ | 610 | $ | 599 | |||||||||||||
| EMEA | 119 | 135 | |||||||||||||||
| APAC | 151 | 138 | |||||||||||||||
| Hillrom | 200 | — | |||||||||||||||
| Total segment operating income | $ | 1,080 | $ | 872 |
The following is a reconciliation of segment operating income to income before income taxes per the condensed consolidated statements of income.
| Three months ended March 31, | |||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||
| Total segment operating income | $ | 1,080 | $ | 872 | |||||||||||||
| Corporate and other | (917) | (482) | |||||||||||||||
| Total operating income | 163 | 390 | |||||||||||||||
| Interest expense, net | 85 | 34 | |||||||||||||||
| Other (income) expense, net | (16) | 5 | |||||||||||||||
| Income before income taxes | $ | 94 | $ | 351 |
Refer to Note 9 for additional information on Net Sales by product category.
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