filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for management’s discussion and analysis of our financial condition and results of operations. The following is management’s discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2023 and 2022.
RECENT STRATEGIC ACTIONS
In January 2023, we announced the following planned strategic actions that are intended to enhance our operational effectiveness, accelerate innovation and drive additional stockholder value: (a) a proposed spinoff of our Kidney Care business into an independent publicly traded company focused on kidney care and organ support (the proposed spinoff), (b) our development of a new operating model to simplify our operations and better align our manufacturing and supply chain to our commercial activities and (c) our pursuit of strategic alternatives for our BioPharma Solutions (BPS) business.
The proposed spinoff is currently expected to be completed by July 2024 or earlier, subject to the satisfaction of customary conditions. During the third quarter and first nine months of 2023 we generated $1.11 billion and $3.29 billion, respectively, of net sales from our Kidney Care segment, representing approximately 30% of our consolidated net sales, in both periods.
On September 29, 2023, we completed the sale of our BioPharma Solutions (BPS) business and received cash proceeds of $3.96 billion from that transaction. The financial position, results of operations and cash flows of our BPS business, including our gain from the sale of that business and the related cash proceeds received, are reported as discontinued operations in the accompanying condensed consolidated financial statements. See Note 2 in Item 1 of this Quarterly Report on Form 10-Q for additional information.
During the third quarter and first nine months of 2023 we incurred significant separation-related costs in connection with the proposed spinoff and the recently completed sale of our BPS business. For the remainder of 2023 and the first half of 2024 we expect to continue to incur such costs in connection with the proposed spinoff, which will adversely impact our earnings and operating cash flows. Additionally, if the proposed spinoff is consummated, we expect to incur some amount of dis-synergies due to the reduced size of our company and, as a result, we will need to undertake actions to help ensure that our cost structure is appropriate to support our remaining businesses. There can be no guarantees that the proposed spinoff will be completed in the manner or over the timeframe described above, or at all.
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 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. 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. See Note 16 in Item 1 of this Quarterly Report on Form 10-Q for additional information.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Supply Constraints, Global Economic Conditions and Regulatory Matters
We have experienced significant challenges to our global supply chain in recent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, resulting from the pandemic and other exogenous factors including significant weather events, elevated inflation levels, increased interest rates, disruptions to certain ports of call around the world, the wars in Ukraine, Israel and Gaza and other geopolitical events. Due to the nature of our products, which include dense consumable medical products such as IV fluids, and the geographic locations of our manufacturing facilities, which often require us to transport our products long distances, we are more susceptible to increases in freight costs and other supply chain challenges than certain of our industry peers. While we have seen improvements in the availability of certain component parts and improved pricing in certain raw materials, these challenges have not completely subsided and may continue to have a negative impact on 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 (including those acquired in our December 2021 acquisition of Hill-Rom Holdings, Inc. (Hillrom)) due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future.
Our results of operations are also affected by macroeconomic conditions and levels of business confidence. The wars in Ukraine, Israel and Gaza and the sanctions and other measures being imposed in response to these conflicts (and the potential for escalation of these conflicts) have increased the levels of economic and political uncertainty and we continue to closely monitor the developing situations. With respect to the war in Ukraine and our ongoing business in Russia, we are working on reducing our product offerings in Russia while remaining compliant with all applicable U.S. and European Union sanctions and regulations. While these countries do not constitute a material portion of our business, a significant escalation or expansion of economic disruption or the current scope of these conflicts could have an adverse effect on our business.
Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as COVID-19. COVID-19 had, and COVID-19 or any other future public health crisis could in the future have an adverse impact on, among other things, our expenses, operations, supply chains and distribution systems. Over the course of the COVID-19 pandemic, our business was impacted by shifting healthcare priorities and significant volatility in the demand for our products, and any resurgence of the pandemic or any new public health crisis could again impact healthcare priorities and cause volatility in the demand for our products.
The existence of high inflation rates in the United States and in many of the countries where we conduct business has resulted in, and may continue to result in, higher interest rates, shipping costs, labor costs and other costs and expenses. Additionally, adverse changes in foreign currency exchange rates have increased our costs of sourcing certain raw materials in some jurisdictions. We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses and we may not be able to pass these cost increases on to our customers in a timely manner or at all, which could have a material adverse impact on our profitability and results of operations. Inflation and general macroeconomic factors have caused certain of our customers to reduce or delay orders for our products and services and could cause them to do so in the future, which could have a material adverse impact on our sales and results of operations.
As a medical products company, our operations and many of the products manufactured or sold by us are subject to extensive regulation by numerous government agencies, both within and outside the United States. These regulations (as described in Item 1, Government Regulation, of our Annual Report for the fiscal year ended December 31, 2022) require that we obtain specific approval from FDA and non-U.S. regulatory authorities before we can market and sell most of our products in a particular country. Failure to obtain or maintain those approvals or clearances could have a material adverse impact on our business (including with respect to our ability to compete in the product markets in which we currently operate). Furthermore, FDA in the United States, the European Medicines Agency in Europe, the China Food and Drug Administration (CFDA) in China and other government agencies, inside and outside of the United States, administer requirements covering the testing, safety, effectiveness, manufacturing, labeling, promotion and advertising, distribution and post-market surveillance of our products. Our failure to comply with these requirements may subject us to various actions, including warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses and may have a material adverse impact on our results of operations.
For further discussion, please refer to Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
RESULTS OF OPERATIONS
Net income (loss) attributable to Baxter stockholders for the three and nine months ended September 30, 2023 totaled $2.51 billion, or $4.93 per diluted share, and $2.41 billion, or $4.76 per diluted share, compared to $(2.94) billion, or $(5.83) per diluted share, and $(2.61) billion, or $(5.20) per diluted share, for the three and nine months ended September 30, 2022. Net income (loss) attributable to Baxter stockholders for the three and nine months ended September 30, 2023 included special items which increased net income (loss) by $2.09 billion and $1.36 billion, respectively, or $4.11 and $2.69, per diluted share, respectively. See the following subsection for information about special items for all periods presented. Net income (loss) for the three and nine months ended September 30, 2022 included special items which decreased net income (loss) by $3.35 billion and $3.94 billion, respectively, or $6.65 and $7.82 per diluted share, respectively.
Net income (loss) from continuing operations for both the three and nine months ended September 30, 2023 totaled $51 million, or $0.09 per diluted share and $(142) million, or $(0.29) per diluted share, compared to $(2.99) billion, or $(5.94) per diluted share, and $(2.80) billion, or $(5.58) per diluted share, for the three and nine months ended September 30, 2022, respectively. Net income (loss) from continuing operations for the three and nine months ended September 30, 2023 included special items which decreased net income by $296 million and $1.02 billion respectively, or $0.59 and $2.01 per diluted share, respectively. Net income (loss) from continuing operations for the three and nine months ended September 30, 2022 included special items which decreased net income by $3.36 billion and $3.95 billion, respectively, or $6.66 and $7.83 per diluted share, respectively.
Special Items
The following table provides a summary of our special items from continuing operations and the related impact by line item on our results for the three and nine months ended September 30, 2023 and 2022.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Gross Margin | |||||||||||||||||
| Intangible asset amortization expense | $ | (111) | $ | (110) | $ | (326) | $ | (344) | |||||||||
| Business optimization items1 | (26) | (13) | (327) | (21) | |||||||||||||
| Acquisition and integration items2 | (1) | 2 | (1) | (171) | |||||||||||||
| European medical devices regulation3 | (14) | (12) | (38) | (35) | |||||||||||||
| Separation-related costs4 | (10) | — | (15) | — | |||||||||||||
| Product-related items5 | — | (20) | — | (43) | |||||||||||||
| Long-lived asset impairments6 | (267) | (332) | (267) | (332) | |||||||||||||
| Total Special Items | $ | (429) | $ | (485) | $ | (974) | $ | (946) | |||||||||
| Impact on Gross Margin Ratio | (11.6 pts) | (13.4 pts) | (8.9 pts) | (8.8 pts) | |||||||||||||
| Selling, General and Administrative (SG&A) Expenses | |||||||||||||||||
| Intangible asset amortization expense | $ | 51 | $ | 58 | $ | 155 | $ | 234 | |||||||||
| Business optimization items1 | 50 | 57 | 169 | 171 | |||||||||||||
| Acquisition and integration items2 | 1 | 11 | 15 | 55 | |||||||||||||
| Separation-related costs4 | 67 | $ | — | 108 | — | ||||||||||||
| Legal matters7 | 13 | $ | — | 13 | — | ||||||||||||
| Total Special Items | $ | 182 | $ | 126 | $ | 460 | $ | 460 | |||||||||
| Impact on SG&A Ratio | 4.9 pts | 3.5 pts | 4.2 pts | 4.3 pts | |||||||||||||
| Research and Development (R&D) Expenses | |||||||||||||||||
| Business optimization items1 | $ | 5 | $ | 3 | $ | 12 | $ | 4 | |||||||||
| Acquisition and integration expenses2 | — | 1 | — | 1 | |||||||||||||
| Total Special Items | $ | 5 | $ | 4 | $ | 12 | $ | 5 | |||||||||
| Impact on R&D Ratio | 0.2 pts | 0.1 pts | 0.1 pts | 0.1 pts | |||||||||||||
| Goodwill Impairments | |||||||||||||||||
| Goodwill impairments6 | $ | — | $ | 2,785 | $ | — | $ | 2,785 | |||||||||
| Total Special Items | $ | — | $ | 2,785 | $ | — | $ | 2,785 | |||||||||
| Other Operating Expense (Income), net | |||||||||||||||||
| Loss on product divestiture arrangement10 | $ | — | $ | 54 | $ | — | $ | 54 | |||||||||
| Acquisition and integration items2 | — | (6) | (14) | (34) | |||||||||||||
| Total Special Items | $ | — | $ | 48 | $ | (14) | $ | 20 | |||||||||
| Other (Income) Expense, net | |||||||||||||||||
| Pension curtailment8 | $ | — | $ | — | $ | — | $ | (11) | |||||||||
| Investment impairments9 | — | — | 20 | — | |||||||||||||
| Reclassification of cumulative translation loss to earnings11 | — | 65 | — | 65 | |||||||||||||
| Total Special Items | $ | — | $ | 65 | $ | 20 | $ | 54 | |||||||||
| Income Tax Expense | |||||||||||||||||
| Tax matters12 | $ | (196) | $ | 5 | $ | (152) | $ | 5 | |||||||||
| Tax effects of special items13 | (124) | $ | (162) | (280) | (328) | ||||||||||||
| Total Special Items | $ | (320) | $ | (157) | $ | (432) | $ | (323) | |||||||||
| Impact on Effective Tax Rate | 107.9 pts | (20.2 pts) | 37.4 pts | (20.7 pts) |
Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is consistent with how management and our Board of Directors assess performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact our reported results of operations for the period. Management believes that providing the separate impact of those items on our results in accordance with U.S. GAAP may provide a more complete understanding of our operations and can facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.
1Our results in 2023 and 2022 were impacted by costs associated with our execution of programs to optimize our organization and cost structure. These restructuring and other business optimization costs included actions related to our current implementation of a new operating model intended to simplify and streamline our operations an better align our manufacturing and supply chain to our commercial activities, our integration of Hillrom, the decision to close one of our U.S.-based manufacturing facilities later this year, which resulted in a $243 million noncash impairment of property, plant and equipment in the second quarter of 2023, rationalization of certain other manufacturing and distribution facilities and transformation of certain general and administrative functions. Our results in 2023 included business optimization charges of $81 million in the third quarter and $508 million in the first nine months. Our results in 2022 included business optimization charges of $73 million in the third quarter and $196 million in the first nine months. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.
2Our results in 2023 included $2 million in the third quarter and $2 million in the first nine months of acquisition and integration-related items. These amounts reflected $2 million in the third quarter and $16 million in the first nine months of integration costs, which primarily included costs related to our integration of Hillrom, partially offset by a $14 million benefit in the first nine months from changes in the estimated fair values of contingent consideration liabilities. Our results in 2022 included $4 million in the third quarter and $193 million in the first nine months of acquisition and integration-related items. These amounts included $10 million in the third quarter and $227 million in the first nine months related to our acquisition of Hillrom, primarily reflecting $159 million of incremental cost of sales from the fair value step-ups on acquired Hillrom inventory that was sold in 2022. Other integration expenses in 2022 included third party consulting costs related to our integration and related cost savings activities. Those acquisition and integration-related expenses related to Hillrom were partially offset by an $6 million benefit in the third quarter and a $34 million benefit in the first nine months from changes in the estimated fair values of contingent consideration liabilities.
3Our results in 2023 included $14 million in the third quarter and $38 million in the first nine months of incremental costs to comply with the European Union's medical device regulations for previously registered products, which primarily consist of contractor costs and other direct third-party costs. We consider the adoption of these regulations to be a significant one-time regulatory charge and believe that the costs of initial compliance for previously registered products over the implementation period are not indicative of our core operating results. Our results in 2022 included $12 million in the third quarter and $35 million in the first nine months related to these requirements.
4Our results in 2023 included $77 million in the third quarter and $123 million in the first nine months of separation-related costs, primarily reflecting costs of external advisors supporting our activities to prepare for the proposed spinoff of our Kidney Care segment. We also incurred $4 million and $19 million of additional separation-related costs in the third quarter and first nine months of 2023, respectively, related to the sale of our BPS business that are reported in discontinued operations and are not presented in the table above. Refer to "Recent Strategic Actions" above for more information about those proposed and recently completed transactions.
5Our results in 2022 included charges of $20 million in the third quarter and $43 million in the first nine months related to warranty and remediation activities arising from two field corrective actions on certain of our infusion pumps.
6Our results in 2023 included long-lived asset impairment charges of $267 million in the third quarter and first nine months related to the Hemodialysis (HD) business within our Kidney Care segment, 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 a developed technology intangible asset. Those 2023 impairments exclude the $243 million noncash impairment of property, plant and equipment in the second quarter of 2023 described in footnote 1 above that related to a restructuring action and is presented within the Business Optimization special item in the above table. Our results in 2022 included impairment charges of $3.12 billion in the third quarter and first nine months related to assets acquired in our December 2021 acquisition of Hill-Rom Holdings, Inc., comprised of
(i) a $2.79 billion goodwill impairment and (ii) $332 million of indefinite-lived intangible asset impairments. Refer to Notes 3 and 4 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the impairments.
7Our results in 2023 included costs, including associated legal fees, of $13 million in the third quarter and first nine months related to matters involving alleged violations of the False Claims Act related to a now-discontinued legacy Hillrom sales line and alleged injury from environmental exposure.
8Our results in 2022 included a curtailment gain of $11 million in the first nine months related to an announced change for active non-bargaining participants in our U.S. Hillrom pension plan.
9Our results in 2023 included $20 million of net pre-tax losses from non-marketable investments in several early-stage companies in the first nine months, consisting of $23 million of noncash impairment write-downs, partially offset by a $3 million gain from the sale of an investment.
10Our results in 2022 included a loss of $54 million in the third quarter and first nine months under an arrangement to divest certain product rights for an amount that is less than our cost of those product rights, which was triggered by U.S. and European Union regulatory approvals of the related products. Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information about the related transactions.
11Our results in 2022 included a charge of $65 million in the third quarter and first nine months for cumulative translation adjustments (CTA) reclassified from accumulated other comprehensive income (loss) as a result of the substantial liquidation of our operations in Argentina.
12Our results in 2023 included income tax benefits of $209 million in the third quarter and $199 million in the first nine months resulting from application of the intraperiod tax allocation between continuing operations and discontinued operations. Our results in 2023 included a $30 million valuation allowance in the first nine months to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to previously enacted Swiss tax reform legislation to reflect our current estimate of its recoverability. We also incurred separation-related income tax costs of $13 million in the third quarter and $17 million in the first nine months. Our results in 2022 included a $5 million reallocation of income taxes between continuing operations and discontinued operations resulting from the application of a intraperiod tax allocation.
13This item reflects the income tax impact of the special items identified in this table. The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.
CONSOLIDATED NET SALES
| Three Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| United States | $ | 1,766 | $ | 1,758 | 0 | % | 0 | % | |||||||||
| Emerging markets1 | 852 | 820 | 4 | % | 3 | % | |||||||||||
| Rest of world2 | 1,090 | 1,031 | 6 | % | 3 | % | |||||||||||
| Total net sales | $ | 3,708 | $ | 3,609 | 3 | % | 2 | % |
| Nine Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| United States | $ | 5,183 | $ | 5,170 | 0 | % | 0 | % | |||||||||
| Emerging markets1 | 2,447 | $ | 2,355 | 4 | % | 6 | % | ||||||||||
| Rest of world2 | 3,298 | $ | 3,236 | 2 | % | 4 | % | ||||||||||
| Total net sales | $ | 10,928 | $ | 10,761 | 2 | % | 3 | % |
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.
Foreign currency favorably impacted net sales by 1 percentage point during the third quarter of 2023, compared to the prior year period, primarily due to the weakening of the U.S. Dollar relative to the Euro, British Pound and Mexican
Peso, partially offset by strengthening of the U.S. Dollar relative to the Turkish Lira and Chinese Renminbi. Foreign currency adversely impacted net sales by 1 percentage point during the first nine months of 2023, compared to the prior year period primarily due to the strengthening of the U.S. Dollar relative to the Chinese Renminbi, Turkish Lira, Australian Dollar, Canadian Dollar, Japanese Yen and the Colombian Peso, partially offset by the weakening of the U.S. Dollar relative to the Mexican Peso.
The comparisons presented at constant currency rates reflect current period local currency sales at the prior period’s foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S. GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.
NET SALES BY SEGMENT
Medical Products and Therapies
Our Medical Products and Therapies segment includes sales of our sterile IV solutions, infusion systems, administration sets, parenteral nutrition therapies and surgical hemostat, sealant and adhesion prevention products.
| Three Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| Infusion Therapies and Technologies | $ | 1,003 | $ | 956 | 5 | % | 4 | % | |||||||||
| Advanced Surgery | 255 | 247 | 3 | % | 3 | % | |||||||||||
| Total Medical Product and Therapies net sales | $ | 1,258 | $ | 1,203 | 5 | % | 4 | % |
| Nine Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| Infusion Therapies and Technologies | $ | 2,918 | $ | 2,829 | 3 | % | 4 | % | |||||||||
| Advanced Surgery | 773 | 738 | 5 | % | 6 | % | |||||||||||
| Total Medical Product and Therapies net sales | $ | 3,691 | $ | 3,567 | 3 | % | 4 | % |
Medical Product and Therapies segment net sales increased 5% in the third quarter and 3% in the first nine months of 2023, as compared to the prior year periods.
Infusion Therapies and Technologies net sales increased 5% in the third quarter and 3% in the first nine months of 2023, as compared to the prior year periods. Sales performance in the third quarter and first nine months reflected strong demand for our infusion systems and administration sets, as well as growth in IV solutions and international nutrition compounding, partially offset by lower sales of parenteral nutrition products in the U.S. Sales performance in the first nine months was also partially offset by higher U.S. distributor chargebacks and customer rebates as compared to the prior year periods. Foreign currency exchange rates favorably impacted sales growth by 1% for the third quarter of 2023 and adversely impacted sales growth by 1% for the first nine months of 2023 as compared to the prior year periods.
Advanced Surgery net sales increased 3% in the third quarter and 5% in the first nine months of 2023, as compared to the prior year periods. The increase in the third quarter and first nine months was driven by continued recovery in surgical procedures, partially offset by temporary supply constraints, the exit of a product distribution arrangement and a comparison against prior year periods that benefited from competitor supply constraints. Foreign currency exchange rates favorably impacted sales growth by 1% in the third quarter and adversely impacted sales growth by 1% for the first nine months as compared to the prior year periods.
Healthcare Systems and Technologies
Our Healthcare Systems and Technologies segment includes sales of our connected care solutions and collaboration tools, including smart bed systems, patient monitoring systems and diagnostic technologies, respiratory health devices and advanced equipment for the surgical space, including surgical video technologies, precision positioning
devices and other accessories.
| Three Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| Care and Connectivity Solutions | $ | 443 | $ | 456 | (3) | % | (4) | % | |||||||||
| Front Line Care | 301 | 279 | 8 | % | 8 | % | |||||||||||
| Total Healthcare Systems and Technologies net sales | $ | 744 | $ | 735 | 1 | % | 0 | % |
| Nine Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| Care and Connectivity Solutions | $ | 1,307 | $ | 1,350 | (3) | % | (3) | % | |||||||||
| Front Line Care | 911 | 855 | 7 | % | 7 | % | |||||||||||
| Total Healthcare Systems and Technologies net sales | $ | 2,218 | $ | 2,205 | 1 | % | 1 | % |
Healthcare Systems and Technologies segment net sales increased 1% in the third quarter and first nine months of 2023, as compared to the prior year periods.
Care and Connectivity Solutions net sales decreased 3% in the third quarter and first nine months of 2023, as compared to the prior year periods, driven by lower demand for hospital beds, which we believe is being driven by current capital spending constraints at certain of our customers, and lower rental revenues, partially offset by international demand and sales generated from recent product launches in the U.S. Foreign currency exchange rates favorably impacted sales growth by 1% for the quarter and did not impact sales growth for first nine months as compared to the prior year periods.
Front Line Care net sales increased 8% in the third quarter and 7% in the first nine months of 2023, as compared to the prior year periods. The increase was driven by increased demand for our physical assessment tools, respiratory health products and cardiology products. Performance in the current year periods benefited from backlog reductions due to improved availability of component parts used in certain of our products. Foreign currency exchange rates did not impact sales growth in the third quarter or the first nine months as compared to the prior year periods.
Pharmaceuticals
Our Pharmaceuticals segment includes sales of specialty injectable pharmaceuticals, inhaled anesthesia and drug compounding.
| Three Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| Injectables and Anesthesia | $ | 351 | $ | 325 | 8 | % | 7 | % | |||||||||
| Drug Compounding | 229 | 200 | 15 | % | 13 | % | |||||||||||
| Total Pharmaceuticals net sales | $ | 580 | $ | 525 | 10 | % | 9 | % |
| Nine Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| Injectables and Anesthesia | $ | 987 | $ | 961 | 3 | % | 4 | % | |||||||||
| Drug Compounding | 665 | 613 | 8 | % | 12 | % | |||||||||||
| Total Pharmaceuticals net sales | $ | 1,652 | $ | 1,574 | 5 | % | 7 | % |
Pharmaceuticals segment net sales increased 10% in the third quarter and 5% in the first nine months of 2023, as compared to the prior year periods.
Injectables and Anesthesia net sales increased 8% in the third quarter and 3% in the first nine months of 2023, as compared to the prior year periods. The increases in the third quarter and first nine months reflect growth from our U.S. injectable products, driven by our recent launches of Zosyn, following the transfer of the related product rights to us earlier this year, Bendamustine and Norepinephrine, partially offset by lower sales of Suprane, an inhaled anesthesia product. Foreign currency exchange rates favorably impacted sales growth by 1% for the third quarter of 2023 and adversely impacted sales growth by 1% in the first nine months as compared to the prior year periods.
Drug Compounding net sales increased 15% in the third quarter and 8% in the first nine months of 2023, as compared to the prior year periods. The increase was driven by increased demand for our international pharmacy compounding services. Foreign currency exchange rates favorably impacted sales growth by 2% for the third quarter of 2023 and adversely impacted sales growth by 4% for the first nine months of 2023 as compared to the prior year periods.
Kidney Care
Our Kidney Care segment includes Chronic Therapies, comprised of peritoneal dialysis (PD) and hemodialysis (HD),and Acute Therapies, comprised of continuous renal replacement therapies (CRRT) and other organ support therapies.
| Three Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| Chronic Therapies | $ | 921 | $ | 934 | (1) | % | (3) | % | |||||||||
| Acute Therapies | 188 | 166 | 13 | % | 12 | % | |||||||||||
| Total Kidney Care net sales | $ | 1,109 | $ | 1,100 | 1 | % | 0 | % |
| Nine Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2023 | 2022 | At actual currency rates | At constant currency rates | |||||||||||||
| Chronic Therapies | $ | 2,730 | $ | 2,744 | (1) | % | 1 | % | |||||||||
| Acute Therapies | 564 | 542 | 4 | % | 6 | % | |||||||||||
| Total Kidney Care net sales | $ | 3,294 | $ | 3,286 | 0 | % | 2 | % |
Kidney Care segment net sales increased 1% in the third quarter and were flat for the first nine months of 2023, as compared to the prior year periods.
Chronic Therapies sales decreased 1% in the third quarter and the first nine months of 2023, as compared to the prior year periods. Sales performance in the current year periods was primarily due to patient growth in PD, pricing initiatives and recent government tender awards in EMEA, partially offset by lower sales in China, primarily due to government-based procurement initiatives and the impact of COVID-19 on that country’s renal patient population, and the termination of a distribution agreement in the U.S. Foreign currency exchange rates favorably impacted sales growth by 2% for the third quarter of 2023 and adversely impacted sales growth by 2% for the first nine months of 2023 as compared to the prior year periods.
Acute Therapies net sales increased 13% in the third quarter and 4% in the first nine months of 2023, as compared to the prior year periods. The increases in the current year periods were driven by strong demand for our CRRT offerings. Sales growth for the first nine months of 2023 was adversely impacted by a comparison against a prior year period that included strong COVID-related demand for our CRRT offerings during the first quarter. Foreign currency exchange rates favorably impacted sales growth by 1% for the third quarter of 2023 and adversely impacted sales growth by 2% for the first nine months of 2023 as compared to the prior year periods.
Other
During the three months ended September 30, 2023 and 2022, we earned $17 million and $46 million, respectively, and for the nine months ended September 30, 2023 and 2022, we earned $73 million and $129 million, respectively, of revenues that were not attributable to our reportable segments. In the current and prior year periods, those other sales primarily represent ancillary revenues earned by certain of our manufacturing facilities from contract manufacturing activities and royalty income under a business development arrangement. The decreases in the current year as compared to the prior year periods reflect lower contract manufacturing volume and the termination of the royalty arrangement following our acquisition of the rights to the underlying product.
COSTS AND EXPENSES
Gross Margin and Expense Ratios
| Three months ended September 30, | ||||||||||||||||||||
| 2023 | % of net sales | 2022 | % of net sales | $ change | % change | |||||||||||||||
| Gross margin | $ | 1,117 | 30.1 | % | $ | 1,045 | 29.0 | % | $ | 72 | 6.9 | % | ||||||||
| SG&A | $ | 1,002 | 27.0 | % | $ | 941 | 26.1 | % | $ | 61 | 6.5 | % | ||||||||
| R&D | $ | 166 | 4.5 | % | $ | 151 | 4.2 | % | $ | 15 | 9.9 | % |
| Nine months ended September 30, | ||||||||||||||||||||
| 2023 | % of net sales | 2022 | % of net sales | $ change | % change | |||||||||||||||
| Gross margin | $ | 3,503 | 32.1 | % | $ | 3,678 | 34.2 | % | $ | (175) | (4.8) | % | ||||||||
| SG&A | $ | 2,961 | 27.1 | % | $ | 2,958 | 27.5 | % | $ | 3 | 0.1 | % | ||||||||
| R&D | $ | 495 | 4.5 | % | $ | 448 | 4.2 | % | $ | 47 | 10.5 | % |
Gross Margin
The gross margin ratio was 30.1% and 32.1% in the third quarter and first nine months of 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 11.6 and 8.9 percentage points on the gross margin ratio in the third quarter and first nine months of 2023, respectively. The gross margin ratio was 29.0% and 34.2% in the third quarter and first nine months of 2022, respectively. Special items had an unfavorable impact of approximately 13.4 and 8.8 percentage points on the gross margin ratio in the third quarter and first nine months of 2022, respectively. Refer to the Special Items caption earlier in this section for additional detail.
Excluding the impact of special items, the gross margin ratio decreased in the third quarter and first nine months of 2023 compared to the prior year periods primarily due to the adverse cost impacts of raw materials inflation.
SG&A
The SG&A expenses ratio was 27.0% and 27.1% in the third quarter and first nine months of 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 4.9 and 4.2 percentage points on the SG&A expenses ratio in the third quarter and first nine months of 2023, respectively. The SG&A expenses ratio was 26.1% and 27.5% in the third quarter and first nine months of 2022, respectively. Special items had an unfavorable impact of approximately 3.5 and 4.3 percentage points on the SG&A expenses ratio in the third quarter and first nine months 2022, respectively. Refer to the Special Items caption earlier in this section for additional detail.
Excluding the impact of special items, the SG&A expenses ratio decreased in the third quarter and first nine months of 2023 compared to the prior year periods primarily due to savings from restructuring actions implemented in recent periods, partially offset by higher bonus accruals under our annual employee incentive compensation plans.
R&D
The R&D expenses ratio was 4.5% in both the third quarter and first nine months of 2023. The special items identified earlier in this section had an unfavorable impact of approximately 0.2 and 0.1 percentage points on the R&D expenses ratio in the third quarter and first nine months of 2023. The R&D expenses ratio was 4.2% in both the third quarter and first nine months of 2022. Special items had an unfavorable impact of approximately 0.1 percentage point on the R&D expenses ratio in the third quarter and first nine months of 2022. Refer to the Special Items caption earlier in this section for additional detail.
Excluding the impact of special items, the R&D expenses ratio increased in the third quarter and first nine months of 2023 compared to the prior year periods as a result of increased project-related expenditures, particularly related to our connected care portfolio in our Healthcare Systems and Technology segment.
Business Optimization Items
In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts have included restructuring the organization, optimizing our manufacturing footprint, R&D operations and
supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. The related costs of these actions consisted primarily of employee termination costs, implementation costs, contract termination costs and asset impairments.
For the three and nine months ended September 30, 2023, $14 million and $111 million, respectively, of the restructuring charges, consisting of employee termination costs, were related to the ongoing implementation of our previously announced new operating model intended to simplify and streamline our operations. For the nine months ended September 30, 2023, $253 million of the restructuring charges, consisting of $243 million of asset impairment charges and $10 million of employee termination costs, were related to our decision to cease production of dialyzers at one of our manufacturing facilities in connection with our initiatives to streamline our manufacturing footprint and improve our profitability.
We currently expect to incur additional pre-tax costs, primarily related to the implementation of business optimization programs, of approximately $25 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs to implement business optimization programs in future periods. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding our business optimization programs.
Goodwill Impairments
We assess goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize a goodwill impairment charge for the amount by which a reporting unit's carrying amount exceeds its fair value.
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 for 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 three Hillrom reporting units, driven primarily by shortages of certain component parts used in our products, raw materials inflation and increased supply chain costs. Those goodwill impairment tests resulted in total pre-tax goodwill impairment charges of $2.79 billion in the third quarter of 2022. Refer to Note 4 in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding these goodwill impairment charges, as well as information about related indefinite-lived intangible asset impairment charges.
Further adverse changes to macroeconomic conditions or our earnings forecasts could lead to additional goodwill or intangible asset impairment charges in future periods and such charges could be material to our results of operations.
Other Operating Expense (Income), Net
Other operating expense (income), net was zero and income of $14 million in the third quarter and first nine months of 2023, respectively, and expense of $48 million and $20 million in the third quarter and first nine months of 2022, respectively. The income in the first nine months of 2023 was comprised of gains from changes in the fair values of contingent consideration arrangements. The expense in the three and nine months of 2022 included a loss of $54 million under an arrangement to divest certain product rights for an amount that was less than our cost of those product rights, which was triggered by U.S. and European Union regulatory approvals of the related products. That loss in 2022 was partially offset by gains from changes in the fair values of contingent consideration arrangements.
Interest Expense, Net
Interest expense, net was $128 million and $369 million in the third quarter and first nine months of 2023, respectively, and $104 million and $278 million in the third quarter and first nine months of 2022, respectively. The increase in 2023 was driven by higher interest rates on our floating rate debt, partially offset by net repayments in the current year periods.
We expect that our net interest expense will decrease in future periods as we earn additional interest income and repay a portion of our outstanding borrowings with the proceeds we received from the recent sale of our BPS business.
Other (Income) Expense, Net
Other (income) expense, net was income of $7 million and an expense of $33 million in the third quarter and first nine months of 2023, respectively, and an expense of $61 million and $1 million in the third quarter and first nine months of 2022, respectively. In the third quarter of 2023, the net income was primarily driven by pension and other postretirement benefits and increases in the fair value of marketable equity securities, partially offset by foreign exchange losses. In the first nine months of 2023, the net expense was primarily driven by foreign exchange losses, non-marketable investment impairments and decreases in the fair value of marketable equity securities, partially offset by pension and other postretirement benefits. In the third quarter of 2022, the net income was primarily due to the reclassification of a cumulative translation loss from accumulated other comprehensive income (loss) to earnings due to the substantial liquidation of our operations in Argentina, partially offset by pension benefits. In the first nine months of 2022, the net expense was primarily related to the reclassification of the Argentina cumulative translation loss, partially offset by foreign exchange gains, pension and other postretirement benefits, a pension curtailment gain and increases in the fair value of marketable equity securities.
Income Taxes
Our effective income tax rate was 129.7% and 1.8% in the third quarter, and 58.4% and 0.5% in the first nine months of 2023 and 2022, 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, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances, increases or decreases in liabilities for uncertain tax positions and excess tax benefits or shortfalls on stock compensation awards.
Our effective income tax rate during interim periods reflects our estimated annual effective tax rate excluding discrete items. For the three and nine months ended September 30, 2023, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily driven by the jurisdictional mix of global earnings, which was impacted by the long-lived asset impairments we recognized during the second and third quarters of 2023, and by the significance of non-deductible items to our anticipated pre-tax income for the full year. For the three months ended September 30, 2023, our effective tax rate was also impacted by $13 million of separation-related income tax costs. For the nine months ended September 30, 2023, our effective tax rate was also impacted by a $30 million valuation allowance recorded to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to previously enacted Swiss tax legislation and by $17 million of separation-related income tax costs.
For the three and nine months ended September 30, 2022, the difference between our effective income tax rate and the U.S. federal statutory rate from discrete was primarily attributable to non-deductible goodwill impairments.
Discontinued Operations
On September 29, 2023, we completed the sale of our BPS business and received cash proceeds of $3.96 billion from that transaction. The financial position, results of operations and cash flows of our BPS business, including our gain from the sale of that business and the related cash proceeds received, are reported as discontinued operations in the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Income from discontinued operations, net of tax, was $2.46 billion and $2.56 billion, respectively, in the third quarter and first nine months of 2023, compared to $57 million and $192 million, respectively, in the third quarter and first nine months of 2022. The increases in the current year periods were primarily driven by the $2.89 billion pre-tax gain from the sale of the BPS business ($2.60 billion net of tax). Excluding that gain on sale, pre-tax income from discontinued operations increased by $13 million in the third quarter and decreased by $30 million in the first nine months compared to the prior year periods. The increase during the third quarter was primarily driven by incremental revenue from a customer that did not meet its contractual minimum purchase commitments, partially offset by a comparison against prior year results that included significant sales from contract manufacturing of COVID-19 vaccines. The decrease in the first nine months was primarily driven by the comparison against prior year results that included
significant sales from contract manufacturing of COVID-19 vaccines and increased SG&A expense in the current year period from separation-related costs. Refer to Note 2 within Item 1 for additional information.
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 expense and 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.
The following table presents our segment operating income and reconciliations to loss from continuing operations before income taxes.
| Operating income (loss) | |||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Medical Products and Therapies | $ | 245 | $ | 257 | $ | 706 | $ | 703 | |||||||||
| % of Segment Net Sales | 19.5 | % | 21.4 | % | 19.1 | % | 19.7 | % | |||||||||
| Healthcare Systems and Technologies | 115 | 108 | 327 | 367 | |||||||||||||
| % of Segment Net Sales | 15.5 | % | 14.7 | % | 14.7 | % | 16.6 | % | |||||||||
| Pharmaceuticals | 108 | 82 | 284 | 295 | |||||||||||||
| % of Segment Net Sales | 18.6 | % | 15.6 | % | 17.2 | % | 18.7 | % | |||||||||
| Kidney Care | 96 | 103 | 208 | 307 | |||||||||||||
| % of Segment Net Sales | 8.7 | % | 9.4 | % | 6.3 | % | 9.3 | % | |||||||||
| Other | 6 | 17 | 19 | 52 | |||||||||||||
| Total | 570 | 567 | 1,544 | 1,724 | |||||||||||||
| Unallocated corporate costs | (5) | 1 | (51) | (41) | |||||||||||||
| Intangible asset amortization expense | (162) | (168) | (481) | (578) | |||||||||||||
| Long-lived assets impairments | (267) | (332) | (267) | (332) | |||||||||||||
| Legal matters | (13) | — | (13) | — | |||||||||||||
| Goodwill impairments | — | (2,785) | — | (2,785) | |||||||||||||
| Business optimization items | (81) | (73) | (508) | (196) | |||||||||||||
| Acquisition and integration items | (2) | (4) | (2) | (193) | |||||||||||||
| Loss on product divestiture arrangement | — | (54) | — | (54) | |||||||||||||
| Separation-related costs | (77) | — | (123) | — | |||||||||||||
| European Medical Devices Regulation | (14) | (12) | (38) | (35) | |||||||||||||
| Product-related items | — | (20) | — | (43) | |||||||||||||
| Total operating income (loss) | (51) | (2,880) | 61 | (2,533) | |||||||||||||
| Interest expense, net | 128 | 104 | 369 | 278 | |||||||||||||
| Other (income) expense, net | (7) | 61 | 33 | 1 | |||||||||||||
| Loss from continuing operations before income taxes | $ | (172) | $ | (3,045) | $ | (341) | $ | (2,812) |
Medical Products and Therapies
Segment operating income was $245 million and $706 million in the third quarter and first nine months of 2023, respectively, and $257 million and $703 million in the third quarter and first nine months of 2022. Segment operating income decreased in the third quarter compared to the prior year period due to higher SG&A and R&D expenses, partially offset by the gross profit from higher sales. The increase in segment operating income in the first nine months of 2023 reflected the gross profit from higher sales, partially offset by increases in SG&A and R&D expenses.
Healthcare Systems and Technologies
Segment operating income was $115 million and $327 million in the third quarter and first nine months of 2023, respectively, and $108 million and $367 million in the third quarter and first nine months of 2022. The increase in segment operating income in the third quarter of 2023 was primarily due to increased sales and improved gross margins, primarily driven by a favorable product mix and improved component availability. The decrease in segment operating income in the first nine months of 2023 resulted from a lower gross margin, primarily driven by raw material inflation.
Pharmaceuticals
Segment operating income was $108 million and $284 million in the third quarter and first nine months of 2023, respectively, and $82 million and $295 million in the third quarter and first nine months of 2022. The increase in segment operating income in the third quarter of 2023 was primarily due to the gross profit from higher sales driven by recent product launches. The decrease in segment operating income in the first nine months of 2023 was due to a lower gross margin, primarily driven by raw materials inflation, and increased R&D expense, partially offset by income from recent product launches.
Kidney Care
Segment operating income was $96 million and $208 million in the third quarter and first nine months of 2023, respectively, and $103 million and $307 million in the third quarter and first nine months of 2022. The increase in segment operating income in the third quarter of 2023 reflected lower operating expenses that were almost entirely offset by lower gross margins, primarily driven by raw materials inflation. The decrease in operating income in the first nine months of 2023 was primarily due to lower gross margins, partially offset by lower operating expenses.
Other
During the three months ended September 30, 2023 and 2022, we earned $6 million and $17 million, respectively, and for the nine months ended September 30, 2023 and 2022, we earned $19 million and $52 million, respectively, of operating income that was not attributable to our reportable segments. Operating income generated by activities not attributable to our reportable segments is presented as Other. In the current and prior year periods, other operating income primarily represents income from ancillary revenues earned by certain of our manufacturing facilities from contract manufacturing activities and royalty income under a business development arrangement. The decreases in the current year as compared to the prior year periods reflect lower contract manufacturing volume and the termination of the royalty arrangement following our acquisition of the rights to the underlying product.
Unallocated Corporate Costs
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. Additionally, intangible asset amortization and other special items are not allocated to our segments. Prior to the implementation of our new operating model in the third quarter of 2023, more costs were maintained at corporate and were not allocated to our previous segments. Certain of the costs that were previously maintained at corporate under our prior segment structure that are now allocated to our segments include manufacturing variances and centrally managed supply chain costs, certain R&D costs, product category support costs, stock compensation expense and certain employee benefit plan costs.
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of the statement of cash flows for the nine-month periods ended September 30, 2023 and 2022.
| Nine months ended September 30, | |||||||||||
| (in millions) | 2023 | 2022 | |||||||||
| Cash flows from operations - continuing operations | $ | 1,097 | $ | 594 | |||||||
| Cash flows from investing activities - continuing operations | (489) | $ | (634) | ||||||||
| Cash flows from financing activities | (554) | $ | (1,319) |
Cash Flows from Operations - Continuing Operations
In the first nine months of 2023, cash provided by operating activities - continuing operations was $1.10 billion, as compared to cash provided by operating activities of $594 million in the first nine months of 2022, an increase of $503 million. Cash flows from operations in the current year period was favorably impacted, as compared to the prior year period, by lower annual payouts under our employee incentive compensation plans, which were determined based on our 2022 performance, and by the timing of accounts payable payments.
Cash Flows from Investing Activities
In the first nine months of 2023, cash used for investing activities - continuing operations included payments for acquisitions and investments of $6 million and capital expenditures of $502 million. In the first nine months of 2022, cash used for investing activities included payments for acquisitions and investments of $206 million, primarily related to our payment to acquire the rights to Zosyn, and capital expenditures of $438 million.
In the first nine months of 2023, cash provided by investing activities - discontinued operations included proceeds of $3.96 billion from the sale of our BPS business.
Cash Flows from Financing Activities
In the first nine months of 2023, cash used in financing activities included debt repayments of $353 million and dividend payments of $439 million, partially offset by a net increase in commercial paper borrowings of $214 million and proceeds from stock issued under employee benefit plans of $86 million. In the first nine months of 2022, cash used for financing activities included debt repayments of $953 million and dividend payments of $427 million, partially offset by an increase of commercial paper borrowings of $30 million and proceeds from stock issued under employee benefit plans of $114 million.
As authorized by our Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions. In July 2012, our Board of Directors authorized the repurchase of up to $2.00 billion of our common stock. Our Board of Directors increased this authority by an additional $1.50 billion in each of November 2016 and February 2018, by an additional $2.00 billion in November 2018 and by an additional $1.50 billion in October 2020. We did not repurchase any shares under this authority in the first nine months of 2023. We had $1.30 billion remaining available under this authorization as of September 30, 2023.
Credit Facilities and Access to Capital and Credit Ratings
Credit Facilities
As of September 30, 2023, our U.S. dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of $2.50 billion and €200 million, respectively. There were no borrowings outstanding under these credit facilities as of September 30, 2023 or December 31, 2022. Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings.
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. As of
September 30, 2023, we were in compliance with the financial covenants in these agreements. Based on our covenant calculations as of September 30, 2023, we had capacity to draw on the full amounts under our credit facilities, less outstanding commercial paper borrowings, which were $514 million as of September 30, 2023. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by the institution’s respective commitment. Additionally, a deterioration in our financial performance may further reduce our ability to draw on our credit facilities.
Access to Capital and Credit Ratings
We intend to fund short-term and long-term obligations as they mature through cash on hand, including the proceeds from the recently completed sale of our BPS business, future cash flows from operations or by issuing additional debt. We had $5.79 billion of cash and cash equivalents as of September 30, 2023, with adequate cash available to meet operating requirements in each jurisdiction in which we operate. We invest our excess cash in money market and other funds and diversify the concentration of cash among different financial institutions. As of September 30, 2023, we had approximately $16.49 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt. We currently expect to use substantially all of the $3.70 billion of estimated net after-tax cash proceeds from the BPS divestiture to pay down or retire certain short- and long-term indebtedness beginning in the fourth quarter of 2023 and continuing through the first half of 2024. Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure.
Our ability to generate cash flows from operations, issue debt, including commercial paper, or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in market conditions. However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives and reduce our post-Hillrom acquisition debt levels as we take actions consistent with our capital allocation priorities. In January 2023, Fitch revised our senior debt credit rating outlook from negative to rating watch negative. There have been no changes to our investment grade credit ratings that we disclosed in our 2022 Annual Report.
LIBOR Reform
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR) and other interbank offered rates, which have been widely used as reference rates for various securities and financial contracts, including loans, debt and derivatives. This announcement indicated that the continuation of LIBOR on the current basis was not guaranteed after 2021. Regulators in the U.S. and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate (SOFR). In 2020, it was announced that certain U.S. dollar LIBOR tenors would not cease until 2023. In September 2022, our $2.50 billion U.S. dollar-denominated revolving credit facility and our $4.00 billion Term Loan Credit Agreement were amended to reference SOFR-based rates. Currently, our €200 million Euro-denominated revolving credit facility references EURIBOR-based rates. A discontinuation would require this arrangement to be modified in order to replace EURIBOR with an alternative reference interest rate, which could impact our cost of funds. That credit facility agreement includes provisions related to the determination of a successor rate.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our 2022 Annual Report. Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by us, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2022 Annual Report.
The valuation of goodwill and intangible assets is one of our critical accounting policies and we recognized significant impairment charges during 2022. During the current year-to-date period, our Care and Connectivity Solutions (CCS) reporting unit, which is comprised of our previous Patient Support Systems (PSS) and Global Surgical Solutions (GSS) reporting units, has been experiencing lower levels of customer orders for certain products than what we had
previously expected. Certain of the products sold by that reporting unit are subject to our customers’ capital budgets and we believe that many of those customers are delaying significant capital purchases due to uncertainty in the current economic environment. We currently expect that such capital spending constraints will likely continue for the remainder of 2023. However, we currently expect that such capital spending constraints, which are often cyclical and closely aligned with broader economic conditions, will improve in the foreseeable future. As a result of the combination of our previous PSS and GSS reporting units into our new CCS reporting unit during the third quarter of 2023, which occurred in connection with the broader organizational changes related to our new operating model discussed in Note 16 in Item 1 of this Quarterly Report on Form 10-Q, we performed impairment tests both before and after the reporting unit changed and determined that no goodwill impairment had occurred. However, we are continuing to closely monitor the performance of our CCS reporting unit and if there is a significant adverse change in our outlook for that business in the future a goodwill impairment could arise at that time.
There have been no significant changes in the application of our critical accounting policies during the first nine months of 2023.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no accounting standards issued but not yet effective that we believe will have a material impact on our condensed consolidated financial statements.
LEGAL CONTINGENCIES
Refer to Note 6 within Item 1 for a discussion of our legal contingencies. Upon resolution of any of these uncertainties, we may incur charges in excess of presently established liabilities. While our liability in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters 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 these matters, litigation is inherently uncertain, excessive verdicts do occur, and we may in the future incur material judgments or enter into material settlements of claims.
CERTAIN REGULATORY MATTERS
In July 2017, immediately prior to the closing of our acquisition of Claris Injectables Limited (Claris), the U.S. Food and Drug Administration (FDA) commenced an inspection of the Claris’ facilities in Ahmedabad, India. FDA completed the inspection and subsequently issued a Warning Letter based on observations identified in the 2017 inspection (2017 Warning Letter).¹ FDA re-inspected the facilities and issued a Form FDA 483 on May 17, 2022. On September 1, 2022, FDA notified us that the inspection had been classified as voluntary action indicated. From January 19, 2023 to January 27, 2023, FDA performed an inspection at the Ahmedabad site, concluding with the issuance of a Form FDA 483. On April 26, 2023, FDA notified us that the inspection had been classified as official action indicated. We received a Warning Letter on July 25, 2023 based on observations identified in the January 2023 inspection (2023 Warning Letter)2. Since the issuance of the 2017 Warning Letter, we have implemented corrective and preventive actions to address FDA's related observations, as well as other enhancements at the site. We have fully responded to the 2023 Warning Letter, have implemented additional corrective and preventive actions, and to continue to engage with FDA regarding the agency's observations. In addition, since the issuance of the 2017 Warning Letter, we have secured other sites in our manufacturing network and have launched and distribute select products from those sites in the U.S.
1 Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htm
2 Available online at https://www.fda.gov/inspections-compliance-enforcement-and-criminal-investigations/warning-letters/baxter-healthcare-corporation-654136-07252023
FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q includes forward-looking statements. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events. These forward-looking statements include statements with respect to the proposed spinoff of our Kidney Care business and other
portfolio management activities we may undertake in the future, the costs and timing associated with strategic initiatives including the proposed spinoff, the viability and accuracy of anticipated benefits of our strategic actions, accounting estimates and assumptions (including with respect to goodwill and other intangible asset impairments), global economic conditions, litigation-related matters, future regulatory filings (or the withdrawal or resubmission of any pending submissions) and our R&D pipeline (including anticipated product approvals or clearances), sales from new product offerings, credit exposure to foreign governments, the adequacy of cash flows and credit facilities, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency, interest rate and credit risks, the impact of inflation on our business, the impact of competition, future sales growth, business development activities, cost saving initiatives, future capital and R&D expenditures, future debt issuances, the adequacy of tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.
These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:
| • | our ability to execute and complete strategic initiatives, asset dispositions and other transactions, including the proposed spinoff of our Kidney Care business, our plans to simplify our manufacturing footprint and the timing for such transactions, the ability to satisfy any applicable conditions and the expected proceeds, consideration and benefits; | |||||||
| • | failure to accurately forecast or achieve our short-and long-term financial improvement performance and goals (including with respect to our strategic actions) and related impacts on our liquidity; | |||||||
| • | our ability to execute on our capital allocation plans, including our debt repayment plans, the timing and amount of any dividends, share repurchases and divestiture proceeds and the capital structure of the public company that we expect to form as a result of the proposed spinoff (and the resulting capital structure for the remaining company); | |||||||
| • | the impact of global economic conditions (including, among other things, inflation levels, interest rates, financial market volatility, banking crises, the potential for a recession, the ongoing wars in Ukraine, Israel and Gaza, the related economic sanctions being imposed globally in response to the conflicts and potential trade wars or further escalation of those conflicts) and continuing public health crises, pandemics and epidemics, such as the COVID-19 pandemic, or the anticipation of any of the foregoing, on our operations and our employees, customers and suppliers, including foreign governments in countries in which we operate; | |||||||
| • | downgrades to our credit ratings or ratings outlooks, and the related impact on our funding costs and liquidity; | |||||||
| • | product development risks, including satisfactory clinical performance and obtaining and maintaining required regulatory approvals (including as a result of evolving regulatory requirements or the withdrawal or resubmission of any pending applications), the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle; | |||||||
| • | product quality or patient safety issues leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales, including the focus on evaluating product portfolios for the potential presence or formation of nitrosamines; | |||||||
| • | future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the SEC, DOJ or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities, including the continued delay in lifting the warning letters at our Ahmedabad facility; |
| • | demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with our ability to accurately predict changing customer preferences and future expenditures, which has led to and may continue to lead to increased inventory levels, and needs and advances in technology and the resulting impact on customer inventory levels), and the impact of those products on quality and patient safety concerns; | |||||||
| • | breaches, including by cyber-attack, data leakage, unauthorized access or theft, or failures of or vulnerabilities in, our information technology systems or products; | |||||||
| • | the continuity, availability and pricing of acceptable raw materials and component parts and our ability to pass some or all of these costs to our customers through recent price increases or otherwise, and the related continuity of our manufacturing and distribution and those of our suppliers; | |||||||
| • | inability to create additional production capacity in a timely manner or the occurrence of other manufacturing, sterilization or supply difficulties (including as a result of natural disaster, public health crises and epidemics/pandemics, regulatory actions or otherwise); | |||||||
| • | our ability to finance and develop new products or enhancements on commercially acceptable terms or at all; | |||||||
| • | loss of key employees, the occurrence of labor disruptions or the inability to identify and recruit new employees; | |||||||
| • | failures with respect to our quality, compliance or ethics programs; | |||||||
| • | future actions of third parties, including third-party payers and our customers and distributors (including GPOs and IDNs), the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, the European Union’s General Data Protection Regulation and annual proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S. end stage renal disease market and demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures, which are difficult to estimate in advance); | |||||||
| • | the outcome of pending or future litigation; | |||||||
| • | the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies (including pharmacological advances such as SGLT2 antagonists, GLP-1 agonists and selective MRAs that may impact our Kidney Care business); | |||||||
| • | global regulatory, trade and tax policies (including with respect to climate change and other sustainability matters); | |||||||
| • | the ability to protect or enforce our owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, trade secrets and know-how) or patents of third parties preventing or restricting our manufacture, sale or use of affected products or technology; | |||||||
| • | the impact of any goodwill or other intangible asset impairments on our operating results; | |||||||
| • | fluctuations in foreign exchange and interest rates; | |||||||
| • | any changes in law concerning the taxation of income (whether with respect to current or future tax reform); | |||||||
| • | actions by tax authorities in connection with ongoing tax audits; | |||||||
| • | other factors identified elsewhere in this report and other filings with the SEC, including those factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, all of which are available on our website. |
Actual results may differ materially from those projected in the forward-looking statements. We do not undertake to update our forward-looking statements.
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