| |||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| |||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
|
| |||||||||||||
Delaware | 36-0781620 | |||||||||||||
| (State or other jurisdiction of
| (I.R.S. Employer
| |||||||||||||
One Baxter Parkway, | Deerfield, | Illinois | 60015 | |||||||||||
(Address of | (Zip Code) | |||||||||||||
| 224. | 948.2000 | ||||||||||||||||
| (Registrant’s telephone number, including area code) | |||||||||||||||||
| ||||||||||||||
| Title of each class |
| Name of each exchange on which registered | ||||||||||||
| Common Stock, $1.00 par value | BAX (NYSE) | New York Stock Exchange | ||||||||||||
| Chicago Stock Exchange | ||||||||||||||
| 0.4% Global Notes due 2024 | BAX 24 | New York Stock Exchange | ||||||||||||
| 1.3% Global Notes due 2025 | BAX 25 | New York Stock Exchange | ||||||||||||
| 1.3% Global Notes due 2029 | BAX 29 | New York Stock Exchange | ||||||||||||
| Large accelerated filer |
| Accelerated filer |
| ||||||||||||
Non-accelerated filer |
|
| Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ | ||||||||||||||
2020 Item 1A. Three months ended Nine months ended September 30, September 30, 2017 2016 2017 2016 Net sales $ 2,707 $ 2,558 $ 7,787 $ 7,518 Cost of sales 1,579 1,487 4,487 4,510 Gross margin 1,128 1,071 3,300 3,008 Marketing and administrative expenses 685 726 1,890 2,076 Research and development expenses 151 159 435 490 Operating income 292 186 975 442 Net interest expense 14 14 41 53 Other (income) expense, net (12 ) 44 10 (4,286 ) Income from continuing operations before income taxes 290 128 924 4,675 Income tax expense (benefit) 42 1 139 (51 ) Income from continuing operations 248 127 785 4,726 Income (loss) from discontinued operations, net of tax 3 3 3 (4 ) Net income $ 251 $ 130 $ 788 $ 4,722 Income from continuing operations per common share Basic $ 0.46 $ 0.23 $ 1.45 $ 8.64 Diluted $ 0.45 $ 0.23 $ 1.42 $ 8.56 Income (loss) from discontinued operations per common share Basic $ — $ 0.01 $ — $ (0.01 ) Diluted $ — $ 0.01 $ — $ (0.01 ) Net income per common share Basic $ 0.46 $ 0.24 $ 1.45 $ 8.63 Diluted $ 0.45 $ 0.24 $ 1.42 $ 8.55 Weighted-average number of common shares outstanding Basic 545 544 543 547 Diluted 557 551 554 552 Cash dividends declared per common share $ 0.160 $ 0.130 $ 0.450 $ 0.375 Three months ended Nine months ended September 30, September 30, 2017 2016 2017 2016 Net income $ 251 $ 130 $ 788 $ 4,722 Other comprehensive income (loss), net of tax: Currency translation adjustments, net of tax expense (benefit) of $21 and ($2) for the three months ended September 30, 2017 and 2016, respectively, and $69 and ($12) for the nine months ended September 30, 2017 and 2016, respectively 181 10 530 (16 ) Pension and other employee benefits, net of tax expense of $6 and $11 for the three months ended September 30, 2017 and 2016, respectively, and $26 and $32 for the nine months ended September 30, 2017 and 2016, respectively 6 21 44 61 Hedging activities, net of tax benefit of ($2) and zero for the three months ended September 30, 2017 and 2016, respectively, and ($7) and ($5) for the nine months ended September 30, 2017 and 2016, respectively (6 ) 1 (16 ) (10 ) Available-for-sale securities, net of tax expense of zero for the three months ended September 30, 2017 and 2016, and $1 and zero for the nine months ended September 30, 2017 and 2016, respectively 1 — 4 (4,431 ) Total other comprehensive income (loss), net of tax 182 32 562 (4,396 ) Comprehensive income $ 433 $ 162 $ 1,350 $ 326 September 30, December 31, 2017 2016 Current assets Cash and equivalents $ 3,517 $ 2,801 Accounts and other current receivables, net 1,748 1,691 Inventories 1,550 1,430 Prepaid expenses and other 633 602 Current assets held for disposition — 50 Total current assets 7,448 6,574 Property, plant and equipment, net 4,488 4,289 Other assets Goodwill 3,117 2,595 Other intangible assets, net 1,371 1,111 Other 1,117 977 Total other assets 5,605 4,683 Total assets $ 17,541 $ 15,546 Current liabilities Current maturities of long-term debt and lease obligations $ 3 $ 3 Accounts payable and accrued liabilities 2,572 2,612 Current income taxes payable 87 126 Current liabilities held for disposition — 3 Total current liabilities 2,662 2,744 Long-term debt and lease obligations 3,495 2,779 Other long-term liabilities 1,925 1,743 Equity Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2017 and 2016 683 683 Common stock in treasury, at cost, 138,870,075 shares in 2017 and 143,890,064 shares in 2016 (7,756 ) (7,995 ) Additional contributed capital 5,918 5,958 Retained earnings 14,615 14,200 Accumulated other comprehensive (loss) income (3,994 ) (4,556 ) Total Baxter shareholders’ equity 9,466 8,290 Noncontrolling interests (7 ) (10 ) Total equity 9,459 8,280 Total liabilities and equity $ 17,541 $ 15,546 Nine months ended September 30, 2017 2016 Cash flows from operations Net income $ 788 $ 4,722 Adjustments to reconcile income from continuing operations to net cash from operating activities: Loss (income) from discontinued operations, net of tax (3 ) 4 Depreciation and amortization 562 599 Deferred income taxes (30 ) (298 ) Stock compensation 77 84 Net periodic pension benefit and OPEB costs 93 90 Net realized gains on the Baxalta Retained Share transactions — (4,387 ) Other 69 437 Changes in balance sheet items Accounts and other current receivables, net 32 22 Inventories — (11 ) Accounts payable and accrued liabilities (36 ) (326 ) Business optimization and infusion pump payments (116 ) (119 ) Other (93 ) 121 Cash flows from operations – continuing operations 1,343 938 Cash flows from operations – discontinued operations (20 ) 3 Cash flows from operations 1,323 941 Cash flows from investing activities Capital expenditures (410 ) (519 ) Acquisitions and investments, net of cash acquired (680 ) (47 ) Divestitures and other investing activities, net 2 17 Cash flows from investing activities – continuing operations (1,088 ) (549 ) Cash flows from investing activities – discontinued operations — 13 Cash flows from investing activities (1,088 ) (536 ) Cash flows from financing activities Issuances of debt 633 1,641 Payments of obligations — (1,383 ) Debt extinguishment costs — (16 ) Increase (decrease) in debt with original maturities of three months or less, net — (300 ) Cash dividends on common stock (228 ) (197 ) Proceeds from stock issued under employee benefit plans 298 251 Purchases of treasury stock (275 ) (45 ) Other (37 ) 5 Cash flows from financing activities 391 (44 ) Effect of foreign exchange rate changes on cash and equivalents 90 23 Increase in cash and equivalents 716 384 Cash and equivalents at beginning of period 2,801 2,213 Cash and equivalents at end of period $ 3,517 $ 2,597 Supplemental Schedule of Non-Cash Investing and Financing Activities Net proceeds on the Baxalta Retained Share transactions $ — $ 4,387 Payment of obligations in exchange for Baxalta Retained Shares $ — $ 3,646 Exchange of Baxter shares with Baxalta Retained Shares $ — $ 611 $27 million in 2020. 2020. Three months ended September 30, Nine months ended September 30, (in millions) 2017 2016 2017 2016 Major classes of line items constituting income from discontinued operations before income taxes Net sales $ 1 $ 24 $ 7 $ 144 Cost of sales — (20 ) (5 ) (135 ) Marketing and administrative expenses — — (1 ) (20 ) Income (loss) from discontinued operations before income taxes 1 4 1 (11 ) Gain on disposal of discontinued operations 2 — 2 17 Income tax expense — 1 — 10 Income (loss) from discontinued operations, net of tax $ 3 $ 3 $ 3 $ (4 ) December 31, (in millions) 2016 Carrying amounts of major classes of assets included as part of discontinued operations Accounts and other current receivables, net $ 48 Property, plant, and equipment, net 1 Other 1 Total assets of the disposal group $ 50 Carrying amounts of major classes of liabilities included as part of discontinued operations Accounts payable and accrued liabilities $ 3 Total liabilities of the disposal group $ 3 Three months ended Nine months ended September 30, September 30, (in millions) 2017 2016 2017 2016 Interest expense, net of capitalized interest $ 22 $ 20 $ 62 $ 69 Interest income (8 ) (6 ) (21 ) (16 ) Net interest expense $ 14 $ 14 $ 41 $ 53 Three months ended Nine months ended September 30, September 30, (in millions) 2017 2016 2017 2016 Foreign exchange $ (12 ) $ — $ (27 ) $ (12 ) Net loss on debt extinguishment — 52 — 153 Net realized gains on Baxalta Retained Shares transactions — — — (4,387 ) Venezuela deconsolidation — — 33 — All other — (8 ) 4 (40 ) Other (income) expense, net $ (12 ) $ 44 $ 10 $ (4,286 ) September 30, December 31, (in millions) 2017 2016 Raw materials $ 351 $ 319 Work in process 135 122 Finished goods 1,064 989 Inventories $ 1,550 $ 1,430 September 30, December 31, (in millions) 2017 2016 Property, plant and equipment, at cost $ 9,954 $ 9,162 Accumulated depreciation (5,466 ) (4,873 ) Property, plant and equipment, net $ 4,488 $ 4,289 Three months ended Nine months ended September 30, September 30, (in millions) 2017 2016 2017 2016 Basic shares 545 544 543 547 Effect of dilutive securities 12 7 11 5 Diluted shares 557 551 554 552 (in millions) Assets acquired and liabilities assumed Cash $ 11 Accounts and other current receivables 16 Inventories 30 Prepaid expenses and other 16 Property, plant and equipment 132 Goodwill 310 Other intangible assets 235 Other 20 Accounts payable and accrued liabilities (22 ) Other long-term liabilities (108 ) Total assets acquired and liabilities assumed $ 640 $18 million. In the third quarter of (in millions) Renal Hospital Products Total Balance as of December 31, 2016 $ 397 $ 2,198 $ 2,595 Additions 5 312 317 Currency translation adjustments 31 174 205 Balance as of September 30, 2017 $ 433 $ 2,684 $ 3,117 (in millions) Developed technology, including patents Other amortized intangible assets Indefinite-lived intangible assets Total September 30, 2017 Gross other intangible assets $ 1,979 $ 432 $ 152 $ 2,563 Accumulated amortization (977 ) (215 ) — (1,192 ) Other intangible assets, net $ 1,002 $ 217 $ 152 $ 1,371 December 31, 2016 Gross other intangible assets $ 1,690 $ 384 $ 57 $ 2,131 Accumulated amortization (855 ) (165 ) — (1,020 ) Other intangible assets, net $ 835 $ 219 $ 57 $ 1,111 Three months ended Nine months ended September 30, September 30, (in millions) 2017 2016 2017 2016 Restructuring charges, net $ 31 $ 130 $ 50 $ 237 Costs to implement business optimization programs 21 25 58 44 Gambro integration costs — 5 — 19 Accelerated depreciation — 11 8 25 Total business optimization charges $ 52 $ 171 $ 116 $ 325 Three months ended September 30, 2017 (in millions) COGS SGA R&D Total Employee termination costs $ 7 $ 24 $ — $ 31 Total restructuring charges $ 7 $ 24 $ — $ 31 Three months ended September 30, 2016 (in millions) COGS SGA R&D Total Employee termination costs $ 21 $ 84 $ 1 $ 106 Asset impairments 6 — 27 33 Reserve adjustments Employee termination costs — (3 ) (2 ) (5 ) Contract termination costs (3 ) — (1 ) (4 ) Total restructuring charges $ 24 $ 81 $ 25 $ 130 Nine months ended September 30, 2017 (in millions) COGS SGA R&D Total Employee termination costs $ 21 $ 33 $ — $ 54 Contract termination costs — 5 — 5 Asset impairments 5 — — 5 Reserve adjustments Employee termination costs (7 ) (5 ) (2 ) (14 ) Total restructuring charges $ 19 $ 33 $ (2 ) $ 50 Nine months ended September 30, 2016 (in millions) COGS SGA R&D Total Employee termination costs $ 52 $ 94 $ 13 $ 159 Contract termination costs 9 2 13 24 Asset impairments 28 — 40 68 Reserve adjustments Employee termination costs (1 ) (11 ) (2 ) (14 ) Total restructuring charges $ 88 $ 85 $ 64 $ 237 (in millions) Reserves as of December 31, 2016 $ 164 Charges 59 Reserve adjustments (14 ) Utilization (114 ) CTA 24 Reserves as of September 30, 2017 $ 119 Three months ended September 30, Nine months ended September 30, (in millions) 2017 2016 2017 2016 Sold receivables at beginning of period $ 63 $ 62 $ 68 $ 81 Proceeds from sales of receivables 69 75 198 272 Cash collections (remitted to the owners of the receivables) (66 ) (71 ) (203 ) (299 ) Effect of currency exchange rate changes — 2 3 14 Sold receivables at end of period $ 66 $ 68 $ 66 $ 68 Gain (loss) recognized in OCI Location of gain (loss) Gain (loss) reclassified from AOCI into income (in millions) 2017 2016 in income statement 2017 2016 Cash flow hedges Interest rate contracts $ — $ — Other (income) expense, net $ — $ 5 Foreign exchange contracts (11 ) 3 Cost of sales (3 ) (2 ) Net investment hedge (39 ) — Other (income) expense, net — — Total $ (50 ) $ 3 $ (3 ) $ 3 Gain (loss) recognized in income (in millions) Location of gain (loss) in income statement 2017 2016 Fair value hedges Interest rate contracts Net interest expense $ (1 ) $ (7 ) Undesignated derivative instruments Foreign exchange contracts Other (income) expense, net $ (3 ) $ 9 Gain (loss) recognized in OCI Location of gain (loss) Gain (loss) reclassified from AOCI into income (in millions) 2017 2016 in income statement 2017 2016 Cash flow hedges Interest rate contracts $ (3 ) $ — Other (income) expense, net $ — $ 9 Foreign exchange contracts (24 ) (8 ) Cost of sales (4 ) (3 ) Net investment hedge (70 ) — Other (income) expense, net — — Total $ (97 ) $ (8 ) $ (4 ) $ 6 Gain (loss) recognized in income (in millions) Location of gain (loss) in income statement 2017 2016 Fair value hedges Interest rate contracts Net interest expense $ (1 ) $ 19 Undesignated derivative instruments Foreign exchange contracts Other (income) expense, net $ (7 ) $ 4 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 Interest rate contracts Other long-term assets $ 6 Other long- term liabilities $ — Foreign exchange contracts Prepaid expenses and other 11 Accounts payable and accrued liabilities 4 Foreign exchange contracts Other long-term assets 2 Other long- term liabilities — Total derivative instruments designated as hedges $ 19 $ 4 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other $ — Accounts payable and accrued liabilities $ 1 Total derivative instruments $ 19 $ 5 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 Interest rate contracts Other long-term assets $ 7 Other long- term liabilities $ — Foreign exchange contracts Prepaid expenses and other 22 Accounts payable and accrued liabilities 1 Total derivative instruments designated as hedges $ 29 $ 1 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other $ 1 Accounts payable and accrued liabilities $ 2 Total derivative instruments $ 30 $ 3 September 30, 2017 December 31, 2016 (in millions) Asset Liability Asset Liability Gross amounts recognized in the consolidated balance sheet $ 19 $ 5 $ 30 $ 3 Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet (5 ) (5 ) (3 ) (3 ) Total $ 14 $ — $ 27 $ — Basis of fair value measurement (in millions) Balance as of September 30, 2017 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets Foreign currency hedges $ 13 $ — $ 13 $ — Interest rate hedges 6 — 6 — Available-for-sale securities 11 11 — — Total assets $ 30 $ 11 $ 19 $ — Liabilities Foreign currency hedges $ 5 $ — $ 5 $ — Contingent payments related to acquisitions 10 — — 10 Total liabilities $ 15 $ — $ 5 $ 10 Basis of fair value measurement (in millions) Balance as of December 31, 2016 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets Foreign currency hedges $ 23 $ — $ 23 $ — Interest rate hedges 7 — 7 — Available-for-sale securities 9 9 — — Total assets $ 39 $ 9 $ 30 $ — Liabilities Foreign currency hedges $ 3 $ — $ 3 $ — Contingent payments related to acquisitions 19 — — 19 Total liabilities $ 22 $ — $ 3 $ 19 (in millions) Amortized cost Unrealized gains Unrealized losses Fair value September 30, 2017 $ 9 $ 3 $ 1 $ 11 December 31, 2016 $ 13 $ — $ 4 $ 9 Book values Approximate fair values (in millions) 2017 2016 2017 2016 Assets Investments $ 42 $ 31 $ 42 $ 31 Liabilities Current maturities of long-term debt and lease obligations $ 3 $ 3 $ 3 $ 3 Long-term debt and lease obligations 3,495 2,779 3,568 2,756 Basis of fair value measurement (in millions) Balance as of September 30, 2017 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets Investments $ 42 $ — $ — $ 42 Total assets $ 42 $ — $ — $ 42 Liabilities Current maturities of long-term debt and lease obligations $ 3 $ 3 Long-term debt and lease obligations 3,568 3,568 Total liabilities $ 3,571 $ — $ 3,571 $ — Basis of fair value measurement (in millions) Balance as of December 31, 2016 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets Investments $ 31 $ — $ — $ 31 Total assets $ 31 $ — $ — $ 31 Liabilities Current maturities of long-term debt and lease obligations $ 3 $ — $ 3 $ — Long-term debt and lease obligations 2,756 — 2,756 — Total liabilities $ 2,759 $ — $ 2,759 $ — Three months ended Nine months ended September 30, September 30, (in millions) 2017 2016 2017 2016 Pension benefits Service cost $ 23 $ 23 $ 68 $ 70 Interest cost 46 46 136 138 Expected return on plan assets (75 ) (76 ) (220 ) (227 ) Amortization of net losses and other deferred amounts 42 38 123 113 Net periodic pension benefit cost $ 36 $ 31 $ 107 $ 94 OPEB Service cost $ — $ 1 $ — $ 3 Interest cost 2 4 6 8 Amortization of net loss and prior service credit (7 ) (7 ) (20 ) (15 ) Net periodic OPEB cost $ (5 ) $ (2 ) $ (14 ) $ (4 ) (in millions) CTA Pension and other employee benefits Hedging activities Available- for-sale securities Total Gains (losses) Balance as of December 31, 2016 $ (3,438 ) $ (1,161 ) $ 3 $ 40 $ (4,556 ) Other comprehensive income before reclassifications 501 (25 ) (19 ) 1 458 Amounts reclassified from AOCI (a) 29 69 3 3 104 Net other comprehensive income (loss) 530 44 (16 ) 4 562 Balance as of September 30, 2017 $ (2,908 ) $ (1,117 ) $ (13 ) $ 44 $ (3,994 ) (in millions) CTA Pension and other employee benefits Hedging activities Available- for-sale- securities Total Gains (losses) Balance as of December 31, 2015 $ (3,191 ) $ (1,064 ) $ 7 $ 4,472 $ 224 Other comprehensive income before reclassifications (16 ) (6 ) (6 ) 105 77 Amounts reclassified from AOCI (a) — 67 (4 ) (4,536 ) (4,473 ) Net other comprehensive income (loss) (16 ) 61 (10 ) (4,431 ) (4,396 ) Balance as of September 30, 2016 $ (3,207 ) $ (1,003 ) $ (3 ) $ 41 $ (4,172 ) Amounts reclassified from AOCI (a) (in millions) Three months ended September 30, 2017 Nine months ended September 30, 2017 Location of impact in income statement Translation adjustments Loss on Venezuela deconsolidation $ — $ (29 ) Other (income) expense, net — (29 ) Total before tax — — Income tax expense (benefit) $ — $ (29 ) Net of tax Amortization of pension and other employee benefits items Actuarial losses and other (b) $ (35 ) $ (103 ) (35 ) (103 ) Total before tax 12 34 Income tax expense (benefit) $ (23 ) $ (69 ) Net of tax Losses on hedging activities Foreign exchange contracts $ (3 ) $ (4 ) Cost of sales (3 ) (4 ) Total before tax 1 1 Income tax expense (benefit) $ (2 ) $ (3 ) Net of tax Available-for-sale-securities Other-than-temporary impairment of equity securities $ — $ (4 ) Other (income) expense, net — (4 ) Total before tax — 1 Income tax expense (benefit) — (3 ) Net of tax Total reclassification for the period $ (25 ) $ (104 ) Total net of tax Amounts reclassified from AOCI (a) (in millions) Three months ended September 30, 2016 Nine months ended September 30, 2016 Location of impact in income statement Amortization of pension and other employee benefits items Actuarial losses and other (b) $ (31 ) $ (98 ) (31 ) (98 ) Total before tax 11 31 Income tax expense (benefit) $ (20 ) $ (67 ) Net of tax Gains (losses) on hedging activities Interest rate contracts $ 5 $ 9 Other (income) expense, net Foreign exchange contracts (2 ) (3 ) Cost of sales 3 6 Total before tax (1 ) (2 ) Income tax expense (benefit) $ 2 $ 4 Net of tax Available-for-sale-securities Gains on sale of equity securities $ — $ 4,536 Other (income) expense, net — 4,536 Total before tax — — Income tax expense (benefit) — 4,536 Net of tax Total reclassification for the period $ (18 ) $ 4,473 Total net of tax operations. The court granted our motion to dismiss the consolidated complaint without prejudice in July 2018. The plaintiffs filed an amended complaint, which we moved to dismiss on November 9, 2018. The court granted our motion to dismiss the amended complaint with prejudice on April 3, 2020. The plaintiffs did not file an appeal. Three months ended Nine months ended September 30, September 30, (in millions) 2017 2016 2017 2016 Net sales Renal $ 1,010 $ 977 $ 2,874 $ 2,840 Hospital Products 1,697 1,581 4,913 4,678 Total net sales $ 2,707 $ 2,558 $ 7,787 $ 7,518 EBITDA Renal $ 226 $ 214 $ 649 $ 494 Hospital Products 653 588 1,821 1,673 Total segment EBITDA $ 879 $ 802 $ 2,470 $ 2,167 Three months ended Nine months ended September 30, September 30, (in millions) 2017 2016 2017 2016 Total segment EBITDA $ 879 $ 802 $ 2,470 $ 2,167 Reconciling items Depreciation and amortization (184 ) (204 ) (562 ) (599 ) Stock compensation (31 ) (30 ) (77 ) (84 ) Net interest expense (14 ) (14 ) (41 ) (53 ) Restructuring charges, net (31 ) (130 ) (50 ) (237 ) Venezuela deconsolidation — — (33 ) — Net realized gains on Baxalta Retained Shares transactions — — — 4,387 Net loss on debt extinguishment — (52 ) — (153 ) Other Corporate items (329 ) (244 ) (783 ) (753 ) Income from continuing operations before income taxes $ 290 $ 128 $ 924 $ 4,675 2020 and 2019. Three months ended September 30, Nine months ended September 30, (in millions) 2017 2016 2017 2016 Gross Margin Intangible asset amortization expense $ (38 ) $ (42 ) $ (112 ) $ (124 ) Business optimization items 1 (12 ) (35 ) (42 ) (113 ) Product-related items 2 (21 ) — (17 ) 12 Separation-related costs 4 — (1 ) (1 ) (1 ) Claris acquisition and integration expenses 8 (4 ) (4 ) Hurricane Maria costs 10 (21 ) (21 ) Intangible asset impairment 3 — — — (51 ) Total Special Items $ (96 ) $ (78 ) $ (197 ) $ (277 ) Impact on Gross Margin Ratio (3.5 pts) (3.0 pts) (2.5 pts) (3.7 pts) Marketing and Administrative Expenses Business optimization items 1 $ 39 $ 106 $ 74 $ 137 Separation-related costs 4 2 9 16 45 Claris acquisition and integration expenses 8 11 — 16 — Historical reserve adjustments 5 — — (12 ) — Total Special Items $ 52 $ 115 $ 94 $ 182 Impact on Marketing and Administrative Expense Ratio 1.9 pts 4.5 pts 1.2 pts 2.4 pts Research and Development Expenses Business optimization items 1 $ 1 $ 30 $ — $ 75 Total Special Items $ 1 $ 30 $ — $ 75 Other Expense (Income), Net Loss on debt extinguishment 6 $ — $ 48 $ — $ 149 Net realized gains on Baxalta Retained Share transactions 7 — — — (4,391 ) Venezuela deconsolidation 9 — — 33 — Total Special Items $ — $ 48 $ 33 $ (4,242 ) Income Tax Expense (Benefit) Impact of special items $ (41 ) $ (87 ) $ (87 ) $ (252 ) Total Special Items $ (41 ) $ (87 ) $ (87 ) $ (252 ) Impact on Effective Tax Rate 4.4 pts 21.3 pts 3.1 pts 21.9 pts Three months ended September 30, Percent change (in millions) 2017 2016 At actual currency rates At constant currency rates U.S. Cyclophosphamide Claris Strategic Product Exits Renal $ 1,010 $ 977 3 % 3 % 0 % 0 % (3 )% Hospital Products 1,697 1,581 7 % 7 % 0 % 2 % (1 )% Total net sales $ 2,707 $ 2,558 6 % 6 % 0 % 1 % (1 )% Three months ended September 30, Percent change (in millions) 2017 2016 At actual currency rates At constant currency rates U.S. Cyclophosphamide Claris Strategic Product Exits International $ 1,559 $ 1,491 5 % 4 % 0 % 1 % (3 )% United States 1,148 1,067 8 % 8 % 0 % 1 % 0 % Total net sales $ 2,707 $ 2,558 6 % 6 % 0 % 1 % (1 )% Nine months ended September 30, Percent change (in millions) 2017 2016 At actual currency rates At constant currency rates U.S. Cyclophosphamide Claris Strategic Product Exits Renal $ 2,874 $ 2,840 1 % 2 % 0 % 0 % (2 )% Hospital Products 4,913 4,678 5 % 5 % 0 % 0 % (1 )% Total net sales $ 7,787 $ 7,518 4 % 4 % 0 % 0 % (1 )% Nine months ended September 30, Percent change (in millions) 2017 2016 At actual currency rates At constant currency rates U.S. Cyclophosphamide Claris Strategic Product Exits International $ 4,405 $ 4,376 1 % 2 % 0 % 0 % (2 )% United States 3,382 3,142 8 % 8 % (1 )% 1 % 0 % Total net sales $ 7,787 $ 7,518 4 % 4 % 0 % 0 % (1 )% Three months ended September 30, Percent change (in millions) 2017 2016 At actual currency rates At constant currency rates U.S. Cyclo- phosphamide Claris Strategic Product Exits Total Renal net sales $ 1,010 $ 977 3 % 3 % 0 % 0 % (3 )% Fluid Systems $ 610 $ 576 6 % 6 % 0 % 0 % (1 )% Integrated Pharmacy Solutions 627 563 11 % 11 % (2 )% 5 % 0 % Surgical Care 338 320 6 % 5 % 0 % 0 % (1 )% Other 122 122 — (2 )% 0 % 0 % 0 % Total Hospital Products net sales $ 1,697 $ 1,581 7 % 7 % 0 % 2 % (1 )% Nine months ended September 30, Percent change (in millions) 2017 2016 At actual currency rates At constant currency rates U.S. Cyclo- phosphamide Claris Strategic Product Exits Total Renal net sales $ 2,874 $ 2,840 1 % 2 % 0 % 0 % (2 )% Fluid Systems $ 1,802 $ 1,686 7 % 7 % 0 % 0 % (2 )% Integrated Pharmacy Solutions 1,747 1,682 4 % 5 % (1 )% 1 % 0 % Surgical Care 1,024 972 5 % 6 % 0 % 0 % 0 % Other 340 338 1 % 1 % 0 % 0 % 0 % Total Hospital Products net sales $ 4,913 $ 4,678 5 % 5 % 0 % 0 % (1 )% Three months ended Nine months ended September 30, September 30, (as a percentage of net sales) 2017 2016 Change 2017 2016 Change Gross margin 41.7 % 41.9 % (0.2 pts) 42.4 % 40.0 % 2.4 pts Marketing and administrative expenses 25.3 % 28.4 % (3.1 pts) 24.3 % 27.6 % (3.3 pts) Three months ended September 30, Percent Nine months ended September 30, Percent (in millions) 2017 2016 change 2017 2016 change Research and development expenses $ 151 $ 159 (5 )% $ 435 $ 490 (11 )% As a percentage of net sales 5.6 % 6.2 % 5.6 % 6.5 % the first nine months of first nine months of 2020 due to increased sales in Acute Therapies, Clinical Nutrition, Pharmaceuticals and Renal Care. For the first nine months of 2020, favorable results were partially offset by decreased sales in Advanced Surgery. Other The Nine months ended September 30, (in millions) 2017 2016 Cash flows from operations - continuing operations $ 1,343 $ 938 Cash flows from investing activities - continuing operations (1,088 ) (549 ) Cash flows from financing activities 391 (44 ) Inventories Annualized inventory turns for the Nine September 30, December 31, months ended September 30, (in millions, except inventory turn data) 2017 2016 2017 2016 Renal $ 635 $ 544 3.77 3.58 Hospital Products 915 885 3.97 3.61 Other — 1 n/a n/a Total company $ 1,550 $ 1,430 3.89 3.60 $334 million, partially offset by payments for treasury stock repurchases of $1.0 billion and dividend payments of $310 million. 2020. 2020. matter is now closed. demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with our ability to accurately predict these pressures and the resulting impact on customer inventory levels and the impact of reduced hospital admission rates and elective surgery volumes), and the impact of those products on quality and patient safety concerns; 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 the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies; global regulatory, trade and tax policies; the ability to protect or enforce actions by tax authorities in connection with ongoing tax audits; loss of key employees or inability to identify and recruit new employees; other factors identified elsewhere in this report and other filings with the $25 million. America. Issuer Purchases of Equity Securities Period Total number of shares purchased (1) Average price paid per share Total number of shares purchased as part of publicly announced program(1) Approximate dollar value of shares that may yet be purchased under the program(1) July 1, 2017 through July 31, 2017 — $ — — August 1, 2017 through August 31, 2017 2,082,000 $ 61.05 2,082,000 September 1, 2017 through September 30, 2017 834,700 $ 62.78 834,700 Total 2,916,700 $ 61.54 2,916,700 $ 1,408,670,768 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document * Filed herewith. (Registrant) /s/ James K. Saccaro James K. Saccaro2017Page NumberPage Number 2345626394041424343434445FINANCIALFINANCIAL INFORMATIONItem 1.Statements of IncomeBalance Sheets (unaudited)per share data)information)September 30,
2020December 31,
2019Current assets: Cash and cash equivalents $ 4,359 $ 3,335 Accounts receivable, net of allowances of $122 in 2020 and $112 in 2019 2,001 1,896 Inventories 1,988 1,653 Prepaid expenses and other current assets 685 619 Total current assets 9,033 7,503 Property, plant and equipment, net 4,460 4,512 Goodwill 3,094 3,030 Other intangible assets, net 1,678 1,471 Operating lease right-of-use assets 578 608 Other non-current assets 1,255 1,069 Total assets $ 20,098 $ 18,193 Current liabilities: Short-term debt $ 0 $ 226 Current maturities of long-term debt and finance lease obligations 727 315 Accounts payable and accrued liabilities 2,695 2,689 Total current liabilities 3,422 3,230 Long-term debt and finance lease obligations 5,760 4,809 Operating lease liabilities 490 510 Other non-current liabilities 1,824 1,732 Total liabilities 11,496 10,281 Commitments and contingencies Equity: Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2020 and 2019 683 683 Common stock in treasury, at cost, 172,705,772 shares in 2020 and 177,340,358 shares in 2019 (10,571) (10,764) Additional contributed capital 6,009 5,955 Retained earnings 16,285 15,718 Accumulated other comprehensive (loss) income (3,839) (3,710) Total Baxter stockholders’ equity 8,567 7,882 Noncontrolling interests 35 30 Total equity 8,602 7,912 Total liabilities and equity $ 20,098 $ 18,193 Comprehensive Income (unaudited)millions)millions, except per share data)Three months ended
September 30,Nine months ended
September 30,2020 2019 2020 2019 Net sales $ 2,972 $ 2,851 $ 8,492 $ 8,323 Cost of sales 1,777 1,621 5,096 4,860 Gross margin 1,195 1,230 3,396 3,463 Selling, general and administrative expenses 601 627 1,819 1,869 Research and development expenses 123 144 386 439 Other operating expense (income), net 1 (44) (19) (81) Operating income 470 503 1,210 1,236 Interest expense, net 39 13 96 51 Other (income) expense, net 16 9 32 (8) Income before income taxes 415 481 1,082 1,193 Income tax expense 56 106 143 163 Net income 359 375 939 1,030 Net income attributable to noncontrolling interests 3 6 5 6 Net income attributable to Baxter stockholders $ 356 $ 369 $ 934 $ 1,024 Earnings per share Basic $ 0.70 $ 0.72 $ 1.83 $ 2.01 Diluted $ 0.69 $ 0.71 $ 1.81 $ 1.97 Weighted-average number of shares outstanding Basic 511 511 509 510 Diluted 518 520 517 520 Balance SheetsStatements of Comprehensive Income (unaudited)millions, except shares)millions)Three months ended
September 30,Nine months ended
September 30,2020 2019 2020 2019 Net income $ 359 $ 375 $ 939 $ 1,030 Other comprehensive income (loss), net of tax: Currency translation adjustments, net of tax (benefit) expense of $18 and $(13) for the three months ended September 30, 2020 and 2019, respectively, and $12 and ($11) for the nine months ended September 30, 2020 and 2019, respectively 127 (177) (43) (272) Pension and other postretirement benefits, net of tax expense of $0 and $3 for the three months ended September 30, 2020 and 2019, respectively, and $7 and $9 for the nine months ended September 30, 2020 and 2019, respectively 0 17 26 37 Hedging activities, net of tax (benefit) expense of $5 and ($13) for the three months ended September 30, 2020 and 2019, respectively, and ($33) and ($21) for the nine months ended September 30, 2020 and 2019, respectively 22 (42) (112) (69) Total other comprehensive income (loss), net of tax 149 (202) (129) (304) Comprehensive income 508 173 810 726 Less: Comprehensive income attributable to noncontrolling interests 3 6 5 6 Comprehensive income attributable to Baxter stockholders $ 505 $ 167 $ 805 $ 720 Cash FlowsChanges in Equity (unaudited)For the three months ended September 30, 2020 Baxter International Inc. stockholders' equity Common stock shares Common stock Common stock shares
in treasuryCommon stock in
treasuryAdditional contributed capital Retained earnings Accumulated other comprehensive
income (loss)Total Baxter stockholders' equity Noncontrolling interests Total equity Balance as of July 1, 2020 683 $ 683 173 $ (10,597) $ 5,975 $ 16,055 $ (3,988) $ 8,128 $ 32 $ 8,160 Net income — — — — — 356 — 356 3 359 Other comprehensive income (loss) — — — — — — 149 149 — 149 Stock issued under employee benefit plans and other — — 0 26 34 — — 60 — 60 Dividends declared on common stock — — — — — (126) — (126) — (126) Balance as of September 30, 2020 683 $ 683 173 $ (10,571) $ 6,009 $ 16,285 $ (3,839) $ 8,567 $ 35 $ 8,602 For the nine months ended September 30, 2020 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, 2020 683 $ 683 177 $ (10,764) $ 5,955 $ 15,718 $ (3,710) $ 7,882 $ 30 $ 7,912 Adoption of new accounting standard — — — — — (4) 0 $ (4) — $ (4) Net income — — — — — 934 — 934 5 939 Other comprehensive income (loss) — — — — — — (129) (129) — (129) Stock issued under employee benefit plans and other — — (4) 193 54 0 — 247 — 247 Dividends declared on common stock — — — — — (363) — (363) — (363) Balance as of September 30, 2020 683 $ 683 173 $ (10,571) $ 6,009 $ 16,285 $ (3,839) $ 8,567 $ 35 $ 8,602 For the three months ended September 30, 2019 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 July 1, 2019 683 $ 683 173 $ (10,322) $ 5,906 $ 15,598 $ (4,086) $ 7,779 $ 24 $ 7,803 Net income — — — — — 369 — 369 6 375 Other comprehensive income (loss) — — — — — — (202) (202) — (202) Purchases of treasury stock — — 4 (346) 0 — — (346) — (346) Stock issued under employee benefit plans and other — — (2) 86 20 (1) — 105 — 105 Dividends declared on common stock — — — — — (117) — (117) — (117) Change in noncontrolling interests — — — — — — — — (1) (1) Balance as of September 30, 2019 683 $ 683 175 $ (10,582) $ 5,926 $ 15,849 $ (4,288) $ 7,588 $ 29 $ 7,617 For the nine months ended September 30, 2019 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, 2019 683 $ 683 170 $ (9,989) $ 5,898 $ 15,075 $ (3,823) $ 7,844 $ 22 $ 7,866 Adoption of new accounting standards — — — — — 161 (161) — — 0 Net income — — — — — 1,024 — 1,024 6 1,030 Other comprehensive income (loss) — — — — — — (304) (304) — (304) Purchases of treasury stock — — 14 (1,089) 46 — — (1,043) — (1,043) Stock issued under employee benefit plans and other — — (9) 496 (18) (84) — 394 — 394 Dividends declared on common stock — — — — — (327) — (327) — (327) Change in noncontrolling interests — — — — — — — — 1 1 Balance as of September 30, 2019 683 $ 683 175 $ (10,582) $ 5,926 $ 15,849 $ (4,288) $ 7,588 $ 29 $ 7,617 Nine months ended
September 30,2020 2019 Cash flows from operations Net income $ 939 $ 1,030 Adjustments to reconcile net income to cash flows from operations: Depreciation and amortization 610 580 Deferred income taxes (45) (45) Stock compensation 97 92 Net periodic pension and other postretirement costs 59 8 Intangible asset impairments 17 31 Other 54 90 Changes in balance sheet items: Accounts receivable, net (126) (23) Inventories (305) (88) Accounts payable and accrued liabilities 36 (249) Other (178) (145) Cash flows from operations – continuing operations 1,158 1,281 Cash flows from operations – discontinued operations (2) (6) Cash flows from operations 1,156 1,275 Cash flows from investing activities Capital expenditures (472) (505) Acquisitions, net of cash acquired, and investments (466) (186) Other investing activities, net 23 12 Cash flows from investing activities (915) (679) Cash flows from financing activities Issuances of debt 1,240 1,661 Net decreases in debt with original maturities of three months or less (226) 0 Cash dividends on common stock (348) (310) Proceeds from stock issued under employee benefit plans 180 334 Purchases of treasury stock 0 (1,029) Other financing activities, net (48) (42) Cash flows from financing activities 798 614 Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash (8) (39) Increase in cash, cash equivalents and restricted cash 1,031 1,171 Cash, cash equivalents and restricted cash at beginning of period 3,335 1,838 $ 4,366 $ 3,009 September 30, 2020 Cash and cash equivalents $ 4,359 Restricted cash included in prepaid expenses and other current assets 7 Cash, cash equivalents and restricted cash $ 4,366 (the company(we or Baxter)our) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP)(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 the company’sour Annual Report on Form 10-K for the year ended December 31, 2016 (20162019 (2019 Annual Report).statementpresentation of the interim periods.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.Certain reclassificationsbeen madean adverse impact on our operations, supply chains and distribution systems and has increased and will continue to conform the prior period condensed consolidated statements to the current period presentation.Accounting for Venezuelan OperationsCurrency restrictions enacted in Venezuela require Baxter to obtain approval from the Venezuelan government to exchange Venezuelan bolivars for U.S. dollars and require such exchange to be made at the official exchange rate established by the government. In the first quarter of 2016, the Venezuelan government moved from the three-tier exchange rate system to a two-tiered exchange rate system and the official rate for food and medicine imports was adjusted from 6.3 to 10 bolivars per U.S. dollar. Due to a recent decline in transactions settled at the official rate or the secondary rate and limitations on the company’s ability to repatriate funds generated by its Venezuela operations, the company concluded in the second quarter of 2017 that it no longer met the accounting criteria for control over its business in Venezuela and the company deconsolidated its Venezuelan operations on June 30, 2017. As a result of deconsolidating the Venezuelan operations, the company recorded a pre-tax charge of $33 million in other (income) expense, net in the second quarter of 2017. This charge included the write-off of the company’s investment in its Venezuelan operations, related unrealized translation adjustments and elimination of intercompany amounts. Beginning in the third quarter of 2017, the company no longer included the results of its Venezuelan business in its consolidated financial statements.Hurricane MariaIn September 2017, Hurricane Maria caused damage to certain of the company's assets in Puerto Rico and disrupted operations. Insurance, less applicable deductibles and subject to any coverage exclusions, covers the repair or replacement of the company's assets that suffered loss or damage, and the company is working closely with its insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to the companyincrease our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. These measures have led to unprecedented restrictions on, disruptions in, and other related impacts on businesses and personal activities. In addition to travel restrictions put in place in early 2020, governments have closed borders, imposed prolonged quarantines and may continue those measures or implement other restrictions and requirements in light of the damagescontinuing spread of the pandemic. We expect that these evolving restrictions and the loss the company suffered. The company's insurance policies also provide coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. In the third quarter of 2017, the Company recorded $21 million of pre-tax charges related to damages caused by the hurricane, including $11 million related to the impairment of damaged inventory and fixed assetsrequirements, as well as $10 millionthe corresponding need to adapt to new methods of idle facility and other costs. These amounts were recorded as a componentconducting business remotely, will continue to have an adverse effect on our business.cost of sales in the condensed consolidated statements of income for the three and nine month periods ended September 30, 2017. At this time, the full amount of combined property damage and business interruption costs and recoveries cannot be estimated, and accordingly, no additional amounts, including amounts for anticipated insurance recoveries, have been recorded as of September 30, 2017.New accounting standardsRecently issued accounting standards not yetJanuary 1, 2020, we adoptedIn August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-12, Targeted Improvements to Accounting2016-13, Financial Instruments - Credit Losses, which requires the measurement of expected lifetime credit losses, rather than incurred losses, for Hedging Activities, which amends ASC 815, Derivativesfinancial instruments held at the reporting date based on historical experience, current conditions and Hedging.reasonable forecasts. The purposemain objective of this ASU is to better alignprovide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a company’s risk management activities and financial reporting for hedging relationships, simplify the hedge accounting requirements, and improve the disclosures of hedging arrangements. The effective date forentity at each reporting date. We adopted this ASU is January 1, 2019, with early adoption permitted.using the modified retrospective approach. The company is evaluating the potential effects on the consolidated financial statements.In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends ASC 715, Compensation – Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic postretirement benefit cost in operating expenses. The service cost component of net periodic postretirement benefit cost should be presented in the same operating expense line items as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest costs, expected return on assets, amortization of prior service cost/credit, and settlement and curtailment effects, are to be included separately and outside of any subtotal of operating income. The company intends to adopt the standard effective January 1, 2018. This guidance will impact the presentation of the company’s consolidated statements of income with no impact on net income. Upon adoption of this ASU was an increase to our allowance for doubtful accounts and a decrease to retained earnings of $4 million.standard on January 1, 2018, operating incomechanges in our allowance for doubtful accounts for the three and nine months ended September 30, 2017, will be recast to increase $82020:(in millions) Three months ended
September 30, 2020Nine months ended
September 30, 2020Balance at beginning of period $ 120 $ 112 Adoption of new accounting standard 0 4 Charged to costs and expenses 3 15 Write-offs (3) (4) Currency translation adjustments 2 (5) Balance at end of period $ 122 $ 122 and $25 million, respectively, with a corresponding increase in other (income) expense, net.In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU No. 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU No. 2014-09 will be effective for the company beginning on January 1, 2018. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the dateSeptember 30, 2020, of adoption. The company has completed an assessment of the new standardwhich $13 million originated in 2016 and is currently executing its detailed implementation planprior, $19 million in 2017, $47 million in 2018, $36 million in 2019 and developing processes for gathering information for required disclosures. Based on the work performed to date, the company does not expect the adoption of the new standard to have a material impact on the consolidated financial statements. The company expects to adopt the standard using the modified retrospective method.Recently adopted accounting pronouncements2017,2020, we adopted ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software, which aligns the companyrequirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Our policies for capitalizing implementation costs incurred in a hosting arrangement were not impacted by this ASU. However, we have historically classified those capitalized costs within property, plant and equipment, net on our condensed consolidated balance sheets and as capital expenditures on our condensed consolidated statements of cash flows. Under the new ASU, those capitalized costs are presented as other non-current assets on our condensed consolidated balance sheets and within operating cash flows on our condensed consolidated statements of cash flows. We adopted this ASU on a prospective basis ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The updated guidance requires all tax effectsand capitalized $10 million and $30 million, respectively, of implementation costs related to share-based payments to be recorded in income tax expense in the consolidated statement of income. Previous guidance requiredhosting arrangements that tax effects of deductions in excess of share-based compensation costs (windfall tax benefits) be recorded in additional paid-in capital, and tax deficiencies be recorded in additional paid-in capital to the extent of previously recognized windfall tax benefits, with the remainder recorded in income tax expense. The new guidance also requires the cash flows resulting from windfall tax benefits to be reported as operating activities in the consolidated statement of cash flows, rather than the previous requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. As a result of the adoption, net income and operating cash flow forare service contracts during the three and nine months ended September 30, 2017, increased by approximately $18 million and $48 million, respectively. The prior periods have not been restated and therefore, windfall tax benefits of $8 million and $35 million, respectively, for the three and nine months ended September 30, 2016, were not included in net income and were included as an inflow from financing activities and an outflow from operating activities in the condensed consolidated statement of cash flows. SEPARATION OF BAXALTA INCORPORATEDOn July 1, 2015, Baxter completed the distribution of approximately 80.5% of the outstanding common stock of Baxalta Incorporated (Baxalta) to Baxter shareholders (the Distribution). After giving effect to the Distribution, the company retained 19.5% of the outstanding common stock, or 131,902,719 shares of Baxalta (Retained Shares). The Distribution was made to Baxter’s shareholders of record as of the close of business on June 17, 2015 (Record Date), who received one share of Baxalta common stock for each Baxter common share held as of the Record Date. As a result of the Distribution, Baxalta became an independent public company trading under the symbol “BXLT” on the New York Stock Exchange.On June 3, 2016, Baxalta became a wholly-owned subsidiary of Shire plc (Shire) through a merger of a wholly-owned Shire subsidiary with and into Baxalta, with Baxalta as the surviving subsidiary (the Merger). References in this report to Baxalta prior to the Merger closing date refer to Baxalta as a stand-alone public company. References in this report to Baxalta subsequent to the Merger closing date refer to Baxalta as a subsidiary of Shire.For a portion of Baxalta’s operations, the legal transfer of Baxalta’s assets and liabilities did not occur with the separation of Baxalta on July 1, 2015 due to the time required to transfer marketing authorizations and other regulatory requirements in certain countries. Under the terms of the International Commercial Operations Agreement (ICOA), Baxalta is subject to the risks and entitled to the benefits generated by these operations and assets until legal transfer; therefore, the net economic benefit and any cash collected by these entities by Baxter are transferred to Baxalta. As of September 30, 2017, all countries have been separated.Following is a summary of the operating results of Baxalta, which have been reflected as discontinued operations for the three and nine months ended September 30, 2017 and 2016. The assets and liabilities have been classified as held for disposition as of December 31, 2016. All assets and liabilities have been transferred as of September 30, 2017.As of December 31, 2016, Baxter recorded a liability of $47 million for its obligation to transfer these net assets to Baxalta. Baxter and Baxalta entered into several agreements in connection with the July 1, 2015 separation, including a transition services agreement (TSA), separation and distribution agreement, manufacturing and supply agreements (MSA), tax matters agreement, an employee matters agreement, a long-term services agreement, and a shareholder’s and registration rights agreement.Pursuant to the TSA, Baxter and Baxalta and their respective subsidiaries are providing to each other, on an interim, transitional basis, various services. Services being provided by Baxter include, among others, finance, information technology, human resources, quality supply chain and certain other administrative services. The services generally commenced on the Distribution date and are expected to terminate within 36 months of the Distribution date. Billings by Baxter under the TSA are recorded as a reduction of the costs to provide the respective service in the applicable expense category, primarily in marketing and administrative expenses, in the condensed consolidated statements of income. In the three and nine months ended September 30, 2017, the company recognized approximately $11 million and $47 million, respectively, as a reduction to marketing and administrative expenses related to the TSA. In the three and nine months ended September 30, 2016, the company recognized approximately $26 million and $79 million, respectively, as a reduction to marketing and administrative expenses related to the TSA. Pursuant to the MSA, Baxalta or Baxter, as the case may be, manufactures, labels, and packages products for the other party. The terms of the agreements range in initial duration from five to 10 years. In the three and nine months ended September 30, 2017, Baxter recognized approximately $6 million and $18 million, respectively, in sales to Baxalta. In the three and nine months ended September 30, 2016, Baxter recognized approximately $6 million and $31 million, respectively, in sales to Baxalta. In addition, in the three and nine months ended September 30, 2017, Baxter recognized $35 million and $133 million, respectively, in cost of sales related to purchases from Baxalta pursuant to the MSA. In the three and nine months ended September 30, 2016, Baxter recognized $47 million and $139 million, respectively, in cost of sales related to purchases from Baxalta pursuant to the MSA. The cash flows associated with these agreements are included in cash flows from operations — continuing operations.Cash outflows of $20 million and inflows of $3 million were reported in cash flows from operations – discontinued operations for the nine-month periods ending September 30, 2017 and 2016, respectively. These relate to non-assignable tenders whereby Baxterremains the seller of Baxalta products, transactions related to importation services Baxter provides in certain countries, in addition to trade payables settled post local separation on Baxalta’s behalf.3. SUPPLEMENTAL FINANCIAL INFORMATIONNet interest expenseOther (income) expense, netInventoriesProperty, plant and equipment, net4. EARNINGS PER SHAREThe numerator for both basic and diluted earnings per share (EPS) is either net income, income from continuing operations, or income from discontinued operations. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The dilutive effect of outstanding stock options, restricted stock units (RSUs) and performance share units (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.The effect of dilutive securities included unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excluded 0.1 million and 2.8 million of equity awards for the third quarter and nine months ended September 30, 2017, respectively, and 0.3 million and 10 million of equity awards for the third quarter and nine months ended September 30, 2016, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 9 for additional information regarding items impacting basic shares.Stock repurchasesIn July 2012, the Board of Directors authorized the repurchase of up to $2 billion of the company’s common stock. The board of directors increased this authority by an additional $1.5 billion in November 2016. During the first three quarters of 2017, the company repurchased 4.7 million shares for $275 million in cash. The company has $1.4 billion remaining available under the authorization as of September 30, 2017.5. ACQUISITIONS AND OTHER ARRANGEMENTSClaris Injectables LimitedOn July 27, 2017, Baxter acquired 100 percent of Claris Injectables Limited (Claris), a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of approximately $629 million, net of cash acquired. ThroughBaxter added capabilitiesof the product rights to Seprafilm Adhesion Barrier (Seprafilm) from Sanofi for approximately $342 million in productioncash. Seprafilm is indicated for use in patients undergoing abdominal or pelvic laparotomy as an adjunct intended to reduce the incidence, extent and severity of essential generic injectable medicines,postoperative adhesions between the abdominal wall and the underlying viscera such as anesthesiaomentum, small bowel, bladder, and analgesics, renal, anti-infectivesstomach, and critical care inbetween the uterus and surrounding structures such as tubes and ovaries, large bowel, and bladder. We concluded that the acquired assets met the definition of a varietybusiness and accounted for the transaction as a business combination using the acquisition method of presentations including bags, vials and ampoules. accounting.valuevalues of the assets acquired and liabilities assumed as of the acquisition date fordate:(in millions) Assets acquired Inventories $ 18 Goodwill 28 Other intangible assets 296 Total assets acquired $ 342 company’s acquisition of Claris:The valuation of total assets acquired and liabilities assumed are preliminary and measurement period adjustments may be recorded in the future as the company finalizes itswe finalize our fair value estimates. TheIn the three and nine months ended September 30, 2020, the results of operations of Claristhe acquired business have been included in the company’sour condensed consolidated statement of income since the date the business was acquired and were not material. Acquisition and integration costs associated with the Clarisacquired. The acquisition were $15contributed $30 million and $20$66 million, inrespectively, of net sales for the three and nine months ended September 30, 2017,2020. Net earnings from the acquisition were not significant during the three and nine months ended September 30, 2020. Acquisition and integration costs, primarily incremental cost of sales relating to inventory fair value step-ups, associated with the acquisition were 0 and $15 million, respectively, for the three and were primarily included within marketingnine months ended September 30, 2020.administrative expenses on the condensed consolidated statements of income.Baxter allocated $235$10 million of the total consideration to acquiredthe Seprafilm developed product rights and customer relationships with useful lives of 10 and 7 years, respectively. The fair values of the intangible assets withwere determined using the residual consideration of $310 million recorded as goodwill.income approach. The acquireddiscount rates used to measure the developed product rights and customer relationship intangible assets include $115 millionwere 14.8% and 11.0%, respectively. We consider the fair values of developed technology with a weighted-average useful life of 8 yearsthe intangible assets to be Level 3 measurements due to the significant estimates and $120 million of in-process research and development with an indefinite useful life. Forassumptions we used in establishing the in-process research and development, additional R&D will be required prior to technological feasibility. estimated fair values. not deductible for tax purposes, includes the value of potential future technologies as well as the overall strategic benefits provided to Baxter in the injectables market,our product portfolio of hemostats and sealants and is included in the Hospital Products segment.Americas and APAC segments.
Cheetah Medical, Inc.Theof intangible assets was determined using the income approach. The income approach is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life, discounted to present value. The discount rates used to measure the developed technology and in-process research and development intangible assets were 12% and 13%, respectively. The company considers the fair value of each of the acquired intangible assets to be Level 3 assets due to the significant estimates and assumptions used by management in establishing the estimated fair values. Refer to Note 10 within the 2016 Annual Report for additional information regarding fair value measurements.Celerity Pharmaceuticals, LLC2017, Baxter paid approximately $102020, we received $7 million from the sellers as a result of an acquisition price adjustment in accordance with the acquisition agreement. Additionally, we recorded measurement period adjustments in the third quarter of 2020 to acquiredecrease the net deferred tax liabilities acquired by $20 million. The measurement period adjustments did not impact our results of operations.(in millions) Cash consideration transferred $ 190 Contingent consideration 18 Total consideration $ 208 (in millions) Assets acquired and liabilities assumed Cash $ 2 Accounts receivable, net 3 Inventories 1 Prepaid expenses and other current assets 1 Property, plant and equipment 1 Goodwill 84 Other intangible assets 131 Operating lease right-of-use assets 1 Accounts payable and other accrued liabilities (4) Other non-current liabilities (12) Total assets acquired and liabilities assumed $ 208 Clindamycin Dextrose from Celerity Pharmaceuticals, LLC (Celerity). Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years. In the second quarter of 2017, Baxter paid approximately $10 million to acquire the rights to Clindamycin Saline from Celerity. Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years.In the first quarter of 2016, Baxter paid approximately $23 million to acquire the rights to Vancomycin injection in 0.9% Sodium Chloride (Normal Saline) in 500mg, 750mg, and 1 gram presentations from Celerity. Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years. Refer to Note 5 within the 2016 Annual Reportadditional product for additional information regarding the company’s agreement with Celerity.Wound Care Technologies, Inc.In April 2017, Baxter paid approximately $8 million to acquire Wound Care Technologies, Inc., a medical technology company that develops and markets external tissue expansion devices for the wound care market.$60 million. The purchase price allocation resulted in an amortizablewas capitalized as a developed-technology intangible asset of $8 million that will bein the quarter ended March 31, 2020 and is being amortized over its estimated economicuseful life of 811 years.6.Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 Interest expense, net of capitalized interest $ 42 $ 28 $ 112 $ 81 Interest income (3) (15) (16) (30) Interest expense, net $ 39 $ 13 $ 96 $ 51 Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 Foreign exchange losses, net $ 23 $ 30 $ 44 $ 44 Pension and other postretirement benefit plans 0 (17) (2) (48) Other, net (7) (4) (10) (4) Other (income) expense, net $ 16 $ 9 $ 32 $ (8) (in millions) September 30,
2020December 31,
2019Raw materials $ 462 $ 377 Work in process 205 185 Finished goods 1,321 1,091 Inventories $ 1,988 $ 1,653 (in millions) September 30,
2020December 31,
2019Property, plant and equipment, at cost $ 10,990 $ 10,660 Accumulated depreciation (6,530) (6,148) Property, plant and equipment, net $ 4,460 $ 4,512 (in millions) Americas EMEA APAC Total Balance as of December 31, 2019 $ 2,428 $ 385 $ 217 $ 3,030 Acquisitions 29 0 7 36 Acquisition accounting adjustments (24) (3) 0 (27) Currency translation and other adjustments 44 7 4 55 Balance as of September 30, 2020 $ 2,477 $ 389 $ 228 $ 3,094 2017,2020, there were no accumulatedreductions in goodwill relating to impairment losses.the company’sour other intangible assets.(in millions) Developed technology, including patents Other amortized intangible assets Indefinite-lived intangible assets
TotalSeptember 30, 2020 September 30, 2020 Gross other intangible assets $ 2,675 $ 475 $ 179 $ 3,329 Accumulated amortization (1,343) (308) — (1,651) Other intangible assets, net $ 1,332 $ 167 $ 179 $ 1,678 December 31, 2019 December 31, 2019 Gross other intangible assets $ 2,309 $ 464 $ 173 $ 2,946 Accumulated amortization (1,190) (285) — (1,475) Other intangible assets, net $ 1,119 $ 179 $ 173 $ 1,471 $38$57 million and $42$48 million in the three months ended September 30, 2017 and 2016, respectively, and $112 million and $124 million in the nine months ended September 30, 2017 and 2016, respectively.In the third quarter of 2016, the company recorded an impairment charge of $27 million related to an indefinite-lived intangible asset (acquired IPR&D) in the company’s Renal segment and its in-center hemodialysis program. The assets of the business were written down to estimated fair value and recorded in research and development expenses.In the second quarter of 2016, the company recorded an impairment charge of $51 million, of which $41 million related to a developed technology asset, relating to the company’s Hospital Products segment synthetic bone repair products business which was acquired from ApaTech Limited in 2010. The assets of the business were written down to estimated fair value and recorded in cost of sales.7. INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGESInfusion Pump ChargesThe company has undertaken a field corrective action with respect to the SIGMA SPECTRUM infusion pump. Remediation primarily includes inspection and repair charges as well as a temporary replacement pump in a limited number of cases. In the third quarter of 2017, the company recorded a charge of $22 million related primarily to cash costs associated with remediation efforts and none of these charges have been utilized as of September 30, 2017. Business Optimization ChargesBeginning in the second half of 2015, the company initiated actions to transform its 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. Through September 30, 2017, the company has incurred cumulative pretax costs of $526 million related to these actions. The costs consisted primarily of employee termination, implementation costs and accelerated depreciation. The company expects to incur additional pretax costs of approximately $285 million and capital expenditures of $90 million through the completion of these initiatives. The company expects to complete these activities by the end of 2018. The costs will primarily include employee termination costs, implementation costs, and accelerated depreciation. Of the total estimated cost, the company expects that approximately 5 percent of the charges will be non-cash.During the three and nine months ended September 30, 2017 and 2016, the company recorded the following charges related to business optimization programs.For segment reporting, business optimization charges are unallocated expenses.During the three and nine months ended September 30, 2017 and 2016, the company recorded the following restructuring charges.Costs to implement business optimization programs for the three and nine months ended September 30, 2017, were $21 million and $58 million respectively, and consisted primarily of external consulting and transition costs as well as employee salary and related costs. These costs were included within cost of sales and marketing and administrative expense.Costs to implement business optimization programs for the three and nine months ended September 30, 2016, were $25 million and $44 million, respectively, and were related primarily to external consulting costs. These costs were included within marketing and administrative and R&D expense.Costs related to the integration of Gambro AB (Gambro) were included within marketing and administrative expense for all referenced periods.For the three and nine months ended September 30, 2017, the company recognized accelerated depreciation, primarily associated with facilities to be closed, of zero and $8 million, respectively. The costs were recorded within cost of sales, marketing and administrative and R&D expense.For the three and nine months ended September 30, 2016, the company recognized $11 million and $25 million, respectively, of accelerated depreciation, primarily associated with facilities to be closed. The costs were recorded in cost of sales for all referenced periods.The following table summarizes activity in the reserves related to the company’s business optimization initiatives.Reserve adjustments primarily relate to employee termination cost reserves established in prior periods.Approximately 80% of the company’s restructuring reserves as of September 30, 2017 relate to employee termination costs, with the remaining reserves attributable to contract termination costs. The reserves are expected to be substantially utilized by the end of 2018.8. DEBT, FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTSDebt IssuanceIn May 2017, Baxter issued €600 million of senior notes at a fixed coupon rate of 1.30% due in May 2025. The company has designated this debt as a non-derivative net investment hedge of its European operations for accounting purposes.Debt RedemptionsIn September 2016, Baxter redeemed an aggregate of approximately $1 billion in principal amount of its 1.850% Senior Notes due 2017, 1.850% Senior Notes due 2018, 5.375% Senior Notes due 2018, 4.500% Senior Notes due 2019, 4.250% Senior Notes due 2020, and 3.200% Senior Notes due 2023. Baxter paid approximately $1 billion, including accrued and unpaid interest and tender premium, to redeem such notes. As a result of the debt redemptions, the company recognized a loss on extinguishment of debt in the third quarter of 2016 of approximately $52 million, which is included in other (income) expense, net.Debt-for-equity exchangesOn January 27, 2016, Baxter exchanged Baxalta Retained Shares for the extinguishment of $1.45 billion aggregate principal amount outstanding under its $1.8 billion U.S. dollar-denominated revolving credit facility. This exchange extinguished the indebtedness under the facility, which was terminated in connection with such debt-for-equity exchange. There were no material prepayment penalties or breakage costs associated with the termination of the facility. Baxter recognized a net realized gain of $1.25 billion related to the Baxalta Retained Shares exchanged, which was included in other (income) expense, net for the period ended September 30, 2016.On March 16, 2016, the company exchanged Baxalta Retained Shares for the extinguishment of approximately $2.2 billion in aggregate principal amount of its 0.950% Notes due May 2016, 5.900% Notes due August 2016, 1.850% Notes due January 2017, 5.375% Notes due May 2018, 1.850% Notes due June 2018, 4.500% Notes due August 2019, and 4.250% Notes due February 2020 purchased by certain third party purchasers in the previously announced debt tender offers. As a result, the company recognized a net loss on extinguishment of debt totaling $101 million and a net realized gain of $2.0 billion on the Baxalta Retained Shares exchanged, which are included in other (income) expense, net for the period ended September 30, 2016.Securitization arrangementThe following is a summary of the activity relating to the company’s securitization arrangement in Japan.The impacts on the condensed consolidated statements of income relating to the sale of receivables were immaterial for each period. Refer to the 2016 Annual Report for further information regarding the company’s securitization agreements.Concentrations of credit riskThe company invests excess cash in certificates of deposit or money market funds and diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss.The company continues to do business with foreign governments in certain countries including Greece, Spain, Portugal and Italy that have experienced a deterioration in credit and economic conditions. As of September 30, 2017, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $151 million.Global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. Governmental actions and customer-specific factors may also require the company to re-evaluate the collectability of its receivables and the company could potentially incur additional credit losses. These conditions may also impact the stability of the Euro.Derivatives and hedging activitiesThe company operates on a global basis and is exposed to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs.The company is 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 Yuan, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso and New Zealand Dollar. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from foreign exchange. Financial market and currency volatility may limit the company’s ability to cost-effectively hedge these exposures.The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company’s policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believes is appropriate.To manage this mix in a cost-efficient manner, the company periodically enters into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.The company does not hold any instruments for trading purposes and none of the company’s outstanding derivative instruments contain credit-risk-related contingent features.All derivative instruments are 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. Based upon the exposure being hedged, the company designates its hedging instruments as cash flow, fair value, or net investment hedges.Cash Flow HedgesThe company 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.For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is accumulated in accumulated other comprehensive income (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 net sales, cost of sales, net interest expense, and other (income) expense, net, and primarily relate to forecasted third-party sales denominated in foreign currencies, forecasted intercompany sales denominated in foreign currencies, and anticipated issuances of debt, respectively.The notional amounts of foreign exchange contracts were $667 million and $561 million as of September 30, 2017 and December 31, 2016, respectively. There were no outstanding interest rate contracts designated as cash flow hedges as of September 30, 2017 and December 31, 2016. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of September 30, 2017 is 15 months.Fair Value HedgesThe company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These instruments hedge the company’s 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 the loss or gain on the underlying hedged item. Fair value hedges are classified in net interest expense, as they hedge the interest rate risk associated with certain of the company’s fixed-rate debt.The total notional amount of interest rate contracts designated as fair value hedges was $200 million as of September 30, 2017 and December 31, 2016.Net Investment HedgesIn May 2017, the company issued €600 million of senior notes due May 2025. The company has designated this debt as a hedge of a portion of its net investment in its European operations and, as a result, mark to spot rate adjustments of the outstanding debt balances have been and will be recorded as a component of AOCI. As of September 30, 2017, the company had an accumulated pre-tax unrealized translation loss in AOCI of $70 million related to the Euro-denominated senior notes.DedesignationsIf it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. If the company removes the cash flow hedge designation because the hedged forecasted transactions are no longer probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions are still probable of occurring are deferred and recognized consistent with the loss or income recognition of the underlying hedged items.There were no hedge dedesignations in the first nine months of 2017 or 2016 resulting from changes in the company’s assessment of the probability that the hedged forecasted transactions would occur.If the company terminates a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged items 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 nine months of 2017. In March 2016, the company terminated a total notional value of $765 million of interest rate contracts in connection with the March debt tender offers, resulting in a $34 million reduction to the debt extinguishment loss. In September 2016, the company terminated a total notional value of $335 million of interest rate contracts in connection with the September debt redemptions, resulting in a $14 million reduction to the debt extinguishment loss.Undesignated Derivative InstrumentsThe company uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the company’s intercompany and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges, and the change in fair value, which substantially offsets the change in book value of the hedged items, is recorded directly to other (income) expense, net. The terms of these instruments generally do not exceed one month.The total notional amount of undesignated derivative instruments was $807 million as of September 30, 2017 and $822 million as of December 31, 2016.Gains and Losses on Hedging ActivitiesThe following tables summarize the income statement locations and gains and losses on the company’s derivative instruments for the three months ended September 30, 20172020 and 2016.The following tables summarize the income statement locations and gains and losses on the company’s derivative instruments for the nine months ended September 30, 2017 and 2016.For the company’s fair value hedges, an equal and offsetting gain of $1 million was recognized in net interest expense in the third quarter and first nine months of 2017,2019, respectively, and an equal and offsetting gain of $7$165 million and loss of $19 million was recognized in net interest expense in the third quarter and first nine months of 2016, respectively, as adjustments to the underlying hedged item, fixed-rate debt. Ineffectiveness related to the company’s cash flow and fair value hedges for all periods presented were not material.As of September 30, 2017, $10 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.Fair Values of Derivative InstrumentsThe following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of September 30, 2017.The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2016.While the company’s derivatives are all subject to master netting arrangements, the company presents its assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, the company is not required to post collateral for any of its outstanding derivatives.The following table provides information on the company’s derivative positions as if they were presented on a net basis, allowing for the right of offset by counterparty.Fair value measurementsThe following tables summarize the bases used to measure financial assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheets.As of September 30, 2017, cash and equivalents of $3.5 billion included money market funds of approximately $1 billion, and as of December 31, 2016, cash and equivalents of $2.8 billion included money market funds of approximately $1 billion. Money market funds would be 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 the company 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 are considered observable and vary depending on the type of derivative, and include contractual terms, interest rate yield curves, foreign exchange rates and volatility.Contingent payments related to acquisitions consist of commercial milestone payments and sales-based payments, and are valued using discounted cash flow techniques. The fair value of commercial milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or expectation of 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 increase or expectation of timing of payment is accelerated. The change in the fair value of contingent payments related to Baxter’s acquisitions, which use significant unobservable inputs (Level 3) in the fair value measurement, were primarily driven by payments of approximately $8 million in the first nine months of 2017.The following table provides information relating to the company’s investments in available-for-sale equity securities.In the first quarter of 2017, the company recorded a $4 million other-than-temporary impairment charge within other (income) expense, net based on the duration of losses related to one of the company’s investments. In the first nine months of 2016, the company recorded $4.4 billion of net realized gains within other (income) expense, net related to exchanges of available-for-sale equity securities, which represented gains from the Retained Share transactions.Book Values and Fair Values of Financial InstrumentsIn addition to the financial instruments that the company is required to recognize at fair value in the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical 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 approximate fair values as of September 30, 2017 and December 31, 2016.The following tables summarize the bases used to measure the approximate fair value of the financial instruments as of September 30, 2017 and December 31, 2016.Investments in 2017 and 2016 included certain cost method investments.In determining the fair value of cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement.The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instrument. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with thecompany’s credit risk. The carrying values of the other financial instruments approximate their fair values due to the short-term maturities of most of these assets and liabilities.9. STOCK COMPENSATIONStock compensation expense totaled $31 million and $30 million in the third quarter of 2017 and 2016, respectively, and $77 million and $84$136 million for the nine months ended September 30, 20172020 and 2016,2019, respectively. Approximately 70%stock compensation expense is2020 and 2019, we recognized impairment charges of $17 million and $31 million, respectively, related to developed-technology intangible assets due to declines in market expectations for the related products. The fair values of the intangible assets were measured using a discounted cash flow approach and the charges are classified in marketing and administrative expenses with the remainder classified inwithin cost of sales and R&D expenses.In March 2017,in the company awarded its annual stock compensation grants which consistedaccompanying condensed consolidated statements of 5.4 million stock options, 0.7 million RSUs and 0.6 million PSUs.10. RETIREMENT AND OTHER BENEFIT PROGRAMSThe following is a summary of net periodic benefit cost relating toincome. We consider the company’s pension and other postemployment benefit (OPEB) plans.11. ACCUMULATED OTHER COMPREHENSIVE INCOMEComprehensive income includes all changes in shareholders’ equity that do not arise from transactions with shareholders, and consists of net income, CTA, pension and other employee benefits, unrealized gains and losses on cash flow hedges and unrealized gains and losses on available-for-sale equity securities. The following table is a net-of-tax summaryfair values of the changes in AOCI by component for the nine months ended September 30, 2017 and 2016.(a)See table below for details about these reclassifications.The following is a summary of the amounts reclassified from AOCIassets to net income during the three and nine months ended September 30, 2017 and 2016.(a)Amounts in parentheses indicate reductions to net income.(b)These AOCI components are included in the computation of net periodic benefit cost disclosed in Note 10.Refer to Note 8 for additional information regarding hedging activity and Note 10 for additional information regarding the amortization of pension and other employee benefits items.12. INCOME TAXESEffective tax rateThe company’s effective income tax rate for continuing operations was 14.5% and 0.8% in the third quarters of 2017 and 2016, respectively, and 15.0% and (1.1%) in the nine months ended September 30, 2017 and 2016, respectively. The company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.The effective income tax rate for continuing operations during the three months ended September 30, 2017 increased from the three months ended September 30, 2016,Level 3 measurements due to the inclusionsignificant estimates and assumptions we used in 2016establishing the estimated fair values.restructuring3.75% senior notes due in October 2025 and other charges incurred$500 million of 3.95% senior notes due in higher tax rate jurisdictions as well asApril 2030 (collectively, the favorable impactsenior notes). Pursuant to a registration rights agreement (the Registration Rights Agreement) with the initial purchasers of discrete items including the partial settlement of an on-going income tax matter relatedsenior notes, we agreed to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the senior notes for new notes with terms substantially identical in all material respects to the company’s Turkish operationssenior notes and to have such registration statement declared effective under the settlementU.S. Securities Act of 1933. If we fail to have such registration statement declaredtransfer pricing audit related to the company’s Italian operations. Windfall benefits realized from stock option exercises and vestingregistration default. RSUs and PSUs associated with the company’s stock compensation programs partially offset the increase from the prior period as such benefits are now reflected as a tax benefit as a result of the company’s adoption of ASU 2016-09 in 2017. The effective income tax rate for continuing operations increased during the nine months ended September 30, 2017 due to the items noted above as well as the absence in the current year2020, there were no borrowings outstanding under our U.S. dollar or Euro-denominated credit facilities. As of the tax-free net realized gains associated with the Baxalta Retained Share transactions, which included debt-for-equity exchanges, the contribution of Baxalta Retained Shares to the company’sDecember 31, 2019, we had €200 million ($224 million) outstanding under our Euro-denominated credit facility at a 0.91% interest rate and no borrowings outstanding under our U.S. pension plan and the exchange of Baxalta Retained Shares for shares of the company, as well as benefits attributable to closing an IRS and German income tax audit that were all reflected during the nine months ended September 30, 2016. The effective income tax rate for continuing operations during the nine months ended September 30, 2017 was favorably impacted by approximately 5.2 percentage points due to tax windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the company’s stock compensation programs.13. LEGAL PROCEEDINGSBaxter isthe company’sour business. The company recordsWe 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 recorded.accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of September 30, 2017, the company’s2020 and December 31, 2019, our total recorded reserves with respect to legal and environmental matters were $15$39 million and $56 million, respectively, and there were no0 related receivables.Baxter hasThe company isWe 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 theour liability of the company in connection with thethese claims cannot be estimated and the resolution thereof in any reporting period could have a significant impact on the company’sour 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 the company’sour consolidated financial position. While the company believeswe believe that it haswe have valid defenses in thesethe matters set forth below, litigation is inherently uncertain, excessive verdicts do occur, and the companywe may incur material judgments or enter into material settlements of claims.the company remainswe 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 the company’sour operations and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, the companywe may be exposed to significant litigation concerning the scope of the company’sour 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.General litigationOn July 31, 2015, Davita Healthcare Partners, Inc. filed suit against Baxter Healthcare Corporation the District Court of the State of Colorado regarding an ongoing commercial dispute relatingvoluntary environmental remediation associated with historic operations at our Irvine, California, United States facility. As of September 30, 2020 and December 31, 2019, our environmental reserves, which are measured on an undiscounted basis, were $17 million and $18 million, respectively. After considering these reserves, the outcome of these matters is not expected to the provisionhave a material adverse effect on our financial position or results of peritoneal dialysis products. A bench trial concluded in third quarter 2016 and the parties were awaiting the court’s decision. In October, 2017, the parties jointly requested a stay in the matter while they work to resolve the matter. The court has granted the stay.purportedputative antitrust class action complaint seeking monetary and injunctive relief was filed in the United States District Court for the Northern District of Illinois. The complaint alleges a conspiracy among manufacturers of IV solutions to restrict output and affect pricing in connection with a shortage of such solutions. Similar parallel actions subsequently were filed. In January 2017, a single consolidated complaint covering these matters was filed in the Northern District of Illinois. The companyWe filed a motion to dismiss the consolidated complaint in February 2017.the companywe became aware of a criminal investigation by the U.S. Department of Justice (DOJ), Antitrust Division and a federal grand jury in the United States District Court for the Eastern District of Pennsylvania. The companyWe and an employee received subpoenas seeking production of documents and testimony regarding the manufacturing, selling, pricing and shortages of IV solutions and containers (including saline solutions and certain other injectable medicines sold by the company)us) and communications with competitors regarding the same. The company is cooperating withOn November 30, 2018, the DOJ notified us that it had closed the investigation. As previously disclosed, theThe New York Attorney General has also requested that Baxterwe provide information regarding business practices in the IV saline industry. The company is cooperatingWe have cooperated with the New York Attorney General.OtherDecember 2016,August 2019, we were named in an amended complaint filed by Fayette County, Georgia in the company receivedMDL 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.civil investigative demand from the Commercial Litigation Branch ofclass action complaint captioned Ethan E. Silverman et al. v. Baxter International Inc. et al. that was filed in the United States DepartmentDistrict Court for the Northern District of Justice primarilyIllinois. 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 alleges 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 contingent discount arrangementscertain intra-company transactions undertaken for and other promotionthe purpose of the company’s TISSEEL and ARTIS products. The company is cooperating in this matter.14 SEGMENT INFORMATIONBaxter’s two segments are strategic businesses that are managed separately because each business develops, manufactures and markets distinct products and services. The segments and a description of their products and services are as follows:The Renal business provides products and services to treat end-stage renal disease, or irreversible kidney failure, along with other renal therapies. The Renal business offers a comprehensive portfolio to meet the needs of patients across the treatment continuum, including technologies and therapies for peritoneal dialysis (PD), hemodialysis (HD), continuous renal replacement therapy (CRRT) and additional dialysis services.The Hospital Products business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, oncology injectable drugs, IV nutrition products, infusion pumps, inhalation anesthetics, and biosurgery products. The business also provides products and services related to pharmacy compounding, drug formulation and packaging technologies.The company uses income from continuing operations before net interest expense, income tax expense, depreciation and amortization expense (Segment EBITDA), on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’s business segments. Intersegment sales are eliminated in consolidation.Certain items are maintained at Corporate and are not allocated to a segment. They primarily include most of the company’s debt and cash and equivalents and related net interest expense,generating foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in agains or avoiding foreign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, nonstrategic investments and related income and expense, certain employee benefit plan costsexchange 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. In addition, we have received a stockholder request for inspection of our books and records in connection with the announcement made in our Form 8-K on October 24, 2019 that we had commenced an internal investigation into certain nonrecurringintra-company transactions that impacted our previously reported non-operating foreign exchange gains losses, and losses. As initially disclosed on October 24, 2019, we also voluntarily advised the staff of the SEC of our internal investigation and we are continuing to cooperate with the staff of the SEC.charges (such as business optimization, integration and separation-related costs, and asset impairments). Financial informationoperating expense (income), net on the condensed consolidated statement of income for the company’s segments is as follows.nine months ended September 30, 2019.The following isIn September 2017, Hurricane Maria caused damage to certain of our assets in Puerto Rico and disrupted operations. As previously disclosed, we realized $42 million of insurance recoveries in 2018 related to the damages and losses from that hurricane. In July 2019, an additional $40 million of claims were approved by our insurers and a reconciliation of segment EBITDA to income from continuing operations before income taxes pergain was recognized within other operating expense (income), net on the condensed consolidated statements of income.Refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Annual Report) for management’s discussion and analysis of the financial condition and results of operations of the company. The following is management’s discussion and analysis of the financial condition and results of operations of the companyincome for the three and nine months ended September 30, 2017.RESULTS OF OPERATIONSBaxter’s income from continuing operations2019. In October 2019, an additional $60 million of claims were approved by our insurers and a gain for that amount was recognized within other operating expense (income), net in the fourth quarter of 2019. No further insurance recoveries are expected.and nine months ended September 30, 2017 totaled $248 million, or $0.45March 31, 2020. diluted share, and $785 million, or $1.42 per diluted share, compared to $127 million, or $0.23 per diluted share, and $4.7 billion, or $8.56 per diluted share for the three and nine months ended September 30, 2016. Income from continuing operations2020 were $0.245 and $0.710, respectively. Cash dividends declared per share for the three and nine months ended September 30, 2017 included special items which decreased income from continuing operations2019 were $0.22 and $0.63, respectively.$108an 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 nine months of 2020, we did not repurchase any shares under this authority. During the first nine months of 2019, we repurchased 13.5 million shares pursuant to Rule 10b5-1 plans and $237 million, respectively, or $0.19 and $0.42 per diluted share, respectively, as further discussed below. Income from continuing operations for the three months endedotherwise. As of September 30, 2016 included special items which reduced2019, we recognized a liability within accounts payable and accrued liabilities of $37 million for share repurchases that settled in early October 2019. We had $897 million remaining available under the authorization as of September 30, 2020. After giving effect to the October 2020 approval, we had $2.4 billion remaining under this authority as of October 29, 2020.continuing operationstransactions 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.$184 million, or $0.33 per diluted share. Special items increased income from continuing operations by $4 billion, or $7.17 per diluted share,component for the nine months ended September 30, 2016.Special Items(in millions) CTA Pension and OPEB plans Hedging activities Total Gains (losses) Balance as of December 31, 2019 $ (2,954) $ (715) $ (41) $ (3,710) Other comprehensive income (loss) before reclassifications (43) (9) (110) (162) Amounts reclassified from AOCI (a) 0 35 (2) 33 Net other comprehensive (loss) income (43) 26 (112) (129) Balance as of September 30, 2020 $ (2,997) $ (689) $ (153) $ (3,839) (in millions) CTA Pension and OPEB plans Hedging activities Total Gains (losses) Balance as of December 31, 2018 $ (2,868) $ (954) $ (1) $ (3,823) Adoption of new accounting standard 9 (169) (1) (161) Other comprehensive income (loss) before
reclassifications(272) 20 (66) (318) Amounts reclassified from AOCI (a) 0 17 (3) 14 Net other comprehensive (loss) income (272) 37 (69) (304) Balance as of September 30, 2019 $ (3,131) $ (1,086) $ (71) $ (4,288) table providesis a summary of the company’s special items and the related impact by line item on the company’s results of continuing operations foramounts reclassified from AOCI to net income during the three and nine months ended September 30, 20172020 and 2016.Amounts reclassified from AOCI (a) (in millions) Three months ended September 30, 2020 Nine months ended September 30, 2020 Location of impact in income statement Amortization of pension and OPEB items Amortization of net losses and prior service costs or credits $ (14) $ (44) Other (income) expense, net Less: Tax effect 3 9 Income tax expense $ (11) $ (35) Net of tax Gains (losses) on hedging activities Foreign exchange contracts $ (2) $ 2 Cost of sales Less: Tax effect 1 0 Income tax expense $ (1) $ 2 Net of tax Total reclassifications for the period $ (12) $ (33) Total net of tax Intangible assetAmounts reclassified from AOCI (a) (in millions) Three months ended September 30, 2019 Nine months ended September 30, 2019 Location of impact in income statement Amortization of pension and OPEB items Amortization of net losses and prior service costs or credits $ (8) $ (23) Other (income) expense, net Less: Tax effect 4 6 Income tax expense $ (4) $ (17) Net of tax Gains on hedging activities Foreign exchange contracts $ 2 $ 3 Cost of sales Less: Tax effect 0 0 Income tax expense $ 2 $ 3 Net of tax Total reclassifications for the period $ (2) $ (14) Total net of tax expenseof pension and OPEB items and Note 14 for additional information regarding hedging activity.identifiedmeasured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation is a special itempromise in a contract to facilitate antransfer a distinct good or service to thecurrent and past operating performance and is similar to how management internally assesses performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impactwhen the company’s reported operations for a period. Management believes that providing the separate impactcustomer obtains control of the above items onpromised goods or services. Revenue is recognized over time when we are creating or enhancing an asset that the company’s resultscustomer 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.accordance with GAAPthe Americas segment. Some contracts in the United States may provide a more complete understandingincluded in this amount contain index-dependent price increases, which are not known at this time. We expect to recognize approximately 10% of this amount as revenue over the remainder of 2020, 25% in each of 2021 and 2022, 20% in 2023, and 10% in each of 2024 and 2025.company’s operationsamounts earned or to be claimed on the related sales and can facilitate a fuller analysisare included in accounts receivable, net and accounts payable and accrued liabilities 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 company’s resultsamount of operations, particularlyconsideration to which we are entitled based on the terms of the contract using the expected value method. The amount of variable consideration included in evaluating performance from one period to another. This information should be considered in addition to, and not as a substitute for, information prepared in accordance with GAAP.1The company's results in the third quarter of 2017 included a charge of $52 million related to business optimization initiatives. This included a charge of $31 million related to restructuring activities and $21 million of costs to implement business optimization programs which primarily included external consulting and project employee costs. The $31 million of restructuring charges were comprised of employee termination costs.The company’s results in the first nine months of 2017 included a net charge of $116 million related to business optimization initiatives. This included a net charge of $50 million related to restructuring activities, $58 million of costs to implement business optimization programs which primarily included external consulting and project employee costs, and $8 million of accelerated depreciation associated with facilities to be closed. The $50 million of net restructuring charges included $40 million of employee termination costs, $5 million of contract termination costs, and $5 million of asset impairment charges primarily related to facility closures.The company’s results in the third quarter of 2016 included a net charge of $171 million related to business optimization initiatives. This included a net charge of $130 million related to restructuring activities, $25 million of costs to implement business optimization programs which included external consulting and employee salary and related costs, $11 million of accelerated depreciation associated with facilities to be closed, and $5 million of Gambro integration costs. The $130 million of restructuring activities included $101 million of employee termination costs, $27 million of intangible asset impairment charges related to acquired in-process R&D, and $2 million of other exit costs.The company’s results in the first nine months of 2016 included a net charge of $325 million related to business optimization initiatives. This included a net charge of $237 million related to restructuring activities, $44 million of costs to implement business optimization programs which included external consulting and employee salary and related costs, $25 million of accelerated depreciation associated with facilities to be closed, and $19 million of Gambro integration costs. The $237 million of restructuring activities included $144 million of employee termination costs, $54 million of costs related to the discontinuance of the VIVIA home hemodialysis development program, $27 million of intangible asset impairment charges related to acquired in-process R&D, and $12 million of other exit costs.2The company’s results in the third quarter and first nine months of 2017 included a net charge of $21 million and $17 million, respectively, related to SIGMA SPECTRUM infusion pump inspection and remediation activities, partially offset by a benefit related to an adjustment to historical product reserves. The company’s results in the first nine months of 2016 included a benefit of $12 million related to an adjustment to the SIGMA SPECTRUM infusion pump reserves. 3The company’s results in the first nine months of 2016 included a $51 million impairment primarily related to developed technology.4The company's results in 2017 and 2016 included costs incurred related to the Baxalta separation totaling $2 million and $10 million, respectively in the third quarter and $17 million and $46 million, respectively, in the first nine months.5The company's results in the first nine months of 2017 included a benefit of $12 million related to an adjustment to the company's historical rebates and discounts reserve.6The company’s results in the third quarter of 2016 included a net debt extinguishment loss of $48 million primarily related to certain debt redemptions. The company’s results in 2016 included a net debt extinguishment loss totaling $149 million related to the March 2016 debt-for-equity exchange for certain company indebtedness and certain other debt redemptions. See Note 8 within Item 1 for additional details.7The company’s results in the first nine months of 2016 included net realized gains of $4.4 billion related to the debt-for-equity exchanges of Baxalta Retained Shares for certain company indebtedness and for the equity-for-equity exchange and pension contribution described above. Refer to Note 8 within Item 1 for additional details.8The company’s results in the third quarter and first nine months of 2017 include acquisition and integration costs of $15 million and $20 million, respectively, related to the company’s acquisition of Claris Injectables Limited (Claris).9The company’s results in 2017 included a charge of $33 million related to the deconsolidation of its Venezuelan operations.10The company’s results in 2017 included a charge of $21 million related to the impact of Hurricane Maria on the company’s operations in Puerto Rico. The costs primarily include inventory and fixed asset impairments as well as idle facility costs.NET SALESForeign currency did not have an impact on consolidated net sales during the third quarter or the first nine months of 2017 comparedprice is limited to the prior periods.The comparisons presented at constant currency rates reflect comparative local currency sales atamount for which it is probable that a significant reversal in revenue will not occur when the prior period’s foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates have not changed between the prior and the current period. The company believes that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of the company’s results of operations, particularly in evaluating performance from one period to another.During 2016, the company made a strategic decision to exit select products in certain markets including Venezuela, India and Turkey. Overall, these items had a negative impact to the company’s net sales growth rate of 1 percentage pointrelated uncertainty is resolved. Revenue recognized during the third quarter and first nine months of 2017, respectively. The company is also presenting the impact of generic competition for U.S. cyclophosphamide to enhance comparability between periods and better identify operating trends. On July 27, 2017, Baxter completed the acquisition of Claris, a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of $629 million, net of cash acquired. In the three and nine months ended September 30, 2017,2020 and 2019 related to performance obligations satisfied in prior periods was not material.Baxterbalance sheets. Net trade accounts receivable was $1.8 billion as of September 30, 2020 and December 31, 2019, respectively.include $27in 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. Our contract asset balances totaled $146 million as of September 30, 2020, of which $58 million related to contract manufacturing services, $39 million related to software sales and $49 million related to bundled equipment and consumable medical products contracts. Our contract asset balances totaled $131related toby Global Business Unit (GBU) between the Claris acquisition.In September 2017, the company’s three Puerto Rico manufacturing sites sustained minimal structural damage from the impact of Hurricane MariaU.S. and limited production activities resumed soon thereafter. Given the temporary disruptions to the company’s manufacturing facilities as a result of the storm, the company expects net sales in the fourth quarter of 2017 to be negatively impacted by approximately $70 million. The company does not expect any material impact to net sales in 2018 or thereafter.Franchise Net Sales ReportingThe international:Three months ended September 30, 2020 2019 (in millions) U.S. International Total U.S. International Total $ 216 $ 739 $ 955 $ 199 $ 719 $ 918 434 246 680 461 240 701 210 330 540 223 304 527 90 147 237 80 139 219 139 97 236 134 82 216 72 105 177 44 86 130 83 64 147 83 57 140 Total Baxter $ 1,244 $ 1,728 $ 2,972 $ 1,224 $ 1,627 $ 2,851 Nine months ended September 30, 2020 2019 (in millions) U.S. International Total U.S. International Total $ 629 $ 2,115 $ 2,744 $ 587 $ 2,092 $ 2,679 1,296 686 1,982 1,308 716 2,024 653 899 1,552 690 885 1,575 250 426 676 236 403 639 370 258 628 397 249 646 204 315 519 136 255 391 186 205 391 183 186 369 Total Baxter $ 3,588 $ 4,904 $ 8,492 $ 3,537 $ 4,786 $ 8,323 segmentCare includes sales of the company’sour peritoneal dialysis (PD), hemodialysis (HD) and continuous renal replacement therapies (CRRT) and additional dialysis services.The Hospital Products segment includes four commercial franchises: Fluid Systems, Integrated Pharmacy Solutions, Surgical Caretherapies and Other.Fluid Systems2Medication Delivery includes sales of the company’sour intravenous (IV) therapies, infusion pumps, administration sets and IV administration sets.Integrated Pharmacy Solutions3Pharmaceuticals includes sales of the company’sour premixed and oncology drug platforms, nutritioninhaled anesthesia and critical care products pharmaceutical reconstitution devices and pharmacy compounding services.Surgical Care4Clinical Nutrition includes sales of the company’s inhaled anesthesia productsour parenteral nutrition (PN) therapies and critical care products as well asrelated products.Other6Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).the company’sour pharmaceutical partnering business.following is a summaryterms of net salesthe related contracts, including the proportion of fixed versus variable payments and any options to shorten or extend the lease term, vary by commercial franchisecustomer. We allocate revenue between equipment leases and medical products based on a reportedtheir standalone selling prices. constant currency basis along with the impact of significant non-operational items.Net sales in the Renal segment during the third quarter and first nine months ended September 30, 2020 were:(in millions) Three months ended September 30, 2020 Nine months ended September 30, 2020 Sales-type lease revenue $ 11 $ 27 Operating lease revenue 16 44 Variable lease revenue 19 57 Total lease revenue $ 46 $ 128 2017 increased 3%lease revenue for the three and 1%, respectively. Excluding the impact of foreign currency, sales increased 3% and 2% in the third quarter and first nine months of 2017, respectively, driven by continued growth of PD patients and adoption of the company’s new Automated Peritoneal Dialysis Cyclers (APD) AMIA in the U.S. and HomeChoice CLARIA in international markets. Increased sales globally of the company’s CRRT products also contributed to growth in the third quarter and first nine months of 2017. Sales growth in the first nine months of 2017 was partially offset by lower sales of HD products internationally, driven by reduced volumes and increased pricing pressures. Certain international strategic market exits negatively impacted the Renal segment’s net sales by 3% and 2% during the third quarter and first nine months of 2017, respectively, and are expected to negatively impact full year Renal segment net sales by approximately $50 million as compared to 2016.Net sales in the Hospital Products segment increased 7% and 5%, respectively, during the third quarter and first nine months of 2017 compared to the prior period on both a reported basis and constant currency basis. Certain international strategic market exits negatively impacted the Hospital Products segment net sales by 1% during the third quarter and first nine months of 2017 and are expected to negatively impact full year 2017 net sales by approximately $50 million as compared to 2016. The company’s acquisition of Claris contributed $27 million of net sales during the third quarter and first nine months of 2017. The principal drivers impacting net sales were the following:(in millions) Three months ended September 30, 2019 Nine months ended September 30, 2019 Sales-type lease revenue $ 3 $ 14 Operating lease revenue 16 46 Variable lease revenue 23 65 Total lease revenue $ 42 $ 125 the Fluid Systems franchise, sales increased 6% in the third quarter and 7% in the first nine months of 2017 on a constant currency basis driven by select pricing and improved volumes for U.S. IV solutions. This increase was also positively impacted by increased sales of the company’s IV access administrative sets, reflecting the on-going pull through from the company’s growing SPECTRUM infusion pump base. In the Integrated Pharmacy Solutions franchise, sales increased 11% in the third quarter and 5% in the first nine months of 2017 on a constant currency basis driven by improved volumes for the company’s nutritional therapies, increased sales of pre-mixed injectable drugs (as a result of recent product launches), the acquisition of Claris and a one-time benefit from an early contract settlement. These increases were offset by decreased U.S. sales of cyclophosphamide, a generic oncology drug, due to the entry of competitors into the market. U.S. sales of cyclophosphamide declined from $163 million in the first nine months of 2016 to $143 million in the first nine months of 2017. The company expects U.S. sales of cyclophosphamide to continue to decline due to the entrance of additional competitors.In the Surgical Care franchise, sales increased 5% in the third quarter and 6% in the first nine months of 2017 on a constant currency basis driven by improved volumes and pricing in the U.S. for the company’s portfolio of anesthetic and critical care products and positive demand for inhaled anesthetics internationally. The increase was principally due to pricing for BREVIBLOC, a fast-acting IV beta blocker, during the third quarter and first nine months of 2017 as well as volume for Transderm Scop during the first nine months. The increased Transderm Scop volume was the result of a temporary supply disruption during the first half of the year related to an alternative product. In the Other franchise, sales decreased 2% in the third quarter and increased 1% in the first nine months of 2017 on a constant currency basis driven by unfavorable volumes in the third quarter and favorable volumes in the first nine months of 2017 for products manufactured by Baxter on behalf of its pharmaceutical partners. In addition, revenues related to the company’s manufacturing and supply agreement with Baxalta were lower in the third quarter and first nine months of 2017 as compared to the prior year.Gross Margin and Expense RatiosGross MarginThe special items identified above had an unfavorable impact of approximately 3.5 and 2.5 percentage points on the gross margin ratio in the third quarter and first nine months of 2017, respectively. The unfavorable impact was 3.0 and 3.7 percentage points in the third quarter and first nine months of 2016, respectively. Refer to the Special Items caption above for additional detail.Excluding the impact of the special items, the gross margin ratio increased due to select price increases, favorable manufacturing performance and a benefit from the company’s business transformation initiatives aimed at simplifying the portfolio to drive efficiency and reduce costs.Marketing and Administrative ExpensesThe special items identified above had an unfavorable impact of approximately 1.9 and 1.2 percentage points on the marketing and administrative expense ratio in the third quarter and first nine months of 2017, respectively. The unfavorable impact was 4.5 and 2.4 percentage points in the third quarter and first nine months of 2016. Refer to the Special Items caption above for additional detail.Excluding the impact of the special items, the marketing and administrative expenses ratio in the third quarter and first nine months of 2017 declined due to the actions taken by the company to rebase its cost structure and focus on expense management. These savings were partially offset by decreased benefits to the marketing and administrative expenses ratio from lower transition service income as the agreement with Baxalta for these services continues to wind down. Research and DevelopmentThe special items identified above had an unfavorable impact of approximately 1.2 and 1.0 percentage points in the third quarter and first nine months of 2016. Refer to the Special Items caption above for additional detail.Excluding the impact of the special items, the research and development expenses ratio increased in the third quarter and first nine months of 2017 as a result of the company’s increased investment in new product development.Business Optimization ItemsBeginning in the second half of 2015, the company initiatedyears, we have undertaken actions to transform its costsour 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. ThroughFrom the commencement of our business optimization activities in the second half of 2015 through September 30, 2017, the company has2020, we have incurred pretaxcumulative pre-tax costs of $526 million$1.1 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation. The company expectsWe currently expect to incur additional pretaxpre-tax costs of approximately $285$15 million and capital expendituresthrough the completion of $90 millionthe initiatives that are currently underway, primarily related to theseimplementation 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.Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 Restructuring charges $ 26 $ 17 $ 58 $ 94 Costs to implement business optimization programs 6 10 19 32 Accelerated depreciation 0 1 0 5 Total business optimization charges $ 32 $ 28 $ 77 $ 131 Three months ended September 30, 2020 (in millions) COGS SG&A R&D Total Employee termination costs $ 4 $ 15 $ 1 $ 20 Contract termination and other costs 1 3 0 4 Asset impairments 0 2 0 2 Total restructuring charges $ 5 $ 20 $ 1 $ 26 Three months ended September 30, 2019 (in millions) COGS SG&A R&D Total Employee termination costs $ 1 $ 2 $ 2 $ 5 Contract termination and other costs 1 0 0 1 Asset impairments 7 0 4 11 Total restructuring charges $ 9 $ 2 $ 6 $ 17 Nine months ended September 30, 2020 (in millions) COGS SG&A R&D Total Employee termination costs $ 9 $ 34 $ (1) $ 42 Contract termination and other costs 3 3 0 6 Asset impairments 8 2 0 10 Total restructuring charges $ 20 $ 39 $ (1) $ 58 Nine months ended September 30, 2019 (in millions) COGS SG&A R&D Total Employee termination costs $ 7 $ 27 $ 28 $ 62 Contract termination and other costs 9 0 0 9 Asset impairments 17 1 5 23 Total restructuring charges $ 33 $ 28 $ 33 $ 94 (in millions) Liability balance as of December 31, 2019 $ 92 Charges 53 Payments (63) Reserve adjustments (5) Currency translation 4 Liability balance as of September 30, 2020 $ 81 2018. These costs2021.Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 Pension benefits Service cost $ 20 $ 18 $ 61 $ 56 Interest cost 24 47 71 137 Expected return on plan assets (40) (74) (121) (214) Amortization of net losses and prior service costs 19 15 57 44 Net periodic pension cost $ 23 $ 6 $ 68 $ 23 OPEB Interest cost $ 2 $ 2 $ 4 $ 6 Amortization of net loss and prior service credit (5) (7) (13) (21) Net periodic OPEB cost (income) $ (3) $ (5) $ (9) $ (15) primarily include employee termination costs, implementation costs, and accelerated depreciation. The company expects that approximately 5 percentbe paid from the assets of the remaining chargespension plan in December 2020. This action will accelerate the satisfaction of future pension obligations and could result in a non-cash pre-tax settlement loss in the fourth quarter of 2020, which will be non-cash. These actionsdetermined based on the rate of acceptance. The settlement loss, if triggered, would be recognized as a non-operating benefit cost.aggregatedenominator for diluted EPS using the treasury stock method.Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 Basic shares 511 511 509 510 Effect of dilutive securities 7 9 8 10 Diluted shares 518 520 517 520 expectedexposed to provide future annual pretax savingsthe 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 approximately $950 million. The savingsthe appropriate trade-off between risk, opportunity and costs.actions will impactexposures.marketing and administrative expenses,interest expense, net, and researchare primarily related to forecasted third-party sales denominated in foreign currencies, forecasted intra-company sales denominated in foreign currencies, and development expenses. Approximately 85 percentanticipated issuances of debt, respectively.expected annual pretax savingshedged item, which are expectedalso recognized in earnings. Fair value hedges are classified in interest expense, net, as they hedge the interest rate risk associated with certain of our fixed-rate debt.realized by the end of 2018,deferred and are recognized consistent with the remainder byloss or income recognition of the end of 2020.Referunderlying 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 Note 7 in Item 1 for additional information regarding the company’s business optimization initiatives.Net Interest ExpenseNet interest expense was $14 million and $41 million inearnings. In the third quarter and first nine months of 2017, respectively, and $142020, we terminated an interest rate contract with a notional amount of $50 million for a $7 million cash payment. In October 2020, we terminated additional interest rate contracts with a notional balance of $350 million and $53a liability fair value of $109 million as of September 30, 2020 for $100 million in cash payments. The losses relating to these terminations continue to be deferred and will be recognized consistent with the third quarter and first nine monthsunderlying hedged item, interest expense on the future issuance of 2016, respectively. The decreasedebt.2017 was primarily driven by lower outstanding debt as a result2020 or 2019 resulting from changes in our assessment of the first quarter 2016 debt-for-equity exchanges which extinguished $3.65 billion of debt as well as reduced coupon rates relatedprobability that the hedged forecasted transactions would occur.third quarter 2016 debt issuance, partially offset by lower interest capitalized on assets under construction. See Note 8 within Item 1 for additional details aboutcumulative fair value adjustment to the debt extinguishments.Other (Income) Expense, NetOther (income) expense, net was incomehedged item at the date of $12 million and expensetermination is amortized to earnings over the remaining term of $10 million in the third quarter and first nine months of 2017, respectively, and expense of $44 million and income of $4.3 billion in the third quarter and first nine months of 2016, respectively. Special itemshedged item. There were 0 fair value hedges terminated during the periods presented included the $4.4 billion net realized gain on the Baxalta Retained Shares transactions in2016,2020 or 2019.$101 million debt extinguishment loss in the first quarter of 2016, the $48 million debt extinguishment loss in the third quarter of 2016, and the $33 million loss on the deconsolidation of the company’s Venezuelan subsidiary inforeign investments that were being hedged. In the second quarter of 2017. Excluding the impact2019, we dedesignated €1.2 billion of special items, other (income) expense,forward contracts designated as a net had higher income in the third quarterinvestment hedge of 2017 and lower income inour European operations. There were no net investment hedges terminated during the first nine months of 2017 as compared2020.2016. Higher income inhedge earnings from the third quarter of 2017 was the resulteffects of foreign currency fluctuations principally relatedexchange relating to intercompanycertain of our intra-company and third-party receivables payables and monetary assetspayables denominated in a foreign currency. Lower incomeThese derivative instruments are generally not formally designated as hedges and the terms of these instruments generally do not exceed one month.firstthree months ended September 30, 2020 and 2019.Gain (loss) recognized in OCI Location of gain (loss)
in income statementGain (loss) reclassified from AOCI into income (in millions) 2020 2019 2020 2019 Cash flow hedges Interest rate contracts $ 31 $ (57) Interest expense, net $ 0 $ 0 Foreign exchange contracts (6) 4 Cost of sales (2) 2 Net investment hedges (103) 96 Other (income) expense, net 0 0 Total $ (78) $ 43 $ (2) $ 2 Location of gain (loss) in income statement Gain (loss) recognized in income (in millions) 2020 2019 Undesignated derivative instruments Foreign exchange contracts Other (income) expense, net $ 7 $ (4) Gain (loss) recognized in OCI Location of gain (loss)
in income statementGain (loss) reclassified from AOCI
into income(in millions) 2020 2019 2020 2019 Cash flow hedges Interest rate contracts $ (144) $ (91) Interest expense, net $ 0 $ 0 Foreign exchange contracts 1 4 Cost of sales 2 3 Net investment hedges (104) 74 Other (income) expense, net 0 0 Total $ (247) $ (13) $ 2 $ 3 Location of gain (loss)
in income statementGain (loss) recognized in income (in millions) 2020 2019 Undesignated derivative instruments Foreign exchange contracts Other (income) expense, net $ 22 $ (16) 2017 was attributableSeptember 30, 2020, $7 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.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 Interest rate contracts Other non-current assets $ 0 Other non-current liabilities $ 179 Foreign exchange contracts Prepaid expenses and other current assets 3 Accounts payable and accrued liabilities 3 Total derivative instruments designated as hedges 3 182 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other current assets 12 Accounts payable and accrued liabilities 9 Total derivative instruments $ 15 $ 191 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 Interest rate contracts Other non-current assets $ 10 Other non-current liabilities $ 52 Foreign exchange contracts Prepaid expenses and other current assets 10 Accounts payable and accrued liabilities 0 Total derivative instruments designated as hedges 20 52 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other current assets 1 Accounts payable and accrued liabilities 2 Total derivative instruments $ 21 $ 54 September 30, 2020 December 31, 2019 (in millions) Asset Liability Asset Liability Gross amounts recognized in the consolidated balance sheet $ 15 $ 191 $ 21 $ 54 Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet (5) (5) (11) (11) Total $ 10 $ 186 $ 10 $ 43 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 September 30, 2020 Balance as of December 31, 2019 Balance as of September 30, 2020 Balance as of December 31, 2019 Long-term debt $ 102 $ 103 $ 5 $ 6 Basis of fair value measurement (in millions) Balance as of September 30, 2020 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 $ 15 $ 0 $ 15 $ 0 Debt securities 5 0 5 0 Marketable equity securities 15 15 0 0 Total $ 35 $ 15 $ 20 $ 0 Liabilities Foreign exchange contracts $ 12 $ 0 $ 12 $ 0 Interest rate contracts 179 0 179 0 Contingent payments related to acquisitions 30 0 0 30 Total $ 221 $ 0 $ 191 $ 30 Basis of fair value measurement (in millions) Balance as of December 31, 2019 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 $ 11 $ 0 $ 11 $ 0 Interest rate contracts 10 0 10 0 Marketable equity securities 3 3 0 0 Total $ 24 $ 3 $ 21 $ 0 Liabilities Foreign exchange contracts $ 2 $ 0 $ 2 $ 0 Interest rate contracts 52 0 52 0 Contingent payments related to acquisitions 39 0 0 39 Total $ 93 $ 0 $ 54 $ 39 Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 Fair value at beginning of period $ 39 $ 27 $ 39 $ 32 Additions 0 0 4 0 Change in fair value recognized in earnings 1 0 (2) (4) Payments (10) 0 (11) (1) Fair value at end of period $ 30 $ 27 $ 30 $ 27 absencefinancial 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 dividendsSeptember 30, 2020 and December 31, 2019.Book values Fair values(a) (in millions) 2020 2019 2020 2019 Liabilities Short-term debt $ 0 $ 226 $ 0 $ 226 Current maturities of long-term debt and finance lease obligations 727 315 732 315 Long-term debt and finance lease obligations 5,760 4,809 6,472 5,156 Retained Shares received from Baxaltashort-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.2016Other non-current assets on our condensed consolidated balance sheets.recognized investment impairment losses in 2017.Segment EBITDAThe company usesSouth America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Our 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. from continuing operations before net interest expense, income tax expense, depreciation and amortization expense (Segment EBITDA), on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’sour business segments. Intersegment sales are eliminated in consolidation.Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 Net sales: Americas $ 1,549 $ 1,534 $ 4,455 $ 4,462 EMEA 777 730 2,262 2,179 APAC 646 587 1,775 1,682 Total net sales $ 2,972 $ 2,851 $ 8,492 $ 8,323 Americas $ 577 $ 595 $ 1,610 $ 1,715 EMEA 160 162 480 465 APAC 161 138 432 394 Total segment operating income $ 898 $ 895 $ 2,522 $ 2,574 Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 Total segment operating income $ 898 $ 895 $ 2,522 $ 2,574 Corporate and other (428) (392) (1,312) (1,338) Total operating income 470 503 1,210 1,236 Net interest expense 39 13 96 51 Other (income) expense, net 16 9 32 (8) Income before income taxes $ 415 $ 481 $ 1,082 $ 1,193 14 within 9 for additional information on Net Sales by GBU.12. Management’s Discussion and Analysis of Financial Condition and Results of Operationsfinancialour special items and the related impact by line item on our results for the three and nine months ended September 30, 2020 and 2019.Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 Gross Margin Intangible asset amortization expense $ (57) $ (48) $ (165) $ (136) — — (17) (31) (6) (10) (24) (39) — (8) (11) (25) (8) (7) (22) (17) — — (3) — Total Special Items $ (71) $ (73) $ (242) $ (248) Impact on Gross Margin Ratio (2.4 pts) (2.6 pts) (2.8 pts) (3.0 pts) Selling, General and Administrative (SG&A) Expenses $ 25 $ 10 $ 53 $ 50 — 3 7 8 2 — 18 — Total Special Items $ 27 $ 13 $ 78 $ 58 Impact on SG&A Ratio 0.9 pts 0.5 pts 0.9 pts 0.7 pts Research and Development (R&D) Expenses $ 1 $ 8 $ — $ 42 — 2 22 8 — — 1 — Total Special Items $ 1 $ 10 $ 23 $ 50 Impact on R&D Ratio 0.0 pts 0.4 pts 0.2 pts 0.6 pts Other Operating Expense (Income), net $ — $ — $ (17) $ — 1 — (2) (4) — (4) — (37) — (40) — (40) Total Special Items $ 1 $ (44) $ (19) $ (81) Income Tax Expense $ (25) $ (35) $ (73) $ (83) Total Special Items $ (25) $ (35) $ (73) $ (83) Impact on Effective Tax Rate (2.2 pts) (4.5 pts) (2.2 pts) (3.1 pts) segment. costs associated with our execution of programs to optimize our organization and cost structure on a global basis. These actions included streamlining our international operations, rationalizing our manufacturing facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. Our results in 2020 included business optimization charges of $32 million in the third quarter and $77 million in the first nine months. Our results in 2019 included business optimization charges of $28 million in the third quarter and $131 million in the first nine months. Additionally, we recognized a gain of $17 million in the first nine months of 2020 for property we sold in conjunction with our business optimization initiatives. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.Three months ended
September 30,Percent change (in millions) 2020 2019 At actual
currency ratesAt constant currency rates United States $ 1,244 $ 1,224 2 % 2 % International $ 1,728 1,627 6 % 5 % Total net sales $ 2,972 $ 2,851 4 % 4 % Nine months ended
September 30,Percent change (in millions) 2020 2019 At actual
currency ratesAt constant currency rates United States $ 3,588 $ 3,537 1 % 1 % International $ 4,904 4,786 2 % 5 % Total net sales $ 8,492 $ 8,323 2 % 3 % Three months ended September 30, Percent change (in millions) 2020 2019 At actual currency rates At constant currency rates Renal Care $ 955 $ 918 4 % 4 % Medication Delivery 680 701 (3) % (3) % Pharmaceuticals 540 527 2 % 1 % Clinical Nutrition 237 219 8 % 5 % Advanced Surgery 236 216 9 % 9 % Acute Therapies 177 130 36 % 35 % Other 147 140 5 % 4 % Total Baxter $ 2,972 $ 2,851 4 % 4 % Nine months ended September 30, Percent change (in millions) 2020 2019 At actual currency rates At constant currency rates Renal Care $ 2,744 $ 2,679 2 % 5 % Medication Delivery 1,982 2,024 (2) % (1) % Pharmaceuticals 1,552 1,575 (1) % (1) % Clinical Nutrition 676 639 6 % 7 % Advanced Surgery 628 646 (3) % (2) % Acute Therapies 519 391 33 % 35 % Other 391 369 6 % 7 % Total Baxter $ 8,492 $ 8,323 2 % 3 % factors impactingnonrecurring purchase from the segments’ financial results.RenalSegment EBITDAU.S. government and a 1% positive impact from foreign exchange rate changes, compared to the prior-year period. Those increases were partially offset by lower demand for inhaled anesthesia products as a result of lower hospital admission rates and reduced elective surgeries resulting from the COVID-19 pandemic. The decrease in the first nine months of 2020 was $226driven by lower demand for inhaled anesthesia products resulting from the COVID-19 pandemic and new competitive entrants for TransDerm Scop. Those impacts were partially offset by increased demand for our international pharmacy compounding services along with certain generic injectables and the nonrecurring purchase from the U.S. government.Three months ended September 30, 2020 % of net sales 2019 % of net sales $ change % change Gross margin $ 1,195 40.2 % $ 1,230 43.1 % $ (35) (2.8) % SG&A $ 601 20.2 % $ 627 22.0 % $ (26) (4.1) % R&D $ 123 4.1 % $ 144 5.1 % $ (21) (14.6) % Nine months ended September 30, 2020 % of net sales 2019 % of net sales $ change % change Gross margin $ 3,396 40.0 % $ 3,463 41.6 % $ (67) (1.9) % SG&A $ 1,819 21.4 % $ 1,869 22.5 % $ (50) (2.7) % R&D $ 386 4.5 % $ 439 5.3 % $ (53) (12.1) % $649income of $19 million in the third quarter and first nine months of 2017, respectively,2020, respectively. In the third quarter and $214first nine months of 2020, we recognized an expense of $1 million and $494a benefit of $2 million, respectively, as a result of the change in the estimated fair value of contingent consideration liabilities. Additionally, in the first nine months of 2020 we recognized a $17 million gain on the sale of property in conjunction with our business optimization initiatives. Other operating expense (income), net was income of $44 million and $81 million in the third quarter and first nine months of 2016,2019, respectively. The increase in 2017 was driven by lower research and development costsIn the third quarter of 2019, we recognized a benefit of $40 million related to insurance recoveries as the company realigned allocationsa result of research and development costs based on project spend attributable to segments, higher gross marginslosses incurred due to product mixHurricane Maria. In the three and lower marketing and administrative expenses as the Renal segment benefited from the company’s business optimization programs and continued focus on reducing discretionary spending. This growth was partially offset by unfavorable foreign currency.Hospital ProductsSegment EBITDA was $653nine months ended September 30, 2019, we recognized gains of $4 million and $1.821 billion$37 million, respectively, when our share of the proceeds under a cost-sharing agreement became realizable following the resolution of a dispute with an insurer related to a legacy product-related matter. Additionally, in the first nine months2017,2020, respectively, and $588$13 million and $1.673 billion$51 million in the third quarter and first nine months of 2016,2019, respectively. ThisThe increase in the third quarter and first nine months of 2020 was primarily driven by higher average debt outstanding as a result of the March 2020 issuance of $750 million of 3.75% senior notes due October 2025 and $500 million of 3.95% senior notes due April 2030. Additionally, interest expense, net increased in the first nine months of 2020 due to the May 2019 issuance of €750 million of 0.40% senior notes due May 2024 and €750 million of 1.3% senior notes due May 2029.Net sales Operating income (loss) Three months ended
September 30,Nine months ended
September 30,Three months ended
September 30,Nine months ended
September 30,(in millions) 2020 2019 2020 2019 2020 2019 2020 2019 Americas $ 1,549 $ 1,534 $ 4,455 $ 4,462 $ 577 $ 595 $ 1,610 $ 1,715 EMEA 777 730 2,262 2,179 160 162 480 465 APAC 646 587 1,775 1,682 161 138 432 394 Corporate and other — — — — (428) (392) (1,312) (1,338) Total $ 2,972 $ 2,851 $ 8,492 $ 8,323 $ 470 $ 503 $ 1,210 $ 1,236 marketinggross profit as a result of an unfavorable product mix and administrative expensesincremental logistics costs due to the impact of the COVID-19 pandemic. The decrease in operating profit in the first nine months of 2020 was primarily driven by decreased sales in multiple GBUs, particularly Medication Delivery, Pharmaceuticals and Advanced Surgery, and lower gross profit as cost savingsa result of an unfavorable product mix and incremental logistics costs due primarily to the impact of the COVID-19 pandemic. The decreases were realized from the company’s business optimization programs and continued focus on reducing discretionary spending. This growth was partially offset by higher researchfavorable performance in Acute Therapies and development costsClinical Nutrition as well as the company realigned allocationsacquisition of researchSeprafilm.development costs basedoperating income were $777 million and $160 million, respectively, in the third quarter and $2.3 billion and $480 million, respectively, in the first nine months of 2020. Segment net sales and operating income were $730 million and $162 million, respectively, in the third quarter and $2.2 billion and $465 million, respectively, in the first nine months of 2019. The change in foreign exchange rates had a positive impact on project spend attributableresults in the third quarter of 2020 as compared to segments2019. On a constant currency basis, operating profit increased in both the third quarter and unfavorable foreign currency.otherincomeitems are maintained at Corporate and expense amounts are not allocated to a segment. These amounts are detailed in the table in Note 14 within Item 1 andThey primarily include net interest expense, foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of thecertain foreign currency hedging activities, corporate headquarters costs, certain R&D costs, certain GBU support costs, stock compensation expense, non-strategic investments and related income and expense, certain employee benefit plan costs, as well asand certain nonrecurring gains, and losses, and other charges (such as business optimization, acquisition and integration and separation-related costs, intangible asset amortization and asset impairments).Income Taxescompany’s effective income tax rate for continuing operations was 14.5% and 0.8%operating loss in the third quarter was higher than the prior-year period primarily due to higher intangible asset amortization expenses and 15.0%business optimization charges in the current year and (1.1%)prior-year gains recognized for Hurricane Maria insurance recoveries. The operating loss in the first nine months of 2017 and 2016, respectively. The company’s effective income tax rate differs from2020 was lower than the U.S. federal statutory rate each yearprior-year period due to certain operations that are subject to tax incentives, statelower business optimization charges and local taxes,lower intangible asset impairment charges in the current-year period, partially offset by insurance recoveries received in 2019 from a legacy product-related matter and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.The effective income tax rate for continuing operations during the three months ended September 30, 2017 increased from the three months ended September 30, 2016, due to the inclusion in 2016 of restructuring and other charges incurred in higher tax rate jurisdictionsHurricane Maria, as well as the favorable impact of discrete items including the partial settlement of an on-going income tax matterhigher investigation and related to the company’s Turkish operationscosts and the settlement of a transfer pricing audit related to the company’s Italian operations. Windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the company’s stock compensation programs partially offset the increase from the prior period as such benefits are now reflected as a tax benefit as a result of the company’s adoption of ASU 2016-09 in 2017. The effective income tax rate for continuing operations increased during the nine months ended September 30, 2017 due to the items noted above as well as the absenceintangible asset amortization in the current year of the tax-free net realized gains associated with the Baxalta Retained Sharetransactions, which included debt-for-equity exchanges, the contribution of Baxalta Retained Shares to the company’s U.S. pension plan and the exchange of Baxalta Retained Shares for shares of the company, as well as benefits attributable to closing an IRS and German income tax audit that were all reflected during the nine months ended September 30, 2016. The effective income tax rate for continuing operations during the nine months ended September 30, 2017 was favorably impacted by approximately 5.2 percentage points due to tax windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the company’s stock compensation programs. Income from Continuing Operations and Earnings per Diluted ShareIncome from continuing operations was $248 million and $127 million for the three months ended September 30, 2017 and 2016, respectively, and $785 million and $4.7 billion for the nine months ended September 30, 2017 and 2016, respectively. Income from continuing operations per diluted share was $0.45 and $0.23 for the three months ended September 30, 2017 and 2016, respectively, and $1.42 and $8.56 for the nine months ended September 30, 2017 and 2016, respectively. The significant factors and events contributing to the changes are discussed above.Income (loss) from Discontinued OperationsDiscontinued operations were insignificant for both periods presented. Refer to Note 2 within Item 1 for additional information regarding the separation of Baxalta.flowflows for the nine monthnine-month periods ended September 30, 20172020 and 2016.2019.Nine months ended September 30, (in millions) 2020 2019 Cash flows from operations - continuing operations $ 1,158 $ 1,281 Cash flows from investing activities Cash flows from investing activities (915) (679) Cash flows from financing activities 798 614 Operatingfrom continuing operations increasedby $7 million for the nine months ended September 30, 2020. In October 2020, we terminated additional interest rate derivative contracts with a notional balance of $350 million and a liability fair value of $109 million as of September 30, 2020 for $100 million in cash payments, which will be reflected as operating cash outflows in the fourth quarter of 2020.2017 as compared2020, the timing of collection of our receivables may be adversely impacted by the COVID-19 pandemic during the remainder of 2020 and into 2021.prior year period. The increase was driven byU.S. rights to multiple products we acquired.factors discussed below.Net IncomeNet income,first nine months of 2020, cash generated from financing activities included $1.2 billion of net proceeds from the issuance of $750 million of senior notes due in 2025 and $500 million of senior notes due in 2030. We have used the net proceeds from the senior notes issuances for general corporate purposes, including to strengthen our balance sheet as adjusted for certain non-cash items, such as depreciation and amortization, net periodic pension benefit and OPEB costs, stock compensation, deferred income taxes and other items increaseda precautionary measure in light of the COVID-19 pandemic. Cash generated from financing activities in the nine months ended September 30, 2017 compared to 2016. Additionally, non-cash items in the nine months ended September 30, 20162020 also included net realized gains of $4.4 billion related to the debt-for-equity exchanges of Baxalta Retained Shares for certain company indebtedness and for the equity-for-equity exchange.Accounts ReceivableCash inflows from accounts receivable were $32 million in the first nine months of 2017 compared to an inflow of $22 million in the prior year. Days sales outstanding in the current year were comparable to the prior year. InventoriesCash outflows relating to inventories decreased in 2017 as compared to the prior-year period. The following is a summary of inventories as of September 30, 2017 and December 31, 2016, as well as annualized inventory turns for the first nine months of 2017 and 2016, by segment.The increase in inventories was driven primarily by timing of purchases and longer sourcing lead times for certain products within the Renal segment portfolio, coupled with the acquisition of Claris in the Hospital Products segment.OtherThe changes in accounts payable and accrued liabilities were a $36 million outflow in the first nine months of 2017 compared to a $326 million outflow in the first nine months of 2016. The changes were primarily driven by a first quarter 2016 non-recurring $303 million tax settlement payment to partially settle a U.S. Federal income tax audit as well as the timing of supplier payments.Payments related to the execution of the company’s business optimization initiatives increased from $98 million in the first nine months of 2016 to $114 million in the first nine months of 2017. The company made payments of $21 million in the first nine months of 2016 related to the execution of the COLLEAGUE infusion pump and SIGMA SPECTRUM infusion pump recalls. Refer to Note 7 within Item 1 for further information regarding the company’s business optimization initiatives.Changes in other balance sheet items include an outflow of $93 million and an inflow of $121 million in the first nine months of 2017 and 2016, respectively, primarily driven by the collection of a tax receivable in the second quarter of 2016.Cash Flows from Investing Activities — Continuing OperationsCapital ExpendituresCapital expenditures were $410 million and $519 million in the first nine months of 2017 and 2016, respectively. The company’s capital expenditures in 2017 were driven by targeted investments in projects to support production of PD and IV solutions.Acquisitions and InvestmentsCash outflows relating to acquisitions and investments of $680 million in the first nine months of 2017 were primarily driven by the $629 million acquisition of Claris, the acquisition of the rights to Clindamycin Saline and Clindamycin Dextrose from Celerity and the acquisition of Wound Care Technologies, Inc. Cash outflows relating to acquisitions and investments of $47 million in the first nine months of 2016 were driven primarily by the acquisition of the rights to Vancomycin from Celerity.Divestitures and Other Investing ActivitiesCash inflows from divestitures and other investing activities in 2017 and 2016 were not significant. Cash Flows from Financing ActivitiesDebt Issuances, Net of Payments of ObligationsNet cash inflows related to debt and other financing obligations totaled $633 million for the first nine months of 2017 primarily related to the issuance of €600 million of senior notes at a fixed coupon rate of 1.30% due in May 2025.Net cash outflows related to debt and other financing obligations totaled $58 million for the first nine months of 2016 primarily related to a $190 million repayment of the company’s 0.95% senior unsecured notes that matured in June 2016, a $130 million repayment of the company’s 5.9% senior unsecured notes that matured in September 2016, and the redemption of approximately $1 billion inaggregate principal amount of senior notes in September 2016, as well as other short-term obligations. The company also had $300 million of net repayments related to its commercial paper program. This was partially offset by issuances of debt totaling $1.6 billion of senior notes in August 2016. See Note 8 within Item 1 for additional details regarding the debt transactions in the first nine months of 2016.Other Financing ActivitiesCash dividend payments totaled $228 million and $197 million in the first nine months of 2017 and 2016, respectively. The increase in cash dividend payments was primarily due to an increase in the quarterly dividend rate from $0.115 to $0.13 per share for quarterly dividends declared between May 2016 and May 2017. In addition, the company increased the quarterly dividend rate from $0.13 to $0.16 per share for quarterly dividends declared beginning in May 2017. Proceeds from stock issued under employee benefit plans increased from $251of $180 million inand was partially offset by the repayment of borrowings under our Euro-denominated credit facility of €200 million ($225 million) and dividend payments of $348 million. In the first nine months of 2016 to $2982019, cash generated from financing activities included $1.7 billion of net proceeds from the issuance of €750 million of senior notes due in the first nine months2024 and €750 million of 2017, primarilysenior notes due to increased option exercises in the first nine months2029 along with stock issued under employee benefit plans of 2017.the company repurchases itswe repurchase our stock depending upon the company’sour cash flows, net debt levellevels and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of the company’sour common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016. The company paid $275 million2016 and February 2018, by an additional $2.0 billion in cash toNovember 2018 and by an additional $1.5 billion in October 2020. We did not repurchase approximately 4.7 millionany shares pursuant tounder this authority in the first nine months of 20172020 and had $1.4 billion$897 million remaining available under this authorization as of September 30, 2017. In2020. After giving effect to the first nine monthsOctober 2020 approval, we had $2.4 billion remaining under this authority as of 2016,October 29, 2020. We expect to recommence our share repurchase activity in the company paid $45 million in cash to repurchase shares. In the first nine monthsfourth quarter of 2016, the company executed an equity-for-equity exchange of Baxalta Retained Shares for 11.5 million outstanding Baxter shares.2017, the company’s2020, our U.S. dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $1.5$2.0 billion and approximately €200 million, respectively. There was no amount outstanding under our U.S. dollar-denominated and Euro-denominated credit facilities as of September 30, 2020. There was €200 million ($224 million) outstanding at a 0.91% interest rate under our Euro-denominated credit facility and no amount outstanding under our U.S. dollar-denominated credit facility as of December 31, 2019. As of September 30, 2017, the company was2020, we were in compliance with the financial covenants in these agreements. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment.The company intends and Credit RatingsThe companyWe had $3.5$4.4 billion of cash and cash equivalents as of September 30, 2017,2020, with adequate cash available to meet operating requirements in each jurisdiction in which the company operates. The company invests itswe operate. We invest our excess cash in certificates of deposit and money market and other funds and diversifiesdiversify the concentration of cash among different financial institutions.The company’s As of September 30, 2020, we had approximately $6.5 billion of long-term debt and finance lease obligations, including current maturities. Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure.the company’sour products or in the solvency of itsour customers or suppliers, deterioration in the company’sour key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, the company believes it haswe believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support the company’sour growth objectives.The company continues Between March and July 2020, Standard & Poor’s, Fitch, and Moody’s reaffirmed our investment grade credit ratings that we disclosed in our 2019 Annual Report.do business with foreign governments in certain countries, including Greece, Spain, Portugalsubmit the rates required to calculate the London Interbank Offered Rate (LIBOR) and Italy,other interbank offered rates, which have experienced a deterioration in creditbeen widely used as reference rates for various securities and economic conditions. Asfinancial contracts, including loans, debt and derivatives. This announcement indicates that the continuation of September 30, 2017,LIBOR on the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $151 million.While these economic conditions havecurrent basis is not significantly impacted the company’s ability to collect receivables, global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delaysguaranteed after 2021. Regulators in the collectionU.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). Currently, our credit facilities and certain of receivablesour derivative instruments reference LIBOR-based rates. The discontinuation of LIBOR will require these arrangements to be modified in order to replace LIBOR with an alternative reference interest rate, which could impact our cost of funds. Our credit facilities include a provision specifying that we and credit losses.Credit RatingsThe company’s credit ratings at September 30, 2017 were as follows.Standard & Poor’sFitchMoody’sRatingsSenior debtA-BBB+Baa2Short-term debtA2F2P2OutlookStableStableStablethe company’sour significant accounting policies is included in Note 1 to the company’sour consolidated financial statements in the 2016our 2019 Annual Report. Certain of the company’sour accounting policies are considered critical, as these policies are the most important to the depiction of the company’sour financial statements and require significant, difficult or complex judgments, 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 the 2016our 2019 Annual Report. There have been no significant changes in the company’s application of itsour critical accounting policies during the first nine months of 2017.LEGAL CONTINGENCIES131 in Item 1 of this Quarterly Report on Form 10-Q for information regarding recently adopted 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.the company’sour legal contingencies. Upon resolution of any of these uncertainties, the companywe may incur charges in excess of presently established liabilities. While theour liability of the company 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 the company’sour 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 the company’sour consolidated financial position. While the company believeswe believe that it haswe have valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the companywe may in the future incur material judgments or enter into material settlements of claims.onin July 27, 2017, immediately prior to the closing of the Claris acquisition. FDA completed the inspection on August 4, 2017, at which time FDAand subsequently issued a related Form-483 (Claris 483). The Claris 483 includes a number ofWarning Letter based on observations across a variety of areas. The company submitted its timely response to the Claris 483 and isidentified in the process of implementing2017 inspection (Claris Warning Letter).1which have included product recalls that are financially immaterial to the company, to address FDA’s prior observations and other items identified in connection with integrating Claris into the company’sour quality systems.In January 2014,companyClaris Warning Letter will be lifted, management continues to pursue and implement other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S. in the meantime. As of December 31, 2019, we have secured alternative locations to produce a majority of the planned new products for distribution into the U.S.Letter from FDA primarily directedLetter. We responded to quality systems for the company’s Round Lake, Illinois, facility, particularlyShow Cause Notice and a follow up inspection occurred in that facility’s capacity asJuly 2019. This matter resulted in a specification developertwo-day suspension order for certain of the company’s medical devices.manufacturing operations, which occurred on March 19 and 20, 2020. This Warning Letter was lifted in February 2017.The company received a Warning Letter in December 2013 that included observations related to the company’s ambulatory infuser business in Irvine, California, which previously had been subject to agency action. This Warning Letter was lifted in May 2017.the companywe received a Warning Letter from FDA regarding operations and processes at itsour North Cove, North Carolina and Jayuya, Puerto Rico facilities. The companyWe attended Regulatory Meetings with the FDA regarding one or both of these facilities in October 2014, November 2015, (concerning the Jayuya facility). The company also requestedJuly 2017, April 2018 and participated in a Regulatory Meeting regarding both facilities in July 2017.October 2018. The Warning Letter addresses observations related to Current Good Manufacturing Practice violations at the two facilities.In June 2010, the company received a Warning Letter from FDA in connection with an inspection of its McGaw Park, Illinois facility, which previously supported the Renal franchise. The company’s Round Lake facility now provides the related capacity for the Renal franchise. The Warning Letter pertains towas closed out in September 2019.processesfourth quarter of 2012, we received two investigative demands from the United States Attorney for the Western District of North Carolina for information regarding our quality and manufacturing practices and procedures at our North Cove facility. In January 2017, the parties resolved the matter by which the company analyzesentering into a deferred prosecution agreement and addresses product complaints through corrective and preventative action, and reports relevant information to FDA. This Warning Letter was lifted in February 2017.On October 9, 2014, the company had a Regulatory Meeting with FDA to discuss the Warning Letters described above. At the meeting, the companycivil settlement whereby we agreed to work closely with FDA to provide regular updatespay approximately $18 million and implement certain enhanced compliance measures. In July 2019, the deferred prosecution agreement expired and, based on its progress to meet all requirements and resolve all matters identifiedour fulfillment of the terms of the agreement, the court dismissed the criminal information previously filed in the Warning Letters described above.Please see Item 1A of the 2016 Annual Report and Item case with prejudice. of Part II of this Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htmfor additional discussion of regulatory matters and how they may impact the company.FORWARD-LOOKING INFORMATIONThis quarterly reporton 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,the company’sour R&D pipeline, strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, the company’sour exposure to financial market volatility and foreign currency and interest rate risks, potential tax liabilityliabilities associated with the separation of the company’sour biopharmaceuticals andbusiness from our medical products businesses, (including the 2016 disposition of the company’s Retained Shares in Baxalta), the impact of competition, future sales growth, business development activities (including the recent acquisitionacquisitions of Claris Injectables in July 2017)Cheetah and Seprafilm), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the sufficiency of the company’sour facilities and financial flexibility, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.the company’sour experience and perception of historical trends, current conditions, and expected future developments as well as other factors that the company believeswe believe are appropriate in the circumstances. While these statements represent the company’s currentour judgment on what the future may hold, and the company believeswe believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:failure to achieve our long-term financial improvement goals;• product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales; • the impact of global economic conditions (including potential trade wars) and continuing public health crises and epidemics, such as the novel strain of coronavirus (COVID-19), including related resurgences, on us and our customers and suppliers, including foreign governments in countries in which we operate; • 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); product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales;U.S. Department of JusticeSEC, DOJ or the New York Attorney General)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;the company’sour quality, compliance andor ethics programs;future actions of third parties, including third-party payers, as healthcare reform and other similar measures are implemented, modified or repealed in the United States and globally;• future actions of third parties, including third-party payers, the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, the European Union’s General Data Protection Regulation and proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S. end stage renal disease market and demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures, which are difficult to estimate in advance); • • failure to achieve our long-term financial improvement goals; the impact of ongoing U.S. healthcare reform and other similar actions undertaken by foreign governments with respect to pricing, reimbursement, taxation and rebate policies;additional legislation, regulation and other governmental pressures in the United States or globally, which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of the company’s business;the company’s ability to identify business development and growth opportunities and to successfully execute on business development strategies;the company’s ability to finance and develop new products or enhancements, on commercially acceptable terms or at all;the availability and pricing of acceptable raw materials and component supply;inability to create additional production capacity in a timely manner or the occurrence of other manufacturing or supply difficulties (including as a result of natural disaster or otherwise);the impact of any future tax liability with respect to the separation and distribution, including with respect to disposition of the Retained Shares;any failure by Baxalta or Shire to satisfy its obligation under the separation agreements, including the tax matters agreement, or the company’s letter agreement with Shire and Baxalta;the company’sour 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 the company’sour manufacture, sale or use of affected products or technology;global economic conditionsany goodwill or other intangible asset impairments on the company and its customers and suppliers, including foreign governments in certain countries in which the company operates;our operating results;which may be a part of comprehensive tax reform;and potential taxes associated with the Base Erosion and Anti-Abuse Tax;breaches or failures of the company’s information technology systems;the outcome of pending or future litigation;the adequacy of the company’s cash flows from operations to meet its ongoing cash obligations and fund its investment program; andSecurities and Exchange Commission,SEC, including those factors described in Item 1A of the company’sour Annual Report on Form 10-K for the year ended December 31, 2016,2019, all of which are available on the company’sour website.The company doesWe do not undertake to update itsour forward-looking statements.The company isNew Zealand Dollar. The company manages itsSwedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows the companyus to net exposures and take advantage of any natural offsets. In addition, the company useswe use derivative and nonderivative financial instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and stockholders’ equity volatility relating to foreign exchange. However, we don't hedge our entire foreign exchange exposure and are still subject to earnings and stockholders' equity volatility relating to foreign exchange risk. Financial market and currency volatility may limit the company’sour ability to cost-effectively hedge these exposures.The company mayforwards and cross-currency swapsforwards to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities.liabilities denominated in foreign currencies. The maximum term over which the company haswe have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions as of September 30, 20172020 is 1512 months. The companyWe also entersenter into derivative instruments to hedge foreign exchange risk on certain intercompanyintra-company and third-party receivables and payables and debt denominated in foreign currencies.itsour risk-management program, the company performswe perform sensitivity analyses to assess potential changes in the fair value of itsour foreign exchange instrumentscontracts relating to hypothetical and reasonably possible near-term movements in foreign exchange rates.option and forward contracts outstanding atas of September 30, 2017,2020, while not predictive in nature, indicated that if the U.S. Dollar uniformly weakened by 10% against all currencies, on a net-of-tax basis, the net pre-tax asset balance of $5$3 million with respect to those contracts would decreaseincrease by $23 million, resulting in a net liability position.option and forward contracts outstanding atas of September 30, 20172020 by replacing the actual exchange rates atas of September 30, 20172020 with exchange rates that are 10% weaker compared to the actual exchange rates for each applicable currency. All other factors are held constant. TheThese sensitivity analysis disregardsanalyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analysisanalyses also disregardsdisregard the offsetting change in value of the underlying hedged transactions and balances.20162019 Annual Report. There were no significant changes duringDuring the quarter ended September 30, 2017.
2020, we terminated an interest rate contract with a notional balance of $50 million for a $7 million cash payment. In October 2020, we terminated additional interest rate contracts with a notional balance of $350 million and a liability fair value of $109 million as of September 30, 2020 for $100 million in cash payments.Baxter carried out an evaluation, under the supervision andits Disclosure Committee and management, including theour Chief Executive Officer and our Chief Financial Officer, ofhas evaluated the effectiveness of Baxter’sour disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of September 30, 2017. 2020.concludedas appropriate, to allow timely decisions regarding required disclosure.company’s disclosurecorrect rates were captured and are being used in our financial systems.procedures were effectivehave fully implemented the above remediation actions. However, while we believe that those actions will remediate the material weakness, we intend toSeptember 30, 2017.Changesand for the periods presented in accordance with U.S. GAAP.related to its overall business optimization initiatives, the company began implementation ofwe have been implementing a long-term business transformation project within the finance, human resources, purchasing and information technology functions which will further centralize and standardize business processes and systems across the company. The company isWe are transitioning some processes to itsour shared services centers while others are movinghave been moved to outsourced providers. This multi-year initiative will beis being conducted in phases and includeincludes modifications to the design and operation of controls over financial reporting.WithBaxter’sour internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 20172020 that have materially affected, or are reasonably likely to materially affect, Baxter’sour internal control over financial reporting.RegisteredRegistered Public Accounting Firminformationstatements included in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 20172020 and 20162019 has been performed by PricewaterhouseCoopers LLP, the company’sour independent registered public accounting firm. Its report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and, therefore, the independent accountants’ liability under Section 11 does not extend to it.RegisteredRegistered Public Accounting FirmShareholdersStockholders of Baxter International Inc. accompanying condensed consolidated balance sheet of Baxter International Inc. and its subsidiaries(the “Company”) as of September 30, 2017,2020, and the related condensed consolidated statements of income, and of comprehensive income and changes in equity for the three-month and nine-month periods ended September 30, 20172020 and 20162019, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 20172020 and 2016. These2019,including the related notes, appearing under Part I, Item 1 of this Quarterly Report on Form 10-Q (collectively referred to as the “interim financialstatements”).Based on our reviews, we are not aware of any material modifications that should be made to the interim financial statements arereferred to abovefor them to be in conformity with accounting principles generally accepted in the responsibilityUnited States of the Company’s management.conducted our reviewhave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)., the consolidatedbalance sheet of the Company as of December 31, 2019, and the related consolidated statements of income, comprehensive income, changes in equityand cash flowsfor the year then ended (not presented herein), and in our report dated March 17, 2020, which includeda paragraph regarding the correction of misstatements in the 2018 and 2017 financial statements and a paragraph describing a change in the manner of accounting for leases in 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the condensed consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income, of comprehensive income, of cash flows and of changes in equity for the year then ended (not presented herein), and in our report dated February 23, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.November 2, 2017
October 29, 2020Item 1.136 is incorporated herein by reference.The following table includes information about the company’s common stock repurchases during the three-month period ended September 30, 2017.(1)In July 2012, the companywe announced that its boardour Board of directorsDirectors authorized the companyus to repurchase up to $2.0 billion of itsour common stock on the open market or in private transactions. The boardBoard of directorsDirectors increased this authority by an additional $1.5 billion in each of November 2016.2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. During the third quarterfirst nine months of 2017, the company repurchased 2.92020, we did not repurchase any shares pursuant to Rule 10b5-1 plans. We had $897 million shares for $180 millionremaining under this program. $1.4 billion remained availableprogram (as amended and after giving effect to stock repurchases) as of September 30, 2017.2020. After giving effect to the October 2020 approval, we had $2.4 billion remaining under this program as of October 29, 2020. This program does not have an expiration date.Exhibit Index:ExhibitNumberDescriptionExhibit
NumberDescription 10.1 10.2 10.3 10.4* 15* 101.LAB* 101.LAB*101.PRE* 101.PRE*101.DEF* 101.DEF**BAXTER INTERNATIONAL INC. Date: October 29, 2020 Date: November 2, 2017By: By:
Executive Vice President and Chief Financial Officer
(duly authorized officer and principal financial officer)45