BAXTER INTERNATIONAL INC

Previous wording

Refer to our Annual Report on Form 10-K for the year ended December 31, 2023 (2023 Annual Report) for management’s discussion and analysis of our financial condition and results of operations. The following is management’s discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2024 and 2023.

Current wording

Refer to our Annual Report on Form 10-K for the year ended December 31, 2023 (2023 Annual Report) for management’s discussion and analysis of our financial condition and results of operations. The following is management’s discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2024 and 2023.

Previous wording

Proposed Separation of Kidney Care Business

Current wording

Pending Sale of Kidney Care Business

Previous wording

Since the initial announcement of the proposed separation of our Kidney Care business, we have incurred significant separation-related costs that have adversely impacted our earnings and cash flows. We expect to continue to incur significant separation costs, which will continue to adversely impact our earnings and cash flows, until the proposed separation is completed. Additionally, if the proposed separation is completed, we expect to incur some amount of dis-synergies due to the reduced size of our company and, as a result, we will need to undertake various actions to help ensure that our cost structure is appropriate to support our remaining businesses.

Current wording

Since the initial announcement of the proposed separation of our Kidney Care business (which is now structured as a pending sale), we have incurred significant separation-related costs, which are reflected in discontinued operations, that have adversely impacted our earnings and cash flows. We expect to continue to incur significant separation costs, which will continue to adversely impact our earnings and cash flows, in connection with the pending sale transaction. Additionally, upon completion of the pending sale transaction, we expect to incur some amount of dis-synergies due to the reduced size of our company and, as a result, we will need to undertake various actions, including cost savings initiatives, to help ensure that our cost structure is appropriate to support our remaining businesses.

Previous wording

There can be no guarantees that the proposed separation or our cost savings initiatives will be completed in the manner or over the timeframe described above, or at all.

Current wording

There can be no guarantees that the pending sale of our Kidney Care business or our proposed cost savings initiatives will be completed in the manner or over the timeframe described above, or at all, or that they will achieve their intended results.

Previous wording

In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Under this new operating model, our business is comprised of four segments: Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals, and Kidney Care (which we are planning to divest through either a sale or spinoff, as discussed above). Our segments were changed during the third quarter of 2023 to align with our new operating model and prior period segment disclosures have been revised to reflect the new segment presentation. See Note 16 in Item 1 of this Quarterly Report on Form 10-Q for additional information.

Current wording

In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Under this new operating model, our business is currently comprised of four segments: Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals, and Kidney Care (which we are planning to divest through the pending sale and accordingly, the results are reported in discontinued operations as discussed in Note 1 in Item 1 of this Quarterly Report on Form 10-Q). Our segments were changed during the third quarter of 2023 to align with our new operating model. See Note 16 in Item 1 of this Quarterly Report on Form 10-Q for additional information. As discussed above, we have entered into the EPA to sell our Kidney Care business in a transaction that is currently expected to close in late 2024 or early 2025, subject to the receipt of customary regulatory approvals and satisfaction of other closing conditions.

Previous wording

On September 29, 2023, we completed the sale of our BioPharma Solutions (BPS) business and received cash proceeds of $3.96 billion from that transaction. The results of operations and cash flows of our BPS business for the three and six months ended June 30, 2023 are reported as discontinued operations in the accompanying condensed consolidated financial statements. We intend to use substantially all of the after-tax proceeds from this transaction to repay certain of our debt obligations, including $514 million of commercial paper borrowings and $2.28 billion of long-term debt that we repaid during the fourth quarter of 2023, as well as €750 million of senior notes that we repaid during the second quarter of 2024. See Note 2 in Item 1 of this Quarterly Report on Form 10-Q for additional information.

Current wording

On September 29, 2023, we completed the sale of our BioPharma Solutions (BPS) business and received cash proceeds of $3.96 billion from that transaction. The results of operations and cash flows of our BPS business for the three and nine months ended September 30, 2023 are reported as discontinued operations in the accompanying condensed consolidated financial statements. We used substantially all of the after-tax proceeds from this transaction to repay certain of our debt obligations, including $514 million of commercial paper borrowings and $2.28 billion of long-term debt that we repaid during the fourth quarter of 2023, as well as €750 million of senior notes that we repaid during the second quarter of 2024. See Note 2 in Item 1 of this Quarterly Report on Form 10-Q for additional information.

Previous wording

We have experienced significant challenges to our global supply chain (which we experienced most acutely in 2022), including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices), and higher transportation costs, resulting from the COVID-19 pandemic and other exogenous factors including significant weather events, elevated inflation levels, increased interest rates, disruptions to certain ports of call and access to shipping ports around the world, the war in Ukraine, the conflict in the Middle East (including attacks on merchant ships in the Red Sea), tensions amongst China, Taiwan, and the U.S., and other geopolitical events. Due to the nature of our products, which include dense consumable medical products such as IV fluids, and the geographic locations of our manufacturing facilities, which often require us to transport our products long distances, we may be more susceptible to increases in freight costs and other supply chain challenges than certain of our industry peers. While we have seen meaningful improvements in the availability of certain component parts and improved pricing in certain raw materials and on certain transportation costs, these challenges may have a negative impact on our supply chain in future periods. These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for certain product categories (including those acquired in our December 2021 acquisition of Hill-Rom Holdings, Inc. (Hillrom)) due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future.

Current wording

In recent years, we have experienced significant challenges to our global supply chain, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices), higher transportation costs, adverse impacts from significant weather events (including Hurricane Helene and the flooding of our North Cove facility), elevated inflation levels and interest rates, disruptions to certain ports of call and access to shipping ports around the world, the war in Ukraine, the conflict in the Middle East, tensions amongst China, Taiwan, and the U.S., and other geopolitical events. While we have seen improvements in the availability of component parts and improved pricing in raw materials and on transportation costs, some of these challenges (including certain of those set forth above as we work to fully remediate our North Cove facility) are expected to have a negative impact on our results of operations in the future.

Previous wording

Our results of operations are also affected by macroeconomic conditions and levels of business confidence. The war in Ukraine, the conflict in the Middle East (including attacks on merchant ships in the Red Sea), tensions amongst China, Taiwan, and the U.S., and the sanctions and other measures being imposed in response to these conflicts (and the potential for escalation of these conflicts) have increased the levels of economic and political uncertainty and we continue to closely monitor the developing situations. While we have substantially completed our wind down efforts related to our business in Russia, a significant escalation or expansion of economic disruption or the current scope of the war in Ukraine could have an adverse effect on our operations (including our supply chain) in the region.

Current wording

Our results of operations are also affected by macroeconomic conditions and levels of business confidence. The war in Ukraine, the conflict in the Middle East, tensions amongst China, Taiwan, and the U.S., and the sanctions and other measures being imposed in response to these conflicts (and the potential for escalation of these conflicts) have increased the levels of economic and political uncertainty and we continue to closely monitor the developing situations. While we have substantially completed our wind down efforts related to our business in Russia, a significant escalation or expansion of economic disruption or the current scope of the war in Ukraine could have an adverse effect on our operations (including our supply chain) in the region.

Previous wording

The existence of high inflation rates in the United States and in many of the countries where we conduct business has resulted in, and may continue to result in, higher interest rates, shipping costs, labor costs, and other costs and expenses. Additionally, adverse changes in foreign currency exchange rates have increased, and could continue to increase, our costs of sourcing certain raw materials in some jurisdictions. We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses and we may not be able to pass these cost increases on to our customers in a timely manner or at all, which could have a material adverse impact on our profitability and results of operations. Inflation and general macroeconomic factors have caused certain of our customers to reduce or delay orders for our products and services and could cause them to do so in the future, which could have a material adverse impact on our sales and results of operations.

Current wording

The existence of high inflation rates in the United States and in many of the countries where we conduct business has resulted in, and may in the future result in, higher interest rates, shipping costs, labor costs, and other costs and expenses. Additionally, adverse changes in foreign currency exchange rates have increased, and could continue to increase, our costs of sourcing certain raw materials in some jurisdictions. We have experienced and may in the future experience inflationary increases in manufacturing costs and operating expenses and we may not be able to pass these cost increases on to our customers in a timely manner or at all, which could have a material adverse impact on our profitability and results of operations. Inflation and general macroeconomic factors have caused certain of our customers to reduce or delay orders for our products and services and could cause them to do so in the future, which could have a material adverse impact on our sales and results of operations.

Previous wording

As a medical products company, our operations and many of the products manufactured or sold by us are subject to extensive regulation by numerous government agencies, both within and outside the United States. These regulations (as described in Item 1, Government Regulation, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023) require that we obtain specific approval from the Food and Drug Administration (FDA) or applicable non-U.S. regulatory authorities before we can market and sell most of our products in a particular country. Failure to obtain or maintain those approvals or clearances could have a material adverse impact on our business (including with respect to our ability to compete in the product markets in which we currently operate). Furthermore, the FDA in the United States, the European Medicines Agency in Europe, the China Food and Drug Administration in China, and other government agencies, inside and outside of the United States, administer requirements covering the testing, safety, effectiveness, manufacturing, labeling, promotion and advertising, pricing, distribution, and post-market surveillance of our products. Our failure to comply with these requirements may subject us to various actions, including warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses, and may have a material adverse impact on our results of operations.

Current wording

As a medical products company, our operations and many of the products manufactured or sold by us are subject to extensive regulation by numerous government agencies, both within and outside the United States. These regulations (as described in Item 1, Government Regulation, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023) require that we obtain specific approval from the Food and Drug Administration (FDA) or applicable non-U.S. regulatory authorities before we can market and sell most of our products in a particular country. Failure to obtain or maintain those approvals or clearances (including temporary importation authorizations) could have a material adverse impact on our business (including with respect to our ability to compete in the product markets in which we currently operate). Furthermore, the FDA in the United States, the European Medicines Agency in Europe, the China Food and Drug Administration in China, and other government agencies, inside and outside of the United States, administer requirements covering the testing, safety, effectiveness, manufacturing, labeling, promotion and advertising, pricing, distribution, and post-market surveillance of our products. Our failure to comply with these requirements may subject us to various actions, including warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses, and may have a material adverse impact on our results of operations.

Previous wording

For the three months ended June 30, 2024, net loss attributable to Baxter stockholders was $314 million, or $0.62 per diluted share. For the three months ended June 30, 2023, net loss from continuing operations attributable to Baxter stockholders was $195 million, or $0.39 per diluted share, and net income from discontinued operations was $54 million, or $0.11 per diluted share. For the three months ended June 30, 2024, our results included special items that adversely impacted net loss attributable to Baxter stockholders by $659 million, or $1.30 per diluted share. For the three months ended June 30, 2023, our results included special items that adversely impacted loss from continuing operations attributable to Baxter stockholders by $475 million, or $0.94 per diluted share, and decreased net income from discontinued operations by $1 million, or $0.00 per diluted share.

Current wording

Net income from continuing operations for the three months ended September 30, 2024 was $61 million, or $0.12 per diluted share compared to $37 million, or $0.07 per diluted share for the three months ended September 30, 2023. Net income from continuing operations for the three months ended September 30, 2024 included special items that adversely impacted net income by $191 million, or $0.37 per diluted share. Net income from continuing operations for the three months ended September 30, 2023 included special items that adversely impacted net income by $184 million, or $0.36 per diluted share. Net income (loss) from continuing operations for the nine months ended September 30, 2024 was $162 million, or $0.32 per diluted share compared to $(38) million, or $(0.08) per diluted share for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, our results included special items that adversely impacted net income (loss) from continuing operations by $507 million, or $0.99 per diluted share. For the nine months ended September 30, 2023, our results included special items that impacted net income (loss) from continuing operations by $571 million, or $1.13 per diluted share.

Previous wording

Foreign currency adversely impacted net sales by 1 percentage point during the three months ended June 30, 2024, compared to the prior year period, primarily due to the strengthening of the U.S. Dollar relative to the Turkish Lira, Chinese Renminbi, Japanese Yen, and Euro, partially offset by the weakening of the U.S. Dollar relative to the Colombian Peso, British Pound, and Mexican Peso.

Current wording

As set forth above, foreign currency had no impact on net sales during the three months ended September 30, 2024, compared to the prior year period, due to the strengthening of the U.S. Dollar relative to the Turkish Lira, Mexican Peso, and Brazilian Real, offset by the weakening of the U.S. Dollar relative to the Euro, British Pound, Australian Dollar and Chinese Renminbi. Foreign currency had no impact on net sales during the nine months ended September 30, 2024, compared to the prior year period, due to the strengthening of the U.S. Dollar relative to Turkish Lira, Japanese Yen, Chinese Renminbi, and Brazilian Real, offset by the weakening of the U.S. Dollar relative to the Colombian Peso, British Pound, and Euro.

Previous wording

Medical Product and Therapies segment net sales increased 4% in the second quarter and increased 5% in the first six months of 2024, as compared to the prior year periods.

Current wording

Medical Product and Therapies segment net sales increased 7% in the third quarter and increased 5% in the first nine months of 2024, as compared to the prior year periods.

Previous wording

Infusion Therapies and Technologies net sales increased 4% in the second quarter and increased 5% in the first six months of 2024, as compared to the prior year periods. Sales performance primarily reflected growth in IV solutions and nutrition product offerings and was attributable to both pricing initiatives and increased sales volume. Foreign currency exchange rates adversely impacted sales growth by 1% for the second quarter of 2024, as compared to the prior year period. In April 2024, we received U.S. Food and Drug Administration (FDA) 510(k) clearance of our Novum IQ large volume infusion pump (LVP) and we shipped our first Novum IQ LVP's in the United States in June 2024. The launch of that product in the United States is expected to favorably impact the net sales generated by our Infusion Therapies and Technologies business during the second half of 2024.

Current wording

Infusion Therapies and Technologies net sales increased 7% in the third quarter and increased 6% in the first nine months of 2024, as compared to the prior year periods. Sales performance in the third quarter primarily reflected growth in Infusion Systems as a result of our Novum IQ large volume infusion and syringe pump sales in the U.S., and to a lesser extent, sales of IV solutions and nutrition product offerings, which collectively were attributable to both pricing initiatives and increased sales volume.

Previous wording

Advanced Surgery net sales increased 2% in the second quarter and increased 4% in the first six months of 2024, as compared to the prior year periods. Sales performance primarily reflected growth in hemostats and sealants and was primarily attributable to increased sales volume. Foreign currency exchange rates adversely impacted sales growth by 2% for the second quarter and the first six months of 2024, as compared to the prior year periods.

Current wording

Advanced Surgery net sales increased 7% in the third quarter and increased 5% in the first nine months of 2024, as compared to the prior year periods. Sales performance primarily reflected growth in hemostats and sealants and was primarily attributable to increased sales volume. Foreign currency exchange rates adversely impacted sales growth by 1% for the first nine months of 2024, as compared to the prior year period.

Previous wording

Healthcare Systems and Technologies segment net sales increased 1% in the second quarter and decreased 4% in the first six months of 2024, as compared to the prior year periods.

Current wording

Healthcare Systems and Technologies segment net sales increased 1% in the third quarter and decreased 2% in the first nine months of 2024, as compared to the prior year periods.

Previous wording

Care and Connectivity Solutions net sales increased 4% in the second quarter and decreased 1% in the first six months of 2024, as compared to the prior year periods. The growth in the second quarter was primarily driven by increased order volume associated with capital spending as compared to the prior year quarterly period, partially offset by declines in care communications products driven by the shifting of installations to future periods and lower rental revenues. The decline in the first six months of 2024 was primarily driven by declines in capital order volume during the first quarter, declines in sales of connected care products driven by the shifting of installations to future periods, and lower rental revenues. We were also impacted by commercial execution challenges in the first quarter that we are continuing to address to improve the performance of this business. Foreign currency exchange rates favorably impacted sales growth by 1% for the first six months of 2024, as compared to the prior year period.

Current wording

Care and Connectivity Solutions net sales increased 3% in the third quarter and were flat in the first nine months of 2024, as compared to the prior year periods. The growth in the third quarter was primarily driven by increased order volume associated with capital spending as compared to the prior year quarterly period, partially offset by declines in care communications products driven by the shifting of installations to future periods and lower sales outside of the U.S.

Previous wording

Front Line Care net sales decreased 4% in the second quarter and decreased 8% in the first six months of 2024, as compared to the prior year periods. Sales performance primarily reflected declines in our connected monitoring and intelligent diagnostics product offerings, partially offset by growth in our cardiology product offerings. The sales decline as compared to the prior year was primarily driven by a backlog increase in the current year period, compared with a backlog reduction in the prior year period, as well as softer demand in the primary care market and lower government orders.

Current wording

Front Line Care net sales decreased 2% in the third quarter and decreased 6% in the first nine months of 2024, as compared to the prior year periods. The sales decline as compared to the prior year periods was primarily driven by a backlog reduction in the prior year period, as well as softer demand in the primary care market and lower government orders, partially offset by growth in our cardiology products.

Previous wording

Drug Compounding net sales increased 20% in the second quarter and increased 17% for the first six months of 2024, as compared to the prior year periods. The increase in the current year periods was driven by increased demand for our international pharmacy compounding offerings due, in part, to customer capacity constraints that resulted in increased outsourcing of compounding activities, which is not currently expected to be as significant in the second half of the year. Foreign currency exchange rates adversely impacted sales growth by 1% for the first six months of 2024, as compared to the prior year period.

Current wording

Drug Compounding net sales increased 17% in the third quarter and for the first nine months of 2024, as compared to the prior year periods. The increase in the current year periods was driven by increased demand for our international pharmacy compounding offerings due, in part, to customer capacity constraints that resulted in increased outsourcing of compounding activities. Foreign currency exchange rates favorably impacted sales growth by 3% for the third quarter of 2024, as compared to the prior year period.

Previous wording

Other sales, which represent sales not attributable to our reportable segments, were $22 million for both the three months ended June 30, 2024 and 2023, and $38 million and $52 million for the six months ended June 30, 2024 and 2023, respectively. In the current and prior year periods, Other sales primarily represent revenues earned by certain of our manufacturing facilities from contract manufacturing activities. The six-month period ended June 30, 2023 also included royalty income under a business development arrangement. The decrease in other sales for the six months ended June 30, 2024 as compared to the prior year period primarily reflects lower contract manufacturing volume and, to a lesser extent, termination of the royalty arrangement following our acquisition of the rights to the underlying product.

Current wording

Other sales, which represent sales not attributable to our reportable segments, were $17 million for both the three months ended September 30, 2024 and 2023, and $55 million and $73 million for the nine months ended September 30, 2024 and 2023, respectively. In the current and prior year periods, Other sales primarily represent revenues earned by certain of our manufacturing facilities from contract manufacturing activities. The nine-month period ended September 30, 2023 also included royalty income under a business development arrangement. The decrease in other sales for the nine months ended September 30, 2024 as compared to the prior year period primarily reflects lower contract manufacturing volume and, to a lesser extent, termination of the royalty arrangement following our acquisition of the rights to the underlying product.

Previous wording

The following table provides a summary of our special items from continuing operations and the related impact by line item on our results for the three and six months ended June 30, 2024 and 2023.

Current wording

The following table provides a summary of our special items from continuing operations and the related impact by line item on our results for the three and nine months ended September 30, 2024 and 2023.

Previous wording

1 Our results for second quarter of 2024 and 2023 included business optimization charges of $20 million and $293 million, respectively. Our results for the first six months of 2024 and 2023 included business optimization charges of $77 million and $427 million, respectively. These restructuring and other business optimization costs included third-party costs incurred to support the transformation of certain general and administrative functions, property, plant and equipment impairments in connection with the transfer of a manufacturing production line as part of our initiative to optimize our global manufacturing and supply chain organization, costs to centralize certain of our R&D activities, our implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities, our decision to close one of our U.S.-based manufacturing facilities in the second quarter of 2023, which resulted in a $243 million noncash impairment of property, plant and equipment and rationalization of certain other manufacturing and distribution facilities. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.

Current wording

1 Our results for third quarter of 2024 and 2023 included business optimization charges of $18 million and $48 million, respectively. Our results for the first nine months of 2024 and 2023 included business optimization charges of $49 million and $167 million, respectively. These restructuring and other business optimization costs included costs primarily related to our implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities, third-party costs incurred to support the transformation of certain general and administrative functions, and rationalization of certain other manufacturing and distribution facilities. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.

Previous wording

2 Our results for the second quarter of 2024 and 2023 included $6 million and $8 million, respectively, and for the first six months of 2024 and 2023 included $11 million and $14 million, respectively, of integration costs which primarily reflected third party consulting costs related to our integration of Hillrom. In 2023, those costs were partially offset by a $1 million benefit in the second quarter and fully offset by a $14 million benefit in the first six months related to changes in the estimated fair values of contingent consideration liabilities.

Current wording

2 Our results for the third quarter of 2024 and 2023 included $5 million and $2 million, respectively, and for both the first nine months of 2024 and 2023 included $16 million, of integration costs which primarily reflected third party consulting costs related to our integration of Hillrom. In 2023, those costs were partially offset by a $14 million benefit in the first nine months related to changes in the estimated fair values of contingent consideration liabilities.

Previous wording

3 Our results for the second quarter of 2024 and 2023 included $10 million and $12 million, respectively, and for the first six months of 2024 and 2023 included $18 million and $24 million, respectively, of incremental costs to comply with the European Union's medical device regulations for previously registered products, which primarily consist of contractor costs and other direct third-party costs. We consider the adoption of these regulations to be a significant one-time regulatory charge and believe that the costs of initial compliance for previously registered products over the implementation period are not indicative of our core operating results.

Current wording

3 Our results for the third quarter of 2024 and 2023 included $9 million and $12 million, respectively, and for the first nine months of 2024 and 2023 included $25 million and $32 million, respectively, of incremental costs to comply with the European Union's medical device regulations for previously registered products, which primarily consist of contractor costs and other direct third-party costs. We consider the adoption of these regulations to be a significant one-time regulatory charge and believe that the costs of initial compliance for previously registered products over the implementation period are not indicative of our core operating results.

Previous wording

6 Our results in 2023 included $20 million of pre-tax losses from non-marketable investments in several early stage companies in the second quarter, consisting of $23 million of noncash impairment write-downs, partially offset by a $3 million gain from the sale of an investment.

Current wording

7 Our results in 2023 included $10 million of pre-tax losses from non-marketable investments in several early stage companies in the first nine months, consisting of $13 million of noncash impairment write-downs, partially offset by a $3 million gain from the sale of an investment.

Previous wording

7 Our results for the second quarter and first six months of 2024 included $5 million and $42 million, respectively, of income tax expenses resulting from internal reorganization transactions related to the proposed separation of our Kidney Care segment. Our results in 2023 included a $30 million valuation allowance recorded to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to previously enacted Swiss tax reform legislation to reflect our current estimate of its recoverability and $4 million of tax costs from separation-related activities.

Current wording

8 Our results for the third quarter of 2024 included $11 million of income tax expense consisting of a $26 million valuation allowance recorded to reduce the carrying amount of a tax attribute carryforward in the U.S. related to the pending sale of our Kidney Care segment, partially offset by application of the intraperiod tax allocation between continuing operations and discontinued operations. Our results for the third quarter of 2023 included $16 million of income tax expense resulting from separation-related income tax costs associated with the sale of our BPS business. Our results for the first nine months of 2024 included $45 million of income tax expense consisting of a $26 million valuation allowance recorded to reduce the carrying amount of a tax attribute carryforward in the U.S. and internal reorganization transactions related to the pending sale of our Kidney Care segment. Our results for the first nine months of 2023 included $67 million of income tax expense consisting of a $30 million valuation allowance recorded to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to previously enacted Swiss tax reform legislation to reflect our current estimate of its recoverability and separation-related income tax costs associated with the sale of our BPS business.

Previous wording

8 This item reflects the income tax impact of the special items identified in this table. The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.

Current wording

9 This item reflects the income tax impact of the special items identified in this table. The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.

Previous wording

Our gross margin ratio was 37.5% and 30.0% for the three months ended June 30, 2024 and 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 3.7 and 10.4 percentage points on the gross margin ratio for the three months ended June 30, 2024 and 2023, respectively. Our gross margin ratio was 38.1% and 33.0% for the six months ended June 30, 2024 and 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 3.7 and 7.6 percentage points on the gross margin ratio for the six months ended June 30, 2024 and 2023, respectively. Refer to the Special Items caption above for additional detail.

Current wording

Our gross margin ratio was 38.3% and 40.6% for the three months ended September 30, 2024 and 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 5.4 and 4.2 percentage points on the gross margin ratio for the three months ended September 30, 2024 and 2023, respectively. Our gross margin ratio was 38.4% and 40.0% for the nine months ended September 30, 2024 and 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 4.8 and 4.3 percentage points on the gross margin ratio for the nine months ended September 30, 2024 and 2023, respectively. Refer to the Special Items caption above for additional detail.

Previous wording

Excluding the impact of special items, the gross margin ratio increased by 0.8 and 1.2 percentage points in the second quarter and first six months of 2024, respectively, compared to the prior year periods. Those gross margin improvements were primarily attributable to our Kidney Care segment, driven by initiatives to reduce our manufacturing and supply chain costs, a favorable product mix, reflecting select exits from lower margin products and markets, and Acute Therapies sales growth, partially offset by lower gross margins in the current year periods in our Pharmaceuticals and Medical Products and Therapies segments.

Current wording

Excluding the impact of special items, the gross margin ratio decreased by 1.1 percentage points in both the third quarter and first nine months of 2024, respectively, compared to the prior year periods. The lower gross margins were driven by an unfavorable product mix, partially offset by initiatives to reduce our manufacturing and supply chain costs.

Previous wording

Our SG&A expenses ratio was 26.8% and 26.0% for the three months ended June 30, 2024 and 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 3.9 and 3.2 percentage points on the SG&A expenses ratio for the three months ended June 30, 2024 and 2023, respectively. Our SG&A expenses ratio was 27.7% and 27.1% for the six months ended June 30, 2024 and 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 4.3 and 3.8 percentage points on the SG&A expenses ratio for the six months ended June 30, 2024 and 2023, respectively.

Current wording

Our SG&A expenses ratio was 27.9% and 28.6% for the three months ended September 30, 2024 and 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 3.3 and 4.2 percentage points on the SG&A expenses ratio for the three months ended September 30, 2024 and 2023, respectively. Our SG&A expenses ratio was 28.0% and 29.7% for the nine months ended September 30, 2024 and 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 2.9 and 4.1 percentage points on the SG&A expenses ratio for the nine months ended September 30, 2024 and 2023, respectively.

Previous wording

Our R&D expenses ratio was 4.5% for the three months ended June 30, 2024 and 2023, respectively. The special items identified earlier in this section had a favorable impact of 0.1 percentage points on the R&D expenses ratio in the second quarter of 2024. The R&D expenses ratio was 4.7% and 4.6% for the six months ended June 30, 2024 and 2023, respectively. The special items identified earlier in this section had an unfavorable impact of approximately 0.2 and 0.1 percentage points on the R&D expenses ratio for the six months ended June 30, 2024 and 2023, respectively.

Current wording

Our R&D expenses ratio was 4.8% and 5.1% for the three months ended September 30, 2024 and 2023, respectively. The special items identified earlier in this section had no impact and an unfavorable impact of 0.1 percentage points on the R&D expense ratio in the third quarter of 2024 and 2023, respectively. The R&D expenses ratio was 4.8% and 5.1% for the nine months ended September 30, 2024 and 2023, respectively. The special items identified earlier in this section had no impact and an unfavorable impact of 0.1 percentage points on the R&D expenses ratio for the nine months ended September 30, 2024 and 2023, respectively.

Previous wording

Excluding the impact of special items, the R&D expenses ratio increased by 0.1 percentage points and remained flat in the second quarter and first six months of 2024, respectively, compared to the prior year periods.

Current wording

Excluding the impact of special items, the R&D expenses ratio decreased by 0.2 percentage points in both the third quarter and first nine months of 2024, compared to the prior year periods.

Previous wording

For the three months ended months ended June 30, 2024, $6 million of the restructuring charges related to a transfer of a manufacturing production line as part of our initiatives to optimize our global manufacturing and supply chain organization. For the six months ended June 30, 2024, $27 million of the restructuring charges related to a program to centralize certain of our R&D activities into a new location, and to our recent implementation of a new operating model intended to simplify and streamline our operations.

Current wording

For the three months ended months ended September 30, 2024, $7 million and $14 million of the restructuring charges, consisting of employee termination costs, related to business optimization initiatives within our Healthcare Systems and Technologies segment. Additionally, for the nine months ended September 30, 2024, $7 million of the restructuring charges, consisting of employee termination costs, related to our recent implementation of a new operating model intended to simplify and streamline our operations.

Previous wording

We currently expect to incur additional pre-tax costs, primarily related to the implementation of business optimization programs, of approximately $7 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified (including after the completion of the proposed Kidney Care separation), we would incur additional restructuring charges and costs to implement business optimization programs in future periods. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding our business optimization programs.

Current wording

We currently expect to incur additional pre-tax costs, primarily related to the implementation of business optimization programs, of approximately $5 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified (including after the completion of the pending sale of our Kidney Care business), we would incur additional restructuring charges and costs to implement business optimization programs in future periods. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding our business optimization programs.

Previous wording

Other operating income, net was $1 million for the three months ended June 30, 2024 and 2023. In the second quarter of 2024, this amount was comprised of income from transition services arrangements related to the divestiture of our BPS business. In the second quarter of 2023, this amount was comprised of gains from changes in the estimated fair value of contingent consideration arrangements. Other operating income, net was $4 million and $14 million for the six months ended June 30, 2024 and 2023, respectively. In the first six months of 2024, this amount was comprised of income from transition services arrangements related to the divestiture of our BPS business. In the first six months of 2023, this amount was comprised of gains from changes in the estimated fair value of contingent consideration arrangements.

Current wording

Other operating income, net was $5 million for the three months ended September 30, 2024. In the third quarter of 2024, this amount was comprised of income from transition services arrangements related to the divestiture of our BPS business. Other operating income, net was $9 million and $14 million for the nine months ended September 30, 2024 and 2023, respectively. In the first nine months of 2024, this amount was comprised of income from transition services arrangements related to the divestiture of our BPS business. In the first nine months of 2023, this amount was comprised of gains from changes in the estimated fair value of contingent consideration arrangements.

Previous wording

Interest expense, net was $85 million and $124 million in the second quarter of 2024 and 2023, respectively and $163 million and $241 million for the first six months of 2024 and 2023, respectively. The decrease in 2024 was driven by debt repayments in the fourth quarter of 2023 and, to a lesser extent, higher interest income due to a higher average cash balance and higher interest rates during the current year period.

Current wording

The decrease in 2024 was driven by debt repayments in the fourth quarter of 2023 and, to a lesser extent, higher interest income due to a higher average cash balance and higher interest rates during the current year period.

Previous wording

Other (income) expense, net was income of $20 million and expense of $42 million for the three months ended June 30, 2024 and 2023, respectively, and income of $27 million and expense of $40 million for the six months ended June 30, 2024 and 2023, respectively. In the current year periods, other income, net was primarily driven by pension and other postretirement benefits, partially offset by foreign exchange losses. In the prior year periods, other expense, net was primarily driven by foreign exchange losses, non-marketable investment impairments and decreases in the fair value of marketable equity securities, partially offset by pension and postretirement benefits.

Current wording

Other (income) expense, net was income of $1 million and income of $12 million for the three months ended September 30, 2024 and 2023, respectively, and income of $34 million and expense of $15 million for the nine months ended September 30, 2024 and 2023, respectively. In the current year periods, other income, net was primarily driven by pension and other postretirement benefits, partially offset by foreign exchange losses. In the three months ended September 30, 2023, other income, net was primarily driven by pension and other postretirement benefits. In the nine months ended September 30, 2023, other expense, net was primarily driven by foreign exchange losses, non-marketable investment impairments and decreases in the fair value of marketable equity securities, partially offset by pension and postretirement benefits.

Previous wording

Our effective income tax rate was (21.0)% and (5.5)% in the second quarter of 2024 and 2023, respectively, and (92.9)% and (14.2)% for the first six months of 2024 and 2023, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances, increases or decreases in liabilities for uncertain tax positions, and excess tax benefits or shortfalls on stock compensation awards. Our effective income tax rate during interim periods reflects our estimated annual effective tax rate and discrete items.

Current wording

Our effective income tax rate was 11.6% and 42.2% in the third quarter of 2024 and 2023, respectively, and 30.2% and 281.0% for the first nine months of 2024 and 2023, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances, increases or decreases in liabilities for uncertain tax positions, and excess tax benefits or shortfalls on stock compensation awards. Our effective income tax rate during interim periods reflects our estimated annual effective tax rate and discrete items.

Previous wording

For the six months ended June 30, 2024, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily driven by a non-deductible goodwill impairment, an increase in income tax expense resulting from internal reorganization transactions related to the proposed separation of our Kidney Care segment, an increase in a valuation allowance in a foreign jurisdiction resulting from changes in future projected income, an increase in our liabilities for various uncertain tax positions, an unfavorable geographic earnings mix, and separation costs that are partially non-deductible.

Current wording

For the nine months ended September 30, 2024, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $26 million valuation allowance recorded to reduce the carrying amount of a tax attribute carryforward in the U.S. related to the pending sale of our Kidney Care segment, an increase in a valuation allowance in a foreign jurisdiction resulting from changes in future projected income, an increase in income tax expense resulting from internal reorganization transactions related to the pending sale of our Kidney Care segment, and an increase in our liabilities for various uncertain tax positions, partially offset by a favorable geographic earnings mix.

Previous wording

For thethree and six months ended June 30, 2023, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $30 million increase in the valuation allowance related to a deferred tax asset basis step-up that arose from previously enacted Swiss tax reform legislation and a favorable geographic earnings mix.

Current wording

For thenine months ended September 30, 2023, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $30 million increase in the valuation allowance related to a deferred tax asset from a tax basis step-up that arose from previously enacted Swiss tax reform legislation, an increase in the valuation allowance in a foreign jurisdiction resulting from changes in future projected income, and excess tax shortfalls on stock compensation awards.