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Item 9A. Controls and Procedures

2022-02-23 compared with 2021-02-11 · 46 added, 51 removed, 213 unchanged (31% of the section changed)

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Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2021.

Remediation of Material Weakness

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019, we identified a material weakness over the accounting for certain foreign exchange gains and losses.

Specifically, we did not have controls in place to m onitor and quantify the difference between the foreign exchange gains and losses that we reported and the foreign exchange gains and losses that we would have reported using exchange rates determined in accordance with U.S.

Additionally, our policies and controls related to approvals and monitoring of intra-company transactions were insufficient to prevent or detect intra-company transactions undertaken solely for the purpose of generating foreign exchange gains or avoiding losses under our historical exchange rate convention.

This material weakness resulted in misstatements that were corrected in the restatement included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Due to the actions taken by us to implement new controls and procedures, management has concluded that this material weakness has been remediated as of December 31, 2020.

The actions we took to remediate the material weakness were as follows:

• Exchange Rate Policy – We discontinued the use of our historical exchange rate convention and are using the exchange rates determined in accordance with U.S.

GAAP for purposes of measuring foreign currency transactions and remeasuring monetary assets and liabilities denominated in a foreign currency.

• Automated Feed – We implemented an automated feed that extracts foreign exchange rates on a daily basis from a recognized third-party exchange rate source.

• Daily Rate Comparison – We implemented a daily rate comparison control that extracts foreign exchange rates from (a) a third-party exchange rate source, (b) our treasury application, and (c) our enterprise resource planning (ERP) system and compares those rates in order to identify any potential differences and provide assurance that the correct rates were captured and are being used in our financial systems.

• Intra-company Transaction Approvals – We updated our policies to require additional approvals of intra-company transactions and implemented a requirement that such transactions be supported by a documented business purpose.

• Personnel - We made personnel changes including hiring a new treasurer from outside Baxter with more than thirty years of treasury experience and responsibility, including at four publicly traded companies.

We have also hired another experienced treasury professional in a newly created director role responsible for treasury governance and controls.

Additionally, we created a treasury controller role within our accounting function and are continuing to add resources as appropriate to improve our financial reporting controls related to treasury activities.

We and our Board of Directors are committed to maintaining a strong control environment and we believe that these remediation efforts represent significant improvements in our controls.

We monitored the related processes and controls throughout the remediation period and have concluded that they are operating effectively.

Management’s Assessment of Internal Control Over Financial Reporting

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Based on that assessment under the framework in Internal Control-Integrated Framework (2013) , management concluded that our internal control over financial reporting was effective as of December 31, 2021.

In December 2021, Baxter acquired 100 percent of the voting equity interest in Hillrom.

As permitted by guidance issued by the SEC, management has excluded the internal controls of Hillrom from its annual assessment of the effectiveness of our internal control over financial reporting for December 31, 2021.

Hillrom is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment of internal control over financial reporting represent approximately 6% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021.

The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Changes in Internal Control Over Financial Reporting

As previously disclosed, since 2017, we have been implementing a long-term business transformation project within our finance, human resources, purchasing and information technology functions which will further centralize and standardize business processes and systems across the company.

We have transitioned and continue to transition some processes to our shared services centers while others have been moved to outsourced providers.

This multi-year initiative is being conducted in phases and includes modifications to the design and operation of controls over financial reporting.

Other than as described in the preceding paragraph and in the Remediation of Material Weakness section above, there have been no changes in our 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 December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the three months ended December 31, 2021, we implemented the first phase of a new global treasury management system supporting cash management, external debt, and risk management processes.

In conjunction with the implementation, we modified business processes impacted by the new system, such as transaction processing, user access security, authorization procedures and system reporting.

In subsequent periods, the remaining phases of the treasury management system will be implemented.

Other than as described in the preceding paragraph, there have been no changes in our 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 December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other Information.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not Applicable.

Directors, Executive Officers and Corporate Governance.

Refer to information under the captions entitled “Corporate Governance at Baxter International Inc.

— Proposal 1 — Election of Directors,” “— Board of Directors — Nomination of Directors,” “— Committees of the Board — Audit Committee,” “— Board Responsibilities — Code of Conduct,” and “Ownership of Our Stock — Delinquent Section 16(a) Reports” in Baxter’s definitive proxy statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders expected to be held on May 4, 2021 (the Proxy Statement), all of which information is incorporated herein by reference.

— Proposal 1 — Election of Directors,” “— Board of Directors — Nomination of Directors,” “— Committees of the Board — Audit Committee,” “— Board Responsibilities — Code of Conduct,” and “Ownership of Baxter Stock — Delinquent Section 16(a) Reports” in Baxter’s definitive proxy statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders expected to be held on May 3, 2022 (the Proxy Statement), all of which information is incorporated herein by reference.

Also refer to information regarding executive officers of Baxter under the caption entitled “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K.

Executive Compensation.

Refer to information under the captions entitled “Executive Compensation,” and “Corporate Governance at Baxter International—Director Compensation” in the Proxy Statement, all of which information is incorporated herein by reference.

Refer to information under the captions entitled “Executive Compensation,” and “Corporate Governance at Baxter International Inc.—Director Compensation” in the Proxy Statement, all of which information is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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(2) Restricted stock units and performance share units are excluded when determining the weighted-average exercise price of outstanding options.

(3) Includes (i) 2,002,996 shares of common stock available for purchase under the Employee Stock Purchase Plan;

(ii) 447,261 shares of common stock available under the 2007 Incentive Plan;

(iii) 2,689,357 shares of common stock available under the 2011 Incentive Plan;

and (iv) 11,771,363 shares of common stock available under the 2015 Incentive Plan.

(4) Includes shares of common stock issuable upon exercise of options granted under the 2001 Incentive Compensation Program.

These shares were made available pursuant to an amendment thereto not approved by stockholders.

These additional shares were approved by our Board of Directors, not our stockholders, although our stockholders have approved the 2001 Incentive Compensation Program.

(3) Includes (i) 11,263,584 shares of common stock available for purchase under the Employee Stock Purchase Plan and (ii) 40,173,931 shares of common stock available under the 2021 Incentive Plan.

(4) Includes 667,640 replacement RSUs granted to holders of Hillrom equity awards at closing of the Hillrom acquisition.

These replacement RSUs were approved by our Board of Directors, not our stockholders.

(5) Includes outstanding awards of 20,696,747 stock options, which have a weighted-average exercise price of $61.14 and a weighted-average remaining term of 5.9 years, 1,797,696 shares of common stock issuable upon vesting of restricted stock units, and 731,651 shares of common stock reserved for issuance in connection with performance share unit grants.

Refer to information under the captions entitled “Ownership of Our Stock — Security Ownership by Directors and Executive Officers” and “— Security Ownership by Certain Beneficial Owners” in the Proxy Statement, all of which information is incorporated herein by reference.

Refer to information under the captions entitled “Ownership of Baxter Stock — Security Ownership by Directors and Executive Officers” and “— Security Ownership by Certain Beneficial Owners” in the Proxy Statement, all of which information is incorporated herein by reference.

Certain Relationships and Related Transactions, and Director Independence .

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Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 238 )

(2) Schedules required by Article 12 of Regulation S-X:

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2.1 Separation and Distribution Agreement (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed on July 7, 2015).

2.2 Agreement and Plan of Merger, dated September 1, 2021, among Hill-Rom Holdings, Inc., the Company and Bel Air Subsidiary, Inc.

(incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed on September 2, 2021).

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on May 10, 2013).

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4.10 First Supplemental Indenture, dated as of March 26, 2020, to the Indenture, dated as of March 26, 2020, between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee (including form of form of 3.950% Senior Notes due 2030) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on March 27, 2020).

4.11 Registration Rights Agreement, dated as of March 26, 2020, by and among the Company and Citigroup Global Markets Inc., Goldman Sachs & Co.

Morgan Securities LLC (as representatives of the initial purchasers) (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on March 27, 2020).

Number and Description of Exhibit

4.11 Second Supplemental Indenture, dated as of November 2, 2020, to the Indenture, dated as of March 26, 2020, between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, (including form of 1.730% Senior Notes due 2031) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on November 6, 2020).

4.13 Registration Rights Agreement, dated as of November 2, 2020, by and among the Company and BofA Securities, Inc., Deutsche Bank Securities Inc.

Morgan Securities LLC, as representatives of the Initial Purchasers (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on November 6, 2020).

4.12 Description of Securities Registered Under Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.9 to the Company’s Annual Report on Form 10-K, filed on March 17, 2020).

10.1 Five-Year Credit Agreement, dated as of December 20, 2019, among Baxter International Inc.

as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent and certain other financial institutions named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 20, 2019).

4.13 Indenture, dated as of July 29, 2021, between the Company, as Issuer, and U.S.

Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3, filed on July 29, 2021).

4.14 Indenture, dated as of December 1, 2021, between the Company, as Issuer, and U.S.

Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on December 2, 2021).

4.15 First Supplemental Indenture, dated as of December 1, 2021, to the Indenture, dated as of December 1, 2021, between the Company and U.S.

Bank National Association, as Trustee (including forms of 0.868% Senior Notes due 2023, 1.322% Senior Notes due 2024, 1.915% Senior Notes due 2027, 2.272% Senior Notes due 2028, 2.539% Senior Notes due 2032, 3.132% Senior Notes due 2051, Floating Rate Senior Notes due 2023 and Floating Rate Senior Notes due 2024) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on December 2, 2021).

4.16 Registration Rights Agreement, dated as of December 1, 2021, by and among the Company and J.P.

Morgan Securities LLC and Citigroup Global Markets Inc.

(as representatives of the initial purchasers) (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on December 2, 2021).

10.1 Credit Agreement, dated as of December 20, 2019, among Baxter Healthcare SA and Baxter World Trade SPRL, as Borrowers, J.P.

Morgan Europe Limited, as Administrative Agent and certain other financial institutions named therein (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on December 20, 2019).

10.2 First Amendment, dated as of October 1, 2021, to the Credit Agreement, dated as of December 20, 2019, among Baxter Healthcare SA and Baxter World Trade SRL, as Borrowers, the Company, the several banks party thereto, J.P.

Morgan AG, as Administrative Agent and each other party thereto (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on October 4, 2021).

10.3 Credit Agreement, dated as of September 30, 2021, among the Company, as Borrower, the financial institutions named therein, as Banks, JPMorgan Chase Bank, N.A., as Administrative Agent, and Citibank, N.A., as Syndication Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on October 4, 2021).

10.4 Five-Year Credit Agreement, dated as of September 30, 2021, among the Company, as Borrower, the financial institutions named therein, as Banks, JPMorgan Chase Bank, N.A., as Administrative Agent, and Bank of America, N.A.

and Citibank, N.A., as Syndication Agents (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on October 4, 2021).

10.5 Tax Matters Agreement, dated as of June 30, 2015, by and between Baxter International Inc.

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(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on January 11, 2016).

10.50 Support Agreement, dated as of September 29, 2015, by and among Baxter International Inc., Third Point LLC, Third Point Partners L.P., Third Point Partners Qualified L.P., Third Point Offshore Master Fund L.P., Third Point Ultra Master Fund L.P., Third Point Reinsurance Co.

Ltd., Third Point Advisors LLC, Third Point Advisors II LLC, Daniel S.

Loeb and Munib Islam (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on September 30, 2015).

C 10.7 Form of Indemnification Agreement entered into with directors and officers (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K, filed on February 21, 2019).

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2007 Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on March 20, 2007).

Number and Description of Exhibit

C 10.9 Baxter International Inc.

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2017 Equity Plan, effective as of March 2, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on March 3, 2017).

Number and Description of Exhibit

C 10.16 Baxter International Inc.

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C 10.17 Baxter International Inc.

Directors’ Deferred Compensation Plan (amended and restated effective May 6, 2019) (incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q, filed on May 8, 2019).

2021 Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on March 22, 2021).

C 10.18* Baxter International Inc.

Directors’ Deferred Compensation Plan (amended and restated effective November 11, 2021) (as amended and restated effective November 11, 2021)

C 10.19 Offer Letter between Baxter International Inc.

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C 10.21 Offer letter between Baxter Healthcare SA and Cristiano Franzi, dated June 8, 2017 (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K, filed on March 17, 2020).

C 10.22 Offer Letter, between Baxter International Inc.

and Giuseppe Accogli, dated November 29, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on November 30, 2021).

C 10.23 Form of Severance Agreement entered into with executive officers (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K, filed on February 21, 2014).

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C 10.26 Baxter International Inc.

Non-Employee Director Compensation Plan (as amended and restated effective January 1, 2018) (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K, filed on February 21, 2019).

Non-Employee Director Compensation Plan (as amended and restated effective July 1, 2021) (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q, filed on October 28, 2021).

C 10.27 Form of Non-Competition, Non-Solicitation and Confidentiality Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on April 14, 2017).

Number and Description of Exhibit

Commitment Agreement, dated as of October 4, 2019, by and among the Company, The Prudential Insurance Company of America and State Street Global Advisors Trust Company, acting solely in its capacity as the independent fiduciary of the Baxter International Inc.

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C 10.34 Baxter International Inc.

and Subsidiaries Deferred Compensation Plan (As Amended and Restated effective January 1, 2021).

Number and Description of Exhibit

and Subsidiaries Deferred Compensation Plan (As Amended and Restated effective January 1, 2021) ( inco rporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10- K, filed on February 11, 2021).

C 10.35 Baxter International Inc.

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Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Number and Description of Exhibit

101.INS* XBRL Instance Document

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Forsyth Director

Gavin III, M.D., Ph.D.

Hellman Director

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Oesterle, M.D.

/s/ Nancy Schlichting Director

Smith Director

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Valuation and Qualifying Accounts (in millions) Balance at

of period Charged to

of period Acquisition Charged to

expenses (Credited)

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Allowance for doubtful accounts $ 112 — 11 6 ( 4 ) $ 125

Deferred tax asset valuation allowance (as restated) $ 310 117 — ( 7 ) $ 420

Deferred tax asset valuation allowance $ 420 — 77 26 ( 69 ) $ 454

Year ended December 31, 2019:

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______________________________________

(1) Valuation accounts of acquired or divested companies, adoption of a new accounting pronouncement and foreign currency translation adjustments.

(1) Includes the adoption of a new accounting pronouncement as of January 1, 2020 and foreign currency translation adjustments.

Reserves are deducted from assets to which they apply.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures