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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-07-28 · 222 added, 157 removed, 259 unchanged (59% of the section changed)

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Refer to our Annual Report on Form 10-K for the year ended December 31, 2021 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, 2022 and 2021.

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, 2022 and 2021.

RESULTS OF OPERATIONS

Net income attributable to Baxter stockholders for the three and six months ended June 30, 2022 totaled $252 million, or $0.50 per diluted share, and $323 million, or $0.64 per diluted share, compared to $298 million, or $0.59 per diluted share, and $596 million, or $1.17 per diluted share, for the three and six months ended June 30, 2021.

The first quarter of 2022 was the first full quarter reflecting Hillrom results of operations after the December 13, 2021 acquisition.

Net income for the three and six months ended June 30, 2022 included special items which decreased net income by $191 million and $591 million, respectively, or $0.37 and $1.16 per diluted share, respectively, as further discussed below.

Net income for the three and six months ended June 30, 2021 included special items which decreased net income by $111 million and $199 million, respectively, or $0.21 and $0.39 per diluted share, respectively, as further discussed below.

On December 13, 2021, we completed our acquisition of all outstanding equity interests of Hill-Rom Holdings, Inc.

(Hillrom) for a purchase price of $10.5 billion.

Including the assumption of Hillrom’s outstanding debt, the enterprise value of the transaction was approximately $12.8 billion.

While the current year periods include the results of operations and cash flows of Hillrom, the prior year periods do not as they preceded the acquisition date.

In the third quarter of 2022, we recognized impairments of goodwill and certain indefinite-lived intangible assets that arose from the Hillrom acquisition.

See Note 4, Goodwill and Other Intangible Assets, Net, of the accompanying condensed consolidated financial statements for additional information about those impairments.

Net income (loss) attributable to Baxter stockholders for the three and nine months ended September 30, 2022 totaled $(2,937) million, or $(5.83) per diluted share, and $(2,614) million, or $(5.20) per diluted share, compared to $450 million, or $0.89 per diluted share, and $1,046 million, or $2.06 per diluted share, for the three and nine months ended September 30, 2021.

Net income (loss) for the three and nine months ended September 30, 2022 included special items which decreased net income by $3.4 billion and $3.9 billion, respectively, or $6.65 and $7.81 per diluted share, respectively, as further discussed below.

Net income (loss) for the three and nine months ended September 30, 2021 included special items which decreased net income by $66 million and $265 million, respectively, or $0.13 and $0.52 per diluted share, respectively, as further discussed below.

Special Items

The following table provides a summary of our special items and the related impact by line item on our results for the three and six months ended June 30, 2022 and 2021.

The following table provides a summary of our special items and the related impact by line item on our results for the three and nine months ended September 30, 2022 and 2021.

Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

(in millions) 2022 2021 2022 2021

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Product-related items 5

(20) — (43) —

Intangible asset impairments 6

(332) — (332) —

Total Special Items $ (485) $ (100) $ (946) $ (281)

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$ 3 $ — $ 4 $ —

Acquisition and integration expenses 2

Total Special Items $ 4 $ — $ 5 $ —

Impact on R&D Ratio 0.1 pts 0.0 pts 0.0 pts 0.0 pts

Other Operating Income, net

Goodwill Impairments

Goodwill impairments 6

$ 2,785 $ — $ 2,785 $ —

Total Special Items $ 2,785 $ — $ 2,785 $ —

Other Operating Expense (Income), net

Loss on product divestiture arrangement 7

$ 54 $ — $ 54 $ —

Acquisition and integration expenses 2

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Total Special Items $ 48 $ (1) $ 20 $ (6)

Interest Expense, net

Acquisition and integration expenses 2

$ — $ 18 $ — $ 18

Total Special Items $ — $ 18 $ — $ 18

Other Income (Expense), net

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$ — $ — $ (11) $ —

Reclassification of cumulative translation loss to earnings 9

Total Special Items $ 65 $ — $ 54 $ —

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These actions included streamlining our international operations, rationalizing our manufacturing and distribution facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs.

In the current period, restructuring charges include actions taken in connection with our integration of Hillrom, which we acquired in

December 2021.

Our results in 2022 included business optimization charges of $42 million in the second quarter and $123 million in the first half.

Our results in 2021 included business optimization charges of $18 million in the second quarter and $45 million in the first half.

In the current period, restructuring charges include actions taken in connection with our integration of Hillrom, which we acquired in December 2021.

Our results in 2022 included business optimization charges of $73 million in the third quarter and $196 million in the first nine months.

Our results in 2021 included business optimization charges of $36 million in the third quarter and $81 million in the first nine months.

Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.

2 Our results in 2022 included $18 million in the second quarter and $189 million in the first half of acquisition and integration-related expenses.

Those costs included $29 million in the second quarter and $217 million in the first half related to our acquisition of Hillrom, primarily reflecting $159 million of incremental costs of sales in the first half from the fair value step-ups on acquired Hillrom inventory that was sold in the first quarter.

2 Our results in 2022 included $4 million in the third quarter and $193 million in the first nine months of acquisition and integration-related expenses.

Those costs included $10 million in the third quarter and $227 million in the first nine months related to our acquisition of Hillrom, primarily reflecting $159 million of incremental costs of sales in the first nine months from the fair value step-ups on acquired Hillrom inventory that was sold in the first quarter.

We have not incurred and we do not expect to incur significant incremental cost of sales from those inventory fair value step-ups beyond what was recognized in the first quarter 2022.

Other integration expenses in the current period included third party consulting costs related to our integration and related cost savings activities.

Those acquisition and integration-related expenses related to Hillrom were partially offset by an $11 million benefit in the second quarter and a $28 million benefit in the first half from changes in the estimated fair value of contingent consideration liabilities.

Our results in 2021 included $1 million in the second quarter and $2 million in the first half of integration expenses related to our acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S.

that was offset by a benefit of $5 million in the second quarter for the change in the estimated fair value of contingent consideration liabilities.

Those acquisition and integration-related expenses related to Hillrom were partially offset by a $6 million benefit in the third quarter and a $34 million benefit in the first nine months from changes in the estimated fair value of contingent consideration liabilities.

Our results in 2021 included acquisition, integration and related financing expenses of $39 million in the third quarter and $36 million in the first nine months.

This included acquisition, integration and related financing expenses for our acquisition of Hillrom and the acquisition to the rights to Caelyx and Doxil for specified territories outside of the U.S.

These expenses were partially offset by benefits in the third quarter and first nine months from changes in the estimated fair value of contingent consideration liabilities.

Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.

3 Our results in 2022 included $12 million in the second quarter and $23 million in the first half of costs related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that became effective in stages beginning in 2021.

Our results in 2021 included $11 million in the second quarter and $19 million in the first half of costs related to these requirements.

4 Our results in 2021 included charges of $17 million in the second quarter and $28 million in the first half for investigation and related cost for matters associated with our previously announced investigation of foreign exchange gains and losses.

3 Our results in 2022 included $12 million in the third quarter and $35 million in the first nine months of costs related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that became effective in stages beginning in 2021.

Our results in 2021 included $11 million in the third quarter and $30 million in the first nine months of costs related to these requirements.

4 Our results in 2021 included charges of $3 million in the third quarter and $31 million in the first nine months for investigation and related cost for matters associated with our previously announced investigation of foreign exchange gains and losses.

Refer to Note 6 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation.

5 Our results in 2022 included charges $23 million in the first half related to warranty and remediation activities arising from two field corrective actions on certain of our infusion pumps.

6 Our results in 2022 included a curtailment gain of $11 million in the second quarter and first half related to an announced change for active non-bargaining participants in our U.S.

5 Our results in 2022 included charges of $20 million in the third quarter and $43 million in the first nine months related to warranty and remediation activities arising from two field corrective actions on certain of our infusion pumps.

6 Our results in 2022 included charges of $3.1 billion in the third quarter and first nine months for goodwill and indefinite-lived intangible asset impairments.

Refer to Note 4 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the impairments.

7 Our results in 2022 included a loss of $54 million in the third quarter and first nine months under an arrangement to divest certain product rights for an amount that is less than our cost of those product rights, which was triggered by U.S.

and European Union regulatory approvals of the related products.

Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information about the related transactions.

8 Our results in 2022 included a curtailment gain of $11 million in the first nine months related to an announced change for active non-bargaining participants in our U.S.

Hillrom pension plan.

7 Our results in 2021 included a charge of $22 million related to an unfavorable court ruling for an uncertain tax position.

9 Our results in 2022 included a charge of $65 million in the third quarter and first nine months for cumulative translation adjustments (CTA) reclassified from accumulated other comprehensive income (loss) as a result of the substantial liquidation of our operations in Argentina.

10 Our results in the third quarter and first nine months of 2021 included a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary.

Our results in the first nine months of 2021 also included a charge of $22 million related to an unfavorable court ruling for an uncertain tax position.

11 Reflected in this item is 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.

Risks and Uncertainties Related to COVID-19 and Global Economic and Other Conditions

FACTORS AFFECTING OUR RESULTS OF OPERATIONS

Risks and Uncertainties Related to COVID-19

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19).

COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and we expect will continue to increase our expenses.

Initial measures taken in 2020 led to unprecedented restrictions on, disruptions in, and other related impacts on business and personal activities, including a shift in healthcare priorities, which resulted in a significant decline in medical procedures in 2020.

As a result, the pandemic has created significant volatility in the demand for our products.

For further information about our revenues by product category, refer to Note 9.

Over the course of the pandemic, our business has been impacted by shifting healthcare priorities and significant volatility in the demand for our products.

For further information about our revenues by product category, refer to Note 9 in Item 1 of this Quarterly Report on Form 10-Q.

Significant uncertainty remains regarding the duration and overall impact of the COVID-19 pandemic.

For example, concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Omicron variants, subvariants and other virus mutations as well as vaccine distribution and hesitancy.

and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to mandatory vaccinations for certain of our employees, moratoriums on elective procedures and mandatory quarantines and travel restrictions).

These measures have caused, and may continue to cause in the future, increased levels of absenteeism, including at our manufacturing and distributing facilities.

Many of our manufacturing plant and distribution center personnel are currently unvaccinated, and we may also experience employee resistance in complying with current and future government vaccine and testing mandates, which may cause labor shortages significantly impacting manufacturing production and distribution center productivity.

Concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Omicron variants, subvariants and other virus mutations as well as vaccine distribution and hesitancy.

and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to moratoriums on elective procedures and mandatory quarantines and travel restrictions), resulting in higher levels of absenteeism, including at our manufacturing and distribution facilities.

Due to the uncertainty caused by the pandemic, our operating performance and financial results, particularly in the short term, may be subject to volatility.

We have experienced significant challenges to our global supply chain in recent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, resulting from the pandemic and other exogenous factors including significant weather events, elevated inflation levels, disruptions to certain ports of call around the world, the war in Ukraine and certain other geopolitical events.

We may continue to experience these and other challenges related to our supply chain in future periods.

Supply Constraints, Global Economic Conditions

We expect to experience some of these and other challenges related to 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 due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future.

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence.

Our results of operations are also affected by macroeconomic conditions and levels of business confidence.

The war in Ukraine and the sanctions and other measures being imposed in response to this conflict have increased the levels of economic and political uncertainty.

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While Russia and Ukraine do not constitute a material portion of our business, a significant escalation or expansion of economic disruption or the conflict’s current scope could have an adverse effect on our business.

We expect that these challenges as well as evolving governmental restrictions and requirements, among other factors, may continue to have an adverse effect on our business.

In addition, the existence of inflation 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 and capital costs, shipping costs, increased costs of labor, weakening exchange rates and other similar effects.

We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses as well as negative impacts from weakening exchange rates, caused by the COVID-19 pandemic or as a result of general macroeconomic factors, and 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 may also cause our customers to reduce or delay orders for our products and services, which could have a material adverse impact on our sales and results of operations.

In addition to acquisitions and organic reinvestment, we consistently look for opportunities to optimize our portfolio.

As such, we may divest businesses, discontinue products or exit markets (in a manner consistent with our commitments to patient safety and quality) to create value and drive enhanced future performance in line with our strategic objectives.

Regulatory Environment

Our operations and products, and those of our customers, are subject to regulation globally by numerous government agencies.

We, like other businesses in our industry, face challenges inherent in product development, including the potential inability to obtain and maintain regulatory approvals and registrations in the United States and abroad, which could preclude or delay commercialization of a product and increase development costs.

New or changing laws and regulations, or changes in enforcement practices in response to requests from various regulatory authorities, could also affect our domestic and foreign operations.

In particular, the U.S.

and other countries may impose new requirements regarding registration, labeling or prohibited materials (including DEHP and polyvinyl chloride) that may require us to re-register products already on the market or change product formulations or otherwise impact our ability to market our products.

Environmental laws, particularly with respect to the emission of greenhouse gases, are also becoming more stringent throughout the world.

Product efficacy or safety concerns regarding products could result in regulatory action on the part of the FDA or foreign counterparts, declining sales and product liability claims, and damage to our reputation.

For example, manufacturers across the pharmaceutical industry, including us, are evaluating their product portfolios for the potential presence or formation of nitrosamines.

We expect that these challenges and conditions, among other factors, may continue to have an adverse effect on our business.

For further discussion, please refer to Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Three Months Ended June 30, Percent change

Three Months Ended September 30, Percent change

(in millions) 2022 2021 At actual

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Total net sales $ 3,773 $ 3,226 17 % 23 %

Six Months Ended June 30, Percent change

Nine Months Ended September 30, Percent change

(in millions) 2022 2021 At actual

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Total net sales $ 11,226 $ 9,270 21 % 26 %

Our acquisition of Hillrom favorably impacted net sales by 23 and 24 percentage points during the second quarter and first half of 2022, respectively, compared to the prior year periods.

Foreign currency unfavorably impacted net sales by 5 and 4 percentage points during the second quarter and first half of 2022, respectively, compared to the prior-year periods, principally due to the strengthening of the U.S.

Our acquisition of Hillrom favorably impacted net sales by 23 and 24 percentage points during the third quarter and first nine months of 2022, respectively, compared to the prior year periods.

Foreign currency unfavorably impacted net sales by 6 and 5 percentage points during the third quarter and first nine months of 2022, respectively, compared to the prior-year periods, principally due to the strengthening of the U.S.

Dollar relative to the Euro, British Pound, Turkish Lira, Australian Dollar and Japanese Yen.

The comparisons presented at constant currency rates reflect local currency sales at the prior period’s foreign exchange rates.

This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period.

This measure provides information on the change in net sales assuming that foreign currency exchange rates had remained constant between the prior and the current period.

We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S.

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• Patient Support Systems includes sales of our connected care solutions:

devices, software, communications and integration technologies.

devices, software, communications and integration technologies and smart beds.

• Front Line Care includes sales of our integrated patient monitoring and diagnostic technologies to help diagnose, treat and manage a wide variety of illness and diseases, including respiratory therapy, cardiology, vision screening and physical assessment.

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The following is a summary of net sales by product category:

Three Months Ended June 30, Percent change

Three Months Ended September 30, Percent change

(in millions) 2022 2021 At actual currency rates At constant currency rates

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Total Baxter $ 3,773 $ 3,226 17 % 23 %

Six months ended June 30, Percent change

Nine months ended September 30, Percent change

(in millions) 2022 2021 At actual currency rates At constant currency rates

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Total Baxter $ 11,226 $ 9,270 21 % 26 %

Renal Care net sales decreased 3% in the second quarter and 3% in the first half of 2022, as compared to the prior-year periods.

The decrease in the second quarter and first half was driven by a 5% and 4%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods, and lower in-center HD sales, partially offset by global patient growth in PD.

Medication Delivery net sales increased 2% in the second quarter and 5% in the first half of 2022, as compared to the prior-year periods.

The increase in the second quarter and first half was driven by increased demand for IV administration sets and solutions, reflecting a recovery in hospital admission rates and surgical procedures.

The first half of 2022 was also favorably impacted by lower U.S.

Renal Care net sales decreased 4% in the third quarter and 3% in the first nine months of 2022, as compared to the prior-year periods.

The decrease in the third quarter and first nine months was driven by an 8% and 5%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods, and lower in-center HD sales, partially offset by global patient growth in PD.

Medication Delivery net sales decreased 3% in the third quarter and increased 2% in the first nine months of 2022, as compared to the prior-year periods.

The decrease in the third quarter was driven by a 3% negative impact from foreign exchange rates as compared to the prior-year period.

The increase in the first nine months was driven by increased demand for IV administration sets and solutions, reflecting a recovery in hospital admission rates and surgical procedures.

The first nine months of 2022 was also favorably impacted by lower U.S.

customer rebates in the current year period.

Those items were partially offset by lower sales of infusion pumps, a 2% negative impact in the second quarter and first half of 2022 from foreign exchange rates as compared to the prior-year periods and sales headwinds in China driven by COVID-related lockdowns.

Those items were partially offset by lower sales of infusion pumps, a 2% negative impact in the first nine months of 2022 from foreign exchange rates as compared to the prior-year period and sales headwinds in China driven by COVID-related lockdowns.

Supply chain constraints, including constraints related to the availability of semiconductor components and other components used in the production of our infusion pumps, and the fact that our new infusion pump platform has not yet received FDA clearance in the U.S.

have contributed to lower sales of infusion pumps in the current year periods.

Pharmaceuticals net sales decreased 3% in the second quarter and 4% in the first half of 2022, as compared to the prior-year periods.

The decrease in the second quarter and first half was primarily driven by a 6% and 5%, respectively, negative impact from foreign exchange rates, as compared to the prior-year periods.

Additionally, pharmaceuticals net sales were adversely impacted by new market entrants increasing competition for certain molecules.

Pharmaceuticals net sales decreased 11% in the third quarter and 7% in the first nine months of 2022, as compared to the prior-year periods.

The decrease in the third quarter and first nine months was primarily driven by a 8% and 6%, respectively, negative impact from foreign exchange rates, as compared to the prior-year periods.

Additionally, pharmaceuticals net sales were adversely impacted by new market entrants increasing competition and supply constraints for certain molecules.

Those items were partially offset by increased sales internationally for inhaled anesthesia products.

Clinical Nutrition net sales decreased 3% in the second quarter and the first half of 2022, as compared to the prior-year periods.

The decrease in the second quarter and first half was driven by a 7% and 6%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods, and lower sales of vitamins resulting from ongoing supply constraints.

Clinical Nutrition net sales decreased 5% in the third quarter and 4% in the first nine months of 2022, as compared to the prior-year periods.

The decrease in the third quarter and first nine months was driven by a 9% and 7%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods, and lower sales of vitamins resulting from ongoing supply constraints.

Those decreases were partially offset by growth in the U.S.

for our PN therapies and related products, including our PN multi-chamber bags.

Advanced Surgery net sales increased 3% in the second quarter and 4% in the first half of 2022, as compared to the prior-year periods.

The increase in the second quarter and first half was driven by continued recovery in surgical procedures, particularly in EMEA, and benefits from competitor supply constraints.

Partially offsetting that increase was a 5% and 4%, respectively, negative impact from foreign exchange rates, as compared to the prior-year periods.

Acute Therapies net sales decreased 8% in the second quarter and 9% in the first half of 2022, as compared to the prior-year periods.

The decrease in the second quarter and first half was driven by lower COVID-related demand for our CRRT systems and a 4% and 3%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods.

BioPharma Solutions net sales decreased 11% in the second quarter and was flat in the first half of 2022, as compared to the prior-year periods.

The decrease in the second quarter includes a 6% negative impact from foreign

exchange rates, as compared to the prior-year quarterly period, and lower sales from manufacturing services and supply packaging related to the production of COVID-19 vaccines on behalf of multiple pharmaceutical companies, reflecting a challenging comparison against a strong prior-year quarterly period.

The flat net sales for the first half of 2022 reflects the offsetting impacts of a 6% negative impact from foreign exchange rates and higher sales of manufacturing services and supply packaging related to the production of COVID-19 vaccines, both as compared to the first half of 2021.

Advanced Surgery net sales decreased 1% in the third quarter and increased 2% in the first nine months of 2022, as compared to the prior-year periods.

The decrease in the third quarter was driven by a 7% negative impact from foreign exchange rate changes, as compared to the prior-year period, partially offset by continued recovery in surgical procedures.

The increase in the first nine months was driven by the continued recovery in surgical procedures, particularly in EMEA, and benefits from competitor supply constraints, partially offset by a 5% negative impact from foreign exchange rates, as compared to the prior-year period.

Acute Therapies net sales decreased 15% in the third quarter and 11% in the first nine months of 2022, as compared to the prior-year periods.

The decrease in the third quarter and first nine months was driven by lower COVID-related

demand for our CRRT systems and a 6% and 4%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods.

BioPharma Solutions net sales decreased 17% in the third quarter and 6% in the first nine months of 2022, as compared to the prior-year periods.

The decrease in the third quarter and first nine months includes a 7% and 6%, respectively, negative impact from foreign exchange rates, as compared to the prior-year periods.

The decrease in the third quarter was also driven by lower sales from manufacturing services and supply packaging related to the production of COVID-19 vaccines on behalf of multiple pharmaceutical companies, reflecting a challenging comparison against a strong prior-year period.

The Patient Support Systems, Front Line Care and Surgical Solutions product categories were added in connection with our acquisition of Hillrom in December of 2021.

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Gross Margin and Expense Ratios

Three months ended June 30,

Three months ended September 30,

2022 % of net sales 2021 % of net sales $ change % change

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R&D $ 152 4.0 % $ 129 4.0 % $ 23 17.8 %

Six months ended June 30,

Nine months ended September 30,

2022 % of net sales 2021 % of net sales $ change % change

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R&D $ 450 4.0 % $ 396 4.3 % $ 54 13.6 %

The gross margin ratio was 38.8% and 37.6% in the second quarter and first half of 2022, respectively.

The special items identified above had an unfavorable impact of approximately 3.7 and 6.2 percentage points on the gross margin ratio in the second quarter and first half of 2022, respectively.

The gross margin ratio was 39.8% and 39.3% in the second quarter and first half of 2021, respectively.

The special items identified above had an unfavorable impact of approximately 2.8 and 3.0 percentage points on the gross margin ratio in the second quarter and first half of 2021, respectively.

The gross margin ratio was 30.0% and 35.0% in the third quarter and first nine months of 2022, respectively.

The special items identified above had an unfavorable impact of approximately 12.9 and 8.5 percentage points on the gross margin ratio in the third quarter and first nine months of 2022, respectively.

The gross margin ratio was 40.9% and 39.9% in the third quarter and first nine months of 2021, respectively.

The special items identified above had an unfavorable impact of approximately 3.1 and 3.0 percentage points on the gross margin ratio in the third quarter and first nine months of 2021, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the gross margin ratio decreased in the second quarter and first half of 2022 compared to the prior-year periods.

The decrease was primarily driven by raw materials inflation and increased supply chain costs, partially offset by a favorable product mix that was primarily driven by our acquisition of Hillrom and lower bonus accrual under our annual employee incentive compensation plans.

The SG&A expenses ratio was 26.1% and 27.2% in the second quarter and first half of 2022, respectively.

The special items identified above had an unfavorable impact of approximately 3.7 and 4.5 percentage points on the SG&A expenses ratio in the second quarter and first half of 2022, respectively.

The SG&A expenses ratio was 21.8% and 21.5% in the second quarter and first half of 2021, respectively.

The special items identified above had an unfavorable impact of approximately 0.9 and 0.7 percentage points on the SG&A expenses ratio in the second quarter and first half of 2021, respectively.

Excluding the impact of the special items, the gross margin ratio decreased in the third quarter and increased in the first nine months of 2022 compared to the prior-year periods.

The decrease in the third quarter was primarily driven by raw materials inflation and increased supply chain costs, partially offset by a favorable product mix that was primarily driven by our acquisition of Hillrom and lower bonus accruals under our annual employee incentive compensation plans.

The increase in the first nine months resulted from a favorable product mix that was that was primarily driven by our acquisition of Hillrom and lower bonus accruals under our annual employee incentive compensation plans, which exceeded the adverse impacts of raw materials inflation and increased supply chain costs for the year-to-date period.

The SG&A expenses ratio was 25.1% and 26.5% in the third quarter and first nine months of 2022, respectively.

The special items identified above had an unfavorable impact of approximately 3.3 and 4.1 percentage points on the SG&A expenses ratio in the third quarter and first nine months of 2022, respectively.

The SG&A expenses ratio was 21.1% and 21.4% in the third quarter and first nine months of 2021, respectively.

The special items identified above had an unfavorable impact of approximately 1.3 and 0.9 percentage points on the SG&A expenses ratio in the third quarter and first nine months of 2021, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the SG&A expenses ratio increased in the second quarter and first half of 2022 compared to the prior-year periods primarily due to the acquisition of Hillrom and increased outbound freight costs, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

The R&D expenses ratio was 4.0% in the second quarter and first half of 2022.

The R&D expenses ratio was 4.5% and 4.4% in the second quarter and first half of 2021, respectively.

The R&D expenses ratio decreases in the second quarter and first half of 2022 compared to the prior-year periods were driven by lower bonus accruals under our annual employee incentive compensation plans and decreased project-related expenditures.

Excluding the impact of the special items, the SG&A expenses ratio increased in the third quarter and first nine months of 2022 compared to the prior-year periods primarily due to the acquisition of Hillrom and increased outbound freight costs, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

The R&D expenses ratio was 4.0% in the third quarter and first nine months of 2022.

The R&D expenses ratio was 4.0% and 4.3% in the third quarter and first nine months of 2021, respectively.

The R&D expenses ratio remained relatively flat in the third quarter and first nine months of 2022 compared to the prior-year periods, with the increase in total spend primarily driven by the Hillrom acquisition, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

Business Optimization Items

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In the current year periods, restructuring charges include actions taken in connection with our integration of Hillrom.

From the commencement of our business optimization actions in the second half of 2015 through June 30, 2022, we have incurred cumulative pre-tax costs of $1.3 billion related to these actions.

From the commencement of our business optimization actions in the second half of 2015 through September 30, 2022, we have incurred cumulative pre-tax costs of $1.4 billion related to these actions.

The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments, and accelerated depreciation.

The reductions in our cost base from these actions in the aggregate are expected to provide cumulative annual pre-tax savings of more than $1.2 billion once the remaining actions are complete.

The savings from completed or in-process actions have reduced cost of sales, SG&A expenses, and R&D expenses.

Approximately 99 percent of the expected annual pre-tax savings from those actions are expected to be realized by the end of 2022, with the remainder by the end of 2023.

We currently expect to incur additional pre-tax costs, primarily related to the implementation of business optimization programs, of approximately $14 million through the completion of initiatives that are currently underway.

We continue to pursue cost savings initiatives, including those related to our integration of Hillrom, and, to the extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs to implement business optimization programs in future periods.

Other Operating Income, Net

Other operating income, net was $11 million and $28 million in the second quarter and first half of 2022, respectively, and $5 million in the second quarter and first half of 2021.

Those amounts reflect net decreases in the estimated fair values of contingent consideration liabilities.

Goodwill Impairments

We assess goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

We recognize a goodwill impairment charge for the amount by which a reporting unit's carrying amount exceeds its fair value.

As described above, we acquired Hillrom on December 13, 2021 and recognized $6.8 billion of goodwill and $6.0 billion of other intangible assets, including $1.9 billion of indefinite-lived intangible assets, in connection with that acquisition.

Our Hillrom segment includes the following three reporting units:

Patient Support Systems, Front Line Care and Surgical Solutions.

During the third quarter of 2022, we performed trigger-based impairment tests of the goodwill of each of those three reporting units, as well as the indefinite-lived intangible assets, consisting primarily of trade names, that we acquired in connection with the Hillrom acquisition.

We performed those tests as of September 30, 2022 due to (a) current macroeconomic conditions, including the rising interest rate environment and broad declines in equity valuations, and (b) reduced earnings forecasts for our three Hillrom reporting units, driven primarily by current shortages of certain component parts used in our products, raw materials inflation and increased supply chain costs.

The impairment tests resulted in total pre-tax goodwill impairment charges of $2.8 billion in the third quarter of 2022, consisting of a $1.4 billion goodwill impairment for our Patient Support Systems reporting unit, a $1.0 billion goodwill impairment for our Front Line Care reporting unit and a $0.4 billion goodwill impairment for our Surgical Solutions reporting unit.

Further adverse changes to macroeconomic conditions or our earnings forecasts could lead to additional goodwill or intangible asset impairment charges in future periods and such charges could be material to our results of operations.

Other Operating Expense (Income), Net

Other operating expense (income), net was $48 million and $20 million in the third quarter and first nine months of 2022, respectively.

The current year periods include a loss of $54 million under an arrangement to divest certain product rights for an amount that is less than our cost of those product rights, which was triggered by U.S.

and European Union regulatory approvals of the related products.

Refer to Note 2 in Item 1 of this Quarterly Report on

Form 10-Q for further information about the related transactions.

That loss was partially offset by gains from net decreases in the estimated fair values of contingent consideration liabilities of $6 million and $34 million in the third quarter and first nine months of 2022, respectively.

Other operating expense (income), net was $1 million and $6 million in the third quarter and first nine months of 2021, respectively, which consisted of gains from net decreases in the estimated fair values of contingent consideration liabilities.

Interest Expense, Net

Interest expense, net was $89 million and $174 million in the second quarter and first half of 2022, respectively, and $34 million and $68 million in the second quarter and first half of 2021, respectively.

The increases in the second quarter and first half of 2022 were driven by higher average debt outstanding in connection with the Hillrom acquisition.

Interest expense, net was $104 million and $278 million in the third quarter and first nine months of 2022, respectively, and $50 million and $118 million in the third quarter and first nine months of 2021, respectively.

The increases in the third quarter and first nine months of 2022 were primarily driven by higher average debt outstanding in connection with the Hillrom acquisition.

Other (Income) Expense, Net

Other (income) expense, net was income of $44 million and $60 million in the second quarter and first half of 2022, respectively, and income of $2 million and expense of $3 million in the second quarter and first half of 2021, respectively.

The increases in the second quarter and first half of 2022 compared to the prior year were primarily due to foreign exchange gains in the current-year periods versus losses in the prior-year periods, pension benefits in the current-year periods versus expenses in the prior-year periods and a pension curtailment gain in the current-year periods.

In the first quarter of 2021, we began to wind down our operations in Argentina.

Upon substantial liquidation of those operations in the future, we expect to reclassify currency translation adjustments (CTA) from accumulated other comprehensive (loss) income to other (income) expense, net and recognize a non-cash charge.

As of June 30, 2022, the CTA loss for our Argentina operations was in excess of $60 million.

Our effective income tax rate was 13.6% and 23.2% in the second quarter, and 15.7% and 19.1% in the first half of 2022 and 2021, respectively.

Other (income) expense, net was an expense of $63 million and $3 million in the third quarter and first nine months of 2022, respectively, and an expense of $12 million and $15 million in the third quarter and first nine months of 2021, respectively.

The increases in the third quarter of 2022 compared to the prior year period was primarily due to the reclassification of a cumulative translation loss from accumulated other comprehensive income (loss) to earnings due to the substantial liquidation of our operations in Argentina, partially offset by pension benefits in the current-year period.

The decrease in the first nine months of 2022 compared to the prior year was primarily due to foreign exchange gains in the current-year period versus losses in the prior-year period, pension benefits in the current-year period versus expenses in the prior-year period and a pension curtailment gain in the current-year period, partially offset by the reclassification of the Argentina cumulative translation loss to earnings.

Our effective income tax rate was 1.1% and (0.2)% in the third quarter, and (1.1)% and 11.8% in the first nine months of 2022 and 2021, respectively.

Our effective income tax rate can differ from the 21% U.S.

federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.

For the three and six months ended June 30, 2022, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a favorable geographic earnings mix and discrete tax matters in various jurisdictions, of which none were individually material, partially offset by an increase in our liabilities for uncertain tax positions.

For the three and six months ended June 30, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a favorable geographic earnings mix and decreases in accrued withholding taxes in several foreign jurisdictions, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.

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 and liabilities for uncertain tax positions and excess tax benefits or shortfalls on stock compensation awards.

For the three and nine months ended September 30, 2022, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to non-deductible goodwill impairments.

For the three months ended September 30, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.

For the nine months ended September 30, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as a favorable geographic earnings mix and changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.

Segment Results

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Americas, EMEA and APAC, and a new global segment for our recently acquired Hillrom business.

We use net sales and operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our segments.

We use net sales and operating income on a segment basis to make resource allocation decisions and

assess the ongoing performance of our segments.

The following is a summary of financial information for our reportable segments:

Net sales Operating income (loss)

Three months ended June 30, Six months ended June 30, Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30, Three months ended September 30, Nine months ended September 30,

(in millions) 2022 2021 2022 2021 2022 2021 2022 2021

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Total $ 3,773 $ 3,226 $ 11,226 $ 9,270 $ (2,799) $ 513 $ (2,296) $ 1,327

Segment net sales and operating income were $1.6 billion and $567 million, respectively, in the second quarter and $3.3 billion and $1.2 billion, respectively, in the first half of 2022.

Segment net sales and operating income were $1.6 billion and $632 million, respectively, in the second quarter and $3.2 billion and $1.2 billion, respectively, in the first half of 2021.

The decrease in operating income in the second quarter of 2022 was due to raw materials inflation, higher supply chain costs and lower sales in our BioPharma Solutions and Acute Therapies product categories, partially offset by higher sales in our Medication Delivery and Renal Care product categories.

The decrease in operating income in the first half of 2022 was due to raw materials inflation, higher supply chain costs and lower sales in our Pharmaceuticals and Acute Therapies product categories, partially offset by higher sales in Medication Delivery, Renal Care and Advanced Surgery.

Segment net sales and operating income were $738 million and $169 million, respectively, in the second quarter and $1.4 billion and $288 million, respectively, in the first half of 2022.

Segment net sales and operating income were $783 million and $159 million, respectively, in the second quarter and $1.5 billion and $294 million, respectively, in the first half of 2021.

The increase in operating income in the second quarter was primarily due to lower operating expenses and improved gross margin, driven by a favorable product mix, partially offset by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period, raw materials inflation and higher supply chain costs.

The decrease in the first half of 2022 was primarily due to an unfavorable impact of foreign exchange rates on results as compared to the prior-year period, raw materials inflation and higher supply chain costs.

For the first half of 2022, the decrease in operating income was partially offset by having a full six months of sales from our February 2021 acquisition of the rights to Caelyx and Doxil for specified territories outside the U.S.

Segment net sales and operating income were $647 million and $156 million, respectively, in the second quarter and $1.3 billion and $307 million, respectively, in the first half of 2022.

Segment net sales and operating income were $691 million and $152 million, respectively, in the second quarter and $1.3 billion and $290 million, respectively, in the first half of 2021.

The increase in operating income in the second quarter and first half of 2022 was due to lower operating expenses and an improved gross margin, driven by a favorable product mix, partially offset by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period, raw materials inflation, higher supply chain costs and sales headwinds in China driven by COVID-related lockdowns.

Segment net sales and operating income were $715 million and $149 million, respectively, in the second quarter and $1.5 billion and $349 million, respectively, in the first half of 2022.

The increases in net sales and operating income in the first quarter and first half of 2022, from zero in the prior year periods, were due to our acquisition of Hillrom in December 2021.

Segment net sales and operating income were $1.7 billion and $588 million, respectively, in the third quarter and $5.0 billion and $1.8 billion, respectively, in the first nine months of 2022.

Segment net sales and operating income were $1.7 billion and $676 million, respectively, in the third quarter and $4.9 billion and $1.9 billion, respectively, in the first nine months of 2021.

The decrease in operating income in the third quarter of 2022 was due to higher supply chain costs and lower sales in our BioPharma Solutions, Pharmaceuticals and Acute Therapies product categories, partially offset by higher sales in our Renal Care and Advanced Surgery product categories.

The decrease in operating income in the first nine months of 2022 was due to raw materials inflation, higher supply chain costs and lower sales in our Pharmaceuticals, Acute Therapies and BioPharma Solutions product categories, partially offset by higher sales in our Medication Delivery, Renal Care and Advanced Surgery product categories.

Segment net sales and operating income were $692 million and $145 million, respectively, in the third quarter and $2.1 billion and $433 million, respectively, in the first nine months of 2022.

Segment net sales and operating income were $779 million and $167 million, respectively, in the third quarter and $2.3 billion and $461 million, respectively, in the first nine months of 2021.

The decrease in operating income in the third quarter and first nine months of 2022 was primarily due to an unfavorable impact of foreign exchange rates on results as compared to the prior-year period, lower sales in our Acute Therapies and BioPharma Solutions product categories and higher supply chain costs, partially offset by lower operating expenses and improved gross margin, driven by a favorable product mix.

For the first nine months of 2022, the decrease in operating income was partially offset by having a full nine months of sales from our February 2021 acquisition of the rights to Caelyx and Doxil for specified territories outside the U.S.

Segment net sales and operating income were $643 million and $152 million, respectively, in the third quarter and $1.9 billion and $459 million, respectively, in the first nine months of 2022.

Segment net sales and operating income were $720 million and $166 million, respectively, in the third quarter and $2.1 billion and $456 million, respectively, in the first nine months of 2021.

The decrease in operating income in the third quarter of 2022 was driven by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period.

The increase in operating income in the first nine months of 2022 was due to lower operating expenses and an improved gross margin, driven by a favorable product mix, partially offset by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period, higher supply chain costs and sales headwinds in China driven by COVID-related lockdowns.

Segment net sales and operating income were $735 million and $215 million, respectively, in the third quarter and $2.2 billion and $564 million, respectively, in the first nine months of 2022.

The increases in net sales and operating income in the third quarter and first nine months of 2022, from zero in the prior year periods, were due to our acquisition of Hillrom in December 2021.

Corporate and Other

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In connection with our ongoing integration activities, beginning in the first quarter 2022, we have updated the measure of profitability for our Hillrom segment by excluding such unallocated costs, consistent with our legacy Baxter segments.

Those unallocated costs related to Hillrom, which totaled $61 million and $280 million for the three and six months ended June 30, 2022, respectively, are now presented within Corporate as well.

The Corporate operating loss in the second quarter was significantly higher than the prior-year period primarily due to higher intangible asset amortization expense, acquisition and integration-related expenses and business optimization charges, all driven by the Hillrom acquisition, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

In September 2013, we entered into an agreement with Celerity Pharmaceutical, LLC (Celerity) to develop certain acute care generic injectable premix and oncolytic products through regulatory approval.

We transferred our rights in these products to Celerity and Celerity assumed ownership and responsibility for development of the products.

We are obligated to purchase the individual product rights from Celerity if the products obtain regulatory approval.

In December 2020, we entered into an agreement with a third party to divest one of the products that is currently being developed by Celerity if that product receives regulatory approval in the U.S.

and/or European Union.

If regulatory approval is obtained, we would incur a loss ranging from $30 million to $60 million for the difference between our purchase price and the divestiture proceeds in connection with that transaction.

Those unallocated costs related to Hillrom, which totaled $3.0 billion and $3.3 billion for the three and nine months ended September 30, 2022, respectively, are now presented within Corporate as well.

The Corporate operating loss in the third quarter was significantly higher than the prior-year period primarily due to goodwill and intangible asset impairments, higher intangible asset amortization expense, acquisition and integration-related expenses and business optimization charges and increased manufacturing variances and centrally managed supply chain costs, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash flows for the six-month periods ended June 30, 2022 and 2021.

Six months ended June 30,

The following table is a summary of the statement of cash flows for the nine-month periods ended September 30, 2022 and 2021.

Nine months ended September 30,

(in millions) 2022 2021

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Cash Flows from Operations

In the first half of 2022, cash provided by operating activities was $482 million, as compared to cash provided by operating activities of $854 million in the first half of 2021, a decrease of $372 million.

In the first nine months of 2022, cash provided by operating activities was $772 million, as compared to cash provided by operating activities of $1.5 billion in the first nine months of 2021, a decrease of $757 million.

The decrease was primarily due to a decrease in our net income in 2022, increases in inventory levels and higher annual payouts under our employee incentive compensation plans in the current year period compared to the prior year period.

Cash Flows from Investing Activities

In the first half of 2022, cash used for investing activities included payments for acquisitions and investments of $190 million, primarily related to our payment to acquire the rights to Zosyn, and capital expenditures of $311 million.

In the first half of 2021, cash used for investing activities included payments for acquisitions and investments of $417 million, primarily related to Caelyx and Doxil and Transderm Scop, and capital expenditures of $329 million.

In the first nine months of 2022, cash used for investing activities included payments for acquisitions and investments of $206 million, primarily related to our payment to acquire the rights to Zosyn, and capital expenditures of $479 million.

In the first nine months of 2021, cash used for investing activities included payments for acquisitions and investments of $463 million, primarily related to Caelyx and Doxil, Transderm Scop and PerClot Polysaccharide Hemostatic System (PerClot), and capital expenditures of $508 million.

See Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.

Cash Flows from Financing Activities

In the first half of 2022, cash used in financing activities included debt repayments of $749 million, dividend payments of $281 million, and a net repayment of short-term borrowings of $45 million, partially offset by proceeds from stock issued under employee benefit plans of $88 million.

In the first half of 2021, cash used for financing activities included payments for treasury stock repurchases of $565 million and dividend payments of $249 million, partially offset by proceeds from stock issued under employee benefit plans of $93 million and the net proceeds from commercial paper borrowings of $50 million.

In the first nine months of 2022, cash used in financing activities included debt repayments of $953 million and dividend payments of $427 million, partially offset by a net increase in commercial paper borrowings of $30 million and proceeds from stock issued under employee benefit plans of $114 million.

In the first nine months of 2021, cash used for financing activities included payments for treasury stock repurchases of $600 million, debt repayments of $407 million and dividend payments of $390 million, partially offset by proceeds from stock issued under employee benefit plans of $135 million and the net proceeds from commercial paper borrowings of $300 million.

As authorized by our Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions.

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Our Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020.

During the second quarter of 2022 we repurchased approximately 0.1 million shares under this authority pursuant to Rule 10b5-1 plans.

We had $1.3 billion remaining available under this authorization as of June 30, 2022.

During the first nine months of 2022, we repurchased 0.5 million shares under this authority pursuant to a Rule 10b5-1 plan.

We had $1.3 billion remaining available under this authorization as of September 30, 2022.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of June 30, 2022, our U.S.

As of September 30, 2022, our U.S.

dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of $2.5 billion and €200 million, respectively.

There were no borrowings outstanding under these credit facilities as of June 30, 2022 or December 31, 2021.

dollar-denominated revolving credit facility guarantees our obligations under commercial paper borrowings, which reduces our borrowing capacity by the amount of such outstanding commercial paper borrowings.

As of June 30, 2022, we were in compliance with the financial covenants in these agreements.

There were no borrowings outstanding under these credit facilities as of September 30, 2022 or December 31, 2021.

Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings.

As of September 30, 2022, we were in compliance with the financial covenants in these agreements.

In the third quarter of 2022, we amended the credit agreement governing our U.S.

dollar-denominated revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to delay the commencement of our net leverage ratio covenant step-down schedule until June 30, 2024.

The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by the institution’s respective commitment.

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We intend to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations or by issuing additional debt.

We had $1.9 billion of cash and cash equivalents as of June 30, 2022, with adequate cash available to meet operating requirements in each jurisdiction in which we operate.

We had $1.6 billion of cash and cash equivalents as of September 30, 2022, with adequate cash available to meet operating requirements in each jurisdiction in which we operate.

We invest our excess cash in money market and other funds and diversify the concentration of cash among different financial institutions.

As of June 30, 2022, we had approximately $16.7 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt.

As of September 30, 2022, we had approximately $16.4 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt.

Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure.

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However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives.

There have been no changes to our investment grade credit ratings that we disclosed in our 2021 Annual Report.

Although our outlook was downgraded from stable to negative by two of the rating agencies during the third quarter of 2022, there have been no changes to our investment grade credit ratings that we disclosed in our 2021 Annual Report.

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR) and other interbank offered rates, which have been widely used as reference rates for various securities and financial contracts, including loans, debt and derivatives.

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dollar LIBOR tenors would not cease until 2023.

Currently, our $2.5 billion U.S.

dollar-denominated revolving credit facility, our €200 million Euro-denominated revolving credit facility and our $4.0 billion Term Loan Credit Agreement 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 and term loan credit agreement include provisions related to the determination of a successor LIBOR rate.

In September 2022, our $2.5 billion U.S.

dollar-denominated revolving credit facility and our $4.0 billion Term Loan Credit Agreement were amended to reference SOFR-based rates.

Currently, our €200 million Euro-denominated revolving credit facility references LIBOR-based rates.

The discontinuation of LIBOR will require this arrangement to be modified in order to replace LIBOR with an alternative reference interest rate, which could impact our cost of funds.

That credit facility agreement includes provisions related to the determination of a successor LIBOR rate.

CRITICAL ACCOUNTING POLICIES

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A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our 2021 Annual Report.

Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by us, often employing the use of estimates about the effects of matters that are inherently uncertain.

of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by us, often employing the use of estimates about the effects of matters that are inherently uncertain.

Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2021 Annual Report.

There have been no significant changes in the application of our critical accounting policies during the first six months of 2022.

We identified the Valuation of Intangible Assets, Including IPR&D, as one of our critical accounting policies in our 2021 Annual Report.

We currently consider the valuation of goodwill to be a part of that critical accounting policy.

Goodwill is initially measured as the excess of the purchase price over the fair value (or other measurement attribute required by U.S.

GAAP) of acquired assets and liabilities in a business combination.

Goodwill is not amortized but is subject to an impairment review annually and whenever indicators of impairment exist.

We have the option to assess goodwill for impairment by initially performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount.

If we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not required to be performed.

If we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform a quantitative goodwill impairment test.

In the quantitative impairment test, we calculate the estimated fair value of the reporting unit.

If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the amount that the reporting unit’s carrying amount, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.

In a quantitative goodwill impairment test, the fair values of our reporting units are generally determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach).

Significant inputs to reporting unit fair value measurements generally include forecasted cash flows, discount rates, terminal growth rates and earnings multiples.

Each of those inputs can significantly affect the fair values of our reporting units.

During the third quarter of 2022, we recognized $2.8 billion of goodwill impairment charges and $332 million of indefinite-lived intangible asset impairment charges.

See Note 4, Goodwill and Other Intangible Assets, Net in Item 1 of this Quarterly Report on Form 10-Q for further information about those impairments.

There have been no other updates to our critical accounting policies and no significant changes in the application of our critical accounting policies during the first nine months of 2022.

RECENT ACCOUNTING PRONOUNCEMENTS

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1 FDA re-inspected the facilities and issued a Form 483 on May 17, 2022.

Classification is still pending.

Management cannot speculate on when the Claris Warning Letter will be lifted.

However, we are continuing to implement corrective and preventive actions to address FDA’s prior observations and other items we identified and 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.

As previously disclosed, we have secured alternative locations to produce a majority of the planned new products to be manufactured in Ahmedabad for distribution into the U.S.

and are producing new products from those locations.

On September 1, 2022, FDA notified the company that the inspection had been classified as voluntary action indicated (VAI).

Since the issuance of the Claris Warning Letter, we have implemented corrective and preventive actions to address FDA’s prior

observations and other items we identified and management has begun working with other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S.

1 Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htm

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Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events.

These forward-looking statements may include statements with respect to accounting estimates and assumptions, impacts of the COVID-19 pandemic and global economic conditions, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses, future regulatory filings and our 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, our exposure to financial market volatility and foreign currency and interest rate risks, potential tax liabilities associated with the separation of our biopharmaceuticals business from our medical products businesses, the impact of competition, future sales growth, business development activities (including the acquisitions of Cheetah, Seprafilm, certain outside of the U.S.

These forward-looking statements may include statements with respect to accounting estimates and assumptions, impacts of the COVID-19 pandemic and global economic conditions, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses, future regulatory filings and our 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, our exposure to financial market volatility and foreign currency and interest rate risks, the impact of competition, future sales growth, business development activities (including the acquisitions of Cheetah, Seprafilm, certain outside of the U.S.

(OUS) rights to Caelyx and Doxil, full U.S.

and specific OUS rights to Transderm Scop, PerClot, Hillrom and certain rights to Zosyn in the U.S.

and Canada), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.

and Canada), business optimization and portfolio rationalization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.

These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances.

While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results.

Whether actual future results and developments will conform to expectations and predictions is

subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:

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:

demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with our ability to accurately predict changing customer preferences, which has led to and may continue to lead to increased inventory levels, and needs and advances in technology and the resulting impact on customer inventory levels and the impact of reduced hospital admission rates and elective surgery volumes), and the impact of those products on quality and patient safety concerns;

1 unchanged sentence

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 development risks, including satisfactory clinical performance and obtaining required regulatory approvals, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;

product development risks, including satisfactory clinical performance and obtaining required regulatory approvals (including as a result of evolving regulatory requirements), the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;

our ability to finance and develop new products or enhancements on commercially acceptable terms or at all;

the impact of global economic conditions (including, among other things, the ongoing war in Ukraine, the related economic sanctions being imposed globally in response to the conflict and potential trade wars and global inflationary pressures) and continuing public health crises, pandemics and epidemics, such as the ongoing COVID-19 pandemic, on us and our employees, customers and suppliers, including foreign governments in countries in which we operate;

our ability to identify business development and growth opportunities and to successfully execute on business development strategies (including the Hillrom acquisition and related integration and restructuring activities);

product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales;

our ability to identify business development, portfolio rationalization and growth opportunities and to successfully execute on these strategies (including the Hillrom acquisition and related integration and restructuring activities);

product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales, including the focus on evaluating product portfolios for the potential presence or formation of nitrosamines;

breaches or failures of our information technology systems or products, including by cyber-attack, data leakage, unauthorized access or theft (as a result of increased remote working arrangements or otherwise);

19 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis