What changed in this filing

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Item 1. Business

2023-02-09 compared with 2022-02-23 · 107 added, 47 removed, 147 unchanged (51% of the section changed)

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and “we", "our” or "us" means Baxter International and its consolidated subsidiaries, unless the context otherwise requires.

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

COVID-19 and its variants have had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and have increased and we expect will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking.

Initial measures taken by businesses and governments beginning 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 elective medical procedures in 2020.

Some of these disruptions and impacts (including the suspension or postponement of elective medical procedures) in certain of our principal markets have continued into 2021.

The pandemic has created significant volatility in the demand for our products.

For further information about our revenues by product category, refer to Note 10 in Item 8 of this Annual Report on Form 10-K.

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 Delta and Omicron variants 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 and moratoriums on elective procedures).

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, including lengthy delays, shortages and interruptions, posed by the pandemic and other exogenous factors (including significant weather events and disruptions to certain ports of call around the world) to our global supply chain, including the cost and availability of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, and may experience these and other challenges in future periods.

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 for us and our suppliers.

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.

For further discussion, refer to Item 1A of this Annual Report on Form 10-K.

Recently Announced Strategic Actions

In January 2023, we announced the following planned strategic actions that are intended to enhance our operational effectiveness, accelerate innovation and drive additional stockholder value:

(a) a proposed spinoff of our Renal Care and Acute Therapies product categories into an independent publicly traded company, (b) our development of a new operating model to simplify our operations and (c) our pursuit of strategic alternatives (including a potential sale) for our BioPharma Solutions (BPS) product category.

This proposed spinoff of our Renal Care and Acute Therapies product categories (the proposed spinoff) is currently expected to be completed during the first half of 2024, approximately 12 to 18 months from the date of the related announcement.

In 2022 we generated $4.4 billion of combined net sales from our Renal Care and Acute Therapies product categories, representing approximately 29% of our consolidated net sales.

We intend for the proposed spinoff to qualify as tax-free to Baxter and our shareholders for U.S.

federal income tax purposes.

The proposed spinoff is subject to the satisfaction of customary conditions, including final approval from our Board of Directors, the filing and effectiveness of a registration statement on Form 10, receipt of an Internal Revenue Service (IRS) ruling or related tax opinions from counsel, satisfactory completion of financing arrangements, consultations with works councils and other employee representative bodies and any necessary regulatory approvals.

To strengthen our ability to deliver on our vision to transform healthcare, we are designing a new operating model intended to simplify and streamline our operations.

Once the simplified model is implemented, we expect to be a more integrated and nimble organization that can respond more effectively to changes in the macroeconomic environment, while enhancing our ability to drive innovation in our product portfolio.

As part of these actions, we are working to create a more resilient supply chain and better align our manufacturing footprint and supply chain to our commercial activities.

Under the new model, our business will be managed across four global business units consisting of:

(1) Medical Products and Therapies, which will include our Medication Delivery, Advanced Surgery and Clinical Nutrition product categories, (2) Healthcare Systems and Technologies, which will include the Patient Support Systems, Front Line Care and Global Surgical Solutions product categories obtained in the Hillrom acquisition, (3) Pharmaceuticals, which will include our BPS product category, for which we are exploring strategic alternatives, and our Pharmaceuticals product category and (4) Kidney Care, which will include our Renal Care and Acute Therapies product categories that we are proposing to spinoff into an independent publicly traded company.

We expect to have our new organizational designs substantially finalized in the second quarter of 2023.

The new operating model will have significant impacts on our systems and processes across our entire company and we expect to have those broader operational changes, including our updated management reporting framework for the new operating model, fully implemented during the second half of 2023.

At that time, we expect that our reportable segments will be changed to align with the new operating model.

We are pursuing strategic alternatives (including a potential sale) for our BPS product category, which includes contract manufacturing services provided to pharmaceutical and biopharmaceutical companies.

In 2022 we generated $644 million of net sales from that product category, representing approximately 4% of our consolidated net sales.

A potential sale of, or other strategic transaction involving, BPS would help us further narrow our strategic focus as a company while providing an opportunity for capital deployment, including debt repayment.

Following these planned strategic actions (including completion of the proposed spinoff), we intend to emerge as a stronger hospital solutions and connected care company.

As a more focused business, we expect to be better positioned to make strategic investments to accelerate our vision and to deliver differentiated value to our stakeholders with our unique combination of products, therapies and connected care platforms.

There can be no guarantees that the proposed spinoff, the simplified operating model or the sale of, or other strategic transaction involving, our BPS product category will be completed in the manner or over the timeframes described above, or at all.

Acquisition of Hillrom

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

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 obligations, the enterprise value of the transaction was approximately $12.8 billion.

terms of the transaction agreement, Hillrom shareholders received $156.00 in cash per each outstanding Hillrom common share.

Prior to our acquisition of Hillrom, Hillrom was a global medical technology leader whose products and services help enable earlier diagnosis and treatment, optimize surgical efficiency, and accelerate patient recovery while simplifying clinical communication and shifting care closer to home.

Hillrom was a global medical technology leader and its products and services help enable earlier diagnosis and treatment, optimize surgical efficiency, and accelerate patient recovery while simplifying clinical communication and shifting care closer to home.

Hillrom made those outcomes possible through digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.

See Note 2 and Note 5 in Item 8 of this Annual Report on Form 10-K for additional information about the Hillrom acquisition and related financing arrangements.

In 2022 the Patient Support Systems, Front Line Care and Global Surgical Solutions product categories of our Hillrom segment collectively generated net sales of $2.9 billion.

During 2022, we also recognized $2.8 billion of goodwill impairments and $332 million of indefinite-lived intangible asset impairments related to goodwill and trade name intangible assets that arose from the Hillrom acquisition.

See Notes 2, 4, 5 and 17 in Item 8 of this Annual Report on Form 10-K for additional information about the Hillrom acquisition, goodwill and intangible asset impairments, Hillrom acquisition financing arrangements and Hillrom segment results, respectively.

Business Segments and Products

We manage our global operations based on four segments, consisting of the following geographic segments related to our legacy Baxter business:

Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific), and a new global segment for our recently acquired Hillrom business.

We currently manage our global operations based on four segments, consisting of the following geographic segments related to our legacy Baxter business:

Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific), and a global segment for our recently acquired Hillrom business.

As discussed above under “Recently Announced Strategic Actions,” we are designing a new operating model intended to simplify and streamline our operations and we expect that our reportable segments will be changed to align with that new operating model when it is fully implemented.

The Americas, EMEA and APAC segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies;

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and surgical hemostat and sealant products.

As discussed above under "Recently Announced Strategic Actions," we are pursuing the proposed spinoff of our Renal Care and Acute Therapies product categories and strategic alternatives for our BPS product category.

The Hillrom segment provides digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices and advanced equipment for the surgical space.

For financial information about our segments, see Note 17 in Item 8 of this Annual Report on Form 10-K.

Business Strategy

Our business strategy is focused on driving sustainable growth and innovation aligned with our mission to save and sustain lives and our vision to transform healthcare with a customer focus to improve patient outcomes, enhance workflow efficiency, and enable cost-effective care.

Our diversified and broad portfolio of medical products that treat life-threatening acute or chronic conditions and our global presence are core components of our strategy as we

work to achieve these objectives.

We are focused on four strategic pillars as part of our pursuit of industry leading performance:

market expansion;

operational efficiency;

and capital allocation.

Our innovation strategy is focused on connected care and core therapies offerings.

Connected care offerings include devices or software that can connect, communicate and/or analyze data to help transform healthcare and improve patient outcomes.

Our acquisition of Hillrom has been a key driver in developing our connected care offerings, as its product portfolio includes digital and connected care solutions and collaboration tools such as smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.

Our core therapies product offerings include medical devices and consumable medical products designed to address essential patient and provider needs across the continuum of care.

As part of this strategy and consistent with our recently announced strategic initiatives, we are shifting our investments to drive innovation in product areas where we have compelling opportunities to serve patients and healthcare professionals while advancing our business.

We are accelerating the pace in which we bring these advances to market to support our future growth.

We are in the midst of launching several new products, geographic expansions and line extensions including in such areas as chronic and acute renal care, smart pump technology, hospital pharmaceuticals and nutritionals, surgical sealants, smart beds, respiratory vests and more.

These comprise a mix of entirely new offerings, improvements on existing technologies and the expansion of current products into new geographies.

Market Expansion

The market expansion component of our strategy includes capturing revenue synergies through the integration of Hillrom, expanding our portfolio geographically, broadening our portfolio through channel expansion and increasing utilization of our products and therapies through market development activities.

These initiatives include using Baxter’s geographic footprint to introduce the Hillrom product portfolio into new markets, as well as expanding value-added services, increasing adoption of underpenetrated therapies and providing education and advocacy to improve access to our products.

Operational Excellence

As discussed above under “Recently Announced Strategic Actions,” we are designing a new operating model intended to simplify and streamline our operations.

As part of these actions, we are working to create a more resilient supply chain and better align our manufacturing footprint and supply chain to our commercial activities.

We also continue to focus on increasing efficiencies through automation and digitization and we remain committed to deliver on the targeted cost synergies expected to be achieved from our acquisition of Hillrom.

We intend to continue to actively manage our cost structure to help ensure that we are committing resources to the highest value uses.

Such high value activities include supporting innovation, building out the portfolio, expanding patient access and accelerating growth for our stockholders.

Maintaining Disciplined and Balanced Capital Allocation

Subject to market conditions and our investment grade targets, our capital allocation strategies include the following:

• debt repayments to support our deleveraging commitments;

• active portfolio management through the identification of attractive acquisition and divestiture transactions, including our recent acquisition of Hillrom, the proposed spinoff and our pursuit of strategic alternatives (including a potential sale) for our BPS product category;

• return capital to stockholders through dividends.

We also intend to reinstate share repurchases over the longer term.

We paid down approximately $900 million of debt during 2022 and we continue to be committed to an investment grade rating, including taking actions toward achieving our 2.75x net leverage commitment.

We currently expect to apply proceeds from the proposed spinoff and potential BPS divestiture toward reducing indebtedness and addressing near-term debt maturities.

During this deleveraging period, we currently intend to maintain our dividend, not make any share repurchases and be highly selective with respect to any potential acquisitions.

Sales and Distribution

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International Operations

The majority of our revenues are generated outside of the United States and geographic expansion remains a component of our strategy.

Our presence includes operations in Europe, the Middle East, Africa, Asia-Pacific, Latin America and Canada.

The majority of our revenues are generated outside of the United States and geographic expansion remains a component of our strategy (including with respect to the Hillrom business).

Our international presence includes operations in Europe, the Middle East, Africa, Asia-Pacific, Latin America and Canada.

We are subject to certain risks inherent in conducting business outside the United States.

For more information on these risks, see the information under the captions “Risks Related to Baxter’s Business —We are subject to risks associated with doing business globally” and “—Changes in foreign currency exchange rates and interest rates could have a material adverse effect on our operating results and liquidity” in Item 1A of this Annual Report on Form 10-K.

For financial information about our foreign and domestic revenues and segment information, see Note 17 in Item 8 of this Annual Report on Form 10-K.

For financial information about our foreign and domestic revenues and segment information, see Notes 10 and 17, respectively, in Item 8 of this Annual Report on Form 10-K.

For more information regarding foreign currency exchange risk, refer to the discussion under the caption entitled “Financial Instrument Market Risk” in Item 7 of this Annual Report on Form 10-K.

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Some of these contracts have terms of more than one year and place limits on our ability to increase prices.

In the case of

hospitals, governments and other facilities, these contracts may specify minimum quantities of a particular product or categories of products to be purchased by the customer.

In the case of hospitals, governments and other facilities, these contracts may specify minimum quantities of a particular product or categories of products to be purchased by the customer.

In keeping with the increased emphasis on cost-effectiveness in healthcare delivery, many hospitals and other customers of medical products in the United States have joined group purchasing organizations (GPOs), or formed integrated delivery networks (IDNs), to enhance purchasing power.

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While many of these materials are generally available, we have experienced and may in the future experience shortages of supply.

Additionally, certain of these materials are secured from single source suppliers or on a spot basis and not pursuant to a contractual arrangement.

Additionally, certain of these materials are secured from single

source suppliers or on a spot basis and not pursuant to a contractual arrangement.

In recent periods, we have experienced increased costs and shortages of raw materials and component parts (including resins and electromechanical devices), which has had a negative impact on our profit margins, due to the increased costs, and on our sales for certain product categories, due to our inability to fully satisfy demand.

In an effort to manage risk associated with raw materials and component supply, we work closely with our suppliers to help ensure availability and continuity of supply while maintaining high quality and reliability.

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We are not always able to recover cost increases for raw materials and component parts through customer pricing due to contractual limits, where applicable, and market forces.

This circumstance occurred during 2022 and our profit margins were adversely impacted because we were unable to fully offset all such cost increases through customer pricing adjustments or other pricing actions.

We seek to utilize long-term supply contracts with some suppliers to help maintain continuity of supply and manage the risk of price increases.

Our ability to do so in the face of limited supply of certain raw materials and component parts and inflationary environment may be limited.

Competition and Healthcare Cost Containment

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In addition to government regulation, managed care organizations in the United States, which include medical insurance companies, medical plan administrators, health-maintenance organizations, hospital and physician alliances and pharmacy benefit managers, continue to put pressure on the price and usage of healthcare products.

Managed care organizations seek to contain healthcare expenditures, and their purchasing strength has been increasing due to their consolidation into fewer, larger

organizations and a growing number of enrolled patients.

Managed care organizations seek to contain healthcare expenditures, and their purchasing strength has been increasing due to their consolidation into fewer, larger organizations and a growing number of enrolled patients.

We face similar issues outside of the United States.

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Trade secret protection of unpatented confidential and proprietary information is also important to us.

We maintain certain details about our processes, products and technology as trade secrets and generally require employees, consultants, and business partners to enter into confidentiality agreements.

We maintain certain details about our processes, products and

technology as trade secrets and generally require employees, consultants, and business partners to enter into confidentiality agreements.

These agreements may be breached and we may not have adequate remedies for any breach.

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These expenditures include costs associated with R&D activities performed at our R&D centers located around the world, which include facilities in Belgium, Sweden, India, Italy, Germany, China, Japan and the United States, as well as in-licensing, milestone and reimbursement payments made to partners for R&D work performed at non-Baxter locations.

As discussed above in under "Recently Announced Strategic Actions," we are designing a new operating model intended to simplify and streamline our operations.

We are also working to create a more resilient supply chain and better align our manufacturing footprint and supply chain to our commercial activities.

These activities may result in the consolidation of one or more R&D facilities.

For more information on our R&D activities, refer to the discussion under the caption entitled “Strategic Objectives” in Item 7 of this Annual Report on Form 10-K.

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Each product that we market is required to meet specific quality standards, both in packaging and in product integrity and quality.

If any of those is determined to be compromised at any time, we endeavor to take corrective and preventive actions designed to ensure compliance with regulatory requirements and to meet customer

expectations.

If any of those is determined to be compromised at any time, we endeavor to take corrective and preventive actions designed to ensure compliance with regulatory requirements and to meet customer expectations.

For more information on corrective actions taken by us, refer to the discussion under the caption entitled “Certain Regulatory Matters” in Item 7 of this Annual Report on Form 10-K.

Corporate Responsibility

Driven by our mission to save and sustain lives, Baxter's corporate responsibility strategy focuses on addressing the environmental, social and governance (ESG) issues that affect our patients, customers, employees, communities and other stakeholders worldwide.

Our corporate responsibility approach supports our business priorities to achieve top quartile results relative to industry peers and other comparators across four dimensions:

patient safety and quality, growth through innovation, best place to work and industry-leading performance.

Advancing our corporate responsibility goals contributes to business, social and economic value, including attraction and retention, enhanced operational efficiency and implementation of enterprise risk management strategies, among others.

In 2021, we launched our 2030 Corporate Responsibility Commitment featuring ten strategic goals for focused action.

Our Commitment is anchored by three pillars - Empower Our Patients, Protect Our Planet and Champion Our People and Communities - and bolstered by our approach to the foundational principles of Ethics and Compliance, Human Rights, Diversity, Equity and Inclusion and Privacy and Data Protection.

The 2030 Corporate Responsibility Commitment and Goals highlight Baxter's corporate responsibility focus and help to further advance our ESG performance.

Our progress against these goals is published annually in our Corporate Responsibility Report which is available on our website under "Our Story-Corporate Responsibility." The Corporate Responsibility Report is not incorporated by reference into this Annual Report on Form 10-K or any other document filed with the SEC.

Government Regulation

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Our environmental policies require compliance with all applicable environmental regulations and contemplate, among other things, appropriate capital expenditures for environmental protection.

For example, we made $33 million and $10 million of capital expenditures in 2021 and 2020, respectively, related to a new ethylene oxide emissions control system at our Mountain Home, Arkansas facility.

All material elements of the new system are expected to be completed in 2022 and we currently expect to incur an additional $10 million of capital expenditures related to this project.

For example, we made $6 million, $33 million and $10 million of capital expenditures in 2022, 2021 and 2020, respectively, related to a new ethylene oxide emissions control system at our Mountain Home, Arkansas facility that was substantially completed in 2022.

Human Capital Management

As of December 31, 2022, we employed approximately 60,000 people globally, with approximately 19,000 employees in the United States and approximately 41,000 employees outside of the United States.

Approximately, 10,000 of those employees joined our organization in December 2021 in connection with our acquisition of Hillrom.

Our employees are our most important assets and set the foundation for our ability to achieve our strategic objectives.

They contribute to our success and, in particular, the employees in our manufacturing, sales, R&D and quality assurance departments are instrumental in driving operational execution and strong financial performance, advancing innovation and maintaining a strong quality and compliance program.

The success and growth of our business depends in large part on our ability to attract, retain and develop a diverse population of talented and high-performing employees at all levels of our organization, including the individuals who

comprise our global workforce as well as executive officers and other key personnel.

They contribute to our success and are instrumental in driving operational execution and our ability to deliver strong

financial performance, advancing innovation and maintaining a strong quality and compliance program across our organization.

To succeed in a competitive labor market, we have developed recruitment and retention strategies, objectives and measures that we focus on as part of the overall management of our business.

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The structure of our compensation programs balances incentive earnings for both short-term and long-term performance.

• Activating Change Today (ACT).

Building on our strong diversity and inclusion platform, our senior leadership is working in close collaboration with the Baxter Black Alliance business resource group and colleagues from across the company on a multidimensional program to advance inclusion and racial justice.

The ACT initiative is focused on driving results across four key areas – Workforce, Workplace, Community and Marketplace – encompassing employees, external stakeholders, and the markets and communities we serve.

• Activating Change Today.

Building on the success of our nine business resource groups (BRGs), one such BRG, Baxter’s Black Alliance, joined forces with colleagues across the company to introduce Activating Change Today (ACT), a multidimensional program to advance inclusion and racial justice.

ACT began as an initiative in 2020 that was initially U.S.

focused following the events surrounding the death of George Floyd, but has since garnered relevance internationally as well.

ACT is focused on driving results across four key areas – Workforce, Workplace, Community and Marketplace – encompassing employees, external stakeholders and the markets and communities we serve.

• Health and Safety.

Health and safety are firmly rooted across our global footprint.

In response to the COVID-19 pandemic and related mitigation measures, we implemented changes in our business in 2020 in an effort to better protect our employees and customers, and to support appropriate health and safety protocols.

For example, we installed physical barriers between employees in production facilities, implemented extensive cleaning and sanitation processes for both production and office administration spaces and implemented broad work-from-home initiatives for employees in our administrative functions.

While our essential workers (production and field service employees) have continued to work at our facilities and provide vital services to our customers, most employees in our administrative functions have effectively worked remotely since March 2020.

Most of our employees outside of our manufacturing facilities worked remotely during the initial stages of the COVID-19 pandemic (beginning in March 2020).

We subsequently implemented our flexible work policy, which we refer to as BaxFlex, which establishes the expectation that employees are in the office two to three days a week.

Our production and field service employees have been working at our facilities throughout the pandemic in the interest of providing vital services to our customers.

• Recruitment, Training and Development.

We use recruitment vehicles to attract diverse talent to our organization and we invest in learning opportunities that foster a growth mindset.

We use recruitment vehicles to attract diverse talent to our organization and we prioritize learning opportunities that foster a growth mindset.

Our formal offerings include a tuition reimbursement program, an e-learning platform known as BaxU and virtual workshops that support our culture, strategy and the development of crucial skills.

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Administered and analyzed by an independent third-party, the survey results are reviewed by our senior leaders, which include our executive officers.

The results of this engagement survey are also shared with individual managers, who are then tasked with taking action based on their employees’ anonymous feedback (both quantitative and qualitative).

By paying close attention to the results both at an aggregate enterprise level as well as at a department/business/work group level, we have been able to enhance our culture of respect, help educate employees more effectively about our benefits offerings as well as our learning and development opportunities and further improve our communications content, mechanisms and frequency.

The results of this engagement survey are also shared with individual managers, who are then tasked with taking action based on their employees’ anonymous feedback.

By paying close attention to the results both at an aggregate enterprise level as well as at a department/business/work group level, we have been able to enhance our culture of speed, simplicity, courage and collaboration, help educate employees more effectively about our benefits offerings as well as our learning and development opportunities and further improve our communications content, mechanisms and frequency.

Available Information

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These reports are also available free of charge via EDGAR through the Securities and Exchange Commission website (www.sec.gov).

In addition, our Corporate Governance Guidelines, Code of Conduct, and the charters for the committees of our Board of Directors are available on our website at www.baxter.com under “About Baxter—About us — Governance.” All the foregoing materials will be made available to stockholders in print upon request by writing to:

In addition, our Corporate Governance Guidelines, Code of Conduct, and the charters for the committees of our Board of Directors are available on our website at www.baxter.com under “Our Story — Our Governance.” All the foregoing materials will be made available to stockholders in print upon request by writing to:

Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

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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 1. Business