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Item 7. Management’s Discussion and Analysis

2023-02-09 compared with 2022-02-23 · 300 added, 295 removed, 388 unchanged (61% of the section changed)

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The following commentary should be read in conjunction with the consolidated financial statements and accompanying notes.

The discussion and analysis of our financial condition as of December 31, 2020 and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, included in Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations, can be found in our Current Report on Form 8-K filed with the SEC on April 29, 2021 (2020 Annual Report), which revised and superseded the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Annual Report on Form 10-K for the year ended December 31, 2020.

The discussion and analysis of our financial condition as of December 31, 2021 and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, is included in Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2021.

EXECUTIVE OVERVIEW

Description of the Company and Business Segments

Baxter International Inc.

is a global medical technology with approximately 60,000 employees worldwide who are engaged in the development, manufacture and sale of a broad range of products, digital health solutions and therapies used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and patients at home under physician supervision.

Our global footprint and the critical nature of our products and services, which are sold in over 100 countries, play a key role in expanding access to healthcare in emerging and developed countries.

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

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

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

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

As discussed below 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.

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

sterile IV solutions;

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and surgical hemostat and sealant products.

These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and patients at home under physician supervision.

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.

Our global footprint and the critical nature of our products and services play a key role in expanding access to healthcare in emerging and developed countries.

We expect to continue to evaluate our business structure as we integrate Hillrom and any changes as a result of that evaluation could impact the composition of our reportable segments in the future.

Our 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.

Financial Results

Our global net sales totaled $15.1 billion in 2022, an increase of 18% over 2021 on a reported and 23% on a constant currency basis.

International sales totaled $7.9 billion in 2022, an increase of 4% compared to 2021 on a reported basis and 12% on a constant currency basis.

Sales in the United States totaled $7.2 billion in 2022, an increase of 39% compared to 2021.

Refer to the Net Sales discussion in the Results of Operations section below for more information related to changes in net sales on a constant currency basis.

Net income (loss) attributable to Baxter stockholders totaled a loss of $2.4 billion, or $(4.83) per diluted share, in 2022.

Net income (loss) in 2022 included special items which adversely impacted our results by $4.2 billion, or $8.33 per diluted share.

Our special items, which included $3.2 billion of goodwill and intangible asset impairments in 2022, are discussed in the Results of Operations section below.

Our financial results included R&D expenses totaling $605 million in 2022, which reflects our focus on balancing investments to support our new product pipeline with efforts to optimize overall R&D spending (including with respect to the maintenance of our portfolio).

While we continue to face continuing global macroeconomic challenges, our financial position remains strong, with operating cash flows from continuing operations totaling $1.2 billion in 2022.

We have continued to execute on our disciplined capital allocation framework, as discussed in the Business Strategy section in Item 1 of this Annual Report on Form 10-K, which is designed to optimize stockholder value creation through reinvestment in our businesses, dividends and share repurchases, as well as acquisitions and other business development initiatives and consistent with our previously stated commitment to achieve our net leverage targets.

Capital expenditures totaled $679 million in 2022 as we continue to invest across our businesses to support future growth, including additional investments in support of new and existing product capacity expansions.

Our investments in capital expenditures in 2022 were focused on projects that improve production efficiency, invest in our quality systems and enhance manufacturing capabilities to support our business growth.

We also continued to return value to our stockholders.

During 2022, we paid cash dividends to our stockholders totaling $573 million.

Additionally, in 2022 we repurchased 0.5 million shares through cash repurchases pursuant to a Rule 10b5-1 repurchase plan.

For information on our share repurchase plans, see Note 8 in Item 8 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 focused on kidney care (the proposed spinoff), (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 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.

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

During 2023 and the first quarter of 2024, we expect to incur significant separation and transaction-related costs related to the proposed spinoff and our pursuit of strategic alternatives (including a potential sale) for our BPS product category, which will adversely impact our earnings and operating cash flows.

Additionally, we expect to incur some amount of dis-synergies following those transactions due to the reduced size of our company and, as a result, we will need to undertake actions to ensure that our cost structure is appropriate to support our remaining businesses.

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.

We are also designing a new operating model intended to simplify and streamline our operations and better align our manufacturing footprint and supply chain to our commercial activities.

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.

FACTORS AFFECTING OUR RESULTS OF OPERATIONS

Supply Constraints and Global Economic Conditions

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 other geopolitical events.

Due to the nature of our products, which include dense consumable medical products such as IV fluids, and the geographic locations of our manufacturing facilities, which often require us to transport our products long distances, we may be more susceptible to increases in freight costs and other supply chain challenges than certain of our industry peers.

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 (including those acquired in the Hillrom acquisition) 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 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.

In response, we continue to monitor the developing situation with respect to ongoing business in Russia and are working on appropriate contingency plans that will support our desire to serving existing, chronically ill patient populations while remaining compliant with all applicable U.S.

and European Union sanctions and regulations.

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.

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 and general macroeconomic factors have caused certain of our customers to reduce or delay orders for our products and services and could cause them to do so in the future, which could have a material adverse impact on our sales and results of operations.

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

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 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.

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 the future (including 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 (including whether hospital admissions, elective procedures and demand for certain of our products and services will return to pre-pandemic levels), our operating performance and financial results, particularly in the short term, may be subject to volatility.

We expect that the challenges caused by the pandemic as well as global economic conditions, 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.

Recent Business Combinations and Asset Acquisitions

On December 13, 2021, we completed the previously announced acquisition of all outstanding equity interests of Hillrom for a purchase price of $10.5 billion.

On March 22, 2022, we entered into an agreement with a subsidiary of Pfizer Inc.

to acquire the rights to Zosyn, a premixed frozen piperacillin-tazobactam product, in the U.S.

Zosyn is used for the treatment of intra-abdominal infections, nosocomial pneumonia, skin and skin structure infections, female pelvic infections and community-acquired pneumonia.

Under the terms of the acquisition, we paid the acquisition price of $122 million and received specified intellectual property, including patent rights, in the first quarter of 2022 and will receive additional intellectual property, including the product rights to Zosyn, in the first quarter of 2023.

Under the arrangement, we are entitled to receive profit sharing payments from sales of Zosyn until the product rights transfer to us in March 2023.

Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for additional information regarding the agreement to acquire the rights to Zosyn.

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.

Under the 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 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 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.

Refer to Note 2 and Note 5 in Item 8 of this Annual Report on Form 10-K for additional information on 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.

On July 29, 2021, we acquired certain assets related to PerClot Polysaccharide Hemostatic System (PerClot), including distribution rights for the U.S.

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Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisition of Caelyx and Doxil.

Seprafilm Adhesion Barrier

In February 2020, we completed the acquisition of the product rights to Seprafilm Adhesion Barrier (Seprafilm) from Sanofi for approximately $342 million in cash.

Seprafilm is indicated for use in patients undergoing abdominal or pelvic laparotomy as an adjunct intended to reduce the incidence, extent and severity of postoperative adhesions between the abdominal wall and the underlying viscera such as omentum, small bowel, bladder, and stomach, and between the uterus and surrounding structures such as tubes and ovaries, large bowel, and bladder.

Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisition of Seprafilm.

Financial Results

Our global net sales totaled $12.8 billion in 2021, an increase of 10% over 2020 on a reported and 7% on a constant currency basis.

International sales totaled $7.6 billion in 2021, an increase of 12% compared to 2020 on a reported basis and 8% on a constant currency basis.

Sales in the United States totaled $5.2 billion in 2021, an increase of 6% compared to 2020.

Refer to the Net Sales discussion in the Results of Operations section below for more information related to changes in net sales on a constant currency basis.

Net income attributable to Baxter stockholders totaled $1.3 billion, or $2.53 per diluted share, in 2021.

Net income in 2021 included special items which resulted in a net decrease to net income of $552 million, or $1.08 per diluted share.

Our special items are discussed in the Results of Operations section below.

Our financial results included R&D expenses totaling $534 million in 2021, which reflects our focus on balancing investments to support our new product pipeline with efforts to optimize overall R&D spending.

Our financial position remains strong, with operating cash flows from continuing operations totaling $2.2 billion in 2021.

We have continued to execute on our disciplined capital allocation framework, which is designed to optimize stockholder value creation through reinvestment in our businesses, dividends and share repurchases, as well as acquisitions and other business development initiatives as discussed in the Strategic Objectives section below.

Capital expenditures totaled $743 million in 2021 as we continue to invest across our businesses to support future growth, including additional investments in support of new and existing product capacity expansions.

Our investments in capital expenditures in 2021 were focused on projects that improve production efficiency and enhance manufacturing capabilities to support our business growth.

We also continued to return value to our stockholders in the form of dividends.

During 2021, we paid cash dividends to our stockholders totaling $530 million.

Additionally, in 2021 we repurchased 7.3 million shares through cash repurchases pursuant to Rule 10b5-1 repurchase plans.

For information on our share repurchase plans, see Note 8 in Item 8 of this Annual Report on Form 10-K.

Strategic Objectives

We continue to focus on several key objectives to successfully execute our long-term strategy to achieve sustainable growth and deliver enhanced stockholder value.

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 to achieve these objectives.

We are focused on three strategic factors as part of our pursuit of industry leading performance:

optimizing our core portfolio globally;

operational excellence focused on streamlining our cost structure and enhancing operational efficiency;

and maintaining a disciplined and balanced approach to capital allocation.

Optimizing the Core Portfolio Globally

Our global product portfolio optimization strategy identifies products that we believe to have characteristics of core growth, products that we expect to provide us with a core return on capital, products that we intend to maintain or manage differently and products that we consider to be strategic bets.

For products with core growth characteristics, we look to invest for long-term, higher margin growth.

For products that we expect to generate a core return on capital, we seek to optimize our return on investment and to maintain or enhance our market position.

For products that we intend to maintain or manage differently, we look to sustain or reposition our underlying investment.

Finally, we are evaluating our market position and investment strategy for products that we consider to be strategic bets.

As part of our portfolio management strategy, we seek to optimize our position in product areas where we have a stable, profitable business model and identify and alter investments in products that have reached the end of their life cycles or for which market positions have evolved unfavorably.

In the course of doing so, we expect to continue to reallocate capital to more promising opportunities or business groupings, as described above.

Additionally, to the extent we identify areas that do not align with our longer-term objectives, we will look to exit or divest these businesses while also continuing to identify new opportunities to enhance future performance.

As part of this strategy, 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 and we are accelerating the pace in which we bring these advances to market.

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, and more.

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

We are also evaluating product development opportunities that leverage the newly acquired Hillrom portfolio.

Operational Excellence

In recent years, we have undertaken a comprehensive review of all aspects of our operations and are actively implementing changes in line with our business goals.

As part of our pursuit of improved margin performance, we are working to optimize our cost structure and we are critically assessing optimal support levels in light of our ongoing portfolio optimization efforts and the Hillrom integration.

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:

• reinvest in the business by funding opportunities that are positioned to deliver sustainable growth, support our innovation efforts and improve margin performance;

• return capital to stockholders through dividends and share repurchases;

• identify and pursue accretive merger and acquisition (M&A) opportunities.

Corporate Responsibility at Baxter

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

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 through employee attraction and retention, enhanced operational efficiency, and implementation of enterprise risk management strategies, among others.

In 2021, we launched our 2030 CR Commitment featuring ten goals for focused action, anchored by three pillars - Empower Our Patients, Protect Our Planet and Champion Our People and Communities - on the foundation of

principles of Ethics and Compliance, Human Rights, Inclusion and Diversity, and Privacy and Data Protection.

The 2030 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.

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 COVID-19 pandemic.

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, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments have taken and continue to take.

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.

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 discussion, refer to the Product Category Net Sales Reporting section below.

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.

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.

Our ability to sustain long-term growth and successfully execute the strategies discussed above depends in part on our ability to manage within an increasingly competitive and regulated environment and to address the other risk factors described in Item 1A of this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

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Intangible asset amortization expense $ (466) $ (287)

Intangible asset impairment 1

Intangible asset impairments 1

Business optimization items 2

Product-related items 3

Acquisition and integration expenses 4

Acquisition and integration costs 4

European medical devices regulation 5

Investigation and related costs 6

Total Special Items $ (1,100) $ (432)

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Business optimization items 2

Acquisition and integration expenses 4

Divestiture-related costs 6

Acquisition and integration costs 4

Investigation and related costs 7

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Business optimization items 2

Acquisition and integration expenses 4

Investigation and related costs 6

Total Special Items $ 3 $ 1

Impact on R&D Expense Ratio 0.0 pts 0.0 pts

Other Operating Income, net

Business optimization items 2

Acquisition and integration expenses 4

Goodwill Impairments

Goodwill impairments 1

Total Special Items $ 2,812 $ —

Other Operating Expense (Income), net

Loss on product divestiture arrangement 9

Loss on subsidiary liquidation 10

Acquisition and integration costs (income) 4

Total Special Items $ 36 $ (6)

Interest Expense, Net

Acquisition and integration expenses 4

Acquisition and integration costs 4

Total Special Items $ — $ 48

Other Expense, Net

Pension settlements 8

Other (Income) Expense, Net

Pension curtailment 11

Reclassification of cumulative translation loss to earnings 12

Loss on debt extinguishment 13

Total Special Items $ 54 $ 5

Income Tax Expense

Income Tax Expense (Benefit)

Tax matters 14

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GAAP may provide a more complete understanding of our operations and can facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

1 In 2020, our results included a charge of $17 million for an asset impairment related to a developed-technology intangible asset.

Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for further information regarding this asset impairment.

2 In 2021 and 2020, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure.

1 Our results in 2022 included charges of $3.2 billion for goodwill and intangible asset impairments.

Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for further information regarding the impairments.

2 Our results in 2022 and 2021 were impacted by costs associated with our execution of programs to optimize our organization and cost structure.

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 canceling certain R&D programs.

In 2022, restructuring charges include actions taken in connection with our integration of Hillrom, which we acquired in December 2021.

Our results in 2022 and 2021 included business optimization charges of $225 million and $114 million, respectively.

Additionally, we recognized a gain of $17 million in 2020 for property we sold in conjunction with our business optimization initiatives.

Refer to Note 11 in Item 8 of this Annual Report on Form 10-K for further information regarding these charges and related liabilities.

3 Our results in 2020 included a charge of $29 million related to Sigma Spectrum infusion pump inspection and remediation activities.

3 Our results in 2022 included charges of $44 million related to warranty and remediation activities arising from two field corrective actions on certain of our infusion pumps.

4 Our results in 2022 included $213 million of acquisition and integration-related costs.

Those costs included $93 million of integration-related costs and $159 million of incremental cost of sales from the fair value step-ups on acquired Hillrom inventory that was sold in 2022.

We do not expect to incur significant incremental costs of sales from those inventory fair value step-ups beyond what was recognized in 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 a $39 million benefit from changes in the estimated fair value of contingent consideration liabilities.

Our results in 2021 included acquisition, integration and related financing expenses of $236 million.

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These expenses were partially offset by benefits from changes in the estimated fair value of contingent consideration liabilities.

Our results in 2020 included $40 million of acquisition and integration expenses.

This included acquisition and integration expenses related to our acquisitions of Cheetah Medical, Inc.

(Cheetah), Seprafilm and in-process R&D assets, partially offset by a benefit related to the change in the estimated fair value of contingent consideration liabilities.

In our Form 10-K for the year ended December 31, 2021, we previously included $4 million of in-process research and development (“IPR&D”) charges within this acquisition and integration-related costs special item.

We updated our policy in the current year to no longer reflect IPR&D charges as a special item, therefore, the $236 million prior year amount above has been updated from the $240 million amount previously reported for comparability purposes.

Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for further information regarding business development activities.

5 Our results in 2021 and 2020 included costs of $42 million and $33 million, respectively, 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 become effective in stages beginning in 2021.

6 Our results in 2021 included charges of $31 million for investigation and related costs.

Those costs related to matters associated with our previously announced investigation of foreign exchange gains and losses, including the settlement of shareholder litigation, a civil penalty from the SEC and related professional fees.

Our results in 2020 included $23 million for investigation and related costs.

Those costs primarily included professional fees for the investigation and related matters, as well as incremental stock compensation expense as we extended the terms of certain stock options that were scheduled to expire in the first quarter of 2020.

Refer to Notes 7 and 8 in Item 8 of this Annual Report on Form 10-K for further information regarding the investigation and stock compensation expense.

5 Our results in 2022 and 2021 included $48 million and $42 million, respectively, of incremental costs to comply with the European Union’s medical device regulations for previously registered products, which primarily consist of contractor costs and other direct third-party costs.

We consider the adoption of these regulations to be a significant one-time regulatory change and believe that the costs of initial compliance for previously registered products over the implementation period are not indicative of our core operating results.

6 Our results in 2022 included $12 million of divestiture-related costs of external advisors related to the proposed spinoff of our Renal Care and Acute Therapies product categories and our pursuit of strategic alternatives (including a potential sale) for our BPS product category.

Refer to “Recently Announced Strategic Actions” above for further information.

7 Our results in 2021 included charges of $31 million for investigation and related costs for matters associated with our previously announced investigation of foreign exchange gains and losses.

Refer to Note 7 in Item 8 of this Annual Report on Form 10-K for further information regarding these charges.

8 Our results in 2021 included legal charges of approximately $13 million associated with claimants alleging injuries as a result of proximity to one of our plants.

8 Our results in 2020 included a charge of $43 million related to lump-sum settlement distributions made to certain former U.S.

employees with vested pension benefits.

Refer to Note 12 in Item 8 of this Annual Report on Form 10-K for further information regarding the lump-sum settlements.

9 Our results in 2022 included 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 8 of this Annual Report on Form 10-K for further information about the related transactions.

10 Our results in 2022 included a loss of $21 million related to our deconsolidation of a foreign subsidiary, including the derecognition of a related noncontrolling interest, upon its liquidation in December 2022 that was completed in connection with our legal entity rationalization activities.

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

Hillrom pension plan.

Refer to Note 12 in Item 8 of this Annual Report on Form 10-K for further information regarding this curtailment gain.

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

13 Our results in 2021 included a loss of $5 million on the early extinguishment of the $2.4 billion debt assumed as part of the Hillrom acquisition.

Our results in 2020 included a loss of $110 million on the November 2020 early extinguishment of $750 million of 3.75% senior notes that were issued in March 2020.

Refer to Note 5 in Item 8 of this Annual Report on Form 10-K for further information.

14 Our results in 2022 included a $25 million valuation allowance recorded to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to Swiss tax reform legislation enacted during 2019, which will be amortizable as a tax deduction ratably over tax years 2025 through 2029, to reflect our current estimate of its recoverability.

Our results in 2021 included a $58 million income tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary and an $18 million income tax benefit related to a change in U.S.

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Total net sales $ 15,113 $ 12,784 18 % 23 %

Net sales for the year ended December 31, 2021 increased 10% at actual and 7% at constant currency rates.

Foreign currency favorably impacted net sales by 3 percentage points during 2021 compared to the prior-year period principally due to the weakening of the U.S.

Dollar relative to the Euro, Australian Dollar, British Pound, Chinese Renminbi and Canadian Dollar.

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

Our acquisition of Hillrom favorably impacted net sales by 21 percentage points for the year ended December 31, 2022, compared to the prior-year period.

Foreign currency unfavorably impacted net sales by 5 percentage points for the year ended December 31, 2022, compared to the prior-year period, principally due to the strengthening of the U.S.

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

The comparisons presented at constant currency rates reflect current year local currency sales at the prior year’s foreign exchange rates, except for current year Hillrom sales which have not been adjusted to prior year rates as they only had 18 days of sales in the prior year period.

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.

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

GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

In 2021, the acquisition of Hillrom and the rights to Caleyx and Doxil for specified territories outside of the U.S.

contributed $212 million and $108 million, respectively, in net sales.

As a result of the increase in COVID-19 cases in late 2021 and early 2022, we have experienced higher levels of absenteeism at our manufacturing facilities.

In addition, a number of our suppliers are experiencing similar staffing challenges, which, together with other supply chain constraints in the current environment, has limited the availability of certain raw materials and component parts used in our products.

These conditions have decreased our current production levels, which we expect to adversely impact our sales growth during the first quarter of 2022.

We currently expect these conditions to improve and our production levels to normalize over the course of 2022.

GAAP measure of change in net sales at actual currency rates, may provide a more complete

understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

Product Category Net Sales Reporting

Beginning in the first quarter of 2021, our product category net sales disclosures (previously referred to as global business units (GBUs)) separately present net sales from our BioPharma Solutions business, which was previously included within Other.

Concurrent with that disaggregation of net sales from our BioPharma Solutions business, we have also allocated certain previously unallocated sales deductions from Other to various categories, primarily based on their respective net sales.

Net sales for 2020 have been recast to conform to the current period presentation.

Additionally, with the acquisition of Hillrom in December 2021, we have added three new product categories:

Upon our acquisition of Hillrom in December 2021, we have added three new product categories:

Patient Support Systems, Front Line Care and Surgical Solutions.

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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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BioPharma Solutions 644 669 (4) % 2 %

Patient Support Systems 115 — n/a n/a

Front Line Care 70 — n/a n/a

Surgical Solutions 27 — n/a n/a

Patient Support Systems 1,487 115 NM NM

Front Line Care 1,148 70 NM NM

Surgical Solutions 304 27 NM NM

Other 140 109 28 % 30 %

Total Baxter $ 15,113 $ 12,784 18 % 23 %

Renal Care net sales increased 4% in 2021, as compared to the prior-year period.

The increase in 2021 was driven by a 2% positive impact from foreign exchange rate changes, as compared to the prior-year period, and global patient growth in PD, partially offset by lower in-center HD sales.

Medication Delivery net sales increased 7% in 2021, as compared to the prior-year period.

The increase in 2021 was due to a favorable comparison to the comparable period of 2020 which was more severely impacted from lower demand for our infusion systems and related IV administration sets and solutions due to lower hospital admission rates and a reduction in elective surgeries resulting from the COVID-19 pandemic.

Additionally, foreign exchange rates had a favorable impact on Medication Delivery net sales of 1% in 2021, as compared to the prior-year period.

Pharmaceuticals net sales increased 9% in 2021, as compared to the prior-year period.

The increase in 2021 was driven by the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S., which contributed $108 million of net sales in 2021.

Additionally, foreign exchange rates had a favorable impact on Pharmaceuticals net sales of 4% in 2021, as compared to the prior-year period.

Partially offsetting this increase was a significant nonrecurring purchase from the U.S.

government in the prior year.

Clinical Nutrition net sales increased 6% in 2021, as compared to the prior-year period.

The increase in 2021 was driven by growth in the U.S.

for our PN therapies and related products and a 2% positive impact from foreign exchange rate changes, as compared to the prior-year period.

The increase was partially offset by lower international sales of vitamins resulting from supply constraints.

Renal Care net sales decreased 4% in 2022, as compared to the prior-year period.

The decrease in 2022 was driven by a 6% negative impact from foreign exchange rate changes, as compared to the prior-year period, and lower in-center HD sales, partially offset by global patient growth in PD and $28 million of incremental revenue in the current year from a customer that did not meet its contractual minimum purchase requirements.

Medication Delivery net sales remained flat in 2022, as compared to the prior-year period.

In the current year increased demand for IV administration sets and solutions, reflecting a recovery in hospital admission rates and surgical procedures and lower U.S.

customer rebates, were offset by lower sales of infusion pumps, a 3% negative

impact 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 for distribution in the U.S.

continues to be subject to ongoing FDA review have adversely impacted sales of infusion pumps in the current year period.

Pharmaceuticals net sales decreased 7% in 2022, as compared to the prior-year period.

The decrease in 2022 was driven by a 6% negative impact from foreign exchange rate changes, as compared to the prior-year period.

Additionally, pharmaceuticals net sales were adversely impacted by increased competition from new market entrants and supply constraints impacting the production of certain molecules.

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

Clinical Nutrition net sales decreased 3% in 2022, as compared to the prior-year period.

The decrease in 2022 was driven by a 7% negative impact from foreign exchange rate changes, as compared to the prior-year period, 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 2% in 2022, as compared to the prior-year period.

The increase in 2021 was driven by a recovery in elective surgeries, as many had been previously postponed due to the COVID-19 pandemic, and a 1% positive impact from foreign exchange rate changes, as compared to the prior-year period.

Additionally, the acquisition of Seprafilm in February of 2020 contributed $8 million of incremental sales in the first quarter of 2021.

Acute Therapies net sales increased 6% in 2021, as compared to the prior-year period.

The increase in 2021 was driven by increased global demand for our CRRT systems during the COVID-19 pandemic and a 3% positive impact from foreign exchange rate changes, as compared to the prior-year period.

BioPharma Solutions net sales increased 38% in 2021, as compared to the prior-year period.

The increase was driven by manufacturing services and supply packaging related to the production of COVID-19 vaccines on behalf of multiple pharmaceutical companies and a 3% positive impact from foreign exchange rate changes, as compared to the prior-year period.

Patient Support Systems net sales were $115 million in 2021 and resulted from the acquisition of Hillrom in December 2021.

Front Line Care net sales were $70 million in 2021 and resulted from the acquisition of Hillrom in December 2021.

Surgical Solutions net sales were $27 million in 2021 and resulted from the acquisition of Hillrom in December 2021.

The increase in 2022 was driven by a continued recovery in surgical procedures, particularly in EMEA, and benefits from competitor supply constraints, partially offset by a 6% negative impact form foreign exchange rate changes, as compared to the prior-year period.

Acute Therapies net sales decreased 10% in 2022, as compared to the prior-year period.

The decrease in 2022 was driven by lower COVID-related demand for our CRRT systems and a 4% negative impact from foreign exchange rate changes, as compared to the prior-year period.

BioPharma Solutions net sales decreased 4% in 2022, as compared to the prior-year period.

The decrease includes a 6% negative impact from foreign exchange rates, as compared to the prior-year period.

The decrease 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 2021.

Net sales for those product categories have been adversely impacted in the current year by ongoing supply chain constraints, particularly related to components used in our Front Line Care product offerings, hospital budget constraints and by delays in product installations for Patient Support Systems and Surgical Solutions resulting from limitations on hospital access due, in part, to staffing challenges being experienced by those customers.

The prior year net sales amounts for those product categories reflect sales over the 18-day period from the acquisition date through year-end.

Gross Margin and Expense Ratios

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Refer to the Special Items section above for additional detail.

Excluding the impact of the special items, the gross margin ratio increased 0.9 percentage points in 2021 compared to 2020 due to a favorable product mix that was partially offset by higher manufacturing and supply chain costs resulting from the COVID-19 pandemic.

Excluding the impact of the special items, the gross margin ratio decreased 0.3 percentage points in 2022 compared to 2021 primarily due to the adverse impacts of raw materials inflation and increased supply chain costs, partially offset by a favorable product mix that was primarily driven by our acquisition of Hillrom, lower bonus accruals under our annual employee incentive compensation plans and lower U.S.

customer rebates.

The SG&A expenses ratio was 25.7% and 22.4% in 2022 and 2021, respectively.

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Refer to the Special Items section above for additional detail.

Excluding the impact of the special items, the SG&A expenses ratio increased 0.2 percentage points in 2021 primarily due to higher bonus accruals under our annual employee incentive compensation plans.

Excluding the impact of the special items, the SG&A expenses ratio increased 1.5 percentage points in 2022 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% and 4.2% in 2022 and 2021, respectively.

The special items identified above had an unfavorable impact of 0.1 and 0.3 percentage points on the R&D expenses ratio in 2021 and 2020, respectively.

The special items identified above did not impact the R&D expenses ratio in 2022 or 2021.

Refer to the Special Items section above for additional detail.

Excluding the impact of the special items, the R&D expenses ratio decreased 0.1 percentage points in 2021 as a result of decreased project-related expenditures that was partially offset by higher bonus accruals under our annual employee incentive compensation plans.

Excluding the impact of the special items, the R&D expenses ratio remained relatively flat 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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The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation.

We currently expect to incur additional pre-tax costs of approximately $30 million through the completion of the initiatives that are currently underway, primarily related to implementation costs.

We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods.

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

The savings from these actions have reduced cost of sales, SG&A expenses, and R&D expenses.

Approximately 99 percent of the expected annual pre-tax savings has been realized through December 31, 2021, with the remainder expected to be realized by the end of 2022.

Refer to Note 11 in Item 8 of this Annual Report on Form 10-K for additional information regarding our business optimization programs.

Other Operating Income, Net

Other operating income, net was $6 million and $19 million in 2021 and 2020, respectively.

In 2021 and 2020, we recognized benefits of $6 million and $2 million, respectively, related to the change in the estimated fair value of contingent consideration liabilities.

Additionally, in 2020, we recognized a $17 million gain on the sale of property in conjunction with our business optimization initiatives.

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.

Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for additional information regarding this agreement.

We currently expect to incur additional pre-tax costs, primarily related to the implementation of business optimization programs, of approximately $46 million through the completion of the 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 may incur additional restructuring charges and costs to implement business optimization programs in future periods.

For example, we expect to incur additional restructuring charges during 2023 related to our implementation of a new operating model intended to simply and streamline our operations (including our manufacturing footprint), as discussed above under "Recently Announced Strategic Actions." Refer to Note 11 in Item 8 of this Annual Report on Form 10-K for additional information regarding our business optimization programs.

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.

Those impairment tests resulted in total pre-tax goodwill impairment charges of $2.8 billion in the third quarter of 2022 relating to our Patient Support Systems, Front Line Care and Surgical Solutions reporting units.

In connection with our annual goodwill impairment assessment in the fourth quarter of 2022, we performed quantitative impairment tests for all our reporting units and recorded an additional $27 million goodwill impairment related to our Surgical Solutions reporting unit.

No goodwill impairments were recorded for our

remaining reporting units in connection with our annual goodwill impairment tests because the fair values of those reporting units exceeded their net book values.

Further adverse changes to macroeconomic conditions or our earnings forecasts could lead to additional goodwill or intangible asset impairment charges in future periods, particularly for the reporting units and intangible assets acquired in the Hillrom acquisition, and such charges could be material to our results of operations.

Other Operating Expense (Income), Net

Other operating expense (income), net was an expense of $36 million and income of $6 million in 2022 and 2021, respectively.

In 2022 we recognized 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 8 of this annual report on Form 10-K for further information about the related transactions.

Additionally, we recognized a loss of $21 million related to the deconsolidation of a foreign subsidiary, including the derecognition of a related noncontrolling interest, upon its liquidation in December 2022 that was completed in connection with our legal entity rationalization activities.

Those losses were partially offset by gains of $39 million from net decreases in the estimated fair values of contingent consideration liabilities.

In 2021 we recognized gains of $6 million related to net decreases in the estimated fair value of contingent consideration liabilities.

Interest Expense, Net

Interest expense, net was $395 million and $192 million in 2022 and 2021, respectively.

The increase in 2021 was primarily driven by financing-related fees incurred in connection with the Hillrom acquisition, which totaled $59 million, and lower interest income due to lower interest rates.

The increase in 2022 was primarily driven by higher average debt outstanding in connection with the Hillrom acquisition, partially offset by acquisition bridge facility commitment fees recognized in 2021 and higher interest income in 2022.

Refer to Note 5 in Item 8 of this Annual Report on Form 10-K for a summary of the components of interest expense, net for 2022 and 2021.

Other Expense, Net

Other expense, net was $41 million and $190 million in 2021 and 2020, respectively.

The net expense in 2021 was primarily driven by foreign exchange net losses and pension and OPEB net expenses.

The net expense in 2020 was primarily driven by a $110 million loss on the early extinguishment of debt related to our November 2020 redemption of $750 million of senior notes that were issued in March 2020, foreign exchange net losses of $49 million and $46 million of pension settlement charges, which included a $43 million charge related to lump-sum settlement distributions made to certain former U.S.

employees with vested pension benefits.

These expenses in 2020 were partially offset by net unrealized gains of $13 million related to marketable equity securities.

We expect expenses from pension and OPEB plans to decrease in 2022 primarily due to prior year actuarial gains that will reduce ongoing benefit costs.

Refer to Note 12 in Item 8 of this Annual Report on Form 10-K for further information regarding pension and OPEB plan expenses.

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 expense, net and recognize a non-cash charge.

As of December 31, 2021, the CTA for our Argentina operations was in excess of $60 million.

Other (Income) Expense, Net

Other (income) expense, net was an expense of $15 million and $41 million in 2022 and 2021, respectively.

The net expense in 2022 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 foreign exchange gains, pension and other postretirement (OPEB) benefits, a pension curtailment gain and net increases in the fair value of marketable equity securities.

The net expense in 2021 was primarily driven by foreign exchange net losses, pension and OPEB expenses and net decreases in the fair values of marketable equity securities.

The effective income tax rate was (2.9)% in 2022 and 12.3% in 2021.

The special items identified above had a favorable impact of 4.5 and 2.6 percentage points on the effective income tax rate in 2021 and 2020, respectively.

The special items identified above had an unfavorable impact of 22.8 percentage points and a favorable impact of 4.5 percentage points on the effective income tax rate in 2022 and 2021, respectively.

Refer to the Special Items section above for additional detail.

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.

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 twelve months ended December 31, 2022, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to favorable geographic earnings mix, a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, a tax benefit related to a change in U.S.

foreign tax credit regulations and excess tax benefits on stock compensation awards, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.

federal statutory rate was primarily attributable to non-deductible impairments of goodwill acquired in the Hillrom acquisition and valuation allowance increases, including a $25 million increase related to deferred tax assets from a tax basis step-up that arose from Swiss tax reform legislation in 2019.

Those items were partially offset by a $47 million net tax benefit, after related valuation allowances, from notional interest deductions received by certain wholly-owned foreign subsidiaries that have financed their operations with equity capital.

For the twelve months ended December 31, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to favorable geographic earnings mix and excess tax benefits on stock compensation awards.

Our tax provisions for 2021 and 2020 do not include any tax charges related to either the Base Erosion and Anti-Abuse Tax (BEAT) or Global Intangible Low Taxed Income (GILTI) provisions, except for the inability to fully utilize foreign tax credits against such GILTI.

federal statutory rate was primarily attributable to favorable geographic earnings mix, including a $50 million net tax benefit, after related valuation allowances, from notional interest deductions, a $58 million tax benefit related to a

tax-deductible foreign statutory loss on an investment in a foreign subsidiary, a tax benefit related to a change in U.S.

foreign tax credit regulations and excess tax benefits on stock compensation awards, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.

Our tax provisions for 2022 and 2021 do not include any significant tax charges related to either the Base Erosion and Anti-Abuse Tax (BEAT) or Global Intangible Low Taxed Income (GILTI) provisions, except for the inability to fully utilize foreign tax credits against such GILTI.

Our accounting policy is to recognize any GILTI charge as a period cost.

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GAAP, will be approximately 21% in 2023.

This rate may be further impacted by a number of factors including discrete items, such as tax windfalls or deficiencies attributable to stock compensation awards, additional audit developments, or the tax effects of any future special items.

Net Income and Earnings per Diluted Share

Net income was $1.3 billion in 2021 and $1.1 billion in 2020.

Diluted earnings per share was $2.53 in 2021 and $2.13 in 2020.

The significant factors and events causing the net changes from 2020 to 2021 are discussed above.

Additionally, earnings per share was positively impacted by the repurchase of 7.3 million shares in 2021 and 6.3 million shares in 2020 through Rule 10b5-1 purchase plans.

This rate may be further impacted by a number of factors including discrete items, such as tax windfalls or deficiencies attributable to stock compensation awards, audit developments or legislative changes, as well as non-deductible or non-taxable items that may arise in the future and our geographic earnings mix.

Net Income (Loss) and Earnings (Loss) per Diluted Share

Net income (loss) was a loss of $2.4 billion in 2022 and income of $1.3 billion in 2021.

Diluted earnings (loss) per share was $(4.83) in 2022 and $2.53 in 2021.

The significant factors and events causing the net changes from 2021 to 2022, including the impairment of $2.8 billion of goodwill related to the Hillrom acquisition, are discussed above.

Additionally, earnings (loss) per share was positively impacted by the repurchase of 0.5 million shares in 2022 and 7.3 million shares in 2021 through Rule 10b5-1 purchase plans.

Refer to Note 8 in Item 8 of this Annual Report on Form 10-K for further information regarding our stock repurchases.

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

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

Americas, EMEA and APAC, and a 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.

In the first quarter of 2021, the information provided to our Chief Executive Officer for purposes of allocating resources and assessing performance was updated to reallocate contracted services activities performed at a German manufacturing facility from our EMEA segment to our Americas segment.

The contracted services performed at that facility are part of our BioPharma Solutions business, which is managed as part of the Americas segment.

Accordingly, the reported financial results of the Americas segment now include the contracted services activities performed at that facility.

Segment results for 2020 have been recast to conform to this presentation.

Refer to Note 17 in Item 8 of this Annual Report on Form 10-K for additional details regarding our segments.

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

Net sales Operating income

Net sales Operating income (loss)

years ended December 31 (in millions) 2022 2021 2022 2021

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Total $ 15,113 $ 12,784 $ (1,943) $ 1,710

Segment net sales and operating income in 2021 was $6.7 billion and $2.6 billion, respectively.

Segment net sales and operating income in 2020 was $6.3 billion and $2.4 billion, respectively.

The increase in operating profit in 2021 was primarily driven by favorable sales performance in our BioPharma Solutions, Medication Delivery and Advanced Surgery product categories, partially offset by unfavorable performance in Pharmaceuticals.

Segment net sales and operating income in 2021 was $3.1 billion and $632 million, respectively.

Segment net sales and operating income in 2020 was $2.9 billion and $523 million, respectively.

The increase in operating profit in 2021 was due to the favorable impact of foreign exchange rates on results as compared to the prior-year period and the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S., which contributed $93 million of net sales and operating profit to the region, respectively.

Segment net sales and operating income in 2021 was $2.8 billion and $623 million, respectively.

Segment net sales and operating income in 2020 was $2.5 billion and $591 million, respectively.

The increase in operating profit in 2021 was due to the favorable impact of foreign exchange rates on results as compared to the prior-year period and the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S., which contributed $13 million of net sales and operating profit to the region, respectively.

Segment net sales and operating loss for 2021 was $212 million and $80 million, respectively.

The increase in operating loss in 2021 was due to the acquisition of Hillrom in December 2021.

Segment net sales and operating income in 2022 were $6.7 billion and $2.4 billion, respectively.

Segment net sales and operating income in 2021 were $6.7 billion and $2.6 billion, respectively.

The decrease in operating income in 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 Renal Care, Medication Delivery, Clinical Nutrition and Advanced Surgery product categories.

Segment net sales and operating income in 2022 were $2.9 billion and $607 million, respectively.

Segment net sales and operating income in 2021 were $3.1 billion and $632 million, respectively.

The decrease in operating income in 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 Renal Care, Acute Therapies, Clinical Nutrition, Medication Delivery and Pharmaceuticals product categories and higher supply chain costs, partially offset by lower operating expenses and

an improved gross margin, driven by a favorable product mix and by having a full 12 months of sales from our February 2021 acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S.

Segment net sales and operating income in 2022 were $2.6 billion and $623 million, respectively.

Segment net sales and operating income in 2021 were $2.8 billion and $623 million, respectively.

Operating income in 2022 remained flat due to lower operating expenses and an improved gross margin, driven by a favorable product mix, 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 for 2022 were $2.9 billion and $730 million, respectively.

Segment net sales and operating loss for 2021 were $212 million and $80 million, respectively.

The increase in net sales and operating income were due to our acquisition of Hillrom in December 2021.

The prior year amounts reflect activity over the 18-day period from the acquisition date through year-end.

Corporate and Other

Certain items are maintained at Corporate and are not allocated to a segment.

They primarily include certain headquarter costs, certain R&D costs, certain product categories support costs, stock compensation expense, certain employee benefit plan costs, certain foreign currency hedging activities, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments).

The operating loss in 2021 was higher than 2020 primarily due to acquisition and integration expenses related to the Hillrom acquisition, higher intangible asset amortization expense and higher bonus accruals under our annual employee incentive compensation plans in the current year.

They primarily include corporate headquarter costs, certain R&D costs, manufacturing variances and centrally managed supply chain costs, product category support costs, stock compensation expense, certain employee benefit plan costs, certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and goodwill and intangible asset impairments).

For the period from our acquisition of Hillrom on December 13, 2021 through December 31, 2021, we previously included all costs incurred by the Hillrom business within that segment, including $127 million related to the types of costs described in the preceding sentence that are maintained at Corporate for our legacy Baxter segments.

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

The Corporate operating loss in 2022 was higher than 2021 primarily due to goodwill and intangible asset impairments, higher intangible asset amortization expense, acquisition and integration-related costs, 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

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In 2022 and 2021, cash provided by operating activities was $1.2 billion and $2.2 billion, respectively.

Operating cash flows increased in 2021 primarily due to a lower increase in inventories in 2021 compared to 2020, an increase in our net income in 2021, payments of $173 million to settle interest rate derivative contracts in 2020 and lower

employee incentive compensation payments in 2021 compared to 2020, partially offset by cash outflows of approximately $47 million in 2021 related to Hillrom acquisition and integration costs.

Operating cash flows decreased in 2022 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, which were based on our 2021 results, compared to payouts made in the prior-year period, which were based on our 2020 results.

Operating cash flows were also adversely impacted in the current year by the timing of accounts receivable collections and accounts payable payments in the fourth quarter of 2022.

Cash Flows from Investing Activities

In 2021, cash used for investing activities included payments for acquisitions and investments of $10.5 billion, primarily related to Hillrom, Caleyx and Doxil, Transderm Scop and PerClot, and capital expenditures of $743 million.

In 2020, cash used for investing activities included payments for acquisitions and investments of $494 million, primarily related to Seprafilm and multiple product acquisitions, and capital expenditures of $709 million.

We expect that our capital expenditures will increase in 2022 as we make investments in our manufacturing capacity in response to proposed regulatory changes of the U.S.

Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S.

end stage renal disease market and demand for our peritoneal dialysis products.

In 2022, cash used for investing activities included payments for acquisitions and investments of $263 million, primarily related to our payment to acquire the rights to Zosyn, and capital expenditures of $679 million.

cash used for investing activities included payments for acquisitions and investments of $10.5 billion, primarily related to Hillrom, Caleyx and Doxil, Transderm Scop and PerClot, and capital expenditures of $743 million.

Cash Flows from Financing Activities

In 2022, cash used in financing activities included debt repayments of $954 million and dividend payments of $573 million, partially offset by a net increase in commercial paper borrowings of $55 million and proceeds from stock issued under employee benefit plans of $127 million.

In 2021, cash generated from financing activities included $11.8 billion to fund the consideration for the Hillrom acquisition, repay certain indebtedness of Hillrom, and to pay fees and expenses related to the foregoing.

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Financing activities in 2021 also included payments for treasury stock repurchases of $600 million, dividend payments of $530 million and receipts from stock issued under employee benefit plans of $187 million.

In 2020, cash generated from financing activities included $1.2 billion of net proceeds from the March 2020 issuance of $750 million of senior notes due in 2025 and $500 million of senior notes due in 2030.

In November 2020, we issued $650 million of senior notes due in 2031 and used the proceeds, along with cash on hand, to redeem the $750 million senior notes due in 2025 that were issued in March 2020 for $854 million, which included a $104 million make-whole premium.

We have used the net proceeds from those senior notes issuances and redemptions for general corporate purposes, including to strengthen our balance sheet as a precautionary measure in light of the COVID-19 pandemic.

In 2020, we also repaid $322 million of variable rate notes that matured and the borrowings under our Euro-denominated credit facility of €200 million ($225 million).

Financing activities in 2020 also included payments for stock repurchases of $500 million, dividend payments of $473 million and receipts from stock issued under employee benefit plans of $202 million.

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

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The 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.

We paid $600 million in cash to repurchase approximately 7.3 million shares under this authority pursuant to Rule 10b5-1 plans in 2021 and had $1.3 billion remaining available under this authorization as of December 31, 2021.

We paid $32 million in cash to repurchase approximately 0.5 million shares under this authority pursuant to a Rule 10b5-1 plan in 2022 and had $1.3 billion remaining available under this authorization as of December 31, 2022.

We do not intend to make any share repurchases in the near term as we focus on achieving our 2.75x net leverage commitment.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

On September 30, 2021, we entered into a new U.S.

dollar-denominated revolving credit facility (the USD Revolver) and on October 1, 2021, we amended our existing Euro-denominated revolving credit facility (as amended, the Euro Revolver).

As of December 31, 2021, our USD Revolver had capacity of $2.5 billion and our Euro Revolver had a capacity of approximately €200 million.

As of December 31, 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.

Each of the facilities matures in 2026.

The facilities enable us to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net

leverage ratio.

The facilities enable us to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net leverage ratio.

Fees under the credit facilities are 0.125% annually as of December 31, 2022 and are based on our credit ratings and the total capacity of the facility.

Prior to entering into the USD Revolver and the Euro Revolver, our previous U.S.

dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $2.0 billion and €200 million, respectively.

Fees under these credit facilities were 0.09% annually as of December 31, 2021 and were based on our credit ratings and the total capacity of the facility.

There were no borrowings under these credit facilities as of December 31, 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.

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.

As of December 31, 2022, we were in compliance with the financial covenants in these agreements.

Based on our covenant calculations as of December 31, 2022, we have capacity to draw approximately $2.1 billion under our credit facilities, less outstanding commercial paper borrowings, which were $299 million at year-end.

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.

Additionally, a deterioration in our financial performance may further reduce our ability to draw on our credit facilities.

We also maintain other credit arrangements, as described in Note 5 in Item 8 of this Annual Report on Form 10-K.

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Our ability to generate cash flows from operations, issue debt, including commercial paper, or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions.

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 and reduce our post-acquisition debt levels.

Our credit ratings at December 31, 2022 were as follows:

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Short-term debt A2 F2 P2

Outlook Stable Stable Stable

Our senior debt credit ratings were downgraded in 2021 as a result of the debt we issued to fund the Hillrom acquisition.

Outlook Negative Negative Stable

Our senior debt credit ratings outlook was changed from stable to negative by two of the rating agencies during the third quarter of 2022.

In January 2023, Fitch further revised our senior debt credit rating outlook from negative to rating watch negative.

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 EURIBOR-based rates.

A discontinuation would require this arrangement to be modified in order to replace EURIBOR 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 rate.

Contractual Obligations

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Our hedging policy attempts to manage these risks to an acceptable level based on our judgment of the appropriate trade-off between risk, opportunity and costs.

Refer to Note 15 and Note 16 in Item 8 of this Annual Report on Form 10-K for further information regarding our financial instruments and hedging strategies.

Refer to Note 15 in Item 8 of this Annual Report on Form 10-K for further information regarding our financial instruments and hedging strategies.

Currency Risk

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Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.

We use options and forwards to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities denominated in foreign currencies.

We use forwards to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities denominated in foreign currencies.

The maximum term over which we have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions as of December 31, 2022 is 12 months.

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Dollar uniformly weakened by 10% against all currencies, the net pre-tax asset balance of $2 million with respect to those contracts would change by $68 million.

A similar analysis performed with respect to contracts outstanding as of December 31, 2020 indicated that, on a pre-tax basis, the net liability balance of $8 million would change by $32 million.

A similar analysis performed with respect to contracts outstanding as of December 31, 2021 indicated that, on a pre-tax basis, the net asset balance of $3 million would change by $34 million.

The sensitivity analysis model recalculates the fair value of the foreign exchange contracts outstanding as of December 31, 2022 by replacing the actual exchange rates as of December 31, 2022 with exchange rates that are 10% weaker compared to the actual exchange rates for each applicable currency.

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The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

Our subsidiary in Argentina is reported using highly inflationary accounting effective July 1, 2018.

Changes in the value of the Argentine peso applied to our peso-denominated net monetary asset positions are recorded in income at the time of the change.

As of December 31, 2021, our net monetary assets denominated in Argentine pesos are not significant.

In February 2022, the three-year cumulative inflation rate in Turkey exceeded 100 percent.

As a result, on April 1, 2022, we began reporting the results of our subsidiary in that jurisdiction using highly inflationary accounting, which requires that the functional currency of the entity be changed to the reporting currency of its parent.

As of December 31, 2022, our subsidiary in Turkey had net monetary assets of $33 million.

Interest Rate Risk

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We also periodically use forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of term debt.

As of December 31, 2021, there were no interest rate derivative contracts outstanding and we had approximately $4.9 billion of outstanding floating rate debt.

A 100 basis point change in

interest rates would impact out pre-tax earnings and cash flows by approximately $49 million over a one-year period.

As of December 31, 2022, there were no interest rate derivative contracts outstanding and we had approximately $3.9 billion of outstanding floating rate debt and $299 million of commercial

A 100 basis point change in interest rates would impact out pre-tax earnings and cash flows by approximately $42 million over a one-year period.

CHANGES IN ACCOUNTING STANDARDS

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RECENT ACCOUNTING PRONOUNCEMENTS

In July 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-05, Leases (Topic 842), which requires a lessor to classify a lease with variable lease payments (that do not depend on an index or rate) as an operating lease if (1) the lease would have been classified as a sales-type or direct financing lease, and (2) the lessor would have recognized a selling loss at lease commencement.

These changes are intended to avoid recognizing a day-one loss for a lease with variable payments even though the lessor expects the arrangement will be profitable overall.

In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sales Restrictions, which (1) clarifies the guidance in Topic 820 on the fair value measurement of an equity security that is subject to contractual restrictions that prohibit the sale of an equity security and (2) requires specific disclosures related to such an equity security.

The standard is effective for our financial statements beginning in 2024.

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The service component of employee benefit expenses is reported in the same line items in the consolidated income statements as the applicable employee’s compensation expense.

All other components of these employee benefit expenses are reported in other expense, net in our consolidated statements of income.

All other components of these employee benefit expenses are reported in other (income) expense, net in our consolidated statements of income (loss).

The valuation of the funded status and net periodic benefit cost for the plans is calculated using actuarial assumptions.

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and Puerto Rico employees.

This assumption will decrease to 5% in 2022.

This assumption will increase to 6.43% in 2023.

This assumption is not applicable to our OPEB plan because it is not funded.

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We will continue to evaluate the need for additional valuation allowances and, as circumstances change, the valuation allowance may change.

Valuation of Intangible Assets, Including IPR&D

As a result of our acquisition of Hillrom in December 2021, our intangible asset balance increased to $7.8 billion as of December 31, 2021 compared to $1.7 billion as of December 31, 2020.

Valuation of Goodwill and Intangible Assets

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) based on the guideline public company method.

Significant assumptions used in the determination reporting unit fair value measurements generally include forecasted cash flows, discount rates, terminal growth rates and earnings multiples.

The discounted cash flow models used to determine the fair values of our reporting units during 2022 reflected our most recent cash flow projections, discount rates ranging from 9% to 10% and terminal growth rates ranging from 2% to 3%.

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

During 2022, we recognized $2.8 billion of goodwill impairment charges related to the three reporting units within our

Hillrom segment.

See Note 4, Goodwill and Other Intangible Assets, Net in Item 8 of this Annual Report on Form 10-K for further information about those impairments.

We record acquired intangible assets at fair value in business combinations and at cost in asset acquisitions.

Valuations are generally completed for intangible assets acquired in business acquisitions using a discounted cash flow analysis (an income approach), incorporating the stage of completion and consideration of market participant assumptions.

The most significant estimates and assumptions inherent in a discounted cash flow analysis (an income approach) include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, royalty rates, terminal growth rate, contributory asset charges, and customer attrition rate.

Valuations are generally completed for intangible assets acquired in business acquisitions using a discounted cash flow analysis (an income approach) and reflect our judgements about the assumptions that market participants would use in pricing the assets.

The most significant estimates and assumptions inherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, the stage in completion (for acquired in-process R&D), royalty rates, terminal growth rates, contributory asset charges and customer attrition rates (for customer-related intangibles).

The relief from royalty models used in the determination of the fair values of our trade name intangible assets during 2022 reflected our most recent revenue projections, a discount rate of 9.5%, royalty rates ranging from 3% to 5% and terminal growth rates ranging from 2% to 3%.

Each of these factors and assumptions can significantly affect the value of the intangible asset.

During the third quarter of 2022, we recognized pre-tax impairment charges of $332 million to reduce the carrying amounts of certain indefinite-lived intangible assets, which primarily related to the Hillrom and Welch Allyn trade names acquired in the Hillrom acquisition, to their estimated fair values.

Additionally, during 2022 and 2020 we recognized pre-tax impairment charges of $12 million and $17 million, respectively, related to developed technology intangible assets due to declines in market expectations for the related products.

See Note 4, Goodwill and Other Intangible Assets, Net in Item 8 of this Annual Report on Form 10-K for further information about those impairments.

Acquired in-process R&D (IPR&D) is the value assigned to acquired technology or products under development which have not received regulatory approval and have no alternative future use.

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Due to the inherent uncertainty associated with R&D projects, there is no assurance that actual results will not differ materially from the underlying assumptions used to prepare discounted cash flow analyses, nor that the R&D project will result in a successful commercial product.

Due to a change in the timing and amount of projected cash flows associated with $140 million of acquired in-process R&D intangible assets from a historical acquisition, we updated the estimated fair values of these assets in 2021.

While no impairment has been recorded because the estimated fair values of those assets exceeded their carrying values, the estimated excess of fair value over carrying value of these assets further declined in 2021 and are at risk of future impairment should the estimated timing or amount of projected cash flows further deteriorate.

In 2021, we changed the measurement date of our annual indefinite-lived intangible asset impairment tests from December 31st to November 1st.

This change better aligns the timing of the impairment tests with our long-term business planning process.

The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or avoidance of an impairment charge.

CERTAIN REGULATORY MATTERS

Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India in July 2017, immediately prior to the closing of the Claris acquisition.

FDA completed the inspection and subsequently issued a Warning Letter based on observations identified in the 2017 inspection (Claris Warning Letter).¹ Due to challenges with the ongoing COVID-19 pandemic, FDA has not yet re-inspected the facilities and 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.

Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India in July 2017, immediately prior to the closing of our acquisition of Claris Injectables Limited (Claris).

FDA completed the inspection and subsequently issued a Warning Letter based on observations identified in the 2017 inspection (Claris Warning Letter).¹ FDA re-inspected the facilities and issued a Form 483 on May 17, 2022.

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

On January 19, 2023, FDA arrived to re-inspect the facilities and issued a Form 483 on January 27, 2023.

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.

Refer to Item 1A of this Annual Report on Form 10-K for additional discussion of regulatory matters and how they may impact us.

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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, 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 and Hillrom), 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.

These forward-looking statements may include statements with respect to plans to implement a simplified commercial and manufacturing footprint, the proposed spinoff of our Renal Care and Acute Therapies product categories, review of strategic alternatives for our BPS product category and other potential portfolio management activities we may undertake in the future, accounting estimates and assumptions, global economic conditions and impacts of the COVID-19 pandemic, 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, sales from new product offerings, credit exposure to foreign governments, the adequacy of cash flows and credit facilities, 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 inflation on our business, the impact of competition, future sales growth, business development activities, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the adequacy of 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.

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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 consumer preferences 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;

product development risks, including satisfactory clinical performance, 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 potential trade wars) and public health crises 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;

the continuity, availability and pricing of acceptable raw materials and component parts, and the related continuity of our manufacturing and distribution (including impacts from COVID-19) and those of our suppliers;

our ability to execute and complete strategic initiatives, asset dispositions and other transactions, including the proposed spinoff of our Renal Care and Acute Therapies product categories, our plans to simplify our operating model and manufacturing footprint and our strategic alternatives for our BPS product category, the timing for such transactions, the ability to satisfy any applicable conditions and the expected proceeds, consideration and benefits;

failure to accurately forecast or achieve our short-and long-term financial improvement performance and goals (including with respect to our recently announced strategic actions) and related impacts on our liquidity;

our ability to execute on our capital allocation plans, including our debt repayment plans, the timing and amount of any dividends, share repurchases and divestiture proceeds and the capital structure of the public company that we expect to form as a result of the proposed spinoff (and the resulting capital structure for the remaining company);

the impact of global economic conditions (including, among other things, inflation levels, interest rates, the potential for a recession, the ongoing war in Ukraine, the related economic sanctions being imposed globally in response to the conflict and potential trade wars) and continuing public health crises, pandemics and epidemics, such as the ongoing COVID-19 pandemic, or the anticipation of any of the foregoing, on our operations and on our employees, customers and suppliers, including foreign governments in countries in which we operate;

downgrades to our credit ratings or ratings outlooks, and the related impact on our funding costs and liquidity;

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 consumer 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;

the continuity, availability and pricing of acceptable raw materials and component parts (and our ability to pass some or all of these costs to our customers through recent price increases), and the related continuity of our manufacturing and distribution and those of our suppliers;

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);

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

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);

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;

loss of key employees, the occurrence of labor disruptions or the inability to identify and recruit new employees;

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 remote working arrangements or otherwise);

future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the SEC, DOJ or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities, including the continued delay in lifting the warning letter at our Ahmedabad facility;

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future actions of third parties, including third-party payers and our customers and distributors (including GPOs and IDNs), the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies;

legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, the European Union’s General Data Protection Regulation and proposed regulatory changes of the U.S.

Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S.

end stage renal disease market and demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures, which are difficult to estimate in advance);

the outcome of pending or future litigation, including the opioid litigation and current or future ethylene oxide litigation or other claims;

failure to achieve our short- and long-term financial improvement goals;

the outcome of pending or future litigation, including the opioid litigation and ethylene oxide litigation or other claims;

the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies;

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fluctuations in foreign exchange and interest rates;

any changes in law concerning the taxation of income (whether with respect to current or future tax reform), including income earned outside the United States and potential taxes associated with the Base Erosion and Anti-Abuse Tax or the Build Back Better framework;

any changes in law concerning the taxation of income (whether with respect to current or future tax reform);

actions by tax authorities in connection with ongoing tax audits;

loss of key employees, the occurrence of labor disruptions or the inability to identify and recruit new employees;

other factors identified elsewhere in this Annual Report on Form 10-K including those factors described in Item 1A and other filings with the SEC, all of which are available on our website.

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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 7. Management’s Discussion and Analysis