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Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-27 · 247 added, 147 removed, 210 unchanged (65% of the section changed)

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Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for management’s discussion and analysis of our financial condition and results of operations.

The following is management’s discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2023 and 2022.

RECENTLY ANNOUNCED STRATEGIC ACTIONS

The following is management’s discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2023 and 2022.

RECENT 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.

(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 for our BioPharma Solutions (BPS) product category.

The proposed spinoff is currently expected to be completed by July 2024 or earlier, subject to the satisfaction of customary conditions.

In the first quarter of 2023 we generated $1.1 billion of net sales from our Renal Care and Acute Therapies product categories, representing approximately 29% of our consolidated net sales.

Additionally, in the first quarter of 2023 we generated $139 million of net sales from our BPS product category, representing approximately 4% of our consolidated net sales.

During the first quarter of 2023 we incurred 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.

During the second quarter and first half of 2023 we generated $1.12 billion and $2.19 billion, respectively, of net sales from our Renal Care and Acute Therapies product categories, representing approximately 30% of our consolidated net sales, in both periods.

In May 2023, we entered into a definitive agreement to sell our BPS business.

That business provides pharmaceutical and contract manufacturing and development services, which include sterile fill-finish manufacturing and support services across clinical and commercial applications, primarily serving customers in the pharmaceutical industry.

BPS has historically operated through our subsidiaries Baxter Pharmaceutical Solutions, LLC, a Delaware limited liability company, and Baxter Oncology GmbH, a German limited liability company.

Under the related equity purchase agreement (EPA), we have agreed to sell those entities to Advent International and Warburg Pincus for $4.25 billion in cash, subject to certain adjustments specified in the EPA.

After giving effect to those adjustments, we currently expect to receive approximately $3.92 billion of net pre-tax cash proceeds (approximately $3.40 billion after tax).

The transaction is expected to close during the second half of 2023, subject to regulatory approvals and other customary conditions.

Upon closing, we currently expect to recognize a pre-tax gain of approximately $2.97 billion.

We intend to use the net after-tax proceeds from this transaction to repay certain of our debt obligations.

We concluded that our BPS business met the criteria to be classified as held-for-sale in May 2023.

A component of an entity is reported in discontinued operations after meeting the criteria for held-for-sale classification if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results.

We analyzed the quantitative and qualitative factors relevant to the pending divestiture of our BPS business, including its significance to our overall net income (loss) and earnings (loss) per share, and determined that those conditions for discontinued operations presentation have been met.

As such, the financial position, results of operations and cash flows of that business are reported as discontinued operations in the accompanying consolidated financial statements.

Prior period amounts have been adjusted to reflect discontinued operations presentation.

Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information about our discontinued operations.

During the second quarter and first half of 2023 we incurred significant separation and transaction-related costs related to the proposed spinoff and the pending sale of our BPS product category.

For the remainder of 2023 and the first half of 2024 we expect to continue to incur such costs, which will adversely impact our earnings and operating cash flows.

Additionally, if these proposed actions are consummated, 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 help ensure that our cost structure is appropriate to support our remaining businesses.

There can be no guarantees that the proposed spinoff 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.

Additionally, if these proposed and pending actions are consummated, 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 help ensure that our cost structure is appropriate to support our remaining businesses.

There can be no guarantees that the proposed spinoff or the pending sale of our BPS product category will be completed in the manner or over the timeframes described above, or at all.

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

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

However, there could be no guarantees that the implementation of our new operating model will be completed within that timeframe.

However, there can be no guarantees that the implementation of our new operating model will be completed within that timeframe.

FACTORS AFFECTING OUR RESULTS OF OPERATIONS

Supply Constraints, 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, increased interest rates, disruptions to certain ports of call around the world, the war in Ukraine and other geopolitical events.

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 a number of exogenous factors including significant weather events, elevated inflation levels, increased interest rates, 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 are more susceptible to increases in freight costs and other supply chain challenges than certain of our industry peers.

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

While we have begun to see improvements in the availability of certain component parts and improved pricing in certain raw materials, these challenges have not completely subsided and may continue to have a negative impact on our supply chain in future periods.

These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for certain product categories (including those acquired in our December 2021 acquisition of Hill-Rom Holdings, Inc.

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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 reducing our product offerings in Russia while remaining compliant with all applicable U.S.

In response, we continue to monitor the developing situation with respect to ongoing business in Russia and are working on reducing our product offerings in Russia while remaining compliant with all applicable U.S.

and European Union sanctions and regulations.

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Over the course of the COVID-19 pandemic, our business was impacted by shifting healthcare priorities and significant volatility in the demand for our products, and any resurgence of the pandemic or any new public health crisis could again impact healthcare priorities and cause volatility in the demand for our products.

In addition, the existence of high inflation rates in the United States and in many of the countries where we conduct business has resulted in, and may continue to result in, higher interest rates, shipping costs, labor costs and other costs and expenses, as well as weakening exchange rates.

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 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.

The existence of high inflation rates in the United States and in many of the countries where we conduct business has resulted in, and may continue to result in, higher interest rates, shipping costs, labor costs and other costs and expenses.

Additionally, adverse changes in foreign currency exchange rates have increased our costs of sourcing certain raw materials in some jurisdictions.

We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses and we may not be able to pass these cost increases on to our customers in a timely manner or at all, which could have a material adverse impact on our profitability and results of operations.

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

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RESULTS OF OPERATIONS

Net income attributable to Baxter stockholders for the three months ended March 31, 2023 totaled $44 million, or $0.09 per diluted share, compared to $71 million, or $0.14 per diluted share, for the three months ended March 31, 2022.

Net income for the three months ended March 31, 2023 included special items which decreased net income by $253 million, or $0.50 per diluted share, respectively, as further discussed below.

Net income for the three months ended March 31, 2022 included special items which decreased net income by $400 million, or $0.79 per diluted share, as further discussed below.

Net income (loss) attributable to Baxter stockholders for the three and six months ended June 30, 2023 totaled $(141) million, or $(0.28) per diluted share, and $(97) million, or $(0.19) per diluted share, compared to $252 million, or $0.50 per diluted share, and $323 million, or $0.64 per diluted share, for the three and six months ended June 30, 2022.

Net income (loss) attributable to Baxter stockholders for the three and six months ended June 30, 2023 included special items which decreased net income (loss) by $476 million and $729 million, respectively, or $0.94 and $1.44, per diluted share, respectively.

See the following subsection for information about special items for all periods presented.

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

Net income (loss) from continuing operations for both the three and six months ended June 30, 2023 totaled $(193) million, or $(0.39) per diluted share, compared to $185 million, or $0.36 per diluted share, and $193 million, or $0.37

per diluted share, for the three and six months ended June 30, 2022, respectively.

Net income (loss) from continuing operations for the three and six months ended June 30, 2023 included special items which decreased net income by $475 million and $724 million, respectively, or $0.94 and $1.43 per diluted share, respectively.

Net income (loss) from continuing operations for the three and six months ended June 30, 2022 included special items which decreased net income by $191 million and $591 million, respectively, or $0.37 and $1.16 per diluted share, respectively.

Special Items

The following table provides a summary of our special items and the related impact by line item on our results for the three months ended March 31, 2023 and 2022.

The following table provides a summary of our special items and the related impact by line item on our results for the three and six months ended June 30, 2023 and 2022.

Three months ended

June 30, Six months ended

(in millions) 2023 2022 2023 2022

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Business optimization items 1

(266) (6) (301) (8)

Acquisition and integration items 2

— (9) — (173)

European medical devices regulation 3

(12) (12) (24) (23)

Divestiture-related costs 4

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Total Special Items $ (387) $ (139) $ (545) $ (461)

Impact on Gross Margin Ratio (4.3 pts) (8.6 pts)

Impact on Gross Margin Ratio (10.4 pts) (3.9 pts) (7.6 pts) (6.5 pts)

Selling, General and Administrative (SG&A) Expenses

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Business optimization items 1

27 36 119 114

Acquisition and integration items 2

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Total Special Items $ 120 $ 137 $ 278 $ 334

Impact on SG&A Ratio 4.5 pts 5.3 pts

Impact on SG&A Ratio 3.2 pts 3.8 pts 3.8 pts 4.7 pts

Research and Development (R&D) Expenses

Business optimization items 1

$ — $ — $ 7 $ 1

Total Special Items $ — $ — $ 7 $ 1

Impact on R&D Ratio 0.2 pts 0.0 pts

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

Other Operating Expense (Income), net

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Total Special Items $ (1) $ (11) $ (14) $ (28)

Other (Income) Expense, net

Pension curtailment 6

$ — $ (11) $ — $ (11)

Investment impairments 7

Total Special Items $ 20 $ (11) $ 20 $ (11)

Income Tax Expense

Tax matters 8

$ 34 $ — $ 34 $ —

Tax effects of special items 9

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Total Special Items $ (51) $ (63) $ (112) $ (166)

Impact on Effective Tax Rate 12.7 pts 1.5 pts

Impact on Effective Tax Rate (23.3 pts) (5.0 pts) (34.6 pts) (3.6 pts)

Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is consistent with how management and our Board of Directors assess performance.

Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact our reported results of operations for the period.

Management believes that providing the separate impact of those items on our results in accordance with U.S.

Management believes that providing the

separate impact of those items on our results in accordance with U.S.

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 Our results in 2023 and 2022 were impacted by costs associated with our execution of programs to optimize our organization and cost structure.

These restructuring and other business optimization costs included actions related to our current implementation of a new operating model intended to simplify and streamline our operations, our integration of Hillrom, rationalization of certain manufacturing and distribution facilities and transformation of certain general and administrative functions.

Our results in 2023 and 2022 included business optimization charges of $134 million and $81 million, respectively.

These restructuring and other business optimization costs included actions related to our current implementation of a new operating model intended to simplify and streamline our operations, our integration of Hillrom, the decision to close one of our U.S.-based manufacturing facilities later this year, which resulted in a $243 million noncash impairment of property, plant and equipment in the second quarter of 2023, rationalization of certain other manufacturing and distribution facilities and transformation of certain general and administrative functions.

Our results in 2023 included business optimization charges of $50 million in the second quarter and $184 million in the first half.

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

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

2 Our results in 2023 included $7 million of net benefits from acquisition and integration-related items.

Acquisition and integration benefits reflected $13 million of net gains from changes in the estimated fair

values of contingent consideration liabilities, partially offset by $6 million of integration costs, which primarily included third party consulting costs related to our integration of Hillrom.

Our results in 2022 included $171 million of acquisition and integration-related expenses.

Those costs included $29 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.

2 Our results in 2023 included $7 million in the second quarter and zero in the first half of acquisition and integration-related items.

These amounts reflected $8 million in the second quarter and $14 million in the first half of integration costs, which primarily included third party consulting costs related to our integration of Hillrom, partially offset by a $1 million benefit in the second quarter and fully offset by a $14 million benefit in the first half from changes in the estimated fair values of contingent consideration liabilities.

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

These amounts included $29 million in the second quarter and $217 million in the first half related to our acquisition of Hillrom, primarily reflecting $159 million of incremental cost of sales from the fair value step-ups on acquired Hillrom inventory that was sold in 2022.

Other integration expenses in 2022 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 $17 million of net gains from changes in the estimated fair values of contingent consideration liabilities assumed in the Hillrom acquisition.

3 Our results in 2023 and 2022 included $12 million and $11 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.

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

3 Our results in 2023 included $12 million in the second quarter and $24 million in the first half of incremental costs to comply with the European Union's medical device regulations for previously registered products, which primarily consist of contractor costs and other direct third-party costs.

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

4 Our results in 2023 included $16 million of divestiture-related costs, primarily reflecting costs of external advisors supporting our activities to prepare for 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 more information.

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

6 Reflected in this item is the income tax impact of the special items identified in this table.

Our results in 2022 included $12 million in the second quarter and $23 million in the first half related to these requirements.

4 Our results in 2023 included $37 million in the second quarter and $46 million in the first half of divestiture-related costs, primarily reflecting costs of external advisors supporting our activities to prepare for the proposed spinoff of our Renal Care and Acute Therapies product categories.

We also incurred $8 million and $15 million of additional divestiture-related costs in the second quarter and first half of 2023, respectively, related to the pending sale of our BPS product category that are reported in discontinued operations and are not presented in the table above.

Refer to "Recent Strategic Actions" above for more information about those proposed and pending transactions.

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

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

Hillrom pension plan.

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

8 Our results in 2023 included a $30 million valuation allowance recorded to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to previously enacted Swiss tax reform legislation to reflect our current estimate of its recoverability and $4 million of tax costs from divestiture-related activities.

9 This item reflects the income tax impact of the special items identified in this table.

The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.

Three Months Ended March 31, Percent change

Three Months Ended June 30, Percent change

(in millions) 2023 2022 At actual

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Total net sales $ 3,707 $ 3,594 3 % 4 %

Foreign currency unfavorably impacted net sales by 4 percentage points during the first quarter of 2023 compared to the prior-year period, principally due to the strengthening of the U.S.

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

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

Six Months Ended June 30, Percent change

(in millions) 2023 2022 At actual

currency rates At constant currency rates

United States $ 3,418 $ 3,412 0 % 0 %

International $ 3,802 3,740 2 % 6 %

Total net sales $ 7,220 $ 7,152 1 % 3 %

Foreign currency unfavorably impacted net sales by 1 percentage point during the second quarter of 2023, compared to the prior-year periods, principally due to the strengthening of the U.S.

Dollar relative to the Chinese Renminbi, Australian Dollar and Turkish Lira, partially offset by the weakening of the U.S.

Dollar relative to the Euro.

Foreign currency unfavorably impacted net sales by 2 percentage points during the first half of 2023 due to the strengthening of the U.S.

Dollar relative to the Chinese Renminbi, Australian Dollar, Turkish Lira, British Pound and the Colombian Peso.

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

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

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• Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).

• BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical and biopharmaceutical companies.

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

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• Other includes sales of other miscellaneous product and service offerings.

Contract manufacturing revenues earned by our manufacturing facility in Round Lake Illinois, which totaled $2 million for the six months ended June 30, 2023 and $11 million and $18 million for the three and six months ended June 30, 2022, respectively, were historically presented as BPS sales.

Those sales transactions, which are not impacted by the pending divestiture of our BPS business,

continue to be presented as continuing operations in the accompany consolidated financial statements and have been reclassified to our Other product category for all periods presented.

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

Three Months Ended March 31, Percent change

Three Months Ended June 30, Percent change

(in millions) 2023 2022 At actual currency rates At constant currency rates

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180 173 4 % 6 %

BioPharma Solutions 139 156 (11) % (9) %

Patient Support Systems 359 364 (1) % (1) %

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Total Baxter $ 3,707 $ 3,594 3 % 4 %

Renal Care net sales were flat in the first quarter of 2023, as compared to the prior-year period.

Sales performance for the period reflects a 4% negative impact from foreign exchange rates, as compared to the prior-year period, and lower sales in China primarily due to government-based procurement initiatives and the recent termination of a distribution agreement in the U.S., partially offset by patient growth in PD and recent government tender awards in EMEA.

Medication Delivery net sales decreased 3% in the first quarter of 2023, as compared to the prior-year period.

The decrease was driven by lower sales of infusion pumps, primarily due to supply constraints, higher U.S.

distributor chargebacks and customer rebates in the current year period and a 3% negative impact from foreign exchange rates, partially offset by increased international demand for our IV administration sets and solutions, reflecting a recovery in hospital admission rates and surgical procedures.

Pharmaceuticals net sales were flat in the first quarter of 2023, as compared to the prior-year period, reflecting increased demand for our international pharmacy compounding services and U.S.

injectable products, partially offset by a 5% negative impact from foreign exchange rates, as compared to the prior-year period, and lower demand internationally for injectable products.

Clinical Nutrition net sales decreased 1% in the first quarter of 2023, as compared to the prior-year period.

The decrease was driven by a 4% negative impact from foreign exchange rate changes, as compared to the prior-year period, partially offset by increased demand for our nutrition compounding services.

Advanced Surgery net sales increased 8% in the first quarter of 2023, as compared to the prior-year period.

The increase was driven by continued recovery in surgical procedures, partially offset by a 3% negative impact from foreign exchange rate changes, as compared to the prior-year period.

Acute Therapies net sales decreased 4% in the first quarter of 2023, as compared to the prior-year period.

The decrease was driven by a 3% negative impact from foreign exchange rate changes, as compared to the prior-year period, and lower COVID-related demand for our CRRT systems.

BioPharma Solutions net sales decreased 11% in the first quarter of 2023, as compared to the prior-year period.

The decrease was primarily driven by lower sales of 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 decrease also includes a 2% negative impact from foreign exchange rates, as compared to the prior-year period.

Patient Support Systems net sales decreased 9% in the first quarter of 2023, as compared to the prior-year period.

The decrease reflects lower demand for hospital beds, which we believe was driven by current capital spending constraints at certain of our customers, lower rental revenues and a 1% negative impact from foreign exchange rates, as compared to the prior-year period, partially offset by increased sales in our connected care offerings.

Front Line Care net sales increased 3% in the first quarter of 2023, as compared to the prior-year period.

The increase was driven by increased demand for our physical assessment tools and cardiology products, partially offset by a 1% negative impact from foreign exchange rates, as compared to the prior-year period.

Global Surgical Solutions net sales increased 4% in the first quarter of 2023, as compared to the prior-year period.

The increase was driven by strong international demand, partially offset by a 4% negative impact from foreign exchange rates, as compared to the prior-year period.

Six months ended June 30, Percent change

(in millions) 2023 2022 At actual currency rates At constant currency rates

$ 1,828 $ 1,825 0 % 3 %

Medication Delivery

1,448 1,416 2 % 4 %

Pharmaceuticals

1,074 1,049 2 % 6 %

Clinical Nutrition

467 457 2 % 5 %

Advanced Surgery

518 491 5 % 7 %

Acute Therapies

360 361 (0) % 2 %

Patient Support Systems 707 747 (5) % (5) %

Front Line Care 609 576 6 % 6 %

Global Surgical Solutions 158 147 7 % 8 %

51 83 (39) % (39) %

Total Baxter $ 7,220 $ 7,152 1 % 3 %

Renal Care net sales increased 1% in the second quarter and were flat in the first half of 2023, as compared to the prior-year periods.

Sales performance in the current year periods was primarily due to patient growth in PD, pricing initiatives and recent government tender awards in EMEA, partially offset by lower sales in China, primarily due to government-based procurement initiatives and the impact of COVID-19 on that country’s renal patient population, the termination of a distribution agreement in the U.S.

and negative foreign exchange rate impacts of 1% and 3%, respectively, for the second quarter and first half of 2023, as compared to the prior-year periods.

Medication Delivery net sales increased 7% in the second quarter and 2% in the first half of 2023, as compared to the prior-year periods.

Performance in the second quarter benefited from increased demand for our IV administration sets and solutions, reflecting a recovery in hospital admission rates and surgical procedures, competitor supply constraints and some improvement in the availability of certain component parts used in our infusion pumps.

Performance in the first half benefited from the same items impacting sales in the second quarter, partially offset by higher U.S.

distributor chargebacks and customer rebates and a 2% negative impact from foreign exchange rates, as compared to the prior-year period.

Pharmaceuticals net sales increased 4% in the second quarter and 2% in the first half of 2023, as compared to the prior-year periods.

The increases in the second quarter and first half reflect growth from our U.S.

injectable products,

driven by our recent launches of Zosyn, following the transfer of the related product rights to us earlier this year, Bendamustine and Norepinephrine, and increased demand for our international pharmacy compounding services.

Partially offsetting those items were lower sales of inhaled anesthesia and negative foreign exchange rate impacts of 2% and 4%, respectively, for the second quarter and first half of 2023, as compared to the prior-year periods.

Clinical Nutrition net sales increased 6% in the second quarter and 2% in the first half of 2023, as compared to the prior-year periods.

The increase in the second quarter and first half was driven by strong demand for our nutrition compounding services and our parenteral nutrition products.

Partially offsetting those items was increased competitor activity in the U.S.

and negative foreign exchange rate impacts of 1% and 3%, respectively, for the second quarter and first half of 2023, as compared to the prior-year periods.

Advanced Surgery net sales increased 3% in the second quarter and 5% in the first half of 2023, as compared to the prior-year periods.

The increase in the second quarter and first half was driven by continued recovery in surgical procedures, partially offset by supply constraints, the exit of a product distribution arrangement, a comparison against prior-year periods that benefited from competitor supply constraints and a 1% and 2%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods.

Acute Therapies net sales increased 4% in the second quarter and were flat in the first half of 2023, as compared to the prior-year periods.

The increase in the second quarter was driven by strong demand for our CRRT offerings, partially offset by a 2% negative impact from foreign exchange rate changes, as compared to the prior-year period.

The flat net sales in the first half also reflects a comparison against a prior year period that included strong COVID-related demand for our CRRT offerings during the first quarter.

Patient Support Systems net sales decreased 1% in the second quarter and 5% in the first half of 2023, as compared to the prior-year periods.

The decreases reflect lower demand for hospital beds, which we believe is being driven by current capital spending constraints at certain of our customers, and lower rental revenues, partially offset by sales generated from recent product launches in the U.S.

We are starting to see some improvement in capital spending, as our order rates improved sequentially from the first quarter to the second quarter of 2023.

Front Line Care net sales increased 9% in the second quarter and 6% in the first half of 2023, as compared to the prior-year periods.

The increase was driven by increased demand for our physical assessment tools, respiratory health products and cardiology products.

Performance in the second quarter benefited from improved availability of component parts used in certain of our products.

Global Surgical Solutions net sales increased 12% in the second quarter and 7% in the first half of 2023, as compared to the prior-year periods, driven by strong international demand.

Sales growth in the second quarter reflected a 3% positive impact from foreign exchange rates and sales growth in the first half reflected a 1% negative impact from foreign exchange rates, as compared to the prior-year periods.

Gross Margin and Expense Ratios

Three months ended March 31,

Three months ended June 30,

2023 % of net sales 2022 % of net sales $ change % change

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R&D $ 165 4.5 % $ 148 4.1 % $ 17 11.5 %

The gross margin ratio was 36.9% and 36.4% in the first quarter of 2023 and 2022, respectively.

The special items identified above had an unfavorable impact of approximately 4.3 and 8.6 percentage points on the gross margin ratio in the first quarter of 2023 and 2022, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the gross margin ratio decreased in the first quarter of 2023 compared to the prior-year period primarily due to the adverse cost impacts of raw materials inflation.

The SG&A expenses ratio was 27.7% and 28.4% in the first quarter of 2023 and 2022, respectively.

The special items identified above had an unfavorable impact of approximately 4.5 and 5.3 percentage points on the SG&A expenses ratio in the first quarter of 2023 and 2022, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the SG&A expenses ratio was flat in the first quarter of 2023 compared to the prior-year period.

The R&D expenses ratio was 4.5% and 4.0% in the first quarter of 2023 and 2022, respectively.

The special items identified above had an unfavorable impact of approximately 0.2 percentage points on the R&D expenses ratio in the first quarter of 2023 and no impact on the R&D expenses ratio in the first quarter of 2022.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items the R&D expenses ratio increased in the first quarter of 2023 compared to the prior-year period as a result of increased project-related expenditures, particularly related to our connected care portfolio.

Six months ended June 30,

2023 % of net sales 2022 % of net sales $ change % change

Gross margin $ 2,386 33.0 % $ 2,633 36.8 % $ (247) (9.4) %

SG&A $ 1,959 27.1 % $ 2,017 28.2 % $ (58) (2.9) %

R&D $ 329 4.6 % $ 297 4.2 % $ 32 10.8 %

The gross margin ratio was 30.0% and 33.0% in the second quarter and first half of 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 10.4 and 7.6 percentage points on the gross margin ratio in the second quarter and first half of 2023, respectively.

The gross margin ratio was 38.1% and 36.8% in the second quarter and first half of 2022, respectively.

Special items had an unfavorable impact of

approximately 3.9 and 6.5 percentage points on the gross margin ratio in the second quarter and first half of 2022, respectively.

Refer to the Special Items caption earlier in this section for additional detail.

Excluding the impact of special items, the gross margin ratio decreased in the second quarter and first half of 2023 compared to the prior-year periods primarily due to the adverse cost impacts of raw materials inflation.

The SG&A expenses ratio was 26.0% and 27.1% in the second quarter and first half of 2023, respectively.

The special items identified earlier in this section had an unfavorable impact of approximately 3.2 and 3.8 percentage points on the SG&A expenses ratio in the second quarter and first half of 2023, respectively.

The SG&A expenses ratio was 27.0% and 28.2% in the second quarter and first half of 2022, respectively.

Special items had an unfavorable impact of approximately 3.8 and 4.7 percentage points on the SG&A expenses ratio in the second quarter and first half 2022, respectively.

Refer to the Special Items caption earlier in this section for additional detail.

Excluding the impact of special items, the SG&A expenses ratio decreased in the second quarter and first half of 2023 compared to the prior-year periods primarily due to savings from restructuring actions implemented in recent periods, partially offset by higher bonus accruals under our annual employee incentive compensation plan.

The R&D expenses ratio was 4.5% and 4.6% in the second quarter and first half of 2023, respectively.

The special items identified earlier in this section had no impact on the R&D expenses ratio in the second quarter and an unfavorable impact of approximately 0.1 percentage point on the R&D expenses ratio in the first half of 2023.

The R&D expenses ratio was 4.1% and 4.2% in the second quarter and first half of 2022, respectively.

Special items had no impact on the R&D expenses ratio in the second quarter and an unfavorable impact of approximately 0.1 percentage point on the R&D expenses ratio in the first half of 2022.

Refer to the Special Items caption earlier in this section for additional detail.

Excluding the impact of special items, the R&D expenses ratio increased in the second quarter and first half of 2023 compared to the prior-year periods as a result of increased project-related expenditures, particularly related to our connected care portfolio.

Business Optimization Items

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These efforts have included restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions.

From the commencement of our business optimization actions in the second half of 2015 through March 31, 2023, we have incurred cumulative pre-tax costs of $1.6 billion related to these actions.

From the commencement of our business optimization actions in the second half of 2015 through June 30, 2023, we have incurred cumulative pre-tax costs of $1.86 billion related to these actions.

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

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

For example, we expect to incur additional restructuring charges during 2023 related to our implementation of a new operating model intended to simplify and streamline our operations (including our manufacturing footprint), as discussed above under "Recently Announced Strategic Actions." Refer to Note 9 in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding our business optimization programs.

For example, we expect to incur additional restructuring charges during 2023 related to our implementation of a new operating model intended to simplify and streamline our operations (including our manufacturing footprint), as discussed above under "Recent Strategic Actions." Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding our business optimization programs.

Other Operating Income, Net

Other operating income, net was $13 million in the first quarter of 2023 and $17 million in the first quarter of 2022.

In both periods these amounts were comprised of changes in the estimated fair value of contingent consideration liabilities.

Other operating income, net was $1 million and $14 million in the second quarter and first half of 2023, respectively, and $11 million and $28 million in the second quarter and first half of 2022, respectively.

Those amounts were comprised of changes in the estimated fair value of contingent consideration liabilities.

Interest Expense, Net

Interest expense, net was $117 million in the first quarter of 2023 and $85 million in the first quarter of 2022.

The increase in 2023 was driven by higher interest rates on our floating rate debt.

Other Income, Net

Other income, net was $1 million in the first quarter of 2023 and $16 million in the first quarter of 2022.

In the first quarter of 2023, other income, net was primarily due to pension and other postretirement benefits and increases in the fair value of marketable equity securities partially offset by foreign exchange losses.

In the first quarter of 2022, other income, net was due to foreign exchange gains and pension and other postretirement benefits.

Our effective income tax rate was 35.7% and 22.3% in the first quarter of 2023 and 2022, respectively.

Interest expense, net was $124 million and $241 million in the second quarter and first half of 2023, respectively, and $89 million and $174 million in the second quarter and first half of 2022, respectively.

The increase in 2023 was driven by higher interest rates on our floating rate debt, partially offset by net repayments in the current year periods.

Other (Income) Expense, Net

Other (income) expense, net was an expense of $42 million and $40 million in the second quarter and first half of 2023, respectively, and income of $44 million and $60 million in the second quarter and first half of 2022, respectively.

In the second quarter and first half of 2023, the net expense was primarily driven by foreign exchange losses, non-marketable investment impairments and a decrease in the fair value of marketable equity securities, partially offset by pension and other postretirement benefits.

In the second quarter and first half of 2022, the income was primarily due to foreign exchange gains, an increase in the fair value of marketable equity securities, pension and other postretirement benefits and a pension curtailment gain.

Our effective income tax rate was (5.5)% and 15.5% in the second quarter, and (14.2)% and 17.2% in the first half of 2023 and 2022, respectively.

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

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

For the three months ended March 31, 2023, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to tax shortfalls on stock compensation awards and an increase in our liabilities for uncertain tax positions, partially offset by a favorable geographic earnings mix.

For the three months ended March 31, 2022, the difference between our effective income tax rate and the U.S.

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

For the three and six months ended June 30, 2023, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a $30 million increase in the valuation allowance related to a deferred tax asset basis step-up that arose from previously enacted Swiss tax reform legislation and a favorable geographic earnings mix.

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

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

Discontinued Operations

In May 2023, we entered into a definitive agreement to sell our BPS business and its results have been presented as discontinued operations for the three and six months ended June 30, 2023 and 2022.

Income from discontinued operations, net of tax, was $54 million and $99 million, respectively, in the second quarter and first half of 2023, compared to $70 million and $135 million, respectively, in the second quarter and first half of 2022.

The decreases were primarily driven by lower sales in the current year periods, reflecting a comparison against prior year periods that included more significant sales from contract manufacturing of COVID-19 vaccines, as well as increased SG&A expense due to divestiture-related costs of $8 million and $15 million, respectively, in the second quarter and first half of 2023.

Refer to Note 2 within Item 1 for additional information.

Segment Results

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

Our global operations are currently comprised of four segments, consisting of the following geographic segments related to legacy Baxter business:

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

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

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

ongoing performance of our segments.

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

Net sales Operating income (loss)

Three months ended March 31, Three months ended March 31,

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

(in millions) 2023 2022 2023 2022 2023 2022 2023 2022

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Total $ 3,707 $ 3,594 $ 7,220 $ 7,152 $ (17) $ 264 $ 112 $ 347

Segment net sales and operating income were $1.6 billion and $481 million, respectively, in the first quarter of 2023 and $1.6 billion and $610 million, respectively, in the first quarter of 2022.

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

Segment net sales and operating income were $714 million and $106 million, respectively, in the first quarter of 2023 and $699 million and $119 million, respectively, in the first quarter of 2022.

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

Segment net sales and operating income were $602 million and $107 million, respectively, in the first quarter 2023 and $627 million and $151 million, respectively, in the first quarter of 2022.

The decrease in operating income was driven by the unfavorable impact of foreign exchange rates on results, as compared to the prior-year period, and higher supply chain and raw materials costs.

Segment net sales and operating income were $731 million and $158 million, respectively, in the first quarter of 2023 and $755 million and $200 million, respectively, in the first quarter of 2022.

The decrease in operating income was due to lower sales in our Patient Support Systems product category, an unfavorable product mix and higher supply chain costs, partially offset by higher sales in our Front Line Care and Global Surgical Solutions product categories.

Segment net sales and operating income were $1.56 billion and $498 million, respectively, in the second quarter of 2023 and $3.03 billion and $918 million, respectively, in the first half of 2023.

Segment net sales and operating income were $1.49 billion and $488 million, respectively, in the second quarter and $2.97 billion and $1.01 billion, respectively, in the first half of 2022.

The increase in operating income in the second quarter of 2023 was primarily due to increased sales and SG&A savings from restructuring actions implemented in recent periods, partially offset by lower gross margins due to raw materials inflation and higher supply chain costs.

The decrease in operating income in the first half of 2023 was due to lower gross margins resulting from raw materials inflation and higher supply chain costs, partially offset by increased sales and SG&A savings from restructuring actions implemented in recent periods.

Segment net sales and operating income were $762 million and $112 million, respectively, in the second quarter of 2023 and $1.48 billion and $218 million, respectively, in the first half of 2023.

Segment net sales and operating income were $738 million and $169 million, respectively, in the second quarter and $1.44 billion and $288 million, respectively, in the first half of 2022.

Segment net sales and operating income were $638 million and $118 million, respectively, in the second quarter of 2023 and $1.24 billion and $225 million, respectively, in the first half of 2023.

Segment net sales and operating income were $647 million and $156 million, respectively, in the second quarter $1.27 billion and $307 million, respectively, in the first half of 2022.

The decrease in operating income was driven by lower sales, resulting from the unfavorable impact of foreign exchange rates on results, as compared to the prior-year period, and higher supply chain and raw materials costs.

Segment net sales and operating income were $743 million and $147 million, respectively, in the second quarter of 2023 and $1.47 billion and $305 million, respectively, in the first half of 2023.

Segment net sales and operating income were $715 million and $149 million, respectively, in the second quarter and $1.47 billion and $349 million, respectively, in the first half of 2022.

The increase in operating income in the second quarter was due to savings from restructuring actions implemented during the current year, partially offset by an unfavorable product mix and higher supply chain and raw materials costs.

The decrease in operating income in the first half of 2023 was due to lower sales in our Patient Support Systems product category, an unfavorable product mix and higher supply chain and raw materials costs, partially offset by higher sales in our Front Line Care and Global Surgical Solutions product categories.

Corporate and Other

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They primarily include corporate headquarters 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, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments).

The Corporate operating loss in the first quarter of 2023 was lower than the prior-year period primarily due to lower intangible asset amortization expense and acquisition and integration-related expenses, partially offset by higher business optimization charges and increased centrally managed manufacturing and supply chain costs.

The Corporate operating loss in the second quarter was higher than the prior-year periods primarily due to business optimization charges, which included a $243 million noncash impairment of property, plant and equipment resulting from our decision to close one of our U.S.-based manufacturing facilities later this year, increased centrally managed manufacturing and supply chain costs and higher bonus accruals under our annual employee incentive compensation plans, partially offset by lower intangible asset amortization expense and acquisition and integration-related expenses.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash flows for the three-month periods ended March 31, 2023 and 2022.

Three months ended March 31,

The following table is a summary of the statement of cash flows for the six-month periods ended June 30, 2023 and 2022.

Six months ended June 30,

(in millions) 2023 2022

Cash flows from operations $ 479 $ 208

Cash flows from investing activities (170) (304)

Cash flows from operations - continuing operations $ 780 $ 369

Cash flows from investing activities - continuing operations (326) (457)

Cash flows from financing activities (492) (1,017)

Cash Flows from Operations

In the first three months of 2023, cash provided by operating activities was $479 million, as compared to cash provided by operating activities of $208 million in the first three months of 2022, an increase of $271 million.

Cash Flows from Operations - Continuing Operations

In the first half of 2023, cash provided by operating activities - continuing operations was $780 million, as compared to cash provided by operating activities of $369 million in the first half of 2022, an increase of $411 million.

Cash flows from operations in the current year period was favorably impacted, as compared to the prior year period, by lower annual payouts under our employee incentive compensation plans, which were determined based on our 2022 performance, and by the timing of accounts payable payments.

Cash Flows from Investing Activities

In the first three months of 2023, cash used for investing activities included payments for acquisitions and investments of $3 million and capital expenditures of $172 million.

In the first three months of 2022, cash used for investing activities included payments for acquisitions and investments of $174 million and capital expenditures of $140 million.

Cash Flows from Investing Activities - Continuing Operations

In the first half of 2023, cash used for investing activities - continuing operations included payments for acquisitions and investments of $3 million and capital expenditures of $328 million.

In the first half of 2022, cash used for investing activities included payments for acquisitions and investments of $190 million, primarily related to our payment to acquire the rights to Zosyn, and capital expenditures of $277 million.

Cash Flows from Financing Activities

In the first three months of 2023, cash used in financing activities included a net decrease in commercial paper borrowings of $249 million, dividend payments of $146 million and debt repayments of $3 million, partially offset by proceeds from stock issued under employee benefit plans of $36 million.

In the first three months of 2022, cash used for financing activities included debt repayments of $404 million, dividend payments of $140 million, and a $45 million net repayment of short-term borrowings, partially offset by proceeds from stock issued under employee benefit plans of $66 million.

In the first half of 2023, cash used in financing activities included dividend payments of $292 million and debt repayments of $142 million and a net decrease in commercial paper borrowings of $51 million, partially offset by proceeds from stock issued under employee benefit plans of $54 million.

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

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

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Our Board of Directors increased this authority by an additional $1.50 billion in each of November 2016 and February 2018, by an additional $2.00 billion in November 2018 and by an additional $1.50 billion in October 2020.

We did not repurchase any shares under this authority in the first three months of 2023.

We had $1.3 billion remaining available under this authorization as of March 31, 2023.

We did not repurchase any shares under this authority in the first half of 2023.

We had $1.30 billion remaining available under this authorization as of June 30, 2023.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of March 31, 2023, our U.S.

As of June 30, 2023, our U.S.

dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of $2.50 billion and €200 million, respectively.

There were no borrowings outstanding under these credit facilities as of March 31, 2023 or December 31, 2022.

There were no borrowings outstanding under these credit facilities as of June 30, 2023 or December 31, 2022.

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.

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dollar-denominated term loan credit facility and revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to amend the net leverage ratio covenant to increase the maximum net leverage ratio for the four fiscal quarters ending March 31, 2023, June 30, 2023, September 30, 2023 and December 31, 2023.

As of March 31, 2023, we were in compliance with the financial covenants in these agreements.

Based on our covenant calculations as of March 31, 2023, we had capacity to draw approximately $2.2 billion under our credit facilities, less outstanding commercial paper borrowings, which were $50 million as of March 31, 2023.

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.

As of June 30, 2023, we were in compliance with the financial covenants in these agreements.

Based on our covenant calculations as of June 30, 2023, we had capacity to draw approximately $2.63 billion under our credit facilities, less outstanding commercial paper borrowings, which were $249 million as of June 30, 2023.

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.

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

We had $1.7 billion of cash and cash equivalents as of March 31, 2023, with adequate cash available to meet operating requirements in each jurisdiction in which we operate.

We had $1.72 billion of cash and cash equivalents as of June 30, 2023, with adequate cash available to meet operating requirements in each jurisdiction in which we operate.

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

As of March 31, 2023, we had approximately $16.4 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt.

As of June 30, 2023, we had approximately $16.48 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt.

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

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We currently expect that such capital spending constraints will likely continue throughout much of 2023.

However, we have not reduced our longer-term outlook for that reporting unit as we currently expect that such capital spending constraints, which are often cyclical and closely aligned with broader economic conditions, will improve in the foreseeable future.

Based on the excess of the reporting unit’s fair value over its carrying amount during our most recent annual impairment test in the fourth quarter of 2022 and our expectations for its performance over the forecast period, we determined that it is not more likely than not that the goodwill of that reporting unit was impaired as of

March 31, 2023.

Therefore, we did not perform a trigger-based quantitative goodwill impairment test during the first quarter of 2023.

However, we have not reduced our longer-term outlook for that reporting unit and we have seen sequential improvement in capital orders between the first and second quarters of 2023.

We currently expect that such capital spending constraints, which are often cyclical and closely aligned with broader economic conditions, will continue to improve in the foreseeable future.

Therefore, we did not perform a trigger-based quantitative goodwill impairment test during the second quarter of 2023.

However, we are continuing to closely monitor the performance of our Patient Support Systems reporting unit and if there is a significant adverse change in our outlook for that business in the future a goodwill impairment could arise at that time.

There have been no significant changes in the application of our critical accounting policies during the first three months of 2023.

There have been no significant changes in the application of our critical accounting policies during the first half of 2023.

RECENT ACCOUNTING PRONOUNCEMENTS

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Food and Drug Administration (FDA) commenced an inspection of the Claris’ facilities in Ahmedabad, India.

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 us 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.

On April 26, 2023, FDA notified us that the inspection had been classified as official action indicated (OAI).

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.

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

On September 1, 2022, FDA notified us that the inspection had been classified as voluntary action indicated.

From January 19, 2023 to January 27, 2023, FDA performed an inspection at the Ahmedabad site, concluding with the issuance of a Form FDA 483.

On April 26, 2023, FDA notified us that the inspection had been classified as official action indicated.

We received a Warning Letter on July 25, 2023 based on observations identified in the January 2023 inspection (2023 Warning Letter).

Since the issuance of the 2017 Warning Letter, we have implemented corrective and preventive actions to address FDA's observations, as well as other enhancements at the site.

We intend to fully respond to the 2023 Warning Letter, including the implementation of additional corrective and preventive actions, and to continue to engage with FDA regarding the agency's observations.

In addition, since the issuance of the 2017 Warning Letter, we

have secured other sites in our manufacturing network and have launched and distribute select products from those sites in the U.S.

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

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

These forward-looking statements may include statements with respect to plan to implement a simplified operating model, the proposed spinoff of our Renal Care and Acute Therapies product categories, review of strategic alternatives (including a potential sale) 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 the 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, interest rate and credit risks (including as a result of recent banking crises), 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, 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 may include statements with respect to our plan to implement a simplified operating model, the proposed spinoff of our Renal Care and Acute Therapies product categories, our review of strategic alternatives the pending sale of our BPS product category and other portfolio management activities we may undertake in the future, accounting estimates and assumptions (including with respect to goodwill and other intangible asset impairments), global economic conditions, litigation-related matters, future regulatory filings and our R&D pipeline (including anticipated product approvals or clearances), 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, interest rate and credit risks (including as a result of recent banking crises), 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, 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:

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 evaluation of 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;

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 the pending sale of 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 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, financial market volatility, banking crises, 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 our employees, customers and suppliers, including foreign governments in countries in which we operate;

the impact of global economic conditions (including, among other things, inflation levels, interest rates, financial market volatility, banking crises, 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 COVID-19 pandemic, or the anticipation of any of the foregoing, on our operations and 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 customer preferences and future expenditures, 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);

product development risks, including satisfactory clinical performance and obtaining and maintaining 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;

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;

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 letters at our Ahmedabad facility;

demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with our ability to accurately predict changing customer preferences and future expenditures, 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 those products on quality and patient safety concerns;

breaches, including by cyber-attack, data leakage, unauthorized access or theft, or failures of or vulnerabilities in, our information technology systems or products;

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 or otherwise), and the related continuity of our manufacturing and distribution and those of our suppliers;

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;

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);

failures with respect to our quality, compliance or ethics programs;

3 unchanged sentences

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 ethylene oxide litigation or other claims;

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

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

9 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis