Baxter 10k

This assignment explores the extensive amount and type of information included in a company’s
Annual Report, also known as Form 10-K, filed with the Securities and Exchange Commission
(SEC) and certain other quarterly disclosures by the company. Baxter International, Inc.
(“Baxter”) Annual Report can be found on the course Blackboard site under the Assessments
link for assignment 1.
You are asked to answer the following questions about Baxter. Be sure to address all parts of
each questions for full credit.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________________________________________
FORM 10-K
_____________________________________________________________________________________________
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
☐
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-4448
_____________________________________________________________________________________________
Baxter International Inc.
(Exact Name of Registrant as Specified in its Charter)
_____________________________________________________________________________________________
Delaware
36-0781620
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
One Baxter Parkway, Deerfield,
Illinois
60015
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code 224.948.2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common stock, $1.00 par value
BAX (NYSE)
0.4% Global Notes due 2024
1.3% Global Notes due 2025
1.3% Global Notes due 2029
BAX 24
BAX 25
BAX 29
New York Stock Exchange
Chicago Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_____________________________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ☐
Yes ☐
No ☑
No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ☑
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☑
☐
☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of
an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ☑
The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2022 (the last business day of the registrant’s most recently completed
second fiscal quarter), based on the per share closing sale price of $64.23 on that date and the assumption for the purpose of this computation only that all of the registrant’s
directors and executive officers are affiliates, was approximately $32 billion. The number of shares of the registrant’s common stock, $1.00 par value, outstanding as of January 31,
2023 was 504,672,166.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive 2023 proxy statement for use in connection with its Annual Meeting of Stockholders expected to be held on May 2, 2023 are incorporated by
reference into Part III of this report.
TABLE OF CONTENTS
Page
Number
Item 1.
Business
1
Item 1A.
Risk Factors
9
Item 1B.
Unresolved Staff Comments
26
Item 2.
Properties
27
Item 3.
Legal Proceedings
27
Item 4.
Mine Safety Disclosures
27
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
29
Item 6.
Reserved
29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
53
Item 8.
Financial Statements and Supplementary Data
54
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
117
Item 9A.
Controls and Procedures
117
Item 9B.
Other Information
117
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
117
Item 10.
Directors, Executive Officers and Corporate Governance
117
Item 11.
Executive Compensation
118
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
118
Item 13.
Certain Relationships and Related Transactions, and Director Independence
119
Item 14.
Principal Accountant Fees and Services
119
Item 15.
Exhibits and Financial Statement Schedules
119
Item 16.
Form 10-K Summary
119
PART I
Item 1.
Business.
Company Overview
Baxter International Inc., through its subsidiaries, provides a broad portfolio of essential healthcare products, including acute and chronic dialysis
therapies; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable
pharmaceuticals; surgical hemostat and sealant products, advanced surgical equipment; smart bed systems; patient monitoring and diagnostic
technologies; and respiratory health devices. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation
centers, doctors’ offices and by patients at home under physician supervision. 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. As of December 31, 2022, we manufactured
products in over 20 countries and sold them in over 100 countries.
Baxter International Inc. was incorporated under Delaware law in 1931. As used in this report, “Baxter International” means Baxter International
Inc. and “we”, “our” or “us” means Baxter International and its consolidated subsidiaries, unless the context otherwise requires.
Recently Announced Strategic Actions
In January 2023, we announced the following planned strategic actions that are intended to enhance our operational effectiveness, accelerate
innovation and drive additional stockholder value: (a) a proposed spinoff of our Renal Care and Acute Therapies product categories into an
independent publicly traded company, (b) our development of a new operating model to simplify our operations and (c) our pursuit of strategic
alternatives (including a potential sale) for our BioPharma Solutions (BPS) product category.
This proposed spinoff of our Renal Care and Acute Therapies product categories (the proposed spinoff) is currently expected to be completed
during the first half of 2024, approximately 12 to 18 months from the date of the related announcement. In 2022 we generated $4.4 billion of
combined net sales from our Renal Care and Acute Therapies product categories, representing approximately 29% of our consolidated net
sales. We intend for the proposed spinoff to qualify as tax-free to Baxter and our shareholders for U.S. federal income tax purposes. The
proposed spinoff is subject to the satisfaction of customary conditions, including final approval from our Board of Directors, the filing and
effectiveness of a registration statement on Form 10, receipt of an Internal Revenue Service (IRS) ruling or related tax opinions from counsel,
satisfactory completion of financing arrangements, consultations with works councils and other employee representative bodies and any
necessary regulatory approvals.
To strengthen our ability to deliver on our vision to transform healthcare, we are designing a new operating model intended to simplify and
streamline our operations. Once the simplified model is implemented, we expect to be a more integrated and nimble organization that can
respond more effectively to changes in the macroeconomic environment, while enhancing our ability to drive innovation in our product portfolio.
As part of these actions, we are working to create a more resilient supply chain and better align our manufacturing footprint and supply chain to
our commercial activities. Under the new model, our business will be managed across four global business units consisting of: (1) Medical
Products and Therapies, which will include our Medication Delivery, Advanced Surgery and Clinical Nutrition product categories, (2) Healthcare
Systems and Technologies, which will include the Patient Support Systems, Front Line Care and Global Surgical Solutions product categories
obtained in the Hillrom acquisition, (3) Pharmaceuticals, which will include our BPS product category, for which we are exploring strategic
alternatives, and our Pharmaceuticals product category and (4) Kidney Care, which will include our Renal Care and Acute Therapies product
categories that we are proposing to spinoff into an independent publicly traded company.
We expect to have our new organizational designs substantially finalized in the second quarter of 2023. The new operating model will have
significant impacts on our systems and processes across our entire company and we expect to have those broader operational changes,
including our updated management reporting framework for the new operating model, fully implemented during the second half of 2023. At that
time, we expect that our reportable segments will be changed to align with the new operating model.
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We are pursuing strategic alternatives (including a potential sale) for our BPS product category, which includes contract manufacturing services
provided to pharmaceutical and biopharmaceutical companies. In 2022 we generated $644 million of net sales from that product category,
representing approximately 4% of our consolidated net sales. A potential sale of, or other strategic transaction involving, BPS would help us
further narrow our strategic focus as a company while providing an opportunity for capital deployment, including debt repayment.
Following these planned strategic actions (including completion of the proposed spinoff), we intend to emerge as a stronger hospital solutions
and connected care company. As a more focused business, we expect to be better positioned to make strategic investments to accelerate our
vision and to deliver differentiated value to our stakeholders with our unique combination of products, therapies and connected care platforms.
There can be no guarantees that the proposed spinoff, the simplified operating model or the sale of, or other strategic transaction involving, our
BPS product category will be completed in the manner or over the timeframes described above, or at all.
Acquisition of Hillrom
On December 13, 2021, we completed 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. Hillrom was a global medical technology leader and its products and services help enable earlier diagnosis and treatment, optimize
surgical efficiency, and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. Hillrom made those
outcomes possible through digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and
diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time
insights at the point of care. In 2022 the Patient Support Systems, Front Line Care and Global Surgical Solutions product categories of our
Hillrom segment collectively generated net sales of $2.9 billion. During 2022, we also recognized $2.8 billion of goodwill impairments and $332
million of indefinite-lived intangible asset impairments related to goodwill and trade name intangible assets that arose from the Hillrom
acquisition. See Notes 2, 4, 5 and 17 in Item 8 of this Annual Report on Form 10-K for additional information about the Hillrom acquisition,
goodwill and intangible asset impairments, Hillrom acquisition financing arrangements and Hillrom segment results, respectively.
Business Segments and Products
We currently manage our global operations based on four segments, consisting of the following geographic segments related to our legacy
Baxter business: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific), and a global segment
for our recently acquired Hillrom business. As discussed above under “Recently Announced Strategic Actions,” we are designing a new operating
model intended to simplify and streamline our operations and we expect that our reportable segments will be changed to align with that new
operating model when it is fully implemented.
The Americas, EMEA and APAC segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis
therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable
pharmaceuticals; and surgical hemostat and sealant products. As discussed above under “Recently Announced Strategic Actions,” we are
pursuing the proposed spinoff of our Renal Care and Acute Therapies product categories and strategic alternatives for our BPS product
category. The Hillrom segment provides digital and connected care solutions and collaboration tools, including smart bed systems, patient
monitoring and diagnostic technologies, respiratory health devices and advanced equipment for the surgical space.
For financial information about our segments, see Note 17 in Item 8 of this Annual Report on Form 10-K.
Business Strategy
Our business strategy is focused on driving sustainable growth and innovation aligned with our mission to save and sustain lives and our vision
to transform healthcare with a customer focus to improve patient outcomes, enhance workflow efficiency, and enable cost-effective care. Our
diversified and broad portfolio of medical products that treat life-threatening acute or chronic conditions and our global presence are core
components of our strategy as we
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work to achieve these objectives. We are focused on four strategic pillars as part of our pursuit of industry leading performance: innovation;
market expansion; operational efficiency; and capital allocation.
Innovation
Our innovation strategy is focused on connected care and core therapies offerings. Connected care offerings include devices or software that
can connect, communicate and/or analyze data to help transform healthcare and improve patient outcomes. Our acquisition of Hillrom has been
a key driver in developing our connected care offerings, as its product portfolio includes digital and connected care solutions and collaboration
tools such as smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the
surgical space and more, delivering actionable, real-time insights at the point of care. Our core therapies product offerings include medical
devices and consumable medical products designed to address essential patient and provider needs across the continuum of care.
As part of this strategy and consistent with our recently announced strategic initiatives, we are shifting our investments to drive innovation in
product areas where we have compelling opportunities to serve patients and healthcare professionals while advancing our business. We are
accelerating the pace in which we bring these advances to market to support our future growth. We are in the midst of launching several new
products, geographic expansions and line extensions including in such areas as chronic and acute renal care, smart pump technology, hospital
pharmaceuticals and nutritionals, surgical sealants, smart beds, respiratory vests and more. These comprise a mix of entirely new offerings,
improvements on existing technologies and the expansion of current products into new geographies.
Market Expansion
The market expansion component of our strategy includes capturing revenue synergies through the integration of Hillrom, expanding our
portfolio geographically, broadening our portfolio through channel expansion and increasing utilization of our products and therapies through
market development activities. These initiatives include using Baxter’s geographic footprint to introduce the Hillrom product portfolio into new
markets, as well as expanding value-added services, increasing adoption of underpenetrated therapies and providing education and advocacy to
improve access to our products.
Operational Excellence
As discussed above under “Recently Announced Strategic Actions,” we are designing a new operating model intended to simplify and streamline
our operations. Once the simplified model is implemented, we expect to be a more integrated and nimble organization that can respond more
effectively to changes in the macroeconomic environment, while enhancing our ability to drive innovation in our product portfolio. As part of these
actions, we are working to create a more resilient supply chain and better align our manufacturing footprint and supply chain to our commercial
activities. We also continue to focus on increasing efficiencies through automation and digitization and we remain committed to deliver on the
targeted cost synergies expected to be achieved from our acquisition of Hillrom. We intend to continue to actively manage our cost structure to
help ensure that we are committing resources to the highest value uses. Such high value activities include supporting innovation, building out the
portfolio, expanding patient access and accelerating growth for our stockholders.
Maintaining Disciplined and Balanced Capital Allocation
Subject to market conditions and our investment grade targets, our capital allocation strategies include the following:
•
debt repayments to support our deleveraging commitments;
•
active portfolio management through the identification of attractive acquisition and divestiture transactions, including our recent
acquisition of Hillrom, the proposed spinoff and our pursuit of strategic alternatives (including a potential sale) for our BPS product
category; and
•
return capital to stockholders through dividends. We also intend to reinstate share repurchases over the longer term.
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We paid down approximately $900 million of debt during 2022 and we continue to be committed to an investment grade rating, including taking
actions toward achieving our 2.75x net leverage commitment. We currently expect to apply proceeds from the proposed spinoff and potential
BPS divestiture toward reducing indebtedness and addressing near-term debt maturities. During this deleveraging period, we currently intend to
maintain our dividend, not make any share repurchases and be highly selective with respect to any potential acquisitions.
Sales and Distribution
We have our own direct sales force and also make sales to and through independent distributors, drug wholesalers acting as sales agents and
specialty pharmacy or other alternate site providers. In the United States, third parties, such as Cardinal Health, Inc., warehouse and ship a
significant portion of our products through their distribution centers. These centers are generally stocked with adequate inventories to facilitate
prompt customer service. Sales and distribution methods include frequent contact by sales and customer service representatives, automated
communications via various electronic purchasing systems, circulation of catalogs and merchandising bulletins, direct-mail campaigns, trade
publication presence and advertising.
Sales are made and products are distributed on a direct basis or through independent distributors or sales agents in more than 100 countries as
of December 31, 2022.
International Operations
The majority of our revenues are generated outside of the United States and geographic expansion remains a component of our strategy
(including with respect to the Hillrom business). Our international presence includes operations in Europe, the Middle East, Africa, Asia-Pacific,
Latin America and Canada. We are subject to certain risks inherent in conducting business outside the United States. For more information on
these risks, see the information under the captions “Risks Related to Baxter’s Business —We are subject to risks associated with doing business
globally” and “—Changes in foreign currency exchange rates and interest rates could have a material adverse effect on our operating results and
liquidity” in Item 1A of this Annual Report on Form 10-K.
For financial information about our foreign and domestic revenues and segment information, see Notes 10 and 17, respectively, in Item 8 of this
Annual Report on Form 10-K. For more information regarding foreign currency exchange risk, refer to the discussion under the caption entitled
“Financial Instrument Market Risk” in Item 7 of this Annual Report on Form 10-K.
Contractual Arrangements
Our products are sold through contracts with customers, both within and outside the United States. Some of these contracts have terms of more
than one year and place limits on our ability to increase prices. In the case of hospitals, governments and other facilities, these contracts may
specify minimum quantities of a particular product or categories of products to be purchased by the customer.
In keeping with the increased emphasis on cost-effectiveness in healthcare delivery, many hospitals and other customers of medical products in
the United States have joined group purchasing organizations (GPOs), or formed integrated delivery networks (IDNs), to enhance purchasing
power. GPOs and IDNs negotiate pricing arrangements with manufacturers and distributors and the negotiated prices are made available to
members. We have purchasing agreements with several of the major GPOs in the United States. GPOs may have agreements with more than
one supplier for certain products. Accordingly, in these cases, we face competition from other suppliers even where a customer is a member of a
GPO under contract with us. Purchasing power is similarly consolidated in many other countries. For example, public contracting authorities
often act as the purchasing entities for the hospitals and other customers of medical products in their region and many hospitals and other
customers have joined joint procurement entities and buying consortia. The result is that demand for healthcare products is increasingly
concentrated across our markets globally. Additionally, our contractual pricing arrangements with GPOs, IDNs and public contracting authorities
limit our ability to increase prices in order to offset raw materials or component price increases or otherwise.
Raw Materials and Component Parts
Raw materials and component parts essential to our business are purchased from numerous suppliers worldwide in the ordinary course of
business. While many of these materials are generally available, we have experienced and may in the future experience shortages of supply.
Additionally, certain of these materials are secured from single
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source suppliers or on a spot basis and not pursuant to a contractual arrangement. In recent periods, we have experienced increased costs and
shortages of raw materials and component parts (including resins and electromechanical devices), which has had a negative impact on our profit
margins, due to the increased costs, and on our sales for certain product categories, due to our inability to fully satisfy demand.
In an effort to manage risk associated with raw materials and component supply, we work closely with our suppliers to help ensure availability
and continuity of supply while maintaining high quality and reliability. We also seek to develop new and alternative sources of supply where
beneficial to our overall raw materials procurement strategy. Refer to Item 1A. Risk Factors of this Annual Report on Form 10-K for further
information regarding risks related to the supply chain, raw materials and component parts.
We are not always able to recover cost increases for raw materials and component parts through customer pricing due to contractual limits,
where applicable, and market forces. This circumstance occurred during 2022 and our profit margins were adversely impacted because we were
unable to fully offset all such cost increases through customer pricing adjustments or other pricing actions. We seek to utilize long-term supply
contracts with some suppliers to help maintain continuity of supply and manage the risk of price increases. Our ability to do so in the face of
limited supply of certain raw materials and component parts and inflationary environment may be limited.
Competition and Healthcare Cost Containment
Our businesses benefit from a number of competitive advantages, including the breadth and depth of our product offerings and our strong
relationships with customers, including hospitals and clinics, GPOs, IDNs, physicians and patients, many of whom self-administer home-based
therapies that we supply. We also benefit from efficiencies and cost advantages resulting from shared manufacturing facilities and the
technological advantages of our products.
Although no single company competes with us in all of our businesses, we face substantial competition in each of our segments from
international and domestic healthcare, medical products and pharmaceutical companies and providers of all sizes, and these competitors often
differ across our businesses. In addition, global and regional competitors continue to expand their manufacturing capacity and sales and
marketing channels. We believe customer purchasing decisions are primarily focused on cost-effectiveness, price, service, product performance
and technological innovation. There has been increasing consolidation in our customer base and by our competitors, which continues to result in
pricing and market pressures.
Global efforts toward healthcare cost containment continue to exert pressure on product pricing. Governments around the world use various
mechanisms to control healthcare expenditures, such as price controls, the formation of public contracting authorities, product formularies (lists
of recommended or approved products), and competitive tenders which require the submission of a bid to sell products. Sales of our products
are dependent, in part, on the availability of reimbursement by government agencies and healthcare programs, as well as insurance companies
and other private payers. In the United States, the federal and many state governments have adopted or proposed initiatives relating to Medicaid
and other health programs that may limit reimbursement or increase rebates that we and other providers are required to pay to the state. In
addition to government regulation, managed care organizations in the United States, which include medical insurance companies, medical plan
administrators, health-maintenance organizations, hospital and physician alliances and pharmacy benefit managers, continue to put pressure on
the price and usage of healthcare products. Managed care organizations seek to contain healthcare expenditures, and their purchasing strength
has been increasing due to their consolidation into fewer, larger organizations and a growing number of enrolled patients. We face similar issues
outside of the United States. In Europe and Latin America, for example, the government provides healthcare at low cost to patients, and controls
its expenditures by purchasing products through public tenders, collective purchasing, regulating prices, setting reference prices in public
tenders or limiting reimbursement or patient access to certain products. For further discussion, refer to Item 1A of this Annual Report on Form
10-K.
Intellectual Property
Patents and other proprietary rights are essential to our business. We rely on patents, trademarks, copyrights, trade secrets, know-how and
confidentiality agreements to develop, maintain and strengthen our competitive position. We own a number of patents and trademarks
throughout the world and have entered into license arrangements relating to various third-party patents and technologies. Products
manufactured by us are sold primarily under our own trademarks and trade names. Some products distributed by us are sold under our trade
names, while others are sold under trade names owned by our suppliers or partners. Trade secret protection of unpatented confidential and
proprietary information is also important to us. We maintain certain details about our processes, products and
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technology as trade secrets and generally require employees, consultants, and business partners to enter into confidentiality agreements. These
agreements may be breached and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become
known or be independently discovered by competitors. To the extent that our employees, consultants, and business partners use intellectual
property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
Our policy is to protect our products and technology through patents and trademarks on a worldwide basis. This protection is sought in a manner
that balances the cost of such protection against obtaining the greatest value for us. We also recognize the need to promote the enforcement of
our patents and trademarks and take commercially reasonable steps to enforce our patents and trademarks around the world against potential
infringers, including judicial or administrative action where appropriate.
We operate in an industry susceptible to significant patent litigation. At any given time, we are involved as either a plaintiff or defendant in a
number of patent infringement and other intellectual property-related actions. Such litigation can result in significant royalty or other payments or
result in injunctions that can prevent the sale of products. For more information on patent and other litigation, see Note 7 in Item 8 of this Annual
Report on Form 10-K.
Research and Development
Our investment in research and development (R&D), consistent with our portfolio optimization and capital allocation strategies, helps fuel our
future growth and our ability to remain competitive in each of our product categories. Accordingly, we continue to focus our investment on select
R&D programs to enhance future growth through clinical differentiation. Expenditures for our R&D activities were $605 million in 2022, $534
million in 2021, and $521 million in 2020. These expenditures include costs associated with R&D activities performed at our R&D centers located
around the world, which include facilities in Belgium, Sweden, India, Italy, Germany, China, Japan and the United States, as well as in-licensing,
milestone and reimbursement payments made to partners for R&D work performed at non-Baxter locations. As discussed above in under
“Recently Announced Strategic Actions,” we are designing a new operating model intended to simplify and streamline our operations. We are
also working to create a more resilient supply chain and better align our manufacturing footprint and supply chain to our commercial activities.
These activities may result in the consolidation of one or more R&D facilities.
For more information on our R&D activities, refer to the discussion under the caption entitled “Strategic Objectives” in Item 7 of this Annual
Report on Form 10-K.
Quality Management
Our continued success depends upon the quality of our products. Quality management plays an essential role in determining and meeting
customer requirements, helping to prevent defects, facilitating continuing improvement of our processes, products and services, and helping to
assure the safety and efficacy of our products. Our quality system enables the design, development, manufacturing, packaging, sterilization,
handling, distribution and labeling of our products to ensure that they conform to customer requirements. In order to consistently improve the
effectiveness and efficiency of our quality system, various measurement, monitoring and analysis methods, such as management reviews and
internal, external and vendor audits, are employed at local and central levels.
Each product that we market is required to meet specific quality standards, both in packaging and in product integrity and quality. If any of those
is determined to be compromised at any time, we endeavor to take corrective and preventive actions designed to ensure compliance with
regulatory requirements and to meet customer expectations. For more information on corrective actions taken by us, refer to the discussion
under the caption entitled “Certain Regulatory Matters” in Item 7 of this Annual Report on Form 10-K.
Corporate Responsibility
Driven by our mission to save and sustain lives, Baxter’s corporate responsibility strategy focuses on addressing the environmental, social and
governance (ESG) issues that affect our patients, customers, employees, communities and other stakeholders worldwide. Our corporate
responsibility approach supports our business priorities to achieve top quartile results relative to industry peers and other comparators across
four dimensions: patient safety and quality, growth through innovation, best place to work and industry-leading performance. Advancing our
corporate responsibility goals contributes to business, social and economic value, including attraction and retention, enhanced operational
efficiency and implementation of enterprise risk management strategies, among others.
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In 2021, we launched our 2030 Corporate Responsibility Commitment featuring ten strategic goals for focused action. Our Commitment is
anchored by three pillars – Empower Our Patients, Protect Our Planet and Champion Our People and Communities – and bolstered by our
approach to the foundational principles of Ethics and Compliance, Human Rights, Diversity, Equity and Inclusion and Privacy and Data
Protection. The 2030 Corporate Responsibility Commitment and Goals highlight Baxter’s corporate responsibility focus and help to further
advance our ESG performance. Our progress against these goals is published annually in our Corporate Responsibility Report which is available
on our website under “Our Story-Corporate Responsibility.” The Corporate Responsibility Report is not incorporated by reference into this Annual
Report on Form 10-K or any other document filed with the SEC.
Government Regulation
Our operations and many of the products manufactured or sold by us are subject to extensive regulation by numerous government agencies,
both within and outside the United States. The Food and Drug Administration (FDA) in the United States, the European Medicines Agency (EMA)
in Europe, the China Food and Drug Administration (CFDA) in China and other government agencies, inside and outside of the United States,
administer requirements covering the testing, safety, effectiveness, manufacturing, labeling, promotion and advertising, distribution and postmarket surveillance of our products. We must obtain specific approval from FDA and non-U.S. regulatory authorities before we can market and
sell most of our products in a particular country. Even after we obtain regulatory approval to market a product, the product and our manufacturing
processes and quality systems are subject to continued review by FDA and other regulatory authorities globally, including additional 510(k) and
other regulatory submissions, and approvals or the time needed to secure approvals are not certain. State agencies in the United States also
regulate our facilities, operations, employees, products and services within their respective states. We, along with our facilities, are subject to
periodic inspections and possible administrative and legal actions by FDA and other regulatory agencies inside and outside the United States.
Such actions may include warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of
products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing
approvals and licenses. As situations require, we take steps to ensure safety and efficacy of our products, such as removing products found not
to meet applicable requirements from the market and improving the effectiveness of quality systems. For more information on compliance
actions taken by us, refer to the discussion under the caption entitled “Certain Regulatory Matters” in Item 7 of this Annual Report on Form 10-K.
We are also subject to various laws inside and outside the United States concerning our relationships with healthcare professionals and
government officials, price reporting and regulation, the promotion, sales and marketing of our products and services, the importation and
exportation of products, the operation of our facilities and distribution of products. In the United States, we are subject to the oversight of FDA,
Office of the Inspector General within the Department of Health and Human Services (OIG), the Center for Medicare/Medicaid Services (CMS),
the Department of Justice (DOJ), Environmental Protection Agency, Department of Defense and Customs and Border Protection in addition to
others. We supply products and services to healthcare providers that are reimbursed by federally funded programs such as Medicare. As a
result, our activities are subject to regulation by CMS and enforcement by OIG and DOJ. In each jurisdiction outside the United States, our
activities are subject to regulation by government agencies including the EMA in Europe, CFDA in China and other agencies in other
jurisdictions. Many of the agencies enforcing these laws have increased their enforcement activities with respect to healthcare companies in
recent years. These actions appear to be part of a general trend toward increased enforcement activity globally.
Our operations involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. Our
environmental policies require compliance with all applicable environmental regulations and contemplate, among other things, appropriate
capital expenditures for environmental protection. For example, we made $6 million, $33 million and $10 million of capital expenditures in 2022,
2021 and 2020, respectively, related to a new ethylene oxide emissions control system at our Mountain Home, Arkansas facility that was
substantially completed in 2022.
Human Capital Management
As of December 31, 2022, we employed approximately 60,000 people globally, with approximately 19,000 employees in the United States and
approximately 41,000 employees outside of the United States. Our employees are our most important assets and set the foundation for our
ability to achieve our strategic objectives. They contribute to our success and are instrumental in driving operational execution and our ability to
deliver strong
7
financial performance, advancing innovation and maintaining a strong quality and compliance program across our organization.
The success and growth of our business depends in large part on our ability to attract, retain and develop a diverse population of talented and
high-performing employees at all levels of our organization, including the individuals who comprise our global workforce as well as executive
officers and other key personnel. To succeed in a competitive labor market, we have developed recruitment and retention strategies, objectives
and measures that we focus on as part of the overall management of our business. These strategies, objectives and measures form our human
capital management framework and are advanced through the following programs, policies and initiatives:
•
•
•
•
Competitive Pay and Benefits. Our compensation programs are designed to align the compensation of our employees with our
performance and to provide the proper incentives to attract, retain and motivate employees to achieve superior results. The structure of
our compensation programs balances incentive earnings for both short-term and long-term performance.
Activating Change Today. Building on the success of our nine business resource groups (BRGs), one such BRG, Baxter’s Black Alliance,
joined forces with colleagues across the company to introduce Activating Change Today (ACT), a multidimensional program to advance
inclusion and racial justice. ACT began as an initiative in 2020 that was initially U.S. focused following the events surrounding the death
of George Floyd, but has since garnered relevance internationally as well. ACT is focused on driving results across four key areas –
Workforce, Workplace, Community and Marketplace – encompassing employees, external stakeholders and the markets and
communities we serve.
Health and Safety. Health and safety are firmly rooted across our global footprint. Most of our employees outside of our manufacturing
facilities worked remotely during the initial stages of the COVID-19 pandemic (beginning in March 2020). We subsequently implemented
our flexible work policy, which we refer to as BaxFlex, which establishes the expectation that employees are in the office two to three
days a week. Our production and field service employees have been working at our facilities throughout the pandemic in the interest of
providing vital services to our customers.
Recruitment, Training and Development. We use recruitment vehicles to attract diverse talent to our organization and we prioritize
learning opportunities that foster a growth mindset. Our formal offerings include a tuition reimbursement program, an e-learning platform
known as BaxU and virtual workshops that support our culture, strategy and the development of crucial skills. To assess the impact of
the investments we make in our people, and to help us consistently improve our human resources programs, we regularly conduct
anonymous surveys of our global workforce to seek feedback on a variety of topics including confidence in our leadership,
competitiveness of our compensation and benefits packages, career growth opportunities and improvements on how we can make our
company an employer of choice. Administered and analyzed by an independent third-party, the survey results are reviewed by our senior
leaders, which include our executive officers. The results of this engagement survey are also shared with individual managers, who are
then tasked with taking action based on their employees’ anonymous feedback. By paying close attention to the results both at an
aggregate enterprise level as well as at a department/business/work group level, we have been able to enhance our culture of speed,
simplicity, courage and collaboration, help educate employees more effectively about our benefits offerings as well as our learning and
development opportunities and further improve our communications content, mechanisms and frequency.
Available Information
We make available free of charge on our website at www.baxter.com our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended (Exchange Act), as soon as reasonably practicable after electronically filing or furnishing such material with the
Securities and Exchange Commission. These reports are also available free of charge via EDGAR through the Securities and Exchange
Commission website (www.sec.gov). In addition, our Corporate Governance Guidelines, Code of Conduct, and the charters for the committees
of our Board of Directors are available on our website at www.baxter.com under “Our Story — Our Governance.” All the foregoing materials will
be made available to stockholders in print upon request by writing to: Corporate Secretary, Baxter International Inc., One Baxter Parkway,
Deerfield, Illinois 60015. Information contained on our website shall not be deemed incorporated into, or to be a part of, this Annual Report on
Form 10-K.
8
Item 1A.
Risk Factors.
In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the
following risk factors. If any of the events described below occurs, our business, financial condition, results of operations, future growth
prospects and stock price could suffer.
Risk Factors Summary
This summary of risks below is intended to provide an overview of the risks we face and should not be considered a substitute for the more
detailed risk factors discussed immediately following this summary.
Strategic Risks
•
The proposed spinoff of our Renal Care and Acute Therapies product categories may not be completed on the terms or timeline
currently contemplated, if at all.
•
We will be exposed to new risks as a result of the proposed spinoff and other strategic actions we are undertaking.
•
We may fail to realize the anticipated benefits of the Hillrom acquisition.
•
If our business strategy and development activities are unsuccessful, our business, financial condition and results of operations could be
adversely affected.
Risks Related to Our Financial Performance and Our Common Stock
•
Global economic conditions, including inflation and supply chain disruptions, have adversely affected, and could continue to adversely
affect, our operations.
•
Our operating results and financial condition may fluctuate.
•
We may not achieve our financial goals.
•
We have incurred a substantial amount of debt in connection with the Hillrom acquisition.
•
Changes in foreign currency exchange rates and interest rates could have a material adverse effect on our operating results and
liquidity.
•
Our common stock price has fluctuated significantly and may continue to do so.
•
Future material impairments in the value of our long-lived assets, including goodwill, could negatively affect our operating results.
Other Risks Relating to Our Business
•
The effects of the COVID-19 pandemic have had, and we expect will continue to have, a material adverse effect on our business.
•
If we are unable to successfully introduce new products or fail to keep pace with changing consumer preferences and needs and
advances in technology, our business, financial condition and results of operations could be adversely affected.
•
Issues with product supply or quality could, among other things, have an adverse effect on our business or cause a loss of customer
confidence in us or our products.
•
There is substantial competition in the product markets in which we operate and the risk of declining demand and pricing pressures
could adversely affect our operating results.
•
If we fail to attract and retain key employees our business may suffer.
Risks Related to Our Business Operations
•
Segments of our business are significantly dependent on major contracts with GPOs, IDNs, and certain other distributors and
purchasers.
•
We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions, and
might experience business disruptions and adverse tax consequences associated with restructuring, realignment and cost reduction
activities.
9
•
If we are unable to obtain sufficient components or raw materials on a timely basis or for a cost-effective price or if we experience other
manufacturing, sterilization, supply or distribution difficulties, our business and results of operations may be adversely affected.
•
Climate change, or legal, regulatory or market measures to address climate change, could adversely affect our business, results of
operations and financial condition.
•
Breaches and breakdowns affecting our information technology systems or protected information could have a material adverse effect
on us.
•
We are subject to risks associated with doing business globally.
•
A portion of our workforce is unionized, and we could face labor disruptions that would interfere with our operations.
Risks Related to Legal and Regulatory Matters
•
We are subject to a number of laws and regulations, and we are susceptible to a changing regulatory environment.
•
Increasing regulatory focus on privacy and security issues and expanding laws could impact our business and expose us to increased
liability.
•
If reimbursement or other payment for our current or future products is reduced or modified in the United States or in foreign countries or
changes to policies with respect to pricing, taxation or rebates, our business could suffer.
•
We could be subject to fines or damages and possible exclusion from participation in federal or state healthcare programs if we fail to
comply with the laws and regulations applicable to our business.
•
If we are unable to protect our patents or other proprietary rights, or if we infringe the patents or other proprietary rights of others, our
competitiveness and business prospects may be materially damaged.
•
Changes in tax laws or exposure to additional income tax liabilities may have a negative impact on our operating results.
•
We are party to a number of pending lawsuits and other disputes which may have an adverse impact on our business, operations or
financial condition.
Strategic Risks
The proposed spinoff of our Renal Care and Acute Therapies product categories may not be completed on the terms or timeline
currently contemplated, if at all.
We recently announced a series of strategic actions, including the proposed spinoff of our Renal Care and Acute Therapies product categories, a
review of strategic alternatives for our BPS product category and plans to implement a simplified operating model and manufacturing footprint.
We may encounter challenges to executing the proposed spinoff of our Renal Care and Acute Therapies product categories on the terms and
within the timeframe we announced, or at all. The spinoff will be subject to the satisfaction of a number of customary conditions, including final
approval from the Baxter Board of Directors, the filing and effectiveness of a registration statement on Form 10, receipt of a favorable Internal
Revenue Service ruling or tax opinion from counsel with respect to the tax-free nature of the spin, satisfactory completion of financing
arrangements and receipt of any necessary regulatory approvals. The failure to satisfy any of the required conditions could delay the completion
of the proposed spinoff for a significant period of time or prevent it from occurring at all. Additionally, it is complex in nature, and unanticipated
developments or changes, including disruptions in general market conditions, changes in law or challenges in executing the separation of the
two businesses, may affect our ability to complete the spinoff on the terms or on the timeline we announced, or at all. The terms and conditions
of the required regulatory authorizations and consents that are granted, if any, may also impose requirements, limitations or costs, or place
restrictions on the conduct of the independent companies or impact our ability to complete the spinoff on the terms or timeline we announced, or
at all.
Although we intend for the proposed spinoff to be tax-free to the company’s stockholders for U.S. federal income tax purposes, we expect to
incur non-U.S. cash taxes on the preparatory restructuring and may also incur non-cash tax expense including potential impairments of deferred
tax assets. Moreover, there can be no assurance that the proposed spinoff will qualify as tax-free for U.S. federal income tax purposes. The IRS
ruling or opinion from counsel
10
mentioned above will be based upon various factual representations and assumptions, as well as certain undertakings made by the Company
and the new independent company. If any of these factual representations or assumptions are, or become, untrue or incomplete in any material
respect, an undertaking is not complied with, or the facts upon which the opinion or ruling are based are materially different from the actual facts
relating to the spinoff, reliance on the opinion or ruling may be jeopardized. If the spinoff were ultimately determined to be taxable for U.S.
federal income tax purposes, we would incur a significant tax liability, while the distributions to the company’s stockholders would become
taxable and the new independent company could incur income tax liabilities as well.
We will be exposed to new risks as a result of the proposed spinoff and other strategic actions we are undertaking. Our strategic
actions may not achieve their anticipated benefits, or our costs may exceed our estimates.
Our businesses will face material challenges in connection with the proposed spinoff and the other strategic actions we are undertaking
(including a review of strategic alternatives for our BPS product category and plans to implement a simplified operating model and manufacturing
footprint). These challenges include, without limitation, the diversion of management’s attention from ongoing business concerns; appropriately
allocating assets and liabilities among the companies to be separated in the proposed spinoff, particularly given the complex nature of the
spinoff; attracting, retaining and motivating key management and other employees; retaining existing, or attracting new, business and operational
relationships, including with customers, suppliers, employees and other counterparties; maintaining our relationships with regulators; assigning
customer contracts and intellectual property to each of the businesses; and potential negative reactions from the financial markets. In particular,
in the last few years, the company has undertaken other strategic and business transformation actions (including the acquisition of Hillrom and
cost reduction initiatives) that have entailed changes across our organizational structure, senior leadership, culture, functional alignment,
outsourcing and other areas. This poses risks in the form of personnel capacity constraints and institutional knowledge loss that has led to and
could in the future lead to missed performance or financial targets and harm to our reputation, and these risks are heightened with the additional
interdependent actions that will be needed to complete the proposed spinoff and other strategic actions we are pursuing.
We have begun and will continue to incur significant expenses in connection with the proposed spinoff and other strategic actions we have
announced. These expenses may be higher than currently anticipated or may not yield a discernible benefit if the actions are not completed on
schedule or at all. In addition, the anticipated benefits of these actions are based on a number of assumptions, some of which may prove
incorrect, and we cannot predict with certainty when the expected benefits will occur, or the extent to which they will be achieved. As a result,
even if the proposed spinoff or other strategic actions are completed, they may not achieve some or all of the anticipated strategic, financial,
operational or other benefits in the expected timeframe, or at all, which could adversely impact our business, results of operations or financial
condition.
Further, even if the proposed spinoff is completed, we cannot assure you that each separate company will be successful. Completion of the
spinoff will result in independent public companies that are smaller, less diversified companies, with more limited businesses concentrated in
their respective industries than Baxter is today. As a result, each company will be more vulnerable to changing market conditions, which could
have a material adverse effect on its business, financial condition and results of operations. In addition, the diversification of revenues, costs and
cash flows will diminish, such that each company’s results of operations, cash flows, working capital, effective tax rate and financing
requirements may be subject to increased volatility, and each company’s ability to fund capital expenditures and investments, pay dividends and
meet debt obligations and other liabilities may be diminished. Each company will also incur one-time and ongoing costs, including costs of
operating as independent companies, that the separated businesses will no longer be able to share. In addition, until the market has fully
analyzed the values of the separate companies, the price of our common stock and common stock of the new company may experience
volatility. Our common stock or the common stock of the new company may not match some holders’ investment strategies or meet minimum
criteria for inclusion in stock market indices or portfolios, which could cause certain investors to sell their shares, which could in turn lead to
declines in the trading price of such stock. As a result of any of the foregoing or other risks, the combined value of the common stock of the two
publicly traded companies may be less than what the value of our common stock would have been absent the spinoff.
We may fail to realize the anticipated benefits of the Hillrom acquisition.
During 2021, we completed the acquisition of Hillrom. The success of this acquisition depends on, among other things, our ability to integrate
Hillrom in a manner that facilitates growth opportunities, realizes anticipated cost and revenue synergies (some of which are still being identified)
and achieves certain previously communicated net
11
leverage targets without adversely affecting current revenues and investments in future growth. If we are not able to successfully achieve these
objectives, the anticipated benefits of the Hillrom acquisition may not be realized fully or at all or may take longer to realize than expected.
There is a significant degree of difficulty and management distraction inherent in the process of integrating an acquisition. These difficulties
include challenges consolidating certain operations and functions (including regulatory and other corporate functions), integrating technologies
(including differing IT systems and processes), organizations, procedures, policies and operations, addressing differences in the business
cultures of the two companies and retaining key personnel. The integration is complex and time consuming and aspects of it may be delayed, or
additional and unforeseen expenses may result, in light of our recently announced strategic initiatives. The integration process and other
disruptions resulting from the Hillrom acquisition may also disrupt our ongoing businesses or cause inconsistencies in standards, controls,
procedures and policies that adversely affect our relationships with market participants, employees, regulators and others with whom we have
business or other dealings. Any failure to successfully or cost-effectively integrate Hillrom could have a material adverse effect on our business
and cause reputational harm. Challenges associated with our integration efforts are heightened due to the other strategic actions we are
pursuing.
If our business strategy and development activities are unsuccessful, our business, financial condition and results of operations
could be adversely affected.
While we remain committed to deleveraging, we expect to engage in significant business development activities over the longer term (once we
have satisfied our net leverage targets), including evaluating acquisitions, joint development opportunities, technology licensing arrangements
and other opportunities. These activities may result in substantial investment of our resources (including resources currently focused on the
recently announced strategic initiatives discussed above). Our success developing products or expanding into new markets from such activities
will depend on a number of factors, including our ability to find suitable opportunities for acquisition, investment or alliance; competition from
other companies in the industries in which we operate that are seeking similar opportunities; whether we are able to complete an acquisition,
investment or alliance on terms that are satisfactory to us; the strength of the other company’s underlying technology, products and ability to
execute its business strategies; any intellectual property and litigation related to the other company’s products or technology; and our ability to
successfully integrate the acquired company, business, product, technology or research into our existing operations, including the ability to
adequately fund acquired in-process R&D projects and to maintain adequate controls over the combined operations. Certain of these activities
are subject to antitrust and competition laws, which laws could impact our ability to pursue strategic transactions and could result in mandated
divestitures in the context of proposed acquisitions. If we are unsuccessful in our business development activities, we may not realize the
intended benefits of such activities, including that acquisition and integration costs may be greater than expected or the possibility that expected
return on investment, synergies and accretion will not be realized or will not be realized within the expected timeframes. For more information,
see Note 2 in Item 8 of this Annual Report.
Risks Related to Our Financial Performance and Our Common Stock
Global economic conditions, including inflation and supply chain disruptions, have adversely affected, and could continue to
adversely affect, our operations.
General global economic downturns and macroeconomic trends, including heightened inflation, capital markets volatility, interest rate and
currency rate fluctuations, and economic slowdown or recession, have resulted and may continue to result in unfavorable conditions that
negatively affect demand for our products and exacerbate some of the other risks that affect our business, financial condition and results of
operations. Both domestic and international markets experienced significant inflationary pressures in fiscal year 2022 and inflation rates in the
U.S., as well as in other countries in which we operate, are currently expected to continue at elevated levels for the near-term. In addition, the
Federal Reserve in the U.S. and other central banks in various countries have raised, and may again raise, interest rates in response to
concerns about inflation, which, coupled with reduced government spending and volatility in financial markets, has had and may continue to
have the effect of further increasing economic uncertainty and heightening these risks. Interest rate increases or other government actions taken
to reduce inflation have resulted in recessionary pressures in many parts of the world. Furthermore, currency exchange rates have been
especially volatile in the recent past, and these currency fluctuations have affected, and may continue to affect, the reported value of our assets
and liabilities, as well as our cash flows.
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 and labor
costs, resulting from COVID-19 and other
12
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 due to our inability to fully satisfy demand and
may continue to have a negative impact on our sales in the future. They have also made it increasingly difficult to model accurately our shortterm and long-term financial objectives and may continue to do so in the future
Our ability to generate cash flows from operations has been affected, and could continue to be affected, if there is a material decline in the
demand for our products or, in the solvency or planned capital expenditures of our customers or suppliers, or if there is deterioration in our key
financial ratios or credit ratings. Current or worsening economic conditions may impact the ability of our customers (including governments) to
pay for our products and services and the amount spent on healthcare generally, which could result in decreased demand for our products and
services, declining cash flows, longer sales cycles, increased inventory levels, slower adoption of new technologies and increased price
competition. These conditions may also adversely affect certain of our suppliers, which could disrupt our ability to produce products. We continue
to do business with foreign governments in certain countries, including Greece and Italy, which have experienced deterioration in credit and
economic conditions. While global economic conditions have not significantly impacted our ability to collect receivables, liquidity issues in certain
countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses, and may also impact the stability
of the U.S. dollar, Euro or Yuan.
Our operating results and financial condition may fluctuate.
Our operating results and financial condition may fluctuate from quarter to quarter and year to year for a number of reasons. Events, such as
changes to our expectations, strategy or forecasts (including as a result of evolving global macroeconomic conditions and updated expectations
regarding the timing of new regulatory approvals) or even a relatively small revenue shortfall or increase in supply chain or other costs which we
are unable to offset may cause financial results for a period to be below our expectations or projections. As a result, we believe that period-toperiod comparisons of our results of operations are not necessarily meaningful, nor should they be relied upon as an indication of future
performance. Our operating results and financial condition are also subject to fluctuation from all of the risks described throughout this section.
These fluctuations may adversely affect our results of operations and financial condition and our stock price.
We may not achieve our financial goals.
We continue to evaluate and refine both our short-term and long-term financial objectives, including our stated commitment to achieve certain
net leverage targets. Our ability to achieve these targets depends, in part, on our ability to realize the anticipated benefits of the acquisition (and
related cost and revenue synergy targets) while working to execute on our stated portfolio management and other recently announced strategic
initiatives. We may fail to achieve our targeted financial results if we are unsuccessful in implementing our strategies, our estimates or
assumptions change or for any other reason. Our failure to achieve our financial goals could have a material adverse effect on our business,
financial condition and results of operations.
We have incurred a substantial amount of debt in connection with the Hillrom acquisition, which could adversely affect our business,
financial condition or results of operations.
We incurred acquisition-related debt financing of approximately $11.8 billion to fund the cash consideration for the Hillrom acquisition, refinance
certain indebtedness of Hillrom and pay related fees and expenses. Our substantially increased indebtedness and higher debt-to-equity ratio
following the acquisition has the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions
and has increased our borrowing costs (including as a result of the downgrade in our senior debt credit ratings in 2021). The increased levels of
indebtedness and our recent projected financial performance could also reduce funds available (under our credit facilities or otherwise) for
investments in product development, capital expenditures, dividend payments, acquisitions, share repurchases and other activities and may
create competitive disadvantages for us relative to other companies with lower debt levels. In addition, until we achieve our commitment to
reduce our indebtedness following the Hillrom acquisition, our capital allocation activities and operational flexibility is limited. There can be no
assurance that we will be successful in doing so on a timely basis or at all.
13
Changes in foreign currency exchange rates and interest rates could have a material adverse effect on our operating results and
liquidity.
We generate the majority of our revenue and profit outside the United States. As a result, our financial results have been and may in the future
be adversely affected by fluctuations in foreign currency exchange rates. We cannot predict with any certainty changes in foreign currency
exchange rates or our ability to mitigate these risks. We have experienced, and may continue to experience, additional volatility as a result of
inflation and other macroeconomic factors, including in emerging market countries. We are also exposed to changes in interest rates, and our
ability to access the money markets and capital markets on terms that are favorable to us, or at all, could be impeded if market conditions are
not favorable. For more information see “Financial Instrument Market Risk” in Item 7 of this Annual Report.
Our common stock price has fluctuated significantly and may continue to do so in the future.
The price of our common stock has fluctuated significantly and may continue to do so in the future for a number of reasons, including, but not
limited to:
•
market perceptions of any strategic actions or other developments related to our business we announce, including, for example, our
announcement regarding the proposed spinoff of our Renal Care and Acute Therapies product categories;
•
variations in our net sales, earnings or other financial results from investors’ expectations or our previously issued guidance;
•
departure of key personnel;
•
fluctuations in the results of our operations and general conditions in the economy, our market, and the markets served by our
customers; and
•
the operating and stock performance of comparable companies or related industries.
In addition, prices in the stock market have generally been volatile over the past few years. In certain cases, the fluctuations have been
unrelated to the operating performance of the affected companies. As a result, the price of our common stock could also fluctuate in the future
without regard to our operating performance.
Future material impairments in the value of our long-lived assets, including goodwill, could negatively affect our operating results.
We regularly review our long-lived assets, including identifiable intangible assets, goodwill (which results from our acquisition activity) and
property, plant and equipment, for impairment. Goodwill and acquired indefinite life intangible assets are subject to impairment review on an
annual basis and whenever potential impairment indicators are present. Other long-lived assets are reviewed when there is an indication that
impairment may have occurred. Changes in market conditions or other changes in the future outlook of value may lead to impairment charges in
the future. In addition, we may from time to time sell assets that we determine are not critical to our strategy, including in connection with
strategic exits. Future events or decisions may lead to asset impairments and/or related charges. Certain non-cash impairments may result from
a change in our strategic goals, business direction or other factors relating to the overall business environment. Material impairment charges
could negatively affect our results of operations.
For example, in the third quarter of 2022, we recorded a $2.8 billion goodwill impairment relating to our three Hillrom reporting units due to
macroeconomic conditions, including the rising interest rate environment and broad declines in equity valuations, and reduced earnings
forecasts for these units, driven primarily by shortages of certain component parts used in our products, raw materials inflation and increased
supply chain costs. Further adverse changes to macroeconomic conditions or our earnings forecasts could lead to additional goodwill or
intangible asset impairment charges in future periods and such charges could be material to our results of operations. For more information on
the valuation of goodwill and intangible assets, see “Critical Accounting Policies” in Item 7 of this Annual Report.
Other Risks Relating to Our Business
The effects of the COVID-19 pandemic have had, and we expect will continue to have, a material adverse effect on our business. The
nature and extent of future impacts are uncertain and unpredictable.
Our global operations expose us to risks associated with public health crises, including epidemics and pandemics, such as the COVID-19
pandemic. COVID-19 has had, and we expect will continue to have, an adverse impact on
14
our operations, supply chains and distribution systems and has increased and will continue to increase our expenses, including due to
preventive and precautionary measures that we, other businesses and governments have taken and may continue to take.
COVID-19 has adversely affected and many continue to adversely affect our business in many ways, including, but not limited to, the following:
•
We have experienced, and expect to continue to experience, significant and unpredictable reductions or increases in demand for certain
of our products as healthcare customers re-prioritize the treatment of patients. Some of our products are particularly sensitive to
reductions in elective medical procedures. For example, due to the spread of the Omicron variant in 2022, many elective procedures
were suspended or postponed in our principal markets as hospital systems prioritized treatment of COVID-19 patients again or
otherwise comply with changing government guidelines. Further delays or cancellations may occur in the future. While we have started
to see a resurgence in the scheduling of elective procedures in at least some of the markets in which we operate, if patients and hospital
systems de-prioritize, delay or cancel elective procedures in the future, our business, financial condition and results of operations may
be negatively affected. Additionally, through the pandemic, certain portions of our patient populations (including End Stage Renal
Disease patients) have experienced heightened mortality levels. Demand for related products and services may not rebound to prepandemic levels in light of these increased mortality rates.
•
A significant number of our suppliers, manufacturers, distributors and vendors have been adversely affected by the COVID-19
pandemic, including obstacles relating to their ability to maintain the continuity of their on-site operations. These impacts have caused
interruptions and delays in our supply chain, and may continue to do so, resulting in more expensive alternative sources of labor and
materials and heightened supply chain costs. Any delay or shortage in the supply of components or materials or other operational or
logistical challenges impacts our ability to satisfy consumer demand for our products in a timely manner or at all, which could harm our
reputation, future sales and profitability. For example, we have experienced supply constraints for amino acid raw materials used in our
parenteral nutrition products, as such materials are being used to produce COVID-19 vaccines. These constraints have resulted in
certain product backorders and may do so in the future.
•
We could experience a loss of sales and profitability due to delayed payments, reduced demand or capital constraints of healthcare
professionals, hospitals and other customers (including potential insolvency) and suppliers and vendors facing liquidity or other financial
issues. These liquidity or other financial issues could be exacerbated if prolonged high levels of unemployment or loss of insurance
coverage impact patients’ ability to access treatments that use our products and services.
•
COVID-19 has adversely impacted the continued service and availability of skilled personnel necessary to run our operations. For
example, we have faced increased absenteeism in connection with the rise of various COVID-19 variants. Although we have sought to
mitigate these staffing challenges through overtime and enlisting contingent labor, staffing shortages have strained our operations and
increased our expenses.
•
We face increased operational challenges as we continue to take measures to support and protect employee health and safety, including
through work from home policies. While many of our employees have returned to work, remote or hybrid working arrangements heighten
our risks associated with information technology systems and networks, including cyber-attacks, computer viruses, malicious software,
security breaches, and telecommunication failures, both for systems and networks we control directly and for those that employees and
third-party developers rely on to work remotely. Any failure to prevent or mitigate security breaches or cyber risks or detect, or respond
adequately to, a security breach or cyber risk, or any other disruptions to our information technology systems and networks (as a result
of remote working arrangements or otherwise), can have adverse effects on our business and cause reputational and financial harm.
Any of these and other impacts of the pandemic could have a material adverse effect on our business, financial condition and results of
operations.
In addition, the scope and duration of any future public health crisis will depend on a number of factors, including the potential emergence of new
variants, the pace at which government restrictions are imposed and lifted and the extent of such restrictions, the scope of additional actions
taken to mitigate the spread of disease, the availability, effectiveness and acceptance of vaccines and the speed and extent to which global
markets and utilization rates for our products fully recover from the disruptions caused by such a public health crisis. The impact of these and
other factors on our business, financial condition and results of operations will depend on future developments that are highly uncertain and
cannot be predicted with confidence. Finally, to the extent COVID-19 or any future public health
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crisis adversely affects our operations and global economic conditions more generally, many of the other risks described in this “Risk Factors”
section may be heightened.
If we are unable to successfully introduce new products or fail to keep pace with changing consumer preferences and needs and
advances in technology, our business, financial condition and results of operations could be adversely affected.
We need to successfully introduce new products to achieve our strategic business objectives. We can provide no assurances that our new
products will achieve commercial acceptance in the marketplace. In addition, difficulties in manufacturing or in obtaining regulatory approvals,
have delayed and may in the future delay or prohibit introduction of new products into the marketplace. We may not be able to obtain patent
protection on our new products or be able to defend our intellectual property rights globally. Warranty claims and service costs relating to our
new products might be greater than anticipated, and we might be required to devote significant resources to address any quality issues
associated with our new products, which could reduce the resources available for further new product development and other matters. In
addition, the introduction of new products might also cause customers to defer purchases of existing products. Our future financial performance
will also depend in part on our ability to influence, anticipate, identify and respond to changing consumer preferences and needs. We might not
correctly anticipate or identify trends in customer preferences or needs or might identify them later than competitors do.
Failure to successfully introduce new products in a cost-effective manner, or delays in customer purchasing decisions related to the evaluation of
new products, could cause us to lose market share and could materially adversely affect our business. Furthermore, product development
requires substantial investment and there is inherent risk in the R&D process. A successful product development process further depends on
many other factors, including our ability to adapt to new technologies, demonstrate satisfactory clinical results and differentiate our products from
those of our competitors. If we cannot successfully introduce new competitive products or adapt to changing technologies, our products may
become obsolete and our revenue and profitability could suffer.
Issues with product supply or quality could have an adverse effect on our business or cause a loss of customer confidence in us or
our products, among other negative consequences.
Our success depends upon the availability and quality of our products and the underlying raw materials and component parts. The medical
products and pharmaceutical industries are competitive and subject to complex market dynamics and varying demand levels. These levels vary
in response to economic conditions, regulatory requirements, seasonality, natural disasters, pandemics, epidemics and other matters. For
example, for many of our suppliers, the COVID-19 pandemic created obstacles relating to their ability to maintain the continuity of their on-site
operations. We have experienced, and may continue to experience, increases in the cost of certain raw materials and component parts and have
incurred, and may continue to incur, increased freight costs as a result of, among other things, rising and high levels of inflation, increased
energy and transportation prices as a result of the Russia-Ukraine conflict and other obstacles due to the COVID-19 pandemic. These obstacles
may prevent suppliers from providing goods and services to us on reasonable terms or at all.
Additionally, the development of new or enhanced products involves a lengthy regulatory process and is capital intensive. As a result, our ability
to match our production levels and capacity to market demand is imprecise and may result in a failure to meet market demand or satisfy
customer requirements for our products or, alternatively, an oversupply of inventory. Increased costs relating to freight, raw materials or
component parts and difficulties hiring and retaining staff have had and may continue to have a negative impact on product supply. Failure to
meet market demand may result in customers transitioning to available competitive products, loss of market share, negative publicity,
reputational damage, loss of customer confidence or other negative consequences (including a decline in stock price).
Our success also depends on our ability to maintain and routinely improve product quality and our quality management program. Quality
management plays an essential role in meeting customer requirements, preventing defects, improving our products and services and assuring
the safety and efficacy of our products. While we have a quality system that covers the lifecycle of our products, quality and safety issues have
and may in the future occur with respect to our products. New or unintended uses of our products (for example, in response to changing clinical
practice) may also raise quality or safety issues. A quality or safety issue may result in adverse inspection reports, voluntary or official action
indicated, warning letters, import bans, product recalls (either voluntary or required by FDA or similar governmental authorities in other countries)
or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions (which may include
corporate integrity agreements), costly litigation, refusal of a government to grant approvals and licenses, restrictions on operations or
withdrawal of existing approvals and licenses. See “-Risks Related to Legal and Regulatory Matters.” An inability to
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address a quality or safety issue in an effective and timely manner may also cause negative publicity, a loss of customer confidence in us or our
current or future products, which may result in the loss of sales and difficulty in successfully launching new products. Additionally, we have made
and continue to make significant investments in assets, including inventory and property, plant and equipment, which relate to potential new
products or modifications to existing products. Product quality or safety issues may restrict us from being able to realize the expected returns
from these investments, potentially resulting in asset impairments in the future.
Unaffiliated third-party suppliers provide a number of goods and services to our R&D, clinical and manufacturing organizations, many of whom
do so on a spot basis and not pursuant to a contractual arrangement. Our ability to receive goods or services at all or on reasonable financial
terms from these third parties will be impacted if they are unable or refuse to supply or service us. Moreover, we may have limited or no recourse
if the goods or services are not subject to contractual terms. If we are unable to identify or secure regulatory approval for an alternative provider
on reasonable terms, our ability to meet our obligations to our customers could be negatively impacted, which could adversely affect our financial
results and our reputation. Additionally, third party suppliers are required to comply with our quality standards (and those of applicable regulatory
bodies). Failure of a third-party supplier to provide compliant raw materials, component parts or supplies (or to help us secure all required
regulatory approvals for the use of their products or services) has resulted in delays and service interruptions and may do so in the future or
cause quality related issues that may negatively impact our business results.
There is substantial competition in the product markets in which we operate and the risk of declining demand and pricing pressures
could adversely affect our operating results.
Although no single company competes with us in all of our businesses, we face substantial competition in all of our markets from international
and domestic healthcare medical products and pharmaceutical companies and providers of all sizes, and these competitors often differ across
our businesses. Competition is primarily focused on cost-effectiveness, price, service, product performance and technological innovation.
Competition may increase further as additional companies begin to enter our markets or modify their existing products to compete directly with
ours. If our competitors respond more quickly to new or emerging technologies and changes in customer requirements or we do not introduce
new versions or upgrades to our product portfolio in response to those requirements, our products may be rendered obsolete or non-competitive.
If our competitors develop more effective or affordable products or achieve earlier patent protection or product commercialization than we do, our
business, financial condition and operations will likely be negatively affected. If we are forced to reduce our prices due to increased competition,
our business could become less profitable.
In addition, many healthcare industry companies, including healthcare systems, distributors, manufacturers, providers, and insurers, are
consolidating or have formed strategic alliances. As the healthcare industry consolidates, competition to provide goods and services to industry
participants will become more intense. Further, this consolidation creates larger enterprises with greater negotiating power, which they can use
to negotiate price concessions. If we face an increase in costs or must reduce (or are unable to successfully increase) our prices because of
industry consolidation. the long-term nature of our customer contracts or for other reasons, or if we lose customers as a result of consolidation,
our business, financial condition and results of operations could be adversely affected.
Demand for our products and services depends in large part on overall demand in the healthcare market. With the healthcare market’s increased
focus on hospital asset and resource efficiency as well as reimbursement constraints, we have seen spending for some of our products decline
recently and it may continue to do so over time. Further, the competitive pressures in our industry could cause us to lose market share unless we
increase our commercial investments or reduce our prices, which could adversely impact our operating results. These factors, along with
possible legislative, regulatory and other developments, might result in significant shifts in market share among the industry’s major participants,
which includes us. Accordingly, if we are unable to effectively differentiate ourselves from our competitors in terms of new products and
diversification of our product portfolio, then our market share, sales and profitability could be adversely impacted through lower volume or
decreased prices.
If we fail to attract and retain key employees our business may suffer.
Our ability to compete effectively depends on our ability to attract and retain key employees, including people in senior management, sales,
marketing, information technology and R&D positions and from the recently acquired Hillrom business. Competition for top talent in the
healthcare industry can be intense. Our ability to recruit and retain such talent will depend on a number of factors, including hiring practices of
our competitors, compensation and benefits (as may be impacted by any financial performance challenges), work location, work environment
(including our competitors’ policies regarding remote or hybrid work arrangements, the market’s perception of our recently
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announced strategic initiatives and industry economic conditions. If we cannot effectively recruit and retain qualified employees, our business
could suffer.
Risks Related to Our Business Operations
Segments of our business are significantly dependent on major contracts with GPOs, IDNs, and certain other distributors and
purchasers.
A portion of our U.S. hospital sales and rentals are made pursuant to contracts with hospital GPOs. At any given time, we are typically at various
stages of responding to bids, negotiating and renewing expiring GPO agreements. Failure to be included in certain of these agreements could
have a material adverse effect on our business, including product sales and service and rental revenue. In addition, we have faced and continue
to face challenges related to increasing costs associated with these agreements (associated with ongoing supply chain challenges and inflation),
which have negatively impacted our revenues and may continue to do so in the future.
Our participation in such programs often requires increased discounting or restrictions on our ability to raise prices, and failure to participate or to
be selected for participation in such programs might result in a reduction of sales to the member hospitals. In addition, the industry is showing an
increased focus on contracting directly with health systems or IDNs (which typically represent influential members and owners of GPOs). IDNs
and health systems often make key purchasing decisions and have influence over the GPO’s contract decisions, and often request additional
discounts or other enhancements. Further, certain other distributors and purchasers have similar processes to the GPOs and IDNs and failure to
be included in agreements with these other purchasers could have a material adverse effect on our business.
We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions,
and might experience business disruptions and adverse tax consequences associated with restructuring, realignment and cost
reduction activities.
Portions of our business have been, and may in the future be, the subject of restructuring, realignment and cost reduction initiatives. For
example, we continue to work to successfully integrate Hillrom into our operations and we recently announced our plans to implement a
simplified operating model and manufacturing footprint. While we initiate these actions with the goal of realizing efficiencies, we may not be
successful in achieving the full efficiencies and cost reduction benefits we expect. Further, such benefits might be realized later than expected,
and the ongoing costs of implementing these measures might be greater than anticipated. If these measures are not successful or sustainable,
we might undertake additional realignment and cost reduction efforts, which could result in future charges. Moreover, our ability to achieve our
other strategic goals and business plans might be adversely affected, and we could experience business disruptions, if our restructuring and
realignment efforts and our cost reduction activities prove ineffective. These actions, the resulting costs, and potential delays or potential lower
than anticipated benefits might also impact our foreign tax positions and might require us to record tax reserves against certain deferred tax
assets in our international business.
If we are unable to obtain sufficient components or raw materials on a timely basis or for a cost-effective price or if we experience
other manufacturing, sterilization, supply or distribution difficulties, our business and results of operations may be adversely affected.
The manufacture of our products requires, among other things, the timely supply or delivery of sufficient amounts of quality components and
materials. We manufacture our products in approximately 60 principal manufacturing locations. We acquire our components, materials and other
requirements for manufacturing from many suppliers and vendors in various countries, including sometimes from ourselves for self-supplied
requirements. We endeavor, either alone or working closely with our suppliers, to ensure the continuity of our inputs and supplies but we cannot
guarantee these efforts will always be successful. Further, while efforts are made to diversify certain of our sources of components and
materials, in certain instances there is only a sole source or supplier with no alternatives yet identified. Additionally, we obtain certain
components and materials on a spot basis from third party suppliers with whom we do not have a contractual arrangement. For most of our
components and materials for which a single source or supplier is used, alternative sources or suppliers may exist, but we have made a strategic
determination to use the single source or supplier. Although we do carry strategic inventory and maintain insurance to help mitigate the potential
risk related to supply disruption, such measures may not be sufficient or effective. A reduction, interruption or suspension in supply, other supply
chain issues, including those due to the revocation of distribution facilities’ licenses or as a result of our recently announced strategic initiatives,
and our inability to quickly develop acceptable alternative sources for such supply could adversely affect our ability to manufacture, distribute
and sell our products in a timely or cost-effective manner. We have faced difficulties obtaining supplies of key materials such
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as electromechanical components, active ingredients for pharmaceuticals and resins due to supply chain disruptions and the COVID-19
pandemic. Moreover, changes in regulation, world trade policies, international taxes and government-to-government relations and issues with
export and import activities could negatively impact our ability to distribute products within a country and across countries. See “-Risks Related to
Legal and Regulatory Matters.”
Additionally, volatility in our costs of energy, transportation/freight, components, raw materials and other supply, manufacturing and distribution
costs have had and could in the future adversely affect our results of operations. These prices might continue to fluctuate based on many factors
beyond our control, including, but not limited to, changes in general economic conditions (including inflation), political unrest, labor costs, delivery
costs, competition and currency exchange rates.
Significant increases in the cost of raw materials, sub-assemblies or materials used in the production of our products that cannot be recovered
through increased prices of our products (or the unavailability of those raw materials, sub-assemblies or production materials) have adversely
affect our results of operations and may continue to do so in the future. There can be no assurance that the marketplace will support higher
prices or that such prices and producti…