filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2021 for management’s discussion and analysis of our financial condition and results of operations. The following is management’s discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2022 and 2021.
RESULTS OF OPERATIONS
On December 13, 2021, we completed our acquisition of all outstanding equity interests of Hill-Rom Holdings, Inc. (Hillrom) for a purchase price of $10.5 billion. Including the assumption of Hillrom’s outstanding debt, the enterprise value of the transaction was approximately $12.8 billion. While the current year periods include the results of operations and cash flows of Hillrom, the prior year periods do not as they preceded the acquisition date. In the third quarter of 2022, we recognized impairments of goodwill and certain indefinite-lived intangible assets that arose from the Hillrom acquisition. See Note 4, Goodwill and Other Intangible Assets, Net, of the accompanying condensed consolidated financial statements for additional information about those impairments.
Net income (loss) attributable to Baxter stockholders for the three and nine months ended September 30, 2022 totaled $(2,937) million, or $(5.83) per diluted share, and $(2,614) million, or $(5.20) per diluted share, compared to $450 million, or $0.89 per diluted share, and $1,046 million, or $2.06 per diluted share, for the three and nine months ended September 30, 2021. Net income (loss) for the three and nine months ended September 30, 2022 included special items which decreased net income by $3.4 billion and $3.9 billion, respectively, or $6.65 and $7.81 per diluted share, respectively, as further discussed below. Net income (loss) for the three and nine months ended September 30, 2021 included special items which decreased net income by $66 million and $265 million, respectively, or $0.13 and $0.52 per diluted share, respectively, as further discussed below.
Special Items
The following table provides a summary of our special items and the related impact by line item on our results for the three and nine months ended September 30, 2022 and 2021.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
| (in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Gross Margin | |||||||||||||||||
| Intangible asset amortization expense | $ | (110) | $ | (68) | $ | (344) | $ | (199) | |||||||||
| Business optimization items1 | (13) | (20) | (21) | (51) | |||||||||||||
| Acquisition and integration expenses2 | 2 | (1) | (171) | (1) | |||||||||||||
| European medical devices regulation3 | (12) | (11) | (35) | (30) | |||||||||||||
| Product-related items5 | (20) | — | (43) | — | |||||||||||||
| Intangible asset impairments6 | (332) | — | (332) | — | |||||||||||||
| Total Special Items | $ | (485) | $ | (100) | $ | (946) | $ | (281) | |||||||||
| Impact on Gross Margin Ratio | (12.9 pts) | (3.1 pts) | (8.5 pts) | (3.0 pts) | |||||||||||||
| Selling, General and Administrative (SG&A) Expenses | |||||||||||||||||
| Intangible asset amortization expense | $ | 58 | $ | — | $ | 234 | $ | — | |||||||||
| Business optimization items1 | 57 | 16 | 171 | 30 | |||||||||||||
| Acquisition and integration expenses2 | 11 | 21 | 55 | 23 | |||||||||||||
| Investigation and related costs4 | — | 3 | — | 31 | |||||||||||||
| Total Special Items | $ | 126 | $ | 40 | $ | 460 | $ | 84 | |||||||||
| Impact on SG&A Ratio | 3.3 pts | 1.3 pts | 4.1 pts | 0.9 pts | |||||||||||||
| Research and Development (R&D) Expenses | |||||||||||||||||
| Business optimization items1 | $ | 3 | $ | — | $ | 4 | $ | — | |||||||||
| Acquisition and integration expenses2 | 1 | — | 1 | — | |||||||||||||
| Total Special Items | $ | 4 | $ | — | $ | 5 | $ | — | |||||||||
| Impact on R&D Ratio | 0.1 pts | 0.0 pts | 0.0 pts | 0.0 pts | |||||||||||||
| Goodwill Impairments | |||||||||||||||||
| Goodwill impairments6 | $ | 2,785 | $ | — | $ | 2,785 | $ | — | |||||||||
| Total Special Items | $ | 2,785 | $ | — | $ | 2,785 | $ | — | |||||||||
| Other Operating Expense (Income), net | |||||||||||||||||
| Loss on product divestiture arrangement7 | $ | 54 | $ | — | $ | 54 | $ | — | |||||||||
| Acquisition and integration expenses2 | (6) | (1) | (34) | (6) | |||||||||||||
| Total Special Items | $ | 48 | $ | (1) | $ | 20 | $ | (6) | |||||||||
| Interest Expense, net | |||||||||||||||||
| Acquisition and integration expenses2 | $ | — | $ | 18 | $ | — | $ | 18 | |||||||||
| Total Special Items | $ | — | $ | 18 | $ | — | $ | 18 | |||||||||
| Other Income (Expense), net | |||||||||||||||||
| Pension curtailment8 | $ | — | $ | — | $ | (11) | $ | — | |||||||||
| Reclassification of cumulative translation loss to earnings9 | 65 | — | 65 | — | |||||||||||||
| Total Special Items | $ | 65 | $ | — | $ | 54 | $ | — | |||||||||
| Income Tax Expense | |||||||||||||||||
| Tax matters10 | $ | — | $ | (58) | $ | — | $ | (36) | |||||||||
| Tax effects of special items11 | (162) | (33) | (328) | (76) | |||||||||||||
| Total Special Items | $ | (162) | $ | (91) | $ | (328) | $ | (112) | |||||||||
| Impact on Effective Tax Rate | (22.7 pts) | (15.0 pts) | (22.2 pts) | (4.3 pts) |
Intangible asset amortization expense, which increased significantly from the prior year due to the Hillrom acquisition, is identified as a special item to facilitate an evaluation of current and past operating performance and is consistent with how management and our Board of Directors assess performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact our reported results of operations for the period. Management believes that providing the separate impact of those items may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.
1In 2022 and 2021, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure. These actions included streamlining our international operations, rationalizing our manufacturing and distribution facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. In the current period, restructuring charges include actions taken in connection with our integration of Hillrom, which we acquired in December 2021. Our results in 2022 included business optimization charges of $73 million in the third quarter and $196 million in the first nine months. Our results in 2021 included business optimization charges of $36 million in the third quarter and $81 million in the first nine months. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.
2Our results in 2022 included $4 million in the third quarter and $193 million in the first nine months of acquisition and integration-related expenses. Those costs included $10 million in the third quarter and $227 million in the first nine months related to our acquisition of Hillrom, primarily reflecting $159 million of incremental costs of sales in the first nine months from the fair value step-ups on acquired Hillrom inventory that was sold in the first quarter. We have not incurred and we do not expect to incur significant incremental cost of sales from those inventory fair value step-ups beyond what was recognized in the first quarter 2022. Other integration expenses in the current period included third party consulting costs related to our integration and related cost savings activities. Those acquisition and integration-related expenses related to Hillrom were partially offset by a $6 million benefit in the third quarter and a $34 million benefit in the first nine months from changes in the estimated fair value of contingent consideration liabilities. Our results in 2021 included acquisition, integration and related financing expenses of $39 million in the third quarter and $36 million in the first nine months. This included acquisition, integration and related financing expenses for our acquisition of Hillrom and the acquisition to the rights to Caelyx and Doxil for specified territories outside of the U.S. These expenses were partially offset by benefits in the third quarter and first nine months from changes in the estimated fair value of contingent consideration liabilities. Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.
3Our results in 2022 included $12 million in the third quarter and $35 million in the first nine months of costs related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that became effective in stages beginning in 2021. Our results in 2021 included $11 million in the third quarter and $30 million in the first nine months of costs related to these requirements.
4Our results in 2021 included charges of $3 million in the third quarter and $31 million in the first nine months for investigation and related cost for matters associated with our previously announced investigation of foreign exchange gains and losses. Refer to Note 6 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation.
5Our results in 2022 included charges of $20 million in the third quarter and $43 million in the first nine months related to warranty and remediation activities arising from two field corrective actions on certain of our infusion pumps.
6Our results in 2022 included charges of $3.1 billion in the third quarter and first nine months for goodwill and indefinite-lived intangible asset impairments. Refer to Note 4 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the impairments.
7Our results in 2022 included a loss of $54 million in the third quarter and first nine months under an arrangement to divest certain product rights for an amount that is less than our cost of those product rights, which was triggered by U.S. and European Union regulatory approvals of the related products. Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information about the related transactions.
8Our results in 2022 included a curtailment gain of $11 million in the first nine months related to an announced change for active non-bargaining participants in our U.S. Hillrom pension plan.
9Our results in 2022 included a charge of $65 million in the third quarter and first nine months for cumulative translation adjustments (CTA) reclassified from accumulated other comprehensive income (loss) as a result of the substantial liquidation of our operations in Argentina.
10Our results in the third quarter and first nine months of 2021 included a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary. Our results in the first nine months of 2021 also included a charge of $22 million related to an unfavorable court ruling for an uncertain tax position.
11Reflected in this item is the income tax impact of the special items identified in this table. The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Risks and Uncertainties Related to COVID-19
Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19). COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and we expect will continue to increase our expenses. Over the course of the pandemic, our business has been impacted by shifting healthcare priorities and significant volatility in the demand for our products. For further information about our revenues by product category, refer to Note 9 in Item 1 of this Quarterly Report on Form 10-Q. Significant uncertainty remains regarding the duration and overall impact of the COVID-19 pandemic. Concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Omicron variants, subvariants and other virus mutations as well as vaccine distribution and hesitancy. The U.S. and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to moratoriums on elective procedures and mandatory quarantines and travel restrictions), resulting in higher levels of absenteeism, including at our manufacturing and distribution facilities. Due to the uncertainty caused by the pandemic, our operating performance and financial results, particularly in the short term, may be subject to volatility.
Supply Constraints, Global Economic Conditions
We have experienced significant challenges to our global supply chain in recent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, resulting from the pandemic and other exogenous factors including significant weather events, elevated inflation levels, disruptions to certain ports of call around the world, the war in Ukraine and other geopolitical events. We expect to experience some of these and other challenges related to our supply chain in future periods. These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for certain product categories due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future.
Our results of operations are also affected by macroeconomic conditions and levels of business confidence. The war in Ukraine and the sanctions and other measures being imposed in response to this conflict have increased the levels of economic and political uncertainty. In response, we continue to monitor the developing situation with respect to ongoing business in Russia and are working on appropriate contingency plans that will support our desire to serving existing, chronically ill patient populations while remaining compliant with all applicable U.S. and European Union sanctions and regulations. While Russia and Ukraine do not constitute a material portion of our business, a significant escalation or expansion of economic disruption or the conflict’s current scope could have an adverse effect on our business.
In addition, the existence of inflation in the United States and in many of the countries where we conduct business has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, increased costs of labor, weakening exchange rates and other similar effects. We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses as well as negative impacts from weakening exchange rates, caused by the COVID-19 pandemic or as a result of general macroeconomic factors, and may not be able to pass these cost increases on to our customers in a timely manner or at all, which could have a material adverse impact on our profitability and results of operations. Inflation may also cause our customers to reduce or delay orders for our products and services, which could have a material adverse impact on our sales and results of operations.
In addition to acquisitions and organic reinvestment, we consistently look for opportunities to optimize our portfolio. As such, we may divest businesses, discontinue products or exit markets (in a manner consistent with our commitments to patient safety and quality) to create value and drive enhanced future performance in line with our strategic objectives.
Regulatory Environment
Our operations and products, and those of our customers, are subject to regulation globally by numerous government agencies. We, like other businesses in our industry, face challenges inherent in product development, including the potential inability to obtain and maintain regulatory approvals and registrations in the United States and abroad, which could preclude or delay commercialization of a product and increase development costs. New or changing laws and regulations, or changes in enforcement practices in response to requests from various regulatory authorities, could also affect our domestic and foreign operations. In particular, the U.S. and other countries may impose new requirements regarding registration, labeling or prohibited materials (including DEHP and polyvinyl chloride) that may require us to re-register products already on the market or change product formulations or otherwise impact our ability to market our products. Environmental laws, particularly with respect to the emission of greenhouse gases, are also becoming more stringent throughout the world. Product efficacy or safety concerns regarding products could result in regulatory action on the part of the FDA or foreign counterparts, declining sales and product liability claims, and damage to our reputation. For example, manufacturers across the pharmaceutical industry, including us, are evaluating their product portfolios for the potential presence or formation of nitrosamines.
We expect that these challenges and conditions, among other factors, may continue to have an adverse effect on our business.
For further discussion, please refer to Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
NET SALES
| Three Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2022 | 2021 | At actual currency rates | At constant currency rates | |||||||||||||
| United States | $ | 1,849 | $ | 1,319 | 40 | % | 40 | % | |||||||||
| International | $ | 1,924 | 1,907 | 1 | % | 12 | % | ||||||||||
| Total net sales | $ | 3,773 | $ | 3,226 | 17 | % | 23 | % |
| Nine Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2022 | 2021 | At actual currency rates | At constant currency rates | |||||||||||||
| United States | $ | 5,370 | $ | 3,697 | 45 | % | 45 | % | |||||||||
| International | $ | 5,856 | 5,573 | 5 | % | 13 | % | ||||||||||
| Total net sales | $ | 11,226 | $ | 9,270 | 21 | % | 26 | % |
Our acquisition of Hillrom favorably impacted net sales by 23 and 24 percentage points during the third quarter and first nine months of 2022, respectively, compared to the prior year periods. Foreign currency unfavorably impacted net sales by 6 and 5 percentage points during the third quarter and first nine months of 2022, respectively, compared to the prior-year periods, principally due to the strengthening of the U.S. Dollar relative to the Euro, British Pound, Turkish Lira, Australian Dollar and Japanese Yen.
The comparisons presented at constant currency rates reflect local currency sales at the prior period’s foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had remained constant between the prior and the current period. We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S. GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.
Product Category Net Sales Reporting
Upon our acquisition of Hillrom, we added three new product categories: Patient Support Systems, Front Line Care and Surgical Solutions. Our product categories include the following:
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Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.
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Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices.
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Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.
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Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.
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Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.
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Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).
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BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical and biopharmaceutical companies.
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Patient Support Systems includes sales of our connected care solutions: devices, software, communications and integration technologies and smart beds.
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Front Line Care includes sales of our integrated patient monitoring and diagnostic technologies to help diagnose, treat and manage a wide variety of illness and diseases, including respiratory therapy, cardiology, vision screening and physical assessment.
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Surgical Solutions includes sales of our surgical video technologies, tables, lights, pendants, precision positioning devices and other accessories.
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Other includes sales of other miscellaneous product and service offerings.
The following is a summary of net sales by product category:
| Three Months Ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2022 | 2021 | At actual currency rates | At constant currency rates | |||||||||||||
| Renal Care | $ | 942 | $ | 981 | (4) | % | 4 | % | |||||||||
| Medication Delivery | 725 | 747 | (3) | % | (0) | % | |||||||||||
| Pharmaceuticals | 525 | 589 | (11) | % | (3) | % | |||||||||||
| Clinical Nutrition | 231 | 244 | (5) | % | 4 | % | |||||||||||
| Advanced Surgery | 247 | 249 | (1) | % | 6 | % | |||||||||||
| Acute Therapies | 158 | 185 | (15) | % | (9) | % | |||||||||||
| BioPharma Solutions | 172 | 206 | (17) | % | (10) | % | |||||||||||
| Patient Support Systems | 380 | — | N/A | N/A | |||||||||||||
| Front Line Care | 279 | — | N/A | N/A | |||||||||||||
| Surgical Solutions | 76 | — | N/A | N/A | |||||||||||||
| Other | 38 | 25 | 52 | % | 56 | % | |||||||||||
| Total Baxter | $ | 3,773 | $ | 3,226 | 17 | % | 23 | % |
| Nine months ended September 30, | Percent change | ||||||||||||||||
| (in millions) | 2022 | 2021 | At actual currency rates | At constant currency rates | |||||||||||||
| Renal Care | $ | 2,767 | $ | 2,867 | (3) | % | 2 | % | |||||||||
| Medication Delivery | 2,141 | 2,096 | 2 | % | 4 | % | |||||||||||
| Pharmaceuticals | 1,574 | 1,687 | (7) | % | (1) | % | |||||||||||
| Clinical Nutrition | 688 | 715 | (4) | % | 3 | % | |||||||||||
| Advanced Surgery | 738 | 722 | 2 | % | 7 | % | |||||||||||
| Acute Therapies | 519 | 580 | (11) | % | (7) | % | |||||||||||
| BioPharma Solutions | 491 | 524 | (6) | % | (0) | % | |||||||||||
| Patient Support Systems | 1,127 | — | N/A | N/A | |||||||||||||
| Front Line Care | 855 | — | N/A | N/A | |||||||||||||
| Surgical Solutions | 223 | — | N/A | N/A | |||||||||||||
| Other | 103 | 79 | 30 | % | 33 | % | |||||||||||
| Total Baxter | $ | 11,226 | $ | 9,270 | 21 | % | 26 | % |
Renal Care net sales decreased 4% in the third quarter and 3% in the first nine months of 2022, as compared to the prior-year periods. The decrease in the third quarter and first nine months was driven by an 8% and 5%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods, and lower in-center HD sales, partially offset by global patient growth in PD.
Medication Delivery net sales decreased 3% in the third quarter and increased 2% in the first nine months of 2022, as compared to the prior-year periods. The decrease in the third quarter was driven by a 3% negative impact from foreign exchange rates as compared to the prior-year period. The increase in the first nine months was driven by increased demand for IV administration sets and solutions, reflecting a recovery in hospital admission rates and surgical procedures. The first nine months of 2022 was also favorably impacted by lower U.S. customer rebates in the current year period. Those items were partially offset by lower sales of infusion pumps, a 2% negative impact in the first nine months of 2022 from foreign exchange rates as compared to the prior-year period and sales headwinds in China driven by COVID-related lockdowns. Supply chain constraints, including constraints related to the availability of semiconductor components and other components used in the production of our infusion pumps, and the fact that our new infusion pump platform has not yet received FDA clearance in the U.S. have contributed to lower sales of infusion pumps in the current year periods.
Pharmaceuticals net sales decreased 11% in the third quarter and 7% in the first nine months of 2022, as compared to the prior-year periods. The decrease in the third quarter and first nine months was primarily driven by a 8% and 6%, respectively, negative impact from foreign exchange rates, as compared to the prior-year periods. Additionally, pharmaceuticals net sales were adversely impacted by new market entrants increasing competition and supply constraints for certain molecules. Those items were partially offset by increased sales internationally for inhaled anesthesia products.
Clinical Nutrition net sales decreased 5% in the third quarter and 4% in the first nine months of 2022, as compared to the prior-year periods. The decrease in the third quarter and first nine months was driven by a 9% and 7%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods, and lower sales of vitamins resulting from ongoing supply constraints. Those decreases were partially offset by growth in the U.S. for our PN therapies and related products, including our PN multi-chamber bags.
Advanced Surgery net sales decreased 1% in the third quarter and increased 2% in the first nine months of 2022, as compared to the prior-year periods. The decrease in the third quarter was driven by a 7% negative impact from foreign exchange rate changes, as compared to the prior-year period, partially offset by continued recovery in surgical procedures. The increase in the first nine months was driven by the continued recovery in surgical procedures, particularly in EMEA, and benefits from competitor supply constraints, partially offset by a 5% negative impact from foreign exchange rates, as compared to the prior-year period.
Acute Therapies net sales decreased 15% in the third quarter and 11% in the first nine months of 2022, as compared to the prior-year periods. The decrease in the third quarter and first nine months was driven by lower COVID-related
demand for our CRRT systems and a 6% and 4%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods.
BioPharma Solutions net sales decreased 17% in the third quarter and 6% in the first nine months of 2022, as compared to the prior-year periods. The decrease in the third quarter and first nine months includes a 7% and 6%, respectively, negative impact from foreign exchange rates, as compared to the prior-year periods. The decrease in the third quarter was also driven by lower sales from manufacturing services and supply packaging related to the production of COVID-19 vaccines on behalf of multiple pharmaceutical companies, reflecting a challenging comparison against a strong prior-year period.
The Patient Support Systems, Front Line Care and Surgical Solutions product categories were added in connection with our acquisition of Hillrom in December of 2021. Net sales of those product categories have been adversely impacted in the current year periods by ongoing supply chain constraints, particularly related to components used in our Front Line Care product offerings, and by delays in product installations for Patient Support Systems and Surgical Solutions resulting from limitations on hospital access due, in part, to staffing challenges being experienced by those customers.
Gross Margin and Expense Ratios
| Three months ended September 30, | ||||||||||||||||||||
| 2022 | % of net sales | 2021 | % of net sales | $ change | % change | |||||||||||||||
| Gross margin | $ | 1,133 | 30.0 | % | $ | 1,321 | 40.9 | % | $ | (188) | (14.2) | % | ||||||||
| SG&A | $ | 947 | 25.1 | % | $ | 680 | 21.1 | % | $ | 267 | 39.3 | % | ||||||||
| R&D | $ | 152 | 4.0 | % | $ | 129 | 4.0 | % | $ | 23 | 17.8 | % |
| Nine months ended September 30, | ||||||||||||||||||||
| 2022 | % of net sales | 2021 | % of net sales | $ change | % change | |||||||||||||||
| Gross margin | $ | 3,934 | 35.0 | % | $ | 3,699 | 39.9 | % | $ | 235 | 6.4 | % | ||||||||
| SG&A | $ | 2,975 | 26.5 | % | $ | 1,982 | 21.4 | % | $ | 993 | 50.1 | % | ||||||||
| R&D | $ | 450 | 4.0 | % | $ | 396 | 4.3 | % | $ | 54 | 13.6 | % |
Gross Margin
The gross margin ratio was 30.0% and 35.0% in the third quarter and first nine months of 2022, respectively. The special items identified above had an unfavorable impact of approximately 12.9 and 8.5 percentage points on the gross margin ratio in the third quarter and first nine months of 2022, respectively. The gross margin ratio was 40.9% and 39.9% in the third quarter and first nine months of 2021, respectively. The special items identified above had an unfavorable impact of approximately 3.1 and 3.0 percentage points on the gross margin ratio in the third quarter and first nine months of 2021, respectively. Refer to the Special Items caption above for additional detail.
Excluding the impact of the special items, the gross margin ratio decreased in the third quarter and increased in the first nine months of 2022 compared to the prior-year periods. The decrease in the third quarter was primarily driven by raw materials inflation and increased supply chain costs, partially offset by a favorable product mix that was primarily driven by our acquisition of Hillrom and lower bonus accruals under our annual employee incentive compensation plans. The increase in the first nine months resulted from a favorable product mix that was that was primarily driven by our acquisition of Hillrom and lower bonus accruals under our annual employee incentive compensation plans, which exceeded the adverse impacts of raw materials inflation and increased supply chain costs for the year-to-date period.
SG&A
The SG&A expenses ratio was 25.1% and 26.5% in the third quarter and first nine months of 2022, respectively. The special items identified above had an unfavorable impact of approximately 3.3 and 4.1 percentage points on the SG&A expenses ratio in the third quarter and first nine months of 2022, respectively. The SG&A expenses ratio was 21.1% and 21.4% in the third quarter and first nine months of 2021, respectively. The special items identified above had an unfavorable impact of approximately 1.3 and 0.9 percentage points on the SG&A expenses ratio in the third quarter and first nine months of 2021, respectively. Refer to the Special Items caption above for additional detail.
Excluding the impact of the special items, the SG&A expenses ratio increased in the third quarter and first nine months of 2022 compared to the prior-year periods primarily due to the acquisition of Hillrom and increased outbound freight costs, partially offset by lower bonus accruals under our annual employee incentive compensation plans.
R&D
The R&D expenses ratio was 4.0% in the third quarter and first nine months of 2022. The R&D expenses ratio was 4.0% and 4.3% in the third quarter and first nine months of 2021, respectively.
The R&D expenses ratio remained relatively flat in the third quarter and first nine months of 2022 compared to the prior-year periods, with the increase in total spend primarily driven by the Hillrom acquisition, partially offset by lower bonus accruals under our annual employee incentive compensation plans.
Business Optimization Items
In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. In the current year periods, restructuring charges include actions taken in connection with our integration of Hillrom. From the commencement of our business optimization actions in the second half of 2015 through September 30, 2022, we have incurred cumulative pre-tax costs of $1.4 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments, and accelerated depreciation.
We currently expect to incur additional pre-tax costs, primarily related to the implementation of business optimization programs, of approximately $14 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives, including those related to our integration of Hillrom, and, to the extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs to implement business optimization programs in future periods.
Goodwill Impairments
We assess goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize a goodwill impairment charge for the amount by which a reporting unit's carrying amount exceeds its fair value.
As described above, we acquired Hillrom on December 13, 2021 and recognized $6.8 billion of goodwill and $6.0 billion of other intangible assets, including $1.9 billion of indefinite-lived intangible assets, in connection with that acquisition. Our Hillrom segment includes the following three reporting units: Patient Support Systems, Front Line Care and Surgical Solutions. During the third quarter of 2022, we performed trigger-based impairment tests of the goodwill of each of those three reporting units, as well as the indefinite-lived intangible assets, consisting primarily of trade names, that we acquired in connection with the Hillrom acquisition. We performed those tests as of September 30, 2022 due to (a) current macroeconomic conditions, including the rising interest rate environment and broad declines in equity valuations, and (b) reduced earnings forecasts for our three Hillrom reporting units, driven primarily by current shortages of certain component parts used in our products, raw materials inflation and increased supply chain costs. The impairment tests resulted in total pre-tax goodwill impairment charges of $2.8 billion in the third quarter of 2022, consisting of a $1.4 billion goodwill impairment for our Patient Support Systems reporting unit, a $1.0 billion goodwill impairment for our Front Line Care reporting unit and a $0.4 billion goodwill impairment for our Surgical Solutions reporting unit.
Further adverse changes to macroeconomic conditions or our earnings forecasts could lead to additional goodwill or intangible asset impairment charges in future periods and such charges could be material to our results of operations.
Other Operating Expense (Income), Net
Other operating expense (income), net was $48 million and $20 million in the third quarter and first nine months of 2022, respectively. The current year periods include a loss of $54 million under an arrangement to divest certain product rights for an amount that is less than our cost of those product rights, which was triggered by U.S. and European Union regulatory approvals of the related products. Refer to Note 2 in Item 1 of this Quarterly Report on
Form 10-Q for further information about the related transactions. That loss was partially offset by gains from net decreases in the estimated fair values of contingent consideration liabilities of $6 million and $34 million in the third quarter and first nine months of 2022, respectively.
Other operating expense (income), net was $1 million and $6 million in the third quarter and first nine months of 2021, respectively, which consisted of gains from net decreases in the estimated fair values of contingent consideration liabilities.
Interest Expense, Net
Interest expense, net was $104 million and $278 million in the third quarter and first nine months of 2022, respectively, and $50 million and $118 million in the third quarter and first nine months of 2021, respectively. The increases in the third quarter and first nine months of 2022 were primarily driven by higher average debt outstanding in connection with the Hillrom acquisition.
Other (Income) Expense, Net
Other (income) expense, net was an expense of $63 million and $3 million in the third quarter and first nine months of 2022, respectively, and an expense of $12 million and $15 million in the third quarter and first nine months of 2021, respectively. The increases in the third quarter of 2022 compared to the prior year period was primarily due to the reclassification of a cumulative translation loss from accumulated other comprehensive income (loss) to earnings due to the substantial liquidation of our operations in Argentina, partially offset by pension benefits in the current-year period. The decrease in the first nine months of 2022 compared to the prior year was primarily due to foreign exchange gains in the current-year period versus losses in the prior-year period, pension benefits in the current-year period versus expenses in the prior-year period and a pension curtailment gain in the current-year period, partially offset by the reclassification of the Argentina cumulative translation loss to earnings.
Income Taxes
Our effective income tax rate was 1.1% and (0.2)% in the third quarter, and (1.1)% and 11.8% in the first nine months of 2022 and 2021, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits or shortfalls on stock compensation awards.
For the three and nine months ended September 30, 2022, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to non-deductible goodwill impairments.
For the three months ended September 30, 2021, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.
For the nine months ended September 30, 2021, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as a favorable geographic earnings mix and changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.
Segment Results
We manage our global operations based on four segments, consisting of the following geographic segments related to legacy Baxter business: Americas, EMEA and APAC, and a new global segment for our recently acquired Hillrom business. We use net sales and operating income on a segment basis to make resource allocation decisions and
assess the ongoing performance of our segments. The following is a summary of financial information for our reportable segments:
| Net sales | Operating income (loss) | ||||||||||||||||||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||
| (in millions) | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||
| Americas | $ | 1,703 | $ | 1,727 | $ | 4,975 | $ | 4,911 | $ | 588 | $ | 676 | $ | 1,765 | $ | 1,907 | |||||||||||||||||||
| EMEA | 692 | 779 | 2,129 | 2,300 | 145 | 167 | 433 | 461 | |||||||||||||||||||||||||||
| APAC | 643 | 720 | 1,917 | 2,059 | 152 | 166 | 459 | 456 | |||||||||||||||||||||||||||
| Hillrom | 735 | — | 2,205 | — | 215 | — | 564 | — | |||||||||||||||||||||||||||
| Total segments | 3,773 | 3,226 | 11,226 | 9,270 | 1,100 | 1,009 | 3,221 | 2,824 | |||||||||||||||||||||||||||
| Corporate and other | — | — | — | — | (3,899) | (496) | (5,517) | (1,497) | |||||||||||||||||||||||||||
| Total | $ | 3,773 | $ | 3,226 | $ | 11,226 | $ | 9,270 | $ | (2,799) | $ | 513 | $ | (2,296) | $ | 1,327 |
Americas
Segment net sales and operating income were $1.7 billion and $588 million, respectively, in the third quarter and $5.0 billion and $1.8 billion, respectively, in the first nine months of 2022. Segment net sales and operating income were $1.7 billion and $676 million, respectively, in the third quarter and $4.9 billion and $1.9 billion, respectively, in the first nine months of 2021. The decrease in operating income in the third quarter of 2022 was due to higher supply chain costs and lower sales in our BioPharma Solutions, Pharmaceuticals and Acute Therapies product categories, partially offset by higher sales in our Renal Care and Advanced Surgery product categories. The decrease in operating income in the first nine months of 2022 was due to raw materials inflation, higher supply chain costs and lower sales in our Pharmaceuticals, Acute Therapies and BioPharma Solutions product categories, partially offset by higher sales in our Medication Delivery, Renal Care and Advanced Surgery product categories.
EMEA
Segment net sales and operating income were $692 million and $145 million, respectively, in the third quarter and $2.1 billion and $433 million, respectively, in the first nine months of 2022. Segment net sales and operating income were $779 million and $167 million, respectively, in the third quarter and $2.3 billion and $461 million, respectively, in the first nine months of 2021. The decrease in operating income in the third quarter and first nine months of 2022 was primarily due to an unfavorable impact of foreign exchange rates on results as compared to the prior-year period, lower sales in our Acute Therapies and BioPharma Solutions product categories and higher supply chain costs, partially offset by lower operating expenses and improved gross margin, driven by a favorable product mix. For the first nine months of 2022, the decrease in operating income was partially offset by having a full nine months of sales from our February 2021 acquisition of the rights to Caelyx and Doxil for specified territories outside the U.S.
APAC
Segment net sales and operating income were $643 million and $152 million, respectively, in the third quarter and $1.9 billion and $459 million, respectively, in the first nine months of 2022. Segment net sales and operating income were $720 million and $166 million, respectively, in the third quarter and $2.1 billion and $456 million, respectively, in the first nine months of 2021. The decrease in operating income in the third quarter of 2022 was driven by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period. The increase in operating income in the first nine months of 2022 was due to lower operating expenses and an improved gross margin, driven by a favorable product mix, partially offset by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period, higher supply chain costs and sales headwinds in China driven by COVID-related lockdowns.
Hillrom
Segment net sales and operating income were $735 million and $215 million, respectively, in the third quarter and $2.2 billion and $564 million, respectively, in the first nine months of 2022. The increases in net sales and operating income in the third quarter and first nine months of 2022, from zero in the prior year periods, were due to our acquisition of Hillrom in December 2021.
Corporate and Other
Certain items are maintained at Corporate and are not allocated to a segment. They primarily include corporate headquarters costs, certain R&D costs, manufacturing variances and centrally managed supply chain costs, product category support costs, stock compensation expense, certain employee benefit plan costs, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments). For the period from our acquisition of Hillrom on December 13, 2021 through December 31, 2021, we previously included all costs incurred by the Hillrom business within that segment, including the types of costs described in the preceding sentence that are maintained at Corporate for our legacy Baxter segments. In connection with our ongoing integration activities, beginning in the first quarter 2022, we have updated the measure of profitability for our Hillrom segment by excluding such unallocated costs, consistent with our legacy Baxter segments. Those unallocated costs related to Hillrom, which totaled $3.0 billion and $3.3 billion for the three and nine months ended September 30, 2022, respectively, are now presented within Corporate as well.
The Corporate operating loss in the third quarter was significantly higher than the prior-year period primarily due to goodwill and intangible asset impairments, higher intangible asset amortization expense, acquisition and integration-related expenses and business optimization charges and increased manufacturing variances and centrally managed supply chain costs, partially offset by lower bonus accruals under our annual employee incentive compensation plans.
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of the statement of cash flows for the nine-month periods ended September 30, 2022 and 2021.
| Nine months ended September 30, | |||||||||||
| (in millions) | 2022 | 2021 | |||||||||
| Cash flows from operations | $ | 772 | $ | 1,529 | |||||||
| Cash flows from investing activities | (675) | (933) | |||||||||
| Cash flows from financing activities | (1,319) | (1,031) |
Cash Flows from Operations
In the first nine months of 2022, cash provided by operating activities was $772 million, as compared to cash provided by operating activities of $1.5 billion in the first nine months of 2021, a decrease of $757 million. The decrease was primarily due to a decrease in our net income in 2022, increases in inventory levels and higher annual payouts under our employee incentive compensation plans in the current year period compared to the prior year period.
Cash Flows from Investing Activities
In the first nine months of 2022, cash used for investing activities included payments for acquisitions and investments of $206 million, primarily related to our payment to acquire the rights to Zosyn, and capital expenditures of $479 million. In the first nine months of 2021, cash used for investing activities included payments for acquisitions and investments of $463 million, primarily related to Caelyx and Doxil, Transderm Scop and PerClot Polysaccharide Hemostatic System (PerClot), and capital expenditures of $508 million. See Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.
Cash Flows from Financing Activities
In the first nine months of 2022, cash used in financing activities included debt repayments of $953 million and dividend payments of $427 million, partially offset by a net increase in commercial paper borrowings of $30 million and proceeds from stock issued under employee benefit plans of $114 million. In the first nine months of 2021, cash used for financing activities included payments for treasury stock repurchases of $600 million, debt repayments of $407 million and dividend payments of $390 million, partially offset by proceeds from stock issued under employee benefit plans of $135 million and the net proceeds from commercial paper borrowings of $300 million.
As authorized by our Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions. In July 2012, our Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. Our Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020.
During the first nine months of 2022, we repurchased 0.5 million shares under this authority pursuant to a Rule 10b5-1 plan. We had $1.3 billion remaining available under this authorization as of September 30, 2022.
Credit Facilities and Access to Capital and Credit Ratings
Credit Facilities
As of September 30, 2022, our U.S. dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of $2.5 billion and €200 million, respectively. There were no borrowings outstanding under these credit facilities as of September 30, 2022 or December 31, 2021. Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings.
As of September 30, 2022, we were in compliance with the financial covenants in these agreements. In the third quarter of 2022, we amended the credit agreement governing our U.S. dollar-denominated revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to delay the commencement of our net leverage ratio covenant step-down schedule until June 30, 2024. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by the institution’s respective commitment.
Access to Capital and Credit Ratings
We intend to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations or by issuing additional debt. We had $1.6 billion of cash and cash equivalents as of September 30, 2022, with adequate cash available to meet operating requirements in each jurisdiction in which we operate. We invest our excess cash in money market and other funds and diversify the concentration of cash among different financial institutions. As of September 30, 2022, we had approximately $16.4 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt. Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure.
Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions, including global economic conditions. However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives. Although our outlook was downgraded from stable to negative by two of the rating agencies during the third quarter of 2022, there have been no changes to our investment grade credit ratings that we disclosed in our 2021 Annual Report.
LIBOR Reform
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR) and other interbank offered rates, which have been widely used as reference rates for various securities and financial contracts, including loans, debt and derivatives. This announcement indicated that the continuation of LIBOR on the current basis was not guaranteed after 2021. Regulators in the U.S. and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate (SOFR). In 2020, it was announced that certain U.S. dollar LIBOR tenors would not cease until 2023. In September 2022, our $2.5 billion U.S. dollar-denominated revolving credit facility and our $4.0 billion Term Loan Credit Agreement were amended to reference SOFR-based rates. Currently, our €200 million Euro-denominated revolving credit facility references LIBOR-based rates. The discontinuation of LIBOR will require this arrangement to be modified in order to replace LIBOR with an alternative reference interest rate, which could impact our cost of funds. That credit facility agreement includes provisions related to the determination of a successor LIBOR rate.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our 2021 Annual Report. Certain
of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by us, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2021 Annual Report. We identified the Valuation of Intangible Assets, Including IPR&D, as one of our critical accounting policies in our 2021 Annual Report. We currently consider the valuation of goodwill to be a part of that critical accounting policy.
Goodwill is initially measured as the excess of the purchase price over the fair value (or other measurement attribute required by U.S. GAAP) of acquired assets and liabilities in a business combination. Goodwill is not amortized but is subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess goodwill for impairment by initially performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not required to be performed. If we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform a quantitative goodwill impairment test. In the quantitative impairment test, we calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the amount that the reporting unit’s carrying amount, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. In a quantitative goodwill impairment test, the fair values of our reporting units are generally determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach). Significant inputs to reporting unit fair value measurements generally include forecasted cash flows, discount rates, terminal growth rates and earnings multiples. Each of those inputs can significantly affect the fair values of our reporting units. During the third quarter of 2022, we recognized $2.8 billion of goodwill impairment charges and $332 million of indefinite-lived intangible asset impairment charges. See Note 4, Goodwill and Other Intangible Assets, Net in Item 1 of this Quarterly Report on Form 10-Q for further information about those impairments.
There have been no other updates to our critical accounting policies and no significant changes in the application of our critical accounting policies during the first nine months of 2022.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sales Restrictions, which (1) clarifies the guidance in Topic 820 on the fair value measurement of an equity security that is subject to contractual restrictions that prohibit the sale of an equity security and (2) requires specific disclosures related to such an equity security. The standard is effective for our financial statements beginning in 2024. The impact of the adoption of this ASU is not expected to have a material effect on our condensed consolidated financial statements.
LEGAL CONTINGENCIES
Refer to Note 6 within Item 1 for a discussion of our legal contingencies. Upon resolution of any of these uncertainties, we may incur charges in excess of presently established liabilities. While our liability in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and we may in the future incur material judgments or enter into material settlements of claims.
CERTAIN REGULATORY MATTERS
The U.S. Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India in July 2017, immediately prior to the closing of our acquisition of Claris Injectables Limited (Claris). FDA completed the inspection and subsequently issued a Warning Letter based on observations identified in the 2017 inspection (Claris Warning Letter).1 FDA re-inspected the facilities and issued a Form 483 on May 17, 2022. On September 1, 2022, FDA notified the company that the inspection had been classified as voluntary action indicated (VAI). Since the issuance of the Claris Warning Letter, we have implemented corrective and preventive actions to address FDA’s prior
observations and other items we identified and management has begun working with other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S.
1 Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htm
FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q includes forward-looking statements. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events. These forward-looking statements may include statements with respect to accounting estimates and assumptions, impacts of the COVID-19 pandemic and global economic conditions, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses, future regulatory filings and our R&D pipeline, strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, the impact of competition, future sales growth, business development activities (including the acquisitions of Cheetah, Seprafilm, certain outside of the U.S. (OUS) rights to Caelyx and Doxil, full U.S. and specific OUS rights to Transderm Scop, PerClot, Hillrom and certain rights to Zosyn in the U.S. and Canada), business optimization and portfolio rationalization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.
These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:
| • | demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with our ability to accurately predict changing customer preferences, which has led to and may continue to lead to increased inventory levels, and needs and advances in technology and the resulting impact on customer inventory levels and the impact of reduced hospital admission rates and elective surgery volumes), and the impact of those products on quality and patient safety concerns; |
| • | the continuity, availability and pricing of acceptable raw materials and component parts (and our ability to pass some or all of these costs on to our customers), and the related continuity of our manufacturing and distribution (including impacts from COVID-19) and those of our suppliers; | |||||||
| • | inability to create additional production capacity in a timely manner or the occurrence of other manufacturing, sterilization or supply difficulties (including as a result of natural disaster, public health crises and epidemics/pandemics, regulatory actions or otherwise); | |||||||
| • | product development risks, including satisfactory clinical performance and obtaining required regulatory approvals (including as a result of evolving regulatory requirements), the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle; |
| • | our ability to finance and develop new products or enhancements on commercially acceptable terms or at all; |
| • | the impact of global economic conditions (including, among other things, the ongoing war in Ukraine, the related economic sanctions being imposed globally in response to the conflict and potential trade wars and global inflationary pressures) and continuing public health crises, pandemics and epidemics, such as the ongoing COVID-19 pandemic, on us and our employees, customers and suppliers, including foreign governments in countries in which we operate; |
| • | our ability to identify business development, portfolio rationalization and growth opportunities and to successfully execute on these strategies (including the Hillrom acquisition and related integration and restructuring activities); |
| • | product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales, including the focus on evaluating product portfolios for the potential presence or formation of nitrosamines; |
| • | breaches or failures of our information technology systems or products, including by cyber-attack, data leakage, unauthorized access or theft (as a result of increased remote working arrangements or otherwise); |
| • | future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the SEC, DOJ or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities, including the continued delay in lifting the warning letter at our Ahmedabad facility; |
| • | failures with respect to our quality, compliance or ethics programs; |
| • | future actions of third parties, including third-party payers and our customers and distributors (including group purchasing organizations and formed integrated delivery networks), the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, the European Union’s General Data Protection Regulation and proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S. end stage renal disease market and demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures, which are difficult to estimate in advance); |
| • | the outcome of pending or future litigation, including the opioid litigation and ethylene oxide litigation or other claims; | |||||||
| • | failure to achieve our short- and long-term financial goals; |
| • | the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies; |
| • | global regulatory, trade and tax policies (including with respect to climate change and other sustainability matters); |
| • | the ability to protect or enforce our owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, trade secrets and know-how) or patents of third parties preventing or restricting our manufacture, sale or use of affected products or technology; |
| • | the impact of any goodwill or other intangible asset impairments on our operating results; |
| • | fluctuations in foreign exchange and interest rates; |
| • | any changes in law concerning the taxation of income (whether with respect to current or future tax reform), including income earned outside the United States and potential taxes associated with the Base Erosion and Anti-Abuse Tax or the Build Back Better framework; |
| • | actions by tax authorities in connection with ongoing tax audits; |
| • | loss of key employees, the occurrence of labor disruptions or the inability to identify and recruit new employees; |
| • | other factors identified elsewhere in this report and other filings with the SEC, including those factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, all of which are available on our website. |
Actual results may differ materially from those projected in the forward-looking statements. We do not undertake to update our forward-looking statements.
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