BAXTER INTERNATIONAL INC (BAX) FY 2022 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following commentary should be read in conjunction with the consolidated financial statements and accompanying notes. The discussion and analysis of our financial condition as of December 31, 2021 and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2021.

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EXECUTIVE OVERVIEW

Description of the Company and Business Segments

Baxter International Inc. is a global medical technology with approximately 60,000 employees worldwide who are engaged in the development, manufacture and sale of a broad range of products, digital health solutions and therapies used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and patients at home under physician supervision. Our global footprint and the critical nature of our products and services, which are sold in over 100 countries, play a key role in expanding access to healthcare in emerging and developed countries.

We manage our global operations based on four segments, consisting of the following geographic segments related to our legacy Baxter business: Americas, EMEA and APAC, and a global segment for our recently acquired Hillrom business. As discussed below under “Recently Announced Strategic Actions,” we are designing a new operating model intended to simplify and streamline our operations and we expect that our reportable segments will be changed to align with that new operating model when it is fully implemented.

Our Americas, EMEA and APAC segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. Our Hillrom segment provides digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices and advanced equipment for the surgical space.

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

Financial Results

Our global net sales totaled $15.1 billion in 2022, an increase of 18% over 2021 on a reported and 23% on a constant currency basis. International sales totaled $7.9 billion in 2022, an increase of 4% compared to 2021 on a reported basis and 12% on a constant currency basis. Sales in the United States totaled $7.2 billion in 2022, an increase of 39% compared to 2021. Refer to the Net Sales discussion in the Results of Operations section below for more information related to changes in net sales on a constant currency basis.

Net income (loss) attributable to Baxter stockholders totaled a loss of $2.4 billion, or $(4.83) per diluted share, in 2022. Net income (loss) in 2022 included special items which adversely impacted our results by $4.2 billion, or $8.33 per diluted share. Our special items, which included $3.2 billion of goodwill and intangible asset impairments in 2022, are discussed in the Results of Operations section below.

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

While we continue to face continuing global macroeconomic challenges, our financial position remains strong, with operating cash flows from continuing operations totaling $1.2 billion in 2022. We have continued to execute on our disciplined capital allocation framework, as discussed in the Business Strategy section in Item 1 of this Annual Report on Form 10-K, which is designed to optimize stockholder value creation through reinvestment in our businesses, dividends and share repurchases, as well as acquisitions and other business development initiatives and consistent with our previously stated commitment to achieve our net leverage targets.

Capital expenditures totaled $679 million in 2022 as we continue to invest across our businesses to support future growth, including additional investments in support of new and existing product capacity expansions. Our investments in capital expenditures in 2022 were focused on projects that improve production efficiency, invest in our quality systems and enhance manufacturing capabilities to support our business growth.

We also continued to return value to our stockholders. During 2022, we paid cash dividends to our stockholders totaling $573 million. Additionally, in 2022 we repurchased 0.5 million shares through cash repurchases pursuant to a Rule 10b5-1 repurchase plan. For information on our share repurchase plans, see Note 8 in Item 8 of this Annual Report on Form 10-K.

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Recently Announced Strategic Actions

In January 2023, we announced the following planned strategic actions that are intended to enhance our operational effectiveness, accelerate innovation and drive additional stockholder value: (a) a proposed spinoff of our Renal Care and Acute Therapies product categories into an independent publicly traded company focused on kidney care (the proposed spinoff), (b) our development of a new operating model to simplify our operations and (c) our pursuit of strategic alternatives (including a potential sale) for our BioPharma Solutions (BPS) product category.

This proposed spinoff is currently expected to be completed during the first half of 2024, approximately 12 to 18 months from the date of the related announcement. In 2022 we generated $4.4 billion of combined net sales from our Renal Care and Acute Therapies product categories, representing approximately 29% of our consolidated net sales. Additionally, in 2022 we generated $644 million of net sales from our BPS product category, representing approximately 4% of our consolidated net sales.

During 2023 and the first quarter of 2024, we expect to incur significant separation and transaction-related costs related to the proposed spinoff and our pursuit of strategic alternatives (including a potential sale) for our BPS product category, which will adversely impact our earnings and operating cash flows. Additionally, we expect to incur some amount of dis-synergies following those transactions due to the reduced size of our company and, as a result, we will need to undertake actions to ensure that our cost structure is appropriate to support our remaining businesses.

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

We are also designing a new operating model intended to simplify and streamline our operations and better align our manufacturing footprint and supply chain to our commercial activities. The new operating model will have significant impacts on our systems and processes across our entire company and we expect to have those broader operational changes, including our updated management reporting framework for the new operating model, fully implemented during the second half of 2023. At that time, we expect that our reportable segments will be changed to align with the new operating model.

FACTORS AFFECTING OUR RESULTS OF OPERATIONS

Supply Constraints and Global Economic Conditions

We have experienced significant challenges to our global supply chain in recent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, resulting from the pandemic and other exogenous factors including significant weather events, elevated inflation levels, disruptions to certain ports of call around the world, the war in Ukraine and other geopolitical events. Due to the nature of our products, which include dense consumable medical products such as IV fluids, and the geographic locations of our manufacturing facilities, which often require us to transport our products long distances, we may be more susceptible to increases in freight costs and other supply chain challenges than certain of our industry peers. We expect to experience some of these and other challenges related to our supply chain in future periods. These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for certain product categories (including those acquired in the Hillrom acquisition) due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future.

Our results of operations are also affected by macroeconomic conditions and levels of business confidence. The war in Ukraine and the sanctions and other measures being imposed in response to this conflict have increased the levels of economic and political uncertainty. In response, we continue to monitor the developing situation with respect to ongoing business in Russia and are working on appropriate contingency plans that will support our desire to serving existing, chronically ill patient populations while remaining compliant with all applicable U.S. and European Union sanctions and regulations. While Russia and Ukraine do not constitute a material portion of our business, a significant escalation or expansion of economic disruption or the conflict’s current scope could have an adverse effect on our business.

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In addition, the existence of inflation in the United States and in many of the countries where we conduct business has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, increased costs of labor, weakening exchange rates and other similar effects. We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses as well as negative impacts from weakening exchange rates, caused by the COVID-19 pandemic or as a result of general macroeconomic factors, and may not be able to pass these cost increases on to our customers in a timely manner or at all, which could have a material adverse impact on our profitability and results of operations. Inflation and general macroeconomic factors have caused certain of our customers to reduce or delay orders for our products and services and could cause them to do so in the future, which could have a material adverse impact on our sales and results of operations.

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 10 in Item 8 of this Annual Report on Form 10-K. Significant uncertainty remains regarding the duration and overall impact of the COVID-19 pandemic. Concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Omicron variants, subvariants and other virus mutations as well as vaccine distribution and hesitancy. The U.S. and other governments may continue existing measures or implement new restrictions and other requirements in the future (including moratoriums on elective procedures and mandatory quarantines and travel restrictions), resulting in higher levels of absenteeism, including at our manufacturing and distribution facilities. Due to the uncertainty caused by the pandemic (including whether hospital admissions, elective procedures and demand for certain of our products and services will return to pre-pandemic levels), our operating performance and financial results, particularly in the short term, may be subject to volatility.

We expect that the challenges caused by the pandemic as well as global economic conditions, among other factors, may continue to have an adverse effect on our business. For further discussion, refer to Item 1A of this Annual Report on Form 10-K.

Recent Business Combinations and Asset Acquisitions

Zosyn

On March 22, 2022, we entered into an agreement with a subsidiary of Pfizer Inc. to acquire the rights to Zosyn, a premixed frozen piperacillin-tazobactam product, in the U.S. and Canada. Zosyn is used for the treatment of intra-abdominal infections, nosocomial pneumonia, skin and skin structure infections, female pelvic infections and community-acquired pneumonia. Under the terms of the acquisition, we paid the acquisition price of $122 million and received specified intellectual property, including patent rights, in the first quarter of 2022 and will receive additional intellectual property, including the product rights to Zosyn, in the first quarter of 2023. Under the arrangement, we are entitled to receive profit sharing payments from sales of Zosyn until the product rights transfer to us in March 2023. Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for additional information regarding the agreement to acquire the rights to Zosyn.

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 whose products and services help enable earlier diagnosis and treatment, optimize surgical efficiency, and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. Hillrom made those outcomes possible through digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.

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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.

PerClot

On July 29, 2021, we acquired certain assets related to PerClot Polysaccharide Hemostatic System (PerClot), including distribution rights for the U.S. and specified territories outside of the U.S., from CryoLife, Inc. for an upfront purchase price of $25 million and the potential for additional cash consideration of up to $36 million, which had an acquisition-date fair value of $28 million, based upon regulatory and commercial milestones. PerClot is an absorbable powder hemostat indicated for use in surgical procedures, including cardiac, vascular, orthopedic, spinal, neurological, gynecological, ENT and trauma surgery as an adjunct hemostat when control of bleeding from capillary, venous, or arteriolar vessels by pressure, ligature, and other conventional means is either ineffective or impractical. Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisition of PerClot.

Transderm Scop

On March 31, 2021, we acquired the rights to Transderm Scop (TDS) for the U.S. and specified territories outside of the U.S. from subsidiaries of GlaxoSmithKline for an upfront purchase price of $60 million including the cost of acquired inventory and the potential for additional cash consideration of $30 million, which had an acquisition-date fair value of $24 million, based upon regulatory approval of a new contract manufacturer by a specified date. We previously sold this product under a distribution license to the U.S. institutional market. TDS is indicated for post-operative nausea and vomiting in the U.S. and motion sickness in European markets. Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisition of TDS.

Caelyx and Doxil

On February 17, 2021, we acquired the rights to Caelyx and Doxil, the branded versions of liposomal doxorubicin, from a subsidiary of Johnson & Johnson for specified territories outside of the U.S for approximately $325 million in cash. We previously acquired the U.S. rights to this product in 2019. Liposomal doxorubicin is a chemotherapy medicine used to treat various types of cancer. Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisition of Caelyx and Doxil.

RESULTS OF OPERATIONS

Special Items

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The following table provides a summary of our special items and the related impact by line item on our results for 2022 and 2021.

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Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is consistent with how management and our Board of Directors internally 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 results of operations for a period. Management believes that providing the separate impact of the above items on our results in accordance with U.S. GAAP may provide a more complete understanding of our operations and can facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

1Our results in 2022 included charges of $3.2 billion for goodwill and intangible asset impairments. Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for further information regarding the impairments.

2Our results in 2022 and 2021 were impacted by costs associated with our execution of programs to optimize our organization and cost structure. These actions included streamlining our international operations, rationalizing our manufacturing and distribution facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and canceling certain R&D programs. In 2022, restructuring charges include actions taken in connection with our integration of Hillrom, which we acquired in December 2021. Our results in 2022 and 2021 included business optimization charges of $225 million and $114 million, respectively. Refer to Note 11 in Item 8 of this Annual Report on Form 10-K for further information regarding these charges and related liabilities.

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

4Our results in 2022 included $213 million of acquisition and integration-related costs. Those costs included $93 million of integration-related costs and $159 million of incremental cost of sales from the fair value step-ups on acquired Hillrom inventory that was sold in 2022. We do not expect to incur significant incremental costs of sales from those inventory fair value step-ups beyond what was recognized in 2022. Other integration expenses in the current period included third party consulting costs related to our integration and related cost savings activities. Those acquisition and integration-related expenses related to Hillrom were partially offset by a $39 million benefit from changes in the estimated fair value of contingent consideration liabilities. Our results in 2021 included acquisition, integration and related financing expenses of $236 million. This included acquisition, integration and related financing expenses for our acquisition of Hillrom and the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S. These expenses were partially offset by benefits from changes in the estimated fair value of contingent consideration liabilities. In our Form 10-K for the year ended December 31, 2021, we previously included $4 million of in-process research and development (“IPR&D”) charges within this acquisition and integration-related costs special item. We updated our policy in the current year to no longer reflect IPR&D charges as a special item, therefore, the $236 million prior year amount above has been updated from the $240 million amount previously reported for comparability purposes. Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for further information regarding business development activities.

5Our results in 2022 and 2021 included $48 million and $42 million, respectively, of incremental costs to comply with the European Union’s medical device regulations for previously registered products, which primarily consist of contractor costs and other direct third-party costs. We consider the adoption of these regulations to be a significant one-time regulatory change and believe that the costs of initial compliance for previously registered products over the implementation period are not indicative of our core operating results.

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

7Our results in 2021 included charges of $31 million for investigation and related costs for matters associated with our previously announced investigation of foreign exchange gains and losses. Refer to Note 7 in Item 8 of this Annual Report on Form 10-K for further information regarding these charges.

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

9Our results in 2022 included a loss of $54 million under an arrangement to divest certain product rights for an amount that is less than our cost of those product rights, which was triggered by U.S. and European Union regulatory approvals of the related products. Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for further information about the related transactions.

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

11Our results in 2022 included a curtailment gain of $11 million related to an announced change for active non-bargaining participants in our U.S. Hillrom pension plan. Refer to Note 12 in Item 8 of this Annual Report on Form 10-K for further information regarding this curtailment gain.

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

13Our results in 2021 included a loss of $5 million on the early extinguishment of the $2.4 billion debt assumed as part of the Hillrom acquisition. Refer to Note 5 in Item 8 of this Annual Report on Form 10-K for further information.

14Our results in 2022 included a $25 million valuation allowance recorded to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to Swiss tax reform legislation enacted during 2019, which will be amortizable as a tax deduction ratably over tax years 2025 through 2029, to reflect our current estimate of its recoverability. Our results in 2021 included a $58 million income tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary and an $18 million income tax benefit related to a change in U.S. foreign tax credit regulations, partially offset by a $22 million income tax expense related to an unfavorable court ruling for an uncertain tax position.

15Reflected 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.

Net Sales

Our acquisition of Hillrom favorably impacted net sales by 21 percentage points for the year ended December 31, 2022, compared to the prior-year period. Foreign currency unfavorably impacted net sales by 5 percentage points for the year ended December 31, 2022, compared to the prior-year period, principally due to the strengthening of the U.S. dollar relative to the Euro, British Pound, Turkish Lira, Australian Dollar, Japanese Yen and Chinese Renminbi.

The comparisons presented at constant currency rates reflect current year local currency sales at the prior year’s foreign exchange rates, except for current year Hillrom sales which have not been adjusted to prior year rates as they only had 18 days of sales in the prior year period. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S. GAAP measure of change in net sales at actual currency rates, may provide a more complete

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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 in December 2021, we have added three new product categories: Patient Support Systems, Front Line Care and Surgical Solutions. Our product categories include the following:

•Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.

•Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices.

•Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.

•Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.

•Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.

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

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

•Patient Support Systems includes sales of our connected care solutions: devices, software, communications and integration technologies and smart beds.

•Front Line Care includes sales of our integrated patient monitoring and diagnostic technologies to help diagnose, treat and manage a wide variety of illness and diseases, including respiratory therapy, cardiology, vision screening and physical assessment.

•Surgical Solutions includes sales of our surgical video technologies, tables, lights, pendants, precision positioning devices and other accessories.

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

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

Renal Care net sales decreased 4% in 2022, as compared to the prior-year period. The decrease in 2022 was driven by a 6% negative impact from foreign exchange rate changes, as compared to the prior-year period, and lower in-center HD sales, partially offset by global patient growth in PD and $28 million of incremental revenue in the current year from a customer that did not meet its contractual minimum purchase requirements.

Medication Delivery net sales remained flat in 2022, as compared to the prior-year period. In the current year increased demand for IV administration sets and solutions, reflecting a recovery in hospital admission rates and surgical procedures and lower U.S. customer rebates, were offset by lower sales of infusion pumps, a 3% negative

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impact from foreign exchange rates as compared to the prior-year period and sales headwinds in China driven by COVID-related lockdowns. Supply chain constraints, including constraints related to the availability of semiconductor components and other components used in the production of our infusion pumps, and the fact that our new infusion pump platform for distribution in the U.S. continues to be subject to ongoing FDA review have adversely impacted sales of infusion pumps in the current year period.

Pharmaceuticals net sales decreased 7% in 2022, as compared to the prior-year period. The decrease in 2022 was driven by a 6% negative impact from foreign exchange rate changes, as compared to the prior-year period. Additionally, pharmaceuticals net sales were adversely impacted by increased competition from new market entrants and supply constraints impacting the production of certain molecules. Those items were partially offset by increased sales internationally for inhaled anesthesia products.

Clinical Nutrition net sales decreased 3% in 2022, as compared to the prior-year period. The decrease in 2022 was driven by a 7% negative impact from foreign exchange rate changes, as compared to the prior-year period, and lower sales of vitamins resulting from ongoing supply constraints. Those decreases were partially offset by growth in the U.S. for our PN therapies and related products, including our PN multi-chamber bags.

Advanced Surgery net sales increased 2% in 2022, as compared to the prior-year period. The increase in 2022 was driven by a continued recovery in surgical procedures, particularly in EMEA, and benefits from competitor supply constraints, partially offset by a 6% negative impact form foreign exchange rate changes, as compared to the prior-year period.

Acute Therapies net sales decreased 10% in 2022, as compared to the prior-year period. The decrease in 2022 was driven by lower COVID-related demand for our CRRT systems and a 4% negative impact from foreign exchange rate changes, as compared to the prior-year period.

BioPharma Solutions net sales decreased 4% in 2022, as compared to the prior-year period. The decrease includes a 6% negative impact from foreign exchange rates, as compared to the prior-year period. The decrease was also driven by lower sales from manufacturing services and supply packaging related to the production of COVID-19 vaccines on behalf of multiple pharmaceutical companies, reflecting a challenging comparison against a strong prior-year period.

The Patient Support Systems, Front Line Care and Surgical Solutions product categories were added in connection with our acquisition of Hillrom in December 2021. Net sales for those product categories have been adversely impacted in the current year by ongoing supply chain constraints, particularly related to components used in our Front Line Care product offerings, hospital budget constraints and by delays in product installations for Patient Support Systems and Surgical Solutions resulting from limitations on hospital access due, in part, to staffing challenges being experienced by those customers. The prior year net sales amounts for those product categories reflect sales over the 18-day period from the acquisition date through year-end.

Gross Margin and Expense Ratios

Gross Margin

The gross margin ratio was 35.7% and 39.9% in 2022 and 2021, respectively. The special items identified above had an unfavorable impact of 7.3 and 3.4 percentage points on the gross margin ratio in 2022 and 2021, respectively. Refer to the Special Items section above for additional detail.

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

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SG&A

The SG&A expenses ratio was 25.7% and 22.4% in 2022 and 2021, respectively. The special items identified above had an unfavorable impact of 3.8 and 2.0 percentage points on the SG&A expenses ratio in 2022 and 2021, respectively. Refer to the Special Items section above for additional detail.

Excluding the impact of the special items, the SG&A expenses ratio increased 1.5 percentage points in 2022 primarily due to the acquisition of Hillrom and increased outbound freight costs, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

R&D

The R&D expenses ratio was 4.0% and 4.2% in 2022 and 2021, respectively. The special items identified above did not impact the R&D expenses ratio in 2022 or 2021. Refer to the Special Items section above for additional detail.

Excluding the impact of the special items, the R&D expenses ratio remained relatively flat with the increase in total spend primarily driven by the Hillrom acquisition, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

Business Optimization Items

In recent years, we have undertaken actions to transform our cost structure and enhance our operational efficiency. These efforts have included restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. From the commencement of our business optimization actions in the second half of 2015 through December 31, 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 $46 million through the completion of the initiatives that are currently underway. We continue to pursue cost savings initiatives, including those related to our integration of Hillrom, and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods. For example, we expect to incur additional restructuring charges during 2023 related to our implementation of a new operating model intended to simply and streamline our operations (including our manufacturing footprint), as discussed above under "Recently Announced Strategic Actions." Refer to Note 11 in Item 8 of this Annual Report on Form 10-K for additional information regarding our business optimization programs.

Goodwill Impairments

We assess goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize a goodwill impairment charge for the amount by which a reporting unit's carrying amount exceeds its fair value.

As described above, we acquired Hillrom on December 13, 2021 and recognized $6.8 billion of goodwill and $6.0 billion of other intangible assets, including $1.9 billion of indefinite-lived intangible assets, in connection with that acquisition. Our Hillrom segment includes the following three reporting units: Patient Support Systems, Front Line Care and Surgical Solutions. During the third quarter of 2022, we performed trigger-based impairment tests of the goodwill of each of those three reporting units, as well as the indefinite-lived intangible assets, consisting primarily of trade names, that we acquired in connection with the Hillrom acquisition. We performed those tests as of September 30, 2022 due to (a) current macroeconomic conditions, including the rising interest rate environment and broad declines in equity valuations, and (b) reduced earnings forecasts for our three Hillrom reporting units, driven primarily by current shortages of certain component parts used in our products, raw materials inflation and increased supply chain costs. Those impairment tests resulted in total pre-tax goodwill impairment charges of $2.8 billion in the third quarter of 2022 relating to our Patient Support Systems, Front Line Care and Surgical Solutions reporting units. In connection with our annual goodwill impairment assessment in the fourth quarter of 2022, we performed quantitative impairment tests for all our reporting units and recorded an additional $27 million goodwill impairment related to our Surgical Solutions reporting unit. No goodwill impairments were recorded for our

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

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

Other Operating Expense (Income), Net

Other operating expense (income), net was an expense of $36 million and income of $6 million in 2022 and 2021, respectively. In 2022 we recognized a loss of $54 million under an arrangement to divest certain product rights for an amount that is less than our cost of those product rights, which was triggered by U.S. and European Union regulatory approvals of the related products. Refer to Note 2 in Item 8 of this annual report on Form 10-K for further information about the related transactions. Additionally, we recognized a loss of $21 million related to the deconsolidation of a foreign subsidiary, including the derecognition of a related noncontrolling interest, upon its liquidation in December 2022 that was completed in connection with our legal entity rationalization activities. Those losses were partially offset by gains of $39 million from net decreases in the estimated fair values of contingent consideration liabilities. In 2021 we recognized gains of $6 million related to net decreases in the estimated fair value of contingent consideration liabilities.

Interest Expense, Net

Interest expense, net was $395 million and $192 million in 2022 and 2021, respectively. The increase in 2022 was primarily driven by higher average debt outstanding in connection with the Hillrom acquisition, partially offset by acquisition bridge facility commitment fees recognized in 2021 and higher interest income in 2022. Refer to Note 5 in Item 8 of this Annual Report on Form 10-K for a summary of the components of interest expense, net for 2022 and 2021.

Other (Income) Expense, Net

Other (income) expense, net was an expense of $15 million and $41 million in 2022 and 2021, respectively. The net expense in 2022 was primarily due to the reclassification of a cumulative translation loss from accumulated other comprehensive income (loss) to earnings due to the substantial liquidation of our operations in Argentina, partially offset by foreign exchange gains, pension and other postretirement (OPEB) benefits, a pension curtailment gain and net increases in the fair value of marketable equity securities. The net expense in 2021 was primarily driven by foreign exchange net losses, pension and OPEB expenses and net decreases in the fair values of marketable equity securities.

Income Taxes

The effective income tax rate was (2.9)% in 2022 and 12.3% in 2021. The special items identified above had an unfavorable impact of 22.8 percentage points and a favorable impact of 4.5 percentage points on the effective income tax rate in 2022 and 2021, respectively. Refer to the Special Items section above for additional detail. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits or shortfalls on stock compensation awards.

For the twelve months ended December 31, 2022, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to non-deductible impairments of goodwill acquired in the Hillrom acquisition and valuation allowance increases, including a $25 million increase related to deferred tax assets from a tax basis step-up that arose from Swiss tax reform legislation in 2019. Those items were partially offset by a $47 million net tax benefit, after related valuation allowances, from notional interest deductions received by certain wholly-owned foreign subsidiaries that have financed their operations with equity capital.

For the twelve months ended December 31, 2021, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to favorable geographic earnings mix, including a $50 million net tax benefit, after related valuation allowances, from notional interest deductions, a $58 million tax benefit related to a

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tax-deductible foreign statutory loss on an investment in a foreign subsidiary, a tax benefit related to a change in U.S. foreign tax credit regulations and excess tax benefits on stock compensation awards, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.

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

We anticipate that our effective income tax rate, calculated in accordance with U.S. GAAP, will be approximately 21% in 2023.  This rate may be further impacted by a number of factors including discrete items, such as tax windfalls or deficiencies attributable to stock compensation awards, audit developments or legislative changes, as well as non-deductible or non-taxable items that may arise in the future and our geographic earnings mix.

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

Net income (loss) was a loss of $2.4 billion in 2022 and income of $1.3 billion in 2021. Diluted earnings (loss) per share was $(4.83) in 2022 and $2.53 in 2021. The significant factors and events causing the net changes from 2021 to 2022, including the impairment of $2.8 billion of goodwill related to the Hillrom acquisition, are discussed above. Additionally, earnings (loss) per share was positively impacted by the repurchase of 0.5 million shares in 2022 and 7.3 million shares in 2021 through Rule 10b5-1 purchase plans. Refer to Note 8 in Item 8 of this Annual Report on Form 10-K for further information regarding our stock repurchases.

Segment results

We manage our global operations based on four segments, consisting of the following geographic segments related to our legacy Baxter business: Americas, EMEA and APAC, and a 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. Refer to Note 17 in Item 8 of this Annual Report on Form 10-K for additional details regarding our segments.

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

Americas

Segment net sales and operating income in 2022 were $6.7 billion and $2.4 billion, respectively. Segment net sales and operating income in 2021 were $6.7 billion and $2.6 billion, respectively. The decrease in operating income in 2022 was due to raw materials inflation, higher supply chain costs and lower sales in our Pharmaceuticals, Acute Therapies and BioPharma Solutions product categories, partially offset by higher sales in our Renal Care, Medication Delivery, Clinical Nutrition and Advanced Surgery product categories.

EMEA

Segment net sales and operating income in 2022 were $2.9 billion and $607 million, respectively. Segment net sales and operating income in 2021 were $3.1 billion and $632 million, respectively. The decrease in operating income in 2022 was primarily due to an unfavorable impact of foreign exchange rates on results as compared to the prior-year period, lower sales in our Renal Care, Acute Therapies, Clinical Nutrition, Medication Delivery and Pharmaceuticals product categories and higher supply chain costs, partially offset by lower operating expenses and

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

APAC

Segment net sales and operating income in 2022 were $2.6 billion and $623 million, respectively. Segment net sales and operating income in 2021 were $2.8 billion and $623 million, respectively. Operating income in 2022 remained flat due to lower operating expenses and an improved gross margin, driven by a favorable product mix, offset by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period, higher supply chain costs and sales headwinds in China driven by COVID-related lockdowns.

Hillrom

Segment net sales and operating income for 2022 were $2.9 billion and $730 million, respectively. Segment net sales and operating loss for 2021 were $212 million and $80 million, respectively. The increase in net sales and operating income were due to our acquisition of Hillrom in December 2021. The prior year amounts reflect activity over the 18-day period from the acquisition date through year-end.

Corporate and Other

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include corporate headquarter costs, certain R&D costs, manufacturing variances and centrally managed supply chain costs, product category support costs, stock compensation expense, certain employee benefit plan costs, certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and goodwill and intangible asset impairments). For the period from our acquisition of Hillrom on December 13, 2021 through December 31, 2021, we previously included all costs incurred by the Hillrom business within that segment, including $127 million related to the types of costs described in the preceding sentence that are maintained at Corporate for our legacy Baxter segments. In connection with our ongoing integration activities, beginning in the first quarter of 2022, we have updated the measure of profitability for our Hillrom segment by excluding such unallocated costs, consistent with our legacy Baxter segments.

The Corporate operating loss in 2022 was higher than 2021 primarily due to goodwill and intangible asset impairments, higher intangible asset amortization expense, acquisition and integration-related costs, business optimization charges and increased manufacturing variances and centrally managed supply chain costs, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows from Operations — Continuing Operations

In 2022 and 2021, cash provided by operating activities was $1.2 billion and $2.2 billion, respectively.  Operating cash flows decreased in 2022 primarily due to a decrease in our net income in 2022, increases in inventory levels and higher annual payouts under our employee incentive compensation plans in the current-year period, which were based on our 2021 results, compared to payouts made in the prior-year period, which were based on our 2020 results. Operating cash flows were also adversely impacted in the current year by the timing of accounts receivable collections and accounts payable payments in the fourth quarter of 2022.

Cash Flows from Investing Activities

In 2022, cash used for investing activities included payments for acquisitions and investments of $263 million, primarily related to our payment to acquire the rights to Zosyn, and capital expenditures of $679 million. In 2021,

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

Cash Flows from Financing Activities

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

In 2021, cash generated from financing activities included $11.8 billion to fund the consideration for the Hillrom acquisition, repay certain indebtedness of Hillrom, and to pay fees and expenses related to the foregoing. In September 2021, we entered into a term loan credit agreement (the Term Loan Credit Agreement), pursuant to which a syndicate of financial institutions has committed to provide us with a senior unsecured term loan facility in an aggregate principal amount of $4.0 billion (the Term Loan Facility), consisting of a $2.0 billion three-year term loan and a $2.0 billion five-year term loan. In December 2021, we issued $800 million senior notes due in 2023, $1.4 billion senior notes due in 2024, $1.45 billion senior notes due in 2027, $1.25 billion senior notes due in 2028, $1.55 billion senior notes due in 2032, $750 million senior notes due in 2051, $300 million floating rate senior notes due in 2023 and $300 million floating rate senior notes due in 2024. We also had net proceeds from commercial paper borrowings of $299 million and repaid debt obligations of $2.8 billion, including $2.4 billion of debt that was assumed in the Hillrom acquisition. Financing activities in 2021 also included payments for treasury stock repurchases of $600 million, dividend payments of $530 million and receipts from stock issued under employee benefit plans of $187 million.

As authorized by the Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. We paid $32 million in cash to repurchase approximately 0.5 million shares under this authority pursuant to a Rule 10b5-1 plan in 2022 and had $1.3 billion remaining available under this authorization as of December 31, 2022. We do not intend to make any share repurchases in the near term as we focus on achieving our 2.75x net leverage commitment.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of December 31, 2022, our U.S. dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of $2.5 billion and €200 million, respectively. Each of the facilities matures in 2026. The facilities enable us to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net leverage ratio. Fees under the credit facilities are 0.125% annually as of December 31, 2022 and are based on our credit ratings and the total capacity of the facility. Fees under these credit facilities were 0.09% annually as of December 31, 2021 and were based on our credit ratings and the total capacity of the facility. There were no borrowings under these credit facilities as of December 31, 2022 or December 31, 2021. Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings.

In the third quarter of 2022, we amended the credit agreement governing our U.S. dollar-denominated revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to delay the commencement of our net leverage ratio covenant step-down schedule until June 30, 2024. As of December 31, 2022, we were in compliance with the financial covenants in these agreements. Based on our covenant calculations as of December 31, 2022, we have capacity to draw approximately $2.1 billion under our credit facilities, less outstanding commercial paper borrowings, which were $299 million at year-end. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by the institution’s respective commitment. Additionally, a deterioration in our financial performance may further reduce our ability to draw on our credit facilities.

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

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Access to Capital and Credit Ratings

We intend to fund short-term and long-term obligations as they mature through cash on hand and future cash flows from operations or by issuing additional debt. We had $1.7 billion of cash and cash equivalents as of December 31, 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 December 31, 2022, we had approximately $16.6 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt. Subject to market conditions and our investment grade targets, we regularly evaluate opportunities with respect to our capital structure.

Our ability to generate cash flows from operations, issue debt, including commercial paper, or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives and reduce our post-acquisition debt levels as we take actions consistent with our capital allocation priorities.

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

Our senior debt credit ratings outlook was changed from stable to negative by two of the rating agencies during the third quarter of 2022. In January 2023, Fitch further revised our senior debt credit rating outlook from negative to rating watch negative.

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 EURIBOR-based rates. A discontinuation would require this arrangement to be modified in order to replace EURIBOR with an alternative reference interest rate, which could impact our cost of funds. That credit facility agreement includes provisions related to the determination of a successor rate.

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Contractual Obligations

As of December 31, 2022, we had contractual obligations, excluding accounts payable and accrued expenses and other current liabilities, payable or maturing in the following periods.

1.Interest payments on debt and finance lease obligations are calculated for future periods using interest rates in effect at the end of 2022. Certain of these projected interest payments may differ in the future based on foreign currency fluctuations or other factors or events. The projected interest payments only pertain to obligations and agreements outstanding at December 31, 2022. Refer to Note 5 and Note 6, respectively, in Item 8 of this Annual Report on Form 10-K for further discussion regarding our debt instruments outstanding and finance lease obligations at December 31, 2022.

2.The primary components of other non-current liabilities in our consolidated balance sheet as of December 31, 2022 are pension and other postretirement benefits, deferred tax liabilities, long-term tax liabilities, and litigation and environmental reserves. We projected the timing of the related future cash payments based on contractual maturity dates (where applicable) and estimates of the timing of payments (for liabilities with no contractual maturity dates). The actual timing of payments could differ from our estimates.

We contributed $48 million and $73 million to our defined benefit pension plans in 2022 and 2021, respectively. The timing of funding in future periods is uncertain and is dependent on future movements in interest rates, investment returns, changes in laws and regulations, and other variables. Therefore, the table above excludes cash outflows related to our pension plans. The amount included within other non-current liabilities (and excluded from the table above) related to our pension plan liabilities was $737 million as of December 31, 2022. In 2023, we have no obligation to fund our principal plans in the United States and we expect to make contributions of at least $43 million to our foreign pension plans. Additionally, we have excluded long-term tax liabilities, which include liabilities for unrecognized tax positions, and deferred tax liabilities from the table above because we are unable to estimate the timing of the related cash outflows. The amounts of long-term tax liabilities and deferred tax liabilities included within other non-current liabilities (and excluded from the table above) were $64 million and $698 million, respectively, as of December 31, 2022.

3.Includes our significant contractual unconditional purchase obligations. For cancellable agreements, any penalty due upon cancellation is included. These commitments do not exceed our projected requirements and are in the normal course of business. Examples include firm commitments for raw material and component part purchases, utility agreements and service contracts.

Off-Balance Sheet Arrangements

We periodically enter into off-balance sheet arrangements. Certain contingencies arise in the normal course of business and are not recorded in the consolidated balance sheets in accordance with U.S. GAAP (such as contingent joint development and commercialization arrangement payments). Also, upon resolution of uncertainties, we may incur charges in excess of presently established liabilities for certain matters (such as contractual indemnifications). For a discussion of our significant off-balance sheet arrangements, refer to Note 15 in Item 8 of this Annual Report on Form 10-K for information regarding receivable transactions, and Note 2 and Note 7 in Item 8 of this Annual Report on Form 10-K for information regarding joint development and commercialization arrangements, indemnifications and legal contingencies.

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FINANCIAL INSTRUMENT MARKET RISK

We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. Our hedging policy attempts to manage these risks to an acceptable level based on our judgment of the appropriate trade-off between risk, opportunity and costs. Refer to Note 15 in Item 8 of this Annual Report on Form 10-K for further information regarding our financial instruments and hedging strategies.

Currency Risk

We are primarily exposed to foreign exchange risk with respect to revenues generated outside of the United States denominated in the Euro, British Pound, Chinese Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Turkish Lira, Indian Rupee and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative financial instruments to further reduce the net exposure to foreign exchange, however these instruments may be unavailable or inefficient in emerging or volatile markets. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and stockholders’ equity volatility relating to foreign exchange. However, we don't hedge our entire foreign exchange exposure and are still subject to earnings and stockholders' equity volatility relating to foreign exchange risk. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.

We use forwards to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities denominated in foreign currencies. The maximum term over which we have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions as of December 31, 2022 is 12 months. We also enter into derivative instruments to hedge foreign exchange risk on certain intra-company and third-party receivables and payables and debt denominated in foreign currencies.

As part of our risk-management program, we perform sensitivity analyses to assess potential changes in the fair value of our foreign exchange instruments relating to hypothetical and reasonably possible near-term movements in foreign exchange rates.

A sensitivity analysis of changes in the fair value of foreign exchange contracts outstanding as of December 31, 2022, while not predictive in nature, indicated that if the U.S. Dollar uniformly weakened by 10% against all currencies, the net pre-tax asset balance of $2 million with respect to those contracts would change by $68 million. A similar analysis performed with respect to contracts outstanding as of December 31, 2021 indicated that, on a pre-tax basis, the net asset balance of $3 million would change by $34 million.

The sensitivity analysis model recalculates the fair value of the foreign exchange contracts outstanding as of December 31, 2022 by replacing the actual exchange rates as of December 31, 2022 with exchange rates that are 10% weaker compared to the actual exchange rates for each applicable currency. All other factors are held constant. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

In February 2022, the three-year cumulative inflation rate in Turkey exceeded 100 percent. As a result, on April 1, 2022, we began reporting the results of our subsidiary in that jurisdiction using highly inflationary accounting, which requires that the functional currency of the entity be changed to the reporting currency of its parent. As of December 31, 2022, our subsidiary in Turkey had net monetary assets of $33 million.

Interest Rate Risk

We are also exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates. Our policy is to manage interest costs using the mix of fixed- and floating-rate debt that we believe is appropriate at that time. To manage this mix in a cost-efficient manner, we periodically enter into interest rate swaps in which we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. We also periodically use forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of term debt. As of December 31, 2022, there were no interest rate derivative contracts outstanding and we had approximately $3.9 billion of outstanding floating rate debt and $299 million of commercial

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

CHANGES IN ACCOUNTING STANDARDS

Refer to Note 1 in Item 8 of this Annual Report on Form 10-K for information on changes in accounting standards.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sales Restrictions, which (1) clarifies the guidance in Topic 820 on the fair value measurement of an equity security that is subject to contractual restrictions that prohibit the sale of an equity security and (2) requires specific disclosures related to such an equity security. The standard is effective for our financial statements beginning in 2024. The impact of the adoption of this ASU is not expected to have a material effect on our consolidated financial statements.

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 in Item 8 of this Annual Report on Form 10-K. 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. Actual results that differ from our estimates could have an unfavorable effect on our results of operations and financial position. The following is a summary of accounting policies that we consider critical to the consolidated financial statements.

Revenue Recognition and Related Provisions and Allowances

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration primarily related to rebates and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. Our estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration included in the net sales price is limited to the amount that is probable not to result in a significant reversal in the amount of the cumulative revenue recognized in a future period. Additionally, our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately and determining the allocation of the transaction price may require significant judgment.

Pension and OPEB Plans

We provide pension and other postretirement benefits to certain of our employees. The service component of employee benefit expenses is reported in the same line items in the consolidated income statements as the applicable employee’s compensation expense. All other components of these employee benefit expenses are reported in other (income) expense, net in our consolidated statements of income (loss). The valuation of the funded status and net periodic benefit cost for the plans is calculated using actuarial assumptions. These assumptions are reviewed annually and revised if appropriate. The significant assumptions include the following:

•interest rates used to discount pension and OPEB plan liabilities;

•the long-term rate of return on pension plan assets;

•rates of increases in employee compensation (used in estimating liabilities);

•anticipated future healthcare trend rates (used in estimating the OPEB plan liability); and

•other assumptions involving demographic factors such as retirement, mortality and turnover (used in estimating liabilities).

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Selecting assumptions involves an analysis of both short-term and long-term historical trends and known economic and market conditions at the time of the valuation (also called the measurement date). The use of different assumptions would result in different measures of the funded status and net cost. Actual results in the future could differ from expected results.

Our key assumptions are listed in Note 12 in Item 8 of this Annual Report on Form 10-K. The most critical assumptions relate to the plans covering U.S. and Puerto Rico employees, because these plans are the most significant to our consolidated financial statements.

Discount Rate Assumption

Effective for the December 31, 2022 measurement date, we utilized discount rates of 5.55% and 5.46% to measure our benefit obligations for our most significant U.S. and Puerto Rico pension plans and OPEB plan, respectively. We used a broad population of approximately 200 Aa-rated corporate bonds as of December 31, 2022 to determine the discount rate assumption. All bonds were denominated in U.S. dollars, with a minimum amount outstanding of $50 million. This population of bonds was narrowed from a broader universe of approximately 700 Moody’s Aa rated, non-callable (or callable with make-whole provisions) bonds by eliminating the top 10th percentile and bottom 40th percentile to adjust for any pricing anomalies and to represent the bonds we would most likely select if we were to actually annuitize our pension and OPEB plan liabilities. This portfolio of bonds was used to generate a yield curve and associated spot rate curve to discount the projected benefit payments for the U.S. and Puerto Rico plans. The discount rate is the single level rate that produces the same result as the spot rate curve.

For plans in Canada, Japan, the United Kingdom and other European countries, we use a method essentially the same as that described for the U.S. and Puerto Rico plans. For our other international plans, the discount rate is generally determined by reviewing country- and region-specific government and corporate bond interest rates.

To understand the impact of changes in discount rates on pension and OPEB plan cost, we perform a sensitivity analysis. Holding all other assumptions constant, for each 50 basis point (i.e., one-half of one percent) increase in the discount rate, global pre-tax pension and OPEB plan cost would decrease by approximately $25 million, and for each 50 basis point decrease in the discount rate, global pre-tax pension and OPEB plan cost would increase by approximately $35 million.

Return on Plan Assets Assumption

In measuring the net periodic cost for 2022, we used a long-term expected rate of return of 5.00% for our most significant pension plans covering U.S. and Puerto Rico employees. This assumption will increase to 6.43% in 2023. This assumption is not applicable to our OPEB plan because it is not funded.

We establish the long-term asset return assumption based on a review of historical compound average asset returns, both company-specific and relating to the broad market (based on our asset allocation), as well as an analysis of current market and economic information and future expectations. The current asset return assumption is supported by historical market experience for both our actual and targeted asset allocation. In calculating net pension cost, the expected return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. The difference between this expected return and the actual return on plan assets is a component of the total net unrecognized gain or loss and is subject to amortization in the future.

To understand the impact of changes in the expected asset return assumption on net cost, we perform a sensitivity analysis. Holding all other assumptions constant, for each 50 basis point increase (decrease) in the asset return assumption, global pre-tax pension plan cost would decrease (increase) by approximately $17 million.

Other Assumptions

For the U.S. and Puerto Rico plans, we used the Pri-2012 combined mortality table with improvements projected using the MP-2021 projection scale adjusted to a long-term improvement of 0.8% as of December 31, 2022. For all other pension plans, we utilized country- and region-specific mortality tables to calculate the plans’ benefit obligations. We periodically analyze and update our assumptions concerning demographic factors such as retirement, mortality and turnover, considering historical experience as well as anticipated future trends.

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The assumptions relating to employee compensation increases and future healthcare costs are based on historical experience, market trends, and anticipated future company actions.

Deferred Tax Asset Valuation Allowances and Reserves for Uncertain Tax Positions

We maintain valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The realizability assessments made at a given balance sheet date are subject to change in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if we take operational or tax planning actions that could impact the future taxable earnings of a subsidiary.

In the normal course of business, we are audited by federal, state and foreign tax authorities, and are periodically challenged regarding the amount of taxes due. These challenges relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. We believe our tax positions comply with applicable tax law and we intend to defend our positions. In evaluating the exposure associated with various tax filing positions, we record reserves for uncertain tax positions in accordance with U.S. GAAP based on the technical support for the positions, our past audit experience with similar situations, and potential interest and penalties related to the matters. Our results of operations and effective tax rate in a given period could be impacted if, upon final resolution with taxing authorities, we prevail in positions for which reserves have been established, or we are required to pay amounts in excess of established reserves.

Realization of the U.S. and foreign operating loss and tax credit carryforwards depends on generating sufficient future earnings. A valuation allowance of $704 million and $401 million was recognized as of December 31, 2022 and 2021, respectively, to reduce the deferred tax assets associated with net operating loss and tax credit carryforwards because we do not believe it is more likely than not that these assets will be fully realized prior to expiration. After evaluating relevant U.S. tax laws, any elections or other opportunities that may be available, and the future expiration of certain U.S. tax provisions that will impact the utilization of our U.S. foreign tax credit carryforwards, management expects to be able to realize some, but not all, of the U.S. foreign tax credit deferred tax assets up to its overall domestic loss (ODL) balance plus other recurring and non-recurring foreign inclusions. Therefore, a valuation allowance of $119 million and $98 million was recognized with respect to the foreign tax credit carryforwards as of December 31, 2022 and 2021, respectively. We will continue to evaluate the need for additional valuation allowances and, as circumstances change, the valuation allowance may change.

Valuation of Goodwill and Intangible Assets

Goodwill is initially measured as the excess of the purchase price over the fair value (or other measurement attribute required by U.S. GAAP) of acquired assets and liabilities in a business combination. Goodwill is not amortized but is subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess goodwill for impairment by initially performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not required to be performed. If we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform a quantitative goodwill impairment test. In the quantitative impairment test, we calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the amount that the reporting unit’s carrying amount, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. In a quantitative goodwill impairment test, the fair values of our reporting units are generally determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach) based on the guideline public company method. Significant assumptions used in the determination reporting unit fair value measurements generally include forecasted cash flows, discount rates, terminal growth rates and earnings multiples. The discounted cash flow models used to determine the fair values of our reporting units during 2022 reflected our most recent cash flow projections, discount rates ranging from 9% to 10% and terminal growth rates ranging from 2% to 3%. Each of these inputs can significantly affect the fair values of our reporting units. During 2022, we recognized $2.8 billion of goodwill impairment charges related to the three reporting units within our

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

We record acquired intangible assets at fair value in business combinations and at cost in asset acquisitions. Valuations are generally completed for intangible assets acquired in business acquisitions using a discounted cash flow analysis (an income approach) and reflect our judgements about the assumptions that market participants would use in pricing the assets. The most significant estimates and assumptions inherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, the stage in completion (for acquired in-process R&D), royalty rates, terminal growth rates, contributory asset charges and customer attrition rates (for customer-related intangibles). The relief from royalty models used in the determination of the fair values of our trade name intangible assets during 2022 reflected our most recent revenue projections, a discount rate of 9.5%, royalty rates ranging from 3% to 5% and terminal growth rates ranging from 2% to 3%. Each of these factors and assumptions can significantly affect the value of the intangible asset.

During the third quarter of 2022, we recognized pre-tax impairment charges of $332 million to reduce the carrying amounts of certain indefinite-lived intangible assets, which primarily related to the Hillrom and Welch Allyn trade names acquired in the Hillrom acquisition, to their estimated fair values. Additionally, during 2022 and 2020 we recognized pre-tax impairment charges of $12 million and $17 million, respectively, related to developed technology intangible assets due to declines in market expectations for the related products. See Note 4, Goodwill and Other Intangible Assets, Net in Item 8 of this Annual Report on Form 10-K for further information about those impairments.

Acquired in-process R&D (IPR&D) is the value assigned to acquired technology or products under development which have not received regulatory approval and have no alternative future use. IPR&D acquired in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the R&D project is abandoned, the indefinite-lived intangible asset is charged to expense.

IPR&D acquired in transactions that are not business combinations is expensed immediately. For such transactions, payments made to third parties on or after regulatory approval are capitalized as intangible assets and amortized over the remaining useful life of the related asset.

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

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

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). On January 19, 2023, FDA arrived to re-inspect the facilities and issued a Form 483 on January 27, 2023. Since the issuance of the Claris Warning Letter, we have implemented corrective and preventive actions to address FDA's prior observations and other items we identified and management has begun working with other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S.

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

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

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FORWARD-LOOKING INFORMATION

This annual report 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 plans to implement a simplified commercial and manufacturing footprint, the proposed spinoff of our Renal Care and Acute Therapies product categories, review of strategic alternatives for our BPS product category and other potential portfolio management activities we may undertake in the future, accounting estimates and assumptions, global economic conditions and impacts of the COVID-19 pandemic, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses, future regulatory filings and our R&D pipeline, sales from new product offerings, credit exposure to foreign governments, the adequacy of cash flows and credit facilities, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, the impact of inflation on our business, the impact of competition, future sales growth, business development activities, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the adequacy of tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.

These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances. 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:

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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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