Baxter International Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Financial amounts are in U.S. dollars; comparisons are primarily with FY 2021.
Business context and reporting period
Baxter is a global medical technology company selling dialysis therapies, IV solutions and infusion products, pharmaceuticals, nutrition and surgical products, and connected-care and hospital equipment. It reported through Americas, EMEA, APAC and Hillrom segments. Hillrom was acquired in December 2021, so FY 2021 included only 18 days of Hillrom results, limiting direct year-over-year comparisons.
In January 2023, Baxter announced a proposed spinoff of Renal Care and Acute Therapies, a simplified operating model, and a review of strategic alternatives, including a potential sale, for BioPharma Solutions (BPS).
Key financial metrics
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net sales | $15.113 billion | $12.784 billion |
| Gross margin | $5.397 billion; 35.7% of sales | $5.105 billion; 39.9% |
| Operating income (loss) | $(1.943) billion | $1.710 billion |
| Net income (loss) attributable to Baxter stockholders | $(2.433) billion; diluted EPS $(4.83) | $1.284 billion; diluted EPS $2.53 |
| Cash from operating activities | $1.211 billion | $2.222 billion |
| Capital expenditures | $679 million in cash-flow disclosure | $743 million |
| Cash and cash equivalents at year-end | $1.718 billion | $2.951 billion |
| Total debt, including current maturities and finance leases | $16.636 billion | $17.660 billion |
Sales increased 18% reported and 23% at constant currency. The Hillrom acquisition contributed 21 percentage points to reported growth, while foreign exchange reduced growth by 5 points. U.S. sales were $7.223 billion, up 39%; international sales were $7.890 billion, up 4% reported and 12% at constant currency.
The reported gross margin fell 4.2 percentage points. Excluding the special items identified by management, it declined 0.3 percentage points, mainly due to raw-material inflation and higher supply-chain costs, partly offset by product mix and lower incentive compensation accruals. Operating cash flow declined by $1.011 billion, reflecting lower earnings, higher inventory, incentive payouts, and the timing of receivable collections and payable payments.
FY 2022 included $2.812 billion of goodwill impairment and $344 million of intangible-asset impairment charges. Management said special items reduced results by $4.2 billion, or $8.33 per diluted share. Other notable items included $395 million of net interest expense, up from $192 million, and a $(2.353) billion loss before tax. The effective tax rate was negative 2.9%, affected substantially by non-deductible goodwill impairment and valuation allowances.
Material changes versus FY 2021
- Sales growth was substantially affected by the full-year inclusion of Hillrom, compared with only 18 days of Hillrom sales in FY 2021.
- Hillrom-related goodwill and intangible impairments, triggered by reduced forecasts, component shortages, inflation and higher supply costs, were the primary unusual drivers of the FY 2022 net loss.
- Interest expense more than doubled following the debt-funded Hillrom acquisition. Baxter repaid $954 million of debt in 2022 and said it remained committed to a 2.75x net-leverage target.
- Reported sales declined in several legacy categories: Renal Care was down 4%, Pharmaceuticals 7%, Clinical Nutrition 3%, and Acute Therapies 10%. Medication Delivery was flat; Advanced Surgery increased 2%. Constant-currency results were better in several categories.
- Operating cash flow fell, while year-end cash declined by $1.233 billion. Total debt also declined, but near-term obligations remained material.
Guidance, outlook, risks and contingencies
- Strategic plans: Baxter targeted completion of the Renal Care and Acute Therapies spinoff in the first half of 2024, subject to board, regulatory, financing and other conditions. These categories generated $4.4 billion of 2022 sales, about 29% of consolidated sales. BPS generated $644 million, about 4%.
- Costs and capital allocation: Management expected significant separation and transaction costs during 2023 and the first quarter of 2024, with adverse effects on earnings and operating cash flow, and anticipated some post-transaction dis-synergies. It intended to maintain the dividend, avoid near-term share repurchases and prioritize debt reduction. Proceeds from a spinoff or BPS transaction were expected to support debt reduction, but completion and proceeds were not assured.
- Outlook: Management anticipated an approximately 21% U.S. GAAP effective tax rate for 2023. The filing text does not provide a clear consolidated revenue or EPS forecast for 2023.
- Operating risks: Persistent supply constraints, inflation, freight and labor costs, foreign-exchange movements, COVID-related demand volatility, hospital budget constraints, and pricing limits could pressure sales and margins. Baxter noted supply-related constraints on infusion pumps and said its new U.S. pump platform remained under FDA review.
- Debt and liquidity: Cash was $1.718 billion against $16.636 billion of total debt and finance-lease obligations. Contractual debt and finance-lease obligations included $1.404 billion due within one year and $4.182 billion due in 2024. Credit outlooks were negative at S&P and Fitch and stable at Moody’s; Fitch moved to rating watch negative in January 2023. Baxter reported compliance with financial covenants at year-end.
- Regulatory and legal matters: FDA classified a 2022 inspection of the Claris Ahmedabad facility as voluntary action indicated; a January 2023 reinspection resulted in a Form 483. Baxter also disclosed a DOJ investigative demand concerning Hillrom and False Claims Act and Anti-Kickback Statute compliance, as well as antitrust litigation brought by Linet and an ethylene-oxide exposure lawsuit. The filing does not provide a clear estimated loss range for certain contingencies.
- Controls and audit: Management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2022. The auditor identified Hillrom goodwill and trade-name impairment testing as critical audit matters, reflecting significant valuation assumptions.
Most important facts for investors to verify
- Progress, approvals, tax treatment, financing and expected costs of the proposed spinoff, and the outcome and proceeds, if any, from a BPS transaction.
- Underlying operating trends excluding impairments and acquisition effects, including whether Hillrom supply constraints and integration challenges improve.
- Debt repayment and leverage progress, upcoming maturities, credit-rating developments, and the ability to sustain the dividend while deleveraging.
- FDA review of the infusion pump platform, follow-up at the Claris facility, and developments in the DOJ, Linet and ethylene-oxide matters.
- Reconcile capital-expenditure disclosures: the cash-flow statement and MD&A report $679 million for 2022, while the segment-information table reports $688 million.