Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2021 for management's discussion and analysis of our financial condition and results of operations. The following is management's discussion and analysis of our financial condition and results of operations for the three and six months endedJune 30, 2022 and 2021. RESULTS OF OPERATIONS Net income attributable to Baxter stockholders for the three and six months endedJune 30, 2022 totaled$252 million , or$0.50 per diluted share, and$323 million , or$0.64 per diluted share, compared to$298 million , or$0.59 per diluted share, and$596 million , or$1.17 per diluted share, for the three and six months endedJune 30, 2021 . The first quarter of 2022 was the first full quarter reflecting Hillrom results of operations after theDecember 13, 2021 acquisition. Net income for the three and six months endedJune 30, 2022 included special items which decreased net income by$191 million and$591 million , respectively, or$0.37 and$1.16 per diluted share, respectively, as further discussed below. Net income for the three and six months endedJune 30, 2021 included special items which decreased net income by$111 million and$199 million , respectively, or$0.21 and$0.39 per diluted share, respectively, as further discussed below. 31 --------------------------------------------------------------------------------
Special Items
The following table provides a summary of our special items and the related
impact by line item on our results for the three and six months ended
Three months ended Six months ended June 30, June 30, (in millions) 2022 2021 2022 2021 Gross Margin Intangible asset amortization expense$ (112) $
(67)
Business optimization items1 (6) (10) (8) (31) Acquisition and integration expenses2 (9) - (173) - European medical devices regulation3 (12) (11) (23) (19) Product-related items5 - - (23) - Total Special Items$ (139) $ (88) $ (461) $ (181) Impact on Gross Margin Ratio (3.7 pts) (2.8 pts) (6.2 pts) (3.0 pts) Selling, General and Administrative (SG&A) Expenses Intangible asset amortization expense$ 81 $ -$ 176 $ - Business optimization items1 36 8 114 14 Acquisition and integration expenses2 20 1 44 2 Investigation and related costs4 - 17 - 28 Total Special Items$ 137 $ 26 $ 334 $ 44 Impact on SG&A Ratio 3.7 pts 0.9 pts 4.5 pts 0.7 pts Research and Development (R&D) Expenses Business optimization items1 $ - $ -$ 1 $ - Total Special Items $ - $ -$ 1 $ - Impact on R&D Ratio 0.0 pts 0.0 pts 0.0 pts 0.0 pts Other Operating Income, net Acquisition and integration expenses2$ (11) $ (5) $ (28) $ (5) Total Special Items$ (11) $ (5) $ (28) $ (5) Other Income (Expense), net Pension curtailment6$ (11) $ -$ (11) $ - Total Special Items$ (11) $ -$ (11) $ - Income Tax Expense Tax matters7 $ -$ 22 $ -$ 22 Tax effects of special items8 (63) (20) (166) (43) Total Special Items$ (63) $ 2 $ (166) $ (21) Impact on Effective Tax Rate (5.2 pts) 5.2 pts (4.1 pts) 2.1 pts Intangible asset amortization expense, which increased significantly from the prior year due to the Hillrom acquisition, is identified as a special item to facilitate an evaluation of current and past operating performance and is consistent with how management and our Board of Directors assess performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact our reported results of operations for the period. Management believes that providing the separate impact of those items may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another. 1In 2022 and 2021, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure. These actions included streamlining our international operations, rationalizing our manufacturing and distribution facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. In the current period, restructuring charges include actions taken in connection with our integration of Hillrom, which we acquired in 32 --------------------------------------------------------------------------------December 2021 . Our results in 2022 included business optimization charges of$42 million in the second quarter and$123 million in the first half. Our results in 2021 included business optimization charges of$18 million in the second quarter and$45 million in the first half. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities. 2Our results in 2022 included$18 million in the second quarter and$189 million in the first half of acquisition and integration-related expenses. Those costs included$29 million in the second quarter and$217 million in the first half related to our acquisition of Hillrom, primarily reflecting$159 million of incremental costs of sales in the first half from the fair value step-ups on acquired Hillrom inventory that was sold in the first quarter. We have not incurred and we do not expect to incur significant incremental cost of sales from those inventory fair value step-ups beyond what was recognized in the first quarter 2022. Other integration expenses in the current period included third party consulting costs related to our integration and related cost savings activities. Those acquisition and integration-related expenses related to Hillrom were partially offset by an$11 million benefit in the second quarter and a$28 million benefit in the first half from changes in the estimated fair value of contingent consideration liabilities. Our results in 2021 included$1 million in the second quarter and$2 million in the first half of integration expenses related to our acquisition of the rights to Caelyx and Doxil for specified territories outside of theU.S. that was offset by a benefit of$5 million in the second quarter for the change in the estimated fair value of contingent consideration liabilities. Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities. 3Our results in 2022 included$12 million in the second quarter and$23 million in the first half of costs related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of theEuropean Union's regulations for medical devices that became effective in stages beginning in 2021. Our results in 2021 included$11 million in the second quarter and$19 million in the first half of costs related to these requirements. 4Our results in 2021 included charges of$17 million in the second quarter and$28 million in the first half for investigation and related cost for matters associated with our previously announced investigation of foreign exchange gains and losses. Refer to Note 6 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation. 5Our results in 2022 included charges$23 million in the first half related to warranty and remediation activities arising from two field corrective actions on certain of our infusion pumps. 6Our results in 2022 included a curtailment gain of$11 million in the second quarter and first half related to an announced change for active non-bargaining participants in ourU.S. Hillrom pension plan.
7Our results in 2021 included a charge of
8Reflected 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.
Risks and Uncertainties Related to COVID-19 and Global Economic and Other Conditions
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. Initial measures taken in 2020 led to unprecedented restrictions on, disruptions in, and other related impacts on business and personal activities, including a shift in healthcare priorities, which resulted in a significant decline in medical procedures in 2020. As a result, the pandemic has created significant volatility in the demand for our products. For further information about our revenues by product category, refer to Note 9. Significant uncertainty remains regarding the duration and overall impact of the COVID-19 pandemic. For example, 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. TheU.S. and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to mandatory vaccinations for certain of our employees, moratoriums on elective procedures and mandatory quarantines and travel restrictions). These measures have caused, and may continue to cause in the future, increased levels of absenteeism, including at our manufacturing and distributing facilities. Many of our manufacturing plant and distribution center personnel are currently unvaccinated, and we may also experience employee resistance in complying with current and future government vaccine and testing mandates, which may cause labor shortages significantly impacting manufacturing production and distribution center productivity. 33 --------------------------------------------------------------------------------
Due to the uncertainty caused by the pandemic, our operating performance and financial results, particularly in the short term, may be subject to volatility.
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 inUkraine and certain other geopolitical events. We may continue to experience these and other challenges related to our supply chain in future periods. These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for certain product categories due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future. Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. The war inUkraine 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 inRussia and are working on appropriate contingency plans that will support our desire to serving existing, chronically ill patient populations while remaining compliant with all applicableU.S. andEuropean Union sanctions and regulations. WhileRussia andUkraine 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. We expect that these challenges as well as evolving governmental restrictions and requirements, among other factors, may continue to have an adverse effect on our business.
For further discussion, please refer to Item 1A, "Risk Factors" in our Annual
Report on Form 10-K for the fiscal year ended
NET SALES Three Months Ended June 30, Percent change At actual At constant (in millions) 2022 2021 currency rates currency rates United States$ 1,764 $ 1,198 47 % 47 % International$ 1,982 1,900 4 % 13 % Total net sales$ 3,746 $ 3,098 21 % 26 % Six Months Ended June 30, Percent change At actual At constant (in millions) 2022 2021 currency rates currency rates United States$ 3,521 $ 2,378 48 % 48 % International$ 3,932 3,666 7 % 14 % Total net sales$ 7,453 $ 6,044 23 % 27 % Our acquisition of Hillrom favorably impacted net sales by 23 and 24 percentage points during the second quarter and first half of 2022, respectively, compared to the prior year periods. Foreign currency unfavorably impacted net sales by 5 and 4 percentage points during the second quarter and first half of 2022, respectively, compared to the prior-year periods, principally due to the strengthening of theU.S. Dollar relative to the Euro, British Pound, Turkish Lira, Australian Dollar and Japanese Yen. The comparisons presented at constant currency rates reflect local currency sales at the prior period's foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had 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 theU.S. GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another. 34 --------------------------------------------------------------------------------
Product Category Net Sales Reporting
Upon our acquisition of Hillrom, we added three new product categories: Patient Support Systems, FrontLine 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. •FrontLine 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:
Three Months Ended June 30, Percent change At actual currency At constant currency (in millions) 2022 2021 rates rates Renal Care $ 931$ 964 (3) % 2 % Medication Delivery 710 697 2 % 4 % Pharmaceuticals 528 546 (3) % 3 % Clinical Nutrition 230 237 (3) % 4 % Advanced Surgery 263 256 3 % 8 % Acute Therapies 173 188 (8) % (4) % BioPharma Solutions 163 183 (11) % (5) % Patient Support Systems 364 - N/A N/A Front Line Care 282 - N/A N/A Surgical Solutions 69 - N/A N/A Other 33 27 22 % 26 % Total Baxter$ 3,746 $ 3,098 21 % 26 % 35
-------------------------------------------------------------------------------- Six months ended June 30, Percent change At actual currency At constant currency (in millions) 2022 2021 rates rates Renal Care$ 1,825 $ 1,886 (3) % 1 % Medication Delivery 1,416 1,349 5 % 7 % Pharmaceuticals 1,049 1,098 (4) % 1 % Clinical Nutrition 457 471 (3) % 3 % Advanced Surgery 491 473 4 % 8 % Acute Therapies 361 395 (9) % (6) % BioPharma Solutions 319 318 0 % 6 % Patient Support Systems 747 - N/A N/A Front Line Care 576 - N/A N/A Surgical Solutions 147 - N/A N/A Other 65 54 20 % 22 % Total Baxter$ 7,453 $ 6,044 23 % 27 % Renal Care net sales decreased 3% in the second quarter and 3% in the first half of 2022, as compared to the prior-year periods. The decrease in the second quarter and first half was driven by a 5% and 4%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods, and lower in-center HD sales, partially offset by global patient growth in PD. Medication Delivery net sales increased 2% in the second quarter and 5% in the first half of 2022, as compared to the prior-year periods. The increase in the second quarter and first half was driven by increased demand for IV administration sets and solutions, reflecting a recovery in hospital admission rates and surgical procedures. The first half of 2022 was also favorably impacted by lowerU.S. customer rebates in the current year period. Those items were partially offset by lower sales of infusion pumps, a 2% negative impact in the second quarter and first half of 2022 from foreign exchange rates as compared to the prior-year periods and sales headwinds inChina driven by COVID-related lockdowns. Supply chain constraints, including constraints related to the availability of semiconductor components and other components used in the production of our infusion pumps, and the fact that our new infusion pump platform has not yet received FDA clearance in theU.S. have contributed to lower sales of infusion pumps in the current year periods. Pharmaceuticals net sales decreased 3% in the second quarter and 4% in the first half of 2022, as compared to the prior-year periods. The decrease in the second quarter and first half was primarily driven by a 6% and 5%, respectively, negative impact from foreign exchange rates, as compared to the prior-year periods. Additionally, pharmaceuticals net sales were adversely impacted by new market entrants increasing competition for certain molecules. Those items were partially offset by increased sales internationally for inhaled anesthesia products. Clinical Nutrition net sales decreased 3% in the second quarter and the first half of 2022, as compared to the prior-year periods. The decrease in the second quarter and first half was driven by a 7% and 6%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods, and lower sales of vitamins resulting from ongoing supply constraints. Those decreases were partially offset by growth in theU.S. for our PN therapies and related products, including our PN multi-chamber bags. Advanced Surgery net sales increased 3% in the second quarter and 4% in the first half of 2022, as compared to the prior-year periods. The increase in the second quarter and first half was driven by continued recovery in surgical procedures, particularly in EMEA, and benefits from competitor supply constraints. Partially offsetting that increase was a 5% and 4%, respectively, negative impact from foreign exchange rates, as compared to the prior-year periods. Acute Therapies net sales decreased 8% in the second quarter and 9% in the first half of 2022, as compared to the prior-year periods. The decrease in the second quarter and first half was driven by lower COVID-related demand for our CRRT systems and a 4% and 3%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods. BioPharma Solutions net sales decreased 11% in the second quarter and was flat in the first half of 2022, as compared to the prior-year periods. The decrease in the second quarter includes a 6% negative impact from foreign 36 -------------------------------------------------------------------------------- exchange rates, as compared to the prior-year quarterly period, and 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 quarterly period. The flat net sales for the first half of 2022 reflects the offsetting impacts of a 6% negative impact from foreign exchange rates and higher sales of manufacturing services and supply packaging related to the production of COVID-19 vaccines, both as compared to the first half of 2021. The Patient Support Systems, FrontLine Care and Surgical Solutions product categories were added in connection with our acquisition of Hillrom in December of 2021. Net sales of those product categories have been adversely impacted in the current year periods by ongoing supply chain constraints, particularly related to components used in our FrontLine Care product offerings, and by delays in product installations for Patient Support Systems and Surgical Solutions resulting from limitations on hospital access due, in part, to staffing challenges being experienced by those customers.
Gross Margin and Expense Ratios
Three months ended June 30, 2022 % of net sales 2021 % of net sales $ change % change Gross margin$ 1,453 38.8 %$ 1,233 39.8 %$ 220 17.8 % SG&A$ 976 26.1 %$ 675 21.8 %$ 301 44.6 % R&D$ 148 4.0 %$ 139 4.5 %$ 9 6.5 % Six months ended June 30, 2022 % of net sales 2021 % of net sales $ change % change Gross margin$ 2,801 37.6 %$ 2,378 39.3 %$ 423 17.8 % SG&A$ 2,028 27.2 %$ 1,302 21.5 %$ 726 55.8 % R&D$ 298 4.0 %$ 267 4.4 %$ 31 11.6 % Gross Margin The gross margin ratio was 38.8% and 37.6% in the second quarter and first half of 2022, respectively. The special items identified above had an unfavorable impact of approximately 3.7 and 6.2 percentage points on the gross margin ratio in the second quarter and first half of 2022, respectively. The gross margin ratio was 39.8% and 39.3% in the second quarter and first half of 2021, respectively. The special items identified above had an unfavorable impact of approximately 2.8 and 3.0 percentage points on the gross margin ratio in the second quarter and first half of 2021, respectively. Refer to the Special Items caption above for additional detail. Excluding the impact of the special items, the gross margin ratio decreased in the second quarter and first half of 2022 compared to the prior-year periods. The decrease was primarily driven by raw materials inflation and increased supply chain costs, partially offset by a favorable product mix that was primarily driven by our acquisition of Hillrom and lower bonus accrual under our annual employee incentive compensation plans.
SG&A
The SG&A expenses ratio was 26.1% and 27.2% in the second quarter and first half of 2022, respectively. The special items identified above had an unfavorable impact of approximately 3.7 and 4.5 percentage points on the SG&A expenses ratio in the second quarter and first half of 2022, respectively. The SG&A expenses ratio was 21.8% and 21.5% in the second quarter and first half of 2021, respectively. The special items identified above had an unfavorable impact of approximately 0.9 and 0.7 percentage points on the SG&A expenses ratio in the second quarter and first half of 2021, respectively. Refer to the Special Items caption above for additional detail. Excluding the impact of the special items, the SG&A expenses ratio increased in the second quarter and first half of 2022 compared to the prior-year periods primarily due to the acquisition of Hillrom and increased outbound freight costs, partially offset by lower bonus accruals under our annual employee incentive compensation plans.
R&D
The R&D expenses ratio was 4.0% in the second quarter and first half of 2022. The R&D expenses ratio was 4.5% and 4.4% in the second quarter and first half of 2021, respectively. 37 -------------------------------------------------------------------------------- The R&D expenses ratio decreases in the second quarter and first half of 2022 compared to the prior-year periods were driven by lower bonus accruals under our annual employee incentive compensation plans and decreased project-related expenditures.
Business Optimization Items
In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. In the current year periods, restructuring charges include actions taken in connection with our integration of Hillrom. From the commencement of our business optimization actions in the second half of 2015 throughJune 30, 2022 , we have incurred cumulative pre-tax costs of$1.3 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments, and accelerated depreciation. The reductions in our cost base from these actions in the aggregate are expected to provide cumulative annual pre-tax savings of more than$1.2 billion once the remaining actions are complete. The savings from completed or in-process actions have reduced cost of sales, SG&A expenses, and R&D expenses. Approximately 99 percent of the expected annual pre-tax savings from those actions are expected to be realized by the end of 2022, with the remainder by the end of 2023. We currently expect to incur additional pre-tax costs, primarily related to the implementation of business optimization programs, of approximately$29 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives, including those related to our integration of Hillrom, and, to the extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs to implement business optimization programs in future periods.
Other Operating Income, Net
Other operating income, net was
Interest Expense, Net
Interest expense, net was$89 million and$174 million in the second quarter and first half of 2022, respectively, and$34 million and$68 million in the second quarter and first half of 2021, respectively. The increases in the second quarter and first half of 2022 were driven by higher average debt outstanding in connection with the Hillrom acquisition.
Other (Income) Expense, Net
Other (income) expense, net was income of$44 million and$60 million in the second quarter and first half of 2022, respectively, and income of$2 million and expense of$3 million in the second quarter and first half of 2021, respectively. The increases in the second quarter and first half of 2022 compared to the prior year were primarily due to foreign exchange gains in the current-year periods versus losses in the prior-year periods, pension benefits in the current-year periods versus expenses in the prior-year periods and a pension curtailment gain in the current-year periods. In the first quarter of 2021, we began to wind down our operations inArgentina . Upon substantial liquidation of those operations in the future, we expect to reclassify currency translation adjustments (CTA) from accumulated other comprehensive (loss) income to other (income) expense, net and recognize a non-cash charge. As ofJune 30, 2022 , the CTA loss for ourArgentina operations was in excess of$60 million .
Income Taxes
Our effective income tax rate was 13.6% and 23.2% in the second quarter, and 15.7% and 19.1% in the first half of 2022 and 2021, respectively. Our effective income tax rate can differ from the 21%U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards. 38 -------------------------------------------------------------------------------- For the three and six months endedJune 30, 2022 , the difference between our effective income tax rate and theU.S. federal statutory rate was primarily attributable to a favorable geographic earnings mix and discrete tax matters in various jurisdictions, of which none were individually material, partially offset by an increase in our liabilities for uncertain tax positions. For the three and six months endedJune 30, 2021 , the difference between our effective income tax rate and theU.S. federal statutory rate was primarily attributable to a favorable geographic earnings mix and decreases in accrued withholding taxes in several foreign jurisdictions, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position. Segment Results We manage our global operations based on four segments, consisting of the following geographic segments related to legacy Baxter business:Americas , EMEA and APAC, and a new global segment for our recently acquired Hillrom business. We use net sales and operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our segments. The following is a summary of financial information for our reportable segments: Net sales Operating income (loss) Three months ended Three months ended June 30, Six months ended June 30, June 30, Six months ended June 30, (in millions) 2022 2021 2022 2021 2022 2021 2022 2021 Americas$ 1,646 $ 1,624 $ 3,272 $ 3,184 $ 567 $ 632 $ 1,177 $ 1,231 EMEA 738 783 1,437 1,521 169 159 288 294 APAC 647 691 1,274 1,339 156 152 307 290 Hillrom 715 - 1,470 - 149 - 349 - Total segments 3,746 3,098 7,453 6,044 1,041 943 2,121 1,815 Corporate and other - - - - (701) (519) (1,618) (1,001) Total$ 3,746 $ 3,098 $ 7,453 $ 6,044 $ 340 $ 424 $ 503$ 814 Americas Segment net sales and operating income were$1.6 billion and$567 million , respectively, in the second quarter and$3.3 billion and$1.2 billion , respectively, in the first half of 2022. Segment net sales and operating income were$1.6 billion and$632 million , respectively, in the second quarter and$3.2 billion and$1.2 billion , respectively, in the first half of 2021. The decrease in operating income in the second quarter of 2022 was due to raw materials inflation, higher supply chain costs and lower sales in our BioPharma Solutions and Acute Therapies product categories, partially offset by higher sales in our Medication Delivery and Renal Care product categories. The decrease in operating income in the first half of 2022 was due to raw materials inflation, higher supply chain costs and lower sales in our Pharmaceuticals and Acute Therapies product categories, partially offset by higher sales in Medication Delivery, Renal Care and Advanced Surgery.
EMEA
Segment net sales and operating income were$738 million and$169 million , respectively, in the second quarter and$1.4 billion and$288 million , respectively, in the first half of 2022. Segment net sales and operating income were$783 million and$159 million , respectively, in the second quarter and$1.5 billion and$294 million , respectively, in the first half of 2021. The increase in operating income in the second quarter was primarily due to lower operating expenses and improved gross margin, driven by a favorable product mix, partially offset by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period, raw materials inflation and higher supply chain costs. The decrease in the first half of 2022 was primarily due to an unfavorable impact of foreign exchange rates on results as compared to the prior-year period, raw materials inflation and higher supply chain costs. For the first half of 2022, the decrease in operating income was partially offset by having a full six months of sales from ourFebruary 2021 acquisition of the rights to Caelyx and Doxil for specified territories outside theU.S. 39 --------------------------------------------------------------------------------
APAC
Segment net sales and operating income were$647 million and$156 million , respectively, in the second quarter and$1.3 billion and$307 million , respectively, in the first half of 2022. Segment net sales and operating income were$691 million and$152 million , respectively, in the second quarter and$1.3 billion and$290 million , respectively, in the first half of 2021. The increase in operating income in the second quarter and first half of 2022 was due to lower operating expenses and an improved gross margin, driven by a favorable product mix, partially offset by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period, raw materials inflation, higher supply chain costs and sales headwinds inChina driven by COVID-related lockdowns. Hillrom
Segment net sales and operating income were
Corporate and Other
Certain items are maintained at Corporate and are not allocated to a segment. They primarily include corporate headquarters costs, certain R&D costs, manufacturing variances and centrally managed supply chain costs, product category support costs, stock compensation expense, certain employee benefit plan costs, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments). For the period from our acquisition of Hillrom onDecember 13, 2021 throughDecember 31, 2021 , we previously included all costs incurred by the Hillrom business within that segment, including the types of costs described in the preceding sentence that are maintained at Corporate for our legacy Baxter segments. In connection with our ongoing integration activities, beginning in the first quarter 2022, we have updated the measure of profitability for our Hillrom segment by excluding such unallocated costs, consistent with our legacy Baxter segments. Those unallocated costs related to Hillrom, which totaled$61 million and$280 million for the three and six months endedJune 30, 2022 , respectively, are now presented within Corporate as well. The Corporate operating loss in the second quarter was significantly higher than the prior-year period primarily due to higher intangible asset amortization expense, acquisition and integration-related expenses and business optimization charges, all driven by the Hillrom acquisition, partially offset by lower bonus accruals under our annual employee incentive compensation plans. InSeptember 2013 , we entered into an agreement withCelerity Pharmaceutical, LLC (Celerity) to develop certain acute care generic injectable premix and oncolytic products through regulatory approval. We transferred our rights in these products to Celerity and Celerity assumed ownership and responsibility for development of the products. We are obligated to purchase the individual product rights from Celerity if the products obtain regulatory approval. InDecember 2020 , we entered into an agreement with a third party to divest one of the products that is currently being developed by Celerity if that product receives regulatory approval in theU.S. and/orEuropean Union . If regulatory approval is obtained, we would incur a loss ranging from$30 million to$60 million for the difference between our purchase price and the divestiture proceeds in connection with that transaction. 40 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of the statement of cash flows for the
six-month periods ended
Six months ended June 30, (in millions) 2022 2021 Cash flows from operations $ 482$ 854 Cash flows from investing activities (491)
(726)
Cash flows from financing activities (1,017) (707) Cash Flows from Operations In the first half of 2022, cash provided by operating activities was$482 million , as compared to cash provided by operating activities of$854 million in the first half of 2021, a decrease of$372 million . The decrease was primarily due to a decrease in our net income in 2022, increases in inventory levels and higher annual payouts under our employee incentive compensation plans in the current year period compared to the prior year period.
Cash Flows from Investing Activities
In the first half of 2022, cash used for investing activities included payments for acquisitions and investments of$190 million , primarily related to our payment to acquire the rights to Zosyn, and capital expenditures of$311 million . In the first half of 2021, cash used for investing activities included payments for acquisitions and investments of$417 million , primarily related to Caelyx and Doxil and Transderm Scop, and capital expenditures of$329 million . See Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.
Cash Flows from Financing Activities
In the first half of 2022, cash used in financing activities included debt repayments of$749 million , dividend payments of$281 million , and a net repayment of short-term borrowings of$45 million , partially offset by proceeds from stock issued under employee benefit plans of$88 million . In the first half of 2021, cash used for financing activities included payments for treasury stock repurchases of$565 million and dividend payments of$249 million , partially offset by proceeds from stock issued under employee benefit plans of$93 million and the net proceeds from commercial paper borrowings of$50 million . As authorized by our Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions. InJuly 2012 , our Board of Directors authorized the repurchase of up to$2.0 billion of our common stock. Our Board of Directors increased this authority by an additional$1.5 billion in each ofNovember 2016 andFebruary 2018 , by an additional$2.0 billion inNovember 2018 and by an additional$1.5 billion inOctober 2020 . During the second quarter of 2022 we repurchased approximately 0.1 million shares under this authority pursuant to Rule 10b5-1 plans. We had$1.3 billion remaining available under this authorization as ofJune 30, 2022 .
Credit Facilities and Access to Capital and Credit Ratings
Credit Facilities
As ofJune 30, 2022 , ourU.S. dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of$2.5 billion and €200 million, respectively. There were no borrowings outstanding under these credit facilities as ofJune 30, 2022 orDecember 31, 2021 . OurU.S. dollar-denominated revolving credit facility guarantees our obligations under commercial paper borrowings, which reduces our borrowing capacity by the amount of such outstanding commercial paper borrowings. As ofJune 30, 2022 , we were in compliance with the financial covenants in these agreements. 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. 41 --------------------------------------------------------------------------------
Access to Capital and Credit Ratings
We intend to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations or by issuing additional debt. We had$1.9 billion of cash and cash equivalents as ofJune 30, 2022 , with adequate cash available to meet operating requirements in each jurisdiction in which we operate. We invest our excess cash in money market and other funds and diversify the concentration of cash among different financial institutions. As ofJune 30, 2022 , we had approximately$16.7 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt. Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure. Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions, including global economic conditions. However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives. There have been no changes to our investment grade credit ratings that we disclosed in our 2021 Annual Report. LIBOR Reform In 2017, theUnited 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 theU.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 certainU.S. dollar LIBOR tenors would not cease until 2023. Currently, our$2.5 billion U.S. dollar-denominated revolving credit facility, our €200 million Euro-denominated revolving credit facility and our$4.0 billion Term Loan Credit Agreement reference LIBOR-based rates. The discontinuation of LIBOR will require these arrangements to be modified in order to replace LIBOR with an alternative reference interest rate, which could impact our cost of funds. Our credit facilities and term loan credit agreement include provisions related to the determination of a successor LIBOR rate.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance withU.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our 2021 Annual Report. Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by us, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in our 2021 Annual Report. There have been no significant changes in the application of our critical accounting policies during the first six months of 2022.
RECENT ACCOUNTING PRONOUNCEMENTS
InJune 2022 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sales Restrictions, which (1) clarifies the guidance in Topic 820 on the fair value measurement of an equity security that is subject to contractual restrictions that prohibit the sale of an equity security and (2) requires specific disclosures related to such an equity security. The standard is effective for our financial statements beginning in 2024. The impact of the adoption of this ASU is not expected to have a material effect on our condensed consolidated financial statements. 42 --------------------------------------------------------------------------------
LEGAL CONTINGENCIES
Refer to Note 6 within Item 1 for a discussion of our legal contingencies. Upon resolution of any of these uncertainties, we may incur charges in excess of presently established liabilities. While our liability in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and we may in the future incur material judgments or enter into material settlements of claims.
CERTAIN REGULATORY MATTERS
TheU.S. Food and Drug Administration (FDA) commenced an inspection of Claris' facilities in Ahmedabad,India inJuly 2017 , immediately prior to the closing of our acquisition ofClaris 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 onMay 17, 2022 . Classification is still pending. Management cannot speculate on when the Claris Warning Letter will be lifted. However, we are continuing to implement corrective and preventive actions to addressFDA's prior observations and other items we identified and management continues to pursue and implement other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in theU.S. As previously disclosed, we have secured alternative locations to produce a majority of the planned new products to be manufactured in Ahmedabad for distribution into theU.S. and are producing new products from those locations. 1 Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htm
FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q includes forward-looking statements. Use of the words "may," "will," "would," "could," "should," "believes," "estimates," "projects," "potential," "expects," "plans," "seeks," "intends," "evaluates," "pursues," "anticipates," "continues," "designs," "impacts," "affects," "forecasts," "target," "outlook," "initiative," "objective," "designed," "priorities," "goal," or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events. These forward-looking statements may include statements with respect to accounting estimates and assumptions, impacts of the COVID-19 pandemic and global economic conditions, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses, future regulatory filings and our R&D pipeline, strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, potential tax liabilities associated with the separation of our biopharmaceuticals business from our medical products businesses, the impact of competition, future sales growth, business development activities (including the acquisitions of Cheetah, Seprafilm, certain outside of theU.S. (OUS) rights to Caelyx and Doxil, fullU.S. and specific OUS rights to Transderm Scop, PerClot, Hillrom and certain rights to Zosyn in theU.S. andCanada ), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts. These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is 43 --------------------------------------------------------------------------------
subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:
• demand for and market acceptance risks for and competitive pressures related to
new and existing products (including challenges with our
ability to accurately
predict changing customer preferences (which has led to and
may continue to lead
to increased inventory levels) and needs and advances in
technology and the
resulting impact on customer inventory levels and the impact
of reduced hospital
admission rates and elective surgery volumes), and the impact
of those products
on quality and patient safety concerns;
• the continuity, availability and pricing of acceptable raw materials and component
parts (and our ability to pass some or all of these costs on
to our customers), and
the related continuity of our manufacturing and distribution
(including impacts from
COVID-19) and those of our suppliers;
• inability to create additional production capacity in a timely manner or the
occurrence of other manufacturing, sterilization or supply
difficulties (including as
a result of natural disaster, public health crises and
epidemics/pandemics, regulatory
actions or otherwise);
• product development risks, including satisfactory clinical performance and obtaining
required regulatory approvals, the ability to manufacture at
appropriate scale, and
the general unpredictability associated with the product
development cycle;
• our ability to finance and develop new products or enhancements on commercially
acceptable terms or at all;
• the impact of global economic conditions (including, among other things, the
ongoing war inUkraine , the related economic sanctions being
imposed globally in
response to the conflict and potential trade wars and global
inflationary
pressures) and continuing public health crises, pandemics and
epidemics, such as
the ongoing COVID-19 pandemic, on us and our employees,
customers and suppliers,
including foreign governments in countries in which we operate;
• our ability to identify business development and growth opportunities and to
successfully execute on business development strategies
(including the Hillrom
acquisition and related integration and restructuring activities);
• product quality or patient safety issues, leading to product recalls,
withdrawals, launch delays, warning letters, import bans,
sanctions, seizures,
litigation, or declining sales;
• breaches or failures of our information technology systems or products, including
by cyber-attack, data leakage, unauthorized access or theft
(as a result of
increased remote working arrangements or otherwise);
• future actions of (or failures to act or delays in acting by) FDA, the European
Medicines Agency or any other regulatory body or government
authority (including
theSEC , DOJ or the Attorney General of any State) that could
delay, limit or
suspend product development, manufacturing or sale or result
in seizures, recalls,
injunctions, monetary sanctions or criminal or civil
liabilities, including the
continued delay in lifting the warning letter at our
Ahmedabad facility;
• failures with respect to our quality, compliance or ethics programs;
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• future actions of third parties, including third-party payers and our customers
and distributors (including group purchasing organizations
and formed integrated
delivery networks), the impact of healthcare reform and its
implementation,
suspension, repeal, replacement, amendment, modification and
other similar actions
undertaken bythe United States or foreign governments,
including with respect to
pricing, reimbursement, taxation and rebate policies;
legislation, regulation and
other governmental pressures inthe United States or
globally, including the cost
of compliance and potential penalties for purported
noncompliance thereof, all of
which may affect pricing, reimbursement, taxation and rebate
policies of
government agencies and private payers or other elements of
our business,
including new or amended laws, rules and regulations (such as
the
Consumer Privacy Act of 2018, theEuropean Union's General
Data Protection
Regulation and proposed regulatory changes of theU.S.
Human Services in kidney health policy and reimbursement,
which may substantially
change theU.S. end stage renal disease market and demand for
our peritoneal
dialysis products, necessitating significant multi-year
capital expenditures,
which are difficult to estimate in advance);
• the outcome of pending or future litigation, including the opioid litigation and
ethylene oxide litigation or other claims; • failure to achieve our short- and long-term financial goals;
• the impact of competitive products and pricing, including generic competition,
drug reimportation and disruptive technologies;
• global regulatory, trade and tax policies (including with respect to climate
change and other sustainability matters);
• the ability to protect or enforce our owned or in-licensed patent or other
proprietary rights (including trademarks, copyrights, trade
secrets and
know-how) or patents of third parties preventing or
restricting our manufacture,
sale or use of affected products or technology;
• the impact of any goodwill or other intangible asset impairments on our
operating results; • fluctuations in foreign exchange and interest rates;
• any changes in law concerning the taxation of income (whether with respect to
current or future tax reform), including income earned
outside
and potential taxes associated with the Base Erosion and
Anti-Abuse Tax or the
Build Back Better framework; • actions by tax authorities in connection with ongoing tax audits;
• loss of key employees, the occurrence of labor disruptions or the inability to
identify and recruit new employees;
• other factors identified elsewhere in this report and other filings with the
SEC , including those factors described in Item 1A of our
Annual Report on Form
10-K for the year endedDecember 31, 2021 , all of which are available on our website.
Actual results may differ materially from those projected in the forward-looking statements. We do not undertake to update our forward-looking statements.
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