Baxter International Inc. (NYSE:BAX) Q1 2022 Results Conference Call April 28, 2022 8:30 AM ET Company Participants Clare Trachtman - VP, IR Joe Almeida - Chairman, CEO Giuseppe Accogli - COO Jay Saccaro - CFO Conference Call Participants Drew Ranieri - Morgan Stanley Danielle Antalffy - SVB Leerink Joanne Wuensch - Citi Larry Biegelsen - Wells Fargo Matt Miksic - Credit Suisse Pito Chickering - Deutsche Bank Robbie Marcus - JP Morgan Travis Steed - Bank of America Vijay Kumar - Evercore ISI Operator Good m ...

[PART I. FINANCIAL INFORMATION](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (unaudited)](index=2&type=section&id=Item%201.%20Financial%20Statements%20(unaudited)) This section presents the unaudited condensed consolidated financial statements for Q1 2022, including balance sheets, income statements, and cash flows, with notes detailing accounting policies, acquisitions, and segment performance [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased slightly to **$32.7 billion** as of March 31, 2022, with liabilities also down and equity stable at **$9.1 billion** Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Total Current Assets** | $8,173 | $8,872 | | **Total Assets** | **$32,716** | **$33,521** | | **Total Current Liabilities** | $3,890 | $4,236 | | **Total Liabilities** | **$23,597** | **$24,400** | | **Total Equity** | **$9,119** | **$9,121** | [Condensed Consolidated Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Q1 2022 net sales rose to **$3.71 billion** due to Hillrom, but operating income fell to **$163 million** and net income to **$71 million**, resulting in **$0.14** diluted EPS Q1 2022 vs Q1 2021 Income Statement (in millions, except EPS) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | **Net Sales** | $3,707 | $2,946 | | **Gross Margin** | $1,348 | $1,145 | | **Operating Income** | $163 | $390 | | **Net Income Attributable to Baxter** | $71 | $298 | | **Diluted EPS** | $0.14 | $0.58 | [Condensed Consolidated Statements of Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) Comprehensive income attributable to Baxter stockholders decreased to **$64 million** in Q1 2022, primarily due to lower net income, despite a smaller other comprehensive loss compared to the prior year Q1 2022 vs Q1 2021 Comprehensive Income (in millions) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Income | $73 | $300 | | Total Other Comprehensive Loss | ($7) | ($166) | | **Comprehensive Income Attributable to Baxter** | **$64** | **$132** | [Condensed Consolidated Statements of Changes in Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Equity) Total equity remained stable at **$9.1 billion** in Q1 2022, with net income of **$71 million** offset by **$142 million** in dividends and **$76 million** from employee stock issuances - Key changes to equity in Q1 2022 included a **$71 million** increase from net income, a **$142 million** decrease from dividends declared, and a **$76 million** increase from stock issued under employee benefit plans[12](index=12&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow decreased to **$208 million** in Q1 2022, with **$304 million** used in investing activities and **$548 million** in financing activities, leading to a net cash decrease of **$657 million** Q1 2022 vs Q1 2021 Cash Flows (in millions) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | **Cash flows from operations** | $208 | $377 | | **Cash flows from investing activities** | ($304) | ($538) | | **Cash flows from financing activities** | ($548) | ($358) | | **Decrease in cash** | ($657) | ($550) | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, significant acquisitions (Hillrom for **$10.5 billion**, Zosyn for **$122 million**), business optimization charges, legal contingencies including an **$18 million** SEC settlement, and segment performance - Completed the acquisition of Hillrom in December 2021 for a purchase price of **$10.5 billion**, resulting in goodwill of **$6.8 billion** In Q1 2022, recognized **$159 million** in incremental cost of sales from fair value step-ups on acquired Hillrom inventory[24](index=24&type=chunk)[27](index=27&type=chunk)[29](index=29&type=chunk) - In March 2022, acquired the rights to Zosyn, a premixed frozen piperacillin-tazobactam product, from a subsidiary of Pfizer Inc. for **$122 million**[30](index=30&type=chunk) - Reached a settlement with the SEC in February 2022 regarding an internal investigation into foreign exchange gains and losses, agreeing to pay a civil penalty of **$18 million**, which was paid in Q1 2022[52](index=52&type=chunk) - As of March 31, 2022, the company had **$1.3 billion** remaining available under its stock repurchase authorization No shares were repurchased in Q1 2022[63](index=63&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2022 results, noting a **26%** sales increase to **$3.7 billion** driven by the Hillrom acquisition, but a decline in net income to **$71 million** due to special items, also covering liquidity and market risks [Results of Operations](index=29&type=section&id=Results%20of%20Operations) Net income attributable to Baxter stockholders decreased to **$71 million** ($0.14/share) in Q1 2022, primarily due to **$400 million** in special items, including intangible asset amortization and acquisition-related expenses Impact of Special Items on Q1 2022 Results (in millions) | Item | Gross Margin Impact | SG&A Impact | Total Impact (Pre-tax) | | :--- | :--- | :--- | :--- | | Intangible asset amortization | ($122) | $95 | ($27) | | Business optimization | ($2) | $78 | $76 | | Acquisition & integration | ($164) | $24 | ($140) | | **Total Special Items** | **($322)** | **$197** | **...** | - Net sales increased **26%** (**29%** at constant currency) to **$3.7 billion**, with the Hillrom acquisition contributing **26 percentage points** of growth Foreign currency had an unfavorable impact of **3 percentage points**[141](index=141&type=chunk) [Product Category Net Sales Reporting](index=31&type=section&id=Product%20Category%20Net%20Sales%20Reporting) Hillrom contributed **$383 million** (Patient Support Systems), **$294 million** (Front Line Care), and **$78 million** (Surgical Solutions), while legacy businesses showed mixed performance, with BioPharma Solutions growing **16%** Net Sales by Product Category - Q1 2022 (in millions) | Product Category | Q1 2022 Sales | YoY % Change (Actual) | YoY % Change (Constant) | | :--- | :--- | :--- | :--- | | Renal Care | $894 | (3)% | 1% | | Medication Delivery | $706 | 8% | 10% | | Pharmaceuticals | $521 | (6)% | (2)% | | Clinical Nutrition | $227 | (3)% | 1% | | Advanced Surgery | $228 | 5% | 8% | | Acute Therapies | $188 | (9)% | (7)% | | BioPharma Solutions | $156 | 16% | 21% | | Patient Support Systems | $383 | N/A | N/A | | Front Line Care | $294 | N/A | N/A | | Surgical Solutions | $78 | N/A | N/A | | **Total Baxter** | **$3,707** | **26%** | **29%** | [Segment Results](index=34&type=section&id=Segment%20Results) The Hillrom segment generated **$755 million** in net sales and **$200 million** in operating income, while Americas operating income increased to **$610 million**, EMEA decreased to **$119 million**, and APAC grew to **$151 million** Segment Performance - Q1 2022 vs Q1 2021 (in millions) | Segment | Net Sales Q1 2022 | Net Sales Q1 2021 | Operating Income Q1 2022 | Operating Income Q1 2021 | | :--- | :--- | :--- | :--- | :--- | | Americas | $1,626 | $1,560 | $610 | $599 | | EMEA | $699 | $738 | $119 | $135 | | APAC | $627 | $648 | $151 | $138 | | Hillrom | $755 | — | $200 | — | | **Total Segments** | **$3,707** | **$2,946** | **$1,080** | **$872** | [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) Operating cash flow decreased to **$208 million** in Q1 2022, with **$2.3 billion** in cash and equivalents remaining after **$304 million** in investing and **$548 million** in financing activities, and **$1.3 billion** available for stock repurchases - The decrease in operating cash flow was primarily due to lower net income and higher annual payouts under employee incentive compensation plans[171](index=171&type=chunk) - Financing activities in Q1 2022 included **$404 million** in debt repayments and **$140 million** in dividend payments[173](index=173&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=40&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces foreign exchange and interest rate risks, using derivatives for hedging, with a **10%** USD weakening potentially impacting foreign exchange contracts by **$55 million**, and will apply highly inflationary accounting for its Turkish subsidiary - The company is primarily exposed to foreign exchange risk from revenues denominated in currencies such as the Euro, British Pound, Chinese Renminbi, and Japanese Yen[188](index=188&type=chunk) - A sensitivity analysis indicated that if the U.S. Dollar uniformly weakened by **10%** against all currencies, the net pre-tax asset balance of its foreign exchange contracts would change by **$55 million**[190](index=190&type=chunk) - Effective **April 1, 2022**, the company will begin using highly inflationary accounting for its subsidiary in Turkey due to the country's three-year cumulative inflation rate exceeding **100%**[191](index=191&type=chunk) [Item 4. Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of **March 31, 2022**, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[194](index=194&type=chunk) - There were no changes in internal control over financial reporting during the quarter ended **March 31, 2022**, that have materially affected, or are reasonably likely to materially affect, the company's internal control[195](index=195&type=chunk) [PART II. OTHER INFORMATION](index=42&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=42&type=section&id=Item%201.%20Legal%20Proceedings) Legal proceedings, including environmental, opiate, and other litigation matters, are incorporated by reference from Note 6 of the financial statements - Information regarding legal proceedings is incorporated by reference from Part I, Item 1, Note 6 of this report[197](index=197&type=chunk) [Item 1A. Risk Factors](index=42&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K have been reported - The company reports no material changes to the risk factors previously disclosed in its 2021 Annual Report[197](index=197&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not repurchase common stock in Q1 2022, with **$1.3 billion** remaining available under its stock repurchase authorization as of March 31, 2022 - No shares were repurchased under the company's stock repurchase program during the first quarter of 2022[197](index=197&type=chunk) - As of **March 31, 2022**, **$1.3 billion** remained available for repurchase under the authorized program[197](index=197&type=chunk) [Item 6. Exhibits](index=43&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including incentive plan agreements, an offer letter, CEO/CFO certifications, and XBRL data files - The report includes certifications from the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act of 2002[199](index=199&type=chunk)

COVID-19 Impact - The COVID-19 pandemic has caused significant and unpredictable reductions in demand for certain products, particularly those sensitive to elective medical procedures [39]. - Supply chain disruptions due to the pandemic have led to increased costs and delays, particularly for amino acid raw materials used in parenteral nutrition products [40]. - The company has faced increased absenteeism and staffing challenges due to COVID-19, impacting operational efficiency and increasing expenses [42]. - The company faced challenges due to COVID-19, impacting operations, supply chains, and increasing expenses, with ongoing uncertainty regarding recovery [160]. - The company expects production levels to normalize over the course of 2022 after experiencing supply chain constraints and absenteeism due to COVID-19 [174]. Business Development and Acquisitions - The introduction of new products is critical for achieving strategic business objectives, but there are risks related to regulatory approvals and market acceptance [46]. - The Hillrom acquisition completed in 2021 requires successful integration to realize anticipated cost and revenue synergies, which may take longer than expected [59]. - Business development activities, including acquisitions and joint ventures, are essential for growth but carry risks related to integration and realization of expected benefits [61]. - The company incurred approximately $11.8 billion in acquisition-related debt to fund the Hillrom acquisition, refinance existing Hillrom debt, and cover related fees and expenses [69]. - The company completed the acquisition of Hillrom for a purchase price of $10.5 billion, with an enterprise value of approximately $12.8 billion [142]. - The company acquired PerClot for an upfront purchase price of $25 million, with potential additional cash consideration of up to $36 million [144]. - The company acquired Transderm Scop for an upfront purchase price of $60 million, with potential additional cash consideration of $30 million [145]. - The company acquired rights to Caelyx and Doxil for approximately $325 million in cash [146]. - The company completed the acquisition of Seprafilm for approximately $342 million in cash [147]. - Special items in 2021 included $240 million in acquisition and integration expenses related to the Hillrom acquisition and other business development activities [167]. Financial Performance - Global net sales reached $12.8 billion in 2021, a 10% increase from 2020, with international sales at $7.6 billion (up 12%) and U.S. sales at $5.2 billion (up 6%) [148]. - Net income attributable to Baxter stockholders was $1.3 billion, or $2.53 per diluted share, including special items that decreased net income by $552 million [148]. - Operating cash flows from continuing operations amounted to $2.2 billion in 2021, indicating a strong financial position [149]. - Capital expenditures were $743 million in 2021, focused on enhancing production efficiency and supporting future growth [150]. - Cash dividends paid to stockholders totaled $530 million in 2021, alongside the repurchase of 7.3 million shares [150]. - Net income for 2021 was $1.3 billion, an increase from $1.1 billion in 2020, with diluted earnings per share rising to $2.53 from $2.13 [196]. - Total net sales for 2021 reached $12.8 billion, up from $11.7 billion in 2020, with operating income increasing to $1.71 billion from $1.62 billion [199]. Operational Challenges - Increased competition in the healthcare market could lead to pricing pressures and loss of market share if the company fails to innovate or respond to customer needs [55]. - The healthcare market's focus on efficiency and reimbursement constraints may lead to declining spending on some of the company's products over time [57]. - The company may face challenges in maintaining product quality and safety, which could result in negative publicity and loss of customer confidence [51]. - The company faces challenges in obtaining sufficient components and raw materials, which could adversely affect manufacturing and distribution capabilities [70]. - Manufacturing complexities and regulatory requirements pose risks of production failures, leading to launch delays and potential revenue loss [74]. - The company relies on approximately 50 manufacturing facilities globally, and disruptions at any single facility could materially impact production and financial performance [75]. Regulatory and Compliance Risks - The company is subject to extensive regulations, including the Healthcare Reform Act, which could lead to pricing pressure and impact product demand [92]. - Compliance with the new European Union Medical Device Regulation, effective May 2021, requires adherence to stringent quality and safety standards [93]. - The company is exposed to risks related to reimbursement changes, particularly from government payers, which could adversely affect sales and pricing flexibility [104]. - The Healthcare Reform Act includes provisions that may increase Medicaid rebates and reduce Medicare payments, potentially leading to downward pricing pressure [106]. - The company has compliance programs in place to address legal and regulatory risks, but violations could result in significant penalties and adversely affect operations [99]. - The company is subject to environmental regulations that may increase operational costs and necessitate changes to manufacturing processes [97]. - The company must navigate complex global data privacy laws, including GDPR and CCPA, which impose stringent requirements and potential penalties for non-compliance [102]. - Compliance with stringent federal and state regulations is critical, as non-compliance could result in contract terminations and exclusion from federal healthcare programs [111]. Economic and Market Conditions - Increased global economic competition and trade tensions, particularly between the U.S., China, and Russia, may adversely affect the company's business and financial condition [87]. - Economic conditions may adversely affect cash flow generation, demand for products, and the solvency of customers, particularly in regions with deteriorating credit conditions [121]. - Fluctuations in foreign currency exchange rates and interest rates could materially affect operating results and liquidity, given the majority of revenue is generated outside the U.S. [122]. - The effective income tax rate was 12.3% in 2021, down from 14.1% in 2020, influenced by favorable geographic earnings mix and tax benefits [193]. Debt and Financial Obligations - The increased debt levels have reduced the company's flexibility to respond to changing business conditions and increased borrowing costs, impacting capital allocation for investments and operational flexibility [69]. - The company's senior debt credit ratings were downgraded to BBB by Standard & Poor's and Fitch, and Baa2 by Moody's due to debt issued for the Hillrom acquisition [214]. - The company has $23.6 billion in total contractual obligations, with $1.8 billion maturing in less than one year [218]. - A 100 basis point change in interest rates would impact the company's pre-tax earnings and cash flows by approximately $49 million over a one-year period [231]. - The company has approximately $4.9 billion of outstanding floating rate debt as of December 31, 2021 [230]. Research and Development - R&D expenses totaled $534 million in 2021, reflecting a balanced investment approach for new product development and overall R&D optimization [149]. - R&D expenses ratio decreased to 4.2% in 2021 from 4.5% in 2020, reflecting reduced project-related expenditures [185]. - The company is launching several new products and geographic expansions in areas such as chronic and acute renal care and smart pump technology [154]. Cash Flow and Investments - Cash provided by operating activities was $2.2 billion in 2021, an increase from $1.9 billion in 2020 [205]. - Cash used for investing activities in 2021 was $10.5 billion, primarily for acquisitions including Hillrom, compared to $494 million in 2020 [207]. - Cash generated from financing activities in 2021 included $11.8 billion to fund the Hillrom acquisition and repay certain indebtedness [208]. - The company generated cash flows from operations and has sufficient financial flexibility to issue debt and attract long-term capital to support growth objectives [213].

Financial Data and Key Metrics Changes - Baxter reported fourth quarter 2021 sales growth of 10% on a reported basis, 12% at constant currency, and 4% at operational rates [12] - Adjusted earnings per share for the fourth quarter were $1.04, up 30% year-over-year, with Hillrom contributing $0.08 to this figure [12][21] - For the full year 2021, sales increased by 10% on a reported basis, 7% on a constant currency basis, and 5% operationally, with adjusted earnings per share of $3.61, a 17% increase year-over-year [31] Business Line Data and Key Metrics Changes - Renal Care sales were $1 billion, increasing 4% on a constant currency basis, driven by growth in both HD and PD businesses [23] - Medication Delivery sales of $784 million increased 6% on a constant currency basis, reflecting recovery in hospital admissions and demand for infusion pumps [24] - Pharmaceutical sales of $604 million advanced 8% on a constant currency basis, driven by international pharmacy compounding and anesthesia growth [25] - Clinical Nutrition sales were $249 million, increasing 4% on a constant currency basis, while Advanced Surgery sales were flat at $255 million [26] - Acute Therapies sales declined 7% on a constant currency basis, but exceeded expectations due to elevated demand for CRRT [27] - Hillrom's unaudited sales for the full quarter were $724 million, reflecting supply constraints impacting product shipments [28] Market Data and Key Metrics Changes - Sales in the Americas increased 5% on both constant currency and operational basis, while Europe, Middle East, and Africa grew 5% on a constant currency basis and 1% operationally [22] - APAC region sales advanced 6% on a constant currency basis and 5% operationally [22] Company Strategy and Development Direction - The acquisition of Hillrom is seen as a pivotal point in Baxter's transformation, enhancing its med tech portfolio and enabling connected care innovations [11][16] - The company is focused on operational efficiency and addressing supply chain challenges while exploring cost pass-through opportunities in select geographies [15][33] - Baxter aims to innovate and introduce new products, including the anticipated U.S. launch of the NOVUM IQ smart pump and TrueVue connected digital solutions [17] Management's Comments on Operating Environment and Future Outlook - Management acknowledged ongoing supply chain disruptions and inflationary pressures impacting performance, particularly in the first quarter of 2022 [32][33] - The company expects a strong ramp in sales into the second quarter, driven by new product launches and easing COVID-19 dynamics [33] - For 2022, Baxter anticipates global sales growth of 24% to 25% on a reported basis and adjusted earnings of $4.25 to $4.35 per diluted share [34] Other Important Information - Baxter's adjusted gross margin for the fourth quarter was 44.3%, reflecting operational improvements and favorable product mix [29] - The company returned approximately $1.1 billion to shareholders through dividends and share repurchases in 2021 [32] Q&A Session Summary Question: What is driving the lower EPS growth for base Baxter? - Management noted short-term impacts from supply chain issues and inflation, with expectations for improvement as the year progresses [37][39] Question: Are there any COVID headwinds affecting revenue guidance? - Management indicated that COVID-related impacts are primarily supply chain-related, with expectations for normalization throughout the year [41][49] Question: What is the contribution from Hillrom in the first quarter guidance? - Hillrom is expected to contribute over $0.10 to EPS in the first quarter, despite facing supply chain challenges [52] Question: Can you elaborate on passing inflationary costs to customers? - Management stated that pricing strategies are in place, and selective cost increases will be implemented based on exceptional circumstances [54] Question: What is the status of the NOVUM IQ approval? - The company is in the final stages of documentation submission to the FDA, expecting a response within 31 days [57] Question: When will the portfolio evaluation process conclude? - Management anticipates providing updates on portfolio adjustments by May or later, focusing on increasing CAGR and profitability [62] Question: Are there any revenue synergies included in the 2022 guidance? - No revenue synergies are included in the 2022 guidance, but management is optimistic about long-term growth opportunities from the Hillrom acquisition [65]

Baxter and Hillrom Integration - Baxter is integrating Hillrom and evaluating revenue growth opportunities in a $40 billion+ total addressable market (TAM) with a 5%+ weighted average market growth rate (WAMGR)[5] - Baxter expects to deliver approximately $250 million of annual pre-tax cost synergies by the end of 2024 through optimizing organizational design, simplifying processes, vendor contracting, and consolidating operations and facilities[5, 30] - Baxter anticipates low double-digit accretion to adjusted earnings beginning in 2022 and expanding thereafter, with a high-single digit Return on Invested Capital (ROIC) expected by 2026[5] Financial Performance and Strategy - In FY 2020, the combined revenue geography was 47% in the U S and 53% outside the U S[8] - Baxter announced a quarterly dividend of $0.28 per share, reflecting a strong financial position and commitment to returning value to investors[31] - Baxter plans to moderate share repurchases in the near term to focus on deleveraging[31] Innovation and Product Development - Baxter is launching new products like the Novum IQ Suite, Premix Injectables, PanOptic & MacroView Plus, and Prismax 2 to meet the needs of patients and providers[28] - Baxter is investing $275 million in underserved communities[32] Corporate Responsibility - Baxter aims to achieve carbon neutrality for direct operations by 2040[32]