Baxter(BAX) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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 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 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 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 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] Condensed Consolidated Statements of Cash Flows 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 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][27][29] - In March 2022, acquired the rights to Zosyn, a premixed frozen piperacillin-tazobactam product, from a subsidiary of Pfizer Inc. for $122 million[30] - 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] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] Product Category Net Sales Reporting 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 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 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] - Financing activities in Q1 2022 included $404 million in debt repayments and $140 million in dividend payments[173] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] - 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] Item 4. Controls and Procedures 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] - 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] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - As of March 31, 2022, $1.3 billion remained available for repurchase under the authorized program[197] Item 6. Exhibits 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]