Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒

The number of shares of the registrant’s Common Stock, par value $1.00 per share, outstanding as of October ~~31, 2016~~27, 2017 was ~~543,919,936~~544,831,923 shares.

The accompanying notes are an integral part of these condensed consolidated financial statements.

The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (the company or Baxter) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended December 31, ~~2015 (2015~~2016 (2016 Annual Report).

In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair statement of the interim periods. All such adjustments, unless otherwise noted herein, are of a normal, recurring nature. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year.

Certain reclassifications have been made to conform the prior period condensed consolidated statements to the current period presentation.

Currency restrictions enacted in Venezuela require Baxter to obtain approval from the Venezuelan government to exchange Venezuelan bolivars for U.S. dollars and require such exchange to be made at the official exchange rate established by the government. In the first quarter of ~~Baxalta Incorporated~~

~~On July 1, 2015, Baxter completed~~2016, the ~~distribution~~Venezuelan government moved from the three-tier exchange rate system to a two-tiered exchange rate system and the official rate for food and medicine imports was adjusted from 6.3 to 10 bolivars per U.S. dollar. Due to a recent decline in transactions settled at the official rate or the secondary rate and limitations on the company’s ability to repatriate funds generated by its Venezuela operations, the company concluded in the second quarter of ~~approximately 80.5% of~~2017 that it no longer met the ~~outstanding common stock of Baxalta Incorporated (Baxalta) to Baxter shareholders (the Distribution). The Distribution was made to Baxter’s shareholders of record as of~~accounting criteria for control over its business in Venezuela and the ~~close of business~~company deconsolidated its Venezuelan operations on June ~~17, 2015 (Record Date), who received one share of Baxalta common stock for each Baxter common share held as of the Record Date.~~30, 2017. As a result of deconsolidating the ~~Distribution, Baxalta became an independent public~~Venezuelan operations, the company ~~trading under the symbol “BXLT” on the New York Stock Exchange. On June 3, 2016,~~recorded a ~~wholly-owned subsidiary~~pre-tax charge of ~~Shire plc (Shire) merged with and into Baxalta, with Baxalta as the surviving company~~$33 million in other (income) expense, net in the ~~merger (Merger).~~second quarter of 2017. This charge included the write-off of the company’s investment in its Venezuelan operations, related unrealized translation adjustments and elimination of intercompany amounts. Beginning in the third quarter of 2017, the company no longer included the results of its Venezuelan business in its consolidated financial statements.

In September 2017, Hurricane Maria caused damage to certain of the company's assets in ~~this report~~Puerto Rico and disrupted operations. Insurance, less applicable deductibles and subject to ~~Baxalta prior~~any coverage exclusions, covers the repair or replacement of the company's assets that suffered loss or damage, and the company is working closely with its insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to the ~~Merger closing date refers to Baxalta~~company as ~~a stand-alone public company. References in this report to Baxalta subsequent to the Merger closing date refer to Baxalta as a subsidiary of Shire.~~

As a result of the ~~separation,~~damages and the loss the company suffered. The company's insurance policies also provide coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. In the third quarter of 2017, the Company recorded $21 million of pre-tax charges related to damages caused by the hurricane, including $11 million related to the impairment of damaged inventory and fixed assets as well as $10 million of idle facility and other costs. These amounts were recorded as a component of cost of sales in the condensed consolidated statements of income ~~condensed consolidated balance sheets, condensed consolidated statements~~for the three and nine month periods ended September 30, 2017. At this time, the full amount of ~~cash flow~~combined property damage and ~~related financial information reflect Baxalta’s operations, assets~~business interruption costs and ~~liabilities,~~recoveries cannot be estimated, and ~~cash flows~~accordingly, no additional amounts, including amounts for anticipated insurance recoveries, have been recorded as ~~discontinued operations for all periods presented. Refer to Note 2 for additional information regarding the separation~~ of ~~Baxalta.~~September 30, 2017.

In ~~March 2016,~~August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. ~~2016-09,~~2017-12, Targeted Improvements to ~~Employee Share-Based Payment~~ Accounting for Hedging Activities, which amends ASC ~~Topic 718,~~815, Derivatives and Hedging. The purpose of this ASU is to better align a company’s risk management activities and financial reporting for hedging relationships, simplify the hedge accounting requirements, and improve the disclosures of hedging arrangements. The effective date for this ASU is January 1, 2019, with early adoption permitted. The company is evaluating the potential effects on the consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends ASC 715, Compensation – ~~Stock Compensation.~~Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic postretirement benefit cost in operating expenses. The ~~updated guidance requires all tax effects related to share-based payment~~service cost component of net periodic postretirement benefit cost should be ~~recorded in income tax expense~~presented in the ~~consolidated statement of income. Current guidance requires that tax effects of deductions in excess of share-based~~same operating expense line items as other employee compensation costs ~~(windfall~~

~~tax benefits) be recorded in additional paid-in capital,~~arising from services rendered during the period. The other components of net benefit cost, including interest costs, expected return on assets, amortization of prior service cost/credit, and tax deficiencies (shortfalls) be recorded in additional paid-in capital to the extent of previously recognized windfall tax benefits, with the remainder recorded in income tax expense. The new guidance also requires all tax-related cash flows resulting from share-based paymentssettlement and curtailment effects, are to be ~~reported as~~included separately and outside of any subtotal of operating ~~activities in~~income. The company intends to adopt the consolidated statement of cash flows, rather than the current requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. The guidance isstandard effective ~~for the company beginning~~ January 1, ~~2017. The~~2018. This guidance will impact the presentation of the company’s consolidated statements of income with no impact on net income. Upon adoption of the standard ~~is dependent~~ on ~~the timing and value of award exercises and vesting. The company has evaluated the impact of this standard on its consolidated financial statements~~January 1, 2018, operating income for the three and nine ~~month periods~~months ended September 30, ~~2016, and determined that net income and operating cash flow for the periods would have each increased by approximately $9~~2017, will be recast to increase $8 million and ~~$36~~$25 million, respectively, ~~if the company had adopted the new standard January 1, 2016.~~

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees are required to recognize lease assets and liabilities on the balance sheet for leases classified as operating leases under current GAAP. This ASU is effective for the company beginning January 1, 2019. The company is currently evaluating the impact of this standard on its consolidated financial statements.with a corresponding increase in other (income) expense, net.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU No. 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU No. 2014-09 will be effective for the company beginning on January 1, 2018. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The company has completed an assessment of the new standard and is currently ~~evaluating~~executing its detailed implementation plan and developing processes for gathering information for required disclosures. Based on the work performed to date, the company does not expect the adoption of the new standard to have a material impact ~~of adopting~~on the ~~standard on its~~ consolidated financial statements. The company expects to adopt the standard using the modified retrospective method.

As of January 1, ~~2016,~~2017, the company adopted on a prospective basis ASU No. ~~2015-03, Simplifying the Presentation of Debt Issuance Costs,~~2016-09, Improvements to Employee Share-Based Payment Accounting, which ~~amended~~amends ASC ~~835-30, Interest - Imputation of Interest. This~~Topic 718, Compensation – Stock Compensation. The updated guidance requires ~~that debt issuance costs~~all tax effects related to ~~a recognized debt liability~~share-based payments to be presented as a direct deduction from the carrying amount of the related debt liability. As a result of the adoption, the company reclassified debt issuance costs of $13 million from other assets to long-term debtrecorded in income tax expense in the ~~Company’s~~ consolidated ~~balance sheet as~~statement of ~~December 31, 2015.~~income. Previous guidance required that tax effects of deductions in excess of share-based compensation costs (windfall tax benefits) be recorded in additional paid-in capital, and tax deficiencies be recorded in additional paid-in capital to the extent of previously recognized windfall tax benefits, with the remainder recorded in income tax expense. The ~~adoption of this~~new guidance ~~did not impact~~also requires the ~~company’s consolidated statements of earnings, comprehensive income, shareholders’ equity, or~~ cash ~~flows.~~

As of January 1, 2016, the company adopted ASU No. 2015-05, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This guidance requires software licenses within cloud computing arrangementsflows resulting from windfall tax benefits to be ~~classified~~reported as ~~intangible assets. The adoption~~operating activities in the consolidated statement of ~~ASU No. 2015-05 did not have a material impact on Baxter’s financial position or results of operations.~~

~~As of July 1, 2016,~~cash flows, rather than the ~~company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230). The guidance requires that the cash payments for debt prepayment or debt extinguishment costs be classified~~previous requirement to present windfall tax benefits as ~~cash outflows for~~an inflow from financing activities and an outflow from operating activities. As a result of the adoption, net income and operating cash flow for the three and nine months ended September 30, 2017, increased by approximately $18 million and $48 million, respectively. The prior periods have not been restated and therefore, windfall tax benefits of $8 million and $35 million, respectively, for the three and nine months ended September 30, 2016, were not included in net income and were included as an inflow from financing activities and an outflow from operating activities in the ~~third quarter~~condensed consolidated statement of ~~2016 the company has reclassified certain debt prepayments and debt extinguishment costs from operating to financing activities which resulted in a decrease in financing~~ cash flows of $16 million and $124 million for the first nine months of 2016 and 2015, respectively. The adoption of this guidance did not impact the company’s consolidated statements of earnings, consolidated balance sheet, comprehensive income, or shareholders’ equity.flows.

On July 1, 2015, Baxter completed the distribution of approximately 80.5% of the outstanding common stock of Baxalta Incorporated (Baxalta) to Baxter shareholders (the Distribution). After giving effect to the Distribution, the company retained 19.5% of the outstanding common stock, or 131,902,719 shares of Baxalta (Retained Shares). ~~Effective January 27, 2016, Baxter completed a debt-for-equity exchange through the transfer~~The Distribution was made to Baxter’s shareholders of ~~37,573,040 Retained Shares in exchange for the extinguishment~~record as of the ~~$1.45 billion aggregate principal amount~~close of ~~indebtedness outstanding~~business on June 17, 2015 (Record Date), who received one share of Baxalta common stock for each Baxter common share held as of the Record Date. As a result of the Distribution, Baxalta became an independent public company trading under the ~~company’s prior U.S. dollar denominated revolving credit facility, which was terminated in connection~~symbol “BXLT” on the New York Stock Exchange.

On June 3, 2016, Baxalta became a wholly-owned subsidiary of Shire plc (Shire) through a merger of a wholly-owned Shire subsidiary with the closing of this exchange. On March 16, 2016, the company completed a debt-for-equity exchange, in which Baxter exchanged 63,823,582 Retained Shares for the extinguishment of $2.2 billion in aggregate principal amount of Baxter indebtedness. On May 6, 2016 the company contributed 17,145,570 Retained Shares to Baxter’s U.S. pension fund. On May 26, 2016 the company completed an equity-for-equity exchange by exchanging 13,360,527 Retained Shares for 11,526,638 shares of Baxter. The company held no shares ofand into Baxalta, with Baxalta as the surviving subsidiary (the Merger). References in this report to Baxalta prior to the Merger closing date refer to Baxalta as a stand-alone public company. References in this report to Baxalta subsequent to the Merger closing date refer to Baxalta as a subsidiary of ~~September 30, 2016. See Note 8 for additional details regarding these transactions.~~Shire.

For a portion of Baxalta’s operations, the legal transfer of Baxalta’s assets and liabilities did not occur with the separation of Baxalta on July 1, 2015 due to the time required to transfer marketing authorizations and other regulatory requirements in certain countries. Under the terms of the International Commercial Operations Agreement (ICOA), Baxalta is subject to the risks and entitled to the benefits generated by these operations and assets until legal transfer; therefore, the net economic benefit and any cash collected by these entities by Baxter are transferred to Baxalta. As of September 30, 2017, all countries have been separated.

Following is a summary of the operating results of Baxalta, which have been reflected as discontinued operations for the three and nine months ended September 30, ~~2016~~2017 and ~~2015.~~2016. The assets and liabilities have been classified as held for disposition as of ~~September 30, 2016 and~~ December 31, ~~2015.~~

As2016. All assets and liabilities have been transferred as of September 30, ~~2016 and~~2017.

As of December 31, ~~2015,~~2016, Baxter ~~has~~ recorded a ~~net~~ liability of ~~$44~~$47 million ~~and $190 million, respectively,~~ for its obligation to transfer these net assets to Baxalta. In the first nine months of 2016, the company transferred $156 million of net assets to Baxalta resulting in a gain of $17 million, which is recorded within income from discontinued operations, net of tax. It is expected that the majority of the remaining operations will be transferred to Baxalta during the fourth quarter of 2016.

Baxter and Baxalta entered into several agreements in connection with the July 1, 2015 separation, including a transition services agreement (TSA), separation and distribution agreement, manufacturing and supply agreements (MSA), tax matters agreement, an employee matters agreement, a long-term services agreement, and a shareholder’s and registration rights agreement.

Pursuant to the TSA, Baxter and Baxalta and their respective subsidiaries are providing to each other, on an interim, transitional basis, various services. Services being provided by Baxter include, among others, finance, information technology, human resources, quality supply chain and certain other administrative services. The services generally commenced on the Distribution date and are expected to terminate within ~~24 months (or~~ 36 months ~~in the case of certain information technology services)~~ of the Distribution date. Billings by Baxter under the TSA are recorded as a reduction of the costs to provide the respective service in the applicable expense category, primarily in marketing and administrative expenses, in the condensed consolidated statements of income. In the three and nine months ended September 30, 2017, the company recognized approximately $11 million and $47 million, respectively, as a reduction to marketing and administrative expenses related to the TSA. In the three and nine months ended September 30, 2016, the company recognized approximately $26 million and $79 million, respectively, as a reduction into marketing and administrative expenses related to the TSA.

Pursuant to the MSA, Baxalta or Baxter, as the case may be, manufactures, labels, and packages products for the other party. The terms of the agreements range in initial duration from five to ~~ten~~10 years. In the three and nine months ended September 30, 2017, Baxter recognized approximately $6 million and $18 million, respectively, in sales to Baxalta. In the three and nine months ended September 30, 2016, Baxter recognized approximately $6 million and $31 million, respectively, in sales to Baxalta. In addition, in the three and nine months ended September 30, 2017, Baxter recognized $6$35 million and ~~$30~~$133 million, respectively, in cost of sales related to purchases from Baxalta pursuant to the MSA. In the three and nine months ended September 30, 2016, Baxter recognized $47 million and $139 million, respectively, in cost of sales related to purchases from Baxalta pursuant to the MSA. The cash flows associated with these agreements are included in cash flows from operations — continuing operations.

Cash outflows of $20 million and inflows of $3 million were reported in cash flows from operations – discontinued operations for the ~~period~~nine-month periods ending September 30, ~~2016.~~2017 and 2016, respectively. These relate to non-assignable tenders whereby Baxter

remains the seller of Baxalta products, transactions related to importation services Baxter provides in certain countries, in addition to trade payables settled ~~by Baxter~~post local separation on Baxalta’s ~~behalf after the local separation.~~behalf.

The numerator for both basic and diluted earnings per share (EPS) is either net income, income from continuing operations, or income from discontinued operations. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The dilutive effect of outstanding stock options, restricted stock units (RSUs) and performance share units (PSUs) is reflected in the denominator for diluted EPS using the treasury stock method.

The effect of dilutive securities included unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excluded 0.1 million and 2.8 million of equity awards for the third quarter and nine months ended September 30, 2017, respectively, and 0.3 million and 10 million of equity awards for the third quarter and nine months ended September 30, 2016, respectively, ~~and 18 million and 16 million equity awards for the third quarter and nine months ended September 30, 2015,~~ because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 9 for additional information regarding items impacting basic shares.

In July 2012, the Board of Directors authorized the repurchase of up to ~~$2.0~~$2 billion of the company’s common stock. The board of directors increased this authority by an additional $1.5 billion in November 2016. During the first three quarters of 2017, the company repurchased 4.7 million shares for $275 million in cash. The company has $1.4 billion remaining available under the authorization as of September 30, 2017.

On July 27, 2017, Baxter acquired 100 percent of Claris Injectables Limited (Claris), a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of approximately $629 million, net of cash acquired. Through the acquisition, Baxter added capabilities in production of essential generic injectable medicines, such as anesthesia and analgesics, renal, anti-infectives and critical care in a variety of presentations including bags, vials and ampoules. The following table summarizes the fair value of the assets acquired and liabilities assumed as of the acquisition date for the company’s acquisition of Claris:

The valuation of total assets acquired and liabilities assumed are preliminary and measurement period adjustments may be recorded in the future as the company finalizes its fair value estimates. The results of operations of Claris have been included in the company’s condensed consolidated statement of income since the date the business was acquired and were not material. Acquisition and integration costs associated with the Claris acquisition were $15 million and $20 million in the three and nine months ended September 30, 2017, respectively, and were primarily included within marketing and administrative expenses on the condensed consolidated statements of income.

Baxter allocated $235 million of the total consideration to acquired intangible assets with the residual consideration of $310 million recorded as goodwill. The acquired intangible assets include $115 million of developed technology with a weighted-average useful life of 8 years and $120 million of in-process research and development with an indefinite useful life. For the in-process research and development, additional R&D will be required prior to technological feasibility. The goodwill, which is not deductible for tax purposes, includes the value of potential future technologies as well as the overall strategic benefits to Baxter in the injectables market, and is included in the Hospital Products segment.

The fair value of intangible assets was determined using the income approach. The income approach is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life, discounted to present value. The discount rates used to measure the developed technology and in-process research and development intangible assets were 12% and 13%, respectively. The company considers the fair value of each of the acquired intangible assets to be Level 3 assets due to the significant estimates and assumptions used by management in establishing the estimated fair values. Refer to Note 10 within the 2016 Annual Report for additional information regarding fair value measurements.

In the third quarter of ~~2016, the company repurchased approximately 0.9 million shares pursuant to this authority and has $0.4 billion remaining available under this authorization as of September 30, 2016.~~

In the second quarter of 2016, the company executed an equity-for-equity exchange of Retained Shares for 11.5 million outstanding Baxter shares. Refer to Note 8 for additional information regarding Retained Share transactions.

~~In the first quarter of 2016,~~2017, Baxter paid approximately ~~$23~~$10 million to acquire the rights to ~~vancomycin injection in 0.9% Sodium Chloride (Normal Saline) in 500 mg, 750 mg and 1 gram presentations~~Clindamycin Dextrose from Celerity Pharmaceuticals, LLC (Celerity). Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years.

In the second quarter of 2017, Baxter paid approximately $10 million to acquire the rights to Clindamycin Saline from Celerity. Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years.

In the first quarter of 2016, Baxter paid approximately $23 million to acquire the rights to Vancomycin injection in 0.9% Sodium Chloride (Normal Saline) in 500mg, 750mg, and 1 gram presentations from Celerity. Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years. Refer to Note 5 within the ~~2015~~2016 Annual Report for additional information regarding the company’s agreement with Celerity.

In April 2017, Baxter paid approximately $8 million to acquire Wound Care Technologies, Inc., a medical technology company that develops and markets external tissue expansion devices for the wound care market. The purchase price allocation resulted in an amortizable intangible asset of $8 million that will be amortized over its estimated economic life of 8 years.

As of September 30, ~~2016,~~2017, there were no accumulated goodwill impairment losses.

Intangible asset amortization expense was ~~$42~~$38 million and ~~$40~~$42 million in the three months ended September 30, 2017 and 2016, respectively, and ~~2015, respectively,~~$112 million and $124 million ~~and $120 million for~~in the nine months ended September 30, 2017 and 2016, ~~and 2015,~~ respectively.

In the third quarter of 2016, the company recorded an impairment charge of $27 million related to an indefinite-lived intangible asset (acquired IPR&D) in the company’s Renal segment and its in-center hemodialysis program. The assets of the business were written down to estimated fair value and recorded in research and development expenses.

In the second quarter of 2016, the company recorded an impairment charge of $51 million, of which $41 million related to a developed technology asset, relating to the company’s Hospital Products segment synthetic bone repair products business which was acquired from ApaTech Limited in 2010. The assets of the business were written down to estimated fair value and recorded in cost of sales.

The decrease in other intangible assets, net during the first nine months of 2016 was primarily driven by amortization expense and the impairments noted above, partially offset by the acquisition of vancomycin detailed in Note 5 and currency translation adjustments (CTA).

~~In the first quarter of 2016, the~~The company ~~refined its estimates for remediation activities related~~has undertaken a field corrective action with respect to the SIGMA SPECTRUM infusion pump. Remediation primarily includes inspection and repair charges as well as a temporary replacement pump ~~recall and decreased~~in a limited number of cases. In the ~~reserve by $12 million. For the three and nine months ended September 30, 2016,~~third quarter of 2017, the company recorded ~~utilization~~a charge of ~~the SIGMA SPECTRUM reserve~~$22 million related primarily to cash costs associated with remediation efforts and none of ~~zero and $24 million, respectively. The balance~~these charges have been utilized as of September 30, ~~2016 was $4 million for the SIGMA SPECTRUM infusion pump recall. Refer to the 2015 Annual Report for further information about the company’s infusion pump recall activities.~~2017.

Beginning in the second half of 2015, the company initiated actions to transform its cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through September 30, 2017, the company has incurred cumulative pretax costs of $526 million related to these actions. The costs consisted primarily of employee termination, implementation costs and accelerated depreciation. The company ~~records charges from its business optimization initiatives~~expects to incur additional pretax costs of approximately $285 million and capital expenditures of $90 million through the completion of these initiatives. The company expects to complete these activities by the end of 2018. The costs will primarily ~~related to optimizing~~include employee termination costs, implementation costs, and accelerated depreciation. Of the ~~company’s overall~~total estimated cost, ~~structure on a global basis, as~~ the company ~~streamlines its operations, rationalizes its manufacturing facilities, enhances its general and administrative infrastructure and realigns certain research and development (R&D) activities.~~expects that approximately 5 percent of the charges will be non-cash.

During the three and nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, the company recorded the following charges related to business optimization programs.

~~Included in the restructuring~~For segment reporting, business optimization charges ~~for~~are unallocated expenses.

During the three ~~months ended September 30, 2016 were net employee termination costs of $101 million which primarily consisted of a global workforce reduction program~~ and ~~$27 million related to the impairment of acquired IPR&D as described in Note 6. The restructuring charges for the~~ nine months ended September 30, 2016 also include $54 million for costs associated with the discontinuance of the VIVIA home hemodialysis development program. These costs consisted of contract termination costs of $21 million, asset impairments of $31 million,2017 and ~~other exit costs of $2 million.~~

~~For the three and nine month periods ended September 30,~~ 2016, ~~and 2015,~~ the company recorded the following ~~components of~~ restructuring ~~costs:~~charges.

Costs to implement business optimization programs for the three and nine months ended September 30, 2017, were $21 million and $58 million respectively, and consisted primarily of external consulting and transition costs as well as employee salary and related costs. These costs were included within cost of sales and marketing and administrative expense.

Costs to implement business optimization programs for the three and nine months ended September 30, 2016, were $25 million and $44 million, ~~respectively. These costs consisted~~respectively, and were related primarily ofto external consulting ~~and employee salary and related~~ costs. ~~The~~These costs were included within marketing and administrative and R&D expense.

Costs related to the integration of Gambro AB (Gambro) were included within marketing and administrative expense for all referenced periods.

For the three and nine months ended September 30, 2017, the company recognized accelerated depreciation, primarily associated with facilities to be closed, of zero and $8 million, respectively. The costs were recorded within cost of sales, marketing and administrative and R&D expense.

For the three and nine months ended September 30, 2016, the company recognized $11 million and $25 million, respectively, of accelerated depreciation, primarily associated with facilities to be ~~closed of $11 million and $25 million, respectively.~~closed. The costs were recorded in cost of sales for all referenced periods.

The following table summarizes ~~cash~~ activity in the reserves related to the company’s ~~restructuring~~business optimization initiatives.

Reserve adjustments primarily relate to employee termination cost reserves established in prior periods.

~~The~~Approximately 80% of the company’s restructuring reserves ~~of $196 million~~ as of September 30, ~~2016 consisted of $171 million of~~2017 relate to employee termination costs, ~~and~~with the remaining reserves ~~related~~attributable to contract termination costs. The reserves are expected to be substantially utilized by the end of ~~2017.~~2018.

In ~~August 2016,~~May 2017, Baxter issued €600 million of senior notes ~~with a total aggregate principal amount of $1.6 billion, comprised of $400 million~~ at a fixed coupon rate of ~~1.70%~~1.30% due in ~~August 2021, $750 million at~~May 2025. The company has designated this debt as a ~~fixed coupon rate~~non-derivative net investment hedge of ~~2.60% due in August 2026, and $450 million at a fixed coupon rate of 3.50% due in August 2046.~~its European operations for accounting purposes.

In September 2016, Baxter redeemed an aggregate of approximately $1 billion in principal amount of its 1.850% Senior Notes due 2017, 1.850% Senior Notes due 2018, 5.375% Senior Notes due 2018, 4.500% Senior Notes due 2019, 4.250% Senior Notes due 2020, and 3.200% Senior Notes due 2023. Baxter paid approximately $1 billion, including accrued and unpaid interest and tender premium, to redeem such notes. As a result of the debt redemptions, the company recognized a loss on extinguishment of debt in the third quarter of 2016 of approximately $52 million, which is included in other (income) expense, ~~(income),~~ net.

On January 27, 2016, Baxter exchanged Baxalta Retained Shares for the extinguishment of $1.45 billion aggregate principal amount outstanding under its $1.8 billion U.S. dollar-denominated revolving credit facility. This exchange extinguished the indebtedness under the facility, which was terminated in connection with such debt-for-equity exchange. There were no material prepayment penalties or breakage costs associated with the termination of the facility. Baxter recognized a net realized gain of $1.25 billion related to the Baxalta Retained Shares exchanged, which was included in other ~~income,~~(income) expense, net for the ~~nine months~~period ended September 30, 2016.

On March 16, 2016, the company exchanged Baxalta Retained Shares for the extinguishment of approximately $2.2 billion in aggregate principal amount of its 0.950% Notes due May 2016, 5.900% Notes due August 2016, 1.850% Notes due January 2017, 5.375% Notes due May 2018, 1.850% Notes due June 2018, 4.500% Notes due August 2019, and 4.250% Notes due February 2020 purchased by certain third party purchasers in the previously announced debt tender offers. As a result, the company recognized a net loss on extinguishment of debt totaling $101 million and a net realized gain of $2.0 billion on the Baxalta Retained Shares exchanged, which are included in other ~~income,~~(income) expense, net for the ~~nine months~~period ended September 30, 2016.

In the second quarter of 2016, the company repaid the $190 million outstanding balance of its 0.95% senior unsecured notes that matured in June 2016. In the third quarter of 2016, the company repaid the $130 million outstanding balance of its 5.9% senior unsecured notes that matured in September 2016.

During the first nine months of 2016, the company issued and redeemed commercial paper, of which zero was outstanding as of September 30, 2016. There was a balance of $300 million outstanding at December 31, 2015 with a weighted-average interest rate of 0.6%. This commercial paper is classified as short-term debt.

The following is a summary of the activity relating to the company’s securitization arrangement in Japan.

The impacts on the condensed consolidated statements of income relating to the sale of receivables were immaterial for each period. Refer to the ~~2015~~2016 Annual Report for further information regarding the company’s securitization ~~arrangement.~~agreements.

The company invests excess cash in certificates of deposit or money market funds and diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss.

The company continues to do business with foreign governments in certain countries including Greece, Spain, Portugal and Italy that have experienced a deterioration in credit and economic conditions. As of September 30, ~~2016,~~2017, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled ~~$181~~$151 million.

Global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. Governmental actions and customer-specific factors may also require the company to re-evaluate the collectability of its receivables and the company could potentially incur additional credit losses. These conditions may also impact the stability of the Euro.

The company operates on a global basis and is exposed to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs.

The company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, British Pound, Chinese Yuan, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, ~~Swedish Krona,~~ Mexican Peso and New Zealand Dollar. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from foreign exchange. Financial market and currency volatility may limit the company’s ability to cost-effectively hedge these exposures.

The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company’s policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believes is appropriate.

To manage this mix in a cost-efficient manner, the company periodically enters into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.

The company does not hold any instruments for trading purposes and none of the company’s outstanding derivative instruments contain credit-risk-related contingent features.

All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets and are classified as short-term or long-term based on the scheduled maturity of the instrument. Based upon the exposure being hedged, the company designates its hedging instruments as cash flow, or fair value, or net investment hedges.

The company may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities.

For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is accumulated in accumulated other comprehensive income (AOCI) and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid are initially recorded as assets and reclassified to other comprehensive income (OCI) over the life of the option, and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in net sales, cost of sales, ~~and~~ net interest expense, and other (income) expense, net, and primarily relate to forecasted third-party sales denominated in foreign currencies, forecasted intercompany sales denominated in foreign currencies, and anticipated issuances of debt, respectively.

The notional amounts of foreign exchange contracts were ~~$438~~$667 million and ~~$378~~$561 million as of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. There were no outstanding interest rate contracts designated as cash flow hedges as of September 30, ~~2016~~2017 and December 31, ~~2015.~~2016. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of September 30, ~~2016~~2017 is 15 months.

The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These instruments hedge the company’s earnings from changes in the fair value of debt due to fluctuations in the designated benchmark interest rate. For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets the loss or gain on the underlying hedged item. Fair value hedges are classified in net interest expense, as they hedge the interest rate risk associated with certain of the company’s fixed-rate debt.

The total notional amount of interest rate contracts designated as fair value hedges was $200 million ~~and $1.3 billion~~ as of September 30, ~~2016~~2017 and December 31, ~~2015, respectively.~~2016.

In May 2017, the company issued €600 million of senior notes due May 2025. The ~~decrease is due~~company has designated this debt as a hedge of a portion of its net investment in its European operations and, as a result, mark to ~~swaps terminated~~spot rate adjustments of the outstanding debt balances have been and will be recorded as a component of AOCI. As of September 30, 2017, the company had an accumulated pre-tax unrealized translation loss in ~~conjunction with~~AOCI of $70 million related to the ~~previously mentioned debt-for-equity exchanges and debt redemptions.~~Euro-denominated senior notes.

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. If the company removes the cash flow hedge designation because the hedged forecasted transactions are no longer probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions are still probable of occurring are deferred and recognized consistent with the loss or income recognition of the underlying hedged items.

There were no hedge dedesignations in the first nine months of ~~2016~~2017 or ~~2015~~2016 resulting from changes in the company’s assessment of the probability that the hedged forecasted transactions would occur.

If the company terminates a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged items at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated during the first nine months of 2017. In March 2016, the company terminated a total notional value of $765 million of interest rate contracts in connection with the March debt tender offers, resulting in a $34 million reduction to the debt extinguishment loss. In September 2016, the company terminated a total notional value of $335 million of interest rate contracts in connection with the September debt redemptions, resulting in a $14 million reduction to the debt extinguishment loss. The company terminated a total notional value of $1.65 billion of interest rate contracts in connection with debt tender offers, which resulted in a $33 million reduction to the debt extinguishment loss, during the first nine months of 2015.

The company uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the company’s intercompany and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges, and the change in fair value, which substantially offsets the change in book value of the hedged items, is recorded directly to other (income) expense, ~~(income),~~ net. The terms of these instruments generally do not exceed one month.

The total notional amount of undesignated derivative instruments was ~~$914~~$807 million as of September 30, ~~2016~~2017 and ~~$580~~$822 million as of December 31, ~~2015.~~2016.

The following tables summarize the income statement locations and gains and losses on the company’s derivative instruments for the three months ended September 30, ~~2016~~2017 and ~~2015.~~2016.

The following tables summarize the income statement locations and gains and losses on the company’s derivative instruments for the nine months ended September 30, ~~2016~~2017 and ~~2015.~~2016.

For the company’s fair value hedges, an equal and offsetting gain of $7$1 million ~~and loss of $19 million were~~was recognized in net interest expense in the third quarter and first nine months of ~~2016,~~2017, respectively, and an equal and offsetting ~~gains~~gain of ~~$11~~$7 million and ~~$24~~loss of $19 million ~~were~~was recognized in net interest expense in the third quarter and first nine months of ~~2015,~~2016, respectively, as adjustments to the underlying hedged item, fixed-rate debt. Ineffectiveness related to the company’s cash flow and fair value hedges for ~~the nine months ended September 30, 2016 was~~all periods presented were not material.

As of September 30, ~~2016, $3~~2017, $10 million of deferred, net after-tax losses on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of September 30, ~~2016.~~2017.

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, ~~2015.~~2016.

While the company’s derivatives are all subject to ~~master-netting~~master netting arrangements, the company presents its assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, the company is not required to post collateral for any of its outstanding derivatives.

The following table provides information on the company’s derivative positions as if they were presented on a net basis, allowing for the right of offset by counterparty.

The following tables summarize the ~~basis~~bases used to measure financial assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheets.

As of September 30, ~~2016,~~2017, cash and equivalents of ~~$2.6~~$3.5 billion included money market funds of approximately ~~$785 million,~~$1 billion, and as of December 31, ~~2015,~~2016, cash and equivalents of ~~$2.2~~$2.8 billion included money market funds of approximately ~~$500 million.~~$1 billion. Money market funds would be considered Level 2 in the fair value hierarchy.

For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The investment in the Retained Shares of $5.1 billion as of December 31, 2015 was categorized as a Level 2 security as these securities were not registered as of that date. The value of this investment was based on Baxalta’s common stock price as of December 31, 2015, which represents an identical equity instrument registered under the Securities Act of 1933, as amended. The majority of the derivatives entered into by the company are valued using internal valuation techniques as no quoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholes models. The key inputs are considered observable and vary depending on the type of derivative, and include contractual terms, interest rate yield curves, foreign exchange rates and volatility.

Contingent payments related to acquisitions consist of commercial milestone payments and sales-based payments, and are valued using discounted cash flow techniques. The fair value of commercial milestone payments reflects management’s expectations of probability of payment, and ~~increase~~increases as the probability of payment increases or expectation of timing of payments is accelerated. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increase or expectation of timing of payment is accelerated. ~~Changes~~The change in the fair value of contingent payments related to Baxter’s acquisitions, which use significant unobservable inputs (Level 3) in the fair value measurement, were ~~immaterial during the nine months~~primarily driven by payments of ~~2016. The company made minor sales-based payments~~approximately $8 million in the first nine months of ~~2016.~~2017.

The following table provides information relating to the company’s investments in available-for-sale equity securities.

In the first quarter of 2017, the company recorded a $4 million other-than-temporary impairment charge within other (income) expense, net based on the duration of losses related to one of the company’s investments. In the first nine months of 2016, the company recorded ~~net~~ $4.4 billion of net realized gains within other ~~income,~~(income) expense, net related to exchanges of available-for-sale equity securities, which represented gains from the Retained ~~Shares~~Share transactions. On May 6, 2016, Baxter made a voluntary non-cash contribution of 17,145,570 Retained Shares to the company’s U.S. pension fund. The company recorded $611 million of realized gains within other income, net related to the contribution of Retained Shares. On May 26, 2016, Baxter completed an exchange of 13,360,527 Retained Shares for 11,526,638 outstanding shares of Baxter common stock. The company recorded $537 million of realized gains within other income, net related to the exchange of the Retained Shares. The company held no shares of Baxalta as of September 30, 2016. Refer to the debt-for-equity exchange section above for discussion related to the first quarter 2016 Retained Shares transactions. In the first nine months of 2015 the company recorded $38 million of income in other expense (income), net related to sales of available-for-sale equity securities and equity method investments, which primarily represented gains from the sale of certain investments as well as distributions from funds that sold portfolio companies.

In addition to the financial instruments that the company is required to recognize at fair value in the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized in the condensed consolidated balance sheets and the approximate fair values as of September 30, ~~2016~~2017 and December 31, ~~2015.~~2016.

The following tables summarize the ~~basis~~bases used to measure the approximate fair value of the financial instruments as of September 30, ~~2016~~2017 and December 31, ~~2015.~~2016.

            Basis of fair value measurement
(in millions)
Balance as of
December 31,
2015

Quoted prices in
active markets for
identical assets
(Level 1)

Significant other
observable inputs
(Level 2)

Significant
unobservable inputs
(Level 3)

Assets

Investments
   $     21       $—       $       2       $19
Total assets
   $     21       $—       $       2       $19

Liabilities

Short-term debt
   $1,775       $—       $1,775       $—
Current maturities of long-term debt and lease obligations
   818       —       818       —
Long-term debt and lease obligations
   4,077       —       4,077       —
Total liabilities
   $6,670       $—       $6,670       $—

Investments in ~~2016~~2017 and ~~2015~~2016 included certain cost method ~~investments and held-to-maturity debt securities.~~

The fair value of held-to-maturity debt securities is calculated using a discounted cash flow model that incorporates observable inputs, including interest rate yields, which represents a Level 2 basis of fair value measurement.investments.

In determining the fair value of cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement.

The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instrument. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with the

company’s credit risk. The carrying values of the other financial instruments approximate their fair values due to the short-term maturities of most of these assets and liabilities.

Stock compensation expense totaled $31 million and $30 million ~~for both~~in the ~~three months ended September 30,~~third quarter of 2017 and 2016, respectively, and ~~2015, and $84~~$77 million and ~~$96~~$84 million for the nine months ended September 30, 2017 and 2016, ~~and 2015,~~ respectively. ~~Over~~Approximately 70% of stock compensation expense is classified in marketing and administrative expenses with the remainder classified in cost of sales and R&D expenses.

In March ~~2016,~~2017, the company awarded its annual stock compensation grants which consisted of ~~6.4~~5.4 million stock options, ~~1.0~~0.7 million RSUs and ~~0.3~~0.6 million PSUs.

The following is a summary of net periodic benefit cost relating to the company’s pension and other postemployment benefit (OPEB) plans.

In the second quarter of 2016, the company made a $706 million voluntary, non-cash contribution to the qualified U.S. pension plan using Retained Shares. Refer to Note 8 for additional information regarding Retained Share transactions.

Comprehensive income includes all changes in ~~shareholders��~~shareholders’ equity that do not arise from transactions with shareholders, and consists of net income, CTA, pension and other employee benefits, unrealized gains and losses on cash flow hedges and unrealized gains and losses on available-for-sale equity securities. The following table is a net-of-tax summary of the changes in AOCI by component for the nine months ended September 30, ~~2016~~2017 and ~~2015.~~2016.

The following is a summary of the amounts reclassified from AOCI to net income during the three ~~months~~ and nine months ended September 30, ~~2016~~2017 and ~~2015.~~2016.

Refer to Note 8 for additional information regarding hedging activity and Note 10 for additional information regarding the amortization of pension and other employee benefits items.

The company’s effective income tax rate for continuing operations was ~~0.8%~~14.5% and ~~106.1%~~0.8% in the ~~three months ended September 30,~~third quarters of 2017 and 2016, ~~and 2015,~~ respectively, and 15.0% and (1.1%) ~~and 5.8%~~ in the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. The company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

The effective income tax rate for continuing operations during the three months ended September 30, 2017 increased from the three months ended September 30, 2016, ~~decreased~~ due to the inclusion in 2016 of restructuring and other charges incurred in higher tax rate jurisdictions as well as the favorable impact of discrete items including the partial settlement of an on-going income tax matter related to the company’s Turkish operations and the settlement of a transfer pricing audit related to the company’s Italian operations. ~~Partially offsetting~~Windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the ~~foregoing items were~~company’s stock compensation programs partially offset the increase from the prior period as such benefits are now reflected as a tax ~~charges related to~~benefit as a result of the ~~settlement~~company’s adoption of ~~state income tax audit matters.~~ ASU 2016-09 in 2017.

The effective income tax rate for continuing operations in the third quarter of 2015 was primarily the result of charges associated with the company’s spin-off of Baxalta, such as debt tender premium costs associated with debt refinancing, which received tax benefits at rates significantly higher than the rate of tax without such charges. The resulting tax benefits were greater than the resulting net loss for the period.

~~In addition to the foregoing factors, the income tax rate for~~increased during the nine months ended September 30, ~~2016 benefited by several factors including tax-free net realized gains during~~2017 due to the ~~first and second quarter associated with the exchanges of Baxalta retained shares for the company’s debt and the company’s shares~~items noted above as well as the absence in the current year of the tax-free net realized gains associated with the Baxalta Retained Share transactions, which included debt-for-equity exchanges, the contribution of Baxalta ~~retained shares~~Retained Shares to the company’s U.S. pension ~~plan. Additionally,~~plan and the exchange of Baxalta Retained Shares for shares of the company, as well as benefits attributable to closing an IRS and German income tax audit that were all reflected during the nine months ended September 30, 2016. The effective income tax rate for ~~this period~~continuing operations during the nine months ended September 30, 2017 was favorably impacted by approximately 5.2 percentage points due to tax windfall benefits realized from ~~partially settling an IRS (2008-2013) income tax audit~~stock option exercises and ~~settling a German (2008-2011) income tax audit.~~

~~During~~vesting of RSUs and PSUs associated with the first quarter of 2016, Baxter paid approximately $303 million to partially settle a US Federal income tax audit for the period 2008-2013. Additionally, the company settled a German income tax audit for the period 2008-2011. As a result, the company reduced its gross unrecognized tax benefits by $85 million. Pursuant to the tax matters agreement with Baxalta, Baxalta paid the company approximately $34 million related to its tax indemnity obligations in respect of its portion of the settled gross unrecognized tax benefits. See Note 2 for additional details regarding the separation of Baxalta.company’s stock compensation programs.

Baxter is involved in product liability, patent, commercial, and other legal matters that arise in the normal course of the company’s business. The company records a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is recorded. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of September 30, ~~2016,~~2017, the company’s total recorded reserves with respect to legal matters were ~~$50~~$15 million and ~~the total~~there were no related ~~receivables were $10 million.~~receivables.

Baxter has established reserves for certain of the matters discussed below. The company is not able to estimate the amount or range of any loss for certain contingencies for which there is no reserve or additional loss for matters already reserved. While the liability of the company in connection with the claims cannot be estimated and ~~although~~ the resolution thereof in any reporting period ~~of one or more of these matters~~ could have a significant impact on the company’s 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 the company’s consolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may incur material judgments or enter into material settlements of claims.

In addition to the matters described below, the company remains subject to the risk of future administrative and legal actions. With respect to governmental and regulatory matters, these actions may lead to product recalls, injunctions, and other restrictions on the company’s operations and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, the company may be exposed to significant litigation concerning the scope of the company’s and others’ rights. Such litigation could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations.

On July 31, 2015, Davita Healthcare Partners, Inc. filed suit against Baxter Healthcare Corporation in the District Court of the State of Colorado regarding an ongoing commercial dispute relating to the provision of peritoneal dialysis products. ~~The company denies the claims and is vigorously defending itself against the suit.~~ A bench trial concluded in third quarter 2016 and the parties ~~are~~were awaiting the court’s decision. In October, 2017, the parties jointly requested a stay in the matter while they work to resolve the matter. The court has granted the stay.

In November 2016, a purported antitrust class action complaint seeking monetary and injunctive relief ~~from the company~~ was filed in the United States District Court for the Northern District of Illinois. The complaint alleges a conspiracy among manufacturers of IV solutions to restrict output and affect pricing in connection with a shortage of such solutions. Similar parallel actions subsequently were filed. In January 2017, a single consolidated complaint covering these matters was filed in the Northern District of Illinois. The company filed a motion to dismiss the consolidated complaint in February 2017.

In April 2017, the company became aware of a criminal investigation by the U.S. Department of Justice, Antitrust Division and a federal grand jury in the United States District Court for the Eastern District of Pennsylvania. The company and an employee received subpoenas seeking production of documents and testimony regarding the manufacturing, selling, pricing and shortages of IV solutions and containers (including saline solutions and certain other injectable medicines sold by the company) and communications with competitors regarding the same. The company is cooperating with the investigation. As previously disclosed, the New York Attorney General has requested that Baxter provide information regarding business practices in the IV saline industry. The company is cooperating with the New York Attorney General.

In ~~the fourth quarter of 2012,~~December 2016, the company received ~~two~~a civil investigative ~~demands~~demand from the Commercial Litigation Branch of the United States ~~Attorney~~Department of Justice primarily relating to contingent discount arrangements for, ~~the Western District of North Carolina for information regarding its quality~~ and ~~manufacturing practices and procedures and related potential violation~~other promotion of, the ~~Food Drug~~company’s TISSEEL and ~~Cosmetic Act associated with operations at its North Cove facility.~~ARTIS products. The company is ~~fully~~ cooperating ~~with~~in this ~~investigation.~~matter.

Baxter’s two segments are strategic businesses that are managed separately because each business develops, manufactures and markets distinct products and services. The segments and a description of their products and services are as follows:

TheRenal business provides products and services to treat end-stage renal disease, or irreversible kidney failure, along with other renal therapies. The Renal business offers a comprehensive portfolio to meet the needs of patients across the treatment continuum, including technologies and therapies for peritoneal dialysis (PD), hemodialysis (HD), continuous renal replacement therapy (CRRT) and additional dialysis services.

TheHospital Products business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, oncology injectable drugs, IV nutrition products, infusion pumps, inhalation anesthetics, and biosurgery products. The business also provides products and services related to pharmacy compounding, drug formulation and packaging technologies.

The company uses income from continuing operations before net interest expense, income tax expense, depreciation and amortization expense (Segment EBITDA), on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’s business segments. Intersegment sales are eliminated in consolidation.

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include most of the company’s debt and cash and equivalents and related net interest expense, foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, nonstrategic investments and related income and expense, certain employee benefit plan costs as well as certain nonrecurring gains, losses, and other charges (such as business optimization, integration and separation-related costs, and asset ~~impairment)~~impairments). Financial information for the company’s segments is as follows.

      September 30,    December 31,
(in millions)    2016    2015
Total assets

Renal
   $ 4,586       $ 4,609
Hospital Products
   6,602       6,632
Other
   4,607       9,721
Total assets
   $    15,795       $   20,962

The following is a reconciliation of segment EBITDA to income from continuing operations before income taxes per the condensed consolidated statements of income.

Refer to the company’s Annual Report on Form 10-K for the year ended December 31, ~~2015 (2015~~2016 (2016 Annual Report) for management’s discussion and analysis of the financial condition and results of operations of the company. The following is management’s discussion and analysis of the financial condition and results of operations of the company for the three and nine months ended September 30, ~~2016.~~2017.

On July 1, 2015, Baxter completed the distribution of approximately 80.5% of the outstanding common stock of its biopharmaceuticals business, Baxalta Incorporated (Baxalta), to Baxter shareholders (the Distribution). As a result of the separation, the operating results of Baxalta have been reflected as discontinued operations. Refer to Note 2 for additional information regarding the separation of Baxalta. Unless otherwise stated, financial results herein reflect continuing operations.

Baxter’s income from continuing operations for the three and nine months ended September 30, ~~2016~~2017 totaled $248 million, or $0.45 per diluted share, and $785 million, or $1.42 per diluted share, compared to $127 million, or $0.23 per diluted share, and $4.7 billion, or $8.56 per diluted ~~share. This compares to $2 million, or $0.00 per diluted share, and $210 million, or $0.38 per diluted~~ share for the three and nine months ended September 30, ~~2015.~~2016. Income from continuing operations for the three and nine months ended September 30, 2017 included special items which decreased income from continuing operations by $108 million and $237 million, respectively, or $0.19 and $0.42 per diluted share, respectively, as further discussed below. Income from continuing operations for the three months ended September 30, 2016 included special items which reduced income from continuing operations by $184 million, or $0.33 per diluted share. Special items increased income from continuing operations by $4 billion, or $7.17 per diluted share, for the nine months ended September 30, 2016. Income from continuing operations for the three and nine months ended September 30, 2015 included special items which reduced income from continuing operations by $223 million, or $0.41 per diluted share, and $309 million, or $0.57 per diluted share, respectively.

The following table provides a summary of the company’s special items and the related impact by line item on the company’s results of continuing operations for the three and nine months ended September 30, ~~2016~~2017 and ~~2015.~~2016.

Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is similar to how management internally assesses performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact the company’s reported operations for a period. Management believes that providing the separate impact of the above items on the company’s results in accordance with GAAP in the United States may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of the company’s results of operations, particularly in evaluating performance from one period to another. This information should be considered in addition to, and not as a substitute for, information prepared in accordance with GAAP.

Foreign currency ~~unfavorably impacted~~did not have an impact on consolidated net sales ~~by one percentage point and three percentage points~~ during the third quarter ~~and first nine months of 2016, respectively. During~~or the first nine months of ~~2016, foreign currency was principally impacted by the strengthening of the U.S dollar relative~~2017 compared to the ~~Mexican Peso, Colombian Peso, British Pound, Australian Dollar, as well as certain other currencies.~~prior periods.

The comparisons presented at constant currency rates reflect comparative 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 have not changed between the prior and the current period. The company believes that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of the company’s results of operations, particularly in evaluating performance from one period to another.

During 2016, the company made a strategic decision to exit select products in certain markets including Venezuela, India and Turkey. Overall, these items had a negative impact to the company’s net sales growth rate of 1 percentage point during the third quarter and first nine months of 2017, respectively. The company is also presenting the impact of generic competition for U.S. cyclophosphamide to enhance comparability between periods and better identify operating trends.

On July 27, 2017, Baxter completed the acquisition of Claris, a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of $629 million, net of cash acquired. In the three and nine months ended September 30, 2017, consolidated Baxter results include $27 million of net sales related to the Claris acquisition.

In September 2017, the company’s three Puerto Rico manufacturing sites sustained minimal structural damage from the impact of Hurricane Maria and limited production activities resumed soon thereafter. Given the temporary disruptions to the company’s manufacturing facilities as a result of the storm, the company expects net sales in the fourth quarter of 2017 to be negatively impacted by approximately $70 million. The company does not expect any material impact to net sales in 2018 or thereafter.

The Renal segment includes sales of the company’s peritoneal dialysis (PD), hemodialysis (HD) and continuous renal replacement ~~therapies.~~therapies (CRRT) and additional dialysis services.

The Hospital Products segment includes four commercial franchises: Fluid Systems, Integrated Pharmacy Solutions, Surgical Care and Other.

Fluid Systems includes sales of the company’s intravenous (IV) therapies, infusion pumps and IV administration sets.

Integrated Pharmacy Solutions includes sales of the company’s premixed and oncology drug platforms, nutrition products, pharmaceutical reconstitution devices and pharmacy compounding services.

Surgical Care includes sales of the company’s inhaled anesthesia products and critical care products as well as biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.

Other includes sales primarily from the company’s pharmaceutical partnering business.

The following is a summary of net sales by commercial ~~franchise.~~franchise on a reported and constant currency basis along with the impact of significant non-operational items.


	Three months ended								Nine months ended								Three months ended
	September 30,				Percent change				September 30,				Percent change				September 30,				Percent change
(in millions)	2016		2015		At actual currency rates		At constant currency rates		2016		2015		At actual currency rates		At constant currency rates		2017		2016		At actual currency rates			At constant currency rates			U.S. Cyclo- phosphamide			Claris			Strategic Product Exits
Total Renal net sales	$	977	$	943		4%		6%	$	2,840	$	2,805		1%		5%	$	1,010	$	977		3	%		3	%		0	%		0	%		(3	)%

Fluid Systems	$	576	$	526		10%		11%	$	1,686	$	1,537		10%		12%	$	610	$	576		6	%		6	%		0	%		0	%		(1	)%
Integrated Pharmacy Solutions		563		590		(5%)		(4%)		1,682		1,702		(1%)		1%		627		563		11	%		11	%		(2	)%		5	%		0	%
Surgical Care		320		322		(1%)		0%		972		977		(1%)		1%		338		320		6	%		5	%		0	%		0	%		(1	)%
Other		122		106		15%		15%		338		344		(2%)		(1%)		122		122		—			(2	)%		0	%		0	%		0	%
Total Hospital Products net sales	$	1,581	$	1,544		2%		3%	$	4,678	$	4,560		3%		5%	$	1,697	$	1,581		7	%		7	%		0	%		2	%		(1	)%

	Nine months ended
	September 30,				Percent change
(in millions)	2017		2016		At actual currency rates			At constant currency rates			U.S. Cyclo- phosphamide			Claris			Strategic Product Exits
Total Renal net sales	$	2,874	$	2,840		1	%		2	%		0	%		0	%		(2	)%
Fluid Systems	$	1,802	$	1,686		7	%		7	%		0	%		0	%		(2	)%
Integrated Pharmacy Solutions		1,747		1,682		4	%		5	%		(1	)%		1	%		0	%
Surgical Care		1,024		972		5	%		6	%		0	%		0	%		0	%
Other		340		338		1	%		1	%		0	%		0	%		0	%
Total Hospital Products net sales	$	4,913	$	4,678		5	%		5	%		0	%		0	%		(1	)%

Net sales in the Renal segment ~~increased 4% and 1%~~ during the third quarter and first nine months of ~~2016, respectively. These amounts include an unfavorable foreign currency impact of two percentage points~~2017 increased 3% and four percentage points in the third quarter and first nine months of 2016, respectively. Excluding the impact of foreign currency, sales increased 6% and 5% during the third quarter and first nine months of 2016, respectively. This growth was driven by continued global growth of patients, new product launches, and improved pricing in the United States in our PD business. PD growth contributed approximately four and two percentage points to the growth rate during the third quarter and first nine months of 2016, respectively. In addition, global growth of the company’s continuous renal replacement therapy to treat acute kidney injury contributed one and two percentage points to the growth rate during the third quarter and first nine months of 2016, respectively.

Net sales in the Hospital Products segment increased 2% and 3% during the third quarter and first nine months of 2016, respectively. These amounts include an unfavorable foreign currency impact of one percentage point and two percentage points in the third quarter and first nine months of 2016,1%, respectively. Excluding the impact of foreign currency, sales increased 3% and 5%2% in the third quarter and first nine months of 2017, respectively, driven by continued growth of PD patients and adoption of the company’s new Automated Peritoneal Dialysis Cyclers (APD) AMIA in the U.S. and HomeChoice CLARIA in international markets. Increased sales globally of the company’s CRRT products also contributed to growth in the third quarter and first nine months of 2017. Sales growth in the first nine months of 2017 was partially offset by lower sales of HD products internationally, driven by reduced volumes and increased pricing pressures. Certain international strategic market exits negatively impacted the Renal segment’s net sales by 3% and 2% during the third quarter and first nine months of ~~2016, respectively.~~2017, respectively, and are expected to negatively impact full year Renal segment net sales by approximately $50 million as compared to 2016.

Net sales in the Hospital Products segment increased 7% and 5%, respectively, during the third quarter and first nine months of 2017 compared to the prior period on both a reported basis and constant currency basis. Certain international strategic market exits negatively impacted the Hospital Products segment net sales by 1% during the third quarter and first nine months of 2017 and are expected to negatively impact full year 2017 net sales by approximately $50 million as compared to 2016. The company’s acquisition of Claris contributed $27 million of net sales during the third quarter and first nine months of 2017. The principal drivers impacting net sales were the following:

In the Fluid Systems franchise, sales increased 6% in the third quarter and 7% in the first nine months of 2017 on a constant currency basis driven by select pricing and improved volumes for U.S. IV solutions. This increase was also positively impacted by increased sales of the company’s IV access administrative sets, reflecting the on-going pull through from the company’s growing SPECTRUM infusion pump base.

In the Integrated Pharmacy Solutions franchise, sales increased 11% in the third quarter and ~~12%~~5% in the first nine months of 2017 on a constant currency basis driven by improved volumes for the company’s nutritional therapies, increased sales of pre-mixed injectable drugs (as a result of recent product launches), the acquisition of Claris and a one-time benefit from an early contract settlement. These increases were offset by decreased U.S. sales of cyclophosphamide, a generic oncology drug, due to the entry of competitors into the market. U.S. sales of cyclophosphamide declined from $163 million in the first nine months of 2016 to $143 million in the first nine months of 2017. The company expects U.S. sales of cyclophosphamide to continue to decline due to the entrance of additional competitors.

In the Surgical Care franchise, sales increased 5% in the third quarter and 6% in the first nine months of 2017 on a constant currency basis driven by ~~favorable~~improved volumes and pricing in the U.S. for the company’s portfolio of anesthetic and critical care products and positive demand for inhaled anesthetics internationally. The increase was principally due to pricing for BREVIBLOC, a fast-acting IV ~~solutions~~beta blocker, during the third quarter and first nine months of 2017 as well as volume for Transderm Scop during the first nine months. The increased ~~sales~~Transderm Scop volume was the result of a temporary supply disruption during the first half of the ~~SIGMA SPECTRUM pump and the~~year related ~~sets in the United States.~~to an alternative product.

In the ~~Integrated Pharmacy Solutions~~Other franchise, sales ~~declined 4%~~decreased 2% in the third quarter and increased 1% in the first nine months of ~~2016~~2017 on a constant currency ~~basis. These changes were~~basis driven by ~~global demand for the company’s nutritional therapies, contributing approximately two percentage points during~~unfavorable volumes in the third quarter and first nine months of 2016 and demand for the company’s international hospital pharmacy compounding services which contributed one and two percentage points during the third quarter and first nine months of 2016, respectively. These increases were offset by lower U.S. sales of the company’s pharmacy injectable products, as there were government PROTOPAM orders in the first and third quarters of 2015 that did not reoccur in 2016, contributing approximately one percentage point of decline. In addition, U.S. cyclophosphamide sales were approximately $163 million and $208 millionfavorable volumes in the first nine months of ~~2016~~2017 for products manufactured by Baxter on behalf of its pharmaceutical partners. In addition, revenues related to the company’s manufacturing and ~~2015, respectively, which contributed approximately one percentage point of decline for the first nine months of 2016. The company expects additional competitors will enter the market.~~

~~In the Surgical Care franchise, sales remained flat at 0% and increased 1%~~supply agreement with Baxalta were lower in the third quarter and first nine months of 2016, respectively, on a constant currency basis driven by increased global Biosurgery products which contributed approximately two and one percentage point during the third quarter and first nine months of 2016, respectively. Demand for international anesthesia products contributed to the approximately two percentage point decline and one percentage point increase during the third quarter and first nine months of 2016, respectively, due to certain higher than anticipated government austerity measures in Europe and the timing of certain shipments internationally.

In the Other franchise, sales increased 15% and declined 1% in the third quarter and first nine months of 2016, respectively, on a constant currency basis driven by lower demand for products manufactured by Baxter on behalf of one of its pharmaceutical partners. This decline was offset by increased customer demand for products produced in our cytotoxic manufacturing facility in Germany. The company also recognized $6 million and $31 million in the third quarter and first nine months of 2016, respectively,2017 as compared to ~~$15 million and $24 million in~~ the ~~third quarter and first nine months of 2015, respectively, related to the company’s manufacturing and supply agreement with Baxalta.~~prior year.

Gross Margin and Expense Ratios


	Three months ended						Nine months ended						Three months ended							Nine months ended
	September 30,						September 30,						September 30,							September 30,
(as a percentage of net sales)	2016		2015		Change		2016		2015		Change		2017			2016			Change	2017			2016			Change
Gross margin		41.9%		41.6%		0.3 pts		40.0%		41.7%		(1.7) pts		41.7	%		41.9	%	(0.2 pts)		42.4	%		40.0	%	2.4 pts
Marketing and administrative expenses		28.4%		31.9%		(3.5) pts		27.6%		32.1%		(4.5) pts		25.3	%		28.4	%	(3.1 pts)		24.3	%		27.6	%	(3.3 pts)

Gross Margin

The special items identified above had an unfavorable impact of approximately ~~3.0~~3.5 and ~~3.7~~2.5 percentage points on the gross margin ratio in the third quarter and first nine months of ~~2016,~~2017, respectively. The unfavorable impact was ~~2.2~~3.0 and ~~1.8~~3.7 percentage points in the third quarter and first nine months of ~~2015,~~2016, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the gross margin ratio increased ~~1.1%~~due to select price increases, favorable manufacturing performance and ~~0.2% in~~a benefit from the ~~third quarter and first nine months of 2016, respectively. The gross margin ratio was impacted by a positive sales mix, improved pricing in select areas of~~company’s business transformation initiatives aimed at simplifying the portfolio ~~favorable manufacturing variances in the quarter,~~to drive efficiency and ~~reduced sales of U.S. cyclophosphamide.~~reduce costs.

Marketing and Administrative Expenses

The special items identified above had an unfavorable impact of approximately ~~4.5~~1.9 and ~~2.4~~1.2 percentage points on the marketing and administrative expense ratio in the third quarter and first nine months of ~~2016,~~2017, respectively. The unfavorable impact was ~~5.0~~4.5 and ~~2.8~~2.4 percentage points in the third quarter and first nine months of ~~2015.~~2016. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the marketing and administrative expenses ratio in the third quarter and first nine months of ~~2016~~2017 declined ~~by approximately $13 million and $43 million, respectively, as a result of reduced pension expense, as well as benefits from~~due to the ~~company’s~~ actions taken by the company to rebase its cost structure and ~~continued~~ focus on expense management. ~~In addition,~~These savings were partially offset by decreased benefits to the marketing and administrative expenses ratio from lower transition service income as the agreement with Baxalta for these services continues to wind down.

Research and Development

	Three months ended September 30,						Percent			Nine months ended September 30,						Percent
(in millions)	2017			2016			change			2017			2016			change
Research and development expenses	$	151		$	159			(5	)%	$	435		$	490			(11	)%
As a percentage of net sales		5.6	%		6.2	%					5.6	%		6.5	%

The special items identified above had an unfavorable impact of approximately 1.2 and 1.0 percentage points in the third quarter and first nine months of ~~2016~~2016. Refer to the ~~company recognized $26 million~~Special Items caption above for additional detail.

Excluding the impact of the special items, the research and ~~$79 million, respectively, as a reduction to expense under the transition services agreement with Baxalta as compared to $29 million and $45 million~~development expenses ratio increased in the third quarter and first nine months of ~~2015, respectively.~~

~~Research and Development~~

      Three months ended          Nine months ended
   September 30,    Percent
change    September 30,    Percent
change
(in millions)    2016    2015       2016    2015
Research and development expenses
   $159       $148       7%       $490       $442       11%
As a percentage of net sales
   6.2%       6.0%          6.5%       6.0%

~~Research and development expenses increased by 7% and 11% during the third quarter and first nine months of 2016, respectively,~~2017 as a result of the special items identified above. Excluding the impact of the special items, research and development expenses decreased 8% and 4% and during the third quarter and first nine months of 2016, respectively, primarily due to the optimization of the R&D infrastructure, the exit of certain R&D programs, and the impact of foreign currency.company’s increased investment in new product development.

Business Optimization Items

~~The~~Beginning in the second half of 2015, the company initiated actions to transform its costs structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through September 30, 2017, the company has ~~implemented certain restructuring initiatives in an effort~~incurred pretax costs of $526 million related to optimize the company’s overall cost structure on a global basis, as it streamlines its operations, rationalizes its manufacturing facilities, enhances its general and administrative infrastructure, and re-aligns certain R&D activities.

~~Through the nine months ended September 30, 2016, the company recorded gross restructuring charges~~these actions. The costs consisted primarily of $251 million primarily relating to a global workforce reduction initiative, the impairment of an acquired IPR&D intangible asset, and the discontinuation of the VIVIA home hemodialysis development program. Of the $251 million total restructuring charges, the company recorded gross employee termination costs, implementation costs, and accelerated depreciation. The company expects to incur additional pretax costs of ~~$106~~approximately $285 million and capital expenditures of $90 million related to these initiatives by the end of 2018. These costs will primarily include employee termination costs, implementation costs, and accelerated depreciation. The company expects that approximately 5 percent of the remaining charges will be non-cash. These actions in the ~~third quarter of 2016 which relates to global workforce reductions. These actions~~aggregate are expected to provide future annual pretax savings of ~~$0.12 per diluted share when~~approximately $950 million. The savings from these actions will impact cost of sales, marketing and administrative expenses, and research and development expenses. Approximately 85 percent of the ~~program is fully implemented~~expected annual pretax savings are expected to be realized by the end of ~~2017.~~ 2018, with the remainder by the end of 2020.

Refer to Note 7 ~~within~~in Item 1 for additional information regarding the company’s business optimization initiatives.

Net Interest Expense

Net interest expense was $14 million and $41 million in the third quarter and first nine months of 2017, respectively, and $14 million and $53 million in the third quarter and first nine months of 2016, ~~respectively, and $34 million and $94 million in the third quarter and first nine months of 2015,~~ respectively. The decrease in the first nine months of ~~2016~~2017 was primarily driven by lower outstanding debt as a result of the first quarter 2016 debt-for-equity exchanges which extinguished $3.65 billion of debt as well as reduced coupon rates ~~resulting from~~related to the Q3third quarter 2016 debt issuance, partially offset by lower interest capitalized ~~interest compared to the same period last year.~~on assets under construction. See Note 8 within Item 1 for additional details about the debt extinguishments.

Other (Income) Expense, ~~(Income),~~ Net

Other (income) expense, ~~(income),~~ net was income of $12 million and expense of $10 million in the third quarter and first nine months of 2017, respectively, and expense of $44 million and income of ~~expense and~~ $4.3 billion ~~of income~~ in the third quarter and first nine months of 2016, ~~respectively,~~respectively. Special items during the periods presented included the $4.4 billion net realized gain on the Baxalta Retained Shares transactions in

the first nine months of 2016, the $101 million debt extinguishment loss in the first quarter of 2016, the $48 million debt extinguishment loss in the third quarter of 2016, and ~~$91~~the $33 million loss on the deconsolidation of the company’s Venezuelan subsidiary in the second quarter of 2017. Excluding the impact of special items, other (income) expense, ~~and $46 million~~net had higher income in the third quarter of 2017 and lower income in the first nine months of ~~2015, respectively.~~

~~The~~2017 as compared to 2016. Higher income in the third quarter ~~and first nine months~~ of ~~2016 included net realized gains~~2017 was the result of $0 and $4.4 billion, respectively, on the Retained Shares transactions, dividend income of $0 and $16 million, respectively, from the Retained Shares, and $0 million and $12 million, respectively, of income related to foreign currency fluctuations principally ~~relating~~related to intercompany receivables, payables and monetary assets denominated in a foreign currency. ~~These~~Lower income ~~items were partially offset by net debt extinguishment losses of $52 million and $153 million in~~for the ~~third quarter and~~ first nine months of ~~2016, respectively. See Note 8 within Item 1 for additional details regarding~~2017 was attributable to the ~~debt extinguishment losses and~~absence of dividends on the Retained Shares ~~transactions.~~

~~The third quarter~~received from Baxalta in 2016 and ~~first nine months of 2015 included a $130 million loss on extinguishment of debt. This loss was more than offset~~recognized investment impairment losses in the first nine months by $52 million of income related to a litigation settlement in which Baxter was the beneficiary, $38 million of income related to the sales of available-for-sale securities, and $92 million of income related to foreign currency fluctuations, principally relating to intercompany receivables, payables and monetary assets denominated in a foreign currency.2017.

Segment EBITDA

The company uses income from continuing operations before net interest expense, income tax expense, depreciation and amortization expense (Segment EBITDA), on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’s business segments. Refer to Note 14 within Item 1 for a summary of financial results by segment. The following is a summary of significant factors impacting the segments’ financial results.

Renal

Segment EBITDA was $226 million and $649 million in the third quarter and first nine months of 2017, respectively, and $214 million and $494 million in the third quarter and first nine months of 2016, ~~respectively,~~respectively. The increase in 2017 was driven by lower research and ~~$182~~development costs as the company realigned allocations of research and development costs based on project spend attributable to segments, higher gross margins due to product mix and lower marketing and administrative expenses as the Renal segment benefited from the company’s business optimization programs and continued focus on reducing discretionary spending. This growth was partially offset by unfavorable foreign currency.

Hospital Products

Segment EBITDA was $653 million and ~~$422 million~~$1.821 billion in the third quarter and first nine months of ~~2015, respectively. The increase in 2016 was primarily driven by increased sales~~2017, respectively, and lower marketing and administrative expenses as cost savings were realized form the company’s business optimization programs and continued focus on expense management. This was partially offset by unfavorable foreign currency, incremental manufacturing and quality costs, and higher allocated research and development costs.

~~Hospital Products~~

~~Segment EBITDA was~~ $588 million and $1.673 billion in the third quarter and first nine months of 2016, ~~respectively, and $515 million and $1.462 billion in the third quarter and first nine months of 2015,~~ respectively. This increase was driven by ~~increased~~higher net sales, and lower marketing and administrative expenses as cost savings were realized from the company’s business optimization programs and continued focus on ~~expense management.~~reducing discretionary spending. This growth was partially offset by higher research and development costs as the company realigned allocations of research and development costs based on project spend attributable to segments and unfavorable foreign ~~currency fluctuations.~~currency.

Corporate and other

Certain income and expense amounts are not allocated to a segment. These amounts are detailed in the table in Note 14 within Item 1 and primarily include net interest expense, foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, non-strategic investments and related income and expense, certain employee benefit plan costs as well as certain nonrecurring gains and losses and other charges (such as business optimization, integration and separation-related costs and asset ~~impairment)~~impairments).

Income Taxes

The company’s effective income tax rate for continuing operations was ~~0.8%~~14.5% and ~~106.1%~~0.8% in the third quarter and 15.0% and (1.1%) ~~and 5.8%~~ for the first nine months of ~~2016~~2017 and ~~2015,~~2016, respectively. The company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

transactions, which included debt-for-equity exchanges, the contribution of Baxalta ~~retained shares~~Retained Shares to the company’s U.S. pension ~~plan. Additionally,~~plan and the ~~income tax rate~~exchange of Baxalta Retained Shares for ~~this period was favorably impacted by tax~~shares of the company, as well as benefits ~~from partially settling~~attributable to closing an IRS ~~(2008-2013)~~and German income tax audit ~~and settling a German (2008-2011)~~that were all reflected during the nine months ended September 30, 2016. The effective income ~~tax audit.~~

~~The company anticipates that the effective~~ tax rate for continuing operations ~~for~~during the ~~full-year 2016 will be~~nine months ended September 30, 2017 was favorably impacted by approximately ~~20.5%, excluding the impact~~5.2 percentage points due to tax windfall benefits realized from stock option exercises and vesting of ~~audit developments~~RSUs and ~~other discrete items. Changes in~~PSUs associated with the company’s mix of earnings may also impact the effective tax rate and as profit improvement initiatives are implemented at different times and across different operations, the earnings mix could shift with an impact on the effective tax rate.stock compensation programs.

Income from Continuing Operations and Earnings per Diluted Share

Income from continuing operations was ~~$127~~$248 million and $2$127 million for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and $785 million and $4.7 billion ~~and $210 million~~ for the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. Income from continuing operations per diluted share was ~~$0.23~~$0.45 and ~~$0.00~~$0.23 for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$8.56~~$1.42 and ~~$0.38~~$8.56 for the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. The significant factors and events contributing to ~~these~~the changes are discussed above.

Income ~~(Loss)~~(loss) from Discontinued Operations

~~The following table is a summary of the operating results of Baxalta, which have been reflected as discontinued~~

Discontinued operations were insignificant for ~~the quarters ended September 30, 2016 and 2015.~~

      Three months ended Nine months ended
   September 30, September 30,
(in millions)    2016    2015 2016    2015
Net sales
   $24       $63    $144       $2,853
Income (loss) from discontinued operations before income taxes
   4       (1 ) (11)       748
Gain on disposal of discontinued operations
   —       —    17       —
Income tax expense
   1       —    10       195
Income (loss) from discontinued operations, net of tax
   $  3       $ (1 ) $  (4)       $   553

both periods presented. Refer to Note 2 within Item 1 for additional information regarding the separation of Baxalta.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash ~~flows~~flow for the nine ~~months~~month periods ended September 30, ~~2016~~2017 and ~~2015.~~2016.


	Nine months ended						Nine months ended
	September 30,						September 30,
(in millions)	2016			2015			2017			2016
Cash flows from operations – continuing operations		$ 938			$ 757
Cash flows from investing activities – continuing operations		(549	)		(629	)
Cash flows from operations - continuing operations							$	1,343		$	938
Cash flows from investing activities - continuing operations								(1,088	)		(549	)
Cash flows from financing activities		$ (44	)		$ (253	)		391			(44	)

Cash Flows from Operations — Continuing Operations

Operating cash flows from continuing operations increased during the first nine months of ~~2016~~2017 as compared to the prior year period. The increase was driven by the factors discussed below.

Net Income

Net income, as adjusted for certain non-cash items, such as depreciation and amortization, net periodic pension benefit and OPEB costs, stock compensation, deferred income taxes and other items increased in the nine months ended September 30, 2017 compared to 2016. Additionally, non-cash items in the nine months ended September 30, 2016 included net realized gains of $4.4 billion related to the debt-for-equity exchanges of Baxalta Retained Shares for certain company indebtedness and for the equity-for-equity exchange.

Accounts Receivable

Cash ~~flows relating to~~inflows from accounts receivable were $32 million in the first nine months of 2017 compared to an inflow of $22 million ~~during the first nine months of 2016 compared to an inflow of $5 million~~ in the prior ~~year period and days~~year. Days sales outstanding ~~decreased~~in the current year were comparable to ~~55.0 days at September 30, 2016 from 60.3 at September 30, 2015. This decrease was primarily driven by timing of collections in certain international markets.~~the prior year.

Inventories

Cash outflows relating to inventories ~~declined~~decreased in ~~the first nine months of 2016~~2017 as compared to the ~~prior year~~prior-year period. The following is a summary of inventories as of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, as well as annualized inventory turns for the first nine months of ~~2016~~2017 and ~~2015,~~2016, by segment.


	Inventories				Annualized inventory turns for the nine months ended September 30,				Inventories				Annualized inventory turns for the Nine
	September 30,		December 31,						September 30,		December 31,		months ended September 30,
(in millions, except inventory turn data)	2016		2015		2016		2015		2017		2016		2017		2016
Renal		$ 614		$ 605		3.58		3.61	$	635	$	544		3.77		3.58
Hospital Products		954		955		3.61		3.14		915		885		3.97		3.61
Other		—		44		n/a		n/a		—		1	n/a		n/a
Total company		$1,568		$1,604		3.60		3.32	$	1,550	$	1,430		3.89		3.60

~~Segment inventory levels remained consistent during the first nine months of 2016.~~ The increase in ~~inventory turns~~inventories was driven primarily by timing of ~~0.28 from September 30, 2015 to September 30, 2016 related to business optimization charges~~purchases and ~~intangible asset impairments.~~longer sourcing lead times for certain products within the Renal segment portfolio, coupled with the acquisition of Claris in the Hospital Products segment.

Other

The changes in accounts payable and accrued liabilities ~~was~~were a $36 million outflow in the first nine months of 2017 compared to a $326 million outflow in the first nine months of ~~2016 compared to a $14 million inflow in the first nine months of 2015.~~2016. The ~~change was~~changes were primarily driven by ~~an increase in~~a first quarter 2016 non-recurring $303 million tax ~~payments primarily due~~settlement payment to partially settle a U.S. Federal income tax ~~settlement~~audit as well as the timing of ~~payments to suppliers. See Note 12 within Item 1 for additional details regarding the tax settlement.~~supplier payments.

Payments related to the execution of the ~~SIGMA SPECTRUM infusion pump recall as well as the~~ company’s business optimization initiatives increased from ~~$61~~$98 million in the first nine months of ~~2015~~2016 to ~~$119~~$114 million in the first nine months of ~~2016.~~2017. The company made payments of $21 million in the first nine months of 2016 related to the execution of the COLLEAGUE infusion pump and SIGMA SPECTRUM infusion pump recalls. Refer to Note 7 within Item 1 for further information regarding the ~~SIGMA SPECTRUM infusion pump recalls as well as the~~company’s business optimization initiatives.

Changes in other balance sheet items ~~were inflows~~include an outflow of ~~$121~~$93 million and ~~outflows~~an inflow of ~~$216~~$121 million in the first nine months of ~~2016~~2017 and ~~2015,~~2016, respectively, primarily driven by ~~changes~~the collection of a tax receivable in ~~prepaid expenses. During~~ the ~~first nine months~~second quarter of 2016, the company received a U.S. federal income tax refund of $218 million as a result of carrying back to prior tax years the company’s 2015 U.S. tax loss which arose, in significant part, from the funding of the company’s defined benefit pension plan with a portion of the Baxalta retained stake.2016.

Cash Flows from Investing Activities — Continuing Operations

Capital Expenditures

Capital expenditures were ~~$519~~$410 million and ~~$658~~$519 million in the first nine months of ~~2016~~2017 and ~~2015,~~2016, respectively. The company’s capital expenditures in ~~2016 consisted of~~2017 were driven by targeted investments in projects to support production of PD and IV ~~solutions as well as expansion activities for dialyzers. The decline~~solutions.

Acquisitions and Investments

Cash outflows relating to acquisitions and investments of $680 million in ~~capital expenditures is due~~the first nine months of 2017 were primarily driven by the $629 million acquisition of Claris, the acquisition of the rights to ~~a reduction in spending related to ongoing projects~~Clindamycin Saline and Clindamycin Dextrose from Celerity and the ~~completion~~acquisition of ~~certain expansion activities.~~

~~Acquisitions and Investments~~

Wound Care Technologies, Inc. Cash outflows relating to acquisitions and investments of $47 million in the first nine months of 2016 were driven primarily by the acquisition of the rights to ~~vancomycin~~Vancomycin from Celerity. Cash outflows relating to acquisitions and investments of $27 million in the first nine months of 2015 were driven primarily by the acquisition of the rights to cefazolin injection in GALAXY Container (2 g/100 mL).

Divestitures and Other Investing Activities

Cash inflows from divestitures and other investing activities in ~~the first nine months of~~2017 and 2016 ~~and 2015~~ were ~~$17 million and $56 million, respectively. The decrease was primarily due to the sales of certain investments in the first nine months of 2015.~~not significant.

Cash Flows from Financing Activities

Debt Issuances, Net of Payments of Obligations

Net cash inflows related to debt and other financing obligations totaled $633 million for the first nine months of 2017 primarily related to the issuance of €600 million of senior notes at a fixed coupon rate of 1.30% due in May 2025.

Net cash outflows related to debt and other financing obligations totaled $58 million for the first nine months of 2016 primarily related to a $190 million repayment of the company’s 0.95% senior unsecured notes that matured in June 2016, a $130 million repayment of the company’s 5.9% senior unsecured notes that matured in September 2016, and the redemption of approximately $1 billion in

aggregate principal amount of senior notes in September 2016, as well as other short-term obligations. The company also had $300 million of net repayments related to its commercial paper program. This was partially offset by issuances of debt totaling $1.6 billion of senior notes in August 2016. See Note 8 within Item 1 for additional details regarding the debt transactions in the first nine months of 2016.

~~Cash inflows related to issuances of debt totaled $6.9 billion for the first nine months of 2015 primarily related to the Baxalta senior~~

notes and borrowings under the company’s revolving credit facilities. The company purchased an aggregate of approximately $2.7 billion in principal amount of its notes through two debt tender offers that closed in July 2015. Additionally, the company repaid $600 million of 4.625% senior unsecured notes that matured in March 2015 as well as the borrowings under the company’s Euro-denominated revolving credit facility. The company also had $450 million of net repayments related to its commercial paper program.

Other Financing Activities

Cash dividend payments totaled ~~$197~~$228 million and ~~$847~~$197 million in the first nine months of ~~2016~~2017 and ~~2015,~~2016, respectively. The ~~decrease~~increase in cash dividend payments was primarily due to ~~a decrease~~an increase in the quarterly dividend rate ~~of approximately 75%~~from $0.115 to $0.13 per share ~~as announced~~for quarterly dividends declared between May 2016 and May 2017. In addition, the company increased the quarterly dividend rate from $0.13 to $0.16 per share for quarterly dividends declared beginning in ~~July 2016.~~

May 2017. Proceeds ~~and realized excess tax benefits~~ from stock issued under employee benefit plans increased from ~~$174~~$251 million in the first nine months of ~~2015~~2016 to ~~$286~~$298 million in the first nine months of ~~2016,~~2017, primarily due to increased option exercises in the first nine months of ~~2016.~~2017.

~~In the first nine months of 2016, the company executed an equity-for-equity exchange of Retained Shares for 11.5 million outstanding Baxter shares.~~ As authorized by the Board of Directors, the company repurchases its stock depending upon the company’s cash flows, net debt level and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of the company’s common stock. ~~In the third quarter~~The Board of ~~2016, the~~Directors increased this authority by an additional $1.5 billion in November 2016. The company ~~repurchased~~paid $275 million in cash to repurchase approximately ~~0.9~~4.7 million shares pursuant to this authority in the first nine months of 2017 and had ~~$0.4~~$1.4 billion remaining available under this authorization as of September 30, ~~2016. The company did not repurchase stock in~~2017. In the first nine months of ~~2015.~~2016, the company paid $45 million in cash to repurchase shares. In the first nine months of 2016, the company executed an equity-for-equity exchange of Baxalta Retained Shares for 11.5 million outstanding Baxter shares.

Credit Facilities, Access to Capital and Credit Ratings

Credit Facilities

As of September 30, ~~2016,~~2017, the company’s U.S. dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $1.5 billion and approximately ~~$200~~€200 million, ~~Euro,~~ respectively. As of September 30, ~~2016,~~2017, the company was 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 each institution’s respective commitment.

Access to Capital

The company intends 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. The company had ~~$2.6~~$3.5 billion of cash and equivalents as of September 30, ~~2016,~~2017, with adequate cash available to meet operating requirements in each jurisdiction in which the company operates. The company invests its excess cash in certificates of deposit and money market funds, and diversifies the concentration of cash among different financial institutions.

The company’s 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 the company’s products or in the solvency of its

customers or suppliers, deterioration in the company’s key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, the company believes it has sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support the company’s growth objectives.

The company continues to do business with foreign governments in certain countries, including Greece, Spain, Portugal and Italy, which have experienced a deterioration in credit and economic conditions. As of September 30, ~~2016,~~2017, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled ~~$181~~$151 million.

While these economic conditions have not significantly impacted the company’s ability to collect receivables, global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses.

Credit Ratings

The company’s credit ratings at September 30, ~~2016~~2017 were as ~~follows:~~follows.

Standard & Poor’s

Fitch

~~Fitch~~

Moody’s

Ratings

Senior debt

A-

BBB+

~~BBB+~~

Baa2

Short-term debt

Outlook

Stable

~~Stable~~

Stable

~~Stable~~

~~CONTRACTUAL OBLIGATIONS~~

The table below summarizes Baxter’s contractual obligations as of September 30, 2016 related to long-term debt and interest expense in the following periods to give effect to the company’s debt redemptions and debt offerings.

(in millions)    Total    Less than
one year
One to
three years

Three to
five years

More than
five years

Long-term debt and capital lease obligations, including current maturities
   $2,840       $  6       $    6       $736       $2,092
Interest on short- and long-term debt and capital lease obligations¹
   1,530       85       170       167       1,108
Contractual obligations
   $4,370       $91       $176       $903       $3,200

Interest payments on debt and capital lease obligations are calculated for future periods using interest rates in effect at September 30, 2016. Projected interest payments include the related effects of interest rate swap agreements. Certain of these projected interest payments may differ in the future based on changes in floating interest rates, foreign currency fluctuations or other factors or events. The projected interest payments only pertain to obligations and agreements outstanding at September 30, 2016. Refer to Note 8 within Item 1 for additional information regarding the company’s debt instruments and related interest rate agreements outstanding at September 2016.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of the company’s significant accounting policies is included in Note 1 to the company’s consolidated financial statements in the ~~2015~~2016 Annual Report. Certain of the company’s accounting policies are considered critical, as these policies are the most important to the depiction of the company’s financial statements and require significant, difficult or complex judgments, 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 the ~~2015~~2016 Annual Report. There have been no significant changes in the company’s application of its critical accounting policies during the first nine months of ~~2016.~~2017.

LEGAL CONTINGENCIES

Refer to Note 13 within Item 1 for a discussion of the company’s legal contingencies. Upon resolution of any of these uncertainties, the company may incur charges in excess of presently established liabilities. While the liability of the company 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 the company’s 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 the company’s consolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments or enter into material settlements of claims.

CERTAIN REGULATORY MATTERS

The U.S. Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India on July 27, 2017, immediately prior to the closing of the Claris acquisition. FDA completed the inspection on August 4, 2017, at which time FDA issued a related Form-483 (Claris 483). The Claris 483 includes a number of observations across a variety of areas. The company submitted its timely response to the Claris 483 and is in the process of implementing corrective and preventive actions, which have included product recalls that are financially immaterial to the company, to address FDA’s observations and other items identified in connection with integrating Claris into the company’s quality systems.

In January 2014, the company received a Warning Letter from FDA primarily directed to quality systems for the company’s Round Lake, Illinois, facility, particularly in that facility’s capacity as a specification developer for certain of the company’s medical devices. This Warning Letter was lifted in February 2017.

The company received a ~~separate~~ Warning Letter in December 2013 that included observations related to the company’s ambulatory infuser business in Irvine, California, which previously had been subject to agency action. This Warning Letter was lifted in May 2017.

In June 2013, the company received a Warning Letter from FDA regarding operations and processes at its North Cove, North Carolina and Jayuya, Puerto Rico ~~facilities and~~facilities. The company attended Regulatory Meetings with the FDA in November 2015 ~~attended~~(concerning the Jayuya facility). The company also requested and participated in a Regulatory Meeting ~~with FDA concerning the Jayuya facility.~~regarding both facilities in July 2017. The Warning Letter addresses observations related to Current Good Manufacturing Practice ~~(CGMP)~~ violations at the two facilities.

In June 2010, the company received a Warning Letter from FDA in connection with an inspection of its McGaw Park, Illinois facility, which previously supported the Renal franchise. The company’s Round Lake facility now provides the related capacity for the Renal franchise. The Warning Letter pertains to the processes by which the company analyzes and addresses product complaints through corrective and preventative action, and reports relevant information to FDA. This Warning Letter was lifted in February 2017.

On October 9, 2014, the company had a Regulatory Meeting with FDA to discuss the Warning Letters described above. At the meeting, the company agreed to work closely with FDA to provide regular updates on its progress to meet all requirements and resolve all matters identified in the Warning Letters described above.

Please see Item 1A of the ~~2015~~2016 Annual Report and Item 1 of Part II of this quarterly report for additional discussion of regulatory matters and how they may impact the company.

FORWARD-LOOKING INFORMATION

This quarterly report includes forward-looking statements. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events. These forward-looking statements may include statements with respect to accounting estimates and assumptions, litigation-related matters including outcomes, future regulatory filings and the company’s R&D pipeline, strategic objectives, 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, the company’s exposure to financial market volatility and foreign currency and interest rate risks, potential tax liability associated the ~~impact~~separation of the ~~recent separation of the~~company’s biopharmaceuticals and medical products businesses (including the 2016 disposition of the company’s Retained Shares in Baxalta), the impact of competition, future sales growth, business development activities (including the recent acquisition of Claris Injectables in July 2017), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the sufficiency of the company’s facilities and financial flexibility, 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 the company’s experience and perception of historical trends, current conditions, and expected future developments as well as other factors that the company believes are appropriate in the circumstances. While these statements represent the company’s current judgment on what the future may hold, and the company believes these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:

failure to achieve our long-term financial improvement goals;

demand for and market acceptance risks for and competitive pressures related to new and existing ~~products;~~products, and the impact of those products on quality and patient safety concerns;

product development risks, including satisfactory clinical performance, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;

product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales;

future actions of (or failures to act or delays in acting by) FDA, ~~EMA~~the European Medicines Agency or any other regulatory body or government authority (including the U.S. Department of Justice or the New York Attorney General) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities;

failures with respect to the company’s quality, compliance and ethics programs;

future actions of third parties, including third-party payers, as healthcare reform and other similar measures are implemented, modified or repealed in the United States and globally;

the impact of ongoing U.S. healthcare reform and other similar actions undertaken by foreign governments with respect to pricing, reimbursement, taxation and rebate policies;

additional legislation, regulation and other governmental pressures in the United States or globally, which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of the company’s business;

the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies;

global regulatory, trade and tax policies;

the company’s ability to identify business development and growth opportunities and to successfully execute on business development strategies;

the company’s ability to finance and develop new products or enhancements, ~~internally,~~ on commercially acceptable terms or at all;

the company’s ability to realize the anticipated benefits from its joint product development and commercialization arrangements, governmental collaborations and other business development activities;

the availability and pricing of acceptable raw materials and component supply;

inability to create additional production capacity in a timely manner or the occurrence of other manufacturing or supply ~~difficulties;~~

~~the company’s ability to achieve the intended results associated with the separation~~difficulties (including as a result of ~~its biopharmaceuticals and medical products businesses~~natural disaster or ~~targeted margin improvements;~~otherwise);

the impact of any future tax liability with respect to the separation and ~~distribution;~~distribution, including with respect to disposition of the Retained Shares;

any failure by Baxalta or Shire to satisfy its obligation under the separation agreements, including the tax matters agreement, or the company’s letter agreement with Shire and Baxalta;

the ability to protect or enforce the company’s 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 the company’s manufacture, sale or use of affected products or technology;

the impact of global economic conditions on the company and its customers and suppliers, including foreign governments in certain countries in which the company operates;

fluctuations in foreign exchange and interest rates;

any changes in law concerning the taxation of income, including income earned outside the United ~~States;~~States, which may be a part of comprehensive tax reform;

actions by tax authorities in connection with ongoing tax audits;

breaches or failures of the company’s information technology systems;

loss of key employees or inability to identify and recruit new employees;

the outcome of pending or future litigation;

the adequacy of the company’s cash flows from operations to meet its ongoing cash obligations and fund its investment program; and

other factors identified elsewhere in this report on and other filings with the Securities and Exchange Commission, including those factors described in Item 1A of the company’s Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, all of which are available on the company’s website.

Actual results may differ materially from those projected in the forward-looking statements. The company does not undertake to update its forward-looking statements.

Item 3.

Quantitative and ~~Qualitative~~Qualitative Disclosures About Market Risk

Currency Risk

The company is primarily exposed to foreign exchange risk with respect to ~~recognized assets and liabilities, forecasted transactions and net assets~~revenues generated outside of the United States denominated in the Euro, British Pound, Chinese Yuan, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, ~~Columbian~~Colombian Peso, Brazilian Real, ~~Swedish Krona,~~ Mexican Peso and New Zealand Dollar. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative financial instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and ~~shareholders’~~stockholders’ equity volatility relating to foreign exchange. Financial market and currency volatility may limit the company’s ability to cost-effectively hedge these exposures.

The company may use options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of September 30, ~~2016~~2017 is 15 months. The company also enters into derivative instruments to hedge certain intercompany and third-party receivables and payables and debt denominated in foreign currencies.

In advance of the U.K. European Union membership referendum, the company increased the coverage level of its British Pound and Euro exposures by adding to its derivative positions to hedge those underlying exposures over the next 18 months. As a result, we do not expect to be significantly impacted by future potential currency volatility in the near term caused by the U.K.’s proposed exit from the European Union due to the size and composition of the company’s U.K. operations and the derivative strategy and positions we currently have in place.

As part of its risk-management program, the company performs a sensitivity ~~analysis~~analyses to assess potential changes in the fair value of its foreign exchange instruments relating to hypothetical and reasonably possible near-term movements in foreign exchange rates.

A sensitivity analysis of changes in the fair value of foreign exchange option and forward contracts outstanding at September 30, ~~2016,~~2017, while not predictive in nature, indicated that if the U.S. Dollar uniformly weakened by 10% against all currencies, on a net-of-tax basis, the net asset balance of $7$5 million with respect to those contracts would decrease by ~~$27~~$23 million, resulting in a net ~~liability.~~liability position.

The sensitivity analysis model recalculates the fair value of the foreign exchange option and forward contracts outstanding at September 30, ~~2016~~2017 by replacing the actual exchange rates at September 30, ~~2016~~2017 with exchange rates that are 10% weaker to the actual exchange rates for each applicable currency. All other factors are held constant. The sensitivity analysis disregards the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analysis also disregards the offsetting change in value of the underlying hedged transactions and balances.

Interest Rate and Other Risks

Refer to the caption “Interest Rate and Other Risks” in the “Financial Instrument Market Risk” section of the ~~2015~~2016 Annual Report. There were no significant changes during the quarter ended September 30, ~~2016.~~2017.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Baxter carried out an evaluation, under the supervision and with the participation of its Disclosure Committee and management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of Baxter’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of September 30, ~~2016.~~2017. Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures were effective as of September 30, ~~2016.~~2017.

Changes in Internal Control over Financial Reporting

~~There~~In the third quarter of 2017, related to its overall business optimization initiatives, the company began implementation of a business transformation project within the finance, human resources, purchasing and information technology functions which will further centralize and standardize business processes and systems across the company. The company is transitioning some processes to its shared services centers while others are moving to outsourced providers. This multi-year initiative will be conducted in phases and include modifications to the design and operation of controls over financial reporting.

With the exception of the above, there have been no changes in Baxter’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, Baxter’s internal control over financial reporting.

Review by Independent ~~Registered~~Registered Public Accounting Firm

A review of the interim condensed consolidated financial information included in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 has been performed by PricewaterhouseCoopers LLP, the company’s independent registered public accounting firm. Its report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and therefore, the independent accountants’ liability under Section 11 does not extend to it.

Report of Independent ~~Registered~~Registered Public Accounting Firm

To the Board of Directors and Shareholders of Baxter International Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Baxter International Inc. and its subsidiaries as of September 30, ~~2016,~~2017, and the related condensed consolidated statements of income ~~for the three month~~ and ~~nine month periods ended September 30, 2016 and 2015, the condensed consolidated statements~~ of comprehensive income for the ~~three month~~three-month and ~~nine month~~nine-month periods ended September 30, ~~2016~~2017 and ~~2015~~2016 and the condensed consolidated statements of cash flows for the ~~nine month~~nine-month periods ended September 30, ~~2016~~2017 and ~~2015.~~2016. These interim financial statements are the responsibility of the ~~company’s~~Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, ~~2015,~~2016, and the related consolidated statements of income, of comprehensive income, of cash flows and of changes in equity for the year then ended (not presented herein), and in our report dated February ~~26, 2016,~~23, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying ~~condensed~~ consolidated balance sheet information as of December 31, ~~2015,~~2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been ~~derived.~~derived.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

November ~~7, 2016~~

2, 2017

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

The information in Part I, Item 1, Note 13 is incorporated herein by reference.

Item 6. 2.

~~Exhibits~~

Unregistered Sales of Equity Securities and Use of Proceeds

The following table includes information about the company’s common stock repurchases during the three-month period ended September 30, 2017.

Issuer Purchases of Equity Securities

Period	Total number of shares purchased ⁽¹⁾		Average price paid per share		Total number of shares purchased as part of publicly announced program⁽¹⁾		Approximate dollar value of shares that may yet be purchased under the program⁽¹⁾
July 1, 2017 through July 31, 2017	—		$	—	—
August 1, 2017 through August 31, 2017		2,082,000	$	61.05		2,082,000
September 1, 2017 through September 30, 2017		834,700	$	62.78		834,700
Total		2,916,700	$	61.54		2,916,700	$	1,408,670,768

(1)In July 2012, the company announced that its board of directors authorized the company to repurchase up to $2.0 billion of its common stock on the open market or in private transactions. The board of directors increased this authority by an additional $1.5 billion in November 2016. During the third quarter of 2017, the company repurchased 2.9 million shares for $180 million under this program. $1.4 billion remained available as of September 30, 2017. This program does not have an expiration date.

Item 6.

Exhibits

Exhibit Index:


Exhibit Number		Description

15*		Letter Re Unaudited Interim Financial Information

31.1*		Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*		Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

*	Filed herewith.

~~Signature~~Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


		BAXTER INTERNATIONAL INC.
		(Registrant)

Date: November ~~7, 2016~~2, 2017	By:	/s/ James K. Saccaro
		James K. Saccaro
		~~Corporate~~ Executive Vice President and Chief Financial Officer
		(duly authorized officer and principal financial officer)

4645


Delaware		36-0781620
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Baxter Parkway, Deerfield, Illinois		60015
(Address of principal executive offices)		(Zip Code)


Large accelerated filer	☒	x	Accelerated filer		¨ ☐

Non-accelerated filer	☐	¨ ~~(Do~~ (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	¨ ☐


	Three months ended					Nine months ended						Three months ended					Nine months ended
	September 30,					September 30,						September 30,					September 30,
	2016		2015			2016			2015			2017			2016		2017		2016
Net sales		$2,558		$2,487			$7,518			$7,365		$	2,707		$	2,558	$	7,787	$	7,518
Cost of sales		1,487		1,453			4,510			4,291			1,579			1,487		4,487		4,510
Gross margin		1,071		1,034			3,008			3,074			1,128			1,071		3,300		3,008
Marketing and administrative expenses		726		794			2,076			2,361			685			726		1,890		2,076
Research and development expenses		159		148			490			442			151			159		435		490
Operating income		186		92			442			271			292			186		975		442
Net interest expense		14		34			53			94			14			14		41		53
Other expense (income), net		44		91			(4,286	)		(46	)
Income (loss) from continuing operations before income taxes		128		(33	)		4,675			223
Other (income) expense, net													(12	)		44		10		(4,286	)
Income from continuing operations before income taxes													290			128		924		4,675
Income tax expense (benefit)		1		(35	)		(51	)		13			42			1		139		(51	)
Income from continuing operations		127		2			4,726			210			248			127		785		4,726
Income (loss) from discontinued operations, net of tax		3		(1	)		(4	)		553			3			3		3		(4	)
Net income		$ 130		$ 1			$4,722			$ 763		$	251		$	130	$	788	$	4,722

Income from continuing operations per common share
Basic		$ 0.23		$ 0.00			$ 8.64			$ 0.39		$	0.46		$	0.23	$	1.45	$	8.64

Diluted		$ 0.23		$ 0.00			$ 8.56			$ 0.38		$	0.45		$	0.23	$	1.42	$	8.56

Income (loss) from discontinued operations per common share
Basic		$ 0.01		$ 0.00			$ (0.01	)		$ 1.01		$	—		$	0.01	$	—	$	(0.01	)

Diluted		$ 0.01		$ 0.00			$ (0.01	)		$ 1.01		$	—		$	0.01	$	—	$	(0.01	)

Net income per common share
Basic		$ 0.24		$ 0.00			$ 8.63			$ 1.40		$	0.46		$	0.24	$	1.45	$	8.63

Diluted		$ 0.24		$ 0.00			$ 8.55			$ 1.39		$	0.45		$	0.24	$	1.42	$	8.55

Weighted-average number of common shares outstanding
Basic		544		546			547			544			545			544		543		547

Diluted		551		549			552			548			557			551		554		552

Cash dividends declared per common share		$ 0.13		$0.115			$0.375			$1.155		$	0.160		$	0.130	$	0.450	$	0.375


			September 30,			December 31,					September 30,			December 31,
			2016			2015					2017			2016
Current assets		Cash and equivalents		$ 2,597			$ 2,213			Cash and equivalents	$	3,517		$	2,801
		Accounts and other current receivables, net		1,739			1,731
		Inventories		1,568			1,604			Accounts and other current receivables, net		1,748			1,691
		Prepaid expenses and other		634			855			Inventories		1,550			1,430
		Investment in Baxalta common stock		—			5,148			Prepaid expenses and other		633			602
		Current assets held for disposition		51			245			Current assets held for disposition		—			50
		Total current assets		6,589			11,796			Total current assets		7,448			6,574
Property, plant and equipment, net	Property, plant and equipment, net			4,327			4,386		Property, plant and equipment, net			4,488			4,289
Other assets		Goodwill		2,679			2,687			Goodwill		3,117			2,595
		Other intangible assets, net		1,180			1,349			Other intangible assets, net		1,371			1,111
		Other		1,020			744			Other		1,117			977
		Total other assets		4,879			4,780			Total other assets		5,605			4,683
Total assets				$ 15,795			$ 20,962				$	17,541		$	15,546

Current liabilities		Short-term debt		$ —			$ 1,775			Current maturities of long-term debt and lease obligations	$	3		$	3
		Current maturities of long-term debt and lease obligations		6			810
		Accounts payable and accrued liabilities		2,499			2,666			Accounts payable and accrued liabilities		2,572			2,612
		Current income taxes payable		98			453			Current income taxes payable		87			126
		Current liabilities held for disposition		3			46			Current liabilities held for disposition		—			3
		Total current liabilities		2,606			5,750			Total current liabilities		2,662			2,744
Long-term debt and lease obligations	Long-term debt and lease obligations			2,834			3,922		Long-term debt and lease obligations			3,495			2,779
Other long-term liabilities	Other long-term liabilities			1,691			2,425		Other long-term liabilities			1,925			1,743
Equity		Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2016 and 2015		683			683			Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2017 and 2016		683			683
		Common stock in treasury, at cost, 139,581,579 shares in 2016 and 135,839,938 shares in 2015		(7,813	)		(7,646	)		Common stock in treasury, at cost, 138,870,075 shares in 2017 and 143,890,064 shares in 2016		(7,756	)		(7,995	)
		Additional contributed capital		5,930			5,902			Additional contributed capital		5,918			5,958
		Retained earnings		14,049			9,683			Retained earnings		14,615			14,200
		Accumulated other comprehensive (loss) income		(4,172	)		224			Accumulated other comprehensive (loss) income		(3,994	)		(4,556	)
		Total Baxter shareholders’ equity		8,677			8,846			Total Baxter shareholders’ equity		9,466			8,290
		Noncontrolling interests		(13	)		19			Noncontrolling interests		(7	)		(10	)
		Total equity		8,664			8,865			Total equity		9,459			8,280
Total liabilities and equity	Total liabilities and equity			$ 15,795			$ 20,962		Total liabilities and equity		$	17,541		$	15,546


			Nine months ended								Nine months ended
			September 30,								September 30,
			2016			2015					2017			2016
Cash flows from operations		Net income		$4,722			$ 763			Net income	$	788		$	4,722
		Adjustments to reconcile income from continuing operations to net cash from operating activities:
		Loss (income) from discontinued operations, net of tax		4			(553	)
		Depreciation and amortization		599			593			Adjustments to reconcile income from continuing operations to net cash from operating activities:
		Deferred income taxes		(298	)		63			Loss (income) from discontinued operations, net of tax		(3	)		4
		Stock compensation		84			96			Depreciation and amortization		562			599
		Realized excess tax benefits from stock issued under employee benefit plans		(36	)		(6	)		Deferred income taxes		(30	)		(298	)
		Net periodic pension benefit and OPEB costs		90			170			Stock compensation		77			84
		Business optimization items		237			102			Net periodic pension benefit and OPEB costs		93			90
		Net realized gains on Baxalta common stock		(4,387	)		—			Net realized gains on the Baxalta Retained Share transactions		—			(4,387	)
		Other		236			(8	)		Other		69			437
		Changes in balance sheet items								Changes in balance sheet items
		Accounts and other current receivables, net		22			5			Accounts and other current receivables, net		32			22
		Inventories		(11	)		(205	)		Inventories		—			(11	)
		Accounts payable and accrued liabilities		(326	)		14			Accounts payable and accrued liabilities		(36	)		(326	)
		Business optimization and infusion pump payments		(119	)		(61	)		Business optimization and infusion pump payments		(116	)		(119	)
		Other		121			(216	)		Other		(93	)		121
		Cash flows from operations – continuing operations		938			757			Cash flows from operations – continuing operations		1,343			938
		Cash flows from operations – discontinued operations		3			290			Cash flows from operations – discontinued operations		(20	)		3
		Cash flows from operations		941			1,047			Cash flows from operations		1,323			941
Cash flows from investing activities		Capital expenditures		(519	)		(658	)		Capital expenditures		(410	)		(519	)
		Acquisitions and investments, net of cash acquired		(47	)		(27	)		Acquisitions and investments, net of cash acquired		(680	)		(47	)
		Divestitures and other investing activities		17			56			Divestitures and other investing activities, net		2			17
		Cash flows from investing activities – continuing operations		(549	)		(629	)		Cash flows from investing activities – continuing operations		(1,088	)		(549	)
		Cash flows from investing activities – discontinued operations		13			(946	)		Cash flows from investing activities – discontinued operations		—			13
		Cash flows from investing activities		(536	)		(1,575	)		Cash flows from investing activities		(1,088	)		(536	)
Cash flows from financing activities		Issuances of debt		1,641			6,868			Issuances of debt		633			1,641
		Payments of obligations		(1,383	)		(3,723	)		Payments of obligations		—			(1,383	)
		Debt extinguishment costs		(16	)		(114	)		Debt extinguishment costs		—			(16	)
		Decrease in debt with original maturities of three months or less, net		(300	)		(450	)		Increase (decrease) in debt with original maturities of three months or less, net		—			(300	)
		Transfer of cash and equivalents to Baxalta		—			(2,122	)		Cash dividends on common stock		(228	)		(197	)
		Cash dividends on common stock		(197	)		(847	)		Proceeds from stock issued under employee benefit plans		298			251
		Proceeds and realized excess tax benefits from stock issued under employee benefit plans		286			174			Purchases of treasury stock		(275	)		(45	)
		Purchase of treasury stock		(45	)		—			Other		(37	)		5
		Other		(30	)		(39	)		Cash flows from financing activities		391			(44	)
		Cash flows from financing activities		(44	)		(253	)
Effect of foreign exchange rate changes on cash and equivalents	Effect of foreign exchange rate changes on cash and equivalents			23			(174	)	Effect of foreign exchange rate changes on cash and equivalents			90			23
Increase (decrease) in cash and equivalents				384			(955	)
Increase in cash and equivalents									Increase in cash and equivalents			716			384
Cash and equivalents at beginning of period	Cash and equivalents at beginning of period			2,213			2,925		Cash and equivalents at beginning of period			2,801			2,213
Cash and equivalents at end of period	Cash and equivalents at end of period			$ 2,597			$ 1,970		Cash and equivalents at end of period		$	3,517		$	2,597

Supplemental Schedule of Non-Cash Investing and Financing Activities	Supplemental Schedule of Non-Cash Investing and Financing Activities								Supplemental Schedule of Non-Cash Investing and Financing Activities
Net proceeds on Retained Share transactions				$ 4,387			$ —
Payment of obligations in exchange for Retained Shares				3,646			—
Exchange of Baxter shares with Retained Shares				611			—
Other Supplemental Information
Income taxes paid				$ 453			$ 357

Net proceeds on the Baxalta Retained Share transactions									Net proceeds on the Baxalta Retained Share transactions		$	—		$	4,387
Payment of obligations in exchange for Baxalta Retained Shares									Payment of obligations in exchange for Baxalta Retained Shares		$	—		$	3,646
Exchange of Baxter shares with Baxalta Retained Shares									Exchange of Baxter shares with Baxalta Retained Shares		$	—		$	611


		224-948-2000
		(Registrant’s telephone number, including area code)


				Page Number
PARTI.		FINANCIAL INFORMATION				2
Item 1.		Financial Statements (unaudited)				2
		Condensed Consolidated Statements of Income			2
		Condensed Consolidated Statements of Comprehensive Income			3
		Condensed Consolidated Balance Sheets			4
		Condensed Consolidated Statements of Cash Flows			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			40	39
Item 4.		Controls and Procedures			41	40
Review by Independent Registered Public Accounting Firm					42	41
Report of Independent Registered Public Accounting Firm					43
			42
~~PARTII.~~
PART II.		OTHER INFORMATION				43
Item 1.		Legal Proceedings		43
Item 2.	44	Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 6.		Exhibits			45	44
Signature							46	45

(in millions)
Assets acquired and liabilities assumed
Cash	$	11
Accounts and other current receivables		16
Inventories		30
Prepaid expenses and other		16
Property, plant and equipment		132
Goodwill		310
Other intangible assets		235
Other		20
Accounts payable and accrued liabilities		(22	)
Other long-term liabilities		(108	)
Total assets acquired and liabilities assumed	$	640


(in millions)	Developed technology, including patents			Other amortized intangible assets			Indefinite-lived intangible assets		Total			Developed technology, including patents			Other amortized intangible assets			Indefinite-lived intangible assets		Total
September 30, 2016
September 30, 2017
Gross other intangible assets		$1,753			$ 401			$58		$2,212		$	1,979		$	432		$	152	$	2,563
Accumulated amortization		(866	)		(166	)		—		(1,032	)		(977	)		(215	)		—		(1,192	)
Other intangible assets, net		$ 887			$ 235			$58		$1,180		$	1,002		$	217		$	152	$	1,371

December 31, 2015
December 31, 2016
Gross other intangible assets		$1,742			$ 393			$86		$2,221		$	1,690		$	384		$	57	$	2,131
Accumulated amortization		(729	)		(143	)		—		(872	)		(855	)		(165	)		—		(1,020	)
Other intangible assets, net		$1,013			$ 250			$86		$1,349		$	835		$	219		$	57	$	1,111


(in millions)
Reserves as of December 31, 2015	$	116
Reserves as of December 31, 2016				$	164
Charges		183			59
Reserve adjustments		(14	)		(14	)
Utilization		(98	)		(114	)
CTA		9			24
Reserves as of September 30, 2016	$	196

Reserves as of September 30, 2017				$	119


	Gain (loss) recognized in OCI				Location of gain (loss) in income statement			Gain (loss) reclassified from AOCI into income						Gain (loss) recognized in OCI							Location of gain (loss)		Gain (loss) reclassified from AOCI into income
(in millions)	2016		2015				2016				2015		2017				2016			in income statement		2017				2016
Cash flow hedges					Location of gain (loss) in income statement
Interest rate contracts		$—		$—		Other expense (income), net			$ 5			$—		$	—			$	—		Other (income) expense, net		$	—			$	5
Foreign exchange contracts		3		1		Cost of sales			(2	)		5			(11	)			3		Cost of sales			(3	)			(2	)
Net investment hedge															(39	)			—		Other (income) expense, net			—				—
Total		$ 3		$ 1					$ 3			$ 5		$	(50	)		$	3				$	(3	)		$	3


			Gain (loss) recognized in income							Gain (loss) recognized in income
(in millions)	Location of gain (loss) in income statement		2016			2015			Location of gain (loss) in income statement	2017			2016
Fair value hedges
Interest rate contracts		Net interest expense		$(7	)		$(11	)	Net interest expense	$	(1	)	$	(7	)
Undesignated derivative instruments
Foreign exchange contracts		Other expense (income), net		$ 9			$ 12		Other (income) expense, net	$	(3	)	$	9


	Derivatives in asset positions				Derivatives in liability positions				Derivatives in asset positions			Derivatives in liability positions
(in millions)	Balance sheet location		Fair value		Balance sheet location		Fair value		Balance sheet location	Fair value		Balance sheet location	Fair value
Derivative instruments designated as hedges
Interest rate contracts		Other long-term assets		$ 16		Other long-term liabilities		$ —	Other long-term assets	$	6	Other long- term liabilities	$	—
Foreign exchange contracts		Prepaid expenses and other		13		Accounts payable and accrued liabilities		2	Prepaid expenses and other		11	Accounts payable and accrued liabilities		4
Foreign exchange contracts		Other long-term assets		1		Other long-term liabilities		—	Other long-term assets		2	Other long- term liabilities		—
Total derivative instruments designated as hedges				$ 30				$ 2		$	19		$	4

Undesignated derivative instruments
Foreign exchange contracts		Prepaid expenses and other		$ —		Accounts payable and accrued liabilities		$ 1	Prepaid expenses and other	$	—	Accounts payable and accrued liabilities	$	1
Total derivative instruments				$ 30				$ 3		$	19		$	5


			Basis of fair value measurement								Basis of fair value measurement
(in millions)	Balance as of September 30, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance as of September 30, 2017		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign currency hedges		$ 14		$—		$ 14		$—	$	13	$	—	$	13	$	—
Interest rate hedges		16		—		16		—		6		—		6		—
Available-for-sale securities		10		10		—		—		11		11		—		—
Total assets		$ 40		$10		$ 30		$—	$	30	$	11	$	19	$	—

Liabilities
Foreign currency hedges		$ 3		$—		$ 3		$—	$	5	$	—	$	5	$	—
Contingent payments related to acquisitions		19		—		—		19		10		—		—		10
Total liabilities		$ 22		$—		$ 3		$19	$	15	$	—	$	5	$	10


			Basis of fair value measurement
(in millions)	Balance as of December 31, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign currency hedges		$ 10		$—		$ 10		$—
Interest rate hedges		46		—		46		—
Available-for-sale securities		5,162		14		5,148		—
Total assets		$5,218		$14		$5,204		$—

Liabilities
Foreign currency hedges		$ 2		$—		$ 2		$—
Contingent payments related to acquisitions		20		—		—		20
Total liabilities		$ 22		$—		$ 2		$20

			Basis of fair value measurement
(in millions)	Balance as of December 31, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign currency hedges	$	23	$	—	$	23	$	—
Interest rate hedges		7		—		7		—
Available-for-sale securities		9		9		—		—
Total assets	$	39	$	9	$	30	$	—
Liabilities
Foreign currency hedges	$	3	$	—	$	3	$	—
Contingent payments related to acquisitions		19		—		—		19
Total liabilities	$	22	$	—	$	3	$	19


(in millions)	Amortized cost		Unrealized gains		Unrealized losses		Fair value
September 30, 2016		$ 13		$ 1		$ 4		$ 10
December 31, 2015		$732		$4,430		$—		$5,162


	Book values				Approximate fair values				Book values				Approximate fair values
(in millions)	2016		2015		2016		2015		2017		2016		2017		2016
Assets
Investments		$ 33		$ 21		$ 32		$ 21	$	42	$	31	$	42	$	31

Liabilities
Short-term debt		$ —		$1,775		$ —		$1,775
Current maturities of long-term debt and lease obligations		6		810		6		818	$	3	$	3	$	3	$	3
Long-term debt and lease obligations		2,834		3,922		2,960		4,077		3,495		2,779		3,568		2,756

			Basis of fair value measurement
(in millions)	Balance as of December 31, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments	$	31	$	—	$	—	$	31
Total assets	$	31	$	—	$	—	$	31
Liabilities
Current maturities of long-term debt and lease obligations	$	3	$	—	$	3	$	—
Long-term debt and lease obligations		2,756		—		2,756		—
Total liabilities	$	2,759	$	—	$	2,759	$	—


			Basis of fair value measurement
(in millions)	Balance as of December 31, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$ 21		$—		$ 2		$19
Total assets		$ 21		$—		$ 2		$19

Liabilities
Short-term debt		$1,775		$—		$1,775		$—
Current maturities of long-term debt and lease obligations		818		—		818		—
Long-term debt and lease obligations		4,077		—		4,077		—
Total liabilities		$6,670		$—		$6,670		$—


(in millions)	CTA			Pension and other employee benefits			Hedging activities			Available- for-sale securities			Total			CTA			Pension and other employee benefits			Hedging activities			Available- for-sale securities		Total
Gains (losses)
Balance as of December 31, 2015	$	(3,191	)		$ (1,064	)	$	7		$	4,472		$	224
Balance as of December 31, 2016																$	(3,438	)	$	(1,161	)	$	3		$	40	$	(4,556	)
Other comprehensive income before reclassifications		(16	)		(6	)		(6	)		105			77			501			(25	)		(19	)		1		458
Amounts reclassified from AOCI (a)		—			67			(4	)		(4,536	)		(4,473	)		29			69			3			3		104
Net other comprehensive (loss) income		(16	)		61			(10	)		(4,431	)		(4,396	)
Balance as of September 30, 2016	$	(3,207	)		$ (1,003	)	$	(3	)	$	41		$	(4,172	)



(in millions)	CTA			Pension and other employee benefits			Hedging activities			Available- for-sale- securities			Total
Gains (losses)
Balance as of December 31, 2014	$	(2,323	)		$ (1,427	)	$	34		$	66		$	(3,650	)
Other comprehensive income before reclassifications		(985	)		118			55			3,446			2,634
Amounts reclassified from AOCI (a)		—			94			(39	)		(6	)		49
Net other comprehensive (loss) income		(985	)		212			16			3,440			2,683
Distribution of Baxalta		226			198			(42	)		(32	)		350
Balance as of September 30, 2015	$	(3,082	)		$ (1,017	)	$	8		$	3,474		$	(617	)

Net other comprehensive income (loss)																	530			44			(16	)		4		562
Balance as of September 30, 2017																$	(2,908	)	$	(1,117	)	$	(13	)	$	44	$	(3,994	)

								Amounts reclassified from AOCI (a)
(in millions)								Three months ended September 30, 2017			Nine months ended September 30, 2017			Location of impact in income statement
Translation adjustments
Loss on Venezuela deconsolidation								$	—		$	(29	)	Other (income) expense, net
									—			(29	)	Total before tax
	Amounts reclassified from AOCI (a)								—			—		Income tax expense (benefit)
(in millions)	Three months ended September 30, 2016			Nine months ended September 30, 2016			Location of impact in income statement
								$	—		$	(29	)	Net of tax
Amortization of pension and other employee benefits items
Actuarial losses and other (b)	$	(31	)	$	(98	)		$	(35	)	$	(103	)
		(31	)		(98	)	Total before tax		(35	)		(103	)	Total before tax
		11			31		Tax benefit		12			34		Income tax expense (benefit)
	$	(20	)	$	(67	)	Net of tax	$	(23	)	$	(69	)	Net of tax

Gains on hedging activities
Interest rate contracts	$	5		$	9		Other income, net
Losses on hedging activities
Foreign exchange contracts		(2	)		(3	)	Cost of sales	$	(3	)	$	(4	)	Cost of sales
		3			6		Total before tax		(3	)		(4	)	Total before tax
		(1	)		(2	)	Tax expense		1			1		Income tax expense (benefit)
	$	2		$	4		Net of tax	$	(2	)	$	(3	)	Net of tax

Available-for-sale-securities
Gains on sale of equity securities	$	—		$	4,536		Other income, net
		—			4,536		Total before tax
Other-than-temporary impairment of equity securities								$	—		$	(4	)	Other (income) expense, net
		—			—		Tax benefit		—			(4	)	Total before tax
	$	—		$	4,536		Net of tax		—			1		Income tax expense (benefit)
									—			(3	)	Net of tax
Total reclassification for the period	$	(18	)	$	4,473		Total net of tax	$	(25	)	$	(104	)	Total net of tax


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,						Nine months ended September 30,
(in millions)	2016			2015			2016			2015			2017			2016			2017			2016
Gross Margin
Intangible asset amortization expense		$(42	)		$(40	)		$(124	)		$(120	)	$	(38	)	$	(42	)	$	(112	)	$	(124	)
Business optimization items¹		(35	)		(32	)		(113	)		(28	)		(12	)		(35	)		(42	)		(113	)
Product-related items²		—			18			12			18			(21	)		—			(17	)		12
Separation-related costs ⁴														—			(1	)		(1	)		(1	)
Claris acquisition and integration expenses ⁸														(4	)					(4	)
Hurricane Maria costs ¹⁰														(21	)					(21	)
Intangible asset impairment³		—			—			(51	)		—			—			—			—			(51	)
Baxalta separation-related costs⁴		(1	)		(1	)		(1	)		(1	)
Total Special Items		$(78	)		$(55	)		$(277	)		$(131	)	$	(96	)	$	(78	)	$	(197	)	$	(277	)

Impact on Gross Margin Ratio		(3.0 pts	)		(2.2 pts	)		(3.7 pts	)		(1.8 pts	)	(3.5 pts)			(3.0 pts)			(2.5 pts)			(3.7 pts)
Marketing and Administrative Expenses
Business optimization items¹		$106			$64			$137			$113		$	39		$	106		$	74		$	137
Baxalta separation-related costs⁴		9			60			45			88
Separation-related costs ⁴														2			9			16			45
Claris acquisition and integration expenses ⁸														11			—			16			—
Historical reserve adjustments ⁵														—			—			(12	)		—
Total Special Items		$115			$124			$182			$201		$	52		$	115		$	94		$	182

Impact on Marketing and Administrative Expense Ratio		4.5 pts			5.0 pts			2.4 pts			2.8 pts		1.9 pts			4.5 pts			1.2 pts			2.4 pts
Research and Development Expenses
Business optimization items¹		$30			$8			$75			$11		$	1		$	30		$	—		$	75
Total Special Items		$30			$8			$75			$11		$	1		$	30		$	—		$	75

Other Expense (Income), Net
Net realized gains on Retained Shares transactions⁵		$—			$—			$(4,391	)		$—
Loss on debt extinguishment⁶		48			130			149			130		$	—		$	48		$	—		$	149
Litigation settlement		—			—			—			(52	)
Net realized gains on Baxalta Retained Share transactions ⁷														—			—			—			(4,391	)
Venezuela deconsolidation ⁹														—			—			33			—
Total Special Items		$48			$130			$(4,242	)		$78		$	—		$	48		$	33		$	(4,242	)

Income Tax Benefit
Impact of special items⁷		$(87	)		$(94	)		$(252	)		$(112	)
Income Tax Expense (Benefit)
Impact of special items													$	(41	)	$	(87	)	$	(87	)	$	(252	)
Total Special Items		$(87	)		$(94	)		$(252	)		$(112	)	$	(41	)	$	(87	)	$	(87	)	$	(252	)

Impact on Effective Tax Rate		21.3 pts			(85.3 pts	)		21.9 pts			13.6 pts		4.4 pts			21.3 pts			3.1 pts			21.9 pts


(in millions)	Total		Less than one year		One to three years		Three to five years		More than five years
Long-term debt and capital lease obligations, including current maturities		$2,840		$ 6		$ 6		$736		$2,092
Interest on short- and long-term debt and capital lease obligations¹		1,530		85		170		167		1,108
Contractual obligations		$4,370		$91		$176		$903		$3,200