UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

_________________________________________________________________________________

☒
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~

2022

☐
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-4448

BAXTER INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________________________________

~~Delaware~~

~~36-0781620~~

Delaware

36-0781620

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One Baxter Parkway, ~~Deerfield, Illinois~~

Deerfield,

Illinois

60015

(Address of ~~principal executive offices)~~

Principal Executive Offices)

(Zip Code)

224.

948.2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

~~224-948-2000~~

Title of each class

~~(Registrant’s telephone number, including area code)~~

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 par value

BAX (NYSE)

New York Stock Exchange

Chicago Stock Exchange

0.4% Global Notes due 2024

BAX 24

New York Stock Exchange

1.3% Global Notes due 2025

BAX 25

New York Stock Exchange

1.3% Global Notes due 2029

BAX 29

New York Stock Exchange

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

~~(Do not check if a smaller reporting company)~~

Smaller reporting company

☐

Emerging growth company

☐

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 ☒

The number of shares of the registrant’s Common Stock, par value $1.00 per share, outstanding as of October ~~27, 2017~~20, 2022 was ~~544,831,923~~504,120,759 shares.

BAXTER INTERNATIONAL INC.

FORM 10-Q

For the quarterly period ended September 30, ~~2017~~

2022

TABLE OF CONTENTS

		~~Page Number~~
			Page Number
PART I.			FINANCIAL INFORMATION			2
Item 1.			Financial Statements (unaudited)			2
	Condensed Consolidated Balance Sheets		2
	Condensed Consolidated Statements of Income (Loss)				2 3
			Condensed Consolidated Statements of Comprehensive Income (Loss)			3 4
			Condensed Consolidated ~~Balance Sheets~~Statements of Changes in Equity			4 5
			Condensed Consolidated Statements of Cash Flows			5 7
			Notes to Condensed Consolidated Financial Statements			6 8
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			26 32
Item 3.			Quantitative and Qualitative Disclosures about Market Risk			39 49
Item 4.			Controls and Procedures			40 50
~~Review by Independent Registered Public Accounting Firm~~			41
~~Report of Independent Registered Public Accounting Firm~~		42

PART II.		OTHER INFORMATION		43 51
Item 1.			Legal Proceedings			43 51
Item 1A.	Risk Factors		51
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			43 51
Item 6.			Exhibits			44 52
Signature			45 53

PART I. ~~FINANCI~~ALFINANCIAL INFORMATION

~~Item 1.~~

Item 1. Financial Statements

Baxter International Inc.

Condensed Consolidated ~~Statements of Income~~Balance Sheets (unaudited)

(in millions, except ~~per~~ share ~~data)~~

information)


	September 30, 2022		December 31, 2021
Current assets:
Cash and cash equivalents	$	1,601	$	2,951
Accounts receivable, net of allowances of $120 in 2022 and $122 in 2021	2,555		2,629
Inventories	2,675		2,453
Prepaid expenses and other current assets	979		839
Total current assets	7,810		8,872
Property, plant and equipment, net	4,799		5,178
Goodwill	6,639		9,836
Other intangible assets, net	6,927		7,792
Operating lease right-of-use assets	546		630
Other non-current assets	1,244		1,213
Total assets	$	27,965	$	33,521
Current liabilities:
Short-term debt	$	275	$	301
Current maturities of long-term debt and finance lease obligations	4		210
Accounts payable	1,234		1,246
Accrued expenses and other current liabilities	2,195		2,479
Total current liabilities	3,708		4,236
Long-term debt and finance lease obligations, less current portion	16,153		17,149
Operating lease liabilities	454		522
Other non-current liabilities	2,071		2,493
Total liabilities	22,386		24,400
Commitments and contingencies
Equity:
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2022 and 2021	683		683
Common stock in treasury, at cost,179,451,293 shares in 2022 and 181,879,516 shares in 2021	(11,406)		(11,488)
Additional contributed capital	6,297		6,197
Retained earnings	14,015		17,065
Accumulated other comprehensive income (loss)	(4,054)		(3,380)
Total Baxter stockholders’ equity	5,535		9,077
Noncontrolling interests	44		44
Total equity	5,579		9,121
Total liabilities and equity	$	27,965	$	33,521

Three months ended

Nine months ended

September 30,

September 30,

2017

2016

2017

2016

Net sales

$
2,707

$
2,558

$
7,787

$
7,518

Cost of sales

1,579

1,487

4,487

4,510

Gross margin

1,128

1,071

3,300

3,008

Marketing and administrative expenses

685

726

1,890

2,076

Research and development expenses

151

159

435

490

Operating income

292

186

975

442

Net interest expense

14

14

41

53

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)

42

1

139

(51
)
Income from continuing operations

248

127

785

4,726

Income (loss) from discontinued operations, net of tax

3

3

3

(4
)
Net income

$
251

$
130

$
788

$
4,722

Income from continuing operations per common share

Basic

$
0.46

$
0.23

$
1.45

$
8.64

Diluted

$
0.45

$
0.23

$
1.42

$
8.56

Income (loss) from discontinued operations per common share

Basic

$
—

$
0.01

$
—

$
(0.01
)
Diluted

$
—

$
0.01

$
—

$
(0.01
)
Net income per common share

Basic

$
0.46

$
0.24

$
1.45

$
8.63

Diluted

$
0.45

$
0.24

$
1.42

$
8.55

Weighted-average number of common shares outstanding

Basic

545

544

543

547

Diluted

557

551

554

552

Cash dividends declared per common share

$
0.160

$
0.130

$
0.450

$
0.375

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

Baxter International Inc.

Condensed Consolidated Statements of ~~Comprehensive~~ Income (Loss) (unaudited)

(in ~~millions)~~

millions, except per share data)


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Net sales	$	3,773	$	3,226	$	11,226	$	9,270
Cost of sales	2,640		1,905		7,292		5,571
Gross margin	1,133		1,321		3,934		3,699
Selling, general and administrative expenses	947		680		2,975		1,982
Research and development expenses	152		129		450		396
Goodwill impairments	2,785		—		2,785		—
Other operating expense (income), net	48		(1)		20		(6)
Operating income (loss)	(2,799)		513		(2,296)		1,327
Interest expense, net	104		50		278		118
Other (income) expense, net	63		12		3		15
Income (loss) before income taxes	(2,966)		451		(2,577)		1,194
Income tax expense (benefit)	(32)		(1)		29		141
Net income (loss)	(2,934)		452		(2,606)		1,053
Net income attributable to noncontrolling interests	3		2		8		7
Net income (loss) attributable to Baxter stockholders	$	(2,937)	$	450	$	(2,614)	$	1,046
Earnings (loss) per share
Basic	$	(5.83)	$	0.90	$	(5.20)	$	2.08
Diluted	$	(5.83)	$	0.89	$	(5.20)	$	2.06
Weighted-average number of shares outstanding
Basic	504		500		503		503
Diluted	504		506		503		509

Three months ended

Nine months ended

September 30,

September 30,

2017

2016

2017

2016

Net income

$
251

$
130

$
788

$
4,722

Other comprehensive income (loss), net of tax:

Currency translation adjustments, net of tax expense (benefit) of $21 and ($2) for the three months ended September 30, 2017 and 2016, respectively, and $69 and ($12) for the nine months ended September 30, 2017 and 2016, respectively

181

10

530

(16
)
Pension and other employee benefits, net of tax expense of $6 and $11 for the three months ended September 30, 2017 and 2016, respectively, and $26 and $32 for the nine months ended September 30, 2017 and 2016, respectively

6

21

44

61

Hedging activities, net of tax benefit of ($2) and zero for the three months ended September 30, 2017 and 2016, respectively, and ($7) and ($5) for the nine months ended September 30, 2017 and 2016, respectively

(6
)

1

(16
)

(10
)
Available-for-sale securities, net of tax expense of zero for the three months ended September 30, 2017 and 2016, and $1 and zero for the nine months ended September 30, 2017 and 2016, respectively

1

—

4

(4,431
)
Total other comprehensive income (loss), net of tax

182

32

562

(4,396
)
Comprehensive income

$
433

$
162

$
1,350

$
326

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

Baxter International Inc.

Condensed Consolidated ~~Balance Sheets~~Statements of Comprehensive Income (Loss) (unaudited)

(in ~~millions, except shares)~~

millions)


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Net income (loss)	$	(2,934)	$	452	$	(2,606)	$	1,053
Other comprehensive income (loss), net of tax:
Currency translation adjustments, net of tax expense (benefit) of ($16) and $3 for the three months ended September 30, 2022 and 2021, respectively, and ($25) and $16 for the nine months ended September 30, 2022 and 2021, respectively.	(319)		(137)		(751)		(257)
Pension and other postretirement benefits, net of tax expense of $5 and $8 for the three months ended September 30, 2022 and 2021, respectively, and $13 and $19 for the nine months ended September 30, 2022 and 2021, respectively.	16		22		48		63
Hedging activities, net of tax expense of $5 and $3 for the three months ended September 30, 2022 and 2021, respectively, and $8 and $8 for the nine months ended September 30, 2022 and 2021, respectively.	16		9		27		26
Available-for-sale debt securities, net of tax expense of zero for the three months ended September 30, 2022 and 2021, respectively, and $1 and zero for the nine months ended September 30, 2022 and 2021, respectively.	—		—		2		—
Total other comprehensive income (loss), net of tax	(287)		(106)		(674)		(168)
Comprehensive income (loss)	(3,221)		346		(3,280)		885
Less: Comprehensive income attributable to noncontrolling interests	3		2		8		7
Comprehensive income (loss) attributable to Baxter stockholders	$	(3,224)	$	344	$	(3,288)	$	878

September 30,

December 31,

2017

2016

Current assets

Cash and equivalents

$
3,517

$
2,801

Accounts and other current receivables, net

1,748

1,691

Inventories

1,550

1,430

Prepaid expenses and other

633

602

Current assets held for disposition

—

50

Total current assets

7,448

6,574

Property, plant and equipment, net

4,488

4,289

Other assets

Goodwill

3,117

2,595

Other intangible assets, net

1,371

1,111

Other

1,117

977

Total other assets

5,605

4,683

Total assets

$
17,541

$
15,546

Current liabilities

Current maturities of long-term debt and lease obligations

$
3

$
3

Accounts payable and accrued liabilities

2,572

2,612

Current income taxes payable

87

126

Current liabilities held for disposition

—

3

Total current liabilities

2,662

2,744

Long-term debt and lease obligations

3,495

2,779

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 2017 and 2016

683

683

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

5,918

5,958

Retained earnings

14,615

14,200

Accumulated other comprehensive (loss) income

(3,994
)

(4,556
)

Total Baxter shareholders’ equity

9,466

8,290

Noncontrolling interests

(7
)

(10
)

Total equity

9,459

8,280

Total liabilities and equity

$
17,541

$
15,546

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

Baxter International Inc.

Condensed Consolidated Statements of ~~Cash Flows~~Changes in Equity (unaudited)

(in millions)

Nine months ended

September 30,

2017

2016

Cash flows from operations

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

(3
)

4

Depreciation and amortization

562

599

Deferred income taxes

(30
)

(298
)

Stock compensation

77

84

Net periodic pension benefit and OPEB costs

93

90

Net realized gains on the Baxalta Retained Share transactions

—

(4,387
)

Other

69

437

Changes in balance sheet items

Accounts and other current receivables, net

32

22

Inventories

—

(11
)

Accounts payable and accrued liabilities

(36
)

(326
)

Business optimization and infusion pump payments

(116
)

(119
)

Other

(93
)

121

Cash flows from operations – continuing operations

1,343

938

Cash flows from operations – discontinued operations

(20
)

3

Cash flows from operations

1,323

941

Cash flows from investing activities

Capital expenditures

(410
)

(519
)

Acquisitions and investments, net of cash acquired

(680
)

(47
)

Divestitures and other investing activities, net

2

17

Cash flows from investing activities – continuing operations

(1,088
)

(549
)

Cash flows from investing activities – discontinued operations

—

13

Cash flows from investing activities

(1,088
)

(536
)
Cash flows from financing activities

Issuances of debt

633

1,641

Payments of obligations

—

(1,383
)

Debt extinguishment costs

—

(16
)

Increase (decrease) in debt with original maturities of three months or less, net

—

(300
)

Cash dividends on common stock

(228
)

(197
)

Proceeds from stock issued under employee benefit plans

298

251

Purchases of treasury stock

(275
)

(45
)

Other

(37
)

5

Cash flows from financing activities

391

(44
)
Effect of foreign exchange rate changes on cash and equivalents

90

23

Increase in cash and equivalents

716

384

Cash and equivalents at beginning of period

2,801

2,213

Cash and equivalents at end of period

$
3,517

$
2,597

Supplemental Schedule of Non-Cash Investing and Financing Activities

Net proceeds on the Baxalta Retained Share transactions

$
—

$
4,387

Payment of obligations in exchange for Baxalta Retained Shares

$
—

$
3,646

Exchange of Baxter shares with Baxalta Retained Shares

$
—

$
611


	For the three months ended September 30, 2022
	Baxter International Inc. stockholders' equity
	Common stock shares	Common stock		Common stock shares in treasury	Common stock in treasury		Additional contributed capital		Retained earnings		Accumulated other comprehensive income (loss)		Total Baxter stockholders' equity		Noncontrolling interests		Total equity
Balance as of July 1, 2022	683	$	683	180	$	(11,409)	$	6,253	$	17,099	$	(3,767)	$	8,859	$	44	$	8,903

Net income (loss)	—	—		—	—		—		(2,937)		—		(2,937)		3		(2,934)
Other comprehensive income (loss)	—	—		—	—		—		—		(287)		(287)		—		(287)
Purchases of treasury stock	—	—		—	(24)		—		—		—		(24)		—		(24)
Stock issued under employee benefit plans and other	—	—		(1)	27		44		—		—		71		—		71
Dividends declared on common stock	—	—		—	—		—		(147)		—		(147)		—		(147)
Change in noncontrolling interests	—	—		—	—		—		—		—		—		(3)		(3)
Balance as of September 30, 2022	683	$	683	179	$	(11,406)	$	6,297	$	14,015	$	(4,054)	$	5,535	$	44	$	5,579


	For the nine months ended September 30, 2022
	Baxter International Inc. stockholders' equity
	Common stock shares	Common stock		Common stock shares in treasury	Common stock in treasury		Additional contributed capital		Retained earnings		Accumulated other comprehensive income (loss)		Total Baxter stockholders' equity		Noncontrolling interests		Total equity
Balance as of January 1, 2022	683	$	683	182	$	(11,488)	$	6,197	$	17,065	$	(3,380)	$	9,077	$	44	$	9,121

Net income (loss)	—	—		—	—		—		(2,614)		—		(2,614)		8		(2,606)
Other comprehensive income (loss)	—	—		—	—		—		—		(674)		(674)		—		(674)
Purchases of treasury stock	—	—		—	(32)		—		—		—		(32)		—		(32)
Stock issued under employee benefit plans and other	—	—		(3)	114		100		—		—		214		—		214
Dividends declared on common stock	—	—		—	—		—		(436)		—		(436)		—		(436)
Change in noncontrolling interests	—	—		—	—		—		—		—		—		(8)		(8)
Balance as of September 30, 2022	683	$	683	179	$	(11,406)	$	6,297	$	14,015	$	(4,054)	$	5,535	$	44	$	5,579


	For the three months ended September 30, 2021
	Baxter International Inc. stockholders' equity
	Common stock shares	Common stock		Common stock shares in treasury	Common stock in treasury		Additional contributed capital		Retained earnings		Accumulated other comprehensive income (loss)		Total Baxter stockholders' equity		Noncontrolling interests		Total equity
Balance as of July 1, 2021	683	$	683	184	$	(11,561)	$	6,090	$	16,658	$	(3,376)	$	8,494	$	41	$	8,535

Net income (loss)	—	—		—	—		—		450		—		450		2		452
Other comprehensive income (loss)	—	—		—	—		—		—		(106)		(106)		—		(106)

Stock issued under employee benefit plans and other	—	—		(1)	32		41		—		—		73		—		73
Dividends declared on common stock	—	—		—	—		—		(141)		—		(141)		—		(141)
Change in noncontrolling interests	—	—		—	—		—		—		—		—		2		2
Balance as of September 30, 2021	683	$	683	183	$	(11,529)	$	6,131	$	16,967	$	(3,482)	$	8,770	$	45	$	8,815


	For the nine months ended September 30, 2021
	Baxter International Inc. stockholders' equity
	Common stock shares	Common stock		Common stock shares in treasury	Common stock in treasury		Additional contributed capital		Retained earnings		Accumulated other comprehensive income (loss)		Total Baxter stockholders' equity		Noncontrolling interests		Total equity
Balance as of January 1, 2021	683	$	683	179	$	(11,051)	$	6,043	$	16,328	$	(3,314)	$	8,689	$	37	$	8,726

Net income (loss)	—	—		—	—		—		1,046		—		1,046		7		1,053
Other comprehensive income (loss)	—	—		—	—		—		—		(168)		(168)		—		(168)
Purchases of treasury stock	—	—		7	(600)		—		—		—		(600)		—		(600)
Stock issued under employee benefit plans and other	—	—		(3)	122		88		—		—		210		—		210
Dividends declared on common stock	—	—		—	—		—		(407)		—		(407)		—		(407)
Change in noncontrolling interests	—	—		—	—		—		—		—		—		1		1
Balance as of September 30, 2021	683	$	683	183	$	(11,529)	$	6,131	$	16,967	$	(3,482)	$	8,770	$	45	$	8,815

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

Baxter International Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in millions)


	Nine months ended September 30,
	2022		2021
Cash flows from operations
Net income (loss)	$	(2,606)	$	1,053
Adjustments to reconcile net income (loss) to cash flows from operations:
Depreciation and amortization	1,069		645
Deferred income taxes	(174)		(98)
Stock compensation	122		93
Net periodic pension and other postretirement costs	42		77
Intangible asset impairments	332		—
Goodwill impairments	2,785		—
Loss on product divestiture arrangement	54		—
Reclassification of cumulative translation loss to earnings	65		—
Other	(35)		46
Changes in balance sheet items:
Accounts receivable, net	(116)		(128)
Inventories	(410)		(149)
Prepaid expenses and other current assets	(98)		(51)
Accounts payable	84		14
Accrued expenses and other current liabilities	(250)		91
Other	(92)		(64)


Cash flows from operations	772		1,529
Cash flows from investing activities
Capital expenditures	(479)		(508)
Acquisitions, net of cash acquired, and investments	(206)		(463)
Other investing activities, net	10		38
Cash flows from investing activities	(675)		(933)
Cash flows from financing activities
Repayments of debt	(953)		(407)
Issuances of debt	—		50
Net increases (decreases) in debt with original maturities of three months or less	30		251
Cash dividends on common stock	(427)		(390)
Proceeds from stock issued under employee benefit plans	114		135
Purchases of treasury stock	(32)		(600)
Debt issuance costs	—		(37)
Other financing activities, net	(51)		(33)
Cash flows from financing activities	(1,319)		(1,031)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(130)		(40)
Decrease in cash, cash equivalents and restricted cash	(1,352)		(475)
Cash, cash equivalents and restricted cash at beginning of period (1)	2,956		3,736
Cash, cash equivalents and restricted cash at end of period (1)	$	1,604	$	3,261

(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to the amounts reported within the condensed consolidated balance sheet as of September 30, 2022, December 31, 2021, and September 30, 2021 (in millions):


	September 30, 2022		December 31, 2021		September 30, 2021
Cash and cash equivalents	$	1,601	$	2,951	$	3,258
Restricted cash included in prepaid expenses and other current assets	3		5		3
Cash, cash equivalents and restricted cash	$	1,604	$	2,956	$	3,261

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

Baxter International Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries ~~(the company~~(we or ~~Baxter)~~our) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). for interim financial reporting. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ~~(GAAP)~~(U.S. 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~~our Annual Report on Form 10-K for the year ended December 31, ~~2016 (2016~~2021 (2021 Annual Report).

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

~~Certain reclassifications~~

Risks and Uncertainties Related to COVID-19 and Global Economic and Other Conditions

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19). COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and we expect will continue to increase our expenses. Over the course of the pandemic, our business has been ~~made~~impacted by shifting healthcare priorities and significant volatility in the demand for our products. For further information about our revenues by product category, refer to ~~conform~~Note 9. Significant uncertainty remains regarding the ~~prior period condensed consolidated statements~~duration and overall impact of the COVID-19 pandemic. Concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Omicron variants, subvariants and other virus mutations as well as vaccine distribution and hesitancy. The U.S. and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to moratoriums on elective procedures and mandatory quarantines and travel restrictions), resulting in higher levels of absenteeism, including at our manufacturing and distribution facilities. Due to the ~~current period presentation.~~

~~Accounting for Venezuelan Operations~~

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 2016, the 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 2017 that it no longer met the accounting criteria for control over its business in Venezuela and the company deconsolidated its Venezuelan operations on June 30, 2017. As a result of deconsolidating the Venezuelan operations, the company recorded a pre-tax charge of $33 million in other (income) expense, net in the 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.

~~Hurricane Maria~~

In September 2017, Hurricane Maria caused damage to certain of the company's assets in Puerto Rico and disrupted operations. Insurance, less applicable deductibles and subject to 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 company as a result of the 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 damagesuncertainty caused by the ~~hurricane,~~pandemic, our operating performance and financial results, particularly in the short term, may be subject to volatility.

We have experienced significant challenges to our global supply chain in recent periods, including ~~$11 million~~production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, resulting from the pandemic and other exogenous factors including significant weather events, elevated inflation levels, disruptions to certain ports of call around the world, the war in Ukraine and other geopolitical events. We expect to experience some of these and other challenges related to our supply chain in future periods. These challenges, including the ~~impairment~~unavailability of ~~damaged inventory~~certain raw materials and ~~fixed assets~~component parts, have also had a negative impact on our sales for certain product categories due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future.

We expect that the challenges caused by the pandemic as well as ~~$10 million~~global economic conditions, among other factors, may continue to have an adverse effect on our business.

New Accounting Standards

Recently adopted accounting pronouncements

As of idle facility and other costs. These amounts were recorded as a component of cost of sales in the condensed consolidated statements of income for the three and nine month periods ended September 30, 2017. At this time, the full amount of combined property damage and business interruption costs and recoveries cannot be estimated, and accordingly, no additional amounts, including amounts for anticipated insurance recoveries, have been recorded as of September 30, 2017.

~~New accounting standards~~

~~Recently issued accounting standards not yet~~January 1, 2022, we adopted

~~In August 2017, the Financial Accounting Standards Board (FASB) issued~~ Accounting Standards Update (ASU) ~~No. 2017-12, Targeted Improvements~~2021-05, Leases (Topic 842), which requires a lessor to ~~Accounting~~classify a lease with variable lease payments (that do not depend on an index or rate) as an operating lease if (1) the lease would have been classified as a sales-type or direct financing lease, and (2) the lessor would have recognized a selling loss at lease commencement. These changes are intended to avoid recognizing a day-one loss for ~~Hedging Activities, which amends ASC 815, Derivatives and Hedging.~~a lease with variable payments even though the lessor expects the arrangement will be profitable overall. The ~~purpose~~adoption 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 – 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 service cost component of net periodic postretirement benefit cost should be presented in the same operating expense line items as other employee compensation costs 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 settlement and curtailment effects, are to be included separately and outside of any subtotal of operating income. The company intends to adopt the standard effective January 1, 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 on January 1, 2018, operating income for the three and nine months ended September 30, 2017, will be recast to increase $8 million and $25 million, respectively, 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 executing its detailed implementation plan and developing processes for gathering information for required disclosures. Based on the work performed to date, the company doesdid not ~~expect the adoption of the new standard to~~ have a material impact on ~~the~~our condensed consolidated financial statements. ~~The company expects to adopt~~

2. ACQUISITIONS AND OTHER ARRANGEMENTS

Hillrom

~~Recently adopted accounting pronouncements~~

As of January 1, 2017, the company adopted on a prospective basis ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The updated guidance requires all tax effects related to share-based payments to be recorded in income tax expense in the consolidated statement of 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 new guidance also requires the cash flows resulting from windfall tax benefits to be reported as operating activities in the consolidated statement of cash flows, rather than the previous requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. As a resultenterprise value of the ~~adoption, net income and operating cash flow for the three and nine months ended September 30, 2017, increased by~~transaction was 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 condensed consolidated statement of cash flows.

~~2. SEPARATION OF BAXALTA INCORPORATED~~

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). The Distribution was made to Baxter’s shareholders of record as of the close of 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 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 and 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 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.$12.8 billion. 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, 2017 and 2016. The assets and liabilities have been classified as held for disposition as of December 31, 2016. All assets and liabilities have been transferred as of September 30, 2017.

Three months ended
September 30,

Nine months ended
September 30,

(in millions)

2017

2016

2017

2016

Major classes of line items constituting income from
discontinued operations before income taxes

Net sales

$
1

$
24

$
7

$
144

Cost of sales

—

(20
)

(5
)

(135
)
Marketing and administrative expenses

—

—

(1
)

(20
)
Income (loss) from discontinued operations before income taxes

1

4

1

(11
)
Gain on disposal of discontinued operations

2

—

2

17

Income tax expense

—

1

—

10

Income (loss) from discontinued operations, net of tax

$
3

$
3

$
3

$
(4
)

December 31,

(in millions)

2016

Carrying amounts of major classes of assets included as
part of discontinued operations

Accounts and other current receivables, net

$
48

Property, plant, and equipment, net

1

Other

1

Total assets of the disposal group

$
50

Carrying amounts of major classes of liabilities included as
part of discontinued operations

Accounts payable and accrued liabilities

$
3

Total liabilities of the disposal group

$
3

~~As of December 31, 2016, Baxter recorded a liability of $47 million for its obligation to transfer these net assets to Baxalta.~~

~~Baxter and Baxalta entered into several agreements in connection with the July 1, 2015 separation, including a transition services~~transaction 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 36 months 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 to 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 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 $35 million and $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 includedHillrom shareholders received $156.00 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 nine-month periods ending September 30, 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 post local separation on Baxalta’s behalf.

~~3. SUPPLEMENTAL FINANCIAL INFORMATION~~

~~Net interest expense~~

Three months ended

Nine months ended

September 30,

September 30,

(in millions)

2017

2016

2017

2016

Interest expense, net of capitalized interest

$
22

$
20

$
62

$
69

Interest income

(8
)

(6
)

(21
)

(16
)
Net interest expense

$
14

$
14

$
41

$
53

~~Other (income) expense, net~~

Three months ended

Nine months ended

September 30,

September 30,

(in millions)

2017

2016

2017

2016

Foreign exchange

$
(12
)

$
—

$
(27
)

$
(12
)
Net loss on debt extinguishment

—

52

—

153

Net realized gains on Baxalta Retained Shares transactions

—

—

—

(4,387
)
Venezuela deconsolidation

—

—

33

—

All other

—

(8
)

4

(40
)
Other (income) expense, net

$
(12
)

$
44

$
10

$
(4,286
)

~~Inventories~~

September 30,

December 31,

(in millions)

2017

2016

Raw materials

$
351

$
319

Work in process

135

122

Finished goods

1,064

989

Inventories

$
1,550

$
1,430

~~Property, plant and equipment, net~~

September 30,

December 31,

(in millions)

2017

2016

Property, plant and equipment, at cost

$
9,954

$
9,162

Accumulated depreciation

(5,466
)

(4,873
)
Property, plant and equipment, net

$
4,488

$
4,289

~~4. EARNINGS PER SHARE~~

~~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~~outstanding Hillrom 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.

share.

~~The following table is a reconciliation of basic shares to diluted shares.~~

Three months ended

Nine months ended

September 30,

September 30,

(in millions)

2017

2016

2017

2016

Basic shares

545

544

543

547

Effect of dilutive securities

12

7

11

5

Diluted shares

557

551

554

552

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, 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.

~~Stock repurchases~~

In July 2012, the Board of Directors authorized the repurchase of up to $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.

~~5. ACQUISITIONS AND OTHER ARRANGEMENTS~~

~~Claris Injectables Limited~~

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 total consideration paid:


(in millions)
Cash consideration paid to Hillrom shareholders(a)	$	10,474
Fair value of equity awards issued to Hillrom equity award holders(b)	2
Total Consideration	$	10,476

(a) Represents cash consideration transferred of $156.00 per outstanding Hillrom common share to existing shareholders and holders of equity awards that vested at closing pursuant to their original terms.

(b) Represents the pre-acquisition service portion of the fair value of 668 thousand replacement restricted stock units issued to Hillrom equity award holders at closing.

The valuation of assets acquired and liabilities assumed has not yet been finalized as of September 30, 2022. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for acquired intangible assets, goodwill and income taxes among other items. The completion of the valuation will occur no later than one year from the acquisition date. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition ~~date for~~date:


(in millions)
Assets acquired and liabilities assumed
Cash and cash equivalents	$	399
Accounts receivable	562
Inventories	557
Prepaid expenses and other current assets	49
Property, plant and equipment	514
Goodwill	6,810
Other intangible assets	6,029
Operating lease right-of-use assets	74
Other non-current assets	132
Short-term debt	(250)
Accounts payable	(140)
Accrued expenses and other current liabilities	(558)
Long-term debt and finance lease obligations	(2,118)
Operating lease liabilities	(57)
Other non-current liabilities	(1,527)
Total assets acquired and liabilities assumed	$	10,476

In the ~~company’s acquisition~~first nine months of ~~Claris:~~

(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

~~The valuation of total assets acquired and liabilities assumed are preliminary and~~2022 we recorded measurement period adjustments, ~~may be recorded~~primarily impacting accounts receivable, property, plant and equipment, other intangible assets, and deferred income tax liabilities. Individually the

measurement period adjustments were not material and in ~~the future as the company finalizes its fair value estimates.~~total increased goodwill by $25 million. The measurement period adjustments did not have a significant impact to our results of ~~operations of Claris have been included in~~operations.

The goodwill from 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~~Hillrom 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~~an assembled workforce as well as the overall strategic benefits provided to ~~Baxter in the injectables market,~~our product portfolio and is included in the ~~Hospital Products~~Hillrom segment.

See Note 4 for additional information about impairments recognized in the third quarter of 2022 related to goodwill and certain intangible assets acquired in the Hillrom acquisition.

~~The~~For the nine months ended September 30, 2022, we recognized $159 million of incremental costs of sales from the fair value step-ups on acquired Hillrom inventory that was sold in the first quarter.

Other Business Development Activities

Celerity Pharmaceuticals, LLC

In September 2013, we entered into an agreement with Celerity Pharmaceuticals, LLC (Celerity) to develop certain acute care generic injectable premix and oncolytic products through regulatory approval. We transferred our rights in these products to Celerity and Celerity assumed ownership and responsibility for development of ~~intangible assets~~the products. We are obligated to purchase the individual product rights from Celerity if the products obtain regulatory approval. In December 2020, we entered into an agreement with a third party to divest our rights to one of the products that was ~~determined using~~being developed by Celerity, a generic version of liposomal doxorubicin, for less than $1 million if that product were to receive regulatory approval in the ~~income approach. The income approach~~U.S. and European Union in 2022. Liposomal doxorubicin is a ~~valuation technique~~chemotherapy medicine used to treat various types of cancer and we entered into this transaction to divest our rights to this generic version of that ~~provides~~product after we had separately entered into a transaction to acquire the branded version.

The related regulatory approvals were subsequently obtained for the generic version of liposomal doxorubicin and we recognized a loss of approximately $54 million in the third quarter of 2022, representing the difference between the amount we owe Celerity following those regulatory approvals and the proceeds that we will receive from our divestiture of those product rights. That loss is reported within other operating expense (income), net in our condensed consolidated statements of operations for the three and nine months ended September 30, 2022.

Zosyn

In March 2022, we entered into an ~~estimate~~agreement with a subsidiary of Pfizer Inc. to acquire the rights to Zosyn, a premixed frozen piperacillin-tazobactam product, in the U.S. and Canada. Zosyn is used for the treatment of intra-abdominal infections, nosocomial pneumonia, skin and skin structure infections, female pelvic infections and community-acquired pneumonia. Under the terms of the acquisition, we paid the acquisition price of $122 million currently, received specified intellectual property, including patent rights, in the first quarter and will receive additional intellectual property, including the product rights to Zosyn, in the first quarter of 2023. Under the arrangement, we are entitled to receive profit sharing payments from sales of Zosyn until the product rights transfer to us in March 2023.

The transaction has been accounted for as an asset acquisition, as substantially all 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~~assets being acquired under the arrangement was concentrated in the product rights that we will receive, which we classify as a developed technology intangible asset. Accordingly, the $122 million purchase price was primarily allocated to ~~present value. The discount rates used to measure~~ the developed technology intangible asset class and ~~in-process research~~will be amortized over an estimated useful life of 9 years.

3. SUPPLEMENTAL FINANCIAL INFORMATION

Allowance for Doubtful Accounts

The following table is a summary of the changes in our allowance for doubtful accounts for the three and ~~development intangible~~nine months ended September 30, 2022 and 2021.


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021
Balance at beginning of period	$	125	$	117	$	122	$	125

Charged to costs and expenses	2		2		11		(1)
Write-offs	(2)		(2)		(4)		(3)
Currency translation adjustments	(5)		(2)		(9)		(6)
Balance at end of period	$	120	$	115	$	120	$	115

Inventories


(in millions)	September 30, 2022		December 31, 2021
Raw materials	$	690	$	591
Work in process	305		300
Finished goods	1,680		1,562
Inventories	$	2,675	$	2,453

Property, Plant and Equipment, Net


(in millions)	September 30, 2022		December 31, 2021
Property, plant and equipment, at cost	$	11,084	$	11,728
Accumulated depreciation	(6,285)		(6,550)
Property, plant and equipment, net	$	4,799	$	5,178

In September 2022, we signed a purchase agreement with a buyer to sell our corporate headquarters in Deerfield, Illinois for $52 million. The related assets ~~were 12%~~are classified as held-for-sale and ~~13%~~are presented within prepaid expenses and other current assets in the accompanying consolidated balance sheet as of September 30, 2022. While the closing remains subject to the satisfaction of various closing conditions (including satisfactory completion of municipal diligence by the buyer), ~~respectively. The company considers~~we expect the ~~fair~~transaction to close in 2023 and the net book value of ~~each~~the assets approximates the transaction price net of estimated selling costs.

Interest Expense, Net


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021
Interest expense, net of capitalized interest	$	109	$	54	$	290	$	128
Interest income	(5)		(4)		(12)		(10)
Interest expense, net	$	104	$	50	$	278	$	118

Other (Income) Expense, Net


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021
Foreign exchange (gains) losses, net	$	—	$	—	$	(26)	$	5
Pension and other postretirement benefit plans	(5)		4		(17)		11
Pension curtailment	—		—		(11)		—
Change in fair value of marketable equity securities	3		9		(5)		2
Reclassification of cumulative translation loss to earnings	65		—		65		—
Other, net	—		(1)		(3)		(3)
Other (income) expense, net	$	63	$	12	$	3	$	15

We have been winding down our operations in Argentina since early 2021 and we determined that the net assets 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.

~~Celerity Pharmaceuticals, LLC~~

Inrelated entities were substantially liquidated during the third quarter of ~~2017, Baxter paid approximately $10~~2022. As a result of that determination, we reclassified their $65 million cumulative translation loss from accumulated other comprehensive income (loss) to ~~acquire the rights to Clindamycin Dextrose from Celerity Pharmaceuticals, LLC (Celerity). Baxter capitalized the purchase price as an intangible asset~~other (income) expense, net.

Non-Cash Operating 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~~Investing Activities

Right-of-use operating lease assets obtained 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 2016 Annual Reportexchange for ~~additional information regarding the company’s agreement with Celerity.~~

~~Wound Care Technologies, Inc.~~

~~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~~lease obligations for the ~~wound care market. The purchase price allocation resulted~~nine months ended September 30, 2022 and 2021 were $59 million and $69 million, respectively.

Purchases of property, plant and equipment included in ~~an amortizable intangible asset~~accounts payable as of $8September 30, 2022 and 2021 were $65 million ~~that will be amortized over its estimated economic life of 8 years.~~

6.and $49 million, respectively.

4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by business segment.


(in millions)	Americas		EMEA		APAC		Hillrom		Total
Balance as of December 31, 2021	$	2,517	$	309	$	224	$	6,786	$	9,836


Acquisition accounting adjustments	—		—		—		25		25
Impairments	—		—		—		(2,785)		(2,785)
Currency translation	(241)		(29)		(22)		(145)		(437)
Balance as of September 30, 2022	$	2,276	$	280	$	202	$	3,881	$	6,639

(in millions)

Renal

Hospital Products

Total

Balance as of December 31, 2016

$
397

$
2,198

$
2,595

Additions

5

312

317

Currency translation adjustments

31

174

205

Balance as of September 30, 2017

$
433

$
2,684

$
3,117

We assess goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize a goodwill impairment charge for the amount by which a reporting unit's carrying amount exceeds its fair value.

Goodwill Impairments

As described in Note 2, we acquired Hillrom on December 13, 2021 and recognized $6.8 billion of goodwill and $6.0 billion of other intangible assets, including $1.9 billion of indefinite-lived intangible assets, in connection with that acquisition. Our Hillrom segment includes the following three reporting units: Patient Support Systems, Front Line Care and Surgical Solutions. During the third quarter of 2022, we performed trigger-based impairment tests of the goodwill of each of those three reporting units, as well as the indefinite-lived intangible assets, consisting primarily of trade names, that we acquired in connection with the Hillrom acquisition. We performed those tests as of September 30, 2022 due to (a) current macroeconomic conditions, including the rising interest rate environment and broad declines in equity valuations, and (b) reduced earnings forecasts for our three Hillrom reporting units, driven primarily by current shortages of certain component parts used in our products, raw materials inflation and increased supply chain costs. The impairment tests resulted in total pre-tax goodwill impairment charges of $2.8 billion in the third quarter of 2022, consisting of a $1.4 billion goodwill impairment for our Patient Support Systems reporting unit, a $1.0 billion goodwill impairment for our Front Line Care reporting unit and a $0.4 billion goodwill impairment for our Surgical

Solutions reporting unit. See further discussion below for information regarding intangible asset impairment charges recognized during the third quarter of 2022.

The fair values of the reporting units tested for impairment during the third quarter of 2022 were determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach). Significant inputs to the reporting unit fair value measurements included forecasted cash flows, discount rates, terminal growth rates and earnings multiples. Our reporting unit fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.

Other intangible assets, net

The following is a summary of our other intangible assets.


							Indefinite-lived intangible assets
(in millions)	Customer relationships		Developed technology, including patents		Other amortized intangible assets		Trade names		In process Research and Development		Total
September 30, 2022
Gross other intangible assets	$	3,447	$	3,752	$	310	$	1,578	$	213	$	9,300
Accumulated amortization	(410)		(1,743)		(220)		—		—		(2,373)
Other intangible assets, net	$	3,037	$	2,009	$	90	$	1,578	$	213	$	6,927
December 31, 2021
Gross other intangible assets	$	3,437	$	3,801	$	344	$	1,910	$	230	$	9,722
Accumulated amortization	(162)		(1,556)		(212)		—		—		(1,930)
Other intangible assets, net	$	3,275	$	2,245	$	132	$	1,910	$	230	$	7,792

Intangible asset amortization expense was $168 million and $68 million for the three months ended September 30, 2022 and 2021, respectively, and $578 million and $199 million for the nine months ended September 30, 2022 and 2021.

Indefinite-lived Intangible Asset Impairments

In addition to the goodwill impairments discussed above, we recognized pre-tax impairment charges of $332 million in the third quarter of 2022 to reduce the carrying amounts of certain indefinite-lived intangible assets, which related to trade names acquired in the Hillrom acquisition, to their estimated fair values. Those intangible asset impairment charges are classified within cost of sales in the accompanying condensed consolidated statements of income (loss) for the three and nine months ended September 30, 2022.

The fair values of the indefinite-lived intangible assets tested for impairment were determined using a discounted cash flow model and significant inputs included forecasted cash flows, royalty rates and discount rates. Our indefinite-lived intangible asset fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.

5. FINANCING ARRANGEMENTS

Significant Debt Activity

In December 2021, we issued $800 million of 0.868% senior notes due in 2023, $1.4 billion of 1.322% senior notes due in 2024, $1.45 billion of 1.915% senior notes due in 2027, $1.25 billion of 2.272% senior notes due in 2028, $1.55 billion of 2.539% senior notes due in 2032, $750 million of 3.132% senior notes due in 2051, $300 million of floating rate senior notes due in 2023 and $300 million of floating rate senior notes due in 2024 (collectively, the Hillrom notes) to fund a portion of the consideration for the Hillrom acquisition, repay certain indebtedness of Hillrom and to pay fees and expenses related to the foregoing. In conjunction with the issuances of the Hillrom notes, we entered into a registration rights agreement in which we agreed to file a registration statement with the SEC with respect to an offer to exchange the Hillrom notes for new issues of notes with the same terms registered under the

Securities Act of 1933, as amended. Those exchange offers with respect to the Hillrom notes were completed in the second quarter of 2022.

In the first half of 2022, we repaid $335 million of our $2.0 billion three-year term loan facility and $355 million of our $2.0 billion five-year term loan facility. The loss from the early extinguishment of this debt was not significant. In the third quarter of 2022, we amended the credit agreements governing our term loan facility and our U.S. dollar-denominated revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to delay the commencement of our net leverage ratio covenant step-down schedule until June 30, 2024. We also amended the credit agreements governing our term loan facility and our U.S. dollar denominated revolving credit facility to transition the benchmark rate from LIBOR to the Secured Overnight Financing Rate (SOFR).

In the third quarter of 2022, we repaid $203 million of our 2.4% senior dues due in 2022.

Credit Facilities

Our U.S. dollar-denominated revolving credit facility has a capacity of $2.5 billion and our Euro-denominated revolving credit facility has a capacity of €200 million. Each of the facilities matures in 2026. There were no borrowings outstanding under these credit facilities as of September 30, 2022 or December 31, 2021.Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings.

Commercial Paper

As of September 30, ~~2017,~~2022, we had $275 million of commercial paper outstanding with a weighted-average interest rate of 3.02% and an original weighted-average term of 49 days. As of December 31, 2021, we had $300 million of commercial paper outstanding with a weighted-average interest rate of 0.27% and an original weighted-average term of 88 days.

6. COMMITMENTS AND CONTINGENCIES

We are involved in product liability, patent, commercial, and other legal matters that arise in the normal course of our business. We record 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 accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of September 30, 2022 and December 31, 2021, our total recorded reserves with respect to legal and environmental matters were $31 million and $72 million, respectively.

We have established reserves for certain of the matters discussed below. We are 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 our liability in connection with these claims cannot be estimated and the resolution thereof in any reporting period could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in the matters set forth below, litigation is inherently uncertain, excessive verdicts do occur, and we may incur material judgments or enter into material settlements of claims.

In addition to the matters described below, we remain 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 our operations and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, we may be exposed to significant litigation concerning the scope of our 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.

Environmental

We are involved as a potentially responsible party (PRP) for environmental clean-up costs at six Superfund sites. Under the U.S. Superfund statute and many state laws, generators of hazardous waste sent to a disposal or recycling site are liable for site cleanup if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Separate from these Superfund cases noted above, we are involved in an ongoing environmental remediations associated with historic operations at certain of our facilities. As of September 30, 2022 and December 31, 2021, our

environmental reserves, which are measured on an undiscounted basis, were no$17 million and $18 million, respectively. After considering these reserves, the outcome of these matters is not expected to have a material adverse effect on our financial position or results of operations.

General Litigation

In August 2019, we were named in an amended complaint filed by Fayette County, Georgia in the MDL In re: National Prescription Opiate Litigation pending in the U.S. District Court, Northern District of Ohio. The complaint alleges that multiple manufacturers and distributors of opiate products improperly marketed and diverted these products, which caused harm to Fayette County. The complaint is limited in its allegations as to Baxter and does not distinguish between injectable opiate products and orally administered opiates. We manufactured generic injectable opiate products in our facility in Cherry Hill, NJ, which we divested in 2011.

In November 2019, we and certain of our officers were named in a class action complaint captioned Ethan E. Silverman et al. v. Baxter International Inc. et al. that was filed in the United States District Court for the Northern District of Illinois. The plaintiff, who allegedly purchased shares of our common stock during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter common stock between February 21, 2019 and October 23, 2019. The plaintiff alleged that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to certain intra-company transactions undertaken for the purpose of generating foreign exchange gains or avoiding foreign exchange losses, as well as our internal controls over financial reporting. On January 29, 2020, the Court appointed Varma Mutual Pension Insurance Company and Louisiana Municipal Police Employees Retirement System as lead plaintiffs in the case. Plaintiffs filed an amended complaint on June 25, 2020 containing substantially the same allegations. On August 24, 2020, we filed a motion to dismiss the amended complaint. On January 12, 2021, the Court granted our motion to dismiss the amended complaint but gave plaintiffs an opportunity to file a further-amended complaint. The parties reached an agreement to settle the case for $16 million, subject to the completion of confirmatory discovery and final approval by the Court. The Court granted final approval of the settlement on August 11, 2021 and the settlement became effective on September 13, 2021.

As initially disclosed in our Form 8-K on October 24, 2019, we voluntarily advised the staff of the SEC of an internal investigation into certain intra-company transactions that impacted our previously reported non-operating foreign exchanges gains and losses. We also received a stockholder request for inspection of our books and records in connection with the October 24, 2019 announcement. The Company has cooperated with the staff of the SEC in its investigation into related matters, and on February 18, 2022, we reached a settlement with the SEC. Without admitting or denying the findings in the administrative order issued by the SEC, we agreed to pay a civil penalty of $18 million and to cease and desist from violations of specified provisions of the federal securities laws and related rules. In the order, the SEC acknowledged the Company’s cooperation. We paid the penalty in the first quarter of 2022.

In March 2020, two lawsuits were filed against us in the Northern District of Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used in our manufacturing facility in Mountain Home, Arkansas to sterilize certain of our products. The plaintiffs sought damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief. The parties reached agreement to settle these lawsuits in the third quarter of 2021 for amounts that were not material to our financial results, which were paid in the fourth quarter of 2021. We have since resolved, without litigation, additional claims of injuries from exposure to ethylene oxide at Mountain Home for amounts within accruals previously established as of December 31, 2021. On October 20, 2022, a lawsuit was filed against us in the Western District of Arkansas alleging injury as a result of exposure to ethylene oxide at Mountain Home.

In July 2021, Hill-Rom, Inc. received a subpoena (from the United States Office of Inspector General for the Department of Health and Human Services (DHHS) requesting documents and information related to compliance with the False Claims Act and the Anti-Kickback Statute. Hillrom has been working with the DHHS and the Department of Justice (DOJ) to provide information responsive to the subpoena. Hillrom also voluntarily began a related internal review and Hillrom and now Baxter have been cooperating fully with the DHHS and the DOJ with respect to these matters. The DHHS often issues this type of subpoena when investigating alleged violations of the False Claims Act.

On December 28, 2021, Linet Americas, Inc. (Linet) filed a complaint against Hill-Rom Holdings, Inc., Hill-Rom Company, Inc., and Hill-Rom Services, Inc. in the United States District Court for the Northern District of Illinois, captioned Linet Americas, Inc. v. Hill-Rom Holdings, Inc.; Hill-Rom Company, Inc.; Hill-Rom Services, Inc. Linet alleges that Hillrom violated Sections 1, 2 and 3 of The Sherman Antitrust Act of 1890 and the Illinois Antitrust Act by

allegedly engaging in anti-competitive conduct in alleged markets for standard, ICU and birthing beds. Hillrom filed an answer to the complaint on January 28, 2022 and filed on May 27, 2022, a motion challenging certain aspects of plaintiff's case.

7. STOCKHOLDERS’ EQUITY

Cash Dividends

Cash dividends declared per share for the three and nine months ended September 30, 2022 were $0.29 and $0.86. Cash dividends declared per share for the three and nine months ended September 30, 2021 were $0.280 and $0.805.

Stock Repurchase Programs

In July 2012, our Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. Our Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. During the first nine months of 2022, we repurchased 0.5 million shares under this authority pursuant to a Rule 10b5-1 plan. During the first nine months of 2021, we repurchased 7.3 million shares under this authority pursuant to Rule 10b5-1 plans. We had $1.3 billion remaining available under the authorization as of September 30, 2022.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of net income (loss), cumulative translation adjustments (CTA), certain gains and losses from pension and other postretirement employee benefit (OPEB) plans and gains and losses on cash flow hedges.

The following table is a net-of-tax summary of the changes in accumulated ~~goodwill impairment losses.~~

~~Other intangible assets, net~~

other comprehensive income (loss) (AOCI) by component for the nine months ended September 30, 2022 and 2021.
(in millions) CTA Pension and OPEB plans Hedging activities Available-for-sale Debt securities Total
Gains (losses)
Balance as of December 31, 2021 $ (2,907) $ (347) $ (126) $ — $ (3,380)
Other comprehensive income (loss) before reclassifications (816) 29 33 2 (752)
Amounts reclassified from AOCI (a) 65 19 (6) — 78
Net other comprehensive income (loss) (751) 48 27 2 (674)
Balance as of September 30, 2022 $ (3,658) $ (299) $ (99) $ 2 $ (4,054)


(in millions)	CTA		Pension and OPEB plans		Hedging activities		Total
Gains (losses)
Balance as of December 31, 2020	$	(2,587)	$	(574)	$	(153)	$	(3,314)

Other comprehensive income (loss) before reclassifications	(257)		13		5		(239)
Amounts reclassified from AOCI (a)	—		50		21		71
Net other comprehensive income (loss)	(257)		63		26		(168)
Balance as of September 30, 2021	$	(2,844)	$	(511)	$	(127)	$	(3,482)

(a) See table below for details about these reclassifications.

The following is a summary of the ~~company’s other intangible assets.~~

(in millions)

Developed technology,
including patents

Other amortized
intangible assets

Indefinite-lived
intangible assets

Total

September 30, 2017

Gross other intangible assets

$
1,979

$
432

$
152

$
2,563

Accumulated amortization

(977
)

(215
)

—

(1,192
)
Other intangible assets, net

$
1,002

$
217

$
152

$
1,371

December 31, 2016

Gross other intangible assets

$
1,690

$
384

$
57

$
2,131

Accumulated amortization

(855
)

(165
)

—

(1,020
)
Other intangible assets, net

$
835

$
219

$
57

$
1,111

~~Intangible asset amortization expense was $38 million~~amounts reclassified from AOCI to net income during the three and ~~$42 million in the three~~nine months ended September 30, ~~2017~~2022 and ~~2016, respectively,~~2021.
Amounts reclassified from AOCI (a)
(in millions) Three months ended September 30, 2022 Nine months ended
September 30, 2022 Location of impact in income statement
CTA
Reclassification of cumulative translation loss to earnings $ (65) $ (65) Other (income) expense, net
Less: Tax effect — — Income tax expense
$ (65) $ (65) Net of tax
Pension and OPEB items
Amortization of net losses and prior service costs or credits $ (8) $ (25) Other (income) expense, net
Less: Tax effect 2 6 Income tax expense
$ (6) $ (19) Net of tax
Gains (losses) on hedging activities
Foreign exchange contracts $ 6 $ 11 Cost of sales
Interest rate contracts (1) (4) Interest expense, net
5 7 Total before tax
Less: Tax effect (1) (1) Income tax expense
$ 4 $ 6 Net of tax
Total reclassifications for the period $ (67) $ (78) Total net of tax

(a) Amounts in parentheses indicate reductions to net income



	Amounts reclassified from AOCI (a)
(in millions)	Three months ended September 30, 2021		Nine months ended September 30, 2021		Location of impact in income statement
Amortization of pension and OPEB items
Amortization of net losses and prior service costs or credits	$	(21)	$	(62)	Other (income) expense, net
Less: Tax effect	4		12		Income tax expense
	$	(17)	$	(50)	Net of tax
Gains on hedging activities
Foreign exchange contracts	$	(5)	$	(23)	Cost of sales
Interest rate contracts	(1)		(4)		Interest expense, net
	(6)		(27)		Total before tax
Less: Tax effect	1		6		Income tax expense
	$	(5)	$	(21)	Net of tax
Total reclassifications for the period	$	(22)	$	(71)	Total net of tax

Refer to Note 3 for additional information regarding the reclassification of a cumulative translation loss to earnings, Note 11 for additional information regarding the amortization of pension and ~~$112 million~~OPEB items and ~~$124 million~~Note 14 for additional information regarding hedging activity.

9. REVENUES

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of our contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the

contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Our global payment terms are typically between 30-90 days.

Most of our performance obligations are satisfied at a point in time. This includes sales of our broad portfolio of essential healthcare products across our business segments. Our three legacy Baxter geographic segments include acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. Our legacy Hillrom segment includes smart bed systems; patient monitoring and diagnostic technologies; respiratory health devices; and advanced equipment for the surgical space. For most of those sales, our performance obligation is satisfied upon delivery to the customer. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation.

To a lesser extent, we enter into arrangements for which revenue may be recognized over time. For example, our Americas segment includes contract manufacturing arrangements, our Hillrom segment includes digital and connected care solutions and collaboration tools that are implemented over time and all of our segments include equipment leases and certain subscription software and licensing arrangements. We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services. Revenue is recognized over time when we are creating or enhancing an asset that the customer controls as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.

As of September 30, 2022, we had $10.9 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of more than one year, which are primarily included in the Americas segment. Some contracts in the United States included in this amount contain index-dependent price increases, which are not known at this time. We expect to recognize approximately 10% of this amount as revenue over the remainder of 2022, 30% in each of 2023 and 2024, 15% in 2025 and 15% thereafter.

Significant Judgments

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration primarily related to rebates and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in accrued expenses and other current liabilities and accounts receivable, net on the condensed consolidated balance sheets. Management's estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract using the expected value method. The amount of variable consideration included in the net sales price is limited to the amount for which it is probable that a significant reversal in revenue will not occur when the related uncertainty is resolved. Revenue recognized during the three and nine months ended September 30, 2022 and 2021 related to performance obligations satisfied in prior periods was not material. Additionally, our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately and determining the allocation of the transaction price may require significant judgement.

Contract Balances

The timing of revenue recognition, billings and cash collections results in the recognition of trade accounts receivable, unbilled receivables, contract assets and customer advances and deposits (contract liabilities) on our condensed consolidated balance sheets. Net trade accounts receivable was $2.3 billion and $2.4 billion as of September 30, 2022 and December 31, 2021, respectively.

For contract manufacturing arrangements, revenue is primarily recognized throughout the production cycle, which typically lasts up to 90 days, resulting in the recognition of contract assets until the related services are completed and the customers are billed. Additionally, for certain arrangements containing a performance obligation to deliver software that can be used with medical devices, we recognize revenue upon delivery of the software, which results in the recognition of contract assets when customers are billed over time, generally over one to five years. For bundled contracts involving equipment delivered up-front and consumable medical products to be delivered over time, total contract revenue is allocated between the equipment and consumable medical products. In certain of those arrangements, a contract asset is created for the difference between the amount of equipment revenue recognized upon delivery and the amount of consideration initially receivable from the customer. In those arrangements, the

contract asset becomes a trade account receivable as consumable medical products are delivered and billed, generally over one to seven years.

The following table summarizes our contract assets:


(in millions)	September 30, 2022		December 31, 2021
Contract manufacturing services	$	65	$	50
Software sales	44		45
Bundled equipment and consumable medical products contracts	120		100
Contract assets	$	229	$	195

The following table summarizes the classification of contract assets and contract liabilities as reported in the condensed consolidated balance sheets:


(in millions)	September 30, 2022		December 31, 2021
Prepaid expenses and other current assets	$	106	$	84
Other non-current assets	123		111
Contract assets	$	229	$	195

Accrued expenses and other current liabilities	$	158	$	162
Other non-current liabilities	82		84
Contract liabilities	$	240	$	246

Contract liabilities represent deferred revenues that arise as a result of cash received from customers or where the timing of billing for services precedes satisfaction of our performance obligations. Such remaining performance obligations represent the portion of the contract price for which work has not been performed and are primarily related to our installation and service contracts. We expect to satisfy the majority of the remaining performance obligations and recognize revenue related to installation and service contracts within the next 12 months with most of the non-current performance obligations satisfied within 24 months.

The following table summarizes contract liability activity for the nine months ended September 30, ~~2017~~2022. The contract liability balance represents the transaction price allocated to the remaining performance obligations.


	Nine months ended September 30, 2022
Balance at beginning of period	$	246
New revenue deferrals	460
Revenue recognized upon satisfaction of performance obligations	(463)
Currency translation	(3)
Balance at end of period	$	240

During the nine months ended September 30, 2021, the amount of revenue recognized that was included in contract liabilities as of December 31, 2020 was not significant.

Disaggregation of Net Sales

In connection with our acquisition of Hillrom in December 2021, we added three new product categories: Patient Support Systems, Front Line Care and ~~2016, respectively.~~

Surgical Solutions.

The following tables disaggregate our net sales from contracts with customers by product category between the ~~third quarter~~U.S. and international:


	Three Months Ended September 30,
	2022						2021
(in millions)	U.S.		International		Total		U.S.		International		Total
Renal Care 1	$	240	$	702	$	942	$	222	$	759	$	981
Medication Delivery 2	475		250		725		490		257		747
Pharmaceuticals 3	173		352		525		188		401		589
Clinical Nutrition 4	92		139		231		88		156		244
Advanced Surgery 5	141		106		247		135		114		249
Acute Therapies 6	53		105		158		69		116		185
BioPharma Solutions 7	99		73		172		109		97		206
Patient Support Systems 8	301		79		380		—		—		—
Front Line Care 9	209		70		279		—		—		—
Surgical Solutions 10	38		38		76		—		—		—
Other 11	28		10		38		18		7		25
Total Baxter	$	1,849	$	1,924	$	3,773	$	1,319	$	1,907	$	3,226


	Nine Months Ended September 30,
	2022						2021
(in millions)	U.S.		International		Total		U.S.		International		Total
Renal Care 1	$	690	$	2,077	$	2,767	$	655	$	2,212	$	2,867
Medication Delivery 2	1,406		735		2,141		1,345		751		2,096
Pharmaceuticals 3	494		1,080		1,574		550		1,137		1,687
Clinical Nutrition 4	266		422		688		255		460		715
Advanced Surgery 5	428		310		738		405		317		722
Acute Therapies 6	179		340		519		211		369		580
BioPharma Solutions 7	226		265		491		218		306		524
Patient Support Systems 8	880		247		1,127		—		—		—
Front Line Care 9	618		237		855		—		—		—
Surgical Solutions 10	111		112		223		—		—		—
Other 11	72		31		103		58		21		79
Total Baxter	$	5,370	$	5,856	$	11,226	$	3,697	$	5,573	$	9,270

1Renal Care includes sales of ~~2016, the company recorded an impairment charge~~our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.

2Medication Delivery includes sales of ~~$27 million~~our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices.

3Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.

4Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related ~~to an indefinite-lived intangible asset (acquired IPR&D)~~products.

5Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.

6Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the ~~company’s Renal segment~~intensive care unit (ICU).

7BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical and ~~its in-center hemodialysis program. The assets~~biopharmaceutical companies.

8Patient Support Systems includes sales of ~~the business were written down~~our connected care solutions: devices, software, communications and integration technologies and smart beds.

9Front Line Care includes sales of our integrated patient monitoring and diagnostic technologies to ~~estimated fair value~~help diagnose, treat and ~~recorded in research~~manage a wide variety of illness and ~~development expenses.~~

~~In the second quarter~~diseases, including respiratory therapy, cardiology, vision screening and physical assessment.

10Surgical Solutions includes sales of ~~2016, the company recorded an impairment charge~~our surgical video technologies, tables, lights, pendants, precision positioning devices and other accessories.

11Other includes sales 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 valuemiscellaneous product and ~~recorded in cost of sales.~~

~~7. INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES~~

~~Infusion Pump Charges~~

~~The company has undertaken a field corrective action with respect to the SIGMA SPECTRUM infusion pump. Remediation primarily includes inspection~~service offerings.

Lease Revenue

We lease smart beds, such as bariatric, critical care, maternal, and ~~repair charges~~home care beds, as well as ~~a temporary replacement pump~~other surfaces, to customers during periods of peak demand or for specialty purposes. We also lease medical equipment, such as renal dialysis equipment and infusion pumps, to customers, primarily in ~~a limited number~~conjunction with arrangements to provide consumable medical products such as dialysis therapies, IV fluids and inhaled anesthetics. Certain of ~~cases. In~~our equipment leases are classified as sales-type leases and the ~~third quarter~~remainder are operating leases. The terms of ~~2017,~~ the ~~company recorded a charge~~related contracts, including the proportion of ~~$22~~fixed versus variable payments and any options to shorten or extend the lease term, vary by customer. We allocate revenue between equipment leases and medical products based on their standalone selling prices.

The components of lease revenue for the three and nine months ended September 30, 2022 and 2021 were:


(in millions)	Three months ended September 30, 2022		Nine months ended September 30, 2022
Sales-type lease revenue	$	3	$	11
Operating lease revenue	145		380
Variable lease revenue	9		41
Total lease revenue	$	157	$	432


(in millions)	Three months ended September 30, 2021		Nine months ended September 30, 2021
Sales-type lease revenue	$	3	$	19
Operating lease revenue	21		90
Variable lease revenue	27		59
Total lease revenue	$	51	$	168

Our net investment in sales-type leases was $95 million ~~related primarily to cash costs associated with remediation efforts and none of these charges have been utilized~~ as of September 30, ~~2017.~~

~~Business Optimization Charges~~

~~Beginning~~2022, of which $18 million originated in ~~the second half of 2015, the company initiated~~2018 and prior, $19 million in 2019, $26 million in 2020, $24 million in 2021, and $8 million in 2022.

10. BUSINESS OPTIMIZATION CHARGES

In recent years, we have undertaken actions to transform ~~its~~our 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~~In the current period, restructuring charges include actions taken in connection with our integration of Hillrom. From the commencement of our business optimization activities in the second half of 2015 through September 30, ~~2017, the company has~~2022, we have incurred cumulative ~~pretax~~pre-tax costs of ~~$526 million~~$1.4 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation. ~~The company expects~~We currently expect to incur additional ~~pretax~~pre-tax costs, primarily related to implementation of business optimization programs, of approximately ~~$285 million and capital expenditures of $90~~$14 million through the completion of ~~these initiatives. The company expects~~initiatives that are currently underway. We continue to ~~complete these activities by~~pursue cost savings initiatives, including those related to our integration of Hillrom, and, to the ~~end of 2018. The~~extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs will primarily include employee termination costs, implementation costs, and accelerated depreciation. Of the total estimated cost, the company expects that approximately 5 percent of the charges will be non-cash.

to implement business optimization programs in future periods.

During the three and nine months ended September 30, ~~2017~~2022 and ~~2016, the company~~2021, we recorded the following charges related to business optimization programs.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2022		2021		2022		2021
Restructuring charges	$	57	$	32	$	150	$	67
Costs to implement business optimization programs	16		4		46		14

Total business optimization charges	$	73	$	36	$	196	$	81

Three months ended

Nine months ended

September 30,

September 30,

(in millions)

2017

2016

2017

2016

Restructuring charges, net

$
31

$
130

$
50

$
237

Costs to implement business optimization programs

21

25

58

44

Gambro integration costs

—

5

—

19

Accelerated depreciation

—

11

8

25

Total business optimization charges

$
52

$
171

$
116

$
325

For segment reporting purposes, business optimization charges are unallocated expenses.

~~During the three and nine months ended September 30, 2017 and 2016, the company recorded the following restructuring charges.~~

Three months ended

September 30, 2017

(in millions)

COGS

SGA

R&D

Total

Employee termination costs

$
7

$
24

$
—

$
31

Total restructuring charges

$
7

$
24

$
—

$
31

Three months ended

September 30, 2016

(in millions)

COGS

SGA

R&D

Total

Employee termination costs

$
21

$
84

$
1

$
106

Asset impairments

6

—

27

33

Reserve adjustments

Employee termination costs

—

(3
)

(2
)

(5
)
Contract termination costs

(3
)

—

(1
)

(4
)
Total restructuring charges

$
24

$
81

$
25

$
130

Nine months ended

September 30, 2017

(in millions)

COGS

SGA

R&D

Total

Employee termination costs

$
21

$
33

$
—

$
54

Contract termination costs

—

5

—

5

Asset impairments

5

—

—

5

Reserve adjustments

Employee termination costs

(7
)

(5
)

(2
)

(14
)
Total restructuring charges

$
19

$
33

$
(2
)

$
50

Nine months ended

September 30, 2016

(in millions)

COGS

SGA

R&D

Total

Employee termination costs

$
52

$
94

$
13

$
159

Contract termination costs

9

2

13

24

Asset impairments

28

—

40

68

Reserve adjustments

Employee termination costs

(1
)

(11
)

(2
)

(14
)
Total restructuring charges

$
88

$
85

$
64

$
237

Costs to implement business optimization programs for the three and nine months ended September 30, ~~2017, were $21 million~~2022 and ~~$58 million~~2021, respectively, ~~and~~ consisted primarily of external consulting and transition costs, ~~as well as~~including employee ~~salary~~compensation and related costs. These costs were primarily included within cost of sales and ~~marketing~~SG&A expense.

During the three and ~~administrative expense.~~

~~Costs~~nine months ended September 30, 2022 and 2021, we recorded the following restructuring charges.
Three months ended September 30, 2022
(in millions) COGS SG&A R&D Total
Employee termination costs $ 13 $ 36 $ 4 $ 53
Contract termination and other costs — 2 — 2
Asset impairments 1 1 — 2
Total restructuring charges $ 14 $ 39 $ 4 $ 57


	Three months ended September 30, 2021
(in millions)	COGS		SG&A		Total
Employee termination costs	$	11	$	8	$	19
Contract termination and other costs	—		2		2
Asset impairments	11		—		11
Total restructuring charges	$	22	$	10	$	32


	Nine months ended September 30, 2022
(in millions)	COGS		SG&A		R&D		Total
Employee termination costs	$	19	$	99	$	4	$	122
Contract termination and other costs	—		19		—		19
Asset impairments	1		8		—		9
Total restructuring charges	$	20	$	126	$	4	$	150


	Nine months ended September 30, 2021
(in millions)	COGS		SG&A		Total
Employee termination costs	$	35	$	14	$	49
Contract termination and other costs	—		2		2
Asset impairments	16		—		16
Total restructuring charges	$	51	$	16	$	67

The following table summarizes activity in the liability related to ~~implement business optimization programs~~our restructuring initiatives.


(in millions)
Liability balance as of December 31, 2021	$	109
Charges	147
Payments	(108)
Reserve adjustments	(6)
Currency translation	(14)
Liability balance as of September 30, 2022	$	128

Substantially all of our restructuring liabilities as of September 30, 2022 relate to employee termination costs, with the remaining liabilities attributable to contract termination costs. Substantially all of the cash payments for those liabilities are expected to be disbursed by the end of 2023.

11. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS

The following is a summary of net periodic benefit cost relating to our pension and OPEB plans.


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021
Pension benefits
Service cost	$	19	$	22	$	59	$	66
Interest cost	25		18		73		54
Expected return on plan assets	(39)		(36)		(118)		(108)
Amortization of net losses and prior service costs	11		23		34		69
Net periodic pension cost	$	16	$	27	$	48	$	81
OPEB
Interest cost	$	1	$	1	$	3	$	3
Amortization of net loss and prior service credit	(3)		(2)		(9)		(7)
Net periodic OPEB cost (income)	$	(2)	$	(1)	$	(6)	$	(4)

U.S. Hillrom Pension Plan Amendment

In May 2022, we announced that the pay and service amounts used to calculate pension benefits for active non-bargaining participants in our U.S. Hillrom pension plan will freeze as of December 31, 2022. Years of additional service earned and eligible compensation received after December 31, 2022 will not be included in the determination of the benefits payable to those participants. This change resulted in an $11 million decline in the projected benefit obligation (PBO) with an offsetting curtailment gain included within other (income) expense, net on the condensed consolidated statements of income (loss) for the nine months ended September 30, 2022.

12. INCOME TAXES

Our effective income tax rate was 1.1% and (0.2)% for the three months ended September 30, 2022 and 2021, respectively, and (1.1)% and 11.8% for the nine months ended September 30, 2022 and 2021, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits or shortfalls on stock compensation awards.

For the three and nine months ended September 30, 2022, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to non-deductible goodwill impairments.

For the three months ended September 30, 2021, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.

For the nine months ended September 30, 2021, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as a favorable geographic earnings mix and changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.

13. EARNINGS PER SHARE

The numerator for both basic and diluted earnings per share (EPS) is net income (loss) attributable to Baxter stockholders. The denominator for basic EPS is the weighted-average number of shares outstanding during the period. The dilutive effect of outstanding stock options, RSUs and PSUs is reflected in the denominator for diluted EPS using the treasury stock method.

The following table is a reconciliation of basic shares to diluted shares.


	Three months ended September 30,		Nine months ended September 30,
(in millions)	2022	2021	2022	2021
Basic shares	504	500	503	503
Effect of dilutive securities	—	6	—	6
Diluted shares	504	506	503	509

Basic and diluted shares are the same for the three and nine months ended September 30, ~~2016, were $25 million and $44 million, respectively, and were related primarily~~2022 due to ~~external consulting costs. These costs were included within marketing and administrative and R&D expense.~~

~~Costs related to the integration~~our net losses for those periods. The effect of ~~Gambro AB (Gambro) were included within marketing and administrative expense~~dilutive securities for ~~all referenced periods.~~

~~For~~ the three and nine months ended September 30, ~~2017, the company recognized accelerated depreciation, primarily associated with facilities~~2021 includes unexercised stock options, unvested RSUs and contingently issuable shares related to ~~be closed, of zero and $8~~granted PSUs.

Diluted EPS excludes 23 million ~~respectively. The costs were recorded within cost of sales, marketing and administrative and R&D expense.~~

~~For~~shares issuable under equity awards for the three and nine months ended September 30, ~~2016, the company recognized $11~~2022, respectively, and 7 million ~~and $25 million, respectively, of accelerated depreciation, primarily associated with facilities to be closed. The costs were recorded in cost of sales for all referenced periods.~~

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

(in millions)

Reserves as of December 31, 2016

$
164

Charges

59

Reserve adjustments

(14
)
Utilization

(114
)
CTA

24

Reserves as of September 30, 2017

$
119

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

Approximately 80% of the company’s restructuring reserves as of September 30, 2017 relate to employee termination costs, with the remaining reserves attributable to contract termination costs. The reserves are expected to be substantially utilized by the end of 2018.

~~8. DEBT, FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS~~

~~Debt Issuance~~

In May 2017, Baxter issued €600 million of senior notes at a fixed coupon rate of 1.30% due in May 2025. The company has designated this debt as a non-derivative net investment hedge of its European operations for accounting purposes.

~~Debt Redemptions~~

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, net.

~~Debt-for-equity exchanges~~

~~On January 27, 2016, Baxter exchanged Baxalta Retained Shares~~shares issuable under equity awards 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) expense, net for the periodthree and nine months 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 loss2021, respectively, because their inclusion would have had an anti-dilutive effect 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) expense, net for the period ended September 30, 2016.

~~Securitization arrangement~~

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

Three months ended
September 30,

Nine months ended
September 30,

(in millions)

2017

2016

2017

2016

Sold receivables at beginning of period

$
63

$
62

$
68

$
81

Proceeds from sales of receivables

69

75

198

272

Cash collections (remitted to the owners of the receivables)

(66
)

(71
)

(203
)

(299
)
Effect of currency exchange rate changes

—

2

3

14

Sold receivables at end of period

$
66

$
68

$
66

$
68

~~The impacts on the condensed consolidated statements of income relating to the sale of receivables were immaterial for each period.~~diluted EPS. Refer to ~~the 2016 Annual Report~~Note 7 for ~~further~~additional information regarding ~~the company’s securitization agreements.~~

~~Concentrations of credit risk~~

~~The company invests excess cash in certificates of deposit or money market funds~~items impacting basic 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.

diluted shares.

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, 2017, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $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.

~~Derivatives and hedging activities~~

~~The company operates~~

14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

~~The company is~~

We are 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,~~Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Turkish Lira, Indian Rupee and ~~New Zealand Dollar. The company manages its~~Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows ~~the company~~us to net exposures and take advantage of any natural offsets. In addition, ~~the company uses~~we use derivative and nonderivative instruments to further reduce the net exposure to foreign ~~exchange.~~exchange risk. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from changes in foreign ~~exchange.~~exchange rates. Financial market and currency volatility may limit ~~the company’s~~our ability to cost-effectively hedge these exposures.

~~The company is~~

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

appropriate at that time. To manage this mix in a cost-efficient manner, ~~the company~~we periodically ~~enters~~enter into interest rate swaps in which ~~the company agrees~~we agree 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~~

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

All derivative instruments are generally 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~~We designate certain of our derivatives and foreign-currency denominated debt as hedging instruments asin cash flow, fair value or net investment hedges.

Cash Flow ~~Hedges~~

~~The company~~Hedges

We 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.

We periodically use treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt.

For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is ~~accumulated~~recorded in ~~accumulated other comprehensive income (AOCI)~~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 ~~net~~and interest ~~expense, and other (income)~~ expense, net, and are primarily ~~relate~~related to forecasted ~~third-party sales denominated in foreign currencies, forecasted intercompany~~intra-company sales denominated in foreign currencies and forecasted interest payments on anticipated issuances of debt, respectively.

The notional amounts of foreign exchange contracts designated as cash flow hedges were ~~$667~~$407 million and ~~$561~~$377 million as of September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at September 30, 2022 is 12 months for foreign exchange contracts. There were no outstanding interest rate contracts designated as cash flow hedges as of September 30, ~~2017~~2022 and December 31, ~~2016. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of September 30, 2017 is 15 months.~~

2021.

Fair Value ~~Hedges~~

~~The company uses~~Hedges

We periodically use interest rate swaps to convert a portion of ~~its~~our fixed-rate debt into variable-rate debt. These instruments hedge ~~the company’s~~our 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 changes in fair value attributable to a particular risk, such as changes in interest rates, of the ~~loss or gain on~~hedged item, which are also recognized in earnings. Changes in the ~~underlying hedged item. Fair~~fair value of hedge instruments designated as fair value hedges are classified in ~~net~~ interest expense, net, as they hedge the interest rate risk associated with certain of ~~the company’s~~our fixed-rate debt.

~~The total notional amount of~~

There were no outstanding interest rate contracts designated as fair value hedges ~~was $200 million~~ as of September 30, ~~2017~~2022 and December 31, ~~2016.~~

2021.

Net Investment ~~Hedges~~

Hedges

In May 2017, ~~the company~~we issued €600 million of senior notes due May 2025. ~~The company has~~In May 2019, we issued €750 million of senior notes due May 2024 and €750 million of senior notes due May 2029. We have designated ~~this~~these debt obligations as ~~a hedge~~hedges of ~~a portion of its~~our net investment in ~~its~~our European operations and, as a result, mark to spot rate adjustments ofon the outstanding debt balances ~~have been and will be~~are recorded as a component of AOCI. As of September 30, ~~2017, the company~~2022, we had an accumulated pre-tax unrealized translation ~~loss~~gain in AOCI of ~~$70~~$265 million related to the Euro-denominated senior notes.

Dedesignations

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, ~~the company discontinues~~we discontinue 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~~generally continue to be deferred and are recognized consistent with the loss or income recognition of the underlying hedged items.

However, if it is probable that the hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings.

There were no hedge dedesignations in the first nine months of ~~2017~~2022 or ~~2016~~2021 resulting from changes in ~~the company’s~~our assessment of the probability that the hedged forecasted transactions would occur.

If ~~the company terminates~~we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged ~~items~~item 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,~~2022 or 2021.

If we remove a net investment hedge designation, any gains or losses recognized in AOCI are not reclassified to earnings until we sell, liquidate, or deconsolidate the ~~company~~foreign investments that were being hedged. There were no net investment hedges terminated ~~a total notional value~~during the first nine months 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.

2022 or 2021.

Undesignated Derivative Instruments

~~The company uses~~

We use forward contracts to hedge earnings from the effects of foreign exchange relating to certain of ~~the company’s intercompany~~our intra-company 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, net. The~~ terms of these instruments generally do not exceed one month.

The total notional amount of undesignated derivative instruments was ~~$807~~$548 million as of September 30, ~~2017~~2022 and ~~$822~~$851 million as of December 31, ~~2016.~~

2021.

Gains and Losses on Hedging ~~Activities~~

Instruments and Undesignated Derivative Instruments

The following tables summarize the ~~income statement locations and~~ gains and losses on our hedging instruments and the ~~company’s derivative instruments~~classification of those gains and losses within our condensed consolidated financial statements for the three months ended September 30, ~~2017~~2022 and ~~2016.~~

2021.


	Gain (loss) recognized in OCI				Location of gain (loss) in income statement	Gain (loss) reclassified from AOCI into income
(in millions)	2022		2021			2022		2021
Cash flow hedges
Interest rate contracts	$	—	$	—	Interest expense, net	$	(1)	$	(1)
Foreign exchange contracts	26		6		Cost of sales	6		(5)
Net investment hedges	126		60		Other (income) expense, net	—		—
Total	$	152	$	66		$	5	$	(6)

Gain (loss) recognized in OCI

Location of gain (loss)

Gain (loss) reclassified from AOCI
into income

(in millions)

2017

2016

in income statement

2017

2016

Cash flow hedges

Interest rate contracts

$
—

$
—

Other (income) expense, net

$
—

$
5

Foreign exchange contracts

(11
)

3

Cost of sales

(3
)

(2
)
Net investment hedge

(39
)

—

Other (income) expense, net

—

—

Total

$
(50
)

$
3

$
(3
)

$
3


	Location of gain (loss) in income statement	Gain (loss) recognized in income
(in millions)		2022		2021
Undesignated derivative instruments
Foreign exchange contracts	Other (income) expense, net	$	(11)	$	(7)

Gain (loss) recognized in income

(in millions)

Location of gain (loss) in income statement

2017

2016

Fair value hedges

Interest rate contracts

Net interest expense

$
(1
)

$
(7
)
Undesignated derivative instruments

Foreign exchange contracts

Other (income) expense, net

$
(3
)

$
9

The following tables summarize the ~~income statement locations and~~ gains and losses on our hedging instruments and the ~~company’s derivative instruments~~classification of those gains and losses within our condensed consolidated financial statements for the nine months ended September 30, ~~2017~~2022 and ~~2016.~~

2021.


	Gain (loss) recognized in OCI						Location of gain (loss)	Gain (loss) reclassified from AOCI into income							Gain (loss) recognized in OCI				Location of gain (loss) in income statement	Gain (loss) reclassified from AOCI into income
(in millions)	2017			2016			in income statement	2017			2016			(in millions)	2022		2021		Location of gain (loss) in income statement	2022		2021
Cash flow hedges														Cash flow hedges
Interest rate contracts	$	(3	)	$	—		Other (income) expense, net	$	—		$	9		Interest rate contracts	$	—	$	—	Interest expense, net	$	(4)	$	(4)
Foreign exchange contracts		(24	)		(8	)	Cost of sales		(4	)		(3	)	Foreign exchange contracts	42		7		Cost of sales	11		(23)
Net investment hedge		(70	)		—		Other (income) expense, net		—			—
Net investment hedges														Net investment hedges	311		143		Other (income) expense, net	—		—
Total	$	(97	)	$	(8	)		$	(4	)	$	6		Total	$	353	$	150		$	7	$	(27)


		Gain (loss) recognized in income						Location of gain (loss) in income statement	Gain (loss) recognized in income
(in millions)	Location of gain (loss) in income statement	2017			2016		(in millions)	Location of gain (loss) in income statement	2022		2021
Fair value hedges
Interest rate contracts	Net interest expense	$	(1	)	$	19

Undesignated derivative instruments							Undesignated derivative instruments
Foreign exchange contracts	Other (income) expense, net	$	(7	)	$	4	Foreign exchange contracts	Other (income) expense, net	$	(34)	$	(26)

For the company’s fair value hedges, an equal and offsetting gain of $1 million was recognized in net interest expense in the third quarter and first nine months of 2017, respectively, and an equal and offsetting gain of $7 million and loss of $19 million was recognized in net interest expense in the third quarter and first nine months of 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 all periods presented were not material.

As of September 30, ~~2017, $10~~2022, $22 million of deferred, net after-tax ~~losses~~gains 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.

~~Fair Values of~~

Derivative ~~Instruments~~

Assets and Liabilities

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

2022.


	Derivatives in asset positions			Derivatives in liability positions
(in millions)	Balance sheet location	Fair value		Balance sheet location	Fair value
Derivative instruments designated as hedges

Foreign exchange contracts	Prepaid expenses and other current assets	$	31	Accrued expenses and other current liabilities	$	—

Total derivative instruments designated as hedges		31			—
Undesignated derivative instruments
Foreign exchange contracts	Prepaid expenses and other current assets	4		Accrued expenses and other current liabilities	9
Total derivative instruments		$	35		$	9

Derivatives in asset positions

Derivatives in liability positions

(in millions)

Balance sheet location

Fair value

Balance sheet location

Fair value

Derivative instruments designated as hedges

Interest rate contracts

Other long-term assets

$
6

Other long-
term liabilities

$
—

Foreign exchange contracts

Prepaid expenses and other

11

Accounts payable and
accrued liabilities

4

Foreign exchange contracts

Other long-term assets

2

Other long-
term liabilities

—

Total derivative instruments designated as hedges

$
19

$
4

Undesignated derivative instruments

Foreign exchange contracts

Prepaid expenses and other

$
—

Accounts payable and
accrued liabilities

$
1

Total derivative instruments

$
19

$
5

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

2021.


	Derivatives in asset positions			Derivatives in liability positions
(in millions)	Balance sheet location	Fair value		Balance sheet location	Fair value
Derivative instruments designated as hedges

Foreign exchange contracts	Prepaid expenses and other current assets	$	6	Accrued expenses and other current liabilities	$	3

Total derivative instruments designated as hedges		6			3
Undesignated derivative instruments
Foreign exchange contracts	Prepaid expenses and other current assets	2		Accrued expenses and other current liabilities	2
Total derivative instruments		$	8		$	5

Derivatives in asset positions

Derivatives in liability positions

(in millions)

Balance sheet location

Fair value

Balance sheet location

Fair value

Derivative instruments designated as hedges

Interest rate contracts

Other long-term assets

$
7

Other long-
term liabilities

$
—

Foreign exchange contracts

Prepaid expenses and other

22

Accounts payable
and
accrued liabilities

1

Total derivative instruments designated as hedges

$
29

$
1

Undesignated derivative instruments

Foreign exchange contracts

Prepaid expenses and other

$
1

Accounts payable
and
accrued liabilities

$
2

Total derivative instruments

$
30

$
3

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

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


	September 30, 2022				December 31, 2021
(in millions)	Asset		Liability		Asset		Liability
Gross amounts recognized in the condensed consolidated balance sheets	$	35	$	9	$	8	$	5
Gross amount subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet	(7)		(7)		(2)		(2)
Total	$	28	$	2	$	6	$	3

September 30, 2017

December 31, 2016

(in millions)

Asset

Liability

Asset

Liability

Gross amounts recognized in the consolidated balance sheet

$
19

$
5

$
30

$
3

Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet

(5
)

(5
)

(3
)

(3
)
Total

$
14

$
—

$
27

$
—

~~Fair~~

The following table presents the amounts recorded on the condensed consolidated balance sheet related to fair value ~~measurements~~

hedges:
Carrying amount of hedged item Cumulative amount of fair value hedging adjustment included
in the carrying amount of the hedged item (a)
(in millions) Balance as of September 30, 2022 Balance as of December 31, 2021 Balance as of September 30, 2022 Balance as of December 31, 2021
Long-term debt $ 101 $ 101 $ 4 $ 4

(a) These fair value hedges were terminated in 2018 and earlier periods.

15. FAIR VALUE MEASUREMENTS

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

basis.


			Basis of fair value measurement
(in millions)	Balance as of September 30, 2022		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign exchange contracts	$	35	$	—	$	35	$	—

Available-for-sale debt securities	44		—		—		44
Marketable equity securities	25		25		—		—
Total	$	104	$	25	$	35	$	44
Liabilities
Foreign exchange contracts	$	9	$	—	$	9	$	—

Contingent payments related to acquisitions	90		—		—		90
Total	$	99	$	—	$	9	$	90

Basis of fair value measurement

(in millions)

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

$
13

$
—

$
13

$
—

Interest rate hedges

6

—

6

—

Available-for-sale securities

11

11

—

—

Total assets

$
30

$
11

$
19

$
—

Liabilities

Foreign currency hedges

$
5

$
—

$
5

$
—

Contingent payments related to acquisitions

10

—

—

10

Total liabilities

$
15

$
—

$
5

$
10


			Basis of fair value measurement
(in millions)	Balance as of December 31, 2021		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign exchange contracts	$	8	$	—	$	8	$	—

Available-for-sale debt securities	30		—		—		30
Marketable equity securities	10		10		—		—
Total	$	48	$	10	$	8	$	30
Liabilities
Foreign exchange contracts	$	5	$	—	$	5	$	—

Contingent payments related to acquisitions	143		—		—		143
Total	$	148	$	—	$	5	$	143

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

As of September 30, ~~2017,~~2022 and December 31, 2021, cash and cash equivalents of ~~$3.5~~$1.6 billion and $3.0 billion, respectively, included money market and other short-term funds of approximately ~~$1 billion,~~$161 million and ~~as of December 31, 2016, cash and equivalents of $2.8 billion included money market funds of approximately $1 billion. Money market funds would be~~$816 million, respectively, which are 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 majority of the derivatives entered into by ~~the company~~us 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, which are considered observable and vary depending on the type of derivative, ~~and~~ include contractual terms, interest rate yield curves, foreign exchange rates and volatility.

Available-for-sale debt securities, which consist of convertible debt and convertible redeemable preferred shares issued by nonpublic entities, are measured using discounted cash flow and option pricing models. Those available-for-sale debt securities are classified as Level 3 fair value measurements when there are no observable transactions near the balance sheet date due to the lack of observable data over certain fair value inputs such as equity volatility. The fair values of available-for-sale debt securities increase when interest rates decrease, equity volatility increases, or the fair values of the equity shares underlying the conversion options increase.

Contingent payments related to acquisitions, which 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 increases as the probability of payment increases or ~~expectation of~~the expected 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~~increases or ~~expectation of~~the expected timing of payment is accelerated.

The ~~change in the~~following table is a reconciliation of recurring fair value ~~of contingent payments related to Baxter’s acquisitions, which~~measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions and available-for-sale debt securities.


	Three months ended September 30,
	2022				2021
(in millions)	Contingent payments related to acquisitions		Available-for-sale debt securities		Contingent payments related to acquisitions
Fair value at beginning of period	$	113	$	44	$	34
Additions	—		—		28
Change in fair value recognized in earnings	(6)		—		(1)


Payments	(17)		—		—

Fair value at end of period	$	90	$	44	$	61


	Nine months ended September 30,
	2022				2021
(in millions)	Contingent payments related to acquisitions		Available-for-sale debt securities		Contingent payments related to acquisitions
Fair value at beginning of period	$	143	$	30	$	30
Additions	—		21		52

Change in fair value recognized in earnings	(34)		—		(6)
Change in fair value recognized in AOCI	—		3		—
Payments	(19)		—		(16)
Transfers out of Level 3	—		(10)		—
Currency translation	—		—		1
Fair value at end of period	$	90	$	44	$	61

During the nine months ended September 30, 2022, $8 million of available-for-sale debt securities that were previously classified as Level 3 converted to marketable equity securities, which are classified as Level 1 in the fair value ~~measurement, were primarily driven by payments of approximately $8 million in~~hierarchy, upon the ~~first nine months of 2017.~~

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

(in millions)

Amortized cost

Unrealized gains

Unrealized losses

Fair value

September 30, 2017

$
9

$
3

$
1

$
11

December 31, 2016

$
13

$
—

$
4

$
9

~~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~~initial public offering of the company’s investments. In the first nine months of 2016, the company recorded $4.4 billion of net realized gains within other (income) expense, net related to exchanges of available-for-sale equity securities, which represented gains from the Retained Share transactions.

~~Book Values and~~investee.

Financial Instruments Not Measured at Fair ~~Values of Financial Instruments~~

Value

In addition to the financial instruments that ~~the company is~~we are required to recognize at fair value in the condensed consolidated balance sheets, ~~the company has~~we have certain financial instruments that are recognized at ~~historical~~amortized 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~~estimated fair values as of September 30, ~~2017~~2022 and December 31, ~~2016.~~

2021.

Book values

Approximate fair values

(in millions)

2017

2016

2017

2016

Assets

Investments

$
42

$
31

$
42

$
31

Liabilities

Current maturities of long-term debt and lease obligations

$
3

$
3

$
3

$
3

Long-term debt and lease obligations

3,495

2,779

3,568

2,756


	Book values				Fair values(a)
(in millions)	2022		2021		2022		2021
Liabilities
Short-term debt	$	275	$	301	$	275	$	301
Current maturities of long-term debt and finance lease obligations	4		210		4		212
Long-term debt and finance lease obligations	16,153		17,149		14,402		17,568

~~The following tables summarize the bases used to measure the approximate~~

(a) These fair value ~~of the financial instruments~~amounts are classified as ~~of September 30, 2017 and December 31, 2016.~~

Basis of fair value measurement

(in millions)

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

Investments

$
42

$
—

$
—

$
42

Total assets

$
42

$
—

$
—

$
42

Liabilities

Current maturities of long-term debt and lease obligations

$
3

$
3

Long-term debt and lease obligations

3,568

3,568

Total liabilities

$
3,571

$
—

$
3,571

$
—

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

$
—

~~Investments in 2017 and 2016 included certain cost method investments.~~

~~In determining~~Level 2 within the fair value hierarchy as they are estimated based on observable inputs.

The carrying value of ~~cost method investments,~~short-term debt approximates its fair value due to the ~~company takes into consideration recent transactions, as well as the financial information~~short-term maturities of the ~~investee, which represents a Level 3 basis of fair value measurement.~~

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

~~company’s~~our credit risk. The carrying values of ~~the~~ other financial instruments, such as accounts receivable and accounts payable, approximate their fair values due to the short-term maturities of most of ~~these~~those assets and liabilities.

~~9. STOCK COMPENSATION~~

~~Stock compensation expense totaled $31~~

Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $102 million and $30 million in the third quarter of 2017 and 2016, respectively, and $77 million and $84 million for the nine months ended September 30, 2017 and 2016, respectively. 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 2017, the company awarded its annual stock compensation grants which consisted of 5.4 million stock options, 0.7 million RSUs and 0.6 million PSUs.~~

~~10. RETIREMENT AND OTHER BENEFIT PROGRAMS~~

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

Three months ended

Nine months ended

September 30,

September 30,

(in millions)

2017

2016

2017

2016

Pension benefits

Service cost

$
23

$
23

$
68

$
70

Interest cost

46

46

136

138

Expected return on plan assets

(75
)

(76
)

(220
)

(227
)
Amortization of net losses and other deferred amounts

42

38

123

113

Net periodic pension benefit cost

$
36

$
31

$
107

$
94

OPEB

Service cost

$
—

$
1

$
—

$
3

Interest cost

2

4

6

8

Amortization of net loss and prior service credit

(7
)

(7
)

(20
)

(15
)
Net periodic OPEB cost

$
(5
)

$
(2
)

$
(14
)

$
(4
)

~~11. ACCUMULATED OTHER COMPREHENSIVE INCOME~~

Comprehensive income includes all changes in 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, 2017 and 2016.

(in millions)

CTA

Pension and
other employee
benefits

Hedging
activities

Available-
for-sale
securities

Total

Gains (losses)

Balance as of December 31, 2016

$
(3,438
)

$
(1,161
)

$
3

$
40

$
(4,556
)
Other comprehensive income before reclassifications

501

(25
)

(19
)

1

458

Amounts reclassified from AOCI (a)

29

69

3

3

104

Net other comprehensive income (loss)

530

44

(16
)

4

562

Balance as of September 30, 2017

$
(2,908
)

$
(1,117
)

$
(13
)

$
44

$
(3,994
)

(in millions)

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

Other comprehensive income before reclassifications

(16
)

(6
)

(6
)

105

77

Amounts reclassified from AOCI (a)

—

67

(4
)

(4,536
)

(4,473
)
Net other comprehensive income (loss)

(16
)

61

(10
)

(4,431
)

(4,396
)
Balance as of September 30, 2016

$
(3,207
)

$
(1,003
)

$
(3
)

$
41

$
(4,172
)

~~(a)~~

~~See table below for details about these reclassifications.~~

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

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

—

—

Income tax expense (benefit)

$
—

$
(29
)

Net of tax
Amortization of pension and other employee benefits items

Actuarial losses and other (b)

$
(35
)

$
(103
)

(35
)

(103
)

Total before tax

12

34

Income tax expense (benefit)

$
(23
)

$
(69
)

Net of tax
Losses on hedging activities

Foreign exchange contracts

$
(3
)

$
(4
)

Cost of sales

(3
)

(4
)

Total before tax

1

1

Income tax expense (benefit)

$
(2
)

$
(3
)

Net of tax
Available-for-sale-securities

Other-than-temporary impairment of equity securities

$
—

$
(4
)

Other (income) expense, net

—

(4
)

Total before tax

—

1

Income tax expense (benefit)

—

(3
)

Net of tax
Total reclassification for the period

$
(25
)

$
(104
)

Total net of tax

Amounts reclassified from AOCI (a)

(in millions)

Three months ended
September 30, 2016

Nine months ended
September 30, 2016

Location of impact in income statement
Amortization of pension and other employee benefits items

Actuarial losses and other (b)

$
(31
)

$
(98
)

(31
)

(98
)

Total before tax

11

31

Income tax expense (benefit)

$
(20
)

$
(67
)

Net of tax
Gains (losses) on hedging activities

Interest rate contracts

$
5

$
9

Other (income) expense, net
Foreign exchange contracts

(2
)

(3
)

Cost of sales

3

6

Total before tax

(1
)

(2
)

Income tax expense (benefit)

$
2

$
4

Net of tax
Available-for-sale-securities

Gains on sale of equity securities

$
—

$
4,536

Other (income) expense, net

—

4,536

Total before tax

—

—

Income tax expense (benefit)

—

4,536

Net of tax
Total reclassification for the period

$
(18
)

$
4,473

Total net of tax

~~(a)~~

~~Amounts in parentheses indicate reductions to net income.~~

~~(b)~~

~~These AOCI components are included in the computation of net periodic benefit cost disclosed in Note 10.~~

~~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.~~

~~12. INCOME TAXES~~

~~Effective tax rate~~

The company’s effective income tax rate for continuing operations was 14.5% and 0.8% in the third quarters of 2017 and 2016, respectively, and 15.0% and (1.1%) in the nine months ended September 30, 2017 and 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, 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. Windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the company’s stock compensation programs partially offset the increase from the prior period as such benefits are now reflected as a tax benefit as a result of the company’s adoption of ASU 2016-09 in 2017.

The effective income tax rate for continuing operations increased during the nine months ended September 30, 2017 due to the 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 to the company’s U.S. pension 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 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 stock option exercises and vesting of RSUs and PSUs associated with the company’s stock compensation programs.

~~13. LEGAL PROCEEDINGS~~

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, ~~2017, the company’s total recorded reserves with respect to legal matters were $15~~2022 and $114 million ~~and there were no related receivables.~~

~~Baxter has established reserves for certain~~as of December 31, 2021. Those investments are included in Other non-current assets on our condensed consolidated balance sheets.

16. SEGMENT INFORMATION

We manage our business based on four segments, consisting of the ~~matters discussed below. The company is not able~~following geographic segments related 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 estimatedour legacy Baxter business: Americas (North and ~~the resolution thereof in any reporting period could have~~South America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific), and 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.

~~General litigation~~

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. A bench trial concluded in third quarter 2016 and the parties 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 was filed in the United States District Court~~new global segment for the ~~Northern District~~acquired Hillrom business. The Americas, EMEA and APAC segments provide a broad portfolio of ~~Illinois.~~essential healthcare products, including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. The ~~complaint alleges a conspiracy among manufacturers of IV~~Hillrom segment provides digital and connected care 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~~collaboration tools, including smart bed systems, patient monitoring and ~~a federal grand jury in the United States District Court~~diagnostic technologies, respiratory health devices, and advanced equipment 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.

~~Other~~

In December 2016, the company received a civil investigative demand from the Commercial Litigation Branch of the United States Department of Justice primarily relating to contingent discount arrangements for, and other promotion of, the company’s TISSEEL and ARTIS products. The company is cooperating in this matter.

surgical space.

~~14 SEGMENT INFORMATION~~

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:

~~The~~ ~~Renal~~ 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.

~~The~~ ~~Hospital 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~~We use operating 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~~our 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, certain R&D costs, manufacturing variances and centrally managed supply chain costs, product category support costs, stock compensation ~~expense, nonstrategic investments and related income and~~ expense, certain employee benefit plan costs, ~~as well as~~and certain ~~nonrecurring~~ gains, losses, and other charges (such as business optimization, acquisition and integration ~~and separation-related~~ costs, intangible asset amortization and asset impairments). For the period from our acquisition of Hillrom on December 13, 2021 through December 31, 2021, we previously included all costs incurred by the Hillrom business within that segment, including the types of costs described in the preceding sentence that are maintained at Corporate for our legacy Baxter segments. In connection with our ongoing integration activities, beginning in the first quarter 2022, we have updated the measure of profitability for our Hillrom segment by excluding such unallocated costs, consistent with our legacy Baxter segments. Those unallocated costs related to Hillrom, which totaled $3.0 billion and $3.3 billion for the three and nine months ended September 30, 2022, respectively, and primarily related to goodwill and intangible asset impairments are now presented within Corporate as well.

Our chief operating decision maker does not receive any asset information by operating segment and, accordingly, we do not report asset information by operating segment.

Financial information for ~~the company’s~~our segments is as follows.


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021
Net sales:
Americas	$	1,703	$	1,727	$	4,975	$	4,911
EMEA	692		779		2,129		2,300
APAC	643		720		1,917		2,059
Hillrom	735		—		2,205		—
Total net sales	$	3,773	$	3,226	$	11,226	$	9,270
Operating income:
Americas	$	588	$	676	$	1,765	$	1,907
EMEA	145		167		433		461
APAC	152		166		459		456
Hillrom	215		—		564		—
Total segment operating income	$	1,100	$	1,009	$	3,221	$	2,824

Three months ended

Nine months ended

September 30,

September 30,

(in millions)

2017

2016

2017

2016

Net sales

Renal

$
1,010

$
977

$
2,874

$
2,840

Hospital Products

1,697

1,581

4,913

4,678

Total net sales

$
2,707

$
2,558

$
7,787

$
7,518

EBITDA

Renal

$
226

$
214

$
649

$
494

Hospital Products

653

588

1,821

1,673

Total segment EBITDA

$
879

$
802

$
2,470

$
2,167

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

Three months ended

Nine months ended

September 30,

September 30,

(in millions)

2017

2016

2017

2016

Total segment EBITDA

$
879

$
802

$
2,470

$
2,167

Reconciling items

Depreciation and amortization

(184
)

(204
)

(562
)

(599
)
Stock compensation

(31
)

(30
)

(77
)

(84
)
Net interest expense

(14
)

(14
)

(41
)

(53
)
Restructuring charges, net

(31
)

(130
)

(50
)

(237
)
Venezuela deconsolidation

—

—

(33
)

—

Net realized gains on Baxalta Retained Shares transactions

—

—

—

4,387

Net loss on debt extinguishment

—

(52
)

—

(153
)
Other Corporate items

(329
)

(244
)

(783
)

(753
)
Income from continuing operations before income taxes

$
290

$
128

$
924

$
4,675


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021
Total segment operating income	$	1,100	$	1,009	$	3,221	$	2,824
Corporate and other	(3,899)		(496)		(5,517)		(1,497)
Total operating income (loss)	(2,799)		513		(2,296)		1,327
Interest expense, net	104		50		278		118
Other (income) expense, net	63		12		3		15
Income (loss) before income taxes	$	(2,966)	$	451	$	(2,577)	$	1,194

~~Item 2.~~

~~Management’s Discussion and Analysis of~~ ~~Financial Condition and Results of Operations~~

Refer to ~~the company’s~~Note 9 for additional information on Net Sales by product category.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Refer to our Annual Report on Form 10-K for the year ended December 31, ~~2016 (2016 Annual Report)~~2021 for management’s discussion and analysis of ~~the~~our financial condition and results of ~~operations of the company.~~operations. The following is management’s discussion and analysis of ~~the~~our financial condition and results of ~~operations of the company for the three and nine months ended September 30, 2017.~~

~~RESULTS OF OPERATIONS~~

~~Baxter’s income from continuing~~ operations for the three and nine months ended September 30, ~~2017~~2022 and 2021.

RESULTS OF OPERATIONS

On December 13, 2021, we completed our acquisition of all outstanding equity interests of Hill-Rom Holdings, Inc. (Hillrom) for a purchase price of $10.5 billion. Including the assumption of Hillrom’s outstanding debt, the enterprise value of the transaction was approximately $12.8 billion. While the current year periods include the results of operations and cash flows of Hillrom, the prior year periods do not as they preceded the acquisition date. In the third quarter of 2022, we recognized impairments of goodwill and certain indefinite-lived intangible assets that arose from the Hillrom acquisition. See Note 4, Goodwill and Other Intangible Assets, Net, of the accompanying condensed consolidated financial statements for additional information about those impairments.

Net income (loss) attributable to Baxter stockholders for the three and nine months ended September 30, 2022 totaled ~~$248~~$(2,937) million, or ~~$0.45~~$(5.83) per diluted share, and ~~$785~~$(2,614) million, or ~~$1.42~~$(5.20) per diluted share, compared to ~~$127~~$450 million, or ~~$0.23~~$0.89 per diluted share, and ~~$4.7 billion,~~$1,046 million, or ~~$8.56~~$2.06 per diluted share, for the three and nine months ended September 30, ~~2016. Income from continuing operations~~2021. Net income (loss) for the three and nine months ended September 30, ~~2017~~2022 included special items which decreased net income ~~from continuing operations~~ by ~~$108 million~~$3.4 billion and ~~$237 million,~~$3.9 billion, respectively, or ~~$0.19~~$6.65 and ~~$0.42~~$7.81 per diluted share, respectively, as further discussed below. ~~Income from continuing operations~~Net income (loss) 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 theand nine months ended September 30, ~~2016.~~

2021 included special items which decreased net income by $66 million and $265 million, respectively, or $0.13 and $0.52 per diluted share, respectively, as further discussed below.

Special Items

The following table provides a summary of ~~the company’s~~our special items and the related impact by line item on ~~the company’s~~our results ~~of continuing operations~~ for the three and nine months ended September 30, ~~2017~~2022 and ~~2016.~~

Three months ended September 30,

Nine months ended September 30,

(in millions)

2017

2016

2017

2016

Gross Margin

Intangible asset amortization expense

$
(38
)

$
(42
)

$
(112
)

$
(124
)
Business optimization items ¹

(12
)

(35
)

(42
)

(113
)
Product-related items ²

(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 impairment ³

—

—

—

(51
)
Total Special Items

$
(96
)

$
(78
)

$
(197
)

$
(277
)
Impact on Gross Margin Ratio

(3.5 pts)

(3.0 pts)

(2.5 pts)

(3.7 pts)

Marketing and Administrative Expenses

Business optimization items ¹

$
39

$
106

$
74

$
137

Separation-related costs ⁴

2

9

16

45

Claris acquisition and integration expenses ⁸

11

—

16

—

Historical reserve adjustments ⁵

—

—

(12
)

—

Total Special Items

$
52

$
115

$
94

$
182

Impact on Marketing and Administrative Expense Ratio

1.9 pts

4.5 pts

1.2 pts

2.4 pts

Research and Development Expenses

Business optimization items ¹

$
1

$
30

$
—

$
75

Total Special Items

$
1

$
30

$
—

$
75

Other Expense (Income), Net

Loss on debt extinguishment ⁶

$
—

$
48

$
—

$
149

Net realized gains on Baxalta Retained Share transactions ⁷

—

—

—

(4,391
)
Venezuela deconsolidation ⁹

—

—

33

—

Total Special Items

$
—

$
48

$
33

$
(4,242
)
Income Tax Expense (Benefit)

Impact of special items

$
(41
)

$
(87
)

$
(87
)

$
(252
)
Total Special Items

$
(41
)

$
(87
)

$
(87
)

$
(252
)
Impact on Effective Tax Rate

4.4 pts

21.3 pts

3.1 pts

21.9 pts

2021.


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021
Gross Margin
Intangible asset amortization expense	$	(110)	$	(68)	$	(344)	$	(199)

Business optimization items1	(13)		(20)		(21)		(51)
Acquisition and integration expenses2	2		(1)		(171)		(1)

European medical devices regulation3	(12)		(11)		(35)		(30)
Product-related items5	(20)		—		(43)		—
Intangible asset impairments6	(332)		—		(332)		—

Total Special Items	$	(485)	$	(100)	$	(946)	$	(281)
Impact on Gross Margin Ratio	(12.9 pts)		(3.1 pts)		(8.5 pts)		(3.0 pts)
Selling, General and Administrative (SG&A) Expenses
Intangible asset amortization expense	$	58	$	—	$	234	$	—
Business optimization items1	57		16		171		30
Acquisition and integration expenses2	11		21		55		23
Investigation and related costs4	—		3		—		31

Total Special Items	$	126	$	40	$	460	$	84
Impact on SG&A Ratio	3.3 pts		1.3 pts		4.1 pts		0.9 pts
Research and Development (R&D) Expenses
Business optimization items1	$	3	$	—	$	4	$	—
Acquisition and integration expenses2	1		—		1		—


Total Special Items	$	4	$	—	$	5	$	—
Impact on R&D Ratio	0.1 pts		0.0 pts		0.0 pts		0.0 pts
Goodwill Impairments
Goodwill impairments6	$	2,785	$	—	$	2,785	$	—
Total Special Items	$	2,785	$	—	$	2,785	$	—
Other Operating Expense (Income), net

Loss on product divestiture arrangement7	$	54	$	—	$	54	$	—
Acquisition and integration expenses2	(6)		(1)		(34)		(6)


Total Special Items	$	48	$	(1)	$	20	$	(6)
Interest Expense, net
Acquisition and integration expenses2	$	—	$	18	$	—	$	18
Total Special Items	$	—	$	18	$	—	$	18
Other Income (Expense), net
Pension curtailment8	$	—	$	—	$	(11)	$	—
Reclassification of cumulative translation loss to earnings9	65		—		65		—
Total Special Items	$	65	$	—	$	54	$	—
Income Tax Expense
Tax matters10	$	—	$	(58)	$	—	$	(36)
Tax effects of special items11	(162)		(33)		(328)		(76)
Total Special Items	$	(162)	$	(91)	$	(328)	$	(112)
Impact on Effective Tax Rate	(22.7 pts)		(15.0 pts)		(22.2 pts)		(4.3 pts)

Intangible asset amortization expense, which increased significantly from the prior year due to the Hillrom acquisition, is identified as a special item to facilitate an evaluation of current and past operating performance and is ~~similar to~~consistent with how management ~~internally assesses~~and our Board of Directors assess performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact ~~the company’s~~our reported results of operations for athe period. Management believes that providing the separate impact of ~~the above~~those 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~~our results of operations, particularly in evaluating performance from one period to another. ~~This information should be considered~~

1In 2022 and 2021, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure. These actions included streamlining our international operations, rationalizing our manufacturing and distribution facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. In the current period, restructuring charges include actions taken in ~~addition to, and not as a substitute for, information prepared~~connection with our integration of Hillrom, which we acquired in ~~accordance with GAAP.~~

~~The company's~~December 2021. Our results in 2022 included business optimization charges of $73 million in the third quarter of 2017 included a charge of $52 million related to business optimization initiatives. This included a charge of $31 million related to restructuring activities and $21 million of costs to implement business optimization programs which primarily included external consulting and project employee costs. The $31 million of restructuring charges were comprised of employee termination costs.

The company’s results in the first nine months of 2017 included a net charge of $116 million related to business optimization initiatives. This included a net charge of $50 million related to restructuring activities, $58 million of costs to implement business optimization programs which primarily included external consulting and project employee costs, and $8 million of accelerated depreciation associated with facilities to be closed. The $50 million of net restructuring charges included $40 million of employee termination costs, $5 million of contract termination costs, and $5 million of asset impairment charges primarily related to facility closures.

The company’s results in the third quarter of 2016 included a net charge of $171 million related to business optimization initiatives. This included a net charge of $130 million related to restructuring activities, $25 million of costs to implement business optimization programs which included external consulting and employee salary and related costs, $11 million of accelerated depreciation associated with facilities to be closed, and $5 million of Gambro integration costs. The $130 million of restructuring activities included $101 million of employee termination costs, $27 million of intangible asset impairment charges related to acquired in-process R&D, and $2 million of other exit costs.

The company’s results in the first nine months of 2016 included a net charge of $325 million related to business optimization initiatives. This included a net charge of $237 million related to restructuring activities, $44 million of costs to implement business optimization programs which included external consulting and employee salary and related costs, $25 million of accelerated depreciation associated with facilities to be closed, and $19 million of Gambro integration costs. The $237 million of restructuring activities included $144 million of employee termination costs, $54 million of costs related to the discontinuance of the VIVIA home hemodialysis development program, $27 million of intangible asset impairment charges related to acquired in-process R&D, and $12 million of other exit costs.

The company’s results in the third quarter and first nine months of 2017 included a net charge of $21 million and $17 million, respectively, related to SIGMA SPECTRUM infusion pump inspection and remediation activities, partially offset by a benefit related to an adjustment to historical product reserves. The company’s results in the first nine months of 2016 included a benefit of $12 million related to an adjustment to the SIGMA SPECTRUM infusion pump reserves.

³	~~The company’s results in the first nine months of 2016 included a $51 million impairment primarily related to developed technology.~~

⁴	The company's results in 2017 and 2016 included costs incurred related to the Baxalta separation totaling $2 million and $10 million, respectively in the third quarter and $17 million and $46 million, respectively, in the first nine months.

⁵	~~The company's results in the first nine months of 2017 included a benefit of $12 million related to an adjustment to the company's historical rebates and discounts reserve.~~

⁶

The company’s results in the third quarter of 2016 included a net debt extinguishment loss of $48 million primarily related to certain debt redemptions. The company’s results in 2016 included a net debt extinguishment loss totaling $149 million related to the March 2016 debt-for-equity exchange for certain company indebtedness and certain other debt redemptions. See Note 8 within Item 1 for additional details.

⁷

The company’s results in the first nine months of 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 and pension contribution described above. Refer to Note 8 within Item 1 for additional details.

⁸	The company’s results in the third quarter and first nine months of 2017 include acquisition and integration costs of $15 million and $20 million, respectively, related to the company’s acquisition of Claris Injectables Limited (Claris).

⁹	~~The company’s results in 2017 included a charge of $33 million related to the deconsolidation of its Venezuelan operations.~~

¹⁰	The company’s results in 2017 included a charge of $21 million related to the impact of Hurricane Maria on the company’s operations in Puerto Rico. The costs primarily include inventory and fixed asset impairments as well as idle facility costs.

~~NET SALES~~

Three months ended
September 30,

Percent change

(in millions)

2017

2016

At actual
currency rates

At constant
currency rates

U.S. Cyclophosphamide

Claris

Strategic Product Exits

Renal

$
1,010

$
977

3
%

3
%

0
%

0
%

(3
)%
Hospital Products

1,697

1,581

7
%

7
%

0
%

2
%

(1
)%
Total net sales

$
2,707

$
2,558

6
%

6
%

0
%

1
%

(1
)%

Three months ended

September 30,

Percent change

(in millions)

2017

2016

At actual
currency rates

At constant
currency rates

U.S. Cyclophosphamide

Claris

Strategic Product Exits

International

$
1,559

$
1,491

5
%

4
%

0
%

1
%

(3
)%
United States

1,148

1,067

8
%

8
%

0
%

1
%

0
%
Total net sales

$
2,707

$
2,558

6
%

6
%

0
%

1
%

(1
)%

Nine months ended
September 30,

Percent change

(in millions)

2017

2016

At actual
currency rates

At constant
currency rates

U.S. Cyclophosphamide

Claris

Strategic Product Exits

Renal

$
2,874

$
2,840

1
%

2
%

0
%

0
%

(2
)%
Hospital Products

4,913

4,678

5
%

5
%

0
%

0
%

(1
)%
Total net sales

$
7,787

$
7,518

4
%

4
%

0
%

0
%

(1
)%

Nine months ended

September 30,

Percent change

(in millions)

2017

2016

At actual
currency rates

At constant
currency rates

U.S. Cyclophosphamide

Claris

Strategic Product Exits

International

$
4,405

$
4,376

1
%

2
%

0
%

0
%

(2
)%
United States

3,382

3,142

8
%

8
%

(1
)%

1
%

0
%
Total net sales

$
7,787

$
7,518

4
%

4
%

0
%

0
%

(1
)%

~~Foreign currency did not have an impact on consolidated net sales during~~ the third quarter orand $196 million in the first nine months. Our results in 2021 included business optimization charges of $36 million in the third quarter and $81 million in the first nine months. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.

2Our results in 2022 included $4 million in the third quarter and $193 million in the first nine months of ~~2017~~acquisition and integration-related expenses. Those costs included $10 million in the third quarter and $227 million in the first nine months related to our acquisition of Hillrom, primarily reflecting $159 million of incremental costs of sales in the first nine months from the fair value step-ups on acquired Hillrom inventory that was sold in the first quarter. We have not incurred and we do not expect to incur significant incremental cost of sales from those inventory fair value step-ups beyond what was recognized in the first quarter 2022. Other integration expenses in the current period included third party consulting costs related to our integration and related cost savings activities. Those acquisition and integration-related expenses related to Hillrom were partially offset by a $6 million benefit in the third quarter and a $34 million benefit in the first nine months from changes in the estimated fair value of contingent consideration liabilities. Our results in 2021 included acquisition, integration and related financing expenses of $39 million in the third quarter and $36 million in the first nine months. This included acquisition, integration and related financing expenses for our acquisition of Hillrom and the acquisition to the rights to Caelyx and Doxil for specified territories outside of the U.S. These expenses were partially offset by benefits in the third quarter and first nine months from changes in the estimated fair value of contingent consideration liabilities. Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.

3Our results in 2022 included $12 million in the third quarter and $35 million in the first nine months of costs related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that became effective in stages beginning in 2021. Our results in 2021 included $11 million in the third quarter and $30 million in the first nine months of costs related to these requirements.

4Our results in 2021 included charges of $3 million in the third quarter and $31 million in the first nine months for investigation and related cost for matters associated with our previously announced investigation of foreign exchange gains and losses. Refer to Note 6 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation.

5Our results in 2022 included charges of $20 million in the third quarter and $43 million in the first nine months related to warranty and remediation activities arising from two field corrective actions on certain of our infusion pumps.

6Our results in 2022 included charges of $3.1 billion in the third quarter and first nine months for goodwill and indefinite-lived intangible asset impairments. Refer to Note 4 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the impairments.

7Our results in 2022 included a loss of $54 million in the third quarter and first nine months under an arrangement to divest certain product rights for an amount that is less than our cost of those product rights, which was triggered by U.S. and European Union regulatory approvals of the related products. Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information about the related transactions.

8Our results in 2022 included a curtailment gain of $11 million in the first nine months related to an announced change for active non-bargaining participants in our U.S. Hillrom pension plan.

9Our results in 2022 included a charge of $65 million in the third quarter and first nine months for cumulative translation adjustments (CTA) reclassified from accumulated other comprehensive income (loss) as a result of the substantial liquidation of our operations in Argentina.

10Our results in the third quarter and first nine months of 2021 included a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary. Our results in the first nine months of 2021 also included a charge of $22 million related to an unfavorable court ruling for an uncertain tax position.

11Reflected in this item is the income tax impact of the special items identified in this table. The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.

FACTORS AFFECTING OUR RESULTS OF OPERATIONS

Risks and Uncertainties Related to COVID-19

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19). COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and we expect will continue to increase our expenses. Over the course of the pandemic, our business has been impacted by shifting healthcare priorities and significant volatility in the demand for our products. For further information about our revenues by product category, refer to Note 9 in Item 1 of this Quarterly Report on Form 10-Q. Significant uncertainty remains regarding the duration and overall impact of the COVID-19 pandemic. Concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Omicron variants, subvariants and other virus mutations as well as vaccine distribution and hesitancy. The U.S. and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to moratoriums on elective procedures and mandatory quarantines and travel restrictions), resulting in higher levels of absenteeism, including at our manufacturing and distribution facilities. Due to the uncertainty caused by the pandemic, our operating performance and financial results, particularly in the short term, may be subject to volatility.

Supply Constraints, Global Economic Conditions

We have experienced significant challenges to our global supply chain in recent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, resulting from the pandemic and other exogenous factors including significant weather events, elevated inflation levels, disruptions to certain ports of call around the world, the war in Ukraine and other geopolitical events. We expect to experience some of these and other challenges related to our supply chain in future periods. These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for certain product categories due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future.

Our results of operations are also affected by macroeconomic conditions and levels of business confidence. The war in Ukraine and the sanctions and other measures being imposed in response to this conflict have increased the levels of economic and political uncertainty. In response, we continue to monitor the developing situation with respect to ongoing business in Russia and are working on appropriate contingency plans that will support our desire to serving existing, chronically ill patient populations while remaining compliant with all applicable U.S. and European Union sanctions and regulations. While Russia and Ukraine do not constitute a material portion of our business, a significant escalation or expansion of economic disruption or the conflict’s current scope could have an adverse effect on our business.

In addition, the existence of inflation in the United States and in many of the countries where we conduct business has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, increased costs of labor, weakening exchange rates and other similar effects. We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses as well as negative impacts from weakening exchange rates, caused by the COVID-19 pandemic or as a result of general macroeconomic factors, and may not be able to pass these cost increases on to our customers in a timely manner or at all, which could have a material adverse impact on our profitability and results of operations. Inflation may also cause our customers to reduce or delay orders for our products and services, which could have a material adverse impact on our sales and results of operations.

In addition to acquisitions and organic reinvestment, we consistently look for opportunities to optimize our portfolio. As such, we may divest businesses, discontinue products or exit markets (in a manner consistent with our commitments to patient safety and quality) to create value and drive enhanced future performance in line with our strategic objectives.

Regulatory Environment

Our operations and products, and those of our customers, are subject to regulation globally by numerous government agencies. We, like other businesses in our industry, face challenges inherent in product development, including the potential inability to obtain and maintain regulatory approvals and registrations in the United States and abroad, which could preclude or delay commercialization of a product and increase development costs. New or changing laws and regulations, or changes in enforcement practices in response to requests from various regulatory authorities, could also affect our domestic and foreign operations. In particular, the U.S. and other countries may impose new requirements regarding registration, labeling or prohibited materials (including DEHP and polyvinyl chloride) that may require us to re-register products already on the market or change product formulations or otherwise impact our ability to market our products. Environmental laws, particularly with respect to the emission of greenhouse gases, are also becoming more stringent throughout the world. Product efficacy or safety concerns regarding products could result in regulatory action on the part of the FDA or foreign counterparts, declining sales and product liability claims, and damage to our reputation. For example, manufacturers across the pharmaceutical industry, including us, are evaluating their product portfolios for the potential presence or formation of nitrosamines.

We expect that these challenges and conditions, among other factors, may continue to have an adverse effect on our business.

For further discussion, please refer to Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

NET SALES


	Three Months Ended September 30,				Percent change
(in millions)	2022		2021		At actual currency rates		At constant currency rates
United States	$	1,849	$	1,319	40	%	40	%
International	$	1,924	1,907		1	%	12	%
Total net sales	$	3,773	$	3,226	17	%	23	%


	Nine Months Ended September 30,				Percent change
(in millions)	2022		2021		At actual currency rates		At constant currency rates
United States	$	5,370	$	3,697	45	%	45	%
International	$	5,856	5,573		5	%	13	%
Total net sales	$	11,226	$	9,270	21	%	26	%

Our acquisition of Hillrom favorably impacted net sales by 23 and 24 percentage points during the third quarter and first nine months of 2022, respectively, compared to the prior year periods.

Foreign currency unfavorably impacted net sales by 6 and 5 percentage points during the third quarter and first nine months of 2022, respectively, compared to the prior-year periods, principally due to the strengthening of the U.S. Dollar relative to the Euro, British Pound, Turkish Lira, Australian Dollar and Japanese Yen.

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~~had remained constant between the prior and the current period. ~~The company believes~~We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S. 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~~our 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~~

Product Category Net Sales Reporting

Upon our acquisition of ~~Claris, a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of $629 million, net of cash acquired. In~~Hillrom, we added three new product categories: Patient Support Systems, Front Line Care and Surgical Solutions. Our product categories include the ~~three and nine months ended September 30, 2017, consolidated Baxter results include $27 million of net sales related to the Claris acquisition.~~

following:

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.

~~Franchise Net Sales Reporting~~

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

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

services.

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

drug reconstitution devices.

~~Integrated Pharmacy Solutions~~• Pharmaceuticals includes sales of ~~the company’s~~our premixed and oncology drug platforms, ~~nutrition~~inhaled anesthesia and critical care products ~~pharmaceutical reconstitution devices~~ and pharmacy compounding services.

~~Surgical Care~~• Clinical Nutrition includes sales of ~~the company’s inhaled anesthesia products~~our parenteral nutrition (PN) therapies and ~~critical care products as well as~~related products.

• Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.

~~Other~~• Acute Therapies includes sales ~~primarily from~~of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the ~~company’s~~intensive care unit (ICU).

• BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical ~~partnering business.~~

and biopharmaceutical companies.

• Patient Support Systems includes sales of our connected care solutions: devices, software, communications and integration technologies and smart beds.

• Front Line Care includes sales of our integrated patient monitoring and diagnostic technologies to help diagnose, treat and manage a wide variety of illness and diseases, including respiratory therapy, cardiology, vision screening and physical assessment.

• Surgical Solutions includes sales of our surgical video technologies, tables, lights, pendants, precision positioning devices and other accessories.

• Other includes sales of other miscellaneous product and service offerings.

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

product category:


	Three Months Ended September 30,				Percent change
(in millions)	2022		2021		At actual currency rates		At constant currency rates
Renal Care	$	942	$	981	(4)	%	4	%
Medication Delivery	725		747		(3)	%	(0)	%
Pharmaceuticals	525		589		(11)	%	(3)	%
Clinical Nutrition	231		244		(5)	%	4	%
Advanced Surgery	247		249		(1)	%	6	%
Acute Therapies	158		185		(15)	%	(9)	%
BioPharma Solutions	172		206		(17)	%	(10)	%
Patient Support Systems	380		—		N/A		N/A
Front Line Care	279		—		N/A		N/A
Surgical Solutions	76		—		N/A		N/A
Other	38		25		52	%	56	%
Total Baxter	$	3,773	$	3,226	17	%	23	%

Three 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

$
1,010

$
977

3
%

3
%

0
%

0
%

(3
)%
Fluid Systems

$
610

$
576

6
%

6
%

0
%

0
%

(1
)%
Integrated Pharmacy Solutions

627

563

11
%

11
%

(2
)%

5
%

0
%
Surgical Care

338

320

6
%

5
%

0
%

0
%

(1
)%
Other

122

122

—

(2
)%

0
%

0
%

0
%
Total Hospital Products net sales

$
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
)%


	Nine months ended September 30,				Percent change
(in millions)	2022		2021		At actual currency rates		At constant currency rates
Renal Care	$	2,767	$	2,867	(3)	%	2	%
Medication Delivery	2,141		2,096		2	%	4	%
Pharmaceuticals	1,574		1,687		(7)	%	(1)	%
Clinical Nutrition	688		715		(4)	%	3	%
Advanced Surgery	738		722		2	%	7	%
Acute Therapies	519		580		(11)	%	(7)	%
BioPharma Solutions	491		524		(6)	%	(0)	%
Patient Support Systems	1,127		—		N/A		N/A
Front Line Care	855		—		N/A		N/A
Surgical Solutions	223		—		N/A		N/A
Other	103		79		30	%	33	%
Total Baxter	$	11,226	$	9,270	21	%	26	%

~~Net~~

Renal Care net sales decreased 4% in ~~the Renal segment during~~ the third quarter and 3% in the first nine months of ~~2017 increased 3% and 1%, respectively. Excluding~~2022, as compared to the ~~impact of foreign currency, sales increased 3% and 2%~~prior-year periods. The decrease in the third quarter and first nine months ~~of 2017, respectively,~~was driven by ~~continued~~an 8% and 5%, respectively, negative impact from foreign exchange rate changes, as compared to the prior-year periods, and lower in-center HD sales, partially offset by global patient growth ~~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~~PD.

Medication Delivery net sales ~~globally of the company’s CRRT products also contributed to growth~~decreased 3% in the third quarter and ~~first nine months of 2017. Sales growth~~increased 2% in the first nine months of ~~2017~~2022, as compared to the prior-year periods. The decrease in the third quarter was driven by a 3% negative impact from foreign exchange rates as compared to the prior-year period. The increase in the first nine months was driven by increased demand for IV administration sets and solutions, reflecting a recovery in hospital admission rates and surgical procedures. The first nine months of 2022 was also favorably impacted by lower U.S. customer rebates in the current year period. Those items were partially offset by lower sales of ~~HD products internationally, driven by reduced volumes and increased pricing pressures. Certain international strategic market exits negatively impacted~~infusion pumps, a 2% negative impact in the ~~Renal segment’s net sales by 3% and 2% during the third quarter and~~ first nine months of ~~2017, respectively, and are expected to negatively impact full year Renal segment net sales by approximately $50 million~~2022 from foreign exchange rates as compared to ~~2016.~~

~~Net~~the prior-year period and sales headwinds in China driven by COVID-related lockdowns. Supply chain constraints, including constraints related to the availability of semiconductor components and other components used in the ~~Hospital Products segment increased 7%~~production of our infusion pumps, and ~~5%, respectively, during~~ the ~~third quarter and first nine months~~fact that our new infusion pump platform has not yet received FDA clearance in the U.S. have contributed to lower sales of ~~2017 compared to~~infusion pumps in the ~~prior period on both a reported basis and constant currency basis. Certain international strategic market exits negatively impacted the Hospital Products segment~~current year periods.

Pharmaceuticals 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%~~decreased 11% 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~~2022, as compared to 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%~~prior-year periods. The decrease in the third quarter and first nine months was primarily driven by a 8% and 6%, respectively, negative impact from foreign exchange rates, as compared to the prior-year periods. Additionally, pharmaceuticals net sales were adversely impacted by new market entrants increasing competition and supply constraints for certain molecules. Those items were partially offset by increased sales internationally for inhaled anesthesia products.

Clinical Nutrition net sales decreased 5% in the third quarter and 4% in the first nine months of ~~2017 on a constant currency basis~~2022, as compared to the prior-year periods. The decrease in the third quarter and first nine months was driven by ~~improved volumes for~~a 9% and 7%, respectively, negative impact from foreign exchange rate changes, as compared to the ~~company’s nutritional therapies, increased~~prior-year periods, and lower sales of ~~pre-mixed injectable drugs (as a result of recent product launches), the acquisition of Claris and a one-time benefit~~vitamins resulting from ~~an early contract settlement. These increases~~ongoing supply constraints. Those decreases were partially offset by growth in the U.S. for our PN therapies and related products, including our PN multi-chamber bags.

Advanced Surgery net sales decreased ~~U.S. sales of cyclophosphamide, a generic oncology drug, due to~~1% in the ~~entry of competitors into the market. U.S. sales of cyclophosphamide declined from $163 million~~third quarter and increased 2% in the first nine months of ~~2016~~2022, as compared to ~~$143 million~~the prior-year periods. The decrease in the third quarter was driven by a 7% negative impact from foreign exchange rate changes, as compared to the prior-year period, partially offset by continued recovery in surgical procedures. The increase in the first nine months was driven by the continued recovery in surgical procedures, particularly in EMEA, and benefits from competitor supply constraints, partially offset by a 5% negative impact from foreign exchange rates, as compared to the prior-year period.

Acute Therapies net sales decreased 15% in the third quarter and 11% in the first nine months of ~~2017. The company expects U.S. sales of cyclophosphamide to continue to decline due~~2022, as compared to the ~~entrance of additional competitors.~~

prior-year periods. The decrease in the third quarter and first nine months was driven by lower COVID-related

Indemand for our CRRT systems and a 6% and 4%, respectively, negative impact from foreign exchange rate changes, as compared to the ~~Surgical Care franchise,~~prior-year periods.

BioPharma Solutions net sales ~~increased 5%~~decreased 17% in the third quarter and 6% in the first nine months of ~~2017 on a constant currency basis driven by improved volumes and pricing~~2022, as compared to the prior-year periods. The decrease 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 beta blocker, during the third quarter and first nine months ~~of 2017~~includes a 7% and 6%, respectively, negative impact from foreign exchange rates, as ~~well as volume for Transderm Scop during~~compared to the ~~first nine months.~~prior-year periods. The ~~increased Transderm Scop volume was the result of a temporary supply disruption during the first half of the year related to an alternative product.~~

~~In the Other franchise, sales decreased 2%~~decrease in the third quarter ~~and increased 1% in the first nine months of 2017 on a constant currency basis~~was also driven by ~~unfavorable volumes in~~lower sales from manufacturing services and supply packaging related to the ~~third quarter and favorable volumes in the first nine months~~production of ~~2017 for products manufactured by Baxter~~COVID-19 vaccines on behalf of ~~its~~multiple pharmaceutical ~~partners. In addition, revenues~~companies, reflecting a challenging comparison against a strong prior-year period.

The Patient Support Systems, Front Line Care and Surgical Solutions product categories were added in connection with our acquisition of Hillrom in December of 2021. Net sales of those product categories have been adversely impacted in the current year periods by ongoing supply chain constraints, particularly related to ~~the company’s manufacturing~~components used in our Front Line Care product offerings, and ~~supply agreement with Baxalta were lower~~by delays in product installations for Patient Support Systems and Surgical Solutions resulting from limitations on hospital access due, in part, to staffing challenges being experienced by those customers.

Gross Margin and Expense Ratios


	Three months ended September 30,
	2022		% of net sales		2021		% of net sales		$ change		% change
Gross margin	$	1,133	30.0	%	$	1,321	40.9	%	$	(188)	(14.2)	%
SG&A	$	947	25.1	%	$	680	21.1	%	$	267	39.3	%
R&D	$	152	4.0	%	$	129	4.0	%	$	23	17.8	%


	Nine months ended September 30,
	2022		% of net sales		2021		% of net sales		$ change		% change
Gross margin	$	3,934	35.0	%	$	3,699	39.9	%	$	235	6.4	%
SG&A	$	2,975	26.5	%	$	1,982	21.4	%	$	993	50.1	%
R&D	$	450	4.0	%	$	396	4.3	%	$	54	13.6	%

Gross Margin

The gross margin ratio was 30.0% and 35.0% in the third quarter and first nine months of ~~2017 as compared to the prior year.~~

~~Gross Margin and Expense Ratios~~

Three months ended

Nine months ended

September 30,

September 30,

(as a percentage of net sales)

2017

2016

Change

2017

2016

Change
Gross margin

41.7
%

41.9
%

(0.2 pts)

42.4
%

40.0
%

2.4 pts
Marketing and administrative expenses

25.3
%

28.4
%

(3.1 pts)

24.3
%

27.6
%

(3.3 pts)

~~Gross Margin~~

2022, respectively. The special items identified above had an unfavorable impact of approximately ~~3.5~~12.9 and ~~2.5~~8.5 percentage points on the gross margin ratio in the third quarter and first nine months of ~~2017,~~2022, respectively. The ~~unfavorable impact~~gross margin ratio was ~~3.0~~40.9% and ~~3.7 percentage points~~39.9% in the third quarter and first nine months of ~~2016,~~2021, respectively. The special items identified above had an unfavorable impact of approximately 3.1 and 3.0 percentage points on the gross margin ratio in the third quarter and first nine months of 2021, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the gross margin ratio decreased in the third quarter and increased ~~due~~in the first nine months of 2022 compared to ~~select price increases,~~the prior-year periods. The decrease in the third quarter was primarily driven by raw materials inflation and increased supply chain costs, partially offset by a favorable ~~manufacturing performance~~product mix that was primarily driven by our acquisition of Hillrom and lower bonus accruals under our annual employee incentive compensation plans. The increase in the first nine months resulted from a ~~benefit from~~favorable product mix that was that was primarily driven by our acquisition of Hillrom and lower bonus accruals under our annual employee incentive compensation plans, which exceeded the ~~company’s business transformation initiatives aimed at simplifying~~adverse impacts of raw materials inflation and increased supply chain costs for the ~~portfolio to drive efficiency~~year-to-date period.

SG&A

The SG&A expenses ratio was 25.1% and ~~reduce costs.~~

~~Marketing~~26.5% in the third quarter and ~~Administrative Expenses~~

first nine months of 2022, respectively. The special items identified above had an unfavorable impact of approximately ~~1.9~~3.3 and ~~1.2~~4.1 percentage points on the marketing and administrative expense ratio in the third quarter and first nine months of 2017, respectively. The unfavorable impact was 4.5 and 2.4 percentage points in the third quarter and first nine months of 2016. Refer to the Special Items caption above for additional detail.

~~Excluding the impact of the special items, the marketing and administrative~~SG&A expenses ratio in the third quarter and first nine months of 2017 declined due to the actions taken by the company to rebase its cost structure and focus on expense management. These savings were partially offset by decreased benefits to the marketing and administrative2022, respectively. The SG&A expenses ratio ~~from lower transition service income as~~was 21.1% and 21.4% in the ~~agreement with Baxalta for these services continues to wind down.~~

~~Research~~third quarter 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
%

first nine months of 2021, respectively. The special items identified above had an unfavorable impact of approximately ~~1.2~~1.3 and ~~1.0~~0.9 percentage points on the SG&A expenses ratio in the third quarter and first nine months of ~~2016.~~2021, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the ~~research and development~~SG&A expenses ratio increased in the third quarter and first nine months of ~~2017 as a result~~2022 compared to the prior-year periods primarily due to the acquisition of Hillrom and increased outbound freight costs, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

R&D

The R&D expenses ratio was 4.0% in the ~~company’s increased investment~~third quarter and first nine months of 2022. The R&D expenses ratio was 4.0% and 4.3% in ~~new product development.~~

the third quarter and first nine months of 2021, respectively.

The R&D expenses ratio remained relatively flat in the third quarter and first nine months of 2022 compared to the prior-year periods, with the increase in total spend primarily driven by the Hillrom acquisition, partially offset by lower bonus accruals under our annual employee incentive compensation plans.

Business Optimization Items

~~Beginning in the second half of 2015, the company initiated~~

In recent years, we have undertaken actions to transform ~~its costs~~our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing ~~the~~our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. ~~Through~~In the current year periods, restructuring charges include actions taken in connection with our integration of Hillrom. From the commencement of our business optimization actions in the second half of 2015 through September 30, ~~2017, the company has~~2022, we have incurred ~~pretax~~cumulative pre-tax costs of ~~$526 million~~$1.4 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments, and accelerated depreciation. ~~The company expects~~

We currently expect to incur additional ~~pretax~~pre-tax costs, primarily related to the implementation of business optimization programs, of approximately ~~$285~~$14 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives, including those related to our integration of Hillrom, and, to the extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs to implement business optimization programs in future periods.

Goodwill Impairments

We assess goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize a goodwill impairment charge for the amount by which a reporting unit's carrying amount exceeds its fair value.

As described above, we acquired Hillrom on December 13, 2021 and recognized $6.8 billion of goodwill and $6.0 billion of other intangible assets, including $1.9 billion of indefinite-lived intangible assets, in connection with that acquisition. Our Hillrom segment includes the following three reporting units: Patient Support Systems, Front Line Care and Surgical Solutions. During the third quarter of 2022, we performed trigger-based impairment tests of the goodwill of each of those three reporting units, as well as the indefinite-lived intangible assets, consisting primarily of trade names, that we acquired in connection with the Hillrom acquisition. We performed those tests as of September 30, 2022 due to (a) current macroeconomic conditions, including the rising interest rate environment and broad declines in equity valuations, and (b) reduced earnings forecasts for our three Hillrom reporting units, driven primarily by current shortages of certain component parts used in our products, raw materials inflation and increased supply chain costs. The impairment tests resulted in total pre-tax goodwill impairment charges of $2.8 billion in the third quarter of 2022, consisting of a $1.4 billion goodwill impairment for our Patient Support Systems reporting unit, a $1.0 billion goodwill impairment for our Front Line Care reporting unit and a $0.4 billion goodwill impairment for our Surgical Solutions reporting unit.

Further adverse changes to macroeconomic conditions or our earnings forecasts could lead to additional goodwill or intangible asset impairment charges in future periods and such charges could be material to our results of operations.

Other Operating Expense (Income), Net

Other operating expense (income), net was $48 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 aggregate are expected to provide future annual pretax savings of 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 expected annual pretax savings are expected to be realized by the end of 2018, with the remainder by the end of 2020.

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

~~Net Interest Expense~~

~~Net interest expense was $14 million and $41~~$20 million in the third quarter and first nine months of ~~2017, respectively,~~2022, respectively. The current year periods include a loss of $54 million under an arrangement to divest certain product rights for an amount that is less than our cost of those product rights, which was triggered by U.S. and ~~$14~~European Union regulatory approvals of the related products. Refer to Note 2 in Item 1 of this Quarterly Report on

Form 10-Q for further information about the related transactions. That loss was partially offset by gains from net decreases in the estimated fair values of contingent consideration liabilities of $6 million and ~~$53~~$34 million in the third quarter and first nine months of ~~2016,~~2022, respectively. The decrease in the first nine months of 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 related to the third quarter 2016 debt issuance, partially offset by lower interest capitalized on assets under construction. See Note 8 within Item 1 for additional details about the debt extinguishments.

Other ~~(Income) Expense, Net~~

~~Other~~operating expense (income) ~~expense,~~, net was ~~income of $12~~$1 million and ~~expense of $10~~$6 million in the third quarter and first nine months of ~~2017,~~2021, respectively, ~~and~~which consisted of gains from net decreases in the estimated fair values of contingent consideration liabilities.

Interest Expense, Net

Interest expense, ~~of $44~~net was $104 million and income of $4.3 billion in the third quarter and first nine months of 2016, 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 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, net had higher income in the third quarter of 2017 and lower income in the first nine months of 2017 as compared to 2016. Higher income in the third quarter of 2017 was the result of foreign currency fluctuations principally related to intercompany receivables, payables and monetary assets denominated in a foreign currency. Lower income for the first nine months of 2017 was attributable to the absence of dividends on the Retained Shares received from Baxalta in 2016 and recognized investment impairment losses in 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~~$278 million in the third quarter and first nine months of ~~2017,~~2022, respectively, and ~~$214~~$50 million and ~~$494~~$118 million in the third quarter and first nine months of ~~2016,~~2021, respectively. The increase in 2017 was driven by lower research and 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 $1.821 billion~~increases in the third quarter and first nine months of ~~2017, respectively, and $588~~2022 were primarily driven by higher average debt outstanding in connection with the Hillrom acquisition.

Other (Income) Expense, Net

Other (income) expense, net was an expense of $63 million and ~~$1.673 billion~~$3 million in the third quarter and first nine months of ~~2016,~~2022, respectively, and an expense of $12 million and $15 million in the third quarter and first nine months of 2021, respectively. ~~This increase~~The increases in the third quarter of 2022 compared to the prior year period was ~~driven~~primarily due to the reclassification of a cumulative translation loss from accumulated other comprehensive income (loss) to earnings due to the substantial liquidation of our operations in Argentina, partially offset by ~~higher~~pension benefits in the current-year period. The decrease in the first nine months of 2022 compared to the prior year was primarily due to foreign exchange gains in the current-year period versus losses in the prior-year period, pension benefits in the current-year period versus expenses in the prior-year period and a pension curtailment gain in the current-year period, partially offset by the reclassification of the Argentina cumulative translation loss to earnings.

Income Taxes

Our effective income tax rate was 1.1% and (0.2)% in the third quarter, and (1.1)% and 11.8% in the first nine months of 2022 and 2021, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits or shortfalls on stock compensation awards.

Segment Results

We manage our global operations based on four segments, consisting of the following geographic segments related to legacy Baxter business: Americas, EMEA and APAC, and a new global segment for our recently acquired Hillrom business. We use net sales and operating income on a segment basis to make resource allocation decisions and

assess the ongoing performance of our segments. The following is a summary of financial information for our reportable segments:


	Net sales								Operating income (loss)
	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021		2022		2021		2022		2021
Americas	$	1,703	$	1,727	$	4,975	$	4,911	$	588	$	676	$	1,765	$	1,907
EMEA	692		779		2,129		2,300		145		167		433		461
APAC	643		720		1,917		2,059		152		166		459		456
Hillrom	735		—		2,205		—		215		—		564		—
Total segments	3,773		3,226		11,226		9,270		1,100		1,009		3,221		2,824
Corporate and other	—		—		—		—		(3,899)		(496)		(5,517)		(1,497)
Total	$	3,773	$	3,226	$	11,226	$	9,270	$	(2,799)	$	513	$	(2,296)	$	1,327

Americas

Segment net sales and operating income were $1.7 billion and $588 million, respectively, in the third quarter and $5.0 billion and $1.8 billion, respectively, in the first nine months of 2022. Segment net sales and operating income were $1.7 billion and $676 million, respectively, in the third quarter and $4.9 billion and $1.9 billion, respectively, in the first nine months of 2021. The decrease in operating income in the third quarter of 2022 was due to higher supply chain costs and lower ~~marketing~~sales in our BioPharma Solutions, Pharmaceuticals and ~~administrative~~Acute Therapies product categories, partially offset by higher sales in our Renal Care and Advanced Surgery product categories. The decrease in operating income in the first nine months of 2022 was due to raw materials inflation, higher supply chain costs and lower sales in our Pharmaceuticals, Acute Therapies and BioPharma Solutions product categories, partially offset by higher sales in our Medication Delivery, Renal Care and Advanced Surgery product categories.

EMEA

Segment net sales and operating income were $692 million and $145 million, respectively, in the third quarter and $2.1 billion and $433 million, respectively, in the first nine months of 2022. Segment net sales and operating income were $779 million and $167 million, respectively, in the third quarter and $2.3 billion and $461 million, respectively, in the first nine months of 2021. The decrease in operating income in the third quarter and first nine months of 2022 was primarily due to an unfavorable impact of foreign exchange rates on results as compared to the prior-year period, lower sales in our Acute Therapies and BioPharma Solutions product categories and higher supply chain costs, partially offset by lower operating expenses ~~as cost savings were realized from~~and improved gross margin, driven by a favorable product mix. For the ~~company’s business optimization programs and continued focus on reducing discretionary spending. This growth~~first nine months of 2022, the decrease in operating income was partially offset by having a full nine months of sales from our February 2021 acquisition of the rights to Caelyx and Doxil for specified territories outside the U.S.

APAC

Segment net sales and operating income were $643 million and $152 million, respectively, in the third quarter and $1.9 billion and $459 million, respectively, in the first nine months of 2022. Segment net sales and operating income were $720 million and $166 million, respectively, in the third quarter and $2.1 billion and $456 million, respectively, in the first nine months of 2021. The decrease in operating income in the third quarter of 2022 was driven by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period. The increase in operating income in the first nine months of 2022 was due to lower operating expenses and an improved gross margin, driven by a favorable product mix, partially offset by the unfavorable impact of foreign exchange rates on results as compared to the prior-year period, higher ~~research~~supply chain costs and ~~development costs as~~sales headwinds in China driven by COVID-related lockdowns.

Hillrom

Segment net sales and operating income were $735 million and $215 million, respectively, in the ~~company realigned allocations~~third quarter and $2.2 billion and $564 million, respectively, in the first nine months of ~~research~~2022. The increases in net sales and ~~development costs based on project spend attributable~~operating income in the third quarter and first nine months of 2022, from zero in the prior year periods, were due to ~~segments and unfavorable foreign currency.~~

our acquisition of Hillrom in December 2021.

Corporate and ~~other~~

Other

Certain ~~income~~items are maintained at Corporate and ~~expense amounts~~ are not allocated to a segment. ~~These amounts are detailed in the table in Note 14 within Item 1 and~~They 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, certain R&D costs, manufacturing variances and centrally managed supply chain costs, product category support costs, stock compensation ~~expense, non-strategic investments and related income and~~ expense, certain employee benefit plan costs, ~~as well as~~and certain ~~nonrecurring~~ gains, ~~and~~ losses, and other charges (such as business optimization, acquisition and integration ~~and separation-related~~ costs, intangible asset amortization and asset impairments).

~~Income Taxes~~

~~The company’s effective income tax rate for continuing operations was 14.5% and 0.8%~~ For the period from our acquisition of Hillrom on December 13, 2021 through December 31, 2021, we previously included all costs incurred by the Hillrom business within that segment, including the types of costs described in the ~~third~~preceding sentence that are maintained at Corporate for our legacy Baxter segments. In connection with our ongoing integration activities, beginning in the first quarter 2022, we have updated the measure of profitability for our Hillrom segment by excluding such unallocated costs, consistent with our legacy Baxter segments. Those unallocated costs related to Hillrom, which totaled $3.0 billion and ~~15.0% and (1.1%)~~$3.3 billion for the ~~first nine months of 2017~~three and 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 increased during the~~ nine months ended September 30, ~~2017~~2022, respectively, are now presented within Corporate as well.

The Corporate operating loss in the third quarter was significantly higher than the prior-year period primarily due to ~~the 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 to the company’s U.S. pension plan~~goodwill and ~~the exchange of Baxalta Retained Shares for shares of the company, as well as benefits attributable to closing an IRS~~intangible asset impairments, higher intangible asset amortization expense, acquisition and German income tax audit that were all reflected during the nine months ended September 30, 2016. The effective income tax rate for continuing operations during the nine months ended September 30, 2017 was favorably impactedintegration-related expenses and business optimization charges and increased manufacturing variances and centrally managed supply chain costs, partially offset by ~~approximately 5.2 percentage points due to tax windfall benefits realized from stock option exercises and vesting of RSUs and PSUs associated with the company’s stock~~lower bonus accruals under our annual employee incentive compensation ~~programs.~~

~~Income from Continuing Operations and Earnings per Diluted Share~~

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

~~Income (loss) from Discontinued Operations~~

~~Discontinued operations were insignificant for both periods presented. Refer to Note 2 within Item 1 for additional information regarding the separation of Baxalta.~~

plans.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash ~~flow~~flows for the ~~nine month~~nine-month periods ended September 30, ~~2017~~2022 and ~~2016.~~

2021.


	Nine months ended September 30,
(in millions)	2022		2021
Cash flows from operations	$	772	$	1,529
Cash flows from investing activities	(675)		(933)
Cash flows from financing activities	(1,319)		(1,031)

Nine months ended

September 30,

(in millions)
2017

2016

Cash flows from operations - continuing operations
$
1,343

$
938

Cash flows from investing activities - continuing operations

(1,088
)

(549
)
Cash flows from financing activities

391

(44
)

Cash Flows from Operations ~~— Continuing Operations~~

~~Operating cash flows from continuing operations increased during~~

In the first nine months of ~~2017~~2022, cash provided by operating activities was $772 million, as compared to ~~the prior year period. The increase was driven~~cash provided 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 gainsoperating activities of ~~$4.4~~$1.5 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 inflows from accounts receivable were $32 million~~ in the first nine months of ~~2017 compared~~2021, a decrease of $757 million. The decrease was primarily due to ~~an inflow of $22 million~~a decrease in ~~the prior year. Days sales outstanding~~our net income in 2022, increases in inventory levels and higher annual payouts under our employee incentive compensation plans in the current year ~~were comparable~~period compared to the prior ~~year.~~

year period.

~~Inventories~~

Cash outflows relating to inventories decreased in 2017 as compared to the prior-year period. The following is a summary of inventories as of September 30, 2017 and December 31, 2016, as well as annualized inventory turns forFlows from Investing Activities

In the first nine months of ~~2017~~2022, cash used for investing activities included payments for acquisitions and ~~2016, by segment.~~

Inventories

Annualized inventory
turns for the Nine

September 30,

December 31,

months ended September 30,

(in millions, except inventory turn data)

2017

2016

2017

2016

Renal

$
635

$
544

3.77

3.58

Hospital Products

915

885

3.97

3.61

Other

—

1

n/a

n/a

Total company

$
1,550

$
1,430

3.89

3.60

~~The increase in inventories was driven~~investments of $206 million, primarily ~~by timing~~related to our payment to acquire the rights to Zosyn, and capital expenditures of ~~purchases and 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 were a $36 million outflow in~~$479 million. In the first nine months of ~~2017 compared~~2021, cash used for investing activities included payments for acquisitions and investments of $463 million, primarily related to ~~a $326 million outflow~~Caelyx and Doxil, Transderm Scop and PerClot Polysaccharide Hemostatic System (PerClot), and capital expenditures of $508 million. See Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.

Cash Flows from Financing Activities

In the first nine months of ~~2016. The changes were primarily driven by a first quarter 2016 non-recurring $303~~2022, cash used in financing activities included debt repayments of $953 million ~~tax settlement payment to partially settle a U.S. Federal income tax audit as well as the timing of supplier payments.~~

Payments related to the execution of the company’s business optimization initiatives increased from $98 million in the first nine months of 2016 to $114 million in the first nine months of 2017. The company madeand dividend payments of ~~$21~~$427 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 company’s business optimization initiatives.

Changes in other balance sheet items include an outflow of $93 million and an inflow of $121 million in the first nine months of 2017 and 2016, respectively, primarily driven by the collection of a tax receivable in the second quarter of 2016.

~~Cash Flows from Investing Activities — Continuing Operations~~

~~Capital Expenditures~~

Capital expenditures were $410 million and $519 million in the first nine months of 2017 and 2016, respectively. The company’s capital expenditures in 2017 were driven by targeted investments in projects to support production of PD and IV solutions.

~~Acquisitions and Investments~~

Cash outflows relating to acquisitions and investments of $680 million in the first nine months of 2017 were primarily driven by the $629 million acquisition of Claris, the acquisition of the rights to Clindamycin Saline and Clindamycin Dextrose from Celerity and the acquisition of 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 from Celerity.

~~Divestitures and Other Investing Activities~~

~~Cash inflows from divestitures and other investing activities in 2017 and 2016 were 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~~a net increase in commercial paper borrowings 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.~~

~~Other Financing Activities~~

~~Cash dividend payments totaled $228~~$30 million and $197 million in the first nine months of 2017 and 2016, respectively. The increase in cash dividend payments was primarily due to an increase in the quarterly dividend rate from $0.115 to $0.13 per share 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 May 2017. Proceedsproceeds from stock issued under employee benefit plans ~~increased from $251 million in~~of $114 million. In the first nine months of ~~2016 to $298~~2021, cash used for financing activities included payments for treasury stock repurchases of $600 million, indebt repayments of $407 million and dividend payments of $390 million, partially offset by proceeds from stock issued under employee benefit plans of $135 million and the ~~first nine months~~net proceeds from commercial paper borrowings of ~~2017, primarily due to increased option exercises in the first nine months of 2017.~~

$300 million.

As authorized by ~~the~~our Board of Directors, ~~the company repurchases its~~we repurchase our stock depending upon ~~the company’s~~our cash flows, net debt ~~level~~levels and market conditions. In July 2012, ~~the~~our Board of Directors authorized the repurchase of up to $2.0 billion of ~~the company’s~~our common stock. ~~The~~Our Board of Directors increased this authority by an additional $1.5 billion in each of November ~~2016. The company paid $275 million~~2016 and February 2018, by an additional $2.0 billion in ~~cash to repurchase approximately 4.7 million shares pursuant to this authority~~November 2018 and by an additional $1.5 billion in October 2020.

During the first nine months of ~~2017 and~~2022, we repurchased 0.5 million shares under this authority pursuant to a Rule 10b5-1 plan. We had ~~$1.4~~$1.3 billion remaining available under this authorization as of September 30, 2017. In the first nine months of 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.

2022.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of September 30, ~~2017, the company’s~~2022, our U.S. dollar-denominated revolving credit facility and Euro-denominated ~~senior~~ revolving credit facility had a maximum capacity of ~~$1.5~~$2.5 billion and ~~approximately~~ €200 million, respectively. There were no borrowings outstanding under these credit facilities as of September 30, 2022 or December 31, 2021. Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings.

As of September 30, ~~2017, the company was~~2022, we were in compliance with the financial covenants in these agreements. In the third quarter of 2022, we amended the credit agreement governing our U.S. dollar-denominated revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to delay the commencement of our net leverage ratio covenant step-down schedule until June 30, 2024. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by ~~each~~the institution’s respective commitment.

Access to Capital

~~The company intends~~ and Credit Ratings

We intend to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations or by issuing additional debt. ~~The company~~We had ~~$3.5~~$1.6 billion of cash and cash equivalents as of September 30, ~~2017,~~2022, with adequate cash available to meet operating requirements in each jurisdiction in which ~~the company operates. The company invests its~~we operate. We invest our excess cash in ~~certificates of deposit and~~ money market and other funds and ~~diversifies~~diversify the concentration of cash among different financial institutions.

~~The company’s~~ As of September 30, 2022, we had approximately $16.4 billion of long-term debt and finance lease obligations, including current maturities, and short-term debt. Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure.

Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for ~~the company’s~~our products or in the solvency of ~~its~~our customers or suppliers, deterioration in ~~the company’s~~our key financial ratios or credit ratings or other significantly unfavorable changes in conditions, including global economic conditions. However, ~~the company believes it has~~we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support ~~the company’s~~our growth objectives.

~~The company continues~~ Although our outlook was downgraded from stable to ~~do business with foreign governments~~negative by two of the rating agencies during the third quarter of 2022, there have been no changes to our investment grade credit ratings that we disclosed in ~~certain countries, including Greece, Spain, Portugal~~our 2021 Annual Report.

LIBOR Reform

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR) and ~~Italy,~~other interbank offered rates, which have ~~experienced a deterioration in credit~~been widely used as reference rates for various securities and ~~economic conditions. As~~financial contracts, including loans, debt and derivatives. This announcement indicated that the continuation of ~~September 30, 2017,~~LIBOR on the ~~company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $151 million.~~

~~While these economic conditions have~~current basis was 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~~guaranteed after 2021. Regulators in the ~~collection~~U.S. and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate (SOFR). In 2020, it was announced that certain U.S. dollar LIBOR tenors would not cease until 2023. In September 2022, our $2.5 billion U.S. dollar-denominated revolving credit facility and our $4.0 billion Term Loan Credit Agreement were amended to reference SOFR-based rates. Currently, our €200 million Euro-denominated revolving credit facility references LIBOR-based rates. The discontinuation of ~~receivables and~~LIBOR will require this arrangement to be modified in order to replace LIBOR with an alternative reference interest rate, which could impact our cost of funds. That credit ~~losses.~~

facility agreement includes provisions related to the determination of a successor LIBOR rate.

~~Credit Ratings~~

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

	~~Standard & Poor’s~~	~~Fitch~~	~~Moody’s~~
~~Ratings~~
~~Senior debt~~	A-	~~BBB+~~	~~Baa2~~
~~Short-term debt~~	A2	F2	P2
~~Outlook~~	~~Stable~~	~~Stable~~	~~Stable~~

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. 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~~our significant accounting policies is included in Note 1 to ~~the company’s~~our consolidated financial statements in ~~the 2016~~our 2021 Annual Report. Certain

of ~~the company’s~~our accounting policies are considered critical, as these policies are the most important to the depiction of ~~the company’s~~our financial statements and require significant, difficult or complex judgments by us, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in ~~the 2016~~our 2021 Annual Report. We identified the Valuation of Intangible Assets, Including IPR&D, as one of our critical accounting policies in our 2021 Annual Report. We currently consider the valuation of goodwill to be a part of that critical accounting policy.

Goodwill is initially measured as the excess of the purchase price over the fair value (or other measurement attribute required by U.S. GAAP) of acquired assets and liabilities in a business combination. Goodwill is not amortized but is subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess goodwill for impairment by initially performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not required to be performed. If we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform a quantitative goodwill impairment test. In the quantitative impairment test, we calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the amount that the reporting unit’s carrying amount, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. In a quantitative goodwill impairment test, the fair values of our reporting units are generally determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach). Significant inputs to reporting unit fair value measurements generally include forecasted cash flows, discount rates, terminal growth rates and earnings multiples. Each of those inputs can significantly affect the fair values of our reporting units. During the third quarter of 2022, we recognized $2.8 billion of goodwill impairment charges and $332 million of indefinite-lived intangible asset impairment charges. See Note 4, Goodwill and Other Intangible Assets, Net in Item 1 of this Quarterly Report on Form 10-Q for further information about those impairments.

There have been no other updates to our critical accounting policies and no significant changes in the ~~company’s~~ application of ~~its~~our critical accounting policies during the first nine months of ~~2017.~~

2022.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sales Restrictions, which (1) clarifies the guidance in Topic 820 on the fair value measurement of an equity security that is subject to contractual restrictions that prohibit the sale of an equity security and (2) requires specific disclosures related to such an equity security. The standard is effective for our financial statements beginning in 2024. The impact of the adoption of this ASU is not expected to have a material effect on our condensed consolidated financial statements.

LEGAL CONTINGENCIES

Refer to Note 136 within Item 1 for a discussion of ~~the company’s~~our legal contingencies. Upon resolution of any of these uncertainties, ~~the company~~we may incur charges in excess of presently established liabilities. While ~~the~~our 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~~our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on ~~the company’s~~our consolidated financial position. While ~~the company believes~~we believe that ~~it has~~we have valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and ~~the company~~we 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 onin July ~~27,~~ 2017, immediately prior to the closing of ~~the~~our acquisition of Claris ~~acquisition.~~Injectables Limited (Claris). FDA completed the inspection ~~on August 4, 2017, at which time FDA~~and subsequently issued a ~~related Form-483~~Warning Letter based on observations identified in the 2017 inspection (Claris ~~483)~~Warning Letter).1 FDA re-inspected the facilities and issued a Form 483 on May 17, 2022. On September 1, 2022, FDA notified the company that the inspection had been classified as voluntary action indicated (VAI). ~~The Claris 483 includes a number~~Since the issuance of ~~observations across a variety of areas. The company submitted its timely response to~~ the Claris ~~483 and is in the process of implementing~~Warning Letter, we have implemented corrective and preventive actions ~~which have included product recalls that are financially immaterial to the company,~~ to address FDA’s prior

observations and other items we identified ~~in connection~~and management has begun working with ~~integrating Claris into~~other manufacturing locations, including contract manufacturing organizations, to support the ~~company’s quality systems.~~

~~In January 2014, the company received a Warning Letter from FDA primarily directed to quality systems~~production of new products 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 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. The company attended Regulatory Meetings with the FDA in November 2015 (concerning the Jayuya facility). The company also requested and participated in a Regulatory Meeting regarding both facilities in July 2017. The Warning Letter addresses observations related to Current Good Manufacturing Practice 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 identifieddistribution in the ~~Warning Letters described above.~~

~~Please see Item 1A of the 2016 Annual Report and Item~~ U.S.

1 ~~of Part II of this~~ Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htm

FORWARD-LOOKING INFORMATION

This quarterly report ~~for additional discussion of regulatory matters and how they may impact the company.~~

~~FORWARD-LOOKING INFORMATION~~

~~This quarterly report~~on Form 10-Q includes forward-looking statements. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events. These forward-looking statements may include statements with respect to accounting estimates and assumptions, impacts of the COVID-19 pandemic and global economic conditions, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses, future regulatory filings and ~~the company’s~~our R&D pipeline, strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, ~~the company’s~~our exposure to financial market volatility and foreign currency and interest rate risks, ~~potential tax liability associated the 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~~acquisitions of ~~Claris Injectables~~Cheetah, Seprafilm, certain outside of the U.S. (OUS) rights to Caelyx and Doxil, full U.S. and specific OUS rights to Transderm Scop, PerClot, Hillrom and certain rights to Zosyn in ~~July 2017)~~the U.S. and Canada), business optimization and portfolio rationalization 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~~our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that ~~the company believes~~we believe are appropriate in the circumstances. While these statements represent ~~the company’s current~~our judgment on what the future may hold, and ~~the company believes~~we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is 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 (including challenges with our ability to accurately predict changing customer preferences, which has led to and may continue to lead to increased inventory levels, and needs and advances in technology and the resulting impact on customer inventory levels and the impact of reduced hospital admission rates and elective surgery volumes), and the impact of those products on quality and patient safety concerns;


			•			the continuity, availability and pricing of acceptable raw materials and component parts (and our ability to pass some or all of these costs on to our customers), and the related continuity of our manufacturing and distribution (including impacts from COVID-19) and those of our suppliers;

			•			inability to create additional production capacity in a timely manner or the occurrence of other manufacturing, sterilization or supply difficulties (including as a result of natural disaster, public health crises and epidemics/pandemics, regulatory actions or otherwise);

			•			product development risks, including satisfactory clinical performance and obtaining required regulatory approvals (including as a result of evolving regulatory requirements), the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;

our ability to finance and develop new products or enhancements on commercially acceptable terms or at all;

~~product development risks, including satisfactory clinical performance,~~


			•			the impact of global economic conditions (including, among other things, the ongoing war in Ukraine, the related economic sanctions being imposed globally in response to the conflict and potential trade wars and global inflationary pressures) and continuing public health crises, pandemics and epidemics, such as the ongoing COVID-19 pandemic, on us and our employees, customers and suppliers, including foreign governments in countries in which we operate;

our ability to ~~manufacture at appropriate scale,~~identify business development, portfolio rationalization and growth opportunities and to successfully execute on these strategies (including the ~~general unpredictability associated with the product development cycle;~~

Hillrom acquisition and related integration and restructuring activities);

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

sales, including the focus on evaluating product portfolios for the potential presence or formation of nitrosamines;

breaches or failures of our information technology systems or products, including by cyber-attack, data leakage, unauthorized access or theft (as a result of increased remote working arrangements or otherwise);

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

liabilities, including the continued delay in lifting the warning letter at our Ahmedabad facility;

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


			•			future actions of third parties, including third-party payers and our customers and distributors (including group purchasing organizations and formed integrated delivery networks), the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, the European Union’s General Data Protection Regulation and proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S. end stage renal disease market and demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures, which are difficult to estimate in advance);

~~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 outcome of pending or future litigation, including the opioid litigation and ethylene oxide litigation or other claims;

			•			failure to achieve our short- and long-term financial goals;

~~the impact of 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, on commercially acceptable terms or at all;~~

~~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~~policies (including ~~as a result of natural disaster or otherwise);~~

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

other sustainability matters);

~~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~~our owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, trade secrets and know-how) or patents of third parties preventing or restricting ~~the company’s~~our manufacture, sale or use of affected products or technology;

the impact of ~~global economic conditions~~any goodwill or other intangible asset impairments on ~~the company and its customers and suppliers, including foreign governments in certain countries in which the company operates;~~

our operating results;

fluctuations in foreign exchange and interest rates;

any changes in law concerning the taxation of income (whether with respect to current or future tax reform), including income earned outside the United States ~~which may be a part of comprehensive tax reform;~~

and potential taxes associated with the Base Erosion and Anti-Abuse Tax or the Build Back Better framework;

actions by tax authorities in connection with ongoing tax audits;

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

loss of key employees, the occurrence of labor disruptions or the 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 and other filings with the ~~Securities and Exchange Commission,~~SEC, including those factors described in Item 1A of ~~the company’s~~our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2021, all of which are available on ~~the company’s~~our website.

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

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Currency Risk

~~The company is~~

We are primarily exposed to foreign exchange risk with respect to revenues generated outside of the United States denominated in the Euro, British Pound, Chinese ~~Yuan,~~Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee and ~~New Zealand Dollar. The company manages its~~Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows ~~the company~~us to net exposures and take advantage of any natural offsets. In addition, ~~the company uses~~we use 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 stockholders’ equity volatility relating to foreign exchange. However, we don't hedge our entire foreign exchange exposure and are still subject to earnings and stockholders' equity volatility relating to foreign exchange risk. Financial market and currency volatility may limit ~~the company’s~~our ability to cost-effectively hedge these exposures.

~~The company may~~

We use options ~~forwards~~ and ~~cross-currency swaps~~forwards to hedge the foreign exchange risk to earnings relating to forecasted transactions ~~denominated in foreign currencies~~ and recognized assets and ~~liabilities.~~liabilities denominated in foreign currencies. The maximum term over which ~~the company has~~we have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions as of September 30, ~~2017~~2022 is 1512 months. ~~The company~~We also ~~enters~~enter into derivative instruments to hedge foreign exchange risk on certain ~~intercompany~~intra-company and third-party receivables and payables and debt denominated in foreign currencies.

As part of ~~its~~our risk-management program, ~~the company performs~~we perform sensitivity analyses to assess potential changes in the fair value of ~~its~~our 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 atas of September 30, ~~2017,~~2022, 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 pre-tax asset balance of $5$26 million with respect to those contracts would ~~decrease~~change by ~~$23 million, resulting in a net liability position.~~

$70 million.

The sensitivity analysis model recalculates the fair value of the foreign exchange ~~option and forward~~ contracts outstanding atas of September 30, ~~2017~~2022 by replacing the actual exchange rates atas of September 30, ~~2017~~2022 with exchange rates that are 10% weaker compared to the actual exchange rates for each applicable currency. All other factors are held constant. ~~The~~These sensitivity ~~analysis disregards~~analyses disregard 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~~analyses also ~~disregards~~disregard the offsetting change in value of the underlying hedged transactions and balances.

In February 2022, the three-year cumulative inflation rate in Turkey exceeded 100 percent. As a result, on April 1, 2022, we began reporting the results of our subsidiary in that jurisdiction using highly inflationary accounting, which requires that the functional currency of the entity be changed to the reporting currency of its parent. As of September 30, 2022, our subsidiary in Turkey had net monetary assets of $40 million.

Interest Rate and Other Risks

Refer to the caption “Interest Rate and Other Risks” in the “Financial Instrument Market Risk” section of the ~~2016~~2021 Annual Report. There were no significant changes during the quarter ended September 30, ~~2017.~~

2022.

~~Item 4.~~

~~Controls~~ ~~and Procedures~~

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~Baxter carried out an evaluation, under the supervision and~~

Our management, with the participation of ~~its Disclosure Committee and management, including the~~our Chief Executive Officer and our Chief Financial Officer, ofhas evaluated the effectiveness of ~~Baxter’s~~our 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, ~~2017.~~2022. Based on that evaluation, ~~the~~our Chief Executive Officer and our Chief Financial Officer concluded that ~~the company’s~~our disclosure controls and procedures were effective as of September 30, ~~2017.~~

~~Changes~~2022.

Changes in Internal Control over Financial Reporting

In ~~the third quarter of 2017, related to its overall business~~connection with our finance transformation and process optimization initiatives, during the ~~company began implementation~~quarter ended September 30, 2022 we transferred certain accounting and finance activities to new Baxter global business service centers located in Kuala Lumpur, Malaysia, and Warsaw, Poland. These transitions followed several months of ~~a business transformation project within the finance, human resources, purchasing~~knowledge transfer and ~~information technology functions which will further centralize~~training programs 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 includeincluded modifications to the design and operation of our internal controls over financial ~~reporting.~~

~~With~~reporting in some cases. Additional transitions of accounting and finance activities to our global business service centers are planned over the ~~exception of~~coming year.

Except as described in the ~~above,~~preceding paragraph, there have been no changes in ~~Baxter’s~~our 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, ~~2017~~2022 that have materially affected, or are reasonably likely to materially affect, ~~Baxter’s~~our internal control over financial reporting.

~~Review by Independent 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, 2017 and 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 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, 2017, and the related condensed consolidated statements of income and of comprehensive income for the three-month and nine-month periods ended September 30, 2017 and 2016 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2017 and 2016. These interim financial statements are the responsibility of the 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, 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 23, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

~~/s/ PricewaterhouseCoopers LLP~~

~~Chicago, Illinois~~

~~November 2, 2017~~

PART II. OTHER INFORMATION

~~Item 1.~~

Item 1. Legal Proceedings

The information in Part I, Item 1, Note 136 is incorporated herein by reference.

~~Item~~ 2.

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

~~The following table includes information about~~

Item 1A. Risk Factors

We do not believe that there have been any material changes to the ~~company’s common stock repurchases during the three-month period ended September 30, 2017.~~

risk factors previously disclosed in our 2021 Annual Report.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



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, 2022 through July 31, 2022	375,000	$	64.80	375,000
August 1, 2022 through August 31, 2022	—	$	—	—
September 1, 2022 through September 30, 2022	—	$	—	—
Total	375,000	$	64.80	375,000	$	1,264,718,521

(1)In July 2012, ~~the company~~we announced that ~~its board~~our Board of ~~directors~~Directors authorized ~~the company~~us to repurchase up to $2.0 billion of ~~its~~our common stock on the open market or in private transactions. The ~~board~~Board of d~~irectors~~Directors increased this authority by an additional $1.5 billion in each of November ~~2016.~~2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. During the third quarter of ~~2017, the company~~2022, we repurchased ~~2.9~~approximately 0.4 million shares for ~~$180~~$24 million pursuant to this authority through a Rule 10b5-1 purchase plan. We had $1.3 billion remaining under this ~~program. $1.4 billion remained available~~program as of September 30, ~~2017.~~2022. This program does not have an expiration date.

Item 6. Exhibits

Exhibit Index:

~~Item 6.~~

E~~xhibits~~

~~Exhibit Index:~~

~~Exhibit~~ ~~Number~~	~~Description~~
Exhibit Number		Description
15*		~~Letter Re Unaudited Interim Financial Information~~
10.1		First Amendment, dated as of September 28, 2022, to the Credit Agreement, dated as of September 30, 2021, among Baxter International Inc., as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent and certain other financial institutions named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on September 30, 2022).
31.1*
10.2		Second Amendment, dated as of September 28, 2022, to the Credit Agreement, dated as of September 30, 2021, as amended by the First Amendment, dated as of September 28, 2022, amount Baxter International Inc., as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent and certain other financial institutions named therein (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed on September 30, 2022).

10.3		First Amendment, dated as of September 28, 2022, to the Five-Year Credit Agreement, dated as of September 30, 2021, among Baxter International Inc., as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent and certain other financial institutions named therein (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, filed on September 30, 2022).

10.4		Second Amendment, dated as of September 28, 2022, to the Five-Year Credit Agreement, dated as of September 30, 2021, among Baxter International Inc., as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent and certain other financial institutions named therein (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, filed on September 30, 2022).

10.5		Second Amendment, dated as of September 28, 2022, to the Credit Agreement, dated as of December 20, 2019, as amended by the First Amendment, dated as of October 1, 2021, among Baxter Healthcare SA and Baxter World Trade SRL, as Borrowers, JPMorgan SE, as Administrative Agent and certain other financial institutions named therein (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K, filed on September 30, 2022).

31.1*		Certification of Chief Executive Officer Pursuant to Rules ~~13a-14(a)~~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*
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
104*		Cover Page Interactive Data File (formatted as Inline XBRL and contained within the Inline XBRL Instance Document in Exhibit 101)

*	* 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: October 27, 2022

~~Date: November 2, 2017~~

By:

~~By:~~

/s/ James K. Saccaro

James K. Saccaro

Executive Vice President and Chief Financial Officer

(duly authorized officer and principal financial officer)

	Three months ended					Nine months ended
	September 30,					September 30,
	2017			2016		2017		2016
Net sales	$	2,707		$	2,558	$	7,787	$	7,518
Cost of sales		1,579			1,487		4,487		4,510
Gross margin		1,128			1,071		3,300		3,008
Marketing and administrative expenses		685			726		1,890		2,076
Research and development expenses		151			159		435		490
Operating income		292			186		975		442
Net interest expense		14			14		41		53
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)		42			1		139		(51	)
Income from continuing operations		248			127		785		4,726
Income (loss) from discontinued operations, net of tax		3			3		3		(4	)
Net income	$	251		$	130	$	788	$	4,722
Income from continuing operations per common share
Basic	$	0.46		$	0.23	$	1.45	$	8.64
Diluted	$	0.45		$	0.23	$	1.42	$	8.56
Income (loss) from discontinued operations per common share
Basic	$	—		$	0.01	$	—	$	(0.01	)
Diluted	$	—		$	0.01	$	—	$	(0.01	)
Net income per common share
Basic	$	0.46		$	0.24	$	1.45	$	8.63
Diluted	$	0.45		$	0.24	$	1.42	$	8.55
Weighted-average number of common shares outstanding
Basic		545			544		543		547
Diluted		557			551		554		552
Cash dividends declared per common share	$	0.160		$	0.130	$	0.450	$	0.375

		September 30,			December 31,
		2017			2016
Current assets	Cash and equivalents	$	3,517		$	2,801
	Accounts and other current receivables, net		1,748			1,691
	Inventories		1,550			1,430
	Prepaid expenses and other		633			602
	Current assets held for disposition		—			50
	Total current assets		7,448			6,574
Property, plant and equipment, net			4,488			4,289
Other assets	Goodwill		3,117			2,595
	Other intangible assets, net		1,371			1,111
	Other		1,117			977
	Total other assets		5,605			4,683
Total assets		$	17,541		$	15,546
Current liabilities	Current maturities of long-term debt and lease obligations	$	3		$	3
	Accounts payable and accrued liabilities		2,572			2,612
	Current income taxes payable		87			126
	Current liabilities held for disposition		—			3
	Total current liabilities		2,662			2,744
Long-term debt and lease obligations			3,495			2,779
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 2017 and 2016		683			683
	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		5,918			5,958
	Retained earnings		14,615			14,200
	Accumulated other comprehensive (loss) income		(3,994	)		(4,556	)
	Total Baxter shareholders’ equity		9,466			8,290
	Noncontrolling interests		(7	)		(10	)
	Total equity		9,459			8,280
Total liabilities and equity		$	17,541		$	15,546

(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)	Renal		Hospital Products		Total
Balance as of December 31, 2016	$	397	$	2,198	$	2,595
Additions		5		312		317
Currency translation adjustments		31		174		205
Balance as of September 30, 2017	$	433	$	2,684	$	3,117

(in millions)	Developed technology, including patents			Other amortized intangible assets			Indefinite-lived intangible assets		Total
September 30, 2017
Gross other intangible assets	$	1,979		$	432		$	152	$	2,563
Accumulated amortization		(977	)		(215	)		—		(1,192	)
Other intangible assets, net	$	1,002		$	217		$	152	$	1,371
December 31, 2016
Gross other intangible assets	$	1,690		$	384		$	57	$	2,131
Accumulated amortization		(855	)		(165	)		—		(1,020	)
Other intangible assets, net	$	835		$	219		$	57	$	1,111

	Three months ended
	September 30, 2016
(in millions)	COGS			SGA			R&D			Total
Employee termination costs	$	21		$	84		$	1		$	106
Asset impairments		6		—				27			33
Reserve adjustments
Employee termination costs	—				(3	)		(2	)		(5	)
Contract termination costs		(3	)	—				(1	)		(4	)
Total restructuring charges	$	24		$	81		$	25		$	130

(in millions)
Reserves as of December 31, 2016	$	164
Charges		59
Reserve adjustments		(14	)
Utilization		(114	)
CTA		24
Reserves as of September 30, 2017	$	119


	Carrying amount of hedged item				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a)
(in millions)	Balance as of September 30, 2022		Balance as of December 31, 2021		Balance as of September 30, 2022		Balance as of December 31, 2021
Long-term debt	$	101	$	101	$	4	$	4

			Basis of fair value measurement
(in millions)	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	$	13	$	—	$	13	$	—
Interest rate hedges		6		—		6		—
Available-for-sale securities		11		11		—		—
Total assets	$	30	$	11	$	19	$	—
Liabilities
Foreign currency hedges	$	5	$	—	$	5	$	—
Contingent payments related to acquisitions		10		—		—		10
Total liabilities	$	15	$	—	$	5	$	10

			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, 2017	$	9	$	3	$	1	$	11
December 31, 2016	$	13	$	—	$	4	$	9

	Book values				Approximate fair values
(in millions)	2017		2016		2017		2016
Assets
Investments	$	42	$	31	$	42	$	31

Liabilities
Current maturities of long-term debt and lease obligations	$	3	$	3	$	3	$	3
Long-term debt and lease obligations		3,495		2,779		3,568		2,756

			Basis of fair value measurement
(in millions)	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
Investments	$	42	$	—	$	—	$	42
Total assets	$	42	$	—	$	—	$	42
Liabilities
Current maturities of long-term debt and lease obligations	$	3			$	3
Long-term debt and lease obligations		3,568				3,568
Total liabilities	$	3,571	$	—	$	3,571	$	—

			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	$	—

(in millions)	CTA			Pension and other employee benefits			Hedging activities			Available- for-sale securities		Total
Gains (losses)
Balance as of December 31, 2016	$	(3,438	)	$	(1,161	)	$	3		$	40	$	(4,556	)
Other comprehensive income before reclassifications		501			(25	)		(19	)		1		458
Amounts reclassified from AOCI (a)		29			69			3			3		104
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
		—			—		Income tax expense (benefit)
	$	—		$	(29	)	Net of tax
Amortization of pension and other employee benefits items
Actuarial losses and other (b)	$	(35	)	$	(103	)
		(35	)		(103	)	Total before tax
		12			34		Income tax expense (benefit)
	$	(23	)	$	(69	)	Net of tax
Losses on hedging activities
Foreign exchange contracts	$	(3	)	$	(4	)	Cost of sales
		(3	)		(4	)	Total before tax
		1			1		Income tax expense (benefit)
	$	(2	)	$	(3	)	Net of tax
Available-for-sale-securities
Other-than-temporary impairment of equity securities	$	—		$	(4	)	Other (income) expense, net
		—			(4	)	Total before tax
		—			1		Income tax expense (benefit)
		—			(3	)	Net of tax
Total reclassification for the period	$	(25	)	$	(104	)	Total net of tax

	Amounts reclassified from AOCI (a)
(in millions)	Three months ended September 30, 2016			Nine months ended September 30, 2016			Location of impact in income statement
Amortization of pension and other employee benefits items
Actuarial losses and other (b)	$	(31	)	$	(98	)
		(31	)		(98	)	Total before tax
		11			31		Income tax expense (benefit)
	$	(20	)	$	(67	)	Net of tax
Gains (losses) on hedging activities
Interest rate contracts	$	5		$	9		Other (income) expense, net
Foreign exchange contracts		(2	)		(3	)	Cost of sales
		3			6		Total before tax
		(1	)		(2	)	Income tax expense (benefit)
	$	2		$	4		Net of tax
Available-for-sale-securities
Gains on sale of equity securities	$	—		$	4,536		Other (income) expense, net
		—			4,536		Total before tax
		—			—		Income tax expense (benefit)
		—			4,536		Net of tax
Total reclassification for the period	$	(18	)	$	4,473		Total net of tax

	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	%

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

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