What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-23 compared with 2021-02-11 · 522 added, 438 removed, 1496 unchanged (39% of the section changed)

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Current maturities of long-term debt and finance lease obligations 210 406

Accounts payable and accrued liabilities 2,927 2,689

Accounts payable 1,246 1,043

Accrued expenses and other current liabilities 2,479 1,884

Total current liabilities 4,236 3,333

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Interest expense, net 192 134 71

Other (income) expense, net 190 731 ( 78 )

Income from continuing operations before income taxes 1,292 970 1,617

Other expense, net 41 190 731

Income before income taxes 1,477 1,292 970

Income tax expense (benefit) 182 182 ( 41 )

Income from continuing operations 1,110 1,011 1,552

Loss from discontinued operations, net of tax — — ( 6 )

Net income 1,295 1,110 1,011

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Net income attributable to Baxter stockholders $ 1,284 $ 1,102 $ 1,001

Earnings per share from continuing operations

Basic $ 2.17 $ 1.97 $ 2.91

Diluted $ 2.13 $ 1.93 $ 2.84

Loss per share from discontinued operations

Basic $ — $ — $ ( 0.01 )

Diluted $ — $ — $ ( 0.01 )

Earnings per share

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Balance as of January 1, 2019 683 $ 683 170 $ ( 9,989 ) $ 5,898 $ 15,075 $ ( 3,823 ) $ 7,844 $ 22 $ 7,866

Adoption of new accounting standards — — — — — ( 22 ) ( 3 ) $ ( 25 ) — $ ( 25 )

Adoption of new accounting standard — — — — — 161 ( 161 ) $ — — $ —

Net income — — — — — 1,001 — $ 1,001 10 $ 1,011

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Balance as of December 31, 2020 683 $ 683 179 $ ( 11,051 ) $ 6,043 $ 16,328 $ ( 3,314 ) $ 8,689 $ 37 $ 8,726

Adoption of new accounting standard — — — — — ( 4 ) — ( 4 ) — ( 4 )

Net income — — — — — 1,284 — 1,284 11 1,295

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Net income $ 1,295 $ 1,110 $ 1,011

Adjustments to reconcile income from continuing operations to net cash from operating activities:

Loss from discontinued operations, net of tax — — 6

Adjustments to reconcile net income to net cash from operating activities:

Depreciation and amortization 890 823 789

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Inventories ( 37 ) ( 162 ) 4

Accounts payable and accrued liabilities 143 ( 212 ) 60

Prepaid expenses and other current assets ( 41 ) ( 37 ) ( 31 )

Accounts payable 104 57 ( 23 )

Accrued expenses and other current liabilities 108 86 ( 196 )

Other ( 125 ) ( 97 ) ( 127 )

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Capital expenditures ( 743 ) ( 709 ) ( 696 )

Acquisitions and investments, net of cash acquired ( 494 ) ( 418 ) ( 268 )

Acquisitions, net of cash acquired, and investments ( 10,502 ) ( 494 ) ( 418 )

Other investing activities, net 45 24 14

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Cash flows from financing activities

Issuances of long-term debt 1,885 1,661 —

Payments of long-term debt ( 1,181 ) — —

(Repayments) borrowings under revolving credit facility ( 226 ) 222 —

Issuances of debt 11,903 1,885 1,661

Repayments of debt ( 2,823 ) ( 1,181 ) —

Net increase (decrease) in debt with original maturities of three months or less 246 ( 226 ) 222

Cash dividends on common stock ( 530 ) ( 473 ) ( 423 )

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Purchases of treasury stock ( 600 ) ( 500 ) ( 1,270 )

Debt issuance costs ( 98 ) ( 5 ) ( 2 )

Other financing activities, net ( 40 ) ( 47 ) ( 46 )

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Cash, cash equivalents and restricted cash at beginning of year (1)

3,736 3,335 1,838

Cash, cash equivalents and restricted cash at end of year (1)

$ 2,956 $ 3,736 $ 3,335

(1) We did not have restricted cash balances as of December 31, 2019 or 2018.

The following table provides a reconciliation of cash, cash equivalents and restricted cash amounts as shown in the consolidated statement of cash flows to the amount reported in the consolidated balance sheet as of December 31, 2020:

(1) We did not have restricted cash balances as of December 31, 2019.

The following table provides a reconciliation of cash, cash equivalents and restricted cash amounts as shown in the consolidated statement of cash flows to the

amount reported in the consolidated balance sheet as of December 31, 2021 and 2020:

As of December 31 (in millions) 2021 2020

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generic injectable pharmaceuticals;

and surgical hemostat and sealant products.

surgical hemostat and sealant products, advanced surgical equipment;

smart bed systems;

patient monitoring and diagnostic technologies;

and respiratory health devices.

These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and patients at home under physician supervision.

Our global footprint and the critical nature of our products and services play a key role in expanding access to healthcare in emerging and developed countries.

We operate in three segments:

Americas, EMEA and APAC, which are described in Note 16.

We operate in four segments:

Americas, EMEA, APAC and Hillrom which are described in Note 17.

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, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking.

These measures have led to unprecedented restrictions on, disruptions in, and other related impacts on businesses and personal activities.

In addition to travel restrictions put in place in early 2020, governments have closed borders, imposed prolonged quarantines and may continue those measures or implement other restrictions and requirements in light of the continuing spread of the pandemic.

We expect that these evolving restrictions and requirements, as well as the corresponding need to adapt to new methods of conducting business remotely, will continue to have an adverse effect on our business.

Initial measures taken in 2020 led to unprecedented restrictions on, disruptions in, and other related impacts on business and personal activities, including a shift in healthcare priorities, which resulted in a significant decline in medical procedures in 2020.

The pandemic has created significant volatility in the demand for our products.

For further information about our revenues by product category, refer to Note 10.

Significant uncertainty remains regarding the duration and overall impact of the COVID-19 pandemic.

For example, concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Omicron and Delta variants and other virus mutations as well as vaccine distribution and hesitancy.

and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to mandatory vaccinations for certain of our employees and moratoriums on elective procedures).

Due to the uncertainty caused by the pandemic, our operating performance and financial results, particularly in the short term, may be subject to volatility.

We have experienced significant challenges, including lengthy delays, shortages and interruptions, posed by the pandemic and other exogenous factors (including significant weather events and disruptions to certain ports of call around the world) to our global supply chain, including the cost and availability of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, and may experience these and other challenges in future periods.

Many of our manufacturing plant and distribution center personnel are currently unvaccinated, and we may also experience employee resistance in complying with current and future government vaccine and testing mandates, which may cause labor shortages significantly impacting manufacturing production and distribution center productivity.

We expect that these challenges as well as evolving governmental restrictions and requirements, among other factors, may continue to have an adverse effect on our business.

Use of Estimates

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

On December 13, 2021, we completed the previously announced 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 obligations, the enterprise value of the transaction was approximately $ 12.8 billion.

Beginning December 13, 2021, our financial statements include the assets, liabilities and operating results of Hillrom.

Refer to Note 2 for additional information.

On July 29, 2021, we acquired certain assets related to PerClot Polysaccharide Hemostatic System (PerClot), including distribution rights for the U.S.

and specified territories outside of the U.S., from CryoLife, Inc.

for an upfront purchase price of $ 25 million and the potential for additional cash consideration of up to $ 36 million, which had an acquisition-date fair value of $ 28 million, based upon regulatory and commercial milestones.

Beginning July 29, 2021, our financial statements include the assets, liabilities and operating results of PerClot.

Refer to Note 2 for additional information.

On March 31, 2021, we acquired the rights to Transderm Scop (TDS) for the U.S.

and specified territories outside of the U.S.

from subsidiaries of GlaxoSmithKline for an upfront purchase price of $ 60 million including the cost of acquired inventory and the potential for additional cash consideration of $ 30 million, which had an acquisition-date fair value of $ 24 million, based upon regulatory approval of a new contract manufacturer by a specified date.

We previously sold this product under a distribution license to the U.S.

institutional market.

Beginning on March 31, 2021, our financial statements include the assets, liabilities and operating results of TDS.

Refer to Note 2 for additional information.

On February 17, 2021, we acquired the rights to Caelyx and Doxil, the branded versions of liposomal doxorubicin, from a subsidiary of Johnson & Johnson for specified territories outside of the U.S for approximately $ 325 million in cash.

Beginning February 17, 2021, our financial statements include the assets, liabilities and operating results of Caelyx and Doxil.

Refer to Note 2 for additional information.

On February 14, 2020, we completed the acquisition of the product rights to Seprafilm Adhesion Barrier (Seprafilm) from Sanofi for approximately $ 342 million in cash .

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Refer to Note 2 for additional information.

On November 18, 2018, we acquired a controlling financial interest in our joint venture in Saudi Arabia.

The acquisition allows us to increase manufacturing output and utilize the facilities for additional capacity for certain products in the region.

Beginning November 18, 2018, we consolidated the financial statements of the joint venture with our consolidated financial statements.

Refer to Note 2 for additional information.

On March 16, 2018, we acquired two hemostat and sealant products from Mallinckrodt plc:

Recothrom Thrombin topical (Recombinant) and Preveleak Surgical Sealant for total consideration of $ 184 million.

Beginning March 16,

2018, our financial statements include the assets, liabilities and operating results of Recothrom and Preveleak.

Refer to Note 2 for additional information.

Revenue Recognition

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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 35 % of this amount as revenue in 2021, 25 % in 2022, 20 % in 2023, 10 % in each of 2024 and 2025, and the remaining balance thereafter.

We expect to recognize approximately 35 % of this amount as revenue in 2022, 30 % in 2023, 15 % in each of 2024 and 2025, and 5 % in 2026.

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 accounts receivable, net and accounts payable and accrued liabilities on the consolidated balance sheets.

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 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.

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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 judgment.

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 consolidated balance sheets.

Net trade accounts receivable was $ 1.7 billion and $ 1.8 billion as of December 31, 2020 and 2019, 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 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 provided and billed, generally over one to seven years.

The following table summarizes our contract assets:

as of December 31 (in millions) 2020 2019

Contract manufacturing services $ 47 $ 36

Software sales 40 43

Bundled equipment and consumable medical products contracts 47 52

Contract assets $ 134 $ 131

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

as of December 31 (in millions) 2020 2019

Accounts receivable, net $ 70 $ 63

Other non-current assets 64 68

Contract assets $ 134 $ 131

Accounts payable and accrued liabilities $ 32 $ —

Other non-current liabilities 34 12

Contract liabilities $ 66 $ 12

In 2020, 2019 and 2018, the amount of revenue recognized that was included in contract liabilities as of December 31, 2019, 2018 and 2017 was not significant.

Practical Expedients

We apply a practical expedient to expense as incurred costs to obtain a contract with a customer when the amortization period would have been one year or less.

We do not disclose the value of the transaction price that is allocated to unsatisfied performance obligations for contracts with an original expected length of one year or less.

We do not disclose the value of the transaction price that is allocated to unsatisfied performance obligations for contracts with an original expected length of less than one year .

We have elected to use the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component if it is expected, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Additionally, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer are excluded from revenue.

Disaggregation of Net Sales

The following tables disaggregate our net sales from contracts with customers by Global Business Unit (GBU) between the U.S.

and international:

2020 2019 2018

years ended December 31 (in millions) U.S.

International Total U.S.

International Total

$ 848 $ 2,909 $ 3,757 $ 791 $ 2,848 $ 3,639 $ 816 $ 2,835 $ 3,651

Medication Delivery 2

1,782 953 2,735 1,822 977 2,799 1,690 974 2,664

Pharmaceuticals 3

874 1,249 2,123 940 1,215 2,155 996 1,091 2,087

Clinical Nutrition 4

342 580 922 320 552 872 321 554 875

Advanced Surgery 5

518 370 888 535 342 877 466 332 798

Acute Therapies 6

286 454 740 184 351 535 174 341 515

228 280 508 234 251 485 260 249 509

Total Baxter $ 4,878 $ 6,795 $ 11,673 $ 4,826 $ 6,536 $ 11,362 $ 4,723 $ 6,376 $ 11,099

1 Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.

2 Medication Delivery includes sales of our IV therapies, infusion pumps, administration sets and drug reconstitution devices.

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

4 Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.

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

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

7 Other primarily includes sales of contract manufacturing services from our pharmaceutical partnering business.

Accounts Receivable and Allowance for Doubtful Accounts

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Balance at beginning of period $ 125 $ 112

Acquisition 13 —

Adoption of new accounting standard — 4

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Shipping costs, which are costs incurred to physically move product from our premises to the customer’s premises, are classified as selling, general and administrative (SG&A) expenses.

Handling costs, which are costs incurred to store, move and prepare products for shipment, are classified as cost of sales.

Handling costs, which are costs incurred to

store, move and prepare products for shipment, are classified as cost of sales.

Approximately $ 381 million in 2021, $ 325 million in 2020 and $ 324 million in 2019 of shipping costs were classified in SG&A expenses.

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Research and development (R&D) costs, including R&D acquired in transactions that are not business combinations, are expensed as incurred.

Pre-regulatory approval contingent milestone obligations to counterparties in collaborative arrangements, which include acquired R&D, are expensed when the milestone is achieved.

Pre-regulatory approval contingent milestone obligations to counterparties in collaborative arrangements, which include acquired R&D, are expensed when the milestone is probable to be achieved.

Contingent milestone payments made to such counterparties on or after regulatory approval are capitalized and amortized over the remaining useful life of the related product.

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Employee termination costs are primarily recorded when actions are probable and estimable.

Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.

Costs for one-time

termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.

Refer to the discussion below regarding the accounting for asset impairment charges.

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If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the amount that its carrying amount, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.

In 2021, we changed the measurement date of our annual goodwill impairment test from December 31st to November 1st.

This change better aligns the timing of the goodwill impairment test with our long-term business planning process.

The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or avoidance of an impairment charge.

Indefinite-lived intangible assets, such as IPR&D acquired in business combinations and certain trademarks with indefinite lives, are subject to an impairment review annually and whenever indicators of impairment exist.

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If the carrying amount exceeds the fair value of the indefinite-lived intangible asset, we write the carrying amount down to the fair value.

In 2021, we changed the measurement date of our annual indefinite-lived intangible asset impairment tests from December 31st to November 1st.

This change better aligns the timing of the impairment tests with our long-term business planning process.

The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or avoidance of an impairment charge.

We review the carrying amounts of long-lived assets, other than goodwill and intangible assets not subject to amortization, for potential impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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Investments in Equity Securities

Our investments in marketable equity securities are classified as other non-current assets and are measured at fair value with gains and losses recognized in other (income) expense, net.

Our investments in marketable equity securities are classified as other non-current assets and are measured at fair value with gains and losses recognized in other expense, net.

We have elected to apply the measurement alternative to equity securities without readily determinable fair values.

As such, our non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer.

Gains and losses on non-marketable equity securities are also recognized in other (income) expense, net.

Noncontrolling investments in common stock or in-substance common stock are accounted for under the equity method if we have significant influence over the operating and financial policies of the investee.

Gains and losses on non-marketable equity securities are also recognized in other expense, net.

Noncontrolling investments in common stock or in-substance common stock are accounted for under the equity method if we have the ability to exercise significant influence over the operating and financial policies of the investee.

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates.

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With respect to uncertain tax positions, we determine whether the position is more-likely-than-not to be sustained upon examination based on the technical merits of the position.

Any tax position that meets the more-likely-than-not recognition threshold is measured and recognized in the consolidated financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

tax position that meets the more-likely-than-not recognition threshold is measured and recognized in the consolidated financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The liability relating to uncertain tax positions is classified as current in the consolidated balance sheets to the extent that we anticipate making a payment within one year.

Interest and penalties associated with income taxes are classified in the income tax expense line in the consolidated statements of income.

Refer to the Recently Adopted Accounting Pronouncements section of this note and Note 12 for additional information related to the Tax Cuts and Jobs Act of 2017 (2017 Tax Act).

Foreign Currency Translation

Currency translation adjustments (CTA) related to foreign operations are included in other comprehensive income (OCI).

For foreign operations in highly inflationary economies, translation gains and losses are included in other (income) expense, net, and were not material in 2020, 2019 and 2018.

For foreign operations in highly inflationary economies, translation gains and losses are included in other expense, net, and were not material in 2021, 2020 and 2019.

Derivatives and Hedging Activities

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Option premiums or net premiums paid are initially recorded as assets and reclassified to OCI over the life of the option, and then recognized in earnings consistent with the underlying hedged item.

Cash flow hedges are classified in cost of sales and interest expense, net, and are primarily related to forecasted third-party sales denominated in foreign currencies, forecasted intra-company sales denominated in foreign currencies and forecasted interest payments on anticipated issuances of debt, respectively.

Cash flow hedges are classified in cost of sales and interest expense, net, and are primarily related to forecasted intra-company sales denominated in foreign currencies and forecasted interest payments on anticipated issuances of debt, respectively.

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 hedged item, which are also recognized in earnings.

Fair value hedges are classified in interest expense, net, as they hedge the interest rate risk associated with certain of our fixed-rate debt.

Changes in the fair value of hedge instruments designated as fair value hedges are classified in interest expense, net, as they hedge the interest rate risk associated with certain of our fixed-rate debt.

We have designated our Euro-denominated senior notes as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments on the outstanding debt balances are recorded as a component of AOCI.

For derivative instruments that are not designated as hedges, the change in fair value is recorded directly to other (income) expense, net.

For derivative instruments that are not designated as hedges, the change in fair value is recorded directly to other expense, net.

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, we discontinue hedge accounting prospectively.

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New Accounting Standards

Recently issued accounting standards not yet adopted

In July 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-05, Leases (Topic 842), which requires a lessor to 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 a lease with variable payments even though the lessor expects the arrangement will be profitable overall.

The standard is effective for our financial statements beginning in 2022.

The impact of the adoption of this ASU is not expected to have a material effect on our consolidated financial statements.

Recently adopted accounting pronouncements

As of January 1, 2020, we adopted Accounting Standards Update (ASU) No.

In the fourth quarter of 2021, we adopted ASU 2021-08, Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.

This ASU requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with Customers).

This ASU is expected to reduce diversity in practice and increase comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination.

In accordance with this ASU we recognized contract liabilities of $ 142 million as part of the Hillrom acquisition in December 2021.

We did not acquire contract assets or liabilities in connection with other acquisitions completed in 2021.

As of January 1, 2020, we adopted ASU No.

2016-13, Financial Instruments - Credit Losses, which requires the measurement of expected lifetime credit losses, rather than incurred losses, for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts.

The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held

by a reporting entity at each reporting date.

We adopted this ASU using the modified retrospective approach.

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Under the new ASU, those capitalized costs are presented as other non-current assets on our consolidated balance sheets and within operating cash flows on our consolidated statements of cash flows.

We adopted this ASU on a prospective basis and capitalized $ 44 million of implementation costs related to hosting arrangements that are service contracts during the year ended December 31, 2020.

We adopted this ASU on a prospective basis and capitalized $ 45 million and $ 44 million of implementation costs related to hosting arrangements that are service contracts during the years ended December 31, 2021 and 2020, respectively.

As of January 1, 2020, we adopted ASU No.

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i) not to reassess whether any expired or existing contracts as of the adoption date are or contain leases;

ii) not to reassess the lease classification for any expired or existing leases as of the adoption date;

ii) not to reassess the lease

classification for any expired or existing leases as of the adoption date;

and iii) not to reassess initial direct costs for any existing leases as of the adoption date.

The adjustment to record operating lease right-of-use assets and operating lease liabilities was $ 502 million as of January 1, 2019.

The impact to the consolidated statements of income was not material and there was no net impact to the consolidated statements of cash flows.

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2018-02, Reclassification of Certain Tax Effects from AOCI.

As a result of the enactment of the 2017 Tax Act, this guidance provides for a reclassification of certain tax effects from AOCI to retained earnings.

This guidance provides for a reclassification of certain tax effects from AOCI to retained earnings.

The impact of the adoption of this standard was a $ 161 million increase to retained earnings.

As of January 1, 2018, we adopted ASU No.

2016-16, Income Taxes (Topic 740):

Intra-Entity Transfers of Assets Other than Inventory (ASU No.

2016-16) using the modified retrospective method.

2016-16 generally accelerates the recognition of income tax consequences for intra-company asset transfers other than inventory.

We recorded a $ 70 million reduction to retained earnings upon adoption of the standard on January 1, 2018 related to the unrecognized income tax effects of asset transfers that occurred prior to adoption.

Net income increased $ 14 million for the year ended December 31, 2018 as a result of the adoption of the standard.

As of January 1, 2018, we adopted Topic 606, which amends the existing accounting standards for revenue recognition.

2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to receive when products are transferred to customers.

The primary impact of the new standard relates to our contract manufacturing operations and software arrangements.

Certain contract manufacturing arrangements require revenue recognition over-time in situations in which we produce products that have no alternative use and we have an enforceable right to payment for performance completed to date, inclusive of a reasonable profit margin.

This results in an acceleration of revenue recognition for certain contractual arrangements as compared to recognition under prior accounting literature.

The new guidance also impacts our arrangements subject to previous software revenue recognition guidance, as we are required to recognize as revenue a significant portion of the contract consideration upon delivery of the software compared to the previous practice of recognizing the contract consideration ratably over time for certain arrangements.

We adopted Topic 606

using the modified retrospective method.

The adjustment upon adoption increased our opening balance of retained earnings by approximately $ 45 million, net of tax, on January 1, 2018.

The impact to net sales as a result of the adoption was an increase of $ 7 million for the year ended December 31, 2018.

The impact to cost of sales was not material for the year ended December 31, 2018.

In December 2017, the SEC issued guidance for situations where the accounting for certain elements of the 2017 Tax Act could not be completed prior to the release of a company's financial statements.

For specific elements of the 2017 Tax Act, we determined a reasonable estimate for certain effects and recorded that estimate as a provisional amount in 2017.

The guidance provided a measurement period to allow a company to account for these specific elements, which began in the reporting period that included the enactment of the 2017 Tax Act and ended when we obtained, prepared and analyzed the information needed in order to complete its accounting assessments or one year, whichever occurred sooner.

The resulting tax effects were to be recognized in the period the assessment was complete, and included in income tax expense, accompanied by appropriate disclosures.

The measurement period closed in 2018 and we recorded adjustments to reduce income tax expense by $ 207 million in 2018.

Refer to Note 12 for additional information related to the 2017 Tax Act.

ACQUISITIONS AND OTHER ARRANGEMENTS

Results of operations of acquired companies are included in our results of operations as of the respective acquisition dates.

The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition.

The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values (or other measurement attribute required under U.S.

GAAP) at the date of the acquisition.

Any purchase price in excess of these net assets is recorded as goodwill.

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The fair value of sales-based payments is based upon probability-weighted future revenue estimates and increases or decreases as revenue estimates or expectation of timing or amount of payments changes.

On December 13, 2021, we completed the previously announced acquisition of all outstanding equity interests of Hillrom for a purchase price of $ 10.5 billion.

Including the assumption of Hillrom's outstanding debt obligations, the enterprise value of the transaction was approximately $ 12.8 billion.

Under the terms of the transaction agreement, Hillrom shareholders received $ 156.00 in cash per each outstanding Hillrom common share.

Prior to our acquisition of Hillrom, Hillrom was a global medical technology leader whose products and services help enable earlier diagnosis and treatment, optimize surgical efficiency, and accelerate patient recovery while simplifying clinical communication and shifting care closer to home.

Hillrom made those outcomes possible through digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.

The following table summarizes the fair value of the total consideration paid:

(in millions)

Cash consideration paid to Hillrom shareholders (a)

Fair value of equity awards issued to Hillrom equity award holders (b)

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 December 31, 2021.

As a result, we recorded preliminary estimates for the fair value of assets acquired and liabilities assumed as of the acquisition date.

Finalization of the valuation during the measurement period could result in a change in the

amounts recorded for the acquisition date fair value of 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:

(in millions)

Assets acquired and liabilities assumed

Cash and cash equivalents $ 399

Accounts receivable 591

Inventories 560

Prepaid expenses and other current assets 49

Property, plant and equipment 503

Goodwill 6,785

Other intangible assets 6,022

Operating lease right-of-use assets 74

Other non-current assets 128

Short-term debt ( 250 )

Accounts payable ( 140 )

Accrued expenses and other current liabilities ( 552 )

Long-term debt and finance lease obligations ( 2,118 )

Operating lease liabilities ( 57 )

Other non-current liabilities ( 1,518 )

Total assets acquired and liabilities assumed $ 10,476

We allocated $ 804 million of the total consideration to developed technology with a weighted-average useful life of 5 years, $ 1.9 billion to trade names with an indefinite useful life, $ 62 million to trade names with a weighted-average useful life of 7 years, $ 3.2 billion to customer relationships with a weighted-average useful life of 15 years and $ 30 million to IPR&D that is considered an indefinite lived intangible asset.

The fair values of the intangible assets were determined using the income approach.

We used a discount rate of 8.5 % to value the developed technology, trade names and customer relationships and 9.0 % to value the IPR&D.

We consider the fair value of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair value.

We also recognized $ 1.3 billion of deferred income tax liabilities in connection with the acquisition, which are included in other non-current liabilities in the accompanying consolidated balance sheet as of December 31, 2021.

The goodwill, which is not deductible for tax purposes, includes the value of an assembled workforce as well as the overall strategic benefits provided to our product portfolio and is included in the Hillrom segment.

The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired.

The Hillrom acquisition contributed $ 212 million of net sales and a $ 96 million of pretax loss, including integration costs and interest expense on acquisition financing, for the year ended December 31, 2021.

Costs directly resulting from the Hillrom acquisition, included acquisition and integration costs of $ 139 million and the incremental cost of sales relating to inventory fair value step-ups of $ 42 million in 2021.

The following table presents the unaudited pro forma combined results of Baxter and Hillrom for the years ended December 31, 2021 and 2020 as if the acquisition of Hillrom had occurred on January 1, 2020:

years ended December 31 (in millions) 2021 2020

Net sales $ 15,574 $ 14,610

Net income attributable to Baxter stockholders 962 635

The acquisition has been accounted for in the unaudited pro forma combined financial information using the acquisition method of accounting with Baxter as the acquirer.

In order to reflect the occurrence of the acquisition as if it occurred on January 1, 2020 as required, the unaudited pro forma combined financial information includes adjustments to reflect incremental depreciation and amortization expense based on the current preliminary fair values of the identifiable tangible and intangible assets acquired, additional interest expense associated with the issuance of debt to finance the acquisition, nonrecurring costs directly attributable to the acquisition and the income tax effects of the pro forma adjustments.

Those nonrecurring costs, which consist of $ 201 million of costs from inventory fair value step-ups and $ 314 million of acquisition-related costs for both Baxter and Hillrom, are reflected in the unaudited pro forma combined financial information for the year ended December 31, 2020.

The unaudited pro forma combined financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2020.

In addition, the unaudited pro forma combined financial information is not a projection of future results of operations of the combined company nor does it reflect the expected realization of any potential synergies or cost savings associated with the acquisition.

On July 29, 2021, we acquired certain assets related to PerClot, including distribution rights for the U.S.

and specified territories outside of the U.S., from CryoLife, Inc.

PerClot is an absorbable powder hemostat indicated for use in surgical procedures, including cardiac, vascular, orthopedic, spinal, neurological, gynecological, ENT and trauma surgery as an adjunct hemostat when control of bleeding from capillary, venous, or arteriolar vessels by pressure, ligature, and other conventional means is either ineffective or impractical.

PerClot is approved for distribution in the European Union and other markets and was submitted for Pre-Market Approval (PMA) for distribution in the U.S.

in the fourth quarter of 2021.

We concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting.

The fair values of the potential contingent consideration payments were estimated by applying probability-weighted expected payment models and are Level 3 fair value measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.

The following table summarizes the fair value of the consideration transferred:

(in millions)

Contingent Consideration 28

Total Consideration $ 53

The following table summarizes the fair value of the assets acquired as of the acquisition date:

(in millions)

Assets acquired

Other intangible assets 49

Total assets acquired $ 53

The valuation of the assets acquired are preliminary and measurement period adjustments may be recorded in the future as we finalize our fair value estimates.

The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired and were not material for the year ended December 31, 2021.

We allocated $ 39 million of the total consideration to an in-process research and development (IPR&D) asset with an indefinite useful life, $ 9 million to the approved PerClot developed product rights with an estimated useful life of 10 years and $ 1 million to customer relationships with an estimated useful life of 10 years.

The fair values of the intangible assets were determined using the income approach.

The discount rates used to measure the intangible assets were 18.7 % for IPR&D, 16.0 % for developed product rights and 15.0 % for customer relationships.

We consider the fair values of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.

The goodwill, which is deductible for tax purposes, includes the value of overall strategic benefits provided to our surgical portfolio of hemostats and sealants and is included in the Americas and EMEA segments.

Transderm Scop

On March 31, 2021, we acquired the rights to TDS for the U.S.

and specified territories outside of the U.S.

We previously sold this product under a distribution license to the U.S.

institutional market.

TDS is indicated for post-operative nausea and vomiting in the U.S.

and motion sickness in European markets.

W e concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting.

The fair value of the potential contingent consideration payment was estimated by applying a probability-weighted expected payment model and is a Level 3 fair value measurement due to the significant estimates and assumptions used by management in establishing the estimated fair value.

The following table summarizes the fair value of the consideration transferred:

(in millions)

Contingent Consideration 24

Total Consideration $ 84

The following table summarizes the fair value of the assets acquired as of the acquisition date:

(in millions)

Assets acquired

Inventory $ 16

Other intangible assets 67

Total assets acquired $ 84

We allocated $ 64 million of the total consideration to the TDS developed product rights with an estimated useful life of 9 years and $ 3 million to customer relationships with an estimated useful life of 7 years.

The fair values of the intangible assets were determined using the income approach.

The discount rates used to measure the intangible assets were 22.5 % for developed product rights and 15.5 % for customer relationships.

We consider the fair values of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.

The goodwill, which is deductible for tax purposes, includes the value of overall strategic benefits provided to our pharmaceutical portfolio and is included in the Americas segment.

Seprafilm Adhesion Barrier

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Total assets acquired $ 342

For the year ended December 31, 2020, the results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired.

The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired.

The acquisition contributed $ 94 million of net sales and $ 18 million of pretax income for the year ended December 31, 2020.

Acquisition and

integration costs, primarily incremental cost of sales relating to inventory fair value step-ups, associated with the acquisition were $ 15 million for the year ended December 31, 2020.

Acquisition and integration costs, primarily incremental cost of sales relating to inventory fair value step-ups, associated with the acquisition were $ 15 million for the year ended December 31, 2020.

We allocated $ 286 million and $ 10 million of the total consideration to the Seprafilm developed product rights and customer relationships with useful lives of 10 and 7 years, respectively.

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In 2020, we received $ 7 million from the sellers as a result of an acquisition price adjustment in accordance with the acquisition agreement.

Additionally, we recorded measurement period adjustments in 2020 to decrease the net deferred tax liabilities acquired by $ 20 million.

The measurement period adjustments reduced goodwill and did not impact our results of operations.

The fair value of the potential contingent consideration payments was estimated by applying a probability-weighted expected payment model for the clinical milestone and a Monte Carlo simulation model for the commercial milestone, which were then discounted to present value.

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The goodwill, which is not deductible for tax purposes, includes the value of potential future technologies as well as the overall strategic benefits provided to our product portfolio and is included primarily in the Americas segment.

Recothrom and Preveleak

On March 16, 2018, we acquired two hemostat and sealant products from Mallinckrodt plc:

Recothrom Thrombin topical (Recombinant), the first and only stand-alone recombinant thrombin, and Preveleak Surgical Sealant, which is used in vascular reconstruction.

We concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting.

The purchase price included an upfront payment of approximately $ 163 million in 2018.

In addition, the purchase price included new and assumed contingent payments in the future related to inventory and technology transfer milestones and net revenue royalty payments with an estimated fair value of $ 21 million as of the acquisition date.

The maximum aggregate amounts payable for the inventory and technology transfer and net revenue royalties were $ 7 million, $ 15 million and $ 143 million, respectively.

The fair value of the potential contingent consideration payments was estimated by applying a probability-weighted expected payment model for the inventory and technology transfer payments and a Monte Carlo simulation model for contingent royalty payments, which were then discounted to present value.

The following table summarizes the fair value of consideration transferred:

(in millions)

Cash consideration transferred $ 163

Contingent consideration 21

Total consideration $ 184

The following table summarizes the fair value of the assets acquired as of the acquisition date:

(in millions)

Assets acquired

Accounts receivable, net $ 2

Other intangible assets 100

Total assets acquired $ 184

The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired.

The Recothrom and Preveleak acquisitions contributed $ 80 million and $ 52 million of net sales for the years ended December 31, 2019 and 2018, respectively.

Acquisition and integration costs, including incremental cost of sales relating to inventory fair value step-ups, associated with the acquisition were $ 20 million and $ 17 million, respectively, in 2019 and 2018.

We allocated $ 100 million of the total consideration to the Recothrom and Preveleak developed product rights with a weighted-average useful life of 10 years.

The fair value of the intangible assets was determined using the income approach.

The discount rates used to measure the Recothrom and Preveleak intangible assets were 12.5 % and 13.0 %, respectively.

We consider the fair value of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.

The goodwill, which is deductible for tax purposes, includes the value of potential future technologies as well as the overall strategic benefits provided to our surgical portfolio of hemostats and sealants, and is included in the Americas segment.

Saudi Arabia Joint Venture

In November 2018, we acquired additional equity to obtain a 51 % controlling financial interest of our joint venture in Saudi Arabia that was previously accounted for under the equity method of accounting.

The acquisition allows us to increase manufacturing output and utilize the facilities for additional capacity for certain products in the region.

Beginning in the fourth quarter of 2018, we consolidated the financial statements of the joint venture with our consolidated financial statements.

The results of operations of the joint venture have been included in our consolidated statement of income since the date the business was acquired and were not significant.

The guidance on accounting for business combinations requires that an acquirer remeasure its previously held equity interest in an acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings.

Thus, in connection with the acquisition, the carrying amount of our previously held equity interest in the joint venture was remeasured to fair value at the acquisition date, resulting in a gain in the fourth quarter of 2018 of $ 24 million, which was included in other (income) expense, net in the consolidated statement of income.

The fair value of the equity interest on the acquisition date was $ 39 million and we consider the fair value to be a Level 3 measurement due to the significant estimates and assumptions used by management in establishing the estimated fair value.

The following table summarizes the fair value of consideration transferred:

(in millions)

Consideration transferred

Fair value of equity investment 39

Noncontrolling interest 39

Total consideration transferred $ 80

The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:

(in millions)

Assets acquired and liabilities assumed

Accounts receivable, net 25

Inventories 8

Property, plant and equipment 12

Other intangible assets 40

Other non-current assets 2

Short-term debt ( 4 )

Accounts payable and accrued liabilities ( 16 )

Other non-current liabilities ( 8 )

Total assets acquired and liabilities assumed $ 80

The goodwill, which is not deductible for tax purposes, includes the value to create a more fully integrated supply chain and go-to-market business model and is included in the EMEA segment.

In connection with the acquisition, we reacquired certain license rights which had provided the joint venture with the exclusive and perpetual rights to manufacture and distribute our products for sale in specified territories.

Reacquired license rights with fair values totaling $ 10 million were assigned a useful life of 12 years.

Other amortizable intangible assets consist of customer relationships and have a weighted-average estimated useful life of 10 years.

The intangible assets were valued using the income approach.

The discount rates used to measure the reacquired rights and customer relationship intangible assets were 13.0 % and 14.0 %, respectively.

We consider the fair value of each of the acquired intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.

The fair value of the 49 % noncontrolling interest in the joint venture is estimated to be $ 39 million.

The fair value of the noncontrolling interest was estimated using the income approach applied to the projected cash flows of the joint

As the joint venture is a private company, the fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement.

Claris Injectables Limited

On July 27, 2017, we 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, we 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.

In the first quarter of 2018, we settled certain claims with Claris Lifesciences Limited related to the acquired operations and terminated a development agreement with Dorizoe Lifesciences Limited.

As a result, we received cash of $ 73 million in February 2018 and were released from an accrued liability to Claris Lifesciences Limited of $ 7 million.

The total of $ 80 million is reflected as a benefit within other operating income, net in the 2018 consolidated statement of income.

Other Business Combinations

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These acquisitions did not materially affect our results of operations.

We have not presented pro forma financial information for any of the 2020, 2019 or 2018 acquisitions because their results are not material to our consolidated financial statements.

Excluding Hillrom, we have not presented pro forma financial information for any of the 2021, 2020 or 2019 acquisitions because their results are not material to our consolidated financial statements.

Other Business Development Activities

Transderm Scop

In February 2021, we agreed to acquire the rights to Transderm Scop from subsidiaries of GlaxoSmithKline for an upfront purchase price of $ 55 million plus the cost of acquired inventory and the potential for additional cash consideration of $ 30 million based upon a successful technology transfer by a specified date.

We currently sell this product under a distribution license to the U.S.

institutional market.

Transderm Scop is indicated for post-operative nausea and vomiting in the U.S.

and motion sickness in European markets.

We expect the transaction to close late in the first quarter or early in the second quarter of 2021, subject to the satisfaction of closing conditions.

Caelyx and Doxil

In December 2020, we agreed to acquire the rights to Caelyx and Doxil, the branded versions of liposomal doxorubicin, from a subsidiary of Johnson & Johnson for specified territories outside of the U.S.

for $ 325 million.

On February 17, 2021, we acquired the rights to Caelyx and Doxil, the branded versions of liposomal doxorubicin, from a subsidiary of Johnson & Johnson for specified territories outside of the U.S.

We previously acquired the U.S.

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Liposomal doxorubicin is a chemotherapy medicine used to treat various types of cancer.

We expect the transaction to close late in the first quarter or early in the second quarter of 2021, subject to the satisfaction of regulatory approvals and other closing conditions.

The transaction was accounted for as an asset acquisition, as substantially all of the fair value of the gross assets acquired was concentrated in the developed technology intangible asset.

The purchase price of $ 325 million was allocated to the assets acquired, which included a $ 314 million developed-technology intangible asset with an estimated useful life of 9 years and an $ 11 million customer relationship intangible asset with an estimated useful life of 8 years.

Net sales related to this acquisition were $ 108 million for the year ended December 31, 2021.

Celerity Pharmaceuticals, LLC

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We are obligated to purchase the individual product rights from Celerity if the products obtain regulatory approval.

We did not purchase any product rights from Celerity in 2020.

In 2019 and 2018, we paid $ 86 million and $ 72 million, respectively, to acquire the rights to various products that have received regulatory approval.

The payment in 2018 for one of the products was based on tentative approval from the U.S.

Food and Drug Administration (FDA).

Full approval from FDA was received in the third quarter of 2018.

We did not purchase any product rights from Celerity in 2021 or 2020.

In 2019, we paid $ 86 million to acquire the rights to various products that have received regulatory approval.

We capitalized the purchase prices of products that were purchased upon regulatory approval as intangible assets and are amortizing the assets over their estimated useful lives of 12 years.

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The purchase prices were capitalized as developed-technology intangible assets and are being amortized over a weighted-average estimated useful life of 11 years.

During 2020, we also entered into distribution license arrangements for multiple products that have not yet obtained regulatory approval for upfront cash payments of $ 22 million.

The cash paid was treated as R&D expenses on our consolidated statement of income.

During 2021 and 2020, we also entered into distribution license arrangements for multiple products that have not yet obtained regulatory approval for upfront cash payments of $ 3 million and $ 22 million, respectively.

The cash paid was treated as R&D expenses on our consolidated statements of income.

We could make additional payments of up to $ 35 million upon the achievement of certain development, regulatory or commercial milestones.

During 2019, we acquired the rights to multiple products for an aggregate purchase price of $ 80 million.

The purchase prices were capitalized primarily as developed-technology intangible assets and are being amortized over a weighted-average useful of 10 years.

The purchase prices were capitalized primarily as developed-technology intangible assets and are being amortized over a weighted-average useful life of 10 years.

In addition to the significant arrangements described above, we have entered into several other collaborative arrangements.

10 unchanged sentences

Prepaid income taxes 166 183

Contract assets 84 70

Other 390 342

5 unchanged sentences

Machinery and equipment 7,097 6,884

Equipment with customers 1,671 1,489

Equipment on lease with customers 1,684 1,671

Construction in progress 860 701

Total property, plant and equipment (PP&E), at cost 11,271 10,660

Total property, plant and equipment, at cost 11,728 11,271

Accumulated depreciation ( 6,550 ) ( 6,549 )

PP&E, net $ 4,722 $ 4,512

Property, plant and equipment, net $ 5,178 $ 4,722

Depreciation expense was $ 592 million in 2021, $ 601 million in 2020 and $ 606 million in 2019.

8 unchanged sentences

Other non-current assets $ 1,213 $ 1,395

Accounts Payable and Accrued Liabilities

Accrued Expenses and Other Current Liabilities

as of December 31 (in millions) 2021 2020

Accounts payable $ 1,043 $ 892

Common stock dividends payable $ 140 $ 125

1 unchanged sentence

Property, payroll and certain other taxes 174 148

Contract liabilities 162 32

Restructuring liabilities 97 92

3 unchanged sentences

Pension and other postretirement benefits 46 48

Contingent payments related to acquisitions 21 16

Other 701 523

Accounts payable and accrued liabilities $ 2,927 $ 2,689

Accrued expenses and other current liabilities $ 2,479 $ 1,884

Other Non-Current Liabilities

3 unchanged sentences

Long-term tax liabilities 80 84

Interest rate contracts — 52

Contingent payments related to acquisitions 122 14

Contract liabilities 84 34

Litigation and environmental reserves 28 29

9 unchanged sentences

Interest expense, net $ 192 $ 134 $ 71

Other (Income) Expense, net

Other Expense, net

years ended December 31 (in millions) 2021 2020 2019

Foreign exchange losses (gains), net $ 49 $ 37 $ ( 14 )

Investment gains ( 13 ) ( 1 ) ( 3 )

Saudi Arabia joint venture gain — — ( 24 )

Foreign exchange (gains) losses, net $ 19 $ 49 $ 37

Change in fair value of marketable equity securities 7 ( 13 ) ( 1 )

Loss on debt extinguishment 5 110 —

2 unchanged sentences

Other, net ( 3 ) 1 ( 7 )

Other (income) expense, net $ 190 $ 731 $ ( 78 )

Other expense, net $ 41 $ 190 $ 731

Supplemental Cash Flow Information

6 unchanged sentences

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

The following table is a summary of the activity in goodwill by segment.

(in millions) Americas EMEA APAC Total

The following is a reconciliation of goodwill by business segment.

(in millions) Americas EMEA APAC Hillrom Total

December 31, 2019 $ 2,428 $ 385 $ 217 $ — $ 3,030

3 unchanged sentences

December 31, 2020 $ 2,574 $ 406 $ 237 $ — $ 3,217

Reallocation of goodwill 81 ( 81 ) — — —

Additions 4 1 — 6,785 6,790

Acquisition accounting adjustments ( 45 ) ( 6 ) ( 2 ) ( 53 )

Currency translation ( 142 ) ( 17 ) ( 13 ) 1 ( 171 )

1 unchanged sentence

As of December 31, 2021, there were no reductions in goodwill relating to impairment losses.

As discussed in Note 17 - Segment Information, we made a change to our reportable segments in the first quarter of 2021.

As a result of this change, we reallocated goodwill from our EMEA segment to the Americas segment using a relative fair value approach.

In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and following the reallocation and determined that no impairment existed.

Other Intangible Assets, Net

The following table is a summary of our other intangible assets.

The following is a summary of our other intangible assets.

(in millions) Developed technology,

including patents Other amortized

intangible assets Indefinite-lived

intangible assets Customer relationships Indefinite-lived

intangible assets Total

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In the second quarters of 2020 and 2019, we recognized impairment charges of $ 17 million and $ 31 million, respectively, related to developed-technology intangible assets due to declines in market expectations for the related products.

The fair values of the intangible assets were measured using a discounted cash flow approach and the charges are classified within cost of sales in the accompanying consolidated statements of income for the years ended December 31, 2020 and December 31, 2019.

We consider the fair values of the assets to be Level 3 measurements due to the significant estimates and assumptions we used in establishing the estimated fair values.

3 unchanged sentences

as of December 31 (in millions) Effective interest rate in 2021¹ 2021 1

Variable-rate loan due 2020 1.0 % $ — $ 313

Commercial paper 0.3 % $ 300 $ —

1.7 % notes due 2021

2.4 % notes due 2022

2.5 % 203 203

0.868 % notes due 2023

Floating-rate notes due 2023 1.9 % 298 —

0.4 % notes due 2024

0.6 % 846 915

1 unchanged sentence

1.7 % 1,393 —

7.0 % notes due 2024

Floating-rate notes due 2024 0.9 % 298 —

Term loan due 2024 1.8 % 1,998 —

1.3 % notes due in 2025

2 unchanged sentences

2.7 % 747 746

Term loan due 2026 1.9 % 1,998 —

7.65 % debentures due 2027

1.915 % notes due 2027

2.2 % 1,441 —

6.625 % debentures due 2028

2 unchanged sentences

1.3 % notes due 2029

1.4 % 841 912

3.95 % notes due 2030

4.0 % 495 495

1.73 % notes due 2031

1 unchanged sentence

2.539 % notes due 2032

2.7 % 1,537 —

6.25 % notes due 2037

1 unchanged sentence

3.65 % notes due 2042

4.5 % notes due 2043

4.6 % 256 256

3.5 % notes due 2046

3.6 % 441 440

3.132 % notes due 2051

Finance leases and other 9.3 % 81 74

Total debt 17,660 6,192

Current portion ( 406 ) ( 315 )

Long-term portion $ 5,786 $ 4,809

Short-term debt ( 301 ) —

Current maturities of long-term debt and finance lease obligations ( 210 ) ( 406 )

Long-term debt and finance lease obligations $ 17,149 $ 5,786

1 Book values include any discounts, premiums and adjustments related to hedging instruments and effective interest rates reflect amortization of those items.

4 unchanged sentences

In March 2020, we issued $ 750 million of 3.75 % senior notes due in October 2025 and $ 500 million of 3.95 % senior notes due in April 2030 (collectively, the March 2020 senior notes).

Pursuant to a registration rights agreement (the March 2020 Registration Rights Agreement) with the initial purchasers of the March 2020 senior notes, we agreed to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the March 2020 senior notes for new notes with terms substantially identical in all material respects to the March 2020 senior notes and to have such registration statement declared effective under the U.S.

Pursuant to a registration rights agreement (the March 2020 Registration Rights Agreement) with the initial purchasers of the March 2020 senior notes, we agreed

to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the March 2020 senior notes for new notes with terms substantially identical in all material respects to the March 2020 senior notes and to have such registration statement declared effective under the U.S.

Securities Act of 1933.

If we fail to have such registration statement declared effective by September 17, 2021 (a registration default), the annual interest rate on the March 2020 senior notes would increase by 0.25 % for the 90-day period immediately following such registration default and by an additional 0.25 % thereafter.

The maximum additional interest rate is 0.50 % per annum and if a registration default is corrected, the March 2020 senior notes would revert to the original interest rates.

The payment of additional interest is the sole remedy for the holders of the March 2020 senior notes in the event of a registration default.

The exchange offer with respect to the notes due April 2030 was completed in May 2021.

In October 2020, we repaid $ 322 million of variable-rate loans that matured in 2020.

2 unchanged sentences

Securities Act of 1933.

If we fail to have such registration statement declared effective by April 26, 2022 (a registration default), the annual interest rate on the November 2020 senior notes would increase by 0.25 % for the 90-day period immediately following such registration default and by an additional 0.25 % thereafter.

The maximum additional interest rate is 0.50 % per annum and if a registration default is corrected, the November 2020 senior notes would revert to the original interest rates.

The payment of additional interest is the sole remedy for the holders of the November 2020 senior notes in the event of a registration default.

The exchange offer with respect to the November 2020 senior notes was completed in May 2021.

We used the proceeds from the November 2020 senior notes, along with cash on hand, to redeem the $ 750 million of 3.75 % senior notes due in October 2025 that were issued in March 2020.

In connection with the redemption of the $ 750 million of 3.75 % senior notes due in October 2025, including the payment of a $ 104 million make-whole premium to the debt holders, we recognized a pre-tax loss of $ 110 million from the early extinguishment of the debt, which is included in other (income) expense, net in 2020.

In connection with the redemption of the $ 750 million of 3.75 % senior notes due in October 2025, including the payment of a $ 104 million make-whole premium to the debt holders, we recognized a pre-tax loss of $ 110 million from the early extinguishment of debt, which is included in other expense, net in 2020.

In July 2021, we redeemed $ 400 million in 1.7 % senior notes due August 2021, which was partially funded by the issuance of commercial paper.

On September 30, 2021, we entered into a term loan credit agreement (the Term Loan Credit Agreement), pursuant to which a syndicate of financial institutions has committed to provide us with a senior unsecured term loan facility in an aggregate principal amount of $ 4.0 billion (the Term Loan Facility), consisting of a $ 2.0 billion three-year term loan facility and a $ 2.0 billion five -year term loan facility.

Loans under the Term Loan Facility were funded on the closing date of the Hillrom acquisition to fund a portion of the consideration for the Hillrom acquisition, repay certain indebtedness of Hillrom, and pay fees and expenses related to the foregoing.

Loans under the Term Loan Facility bear interest at variable rates, are subject to amortization at a quarterly rate of 0.625 % for the first four quarters following the anniversary of our initial borrowing date and 1.25 % thereafter (with loans outstanding under the five-year tranche subject to amortization at a quarterly rate of 1.875 % after the second anniversary of the commencement of amortization and 2.500 % after the third anniversary of the commencement of amortization).

The Term Loan Credit Agreement contains various covenants, including a maximum net leverage ratio.

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 pay fees and expenses related to the foregoing.

Pursuant to a registration rights agreement (the Hillrom Notes Registration Rights Agreement) with the initial purchasers of the Hillrom notes, we agreed to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the Hillrom notes for new notes with terms substantially identical in all material respects to the Hillrom notes and to have such registration statement declared effective under the U.S.

Securities Act of 1933.

If we fail to have such registration statement declared effective by March 25, 2023 (a registration default), the annual interest rate on the Hillrom notes would increase by 0.25 % for the 90-day period immediately following such registration default and by an additional 0.25 % thereafter.

The maximum additional interest rate is 0.50 % per annum and if a registration default is corrected, the Hillrom notes would revert to the original interest rates.

The payment of additional interest is the sole remedy for the holders of the Hillrom notes in the event of a registration default.

On September 1, 2021, we entered into a bridge facility commitment letter with JPMorgan Chase Bank, N.A.

(JP Morgan) and Citigroup Global Markets Inc.

(Citi) pursuant to which JP Morgan and Citi committed to provide a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of $ 11.4 billion (the Bridge Facility) for the purpose of funding the consideration for the Hillrom acquisition, repaying certain indebtedness of Hillrom, and paying fees and expenses related to the foregoing.

The Bridge Facility included upfront fees of $ 40 million.

The commitments under the Bridge Facility were reduced by $ 4.0 billion on September 30, 2021 when we entered into the Term Loan Facility and the remaining commitments were reduced to zero on December 1, 2021 when we issued the Hillrom notes, both in accordance with the terms of the commitment letter.

As a result, the Bridge Facility was

terminated and the remaining unamortized upfront fees related to the Bridge Facility were charged to interest expense, net during the year ended December 31, 2021.

Baxter assumed debt with an acquisition-date fair value of $ 2.4 billion as part of the acquisition of Hillrom.

Baxter used the proceeds from the Hillrom notes, the Term Loan Facility and cash on hand to repay substantially all of this indebtedness, including accrued interest and applicable early redemption premiums, and recognized a net loss on the early extinguishment of debt of $ 5 million.

Credit Facilities

In December 2019, we entered into new U.S.

and Euro-denominated credit facilities.

dollar-denominated revolving credit facility has a capacity of $ 2.0 billion and our Euro-denominated revolving credit facility has a capacity of approximately € 200 million.

On September 30, 2021, we entered into a new U.S.

dollar-denominated revolving credit facility (the USD Revolver), and on October 1, 2021, we amended our existing Euro-denominated revolving credit facility (as amended, the Euro Revolver).

Our USD Revolver has a capacity of $ 2.5 billion and our Euro Revolver has a capacity of € 200 million.

Each of the facilities matures in 2026.

As of December 31, 2020, we had no borrowings outstanding under our U.S.

dollar-denominated or Euro-denominated credit facilities.

As of December 31, 2019, we had € 200 million ($ 224 million) outstanding under our Euro-denominated facility at a 0.91 % interest rate and no borrowings outstanding under our U.S.

dollar-denominated credit facility.

The facilities enable us to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net leverage ratio.

Fees under the credit facilities are 0.09 % annually as of December 31, 2021 and are based on our credit ratings and the total capacity of the facility.

We also maintain other credit arrangements, which totaled approximately $ 200 million as of December 31, 2020 and 2019, respectively.

There were no amounts outstanding under these arrangements as of December 31, 2020 and there was $ 2 million outstanding as of December 31, 2019.

Prior to entering into the USD Revolver and the Euro Revolver, our previous U.S.

dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of $ 2.0 billion and € 200 million, respectively.

Fees under these credit facilities were 0.09 % annually as of December 31, 2020 and were based on our credit ratings and the total capacity of the facility.

There were no borrowings outstanding under these credit facilities as of December 31, 2021 and 2020.

We also maintain other credit arrangements, which totaled approximately $ 225 million and $ 200 million as of December 31, 2021 and 2020, respectively.

There were no amounts outstanding under these arrangements as of December 31, 2021 and 2020.

As of December 31, 2021, we were in compliance with the financial covenants in these agreements.

The non-performance of any financial institution supporting any of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment.

Commercial Paper

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.

There was no commercial paper outstanding as of December 31, 2020.

Future Debt Maturities

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Lease cost $ 178 $ 179 $ 220

For the year ended December 31, 2018, rent expense was $ 152 million.

The following table contains supplemental cash flow information related to leases for the years ended December 31, 2021, 2020 and 2019:

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Right-of-use finance lease assets obtained in exchange for lease obligations 4 8 —

We have entered into lease agreements with aggregate future payments of $ 46 million for leases that have not yet commenced as of December 31, 2020.

There are no material lease transactions that we entered into but have not yet commenced as of December 31, 2021.

Supplemental balance sheet information related to leases as of December 31, 2021 and 2020 include:

(in millions) December 31, 2020 December 31, 2019

(in millions) 2021 2020

Operating leases

Operating lease right-of-use assets $ 630 $ 603

Accounts payable and accrued liabilities $ 111 $ 101

Accrued expenses and other current liabilities $ 128 $ 111

Operating lease liabilities 522 501

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(iv) indemnities involving the representations and warranties in certain contracts;

(v) contractual indemnities related to the separation and distribution as set forth in certain of the agreements entered into in connection with such transactions (including the separation and distribution agreement and the tax matters agreement with Baxalta);

and (vi) contractual indemnities for our directors and certain of our executive officers for services provided to or at the request of us.

In addition, under our Amended and Restated Certificate of Incorporation, and consistent with Delaware General Corporation Law, we have agreed to indemnify our directors and officers for certain losses and expenses upon the occurrence of certain prescribed events.

and (v) contractual indemnities for our directors and certain of our executive officers for services provided to or at the request of us.

In addition, under our Amended and Restated Certificate of Incorporation, and consistent with Delaware General Corporation Law, we have agreed

to indemnify our directors and officers for certain losses and expenses upon the occurrence of certain prescribed events.

The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential for future payments that we could be obligated to make.

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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 December 31, 2020 and 2019, our total recorded reserves with respect to legal and environmental matters were $ 40 million and $ 56 million, respectively, and there were no related receivables.

If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded.

As of December 31, 2021 and 2020, our total recorded reserves with respect to legal and environmental matters were $ 72 million and $ 40 million, respectively.

We have established reserves for certain of the matters discussed below.

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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.

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Department of Justice (DOJ), Antitrust Division and a federal grand jury in the United States District Court for the Eastern District of Pennsylvania.

We 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 us) and communications with competitors regarding the same.

medicines sold by us) and communications with competitors regarding the same.

On November 30, 2018, the DOJ notified us that it had closed the investigation.

The New York Attorney General has also requested that we provide information regarding business practices in the IV saline industry.

We have cooperated with the New York Attorney General.

We cooperated with that request and have been advised that the matter has now been closed.

In August 2019, we were named in an amended complaint filed by Fayette County, Georgia in the MDL In re:

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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.

In addition, we have received a stockholder request for inspection of our books and records in connection with the announcement made in our Form 8-K on October 24, 2019 that we had commenced an internal investigation into certain intra-company transactions that impacted our previously reported non-operating foreign exchange gains and losses.

As initially disclosed on October 24, 2019, we also voluntarily advised the staff of the SEC of our internal investigation and we are continuing to cooperate with the staff of the SEC.

As initially disclosed on October 24, 2019, we also voluntarily advised the staff of the SEC of our internal investigation and we have been cooperating with the staff of the SEC.

On February 18, 2022, we reached a settlement with the SEC, which resolved the SEC’s investigation into related matters.

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 are fully accrued for the civil penalty as of December 31, 2021 and we expect to pay 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 seek damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief.

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 are not material to our financial results, which were paid in the fourth quarter of 2021.

The settlement of these claims does not preclude potential future lawsuits.

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 (the 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 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.

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.

As previously disclosed, in 2008 we recalled our heparin sodium injection products in the United States.

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In September 2017, Hurricane Maria caused damage to certain of our assets in Puerto Rico and disrupted operations.

Insurance, less applicable deductibles and subject to any coverage exclusions, covered the repair or replacement of our assets that suffered loss or damage, and also provided coverage for interruption to our business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered.

In 2017, we recorded $ 32 million of pre-tax charges related to damages caused by the hurricane, including $ 11 million related to the impairment of damaged inventory and fixed assets as well as $ 21 million of idle facility and other costs.

These amounts were recorded as a component of cost of sales in the consolidated statement of income for year ended December 31, 2017.

In 2019 and 2018, we recognized $ 100 million and $ 42 million, respectively, of insurance recoveries related to the previously mentioned asset impairments and idle facility and other costs suffered as a result of the hurricane.

These benefits were recorded as a reduction of cost of sales and within other operating income, net on the consolidated statements of income for the years ended December 31, 2019 and 2018.

No further insurance recoveries are expected.

In 2019, we recognized $ 100 million of insurance recoveries related to the losses from the hurricane, which are classified within other operating income, net on the consolidated statement of income.

STOCKHOLDERS’ EQUITY

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The fair value of stock options is determined using the Black-Scholes model.

The weighted-average assumptions used in estimating the fair value of stock options granted during each year, along with the weighted-average grant-date fair values, were as follows:

The weighted-average assumptions used in estimating the fair value of stock options granted during each year, along with the weighted-average grant-

date fair values, were as follows:

years ended December 31 2021 2020 2019

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Granted 714 $ 77.84

Replacement RSUs granted in acquisition 668 $ 80.86

Vested ( 591 ) $ 71.63

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Nonvested RSUs as of December 31, 2021 1,798 $ 78.01

In connection with the Hillrom acquisition, during the fourth quarter of 2021, we issued 668 thousand replacement RSUs to holders of Hillrom equity awards.

Refer to Note 2 for additional information regarding the Hillrom acquisition.

As of December 31, 2021, $ 82 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over a weighted-average period of approximately 2.1 years.

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Our annual equity awards stock compensation program for senior management includes the issuance of PSUs.

In 2020, the PSUs awarded were based on our compound annual sales growth rate (CAGR) performance, our adjusted return on invested capital (ROIC) performance and on our stock performance relative to our peer group.

In 2020 and 2021, the PSUs awarded were based on our compound annual sales growth rate (CAGR) performance, our adjusted return on invested capital (ROIC) performance and on our stock performance relative to our peer group.

PSUs awarded between 2017 and 2019 were based on adjusted operating margin as well as stock performance relative to our peer group.

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The Baxter International Inc.

Employee Stock Purchase Plan provides for 10 million shares of common stock available for issuance to eligible participants, of which approximately two million shares were available for future purchases as of December 31, 2020.

Employee Stock Purchase Plan provides for 20 million shares of common stock available for issuance to eligible participants, of which approximately 11 million shares were available for future purchases as of December 31, 2021.

During 2021, 2020, and 2019, we issued approximately 0.7 million, 0.7 million and 0.7 million shares, respectively, under the employee stock purchase plan.

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The 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.

We repurchased 6.3 million shares under this authority pursuant to a Rule 10b5-1 plan for $ 500 million in cash in 2020, 16.5 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise for $ 1.3 billion in cash in 2019 and 35.8 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise for $ 2.5 billion in cash in 2018.

We repurchased 7.3 million shares under this authority pursuant to Rule 10b5-1 plans for $ 600 million in cash in 2021, 6.3 million shares under this authority pursuant to a Rule 10b5-1 plan for $ 500 million in cash in 2020 and 16.5 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise for $ 1.3 billion in cash in 2019.

We had $ 1.3 billion of purchase authority available as of December 31, 2021.

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Based on the volume-weighted average price of our common stock during the term of the ASR Agreement, we received an additional 0.6 million shares from the investment bank at settlement in May 2019.

In addition to common stock, our authorized capital structure includes 100 million shares of preferred stock, no par value.

As of December 31, 2021 and 2020, no shares of preferred stock were outstanding.

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, CTA, certain gains and losses from other postretirement benefit (OPEB) plans and gains and losses on cash flow hedges.

Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of net income, CTA, certain gains and losses from 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 AOCI by component for the years ended December 31, 2021 and 2020.

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Balance as of December 31, 2019 $ ( 2,954 ) $ ( 715 ) $ ( 41 ) $ ( 3,710 )

Adoption of new accounting standard 9 ( 169 ) ( 1 ) ( 161 )

Other comprehensive income (loss) before reclassifications 367 59 ( 117 ) 309

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Pension and OPEB items

Amortization of net losses and prior service costs or credits $ ( 59 ) $ ( 31 ) Other (income) expense, net

Settlement charges ( 46 ) ( 755 ) Other (income) expense, net

Amortization of net losses and prior service costs or credits $ ( 82 ) $ ( 59 ) Other expense, net

Settlement charges ( 2 ) ( 46 ) Other expense, net

( 84 ) ( 105 ) Total before tax

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Refer to Note 12 for additional information regarding the amortization of pension and OPEB items and Note 15 for additional information regarding hedging activity.

Contract Balances

Net trade accounts receivable was $ 2.4 billion and $ 1.7 billion as of December 31, 2021 and 2020, respectively.

Additionally, for 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 .

In those arrangements, the contract asset becomes a trade account receivable as consumable medical products are provided and billed, generally over one to seven years.

The following table summarizes our contract assets:

as of December 31 (in millions) 2021 2020

Contract manufacturing services $ 50 $ 47

Software sales 45 40

Bundled equipment and consumable medical products contracts 100 47

Contract assets $ 195 $ 134

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

as of December 31 (in millions) 2021 2020

Prepaid expenses and other current assets $ 84 $ 70

Other non-current assets 111 64

Contract assets $ 195 $ 134

Accrued expenses and other current liabilities $ 162 $ 32

Other non-current liabilities 84 34

Contract liabilities $ 246 $ 66

In 2021, $ 20 million of revenue was recognized that was included in contract liabilities as of December 31, 2020.

In 2020 and 2019, the amount of revenue recognized that was included in contract liabilities as of December 31, 2019 and 2018 was not significant.

Disaggregation of Net Sales

Beginning in the first quarter of 2021, our product category net sales disclosures (previously referred to as global business units (GBUs)) separately present net sales from our BioPharma Solutions business, which was previously included within Other.

Concurrent with that disaggregation of net sales from our BioPharma Solutions business, we have also allocated certain previously unallocated sales deductions from Other to various categories, primarily based on their respective net sales.

Net sales for 2020 and 2019 have been recast to conform to this presentation.

Additionally, with the acquisition of Hillrom in December 2021, we have added three new product categories:

Patient Support Systems, Front Line Care and Surgical Solutions.

The following tables disaggregate our net sales from contracts with customers by product category between the U.S.

and international:

2021 2020 2019

years ended December 31 (in millions) U.S.

International Total U.S.

International Total

$ 890 $ 3,010 $ 3,900 $ 848 $ 2,909 $ 3,757 $ 791 $ 2,848 $ 3,639

Medication Delivery 2

1,859 1,021 2,880 1,738 953 2,691 1,762 977 2,739

Pharmaceuticals 3

753 1,538 2,291 849 1,249 2,098 904 1,215 2,119

Clinical Nutrition 4

343 621 964 330 580 910 308 552 860

Advanced Surgery 5

545 432 977 516 370 886 533 342 875

Acute Therapies 6

287 495 782 286 454 740 184 351 535

BioPharma Solutions 7

273 396 669 234 252 486 257 212 469

Patient Support Systems 8

86 29 115 — — — — — —

Front Line Care 9

51 19 70 — — — — — —

Surgical Solutions 10

12 15 27 — — — — — —

81 28 109 77 28 105 87 39 126

Total Baxter $ 5,180 $ 7,604 $ 12,784 $ 4,878 $ 6,795 $ 11,673 $ 4,826 $ 6,536 $ 11,362

1 Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.

2 Medication Delivery includes sales of our IV therapies, infusion pumps, administration sets and drug reconstitution devices.

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

4 Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.

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

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

7 BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical and biopharmaceutical companies.

8 Patient Support Systems includes sales of our connected care solutions:

devices, software, communications and integration technologies.

9 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.

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

11 Other includes sales of miscellaneous product and service offerings.

BUSINESS OPTIMIZATION CHARGES

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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.

From the commencement of our business optimization activities through December 31, 2020, we have incurred cumulative pre-tax costs of approximately $ 1.1 billion related to these actions.

From the commencement of our business optimization activities in the second half of 2015 through December 31, 2021, we have incurred cumulative pre-tax costs of approximately $ 1.2 billion related to these actions.

These costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation.

We currently expect to incur additional pre-tax cash costs of approximately $ 14 million through the completion of the initiatives that are currently underway, primarily related to implementation costs.

We currently expect to incur additional pre-tax cash costs of

approximately $ 30 million through the completion of the initiatives that are currently underway, primarily related to implementation costs.

We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods.

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The costs were generally included within cost of sales, SG&A expense and R&D expense.

For the years ended December 31, 2019 and 2018, respectively, we recognized accelerated depreciation, primarily associated with facilities to be closed.

For the year ended December 31, 2019, we recognized accelerated depreciation, primarily associated with facilities to be closed.

The costs were recorded within cost of sales and SG&A expense.

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Liability balance as of December 31, 2020 113

Assumed in acquisition 6

Payments ( 78 )

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Participant contributions 4 4 — —

Actuarial loss 401 924 13 26

Actuarial (gain) loss ( 186 ) 401 ( 14 ) 13

Benefit payments ( 103 ) ( 109 ) ( 19 ) ( 20 )

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Curtailment ( 5 ) ( 4 ) — —

Acquisitions 364 — 11 —

Plan Amendments 15 — — —

Foreign exchange and other ( 105 ) 141 — —

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Settlements ( 13 ) ( 271 ) — —

Acquisitions 305 — — —

Foreign exchange and other ( 57 ) 75 — —

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Actuarial gains and losses result from changes in actuarial assumptions (such as changes in the discount rate and revised mortality rates).

Actuarial losses in 2020 and 2019 related to plan benefit obligations were primarily the result of changes in discount rates.

Actuarial gains in 2021 and losses in 2020 related to plan benefit obligations were primarily the result of changes in discount rates.

The pension obligation information in the table above represents the projected benefit obligation (PBO).

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Amortization of loss to earnings, net of tax of $ 17 in 2021, $ 12 in 2020 and $ 6 in 2019

Settlement charges, net of tax of $ 11 in 2020 and $ 188 in 2019

$ 35 $ 567 $ —

Settlement charges, net of tax of $ 0 in 2021, $ 11 in 2020 and $ 188 in 2019

Pension and other employee benefits $ 227 $ 141 $ 408

In 2020, OCI activity for pension and OPEB plans was primarily related to actuarial gains and losses.

In 2021 and 2020, OCI activity for pension and OPEB plans was primarily related to actuarial gains and losses.

In 2019, OCI activity for pension and OPEB plans was primarily related to the U.S.

pension settlement charge and actuarial gains and losses.

In 2018, OCI activity for pension and OPEB plans was primarily related to actuarial gains and losses.

Net Periodic Benefit Cost

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Settlement charges 2 46 755

Other ( 4 ) — —

Net periodic pension benefit cost $ 105 $ 138 $ 795

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• Periodic monitoring of investment manager performance and adherence to the investment committee’s policies.

Plan assets are invested using a total return investment approach whereby a mix of equity securities, debt securities and other investments are used to preserve asset values, diversify risk and exceed the planned benchmark investment return.

investment return.

Investment strategies and asset allocations are based on consideration of plan liabilities, the plans’ funded status and other factors, such as the plans’ demographics and liability durations.

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Other holdings 152 21 122 9 —

Collateral held on loaned securities 19 — 19 — —

Collateral to be paid on loaned securities ( 19 ) ( 19 ) — — —

Fair value of pension plan assets $ 3,784 $ 758 $ 1,928 $ 9 $ 1,089

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In 2022, we expect to make contributions of at least $ 41 million to our foreign pension plans.

We expect to have net cash outflows relating to our OPEB plan of approximately $ 18 million in 2021.

We expect to have net cash outflows relating to our OPEB plans of approximately $ 19 million in 2022.

The following table details the funded status percentage of our pension plans as of December 31, 2021, including certain plans that are unfunded in accordance with the guidelines of our funding policy outlined above.

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As a result of this transaction, we recognized a non-cash pretax pension settlement charge of $ 755 million in the fourth quarter of 2019.

Pension Plan Amendments

In January 2018, we announced changes to our U.S.

pension plans.

We spun off the assets and liabilities of the qualified plan attributable to current employees into a new plan and will freeze the pay and service amounts used to calculate pension benefits for active participants in the U.S.

pension plans as of December 31, 2022.

The assets and liabilities attributable to retired and former company employees remained with the original qualified plan.

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 participants.

These changes resulted in a $ 57 million decline in the PBO upon the effective date of the changes.

Defined Contribution Plan

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We recognized expense of $ 59 million in 2021, $ 61 million in 2020 and $ 53 million in 2019 related to contributions to this plan.

Income from Continuing Operations Before Income Tax Expense by Category

Income Before Income Tax Expense (Benefit) by Category

years ended December 31 (in millions) 2021 2020 2019

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International 1,901 1,621 1,556

Income from continuing operations before income taxes $ 1,292 $ 970 $ 1,617

Income Tax Expense (Benefit) Related to Continuing Operations

Income before income taxes $ 1,477 $ 1,292 $ 970

Income Tax Expense (Benefit)

years ended December 31 (in millions) 2021 2020 2019

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Total deferred tax liabilities 2,048 762

Net deferred tax asset $ 605 $ 429

Net deferred tax asset (liability) $ ( 586 ) $ 605

At December 31, 2021, we had U.S.

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The foreign operating loss carryforwards expire between 2022 and 2033 with $ 798 million having no expiration date.

Substantially all of the foreign tax credit carryforwards have no expiration date.

A ll of the foreign tax credit carryforwards have no expiration date.

Realization of the U.S.

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A valuation allowance of $ 401 million and $ 454 million was recognized as of December 31, 2021 and 2020, respectively, to reduce the deferred tax assets associated with net operating loss and tax credit carryforwards because we do not believe it is more likely than not that these assets will be fully realized prior to expiration.

After evaluating the 2017 Tax Act and related U.S.

Treasury Regulations, any elections or other opportunities that may be available, and the future expiration of certain U.S.

After evaluating relevant U.S.

tax laws, any elections or other opportunities that may be available, and the future expiration of certain U.S.

tax provisions that will impact the utilization of our U.S.

foreign tax credit carryforwards, management expects to be able to realize some, but not all, of the U.S.

foreign tax credit deferred tax assets up to its overall domestic loss (ODL) balance plus other recurring

and non-recurring foreign inclusions.

foreign tax credit deferred tax assets up to its overall domestic loss (ODL) balance plus other recurring and non-recurring foreign inclusions.

Therefore, a valuation allowance of $ 98 million and $ 157 million was recognized with respect to the foreign tax credit carryforwards as of December 31, 2021 and 2020, respectively.

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Therefore, a valuation allowance of $ 59 million and $ 72 million was recognized on the Swiss deferred tax assets as of December 31, 2021 and 2020, respectively.

As part of the acquisition of Hillrom in 2021, we recorded deferred tax liabilities of $ 1.3 billion related to the step-up in our U.S.

GAAP basis of tangible and intangible assets and liabilities to fair market value which is in excess of the assets’ historical tax bases.

Income Tax Expense (Benefit) Reconciliation

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Impact of foreign taxes 103 88 65

Tax-deductible foreign statutory loss on an investment in a foreign subsidiary ( 58 ) — —

Unfavorable court decision in a foreign jurisdiction related to an uncertain tax position

Swiss tax reform net asset basis step-up — — ( 159 )

1 unchanged sentence

Transition tax due to 2017 Tax Act — — ( 16 )

valuation allowance due to 2017 Tax Act — — ( 194 )

Other valuation allowances 8 110 21

Valuation allowances ( 61 ) 8 110

Stock compensation windfall tax benefits ( 13 ) ( 27 ) ( 54 )

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Income tax expense (benefit) $ 182 $ 182 $ ( 41 )

The enactment of the 2017 Tax Act created a territorial tax system that allows companies to repatriate certain foreign earnings without incurring additional U.S.

federal tax by providing for a 100% dividend exemption.

Under the dividend-exemption provision, 100% of the foreign-source portion of dividends paid by certain foreign corporations to a U.S.

corporate stockholder are exempt from U.S.

federal taxation.

As a result of the U.S.

change to a territorial tax system and the incurrence of the one-time transition tax charge, we plan to repatriate our foreign earnings that were previously considered indefinitely reinvested with the exception of approximately $ 243 million of accumulated earnings as of December 31, 2020 related to one of our foreign operations.

Additional withholding taxes of $ 24 million would be incurred if such earnings were remitted currently.

W e plan to repatriate our foreign earnings with the exception of approximately $ 286 million of accumulated earnings that are indefinitely reinvested as of December 31, 2021 related to one of our foreign operations.

Additional withholding and capital gain taxes of $ 29 million would be incurred if such earnings were remitted currently.

Our tax provisions for 2021, 2020 and 2019 do not include any tax charges related to either the Base Erosion and Anti-Abuse Tax (BEAT) or Global Intangible Low Taxed Income (GILTI) provisions, except for the inability to fully utilize foreign tax credits against such GILTI.

While we are not expecting to be subject to a tax charge under the 2017 Tax Act GILTI provisions in the near term, our accounting policy is to recognize this charge as a period cost.

Our accounting policy is to recognize any GILTI charge as a period cost.

Our effective income tax rate can differ from the 21% U.S.

federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.

In 2021, our effective rate was impacted favorably by geographic earnings mix, a $ 58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, a tax benefit related to a change in U.S.

foreign tax credit regulations, which is reflected in the valuation allowances item in the table above, and excess tax benefits on stock compensation awards, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.

In 2020, our effective tax rate was impacted favorably by geographic earnings mix and excess tax benefits on stock compensation awards.

In 2019, Switzerland and India enacted tax reform legislation that had a material impact on our effective tax rate.

We recognized a deferred tax benefit of $ 90 million to reflect a tax basis step-up, net of a valuation allowance, partially offset by a $ 5 million deferred tax revaluation to reflect an increase in the statutory tax rate, under the newly

enacted Swiss tax laws.

We also recognized a net deferred tax benefit of $ 24 million associated with deferred tax revaluation in India to reflect a decrease in the statutory tax rate.

Our effective tax rate was also favorably impacted by $ 57 million in 2019 related to a notional interest deduction on the share capital of a foreign subsidiary.

The gross tax benefit of the deduction is included in the table above within impact of foreign taxes and the portion not expected to be realized is included within other valuation allowances.

In 2018, we completed our one-year measurement period adjustments to the 2017 Tax Act provisional amounts in accordance with SAB 118, which resulted in tax benefits comprised of the items described in the following paragraphs.

These benefits were partially offset by the tax impact of non-deductible corrections of misstatements related to foreign exchange gains and losses for the year ended December 31, 2018 which are included above within the impact of foreign taxes.

The 2017 Tax Act reduced the U.S.

statutory tax rate from 35 % to 21 % for years after 2017.

In 2018, we collected all of the necessary data to complete our analysis of the effect of the 2017 Tax Act on the remeasurement of the underlying deferred taxes and recognized an additional deferred tax benefit of $ 8 million.

The 2017 Tax Act requires us to pay U.S.

income taxes on accumulated foreign subsidiary earnings not previously subject to U.S.

income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings.

In 2018, after further study of the 2017 Tax Act and related U.S.

Treasury Regulations, and further analysis of historical earnings and profits and tax pools, as well as refinements of the cash portion of the charge, which was provisional due to certain foreign subsidiaries with non-calendar tax year-ends, we reduced our one-time transitional tax expense by $ 5 million.

Additionally, the 2017 Tax Act changed the rules that enabled taxpayers to generate foreign source income related to export sales that were eligible to utilize foreign tax credits.

After studying the 2017 Tax Act and related U.S.

Treasury Regulations and evaluating any elections or other opportunities that may be available, we currently expect to be able to realize some, but not all, of the foreign tax credit deferred tax assets up to our ODL balance plus recurring and non-recurring foreign inclusions.

Accordingly, we reduced our provisional foreign tax credit deferred tax asset valuation allowance and recognized a 2018 benefit of $ 194 million.

The gross tax benefit of the deduction is included in the table above within impact of foreign taxes and the portion not expected to be realized is included within valuation allowances.

Unrecognized Tax Benefits

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Balance at beginning of the year $ 90 $ 111 $ 127

Increase due to acquisition 11 — —

Increase associated with tax positions taken during the current year 31 8 8

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Of the gross unrecognized tax benefits, $ 39 million and $ 47 million were recognized as liabilities in the consolidated balance sheets as of December 31, 2021 and 2020, respectively.

We have recognized net indemnification receivables from Baxalta in the amount of $ 2 million, $ 6 million and $ 6 million as of December 31, 2020, 2019 and 2018, respectively, related to the unrecognized tax benefits for which we are the primary obligor but economically relate to Baxalta operations.

Tax Incentives

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The financial impact of the reductions as compared to the statutory tax rates is indicated in the income tax expense reconciliation table above.

The tax reductions as compared to the local statutory rate favorably impacted earnings per diluted share from continuing operations by $ 0.33 in 2020, $ 0.27 in 2019, and $ 0.29 in 2018.

The tax reductions as compared to the local statutory rate favorably impacted earnings per diluted share by $ 0.38 in 2021, $ 0.33 in 2020, and $ 0.27 in 2019.

The above grants provide that our manufacturing operations are and will be partially exempt from local taxes with varying expirations from 2023 to 2029.

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As of December 31, 2021, we had ongoing audits in the United States, Germany, United Kingdom, China and other jurisdictions.

During 2021, we closed U.S.

tax years 2009-2016 with the IRS with no material adjustments to our financial statements.

Tax years 2017 and forward remain under examination by the IRS and tax years 2012 and forward remain under examination by various foreign taxing authorities.

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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 income from continuing operations to net income attributable to Baxter stockholders.

years ended December 31(in millions) 2020 2019 2018

Income from continuing operations $ 1,110 $ 1,011 $ 1,552

Income from continuing operations attributable to noncontrolling interests 8 10 —

Income from continuing operations attributable to Baxter stockholders 1,102 1,001 1,552

Loss from discontinued operations attributable to Baxter stockholders — — ( 6 )

Net income attributable to Baxter stockholders $ 1,102 $ 1,001 $ 1,546

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

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We continue to service the receivables in this arrangement.

Servicing assets or liabilities are not recognized because we receive adequate compensation to

service the sold receivables.

Servicing assets or liabilities are not recognized because we receive adequate compensation to service the sold receivables.

The Japanese arrangement includes limited recourse provisions, which are not material.

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Our hedging policy attempts to manage these risks to an acceptable level based on our judgment of the appropriate trade-off between risk, opportunity and costs.

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, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee and Swedish Krona.

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 Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Turkish Lira, Indian Rupee and Swedish Krona.

We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets.

In addition, we use derivative and nonderivative instruments to further reduce the net exposure to foreign 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 rates.

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 rates.

Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.

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The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at December 31, 2021 is 12 months for foreign exchange contracts.

The total notional amounts of interest rate contracts designated as cash flow hedges were $ 550 million as of December 31, 2019.

Those interest rate contracts were hedging the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt and were terminated in 2020 when we issued $ 650 million of senior notes due in 2031.

There were no outstanding interest rate contracts designated as cash flow hedges as of December 31, 2020.

There were no outstanding interest rate contracts designated as cash flow hedges as of December 31, 2021 and 2020.

Fair Value Hedges

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There were no cash flow hedge dedesignations in 2021, 2020 or 2019 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur.

In 2020, we terminated interest rate contracts with a notional amount of $ 550 million for $ 173 million in cash payments.

In 2020, we terminated interest rate contracts with a notional amount of $ 550 million for

$ 173 million in cash payments.

The losses relating to these terminations continue to be deferred and are being recognized consistent with the underlying hedged item, interest expense on the issuance of debt.

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There were no fair value hedges terminated in 2021, 2020 or 2019.

In 2018, we terminated our interest rate fair value hedges and the cumulative fair value adjustment to the hedged item was insignificant.

If we remove a net investment hedge designation, any gain or loss recognized in AOCI is not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged.

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We use forward contracts to hedge earnings from the effects of foreign exchange relating to certain of 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 terms of these instruments generally do not exceed one month.

The total notional amount of undesignated derivative instruments was $ 1.0 billion and $ 619 million as of December 31, 2020 and 2019, respectively.

These derivative instruments are generally not formally designated as hedges and the terms of these instruments generally do not exceed one month.

The total notional amount of undesignated derivative instruments was $ 851 million and $ 1.0 billion as of December 31, 2021 and 2020, respectively.

Gains and Losses on Hedging Instruments and Undesignated Derivative Instruments

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Foreign exchange contracts 5 ( 21 ) ( 9 ) Cost of sales ( 23 ) ( 5 ) 4

Net investment hedges ( 224 ) 12 32 Other (income) expense, net — — —

Net investment hedges 200 ( 224 ) 12 Other expense, net — — —

Total $ 205 $ ( 376 ) $ ( 34 ) $ ( 29 ) $ ( 6 ) $ 4

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(in millions) 2021 2020 2019

Fair value hedges

Interest rate contracts Interest expense, net $ — $ — $ ( 4 )

Undesignated derivative instruments

Foreign exchange contracts Other (income) expense, net $ 49 $ 17 $ —

For our fair value hedges, an equal and offsetting gain of $ 4 million was recognized in interest expense, net as an adjustment to the underlying hedged item, fixed-rate debt, in 2018.

Foreign exchange contracts Other expense, net $ ( 36 ) $ 49 $ 17

The following table summarizes net-of-tax activity in AOCI, a component of stockholders’ equity, related to our cash flow hedges.

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Foreign exchange contracts

Prepaid expenses and other current assets $ — Accounts payable and

accrued liabilities $ 17

Prepaid expenses and other current assets $ 6 Accrued expenses and other current liabilities $ 3

Total derivative instruments designated as hedges 6 3

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Foreign exchange contracts

Prepaid expenses and other current assets 11 Accounts payable and

accrued liabilities 2

Prepaid expenses and other current assets 2 Accrued expenses and other current liabilities 2

Total derivative instruments $ 8 $ 5

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Derivative instruments designated as hedges

Interest rate contracts

Other non-current assets $ 10 Other non-current

liabilities $ 52

Foreign exchange contracts

Prepaid expenses and other current assets 10 Accounts payable and

accrued liabilities —

Prepaid expenses and other current assets — Accrued expenses and other current liabilities 17

Total derivative instruments designated as hedges — 17

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Foreign exchange contracts

Prepaid expenses and other current assets 1 Accounts payable and

accrued liabilities 2

Prepaid expenses and other current assets 11 Accrued expenses and other current liabilities 2

Total derivative instruments $ 11 $ 19

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Long-term debt $ 101 $ 102 $ 4 $ 5

(a) These fair value hedges were terminated prior to December 31, 2018.

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

FAIR VALUE MEASUREMENTS

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Foreign exchange contracts $ 11 $ — $ 11 $ —

Interest rate contracts 10 — 10 —

Debt securities 13 — 13 —

Marketable equity securities 17 17 — —

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Foreign exchange contracts $ 19 $ — $ 19 $ —

Interest rate contracts 52 — 52 —

Contingent payments related to acquisitions 30 — — 30

Total $ 49 $ — $ 19 $ 30

As of December 31, 2020 and 2019, cash and cash equivalents of $ 3.7 billion and $ 3.3 billion, respectively, included money market and other short-term funds of approximately $ 1.8 billion and $ 1.7 billion, respectively, which are considered Level 2 in the fair value hierarchy.

As of December 31, 2021 and 2020, cash and cash equivalents of $ 3.0 billion and $ 3.7 billion, respectively, included money market and other short-term funds of approximately $ 816 million and $ 1.8 billion, 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.

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The key inputs, which are considered observable and vary depending on the type of derivative, include contractual terms, interest rate yield curves, foreign exchange rates and volatility.

Debt securities were reclassified to Level 3 as of December 31, 2021 because there were no observable transactions for those debt securities near the balance sheet date.

There was no change in the estimated fair value of those debt securities for the year ended December 31, 2021.

Contingent payments related to acquisitions, which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques.

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In addition to the financial instruments that we are required to recognize at fair value in the consolidated balance sheets, we have certain financial instruments that are recognized at amortized cost or some basis other than fair value.

For these financial instruments, the following table provides the values recognized in the consolidated balance sheets and the estimated fair values.

For these financial instruments, the following table provides the values recognized in the consolidated

balance sheets and the estimated fair values.

Book values Fair values(a)

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SEGMENT INFORMATION

We manage our business based on three geographical segments:

Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific).

Our segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies;

We manage our global operations based on four segments, consisting of the following geographic segments related to our legacy Baxter business:

Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific), and a new global segment for our recently acquired Hillrom business.

The Americas, EMEA and APAC segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies;

sterile IV solutions;

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and surgical hemostat and sealant products.

The Hillrom segment provides digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, and advanced equipment for the surgical space.

In the first quarter of 2021, the information provided to our Chief Executive Officer for purposes of allocating resources and assessing performance was updated to reallocate contracted services activities performed at a German manufacturing facility from our EMEA segment to our Americas segment.

The contracted services performed at that facility are part of our BioPharma Solutions business, which is managed as part of the Americas segment.

Accordingly, the reported financial results of the Americas segment now include the contracted services activities performed at that facility.

Segment results for 2020 and 2019 have been recast to conform to this presentation.

We use operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our business segments.

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Certain items are maintained at Corporate and are not allocated to a segment.

They primarily include the majority of foreign currency hedging activities, corporate headquarters costs, certain R&D costs, certain GBU support costs, stock compensation expense, certain employee benefit plan costs, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments).

They primarily include corporate headquarters costs, certain R&D costs, certain product category support costs, stock compensation expense, certain employee benefit plan costs, certain foreign currency hedging activities, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments).

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.

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APAC 2,791 2,475 2,300

Hillrom 212 — —

Total net sales $ 12,784 $ 11,673 $ 11,362

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APAC 623 591 549

Hillrom ( 80 ) — —

Total segment operating income $ 3,787 $ 3,503 $ 3,575

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APAC 98 94 85

Hillrom 4 — —

Corporate and other 86 108 117

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APAC 82 103 98

Hillrom 5 — —

Corporate and other 72 84 120

Total capital expenditures $ 709 $ 724 $ 686

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

The following table is a reconciliation of segment operating income to income before income taxes per the consolidated statements of income.

for the years ended December 31 (in millions) 2021 2020 2019

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Net interest expense 192 134 71

Other (income) expense, net 190 731 ( 78 )

Income from continuing operations before income taxes $ 1,292 $ 970 $ 1,617

Other expense, net 41 190 731

Income before income taxes $ 1,477 $ 1,292 $ 970

Geographic information

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Latin America and Canada 1,249 1,191 1,268

Total Americas $ 6,069 $ 6,094 $ 5,951

EMEA 3,552 3,129 2,968

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as of December 31 (in millions) 2021 2020

PP&E and operating lease right-of-use assets, net:

Property, plant and equipment and operating lease right-of-use assets, net:

United States $ 2,337 $ 1,888

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Latin America and Canada 917 857

Consolidated PP&E and operating lease right-of-use assets, net $ 5,325 $ 5,120

QUARTERLY FINANCIAL DATA (UNAUDITED)

years ended December 31 (in millions, except per share data) First quarter Second quarter Third quarter Fourth quarter²

Net sales $ 2,802 $ 2,718 $ 2,972 $ 3,181 $ 11,673

Gross margin 1,163 1,038 1,195 1,191 4,587

Net income attributable to Baxter stockholders 332 246 356 168 1,102

Earnings per share

Basic 0.65 0.48 0.70 0.33 2.17

Diluted 0.64 0.48 0.69 0.33 2.13

First quarter Second quarter Third quarter Fourth quarter³ Full year

Net sales $ 2,638 $ 2,834 $ 2,851 $ 3,039 $ 11,362

Gross margin 1,080 1,153 1,230 1,298 4,761

Net income (loss) attributable to Baxter stockholders 342 313 369 ( 23 ) 1,001

Earnings (loss) per share

Basic 0.67 0.61 0.72 ( 0.05 ) 1.97

Diluted 0.66 0.60 0.71 ( 0.05 ) 1.93

¹Totals may not add across due to rounding.

²Results for the fourth quarter and full year of 2020 include a pre-tax charge of $ 110 million ($ 90 million, or $ 0.17 per diluted share, on an after-tax basis) related to the November 2020 early extinguishment of $ 750 million of 3.75 % senior notes that were issued in March 2020, a pre-tax charge of $ 29 million ($ 22 million, or $ 0.04 per diluted share, on an after-tax basis) related to Sigma Spectrum infusion pump inspection and remediation activities and a pre-tax charge of $ 43 million ($ 33 million, or $ 0.06 per diluted share, on an after-tax basis) related to lump-sum settlement distributions made to certain former U.S.

employees with vested pension benefits.

³Results for the fourth quarter and full year of 2019 include a pre-tax charge of $ 755 million ($ 568 million, or $ 1.09 per diluted share, on an after-tax basis) related to the annuitization of a portion of our U.S.

pension plan.

Total property, plant and equipment and operating lease right-of-use assets, net $ 5,808 $ 5,325

Report of Independent Registered Public Accounting Firm

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We have audited the accompanying consolidated balance sheets of Baxter International Inc.

and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the index appearing under Item 15(2) (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedule listed in the index appearing under Item 15 (2) (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

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We believe that our audits provide a reasonable basis for our opinions.

As described in Management's Assessment of Internal Control Over Financial Reporting, management has excluded Hill-Rom Holdings, Inc.

(Hillrom) from its assessment of internal control over financial reporting as of December 31, 2021 because it was acquired by the Company in a purchase business combination during 2021.

We have also excluded Hillrom from our audit of internal control over financial reporting.

Hillrom is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 6% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation Allowance on United States (U.S.) Foreign Tax Credit Carryforwards

As described in Note 12 to the consolidated financial statements, as of December 31, 2020, the Company has $1,367 million of total deferred tax assets, including $373 million of deferred tax assets for U.S.

As described in No te 13 to the consolidated financial statements, as of December 31, 2021, the Company has $1,462 million of total deferred tax assets, including $339 million of deferred tax assets for U.S.

foreign tax credit carryforwards in the United States.

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The principal considerations for our determination that performing procedures relating to the valuation allowance on U.S.

foreign tax credit carryforwards is a critical audit matter are the significant judgment by management when assessing factors related to expected future earnings, which in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and evaluating evidence related to management’s expected future earnings.

foreign tax credit carryforwards is a critical audit matter are the significant judgment by management when assessing factors related to expected future earnings, which in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and evaluating audit evidence related to management’s expected future earnings.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

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These procedures also included, among others, evaluating management’s assessment of the realizability of the deferred tax assets, including evaluating the reasonableness of expected future earnings during the applicable periods.

Evaluating management’s factors related to expected future earnings involved evaluating whether the factors were reasonable considering the current and past performance of the Company and evidence obtained in other areas of the audit.

Evaluating management’s assumption related to expected future earnings involved evaluating whether the factors were reasonable considering the current and past performance of the Company and evidence obtained in other areas of the audit.

Valuation of Certain Acquired Intangible Assets - Hill-Rom Holdings, Inc.

(Hillrom) Acquisition

As described in Note 2 to the consolidated financial statements, on December 13, 2021, the Company acquired all of the outstanding equity interests of Hillrom for a purchase price of $10.5 billion.

Management allocated $804 million of the total consideration to the developed technology with a weighted-average useful life of 5 years, $1.9 billion to trade names with an indefinite useful life, and $3.2 billion to customer relationships with a weighted-average useful life of 15 years.

The fair values of the intangible assets were determined using the income approach.

Significant estimates and assumptions were used by management in establishing the estimated fair value.

As disclosed by management, the significant estimates and assumptions inherent in a discounted cash flow analysis (income approach) include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the asset’s life cycle, royalty rates, terminal growth rate, contributory asset charges, and customer attrition rates.

Each of these factors and assumptions can significantly affect the value of the intangible asset.

The principal considerations for our determination that performing procedures relating to the valuation of certain acquired intangible assets in connection with the Hillrom acquisition is a critical audit matter are (i) the significant judgment by management when developing the fair value of the developed technology, trade names and customer relationships intangible assets;

(ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the amount and timing of future projected cash flows for each of the aforementioned intangible assets, the royalty rates for the developed technology and trade names intangible assets, the attrition rates, discount rate and contributory asset charges for the customer relationships intangible asset, and the asset’s life cycle and discount rate for the trade names intangible asset;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to acquisition accounting, including controls over management’s valuation of the intangible assets and controls over the development of the assumptions related to the amount and timing of projected future cash flows, the discount rates, the asset’s life cycle, royalty rates, terminal growth rate, contributory asset charges, and customer attrition rates.

These procedures also included, among others, (i) reading the purchase agreement, and (ii) testing management’s process for estimating the fair value of intangible assets.

Testing management’s process included (i) evaluating the appropriateness of the income approaches used to fair value the intangible assets, (ii) testing the completeness and accuracy of data provided by management, and (iii) evaluating the reasonableness of the significant assumptions related to the amount and timing of projected future cash flows, the discount rates, the asset’s life cycle, royalty rates, terminal growth rate, contributory asset charges, and customer attrition rates .

Evaluating management’s assumptions involved evaluating whether the assumptions used were reasonable considering current and past performance of the acquired entity, consistency with external market and industry data, and consistency with evidence obtained in other areas of the audit, as applicable.

Professionals with specialized skill and knowledge were used to assist in the evaluation of management’s income approaches and the discount rates, the asset’s life cycle, royalty rates, terminal growth rate, contributory asset charges, and customer attrition rates assumptions.

/s/ PricewaterhouseCoopers LLP

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data