What changed in this filing

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Item 1. Financial Statements

2022-10-27 compared with 2022-07-28 · 248 added, 181 removed, 766 unchanged (36% of the section changed)

3 unchanged sentences

(in millions, except share information)

September 30,

2022 December 31,

27 unchanged sentences

Retained earnings 14,015 17,065

Accumulated other comprehensive (loss) income ( 3,767 ) ( 3,380 )

Accumulated other comprehensive income (loss) ( 4,054 ) ( 3,380 )

Total Baxter stockholders’ equity 5,535 9,077

4 unchanged sentences

Baxter International Inc.

Condensed Consolidated Statements of Income (unaudited)

Condensed Consolidated Statements of Income (Loss) (unaudited)

(in millions, except per share data)

Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

2022 2021 2022 2021

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Research and development expenses 152 129 450 396

Other operating income, net ( 11 ) ( 5 ) ( 28 ) ( 5 )

Operating income 340 424 503 814

Goodwill impairments 2,785 — 2,785 —

Other operating expense (income), net 48 ( 1 ) 20 ( 6 )

Operating income (loss) ( 2,799 ) 513 ( 2,296 ) 1,327

Interest expense, net 104 50 278 118

Other (income) expense, net 63 12 3 15

Income before income taxes 295 392 389 743

Income tax expense 40 91 61 142

Net income 255 301 328 601

Income (loss) before income taxes ( 2,966 ) 451 ( 2,577 ) 1,194

Income tax expense (benefit) ( 32 ) ( 1 ) 29 141

Net income (loss) ( 2,934 ) 452 ( 2,606 ) 1,053

Net income attributable to noncontrolling interests 3 2 8 7

Net income attributable to Baxter stockholders $ 252 $ 298 $ 323 $ 596

Earnings per share

Net income (loss) attributable to Baxter stockholders $ ( 2,937 ) $ 450 $ ( 2,614 ) $ 1,046

Earnings (loss) per share

Basic $ ( 5.83 ) $ 0.90 $ ( 5.20 ) $ 2.08

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Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

2022 2021 2022 2021

Net income $ 255 $ 301 $ 328 $ 601

Net income (loss) $ ( 2,934 ) $ 452 $ ( 2,606 ) $ 1,053

Other comprehensive income (loss), net of tax:

Currency translation adjustments, net of tax expense (benefit) of $ 2 and $( 4 ) for the three months ended June 30, 2022 and 2021, respectively, and ($ 9 ) and $ 13 for the six months ended June 30, 2022 and 2021, respectively.

Currency translation adjustments, net of tax expense (benefit) of ($ 16 ) and $ 3 for the three months ended September 30, 2022 and 2021, respectively, and ($ 25 ) and $ 16 for the nine months ended September 30, 2022 and 2021, respectively.

( 319 ) ( 137 ) ( 751 ) ( 257 )

Pension and other postretirement benefits, net of tax expense of $ 5 and $ 3 for the three months ended June 30, 2022 and 2021, respectively, and $ 8 and $ 11 for the six months ended June 30, 2022 and 2021, respectively.

Hedging activities, net of tax expense of $ 4 and $ 2 for the three months ended June 30, 2022 and 2021, respectively, and $ 3 and $ 5 for the six months ended June 30, 2022 and 2021, respectively.

Available-for-sale debt securities, net of tax expense of zero for the three months ended June 30, 2022 and 2021, respectively, and $ 1 and zero for the six months ended June 30, 2022 and 2021, respectively.

Pension and other postretirement benefits, net of tax expense of $ 5 and $ 8 for the three months ended September 30, 2022 and 2021, respectively, and $ 13 and $ 19 for the nine months ended September 30, 2022 and 2021, respectively.

Hedging activities, net of tax expense of $ 5 and $ 3 for the three months ended September 30, 2022 and 2021, respectively, and $ 8 and $ 8 for the nine months ended September 30, 2022 and 2021, respectively.

Available-for-sale debt securities, net of tax expense of zero for the three months ended September 30, 2022 and 2021, respectively, and $ 1 and zero for the nine months ended September 30, 2022 and 2021, respectively.

Total other comprehensive income (loss), net of tax ( 287 ) ( 106 ) ( 674 ) ( 168 )

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(in millions)

For the three months ended June 30, 2022

For the three months ended September 30, 2022

Baxter International Inc.

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income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity

Balance as of April 1, 2022 683 $ 683 180 $ ( 11,422 ) $ 6,207 $ 16,994 $ ( 3,387 ) $ 9,075 $ 44 $ 9,119

Net income — — — — — 252 — 252 3 255

Balance as of July 1, 2022 683 $ 683 180 $ ( 11,409 ) $ 6,253 $ 17,099 $ ( 3,767 ) $ 8,859 $ 44 $ 8,903

Net income (loss) — — — — — ( 2,937 ) — ( 2,937 ) 3 ( 2,934 )

Other comprehensive income (loss) — — — — — — ( 287 ) ( 287 ) — ( 287 )

3 unchanged sentences

Change in noncontrolling interests — — — — — — — — ( 3 ) ( 3 )

Balance as of June 30, 2022

Balance as of September 30, 2022

683 $ 683 179 $ ( 11,406 ) $ 6,297 $ 14,015 $ ( 4,054 ) $ 5,535 $ 44 $ 5,579

For the six months ended June 30, 2022

For the nine months ended September 30, 2022

Baxter International Inc.

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Balance as of January 1, 2022 683 $ 683 182 $ ( 11,488 ) $ 6,197 $ 17,065 $ ( 3,380 ) $ 9,077 $ 44 $ 9,121

Net income — — — — — 323 — 323 5 328

Net income (loss) — — — — — ( 2,614 ) — ( 2,614 ) 8 ( 2,606 )

Other comprehensive income (loss) — — — — — — ( 674 ) ( 674 ) — ( 674 )

3 unchanged sentences

Change in noncontrolling interests — — — — — — — — ( 8 ) ( 8 )

Balance as of June 30, 2022

Balance as of September 30, 2022

683 $ 683 179 $ ( 11,406 ) $ 6,297 $ 14,015 $ ( 4,054 ) $ 5,535 $ 44 $ 5,579

For the three months ended June 30, 2021

For the three months ended September 30, 2021

Baxter International Inc.

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Common stock shares Common stock Common stock shares in treasury Common stock in treasury Additional contributed capital Retained earnings Accumulated other comprehensive income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity

Balance as of April 1, 2021 683 $ 683 181 $ ( 11,296 ) $ 6,043 $ 16,502 $ ( 3,480 ) $ 8,452 $ 38 $ 8,490

Net income — — — — — 298 — 298 3 301

Balance as of July 1, 2021 683 $ 683 184 $ ( 11,561 ) $ 6,090 $ 16,658 $ ( 3,376 ) $ 8,494 $ 41 $ 8,535

Net income (loss) — — — — — 450 — 450 2 452

Other comprehensive income (loss) — — — — — — ( 106 ) ( 106 ) — ( 106 )

Purchases of treasury stock — — 3 ( 300 ) — — — ( 300 ) — ( 300 )

Stock issued under employee benefit plans and other — — ( 1 ) 32 41 — — 73 — 73

Dividends declared on common stock — — — — — ( 141 ) — ( 141 ) — ( 141 )

Balance as of June 30, 2021 683 $ 683 184 $ ( 11,561 ) $ 6,090 $ 16,658 $ ( 3,376 ) $ 8,494 $ 41 $ 8,535

For the six months ended June 30, 2021

Change in noncontrolling interests — — — — — — — — 2 2

Balance as of September 30, 2021 683 $ 683 183 $ ( 11,529 ) $ 6,131 $ 16,967 $ ( 3,482 ) $ 8,770 $ 45 $ 8,815

For the nine months ended September 30, 2021

Baxter International Inc.

2 unchanged sentences

Balance as of January 1, 2021 683 $ 683 179 $ ( 11,051 ) $ 6,043 $ 16,328 $ ( 3,314 ) $ 8,689 $ 37 $ 8,726

Net income — — — — — 596 — 596 5 601

Net income (loss) — — — — — 1,046 — 1,046 7 1,053

Other comprehensive income (loss) — — — — — — ( 168 ) ( 168 ) — ( 168 )

3 unchanged sentences

Change in noncontrolling interests — — — — — — — — 1 1

Balance as of June 30, 2021

Balance as of September 30, 2021

683 $ 683 183 $ ( 11,529 ) $ 6,131 $ 16,967 $ ( 3,482 ) $ 8,770 $ 45 $ 8,815

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(in millions)

Six months ended

Nine months ended

September 30,

Cash flows from operations

Net income $ 328 $ 601

Adjustments to reconcile net income to cash flows from operations:

Net income (loss) $ ( 2,606 ) $ 1,053

Adjustments to reconcile net income (loss) to cash flows from operations:

Depreciation and amortization 1,069 645

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Net periodic pension and other postretirement costs 42 77

Intangible asset impairments 332 —

Goodwill impairments 2,785 —

Loss on product divestiture arrangement 54 —

Reclassification of cumulative translation loss to earnings 65 —

Other ( 35 ) 46

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Repayments of debt ( 953 ) ( 407 )

Issuances of debt — 50

Net increases (decreases) in debt with original maturities of three months or less 30 251

2 unchanged sentences

Purchases of treasury stock ( 32 ) ( 600 )

Debt issuance costs — ( 37 )

Other financing activities, net ( 51 ) ( 33 )

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$ 1,604 $ 3,261

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

June 30, 2022 December 31, 2021 June 30, 2021

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

September 30, 2022 December 31, 2021 September 30, 2021

Cash and cash equivalents $ 1,601 $ 2,951 $ 3,258

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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.

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.

As a result, the pandemic has created significant volatility in the demand for our products.

Over the course of the pandemic, our business has been impacted by shifting healthcare priorities and significant volatility in the demand for our products.

For further information about our revenues by product category, refer to Note 9.

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 variants, subvariants 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, moratoriums on elective procedures and mandatory quarantines and travel restrictions).

These measures have caused, and may continue to cause in the future, increased levels of absenteeism, including at our manufacturing and distributing facilities.

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.

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

and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to moratoriums on elective procedures and mandatory quarantines and travel restrictions), resulting in higher levels of absenteeism, including at our manufacturing and distribution facilities.

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

We have experienced significant challenges to our global supply chain in recent periods, including production delays and interruptions, increased costs and shortages of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, resulting from the pandemic and other exogenous factors including significant weather events, elevated inflation levels, disruptions to certain ports of call around the world, the war in Ukraine and certain other geopolitical events.

We may continue to experience these and other challenges related to our supply chain in future periods.

We expect to experience some of these and other challenges related to our supply chain in future periods.

These challenges, including the unavailability of certain raw materials and component parts, have also had a negative impact on our sales for certain product categories due to our inability to fully satisfy demand and may continue to have a negative impact on our sales in the future.

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.

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

New Accounting Standards

Recently adopted accounting pronouncements

As of January 1, 2022, we adopted 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.

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(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 June 30, 2022.

The valuation of assets acquired and liabilities assumed has not yet been finalized as of September 30, 2022.

Finalization of the valuation during the measurement period could result in a change in the amounts recorded for acquired intangible assets, goodwill and income taxes among other items.

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Total assets acquired and liabilities assumed $ 10,476

In the first half of 2022 we recorded measurement period adjustments, primarily impacting accounts receivable, other intangible assets, and deferred income tax liabilities.

Individually the measurement period adjustments were not

material and in total increased goodwill by $ 35 million.

In the first nine months of 2022 we recorded measurement period adjustments, primarily impacting accounts receivable, property, plant and equipment, other intangible assets, and deferred income tax liabilities.

Individually the

measurement period adjustments were not material and in total increased goodwill by $ 25 million.

The measurement period adjustments did not have a significant impact to our results of operations.

The goodwill from the Hillrom acquisition, 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.

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

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

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

Other Business Development Activities

Celerity Pharmaceuticals, LLC

In September 2013, we entered into an agreement with Celerity Pharmaceuticals, LLC (Celerity) to develop certain acute care generic injectable premix and oncolytic products through regulatory approval.

We transferred our rights in these products to Celerity and Celerity assumed ownership and responsibility for development of the products.

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

In December 2020, we entered into an agreement with a third party to divest our rights to one of the products that was being developed by Celerity, a generic version of liposomal doxorubicin, for less than $ 1 million if that product were to receive regulatory approval in the U.S.

and European Union in 2022.

Liposomal doxorubicin is a chemotherapy medicine used to treat various types of cancer and we entered into this transaction to divest our rights to this generic version of that product after we had separately entered into a transaction to acquire the branded version.

The related regulatory approvals were subsequently obtained for the generic version of liposomal doxorubicin and we recognized a loss of approximately $ 54 million in the third quarter of 2022, representing the difference between the amount we owe Celerity following those regulatory approvals and the proceeds that we will receive from our divestiture of those product rights.

That loss is reported within other operating expense (income), net in our condensed consolidated statements of operations for the three and nine months ended September 30, 2022.

In March 2022, we entered into an agreement with a subsidiary of Pfizer Inc.

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Allowance for Doubtful Accounts

The following table is a summary of the changes in our allowance for doubtful accounts for the three and six months ended June 30, 2022 and 2021.

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

Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

(in millions) 2022 2021 2022 2021

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Balance at end of period $ 120 $ 115 $ 120 $ 115

(in millions) June 30,

(in millions) September 30,

2022 December 31,

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Property, Plant and Equipment, Net

(in millions) June 30,

(in millions) September 30,

2022 December 31,

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Property, plant and equipment, net $ 4,799 $ 5,178

In September 2022, we signed a purchase agreement with a buyer to sell our corporate headquarters in Deerfield, Illinois for $ 52 million.

The related assets are classified as held-for-sale and are presented within prepaid expenses and other current assets in the accompanying consolidated balance sheet as of September 30, 2022.

While the closing remains subject to the satisfaction of various closing conditions (including satisfactory completion of municipal diligence by the buyer), we expect the transaction to close in 2023 and the net book value of the assets approximates the transaction price net of estimated selling costs.

Interest Expense, Net

Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

(in millions) 2022 2021 2022 2021

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Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

(in millions) 2022 2021 2022 2021

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Change in fair value of marketable equity securities 3 9 ( 5 ) 2

Reclassification of cumulative translation loss to earnings 65 — 65 —

Other, net — ( 1 ) ( 3 ) ( 3 )

Other (income) expense, net $ 63 $ 12 $ 3 $ 15

We have been winding down our operations in Argentina since early 2021 and we determined that the net assets of the related entities were substantially liquidated during the third quarter of 2022.

As a result of that determination, we reclassified their $ 65 million cumulative translation loss from accumulated other comprehensive income (loss) to other (income) expense, net.

Non-Cash Operating and Investing Activities

Right-of-use operating lease assets obtained in exchange for lease obligations for the six months ended June 30, 2022 and 2021 were $ 23 million and $ 21 million, respectively.

Purchases of property, plant and equipment included in accounts payable as of June 30, 2022 and 2021 were $ 66 million and $ 70 million, respectively.

Unsettled share repurchases included in accrued expenses and other current liabilities as of June 30, 2022 and 2021 were $ 8 million and $ 35 million , respectively.

Right-of-use operating lease assets obtained in exchange for lease obligations for the nine months ended September 30, 2022 and 2021 were $ 59 million and $ 69 million, respectively.

Purchases of property, plant and equipment included in accounts payable as of September 30, 2022 and 2021 were $ 65 million and $ 49 million, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

3 unchanged sentences

Acquisition accounting adjustments — — — 25 25

Impairments — — — ( 2,785 ) ( 2,785 )

Currency translation ( 241 ) ( 29 ) ( 22 ) ( 145 ) ( 437 )

Balance as of June 30, 2022 $ 2,367 $ 292 $ 210 $ 6,775 $ 9,644

As of June 30, 2022, there were no reductions in goodwill relating to impairment losses.

Balance as of September 30, 2022 $ 2,276 $ 280 $ 202 $ 3,881 $ 6,639

We assess goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

We recognize a goodwill impairment charge for the amount by which a reporting unit's carrying amount exceeds its fair value.

Goodwill Impairments

As described in Note 2, we acquired Hillrom on December 13, 2021 and recognized $ 6.8 billion of goodwill and $ 6.0 billion of other intangible assets, including $ 1.9 billion of indefinite-lived intangible assets, in connection with that acquisition.

Our Hillrom segment includes the following three reporting units:

Patient Support Systems, Front Line Care and Surgical Solutions.

During the third quarter of 2022, we performed trigger-based impairment tests of the goodwill of each of those three reporting units, as well as the indefinite-lived intangible assets, consisting primarily of trade names, that we acquired in connection with the Hillrom acquisition.

We performed those tests as of September 30, 2022 due to (a) current macroeconomic conditions, including the rising interest rate environment and broad declines in equity valuations, and (b) reduced earnings forecasts for our three Hillrom reporting units, driven primarily by current shortages of certain component parts used in our products, raw materials inflation and increased supply chain costs.

The impairment tests resulted in total pre-tax goodwill impairment charges of $ 2.8 billion in the third quarter of 2022, consisting of a $ 1.4 billion goodwill impairment for our Patient Support Systems reporting unit, a $ 1.0 billion goodwill impairment for our Front Line Care reporting unit and a $ 0.4 billion goodwill impairment for our Surgical

Solutions reporting unit.

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

The fair values of the reporting units tested for impairment during the third quarter of 2022 were determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach).

Significant inputs to the reporting unit fair value measurements included forecasted cash flows, discount rates, terminal growth rates and earnings multiples.

Our reporting unit fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.

Other intangible assets, net

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(in millions) Customer relationships Developed technology, including patents Other amortized intangible assets Trade names In process Research and Development

June 30, 2022

September 30, 2022

Gross other intangible assets $ 3,447 $ 3,752 $ 310 $ 1,578 $ 213 $ 9,300

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Other intangible assets, net $ 3,275 $ 2,245 $ 132 $ 1,910 $ 230 $ 7,792

Intangible asset amortization expense was $ 193 million and $ 67 million for the three months ended June 30, 2022 and 2021, respectively, and $ 410 million and $ 131 million for the six months ended June 30, 2022 and 2021.

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

Indefinite-lived Intangible Asset Impairments

In addition to the goodwill impairments discussed above, we recognized pre-tax impairment charges of $ 332 million in the third quarter of 2022 to reduce the carrying amounts of certain indefinite-lived intangible assets, which related to trade names acquired in the Hillrom acquisition, to their estimated fair values.

Those intangible asset impairment charges are classified within cost of sales in the accompanying condensed consolidated statements of income (loss) for the three and nine months ended September 30, 2022.

The fair values of the indefinite-lived intangible assets tested for impairment were determined using a discounted cash flow model and significant inputs included forecasted cash flows, royalty rates and discount rates.

Our indefinite-lived intangible asset fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.

FINANCING ARRANGEMENTS

Significant Debt Activity

In December 2021, we issued $ 800 million of 0.868 % senior notes due in 2023, $ 1.4 billion of 1.322 % senior notes due in 2024, $ 1.45 billion of 1.915 % senior notes due in 2027, $ 1.25 billion of 2.272 % senior notes due in 2028, $ 1.55 billion of 2.539 % senior notes due in 2032, $ 750 million of 3.132 % senior notes due in 2051, $ 300 million of floating rate senior notes due in 2023 and $ 300 million of floating rate senior notes due in 2024 (collectively, the Hillrom notes) to fund a portion of the consideration for the Hillrom acquisition, repay certain indebtedness of Hillrom and to pay fees and expenses related to the foregoing.

In conjunction with the issuances of the Hillrom notes, we entered into a registration rights agreement in which we agreed to file a registration statement with the SEC with respect to an offer to exchange the Hillrom notes for new issues of notes with the same terms registered under the

Securities Act of 1933, as amended.

Those exchange offers with respect to the Hillrom notes were completed in the second quarter of 2022.

In the first half of 2022, we repaid $ 335 million of our $ 2.0 billion three-year term loan facility and $ 355 million of our $ 2.0 billion five-year term loan facility.

The loss from the early extinguishment of this debt was not significant.

Those exchange offers with respect to the Hillrom notes were completed in June 2022.

In the third quarter of 2022, we amended the credit agreements governing our term loan facility and our U.S.

dollar-denominated revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to delay the commencement of our net leverage ratio covenant step-down schedule until June 30, 2024.

We also amended the credit agreements governing our term loan facility and our U.S.

dollar denominated revolving credit facility to transition the benchmark rate from LIBOR to the Secured Overnight Financing Rate (SOFR).

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

Credit Facilities

1 unchanged sentence

Each of the facilities matures in 2026.

There were no borrowings outstanding under these credit facilities as of June 30, 2022 or December 31, 2021.

dollar-denominated revolving credit facility guarantees our obligations under commercial paper borrowings, which reduces our borrowing capacity by the amount of such outstanding commercial paper borrowings.

There were no borrowings outstanding under these credit facilities as of September 30, 2022 or December 31, 2021.

Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings.

Commercial Paper

As of June 30, 2022, we had $ 200 million of commercial paper outstanding with a weighted-average interest rate of 1.8 % and an original weighted-average term of 51 days.

As of September 30, 2022, we had $ 275 million of commercial paper outstanding with a weighted-average interest rate of 3.02 % and an original weighted-average term of 49 days.

As of December 31, 2021, we had $ 300 million of commercial paper outstanding with a weighted-average interest rate of 0.27 % and an original weighted-average term of 88 days.

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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

As of June 30, 2022 and December 31, 2021, our total recorded reserves with respect to legal and environmental matters were $ 38 million and $ 72 million, respectively.

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

As of September 30, 2022 and December 31, 2021, our total recorded reserves with respect to legal and environmental matters were $ 31 million and $ 72 million, respectively.

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

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Separate from these Superfund cases noted above, we are involved in an ongoing environmental remediations associated with historic operations at certain of our facilities.

As of June 30, 2022 and December 31, 2021, our environmental reserves, which are measured on an undiscounted basis, were $ 18 million, respectively.

As of September 30, 2022 and December 31, 2021, our

environmental reserves, which are measured on an undiscounted basis, were $ 17 million and $ 18 million, respectively.

After considering these reserves, the outcome of these matters is not expected to have a material adverse effect on our financial position or results of operations.

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The Company has cooperated with the staff of the SEC in its investigation into related matters, and on February 18, 2022, we reached a settlement with the SEC.

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.

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.

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We have since resolved, without litigation, additional claims of injuries from exposure to ethylene oxide at Mountain Home for amounts within accruals previously established as of December 31, 2021.

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

On October 20, 2022, a lawsuit was filed against us in the Western District of Arkansas alleging injury as a result of exposure to ethylene oxide at Mountain Home.

In July 2021, Hill-Rom, Inc.

received a subpoena (from the United States Office of Inspector General for the Department of Health and Human Services (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.

received a subpoena (from the United States Office of Inspector General for the Department of Health and Human Services (DHHS) requesting documents and information related to compliance with the False Claims Act and the Anti-Kickback Statute.

Hillrom has been working with the DHHS and the Department of Justice (DOJ) to provide information responsive to the subpoena.

Hillrom also voluntarily began a related internal review and Hillrom and now Baxter have been cooperating fully with the DHHS and the DOJ with respect to these matters.

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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.

Linet alleges that Hillrom violated Sections 1, 2 and 3 of The Sherman Antitrust Act of 1890 and the Illinois Antitrust Act by

allegedly engaging in anti-competitive conduct in alleged markets for standard, ICU and birthing beds.

Hillrom filed an answer to the complaint on January 28, 2022 and filed on May 27, 2022, a motion challenging certain aspects of plaintiff's case.

1 unchanged sentence

Cash Dividends

Cash dividends declared per share for the three and six months ended June 30, 2022 were $ 0.29 and $ 0.57 .

Cash dividends declared per share for the three and six months ended June 30, 2021 were $ 0.28 and $ 0.525 .

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

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

Stock Repurchase Programs

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Our Board of Directors increased this authority by an additional $ 1.5 billion in each of November 2016 and February 2018, by an additional $ 2.0 billion in November 2018 and by an additional $ 1.5 billion in October 2020.

During the second quarter of 2022 we repurchased 0.1 million shares under this authority pursuant to Rule 10b5-1 plans.

During the first half of 2021, we repurchased 7.3 million shares under this authority pursuant to Rule 10b5-1 plans.

We had $ 1.3 billion remaining available under the authorization as of June 30, 2022.

During the first nine months of 2022, we repurchased 0.5 million shares under this authority pursuant to a Rule 10b5-1 plan.

During the first nine months of 2021, we repurchased 7.3 million shares under this authority pursuant to Rule 10b5-1 plans.

We had $ 1.3 billion remaining available under the authorization as of September 30, 2022.

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, currency translation adjustments (CTA), certain gains and losses from pension and other postretirement employee benefit (OPEB) plans and gains and losses on cash flow hedges.

The following table is a net-of-tax summary of the changes in accumulated other comprehensive (loss) income (AOCI) by component for the six months ended June 30, 2022 and 2021.

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

The following table is a net-of-tax summary of the changes in accumulated other comprehensive income (loss) (AOCI) by component for the nine months ended September 30, 2022 and 2021.

(in millions) CTA Pension and OPEB plans Hedging activities Available-for-sale Debt securities Total

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Net other comprehensive income (loss) ( 751 ) 48 27 2 ( 674 )

Balance as of June 30, 2022 $ ( 3,339 ) $ ( 315 ) $ ( 115 ) $ 2 $ ( 3,767 )

Balance as of September 30, 2022 $ ( 3,658 ) $ ( 299 ) $ ( 99 ) $ 2 $ ( 4,054 )

(in millions) CTA Pension and OPEB plans Hedging activities Total

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Net other comprehensive income (loss) ( 257 ) 63 26 ( 168 )

Balance as of June 30, 2021 $ ( 2,707 ) $ ( 533 ) $ ( 136 ) $ ( 3,376 )

Balance as of September 30, 2021 $ ( 2,844 ) $ ( 511 ) $ ( 127 ) $ ( 3,482 )

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

The following is a summary of the amounts reclassified from AOCI to net income during the three and six months ended June 30, 2022 and 2021.

The following is a summary of the amounts reclassified from AOCI to net income during the three and nine months ended September 30, 2022 and 2021.

Amounts reclassified from AOCI (a)

(in millions) Three months ended June 30, 2022 Six months ended

June 30, 2022 Location of impact in income statement

(in millions) Three months ended September 30, 2022 Nine months ended

September 30, 2022 Location of impact in income statement

Reclassification of cumulative translation loss to earnings $ ( 65 ) $ ( 65 ) Other (income) expense, net

Tax effect — — Income tax expense

$ ( 65 ) $ ( 65 ) Net of tax

Pension and OPEB items

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Amounts reclassified from AOCI (a)

(in millions) Three months ended June 30, 2021 Six months ended June 30, 2021 Location of impact in income statement

(in millions) Three months ended September 30, 2021 Nine months ended September 30, 2021 Location of impact in income statement

Amortization of pension and OPEB items

Amortization of net losses and prior service costs or credits $ ( 20 ) $ ( 41 ) Other expense, net

Amortization of net losses and prior service costs or credits $ ( 21 ) $ ( 62 ) Other (income) expense, net

Tax effect 4 12 Income tax expense

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Total reclassifications for the period $ ( 22 ) $ ( 71 ) Total net of tax

Refer to Note 11 for additional information regarding the amortization of pension and OPEB items and Note 14 for additional information regarding hedging activity.

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

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.

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Some of our contracts have multiple performance obligations.

For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.

For contracts with multiple performance obligations, we allocate the

contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.

Our global payment terms are typically between 30 - 90 days.

Most of our performance obligations are satisfied at a point in time.

This includes sales of our broad portfolio of essential healthcare products across our geographic segments including acute and chronic dialysis therapies;

This includes sales of our broad portfolio of essential healthcare products across our business segments.

Our three legacy Baxter geographic segments include acute and chronic dialysis therapies;

sterile IV solutions;

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generic injectable pharmaceuticals;

surgical hemostat and sealant products;

hospital beds and services;

surgical tables, lights and pendants;

and patient monitoring and diagnostic technologies.

and surgical hemostat and sealant products.

Our legacy Hillrom segment includes smart bed systems;

patient monitoring and diagnostic technologies;

respiratory health devices;

and advanced equipment for the surgical space.

For most of those sales, our performance obligation is satisfied upon delivery to the customer.

Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation.

To a lesser extent, in all of our segments, we enter into other types of contracts including contract manufacturing arrangements, equipment leases, and certain subscription software and licensing arrangements.

To a lesser extent, we enter into arrangements for which revenue may be recognized over time.

For example, our Americas segment includes contract manufacturing arrangements, our Hillrom segment includes digital and connected care solutions and collaboration tools that are implemented over time and all of our segments include equipment leases and certain subscription software and licensing arrangements.

We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services.

Revenue is recognized over time when we are creating or enhancing an asset that the customer controls as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.

As of June 30, 2022, we had $ 10.8 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of more than one year, which are primarily included in the Americas segment.

As of September 30, 2022, we had $ 10.9 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of more than one year, which are primarily included in the Americas segment.

Some contracts in the United States included in this amount contain index-dependent price increases, which are not known at this time.

We expect to recognize approximately 15 % of this amount as revenue over the remainder of 2022, 30 % in 2023, 25 % in 2024, 15 % in 2025 and 15 % thereafter.

We expect to recognize approximately 10 % of this amount as revenue over the remainder of 2022, 30 % in each of 2023 and 2024, 15 % in 2025 and 15 % thereafter.

Significant Judgments

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These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in accrued expenses and other current liabilities and accounts receivable, net on the condensed consolidated balance sheets.

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.

Management's estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns.

Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract using the expected value method.

The amount of variable consideration included in the net sales price is limited to the amount for which it is probable that a significant reversal in revenue will not occur when the related uncertainty is resolved.

Revenue recognized during the three and six months ended June 30, 2022 and 2021 related to performance obligations satisfied in prior periods was not material.

Revenue recognized during the three and nine months ended September 30, 2022 and 2021 related to performance obligations satisfied in prior periods was not material.

Additionally, our contracts with customers often include promises to transfer multiple products and services to a customer.

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The timing of revenue recognition, billings and cash collections results in the recognition of trade accounts receivable, unbilled receivables, contract assets and customer advances and deposits (contract liabilities) on our condensed consolidated balance sheets.

Net trade accounts receivable was $ 2.3 billion and $ 2.4 billion as of June 30, 2022 and December 31, 2021, respectively.

Net trade accounts receivable was $ 2.3 billion and $ 2.4 billion as of September 30, 2022 and December 31, 2021, respectively.

For contract manufacturing arrangements, revenue is primarily recognized throughout the production cycle, which typically lasts up to 90 days, resulting in the recognition of contract assets until the related services are completed and the customers are billed.

Additionally, for 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 .

Additionally, for certain arrangements containing a performance obligation to deliver software that can be used with medical devices, we recognize revenue upon delivery of the software, which results in the recognition of contract assets when customers are billed over time, generally over one to five years .

For bundled contracts involving equipment delivered up-front and consumable medical products to be delivered over time, total contract revenue is allocated between the equipment and consumable medical products.

In certain of those arrangements, a contract asset is created for the difference between the amount of equipment revenue recognized upon delivery and the amount of consideration initially receivable from the customer.

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

In those arrangements, the

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

The following table summarizes our contract assets:

(in millions) June 30,

(in millions) September 30,

2022 December 31,

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

(in millions) June 30,

(in millions) September 30,

2022 December 31,

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We expect to satisfy the majority of the remaining performance obligations and recognize revenue related to installation and service contracts within the next 12 months with most of the non-current performance obligations satisfied within 24 months.

The following table summarizes contract liability activity for the six months ended June 30, 2022.

The following table summarizes contract liability activity for the nine months ended September 30, 2022.

The contract liability balance represents the transaction price allocated to the remaining performance obligations.

Six months ended

June 30, 2022

Nine months ended

September 30, 2022

Balance at beginning of period $ 246

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Balance at end of period $ 240

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

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

Disaggregation of Net Sales

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and international:

Three Months Ended June 30,

Three Months Ended September 30,

(in millions) U.S.

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Total Baxter $ 1,849 $ 1,924 $ 3,773 $ 1,319 $ 1,907 $ 3,226

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions) U.S.

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

devices, software, communications and integration technologies.

devices, software, communications and integration technologies and smart beds.

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.

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We allocate revenue between equipment leases and medical products based on their standalone selling prices.

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

(in millions) Three months ended June 30, 2022 Six months ended June 30, 2022

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

(in millions) Three months ended September 30, 2022 Nine months ended September 30, 2022

Sales-type lease revenue $ 3 $ 11

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Total lease revenue $ 157 $ 432

(in millions) Three months ended June 30, 2021 Six months ended June 30, 2021

(in millions) Three months ended September 30, 2021 Nine months ended September 30, 2021

Sales-type lease revenue $ 3 $ 19

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Total lease revenue $ 51 $ 168

Our net investment in sales-type leases was $ 101 million as of June 30, 2022, of which $ 21 million originated in 2018 and prior, $ 21 million in 2019, $ 28 million in 2020, $ 25 million in 2021, and $ 6 million in 2022.

Our net investment in sales-type leases was $ 95 million as of September 30, 2022, of which $ 18 million originated in 2018 and prior, $ 19 million in 2019, $ 26 million in 2020, $ 24 million in 2021, and $ 8 million in 2022.

BUSINESS OPTIMIZATION CHARGES

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In the current period, restructuring charges include actions taken in connection with our integration of Hillrom.

From the commencement of our business optimization activities in the second half of 2015 through June 30, 2022, we have incurred cumulative pre-tax costs of $ 1.3 billion related to these actions.

From the commencement of our business optimization activities in the second half of 2015 through September 30, 2022, we have incurred cumulative pre-tax costs of $ 1.4 billion related to these actions.

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

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We continue to pursue cost savings initiatives, including those related to our integration of Hillrom, and, to the extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs to implement business optimization programs in future periods.

During the three and six months ended June 30, 2022 and 2021, we recorded the following charges related to business optimization programs.

Three Months Ended June 30, Six Months Ended June 30,

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

Three Months Ended September 30, Nine Months Ended September 30,

(in millions) 2022 2021 2022 2021

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

Costs to implement business optimization programs for the three and six months ended June 30, 2022 and 2021, respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs.

Costs to implement business optimization programs for the three and nine months ended September 30, 2022 and 2021, respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs.

These costs were primarily included within cost of sales and SG&A expense.

During the three and six months ended June 30, 2022 and 2021, we recorded the following restructuring charges.

Three months ended June 30, 2022

(in millions) COGS SG&A Total

During the three and nine months ended September 30, 2022 and 2021, we recorded the following restructuring charges.

Three months ended September 30, 2022

(in millions) COGS SG&A R&D Total

Employee termination costs $ 13 $ 36 $ 4 $ 53

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Total restructuring charges $ 14 $ 39 $ 4 $ 57

Three months ended June 30, 2021

Three months ended September 30, 2021

(in millions) COGS SG&A Total

Employee termination costs $ 11 $ 8 $ 19

Contract termination and other costs — 2 2

Asset impairments 11 — 11

Total restructuring charges $ 22 $ 10 $ 32

Six months ended June 30, 2022

(in millions) COGS SG&A Total

Nine months ended September 30, 2022

(in millions) COGS SG&A R&D Total

Employee termination costs $ 19 $ 99 $ 4 $ 122

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Total restructuring charges $ 20 $ 126 $ 4 $ 150

Six months ended June 30, 2021

Nine months ended September 30, 2021

(in millions) COGS SG&A Total

Employee termination costs $ 35 $ 14 $ 49

Contract termination and other costs — 2 2

Asset impairments 16 — 16

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Currency translation ( 14 )

Liability balance as of June 30, 2022 $ 116

Substantially all of our restructuring liabilities as of June 30, 2022 relate to employee termination costs, with the remaining liabilities attributable to contract termination costs.

Liability balance as of September 30, 2022 $ 128

Substantially all of our restructuring liabilities as of September 30, 2022 relate to employee termination costs, with the remaining liabilities attributable to contract termination costs.

Substantially all of the cash payments for those liabilities are expected to be disbursed by the end of 2023.

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Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

(in millions) 2022 2021 2022 2021

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Years of additional service earned and eligible compensation received after December 31, 2022 will not be included in the determination of the benefits payable to those participants.

This change resulted in an $ 11 million decline in the projected benefit obligation (PBO) with an offsetting curtailment gain included within other income (expense), net on the condensed consolidated statements of income for the three months and six months ended June 30, 2022.

Our effective income tax rate was 13.6 % and 23.2 % for the three months ended June 30, 2022 and 2021, respectively, and 15.7 % and 19.1 % for the six months ended June 30, 2022 and 2021, respectively.

This change resulted in an $ 11 million decline in the projected benefit obligation (PBO) with an offsetting curtailment gain included within other (income) expense, net on the condensed consolidated statements of income (loss) for the nine months ended September 30, 2022.

Our effective income tax rate was 1.1 % and ( 0.2 )% for the three months ended September 30, 2022 and 2021, respectively, and ( 1.1 )% and 11.8 % for the nine months ended September 30, 2022 and 2021, respectively.

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

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

For the three and six months ended June 30, 2022, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a favorable geographic earnings mix and discrete tax matters in various jurisdictions, of which none were individually material, partially offset by an increase in our liabilities for uncertain tax positions.

For the three and six months ended June 30, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a favorable geographic earnings mix and decreases in accrued withholding taxes in several foreign jurisdictions, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.

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

For the three and nine months ended September 30, 2022, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to non-deductible goodwill impairments.

For the three months ended September 30, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a $ 58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.

For the nine months ended September 30, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a $ 58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, as well as a favorable geographic earnings mix and changes related to our ability to realize tax credit carryforwards based on a favorable tax ruling in a foreign jurisdiction.

EARNINGS PER SHARE

The numerator for both basic and diluted earnings per share (EPS) is net income attributable to Baxter stockholders.

The numerator for both basic and diluted earnings per share (EPS) is net income (loss) attributable to Baxter stockholders.

The denominator for basic EPS is the weighted-average number of shares outstanding during the period.

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Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

(in millions) 2022 2021 2022 2021

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Diluted shares 504 506 503 509

The effect of dilutive securities includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs.

The computation of diluted EPS excludes 12 million and 8 million equity awards for the three and six months ended June 30, 2022, respectively, and 7 million equity awards for the three and six months ended June 30, 2021, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS.

Basic and diluted shares are the same for the three and nine months ended September 30, 2022 due to our net losses for those periods.

The effect of dilutive securities for the three and nine months ended September 30, 2021 includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs.

Diluted EPS excludes 23 million shares issuable under equity awards for the three and nine months ended September 30, 2022, respectively, and 7 million shares issuable under equity awards for the three and nine months ended September 30, 2021, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS.

Refer to Note 7 for additional information regarding items impacting basic and diluted shares.

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

Cash flow hedges are classified in 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.

The notional amounts of foreign exchange contracts designated as cash flow hedges were $ 403 million and $ 377 million as of June 30, 2022 and December 31, 2021, respectively.

The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at June 30, 2022 is 12 months for foreign exchange contracts.

There were no outstanding interest rate contracts designated as cash flow hedges as of June 30, 2022 and December 31, 2021.

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.

The notional amounts of foreign exchange contracts designated as cash flow hedges were $ 407 million and $ 377 million as of September 30, 2022 and December 31, 2021, respectively.

The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at September 30, 2022 is 12 months for foreign exchange contracts.

There were no outstanding interest rate contracts designated as cash flow hedges as of September 30, 2022 and December 31, 2021.

Fair Value Hed g es

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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.

There were no outstanding interest rate contracts designated as fair value hedges as of June 30, 2022 and December 31, 2021.

There were no outstanding interest rate contracts designated as fair value hedges as of September 30, 2022 and December 31, 2021.

Net Investment Hed g es

2 unchanged sentences

We have designated these debt obligations 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.

As of June 30, 2022, we had an accumulated pre-tax unrealized translation gain in AOCI of $ 139 million related to the Euro-denominated senior notes.

As of September 30, 2022, we had an accumulated pre-tax unrealized translation gain in AOCI of $ 265 million related to the Euro-denominated senior notes.

Dedesignations

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

There were no hedge dedesignations in the first six months of 2022 or 2021 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur.

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

If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged item at the date of termination is amortized to earnings over the remaining term of the hedged item.

There were no fair value hedges terminated during the first six months of 2022 or 2021.

There were no fair value hedges terminated during the first nine months of 2022 or 2021.

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

There were no net investment hedges terminated during the first six months of 2022 or 2021.

There were no net investment hedges terminated during the first nine months of 2022 or 2021.

Undesignated Derivative Instruments

1 unchanged sentence

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 $ 998 million as of June 30, 2022 and $ 851 million as of December 31, 2021.

The total notional amount of undesignated derivative instruments was $ 548 million as of September 30, 2022 and $ 851 million as of December 31, 2021.

Gains and Losses on Hedging Instruments and Undesignated Derivative Instruments

The following tables summarize the gains and losses on our hedging instruments and the classification of those gains and losses within our condensed consolidated financial statements for the three months ended June 30, 2022 and

Gain (loss) recognized in OCI Location of gain (loss)

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Foreign exchange contracts Other (income) expense, net $ ( 11 ) $ ( 7 )

Gain (loss) recognized in OCI Location of gain (loss)

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Foreign exchange contracts Other (income) expense, net $ ( 34 ) $ ( 26 )

As of June 30, 2022, $ 7 million of deferred, net after-tax gains on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

As of September 30, 2022, $ 22 million of deferred, net after-tax gains on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

Derivative Assets and Liabilities

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of June 30, 2022.

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of September 30, 2022.

Derivatives in asset positions Derivatives in liability positions

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in millions) Asset Liability Asset Liability

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in the carrying amount of the hedged item (a)

(in millions) Balance as of June 30, 2022 Balance as of December 31, 2021 Balance as of June 30, 2022 Balance as of December 31, 2021

(in millions) Balance as of September 30, 2022 Balance as of December 31, 2021 Balance as of September 30, 2022 Balance as of December 31, 2021

Long-term debt $ 101 $ 101 $ 4 $ 4

3 unchanged sentences

Basis of fair value measurement

(in millions) Balance as of June 30, 2022 Quoted prices in active markets for identical assets

(in millions) Balance as of September 30, 2022 Quoted prices in active markets for identical assets

(Level 1) Significant other

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Total $ 148 $ — $ 5 $ 143

As of June 30, 2022 and December 31, 2021, cash and cash equivalents of $ 1.9 billion and $ 3.0 billion, respectively, included money market and other short-term funds of approximately $ 247 million and $ 816 million, respectively, which are considered Level 2 in the fair value hierarchy.

As of September 30, 2022 and December 31, 2021, cash and cash equivalents of $ 1.6 billion and $ 3.0 billion, respectively, included money market and other short-term funds of approximately $ 161 million and $ 816 million, respectively, which are considered Level 2 in the fair value hierarchy.

For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs.

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The fair value of milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or the expected timing of payments is accelerated.

The fair value of sales-based payments is based upon probability-weighted future

revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increases or the expected timing of payment is accelerated.

The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increases or the expected timing of payment is accelerated.

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

Three months ended June 30,

Three months ended September 30,

(in millions) Contingent payments related to acquisitions Available-for-sale debt securities Contingent payments related to acquisitions

Fair value at beginning of period $ 113 $ 44 $ 34

Additions — — 28

Change in fair value recognized in earnings ( 6 ) — ( 1 )

Change in fair value recognized in AOCI — 1 —

Transfers out of Level 3 — ( 10 ) —

Currency translation — — 1

Payments ( 17 ) — —

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

Six months ended June 30,

Nine months ended September 30,

(in millions) Contingent payments related to acquisitions Available-for-sale debt securities Contingent payments related to acquisitions

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

During the second quarter and first half of 2022, $ 8 million of available-for-sale debt securities that were previously classified as Level 3 converted to marketable equity securities, which are classified as Level 1 in the fair value hierarchy, upon the initial public offering of the investee.

During the nine months ended September 30, 2022, $ 8 million of available-for-sale debt securities that were previously classified as Level 3 converted to marketable equity securities, which are classified as Level 1 in the fair value hierarchy, upon the initial public offering of the investee.

Financial Instruments Not Measured at Fair Value

In addition to the financial instruments that we are required to recognize at fair value in the condensed 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 condensed consolidated balance sheets and the estimated fair values as of June 30, 2022 and December 31, 2021.

For these financial instruments, the following table provides the values recognized in the condensed consolidated balance sheets and the estimated fair values as of September 30, 2022 and December 31, 2021.

Book values Fair values(a)

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The carrying value of short-term debt approximates its fair value due to the short-term maturities of the obligations.

The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of

the respective debt instruments.

The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instruments.

Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with our credit risk.

The carrying values of other financial instruments, such as accounts receivable and accounts payable, approximate their fair values due to the short-term maturities of most of those assets and liabilities.

Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $ 104 million as of June 30, 2022 and $ 114 million as of December 31, 2021.

Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $ 102 million as of September 30, 2022 and $ 114 million as of December 31, 2021.

Those investments are included in Other non-current assets on our condensed consolidated balance sheets.

16 unchanged sentences

In connection with our ongoing integration activities, beginning in the first quarter 2022, we have updated the measure of profitability for our Hillrom segment by excluding such unallocated costs, consistent with our legacy Baxter segments.

Those unallocated costs related to Hillrom, which totaled $ 61 million and $ 280 million for the three and six months ended June 30, 2022, respectively, are now presented within Corporate as well.

Those unallocated costs related to Hillrom, which totaled $ 3.0 billion and $ 3.3 billion for the three and nine months ended September 30, 2022, respectively, and primarily related to goodwill and intangible asset impairments are now presented within Corporate as well.

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

1 unchanged sentence

Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

(in millions) 2022 2021 2022 2021

12 unchanged sentences

Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

(in millions) 2022 2021 2022 2021

1 unchanged sentence

Corporate and other ( 3,899 ) ( 496 ) ( 5,517 ) ( 1,497 )

Total operating income 340 424 503 814

Total operating income (loss) ( 2,799 ) 513 ( 2,296 ) 1,327

Interest expense, net 104 50 278 118

Other (income) expense, net 63 12 3 15

Income before income taxes $ 295 $ 392 $ 389 $ 743

Income (loss) before income taxes $ ( 2,966 ) $ 451 $ ( 2,577 ) $ 1,194

Refer to Note 9 for additional information on Net Sales by product category.

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-Q

Item 1. Financial Statements