UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~September 30, 2020~~March 31, 2021


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

For the transition period from to

Commission file number 1-4448

BAXTER INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

Delaware

36-0781620

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

One Baxter Parkway,

Deerfield,

Illinois

60015

(Address of Principal Executive Offices)

(Zip Code)

224.

948.2000

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 par value

BAX (NYSE)

New York Stock Exchange

Chicago Stock Exchange

0.4% Global Notes due 2024

BAX 24

New York Stock Exchange

1.3% Global Notes due 2025

BAX 25

New York Stock Exchange

1.3% Global Notes due 2029

BAX 29

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

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

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

The number of shares of the registrant’s Common Stock, par value $1.00 per share, outstanding as of ~~October~~April 22, ~~2020~~2021 was ~~510,818,398~~502,851,993 shares.

BAXTER INTERNATIONAL INC.

FORM 10-Q

For the quarterly period ended ~~September 30, 2020~~March 31, 2021

TABLE OF CONTENTS


		Page Number
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Condensed Consolidated Statements of Changes in Equity	5
	Condensed Consolidated Statements of Cash Flows	76
	Notes to Condensed Consolidated Financial Statements	87
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2927
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4438
Item 4.	Controls and Procedures	45
~~Review by Independent Registered Public Accounting Firm~~		47
~~Report of Independent Registered Public Accounting Firm~~		4839

PART II.	OTHER INFORMATION	4940
Item 1.	Legal Proceedings	4940
Item 1A.	Risk Factors	4940
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5040
Item 6.	Exhibits	5141
Signature		5242

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Baxter International Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in millions, except share information)


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	4,359	$	3,335	Cash and cash equivalents	$	3,182	$	3,730
Accounts receivable, net of allowances of $122 in 2020 and $112 in 2019		2,001		1,896
Accounts receivable, net of allowances of $120 in 2021 and $125 in 2020						Accounts receivable, net of allowances of $120 in 2021 and $125 in 2020	1,915		2,007
Inventories	Inventories	1,988		1,653		Inventories	2,017		1,916
Prepaid expenses and other current assets	Prepaid expenses and other current assets	685		619		Prepaid expenses and other current assets	742		758
Total current assets	Total current assets	9,033		7,503		Total current assets	7,856		8,411
Property, plant and equipment, net	Property, plant and equipment, net	4,460		4,512		Property, plant and equipment, net	4,614		4,722
Goodwill	Goodwill	3,094		3,030		Goodwill	3,111		3,217
Other intangible assets, net	Other intangible assets, net	1,678		1,471		Other intangible assets, net	1,962		1,671
Operating lease right-of-use assets	Operating lease right-of-use assets	578		608		Operating lease right-of-use assets	567		603
Other non-current assets	Other non-current assets	1,255		1,069		Other non-current assets	1,356		1,395
Total assets	Total assets	$	20,098	$	18,193	Total assets	$	19,466	$	20,019
Current liabilities:	Current liabilities:					Current liabilities:
Short-term debt		$	0	$	226

Current maturities of long-term debt and finance lease obligations	Current maturities of long-term debt and finance lease obligations	727		315		Current maturities of long-term debt and finance lease obligations	407		406
Accounts payable and accrued liabilities		2,695		2,689
Accounts payable						Accounts payable	1,023		1,043
Accrued expenses and other current liabilities						Accrued expenses and other current liabilities	1,757		1,884
Total current liabilities	Total current liabilities	3,422		3,230		Total current liabilities	3,187		3,333
Long-term debt and finance lease obligations	Long-term debt and finance lease obligations	5,760		4,809		Long-term debt and finance lease obligations	5,681		5,786
Operating lease liabilities	Operating lease liabilities	490		510		Operating lease liabilities	472		501
Other non-current liabilities	Other non-current liabilities	1,824		1,732		Other non-current liabilities	1,636		1,673
Total liabilities	Total liabilities	11,496		10,281		Total liabilities	10,976		11,293
Commitments and contingencies	Commitments and contingencies					Commitments and contingencies	0
Equity:	Equity:					Equity:
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2020 and 2019		683		683
Common stock in treasury, at cost, 172,705,772 shares in 2020 and 177,340,358 shares in 2019		(10,571)		(10,764)
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2021 and 2020						Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2021 and 2020	683		683
Common stock in treasury, at cost, 180,817,748 shares in 2021 and 178,580,208 shares in 2020						Common stock in treasury, at cost, 180,817,748 shares in 2021 and 178,580,208 shares in 2020	(11,296)		(11,051)
Additional contributed capital	Additional contributed capital	6,009		5,955		Additional contributed capital	6,043		6,043
Retained earnings	Retained earnings	16,285		15,718		Retained earnings	16,502		16,328
Accumulated other comprehensive (loss) income	Accumulated other comprehensive (loss) income	(3,839)		(3,710)		Accumulated other comprehensive (loss) income	(3,480)		(3,314)
Total Baxter stockholders’ equity	Total Baxter stockholders’ equity	8,567		7,882		Total Baxter stockholders’ equity	8,452		8,689
Noncontrolling interests	Noncontrolling interests	35		30		Noncontrolling interests	38		37
Total equity	Total equity	8,602		7,912		Total equity	8,490		8,726
Total liabilities and equity	Total liabilities and equity	$	20,098	$	18,193	Total liabilities and equity	$	19,466	$	20,019

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

Baxter International Inc.

Condensed Consolidated Statements of Income (unaudited)

(in millions, except per share data)


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2020		2019		2020		2019			2021		2020
Net sales	Net sales	$	2,972	$	2,851	$	8,492	$	8,323	Net sales	$	2,946	$	2,802
Cost of sales	Cost of sales	1,777		1,621		5,096		4,860		Cost of sales	1,801		1,639
Gross margin	Gross margin	1,195		1,230		3,396		3,463		Gross margin	1,145		1,163
Selling, general and administrative expenses	Selling, general and administrative expenses	601		627		1,819		1,869		Selling, general and administrative expenses	627		628
Research and development expenses	Research and development expenses	123		144		386		439		Research and development expenses	128		146
Other operating expense (income), net		1		(44)		(19)		(81)
Other operating income, net										Other operating income, net	0		(20)
Operating income	Operating income	470		503		1,210		1,236		Operating income	390		409
Interest expense, net	Interest expense, net	39		13		96		51		Interest expense, net	34		21
Other (income) expense, net		16		9		32		(8)
Other expense, net										Other expense, net	5		10
Income before income taxes	Income before income taxes	415		481		1,082		1,193		Income before income taxes	351		378
Income tax expense	Income tax expense	56		106		143		163		Income tax expense	51		45
Net income	Net income	359		375		939		1,030		Net income	300		333
Net income attributable to noncontrolling interests	Net income attributable to noncontrolling interests	3		6		5		6		Net income attributable to noncontrolling interests	2		1
Net income attributable to Baxter stockholders	Net income attributable to Baxter stockholders	$	356	$	369	$	934	$	1,024	Net income attributable to Baxter stockholders	$	298	$	332
Earnings per share	Earnings per share									Earnings per share
Basic	Basic	$	0.70	$	0.72	$	1.83	$	2.01	Basic	$	0.59	$	0.65
Diluted	Diluted	$	0.69	$	0.71	$	1.81	$	1.97	Diluted	$	0.58	$	0.64
Weighted-average number of shares outstanding	Weighted-average number of shares outstanding									Weighted-average number of shares outstanding
Basic	Basic	511		511		509		510		Basic	505		507
Diluted	Diluted	518		520		517		520		Diluted	511		516

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

Baxter International Inc.

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

(in millions)

Three months ended
September 30, Nine months ended
September 30,
2020 2019 2020 2019
Net income $ 359 $ 375 $ 939 $ 1,030
Other comprehensive income (loss), net of tax:
Currency translation adjustments, net of tax (benefit) expense of $18 and $(13) for the three months ended September 30, 2020 and 2019, respectively, and $12 and ($11) for the nine months ended September 30, 2020 and 2019, respectively 127 (177) (43) (272)
Pension and other postretirement benefits, net of tax expense of $0 and $3 for the three months ended September 30, 2020 and 2019, respectively, and $7 and $9 for the nine months ended September 30, 2020 and 2019, respectively 0 17 26 37
Hedging activities, net of tax (benefit) expense of $5 and ($13) for the three months ended September 30, 2020 and 2019, respectively, and ($33) and ($21) for the nine months ended September 30, 2020 and 2019, respectively 22 (42) (112) (69)
Total other comprehensive income (loss), net of tax 149 (202) (129) (304)
Comprehensive income 508 173 810 726
Less: Comprehensive income attributable to noncontrolling interests 3 6 5 6
Comprehensive income attributable to Baxter stockholders $ 505 $ 167 $ 805 $ 720


	Three months ended March 31,
	2021		2020
Net income	$	300	$	333
Other comprehensive income (loss), net of tax:
Currency translation adjustments, net of tax expense (benefit) of $17 and $(8) for the three months ended March 31, 2021 and 2020, respectively	(208)		(359)
Pension and other postretirement benefits, net of tax expense of $8 and $6 for the three months ended March 31, 2021 and 2020, respectively	30		22
Hedging activities, net of tax expense (benefit) of $3 and ($39) for the three months ended March 31, 2021 and 2020, respectively	12		(130)
Total other comprehensive income (loss), net of tax	(166)		(467)
Comprehensive income (loss)	134		(134)
Less: Comprehensive income attributable to noncontrolling interests	2		1
Comprehensive income (loss) attributable to Baxter stockholders	$	132	$	(135)

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

Baxter International Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)

(in millions)


		For the three months ended September 30, 2020																			For the three months ended March 31, 2021
		Baxter International Inc. stockholders' equity																			Baxter International Inc. stockholders' equity
		Common stock shares	Common stock		Common stock shares in treasury	Common stock in treasury		Additional contributed capital		Retained earnings		Accumulated other comprehensive income (loss)		Total Baxter stockholders' equity		Noncontrolling interests		Total equity			Common stock shares	Common stock		Common stock shares in treasury	Common stock in treasury		Additional contributed capital		Retained earnings		Accumulated other comprehensive income (loss)		Total Baxter stockholders' equity		Noncontrolling interests		Total equity
Balance as of July 1, 2020		683	$	683	173	$	(10,597)	$	5,975	$	16,055	$	(3,988)	$	8,128	$	32	$	8,160
Balance as of January 1, 2021																				Balance as of January 1, 2021	683	$	683	179	$	(11,051)	$	6,043	$	16,328	$	(3,314)	$	8,689	$	37	$	8,726

Net income	Net income	—	—		—	—		—		356		—		356		3		359		Net income	—	—		—	—		—		298		—		298		2		300
Other comprehensive income (loss)	Other comprehensive income (loss)	—	—		—	—		—		—		149		149		—		149		Other comprehensive income (loss)	—	—		—	—		—		—		(166)		(166)		—		(166)

Purchases of treasury stock																				Purchases of treasury stock	—	—		4	(300)		—		—		—		(300)		—		(300)
Stock issued under employee benefit plans and other	Stock issued under employee benefit plans and other	—	—		0	26		34		—		—		60		—		60		Stock issued under employee benefit plans and other	—	—		(2)	55		—		—		—		55		—		55
Dividends declared on common stock	Dividends declared on common stock	—	—		—	—		—		(126)		—		(126)		—		(126)		Dividends declared on common stock	—	—		—	—		—		(124)		—		(124)		—		(124)

Balance as of September 30, 2020		683	$	683	173	$	(10,571)	$	6,009	$	16,285	$	(3,839)	$	8,567	$	35	$	8,602
Change in noncontrolling interests																				Change in noncontrolling interests	—	—		—	—		—		—		—		—		(1)		(1)
Balance as of March 31, 2021																				Balance as of March 31, 2021	683	$	683	181	$	(11,296)	$	6,043	$	16,502	$	(3,480)	$	8,452	$	38	$	8,490

For the nine months ended September 30, 2020
Baxter International Inc. stockholders' equity
Common stock shares Common stock Common stock shares in treasury Common stock in treasury Additional contributed capital Retained earnings Accumulated other comprehensive income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity
Balance as of January 1, 2020 683 $ 683 177 $ (10,764) $ 5,955 $ 15,718 $ (3,710) $ 7,882 $ 30 $ 7,912
Adoption of new accounting standard — — — — — (4) 0 $ (4) — $ (4)
Net income — — — — — 934 — 934 5 939
Other comprehensive income (loss) — — — — — — (129) (129) — (129)
Stock issued under employee benefit plans and other — — (4) 193 54 0 — 247 — 247
Dividends declared on common stock — — — — — (363) — (363) — (363)
Balance as of September 30, 2020 683 $ 683 173 $ (10,571) $ 6,009 $ 16,285 $ (3,839) $ 8,567 $ 35 $ 8,602

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

~~Baxter International Inc.~~

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

~~(in millions)~~


	For the three months ended March 31, 2020
	Baxter International Inc. stockholders' equity
	Common stock shares	Common stock		Common stock shares in treasury	Common stock in treasury		Additional contributed capital		Retained earnings		Accumulated other comprehensive income (loss)		Total Baxter stockholders' equity		Noncontrolling interests		Total equity
Balance as of January 1, 2020	683	$	683	177	$	(10,764)	$	5,955	$	15,718	$	(3,710)	$	7,882	$	30	$	7,912
Adoption of new accounting standard	—	—		—	—		—		(4)		—		(4)		—		(4)
Net income	—	—		—	—		—		332		—		332		1		333
Other comprehensive income (loss)	—	—		—	—		—		—		(467)		(467)		—		(467)

Stock issued under employee benefit plans and other	—	—		(2)	87		(20)		—		—		67		—		67
Dividends declared on common stock	—	—		—	—		—		(111)		—		(111)		—		(111)

Balance as of March 31, 2020	683	$	683	175	$	(10,677)	$	5,935	$	15,935	$	(4,177)	$	7,699	$	31	$	7,730

For the three months ended September 30, 2019
Baxter International Inc. stockholders' equity
Common stock shares Common stock Common stock shares in treasury Common stock in treasury Additional contributed capital Retained earnings Accumulated other comprehensive income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity
Balance as of July 1, 2019 683 $ 683 173 $ (10,322) $ 5,906 $ 15,598 $ (4,086) $ 7,779 $ 24 $ 7,803
Net income — — — — — 369 — 369 6 375
Other comprehensive income (loss) — — — — — — (202) (202) — (202)
Purchases of treasury stock — — 4 (346) 0 — — (346) — (346)
Stock issued under employee benefit plans and other — — (2) 86 20 (1) — 105 — 105
Dividends declared on common stock — — — — — (117) — (117) — (117)
Change in noncontrolling interests — — — — — — — — (1) (1)
Balance as of September 30, 2019 683 $ 683 175 $ (10,582) $ 5,926 $ 15,849 $ (4,288) $ 7,588 $ 29 $ 7,617

For the nine months ended September 30, 2019
Baxter International Inc. stockholders' equity
Common stock shares Common stock Common stock shares in treasury Common stock in treasury Additional contributed capital Retained earnings Accumulated other comprehensive income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity
Balance as of January 1, 2019 683 $ 683 170 $ (9,989) $ 5,898 $ 15,075 $ (3,823) $ 7,844 $ 22 $ 7,866
Adoption of new accounting standards — — — — — 161 (161) — — 0
Net income — — — — — 1,024 — 1,024 6 1,030
Other comprehensive income (loss) — — — — — — (304) (304) — (304)
Purchases of treasury stock — — 14 (1,089) 46 — — (1,043) — (1,043)
Stock issued under employee benefit plans and other — — (9) 496 (18) (84) — 394 — 394
Dividends declared on common stock — — — — — (327) — (327) — (327)
Change in noncontrolling interests — — — — — — — — 1 1
Balance as of September 30, 2019 683 $ 683 175 $ (10,582) $ 5,926 $ 15,849 $ (4,288) $ 7,588 $ 29 $ 7,617

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

Baxter International Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in millions)


		Nine months ended September 30,					Three months ended March 31,
		2020		2019			2021		2020
Cash flows from operations	Cash flows from operations					Cash flows from operations
Net income	Net income	$	939	$	1,030	Net income	$	300	$	333
Adjustments to reconcile net income to cash flows from operations:	Adjustments to reconcile net income to cash flows from operations:					Adjustments to reconcile net income to cash flows from operations:
Depreciation and amortization	Depreciation and amortization	610		580		Depreciation and amortization	217		199
Deferred income taxes	Deferred income taxes	(45)		(45)		Deferred income taxes	(25)		(17)
Stock compensation	Stock compensation	97		92		Stock compensation	22		29
Net periodic pension and other postretirement costs	Net periodic pension and other postretirement costs	59		8		Net periodic pension and other postretirement costs	26		20
Intangible asset impairments		17		31

Other	Other	54		90		Other	14		13
Changes in balance sheet items:	Changes in balance sheet items:					Changes in balance sheet items:
Accounts receivable, net	Accounts receivable, net	(126)		(23)		Accounts receivable, net	51		(57)
Inventories	Inventories	(305)		(88)		Inventories	(129)		(83)
Accounts payable and accrued liabilities		36		(249)
Prepaid expenses and other current assets						Prepaid expenses and other current assets	2		(14)
Accounts payable						Accounts payable	22		82
Accrued expenses and other current liabilities						Accrued expenses and other current liabilities	(124)		(192)
Other	Other	(178)		(145)		Other	1		(39)
Cash flows from operations – continuing operations	Cash flows from operations – continuing operations	1,158		1,281		Cash flows from operations – continuing operations	377		274
Cash flows from operations – discontinued operations	Cash flows from operations – discontinued operations	(2)		(6)		Cash flows from operations – discontinued operations	0		(2)
Cash flows from operations	Cash flows from operations	1,156		1,275		Cash flows from operations	377		272
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Capital expenditures	Capital expenditures	(472)		(505)		Capital expenditures	(171)		(172)
Acquisitions, net of cash acquired, and investments	Acquisitions, net of cash acquired, and investments	(466)		(186)		Acquisitions, net of cash acquired, and investments	(381)		(443)
Other investing activities, net	Other investing activities, net	23		12		Other investing activities, net	14		11
Cash flows from investing activities	Cash flows from investing activities	(915)		(679)		Cash flows from investing activities	(538)		(604)
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Issuances of debt	Issuances of debt	1,240		1,661		Issuances of debt	0		1,240
Net decreases in debt with original maturities of three months or less		(226)		0

Cash dividends on common stock	Cash dividends on common stock	(348)		(310)		Cash dividends on common stock	(125)		(111)
Proceeds from stock issued under employee benefit plans	Proceeds from stock issued under employee benefit plans	180		334		Proceeds from stock issued under employee benefit plans	48		66
Purchases of treasury stock	Purchases of treasury stock	0		(1,029)		Purchases of treasury stock	(253)		0
Other financing activities, net	Other financing activities, net	(48)		(42)		Other financing activities, net	(28)		(25)
Cash flows from financing activities	Cash flows from financing activities	798		614		Cash flows from financing activities	(358)		1,170
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(8)		(39)		Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(31)		(63)
Increase in cash, cash equivalents and restricted cash		1,031		1,171
Increase (decrease) in cash, cash equivalents and restricted cash						Increase (decrease) in cash, cash equivalents and restricted cash	(550)		775
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	3,335		1,838		Cash, cash equivalents and restricted cash at beginning of period	3,736		3,335
Cash, cash equivalents and restricted cash at end of period (1)	Cash, cash equivalents and restricted cash at end of period (1)	$	4,366	$	3,009	Cash, cash equivalents and restricted cash at end of period (1)	$	3,186	$	4,110

(1) We did not have any restricted cash balances as of ~~December~~March 31, ~~2019, September 30, 2019~~2020 or December 31, ~~2018.~~2019. 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,~~March 31, 2021 and December 31, 2020 (in millions):


	~~September 30, 2020~~
~~Cash and cash equivalents~~	$	~~4,359~~
~~Restricted cash included in prepaid expenses and other current assets~~	7
~~Cash, cash equivalents and restricted cash~~	$	~~4,366~~


	March 31, 2021		December 31, 2020
Cash and cash equivalents	$	3,182	$	3,730
Restricted cash included in prepaid expenses and other current assets	4		6
Cash, cash equivalents and restricted cash	$	3,186	$	3,736

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

Baxter International Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (we or our) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) in the United States have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2019 (2019~~2020 (2020 Annual Report).

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

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

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 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.

~~New Accounting Standards~~

~~Recently adopted accounting pronouncements~~

As of January 1, 2020, we adopted Accounting Standards Update (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. The impact of the adoption of this ASU was an increase to our allowance for doubtful accounts and a decrease to retained earnings of $4 million.

~~The following table is a summary of the changes in our allowance for doubtful accounts for the three and nine months ended September 30, 2020:~~

(in millions) Three months ended
September 30, 2020 Nine months ended
September 30, 2020
Balance at beginning of period $ 120 $ 112
Adoption of new accounting standard 0 4
Charged to costs and expenses 3 15
Write-offs (3) (4)
Currency translation adjustments 2 (5)
Balance at end of period $ 122 $ 122

ASU 2016-13 also requires disclosure by vintage year of origination for net investments in leases. Our net investment in sales-type leases was $142 million as of September 30, 2020, of which $13 million originated in 2016 and prior, $19 million in 2017, $47 million in 2018, $36 million in 2019 and $27 million in 2020.

As of January 1, 2020, we adopted ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Our policies for capitalizing implementation costs incurred in a hosting arrangement were not impacted by this ASU. However, we have historically classified those capitalized costs within property, plant and equipment, net on our condensed consolidated balance sheets and as capital expenditures on our condensed consolidated statements of cash flows. Under the new ASU, those capitalized costs are presented as other non-current assets on our condensed consolidated balance sheets and within operating cash flows on our condensed consolidated statements of cash flows. We adopted this ASU on a prospective basis and capitalized $10 million and $30 million, respectively, of implementation costs related to hosting arrangements that are service contracts during the three and nine months ended September 30, 2020.

2. ACQUISITIONS AND OTHER ARRANGEMENTS

~~Seprafilm Adhesion Barrier~~Transderm Scop

In ~~February 2020,~~ March 2021, we ~~completed~~acquired the ~~acquisition~~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 ~~rights~~under a distribution license to ~~Seprafilm Adhesion Barrier (Seprafilm) from Sanofi for approximately~~ ~~$342 million in cash. Seprafilm~~the U.S. institutional market. TDS is indicated for ~~use~~post-operative nausea and vomiting in ~~patients undergoing abdominal or pelvic laparotomy as an adjunct intended to reduce~~ the ~~incidence, extent~~U.S. and severity of postoperative adhesions between the abdominal wall and the underlying viscera such as omentum, small bowel, bladder, and stomach, and between the uterus and surrounding structures such as tubes and ovaries, large bowel, and bladder. Wemotion sickness in European markets. 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 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 ~~values~~value of the consideration transferred:


(in millions)
Cash	$	60
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


~~Inventories~~Inventory	$	1814


Goodwill	283
Other intangible assets	~~296~~67



Total assets ~~acquired~~required	$	~~342~~84

The ~~valuations~~valuation of the assets acquired are preliminary and measurement period adjustments may be recorded in the future as we finalize our fair value estimates. ~~In the three and nine months ended September 30, 2020, the~~The results of operations of the acquired business have been included in our ~~condensed~~ consolidated statement of income since the date the business was ~~acquired. The acquisition contributed $30 million~~acquired and ~~$66 million, respectively, of net sales for the three and nine months ended September 30, 2020. Net earnings from the acquisition~~ were ~~not significant~~insignificant during the three ~~and nine~~ months ended September 30, 2020. Acquisition and integration costs, primarily incremental cost of sales relating to inventory fair value step-ups, associated with the acquisition were 0 and $15 million, respectively, for the three and nine months ended September 30, 2020.March 31, 2021.

We allocated ~~$286 million and $10~~$64 million of the total consideration to the ~~Seprafilm~~TDS developed product rights with an estimated useful life of 9 years and $3 million to customer relationships with an estimated useful ~~lives~~life of ~~10 and~~ 7 ~~years, respectively.~~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 ~~relationship intangible assets were 14.8% and 11.0%, respectively.~~relationships. We consider the fair ~~values~~value of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions we used by management in establishing the estimated fair values.

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

~~Cheetah Medical, Inc.~~

On October 25, 2019, we acquired 100 percent of Cheetah Medical, Inc. (Cheetah) for total upfront cash consideration of $195 million, net of cash acquired, with the potential for additional cash consideration, up to $40 million, based on clinical and commercial milestones for which the acquisition date fair value was $18 million. In the third quarter of 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 the third quarter of 2020 to decrease the net deferred tax liabilities acquired by $20 million. The measurement period adjustments did not impact our results of operations.

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


~~(in millions)~~
~~Cash consideration transferred~~	$	~~190~~
~~Contingent consideration~~	18
~~Total consideration~~	$	~~208~~

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


~~(in millions)~~
~~Assets acquired and liabilities assumed~~
~~Cash~~	$	2
~~Accounts receivable, net~~	3
~~Inventories~~	1
~~Prepaid expenses and other current assets~~	1
~~Property, plant and equipment~~	1
~~Goodwill~~	84
~~Other intangible assets~~	~~131~~
~~Operating lease right-of-use assets~~	1
~~Accounts payable and other accrued liabilities~~	~~(4)~~
~~Other non-current liabilities~~	~~(12)~~
~~Total assets acquired and liabilities assumed~~	$	~~208~~

~~Other Business Combinations~~

We completed other individually immaterial acquisitions in the nine months ended September 30, 2020 for total consideration of $13 million in cash at closing plus aggregate future potential contingent consideration of up to

~~$12 million with an acquisition date fair value of $4 million. The acquisitions primarily resulted in the recognition of goodwill and other intangible assets.~~

We have not presented pro forma financial information for ~~any of our acquisitions~~the acquisition because ~~their~~its results are not material to our ~~condensed~~ consolidated financial statements.

~~Other Business Development Activities~~Caelyx and Doxil

In ~~January 2020,~~February 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. rights to this product in 2019. Liposomal doxorubicin is a chemotherapy medicine used to treat various types of cancer. The transaction was accounted for as an ~~additional product for $60 million.~~ 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 ~~capitalized as~~allocated to the assets acquired, which included a $314 million developed-technology intangible asset ~~in the quarter ended March 31, 2020 and is being amortized over its~~with an estimated useful life of 119 years and an $11 million customer relationship intangible asset with an estimated useful life of 8 years.

In Net sales related to this acquisition from the ~~nine months ended September 30, 2020, we entered into distribution license arrangements for multiple products that have not yet obtained regulatory approval for upfront cash payments of $22~~acquisition date through March 31, 2021 were $13 million. The cash paid was treated as research and development (R&D) expenses on our condensed consolidated statement of income. We could make additional payments of up to $44 million upon the achievement of certain development, regulatory or commercial milestones.

3. SUPPLEMENTAL FINANCIAL INFORMATION

Interest Expense, Net


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021		2020
Interest expense, net of capitalized interest	Interest expense, net of capitalized interest	$	42	$	28	$	112	$	81	Interest expense, net of capitalized interest	$	37	$	30
Interest income	Interest income	(3)		(15)		(16)		(30)		Interest income	(3)		(9)
Interest expense, net	Interest expense, net	$	39	$	13	$	96	$	51	Interest expense, net	$	34	$	21

Other ~~(Income)~~ Expense, Net


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021		2020
Foreign exchange losses, net		$	23	$	30	$	44	$	44
Foreign exchange (gains) losses, net										Foreign exchange (gains) losses, net	$	(3)	$	11
Pension and other postretirement benefit plans	Pension and other postretirement benefit plans	0		(17)		(2)		(48)		Pension and other postretirement benefit plans	4		(1)
Other, net	Other, net	(7)		(4)		(10)		(4)		Other, net	4		0
Other (income) expense, net		$	16	$	9	$	32	$	(8)
Other expense, net										Other expense, net	$	5	$	10

Allowance for Doubtful Accounts

The following table is a summary of the changes in our allowance for doubtful accounts for the three months ended March 31, 2021 and 2020.


	Three months ended March 31,
(in millions)	2021		2020
Balance at beginning of period	$	125	$	112
Adoption of new accounting standard	0		4
Charged to costs and expenses	1		7

Currency translation adjustments	(6)		(9)
Balance at end of period	$	120	$	114

Inventories


(in millions)	(in millions)	September 30, 2020		December 31, 2019		(in millions)	March 31, 2021		December 31, 2020
Raw materials	Raw materials	$	462	$	377	Raw materials	$	457	$	460
Work in process	Work in process	205		185		Work in process	221		196
Finished goods	Finished goods	1,321		1,091		Finished goods	1,339		1,260
Inventories	Inventories	$	1,988	$	1,653	Inventories	$	2,017	$	1,916

Property, Plant and Equipment, Net


(in millions)	(in millions)	September 30, 2020		December 31, 2019		(in millions)	March 31, 2021		December 31, 2020
Property, plant and equipment, at cost	Property, plant and equipment, at cost	$	10,990	$	10,660	Property, plant and equipment, at cost	$	11,105	$	11,271
Accumulated depreciation	Accumulated depreciation	(6,530)		(6,148)		Accumulated depreciation	(6,491)		(6,549)
Property, plant and equipment, net	Property, plant and equipment, net	$	4,460	$	4,512	Property, plant and equipment, net	$	4,614	$	4,722

Non-Cash Operating and Investing Activities

Right-of-use operating lease assets obtained in exchange for lease obligations for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ were ~~$42~~$5 million and ~~$164~~$15 million, respectively. ~~Right-of-use finance lease assets obtained in exchange for lease obligations for the nine months ended September 30, 2020 were $7 million.~~ As of ~~September 30,~~

~~2020,~~March 31, 2021, we have entered into lease agreements with aggregate future lease payments of approximately ~~$45~~$46 million for facilities and equipment that have not yet commenced.

Purchases of property, plant and equipment included in accounts payable ~~and accrued liabilities~~ as of ~~September 30,~~March 31, 2021 and 2020 ~~and 2019 was $48~~were $63 million and $49 million, respectively.

Unsettled share repurchases included in accrued expenses and other current liabilities were $47 million ~~respectively.~~as of March 31, 2021. There were 0 unsettled share repurchases as of March 31, 2020.

4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by business segment.

(in millions) Americas EMEA APAC Total
Balance as of December 31, 2019 $ 2,428 $ 385 $ 217 $ 3,030
Acquisitions 29 0 7 36
Acquisition accounting adjustments (24) (3) 0 (27)
Currency translation and other adjustments 44 7 4 55
Balance as of September 30, 2020 $ 2,477 $ 389 $ 228 $ 3,094


(in millions)	Americas		EMEA		APAC		Total
Balance as of December 31, 2020	$	2,574	$	406	$	237	$	3,217
Reallocation of goodwill	81		(81)		0		0
Acquisitions	2		1		0		3

Currency translation	(90)		(11)		(8)		(109)
Balance as of March 31, 2021	$	2,567	$	315	$	229	$	3,111

As of ~~September 30, 2020,~~March 31, 2021, there were no0 reductions in goodwill relating to impairment losses.

As discussed in Note 16 - 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 the reallocation and determined that no impairment existed.

Other intangible assets, net

The following is a summary of our other intangible assets.


(in millions)	(in millions)	Developed technology, including patents		Other amortized intangible assets		Indefinite-lived intangible assets		Total		(in millions)	Developed technology, including patents		Other amortized intangible assets		Indefinite-lived intangible assets		Total
September 30, 2020
March 31, 2021										March 31, 2021
Gross other intangible assets	Gross other intangible assets	$	2,675	$	475	$	179	$	3,329	Gross other intangible assets	$	3,023	$	491	$	169	$	3,683
Accumulated amortization	Accumulated amortization	(1,343)		(308)		—		(1,651)		Accumulated amortization	(1,394)		(327)		—		(1,721)
Other intangible assets, net	Other intangible assets, net	$	1,332	$	167	$	179	$	1,678	Other intangible assets, net	$	1,629	$	164	$	169	$	1,962
December 31, 2019
December 31, 2020										December 31, 2020
Gross other intangible assets	Gross other intangible assets	$	2,309	$	464	$	173	$	2,946	Gross other intangible assets	$	2,713	$	495	$	169	$	3,377
Accumulated amortization	Accumulated amortization	(1,190)		(285)		—		(1,475)		Accumulated amortization	(1,374)		(332)		—		(1,706)
Other intangible assets, net	Other intangible assets, net	$	1,119	$	179	$	173	$	1,471	Other intangible assets, net	$	1,339	$	163	$	169	$	1,671

Intangible asset amortization expense was ~~$57~~$64 million and ~~$48~~$52 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $165 million and $136 million for the nine months ended September 30, 2020 and 2019,~~ respectively.

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 condensed consolidated statements of income. 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.

5. FINANCING ARRANGEMENTS

~~Debt Issuance~~

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 senior notes). Pursuant to a registration rights agreement (the Registration Rights Agreement) with the initial purchasers of the senior notes, we agreed to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the senior notes for new notes with terms substantially identical in all material respects to the 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 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 senior notes would revert to the original interest rates. The payment of additional interest is the sole remedy for the holders of the senior notes in the event of a registration default.

Credit Facilities

Our U.S. 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. As of ~~September 30,~~March 31, 2021 and December 31, 2020, there were no borrowings outstanding under our U.S. dollar or Euro-denominated credit facilities. As of December 31, 2019, we had €200 million ($224 million) outstanding under our Euro-denominated credit facility at a 0.91% interest rate and no borrowings outstanding under our U.S. dollar-denominated credit facility.

6. COMMITMENTS AND CONTINGENCIES

We are involved in product liability, patent, commercial, and other legal matters that arise in the normal course of our business. We record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, our total recorded reserves with respect to legal and environmental matters were ~~$39~~$53 million and ~~$56~~$40 million, respectively, and there ~~were 0 related receivables.~~was a $7 million insurance receivable as of March 31, 2021.

We have established reserves for certain of the matters discussed below. We are not able to estimate the amount or range of any loss for certain contingencies for which there is no reserve or additional loss for matters already reserved. While our liability in connection with these claims cannot be estimated and the resolution thereof in any reporting period could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in the matters set forth below, litigation is inherently uncertain, excessive verdicts do occur, and we may incur material judgments or enter into material settlements of claims.

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

Environmental

We are involved as a potentially responsible party (PRP) for environmental clean-up costs at 6 Superfund sites. Under the U.S. Superfund statute and many state laws, generators of hazardous waste sent to a disposal or recycling site are liable for site cleanup if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Separate from these Superfund cases, we are involved in an ongoing voluntary environmental remediation associated with historic operations at our Irvine, California, United States facility. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, our environmental reserves, which are measured on an undiscounted basis, were ~~$17~~$19 million and ~~$18~~$20 million, respectively. After considering these reserves, the outcome of these matters is not expected to have a material adverse effect on our financial position or results of operations.

General Litigation

In November 2016, a putative antitrust class action complaint seeking monetary and injunctive relief was filed in the United States District Court for the Northern District of Illinois. The complaint alleges a conspiracy among manufacturers of IV solutions to restrict output and affect pricing in connection with a shortage of such solutions. Similar parallel actions subsequently were filed. In January 2017, a single consolidated complaint covering these matters was filed in the Northern District of Illinois. We filed a motion to dismiss the consolidated complaint in February 2017. The court granted our motion to dismiss the consolidated complaint without prejudice in July 2018. The plaintiffs filed an amended complaint, which we moved to dismiss on November 9, 2018. The court granted our motion to dismiss the amended complaint with prejudice on April 3, 2020. The plaintiffs did not file an appeal.

In April 2017, we became aware of a criminal investigation by the U.S. 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. On November 30, 2018, the DOJ notified us that it had closed the investigation. The New York Attorney General ~~has~~had also requested that we provide information regarding business practices in the IV saline industry. We ~~have~~ cooperated with that request and have been advised that the ~~New York Attorney General.~~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: National Prescription Opiate Litigation pending in the U.S. District Court, Northern District of Ohio. The complaint alleges that multiple manufacturers and distributors of opiate products improperly marketed and diverted these products, which caused harm to Fayette County. The complaint is limited in its allegations as to Baxter and does not distinguish between injectable opiate products and orally administered opiates. We manufactured generic injectable opiate products in our facility in Cherry Hill, NJ, which we divested in 2011.

In November 2019, we and certain of our officers were named in a class action complaint captioned Ethan E. Silverman et al. v. Baxter International Inc. et al. that was filed in the United States District Court for the Northern District of Illinois. The plaintiff, who allegedly purchased shares of our common stock during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter common stock between February 21, 2019 and October 23, 2019. The plaintiff alleges that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to certain intra-company transactions undertaken for the purpose of generating foreign exchange gains or avoiding foreign exchange losses, as well as our internal controls over financial reporting. On January 29, 2020, the Court appointed Varma Mutual Pension Insurance Company and Louisiana Municipal Police Employees Retirement System as lead plaintiffs in the case. Plaintiffs filed an amended complaint on June 25, 2020 containing substantially the same allegations. On August 24, 2020, we filed a motion to dismiss the amended complaint. On January 12, 2021, the Court granted our motion to dismiss the amended complaint but gave plaintiffs an opportunity to file a further-amended complaint. The parties reached an agreement to settle the case for $16 million, subject to the completion of confirmatory discovery and final approval by the Court. The Court granted preliminary approval of the settlement on April 20, 2021. A final approval hearing is currently scheduled for August 10, 2021. We are fully reserved for the settlement amount as of March 31, 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.

In March 2020, ~~two~~2 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.

~~Other~~

~~As previously disclosed, in 2008 we recalled our heparin sodium injection products~~7. STOCKHOLDERS’ EQUITY

Stock-Based Compensation

Stock compensation expense totaled $22 million and $29 million in the ~~United States. Following~~first quarter of 2021 and 2020, respectively. Approximately 75% of stock compensation expense is classified within SG&A expense with the ~~recall, more than 1,000 lawsuits alleging that plaintiffs suffered various reactions to a heparin contaminant,~~remainder classified in ~~some cases resulting in fatalities, were filed. In January 2019, the last~~cost of ~~these cases was settled. In~~sales and R&D expense.

We awarded stock compensation grants which consisted of 4.0 million stock options, 0.5 million restricted stock units (RSUs) and 0.3 million performance stock units (PSUs) during the first ~~nine months~~quarter of ~~2019, following~~2021. The grant date fair values of stock options, RSUs and PSUs awarded in the ~~resolution~~first quarter of ~~an insurance dispute, we received cash proceeds of $39~~2021 were $62 million, ~~for our allocation~~$40 million and $27 million, respectively. Stock options and RSUs generally vest in one-third increments over a three-year period. Approximately 12.5% of the ~~insurance proceeds under~~PSUs with a ~~settlement and cost-sharing agreement~~grant date in the current period related to the ~~defense~~establishment of the ~~heparin product liability cases. We recognized~~adjusted operating margin vesting condition for awards issued in 2019. The remainder of PSUs granted in the current period were awarded in March 2021, for which the vesting conditions are equally divided based on our compound annual sales growth rate performance, our adjusted return on invested capital performance and on our stock performance relative to a ~~$37 million gain in connection with the resolution~~specified peer group. All of the ~~dispute~~PSUs vest at the end of the applicable three-year service period.

Stock Options

The weighted-average Black-Scholes assumptions used in establishing the fair value of stock options granted during the period, along with weighted-average grant date fair values, were as follows:


	Three months ended March 31,
	2021			2020
Expected volatility	25		%	26		%
Expected life (in years)	5.5			5.5
Risk-free interest rate	0.8		%	0.6		%
Dividend yield	1.3		%	1.2		%
Fair value per stock option	$	16		$	16

The total intrinsic value of stock options exercised was $21 million and $52 million during the ~~insurer that is classified within other operating expense (income), net on~~first quarters of 2021 and 2020, respectively.

As of March 31, 2021, the ~~condensed consolidated statement of income for the nine months ended September 30, 2019.~~

~~In September 2017, Hurricane Maria caused damage to certain of our assets in Puerto Rico and disrupted operations. As previously disclosed, we realized $42 million of insurance recoveries in 2018~~unrecognized compensation cost related to all unvested stock options of $109 million is expected to be recognized as expense over a weighted-average period of 2.1 years.

RSUs

As of March 31, 2021, the ~~damages and losses from that hurricane. In July 2019, an additional $40~~unrecognized compensation cost related to all unvested RSUs of $75 million is expected to be recognized as expense over a weighted-average period of ~~claims were approved by our insurers and~~2.1 years.

PSUs

As of March 31, 2021, the unrecognized compensation cost related to all unvested PSUs of $46 million is expected to be recognized as expense over a ~~gain was recognized within other operating expense (income), net on the condensed consolidated statements~~weighted-average period of income for the three and nine months ended September 30, 2019. In October 2019, an additional $60 million of claims were approved by our insurers and a gain for that amount was recognized within other operating expense (income), net in the fourth quarter of 2019. No further insurance recoveries are expected.1.8 years.

1412

~~7. STOCKHOLDERS’ EQUITY~~

Stock Options Award Modification

In the first quarter of 2020, we modified the terms of stock option awards granted to 123 employees. Specifically, we extended the term for certain stock options that were scheduled to expire in the first quarter of 2020 as applicable employees were not permitted to exercise these awards due to our announcement in February 2020 that our previously issued financial statements should no longer be relied upon. The stock options were extended in order to allow impacted employees to exercise their stock option awards for a brief period once we became current with our SEC reporting obligations, which occurred in March 2020. As a result of the modifications, we recognized an additional $8 million of stock compensation expense during the ~~three months~~quarter ended March 31, 2020.

Cash Dividends

Cash dividends declared per share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020 were $0.245 and ~~$0.710, respectively. Cash dividends declared per share for the three and nine months ended September 30, 2019 were~~ $0.22, ~~and $0.63,~~ respectively.

Stock Repurchase Programs

In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. 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. During the first ~~nine months~~quarter of 2021, we repurchased 3.6 million shares under this authority pursuant to a Rule 10b5-1 plan. During the first quarter of 2020, we did not repurchase any shares under this authority. ~~During the first nine months of 2019, we repurchased 13.5 million shares pursuant to Rule 10b5-1 plans and otherwise.~~ As of ~~September 30, 2019,~~March 31, 2021, we recognized a liability within ~~accounts payable~~accrued expenses and ~~accrued~~other current liabilities of ~~$37~~$47 million for share repurchases that settled in ~~early October 2019.~~April 2021. We had ~~$897 million~~$1.6 billion remaining available under the authorization as of ~~September 30, 2020. After giving effect to the October 2020 approval, we had $2.4 billion remaining under this authority as of October 29, 2020.~~March 31, 2021.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of net income, 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 ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.


(in millions)	(in millions)	CTA		Pension and OPEB plans		Hedging activities		Total		(in millions)	CTA		Pension and OPEB plans		Hedging activities		Total
Gains (losses)	Gains (losses)									Gains (losses)
Balance as of December 31, 2019		$	(2,954)	$	(715)	$	(41)	$	(3,710)
Balance as of December 31, 2020										Balance as of December 31, 2020	$	(2,587)	$	(574)	$	(153)	$	(3,314)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	(43)		(9)		(110)		(162)		Other comprehensive income (loss) before reclassifications	(208)		13		3		(192)
Amounts reclassified from AOCI (a)	Amounts reclassified from AOCI (a)	0		35		(2)		33		Amounts reclassified from AOCI (a)	0		17		9		26
Net other comprehensive (loss) income		(43)		26		(112)		(129)
Balance as of September 30, 2020		$	(2,997)	$	(689)	$	(153)	$	(3,839)
Net other comprehensive income (loss)										Net other comprehensive income (loss)	(208)		30		12		(166)
Balance as of March 31, 2021										Balance as of March 31, 2021	$	(2,795)	$	(544)	$	(141)	$	(3,480)


(in millions)	(in millions)	CTA		Pension and OPEB plans		Hedging activities		Total		(in millions)	CTA		Pension and OPEB plans		Hedging activities		Total
Gains (losses)	Gains (losses)									Gains (losses)
Balance as of December 31, 2018		$	(2,868)	$	(954)	$	(1)	$	(3,823)
Adoption of new accounting standard		9		(169)		(1)		(161)
Balance as of December 31, 2019										Balance as of December 31, 2019	$	(2,954)	$	(715)	$	(41)	$	(3,710)

Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	(272)		20		(66)		(318)		Other comprehensive income (loss) before reclassifications	(359)		10		(131)		(480)
Amounts reclassified from AOCI (a)	Amounts reclassified from AOCI (a)	0		17		(3)		14		Amounts reclassified from AOCI (a)	0		12		1		13
Net other comprehensive (loss) income		(272)		37		(69)		(304)
Balance as of September 30, 2019		$	(3,131)	$	(1,086)	$	(71)	$	(4,288)
Net other comprehensive income (loss)										Net other comprehensive income (loss)	(359)		22		(130)		(467)
Balance as of March 31, 2020										Balance as of March 31, 2020	$	(3,313)	$	(693)	$	(171)	$	(4,177)

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

The following is a summary of the amounts reclassified from AOCI to net income during the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

Amounts reclassified from AOCI (a)
(in millions) Three months ended September 30, 2020 Nine months ended September 30, 2020 Location of impact in income statement
Amortization of pension and OPEB items
Amortization of net losses and prior service costs or credits $ (14) $ (44) Other (income) expense, net
Less: Tax effect 3 9 Income tax expense
$ (11) $ (35) Net of tax
Gains (losses) on hedging activities
Foreign exchange contracts $ (2) $ 2 Cost of sales
Less: Tax effect 1 0 Income tax expense
$ (1) $ 2 Net of tax
Total reclassifications for the period $ (12) $ (33) Total net of tax


		Amounts reclassified from AOCI (a)						Amounts reclassified from AOCI (a)
(in millions)	(in millions)	Three months ended September 30, 2019		Nine months ended September 30, 2019		Location of impact in income statement	(in millions)	Three months ended March 31, 2021		Three Months Ended March 31, 2020		Location of impact in income statement
Amortization of pension and OPEB items	Amortization of pension and OPEB items						Amortization of pension and OPEB items
Amortization of net losses and prior service costs or credits	Amortization of net losses and prior service costs or credits	$	(8)	$	(23)	Other (income) expense, net	Amortization of net losses and prior service costs or credits	$	(21)	$	(15)	Other expense, net
Less: Tax effect	Less: Tax effect	4		6		Income tax expense	Less: Tax effect	4		3		Income tax expense
		$	(4)	$	(17)	Net of tax		$	(17)	$	(12)	Net of tax
Gains on hedging activities
Gains (losses) on hedging activities							Gains (losses) on hedging activities
Foreign exchange contracts	Foreign exchange contracts	$	2	$	3	Cost of sales	Foreign exchange contracts	$	(10)	$	(1)	Cost of sales
Interest rate contracts							Interest rate contracts	$	(1)	0		Interest expense, net
								(11)		(1)		Total before tax
Less: Tax effect	Less: Tax effect	0		0		Income tax expense	Less: Tax effect	2		0		Income tax expense
		$	2	$	3	Net of tax		$	(9)	$	(1)	Net of tax
Total reclassifications for the period	Total reclassifications for the period	$	(2)	$	(14)	Total net of tax	Total reclassifications for the period	$	(26)	$	(13)	Total net of tax

(a) Amounts in parentheses indicate reductions to net income.

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

9. REVENUES

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation is a promise in a contract to transfer a distinct good or service to the

customer and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of our contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Our global payment terms are typically between 30-90 days.

The majority 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; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. For a majority of these 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. We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services. Revenue is recognized over time when we are creating or enhancing an asset that the customer controls as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.

As of ~~September 30, 2020,~~March 31, 2021, we had ~~$7.8~~$7.9 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of one year or more, which are primarily included in the Americas segment. Some contracts in the United States included in this amount contain index-dependent price increases, which are not known at this time. We expect to recognize approximately ~~10%~~25% of this amount as revenue over the remainder of ~~2020,~~2021, 30% in 2022, 25% ~~in each of 2021 and 2022, 20%~~ in 2023, and 10% in each of 2024 and 2025.

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 ~~product returns, sales discounts~~ 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~~accrued expenses and ~~accrued~~other current liabilities on the condensed consolidated balance sheets. Management's estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract using the expected value method. The amount of variable consideration included in the net sales price is limited to the amount for which it is probable that a significant reversal in revenue will not occur when the related uncertainty is resolved. Revenue recognized during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ related to performance obligations satisfied in prior periods was not material. Additionally, our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately and determining the allocation of the transaction price may require significant judgement.

Contract Balances

The timing of revenue recognition, billings and cash collections results in the recognition of trade accounts receivable, unbilled receivables, contract assets and customer advances and deposits (contract liabilities) on our condensed consolidated balance sheets. Net trade accounts receivable was ~~$1.8~~$1.6 billion and $1.7 billion as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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. ~~Our~~

The following table summarizes our contract ~~asset balances totaled $146 million~~assets:


(in millions)	March 31, 2021		December 31, 2020
Contract manufacturing services	$	49	$	47
Software sales	41		40
Bundled equipment and consumable medical products contracts	46		47
Contract assets	$	136	$	134

The following table summarizes the classification of contract assets and contract liabilities as of September 30, 2020, of which $58 million related to contract manufacturing services, $39 million related to software sales and $49 million related to bundled equipment and consumable medical products contracts. Our contract asset balances totaled $131reported in the condensed consolidated balance sheets:


(in millions)	March 31, 2021		December 31, 2020
Prepaid expenses and other current assets	$	74	$	70
Other non-current assets	62		64
Contract assets	$	136	$	134

Accrued expenses and other current liabilities	$	38	$	32
Other non-current liabilities	42		34
Contract liabilities	$	80	$	66

1715

million as of December 31, 2019, of which $36 million related to contract manufacturing services, $43 million related to software sales and $52 million related to bundled equipment and consumable medical products contracts. Contract assets are presented within accounts receivable, net ($81 million and $63 million as of September 30, 2020 and December 31, 2019, respectively) and other non-current assets ($65 million and $68 million as of September 30, 2020 and December 31, 2019, respectively) in the accompanying condensed consolidated balance sheets. Contract liabilities as of September 30, 2020 and December 31, 2019 were $63 million and $12 million, respectively, and were included in accounts payable and other accrued liabilities ($31 million as of September 30, 2020) and other non-current liabilities ($32 million and $12 million as of September 30, 2020 and December 31, 2019, respectively) in the accompanying condensed consolidated balance sheets.are recognized when a customer pays consideration before we transfer goods or provide services. During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, the amount of revenue recognized that was included in contract liabilities as of December 31, 2020 and 2019 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 the first quarter of 2020 have been recast to conform to the current period presentation.

The following tables disaggregate our net sales from contracts with customers by ~~Global Business Unit (GBU)~~product category between the U.S. and international:

Three months ended September 30,
2020 2019
(in millions) U.S. International Total U.S. International Total
Renal Care 1
$ 216 $ 739 $ 955 $ 199 $ 719 $ 918
Medication Delivery 2
434 246 680 461 240 701
Pharmaceuticals 3
210 330 540 223 304 527
Clinical Nutrition 4
90 147 237 80 139 219
Advanced Surgery 5
139 97 236 134 82 216
Acute Therapies 6
72 105 177 44 86 130
Other 7
83 64 147 83 57 140
Total Baxter $ 1,244 $ 1,728 $ 2,972 $ 1,224 $ 1,627 $ 2,851


		Nine months ended September 30,													Three Months Ended March 31,
		2020						2019							2021						2020
(in millions)	(in millions)	U.S.		International		Total		U.S.		International		Total		(in millions)	U.S.		International		Total		U.S.		International		Total
Renal Care 1	Renal Care 1	$	629	$	2,115	$	2,744	$	587	$	2,092	$	2,679	Renal Care 1	$	216	$	706	$	922	$	204	$	666	$	870
Medication Delivery 2	Medication Delivery 2	1,296		686		1,982		1,308		716		2,024		Medication Delivery 2	411		241		652		449		229		678
Pharmaceuticals 3	Pharmaceuticals 3	653		899		1,552		690		885		1,575		Pharmaceuticals 3	200		352		552		220		296		516
Clinical Nutrition 4	Clinical Nutrition 4	250		426		676		236		403		639		Clinical Nutrition 4	83		151		234		79		138		217
Advanced Surgery 5	Advanced Surgery 5	370		258		628		397		249		646		Advanced Surgery 5	126		91		217		137		87		224
Acute Therapies 6	Acute Therapies 6	204		315		519		136		255		391		Acute Therapies 6	81		126		207		60		96		156
Other 7		186		205		391		183		186		369
BioPharma Solutions 7														BioPharma Solutions 7	44		91		135		48		66		114
Other 8														Other 8	19		8		27		20		7		27
Total Baxter	Total Baxter	$	3,588	$	4,904	$	8,492	$	3,537	$	4,786	$	8,323	Total Baxter	$	1,180	$	1,766	$	2,946	$	1,217	$	1,585	$	2,802

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

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

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

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

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

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

7~~Other primarily~~BioPharma Solutions includes sales of ~~contract manufacturing~~contracted services ~~from our~~we provide to various pharmaceutical ~~partnering business.~~and biopharmaceutical companies.

8Other includes sales of miscellaneous product and service offerings.

Lease Revenue

We lease medical equipment, such as renal dialysis equipment and infusion pumps, to customers, primarily in conjunction with arrangements to provide consumable medical products such as dialysis therapies, IV fluids and inhaled anesthetics. Certain of our equipment leases are classified as sales-type leases and the remainder are operating leases. The terms of the related contracts, including the proportion of fixed versus variable payments and any options to shorten or extend the lease term, vary by customer. We allocate revenue between equipment leases and medical products based on their standalone selling prices.

~~The components of lease revenue for the three and nine months ended September 30, 2020 were:~~

(in millions) Three months ended September 30, 2020 Nine months ended September 30, 2020
Sales-type lease revenue $ 11 $ 27
Operating lease revenue 16 44
Variable lease revenue 19 57
Total lease revenue $ 46 $ 128

The components of lease revenue for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2021 and 2020 were:


							Three Months Ended March 31,
(in millions)	(in millions)	Three months ended September 30, 2019		Nine months ended September 30, 2019		(in millions)	2021		2020
Sales-type lease revenue	Sales-type lease revenue	$	3	$	14	Sales-type lease revenue	$	6	$	6
Operating lease revenue	Operating lease revenue	16		46		Operating lease revenue	34		14
Variable lease revenue	Variable lease revenue	23		65		Variable lease revenue	17		18
Total lease revenue	Total lease revenue	$	42	$	125	Total lease revenue	$	57	$	38

Our net investment in sales-type leases was $131 million as of March 31, 2021, of which $19 million originated in 2017 and prior, $32 million in 2018, $36 million in 2019, $38 million in 2020 and $6 million in 2021.

10. BUSINESS OPTIMIZATION CHARGES

In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. From the commencement of our business optimization activities ~~in the second half of 2015~~ through ~~September 30, 2020,~~March 31, 2021, we have incurred cumulative pre-tax costs of $1.1 billion related to these actions. The 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 costs of approximately ~~$15~~$12 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.

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we recorded the following charges related to business optimization programs.


		Three months ended September 30,				Nine months ended September 30,					Three Months Ended March 31,
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021		2020
Restructuring charges	Restructuring charges	$	26	$	17	$	58	$	94	Restructuring charges	$	25	$	25
Costs to implement business optimization programs	Costs to implement business optimization programs	6		10		19		32		Costs to implement business optimization programs	2		7
Accelerated depreciation		0		1		0		5

Total business optimization charges	Total business optimization charges	$	32	$	28	$	77	$	131	Total business optimization charges	$	27	$	32

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

Costs to implement business optimization programs for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs. ~~The~~These costs were ~~generally~~primarily included ~~within cost of sales, SG&A expense and R&D expense.~~

~~For the three and nine months ended September 30, 2019, respectively, we recognized accelerated depreciation, primarily associated with facilities to be closed. The costs were recorded~~ within cost of sales and SG&A expense.

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we recorded the following restructuring charges.


		Three months ended September 30, 2020									Three months ended March 31, 2021
(in millions)	(in millions)	COGS		SG&A		R&D		Total		(in millions)	COGS		SG&A		R&D		Total
Employee termination costs	Employee termination costs	$	4	$	15	$	1	$	20	Employee termination costs	$	16	$	5	$	0	$	21
Contract termination and other costs		1		3		0		4

Asset impairments	Asset impairments	0		2		0		2		Asset impairments	4		0		0		4
Total restructuring charges	Total restructuring charges	$	5	$	20	$	1	$	26	Total restructuring charges	$	20	$	5	$	0	$	25


		Three months ended September 30, 2019									Three months ended March 31, 2020
(in millions)	(in millions)	COGS		SG&A		R&D		Total		(in millions)	COGS		SG&A		R&D		Total
Employee termination costs	Employee termination costs	$	1	$	2	$	2	$	5	Employee termination costs	$	2	$	16	$	1	$	19
Contract termination and other costs		1		0		0		1

Asset impairments	Asset impairments	7		0		4		11		Asset impairments	6		0		0		6
Total restructuring charges	Total restructuring charges	$	9	$	2	$	6	$	17	Total restructuring charges	$	8	$	16	$	1	$	25

Nine months ended September 30, 2020
(in millions) COGS SG&A R&D Total
Employee termination costs $ 9 $ 34 $ (1) $ 42
Contract termination and other costs 3 3 0 6
Asset impairments 8 2 0 10
Total restructuring charges $ 20 $ 39 $ (1) $ 58

Nine months ended September 30, 2019
(in millions) COGS SG&A R&D Total
Employee termination costs $ 7 $ 27 $ 28 $ 62
Contract termination and other costs 9 0 0 9
Asset impairments 17 1 5 23
Total restructuring charges $ 33 $ 28 $ 33 $ 94

In conjunction with our business optimization initiatives in 2020, we sold property that resulted in a gain of $17 million. This ~~benefit~~gain is reflected within other operating ~~expense (income),~~income, net in our condensed consolidated statement of income for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2020.

The following table summarizes activity in the liability related to our restructuring initiatives.


(in millions)
Liability balance as of December 31, ~~2019~~2020	$	92113
Charges	5321
Payments	~~(63)~~(24)
~~Reserve adjustments~~	~~(5)~~
Currency translation	4 (3)
Liability balance as of ~~September 30, 2020~~March 31, 2021	$	81107

Substantially all of our restructuring liabilities as of ~~September 30, 2020~~March 31, 2021 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 ~~2021.~~2022.

11. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS

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


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021		2020
Pension benefits	Pension benefits									Pension benefits
Service cost	Service cost	$	20	$	18	$	61	$	56	Service cost	$	22	$	21
Interest cost	Interest cost	24		47		71		137		Interest cost	18		24
Expected return on plan assets	Expected return on plan assets	(40)		(74)		(121)		(214)		Expected return on plan assets	(36)		(41)
Amortization of net losses and prior service costs	Amortization of net losses and prior service costs	19		15		57		44		Amortization of net losses and prior service costs	23		19
Net periodic pension cost	Net periodic pension cost	$	23	$	6	$	68	$	23	Net periodic pension cost	$	27	$	23
OPEB	OPEB									OPEB
Interest cost	Interest cost	$	2	$	2	$	4	$	6	Interest cost	$	1	$	1
Amortization of net loss and prior service credit	Amortization of net loss and prior service credit	(5)		(7)		(13)		(21)		Amortization of net loss and prior service credit	(2)		(4)
Net periodic OPEB cost (income)	Net periodic OPEB cost (income)	$	(3)	$	(5)	$	(9)	$	(15)	Net periodic OPEB cost (income)	$	(1)	$	(3)

In September 2020, we offered certain former U.S. employees with a vested pension benefit a limited-time option to take a lump sum distribution in lieu of future monthly payments. Those accepting the option will be paid from the assets of the pension plan in December 2020. This action will accelerate the satisfaction of future pension obligations and could result in a non-cash pre-tax settlement loss in the fourth quarter of 2020, which will be determined based on the rate of acceptance. The settlement loss, if triggered, would be recognized as a non-operating benefit cost.

12. INCOME TAXES

Our effective income tax rate was ~~13.5%~~14.5% and ~~22.0%~~11.9% for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and 13.2% and 13.7% for the nine months ended September 30, 2020 and 2019,~~ 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 months ended ~~September 30, 2020,~~March 31, 2021, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to decreases in accrued withholding taxes in several foreign jurisdictions and a favorable geographic earnings ~~mix and changes~~mix.

As of March 31, 2021, we had an uncertain tax position under appeal in a foreign jurisdiction for which we did not record income tax expense because we believed that the position had a more-likely-than-not chance of being sustained based on its technical merits under the applicable tax laws. On April 23, 2021, we received an unfavorable court decision related to ~~our ability~~this matter. As a result of that decision, we will record a discrete income tax expense of $22 million to ~~realize foreign~~reflect the resolution of this tax ~~credits.~~ matter in the second quarter of 2021.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2020, 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 excess tax benefits on stock compensation awards.

For the three months ended September 30, 2019, our effective income tax rate was substantially consistent with the 21% U.S. federal statutory rate as unfavorable return-to-provision adjustments in various jurisdictions were offset by excess tax benefits on stock compensation awards. For the nine months ended September 30, 2019, the difference between our effective tax rate and the U.S. federal statutory rate was primarily attributable to excess tax benefits on stock compensation awards and the recognition of tax benefits associated with a favorable tax ruling.

13. EARNINGS PER SHARE

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

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


		Three months ended September 30,		Nine months ended September 30,			Three months ended March 31,
(in millions)	(in millions)	2020	2019	2020	2019	(in millions)	2021	2020
Basic shares	Basic shares	511	511	509	510	Basic shares	505	507
Effect of dilutive securities	Effect of dilutive securities	7	9	8	10	Effect of dilutive securities	6	9
Diluted shares	Diluted shares	518	520	517	520	Diluted shares	511	516

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 47 million and 31 million equity awards for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, and 2020, ~~respectively, and 4 million equity awards each for the three and nine months ended September 30, 2019,~~ 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.

14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. 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,~~Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, 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. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.

We are also exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates. Our policy is to manage interest costs using athe mix of fixed- and floating-rate debt that we believe is ~~appropriate.~~appropriate at that time. To manage this mix in a cost-efficient manner, we periodically enter into interest rate swaps in which we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.

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

All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets and are generally classified as short-term or long-term based on the scheduled maturity of the instrument. We designate certain of our derivatives and foreign-currency denominated debt as hedging instruments in cash flow, fair value, or net investment hedges.

Cash Flow Hedges

We may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities. We periodically use treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt.

For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is recorded in AOCI and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid are initially recorded as assets and reclassified to other comprehensive income (OCI) over the life of the option, and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in 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.

The notional amounts of foreign exchange contracts designated as cash flow hedges were ~~$334~~$355 million and ~~$617~~$345 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at ~~September 30, 2020~~March 31, 2021 is 12 months for foreign exchange contracts. ~~The total notional amounts of~~There were 0 outstanding interest rate contracts designated as cash flow hedges ~~were $500 million and $550 million~~ as of ~~September 30, 2020~~March 31, 2021 and December 31, 2019, respectively. The interest rate contracts have maturity dates in 2022 and hedge the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt.2020.

Fair Value Hedges

We periodically use interest rate swaps to convert a portion of our fixed-rate debt into variable-rate debt. These instruments hedge our earnings from changes in the fair value of debt due to fluctuations in the designated benchmark interest rate. For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets changes in fair value attributable to a particular risk, such as changes in interest rates, of the hedged item, which are also recognized in earnings. ~~Fair~~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 0 outstanding interest rate ~~swap~~ contracts designated as fair value hedges as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.

Net Investment Hedges

In May 2017, we issued €600 million of senior notes due May 2025. In May 2019, we issued €750 million of senior notes due May 2024 and €750 million of senior notes due May 2029. We have designated 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 ~~September 30, 2020,~~March 31, 2021, we had an accumulated pre-tax unrealized translation loss in AOCI of ~~$125~~$131 million related to the Euro-denominated senior notes.

In May 2019, we entered into forward contracts designated as net investment hedges to reduce exposure to changes in currency rates on €1.2 billion of our net investment in our European operations. Those hedges were entered into in advance of the issuance of our senior notes mentioned above, were settled in the second quarter of 2019 and resulted in an insignificant loss.

Dedesignations

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, we discontinue hedge accounting prospectively. Gains or losses relating to terminations of effective cash flow hedges generally continue to be deferred and are recognized consistent with the loss or income recognition of the underlying hedged items. However, if it is probable that the hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings. In the third quarter of 2020, we terminated an interest rate contract with a notional amount of $50 million for a $7 million cash payment. In October 2020, we terminated additional interest rate contracts with a notional balance of $350 million and a liability fair value of $109 million as of September 30, 2020 for $100 million in cash payments. The losses relating to these terminations continue to be deferred and will be recognized consistent with the underlying hedged item, interest expense on the future issuance of debt.

There were no0 hedge dedesignations in the first ~~nine~~three months of ~~2020~~2021 or ~~2019~~2020 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 0 fair value hedges terminated during the first ~~nine~~three months of ~~2020~~2021 or ~~2019.~~2020.

If we remove a net investment hedge designation, any ~~gains~~gain or ~~losses~~loss recognized in AOCI ~~are~~is not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged. ~~In the second quarter of 2019, we dedesignated €1.2 billion of forward contracts designated as a net investment hedge of our European operations.~~ There were no0 net investment hedges terminated during the first ~~nine~~three months of 2021 or 2020.

Undesignated Derivative Instruments

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 ~~$765~~$780 million as of ~~September 30, 2020~~March 31, 2021 and ~~$619 million~~$1.0 billion as of December 31, ~~2019.~~2020.

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 ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.


		Gain (loss) recognized in OCI				Location of gain (loss) in income statement	Gain (loss) reclassified from AOCI into income					Gain (loss) recognized in OCI				Location of gain (loss) in income statement	Gain (loss) reclassified from AOCI into income
(in millions)	(in millions)	2020		2019			2020		2019		(in millions)	2021		2020			2021		2020
Cash flow hedges	Cash flow hedges										Cash flow hedges
Interest rate contracts	Interest rate contracts	$	31	$	(57)	Interest expense, net	$	0	$	0	Interest rate contracts	$	0	$	(184)	Interest expense, net	$	(1)	$	0
Foreign exchange contracts	Foreign exchange contracts	(6)		4		Cost of sales	(2)		2		Foreign exchange contracts	4		14		Cost of sales	(10)		(1)
Net investment hedges	Net investment hedges	(103)		96		Other (income) expense, net	0		0		Net investment hedges	114		49		Other expense, net	0		0
Total	Total	$	(78)	$	43		$	(2)	$	2	Total	$	118	$	(121)		$	(11)	$	(1)

Location of gain (loss) in income statement Gain (loss) recognized in income
(in millions) 2020 2019
Undesignated derivative instruments
Foreign exchange contracts Other (income) expense, net $ 7 $ (4)

Gain (loss) recognized in OCI Location of gain (loss)
in income statement Gain (loss) reclassified from AOCI
into income
(in millions) 2020 2019 2020 2019
Cash flow hedges
Interest rate contracts $ (144) $ (91) Interest expense, net $ 0 $ 0
Foreign exchange contracts 1 4 Cost of sales 2 3
Net investment hedges (104) 74 Other (income) expense, net 0 0
Total $ (247) $ (13) $ 2 $ 3


	Location of gain (loss) in income statement	Gain (loss) recognized in income
(in millions)		2021		2020
Undesignated derivative instruments
Foreign exchange contracts	Other expense, net	$	(22)	$	2

Location of gain (loss)
in income statement Gain (loss) recognized in income
(in millions) 2020 2019
Undesignated derivative instruments
Foreign exchange contracts Other (income) expense, net $ 22 $ (16)

As of ~~September 30, 2020, $7~~March 31, 2021, $12 million of deferred, net after-tax losses on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

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 ~~September 30, 2020.~~March 31, 2021.

Derivatives in asset positions

Derivatives in liability positions

Derivatives in asset positions

Derivatives in liability positions

(in millions)

Balance sheet location

Fair value

Balance sheet location

Fair value

(in millions)

Balance sheet location

Fair value

Balance sheet location

Fair value

Derivative instruments designated as hedges

Interest rate contracts

Other non-current assets

Other non-current liabilities

179

Foreign exchange contracts

Prepaid expenses and other current assets

Accounts payable and accrued liabilities

Foreign exchange contracts

Prepaid expenses and other current assets

Accrued expenses and other current liabilities

Total derivative instruments designated as hedges

182

Total derivative instruments designated as hedges

Undesignated derivative instruments

Foreign exchange contracts

Prepaid expenses and other current assets

Accounts payable and accrued liabilities

Foreign exchange contracts

Prepaid expenses and other current assets

Accrued expenses and other current liabilities

Total derivative instruments

191

Total derivative instruments

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, ~~2019.~~2020.

Derivatives in asset positions

Derivatives in liability positions

Derivatives in asset positions

Derivatives in liability positions

(in millions)

Balance sheet location

Fair value

Balance sheet location

Fair value

(in millions)

Balance sheet location

Fair value

Balance sheet location

Fair value

Derivative instruments designated as hedges

Interest rate contracts

Other non-current assets

Other non-current liabilities

Foreign exchange contracts

Prepaid expenses and other current assets

Accounts payable and accrued liabilities

Foreign exchange contracts

Prepaid expenses and other current assets

Accrued expenses and other current liabilities

Total derivative instruments designated as hedges

Undesignated derivative instruments

Foreign exchange contracts

Prepaid expenses and other current assets

Accounts payable and accrued liabilities

Foreign exchange contracts

Prepaid expenses and other current assets

Accrued expenses and other current liabilities

Total derivative instruments

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

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.

September 30, 2020 December 31, 2019
(in millions) Asset Liability Asset Liability
Gross amounts recognized in the consolidated balance sheet $ 15 $ 191 $ 21 $ 54
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet (5) (5) (11) (11)
Total $ 10 $ 186 $ 10 $ 43


	March 31, 2021				December 31, 2020
(in millions)	Asset		Liability		Asset		Liability
Gross amounts recognized in the consolidated balance sheet	$	3	$	15	$	11	$	19
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet	(3)		(3)		(6)		(6)
Total	$	0	$	12	$	5	$	13

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


		Carrying amount of hedged item				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a)					Carrying amount of hedged item				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a)
(in millions)	(in millions)	Balance as of September 30, 2020		Balance as of December 31, 2019		Balance as of September 30, 2020		Balance as of December 31, 2019		(in millions)	Balance as of March 31, 2021		Balance as of December 31, 2020		Balance as of March 31, 2021		Balance as of December 31, 2020
Long-term debt	Long-term debt	$	102	$	103	$	5	$	6	Long-term debt	$	102	$	102	$	5	$	5

(a) These fair value hedges were terminated ~~prior to December 31, 2019.~~in 2018 and earlier periods.

15. FAIR VALUE MEASUREMENTS

The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis.


				Basis of fair value measurement									Basis of fair value measurement
(in millions)	(in millions)	Balance as of September 30, 2020		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		(in millions)	Balance as of March 31, 2021		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets	Assets									Assets
Foreign exchange contracts	Foreign exchange contracts	$	15	$	0	$	15	$	0	Foreign exchange contracts	$	3	$	0	$	3	$	0

Debt securities	Debt securities	5		0		5		0		Debt securities	13		0		13		0
Marketable equity securities	Marketable equity securities	15		15		0		0		Marketable equity securities	2		2		0		0
Total	Total	$	35	$	15	$	20	$	0	Total	$	18	$	2	$	16	$	0
Liabilities	Liabilities									Liabilities
Foreign exchange contracts	Foreign exchange contracts	$	12	$	0	$	12	$	0	Foreign exchange contracts	$	15	$	0	$	15	$	0
Interest rate contracts		179		0		179		0

Contingent payments related to acquisitions	Contingent payments related to acquisitions	30		0		0		30		Contingent payments related to acquisitions	38		0		0		38
Total	Total	$	221	$	0	$	191	$	30	Total	$	53	$	0	$	15	$	38


				Basis of fair value measurement									Basis of fair value measurement
(in millions)	(in millions)	Balance as of December 31, 2019		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		(in millions)	Balance as of December 31, 2020		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets	Assets									Assets
Foreign exchange contracts	Foreign exchange contracts	$	11	$	0	$	11	$	0	Foreign exchange contracts	$	11	$	0	$	11	$	0
Interest rate contracts		10		0		10		0

Debt securities										Debt securities	13		0		13		0
Marketable equity securities	Marketable equity securities	3		3		0		0		Marketable equity securities	17		17		0		0
Total	Total	$	24	$	3	$	21	$	0	Total	$	41	$	17	$	24	$	0
Liabilities	Liabilities									Liabilities
Foreign exchange contracts	Foreign exchange contracts	$	2	$	0	$	2	$	0	Foreign exchange contracts	$	19	$	0	$	19	$	0
Interest rate contracts		52		0		52		0

Contingent payments related to acquisitions	Contingent payments related to acquisitions	39		0		0		39		Contingent payments related to acquisitions	30		0		0		30
Total	Total	$	93	$	0	$	54	$	39	Total	$	49	$	0	$	19	$	30

As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, cash and cash equivalents of ~~$4.4~~$3.2 billion and ~~$3.3~~$3.7 billion, respectively, included money market and other short-term funds of approximately ~~$2.5~~$1.7 billion and ~~$1.7~~$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. The majority of the derivatives entered into by us are valued using internal valuation techniques as no quoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholes

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

Contingent payments related to acquisitions, ~~accounted for as business combinations,~~ which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques. 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 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.


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021		2020
Fair value at beginning of period	Fair value at beginning of period	$	39	$	27	$	39	$	32	Fair value at beginning of period	$	30	$	39
Additions	Additions	0		0		4		0		Additions	24		4

Change in fair value recognized in earnings	Change in fair value recognized in earnings	1		0		(2)		(4)		Change in fair value recognized in earnings	0		(3)
Payments	Payments	(10)		0		(11)		(1)		Payments	(16)		(1)
Fair value at end of period	Fair value at end of period	$	30	$	27	$	30	$	27	Fair value at end of period	$	38	$	39

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.


		Book values				Fair values(a)					Book values		Fair values(a)
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021	2020	2021	2020
Liabilities	Liabilities									Liabilities
Short-term debt		$	0	$	226	$	0	$	226

Current maturities of long-term debt and finance lease obligations	Current maturities of long-term debt and finance lease obligations	727		315		732		315		Current maturities of long-term debt and finance lease obligations	407	406	409	409
Long-term debt and finance lease obligations	Long-term debt and finance lease obligations	5,760		4,809		6,472		5,156		Long-term debt and finance lease obligations	5,681	5,786	6,085	6,471

(a) These fair value amounts are classified as Level 2 within the fair value hierarchy as they are estimated based on observable inputs.

~~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. 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 ~~$92~~$98 million at ~~September 30, 2020~~March 31, 2021 and ~~$73~~$105 million at December 31, ~~2019.~~2020. Those investments are included in Other non-current assets on our condensed consolidated balance sheets.

16. SEGMENT INFORMATION

We manage our business based on 3 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; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. 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 the first quarter of 2020 have been recast to conform to the current period presentation.

We use operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our business segments. Intersegment sales are eliminated in consolidation.

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include ~~the majority of foreign currency hedging activities,~~ corporate headquarters costs, certain R&D costs, certain ~~GBU~~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.

Financial information for our segments is as follows.


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021		2020
Net sales:	Net sales:									Net sales:
Americas	Americas	$	1,549	$	1,534	$	4,455	$	4,462	Americas	$	1,560	$	1,565
EMEA	EMEA	777		730		2,262		2,179		EMEA	738		688
APAC	APAC	646		587		1,775		1,682		APAC	648		549
Total net sales	Total net sales	$	2,972	$	2,851	$	8,492	$	8,323	Total net sales	$	2,946	$	2,802
Operating income:	Operating income:									Operating income:
Americas	Americas	$	577	$	595	$	1,610	$	1,715	Americas	$	599	$	588
EMEA	EMEA	160		162		480		465		EMEA	135		117
APAC	APAC	161		138		432		394		APAC	138		128
Total segment operating income	Total segment operating income	$	898	$	895	$	2,522	$	2,574	Total segment operating income	$	872	$	833

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


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021		2020
Total segment operating income	Total segment operating income	$	898	$	895	$	2,522	$	2,574	Total segment operating income	$	872	$	833
Corporate and other	Corporate and other	(428)		(392)		(1,312)		(1,338)		Corporate and other	(482)		(424)
Total operating income	Total operating income	470		503		1,210		1,236		Total operating income	390		409
Net interest expense	Net interest expense	39		13		96		51		Net interest expense	34		21
Other (income) expense, net		16		9		32		(8)
Other expense, net										Other expense, net	5		10
Income before income taxes	Income before income taxes	$	415	$	481	$	1,082	$	1,193	Income before income taxes	$	351	$	378

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

2826

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

Refer to our Annual Report on Form 10-K for the year ended December 31, ~~2019 (2019~~2020 (2020 Annual Report) for management’s discussion and analysis of our financial condition and results of operations. The following is management’s discussion and analysis of our financial condition and results of operations for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

RESULTS OF OPERATIONS

Net income attributable to Baxter stockholders for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 totaled ~~$356~~$298 million, or ~~$0.69 per diluted share, and $934 million, or $1.81~~$0.58 per diluted share, compared to ~~$369~~$332 million, or ~~$0.71 per diluted share, and $1.0 billion, or $1.97~~$0.64 per diluted share for the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020. Net income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 included special items which decreased net income by $88 million, or $0.18 per diluted share, as further discussed below. Net income for the three months ended March 31, 2020 included special items which decreased net income by ~~$75~~$93 million, ~~and $251 million, respectively,~~ or ~~$0.14 and $0.49~~$0.18 per diluted share, ~~respectively,~~ as further discussed below. Net income for the three and nine months ended September 30, 2019 included special items which decreased net income by $17 million and $192 million, respectively, or $0.03 and $0.37 per diluted share, respectively, as further discussed below.

Special Items

The following table provides a summary of our special items and the related impact by line item on our results for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

Three months ended
September 30, Nine months ended
September 30,
(in millions) 2020 2019 2020 2019
Gross Margin
Intangible asset amortization expense $ (57) $ (48) $ (165) $ (136)
Intangible asset impairments 1
— — (17) (31)
Business optimization items 2
(6) (10) (24) (39)
Acquisition and integration expenses 3
— (8) (11) (25)
European medical devices regulation 4
(8) (7) (22) (17)
Investigation and related costs 5
— — (3) —
Total Special Items $ (71) $ (73) $ (242) $ (248)
Impact on Gross Margin Ratio (2.4 pts) (2.6 pts) (2.8 pts) (3.0 pts)
Selling, General and Administrative (SG&A) Expenses
Business optimization items 2
$ 25 $ 10 $ 53 $ 50
Acquisition and integration expenses 3
— 3 7 8
Investigation and related costs 5
2 — 18 —
Total Special Items $ 27 $ 13 $ 78 $ 58
Impact on SG&A Ratio 0.9 pts 0.5 pts 0.9 pts 0.7 pts
Research and Development (R&D) Expenses
Business optimization items 2
$ 1 $ 8 $ — $ 42
Acquisition and integration expenses 3
— 2 22 8
Investigation and related costs 5
— — 1 —
Total Special Items $ 1 $ 10 $ 23 $ 50
Impact on R&D Ratio 0.0 pts 0.4 pts 0.2 pts 0.6 pts
Other Operating Expense (Income), net
Business optimization items 2
$ — $ — $ (17) $ —
Acquisition and integration expenses 3
1 — (2) (4)
Insurance recoveries from a legacy product-related matter 6
— (4) — (37)
Hurricane Maria insurance recoveries 7
— (40) — (40)
Total Special Items $ 1 $ (44) $ (19) $ (81)
Income Tax Expense
Tax effects of special items and impact of U.S. tax reform ⁸
$ (25) $ (35) $ (73) $ (83)
Total Special Items $ (25) $ (35) $ (73) $ (83)
Impact on Effective Tax Rate (2.2 pts) (4.5 pts) (2.2 pts) (3.1 pts)


	Three months ended March 31,
(in millions)	2021		2020
Gross Margin
Intangible asset amortization expense	$	(64)	$	(52)

Business optimization items1	(21)		(10)
Acquisition and integration expenses2	—		(7)

European medical devices regulation3	(8)		(6)


Investigation and related costs4	—		(3)
Total Special Items	$	(93)	$	(78)
Impact on Gross Margin Ratio	(3.1 pts)		(2.8 pts)
Selling, General and Administrative (SG&A) Expenses
Business optimization items1	$	6	$	21
Acquisition and integration expenses2	1		3
Investigation and related costs4	11		14

Total Special Items	$	18	$	38
Impact on SG&A Ratio	0.6 pts		1.3 pts
Research and Development (R&D) Expenses
Business optimization items1	$	—	$	1
Acquisition and integration expenses2	—		21

Investigation and related costs4	—		1
Total Special Items	$	—	$	23
Impact on R&D Ratio	0.0 pts		0.8 pts
Other Operating Income, net
Business optimization items1	$	—	$	(17)
Acquisition and integration expenses2	—		(3)


Total Special Items	$	—	$	(20)
Income Tax Expense
Tax effects of special items5	$	(23)	$	(26)
Total Special Items	$	(23)	$	(26)
Impact on Effective Tax Rate	(1.5 pts)		(2.4 pts)

Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is consistent with how management and our Board of Directors assess performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact our reported results of operations for the period. Management believes that providing the separate impact of those items may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

1In ~~2020~~2021 and 2019, our results included charges of $17 million and $31 million for asset impairments related to developed-technology intangible assets. Refer to Note 4 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these asset impairments.

2In 2020, ~~and 2019,~~ our results were impacted by costs associated with our execution of programs to optimize our organization and cost ~~structure on a global basis.~~structure. These actions included streamlining our international operations, rationalizing our manufacturing facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. Our results in 2021 and 2020 included business optimization charges of $27 million and $32 million, ~~in the third quarter and $77 million in the first nine months. Our results in 2019 included business optimization charges of $28 million in the third quarter and $131 million in the first nine months.~~respectively. Additionally, we recognized a gain of $17 million in ~~the first nine months of~~ 2020 for property we sold in conjunction with our business optimization initiatives. Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.

32Our results in 2021 included $1 million of integration expenses related to our acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S. Our results in 2020 included $1$28 million ~~in the third quarter and $38 million in the first nine months~~ of ~~acquisition and integration expenses. This included~~ acquisition and integration expenses related to our acquisitions of Cheetah Medical Inc. (Cheetah) ~~and~~, Seprafilm and ~~the purchase of~~ in-process R&D assets, in the first nine months. Additionally, the change in the estimated fair value of contingent consideration liabilities in 2020 was an expense in the third quarter and a benefit in the first nine months. Our results in 2019 included $13 million in the third quarter and $37 million in the first nine months of acquisition and integration expenses. This included acquisition and integration expenses related to our acquisitions of Claris and the ~~Recothrom~~ ~~and~~ ~~Preveleak~~ ~~products in prior periods and the purchase of in-process R&D assets in the third quarter and first nine months,~~ partially offset by the change in the estimated fair value of contingent consideration ~~liabilities in the first nine months.~~liabilities. Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.

43Our results in 2021 and 2020 included $8 million ~~in the third quarter~~ and ~~$22~~$6 million, ~~in the first nine months of costs~~respectively, related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that are scheduled to become effective in ~~2021. Our results~~stages beginning in ~~2019 included $7 million in the third quarter and $17 million in the first nine months of costs related to these requirements.~~2021.

54Our results in 2021 and 2020 included ~~costs~~charges of $2$11 million ~~in the third quarter~~ and ~~$22~~$18 million, ~~in the first nine months~~respectively, for investigation and related costs. This included $2 million in ~~the third quarter~~2021 and ~~$14~~$10 million in ~~the first nine months~~2020 of costs related to our investigation of foreign exchange gains and losses associated with certain intra-company transactions and related legal matters. We also recorded a charge of $9 million in the first quarter of 2021 for a proposed settlement of shareholder litigation related to that investigation. Additionally, we recorded incremental stock compensation expense of $8 million in ~~the first nine months~~2020 as we extended the term of certain stock options that were scheduled to expire in the first quarter of 2020. Refer to Notes 6 and 7 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation and related legal charge and stock compensation expense.

6Our results in 2019 included a benefit of $4 million in the third quarter and $37 million in the first nine months for our allocation of insurance proceeds received pursuant to a settlement and cost-sharing arrangement for a legacy product-related matter. Refer to Note 6 in Item 1 of this Quarterly Report on Form 10-Q for further information.

7Our results in 2019 included benefits of $40 million related to insurance recoveries as a result of losses incurred due to Hurricane Maria. Refer to Note 6 in Item 1 of this Quarterly Report on Form 10-Q for further information.

85Reflected in this item is the income tax impact of the special items identified in this table. ~~Additionally, our results in 2019 included a benefit of $16 million related to an adjustment for U.S. tax reform.~~ The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.

NET SALES


		Three months ended September 30,				Percent change					Three Months Ended March 31,				Percent change
(in millions)	(in millions)	2020		2019		At actual currency rates		At constant currency rates		(in millions)	2021		2020		At actual currency rates		At constant currency rates
United States	United States	$	1,244	$	1,224	2	%	2	%	United States	$	1,180	$	1,217	(3)	%	(3)	%
International	International	$	1,728	1,627		6	%	5	%	International	$	1,766	1,585		11	%	5	%
Total net sales	Total net sales	$	2,972	$	2,851	4	%	4	%	Total net sales	$	2,946	$	2,802	5	%	1	%

Nine months ended
September 30, Percent change
(in millions) 2020 2019 At actual
currency rates At constant currency rates
United States $ 3,588 $ 3,537 1 % 1 %
International $ 4,904 4,786 2 % 5 %
Total net sales $ 8,492 $ 8,323 2 % 3 %

Foreign currency ~~had an insignificant impact on~~favorably impacted net sales by 4 percentage points during the ~~third~~first quarter of ~~2020~~2021 compared to the prior-year ~~as the strengthening of the U.S. Dollar relative~~period principally due to ~~the Brazilian Real, Mexican Peso and Colombian Peso was offset by~~ the weakening of the U.S. Dollar relative to the Euro, Australian Dollar, British Pound and British Pound. Foreign currency unfavorably impacted net sales by 1 percentage point during the first nine months of 2020 compared to the prior-year period principally due to the strengthening of the U.S. Dollar relative to the Mexican Peso, Australian Dollar, Brazilian Real, Chinese ~~Renminbi and Colombian Peso.~~Renminbi.

The comparisons presented at constant currency rates reflect local currency sales at the prior period’s foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S. GAAP measure of change in

net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

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 pandemic. 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. For further discussion, refer to the ~~Global Business Unit~~Product Category Net Sales Reporting section below and Item 1A. Risk Factors in our 2020 Annual ~~Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.~~Report.

~~Global Business Unit~~Product Category Net Sales Reporting

~~Our~~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 the first quarter of 2020 have been recast to conform to the current period presentation.

Our product categories include the following:

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

• Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices.

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

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

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

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

• ~~Other~~ BioPharma Solutions~~primarily~~ includes sales of ~~contract manufacturing~~contracted services ~~from our~~we provide to various pharmaceutical ~~partnering business.~~and biopharmaceutical companies.

•

Other includes sales of other miscellaneous product and service offerings.

The following is a summary of net sales by ~~GBU.~~product category:


		Three months ended September 30,				Percent change					Three Months Ended March 31,				Percent change
(in millions)	(in millions)	2020		2019		At actual currency rates		At constant currency rates		(in millions)	2021		2020		At actual currency rates		At constant currency rates
Renal Care	Renal Care	$	955	$	918	4	%	4	%	Renal Care	$	922	$	870	6	%	2	%
Medication Delivery	Medication Delivery	680		701		(3)	%	(3)	%	Medication Delivery	652		678		(4)	%	(6)	%
Pharmaceuticals	Pharmaceuticals	540		527		2	%	1	%	Pharmaceuticals	552		516		7	%	1	%
Clinical Nutrition	Clinical Nutrition	237		219		8	%	5	%	Clinical Nutrition	234		217		8	%	3	%
Advanced Surgery	Advanced Surgery	236		216		9	%	9	%	Advanced Surgery	217		224		(3)	%	(6)	%
Acute Therapies	Acute Therapies	177		130		36	%	35	%	Acute Therapies	207		156		33	%	28	%
BioPharma Solutions										BioPharma Solutions	135		114		18	%	11	%
Other	Other	147		140		5	%	4	%	Other	27		27		0	%	(4)	%
Total Baxter	Total Baxter	$	2,972	$	2,851	4	%	4	%	Total Baxter	$	2,946	$	2,802	5	%	1	%

Nine months ended September 30, Percent change
(in millions) 2020 2019 At actual currency rates At constant currency rates
Renal Care $ 2,744 $ 2,679 2 % 5 %
Medication Delivery 1,982 2,024 (2) % (1) %
Pharmaceuticals 1,552 1,575 (1) % (1) %
Clinical Nutrition 676 639 6 % 7 %
Advanced Surgery 628 646 (3) % (2) %
Acute Therapies 519 391 33 % 35 %
Other 391 369 6 % 7 %
Total Baxter $ 8,492 $ 8,323 2 % 3 %

Renal Care net sales increased ~~4% in the third quarter and 2%~~6% in the first ~~nine months~~quarter of ~~2020,~~2021, as compared to the prior-year ~~periods. The~~period. That increase ~~in the third quarter and first nine months~~ was driven by global patient growth in ~~PD. Changes in~~PD and a 4% positive impact from foreign exchange ~~rates had an insignificant impact on Renal Care net sales in the third quarter and a negative impact of 3% in the first nine months of 2020,~~rate changes, as compared to the prior-year ~~periods.~~period.

Medication Delivery net sales decreased ~~3% in the third quarter and 2%~~4% in the first ~~nine months~~quarter of ~~2020,~~2021, as compared to the prior-year ~~periods. The~~period. That decrease ~~in the third quarter and first nine months~~ was primarily driven by lower demand for our infusion systems and related IV administration sets and solutions due to lower hospital admission rates and a reduction in elective surgeries resulting from the COVID-19 ~~pandemic, including~~pandemic. Additionally, the prior-year period benefited from additional sales as our customers prepared for the impact ~~from shelter in place initiatives as well as patient safety concerns related to potential COVID-19 infection risk. Changes~~of COVID-19. Those decreases were partially offset by changes in foreign exchange rates which had ~~an insignificant~~a favorable impact on Medication Delivery net sales ~~in the third quarter and a negative impact~~ of 1%2% in the first ~~nine months~~quarter of ~~2020,~~2021, as compared to the prior-year ~~periods.~~period.

Pharmaceuticals net sales increased ~~2% in the third quarter and decreased 1%~~7% in the first ~~nine months~~quarter of ~~2020,~~2021, as compared to the prior-year ~~periods. The~~period. That increase ~~in the third quarter~~ was driven by ~~increased demand for our international pharmacy compounding services along with~~ a ~~significant nonrecurring purchase from the U.S. government and a 1%~~6% positive impact from foreign exchange rate changes, compared to the prior-year period. Additionally, the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S. contributed $13 million of net sales in the first quarter of 2021. Those increases were partially offset by lower demand for inhaled anesthesia products ~~as a result of lower hospital admission rates and reduced elective surgeries~~ resulting from the COVID-19 pandemic. ~~The decrease in~~Additionally, the ~~first nine months~~prior-year period benefited from additional sales as our customers prepared for the impact of 2020 was driven by lower demand for inhaled anesthesia products resulting from the COVID-19 pandemic and new competitive entrants for TransDerm Scop. Those impacts were partially offset by increased demand for our international pharmacy compounding services along with certain generic injectables and the nonrecurring purchase from the U.S. government.COVID-19.

Clinical Nutrition net sales increased 8% in the ~~third~~first quarter ~~and 6% in the first nine months~~ of ~~2020,~~2021, as compared to the prior-year ~~periods. The~~period. That increase ~~in the third quarter and first nine months of 2020~~ was driven by a 5% positive impact from foreign exchange rate changes, compared to the prior-year period. Additionally, Clinical Nutrition net sales increased due to higher demand for our PN therapies and related ~~products, recent product launches and competitor shortages for amino acids. Additionally, foreign exchange rate changes had a positive impact on~~products.

Advanced Surgery net sales ofdecreased 3% in the ~~third~~first quarter ~~and a negative impact~~ of ~~1% for the first nine months of 2020,~~2021, as compared to the prior-year ~~periods.~~

Advanced Surgery net sales increased 9% in the third quarter and decreased 3% in the first nine months of 2020, as compared to the prior-year periods. The increase in the third quarter was due to the acquisition of Seprafilm, which contributed $30 million in net sales during the third quarter. Theperiod. That decrease ~~in the first nine months of 2020~~ was driven by the impact of the COVID-19 pandemic as many elective surgeries were ~~postponed~~postponed. Additionally, contributing to the decrease compared to the prior-year period was increased demand for our hemostats and sealants in the first quarter of 2020 due, in part, to competitive supply disruptions. Partially offsetting those decreases was the acquisition of Seprafilm in February of 2020, which contributed $8 million of incremental sales in the first quarter of 2021, and a ~~1% negative~~3% positive impact from foreign exchange rate changes, as compared to the prior-year period. Partially offsetting the decrease was the acquisition of Seprafilm, which contributed $66 million in net sales during the first nine months of 2020, and a benefit from increased demand for our hemostats and sealants early in the year due, in part, to competitive supply disruptions.

Acute Therapies net sales increased ~~36% in the third quarter and~~ 33% in the first ~~nine months~~quarter of ~~2020,~~2021, as compared to the prior-year ~~periods. The~~period. That increase ~~in the third quarter and first nine months~~ was driven by increased global demand for our CRRT systems to treat acute kidney ~~injuries. Additionally,~~injury during the COVID-19 pandemic and a 5% positive impact from foreign exchange rate changes, ~~had a positive impact on net sales of 1% in the third quarter and a negative impact of 2% for the first nine months of 2020,~~ as compared to the prior-year ~~periods. The COVID-19 pandemic drove the increases in demand for those products in the third quarter and first nine months of 2020.~~period.

~~Other~~BioPharma Solutions net sales increased ~~5% in the third quarter and 6%~~18% in the first ~~nine months~~quarter of ~~2020,~~2021, as compared to the prior-year ~~periods. The~~period. That increase ~~in the third quarter and first nine months of 2020~~ was driven by ~~increased demand for our contract~~ manufacturing ~~services. Additionally,~~services and supply packaging related to the production of COVID-19 vaccines on behalf of multiple pharmaceutical companies and a 7% positive impact from foreign exchange rate changes, ~~had a positive impact on net sales of 1% in the third quarter and a negative impact of 1% for the first nine months of 2020,~~ as compared to the prior-year ~~periods.~~period.

Gross Margin and Expense Ratios


		Three months ended September 30,													Three months ended March 31,
		2020		% of net sales		2019		% of net sales		$ change		% change			2021		% of net sales		2020		% of net sales		$ change		% change
Gross margin	Gross margin	$	1,195	40.2	%	$	1,230	43.1	%	$	(35)	(2.8)	%	Gross margin	$	1,145	38.9	%	$	1,163	41.5	%	$	(18)	(1.5)	%
SG&A	SG&A	$	601	20.2	%	$	627	22.0	%	$	(26)	(4.1)	%	SG&A	$	627	21.3	%	$	628	22.4	%	$	(1)	(0.2)	%
R&D	R&D	$	123	4.1	%	$	144	5.1	%	$	(21)	(14.6)	%	R&D	$	128	4.3	%	$	146	5.2	%	$	(18)	(12.3)	%

Nine months ended September 30,
2020 % of net sales 2019 % of net sales $ change % change
Gross margin $ 3,396 40.0 % $ 3,463 41.6 % $ (67) (1.9) %
SG&A $ 1,819 21.4 % $ 1,869 22.5 % $ (50) (2.7) %
R&D $ 386 4.5 % $ 439 5.3 % $ (53) (12.1) %

Gross Margin

The gross margin ratio was ~~40.2%~~38.9% and ~~40.0%~~41.5% in the ~~third~~first quarter of 2021 and ~~first nine months of~~ 2020, respectively. The special items identified above had an unfavorable impact of approximately ~~2.4~~3.1 and 2.8 percentage points on the gross margin ratio in the ~~third~~first quarter of 2021 and ~~first nine months of~~ 2020, respectively. The gross margin ratio was 43.1% and 41.6% in the third quarter and first nine months of 2019, respectively. The special items identified above had an unfavorable impact of approximately 2.6 and 3.0 percentage points on the gross margin ratio in the third quarter and first nine months of 2019, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the gross margin ratio decreased in the ~~third~~first quarter ~~and first nine months~~ of ~~2020~~2021 compared to the ~~prior year~~prior-year period due to an unfavorable product mix ~~additional compensation~~and higher manufacturing and supply chain costs ~~primarily for our manufacturing employees, reduced manufacturing efficiencies and incremental logistics costs, all in response to~~resulting from the COVID-19 pandemic.

~~We expect the gross margin ratio for full year 2020 to be negatively impacted by those same factors.~~

SG&A

The SG&A expenses ratio was ~~20.2%~~21.3% and ~~21.4%~~22.4% in the ~~third~~first quarter of 2021 and ~~first nine months of~~ 2020, respectively. The special items identified above had an unfavorable impact of approximately ~~0.9 percentage points on the SG&A expenses ratio in each of the third quarter~~0.6 and ~~first nine months of 2020. The SG&A expenses ratio was 22.0% and 22.5% in the third quarter and first nine months of 2019, respectively. The special items identified above had an~~

~~unfavorable impact of approximately 0.5 and 0.7~~1.3 percentage points on the SG&A expenses ratio in the ~~third~~first quarter of 2021 and ~~first nine months of 2019,~~2020, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the SG&A expenses ratio decreased in the ~~third~~first quarter ~~and first nine months~~ of ~~2020~~2021 compared to the prior-year period primarily due to ~~lower bonus accruals under our annual employee incentive compensation plans,~~ actions we took to restructure our cost position and focus on expense management and reduced travel and related expenses due to the COVID-19 pandemic.

R&D

The R&D expenses ratio was ~~4.1%~~4.3% and ~~4.5%~~5.2% in the ~~third~~first quarter of 2021 and ~~first nine months of~~ 2020, respectively. The special items identified above had no impact and an unfavorable impact of approximately ~~0.2~~0.8 percentage points on the R&D expenses ratio in the ~~third~~first quarter of 2021 and ~~first nine months of~~ 2020, respectively. The R&D expenses ratio was 5.1% and 5.3% in the third quarter and first nine months of 2019, respectively. The special items identified above had an unfavorable impact of approximately 0.4 and 0.6 percentage points on the R&D expenses ratio in the third quarter and first nine months of 2019, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the R&D expenses ratio decreased in the ~~third~~first quarter ~~and first nine months~~ of ~~2020~~2021 compared to the prior-year period as a result of ~~the timing of project-related expenditures compared to the prior year and~~ actions we took to restructure our cost position and focus on expense ~~management.~~

~~Due~~management and reduced travel and related expenses due to ~~a change in~~ the timing and amount of projected cash flows associated with $140 million of acquired in-process R&D intangible assets from a historical acquisition, we updated the estimated fair values of these assets. While no impairment has been recorded because the estimated fair values of those assets exceeded their carrying values, the estimated fair values of these assets declined and are at risk of future impairment should the estimated timing or amount of projected cash flows further deteriorate.COVID-19 pandemic.

Business Optimization Items

~~Beginning in the second half of 2015,~~In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. ~~Through September 30, 2020,~~From the commencement of our business optimization actions in the second half of 2015 through March 31, 2021, we have incurred cumulative pre-tax costs of $1.1 billion related to these actions. The 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 costs of approximately ~~$15~~$12 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. The reductions in our cost base from these actions in the aggregate are expected to provide cumulative annual pre-tax savings of more than $1.2 billion once the remaining actions are complete. The savings from these actions will impact cost of sales, SG&A expenses, and R&D expenses. Approximately 9599 percent of the expected annual pre-tax savings are expected to be realized by the end of ~~2020,~~2021, with the remainder by the end of 2023.

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

Other operating ~~expense (income),~~income, net was ~~an expense of $1 million and income of $19~~$20 million in the ~~third~~first quarter ~~and first nine months~~ of 2020 ~~respectively. In the third quarter and first nine months of 2020, we recognized an expense of $1 million and a benefit of $2 million, respectively,~~ as ~~a result of the change in the estimated fair value of contingent consideration liabilities. Additionally, in the first nine months of 2020~~ we recognized a $17 million gain on the sale of property in conjunction with our business optimization ~~initiatives. Other operating expense (income), net was income of $44~~initiatives and a $3 million ~~and $81 million in the third quarter and first nine months of 2019, respectively. In the third quarter of 2019, we recognized a benefit of $40 million related to insurance recoveries~~gain as a result of ~~losses incurred due to Hurricane Maria. In the three and nine months ended September 30, 2019, we recognized gains of $4 million and $37 million, respectively, when our share of the proceeds under~~ a ~~cost-sharing agreement became realizable following the resolution of a dispute with an insurer related to a legacy product-related matter. Additionally, in the first nine months~~

~~of 2019 we recognized a benefit of $4 million as a result of the~~ change in the estimated fair value of contingent consideration liabilities.

In September 2013, we entered into an agreement with Celerity Pharmaceutical, 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 one of the products that is currently being developed by Celerity if that product receives regulatory approval in the U.S. and/or European Union. If regulatory approval is obtained, we would incur a loss ranging from $30 million to $60 million for the difference between our purchase price and the divestiture proceeds in connection with that transaction.

Interest Expense, Net

Interest expense, net was ~~$39~~$34 million and ~~$96~~$21 million in the ~~third~~first quarter of 2021 and ~~first nine months of~~ 2020, ~~respectively, and $13 million and $51 million in the third quarter and first nine months of 2019,~~ respectively. The increase in ~~the third quarter and first nine months of 2020~~2021 was primarily driven by higher average debt outstanding ~~as a result of the March 2020 issuance of $750 million of 3.75% senior notes~~and lower interest income due ~~October 2025 and $500 million of 3.95% senior notes due April 2030. Additionally,~~to lower interest rates.

Other Expense, Net

Other expense, net ~~increased~~was $5 million and $10 million in the first ~~nine months~~quarter of 2021 and 2020, ~~due to the May 2019 issuance of €750 million of 0.40% senior notes due May 2024 and €750 million of 1.3% senior notes due May 2029.~~

We expect that interest expense, net will increase by more than $60 million in 2020 compared to 2019 primarily due to reduced interest income as a result of lower interest rates on cash balances and higher interest expense as a result of the $1.25 billion of senior notes issued in March 2020.

~~Other (Income) Expense, Net~~

~~Other (income) expense, net was an expense of $16 million and $32 million~~respectively. The decrease in the ~~third~~first quarter ~~and first nine months~~ of 2020, respectively, and an expense of $9 million and income of $8 million in the third quarter and first nine months of 2019, respectively. The increase in expense in the third quarter and first nine months of 20202021 compared to the prior year was primarily due to ~~lower pension benefits as~~ a ~~result of the annuitization of our U.S. pension plans~~foreign exchange net gain in the ~~fourth quarter of 2019. Additionally, we recognized an unrealized gain of $9 million on~~current year compared to a ~~marketable equity security in the third quarter of 2020.~~

In September 2020, we offered certain former U.S. employees with a vested pension benefit a limited-time option to take a lump sum distribution in lieu of future monthly payments. Those accepting the option will be paid from the assets of the pension plan in December 2020. This action will accelerate the satisfaction of future pension obligations and could result in a non-cash pre-tax settlementnet loss in the ~~fourth~~prior year, partially offset by an investment impairment in the current year.

In the first quarter of ~~2020, which will be determined based on~~2021, we began to wind down our operations in Argentina. Upon substantial liquidation of those operations in the ~~rate~~future, we expect to reclassify currency translation adjustments (CTA) from accumulated other comprehensive (loss) income to other expense, net and recognize a non-cash charge. As of ~~acceptance. The settlement loss, if triggered, would be recognized as a non-operating benefit cost.~~

March 31, 2021, the CTA for our Argentina operations was in excess of $60 million.

Income Taxes

Our effective income tax rate was ~~13.5%~~14.5% and ~~22.0% in the third quarter and 13.2% and 13.7%~~11.9% in the first ~~nine months~~quarter of ~~2020~~2021 and ~~2019,~~2020, 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.

Segment Results

We use net sales and operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our segments. 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 the first quarter of 2020 have been recast to conform to the current period presentation. The following is a summary of financial information for our reportable segments:


		Net sales								Operating income (loss)									Net sales				Operating income (loss)
		Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,					Three months ended March 31,
(in millions)	(in millions)	2020		2019		2020		2019		2020		2019		2020		2019		(in millions)	2021		2020				2021		2020
Americas	Americas	$	1,549	$	1,534	$	4,455	$	4,462	$	577	$	595	$	1,610	$	1,715	Americas	$	1,560	$	1,565			$	599	$	588
EMEA	EMEA	777		730		2,262		2,179		160		162		480		465		EMEA	738		688				135		117
APAC	APAC	646		587		1,775		1,682		161		138		432		394		APAC	648		549				138		128
Total segments																		Total segments	2,946		2,802				872		833
Corporate and other	Corporate and other	—		—		—		—		(428)		(392)		(1,312)		(1,338)		Corporate and other	—		—				(482)		(424)
Total	Total	$	2,972	$	2,851	$	8,492	$	8,323	$	470	$	503	$	1,210	$	1,236	Total	$	2,946	$	2,802			$	390	$	409

Americas

Segment net sales and operating income were ~~$1.5~~$1.6 billion and ~~$577~~$599 million, respectively, in the ~~third~~first quarter of 2021 and ~~$4.5~~$1.6 billion and ~~$1.6 billion,~~$588 million, respectively, in the first ~~nine months~~quarter of 2020. ~~Segment net sales and operating income were $1.5 billion and $595 million, respectively, in the third quarter and $4.5 billion and $1.7 billion, respectively, in the first nine months of 2019.~~ The ~~decrease~~increase in operating profit in the ~~third~~ first

quarter was due to ~~lower gross profit as a result of an~~favorable sales performance in our Acute Therapies, BioPharma Solutions, Renal Care and Clinical Nutrition product categories, partially offset by unfavorable ~~product mix and incremental logistics costs due to the impact of the COVID-19 pandemic. The decrease~~performance in ~~operating profit in the first nine months of 2020 was primarily driven by decreased sales in multiple GBUs, particularly Medication Delivery,~~ Pharmaceuticals, ~~and~~ Advanced Surgery and lower gross profit as a result of an unfavorable product mix and incremental logistics costs due primarily to the impact of the COVID-19 pandemic. The decreases were partially offset by favorable performance in Acute Therapies and Clinical Nutrition as well as the acquisition of Seprafilm.Medication Delivery.

EMEA

Segment net sales and operating income were ~~$777~~$738 million and ~~$160 million, respectively, in the third quarter and $2.3 billion and $480~~$135 million, respectively, in the first ~~nine months~~quarter of ~~2020. Segment net sales~~2021 and ~~operating income were $730~~$688 million and ~~$162 million, respectively, in the third quarter and $2.2 billion and $465~~$117 million, respectively, in the first ~~nine months~~quarter of ~~2019.~~2020. The ~~change~~increase in operating profit in the first quarter was due to the favorable impact of foreign exchange rates ~~had a positive impact~~ on results in the ~~third~~first quarter of ~~2020~~2021 as compared to ~~2019. On a constant currency basis,~~2020 and the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S. which contributed $10 million of net sales and operating profit ~~increased in both~~to the third quarter and first nine months of 2020 due to increased sales in Acute Therapies, Clinical Nutrition, Pharmaceuticals and Renal Care. For the first nine months of 2020, favorable results were partially offset by decreased sales in Advanced Surgery.region.

APAC

Segment net sales and operating income were ~~$646 million and $161 million, respectively, in the third quarter and $1.8 billion and $432 million, respectively, in the first nine months of 2020. Segment net sales and operating income were $587~~$648 million and $138 million, respectively, in the ~~third~~first quarter of 2021 and ~~$1.7 billion~~were $549 million and ~~$394~~$128 million, respectively, in the first ~~nine months~~quarter of ~~2019.~~2020. The ~~increases~~increase in operating profit in the ~~third~~first quarter ~~and first nine months~~was due to the favorable impact of ~~2020 were primarily driven by increased sales in multiple GBUs, particularly Renal Care, Acute Therapies and Pharmaceuticals. The acquisition of Seprafilm also positively contributed to~~foreign exchange rates on results in ~~2020.~~the first quarter of 2021 as compared to 2020 and favorable sales performance in Acute Therapies.

Corporate and Other

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include ~~certain foreign currency hedging activities,~~ corporate headquarters costs, certain R&D costs, certain ~~GBU~~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). The operating loss in the ~~third~~first quarter of 2021 was higher than the prior-year period primarily due to higher intangible asset amortization ~~expenses~~expense, restructuring charges and ~~business optimization charges~~employee benefits expenses in the current year and prior-year gains recognized for Hurricane Maria insurance recoveries. The operating loss in the first nine months of 2020 was lower than the prior-year period due to lower business optimization charges and lower intangible asset impairment charges in the current-year period,that were partially offset by ~~insurance recoveries received in 2019 from a legacy product-related matter~~higher acquisition and ~~Hurricane Maria, as well as higher investigation and related costs and intangible asset amortization~~integration expenses in the ~~current~~prior year.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash flows for the ~~nine-month~~three-month periods ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.


		Nine months ended September 30,					Three months ended March 31,
(in millions)	(in millions)	2020		2019		(in millions)	2021		2020
Cash flows from operations - continuing operations	Cash flows from operations - continuing operations	$	1,158	$	1,281	Cash flows from operations - continuing operations	$	377	$	274
Cash flows from investing activities	Cash flows from investing activities	(915)		(679)		Cash flows from investing activities	(538)		(604)
Cash flows from financing activities	Cash flows from financing activities	798		614		Cash flows from financing activities	(358)		1,170

Cash Flows from Operations — Continuing Operations

In the first ~~nine~~three months of ~~2020,~~2021, cash provided by operating activities was ~~$1.2 billion,~~$377 million, as compared to cash provided by operating activities of ~~$1.3 billion~~$274 million in the first ~~nine~~three months of ~~2019, a decrease~~2020, an increase of ~~$123~~$103 million. The ~~decrease~~increase was primarily due to ~~a more significant increase in inventory levels in the current year, the timing of customer payments~~favorable accounts receivable collections and ~~insurance recoveries received in 2019 from a legacy product-related matter and Hurricane Maria, partially offset by the timing of vendor payments and~~ lower ~~restructuring and~~ employee incentive compensation payments in the current ~~year.~~

~~Additionally~~year compared to the prior year, partially offset by a higher increase in inventories in the third quarter of 2020, we terminated an interest rate derivative contract which negatively impacted operating cash flows by $7 million for the nine months ended September 30, 2020. In October 2020, we terminated additional interest rate derivative contracts with a notional balance of $350 millioncurrent year and ~~a liability fair value of $109 million as of September 30, 2020 for $100 million in cash payments, which will be reflected as operating cash outflows in the fourth quarter of 2020.~~

~~While we did not experience significant collection issues related to our receivables during the first nine months of 2020,~~ the timing of ~~collection of our receivables may be adversely impacted by the COVID-19 pandemic during the remainder of 2020 and into 2021.~~vendor payments.

Cash Flows from Investing Activities

In the first ~~nine~~three months of 2021, cash used for investing activities included payments for acquisitions of $381 million, primarily related to Caelyx and Doxil and Transderm Scop, and capital expenditures of $171 million. In the first three months of 2020, cash used for investing activities included payments for acquisitions of ~~$466~~$443 million, primarily related to Seprafilm and rights to multiple products we acquired, and capital expenditures of ~~$472~~$172 million. In the first nine months of 2019, cash used for investing activities included capital expenditures of $505 million and payments for acquisitions of $186 million, primarily related to the U.S. rights to multiple products we acquired.

Cash Flows from Financing Activities

In the first ~~nine~~three months of 2021, cash used in financing activities included payments for treasury stock repurchases of $253 million and dividend payments of $125 million, partially offset by proceeds from stock issued under employee benefit plans of $48 million. In the first three months of 2020, cash generated from financing activities included $1.2

billion of net proceeds from the issuance of ~~$750 million~~$1.25 billion of senior notes due in 2025 and $500 million of senior notes due in 2030. We have used the net proceeds from the senior notes issuances for general corporate purposes, including to strengthen our balance sheet as a precautionary measure in light of the COVID-19 pandemic. Cash generated from financingnotes. Financing activities in the ~~nine~~three months ended ~~September 30,~~March 31, 2020 also included receipts from stock issued under employee benefit plans of ~~$180~~$66 million ~~and was partially offset by the repayment of borrowings under our Euro-denominated credit facility of €200 million ($225 million)~~ and dividend payments of $348 million. In the first nine months of 2019, cash generated from financing activities included $1.7 billion of net proceeds from the issuance of €750 million of senior notes due in 2024 and €750 million of senior notes due in 2029 along with stock issued under employee benefit plans of $334 million, partially offset by payments for treasury stock repurchases of $1.0 billion and dividend payments of $310$111 million.

As authorized by the Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. 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 ~~did not~~paid $253 million in cash to repurchase ~~any~~approximately 3.6 million shares under this authority pursuant to a Rule 10b5-1 plan in the first ~~nine~~three months of ~~2020~~2021 and recognized a liability within accrued expenses and other current liabilities of $47 million for share repurchases that settled in April 2021. We had ~~$897 million~~$1.6 billion remaining available under this authorization as of September 30, 2020. After giving effect to the October 2020 approval, we had $2.4 billion remaining under this authority as of October 29, 2020. We expect to recommence our share repurchase activity in the fourth quarter of 2020.

March 31, 2021.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of ~~September 30, 2020,~~March 31, 2021, our U.S. dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $2.0 billion and €200 million, respectively. There ~~was~~were no ~~amount~~borrowings outstanding under our U.S. dollar-denominated and Euro-denominated credit facilities as of September 30, 2020. There was €200 million ($224 million) outstanding at a 0.91% interest rate under our Euro-denominated credit facility and no amount outstanding under our U.S. dollar-denominated credit facility as ofMarch 31, 2021 or December 31, ~~2019.~~2020. As of ~~September 30, 2020,~~March 31, 2021, we were in compliance with the financial covenants in these agreements. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by ~~each~~the institution’s respective commitment.

Access to Capital and Credit Ratings

We intend to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations or by issuing additional debt. We had ~~$4.4~~$3.2 billion of cash and cash equivalents as of ~~September 30, 2020,~~March 31, 2021, with adequate cash available to meet operating requirements in each jurisdiction in which we operate. We invest our excess cash in money market and other funds and diversify the concentration of cash among different financial institutions. As of ~~September 30, 2020,~~March 31, 2021, we had approximately ~~$6.5~~$6.1 billion of long-term debt and finance lease obligations, including current maturities. Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure.

Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives. ~~Between March and July 2020, Standard & Poor’s, Fitch, and Moody’s reaffirmed~~There have been no changes to our investment grade credit ratings that we disclosed in our ~~2019~~2020 Annual Report.

~~LIBOR Reform~~

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR) and other interbank offered rates, which have been widely used as reference rates for various securities and financial contracts, including loans, debt and derivatives. This announcement indicates that the continuation of LIBOR on the current basis iswas not guaranteed after 2021. Regulators in the U.S. and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate (SOFR). In 2020, it was announced that certain U.S. dollar LIBOR tenors would not cease until 2023. Currently, our credit facilities ~~and certain of our derivative instruments~~ reference LIBOR-based rates. The discontinuation of LIBOR will require these arrangements to be modified in order to replace LIBOR with an alternative reference interest rate, which could impact our cost of funds. Our credit facilities include a provision specifying that we and the lenders will negotiate in good faith for the determination of a successor LIBOR rate.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our ~~2019~~2020 Annual Report. Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our

financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our ~~2019~~2020 Annual Report. There have been no significant changes in the application of our critical accounting policies during the first ~~nine~~three months of ~~2020.~~2021.

RECENT ACCOUNTING PRONOUNCEMENTS

~~Refer to Note 1 in Item 1 of this Quarterly Report on Form 10-Q for information regarding recently adopted accounting pronouncements.~~ There are no accounting standards issued but not yet effective that we believe will have a material impact on our condensed consolidated financial statements.

LEGAL CONTINGENCIES

Refer to Note 6 within Item 1 for a discussion of our legal contingencies. Upon resolution of any of these uncertainties, we may incur charges in excess of presently established liabilities. While our liability in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and we may in the future incur material judgments or enter into material settlements of claims.

CERTAIN REGULATORY MATTERS

~~The~~Immediately prior to the closing of our acquisition of Claris Injectables Limited (Claris), the U.S. Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India in July ~~2017, immediately prior to the closing of the Claris acquisition.~~2017. FDA completed the inspection and subsequently issued a Warning Letter based on observations identified in the 2017 inspection (Claris Warning Letter).1

~~While~~ FDA has not yet re-inspected the facilities and management cannot speculate on when the Claris Warning Letter will be lifted. However, we are continuing to implement corrective and preventive actions to address FDA’s prior observations and other items we identified ~~in connection with integrating Claris into our quality systems.~~

~~While management cannot speculate on when the Claris Warning Letter will be lifted,~~and management continues to pursue and implement other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S. ~~in the meantime.~~ As of December 31, ~~2019,~~2020, we have secured alternative locations to produce a majority of the planned new products to be manufactured in Ahmedabad for distribution into the U.S.

On May 6, 2019, we received a Show Cause Notice under the Drugs & Cosmetics Act, 1940 and Rules thereunder (Show Cause Notice) from the Commissioner of the Food & Drugs Control Administration in the Gujarat State in Gandhinagar, India (Commissioner). The Show Cause Notice was issued regarding an April 9, 2019 inspection of our Claris facilities in Ahmedabad, India by the Commissioner. The Show Cause Notice contained a number of observations of alleged Good Manufacturing Practice related issues across a variety of areas, some of which overlap with the areas covered in the Claris Warning Letter. We responded to the Show Cause Notice and a follow up inspection occurred in July 2019. This matter resulted in a two-day suspension order for certain manufacturing operations, which occurred on March 19 and 20, 2020. This matter is now closed.

In June 2013, we received a Warning Letter from FDA regarding operations and processes at our North Cove, North Carolina and Jayuya, Puerto Rico facilities. We attended Regulatory Meetings with FDA regarding one or both of these facilities in October 2014, November 2015, July 2017, April 2018 and October 2018. The Warning Letter addresses observations related to Current Good Manufacturing Practice violations at the two facilities. The Warning Letter was closed out in September 2019.

As previously disclosed, in the fourth quarter of 2012, we received two investigative demands from the United States Attorney for the Western District of North Carolina for information regarding our quality and manufacturing practices and procedures at our North Cove facility. In January 2017, the parties resolved the matter by entering into a deferred prosecution agreement and a civil settlement whereby we agreed to pay approximately $18 million and implement certain enhanced compliance measures. In July 2019, the deferred prosecution agreement expired and, based on our fulfillment of the terms of the agreement, the court dismissed the criminal information previously filed in the case with prejudice.

1 Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htm

FORWARD-LOOKING INFORMATION

This quarterly report on Form 10-Q includes forward-looking statements. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,”

~~“objective,~~ “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events. These forward-looking statements may include statements with respect to accounting estimates and assumptions, impacts of the COVID-19 pandemic, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses and the material weakness identified as a result thereof, future regulatory filings and our R&D pipeline, strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, potential tax liabilities associated with the separation of our biopharmaceuticals business from our medical products businesses, the impact of competition, future sales growth, business development activities (including the acquisitions of Cheetah , Seprafilm, certain outside of the U.S. (OUS) rights to Caelyx and ~~Seprafilm)~~Doxil, and full U.S. and specific OUS rights to Transderm Scop), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, ~~the sufficiency of our facilities and financial flexibility,~~ the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.

These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or

financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:

demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with our ability to accurately predict these pressures and the resulting impact on customer inventory levels and the impact of reduced hospital admission rates and elective surgery volumes), and the impact of those products on quality and patient safety concerns;

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

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

our ability to identify business development and growth opportunities and to successfully execute on business development strategies;


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

			•			the impact of global economic conditions (including potential trade wars) and continuing public health crises, pandemics and epidemics, such as the ~~novel strain of coronavirus (COVID-19),~~COVID-19 pandemic, including related resurgences, on us and our customers and suppliers, including foreign governments in countries in which we operate;

the continuity, availability and pricing of acceptable raw materials and component supply, and the related continuity of our manufacturing and distribution;


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

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

future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the SEC, DOJ or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities, including the continued delay in lifting the warning letter at our Ahmedabad facility or proceedings related to the misstatements in previously reported non-operating income related to foreign exchange gains and losses;

the impacts of the material weakness identified as a result of the internal investigation related to foreign exchange gains and losses and our remediation efforts, including the risk that we may experience additional material weaknesses;

developments that would require the correction of additional misstatements in our previously issued financial statements;

failures with respect to our quality, compliance or ethics programs;


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


			•			the outcome of pending or future litigation, including the opioid litigation and litigation related to the investigation of foreign exchange gains and losses;

			•			failure to achieve our long-term financial improvement goals;

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

global regulatory, trade and tax policies;

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

the impact of any goodwill or other intangible asset impairments on our operating results;

any failure by Baxalta or Shire to satisfy its obligations under the separation agreements, including the tax matters agreement, or that certain letter agreement entered into with Shire and Baxalta;

fluctuations in foreign exchange and interest rates;

any changes in law concerning the taxation of income (whether with respect to current or future tax reform), including income earned outside the United States and potential taxes associated with the Base Erosion and Anti-Abuse Tax;

actions by tax authorities in connection with ongoing tax audits;

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

other factors identified elsewhere in this report and other filings with the SEC, including those factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, all of which are available on our website.

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Currency Risk

We are primarily exposed to foreign exchange risk with respect to revenues generated outside of the United States denominated in the Euro, British Pound, Chinese ~~Yuan,~~Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee and 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 financial instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and stockholders’ equity volatility relating to foreign exchange. However, we don't hedge our entire foreign exchange exposure and are still subject to earnings and stockholders' equity volatility relating to foreign exchange risk. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.

We use options and forwards to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities denominated in foreign currencies. The maximum term over which we have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions as of ~~September 30, 2020~~March 31, 2021 is 12 months. We also enter into derivative instruments to hedge foreign exchange risk on certain intra-company and third-party receivables and payables and debt denominated in foreign currencies.

As part of our risk-management program, we perform sensitivity analyses to assess potential changes in the fair value of our foreign exchange contracts relating to hypothetical and reasonably possible near-term movements in foreign exchange rates.

A sensitivity analysis of changes in the fair value of foreign exchange contracts outstanding as of ~~September 30, 2020,~~March 31, 2021, while not predictive in nature, indicated that if the U.S. Dollar uniformly weakened by 10% against all currencies, the net pre-tax ~~asset~~liability balance of $3$12 million with respect to those contracts would ~~increase~~decrease by ~~$25 million.~~$40 million, resulting in a net pre-tax asset balance.

The sensitivity analysis model recalculates the fair value of the foreign exchange contracts outstanding as of ~~September 30, 2020~~March 31, 2021 by replacing the actual exchange rates as of ~~September 30, 2020~~March 31, 2021 with exchange rates that are 10% weaker compared to the actual exchange rates for each applicable currency. All other factors are held constant. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

Our subsidiary in Argentina is reported using highly inflationary accounting effective July 1, 2018. Changes in the value of the Argentine Peso applied to our peso-denominated net monetary asset positions are recorded in income at the time of the change. As of ~~September 30, 2020,~~March 31, 2021, our net monetary assets denominated in Argentine Pesos are not significant.

Interest Rate and Other Risks

Refer to the caption “Interest Rate and Other Risks” in the “Financial Instrument Market Risk” section of the ~~2019~~2020 Annual Report. ~~During~~There were no significant changes during the quarter ended September 30, 2020, we terminated an interest rate contract with a notional balance of $50 million for a $7 million cash payment. In October 2020, we terminated additional interest rate contracts with a notional balance of $350 million and a liability fair value of $109 million as of September 30, 2020 for $100 million in cash payments.March 31, 2021.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of ~~September 30, 2020.~~

March 31, 2021. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer, concluded that ~~as of September 30, 2020, due to the material weakness in our internal control over financial reporting described below,~~ our disclosure controls and procedures were ~~not~~ effective to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.

We did not maintain effective controls over the accounting for certain foreign exchange gains and losses. Specifically, we previously did not have controls in place to monitor and quantify the difference between the foreign exchange gains and losses that we reported and the foreign exchange gains and losses that we would have reported using exchange rates determined in accordance with U.S. GAAP. Additionally, our policies and controls related to approvals and monitoring of intra-company transactions were insufficient to prevent or detect intra-company transactions undertaken solely for the purpose of generating foreign exchange gains or avoiding losses under our historical exchange rate convention. This material weakness resulted in the restatement of our consolidated financial statements as of ~~December~~March 31, 2018 and for the years ended December 31, 2018 and 2017 and each of the quarterly and year-to-date periods in the year ended December 31, 2018 and the first two quarters and related year-to-date interim period in the year ended December 31, 2019. Additionally, this material weakness could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

~~Remediation of the Material Weakness~~

Management has implemented changes to strengthen our internal controls over the accounting for foreign exchange gains and losses. These changes are intended to address the identified material weakness and enhance our overall control environment and include the ongoing activities described below.

•Exchange Rate Policy – We have discontinued the use of our historical exchange rate convention and are using the exchange rates determined in accordance with U.S. GAAP for purposes of measuring foreign currency transactions and remeasuring monetary assets and liabilities denominated in a foreign currency.

•~~Automated Feed – We have implemented an automated feed that extracts foreign exchange rates on a daily basis from a recognized third-party exchange rate source.~~

•Daily Rate Comparison – We have implemented a daily rate comparison control that extracts foreign exchange rates from (a) a third-party exchange rate source, (b) our treasury application, and (c) our enterprise resource planning (ERP) system and compares those rates in order to identify any potential differences and provide assurance that the correct rates were captured and are being used in our financial systems.

•Intra-company Transaction Approvals – We have updated our policies to require additional approvals of intra-company transactions and implemented a requirement that such transactions be supported by a documented business purpose.

•Personnel - We have made personnel changes including hiring a new treasurer from outside Baxter with more than thirty years of treasury experience and responsibility, including at four publicly traded companies. We have also hired another experienced treasury professional in a newly created director role responsible for treasury governance and controls. Additionally, we have created a treasury controller role within our accounting function and are continuing to add resources as appropriate to improve our financial reporting controls related to treasury activities.

We have made significant progress to remediate the material weakness and have fully implemented the above remediation actions. However, while we believe that those actions will remediate the material weakness, we intend to

~~continue to monitor their operating effectiveness for a sufficient period of time prior to reaching a determination that the material weakness has been remediated.~~

Notwithstanding the identified material weakness, management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented in accordance with U.S. GAAP.2021.

Changes in Internal Control over Financial Reporting

In the third quarter of 2020, we completed an upgrade to our ERP software. In connection with the ERP upgrade, we updated the processes that constitute our internal control over financial reporting, as necessary. This normal course of business ERP upgrade was implemented to remain current with the latest release of the software.

As previously disclosed, since 2017, we have been implementing a long-term business transformation project within the finance, human resources, purchasing and information technology functions which will further centralize and standardize business processes and systems across the company. We are transitioning some processes to our shared services centers while others have been moved to outsourced providers. This multi-year initiative is being conducted in phases and includes modifications to the design and operation of controls over financial reporting.

As a result of COVID-19, our global accounting and financial reporting function has shifted to a primarily work from home environment and that change was rapid. While our internal controls over financial reporting were not specifically designed for our current work from home operating environment, we believe that those internal controls are continuing to function effectively, with the exception of the material weakness identified above, while primarily being performed remotely in the current environment.

~~Other than as described in the three preceding paragraphs and in the~~ ~~Remediation of Material Weakness~~ ~~section above, there~~There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~September 30, 2020~~March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Review by Independent Registered Public Accounting Firm~~

A review of the interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2020 and 2019 has been performed by PricewaterhouseCoopers LLP, our independent registered public accounting firm. Its report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and, therefore, the independent accountants’ liability under Section 11 does not extend to it.

~~Report of Independent Registered Public Accounting Firm~~

~~To the Board of Directors and Stockholders of Baxter International Inc.~~

~~Results of Review of Interim Financial Statements~~

~~We have reviewed the condensed consolidated balance sheet of Baxter International Inc. and its subsidiaries~~(the “Company”) as of September 30, 2020, and the related condensed consolidated statements of income, comprehensive income and changes in equity for the three-month and nine-month periods ended September 30, 2020 and 2019, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2020 and 2019,~~including the related notes, appearing under Part I, Item 1 of this Quarterly Report on Form 10-Q (collectively referred to as the “interim financialstatements”).Based on our reviews, we are not aware of any material modifications that should be made to the interim financial statements referred to abovefor them to be in conformity with accounting principles generally accepted in the United States of America.~~

~~We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheet of the Company as of December 31, 2019, and the related consolidated statements of income, comprehensive income, changes in equityand cash flowsfor the year then ended (not presented herein), and in our report dated March 17, 2020, which included~~a paragraph regarding the correction of misstatements in the 2018 and 2017 financial statements and a paragraph describing a change in the manner of accounting for leases in 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the condensed consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

~~Basis for Review Results~~

~~These interim financial statements are the responsibility of the Company’s management.~~We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

~~/s/ PricewaterhouseCoopers LLP~~

~~Chicago, Illinois~~

~~October 29, 2020~~

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information in Part I, Item 1, Note 6 is incorporated herein by reference.

Item 1A. Risk Factors

The following risk factor, which should be read in conjunction with our risk factors discussed in the “Risk Factors” section in our 2019 Annual Report, could materially affect our business, financial condition or results of operations. Except as set forth below, we areWe do not ~~aware of~~believe that there have been any material changes to the risk factors ~~described~~previously disclosed in our ~~2019~~2020 Annual Report.

We are subject to risks associated with the COVID-19 pandemic and related impacts, which have had, and we expect will continue to have, a material adverse effect on our business. The nature and extent of future impacts are highly uncertain and unpredictable.

Our global operations expose us to risks associated with public health crises, including epidemics and pandemics, such as the COVID-19 pandemic. 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 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. Risks associated with COVID-19 include, but are not limited to, the following:

•We have experienced, and expect to continue to experience, significant and unpredictable reductions or increases in demand for certain of our products as healthcare customers re-prioritize the treatment of patients. Some of our products are particularly sensitive to reductions in elective medical procedures, and, as hospital systems prioritize treatment of COVID-19 patients and otherwise comply with government guidelines, many of those procedures have been suspended or postponed in our principal markets. In the second and third quarters of 2020, this resulted in lower levels of general hospital admissions and elective surgery volumes in those markets, which negatively impacted the demand for certain of our products. It is not possible to predict the timing of a broad resumption of elective medical procedures. If patients and hospital systems continue to de-prioritize, delay or cancel these procedures, our business, financial condition and results of operations would continue to be negatively affected.

•A significant number of our suppliers, manufacturers, distributors and vendors have been adversely affected by the COVID-19 pandemic, including by impacting the ability of their employees to get to their places of work and maintain the continuity of their on-site operations. These impacts could impair our ability to move our products through distribution channels to end customers, and any such delay or shortage in the supply of components or materials may result in our inability to satisfy consumer demand for our products in a timely manner or at all, which could harm our reputation, future sales and profitability.

•We could experience a loss of sales and profitability due to delayed payments, reduced demand or insolvency of healthcare professionals, hospitals and other customers, and suppliers and vendors facing liquidity or other financial issues. These liquidity or other financial issues could be exacerbated if prolonged high levels of unemployment or loss of insurance coverage impact patients’ ability to access treatments that use our products and services.

•COVID-19 could adversely impact our ability to retain key employees and the continued service and availability of skilled personnel necessary to run our operations, including members of our management, as well as the ability of our suppliers, manufacturers, distributors and vendors to retain their key employees. To the extent our management or other personnel are impacted in significant numbers by COVID-19 and are not available to perform their professional duties, we could experience delays in, or the suspension of, our manufacturing operations, research and development activities and other functions.

•We face increased operational challenges as we continue to take measures to support and protect employee health and safety, including through office closures and the implementation of work from home policies. For example, remote working arrangements heighten our risks associated with information technology systems and networks, including cyber-attacks, computer viruses, malicious software, security breaches, and telecommunication failures, both for systems and networks we control directly and for those that employees and third-party developers rely on to work remotely. Any failure to prevent or mitigate security breaches or cyber risks or detect, or respond adequately to, a security breach or cyber risk, or any other disruptions to our information technology systems and networks, can have adverse effects on our business and cause reputational and financial harm. We have, like other large multi-national companies, experienced cyber incidents in the past and may experience them in the future, which have exposed and may continue to expose vulnerabilities in our information technology systems. These risks are particularly heightened due to COVID-19 as cybercriminals attempt to profit from the disruptions caused by the uncertain environment.

•COVID-19 and related impacts have affected and may further affect the global economy and capital markets worldwide, which, among other consequences, may restrict our access to capital, increase financing costs, adversely affect our liquidity, the perceptions of our creditworthiness, and our ability to complete acquisitions, and increase volatility in foreign currency exchange rates.

While COVID-19 has had, and we expect it to continue to have, an adverse effect on our business, financial condition or results of operations, it is uncertain how COVID-19 will affect our global operations generally if these impacts continue to persist or exacerbate over an extended period of time. Uncertainties include, but are not limited to:

•~~The severity and duration of the pandemic, including the duration and extent of related resurgences, and future mutations or outbreaks of related strains of the virus in areas in which we operate;~~

•~~Evolving macroeconomic factors, including general economic uncertainty, unemployment rates, and recessionary pressures;~~

•The continued success of measures taken by governmental authorities worldwide to stabilize the markets and support economic growth, which is unknown and may not be sufficient to address future market dislocations or avert severe and prolonged reductions in economic activity;

•~~Unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response;~~

•~~The pace of recovery when the pandemic subsides; and~~

•~~The long-term impact of the pandemic on our business.~~

Any of the impacts discussed above could have a material adverse effect on our business, financial condition and results of operations. To the extent that COVID-19 continues to adversely affect our business, financial condition or results of operations, it may also heighten other risks described in the “Risk Factors” section in our ~~2019 Annual Report~~.

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



Period	Total number of shares purchased (1)	Average price paid per share		Total number of shares purchased as part of publicly announced program(1)	Approximate dollar value of shares that may yet be purchased under the program(1)
January 1, 2021 through January 31, 2021	—	$	—	—
February 1, 2021 through February 28, 2021	—	$	—	—
March 1, 2021 through March 31, 2021	3,635,500	$	82.54	3,635,500
Total	3,635,500	$	82.54	3,635,500	$	1,597,200,466

(1)In July 2012, we announced that our Board of Directors authorized us to repurchase up to $2.0 billion of our common stock on the open market or in private transactions. 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. During the first ~~nine months~~quarter of ~~2020,~~2021, we ~~did not repurchase any~~repurchased approximately 3.6 million shares for $300 million pursuant to this authority through a Rule 10b5-1 ~~plans.~~purchase plan. We had ~~$897 million remaining under this program (as amended and after giving effect to stock repurchases) as of September 30, 2020. After giving effect to the October 2020 approval, we had $2.4~~$1.6 billion remaining under this program as of ~~October 29, 2020.~~March 31, 2021. This program does not have an expiration date.

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Item 6. Exhibits

Exhibit Index:


Exhibit Number						Description
~~10.1~~						New Change-in-Control Agreement between Baxter International Inc. and José Almeida, dated as of September 24, 2020 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on September 25, 2020).

~~10.2~~						~~Form of Amended Grandfathered Change-in-Control Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form~~ ~~8-K, filed on September 25, 2020).~~

~~10.3~~						Amended OUS Change-in-Control Agreement between Baxter International Inc. and Cristiano Franzi, dated as of September 25, 2020 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form ~~8-K, filed on September 25, 2020).~~

10.4*						~~Form of Change-in-Control Agreement~~

15*						~~Letter Re Unaudited Interim Financial Information~~

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

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

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

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

101.INS*						XBRL Instance Document

101.SCH*						XBRL Taxonomy Extension Schema Document

101.CAL*						XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*						XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*						XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith.

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Signature

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


		BAXTER INTERNATIONAL INC.
		(Registrant)
Date: ~~October~~April 29, ~~2020~~2021
	By:	/s/ James K. Saccaro
		James K. Saccaro Executive Vice President and Chief Financial Officer (duly authorized officer and principal financial officer)

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(in millions)	Three months ended September 30, 2020		Nine months ended September 30, 2020
Balance at beginning of period	$	120	$	112
Adoption of new accounting standard	0		4
Charged to costs and expenses	3		15
Write-offs	(3)		(4)
Currency translation adjustments	2		(5)

Balance at end of period	$	122	$	122


(in millions)	Three months ended September 30, 2020		Nine months ended September 30, 2020
Sales-type lease revenue	$	11	$	27
Operating lease revenue	16		44
Variable lease revenue	19		57
Total lease revenue	$	46	$	128


	Gain (loss) recognized in OCI				Location of gain (loss) in income statement	Gain (loss) reclassified from AOCI into income
(in millions)	2020		2019			2020		2019
Cash flow hedges
Interest rate contracts	$	(144)	$	(91)	Interest expense, net	$	0	$	0
Foreign exchange contracts	1		4		Cost of sales	2		3
Net investment hedges	(104)		74		Other (income) expense, net	0		0
Total	$	(247)	$	(13)		$	2	$	3