Item 8. Financial Statements and Supplementary Data.

CONSOLIDATED BALANCE SHEETS

as of December 31 (in millions, except share information)			2021						2020
Current assets:
Cash and cash equivalents			$	2,951					$	3,730
Accounts receivable, net of allowance of $122 in 2021 and $125 in 2020			2,629						2,007
Inventories			2,453						1,916
Prepaid expenses and other current assets			839						758
Total current assets			8,872						8,411
Property, plant and equipment, net			5,178						4,722
Goodwill			9,836						3,217
Other intangible assets, net			7,792						1,671
Operating lease right-of-use assets			630						603
Other non-current assets			1,213						1,395
Total assets			$	33,521					$	20,019
Current liabilities:
Short-term debt			$	301					$	—
Current maturities of long-term debt and finance lease obligations			210						406
Accounts payable			1,246						1,043
Accrued expenses and other current liabilities			2,479						1,884
Total current liabilities			4,236						3,333
Long-term debt and finance lease obligations			17,149						5,786
Operating lease liabilities			522						501
Other non-current liabilities			2,493						1,673
Total liabilities			24,400						11,293
Commitments and contingencies
Equity:
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, 181,879,516 shares in 2021 and 178,580,208 shares in 2020			(11,488)						(11,051)
Additional contributed capital			6,197						6,043
Retained earnings			17,065						16,328
Accumulated other comprehensive (loss) income			(3,380)						(3,314)
Total Baxter stockholders’ equity			9,077						8,689
Noncontrolling interests			44						37
Total equity			9,121						8,726
Total liabilities and equity			$	33,521					$	20,019

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

CONSOLIDATED STATEMENTS OF INCOME

years ended December 31 (in millions, except per share data)			2021			2020			2019
Net sales			$	12,784		$	11,673		$	11,362
Cost of sales			7,679			7,086			6,601
Gross margin			5,105			4,587			4,761
Selling, general and administrative expenses			2,867			2,469			2,535
Research and development expenses			534			521			595
Other operating income, net			(6)			(19)			(141)
Operating income			1,710			1,616			1,772
Interest expense, net			192			134			71
Other expense, net			41			190			731
Income before income taxes			1,477			1,292			970
Income tax expense (benefit)			182			182			(41)
Net income			1,295			1,110			1,011
Net income attributable to noncontrolling interests			11			8			10
Net income attributable to Baxter stockholders			$	1,284		$	1,102		$	1,001
Earnings per share
Basic			$	2.56		$	2.17		$	1.97
Diluted			$	2.53		$	2.13		$	1.93
Weighted-average number of shares outstanding
Basic			502			509			509
Diluted			508			517			519

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

years ended December 31 (in millions)			2021			2020			2019
Net income			$	1,295		$	1,110		$	1,011
Other comprehensive (loss) income, net of tax:
Currency translation adjustments, net of tax expense (benefit) of $30 in 2021, ($51) in 2020 and $(5) in 2019			(320)			367			(95)
Pension and other postretirement benefit plans, net of tax expense of $60 in 2021 $40 in 2020 and $130 in 2019			227			141			408
Hedging activities, net of tax expense (benefit) of $7 in 2021, $(34) in 2020 and ($11) in 2019			27			(112)			(39)
Total other comprehensive (loss) income, net of tax			(66)			396			274
Comprehensive income			1,229			1,506			1,285
Less: Comprehensive income attributable to noncontrolling interests			11			8			10
Comprehensive income attributable to Baxter stockholders			$	1,218		$	1,498		$	1,275

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

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

			Baxter International Inc. stockholders' equity
(in millions)			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 standard			—			—			—			—			—			161			(161)			$	—		—			$	—
Net income			—			—			—			—			—			1,001			—			$	1,001		10			$	1,011
Other comprehensive income (loss)			—			—			—			—			—			—			274			274			—			274
Purchases of treasury stock			—			—			16			(1,293)			46			—			—			(1,247)			—			(1,247)
Stock issued under employee benefit plans and other			—			—			(9)			518			11			(84)			—			445			—			445
Dividends declared on common stock			—			—			—			—			—			(435)			—			(435)			—			(435)
Changes in noncontrolling interests			—			—			—			—			—			—			—			—			(2)			(2)
Balance as of December 31, 2019			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			—			—			—			—			—			1,102			—			1,102			8			1,110
Other comprehensive income (loss)			—			—			—			—			—			—			396			396			—			396
Purchases of treasury stock			—			—			6			(500)			—			—			—			(500)			—			(500)
Stock issued under employee benefit plans and other			—			—			(4)			213			88			—			—			301			—			301
Dividends declared on common stock			—			—			—			—			—			(488)			—			(488)			—			(488)
Changes in noncontrolling interests			—			—			—			—			—			—			—			—			(1)			(1)
Balance as of December 31, 2020			683			$	683		179			$	(11,051)		$	6,043		$	16,328		$	(3,314)		$	8,689		$	37		$	8,726
Net income			—			—			—			—			—			1,284			—			1,284			11			1,295
Other comprehensive income (loss)			—			—			—			—			—			—			(66)			(66)			—			(66)
Purchases of treasury stock			—			—			7			(600)			—			—			—			(600)			—			(600)
Stock issued under employee benefit plans and other			—			—			(4)			163			154			—			—			317			—			317
Dividends declared on common stock			—			—			—			—			—			(547)			—			(547)			—			(547)
Changes in noncontrolling interests			—			—			—			—			—			—			—			—			(4)			(4)
Balance as of December 31, 2021			683			$	683		182			$	(11,488)		$	6,197		$	17,065		$	(3,380)		$	9,077		$	44		$	9,121

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

years ended December 31 (in millions)			2021			2020			2019
Cash flows from operations
Net income			$	1,295		$	1,110		$	1,011
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			890			823			789
Pension settlement charges			2			46			755
Net periodic pension benefit and other postretirement costs			99			81			22
Deferred income taxes			(146)			(88)			(310)
Stock compensation			146			130			122
Loss on debt extinguishment			5			110			—
Intangible asset impairments			—			17			31
Settlement of interest rate derivative contracts			—			(173)			—
Other			92			86			115
Changes in balance sheet items:
Accounts receivable, net			(170)			(119)			(52)
Inventories			(37)			(162)			4
Prepaid expenses and other current assets			(41)			(37)			(31)
Accounts payable			104			57			(23)
Accrued expenses and other current liabilities			108			86			(196)
Other			(125)			(97)			(127)
Cash flows from operations – continuing operations			2,222			1,870			2,110
Cash flows from operations – discontinued operations			—			(2)			(6)
Cash flows from operations			2,222			1,868			2,104
Cash flows from investing activities
Capital expenditures			(743)			(709)			(696)
Acquisitions, net of cash acquired, and investments			(10,502)			(494)			(418)
Other investing activities, net			45			24			14
Cash flows from investing activities			(11,200)			(1,179)			(1,100)
Cash flows from financing activities
Issuances of debt			11,903			1,885			1,661
Repayments of debt			(2,823)			(1,181)			—
Net increase (decrease) in debt with original maturities of three months or less			246			(226)			222
Cash dividends on common stock			(530)			(473)			(423)
Proceeds from stock issued under employee benefit plans			187			202			356
Purchases of treasury stock			(600)			(500)			(1,270)
Debt issuance costs			(98)			(5)			(2)
Other financing activities, net			(40)			(47)			(46)
Cash flows from financing activities			8,245			(345)			498
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash			(47)			57			(5)
Increase (decrease) in cash, cash equivalents and restricted cash			(780)			401			1,497
Cash, cash equivalents and restricted cash at beginning of year (1)			3,736			3,335			1,838
Cash, cash equivalents and restricted cash at end of year (1)			$	2,956		$	3,736		$	3,335

(1) We did not have restricted cash balances as of December 31, 2019. The following table provides a reconciliation of cash, cash equivalents and restricted cash amounts as shown in the consolidated statement of cash flows to the

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

As of December 31 (in millions)			2021			2020
Cash and cash equivalents			$	2,951		$	3,730
Restricted cash included in prepaid expenses and other current assets			5			6
Cash, cash equivalents and restricted cash			$	2,956		$	3,736

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Baxter International Inc., through our subsidiaries (collectively, Baxter, we, our or us), provides a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; surgical hemostat and sealant products, advanced surgical equipment; smart bed systems; patient monitoring and diagnostic technologies; and respiratory health devices. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and patients at home under physician supervision. Our global footprint and the critical nature of our products and services play a key role in expanding access to healthcare in emerging and developed countries. We operate in four segments: Americas, EMEA, APAC and Hillrom which are described in Note 17.

Risks and Uncertainties Related to COVID-19

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19). COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and we expect will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments have taken and continue to take. Initial measures taken in 2020 led to unprecedented restrictions on, disruptions in, and other related impacts on business and personal activities, including a shift in healthcare priorities, which resulted in a significant decline in medical procedures in 2020. The pandemic has created significant volatility in the demand for our products. For further information about our revenues by product category, refer to Note 10. Significant uncertainty remains regarding the duration and overall impact of the COVID-19 pandemic. For example, concerns remain regarding the pace of economic recovery due to virus resurgence across the globe from the Omicron and Delta variants and other virus mutations as well as vaccine distribution and hesitancy. The U.S. and other governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the pandemic (including with respect to mandatory vaccinations for certain of our employees and moratoriums on elective procedures). Due to the uncertainty caused by the pandemic, our operating performance and financial results, particularly in the short term, may be subject to volatility. We have experienced significant challenges, including lengthy delays, shortages and interruptions, posed by the pandemic and other exogenous factors (including significant weather events and disruptions to certain ports of call around the world) to our global supply chain, including the cost and availability of raw materials and component parts (including resins and electromechanical devices) and higher transportation costs, and may experience these and other challenges in future periods. Many of our manufacturing plant and distribution center personnel are currently unvaccinated, and we may also experience employee resistance in complying with current and future government vaccine and testing mandates, which may cause labor shortages significantly impacting manufacturing production and distribution center productivity. We expect that these challenges as well as evolving governmental restrictions and requirements, among other factors, may continue to have an adverse effect on our business.

Use of Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.

Basis of Presentation

The consolidated financial statements include the accounts of Baxter and our majority-owned subsidiaries that we control, after elimination of intra-company transactions. Certain reclassifications have been made to conform the prior period consolidated financial statements to the current period presentation.

On December 13, 2021, we completed the previously announced acquisition of all outstanding equity interests of Hill-Rom Holdings, Inc. (Hillrom) for a purchase price of $10.5 billion. Including the assumption of Hillrom's

outstanding debt obligations, the enterprise value of the transaction was approximately $12.8 billion. Beginning December 13, 2021, our financial statements include the assets, liabilities and operating results of Hillrom. Refer to Note 2 for additional information.

On July 29, 2021, we acquired certain assets related to PerClot Polysaccharide Hemostatic System (PerClot), including distribution rights for the U.S. and specified territories outside of the U.S., from CryoLife, Inc. for an upfront purchase price of $25 million and the potential for additional cash consideration of up to $36 million, which had an acquisition-date fair value of $28 million, based upon regulatory and commercial milestones. Beginning July 29, 2021, our financial statements include the assets, liabilities and operating results of PerClot. Refer to Note 2 for additional information.

On March 31, 2021, we acquired the rights to Transderm Scop (TDS) for the U.S. and specified territories outside of the U.S. from subsidiaries of GlaxoSmithKline for an upfront purchase price of $60 million including the cost of acquired inventory and the potential for additional cash consideration of $30 million, which had an acquisition-date fair value of $24 million, based upon regulatory approval of a new contract manufacturer by a specified date. We previously sold this product under a distribution license to the U.S. institutional market. Beginning on March 31, 2021, our financial statements include the assets, liabilities and operating results of TDS. Refer to Note 2 for additional information.

On February 17, 2021, we acquired the rights to Caelyx and Doxil, the branded versions of liposomal doxorubicin, from a subsidiary of Johnson & Johnson for specified territories outside of the U.S for approximately $325 million in cash. Beginning February 17, 2021, our financial statements include the assets, liabilities and operating results of Caelyx and Doxil. Refer to Note 2 for additional information.

On February 14, 2020, we completed the acquisition of the product rights to Seprafilm Adhesion Barrier (Seprafilm) from Sanofi for approximately $342 million in cash. Beginning February 14, 2020, our financial statements include the assets, liabilities and operating results of Seprafilm. Refer to Note 2 for additional information.

On October 25, 2019, we acquired 100 percent of Cheetah Medical, Inc. (Cheetah) for total cash consideration of $188 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. Beginning October 25, 2019, our financial statements include the assets, liabilities and operating results of Cheetah. Refer to Note 2 for additional information.

Revenue Recognition

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 when our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.

As of December 31, 2021, we had $7.8 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 35% of this amount as revenue in 2022, 30% in 2023, 15% in each of 2024 and 2025, and 5% in 2026.

Significant Judgments

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration primarily related to rebates and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in accrued expenses and other current liabilities and accounts receivable, net on the consolidated balance sheets. Management's estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. 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 that is probable not to result in a significant reversal in the amount of the cumulative revenue recognized in a future period. Revenue recognized in the years ended December 31, 2021, 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 judgment.

Practical Expedients

We apply a practical expedient to expense as incurred costs to obtain a contract with a customer when the amortization period would have been one year or less. We do not disclose the value of the transaction price that is allocated to unsatisfied performance obligations for contracts with an original expected length of less than one year. We have elected to use the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component if it is expected, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Additionally, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer are excluded from revenue.

Accounts Receivable and Allowance for Doubtful Accounts

In the normal course of business, we provide credit to our customers, perform credit evaluations of these customers and maintain reserves for potential credit losses. In determining the amount of the allowance for doubtful accounts, we consider, among other items, historical credit losses, the past-due status of receivables, payment histories, other customer-specific information, current economic conditions and reasonable and supportable future forecasts. Receivables are written off when we determine they are uncollectible.

The following table summarizes the allowance for doubtful accounts.

years ended December 31 (in millions)			2021			2020
Balance at beginning of period			$	125		$	112
Acquisition			13			—
Adoption of new accounting standard			—			4
Charged to costs and expenses			(2)			11
Write-offs			(5)			(4)
Currency translation adjustments			(9)			2
Balance at end of period			$	122		$	125

Shipping and Handling Costs

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

store, move and prepare products for shipment, are classified as cost of sales. Approximately $381 million in 2021, $325 million in 2020 and $324 million in 2019 of shipping costs were classified in SG&A expenses.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash, certificates of deposit and money market and other short-term funds with original maturities of three months or less. Restricted cash represents cash balances restricted as to withdrawal or use and are included in prepaid expenses and other current assets on the consolidated balance sheets.

Inventories

Inventories are stated at the lower of cost or net realizable value determined by the first-in, first-out method. We review inventories on hand at least quarterly and record provisions for estimated excess, slow-moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value.

Property, Plant and Equipment, Net

Property, plant and equipment are stated at cost. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets, which range from 20 to 50 years for buildings and improvements and from 3 to 15 years for machinery and equipment. Leasehold improvements are amortized over the life of the related facility lease (including any renewal periods, if appropriate) or the asset, whichever is shorter. We capitalize certain computer software and software development costs incurred in connection with developing or obtaining software for internal use. Capitalized software costs are included within machinery and equipment and are amortized on a straight-line basis over the estimated useful lives of the software, which generally range from three to five years.

Research and Development

Research and development (R&D) costs, including R&D acquired in transactions that are not business combinations, are expensed as incurred. Pre-regulatory approval contingent milestone obligations to counterparties in collaborative arrangements, which include acquired R&D, are expensed when the milestone is probable to be achieved. Contingent milestone payments made to such counterparties on or after regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangible assets, net.

Acquired in-process R&D (IPR&D) is the value assigned to technology or products under development acquired in a business combination which have not received regulatory approval and have no alternative future use. Acquired IPR&D is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is accounted for as a finite-lived intangible asset and amortized on a straight-line basis over the estimated economic life of the related technology or product, subject to annual impairment reviews as discussed below. If the R&D project is abandoned, the indefinite-lived asset is charged to expense.

Collaborative Arrangements

We enter into collaborative arrangements in the normal course of business. These collaborative arrangements take a number of forms and structures and are designed to enhance and expedite long-term sales and profitability growth. These arrangements may provide for us to obtain commercialization rights to a product under development, and require us to make upfront payments, contingent milestone payments, profit-sharing, and/or royalty payments. We may be responsible for ongoing costs associated with the arrangements, including R&D cost reimbursements to the counterparty. See the R&D section of this note regarding the accounting treatment of upfront and contingent milestone payments. Any royalty and profit-sharing payments during the commercialization phase are expensed as cost of sales when they become due and payable.

Restructuring Charges

We record liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. Employee termination costs are primarily recorded when actions are probable and estimable. Costs for one-time

termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. Refer to the discussion below regarding the accounting for asset impairment charges.

Goodwill, Intangible Assets, and Other Long-Lived Assets

Goodwill is the excess of the purchase price over the fair value of acquired assets and liabilities in a business combination. Goodwill is not amortized but is subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess goodwill for impairment by initially performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not required to be performed. If we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform a quantitative goodwill impairment test. In the quantitative impairment test, we calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the amount that its carrying amount, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. In 2021, we changed the measurement date of our annual goodwill impairment test from December 31st to November 1st. This change better aligns the timing of the goodwill impairment test with our long-term business planning process. The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or avoidance of an impairment charge.

Indefinite-lived intangible assets, such as IPR&D acquired in business combinations and certain trademarks with indefinite lives, are subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess indefinite-lived intangible assets for impairment by first performing qualitative assessments to determine whether it is more-likely-than-not that the fair values of the indefinite-lived intangible assets are less than the carrying amounts. If we determine that it is more-likely-than-not that an indefinite-lived intangible asset is impaired, or if we elect not to perform an initial qualitative assessment, we then perform the quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds the fair value of the indefinite-lived intangible asset, we write the carrying amount down to the fair value. In 2021, we changed the measurement date of our annual indefinite-lived intangible asset impairment tests from December 31st to November 1st. This change better aligns the timing of the impairment tests with our long-term business planning process. The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or avoidance of an impairment charge.

We review the carrying amounts of long-lived assets, other than goodwill and intangible assets not subject to amortization, for potential impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating recoverability, we group assets and liabilities at the lowest level such that the identifiable cash flows relating to the group are largely independent of the cash flows of other assets and liabilities. We then compare the carrying amounts of the assets or asset groups with the related estimated undiscounted future cash flows. In the event impairment exists, an impairment charge is recorded as the amount by which the carrying amount of the asset or asset group exceeds the fair value.

Investments in Equity Securities

Our investments in marketable equity securities are classified as other non-current assets and are measured at fair value with gains and losses recognized in other expense, net. We have elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, our non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. Gains and losses on non-marketable equity securities are also recognized in other expense, net. Noncontrolling investments in common stock or in-substance common stock are accounted for under the equity method if we have the ability to exercise significant influence over the operating and financial policies of the investee.

Income Taxes

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. We maintain valuation allowances unless it is more-likely-than-not that the deferred tax asset will be realized. With respect to uncertain tax positions, we determine whether the position is more-likely-than-not to be sustained upon examination based on the technical merits of the position. Any

tax position that meets the more-likely-than-not recognition threshold is measured and recognized in the consolidated financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The liability relating to uncertain tax positions is classified as current in the consolidated balance sheets to the extent that we anticipate making a payment within one year. Interest and penalties associated with income taxes are classified in the income tax expense line in the consolidated statements of income.

Foreign Currency Translation

Currency translation adjustments (CTA) related to foreign operations are included in other comprehensive income (OCI). For foreign operations in highly inflationary economies, translation gains and losses are included in other expense, net, and were not material in 2021, 2020 and 2019.

Derivatives and Hedging Activities

All derivative instruments are recognized as either assets or liabilities at fair value in the 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.

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

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

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

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

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, we discontinue hedge accounting prospectively. 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. 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. If we remove a net investment hedge designation, any gains or losses recognized in AOCI are not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged.

Cash flows related to the settlement of derivative instruments designated as net investment hedges of foreign operations are classified in the consolidated statements of cash flows within investing activities. Cash flows for all other derivatives, including those that are not designated as a hedge, are classified in the same line item as the cash flows of the related hedged item, which is generally within operating activities.

Refer to Note 15 for further information regarding our derivative and hedging activities.

New Accounting Standards

Recently issued accounting standards not yet adopted

In July 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-05, Leases (Topic 842), which requires a lessor to classify a lease with variable lease payments (that do not depend on an index or rate) as an operating lease if (1) the lease would have been classified as a sales-type or direct financing lease, and (2) the lessor would have recognized a selling loss at lease commencement. These changes are intended to avoid recognizing a day-one loss for a lease with variable payments even though the lessor expects the arrangement will be profitable overall. The standard is effective for our financial statements beginning in 2022. The impact of the adoption of this ASU is not expected to have a material effect on our consolidated financial statements.

Recently adopted accounting pronouncements

In the fourth quarter of 2021, we adopted ASU 2021-08, Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with Customers). This ASU is expected to reduce diversity in practice and increase comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. In accordance with this ASU we recognized contract liabilities of $142 million as part of the Hillrom acquisition in December 2021. We did not acquire contract assets or liabilities in connection with other acquisitions completed in 2021.

As of January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments - Credit Losses, which requires the measurement of expected lifetime credit losses, rather than incurred losses, for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. We adopted this ASU using the modified retrospective approach. 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.

As of January 1, 2020, we adopted ASU No. 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 consolidated balance sheets and as capital expenditures on our consolidated statements of cash flows. Under the new ASU, those capitalized costs are presented as other non-current assets on our consolidated balance sheets and within operating cash flows on our consolidated statements of cash flows. We adopted this ASU on a prospective basis and capitalized $45 million and $44 million of implementation costs related to hosting arrangements that are service contracts during the years ended December 31, 2021 and 2020, respectively.

As of January 1, 2020, we adopted ASU No. 2017-04, Intangibles – Goodwill and Other, Simplifying the Test for Goodwill Impairment. This standard eliminates Step 2 of the goodwill impairment test and requires a goodwill impairment to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. The adoption of this standard did not impact our consolidated financial statements.

As of January 1, 2020, we adopted ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU amends ASC 715 to remove certain disclosures, clarify certain existing disclosures and add additional disclosures. The adoption of this standard did not have a material impact on our consolidated financial statements.

As of January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). Under this guidance, lessees are required to recognize a right-of-use asset and a lease liability on the balance sheet for all operating leases, other than those that meet the definition of a short-term lease. We adopted Topic 842 using the modified retrospective method. We elected the following practical expedients when assessing the transition impact: i) not to reassess whether any expired or existing contracts as of the adoption date are or contain leases; ii) not to reassess the lease

classification for any expired or existing leases as of the adoption date; and iii) not to reassess initial direct costs for any existing leases as of the adoption date. The impact to the consolidated statements of income was not material and there was no net impact to the consolidated statements of cash flows.

As of January 1, 2019, we adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from AOCI. This guidance provides for a reclassification of certain tax effects from AOCI to retained earnings. The impact of the adoption of this standard was a $161 million increase to retained earnings.

NOTE 2

ACQUISITIONS AND OTHER ARRANGEMENTS

Results of operations of acquired companies are included in our results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values (or other measurement attribute required under U.S. GAAP) at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.

Contingent consideration related to business combinations is recognized at its estimated fair value on the acquisition date. Subsequent changes to the fair value of those contingent consideration arrangements are recognized in earnings. Contingent consideration related to acquisitions may consist of development, regulatory and commercial milestone payments, and sales or earnings-based payments, and are valued using discounted cash flow techniques. The fair value of development, regulatory and commercial milestone payments reflects management’s expectations of the probability of payment, and increases or decreases as the probability of payment or expectation of timing or amount of payments changes. The fair value of sales-based payments is based upon probability-weighted future revenue estimates and increases or decreases as revenue estimates or expectation of timing or amount of payments changes.

Hillrom

On December 13, 2021, we completed the previously announced acquisition of all outstanding equity interests of Hillrom for a purchase price of $10.5 billion. Including the assumption of Hillrom's outstanding debt obligations, the enterprise value of the transaction was approximately $12.8 billion. Under the terms of the transaction agreement, Hillrom shareholders received $156.00 in cash per each outstanding Hillrom common share.

Prior to our acquisition of Hillrom, Hillrom was a global medical technology leader whose products and services help enable earlier diagnosis and treatment, optimize surgical efficiency, and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. Hillrom made those outcomes possible through digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.

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

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

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

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

The valuation of assets acquired and liabilities assumed has not yet been finalized as of December 31, 2021. As a result, we recorded preliminary estimates for the fair value of assets acquired and liabilities assumed as of the acquisition date. Finalization of the valuation during the measurement period could result in a change in the

amounts recorded for the acquisition date fair value of intangible assets, goodwill and income taxes among other items. The completion of the valuation will occur no later than one year from the acquisition date. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition date:

(in millions)
Assets acquired and liabilities assumed
Cash and cash equivalents			$	399
Accounts receivable			591
Inventories			560
Prepaid expenses and other current assets			49
Property, plant and equipment			503
Goodwill			6,785
Other intangible assets			6,022
Operating lease right-of-use assets			74
Other non-current assets			128
Short-term debt			(250)
Accounts payable			(140)
Accrued expenses and other current liabilities			(552)
Long-term debt and finance lease obligations			(2,118)
Operating lease liabilities			(57)
Other non-current liabilities			(1,518)
Total assets acquired and liabilities assumed			$	10,476

We allocated $804 million of the total consideration to developed technology with a weighted-average useful life of 5 years, $1.9 billion to trade names with an indefinite useful life, $62 million to trade names with a weighted-average useful life of 7 years, $3.2 billion to customer relationships with a weighted-average useful life of 15 years and $30 million to IPR&D that is considered an indefinite lived intangible asset. The fair values of the intangible assets were determined using the income approach. We used a discount rate of 8.5% to value the developed technology, trade names and customer relationships and 9.0% to value the IPR&D. We consider the fair value of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair value. We also recognized $1.3 billion of deferred income tax liabilities in connection with the acquisition, which are included in other non-current liabilities in the accompanying consolidated balance sheet as of December 31, 2021.

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

The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired. The Hillrom acquisition contributed $212 million of net sales and a $96 million of pretax loss, including integration costs and interest expense on acquisition financing, for the year ended December 31, 2021.

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

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

years ended December 31 (in millions)			2021			2020
Net sales			$	15,574		$	14,610
Net income attributable to Baxter stockholders			962			635

The acquisition has been accounted for in the unaudited pro forma combined financial information using the acquisition method of accounting with Baxter as the acquirer. In order to reflect the occurrence of the acquisition as if it occurred on January 1, 2020 as required, the unaudited pro forma combined financial information includes adjustments to reflect incremental depreciation and amortization expense based on the current preliminary fair values of the identifiable tangible and intangible assets acquired, additional interest expense associated with the issuance of debt to finance the acquisition, nonrecurring costs directly attributable to the acquisition and the income tax effects of the pro forma adjustments. Those nonrecurring costs, which consist of $201 million of costs from inventory fair value step-ups and $314 million of acquisition-related costs for both Baxter and Hillrom, are reflected in the unaudited pro forma combined financial information for the year ended December 31, 2020. The unaudited pro forma combined financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2020. In addition, the unaudited pro forma combined financial information is not a projection of future results of operations of the combined company nor does it reflect the expected realization of any potential synergies or cost savings associated with the acquisition.

PerClot

On July 29, 2021, we acquired certain assets related to PerClot, including distribution rights for the U.S. and specified territories outside of the U.S., from CryoLife, Inc. for an upfront purchase price of $25 million and the potential for additional cash consideration of up to $36 million, which had an acquisition-date fair value of $28 million, based upon regulatory and commercial milestones. PerClot is an absorbable powder hemostat indicated for use in surgical procedures, including cardiac, vascular, orthopedic, spinal, neurological, gynecological, ENT and trauma surgery as an adjunct hemostat when control of bleeding from capillary, venous, or arteriolar vessels by pressure, ligature, and other conventional means is either ineffective or impractical. PerClot is approved for distribution in the European Union and other markets and was submitted for Pre-Market Approval (PMA) for distribution in the U.S. in the fourth quarter of 2021. We concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. The fair values of the potential contingent consideration payments were estimated by applying probability-weighted expected payment models and are Level 3 fair value measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.

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

(in millions)
Cash			$	25
Contingent Consideration			28
Total Consideration			$	53

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

(in millions)
Assets acquired
Goodwill			$	4
Other intangible assets			49
Total assets acquired			$	53

The valuation of the assets acquired are preliminary and measurement period adjustments may be recorded in the future as we finalize our fair value estimates. The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired and were not material for the year ended December 31, 2021.

We allocated $39 million of the total consideration to an in-process research and development (IPR&D) asset with an indefinite useful life, $9 million to the approved PerClot developed product rights with an estimated useful life of 10 years and $1 million to customer relationships with an estimated useful life of 10 years. The fair values of the intangible assets were determined using the income approach. The discount rates used to measure the intangible assets were 18.7% for IPR&D, 16.0% for developed product rights and 15.0% for customer relationships. We consider the fair values of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.

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

Transderm Scop

On March 31, 2021, we acquired the rights to TDS for the U.S. and specified territories outside of the U.S. from subsidiaries of GlaxoSmithKline for an upfront purchase price of $60 million including the cost of acquired inventory and the potential for additional cash consideration of $30 million, which had an acquisition-date fair value of $24 million, based upon regulatory approval of a new contract manufacturer by a specified date. We previously sold this product under a distribution license to the U.S. institutional market. TDS is indicated for post-operative nausea and vomiting in the U.S. and motion 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 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
Inventory			$	16
Goodwill			1
Other intangible assets			67
Total assets acquired			$	84

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

We allocated $64 million of the total consideration to the TDS developed product rights with an estimated useful life of 9 years and $3 million to customer relationships with an estimated useful life of 7 years. The fair values of the intangible assets were determined using the income approach. The discount rates used to measure the intangible assets were 22.5% for developed product rights and 15.5% for customer relationships. We consider the fair values of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.

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

Seprafilm Adhesion Barrier

On February 14, 2020, we completed the acquisition of the product rights to Seprafilm Adhesion Barrier (Seprafilm) from Sanofi for approximately $342 million in cash. Seprafilm is indicated for use in patients undergoing abdominal or pelvic laparotomy as an adjunct intended to reduce the incidence, extent 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. 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 following table summarizes the fair values of the assets acquired as of the acquisition date:

(in millions)
Assets acquired
Inventories			$	18
Goodwill			28
Other intangible assets			296
Total assets acquired			$	342

The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired. The acquisition contributed $94 million of net sales and $18 million of pretax income for the year ended December 31, 2020. Acquisition and integration costs, primarily incremental cost of sales relating to inventory fair value step-ups, associated with the acquisition were $15 million for the year ended December 31, 2020.

We allocated $286 million and $10 million of the total consideration to the Seprafilm developed product rights and customer relationships with useful lives of 10 and 7 years, respectively. The fair values of the intangible assets were determined using the income approach. The discount rates used to measure the developed product rights and customer relationship intangible assets were 14.8% and 11.0%, respectively. We consider the fair values of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions we used 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 portfolio of hemostats and sealants and is included in the Americas and APAC segments.

Cheetah Medical, Inc.

On October 25, 2019, we acquired 100 percent of Cheetah Medical, Inc. (Cheetah), a leading provider of hemodynamic monitoring technologies, 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 2020, we received $7 million from the sellers as a result of an acquisition price adjustment in accordance with the acquisition agreement. The fair value of the potential contingent consideration payments was estimated by applying a probability-weighted expected payment model for the clinical milestone and a Monte Carlo simulation model for the commercial milestone, which were then discounted to present value. The fair value measurements were based on Level 3 inputs.

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 accrued liabilities			(4)
Other non-current liabilities			(12)
Total assets acquired and liabilities assumed			$	208

The results of operations of the acquired business have been included in our consolidated statement of income since the date the business was acquired and were not significant. Acquisition and integration costs associated with the acquisition were $5 million and $3 million in 2020 and 2019, respectively.

We allocated $123 million of the total consideration to the developed product rights with a weighted-average useful life of 15 years and $8 million to customer relationships with a useful life of 13 years. The fair values of the intangible assets were determined using the income approach. The discount rates used to measure the intangible assets were 11.0% for developed product rights and 10.0% for customer relationships. We consider the fair value of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.

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

Other Business Combinations

Total consideration transferred for other acquisitions totaled $21 million, $18 million and $10 million in 2021, 2020 and 2019, respectively, and primarily resulted in the recognition of goodwill and other intangible assets. These acquisitions did not materially affect our results of operations.

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

Other Business Development Activities

Caelyx and Doxil

On February 17, 2021, we acquired the rights to Caelyx and Doxil, the branded versions of liposomal doxorubicin, from a subsidiary of Johnson & Johnson for specified territories outside of the U.S. We previously acquired the U.S. 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 asset acquisition, as substantially all of the fair value of the gross assets acquired was concentrated in the developed technology intangible asset. The purchase price of $325 million was allocated to the assets acquired, which included a $314 million developed-technology intangible asset with an estimated useful life of 9 years and an $11 million customer relationship intangible asset with an estimated useful life of 8 years. Net sales related to this acquisition were $108 million for the year ended December 31, 2021.

Celerity Pharmaceuticals, LLC

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. We did not purchase any product rights from Celerity in 2021 or 2020. In 2019, we paid $86 million to acquire the rights to various products that have received regulatory approval. We capitalized the purchase prices of products that were purchased upon regulatory approval as intangible assets and are amortizing the assets over their estimated useful lives of 12 years. As of December 31, 2021, our contingent future payments total up to $77 million upon Celerity’s achievement of specified regulatory approvals. 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.

Other Asset Acquisitions

During 2020, we acquired the rights to multiple products for $73 million. The purchase prices were capitalized as developed-technology intangible assets and are being amortized over a weighted-average estimated useful life of 11 years.

During 2021 and 2020, we also entered into distribution license arrangements for multiple products that have not yet obtained regulatory approval for upfront cash payments of $3 million and $22 million, respectively. The cash paid was treated as R&D expenses on our consolidated statements of income. We could make additional payments of up to $35 million upon the achievement of certain development, regulatory or commercial milestones.

During 2019, we acquired the rights to multiple products for an aggregate purchase price of $80 million. The purchase prices were capitalized primarily as developed-technology intangible assets and are being amortized over a weighted-average useful life of 10 years.

Other

In addition to the significant arrangements described above, we have entered into several other collaborative arrangements. We could make additional payments of up to $19 million upon the achievement of certain development and regulatory milestones, in addition to future payments related to contingent commercialization milestones, profit-sharing and royalties.

NOTE 3

SUPPLEMENTAL FINANCIAL INFORMATION

Inventories

as of December 31 (in millions)			2021			2020
Raw materials			$	591		$	460
Work in process			300			196
Finished goods			1,562			1,260
Inventories			$	2,453		$	1,916

Prepaid Expenses and Other Current Assets

as of December 31 (in millions)			2021			2020
Prepaid value added taxes			$	199		$	163
Prepaid income taxes			166			183
Contract assets			84			70
Other			390			342
Prepaid expenses and other current assets			$	839		$	758

Property, Plant and Equipment, Net

as of December 31 (in millions)			2021			2020
Land and land improvements			$	172		$	166
Buildings and leasehold improvements			1,915			1,849
Machinery and equipment			7,097			6,884
Equipment on lease with customers			1,684			1,671
Construction in progress			860			701
Total property, plant and equipment, at cost			11,728			11,271
Accumulated depreciation			(6,550)			(6,549)
Property, plant and equipment, net			$	5,178		$	4,722

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

Other Non-Current Assets

as of December 31 (in millions)			2021			2020
Deferred tax assets			$	376		$	748
Non-current receivables, net			113			158
Contract assets			111			64
Capitalized implementation costs in hosting arrangements			99			68
Pension and other postretirement benefits			228			155
Investments			154			135
Other			132			67
Other non-current assets			$	1,213		$	1,395

Accrued Expenses and Other Current Liabilities

as of December 31 (in millions)			2021			2020
Common stock dividends payable			$	140		$	125
Employee compensation and withholdings			608			415
Property, payroll and certain other taxes			174			148
Contract liabilities			162			32
Restructuring liabilities			97			92
Accrued rebates			312			239
Operating lease liabilities			128			111
Income taxes payable			90			135
Pension and other postretirement benefits			46			48
Contingent payments related to acquisitions			21			16
Other			701			523
Accrued expenses and other current liabilities			$	2,479		$	1,884

Other Non-Current Liabilities

as of December 31 (in millions)			2021			2020
Pension and other postretirement benefits			$	1,052		$	1,214
Deferred tax liabilities			962			143
Long-term tax liabilities			80			84
Contingent payments related to acquisitions			122			14
Contract liabilities			84			34
Litigation and environmental reserves			28			29
Restructuring liabilities			12			21
Other			153			134
Other non-current liabilities			$	2,493		$	1,673

Interest Expense, net

years ended December 31 (in millions)			2021			2020			2019
Interest costs			$	217		$	162		$	120
Interest costs capitalized			(11)			(9)			(9)
Interest expense			206			153			111
Interest income			(14)			(19)			(40)
Interest expense, net			$	192		$	134		$	71

Other Expense, net

years ended December 31 (in millions)			2021			2020			2019
Foreign exchange (gains) losses, net			$	19		$	49		$	37
Change in fair value of marketable equity securities			7			(13)			(1)
Loss on debt extinguishment			5			110			—
Pension settlements			2			46			755
Pension and other postretirement benefit plans			11			(3)			(53)
Other, net			(3)			1			(7)
Other expense, net			$	41		$	190		$	731

Supplemental Cash Flow Information

Non-Cash Investing Activities

Purchases of property, plant and equipment included in accounts payable and accrued liabilities as of December 31, 2021, 2020 and 2019 was $79 million, $102 million and $87 million, respectively.

Other Supplemental Information

year ended December 31 (in millions)			2021			2020			2019
Interest paid, net of portion capitalized			$	145		$	137		$	103
Income taxes paid			$	282		$	249		$	294

NOTE 4

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by business segment.

(in millions)			Americas			EMEA			APAC			Hillrom			Total
December 31, 2019			$	2,428		$	385		$	217		$	—		$	3,030
Additions			26			1			7			—			34
Acquisition accounting adjustments			(45)			(6)			(2)			—			(53)
Currency translation			165			26			15			—			206
December 31, 2020			$	2,574		$	406		$	237		$	—		$	3,217
Reallocation of goodwill			81			(81)			—			—			—
Additions			4			1			—			6,785			6,790
Currency translation			(142)			(17)			(13)			1			(171)
December 31, 2021			$	2,517		$	309		$	224		$	6,786		$	9,836

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

As discussed in Note 17 - Segment Information, we made a change to our reportable segments in the first quarter of 2021. As a result of this change, we reallocated goodwill from our EMEA segment to the Americas segment using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and following the reallocation and determined that no impairment existed.

Other Intangible Assets, Net

The following is a summary of our other intangible assets.

(in millions)			Developed technology, including patents			Other amortized intangible assets			Customer relationships			Indefinite-lived intangible assets			Total
December 31, 2021
Gross other intangible assets			$	3,801		$	344		$	3,437		$	2,140		$	9,722
Accumulated amortization			(1,556)			(212)			(162)			—			$	(1,930)
Other intangible assets, net			$	2,245		$	132		$	3,275		$	2,140		$	7,792
December 31, 2020
Gross other intangible assets			$	2,713		$	269		$	226		$	169		$	3,377
Accumulated amortization			(1,374)			(193)			(139)			—			$	(1,706)
Other intangible assets, net			$	1,339		$	76		$	87		$	169		$	1,671

Intangible asset amortization expense was $298 million in 2021, $222 million in 2020 and $183 million in 2019. The anticipated annual amortization expense for definite-lived intangible assets recorded as of December 31, 2021 is $718 million in 2022, $627 million in 2023, $605 million in 2024, $572 million in 2025 and $542 million in 2026.

In the second quarters of 2020 and 2019, we recognized impairment charges of $17 million and $31 million, respectively, related to developed-technology intangible assets due to declines in market expectations for the related products. The fair values of the intangible assets were measured using a discounted cash flow approach and the charges are classified within cost of sales in the accompanying consolidated statements of income for the years ended December 31, 2020 and 2019. We consider the fair values of the assets to be Level 3 measurements due to the significant estimates and assumptions we used in establishing the estimated fair values.

NOTE 5

DEBT AND CREDIT FACILITIES

Debt Outstanding

At December 31, 2021 and 2020, we had the following debt outstanding:

as of December 31 (in millions)			Effective interest rate in 2021¹			20211						20201
Commercial paper			0.3		%	$	300					$	—
1.7% notes due 2021			1.9		%	—						400
2.4% notes due 2022			2.5		%	203						203
0.868% notes due 2023			1.2		%	797						—
Floating-rate notes due 2023			1.9		%	298						—
0.4% notes due 2024			0.6		%	846						915
1.322% notes due 2024			1.7		%	1,393						—
7.0% notes due 2024			7.0		%	13						—
Floating-rate notes due 2024			0.9		%	298						—
Term loan due 2024			1.8		%	1,998						—
1.3% notes due in 2025			1.4		%	678						734
2.6% notes due 2026			2.7		%	747						746
Term loan due 2026			1.9		%	1,998						—
7.65% debentures due 2027			7.7		%	5						5
1.915% notes due 2027			2.2		%	1,441						—
6.625% debentures due 2028			5.6		%	96						97
2.272% notes due 2028			2.5		%	1,241						—
1.3% notes due 2029			1.4		%	841						912
3.95% notes due 2030			4.0		%	495						495
1.73% notes due 2031			3.2		%	644						644
2.539% notes due 2032			2.7		%	1,537						—
6.25% notes due 2037			6.3		%	265						265
3.65% notes due 2042			3.7		%	6						6
4.5% notes due 2043			4.6		%	256						256
3.5% notes due 2046			3.6		%	441						440
3.132% notes due 2051			3.2		%	742						—
Finance leases and other			9.3		%	81						74
Total debt						17,660						6,192
Short-term debt						(301)						—
Current maturities of long-term debt and finance lease obligations						(210)						(406)
Long-term debt and finance lease obligations						$	17,149					$	5,786

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

Significant Debt Activity

In May 2019, we issued €750 million of 0.40% senior notes due May 2024 and €750 million of 1.3% senior notes due May 2029. We have designated these debt instruments as net investment hedges of our European operations. Refer to Note 15 for additional information.

In March 2020, we issued $750 million of 3.75% senior notes due in October 2025 and $500 million of 3.95% senior notes due in April 2030 (collectively, the March 2020 senior notes). Pursuant to a registration rights agreement (the March 2020 Registration Rights Agreement) with the initial purchasers of the March 2020 senior notes, we agreed

to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the March 2020 senior notes for new notes with terms substantially identical in all material respects to the March 2020 senior notes and to have such registration statement declared effective under the U.S. Securities Act of 1933. The exchange offer with respect to the notes due April 2030 was completed in May 2021.

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

In November 2020, we issued $650 million of 1.73% senior notes due in April 2031 (the November 2020 senior notes). Pursuant to a registration rights agreement (the November 2020 Registration Rights Agreement) with the initial purchasers of the November 2020 senior notes, we agreed to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the November 2020 senior notes for new notes with terms substantially identical in all material respects to the November 2020 senior notes and to have such registration statement declared effective under the U.S. Securities Act of 1933. The exchange offer with respect to the November 2020 senior notes was completed in May 2021.

We used the proceeds from the November 2020 senior notes, along with cash on hand, to redeem the $750 million of 3.75% senior notes due in October 2025 that were issued in March 2020. In connection with the redemption of the $750 million of 3.75% senior notes due in October 2025, including the payment of a $104 million make-whole premium to the debt holders, we recognized a pre-tax loss of $110 million from the early extinguishment of debt, which is included in other expense, net in 2020.

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

On September 30, 2021, we entered into a term loan credit agreement (the Term Loan Credit Agreement), pursuant to which a syndicate of financial institutions has committed to provide us with a senior unsecured term loan facility in an aggregate principal amount of $4.0 billion (the Term Loan Facility), consisting of a $2.0 billion three-year term loan facility and a $2.0 billion five-year term loan facility. Loans under the Term Loan Facility were funded on the closing date of the Hillrom acquisition to fund a portion of the consideration for the Hillrom acquisition, repay certain indebtedness of Hillrom, and pay fees and expenses related to the foregoing. Loans under the Term Loan Facility bear interest at variable rates, are subject to amortization at a quarterly rate of 0.625% for the first four quarters following the anniversary of our initial borrowing date and 1.25% thereafter (with loans outstanding under the five-year tranche subject to amortization at a quarterly rate of 1.875% after the second anniversary of the commencement of amortization and 2.500% after the third anniversary of the commencement of amortization). The Term Loan Credit Agreement contains various covenants, including a maximum net leverage ratio.

In December 2021, we issued $800 million of 0.868% senior notes due in 2023, $1.4 billion of 1.322% senior notes due in 2024, $1.45 billion of 1.915% senior notes due in 2027, $1.25 billion of 2.272% senior notes due in 2028, $1.55 billion of 2.539% senior notes due in 2032, $750 million of 3.132% senior notes due in 2051, $300 million of floating rate senior notes due in 2023 and $300 million of floating rate senior notes due in 2024 (collectively, the Hillrom notes) to fund a portion of the consideration for the Hillrom acquisition, repay certain indebtedness of Hillrom, and pay fees and expenses related to the foregoing. Pursuant to a registration rights agreement (the Hillrom Notes Registration Rights Agreement) with the initial purchasers of the Hillrom notes, we agreed to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the Hillrom notes for new notes with terms substantially identical in all material respects to the Hillrom notes and to have such registration statement declared effective under the U.S. Securities Act of 1933. If we fail to have such registration statement declared effective by March 25, 2023 (a registration default), the annual interest rate on the Hillrom notes would increase by 0.25% for the 90-day period immediately following such registration default and by an additional 0.25% thereafter. The maximum additional interest rate is 0.50% per annum and if a registration default is corrected, the Hillrom notes would revert to the original interest rates. The payment of additional interest is the sole remedy for the holders of the Hillrom notes in the event of a registration default.

On September 1, 2021, we entered into a bridge facility commitment letter with JPMorgan Chase Bank, N.A. (JP Morgan) and Citigroup Global Markets Inc. (Citi) pursuant to which JP Morgan and Citi committed to provide a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of $11.4 billion (the Bridge Facility) for the purpose of funding the consideration for the Hillrom acquisition, repaying certain indebtedness of Hillrom, and paying fees and expenses related to the foregoing. The Bridge Facility included upfront fees of $40 million. The commitments under the Bridge Facility were reduced by $4.0 billion on September 30, 2021 when we entered into the Term Loan Facility and the remaining commitments were reduced to zero on December 1, 2021 when we issued the Hillrom notes, both in accordance with the terms of the commitment letter. As a result, the Bridge Facility was

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

Baxter assumed debt with an acquisition-date fair value of $2.4 billion as part of the acquisition of Hillrom. Baxter used the proceeds from the Hillrom notes, the Term Loan Facility and cash on hand to repay substantially all of this indebtedness, including accrued interest and applicable early redemption premiums, and recognized a net loss on the early extinguishment of debt of $5 million.

Credit Facilities

On September 30, 2021, we entered into a new U.S. dollar-denominated revolving credit facility (the USD Revolver), and on October 1, 2021, we amended our existing Euro-denominated revolving credit facility (as amended, the Euro Revolver). Our USD Revolver has a capacity of $2.5 billion and our Euro Revolver has a capacity of €200 million. Each of the facilities matures in 2026. The facilities enable us to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net leverage ratio. Fees under the credit facilities are 0.09% annually as of December 31, 2021 and are based on our credit ratings and the total capacity of the facility. Prior to entering into the USD Revolver and the Euro Revolver, our previous U.S. dollar-denominated revolving credit facility and Euro-denominated revolving credit facility had a maximum capacity of $2.0 billion and €200 million, respectively. Fees under these credit facilities were 0.09% annually as of December 31, 2020 and were based on our credit ratings and the total capacity of the facility. There were no borrowings outstanding under these credit facilities as of December 31, 2021 and 2020.

We also maintain other credit arrangements, which totaled approximately $225 million and $200 million as of December 31, 2021 and 2020, respectively. There were no amounts outstanding under these arrangements as of December 31, 2021 and 2020.

As of December 31, 2021, we were in compliance with the financial covenants in these agreements. The non-performance of any financial institution supporting any of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment.

Commercial Paper

As of December 31, 2021, we had $300 million of commercial paper outstanding with a weighted-average interest rate of 0.27% and an original weighted-average term of 88 days. There was no commercial paper outstanding as of December 31, 2020.

Future Debt Maturities

as of and for the years ended December 31 (in millions)			Debt maturities
2022			$	513
2023			1,108
2024			4,567
2025			684
2026			2,754
Thereafter			8,128
Total obligations and commitments			17,754
Discounts, premiums, and adjustments relating to hedging instruments			(94)
Total debt			$	17,660

NOTE 6

LEASES

Lessee Activity

We have entered into operating and finance leases primarily for office, manufacturing, warehouse and R&D facilities, vehicles and equipment. Our leases have remaining terms from 1 to 41 years and some of those leases include options that provide us with the ability to extend the lease term for periods ranging from 1 to 16 years. Such options are included in the lease term when it is reasonably certain that the option will be exercised.

Certain of our leases include provisions for variable lease payments which are based on, but not limited to, maintenance, insurance, taxes, index escalations and usage-based amounts. For all asset classes, we have elected to apply a practical expedient to account for other services within lease contracts as components of the lease. We also have elected to apply a practical expedient for short-term leases whereby we do not recognize a lease liability and right-of-use asset for leases with a term of less than 12 months.

We classify our leases as operating or finance at the lease commencement date. Finance leases are generally those leases for which we will pay substantially all of the underlying asset’s fair value or will use the asset for all or a major part of its economic life, including circumstances in which we will ultimately own the asset. All other leases are operating leases. For finance leases, we recognize interest expense using the effective interest method and we recognize amortization expense on the right-of-use asset over the shorter of the lease term or the useful life of the asset. For operating leases, we recognize lease cost on a straight-line basis over the term of the lease.

Lease liabilities and right-of-use assets are recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. We determine the present value of payments under a lease based on our incremental borrowing rate as of the lease commencement date. The incremental borrowing rate is equal to the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. For operating leases that commenced prior to our adoption of Topic 842, we measured the lease liabilities and right-of-use assets using our incremental borrowing rate as of January 1, 2019.

The components of lease cost for the years ended December 31, 2021, 2020 and 2019 were:

(in millions)			2021						2020						2019
Operating lease cost			$	114					$	115					$	121
Finance lease cost
Amortization of right-of-use assets			7						5						5
Interest on lease liabilities			5						5						5
Variable lease cost			52						54						89
Lease cost			$	178					$	179					$	220

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

(in millions)			2021						2020						2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases			$	124					$	127					$	119
Operating cash flows from finance leases			5						4						4
Financing cash flows from finance leases			4						4						4
Right-of-use operating lease assets obtained in exchange for lease obligations			71						67						207
Right-of-use finance lease assets obtained in exchange for lease obligations			4						8						—

There are no material lease transactions that we entered into but have not yet commenced as of December 31, 2021. Supplemental balance sheet information related to leases as of December 31, 2021 and 2020 include:

(in millions)			2021						2020
Operating leases
Operating lease right-of-use assets			$	630					$	603
Accrued expenses and other current liabilities			$	128					$	111
Operating lease liabilities			522						501
Total operating lease liabilities			$	650					$	612
Finance leases
Property, plant and equipment, at cost			$	86					$	76
Accumulated depreciation			(31)						(28)
Property, plant and equipment, net			$	55					$	48
Current maturities of long-term debt and finance lease obligations			$	2					$	1
Long-term debt and finance lease obligations			68						64
Total finance lease liabilities			$	70					$	65

Lease term and discount rates as of December 31, 2021 and 2020 were:

			December 31, 2021						December 31, 2020
Weighted-average remaining lease term (years)
Operating leases			8						9
Finance leases			12						13
Weighted-average discount rate
Operating leases			1.8		%				2.2		%
Finance leases			9.3		%				10.3		%

Maturities of operating and finance lease liabilities as of December 31, 2021 were:

(in millions)			Finance Leases			Operating Leases
2022			$	10		$	141
2023			9			118
2024			9			95
2025			9			76
2026			9			60
Thereafter			72			216
Total minimum lease payments			118			706
Less: imputed interest			(48)			(56)
Present value of lease liabilities			$	70		$	650

Lessor Activity

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, intravenous (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 years ended December 31, 2021, 2020 and 2019 were:

(in millions)			2021						2020						2019
Sales-type lease revenue			$	27					$	38					$	35
Operating lease revenue			136						84						61
Variable lease revenue			79						80						85
Total lease revenue			$	242					$	202					$	181

The components of our net investment in sales-type leases as of December 31, 2021 and 2020 were:

(in millions)			2021						2020
Minimum lease payments			$	111					$	122
Unguaranteed residual values			4						12
Net investment in leases			$	115					$	134

Our net investment in sales-type leases is classified as follows in the accompanying consolidated balance sheets:

(in millions)			December 31, 2021						December 31, 2020
Accounts receivable, net			$	40					$	39
Other non-current assets			75						95
Total			$	115					$	134

Our net investment in sales-type leases was $115 million as of December 31, 2021, of which $13 million originated in 2017 and prior, $24 million in 2018, $24 million in 2019, $32 million in 2020 and $22 million in 2021.

Maturities of sales-type and operating leases as of December 31, 2021 were:

(in millions)			Sales-type Leases			Operating Leases
2022			$	43		$	87
2023			32			79
2024			22			75
2025			12			60
2026			5			11
Thereafter			1			2
Total minimum lease payments			115			$	314
Less: imputed interest			(4)
Present value of minimum lease payments			$	111

NOTE 7

COMMITMENTS AND CONTINGENCIES

Refer to Note 2 for information regarding our unfunded contingent payments associated with collaborative and other arrangements.

Indemnifications

During the normal course of business, we make indemnities, commitments and guarantees pursuant to which we may be required to make payments related to specific transactions. Indemnifications include: (i) intellectual property indemnities to customers in connection with the use, sales or license of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises; (iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; (iv) indemnities involving the representations and warranties in certain contracts; and (v) contractual indemnities for our directors and certain of our executive officers for services provided to or at the request of us. In addition, under our Amended and Restated Certificate of Incorporation, and consistent with Delaware General Corporation Law, we have agreed

to indemnify our directors and officers for certain losses and expenses upon the occurrence of certain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential for future payments that we could be obligated to make. To help address some of these risks, we maintain various insurance coverages. Based on historical experience and evaluation of the agreements, we do not believe that any payments related to our indemnities will have a material impact on our financial condition or results of operations.

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

We have established reserves for certain of the matters discussed below. 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, all of which could materially affect future results of operations. With respect to intellectual property, we may be exposed to significant litigation concerning the scope of our and others’ rights. Such litigation could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations.

Environmental

We are involved as a potentially responsible party (PRP) for environmental clean-up costs at six Superfund sites. Under the U.S. Superfund statute and many state laws, generators of hazardous waste sent to a disposal or recycling site are liable for site cleanup if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Separate from the Superfund cases noted above, we are involved in ongoing environmental remediations associated with historic operations at certain of our facilities. As of December 31, 2021 and 2020, our environmental reserves, which are measured on an undiscounted basis, were $18 million and $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 also requested that we provide information regarding business practices in the IV saline industry. We cooperated with that request and have been advised that the matter has now been closed.

In August 2019, we were named in an amended complaint filed by Fayette County, Georgia in the MDL In re: 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 final approval of the settlement on August 11, 2021 and the settlement became effective on September 13, 2021.

In addition, we have received a stockholder request for inspection of our books and records in connection with the announcement made in our Form 8-K on October 24, 2019 that we had commenced an internal investigation into certain intra-company transactions that impacted our previously reported non-operating foreign exchange gains and losses. As initially disclosed on October 24, 2019, we also voluntarily advised the staff of the SEC of our internal investigation and we have been cooperating with the staff of the SEC. On February 18, 2022, we reached a settlement with the SEC, which resolved the SEC’s investigation into related matters. Without admitting or denying the findings in the administrative order issued by the SEC, we agreed to pay a civil penalty of $18 million and to cease and desist from violations of specified provisions of the federal securities laws and related rules. In the order, the SEC acknowledged the Company’s cooperation. We are fully accrued for the civil penalty as of December 31, 2021 and we expect to pay the penalty in the first quarter of 2022.

In March 2020, two lawsuits were filed against us in the Northern District of Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used in our manufacturing facility in Mountain Home, Arkansas to sterilize certain of our products. The plaintiffs sought damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief. The parties reached agreement to settle these lawsuits in the third quarter of 2021 for amounts that are not material to our financial results, which were paid in the fourth quarter of 2021. The settlement of these claims does not preclude potential future lawsuits.

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

The DHHS often issues this type of subpoena when investigating alleged violations of the False Claims Act.

On December 28, 2021, Linet Americas, Inc. (Linet) filed a complaint against Hill-Rom Holdings, Inc., Hill-Rom Company, Inc., and Hill-Rom Services, Inc. in the United States District Court for the Northern District of Illinois, captioned Linet Americas, Inc. v. Hill-Rom Holdings, Inc.; Hill-Rom Company, Inc.; Hill-Rom Services, Inc. Linet alleges that Hillrom violated Sections 1, 2 and 3 of The Sherman Antitrust Act of 1890 and the Illinois Antitrust Act by allegedly engaging in anti-competitive conduct in alleged markets for standard, ICU and birthing beds. Hillrom filed an answer to the complaint on January 28, 2022.

Other

As previously disclosed, in 2008 we recalled our heparin sodium injection products in the United States. Following the recall, more than 1,000 lawsuits alleging that plaintiffs suffered various reactions to a heparin contaminant, in some cases resulting in fatalities, were filed. In January 2019, the last of these cases was settled. In 2019, following the resolution of an insurance dispute, we received cash proceeds of $39 million for our allocation of the insurance proceeds under a settlement and cost-sharing agreement related to the defense of the heparin product liability cases. We recognized a $37 million gain in connection with the resolution of the dispute with the insurer that is classified within other operating income, net on the consolidated statement of income for the year ended December 31, 2019.

In September 2017, Hurricane Maria caused damage to certain of our assets in Puerto Rico and disrupted operations. In 2019, we recognized $100 million of insurance recoveries related to the losses from the hurricane, which are classified within other operating income, net on the consolidated statement of income.

NOTE 8

STOCKHOLDERS’ EQUITY

Stock-Based Compensation

Our stock-based compensation generally includes stock options, restricted stock units (RSUs), performance share units (PSUs) and purchases under our employee stock purchase plan. Shares issued relating to our stock-based plans are generally issued out of treasury stock.

As of December 31, 2021, approximately 51 million authorized shares are available for future awards under our stock-based compensation plans.

Stock Compensation Expense

Stock compensation expense was $146 million, $130 million and $122 million in 2021, 2020 and 2019, respectively. The related tax benefit recognized was $36 million in 2021, $53 million in 2020 and $70 million in 2019. Included in the benefit in 2021, 2020 and 2019 were realized excess tax benefits for stock-based compensation of $13 million, $27 million and $54 million, respectively.

Stock compensation expense is recorded at the corporate level and is not allocated to the segments. Approximately 75% of stock compensation expense is classified in SG&A expenses, with the remainder classified in cost of sales and R&D expenses. Costs capitalized in the consolidated balance sheets at December 31, 2021 and 2020 were not material.

Stock compensation expense is based on awards expected to vest, and therefore has been reduced by estimated forfeitures.

Stock Options

Stock options are granted to employees and non-employee directors with exercise prices equal to 100% of the market value on the date of grant. Stock options granted to employees generally vest in one-third increments over a three-year period. Stock options granted to non-employee directors generally vest immediately on the grant date and are issued with a six-month claw-back provision. Stock options typically have a contractual term of 10 years. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the substantive vesting period.

The fair value of stock options is determined using the Black-Scholes model. The weighted-average assumptions used in estimating the fair value of stock options granted during each year, along with the weighted-average grant-

date fair values, were as follows:

years ended December 31			2021			2020			2019
Expected volatility			24		%	26		%	19		%
Expected life (in years)			5.5			5.5			5.5
Risk-free interest rate			0.8		%	0.6		%	2.5		%
Dividend yield			1.3		%	1.2		%	1.0		%
Fair value per stock option			$	16		$	16		$	15

The following table summarizes stock option activity for the year ended December 31, 2021 and the outstanding stock options as of December 31, 2021.

(options and aggregate intrinsic values in thousands)			Options			Weighted- average exercise price			Weighted- average remaining contractual term (in years)			Aggregate intrinsic value
Outstanding as of January 1, 2021			20,196			$	56.88
Granted			4,034			$	77.32
Exercised			(2,759)			$	49.68
Forfeited			(729)			$	76.33
Expired			(46)			$	53.75
Outstanding as of December 31, 2021			20,696			$	61.14		5.9			$	511,187
Vested or expected to vest as of December 31, 2021			20,391			$	60.91		5.9			$	508,645
Exercisable as of December 31, 2021			13,821			$	53.46		4.6			$	447,799

The aggregate intrinsic value in the table above represents the difference between the exercise price and our closing stock price on the last trading day of the year. The total intrinsic value of options exercised in 2021, 2020 and 2019 was $78 million, $131 million and $272 million, respectively.

As of December 31, 2021, $60 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of approximately 1.7 years.

RSUs

RSUs are granted to employees and non-employee directors. RSUs granted to employees generally vest in one-third increments over a three-year period. RSUs granted to non-employee directors generally vest immediately on the grant date and are issued with a six-month claw-back provision. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the substantive vesting period. The fair value of RSUs is determined based on the number of shares granted and the closing price of our common stock on the date of grant.

The following table summarizes nonvested RSU activity for the year ended December 31, 2021.

(share units in thousands)			Share units			Weighted- average grant-date fair value
Nonvested RSUs as of January 1, 2021			1,138			$	73.11
Granted			714			$	77.84
Replacement RSUs granted in acquisition			668			$	80.86
Vested			(591)			$	71.63
Forfeited			(131)			$	77.75
Nonvested RSUs as of December 31, 2021			1,798			$	78.01

In connection with the Hillrom acquisition, during the fourth quarter of 2021, we issued 668 thousand replacement RSUs to holders of Hillrom equity awards. Refer to Note 2 for additional information regarding the Hillrom acquisition.

As of December 31, 2021, $82 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over a weighted-average period of approximately 2.1 years. The weighted-average grant-date fair value of RSUs granted in 2021, 2020 and 2019 was $79.30, $77.51 and $75.60, respectively. The fair value of RSUs vested in 2021, 2020 and 2019 was $47 million, $52 million and $57 million, respectively.

PSUs

Our annual equity awards stock compensation program for senior management includes the issuance of PSUs. In 2020 and 2021, the PSUs awarded were based on our compound annual sales growth rate (CAGR) performance, our adjusted return on invested capital (ROIC) performance and on our stock performance relative to our peer group. PSUs awarded between 2017 and 2019 were based on adjusted operating margin as well as stock performance relative to our peer group. The vesting condition for CAGR and ROIC PSUs is set at the beginning of the 3-year service period while the vesting condition for adjusted operating margin is set at the beginning of each year for each tranche of the award during the 3-year service period. Compensation cost for the CAGR, adjusted ROIC and adjusted operating margin PSUs is measured based on the fair value of the awards on the date that the specific vesting terms for each award are established and the fair value of the awards is determined based on the quoted price of our stock on the grant date of the award. The compensation cost for CAGR, adjusted ROIC and adjusted operating margin PSUs is adjusted at each reporting date to reflect the estimated vesting outcome.

The fair value for PSUs based on our stock performance relative to our peer group is determined using a Monte Carlo model. The assumptions used in estimating the fair value of these PSUs granted during the period, along with the grant-date fair values, were as follows:

years ended December 31			2021			2020			2019
Baxter volatility			28		%	26		%	19		%
Peer group volatility			26%-81%			23%-95%			18%-113%
Correlation of returns			0.05-0.65			0.19-0.70			0.13-0.63
Risk-free interest rate			0.3		%	0.4		%	2.5		%
Fair value per PSU			$	86		$	108		$	106

The following table summarizes nonvested PSU activity for the year ended December 31, 2021.

(share units in thousands)			Share units			Weighted- average grant-date fair value
Nonvested PSUs as of January 1, 2021			760			$	86.69
Granted			241			$	78.24
Vested			(178)			$	78.41
Forfeited			(91)			$	87.63
Nonvested PSUs as of December 31, 2021			732			$	85.87

Unrecognized compensation cost related to all unvested PSUs of $23 million at December 31, 2021 is expected to be recognized as expense over a weighted-average period of 1.5 years.

Employee Stock Purchase Plan

Nearly all employees are eligible to participate in our employee stock purchase plan. The employee purchase price is 85% of the closing market price on the purchase date.

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

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

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 first quarter of 2020.

Cash Dividends

Total cash dividends declared per share for 2021, 2020, and 2019 were $1.085, $0.955 and $0.850, respectively.

A quarterly dividend of $0.245 per share ($0.98 on an annualized basis) was declared in February 2021 and was paid in April 2021. Quarterly dividends of $0.28 per share ($1.12 on an annualized basis) were declared in May and July of 2021 and were paid in July and October of 2021, respectively. Our Board of Directors declared a quarterly dividend of $0.28 per share in November of 2021, which was paid in January of 2022.

Stock Repurchase Programs

As authorized by the Board of Directors, we repurchase our stock depending on our cash flows, net debt level and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of 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 repurchased 7.3 million shares under this authority pursuant to Rule 10b5-1 plans for $600 million in cash in 2021, 6.3 million shares under this authority pursuant to a Rule 10b5-1 plan for $500 million in cash in 2020 and 16.5 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise for $1.3 billion in cash in 2019. We had $1.3 billion of purchase authority available as of December 31, 2021.

Accelerated Share Repurchase Agreement

In December 2018, we entered into a $300 million accelerated share repurchase agreement (ASR Agreement) with an investment bank. We funded the ASR Agreement with available cash. The ASR Agreement was executed pursuant to the 2012 Repurchase Authorization described above. Under the ASR Agreement, we received 3.6 million shares upon execution. Based on the volume-weighted average price of our common stock during the term of the ASR Agreement, we received an additional 0.6 million shares from the investment bank at settlement in May 2019.

Other

In addition to common stock, our authorized capital structure includes 100 million shares of preferred stock, no par value. As of December 31, 2021 and 2020, no shares of preferred stock were outstanding.

NOTE 9

ACCUMULATED OTHER COMPREHENSIVE INCOME

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

The following table is a net-of-tax summary of the changes in AOCI by component for the years ended December 31, 2021 and 2020.

(in millions)			CTA			Pension and OPEB plans			Hedging activities			Total
Gains (losses)
Balance as of December 31, 2020			$	(2,587)		$	(574)		$	(153)		$	(3,314)
Other comprehensive (loss) income before reclassifications			(320)			160			4			(156)
Amounts reclassified from AOCI (a)			—			67			23			90
Net other comprehensive (loss) income			(320)			227			27			(66)
Balance as of December 31, 2021			$	(2,907)		$	(347)		$	(126)		$	(3,380)

(in millions)			CTA			Pension and OPEB plans			Hedging activities			Total
Gains (losses)
Balance as of December 31, 2019			$	(2,954)		$	(715)		$	(41)		$	(3,710)
Other comprehensive income (loss) before reclassifications			367			59			(117)			309
Amounts reclassified from AOCI (a)			—			82			5			87
Net other comprehensive (loss) income			367			141			(112)			396
Balance as of December 31, 2020			$	(2,587)		$	(574)		$	(153)		$	(3,314)

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

The following table is a summary of the amounts reclassified from AOCI to net income during the years ended December 31, 2021 and 2020.

			Amounts reclassified from AOCI (a)
(in millions)			2021			2020			Location of impact in income statement
Pension and OPEB items
Amortization of net losses and prior service costs or credits			$	(82)		$	(59)		Other expense, net
Settlement charges			(2)			(46)			Other expense, net
			(84)			(105)			Total before tax
Less: Tax effect			17			23			Income tax expense
			$	(67)		$	(82)		Net of tax
Gains (losses) on hedging activities
Foreign exchange contracts			$	(23)		$	(5)		Cost of sales
Interest rate contracts			(6)			(1)			Interest expense, net
			(29)			(6)			Total before tax
Less: Tax effect			6			1			Income tax expense
			$	(23)		$	(5)		Net of tax
Total reclassification for the period			$	(90)		$	(87)		Total net of tax

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

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

NOTE 10

REVENUES

Contract Balances

The timing of revenue recognition, billings and cash collections results in the recognition of trade accounts receivable, unbilled receivables, contract assets, and customer advances and deposits (contract liabilities) on our consolidated balance sheets. Net trade accounts receivable was $2.4 billion and $1.7 billion as of December 31, 2021 and 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.

The following table summarizes our contract assets:

as of December 31 (in millions)			2021			2020
Contract manufacturing services			$	50		$	47
Software sales			45			40
Bundled equipment and consumable medical products contracts			100			47
Contract assets			$	195		$	134

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

as of December 31 (in millions)			2021			2020
Prepaid expenses and other current assets			$	84		$	70
Other non-current assets			111			64
Contract assets			$	195		$	134
Accrued expenses and other current liabilities			$	162		$	32
Other non-current liabilities			84			34
Contract liabilities			$	246		$	66

In 2021, $20 million of revenue was recognized that was included in contract liabilities as of December 31, 2020. In 2020 and 2019, the amount of revenue recognized that was included in contract liabilities as of December 31, 2019 and 2018 was not significant.

Disaggregation of Net Sales

Beginning in the first quarter of 2021, our product category net sales disclosures (previously referred to as global business units (GBUs)) separately present net sales from our BioPharma Solutions business, which was previously included within Other. Concurrent with that disaggregation of net sales from our BioPharma Solutions business, we have also allocated certain previously unallocated sales deductions from Other to various categories, primarily based on their respective net sales. Net sales for 2020 and 2019 have been recast to conform to this presentation.

Additionally, with the acquisition of Hillrom in December 2021, we have added three new product categories: Patient Support Systems, Front Line Care and Surgical Solutions.

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

			2021												2020												2019
years ended December 31 (in millions)			U.S.			International			Total						U.S.			International			Total						U.S.			International			Total
Renal Care1			$	890		$	3,010		$	3,900					$	848		$	2,909		$	3,757					$	791		$	2,848		$	3,639
Medication Delivery2			1,859			1,021			2,880						1,738			953			2,691						1,762			977			2,739
Pharmaceuticals3			753			1,538			2,291						849			1,249			2,098						904			1,215			2,119
Clinical Nutrition4			343			621			964						330			580			910						308			552			860
Advanced Surgery5			545			432			977						516			370			886						533			342			875
Acute Therapies6			287			495			782						286			454			740						184			351			535
BioPharma Solutions7			273			396			669						234			252			486						257			212			469
Patient Support Systems8			86			29			115						—			—			—						—			—			—
Front Line Care9			51			19			70						—			—			—						—			—			—
Surgical Solutions10			12			15			27						—			—			—						—			—			—
Other11			81			28			109						77			28			105						87			39			126
Total Baxter			$	5,180		$	7,604		$	12,784					$	4,878		$	6,795		$	11,673					$	4,826		$	6,536		$	11,362

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

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

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

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

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

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

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

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

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

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

11 Other includes sales of miscellaneous product and service offerings.

NOTE 11

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 December 31, 2021, we have incurred cumulative pre-tax costs of approximately $1.2 billion related to these actions. These costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation. We currently expect to incur additional pre-tax cash costs of

approximately $30 million through the completion of the initiatives that are currently underway, primarily related to implementation costs. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods.

We recorded the following charges related to business optimization programs in 2021, 2020, and 2019:

years ended December 31 (in millions)			2021			2020			2019
Restructuring charges			$	91		$	111		$	134
Costs to implement business optimization programs			23			23			45
Accelerated depreciation			—			—			5
Total business optimization charges			$	114		$	134		$	184

For segment reporting, business optimization charges are unallocated expenses.

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

For the year ended December 31, 2019, we recognized accelerated depreciation, primarily associated with facilities to be closed. The costs were recorded within cost of sales and SG&A expense.

During the years ended December 31, 2021, 2020 and 2019, we recorded the following restructuring charges:

			2021
(in millions)			COGS			SG&A			R&D			Total
Employee termination costs			$	37		$	35		$	1		$	73
Contract termination and other costs			—			2			—			2
Asset impairments			16			—			—			16
Total restructuring charges			$	53		$	37		$	1		$	91
			2020
(in millions)			COGS			SG&A			R&D			Total
Employee termination costs			$	36		$	54		$	2		$	92
Contract termination and other costs			4			4			—			8
Asset impairments			8			3			—			11
Total restructuring charges			$	48		$	61		$	2		$	111
			2019
(in millions)			COGS			SG&A			R&D			Total
Employee termination costs			$	13		$	37		$	25		$	75
Contract termination and other costs			10			1			—			11
Asset impairments			37			2			9			48
Total restructuring charges			$	60		$	40		$	34		$	134

In conjunction with our business optimization initiatives, we sold property that resulted in a gain of $17 million in 2020. This benefit is reflected within other operating income, net in our consolidated statement of income for the year ended December 31, 2020.

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

(in millions)
Liability balance as of December 31, 2018			$	101
Charges			113
Payments			(93)
Reserve adjustments			(27)
Currency translation			(2)
Liability balance as of December 31, 2019			92
Charges			116
Payments			(86)
Reserve adjustments			(16)
Currency translation			7
Liability balance as of December 31, 2020			113
Assumed in acquisition			6
Charges			94
Payments			(78)
Reserve adjustments			(19)
Currency translation			(7)
Liability balance as of December 31, 2021			$	109

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

Substantially all of our restructuring liabilities as of December 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 2023.

NOTE 12

PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS

We sponsor a number of qualified and nonqualified pension plans for eligible employees. We also sponsor certain unfunded contributory healthcare and life insurance benefits for substantially all domestic retired employees. Newly hired employees in the United States and Puerto Rico are not eligible to participate in the pension plans but receive a higher level of company contributions in the defined contribution plans.

Reconciliation of Pension and Other Postretirement Benefit Plan Obligations, Assets and Funded Status

The benefit plan information in the table below pertains to all of our pension and OPEB plans, both in the United States and in other countries.

			Pension benefits									OPEB
as of and for the years ended December 31 (in millions)			2021			2020						2021			2020
Benefit obligations
Beginning of period			$	4,313		$	3,973					$	228		$	228
Service cost			87			83						1			1
Interest cost			72			95						4			6
Participant contributions			4			4						—			—
Actuarial (gain) loss			(186)			401						(14)			13
Benefit payments			(103)			(109)						(19)			(20)
Settlements			(13)			(271)						—			—
Curtailment			(5)			(4)						—			—
Acquisitions			364			—						11			—
Plan Amendments			15			—						—			—
Foreign exchange and other			(105)			141						—			—
End of period			4,443			4,313						211			228
Fair value of plan assets
Beginning of period			3,434			2,973						—			—
Actual return on plan assets			141			688						—			—
Employer contributions			73			74						19			20
Participant contributions			4			4						—			—
Benefit payments			(103)			(109)						(19)			(20)
Settlements			(13)			(271)						—			—
Acquisitions			305			—						—			—
Foreign exchange and other			(57)			75						—			—
End of period			3,784			3,434						—			—
Funded status at December 31			$	(659)		$	(879)					$	(211)		$	(228)
Amounts recognized in the consolidated balance sheets
Noncurrent asset			$	228		$	155					$	—		$	—
Current liability			(29)			(30)						(17)			(18)
Noncurrent liability			(858)			(1,004)						(194)			(210)
Net liability recognized at December 31			$	(659)		$	(879)					$	(211)		$	(228)

Actuarial gains and losses result from changes in actuarial assumptions (such as changes in the discount rate and revised mortality rates). Actuarial gains in 2021 and losses in 2020 related to plan benefit obligations were primarily the result of changes in discount rates.

The pension obligation information in the table above represents the projected benefit obligation (PBO). The PBO incorporates assumptions relating to future compensation levels. The accumulated benefit obligation (ABO) is the same as the PBO except that it includes no assumptions relating to future compensation levels. The ABO for all of our pension plans was $4.3 billion and $4.1 billion at the 2021 and 2020 measurement dates, respectively.

The information in the funded status table above represents the totals for all of our pension plans. The following table is information relating to the individual plans in the funded status table above that have an ABO in excess of plan assets.

as of December 31 (in millions)			2021			2020
ABO			$	2,991		$	2,920
Fair value of plan assets			$	2,209		$	2,047

The following table presents information relating to the individual plans in the funded status table above that have a PBO in excess of plan assets (many of which also have an ABO in excess of assets and are therefore also included in the table directly above).

as of December 31 (in millions)			2021			2020
PBO			$	3,254		$	3,421
Fair value of plan assets			$	2,366		$	2,387

Expected Net Pension and OPEB Plan Payments for the Next 10 Years

(in millions)			Pension benefits			OPEB
2022			$	126		$	19
2023			146			17
2024			161			17
2025			166			16
2026			179			15
2027 through 2031			1,018			64
Total expected net benefit payments for next 10 years			$	1,796		$	148

The expected net benefit payments above reflect the total net benefits expected to be paid from the plans’ assets (for funded plans) or from our assets (for unfunded plans). The federal subsidies relating to the Medicare Prescription Drug, Improvement and Modernization Act are not expected to be significant.

Amounts Recognized in AOCI

The pension and OPEB plans’ gains or losses, prior service costs or credits, and transition assets or obligations not yet recognized in net periodic benefit cost are recognized on a net-of-tax basis in AOCI and will be amortized from AOCI to net periodic benefit cost in the future. For active employees, we utilize the average future working lifetime as the amortization period for prior service. For inactive employees, we utilize the average remaining life expectancy as the amortization period for prior service.

The following table is a summary of the pre-tax losses included in AOCI at December 31, 2021 and December 31, 2020.

(in millions)			Pension benefits			OPEB
Actuarial loss (gain)			$	509		$	(37)
Prior service credit and transition obligation			8			(36)
Total pre-tax loss (gain) recognized in AOCI at December 31, 2021			$	517		$	(73)
Actuarial loss (gain)			$	811		$	(23)
Prior service credit and transition obligation			(9)			(45)
Total pre-tax loss (gain) recognized in AOCI at December 31, 2020			$	802		$	(68)

Refer to Note 9 for the net-of-tax balances included in AOCI as of each of the year-end dates. The following table is a summary of the net-of-tax amounts recorded in OCI relating to pension and OPEB plans.

Year ended December 31 (in millions)			2021			2020			2019
Gain (loss) arising during the year, net of tax of $43 in 2021, $17 in 2020 and $(64) in 2019			$	160		$	59		$	(184)
Amortization of loss to earnings, net of tax of $17 in 2021, $12 in 2020 and $6 in 2019			65			47			25
Settlement charges, net of tax of $0 in 2021, $11 in 2020 and $188 in 2019			2			35			567
Pension and other employee benefits			$	227		$	141		$	408

In 2021 and 2020, OCI activity for pension and OPEB plans was primarily related to actuarial gains and losses. In 2019, OCI activity for pension and OPEB plans was primarily related to the U.S. pension settlement charge and actuarial gains and losses.

Net Periodic Benefit Cost

Year ended December 31 (in millions)			2021			2020			2019
Pension benefits
Service cost			$	87		$	83		$	74
Interest cost			72			95			172
Expected return on plan assets			(143)			(163)			(264)
Amortization of net losses and other deferred amounts			91			77			58
Settlement charges			2			46			755
Other			(4)			—			—
Net periodic pension benefit cost			$	105		$	138		$	795
OPEB
Service cost			$	1		$	1		$	1
Interest cost			4			6			8
Amortization of net losses and prior service credit			(9)			(18)			(27)
Net periodic OPEB cost			$	(4)		$	(11)		$	(18)

Weighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date

			Pension benefits									OPEB
			2021			2020						2021			2020
Discount rate
U.S. and Puerto Rico plans			3.01		%	2.73		%				2.76		%	2.33		%
International plans			1.47		%	1.00		%				n/a			n/a
Rate of compensation increase
U.S. and Puerto Rico plans			3.68		%	3.68		%				n/a			n/a
International plans			3.11		%	3.03		%				n/a			n/a
Annual rate of increase in the per-capita cost			n/a			n/a						6.25		%	6.50		%
Rate decreased to			n/a			n/a						5.00		%	5.00		%
by the year ended			n/a			n/a						2027			2027

The assumptions above, which were used in calculating the December 31, 2021 measurement date benefit obligations, will be used in the calculation of net periodic benefit cost in 2022.

Weighted-Average Assumptions Used in Determining Net Periodic Benefit Cost

			Pension benefits												OPEB
			2021			2020			2019						2021			2020			2019
Discount rate
U.S. and Puerto Rico plans			2.73		%	3.44		%	4.18		%				2.33		%	3.16		%	4.20		%
International plans			1.00		%	1.34		%	2.02		%				n/a			n/a			n/a
Expected return on plan assets
U.S. and Puerto Rico plans			5.50		%	6.50		%	6.29		%				n/a			n/a			n/a
International plans			3.58		%	4.23		%	5.45		%				n/a			n/a			n/a
Rate of compensation increase
U.S. and Puerto Rico plans			3.68		%	3.68		%	3.66		%				n/a			n/a			n/a
International plans			3.03		%	3.03		%	3.08		%				n/a			n/a			n/a
Annual rate of increase in the per-capita cost			n/a			n/a			n/a						6.25		%	6.50		%	6.75		%
Rate decreased to			n/a			n/a			n/a						5.00		%	5.00		%	5.00		%
by the year ended			n/a			n/a			n/a						2027			2027			2027

We established the expected return on plan assets assumption primarily based on a review of historical compound average asset returns, both company-specific and relating to the broad market (based on our asset allocation), as well as an analysis of current market and economic information and future expectations. We plan to use a 5.00% assumption for our U.S. and Puerto Rico plans for 2022.

Pension Plan Assets

An investment committee of members of senior management is responsible for supervising, monitoring and evaluating the invested assets of our funded pension plans. The investment committee, which meets at least quarterly, abides by documented policies and procedures relating to investment goals, targeted asset allocations, risk management practices, allowable and prohibited investment holdings, diversification, use of derivatives, the relationship between plan assets and benefit obligations, and other relevant factors and considerations.

The investment committee’s policies and procedures include the following:

• Ability to pay all benefits when due;

• Targeted long-term performance expectations relative to applicable market indices, such as Russell, MSCI EAFE, and other indices;

• Targeted asset allocation percentage ranges (summarized below), and periodic reviews of these allocations;

• Diversification of assets among third-party investment managers, and by geography, industry, stage of business cycle and other measures;

• Specified investment holding and transaction prohibitions (for example, private placements or other restricted securities, securities that are not traded in a sufficiently active market, short sales, certain derivatives, commodities and margin transactions);

• Specified portfolio percentage limits on holdings in a single corporate or other entity (generally 5% at time of purchase, except for holdings in U.S. government or agency securities);

• Specified average credit quality for the fixed-income securities portfolio (at least A- by Standard & Poor’s or A3 by Moody’s);

• Specified portfolio percentage limits on foreign holdings; and

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

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

investment return. Investment strategies and asset allocations are based on consideration of plan liabilities, the plans’ funded status and other factors, such as the plans’ demographics and liability durations. Investment performance is reviewed by the investment committee on a quarterly basis and asset allocations are reviewed at least annually.

Plan assets are managed in a balanced portfolio comprised of two major components: return-seeking investments and liability hedging investments. The target allocations for plan assets are 50% in return-seeking investments and 50% in liability hedging investments and other holdings. The documented policy includes an allocation range based on each individual investment type within the major components that allows for a variance from the target allocations depending on the investment type. Return-seeking investments primarily include common stock of U.S. and international companies, common/collective trust funds, mutual funds, hedge funds, and partnership investments. Liability hedging investments and other holdings primarily include cash, money market funds with an original maturity of three months or less, U.S. and foreign government and governmental agency issues, corporate bonds, municipal securities, derivative contracts and asset-backed securities.

While the investment committee provides oversight over plan assets for U.S. and international plans, the summary above is specific to the plans in the United States. The plan assets for international plans are managed and allocated by the entities in each country, with input and oversight provided by the investment committee. The plan assets for the U.S. and international plans are included in the table below.

The following tables summarize our pension plan financial instruments that are measured at fair value on a recurring basis.

						Basis of fair value measurement
(in millions)			Balance at December 31, 2021			Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Measured at NAV (a)
Assets
Fixed income securities
Cash and cash equivalents			$	368		$	50		$	318		$	—		$	—
U.S. government and government agency issues			271			—			271			—			—
Corporate bonds			573			—			573			—			—
Equity securities
Common stock			452			452			—			—			—
Mutual funds			521			235			286			—			—
Common/collective trust funds			1,118			—			358			—			760
Partnership investments			329			—			—			—			329
Other holdings			152			21			122			9			—
Fair value of pension plan assets			$	3,784		$	758		$	1,928		$	9		$	1,089

(a) Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

						Basis of fair value measurement
(in millions)			Balance at December 31, 2020			Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Measured at NAV (a)
Assets
Fixed income securities
Cash and cash equivalents			$	265		$	91		$	174		$	—		$	—
U.S. government and government agency issues			280			—			280			—			—
Corporate bonds			744			—			744			—			—
Equity securities
Common stock			453			453			—			—			—
Mutual funds			510			217			293			—			—
Common/collective trust funds			771			—			341			—			430
Partnership investments			296			—			—			—			296
Other holdings			115			22			82			11			—
Collateral held on loaned securities			19			—			19			—			—
Liabilities
Collateral to be paid on loaned securities			(19)			(19)			—			—			—
Fair value of pension plan assets			$	3,434		$	764		$	1,933		$	11		$	726

(a) Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

The following table is a reconciliation of changes in fair value measurements that used significant unobservable inputs (Level 3).

(in millions)															Other holdings
Balance at December 31, 2019															$	10
Purchases															1
Balance at December 31, 2020															11
Sales															(2)
Balance at December 31, 2021															$	9

The assets and liabilities of our pension plans are valued using the following valuation methods:

Investment category			Valuation methodology
Cash and cash equivalents			These largely consist of a short-term investment fund, U.S. dollars and foreign currency. The fair value of the short-term investment fund is based on the net asset value.
U.S. government and government agency issues			Values are based on reputable pricing vendors, who typically use pricing matrices or models that use observable inputs.
Corporate bonds			Values are based on reputable pricing vendors, who typically use pricing matrices or models that use observable inputs.
Common stock			Values are based on the closing prices on the valuation date in an active market on national and international stock exchanges.
Mutual funds			Values are based on the net asset value of the units held in the respective fund which are obtained from national and international exchanges or based on the net asset value of the underlying assets of the fund provided by the fund manager.
Common/collective trust funds			Values are based on the net asset value of the units held at year end.
Partnership investments			Values are based on the net asset value of the participation by us in the investment as determined by the general partner or investment manager of the respective partnership.
Other holdings			The value of these assets vary by investment type, but primarily are determined by reputable pricing vendors, who use pricing matrices or models that use observable inputs.
Collateral held on loaned securities			Values are based on the net asset value per unit of the fund in which the collateral is invested.
Collateral to be paid on loaned securities			Values are based on the fair value of the underlying securities loaned on the valuation date.

Expected Pension and OPEB Plan Funding

Our funding policy for our pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that we may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flows generated by us, and other factors. Volatility in the global financial markets could have an unfavorable impact on future funding requirements. We have no obligation to fund our principal plans in the United States and Puerto Rico in 2022. We continually reassess the amount and timing of any discretionary contributions. In 2022, we expect to make contributions of at least $41 million to our foreign pension plans. We expect to have net cash outflows relating to our OPEB plans of approximately $19 million in 2022.

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

			United States and Puerto Rico									International
as of December 31, 2021 (in millions)			Qualified plans			Nonqualified plan						Funded plans			Unfunded plans			Total
Fair value of plan assets			$	2,700		n/a						$	1,084		n/a			$	3,784
PBO			2,713			$	257					1,015			$	458		4,443
Funded status percentage			100		%	n/a						107		%	n/a			85		%

Pension Settlement Transactions

In October 2020, we offered certain former U.S. employees with vested pension benefits a limited-time option to take a lump sum distribution in lieu of future monthly payments. This option expired in November 2020 and approximately 40% of the eligible participants accepted the offer. Payments from plan assets to participants who accepted the offer were made in December 2020 and totaled $252 million. As a result of these transactions, we recognized non-cash pretax pension settlement charges of $43 million in the fourth quarter of 2020.

As part of our continued effort to reduce pension plan obligations, we transferred approximately $2.4 billion of U.S. qualified pension plan liabilities to an insurance company through the purchase of a group annuity contract in October 2019. As a result of this transaction, we recognized a non-cash pretax pension settlement charge of $755 million in the fourth quarter of 2019.

U.S. Defined Contribution Plan

Most U.S. employees are eligible to participate in a qualified defined contribution plan. We recognized expense of $59 million in 2021, $61 million in 2020 and $53 million in 2019 related to contributions to this plan.

NOTE 13

INCOME TAXES

Income Before Income Tax Expense (Benefit) by Category

years ended December 31 (in millions)			2021			2020			2019
United States			$	(424)		$	(329)		$	(586)
International			1,901			1,621			1,556
Income before income taxes			$	1,477		$	1,292		$	970

Income Tax Expense (Benefit)

years ended December 31 (in millions)			2021			2020			2019
Current
United States
Federal			$	(11)		$	7		$	8
State and local			10			(7)			3
International			329			270			258
Current income tax expense			328			270			269
Deferred
United States
Federal			(103)			(99)			(140)
State and local			(8)			5			(29)
International			(35)			6			(141)
Deferred income tax expense (benefit)			(146)			(88)			(310)
Income tax expense (benefit)			$	182		$	182		$	(41)

Deferred Tax Assets and Liabilities

as of December 31 (in millions)			2021			2020
Deferred tax assets
Accrued liabilities and other			$	434		$	376
Pension and other postretirement benefits			174			218
Tax credit and net operating loss carryforwards			939			905
Swiss tax reform net asset basis step-up			161			174
Operating lease liabilities			155			148
Valuation allowances			(401)			(454)
Total deferred tax assets			1,462			1,367
Deferred tax liabilities
Subsidiaries’ unremitted earnings			66			77
Long-lived assets and other			1,831			539
Operating lease right-of-use assets			151			146
Total deferred tax liabilities			2,048			762
Net deferred tax asset (liability)			$	(586)		$	605

At December 31, 2021, we had U.S. state operating loss carryforwards totaling $1.1 billion, U.S. federal operating loss carryforwards totaling $455 million and tax credit carryforwards totaling $411 million, which includes a U.S. foreign tax credit carryforward of $339 million. The U.S. federal and state operating loss and tax credit carryforwards expire between 2022 and 2041, with $334 million of the operating loss carryforwards having no expiration date.

At December 31, 2021, with respect to our operations outside the U.S., we had foreign operating loss carryforwards totaling $1.4 billion and foreign tax credit carryforwards totaling $15 million. The foreign operating loss carryforwards expire between 2022 and 2033 with $798 million having no expiration date. All of the foreign tax credit carryforwards have no expiration date.

Realization of the U.S. and foreign operating loss and tax credit carryforwards depends on generating sufficient future earnings. A valuation allowance of $401 million and $454 million was recognized as of December 31, 2021 and 2020, respectively, to reduce the deferred tax assets associated with net operating loss and tax credit carryforwards because we do not believe it is more likely than not that these assets will be fully realized prior to expiration. After evaluating relevant U.S. tax laws, any elections or other opportunities that may be available, and the future expiration of certain U.S. tax provisions that will impact the utilization of our U.S. foreign tax credit carryforwards, management expects to be able to realize some, but not all, of the U.S. foreign tax credit deferred tax assets up to its overall domestic loss (ODL) balance plus other recurring and non-recurring foreign inclusions. Therefore, a valuation allowance of $98 million and $157 million was recognized with respect to the foreign tax credit carryforwards as of December 31, 2021 and 2020, respectively. We will continue to evaluate the need for additional valuation allowances and, as circumstances change, the valuation allowance may change.

As a result of Swiss tax reform legislation enacted during 2019, we recognized an $863 million net asset basis step-up that is amortizable as a tax deduction ratably over tax years 2025 through 2029. Accordingly, a deferred tax asset of $161 million and $174 million was recognized as of December 31, 2021 and 2020, respectively. We expect to realize some, but not all, of the Swiss deferred tax assets based principally on expected future earnings generated by the Swiss subsidiary during the period in which the tax basis will be amortized. Therefore, a valuation allowance of $59 million and $72 million was recognized on the Swiss deferred tax assets as of December 31, 2021 and 2020, respectively.

As part of the acquisition of Hillrom in 2021, we recorded deferred tax liabilities of $1.3 billion related to the step-up in our U.S. GAAP basis of tangible and intangible assets and liabilities to fair market value which is in excess of the assets’ historical tax bases.

Income Tax Expense (Benefit) Reconciliation

years ended December 31 (in millions)			2021			2020			2019
Income tax expense at U.S. statutory rate			$	310		$	271		$	204
Tax incentives			(193)			(169)			(140)
State and local taxes, net of federal benefit			10			(2)			(17)
Impact of foreign taxes			103			88			65
Tax-deductible foreign statutory loss on an investment in a foreign subsidiary			(58)			—			—
Unfavorable court decision in a foreign jurisdiction related to an uncertain tax position			22			—			—
Swiss tax reform net asset basis step-up			—			—			(159)
Deferred tax revaluation due to 2017 Tax Act and foreign tax reform			—			—			(19)
Transition tax due to 2017 Tax Act			—			—			(16)
Valuation allowances			(61)			8			110
Stock compensation windfall tax benefits			(13)			(27)			(54)
Research and development tax credits			(5)			(7)			(13)
Unutilized foreign tax credits			14			15			5
Other, net			53			5			(7)
Income tax expense (benefit)			$	182		$	182		$	(41)

We plan to repatriate our foreign earnings with the exception of approximately $286 million of accumulated earnings that are indefinitely reinvested as of December 31, 2021 related to one of our foreign operations. Additional withholding and capital gain taxes of $29 million would be incurred if such earnings were remitted currently.

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

Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.

In 2021, our effective rate was impacted favorably by geographic earnings mix, a $58 million tax benefit related to a tax-deductible foreign statutory loss on an investment in a foreign subsidiary, a tax benefit related to a change in U.S. foreign tax credit regulations, which is reflected in the valuation allowances item in the table above, and excess tax benefits on stock compensation awards, partially offset by an unfavorable court decision in a foreign jurisdiction related to an uncertain tax position.

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

In 2019, Switzerland and India enacted tax reform legislation that had a material impact on our effective tax rate. We recognized a deferred tax benefit of $90 million to reflect a tax basis step-up, net of a valuation allowance, partially offset by a $5 million deferred tax revaluation to reflect an increase in the statutory tax rate, under the newly enacted Swiss tax laws. We also recognized a net deferred tax benefit of $24 million associated with deferred tax revaluation in India to reflect a decrease in the statutory tax rate. Our effective tax rate was also favorably impacted by $57 million in 2019 related to a notional interest deduction on the share capital of a foreign subsidiary. The gross tax benefit of the deduction is included in the table above within impact of foreign taxes and the portion not expected to be realized is included within valuation allowances.

Unrecognized Tax Benefits

We classify interest and penalties associated with income taxes in income tax expense (benefit) within the consolidated statements of income. Net interest and penalties recognized were not significant during 2021, 2020 and 2019. The liability recognized related to interest and penalties was $19 million and $17 million as of December 31, 2021 and 2020, respectively. The total amount of gross unrecognized tax benefits that, if recognized, would impact the effective tax rate are $39 million, $48 million and $70 million as of December 31, 2021, 2020 and 2019, respectively.

The following table is a reconciliation of our unrecognized tax benefits, including those related to discontinued operations, for the years ended December 31, 2021, 2020 and 2019.

as of and for the years ended (in millions)			2021			2020			2019
Balance at beginning of the year			$	90		$	111		$	127
Increase due to acquisition			11			—			—
Increase associated with tax positions taken during the current year			31			8			8
Increase (decrease) associated with tax positions taken during a prior year			(3)			(1)			(3)
Settlements			(2)			(18)			(20)
Decrease associated with lapses in statutes of limitations			(16)			(10)			(1)
Balance at end of the year			$	111		$	90		$	111

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

Tax Incentives

We have received tax incentives in Puerto Rico, Switzerland, Dominican Republic, Costa Rica and Thailand. The financial impact of the reductions as compared to the statutory tax rates is indicated in the income tax expense reconciliation table above. The tax reductions as compared to the local statutory rate favorably impacted earnings per diluted share by $0.38 in 2021, $0.33 in 2020, and $0.27 in 2019. The above grants provide that our manufacturing operations are and will be partially exempt from local taxes with varying expirations from 2023 to 2029.

Examinations of Tax Returns

As of December 31, 2021, we had ongoing audits in the United States, Germany, United Kingdom, China and other jurisdictions. During 2021, we closed U.S. tax years 2009-2016 with the IRS with no material adjustments to our financial statements. Tax years 2017 and forward remain under examination by the IRS and tax years 2012 and forward remain under examination by various foreign taxing authorities. We believe that it is reasonably possible that our gross unrecognized tax benefits will be reduced within the next 12 months by $30 million. While the final outcome of these matters is inherently uncertain, we believe we have made adequate tax provisions for all years subject to examination.

NOTE 14

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, RSUs and PSUs is reflected in the denominator for diluted EPS using the treasury stock method.

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

years ended December 31(in millions)			2021			2020			2019
Basic shares			502			509			509
Effect of dilutive securities			6			8			10
Diluted shares			508			517			519

The effect of dilutive securities included unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excluded 7 million, 4 million, and 4 million equity awards in 2021, 2020, and 2019, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 8 for additional information regarding items impacting basic shares.

NOTE 15

FINANCIAL INSTRUMENTS, DERIVATIVES AND HEDGING ACTIVITIES

Accounts Receivable Sales

For accounts receivable originated in Japan, we have entered into agreements with financial institutions in which the entire interest in and ownership of the receivable is sold. We continue to service the receivables in this arrangement. Servicing assets or liabilities are not recognized because we receive adequate compensation to service the sold receivables. The Japanese arrangement includes limited recourse provisions, which are not material.

The following is a summary of the activity relating to the arrangement.

as of and for the years ended December 31 (in millions)						2021			2020			2019
Sold receivables at beginning of year						$	96		$	79		$	69
Proceeds from sales of receivables						339			348			292
Cash collections (remitted to the owners of the receivables)						(346)			(335)			(282)
Effect of foreign exchange rate changes						(8)			4			—
Sold receivables at end of year						$	81		$	96		$	79

The net losses relating to the sales of accounts receivable were immaterial for each year.

Concentrations of Credit Risk

We invest excess cash in certificates of deposit or money market or other funds and diversify the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, we have diversified our selection of counterparties, and have arranged collateralization and master-netting agreements to minimize the risk of loss.

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

Foreign Currency and Interest Rate Risk Management

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 Renminbi, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Turkish Lira, Indian Rupee and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative instruments to further reduce the net exposure to foreign exchange risk. Gains and losses on the hedging instruments offset

losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from changes in foreign exchange rates. 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 the mix of fixed- and floating-rate debt that we believe is 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.

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.

The notional amounts of foreign exchange contracts designated as cash flow hedges were $377 million and $345 million as of December 31, 2021 and 2020, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at December 31, 2021 is 12 months for foreign exchange contracts. There were no outstanding interest rate contracts designated as cash flow hedges as of December 31, 2021 and 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.

There were no outstanding interest rate contracts designated as fair value hedges as of December 31, 2021 and 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 of the outstanding debt balances are recorded as a component of AOCI. As of December 31, 2021, we had an accumulated pre-tax unrealized translation loss in AOCI of $45 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 hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings. There were no cash flow hedge dedesignations in 2021, 2020 or 2019 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur. In 2020, we terminated interest rate contracts with a notional amount of $550 million for

$173 million in cash payments. The losses relating to these terminations continue to be deferred and are being recognized consistent with the underlying hedged item, interest expense on the issuance of debt.

If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged item at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated in 2021, 2020 or 2019.

If we remove a net investment hedge designation, any gain or loss recognized in AOCI is not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged. In 2019, we dedesignated €1.2 billion of forward contracts designated as a net investment hedge of our European operations. There were no net investment hedges terminated in 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 $851 million and $1.0 billion as of December 31, 2021 and 2020, respectively.

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 consolidated financial statements for the years ended December 31, 2021, 2020, and 2019.

(in millions)			Gain (loss) recognized in OCI									Location of gain (loss) in income statement			Gain (loss) reclassified from AOCI into income
2021			2020			2019			2021			2020			2019
Cash flow hedges
Interest rate contracts			$	—		$	(131)		$	(37)		Interest expense, net			$	(6)		$	(1)		$	—
Foreign exchange contracts			5			(21)			(9)			Cost of sales			(23)			(5)			4
Net investment hedges			200			(224)			12			Other expense, net			—			—			—
Total			$	205		$	(376)		$	(34)					$	(29)		$	(6)		$	4

			Location of gain (loss) in income statement						Gain (loss) recognized in income
(in millions)									2021			2020			2019
Undesignated derivative instruments
Foreign exchange contracts			Other expense, net						$	(36)		$	49		$	17

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

as of and for the year ended December 31 (in millions)			2021			2020			2019
Accumulated other comprehensive income (loss) balance at beginning of year			$	(153)		$	(41)		$	(1)
Adoption of new accounting standard			—			—			(1)
(Loss) gain in fair value of derivatives during the year			4			(117)			(36)
Amount reclassified to earnings during the year			23			5			(3)
Accumulated other comprehensive income (loss) balance at end of year			$	(126)		$	(153)		$	(41)

As of December 31, 2021, $2 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 consolidated balance sheet as of December 31, 2021.

			Derivatives in asset positions									Derivatives in liability positions
(in millions)			Balance sheet location			Fair value						Balance sheet location			Fair value
Derivative instruments designated as hedges
Foreign exchange contracts			Prepaid expenses and other current assets			$	6					Accrued expenses and other current liabilities			$	3
Total derivative instruments designated as hedges						6									3
Undesignated derivative instruments
Foreign exchange contracts			Prepaid expenses and other current assets			2						Accrued expenses and other current liabilities			2
Total derivative instruments						$	8								$	5

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

			Derivatives in asset positions									Derivatives in liability positions
(in millions)			Balance sheet location			Fair value						Balance sheet location			Fair value
Derivative instruments designated as hedges
Foreign exchange contracts			Prepaid expenses and other current assets			—						Accrued expenses and other current liabilities			17
Total derivative instruments designated as hedges						—									17
Undesignated derivative instruments
Foreign exchange contracts			Prepaid expenses and other current assets			11						Accrued expenses and other current liabilities			2
Total derivative instruments						$	11								$	19

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 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.

			December 31, 2021									December 31, 2020
(in millions)			Asset			Liability						Asset			Liability
Gross amounts recognized in the consolidated balance sheets			$	8		$	5					$	11		$	19
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheets			(2)			(2)						(6)			(6)
Total			$	6		$	3					$	5		$	13

The following table presents the amounts recorded on the consolidated balance sheets 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)
(in millions)			Balance as of December 31, 2021			Balance as of December 31, 2020						Balance as of December 31, 2021			Balance as of December 31, 2020
Long-term debt			$	101		$	102					$	4		$	5

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

NOTE 16

FAIR VALUE MEASUREMENTS

The fair value hierarchy consists of the following three levels:

• Level 1 — Quoted prices in active markets that we have the ability to access for identical assets or liabilities;

• Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and

• Level 3 — Valuations using significant inputs that are unobservable in the market and include the use of judgment by management about the assumptions market participants would use in pricing the asset or liability.

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

						Basis of fair value measurement
(in millions)			Balance as of December 31, 2021			Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Assets
Foreign exchange contracts			$	8		$	—		$	8		$	—
Debt securities			30			—			—			30
Marketable equity securities			10			10			—			—
Total			$	48		$	10		$	8		$	30
Liabilities
Foreign exchange contracts			$	5		$	—		$	5		$	—
Contingent payments related to acquisitions			143			—			—			143
Total			$	148		$	—		$	5		$	143

						Basis of fair value measurement
(in millions)			Balance as of December 31, 2020			Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Assets
Foreign exchange contracts			$	11		$	—		$	11		$	—
Debt securities			13			—			13			—
Marketable equity securities			17			17			—			—
Total			$	41		$	17		$	24		$	—
Liabilities
Foreign exchange contracts			$	19		$	—		$	19		$	—
Contingent payments related to acquisitions			30			—			—			30
Total			$	49		$	—		$	19		$	30

As of December 31, 2021 and 2020, cash and cash equivalents of $3.0 billion and $3.7 billion, respectively, included money market and other short-term funds of approximately $816 million and $1.8 billion, respectively, which are considered Level 2 in the fair value hierarchy.

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

Debt securities were reclassified to Level 3 as of December 31, 2021 because there were no observable transactions for those debt securities near the balance sheet date. There was no change in the estimated fair value of those debt securities for the year ended December 31, 2021.

Contingent payments related to acquisitions, which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques. 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 our recurring fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions.

as of and for the years ended December 31 (in millions)			2021			2020
Fair value at beginning of period			$	30		$	39
Additions			135			4
Change in fair value recognized in earnings			(6)			(2)
Payments			(16)			(11)
Fair value at end of period			$	143		$	30

Financial Instruments Not Measured at Fair Value

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

balance sheets and the estimated fair values.

			Book values									Fair values(a)
as of December 31 (in millions)			2021			2020						2021			2020
Liabilities
Short-term debt			$	301		$	—					$	301		$	—
Current maturities of long-term debt and finance lease obligations			210			406						212			409
Long-term debt and finance lease obligations			17,149			5,786						17,568			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 $114 million and $105 million at December 31, 2021 and 2020, respectively. These amounts are included in Other non-current assets on our consolidated balance sheets.

NOTE 17

SEGMENT INFORMATION

We manage our global operations based on four segments, consisting of the following geographic segments related to our legacy Baxter business: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific), and a new global segment for our recently acquired Hillrom business. The Americas, EMEA and APAC segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. The Hillrom segment provides digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, and advanced equipment for the surgical space. In the first quarter of 2021, the information provided to our Chief Executive Officer for purposes of allocating resources and assessing performance was updated to reallocate contracted services activities performed at a German manufacturing facility from our EMEA segment to our Americas segment. The contracted services performed at that facility are part of our BioPharma Solutions business, which is managed as part of the Americas segment. Accordingly, the reported financial results of the Americas segment now include the contracted services activities performed at that facility. Segment results for 2020 and 2019 have been recast to conform to this presentation.

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

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include corporate headquarters costs, certain R&D costs, certain product category support costs, stock compensation expense, certain employee benefit plan costs, certain foreign currency hedging activities, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments). Our chief operating decision maker does not receive any asset information by operating segment and, accordingly, we do not report asset information by operating segment.

Financial information for our segments is as follows:

for the years ended December 31 (in millions)			2021			2020			2019
Net sales:
Americas			$	6,666		$	6,321		$	6,306
EMEA			3,115			2,877			2,756
APAC			2,791			2,475			2,300
Hillrom			212			—			—
Total net sales			$	12,784		$	11,673		$	11,362
Operating income:
Americas			$	2,612		$	2,389		$	2,499
EMEA			632			523			527
APAC			623			591			549
Hillrom			(80)			—			—
Total segment operating income			$	3,787		$	3,503		$	3,575
Depreciation Expense:
Americas			$	257		$	249		$	255
EMEA			147			150			149
APAC			98			94			85
Hillrom			4			—			—
Corporate and other			86			108			117
Total depreciation expense			$	592		$	601		$	606
Capital expenditures:
Americas			$	394		$	380		$	325
EMEA			156			157			143
APAC			82			103			98
Hillrom			5			—			—
Corporate and other			72			84			120
Total capital expenditures			$	709		$	724		$	686

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

for the years ended December 31 (in millions)			2021			2020			2019
Total segment operating income			$	3,787		$	3,503		$	3,575
Corporate and other			(2,077)			(1,887)			(1,803)
Total operating income			1,710			1,616			1,772
Net interest expense			192			134			71
Other expense, net			41			190			731
Income before income taxes			$	1,477		$	1,292		$	970

Geographic information

for the years ended December 31 (in millions)			2021			2020			2019
Net sales:
United States			$	5,180		$	4,878		$	4,826
Latin America and Canada			1,249			1,191			1,268
EMEA			3,552			3,129			2,968
APAC			2,803			2,475			2,300
Total net sales			$	12,784		$	11,673		$	11,362

as of December 31 (in millions)			2021			2020
Property, plant and equipment and operating lease right-of-use assets, net:
United States			$	2,337		$	1,888
EMEA			1,576			1,556
APAC			978			1,024
Latin America and Canada			917			857
Total property, plant and equipment and operating lease right-of-use assets, net			$	5,808		$	5,325

Report of Independent Registered Public Accounting Firm

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

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Baxter International Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedule listed in the index appearing under Item 15 (2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Assessment of Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As described in Management's Assessment of Internal Control Over Financial Reporting, management has excluded Hill-Rom Holdings, Inc. (Hillrom) from its assessment of internal control over financial reporting as of December 31, 2021 because it was acquired by the Company in a purchase business combination during 2021. We have also excluded Hillrom from our audit of internal control over financial reporting. Hillrom is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 6% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

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

As described in Note 13 to the consolidated financial statements, as of December 31, 2021, the Company has $1,462 million of total deferred tax assets, including $339 million of deferred tax assets for U.S. foreign tax credit carryforwards in the United States. The deferred tax assets for U.S. foreign tax credit carryforwards is partially offset by a valuation allowance of $98 million. As disclosed by management, valuation allowances are maintained unless it is more likely than not that all or a portion of the deferred tax asset will be realized. In determining whether a valuation allowance is warranted, management evaluates factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. After evaluating the 2017 Tax Act and related U.S. Treasury Regulations, any elections or other opportunities that may be available, and the future expiration of certain U.S. tax provisions that will impact the utilization of the Company’s U.S. foreign tax credit carryforwards, management expects to be able to realize some, but not all, of the U.S. foreign tax credit deferred tax assets up to its overall domestic loss balance plus other recurring and non-recurring foreign inclusions.

The principal considerations for our determination that performing procedures relating to the valuation allowance on U.S. foreign tax credit carryforwards is a critical audit matter are the significant judgment by management when assessing factors related to expected future earnings, which in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and evaluating audit evidence related to management’s expected future earnings.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls over the valuation allowance on U.S. foreign tax credit carryforwards, including controls over the development of expected future earnings. These procedures also included, among others, evaluating management’s assessment of the realizability of the deferred tax assets, including evaluating the reasonableness of expected future earnings during the applicable periods. Evaluating management’s assumption related to expected future earnings involved evaluating whether the factors were reasonable considering the current and past performance of the Company and evidence obtained in other areas of the audit.

Valuation of Certain Acquired Intangible Assets - Hill-Rom Holdings, Inc. (Hillrom) Acquisition

As described in Note 2 to the consolidated financial statements, on December 13, 2021, the Company acquired all of the outstanding equity interests of Hillrom for a purchase price of $10.5 billion. Management allocated $804 million of the total consideration to the developed technology with a weighted-average useful life of 5 years, $1.9 billion to trade names with an indefinite useful life, and $3.2 billion to customer relationships with a weighted-average useful life of 15 years. The fair values of the intangible assets were determined using the income approach. Significant estimates and assumptions were used by management in establishing the estimated fair value. As disclosed by management, the significant estimates and assumptions inherent in a discounted cash flow analysis (income approach) include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the asset’s life cycle, royalty rates, terminal growth rate, contributory asset charges, and customer attrition rates. Each of these factors and assumptions can significantly affect the value of the intangible asset.

The principal considerations for our determination that performing procedures relating to the valuation of certain acquired intangible assets in connection with the Hillrom acquisition is a critical audit matter are (i) the significant judgment by management when developing the fair value of the developed technology, trade names and customer relationships intangible assets; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the amount and timing of future projected cash flows for each of the aforementioned intangible assets, the royalty rates for the developed technology and trade names intangible assets, the attrition rates, discount rate and contributory asset charges for the customer relationships intangible asset, and the asset’s life cycle and discount rate for the trade names intangible asset; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to acquisition accounting, including controls over management’s valuation of the intangible assets and controls over the development of the assumptions related to the amount and timing of projected future cash flows, the discount rates, the asset’s life cycle, royalty rates, terminal growth rate, contributory asset charges, and customer attrition rates. These procedures also included, among others, (i) reading the purchase agreement, and (ii) testing management’s process for estimating the fair value of intangible assets. Testing management’s process included (i) evaluating the appropriateness of the income approaches used to fair value the intangible assets, (ii) testing the completeness and accuracy of data provided by management, and (iii) evaluating the reasonableness of the significant assumptions related to the amount and timing of projected future cash flows, the discount rates, the asset’s life cycle, royalty rates, terminal growth rate, contributory asset charges, and customer attrition rates. Evaluating management’s assumptions involved evaluating whether the assumptions used were reasonable considering current and past performance of the acquired entity, consistency with external market and industry data, and consistency with evidence obtained in other areas of the audit, as applicable. Professionals with specialized skill and knowledge were used to assist in the evaluation of management’s income approaches and the discount rates, the asset’s life cycle, royalty rates, terminal growth rate, contributory asset charges, and customer attrition rates assumptions.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 23, 2022

We have served as the Company’s auditor since 1985.