Item 1. Financial Statements

Baxter International Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in millions, except share information)

			March 31, 2023			December 31, 2022
Current assets:
Cash and cash equivalents			$	1,673		$	1,718
Accounts receivable, net of allowances of $122 in 2023 and $114 in 2022			2,547			2,659
Inventories			2,922			2,718
Prepaid expenses and other current assets			957			916
Total current assets			8,099			8,011
Property, plant and equipment, net			5,000			4,979
Goodwill			6,868			6,843
Other intangible assets, net			6,640			6,793
Operating lease right-of-use assets			554			550
Other non-current assets			1,130			1,111
Total assets			$	28,291		$	28,287
Current liabilities:
Short-term debt			$	50		$	299
Current maturities of long-term debt and finance lease obligations			1,103			1,105
Accounts payable			1,290			1,139
Accrued expenses and other current liabilities			2,317			2,202
Total current liabilities			4,760			4,745
Long-term debt and finance lease obligations, less current portion			15,278			15,232
Operating lease liabilities			458			456
Other non-current liabilities			1,854			1,959
Total liabilities			22,350			22,392
Commitments and contingencies
Equity:
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2023 and 2022			683			683
Common stock in treasury, at cost,177,658,649 shares in 2023 and 179,062,594 shares in 2022			(11,324)			(11,389)
Additional contributed capital			6,312			6,322
Retained earnings			13,947			14,050
Accumulated other comprehensive income (loss)			(3,739)			(3,833)
Total Baxter stockholders’ equity			5,879			5,833
Noncontrolling interests			62			62
Total equity			5,941			5,895
Total liabilities and equity			$	28,291		$	28,287

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

Baxter International Inc.

Condensed Consolidated Statements of Income (unaudited)

(in millions, except per share data)

			Three months ended March 31,
			2023			2022
Net sales			$	3,649		$	3,707
Cost of sales			2,302			2,359
Gross margin			1,347			1,348
Selling, general and administrative expenses			1,010			1,052
Research and development expenses			164			150
Other operating income, net			(13)			(17)
Operating income			186			163
Interest expense, net			117			85
Other income, net			(1)			(16)
Income before income taxes			70			94
Income tax expense			25			21
Net income			45			73
Net income attributable to noncontrolling interests			1			2
Net income attributable to Baxter stockholders			$	44		$	71
Earnings per share
Basic			$	0.09		$	0.14
Diluted			$	0.09		$	0.14
Weighted-average number of shares outstanding
Basic			505			503
Diluted			507			509

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

Baxter International Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(in millions)

			Three months ended March 31,
			2023			2022
Net income			$	45		$	73
Other comprehensive income (loss), net of tax:
Currency translation adjustments, net of tax expense (benefit) of ($13) and $(11) for the three months ended March 31, 2023 and 2022, respectively.			102			(15)
Pension and other postretirement benefits, net of tax expense (benefit) of ($1) and $3 for the three months ended March 31, 2023 and 2022, respectively.			(6)			9
Hedging activities, net of tax expense (benefit) of ($1) for the three months ended March 31, 2023 and 2022.			(2)			(2)
Available-for-sale debt securities, net of tax expense of zero and $1 for the three months ended March 31, 2023 and 2022, respectively.			—			1
Total other comprehensive income (loss), net of tax			94			(7)
Comprehensive income			139			66
Less: Comprehensive income attributable to noncontrolling interests			1			2
Comprehensive income attributable to Baxter stockholders			$	138		$	64

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

Baxter International Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)

(in millions)

			For the three months ended March 31, 2023
			Baxter International Inc. stockholders' equity
			Common stock shares			Common stock			Common stock shares in treasury			Common stock in treasury			Additional contributed capital			Retained earnings			Accumulated other comprehensive income (loss)			Total Baxter stockholders' equity			Noncontrolling interests			Total equity
Balance as of January 1, 2023			683			$	683		179			$	(11,389)		$	6,322		$	14,050		$	(3,833)		$	5,833		$	62		$	5,895
Net income			—			—			—			—			—			44			—			44			1			45
Other comprehensive income			—			—			—			—			—			—			94			94			—			94
Stock issued under employee benefit plans and other			—			—			(1)			65			(10)			—			—			55			—			55
Dividends declared on common stock			—			—			—			—			—			(147)			—			(147)			—			(147)
Change in noncontrolling interests			—			—			—			—			—			—			—			—			(1)			(1)
Balance as of March 31, 2023			683			$	683		178			$	(11,324)		$	6,312		$	13,947		$	(3,739)		$	5,879		$	62		$	5,941

			For the three months ended March 31, 2022
			Baxter International Inc. stockholders' equity
			Common stock shares			Common stock			Common stock shares in treasury			Common stock in treasury			Additional contributed capital			Retained earnings			Accumulated other comprehensive income (loss)			Total Baxter stockholders' equity			Noncontrolling interests			Total equity
Balance as of January 1, 2022			683			$	683		182			$	(11,488)		$	6,197		$	17,065		$	(3,380)		$	9,077		$	44		$	9,121
Net income			—			—			—			—			—			71			—			71			2			73
Other comprehensive income			—			—			—			—			—			—			(7)			(7)			—			(7)
Stock issued under employee benefit plans and other			—			—			(2)			66			10			—			—			76			—			76
Dividends declared on common stock			—			—			—			—			—			(142)			—			(142)			—			(142)
Change in noncontrolling interests			—			—			—			—			—			—			—			—			(2)			(2)
Balance as of March 31, 2022			683			$	683		180			$	(11,422)		$	6,207		$	16,994		$	(3,387)		$	9,075		$	44		$	9,119

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

Baxter International Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in millions)

			Three months ended March 31,
			2023			2022
Cash flows from operations
Net income			$	45		$	73
Adjustments to reconcile net income to cash flows from operations:
Depreciation and amortization			319			380
Deferred income taxes			(50)			(55)
Stock compensation			25			32
Net periodic pension and other postretirement costs			(4)			14
Other			14			(12)
Changes in balance sheet items:
Accounts receivable, net			136			153
Inventories			(181)			(105)
Prepaid expenses and other current assets			(39)			(13)
Accounts payable			157			5
Accrued expenses and other current liabilities			93			(221)
Other			(36)			(43)
Cash flows from operations			479			208
Cash flows from investing activities
Capital expenditures			(172)			(140)
Acquisitions, net of cash acquired, and investments			(3)			(174)
Other investing activities, net			5			10
Cash flows from investing activities			(170)			(304)
Cash flows from financing activities
Repayments of debt			(3)			(404)
Net decreases in debt with original maturities of three months or less			(249)			(45)
Cash dividends on common stock			(146)			(140)
Proceeds from stock issued under employee benefit plans			36			66
Other financing activities, net			(10)			(25)
Cash flows from financing activities			(372)			(548)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash			18			(13)
Decrease in cash, cash equivalents and restricted cash			(45)			(657)
Cash, cash equivalents and restricted cash at beginning of period (1)			1,722			2,956
Cash, cash equivalents and restricted cash at end of period (1)			$	1,677		$	2,299

(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to the amounts reported within the condensed consolidated balance sheet as of March 31, 2023, December 31, 2022, and March 31, 2022 (in millions):

			March 31, 2023			December 31, 2022			March 31, 2022
Cash and cash equivalents			$	1,673		$	1,718		$	2,294
Restricted cash included in prepaid expenses and other current assets			4			4			5
Cash, cash equivalents and restricted cash			$	1,677		$	1,722		$	2,299

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

Baxter International Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (we, our or Baxter) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) in the United States have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Annual Report).

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

In January 2023, we announced our intention to separate our Renal Care and Acute Therapies product categories into a new, publicly traded company. While the completion of the proposed spinoff is subject to satisfaction of customary conditions, we are targeting completion of the planned separation by July 2024 or earlier. Additionally, we announced that we are pursuing strategic alternatives (including a potential sale) for our BioPharma Solutions product category.

Risks and Uncertainties

Supply Constraints and Global Economic Conditions

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

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

2. SUPPLEMENTAL FINANCIAL INFORMATION

Allowance for Doubtful Accounts

The following table is a summary of the changes in our allowance for doubtful accounts for the three months ended March 31, 2023 and 2022.

			Three months ended March 31,
(in millions)			2023			2022
Balance at beginning of period			$	114		$	122
Charged to costs and expenses			7			6
Write-offs			(1)			(1)
Currency translation adjustments			2			2
Balance at end of period			$	122		$	129

Inventories

(in millions)			March 31, 2023			December 31, 2022
Raw materials			$	812		$	738
Work in process			316			293
Finished goods			1,794			1,687
Inventories			$	2,922		$	2,718

Property, Plant and Equipment, Net

(in millions)			March 31, 2023			December 31, 2022
Property, plant and equipment, at cost			$	11,622		$	11,421
Accumulated depreciation			(6,622)			(6,442)
Property, plant and equipment, net			$	5,000		$	4,979

Interest Expense, Net

			Three months ended March 31,
(in millions)			2023			2022
Interest expense, net of capitalized interest			$	127		$	88
Interest income			(10)			(3)
Interest expense, net			$	117		$	85

Other Income, Net

			Three months ended March 31,
(in millions)			2023			2022
Foreign exchange (gains) losses, net			$	14		$	(11)
Pension and other postretirement benefit plans			(10)			(5)
Change in fair value of marketable equity securities			(5)			1
Other, net			—			(1)
Other income, net			$	(1)		$	(16)

Non-Cash Operating and Investing Activities

Right-of-use operating lease assets obtained in exchange for lease obligations for the three months ended March 31, 2023 and 2022 were $26 million and $14 million, respectively.

Purchases of property, plant and equipment included in accounts payable as of March 31, 2023 and 2022 were $70 million and $53 million, respectively.

3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by business segment.

(in millions)			Americas			EMEA			APAC			Hillrom			Total
Balance as of December 31, 2022			$	2,356		$	289		$	210		$	3,988		$	6,843
Currency translation			18			2			2			3			25
Balance as of March 31, 2023			$	2,374		$	291		$	212		$	3,991		$	6,868

For the periods ended March 31, 2023 and 2022, there were no reductions in goodwill relating to impairment losses.

Other intangible assets, net

The following is a summary of our other intangible assets.

												Indefinite-lived intangible assets
(in millions)			Customer relationships			Developed technology, including patents			Other amortized intangible assets			Trade names			In process Research and Development			Total
March 31, 2023
Gross other intangible assets			$	3,454		$	3,862		$	326		$	1,571		$	202		$	9,415
Accumulated amortization			(529)			(2,000)			(246)			—			—			(2,775)
Other intangible assets, net			$	2,925		$	1,862		$	80		$	1,571		$	202		$	6,640
December 31, 2022
Gross other intangible assets			$	3,452		$	3,836		$	325		$	1,571		$	202		$	9,386
Accumulated amortization			(470)			(1,888)			(235)			—			—			(2,593)
Other intangible assets, net			$	2,982		$	1,948		$	90		$	1,571		$	202		$	6,793

Intangible asset amortization expense was $162 million and $217 million for the three months ended March 31, 2023 and 2022, respectively.

4. FINANCING ARRANGEMENTS

Credit Facilities

In the first quarter of 2023, we amended the credit agreements governing our U.S. dollar-denominated term loan credit facility and revolving credit facility and the guaranty agreement with respect to our Euro-denominated revolving credit facility, in each case to amend the net leverage ratio covenant to increase the maximum net leverage ratio for the four fiscal quarters ending March 31, 2023, June 30, 2023, September 30, 2023 and December 31, 2023.

Our U.S. dollar-denominated revolving credit facility has a capacity of $2.5 billion and our Euro-denominated revolving credit facility has a capacity of €200 million. Each of the facilities matures in 2026. There were no borrowings outstanding under these credit facilities as of March 31, 2023 or December 31, 2022. Our commercial paper borrowing arrangements require us to maintain undrawn borrowing capacity under our credit facilities for an amount at least equal to our outstanding commercial paper borrowings. Based on our covenant calculations as of March 31, 2023 we have capacity to draw approximately $2.2 billion under our credit facilities, less commercial paper borrowings which were $50 million as of March 31, 2023.

Commercial Paper

As of March 31, 2023, we had $50 million of commercial paper outstanding with a weighted-average interest rate of 5.42% and an original weighted-average term of 28 days. As of December 31, 2022, we had $299 million of commercial paper outstanding with a weighted-average interest rate of 4.75% and an original weighted-average term of 32 days.

5. COMMITMENTS AND CONTINGENCIES

We are involved in product liability, patent, commercial, and other legal matters that arise in the normal course of our business. We record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of March 31, 2023 and December 31, 2022, our total recorded reserves with respect to legal and environmental matters were $29 million and $28 million, respectively.

We have established reserves for certain of the matters discussed below. We are not able to estimate the amount or range of any loss for certain contingencies for which there is no reserve or additional loss for matters already reserved. While our liability in connection with these claims cannot be estimated and the resolution thereof in any reporting period could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial

position. While we believe that we have valid defenses in the matters set forth below, litigation is inherently uncertain, excessive verdicts do occur, and we may incur material judgments or enter into material settlements of claims.

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

Environmental

We are involved as a potentially responsible party (PRP) for environmental clean-up costs at six Superfund sites. Under the U.S. Superfund statute and many state laws, generators of hazardous waste sent to a disposal or recycling site are liable for site cleanup if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Separate from these Superfund cases noted above, we are involved in an ongoing environmental remediations associated with historic operations at certain of our facilities. As of March 31, 2023 and December 31, 2022, our environmental reserves, which are measured on an undiscounted basis, were $17 million and $19 million, respectively. After considering these reserves, the outcome of these matters is not expected to have a material adverse effect on our financial position or results of operations.

General Litigation

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

In March 2020, two lawsuits were filed against us in the Northern District of Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used in our manufacturing facility in Mountain Home, Arkansas to sterilize certain of our products. The plaintiffs sought damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief. The parties reached agreement to settle these lawsuits in the third quarter of 2021 for amounts that were not material to our financial results, which were paid in the fourth quarter of 2021. We have since resolved, without litigation, additional claims of injuries from exposure to ethylene oxide at Mountain Home for amounts within accruals previously established as of December 31, 2021. On October 20, 2022, a lawsuit was filed against us in the Western District of Arkansas alleging injury as a result of exposure to ethylene oxide at Mountain Home. On December 16, 2022, we filed a motion to dismiss and for a more definite statement. In response, Plaintiffs filed a First Amended Complaint on January 6, 2023. We answered the First Amended Complaint on January 27, 2023.

We acquired Hill-Rom Holdings, Inc. (Hillrom) on December 13, 2021. In July 2021, Hill-Rom, Inc., a wholly-owned subsidiary of Hillrom, 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 Department of Justice (DOJ) to provide information responsive to the subpoena. Hillrom also voluntarily began a related internal review and Hillrom and now Baxter have been cooperating fully with the DHHS and the DOJ with respect to these matters. In October 2022, the DOJ issued a separate Civil Investigative Demand (CID) addressed to Hillrom, requesting documents and information related to compliance with the False Claims Act and the Anti-Kickback Statute. Baxter is cooperating fully with the DOJ in responding to the CID. The DHHS and DOJ often issue these types of requests when investigating alleged violations of the False Claims Act.

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

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

6. STOCKHOLDERS’ EQUITY

Cash Dividends

Cash dividends declared per share for the three months ended March 31, 2023 and 2022 were $0.29 and $0.28, respectively.

Stock Repurchase Programs

In July 2012, our Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. Our Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. During the first quarter of 2023 and 2022, we did not repurchase any shares under this authority. We had $1.3 billion remaining available under the authorization as of March 31, 2023.

7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

The following table is a net-of-tax summary of the changes in accumulated other comprehensive income (loss) (AOCI) by component for the three months ended March 31, 2023 and 2022.

			Gains (losses)
(in millions)			CTA			Pension and OPEB plans			Hedging activities			Available-for-sale debt securities			Total
Balance as of December 31, 2022			$	(3,386)		$	(331)		$	(119)		$	3		$	(3,833)
Other comprehensive income (loss) before reclassifications			102			(3)			—			—			99
Amounts reclassified from AOCI (a)			—			(3)			(2)			—			(5)
Net other comprehensive income (loss)			102			(6)			(2)			—			94
Balance as of March 31, 2023			$	(3,284)		$	(337)		$	(121)		$	3		$	(3,739)

			Gains (losses)
(in millions)			CTA			Pension and OPEB plans			Hedging activities			Available-for-sale debt securities			Total
Balance as of December 31, 2021			$	(2,907)		$	(347)		$	(126)		$	—		$	(3,380)
Other comprehensive income (loss) before reclassifications			(15)			2			(1)			1			(13)
Amounts reclassified from AOCI (a)			—			7			(1)			—			6
Net other comprehensive income (loss)			(15)			9			(2)			1			(7)
Balance as of March 31, 2022			$	(2,922)		$	(338)		$	(128)		$	1		$	(3,387)

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

The following is a summary of the amounts reclassified from AOCI to net income during the three months ended March 31, 2023 and 2022.

			Amounts reclassified from AOCI (a)
(in millions)			Three months ended March 31, 2023			Three months ended March 31, 2022			Location of impact in income statement
Pension and OPEB items
Amortization of net losses and prior service costs or credits			$	5		$	(9)		Other income, net
Less: Tax effect			(2)			2			Income tax expense
			$	3		$	(7)		Net of tax
Gains (losses) on hedging activities
Foreign exchange contracts			$	4		$	2		Cost of sales
Interest rate contracts			(1)			(1)			Interest expense, net
			3			1			Total before tax
Less: Tax effect			(1)			—			Income tax expense
			$	2		$	1		Net of tax
Total reclassifications for the period			$	5		$	(6)		Total net of tax

(a) Amounts in parentheses indicate reductions to net income

Refer to Note 10 for additional information regarding the amortization of pension and OPEB items and Note 13 for additional information regarding hedging activity.

8. REVENUES

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of our contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Our global payment terms are typically between 30-90 days.

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

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

As of March 31, 2023, we had $9.9 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of more than one year, which are primarily included in the Americas segment. Some contracts in the United States included in this amount contain index-dependent price increases, which are not known at this time. We expect to recognize approximately 25% of this amount as revenue over the remainder of 2023, 35% in 2024, 20% in 2025, 10% in 2026 and 10% thereafter.

Significant Judgments

Revenues from product sales are recorded at the net sales price, which includes estimates of variable consideration primarily related to rebates and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in accrued expenses and other current liabilities and accounts receivable, net on the condensed consolidated balance sheets. Management's estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract using the expected value method. The amount of variable consideration included in the net sales price is limited to the amount for which it is probable that a significant reversal in revenue will not occur when the related uncertainty is resolved. Revenue recognized during the three months ended March 31, 2023 and 2022 related to performance obligations satisfied in prior periods was not material. Additionally, our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately and determining the allocation of the transaction price may require significant judgement.

Contract Balances

The timing of revenue recognition, billings and cash collections results in the recognition of trade accounts receivable, unbilled receivables, contract assets and customer advances and deposits (contract liabilities) on our condensed consolidated balance sheets. Net trade accounts receivable was $2.3 billion and $2.4 billion as of March 31, 2023 and December 31, 2022, respectively.

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

The following table summarizes our contract assets:

(in millions)			March 31, 2023			December 31, 2022
Contract manufacturing services			$	49		$	51
Software sales			42			43
Bundled equipment and consumable medical products contracts			120			121
Contract assets			$	211		$	215

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

The following table summarizes contract liability activity for the three months ended March 31, 2023 and 2022. The contract liability balance represents the transaction price allocated to the remaining performance obligations.

			Three Months Ended March 31,
(in millions)			2023			2022
Balance at beginning of period			$	244		$	246
New revenue deferrals			113			116
Revenue recognized upon satisfaction of performance obligations			(121)			(122)
Currency translation			1			—
Balance at end of period			$	237		$	240

For the three months ended March 31, 2023 and 2022, $68 million and $50 million of revenue was recognized that was included in contract liabilities as of December 31, 2022 and 2021, respectively.

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

(in millions)			March 31, 2023			December 31, 2022
Prepaid expenses and other current assets			$	92		$	93
Other non-current assets			119			122
Contract assets			$	211		$	215
Accrued expenses and other current liabilities			$	160		$	164
Other non-current liabilities			77			80
Contract liabilities			$	237		$	244

Disaggregation of Net Sales

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

			Three Months Ended March 31,
			2023									2022
(in millions)			U.S.			International			Total			U.S.			International			Total
Renal Care 1			$	232		$	660		$	892		$	225		$	669		$	894
Medication Delivery 2			436			251			687			472			234			706
Pharmaceuticals 3			173			350			523			157			364			521
Clinical Nutrition 4			78			146			224			84			143			227
Advanced Surgery 5			144			102			246			136			92			228
Acute Therapies 6			61			119			180			68			120			188
BioPharma Solutions 7			69			70			139			52			104			156
Patient Support Systems 8			260			88			348			295			88			383
Front Line Care 9			221			81			302			207			87			294
Global Surgical Solutions 10			38			43			81			37			41			78
Other 11			22			5			27			24			8			32
Total Baxter			$	1,734		$	1,915		$	3,649		$	1,757		$	1,950		$	3,707

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

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

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

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

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

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

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

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

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

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

11Other includes sales of miscellaneous product and service offerings.

Lease Revenue

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

The components of lease revenue for the three months ended March 31, 2023 and 2022 were:

(in millions)			Three months ended March 31, 2023			Three months ended March 31, 2022
Sales-type lease revenue			$	4		$	3
Operating lease revenue			124			122
Variable lease revenue			15			20
Total lease revenue			$	143		$	145

Our net investment in sales-type leases was $82 million as of March 31, 2023, of which $24 million originated in 2019 and prior, $21 million in 2020, $20 million in 2021, $14 million in 2022, and $3 million in 2023.

9. 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 March 31, 2023, we have incurred cumulative pre-tax costs of $1.6 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation. We currently expect to incur additional pre-tax costs, primarily related to implementation of business optimization programs, of approximately $24 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives, including those related the ongoing implementation of our previously announced new operating model intended to simplify and streamline our operations, and, to the extent further cost savings opportunities are identified, we would incur additional restructuring charges and costs to implement business optimization programs in future periods.

During the three months ended March 31, 2023 and 2022, we recorded the following charges related to business optimization programs.

			Three Months Ended March 31,
(in millions)			2023			2022
Restructuring charges			$	110		$	67
Costs to implement business optimization programs			24			14
Total business optimization charges			$	134		$	81

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

Costs to implement business optimization programs for the three months ended March 31, 2023 and 2022, respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs. These costs were primarily included within cost of sales and SG&A expense.

During the three months ended March 31, 2023 and 2022, we recorded the following restructuring charges.

			Three months ended March 31, 2023
(in millions)			COGS			SG&A			R&D			Total
Employee termination costs			$	17		$	63		$	7		$	87
Contract termination and other costs			3			—			—			3
Asset impairments			12			8			—			20
Total restructuring charges			$	32		$	71		$	7		$	110

			Three months ended March 31, 2022
(in millions)			COGS			SG&A			R&D			Total
Employee termination costs			$	2		$	47		$	—		$	49
Contract termination and other costs			—			12			—			12
Asset impairments			—			6			—			6
Total restructuring charges			$	2		$	65		$	—		$	67

For the three months ended March 31, 2023, $78 million of the restructuring charges reflected in the table above, consisting of employee termination costs, were related to the ongoing implementation of our previously announced new operating model intended to simplify and streamline our operations.

For the three months ended March 31, 2022, $56 million of the restructuring charges reflected in the table above were related to integration activities for the Hillrom acquisition, consisting of $38 million of employee termination costs, $12 million of contract termination and other costs and $6 million of asset impairments.

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

(in millions)
Liability balance as of December 31, 2022			$	107
Charges			93
Payments			(23)
Reserve adjustments			(3)
Currency translation			1
Liability balance as of March 31, 2023			$	175

Substantially all of our restructuring liabilities as of March 31, 2023 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 2024.

10. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS

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

			Three months ended March 31,
(in millions)			2023			2022
Pension benefits
Service cost			$	6		$	19
Interest cost			37			24
Expected return on plan assets			(44)			(39)
Amortization of net losses and prior service costs			1			12
Net periodic pension cost			$	—		$	16
OPEB
Interest cost			$	2		$	1
Amortization of net loss and prior service credit			(6)			(3)
Net periodic OPEB cost (income)			$	(4)		$	(2)

11. INCOME TAXES

Our effective income tax rate was 35.7% and 22.3% for the three months ended March 31, 2023 and 2022, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances, increases or decreases in liabilities for uncertain tax positions and excess tax benefits or shortfalls on stock compensation awards.

For the three months ended March 31, 2023, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to tax shortfalls on stock compensation awards and an increase in our liabilities for uncertain tax positions, partially offset by a favorable geographic earnings mix.

For the three months ended March 31, 2022, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to discrete tax matters in various foreign jurisdictions, of which none were individually material, and an increase in our liabilities for uncertain tax positions, partially offset by excess tax benefits on stock compensation awards and a favorable geographic earnings mix.

12. 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.

			Three months ended March 31,
(in millions)			2023			2022
Basic shares			505			503
Effect of dilutive securities			2			6
Diluted shares			507			509

The effect of dilutive securities includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excludes 17 million and 4 million shares issuable under equity awards for the three months ended March 31, 2023 and 2022, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS.

13. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, British Pound, Chinese 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.

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

Cash Flow Hedges

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

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

The notional amounts of foreign exchange contracts designated as cash flow hedges were $386 million and $398 million as of March 31, 2023 and December 31, 2022, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at March 31, 2023 is 12 months for foreign exchange contracts. There were no outstanding interest rate contracts designated as cash flow hedges as of March 31, 2023 and December 31, 2022.

Fair Value Hedges

We periodically use interest rate swaps to convert a portion of our fixed-rate debt into variable-rate debt. These instruments hedge our earnings from changes in the fair value of debt due to fluctuations in the designated benchmark interest rate. For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets changes in fair value attributable to a particular risk, such as changes in interest rates, of the hedged item, which are also recognized in earnings. Changes in the fair value of hedge instruments designated as fair value hedges are classified in interest expense, net, as they hedge the interest rate risk associated with certain of our fixed-rate debt.

There were no outstanding interest rate contracts designated as fair value hedges as of March 31, 2023 and December 31, 2022.

Net Investment Hedges

In May 2017, we issued €600 million of senior notes due May 2025. In May 2019, we issued €750 million of senior notes due May 2024 and €750 million of senior notes due May 2029. We have designated these debt obligations as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments on the outstanding debt balances are recorded as a component of AOCI. As of March 31, 2023, we had an accumulated pre-tax unrealized translation gain in AOCI of $47 million related to the Euro-denominated senior notes.

Dedesignations

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

There were no cash flow hedge dedesignations in the first three months of 2023 or 2022 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur.

If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged item at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated during the first three months of 2023 or 2022.

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. There were no net investment hedges terminated during the first three months of 2023 or 2022.

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 $632 million as of March 31, 2023 and $753 million as of December 31, 2022.

Gains and Losses on Hedging Instruments and Undesignated Derivative Instruments

The following tables summarize the gains and losses on our hedging instruments and the classification of those gains and losses within our condensed consolidated financial statements for the three months ended March 31, 2023 and 2022.

			Gain (loss) recognized in OCI												Location of gain (loss) in income statement			Gain (loss) reclassified from AOCI into income
(in millions)			2023						2022						2023						2022
Cash flow hedges
Interest rate contracts			$	—					$	—					Interest expense, net			$	(1)					$	(1)
Foreign exchange contracts			—						(3)						Cost of sales			4						2
Net investment hedges			(48)						42						Other income, net			—						—
Total			$	(48)					$	39								$	3					$	1

			Location of gain (loss) in income statement			Gain (loss) recognized in income
(in millions)			2023						2022
Undesignated derivative instruments
Foreign exchange contracts			Other income, net			$	(3)					$	3

As of March 31, 2023, $3 million of deferred, net after-tax losses on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

Derivative Assets and Liabilities

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of March 31, 2023.

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

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2022.

			Derivatives in asset positions									Derivatives in liability positions
(in millions)			Balance sheet location			Fair value						Balance sheet location			Fair value
Derivative instruments designated as hedges
Foreign exchange contracts			Prepaid expenses and other current assets			$	8					Accrued expenses and other current liabilities			$	5
Total derivative instruments designated as hedges						8									5
Undesignated derivative instruments
Foreign exchange contracts			Prepaid expenses and other current assets			6						Accrued expenses and other current liabilities			7
Total derivative instruments						$	14								$	12

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

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

			March 31, 2023									December 31, 2022
(in millions)			Asset			Liability						Asset			Liability
Gross amounts recognized in the condensed consolidated balance sheets			$	8		$	8					$	14		$	12
Gross amount subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet			(3)			(3)						(4)			(4)
Total			$	5		$	5					$	10		$	8

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

			Carrying amount of hedged item									Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a)
(in millions)			Balance as of March 31, 2023			Balance as of December 31, 2022						Balance as of March 31, 2023			Balance as of December 31, 2022
Long-term debt			$	101		$	101					$	4		$	4

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

14. FAIR VALUE MEASUREMENTS

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

						Basis of fair value measurement
(in millions)			Balance as of March 31, 2023			Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Assets
Foreign exchange contracts			$	8		$	—		$	8		$	—
Available-for-sale debt securities			42			—			—			42
Marketable equity securities			38			38			—			—
Total			$	88		$	38		$	8		$	42
Liabilities
Foreign exchange contracts			$	8		$	—		$	8		$	—
Contingent payments related to acquisitions			70			—			—			70
Total			$	78		$	—		$	8		$	70

						Basis of fair value measurement
(in millions)			Balance as of December 31, 2022			Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Assets
Foreign exchange contracts			$	14		$	—		$	14		$	—
Available-for-sale debt securities			47			—			—			47
Marketable equity securities			32			32			—			—
Total			$	93		$	32		$	14		$	47
Liabilities
Foreign exchange contracts			$	12		$	—		$	12		$	—
Contingent payments related to acquisitions			84			—			—			84
Total			$	96		$	—		$	12		$	84

As of March 31, 2023 and December 31, 2022, cash and cash equivalents of $1.7 billion, respectively, included money market and other short-term funds of approximately $369 million and $341 million, respectively, which are considered Level 2 in the fair value hierarchy.

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

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

Contingent payments related to acquisitions, which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques. The fair value of milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or the expected timing of payments is accelerated. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increases or the expected timing of payment is accelerated.

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

			Three months ended March 31,
			2023									2022
(in millions)			Contingent payments related to acquisitions			Available-for-sale debt securities						Contingent payments related to acquisitions			Available-for-sale debt securities
Fair value at beginning of period			$	84		$	47					$	143		$	30
Additions			—			—						—			21
Change in fair value recognized in earnings			(13)			—						(17)			—
Change in fair value recognized in AOCI			—			—						—			2
Transfers out of Level 3			—			(5)						—			—
Payments			(1)			—						(2)			—
Fair value at end of period			$	70		$	42					$	124		$	53

Financial Instruments Not Measured at Fair Value

In addition to the financial instruments that we are required to recognize at fair value in the condensed consolidated balance sheets, we have certain financial instruments that are recognized at amortized cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized in the condensed consolidated balance sheets and the estimated fair values as of March 31, 2023 and December 31, 2022.

			Book values									Fair values(a)
(in millions)			2023			2022						2023			2022
Liabilities
Short-term debt			$	50		$	299					$	50		$	299
Current maturities of long-term debt and finance lease obligations			1,103			1,105						1,084			1,079
Long-term debt and finance lease obligations			15,278			15,232						14,011			13,657

(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.

The carrying values of equity investments without readily determinable fair values that we measure at cost, less impairment were $103 million as of March 31, 2023 and $104 million as of December 31, 2022. When applicable, we also adjust the measurement of such equity investments for observable prices in orderly transactions for an identical

or similar investment of the same issuer. Those investments are included in Other non-current assets on our condensed consolidated balance sheets.

15. SEGMENT INFORMATION

We manage our business 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 global segment for our 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.

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, manufacturing variances and centrally managed supply chain costs, product category support costs, stock compensation expense, certain employee benefit plan costs, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments).

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

Financial information for our segments is as follows.

			Three months ended March 31,
(in millions)			2023			2022
Net sales:
Americas			$	1,602		$	1,626
EMEA			714			699
APAC			602			627
Hillrom			731			755
Total net sales			$	3,649		$	3,707
Operating income:
Americas			$	481		$	610
EMEA			106			119
APAC			107			151
Hillrom			158			200
Total segment operating income			$	852		$	1,080

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

			Three months ended March 31,
(in millions)			2023			2022
Total segment operating income			$	852		$	1,080
Corporate and other			(666)			(917)
Total operating income			186			163
Interest expense, net			117			85
Other income, net			(1)			(16)
Income before income taxes			$	70		$	94

We are implementing a new operating model intended to simplify and streamline our operations and we expect that our reportable segments will be changed to align with that new operating model when it is fully implemented, which is currently expected in the second half of 2023.