Item 1. Financial Statements

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Item 1. Financial Statements

Baxter International Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in millions, except share information)


	September 30, 2023		December 31, 2022
Current assets:
Cash and cash equivalents	$	5,788	$	1,718
Accounts receivable, net of allowances of $132 in 2023 and $114 in 2022	2,512		2,571
Inventories	2,873		2,679
Prepaid expenses and other current assets	861		857
Current assets of discontinued operations	—		186
Total current assets	12,034		8,011
Property, plant and equipment, net	4,278		4,695
Goodwill	6,407		6,452
Other intangible assets, net	6,230		6,793
Operating lease right-of-use assets	519		541
Other non-current assets	1,188		1,109
Non-current assets of discontinued operations	—		686
Total assets	$	30,656	$	28,287
Current liabilities:
Short-term debt	$	514	$	299
Current maturities of long-term debt and finance lease obligations	1,912		1,105
Accounts payable	1,246		1,110
Accrued expenses and other current liabilities	2,537		2,170
Current liabilities of discontinued operations	—		61
Total current liabilities	6,209		4,745
Long-term debt and finance lease obligations, less current portion	14,067		15,232
Operating lease liabilities	436		447
Other non-current liabilities	1,778		1,848
Non-current liabilities of discontinued operations	—		120
Total liabilities	22,490		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, 176,198,622 shares in 2023 and 179,062,594 shares in 2022	(11,249)		(11,389)
Additional contributed capital	6,368		6,322
Retained earnings	16,015		14,050
Accumulated other comprehensive income (loss)	(3,716)		(3,833)
Total Baxter stockholders’ equity	8,101		5,833
Noncontrolling interests	65		62
Total equity	8,166		5,895
Total liabilities and equity	$	30,656	$	28,287

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

Baxter International Inc.

Condensed Consolidated Statements of Income (Loss) (unaudited)

(in millions, except per share data)


	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Net sales	$	3,708	$	3,609	$	10,928	$	10,761
Cost of sales	2,591		2,564		7,425		7,083
Gross margin	1,117		1,045		3,503		3,678
Selling, general and administrative expenses	1,002		941		2,961		2,958
Research and development expenses	166		151		495		448
Goodwill impairments	—		2,785		—		2,785
Other operating expense (income), net	—		48		(14)		20
Operating income (loss)	(51)		(2,880)		61		(2,533)
Interest expense, net	128		104		369		278
Other (income) expense, net	(7)		61		33		1
Loss from continuing operations before income taxes	(172)		(3,045)		(341)		(2,812)
Income tax benefit	(223)		(54)		(199)		(14)
Income (loss) from continuing operations	51		(2,991)		(142)		(2,798)
Income from discontinued operations, net of tax	2,460		57		2,559		192
Net income (loss)	2,511		(2,934)		2,417		(2,606)
Net income attributable to noncontrolling interests	3		3		6		8
Net income (loss) attributable to Baxter stockholders	$	2,508	$	(2,937)	$	2,411	$	(2,614)
Income (loss) from continuing operations per common share
Basic	$	0.09	$	(5.94)	$	(0.29)	$	(5.58)
Diluted	$	0.09	$	(5.94)	$	(0.29)	$	(5.58)
Income from discontinued operations per common share
Basic	$	4.85	$	0.11	$	5.06	$	0.38
Diluted	$	4.83	$	0.11	$	5.06	$	0.38
Net income (loss) per common share
Basic	$	4.95	$	(5.83)	$	4.76	$	(5.20)
Diluted	$	4.93	$	(5.83)	$	4.76	$	(5.20)
Weighted-average number of shares outstanding
Basic	507		504		506		503
Diluted	509		504		506		503

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

Baxter International Inc.

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

(in millions)


	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Income (loss) from continuing operations	$	51	$	(2,991)	$	(142)	$	(2,798)
Other comprehensive income (loss) from continuing operations, net of tax:
Currency translation adjustments, net of tax expense (benefit) of $10 and $(16) for the three months ended September 30, 2023 and 2022, respectively, and $1 and ($25) for the nine months ended September 30, 2023 and 2022, respectively.	(67)		(274)		(62)		(650)
Pension and other postretirement benefits, net of tax expense (benefit) of zero and $5 for the three months ended September 30, 2023 and 2022, respectively, and ($3) and $13 the nine months ended September 30, 2023 and 2022, respectively.	(1)		15		(12)		47
Hedging activities, net of tax expense (benefit) of $2 and $5 for the three months ended September 30, 2023 and 2022, respectively, and $3 and $8 for the nine months ended September 30, 2023 and 2022, respectively.	5		16		10		27
Available-for-sale debt securities, net of tax expense of zero for the three months ended September 30, 2023 and 2022 and zero and $1 for the nine months ended September 30, 2023 and 2022, respectively.	—		—		—		2
Total other comprehensive loss from continuing operations, net of tax	(63)		(243)		(64)		(574)
Comprehensive loss from continuing operations	(12)		(3,234)		(206)		(3,372)
Income from discontinued operations, net of tax	2,460		57		2,559		192
Other comprehensive income (loss) from discontinued operations
Currency translation adjustments, net of tax expense (benefit) of zero for the three and nine months ended September 30, 2023 and 2022	165		(45)		185		(101)
Pension and other postretirement benefits, net of tax expense (benefit) of zero for the three and nine months ended September 30, 2023 and 2022	(4)		1		(4)		1
Total other comprehensive income (loss) from discontinued operations	161		(44)		181		(100)
Comprehensive income from discontinued operations	2,621		13		2,740		92
Comprehensive income (loss)	2,609		(3,221)		2,534		(3,280)
Less: Comprehensive income attributable to noncontrolling interests	3		3		6		8
Comprehensive income (loss) attributable to Baxter stockholders	$	2,606	$	(3,224)	$	2,528	$	(3,288)

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

Baxter International Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)

(in millions)


	For the three months ended September 30, 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 July 1, 2023	683	$	683	177	$	(11,296)	$	6,341	$	13,655	$	(3,814)	$	5,569	$	62	$	5,631

Net income	—	—		—	—		—		2,508		—		2,508		3		2,511
Other comprehensive income (loss)	—	—		—	—		—		—		98		98		—		98

Stock issued under employee benefit plans and other	—	—		(1)	47		27		—		—		74		—		74
Dividends declared on common stock	—	—		—	—		—		(148)		—		(148)		—		(148)
Change in noncontrolling interests	—	—		—	—		—		—		—		—		—		—
Balance as of September 30, 2023	683	$	683	176	$	(11,249)	$	6,368	$	16,015	$	(3,716)	$	8,101	$	65	$	8,166



	For the nine months ended September 30, 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	—	—		—	—		—		2,411		—		2,411		6		2,417
Other comprehensive income (loss)	—	—		—	—		—		—		117		117		—		117

Stock issued under employee benefit plans and other	—	—		(3)	140		46		—		—		186		—		186
Dividends declared on common stock	—	—		—	—		—		(446)		—		(446)		—		(446)
Change in noncontrolling interests	—	—		—	—		—		—		—		—		(3)		(3)
Balance as of September 30, 2023	683	$	683	176	$	(11,249)	$	6,368	$	16,015	$	(3,716)	$	8,101	$	65	$	8,166


	For the three months ended September 30, 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 July 1, 2022	683	$	683	180	$	(11,409)	$	6,253	$	17,099	$	(3,767)	$	8,859	$	44	$	8,903

Net loss	—	—		—	—		—		(2,937)		—		(2,937)		3		(2,934)
Other comprehensive income (loss)	—	—		—	—		—		—		(287)		(287)		—		(287)
Purchases of treasury stock	—	—		—	(24)		—		—		—		(24)		—		(24)
Stock issued under employee benefit plans and other	—	—		(1)	27		44		—		—		71		—		71
Dividends declared on common stock	—	—		—	—		—		(147)		—		(147)		—		(147)
Change in noncontrolling interests	—	—		—	—		—		—		—		—		(3)		(3)
Balance as of September 30, 2022	683	$	683	179	$	(11,406)	$	6,297	$	14,015	$	(4,054)	$	5,535	$	44	$	5,579



	For the nine months ended September 30, 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 loss	—	—		—	—		—		(2,614)		—		(2,614)		8		(2,606)
Other comprehensive income (loss)	—	—		—	—		—		—		(674)		(674)		—		(674)
Purchases of treasury stock	—	—		—	(32)		—		—		—		(32)		—		(32)
Stock issued under employee benefit plans and other	—	—		(3)	114		100		—		—		214		—		214
Dividends declared on common stock	—	—		—	—		—		(436)		—		(436)		—		(436)
Change in noncontrolling interests	—	—		—	—		—		—		—		—		(8)		(8)
Balance as of September 30, 2022	683	$	683	179	$	(11,406)	$	6,297	$	14,015	$	(4,054)	$	5,535	$	44	$	5,579

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

Baxter International Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in millions)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operations
Net income (loss)	$	2,417	$	(2,606)
Less: Income from discontinued operations, net of tax	2,559		192
Loss from continuing operations	(142)		(2,798)
Adjustments to reconcile net income to cash flows from operations:
Depreciation and amortization	939		1,054
Deferred income taxes	(597)		(189)
Stock compensation	103		122
Net periodic pension and other postretirement costs	(12)		42
Goodwill impairments	—		2,785
Intangible asset impairments	77		332
Other long-lived asset impairments	461		—
Loss on product divestiture arrangement	—		54
Reclassification of cumulative translation loss to earnings	—		65
Other	45		(34)
Changes in balance sheet items:
Accounts receivable, net	55		(74)
Inventories	(216)		(405)
Prepaid expenses and other current assets	(44)		(106)
Accounts payable	136		81
Accrued expenses and other current liabilities	372		(238)
Other	(80)		(97)


Cash flows from operations - continuing operations	1,097		594
Cash flows from operations - discontinued operations	98		178
Cash flows from operations	1,195		772
Cash flows from investing activities
Capital expenditures	(502)		(438)
Acquisitions, net of cash acquired, and investments	(6)		(206)
Other investing activities, net	19		10
Cash flows from investing activities - continuing operations	(489)		(634)
Cash flows from investing activities - discontinued operations	3,932		(41)
Cash flows from investing activities	3,443		(675)
Cash flows from financing activities
Repayments of debt	(353)		(953)

Net increases in debt with original maturities of three months or less	214		30
Cash dividends on common stock	(439)		(427)
Proceeds from stock issued under employee benefit plans	86		114
Purchases of treasury stock	—		(32)

Other financing activities, net	(62)		(51)
Cash flows from financing activities	(554)		(1,319)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(14)		(130)
Increase (decrease) in cash, cash equivalents and restricted cash	4,070		(1,352)
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)	$	5,792	$	1,604

(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to the amounts reported within the condensed consolidated balance sheet as of September 30, 2023, December 31, 2022, and September 30, 2022 (in millions):


	September 30, 2023		December 31, 2022		September 30, 2022
Cash and cash equivalents	$	5,788	$	1,718	$	1,601
Restricted cash included in prepaid expenses and other current assets	4		4		3
Cash, cash equivalents and restricted cash	$	5,792	$	1,722	$	1,604

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 note 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 Kidney Care business 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.

On September 29, 2023, we completed the sale of our BioPharma Solutions (BPS) business and received net pre-tax cash proceeds of $3.96 billion from that transaction. The financial position, results of operations and cash flows of our BPS business, including our gain from the sale of that business and the related cash proceeds received, are reported as discontinued operations in the accompanying condensed consolidated financial statements. See Note 2 for additional information.

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, increased interest rates, disruptions to certain ports of call around the world, the wars in Ukraine, Israel and Gaza 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. While we have seen improvements in the availability of certain component parts and improved pricing in certain raw materials, these challenges have not completely subsided 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. DISCONTINUED OPERATIONS

On September 29, 2023, we sold our BPS business to Advent International and Warburg Pincus (collectively, the "buyers"). Under the terms of the related Equity Purchase agreement entered into with the buyers in May 2023, we were entitled to aggregate consideration of $4.25 billion, subject to adjustment for specified items. After giving effect to those adjustments, we received cash proceeds of $3.96 billion. We recognized a pre-tax gain on the sale of $2.89 billion ($2.60 billion net of tax), which represents the excess of (a) the $3.91 billion in net consideration received, consisting of (i) $3.96 billion in cash proceeds from the buyers, less (ii) $47 million in transaction costs, over (b) the sum of (i) the $840 million net book value of the BPS business upon the closing of the transaction and (ii) BPS's $181 million other comprehensive loss, which was reclassified to earnings.

The BPS business, which was historically reported within our Americas segment, provides contract manufacturing and development services, which include sterile fill-finish manufacturing and support services across clinical and

commercial applications, primarily serving customers in the pharmaceutical industry. BPS was historically operated through our former, wholly-owned subsidiaries Baxter Pharmaceutical Solutions LLC, a Delaware limited liability company, and Baxter Oncology GmbH, a German limited liability company (collectively, the "divested entities"). We intend to use the net after-tax proceeds from this transaction to repay certain of our debt obligations.

We concluded that our BPS business met the criteria to be classified as held-for-sale in May 2023. A component of an entity is reported in discontinued operations after meeting the criteria for held-for-sale classification if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. We analyzed the quantitative and qualitative factors relevant to the divestiture of our BPS business, including its significance to our overall net income (loss) and earnings (loss) per share, and determined that those conditions for discontinued operations presentation had been met. As such, the financial position, results of operations and cash flows of that business, including our gain from the sale of that business and the related cash proceeds received, are reported as discontinued operations in the accompanying condensed consolidated financial statements. Prior period amounts have been adjusted to reflect discontinued operations presentation.

At closing of the transaction, Baxter Pharmaceutical Solutions LLC included a BPS manufacturing facility in Bloomington Indiana and Baxter Oncology GmbH included a manufacturing facility in Halle Germany. Previously, Baxter Oncology GmbH included an additional manufacturing site in Bielefeld Germany that was not part of the BPS business and was transferred to another Baxter entity prior to closing of the divestiture. Accordingly, amounts related to the Bielefeld site continue to be presented as continuing operations in the accompanying condensed consolidated financial statements.

At closing of the transaction, Baxter entered into a Transition Services Agreement (TSA) and a Master Commercial Manufacturing and Supply Agreement (MSA) with the divested entities. Pursuant to the TSA, Baxter and the divested entities will provide to each other, on an interim basis, specific transition services for up to 24 months post-closing to help ensure business continuity and minimize disruptions. Services to be provided under the TSA include finance, information technology, human resources, integrated supply chain and certain other administrative services. Pursuant to the MSA, the divested entities will provide development, manufacturing, regulatory and other related services for certain Baxter pharmaceutical products for up to 5 years post-closing (with certain extension rights as provided therein).

Results of Discontinued Operations and Assets and Liabilities of Discontinued Operations

The following table summarizes the major classes of line items included in income from discontinued operations, net of tax, for the three and nine months ended September 30, 2023 and 2022:


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Net sales	$	191	$	164	$	469	$	465
Cost of sales	81		76		216		209
Gross margin	110		88		253		256
Selling, general and administrative expenses	15		6		44		17
Research and development expenses	1		1		2		2

Other (income) expense, net	2		2		2		2
Income from discontinued operations before gain on disposition and income taxes	92		79		205		235
Gain on disposition	2,890		—		2,890		—
Income tax expense	522		22		536		43
Income from discontinued operations, net of tax	$	2,460	$	57	$	2,559	$	192

For the three and nine months ended September 30, 2023, selling, general and administrative expenses include $4 million and $19 million, respectively, of separation-related costs incurred in connection with the sale of BPS.

The following table summarizes the carrying amounts of the major classes of assets and liabilities classified as discontinued operations in the condensed consolidated balance sheets as of December 31, 2022:


(in millions)	December 31, 2022

Accounts receivable, net of allowances	$	88
Inventories	39
Prepaid expenses and other current assets	59
Property, plant and equipment, net	284
Goodwill	391
Operating lease right-of-use assets	9
Other non-current assets	2
Assets of discontinued operations	$	872
Accounts payable	$	29
Accrued expenses and other current liabilities	32
Operating lease liabilities	9
Other non-current liabilities	111
Liabilities of discontinued operations	$	181

3. 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 and nine months ended September 30, 2023 and 2022.


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Balance at beginning of period	$	128	$	125	$	114	$	122

Charged to costs and expenses	4		2		20		11
Write-offs	(1)		(2)		(7)		(4)
Currency translation adjustments	1		(5)		5		(9)
Balance at end of period	$	132	$	120	$	132	$	120

Inventories


(in millions)	September 30, 2023		December 31, 2022
Raw materials	$	713	$	698
Work in process	301		294
Finished goods	1,859		1,687
Inventories	$	2,873	$	2,679

Property, Plant and Equipment, Net


(in millions)	September 30, 2023		December 31, 2022
Property, plant and equipment, at cost	$	10,863	$	10,780
Accumulated depreciation	(6,585)		(6,085)
Property, plant and equipment, net	$	4,278	$	4,695

Impairments of Property, Plant and Equipment and Certain Other Long-Lived Assets

We review the carrying amounts of long-lived assets used in operations for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating recoverability of long-lived assets other than goodwill and intangible assets not subject to amortization, we group assets and liabilities at the lowest level such that the identified cash flows relating to the group are largely independent of the cash flows of other assets and liabilities. If the carrying amount of an asset group is greater than the related estimated undiscounted future cash flows, the carrying value is not considered recoverable. In that case, an impairment charge is recorded if, and to the extent that, the amount by which the asset group's carrying amount exceeds its fair value. However, the portion of an impairment loss allocated to an individual long-lived asset within an asset group cannot reduce the carrying amount of that asset below its fair value is determinable without undue cost and effort.

Impairment of Opelika, Alabama Manufacturing Facility

Our manufacturing facility in Opelika, Alabama is one of three Baxter manufacturing facilities that currently produce dialyzers used in hemodialysis (HD) treatments. The current competitive environment has increased the global supply of those products and, in connection with our initiatives to streamline our manufacturing footprint and improve our profitability, we have made the decision to cease production of dialyzers at the Opelika facility near the end of 2023. We believe that there is more than adequate availability of dialyzers in the United States and globally, and we intend to continue to manufacture those products at volumes aligned with the related market demand at our other manufacturing facilities that currently produce them.

As a result of our decision to cease dialyzer production at this manufacturing facility, we performed a trigger-based recoverability assessment of its long-lived assets, which consist of a building and manufacturing equipment, including specialized equipment used in the production of dialyzers. The carrying amount of that asset group exceeded the estimated undiscounted cash flows expected to be generated, and we recognized an impairment charge of $243 million, classified within cost of sales in the accompanying condensed consolidated statements of income (loss), during the second quarter of 2023 to reduce the carrying amounts to their estimated fair values.

The fair values of the building and manufacturing equipment tested for impairment during the second quarter of 2023 were determined based on transaction prices of comparable assets (a market approach). Significant assumptions used in the determination of the fair values included the identification of representative comparable assets. Our long-lived asset fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.

Other Impairments of Long-Lived Assets Related to HD Business

In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Our segments were changed during the third quarter of 2023 to align with our new operating model. See further discussion in Note 16, Segment Information. In connection with that segment change, we identified new reporting units for impairment testing purposes and performed fair value measurements of our reporting units to reallocate goodwill to the new reporting units based on their relative fair values and to assess those reporting units for impairment. We identified our HD business within our Kidney Care segment as one of the new reporting units. Based on the estimated fair value of that reporting unit, we allocated no goodwill to it. Additionally, we determined that a triggering event was present to review the carrying amounts of long-lived assets within the HD reporting unit, which include four manufacturing facilities that primarily manufacture HD products, HD equipment leased to customers under operating leases and developed technology intangible assets, for potential impairment. In connection with that evaluation, we determined that the carrying amount of the asset group represented by our HD reporting unit, which is the lowest level for which identifiable cash flows are largely independent of other assets and liabilities, exceeded its forecasted undiscounted cash flows. We then measured the excess of the carrying amount of that asset group over its fair value and allocated the resulting impairment to its long-lived assets, limiting the impairments of individual assets within the group to amounts that would not result in their carrying amounts being written down below their fair values. As a result, we recognized $267 million of long-lived asset impairment charges, comprised of (i) a $190 million impairment charge related to certain manufacturing equipment, operating lease right-of-use assets and HD equipment leased to customers and (ii) a $77 million impairment charge related to developed technology intangible assets. The impairments are classified within cost of sales in the accompanying consolidated statements of income (loss) for the three and nine months ended September 30, 2023.

The fair value of the HD asset group was based on a discounted cash flow model (an income approach). Significant assumptions used in the determination of its fair value include forecasted cash flows, discount rates and terminal growth rates. The discounted cash flow model used to determine the fair value of the HD asset group during the third quarter 2023 reflected our most recent cash flow projections, a discount rate of 8% and a terminal growth rate of 1.5%. We also measured the fair values of individual assets within that asset group to ensure that the allocation of the asset group’s impairment to the long-lived assets within that group would not reduce the carrying amount of any individual asset below its fair value. The fair values of the buildings, manufacturing equipment and HD equipment leased to customers within that asset group were determined based on transaction prices of comparable assets (a market approach). Significant assumptions used in the determination of those fair values included the identification of representative comparable assets. The fair value of the right-of-use asset within that group was determined based on market rents and discount rates. Our long-lived asset fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.

Interest Expense, Net


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Interest expense, net of capitalized interest	$	136	$	109	$	395	$	290
Interest income	(8)		(5)		(26)		(12)
Interest expense, net	$	128	$	104	$	369	$	278

Other (Income) Expense, Net


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Foreign exchange (gains) losses, net	$	13	$	—	$	49	(26)
Pension and other postretirement benefit plans	(11)		(6)		(32)		(18)
Pension curtailment	—		—		—		(11)
Change in fair value of marketable equity securities	(3)		3		3		(5)
Reclassification of cumulative translation loss to earnings	—		65		—		65
Non-marketable investment impairments	—		—		23		—
Other, net	(6)		(1)		(10)		(4)
Other (income) expense, net	$	(7)	$	61	$	33	$	1

Non-Cash Operating and Investing Activities

Right-of-use operating lease assets obtained in exchange for lease obligations for the nine months ended September 30, 2023 and 2022 were $73 million and $59 million, respectively.

Purchases of property, plant and equipment included in accounts payable as of September 30, 2023 and 2022 were $43 million and $65 million, respectively.

4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by segment.


(in millions)	Americas		EMEA		APAC		Medical Products and Therapies		Healthcare Systems and Technologies1		Pharmaceuticals		Kidney Care		Total
Balance as of December 31, 2022	$	1,965	$	289	$	210	$	—	$	3,988	$	—	$	—	$	6,452
Currency translation and other	(27)		(4)		(3)		(2)		(7)		(1)		(1)		(45)
Reallocation of goodwill	(1,938)		(285)		(207)		1,195		—		542		693		—



Balance as of September 30, 2023	$	—	$	—	$	—	$	1,193	$	3,981	$	541	$	692	$	6,407

1 Prior to the third quarter of 2023, our Healthcare Systems and Technologies segment was referred to as our Hillrom segment.

We assess goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize a goodwill impairment charge for the amount by which a reporting unit's carrying amount exceeds its fair value.

Change in Reportable Segments

As discussed in Note 16, Segment Information, our reportable segments were previously comprised 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. In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Our segments were changed during the third quarter of 2023 to align with our new operating model. Our business is comprised of four segments under this new operating model: Medical Products and Therapies, Healthcare Systems and Technologies (formerly referred to as our Hillrom segment), Pharmaceuticals and Kidney Care. As a result of this segment change, we reallocated the goodwill from our previous Americas, EMEA and APAC segments to the reporting units within our new Medical Products and Therapies, Pharmaceuticals and Kidney Care segments based on the relative fair values of those reporting units. We also performed goodwill impairment assessments of all of our reporting units during the third quarter of 2023, including both our legacy reporting units and the reporting units of our new segments, and we did not identify any goodwill impairments.

Goodwill Impairments

We acquired Hill-Rom Holdings, Inc. in December 2021 and recognized $6.83 billion of goodwill and $6.03 billion of other intangible assets, including $1.91 billion of indefinite-lived intangible assets, in connection with that acquisition. During the third quarter of 2022, we performed trigger-based impairment tests for each of the reporting units within our Hillrom segment (currently referred to as our Healthcare Systems and Technologies segment), as well as the indefinite-lived intangible assets, consisting primarily of trade names, that we acquired in connection with the Hillrom acquisition. We performed those tests as of September 30, 2022 due to (a) current macroeconomic conditions, including the rising interest rate environment and broad declines in equity valuations, and (b) reduced earnings forecasts for our Hillrom reporting units, driven primarily by shortages of certain component parts used in our products, raw materials inflation and increased supply chain costs. Those impairment tests resulted in total pre-tax goodwill impairment charges of $2.79 billion in the third quarter of 2022.

The fair values of the reporting units for which impairments were recognized during the third quarter of 2022 were determined based on a discounted cash flow model (an income approach) and earnings multiples (a market approach) based on the guideline public company method. Significant assumptions used in the determination of the fair values of our reporting units generally include forecasted cash flows, discount rates, terminal growth rates and earnings multiples. The discounted cash flow models used to determine the fair values of our reporting units during 2022 reflected our most recent cash flow projections, discount rates ranging from 9% to 10% and terminal growth rates ranging from 2% to 3%. Our reporting unit fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.

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

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
September 30, 2023
Gross other intangible assets	$	3,442	$	3,778	$	320	$	1,571	$	163	$	9,274
Accumulated amortization	(631)		(2,161)		(252)		—		—		(3,044)
Other intangible assets, net	$	2,811	$	1,617	$	68	$	1,571	$	163	$	6,230
December 31, 2022
Gross other intangible assets	$	3,442	$	3,836	$	325	$	1,571	$	202	$	9,376
Accumulated amortization	(460)		(1,888)		(235)		—		—		(2,583)
Other intangible assets, net	$	2,982	$	1,948	$	90	$	1,571	$	202	$	6,793

Intangible asset amortization expense was $162 million and $168 million for the three months ended September 30, 2023 and 2022, respectively, and $481 million and $578 million for the nine months ended September 30, 2023 and 2022, respectively.

Intangible Asset Impairments

Impairment of Developed Technology Intangible Asset Related to HD Business

In the third quarter of 2023, we reviewed the long-lived assets of our HD reporting unit for potential impairment and recognized a $77 million impairment of developed technology intangible assets, in addition to other impairments of property, plant and equipment and operating lease right-of-use assets.

See Note 3, Supplemental Financial Information, for information about the impairment of this intangible asset, impairments of other long-lived assets related to our HD business and related fair value measurements.

Impairment of Indefinite-Lived Intangible Assets from Our Hillrom Acquisition

In the third quarter of 2022, we recognized pre-tax impairment charges of $332 million to reduce the carrying amounts of certain indefinite-lived intangible assets, which primarily related to the Hillrom and Welch Allyn trade names acquired in the Hillrom acquisition, to their estimated fair values. Those intangible asset impairment charges are classified within cost of sales in the accompanying consolidated statements of income (loss) for the three and nine months ended September 30, 2022.

The fair values of the trade name intangible assets were determined using the relief from royalty method. Significant assumptions used in the determination of the fair values of the trade name intangible assets included revenue growth rates, terminal growth rates, discount rates and royalty rates. The relief from royalty models used in the determination of the fair values of our trade name intangible assets during 2022 reflected our most recent revenue projections, a discount rate of 9.5%, royalty rates ranging from 3% to 5% and terminal growth rates ranging from 2% to 3%. Our trade name intangible asset fair value measurements are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.

5. 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 $2.50 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 September 30, 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 September 30, 2023 we have capacity to draw on the full amounts under our credit facilities, less commercial paper borrowings which were $514 million as of September 30, 2023.

In the first nine months of 2023, we repaid $350 million of our $2.00 billion three-year term loan facility. In October 2023, we repaid an additional $950 million under that term loan facility and our entire $514 million of outstanding commercial paper borrowings, both using proceeds from the sale of our BPS business. The losses from our early extinguishments of debt were not significant.

Commercial Paper

As of September 30, 2023, we had $514 million of commercial paper outstanding with a weighted-average interest rate of 5.53% and an original weighted-average term of 13 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.

6. COMMITMENTS AND CONTINGENCIES

We are involved in product liability, patent, commercial, and other legal matters that arise in the normal course of our business. We record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of September 30, 2023 and December 31, 2022, our total recorded reserves with respect to legal and environmental matters were $33 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 (including our ability to launch new products) 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 ongoing environmental remediations associated with historic operations at certain of our facilities. As of September 30, 2023 and December 31, 2022, our environmental reserves, which are measured on an undiscounted basis, were $16 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. On July 17, 2023, we were voluntarily dismissed from the litigation without prejudice.

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. The parties reached agreement to settle this lawsuit in the third quarter of 2023 for an amount that was not material to our financial results, which was paid in the fourth quarter of 2023. The case was dismissed on October 17, 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.

In July 2023, we and certain of our officers were named in a class action complaint captioned Grover J. Kelley 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 securities during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter securities on the public market between May 25, 2022, and February 8, 2023. The plaintiff alleges that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to supply chain and financial guidance. The Court appointed Kelley as lead plaintiff on September 20, 2023.

7. STOCKHOLDERS’ EQUITY

Cash Dividends

Cash dividends declared per share for the three and nine months ended September 30, 2023 were $0.29 and $0.87, respectively. Cash dividends declared per share for the three and nine months ended September 30, 2022 were $0.29 and $0.86, respectively.

Stock Repurchase Programs

In July 2012, our Board of Directors authorized a share repurchase program and the related authorization amount was subsequently increased a number of times. During the first nine months of 2023 we did not repurchase any shares

under this authority. During the first nine months of 2022 we repurchased 0.5 million shares under this authority pursuant to Rule 10b5-1 plans. We had $1.30 billion remaining available under the authorization as of September 30, 2023.

8. 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 (loss), 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 nine months ended September 30, 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	(62)		—		15		—		(47)
Amounts reclassified from AOCI (a)	185		(16)		(5)		—		164
Net other comprehensive income (loss)	123		(16)		10		—		117
Balance as of September 30, 2023	$	(3,263)	$	(347)	$	(109)	$	3	$	(3,716)


	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	(816)		29		33		2		(752)
Amounts reclassified from AOCI (a)	65		19		(6)		—		78
Net other comprehensive income (loss)	(751)		48		27		2		(674)
Balance as of September 30, 2022	$	(3,658)	$	(299)	$	(99)	$	2	$	(4,054)

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

The following is a summary of the amounts reclassified from AOCI to net income during the three and nine months ended September 30, 2023 and 2022.


	Amounts reclassified from AOCI (a)
(in millions)	Three months ended September 30, 2023		Nine months ended September 30, 2023		Location of impact in income statement
CTA
Reclassification of cumulative translation loss to earnings from BPS divestiture	$	(185)	$	(185)	Income from discontinued operations, net of tax
Less: Tax effect	—		—		Income from discontinued operations, net of tax
	$	(185)	$	(185)	Net of tax
Pension and OPEB items
Amortization of net losses and prior service costs or credits	$	5	$	15	Other (income) expense, net
Pension settlement from BPS divestiture	4		4		Income from discontinued operations, net of tax
	9		19
Less: Tax effect	—		(3)		Income tax expense
	$	9	$	16	Net of tax
Gains (losses) on hedging activities
Foreign exchange contracts	$	3	$	10	Cost of sales
Interest rate contracts	(1)		(4)		Interest expense, net
	2		6		Total before tax
Less: Tax effect	—		(1)		Income tax expense
	$	2	$	5	Net of tax
Total reclassifications for the period	$	(174)	$	(164)	Total net of tax

(a) Amounts in parentheses indicate reductions to net income



	Amounts reclassified from AOCI (a)
(in millions)	Three months ended September 30, 2022		Nine months ended September 30, 2022		Location of impact in income statement
CTA
Reclassification of cumulative translation loss to earnings	$	(65)	$	(65)	Other (income) expense, net
Less: Tax effect	—		—		Income tax expense
	$	(65)	$	(65)	Net of tax
Amortization of pension and OPEB items
Amortization of net losses and prior service costs or credits	$	(8)	$	(25)	Other (income) expense, net
Less: Tax effect	2		6		Income tax expense
	$	(6)	$	(19)	Net of tax
Gains on hedging activities
Foreign exchange contracts	$	6	$	11	Cost of sales
Interest rate contracts	(1)		(4)		Interest expense, net
	5		7		Total before tax
Less: Tax effect	(1)		(1)		Income tax expense
	$	4	$	6	Net of tax
Total reclassifications for the period	$	(67)	$	(78)	Total net of tax

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

9. REVENUES

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

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. We earn revenues from acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; surgical hemostat and sealant products; smart bed systems; patient monitoring and diagnostic technologies; respiratory health devices; and advanced equipment for the surgical space. For most of those offerings, 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 recently divested BPS business, which is reported within discontinued operations and included contract manufacturing arrangements, our Healthcare Systems and Technologies 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 September 30, 2023, we had $7.35 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 Medical Product and Therapies and Kidney Care segments. Some contracts in the United States included in this amount contain index-dependent price increases, which are not known at this time. We expect to recognize approximately 10% of this amount as revenue over the remainder of 2023, 45% in 2024, 25% 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 and nine months ended September 30, 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 $2.28 billion and $2.34 billion as of September 30, 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)	September 30, 2023		December 31, 2022
Contract manufacturing services	$	3	$	10
Software sales	45		43
Bundled equipment and consumable medical products contracts	114		121
Contract assets	$	162	$	174

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 nine months ended September 30, 2023 and 2022. The contract liability balance represents the transaction price allocated to the remaining performance obligations.


	Nine Months Ended September 30,
(in millions)	2023		2022
Balance at beginning of period	$	194	$	196
New revenue deferrals	491		457
Revenue recognized upon satisfaction of performance obligations	(493)		(462)
Currency translation	3		(3)
Balance at end of period	$	195	$	188

For the nine months ended September 30, 2023 and 2022, $119 million and $99 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)	September 30, 2023		December 31, 2022
Prepaid expenses and other current assets	$	50	$	52
Other non-current assets	112		122
Contract assets	$	162	$	174

Accrued expenses and other current liabilities	$	154	$	154
Other non-current liabilities	41		40
Contract liabilities	$	195	$	194

Disaggregation of Net Sales

Refer to Note 16 for additional information on our net sales including the disaggregation of net sales within each of our segments and net sales by geographic location.

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 and nine months ended September 30, 2023 and 2022 were:


(in millions)	Three months ended September 30, 2023		Nine Months Ended September 30, 2023
Sales-type lease revenue	$	2	$	9
Operating lease revenue	124		380
Variable lease revenue	12		41
Total lease revenue	$	138	$	430



(in millions)	Three months ended September 30, 2022		Nine months ended September 30, 2022
Sales-type lease revenue	$	3	$	11
Operating lease revenue	145		380
Variable lease revenue	9		41
Total lease revenue	$	157	$	432

Our net investment in sales-type leases was $68 million as of September 30, 2023, of which $10 million originated in 2019 and prior, $19 million in 2020, $19 million in 2021, $13 million in 2022, and $7 million in 2023.

10. BUSINESS OPTIMIZATION CHARGES

In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. The related costs of those actions consisted primarily of employee termination costs, implementation costs, contract termination costs and asset impairments. We currently expect to incur additional pre-tax costs, primarily related to implementation of business optimization programs, of approximately $25 million through the completion of initiatives that are currently underway. We continue to pursue cost savings initiatives, including those related to our newly implemented 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 and nine months ended September 30, 2023 and 2022, we recorded the following charges related to business optimization programs.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2023		2022		2023		2022
Restructuring charges	$	64	$	57	$	461	$	150
Costs to implement business optimization programs	17		16		47		46

Total business optimization charges	$	81	$	73	$	508	$	196

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

Costs to implement business optimization programs for the three and nine months ended September 30, 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 and nine months ended September 30, 2023 and 2022, we recorded the following restructuring charges.


	Three months ended September 30, 2023
(in millions)	COGS		SG&A		R&D		Total
Employee termination costs	$	17	$	33	$	5	$	55
Contract termination and other costs	—		2		—		2
Asset impairments	7		—		—		7
Total restructuring charges	$	24	$	35	$	5	$	64


	Three months ended September 30, 2022
(in millions)	COGS		SG&A		R&D		Total
Employee termination costs	$	13	$	36	$	4	$	53
Contract termination and other costs	—		2		—		2
Asset impairments	1		1		—		2
Total restructuring charges	$	14	$	39	$	4	$	57



	Nine months ended September 30, 2023
(in millions)	COGS		SG&A		R&D		Total
Employee termination costs	$	43	$	115	$	12	$	170
Contract termination and other costs	3		4		—		7
Asset impairments	276		8		—		284
Total restructuring charges	$	322	$	127	$	12	$	461



	Nine months ended September 30, 2022
(in millions)	COGS		SG&A		R&D		Total
Employee termination costs	$	19	$	99	$	4	$	122
Contract termination and other costs	—		19		—		19
Asset impairments	1		8		—		9
Total restructuring charges	$	20	$	126	$	4	$	150

For the three and nine months ended September 30, 2023, $14 million and $111 million, respectively, of the restructuring charges reflected in the table above, consisting of employee termination costs, were related to the implementation of our previously announced new operating model intended to simplify and streamline our operations. For the nine months ended September 30, 2023, $253 million of the restructuring charges reflected in the table above, consisting of $243 million of asset impairment charges and $10 million of employee termination costs, were related to

our decision to cease production of dialyzers at one of our manufacturing facilities in connection with our initiatives to streamline our manufacturing footprint and improve our profitability. See Note 3 for additional information.

For the three months ended September 30, 2022, $14 million of the restructuring charges reflected in the table above were related to integration activities for the Hillrom acquisition, consisting of $12 million of employee termination costs and $2 million of contract termination. For the nine months ended September 30, 2022, $97 million of the restructuring charges reflected in the table above were related to integration activities for the Hillrom acquisition, consisting of $71 million of employee termination costs, $19 million of contract termination and other costs and $7 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	189
Payments	(108)
Reserve adjustments	(12)
Currency translation	(5)
Liability balance as of September 30, 2023	$	171

Substantially all of our restructuring liabilities as of September 30, 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.

11. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS

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


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Pension benefits
Service cost	$	7	$	19	$	20	$	59
Interest cost	36		25		108		73
Expected return on plan assets	(44)		(39)		(131)		(118)
Amortization of net losses and prior service costs	1		10		3		33
Net periodic pension cost	$	—	$	15	$	—	$	47
OPEB
Interest cost	$	2	$	1	$	6	$	3
Amortization of net loss and prior service credit	(6)		(3)		(18)		(9)
Net periodic OPEB cost (income)	$	(4)	$	(2)	$	(12)	$	(6)

12. INCOME TAXES

Our effective income tax rate was 129.7% and 1.8% for the three months ended September 30, 2023 and 2022, respectively, and 58.4% and 0.5% for the nine months ended September 30, 2023 and 2022, respectively. Our effective income tax rate can differ from the 21.0% 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.

Our effective income tax rate during interim periods reflects our estimated annual effective tax rate excluding discrete items. For the three and nine months ended September 30, 2023, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily driven by the jurisdictional mix of global earnings, which was impacted by the long-lived asset impairments we recognized during the second and third quarters of 2023, and by the significance of non-deductible items to our anticipated pre-tax income for the full year. For the three months ended September 30, 2023, our effective tax rate was also impacted by $13 million of separation-related income tax costs.

For the nine months ended September 30, 2023, our effective tax rate was also impacted by a $30 million valuation allowance recorded to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to previously enacted Swiss tax legislation and by $17 million of separation-related income tax costs.

For the three and nine months ended September 30, 2022, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to non-deductible goodwill impairments.

13. EARNINGS PER SHARE

The numerator for both basic and diluted earnings per share (EPS) is net income (loss) attributable to Baxter stockholders. The denominator for basic EPS is the weighted-average number of shares outstanding during the period. 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 net income (loss) attributable to Baxter stockholders.


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Income (loss) from continuing operations	$	51	$	(2,991)	$	(142)	$	(2,798)
Less: Net income attributable to noncontrolling interests	3		3		6		8
Income (loss) from continuing operations attributable to Baxter stockholders	48		(2,994)		(148)		(2,806)
Income from discontinued operations	2,460		57		2,559		192
Net income (loss) attributable to Baxter stockholders	$	2,508	$	(2,937)	$	2,411	$	(2,614)

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


	Three months ended September 30,		Nine months ended September 30,
(in millions)	2023	2022	2023	2022
Basic shares	507	504	506	503
Effect of dilutive securities	2	—	—	—
Diluted shares	509	504	506	503

The effect of dilutive securities for the three months ended September 30, 2023 includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. Basic and diluted shares are the same for the three months ended September 30, 2022 and the nine months ended September 30, 2023 and 2022 due to our net losses from continuing operations for those periods.

Diluted EPS excludes 18 million and 25 million shares issuable under equity awards for the three and nine months ended September 30, 2023, respectively, and 23 million shares issuable under equity awards for the three and nine months ended September 30, 2022, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS.

14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, Chinese Renminbi, Japanese Yen, Swedish Krona, British Pound, Polish Zloty, Mexican Peso, Australian Dollar, Canadian Dollar, Korean Won, Colombian Peso, Brazilian Real, Russian Ruble, Turkish Lira and Indian Rupee. 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 our net exposure to foreign exchange risk. Gains and losses on the hedging instruments are intended to 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.

Derivative instruments are 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 $437 million and $398 million as of September 30, 2023 and December 31, 2022, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at September 30, 2023 is 12 months for foreign exchange contracts. There were no outstanding interest rate contracts designated as cash flow hedges as of September 30, 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 September 30, 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 September 30, 2023, we had an accumulated pre-tax unrealized translation gain in AOCI of $105 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 nine 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 nine 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 nine 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 $626 million as of September 30, 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 September 30, 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	9		26		Cost of sales	3			6
Net investment hedges	48		126		Other (income) expense, net	—			—
Total	$	57	$	152		$	2		$	5


	Location of gain (loss) in income statement	Gain (loss) recognized in income
(in millions)	2023			2022
Undesignated derivative instruments
Foreign exchange contracts	Other (income) expense, net	$	2		$	(11)



	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	$	(4)	$	(4)
Foreign exchange contracts	19		42		Cost of sales	10		11
Net investment hedges	10		311		Other (income) expense, net	—		—
Total	$	29	$	353		$	6	$	7



	Location of gain (loss) in income statement	Gain (loss) recognized in income
(in millions)	2023	2022


Undesignated derivative instruments
Foreign exchange contracts	Other (income) expense, net	$	(16)	$	(34)

As of September 30, 2023, $7 million of deferred, net after-tax gains on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

Derivative Assets and Liabilities

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of September 30, 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	$	13	Accrued expenses and other current liabilities	$	1

Total derivative instruments designated as hedges		13			1
Undesignated derivative instruments
Foreign exchange contracts	Prepaid expenses and other current assets	8		Accrued expenses and other current liabilities	2
Total derivative instruments		$	21		$	3

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.


	September 30, 2023				December 31, 2022
(in millions)	Asset		Liability		Asset		Liability
Gross amounts recognized in the condensed consolidated balance sheets	$	21	$	3	$	14	$	12
Gross amount subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet	(1)		(1)		(4)		(4)
Total	$	20	$	2	$	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 September 30, 2023		Balance as of December 31, 2022		Balance as of September 30, 2023		Balance as of December 31, 2022
Long-term debt	$	100	$	101	$	3	$	4

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

15. FAIR VALUE MEASUREMENTS

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


			Basis of fair value measurement
(in millions)	Balance as of September 30, 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	$	21	$	—	$	21	$	—

Available-for-sale debt securities	39		—		—		39
Marketable equity securities	39		39		—		—
Total	$	99	$	39	$	21	$	39
Liabilities
Foreign exchange contracts	$	3	$	—	$	3	$	—

Contingent payments related to acquisitions	19		—		—		19
Total	$	22	$	—	$	3	$	19


			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 September 30, 2023 and December 31, 2022, cash and cash equivalents of $5.79 billion and $1.72 billion, respectively, included money market and other short-term funds of approximately $4.34 billion 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. A 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 September 30,
	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	$	21	$	37	$	113	$	44
Additions	—		2		—		—
Change in fair value recognized in earnings	—		—		(6)		—


Payments	(2)		—		(17)		—

Fair value at end of period	$	19	$	39	$	90	$	44



	Nine months ended September 30,
	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	—		2		—		21
Change in fair value recognized in earnings	(14)		(5)		(34)		—
Change in fair value recognized in AOCI	—		—		—		3
Transfers out of Level 3	—		(5)		—		(10)
Payments	(51)		—		(19)		—

Fair value at end of period	$	19	$	39	$	90	$	44

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

Financial Instruments Not Measured at Fair Value

In addition to the financial instruments that we are required to recognize at fair value in the condensed consolidated balance sheets, we have certain financial instruments that are recognized at amortized cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized in the condensed consolidated balance sheets and the estimated fair values as of September 30, 2023 and December 31, 2022.


	Book values				Fair values(a)
(in millions)	2023		2022		2023		2022
Liabilities
Current maturities of long-term debt and finance lease obligations	$	1,912	$	1,105	$	1,891	$	1,079
Long-term debt and finance lease obligations	14,067		15,232		12,462		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 not presented in the above table, such as accounts receivable, short-term debt and accounts payable, approximate their fair values due to the short-term maturities of most of those assets and liabilities.

Investments Without Readily Determinable Fair Values

The carrying values of equity investments without readily determinable fair values that we measure at cost, less impairment were $74 million as of September 30, 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. During the first nine months of 2023, several of our investees either completed or were in the process of undertaking new financing rounds at lower enterprise valuations as compared to their valuations at the time of our investments. As a result, we recognized $18 million of impairments of equity investments without readily determinable fair values in the second quarter. In addition, we recognized a $5 million impairment of a convertible debt investment, which is accounted for as an available-for-sale security, during the first nine months of 2023. The fair value measurements of investments in non-marketable equity and convertible debt securities are classified as Level 3 in the fair value hierarchy because they involve significant unobservable inputs.

16. SEGMENT INFORMATION

Our reportable segments were previously comprised 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. In the third quarter of 2023, we completed the implementation of a new operating model intended to simplify and streamline our operations and better align our manufacturing and supply chain to our commercial activities. Our business is comprised of four segments under this new operating model: Medical Products and Therapies, Healthcare Systems and Technologies (formerly referred to as our Hillrom segment), Pharmaceuticals and Kidney Care. Our segments were changed during the third quarter of 2023 to align with our new operating model and prior period segment disclosures have been revised to reflect the new segment presentation.

The Medical Products and Therapies segment includes sales of our sterile IV solutions, infusion systems, administration sets, parenteral nutrition therapies and surgical hemostat, sealant and adhesion prevention products. The Healthcare Systems and Technologies segment includes sales of our connected care solutions and collaboration tools, including smart bed systems, patient monitoring systems and diagnostic technologies, respiratory health devices and advanced equipment for the surgical space, including surgical video technologies, precision positioning devices and other accessories. The Pharmaceuticals segment includes sales of specialty injectable pharmaceuticals, inhaled anesthesia and drug compounding. The Kidney Care segment includes sales of chronic and acute dialysis therapies and services, including peritoneal dialysis, hemodialysis, continuous renal replacement therapies (CRRT) and other organ support therapies. Other sales not allocated to a segment primarily include sales of products and services provided directly through certain of our manufacturing facilities and royalty income under a business development arrangement that ended in early 2023 when we acquired the related product rights.

Disaggregation of Net Sales

The following tables present our U.S. and International disaggregated net sales. Intersegment sales are eliminated in consolidation.


	Three Months Ended September 30,
	2023						2022
(in millions)	U.S.		International		Total		U.S.		International		Total
Infusion Therapies and Technologies	$	570	$	433	$	1,003	$	567	$	389	$	956
Advanced Surgery	139		116		255		141		106		247
Medical Products and Therapies	709		549		1,258		708		495		1,203
Care and Connectivity Solutions	317		126		443		339		117		456
Front Line Care	234		67		301		209		70		279
Healthcare Systems and Technologies	551		193		744		548		187		735
Injectables and Anesthesia	195		156		351		173		152		325
Drug Compounding	—		229		229		—		200		200
Pharmaceuticals	195		385		580		173		352		525
Chronic Therapies1	233		688		921		236		698		934

Acute Therapies1	66		122		188		57		109		166
Kidney Care	299		810		1,109		293		807		1,100
Other1	12		5		17		36		10		46
Total Baxter	$	1,766	$	1,942	$	3,708	$	1,758	$	1,851	$	3,609


	Nine Months Ended September 30,
	2023						2022
(in millions)	U.S.		International		Total		U.S.		International		Total
Infusion Therapies and Technologies	$	1,654	$	1,264	$	2,918	$	1,672	$	1,157	$	2,829
Advanced Surgery	433		340		773		428		310		738
Medical Products and Therapies	2,087		1,604		3,691		2,100		1,467		3,567
Care and Connectivity Solutions	926		381		1,307		991		359		1,350
Front Line Care	681		230		911		618		237		855
Healthcare Systems and Technologies	1,607		611		2,218		1,609		596		2,205
Injectables and Anesthesia	550		437		987		494		467		961
Drug Compounding	—		665		665		—		613		613
Pharmaceuticals	550		1,102		1,652		494		1,080		1,574
Chronic Therapies1	689		2,041		2,730		675		2,069		2,744

Acute Therapies1	194		370		564		194		348		542
Kidney Care	883		2,411		3,294		869		2,417		3,286
Other1	56		17		73		98		31		129
Total Baxter	$	5,183	$	5,745	$	10,928	$	5,170	$	5,591	$	10,761

1In connection with our segment change in the third quarter of 2023, we made the following reclassifications of prior period sales amounts to conform to the current period presentation. We reclassified $16 million of sales from the first half of 2023 and $8 million and $23 million for the three and nine months ended September 30, 2022, respectively, from Chronic Therapies to Acute Therapies. Additionally, in connection with the reclassification of our BPS business to discontinued operations during the second quarter of 2023, we reclassified $2 million of contract manufacturing revenues from the first quarter of 2023 and $8 million and $26 million for the three and nine months ended September 30, 2022, respectively, from BPS to Other (within continuing operations), as the related manufacturing facility was not part of that divestiture transaction.

Geographic Sales Information

Our net sales are attributed to the following geographic regions based on the location of the customer.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
United States	$	1,766	$	1,758	$	5,183	$	5,170
Emerging markets1	852		820		2,447		2,355
Rest of world2	1,090		1,031		3,298		3,236
Total Baxter	$	3,708	$	3,609	$	10,928	$	10,761

1 Emerging markets include sales from our operations in Eastern Europe, the Middle East, Africa, Latin America and Asia (except for Japan).

2 Rest of world includes sales from our operations in Western Europe, Canada, Japan, Australia and New Zealand.

Segment Operating Income

We use segment operating income to evaluate the performance of our segments and to make resource allocation decisions. Segment operating income represents income before income taxes, interest and other non-operating income or expense, unallocated corporate costs, intangible asset amortization and other special items. Special items, which are presented below in our reconciliations of segment operating income to income (loss) from continuing operations before income taxes, are excluded from segment operating income because they are highly variable, difficult to predict and of a size that may substantially impact our reported results of operations for the period.

Under our new operating model, most global functional support costs, overhead costs and other shared costs that benefit our segments are allocated to those segments. Corporate costs that are not allocated to our segments, as well as any differences between actual corporate costs and the amounts allocated to our segments, are presented as

unallocated corporate costs. The following table presents our segment operating income and reconciliations of segment operating income to income (loss) from continuing operations before income taxes.


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Medical Products and Therapies	$	245	$	257	$	706	$	703
Healthcare Systems and Technologies	115		108		327		367
Pharmaceuticals	108		82		284		295
Kidney Care	96		103		208		307
Other	6		17		19		52
Total	570		567		1,544		1,724
Unallocated corporate costs	(5)		1		(51)		(41)
Intangible asset amortization expense	(162)		(168)		(481)		(578)
Long-lived asset impairments	(267)		(332)		(267)		(332)
Legal matters	(13)		—		(13)		—
Goodwill impairments	—		(2,785)		—		(2,785)
Business optimization items	(81)		(73)		(508)		(196)
Acquisition and integration items	(2)		(4)		(2)		(193)
Loss on product divestiture arrangement	—		(54)		—		(54)
Separation-related costs	(77)		—		(123)		—
European Medical Devices Regulation	(14)		(12)		(38)		(35)
Product-related items	—		(20)		—		(43)
Total operating income (loss)	(51)		(2,880)		61		(2,533)
Interest expense, net	128		104		369		278
Other (income) expense, net	(7)		61		33		1
Loss from continuing operations before income taxes	$	(172)	$	(3,045)	$	(341)	$	(2,812)

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

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