BAXTER INTERNATIONAL INC (Form: 10-Q, Received: 10/29/2020 07:23:49)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________________________________________________

FORM 10-Q

_________________________________________________________________________________


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

For the quarterly period ended September 30, 2020


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

For the transition period from to

Commission file number 1-4448

_________________________________________________________________________________

BAXTER INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________________________________

Delaware

36-0781620

(State or other jurisdiction of
incorporation or organization)

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

One Baxter Parkway,

Deerfield,

Illinois

60015

(Address of Principal Executive Offices)

(Zip Code)

224.

948.2000

(Registrant’s telephone number, including area code)

_________________________________________________________________________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 par value

BAX (NYSE)

New York Stock Exchange

Chicago Stock Exchange

0.4% Global Notes due 2024

BAX 24

New York Stock Exchange

1.3% Global Notes due 2025

BAX 25

New York Stock Exchange

1.3% Global Notes due 2029

BAX 29

New York Stock Exchange

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

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

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

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

BAXTER INTERNATIONAL INC.

FORM 10-Q

For the quarterly period ended September 30, 2020

TABLE OF CONTENTS


		Page Number
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statements of Changes in Equity	5
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	45
Review by Independent Registered Public Accounting Firm		47
Report of Independent Registered Public Accounting Firm		48

PART II.	OTHER INFORMATION	49
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 6.	Exhibits	51
Signature		52

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Baxter International Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in millions, except share information)


	September 30, 2020		December 31, 2019
Current assets:
Cash and cash equivalents	$	4,359	$	3,335
Accounts receivable, net of allowances of $122 in 2020 and $112 in 2019	2,001		1,896
Inventories	1,988		1,653
Prepaid expenses and other current assets	685		619
Total current assets	9,033		7,503
Property, plant and equipment, net	4,460		4,512
Goodwill	3,094		3,030
Other intangible assets, net	1,678		1,471
Operating lease right-of-use assets	578		608
Other non-current assets	1,255		1,069
Total assets	$	20,098	$	18,193
Current liabilities:
Short-term debt	$	—	$	226
Current maturities of long-term debt and finance lease obligations	727		315
Accounts payable and accrued liabilities	2,695		2,689
Total current liabilities	3,422		3,230
Long-term debt and finance lease obligations	5,760		4,809
Operating lease liabilities	490		510
Other non-current liabilities	1,824		1,732
Total liabilities	11,496		10,281
Commitments and contingencies
Equity:
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2020 and 2019	683		683
Common stock in treasury, at cost, 172,705,772 shares in 2020 and 177,340,358 shares in 2019	(10,571)		(10,764)
Additional contributed capital	6,009		5,955
Retained earnings	16,285		15,718
Accumulated other comprehensive (loss) income	(3,839)		(3,710)
Total Baxter stockholders’ equity	8,567		7,882
Noncontrolling interests	35		30
Total equity	8,602		7,912
Total liabilities and equity	$	20,098	$	18,193

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

Baxter International Inc.

Condensed Consolidated Statements of Income (unaudited)

(in millions, except per share data)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net sales	$	2,972	$	2,851	$	8,492	$	8,323
Cost of sales	1,777		1,621		5,096		4,860
Gross margin	1,195		1,230		3,396		3,463
Selling, general and administrative expenses	601		627		1,819		1,869
Research and development expenses	123		144		386		439
Other operating expense (income), net	1		(44)		(19)		(81)
Operating income	470		503		1,210		1,236
Interest expense, net	39		13		96		51
Other (income) expense, net	16		9		32		(8)
Income before income taxes	415		481		1,082		1,193
Income tax expense	56		106		143		163
Net income	359		375		939		1,030
Net income attributable to noncontrolling interests	3		6		5		6
Net income attributable to Baxter stockholders	$	356	$	369	$	934	$	1,024
Earnings per share
Basic	$	0.70	$	0.72	$	1.83	$	2.01
Diluted	$	0.69	$	0.71	$	1.81	$	1.97
Weighted-average number of shares outstanding
Basic	511		511		509		510
Diluted	518		520		517		520

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

Baxter International Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(in millions)


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

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

Baxter International Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)

(in millions)


	For the three months ended September 30, 2020
	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, 2020	683	$	683	173	$	(10,597)	$	5,975	$	16,055	$	(3,988)	$	8,128	$	32	$	8,160

Net income	—	—		—	—		—		356		—		356		3		359
Other comprehensive income (loss)	—	—		—	—		—		—		149		149		—		149

Stock issued under employee benefit plans and other	—	—		—	26		34		—		—		60		—		60
Dividends declared on common stock	—	—		—	—		—		(126)		—		(126)		—		(126)

Balance as of September 30, 2020	683	$	683	173	$	(10,571)	$	6,009	$	16,285	$	(3,839)	$	8,567	$	35	$	8,602


	For the nine months ended September 30, 2020
	Baxter International Inc. stockholders' equity
	Common stock shares	Common stock		Common stock shares in treasury	Common stock in treasury		Additional contributed capital		Retained earnings		Accumulated other comprehensive income (loss)		Total Baxter stockholders' equity		Noncontrolling interests		Total equity
Balance as of January 1, 2020	683	$	683	177	$	(10,764)	$	5,955	$	15,718	$	(3,710)	$	7,882	$	30	$	7,912
Adoption of new accounting standard	—	—		—	—		—		(4)		—		$	(4)	—		$	(4)
Net income	—	—		—	—		—		934		—		934		5		939
Other comprehensive income (loss)	—	—		—	—		—		—		(129)		(129)		—		(129)

Stock issued under employee benefit plans and other	—	—		(4)	193		54		—		—		247		—		247
Dividends declared on common stock	—	—		—	—		—		(363)		—		(363)		—		(363)

Balance as of September 30, 2020	683	$	683	173	$	(10,571)	$	6,009	$	16,285	$	(3,839)	$	8,567	$	35	$	8,602

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

Baxter International Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)

(in millions)


	For the three months ended September 30, 2019
	Baxter International Inc. stockholders' equity
	Common stock shares	Common stock		Common stock shares in treasury	Common stock in treasury		Additional contributed capital		Retained earnings		Accumulated other comprehensive income (loss)		Total Baxter stockholders' equity		Noncontrolling interests		Total equity
Balance as of July 1, 2019	683	$	683	173	$	(10,322)	$	5,906	$	15,598	$	(4,086)	$	7,779	$	24	$	7,803

Net income	—	—		—	—		—		369		—		369		6		375
Other comprehensive income (loss)	—	—		—	—		—		—		(202)		(202)		—		(202)
Purchases of treasury stock	—	—		4	(346)		—		—		—		(346)		—		(346)
Stock issued under employee benefit plans and other	—	—		(2)	86		20		(1)		—		105		—		105
Dividends declared on common stock	—	—		—	—		—		(117)		—		(117)		—		(117)
Change in noncontrolling interests	—	—		—	—		—		—		—		—		(1)		(1)
Balance as of September 30, 2019	683	$	683	175	$	(10,582)	$	5,926	$	15,849	$	(4,288)	$	7,588	$	29	$	7,617


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

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

Baxter International Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in millions)


	Nine months ended September 30,
	2020		2019
Cash flows from operations
Net income	$	939	$	1,030
Adjustments to reconcile net income to cash flows from operations:
Depreciation and amortization	610		580
Deferred income taxes	(45)		(45)
Stock compensation	97		92
Net periodic pension and other postretirement costs	59		8
Intangible asset impairments	17		31
Other	54		90
Changes in balance sheet items:
Accounts receivable, net	(126)		(23)
Inventories	(305)		(88)
Accounts payable and accrued liabilities	36		(249)
Other	(178)		(145)
Cash flows from operations – continuing operations	1,158		1,281
Cash flows from operations – discontinued operations	(2)		(6)
Cash flows from operations	1,156		1,275
Cash flows from investing activities
Capital expenditures	(472)		(505)
Acquisitions, net of cash acquired, and investments	(466)		(186)
Other investing activities, net	23		12
Cash flows from investing activities	(915)		(679)
Cash flows from financing activities
Issuances of debt	1,240		1,661
Net decreases in debt with original maturities of three months or less	(226)		—
Cash dividends on common stock	(348)		(310)
Proceeds from stock issued under employee benefit plans	180		334
Purchases of treasury stock	—		(1,029)
Other financing activities, net	(48)		(42)
Cash flows from financing activities	798		614
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(8)		(39)
Increase in cash, cash equivalents and restricted cash	1,031		1,171
Cash, cash equivalents and restricted cash at beginning of period	3,335		1,838
Cash, cash equivalents and restricted cash at end of period (1)	$	4,366	$	3,009

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


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

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

Baxter International Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

1. BASIS OF PRESENTATION

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

Risks and Uncertainties Related to COVID-19

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19). COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. These measures have led to unprecedented restrictions on, disruptions in, and other related impacts on businesses and personal activities. In addition to travel restrictions put in place in early 2020, governments have closed borders, imposed prolonged quarantines and may continue those measures or implement other restrictions and requirements in light of the continuing spread of the pandemic. We expect that these evolving restrictions and requirements, as well as the corresponding need to adapt to new methods of conducting business remotely, will continue to have an adverse effect on our business.

New Accounting Standards

Recently adopted accounting pronouncements

As of January 1, 2020, we adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses, which requires the measurement of expected lifetime credit losses, rather than incurred losses, for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. We adopted this ASU using the modified retrospective approach. The impact of the adoption of this ASU was an increase to our allowance for doubtful accounts and a decrease to retained earnings of $4 million.

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


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

Balance at end of period	$	122	$	122

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

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

2. ACQUISITIONS AND OTHER ARRANGEMENTS

Seprafilm Adhesion Barrier

In February 2020, we completed the acquisition of the product rights to Seprafilm Adhesion Barrier (Seprafilm) from Sanofi for approximately $342 million in cash. Seprafilm is indicated for use in patients undergoing abdominal or pelvic laparotomy as an adjunct intended to reduce the incidence, extent and severity of postoperative adhesions between the abdominal wall and the underlying viscera such as omentum, small bowel, bladder, and stomach, and between the uterus and surrounding structures such as tubes and ovaries, large bowel, and bladder. We concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting.

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


(in millions)
Assets acquired


Inventories	$	18


Goodwill	28
Other intangible assets	296



Total assets acquired	$	342

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

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

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

Cheetah Medical, Inc.

On October 25, 2019, we acquired 100 percent of Cheetah Medical, Inc. (Cheetah) for total upfront cash consideration of $195 million, net of cash acquired, with the potential for additional cash consideration, up to $40 million, based on clinical and commercial milestones for which the acquisition date fair value was $18 million. In the third quarter of 2020, we received $7 million from the sellers as a result of an acquisition price adjustment in accordance with the acquisition agreement. Additionally, we recorded measurement period adjustments in the third quarter of 2020 to decrease the net deferred tax liabilities acquired by $20 million. The measurement period adjustments did not impact our results of operations.

The following table summarizes the fair value of consideration transferred:


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

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


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

Other Business Combinations

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

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

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

Other Business Development Activities

In January 2020, we acquired the U.S. rights to an additional product for $60 million. The purchase price was capitalized as a developed-technology intangible asset in the quarter ended March 31, 2020 and is being amortized over its estimated useful life of 11 years.

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

3. SUPPLEMENTAL FINANCIAL INFORMATION

Interest Expense, Net


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

Other (Income) Expense, Net


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2020		2019		2020		2019
Foreign exchange losses, net	$	23	$	30	$	44	$	44
Pension and other postretirement benefit plans	—		(17)		(2)		(48)
Other, net	(7)		(4)		(10)		(4)
Other (income) expense, net	$	16	$	9	$	32	$	(8)

Inventories


(in millions)	September 30, 2020		December 31, 2019
Raw materials	$	462	$	377
Work in process	205		185
Finished goods	1,321		1,091
Inventories	$	1,988	$	1,653

Property, Plant and Equipment, Net


(in millions)	September 30, 2020		December 31, 2019
Property, plant and equipment, at cost	$	10,990	$	10,660
Accumulated depreciation	(6,530)		(6,148)
Property, plant and equipment, net	$	4,460	$	4,512

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, 2020 and 2019 were $42 million and $164 million, respectively. Right-of-use finance lease assets obtained in exchange for lease obligations for the nine months ended September 30, 2020 were $7 million. As of September 30,

2020, we have entered into lease agreements with aggregate future lease payments of approximately $45 million for facilities that have not yet commenced.

Purchases of property, plant and equipment included in accounts payable and accrued liabilities as of September 30, 2020 and 2019 was $48 million and $47 million, respectively.

4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by business segment.


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

As of September 30, 2020, there were no reductions in goodwill relating to impairment losses.

Other intangible assets, net

The following is a summary of our other intangible assets.


(in millions)	Developed technology, including patents		Other amortized intangible assets		Indefinite-lived intangible assets		Total
September 30, 2020
Gross other intangible assets	$	2,675	$	475	$	179	$	3,329
Accumulated amortization	(1,343)		(308)		—		(1,651)
Other intangible assets, net	$	1,332	$	167	$	179	$	1,678
December 31, 2019
Gross other intangible assets	$	2,309	$	464	$	173	$	2,946
Accumulated amortization	(1,190)		(285)		—		(1,475)
Other intangible assets, net	$	1,119	$	179	$	173	$	1,471

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

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

5. FINANCING ARRANGEMENTS

Debt Issuance

In March 2020, we issued $750 million of 3.75% senior notes due in October 2025 and $500 million of 3.95% senior notes due in April 2030 (collectively, the senior notes). Pursuant to a registration rights agreement (the Registration Rights Agreement) with the initial purchasers of the senior notes, we agreed to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the senior notes for new notes with terms substantially identical in all material respects to the senior notes and to have such registration statement declared effective under the U.S. Securities Act of 1933. If we fail to have such registration statement declared

effective by September 17, 2021 (a registration default), the annual interest rate on the senior notes would increase by 0.25% for the 90-day period immediately following such registration default and by an additional 0.25% thereafter. The maximum additional interest rate is 0.50% per annum and if a registration default is corrected, the senior notes would revert to the original interest rates. The payment of additional interest is the sole remedy for the holders of the senior notes in the event of a registration default.

Credit Facilities

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

6. COMMITMENTS AND CONTINGENCIES

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

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

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

Environmental

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

General Litigation

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

In April 2017, we became aware of a criminal investigation by the U.S. Department of Justice (DOJ), Antitrust Division and a federal grand jury in the United States District Court for the Eastern District of Pennsylvania. We and an employee received subpoenas seeking production of documents and testimony regarding the manufacturing, selling, pricing and shortages of IV solutions and containers (including saline solutions and certain other injectable medicines sold by us) and communications with competitors regarding the same. On November 30, 2018, the DOJ notified us that it had closed the investigation. The New York Attorney General has also requested that we provide information regarding business practices in the IV saline industry. We have cooperated with the New York Attorney General.

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

In November 2019, we and certain of our officers were named in a class action complaint captioned Ethan E. Silverman et al. v. Baxter International Inc. et al. that was filed in the United States District Court for the Northern District of Illinois. The plaintiff, who allegedly purchased shares of our common stock during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter common stock between February 21, 2019 and October 23, 2019. The plaintiff alleges that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to certain intra-company transactions undertaken for the purpose of generating foreign exchange gains or avoiding foreign exchange losses, as well as our internal controls over financial reporting. On January 29, 2020, the Court appointed Varma Mutual Pension Insurance Company and Louisiana Municipal Police Employees Retirement System as lead plaintiffs in the case. Plaintiffs filed an amended complaint on June 25, 2020 containing substantially the same allegations. On August 24, 2020, we filed a motion to dismiss the amended complaint. In addition, we have received a stockholder request for inspection of our books and records in connection with the announcement made in our Form 8-K on October 24, 2019 that we had commenced an internal investigation into certain intra-company transactions that impacted our previously reported non-operating foreign exchange gains and losses. As initially disclosed on October 24, 2019, we also voluntarily advised the staff of the SEC of our internal investigation and we are continuing to cooperate with the staff of the SEC.

In March 2020, two lawsuits were filed against us in the Northern District of Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used in our manufacturing facility in Mountain Home, Arkansas to sterilize certain of our products. The plaintiffs seek damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief.

Other

As previously disclosed, in 2008 we recalled our heparin sodium injection products in the United States. Following the recall, more than 1,000 lawsuits alleging that plaintiffs suffered various reactions to a heparin contaminant, in some cases resulting in fatalities, were filed. In January 2019, the last of these cases was settled. In the first nine months of 2019, following the resolution of an insurance dispute, we received cash proceeds of $39 million for our allocation of the insurance proceeds under a settlement and cost-sharing agreement related to the defense of the heparin product liability cases. We recognized a $37 million gain in connection with the resolution of the dispute with the insurer that is classified within other operating expense (income), net on the condensed consolidated statement of income for the nine months ended September 30, 2019.

In September 2017, Hurricane Maria caused damage to certain of our assets in Puerto Rico and disrupted operations. As previously disclosed, we realized $42 million of insurance recoveries in 2018 related to the damages and losses from that hurricane. In July 2019, an additional $40 million of claims were approved by our insurers and a gain was recognized within other operating expense (income), net on the condensed consolidated statements of income for the three and nine months ended September 30, 2019. In October 2019, an additional $60 million of claims were approved by our insurers and a gain for that amount was recognized within other operating expense (income), net in the fourth quarter of 2019. No further insurance recoveries are expected.

7. STOCKHOLDERS’ EQUITY

Stock Options Award Modification

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

Cash Dividends

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

Stock Repurchase Programs

In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. During the first nine months of 2020, we did not repurchase any shares under this authority. During the first nine months of 2019, we repurchased 13.5 million shares pursuant to Rule 10b5-1 plans and otherwise. As of September 30, 2019, we recognized a liability within accounts payable and accrued liabilities of $37 million for share repurchases that settled in early October 2019. We had $897 million remaining available under the authorization as of September 30, 2020. After giving effect to the October 2020 approval, we had $2.4 billion remaining under this authority as of October 29, 2020.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

The following table is a net-of-tax summary of the changes in accumulated other comprehensive (loss) income (AOCI) by component for the nine months ended September 30, 2020 and 2019.


(in millions)	CTA		Pension and OPEB plans		Hedging activities		Total
Gains (losses)
Balance as of December 31, 2019	$	(2,954)	$	(715)	$	(41)	$	(3,710)
Other comprehensive income (loss) before reclassifications	(43)		(9)		(110)		(162)
Amounts reclassified from AOCI (a)	—		35		(2)		33
Net other comprehensive (loss) income	(43)		26		(112)		(129)
Balance as of September 30, 2020	$	(2,997)	$	(689)	$	(153)	$	(3,839)


(in millions)	CTA		Pension and OPEB plans		Hedging activities		Total
Gains (losses)
Balance as of December 31, 2018	$	(2,868)	$	(954)	$	(1)	$	(3,823)
Adoption of new accounting standard	9		(169)		(1)		(161)
Other comprehensive income (loss) before reclassifications	(272)		20		(66)		(318)
Amounts reclassified from AOCI (a)	—		17		(3)		14
Net other comprehensive (loss) income	(272)		37		(69)		(304)
Balance as of September 30, 2019	$	(3,131)	$	(1,086)	$	(71)	$	(4,288)

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

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


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




	Amounts reclassified from AOCI (a)
(in millions)	Three months ended September 30, 2019		Nine months ended September 30, 2019		Location of impact in income statement
Amortization of pension and OPEB items
Amortization of net losses and prior service costs or credits	$	(8)	$	(23)	Other (income) expense, net
Less: Tax effect	4		6		Income tax expense
	$	(4)	$	(17)	Net of tax
Gains on hedging activities
Foreign exchange contracts	$	2	$	3	Cost of sales
Less: Tax effect	—		—		Income tax expense
	$	2	$	3	Net of tax
Total reclassifications for the period	$	(2)	$	(14)	Total net of tax

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

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

9. REVENUES

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

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

The majority of our performance obligations are satisfied at a point in time. This includes sales of our broad portfolio of essential healthcare products across our geographic segments including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. For a majority of these sales, our performance obligation is satisfied upon delivery to the customer. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation.

To a lesser extent, in all of our segments, we enter into other types of contracts including contract manufacturing arrangements, equipment leases, and certain subscription software and licensing arrangements. We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services. Revenue is recognized over time when we are creating or enhancing an asset that the customer controls as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.

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

Significant Judgments

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration related to rebates, product returns, sales discounts and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in accounts receivable, net and accounts payable and accrued liabilities on the condensed consolidated balance sheets. Management's estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract using the expected value method. The amount of variable consideration included in the net sales price is limited to the amount for which it is probable that a significant reversal in revenue will not occur when the related uncertainty is resolved. Revenue recognized during the three and nine months ended September 30, 2020 and 2019 related to performance obligations satisfied in prior periods was not material.

Contract Balances

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

For contract manufacturing arrangements, revenue is primarily recognized throughout the production cycle, which typically lasts up to 90 days, resulting in the recognition of contract assets until the related services are completed and the customers are billed. Additionally, for arrangements containing a performance obligation to deliver software that can be used with medical devices, we recognize revenue upon delivery of the software, which results in the recognition of contract assets when customers are billed over time, generally over one to five years. For bundled contracts involving equipment delivered up-front and consumable medical products to be delivered over time, total contract revenue is allocated between the equipment and consumable medical products. In certain of those arrangements, a contract asset is created for the difference between the amount of equipment revenue recognized upon delivery and the amount of consideration initially receivable from the customer. In those arrangements, the contract asset becomes a trade account receivable as consumable medical products are provided and billed, generally over one to seven years. Our contract asset balances totaled $146 million as of September 30, 2020, of which $58 million related to contract manufacturing services, $39 million related to software sales and $49 million related to bundled equipment and consumable medical products contracts. Our contract asset balances totaled $131

million as of December 31, 2019, of which $36 million related to contract manufacturing services, $43 million related to software sales and $52 million related to bundled equipment and consumable medical products contracts. Contract assets are presented within accounts receivable, net ($81 million and $63 million as of September 30, 2020 and December 31, 2019, respectively) and other non-current assets ($65 million and $68 million as of September 30, 2020 and December 31, 2019, respectively) in the accompanying condensed consolidated balance sheets. Contract liabilities as of September 30, 2020 and December 31, 2019 were $63 million and $12 million, respectively, and were included in accounts payable and other accrued liabilities ($31 million as of September 30, 2020) and other non-current liabilities ($32 million and $12 million as of September 30, 2020 and December 31, 2019, respectively) in the accompanying condensed consolidated balance sheets. During the nine months ended September 30, 2020, the amount of revenue recognized that was included in contract liabilities as of December 31, 2019 was not significant.

Disaggregation of Net Sales

The following tables disaggregate our net sales by Global Business Unit (GBU) between the U.S. and international:


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



	Nine months ended September 30,
	2020						2019
(in millions)	U.S.		International		Total		U.S.		International		Total
Renal Care 1	$	629	$	2,115	$	2,744	$	587	$	2,092	$	2,679
Medication Delivery 2	1,296		686		1,982		1,308		716		2,024
Pharmaceuticals 3	653		899		1,552		690		885		1,575
Clinical Nutrition 4	250		426		676		236		403		639
Advanced Surgery 5	370		258		628		397		249		646
Acute Therapies 6	204		315		519		136		255		391
Other 7	186		205		391		183		186		369
Total Baxter	$	3,588	$	4,904	$	8,492	$	3,537	$	4,786	$	8,323

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

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

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

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

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

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

7Other primarily includes sales of contract manufacturing services from our pharmaceutical partnering business.

Lease Revenue

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

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


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

The components of lease revenue for the three and nine months ended September 30, 2019 were:


(in millions)	Three months ended September 30, 2019		Nine months ended September 30, 2019
Sales-type lease revenue	$	3	$	14
Operating lease revenue	16		46
Variable lease revenue	23		65
Total lease revenue	$	42	$	125

10. BUSINESS OPTIMIZATION CHARGES

In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. From the commencement of our business optimization activities in the second half of 2015 through September 30, 2020, we have incurred cumulative pre-tax costs of $1.1 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments and accelerated depreciation. We currently expect to incur additional pre-tax costs of approximately $15 million through the completion of the initiatives that are currently underway, primarily related to implementation costs. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods.

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


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2020		2019		2020		2019
Restructuring charges	$	26	$	17	$	58	$	94
Costs to implement business optimization programs	6		10		19		32
Accelerated depreciation	—		1		—		5
Total business optimization charges	$	32	$	28	$	77	$	131

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, 2020 and 2019, respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs. The costs were generally included within cost of sales, SG&A expense and R&D expense.

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

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


	Three months ended September 30, 2020
(in millions)	COGS		SG&A		R&D		Total
Employee termination costs	$	4	$	15	$	1	$	20
Contract termination and other costs	1		3		—		4
Asset impairments	—		2		—		2
Total restructuring charges	$	5	$	20	$	1	$	26


	Three months ended September 30, 2019
(in millions)	COGS		SG&A		R&D		Total
Employee termination costs	$	1	$	2	$	2	$	5
Contract termination and other costs	1		—		—		1
Asset impairments	7		—		4		11
Total restructuring charges	$	9	$	2	$	6	$	17



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



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

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

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


(in millions)
Liability balance as of December 31, 2019	$	92
Charges	53
Payments	(63)
Reserve adjustments	(5)
Currency translation	4
Liability balance as of September 30, 2020	$	81

Substantially all of our restructuring liabilities as of September 30, 2020 relate to employee termination costs, with the remaining liabilities attributable to contract termination costs. Substantially all of the cash payments for those liabilities are expected to be disbursed by the end of 2021.

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)	2020		2019		2020		2019
Pension benefits
Service cost	$	20	$	18	$	61	$	56
Interest cost	24		47		71		137
Expected return on plan assets	(40)		(74)		(121)		(214)
Amortization of net losses and prior service costs	19		15		57		44
Net periodic pension cost	$	23	$	6	$	68	$	23
OPEB
Interest cost	$	2	$	2	$	4	$	6
Amortization of net loss and prior service credit	(5)		(7)		(13)		(21)
Net periodic OPEB cost (income)	$	(3)	$	(5)	$	(9)	$	(15)

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

12. INCOME TAXES

Our effective income tax rate was 13.5% and 22.0% for the three months ended September 30, 2020 and 2019, respectively, and 13.2% and 13.7% for the nine months ended September 30, 2020 and 2019, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.

For the three months ended September 30, 2020, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a favorable geographic earnings mix and changes related to our ability to realize foreign tax credits. For the nine months ended September 30, 2020, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily attributable to a favorable geographic earnings mix and excess tax benefits on stock compensation awards.

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

13. EARNINGS PER SHARE

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

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


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

The effect of dilutive securities includes unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excludes 4 million and 3 million equity awards for the three and nine months ended September 30, 2020, respectively, and 4 million equity awards each for the three and nine months ended September 30, 2019, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS.

14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, British Pound, Chinese Yuan, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative instruments to further reduce the net exposure to foreign exchange risk. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from changes in foreign exchange rates. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.

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

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

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

Cash Flow Hedges

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

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

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

Fair Value Hedges

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

Net Investment Hedges

In May 2017, we issued €600 million of senior notes due May 2025. In May 2019, we issued €750 million of senior notes due May 2024 and €750 million of senior notes due May 2029. We have designated these debt obligations as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments on the outstanding debt balances are recorded as a component of AOCI. As of September 30, 2020, we had an accumulated pre-tax unrealized translation loss in AOCI of $125 million related to the Euro-denominated senior notes.

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

Dedesignations

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

There were no hedge dedesignations in the first nine months of 2020 or 2019 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 2020 or 2019.

If we remove a net investment hedge designation, any gains or losses recognized in AOCI are not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged. In the second quarter of 2019, we dedesignated €1.2 billion of forward contracts designated as a net investment hedge of our European operations. There were no net investment hedges terminated during the first nine months of 2020.

Undesignated Derivative Instruments

We use forward contracts to hedge earnings from the effects of foreign exchange relating to certain of our intra-company and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges and the terms of these instruments generally do not exceed one month.

The total notional amount of undesignated derivative instruments was $765 million as of September 30, 2020 and $619 million as of December 31, 2019.

Gains and Losses on Hedging Instruments

The following tables summarize the gains and losses on our hedging instruments and the classification of those gains and losses within our condensed consolidated financial statements for the three months ended September 30, 2020 and 2019.


	Gain (loss) recognized in OCI				Location of gain (loss) in income statement	Gain (loss) reclassified from AOCI into income
(in millions)	2020		2019			2020		2019
Cash flow hedges
Interest rate contracts	$	31	$	(57)	Interest expense, net	$	—	$	—
Foreign exchange contracts	(6)		4		Cost of sales	(2)		2
Net investment hedges	(103)		96		Other (income) expense, net	—		—
Total	$	(78)	$	43		$	(2)	$	2


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


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


	Location of gain (loss) in income statement	Gain (loss) recognized in income
(in millions)		2020		2019


Undesignated derivative instruments
Foreign exchange contracts	Other (income) expense, net	$	22	$	(16)

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

Derivative Assets and Liabilities

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of September 30, 2020.


	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
Interest rate contracts	Other non-current assets	$	—	Other non-current liabilities	$	179
Foreign exchange contracts	Prepaid expenses and other current assets	3		Accounts payable and accrued liabilities	3

Total derivative instruments designated as hedges		3			182
Undesignated derivative instruments
Foreign exchange contracts	Prepaid expenses and other current assets	12		Accounts payable and accrued liabilities	9
Total derivative instruments		$	15		$	191

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


	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
Interest rate contracts	Other non-current assets	$	10	Other non-current liabilities	$	52
Foreign exchange contracts	Prepaid expenses and other current assets	10		Accounts payable and accrued liabilities	—

Total derivative instruments designated as hedges		20			52
Undesignated derivative instruments
Foreign exchange contracts	Prepaid expenses and other current assets	1		Accounts payable and accrued liabilities	2
Total derivative instruments		$	21		$	54

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

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


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

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, 2020		Balance as of December 31, 2019		Balance as of September 30, 2020		Balance as of December 31, 2019
Long-term debt	$	102	$	103	$	5	$	6

(a) These fair value hedges were terminated prior to December 31, 2019.

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, 2020		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign exchange contracts	$	15	$	—	$	15	$	—

Debt securities	5		—		5		—
Marketable equity securities	15		15		—		—
Total	$	35	$	15	$	20	$	—
Liabilities
Foreign exchange contracts	$	12	$	—	$	12	$	—
Interest rate contracts	179		—		179		—
Contingent payments related to acquisitions	30		—		—		30
Total	$	221	$	—	$	191	$	30


			Basis of fair value measurement
(in millions)	Balance as of December 31, 2019		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign exchange contracts	$	11	$	—	$	11	$	—
Interest rate contracts	10		—		10		—
Marketable equity securities	3		3		—		—
Total	$	24	$	3	$	21	$	—
Liabilities
Foreign exchange contracts	$	2	$	—	$	2	$	—
Interest rate contracts	52		—		52		—
Contingent payments related to acquisitions	39		—		—		39
Total	$	93	$	—	$	54	$	39

As of September 30, 2020 and December 31, 2019, cash and cash equivalents of $4.4 billion and $3.3 billion, respectively, included money market and other short-term funds of approximately $2.5 billion and $1.7 billion, respectively, which are considered Level 2 in the fair value hierarchy.

For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The majority of the derivatives entered into by us are valued using internal valuation techniques as no quoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholes

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

Contingent payments related to acquisitions accounted for as business combinations, which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques. The fair value of milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or the expected timing of payments is accelerated. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increases or the expected timing of payment is accelerated. The following table is a reconciliation of recurring fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions.


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

Change in fair value recognized in earnings	1		—		(2)		(4)
Payments	(10)		—		(11)		(1)
Fair value at end of period	$	30	$	27	$	30	$	27

Financial Instruments Not Measured at Fair Value

In addition to the financial instruments that we are required to recognize at fair value in the condensed consolidated balance sheets, we have certain financial instruments that are recognized at amortized cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized in the condensed consolidated balance sheets and the estimated fair values as of September 30, 2020 and December 31, 2019.


	Book values				Fair values(a)
(in millions)	2020		2019		2020		2019
Liabilities
Short-term debt	$	—	$	226	$	—	$	226
Current maturities of long-term debt and finance lease obligations	727		315		732		315
Long-term debt and finance lease obligations	5,760		4,809		6,472		5,156

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

The carrying value of short-term debt approximates its fair value due to the short-term maturities of the obligations. The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instruments. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with our credit risk. The carrying values of other financial instruments, such as accounts receivable and accounts payable, approximate their fair values due to the short-term maturities of most of those assets and liabilities.

Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $92 million at September 30, 2020 and $73 million at December 31, 2019. Those investments are included in Other non-current assets on our condensed consolidated balance sheets.

16. SEGMENT INFORMATION

We manage our business based on three geographical segments: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Our segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products.

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

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

Financial information for our segments is as follows.


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2020		2019		2020		2019
Net sales:
Americas	$	1,549	$	1,534	$	4,455	$	4,462
EMEA	777		730		2,262		2,179
APAC	646		587		1,775		1,682
Total net sales	$	2,972	$	2,851	$	8,492	$	8,323
Operating income:
Americas	$	577	$	595	$	1,610	$	1,715
EMEA	160		162		480		465
APAC	161		138		432		394
Total segment operating income	$	898	$	895	$	2,522	$	2,574

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


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2020		2019		2020		2019
Total segment operating income	$	898	$	895	$	2,522	$	2,574
Corporate and other	(428)		(392)		(1,312)		(1,338)
Total operating income	470		503		1,210		1,236
Net interest expense	39		13		96		51
Other (income) expense, net	16		9		32		(8)
Income before income taxes	$	415	$	481	$	1,082	$	1,193

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

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

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

RESULTS OF OPERATIONS

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

Special Items

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


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2020		2019		2020		2019
Gross Margin
Intangible asset amortization expense	$	(57)	$	(48)	$	(165)	$	(136)
Intangible asset impairments 1	—		—		(17)		(31)
Business optimization items 2	(6)		(10)		(24)		(39)
Acquisition and integration expenses 3	—		(8)		(11)		(25)

European medical devices regulation 4	(8)		(7)		(22)		(17)


Investigation and related costs 5	—		—		(3)		—
Total Special Items	$	(71)	$	(73)	$	(242)	$	(248)
Impact on Gross Margin Ratio	(2.4 pts)		(2.6 pts)		(2.8 pts)		(3.0 pts)
Selling, General and Administrative (SG&A) Expenses
Business optimization items 2	$	25	$	10	$	53	$	50
Acquisition and integration expenses 3	—		3		7		8
Investigation and related costs 5	2		—		18		—

Total Special Items	$	27	$	13	$	78	$	58
Impact on SG&A Ratio	0.9 pts		0.5 pts		0.9 pts		0.7 pts
Research and Development (R&D) Expenses
Business optimization items 2	$	1	$	8	$	—	$	42
Acquisition and integration expenses 3	—		2		22		8

Investigation and related costs 5	—		—		1		—
Total Special Items	$	1	$	10	$	23	$	50
Impact on R&D Ratio	0.0 pts		0.4 pts		0.2 pts		0.6 pts
Other Operating Expense (Income), net
Business optimization items 2	$	—	$	—	$	(17)	$	—
Acquisition and integration expenses 3	1		—		(2)		(4)
Insurance recoveries from a legacy product-related matter 6	—		(4)		—		(37)
Hurricane Maria insurance recoveries 7	—		(40)		—		(40)

Total Special Items	$	1	$	(44)	$	(19)	$	(81)
Income Tax Expense
Tax effects of special items and impact of U.S. tax reform ⁸	$	(25)	$	(35)	$	(73)	$	(83)
Total Special Items	$	(25)	$	(35)	$	(73)	$	(83)
Impact on Effective Tax Rate	(2.2 pts)		(4.5 pts)		(2.2 pts)		(3.1 pts)

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

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

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

3Our results in 2020 included $1 million in the third quarter and $38 million in the first nine months of acquisition and integration expenses. This included acquisition and integration expenses related to our acquisitions of Cheetah Medical Inc. (Cheetah) and Seprafilm and the purchase of in-process R&D assets in the first nine months. Additionally, the change in the estimated fair value of contingent consideration liabilities in 2020 was an expense in the third quarter and a benefit in the first nine months. Our results in 2019 included $13 million in the third quarter and $37 million in the first nine months of acquisition and integration expenses. This included acquisition and integration expenses related to our acquisitions of Claris and the Recothrom and Preveleak products in prior periods and the purchase of in-process R&D assets in the third quarter and first nine months, partially offset by the change in the estimated fair value of contingent consideration liabilities in the first nine months. Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.

4Our results in 2020 included $8 million in the third quarter and $22 million in the first nine months of costs related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that are scheduled to become effective in 2021. Our results in 2019 included $7 million in the third quarter and $17 million in the first nine months of costs related to these requirements.

5Our results in 2020 included costs of $2 million in the third quarter and $22 million in the first nine months for investigation and related costs. This included $2 million in the third quarter and $14 million in the first nine months of costs related to our investigation of foreign exchange gains and losses associated with certain intra-company transactions and related legal matters. Additionally, we recorded incremental stock compensation expense of $8 million in the first nine months as we extended the term of certain stock options that were scheduled to expire in the first quarter of 2020. Refer to Notes 6 and 7 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation and stock compensation expense.

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

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

8Reflected in this item is the income tax impact of the special items identified in this table. Additionally, our results in 2019 included a benefit of $16 million related to an adjustment for U.S. tax reform. The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.

NET SALES


	Three months ended September 30,				Percent change
(in millions)	2020		2019		At actual currency rates		At constant currency rates
United States	$	1,244	$	1,224	2	%	2	%
International	$	1,728	1,627		6	%	5	%
Total net sales	$	2,972	$	2,851	4	%	4	%


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

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

The comparisons presented at constant currency rates reflect local currency sales at the prior period’s foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S. GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

Global Business Unit Net Sales Reporting

Our global business units (GBUs) include the following:

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

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

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

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

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

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

• Other primarily includes sales of contract manufacturing services from our pharmaceutical partnering business.

The following is a summary of net sales by GBU.


	Three months ended September 30,				Percent change
(in millions)	2020		2019		At actual currency rates		At constant currency rates
Renal Care	$	955	$	918	4	%	4	%
Medication Delivery	680		701		(3)	%	(3)	%
Pharmaceuticals	540		527		2	%	1	%
Clinical Nutrition	237		219		8	%	5	%
Advanced Surgery	236		216		9	%	9	%
Acute Therapies	177		130		36	%	35	%
Other	147		140		5	%	4	%
Total Baxter	$	2,972	$	2,851	4	%	4	%


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

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

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

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

Clinical Nutrition net sales increased 8% in the third quarter and 6% in the first nine months of 2020, as compared to the prior-year periods. The increase in the third quarter and first nine months of 2020 was driven by increased demand for our PN therapies and related products, recent product launches and competitor shortages for amino acids. Additionally, foreign exchange rate changes had a positive impact on net sales of 3% in the third quarter and a negative impact of 1% for the first nine months of 2020, as compared to the prior-year periods.

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

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

Other net sales increased 5% in the third quarter and 6% in the first nine months of 2020, as compared to the prior-year periods. The increase in the third quarter and first nine months of 2020 was driven by increased demand for our contract manufacturing services. Additionally, foreign exchange rate changes had a positive impact on net sales of 1% in the third quarter and a negative impact of 1% for the first nine months of 2020, as compared to the prior-year periods.

Gross Margin and Expense Ratios


	Three months ended September 30,
	2020		% of net sales		2019		% of net sales		$ change		% change
Gross margin	$	1,195	40.2	%	$	1,230	43.1	%	$	(35)	(2.8)	%
SG&A	$	601	20.2	%	$	627	22.0	%	$	(26)	(4.1)	%
R&D	$	123	4.1	%	$	144	5.1	%	$	(21)	(14.6)	%



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

Gross Margin

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

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

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

SG&A

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

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

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

R&D

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

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

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

Business Optimization Items

Beginning in the second half of 2015, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through September 30, 2020, we have incurred cumulative pre-tax costs of $1.1 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments, and accelerated depreciation. We currently expect to incur additional pre-tax costs of approximately $15 million through the completion of the initiatives that are currently underway, primarily related to implementation costs. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods. The reductions in our cost base from these actions in the aggregate are expected to provide cumulative annual pre-tax savings of more than $1.2 billion once the remaining actions are complete. The savings from these actions will impact cost of sales, SG&A expenses, and R&D expenses. Approximately 95 percent of the expected annual pre-tax savings are expected to be realized by the end of 2020, with the remainder by the end of 2023.

Other Operating Expense (Income), Net

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

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

Interest Expense, Net

Interest expense, net was $39 million and $96 million in the third quarter and first nine months of 2020, respectively, and $13 million and $51 million in the third quarter and first nine months of 2019, respectively. The increase in the third quarter and first nine months of 2020 was primarily driven by higher average debt outstanding as a result of the March 2020 issuance of $750 million of 3.75% senior notes due October 2025 and $500 million of 3.95% senior notes due April 2030. Additionally, interest expense, net increased in the first nine months of 2020 due to the May 2019 issuance of €750 million of 0.40% senior notes due May 2024 and €750 million of 1.3% senior notes due May 2029.

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

Other (Income) Expense, Net

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

Income Taxes

Our effective income tax rate was 13.5% and 22.0% in the third quarter and 13.2% and 13.7% in the first nine months of 2020 and 2019, respectively. Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.

Segment Results

We use operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our segments. The following is a summary of financial information for our reportable segments:


	Net sales								Operating income (loss)
	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
(in millions)	2020		2019		2020		2019		2020		2019		2020		2019
Americas	$	1,549	$	1,534	$	4,455	$	4,462	$	577	$	595	$	1,610	$	1,715
EMEA	777		730		2,262		2,179		160		162		480		465
APAC	646		587		1,775		1,682		161		138		432		394
Corporate and other	—		—		—		—		(428)		(392)		(1,312)		(1,338)
Total	$	2,972	$	2,851	$	8,492	$	8,323	$	470	$	503	$	1,210	$	1,236

Americas

Segment net sales and operating income were $1.5 billion and $577 million, respectively, in the third quarter and $4.5 billion and $1.6 billion, respectively, in the first nine months of 2020. Segment net sales and operating income were $1.5 billion and $595 million, respectively, in the third quarter and $4.5 billion and $1.7 billion, respectively, in the first nine months of 2019. The decrease in operating profit in the third quarter was due to lower gross profit as a result of an unfavorable product mix and incremental logistics costs due to the impact of the COVID-19 pandemic. The decrease in operating profit in the first nine months of 2020 was primarily driven by decreased sales in multiple GBUs, particularly Medication Delivery, Pharmaceuticals and Advanced Surgery, and lower gross profit as a result of an unfavorable product mix and incremental logistics costs due primarily to the impact of the COVID-19 pandemic. The decreases were partially offset by favorable performance in Acute Therapies and Clinical Nutrition as well as the acquisition of Seprafilm.

EMEA

Segment net sales and operating income were $777 million and $160 million, respectively, in the third quarter and $2.3 billion and $480 million, respectively, in the first nine months of 2020. Segment net sales and operating income were $730 million and $162 million, respectively, in the third quarter and $2.2 billion and $465 million, respectively, in the first nine months of 2019. The change in foreign exchange rates had a positive impact on results in the third quarter of 2020 as compared to 2019. On a constant currency basis, operating profit increased in both the third quarter and first nine months of 2020 due to increased sales in Acute Therapies, Clinical Nutrition, Pharmaceuticals and Renal Care. For the first nine months of 2020, favorable results were partially offset by decreased sales in Advanced Surgery.

APAC

Segment net sales and operating income were $646 million and $161 million, respectively, in the third quarter and $1.8 billion and $432 million, respectively, in the first nine months of 2020. Segment net sales and operating income were $587 million and $138 million, respectively, in the third quarter and $1.7 billion and $394 million, respectively, in the first nine months of 2019. The increases operating profit in the third quarter and first nine months of 2020 were primarily driven by increased sales in multiple GBUs, particularly Renal Care, Acute Therapies and Pharmaceuticals. The acquisition of Seprafilm also positively contributed to results in 2020.

Corporate and Other

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

LIQUIDITY AND CAPITAL RESOURCES

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


	Nine months ended September 30,
(in millions)	2020		2019
Cash flows from operations - continuing operations	$	1,158	$	1,281
Cash flows from investing activities	(915)		(679)
Cash flows from financing activities	798		614

Cash Flows from Operations — Continuing Operations

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

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

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

Cash Flows from Investing Activities

In the first nine months of 2020, cash used for investing activities included payments for acquisitions of $466 million, primarily related to Seprafilm and rights to multiple products we acquired, and capital expenditures of $472 million. In the first nine months of 2019, cash used for investing activities included capital expenditures of $505 million and payments for acquisitions of $186 million, primarily related to the U.S. rights to multiple products we acquired.

Cash Flows from Financing Activities

In the first nine months of 2020, cash generated from financing activities included $1.2 billion of net proceeds from the issuance of $750 million of senior notes due in 2025 and $500 million of senior notes due in 2030. We have used the net proceeds from the senior notes issuances for general corporate purposes, including to strengthen our balance sheet as a precautionary measure in light of the COVID-19 pandemic. Cash generated from financing activities in the nine months ended September 30, 2020 also included stock issued under employee benefit plans of $180 million and was partially offset by the repayment of borrowings under our Euro-denominated credit facility of €200 million ($225 million) and dividend payments of $348 million. In the first nine months of 2019, cash generated from financing activities included $1.7 billion of net proceeds from the issuance of €750 million of senior notes due in 2024 and €750 million of senior notes due in 2029 along with stock issued under employee benefit plans of $334 million, partially offset by payments for treasury stock repurchases of $1.0 billion and dividend payments of $310 million.

As authorized by the Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. We did not repurchase any shares under this authority in the first nine months of 2020 and had $897 million remaining available under this authorization as of September 30, 2020. After giving effect to the October 2020 approval, we had $2.4 billion remaining under this authority as of October 29, 2020. We expect to recommence our share repurchase activity in the fourth quarter of 2020.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

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

Access to Capital and Credit Ratings

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

Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives. Between March and July 2020, Standard & Poor’s, Fitch, and Moody’s reaffirmed our investment grade credit ratings that we disclosed in our 2019 Annual Report.

LIBOR Reform

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

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our 2019 Annual Report. Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2019 Annual Report. There have been no significant changes in the application of our critical accounting policies during the first nine months of 2020.

RECENT ACCOUNTING PRONOUNCEMENTS

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

LEGAL CONTINGENCIES

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

CERTAIN REGULATORY MATTERS

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

While FDA has not yet re-inspected the facilities, we are continuing to implement corrective and preventive actions to address FDA’s prior observations and other items identified in connection with integrating Claris into our quality systems.

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

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

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

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

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

FORWARD-LOOKING INFORMATION

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

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

These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:


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


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


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


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


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

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


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


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


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


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


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


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


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


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


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

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


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


			•			global regulatory, trade and tax policies;


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


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


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


			•			fluctuations in foreign exchange and interest rates;


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


			•			actions by tax authorities in connection with ongoing tax audits;


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


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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Currency Risk

We are primarily exposed to foreign exchange risk with respect to revenues generated outside of the United States denominated in the Euro, British Pound, Chinese Yuan, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative financial instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and stockholders’ equity volatility relating to foreign exchange. However, we don't hedge our entire foreign exchange exposure and are still subject to earnings and stockholders' equity volatility relating to foreign exchange risk. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.

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

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

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

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

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

Interest Rate and Other Risks

Refer to the caption “Interest Rate and Other Risks” in the “Financial Instrument Market Risk” section of the 2019 Annual Report. During the quarter ended September 30, 2020, we terminated an interest rate contract with a notional balance of $50 million for a $7 million cash payment. In October 2020, we terminated additional interest rate contracts with a notional balance of $350 million and a liability fair value of $109 million as of September 30, 2020 for $100 million in cash payments.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

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

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

Remediation of the Material Weakness

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

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

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

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

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

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

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

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

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

Changes in Internal Control over Financial Reporting

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

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

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

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

Review by Independent Registered Public Accounting Firm

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

Report of Independent Registered Public Accounting Firm

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

Results of Review of Interim Financial Statements

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

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

Basis for Review Results

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

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

October 29, 2020

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

Our global operations expose us to risks associated with public health crises, including epidemics and pandemics, such as the COVID-19 pandemic. COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. These measures have led to unprecedented restrictions on, disruptions in, and other related impacts on businesses and personal activities. In addition to travel restrictions put in place in early 2020, governments have closed borders, imposed prolonged quarantines and may continue those measures or implement other restrictions and requirements in light of the continuing spread of the pandemic. We expect that these evolving restrictions and requirements, as well as the corresponding need to adapt to new methods of conducting business remotely, will continue to have an adverse effect on our business. Risks associated with COVID-19 include, but are not limited to, the following:

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

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

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

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

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

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

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

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

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

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

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

•The pace of recovery when the pandemic subsides; and

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

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

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

In July 2012, we announced that our Board of Directors authorized us to repurchase up to $2.0 billion of our common stock on the open market or in private transactions. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020. During the first nine months of 2020, we did not repurchase any shares pursuant to Rule 10b5-1 plans. We had $897 million remaining under this program (as amended and after giving effect to stock repurchases) as of September 30, 2020. After giving effect to the October 2020 approval, we had $2.4 billion remaining under this program as of October 29, 2020. This program does not have an expiration date.

Item 6. Exhibits

Exhibit Index:


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

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

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

10.4*						Form of Change-in-Control Agreement

15*						Letter Re Unaudited Interim Financial Information

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

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

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

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

101.INS*						XBRL Instance Document

101.SCH*						XBRL Taxonomy Extension Schema Document

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

_____________________________________

* Filed herewith.

Signature

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


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

Exhibit 10.4

Form of Change In Control Agreement

This Change in Control Agreement (“Agreement”) is entered into by Baxter International Inc. (the “Company”) and [EXECUTIVE NAME] (the “Executive”).

Whereas, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and

Whereas, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and

Whereas, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company’s key management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; and

Now, therefore, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows:

1.Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section.

2.Term of Agreement. The Term of this Agreement shall commence on the Effective Date and shall continue in effect through the second anniversary of the Effective Date; provided, however, that commencing on the first anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than one year before the end of the then-existing Term, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the date on which such Change in Control occurred.

3.The Company’s Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive’s covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. No Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive’s employment with the Company following a Change in Control and during the Term, all subject to the terms and conditions set forth herein and provided that such termination of employment constitutes a “separation from service” for purposes of Section 409A of the Code. This Agreement shall not be construed as creating an express or implied contract of

employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company.

4.The Executive’s Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) the last day of the Potential Change in Control Period, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive’s employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive’s employment for any reason.

5.Compensation Other Than Severance Payments.

5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive’s full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive’s full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive’s employment is terminated by the Company for Disability.

5.2 If the Executive’s employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive’s full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company’s compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason.

5.3 If the Executive’s employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive’s normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company’s retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason.

5.4 Upon the occurrence of a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company (in any case within the meaning of Section 409A of the Code), notwithstanding any provision of any non-qualified defined contribution deferred compensation plans to the contrary, in lieu of any other benefit under such plans attributable to the period before 2009 or for a year commencing after the date of this Agreement, the Company shall pay to the Executive a lump sum amount, in cash,

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equal to the then present value of the deferred compensation otherwise payable to the Executive pursuant to the terms of such plans. The payments required by this Section 5.4 shall be made not later than the fifth day following the date of such change in ownership or control of the Company or change in asset ownership. The provisions of this Section 5.4 shall survive the termination of this Agreement.

5 For the two-year period commencing immediately following a Change in Control, the Company agrees: (A) to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive’s total compensation, including but not limited to the Company’s equity-based long term incentive plans and annual incentive plans, or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan; (B) to continue the Executive’s participation in the plans described in the foregoing paragraph (A) (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive’s participation relative to other participants, as existed immediately prior to the Change in Control; and (C) to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company’s pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company), not to take any other action which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, and to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the time of the Change in Control.

6Severance Payments.

6.1 If the Executive’s employment is terminated following a Change in Control and during the Term (provided that such termination of employment constitutes a “separation from service” within the meaning of Section 409A of the Code), other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 (“Severance Payments”), in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof, provided that the Executive shall have properly executed, within forty-five (45) days of his Date of Termination, and not revoked a customary general waiver and release of claims in a form reasonably acceptable to the Company. For purposes of this Agreement, the Executive’s employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive’s employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason

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occurs at the request or direction of such Person, or (iii) the Executive’s employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct.

(A)In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to [two][one and a half] times the sum of (i) the Executive’s base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (ii) the Executive’s target annual bonus under any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination or, if higher, the highest target annual bonus in respect of the fiscal year in which occurs the Change in Control or the first event or circumstance constituting Good Reason.

(B)(1) For the [twenty-four (24)][eighteen (18)] month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, accident and health insurance benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater after-tax cost to the Executive than the after-tax cost to the Executive immediately prior to such date or occurrence; provided, however, that such health and welfare benefits shall be provided, as applicable, through an arrangement that satisfies the requirements of Section 105 or 106 of the Code and, to the extent the payments represent a reimbursement of expenses incurred by the Participant, shall be paid not later than the last day of the year following the year in which the underlying expenses were incurred. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be eliminated if benefits of the same type are received by or made available to the Executive during the twenty-four (24) month period following the Executive’s termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive).

(2) In addition, if the Executive would have become entitled to benefits under the Company’s post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive’s employment terminated at any time during the period of twenty-four (24) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive’s dependents commencing on the later of (i) the date

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on which such coverage would have first become available and (ii) the date on which benefits described in subsection (1) terminate.

(3) To the extent the benefits to be made available under this Section 6.1(B) are not medical expenses within the meaning of Treas. Reg. § 1.409A-1(b)(9)(v)(B) and are not short-term deferrals within the meaning of Section 409A of the Code, then during the first six months following the Date of Termination the Executive shall pay to the Company, at the time such benefits are provided, the fair market value of such benefits, and the Company shall reimburse the Executive for any such payment not later than the fifth day following the expiration of such six-month period unless the Company reasonably determines, based on the advice of counsel, that the benefits can be provided during such six-month period without causing the Executive to be subject to an “additional tax” under Section 409A(a)(2) of the Code.

(C)Notwithstanding any provision of any annual incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. The provisions of this Section 6.1(C) shall survive the termination of this Agreement in respect of awards granted under any such annual incentive plans before the date of such termination.

(D)The Company shall provide the Executive with outplacement services suitable to the Executive’s position for a period of [two years][eighteen months] or, if earlier, until the first acceptance by the Executive of an offer of employment, in an aggregate amount not exceeding [$50,000][$35,000] . Subject to the foregoing, in no event shall any payment described in this Section 6.1(D) be made after the end of the calendar year following the calendar year in which the services were provided.

(E)The lump-sum cash payments required pursuant to the preceding provisions of this Section 6.1 hereof shall be made not later than the fifty-fifth (55th) day following the Date of Termination. Notwithstanding the above, the Executive shall not be considered to have terminated employment with the Company for purposes of this Agreement and no payments shall be due to the Executive under this Agreement unless the Executive would be considered to have incurred a “separation from service” from the Company within the meaning of Section 409A of the Code. Each amount to be paid or benefit to be provided under this Agreement shall be construed as a separate identified payment for purposes of Section 409A of the Code. Any payments described in this Agreement that are due within the “short

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term deferral period” within the meaning of Section 409A of the Code or that are otherwise exempt from application of Section 409A of the Code, shall not be treated as deferred compensation unless applicable law requires otherwise. If the Executive, at the Date of Termination, is a “specified employee” as defined in the Baxter International Inc. and Subsidiaries Deferred Compensation Plan, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement during the six-month period immediately following the Executive’s termination of employment shall instead be paid on the first business day after the date that is six months following the Executive’s termination of employment (or upon the Executive’s death, if earlier) unless the Company reasonably determines, based on the advice of counsel, that such delayed commencement is not required to avoid an “additional tax” under Section 409A(a)(2) of the Code. In addition, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, in the event that the Executive’s termination of employment occurs within fifty-five (55) days prior to the end of a calendar year, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement on or before December 31 of the year in which the termination of employment occurs shall, subject to the previous sentence of this section, instead be paid on the first business day following January 1 of the first calendar year beginning after the Executive’s termination of employment.

6.2 The payments provided in subsections (A) and (C) of Section 6.1 hereof shall be made not later than the fifty-fifth (55th) day following the Date of Termination. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations. If the Executive at the time of such separation from service is a “specified employee” as defined in the Baxter International Inc. and Subsidiaries Deferred Compensation Plan, no payments shall be made to the Executive prior to the earlier of (a) the expiration of the six (6) month period measured from the date of the Executive’s “separation from service” (as such term is defined in Section 409A of the Code), or (b) the date of the Executive’s death unless the Company reasonably determines, based on the advice of counsel, that such delayed commencement is not required to avoid an “additional tax” under Section 409A(a)(2) of the Code.

6. The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing any issue hereunder relating to the termination of the Executive’s employment (provided the Executive shall prevail in such dispute), in seeking to obtain or enforce any benefit or right provided by this Agreement (provided the Executive shall obtain or successfully enforce such benefit or right) or in connection with any tax audit or proceeding to the extent attributable to the application of Section 409A of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive’s written request for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require; provided that no such payment shall be made in respect of fees or expenses incurred by the Executive after the later of the tenth anniversary of the Date of Termination or the Executive’s death, and provided further, that, upon the Executive’s separation from service with the Company, in no event shall any additional such payments be made prior to the date that is six months after the date of the Executive’s separation from service unless the Company reasonably determines, based on the advice of

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counsel, that such delay is not required to avoid an “additional tax” under Section 409A(a)(2) of the Code.

7.Termination Procedures.

7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive’s employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 12 hereof. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board (excluding Executive, if Executive is a member of the Board) at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive’s counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail.

7.2 Date of Termination. “Date of Termination,” with respect to any purported termination of the Executive’s employment after a Change in Control and during the Term, shall mean (i) if the Executive’s employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive’s duties during such thirty (30) day period), and (ii) if the Executive’s employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that Executive shall not be considered to have terminated employment with the Company for purposes of this Agreement and no payments shall be due to the Executive under this Agreement unless the Executive would be considered to have incurred a “separation from service” from the Company within the meaning of Section 409A of the Code.

7. Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution

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of such dispute with reasonable diligence; and further provided, however, that the provisions of this Section 7.3 shall apply only to the extent that, pursuant to Treas. Reg. § 1.409A-3(g), they will not cause an additional tax under Section 409A of the Code.

8.No Mitigation. The Company agrees that, if the Executive’s employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6. Further, except as specifically provided in Section 6.1(B), no payment or benefit provided for in this Agreement shall be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

9.Certain Restrictive Covenants.

9.1 Noncompetition. The Executive understands that any entrusting of Confidential Information to him by the Company is done in reliance on a confidential relationship arising out of his employment with the Company. The Executive understands that Confidential Information may include, for example, Trade Secrets, inventions, know-how and products, customer, patient, supplier and competitor information, sales, pricing, cost, and financial data, research, development, marketing and sales programs and strategies, manufacturing, marketing and service techniques, processes and practices, and regulatory strategies. The Executive understands that Confidential Information also includes all information received by the Company or the Subsidiaries under an obligation of confidentiality to a third party. The Executive further understands that Confidential Information that the Executive may acquire or to which the Executive may have access, especially with regard to research and development projects and findings, formulae, designs, formulation, processes, the identity of suppliers, customers and patients, methods of manufacture, and cost and pricing data is of great value to the Company. In consequence of such entrusting and such consideration, the Executive shall not, directly or indirectly, for a period of two years after the Date of Termination: (i) render services to any Competing Organization in connection with any Competing Product within such geographic limits as the Company and such Competing Organization are, or would be, in actual competition when such rendering of services might potentially involve the disclosure or use of confidential information or trade secrets; or (ii) provide advice as to investment in a Competitive Business (including, without limitation, advice with respect to the purchase, sale, or operation of such business, or advice with respect to financing or other economic structuring of such business). The Executive understands that services described in the preceding sentence, including without limitation those rendered to such Competing Organization in an executive, scientific, administrative, or consulting capacity in connection with Competing Products are in support of actual competition in various geographic areas and thus fall within the prohibition of this Agreement regardless of where such services physically are rendered.

9.2 Solicitation of Customers, Suppliers and Employees. While Executive is employed by the Company, and for a period of twenty-four (24) months after the Date of Termination for any reason:

(A)The Executive shall not solicit or attempt to solicit any party who is then or, during the 12-month period prior to such solicitation or attempt by the Executive was (or was

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solicited to become), a customer or supplier of the Company or Affiliate, provided that the restriction in this Section 9.2 shall not apply to any activity on behalf of a business that is not a Competing Organization.

(B)The Executive shall not solicit, entice, persuade or induce any individual who is employed by the Company or the Subsidiaries (or was so employed within 90 days prior to the Executive’s action) to terminate or refrain from renewing or extending such employment or to become employed by or enter into contractual relations with any other individual or entity other than the Company or the Subsidiaries, and the Executive shall not approach any such employee for any such purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity.

9. Nondisparagement. The Executive agrees that, while he is employed by the Company, and after his Date of Termination, he shall not make any false, defamatory or disparaging statements about the Company, the Subsidiaries, or the officers or directors of the Company or the Subsidiaries that are reasonably likely to cause material damage to the Company, the Subsidiaries, or the officers or directors of the Company or the Subsidiaries. While the Executive is employed by the Company, and after his Date of Termination, the Company agrees, on behalf of itself and the Subsidiaries, that neither the officers nor the directors of the Company or the Subsidiaries shall make any false, defamatory or disparaging statements about the Executive that are reasonably likely to cause material damage to the Executive. Notwithstanding the foregoing, nothing in this paragraph will prevent either the Company or any Executive from responding to incorrect, disparaging or derogatory public statement by the other to the extent necessary to correct or refute such public statement. The parties acknowledge that the Executive has the right to: (1) report any good faith allegation of unlawful employment practices to any appropriate federal, state, or local government agency enforcing discrimination laws; (2) report any good faith allegation of criminal conduct to any appropriate federal, state, or local official; (3) participate in a proceeding with any appropriate federal, state, or local government agency enforcing discrimination laws; (4) make any truthful statements or disclosures required by law, regulation, or legal process; and (5) request or receive confidential legal advice.

10.Section 280G. If any payment or benefit received or to be received by the Executive (including any payment or benefit received pursuant to this Agreement or otherwise) would be, in whole or in part, subject to the excise tax imposed by Section 4999 of the Code, or any successor provision thereto, or any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the payments or benefits provided under this Agreement or any other agreement pursuant to which the Executive receives payments that give rise to the Excise Tax will either be (a) paid in full, or (b) reduced to the extent necessary to make such payments and benefits not subject to such Excise Tax. The Company shall reduce or eliminate the payments in the following order of priority in a manner consistent with Section 409A of the Code: (i) first by reducing cash compensation, (ii) next from equity compensation, and then (iii) pro rata among all remaining payments and benefits, in each case, in reverse order beginning with payments that are to be paid the farthest in time from the determination. The Executive shall receive the greater, on an after-tax basis, of (a) or (b). In no event will the Company be required to gross up any payment or benefit to the Executive to avoid the effects of the Excise Tax or to pay any regular or excise taxes arising from the application of

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the Excise Tax. Unless the Company and the Executive otherwise agree in writing, any parachute payment calculation will be made in writing by the Accounting Firm, whose calculations will be conclusive and binding upon the Company and the Executive for all purposes. The Company and the Executive will furnish to the Accounting Firm such information and documents as they may reasonably request in order to make a parachute payment determination. The Accounting Firm also will provide its calculations, together with detailed supporting documentation, both to the Company and to the Executive, before making any payments that may be subject to the Excise Tax. For purposes of this Agreement, “Accounting Firm” shall mean the then-current independent auditors of the Company or such other nationally recognized certified public accounting firm as may be designated by the Company.

11.Successors; Binding Agreement.

11.1In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.

11.This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive’s estate.

12.Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive’s signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:

To the Company:

Baxter International Inc.

Attention: General Counsel

One Baxter Parkway

Deerfield, Illinois 60015

13.Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any

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condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive’s employment with the Company only in the event that the Executive’s employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6, 7 and 9 hereof) shall survive such expiration. To the extent applicable, it is intended that the Agreement comply with the provisions of Section 409A of the Code. The Agreement will be administered and interpreted in a manner consistent with this intent, and any provision that would cause the Agreement to fail to satisfy Section 409A of the Code will have no force and effect until amended to comply therewith (which amendment may be retroactive to the extent permitted by Section 409A of the Code).

14.Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

15.Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

16.Settlement of Disputes; Arbitration.

16.1All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive’s claim has been denied. Notwithstanding the above, in the event of any dispute, any decision by the Board hereunder shall be subject to a de novo review by the arbitrator in accordance with Section 16.2 hereof.

16.2Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the

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Executive’s right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.

16.3The Executive acknowledges that the Company would be irreparably injured by a violation of Section 9 hereof, and the Executive agrees that the Company, notwithstanding the foregoing provisions of this Section 16 and in addition to any other remedies available to it for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Executive from any actual or threatened breach of Section 9. If a bond is required to be posted in order for the Company to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum.

17.Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below:

(A)“Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.

(B)“Beneficial Owner” shall have the meaning set forth in Rule 13d3 under the Exchange Act.

(C)“Board” shall mean the Board of Directors of the Company.

(D)“Cause” for termination by the Company of the Executive’s employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive’s duties with the Company (other than any such failure resulting from the Executive’s incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) that has not been cured within 30 days after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive’s duties or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive’s part shall be deemed “willful” unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive’s act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists.

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(E) “Change in Control” shall have the same meaning given to such term in the Baxter International Inc. 2015 Incentive Plan, as may be amended and as in effect from time to time, or any shareholder-approved successor plan thereto.

(F)“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

(G)“Company” shall mean Baxter International Inc. and, except in determining under Section 17(E) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes this Agreement by operation of law, or otherwise.

(H)“Competing Products” shall mean products, processes, or services of any person or organization other than the Company, in existence or under development, which are substantially the same, may be substituted for, or applied to substantially the same end use as the products, processes or services with which the Executive works during the time of his employment with the Company or about which the Executive acquires Confidential Information through his work with the Company.

(I)“Competing Organization” shall mean persons or organizations engaged in, or about to become engaged in, research or development, production, distribution, marketing, providing or selling of a Competing Product.

(J)“Competitive Business” means any business in which the Company or any of the Subsidiaries was engaged during the 12-month period prior to the Executive’s Date of Termination, any business if the Company or any Subsidiary has devoted material resources to entering into such business during such 12-month period prior to the Date of Termination, and any business to the extent that it is engaged in the investing in or acquisition of all or a portion of the assets or stock of the Company or the Subsidiaries.

(K)“Confidential Information” means information relating to the present or planned business of the Company or the Subsidiaries which has not been released publicly by authorized representatives of the Company or the Subsidiaries.

(L)“Date of Termination” shall have the meaning set forth in Section 7.2 hereof.

(M)“Disability” shall be deemed the reason for the termination by the Company of the Executive’s employment, if, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive’s duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30)

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days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive’s duties.

(N)“Effective Date” shall mean the the date Executive signs this Agreement.

(O)“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

(P)“Executive” shall mean the individual named in the first paragraph of this Agreement.

(Q)“Good Reason” for termination by the Executive of the Executive’s employment shall mean the occurrence (without the Executive’s express written consent which specifically references this Agreement) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (V) below to a “Change in Control” as references to a “Potential Change in Control”), of any one of the following acts by the Company, or failures by the Company to act:

(I)the assignment to the Executive of any duties inconsistent with the Executive’s status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive’s responsibilities from those in effect immediately prior to the Change in Control;

(II)a material reduction by the Company in the Executive’s annual base salary as in effect on the date hereof or as the same may be increased from time to time;

(III)a material change in the location of the Executive’s principal place of employment, including for this purpose any relocation more than fifty (50) miles from the Executive’s principal place of employment immediately prior to the Change in Control or the Company’s requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company’s business to an extent substantially consistent with the Executive’s present business travel obligations;

(IV)the failure by the Company to pay to the Executive any portion of the Executive’s current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; or

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(V)any other action or inaction that constitutes a material breach of this Agreement, including without limitation Sections 5.5 and 11.1.

The Executive’s right to terminate the Executive’s employment for Good Reason shall not be affected by the Executive’s incapacity due to physical or mental illness. The Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. The Executive shall not be deemed to have resigned for Good Reason unless (i) the Executive provides written notice to the Company of the existence of the Good Reason event within ninety (90) days after its initial occurrence, (ii) the Company fails to cure such Good Reason event within thirty (30) days after receipt of such notice, and (iii) the Executive effectively terminates employment within one-hundred eighty (180) days following the occurrence of the non-cured Good Reason event.

(R)“Items” include documents, reports, drawings, photographs, designs, specifications, formulae, plans, samples, research or development information, prototypes, tools, equipment, proposals, marketing or sales plans, customer information, customer lists, patient lists, patient information, regulatory files, financial data, costs, pricing information, supplier information, written, printed or graphic matter, or other information and materials that concern the Company’s or the Subsidiaries’ business that come into his possession or about which the Executive has knowledge by reason of his employment.

(S)“Notice of Termination” shall have the meaning set forth in Section 7.1 hereof.

(T)“Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(U)“Potential Change in Control Period” shall mean the period commencing on the occurrence of a Potential Change in Control and ending upon the occurrence of a Change in Control or, if earlier (I) with respect to a Potential Change in Control occurring pursuant to Section 16(V)(I) hereof, immediately upon the abandonment or termination of the applicable agreement, (ii) with respect to a Potential Change in Control occurring pursuant to Section 16(V)(II) hereof, immediately upon a public announcement by the applicable party that such party has abandoned its intention to take or consider taking actions which if consummated would result in a Change in Control or (iii) with respect to a Potential Change in Control occurring pursuant to Section 16(V)(III) or (IV) hereof, upon the eighteen month anniversary of

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the occurrence of such Potential Change in Control (or such earlier date as may be determined by the Board).

(V)“Potential Change in Control” shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:

(I)the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;

(II)the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control;

(III)any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or

(IV)the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

(W)“Retirement” shall be deemed the reason for the termination by the Executive of the Executive’s employment if such employment is terminated in accordance with the Company’s retirement policy, including early retirement, generally applicable to its salaried employees.

(X)“Severance Payments” shall have the meaning set forth in Section 6.1 hereof.

(Y)“Subsidiary,” for purposes of Section 9 hereof, shall mean any corporation, partnership, joint venture or other entity during any period in which at least fifty percent in such entity is owned, directly or indirectly, by the Company.

(Z)“Term” shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein).

(AA)“Trade Secrets” include all information encompassed in all Items, including but not limited to all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas,

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designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing, that the Company and its Subsidiaries have taken reasonable measures to keep such information secret, and the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

[Remainder of page intentionally blank.]

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date by their signatures below.


EXECUTIVE ____________________________________ Executive’s Signature ____________________________________ Executive’s Signature Date			BAXTER INTERNATIONAL INC. ____________________________________ By: Jeanne Mason Senior Vice President, Human Resources ____________________________________ Signature Date
Executive’s Address for Notices: ____________________________________ Street Address ____________________________________ City, State, Zip Code, Country

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EXHIBIT 15

October 29, 2020

Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549

Commissioners:

We are aware that our report dated October 29, 2020 on our review of interim financial information of Baxter International Inc., which appears in this Quarterly Report on Form 10-Q, is incorporated by reference in the Registration Statements on Form S-8 (Nos. 33-28428, 33-54069, 333-10520, 333-43563, 333-47019, 333-71553, 333-80403, 333-88257, 333-48906, 333-62820, 333-102140, 333-104420, 333-104421, 333-105032, 333-143063, 333-174400, 333-174401, 333-206700 and 333-206701) of Baxter International Inc.

Very truly yours,

/s/PricewaterhouseCoopers LLP

Chicago, Illinois

EXHIBIT 31.1

Certification of Chief Executive Officer

Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Amended

I, José E. Almeida, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Baxter International Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ José E. Almeida
José E. Almeida
Chairman of the Board and
Chief Executive Officer

Date: October 29, 2020

EXHIBIT 31.2

Certification of Chief Financial Officer

Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Amended

I, James K. Saccaro, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Baxter International Inc.;

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ James K. Saccaro
James K. Saccaro
Executive Vice President and Chief Financial Officer

Date: October 29, 2020

EXHIBIT 32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

José E. Almeida, as Chairman of the Board and Chief Executive Officer of Baxter International Inc. (the “Company”), certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ José E. Almeida
José E. Almeida
Chairman of the Board and
Chief Executive Officer

October 29, 2020

EXHIBIT 32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

James K. Saccaro, as Executive Vice President and Chief Financial Officer of Baxter International Inc. (the “Company”), certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ James K. Saccaro
James K. Saccaro
Executive Vice President and Chief Financial Officer

October 29, 2020