10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2016

¨ 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)

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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 April 29, 2016 was 552,262,740 shares.

BAXTER INTERNATIONAL INC.

FORM 10-Q

For the quarterly period ended March 31, 2016

TABLE OF CONTENTS

		Page Number
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Income		2
	Condensed Consolidated Statements of Comprehensive Income		3
	Condensed Consolidated Balance Sheets		4
	Condensed Consolidated Statements of Cash Flows		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36
Item 4.	Controls and Procedures		37
Review by Independent Registered Public Accounting Firm			38
Report of Independent Registered Public Accounting Firm			39
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		40
Item 6.	Exhibits		41
Signature			42

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Baxter International Inc.

Condensed Consolidated Statements of Income (unaudited)

(in millions, except per share data)

	Three months ended
	March 31,
	2016			2015
Net sales		$2,375			$2,403
Cost of sales		1,410			1,384
Gross margin		965			1,019
Marketing and administrative expenses		641			784
Research and development expenses		136			143
Operating income		188			92
Net interest expense		28			30
Other income, net		(3,169	)		(86	)
Income from continuing operations before income taxes		3,329			148
Income tax (benefit)/expense		(58	)		14
Income from continuing operations		3,387			134
(Loss) income from discontinued operations, net of tax		(7	)		296
Net income		$3,380			$    430
Income from continuing operations per common share
Basic		$  6.17			$   0.25
Diluted		$  6.13			$   0.24
Income from discontinued operations per common share
Basic		($  0.01	)		$   0.54
Diluted		($  0.01	)		$   0.54
Net income per common share
Basic		$  6.16			$   0.79
Diluted		$  6.12			$   0.78
Weighted-average number of common shares outstanding
Basic		549			543
Diluted		552			548
Cash dividends declared per common share		$0.115			$   0.52

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

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Baxter International Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(in millions)

	Three months ended
	March 31,
	2016			2015
Net income	$	3,380		$	430
Other comprehensive income (loss), net of tax:
Currency translation adjustments, net of tax expense (benefit) of $14 and ($109) for the three months ended March 31, 2016 and 2015, respectively		92			(1,138	)
Pension and other employee benefits, net of tax expense of $11 and $31 for the three months ended March 31, 2016 and 2015, respectively		21			68
Hedging activities, net of tax benefit of ($3) and ($7) for the three months ended March 31, 2016 and 2015, respectively		(6	)		(10	)
Available-for-sale securities, net of tax expense of zero and $9 for the three months ended March 31, 2016 and 2015, respectively		(3,366	)		21
Total other comprehensive income (loss), net of tax		(3,259	)		(1,059	)
Comprehensive income (loss)	$	121		$	(629	)

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

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Baxter International Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in millions, except shares)

		March 31,			December 31,
		2016			2015
Current assets	Cash and equivalents		$  2,211			$  2,213
	Accounts and other current receivables, net		1,830			1,731
	Inventories		1,682			1,604
	Prepaid expenses and other		951			855
	Investment in Baxalta common stock		1,232			5,148
	Current assets held for disposition		111			245
	Total current assets		8,017			11,796
Property, plant and equipment, net			4,403			4,386
Other assets	Goodwill		2,727			2,687
	Other intangible assets, net		1,359			1,349
	Other		844			744
	Total other assets		4,930			4,780
Total assets			$  17,350			$  20,962
Current liabilities	Short-term debt		$817			$1,775
	Current maturities of long-term debt and lease obligations		472			810
	Accounts payable and accrued liabilities		2,387			2,666
	Current income taxes payable		137			453
	Current liabilities held for disposition		10			46
	Total current liabilities		3,823			5,750
Long-term debt and lease obligations			2,068			3,922
Other long-term liabilities			2,439			2,425
Equity	Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2016 and 2015		683			683
	Common stock in treasury, at cost, 132,271,988 shares in 2016 and 135,839,938 shares in 2015		(7,434	)		(7,646	)
	Additional contributed capital		5,882			5,902
	Retained earnings		12,923			9,683
	Accumulated other comprehensive (loss) income		(3,035	)		224
	Total Baxter shareholders’ equity		9,019			8,846
	Noncontrolling interests		1			19
	Total equity		9,020			8,865
Total liabilities and equity			$  17,350			$  20,962

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

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Baxter International Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in millions)

		Three months ended
		March 31,
		2016			2015
Cash flows from operations	Net income	$	3,380			$    430
	Adjustments to reconcile income from continuing operations to net cash from operating activities:
	(Loss) income from discontinued operations, net of tax		7			(296	)
	Depreciation and amortization		189			187
	Deferred income taxes		(71	)		48
	Stock compensation		23			29
	Net periodic pension benefit and OPEB costs		30			60
	Net realized gains on the Retained Share transactions		(3,239	)		—
	Other		97			(87	)
	Changes in balance sheet items
	Accounts and other current receivables, net		16			50
	Inventories		(26	)		(122	)
	Accounts payable and accrued liabilities		(438	)		(306	)
	Business optimization and infusion pump payments		(34	)		(19	)
	Other		(108	)		(2	)
	Cash flows from operations – continuing operations		(174	)		(28	)
	Cash flows from operations – discontinued operations		(159	)		124
	Cash flows from operations		(333	)		96
Cash flows from investing activities	Capital expenditures		(184	)		(214	)
	Acquisitions and investments, net of cash acquired		(33	)		(7	)
	Divestitures and other investing activities		3			4
	Cash flows from investing activities – continuing operations		(214	)		(217	)
	Cash flows from investing activities – discontinued operations		13			(553	)
	Cash flows from investing activities		(201	)		(770	)
Cash flows from financing activities	Issuances of debt		61			900
	Payments of obligations		(20	)		(618	)
	Increase in debt with original maturities of three months or less, net		450			361
	Cash dividends on common stock		(63	)		(282	)
	Proceeds and realized excess tax benefits from stock issued under employee benefit plans		99			48
	Other		(17	)		(25	)
	Cash flows from financing activities		510			384
Effect of foreign exchange rate changes on cash and equivalents			22			(105	)
Decrease in cash and equivalents			(2	)		(395	)
Cash and equivalents at beginning of period			2,213			2,925
Cash and equivalents at end of period		$	2,211			$  2,530
Supplemental Schedule of Non-Cash Investing and Financing Activities
Net proceeds on Retained Share transactions		$	3,239			$       —
Payment of obligations in exchange for Retained Shares			3,646			—
Other Supplemental Information
Income taxes paid		$	429			$       91

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

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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 (the company or Baxter) 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 generally accepted accounting principles (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 the company’s Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Annual Report).

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

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

Separation of Baxalta Incorporated

On July 1, 2015, Baxter completed the distribution of approximately 80.5% of the outstanding common stock of Baxalta Incorporated (Baxalta) to Baxter shareholders (the Distribution). The Distribution was made to Baxter’s shareholders of record as of the close of business on June 17, 2015 (Record Date), who received one share of Baxalta common stock for each Baxter common share held as of the Record Date. As a result of the Distribution, Baxalta became an independent public company trading under the symbol “BXLT” on the New York Stock Exchange.

As a result of the separation, the condensed consolidated statements of income, condensed consolidated balance sheets, condensed consolidated statements of cash flow and related financial information reflect Baxalta’s operations, assets and liabilities, and cash flows as discontinued operations for all periods presented. Refer to Note 2 for additional information regarding the separation of Baxalta.

New accounting standards

Recently issued accounting standards not yet adopted

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The updated guidance requires all tax effects related to share-based payment to be recorded in income tax expense in the consolidated statement of income. Current guidance requires that tax effects of deductions in excess of share-based compensation costs (windfall tax benefits) be recorded in additional paid-in capital, and tax deficiencies recorded in additional paid-in capital to the extent of previously recognized windfall tax benefits, with the remainder recorded in income tax expense. The new guidance also requires all tax-related cash flows resulting from share-based payments to be reported as operating activities in the consolidated statement of cash flows, rather than the current requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. The guidance is effective for the company beginning January 1, 2017. The company is currently evaluating the impact of this standard on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees are required to recognize lease assets and liabilities on the balance sheet for leases classified as operating leases under current GAAP. This ASU is effective for the company beginning January 1, 2019. The company is currently evaluating the impact of this standard on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU No. 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU No. 2014-09 will be effective for the company beginning on January 1, 2018. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The company is currently evaluating the impact of adopting the standard on its consolidated financial statements.

6

Recently adopted accounting pronouncements

As of January 1, 2016, the company adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amended ASC 835-30, Interest - Imputation of Interest. This guidance requires that debt issuance costs related to a recognized debt liability be presented as a direct deduction from the carrying amount of the related debt liability. As a result of the adoption, the company reclassified debt issuance costs of $13 million from other assets to long-term debt in the Company’s consolidated balance sheet as of December 31, 2015. The adoption of this guidance did not impact the company’s consolidated statements of earnings, comprehensive income, shareholders’ equity, or cash flows.

As of January 1, 2016, the company adopted ASU No. 2015-05, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This guidance requires software licenses within cloud computing arrangements to be classified as intangible assets. The adoption of ASU No. 2015-05 did not have a material impact on Baxter’s financial position or results of operations.

2. SEPARATION OF BAXALTA INCORPORATED

After giving effect to the Distribution, the company retained 19.5% of the outstanding common stock, or 131,902,719 shares of Baxalta (Retained Shares). Effective January 27, 2016, Baxter completed a debt-for-equity exchange through the transfer of 37,573,040 Retained Shares in exchange for the extinguishment of the $1.45 billion aggregate principal amount of indebtedness outstanding under the U.S. dollar denominated revolving credit facility. Additionally, on March 16, 2016, the company completed a debt-for-equity exchange, in which Baxter exchanged 63,823,582 Retained Shares for the extinguishment of $2.2 billion in aggregate principal amount of Baxter indebtedness. See Note 8 for additional details regarding these debt-for-equity transactions. Baxter accounts for its investment in these Retained Shares as available-for-sale equity securities with a fair value of approximately $1.2 billion and $5.1 billion as of March 31, 2016 and December 31, 2015, respectively.

For a portion of Baxalta’s operations, the legal transfer of Baxalta’s assets and liabilities did not occur with the separation of Baxalta on July 1, 2015 due to the time required to transfer marketing authorizations and other regulatory requirements in certain countries. Under the terms of the International Commercial Operations Agreement (ICOA), Baxalta is subject to the risks and entitled to the benefits generated by these operations and assets until legal transfer; therefore, the net economic benefit and any cash collected by these entities are transferred to Baxalta.

Following is a summary of the operating results of Baxalta, which have been reflected as discontinued operations for the three months ended March 31, 2016 and 2015. The assets and liabilities have been classified as held for disposition as of March 31, 2016 and December 31, 2015.

	Three months ended March 31,
(in millions)	2016			2015
Major classes of line items constituting income from discontinued operations before income taxes
Net sales	$	64		$	1,362
Cost of sales		(59	)		(580	)
Marketing and administrative expenses		(20	)		(231	)
Research and development expenses		—			(157	)
Other income and expense items that are not major		—			(2	)
(Loss) income from discontinued operations before income taxes		(15	)		392
Gain on disposal of discontinued operations		17			—
Income tax expense		9			96
(Loss) income from discontinued operations, net of tax	$	(7	)	$	296

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	March 31,		December 31,
(in millions)	2016		2015
Carrying amounts of major classes of assets included as part of discontinued operations
Accounts and other current receivables, net		$   99		$ 228
Inventories		9		8
Property, plant, and equipment, net		1		2
Other		2		7
Total assets of the disposal group		$  111		$ 245
Carrying amounts of major classes of liabilities included as part of discontinued operations
Accounts payable and accrued liabilities		$     2		$  46
Other long-term liabilities		8		—
Total liabilities of the disposal group		$   10		$  46

As of March 31, 2016 and December 31, 2015, Baxter has recorded a liability of $92 million and $190 million, respectively, for its obligation to transfer these net assets to Baxalta. On February 1, 2016, the legal transfer of approximately $90 million of net assets as of December 31, 2015 was distributed to Baxalta resulting in a gain of $17 million, which is recorded within income from discontinued operations, net of tax. It is expected that the majority of the remaining operations will be transferred to Baxalta during 2016.

Baxter and Baxalta entered into several agreements in connection with the July 1, 2015 separation, including a transition services agreement (TSA), separation and distribution agreement, manufacturing and supply agreements (MSA), tax matters agreement, an employee matters agreement, a long-term services agreement, and a shareholder’s and registration rights agreement.

Pursuant to the TSA, Baxter and Baxalta and their respective subsidiaries are providing to each other, on an interim, transitional basis, various services. Services being provided by Baxter include, among others, finance, information technology, human resources, quality supply chain, and certain other administrative services. The services generally commenced on the Distribution date and are expected to terminate within 24 months (or 36 months in the case of certain information technology services) of the Distribution date. Billings by Baxter under the TSA are recorded as a reduction of the costs to provide the respective service in the applicable expense category, primarily in marketing and administrative expenses, in the condensed consolidated statements of income. In the first quarter of 2016, the company recognized approximately $27 million as a reduction to marketing and administrative expenses related to the TSA. Pursuant to the MSA, Baxalta or Baxter, as the case may be, manufactures, labels, and packages products for the other party. The terms of the agreements range in initial duration from five to ten years. In the first quarter of 2016, Baxter recognized approximately $11 million in sales to Baxalta. In addition, Baxter recognized $45 million in cost of sales related to purchases from Baxalta pursuant to the MSA. The cash flows associated with these agreements are included in cash flows from operations — continuing operations.

Cash outflows of $159 million were reported in cash flows from operations – discontinued operations for the period ending March 31, 2016. These relate to non-assignable tenders whereby Baxter remains the seller of Baxalta products, transactions related to importation services Baxter provides in certain countries, in addition to trade payables settled post local separation on Baxalta’s behalf.

3. SUPPLEMENTAL FINANCIAL INFORMATION

Net interest expense

	Three months ended
	March 31,
(in millions)	2016			2015
Interest expense, net of capitalized interest		$   33			$   35
Interest income		(5	)		(5	)
Net interest expense		$   28			$   30

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Other income, net

	Three months ended
	March 31,
(in millions)	2016			2015
Foreign exchange		$         (9	)		$  (89	)
Net loss on debt extinguishment		101			—
Net realized gains on Retained Shares transactions		(3,239	)		—
All other		(22	)		3
Other income, net		$  (3,169	)		$  (86	)

Inventories

	March 31,		December 31,
(in millions)	2016		2015
Raw materials		$     369		$     374
Work in process		159		142
Finished goods		1,154		1,088
Inventories		$  1,682		$  1,604

Property, plant and equipment, net

	March 31,			December 31,
(in millions)	2016			2015
Property, plant and equipment, at cost		$  9,134			$  8,990
Accumulated depreciation		(4,731	)		(4,604	)
Property, plant and equipment, net		$  4,403			$  4,386

4. EARNINGS PER SHARE

The numerator for both basic and diluted earnings per share (EPS) is either net income, income from continuing operations, or income from discontinued operations. The denominator for basic EPS is the weighted-average number of common 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 is a reconciliation of basic shares to diluted shares.

	Three months ended
	March 31,
(in millions)	2016		2015
Basic shares		549		543
Effect of dilutive securities		3		5
Diluted shares		552		548

The effect of dilutive securities included unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excluded 20 million and 9 million equity awards for the three months ended March 31, 2016 and 2015, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 9 for additional information regarding items impacting basic shares.

Stock repurchases

In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of the company’s common stock. During the first quarter of 2016, the company did not repurchase any shares and has $0.5 billion remaining available under the authorization as of March 31, 2016.

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5. ACQUISITIONS AND OTHER ARRANGEMENTS

In the first quarter of 2016, Baxter paid approximately $23 million to acquire the rights to Vancomycin injection in 0.9% Sodium Chloride (Normal Saline) in 500mg, 750mg, and 1 gram presentations from Celerity Pharmaceuticals, LLC (Celerity). Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years. Refer to Note 5 within the 2015 Annual Report for additional information regarding the company’s agreement with Celerity.

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by business segment.

(in millions)	Renal		Hospital Products		Total
Balance as of December 31, 2015	$	408		$2,279	$	2,687
Currency translation adjustments		7		33		40
Balance as of March 31, 2016	$	415		$2,312	$	2,727

As of March 31, 2016, there were no accumulated goodwill impairment losses.

Other intangible assets, net

The following is a summary of the company’s other intangible assets.

(in millions)	Developed technology, including patents			Other amortized intangible assets			Indefinite-lived intangible assets		Total
March 31, 2016
Gross other intangible assets		$1,781			$ 410			$87		$2,278
Accumulated amortization		(766	)		(153	)		—		(919	)
Other intangible assets, net		$1,015			$ 257			$87		$1,359
December 31, 2015
Gross other intangible assets		$1,742			$ 393			$86		$2,221
Accumulated amortization		(729	)		(143	)		—		(872	)
Other intangible assets, net		$1,013			$ 250			$86		$1,349

Intangible asset amortization expense was $40 million in the first quarters of 2016 and 2015, respectively.

The increase in other intangible assets, net during the first three months of 2016 was primarily driven by the acquisition of the rights to Vancomycin detailed in Note 5 and currency translation adjustments (CTA), partially offset by amortization expense.

7. INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES

Infusion pump charges

In the first quarter of 2016, the company refined its estimates for remediation activities related to the SIGMA SPECTRUM infusion pump recall and decreased the reserve by $12 million. In addition, the company recorded utilization of the SIGMA SPECTRUM reserve of $14 million. The balance as of March 31, 2016 was $14 million for the SIGMA SPECTRUM infusion pump recall. Refer to the 2015 Annual Report for further information about the Company’s infusion pump recall activities.

Business optimization charges

The Company records charges from its business optimization initiatives primarily related to optimizing the company’s overall cost structure on a global basis, as the company streamlines its international operations, rationalizes its manufacturing facilities, enhances its general and administrative infrastructure and realigns certain R&D activities. The restructuring charges primarily include employee termination costs, costs associated with the company’s business optimization programs including consulting and other fees, in addition to Gambro integration costs.

10

During the first quarters of 2016 and 2015, the company recorded the following charges related to business optimization programs.

	Three months ended
	March 31,
(in millions)	2016		2015
Restructuring charges, net		$  4		$ (1	)
Costs to implement business optimization programs		11		18
Total business optimization charges		$15		$17

During the first quarters of 2016 and 2015, the company recorded the following restructuring charges.

	Three months ended
	March 31, 2016
(in millions)	COGS		SGA			R&D			Total
Employee termination costs		$13		$ 1			$ 1			$15
Reserve adjustments		(1)		(8	)		(2	)		(11	)
Total restructuring charges		$12		$(7	)		$(1	)		$  4

	Three months ended
	March 31, 2015
(in millions)	COGS			SGA			Total
Employee termination costs		$   1			$11			$12
Asset related costs		3			1			4
Asset impairment		2			—			2
Reserve adjustments		(13	)		(6	)		(19	)
Total restructuring charges		$  (7	)		$  6			$ (1	)

The following table summarizes cash activity in the reserves related to the company’s business optimization initiatives.

(in millions)
Reserves as of December 31, 2015	$	116
Charges		15
Reserve adjustments		(11	)
Utilization		(22	)
CTA		13
Reserves as of March 31, 2016	$	111

The reserves are expected to be substantially utilized by the end of 2016.

8. DEBT, FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Debt-for-equity exchanges

On January 27, 2016, Baxter exchanged Retained Shares for the extinguishment of $1.45 billion aggregate principal amount outstanding under its $1.8 billion U.S. dollar-denominated revolving credit facility. This exchange extinguished the indebtedness under the facility, which was terminated in connection with such debt-for-equity exchange. There were no material prepayment penalties or breakage costs associated with the termination of the facility. Baxter recognized a net realized gain of $1.25 billion related to the Retained Shares exchanged, which was included in other income, net for the period ended March 31, 2016.

11

On March 16, 2016, the company exchanged Retained Shares for the extinguishment of approximately $2.2 billion in principal amount of its 0.950% Notes due May 2016, 5.900% Notes due August 2016, 1.850% Notes due January 2017, 5.375% Notes due May 2018, 1.850% Notes due June 2018, 4.500% Notes due August 2019, and 4.250% Notes due February 2020 purchased by certain third party purchasers in the previously announced debt tender offers. As a result, the company recognized a net loss on extinguishment of debt totaling $101 million and a net realized gain of $2.0 billion on the Retained Shares exchanged, which are included in other income, net for the period ended March 31, 2016.

Commercial paper

During the first quarter of 2016, the company issued and redeemed commercial paper, of which $750 million was outstanding as of March 31, 2016 with a weighted-average interest rate of 0.75%. There was a balance of $300 million outstanding at December 31, 2015 with a weighted-average interest rate of 0.6%. This commercial paper is classified as short-term debt.

Securitization arrangement

The following is a summary of the activity relating to the company’s securitization arrangement in Japan.

	Three months ended March 31,
(in millions)	2016			2015
Sold receivables at beginning of period		$   81			$ 104
Proceeds from sales of receivables		104			113
Cash collections (remitted to the owners of the receivables)		(107	)		(120	)
Effect of currency exchange rate changes		7			(1	)
Sold receivables at end of period		$   85			$   96

The impacts on the condensed consolidated statements of income relating to the sale of receivables were immaterial for each period. Refer to the 2015 Annual Report for further information regarding the company’s securitization agreements.

Concentrations of credit risk

The company invests excess cash in certificates of deposit or money market funds and diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss.

The company continues to do business with foreign governments in certain countries, including Greece, Spain, Portugal and Italy, that have experienced a deterioration in credit and economic conditions. As of March 31, 2016, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $206 million.

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

Derivatives and hedging activities

The company operates on a global basis and is exposed to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs.

The company is 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, Columbian Peso, Brazilian Real, Swedish Krona, and Mexican Peso. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative 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 equity volatility resulting from foreign exchange. Financial market and currency volatility may limit the company’s ability to cost-effectively hedge these exposures.

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The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company’s policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believes is appropriate.

To manage this mix in a cost-efficient manner, the company periodically enters into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.

The company does not hold any instruments for trading purposes and none of the company’s 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. Based upon the exposure being hedged, the company designates its hedging instruments as cash flow or fair value hedges.

Cash Flow Hedges

The company 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.

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

The notional amounts of foreign exchange contracts were $415 million and $378 million as of March 31, 2016 and December 31, 2015, respectively. There were no outstanding interest rate contracts designated as cash flow hedges as of March 31, 2016 and December 31, 2015. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of March 31, 2016 is 15 months.

Fair Value Hedges

The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These instruments hedge the company’s 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 the loss or gain on the underlying hedged item. Fair value hedges are classified in net interest expense, as they hedge the interest rate risk associated with certain of the company’s fixed-rate debt.

The total notional amount of interest rate contracts designated as fair value hedges was $535 million and $1.3 billion as of March 31, 2016 and December 31, 2015, respectively. The decrease is due to swaps terminated in conjunction with the aforementioned debt-for-equity exchanges.

Dedesignations

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. If the company removes the cash flow hedge designation because the hedged forecasted transactions are no longer probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions are still probable of occurring are deferred and recognized consistent with the loss or income recognition of the underlying hedged items.

There were no hedge dedesignations in the first quarters of 2016 or 2015 resulting from changes in the company’s assessment of the probability that the hedged forecasted transactions would occur.

If the company terminates a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged items at the date of termination is amortized to earnings over the remaining term of the hedged item. In March 2016, the company terminated a total notional value of $765 million of interest rate contracts in connection with the March debt tender offers, resulting in a $34 million reduction to the debt extinguishment loss. There were no fair value hedges terminated during the first quarter of 2015.

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Undesignated Derivative Instruments

The company uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the company’s intercompany and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges, and the change in fair value, which substantially offsets the change in book value of the hedged items, is recorded directly to other expense (income), net. The terms of these instruments generally do not exceed one month.

The total notional amount of undesignated derivative instruments was $630 million as of March 31, 2016 and $580 million as of December 31, 2015.

Gains and Losses on Derivative Instruments

The following tables summarize the income statement locations and gains and losses on the company’s derivative instruments for the three months ended March 31, 2016 and 2015.

	Gain (loss) recognized in OCI						Location of gain (loss) in income statement		Gain (loss) reclassified from AOCI into income
(in millions)	2016			2015					2016		2015
Cash flow hedges
Interest rate contracts		$—			$—			Other income, net		$  4		$—
Foreign exchange contracts		—			(1	)		Net sales		—		—
Foreign exchange contracts		(4	)		64			Cost of sales		1		25
Total		$(4	)		$63					$  5		$25

			Gain (loss) recognized in income
(in millions)	Location of gain (loss) in income statement		2016		2015
Fair value hedges
Interest rate contracts		Net interest expense		$22		$ 47
Undesignated derivative instruments
Foreign exchange contracts		Other income, net		$  6		$ (8	)

For the company’s fair value hedges, equal and offsetting losses of $22 million and $47 million were recognized in net interest expense in the first quarters of 2016 and 2015, respectively, as adjustments to the underlying hedged item, fixed-rate debt. Ineffectiveness related to the company’s cash flow and fair value hedges for the first quarter of 2016 was not material.

As of March 31, 2016, $2 million of deferred, net after-tax losses on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

Fair Values of Derivative Instruments

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of March 31, 2016.

	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 long-term assets		$  33		Other long-term liabilities		$—
Foreign exchange contracts		Prepaid expenses and other		9		Accounts payable and accrued liabilities		1
Foreign exchange contracts		Other long-term assets		—		Other long-term liabilities		—
Total derivative instruments designated as hedges				$  42				$  1
Undesignated derivative instruments
Foreign exchange contracts		Prepaid expenses and other		$  —		Accounts payable and accrued liabilities		$  2
Total derivative instruments				$  42				$  3

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The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2015.

	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		Prepaid expenses and other		$  —		Accounts payable and accrued liabilities		$  —
Interest rate contracts		Other long-term assets		46		Other long-term liabilities		—
Foreign exchange contracts		Prepaid expenses and other		9		Accounts payable and accrued liabilities		1
Total derivative instruments designated as hedges				$  55				$    1
Undesignated derivative instruments
Foreign exchange contracts		Prepaid expenses and other		$    1		Accounts payable and accrued liabilities		$    1
Total derivative instruments				$  56				$    2

While the company’s derivatives are all subject to master netting arrangements, the company presents its assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, the company is not required to post collateral for any of its outstanding derivatives.

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

	March 31, 2016						December 31, 2015
(in millions)	Asset			Liability			Asset			Liability
Gross amounts recognized in the consolidated balance sheet		$42			$  3			$56			$  2
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet		(3	)		(3	)		(2	)		(2	)
Total		$39			$—			$54			$—

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Fair value measurements

The following tables summarize the bases used to measure financial assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheets.

			Basis of fair value measurement
(in millions)	Balance as of March 31, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign currency hedges		$       9		$—		$       9		$—
Interest rate hedges		33		—		33		—
Available-for-sale securities		1,242		10		1,232		—
Total assets		$1,284		$10		$1,274		$—
Liabilities
Foreign currency hedges		$       3		$—		$       3		$—
Contingent payments related to acquisitions		20		—		—		20
Total liabilities		$     23		$—		$       3		$20
			Basis of fair value measurement
(in millions)	Balance as of December 31, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign currency hedges		$     10		$—		$     10		$—
Interest rate hedges		46		—		46		—
Available-for-sale securities		5,162		14		5,148		—
Total assets		$5,218		$14		$5,204		$—
Liabilities
Foreign currency hedges		$       2		$—		$       2		$—
Contingent payments related to acquisitions		20		—		—		20
Total liabilities		$     22		$—		$       2		$20

As of March 31, 2016, cash and equivalents of $2.2 billion included money market funds of approximately $483 million, and as of December 31, 2015, cash and equivalents of $2.2 billion included money market funds of approximately $500 million. Money market funds would be 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 investment in the Retained Shares of $1.2 billion as of March 31, 2016 and $5.1 billion as of December 31, 2015, is categorized as a Level 2 security as these securities were not registered as of those dates. The value of this investment is based on Baxalta’s common stock price as of March 31, 2016 and December 31, 2015, which represents an identical equity instrument registered under the Securities Act of 1933, as amended. The majority of the derivatives entered into by the company 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 are considered observable and vary depending on the type of derivative, and include contractual terms, interest rate yield curves, foreign exchange rates and volatility.

Contingent payments related to acquisitions consist of commercial milestone payments and sales-based payments, and are valued using discounted cash flow techniques. The fair value of commercial milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or expectation of 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 increase or expectation of timing of payment is accelerated. Changes in the fair value of contingent payments related to Baxter’s acquisitions, which use significant unobservable inputs (Level 3) in the fair value measurement, were immaterial during the first quarter of 2016. The company made minor sales-based payments in the first quarter of 2016.

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The following table provides information relating to the company’s investments in available-for-sale equity securities.

(in millions)	Amortized cost		Unrealized gains		Unrealized losses		Fair value
March 31, 2016		$179		$1,065		$  2		$1,242
December 31, 2015		$732		$4,430		$—		$5,162

In the first quarter of 2016 the company recorded $3.2 billion of net realized gains within other income, net related to exchanges of available-for-sale equity securities, which represented gains from the Retained Share transactions. The company did not have any sales of available-for-sale or equity method investments in the first quarter of 2015.

Book Values and Fair Values of Financial Instruments

In addition to the financial instruments that the company is required to recognize at fair value in the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical 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 approximate fair values as of March 31, 2016 and December 31, 2015.

	Book values				Approximate fair values
(in millions)	2016		2015		2016		2015
Assets
Investments		$    22		$     21		$    22		$     21
Liabilities
Short-term debt		$  817		$1,775		$  817		$1,775
Current maturities of long-term debt and lease obligations		472		810		475		818
Long-term debt and lease obligations		2,068		3,922		2,232		4,077

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The following tables summarize the bases used to measure the approximate fair value of the financial instruments as of March 31, 2016 and December 31, 2015.

			Basis of fair value measurement
(in millions)	Balance as of March 31, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$     22		$—		$       2		$20
Total assets		$     22		$—		$       2		$20
Liabilities
Short-term debt		$   817		$—		$   817		$—
Current maturities of long-term debt and lease obligations		475		—		475		—
Long-term debt and lease obligations		2,232		—		2,232		—
Total liabilities		$3,524		$—		$3,524		$—

			Basis of fair value measurement
(in millions)	Balance as of December 31, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$     21		$—		$       2		$19
Total assets		$     21		$—		$       2		$19
Liabilities
Short-term debt		$1,775		$—		$1,775		$—
Current maturities of long-term debt and lease obligations		818		—		818		—
Long-term debt and lease obligations		4,077		—		4,077		—
Total liabilities		$6,670		$—		$6,670		$—

Investments in 2016 and 2015 included certain cost method investments and held-to-maturity debt securities.

The fair value of held-to-maturity debt securities is calculated using a discounted cash flow model that incorporates observable inputs, including interest rate yields, which represents a Level 2 basis of fair value measurement.

In determining the fair value of cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement.

The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instrument. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with the company’s credit risk. The carrying values of the other financial instruments approximate their fair values due to the short-term maturities of most of these assets and liabilities.

9. STOCK COMPENSATION

Stock compensation expense totaled $23 million and $29 million in the first quarter of 2016 and 2015, respectively. Over 70% of stock compensation expense is classified in marketing and administrative expenses with the remainder classified in cost of sales and R&D expenses.

The company awarded stock compensation grants consisting of 6.4 million stock options, 1.0 million RSUs and 0.3 million PSUs during the first quarter of 2016.

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Stock Options

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

	Three months ended March 31,
	2016			2015
Expected volatility		20	%		20	%
Expected life (in years)		5.5			5.5
Risk-free interest rate		1.4	%		1.7	%
Dividend yield		1.2	%		3.0	%
Fair value per stock option		$7			$9

The total intrinsic value of stock options exercised was $55 million and $14 million during the first quarters of 2016 and 2015, respectively.

As of March 31, 2016, the unrecognized compensation cost related to all unvested stock options of $87 million is expected to be recognized as expense over a weighted-average period of 2.1 years.

Restricted Stock Units

As of March 31, 2016, the unrecognized compensation cost related to all unvested RSUs of $94 million is expected to be recognized as expense over a weighted-average period of 2.0 years.

Performance Share Units

As of March 31, 2016, the unrecognized compensation cost related to all granted unvested PSUs of $20 million is expected to be recognized as expense over a weighted-average period of 2.1 years.

10. RETIREMENT AND OTHER BENEFIT PROGRAMS

The following is a summary of net periodic benefit cost relating to the company’s pension and other postemployment benefit (OPEB) plans.

	Three months ended
	March 31,
(in millions)	2016			2015
Pension benefits
Service cost		$ 23			$ 23
Interest cost		46			49
Expected return on plan assets		(75	)		(61	)
Amortization of net losses and other deferred amounts		37			43
Net periodic pension benefit cost		$ 31			$ 54
OPEB
Service cost		$   1			$   1
Interest cost		2			6
Amortization of net loss and prior service credit		(4	)		(1	)
Net periodic OPEB cost		$  (1	)		$   6

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11. ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income includes all changes in shareholders’ equity that do not arise from transactions with shareholders, and consists of net income, CTA, pension and other employee benefits, unrealized gains and losses on cash flow hedges and unrealized gains and losses on available-for-sale equity securities. The following table is a net-of-tax summary of the changes in AOCI by component for the three months ended March 31, 2016 and 2015.

(in millions)	CTA			Pension and other employee benefits			Hedging activities			Available- for-sale securities			Total
Gains (losses)
Balance as of December 31, 2015	$	(3,191	)		$  (1,064	)		$  7			$  4,472			$      224
Other comprehensive income before reclassifications		92			(1	)		(3	)		22			110
Amounts reclassified from AOCI (a)		—			22			(3	)		(3,388	)		(3,369	)
Net other comprehensive (loss) income		92			21			(6	)		(3,366	)		(3,259	)
Balance as of March 31, 2016	$	(3,099	)		$  (1,043	)		$  1			$  1,106			$  (3,035	)
(in millions)	CTA			Pension and other employee benefits			Hedging activities			Available- for-sale- securities			Total
Gains (losses)
Balance as of December 31, 2014	$	(2,323	)		$  (1,427	)		$  34			$      66			$  (3,650	)
Other comprehensive income before reclassifications		(1,138	)		33			6			14			(1,085	)
Amounts reclassified from AOCI (a)		—			35			(16	)		7			26
Net other comprehensive (loss) income		(1,138	)		68			(10	)		21			(1,059	)
Balance as of March 31, 2015	$	(3,461	)		$  (1,359	)		$  24			$      87			$  (4,709	)

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

The following is a summary of the amounts reclassified from AOCI to net income during the three months ended March 31, 2016 and 2015.

	Amounts reclassified from AOCI (a)
(in millions)	Three months ended March 31, 2016			Three months ended March 31, 2015			Location of impact in income statement
Amortization of pension and other employee benefits items
Actuarial losses and other (b)		$    (33	)		$ (50	)
		(33	)		(50	)	Total before tax
		11			15		Tax benefit
		$    (22	)		$ (35	)	Net of tax
Gains on hedging activities
Interest rate contracts		$       4			$  —		Net interest expense
Foreign exchange contracts		1			25		Cost of sales
		5			25		Total before tax
		(2	)		(9	)	Tax expense
		$       3			$  16		Net of tax
Available-for-sale-securities
Gains on sale of equity securities		$3,388			$  —		Other income, net
Other-than-temporary impairment of equity securities		—			(9	)	Other income, net
		3,388			(9	)	Total before tax
		—			2		Tax benefit
		3,388			$   (7	)	Net of tax
Total reclassification for the period		$3,369			$ (26	)	Total net of tax

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

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(b) These AOCI components are included in the computation of net periodic benefit cost disclosed in Note 10.

Refer to Note 8 for additional information regarding hedging activity and Note 10 for additional information regarding the amortization of pension and other employee benefits items.

12. INCOME TAXES

Effective tax rate

The company’s effective income tax rate for continuing operations was (1.7)% and 9.5% in the first quarters of 2016 and 2015, respectively. The company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

The effective income tax rate for continuing operations during the three months ended March 31, 2016 decreased due to the impact of discrete items including tax-free net realized gains associated with the debt-for-equity exchanges and the benefits associated with closing an IRS and German income tax audit. These items reduced the effective tax rate by 22.0 percentage points. The effective income tax rate for continuing operations in the first quarter of 2015 included significant deductions related to the separation of Baxalta, including debt tender premium costs that were deductible at rates significantly higher than the rate of tax without such charges.

During the first quarter of 2016, Baxter paid approximately $303 million to partially settle a US Federal income tax audit for the period 2008-2013. Additionally, the company settled a German income tax audit for the period 2008-2011. As a result, the company reduced its gross unrecognized tax benefits by $85 million. Pursuant to the tax matters agreement with Baxalta, Baxalta paid the company approximately $34 million pursuant to its tax indemnity obligations in respect of its portion of the settled gross unrecognized tax benefits. See Note 2 for additional details regarding the separation of Baxalta.

13. LEGAL PROCEEDINGS

Baxter is involved in product liability, patent, commercial, and other legal matters that arise in the normal course of the company’s business. The company records 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 recorded. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of March 31, 2016, the company’s total recorded reserves with respect to legal matters were $34 million and the total related receivables were $10 million.

Baxter has established reserves for certain of the matters discussed below. The company is 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 the liability of the company in connection with the claims cannot be estimated and although the resolution in any reporting period of one or more of these matters could have a significant impact on the company’s 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 the company’s consolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may incur material judgments or enter into material settlements of claims.

In addition to the matters described below, the company remains 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 the company’s operations and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, the company may be exposed to significant litigation concerning the scope of the company’s 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.

General litigation

On July 31, 2015, Davita Healthcare Partners, Inc. filed suit against Baxter Healthcare Corporation in the District Court of the State of Colorado regarding an ongoing commercial dispute relating to the provision of peritoneal dialysis products. The company denies the claims and intends to vigorously defend against the suit. Trial in this case is currently scheduled for August 2016.

Other

In the fourth quarter of 2012, the company received two investigative demands from the United States Attorney for the Western District of North Carolina for information regarding its quality and manufacturing practices and procedures at its North Cove facility. The company is fully cooperating with this investigation.

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14. SEGMENT INFORMATION

Baxter’s two segments are strategic businesses that are managed separately because each business develops, manufactures and markets distinct products and services. The segments and a description of their products and services are as follows:

The Renal business provides products and services to treat end-stage renal disease, or irreversible kidney failure, along with other renal therapies. The Renal business offers a comprehensive portfolio to meet the needs of patients across the treatment continuum, including technologies and therapies for peritoneal dialysis (PD), in-center hemodialysis (HD), home HD, continuous renal replacement therapy and additional dialysis services.

The Hospital Products business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, infusion pumps, inhalation anesthetics, and biosurgery products. The business also provides products and services related to pharmacy compounding, drug formulation and packaging technologies.

The company uses income from continuing operations before net interest expense, income tax expense, depreciation and amortization expense (Segment EBITDA), on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’s business segments. Intersegment sales are eliminated in consolidation.

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include most of the company’s debt and cash and equivalents and related net interest expense, foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, nonstrategic investments and related income and expense, certain employee benefit plan costs as well as certain nonrecurring gains, losses, and other charges (such as business optimization, integration and separation-related costs, and asset impairment). Financial information for the company’s segments is as follows.

	Three months ended
	March 31,
(in millions)	2016		2015
Net sales
Renal		$      898		$      913
Hospital Products		1,477		1,490
Total net sales		$   2,375		$   2,403
EBITDA
Renal		$      122		$        85
Hospital Products		509		487
Total segment EBITDA		$      631		$      572
	March 31,		December 31,
(in millions)	2016		2015
Total assets
Renal		$    4,719		$    4,609
Hospital Products		6,787		6,632
Other		5,844		9,721
Total assets		$   17,350		$  20,962

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The following is a reconciliation of segment EBITDA to income from continuing operations before income taxes per the condensed consolidated statements of income.

	Three months ended
	March 31,
(in millions)	2016			2015
Total segment EBITDA	$	631		$	572
Reconciling items
Depreciation and amortization		(189	)		(187	)
Stock compensation		(23	)		(29	)
Net interest expense		(28	)		(30	)
Business optimization items		(5	)		—
Certain foreign currency fluctuations and hedging activities		22			108
Net realized gains on Retained Shares transactions		3,239			—
Net loss on debt extinguishment		(101	)		—
Other Corporate items		(217	)		(286	)
Income from continuing operations before income taxes	$	3,329		$	148

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

Refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Annual Report) for management’s discussion and analysis of the financial condition and results of operations of the company. The following is management’s discussion and analysis of the financial condition and results of operations of the company for the three months ended March 31, 2016.

Separation of Baxalta Incorporated

On July 1, 2015, Baxter completed the distribution of approximately 80.5% of the outstanding common stock of its biopharmaceuticals business, Baxalta Incorporated (Baxalta), to Baxter shareholders (the Distribution). As a result of the separation, the operating results of Baxalta have been reflected as discontinued operations for the first quarters of 2016 and 2015. Refer to Note 2 for additional information regarding the separation of Baxalta. Unless otherwise stated, financial results herein reflect continuing operations.

RESULTS OF OPERATIONS

Baxter’s income from continuing operations for the three months ended March 31, 2016 totaled $3.4 billion, or $6.13 per diluted share, compared to $134 million, or $0.24 per diluted shares, for the three months ended March 31, 2015. Income from continuing operations for the three months ended March 31, 2016 included special items which increased income from continuing operations by $3.2 billion, or $5.77 per diluted share, as further discussed below. Income from continuing operations for the three months ended March 31, 2015 included special items which reduced income from continuing operations by $53 million, or $0.10 per diluted share, as further discussed below.

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Special Items

The following table provides a summary of the company’s special items and the related impact by line item on the company’s results of continuing operations for the three months ended March 31, 2016 and 2015.

	Three months ended March 31,
(in millions)	2016			2015
Gross Margin
Intangible asset amortization expense		$     (40	)		$(40	)
Business optimization items 1		(12	)		7
Product-related items 2		12			—
Total Special Items		$     (40	)		$(33	)
Impact on Gross Margin Ratio		(1.7 pts	)		(1.4 pts	)
Marketing and Administrative Expenses
Business optimization items 1		$        3			$ 24
Separation-related costs 3		18			12
Total Special Items		$      21			$ 36
Impact on Marketing and Administrative Expense Ratio		0.9 pts			1.5 pts
Other Income, Net
Loss on debt extinguishment 4		$    101			$ —
Net realized gains on Retained Share transactions 5		(3,243	)		—
Total Special Items		$(3,142	)		$ —
Income Tax (Benefit) Expense
Impact of special items		$   (107	)		$(16	)
Total Special Items		$   (107	)		$(16	)
Impact on Effective Tax Rate		(21.5 pts	)		(4.3 pts	)

Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance, particularly in terms of cash returns, and is similar to how management internally assesses performance. Additional special items are identified above because they are highly variable, difficult to predict, and of a size that may substantially impact the company’s reported operations for a period. Management believes that providing the separate impact of the above items on the company’s results in accordance with GAAP in the United States may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of the company’s results of operations, particularly in evaluating performance from one period to another. This information should be considered in addition to, and not as a substitute for, information prepared in accordance with GAAP.

¹  The company’s results in the first quarter of 2016 included a net charge of $15 million related to business optimization initiatives. This included a net charge of $4 million related to employee termination costs, $7 million of Gambro integration costs, and $4 million of consulting fees and other costs associated with the company’s business optimization programs. The company’s results in 2015 included a business optimization net charge of $17 million which included a net benefit of $1 million related to employee termination costs from restructuring actions and costs incurred of $18 million related to the integration of Gambro.

²  The company’s results in the first quarter of 2016 included a net benefit of $12 million related to adjustments to the SIGMA SPECTRUM infusion pump reserves.

³  The company’s results in the first quarter of 2016 and 2015 included costs incurred related to the Baxalta separation totaling $18 million and $12 million, respectively.

⁴  The company’s results in the first quarter of 2016 included a net debt extinguishment loss of $101 million related to the March 2016 debt-for-equity exchange for certain company indebtedness. See Note 8 within Item 1 for additional details.

⁵  The company’s results in the first quarter of 2016 included a net realized gain of $3.2 billion related to the debt-for-equity exchanges of Baxalta Retained Shares for certain company indebtedness. See Note 8 within Item 1 for additional details.

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NET SALES

	Three months ended March 31,				Percent change
(in millions)	2016		2015		At actual currency rates		At constant currency rates
Renal		$   898		$   913		(2)%		5%
Hospital Products		1,477		1,490		(1)%		4%
Total net sales		$2,375		$2,403		(1)%		4%
	Three months ended
	March 31,				Percent change
(in millions)	2016		2015		At actual currency rates		At constant currency rates
International	$	1,383	$	1,458		(5)%		4%
United States		992		945		5%		5%
Total net sales		$2,375		$2,403		(1)%		4%

Foreign currency unfavorably impacted net sales by five percentage points during the first quarter of 2016 compared to the prior period principally due to the strengthening of the U.S. Dollar relative to the Euro as well as certain other currencies.

The comparisons presented at constant currency rates reflect comparative 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 have not changed between the prior and the current period. The company believes that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of the company’s results of operations, particularly in evaluating performance from one period to another.

Franchise Net Sales Reporting

The Renal segment includes sales of the company’s peritoneal dialysis (PD), hemodialysis (HD) and continuous renal replacement therapies.

The Hospital Products segment includes four commercial franchises: Fluid Systems, Integrated Pharmacy Solutions, Surgical Care and Other.

• Fluid Systems includes sales of the company’s intravenous (IV) therapies, infusion pumps and administration sets.

• Integrated Pharmacy Solutions includes sales of the company’s premixed and oncology drug platforms, nutrition products and pharmacy compounding services.

• Surgical Care includes sales of the company’s inhaled anesthesia products as well as biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.

• Other includes sales primarily from the company’s pharmaceutical partnering business.

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The following is a summary of net sales by commercial franchise.

	Three months ended
	March 31,				Percent change
(in millions)	2016		2015		At actual currency rates		At constant currency rates
Total Renal net sales	$	898	$	913		(2)%		5%
Fluid Systems	$	524	$	493		6%		11%
Integrated Pharmacy Solutions		556		564		(1)%		3%
Surgical Care		305		322		(5)%		(2)%
Other		92		111		(17)%		(14)%
Total Hospital Products net sales	$	1,477	$	1,490		(1)%		4%

Net sales in the Renal segment decreased 2% during the first quarter of 2016 compared to the prior period (with an unfavorable foreign currency impact of seven percentage points). Excluding the impact of foreign currency, sales increased 5% driven by continued growth of PD patients and improved pricing in the U.S., which contributed approximately three percentage points. In addition, global growth of the company’s continuous renal replacement therapy to treat acute kidney injury contributed two percentage points to the growth rate.

Net sales in the Hospital Products segment decreased 1% during the first quarter of 2016 compared to the prior period (with an unfavorable foreign currency impact of five percentage points). Excluding the impact of foreign currency, sales increased 4%. The principal drivers impacting net sales were the following:

• In the Fluid Systems franchise, sales increased 11% in the first quarter of 2016 on a constant currency basis driven by favorable pricing and demand for U.S. IV solutions, which contributed approximately six percentage points to the growth rate, as well as increased infusion pump sales and the related sets driven by the launch of the SIGMA SPECTRUM pump in the U.S. in the second quarter of 2015, which contributed approximately five percentage points.

• In the Integrated Pharmacy Solutions franchise, sales increased 3% in the first quarter of 2016 on a constant currency basis driven by international demand for the company’s nutritional therapies, contributing approximately one percentage point, increased international demand for pharmacy injectable products, which contributed approximately one percentage point, along with increased demand for the company’s injectable drug compounding services in certain international markets, which contributed approximately two percentage points to the growth rate. These increases were partially offset by lower U.S. sales of the company’s pharmacy injectable products, as there was a government order last year which did not reoccur this quarter, contributing approximately one percentage point of decline. U.S. cyclophosphamide sales were approximately $60 million in the first quarters of 2016 and 2015. The company expects additional competitors will enter the market later in 2016.

• In the Surgical Care franchise, sales declined 2% in the first quarter of 2016 on a constant currency basis driven by lower demand for the company’s non-core biosurgery products and lower demand in the U.S. for the company’s anesthetics products. This was partially offset by growth in core U.S. surgical sealant and hemostasis products as well as international anesthesia products.

• In the Other franchise, sales declined 14% in the first quarter of 2016 on a constant currency basis driven by lower demand for products manufactured by Baxter on behalf of its pharmaceutical partner. This decline was partially offset by sales related to the company’s manufacturing and supply agreement with Baxalta which totaled $11 million in the first quarter of 2016.

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Gross Margin and Expense Ratios

	Three months ended
	March 31,
(as a percentage of net sales)	2016		2015		Change
Gross margin		40.6%		42.4%		(1.8) pts
Marketing and administrative expenses		27.0%		32.6%		(5.6) pts

Gross Margin

The special items identified above had an unfavorable impact of approximately 1.7 and 1.4 percentage points on the gross margin percentage in the first quarters of 2016 and 2015, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the gross margin ratio declined due to unfavorable foreign exchange impacts, partially offset by improved pricing in the Fluid Systems franchise within the Hospital Products segment and a favorable product mix in the Renal segment.

Marketing and Administrative Expenses

The special items identified above had an unfavorable impact of approximately 0.9 and 1.5 percentage points on the marketing and administrative expense ratio in the first quarters of 2016 and 2015, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the marketing and administrative expenses ratio in the first quarter 2016 declined as the company recognized $27 million as a reduction to expense under the transition services agreement with Baxalta, approximately $20 million of reduced pension expense, favorable foreign currency impacts, lower bad debt expense, benefits from the company’s actions previously taken to rebase its cost structure, and continued focus to reduce discretionary spending.

Research and Development

	Three months ended
	March 31,				Percent change
(in millions)	2016		2015
Research and development expenses		$136		$143		(5)%
As a percentage of net sales		5.7%		6.0%

Research and development expenses declined five percent during the first quarter of 2016 as a result of foreign currency and the favorable results of the Company’s efforts to optimize its overall R&D expenditures and reduce infrastructure related expenses.

Business Optimization Items

The company has implemented certain restructuring initiatives in an effort to streamline its operations, rationalize its manufacturing facilities, enhance its general and administrative infrastructure, and re-align certain R&D activities. In 2015, the company recorded restructuring charges of approximately $130 million. The company estimates that it recognized $0.03 per diluted share of savings related to these programs in the first quarter of 2016. The company expects to recognize future savings of approximately $0.14 per diluted share from these initiatives through 2017. In the first quarter of 2016, the company recorded additional restructuring charges of $15 million relating to certain manufacturing efficiency programs. The company expects to recognize future savings of approximately $0.03 per diluted share from these initiatives through 2017. Refer to Note 7 within Item 1 for additional information regarding the company’s business optimization initiatives.

Net Interest Expense

Net interest expense was $28 million and $30 million in the first quarters of 2016 and 2015, respectively. The decrease in the first quarter of 2016 was primarily driven by lower outstanding debt as a result of the first quarter 2016 debt-for-equity exchanges which extinguished $3.65 billion of debt, partially offset by lower capitalized interest in the first quarter of 2016 compared to the same period last year. See Note 8 within Item 1 for additional details about the debt extinguishments.

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Other Income, Net

Other income, net was $3.2 billion and $86 million in the first quarters of 2016 and 2015, respectively.

The first quarter of 2016 included net realized gains totaling $3.2 billion on the Retained Shares transactions, $9 million dividend income from the Retained Shares, and $9 million of income related to foreign currency fluctuations principally relating to intercompany receivables, payables and monetary assets denominated in a foreign currency. These income items were partially offset by a $101 million net debt extinguishment loss. See Note 8 within Item 1 for additional details regarding the debt extinguishment loss and the Retained Shares transactions.

The first quarter of 2015 included $89 million of income related to foreign currency fluctuations, principally relating to intercompany receivables, payables and monetary assets denominated in a foreign currency.

Segment EBITDA

The company uses income from continuing operations before net interest expense, income tax expense, depreciation and amortization expense (Segment EBITDA), on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’s business segments. Refer to Note 14 within Item 1 for a summary of financial results by segment. The following is a summary of significant factors impacting the segments’ financial results.

Renal

Segment EBITDA was $122 million and $85 million in the first quarters of 2016 and 2015, respectively. The increase in 2016 was driven by lower marketing and administrative expenses as the Renal segment benefited from the company’s business optimization programs and continued to focus on reducing discretionary spending. This was partially offset by unfavorable foreign currency, incremental manufacturing and quality costs, and higher research and development costs as the company realigned allocations of research and development costs based on project spend attributable to segments.

Hospital Products

Segment EBITDA was $509 million and $487 million in the first quarters of 2016 and 2015, respectively. This increase was driven by reduced research and development expenses as the company realigned allocations of research and development costs based on project spend attributable to segments. EBITDA was also favorably impacted by lower marketing and administrative expenses as cost savings were realized from the company’s business optimization programs and continued focus on reducing discretionary spending. This was partially offset by unfavorable foreign currency and increased costs related to incremental manufacturing and quality costs.

Corporate and other

Certain income and expense amounts are not allocated to a segment. These amounts are detailed in the table in Note 14 within Item 1 and primarily include net interest expense, foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, non-strategic investments and related income and expense, certain employee benefit plan costs as well as certain nonrecurring gains and losses and other charges (such as business optimization, integration and separation-related costs and asset impairment).

Income Taxes

The company’s effective income tax rate for continuing operations was (1.7)% and 9.5% in the first quarters of 2016 and 2015, respectively. The company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

The effective income tax rate for continuing operations decreased during the three months ended March 31, 2016 compared to the prior year primarily as a result of discrete items including the retained stake net realized gain and associated tax benefit, along with tax benefits from partially settling an IRS (2008-2013) income tax audit and settling a German (2008-2011) income tax audit, which cumulatively reduced the tax rate by 22.0 percentage points. The prior year period included significant deductions related to the separation of Baxalta, including debt tender premium costs that were deductible at rates significantly higher than the rate of tax without such charges.

The company anticipates that the effective tax rate for continuing operations for the full-year 2016 will be approximately 20.5%, excluding the impact of audit developments and other discrete items.

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Income from Continuing Operations and Earnings per Diluted Share

Income from continuing operations was $3.4 billion, or $6.13 per diluted share, for the first quarter of 2016 and $134 million, or $0.24 per diluted share, for the first quarter of 2015. The significant factors and events contributing to the changes are discussed above.

(Loss) Income from Discontinued Operations

The following table is a summary of the operating results of Baxalta, which have been reflected as discontinued operations for the quarters ended March 31, 2016 and 2015.

	Three months ended
	March 31,
(in millions)	2016			2015
Net sales		$64			$1,362
(Loss) income from discontinued operations before income taxes		(15	)		392
Gain on disposal of discontinued operations		17			—
Income tax expense		9			96
(Loss) income from discontinued operations, net of tax		$ (7	)		$   296

Refer to Note 2 within Item 1 for additional information regarding the separation of Baxalta.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash flow for the three month periods ended March 31, 2016 and 2015.

	Three months ended
	March 31,
(in millions)	2016			2015
Cash flows from operations - continuing operations		$(174	)	$	(28	)
Cash flows from investing activities - continuing operations		(214	)		(217	)
Cash flows from financing activities		510			384

Cash Flows from Operations — Continuing Operations

Operating cash flows from continuing operations decreased during the first quarter of 2016 as compared to the prior year period. The decrease was driven by the factors discussed below.

Accounts Receivable

Cash flows relating to accounts receivable were an inflow of $16 million during the first quarter of 2016 compared to $50 million in the prior year period and days sales outstanding increased to 60.3 days at March 31, 2016 from 58.3 in the same period last year. This increase was primarily driven by slower collections in Europe and Latin America.

Inventories

Cash outflows relating to inventories declined in 2016 as compared to the same prior year period. The following is a summary of inventories as of March 31, 2016 and December 31, 2015, as well as annualized inventory turns for the first quarter of 2016 and 2015, by segment.

	Inventories				Annualized inventory turns for the three months ended March 31,
	March 31,		December 31,
(in millions, except inventory turn data)	2016		2015		2016		2015
Renal		$   623		$   605		3.47		3.54
Hospital Products		1,011		955		3.01		3.20
Other		48		44		n/a		n/a
Total company		$1,682		$1,604		3.19		3.33

The increase in inventories was driven primarily by inventory build in both the Renal and Hospital Products segments which also drove the 0.14 decline in inventory turns from March 31, 2015 to March 31, 2016.

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Other

The changes in accounts payable and accrued liabilities were $438 million in the first quarter of 2016 compared to $306 million outflow in the first quarter of 2015. The changes were primarily driven by an increase in tax payments from the first quarter of 2015 to the first quarter of 2016 primarily driven by a tax settlement as well as the timing of payments to suppliers. See Note 12 within Item 1 for additional details regarding the tax settlement.

Payments related to the execution of the COLLEAGUE infusion pump and SIGMA SPECTRUM infusion pump recalls as well as the company’s business optimization initiatives increased from $19 million in the first quarter of 2015 to $34 million in the first quarter of 2016. Refer to Note 7 within Item 1 for further information regarding the COLLEAGUE infusion pump and SIGMA SPECTRUM infusion pump recalls as well as the business optimization initiatives.

Changes in other balance sheet items were outflows of $108 million and $2 million in the first quarter of 2016 and 2015, respectively, primarily driven by changes in prepaid expenses.

Cash Flows from Investing Activities — Continuing Operations

Capital Expenditures

Capital expenditures were $184 million and $214 million in the first quarters of 2016 and 2015, respectively. The company’s capital expenditures in 2016 were driven by targeted investments in projects to support production of PD and IV solutions as well as expansion plans to meet the demand for dialyzers.

Acquisitions and Investments

Cash outflows relating to acquisitions and investments of $33 million in the first quarter of 2016 were driven primarily by the acquisition of the rights to Vancomycin from Celerity. Cash outflows relating to acquisitions and investments were not significant in the first quarter of 2015.

Divestitures and Other Investing Activities

Cash inflows from divestitures and other investing activities were not significant in the first quarters of 2016 or 2015.

Cash Flows from Financing Activities

Debt Issuances, Net of Payments of Obligations

Net cash inflows related to debt and other financing obligations totaled $491 million for the first quarter of 2016 primarily related to $61 million of borrowings under the company’s revolving credit facility and $450 million for the issuance of commercial paper.

Net cash inflows related to debt and other financing obligations totaled $643 million for the first quarter of 2015 primarily related to $900 million of borrowings under one of the company’s revolving credit facilities as well as $361 million for the issuance of commercial paper. The company repaid $600 million of 4.625% senior unsecured notes that matured in March 2015 as well as other short-term obligations.

Other Financing Activities

Cash dividend payments totaled $63 million and $282 million in the first quarters of 2016 and 2015, respectively. The decrease in cash dividend payments was primarily due to a decrease in the quarterly dividend rate of approximately 78% to $0.115 per share, as announced in July 2015.

Proceeds and realized excess tax benefits from stock issued under employee benefit plans increased from $48 million in the first quarter of 2015 to $99 million in the first quarter of 2016, primarily due to increased option exercises in the first quarter of 2016.

The company did not repurchase stock in the first quarters of 2016 or 2015. As authorized by the Board of Directors, the company repurchases its stock depending upon the company’s cash flows, net debt level and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of the company’s common stock and $0.5 billion remained available as of March 31, 2016.

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Credit Facilities, Access to Capital and Credit Ratings

Credit Facilities

As of March 31, 2016, the company’s U.S. dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $1.5 billion and approximately $220 million, respectively. As of March 31, 2016, the company was 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

The company intends 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. The company had $2.2 billion of cash and equivalents as of March 31, 2016, with adequate cash available to meet operating requirements in each jurisdiction in which the company operates. The company invests its excess cash in certificates of deposit and money market funds, and diversifies the concentration of cash among different financial institutions.

The company’s 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 the company’s products or in the solvency of its customers or suppliers, deterioration in the company’s key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, the company believes it has sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support the company’s growth objectives.

As of March 31, 2016, Baxter held 30,506,097 shares of Baxalta common stock with a fair value of approximately $1.2 billion. This ownership interest provides the rights to dividends declared on Baxalta’s common stock, including a $0.07 per share cash dividend paid on April 1, 2016. Baxter is in the process of contributing 17,145,570 Baxalta shares, or proceeds therefrom, to its U.S. qualified pension plan. Additionally, Baxter currently intends to use up to 13,360,527 of the Retained Shares to complete a stock-for-stock exchange, in accordance with the terms of a registration statement on Form S-4 previously filed by Baxalta on April 21, 2016 (as subsequently amended). Alternatively, Baxter may, among other things, distribute all or a portion of the remaining Retained Shares in a stock dividend or sell the shares for cash. Baxter expects to fully utilize all remaining Retained Shares by the end of the second quarter of 2016.

The company continues to do business with foreign governments in certain countries, including Greece, Spain, Portugal and Italy, which have experienced a deterioration in credit and economic conditions. As of March 31, 2016, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $206 million.

While these economic conditions have not significantly impacted the company’s ability to collect receivables, global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses.

Credit Ratings

The company’s credit ratings at March 31, 2016 were as follows.

	Standard & Poor’s	Fitch	Moody’s
Ratings
Senior debt	A-	BBB+	Baa2
Short-term debt	A2	F2	P2
Outlook	Negative	Stable	Stable

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CONTRACTUAL OBLIGATIONS

There have been no significant changes to the company’s contractual obligations during the first three months of 2016, except for the debt-for-equity exchanges. The table below summarizes Baxter’s contractual obligations as of March 31, 2016 related to short- and long-term debt and interest expense in the following periods to give effect to the above mentioned debt-for-equity exchanges.

(in millions)	Total		Less than one year		One to three years		Three to five years		More than five years
Short-term debt		$   817		$   817		$  —		$  —		$     —
Long-term debt and capital lease obligations, including current maturities		2,540		472		490		213		1,365
Interest on short- and long-term debt and capital lease obligations 1		927		71		124		95		637
Contractual obligations		$4,284		$1,360		$614		$308		$2,002

¹  Interest payments on debt and capital lease obligations are calculated for future periods using interest rates in effect at March 31, 2016. Projected interest payments include the related effects of interest rate swap agreements. Certain of these projected interest payments may differ in the future based on changes in floating interest rates, foreign currency fluctuations or other factors or events. The projected interest payments only pertain to obligations and agreements outstanding at March 31, 2016. Refer to Note 8 within Item 1 for additional information regarding the company’s debt instruments and related interest rate agreements outstanding at March 2016.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of the company’s significant accounting policies is included in Note 1 to the company’s consolidated financial statements in the 2015 Annual Report. Certain of the company’s accounting policies are considered critical, as these policies are the most important to the depiction of the company’s 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 the 2015 Annual Report. There have been no significant changes in the company’s application of its critical accounting policies during the first quarter of 2016.

LEGAL CONTINGENCIES

Refer to Note 13 within Item 1 for a discussion of the company’s legal contingencies. Upon resolution of any of these uncertainties, the company may incur charges in excess of presently established liabilities. While the liability of the company 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 the company’s 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 the company’s consolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments or enter into material settlements of claims.

CERTAIN REGULATORY MATTERS

In January 2014, the company received a Warning Letter from FDA primarily directed to quality systems for the company’s Round Lake, Illinois, facility, particularly in that facility’s capacity as a specification developer for certain of the company’s medical devices. The company received a separate Warning Letter in December 2013 that included observations related to the company’s ambulatory infuser business in Irvine, California, which previously had been subject to agency action.

In June 2013, the company received a Warning Letter from FDA regarding operations and processes at its North Cove, North Carolina and Jayuya, Puerto Rico facilities and in November 2015 attended a Regulatory Meeting with FDA concerning the Jayuya facility. The Warning Letter addresses observations related to Current Good Manufacturing Practice (CGMP) violations at the two facilities.

In June 2010, the company received a Warning Letter from FDA in connection with an inspection of its McGaw Park, Illinois facility, which previously supported the Renal franchise. The company’s Round Lake facility now provides the related capacity for the Renal franchise. The Warning Letter pertains to the processes by which the company analyzes and addresses product complaints through corrective and preventative action, and reports relevant information to FDA.

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On October 9, 2014, the company had a Regulatory Meeting with FDA to discuss the Warning Letters described above. At the meeting, the company agreed to work closely with FDA to provide regular updates on its progress to meet all requirements and resolve all matters identified in the Warning Letters described above.

Please see Item 1A of the 2015 Annual Report and Item 1 of Part II of this quarterly report for additional discussion of regulatory matters and how they may impact the company.

FORWARD-LOOKING INFORMATION

This quarterly report 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, litigation-related matters including outcomes, future regulatory filings and the company’s R&D pipeline, strategic objectives, 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, the company’s exposure to financial market volatility and foreign currency and interest rate risks, the impact of the recent separation of the biopharmaceuticals and medical products businesses, the impact of competition, future sales growth, business development activities, business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the sufficiency of the company’s 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 the company’s experience and perception of historical trends, current conditions, and expected future developments as well as other factors that the company believes are appropriate in the circumstances. While these statements represent the company’s current judgment on what the future may hold, and the company believes 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:

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

• demand for and market acceptance risks for and competitive pressures related to new and existing products;

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

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

• future actions of FDA, EMA or any other regulatory body or government authority that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities;

• failures with respect to the company’s compliance programs;

• future actions of third parties, including third-party payers, as healthcare reform and other similar measures are implemented in the United States and globally;

• the impact of U.S. healthcare reform and other similar actions undertaken by foreign governments with respect to pricing, reimbursement, taxation and rebate policies;

• additional legislation, regulation and other governmental pressures in the United States or globally, which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of the company’s business;

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

• global regulatory, trade and tax policies;

• the company’s ability to identify business development and growth opportunities and to successfully execute on business development strategies;

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• the company’s ability to finance and develop new products or enhancements internally, on commercially acceptable terms or at all;

• the company’s ability to realize the anticipated benefits from its joint product development and commercialization arrangements, governmental collaborations and other business development activities;

• the availability and pricing of acceptable raw materials and component supply;

• inability to create additional production capacity in a timely manner or the occurrence of other manufacturing or supply difficulties;

• the company’s ability to achieve the intended results associated with the separation of its biopharmaceuticals and medical products businesses or targeted margin improvements;

• the company’s ability to dispose of the remainder of its retained stake in Baxalta in a tax-efficient manner (including as a result of delays in obtaining required regulatory approvals or the impact of recently issued U.S. Treasury regulations on the proposed Baxalta – Shire plc merger);

• the impact of any future tax liability with respect to the separation and distribution, including with respect to disposition of any remaining Baxalta shares held by the company;

• any failure by Baxalta or Shire to satisfy its obligation under the separation agreements, including the tax matters agreement, or the company’s letter agreement with Shire plc and Baxalta;

• the ability to protect or enforce the company’s 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 the company’s manufacture, sale or use of affected products or technology;

• the impact of global economic conditions on the company and its customers and suppliers, including foreign governments in certain countries in which the company operates;

• fluctuations in foreign exchange and interest rates;

• any changes in law concerning the taxation of income, including income earned outside the United States;

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

• breaches or failures of the company’s information technology systems;

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

• the outcome of pending or future litigation;

• the adequacy of the company’s cash flows from operations to meet its ongoing cash obligations and fund its investment program; and

• other factors identified elsewhere in this report on and other filings with the Securities and Exchange Commission, including those factors described in Item 1A of the company’s Annual Report on Form 10-K for the year ended December 31, 2015, all of which are available on the company’s website.

Actual results may differ materially from those projected in the forward-looking statements. The company does not undertake to update its forward-looking statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Currency Risk

The company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, Brazilian Real, Colombian Peso, and Swedish Krona. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses 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 shareholders’ equity volatility relating to foreign exchange. Financial market and currency volatility may limit the company’s ability to cost-effectively hedge these exposures.

The company may use options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of March 31, 2016 is 15 months. The company also enters into derivative instruments to hedge certain intercompany and third-party receivables and payables and debt denominated in foreign currencies.

Currency restrictions enacted in Venezuela require Baxter to obtain approval from the Venezuelan government to exchange Venezuelan Bolivars for U.S. Dollars and require such exchange to be made at the official exchange rate established by the government. Since January 1, 2010, Venezuela has been designated as a highly inflationary economy under GAAP and as a result, the functional currency of the company’s subsidiary in Venezuela is the U.S. Dollar. In the first quarter of 2016, the Venezuelan government moved from the three-tier exchange rate system to a two-tiered rate exchange rate system and the official rate for food and medicine imports was adjusted from 6.3 to 10 bolivars per U.S. dollar. This devaluation resulted in a charge of approximately $9 million during the first quarter of 2016. As of March 31, 2016, the company’s subsidiary in Venezuela had net assets of $29 million denominated in the Venezuelan Bolivar. Net sales in Venezuela represent approximately 0.3% of Baxter’s total net sales. Due to continuing uncertain economic conditions in Venezuela, it is possible that additional charges may be recorded in the future.

As part of its risk-management program, the company performs a sensitivity analysis to assess potential changes in the fair value of its foreign exchange instruments 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 option and forward contracts outstanding at March 31, 2016, while not predictive in nature, indicated that if the U.S. Dollar uniformly weakened by 10% against all currencies, on a net-of-tax basis, the net asset balance of $3 million would decrease by $15 million, resulting in a net liability.

The sensitivity analysis model recalculates the fair value of the foreign exchange option and forward contracts outstanding at March 31, 2016 by replacing the actual exchange rates at March 31, 2016 with exchange rates that are 10% weaker to the actual exchange rates for each applicable currency. All other factors are held constant. The sensitivity analysis disregards 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 analysis also disregards the offsetting change in value of the underlying hedged transactions and balances.

Interest Rate and Other Risks

Refer to the caption “Interest Rate and Other Risks” in the “Financial Instrument Market Risk” section of the 2015 Annual Report. There were no significant changes during the quarter ended March 31, 2016.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Baxter carried out an evaluation, under the supervision and with the participation of its Disclosure Committee and management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of Baxter’s 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 March 31, 2016. Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures were effective as of March 31, 2016.

Changes in Internal Control over Financial Reporting

There have been no changes in Baxter’s 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 March 31, 2016 that have materially affected, or are reasonably likely to materially affect, Baxter’s internal control over financial reporting.

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Review by Independent Registered Public Accounting Firm

A review of the interim condensed consolidated financial information included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2016 and 2015 has been performed by PricewaterhouseCoopers LLP, the company’s 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.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Baxter International Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Baxter International Inc. and its subsidiaries as of March 31, 2016, and the related condensed consolidated statements of income for the three month periods ended March 31, 2016 and 2015, the condensed consolidated statements of comprehensive income for the three month periods ended March 31, 2016 and 2015 and the condensed consolidated statements of cash flows for the three month periods ended March 31, 2016 and 2015. These interim financial statements are the responsibility of the company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Public Company Accounting Oversight Board (United States), 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.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2015, and the related consolidated statements of income, of comprehensive income, of cash flows and of changes in equity for the year then ended, and in our report dated February 26, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2015, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

May 6, 2016

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information in Part I, Item 1, Note 13 is incorporated herein by reference.

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Item 6. Exhibits

Exhibit Index:

Exhibit Number	Description
10.1	Agreement, dated January 11, 2016, by and between Baxter International Inc. and Shire plc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on January 11, 2016).
10.2*	Agreement, dated January 8, 2016, by and between Baxter International Inc. and Baxalta Incorporated
C 10.3*	Baxter International Inc. Equity Plan for the 2016 Incentive Plan
15*	Letter Re Unaudited Interim Financial Information
31.1*	Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*	Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1*	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith.

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Signature

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

		BAXTER INTERNATIONAL INC.
		(Registrant)
Date: May 6, 2016	By:	/s/ James K. Saccaro
		James K. Saccaro
		Corporate Vice President and Chief Financial Officer
		(duly authorized officer and principal financial officer)

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EX-10.2

Exhibit 10.2

AGREEMENT

THIS AGREEMENT, dated January 8, 2016, is by and between Baxter International Inc., a corporation organized under the laws of Delaware, United States of America (“Baxter”) and Baxalta Incorporated, a corporation organized under the laws of Delaware, United States of America (“Baxalta” and, together with Baxter, the “Parties”).

RECITALS

WHEREAS, Baxter has separated into two companies (the “Separation”): (i) one comprising Baxter’s BioScience operating segment, excluding the BioSurgery franchise, which is owned and conducted, directly or indirectly, by Baxalta, and (ii) one comprising the Medical Products Business, including the BioSurgery franchise, which continues to be owned and conducted, directly or indirectly, by Baxter;

WHEREAS, Baxter and Baxalta executed that certain Separation and Distribution Agreement, dated as of June 30, 2015 (as may be amended from time to time, the “Separation and Distribution Agreement”), to govern the overall terms of the Separation;

WHEREAS, in connection with the Separation, certain transactions had to be deferred until after the Distribution Date (as defined in the Separation and Distribution Agreement) and in connection with same, Baxalta World Trade LLC, Baxalta GmbH, Baxalta Holding B.V., Baxter World Trade Corporation, Baxter Healthcare SA and Baxter Holding B.V., entered into that certain International Commercial Operations Agreement dated as of June 30, 2015 (the “ICOA”); and

WHEREAS, in furtherance of the Separation, Baxter and Baxalta now desire to document and clarify the terms of reimbursement related to the capitalization of certain Baxalta Local Entities (as defined in the ICOA) by Baxter or one of its Affiliates, the transfer of intercompany Accounts Receivables and Accounts Payables (as such terms are defined in the ICOA) in connection with a Local Closing (as such term is defined in the ICOA) and the terms upon which payments shall be made between the Parties or their respective Affiliates.

NOW, THEREFORE, in consideration of the premises and mutual covenants, agreements and provisions herein contained, and intending to be legally bound, the Parties agree as follows:

1. Definitions. Reference is made to Section 9.15 of the Separation and Distribution Agreement regarding the interpretation of certain words and phrases used in this Agreement. Capitalized terms used herein but not otherwise defined herein shall have the meanings set forth in the Separation and Distribution Agreement.

2. Capital Reimbursements; Negative Net Asset Cash Payment Reimbursements.

(a) Baxalta shall, or shall cause a Baxalta Subsidiary to, reimburse Baxter or a Baxter Subsidiary designated by Baxter for all (i) capital infusions in excess of 50,000 United States Dollars (“Dollars”) (or the foreign currency equivalent determined applying the Exchange Rate (as defined in the ICOA) in effect on the date of the applicable capital infusion) made by Baxter or a Baxter Subsidiary after the Effective

1

Time to an individual Baxalta Local Entity, including any capital infusions sent on behalf of Baxalta or a Baxalta Subsidiary (each, a “Capital Reimbursement”) and (ii) amounts of cash in excess of 50,000 Dollars (or the foreign currency equivalent determined applying the Exchange Rate in effect on the date of the applicable transfer) transferred by or on behalf of a Baxter Local Entity to a Baxalta Local Entity as part of a Local Closing resulting from the value of the Liabilities of the applicable Deferred Baxalta Local Business exceeding the Assets of such Deferred Baxalta Local Business (each, a “Negative Net Asset Cash Payment”).

(b) Each Capital Reimbursement shall be paid by Baxalta or a Baxalta Subsidiary no later than sixty (60) calendar days following (i) the date on which Baxter or a Baxter Subsidiary makes the applicable capital infusion into a Baxalta Local Entity or (ii) the date of this Agreement for all capital infusions made by Baxter or a Baxter Subsidiary into a Baxalta Local Entity following the Effective Time but prior to the date of this Agreement.

(c) Each Negative Net Asset Cash Payment shall be paid by Baxalta or a Baxalta Subsidiary no later than sixty (60) calendar days following the date on which the Negative Net Asset Cash Payment is made by or on behalf of a Baxter Local Entity to the applicable Baxalta Local Entity.

(d) Capital Reimbursement payments made by Baxalta or a Baxalta Subsidiary to Baxter or a Baxter Subsidiary shall be paid in the same currency originally used by Baxter or a Baxter Subsidiary to fund the applicable Baxalta Local Entity. Negative Net Asset Cash Payment amounts paid by Baxalta or a Baxalta Subsidiary to Baxter or a Baxter Subsidiary shall be paid in Dollars or Euros converting the applicable foreign currency amount to Dollars or Euros applying the Exchange Rate in effect on the date of the applicable transfer. The Parties agree that all Liabilities incurred in connection with foreign exchange risks related to each Capital Reimbursement and each Negative Net Asset Cash Payment shall be borne solely by Baxalta.

3. Intercompany Accounts Receivables and Accounts Payables.

(a) The Parties hereby agree that the aggregate value of all accounts, notes and other receivables (net of any provision for doubtful debts recorded at the Effective Time) resulting from sales of Baxalta Products or services prior to any Local Closing (as defined in the ICOA), whether current or noncurrent, whether resulting from sales or services prior to or after the Effective Time, whether owed by a Third Party or Baxter (or one of its Affiliates) and any interest on such receivables (“Accounts Receivable”) are intended to be Baxalta Assets pursuant to the Separation and Distribution Agreement and shall transfer to the applicable Baxalta Local Entity on the relevant Local Closing Date.

(b) The Parties hereby agree that the aggregate value of all trade accounts payable resulting from sales of Baxalta Products or services prior to any Local Closing, whether resulting from sales or services prior to or after the Effective Time and whether owed to a Third Party, Baxter (or one of its Affiliates) or Baxalta (or one of

2

its Affiliates) (“Accounts Payable”) are intended to be Baxalta Liabilities pursuant to the Separation and Distribution Agreement and shall transfer to the applicable Baxalta Local Entity on the relevant Local Closing Date.

(c) Prior to the relevant Local Closing Date, Accounts Receivable owed by Baxter (or one of its Affiliates) or Accounts Payable owed to Baxter (or one of its Affiliates) or Baxalta (or one of its Affiliates) shall be settled in the normal course of business under current customary terms that apply to non-intercompany trade payables and receivables by each Baxter Local Entity and in the event that any such Accounts Receivables or Accounts Payables are unable to be settled in full or in part as a result of foreign currency control restrictions, such Accounts Receivables or Accounts Payables shall remain outstanding and shall transfer to the applicable Baxalta Local Entity on the relevant Local Closing Date.

4. Payment Terms. The Parties hereby agree that, to the extent not otherwise addressed in the Separation and Distribution Agreement, an Ancillary Agreement or a Conveyance and Assumption Instrument, all payments to be made from one Party (or one of its Affiliates) (the “Remitting Party”) to the other Party (or one of its Affiliates) (the “Non-Remitting Party”) in connection with the Separation shall be made no later than sixty (60) days following the date upon which (i) the Non-Remitting Party pays an amount to a Third Party on behalf of the Remitting Party or (ii) the Remitting Party receives an amount from a Third Party on behalf of the Non-Remitting Party.

5. Incorporation by Reference. Article IX (other than Section 9.02) of the Separation and Distribution Agreement is hereby incorporated into this Agreement by reference and made applicable to the Parties hereto in such manner as the context requires in order to give effect to such provisions within this Agreement.

6. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the Laws of the State of Delaware, irrespective of the choice of Laws and principles of the State of Delaware, as to all matters, including matters of validity, construction, effect, enforceability, performance and remedies.

* * * * *

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives.

BAXTER INTERNATIONAL INC.
By:	/s/ James K. Saccaro
Name:	James K. Saccaro
Title:	Corporate Vice President and Chief Financial Officer
	(duly authorized officer and principal financial officer)
BAXALTA INCORPORATED
By:	/s/ Robert J. Hombach
Name:	Robert J. Hombach
Title:	Executive Vice President, Chief Financial Officer and Chief Operations Officers
	(duly authorized officer and principal financial officer)

EX-10.3

EXHIBIT 10.3

Baxter International Inc.

Equity Plan

adopted as of March 3, 2016

1. Purpose

This Equity Plan (the “Plan”) has been adopted by the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of Baxter International Inc. (“Baxter”).

2. Participants

Participants in this Plan (each a “Participant”) shall be select employees of Baxter or its subsidiaries (the “Company”) to whom the Committee may make awards of stock options (each an “Option”), performance share units (each a “PSU”) and restricted stock units (each an “RSU”, and together with Options and PSUs, “Awards”) under this Plan.

3. Awards

Awards shall be made pursuant to and for the purposes stated in the Company incentive compensation program or plan (the “Program”) identified in the individual grant materials provided to the Participant (the “Grant”). Such Grant materials consist of a communication letter to Participants notifying them of their Awards and may include alternative terms with respect to vesting, in which case the vesting terms in the Grant communication letter shall govern. All Awards granted hereunder shall be subject to the Company’s Incentive Compensation Recoupment Policy or Executive Compensation Recoupment Policy, as applicable. Each Award shall be granted as of the date approved and as provided in the Grant, or for eligible French employees as soon thereafter as practicable pursuant to applicable French law (as provided in the attached French Addendum which shall govern such Awards) (the “Grant Date”). The purchase price for each Share subject to an Option shall be the Fair Market Value of a share of common stock (the “Common Stock”), par value $1.00, of Baxter (each a “Share”) on the Grant Date. The terms of each Award will be as set forth in this Plan. Unless otherwise defined herein, capitalized terms used in this Plan shall have the meanings set forth in the Program. Options are not intended to qualify as Incentive Stock Options within the meaning of section 422 of the United States Internal Revenue Code, as amended (the “Code”).

4. Options

4.1. Except for Options granted to employees of the Company’s subsidiaries in France, Options shall become exercisable as follows: (i) one-third on the first anniversary of the Grant Date, (ii) one-third on the second anniversary of the Grant Date, and (iii) the remainder on the third anniversary of the Grant Date. Options granted to employees of the Company’s subsidiaries in France shall become exercisable on the fourth anniversary of the Grant Date. If Options would become exercisable on a date that is not a business day, they will become exercisable on the next business day. A business day is any day on which the Common Stock is traded on the New York Stock Exchange. After Options become exercisable (in each case, in whole or in part) and until they expire, the Options may be exercised in whole or in part, in the manner specified by the Committee. Under no circumstances may Options be exercised after they have expired. Shares may be used to pay the purchase price for Shares to be acquired upon exercise of Options or fulfill any tax withholding obligation, subject to any requirements or restrictions specified by the Committee.

4.2. If a Participant’s employment with the Company terminates before the Participant’s Options become exercisable, the Options will expire when the Participant’s employment with the Company terminates, except (i) in connection with a Qualifying Retirement or death or disability (each as outlined below) or (ii) if the Participant is rehired by the Company within ninety days of termination, in which case the Participant shall be construed to have been continuously employed by the Company for purposes of vesting and exercise.

4.3. If a Participant’s employment with the Company terminates after the Participant’s Options become exercisable, the Options will not expire immediately but will remain exercisable. Subject to Section 4.6, and except in the event of a Qualifying Retirement (as provided in Section 4.4), the Options will expire ninety days after the Participant’s employment with the Company terminates. If the Participant dies or becomes disabled during the ninety-day period, the Options will expire on the fifth anniversary of the termination date.

4.4. If the employment of a Participant who is at least 65 years of age, or at least 55 years of age with at least 10 years of employment with the Company, is terminated other than for Cause or by reason of the Participant’s death or disability (a “Qualifying Retirement”) then (i) if the date of such termination is after the calendar year of the Grant Date, the Options shall continue to vest as provided in Section 4.1, or (ii) if the date of such termination is in the calendar year of the Grant Date, a portion of the Options shall continue to vest as provided in Section 4.1, which portion shall be determined as follows: (# shares covered by Option award) * (# of months worked in that year, rounded to nearest whole month) / 12. Subject to Section 4.6, the Participant’s Options (whether vesting pursuant to (i) or (ii) or previously vested) shall expire on the fifth anniversary of the termination date.

4.5. If the employment of a Participant is terminated due to death or disability, then (i) if the date of such termination is after the calendar year of the Grant Date, the Options shall vest immediately, or (ii) if the date of such termination is in the calendar year of the Grant Date, a portion of the Options shall vest immediately, which portion shall be determined as follows: (# shares covered by Option award) * (# of months worked in that year, rounded to nearest whole month) / 12. Subject to Section 4.6, such Options will expire on the fifth anniversary of the termination date.

4.6. Options that have not previously expired will expire at the close of business on the tenth anniversary of the Grant Date; provided, however, that Options granted to employees residing in Switzerland on the Grant Date shall expire on the eleventh anniversary of the Grant Date. If Options would expire on a date that is not a business day, they will expire at the close of business on the last business day preceding that date.

4.7. Except as the Committee may otherwise provide, Options may only be exercised by the Participant, the Participant’s legal representative, or a person to whom the Participant’s rights in the Options are transferred by will or the laws of descent and distribution.

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4.8. A transfer of employment within the Company will not constitute a termination of employment within the meaning of the Plan.

4.9. A transfer of employment to a company that assumes an Option or issues a substitute option in a transaction to which Section 424 of the Code applies will not constitute a termination of employment within the meaning of the Plan.

4.10. Except to the extent that it would cause the Option to be subject to Section 409A of the Code, the Committee may, in its sole discretion and without receiving permission from any Participant, substitute stock appreciation rights (“SARs”) for any or all outstanding Options. Upon the grant of substitute SARs, the related Options replaced by the substitute SARs shall be cancelled. The grant price of the substitute SARs shall be equal to the Option Price of the related Options, the term of the substitute SARs shall not exceed the term of the related Options, and the terms and conditions applicable to the substitute SARs shall otherwise be substantially the same as those applicable to the related Options replaced by the substitute SARs. Upon exercise, the SARs will be settled in Shares.

4.11. To the extent that an Option has not been exercised on the date the Option would otherwise expire pursuant to Section 4.6, and the Fair Market Value of the Common Stock on such date exceeds the exercise price, Baxter may (but shall not be obligated to), on behalf of the Participant, direct that the Option be exercised and the shares of Common Stock sold, with the proceeds used to pay the exercise price and any applicable tax withholding, and the remaining proceeds credited to the Participant’s account, or take such other action as the Committee may determine; provided that in no event shall Baxter, any member of the Committee, or any person acting on their behalf have any liability to a Participant for failing to take any such action.

5. Performance Share Units

5.1. The PSUs will be earned 50% under 5.1(a) and 50% under 5.1(b) as follows:

5.1(a). The PSUs earned under this subsection (a) will be earned based on the rank of Baxter’s growth in shareholder value (“GSV”) relative to the GSV of companies in the healthcare peer group selected by the Committee within the first ninety (90) days of 2016 (the “GSV PSUs”). GSV will be measured over a three-year period beginning with the first day of the calendar year of the Grant Date and ending on the last day of the third calendar year (the “GSV Performance Period”).

The GSV PSUs will pay out in shares of Common Stock in a range of 0% to 200% of the number of GSV PSUs awarded to the Participant as follows:

Baxter’s Percent Rank	Percentage of Target Grant Earned
85 percent or above	200%
75 percent	150%
60 percent	100%
25 percent	25%
Below 25 percent	0%

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The GSV PSUs will pay out linearly between each set of data points. GSV will be measured based on the average closing stock prices over the last twenty days of the GSV Performance Period (plus reinvested dividends) divided by average closing stock prices over the twenty trading days prior to the beginning of the GSV Performance Period.

5.1(b). The PSUs earned under this subsection (b) will be earned based on Baxter’s Operating Margin (OM) performance (the “OM PSUs”), as defined below. OM performance will be measured annually over a three-year period, beginning with the first day of the calendar year of the Grant Date and ending on the last day of the third calendar year (the “OM Performance Period” and together with the GSV Performance Period, the “Performance Periods”), with one-third of the OM PSUs allocated to each one-year period. For each one-year period, the Committee will set a target OM performance within the first ninety (90) days of each one-year period and assess annual performance against that target after the conclusion of that one-year period, which shall be finalized in accordance with 5.1(c). OM PSUs for the one-year period shall be deemed earned at such time but shall not vest until the end of the three-year OM Performance Period. The use of the term “earned” in this context shall not be construed to imply that the Participant has completed any portion of the service required to receive a payment with respect to the OM PSUs until the end of the vesting period.

For each one-year period, the OM PSUs will pay out in shares of Common Stock in a range of 0% to 200% of the number of OM PSUs allocated to that one-year period to the Participant as follows:

Baxter OM Performance	Percentage of Target Grant Earned
107 percent and above	200%
100 percent	100%
93 percent	25%
Below 93 percent	0%

The OM PSUs will pay out linearly between each set of data points. OM performance will be measured for each one-year period based on such year’s operating income divided by annual sales for such year.

5.1(c). Following the end of the Performance Periods, the Committee shall determine the PSU payout, which determination shall be final and binding. Shares of Common Stock earned will be delivered or otherwise made available to the Participant as soon as practical after the Committee makes its determination but not later than the March 15 after the end of the Performance Periods. PSUs will only be settled in shares of Common Stock. Any other settlement modality shall be considered an exception, which would have to be approved separately by the Committee.

5.2. If a Participant’s employment with the Company terminates before the end of the Performance Periods, any unvested PSUs shall be forfeited on the effective date of termination, except (i) in connection with a Qualifying Retirement or death or disability (each as outlined below), or (ii) if the Participant is rehired by the Company within ninety days of termination, in which case the Participant shall be construed to have been continuously employed by the Company for purposes of vesting.

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5.3. If the employment of a Participant terminates in a Qualifying Retirement then (i) if the date of such termination is after the calendar year of the Grant Date, the PSUs will remain eligible for payout at the end of the Performance Periods on the terms provided in Section 5.1, or (ii) if the date of such termination is in the calendar year of the Grant Date a portion of the unearned PSUs shall remain eligible for payout at the end of the Performance Periods on the terms provided in Section 5.1, which portion shall be determined as follows: (# PSUs awarded) * (# of months worked in that year, rounded to nearest whole month) / 12.

5.4. If the employment with the Company of a Participant is terminated due to death or disability, the PSUs shall vest as follows: (i) if the date of such termination is after the calendar year of the Grant Date, any unearned OM PSUs and any GSV PSUs shall pay out at 100% of the Target Grant (as depicted in the tables in Section 5.1.), in addition to payment of any earned OM PSUs, within sixty days, or (ii) if the date of such termination is in the calendar year of the Grant Date a portion of the unearned PSUs shall pay out as provided in (i), which portion shall be determined as follows: (# PSUs awarded) * (# of months worked in that year, rounded to nearest whole month) / 12.

5.5. The PSUs shall not be transferable and may not be sold, assigned, pledged, hypothecated or otherwise encumbered.

5.6. A transfer of employment within the Company will not constitute a termination of employment within the meaning of the Plan.

5.7. Until the shares of Common Stock have been delivered or otherwise made available as provided in Section 5.1, the Participant shall not be treated as a shareholder as to those shares of Common Stock relating to the PSUs. Notwithstanding the foregoing, the Participant shall be permitted to receive additional PSUs with respect to the PSUs based upon the dividends and distributions paid on shares of Common Stock to the same extent as if each PSU were a share of Common Stock (without adjustment prior to vesting for payment levels set forth in the table in Section 5.1), which additional PSUs shall be determined in amount and value in the Company’s discretion and shall be delivered or made available at the same time and to the same extent as the PSUs to which they relate or as otherwise determined by the Company.

5.8. To the extent required by Section 409A of the Internal Revenue Code, no PSUs that become payable to a specified employee (as defined in the Baxter International Inc. and Subsidiaries Deferred Compensation Plan) by reason of a separation from service shall be paid until the first day of the seventh month following the separation from service, and the PSUs shall be otherwise interpreted and administered in accordance with Section 409A.

6. Restricted Stock Units

6.1. Except for RSUs granted to the employees of the Company’s subsidiaries in France, RSUs are subject to being earned and vested as follows: (i) one-third on the first anniversary of the Grant Date, (ii) one-third on the second anniversary of the Grant Date, and (iii) the remainder on the third anniversary of the Grant Date (each as applicable, a “Vesting Date”). RSUs granted to the employees of the Company’s subsidiaries in France are subject to being earned and vested on the second anniversary of the Grant Date in accordance with the attached French Addendum.

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If RSUs would become earned and vested on a date that is not a business day, the next business day shall be the Vesting Date. The Company will deliver or otherwise make available to the Participant within 2 ¹⁄₂ months following the applicable Vesting Date one Share for each RSU that vests. RSUs will only be settled in Shares. Any other settlement method would be considered an exception and would have to be approved separately by the Committee.

6.2. If a Participant’s employment with the Company terminates before a given Vesting Date, any unvested RSUs will be forfeited when the Participant’s employment with the Company terminates, except (i) in connection with a Qualifying Retirement or death or disability (each as outlined below), or (ii) if the Participant is rehired by the Company within ninety days of termination, in which case the Participant shall be construed to have been continuously employed by the Company for purposes of vesting and payout.

6.3. If the employment of a Participant terminates in a Qualifying Retirement then (i) if the date of such termination is after the calendar year of the Grant Date, the RSUs will remain eligible for payout on the terms provided in Section 6.1, or (ii) if the date of such termination is in the calendar year of the Grant Date a portion of the RSUs shall remain eligible for payout on the terms provided in Section 6.1, which portion shall be determined as follows: (# RSUs awarded) * (# of months worked in that year, rounded to nearest whole month) / 12.

6.4. If the employment with the Company of a Participant is terminated due to death or disability, the RSUs shall vest as follows: (i) if the date of such termination is after the calendar year of the Grant Date, all the RSUs shall pay out within sixty days, or (ii) if the date of such termination is in the calendar year of the Grant Date a portion of the RSUs shall pay out within sixty days, which portion shall be determined as follows: (# RSUs awarded) * (# of months worked in that year, rounded to nearest whole month) / 12.

6.5. The RSUs shall not be transferable and may not be sold, assigned, pledged, hypothecated or otherwise encumbered.

6.6. A transfer of employment within the Company will not constitute a termination of employment within the meaning of the Plan.

6.7. Until the Shares have been delivered or otherwise made available as provided in Section 6.1, the Participant shall not be treated as a shareholder as to those Shares relating to the RSUs. Notwithstanding the foregoing, the Participant shall be permitted to receive additional RSUs with respect to the RSUs based upon the dividends and distributions paid on Shares to the same extent as if each RSU were a Share, which additional RSUs shall be delivered or made available at the same time and to the same extent as the RSUs to which they relate or as otherwise determined by the Company.

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7. Change in Control

Notwithstanding any other provision of the Program or this Plan (and in lieu of vesting at the times otherwise provided in the Program), if the termination of employment of a Participant occurs upon or within twenty-four (24) months following a Change in Control by reason of (a) termination by the Company for reasons other than for Cause or (b) termination by the Participant for Good Reason, then all Awards shall become immediately vested and exercisable.

8. Additional Definitions

For purposes of the Plan, the following capitalized terms shall have the meanings provided below.

“Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.

“Cause” means (i) the willful and continued failure by the Participant to substantially perform his duties with the Company that has not been cured within 30 days after written demand for substantial performance is delivered by the Company, which demand specifically identifies the manner in which the Participant has not substantially performed (other than any such failure resulting from the Participant’s incapacity due to physical or mental illness), (ii) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise, or (iii) the engaging by the Participant in egregious misconduct involving serious moral turpitude, determined in the reasonable judgment of the Committee. For purposes hereof, no act, or failure to act, on the Participant’s part shall be deemed “willful” unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that such action was in the best interest of the Company. Notwithstanding the foregoing, if a Participant is a party to a Change in Control Agreement, “Cause” with respect to such Participant shall have the meaning given to such term in the Change in Control Agreement.

“Change in Control” means the first to occur of any of the following: (i) any Person is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Baxter (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 30% or more of the combined voting power of Baxter’s then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a merger or consolidation of Baxter or any direct or indirect subsidiary of Baxter with any other corporation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of (A) any parent of Baxter or the entity surviving such merger or consolidation or (B) if there is no such parent, of Baxter or such surviving entity; (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Grant Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Baxter) whose appointment or election by the Board or nomination for election by Baxter’s shareholders was approved or recommended by a vote of at least two-thirds

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(2/3) of the directors then still in office who either were directors on the Grant Date or whose appointment, election or nomination for election was previously so approved or recommended; (iii) there is consummated a merger or consolidation of Baxter or any direct or indirect subsidiary of Baxter with any other corporation or other entity, other than a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of (A) any parent of Baxter or the entity surviving such merger or consolidation or (B) if there is no such parent, of Baxter or such surviving entity; or (iv) the shareholders of Baxter approve a plan of complete liquidation or dissolution of Baxter or there is consummated an agreement for the sale or disposition by Baxter of all or substantially all of Baxter’s assets, other than a sale or disposition by Baxter of all or substantially all of Baxter’s assets immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of (A) any parent of Baxter or of the entity to which such assets are sold or disposed or (B) if there is no such parent, of Baxter or such entity.

“Change in Control Agreement” means an employment agreement, change in control agreement or plan, severance agreement or plan, or other agreement between the Company and a Participant or Company plan covering a Participant that provides for benefits upon termination for good reason or cause in connection with a change in control of Baxter and that has been approved by the Board or the Committee.

“Good Reason” means the occurrence (without the Participant’s express written consent) of any of the following which occur on or after a Change in Control: (i) reduction by the Company in the Participant’s annual base salary as in effect on the Grant Date or as the same may be increased from time to time; (ii) the relocation of the Participant’s principal place of employment to a location more than fifty (50) miles from the Participant’s principal place of employment immediately prior to the Change in Control or the Company’s requiring the Participant 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 Participant’s business travel obligations as in effect immediately prior to the Change in Control; or (iii) the failure by the Company to pay to the Participant any portion of the Participant’s current compensation or to pay to the Participant 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. Notwithstanding the foregoing, if a Participant is a party to a Change in Control Agreement, “Good Reason” with respect to such Participant shall have the meaning given to such term in the Change in Control Agreement.

“Person” shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Baxter or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Baxter 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 shareholders of Baxter in substantially the same proportions as their ownership of stock of Baxter.

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9. Withholding

Except as otherwise provided by the Committee, all Awards (including the payout of Awards) under the Plan are subject to withholding of all applicable taxes, which withholding obligations may be satisfied, with the consent of the Committee, through the surrender of Shares that the Participant already owns or to which a Participant is otherwise entitled under the Plan; provided, however, with the consent of the Committee, previously-owned Shares that have been held by the Participant or Shares to which the Participant is entitled under the Plan may only be used to satisfy the minimum tax withholding required by applicable law (or other rates that will not have a negative accounting impact).

10. Program Controls

Except as specifically provided in the Plan, in the event of any inconsistency between the Plan and the Program, the Program will control, but only to the extent such Program provisions will not violate the provisions of section 409A of the Code.

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BAXTER INTERNATIONAL INC.

French Addendum To 2016 Equity Plan

Adopted as of March 3, 2016

1. PURPOSES OF THIS ADDENDUM

This Addendum (the “Addendum”) approved on March 3, 2016, sets out the terms for French Qualified Stock Options and French Qualified Free Shares granted jointly under the Annual Equity Plan (the “Plan”) adopted as of March 3, 2016 by Baxter International Inc. (the “Company”) to Eligible Participants, residents in France, or otherwise selected by the Committee for participation under this Addendum and the Company incentive compensation program or plan (the “Program”) identified in the individual grant materials provided to the Eligible Participant. This Addendum is adopted in accordance with Sections 3 “Administration” and 9 “Amendment and Termination” of the Program to benefit from the specific tax and social security treatment applicable in France to Qualified Option Awards and Qualified Free Share Awards.

For the avoidance of doubt, the present Addendum is not applicable to awards paid in cash and to awards of Performance Shares, Restricted Shares, Performance Units, Cash Incentive Awards or Stock Appreciation Rights. Consequently, dispositions of the Program and/or the Plan applicable to these are not applicable to Awards made further to the present Addendum.

The rules contained in the Program and the Plan will apply to Awards made under this Addendum, unless specifically stated otherwise. The terms and conditions of the present Addendum are identical to the Plan except as provided below. Words and expressions used in this Addendum and not defined herein shall have the same meaning as those words and expressions used in the Program and Plan. The additional terms and conditions in this Addendum are to be read in conjunction with the Program and Plan.

To the extent that the Program and the Plan contradict the provisions set forth hereinafter, the Addendum provisions shall prevail. In addition, to the extent that the terms and conditions specified in the applicable grant communication letter contradict the provisions set forth hereinafter, the Addendum provisions shall prevail.

2. OPTION AWARDS

2.1. General

The Addendum contains the term of “Qualified Stock Option” which refers to the awards of Options granted as per Section 6 of the Program jointly with Section 4 of the Plan in accordance with articles L.225-177 to L.225-185 of the French Commercial Code. Consequently, the terms “Stock Option”, “Options”, “Qualified Stock Option Awards” and “Option Award” herein shall be construed and interpreted accordingly.

2.2. Grant of Options

Notwithstanding the provisions of the Plan, the following rules shall apply to Options Awards granted under this Addendum.

Addendum - 1

In no event shall the number of shares of Common Stock subject to outstanding unexercised Options granted pursuant to this Addendum give right to subscribe shares exceeding one-third (1/3) of the Company’s share capital. The total number of shares of Common Stock that may be granted to Participants under this Addendum shall not exceed 10% of the Granting Company’s share capital at Grant Date, when Options are over existing shares. Outstanding unvested Full Value Awards shall be treated as shares of Common Stock in order to determine the threshold of 10% of the granting Company’s share capital.

If an Option provides a right to acquired already existing shares / treasury shares, the Company shall procure sufficient shares to satisfy the Exercise of such Option at least one day prior to the Participant’s having the right to Exercise such Option. Shares acquired by the Participant upon Option Exercise shall be registered in the name of the Participant or held in an identifiable account. Participants will have the voting and dividend rights attached to the Shares acquired upon Exercise Date as of that date. Upon Exercise, no cash replacement of shares of Common Stock is allowed.

Any market repurchased shares of Common Stock to be delivered to Eligible Individuals upon exercise of Awards granted hereunder shall be acquired by the Company at least one (1) day before the applicable vesting date. The Vesting Date designates the date upon which options, in full or in part, become exercisable by the Participant.

2.3. Grant Date

No Options may be granted under this Addendum: (a) before the end of a period of twenty (20) trading days following (i) a dividend record date for any dividend or (ii) an agreement by the shareholders of the Company to increase the issued share capital of the Company; (b) within a period of ten (10) trading days before and after the publication of consolidated accounting results of the Company (e.g., the filing of an Annual Report on Form 10-K); or (c) within a period beginning with the date upon which the Company’s executive officers become aware of any nonpublic information that, if it were to become publicly known, would reasonably be expected to affect the value of the Company’s shares of Common Stock and ending ten (10) trading days after that information has been publicized.

The Grant Date shall be the date upon which the Committee approves grants to Eligible Individuals or as soon thereafter as possible, ensuring that the above dispositions are respected. The Grant date shall be stated in the grant documentation letter.

2.4. Eligible Individuals

Notwithstanding the provisions of Sections 2(k) or 2(l), as applicable, and Section 4 of the Program or Section 2 of the Plan, Options may only be granted under this Addendum to Eligible Individuals. No Option Award may be made to Eligible Individuals holding more than ten percent (10%) of the issued share capital in the Company.

2.5. Option Price

The Option Price shall be the greatest of: (a) the Fair Market Value of a share of Common Stock on the Grant Date; (b) eighty percent (80%) of the average opening price of a share of Common

Addendum - 2

Stock over the twenty (20) trading days preceding Grant Date; (c) if treasury shares are used to satisfy exercise of the Options, eighty percent (80%) of the average repurchase price per share paid by the Company for such treasury shares. The Option Price is stated in the grant documentation letter and is fixed on the Grant Date.

2.6. Adjustment to Option Price

The number of Options and the Option Price for grants made pursuant to this Addendum may be adjusted in connection with changes in capital operations described in article L.225-181 of the French Commercial Code so that economic rights are maintained.

2.7. Vesting and Exercise of Options

Options granted pursuant to this Addendum shall first become exercisable on the fourth (4th) anniversary of the Grant Date. In case of earlier exercise of Options further notably to Change of Control or Termination of Employment, the Committee may, upon discretionary decision, impose a share sale restriction to the Participant until the fourth anniversary of grant to secure eligibility to the French stock-option regime.

2.8. Termination of Employment

Notwithstanding anything to the contrary, no Option may be exercised before the first anniversary of the Grant Date and shares underlying Options exercised before the fourth anniversary of the Grant Date shall be subject to a share sale restriction until the fourth anniversary of grant. By exception, the Committee may discretionarily decide that Options may be exercised at an earlier date and / or shares sold at an earlier date.

If a Participant’s employment with the Company terminates after the Participant’s Options become exercisable, the Options will not expire immediately but will remain exercisable. Subject to Section 4.6 of the Plan, and except in the event of a Qualifying Retirement, the Options will expire ninety days after the Participant’s employment with the Company terminates. If the Participant dies or becomes disabled during the ninety-day period, the Options will expire on the fifth anniversary of the termination date.

If the employment of a Participant who is at least 65 years of age, or at least 55 years of age with at least 10 years of employment with the Company, is terminated other than for Cause or by reason of the Participant’s death or disability (a “Qualifying Retirement”) then (i) if the date of such termination is after the calendar year of the Grant Date, the Options shall continue to vest as provided in Section 2.7, or (ii) if the date of such termination is in the calendar year of the Grant Date, a portion of the Options shall continue to vest as provided in Section 2.7, which portion shall be determined as follows: (# shares covered by Option award) * (# of months worked in that year, rounded to nearest whole month) / 12. Subject to Section 4.6 of the Plan, the Participant’s Options (whether vesting pursuant to (i) or (ii) or previously vested) shall expire on the fifth anniversary of the termination date.

If the employment of a Participant is terminated due to death, all Options shall vest immediately and the shares shall be immediately transferable.

Addendum - 3

If the employment of a Participant is terminated due to disability corresponding to the 2nd or 3rd categories of Article L.341-4 of the French Social Security Code¹, then (i) if the date of such termination is after the calendar year of the Grant Date, the Options shall vest immediately, or (ii) if the date of such termination is in the calendar year of the Grant Date, a portion of the Options shall vest immediately, which portion shall be determined as follows: (# shares covered by Option award) * (# of months worked in that year, rounded to nearest whole month) / 12. Subject to Section 4.6 of the Plan, such Options will expire on the fifth anniversary of the termination date. The shares acquired upon option exercise shall be immediately transferable.

If the employment of a Participant is terminated due to disability other than to the 2nd or 3rd categories of Article L.341-4 of the French Social Security Code, then (i) if the date of such termination is after the calendar year of the Grant Date, the Options shall continue to vest as provided in Section 2.7, or (ii) if the date of such termination is in the calendar year of the Grant Date, a portion of the Options shall continue to vest as provided in Section 2.7, which portion shall be determined as follows: (# shares covered by Option award) * (# of months worked in that year, rounded to nearest whole month) / 12. Subject to Section 4.6 of the Plan, such Options will expire on the fifth anniversary of the termination date.

2.9. Substitution of SARs for Options – Tandem Awards

Neither SARs nor any other incentive may be substituted for Options granted pursuant to this Addendum. No tandem awards may be made pursuant to this Addendum.

3. FULL VALUE AWARDS

3.1. Definitions

“Full Value Award” means a grant made by Baxter International Inc. to the Participant of a right to receive one Share in the future at a nil cost, in the form of a Restricted Stock Unit. Such grant can be paid exclusively in shares of Common Stock, is awarded respectively in accordance with Section 7 of the Program, in accordance with Section 6 of the Plan for Restricted Stock Units, and in accordance with articles L.225-197-1 to L.225-197-6 of the French Commercial Code on Qualified Free Shares Awards. Such grant cannot be subject to conditions, restrictions and contingencies relating to dividend or dividend equivalent rights and deferred payment or settlement. The purpose of this Addendum is to ensure that grants over shares of Common Stock are in conformity with the applicable French legislation, and are entitled to the corresponding specific French tax and social security treatment. One (1) award gives right to acquire one (1) share subject to satisfaction of applicable considerations, contingencies, conditions, restrictions, if any.

“Grant Date” means the date on which the Committee designates the Participant eligible to receive a Full Value Award further to the present Addendum, and specifies the terms and conditions of such Award, including the maximum number of underlying shares, the Vesting and Share Sale Restriction Periods. The Grant Date is stated in the grant communication letter.

“Vesting Date” means the date on which the Participant acquires the shares of Common Stock. The Vesting Date is stated in the grant communication letter.

Addendum - 4

3.2. Grant

Notwithstanding the provisions of the Plan, the following rules shall apply to Full Value Awards granted under this Addendum.

The total number of shares of Common Stock that may be granted to Participants under this Addendum shall not exceed 10% of the Granting Company’s share capital at Grant Date. Outstanding unvested Full Value Awards shall be treated as shares of Common Stock in order to determine the threshold of 10% of the granting Company’s share capital. Shares of Common Stock of the Company to be delivered under the Plan may be market repurchased shares (already existing shares) or newly issued shares. For Full Value Awards granted over already existing shares, corresponding shares shall be repurchased by the Company at least one day before the applicable Vesting Date.

A Full Value Award may not be made to employees and/or Corporate Officers holding more than 10% of the issued share capital in the Company or who, after having received shares under a Full Value Award granted hereunder, would hold more than 10% of the issued share capital in the Company.

Shares acquired by the Participant upon Vesting Date will be registered in the name of the Participant or be held in an identifiable account. Participants will have the voting and dividend rights attached to the Shares acquired upon Vesting Date as of that date.

3.3. Vesting period / Performance period

Notwithstanding anything to the contrary, in relation to Full Value Awards, the Vesting Date shall not be earlier than the second anniversary of the Grant Date, in any circumstances other than in the event of the death of the Participant or in the event of disability corresponding to the 2nd or 3rd categories of Article L.341-4 of the French Social Security Code .¹

Unless otherwise stated in the grant documentation letter, the Vesting Date for Restricted Stock Units shall be the second anniversary of the Grant Date. The Board of Directors or the Committee reserves the right to reduce or modify the Vesting Date in accordance with and to conform with any amendments to the French Tax Code and/or to the provisions of the French Commercial Code governing Qualified Free Shares. By exception, the Board or the Committee may discretionarily decide that Vesting Date may occur before the second (2nd) anniversary of the Grant Date.

3.4. Share Sale Restriction Period

As of the Vesting Date, shares of Common Stock acquired pursuant to Full Value Award are subject to a minimum of two (2) year share sale restriction, during which the shares may not be sold (the “Share Sale Restriction Period”). If the Participant leaves the employment of the Company or any Affiliate(s), at any time after the Vesting Date, the shares acquired shall not be freely transferable before the expiration of the Share Sale Restriction Period.

¹  For information purposes, please note that

- Second category stands for a disabled person unable to perform any professional activity; and

- Third category stands for a disabled person unable to perform any professional activity and requiring third party assistance in order to perform everyday life tasks.

Addendum - 5

By exception, in the event of the Participant’s death, the heirs shall not be subject to the Share Sale Restriction Period, the shares being freely transferable upon the Participant’s death. By exception, notwithstanding any provision of the Plan and the present Addendum to the contrary, in case of disability corresponding to the 2nd or 3rd categories of Article L.341-4 of the French Social Security Code1, the Participant is entitled to sell the shares prior to the end of the Share Sale Restriction Period, if any.

For the avoidance of doubt, if the Participant leaves the employment, the Company or any Affiliate(s), at any time before the term of the Share Sale Restriction Period, due to his/her Disability other than of second (2nd) or third (3rd) category as defined in Article L.341-4 of the French Social Security Code¹, the Participant shall not be entitled to sale the shares before the second (2nd) anniversary of the Vesting Date.

By exception, the Board or the Committee may discretionarily decide that a Participant shall not be subject to the Share Sale Restriction Period.

3.5. Additional Full Value Awards

Notwithstanding anything to the contrary in the Program or the Plan, the Participant shall not be permitted to receive additional Full Value Awards with respect to the Restricted Stock Units based upon the dividends and distributions paid on shares of Common Stock as if each Restricted Stock Unit was a share of Common Stock.

3.6. Termination of employment

Notwithstanding anything to the contrary in the Program or the Plan, in case of Participant’s death, his/her heirs may request the acquisition of the unvested Restricted Stock Units within six (6) months following this event.

By exception, if the Participant ceases his employment within the Company or any Affiliate(s) due to his disability corresponding to the 2nd or 3rd categories of Article L.341-4 of the French Social Security Code1, the Award shall vest as follows: (i) if the date of such termination is after the calendar year of the Grant Date, all the RSUs shall pay out within sixty days, or (ii) if the date of such termination is in the calendar year of the Grant Date a portion of the RSUs shall pay out as provided in (i), which portion shall be determined as follows: (# RSUs awarded) * (# of months worked in that year, rounded to nearest whole month) / 12.

Notwithstanding anything to the contrary, if the employment with the Company or any Affiliate(s) is terminated due to disability other than of second (2nd) or third (3rd) category as defined in Article L.341-4 of the French Social Security Code, (i) if the date of such termination is after the calendar year of the Grant Date, the RSUs will remain eligible for payout on the terms provided in Section 3.3, or (ii) if the date of such termination is in the calendar year of the Grant Date a portion of the RSUs shall remain eligible for payout on the terms provided in Section 3.3, which portion shall be determined as follows: (# RSUs awarded) * (# of months worked in that year, rounded to nearest whole month) / 12.

Addendum - 6

Notwithstanding anything to the contrary, if the employment with the Company or any Affiliate(s) is terminated due to Qualified Retirement, (i) if the date of such termination is after the calendar year of the Grant Date, the RSUs will remain eligible for payout on the terms provided in Section 3.3, or (ii) if the date of such termination is in the calendar year of the Grant Date a portion of the RSUs shall remain eligible for payout on the terms provided in Section 3.3, which portion shall be determined as follows: (# RSUs awarded) * (# of months worked in that year, rounded to nearest whole month) / 12.

4. Non-Transferability of Awards

No Award granted under the Plan shall be transferable other than by will or the law of descent and distribution.

4.1. Change in Control

When a tax favourable treatment may be available further to French legislation (article 163 bis C-1 bis of the French Tax Code), the Committee, upon discretionary decision, may give the choice to French participants, but has no obligation to. When the Company decides to exchange shares with no cash consideration, pursuant to applicable French legal and tax rules and notably, article L.225-197-1 § III of the French Commercial Code (as amended), then the dispositions of the Plan as well as the periods of Vesting and Share Sale Restriction will remain applicable to shares or rights received in exchange.

5. Tax Withholding

Notwithstanding any provision to the contrary, no shares of Common Stock may be used to satisfy any social security or tax withholding due for Awards granted further to the present Addendum.

The Company or its Affiliates shall have the right to require payment from a Participant to cover any applicable withholding or other employment taxes due with respect to Awards granted hereunder or shall have the right to deduct any applicable withholding or other employment taxes due from other compensation income paid to the Participant.

6. Amendment, Modifications to this Addendum.

No modification can be made to this Addendum, or to outstanding Awards granted hereunder, which is disadvantageous to the Participant or which is in contradiction to the French Commercial Code and French Tax Code provisions, unless the modification is the result of a new law or regulation or any other obligatory disposition or ruling applied to the Company or any other Subsidiary, having legal, fiscal or social implications.

The terms of this Addendum shall be interpreted in accordance with the relevant provisions set forth by French tax and social laws, as well as the regulations issued by the French tax and social administrations.

Addendum - 7

In the event of any conflict between the provisions of this Addendum and the Plan, the provisions of the Addendum shall prevail for any Awards made to Participants under this Addendum.

7. Additional Definitions

“Affiliate” means any entity:

in which the Company holds, directly or indirectly, at least 10% of the voting rights and / or equity;

that holds, directly or indirectly, at least 10% of the voting rights and / or equity in the Company;

in which at least 50% of the equity or voting rights are held, directly or indirectly, by a company which itself holds at least 50% of the Company.

“Company” means Baxter International Inc., a Delaware corporation.

“Corporate Officers” mean “Président du Conseil d’Administration” (Chairman of the Board); “Directeur Général” (Managing Director); “Directeurs Généraux Délégués” (Delegated Managing Directors); Members of the “Directoire”; “Gérant” of a “Société en Commandite par Actions”; “Président” (if a private individual) d’une Société par Actions Simplifiée”.

“Eligible Individual” means any employee with a valid employment contract (“contrat de travail”) at Grant Date, and/or Corporate Officer with or without an employment contract with the Company or Affiliate(s). For the avoidance of doubt, officers and directors of the Company, or of Affiliate(s), are eligible Participants if they have a valid employment contract with one of these entities, or if they are Corporate Officers. Awards cannot be granted under this Addendum to non-employee members of a “Conseil d’Administration” (the Board), to consultant, to independent agent of the Company or Affiliate(s).

Addendum - 8

EX-15

EXHIBIT 15

May 6, 2016

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

Commissioners:

We are aware that our report dated May 6, 2016 on our review of interim financial information of Baxter International Inc. (the “company”) for the three-month periods ended March 31, 2016 and 2015 and included in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2016 is incorporated by reference in its 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) and on Form S-3 (No. 333-207810) and in the Registration Statement on Form S-4 (No. 333-210320) of Baxalta Incorporated.

Very truly yours,

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

EX-31.1

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.

Date: May 6, 2016	By:	/s/ José E. Almeida
		José E. Almeida
		Chairman of the Board and Chief Executive Officer

EX-31.2

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.;

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.

Date: May 6, 2016	By:	/s/ James K. Saccaro
		James K. Saccaro
		Corporate Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION 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. §1350, as adopted pursuant to §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, 2015 as filed with 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

May 6, 2016

EX-32.2

EXHIBIT 32.2

CERTIFICATION 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 Corporate Vice President and Chief Financial Officer of Baxter International Inc. (the “company”), certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §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, 2015 as filed with 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/ James K. Saccaro

James K. Saccaro

Corporate Vice President and Chief Financial Officer

May 6, 2016

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2016	Apr. 29, 2016
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q1
Trading Symbol	BAX
Entity Registrant Name	BAXTER INTERNATIONAL INC
Entity Central Index Key	0000010456
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		552,262,740

XML

Condensed Consolidated Statements of Income - USD ($) shares in Millions, $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Net sales	$ 2,375	$ 2,403
Cost of sales	1,410	1,384
Gross margin	965	1,019
Marketing and administrative expenses	641	784
Research and development expenses	136	143
Operating income	188	92
Net interest expense	28	30
Other income, net	(3,169)	(86)
Income from continuing operations before income taxes	3,329	148
Income tax (benefit)/expense	(58)	14
Income from continuing operations	3,387	134
(Loss) income from discontinued operations, net of tax	(7)	296
Net income	$ 3,380	$ 430
Income from continuing operations per common share
Basic	$ 6.17	$ 0.25
Diluted	6.13	0.24
Income from discontinued operations per common share
Basic	(0.01)	0.54
Diluted	(0.01)	0.54
Net income per common share
Basic	6.16	0.79
Diluted	$ 6.12	$ 0.78
Weighted-average number of common shares outstanding
Basic	549	543
Diluted	552	548
Cash dividends declared per common share	$ 0.115	$ 0.520

XML

Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Net income	$ 3,380	$ 430
Other comprehensive income (loss), net of tax:
Currency translation adjustments, net of tax expense (benefit) of $14 and ($109) for the three months ended March 31, 2016 and 2015, respectively	92	(1,138)
Pension and other employee benefits, net of tax expense of $11 and $31 for the three months ended March 31, 2016 and 2015, respectively	21	68
Hedging activities, net of tax benefit of ($3) and ($7) for the three months ended March 31, 2016 and 2015, respectively	(6)	(10)
Available-for-sale securities, net of tax expense of zero and $9 for the three months ended March 31, 2016 and 2015, respectively	(3,366)	21
Total other comprehensive income (loss), net of tax	(3,259)	(1,059)
Comprehensive income (loss)	$ 121	$ (629)

XML

Condensed Consolidated Statements of Comprehensive Income (Parenthetical) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Tax expense (benefit) on currency translation adjustments	$ 14	$ (109)
Tax expense on pension and other employee benefits	11	31
Tax benefit on hedging activities	(3)	(7)
Tax expense on available-for-sale securities	$ 0	$ 9

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Current assets
Cash and equivalents	$ 2,211	$ 2,213
Accounts and other current receivables, net	1,830	1,731
Inventories	1,682	1,604
Prepaid expenses and other	951	855
Investment in Baxalta common stock	1,232	5,148
Current assets held for disposition	111	245
Total current assets	8,017	11,796
Property, plant and equipment, net	4,403	4,386
Other assets
Goodwill	2,727	2,687
Other intangible assets, net	1,359	1,349
Other	844	744
Total other assets	4,930	4,780
Total assets	17,350	20,962
Current liabilities
Short-term debt	817	1,775
Current maturities of long-term debt and lease obligations	472	810
Accounts payable and accrued liabilities	2,387	2,666
Current income taxes payable	137	453
Current liabilities held for disposition	10	46
Total current liabilities	3,823	5,750
Long-term debt and lease obligations	2,068	3,922
Other long-term liabilities	2,439	2,425
Equity
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2016 and 2015	683	683
Common stock in treasury, at cost, 132,271,988 shares in 2016 and 135,839,938 shares in 2015	(7,434)	(7,646)
Additional contributed capital	5,882	5,902
Retained earnings	12,923	9,683
Accumulated other comprehensive (loss) income	(3,035)	224
Total Baxter shareholders' equity	9,019	8,846
Noncontrolling interests	1	19
Total equity	9,020	8,865
Total liabilities and equity	$ 17,350	$ 20,962

XML

Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares	Mar. 31, 2016	Dec. 31, 2015
Common stock, par value	$ 1	$ 1
Common stock, authorized	2,000,000,000	2,000,000,000
Common stock, issued	683,494,944	683,494,944
Treasury stock, shares	132,271,988	135,839,938

XML

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Cash flows from operations
Net income	$ 3,380	$ 430
Adjustments to reconcile income from continuing operations to net cash from operating activities:
(Loss) income from discontinued operations, net of tax	7	(296)
Depreciation and amortization	189	187
Deferred income taxes	(71)	48
Stock compensation	23	29
Net periodic pension benefit and OPEB costs	30	60
Net realized gains on the Retained Share transactions	(3,239)
Other	97	(87)
Changes in balance sheet items
Accounts and other current receivables, net	16	50
Inventories	(26)	(122)
Accounts payable and accrued liabilities	(438)	(306)
Business optimization and infusion pump payments	(34)	(19)
Other	(108)	(2)
Cash flows from operations - continuing operations	(174)	(28)
Cash flows from operations - discontinued operations	(159)	124
Cash flows from operations	(333)	96
Cash flows from investing activities
Capital expenditures	(184)	(214)
Acquisitions and investments, net of cash acquired	(33)	(7)
Divestitures and other investing activities	3	4
Cash flows from investing activities - continuing operations	(214)	(217)
Cash flows from investing activities - discontinued operations	13	(553)
Cash flows from investing activities	(201)	(770)
Cash flows from financing activities
Issuances of debt	61	900
Payments of obligations	(20)	(618)
Increase in debt with original maturities of three months or less, net	450	361
Cash dividends on common stock	(63)	(282)
Proceeds and realized excess tax benefits from stock issued under employee benefit plans	99	48
Other	(17)	(25)
Cash flows from financing activities	510	384
Effect of foreign exchange rate changes on cash and equivalents	22	(105)
Decrease in cash and equivalents	(2)	(395)
Cash and equivalents at beginning of period	2,213	2,925
Cash and equivalents at end of period	2,211	2,530
Supplemental Schedule of Non-Cash Investing and Financing Activities
Net proceeds on Retained Share transactions	3,239
Payment of obligations in exchange for Retained Shares	3,646
Other Supplemental Information
Income taxes paid	$ 429	$ 91

XML

BASIS OF PRESENTATION

3 Months Ended

Mar. 31, 2016

BASIS OF PRESENTATION

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (the company or Baxter) 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 generally accepted accounting principles (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 the company’s Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Annual Report).

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

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

Separation of Baxalta Incorporated

On July 1, 2015, Baxter completed the distribution of approximately 80.5% of the outstanding common stock of Baxalta Incorporated (Baxalta) to Baxter shareholders (the Distribution). The Distribution was made to Baxter’s shareholders of record as of the close of business on June 17, 2015 (Record Date), who received one share of Baxalta common stock for each Baxter common share held as of the Record Date. As a result of the Distribution, Baxalta became an independent public company trading under the symbol “BXLT” on the New York Stock Exchange.

As a result of the separation, the condensed consolidated statements of income, condensed consolidated balance sheets, condensed consolidated statements of cash flow and related financial information reflect Baxalta’s operations, assets and liabilities, and cash flows as discontinued operations for all periods presented. Refer to Note 2 for additional information regarding the separation of Baxalta.

New accounting standards

Recently issued accounting standards not yet adopted

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The updated guidance requires all tax effects related to share-based payment to be recorded in income tax expense in the consolidated statement of income. Current guidance requires that tax effects of deductions in excess of share-based compensation costs (windfall tax benefits) be recorded in additional paid-in capital, and tax deficiencies recorded in additional paid-in capital to the extent of previously recognized windfall tax benefits, with the remainder recorded in income tax expense. The new guidance also requires all tax-related cash flows resulting from share-based payments to be reported as operating activities in the consolidated statement of cash flows, rather than the current requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. The guidance is effective for the company beginning January 1, 2017. The company is currently evaluating the impact of this standard on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees are required to recognize lease assets and liabilities on the balance sheet for leases classified as operating leases under current GAAP. This ASU is effective for the company beginning January 1, 2019. The company is currently evaluating the impact of this standard on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU No. 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU No. 2014-09 will be effective for the company beginning on January 1, 2018. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The company is currently evaluating the impact of adopting the standard on its consolidated financial statements.

Recently adopted accounting pronouncements

As of January 1, 2016, the company adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amended ASC 835-30, Interest - Imputation of Interest. This guidance requires that debt issuance costs related to a recognized debt liability be presented as a direct deduction from the carrying amount of the related debt liability. As a result of the adoption, the company reclassified debt issuance costs of $13 million from other assets to long-term debt in the Company’s consolidated balance sheet as of December 31, 2015. The adoption of this guidance did not impact the company’s consolidated statements of earnings, comprehensive income, shareholders’ equity, or cash flows.

As of January 1, 2016, the company adopted ASU No. 2015-05, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This guidance requires software licenses within cloud computing arrangements to be classified as intangible assets. The adoption of ASU No. 2015-05 did not have a material impact on Baxter’s financial position or results of operations.

XML

SEPARATION OF BAXALTA INCORPORATED

3 Months Ended

Mar. 31, 2016

SEPARATION OF BAXALTA INCORPORATED

2. SEPARATION OF BAXALTA INCORPORATED

After giving effect to the Distribution, the company retained 19.5% of the outstanding common stock, or 131,902,719 shares of Baxalta (Retained Shares). Effective January 27, 2016, Baxter completed a debt-for-equity exchange through the transfer of 37,573,040 Retained Shares in exchange for the extinguishment of the $1.45 billion aggregate principal amount of indebtedness outstanding under the U.S. dollar denominated revolving credit facility. Additionally, on March 16, 2016, the company completed a debt-for-equity exchange, in which Baxter exchanged 63,823,582 Retained Shares for the extinguishment of $2.2 billion in aggregate principal amount of Baxter indebtedness. See Note 8 for additional details regarding these debt-for-equity transactions. Baxter accounts for its investment in these Retained Shares as available-for-sale equity securities with a fair value of approximately $1.2 billion and $5.1 billion as of March 31, 2016 and December 31, 2015, respectively.

For a portion of Baxalta’s operations, the legal transfer of Baxalta’s assets and liabilities did not occur with the separation of Baxalta on July 1, 2015 due to the time required to transfer marketing authorizations and other regulatory requirements in certain countries. Under the terms of the International Commercial Operations Agreement (ICOA), Baxalta is subject to the risks and entitled to the benefits generated by these operations and assets until legal transfer; therefore, the net economic benefit and any cash collected by these entities are transferred to Baxalta.

Following is a summary of the operating results of Baxalta, which have been reflected as discontinued operations for the three months ended March 31, 2016 and 2015. The assets and liabilities have been classified as held for disposition as of March 31, 2016 and December 31, 2015.

	Three months ended March 31,
(in millions)	2016			2015
Major classes of line items constituting income from discontinued operations before income taxes
Net sales	$	64		$	1,362
Cost of sales		(59	)		(580	)
Marketing and administrative expenses		(20	)		(231	)
Research and development expenses		—			(157	)
Other income and expense items that are not major		—			(2	)
(Loss) income from discontinued operations before income taxes		(15	)		392
Gain on disposal of discontinued operations		17			—
Income tax expense		9			96
(Loss) income from discontinued operations, net of tax	$	(7	)	$	296

	March 31,		December 31,
(in millions)	2016		2015
Carrying amounts of major classes of assets included as part of discontinued operations
Accounts and other current receivables, net		$   99		$ 228
Inventories		9		8
Property, plant, and equipment, net		1		2
Other		2		7
Total assets of the disposal group		$  111		$ 245
Carrying amounts of major classes of liabilities included as part of discontinued operations
Accounts payable and accrued liabilities		$     2		$  46
Other long-term liabilities		8		—
Total liabilities of the disposal group		$   10		$  46

As of March 31, 2016 and December 31, 2015, Baxter has recorded a liability of $92 million and $190 million, respectively, for its obligation to transfer these net assets to Baxalta. On February 1, 2016, the legal transfer of approximately $90 million of net assets as of December 31, 2015 was distributed to Baxalta resulting in a gain of $17 million, which is recorded within income from discontinued operations, net of tax. It is expected that the majority of the remaining operations will be transferred to Baxalta during 2016.

Baxter and Baxalta entered into several agreements in connection with the July 1, 2015 separation, including a transition services agreement (TSA), separation and distribution agreement, manufacturing and supply agreements (MSA), tax matters agreement, an employee matters agreement, a long-term services agreement, and a shareholder’s and registration rights agreement.

Pursuant to the TSA, Baxter and Baxalta and their respective subsidiaries are providing to each other, on an interim, transitional basis, various services. Services being provided by Baxter include, among others, finance, information technology, human resources, quality supply chain, and certain other administrative services. The services generally commenced on the Distribution date and are expected to terminate within 24 months (or 36 months in the case of certain information technology services) of the Distribution date. Billings by Baxter under the TSA are recorded as a reduction of the costs to provide the respective service in the applicable expense category, primarily in marketing and administrative expenses, in the condensed consolidated statements of income. In the first quarter of 2016, the company recognized approximately $27 million as a reduction to marketing and administrative expenses related to the TSA. Pursuant to the MSA, Baxalta or Baxter, as the case may be, manufactures, labels, and packages products for the other party. The terms of the agreements range in initial duration from five to ten years. In the first quarter of 2016, Baxter recognized approximately $11 million in sales to Baxalta. In addition, Baxter recognized $45 million in cost of sales related to purchases from Baxalta pursuant to the MSA. The cash flows associated with these agreements are included in cash flows from operations — continuing operations.

Cash outflows of $159 million were reported in cash flows from operations – discontinued operations for the period ending March 31, 2016. These relate to non-assignable tenders whereby Baxter remains the seller of Baxalta products, transactions related to importation services Baxter provides in certain countries, in addition to trade payables settled post local separation on Baxalta’s behalf.

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SUPPLEMENTAL FINANCIAL INFORMATION

3 Months Ended

Mar. 31, 2016

SUPPLEMENTAL FINANCIAL INFORMATION

3. SUPPLEMENTAL FINANCIAL INFORMATION

Net interest expense

	Three months ended
	March 31,
(in millions)	2016			2015
Interest expense, net of capitalized interest		$   33			$   35
Interest income		(5	)		(5	)
Net interest expense		$   28			$   30

Other income, net

	Three months ended
	March 31,
(in millions)	2016			2015
Foreign exchange		$         (9	)		$  (89	)
Net loss on debt extinguishment		101			—
Net realized gains on Retained Shares transactions		(3,239	)		—
All other		(22	)		3
Other income, net		$  (3,169	)		$  (86	)

Inventories

	March 31,		December 31,
(in millions)	2016		2015
Raw materials		$     369		$     374
Work in process		159		142
Finished goods		1,154		1,088
Inventories		$  1,682		$  1,604

Property, plant and equipment, net

	March 31,			December 31,
(in millions)	2016			2015
Property, plant and equipment, at cost		$  9,134			$  8,990
Accumulated depreciation		(4,731	)		(4,604	)
Property, plant and equipment, net		$  4,403			$  4,386

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EARNINGS PER SHARE

3 Months Ended

Mar. 31, 2016

EARNINGS PER SHARE

4. EARNINGS PER SHARE

The numerator for both basic and diluted earnings per share (EPS) is either net income, income from continuing operations, or income from discontinued operations. The denominator for basic EPS is the weighted-average number of common 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 is a reconciliation of basic shares to diluted shares.

	Three months ended
	March 31,
(in millions)	2016		2015
Basic shares		549		543
Effect of dilutive securities		3		5
Diluted shares		552		548

The effect of dilutive securities included unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excluded 20 million and 9 million equity awards for the three months ended March 31, 2016 and 2015, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 9 for additional information regarding items impacting basic shares.

Stock repurchases

In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of the company’s common stock. During the first quarter of 2016, the company did not repurchase any shares and has $0.5 billion remaining available under the authorization as of March 31, 2016.

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ACQUISITIONS AND OTHER ARRANGEMENTS

3 Months Ended

Mar. 31, 2016

ACQUISITIONS AND OTHER ARRANGEMENTS

5. ACQUISITIONS AND OTHER ARRANGEMENTS

In the first quarter of 2016, Baxter paid approximately $23 million to acquire the rights to Vancomycin injection in 0.9% Sodium Chloride (Normal Saline) in 500mg, 750mg, and 1 gram presentations from Celerity Pharmaceuticals, LLC (Celerity). Baxter capitalized the purchase price as an intangible asset and is amortizing the asset over the estimated economic life of 12 years. Refer to Note 5 within the 2015 Annual Report for additional information regarding the company’s agreement with Celerity.

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GOODWILL AND OTHER INTANGIBLE ASSETS, NET

3 Months Ended

Mar. 31, 2016

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by business segment.

(in millions)	Renal		Hospital Products		Total
Balance as of December 31, 2015	$	408		$2,279	$	2,687
Currency translation adjustments		7		33		40
Balance as of March 31, 2016	$	415		$2,312	$	2,727

As of March 31, 2016, there were no accumulated goodwill impairment losses.

Other intangible assets, net

The following is a summary of the company’s other intangible assets.

(in millions)	Developed technology, including patents			Other amortized intangible assets			Indefinite-lived intangible assets		Total
March 31, 2016
Gross other intangible assets		$1,781			$ 410			$87		$2,278
Accumulated amortization		(766	)		(153	)		—		(919	)
Other intangible assets, net		$1,015			$ 257			$87		$1,359
December 31, 2015
Gross other intangible assets		$1,742			$ 393			$86		$2,221
Accumulated amortization		(729	)		(143	)		—		(872	)
Other intangible assets, net		$1,013			$ 250			$86		$1,349

Intangible asset amortization expense was $40 million in the first quarters of 2016 and 2015, respectively.

The increase in other intangible assets, net during the first three months of 2016 was primarily driven by the acquisition of the rights to Vancomycin detailed in Note 5 and currency translation adjustments (CTA), partially offset by amortization expense.

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INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES

3 Months Ended

Mar. 31, 2016

INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES

7. INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES

Infusion pump charges

In the first quarter of 2016, the company refined its estimates for remediation activities related to the SIGMA SPECTRUM infusion pump recall and decreased the reserve by $12 million. In addition, the company recorded utilization of the SIGMA SPECTRUM reserve of $14 million. The balance as of March 31, 2016 was $14 million for the SIGMA SPECTRUM infusion pump recall. Refer to the 2015 Annual Report for further information about the Company’s infusion pump recall activities.

Business optimization charges

The Company records charges from its business optimization initiatives primarily related to optimizing the company’s overall cost structure on a global basis, as the company streamlines its international operations, rationalizes its manufacturing facilities, enhances its general and administrative infrastructure and realigns certain R&D activities. The restructuring charges primarily include employee termination costs, costs associated with the company’s business optimization programs including consulting and other fees, in addition to Gambro integration costs.

During the first quarters of 2016 and 2015, the company recorded the following charges related to business optimization programs.

	Three months ended
	March 31,
(in millions)	2016		2015
Restructuring charges, net		$  4		$ (1	)
Costs to implement business optimization programs		11		18
Total business optimization charges		$15		$17

During the first quarters of 2016 and 2015, the company recorded the following restructuring charges.

	Three months ended
	March 31, 2016
(in millions)	COGS		SGA			R&D			Total
Employee termination costs		$13		$ 1			$ 1			$15
Reserve adjustments		(1)		(8	)		(2	)		(11	)
Total restructuring charges		$12		$(7	)		$(1	)		$  4

	Three months ended
	March 31, 2015
(in millions)	COGS			SGA			Total
Employee termination costs		$   1			$11			$12
Asset related costs		3			1			4
Asset impairment		2			—			2
Reserve adjustments		(13	)		(6	)		(19	)
Total restructuring charges		$  (7	)		$  6			$ (1	)

The following table summarizes cash activity in the reserves related to the company’s business optimization initiatives.

(in millions)
Reserves as of December 31, 2015	$	116
Charges		15
Reserve adjustments		(11	)
Utilization		(22	)
CTA		13
Reserves as of March 31, 2016	$	111

The reserves are expected to be substantially utilized by the end of 2016.

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DEBT, FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2016

DEBT, FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

8. DEBT, FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Debt-for-equity exchanges

On January 27, 2016, Baxter exchanged Retained Shares for the extinguishment of $1.45 billion aggregate principal amount outstanding under its $1.8 billion U.S. dollar-denominated revolving credit facility. This exchange extinguished the indebtedness under the facility, which was terminated in connection with such debt-for-equity exchange. There were no material prepayment penalties or breakage costs associated with the termination of the facility. Baxter recognized a net realized gain of $1.25 billion related to the Retained Shares exchanged, which was included in other income, net for the period ended March 31, 2016.

On March 16, 2016, the company exchanged Retained Shares for the extinguishment of approximately $2.2 billion in principal amount of its 0.950% Notes due May 2016, 5.900% Notes due August 2016, 1.850% Notes due January 2017, 5.375% Notes due May 2018, 1.850% Notes due June 2018, 4.500% Notes due August 2019, and 4.250% Notes due February 2020 purchased by certain third party purchasers in the previously announced debt tender offers. As a result, the company recognized a net loss on extinguishment of debt totaling $101 million and a net realized gain of $2.0 billion on the Retained Shares exchanged, which are included in other income, net for the period ended March 31, 2016.

Commercial paper

During the first quarter of 2016, the company issued and redeemed commercial paper, of which $750 million was outstanding as of March 31, 2016 with a weighted-average interest rate of 0.75%. There was a balance of $300 million outstanding at December 31, 2015 with a weighted-average interest rate of 0.6%. This commercial paper is classified as short-term debt.

Securitization arrangement

The following is a summary of the activity relating to the company’s securitization arrangement in Japan.

	Three months ended March 31,
(in millions)	2016			2015
Sold receivables at beginning of period		$   81			$ 104
Proceeds from sales of receivables		104			113
Cash collections (remitted to the owners of the receivables)		(107	)		(120	)
Effect of currency exchange rate changes		7			(1	)
Sold receivables at end of period		$   85			$   96

The impacts on the condensed consolidated statements of income relating to the sale of receivables were immaterial for each period. Refer to the 2015 Annual Report for further information regarding the company’s securitization agreements.

Concentrations of credit risk

The company invests excess cash in certificates of deposit or money market funds and diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss.

The company continues to do business with foreign governments in certain countries, including Greece, Spain, Portugal and Italy, that have experienced a deterioration in credit and economic conditions. As of March 31, 2016, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $206 million.

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

Derivatives and hedging activities

The company operates on a global basis and is exposed to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs.

The company is 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, Columbian Peso, Brazilian Real, Swedish Krona, and Mexican Peso. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative 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 equity volatility resulting from foreign exchange. Financial market and currency volatility may limit the company’s ability to cost-effectively hedge these exposures.

The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company’s policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believes is appropriate.

To manage this mix in a cost-efficient manner, the company periodically enters into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.

The company does not hold any instruments for trading purposes and none of the company’s 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. Based upon the exposure being hedged, the company designates its hedging instruments as cash flow or fair value hedges.

Cash Flow Hedges

The company 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.

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

The notional amounts of foreign exchange contracts were $415 million and $378 million as of March 31, 2016 and December 31, 2015, respectively. There were no outstanding interest rate contracts designated as cash flow hedges as of March 31, 2016 and December 31, 2015. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of March 31, 2016 is 15 months.

Fair Value Hedges

The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These instruments hedge the company’s 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 the loss or gain on the underlying hedged item. Fair value hedges are classified in net interest expense, as they hedge the interest rate risk associated with certain of the company’s fixed-rate debt.

The total notional amount of interest rate contracts designated as fair value hedges was $535 million and $1.3 billion as of March 31, 2016 and December 31, 2015, respectively. The decrease is due to swaps terminated in conjunction with the aforementioned debt-for-equity exchanges.

Dedesignations

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. If the company removes the cash flow hedge designation because the hedged forecasted transactions are no longer probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions are still probable of occurring are deferred and recognized consistent with the loss or income recognition of the underlying hedged items.

There were no hedge dedesignations in the first quarters of 2016 or 2015 resulting from changes in the company’s assessment of the probability that the hedged forecasted transactions would occur.

If the company terminates a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged items at the date of termination is amortized to earnings over the remaining term of the hedged item. In March 2016, the company terminated a total notional value of $765 million of interest rate contracts in connection with the March debt tender offers, resulting in a $34 million reduction to the debt extinguishment loss. There were no fair value hedges terminated during the first quarter of 2015.

Undesignated Derivative Instruments

The company uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the company’s intercompany and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges, and the change in fair value, which substantially offsets the change in book value of the hedged items, is recorded directly to other expense (income), net. The terms of these instruments generally do not exceed one month.

The total notional amount of undesignated derivative instruments was $630 million as of March 31, 2016 and $580 million as of December 31, 2015.

Gains and Losses on Derivative Instruments

The following tables summarize the income statement locations and gains and losses on the company’s derivative instruments for the three months ended March 31, 2016 and 2015.

	Gain (loss) recognized in OCI						Location of gain (loss) in income statement		Gain (loss) reclassified from AOCI into income
(in millions)	2016			2015					2016		2015
Cash flow hedges
Interest rate contracts		$—			$—			Other income, net		$  4		$—
Foreign exchange contracts		—			(1	)		Net sales		—		—
Foreign exchange contracts		(4	)		64			Cost of sales		1		25
Total		$(4	)		$63					$  5		$25

			Gain (loss) recognized in income
(in millions)	Location of gain (loss) in income statement		2016		2015
Fair value hedges
Interest rate contracts		Net interest expense		$22		$ 47
Undesignated derivative instruments
Foreign exchange contracts		Other income, net		$  6		$ (8	)

For the company’s fair value hedges, equal and offsetting losses of $22 million and $47 million were recognized in net interest expense in the first quarters of 2016 and 2015, respectively, as adjustments to the underlying hedged item, fixed-rate debt. Ineffectiveness related to the company’s cash flow and fair value hedges for the first quarter of 2016 was not material.

As of March 31, 2016, $2 million of deferred, net after-tax losses on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

Fair Values of Derivative Instruments

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of March 31, 2016.

	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 long-term assets		$  33		Other long-term liabilities		$—
Foreign exchange contracts		Prepaid expenses and other		9		Accounts payable and accrued liabilities		1
Foreign exchange contracts		Other long-term assets		—		Other long-term liabilities		—
Total derivative instruments designated as hedges				$  42				$  1
Undesignated derivative instruments
Foreign exchange contracts		Prepaid expenses and other		$  —		Accounts payable and accrued liabilities		$  2
Total derivative instruments				$  42				$  3

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2015.

	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		Prepaid expenses and other		$  —		Accounts payable and accrued liabilities		$  —
Interest rate contracts		Other long-term assets		46		Other long-term liabilities		—
Foreign exchange contracts		Prepaid expenses and other		9		Accounts payable and accrued liabilities		1
Total derivative instruments designated as hedges				$  55				$    1
Undesignated derivative instruments
Foreign exchange contracts		Prepaid expenses and other		$    1		Accounts payable and accrued liabilities		$    1
Total derivative instruments				$  56				$    2

While the company’s derivatives are all subject to master netting arrangements, the company presents its assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, the company is not required to post collateral for any of its outstanding derivatives.

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

	March 31, 2016						December 31, 2015
(in millions)	Asset			Liability			Asset			Liability
Gross amounts recognized in the consolidated balance sheet		$42			$  3			$56			$  2
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet		(3	)		(3	)		(2	)		(2	)
Total		$39			$—			$54			$—

Fair value measurements

The following tables summarize the bases used to measure financial assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheets.

			Basis of fair value measurement
(in millions)	Balance as of March 31, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign currency hedges		$       9		$—		$       9		$—
Interest rate hedges		33		—		33		—
Available-for-sale securities		1,242		10		1,232		—
Total assets		$1,284		$10		$1,274		$—
Liabilities
Foreign currency hedges		$       3		$—		$       3		$—
Contingent payments related to acquisitions		20		—		—		20
Total liabilities		$     23		$—		$       3		$20
			Basis of fair value measurement
(in millions)	Balance as of December 31, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign currency hedges		$     10		$—		$     10		$—
Interest rate hedges		46		—		46		—
Available-for-sale securities		5,162		14		5,148		—
Total assets		$5,218		$14		$5,204		$—
Liabilities
Foreign currency hedges		$       2		$—		$       2		$—
Contingent payments related to acquisitions		20		—		—		20
Total liabilities		$     22		$—		$       2		$20

As of March 31, 2016, cash and equivalents of $2.2 billion included money market funds of approximately $483 million, and as of December 31, 2015, cash and equivalents of $2.2 billion included money market funds of approximately $500 million. Money market funds would be 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 investment in the Retained Shares of $1.2 billion as of March 31, 2016 and $5.1 billion as of December 31, 2015, is categorized as a Level 2 security as these securities were not registered as of those dates. The value of this investment is based on Baxalta’s common stock price as of March 31, 2016 and December 31, 2015, which represents an identical equity instrument registered under the Securities Act of 1933, as amended. The majority of the derivatives entered into by the company 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 are considered observable and vary depending on the type of derivative, and include contractual terms, interest rate yield curves, foreign exchange rates and volatility.

Contingent payments related to acquisitions consist of commercial milestone payments and sales-based payments, and are valued using discounted cash flow techniques. The fair value of commercial milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or expectation of 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 increase or expectation of timing of payment is accelerated. Changes in the fair value of contingent payments related to Baxter’s acquisitions, which use significant unobservable inputs (Level 3) in the fair value measurement, were immaterial during the first quarter of 2016. The company made minor sales-based payments in the first quarter of 2016.

The following table provides information relating to the company’s investments in available-for-sale equity securities.

(in millions)	Amortized cost		Unrealized gains		Unrealized losses		Fair value
March 31, 2016		$179		$1,065		$  2		$1,242
December 31, 2015		$732		$4,430		$—		$5,162

In the first quarter of 2016 the company recorded $3.2 billion of net realized gains within other income, net related to exchanges of available-for-sale equity securities, which represented gains from the Retained Share transactions. The company did not have any sales of available-for-sale or equity method investments in the first quarter of 2015.

Book Values and Fair Values of Financial Instruments

In addition to the financial instruments that the company is required to recognize at fair value in the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical 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 approximate fair values as of March 31, 2016 and December 31, 2015.

	Book values				Approximate fair values
(in millions)	2016		2015		2016		2015
Assets
Investments		$    22		$     21		$    22		$     21
Liabilities
Short-term debt		$  817		$1,775		$  817		$1,775
Current maturities of long-term debt and lease obligations		472		810		475		818
Long-term debt and lease obligations		2,068		3,922		2,232		4,077

The following tables summarize the bases used to measure the approximate fair value of the financial instruments as of March 31, 2016 and December 31, 2015.

			Basis of fair value measurement
(in millions)	Balance as of March 31, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$     22		$—		$       2		$20
Total assets		$     22		$—		$       2		$20
Liabilities
Short-term debt		$   817		$—		$   817		$—
Current maturities of long-term debt and lease obligations		475		—		475		—
Long-term debt and lease obligations		2,232		—		2,232		—
Total liabilities		$3,524		$—		$3,524		$—

			Basis of fair value measurement
(in millions)	Balance as of December 31, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$     21		$—		$       2		$19
Total assets		$     21		$—		$       2		$19
Liabilities
Short-term debt		$1,775		$—		$1,775		$—
Current maturities of long-term debt and lease obligations		818		—		818		—
Long-term debt and lease obligations		4,077		—		4,077		—
Total liabilities		$6,670		$—		$6,670		$—

Investments in 2016 and 2015 included certain cost method investments and held-to-maturity debt securities.

The fair value of held-to-maturity debt securities is calculated using a discounted cash flow model that incorporates observable inputs, including interest rate yields, which represents a Level 2 basis of fair value measurement.

In determining the fair value of cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement.

The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instrument. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with the company’s credit risk. The carrying values of the other financial instruments approximate their fair values due to the short-term maturities of most of these assets and liabilities.

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STOCK COMPENSATION

3 Months Ended

Mar. 31, 2016

STOCK COMPENSATION

9. STOCK COMPENSATION

Stock compensation expense totaled $23 million and $29 million in the first quarter of 2016 and 2015, respectively. Over 70% of stock compensation expense is classified in marketing and administrative expenses with the remainder classified in cost of sales and R&D expenses.

The company awarded stock compensation grants consisting of 6.4 million stock options, 1.0 million RSUs and 0.3 million PSUs during the first quarter of 2016.

Stock Options

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

	Three months ended March 31,
	2016			2015
Expected volatility		20	%		20	%
Expected life (in years)		5.5			5.5
Risk-free interest rate		1.4	%		1.7	%
Dividend yield		1.2	%		3.0	%
Fair value per stock option		$7			$9

The total intrinsic value of stock options exercised was $55 million and $14 million during the first quarters of 2016 and 2015, respectively.

As of March 31, 2016, the unrecognized compensation cost related to all unvested stock options of $87 million is expected to be recognized as expense over a weighted-average period of 2.1 years.

Restricted Stock Units

As of March 31, 2016, the unrecognized compensation cost related to all unvested RSUs of $94 million is expected to be recognized as expense over a weighted-average period of 2.0 years.

Performance Share Units

As of March 31, 2016, the unrecognized compensation cost related to all granted unvested PSUs of $20 million is expected to be recognized as expense over a weighted-average period of 2.1 years.

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RETIREMENT AND OTHER BENEFIT PROGRAMS

3 Months Ended

Mar. 31, 2016

RETIREMENT AND OTHER BENEFIT PROGRAMS

10. RETIREMENT AND OTHER BENEFIT PROGRAMS

The following is a summary of net periodic benefit cost relating to the company’s pension and other postemployment benefit (OPEB) plans.

	Three months ended
	March 31,
(in millions)	2016			2015
Pension benefits
Service cost		$ 23			$ 23
Interest cost		46			49
Expected return on plan assets		(75	)		(61	)
Amortization of net losses and other deferred amounts		37			43
Net periodic pension benefit cost		$ 31			$ 54
OPEB
Service cost		$   1			$   1
Interest cost		2			6
Amortization of net loss and prior service credit		(4	)		(1	)
Net periodic OPEB cost		$  (1	)		$   6

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ACCUMULATED OTHER COMPREHENSIVE INCOME

3 Months Ended

Mar. 31, 2016

ACCUMULATED OTHER COMPREHENSIVE INCOME

11. ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income includes all changes in shareholders’ equity that do not arise from transactions with shareholders, and consists of net income, CTA, pension and other employee benefits, unrealized gains and losses on cash flow hedges and unrealized gains and losses on available-for-sale equity securities. The following table is a net-of-tax summary of the changes in AOCI by component for the three months ended March 31, 2016 and 2015.

(in millions)	CTA			Pension and other employee benefits			Hedging activities			Available- for-sale securities			Total
Gains (losses)
Balance as of December 31, 2015	$	(3,191	)		$  (1,064	)		$  7			$  4,472			$      224
Other comprehensive income before reclassifications		92			(1	)		(3	)		22			110
Amounts reclassified from AOCI (a)		—			22			(3	)		(3,388	)		(3,369	)
Net other comprehensive (loss) income		92			21			(6	)		(3,366	)		(3,259	)
Balance as of March 31, 2016	$	(3,099	)		$  (1,043	)		$  1			$  1,106			$  (3,035	)
(in millions)	CTA			Pension and other employee benefits			Hedging activities			Available- for-sale- securities			Total
Gains (losses)
Balance as of December 31, 2014	$	(2,323	)		$  (1,427	)		$  34			$      66			$  (3,650	)
Other comprehensive income before reclassifications		(1,138	)		33			6			14			(1,085	)
Amounts reclassified from AOCI (a)		—			35			(16	)		7			26
Net other comprehensive (loss) income		(1,138	)		68			(10	)		21			(1,059	)
Balance as of March 31, 2015	$	(3,461	)		$  (1,359	)		$  24			$      87			$  (4,709	)

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

The following is a summary of the amounts reclassified from AOCI to net income during the three months ended March 31, 2016 and 2015.

	Amounts reclassified from AOCI (a)
(in millions)	Three months ended March 31, 2016			Three months ended March 31, 2015			Location of impact in income statement
Amortization of pension and other employee benefits items
Actuarial losses and other (b)		$    (33	)		$ (50	)
		(33	)		(50	)	Total before tax
		11			15		Tax benefit
		$    (22	)		$ (35	)	Net of tax
Gains on hedging activities
Interest rate contracts		$       4			$  —		Net interest expense
Foreign exchange contracts		1			25		Cost of sales
		5			25		Total before tax
		(2	)		(9	)	Tax expense
		$       3			$  16		Net of tax
Available-for-sale-securities
Gains on sale of equity securities		$3,388			$  —		Other income, net
Other-than-temporary impairment of equity securities		—			(9	)	Other income, net
		3,388			(9	)	Total before tax
		—			2		Tax benefit
		3,388			$   (7	)	Net of tax
Total reclassification for the period		$3,369			$ (26	)	Total net of tax

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

(b) These AOCI components are included in the computation of net periodic benefit cost disclosed in Note 10.

Refer to Note 8 for additional information regarding hedging activity and Note 10 for additional information regarding the amortization of pension and other employee benefits items.

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INCOME TAXES

3 Months Ended

Mar. 31, 2016

INCOME TAXES

12. INCOME TAXES

Effective tax rate

The company’s effective income tax rate for continuing operations was (1.7)% and 9.5% in the first quarters of 2016 and 2015, respectively. The company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

The effective income tax rate for continuing operations during the three months ended March 31, 2016 decreased due to the impact of discrete items including tax-free net realized gains associated with the debt-for-equity exchanges and the benefits associated with closing an IRS and German income tax audit. These items reduced the effective tax rate by 22.0 percentage points. The effective income tax rate for continuing operations in the first quarter of 2015 included significant deductions related to the separation of Baxalta, including debt tender premium costs that were deductible at rates significantly higher than the rate of tax without such charges.

During the first quarter of 2016, Baxter paid approximately $303 million to partially settle a US Federal income tax audit for the period 2008-2013. Additionally, the company settled a German income tax audit for the period 2008-2011. As a result, the company reduced its gross unrecognized tax benefits by $85 million. Pursuant to the tax matters agreement with Baxalta, Baxalta paid the company approximately $34 million pursuant to its tax indemnity obligations in respect of its portion of the settled gross unrecognized tax benefits. See Note 2 for additional details regarding the separation of Baxalta.

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LEGAL PROCEEDINGS

3 Months Ended

Mar. 31, 2016

LEGAL PROCEEDINGS

13. LEGAL PROCEEDINGS

Baxter is involved in product liability, patent, commercial, and other legal matters that arise in the normal course of the company’s business. The company records 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 recorded. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of March 31, 2016, the company’s total recorded reserves with respect to legal matters were $34 million and the total related receivables were $10 million.

Baxter has established reserves for certain of the matters discussed below. The company is 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 the liability of the company in connection with the claims cannot be estimated and although the resolution in any reporting period of one or more of these matters could have a significant impact on the company’s 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 the company’s consolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may incur material judgments or enter into material settlements of claims.

In addition to the matters described below, the company remains 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 the company’s operations and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, the company may be exposed to significant litigation concerning the scope of the company’s 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.

General litigation

On July 31, 2015, Davita Healthcare Partners, Inc. filed suit against Baxter Healthcare Corporation in the District Court of the State of Colorado regarding an ongoing commercial dispute relating to the provision of peritoneal dialysis products. The company denies the claims and intends to vigorously defend against the suit. Trial in this case is currently scheduled for August 2016.

Other

In the fourth quarter of 2012, the company received two investigative demands from the United States Attorney for the Western District of North Carolina for information regarding its quality and manufacturing practices and procedures at its North Cove facility. The company is fully cooperating with this investigation.

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SEGMENT INFORMATION

3 Months Ended

Mar. 31, 2016

SEGMENT INFORMATION

14. SEGMENT INFORMATION

Baxter’s two segments are strategic businesses that are managed separately because each business develops, manufactures and markets distinct products and services. The segments and a description of their products and services are as follows:

The Renal business provides products and services to treat end-stage renal disease, or irreversible kidney failure, along with other renal therapies. The Renal business offers a comprehensive portfolio to meet the needs of patients across the treatment continuum, including technologies and therapies for peritoneal dialysis (PD), in-center hemodialysis (HD), home HD, continuous renal replacement therapy and additional dialysis services.

The Hospital Products business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, infusion pumps, inhalation anesthetics, and biosurgery products. The business also provides products and services related to pharmacy compounding, drug formulation and packaging technologies.

The company uses income from continuing operations before net interest expense, income tax expense, depreciation and amortization expense (Segment EBITDA), on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’s business segments. Intersegment sales are eliminated in consolidation.

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include most of the company’s debt and cash and equivalents and related net interest expense, foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, nonstrategic investments and related income and expense, certain employee benefit plan costs as well as certain nonrecurring gains, losses, and other charges (such as business optimization, integration and separation-related costs, and asset impairment). Financial information for the company’s segments is as follows.

	Three months ended
	March 31,
(in millions)	2016		2015
Net sales
Renal		$      898		$      913
Hospital Products		1,477		1,490
Total net sales		$   2,375		$   2,403
EBITDA
Renal		$      122		$        85
Hospital Products		509		487
Total segment EBITDA		$      631		$      572
	March 31,		December 31,
(in millions)	2016		2015
Total assets
Renal		$    4,719		$    4,609
Hospital Products		6,787		6,632
Other		5,844		9,721
Total assets		$   17,350		$  20,962

The following is a reconciliation of segment EBITDA to income from continuing operations before income taxes per the condensed consolidated statements of income.

	Three months ended
	March 31,
(in millions)	2016			2015
Total segment EBITDA	$	631		$	572
Reconciling items
Depreciation and amortization		(189	)		(187	)
Stock compensation		(23	)		(29	)
Net interest expense		(28	)		(30	)
Business optimization items		(5	)		—
Certain foreign currency fluctuations and hedging activities		22			108
Net realized gains on Retained Shares transactions		3,239			—
Net loss on debt extinguishment		(101	)		—
Other Corporate items		(217	)		(286	)
Income from continuing operations before income taxes	$	3,329		$	148

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SEPARATION OF BAXALTA INCORPORATED (Tables)

3 Months Ended

Mar. 31, 2016

Summary of Discontinued Operations

Following is a summary of the operating results of Baxalta, which have been reflected as discontinued operations for the three months ended March 31, 2016 and 2015. The assets and liabilities have been classified as held for disposition as of March 31, 2016 and December 31, 2015.

	Three months ended March 31,
(in millions)	2016			2015
Major classes of line items constituting income from discontinued operations before income taxes
Net sales	$	64		$	1,362
Cost of sales		(59	)		(580	)
Marketing and administrative expenses		(20	)		(231	)
Research and development expenses		—			(157	)
Other income and expense items that are not major		—			(2	)
(Loss) income from discontinued operations before income taxes		(15	)		392
Gain on disposal of discontinued operations		17			—
Income tax expense		9			96
(Loss) income from discontinued operations, net of tax	$	(7	)	$	296

	March 31,		December 31,
(in millions)	2016		2015
Carrying amounts of major classes of assets included as part of discontinued operations
Accounts and other current receivables, net		$   99		$ 228
Inventories		9		8
Property, plant, and equipment, net		1		2
Other		2		7
Total assets of the disposal group		$  111		$ 245
Carrying amounts of major classes of liabilities included as part of discontinued operations
Accounts payable and accrued liabilities		$     2		$  46
Other long-term liabilities		8		—
Total liabilities of the disposal group		$   10		$  46

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SUPPLEMENTAL FINANCIAL INFORMATION (Tables)

3 Months Ended

Mar. 31, 2016

Net Interest Expense

Net interest expense

	Three months ended
	March 31,
(in millions)	2016			2015
Interest expense, net of capitalized interest		$   33			$   35
Interest income		(5	)		(5	)
Net interest expense		$   28			$   30

Other Income, Net

Other income, net

	Three months ended
	March 31,
(in millions)	2016			2015
Foreign exchange		$         (9	)		$  (89	)
Net loss on debt extinguishment		101			—
Net realized gains on Retained Shares transactions		(3,239	)		—
All other		(22	)		3
Other income, net		$  (3,169	)		$  (86	)

Inventories

Inventories

	March 31,		December 31,
(in millions)	2016		2015
Raw materials		$     369		$     374
Work in process		159		142
Finished goods		1,154		1,088
Inventories		$  1,682		$  1,604

Property, Plant and Equipment, Net

Property, plant and equipment, net

	March 31,			December 31,
(in millions)	2016			2015
Property, plant and equipment, at cost		$  9,134			$  8,990
Accumulated depreciation		(4,731	)		(4,604	)
Property, plant and equipment, net		$  4,403			$  4,386

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EARNINGS PER SHARE (Tables)

3 Months Ended

Mar. 31, 2016

Reconciliation of Basic Shares to Diluted Shares

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

	Three months ended
	March 31,
(in millions)	2016		2015
Basic shares		549		543
Effect of dilutive securities		3		5
Diluted shares		552		548

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GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Tables)

3 Months Ended

Mar. 31, 2016

Goodwill

The following is a reconciliation of goodwill by business segment.

(in millions)	Renal		Hospital Products		Total
Balance as of December 31, 2015	$	408		$2,279	$	2,687
Currency translation adjustments		7		33		40
Balance as of March 31, 2016	$	415		$2,312	$	2,727

Other Intangible Assets, Net

The following is a summary of the company’s other intangible assets.

(in millions)	Developed technology, including patents			Other amortized intangible assets			Indefinite-lived intangible assets		Total
March 31, 2016
Gross other intangible assets		$1,781			$ 410			$87		$2,278
Accumulated amortization		(766	)		(153	)		—		(919	)
Other intangible assets, net		$1,015			$ 257			$87		$1,359
December 31, 2015
Gross other intangible assets		$1,742			$ 393			$86		$2,221
Accumulated amortization		(729	)		(143	)		—		(872	)
Other intangible assets, net		$1,013			$ 250			$86		$1,349

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INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES (Tables)

3 Months Ended

Mar. 31, 2016

Business Optimization Charges

During the first quarters of 2016 and 2015, the company recorded the following charges related to business optimization programs.

	Three months ended
	March 31,
(in millions)	2016		2015
Restructuring charges, net		$  4		$ (1	)
Costs to implement business optimization programs		11		18
Total business optimization charges		$15		$17

Summary of Restructuring Charges

During the first quarters of 2016 and 2015, the company recorded the following restructuring charges.

	Three months ended
	March 31, 2016
(in millions)	COGS		SGA			R&D			Total
Employee termination costs		$13		$ 1			$ 1			$15
Reserve adjustments		(1)		(8	)		(2	)		(11	)
Total restructuring charges		$12		$(7	)		$(1	)		$  4

	Three months ended
	March 31, 2015
(in millions)	COGS			SGA			Total
Employee termination costs		$   1			$11			$12
Asset related costs		3			1			4
Asset impairment		2			—			2
Reserve adjustments		(13	)		(6	)		(19	)
Total restructuring charges		$  (7	)		$  6			$ (1	)

Summary of Cash Activity in Reserves related to Business Optimization Initiatives

The following table summarizes cash activity in the reserves related to the company’s business optimization initiatives.

(in millions)
Reserves as of December 31, 2015	$	116
Charges		15
Reserve adjustments		(11	)
Utilization		(22	)
CTA		13
Reserves as of March 31, 2016	$	111

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DEBT, FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Tables)

3 Months Ended

Mar. 31, 2016

Summary of Activity Relating to Securitization Arrangement

The following is a summary of the activity relating to the company’s securitization arrangement in Japan.

	Three months ended March 31,
(in millions)	2016			2015
Sold receivables at beginning of period		$   81			$ 104
Proceeds from sales of receivables		104			113
Cash collections (remitted to the owners of the receivables)		(107	)		(120	)
Effect of currency exchange rate changes		7			(1	)
Sold receivables at end of period		$   85			$   96

Summary of Gains and Losses on Derivative Instruments

The following tables summarize the income statement locations and gains and losses on the company’s derivative instruments for the three months ended March 31, 2016 and 2015.

	Gain (loss) recognized in OCI						Location of gain (loss) in income statement		Gain (loss) reclassified from AOCI into income
(in millions)	2016			2015					2016		2015
Cash flow hedges
Interest rate contracts		$—			$—			Other income, net		$  4		$—
Foreign exchange contracts		—			(1	)		Net sales		—		—
Foreign exchange contracts		(4	)		64			Cost of sales		1		25
Total		$(4	)		$63					$  5		$25

			Gain (loss) recognized in income
(in millions)	Location of gain (loss) in income statement		2016		2015
Fair value hedges
Interest rate contracts		Net interest expense		$22		$ 47
Undesignated derivative instruments
Foreign exchange contracts		Other income, net		$  6		$ (8	)

Classification and Fair Value Amounts of Derivative Instruments

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of March 31, 2016.

	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 long-term assets		$  33		Other long-term liabilities		$—
Foreign exchange contracts		Prepaid expenses and other		9		Accounts payable and accrued liabilities		1
Foreign exchange contracts		Other long-term assets		—		Other long-term liabilities		—
Total derivative instruments designated as hedges				$  42				$  1
Undesignated derivative instruments
Foreign exchange contracts		Prepaid expenses and other		$  —		Accounts payable and accrued liabilities		$  2
Total derivative instruments				$  42				$  3

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2015.

	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		Prepaid expenses and other		$  —		Accounts payable and accrued liabilities		$  —
Interest rate contracts		Other long-term assets		46		Other long-term liabilities		—
Foreign exchange contracts		Prepaid expenses and other		9		Accounts payable and accrued liabilities		1
Total derivative instruments designated as hedges				$  55				$    1
Undesignated derivative instruments
Foreign exchange contracts		Prepaid expenses and other		$    1		Accounts payable and accrued liabilities		$    1
Total derivative instruments				$  56				$    2

Derivative Positions Presented on Net Basis

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

	March 31, 2016						December 31, 2015
(in millions)	Asset			Liability			Asset			Liability
Gross amounts recognized in the consolidated balance sheet		$42			$  3			$56			$  2
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet		(3	)		(3	)		(2	)		(2	)
Total		$39			$—			$54			$—

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize the bases used to measure financial assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheets.

			Basis of fair value measurement
(in millions)	Balance as of March 31, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign currency hedges		$       9		$—		$       9		$—
Interest rate hedges		33		—		33		—
Available-for-sale securities		1,242		10		1,232		—
Total assets		$1,284		$10		$1,274		$—
Liabilities
Foreign currency hedges		$       3		$—		$       3		$—
Contingent payments related to acquisitions		20		—		—		20
Total liabilities		$     23		$—		$       3		$20
			Basis of fair value measurement
(in millions)	Balance as of December 31, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Foreign currency hedges		$     10		$—		$     10		$—
Interest rate hedges		46		—		46		—
Available-for-sale securities		5,162		14		5,148		—
Total assets		$5,218		$14		$5,204		$—
Liabilities
Foreign currency hedges		$       2		$—		$       2		$—
Contingent payments related to acquisitions		20		—		—		20
Total liabilities		$     22		$—		$       2		$20

Investments in Available-For-Sale Equity Securities

The following table provides information relating to the company’s investments in available-for-sale equity securities.

(in millions)	Amortized cost		Unrealized gains		Unrealized losses		Fair value
March 31, 2016		$179		$1,065		$  2		$1,242
December 31, 2015		$732		$4,430		$—		$5,162

Book Values and Fair Values of Financial Instruments

The following table provides the values recognized in the condensed consolidated balance sheets and the approximate fair values as of March 31, 2016 and December 31, 2015.

	Book values				Approximate fair values
(in millions)	2016		2015		2016		2015
Assets
Investments		$    22		$     21		$    22		$     21
Liabilities
Short-term debt		$  817		$1,775		$  817		$1,775
Current maturities of long-term debt and lease obligations		472		810		475		818
Long-term debt and lease obligations		2,068		3,922		2,232		4,077

Summarization of Bases Used to Measure Fair Value of Financial Instruments

The following tables summarize the bases used to measure the approximate fair value of the financial instruments as of March 31, 2016 and December 31, 2015.

			Basis of fair value measurement
(in millions)	Balance as of March 31, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$     22		$—		$       2		$20
Total assets		$     22		$—		$       2		$20
Liabilities
Short-term debt		$   817		$—		$   817		$—
Current maturities of long-term debt and lease obligations		475		—		475		—
Long-term debt and lease obligations		2,232		—		2,232		—
Total liabilities		$3,524		$—		$3,524		$—

			Basis of fair value measurement
(in millions)	Balance as of December 31, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$     21		$—		$       2		$19
Total assets		$     21		$—		$       2		$19
Liabilities
Short-term debt		$1,775		$—		$1,775		$—
Current maturities of long-term debt and lease obligations		818		—		818		—
Long-term debt and lease obligations		4,077		—		4,077		—
Total liabilities		$6,670		$—		$6,670		$—

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STOCK COMPENSATION (Tables)

3 Months Ended

Mar. 31, 2016

Stock Options Fair Value Assumptions

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

	Three months ended March 31,
	2016			2015
Expected volatility		20	%		20	%
Expected life (in years)		5.5			5.5
Risk-free interest rate		1.4	%		1.7	%
Dividend yield		1.2	%		3.0	%
Fair value per stock option		$7			$9

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RETIREMENT AND OTHER BENEFIT PROGRAMS (Tables)

3 Months Ended

Mar. 31, 2016

Net Periodic Benefit Cost Relating to Pension and Other Postemployement Benefit

The following is a summary of net periodic benefit cost relating to the company’s pension and other postemployment benefit (OPEB) plans.

	Three months ended
	March 31,
(in millions)	2016			2015
Pension benefits
Service cost		$ 23			$ 23
Interest cost		46			49
Expected return on plan assets		(75	)		(61	)
Amortization of net losses and other deferred amounts		37			43
Net periodic pension benefit cost		$ 31			$ 54
OPEB
Service cost		$   1			$   1
Interest cost		2			6
Amortization of net loss and prior service credit		(4	)		(1	)
Net periodic OPEB cost		$  (1	)		$   6

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ACCUMULATED OTHER COMPREHENSIVE INCOME (Tables)

3 Months Ended

Mar. 31, 2016

Summary of Changes in AOCI by Component

The following table is a net-of-tax summary of the changes in AOCI by component for the three months ended March 31, 2016 and 2015.

(in millions)	CTA			Pension and other employee benefits			Hedging activities			Available- for-sale securities			Total
Gains (losses)
Balance as of December 31, 2015	$	(3,191	)		$  (1,064	)		$  7			$  4,472			$      224
Other comprehensive income before reclassifications		92			(1	)		(3	)		22			110
Amounts reclassified from AOCI (a)		—			22			(3	)		(3,388	)		(3,369	)
Net other comprehensive (loss) income		92			21			(6	)		(3,366	)		(3,259	)
Balance as of March 31, 2016	$	(3,099	)		$  (1,043	)		$  1			$  1,106			$  (3,035	)
(in millions)	CTA			Pension and other employee benefits			Hedging activities			Available- for-sale- securities			Total
Gains (losses)
Balance as of December 31, 2014	$	(2,323	)		$  (1,427	)		$  34			$      66			$  (3,650	)
Other comprehensive income before reclassifications		(1,138	)		33			6			14			(1,085	)
Amounts reclassified from AOCI (a)		—			35			(16	)		7			26
Net other comprehensive (loss) income		(1,138	)		68			(10	)		21			(1,059	)
Balance as of March 31, 2015	$	(3,461	)		$  (1,359	)		$  24			$      87			$  (4,709	)

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

Summary of Reclassification from AOCI to Net Income

The following is a summary of the amounts reclassified from AOCI to net income during the three months ended March 31, 2016 and 2015.

	Amounts reclassified from AOCI (a)
(in millions)	Three months ended March 31, 2016			Three months ended March 31, 2015			Location of impact in income statement
Amortization of pension and other employee benefits items
Actuarial losses and other (b)		$    (33	)		$ (50	)
		(33	)		(50	)	Total before tax
		11			15		Tax benefit
		$    (22	)		$ (35	)	Net of tax
Gains on hedging activities
Interest rate contracts		$       4			$  —		Net interest expense
Foreign exchange contracts		1			25		Cost of sales
		5			25		Total before tax
		(2	)		(9	)	Tax expense
		$       3			$  16		Net of tax
Available-for-sale-securities
Gains on sale of equity securities		$3,388			$  —		Other income, net
Other-than-temporary impairment of equity securities		—			(9	)	Other income, net
		3,388			(9	)	Total before tax
		—			2		Tax benefit
		3,388			$   (7	)	Net of tax
Total reclassification for the period		$3,369			$ (26	)	Total net of tax

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

(b) These AOCI components are included in the computation of net periodic benefit cost disclosed in Note 10.

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SEGMENT INFORMATION (Tables)

3 Months Ended

Mar. 31, 2016

Segment Information

Financial information for the company’s segments is as follows.

	Three months ended
	March 31,
(in millions)	2016		2015
Net sales
Renal		$      898		$      913
Hospital Products		1,477		1,490
Total net sales		$   2,375		$   2,403
EBITDA
Renal		$      122		$        85
Hospital Products		509		487
Total segment EBITDA		$      631		$      572
	March 31,		December 31,
(in millions)	2016		2015
Total assets
Renal		$    4,719		$    4,609
Hospital Products		6,787		6,632
Other		5,844		9,721
Total assets		$   17,350		$  20,962

EBITDA to Income from Continuing Operations Reconciliation

The following is a reconciliation of segment EBITDA to income from continuing operations before income taxes per the condensed consolidated statements of income.

	Three months ended
	March 31,
(in millions)	2016			2015
Total segment EBITDA	$	631		$	572
Reconciling items
Depreciation and amortization		(189	)		(187	)
Stock compensation		(23	)		(29	)
Net interest expense		(28	)		(30	)
Business optimization items		(5	)		—
Certain foreign currency fluctuations and hedging activities		22			108
Net realized gains on Retained Shares transactions		3,239			—
Net loss on debt extinguishment		(101	)		—
Other Corporate items		(217	)		(286	)
Income from continuing operations before income taxes	$	3,329		$	148

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Basis of Presentation- Additional Information (Detail) - USD ($) $ in Millions	Jul. 01, 2015	Mar. 31, 2016	Dec. 31, 2015
Basis Of Presentation [Line Items]
Other assets		$ 844	$ 744
ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs | Restatement Adjustment
Basis Of Presentation [Line Items]
Other assets			(13)
Long-term debt, excluding capital lease obligations			$ 13
Spinoff
Basis Of Presentation [Line Items]
Percentage of outstanding common stock distributed	80.50%
Record date for distribution	Jun. 17, 2015

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Separation of Baxalta Incorporated - Additional Information (Detail) - USD ($) $ in Millions			3 Months Ended
	Mar. 16, 2016	Jan. 27, 2016	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Available-for-sale equity securities, fair value			$ 1,242		$ 5,162
Accounts payable and accrued liabilities			2,387		2,666
Cash flows from operations - discontinued operations			$ (159)	$ 124
Spinoff
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Percentage of common stock retained			19.50%
Common stock, shares outstanding		131,902,719
Disposition of Baxalta shares of common stock	63,823,582	37,573,040
Extinguishment of debt	$ 2,200	$ 1,450
Available-for-sale equity securities, fair value			$ 1,200		5,100
Transition Services Agreement
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Reduction in marketing and administrative expense			27
Transition Services Agreement | Manufacturing and supply agreement (MSA) | Spinoff
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Net sales			11
Cost of sales			$ 45
Transition Services Agreement | Minimum | Manufacturing and supply agreement (MSA)
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
The termination of service period			5 years
Transition Services Agreement | Maximum | Manufacturing and supply agreement (MSA)
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
The termination of service period			10 years
Baxalta Inc | Discontinued Operations, Held-for-disposition
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Accounts payable and accrued liabilities			$ 92		190
Net assets					$ 90
Gain on disposal of discontinued operations			17	0
Net sales			64	1,362
Cost of sales			$ 59	$ 580

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Summary of Operating Results Which Have Been Reflected As Discontinued Operations (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
(Loss) income from discontinued operations, net of tax	$ (7)	$ 296
Baxalta Inc | Discontinued Operations, Held-for-disposition
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Net sales	64	1,362
Cost of sales	(59)	(580)
Marketing and administrative expenses	(20)	(231)
Research and development expenses		(157)
Other income and expense items that are not major		(2)
(Loss) income from discontinued operations before income taxes	(15)	392
Gain on disposal of discontinued operations	17	0
Income tax expense	$ 9	$ 96

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Summary of Assets and Liabilities Classified As Held For Disposition (Detail) - Baxalta Inc - Discontinued Operations, Held-for-disposition - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Accounts and other current receivables, net	$ 99	$ 228
Inventories	9	8
Property, plant, and equipment, net	1	2
Other	2	7
Total assets of the disposal group	111	245
Accounts payable and accrued liabilities	2	46
Other long-term liabilities	8	0
Total liabilities of the disposal group	$ 10	$ 46

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Net Interest Expense (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Interest Income Expense Net
Interest expense, net of capitalized interest	$ 33	$ 35
Interest income	(5)	(5)
Net interest expense	$ 28	$ 30

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Other Income, Net (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Other Income, net
Foreign exchange	$ (9)	$ (89)
Net loss on debt extinguishment	101
Net realized gains on Retained Shares transactions	(3,239)
All other	(22)	3
Other income, net	$ (3,169)	$ (86)

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Inventories (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Inventory
Raw materials	$ 369	$ 374
Work in process	159	142
Finished goods	1,154	1,088
Inventories	$ 1,682	$ 1,604

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Property, Plant and Equipment ,Net (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Property, Plant and Equipment, Net
Property, plant and equipment, at cost	$ 9,134	$ 8,990
Accumulated depreciation	(4,731)	(4,604)
Property, plant and equipment, net	$ 4,403	$ 4,386

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Reconciliation of Basic Shares to Diluted Shares (Detail) - shares shares in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Reconciliation of Basic Shares to Diluted Shares
Basic shares	549	543
Effect of dilutive securities	3	5
Diluted shares	552	548

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Earnings Per Share - Additional Information (Detail) - USD ($) shares in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Jul. 31, 2012
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from computation of EPS	20	9
Stock repurchase program, authorized amount			$ 2,000,000,000
Purchases of common stock	0
Remaining value available under stock repurchase programs	$ 500,000,000

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Acquisitions and Other Arrangements - Additional Information (Detail) $ in Millions	3 Months Ended
	Mar. 31, 2016 USD ($)
Acquisitions and Other Arrangements [Line Items]
Payment to acquire the rights to Vancomycin injection	$ 23
Estimated economic life	12 years

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Goodwill (Detail) $ in Millions	3 Months Ended
	Mar. 31, 2016 USD ($)
Goodwill [Line Items]
Goodwill, beginning balance	$ 2,687
Currency translation adjustments	40
Goodwill, ending balance	2,727
Renal
Goodwill [Line Items]
Goodwill, beginning balance	408
Currency translation adjustments	7
Goodwill, ending balance	415
Hospital Products
Goodwill [Line Items]
Goodwill, beginning balance	2,279
Currency translation adjustments	33
Goodwill, ending balance	$ 2,312

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Goodwill and Other Intangible Assets, Net - Additional Information (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Goodwill And Other Intangible Asset [Line Items]
Accumulated goodwill impairment losses	$ 0
Amortization expense	$ 40	$ 40

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Other Intangible Assets, Net (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Intangible Asset Excluding Goodwill [Line Items]
Gross other intangible assets	$ 2,278	$ 2,221
Accumulated amortization	(919)	(872)
Other intangible assets, net	1,359	1,349
Developed technology, including patents
Intangible Asset Excluding Goodwill [Line Items]
Gross other intangible assets	1,781	1,742
Accumulated amortization	(766)	(729)
Other intangible assets, net	1,015	1,013
Other Intangible Assets
Intangible Asset Excluding Goodwill [Line Items]
Gross other intangible assets	410	393
Accumulated amortization	(153)	(143)
Other intangible assets, net	257	250
Indefinite Lived Intangible Assets
Intangible Asset Excluding Goodwill [Line Items]
Gross other intangible assets	87	86
Other intangible assets, net	$ 87	$ 86

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Infusion Pump and Business Optimization Charges - Additional Information (Detail) - SIGMA Spectrum Infusion Pump $ in Millions	3 Months Ended
	Mar. 31, 2016 USD ($)
Infusion Pump Charges
Decrease of infusion pump reserves	$ 12
Utilization of reserves	14
Infusion pump reserve balance	$ 14

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Business Optimization Charges (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	$ 4	$ (1)
Costs to implement business optimization programs	11	18
Total business optimization charges	$ 15	$ 17

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Summary of Restructuring Charges (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	$ 4	$ (1)
Employee Termination Costs
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	15	12
Reserve Adjustments
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	(11)	(19)
Asset Related Costs
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net		4
Asset Impairment
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net		2
Cost of Sales
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	12	(7)
Cost of Sales | Employee Termination Costs
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	13	1
Cost of Sales | Reserve Adjustments
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	(1)	(13)
Cost of Sales | Asset Related Costs
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net		3
Cost of Sales | Asset Impairment
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net		2
Marketing and Administrative Expenses
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	(7)	6
Marketing and Administrative Expenses | Employee Termination Costs
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	1	11
Marketing and Administrative Expenses | Reserve Adjustments
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	(8)	(6)
Marketing and Administrative Expenses | Asset Related Costs
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net		$ 1
Research and Development Expenses
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	(1)
Research and Development Expenses | Employee Termination Costs
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	1
Research and Development Expenses | Reserve Adjustments
Restructuring Cost and Reserve [Line Items]
Restructuring charges, net	$ (2)

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Summary of Cash Activity in Reserves related to Business Optimization Initiatives (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Restructuring Cost and Reserve [Line Items]
Charges	$ 4	$ (1)
Severance and Other Employee Related Costs
Restructuring Cost and Reserve [Line Items]
Reserves, Beginning balance	116
Charges	15
Reserve adjustments	(11)
Utilization	(22)
CTA	13
Reserves, ending balance	$ 111

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Debt, Financial Instruments and Fair Value Measurements - Additional Information (Detail) - USD ($) $ in Millions			3 Months Ended
	Mar. 16, 2016	Jan. 27, 2016	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015	Dec. 31, 2014
Debt and Financial Instruments [Line Items]
Net realized gains on the Retained Share transactions			$ 3,239
Recognized loss on extinguishment of debt			(101)
Commercial paper outstanding			$ 750		$ 300
Maximum length of time hedge in cash flow hedge			15 months
Terminated interest rate contract			$ 765
Gain on termination of interest rate contract			34
Gain (loss) on hedged item in fair value hedge			(22)	$ (47)
Deferred, net after-tax losses on derivative instruments			(2)
Cash and equivalents			2,211	2,530	2,213	$ 2,925
Available-for-sale securities			1,242		5,162
Dedesignated As Hedging Instrument
Debt and Financial Instruments [Line Items]
Derivative notional amount			0	$ 0
Not Designated as Hedging Instrument
Debt and Financial Instruments [Line Items]
Derivative notional amount			630		580
Interest rate contract
Debt and Financial Instruments [Line Items]
Derivative notional amount			0		0
Interest rate contract | Fair value hedges
Debt and Financial Instruments [Line Items]
Derivative notional amount			535		1,300
Foreign exchange contract
Debt and Financial Instruments [Line Items]
Derivative notional amount			415		378
Countries With Liquidity Issues
Debt and Financial Instruments [Line Items]
Total accounts receivable from certain countries with liquidity issues			206
Fair Value, Inputs, Level 2
Debt and Financial Instruments [Line Items]
Money market funds, at carrying value			483		500
Available-for-sale securities			1,200		$ 5,100
Debt Tender Offer
Debt and Financial Instruments [Line Items]
Net realized gains on the Retained Share transactions			$ 2,000
Tender offer date			Mar. 16, 2016
Principal amount of notes exchanged for Retained Share	$ 2,200
Recognized loss on extinguishment of debt			$ (101)
Debt Tender Offer | 0.950% notes due 2016
Debt and Financial Instruments [Line Items]
Senior notes, coupon rates	0.95%
Higher rate of debt maturity periods			May 2016
Debt Tender Offer | 5.9% notes due 2016
Debt and Financial Instruments [Line Items]
Senior notes, coupon rates	5.90%
Higher rate of debt maturity periods			August 2016
Debt Tender Offer | 1.85% Notes due 2017
Debt and Financial Instruments [Line Items]
Senior notes, coupon rates	1.85%
Higher rate of debt maturity periods			January 2017
Debt Tender Offer | 5.375% notes due 2018
Debt and Financial Instruments [Line Items]
Senior notes, coupon rates	5.375%
Higher rate of debt maturity periods			May 2018
Debt Tender Offer | 1.85% notes due 2018
Debt and Financial Instruments [Line Items]
Senior notes, coupon rates	1.85%
Higher rate of debt maturity periods			June 2018
Debt Tender Offer | 4.500% notes due 2019
Debt and Financial Instruments [Line Items]
Senior notes, coupon rates	4.50%
Higher rate of debt maturity periods			August 2019
Debt Tender Offer | 4.25% notes due 2020
Debt and Financial Instruments [Line Items]
Senior notes, coupon rates	4.25%
Higher rate of debt maturity periods			February 2020
Commercial Paper
Debt and Financial Instruments [Line Items]
Debt instrument, weighted average interest rate			0.75%		0.60%
Domestic Line of Credit
Debt and Financial Instruments [Line Items]
Drawing		$ 1,450
Line of Credit Facility Amount Outstanding		$ 1,800
Net realized gains on the Retained Share transactions			$ 1,250

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Summary of Activity Relating to Securitization Arrangement (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Accounts Receivable Securitization [Line Items]
Sold receivables at beginning of period	$ 81	$ 104
Proceeds from sales of receivables	104	113
Cash collections (remitted to the owners of the receivables)	(107)	(120)
Effect of currency exchange rate changes	7	(1)
Sold receivables at end of period	$ 85	$ 96

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Summary of Gains and Losses on Derivative Instruments (Detail) - USD ($) $ in Millions		3 Months Ended
		Mar. 31, 2016	Mar. 31, 2015
Derivative Instruments, Gain (Loss) [Line Items]
Gains (losses) on hedging activities reclassified from AOCI to net income, before tax	[1]	$ 5	$ 25
Other income, net | Not Designated as Hedging Instrument
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) recognized in income, undesignated derivative instruments		6	(8)
Interest rate contract | Net Interest Expense
Derivative Instruments, Gain (Loss) [Line Items]
Gains (losses) on hedging activities reclassified from AOCI to net income, before tax	[1]	4
Fair value hedges | Net Interest Expense
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) recognized in income, fair value hedges		22	47
Cash Flow Hedges
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) recognized in OCI		(4)	63
Gains (losses) on hedging activities reclassified from AOCI to net income, before tax		5	25
Cash Flow Hedges | Interest rate contract | Other income, net
Derivative Instruments, Gain (Loss) [Line Items]
Gains (losses) on hedging activities reclassified from AOCI to net income, before tax		4
Cash Flow Hedges | Foreign Exchange Contracts One
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) recognized in OCI			(1)
Cash Flow Hedges | Foreign Exchange Contracts Two
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) recognized in OCI		(4)	64
Cash Flow Hedges | Foreign Exchange Contracts Two | Cost of Sales
Derivative Instruments, Gain (Loss) [Line Items]
Gains (losses) on hedging activities reclassified from AOCI to net income, before tax		$ 1	$ 25

[1] Amounts in parentheses indicate reductions to net income.

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Classification and Fair Value Amounts of Derivative Instruments (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Derivatives, Fair Value [Line Items]
Derivative asset, fair value	$ 42	$ 56
Derivative liability, fair value	3	2
Designated as Hedging Instrument
Derivatives, Fair Value [Line Items]
Derivative asset, fair value	42	55
Derivative liability, fair value	1	1
Designated as Hedging Instrument | Interest rate contract | Other Long-Term Assets
Derivatives, Fair Value [Line Items]
Derivative asset, fair value	33	46
Designated as Hedging Instrument | Foreign exchange contract | Accounts Payable And Accrued Liabilities
Derivatives, Fair Value [Line Items]
Derivative liability, fair value	1	1
Designated as Hedging Instrument | Foreign exchange contract | Prepaid expenses and other
Derivatives, Fair Value [Line Items]
Derivative asset, fair value	9	9
Not Designated as Hedging Instrument | Foreign exchange contract | Accounts Payable And Accrued Liabilities
Derivatives, Fair Value [Line Items]
Derivative liability, fair value	$ 2	1
Not Designated as Hedging Instrument | Foreign exchange contract | Prepaid expenses and other
Derivatives, Fair Value [Line Items]
Derivative asset, fair value		$ 1

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Derivative Positions Presented On Net Basis (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Derivatives, Fair Value [Line Items]
Gross amounts recognized in the consolidated balance sheet, asset	$ 42	$ 56
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet, asset	(3)	(2)
Total	39	54
Gross amounts recognized in the consolidated balance sheet, liability	3	2
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet, liability	(3)	(2)
Total	$ 0	$ 0

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Financial Assets and Liabilities Measured at Fair Value on Recurring Basis (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreign currency hedges, assets at fair value	$ 42	$ 56
Foreign currency hedges, liabilities at fair value	3	2
Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreign currency hedges, assets at fair value	9	10
Interest rate hedges, assets at fair value	33	46
Available-for-sale securities	1,242	5,162
Total assets	1,284	5,218
Foreign currency hedges, liabilities at fair value	3	2
Contingent payments related to acquisitions	20	20
Total liabilities	23	22
Fair Value, Measurements, Recurring | Fair Value, Inputs, Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities	10	14
Total assets	10	14
Fair Value, Measurements, Recurring | Fair Value, Inputs, Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreign currency hedges, assets at fair value	9	10
Interest rate hedges, assets at fair value	33	46
Available-for-sale securities	1,232	5,148
Total assets	1,274	5,204
Foreign currency hedges, liabilities at fair value	3	2
Total liabilities	3	2
Fair Value, Measurements, Recurring | Fair Value, Inputs, Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent payments related to acquisitions	20	20
Total liabilities	$ 20	$ 20

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Available-for-Sale Equity Securities (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Schedule of Available-for-sale Securities [Line Items]
Amortized cost	$ 179	$ 732
Unrealized gains	1,065	4,430
Unrealized losses	2
Fair value	$ 1,242	$ 5,162

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Book Values and Fair Values of Financial Instruments (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Fair Value And Carrying Value By Balance Sheet Grouping [Line Items]
Long-term debt and lease obligations	$ 2,068	$ 3,922
Book Values
Fair Value And Carrying Value By Balance Sheet Grouping [Line Items]
Investments	22	21
Short-term debt	817	1,775
Current maturities of long-term debt and lease obligations	472	810
Long-term debt and lease obligations	2,068	3,922
Approximate fair values
Fair Value And Carrying Value By Balance Sheet Grouping [Line Items]
Investments	22	21
Short-term debt	817	1,775
Current maturities of long-term debt and lease obligations	475	818
Long-term debt and lease obligations	$ 2,232	$ 4,077

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Summarization of Bases Used to Measure Fair Value of Financial Instruments (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Current maturities of long-term debt and lease obligations	$ 472	$ 810
Long-term debt and lease obligations	2,068	3,922
Approximate fair values
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Investments	22	21
Total assets	22	21
Short-term debt	817	1,775
Current maturities of long-term debt and lease obligations	475	818
Long-term debt and lease obligations	2,232	4,077
Total liabilities	3,524	6,670
Fair Value, Inputs, Level 2 | Approximate fair values
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Investments	2	2
Total assets	2	2
Short-term debt	817	1,775
Current maturities of long-term debt and lease obligations	475	818
Long-term debt and lease obligations	2,232	4,077
Total liabilities	3,524	6,670
Fair Value, Inputs, Level 3 | Approximate fair values
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Investments	20	19
Total assets	$ 20	$ 19

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Stock Compensation - Additional Information (Detail) - USD ($) shares in Millions, $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock compensation expense	$ 23	$ 29
Stock Options granted	6.4
Marketing and Administrative Expenses
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock compensation expense allocation percentage	70.00%	70.00%
Restricted Stock Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Awards Granted	1.0
Unrecognized compensation cost related to all unvested	$ 94
Weighted-average period for all unvested	2 years
Performance Shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Awards Granted	0.3
Unrecognized compensation cost related to all unvested	$ 20
Weighted-average period for all unvested	2 years 1 month 6 days
Employee Stock Option
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total intrinsic value of stock options exercised	$ 55	$ 14
Unrecognized compensation cost related to all unvested	$ 87
Weighted-average period for all unvested	2 years 1 month 6 days

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Stock Options Fair Value Assumptions (Detail) - Employee Stock Option - $ / shares	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected volatility	20.00%	20.00%
Expected life (in years)	5 years 6 months	5 years 6 months
Risk-free interest rate	1.40%	1.70%
Dividend yield	1.20%	3.00%
Fair value per stock option	$ 7	$ 9

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Net Periodic Benefit Cost - Continuing Operations (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Pension Benefits, Defined Benefit
Net periodic benefit cost
Service cost	$ 23	$ 23
Interest cost	46	49
Expected return on plan assets	(75)	(61)
Amortization of net losses and other deferred amounts	37	43
Net periodic OPEB cost	31	54
Other Postretirement Benefit Plans, Defined Benefit
Net periodic benefit cost
Service cost	1	1
Interest cost	2	6
Amortization of net loss and prior service credit	(4)	(1)
Net periodic OPEB cost	$ (1)	$ 6

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Summary of Changes in AOCI by Component (Detail) - USD ($) $ in Millions		3 Months Ended
		Mar. 31, 2016	Mar. 31, 2015
Accumulated Other Comprehensive Income (Loss) [Line Items]
Currency translation adjustment, Beginning Balance		$ (3,191)	$ (2,323)
Currency translation adjustment, other comprehensive income (loss) before reclassifications		92	(1,138)
Currency translation adjustment, amounts reclassified from AOCI	[1]	0	0
Currency translation adjustment, net other comprehensive (loss) income		92	(1,138)
Currency translation adjustment, Ending Balance		(3,099)	(3,461)
Pension and other employee benefit, Beginning Balance		(1,064)	(1,427)
Pension and other employee benefit, Other comprehensive income (loss) before reclassifications		(1)	33
Pension and other employee benefit, Amounts reclassified from AOCI	[1],[2]	22	35
Pension and other employee benefit, Net other comprehensive (loss) income		21	68
Pension and other employee benefit, Ending Balance		(1,043)	(1,359)
Hedging activities, Beginning Balance		7	34
Hedging activities, Other comprehensive income (loss) before reclassifications		(3)	6
Hedging activities, Amounts reclassified from AOCI	[1],[2]	(3)	(16)
Hedging activities, Net other comprehensive income (loss)		(6)	(10)
Hedging activities, Ending Balance		1	24
Available-for-sale securities, Beginning Balance		4,472	66
Available-for-sale securities, Other comprehensive income (loss) before reclassifications		22	14
Available-for-sale securities, Amounts reclassified from AOCI	[1],[2]	(3,388)	7
Available-for-sale securities, Net other comprehensive (loss) income		(3,366)	21
Available-for-sale securities, Ending Balance		1,106	87
Total, Beginning Balance		224	(3,650)
Total, Other comprehensive income (loss) before reclassifications		110	(1,085)
Total, Amounts reclassified from AOCI	[1],[2]	(3,369)	26
Total other comprehensive income (loss), net of tax		(3,259)	(1,059)
Total, Ending Balance		$ (3,035)	$ (4,709)

[1] See table below for details about these reclassifications.

[2] Amounts in parentheses indicate reductions to net income.

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Summary of Amounts Reclassification from AOCI to Net Income (Detail) - USD ($) $ in Millions		3 Months Ended
		Mar. 31, 2016	Mar. 31, 2015
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Amortization of pension and other employee benefits items Actuarial losses and other reclassified from AOCI to net income, before tax	[1]	$ (33)	$ (50)
Amortization of pension and other employee benefits items Actuarial losses and other reclassified from AOCI to net income, tax benefit	[1]	11	15
Amortization of pension and other employee benefits items Actuarial losses and other reclassified from AOCI to net income, net of tax	[1],[2]	(22)	(35)
Gains on hedging activities reclassified from AOCI to net income, before tax	[1]	5	25
Gains on hedging activities reclassified from AOCI to net income, tax expense	[1]	(2)	(9)
Gains on hedging activities reclassified from AOCI to net income, net of tax	[1],[2]	3	16
Gains on available for sale securities reclassified from AOCI to net income, before tax	[1]	3,388	(9)
Gains on available for sale securities reclassified from AOCI to net income, tax benefit	[1]		2
Available-for-sale securities reclassified from AOCI to net income, net of tax	[1],[2]	3,388	(7)
Total reclassification for the period	[1],[2]	3,369	(26)
Other income, net | Equity securities
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Gains on sale securities sale reclassified from AOCI to net income, before tax	[1]	3,388
Gains on sale securities Other-than-temporary impairment of reclassified from AOCI to net income, before tax	[1]		(9)
Interest rate contract | Net Interest Expense
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Gains on hedging activities reclassified from AOCI to net income, before tax	[1]	4
Foreign exchange contract | Cost of Sales
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Gains on hedging activities reclassified from AOCI to net income, before tax	[1]	1	25
Actuarial losses and other
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Amortization of pension and other employee benefits items Actuarial losses and other reclassified from AOCI to net income, before tax	[1],[3]	$ (33)	$ (50)

[1] Amounts in parentheses indicate reductions to net income.

[2] See table below for details about these reclassifications.

[3] These AOCI components are included in the computation of net periodic benefit cost disclosed in Note 10.

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Income Taxes - Additional Information (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Income Taxes [Line Items]
Effective income tax rate	(1.70%)	9.50%
Effective income tax rate excluding discrete items	22.00%
Decrease in gross unrecognized tax benefits	$ 85
Baxalta Inc
Income Taxes [Line Items]
Decrease in gross unrecognized tax benefits	34
Internal Revenue Service (IRS)
Income Taxes [Line Items]
Payment made for partially settlement on US Federal income tax audit for the period 2008-2013	$ 303
Internal Revenue Service (IRS) | Earliest Tax Year
Income Taxes [Line Items]
Income tax period under audit	2008
Internal Revenue Service (IRS) | Latest Tax Year
Income Taxes [Line Items]
Income tax period under audit	2013
Federal Ministry of Finance, Germany | Earliest Tax Year
Income Taxes [Line Items]
Income tax period under audit	2008
Federal Ministry of Finance, Germany | Latest Tax Year
Income Taxes [Line Items]
Income tax period under audit	2011

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Legal Proceedings - Additional Information (Detail) $ in Millions	Mar. 31, 2016 USD ($)
Loss Contingencies [Line Items]
Litigation reserve	$ 34
Litigation related receivables	$ 10

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Segment Information - Additional Information (Detail)	3 Months Ended
	Mar. 31, 2016 Segment
Segment Reporting Information [Line Items]
Number of segments	2

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Segment Information (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Segment Reporting Information [Line Items]
Net sales	$ 2,375	$ 2,403
Segment EBITDA	631	572
Renal
Segment Reporting Information [Line Items]
Net sales	898	913
Segment EBITDA	122	85
Hospital Products
Segment Reporting Information [Line Items]
Net sales	1,477	1,490
Segment EBITDA	$ 509	$ 487

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Segment Information Related to Total Assets (Detail) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	$ 17,350	$ 20,962
Operating Segments | Renal
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	4,719	4,609
Operating Segments | Hospital Products
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	6,787	6,632
Corporate, Non-Segment
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	$ 5,844	$ 9,721

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EBITDA to Income from Continuing Operations Reconciliation (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Total segment EBITDA	$ 631	$ 572
Reconciling items
Depreciation and amortization	(189)	(187)
Stock compensation	(23)	(29)
Net interest expense	(28)	(30)
Business optimization items	(5)
Certain foreign currency fluctuations and hedging activities	22	108
Net realized gains on Retained Shares transactions	3,239
Net loss on debt extinguishment	(101)
Other Corporate items	(217)	(286)
Income from continuing operations before income taxes	$ 3,329	$ 148