Baxter International Annual Report 2014

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K(Mark One) þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2014OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 ofIncorporation or Organization) (I.R.S. Employer Identification No.)One Baxter Parkway, Deerfield, Illinois 60015(Address of Principal Executive Offices) (Zip Code)Registrant’s telephone number, including area code 224.948.2000Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which RegisteredCommon stock, $1.00 par value New York Stock ExchangeChicago Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes þ No ¨Indicate by check mark whether registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to besubmitted 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 tosubmit and post such files) Yes þ No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ¨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 thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer þ Accelerated filer ¨Non-accelerated filer ¨ Smaller reporting company ¨(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þThe aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2014 (the last business day of the registrant’smost recently completed second fiscal quarter), based on the per share closing sale price of $72.30 on that date and the assumption for the purpose of thiscomputation only that all of the registrant’s directors and executive officers are affiliates, was approximately $39 billion. There is no non-voting commonequity held by non-affiliates of the registrant. The number of shares of the registrant’s common stock, $1.00 par value, outstanding as of January 31, 2015 was542,581,466.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive 2015 proxy statement for use in connection with its Annual Meeting of Shareholders to be held on May 5, 2015 areincorporated by reference into Part III of this report. Table of ContentsTABLE OF CONTENTS PageNumber Item 1. Business 1 Item 1A. Risk Factors 6 Item 1B. Unresolved Staff Comments 14 Item 2. Properties 14 Item 3. Legal Proceedings 16 Item 4. Mine Safety Disclosures 16 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17 Item 6. Selected Financial Data 19 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 49 Item 8. Financial Statements and Supplementary Data 50 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 108 Item 9A. Controls and Procedures 108 Item 9B. Other Information 108 Item 10. Directors, Executive Officers and Corporate Governance 109 Item 11. Executive Compensation 109 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 109 Item 13. Certain Relationships and Related Transactions, and Director Independence 109 Item 14. Principal Accountant Fees and Services 109 Item 15. Exhibits and Financial Statement Schedules 110 Table of ContentsPART IItem 1. Business.Company OverviewBaxter International Inc., through its subsidiaries, develops, manufactures and markets products that save and sustain the lives of people with hemophilia,immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. As a global, diversified healthcare company,Baxter applies a unique combination of expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient careworldwide. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices, clinical and medical researchlaboratories, and by patients at home under physician supervision. Baxter manufactures products in 29 countries and sells them in more than 100 countries.Baxter International Inc. was incorporated under Delaware law in 1931. As used in this report, “Baxter International” means Baxter International Inc. and“Baxter,” the “company” or the “Company” means Baxter International and its consolidated subsidiaries.Business Segments and ProductsThe company operates in two segments: BioScience and Medical Products.The BioScience business processes recombinant and plasma-based proteins to treat hemophilia and other bleeding disorders; plasma-based therapies to treatimmune deficiencies, alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions; and biosurgery products.Additionally, the BioScience business is investing in new disease areas, including oncology, as well as emerging technology platforms, including genetherapy and biosimilars.The Medical Products business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filledvials and syringes for injectable drugs, IV nutrition products, infusion pumps, and inhalation anesthetics. The business also provides products and servicesrelated to pharmacy compounding, drug formulation and packaging technologies. In addition, the Medical Products business provides products and servicesto treat end-stage renal disease, or irreversible kidney failures, along with other renal therapies, which business was enhanced through the 2013 acquisition ofGambro AB (Gambro). The Medical Products business now 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 (HHD), continuous renal replacement therapy(CRRT) and additional dialysis services.For financial information about Baxter’s segments and principal product categories, see Note 17 in Item 8 of this Annual Report on Form 10-K.Sales and DistributionThe company has its own direct sales force and also makes sales to and through independent distributors, drug wholesalers acting as sales agents andspecialty pharmacy or other alternate site providers. In the United States, third parties such as Cardinal Health, Inc. warehouse and ship a significant portionof the company’s products through their distribution centers. These centers are generally stocked with adequate inventories to facilitate prompt customerservice. Sales and distribution methods include frequent contact by sales and customer service representatives, automated communications via variouselectronic purchasing systems, circulation of catalogs and merchandising bulletins, direct-mail campaigns, trade publication presence and advertising.International sales are made and products are distributed on a direct basis or through independent distributors or sales agents in more than 100 countries. 1Table of ContentsInternational OperationsThe majority of the company’s revenues are generated outside of the United States and geographic expansion remains a core component of the company’sstrategy. Baxter’s international presence includes operations in Europe (including Eastern and Central Europe), the Middle East, Africa, Asia-Pacific, LatinAmerica and Canada. The company is subject to certain risks inherent in conducting business outside the United States. For more information on these risks,see the information under the captions “We are subject to risks associated with doing business globally” and “Changes in foreign currency exchange ratesand interest rates could have a material adverse effect on our operating results and liquidity” in Item 1A of this Annual Report on Form 10-K.For financial information about foreign and domestic operations and geographic information, see Note 17 in Item 8 of this Annual Report on Form 10-K. Formore information regarding foreign currency exchange risk, refer to the discussion under the caption entitled “Financial Instrument Market Risk” in Item 7 ofthis Annual Report on Form 10-K.Contractual ArrangementsSubstantial portions of the company’s products are sold through contracts with customers, both within and outside the United States. Some of these contractshave terms of more than one year and place limits on the company’s ability to increase prices. In the case of hospitals, governments and other facilities, thesecontracts may specify minimum quantities of a particular product or categories of products to be purchased by the customer.In keeping with the increased emphasis on cost-effectiveness in healthcare delivery, many hospitals and other customers of medical products in the UnitedStates have joined group purchasing organizations (GPOs), or formed integrated delivery networks (IDNs), to enhance purchasing power. GPOs and IDNsnegotiate pricing arrangements with manufacturers and distributors, and the negotiated prices are made available to members. Baxter has purchasingagreements with several of the major GPOs in the United States. GPOs may have agreements with more than one supplier for certain products. Accordingly, inthese cases, Baxter faces competition from other suppliers even where a customer is a member of a GPO under contract with Baxter. Purchasing power issimilarly consolidated in many other countries. For example, public contracting authorities act as the purchasing entities for the hospitals and othercustomers of medical products in their region and many hospitals and other customers have joined joint procurement entities and buying consortia. Theresult is that demand for healthcare products is increasingly concentrated across the company’s markets globally.Raw MaterialsRaw materials essential to Baxter’s business are purchased from numerous suppliers worldwide in the ordinary course of business. Although most of thesematerials are generally available, Baxter at times may experience shortages of supply. In an effort to manage risk associated with raw materials supply, Baxterworks closely with its suppliers to help ensure availability and continuity of supply while maintaining high quality and reliability. The company also seeksto develop new and alternative sources of supply where beneficial to its overall raw materials procurement strategy. In order to produce plasma-basedtherapies, the company also collects plasma at numerous collection facilities in the United States and Europe. For more information on plasma collection,refer to the discussion under the caption “The nature of producing plasma-based therapies may prevent us from timely responding to market forces andeffectively managing our production capacity” in Item 1A of this Annual Report on Form 10-K.The company also utilizes long-term supply contracts with some suppliers to help maintain continuity of supply and manage the risk of price increases.Baxter is not always able to recover cost increases for raw materials through customer pricing due to contractual limits and market forces. 2Table of ContentsCompetition and Healthcare Cost ContainmentBaxter’s BioScience and Medical Products businesses enjoy leading positions based on a number of competitive advantages. The BioScience businessbenefits from continued innovation in its products and therapies, consistency of its supply of products, and strong customer relationships. The MedicalProducts business benefits from the breadth and depth of its product offering, as well as strong relationships with customers, including hospitals and clinics,group purchasing organizations, pharmaceutical and biotechnology companies, and patients, many who self-administer the home-based therapies suppliedby Baxter. Baxter as a whole benefits from efficiencies and cost advantages resulting from shared manufacturing facilities and the technological advantagesof its products.Although no single company competes with Baxter in all of its businesses, Baxter faces substantial competition in each of its segments from internationaland domestic healthcare and pharmaceutical companies of all sizes. BioScience continues to face competitors from pharmaceutical, biotechnology and othercompanies. Medical Products faces competition from medical device manufacturers and pharmaceutical companies. In addition, global and regionalcompetitors continue to expand their manufacturing capacity and sales and marketing channels. Competition is primarily focused on cost-effectiveness,price, service, product performance, and technological innovation. There has been increasing consolidation in the company’s customer base and by itscompetitors, which continues to result in pricing and market pressures.Global efforts toward healthcare cost containment continue to exert pressure on product pricing. Governments around the world use various mechanisms tocontrol healthcare expenditures, such as price controls, the formation of public contracting authorities, product formularies (lists of recommended orapproved products), and competitive tenders which require the submission of a bid to sell products. Sales of Baxter’s products are dependent, in part, on theavailability of reimbursement by government agencies and healthcare programs, as well as insurance companies and other private payors. In the UnitedStates, the federal and many state governments have adopted or proposed initiatives relating to Medicaid and other health programs that may limitreimbursement or increase rebates that Baxter and other providers are required to pay to the state. In addition to government regulation, managed careorganizations in the United States, which include medical insurance companies, medical plan administrators, health-maintenance organizations, hospital andphysician alliances and pharmacy benefit managers, continue to put pressure on the price and usage of healthcare products. Managed care organizations seekto contain healthcare expenditures, and their purchasing strength has been increasing due to their consolidation into fewer, larger organizations and agrowing number of enrolled patients. Baxter faces similar issues outside of the United States. In Europe and Latin America, for example, the governmentprovides healthcare at low cost to patients, and controls its expenditures by purchasing products through public tenders, collective purchasing, regulatingprices, setting reference prices in public tenders or limiting reimbursement or patient access to certain products.Intellectual PropertyPatents and other proprietary rights are essential to Baxter’s business. Baxter relies on patents, trademarks, copyrights, trade secrets, know-how andconfidentiality agreements to develop, maintain and strengthen its competitive position. Baxter owns a number of patents and trademarks throughout theworld and has entered into license arrangements relating to various third-party patents and technologies. Products manufactured by Baxter are sold primarilyunder its own trademarks and trade names. Some products distributed by the company are sold under the company’s trade names, while others are sold undertrade names owned by its suppliers or partners. Trade secret protection of unpatented confidential and proprietary information is also important to Baxter.The company maintains certain details about its processes, products and technology as trade secrets and generally requires employees, consultants, parties tocollaboration agreements and other business partners to enter into confidentiality agreements. These agreements may be breached and Baxter may not haveadequate remedies for any breach. In addition, Baxter’s trade secrets may otherwise become known or be independently discovered by 3Table of Contentscompetitors. To the extent that Baxter’s employees, consultants, parties to collaboration agreements and other business partners use intellectual propertyowned by others in their work for the company, disputes may arise as to the rights in related or resulting know-how and inventions.Baxter’s policy is to protect its products and technology through patents and trademarks on a worldwide basis. This protection is sought in a manner thatbalances the cost of such protection against obtaining the greatest value for the company. Baxter also recognizes the need to promote the enforcement of itspatents and trademarks and takes commercially reasonable steps to enforce its patents and trademarks around the world against potential infringers, includingjudicial or administrative action where appropriate.Baxter operates in an industry susceptible to significant patent litigation. At any given time, the company is involved as either a plaintiff or defendant in anumber of patent infringement and other intellectual property-related actions. Such litigation can result in significant royalty or other payments or result ininjunctions that can prevent the sale of products. For more information on patent and other litigation, see Note 16 in Item 8 of this Annual Report onForm 10-K.Research and DevelopmentBaxter’s investment in research and development (R&D) is essential to its future growth and its ability to remain competitive in each of its business segments.Accordingly, Baxter continues to focus its investment on R&D programs to enhance future growth through clinical differentiation. Expenditures for Baxter’sR&D activities were $1.4 billion in 2014, $1.2 billion in 2013 and $1.1 billion in 2012. These expenditures include costs associated with R&D activitiesperformed at the company’s R&D centers located around the world, which include facilities in Austria, Belgium, Sweden, Italy, Germany, China, Japan andthe United States, as well as in-licensing, milestone and reimbursement payments made to partners for R&D work performed at non-Baxter locations. Includedin Baxter’s R&D activities in 2014 were upfront and milestone payments of $217 million related to collaboration arrangements and $83 million related tobusiness optimization charges.The company’s research efforts emphasize self-manufactured product development, and portions of that research relate to multiple product categories. Baxtersupplements its own R&D efforts by acquiring various technologies and entering into development and other collaboration agreements with third parties. InJuly 2011, Baxter established Baxter Ventures, a strategic initiative to invest in early-stage companies developing products and therapies to accelerateinnovation and growth for the company. Through December 31, 2014, Baxter Ventures’ portfolio has included investments in such therapeutic areas asimmunology, hematology and renal. In addition, Baxter’s BioScience business has been actively engaged in investigating new potential biosimilar andoncology treatments, primarily through business collaborations.For more information on the company’s R&D activities, refer to the discussion under the caption entitled “Strategic Objectives” in Item 7 of this AnnualReport on Form 10-K.Quality ManagementBaxter’s success depends upon the quality of its products. Quality management plays an essential role in determining and meeting customer requirements,preventing defects, facilitating continuous improvement of the company’s processes, products and services, and assuring the safety and efficacy of thecompany’s products. Baxter has one quality system deployed globally that enables the design, development, manufacturing, packaging, sterilization,handling, distribution and labeling of the company’s products to ensure they conform to customer requirements. In order to continually improve theeffectiveness and efficiency of the quality system, various measurements, monitoring and analysis methods such as management reviews and internal,external and vendor audits are employed at local and central levels. 4Table of ContentsEach product that Baxter markets is required to meet specific quality standards, both in packaging and in product integrity and quality. If either of those isdetermined to be compromised at any time, Baxter takes corrective and preventive actions designed to ensure compliance with regulatory requirements andto meet customer expectations. For more information on corrective actions taken by Baxter, refer to the discussion under the caption entitled “CertainRegulatory Matters” in Item 7 of this Annual Report on Form 10-K.Government RegulationThe operations of Baxter and many of the products manufactured or sold by the company are subject to extensive regulation by numerous governmentagencies, both within and outside the United States. The Food and Drug Administration (FDA) in the United States, the European Medicines Agency (EMA)in Europe, the China Food and Drug Administration (CFDA) in China and other government agencies inside and outside of the United States, administerrequirements covering the testing, safety, effectiveness, manufacturing, labeling, promotion and advertising, distribution and post-market surveillance ofBaxter’s products. The company must obtain specific approval from FDA and non-U.S. regulatory authorities before it can market and sell most of itsproducts in a particular country. Even after the company obtains regulatory approval to market a product, the product and the company’s manufacturingprocesses and quality systems are subject to continued review by FDA and other regulatory authorities globally. State agencies in the United States alsoregulate the facilities, operations, employees, products and services of the company within their respective states. The company and its facilities are subjectto periodic inspections and possible administrative and legal actions by FDA and other regulatory agencies inside and outside the United States. Suchactions may include warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil orcriminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses. Assituations require, the company takes steps to ensure safety and efficacy of its products, such as removing products found not to meet applicable requirementsfrom the market and improving the effectiveness of quality systems. For more information on compliance actions taken by the company, refer to thediscussion under the caption entitled “Certain Regulatory Matters” in Item 7 of this Annual Report on Form 10-K.The company is also subject to various laws inside and outside the United States concerning our relationships with healthcare professionals and governmentofficials, price reporting and regulation, the promotion, sales and marketing of our products and services, the importation and exportation of our products, theoperation of our facilities and distribution of our products. In the United States, the company is subject to the oversight of FDA, Office of the InspectorGeneral within the Department of Health and Human Services (OIG), the Center for Medicare/Medicaid Services (CMS), the Department of Justice (DOJ),Environmental Protection Agency, Department of Defense and Customs and Border Protection in addition to others. The company supplies products andservices to healthcare providers that are reimbursed by federally funded programs such as Medicare. As a result, the company’s activities are subject toregulation by CMS and enforcement by OIG and DOJ. In each jurisdiction outside the United States, the company’s activities are subject to regulation bygovernment agencies including the EMA in Europe, CFDA in China and other agencies in other jurisdictions. Many of the agencies enforcing these lawshave increased their enforcement activities with respect to healthcare companies in recent years. These actions appear to be part of a general trend towardincreased enforcement activity globally.Environmental policies of the company require compliance with all applicable environmental regulations and contemplate, among other things, appropriatecapital expenditures for environmental protection.EmployeesAs of December 31, 2014, Baxter employed approximately 66,000 people. 5Table of ContentsAvailable InformationBaxter makes available free of charge on its website at www.baxter.com its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reportson Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended(Exchange Act), as soon as reasonably practicable after electronically filing or furnishing such material to the Securities and Exchange Commission. Inaddition, Baxter’s Corporate Governance Guidelines, Code of Conduct, and the charters for the committees of Baxter’s Board of Directors are available onBaxter’s website at www.baxter.com under “Corporate Governance.” All the foregoing materials will be made available to shareholders in print upon requestby writing to: Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015. Information contained on Baxter’s website shallnot be deemed incorporated into, or to be a part of, this Annual Report on Form 10-K. Item 1A.Risk Factors.In addition to the other information in this Annual Report on Form 10-K, shareholders or prospective investors should carefully consider the following riskfactors. If any of the events described below occurs, our business, financial condition and results of operations and future growth prospects could suffer.If we are unable to successfully introduce new products or fail to keep pace with advances in technology, our business, financial condition and results ofoperations could be adversely affected.We need to successfully introduce new products to achieve our strategic business objectives. Product development requires substantial investment and thereis inherent risk in the research and development process. A successful product development process depends on many factors, including our ability toproperly anticipate and satisfy customer needs, adapt to new technologies, obtain regulatory approvals on a timely basis, demonstrate satisfactory clinicalresults, manufacture products in an economical and timely manner and differentiate our products from those of our competitors. If we cannot successfullyintroduce new products or adapt to changing technologies, our products may become obsolete and our revenue and profitability could suffer.Issues with product quality could have an adverse effect upon our business, subject us to regulatory actions and cause a loss of customer confidence in usor our products.Our success depends upon the quality of our products. Quality management plays an essential role in determining and meeting customer requirements,preventing defects, improving the company’s products and services and assuring the safety and efficacy of our products. Our future success depends on ourability to maintain and continuously improve our quality management program. While we have one quality system deployed globally that covers thelifecycle of our products, quality and safety issues may occur with respect to any of our products. A quality or safety issue may result in adverse inspectionreports, warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminalsanctions, costly litigation, refusal of a government to grant approvals and licenses, restrictions on operations or withdrawal of existing approvals andlicenses. An inability to address a quality or safety issue in an effective and timely manner may also cause negative publicity, a loss of customer confidencein us or our current or future products, which may result in the loss of sales and difficulty in successfully launching new products. Additionally, Baxter hasmade and continues to make significant investments in assets, including inventory and property, plant and equipment, which relate to potential new productsor modifications to existing products. Product quality or safety issues may restrict the company from being able to realize the expected returns from theseinvestments, potentially resulting in asset impairments in the future.Unaffiliated third party suppliers provide a number of goods and services to our R&D, clinical and manufacturing organizations. Third party suppliers arerequired to comply with our quality standards. Failure of a third party supplier to provide compliant raw materials or supplies could result in delays, serviceinterruptions or 6Table of Contentsother quality related issues that may negatively impact our business results. In addition, some of the raw materials employed in our production processes arederived from human and animal origins, requiring robust controls to eliminate the potential for introduction of pathogenic agents or other contaminants.For more information on regulatory matters currently affecting us, refer to the discussion under the caption entitled “Certain Regulatory Matters” in Item 7 ofthis Annual Report on Form 10-K.We are subject to a number of existing laws and regulations, non-compliance with which could adversely affect our business, financial condition andresults of operations, and we are susceptible to a changing regulatory environment.As a participant in the healthcare industry, our operations and products, and those of our customers, are regulated by numerous government agencies, bothinside and outside the United States. The impact of this on us is direct to the extent we are subject to these laws and regulations, and indirect in that in anumber of situations, even though we may not be directly regulated by specific healthcare laws and regulations, our products must be capable of being usedby our customers in a manner that complies with those laws and regulations.The manufacture, distribution, marketing and use of our products are subject to extensive regulation and scrutiny by FDA and other regulatory authoritiesglobally. Any new product must undergo lengthy and rigorous testing and other extensive, costly and time-consuming procedures mandated by FDA andforeign regulatory authorities. Changes to current products may be subject to vigorous review, including additional 510(k) and other regulatory submissions,and approvals are not certain. Our facilities must be approved and licensed prior to production and remain subject to inspection from time to time thereafter.Failure to comply with the requirements of FDA or other regulatory authorities, including a failed inspection or a failure in our adverse event reportingsystem, could result in adverse inspection reports, warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture anddistribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existingapprovals and licenses. Any of these actions could cause a loss of customer confidence in us and our products, which could adversely affect our sales. Therequirements of regulatory authorities, including interpretative guidance, are subject to change and compliance with additional or changing requirements orinterpretative guidance may subject the company to further review, result in product launch delays or otherwise increase our costs. For information on currentregulatory issues affecting us, please refer to the caption entitled “Certain Regulatory Matters” in Item 7 of this Annual Report on Form 10-K. In connectionwith these issues, there can be no assurance that additional costs or civil and criminal penalties will not be incurred, that additional regulatory actions withrespect to the company will not occur, that the company will not face civil claims for damages from purchasers or users, that substantial additional charges orsignificant asset impairments may not be required, that sales of other products may not be adversely affected, or that additional regulation will not beintroduced that may adversely affect the company’s operations and consolidated financial statements.The sales, marketing and pricing of products and relationships that pharmaceutical and medical device companies have with healthcare providers are underincreased scrutiny by federal, state and foreign government agencies. Compliance with the Anti-Kickback Statute, False Claims Act, Food, Drug andCosmetic Act (including as these laws relate to off-label promotion of products) and other healthcare related laws, as well as competition, data and patientprivacy and export and import laws, is under increased focus by the agencies charged with overseeing such activities, including FDA, OIG, DOJ and theFederal Trade Commission. The DOJ and the Securities and Exchange Commission have also increased their focus on the enforcement of the U.S. ForeignCorrupt Practices Act (FCPA), particularly as it relates to the conduct of pharmaceutical companies. The FCPA and similar anti-bribery laws generallyprohibit companies and their employees, contractors or agents from making improper payments to government officials for the purpose of obtaining orretaining business. Healthcare professionals in many countries are employed by the government and consequently may be considered government officials.Foreign governments have also increased their scrutiny of pharmaceutical and medical device companies’ sales and marketing activities and relationshipswith healthcare providers and 7Table of Contentscompetitive practices generally. The laws and standards governing the promotion, sale and reimbursement of our products and those governing ourrelationships with healthcare providers and governments, including the Sunshine Act enacted under the Patient Protection and Affordable Care Act, can becomplicated, are subject to frequent change and may be violated unknowingly. We have compliance programs in place, including policies, training andvarious forms of monitoring, designed to address these risks. Nonetheless, these programs and policies may not always protect us from conduct by individualemployees that violate these laws. Violations or allegations of violations of these laws may result in large civil and criminal penalties, debarment fromparticipating in government programs, diversion of management time, attention and resources and may otherwise have an adverse effect on our business,financial condition and results of operations. For more information related to the company’s ongoing government investigations, please refer to Note 16 inItem 8 of this Annual Report on Form 10-K.The laws and regulations discussed above are broad in scope and subject to evolving interpretations, which could require us to incur substantial costassociated with compliance or to alter one or more of our sales and marketing practices and may subject us to enforcement actions which could adverselyaffect our business, financial condition and results of operations.If reimbursement or other payment for our current or future products is reduced or modified in the United States or abroad, including through theimplementation of government-sponsored healthcare reform or other similar actions, cost containment measures, or changes to policies with respect topricing, taxation or rebates, then our business could suffer.Sales of our products depend, in part, on the extent to which the costs of our products are paid by both public and private payors. These payors includeMedicare, Medicaid, and private health care insurers in the United States and foreign governments and third-party payors outside the United States. Publicand private payors are increasingly challenging the prices charged for medical products and services. We may continue to experience continued downwardpricing pressures from any or all of these payors which could result in an adverse effect on our business, financial condition and operational results.Global efforts toward healthcare cost containment continue to exert pressure on product pricing. Governments around the world use various mechanisms tocontrol healthcare expenditures such as price controls, the formation of public contracting authorities, product formularies (lists of recommended or approvedproducts), and competitive tenders which require the submission of a bid to sell products. Sales of our products are dependent, in part, on the availability ofreimbursement by government agencies and healthcare programs, as well as insurance companies and other private payors. In much of Europe, Latin America,Asia and Australia, for example, the government provides healthcare at low cost to patients, and controls its expenditures by purchasing products throughpublic tenders, collective purchasing, regulating prices, setting reference prices in public tenders or limiting reimbursement or patient access to certainproducts. Additionally, austerity measures or other reforms by foreign governments may limit, reduce or eliminate payments for our products and adverselyaffect both pricing flexibility and demand for our products.For example, in the United States the Patient Protection and Affordable Care Act (PPACA), which was signed into law in March 2010, includes severalprovisions which impact our businesses in the United States, including increased Medicaid rebates and an expansion of the 340B Drug Pricing Programwhich provides certain qualified entities, such as hospitals serving disadvantaged populations, with discounts on the purchase of drugs for outpatient use andan excise tax on the sale of certain drugs. We may also experience downward pricing pressure as the PPACA reduces Medicare and Medicaid payments tohospitals and other providers. While it is intended to expand health insurance coverage and increase access to medical care generally, the long-term impact ofthe PPACA on our business and the demand for our products is uncertain.As a result of these and other measures, including future measures or reforms that cannot be predicted, reimbursement may not be available or sufficient toallow us to sell our products on a competitive basis. 8Table of ContentsLegislation and regulations affecting reimbursement for our products may change at any time and in ways that may be adverse to us. We cannot predict theimpact of these pressures and initiatives, or any negative effects of any additional regulations that may affect our business.There is substantial competition in the product markets in which we operate and in the development of alliances with research, academic andgovernmental institutions.Although no single company competes with us in all of our businesses, we face substantial competition in both of our segments from international anddomestic healthcare and pharmaceutical companies of all sizes. Competition is primarily focused on cost-effectiveness, price, service, product performance,and technological innovation.Competition may increase further as additional companies begin to enter our markets or modify their existing products to compete directly with ours. If ourcompetitors respond more quickly to new or emerging technologies and changes in customer requirements, our products may be rendered obsolete or non-competitive. If our competitors develop more effective or affordable products, or achieve earlier patent protection or product commercialization than we do,our operations will likely be negatively affected. If we are forced to reduce our prices due to increased competition, our business could become lessprofitable. The company’s sales could be adversely affected if any of its contracts with GPOs, IDNs or other customers are terminated due to increasedcompetition or otherwise.We also face competition for marketing, distribution and collaborative development agreements, for establishing relationships with academic and researchinstitutions, and for licenses to intellectual property. In addition, academic institutions, government agencies and other public and private researchorganizations may also conduct research, seek patent protection and establish collaborative arrangements for discovery, research, clinical development andmarketing of products similar to ours. These companies and institutions compete with us in recruiting and retaining qualified scientific and managementpersonnel as well as in acquiring technologies complementary to our programs. If we are unable to successfully compete with these companies andinstitutions, our business may suffer.If our business development activities are unsuccessful, our business could suffer and our financial performance could be adversely affected.As part of our long-term strategy, we are engaged in business development activities including evaluating acquisitions, joint development opportunities,technology licensing arrangements and other opportunities. These activities may result in substantial investment of the company’s resources. Our successdeveloping products or expanding into new markets from such activities will depend on a number of factors, including our ability to find suitableopportunities for acquisition, investment or alliance; whether we are able to complete an acquisition, investment or alliance on terms that are satisfactory tous; the strength of the other company’s underlying technology, products and ability to execute its business strategies; any intellectual property and litigationrelated to these products or technology; and our ability to successfully integrate the acquired company, business, product, technology or research into ourexisting operations, including the ability to adequately fund acquired in-process research and development projects and to maintain adequate controls overthe combined operations. Certain of these activities are subject to antitrust and competition laws, which laws could impact our ability to pursue strategictransactions and could result in mandated divestitures in the context of proposed acquisitions. If we are unsuccessful in our business development activities,we may be unable to meet our financial targets and our financial performance could be adversely affected.For more information on recent business development activities, see Note 5 in Item 8 of this Annual Report on Form 10-K. 9Table of ContentsThe nature of producing plasma-based therapies may prevent us from timely responding to market forces and effectively managing our productioncapacity.The production of plasma-based therapies is a lengthy and complex process, and we source our plasma both externally and internally through BioLife PlasmaServices L.P. (BioLife), our wholly-owned subsidiary. Efforts to increase the collection of plasma or the production of plasma-based therapies may includethe construction and regulatory approval of additional plasma collection facilities and plasma fractionation facilities. We are in the process of building astate-of-the-art manufacturing facility near Covington, Georgia to support growth of our plasma-based treatments, with commercial production scheduled tobegin in 2018. The development of such facilities involves a lengthy regulatory process and is highly capital intensive. In addition, access to,transport anduse of plasma may be subject to restrictions by governmental agencies both inside and outside the United States. As a result, our ability to match ourcollection and production of plasma-based therapies to market demand is imprecise and may result in a failure to meet market demand for our plasma-basedtherapies or, alternatively, an oversupply of inventory. Failure to meet market demand for our plasma-based therapies may result in customers transitioning toavailable competitive products resulting in a loss of market share or customer confidence. In the event of an oversupply, we may be forced to lower the priceswe charge for some of our plasma-based therapies, close collection and processing facilities, record asset impairment charges or take other action which mayadversely affect our business, financial condition and results of operations.If we are unable to obtain sufficient components or raw materials on a timely basis or if we experience other manufacturing or supply difficulties, ourbusiness may be adversely affected.The manufacture of our products requires the timely delivery of sufficient amounts of quality components and materials. We manufacture our products inmore than 50 manufacturing facilities around the world. We acquire our components and materials from many suppliers in various countries. We work closelywith our suppliers to ensure the continuity of supply but we cannot guarantee these efforts will always be successful. Further, while efforts are made todiversify our sources of components and materials, in certain instances we acquire components and materials from a sole supplier. For most of ourcomponents and materials for which a sole supplier is used, we believe that alternative sources of supply exist and have made a strategic determination to usea sole supplier. In very limited instances, however, we do rely upon sole supplier relationships for which no alternatives have currently been identified.Although we do carry strategic inventory and maintain insurance to mitigate the potential risk related to any related supply disruption, there can be noassurance that such measures will be effective. Due to the regulatory environment in which we operate, we may be unable to quickly establish additional orreplacement sources for some components or materials. A reduction or interruption in supply, and an inability to develop alternative sources for such supply,could adversely affect our ability to manufacture our products in a timely or cost-effective manner, and our ability to make product sales.Many of our products are difficult to manufacture. This is due to the complex nature of manufacturing pharmaceuticals, including biologics, and devices, aswell as the strict regulatory regime governing our manufacturing operations. Variations in the manufacturing process may result in production failures whichcould lead to launch delays, product shortage, unanticipated costs, lost revenues and damage to our reputation. A failure to identify and addressmanufacturing problems prior to the release of products to our customers may also result in a quality or safety issue of the type discussed above.Several of our products are manufactured at a single manufacturing facility or stored at a single storage site. Loss or damage to a manufacturing facility orstorage site due to a natural disaster or otherwise could adversely affect our ability to manufacture sufficient quantities of key products or otherwise deliverproducts to meet customer demand or contractual requirements which may result in a loss of revenue and other adverse business consequences. Because ofthe time required to approve and license a manufacturing facility a third party manufacturer may not be available on a timely basis to replace productioncapacity in the event we lose manufacturing capacity or products are otherwise unavailable due to natural disaster, regulatory action or otherwise. 10Table of ContentsThe proposed spin-off of Baxter’s biopharmaceutical business may not be completed on the terms or timeline currently contemplated, if at all, and may notachieve the intended results.In March 2014, Baxter announced plans to create two separate, independent global healthcare companies — one focused on developing and marketinginnovative biopharmaceuticals and the other on life-saving medical products — through a tax-free distribution to Baxter shareholders of publicly tradedstock in the new biopharmaceuticals company. The transaction is expected to be completed by mid-year 2015. Unanticipated developments could delay,prevent or otherwise adversely affect this proposed spin-off, including but not limited to disruptions in general market conditions or potential problems ordelays in obtaining various regulatory, tax and works council approvals or clearances. In addition, consummation of the proposed spin-off will require finalapproval from our Board of Directors. Therefore, we cannot assure that we will be able to complete the spin-off on the terms or on the timeline that weannounced, if at all.We will incur significant expenses in connection with the spin-off. In addition, completion of the proposed spin-off will require significant amounts ofmanagement’s time and effort which may divert management’s attention from other aspects of our business operations. Further, if the spin-off is completed, itmay not achieve the intended results. The spin-off will also require modifications to the company’s systems and processes used to operate our business andaccurately maintain the company’s books and records. We may experience delays, increased costs and other difficulties related to these modifications whichcould adversely affect our business operations, results of operations or financial condition.If we are unable to protect our patents or other proprietary rights, or if we infringe the patents or other proprietary rights of others, our competitivenessand business prospects may be materially damaged.Patent and other proprietary rights are essential to our business. Our success depends to a significant degree on our ability to obtain and enforce patents andlicenses to patent rights, both in the United States and in other countries. We cannot guarantee that pending patent applications will result in issued patents,that patents issued or licensed will not be challenged or circumvented by competitors, that our patents will not be found to be invalid or that the intellectualproperty rights of others will not prevent the company from selling certain products or including key features in the company’s products.The patent position of a healthcare company is often uncertain and involves complex legal and factual questions. Significant litigation concerning patentsand products is pervasive in our industry. Patent claims include challenges to the coverage and validity of our patents on products or processes as well asallegations that our products infringe patents held by competitors or other third parties. A loss in any of these types of cases could result in a loss of patentprotection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations. We alsorely on trademarks, copyrights, trade secrets and know-how to develop, maintain and strengthen our competitive positions. Third parties may know, discoveror independently develop equivalent proprietary information or techniques, or they may gain access to our trade secrets or disclose our trade secrets to thepublic.Although our employees, consultants, parties to collaboration agreements and other business partners are generally subject to confidentiality or similaragreements to protect our confidential and proprietary information, these agreements may be breached, and we may not have adequate remedies for anybreach. To the extent that our employees, consultants, parties to collaboration agreements and other business partners use intellectual property owned byothers in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.Furthermore, our intellectual property, other proprietary technology and other sensitive company data is potentially vulnerable to loss, damage ormisappropriation from system malfunction, computer viruses, unauthorized access to our data or misappropriation or misuse thereof by those with permittedaccess and other events. While we have invested to protect our intellectual property and other data, and continue to work 11Table of Contentsdiligently in this area, there can be no assurance that our precautionary measures will prevent breakdowns, breaches, cyber incidents or other events. Suchevents could have a material adverse effect on our reputation, business, financial condition or results of operations.Misappropriation or other loss of our intellectual property from any of the foregoing would have an adverse effect on our competitive position and may causeus to incur substantial litigation costs.We are subject to risks associated with doing business globally.Our operations are subject to risks inherent in conducting business globally and under the laws, regulations and customs of various jurisdictions andgeographies. These risks include changes in exchange controls and other governmental actions, loss of business in government and public tenders that areheld annually in many cases, increasingly complex labor environments, availability of raw materials, changes in taxation, export control restrictions, changesin or violations of U.S. or local laws, including the FCPA and the United Kingdom Bribery Act, dependence on a few government entities as customers,pricing restrictions, economic and political instability (including instability as it relates to the Euro and currencies in certain emerging market countries),disputes between countries, diminished or insufficient protection of intellectual property, and disruption or destruction of operations in a significantgeographic region regardless of cause, including war, terrorism, riot, civil insurrection or social unrest. Failure to comply with, or material changes to, thelaws and regulations that affect our global operations could have an adverse effect on our business, financial condition or results of operations.Changes in foreign currency exchange rates and interest rates could have a material adverse effect on our operating results and liquidity.We generate the majority of our revenue outside the United States. As a result, our financial results may be adversely affected by fluctuations in foreigncurrency exchange rates. We cannot predict with any certainty changes in foreign currency exchange rates or our ability to mitigate these risks. We mayexperience additional volatility as a result of inflationary pressures and other macroeconomic factors in certain emerging market countries. We are alsoexposed to changes in interest rates, and our ability to access the money markets and capital markets could be impeded if adverse liquidity market conditionsoccur. A discussion of the financial impact of foreign exchange rate and interest rate fluctuations, and the ways and extent to which we attempt to mitigatesuch impact is contained under the caption “Financial Instrument Market Risk” in Item 7 of this Annual Report on Form 10-K.Changes in tax laws or exposure to additional income tax liabilities may have a negative impact on our operating results.Tax policy reform continues to be a topic of discussion in the United States. A significant change to the tax system in the United States, including changes tothe taxation of international income, could have an adverse effect upon our results of operations. Because we operate in multiple income tax jurisdictionsboth inside and outside the United States, we are subject to tax audits in various jurisdictions. Tax authorities may disagree with certain positions we havetaken and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision.However, we may not accurately predict the outcome of these audits, and as a result the actual outcome of these audits may have an adverse impact on ourfinancial results. For more information on ongoing audits, see Note 15 in Item 8 of this Annual Report on Form 10-K.We are increasingly dependent on information technology systems, and our systems and infrastructure face certain risks, including from cyber securitybreaches and data leakage.We increasingly rely upon technology systems and infrastructure. Our technology systems are potentially vulnerable to breakdown or other interruption byfire, power loss, system malfunction, unauthorized access and 12Table of Contentsother events. Likewise, data privacy breaches by employees and others with both permitted and unauthorized access to our systems may pose a risk thatsensitive data may be exposed to unauthorized persons or to the public, or may be permanently lost. The increasing use and evolution of technology,including cloud-based computing, creates additional opportunities for the unintentional dissemination of information, intentional destruction of confidentialinformation stored in our systems or in non-encrypted portable media or storage devices. We could also experience a business interruption, information theftof confidential information, or reputational damage from industrial espionage attacks, malware or other cyber incidents, which may compromise our systeminfrastructure or lead to data leakage, either internally or at our third-party providers or other business partners. While we have invested heavily in theprotection of data and information technology and in related training, there can be no assurance that our efforts will prevent significant breakdowns, breachesin our systems or other cyber incidents that could have a material adverse effect upon our reputation, business, operations or financial condition. In addition,significant implementation issues may arise as we continue to consolidate and outsource certain computer operations and application support activities.If we fail to attract and retain key employees our business may suffer.Our ability to compete effectively depends on our ability to attract and retain key employees, including people in senior management, sales, marketing andresearch positions. Competition for top talent in healthcare can be intense. Our ability to recruit and retain such talent will depend on a number of factors,including hiring practices of our competitors, compensation and benefits, work location, work environment and industry economic conditions. If we cannoteffectively recruit and retain qualified employees, our business could suffer.We are subject to a number of pending lawsuits.We are a defendant in a number of pending lawsuits. In addition, we may be named as a defendant in future patent, product liability or other lawsuits. Thesecurrent and future matters may result in a loss of patent protection, reduced revenue, significant liabilities and diversion of our management’s time, attentionand resources. Given the uncertain nature of litigation generally, we are not able in all cases to estimate the amount or range of loss that could result from anunfavorable outcome in these current matters. In view of these uncertainties, the outcome of these matters may result in charges in excess of any establishedreserves, and, to the extent available, liability insurance. We also continue to be self-insured with respect to product liability claims. The absence of third-party insurance coverage for current or future claims increases our potential exposure to unanticipated claims and adverse decisions. Protracted litigation,including any adverse outcomes, may have an adverse impact on the business, operations or financial condition of the company. Even claims without meritcould subject us to adverse publicity and require us to incur significant legal fees. See Note 16 in Item 8 of this Annual Report on Form 10-K for moreinformation regarding current lawsuits.Current or worsening economic conditions may adversely affect our business and financial condition.The company’s ability to generate cash flows from operations could be affected if there is a material decline in the demand for the company’s products, in thesolvency of its customers or suppliers, or deterioration in the company’s key financial ratios or credit ratings. Current or worsening economic conditions mayadversely affect the ability of our customers (including governments) to pay for our products and services, and the amount spent on healthcare generally. Thiscould result in a decrease in the demand for our products and services, declining cash flows, longer sales cycles, slower adoption of new technologies andincreased price competition. These conditions may also adversely affect certain of our suppliers, which could cause a disruption in our ability to produce ourproducts. We continue to do business with foreign governments in certain countries, including Greece, Spain, Portugal and Italy, that have experienced adeterioration in credit and economic conditions. As of December 31, 2014, the company’s net accounts receivable from the public sector in Greece, Spain,Portugal and Italy totaled $363 million. While global economic conditions have not significantly impacted the company’s ability to collect receivables,liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. These conditionsmay also impact the stability of the 13Table of ContentsEuro. For more information on accounts receivable and credit matters with respect to certain of these countries, refer to the discussion under the captionentitled “Credit Facilities, Access to Capital and Credit Ratings” in Item 7 of this Annual Report on Form 10-K. Item 1B.Unresolved Staff Comments.None. Item 2.Properties.The company’s corporate offices are owned and located at One Baxter Parkway, Deerfield, Illinois 60015.Baxter owns or has long-term leases on all of its manufacturing facilities. The company maintains 17 manufacturing facilities in the United States and itsterritories, including three in Puerto Rico. The company also manufactures in Australia, Austria, Belgium, Brazil, Canada, China, Colombia, Costa Rica, theCzech Republic, Dominican Republic, France, Germany, India, Ireland, Italy, Japan, Malta, Mexico, the Philippines, Poland, Saudi Arabia, Singapore, Spain,Sweden, Switzerland, Tunisia, Turkey and the United Kingdom. The company’s principal manufacturing facilities by segment are listed below: Business Location Owned/LeasedBioScience Orth, Austria Owned Vienna, Austria Owned Lessines, Belgium Owned Bohumil, Czech Republic Owned(5) Pisa, Italy Owned Rieti, Italy Owned Woodlands, Singapore Owned/Leased(3) Neuchatel, Switzerland Owned Elstree, United Kingdom Leased Hayward, California Leased Los Angeles, California Owned Thousand Oaks, California Owned St. Paul, Minnesota Leased Milford, Massachusetts LeasedMedical Products Toongabbie, Australia Owned Lessines, Belgium Owned Sao Paulo, Brazil Owned Alliston, Canada Owned Guangzhou, China Owned Suzhou, China Owned Shanghai, China Owned(1) Cali, Colombia Owned Cartago, Costa Rica Owned Prerov, Czech Republic Leased Haina, Dominican Republic Leased Meyzieu, France Owned Hechingen, Germany Leased Joka, Germany Owned Rostock, Germany Leased 14Table of ContentsBusiness Location Owned/LeasedMedical Products Halle, Germany Owned Castlebar, Ireland Owned Swinford, Ireland Owned Medolla, Italy Owned Poggio Rusco, Italy Leased(2) Sondalo, Italy Owned Grosotto, Italy Owned Miyazaki, Japaxn Owned Cuernavaca, Mexico Owned PESA, Mexico Owned/Leased Tijuana, Mexico Owned Guayama, Puerto Rico Owned Jayuya, Puerto Rico Leased Aibonito, Puerto Rico Leased Woodlands, Singapore Owned/Leased(3) Sabinanigo, Spain Owned Lund, Sweden Leased San Vittore, Switzerland Owned Liverpool, United Kingdom Owned Thetford, United Kingdom Owned Opelika, Alabama Owned Mountain Home, Arkansas Owned Englewood, Colorado Leased Round Lake, Illinois Owned Bloomington, Indiana Owned/Leased(4) Brooklyn Park, Minnesota Leased Cleveland, Mississippi Leased Medina, New York Leased North Cove, North Carolina Owned (1)There are two plants located in Shanghai, China. (2)This plant is a temporary Baxter Renal Gambro location. (3)Baxter owns the facility at Woodlands, Singapore, and leases the property upon which it rests. This facility is shared between the Medical Products and BioScience businesses. (4)The Bloomington, Indiana location includes both owned and leased facilities. (5)Baxter entered into an agreement for the sale of this facility in December 2014.The company also owns or operates shared distribution facilities throughout the world. In the United States and Puerto Rico, there are 8 shared distributionfacilities with the principal facilities located in Memphis, Tennessee; Catano, Puerto Rico; North Cove, North Carolina; and Round Lake, Illinois.Internationally, we have more than 100 shared distribution facilities located in Argentina, Australia, Austria, Belgium, Brazil, Brunei, Canada, Chile, China,Colombia, Costa Rica, the Czech Republic, Ecuador, France, Germany, Greece, Guatemala, Hong Kong, India, Indonesia, Ireland, Italy, Japan, Korea,Malaysia, Mexico, New Zealand, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, theUnited Arab Emirates, the United Kingdom, Venezuela and Vietnam.The company continually evaluates its plants and production lines and believes that its current facilities plus any planned expansions are generally sufficientto meet its expected needs and expected near-term growth. Expansion projects and facility closings will be undertaken as necessary in response to marketneeds. 15Table of ContentsItem 3.Legal Proceedings.Incorporated by reference to Note 16 in Item 8 of this Annual Report on Form 10-K. Item 4.Mine Safety Disclosures.Not Applicable.Executive Officers of the RegistrantRobert L. Parkinson, Jr., age 64, is Chairman and Chief Executive Officer of Baxter, having served in that capacity since April 2004. Prior to joining Baxter,Mr. Parkinson was Dean of Loyola University Chicago School of Business Administration and Graduate School of Business from 2002 to 2004. He retiredfrom Abbott Laboratories in 2001 following a 25-year career, having served in a variety of domestic and international management and leadership positions,including as President and Chief Operating Officer. Mr. Parkinson also serves on the Board of Directors of Chicago-based Northwestern Medical Group and asChairman of the Loyola University Chicago Board of Trustees.Ludwig N. Hantson, Ph.D., age 52, is Corporate Vice President and President, BioScience, having served in that capacity since October 2010. Dr. Hantsonjoined Baxter in May 2010 as Corporate Vice President and President, International. From 2001 to May 2010, Dr. Hantson held various positions at NovartisPharmaceuticals Corporation, the most recent of which was Chief Executive Officer, Pharma North America. Prior to Novartis, Dr. Hantson spent 13 years withJohnson & Johnson in roles of increasing responsibility in marketing and clinical research and development.Robert J. Hombach, age 49, is Corporate Vice President and Chief Financial Officer, having served in that capacity since July 2010. From February 2007 toMarch 2011, Mr. Hombach served as Treasurer and from December 2004 to February 2007, he was Vice President of Finance, Europe. Prior to that,Mr. Hombach served in a number of finance positions of increasing responsibility in the planning, manufacturing, operations and treasury areas at Baxter.Jeanne K. Mason, Ph.D., age 59, is Corporate Vice President, Human Resources. Prior to joining Baxter in May 2006, Dr. Mason was with General Electricfrom 1988, holding various leadership positions, the most recent of which was with GE Insurance Solutions, a primary insurance and reinsurance business,where she was responsible for global human resource functions.David P. Scharf, age 47, is Corporate Vice President and General Counsel, having served in this capacity since August 2009. Mr. Scharf has also served asCorporate Secretary from September 2013. Mr. Scharf joined Baxter in July 2005 and served in progressive leadership roles within the legal department. Priorto joining Baxter, Mr. Scharf was with Guidant Corporation from 2002, in roles of increasing responsibility.All executive officers hold office until the next annual election of officers and until their respective successors are elected and qualified. 16Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.The following table includes information about the company’s common stock repurchases during the three-month period ended December 31, 2014.Issuer Purchases of Equity Securities Period Total Number ofSharesPurchased(1) Average PricePaid per Share Total Number of SharesPurchased as Part ofPublicly AnnouncedPrograms(1) Approximate DollarValue of Sharesthat may yet bePurchased Under theProgram(1) October 1, 2014 throughOctober 31, 2014 420,000 $69.23 420,000 November 1, 2014 throughNovember 30, 2014 298,800 $70.02 298,800 December 1, 2014 throughDecember 31, 2014 — $ — — Total 718,800 $69.56 718,800 $470,589,813 (1)In July 2012, the company announced that its Board of Directors authorized the company to repurchase up to $2.0 billion of its common stock on theopen market or in private transactions. During the fourth quarter of 2014, the company repurchased 0.7 million shares for $50 million under thisprogram. The remaining authorization under this program totaled approximately $0.5 billion at December 31, 2014. This program does not have anexpiration date.Additional information required by this item is incorporated by reference to Note 18 in Item 8 of this Annual Report on Form 10-K. 17Table of ContentsPerformance GraphThe following graph compares the change in Baxter’s cumulative total shareholder return (including reinvested dividends) on Baxter’s common stock withthe Standard & Poor’s 500 Composite Index and the Standard & Poor’s 500 Health Care Index over the past five years. 18Table of ContentsItem 6.Selected Financial Data. as of or for the years ended December 31 2014 2013 2012 2011 2010 Operating Results Net sales $16,671 14,967 13,936 13,638 12,562 (in millions) Income from continuing operations $1,946 2,012 2,283 2,208 1,420 Income from discontinued operations, net of tax $551 0 43 16 0 Net income $2,497 2,012 2,326 2,224 1,420 Depreciation and amortization $1,002 815 704 662 677 Research and development expenses $1,421 1,165 1,081 890 857 Balance Sheet and Capital expenditures $1,898 1,525 1,161 960 963 Cash Flow Information Total assets $25,917 25,224 20,390 19,073 17,489 (in millions) Long-term debt and lease obligations $7,606 8,126 5,580 4,749 4,363 Common StockInformation Weighted-average number of common shares outstanding Basic 542 543 551 569 590 Diluted 547 549 556 573 594 Income from continuing operations per common share Basic $3.59 3.70 4.14 3.88 2.41 Diluted $3.56 3.66 4.11 3.85 2.39 Income from discontinued operations per common share Basic $1.02 0.00 0.08 0.03 0.00 Diluted $1.00 0.00 0.07 0.03 0.00 Net income per common share Basic $4.61 3.70 4.22 3.91 2.41 Diluted $4.56 3.66 4.18 3.88 2.39 Cash dividends declared per common share $2.050 1.920 1.570 1.265 1.180 Year-end market price per common share $73.29 69.55 66.66 49.48 50.62 Other Information Total shareholder return 8.4% 7.3% 38.3% 0.0% (11.6%) Common shareholders of record at year-end 34,742 36,718 42,067 43,534 43,715 Income from continuing operations included charges totaling $83 million for business optimization, $93 million for SIGMA Spectrum Infusion Pumpproduct remediation efforts, $144 million related to the acquisition and integration of Gambro, $167 million for the planned separation of Baxter’sbiopharmaceutical and medical products businesses, $217 million in upfront and milestone payments associated with the company’s collaborationarrangements, $45 million for an other-than-temporary impairment loss related to Baxter’s holdings in the common stock of one of its collaborationpartners, $124 million related to an increase in the estimated fair value of acquisition-related contingent payment liabilities, and $29 million to accountfor an additional year of the Branded Prescription Drug Fee in accordance with final regulations issued by the Internal Revenue Service. Also includedwere benefits of $64 million for business optimization reserves that are no longer probable of being utilized, $25 million for an adjustment to theCOLLEAGUE infusion pump reserves, and $9 million related to third-party recoveries and reversals of prior tax and legal reserves. Income from continuing operations included charges totaling $200 million for business optimization, $17 million primarily related to remediation effortsassociated with modifications to the SIGMA Spectrum Infusion Pump in conjunction with re-filing for 510(k) clearance, $255 million related to theacquisition and integration of Gambro and losses from the derivative instruments used to hedge the anticipated foreign currency cash outflows, $103million primarily related to upfront and milestone payments associated with the company’s collaboration arrangements, $89 million related to tax andlegal reserves associated with VAT matters in Turkey and existing class-action and other related litigation. Also included was a benefit of $20 million forbusiness optimization reserves that are no longer probable of being utilized. Income from continuing operations included charges totaling $150 million for business optimization, $128 million primarily related to upfront andmilestone payments associated with the company’s collaboration arrangements, and $170 million primarily related to pension settlement charges andother pension-related 191,62,63,64,65,678123Table of Contents items. Also included were benefits of $23 million primarily related to an adjustment to the COLLEAGUE infusion pump reserve when the companysubstantially completed its recall activities in the United States and $91 million for gains related to a decrease in the estimated fair value of acquisition-related contingent payment liabilities. Income from continuing operations included charges totaling $180 million for business optimization, $79 million related to litigation and certainhistorical rebate and discount adjustments, and $103 million primarily related to the write-down of Greek government bonds and a contribution to theBaxter International Foundation. Income from continuing operations included charges totaling $256 million for business optimization, $112 million for an impairment associated with thecompany’s divestiture of its U.S. multi-source generic injectables business, $62 million related to litigation, $39 million to write off a deferred tax asset,$34 million primarily related to an upfront payment associated with one of the company’s collaboration arrangements, $28 million to write downaccounts receivable in Greece, and $588 million related to the recall of COLLEAGUE infusion pumps. The COLLEAGUE charge reduced net sales by$213 million. Refer to the notes to the consolidated financial statements for information regarding other charges and income items. Excludes net income attributable to noncontrolling interests of $32 million and $7 million in 2011 and 2010, respectively. Represents the total of appreciation (decline) in market price plus cash dividends declared on common shares. 2045678Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.The following commentary should be read in conjunction with the consolidated financial statements and accompanying notes.EXECUTIVE OVERVIEWDescription of the Company and Business SegmentsBaxter International Inc., through its subsidiaries, develops, manufactures and markets products that save and sustain the lives of people with hemophilia,immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. As a global, diversified healthcare company,Baxter applies a unique combination of expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient careworldwide. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices, clinical and medical researchlaboratories, and by patients at home under physician supervision.The company operates in two segments: BioScience and Medical Products.The BioScience business processes recombinant and plasma-based proteins to treat hemophilia and other bleeding disorders; plasma-based therapies to treatimmune deficiencies, alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions; and biosurgery products.Additionally, the BioScience business is investing in new disease areas, including oncology, as well as emerging technology platforms, including genetherapy and biosimilars.The Medical Products business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filledvials and syringes for injectable drugs, IV nutrition products, infusion pumps, and inhalation anesthetics. The business also provides products and servicesrelated to pharmacy compounding, drug formulation and packaging technologies. In addition, the Medical Products business provides products and servicesto treat end-stage renal disease, or irreversible kidney failure, along with other renal therapies, which business was enhanced through the 2013 acquisition ofGambro AB (Gambro). The Medical Products business now 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 (HHD), continuous renal replacement therapy(CRRT) and additional dialysis services.Baxter has approximately 66,000 employees and conducts business in over 100 countries. The company generates approximately 60% of its revenuesoutside the United States, and maintains over 50 manufacturing facilities and over 100 distribution facilities in the United States, Europe, Asia-Pacific, LatinAmerica and Canada.Planned Spin-Off of Biopharmaceuticals BusinessIn March 2014, Baxter announced plans to create two separate, independent global healthcare companies – one focused on developing and marketinginnovative biopharmaceuticals and the other on life-saving medical products. The transaction is intended to take the form of a tax-free distribution in theUnited States to Baxter shareholders of more than 80% of the publicly traded stock in the new biopharmaceuticals company. The transaction is expected tobe completed by mid-year 2015, subject to market, regulatory and certain other conditions, including final approval by the Baxter Board of Directors, receiptof a favorable opinion and/or rulings in the United States with respect to the tax-free nature of the transaction, and the effectiveness of a Form 10 registrationstatement that has been filed with the SEC. Upon separation, the historical results of the biopharmaceuticals business will be presented as discontinuedoperations.Vaccines Discontinued OperationsIn December 2014, the company completed the divestiture of the commercial vaccines business and entered into a separate agreement for the sale of theremainder of the Vaccines franchise, which is expected to be completed 21Table of Contentsin the first quarter of 2015. As a result of the divestitures, the operating results of the Vaccines franchise have been reflected as discontinued operations for2014, 2013, and 2012. Refer to Note 2 for additional information regarding the presentation of the Vaccines franchise. Unless otherwise stated, financialresults herein reflect continuing operations only.Financial ResultsBaxter’s 2014 results reflect the company’s success in meeting its financial objectives while navigating a challenging and complex macroeconomicenvironment. Baxter has continued to improve operational and commercial execution, while deriving significant benefits from bringing products andtherapies to various markets more effectively. Further, the company has made investments to further advance the product pipeline and position Baxter forfuture growth and success. The company generated significant cash flows in 2014 while maintaining a disciplined capital allocation strategy of returningvalue to shareholders through both share repurchases and increased dividends.Baxter’s global net sales totaled $16.7 billion in 2014, an increase of 11% over 2013, including an unfavorable foreign currency impact of two percentagepoints. The acquisition of Gambro resulted in net sales totaling $1.6 billion in 2014 compared to $513 million in 2013, from the September 6, 2013acquisition date; the acquisition contributed seven percentage points towards total Baxter net sales growth. International sales totaled $9.7 billion in 2014,an increase of 13% compared to 2013, including an unfavorable foreign currency impact of three percentage points. Sales in the United States totaled $7.0billion in 2014, an increase of 9% over 2013.Baxter’s income from continuing operations for 2014 totaled $1.9 billion, or $3.56 per diluted share, compared to $2.0 billion, or $3.66 per diluted share, inthe prior year. Income from continuing operations in 2014 included special items which resulted in a net reduction to income from continuing operations by$737 million, or $1.34 per diluted share. Income from continuing operations in 2013 included special items which resulted in a net reduction to income fromcontinuing operations by $565 million, or $1.03 per diluted share. The company’s special items are discussed further in the Results of Operations sectionbelow.Baxter’s financial results included research and development (R&D) expenses totaling $1.4 billion in 2014, which reflects the acceleration of R&D spendingto advance late-stage development programs and product approvals in both developed and emerging markets, while also focusing on enhancing thecompany’s early-stage and exploratory R&D. During the year, Baxter continued to transform the new product pipeline into a robust portfolio of products andtherapies that improve the quality of care and address key high-potential areas of unmet medical need. Additionally, R&D expenses in 2014 included upfrontand milestone payments of $217 million related to the company’s various collaboration arrangements.The company’s financial position remains strong, with cash flows from operations totaling $3.2 billion in 2014. The company has continued to execute on itsdisciplined capital allocation framework, which is designed to optimize shareholder value creation through targeted capital investments, share repurchasesand dividends, as well as acquisitions and other business development initiatives as discussed in Strategic Objectives below.Capital investments totaled $1.9 billion in 2014 as the company continues to invest across its businesses to support future growth, including additionalinvestments in support of new and existing product capacity expansions in the BioScience and Medical Products segments. The company’s investments incapital expenditures in 2014 were focused on projects that improve production efficiency and enhance manufacturing capabilities to support its strategy ofgeographic expansion with select investments in growing markets.The company also continued to return value to its shareholders in the form of share repurchases and dividends. During 2014, the company repurchasedeight million shares of common stock for $550 million, and paid cash dividends to its shareholders totaling $1.1 billion. 22Table of ContentsStrategic ObjectivesBaxter continues to focus on several key objectives to successfully execute its long-term strategy to achieve sustainable growth and deliver shareholdervalue. Baxter’s diversified and broad portfolio of products that treat life-threatening acute or chronic conditions and its global presence are core componentsof the company’s strategy to achieve these objectives. The company continues to focus on four key strategic growth vectors: advancing the core portfolioglobally, driving innovation through the R&D pipeline, enhancing growth through acquisitions and collaborations, and developing unique public-privatepartnerships.Advancing the Core Portfolio GloballyBaxter is well-positioned in the market, despite challenging global economic conditions, due to the breadth and diversity of the company’s portfolio in bothBioScience and Medical Products. In the BioScience business, the company’s products treat bleeding disorders and a range of immune disorders. TheMedical Products business offers innovative products for treatment of end-stage renal disease and other therapies and technologies supporting the work ofhospital pharmacies and serving the needs of patients in acute care settings.While Baxter is a leader in several of the markets noted above, there is significant potential to expand across the company’s core portfolio by improvingaccess to Baxter’s products and therapies globally.Baxter remains committed to meeting patient demands by enhancing its manufacturing capabilities in both the BioScience and Medical Products businesses.In the BioScience business, the company made progress in the construction of a state-of-the-art manufacturing facility in Covington, Georgia, which isexpected to begin commercial production in 2018. In the Medical Products business, the company is expanding its capacity in several key markets andproduct areas. These include investments in Asia and at the North Cove, North Carolina, facility to support production of PD and IV solutions. Additionally,the company is executing expansion plans at the Opelika, Alabama, facility to meet the growing global demand for dialyzers.Driving Innovation through the R&D PipelineR&D innovation and scientific productivity continue to be key strategic priorities for Baxter. Key developments in 2014 included the following:Product Approvals and Launches • United States Food and Drug Administration (FDA) approval and launch of BAXJECT III, a new reconstitution system for ADVATE[Antihemophilic Factor (Recombinant)], which reduces the number of steps in the reconstitution process for hemophilia A patients andcaregivers. The company has also received approval in Europe with a planned launch in 2015. • FDA approval and launch of HYQVIA [Immune Globulin Infusion 10% (Human) with Recombinant Human Hyaluronidase]. HYQVIA is the firstFDA approved subcutaneous treatment for adult patients with primary immunodeficiency with a dosing regimen requiring only one infusion upto once per month and one injection site per infusion to deliver a full therapeutic dose of immune globulin. • FDA approval and launch of OBIZUR [Antihemophilic Factor (Recombinant), Porcine Sequence] for the treatment of bleeding episodes in adultswith acquired hemophilia A, a very rare and potentially life-threatening acute bleeding disorder. • FDA approval extending the use of RIXUBIS [Coagulation Factor IX (Recombinant)] to children with hemophilia B, for routine prophylactictreatment, control and prevention of bleeding episodes, and perioperative management. The company also received regulatory approvals inseveral markets outside the United States including Australia, Brazil, Canada, Europe, and Japan for either adults (over the age of 12) or bothpediatric and adult patients. 23Table of Contents • FDA approval of FLEXBUMIN 5%, expanding the FLEXBUMIN product portfolio, which is the first and only preparation of human albumin tobe packaged in a flexible plastic container, to include both 5% in a 250 mL solution and 25% in 50 and 100 mL solutions. • European CE marking of myPKFiT, a web-based individualized dosing device for prophylactic treatment of hemophilia A with ADVATE. Thedevice allows physicians to calculate personalized ADVATE treatment regimens based on patient information and individual pharmacokineticprofiles. • Regulatory approval for ADVATE in Turkey and Russia. • FDA 510(k) clearance for the next-generation SIGMA Spectrum Infusion Pump, which increases capacity of the master drug library and enables ahospital to maintain a customized in-house library of facility-defined dosing parameters for infusions, minimizing the likelihood of drug errorduring care.Other Developments • Submission of biologics license applications (BLA) to FDA for the approval of BAX 855, an investigational, extended half-life recombinantfactor VIII (rFVIII) treatment for hemophilia A based on ADVATE [Antihemophilic Factor (Recombinant)], and BAX111, the first highly-purifiedrecombinant von Willebrand Factor (rVWF), as a treatment for patients with von Willebrand disease, the most common type of inherited bleedingdisorder. • European regulatory approval of a new manufacturing facility in Singapore for the production of recombinant proteins, including ADVATE. • Announcement of plans to form a new global innovation and R&D center in Cambridge, Massachusetts, which positions the company toaccelerate innovation by building on its pipeline in core areas of expertise, strengthen and build upon R&D collaborations with partners in newand emerging biotechnology areas, and optimize R&D productivity while enhancing patient care globally.Enhancing Growth through Acquisitions and CollaborationsBaxter has accelerated its pace of acquisitions and collaborations in recent years. Key developments in 2014 included the following: • The acquisition of all the outstanding membership interests in Chatham Therapeutics, LLC (Chatham Therapeutics), obtaining ChathamTherapeutics’ gene therapy programs related to the development and commercialization of treatments for hemophilia. • The acquisition of all the outstanding membership interests in AesRx, LLC (AesRx), obtaining AesRx’s program related to the development andcommercialization of treatments for sickle cell disease. • The acquisition of all of the outstanding shares in IC Net International Ltd, a leader in surveillance and case management software used inhospitals, which enhances Baxter’s unique expertise in hospital pharmacy operations. • The execution of an exclusive collaboration agreement with Merrimack Pharmaceuticals, Inc. (Merrimack) relating to the development andcommercialization of MM-398 (nanoliposomal irinotecan injection), also known as “nal-IRI”, across all markets with the exception of the UnitedStates and Taiwan. • The execution of an exclusive distribution agreement with Rockwell Medical, Inc. (RMI) for its leading HD concentrates in the United States andother select markets, which enhances Baxter’s comprehensive range of therapeutic options across home, in-center and hospital settings forpatients with end-stage renal disease. 24Table of ContentsBaxter has also benefitted from the continued integration of Gambro following the 2013 acquisition. The combination of Gambro’s dialysis products andtherapies and Baxter’s own global leadership in home-based PD therapy provides patients and providers a comprehensive renal portfolio and global array ofcross-therapeutic options.During 2014, Baxter continued to make equity investments in companies developing high-potential technologies through Baxter Ventures, a strategicinitiative established in 2011 to invest in early-stage companies developing products and therapies to accelerate innovation and growth for the company.The company expects to continue to further supplement its internal R&D activities and pursue accelerated growth with its investment in other businessdevelopment opportunities, including acquisitions, collaborations and alliances, that complement our current businesses, enhance our portfolio, and leverageour core strengths.Public-Private PartnershipsIn addition to the company’s business development activities, Baxter is focused on pursuing innovation through unique business models and thedevelopment of public-private partnerships. During 2014, Baxter made advances in its existing public-private partnership with Hemobrás to providehemophilia patients in Brazil greater access to rFVIII therapy for the treatment of hemophilia A. Baxter is Brazil’s exclusive provider of rFVIII and willfacilitate a technology transfer to support local manufacturing capacity and technical expertise.In 2014, Baxter entered into an arrangement with Singapore’s Changi General Hospital to form a new Centre of Excellence in Compounding Sciences todrive process and clinical innovations to meet increasing needs for compounded sterile products while improving quality, efficiency and supporting theongoing shifting of care delivery from the hospital to the community setting and the patient’s home.Baxter is also making progress on a new facility in Amata City, Rayong province, Thailand. The plant will support growing demand for PD therapy inresponse to Thailand’s PD First policy. The new plant is expected to be fully operational in 2016.Responsible Corporate CitizenThe company strives for continued growth and profitability, while furthering its focus on acting as a responsible corporate citizen. At Baxter, sustainabilitymeans creating lasting social, environmental and economic value by addressing the needs of the company’s wide-ranging stakeholder base. Baxter’scomprehensive sustainability program is focused on areas where the company is uniquely positioned to make a positive impact. Priorities include providingemployees a safe, healthy and inclusive workplace, fostering a culture that drives integrity, strengthening access to healthcare, enhancing math and scienceeducation, and driving environmental performance across the product life cycle including development, manufacturing and transport. Baxter and the BaxterInternational Foundation provide financial support and product donations in support of critical needs, from assisting underserved communities to providingemergency relief for countries experiencing natural disasters.Throughout 2014 the company continued to implement a range of water conservation strategies and facility-based energy saving initiatives. In the area ofproduct stewardship and life cycle management, Baxter is pursuing efforts such as sustainable design and reduced packaging. Baxter is also responding to thechallenges of climate change through innovative greenhouse gas emissions-reduction programs, such as shifting to less carbon-intensive energy sources inmanufacturing and transport.Risk FactorsThe company’s ability to sustain long-term growth and successfully execute the strategies discussed above depends in part on the company’s ability tomanage within an increasingly competitive and regulated environment and to address the other risk factors described in Item 1A of this Annual Report onForm 10-K. 25Table of ContentsRESULTS OF OPERATIONSSpecial ItemsThe following table provides a summary of the company’s special items and the related impact by line item on the company’s results of continuingoperations for 2014, 2013, and 2012. years ended December 31 (in millions) 2014 2013 2012 Gross Margin Intangible asset amortization expense $(184) $(129) $(101) Business optimization items 8 (52) (62) Product-related items (64) (17) 23 Gambro acquisition and integration items — (63) — Separation-related costs (2) — — Business development items — — (6) Total Special Items $(242) $(261) $(146) Impact on Gross Margin Ratio (1.5 pts) (1.8 pts) (1.0 pts) Marketing and Administrative Expenses Reserve items and adjustments $(10) $124 $— Branded Prescription Drug Fee 29 — — Business optimization items 2 81 60 Product-related items 4 — — Gambro acquisition and integration items 119 115 — Separation-related costs 150 — — Business development items — — 9 Pension-related items — — 170 Total Special Items $294 $320 $239 Impact on Marketing and Administrative Expense Ratio 1.8 pts 2.1 pts 1.7 pts Research and Development Expenses Business development items $217 $103 $113 Business optimization items 25 47 28 Separation-related costs 15 — — Total Special Items $257 $150 $141 Other Expense (Income), Net Gambro acquisition and integration items $25 $77 $— Reserve items and adjustments 125 (35) (91) Business development items 45 — — Total Special Items $195 $42 $(91) Income Tax Expense Impact of special items $(251) $(208) $(122) Total Special Items $(251) $(208) $(122) Impact on Effective Tax Rate (1.5 pts) (1.4 pts) (2.4 pts) Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance, particularly in termsof cash returns, and is similar to how management internally assesses performance. Upfront and milestone payments related to collaborations that have beenexpensed as R&D are uncertain and often result in a different payment and expense recognition pattern than internal R&D activities and therefore aretypically treated as special items. Additional special items are identified above because they are highly variable, difficult to predict, and of a size that maysubstantially impact the company’s 26Table of Contentsreported operations for a period. Management believes that providing the separate impact of the above items on the company’s GAAP results may provide amore complete understanding of the company’s operations and can facilitate a fuller analysis of the company’s results of operations, particularly inevaluating performance from one period to another.In 2014, 2013 and 2012, the company’s results were impacted by costs associated with the company’s execution of certain strategies to optimize itsorganizational and overall cost structure on a global basis. These actions included streamlining the company’s international operations, rationalizing itsmanufacturing facilities, improving its general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs.The company recorded business optimization charges of $83 million, $200 million, and $150 million in 2014, 2013, and 2012, respectively. The 2014 and2013 business optimization charges were partially offset by adjustments of $64 million and $20 million, respectively, for reserves that are no longer probableof being utilized. Refer to Note 7 for further information regarding these charges and related reserves.In 2014, the company recorded a charge of $93 million for SIGMA Spectrum Infusion Pump product remediation efforts, partially offset by a benefit of $25million for an adjustment to the COLLEAGUE infusion pump reserves. In 2013, the company’s results included total charges of $17 million, primarily relatedto remediation efforts associated with modifications to the SIGMA Spectrum Infusion Pump in conjunction with re-filing for 510(k) clearance. In 2012, thecompany recognized a net benefit of $23 million primarily related to an adjustment to the COLLEAGUE infusion pump reserve when the companysubstantially completed its recall activities in the United States. Refer to Note 7 for further information regarding these charges and related reserves.In 2014, the company recorded total charges of $144 million primarily related to the integration of Gambro. In 2013, the company’s results included totalcharges of $255 million primarily related to the acquisition and integration of Gambro and losses from the derivative instruments used to hedge theanticipated foreign currency cash outflows for the planned acquisition of Gambro. Refer to Note 5 for further information regarding the acquisition ofGambro.In 2014, the company recorded separation-related costs of $167 million for the planned separation of Baxter’s biopharmaceutical and medical productsbusinesses.In 2014, the company recorded total charges of $262 million resulting from $217 million in upfront and milestone payments associated with the company’scollaboration arrangements as well as a $45 million other-than-temporary impairment loss related to Baxter’s holdings in the common stock of one of itscollaboration partners. The company’s results in 2013 and 2012 included total charges of $103 million and $128 million, respectively, primarily related toupfront and milestone payments associated with the company’s collaboration arrangements. Refer to Note 5 for further information regarding the company’scollaboration arrangements.In 2014, the company’s results included a net expense of $115 million primarily related to a $124 million increase in the estimated fair value of acquisition-related contingent payment liabilities, partially offset by $9 million in third-party recoveries and reversals of prior tax and legal reserves. In 2013, thecompany’s results included a net expense of $89 million related to tax and legal reserves associated with tax and VAT matters in Turkey and existing class-action and other related litigation. In 2012, the company recorded gains of $91 million related to a decrease in the estimated fair value of acquisition-relatedcontingent payment liabilities. Refer to Note 10 for further information regarding the change in estimated fair value of contingent payment liabilities.In 2014, the company recorded a charge of $29 million in marketing and administrative expenses to account for an additional year of the BrandedPrescription Drug Fee in accordance with final regulations issued by the Internal Revenue Service. 27Table of ContentsIn 2012, the company recorded total charges of $170 million in marketing and administrative expenses primarily related to pension settlement charges andother pension-related items. Refer to Note 13 for further information regarding the pension settlement charges.Net Sales Percent change At actualcurrency rates At constantcurrency rates years ended December 31 (in millions) 2014 2013 2012 2014 2013 2014 2013 BioScience $6,699 $6,272 $5,983 7% 5% 8% 5% Medical Products 9,972 8,695 7,953 15% 9% 16% 10% Total net sales $16,671 $14,967 $13,936 11% 7% 13% 8% Percent change At actualcurrency rates At constantcurrency rates years ended December 31 (in millions) 2014 2013 2012 2014 2013 2014 2013 United States $7,015 $6,444 $6,043 9% 7% 9% 7% International 9,656 8,523 7,893 13% 8% 16% 9% Total net sales $16,671 $14,967 $13,936 11% 7% 13% 8% Net sales during the year ended December 31, 2014 included $1.6 billion in Gambro sales compared to $513 million in 2013, from the September 6, 2013acquisition date, which favorably impacted total sales growth by seven percentage points at actual currency rates and eight percentage points on a constantcurrency basis. During the year ended December 31, 2013, Gambro sales favorably impacted total sales growth by four percentage points at both actualcurrency rates and on a constant currency basis. Refer to Note 5 for further information regarding the Gambro acquisition.Foreign currency unfavorably impacted net sales by two percentage points during the year ended December 31, 2014 compared to the prior year principallydue to the strengthening of the U.S. Dollar relative to the Euro, Japanese Yen, Swedish Krona and certain other currencies. Foreign currency unfavorablyimpacted net sales by one percentage point during the year ended December 31, 2013 principally due to the strengthening of the U.S. Dollar relative to theJapanese Yen and certain other currencies.The comparisons presented at constant currency rates reflect comparative local currency sales at the prior year’s foreign exchange rates. This measureprovides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. Thecompany believes that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of changein net sales at actual currency rates, may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of thecompany’s results of operations, particularly in evaluating performance from one period to another.Franchise Net Sales ReportingBioScienceThe BioScience segment includes three commercial franchises: Hemophilia, BioTherapeutics and BioSurgery. • Hemophilia includes sales of recombinant and plasma-derived hemophilia products (primarily factor VIII and factor IX). • BioTherapeutics includes sales of the company’s plasma-based therapies to treat alpha-1 antitrypsin deficiency, burns and shock, and otherchronic and acute blood-related conditions. 28Table of Contents • BioSurgery consists of biological products and medical devices used in surgical procedures for hemostasis, tissue sealing, adhesion prevention,as well as hard and soft tissue repair and microsurgery products.The following is a summary of net sales by franchise in the BioScience segment. Percent change At actualcurrency rates At constantcurrency rates years ended December 31 (in millions) 2014 2013 2012 2014 2013 2014 2013 Hemophilia $3,728 $3,437 $3,241 8% 6% 10% 7% BioTherapeutics 2,224 2,118 2,069 5% 2% 6% 2% BioSurgery 747 717 673 4% 7% 4% 6% Total BioScience net sales $6,699 $6,272 $5,983 7% 5% 8% 5% Net sales in the BioScience segment increased 7% and 5% in 2014 and 2013, respectively (with an unfavorable foreign currency impact of one percentagepoint in 2014 and no significant foreign currency impact in 2013). Excluding the impact of foreign currency, the principal drivers impacting net sales werethe following: • In the Hemophilia franchise, sales growth in 2014 was driven by strong global demand for the company’s leading recombinant factor VIIItherapy, ADVATE, which contributed approximately seven percentage points. The company’s sales also benefitted from the expandedprophylaxis indication and strong global demand for its plasma-based inhibitor bypass therapy, FEIBA, which contributed approximately threepercentage points in 2014, as well as the launch of new products, such as RIXUBIS, a recombinant factor IX therapy for the treatment ofhemophilia B patients. We expect growth in the Hemophilia franchise to moderate in 2015 as we expect increased competition from new entrantsincluding a competitor that launched an extended half-life recombinant FVIII therapy in the United States during the third quarter of 2014. Thecompany submitted a BLA for BAX 855, the company’s own investigational extended half-life factor VIII treatment for hemophilia A, to FDA inthe fourth quarter of 2014 following positive topline results from the phase III clinical trial. In addition, the company expects long-term growthin the Hemophilia franchise, driven by strong underlying global demand, further penetration in markets outside the United States, new multi-yeartenders, and new product launches including OBIZUR for acquired hemophilia A. Sales growth in 2013 was driven by strong global demand forADVATE, which contributed approximately six percentage points, in addition to increased sales of FEIBA and shipments to Brazil as part ofBaxter’s ongoing partnership with Hemobrás. • In the BioTherapeutics franchise, sales growth in 2014 was driven by strong global demand for the company’s albumin therapies as well asimmune globulin therapies including GAMMAGARD LIQUID [Immune Globulin Intravenous (Human)]. Immune globulin sales were favorablyimpacted by the fourth quarter introduction of HYQVIA, a subcutaneous immune globulin treatment for adult patients with primaryimmunodeficiency, in the United States. Sales growth in 2013 was driven by immunoglobulin therapies resulting from improved productavailability and accelerated demand for GAMMAGARD LIQUID, albumin and Alpha-1 treatments. Sales growth was partially offset in 2013 bylower international sales as a result of an exit from certain markets due to previous supply constraints. • In the BioSurgery franchise, sales growth in 2014 and 2013 was driven primarily by global demand for the company’s surgical sealants TISSEELand FLOSEAL. Sales growth in 2013 was also favorably impacted by the acquisition of Synovis Life Technologies, Inc. (Synovis). 29Table of ContentsMedical ProductsThe Medical Products segment includes four commercial franchises: Fluid Systems, Renal, Specialty Pharmaceuticals, and BioPharma Solutions. • Fluid Systems principally includes IV solutions, infusion pumps, administration sets and premixed and the oncology drug cyclophosphamide. • Renal consists of therapies to treat end-stage renal disease, including PD, HD, and HHD and therapies to treat acute kidney injuries, includingCRRT. The Renal franchise includes the results of Gambro since the acquisition date of September 6, 2013. Refer to Note 5 for additionalinformation. • Specialty Pharmaceuticals principally includes nutrition and anesthesia products. • BioPharma Solutions principally includes sales from the pharmaceutical partnering business and pharmacy compounding services.The following is a summary of net sales by franchise in the Medical Products segment. Percent change At actualcurrency rates At constantcurrency rates years ended December 31 (in millions) 2014 2013 2012 2014 2013 2014 2013 Fluid Systems $3,222 $3,106 $2,937 4% 6% 4% 6% Renal 4,172 3,089 2,527 35% 22% 38% 24% Specialty Pharmaceuticals 1,574 1,508 1,475 4% 2% 5% 2% BioPharma Solutions 1,004 992 1,014 1% (2%) 2% (2%) Total Medical Products net sales $9,972 $8,695 $7,953 15% 9% 16% 10% Net sales in the Medical Products segment increased 15% and 9% in 2014 and 2013, respectively (with an unfavorable foreign currency impact of onepercentage point in both 2014 and 2013). Excluding the impact of foreign currency, the principal drivers impacting net sales were the following: • In the Fluid Systems franchise, sales growth in 2014 was driven by increased sales and favorable pricing of cyclophosphamide (a genericoncology drug) in the United States, which contributed approximately three percentage points, as well as price improvements and strong U.S.demand for the company’s IV solutions. A generic competitor for cyclophosphamide entered the U.S. market during the fourth quarter of 2014and the company expects additional competitors in the coming months, which is anticipated to substantially impact pricing and demand forBaxter’s product. U.S. sales for cyclophosphamide in 2014 totaled approximately $450 million. Sales growth in 2013 was primarily driven byincreased sales of cyclophosphamide, which contributed approximately six percentage points, as well as strong demand for IV solutions. Salesgrowth in both 2014 and 2013 was partially offset by an expected decline in SIGMA Spectrum Infusion Pump sales due to suspension of sales tonew accounts commencing with the receipt of an FDA Warning Letter in April 2013. • In the Renal franchise, Gambro revenues totaled $1.6 billion in 2014 compared to $513 million from the September 6, 2013 acquisition datethrough December 31, 2013. Excluding the impact of Gambro, sales remained flat at actual currency rates and increased 2% on a constantcurrency basis. Sales growth in 2014 was driven by a higher number of PD patients in the United States and emerging markets, which contributedapproximately four percentage points to sales growth. This growth was partially offset by the divestiture of Baxter’s legacy CRRT business in thefirst quarter of 2014. Excluding the impact of Gambro, sales in 2013 increased 2% at actual currency rates and 4% on a constant currency basisdriven by growth in the number of PD patients in the United States and emerging markets, which contributed approximately four percentagepoints. This growth was partially offset by lower HD sales. 30Table of Contents • In the Specialty Pharmaceuticals franchise, sales growth in 2014 was driven by increased international sales of anesthetics products as well asstrong U.S. demand for nutritional therapies. Sales growth in 2013 was driven by strong global sales of anesthetics, which was partially offset bylower sales of nutrition products due to supplier shortages of distributed vitamins and lipids. • In the BioPharma Solutions franchise, sales growth in 2014 was driven by higher pharmacy compounding revenues. Sales declined in 2013 as aresult of delayed shipments from the company’s Bloomington, Indiana facility, which was partially offset by an improvement in sales during thefourth quarter of 2013 as a result of the timing of orders and shipments as supply constraints were alleviated.Gross Margin and Expense Ratios Change years ended December 31 (as a percent of net sales) 2014 2013 2012 2014 2013 Gross margin 48.9% 49.9% 51.2% (1.0pts) (1.3 pts) Marketing and administrative expenses 24.2% 24.3% 23.6% (0.1pts) 0.7 pts Gross MarginThe special items identified above had an unfavorable impact of 1.5, 1.8 and 1.0 percentage points on the gross margin percentage in 2014, 2013, and 2012,respectively. Refer to the Special Items caption above for additional detail.In addition to the impact of the special items, the gross margin percentage was unfavorably impacted by 1.1 percentage points in 2014 as a result of theintegration of the lower margin Gambro business. Other unfavorable impacts include foreign currency, expedited freight for PD solutions, and manufacturinginefficiencies resulting from lower production volumes as the company continues to make investments to enhance its operations, quality systems andprocesses. The unfavorable impacts from these factors were partially offset by improved product mix within the BioScience segment, lower pension expenseand benefits from the company’s business optimization initiatives.In addition to the impact of the special items, the gross margin percentage was unfavorably impacted by 0.5 percentage points in 2013 as a result of theintegration of the lower margin Gambro business. Other unfavorable impacts include foreign currency, increased pension expense, government austeritymeasures and the realization of additional costs associated with modifications and the ramp-up of production at the company’s Los Angeles fractionationfacilities. The unfavorable impacts from these factors were offset by improved product mix and price improvements.Marketing and Administrative ExpensesThe special items identified above had an unfavorable impact of 1.8, 2.1 and 1.7 percentage points on the marketing and administrative expenses ratio in2014, 2013, and 2012, respectively. Refer to the Special Items caption above for additional detail.In addition to the impact of the special items, the marketing and administrative expenses ratio in 2014 was unfavorably impacted as a result of inclusion ofGambro’s operations, the company’s select investments to support new product launches in the BioScience segment, and incremental freight and logisticalexpenses to support the strong demand for IV solutions. Offsetting the unfavorable impacts in 2014 were savings from the company’s continued focus oncontrolling discretionary spending, lower pension expense and benefits from the company’s business optimization initiatives.In addition to the impact of the special items, the marketing and administrative expenses ratio in 2013 was unfavorably impacted as a result of inclusion ofGambro’s operations, increased pension expense, and select 31Table of Contentsinvestments and spending on marketing and promotional programs for new product launches and to enhance the company’s global presence in internationalmarkets, partially offset by the company’s focus on controlling discretionary spending.Pension Plan ExpenseFluctuations in pension plan expense impacted the company’s gross margin and expense ratios. Pension plan expense decreased $88 million in 2014primarily due to a decrease in amortization of actuarial losses.Pension plan expense decreased in 2013 as 2012 expense included a charge of $168 million primarily related to the settlement of certain U.S. pensionobligations. Excluding the impact of the 2012 settlement charge, pension plan expense increased $70 million in 2013 due to lower interest rates used todiscount the plans’ projected benefit obligations and an increase in amortization of actuarial losses.Business Optimization ItemsThe company has implemented certain business optimization initiatives in an effort to streamline its international operations, rationalize its manufacturingfacilities, enhance its general and administrative infrastructure and re-align certain R&D activities. The company estimates that business optimizationactivities from 2011 through 2013 have resulted in cumulative savings of approximately $0.30 per diluted share as of December 31, 2014. The companyexpects additional savings of approximately $0.09 per diluted share as the programs are fully implemented through 2016. The savings from these actions willimpact cost of sales, marketing and administrative expenses and R&D expenses, and benefit both the BioScience and Medical Products segments. Refer toNote 7 for additional information regarding the company’s business optimization initiatives.In 2014, the company recorded charges of $83 million and expects savings of approximately $0.05 per diluted share as the programs are fully implementedthrough 2016.Research and Development Percent change years ended December 31 (in millions) 2014 2013 2012 2014 2013 Research and development expenses $1,421 $1,165 $1,081 22% 8% as a percent of net sales 8.5% 7.8% 7.8% R&D expenses increased in both 2014 and 2013. The increase in both periods was driven by contributions in the Medical Products segment from theacquisition of Gambro and additional investments in renal therapies as well as new investments in the BioScience segment to advance programs across theR&D pipeline, particularly in the areas of hematology, oncology and immunology. Additionally, R&D expenses related to upfront and milestone paymentsassociated with the company’s collaboration arrangements increased to $217 million in 2014 from $103 million in 2013. Refer to the discussion underStrategic Objectives above for additional detail.Net Interest ExpenseNet interest expense increased by $17 million in 2014 and $41 million in 2013. The increase in 2014 was principally driven by an increase in debt from theissuance of $3.5 billion of senior unsecured notes in June 2013, which was partially offset by the maturity of $350 million of 4.0% senior unsecured notes inMarch 2014, and the company’s interest rate swap hedging activities. The increase in 2013 was principally driven by an increase in debt from the issuance of$1.0 billion of senior unsecured notes in August 2012 and the above mentioned $3.5 billion of senior unsecured notes in June 2013. Refer to Note 3 for asummary of the components of net interest expense for 2014, 2013 and 2012. 32Table of ContentsOther Expense (Income), NetOther expense (income), net was expense of $123 million in 2014, income of $9 million in 2013 and income of $155 million in 2012. Refer to the SpecialItems caption above for additional detail.In addition to the impact of the special items, during 2014 the company recorded $84 million of income related to equity method investments, whichprimarily represented gains from the sale of certain investments as well as distributions from funds that sold portfolio companies.Also included in other expense (income), net were amounts related to foreign currency fluctuations, principally relating to intercompany receivables,payables and loans denominated in a foreign currency.Pre-Tax Income from Continuing OperationsRefer to Note 17 for a summary of financial results by segment. The following is a summary of significant factors impacting the segments’ financial results.BioSciencePre-tax income from continuing operations decreased 12% in 2014 and increased 3% in 2013. Included in pre-tax income from continuing operations during2014 were charges of $217 million related to certain upfront and milestone payments associated with the company’s collaboration arrangements, $26 millionrelated to the Branded Prescription Drug Fee, $45 million related to an other-than-temporary impairment loss associated with Baxter’s holdings in thecommon stock of one of its collaboration partners, and a $124 million loss related to an increase in the estimated fair value of acquisition-related contingentpayment liabilities. Included in pre-tax income from continuing operations during 2013 were charges of $78 million related to upfront and milestonepayments associated with the company’s collaboration arrangements. Included in pre-tax income from continuing operations during 2012 were charges of$123 million related to certain upfront and milestone payments associated with the company’s collaboration arrangements and a gain of $38 million relatedto a decrease in the estimated fair value of acquisition-related contingent payment liabilities.Excluding the impact of the above items, pre-tax income from continuing operations increased 2% in 2014 primarily due to sales growth of higher marginproducts, and was partially offset by increased spending on marketing and promotional programs as well as R&D investments and the impact of foreigncurrency.Excluding the impact of the above items, pre-tax income from continuing operations increased 3% in 2013 primarily due to sales growth of higher marginproducts, partially offset by increased spending on marketing and promotional programs.Medical ProductsPre-tax income decreased 6% in 2014 and 12% in 2013. Included in pre-tax income from continuing operations during 2014 were charges of $93 millionprimarily related to product remediation efforts associated with the SIGMA Spectrum Infusion Pump and Gambro acquisition and integration costs of $120million. Additionally, a benefit of $25 million was recorded for an adjustment to the COLLEAGUE infusion pump reserves as the company refined itsexpectations based on the progress of remediation activities in Canada. Included in pre-tax income from continuing operations during 2013 were charges of$16 million primarily related to remediation efforts associated with modifications to the SIGMA Spectrum Infusion Pump in conjunction with re-filing for510(k) clearance, $25 million related to an upfront payment associated with one of the company’s collaboration arrangements, and Gambro acquisition andintegration-related costs of $192 million. Included in pre-tax income from continuing operations during 2012 was a gain of $53 million related to a decreasein the estimated fair value of acquisition-related contingent payment liabilities as well as a benefit of $23 million related to an adjustment to theCOLLEAGUE infusion pump reserves when the company substantially completed its recall activities in the United States. 33Table of ContentsExcluding the impact of the above items, pre-tax income from continuing operations decreased 8% in 2014. The decrease was driven by product mix,expedited freight for PD solutions, and manufacturing inefficiencies resulting from lower production volumes as the company continues to make investmentsto enhance quality systems and processes. The decrease was partially offset by improved performance in the Fluid Systems and Specialty PharmaceuticalsfranchisesExcluding the impact of the above items, pre-tax income in 2013 increased by 7% primarily due to a favorable impact of sales growth of higher marginproducts and the favorable impact from foreign currency.Corporate and otherCertain income and expense amounts are not allocated to a segment. These amounts are detailed in the table in Note 17 and primarily include net interestexpense, foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in foreign currency) and themajority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, non-strategic investments and related incomeand expense, certain employee benefit plan costs as well as certain nonrecurring gains, losses, and other charges (such as business optimization and assetimpairments).Income TaxesEffective Income Tax RateThe effective income tax rate for continuing operations was 20.2% in 2014, 21.0% in 2013, and 19.6% in 2012. The company anticipates that the effectiveincome tax rate for continuing operations, calculated in accordance with GAAP, will be approximately 21.5% in 2015, excluding any impact from additionalaudit developments or other special items.The company’s effective tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state andlocal taxes and foreign taxes that are different than the U.S. federal statutory rate. The average foreign effective tax rate on international pre-tax income forcontinuing operations was 16.4%, 17.2% and 14.2% for the years ended December 31, 2014, 2013 and 2012, respectively. The company’s average foreigneffective tax rate was lower than the U.S. federal statutory rate as a result of the impact of tax incentives in Puerto Rico, Switzerland and certain other taxjurisdictions outside of the United States, as well as foreign earnings in tax jurisdictions with lower statutory rates than the United States. In addition, asdiscussed further below, the company’s effective income tax rate can be impacted in each year by discrete factors or events. Refer to Note 15 for furtherinformation regarding the company’s income taxes.Factors impacting the company’s effective tax rate in 2014 included a non-deductible charge to account for an additional year of the Branded PrescriptionDrug Fee in accordance with final regulations issued in the third quarter by the Internal Revenue Service. Partially offsetting this increase in the effective taxrate was an increase in income earned in foreign jurisdictions with rates of tax lower than the U.S. rate. Additionally, the company favorably settled certaincontingent tax matters.Factors impacting the company’s effective tax rate in 2013 included the favorable settlement of the company’s bilateral Advance Pricing Agreementproceedings between the U.S. government and the government of Switzerland relating to intellectual property, product, and service transfer pricingarrangements, which was offset by other contingent tax matters principally related to transfer pricing. Additionally, the effective tax rate was unfavorablyimpacted by increases in valuation allowances relating to the tax benefit from losses that the company does not believe that it is more likely than not torealize and interest expense related to the company’s unrecognized tax benefits. Partially offsetting these unfavorable items were $16 million of U.S. R&Dcredits. Additionally, the company’s effective tax rate was impacted by a change in the earnings mix from lower tax to higher tax rate jurisdictions comparedto the prior year.Factors impacting the company’s effective tax rate in 2012 were gains totaling $91 million relating to the reduction of certain contingent payment liabilitiesrelated to prior acquisitions, for which there were no tax 34Table of Contentscharges. Also impacting the effective tax rate was a cost of sales reduction of $37 million for an adjustment to the COLLEAGUE infusion pump reserves whenthe company substantially completed the recall in the United States in 2012, for which there was no tax charge. These items were offset by a change in theearnings mix from lower tax to higher tax rate jurisdictions compared to the prior year.As described in Note 15, management intends to reinvest past earnings in several jurisdictions outside of the United States indefinitely. The company willcontinue to evaluate its global financial structure and U.S. cash needs as part of its planned separation into two independent, global healthcare companies.Income from Continuing Operations and Earnings per Diluted ShareIncome from continuing operations was $1.9 billion in 2014, $2.0 billion in 2013, and $2.3 billion in 2012. Income from continuing operations per dilutedshare was $3.56 in 2014, $3.66 in 2013, and $4.11 in 2012. The significant factors and events causing the net changes from 2013 to 2014 and from 2012 to2013 are discussed above. Additionally, income from continuing operations per diluted share was positively impacted by the repurchase of eight millionshares in 2014, 13 million shares in 2013, and 25 million shares in 2012. Refer to Note 12 for further information regarding the company’s stock repurchases.Income from Discontinued Operations, Net of TaxIncome from discontinued operations, net of tax was $551 million in 2014, $0 million in 2013, and $43 million in 2012. The increase in 2014 was drivenprimarily by the $417 million gain recognized on the sale of the commercial vaccines business. The decrease in 2013 was driven primarily by $90 million inbusiness optimization charges.LIQUIDITY AND CAPITAL RESOURCESThe company’s cash flows reflect both continuing and discontinued operations.Cash Flows from OperationsCash flows from operations totaled $3.2 billion in 2014, $3.2 billion in 2013, and $3.1 billion in 2012. Cash flows remained flat in 2014 as compared to2013 and increased in 2013 as compared to 2012 due to the factors discussed below.Accounts ReceivableCash flows relating to accounts receivable decreased in 2014 and increased in 2013. Days sales outstanding were 52.0 days, 55.9 days, and 53.3 days for2014, 2013, and 2012, respectively. Days sales outstanding in 2014 and 2013 included an unfavorable impact of 1.9 days and 3.4 days, respectively, fromthe acquisition of Gambro. Excluding the impact of Gambro, days sales outstanding declined to 50.1 days in 2014 reflecting an improvement in collectionperiods in both the United States and certain international markets as well as the favorable impact of foreign currency. Similarly, excluding the impact ofGambro, days sales outstanding declined to 52.5 days in 2013 reflecting improvement in collection periods in both the United States and certaininternational markets.InventoriesCash outflows for inventories increased in both 2014 and 2013. The following is a summary of inventories at December 31, 2014 and 2013, as well asinventory turns by segment for 2014, 2013 and 2012. Inventory turns for the year are calculated as the annualized fourth quarter cost of sales divided by theyear-end inventory balance. Inventories Inventory turns (in millions, except inventory turn data) 2014 2013 2014 2013 2012 BioScience $2,147 $2,078 1.41 1.49 1.48 Medical Products 1,412 1,421 3.96 4.36 4.25 Total company $3,559 $3,499 2.42 2.66 2.52 35Table of ContentsThe increase in inventories in 2014 and associated decrease in inventory turns was due to higher levels of plasma protein related inventories in theBioScience segment to support increased demand and future growth and the impact from new products, including RIXUBIS, OBIZUR and HYQVIA. Thedecrease in inventory turns was also driven by higher cost of sales in 2013 compared to 2014 associated with Gambro purchase accounting adjustments andbusiness optimization charges.Inventory turns for the total company increased during 2013 compared to 2012 primarily due to strong sales and inventory management efforts. Inventoryturns in 2013 also included the favorable impacts from the above-mentioned Gambro purchase accounting adjustments and business optimization charges.OtherThe changes in accounts payable and accrued liabilities were $115 million in 2014, $361 million in 2013, and $40 million in 2012. The changes wereprimarily driven by the timing of payments to suppliers and the impact of litigation-related payments.Payments related to the execution of the COLLEAGUE infusion pump recall and the company’s business optimization initiatives were $161 million in 2014,$125 million in 2013, and $283 million in 2012. Refer to Note 7 for further information regarding the COLLEAGUE infusion pump recall and the businessoptimization initiatives.Changes in other balance sheet items were $54 million in 2014, $135 million in 2013, and $193 million in 2012. The changes during 2014 and 2013 wereprimarily driven by prepaid expenses and hedging activity. Cash contributions to the company’s pension plans totaled $74 million, $67 million, and $78million in 2014, 2013, and 2012, respectively.Cash Flows from Investing ActivitiesCapital ExpendituresCapital expenditures totaled $1.9 billion in 2014, $1.5 billion in 2013, and $1.2 billion in 2012. The increase in capital expenditures in 2014 was primarilydriven by product capacity expansions at certain manufacturing facilities, including the Covington, Georgia facility. The company also invested in projectsthat enhance the company’s cost structure and manufacturing capabilities, support the company’s strategy of geographic expansion with select investmentsin growing markets and support an ongoing strategic focus on R&D with the expansion of facilities, pilot manufacturing sites and laboratories.Acquisitions and InvestmentsNet cash outflows related to acquisitions and investments were $409 million in 2014, $3.9 billion in 2013, and $515 million in 2012.The cash outflows in 2014 included $85 million for the acquisitions of Chatham Therapeutics and AesRx as well as $217 million primarily related to upfrontand milestone payments associated with the company’s collaboration arrangements with Merrimack, Coherus Biosciences, Inc. (Coherus), CTI BioPharmaCorp. (CTI BioPharma, formerly named Cell Therapeutics, Inc.) and Momenta Pharmaceuticals, Inc. (Momenta).The cash outflows in 2013 included $3.6 billion for the acquisition of Gambro (net of cash acquired of $88 million) and $51 million for the acquisition of theinvestigational hemophilia compound OBIZUR and related assets from Inspiration BioPharmaceuticals, Inc. and Ipsen Pharma S.A.S. Also included wereupfront and milestone payments of $130 million associated with the company’s collaboration arrangements with Coherus, CTI BioPharma, and JW HoldingsCorporation.The cash outflows in 2012 included $304 million for the acquisition of Synovis, $19 million for the acquisition of Laboratoire Fasonut, and $50 million foran investment in the preferred stock of Onconova Therapeutics, Inc. (Onconova). Also included were upfront payments of $113 million primarily associatedwith the company’s collaboration arrangements with Onconova and Momenta. 36Table of ContentsRefer to Note 5 for further information about these acquisitions and collaborations.Divestitures and Other Investing ActivitiesNet cash inflows relating to divestitures and other investing activities were $765 million in 2014, $14 million in 2013, and $107 million in 2012. Cashinflows in 2014 primarily related to proceeds of $639 million from the sale of the company’s commercial vaccines business as well as the sale of certaininvestments.Cash inflows in 2013 primarily related to various sales of certain investments and other assets.Cash inflows in 2012 primarily related to proceeds of $59 million from the sale and maturity of available-for-sale securities (including the sale of Greekgovernment bonds) and $19 million from the sale of common stock of Enobia Pharma Corporation.Cash Flows from Financing ActivitiesDebt Issuances, Net of Payments of ObligationsNet cash outflows related to debt and other financing obligations totaled $113 million in 2014 driven by approximately $1.0 billion in repayments, whichincluded $500 million of floating rate senior unsecured notes that matured in December 2014 as well as $350 million of 4.0% senior unsecured notes thatmatured in March 2014. The company issued and redeemed commercial paper throughout the year, and there was $875 million outstanding at December 31,2014.In June 2013, the company issued $3.5 billion of senior unsecured notes with various maturities. Approximately $3.0 billion of the net proceeds of these debtissuances was used to finance the acquisition of Gambro in 2013 and the remainder was used for general corporate purposes, including the repayment ofcommercial paper. This issuance was partially offset by the repayment of $300 million of 1.8% senior unsecured notes that matured in March 2013 andpayment of assumed Gambro debt of $221 million after completion of the acquisition in September 2013. Refer to Note 8 for additional informationregarding the debt issuance and Note 5 regarding the Gambro acquisition.In August 2012, the company issued $1.0 billion of senior unsecured notes, with $700 million maturing in August 2022 and bearing a 2.40% coupon rate,and $300 million maturing in August 2042 and bearing a 3.65% coupon rate. The net proceeds of the debt issuance were used for general corporate purposes,which includes capital expenditures associated with previously announced plans to expand capacity to support longer-term growth of the company’s plasma-based treatments, including with respect to the Covington, Georgia facility.The company’s debt instruments discussed above are unsecured and contain certain covenants, including restrictions relating to the company’s creation ofsecured debt.Other Financing ActivitiesCash dividend payments totaled $1.1 billion in 2014, $1.0 billion in 2013, and $804 million in 2012. The increase in cash dividend payments was primarilydue to increases in the quarterly dividend rate of approximately 6%, 9% and 34% as announced in May 2014, May 2013 and July 2012.Proceeds and realized excess tax benefits from stock issued under employee benefit plans totaled $369 million, $508 million, and $512 million in 2014,2013, and 2012, respectively. Realized excess tax benefits, which were $24 million in 2014, $34 million in 2013, and $24 million in 2012, are presented inthe consolidated statements of cash flows as an outflow in the operating section and an inflow in the financing section.As authorized by the Board of Directors, the company repurchases its stock depending on the company’s cash flows, net debt level and market conditions.The company repurchased eight million shares for $550 million in 37Table of Contents2014, 13 million shares for $913 million in 2013, and 25 million shares for $1.5 billion in 2012. In July 2012, the Board of Directors authorized therepurchase of up to $2.0 billion of the company’s common stock and $0.5 billion remained available as of December 31, 2014.Credit Facilities, Access to Capital and Credit RatingsCredit FacilitiesThe company’s primary revolving credit facility has a maximum capacity of $1.5 billion and matures in December 2015. In 2014, the company entered intoan additional revolving credit facility with a maximum capacity of $1.8 billion which also matures in December 2015 and contains similar covenants as theprimary revolving credit facility. The company also maintains a Euro-denominated revolving credit facility with a maximum capacity of approximately $375million as of December 31, 2014 and matures in December 2015. As of December 31, 2014 there were no borrowings outstanding under any of theserevolving credit facilities. As of December 31, 2013, there was approximately $124 million outstanding under the Euro-denominated facility and there wereno outstanding borrowings under the primary revolving credit facility. The company’s facilities enable the company to borrow funds on an unsecured basis atvariable interest rates, and contain various covenants, including a maximum net-debt-to-capital ratio. At December 31, 2014, the company was in compliancewith the financial covenants in these agreements. The non-performance of any financial institution supporting any of the credit facilities would reduce themaximum capacity of these facilities by each institution’s respective commitment.The company also maintains other credit arrangements, as described in Note 8.Access to CapitalThe company intends to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations or by issuingadditional debt. The company had $2.9 billion of cash and equivalents at December 31, 2014, with adequate cash available to meet operating requirementsin each jurisdiction in which the company operates. The divestiture of the Vaccines franchise is not expected to have a significant impact on the company’sliquidity. The company invests its excess cash in certificates of deposit and money market funds, and diversifies the concentration of cash among differentfinancial institutions.The company’s ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adverselyaffected 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’skey financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, the company believes it has sufficient financialflexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support the company’s growthobjectives.The company continues to do business with foreign governments in certain countries, including Greece, Spain, Portugal and Italy, that have experienced adeterioration in credit and economic conditions. As of December 31, 2014 and 2013, the company’s net accounts receivable from the public sector in Greece,Spain, Portugal and Italy totaled $363 million and $561 million, respectively. The decrease in net accounts receivable reflects strong collections in bothSpain and Portugal. While global economic conditions have not significantly impacted the company’s ability to collect receivables, liquidity issues incertain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. 38Table of ContentsCredit RatingsThe company’s credit ratings at December 31, 2014 were as follows: Standard & Poor’s Fitch Moody’sRatings Senior debt A- A A3Short-term debt A2 F1 P2Outlook Negative Negative NegativeIn March 2014, Standard & Poor’s lowered its ratings on Baxter’s senior debt to A- and short-term debt to A2 from A and A1, respectively, at December 31,2013. The change in the credit ratings and outlook is due to the uncertainty around the planned spin-off of Baxter’s biopharmaceuticals business as detailedabove.If Baxter’s credit ratings or outlooks were to be further downgraded, the company’s financing costs related to its credit arrangements and any future debtissuances could be unfavorably impacted. However, any future credit rating downgrade or change in outlook would not affect the company’s ability to drawon its credit facilities, and would not result in an acceleration of the scheduled maturities of any of the company’s outstanding debt, unless, with respect tocertain debt instruments, preceded by a change in control of the company.Contractual ObligationsAs of December 31, 2014, the company had contractual obligations, excluding accounts payable and accrued liabilities (other than the current portion ofunrecognized tax benefits), payable or maturing in the following periods. (in millions) Total Less thanone year One tothree years Three tofive years More thanfive years Short-term debt $913 $913 $ — $— $ — Long-term debt and capital lease obligations, including current maturities 8,469 786 1,786 1,800 4,097 Interest on short- and long-term debt andcapital lease obligations 2,239 209 328 233 1,469 Operating leases 1,047 222 350 243 232 Other long-term liabilities 1,119 — 229 74 816 Purchase obligations 1,864 906 709 193 56 Unrecognized tax benefits 20 20 — — — Contractual obligations $15,671 $3,056 $3,402 $2,543 $6,670 Interest payments on debt and capital lease obligations are calculated for future periods using interest rates in effect at the end of 2014. Projected interestpayments include the related effects of interest rate swap agreements. Certain of these projected interest payments may differ in the future based onchanges in floating interest rates, foreign currency fluctuations or other factors or events. The projected interest payments only pertain to obligations andagreements outstanding at December 31, 2014. Refer to Note 8 and Note 9 for further discussion regarding the company’s debt instruments and relatedinterest rate agreements outstanding at December 31, 2014. The primary components of other long-term liabilities in the company’s consolidated balance sheet are liabilities relating to pension and otherpostemployment benefit plans, litigation, foreign currency hedges, and certain income tax-related liabilities. The company projected the timing of thefuture cash payments based on contractual maturity dates (where applicable) and estimates of the timing of payments (for liabilities with no contractualmaturity dates). The actual timing of payments could differ from the estimates.The company contributed $74 million, $67 million, and $78 million to its defined benefit pension plans in 2014, 2013, and 2012, respectively. Most ofthe company’s plans are funded. The timing of funding in the 391234512Table of Contentsfuture is uncertain and is dependent on future movements in interest rates and investment returns, changes in laws and regulations, and other variables.Therefore, the table above excludes pension plan cash outflows. The pension plan balance included in other long-term liabilities (and excluded from thetable above) totaled $2.2 billion at December 31, 2014. Includes the company’s significant contractual unconditional purchase obligations. For cancelable agreements, any penalty due upon cancellation isincluded. These commitments do not exceed the company’s projected requirements and are in the normal course of business. Examples include firmcommitments for raw material purchases, utility agreements and service contracts. Due to the uncertainty related to the timing of the reversal of uncertain tax positions, the long-term liability relating to uncertain tax positions of $195million at December 31, 2014 has been excluded from the table above. Excludes contingent liabilities, including contingent milestone payments of $2.6 billion associated with joint development and commercializationarrangements and contingent milestone payments of $2.6 billion associated with acquisitions, as well as the company’s unfunded commitment atDecember 31, 2014 of $38 million as a limited partner in multiple investment companies. These amounts have been excluded from the contractualobligations above due to uncertainty regarding the timing and amount of future payments. Refer to Note 5, Note 10 and Note 11 for additionalinformation regarding these commitments.Off-Balance Sheet ArrangementsBaxter periodically enters into off-balance sheet arrangements. Certain contingencies arise in the normal course of business, and are not recorded in theconsolidated balance sheet in accordance with GAAP (such as contingent joint development and commercialization arrangement payments). Also, uponresolution of uncertainties, the company may incur charges in excess of presently established liabilities for certain matters (such as contractualindemnifications). For a discussion of the company’s significant off-balance sheet arrangements, refer to Note 10 for information regarding receivablesecuritizations, Note 11 regarding joint development and commercialization arrangements and indemnifications and Note 16 regarding legal contingencies.FINANCIAL INSTRUMENT MARKET RISKThe 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 inforeign exchange and interest rates. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgmentof the appropriate trade-off between risk, opportunity and costs. Refer to Note 9 and Note 10 for further information regarding the company’s financialinstruments and hedging strategies.Currency RiskThe company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assetsdenominated in the Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, Brazilian Real, Colombian Peso, and Swedish Krona. Thecompany manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any naturaloffsets. In addition, the company uses derivative and nonderivative financial instruments to further reduce the net exposure to foreign exchange. Gains andlosses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and shareholders’ equity volatility relating toforeign 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 transactionsdenominated in foreign currencies and recognized assets and liabilities. The maximum term over which the company has cash flow hedge contracts in placerelated to forecasted transactions at December 31, 2014 is 12 months. The company also enters into derivative instruments to hedge certain intercompany andthird-party receivables and payables and debt denominated in foreign currencies. 40345Table of ContentsCurrency 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 beendesignated 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.Effective February 8, 2013, the Venezuelan government devalued the official exchange rate from 4.3 to 6.3, which resulted in a charge of $11 million during2013. As of December 31, 2014, the company’s subsidiary in Venezuela had net assets of $26 million denominated in the Venezuelan Bolivar. In 2014, netsales in Venezuela represented less than 1% of Baxter’s total net sales.As part of its risk-management program, the company performs sensitivity analyses to assess potential changes in the fair value of its foreign exchangeinstruments 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 December 31, 2014, while not predictivein 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 $12 million withrespect to those contracts would decrease by $72 million, resulting in a net liability position. A similar analysis performed with respect to option and forwardcontracts outstanding at December 31, 2013 indicated that, on a net-of-tax basis, the net asset balance of $18 million would decrease by $71 million.The sensitivity analysis model recalculates the fair value of the foreign exchange option and forward contracts outstanding at December 31, 2014 byreplacing the actual exchange rates at December 31, 2014 with exchange rates that are 10% weaker compared to the actual exchange rates for each applicablecurrency. All other factors are held constant. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directionsand that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of theunderlying hedged transactions and balances.Interest Rate and Other RisksThe 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 policyis 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-efficientmanner, the company periodically enters into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference betweenfixed and floating interest amounts calculated by reference to an agreed-upon notional amount. The company also periodically uses forward-starting interestrate swaps and treasury rate locks to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of term debt.As part of its risk management program, the company performs sensitivity analyses to assess potential gains and losses in earnings relating to hypotheticalmovements in interest rates. A 21 basis-point increase in interest rates (approximately 10% of the company’s weighted-average interest rate during 2014)affecting the company’s financial instruments, including debt obligations and related derivatives, would have an immaterial effect on the company’s 2014,2013 and 2012 earnings and on the fair value of the company’s fixed-rate debt as of the end of each fiscal year.As discussed in Note 10, the fair values of the company’s long-term litigation liabilities were computed by discounting the expected cash flows based oncurrently available information. A 10% movement in the assumed discount rate would have an immaterial effect on the fair values of those liabilities.With respect to the company’s investments in affiliates, the company believes any reasonably possible near-term losses in earnings, cash flows and fair valueswould not be material to the company’s consolidated financial position. 41Table of ContentsCHANGES IN ACCOUNTING STANDARDSRefer to Note 1 for information on changes in accounting standards.CRITICAL ACCOUNTING POLICIESThe preparation of financial statements in accordance with GAAP requires the company to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses. A summary of the company’s significant accounting policies is included in Note 1. Certain of the company’saccounting policies are considered critical because these policies are the most important to the depiction of the company’s financial statements and requiresignificant, difficult or complex judgments by the company, often requiring the use of estimates about the effects of matters that are inherently uncertain.Actual results that differ from the company’s estimates could have an unfavorable effect on the company’s results of operations and financial position. Therehave been no significant changes in the company’s application of its critical accounting policies during 2014. The company’s critical accounting policieshave been reviewed with the Audit Committee of the Board of Directors. The following is a summary of accounting policies that the company considerscritical to the consolidated financial statements.Revenue Recognition and Related Provisions and AllowancesThe company’s policy is to recognize revenues from product sales and services when earned. Specifically, revenue is recognized when persuasive evidence ofan arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectibility is reasonably assured. Forproduct sales, revenue is not recognized until title and risk of loss have transferred to the customer. The shipping terms for the majority of the company’srevenue arrangements are FOB destination. The company sometimes enters into arrangements in which it commits to delivering multiple products or servicesto its customers. In these cases, total arrangement consideration is allocated to the deliverables based on their relative selling prices. Then the allocatedconsideration is recognized as revenue in accordance with the principles described above. Selling prices are determined by applying a selling price hierarchy.Selling prices are determined using vendor specific objective evidence (VSOE), if it exists. Otherwise, selling prices are determined using third partyevidence (TPE). If neither VSOE nor TPE is available, the company uses its best estimate of selling prices.Provisions for rebates, chargebacks to wholesalers and distributors, returns, and discounts (collectively, “sales deductions”) are provided for at the time therelated sales are recorded, and are reflected as a reduction of sales. The sales deductions are based primarily on estimates of the amounts earned or that will beclaimed on such sales.The company periodically and systematically evaluates the collectibility of accounts receivable and determines the appropriate reserve for doubtfulaccounts. In determining the amount of the reserve, the company considers historical credit losses, the past-due status of receivables, payment history andother customer-specific information, and any other relevant factors or considerations.The company also provides for the estimated costs that may be incurred under its warranty programs when the cost is both probable and reasonably estimable,which is at the time the related revenue is recognized. The cost is determined based on actual company experience for the same or similar products as well asother relevant information. Estimates of future costs under the company’s warranty programs could change based on developments in the future. Thecompany is not able to estimate the probability or amount of any future developments that could impact the reserves, but believes presently establishedreserves are adequate.Pension and Other Postemployment Benefit (OPEB) PlansThe company provides pension and other postemployment benefits to certain of its employees. These employee benefit expenses are reported in the sameline items in the consolidated income statement as the applicable employee’s compensation expense. The valuation of the funded status and net periodicbenefit cost for the plans 42Table of Contentsis calculated using actuarial assumptions. These assumptions are reviewed annually, and revised if appropriate. The significant assumptions include thefollowing: • interest rates used to discount pension and OPEB plan liabilities; • the long-term rate of return on pension plan assets; • rates of increases in employee compensation (used in estimating liabilities); • anticipated future healthcare costs (used in estimating the OPEB plan liability); and • other assumptions involving demographic factors such as retirement, mortality and turnover (used in estimating liabilities).Selecting assumptions involves an analysis of both short-term and long-term historical trends and known economic and market conditions at the time of thevaluation (also called the measurement date). The use of different assumptions would result in different measures of the funded status and net cost. Actualresults in the future could differ from expected results. The company is not able to estimate the probability of actual results differing from expected results,but believes its assumptions are appropriate.The company’s key assumptions are listed in Note 13. The most critical assumptions relate to the plans covering U.S. and Puerto Rico employees, becausethese plans are the most significant to the company’s consolidated financial statements.Discount Rate AssumptionFor the U.S. and Puerto Rico plans, at the December 31, 2014 measurement date, the company used a discount rate of 4.00% and 3.95% to measure its benefitobligations for the pension plans and OPEB plan, respectively. These discount rates will be used in calculating the net periodic benefit cost for these plansfor 2015. The company used a broad population of approximately 350 Aa-rated corporate bonds as of December 31, 2014 to determine the discount rateassumption. All bonds were denominated in U.S. Dollars, with a minimum amount outstanding of $50 million. This population of bonds was narrowed from abroader universe of over 700 Moody’s Aa rated, non-callable (or callable with make-whole provisions) bonds by eliminating the top 10th percentile andbottom 40th percentile to adjust for any pricing anomalies and to represent the bonds Baxter would most likely select if it were to actually annuitize itspension and OPEB plan liabilities. This portfolio of bonds was used to generate a yield curve and associated spot rate curve to discount the projected benefitpayments for the U.S. and Puerto Rico plans. The discount rate is the single level rate that produces the same result as the spot rate curve.For plans in Canada, Japan, the United Kingdom and the Eurozone, the company uses a method essentially the same as that described for the U.S. and PuertoRico plans. For the company’s other international plans, the discount rate is generally determined by reviewing country- and region-specific government andcorporate bond interest rates.To understand the impact of changes in discount rates on pension and OPEB plan cost, the company performs a sensitivity analysis. Holding all otherassumptions constant, for each 50 basis point (i.e., one-half of one percent) increase in the discount rate, global pre-tax pension and OPEB plan cost woulddecrease by approximately $44 million, and for each 50 basis point decrease in the discount rate, global pre-tax pension and OPEB plan cost would increaseby approximately $54 million.Return on Plan Assets AssumptionIn measuring net periodic cost for 2014, the company used a long-term expected rate of return of 7.50% for the pension plans covering U.S. and Puerto Ricoemployees. For measuring the net periodic benefit cost for these plans for 2015, this assumption will decrease to 7.25%. This assumption is not applicable tothe company’s OPEB plan because it is not funded. 43Table of ContentsThe company establishes the long-term asset return assumption based on a review of historical compound average asset returns, both company-specific andrelating to the broad market (based on the company’s asset allocation), as well as an analysis of current market and economic information and futureexpectations. The current asset return assumption is supported by historical market experience for both the company’s actual and targeted asset allocation. Incalculating net pension cost, the expected return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of planassets in a systematic manner over five years. The difference between this expected return and the actual return on plan assets is a component of the total netunrecognized gain or loss and is subject to amortization in the future.To understand the impact of changes in the expected asset return assumption on net cost, the company performs a sensitivity analysis. Holding all otherassumptions constant, for each 50 basis point increase (decrease) in the asset return assumption, global pre-tax pension plan cost would decrease (increase) byapproximately $19 million.Other AssumptionsFor the U.S. and Puerto Rico plans, at the December 31, 2014 measurement date, the company used the RP 2014 combined mortality table adjusted to reflectpast experience. For all other pension plans, the company utilized country- and region-specific mortality tables to calculate the plans’ benefit obligations.The company periodically analyzes and updates its assumptions concerning demographic factors such as retirement, mortality and turnover, consideringhistorical experience as well as anticipated future trends.The assumptions relating to employee compensation increases and future healthcare costs are based on historical experience, market trends, and anticipatedfuture company actions. Refer to Note 13 for information regarding the sensitivity of the OPEB plan obligation and the total of the service and interest costcomponents of OPEB plan cost to potential changes in future healthcare costs.Legal ContingenciesThe company is involved in product liability, patent, commercial, regulatory and other legal proceedings that arise in the normal course of business. Refer toNote 16 for further information. The company records a liability when a loss is considered probable and the amount can be reasonably estimated. If thereasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss isnot probable or a probable loss cannot be reasonably estimated, no liability is recorded. The company has established reserves for certain of its legal matters.The company is not able to estimate the amount or range of any loss for certain of the legal contingencies for which there is no reserve or additional loss formatters already reserved. At December 31, 2014, total legal liabilities were $72 million.The company’s loss estimates are generally developed in consultation with outside counsel and are based on analyses of potential outcomes. With respect tothe recording of any insurance recoveries, after completing the assessment and accounting for the company’s legal contingencies, the company separatelyand independently analyzes its insurance coverage and records any insurance recoveries that are probable of occurring at the gross amount that is expected tobe collected. In performing the assessment, the company reviews available information, including historical company-specific and market collectionexperience for similar claims, current facts and circumstances pertaining to the particular insurance claim, the financial viability of the applicable insurancecompany or companies, and other relevant information.While the liability of the company in connection with certain claims cannot be estimated and although the resolution in any reporting period of one or moreof 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 proceedingsis not expected to have a material adverse effect on the company’s consolidated financial position. While the company believes it has valid defenses in thesematters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments or enter into materialsettlements of claims. 44Table of ContentsDeferred Tax Asset Valuation Allowances and Reserves for Uncertain Tax PositionsThe company maintains valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. Changes invaluation allowances are included in the company’s tax provision in the period of change. In determining whether a valuation allowance is warranted, thecompany evaluates factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that couldpotentially enhance the likelihood of realization of a deferred tax asset. The realizability assessments made at a given balance sheet date are subject tochange in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if the company takes operational or taxplanning actions that could impact the future taxable earnings of a subsidiary.In the normal course of business, the company is audited by federal, state and foreign tax authorities, and is periodically challenged regarding the amount oftaxes due. These challenges relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. The companybelieves its tax positions comply with applicable tax law and the company intends to defend its positions. In evaluating the exposure associated with varioustax filing positions, the company records reserves for uncertain tax positions in accordance with GAAP, based on the technical support for the positions, thecompany’s past audit experience with similar situations, and potential interest and penalties related to the matters. The company’s results of operations andeffective tax rate in a given period could be impacted if, upon final resolution with taxing authorities, the company prevailed in positions for which reserveshave been established, or was required to pay amounts in excess of established reserves.Valuation of Intangible Assets, Including IPR&DThe company acquires intangible assets and records them at fair value. Valuations are generally completed for business acquisitions using a discounted cashflow analysis, incorporating the stage of completion and consideration of market participant assumptions. The most significant estimates and assumptionsinherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherentin the future cash flows, the assessment of the asset’s life cycle, and the competitive and other trends impacting the asset, including consideration oftechnical, legal, regulatory, economic and other factors. Each of these factors and assumptions can significantly affect the value of the intangible asset.Acquired in-process R&D (IPR&D) is the value assigned to acquired technology or products under development which have not received regulatory approvaland have no alternative future use.Acquired IPR&D included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisitionare expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is then accounted foras a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the R&D project is abandoned, the indefinite-livedasset is charged to expense.R&D acquired in transactions that are not business combinations is expensed immediately. For such transactions, payments made to third parties on or afterregulatory approval are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.Due to the inherent uncertainty associated with R&D projects, there is no assurance that actual results will not differ materially from the underlyingassumptions used to prepare discounted cash flow analyses, nor that the R&D project will result in a successful commercial product.Impairment of AssetsGoodwill and other indefinite-lived intangible assets are subject to impairment reviews annually, and whenever indicators of impairment exist. The companyassesses goodwill for impairment based on its reporting units, 45Table of Contentswhich are the same as its operating segments, BioScience and Medical Products. As of December 31, 2014, the date of the company’s annual impairmentreview, the fair values of the company’s reporting units were in excess of their carrying values. The company performs a qualitative assessment of otherindefinite-lived intangible assets, including IPR&D, at least annually. If the intangible asset is determined to be more likely than not impaired as a result ofthe assessment, the company completes a quantitative impairment test. Intangible assets with definite lives and other long-lived assets (such as fixed assets)are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Refer to Note1 for further information. The company’s impairment reviews are based on an estimated future cash flow approach that requires significant judgment withrespect to future volume, revenue and expense growth rates, changes in working capital use, foreign currency exchange rates, the selection of an appropriatediscount rate, asset groupings, and other assumptions and estimates. The estimates and assumptions used are consistent with the company’s business plansand a market participant’s views of the company and similar companies. The use of alternative estimates and assumptions could increase or decrease theestimated fair values of the assets, and potentially result in different impacts to the company’s results of operations. Actual results may differ from thecompany’s estimates.Stock-Based Compensation PlansStock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over thesubstantive vesting period. Determining the appropriate fair value model to use requires judgment. Determining the assumptions that enter into the model ishighly subjective and also requires judgment. The company’s stock compensation costs primarily relate to awards of stock options, restricted stock units(RSUs), and performance share units (PSUs). The company uses the Black-Scholes model for estimating the fair value of stock options, and significantassumptions include long-term projections regarding stock price volatility, employee exercise, post-vesting termination and pre-vesting forfeiture behaviors,interest rates and dividend yields. The company’s expected volatility assumption is based on a weighted-average of the historical volatility of Baxter’s stockand the implied volatility from traded options on Baxter’s stock, with historical volatility more heavily weighted. The expected life assumption is primarilybased on the vesting terms of the stock option, historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interestrate for the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield reflects historical experienceas well as future expectations over the expected life of the option.The fair value of RSUs is equal to the quoted price of the company’s common stock on the date of grant.As part of an overall periodic evaluation of the company’s stock compensation programs, the company changed the vesting condition for 50% of the PSUsgranted to senior management beginning with its 2013 annual equity awards. The vesting condition for these PSUs is based on return on invested capital(ROIC), with annual performance targets set at the beginning of the year for each tranche of the award during the three-year service period. The holder of theROIC PSUs is entitled to receive a number of shares of common stock equal to a percentage, ranging from 0% to 200%, of the ROIC PSUs granted, dependingon the actual results compared to the annual performance targets. Compensation cost for the ROIC PSUs is measured based on the fair value of the awards onthe date that the specific vesting terms for each tranche of the award are established. The fair value of the awards is determined based on the quoted price ofthe company’s stock on the grant date for each tranche of the award. The compensation cost for ROIC PSUs is adjusted at each reporting date to reflect theestimated probability of achieving the vesting condition. The probability of achieving the vesting condition has not materially changed during the yearended December 31, 2014. The remaining 50% of the PSUs continued to include conditions for vesting based on Baxter stock performance relative to thecompany’s peer group. The company uses a Monte Carlo model for estimating the fair value of these PSUs. A Monte Carlo model uses stock price volatilityand other variables to estimate the probability of satisfying the market conditions and the resulting fair value of the award. Refer to Note 12 for additionalinformation. 46Table of ContentsCERTAIN REGULATORY MATTERSIn July 2014, the company received a Warning Letter from FDA primarily relating to processes implemented to ensure the absence of particulate matter orleaks associated with products manufactured at the company’s Aibonito, Puerto Rico, plant. The company is working with FDA to resolve this matter, as wellas each of the other Warning Letters listed below.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 letter also included observations relatedto the company’s ambulatory infusor 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, PuertoRico facilities. 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 Renal franchise’s McGaw Park, Illinois facility. TheWarning Letter pertains to the processes by which the company analyzes and addresses product complaints through corrective and preventative actions, andreports relevant information to FDA.On October 9, 2014, the company had a Regulatory Meeting with FDA to discuss the Warning Letters described above. At the meeting, the company agreedto work closely with FDA to provide regular updates on its progress to meet all requirements and resolve all matters identified in the Warning Lettersdescribed above.Please see Item 1A of this Annual Report on Form 10-K for additional discussion of regulatory matters and how they may impact the company.FORWARD-LOOKING INFORMATIONThis annual 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 identifyforward-looking statements that represent our current judgment about possible future events. These forward-looking statements may include statements withrespect 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, estimatesof liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates ofreturn, the company’s exposure to financial market volatility and foreign currency and interest rate risks, the planned separation of the biopharmaceuticalsand medical products businesses, the impact of competition, future sales growth, business development activities, business optimization initiatives, futurecapital and R&D expenditures, future debt issuances, manufacturing expansion, the sufficiency of the company’s facilities and financial flexibility, theadequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, currentconditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances. While these statements representour current judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of 47Table of Contentsany events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risksand uncertainties, including the following factors, many of which are beyond our control: • demand for and market acceptance risks for and competitive pressures related to new and existing products; • product development risks, including satisfactory clinical performance, the ability to manufacture at appropriate scale, and the generalunpredictability 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 payors, as healthcare reform and other similar measures are implemented in the United Statesand 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 developmentstrategies; • the company’s ability to realize the anticipated benefits from its joint product development and commercialization arrangements, governmentalcollaborations and other business development activities; • fluctuations in supply and demand and the pricing of plasma-based therapies; • 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 successfully separate its biopharmaceuticals and medical products businesses on the terms or timeline currentlycontemplated, if at all, and achieve the intended results; • the ability to protect or enforce the company’s owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, tradesecrets and know-how) or patents of third parties preventing or restricting the company’s manufacture, sale or use of affected products ortechnology; • the impact of global economic conditions on the company and its customers and suppliers, including foreign governments in certain countries inwhich 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; 48Table of Contents • 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 Annual Report on Form 10-K including those factors described in Item 1A and other filings with theSecurities and Exchange Commission, 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-lookingstatements. Item 7A.Quantitative and Qualitative Disclosures About Market Risk.Incorporated by reference to the section entitled “Financial Instrument Market Risk” in “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in Item 7 of this Annual Report on Form 10-K. 49Table of ContentsItem 8.Financial Statements and Supplementary Data.CONSOLIDATED BALANCE SHEETS as of December 31 (in millions, except share information) 2014 2013 Current assets Cash and equivalents $2,925 $2,733 Accounts and other current receivables, net 2,803 2,911 Inventories 3,559 3,499 Short-term deferred income taxes 501 504 Prepaid expenses and other 563 548 Total current assets 10,351 10,195 Property, plant and equipment, net 8,698 7,832 Other assets Goodwill 3,874 4,205 Other intangible assets, net 2,079 2,294 Other 915 698 Total other assets 6,868 7,197 Total assets $25,917 $25,224 Current liabilities Short-term debt $913 $181 Current maturities of long-term debt and lease obligations 786 859 Accounts payable and accrued liabilities 4,343 4,208 Total current liabilities 6,042 5,248 Long-term debt and lease obligations 7,606 8,126 Other long-term liabilities 4,113 3,364 Commitments and contingencies Equity Common stock, $1 par value, authorized2,000,000,000 shares, issued683,494,944 shares in 2014 and 2013 683 683 Common stock in treasury, at cost,141,116,857 shares in 2014 and 140,456,989 shares in 2013 (7,993) (7,914) Additional contributed capital 5,853 5,818 Retained earnings 13,227 11,852 Accumulated other comprehensive loss (3,650) (1,976) Total Baxter International Inc. (Baxter)shareholders’ equity 8,120 8,463 Noncontrolling interests 36 23 Total equity 8,156 8,486 Total liabilities and equity $25,917 $25,224 The accompanying notes are an integral part of these consolidated financial statements. 50Table of ContentsCONSOLIDATED STATEMENTS OF INCOME years ended December 31 (in millions, except per share data) 2014 2013 2012 Net sales $16,671 $14,967 $13,936 Cost of sales 8,514 7,495 6,802 Gross margin 8,157 7,472 7,134 Marketing and administrative expenses 4,029 3,642 3,283 Research and development expenses 1,421 1,165 1,081 Net interest expense 145 128 87 Other expense (income), net 123 (9) (155) Income from continuing operations before income taxes 2,439 2,546 2,838 Income tax expense 493 534 555 Income from continuing operations 1,946 2,012 2,283 Income from discontinued operations, net of tax 551 0 43 Net income $2,497 $2,012 $2,326 Income from continuing operations per common share Basic $3.59 $3.70 $4.14 Diluted $3.56 $3.66 $4.11 Income from discontinued operations per common share Basic $1.02 $0.00 $0.08 Diluted $1.00 $0.00 $0.07 Net income per common share Basic $4.61 $3.70 $4.22 Diluted $4.56 $3.66 $4.18 Weighted-average number of common shares outstanding Basic 542 543 551 Diluted 547 549 556 The accompanying notes are an integral part of these consolidated financial statements. 51Table of ContentsCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME years ended December 31 (in millions) 2014 2013 2012 Net income $2,497 $2,012 $2,326 Other comprehensive (loss) income, net of tax: Currency translation adjustments, net of tax (benefit) expense of ($132) in 2014, $41 in 2013 and $22 in 2012 (1,332) 236 (98) Pension and other employee benefits, net of tax (benefit) expense of ($193) in 2014, $309 in 2013 and ($1) in 2012 (400) 592 (111) Hedging activities, net of tax expense (benefit) of $14 in 2014, $7 in 2013 and ($6) in 2012 24 15 (7) Other, net of tax (benefit) of ($2) in 2014, ($3) in 2013 and ($2) in 2012 34 (9) (3) Total other comprehensive (loss) income, net of tax (1,674) 834 (219) Comprehensive income $823 $2,846 $2,107 The accompanying notes are an integral part of these consolidated financial statements. 52Table of ContentsCONSOLIDATED STATEMENTS OF CASH FLOWS years ended December 31 (in millions) (brackets denote cash outflows) 2014 2013 2012 Cash flows from Net income $2,497 $2,012 $2,326 operations Adjustments Depreciation and amortization 1,005 823 712 Deferred income taxes (78) (224) (17) Stock compensation 159 150 130 Realized excess tax benefits from stock issued under employee benefit plans (24) (34) (24) Business optimization charges 27 282 150 Net periodic pension benefit and OPEB costs 275 381 477 Gain on sale of discontinued operations (466) — — Infusion pump and other product-related charges 93 17 — Losses (gains) related to contingent payment liabilities 122 (17) (108) Other 269 54 66 Changes in balance sheet items Accounts and other current receivables, net (125) (36) (41) Inventories (439) (311) (129) Accounts payable and accrued liabilities 115 361 40 Business optimization and infusion pump payments (161) (125) (283) Other (54) (135) (193) Cash flows from operations 3,215 3,198 3,106 Cash flows from investing activities Capital expenditures (including additions to the pool of equipment placed withor leased to customers of $151 in 2014, $148 in 2013 and $150 in 2012) (1,898) (1,525) (1,161) Acquisitions and investments, net of cash acquired (409) (3,851) (515) Divestitures and other investing activities 765 14 107 Cash flows from investing activities (1,542) (5,362) (1,569) Cash flows from Issuances of debt 41 3,636 1,037 financing activities Payments of obligations (1,029) (540) (22) Increase (decrease) in debt with original maturities of three months or less, net 875 — (250) Cash dividends on common stock (1,095) (1,023) (804) Proceeds and realized excess tax benefits from stock issued under employeebenefit plans 369 508 512 Purchases of treasury stock (550) (913) (1,480) Other (13) (23) (108) Cash flows from financing activities (1,402) 1,645 (1,115) Effect of foreign exchange rate changes on cash and equivalents (79) (18) (57) Increase (decrease) in cash and equivalents 192 (537) 365 Cash and equivalents at beginning of year 2,733 3,270 2,905 Cash and equivalents at end of year $2,925 $2,733 $3,270 Other supplemental information Interest paid, net of portion capitalized $208 $200 $135 Income taxes paid $726 $648 $415 The accompanying notes are an integral part of these consolidated financial statements. 53Table of ContentsCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 2014 2013 2012 as of and for the years ended December 31 (in millions) Shares Amount Shares Amount Shares Amount Common stock Balance, beginning and end of year 683 $683 683 $683 683 $683 Common stock in treasury Beginning of year 140 (7,914) 137 (7,592) 123 (6,719) Purchases of common stock 8 (550) 13 (913) 25 (1,480) Stock issued under employee benefit plans and other (7) 471 (10) 591 (11) 607 End of year 141 (7,993) 140 (7,914) 137 (7,592) Additional contributed capital Beginning of year 5,818 5,769 5,783 Stock issued under employee benefit plans and other 35 45 17 Exercise of SIGMA purchase option — 4 (31) End of year 5,853 5,818 5,769 Retained earnings Beginning of year 11,852 10,888 9,429 Net income 2,497 2,012 2,326 Dividends declared on common stock (1,116) (1,048) (866) Stock issued under employee benefit plans (6) — (1) End of year 13,227 11,852 10,888 Accumulated other comprehensive loss Beginning of year (1,976) (2,810) (2,591) Other comprehensive (loss) income (1,674) 834 (219) End of year (3,650) (1,976) (2,810) Total Baxter shareholders’ equity $8,120 $8,463 $6,938 Noncontrolling interests Beginning of year $23 $40 $243 Elimination of SIGMA noncontrolling ownership interest — — (159) Change in noncontrolling interests 13 (17) (44) End of year $36 $23 $40 Total equity $8,156 $8,486 $6,978 The accompanying notes are an integral part of these consolidated financial statements. 54Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of OperationsBaxter International Inc. (Baxter or the company), through its subsidiaries, develops, manufactures and markets products that save and sustain the lives ofpeople with hemophilia, immune disorders, cancer, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. As a global,diversified healthcare company, Baxter applies a unique combination of expertise in medical devices, pharmaceuticals and biotechnology to create productsthat advance patient care worldwide. The company operates in two segments, BioScience and Medical Products, which are described in Note 17.In March 2014, Baxter announced plans to create two separate, independent global healthcare companies – one focused on lifesaving medical products andthe other on developing and marketing innovative biopharmaceuticals. The transition is intended to take the form of a tax-free distribution to Baxtershareholders of more than 80% of the publicly traded stock in the new biopharmaceuticals company. The transaction is expected to be completed by mid-year 2015, subject to market, regulatory and certain other conditions, including final approval by the Baxter Board of Directors, receipt of a favorableopinion and/or rulings with respect to the tax-free nature of the transaction in the United States, and the effectiveness of the Form 10 registration statementfiled with the United States Securities and Exchange Commission. Upon separation, the historical results of the biopharmaceuticals business will bepresented as discontinued operations.Use of EstimatesThe preparation of the financial statements in conformity with generally accepted accounting principles (GAAP) requires the company to make estimates andassumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.Basis of PresentationThe consolidated financial statements include the accounts of Baxter and its majority-owned subsidiaries, any other subsidiaries that Baxter controls, andvariable interest entities (VIEs) in which Baxter is the primary beneficiary, after elimination of intercompany transactions. During 2012, the companyexercised its option to purchase the remaining equity of Sigma International General Medical Apparatus, LLC (SIGMA), which Baxter previouslyconsolidated as the primary beneficiary of a VIE. The company has not subsequently entered into any new arrangements in which it determined that it wasthe primary beneficiary of a VIE, and there were no VIEs consolidated by the company as of December 31, 2013 and 2014. Refer to Note 3 for additionalinformation about the SIGMA option exercise.On September 6, 2013, Baxter acquired Indap Holding AB, the holding company for Gambro AB (Gambro), a privately held dialysis product company basedin Lund, Sweden, for cash consideration of $3.7 billion. Beginning September 6, 2013, Baxter’s financial statements include the assets, liabilities, andoperating results of Gambro. Refer to Note 5 for additional information about the Gambro acquisition.In the third quarter of 2014, the company committed to a plan to divest its Vaccines franchise. Refer to Note 2 for a summary of the operating results of theVaccines franchise reflected as discontinued operations.Revision of 2013 Tax BalancesThe company identified and corrected prior period errors in the presentation of its current and deferred income tax assets and liabilities as of December 31,2013 in the consolidated balance sheet with no impact to total equity. 55Table of ContentsThe company assessed the impact of these errors and concluded that these errors were not material to previously issued financial statements. The companyhas revised its previously reported consolidated balance sheet as of December 31, 2013 as reflected below. as of December 31, 2013 (in millions) As Reported Adjustments As Revised Short-term deferred income taxes $ 393 $ 111 $ 504 Prepaid expense and other 468 80 548 Other assets 1,534 (836) 698 Accounts payable and accrued liabilities 4,866 (658) 4,208 Other long-term liabilities 3,351 13 3,364 Revenue RecognitionThe company recognizes revenues from product sales and services when earned. Specifically, revenue is recognized when persuasive evidence of anarrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectibility is reasonably assured. Forproduct sales, revenue is not recognized until title and risk of loss have transferred to the customer. The shipping terms for the majority of the company’srevenue arrangements are FOB destination. The recognition of revenue is delayed if there are significant post-delivery obligations, such as training,installation or other services. Provisions for discounts, rebates to customers, chargebacks to wholesalers and returns are provided for at the time the relatedsales are recorded, and are reflected as a reduction to gross sales to arrive at net sales.The company sometimes enters into arrangements in which it commits to delivering multiple products or services to its customers. In these cases, totalarrangement consideration is allocated to the deliverables based on their relative selling prices. Then the allocated consideration is recognized as revenue inaccordance with the principles described above. Selling prices are determined by applying a selling price hierarchy. Selling prices are determined usingvendor specific objective evidence (VSOE), if it exists. Otherwise, selling prices are determined using third party evidence (TPE). If neither VSOE nor TPE isavailable, the company uses its best estimate of selling prices.Accounts Receivable and Allowance for Doubtful AccountsIn the normal course of business, the company provides credit to its customers, performs credit evaluations of these customers and maintains reserves forpotential credit losses. In determining the amount of the allowance for doubtful accounts, the company considers, among other items, historical credit losses,the past-due status of receivables, payment histories and other customer-specific information. Receivables are written off when the company determines theyare uncollectible. The allowance for doubtful accounts was $139 million at December 31, 2014 and $169 million at December 31, 2013.Product WarrantiesThe company provides for the estimated costs relating to product warranties at the time the related revenue is recognized. The cost is determined based onactual company experience for the same or similar products, as well as other relevant information. Product warranty liabilities are adjusted based on changesin estimates.Cash and EquivalentsCash and equivalents include cash, certificates of deposit and money market funds with an original maturity of three months or less. 56Table of ContentsInventories as of December 31 (in millions) 2014 2013 Raw materials $910 $920 Work in process 1,126 1,136 Finished goods 1,523 1,443 Inventories $3,559 $3,499 Inventories are stated at the lower of cost (first-in, first-out method) or market value. Market value for raw materials is based on replacement costs, and marketvalue for work in process and finished goods is based on net realizable value. The company reviews inventories on hand at least quarterly and recordsprovisions for estimated excess, slow-moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value.Property, Plant and Equipment, Net as of December 31 (in millions) 2014 2013 Land $225 $220 Buildings and leasehold improvements 2,673 2,670 Machinery and equipment 7,687 7,360 Equipment with customers 1,353 1,361 Construction in progress 2,870 2,184 Total property, plant and equipment, at cost 14,808 13,795 Accumulated depreciation (6,110) (5,963) Property, plant and equipment (PP&E), net $8,698 $7,832 Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets, which range from 20 to 50 years forbuildings and improvements and from three to 15 years for machinery and equipment. Leasehold improvements are amortized over the life of the relatedfacility lease (including any renewal periods, if appropriate) or the asset, whichever is shorter. Baxter capitalizes certain computer software and softwaredevelopment costs incurred in connection with developing or obtaining software for internal use as part of machinery and equipment. Capitalized softwarecosts are amortized on a straight-line basis over the estimated useful lives of the software, and are included in depreciation expense. Straight-line andaccelerated methods of depreciation are used for income tax purposes. Depreciation expense was $809 million in 2014, $674 million in 2013 and $590million in 2012.AcquisitionsResults of operations of acquired companies are included in the company’s results of operations as of the respective acquisition dates. The purchase price ofeach acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. Any purchase price in excess ofthese net assets is recorded as goodwill. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fairvalues during the measurement period, which may be up to one year from the acquisition date.Contingent consideration is recognized at the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent payments arerecognized in earnings. Contingent payments related to acquisitions consist of development, regulatory, and commercial milestone payments, in addition tosales-based payments, and are valued using discounted cash flow techniques. The fair value of development, regulatory, and commercial milestone paymentsreflects management’s expectations of probability of payment, and increases or 57Table of Contentsdecreases as the probability of payment or expectation of timing of payments changes. The fair value of sales-based payments is based upon probability-weighted future revenue estimates and increases or decreases as revenue estimates or expectation of timing of payments changes.Research and DevelopmentResearch and development (R&D) costs, including R&D acquired in transactions that are not business combinations, are expensed as incurred. Pre-regulatoryapproval contingent milestone obligations to counterparties in collaborative arrangements are expensed when the milestone is achieved. Payments made tocounterparties on or after regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized forsuch payments are included in other intangible assets, net of accumulated amortization.Acquired in-process R&D (IPR&D) is the value assigned to technology or products under development acquired in a business combination which have notreceived regulatory approval and have no alternative future use. Acquired IPR&D is capitalized as an indefinite-lived intangible asset. Development costsincurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-livedintangible asset is accounted for as a finite-lived intangible asset and generally amortized on a straight-line basis over the estimated economic life of therelated technology or product, subject to annual impairment reviews as discussed below. If the R&D project is abandoned, the indefinite-lived asset ischarged to expense.Collaborative ArrangementsThe company enters into collaborative arrangements in the normal course of business. These collaborative arrangements take a number of forms andstructures, and are designed to enhance and expedite long-term sales and profitability growth. These arrangements generally provide that Baxter obtaincommercialization rights to a product under development. The agreements often require Baxter to make upfront payments and include additional contingentmilestone payments relating to the achievement of specified development, regulatory and commercial milestones, as well as make royalty payments. Baxtermay also be responsible for other on-going costs associated with the arrangements, including R&D cost reimbursements to the counterparty.Royalty payments are expensed as cost of sales when they become due and payable. Any purchases of inventory from the partner during the developmentstage are expensed as R&D, while such purchases during the commercialization phase are capitalized as inventory and recognized as cost of sales when therelated finished products are sold.Business Optimization ChargesThe company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. Employee termination costsare primarily recorded when actions are probable and estimable. Costs for one-time termination benefits in which the employee is required to render serviceuntil termination in order to receive the benefits are recognized ratably over the future service period. Refer to the discussion below regarding the accountingfor asset impairment charges.GoodwillGoodwill is not amortized, but is subject to an impairment review annually and whenever indicators of impairment exist. Goodwill would be impaired if thecarrying amount of a reporting unit exceeded the fair value of that reporting unit, calculated as the present value of estimated cash flows discounted using arisk-free market rate adjusted for a market participant’s view of similar companies and perceived risks in the cash flows. The implied fair value of goodwill isthen determined by subtracting the fair value of all identifiable net assets other than goodwill from the fair value of the reporting unit, with an impairmentcharge recorded for the excess, if any, of carrying amount of goodwill over the implied fair value. 58Table of ContentsIntangible Assets Not Subject to AmortizationIndefinite-lived intangible assets, such as IPR&D acquired in business combinations and certain trademarks with indefinite lives, are subject to animpairment review annually and whenever indicators of impairment exist. Indefinite-lived intangible assets are impaired if the carrying amount of the assetexceeded the fair value of the asset.Other Long-Lived AssetsThe company reviews the carrying amounts of long-lived assets, other than goodwill and intangible assets not subject to amortization, for potentialimpairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating recoverability, thecompany groups assets and liabilities at the lowest level such that the identifiable cash flows relating to the group are largely independent of the cash flowsof other assets and liabilities. The company then compares the carrying amounts of the assets or asset groups with the related estimated undiscounted futurecash flows. In the event impairment exists, an impairment charge is recorded as the amount by which the carrying amount of the asset or asset group exceedsthe fair value.Shipping and Handling CostsShipping costs, which are costs incurred to physically move product from Baxter’s premises to the customer’s premises, are classified as marketing andadministrative expenses. Handling costs, which are costs incurred to store, move and prepare products for shipment, are classified as cost of sales.Approximately $340 million in 2014, $293 million in 2013 and $265 million in 2012 of shipping costs were classified in marketing and administrativeexpenses.Income TaxesDeferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws andrates. The company maintains valuation allowances unless it is more likely than not that the deferred tax asset will be realized. With respect to uncertain taxpositions, the company determines whether the position is more likely than not to be sustained upon examination, based on the technical merits of theposition. Any tax position that meets the more likely than not recognition threshold is measured and recognized in the consolidated financial statements atthe largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The liability relating to uncertain tax positions isclassified as current in the consolidated balance sheets to the extent the company anticipates making a payment within one year. Interest and penaltiesassociated with income taxes are classified in the income tax expense line in the consolidated statements of income.Foreign Currency TranslationCurrency translation adjustments (CTA) related to foreign operations are included in other comprehensive income (OCI). For foreign operations in highlyinflationary economies, translation gains and losses are included in other expense (income), net, and were not material in 2014, 2013 and 2012.Derivatives and Hedging ActivitiesAll derivative instruments are recognized as either assets or liabilities at fair value in the 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 flowor fair value hedges.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 othercomprehensive income (AOCI) and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid areinitially recorded as assets and reclassified to OCI over the life of the option, and then recognized in earnings consistent with the 59Table of Contentsunderlying hedged item. Cash flow hedges are classified in net sales, cost of sales, and net interest expense, and primarily related to forecasted third-partysales denominated in foreign currencies, forecasted intercompany sales denominated in foreign currencies and anticipated issuances of debt, respectively.For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings,and offsets the loss or gain on the underlying hedged item. Fair value hedges are classified in net interest expense, as they hedge the interest rate riskassociated with certain of the company’s fixed-rate debt.For derivative instruments that are not designated as hedges, the change in fair value is recorded directly to other expense (income), net.If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinues hedgeaccounting prospectively. If the company removes the cash flow hedge designation because the hedged forecasted transactions are no longer probable ofoccurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges inwhich the forecasted transactions are still probable of occurring are deferred and recognized consistent with the income or loss recognition of the underlyinghedged items. If the company terminates a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged items at the date oftermination is amortized to earnings over the remaining term of the hedged item.Derivatives, including those that are not designated as a hedge, are principally classified in the operating section of the consolidated statements of cash flowsin the same category as the related consolidated balance sheet account.Refer to Note 9 for further information regarding the company’s derivative and hedging activities.New Accounting StandardsIn May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts withCustomers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern therecognition 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 thecompany beginning on January 1, 2017. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior periodpresented or retrospectively with the cumulative effect recognized as of the date of adoption. The company is currently evaluating the impact of adopting thenew revenue standard on its consolidated financial statements.NOTE 2DISCONTINUED OPERATIONS In July 2014, the company entered into an agreement with Pfizer Inc. to sell its commercial vaccines business, including NeisVac-C, a vaccine which helpsprotect against meningitis caused by group C meningococcal meningitis, and FSME-IMMUN, which helps protect against tick-borne encephalitis (TBE), aninfection of the brain transmitted by the bite of ticks infected with the TBE-virus, and committed to a plan to divest the remainder of its Vaccines franchise,which includes certain R&D programs. The company completed the divestiture of the commercial vaccines business in December 2014 and received cashproceeds of $639 million and recorded an after-tax gain of $417 million. The company entered into a separate agreement for the sale of the remainder of theVaccines franchise in December 2014, which is expected to be completed in the first quarter of 2015. As a result of the divestitures, the operations and cashflows of the Vaccines franchise will be eliminated from the ongoing operations of the company. 60Table of ContentsFollowing is a summary of the operating results of the Vaccines franchise, which have been reflected as discontinued operations for the years endedDecember 31, 2014, 2013 and 2012. years ended December 31 (in millions) 2014 2013 2012 Net sales $301 $292 $254 Income before income taxes 616 3 51 Income tax expense 65 3 8 Net income $551 $0 $43 NOTE 3SUPPLEMENTAL FINANCIAL INFORMATION Other Long-Term Assets as of December 31 (in millions) 2014 2013 Deferred income taxes $273 $41 Other long-term receivables 127 216 Other 515 441 Other long-term assets $915 $698 Accounts Payable and Accrued Liabilities as of December 31 (in millions) 2014 2013 Accounts payable, principally trade $1,264 $1,103 Income taxes payable 336 382 Deferred income taxes 9 21 Common stock dividends payable 282 266 Employee compensation and withholdings 716 667 Property, payroll and certain other taxes 261 237 Infusion pump reserves 22 64 Business optimization reserves 118 199 Accrued rebates 374 346 Other 961 923 Accounts payable and accrued liabilities $4,343 $4,208 Other Long-Term Liabilities as of December 31 (in millions) 2014 2013 Pension and other employee benefits $2,748 $2,049 Litigation reserves 53 72 Infusion pump reserves — 19 Business optimization reserves 51 89 Contingent payment liabilities 569 340 Other 692 795 Other long-term liabilities $4,113 $3,364 61Table of ContentsNet Interest Expense years ended December 31 (in millions) 2014 2013 2012 Interest costs $237 $225 $165 Interest costs capitalized (70) (70) (52) Interest expense 167 155 113 Interest income (22) (27) (26) Net interest expense $145 $128 $87 Certain of the above 2013 balance sheet amounts were revised in connection with the income tax assets and liabilities adjustments described in Note 1.Exercise of SIGMA OptionIn April 2012, the company exercised its option to purchase the remaining equity of SIGMA for a cash payment of $90 million. Since the 2009 acquisition ofa 40% stake in SIGMA, the company has consolidated the financial statements of SIGMA, with the equity owned by existing SIGMA equity holders reportedas noncontrolling interests. As a result, the exercise of the option was treated as an equity transaction and no additional assets were recognized by Baxterrelated to the additional ownership interest acquired. On the date of exercise, the carrying value of the noncontrolling interest was eliminated to reflectBaxter’s change in ownership interest in SIGMA’s equity and the carrying value of the call option was also eliminated. The exercise of the SIGMA purchaseoption had no direct impact on the company’s results of operations, and the payment was classified as a financing activity on the consolidated statements ofcash flows. Effective as of the date of the option exercise, 100% of SIGMA’s pre-tax income has been reflected in the company’s results of operations and, asa result, the company no longer reports noncontrolling interest related to SIGMA.NOTE 4EARNINGS PER SHARE The numerator for both basic and diluted earnings per share (EPS) is either net income, income from continuing operations, or income from discontinuedoperations. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The dilutive effect ofoutstanding stock options, restricted stock units (RSUs) and performance share units (PSUs) is reflected in the denominator for diluted EPS using the treasurystock method.The following is a reconciliation of basic shares to diluted shares. years ended December 31 (in millions) 2014 2013 2012 Basic shares 542 543 551 Effect of dilutive securities 5 6 5 Diluted shares 547 549 556 The effect of dilutive securities included unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. Thecomputation of diluted EPS excluded 9 million, 5 million, and 16 million equity awards in 2014, 2013 and 2012, respectively, because their inclusion wouldhave had an anti-dilutive effect on diluted EPS. Refer to Note 12 for additional information regarding items impacting basic shares. 62Table of ContentsNOTE 5ACQUISITIONS AND COLLABORATIONS Gambro AB AcquisitionOn September 6, 2013, Baxter acquired 100 percent of the voting equity interests in Indap Holding AB, the holding company for Gambro, a privately helddialysis product company based in Lund, Sweden. Gambro is a global medical technology company focused on developing, manufacturing and supplyingdialysis products and therapies for patients with acute or chronic kidney disease. The transaction provides Baxter with a broad and complementary dialysisproduct portfolio, while further advancing the company’s geographic footprint in the dialysis business. In addition, the company has augmented its pipelinewith Gambro’s next-generation monitors, dialyzers, devices and dialysis solutions.The total cash consideration for the acquisition, as reduced by assumed debt of $221 million, was $3.7 billion. During 2014, the company finalized itsvaluation of the acquisition date assets acquired and liabilities assumed. The measurement period adjustments in 2014 include a $14 million increase toproperty, plant and equipment and $4 million of working capital adjustments. The adjustments resulted in a corresponding decrease in goodwill of $10million and a decrease to the fair value of consideration transferred of $4 million. These adjustments did not have a material impact on Baxter’s results ofoperations during 2014.The following table summarizes the final fair value of the consideration transferred and the amounts recognized for assets acquired and liabilities assumed asof the acquisition date. (in millions) Consideration transferred Cash $3,700 Fair value of consideration transferred $3,700 Assets acquired and liabilities assumed Cash $88 Accounts receivable 488 Inventories 368 Prepaid expenses and other 54 Property, plant, and equipment 740 Other intangible assets 1,290 Other assets 11 Current-maturities of long-term debt and lease obligations (2) Accounts payable and accrued liabilities (345) Long-term debt and lease obligations (261) Other long-term liabilities (including pension obligations of $209) (341) Total identifiable net assets 2,090 Goodwill 1,610 Total assets acquired and liabilities assumed $3,700 The results of operations, assets and liabilities of Gambro are included in the Medical Products segment, together with the related goodwill. Goodwillincludes expected synergies, as well as an expanded dialysis product portfolio and global footprint for the company’s Medical Products business, particularlythe Renal franchise. The goodwill is not deductible for tax purposes. Other intangible assets included developed technology of $916 million, trademarks of$206 million, and indefinite-lived IPR&D of $168 million. Other intangible assets, excluding IPR&D, are being amortized on a straight-line basis over aweighted-average estimated useful life of approximately 15 years. The acquired IPR&D related to next generation monitors, dialyzers, fluids, and othertechnologies used in both chronic and acute therapies. The projects ranged in levels of completion and were 63Table of Contentsexpected to be completed over a five year period. The value of the IPR&D was calculated using cash flow projections adjusted for the inherent technical,regulatory, commercial and obsolescence risk in such activities, discounted at a rate of 12%. As of the acquisition date, additional research and developmentcosts totaling approximately $85 million were projected to be required in order for the projects to obtain regulatory approval. Certain projects werecompleted during 2014, and there has been no material change in management’s projections since the acquisition date.Long-term debt and lease obligations included $221 million of Gambro’s pre-existing Euro-denominated debt assumed by Baxter on the date of closing,which was subsequently paid off in September 2013. The debt settlement has been classified as a financing activity in the consolidated statements of cashflows.The company incurred acquisition-related costs of $101 million during 2013, which were recorded in marketing and administrative expenses.Actual and pro forma impact of acquisitionThe following table presents information for Gambro that has been included in Baxter’s consolidated statements of income from the acquisition date throughDecember 31, 2013. (in millions) Gambro’s operationsincluded in Baxter’s results Net sales $513 Net loss $ (45) The net loss included the impact of fair value adjustments to acquisition-date inventory that was sold in 2013 (approximately $62 million on a pre-tax basis).The following table presents supplemental pro forma information for the years ended December 31, 2013 and 2012 as if the acquisition of Gambro hadoccurred on January 1, 2012. Unaudited Pro Forma Consolidated Results Years ended December 31, (in millions, except per share information) 2013 2012 Net sales $15,996 $15,513 Income from continuing operations 2,138 1,978 Basic EPS from continuing operations $ 3.94 $ 3.59 Diluted EPS from continuing operations $ 3.89 $ 3.56 The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based on the historical information of Baxterand Gambro. The unaudited pro forma consolidated results are not necessarily indicative of what the consolidated results of operations would have been hadthe acquisition been completed on January 1, 2012. In addition, the unaudited pro forma consolidated results are not projections of future results ofoperations of the combined company nor do they reflect the expected realization of any cost savings or synergies associated with the acquisition.The unaudited pro forma consolidated results reflect primarily the following pro forma pre-tax adjustments: • Conversion of Gambro’s historical results of operations from International Financial Reporting Standards (IFRS) to GAAP. • Elimination of Gambro’s historical intangible asset amortization expense and property, plant and equipment depreciation expense. • Addition of amortization expense related to the fair value of identifiable intangible assets acquired. 64Table of Contents • Addition of depreciation expense related to the fair value of property, plant and equipment acquired. • Elimination of a $62 million charge related to the fair value adjustment of acquisition-date inventory from the year ended December 31, 2013. • Addition of a $62 million charge related to the fair value adjustment of acquisition-date inventory to the year ended December 31, 2012. • Elimination of Gambro’s historical interest expense and addition of interest expense associated with debt that was issued in 2013 to partiallyfinance the acquisition. • Elimination of $244 million of acquisition, integration and currency-related charges from the year ended December 31, 2013 and addition ofthese costs to the year ended December 31, 2012. These costs were directly attributable to the acquisition and non-recurring in nature, andincluded acquisition and integration related charges incurred by Baxter, in addition to post-acquisition restructuring costs and losses fromforeign currency hedging activity related to the acquisition.Other AcquisitionsThe following table summarizes the fair value of consideration transferred and the assets acquired and liabilities assumed as of the acquisition date for thecompany’s other significant acquisitions in 2014, 2013 and 2012. 2014 2013 2012 (in millions) Chatham AesRx Inspiration/Ipsen Synovis Consideration transferred Cash, net of cash acquired $ 70 $15 $ 51 $304 Contingent payments 77 65 269 — Fair value of consideration transferred $147 $80 $320 $304 Assets acquired and liabilities assumed Other intangible assets $ 74 $78 $288 $115 Other assets, net — — 25 25 Total identifiable net assets $ 74 $78 $313 $140 Goodwill 73 2 7 164 Total assets acquired and liabilities assumed $147 $80 $320 $304 Pro forma financial information has not been included because these acquisitions, individually and in the aggregate, did not have a material impact on thecompany’s financial position or results of operations for the years ended December 31, 2014, 2013 and 2012. Additional information regarding the aboveacquisitions has been provided below.Chatham Therapeutics, LLCIn May 2012, Baxter entered into an exclusive global license agreement with Chatham Therapeutics, LLC (Chatham Therapeutics) to develop andcommercialize potential treatments for hemophilia B utilizing Chatham Therapeutics’ gene therapy technology. Baxter recognized an R&D charge of $30million related to an upfront payment.In April 2014, Baxter acquired all of the outstanding membership interests in Chatham Therapeutics, obtaining all gene therapy programs related to thedevelopment and commercialization of treatments for hemophilia.Baxter made an initial payment of $70 million, and may make additional payments of up to $560 million in payments related to the achievement ofdevelopment, regulatory and first commercial sale milestones, in addition to sales milestones of up to $780 million. The estimated fair value of thecontingent payment liabilities at the 65Table of Contentsacquisition date was $77 million, which was recorded in other long-term liabilities, and was calculated based on the probability of achieving the specifiedmilestones and the discounting of expected future cash flows. As of December 31, 2014, there were no significant changes to these contingent paymentliabilities.Baxter allocated $74 million of the total consideration to acquired IPR&D, which is being accounted for as an indefinite-lived intangible asset, with theresidual consideration of $73 million recorded as goodwill. The acquired IPR&D primarily related to Chatham Therapeutics’ hemophilia A (FVIII) program,which was in preclinical stage at the time of the acquisition and is expected to be completed in approximately 10 years. The value of the IPR&D wascalculated using cash flow projections adjusted for the inherent technical, regulatory, commercial and obsolescence risks in such activities, discounted at arate of 12%. Additional R&D will be required prior to obtaining regulatory approval and, as of the acquisition date, incremental R&D costs were projected tobe in excess of $130 million. The goodwill, which may be deductible for tax purposes depending on the ultimate resolution of the contingent paymentliabilities, includes the value of potential future technologies as well as the overall strategic benefits of the acquisition to Baxter in the hemophilia marketand is included in the BioScience segment.AesRx, LLCIn June 2014, Baxter acquired all of the outstanding membership interests in AesRx, LLC (AesRx), obtaining AesRx’s program related to the developmentand commercialization of treatments for sickle cell disease.Baxter made an initial payment of $15 million, and may make additional payments of up to $278 million related to the achievement of development andregulatory milestones, in addition to sales milestones of up to $550 million. The estimated fair value of the contingent payment liabilities at the acquisitiondate was $65 million, which was recorded in other long-term liabilities, and was calculated based on the probability of achieving the specified milestonesand the discounting of expected future cash flows. As of December 31, 2014, there were no significant changes to these contingent payment liabilities.Baxter allocated $78 million of the total consideration to acquired IPR&D, which is being accounted for as indefinite-lived intangible assets, with theresidual consideration of $2 million recorded as goodwill. The acquired IPR&D related to AesRx’s sickle cell disease program, which was in Phase II clinicaltrials at the time of the acquisition, and was expected to be completed in approximately five years. The value of IPR&D was calculated using cash flowprojections adjusted for the inherent technical, regulatory, commercial and obsolescence risks in such activities, discounted at a rate of 15.5%. AdditionalR&D will be required prior to obtaining regulatory approval and, as of the acquisition date, incremental R&D costs were projected to be in excess of $40million.Inspiration / IpsenIn March 2013, Baxter acquired the investigational hemophilia compound OBIZUR and related assets from Inspiration BioPharmaceuticals, Inc.(Inspiration), and certain other OBIZUR related assets, including manufacturing operations, were acquired from Ipsen Pharma S.A.S. (Ipsen) in conjunctionwith Inspiration’s bankruptcy proceedings. Ipsen was Inspiration’s senior secured creditor and had been providing Inspiration with debtor-in-possessionfinancing to fund Inspiration’s operations and the sales process. Additionally, Ipsen was the owner of certain assets acquired by Baxter in the transaction.OBIZUR is a recombinant porcine factor VIII that was approved in the United States in 2014 for the treatment of patients with acquired hemophilia A, and isbeing investigated for the treatment of congenital hemophilia A patients with inhibitors.In March 2013, Baxter made an upfront payment of $51 million for OBIZUR and the related assets, and, as of the acquisition date, may make future paymentsof up to $135 million related to the achievement of regulatory and sales milestones. Additionally, Baxter may make sales-based payments. The estimated fairvalue of contingent 66Table of Contentspayment liabilities at the acquisition date was $269 million, which was recorded in other long-term liabilities, and was calculated based on the probability ofachieving the specified milestones and sales-based payments and the discounting of expected future cash flows. As of December 31, 2014, the estimated fairvalue of the contingent payments was $386 million. Refer to Note 10 for additional information regarding the Inspiration / Ipsen contingent paymentliability.Goodwill of $7 million principally includes the value associated with the assembled workforce at the acquired manufacturing facility. The goodwill isdeductible for tax purposes. Other intangible assets of $288 million related to acquired IPR&D activities, and the total was accounted for as an indefinite-lived intangible asset at the acquisition date.The results of operations, assets and liabilities from the Inspiration / Ipsen acquisition are included in the BioScience segment, together with the relatedgoodwill.Synovis Life Technologies, Inc.In February 2012, the company acquired Synovis Life Technologies, Inc. (Synovis), a publicly-traded company which developed, manufactured andmarketed biological and mechanical products for soft tissue repair used in a variety of surgical procedures.Goodwill of $164 million includes expected synergies and other benefits the company believes will result from the acquisition, including an expandedproduct portfolio and the impact of a larger sales force to support surgeons across a range of procedures. The goodwill is not deductible for tax purposes.Other intangible assets of $115 million related to developed technology and are being amortized on a straight-line basis over an estimated average useful lifeof 12 years.The results of operations, assets and liabilities of Synovis are included in the BioScience segment, together with the related goodwill.CollaborationsMerrimack Pharmaceuticals, Inc.In September 2014, Baxter entered into a license and collaboration agreement with Merrimack Pharmaceuticals, Inc. (Merrimack) relating to the developmentand commercialization of MM-398 (nanoliposomal irinotecan injection), also known as “nal-IRI.” The arrangement includes all potential indications forMM-398 across all markets with the exception of the United States and Taiwan. The first indication being pursued is for the treatment of patients withmetastatic pancreatic cancer who were previously treated with gemcitabine-based therapy. In 2014, Baxter recognized an R&D charge of $100 million relatedto an upfront payment. Upon entering into the agreement, Baxter had the potential to make future payments of up to $870 million related to the achievementof development, regulatory, and commercial milestones, in addition to royalty payments.CTI BioPharma Corp.In November 2013, Baxter acquired approximately 16 million shares of CTI BioPharma Corp. (CTI BioPharma), which was formerly named CellTherapeutics, Inc., common stock for $27 million. Baxter also entered into an exclusive worldwide licensing agreement with CTI BioPharma, to develop andcommercialize pacritinib, a novel investigational JAK2/FLT3 inhibitor with activity against genetic mutations linked to myelofibrosis, leukemia and certainsolid tumors. Pacritinib is currently in Phase III development for patients with myelofibrosis, a chronic malignant bone marrow disorder. Under the terms ofthe agreement, Baxter gained commercialization rights for all indications of pacritinib outside the United States and Baxter and CTI BioPharma will jointlycommercialize pacritinib in the United States. CTI BioPharma is responsible for the funding of the majority of development activities as well as themanufacture of the product. In 2013, Baxter recognized an R&D charge of $33 million related to an upfront payment. Upon entering into the agreement,Baxter had the potential to make future payments of up to $302 million related to the achievement of development, regulatory, and commercial milestones,in addition to future royalty payments. 67Table of ContentsCoherus Biosciences, Inc.In August 2013, Baxter entered into an exclusive license agreement with Coherus Biosciences, Inc. (Coherus) to develop and commercialize a biosimilar toENBREL (etanercept) for Europe, Canada, Brazil and certain other markets. Baxter also has the right of first refusal to certain other biosimilars in thecollaboration. Under the terms of the agreement, Coherus is responsible for the development plan, preparation of regulatory filings, and manufacture of theproduct, subject to certain cost reimbursement by Baxter. In 2013, Baxter recognized R&D charges of $30 million related to its decision to continue topursue development of etanercept. Upon entering into the agreement, Baxter had the potential to make future payments of up to $169 million relating to theachievement of development and regulatory milestones, in addition to future royalty payments.JW Holdings CorporationIn July 2013, Baxter entered into a collaboration agreement with JW Holdings Corporation (JW Holdings) for parenteral nutritional products containing anovel formulation of omega 3 lipids. Baxter has exclusive rights to co-develop and distribute the products globally, with the exception of Korea. In 2013,Baxter recognized an R&D charge of $25 million related to an upfront payment. Upon entering into the agreement, Baxter had the potential to make futurepayments of up to $11 million relating to the achievement of regulatory milestones, in addition to future royalty payments.Onconova Therapeutics, Inc.In July 2012, Baxter acquired approximately three million shares of preferred stock in Onconova Therapeutics, Inc. (Onconova) for $50 million. Refer to Note10 for additional information regarding this investment. In September 2012, Baxter entered into an exclusive license agreement with Onconova for rigosertib,a novel targeted anti-cancer compound for the treatment of a group of rare hematologic malignancies called myelodysplastic syndromes and pancreaticcancer. Baxter gained commercialization rights for the compound in Europe. Onconova is responsible for the funding of the R&D as well as the manufactureof the product. In 2012, Baxter recognized an R&D charge of $50 million related to an upfront payment. Upon entering into the agreement, Baxter had thepotential to make future payments of up to $783 million related to the achievement of development, regulatory, and commercial milestones, in addition tofuture royalty payments.Momenta Pharmaceuticals, Inc.In February 2012, the company entered into an exclusive license agreement with Momenta Pharmaceuticals, Inc. (Momenta) to develop and commercializebiosimilars. The arrangement includes specified funding by Baxter, as well as other responsibilities, relating to development and commercializationactivities. In 2012, Baxter recognized an R&D charge of $33 million related to an upfront payment. Upon entering into the agreement, Baxter had thepotential to make future payments of up to $202 million related to the exercise of options to develop additional products and the achievement of technical,development and regulatory milestones for these products, in addition to future royalty payments and potential profit-sharing payments.Unfunded Contingent PaymentsAt December 31, 2014, the company’s unfunded contingent milestone payments associated with all of its collaborative arrangements totaled $2.6 billion.This total excludes any contingent royalty and profit-sharing payments. Based on the company’s projections, any contingent payments made in the futurewill be more than offset over time by the estimated net future cash flows relating to the rights acquired for those payments.Payments to Collaboration PartnersPayments to collaboration partners classified in R&D expenses were $270 million, $129 million, and $138 million in 2014, 2013, and 2012, respectively.These payments were comprised of upfront payments of $100 million, $88 million and $108 million in 2014, 2013 and 2012, respectively, and milestonepayments of $118 million, $17 million and $6 million in 2014, 2013 and 2012, respectively. The remainder related to R&D cost reimbursements. Paymentsto collaboration partners classified in cost of sales were not significant in 2014, 2013 and 2012. 68®Table of ContentsNOTE 6GOODWILL AND OTHER INTANGIBLE ASSETS, NET GoodwillThe following is a summary of the activity in goodwill by segment. (in millions) BioScience MedicalProducts Total December 31, 2012 $ 975 $1,527 $2,502 Additions 7 1,622 1,629 Currency translation and other adjustments 9 65 74 December 31, 2013 991 3,214 4,205 Additions 75 4 79 Currency translation and other adjustments (39) (371) (410) December 31, 2014 $1,027 $2,847 $3,874 Goodwill additions in 2014 and 2013 were primarily related to the acquisitions of Chatham Therapeutics in the BioScience segment and Gambro in theMedical Products segment, respectively.As of December 31, 2014, there were no accumulated goodwill impairment losses.Other Intangible Assets, NetThe following is a summary of the company’s other intangible assets. (in millions) Developed technology,including patents Other amortizedintangible assets Indefinite-livedintangible assets Total December 31, 2014 Gross other intangible assets $2,278 $ 443 $272 $2,993 Accumulated amortization (769) (145) — (914) Other intangible assets, net $1,509 $ 298 $272 $2,079 December 31, 2013 Gross other intangible assets $2,144 $ 494 $465 $3,103 Accumulated amortization (665) (144) — (809) Other intangible assets, net $1,479 $ 350 $465 $2,294 Intangible asset amortization expense was $185 million in 2014, $129 million in 2013 and $101 million in 2012. The anticipated annual amortizationexpense for definite-lived intangible assets recorded as of December 31, 2014 is $193 million in 2015, $189 million in 2016, $173 million in 2017, $168million in 2018 and $155 million in 2019.The decrease in indefinite-lived intangible assets and corresponding increase in developed technology was primarily driven by the acquired IPR&D from theInspiration / Ipsen acquisition obtaining regulatory approval. These intangible assets are being amortized on a straight-line basis over an estimated useful lifeof approximately 15 years. The decrease in indefinite-lived intangible assets was partially offset by additions related to the acquisitions of ChathamTherapeutics and AesRx. The overall decrease in intangible assets was also driven by currency translation. 69Table of ContentsNOTE 7INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES Infusion Pump ChargesThe company is undertaking a field corrective action with respect to the SIGMA Spectrum Infusion Pump, which is predominantly sold in the United States.The United States Food and Drug Administration (FDA) categorized the action as a Class 1 recall during the second quarter of 2014 and the companyrecorded a charge of $93 million related primarily to cash costs associated with remediation efforts. Remediation is expected to include software-relatedcorrections and a replacement pump in a limited number of cases. The company expects to complete remediation by mid-2016. The company utilized $4million of the cash reserves in the fourth quarter of 2014 and, as of December 31, 2014, the company believes the remaining reserves to be adequate;however, it is possible that substantial additional cash and non-cash charges may be required in future periods based on new information or changes inestimates.From 2005 through 2011, the company recorded total charges and adjustments of $925 million related to COLLEAGUE and SYNDEO infusion pumps,including $716 million of cash costs and $209 million principally related to asset impairments.During 2012, the company recorded an adjustment of $37 million in cost of sales to reduce the COLLEAGUE infusion pump reserves as the companysubstantially completed its recall activities in the United States. The company also refined the original expectations for cash and non-cash activities based onexpected usage of the reserves and recorded a $63 million adjustment to increase reserves for cash costs with a corresponding decrease to non-cash reserves,which had no impact on the results of operations. The net impact of these adjustments was an increase in cash reserves of $26 million during 2012. During2013, the company further refined its expectations for cash and non-cash activities related to COLLEAGUE based on expected usage of the reserves andrecorded a $17 million adjustment to decrease reserves for cash costs with a corresponding increase to non-cash reserves, which had no impact on the resultsof operations. During 2014, the company further refined its expectations and recorded an adjustment of $25 million in cost of sales to reduce theCOLLEAGUE infusion pump reserves based on the progress of remediation activities in Canada.The following table summarizes cash activity in the company’s COLLEAGUE and SYNDEO infusion pump reserves through December 31, 2014. (in millions) Charges and adjustments in 2005 through 2011 $716 Utilization in 2005 through 2011 (440) Reserves at December 31, 2011 276 Reserve adjustments 26 Utilization (175) Reserves at December 31, 2012 127 Reserve adjustments (17) Utilization (27) Reserves at December 31, 2013 83 Reserve adjustments (25) Utilization (36) Reserves at December 31, 2014 $22 The reserve for remediation activities in the United States has been substantially utilized, with remaining reserves related to remediation activities outside ofthe United States continuing to be utilized through 2015. 70Table of ContentsAs of December 31, 2014, the company believes the remaining infusion pump reserves for COLLEAGUE and SYNDEO to be adequate; however, additionaladjustments may be recorded in the future as the programs are completed.Business Optimization ChargesFrom 2009 through 2011, the company recorded total charges of $528 million (of which $13 million are classified as discontinued operations) primarilyrelated to costs associated with optimizing the company’s overall cost structure on a global basis, as the company streamlined its international operations,rationalized its manufacturing facilities, enhanced its general and administrative infrastructure and re-aligned certain R&D activities. The total chargesincluded cash costs of $409 million, principally pertaining to severance and other employee-related costs, and $119 million of asset impairments relating tofixed assets, inventory and other assets associated with discontinued products and projects.The company’s total charges in 2014, 2013, and 2012 are presented below. years ended December 31 (in millions) 2014 2013 2012 Cash expenses $87 $182 $98 Non-cash expenses 4 132 52 Reserve adjustments (64) (20) — Total business optimization expenses 27 294 150 Discontinued operations (8) (101) — Business optimization expenses in continuing operations $19 $193 $150 The 2014 charges primarily included severance and other employee-related costs associated with the formation of a new R&D center in Cambridge,Massachusetts as well as Gambro post-acquisition restructuring activities. The 2013 charges included severance, other employee-related costs, and assetimpairments associated with the discontinuation of certain R&D programs related to the Vaccines franchise, in addition to Gambro post-acquisitionrestructuring activities. In 2014 and 2013, the company refined its expectations and recorded adjustments to previous business optimization reserves that areno longer probable of being utilized. The 2012 charges included severance, other employee-related costs, and asset impairments primarily in Europe and theUnited States.The business optimization charges are recorded as follows in the consolidated statements of income: • 2014: ($8 million) in cost of sales, $2 million in marketing and administrative expenses, and $25 million in R&D expenses (with an additional$8 million recorded in discontinued operations) • 2013: $52 million in cost of sales, $95 million in marketing and administrative expenses, and $46 million in R&D expenses (with an additional$101 million recorded in discontinued operations) • 2012: $62 million in cost of sales, $60 million in marketing and administrative expenses, and $28 million in R&D expenses 71Table of ContentsThe following table summarizes cash activity in the reserves related to the company’s business optimization initiatives. (in millions) Charges and adjustments in 2009 through 2011 $409 Utilization in 2009 through 2011 (183) CTA (1) Reserve at December 31, 2011 225 2012 charges 98 Utilization in 2012 (99) CTA (4) Reserve at December 31, 2012 220 2013 charges 182 Reserve adjustments (20) Utilization in 2013 (98) CTA 4 Reserve at December 31, 2013 288 2014 charges 87 Reserve adjustments (62) Utilization in 2014 (125) CTA (19) Reserve at December 31, 2014 $169 The reserves are expected to be substantially utilized by the end of 2016. The company believes the remaining reserves to be adequate; however, additionaladjustments may be recorded in the future as the programs are completed. 72Table of ContentsNOTE 8DEBT, CREDIT FACILITIES AND LEASE COMMITMENTS Debt OutstandingAt December 31, 2014 and 2013, the company had the following debt outstanding. as of December 31 (in millions) 2014 2013 Commercial paper $ 875 $— Other short-term debt 38 181 Short-term debt $ 913 $181 as of December 31 (in millions) Effective interestrate in 2014 2014 2013 4.0% notes due 2014 4.1% — 351 Floating rate notes due 2014 0.6% — 500 Variable-rate loan due 2015 0.8% 171 194 4.625% notes due 2015 4.7% 604 625 5.9% notes due 2016 6.0% 614 622 0.95% notes due 2016 1.1% 500 500 1.85% notes due 2017 2.0% 500 500 Variable-rate loan due 2017 1.0% 120 136 5.375% notes due 2018 5.5% 500 499 1.85% notes due 2018 2.0% 750 750 4.5% notes due 2019 4.6% 535 534 4.25% notes due 2020 4.4% 299 299 2.40% notes due 2022 2.5% 723 684 3.2% notes due 2023 3.3% 1,275 1,246 6.625% debentures due 2028 6.7% 132 133 6.25% notes due 2037 6.3% 499 499 3.65% notes due 2042 3.7% 298 298 4.5% notes due 2043 4.5% 500 500 Other — 372 115 Total debt and capital lease obligations 8,392 8,985 Current portion (786) (859) Long-term portion $7,606 $8,126 Excludes the effect of any related interest rate swaps. Book values include any discounts, premiums and adjustments related to hedging instruments.Significant Debt IssuancesIn June 2013, the company issued $500 million of floating rate senior notes maturing in December 2014, $500 million of senior notes bearing a coupon rateof 0.95% and maturing in June 2016, $750 million of senior notes bearing a coupon rate of 1.85% and maturing in June 2018, $1.25 billion of senior notesbearing a coupon rate of 3.2% and maturing in June 2023, and $500 million of senior notes bearing a coupon rate of 4.5% and maturing in June 2043.Approximately $3.0 billion of the net proceeds from the June 2013 debt issuances was used to finance the acquisition of Gambro in 2013 and the remainderwas used for general corporate purposes, including the repayment of commercial paper.Commercial PaperDuring 2014, the company issued and redeemed commercial paper, and there was $875 million outstanding at December 31, 2014 with a weighted-averageinterest rate of 0.456%. There was no commercial paper outstanding at December 31, 2013. 7312212Table of ContentsCredit FacilitiesThe company’s primary revolving credit facility has a maximum capacity of $1.5 billion and matures in December 2015. In 2014, the company entered intoan additional revolving credit facility with a maximum capacity of $1.8 billion which also matures in December 2015 and contains similar covenants as theprimary revolving credit facility. The company also maintains a Euro-denominated revolving credit facility with a maximum capacity of approximately $375million as of December 31, 2014 and matures in December 2015. As of December 31, 2014 there were no borrowings outstanding under any of theserevolving credit facilities. As of December 31, 2013, there was approximately $124 million outstanding under the Euro-denominated facility and there wereno outstanding borrowings under the primary revolving credit facility. The company’s facilities enable the company to borrow funds on an unsecured basis atvariable interest rates, and contain various covenants, including a maximum net-debt-to-capital ratio. At December 31, 2014, the company was in compliancewith the financial covenants in these agreements. The non-performance of any financial institution supporting any of the credit facilities would reduce themaximum capacity of these facilities by each institution’s respective commitment.The company also maintains other credit arrangements, which totaled $329 million at December 31, 2014 and $587 million at December 31, 2013.Borrowings outstanding under these facilities totaled $38 million at December 31, 2014 and $181million at December 31, 2013.LeasesThe company leases certain facilities and equipment under capital and operating leases expiring at various dates. The leases generally provide for thecompany to pay taxes, maintenance, insurance and certain other operating costs of the leased property. Most of the operating leases contain renewal options.Operating lease rent expense was $250 million in 2014, $214 million in 2013 and $202 million in 2012.Future Minimum Lease Payments and Debt Maturities as of and for the years ended December 31 (in millions) Operatingleases Debt maturitiesand capitalleases 2015 $ 222 $ 786 2016 187 1,142 2017 163 644 2018 130 1,275 2019 113 525 Thereafter 232 4,097 Total obligations and commitments 1,047 8,469 Interest on capital leases, discounts and premiums, and adjustments relating to hedging instruments — (77) Total debt and lease obligations $1,047 $8,392 NOTE 9DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY Foreign Currency and Interest Rate Risk ManagementThe 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 inforeign exchange and interest rates. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgmentof the appropriate trade-off between risk, opportunity and costs. 74Table of ContentsThe company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assetsdenominated in the Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, Brazilian Real, Colombian Peso and Swedish Krona. Thecompany manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any naturaloffsets. In addition, the company uses derivative and nonderivative instruments to further reduce the net exposure to foreign exchange. Gains and losses onthe 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 policyis 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-efficientmanner, the company periodically enters into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference betweenfixed 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-relatedcontingent features.Cash Flow HedgesThe company may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earningsrelating to forecasted transactions and recognized assets and liabilities. The company periodically uses forward-starting interest rate swaps and treasury ratelocks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt. Certain other firm commitments andforecasted transactions are also periodically hedged. Cash flow hedges primarily related to forecasted intercompany sales denominated in foreign currencies,and anticipated issuances of debt.The notional amounts of foreign exchange contracts were $917 million and $2.1 billion as of December 31, 2014 and 2013, respectively. As of December 31,2014, $550 million of interest rate contracts designated as cash flow hedges were outstanding. The company did not have any interest rate contractsdesignated as cash flow hedges outstanding at December 31, 2013. The maximum term over which the company has cash flow hedge contracts in placerelated to forecasted transactions at December 31, 2014 is 12 months.Fair Value HedgesThe 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 fromchanges in the fair value of debt due to fluctuations in the designated benchmark interest rate.The total notional amount of interest rate contracts designated as fair value hedges was $2.9 billion and $1.2 billion as of December 31, 2014 and 2013,respectively.DedesignationsIf it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinues hedgeaccounting prospectively. If the company removes the cash flow hedge designation because the hedged forecasted transactions are no longer probable ofoccurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges inwhich the forecasted transactions are still probable of occurring are deferred and recognized consistent with the loss or income recognition of the underlyinghedged items.There were no hedge dedesignations in 2014 resulting from changes in the company’s assessment of the probability that the hedged forecasted transactionswould occur. In 2013, the company had $1 billion of interest 75Table of Contentsrate contracts designated as cash flow hedges that matured or were terminated, resulting in a net gain of $5 million that was deferred in AOCI. In the secondquarter of 2013, the company determined that certain forecasted transactions associated with these contracts were no longer probable of occurring andtherefore dedesignated the hedge relationship, which, together with ineffectiveness, resulted in the immediate reclassification of a net gain of $11 millionfrom AOCI to net interest expense. The remaining deferred net loss of $6 million from the matured or terminated interest rate contracts is being amortized tonet interest expense against the related accrued interest payments.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 isamortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated during 2014 and 2013.Undesignated Derivative InstrumentsThe company uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the company’s intercompany and third-partyreceivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges and the terms ofthese instruments generally do not exceed one month.The total notional amount of undesignated derivative instruments was $434 million as of December 31, 2014 and $381 million as of December 31, 2013. Inthe fourth quarter of 2012 and the first quarter of 2013, the company entered into option contracts with a total notional amount of $3.7 billion to hedgeanticipated foreign currency cash outflows associated with the planned acquisition of Gambro. These contracts matured in June 2013, and in the secondquarter of 2013, the company entered into undesignated forward contracts with a total notional amount of $1.5 billion also to hedge anticipated foreigncurrency cash outflows associated with the planned acquisition of Gambro, which matured in 2013.The company recorded losses of $23 million in 2013 associated with the Gambro-related option and forward contracts.Gains and Losses on Derivative InstrumentsThe following tables summarize the gains and losses on the company’s derivative instruments for the years ended December 31, 2014 and 2013. Gain (loss)recognized in OCI Location of gain (loss) inincome statement Gain (loss)reclassified fromAOCI into income (in millions) 2014 2013 2014 2013 Cash flow hedges Interest rate contracts $ (1) $26 Net interest expense $ (1) $10 Foreign exchange contracts 1 1 Net sales 1 (1) Foreign exchange contracts 51 36 Cost of sales 13 32 Total $51 $63 $13 $41 Location of gain (loss) inincome statement Gain (loss)recognized in income (in millions) 2014 2013 Fair value hedges Interest rate contracts Net interest expense $68 $(46) Undesignated derivative instruments Foreign exchange contracts Other expense (income), net $49 $ 11 76Table of ContentsFor the company’s fair value hedges, equal and offsetting losses of $68 million and gains of $46 million were recognized in net interest expense in 2014 and2013, respectively, as adjustments to the underlying hedged items, fixed-rate debt. Ineffectiveness related to the company’s cash flow and fair value hedgesfor the year ended December 31, 2014 was not material.The following table summarizes net-of-tax activity in AOCI, a component of shareholders’ equity, related to the company’s cash flow hedges. as of and for the years ended December 31 (in millions) 2014 2013 2012 Accumulated other comprehensive income (loss) balance at beginning of year $10 $(5) $2 Gain (loss) in fair value of derivatives during the year 32 41 (7) Amount reclassified to earnings during the year (8) (26) — Accumulated other comprehensive income (loss) balance at end of year $34 $10 $(5) As of December 31, 2014, $28 million of deferred, net after-tax gains on derivative instruments included in AOCI are expected to be recognized in earningsduring the next 12 months, coinciding with when the hedged items are expected to impact earnings.Fair Values of Derivative InstrumentsThe following table summarizes the classification and fair value amounts of derivative instruments reported in the consolidated balance sheet as ofDecember 31, 2014. Derivatives in asset positions Derivatives in liability positions (in millions) Balance sheet location Fairvalue Balance sheet location Fairvalue Derivative instruments designated as hedges Interest rate contracts Prepaid expenses and other $1 Accounts payableand accrued liabilities $ 2 Interest rate contracts Other long-term assets 89 Other long-term liabilities — Foreign exchange contracts Prepaid expenses and other 51 Accounts payable andaccrued liabilities — Total derivative instruments designated as hedges $141 $ 2 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other $— Accounts payable andaccrued liabilities $23 Total derivative instruments $141 $25 The following table summarizes the classification and fair value amounts of derivative instruments reported in the consolidated balance sheet as ofDecember 31, 2013. Derivatives in asset positions Derivatives in liability positions (in millions) Balance sheet location Fairvalue Balance sheet location Fairvalue Derivative instruments designated as hedges Interest rate contracts Other long-term assets $35 Other long-term liabilities $14 Foreign exchange contracts Prepaid expenses and other 37 Accounts payable andaccrued liabilities 7 Total derivative instruments designated as hedges $72 $21 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other $— Accounts payable andaccrued liabilities $ 1 Total derivative instruments $72 $22 77Table of ContentsWhile the company’s derivatives are all subject to master netting arrangements, the company presents its assets and liabilities related to derivativeinstruments on a gross basis within the condensed consolidated balance sheets. Additionally, the company is not required to post collateral for any of itsoutstanding derivatives. The following table provides information on the company’s derivative positions as if they were presented on a net basis, allowingfor the right of offset by counterparty: December 31, 2014 December 31, 2013 (in millions) Asset Liability Asset Liability Gross amounts recognized in the consolidated balance sheet $141 $ 25 $ 72 $ 22 Gross amount subject to offset in master netting arrangements not offset in the consolidated balancesheet (22) (22) (17) (17) Total $119 $ 3 $ 55 $ 5 NOTE 10FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE MEASUREMENTS Receivable SecuritizationsFor trade receivables originated in Japan, the company has entered into agreements with financial institutions in which the entire interest in and ownership ofthe receivable is sold. The company continues to service the receivables in its Japanese securitization arrangement. Servicing assets or liabilities are notrecognized because the company receives adequate compensation to service the sold receivables. The Japanese securitization arrangement includes limitedrecourse provisions, which are not material.The following is a summary of the activity relating to the securitization arrangement. as of and for the years ended December 31 (in millions) 2014 2013 2012 Sold receivables at beginning of year $114 $157 $160 Proceeds from sales of receivables 464 506 630 Cash collections (remitted to the owners of the receivables) (459) (519) (624) Effect of currency exchange rate changes (15) (30) (9) Sold receivables at end of year $104 $114 $157 The net losses relating to the sales of receivables were immaterial for each year.Concentrations of Credit RiskThe company invests excess cash in certificates of deposit or money market funds and diversifies the concentration of cash among different financialinstitutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arrangedcollateralization 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 adeterioration in credit and economic conditions. As of December 31, 2014 and 2013, the company’s net accounts receivable from the public sector in Greece,Spain, Portugal and Italy totaled $363 million and $561 million, respectively.Global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables andcredit losses. Global economic conditions, governmental actions and customer-specific factors may require the company to re-evaluate the collectibility of itsreceivables and the company could potentially incur additional credit losses. These conditions may also impact the stability of the Euro. 78Table of ContentsFair Value MeasurementsThe fair value hierarchy under the accounting standard for fair value measurements consists of the following three levels: • Level 1 — Quoted prices in active markets that the company has the ability to access for identical assets or liabilities; • Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are notactive, and model-based valuations in which all significant inputs are observable in the market; and • Level 3 — Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’smanagement about the assumptions market participants would use in pricing the asset or liability.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 consolidatedbalance sheets. Basis of fair value measurement(in millions) Balance atDecember 31,2014 Quoted prices inactive markets foridentical assets(Level 1) Significant otherobservable inputs(Level 2) Significantunobservable inputs(Level 3)Assets Foreign currency hedges $ 51 $ — $ 51 $ —Interest rate hedges 90 — 90 —Available-for-sale securities Equity securities 105 105 — —Foreign government debt securities 18 — 18 —Total assets $264 $105 $159 $ —Liabilities Foreign currency hedges $ 23 $ — $ 23 $ —Interest rate hedges 2 — 2 —Contingent payments related to acquisitions 569 — — 569Total liabilities $594 $ — $ 25 $569 Basis of fair value measurement(in millions) Balance atDecember 31,2013 Quoted prices inactive markets foridentical assets(Level 1) Significant otherobservable inputs(Level 2) Significantunobservable inputs(Level 3)Assets Foreign currency hedges $ 37 $ — $ 37 $ —Interest rate hedges 35 — 35 —Available-for-sale securities Equity securities 102 102 — —Foreign government debt securities 18 — 18 —Total assets $192 $102 $ 90 $ —Liabilities Foreign currency hedges $ 8 $ — $ 8 $ —Interest rate hedges 14 — 14 —Contingent payments related to acquisitions 340 — — 340Total liabilities $362 $ — $ 22 $340 79Table of ContentsAs of December 31, 2014, cash and equivalents of $2.9 billion included money market funds of approximately $989 million, which would be consideredLevel 2 in the fair value hierarchy.For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held,without consideration of transaction costs. The majority of the derivatives entered into by the company are valued using internal valuation techniques as noquoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholesmodels. 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. The fair values of foreign government debt securities are obtained from pricing services or broker/dealers who useproprietary pricing applications, which include observable market information for like or same securities.Contingent payments related to acquisitions consist of development, regulatory, and commercial milestone payments, in addition to sales-based payments,and are valued using discounted cash flow techniques. The fair value of development, regulatory, and commercial milestone payments reflects management’sexpectations of probability of payment, and increases as the probability of payment increases or expectation of timing of payments is accelerated. As ofDecember 31, 2014, management’s expected weighted-average probability of payment for development, regulatory, and commercial milestone paymentsexpected to occur was approximately 26%. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increasesas revenue estimates increase, probability weighting of higher revenue scenarios increase or expectation of timing of payment is accelerated.At December 31, 2014, the company held available-for-sale equity securities that had an amortized cost basis and fair value of $79 million and $105 million,respectively. The company had net unrealized gains of $27 million, comprised of unrealized losses of $9 million, which are temporary in nature, andunrealized gains of $36 million. At December 31, 2013, the amortized cost basis and fair value of the available-for-sale equity securities was $111 millionand $102 million, respectively, with $9 million in cumulative unrealized losses. As of December 31, 2014 and 2013, the cumulative unrealized gains orlosses for the company’s available-for-sale debt securities were less than $1 million.In July 2012, Baxter acquired approximately 3 million shares of Onconova preferred stock for $50 million, which the company classified as available-for-saledebt securities as a result of certain mandatory redemption rights held by Baxter. In 2013, Baxter reclassified the securities to available-for-sale equitysecurities as a result of the conversion of the preferred stock to common stock upon the completion of Onconova’s initial public offering. In 2014, thecompany recorded a $45 million other-than-temporary impairment charge to write-down the investment in Onconova to its fair value of $9 million based onthe duration and severity of the loss. The loss was reported in other expense (income), net. The company recognized losses totaling $8 million in 2012 relatedto unrealized and realized losses associated with the company’s Greek government and European Financial Stability Facility bonds, which Baxter sold for$14 million in the second quarter of 2012.In February 2012, as a result of the company’s acquisition of Synovis, the company acquired marketable securities, which included municipal securities,corporate bonds, and U.S. government agency issues, which had been classified as available-for-sale, with primarily all of these securities maturing withinone year. The company received proceeds of $45 million from the sale and maturity of all of these securities in 2012.Refer to Note 13 for fair value disclosures related to the company’s pension plans. 80Table of ContentsThe following table is a reconciliation of the fair value measurements that use significant unobservable inputs (Level 3), which consist of contingentpayments related to acquisitions and preferred stock. (in millions) Contingentpayments Preferredstock Fair value as of December 31, 2012 $ 86 $ 51 Additions 269 — Payments (2) — Net gains recognized in earnings (17) — CTA 4 — Conversion to a publicly traded equity security — (51) Fair value as of December 31, 2013 340 — Additions 142 — Payments (15) — Net losses recognized in earnings 122 — CTA (20) — Fair value as of December 31, 2014 $569 $ — The company’s additions in 2014 related to the contingent payment liabilities of $77 million associated with the acquisition of Chatham Therapeutics and$65 million associated with the acquisition of AesRx. The net loss recognized in earnings primarily related to an increase in the estimated fair value ofcontingent payment liabilities associated with the 2013 acquisition of the investigational hemophilia compound OBIZUR and related assets from Inspirationand Ipsen. The loss was reported in other expense (income), net. The contingent liabilities were increased based on updated information indicating that theprobability of achieving certain sales levels, and the resulting sales-based payments, was higher than previously expected. The company’s additions in 2013principally related to contingent payment liabilities of $269 million associated with the Inspiration / Ipsen acquisition in the first quarter of 2013.As discussed further in Note 7, the company recorded asset impairment charges related to its COLLEAGUE and SYNDEO infusion pumps and businessoptimization initiatives in 2014, 2013, and 2012. As these assets had no alternative use and no salvage value, the fair values, measured using significantunobservable inputs (Level 3), were assessed to be zero.Book Values and Fair Values of Financial InstrumentsIn addition to the financial instruments that the company is required to recognize at fair value on the consolidated balance sheets, the company has certainfinancial instruments that are recognized at historical cost or some basis other than fair value. For these financial instruments, the following table provides thevalues recognized on the consolidated balance sheets and the approximate fair values. Book values Approximatefair values as of December 31 (in millions) 2014 2013 2014 2013 Assets Investments $54 $53 $52 $53 Liabilities Short-term debt 913 181 913 181 Current maturities of long-term debt and lease obligations 786 859 791 862 Long-term debt and lease obligations 7,606 8,126 8,192 8,298 Long-term litigation liabilities 53 72 52 70 81Table of ContentsThe following tables summarize the bases used to measure the approximate fair value of the financial instruments as of December 31, 2014 and 2013. Basis of fair value measurement (in millions) Balance as ofDecember 31,2014 Quoted prices inactive markets foridentical assets(Level 1) Significant otherobservable inputs(Level 2) Significantunobservable inputs(Level 3) Assets Investments $ 52 $— $ 8 $44 Total assets $ 52 $— $ 8 $44 Liabilities Short-term debt $ 913 $— $ 913 $— Current maturities of long-term debt and lease obligations 791 — 791 — Long-term debt and lease obligations 8,192 — 8,192 — Long-term litigation liabilities 52 — — 52 Total liabilities $9,948 $— $9,896 $52 Basis of fair value measurement (in millions) Balance as ofDecember 31,2013 Quoted prices inactive markets foridentical assets(Level 1) Significant otherobservable inputs(Level 2) Significantunobservable inputs(Level 3) Assets Investments $ 53 $— $ 17 $36 Total assets $ 53 $— $ 17 $36 Liabilities Short-term debt $ 181 $— $ 181 $— Current maturities of long-term debt and lease obligations 862 — 862 — Long-term debt and lease obligations 8,298 — 8,298 — Long-term litigation liabilities 70 — — 70 Total liabilities $9,411 $— $9,341 $70 The estimated fair values of long-term litigation liabilities were computed by discounting the expected cash flows based on currently available information,which in many cases does not include final orders or settlement agreements. The discount factors used in the calculations reflect the non-performance risk ofthe company.Investments in 2014 and 2013 include 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 rateyields, which represents a Level 2 basis of fair value measurement. In determining the fair value of cost method investments, the company takes intoconsideration 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. Priceis calculated using the stated terms of the respective debt instrument and yield curves commensurate with the company’s credit risk. The carrying values ofthe other financial instruments approximate their fair values due to the short-term maturities of most of these assets and liabilities. 82Table of ContentsIn 2014, the company recorded $84 million of income in other expense (income), net related to equity method investments, which primarily representedgains from the sale of certain investments as well as distributions from funds that sold portfolio companies.NOTE 11COMMITMENTS AND CONTINGENCIES Collaboration Agreement Contingent PaymentsRefer to Note 5 for information regarding the company’s unfunded contingent payments associated with collaborative arrangements.Limited Partnership CommitmentsIn connection with the company’s initiative to invest in early-stage products and therapies, the company has unfunded commitments of $38 million as alimited partner in multiple investment companies as of December 31, 2014.IndemnificationsDuring the normal course of business, Baxter makes indemnities, commitments and guarantees pursuant to which the company may be required to makepayments related to specific transactions. Indemnifications include: (i) intellectual property indemnities to customers in connection with the use, sales orlicense of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises;(iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; and (iv) indemnities involving therepresentations and warranties in certain contracts. In addition, under Baxter’s Amended and Restated Certificate of Incorporation, and consistent withDelaware General Corporation Law, the company has agreed to indemnify its directors and officers for certain losses and expenses upon the occurrence ofcertain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential forfuture payments that the company could be obligated to make. To help address some of these risks, the company maintains various insurance coverages.Based on historical experience and evaluation of the agreements, the company does not believe that any significant payments related to its indemnities willoccur, and therefore the company has not recorded any associated liabilities.Legal ContingenciesRefer to Note 16 for a discussion of the company’s legal contingencies.NOTE 12SHAREHOLDERS’ EQUITY Stock-Based CompensationThe company’s stock-based compensation generally includes stock options, restricted stock units (RSUs), performance share units (PSUs) and purchasesunder the company’s employee stock purchase plan. Shares issued relating to the company’s stock-based plans are generally issued out of treasury stock.In 2011, shareholders approved the Baxter International Inc. 2011 Incentive Plan which provided for 40 million additional shares of common stock availablefor issuance with respect to awards for participants. As of December 31, 2014, approximately 29 million authorized shares are available for future awardsunder the company’s stock-based compensation plans. 83Table of ContentsStock Compensation ExpenseStock compensation expense recognized in the consolidated statements of income was $159 million, $150 million and $130 million in 2014, 2013 and2012, respectively. The related tax benefit recognized was $51 million in 2014, $45 million in 2013 and $40 million in 2012.Stock compensation expense is recorded at the corporate level and is not allocated to a segment. Over 70% of stock compensation expense is classified inmarketing and administrative expenses, with the remainder classified in cost of sales and R&D expenses. Costs capitalized in the consolidated balance sheetsat December 31, 2014 and 2013 were not significant.Stock compensation expense is based on awards expected to vest, and therefore has been reduced by estimated forfeitures.Stock OptionsStock options are granted to employees and non-employee directors with exercise prices at least equal to 100% of the market value on the date of grant.Stock options granted to employees generally vest in one-third increments over a three-year period. Stock options granted to non-employee directorsgenerally cliff-vest 100% one year from the grant date. Stock options typically have a contractual term of 10 years. The grant-date fair value, adjusted forestimated forfeitures, is recognized as expense on a straight-line basis over the substantive vesting period.The fair value of stock options is determined using the Black-Scholes model. The weighted-average assumptions used in estimating the fair value of stockoptions granted during each year, along with the weighted-average grant-date fair values, were as follows. years ended December 31 2014 2013 2012 Expected volatility 24% 25% 25% Expected life (in years) 5.5 5.5 5.5 Risk-free interest rate 1.7% 0.9% 1.0% Dividend yield 2.84% 2.6% 2.3% Fair value per stock option $12 $12 $10 The following table summarizes stock option activity for the year ended December 31, 2014 and stock option information at December 31, 2014. (options and aggregate intrinsic values in thousands) Options Weighted-averageexerciseprice Weighted-averageremainingcontractualterm (in years) Aggregateintrinsicvalue Outstanding at January 1, 2014 29,129 $57.00 Granted 6,894 69.26 Exercised (5,591) 52.54 Forfeited (1,042) 67.16 Expired (117) 49.21 Outstanding at December 31, 2014 29,273 $60.41 6.2 $377,120 Vested or expected to vest as of December 31, 2014 28,756 $60.25 6.2 $375,093 Exercisable at December 31, 2014 17,419 $55.36 4.6 $312,381 The aggregate intrinsic value in the table above represents the difference between the exercise price and the company’s closing stock price on the last tradingday of the year. The total intrinsic value of options exercised was $114 million, $176 million and $129 million in 2014, 2013 and 2012, respectively. 84Table of ContentsAs of December 31, 2014, $63 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of approximately 1.6 years.RSUsRSUs are granted to employees and non-employee directors. RSUs granted to employees generally vest in one-third increments over a three-year period.RSUs granted to non-employee directors generally cliff-vest one year from the grant date. The grant-date fair value, adjusted for estimated forfeitures, isrecognized as expense on a straight-line basis over the substantive vesting period. The fair value of RSUs is determined based on the number of sharesgranted and the quoted price of the company’s common stock on the date of grant.The following table summarizes nonvested RSU activity for the year ended December 31, 2014. (share units in thousands) Share units Weighted-averagegrant-datefair valueNonvested RSUs at January 1, 2014 2,218 $62.06Granted 1,521 71.22Vested (854) 60.23Forfeited (237) 62.50Nonvested RSUs at December 31, 2014 2,648 $67.89As of December 31, 2014, $92 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over a weighted-averageperiod of approximately 1.7 years. The weighted-average grant-date fair value of RSUs in 2014, 2013 and 2012 was $71.22, $70.09 and $57.03, respectively.The fair value of RSUs vested in 2014, 2013 and 2012 was $62 million, $47 million and $21 million, respectively.PSUsThe company’s annual equity awards stock compensation program for senior management includes the issuance of PSUs based on return on invested capital(ROIC) as well as market conditions. The vesting condition for ROIC PSUs is set at the beginning of the year for each tranche of the award during the three-year service period. Compensation cost for the ROIC PSUs is measured based on the fair value of the awards on the date that the specific vesting terms foreach tranche of the award are established. The fair value of the awards is determined based on the quoted price of the company’s stock on the grant date foreach tranche of the award. The compensation cost for ROIC PSUs is adjusted at each reporting date to reflect the estimated probability of achieving thevesting condition.The fair value for PSUs based on market conditions is determined using a Monte Carlo model. The assumptions used in estimating the fair value of thesePSUs granted during the period, along with the grant-date fair values, were as follows. years ended December 31 2014 2013 2012 Baxter volatility 20% 21% 24% Peer group volatility 13%-58% 13%-38% 14%-50% Correlation of returns 0.23-0.66 0.37-0.62 0.26-0.54 Risk-free interest rate 0.7% 0.3% 0.4% Fair value per PSU $57 $67 $72 Unrecognized compensation cost related to all granted unvested PSUs of $12 million at December 31, 2014 is expected to be recognized as expense over aweighted-average period of 1.6 years. 85Table of ContentsThe following table summarizes nonvested PSU activity for the year ended December 31, 2014. (share units in thousands) Share units Weighted-averagegrant-datefair valueNonvested PSUs at January 1, 2014 645 $70.18Granted 285 62.08Vested (360) 71.51Forfeited (81) 68.16Nonvested PSUs at December 31, 2014 489 $64.80Employee Stock Purchase PlanNearly all employees are eligible to participate in the company’s employee stock purchase plan. The employee purchase price is 85% of the closing marketprice on the purchase date.In 2011, shareholders approved the Baxter International Inc. Employee Stock Purchase Plan which reflected the merger of the previous plans for U.S. andinternational employees. This employee stock purchase plan provided for 10 million shares of common stock available for issuance to eligible participants,of which approximately seven million shares were available for future awards as of December 31, 2014.During 2014, 2013 and 2012, the company issued approximately 0.8 million, 0.8 million and 0.9 million shares, respectively, under the prior and currentemployee stock purchase plans. The number of shares under subscription at December 31, 2014 totaled approximately 0.6 million.Realized Excess Income Tax Benefits and the Impact on the Statements of Cash FlowsRealized excess tax benefits associated with stock compensation are presented in the consolidated statements of cash flows as an outflow within theoperating section and an inflow within the financing section. Realized excess tax benefits from stock-based compensation were $24 million, $34 million and$24 million in 2014, 2013 and 2012, respectively.Cash DividendsTotal cash dividends declared per common share for 2014, 2013, and 2012 were $2.05, $1.92 and $1.57, respectively. In November 2014, the board ofdirectors declared a quarterly dividend of $0.52 per share ($2.08 per share on an annualized basis), which was paid on January 2, 2015 to shareholders ofrecord as of December 5, 2014.In May 2013, the board of directors declared a quarterly dividend of $0.49 per share ($1.96 per share on an annualized basis), which represented an increaseof 9% over the previous quarterly rate. In July 2012, the board of directors declared a quarterly dividend of $0.45 per share ($1.80 per share on an annualizedbasis), which represented an increase of 34% over the previous quarterly rate.Stock Repurchase ProgramsAs authorized by the board of directors, the company repurchases its stock depending on the company’s cash flows, net debt level and market conditions. Thecompany repurchased eight million shares for $0.6 billion in 2014, 13 million shares for $0.9 billion in 2013 and 25 million shares for $1.5 billion in 2012.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 ofDecember 31, 2014. 86Table of ContentsNOTE 13RETIREMENT AND OTHER BENEFIT PROGRAMS The company sponsors a number of qualified and nonqualified pension plans for eligible employees. The company also sponsors certain unfundedcontributory healthcare and life insurance benefits for substantially all domestic retired employees. Newly hired employees in the United States and PuertoRico are not eligible to participate in the pension plans but receive a higher level of company contributions in the defined contribution plans.In July 2014, a change was made to postemployment medical benefits for retirees who are age 65 or older. Effective January 1, 2015, Baxter will exitsponsorship and provide eligible retirees and their dependents a subsidy to be utilized on a medical insurance exchange. This change was accounted for as asignificant plan amendment. Accordingly, the postemployment benefit obligation was remeasured using a discount rate of 4.30% as of July 31, 2014. Theplan amendment resulted in a reduction to the postemployment benefit obligation of $124 million, which was partially offset by a $44 million actuarial lossfor the change in discount rate. The corresponding $80 million recognized in AOCI will be amortized as a reduction to net periodic benefit cost overapproximately 11 years.In August 2012, Baxter announced an offer to terminated-vested participants in the U.S. pension plan (approximately 16,000 participants) to pay a lump-sumpayment which would fully settle the company’s pension plan obligation to these participants. The company offered the one-time voluntary lump-sumpayment in an effort to reduce its long-term pension obligations and ongoing annual pension expense. The final acceptance rate by participants wasapproximately 50 percent, which resulted in a final payout of $377 million from plan assets in December 2012. The company recorded a non-cash settlementcharge of $164 million in the fourth quarter of 2012 to immediately expense the unrealized actuarial losses related to the obligations that were settled, whichwere previously deferred in AOCI. The settlement charge was recognized in marketing and administrative expenses since the terminated-vested participantssubject to the settlement were no longer contributing to the activities of the company. 87Table of ContentsReconciliation of Pension and Other Postemployment Benefits (OPEB) Plan Obligations, Assets and Funded StatusThe benefit plan information in the table below pertains to all of the company’s pension and OPEB plans, both in the United States and in other countries. Pension benefits OPEB as of and for the years ended December 31 (in millions) 2014 2013 2014 2013 Benefit obligations Beginning of period $5,425 $5,364 $564 $650 Service cost 130 137 5 10 Interest cost 242 207 25 26 Participant contributions 10 9 12 11 Actuarial loss/(gain) 965 (350) 106 (99) Benefit payments (228) (203) (37) (34) Settlements (6) (4) — — Acquisitions and divestitures (8) 220 — — Plan amendments (5) — (124) — Foreign exchange and other (194) 45 — — End of period 6,331 5,425 551 564 Fair value of plan assets Beginning of period 4,000 3,642 — — Actual return on plan assets 427 464 — — Employer contributions 74 67 25 23 Participant contributions 10 9 12 11 Benefit payments (228) (203) (37) (34) Settlements (6) (4) — — Acquisitions and divestitures — 8 — — Foreign exchange and other (80) 17 — — End of period 4,197 4,000 — — Funded status at December 31 $(2,134) $(1,425) $(551) $(564) Amounts recognized in the consolidated balance sheets Noncurrent asset $53 $50 $— $— Current liability (29) (29) (23) (24) Noncurrent liability (2,158) (1,446) (528) (540) Net liability recognized at December 31 $(2,134) $(1,425) $(551) $(564) Accumulated Benefit Obligation InformationThe pension obligation information in the table above represents the projected benefit obligation (PBO). The PBO incorporates assumptions relating tofuture compensation levels. The accumulated benefit obligation (ABO) is the same as the PBO except that it includes no assumptions relating to futurecompensation levels. The ABO for all of the company’s pension plans was $5.8 billion and $5.0 billion at the 2014 and 2013 measurement dates,respectively.The information in the funded status table above represents the totals for all of the company’s pension plans. The following is information relating to theindividual plans in the funded status table above that have an ABO in excess of plan assets. as of December 31 (in millions) 2014 2013 ABO $5,550 $4,780 Fair value of plan assets 3,878 3,710 88Table of ContentsThe following is information relating to the individual plans in the funded status table above that have a PBO in excess of plan assets (many of which alsohave an ABO in excess of assets, and are therefore also included in the table directly above). as of December 31 (in millions) 2014 2013 PBO $6,117 $5,260 Fair value of plan assets 3,954 3,785 Expected Net Pension and OPEB Plan Payments for the Next 10 Years (in millions) Pensionbenefits OPEB 2015 $229 $24 2016 242 29 2017 259 30 2018 268 31 2019 286 31 2020 through 2024 1,643 156 Total expected net benefit payments for next 10 years $2,927 $301 The expected net benefit payments above reflect the company’s share of the total net benefits expected to be paid from the plans’ assets (for funded plans) orfrom the company’s assets (for unfunded plans). The federal subsidies relating to the Medicare Prescription Drug, Improvement and Modernization Act arenot expected to be significant.Amounts Recognized in AOCIThe pension and OPEB plans’ gains or losses, prior service costs or credits, and transition assets or obligations not yet recognized in net periodic benefit costare recognized on a net-of-tax basis in AOCI and will be amortized from AOCI to net periodic benefit cost in the future.The following is a summary of the pre-tax losses included in AOCI at December 31, 2014 and December 31, 2013. (in millions) Pensionbenefits OPEB Actuarial loss $2,069 $159 Prior service credit and transition obligation (5) (120) Total pre-tax loss recognized in AOCI at December 31, 2014 $2,064 $39 Actuarial loss $1,455 $55 Prior service credit and transition obligation — (1) Total pre-tax loss recognized in AOCI at December 31, 2013 $1,455 $54 89Table of ContentsRefer to Note 14 for the net-of-tax balances included in AOCI as of each of the year-end dates. The following is a summary of the net-of-tax amounts recordedin OCI relating to pension and OPEB plans. years ended December 31 (in millions) 2014 2013 2012 (Charge) gain arising during the year, net of tax (benefit) expense of ($240) in 2014, $221 in 2013 and ($143) in 2012 $(494) $426 $(353) Settlement charge, net of tax expense of $65 — — 103 Amortization of loss to earnings, net of tax expense of $47 in 2014, $88 in 2013 and $77 in 2012 94 166 139 Pension and other employee benefits (charge) gain $(400) $592 $(111) In 2012, OCI activity for pension and OPEB plans was related to actuarial losses, including the settlement of certain of the company’s pension obligations. In2013, OCI activity for pension and OPEB plans was primarily related to actuarial gains/losses. In 2014, OCI activity for pension and OPEB plans was relatedto actuarial losses as well as the OPEB plan amendment referenced above.Amounts Expected to be Amortized From AOCI to Net Periodic Benefit Cost in 2015With respect to the AOCI balance at December 31, 2014, the following is a summary of the pre-tax amounts expected to be amortized to net periodic benefitcost in 2015. (in millions) Pensionbenefits OPEB Actuarial loss $210 $9 Prior service credit and transition obligation (2) (12) Total pre-tax amount expected to be amortized from AOCI to net pension and OPEB cost in 2015 $208 $(3) Net Periodic Benefit Cost years ended December 31 (in millions) 2014 2013 2012 Pension benefits Service cost $130 $137 $110 Interest cost 242 207 235 Expected return on plan assets (269) (254) (288) Amortization of net losses and other deferred amounts 144 245 209 Settlement losses 1 1 168 Net periodic pension benefit cost $248 $336 $434 OPEB Service cost $5 $10 $7 Interest cost 25 26 29 Amortization of net loss and prior service credit (3) 9 7 Net periodic OPEB cost $27 $45 $43 90Table of ContentsWeighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date Pension benefits OPEB 2014 2013 2014 2013 Discount rate U.S. and Puerto Rico plans 4.00% 4.85% 3.95% 4.90% International plans 2.26% 3.41% n/a n/a Rate of compensation increase U.S. and Puerto Rico plans 3.80% 3.80% n/a n/a International plans 3.28% 3.29% n/a n/a Annual rate of increase in the per-capita cost n/a n/a 6.00% 6.25% Rate decreased to n/a n/a 5.00% 5.00% by the year ended n/a n/a 2019 2019 The assumptions above, which were used in calculating the December 31, 2014 measurement date benefit obligations, will be used in the calculation of netperiodic benefit cost in 2015.Weighted-Average Assumptions Used in Determining Net Periodic Benefit Cost Pension benefits OPEB 2014 2013 2012 2014 2013 2012 Discount rate U.S. and Puerto Rico plans 4.85% 3.95% 4.80% 4.90% 4.00% 4.75% International plans 3.41% 3.19% 4.48% n/a n/a n/a Expected return on plan assets U.S. and Puerto Rico plans 7.50% 7.50% 7.75% n/a n/a n/a International plans 6.02% 6.33% 6.85% n/a n/a n/a Rate of compensation increase U.S. and Puerto Rico plans 3.80% 4.50% 4.50% n/a n/a n/a International plans 3.29% 3.51% 3.54% n/a n/a n/a Annual rate of increase in the per-capita cost n/a n/a n/a 6.25% 6.50% 7.00% Rate decreased to n/a n/a n/a 5.00% 5.00% 5.00% by the year ended n/a n/a n/a 2019 2019 2016 The company establishes the expected return on plan assets assumption primarily based on a review of historical compound average asset returns, bothcompany-specific and relating to the broad market (based on the company’s asset allocation), as well as an analysis of current market and economicinformation and future expectations. The company plans to use a 7.25% assumption for its U.S. and Puerto Rico plans for 2015.Effect of a One-Percent Change in Assumed Healthcare Cost Trend Rate on the OPEB Plan One percentincrease One percentdecrease years ended December 31 (in millions) 2014 2013 2014 2013 Effect on total of service and interest cost components of OPEB cost $4 $6 $(3) $(5) Effect on OPEB obligation $67 $74 $(55) $(61) Pension Plan AssetsAn investment committee of members of senior management is responsible for supervising, monitoring and evaluating the invested assets of the company’sfunded pension plans. The investment committee, which meets at least quarterly, abides by documented policies and procedures relating to investment goals,targeted asset 91Table of Contentsallocations, risk management practices, allowable and prohibited investment holdings, diversification, use of derivatives, the relationship between planassets and benefit obligations, and other relevant factors and considerations.The investment committee’s documented policies and procedures include the following: • Ability to pay all benefits when due; • Targeted long-term performance expectations relative to applicable market indices, such as Standard & Poor’s, Russell, MSCI EAFE, and otherindices; • Targeted asset allocation percentage ranges (summarized below), and periodic reviews of these allocations; • Diversification of assets among third-party investment managers, and by geography, industry, stage of business cycle and other measures; • Specified investment holding and transaction prohibitions (for example, private placements or other restricted securities, securities that are nottraded in a sufficiently active market, short sales, certain derivatives, commodities and margin transactions); • Specified portfolio percentage limits on holdings in a single corporate or other entity (generally 5%, except for holdings in U.S. government oragency securities); • Specified average credit quality for the fixed-income securities portfolio (at least A- by Standard & Poor’s or A3 by Moody’s); • Specified portfolio percentage limits on foreign holdings; and • Periodic monitoring of investment manager performance and adherence to the investment committee’s policies.Plan assets are invested using a total return investment approach whereby a mix of equity securities, debt securities and other investments are used to preserveasset values, diversify risk and exceed the planned benchmark investment return. Investment strategies and asset allocations are based on consideration ofplan liabilities, the plans’ funded status and other factors, such as the plans’ demographics and liability durations. Investment performance is reviewed by theinvestment committee on a quarterly basis and asset allocations are reviewed at least annually.Plan assets are managed in a balanced portfolio comprised of two major components: equity securities and fixed income securities. The target allocations forplan assets are 60 percent in equity securities and 40 percent in fixed income securities and other holdings. The documented policy includes an allocationrange based on each individual investment type within the major components that allows for a variance from the target allocations of approximately fivepercentage points. Equity securities primarily include common stock of U.S. and international companies, common/collective trust funds, mutual funds, andpartnership investments. Fixed income securities and other holdings primarily include cash, money market funds with an original maturity of three months orless, U.S. and foreign government and governmental agency issues, corporate bonds, municipal securities, hedge funds, derivative contracts and asset-backedsecurities.While the investment committee provides oversight over plan assets for U.S. and international plans, the summary above is specific to the plans in the UnitedStates. The plan assets for international plans are managed and allocated by the entities in each country, with input and oversight provided by the investmentcommittee. The plan assets for the U.S. and international plans are included in the table below. 92Table of ContentsThe following tables summarize the bases used to measure the pension plan assets and liabilities that are carried at fair value on a recurring basis. Basis of fair value measurement(in millions) Balance at December 31, 2014 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significantunobservableinputs(Level 3)Assets Fixed income securities Cash and cash equivalents $ 129 $ 21 $ 108 $ —U.S. government and government agency issues 434 — 434 —Corporate bonds 704 — 704 —Equity securities Common stock: Large cap 1,024 1,024 — —Mid cap 459 459 — —Small cap 101 101 — — Total common stock 1,584 1,584 — —Mutual funds 404 180 224 —Common/collective trust funds 607 — 601 6Partnership investments 214 — — 214Other holdings 121 11 108 2Collateral held on loaned securities 266 — 266 —Liabilities Collateral to be paid on loaned securities (266) (82) (184) —Fair value of pension plan assets $4,197 $1,714 $2,261 $222 Basis of fair value measurement(in millions) Balance at December 31, 2013 Quoted prices inactive markets foridentical assets(Level 1) Significant otherobservable inputs(Level 2) Significantunobservableinputs(Level 3)Assets Fixed income securities Cash and cash equivalents $ 267 $ 24 $ 243 $ —U.S. government and government agency issues 287 — 287 —Corporate bonds 637 — 637 —Equity securities Common stock: Large cap 974 974 — —Mid cap 442 442 — —Small cap 93 93 — — Total common stock 1,509 1,509 — —Mutual funds 381 180 201 —Common/collective trust funds 617 — 612 5Partnership investments 199 — — 199Other holdings 103 10 91 2Collateral held on loaned securities 248 — 248 —Liabilities Collateral to be paid on loaned securities (248) (88) (160) —Fair value of pension plan assets $4,000 $1,635 $2,159 $206 93Table of ContentsThe following is a reconciliation of changes in fair value measurements that used significant unobservable inputs (Level 3). (in millions) Total Common/collectivetrust funds Partnershipinvestments Otherholdings Balance at December 31, 2012 $187 $ 5 $180 $ 2 Actual return on plan assets still held at year end 8 — 8 — Actual return on plan assets sold during the year — — — — Purchases, sales and settlements 11 — 11 — Balance at December 31, 2013 206 5 199 2 Actual return on plan assets still held at year end 14 1 13 — Actual return on plan assets sold during the year 4 — 4 — Purchases, sales and settlements (2) — (2) — Balance at December 31, 2014 $222 $ 6 $214 $ 2 The assets and liabilities of the company’s pension plans are valued using the following valuation methods: Investment category Valuation methodologyCash and cash equivalents These largely consist of a short-term investment fund, U.S. Dollars and foreign currency. The fairvalue of the short-term investment fund is based on the net asset valueU.S. government and government agency issues Values are based on reputable pricing vendors, who typically use pricing matrices or models that useobservable inputsCorporate bonds Values are based on reputable pricing vendors, who typically use pricing matrices or models that useobservable inputsCommon stock Values are based on the closing prices on the valuation date in an active market on national andinternational stock exchangesMutual funds Values are based on the net asset value of the units held in the respective fund which are obtainedfrom national and international exchanges or based on the net asset value of the underlying assetsof the fund provided by the fund managerCommon/collective trust funds Values are based on the net asset value of the units held at year endPartnership investments Values are based on the estimated fair value of the participation by the company in the investment asdetermined by the general partner or investment manager of the respective partnershipOther holdings The value of these assets vary by investment type, but primarily are determined by reputable pricingvendors, who use pricing matrices or models that use observable inputsCollateral held on loaned securities Values are based on the net asset value per unit of the fund in which the collateral is investedCollateral to be paid on loaned securities Values are based on the fair value of the underlying securities loaned on the valuation date 94Table of ContentsExpected Pension and OPEB Plan FundingThe company’s funding policy for its pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts thatthe company may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flows generated by the company, andother factors. Volatility in the global financial markets could have an unfavorable impact on future funding requirements. The company has no obligation tofund its principal plans in the United States in 2015. The company continually reassesses the amount and timing of any discretionary contributions. Thecompany expects to make cash contributions to its pension plans of at least $36 million in 2015, primarily related to the company’s international plans. Thecompany expects to have net cash outflows relating to its OPEB plan of approximately $24 million in 2015.The table below details the funded status percentage of the company’s pension plans as of December 31, 2014, including certain plans that are unfunded inaccordance with the guidelines of the company’s funding policy outlined above. United States and Puerto Rico International as of December 31, 2014 (in millions) Qualifiedplans Nonqualifiedplan Fundedplans Unfundedplans Total Fair value of plan assets $3,414 n/a $ 783 n/a $4,197 PBO 4,449 $224 1,064 $594 6,331 Funded status percentage 77% n/a 74% n/a 66% U.S. Defined Contribution PlanMost U.S. employees are eligible to participate in a qualified defined contribution plan. Company contributions were $52 million in 2014, $45 million in2013 and $39 million in 2012.NOTE 14ACCUMULATED 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 is a net-of-tax summary of the changes in AOCI by component for the years ended December 31, 2014 and 2013. (in millions) CTA Pension andother employeebenefits Hedgingactivities Other Total Gains (losses) Balance as of December 31, 2013 $(991) $(1,027) $ 10 $32 $(1,976) Other comprehensive income before reclassifications (1,332) (494) 32 (6) (1,800) Amounts reclassified from AOCI (a) — 94 (8) 40 126 Net other comprehensive (loss) income (1,332) (400) 24 34 (1,674) Balance as of December 31, 2014 $(2,323) $(1,427) $ 34 $66 $(3,650) (in millions) CTA Pension andother employeebenefits Hedgingactivities Other Total Gains (losses) Balance as of December 31, 2012 $(1,227) $(1,619) $ (5) $41 $(2,810) Other comprehensive income before reclassifications 236 426 41 (13) 690 Amounts reclassified from AOCI (a) — 166 (26) 4 144 Net other comprehensive income (loss) 236 592 15 (9) 834 Balance as of December 31, 2013 $(991) $(1,027) $ 10 $32 $(1,976) (a)See table below for details about the reclassifications for the years ended December 31, 2014 and 2013. 95Table of ContentsThe following is a summary of the amounts reclassified from AOCI to net income during the years ended December 31, 2014 and 2013. Amounts reclassified fromAOCI (a) (in millions) 2014 2013 Location of impact in income statement Amortization of pension and other employee benefits items Actuarial losses and other $(141)(b) $(254)(b) (141) (254) Total before tax 47 88 Tax benefit $ (94) $(166) Net of tax Gains (losses) on hedging activities Interest rate contracts $ (1) $ 10 Net interest expense Foreign exchange contracts 1 (1) Net sales Foreign exchange contracts 13 32 Cost of sales 13 41 Total before tax (5) (15) Tax expense $ 8 $ 26 Net of tax Other Other-than-temporary impairment of available-for-sale equity securities $ (45) $ (6) Other expense (income), net Gain on available-for-sale equity securities 1 — Other expense (income), net (44) (6) Total before tax 4 2 Tax benefit $ (40) $ (4) Net of tax Total reclassification for the period $(126) $(144) 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 13.Refer to Note 9 for additional information regarding hedging activity and Note 13 for additional information regarding the amortization of pension and otheremployee benefits items. 96Table of ContentsNOTE 15INCOME TAXES Income from Continuing Operations Before Income Tax Expense by Category years ended December 31 (in millions) 2014 2013 2012 United States $ 74 $446 $385 International 2,365 2,100 2,453 Income from continuing operations before income taxes $2,439 $2,546 $2,838 Income Tax Expense Related to Continuing Operations years ended December 31 (in millions) 2014 2013 2012 Current United States Federal $ 102 $ 296 $ 122 State and local 22 28 55 International 447 434 395 Current income tax expense 571 758 572 Deferred United States Federal (15) (147) 112 State and local (6) (5) (81) International (57) (72) (48) Deferred income tax expense (78) (224) (17) Income tax expense $ 493 $ 534 $ 555 Deferred Tax Assets and Liabilities as of December 31 (in millions) 2014 2013 Deferred tax assets Accrued expenses $642 $426 Retirement benefits 898 669 Tax credits and net operating losses 369 426 Valuation allowances (137) (137) Total deferred tax assets 1,772 1,384 Deferred tax liabilities Subsidiaries’ unremitted earnings 208 265 Asset basis differences 1,011 849 Total deferred tax liabilities 1,219 1,114 Net deferred tax asset $553 $270 At December 31, 2014, the company had U.S. operating loss carryforwards totaling $100 million. The U.S. operating loss carryforwards expire between 2015and 2032. At December 31, 2014, the company had foreign operating loss carryforwards totaling $1.2 billion, and foreign tax credit carryforwards totaling$66 million. Of these foreign amounts, $4 million expires in 2015, $21 million expires in 2016, $49 million expires in 2017, $34 million expires in 2018,$40 million expires in 2019, $2 million expires in 2020, $27 million expires after 2020 and $1.1 billion has no expiration date. Realization of theseoperating loss and tax credit carryforwards depends 97Table of Contentson generating sufficient taxable income in future periods. A valuation allowance of $137 million was recorded at both December 31, 2014 and 2013 toreduce the deferred tax assets associated with net operating loss and tax credit carryforwards, because the company does not believe it is more likely than notthat these assets will be fully realized prior to expiration. The company will continue to evaluate the need for additional valuation allowances and, ascircumstances change, the valuation allowance may change.Income Tax Expense Related to Continuing Operations Reconciliation years ended December 31 (in millions) 2014 2013 2012 Income tax expense at U.S. statutory rate $854 $891 $993 Tax incentives (223) (245) (274) State and local taxes 11 22 (11) Foreign tax benefit (161) (121) (170) Contingent tax matters (37) 26 30 Branded Prescription Drug Fee 24 9 7 Other factors 25 (48) (20) Income tax expense $493 $534 $555 The company recognized deferred U.S. income tax expense of $45 million during 2014 relating to 2014 earnings outside the United States that are notdeemed indefinitely reinvested. Management intends to continue to reinvest past earnings in several jurisdictions outside of the United States indefinitely,and therefore has not recognized U.S. income tax expense on these earnings. U.S. federal and state income taxes, net of applicable credits, on these foreignunremitted earnings from continuing operations of $13.9 billion as of December 31, 2014 would be approximately $4.2 billion. As of December 31, 2013 theforeign unremitted earnings from continuing operations and U.S. federal and state income tax amounts were $12.2 billion and $3.8 billion, respectively.Effective Income Tax Rate for Continuing OperationsThe effective income tax rate for continuing operations was 20.2% in 2014, 21.0% in 2013, and 19.6% in 2012. As detailed in the income tax expensereconciliation table above, the company’s effective tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject totax 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 impactedeach period by discrete factors and events.Factors impacting the company’s effective tax rate in 2014 included a non-deductible charge to account for an additional year of the Branded PrescriptionDrug Fee in accordance with final regulations issued in the third quarter by the Internal Revenue Service. Partially offsetting this increase in the effective taxrate was an increase in income earned in foreign jurisdictions with rates of tax lower than the U.S. rate. Additionally, the company favorably settled certaincontingent tax matters.Factors impacting the company’s effective tax rate in 2013 included the favorable settlement of the company’s bilateral Advance Pricing Agreementproceedings between the U.S. government and the government of Switzerland relating to intellectual property, product, and service transfer pricingarrangements, which was offset by other contingent tax matters principally related to transfer pricing. Additionally, the effective tax rate was unfavorablyimpacted by increases in valuation allowances relating to the tax benefit from losses that the company does not believe that it is more likely than not torealize and interest expense related to the company’s unrecognized tax benefits. Partially offsetting these unfavorable items were $16 million of U.S. R&Dcredits. Additionally, the company’s effective tax rate was impacted by a change in the earnings mix from lower tax to higher tax rate jurisdictions comparedto the prior year.Factors impacting the company’s effective tax rate in 2012 were gains totaling $91 million relating to the reduction of certain contingent payment liabilitiesrelated to prior acquisitions, for which there were no tax charges. Also impacting the effective tax rate was a cost of sales reduction of $37 million for anadjustment to 98Table of Contentsthe COLLEAGUE infusion pump reserves when the company substantially completed the recall in the United States in 2012, for which there was no taxcharge. These items were offset by a change in the earnings mix from lower tax to higher tax rate jurisdictions compared to the prior year.Unrecognized Tax BenefitsThe company classifies interest and penalties associated with income taxes in the income tax expense line in the consolidated statements of income. Netinterest and penalties recorded during 2014, 2013 and 2012 were $12 million, $1 million and $12 million, respectively. The liability recorded atDecember 31, 2014 and 2013 related to interest and penalties was $63 million and $124 million, respectively. The following is a reconciliation of thecompany’s unrecognized tax benefits, including those related to discontinued operations for the years ended December 31, 2014, 2013 and 2012. as of and for the years ended (in millions) 2014 2013 2012 Balance at beginning of the year $287 $437 $443 Increase associated with tax positions taken during the current year 41 31 25 Increase (decrease) associated with tax positions taken during a prior year (27) 38 (9) Settlements (82) (216) (21) Decrease associated with lapses in statutes of limitations (13) (3) (1) Balance at end of the year $206 $287 $437 Of the gross unrecognized tax benefits, $215 million and $393 million were recognized as liabilities in the consolidated balance sheets as of December 31,2014 and 2013, respectively.None of the positions included in the liability for uncertain tax positions related to tax positions for which the ultimate deductibility is highly certain but forwhich there is uncertainty about the timing of such deductibility.Tax IncentivesThe company has received tax incentives in Puerto Rico, Switzerland, and certain other taxing jurisdictions outside the United States. The financial impact ofthe reductions as compared to the statutory tax rates is indicated in the income tax expense reconciliation table above. The tax reductions as compared to thelocal statutory rate favorably impacted earnings from continuing operations per diluted share by $0.42 in 2014, $0.44 in 2013 and $0.50 in 2012. The PuertoRico grant provides that the company’s manufacturing operations are and will be partially exempt from local taxes until the year 2018. The Switzerland grantprovides that the company’s manufacturing operations will be partially exempt from local taxes until approximately the year 2024, at which time the tax ratewill be approximately 8%.Examinations of Tax ReturnsAs of December 31, 2014, Baxter had ongoing audits in the United States, Germany, Austria, Italy, Turkey, and other jurisdictions. Baxter expects to reducethe amount of its liability for uncertain tax positions within the next 12 months by $104 million due principally to the resolution of tax disputes in Turkey,Singapore, Austria, and the United States. While the final outcome of these matters is inherently uncertain, the company believes it has made adequate taxprovisions for all years subject to examination.NOTE 16LEGAL 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 companyrecords 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, andno amount within the 99Table of Contentsrange is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liabilityis recorded. As of December 31, 2014, the company’s total recorded reserves with respect to legal matters were $72 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 certaincontingencies for which there is no reserve or additional loss for matters already reserved. While the liability of the company in connection with the claimscannot 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’sresults 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’sconsolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdictsdo 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 governmentaland 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 thescope 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 asignificant loss of sales, or otherwise materially affect future results of operations.General litigationBaxter is a defendant in a number of suits alleging that certain of the company’s current and former executive officers and its board of directors failed toadequately oversee the operations of the company and issued materially false and misleading statements regarding the company’s plasma-based therapiesbusiness, the company’s remediation of its COLLEAGUE infusion pumps, its heparin product, and other quality matters. Plaintiffs allege these actionsdamaged the company and its shareholders by resulting in a decline in stock price in the second quarter of 2010, payment of excess compensation to theboard of directors and certain of the company’s current and former executive officers, and other damage to the company. The company and plaintiffs in aconsolidated derivative suit filed in the U.S.D.C. for the Northern District of Illinois have entered into a settlement agreement, which settlement has beenpreliminarily approved by the court. Two other derivative actions were previously filed in state courts, one in Lake County, Illinois and one in the DelawareChancery Court. Both matters have been stayed pending the resolution of the federal action. In addition, a consolidated alleged class action is pending in theU.S.D.C. for the Northern District of Illinois against the company and certain of its current executive officers seeking to recover the lost value of investors’stock and the parties are currently proceeding with discovery. In April 2013, the company filed its opposition to the plaintiff’s motion to certify a classaction, which motion is pending.The company was a defendant, along with others, in a number of lawsuits consolidated for pretrial proceedings in the U.S.D.C. for the Northern District ofIllinois alleging that Baxter and certain of its competitors conspired to restrict output and artificially increase the price of plasma-derived therapies since2003. The company settled with the direct purchaser plaintiffs for $64 million, which amount was paid during the first quarter of 2014.OtherIn May 2014, the company received a formal demand for information from the United States Attorney for the Western District of Pennsylvania for informationrelated to alleged “off-label” sales of its pulmonary treatments. The company is fully cooperating with this request.In the fourth quarter of 2012, the company received two investigative demands from the United States Attorney for the Western District of North Carolina forinformation regarding its quality and manufacturing practices and procedures at its North Cove facility. The company is fully cooperating with thisinvestigation. 100Table of ContentsNOTE 17SEGMENT INFORMATION Baxter’s two segments, BioScience and Medical Products, are strategic businesses that are managed separately because each business develops, manufacturesand markets distinct products and services. The segments and a description of their products and services are as follows:The BioScience business processes recombinant and plasma-based proteins to treat hemophilia and other bleeding disorders; plasma-based therapies to treatimmune deficiencies, alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions; and biosurgery products.Additionally, the BioScience business is investing in new disease areas, including oncology, as well as emerging technology platforms, including genetherapy and biosimilars.The Medical Products business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filledvials and syringes for injectable drugs, IV nutrition products, infusion pumps, and inhalation anesthetics. The business also provides products and servicesrelated to pharmacy compounding, drug formulation and packaging technologies. In addition, the Medical Products business provides products and servicesto treat end-stage renal disease, or irreversible kidney failure, along with other renal therapies, which business was enhanced through the 2013 acquisition ofGambro. The Medical Products business now offers a comprehensive portfolio to meet the needs of patients across the treatment continuum, includingtechnologies and therapies for peritoneal dialysis (PD), in-center hemodialysis (HD), home HD (HHD), continuous renal replacement therapy (CRRT) andadditional dialysis services. The financial information for the year ended December 31, 2014 includes the results of Gambro. The financial information for theyear ended December 31, 2013 includes the results of Gambro since the September 6, 2013 acquisition date.The operating results of the Vaccines franchise, previously reported within the BioScience segment, have been reflected as discontinued operations for theyears ended December 31, 2014, 2013 and 2012. Refer to Note 2 for additional information regarding the presentation of the Vaccines franchise.The company uses more than one measurement and multiple views of data to measure segment performance and to allocate resources to the segments.However, the dominant measurements are consistent with the company’s condensed consolidated financial statements and, accordingly, are reported on thesame basis in this report. The company evaluates the performance of its segments and allocates resources to them primarily based on pre-tax income alongwith cash flows and overall economic returns. Intersegment sales are eliminated in consolidation. The accounting policies of the segments are substantiallythe same as those described in the summary of significant accounting policies in Note 1.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 equivalentsand related net interest expense, foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in aforeign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, stock compensation expense, nonstrategicinvestments and related income and expense, certain employee benefit plan costs as well as certain nonrecurring gains, losses, and other charges (such asbusiness optimization and asset impairment). With respect to depreciation and amortization and expenditures for long-lived assets, the difference between thesegment totals and the consolidated totals principally relate to assets maintained at Corporate. 101Table of ContentsSegment Information as of and for the years ended December 31 (in millions) BioScience MedicalProducts Other Total 2014 Net sales $6,699 $9,972 $— $16,671 Depreciation and amortization 285 633 84 1,002 Pre-tax income (loss) from continuing operations 2,040 1,316 (917) 2,439 Assets 9,936 11,440 4,541 25,917 Capital expenditures 1,020 749 129 1,898 2013 Net sales $6,272 $8,695 $— $14,967 Depreciation and amortization 255 472 88 815 Pre-tax income (loss) from continuing operations 2,331 1,398 (1,183) 2,546 Assets 8,967 12,269 3,988 25,224 Capital expenditures 868 530 127 1,525 2012 Net sales $5,983 $7,953 $— $13,936 Depreciation and amortization 235 385 84 704 Pre-tax income (loss) from continuing operations 2,257 1,592 (1,011) 2,838 Assets 7,380 7,568 5,442 20,390 Capital expenditures 570 495 96 1,161 Pre-Tax Income from Continuing Operations Reconciliation years ended December 31 (in millions) 2014 2013 2012 Total pre-tax income from continuing operations from segments $3,356 $3,729 $3,849 Unallocated amounts Net interest expense (145) (128) (87) Certain foreign exchange fluctuations and hedging activities 40 83 53 Stock compensation (159) (150) (130) Business optimization charges (19) (180) (150) Pension settlement charges — — (168) Certain tax and legal reserves — (104) — Other Corporate items (634) (704) (529) Income from continuing operations before income taxes $2,439 $2,546 $2,838 Assets Reconciliation as of December 31 (in millions) 2014 2013 Total segment assets $21,376 $21,236 Cash and equivalents 2,925 2,733 Deferred income taxes 774 545 PP&E, net 494 437 Other Corporate assets 348 273 Consolidated total assets $25,917 $25,224 102Table of ContentsGeographic InformationNet sales are based on product shipment destination and assets are based on physical location. years ended December 31 (in millions) 2014 2013 2012 Net sales United States $7,015 $6,444 $6,043 Europe 5,136 4,371 4,008 Asia-Pacific 2,619 2,324 2,183 Latin America and Canada 1,901 1,828 1,702 Consolidated net sales $16,671 $14,967 $13,936 as of December 31 (in millions) 2014 2013 2012 PP&E, net United States $4,071 $3,091 $2,333 Austria 778 914 802 Other countries 3,849 3,827 2,963 Consolidated PP&E, net $8,698 $7,832 $6,098 Significant Product SalesEffective January 1, 2013, Baxter transitioned to a commercial franchise structure for reporting net sales within each segment. Prior period net sales have beenreclassified to reflect the new commercial franchise structure. The following is a summary of net sales as a percentage of consolidated net sales for thecompany’s commercial franchises. years ended December 31 2014 2013 2012 Hemophilia 22% 23% 23% Fluid Systems 19% 21% 21% Renal 25% 21% 18% BioTherapeutics 13% 14% 15% Specialty Pharmaceuticals 9% 10% 11% Includes sales of recombinant and plasma-derived hemophilia products (primarily factor VIII and factor IX). Principally includes IV solutions, infusion pumps, administration sets, and premixed and oncology drug platforms. Consists of therapies to treat end-stage renal disease, including PD, HD, and HHD and therapies to treat acute kidney injuries, including CRRT. Includes sales of the company’s plasma-based therapies to treat alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute blood-relatedconditions. Principally includes nutrition and anesthesia products. 1031234512345Table of ContentsNOTE 18QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY’S STOCK (UNAUDITED) years ended December 31 (in millions, except per share data) Firstquarter Secondquarter Thirdquarter Fourthquarter Full year 2014 Net sales $3,848 $4,154 $4,197 $4,472 $16,671 Gross margin 1,891 1,969 2,073 2,224 8,157 Income from continuing operations 507 468 447 524 1,946 Income from continuing operations per common share Basic 0.94 0.86 0.83 0.97 3.59 Diluted 0.93 0.85 0.82 0.96 3.56 Income from discontinued operations, net of tax 49 52 21 429 551 Income from discontinued operations per common share Basic 0.09 0.10 0.03 0.79 1.02 Diluted 0.09 0.10 0.04 0.78 1.00 Net income 556 520 468 953 2,497 Net income per common share Basic 1.02 0.96 0.86 1.76 4.61 Diluted 1.01 0.95 0.86 1.74 4.56 Cash dividends declared per common share 0.49 0.52 0.52 0.52 2.05 Market price per common share High 73.58 75.45 77.00 74.70 77.00 Low 66.49 71.98 71.28 67.24 66.49 2013 Net sales $3,364 $3,571 $3,710 $4,322 $14,967 Gross margin 1,696 1,874 1,906 1,996 7,472 Income from continuing operations 523 552 528 409 2,012 Income from continuing operations per common share Basic 0.96 1.02 0.97 0.75 3.70 Diluted 0.95 1.01 0.96 0.74 3.66 Income (loss) from discontinued operations, net of tax 29 38 16 (83) 0 Income from discontinued operations per common share Basic 0.05 0.07 0.03 (0.15) 0.00 Diluted 0.05 0.06 0.03 (0.15) 0.00 Net income 552 590 544 326 2,012 Net income per common share Basic 1.01 1.09 1.00 0.60 3.70 Diluted 1.00 1.07 0.99 0.59 3.66 Cash dividends declared per common share 0.45 0.49 0.49 0.49 1.92 Market price per common share High 72.64 73.04 74.43 69.55 74.43 Low 66.42 68.10 65.69 63.89 63.89 The first quarter of 2014 included charges of $69 million related business optimization, Gambro integration costs, tax and legal reserves, and milestonepayments associated with the company’s collaboration arrangements. The second quarter of 2014 included charges of $177 million related to businessoptimization, Gambro integration costs, product-related items, separation-related costs, reserve items and adjustments, and milestone payments associated with the company’s collaboration arrangements. The third quarter of 2014 included charges of $283 million related tobusiness optimization, Gambro integration costs, separation-related costs, the Branded Prescription Drug Fee, and upfront and milestone paymentsassociated with the company’s 104111122221Table of Contents collaboration arrangements. The fourth quarter of 2014 included $275 million related to business optimization, Gambro integration costs, product-relateditems, separation-related costs, reserve items and adjustments, an other-than-temporary impairment loss, and milestone payments associated with thecompany’s collaboration arrangements. The first quarter of 2013 included charges of $45 million related Gambro acquisition costs and currency-related items. The second quarter of 2013included charges of $76 million related to business optimization and Gambro acquisition costs. The third quarter of 2013 included charges of $152million related to Gambro acquisition and integration costs, reserve items and adjustments, and an upfront payment associated with one of the company’scollaboration arrangements. The fourth quarter of 2013 included $371 million related to business optimization, Gambro acquisition and integration costs,product-related items, and upfront and milestone payments associated with the company’s collaboration arrangements.Baxter common stock is listed on the New York, Chicago and SIX Swiss stock exchanges. The New York Stock Exchange is the principal market on whichthe company’s common stock is traded. At January 31, 2015, there were 34,340 holders of record of the company’s common stock. 1052Table of ContentsManagement’s Responsibility for Consolidated Financial StatementsManagement is responsible for the preparation of the company’s consolidated financial statements and related information appearing in this report.Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statementsreasonably present the company’s financial position, results of operations and cash flows in conformity with accounting principles generally accepted in theUnited States of America. Management has also included in the company’s consolidated financial statements amounts that are based on estimates andjudgments, which it believes are reasonable under the circumstances.PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the company’s consolidated financial statements in accordancewith the standards established by the Public Company Accounting Oversight Board and provides an opinion on whether the consolidated financialstatements present fairly, in all material respects, the financial position, results of operations and cash flows of the company.Management’s Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)under the Securities Exchange Act of 1934, as amended. The company’s internal control over financial reporting is a process designed under the supervisionof the principal executive and financial officers, and effected by the board of directors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principlesgenerally accepted in the United States of America.Management performed an assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2014. In making thisassessment, management used the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on that assessment under the framework in Internal Control-Integrated Framework (2013), management concluded that thecompany’s internal control over financial reporting was effective as of December 31, 2014.The effectiveness of the company’s internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their report which appears herein. /s/ Robert L. Parkinson, Jr. Robert L. Parkinson, Jr.Chairman of the Board andChief Executive Officer /s/ Robert J. Hombach Robert J. HombachCorporate Vice President andChief Financial Officer 106Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of Baxter International Inc.:In our opinion, the consolidated financial statements listed in the index appearing under Item 15(1) present fairly, in all material respects, the financialposition of Baxter International Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also inour opinion, the company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteriaestablished in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and forits assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over FinancialReporting incorporated by reference under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internalcontrol over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Ouraudit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits alsoincluded performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for ouropinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPChicago, IllinoisFebruary 26, 2015 107Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.None. Item 9A.Controls and Procedures.Evaluation of Disclosure Controls and ProceduresBaxter carried out an evaluation, under the supervision and with the participation of its Disclosure Committee and management, including the ChiefExecutive 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 Exchange Act) as of December 31, 2014. Baxter’s disclosure controls and procedures are designed to ensure that information required to bedisclosed by Baxter in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that suchinformation is communicated to management, including the Chief Executive Officer, Chief Financial Officer and its Board of Directors, to allow timelydecisions regarding required disclosure.Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures wereeffective as of December 31, 2014.Assessment of Internal Control Over Financial ReportingBaxter’s report of management’s assessment of the effectiveness of its internal control over financial reporting as of December 31, 2014 and the audit reportregarding the same of Baxter’s independent auditor, PricewaterhouseCoopers LLP, an independent registered public accounting firm, are included in thisAnnual Report on Form 10-K and are incorporated herein by reference.Changes in Internal Control over Financial ReportingThere 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 theExchange Act) during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, Baxter’s internalcontrol over financial reporting. Item 9B.Other Information.None. 108Table of ContentsPART III Item 10.Directors, Executive Officers and Corporate Governance.Refer to information under the captions entitled “Proposal 1 — Election of Directors,” “Committees of the Board — Audit Committee,” “CorporateGovernance — Director Qualifications” “Corporate Governance —Code of Conduct,” and “Section 16(a) Beneficial Ownership Reporting Compliance” inBaxter’s definitive proxy statement to be filed with the Securities and Exchange Commission and delivered to shareholders in connection with the AnnualMeeting of Shareholders to be held on May 5, 2015 (the Proxy Statement), all of which information is incorporated herein by reference. Also refer toinformation regarding executive officers of Baxter under the caption entitled “Executive Officers of the Registrant” in Part I of this Annual Report onForm 10-K. Item 11.Executive Compensation.Refer to information under the captions entitled “Executive Compensation”, “Compensation Committee Report”, and “Director Compensation” in the ProxyStatement, all of which information is incorporated herein by reference. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Refer to information under the captions entitled “Equity Compensation Plan Information,” “Security Ownership by Directors and Executive Officers” and“Security Ownership by Certain Beneficial Owners” in the Proxy Statement, all of which information is incorporated herein by reference. Item 13.Certain Relationships and Related Transactions, and Director Independence.Refer to the information under the captions entitled “Board of Directors,” “Corporate Governance — Director Independence” and “Certain Relationships andRelated Transactions,” in the Proxy Statement, all of which information is incorporated herein by reference. Item 14.Principal Accountant Fees and Services.Refer to the information under the caption entitled “Audit and Non-Audit Fees” in the Proxy Statement, all of which information is incorporated herein byreference. 109Table of ContentsPART IV Item 15.Exhibits and Financial Statement Schedules.The following documents are filed as a part of this report: PageNumber (1) Financial Statements: Consolidated Balance Sheets 50 Consolidated Statements of Income 51 Consolidated Statements of Comprehensive Income 52 Consolidated Statements of Cash Flows 53 Consolidated Statements of Changes in Equity 54 Notes to Consolidated Financial Statements 55 Report of Independent Registered Public Accounting Firm 107 (2) Schedules required by Article 12 of Regulation S-X: Report of Independent Registered Public Accounting Firm on Financial Statement Schedule 116 Schedule II — Valuation and Qualifying Accounts 117 All other schedules have been omitted because they are not applicable or not required. (3) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference. Exhibits in theExhibit Index marked with a “C” in the left margin constitute management contracts or compensatory plans or arrangementscontemplated by Item 15(b) of Form 10-K. 110Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. BAXTER INTERNATIONAL INC.By: /s/ Robert L. Parkinson, Jr. Robert L. Parkinson, Jr. Chairman and Chief Executive OfficerDATE: February 26, 2015Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities indicated on February 26, 2015. Signature Title/s/ Robert L. Parkinson, Jr. Chairman and Chief Executive Officer(principal executive officer)Robert L. Parkinson, Jr. /s/ Robert J. Hombach Corporate Vice President and Chief Financial Officer (principal financialofficer)Robert J. Hombach /s/ Sebastian J. Bufalino Corporate Vice President and Controller(principal accounting officer)Sebastian J. Bufalino /s/ Thomas F. Chen DirectorThomas F. Chen /s/ Uma Chowdhry DirectorUma Chowdhry, Ph.D. /s/ Blake E. Devitt DirectorBlake E. Devitt /s/ John D. Forsyth DirectorJohn D. Forsyth /s/ Gail D. Fosler DirectorGail D. Fosler /s/ James R. Gavin III DirectorJames R. Gavin III, M.D., Ph.D. /s/ Peter S. Hellman DirectorPeter S. Hellman 111Table of ContentsSignature Title/s/ Wayne T. Hockmeyer DirectorWayne T. Hockmeyer, Ph.D. /s/ Carole J. Shapazian DirectorCarole J. Shapazian /s/ Thomas T. Stallkamp DirectorThomas T. Stallkamp /s/ K.J. Storm DirectorK.J. Storm /s/ Albert P. L. Stroucken DirectorAlbert P. L. Stroucken 112Table of ContentsEXHIBIT INDEX Number and Description of Exhibit 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K,filed on May 10, 2013). 3.2 Bylaws, as amended and restated on May 9, 2013 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K,filed on May 10, 2013). 4.1 Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit(a) to the Company’s Registration Statement onForm S-16 (Registration No. 02-65269), filed on August 17, 1979). 4.2 Indenture, dated as of April 26, 2002, between the Company and Bank One Trust Company, N.A., as Trustee (incorporated by reference toExhibit 4.5 to Amendment No. 1 to Form 8-A, filed on December 23, 2002). 4.3 Second Supplemental Indenture, dated as of March 10, 2003, to Indenture dated as of April 26, 2002, between the Company and Bank OneTrust Company, N.A., as Trustee (including form of 4.625% Notes due 2015) (incorporated by reference to Exhibit 4.2 to the Company’sRegistration Statement on Form S-4 (Registration No. 333-109329), filed on September 30, 2003). 4.4 Indenture, dated August 8, 2006, between the Company and J.P. Morgan Trust Company, National Association, as Trustee (incorporated byreference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on August 9, 2006). 4.5 First Supplemental Indenture, dated August 8, 2006, between the Company and J.P. Morgan Trust Company, National Association, asTrustee (including form of 5.90% Senior Note due 2016) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report onForm 8-K, filed on August 9, 2006). 4.6 Second Supplemental Indenture, dated December 7, 2007, between the Company and The Bank of New York Trust Company, N.A. (assuccessor in interest to J.P. Morgan Trust Company, National Association), as Trustee (including form of 6.250% Senior Note due 2037)(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on December 7, 2007). 4.7 Third Supplemental Indenture, dated May 22, 2008, between the Company and The Bank of New York Trust Company, N.A. (as successorin interest to J.P. Morgan Trust Company, National Association), as Trustee (including form of 5.375% Senior Notes due 2018)(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on May 22, 2008). 4.8 Fifth Supplemental Indenture, dated as of August 20, 2009, between the Company and The Bank of New York Mellon Trust Company, N.A.(as successor in interest to J.P. Morgan Trust Company, National Association), as Trustee (including form of 4.50% Senior Notes due 2019)(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 20, 2009). 4.9 Sixth Supplemental Indenture, dated March 9, 2010, between the Company and The Bank of New York Mellon Trust Company, N.A. (assuccessor in interest to J.P. Morgan Trust Company, National Association), as Trustee, (including form of 4.250% Senior Notes due 2020)(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 9, 2010). 4.10 Seventh Supplemental Indenture, dated December 19, 2011, between the Company and The Bank of New York Mellon Trust Company,N.A. (as successor in interest to J.P. Morgan Trust Company, National Association), as Trustee (including form of 1.850% Senior Notes due2017) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on December 19, 2011). 113Table of ContentsNumber and Description of Exhibit 4.11 Eighth Supplemental Indenture, dated August 13, 2012, between the Company and The Bank of New York Mellon Trust Company, N.A. (assuccessor in interest to J.P. Morgan Trust Company, National Association), as Trustee (including forms of 2.400% Senior Notes due 2022and 3.650% Senior Notes due 2042) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed onAugust 13, 2012). 4.12 Ninth Supplemental Indenture, dated June 11, 2013, between the Company and The Bank of New York Mellon Trust Company, N.A. (assuccessor in interest to J.P. Morgan Trust Company, National Association), as Trustee (including forms of 0.950% Senior Notes due 2016,1.850% Senior Notes due 2018, 3.200% Senior Notes due 2023, and 4.500% Senior Notes due 2043) (incorporated by reference to Exhibit4.1 to the Company’s Current Report on Form 8-K, filed on June 11, 2013). 10.1 Four-Year Credit Agreement, dated June 17, 2011, among the Company as Borrower, JPMorgan Chase Bank, National Association , asAdministrative Agent and certain other financial institutions named therein (incorporated by reference to Exhibit 10.18 to the Company’sCurrent Report on Form 8-K, filed on June 22, 2011). 10.2 Amendment No. 1, dated July 11, 2014, to the Four-Year Credit Agreement dated June 17, 2011 (incorporated by reference to Exhibit 10.1to the Company’s Current Report on Form 8-K, filed on July 17, 2014). 10.3 364-Day Credit Agreement, dated December 10, 2014, among the Company as Borrower, JPMorgan Chase Bank, National Association, asAdministrative Agent, and various institutional lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K, filed on December 16, 2014).C 10.4 Form of Indemnification Agreement entered into with directors and officers (incorporated by reference to Exhibit 19.4 to the Company’sQuarterly Report on Form 10-Q, filed on November 14, 1986).C 10.5 Baxter International Inc. 2007 Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement onSchedule 14A, filed on March 20, 2007).C 10.6 Baxter International Inc. Equity Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed onMarch 16, 2007).C 10.7 Baxter International Inc. 2011 Incentive Plan (incorporated by reference to Appendix B to the Company’s Definitive Proxy Statement onSchedule 14A, filed on March 18, 2011).C 10.8 Baxter International Inc. Equity Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed onMay 3, 2011).C 10.9 Baxter International Inc. Directors’ Deferred Compensation Plan (amended and restated effective January 1, 2009) and Amendment No. 1thereto effective January 1, 2012 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K filed onFebruary 23, 2012).C 10.10 Amended and Restated Employment Agreement, between Robert L. Parkinson, Jr. and the Company, dated December 12, 2008(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 17, 2008).C 10.11 Amendment to Employment Agreement, between Robert L. Parkinson, Jr. and the Company, dated July 23, 2013 (incorporated by referenceto Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed on July 31, 2013).C 10.12 Form of Severance Agreement entered into with executive officers (incorporated by reference to Exhibit 10.11 to the Company’s AnnualReport on Form 10-K, filed on February 21, 2014). 114Table of ContentsNumber and Description of ExhibitC 10.13 Baxter International Inc. and Subsidiaries Supplemental Pension Plan (amended and restated effective January 1, 2009) (incorporated byreference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K, filed on February 19, 2009).C 10.14 Baxter International Inc. and Subsidiaries Deferred Compensation Plan (amended and restated effective January 1, 2009) (incorporatedby reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K, filed on February 19, 2009).C 10.15 Baxter International Inc. Employee Stock Purchase Plan (as amended and restated effective July 1, 2011) (incorporated by reference toAppendix A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on March 18, 2011).C 10.16* Baxter International Inc. Non-Employee Director Compensation Plan (as amended and restated effective January 1, 2015).C 10.17 Form of Spin-Off Severance Agreement entered into with certain executive officers (incorporated by reference to Exhibit 10.1 to theCompany’s Annual Report on Form 10-Q, filed on July 30, 2014).C 10.18 First Butel Agreement, between Jean-Luc Butel and the Company, dated July 29, 2014 (incorporated by reference to Exhibit 10.2 to theCompany’s Annual Report on Form 10-Q, filed on July 30, 2014).C 10.19 Form of Second Butel Agreement, between Jean-Luc Butel and the Company (incorporated by reference to Exhibit 10.3 to theCompany’s Annual Report on Form 10-Q, filed on July 30, 2014).C 10.20 Agreement, dated January 5, 2015, between Jean-Luc Butel and Baxter Healthcare (Asia) Pte Ltd. (incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K, filed on January 9, 2015). 12* Computation of Ratio of Earnings to Fixed Charges. 21* Subsidiaries of Baxter International Inc. 23* Consent of PricewaterhouseCoopers LLP. 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) 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-OxleyAct 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-OxleyAct 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. CManagement contract or compensatory plan or arrangement. 115Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ONFINANCIAL STATEMENT SCHEDULETo the Board of Directors and Shareholders of Baxter International Inc.:Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February26, 2015 listed in the index appearing under Item 15(1) in this Form 10-K also included an audit of the financial statement schedule listed in the indexappearing under Item 15(2) of this Annual Report on Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLPChicago, IllinoisFebruary 26, 2015 116Table of ContentsSCHEDULE II Additions Charged(credited)to otheraccounts (1) Valuation and Qualifying Accounts(in millions) Balance atbeginningof period Charged tocosts andexpenses Deductionsfromreserves Balance atend ofperiod Year ended December 31, 2014: Allowance for doubtful accounts $169 1 (16) (15) $139 Deferred tax asset valuation allowance $137 10 (7) (3) $137 Year ended December 31, 2013: Allowance for doubtful accounts $127 26 27 (11) $169 Deferred tax asset valuation allowance $104 13 25 (5) $137 Year ended December 31, 2012: Allowance for doubtful accounts $128 12 (2) (11) $127 Deferred tax asset valuation allowance $116 10 (4) (18) $104 (1)Valuation accounts of acquired or divested companies and foreign currency translation adjustments.Reserves are deducted from assets to which they apply. 117Exhibit 10.16BAXTER INTERNATIONAL INC.Non-Employee Director Compensation Plan(As amended and restated effective January 1, 2015)Terms and Conditions 1.PurposeThis Non-Employee Director Compensation Plan (the “Plan”) is adopted by the Board of Directors (the “Board”) of Baxter International Inc.(“Baxter”). This Plan is adopted pursuant to the Baxter International Inc. 2011 Incentive Plan (the “2011 Incentive Plan”), for the purposes stated in the2011 Incentive Plan. Capitalized terms defined in the 2011 Incentive Plan that are used without being defined in the Plan will have the same meaningas in the 2011 Incentive Plan. 2.ParticipantsEach member of the Board who is not an employee of Baxter or any of its subsidiaries shall participate in the Plan (a “Participant”). 3.Restricted Stock Units 3.1On the date of Baxter’s annual meeting of stockholders (the “Annual Meeting”) in each year beginning with the Annual Meeting held on May 5,2015, and subject to availability of Shares under the 2011 Incentive Plan, each Participant upon completion of the Annual Meeting shall,automatically and without necessity of any action by the Board or any committee thereof, receive the number of Full Value Awards in the formof restricted stock units (“Restricted Stock Units”) equal to the quotient of (A) $115,000 divided by (B) the Fair Market Value of a Share on thedate of grant (rounded to the nearest whole number which is a multiple of ten) (the “Annual Restricted Stock Unit Grant Amount”). 3.2Each Participant elected or appointed on a date other than the date of an Annual Meeting shall, on the date of such election or appointment andautomatically and without necessity of any action by the Board or any committee thereof, receive the number of Restricted Stock Units equal tothe product of (A) the Annual Restricted Stock Unit Grant Amount (as defined in Section 3.1, subject to adjustment in accordance with the 2011Incentive Plan) for the Restricted Stock Units awarded on the date of the immediately preceding Annual Meeting, multiplied by (B) the quotientof (i) the number of full calendar months before the next Annual Meeting divided by (ii) 12 (rounded to the nearest whole number which is amultiple of ten). The number of Restricted Stock Units granted under this Section 3.2 shall not exceed the number available under the 2011Incentive Plan on the date of grant. 3.3Restricted Stock Units may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of, whethervoluntarily, involuntarily or by operation of law. 3.4Except as expressly provided in Sections 3.6, 3.7 and 7, all Restricted Stock Units shall vest on the date of and immediately prior to the nextAnnual Meeting following the date of grant. 3.5Except as provided in Sections 3.6 and 3.7, if a Participant ceases service as a member of the Board before his or her Restricted Stock Units vest,the Participant will forfeit his or her unvested Restricted Stock Units immediately upon ceasing service as a member of the Board. 3.6If a Participant dies while serving as a member of the Board, his or her unvested Restricted Stock Units will not be forfeited and will be fullyvested immediately. 3.7If a Participant becomes disabled and unable to continue service as a member of the Board, his or her Restricted Stock Units will not be forfeitedand will, when the Participant ceases to serve as member of the Board, be fully vested. 3.8No Participant receiving Restricted Stock Units shall have the rights of a stockholder with respect to those Shares underlying the RestrictedStock Units. Participants shall not be permitted to vote the Restricted Stock Units. Participants shall be permitted to receive cash payments equalto the dividends and distributions paid on Shares to the same extent as if each Restricted Stock Unit was a Share, and those Shares were notsubject to the restrictions imposed by this Plan; provided, however, that no dividends or distributions shall be payable to or for the benefit of theParticipant with respect to the record dates for such dividends or distributions occurring on or after the date, if any, on which the Participant hasforfeited the Restricted Stock Units. Cash dividend and distribution equivalents paid on those Shares underlying the Restricted Stock Unitspursuant hereto shall be reinvested in additional Restricted Stock Units. 3.9Participants shall be eligible to defer payment and taxation of those Shares underlying the Restricted Stock Units otherwise payable under thisSection 3 pursuant to the terms and conditions of the Baxter Non-Employee Director Deferred Compensation Plan. 3.10If requested by Baxter, each Participant receiving Restricted Stock Units shall enter into an agreement with Baxter incorporating the terms andconditions of this Plan. Subject to the terms of the 2011 Incentive Plan, after the Restricted Stock Units vest, Shares will be delivered to theParticipant free and clear of all restrictions (or to the Participant’s legal representative, beneficiary or heir). 4.Options 4.1On the date of Baxter’s Annual Meeting in each year beginning with the Annual Meeting on May 5, 2015, and subject to availability of Sharesunder the 2011 Incentive Plan, upon completion of the Annual Meeting each Participant shall be granted Options having a value equal to$60,000, to be determined by the Board or the Compensation Committee of the Board (the “Committee”) based on a Black-Scholes or otheroption valuation model in the discretion of the Board or the Committee (rounded to the nearest whole number which is a multiple of ten) (the“Annual Option Grant Amount”). 4.2Each Participant elected or appointed on a date other than the date of an Annual Meeting shall, on the date of such election or appointment andautomatically and without necessity of any action by the Board or any committee thereof, be granted an Option to purchase that number ofShares equal to the product of (A) the Annual Option Grant Amount (as defined in Section 4.1, subject to adjustment in accordance with the2011 Incentive Plan) for each Option granted on the date of the immediately preceding Annual Meeting, multiplied by (B) the quotient of (i) thenumber of full calendar months before the next Annual Meeting divided by (ii) 12 (rounded to the nearest whole number which is a multiple often). The number of Shares subject to any Option granted under this Section 4.2 shall not exceed the number available under the 2011 IncentivePlan on the date of grant. 4.3The purchase price for each Share subject to an Option shall be the Fair Market Value of a Share on the date of grant. The terms of each Optionwill be as set forth in this Plan and the 2011 Incentive Plan. To the extent that any provision of the Plan is inconsistent with the 2011 IncentivePlan, the 2011 Incentive Plan shall control. The Options are not intended to qualify as Incentive Stock Options within the meaning ofSection 422 of the United States Internal Revenue Code. 4.4Except as expressly provided in Sections 4.8, 4.9, 4.10 and 7, Options shall first become exercisable on the date of and immediately prior to thenext Annual Meeting following the date of grant. 4.5After an Option becomes exercisable and until it expires, it may be exercised in whole or in part, in the manner specified by Baxter. Under nocircumstances may an Option be exercised after it has expired. Shares may be used to pay the purchase price for Shares to be acquired uponexercise of an Option or fulfill any tax withholding obligation, subject to any requirements or restrictions specified by Baxter. 4.6Except as provided in Sections 4.8, 4.9 and 4.10, if a Participant ceases service as a member of the Board before his or her Option becomesexercisable, the Option will expire when the Participant ceases service as a member of the Board. 4.7If a Participant ceases service as a member of the Board after his or her Option becomes exercisable, the Option will not expire but will remainexercisable. Subject to Sections 4.8, 4.9, 4.10 and 4.11, the Option will expire three months after the Participant ceases service as a member of theBoard, unless the Participant dies or becomes disabled during such three month period in which case the Option will expire on the firstanniversary of the date the Participant ceased serving as a member of the Board. 4.8If a Participant dies while serving as a member of the Board, his or her Option will not expire and will remain, or immediately become, fullyexercisable, as the case may be. Subject to Sections 4.10 and 4.11, the Option will expire on the fifth anniversary of the Participant’s death. 4.9If a Participant becomes disabled and unable to continue service as a member of the Board, his or her Option will not expire and will remain, orwhen the Participant ceases to serve as member of the Board become, fully exercisable, as the case may be. Subject to Sections 4.10 and 4.11, theOption will expire on the fifth anniversary of the date the Participant ceases service as a member of the Board. 4.10If a Participant who has served as a member of the Board for a continuous period of at least ten years or who is at least 72 years of age ceases toserve as a member of the Board (including without limitation by reason of death or disability), his or her Option will not expire and will remain, or when the Participant ceases to serve as member of the Board become, fully exercisable, as thecase may be. Subject to Section 4.11, the Option will expire on the fifth anniversary of the date the Participant ceases service as a member of theBoard. 4.11Options that have not previously expired will expire at the close of business on the tenth anniversary of the date of grant. If an Option wouldexpire on a date that is not a Business Day, it will expire at the close of business on the last Business Day preceding that date. A “Business Day”is any day on which the Shares are traded on the New York Stock Exchange. 4.12An exercisable Option may only be exercised by the Participant, his or her legal representative, or a person to whom the Participant’s rights inthe Option are transferred by will or the laws of descent and distribution or in accordance with rules and procedures established by theCommittee. 4.13The Board or the Committee may, in its sole discretion and without receiving permission from any Participant, substitute SARs for any or alloutstanding Options granted on or after May 4, 2004. Upon the grant of substitute SARs, the related Options replaced by the substitute SARsshall be cancelled. The grant price of the substitute SAR shall be equal to the Exercise Price of the related Option, the term of the substitute SARshall not exceed the term of the related Option, and the terms and conditions applicable to the substitute SAR shall otherwise be substantiallythe same as those applicable to the related Option replaced by the substitute SAR. 5.Cash Compensation 5.1Except as provided in the following sentence, Baxter shall pay each Participant a meeting fee of $2,000 for each meeting of the Board or anycommittee thereof attended. Baxter shall pay each Participant a meeting fee of $3,000 for each meeting of the Science and TechnologyCommittee attended. Except as provided in the following section, participants acting as the chairperson of any committee of the Board shallreceive an annual cash retainer of $15,000 for each committee chaired by him or her. A participant acting as the chairperson of the AuditCommittee shall receive an annual cash retainer of $20,000. Amounts payable within this Section 5.1 shall be paid quarterly in arrears and arepayable if the Participant attends in person, by conference telephone, or by any other means permitted by the Delaware General Corporation Lawand Baxter’s Bylaws, as amended and restated. For the purposes of determining the amount of such quarterly payment(s), a Participant must be achairperson of a committee of the Board on or prior to the 15th day of a month in order to be entitled to receive such payment(s) with respect tothat month. 5.2Baxter shall pay each Participant a total annual cash retainer of $65,000 per calendar year (“Annual Cash Retainer”). Baxter shall pay anadditional annual cash retainer of $30,000 per calendar year to the Lead Director (“Lead Director Retainer”). Both the Annual Cash Retainer andLead Director Retainer shall be paid quarterly in arrears. For purposes of determining the amount of such quarterly payment(s), a Participantand/or the Lead Director must be a member of the Board on or prior to the 15th day of a month in order to be entitled to receive such payment(s)with respect to that month. 5.3Participants shall be eligible to defer payment of cash compensation otherwise payable under this Section 5 pursuant to the terms and conditionsof the Baxter Non-Employee Director Deferred Compensation Plan. 6.Availability of Shares If on any grant date, the number of Shares which would otherwise be granted in the form of Restricted Stock Units or subject toOptions granted under the Plan shall exceed the number of Shares then remaining available under the 2011 Incentive Plan, the available shares shall beallocated among the Options and Restricted Stock Units to be granted Participants in proportion to the number of shares subject to Options andRestricted Stock Units that Participants would otherwise be entitled to receive, and allocated evenly between Restricted Stock Units and Options. 7.Change in Control Notwithstanding any other provision of the 2011 Incentive Plan or this Plan, if a Change in Control occurs then all Awards shallbecome immediately vested and exercisable. For purposes of the Plan, a “Change in Control” means the first to occur of any of the following: (i) anyPerson is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Baxter (notincluding in the securities beneficially owned by such Person any securities acquired directly from Baxter or its Affiliates) representing 30% or more ofthe combined voting power of Baxter’s then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with amerger or consolidation of Baxter or any direct or indirect subsidiary of Baxter with any other corporation immediately following which theindividuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of (A) any parent of Baxter or theentity surviving such merger or consolidation or (B) if there is no such parent, of Baxter or such surviving entity; (ii) the following individuals ceasefor any reason to constitute a majority of the number of directors then serving: individuals who, on the date of grant, constitute the Board and any newdirector (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 theelection of directors of Baxter) whose appointment or election by the Board or nomination for election by Baxter’s shareholders was approved orrecommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date of grant or whoseappointment, election or nomination for election was previously so approved or recommended; (iii) there is consummated a merger or consolidation ofBaxter or any direct or indirect subsidiary of Baxter with any other corporation or other entity, other than a merger or consolidation immediatelyfollowing which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of (A) anyparent 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) theshareholders of Baxter approve a plan of complete liquidation or dissolution of Baxter or there is consummated an agreement for the sale or dispositionby 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 immediatelyfollowing which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of (A) anyparent 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. 8.General Provisions 8.1Subject to the limitations contained in Section 9 of the 2011 Incentive Plan, the Board or the Committee may, at any time and in any manner,amend, suspend, or terminate the Plan or any Award outstanding under the Plan. 8.2Participation in the Plan does not give any Participant any right to continue as a member of the Board for any period of time or any right or claimto any benefit unless such right or claim has specifically accrued hereunder.EXHIBIT 12Baxter International Inc. and SubsidiariesComputation of Ratio of Earnings to Fixed Charges(unaudited — in millions, except ratios) Years ended December 31, 2014 2013 2012 2011 2010 Income from continuing operations before income taxes $2,439 $2,546 $2,838 $2,787 $1,890 Fixed charges Interest costs(1) 237 225 165 132 148 Estimated interest in rentals(2) 83 71 67 68 61 Fixed charges as defined 320 296 232 200 209 Adjustments to income from continuing operations Interest costs capitalized (70) (70) (52) (40) (33) Net (gains) losses of less than majority-owned affiliates, net of dividends (83) (24) 1 4 (1) Income from continuing operations as adjusted $2,606 $2,748 $3,019 $2,951 $2,065 Ratio of earnings from continuing operations to fixed charges 8.14 9.28 13.01 14.76 9.88 (1)Excludes interest on uncertain tax positions. (2)Represents the estimated interest portion of rents.Exhibit 21BAXTER INTERNATIONAL INC.The following is a list of subsidiaries of Baxter International Inc. as of December 31, 2014, omitting some subsidiaries which, when considered in theaggregate, would not constitute a significant subsidiary. Where ownership of a subsidiary is less than 100% by Baxter International Inc. or a BaxterInternational Inc. subsidiary, such has been noted by designating the percentage of ownership. Domestic Subsidiary Incorporation Baxter Colorado Holding Inc. Colorado Baxter Corporation Englewood Colorado Baxter Export Corporation Nevada Baxter Global Holdings II Inc. Delaware Baxter Global Holdings Inc. Delaware Baxter Global Trading LLC Delaware Baxter Healthcare Corporation Delaware Baxter Holding Services Company Delaware Baxter Pharmaceutical Solutions LLC Delaware Baxter Sales and Distribution Corp. Delaware Baxter World Trade Corporation Delaware BioLife Plasma Services L.P. Pennsylvania Gambro Renal Products, Inc. Colorado GRP US Holding Corp. Colorado Laboratorios Baxter S.A. Delaware RTS Americas Inc. Delaware RTS Worldwide Holdings Inc. Delaware Synovis Life Technologies, Inc. Minnesota Synovis Micro Companies Alliance, Inc. Minnesota Foreign Subsidiary Incorporation Baxter Argentina S.A. Argentina Baxter Healthcare Pty Ltd Australia Baxter AG Austria Baxter Healthcare GmbH Austria Baxter Innovations GmbH Austria Baxter Belgium SPRL Belgium Baxter R and D Europe S.C.R.L. Belgium Baxter S.A. Belgium Baxter World Trade SPRL Belgium Baxter Hospitalar Ltda. Brazil Baxter Corporation Canada Gambro Inc. Canada Baxter (China) Investment Co., Ltd China Baxter Healthcare (Guangzhou) Company Ltd China 87.5% Baxter Healthcare (Shanghai) Company Ltd China Baxter Healthcare (Suzhou) Company Ltd China Baxter Healthcare (Tianjin) Company Ltd. China 70% Baxter Healthcare Trading (Shanghai) Co., Ltd China Gambro Medical Sales (Shanghai) Co., Ltd China RTS Colombia Ltda Colombia RTS S.A.S. Colombia Baxter Productos Medicos, Ltda. Costa Rica Baxter S.A.S. France Foreign Subsidiary IncorporationGambro Industries SAS France Gambro Hospal SAS France ApaTech GmbH Germany Baxter Deutschland GmbH Germany Baxter Deutschland Holding GmbH Germany Baxter Oncology GmbH Germany Gambro Dialysatoren GmbH Germany Gambro Hospal GmbH Germany Baxter (Hellas) EPE Greece Medicina Corporativa de Dialisis SA Guatemala Baxter Healthcare Limited Hong Kong Baxter (India) Private Limited India Baxter Shared Services & Competencies Limited Ireland Navillus Insurance Company Limited Ireland Baxter Manufacturing S.p.A. Italy Baxter S.p.A. Italy Baxter World Trade Italy S.R.L. Italy Bieffe Medital S.p.A. Italy Gambro Dasco SpA Italy Gambro Hospal SpA Italy Baxter Holdings Limited Japan Baxter Limited Japan Baxter (Malta) Holding Malta Baxter (Malta) Trading Company Limited Malta Baxter Holding Mexico, S. de R.L. de C.V. Mexico Baxter S.A. de C.V. Mexico Gambro Dialisis de Mexico, SA. De R.L. Mexico Plasti-Esteril, S.A. de C.V. Mexico Baxter Healthcare Limited New Zealand Baxter AS Norway Laboratorios Baxter del Peru S.A. Peru Baxter Manufacturing Sp z o.o. Poland Baxter Polska Sp. z.o.o. Poland Baxter ZAO Russia Baxter Healthcare Asia PTE Ltd Singapore Baxter Pacific Investments Pte Ltd Singapore Baxter Incorporated South Korea Gambro Korea Ltd. South Korea Baxter S.L. Spain RTS Servicios de Dialisis, SL Spain Baxter Holding AB Sweden Baxter Medical AB Sweden Gambro AB Sweden Gambro Lundia AB Sweden Indap Holding AB Sweden Baxalta GmbH Switzerland Baxter AG Switzerland Baxter BioScience Manufacturing Sarl Switzerland Baxter Healthcare Holding GmbH Switzerland Baxter Healthcare SA Switzerland Baxter Recombinant Sarl Switzerland Sapa Prodotti Plastici Sagl Switzerland Foreign Subsidiary Incorporation Baxter Healthcare Limited Taiwan Baxter Healthcare (Thailand) Company Limited Thailand Baxter Manufacturing (Thailand) Co., Ltd. Thailand Baxter B.V. The Netherlands Baxter Holding B.V. The Netherlands Baxter Netherlands Holding B.V. The Netherlands Bieffe Medital Nederland N.V. The Netherlands Eczacibasi-Baxter Hastane Urunleri Sanayi ve Ticaret A.S. Turkey 49.99% ApaTech Limited United Kingdom Baxter Healthcare (Holdings) Limited United Kingdom Baxter Healthcare Limited United Kingdom Baxter Healthcare Pharmaceutical Limited United Kingdom EXHIBIT 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-43563, 333-47019, 333-88257, 333-48906, 333-62820, 333-102140, 333-104420, 333-104421, 333-105032, 333-143063, 333-174400 and 333-174401) and on Form S-3 (Nos. 333-123811 and 333-183099) of Baxter International Inc. of our reports dated February 26, 2015 relating to the financial statements, the financial statement schedule and theeffectiveness of internal control over financial reporting, which appear in this Form 10-K./s/ PricewaterhouseCoopers LLPChicago, IllinoisFebruary 26, 2015EXHIBIT 31.1Certification of Chief Executive OfficerPursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as AmendedI, Robert L. Parkinson, Jr., certify that: 1.I have reviewed this Annual Report on Form 10-K 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial 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 aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably 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, tothe 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 arereasonably 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’sinternal control over financial reporting. /s/ Robert L. Parkinson, Jr.Robert L. Parkinson, Jr.Chairman of the Board andChief Executive OfficerDate: February 26, 2015EXHIBIT 31.2Certification of Chief Financial OfficerPursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as AmendedI, Robert J. Hombach, certify that: 1.I have reviewed this Annual Report on Form 10-K 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial 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 aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably 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, tothe 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 arereasonably 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’sinternal control over financial reporting. /s/ Robert J. HombachRobert J. HombachCorporate Vice President and Chief Financial OfficerDate: February 26, 2015EXHIBIT 32.1Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Robert L. Parkinson, Jr., as Chairman of the Board and Chief Executive Officer of Baxter International Inc. (the “Company”), certifies, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1)the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commissionon the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of1934; and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. /s/ Robert L. Parkinson, Jr.Robert L. Parkinson, Jr.Chairman of the Board andChief Executive OfficerFebruary 26, 2015EXHIBIT 32.2Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Robert J. Hombach, as Corporate Vice President and Chief Financial Officer of Baxter International Inc. (the “Company”), certifies, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1)the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and ExchangeCommission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934; and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. /s/ Robert J. HombachRobert J. HombachCorporate Vice President andChief Financial OfficerFebruary 26, 2015

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