UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended JuneSeptember 30, 2019

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

For the transition period from              to            

Commission file number 1-4448

BAXTER INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

Delaware

36-0781620

Delaware

36-0781620
(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer


Identification No.)

One Baxter Parkway, Deerfield, Illinois

Deerfield,

Illinois

60015

(Address of principal executive offices)

Principal Executive Offices)

(Zip Code)


224.948.2000
(Registrant’s telephone number, including area code)

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

224-948-2000

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 par value

BAX (NYSE)

New York Stock Exchange

Chicago Stock Exchange

0.4% Global Notes due 2024

BAX 24

New York Stock Exchange

1.3% Global Notes due 2025

BAX 25

New York Stock Exchange

1.3% Global Notes due 2029

BAX 29

New York Stock Exchange

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

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

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

Large accelerated filer

x

Accelerated filer

o

Non-accelerated filer

o

Smaller reporting company

Emerging growth company

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

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

The number of shares of the registrant’s Common Stock, par value $1.00 per share, outstanding as of July 25, 2019February 29, 2020 was 510,555,869$507,263,731.00 shares.





BAXTER INTERNATIONAL INC.

FORM 10-Q

For the quarterly period ended JuneSeptember 30, 2019

TABLE OF CONTENTS

Page Number

PART I.

FINANCIAL INFORMATIONPage Number

2

2

2

3

4

5

7

8

29

41

42

43

44

45

45

Item 1A.

45

46

47
































Explanatory Note

General

On February 13, 2020, we concluded, in consultation with the Audit Committee of our Board of Directors, that our consolidated financial statements as of December 31, 2018 and 2017, for the years ended December 31, 2018, 2017 and 2016, as of and for the interim periods within the years ended December 31, 2018 and 2017 and the interim periods ended June 30 and March 31, 2019 should no longer be relied upon because of misstatements to our previously reported foreign exchange gains and losses as described below.

Restatement

This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 includes unaudited condensed consolidated financial statements as of September 30, 2019 and December 31, 2018 and for each of the three and nine months ended September 30, 2019 and 2018. We have restated certain information within this Quarterly Report on Form 10-Q, including the condensed consolidated balance sheet as of December 31, 2018 and the condensed consolidated financial statements for the three and nine months ended September 30, 2018.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2019, filed on March 17, 2020, for information about the restatement of our consolidated balance sheet as of December 31, 2018.

Restatement Background

On October 24, 2019, we reported that we had commenced an internal investigation into certain intra-company transactions that impacted our previously reported non-operating foreign exchange gains and losses. Our internal investigation, as it pertains to the evaluation of related financial statement impacts, is complete.

We previously had applied a longstanding convention for the initial measurement of foreign exchange transactions and the subsequent remeasurement of foreign currency denominated monetary assets and liabilities that was not consistent with U.S. Generally Accepted Accounting Principles (U.S. GAAP). Beginning years after the adoption of that convention, certain intra-company transactions were undertaken, after the related exchange rates were already known, solely for the purpose of generating non-operating foreign exchange gains or avoiding foreign exchange losses. We believe that the use of our previous exchange rate convention to generate non-operating foreign exchange gains and avoid losses had occurred for at least ten years. The cumulative impact of correcting misstatements of non-operating foreign exchange gains and losses in periods prior to 2018 has been recorded as a reduction to our opening retained earnings in the condensed consolidated financial statements included herein.

As previously disclosed, we voluntarily advised the staff of the Securities and Exchange Commission (SEC) of our internal investigation and are continuing to cooperate with the staff of the SEC.

Restatement of Previously Issued Condensed Consolidated Financial Statements

As described above, this Quarterly Report on Form 10-Q includes restated condensed consolidated financial statements as of December 31, 2018 and for the three and nine months ended September 30, 2018. In addition to the correction of misstatements related to non-operating foreign exchange gains and losses, we corrected additional misstatements that were immaterial, individually and in the aggregate, to our previously issued financial statements. Those other immaterial misstatements relate to (i) equipment leased to customers under operating leases, (ii) classification of foreign exchange gains and losses on cash balances and intra-company receivables and payables in our consolidated statements of cash flows, (iii) translation of the financial position and results of operations of our foreign operations into U.S. dollars, (iv) statement of income classification of transition services income related to the separation of Baxalta Incorporated in 2015 and (v) other miscellaneous adjustments. See Note 2, Restatement of Previously Issued Condensed Consolidated Financial Statements, in Item 1, Financial Statements, for additional information.

The restatement resulted in the following decreases to our previously reported net income and diluted earnings per share (in millions, except per share data):

Three months ended September 30, 2018Nine months ended September 30, 2018
Net income$(26) $(35) 
Diluted earnings per share$(0.05) $(0.07) 

1


Control Considerations

In connection with the restatement, management has reassessed its conclusions regarding the effectiveness of our internal control over financial reporting as of December 31, 2018 and has determined that a material weakness in our internal control over financial reporting existed as of that date. As a result of the material weakness, our disclosure controls and procedures were not effective as of December 31, 2018 and throughout 2019. Management has been implementing changes to strengthen our internal controls and remediate the material weakness, which continued to exist as of September 30, 2019. See Item 4, Controls and Procedures, for additional information related to the material weakness in internal control over financial reporting and our related remediation activities.

2


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Item 1. Financial Statements
Baxter International Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in millions, except shares)

share information)

 

 

 

June 30,

 

 

December 31,

 

As Restated

 

 

 

2019

 

 

2018

 

September 30,
2019
December 31,
2018

Current assets:

Current assets:

 

 

 

 

 

 

 

 

Current assets:

Cash and cash equivalents

Cash and cash equivalents

 

$

2,925

 

 

$

1,832

 

Cash and cash equivalents$3,009  $1,838  

Accounts and other current receivables, net

 

 

1,885

 

 

 

1,812

 

Accounts receivable, netAccounts receivable, net1,814  1,840  

Inventories

Inventories

 

 

1,757

 

 

 

1,653

 

Inventories1,715  1,667  

Prepaid expenses and other

 

 

651

 

 

 

622

 

Prepaid expenses and other current assetsPrepaid expenses and other current assets672  614  

Total current assets

Total current assets

 

 

7,218

 

 

 

5,919

 

Total current assets7,210  5,959  

Property, plant and equipment, net

Property, plant and equipment, net

 

 

4,541

 

 

 

4,542

 

Property, plant and equipment, net4,406  4,530  

Goodwill

Goodwill

 

 

2,938

 

 

 

2,958

 

Goodwill2,847  3,002  

Other intangible assets, net

Other intangible assets, net

 

 

1,364

 

 

 

1,398

 

Other intangible assets, net1,365  1,410  

Operating lease right-of-use assets

Operating lease right-of-use assets

 

 

588

 

 

 

 

Operating lease right-of-use assets589  —  

Other non-current assets

Other non-current assets

 

 

895

 

 

 

824

 

Other non-current assets882  819  

Total assets

 

 

 

$

17,544

 

 

$

15,641

 

Total assets$17,299  $15,720  

Current liabilities:

Current liabilities:

 

 

 

 

 

 

 

 

Current liabilities:

Short-term debt

Short-term debt

 

$

2

 

 

$

2

 

Short-term debt$—  $ 

Current maturities of long-term debt and finance lease obligations

Current maturities of long-term debt and finance lease obligations

 

 

2

 

 

 

2

 

Current maturities of long-term debt and finance lease obligations  

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities

 

 

2,593

 

 

 

2,832

 

Accounts payable and accrued liabilities2,609  2,810  

Total current liabilities

Total current liabilities

 

 

2,597

 

 

 

2,836

 

Total current liabilities2,611  2,814  

Long-term debt and finance lease obligations

Long-term debt and finance lease obligations

 

 

5,157

 

 

 

3,473

 

Long-term debt and finance lease obligations5,063  3,481  

Operating lease liabilities

Operating lease liabilities

 

 

490

 

 

 

 

Operating lease liabilities494  —  

Other non-current liabilities

Other non-current liabilities

 

 

1,464

 

 

 

1,516

 

Other non-current liabilities1,514  1,559  

Total liabilities

Total liabilities

 

 

9,708

 

 

 

7,825

 

Total liabilities9,682  7,854  
Commitments and contingenciesCommitments and contingencies

Equity:

Equity:

 

 

 

 

 

 

 

 

Equity:

Common stock, $1 par value, authorized 2,000,000,000

shares, issued 683,494,944 shares in 2019 and 2018

Common stock, $1 par value, authorized 2,000,000,000

shares, issued 683,494,944 shares in 2019 and 2018

 

 

683

 

 

 

683

 

Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2019 and 2018683  683  

Common stock in treasury, at cost, 173,275,586 shares

in 2019 and 170,495,859 shares in 2018

 

 

(10,322

)

 

 

(9,989

)

Common stock in treasury, at cost, 175,461,299 shares in 2019 and 170,495,859 shares in 2018Common stock in treasury, at cost, 175,461,299 shares in 2019 and 170,495,859 shares in 2018(10,582) (9,989) 

Additional contributed capital

Additional contributed capital

 

 

5,906

 

 

 

5,898

 

Additional contributed capital5,926  5,898  

Retained earnings

Retained earnings

 

 

16,184

 

 

 

15,626

 

Retained earnings15,849  15,075  

Accumulated other comprehensive (loss) income

Accumulated other comprehensive (loss) income

 

 

(4,639

)

 

 

(4,424

)

Accumulated other comprehensive (loss) income(4,288) (3,823) 

Total Baxter stockholders’ equity

Total Baxter stockholders’ equity

 

 

7,812

 

 

 

7,794

 

Total Baxter stockholders’ equity7,588  7,844  

Noncontrolling interests

Noncontrolling interests

 

 

24

 

 

 

22

 

Noncontrolling interests29  22  

Total equity

Total equity

 

 

7,836

 

 

 

7,816

 

Total equity7,617  7,866  

Total liabilities and equity

Total liabilities and equity

 

$

17,544

 

 

$

15,641

 

Total liabilities and equity$17,299  $15,720  

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


3


Baxter International Inc.

Condensed Consolidated Statements of Income (unaudited)

(in millions, except per share data)

 

Three months ended

 

 

Six months ended

 

Three months ended
September 30,
Nine months ended
September 30,

 

June 30,

 

 

June 30,

 

As RestatedAs Restated

 

2019

 

 

2018

 

 

2019

 

 

2018

 

2019201820192018

Net sales

 

$

2,840

 

 

$

2,842

 

 

$

5,472

 

 

$

5,519

 

Net sales$2,851  $2,761  $8,323  $8,266  

Cost of sales

 

 

1,681

 

 

 

1,603

 

 

 

3,233

 

 

 

3,166

 

Cost of sales1,621  1,529  4,860  4,690  

Gross margin

 

 

1,159

 

 

 

1,239

 

 

 

2,239

 

 

 

2,353

 

Gross margin1,230  1,232  3,463  3,576  

Selling, general and administrative expenses

 

 

642

 

 

 

681

 

 

 

1,242

 

 

 

1,303

 

Selling, general and administrative expenses627  684  1,869  1,993  

Research and development expenses

 

 

166

 

 

 

174

 

 

 

295

 

 

 

314

 

Research and development expenses144  166  439  479  

Other operating income, net

 

 

(4

)

 

 

 

 

 

(37

)

 

 

(80

)

Other operating income, net(44) —  (81) (89) 

Operating income

 

 

355

 

 

 

384

 

 

 

739

 

 

 

816

 

Operating income503  382  1,236  1,193  

Interest expense, net

 

 

20

 

 

 

11

 

 

 

38

 

 

 

23

 

Interest expense, net13  11  51  34  

Other income, net

 

 

(28

)

 

 

(31

)

 

 

(53

)

 

 

(49

)

Other (income) expense, netOther (income) expense, net (1) (8) (45) 

Income before income taxes

 

 

363

 

 

 

404

 

 

 

754

 

 

 

842

 

Income before income taxes481  372  1,193  1,204  

Income tax expense

 

 

20

 

 

 

61

 

 

 

64

 

 

 

110

 

Income tax expense (benefit)Income tax expense (benefit)106  (146) 163  (37) 

Net income

 

$

343

 

 

$

343

 

 

$

690

 

 

$

732

 

Net income375  518  1,030  1,241  

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interestsLess: Net income attributable to noncontrolling interests —   —  
Net income attributable to Baxter stockholdersNet income attributable to Baxter stockholders$369  $518  $1,024  $1,241  
Earnings per shareEarnings per share

Basic

 

$

0.67

 

 

$

0.64

 

 

$

1.35

 

 

$

1.36

 

Basic$0.72  $0.97  $2.01  $2.32  

Diluted

 

$

0.66

 

 

$

0.63

 

 

$

1.33

 

 

$

1.33

 

Diluted$0.71  $0.95  $1.97  $2.26  

Weighted-average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares outstandingWeighted-average number of shares outstanding

Basic

 

 

510

 

 

 

535

 

 

 

511

 

 

 

537

 

Basic511  534  510  536  

Diluted

 

 

519

 

 

 

547

 

 

 

520

 

 

 

549

 

Diluted520  546  520  548  

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


4


Baxter International Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(in millions)

 

Three months ended

 

 

Six months ended

 

Three months ended
September 30,
Nine months ended
September 30,

 

June 30,

 

 

June 30,

 

As RestatedAs Restated

 

2019

 

 

2018

 

 

2019

 

 

2018

 

2019201820192018

Net income

 

$

343

 

 

$

343

 

 

$

690

 

 

$

732

 

Net income$375  $518  $1,030  $1,241  

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

Currency translation adjustments, net of tax (benefit) expense of ($4) and ($24) for the three months ended June 30, 2019 and 2018, respectively, and $2 and ($31) for the six months ended June 30, 2019 and 2018, respectively

 

 

(78

)

 

 

(363

)

 

 

(48

)

 

 

(282

)

Pension and other postretirement benefits, net of tax expense of $3 and $4 for the three months ended June 30, 2019 and 2018, respectively, and $6 and $17 for the six months ended June 30, 2019 and 2018, respectively

 

 

13

 

 

 

29

 

 

 

21

 

 

 

81

 

Hedging activities, net of tax (benefit) expense of ($3) and $2 for the three months ended June 30, 2019 and 2018, respectively, and ($8) and $3 for the six months ended June 30, 2019 and 2018, respectively

 

 

(12

)

 

 

11

 

 

 

(27

)

 

 

6

 

Currency translation adjustments, net of tax (benefit) expense of ($13) and $3 for the three months ended September 30, 2019 and 2018, respectively, and ($11) and ($24) for the nine months ended September 30, 2019 and 2018, respectivelyCurrency translation adjustments, net of tax (benefit) expense of ($13) and $3 for the three months ended September 30, 2019 and 2018, respectively, and ($11) and ($24) for the nine months ended September 30, 2019 and 2018, respectively(177) (9) (272) (314) 
Pension and other postretirement benefits, net of tax expense of $3 and $9 for the three months ended September 30, 2019 and 2018, respectively, and $9 and $26 for the nine months ended September 30, 2019 and 2018, respectivelyPension and other postretirement benefits, net of tax expense of $3 and $9 for the three months ended September 30, 2019 and 2018, respectively, and $9 and $26 for the nine months ended September 30, 2019 and 2018, respectively17   37  94  
Hedging activities, net of tax (benefit) expense of ($13) and $1 for the three months ended September 30, 2019 and 2018, respectively, and ($21) and $4 for the nine months ended September 30, 2019 and 2018, respectivelyHedging activities, net of tax (benefit) expense of ($13) and $1 for the three months ended September 30, 2019 and 2018, respectively, and ($21) and $4 for the nine months ended September 30, 2019 and 2018, respectively(42)  (69)  

Total other comprehensive (loss) income, net of tax

 

 

(77

)

 

 

(323

)

 

 

(54

)

 

 

(195

)

Total other comprehensive (loss) income, net of tax(202)  (304) (212) 

Comprehensive income

 

$

266

 

 

$

20

 

 

$

636

 

 

$

537

 

Comprehensive income173  520  726  1,029  
Less: Comprehensive income attributable to noncontrolling interestsLess: Comprehensive income attributable to noncontrolling interests —   —  
Comprehensive income attributable to Baxter stockholdersComprehensive income attributable to Baxter stockholders$167  $520  $720  $1,029  

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

5



Baxter International Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)

(in millions)

 

For the three and six months ended June 30, 2019

 

 

Baxter International Inc. stockholders' equity

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2019

 

Common stock shares

 

 

Common stock

 

 

Common stock shares in treasury

 

 

Common stock in treasury

 

 

Additional contributed capital

 

 

Retained earnings

 

 

Accumulated other comprehensive income (loss)

 

 

Total Baxter stockholders' equity

 

 

Noncontrolling interests

 

 

Total equity

 

Baxter International Inc. stockholders' equity

Balance as of January 1, 2019

 

683

 

 

$

683

 

 

 

170

 

 

$

(9,989

)

 

$

5,898

 

 

$

15,626

 

 

$

(4,424

)

 

$

7,794

 

 

$

22

 

 

$

7,816

 

Adoption of new accounting standards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

161

 

 

 

(161

)

 

 

 

 

 

 

 

 

 

Common stock sharesCommon stockCommon stock shares
in treasury
Common stock in
treasury
Additional contributed capitalRetained earningsAccumulated other comprehensive
income (loss)
Total Baxter stockholders' equityNoncontrolling interestsTotal equity
Balance as of July 1, 2019 (As Restated)Balance as of July 1, 2019 (As Restated)683  $683  173  $(10,322) $5,906  $15,598  $(4,086) $7,779  $24  $7,803  

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

347

 

 

 

 

 

 

347

 

 

 

 

 

 

347

 

Net income—  —  —  —  —  369  —  369   375  

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

23

 

 

 

 

 

 

23

 

Other comprehensive income (loss)—  —  —  —  —  —  (202) (202) —  (202) 

Purchases of treasury stock

 

 

 

 

 

 

 

 

8

 

 

 

(586

)

 

 

 

 

 

 

 

 

 

 

 

(586

)

 

 

 

 

 

(586

)

Purchases of treasury stock—  —   (346) —  —  —  (346) —  (346) 

Stock issued under employee benefit plans and other

 

 

 

 

 

 

 

 

(5

)

 

 

291

 

 

 

(59

)

 

 

(66

)

 

 

 

 

 

166

 

 

 

 

 

 

166

 

Stock issued under employee benefit plans and other—  —  (2) 86  20  (1) —  105  —  105  

Dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(98

)

 

 

 

 

 

(98

)

 

 

 

 

 

(98

)

Dividends declared on common stock—  —  —  —  —  (117) —  (117) —  (117) 

Change in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Change in noncontrolling interests—  —  —  —  —  —  —  —  (1) (1) 

Balance as of March 31, 2019

 

683

 

 

$

683

 

 

173

 

 

$

(10,284

)

 

$

5,839

 

 

$

15,970

 

 

$

(4,562

)

 

$

7,646

 

 

$

23

 

 

$

7,669

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

343

 

 

 

 

 

 

343

 

 

 

 

 

 

343

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(77

)

 

 

(77

)

 

 

 

 

 

(77

)

Purchases of treasury stock

 

 

 

 

 

 

 

 

2

 

 

 

(157

)

 

 

46

 

 

 

 

 

 

 

 

 

(111

)

 

 

 

 

 

(111

)

Stock issued under employee benefit plans and other

 

 

 

 

 

 

 

 

(2

)

 

 

119

 

 

 

21

 

 

 

(17

)

 

 

 

 

 

123

 

 

 

 

 

 

123

 

Dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(112

)

 

 

 

 

 

(112

)

 

 

 

 

 

(112

)

Change in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Balance as of June 30, 2019

 

 

683

 

 

$

683

 

 

 

173

 

 

$

(10,322

)

 

$

5,906

 

 

$

16,184

 

 

$

(4,639

)

 

$

7,812

 

 

$

24

 

 

$

7,836

 

Balance as of September 30, 2019Balance as of September 30, 2019683  $683  175  $(10,582) $5,926  $15,849  $(4,288) $7,588  $29  $7,617  



For the nine months ended September 30, 2019
Baxter International Inc. stockholders' equity
Common stock sharesCommon stockCommon stock shares in treasuryCommon stock in treasuryAdditional contributed capitalRetained earningsAccumulated other comprehensive income (loss)Total Baxter stockholders' equityNoncontrolling interestsTotal equity
Balance as of January 1, 2019 (As Restated)683  $683  170  $(9,989) $5,898  $15,075  $(3,823) $7,844  $22  $7,866  
Adoption of new accounting standards—  —  —  —  —  161  (161) $—  —  $—  
Net income—  —  —  —  —  1,024  —  1,024   1,030  
Other comprehensive income (loss)—  —  —  —  —  —  (304) (304) —  (304) 
Purchases of treasury stock—  —  14  (1,089) 46  —  —  (1,043) —  (1,043) 
Stock issued under employee benefit plans and other—  —  (9) 496  (18) (84) —  394  —  394  
Dividends declared on common stock—  —  —  —  —  (327) —  (327) —  (327) 
Change in noncontrolling interests—  —  —  —  —  —  —  —    
Balance as of September 30, 2019683  $683  175  $(10,582) $5,926  $15,849  $(4,288) $7,588  $29  $7,617  

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


6



Baxter International Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)

(in millions)

 

For the three and six months ended June 30, 2018

 

 

Baxter International Inc. stockholders' equity

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

 

Common stock shares

 

 

Common stock

 

 

Common stock shares in treasury

 

 

Common stock in treasury

 

 

Additional contributed capital

 

 

Retained earnings

 

 

Accumulated other comprehensive income (loss)

 

 

Total Baxter stockholders' equity

 

 

Noncontrolling interests

 

 

Total equity

 

Baxter International Inc. stockholders' equity  

Balance as of January 1, 2018

 

683

 

 

$

683

 

 

 

142

 

 

$

(7,981

)

 

$

5,940

 

 

$

14,483

 

 

$

(4,001

)

 

$

9,124

 

 

$

(8

)

 

$

9,116

 

Adoption of new accounting standards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16

)

 

 

(3

)

 

 

(19

)

 

 

 

 

 

(19

)

Common stock shares  Common stock  Common stock shares in treasury  Common stock in treasury  Additional contributed capital  Retained earningsAccumulated other comprehensive income (loss) Total Baxter stockholders' equityNoncontrolling interests  Total equity
Balance as of July 1, 2018 (As Restated)Balance as of July 1, 2018 (As Restated)683  $683  148  $(8,485) $5,916  $14,484  $(3,756) $8,842  $(12) $8,830  

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

389

 

 

 

 

 

 

389

 

 

 

 

 

 

389

 

Net income—  —  —  —  —  518  —  518  —  518  

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

128

 

 

 

128

 

 

 

 

 

 

128

 

Other comprehensive income (loss)—  —  —  —  —  —    —   

Purchases of treasury stock

 

 

 

 

 

 

 

 

8

 

 

 

(522

)

 

 

 

 

 

 

 

 

 

 

 

(522

)

 

 

 

 

 

(522

)

Purchases of treasury stock—  —   (247) —  —  —  (247) —  (247) 

Stock issued under employee benefit plans and other

 

 

 

 

 

 

 

 

(3

)

 

 

149

 

 

 

(28

)

 

 

(36

)

 

 

 

 

 

85

 

 

 

 

 

 

85

 

Stock issued under employee benefit plans and other—  —  (2) 93  15  (14) —  94  —  94  

Dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(86

)

 

 

 

 

 

(86

)

 

 

 

 

 

(86

)

Dividends declared on common stock—  —  —  —  —  (102) —  (102) —  (102) 

Change in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

Change in noncontrolling interests—  —  —  —  —  —  —  —  (5) (5) 

Balance as of March 31, 2018

 

683

 

 

$

683

 

 

147

 

 

$

(8,354

)

 

$

5,912

 

 

$

14,734

 

 

$

(3,876

)

 

$

9,099

 

 

$

(6

)

 

$

9,093

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

343

 

 

 

 

 

 

343

 

 

 

 

 

 

343

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(323

)

 

 

(323

)

 

 

 

 

 

(323

)

Purchases of treasury stock

 

 

 

 

 

 

 

 

3

 

 

 

(259

)

 

 

 

 

 

 

 

 

 

 

 

(259

)

 

 

 

 

 

(259

)

Stock issued under employee benefit plans and other

 

 

 

 

 

 

 

 

(2

)

 

 

128

 

 

 

4

 

 

 

(9

)

 

 

 

 

 

123

 

 

 

 

 

 

123

 

Dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(102

)

 

 

 

 

 

(102

)

 

 

 

 

 

(102

)

Change in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

(6

)

Balance as of June 30, 2018

 

 

683

 

 

$

683

 

 

 

148

 

 

$

(8,485

)

 

$

5,916

 

 

$

14,966

 

 

$

(4,199

)

 

$

8,881

 

 

$

(12

)

 

$

8,869

 

Balance as of September 30, 2018 (As Restated)Balance as of September 30, 2018 (As Restated)683  $683  150  $(8,639) $5,931  $14,886  $(3,754) $9,107  $(17) $9,090  



For the nine months ended September 30, 2018
Baxter International Inc. stockholders' equity  
Common stock shares  Common stock  Common stock shares in treasury  Common stock in treasury  Additional contributed capital  Retained earningsAccumulated other comprehensive income (loss) Total Baxter stockholders' equityNoncontrolling interests  Total equity
Balance as of January 1, 2018 (As Restated)683  $683  142  $(7,981) $5,940  $14,014  $(3,539) $9,117  $(8) $9,109  
Adoption of new accounting standards—  —  —  —  —  (20) (3) $(23) —  $(23) 
Net income—  —  —  —  —  1,241  —  1,241  —  1,241  
Other comprehensive income (loss)—  —  —  —  —  —  (212) (212) —  (212) 
Purchases of treasury stock—  —  15  (1,028) —  —  —  (1,028) —  (1,028) 
Stock issued under employee benefit plans and other—  —  (7) 370  (9) (59) —  302  —  302  
Dividends declared on common stock—  —  —  —  —  (290) —  (290) —  (290) 
Change in noncontrolling interests—  —  —  —  —  —  —  —  (9) (9) 
Balance as of September 30, 2018 (As Restated)683  $683  150  $(8,639) $5,931  $14,886  $(3,754) $9,107  $(17) $9,090  
The accompanying notes are an integral part of these condensed consolidated financial statements.


7


Baxter International Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in millions)

 

 

 

Six months ended

 

Nine months ended
September 30,

 

 

 

June 30,

 

As Restated

 

 

 

2019

 

 

2018

 

20192018

Cash flows from operations

Cash flows from operations

 

 

 

 

 

 

 

 

Cash flows from operations

Net income

 

 

 

$

690

 

 

$

732

 

Net income$1,030  $1,241  

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to cash flows from operations:Adjustments to reconcile net income to cash flows from operations:

Depreciation and amortization

Depreciation and amortization

 

 

393

 

 

 

387

 

Depreciation and amortization580  586  

Deferred income taxes

Deferred income taxes

 

 

(55

)

 

 

(51

)

Deferred income taxes(45) (291) 

Stock compensation

Stock compensation

 

 

57

 

 

 

54

 

Stock compensation92  87  

Net periodic pension benefit and other postretirement costs

Net periodic pension benefit and other postretirement costs

 

 

7

 

 

 

21

 

Net periodic pension benefit and other postretirement costs 31  

Restructuring charges

 

 

77

 

 

 

33

 

Intangible asset impairment

Intangible asset impairment

 

 

31

 

 

 

 

Intangible asset impairment31  —  

Other

Other

 

 

21

 

 

 

7

 

Other90  23  

Changes in balance sheet items:

Changes in balance sheet items:

 

 

 

 

 

 

 

 

Changes in balance sheet items:

Accounts and other current receivables, net

 

 

(60

)

 

 

43

 

Accounts receivable, netAccounts receivable, net(23) (16) 

Inventories

Inventories

 

 

(91

)

 

 

(134

)

Inventories(88) (226) 

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities

 

 

(308

)

 

 

(109

)

Accounts payable and accrued liabilities(249) (32) 

Restructuring payments

 

 

(60

)

 

 

(47

)

Other

Other

 

 

(85

)

 

 

(84

)

Other(145) (95) 

Cash flows from operations – continuing operations

Cash flows from operations – continuing operations

 

 

617

 

 

 

852

 

Cash flows from operations – continuing operations1,281  1,308  

Cash flows from operations – discontinued operations

Cash flows from operations – discontinued operations

 

 

(6

)

 

 

 

Cash flows from operations – discontinued operations(6) —  

Cash flows from operations

Cash flows from operations

 

 

611

 

 

 

852

 

Cash flows from operations1,275  1,308  

Cash flows from investing activities

Cash flows from investing activities

 

 

 

 

 

 

 

 

Cash flows from investing activities

Capital expenditures

Capital expenditures

 

 

(352

)

 

 

(311

)

Capital expenditures(505) (453) 

Acquisitions and investments

Acquisitions and investments

 

 

(111

)

 

 

(228

)

Acquisitions and investments(186) (255) 

Other investing activities, net

Other investing activities, net

 

 

1

 

 

 

 

Other investing activities, net12   

Cash flows from investing activities

Cash flows from investing activities

 

 

(462

)

 

 

(539

)

Cash flows from investing activities(679) (700) 

Cash flows from financing activities

Cash flows from financing activities

 

 

 

 

 

 

 

 

Cash flows from financing activities

Issuances of debt

Issuances of debt

 

 

1,661

 

 

 

 

Issuances of debt1,661  —  

Cash dividends on common stock

Cash dividends on common stock

 

 

(198

)

 

 

(173

)

Cash dividends on common stock(310) (274) 

Proceeds from stock issued under employee benefit plans

Proceeds from stock issued under employee benefit plans

 

 

262

 

 

 

170

 

Proceeds from stock issued under employee benefit plans334  232  

Purchases of treasury stock

Purchases of treasury stock

 

 

(720

)

 

 

(781

)

Purchases of treasury stock(1,029) (1,028) 

Other financing activities, net

Other financing activities, net

 

 

(37

)

 

 

(24

)

Other financing activities, net(42) (25) 

Cash flows from financing activities

Cash flows from financing activities

 

 

968

 

 

 

(808

)

Cash flows from financing activities614  (1,095) 

Effect of foreign exchange rate changes on cash and cash equivalents

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(24

)

 

 

(42

)

Effect of foreign exchange rate changes on cash and cash equivalents(39) (53) 

Increase (decrease) in cash and cash equivalents

Increase (decrease) in cash and cash equivalents

 

 

1,093

 

 

 

(537

)

Increase (decrease) in cash and cash equivalents1,171  (540) 

Cash and cash equivalents at beginning of period

Cash and cash equivalents at beginning of period

 

 

1,832

 

 

 

3,394

 

Cash and cash equivalents at beginning of period1,838  3,403  

Cash and cash equivalents at end of period

Cash and cash equivalents at end of period

 

$

2,925

 

 

$

2,857

 

Cash and cash equivalents at end of period$3,009  $2,863  

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Decrease in liabilities for capital expenditures

 

$

47

 

 

$

20

 

Decrease in liability for treasury stock purchases

 

$

23

 

 

$

 

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



8


Baxter International Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (we or our) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP)(U.S. GAAP) in the United States have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the restated consolidated financial statements and notes as of and for the year ended December 31, 2018 included in our Annual Report on Form 10-K for the year ended December 31, 2018 (20182019 (2019 Annual Report).

which was filed on March 17, 2020.

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

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

New Accounting Standards

Recently adopted accounting pronouncements

As of January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under this guidance, lessees are required to recognize a right-of-use asset and a lease liability on the balance sheet for all operating leases, other than those that meet the definition of a short-term lease. We adopted Topic 842 using the modified retrospective method. We elected the following practical expedients when assessing the transition impact: i) not to reassess whether any expired or existing contracts as of the adoption date are or contain leases; ii) not to reassess the lease classification for any expired or existing leases as of the adoption date; and iii) not to reassess initial direct costs for any existing leases as of the adoption date. The adjustment to record operating lease right-of-use assets and operating lease liabilities was $502 million as of January 1, 2019. The impact to the condensed consolidated statements of income was not material and there was no net impact to the condensed consolidated statements of cash flows.

As of January 1, 2019, we adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The purpose of this ASU is to better align a company’s risk management activities and financial reporting for hedging relationships, simplify the hedge accounting requirements, and improve the disclosures of hedging arrangements. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

As of January 1, 2019, we adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI). As a result of the enactment of the U.S. Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act), this guidance provides for a reclassification of certain tax effects from AOCI to retained earnings. The impact of the adoption of this standard was a $161 million increase to retained earnings.


2. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
We have restated herein our condensed consolidated financial statements as of December 31, 2018 and for the three and nine months ended September 30, 2018. We have also restated impacted amounts within the accompanying notes to the consolidated financial statements, as applicable.
Restatement Background
On October 24, 2019, we reported that we had commenced an internal investigation into certain intra-company transactions that impacted our previously reported non-operating foreign exchange gains and losses. Our internal investigation, as it pertains to the evaluation of related financial statement impacts, is complete.
9


We previously had applied a longstanding convention for the initial measurement of foreign currency transactions and the subsequent remeasurement of foreign currency denominated monetary assets and liabilities (collectively, our historical exchange rate convention) that was not consistent with U.S. GAAP. U.S. GAAP requires that foreign currency transactions be initially measured and recorded in an entity’s functional currency using the exchange rate on the date of the transaction and it requires that foreign currency denominated monetary assets and liabilities be remeasured at the end of each reporting period using the exchange rate at that date. Under our historical exchange rate convention, all foreign currency transactions in a given month were initially measured using exchange rates from a specified date near the middle of the previous month. Additionally, all foreign currency denominated monetary assets and liabilities were subsequently remeasured at the end of each month using exchange rates from a specified date near the middle of the current month. Beginning years after the adoption of our historical exchange rate convention, certain intra-company transactions were undertaken, after the related exchange rates were already known, solely for the purpose of generating non-operating foreign exchange gains or avoiding foreign exchange losses.
We identified misstatements relating to foreign currency denominated monetary assets and liabilities and foreign currency derivative contracts that caused our Other income (expense), net and Income before income taxes to be overstated by $30 million and $34 million, respectively, for the three and nine months ended September 30, 2018. Our quantification of those misstatements to our previously reported foreign exchange gains and losses was not limited to intra-company transactions undertaken for the purpose of generating foreign exchange gains or avoiding foreign exchange losses after the related exchange rates were already known. Rather, we identified every legal entity within our consolidated group that had foreign exchange gains or losses above an immaterial threshold and, for those entities, we remeasured all foreign exchange gains and losses from foreign currency denominated cash balances and intra-company loan receivables and payables using the exchange rates required by U.S. GAAP. For those entities, we also quantified misstatements to our previously reported gains and losses on foreign currency derivative contracts, which had used foreign exchange rates determined under our historical exchange rate convention as inputs to the fair value measurements of those contracts. Our quantification of misstatements to the condensed consolidated financial statements did not include foreign currency gains or losses from short-term third-party and intra-company trade receivables and trade payables denominated in foreign currencies. We determined that any potential misstatements relating to such balances that arise in the ordinary course of business and are ultimately settled for cash within a short period of time, generally thirty to sixty days, would not be material to our condensed consolidated financial statements.
In order to correct our previously issued financial statements, we have restated herein our condensed consolidated financial statements as of December 31, 2018 and for the three and nine months ended September 30, 2018, in accordance with Accounting Standards Codification (ASC) Topic 250, Accounting Changes and Error Corrections. In addition to the misstatements described above relating to foreign exchange gains and losses, we corrected additional misstatements that were not material, individually or in the aggregate, to our previously issued condensed consolidated financial statements. Those other immaterial misstatements relate to equipment leased to customers under operating leases, classification of foreign currency gains and losses on cash balances and intra-company loan receivables and payables in our condensed consolidated statements of cash flows, translation of the financial position and results of operations of our foreign operations into U.S. dollars, income statement classification of transition services income related to the separation of Baxalta in 2015, other miscellaneous adjustments, and the income tax effects of those items.
We believe that the use of our historical exchange rate convention to generate non-operating foreign exchange gains and avoid losses had occurred for at least ten years. The cumulative impact of misstatements related to non-operating foreign exchange gains and losses that we corrected for periods earlier than 2018, as well as the cumulative impact of correcting other immaterial misstatements relating to those earlier periods, have been recorded as a reduction to our opening retained earnings as of January 1, 2018.
The categories of misstatements and their impact on our previously issued condensed consolidated financial statements are described in more detail below.
10


Description of Misstatements
Misstatements of Foreign Exchange Gains and Losses
(a) Foreign Currency Denominated Monetary Assets and Liabilities
As discussed above, we recorded adjustments to correct foreign exchange gains and losses on monetary assets and liabilities denominated in a foreign currency to reflect the gains and losses resulting from application of the exchange rates required by U.S. GAAP. The impacts of the foreign currency gain or loss misstatements on each period are discussed in restatement reference (a) throughout this note.
(b) Foreign Currency Derivative Contracts
As discussed above, we recorded adjustments to correct gains and losses on foreign currency derivative contracts by using current exchange rates at the applicable measurement dates as inputs to the related fair value measurements. The impacts of the foreign currency derivative contract gain or loss misstatements on each period are discussed in restatement reference (b) throughout this note.
Additional Misstatements
(c) Equipment Leased to Customers under Operating Leases
Our manufacturing subsidiaries often sell products to commercial subsidiaries within our consolidated group which then sell or lease those products to third-party customers. Under U.S. GAAP, intra-company sales, intra-company cost of sales, and any step-ups in the carrying amount of inventory from intra-company transactions are eliminated in consolidation. If we subsequently sell the products to a third-party customer, the related intra-company profit previously eliminated in consolidation is recognized in our condensed consolidated statements of income. For transactions in which we lease, rather than sell, our products to customers under operating lease arrangements, no profit or loss should be recognized at inception of the arrangement and any intra-company profit previously eliminated in consolidation should be recognized as a reduction to the carrying amount of the related leased assets. Prior to the third quarter of 2019, our international operations incorrectly recognized intra-company profit previously eliminated in consolidation as a reduction of cost of sales, rather than as a reduction of leased assets, at inception of operating lease arrangements. Accordingly, we have recorded adjustments to increase cost of sales and decrease property, plant, and equipment, net in our condensed consolidated financial statements. Those adjustments include corrections of depreciation expense and accumulated depreciation resulting from the decreases to the carrying amounts of the related leased equipment. The impacts of the operating lease misstatements on each period are discussed in restatement reference (c) throughout this note.
(d) Classification of Foreign Currency Gains and Losses in our Condensed Consolidated Statements of Cash Flows
We previously included foreign exchange gains and losses related to intra-company receivables and payables and cash balances within our cash flows from operations. In the accompanying condensed consolidated statements of cash flows, foreign exchange gains and losses, as restated, related to intra-company receivables and payables and cash balances are presented as reconciling items between income from continuing operations and cash flows from operations. The impacts of those misclassifications on our operating cash flows for each period are discussed in restatement reference (d) throughout this note.
(e) Translation of the Financial Position and Results of Operations of our Foreign Operations into U.S. Dollars
U.S. GAAP specifies that the income statement of a foreign operation should be translated into the reporting currency using the exchange rates on the dates the income or expense was recognized and indicates that the use of weighted-average exchange rates during the period is generally appropriate. Similar to our convention for the initial measurement of foreign currency transactions, we historically translated the results of operations of our foreign operations for a given month into U.S. dollars using exchange rates from a specified date near the middle of the previous month. Accordingly, we have recorded adjustments to translate the income statements of our foreign operations into U.S. dollars using the applicable average foreign exchange rates for each month.
U.S. GAAP specifies that the assets and liabilities of foreign operations be translated into the reporting currency at the end of each reporting period using the exchange rate at that date. Similar to our convention for the subsequent remeasurement of foreign currency denominated monetary assets and liabilities, our financial reporting systems were
11


previously configured to translate assets and liabilities at the end of each month using exchange rates from a specified date near the middle of the current month. In recent years, we separately computed the impact of translating assets and liabilities at period-end exchange rates and adjusted our condensed consolidated balance sheets to reflect that difference. However, due to an incorrect input in those manual calculations as of December 31, 2018, our balance sheet was misstated as of that date.
The impacts of misstatements related to the translation of the financial position and results of operations of our foreign operations on each period are discussed in restatement reference (e) throughout this note.
(f) Income Statement Classification of Transition Services Income
We entered into a transition services agreement (TSA) with Baxalta in connection with the July 1, 2015 separation transaction. Services we provided under the TSA included, among others, finance, information technology, human resources, quality, supply chain, and certain other administrative services. Those services generally commenced on July 1, 2015 and concluded on July 1, 2018. As previously disclosed, we recognized income of approximately $9 million under the TSA for the nine months ended September 30, 2018. The amounts earned for those services were previously presented as a reduction of Selling, general, and administrative expenses (which we previously referred to as “Marketing and administrative expenses”) in our condensed consolidated statements of income. The accompanying restated condensed consolidated statement of income for the nine months ended September 30, 2018 presents the amounts earned for those services within Other operating income, net, rather than as a reduction of Selling, general, and administrative expenses. The impacts of the income statement misclassification of TSA income on each period are discussed in restatement reference (f) throughout this note.
(g) Other Miscellaneous Adjustments
We recorded adjustments to correct other out-of-period items and previously uncorrected misstatements that were not material, individually or in the aggregate, to our condensed consolidated financial statements. Those other misstatements were primarily related to a historical restructuring liability and amounts related to our separation of Baxalta in 2015. The impacts of the other miscellaneous adjustments on each period are discussed in restatement reference (g) throughout this note.
Description of Restatement Tables
The following tables present the impact of the adjustments described above to our previously reported condensed consolidated balance sheet as of December 31, 2018 and the condensed consolidated statements of income, comprehensive income, and changes in equity for the three and nine months ended September 30, 2018, and the restated condensed consolidated statement of cash flows for the nine months ended September 30, 2018.
Following the restated condensed consolidated financial statement tables, we have presented reconciliations from our prior periods as previously reported to the restated amounts. The amounts as previously reported for the three and nine months ended September 30, 2018 were derived from our Quarterly Report on Form 10-Q for the period ended September 30, 2018 filed on November 5, 2018.

12


Baxter International Inc.
Condensed Consolidated Balance Sheet
(in millions, except per share)
December 31, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Current assets:
Cash and cash equivalents$1,832  $ (e) $1,838  
Accounts receivable, net1,812  28  (e)(g) 1,840  
Inventories1,653  14  (e)(g) 1,667  
Prepaid expenses and other current assets622  (8) (b)(e)(g) 614  
Total current assets5,919  40  5,959  
Property, plant and equipment, net4,542  (12) (c)(e) 4,530  
Goodwill2,958  44  (e) 3,002  
Other intangible assets, net1,398  12  (e)(g) 1,410  
Other non-current assets824  (5) (a)(c)(e)(g) 819  
Total assets$15,641  $79  $15,720  
Current liabilities:
Short-term debt$ $—  $ 
Current maturities of long-term debt and finance lease obligations —   
Accounts payable and accrued liabilities2,832  (22) (b)(e)(g) 2,810  
Total current liabilities2,836  (22) 2,814  
Long-term debt and finance lease obligations3,473   (e) 3,481  
Other non-current liabilities1,516  43  (a)(c)(e)(g) 1,559  
Total liabilities7,825  29  7,854  
Commitments and contingencies
Equity:
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares683  —  683  
Common stock in treasury, at cost, 170,495,859 shares(9,989) —  (9,989) 
Additional contributed capital5,898  —  5,898  
Retained earnings15,626  (551) (a)(b)(c)(e)(g) 15,075  
Accumulated other comprehensive (loss) income(4,424) 601  (a)(e) (3,823) 
Total Baxter stockholders’ equity7,794  50  7,844  
Noncontrolling interests22  —  22  
Total equity7,816  50  7,866  
Total liabilities and equity$15,641  $79  $15,720  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to retained earnings of $487 million and accumulated other comprehensive loss of $482 million and increases to other non-current assets of $8 million and other non-current liabilities of $13 million as of December 31, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to prepaid expenses and other current assets of $2 million, accounts payable and accrued liabilities of $1 million and retained earnings of $1 million as of December 31, 2018.
13


(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to property, plant and equipment, net of $53 million, other non-current liabilities of $5 million, and retained earnings of $38 million, and an increase to other non-current assets of $10 million as of December 31, 2018.
(e) Translation of the Financial Position and Results of Operations of our Foreign Operations into U.S. Dollars—The correction of these misstatements resulted in increases to cash and cash equivalents of $6 million, accounts receivable, net of $22 million, inventories of $19 million, prepaid expenses and other current assets of $2 million, property, plant and equipment of $41 million, goodwill of $44 million, other intangible assets, net of $13 million, other non-current assets of $6 million, accounts payable and accrued liabilities of $24 million, long-term debt and finance lease obligations of $8 million, and other non-current liabilities of $19 million as of December 31, 2018. The correction of these misstatements also resulted in decreases to retained earnings of $17 million and accumulated other comprehensive loss of $119 million as of December 31, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in decreases to inventories of $5 million, prepaid expenses and other current assets of $12 million, other intangible assets, net of $1 million, other non-current assets of $29 million, accounts payable and accrued liabilities of $47 million, and retained earnings of $10 million, and increases to accounts receivable, net of $6 million and other non-current liabilities of $16 million as of December 31, 2018.


14


Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
Three months ended September 30, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$2,767  $(6) (e) $2,761  
Cost of sales1,531  (2) (c)(e) 1,529  
Gross margin1,236  (4) 1,232  
Selling, general and administrative expenses685  (1) (e) 684  
Research and development expenses166  —  166  
Operating income385  (3) 382  
Interest expense, net11  —  11  
Other (income) expense, net(32) 31  (a)(b)(e) (1) 
Income before income taxes406  (34) 372  
Income tax benefit(138) (8) (a)(b)(c)(e) (146) 
Net income$544  $(26) $518  
Earnings per share
Basic$1.02  $(0.05) $0.97  
Diluted$1.00  $(0.05) $0.95  
Weighted-average number of shares outstanding
Basic534  —  534  
Diluted546  —  546  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to other (income) expense, net of $49 million and income tax expense of $10 million for the three months ended September 30, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to other (income) expense, net of $19 million and income tax expense of $4 million for the three months ended September 30, 2018.
(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in an increase to cost of sales of $4 million and a decrease to income tax expense of $1 million for the three months ended September 30, 2018.
(e) Translation of the Financial Position and Results of Operations of our Foreign Operations into U.S. Dollars—The correction of these misstatements resulted in decreases to net sales of $6 million, cost of sales of $6 million, SG&A expense of $1 million, other (income) expense, net of $1 million, and income tax expense of $1 million for the three months ended September 30, 2018.

15


Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
Nine months ended September 30, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$8,286  $(20) (e) $8,266  
Cost of sales4,697  (7) (c)(e) 4,690  
Gross margin3,589  (13) 3,576  
Selling, general and administrative expenses1,988   (e)(f) 1,993  
Research and development expenses480  (1) (e) 479  
Other operating income, net(80) (9) (f) (89) 
Operating income1,201  (8) 1,193  
Interest expense, net34  —  34  
Other (income) expense, net(81) 36  (a)(b)(e) (45) 
Income before income taxes1,248  (44) 1,204  
Income tax benefit(28) (9) (a)(c)(e) (37) 
Net income$1,276  $(35) $1,241  
Earnings per share
Basic$2.38  $(0.06) $2.32  
Diluted$2.33  $(0.07) $2.26  
Weighted-average number of shares outstanding
Basic536  —  536  
Diluted548  —  548  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to other (income) expense, net of $32 million and income tax expense of $5 million for the nine months ended September 30, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in a decrease to other (income) expense, net of $2 million for the nine months ended September 30, 2018.
(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in an increase to cost of sales of $7 million and a decrease to income tax expense of $2 million for the nine months ended September 30, 2018.
(e) Translation of the Financial Position and Results of Operations of our Foreign Operations into U.S. Dollars—The correction of these misstatements resulted in decreases to net sales of $20 million, cost of sales of $14 million, SG&A expense of $4 million, R&D expense of $1 million, other (income) expense, net of $2 million and income tax expense of $2 million for the nine months ended September 30, 2018.
(f) Income Statement Classification of Transition Services Income—The correction of these misstatements resulted in increases to SG&A expense and other operating income, net of $9 million for the nine months ended September 30, 2018.


16


Baxter International Inc.
Condensed Consolidated Statement of Comprehensive Income
(in millions)
Three months ended September 30, 2018
As previously reportedRestatement impactsAs restated
Net income$544  $(26) $518  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments(50) 41  (9) 
Pension and other postretirement benefit plans   
Hedging activities —   
Total other comprehensive loss, net of tax(40) 42   
Comprehensive income$504  $16  $520  

The $26 million decrease to net income was driven by the items described above in the condensed consolidated statement of income for the three months ended September 30, 2018 section.
The $41 million decrease to currency translation adjustments for the three months ended September 30, 2018 is comprised of a $49 million decrease from the offsetting balance sheet impact of the adjustments to foreign exchange gains and losses partially offset by an $8 million increase to correct the foreign exchange rates used to translate the financial position and results of operations of our foreign operations into U.S. dollars.
The $1 million increase to pension and other postretirement benefit plans for the three months ended September 30, 2018 is a result of the correction of the foreign exchange rates used to translate the financial position and results of operations of our foreign operations into U.S. dollars.


17



Baxter International Inc.
Condensed Consolidated Statement of Comprehensive Income
(in millions)
Nine months ended September 30, 2018
As previously reportedRestatement impactsAs restated
Net income$1,276  $(35) $1,241  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments(332) 18  (314) 
Pension and other postretirement benefit plans89   94  
Hedging activities —   
Total other comprehensive loss, net of tax(235) 23  (212) 
Comprehensive income$1,041  $(12) $1,029  

The $35 million decrease to net income was driven by the items described above in the condensed consolidated statement of income for the nine months ended September 30, 2018 section.
The $18 million decrease to currency translation adjustments for the nine months ended September 30, 2018 is comprised of a $32 million decrease from the offsetting balance sheet impact of the adjustments to foreign exchange gains and losses, partially offset by a $14 million increase to correct the foreign exchange rates used to translate the financial position and results of operations of our foreign operations into U.S. dollars.
The $5 million increase to pension and other postretirement benefit plans for the nine months ended September 30, 2018 is a result of the correction of the foreign exchange rates used to translate the financial position and results of operations of our foreign operations into U.S. dollars.

18


Baxter International Inc.
Condensed Consolidated Statement of Changes in Equity
(in millions)
For the Three Months Ended September 30, 2018
Baxter International Inc. stockholders' equity  
Common stock shares  Common stock  Common stock shares in treasury  Common stock in treasury  Additional contributed capital  Retained earningsAccumulated other comprehensive income (loss) Total Baxter stockholders' equityNoncontrolling interests  Total equity
As previously reported
Balance as of July 1, 2018683  $683  148  $(8,485) $5,916  $14,966  $(4,199) $8,881  $(12) $8,869  
Net income—  —  —  —  —  544  —  $544  —  $544  
Other comprehensive income (loss)—  —  —  —  —  —  (40) (40) —  (40) 
Purchases of treasury stock—  —   (247) —  —  —  (247) —  (247) 
Stock issued under employee benefit plans and other—  —  (2) 93  15  (14) —  94  —  94  
Dividends declared on common stock—  —  —  —  —  (102) —  (102) —  (102) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  (5) (5) 
Balance as of September 30, 2018683  $683  150  $(8,639) $5,931  $15,394  $(4,239) $9,130  $(17) $9,113  
Restatement impacts
Balance as of July 1, 2018—  $—  —  $—  $—  $(482) $443  $(39) $—  $(39) 
Net income—  —  —  —  —  (26) —  (26) —  (26) 
Other comprehensive income (loss)—  —  —  —  —  —  42  42  —  42  
Balance as of September 30, 2018—  $—  —  $—  $—  $(508) $485  $(23) $—  $(23) 
As restated
Balance as of July 1, 2018683  $683  148  $(8,485) $5,916  $14,484  $(3,756) $8,842  $(12) $8,830  
Net income—  —  —  —  —  518  —  518  —  518  
Other comprehensive income (loss)—  —  —  —  —  —    —   
Purchases of treasury stock—  —   (247) —  —  —  (247) —  (247) 
Stock issued under employee benefit plans and other—  —  (2) 93  15  (14) —  94  —  94  
Dividends declared on common stock—  —  —  —  —  (102) —  (102) —  (102) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  (5) (5) 
Balance as of September 30, 2018683  $683  150  $(8,639) $5,931  $14,886  $(3,754) $9,107  $(17) $9,090  
See descriptions of the net income and other comprehensive income impacts in the condensed consolidated statement of income and condensed consolidated statement of comprehensive income for the three months ended September 30, 2018 sections above.

19


Baxter International Inc.
Condensed Consolidated Statement of Changes in Equity
(in millions)
For the Nine Months Ended September 30, 2018
Baxter International Inc. stockholders' equity  
Common stock shares  Common stock  Common stock shares in treasury  Common stock in treasury  Additional contributed capital  Retained earningsAccumulated other comprehensive income (loss) Total Baxter stockholders' equityNoncontrolling interests  Total equity
As previously reported
Balance as of January 1, 2018683  $683  142  $(7,981) $5,940  $14,483  $(4,001) $9,124  $(8) $9,116  
Adoption of new accounting standards—  —  —  —  —  (16) (3) $(19) —  $(19) 
Net income—  —  —  —  —  1,276  —  $1,276  —  $1,276  
Other comprehensive income (loss)—  —  —  —  —  —  (235) (235) —  (235) 
Purchases of treasury stock—  —  15  (1,028) —  —  —  (1,028) —  (1,028) 
Stock issued under employee benefit plans and other—  —  (7) 370  (9) (59) —  302  —  302  
Dividends declared on common stock—  —  —  —  —  (290) —  (290) —  (290) 
Other changes in noncontrolling interests—  —  —  —  —  —  —  —  (9) (9) 
Balance as of September 30, 2018683  $683  150  $(8,639) $5,931  $15,394  $(4,239) $9,130  $(17) $9,113  
Restatement impacts
Balance as of January 1, 2018—  $—  —  $—  $—  $(469) $462  $(7) $—  $(7) 
Adoption of new accounting standards—  —  —  —  —  (4) —  (4) —  (4) 
Net income—  —  —  —  —  (35) —  (35) —  (35) 
Other comprehensive income (loss)—  —  —  —  —  —  23  23  —  23  
Balance as of September 30, 2018—  $—  —  $—  $—  $(508) $485  $(23) $—  $(23) 
As restated
Balance as of January 1, 2018683  $683  142  $(7,981) $5,940  $14,014  $(3,539) $9,117  $(8) $9,109  
Adoption of new accounting standards—  —  —  —  —  (20) (3) (23) —  (23) 
Net income—  —  —  —  —  1,241  —  1,241  —  1,241  
Other comprehensive income (loss)—  —  —  —  —  —  (212) (212) —  (212) 
Purchases of treasury stock—  —  15  (1,028) —  —  —  (1,028) —  (1,028) 
Stock issued under employee benefit plans and other—  —  (7) 370  (9) (59) —  302  —  302  
Dividends declared on common stock—  —  —  —  —  (290) —  (290) —  (290) 
Other changes in noncontrolling interests—  —  —  —  —  —  —  —  (9) (9) 
Balance as of September 30, 2018683  $683  150  $(8,639) $5,931  $14,886  $(3,754) $9,107  $(17) $9,090  
The adjustment to the January 1, 2018 retained earnings and accumulated other comprehensive loss represent the cumulative impacts of foreign exchange gains and losses and the translation of our financial position and results of operations for our foreign operations into U.S. dollars for the periods prior to January 1, 2018. Retained earnings also includes the cumulative impacts of equipment leased to customers under operating leases and other miscellaneous adjustments for the periods prior to January 1, 2018.
20


See descriptions of the net income and other comprehensive income impacts in the condensed consolidated statement of income and condensed consolidated statement of comprehensive income for the nine months ended September 30, 2018 sections above. Additionally, we recorded an adjustment to the opening balance of retained earnings on January 1, 2018 for the adoption of ASU No. 2016-16, which was impacted by our adjustments to equipment leased to customers under operating leases.

21


Baxter International Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
For the Nine Months Ended September 30, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Cash flows from operations
Net income$1,276  $(35) $1,241  
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization594  (8) (c) 586  
Deferred income taxes(284) (7) (c)(g) (291) 
Stock compensation87  —  87  
Net periodic pension benefit and other postretirement costs31  —  31  
Other 17  (d) 23  
Changes in balance sheet items:
Accounts receivable, net(16) —  (16) 
Inventories(226) —  (226) 
Accounts payable and accrued liabilities(31) (1) (b) (32) 
Other(96)  (e) (95) 
Cash flows from operations1,341  (33) 1,308  
Cash flows from investing activities
Capital expenditures(468) 15  (c) (453) 
Acquisitions and investments, net of cash acquired(255) —  (255) 
Other investing activities, net —   
Cash flows from investing activities(715) 15  (700) 
Cash flows from financing activities
Cash dividends on common stock(274) —  (274) 
Proceeds from stock issued under employee benefit plans232  —  232  
Purchases of treasury stock(1,028) —  (1,028) 
Other financing activities, net(25) —  (25) 
Cash flows from financing activities(1,095) —  (1,095) 
Effect of foreign exchange rate changes on cash and cash equivalents(65) 12  (a)(d)(e) (53) 
Increase (decrease) in cash and cash equivalents(534) (6) (540) 
Cash and cash equivalents at beginning of period3,394   (e) 3,403  
Cash and cash equivalents at end of period$2,860  $ (e) $2,863  
22


The $35 million decrease to net income was driven by the items described above in the condensed consolidated statement of income for the nine months ended September 30, 2018 section.

(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in an increase to the effect of foreign exchange rate changes on cash and cash equivalents of $35 million for the nine months ended September 30, 2018.

(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in a decrease to changes in accounts payable and accrued liabilities of $1 million for the nine months ended September 30, 2019.

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to depreciation and amortization of $8 million, deferred income taxes of $2 million and capital expenditures of $15 million for the nine months ended September 30, 2018.

(d) Classification of Foreign Currency Gains and Losses in our Consolidated Statements of Cash Flows - The corrections of these misstatements resulted in a decrease to the effect of foreign exchange rate changes on cash and cash equivalents and an increase to other adjustments to reconcile net income to net cash from operating activities of $17 million for the nine months ended September 30, 2018.

(e) Translation of the Financial Position and Results of Operations of our Foreign Operations into U.S. Dollars - The corrections of these misstatements resulted in an increase in cash and cash equivalents at the beginning of the period of $9 million, at the end of the period of $3 million, and other changes in balance sheet items of $1 million and a decrease to the effect of foreign exchange rate changes on cash and cash equivalents of $6 million for the nine months ended September 30, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in a decrease to deferred income taxes of $5 million for the nine months ended September 30, 2018.

3. ACQUISITIONS AND OTHER ARRANGEMENTS

In the first quarternine months of 2019, we acquired the U.S. rights to multiple products for an aggregate purchase price of $94$166 million. The purchase prices were capitalized primarily as developed-technology intangible assets and we are being amortizedamortizing the assets over atheir estimated weighted-average useful lifelives of 1011 years. Net sales related to these products in the first halfnine months of 2019 were 0t material.
Cheetah Medical, Inc.
On October 25, 2019, we acquired 100% of Cheetah Medical, Inc. (Cheetah) for total upfront cash consideration of $195 million, net of cash acquired, with the potential for additional cash consideration, up to $40 million, based on clinical and commercial milestones for which the acquisition date fair value was $18 million. Cheetah is a leading provider of hemodynamic monitoring technologies. As the acquisition was completed after September 30, 2019, our condensed consolidated financial statements do not material.

include the financial condition or operating results of Cheetah in any of the periods presented herein. The fair value of the potential contingent consideration payments was estimated by applying a probability-weighted expected payment model for the clinical milestone and a Monte Carlo simulation model for the commercial milestone, which were then discounted to present value. The fair value measurements were based on Level 3 inputs. Refer to Note 17 for additional information regarding fair value measurements.

The following table summarizes the fair value of consideration transferred:

(in millions)
Cash consideration transferred$197 
Contingent consideration18 
Total consideration$215 
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date:
23


(in millions)
Assets acquired and liabilities assumed
Cash$
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Goodwill111 
Other intangible assets131 
Operating lease right-of-use assets
Accounts payable and other accrued liabilities(4)
Other non-current liabilities(32)
Total assets acquired and liabilities assumed$215 
We allocated $123 million of the total consideration to the developed product rights with a weighted-average useful life of 15 years and $8 million to customer relationships with a useful life of 13 years. The fair values of the intangible assets were determined using the income approach. The discount rates used to measure the intangible assets were 11.0% for developed product rights and 10.0% for customer relationships. We consider the fair value of the intangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.
The goodwill, which is not deductible for tax purposes, includes the value of potential future technologies as well as the overall strategic benefits provided to our product portfolio and is included primarily in the Americas segment.
Seprafilm Adhesion Barrier
In JulyDecember 2019, we entered into a definitive agreement to acquire Seprafilm Adhesion Barrier (Seprafilm) from Sanofi. The transaction closed in February 2020 and we paid approximately $345 million for the acquired assets, subject to a post-close adjustment. Seprafilm is indicated for use in patients undergoing abdominal or pelvic laparotomy as an adjunct intended to reduce the incidence, extent and severity of postoperative adhesions between the abdominal wall and the underlying viscera such as omentum, small bowel, bladder, and stomach, and between the uterus and surrounding structures such as tubes and ovaries, large bowel, and bladder. As the acquisition was completed after September 30, 2019, our condensed consolidated financial statements do not include the financial condition or results of operations of Seprafilm in any of the periods presented herein. We expect that most of the purchase price will be allocated to intangible assets and we are evaluating whether this transaction will be accounted for as an asset acquisition or a business combination.
Other
In January 2020, we acquired the U.S. rights to an additional product for $62$60 million. The purchase price will be capitalized as a developed-technology intangible asset in the quarter ending September 30, 2019March 31, 2020 and will be amortized over its estimated useful life of 1211 years.


3.

4. SUPPLEMENTAL FINANCIAL INFORMATION

Interest Expense, Net

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

Three months ended
September 30,
Nine months ended
September 30,

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(in millions)2019201820192018

Interest expense, net of capitalized interest

 

$

28

 

 

$

24

 

 

$

53

 

 

$

46

 

Interest expense, net of capitalized interest$28  $24  $81  $70  

Interest income

 

 

(8

)

 

 

(13

)

 

 

(15

)

 

 

(23

)

Interest income(15) (13) (30) (36) 

Interest expense, net

 

$

20

 

 

$

11

 

 

$

38

 

 

$

23

 

Interest expense, net$13  $11  $51  $34  

24


Other Income,(Income) Expense, Net

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Foreign exchange gains, net

 

$

(17

)

 

$

(18

)

 

$

(22

)

 

$

(33

)

Pension and other postretirement benefits

 

 

(15

)

 

 

(14

)

 

 

(31

)

 

 

(26

)

Other

 

 

4

 

 

 

1

 

 

 

 

 

 

10

 

Other income, net

 

$

(28

)

 

$

(31

)

 

$

(53

)

 

$

(49

)

Three months ended
September 30,
Nine months ended
September 30,
As RestatedAs Restated
(in millions)2019201820192018
Foreign exchange losses (gains), net$30  $10  $44  $(19) 
Pension and other postretirement benefit plans(17) (13) (48) (39) 
Other, net(4)  (4) 13  
Other (income) expense, net$ $(1) $(8) $(45) 

Inventories

 

June 30,

 

 

December 31,

 

As Restated

(in millions)

 

2019

 

 

2018

 

(in millions)September 30,
2019
December 31,
2018

Raw materials

 

$

397

 

 

$

363

 

Raw materials$380  $367  

Work in process

 

 

197

 

 

 

203

 

Work in process194  207  

Finished goods

 

 

1,163

 

 

 

1,087

 

Finished goods1,141  1,093  

Inventories

 

$

1,757

 

 

$

1,653

 

Inventories$1,715  $1,667  

Property, Plant and Equipment, Net

 

June 30,

 

 

December 31,

 

As Restated

(in millions)

 

2019

 

 

2018

 

(in millions)September 30,
2019
December 31,
2018

Property, plant and equipment, at cost

 

$

10,593

 

 

$

10,327

 

Property, plant and equipment, at cost$10,379  $10,333  

Accumulated depreciation

 

 

(6,052

)

 

 

(5,785

)

Accumulated depreciation(5,973) (5,803) 

Property, plant and equipment, net

 

$

4,541

 

 

$

4,542

 

Property, plant and equipment, net$4,406  $4,530  

4.

Purchases of property, plant and equipment included in accounts payable and accrued liabilities as of September 30, 2019 and 2018 was $47 million and $62 million, respectively.
5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following is a reconciliation of goodwill by business segment.

(in millions)

 

Americas

 

 

EMEA

 

 

APAC

 

 

Total

 

Balance as of December 31, 2018

 

$

2,351

 

 

$

387

 

 

$

220

 

 

$

2,958

 

Adjustments

 

 

 

 

 

(4

)

 

 

 

 

 

(4

)

Currency translation adjustments

 

 

(13

)

 

 

(2

)

 

 

(1

)

 

 

(16

)

Balance as of June 30, 2019

 

$

2,338

 

 

$

381

 

 

$

219

 

 

$

2,938

 

(in millions)Americas  EMEA  APAC  Total  
Balance as of December 31, 2018 (As Restated)$2,386  $393  $223  $3,002  
Currency translation and other adjustments(121) (23) (11) (155) 
Balance as of September 30, 2019$2,265  $370  $212  $2,847  

As of JuneSeptember 30, 2019, there were no reductions in goodwill relating to impairment losses.


25



Other intangible assets, net

The following is a summary of our other intangible assets.

(in millions)

 

Developed technology,

including patents

 

 

Other amortized

intangible assets

 

 

Indefinite-lived

intangible assets

 

 

Total

 

(in millions)Developed technology, including patentsOther amortized intangible assetsIndefinite-lived intangible assets
Total

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019September 30, 2019

Gross other intangible assets

 

$

2,164

 

 

$

450

 

 

$

188

 

 

$

2,802

 

Gross other intangible assets$2,202  $447  $173  $2,822  

Accumulated amortization

 

 

(1,171

)

 

 

(267

)

 

 

 

 

 

(1,438

)

Accumulated amortization(1,188) (269) —  (1,457) 

Other intangible assets, net

 

$

993

 

 

$

183

 

 

$

188

 

 

$

1,364

 

Other intangible assets, net$1,014  $178  $173  $1,365  

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018 (As Restated)December 31, 2018 (As Restated)

Gross other intangible assets

 

$

2,115

 

 

$

451

 

 

$

188

 

 

$

2,754

 

Gross other intangible assets$2,135  $457  $188  $2,780  

Accumulated amortization

 

 

(1,106

)

 

 

(250

)

 

 

 

 

 

(1,356

)

Accumulated amortization(1,117) (253) —  (1,370) 

Other intangible assets, net

 

$

1,009

 

 

$

201

 

 

$

188

 

 

$

1,398

 

Other intangible assets, net$1,018  $204  $188  $1,410  

Intangible asset amortization expense was $45$48 million and $44$42 million for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $88$136 million and $85$127 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.

For

In the three and six months ended June 30,second quarter of 2019, we recognized a $31 million impairment charge related to a developed-technology intangible asset due to a decline in market expectations for the related product. The fair value of the intangible asset was measured using a discounted cash flow approach and the charge is classified within cost of sales in the accompanying condensed consolidated statementsstatement of income.income for the nine months ended September 30, 2019. We consider the fair value of the asset to be a Level 3 measurement due to the significant estimates and assumptions we used in establishing the estimated fair value.

5.6. FINANCING ARRANGEMENTS

Debt Issuance

In May 2019, we issued €750 million of 0.4%0.40% senior notes due in May 2024 and €750 million of 1.3%1.30% senior notes due in May 2029. We have designated these debt instruments as net investment hedges of our European operations. Refer to Note 1516 for additional information.

Short-term Debt

In the second quarter of 2019, we repaid $795 million of commercial paper and other short-term borrowings that were outstanding as of March 31, 2019. NoNaN commercial paper was outstanding as of JuneSeptember 30, 2019 or December 31, 2018.

6.

Credit Facilities
In December 2019, we entered into new U.S. and Euro-denominated credit facilities. Our U.S. dollar-denominated revolving credit facility has capacity of $2.0 billion and our Euro-denominated senior revolving credit facility has a capacity of €200 million. Each of the facilities matures in 2024. As of December 31, 2019, we had €200 million ($224 million) outstanding under our Euro-denominated facility at a 0.91% interest rate and no borrowings outstanding under our U.S. dollar-denominated credit facility. The facilities enable us to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net leverage ratio. Fees under the credit facilities are variable and are based on our credit ratings and the total capacity of the facility. There were no borrowings outstanding under our previous credit facilities as of September 30, 2019 or December 31, 2018.
7. LEASES

Lessee Activity

We have entered into operating and finance leases primarily for office, manufacturing and research and development (R&D) facilities, vehicles and equipment. Our leases have remaining terms from one to 2516 years and some of those
26


leases include options that provide us with the ability to extend the lease term for periods ranging from one to 12 years. Such options are included in the lease term when it is reasonably certain that the option will be exercised.

Certain of our leases include provisions for variable lease contracts include other services, such as operationspayments which are based on, but not limited to, maintenance, insurance, taxes, index escalations and maintenance.usage-based amounts. For all asset classes, we have elected to apply a practical expedient to account for other services within lease contracts as components of the lease. We also have elected to apply a practical expedient for short-term leases whereby we do not recognize a lease liability and right-of-use asset for leases with a term of less than 12 months.

We classify our leases as operating or finance at the lease commencement date. Finance leases are generally those leases for which we will pay substantially all of the underlying asset’s fair value or will use the asset for all or a major part of its economic life, including circumstances in which we will ultimately own the asset. All other leases are operating leases. For finance leases, we recognize interest expense using the effective interest method and we recognize


amortization expense on the right-of-use asset over the shorter of the lease term or the useful life of the asset. For operating leases, we recognize lease cost on a straight-line basis over the term of the lease.

Lease liabilities and right-of-use assets are recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. We determine the present value of payments under a lease based on our incremental borrowing rate as of the lease commencement date. The incremental borrowing rate is equal to the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. For operating leases that commenced prior to our adoption of Topic 842, we measured the lease liabilities and right-of-use assets using our incremental borrowing rate as of January 1, 2019.

The components of lease cost for the three and nine months ended September 30, 2019 were:
(in millions)Three months ended September 30, 2019Nine months ended
September 30, 2019
Operating lease cost$30  $90  
Finance lease cost
Amortization of right-of-use assets  
Interest on lease liabilities  
Variable lease cost24  68  
Lease cost$58  $166  
The following table contains supplemental cash flow information related to leases for the nine months ended September 30, 2019:
(in millions)Nine months ended
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$89 
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use operating lease assets obtained in exchange for lease obligations164 
27


There were no material lease transactions that we entered into but have not yet commenced as of JuneSeptember 30, 2019.

The components of lease cost for the three and six months ended June 30, 2019 were:

(in millions)

 

Three months ended

June 30, 2019

 

 

Six months ended

June 30, 2019

 

Operating lease cost

 

$

29

 

 

$

60

 

Finance lease cost

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

1

 

 

 

2

 

Interest on lease liabilities

 

 

 

 

 

1

 

Variable lease cost

 

 

21

 

 

 

43

 

Lease cost

 

$

51

 

 

$

106

 

The following table contains supplemental cash flow information related to leases for the six months ended June 30, 2019:

(in millions)

 

Six months ended

June 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows from operating leases

 

$

60

 

Operating cash flows from finance leases

 

 

3

 

Financing cash flows from finance leases

 

 

1

 

 

 

 

 

 

Right-of-use operating lease assets obtained in exchange for lease obligations

 

 

140

 

Supplemental balance sheet information related to leases as of JuneSeptember 30, 2019 includes:

(in millions)

 

June 30, 2019

 

Operating leases

 

 

 

 

Operating lease right-of-use assets

 

$

588

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

98

 

Operating lease liabilities

 

 

490

 

Total operating lease liabilities

 

$

588

 

 

 

 

 

 

Finance leases

 

 

 

 

Property, plant and equipment, at cost

 

$

81

 

Accumulated depreciation

 

 

(27

)

Property, plant and equipment, net

 

$

54

 

 

 

 

 

 

Current maturities of long-term debt and finance lease obligations

 

$

1

 

Long-term debt and finance lease obligations

 

 

58

 

Total finance lease liabilities

 

$

59

 


(in millions)September 30, 2019
Operating leases
Operating lease right-of-use assets$589 
Accounts payable and accrued liabilities$98 
Operating lease liabilities494 
Total operating lease liabilities$592 
Finance leases
Property, plant and equipment, at cost$65 
Accumulated depreciation(19)
Property, plant and equipment, net$46 
Current maturities of long-term debt and finance lease obligations$— 
Long-term debt and finance lease obligations53 
Total finance lease liabilities$53 

Lease term and discount rates as of JuneSeptember 30, 2019 were:

June

September 30, 2019

Weighted-average remaining lease term (years)

Operating leases

10

Finance leases

15

Weighted-average discount rate

Operating leases

2.8 

2.8

%

Finance leases

10.5 

10.3

%

Maturities of operating and finance lease liabilities as of JuneSeptember 30, 2019 were:

(in millions)

 

Finance Leases

 

 

Operating Leases

 

(in millions)Finance LeasesOperating Leases

2019

 

$

4

 

 

$

59

 

2019$ $30  

2020

 

 

8

 

 

 

99

 

2020 104  

2021

 

 

8

 

 

 

83

 

2021 88  

2022

 

 

8

 

 

 

70

 

2022 74  

2023

 

 

6

 

 

 

59

 

2023 62  

Thereafter

 

 

82

 

 

 

297

 

Thereafter83  308  

Total minimum lease payments

 

 

116

 

 

 

667

 

Total minimum lease payments112  666  

Less: imputed interest

 

 

(57

)

 

 

(79

)

Less: imputed interest(59) (74) 

Present value of lease liabilities

 

$

59

 

 

$

588

 

Present value of lease liabilities$53  $592  

28


Future minimum lease payments as of December 31, 2018 as disclosed in our 2018 Annual Report, were:

As Restated

(in millions)

 

Capital Leases

 

 

Operating Leases

 

(in millions)Capital LeasesOperating Leases

2019

 

$

8

 

 

$

122

 

2019$ $123  

2020

 

 

7

 

 

 

93

 

2020 94  

2021

 

 

7

 

 

 

86

 

2021 86  

2022

 

 

8

 

 

 

71

 

2022 72  

2023

 

 

6

 

 

 

64

 

2023 64  

Thereafter

 

 

88

 

 

 

210

 

Thereafter88  212  

Total minimum lease payments

 

 

124

 

 

$

646

 

Total minimum lease payments124  $651  

Less: imputed interest

 

 

(62

)

 

 

 

 

Less: imputed interest(62) 

Present value of lease liabilities

 

$

62

 

 

 

 

 

Present value of lease liabilities$62  

Lessor Activity

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

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

(in millions)

 

Three months ended

June 30, 2019

 

 

Six months ended

June 30, 2019

 

(in millions)Three months ended September 30, 2019Nine months ended September 30, 2019

Sales-type lease revenue

 

$

5

 

 

$

11

 

Sales-type lease revenue$ $14  

Operating lease revenue

 

 

15

 

 

 

30

 

Operating lease revenue16  46  

Variable lease revenue

 

 

21

 

 

 

42

 

Variable lease revenue23  65  

Total lease revenue

 

$

41

 

 

$

83

 

Total lease revenue$42  $125  

The components of our net investment in sales-type leases as of JuneSeptember 30, 2019 were:

(in millions)

 

June 30, 2019

 

Minimum lease payments

 

$

86

 

Unguaranteed residual values

 

 

11

 

Net investment in leases

 

$

97

 

(in millions)September 30, 2019
Minimum lease payments$83 
Unguaranteed residual values11 
Net investment in leases$94 

Our net investment in sales-type leases is classified as follows in the accompanying condensed consolidated balance sheets:

(in millions)

 

June 30, 2019

 

Accounts and other current receivables, net

 

$

36

 

Other non-current assets

 

 

61

 

Total

 

$

97

 

(in millions)September 30, 2019
Accounts receivable, net$36 
Other non-current assets58 
Total$94 

29


Maturities of sales-type and operating leases as of JuneSeptember 30, 2019 were:

(in millions)

 

Sales-type Leases

 

 

Operating Leases

 

(in millions)Sales-type LeasesOperating Leases

2019

 

$

17

 

 

$

24

 

2019$10  $15  

2020

 

 

30

 

 

 

48

 

202031  61  

2021

 

 

24

 

 

 

48

 

202125  61  

2022

 

 

15

 

 

 

30

 

202217  58  

2023

 

 

8

 

 

 

16

 

2023 27  

Thereafter

 

 

2

 

 

 

7

 

Thereafter  

Total minimum lease payments

 

 

96

 

 

$

173

 

Total minimum lease payments95  $227  

Less: imputed interest

 

 

(10

)

 

 

 

 

Less: imputed interest(12) 

Present value of minimum lease payments

 

$

86

 

 

 

 

 

Present value of minimum lease payments$83  

7.
8. COMMITMENTS AND CONTINGENCIES

We are involved in product liability, patent, commercial, and other legal matters that arise in the normal course of our business. We record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of JuneSeptember 30, 2019 and December 31, 2018, our total recorded reserves including the environmental matters discussed below, with respect to legal and environmental matters were $49$55 million and $43$46 million, respectively, and there were no0 related receivables.

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

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


Environmental

Environmental

We are involved as a potentially responsible party (PRP) for environmental clean-up costs at six6 Superfund sites. Under the U.S. Superfund statute and many state laws, generators of hazardous waste sent to a disposal or recycling site are liable for site cleanup if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Separate from the Superfund cases noted above, we are involved in an ongoing voluntary environmental remediation associated with historic operations at our Irvine, California, United States facility. As of JuneSeptember 30, 2019 and December 31, 2018, our environmental reserves, which are measured on an undiscounted basis, were $20 million and $19 million, respectively.million. After considering these reserves, management is of the opinion that the outcome of these matters will not have a material adverse effect on our financial position or results of operations.

General Litigation

In November 2016, a purported antitrust class action complaint seeking monetary and injunctive relief was filed in the United States District Court for the Northern District of Illinois. The complaint alleges a conspiracy among manufacturers of IV solutions to restrict output and affect pricing in connection with a shortage of such solutions. Similar parallel actions subsequently were filed. In January 2017, a single consolidated complaint covering these matters was filed in the Northern District of Illinois. We filed a motion to dismiss the consolidated complaint in
30


February 2017. The court granted our motion to dismiss the consolidated complaint without prejudice in July 2018. The plaintiffs filed an amended complaint on September 6, 2018. We filed a motion to dismiss the amended complaint on November 9, 2018.

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

In August 2019, we were named in an amended complaint filed by Fayette County, Georgia in the MDL In re: National Prescription Opiate Litigation pending in the U.S. District Court, Northern District of Ohio. The complaint alleges that multiple manufacturers and distributors of opiate products improperly marketed and diverted these products, which caused harm to Fayette County. The complaint is limited in its allegations as to Baxter and does not distinguish between injectable opiate products and orally administered opiates. We manufactured generic injectable opiate products in our facility in Cherry Hill, NJ, which we divested in 2011.
In November 2019, we and certain of our officers were named in a class action complaint captioned Ethan E. Silverman et al. v. Baxter International Inc. et al. that was filed in the United States District Court for the Northern District of Illinois. The plaintiff, who allegedly purchased shares of our common stock during the specified class period, filed this putative class action on behalf of himself and shareholders who acquired Baxter common stock between February 21, 2019 and October 23, 2019. The plaintiff alleges that we and certain officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and failing to disclose material facts relating to certain intra-company transactions undertaken for the purpose of generating foreign exchange gains or avoiding foreign exchange losses, as well as our internal controls over financial reporting. On January 29, 2020, the Court appointed Varma Mutual Pension Insurance Company and Louisiana Municipal Police Employees Retirement System as lead plaintiffs in the case. In addition, we have received a stockholder request for inspection of our books and records in connection with the announcement made in our Form 8-K on October 24, 2019 that we had commenced an internal investigation into certain intra-company transactions that impacted our previously reported non-operating foreign exchange gains and losses. As initially disclosed on October 24, 2019, we also voluntarily advised the staff of the SEC of our previously disclosed internal investigation and we are continuing to cooperate with the staff of the SEC.
In March 2020, two lawsuits were filed against us in the Northern District of Illinois by plaintiffs alleging injuries as a result of exposure to ethylene oxide used in our manufacturing facility in Mountain Home, Arkansas to sterilize certain of our products. The plaintiffs seek damages, including compensatory and punitive damages in an unspecified amount, and unspecified injunctive and declaratory relief.
Other

As previously disclosed, in 2008 we recalled our heparin sodium injection products in the United States. Following the recall, more than 1,000 lawsuits alleging that plaintiffs suffered various reactions to a heparin contaminant, in some cases resulting in fatalities, were filed. In January 2019, the last of these cases was settled. In the first halfnine months of 2019, following the resolution of an insurance dispute, we received cash proceeds of $35$39 million for our allocation of the insurance proceeds under a settlement and cost-sharing agreement related to the defense of the heparin product liability cases. We recognized a $33$37 million gain in connection with the resolution of the dispute with the insurer that is classified within other operating income, net on the condensed consolidated statement of income for the sixnine months ended JuneSeptember 30, 2019.

In September 2017, Hurricane Maria caused damage to certain of our assets in Puerto Rico and disrupted operations. As previously disclosed, we realized $42 million of insurance recoveries in 2018 related to the damages and losses from that hurricane. In July 2019, an additional $40 million of claims were approved by our insurers and a gain was recognized within other operating income, net on the condensed consolidated statements of income for the three and nine months ended September 30, 2019. In October 2019, an additional $60 million of claims were approved by our insurers and a gain for that amount will be recognized within other operating income, net in the fourth quarter ending September 30,of 2019.

In December 2016, we received a civil investigative demand from the Commercial Litigation Branch of the U.S. DOJ primarily relating to contingent discount arrangements for, and other promotion of, our TISSEEL and ARTISS products. In April 2018, the DOJ filed a notice of its decision not to intervene and an underlying qui tam complaint ( No further insurance recoveries are expected.

31

U.S. ex rel. Andrew Capp v. Baxter
) was unsealed in the United States District Court for the District of Columbia. The attorney for the relator/plaintiff voluntarily dismissed the qui tam complaint on June 16, 2018. The complaint which is now fully resolved, related to contingent discount arrangements for, and other promotion of, our TISSEEL, ARTISS and VERITAS products.

8.

9. STOCKHOLDERS’ EQUITY

Cash Dividends

Cash dividends declared per common share for the three and sixnine months ended JuneSeptember 30, 2019 were $0.22 and $0.41,$0.63, respectively. Cash dividends declared per common share for the three and sixnine months ended JuneSeptember 30, 2018 were $0.19 and $0.35,$0.54, respectively.


Stock Repurchase Programs

In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018 and by an additional $2.0 billion in November 2018. During the first halfnine months of 2019, we repurchased 9.513.5 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise. As of September 30, 2019, we recognized a liability within accounts payable and accrued liabilities of $37 million for share repurchases that settled in early October 2019. During the first halfnine months of 2018, we repurchased 11.514.9 million shares pursuant to Rule 10b5-1 plans. We had $1.4$1.1 billion remaining available under the authorization as of JuneSeptember 30, 2019.

In December 2018, we entered into a $300 million accelerated share repurchase agreement (ASR Agreement) with an investment bank. We funded the ASR Agreement with available cash. The ASR Agreement was executed pursuant to the 2012 Repurchase Authorization described above. Under the ASR Agreement, we received 3.6 million shares upon execution. Based on the volume-weighted average price of our common stock during the term of the ASR Agreement, we received an additional 0.6 million shares from the investment bank at settlement on May 7, 2019.

9.

10. ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with shareholders,stockholders, and consists of net income, currency translation adjustments (CTA), certain gains and losses from pension and other postretirement employee benefit (OPEB) plans, unrealized gains and losses on cash flow hedges and, prior to 2018, unrealized gains and losses on available-for-sale equity securities. As a result of changes in accounting guidance related to available-for-sale equity securities, the unrealized gains and losses associated with these assets are no longer recognized in AOCI beginning January 1, 2018. The following table is a net-of-tax summary of the changes in AOCI by component for the sixnine months ended JuneSeptember 30, 2019 and 2018.

(in millions)

 

CTA

 

 

Pension and

OPEB plans

 

 

Hedging

activities

 

 

Total

 

Gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

(3,474

)

 

$

(949

)

 

$

(1

)

 

$

(4,424

)

Adoption of new accounting standard

 

 

9

 

 

 

(169

)

 

 

(1

)

 

 

(161

)

Other comprehensive income before reclassifications

 

 

(48

)

 

 

8

 

 

 

(26

)

 

 

(66

)

Amounts reclassified from AOCI (a)

 

 

 

 

 

13

 

 

 

(1

)

 

 

12

 

Net other comprehensive income (loss)

 

 

(48

)

 

 

21

 

 

 

(27

)

 

 

(54

)

Balance as of June 30, 2019

 

$

(3,513

)

 

$

(1,097

)

 

$

(29

)

 

$

(4,639

)

(in millions)

 

CTA

 

 

Pension and

OPEB plans

 

 

Hedging

activities

 

 

Available-

for-sale-

equity securities

 

 

Total

 

Gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2017

 

$

(3,013

)

 

$

(981

)

 

$

(10

)

 

$

3

 

 

$

(4,001

)

Adoption of new accounting standard

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

Other comprehensive income before reclassifications

 

 

(282

)

 

 

51

 

 

 

(1

)

 

 

 

 

 

(232

)

Amounts reclassified from AOCI (a)

 

 

 

 

 

30

 

 

 

7

 

 

 

 

 

 

37

 

Net other comprehensive income (loss)

 

 

(282

)

 

 

81

 

 

 

6

 

 

 

 

 

 

(195

)

Balance as of June 30, 2018

 

$

(3,295

)

 

$

(900

)

 

$

(4

)

 

$

 

 

$

(4,199

)

(a)

See table below for details about these reclassifications.

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


As Restated  
(in millions)CTA  Pension and OPEB plans  Hedging activities  Available- for-sale- equity securities  Total  
Gains (losses)
Balance as of December 31, 2017$(2,545) $(987) $(10) $ $(3,539) 
Adoption of new accounting standard—  —  —  (3) (3) 
Other comprehensive income (loss) before
reclassifications
(314) 50   —  (263) 
Amounts reclassified from AOCI (a)—  44   —  51  
Net other comprehensive income (loss)(314) 94   —  (212) 
Balance as of September 30, 2018$(2,859) $(893) $(2) $—  $(3,754) 
32


(a) See table below for details about these reclassifications.
The following is a summary of the amounts reclassified from AOCI to net income during the three and sixnine months ended JuneSeptember 30, 2019 and 2018.

 

 

Amounts reclassified from AOCI (a)

 

 

 

(in millions)

 

Three months ended

June 30, 2019

 

 

Six months ended

June 30, 2019

 

 

Location of impact in income statement

Amortization of pension and OPEB items

 

 

 

 

 

 

 

 

 

 

Amortization of net losses and prior service costs or credits

 

$

(7

)

 

$

(15

)

 

Other income, net

 

 

 

(7

)

 

 

(15

)

 

Total before tax

 

 

 

1

 

 

 

2

 

 

Income tax expense

 

 

$

(6

)

 

$

(13

)

 

Net of tax

Gains on hedging activities

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

1

 

 

$

1

 

 

Cost of sales

 

 

 

1

 

 

 

1

 

 

Total before tax

 

 

 

 

 

 

 

 

Income tax expense

 

 

$

1

 

 

$

1

 

 

Net of tax

Total reclassifications for the period

 

$

(5

)

 

$

(12

)

 

Total net of tax

 

 

Amounts reclassified from AOCI (a)

 

 

 

(in millions)

 

Three months ended

June 30, 2018

 

 

Six months ended

June 30, 2018

 

 

Location of impact in income statement

Amortization of pension and OPEB items

 

 

 

 

 

 

 

 

 

 

Amortization of net losses and prior service costs or credits

 

$

(18

)

 

$

(36

)

 

Other income, net

 

 

 

(18

)

 

 

(36

)

 

Total before tax

 

 

 

3

 

 

 

6

 

 

Income tax expense

 

 

$

(15

)

 

$

(30

)

 

Net of tax

Losses on hedging activities

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

(6

)

 

$

(10

)

 

Cost of sales

 

 

 

(6

)

 

 

(10

)

 

Total before tax

 

 

 

2

 

 

 

3

 

 

Income tax expense

 

 

$

(4

)

 

$

(7

)

 

Net of tax

Total reclassifications for the period

 

$

(19

)

 

$

(37

)

 

Total net of tax

(a)

Amounts in parentheses indicate reductions to net income.

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


Amounts reclassified from AOCI (a)
(in millions)Three months ended September 30, 2018Nine months ended September 30, 2018Location of impact in income statement
Amortization of pension and OPEB items
Amortization of net losses and prior service costs or credits$(18) $(54) Other income, net
Less: Tax effect 10  Income tax expense
$(14) $(44) Net of tax
Losses on hedging activities
Foreign exchange contracts$(1) $(11) Cost of sales
Less: Tax effect  Income tax expense
$—  $(7) Net of tax
Total reclassifications for the period$(14) $(51) Total net of tax
(a) Amounts in parentheses indicate reductions to net income.
Refer to Note 1213 for additional information regarding the amortization of pension and OPEB items and Note 1516 for additional information regarding hedging activity.

10.

11. REVENUES

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


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

33


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

On JuneSeptember 30, 2019, we had $8.9$9.0 billion of transaction price allocated to remaining performance obligations related to executed contracts with an original duration of one year or more, which are primarily included in the Americas segment. Some contracts in the United States included in this amount contain index-dependent price increases, which are not known at this time. We expect to recognize approximately 10%5% of this amount as revenue over the remainder of 2019, 20% in each year between 2020 and 2022, 10% in each of 2023 and 2024, and the remaining balance thereafter.

Significant Judgments

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for reserves related to rebates, product returns, sales discounts and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in accounts and other current receivables,receivable, net and accounts payable and accrued liabilities on the condensed consolidated balance sheets. Management's estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract using the expected value method. The amount of variable consideration included in the net sales price is limited to the amount that is probable not to result in a significant reversal in the amount of the cumulative revenue recognized in a future period. Revenue recognized during the three and sixnine months ended JuneSeptember 30, 2019 and 2018 related to performance obligations satisfied in prior periods was not material.

Contract Balances

The timing of revenue recognition, billings and cash collections results in the recognition of trade accounts receivable, unbilled receivables, contract assets and customer advances and deposits (contract liabilities) on our condensed consolidated balance sheets. Net trade accounts receivable were $1.8was $1.7 billion and $1.7$1.8 billion as of JuneSeptember 30, 2019 and December 31, 2018, respectively.

For contract manufacturing arrangements, revenue is primarily recognized throughout the production cycle, which typically lasts up to 90 days, resulting in the recognition of contract assets until the related services are completed and the customers are billed. Additionally, for arrangements containing a performance obligation to deliver software that can be used with medical devices, we recognize revenue upon delivery of the software, which results in the recognition of contract assets when customers are billed over time, generally over one to five years. For certain bundled contracts involving equipment delivered up-front and consumable medical products to be delivered over time, total contract revenue is allocated between the equipment and consumable medical products. In conjunction with thesecertain of those arrangements, a contract asset is created which representsfor the difference between the amount of equipment revenue recognized upon saledelivery and the amount of consideration receivedinitially receivable from the customer. TheIn those arrangements, the contract asset is reclassified as accountsbecomes a trade account receivable as consumable medical products are provided and billed, generally over one to seven years. Our contract asset balances totaled $89$109 million as of JuneSeptember 30, 2019, of which $37$31 million related to contract manufacturing services, $40$39 million related to software sales and $12$39 million related to bundled equipment and consumable medical products contracts. Our contract asset balances totaled $80 million as of December 31, 2018, of which $33 million related to contract manufacturing services and $47 million related to software sales. Contract assets are presented within accounts and other receivables,receivable, net ($5763 million and $50 million as of JuneSeptember 30, 2019 and December 31, 2018, respectively) and other non-current assets ($3246 million and $30 million as of JuneSeptember 30, 2019 and December 31, 2018, respectively) in the accompanying condensed consolidated balance sheets. Contract liabilities as of JuneSeptember 30, 2019 and December 31, 2018 were not significant.


34



Disaggregation of Net Sales

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

 

 

Three months ended June 30,

 

 

 

2019

 

 

2018

 

(in millions)

 

U.S.

 

 

International

 

 

Total

 

 

U.S.

 

 

International

 

 

Total

 

Renal Care 1

 

$

196

 

 

$

714

 

 

$

910

 

 

$

204

 

 

$

727

 

 

$

931

 

Medication Delivery 2

 

 

441

 

 

 

248

 

 

 

689

 

 

 

426

 

 

 

255

 

 

 

681

 

Pharmaceuticals 3

 

 

235

 

 

 

304

 

 

 

539

 

 

 

262

 

 

 

275

 

 

 

537

 

Clinical Nutrition 4

 

 

79

 

 

 

136

 

 

 

215

 

 

 

80

 

 

 

141

 

 

 

221

 

Advanced Surgery 5

 

 

143

 

 

 

89

 

 

 

232

 

 

 

118

 

 

 

86

 

 

 

204

 

Acute Therapies 6

 

 

44

 

 

 

89

 

 

 

133

 

 

 

42

 

 

 

87

 

 

 

129

 

Other 7

 

 

55

 

 

 

67

 

 

 

122

 

 

 

78

 

 

 

61

 

 

 

139

 

Total Baxter

 

$

1,193

 

 

$

1,647

 

 

$

2,840

 

 

$

1,210

 

 

$

1,632

 

 

$

2,842

 

 

 

Six months ended June 30,

 

 

 

2019

 

 

2018

 

(in millions)

 

U.S.

 

 

International

 

 

Total

 

 

U.S.

 

 

International

 

 

Total

 

Renal Care 1

 

$

388

 

 

$

1,373

 

 

$

1,761

 

 

$

400

 

 

$

1,399

 

 

$

1,799

 

Medication Delivery 2

 

 

847

 

 

 

476

 

 

 

1,323

 

 

 

862

 

 

 

495

 

 

 

1,357

 

Pharmaceuticals 3

 

 

467

 

 

 

581

 

 

 

1,048

 

 

 

505

 

 

 

528

 

 

 

1,033

 

Clinical Nutrition 4

 

 

156

 

 

 

264

 

 

 

420

 

 

 

163

 

 

 

281

 

 

 

444

 

Advanced Surgery 5

 

 

263

 

 

 

167

 

 

 

430

 

 

 

217

 

 

 

169

 

 

 

386

 

Acute Therapies 6

 

 

92

 

 

 

169

 

 

 

261

 

 

 

88

 

 

 

170

 

 

 

258

 

Other 7

 

 

100

 

 

 

129

 

 

 

229

 

 

 

122

 

 

 

120

 

 

 

242

 

Total Baxter

 

$

2,313

 

 

$

3,159

 

 

$

5,472

 

 

$

2,357

 

 

$

3,162

 

 

$

5,519

 

1

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

Three months ended September 30,
As Restated  
20192018
(in millions)U.S.  International  Total  U.S.  International  Total  
Renal Care 1
$199  $719  $918  $209  $698  $907  
Medication Delivery 2
461  240  701  418  234  652  
Pharmaceuticals 3
223  304  527  240  278  518  
Clinical Nutrition 4
80  139  219  80  137  217  
Advanced Surgery 5
134  82  216  122  77  199  
Acute Therapies 6
44  86  130  41  81  122  
Other 7
83  57  140  84  62  146  
Total Baxter$1,224  $1,627  $2,851  $1,194  $1,567  $2,761  

2

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

3

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

Nine months ended September 30,
As Restated
20192018
(in millions)U.S.InternationalTotalU.S.InternationalTotal
Renal Care 1
$587  $2,092  $2,679  $609  $2,091  $2,700  
Medication Delivery 2
1,308  716  2,024  1,280  726  2,006  
Pharmaceuticals 3
690  885  1,575  745  803  1,548  
Clinical Nutrition 4
236  403  639  243  417  660  
Advanced Surgery 5
397  249  646  339  246  585  
Acute Therapies 6
136  255  391  129  250  379  
Other 7
183  186  369  206  182  388  
Total Baxter$3,537  $4,786  $8,323  $3,551  $4,715  $8,266  

4

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

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

5

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

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

6

Acute Therapies includes sales of our continuous renal replacement therapies (CRRT)3 Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and other organ support therapies focused in the intensive care unit (ICU).

7

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

pharmacy compounding services.

11.

4 Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.
5 Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis,
tissue sealing and adhesion prevention.
6 Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies  
focused in the intensive care unit (ICU).
7 Other primarily includes sales of contract manufacturing services from our pharmaceutical partnering business.
12. BUSINESS OPTIMIZATION CHARGES

Beginning in the second half of 2015,

In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through JuneFrom the commencement of our business optimization activities in the second half of 2015 through September 30, 2019, we have incurred cumulative pre-tax costs of $899$927 million related to these actions. The costs consisted primarily of employee termination, implementation costs, asset impairments and accelerated depreciation. We currently expect to incur additional pre-tax costs of approximately $70$100 million through the completion of these initiatives under our current program. These costs will primarily include employee termination costs, implementation costs, and accelerated depreciation.

To the extent further cost savings opportunities are identified, we may incur additional business optimization expenses.


35


During the three and sixnine months ended JuneSeptember 30, 2019 and 2018, we recorded the following charges related to business optimization programs.

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

Three months ended
September 30,
Nine months ended
September 30,

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(in millions)2019201820192018

Restructuring charges

 

$

52

 

 

$

21

 

 

$

77

 

 

$

33

 

Restructuring charges$17  $63  $94  $96  

Costs to implement business optimization programs

 

 

12

 

 

 

25

 

 

 

22

 

 

 

50

 

Costs to implement business optimization programs10  24  32  74  

Accelerated depreciation

 

 

1

 

 

 

1

 

 

 

4

 

 

 

2

 

Accelerated depreciation    

Total business optimization charges

 

$

65

 

 

$

47

 

 

$

103

 

 

$

85

 

Total business optimization charges$28  $90  $131  $175  

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

Costs to implement business optimization programs for the three and sixnine months ended JuneSeptember 30, 2019 and 2018, respectively, consisted primarily of external consulting and transition costs, including employee compensation and related costs. The costs were generally included within cost of sales, selling, general and administrative (SG&A) expense and R&D expense.

For the three and sixnine months ended JuneSeptember 30, 2019 and 2018, respectively, we recognized accelerated depreciation, primarily associated with facilities to be closed. The costs were recorded within cost of sales and SG&A expense.

During the three and sixnine months ended JuneSeptember 30, 2019 and 2018, we recorded the following restructuring charges.

 

 

 

 

Three months ended June 30, 2019

 

Three months ended September 30, 2019

(in millions)

 

COGS

 

 

SG&A

 

 

R&D

 

 

Total

 

(in millions)COGSSG&AR&DTotal

Employee termination costs

 

$

6

 

 

$

26

 

 

$

17

 

 

$

49

 

Employee termination costs$ $ $ $ 

Contract termination and other costs

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Contract termination and other costs —  —   

Asset impairments

 

 

1

 

 

 

 

 

 

1

 

 

 

2

 

Asset impairments —   11  

Total restructuring charges

 

$

8

 

 

$

26

 

 

$

18

 

 

$

52

 

Total restructuring charges$ $ $ $17  

 

 

 

 

 

 

Three months ended June 30, 2018

 

(in millions)

 

COGS

 

 

SG&A

 

 

R&D

 

 

Total

 

Employee termination costs

 

$

3

 

 

$

8

 

 

$

7

 

 

$

18

 

Contract termination costs

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Asset impairments

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Total restructuring charges

 

$

3

 

 

$

11

 

 

$

7

 

 

$

21

 


 

 

 

 

Six months ended June 30, 2019

 

Three months ended September 30, 2018

(in millions)

 

COGS

 

 

SG&A

 

 

R&D

 

 

Total

 

(in millions)COGSSG&AR&DTotal

Employee termination costs

 

$

6

 

 

$

25

 

 

$

26

 

 

$

57

 

Employee termination costs$16  $33  $ $58  

Contract termination and other costs

 

 

8

 

 

 

 

 

 

 

 

 

8

 

Contract termination costsContract termination costs—   —   

Asset impairments

 

 

10

 

 

 

1

 

 

 

1

 

 

 

12

 

Asset impairments—   —   

Total restructuring charges

 

$

24

 

 

$

26

 

 

$

27

 

 

$

77

 

Total restructuring charges$16  $38  $ $63  

 

 

 

 

 

 

Six months ended June 30, 2018

 

(in millions)

 

COGS

 

 

SG&A

 

 

R&D

 

 

Total

 

Employee termination costs

 

$

4

 

 

$

14

 

 

$

10

 

 

$

28

 

Contract termination costs

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Asset impairments

 

 

1

 

 

 

2

 

 

 

 

 

 

3

 

Total restructuring charges

 

$

5

 

 

$

18

 

 

$

10

 

 

$

33

 



Nine months ended September 30, 2019
(in millions)COGSSG&AR&DTotal
Employee termination costs$ $27  $28  $62  
Contract termination and other costs —  —   
Asset impairments17    23  
Total restructuring charges$33  $28  $33  $94  


Nine months ended September 30, 2018
(in millions)COGSSG&AR&DTotal
Employee termination costs$20  $47  $19  $86  
Contract termination costs—   —   
Asset impairments  —   
Total restructuring charges$21  $56  $19  $96  
36


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

(in millions)

 

 

 

 

Reserve as of December 31, 2018

 

$

101

 

Charges

 

 

78

 

Reserve adjustments

 

 

(13

)

Utilization

 

 

(60

)

Currency translation

 

 

2

 

Reserve as of June 30, 2019

 

$

108

 

(in millions)
Liability balance as of December 31, 2018$101 
Charges84 
Payments(77)
Reserve adjustments(13)
Currency translation(5)
Liability balance as of September 30, 2019$90 

Reserve adjustments primarily related to employee termination cost reserves established in prior periods.

Substantially all of our restructuring reservesliabilities as of JuneSeptember 30, 2019 relate to employee termination costs, with the remaining reservesliabilities attributable to contract termination costs. The reservesSubstantially all of the cash payments for those liabilities are expected to be substantially utilizeddisbursed by the end of 2020.

12.

13. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS

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

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

Three months ended
September 30,
Nine months ended
September 30,

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(in millions)2019201820192018

Pension benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension benefits

Service cost

 

$

19

 

 

$

25

 

 

$

38

 

 

$

47

 

Service cost$18  $23  $56  $70  

Interest cost

 

 

43

 

 

 

45

 

 

 

90

 

 

 

91

 

Interest cost47  45  137  136  

Expected return on plan assets

 

 

(67

)

 

 

(79

)

 

 

(140

)

 

 

(157

)

Expected return on plan assets(74) (78) (214) (235) 

Amortization of net losses and prior service costs

 

 

14

 

 

 

24

 

 

 

29

 

 

 

48

 

Amortization of net losses and prior service costs15  24  44  72  

Net periodic pension benefit cost

 

$

9

 

 

$

15

 

 

$

17

 

 

$

29

 

Net periodic pension benefit cost$ $14  $23  $43  

OPEB

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPEB

Interest cost

 

$

2

 

 

$

2

 

 

$

4

 

 

$

4

 

Interest cost$ $ $ $ 

Amortization of net loss and prior service credit

 

 

(7

)

 

 

(6

)

 

 

(14

)

 

 

(12

)

Amortization of net loss and prior service credit(7) (6) (21) (18) 

Net periodic OPEB cost

 

$

(5

)

 

$

(4

)

 

$

(10

)

 

$

(8

)

Net periodic OPEB cost$(5) $(4) $(15) $(12) 

13.
As part of our continued effort to reduce pension plan obligations, we transferred approximately $2.4 billion of U.S. qualified pension plan liabilities to an insurance company through the purchase of a group annuity contract in October 2019. As a result of this transaction, we will recognize a non-cash pretax pension settlement charge of $755 million in the fourth quarter of 2019.
14. INCOME TAXES

Our effective income tax rate was 5.5%22.0% and 15.1%(39.2)% for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and 8.5%13.7% and 13.1%(3.1)% for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. Our effective income tax rate can differ from the 21% U.S. Federalfederal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.


For the three and six months ended JuneSeptember 30, 2019, the difference between our effective income tax rate andwas substantially consistent with the 21% U.S. Federalfederal statutory rate was primarily attributable to a tax benefit from the resolution of an uncertain tax position (UTP) as a result of a favorable ruling from the related taxing authority andunfavorable return-to-provision adjustments in various jurisdictions were offset by excess tax benefits on stock compensation awards. For the nine months ended September 30, 2019, the difference between our effective tax rate and the U.S. federal statutory rate was primarily attributable to excess tax benefits on stock compensation awards and the recognition of tax benefits associated with a favorable tax ruling.

For the three months ended JuneSeptember 30, 2018, the difference between our effective income tax rate and the U.S. Federalfederal statutory rate was primarily driven by excessa benefit from an adjustment to the 2017 Tax Act provisional amounts as permitted by Staff Accounting Bulletin 118. Specifically, we released a $200 million valuation allowance related to our U.S. foreign tax benefits on stock compensation awards, partially offset by the revaluation of Swedish netcredit deferred tax assets due to legislation reducing the Swedish income tax rate.assets. For the sixnine months ended JuneSeptember 30, 2018, the difference between
37


our effective income tax rate and the U.S. Federalfederal statutory rate was primarily attributable to the adjustment to provisional amounts related to the 2017 Tax Act, nontaxable income from the settlement of certain claims with the seller of the acquired operations of Claris, Injectables Limited, excess tax benefits on stock compensation awards, an adjustment of provisional amounts related to U.S. tax reform, a reduction of aan uncertain tax position liability for a UTP as a result of a settlement with the related taxing authority and the reversal of a valuation allowance as a result of continued profit improvements. Partially offsetting the foregoing benefits was interest on the reserve for UTPs,our uncertain tax position liabilities, the revaluation of Swedish net deferred tax assets due to a change in statutory rates and transfer pricing-related income tax accruals.


14.

15. EARNINGS PER SHARE

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

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

Three months ended

 

 

Six months ended

 

June 30,

 

 

June 30,

 

Three months ended
September 30,
Nine months ended
September 30,

(in millions)

2019

 

 

2018

 

 

2019

 

 

2018

 

(in millions)2019201820192018

Basic shares

 

510

 

 

 

535

 

 

 

511

 

 

 

537

 

Basic shares511  534  510  536  

Effect of dilutive securities

 

9

 

 

 

12

 

 

 

9

 

 

 

12

 

Effect of dilutive securities 12  10  12  

Diluted shares

 

519

 

 

 

547

 

 

 

520

 

 

 

549

 

Diluted shares520  546  520  548  

The effect of dilutive securities included unexercised stock options, unvested RSUs and contingently issuable shares related to granted PSUs. The computation of diluted EPS excluded 4 million equity awards each for the three and sixnine months ended JuneSeptember 30, 2019, respectively, and 4 million and 3 million equity awards each for the three and sixnine months ended JuneSeptember 30, 2018, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS.

15.

16. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

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

We are also exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates. Our policy is to manage interest costs using a mix of fixed- and floating-rate debt that we believe is appropriate.

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

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

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

38


Cash Flow HedgesHed

ges

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


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

The notional amounts of foreign exchange contracts designated as cash flow hedges were $629$689 million and $775$706 million as of June 30, 2019 and December 31, 2018, respectively. The total notional amounts of interest rate contracts designated as cash flow hedges were $300 million and $150 million as of JuneSeptember 30, 2019 and December 31, 2018, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at JuneSeptember 30, 2019 is 1815 months for foreign exchange contracts and 30 years forcontracts. The total notional amounts of interest rate contracts.

contracts designated as cash flow hedges were $550 million and $150 million as of September 30, 2019 and December 31, 2018, respectively. The interest rate contracts have maturity dates in 2022 and hedge the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt.

Fair Value HedgesHed

ges

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

There were no0 outstanding interest rate swap contracts designated as fair value hedges as of JuneSeptember 30, 2019 and December 31, 2018.

Net Investment HedgesHed

ges

In May 2017, we issued €600 million of senior notes due May 2025. In May 2019, we issued €750 million of senior notes due May 2024 and €750 million of senior notes due May 2029. We have designated these debt obligations as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments ofon the outstanding debt balances have been and will beare recorded as a component of AOCI. As of JuneSeptember 30, 2019, we had an accumulated pre-tax unrealized translation lossgain in AOCI of $69$41 million related to the Euro-denominated senior notes.

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

Dedesignations

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

However, if it is probable that the hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings.

There were no hedge dedesignations in the first sixnine months of 2019 or 2018 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur.

39


If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged itemsitem at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no0 fair value hedges terminated during the first sixnine months of 20192019. In the first nine months of 2018, we terminated our interest rate fair value hedges and 2018.

the cumulative fair value adjustment to the hedged item was insignificant.

If we terminate a net investment hedge, any gain or loss recognized in AOCI is not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged. In the second quarter of 2019, we dedesignated €1.2 billion of forward contracts designated as a net investment hedge of our European operations.


Undesignated Derivative Instruments

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

The total notional amount of undesignated derivative instruments was $494$562 million as of JuneSeptember 30, 2019 and $485$487 million as of December 31, 2018.

Gains and Losses on DerivativeHedging Instruments

The following tables summarize the income statement locations and gains and losses on our derivativehedging instruments for the three months ended JuneSeptember 30, 2019 and 2018.

 

Gain (loss) recognized in OCI

 

 

Location of gain (loss)

 

Gain (loss) reclassified from AOCI

into income

 

Gain (loss) recognized in OCILocation of gain (loss)
in income statement
Gain (loss) reclassified from AOCI into income

(in millions)

 

2019

 

 

2018

 

 

in income statement

 

2019

 

 

2018

 

(in millions)2019201820192018

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

Interest rate contracts

 

$

(23

)

 

$

 

 

Interest expense, net

 

$

 

 

$

 

Interest rate contracts$(57) $—  Interest expense, net$—  $—  

Foreign exchange contracts

 

 

9

 

 

 

7

 

 

Cost of sales

 

 

1

 

 

 

(6

)

Foreign exchange contracts  Cost of sales (1) 

Net investment hedges

 

 

(36

)

 

 

38

 

 

Other income, net

 

 

 

 

 

 

Net investment hedges96   Other income, net—  —  

Total

 

$

(50

)

 

$

45

 

 

 

 

$

1

 

 

$

(6

)

Total$43  $ $ $(1) 

 

 

 

 

Gain (loss) recognized in income

 

(in millions)

 

Location of gain (loss) in income statement

 

2019

 

 

2018

 

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income, net

 

$

3

 

 

$

6

 


Location of gain (loss) in income statementGain (loss) recognized in income
As Restated
(in millions)20192018
Undesignated derivative instruments
Foreign exchange contractsOther income, net$(4) $ 
The following tables summarize the income statement locations and gains and losses on our derivativehedging instruments for the sixnine months ended JuneSeptember 30, 2019 and 2018.

 

Gain (loss) recognized in OCI

 

 

Location of gain (loss)

 

Gain (loss) reclassified from AOCI

into income

 

Gain (loss) recognized in OCILocation of gain (loss)
in income statement
Gain (loss) reclassified from AOCI
into income

(in millions)

 

2019

 

 

2018

 

 

in income statement

 

2019

 

 

2018

 

(in millions)2019201820192018

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

Interest rate contracts

 

$

(34

)

 

$

 

 

Interest expense, net

 

$

 

 

$

 

Interest rate contracts$(91) $—  Interest expense, net$—  $—  

Foreign exchange contracts

 

 

 

 

 

(2

)

 

Cost of sales

 

 

1

 

 

 

(10

)

Foreign exchange contracts  Cost of sales (11) 

Net investment hedges

 

 

(22

)

 

 

17

 

 

Other income, net

 

 

 

 

 

 

Net investment hedges74  22  Other income, net—  —  

Total

 

$

(56

)

 

$

15

 

 

 

 

$

1

 

 

$

(10

)

Total$(13) $23  $ $(11) 

 

 

 

 

Gain (loss) recognized in income

 

(in millions)

 

Location of gain (loss) in income statement

 

2019

 

 

2018

 

Fair value hedges

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense, net

 

$

 

 

$

(4

)

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income, net

 

$

(6

)

 

$

(11

)


40


Location of gain (loss)
in income statement
Gain (loss) recognized in income
As Restated
(in millions)20192018
Fair value hedges
Interest rate contractsInterest expense, net$—  $(4) 
Undesignated derivative instruments
Foreign exchange contractsOther income, net$(16) $ 
For our fair value hedges, an equal and offsetting gain of $4 million was recognized in interest expense, net as an adjustment to the underlying hedged item, fixed-rate debt, in the second quarter and first halfnine months of 2018.

As of JuneSeptember 30, 2019, $13$5 million of deferred, net after-tax gains on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.


Fair Values of Derivative Instruments

Assets and Liabilities

The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of JuneSeptember 30, 2019.

 

Derivatives in asset positions

 

 

Derivatives in liability positions

 

Derivatives in asset positionsDerivatives in liability positions

(in millions)

 

Balance sheet location

 

Fair value

 

 

Balance sheet location

 

Fair value

 

(in millions)Balance sheet locationFair valueBalance sheet locationFair value

Derivative instruments designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments designated as hedges

Interest rate contracts

 

Other non-current assets

 

$

 

 

Other non-current liabilities

 

 

$

37

 

Interest rate contractsOther non-current assets$ Other non-current liabilities$95  

Foreign exchange contracts

 

Prepaid expenses and other

 

 

20

 

 

Accounts payable

and accrued liabilities

 

 

1

 

Foreign exchange contractsPrepaid expenses and other current assets24  Accounts payable and accrued liabilities 

Foreign exchange contracts

 

Other non-current assets

 

 

1

 

 

Other non-current liabilities

 

 

 

Foreign exchange contractsOther non-current assets Other non-current liabilities—  

Total derivative instruments designated as hedges

 

 

 

 

21

 

 

 

 

 

38

 

Total derivative instruments designated as hedges27  96  

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

Undesignated derivative instruments

Foreign exchange contracts

 

Prepaid expenses and other

 

 

 

 

Accounts payable

and accrued liabilities

 

 

 

Foreign exchange contractsPrepaid expenses and other current assets—  Accounts payable and accrued liabilities—  

Total derivative instruments

 

 

 

$

21

 

 

 

 

$

38

 

Total derivative instruments$27  $96  

41


The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2018.

Derivatives in asset positionsDerivatives in liability positions

 

Derivatives in asset positions

 

 

Derivatives in liability positions

 

As RestatedAs Restated

(in millions)

 

Balance sheet location

 

Fair value

 

 

Balance sheet location

 

Fair value

 

(in millions)Balance sheet locationFair valueBalance sheet locationFair value

Derivative instruments designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments designated as hedges

Interest rate contracts

 

Other non-current assets

 

$

 

 

Other non-current liabilities

 

$

3

 

Interest rate contractsOther non-current assets$—  Other non-current liabilities$ 

Foreign exchange contracts

 

Prepaid expenses and other

 

 

22

 

 

Accounts payable

and accrued liabilities

 

 

1

 

Foreign exchange contractsPrepaid expenses and other current assets22  Accounts payable and accrued liabilities 

Foreign exchange contracts

 

Other non-current assets

 

 

1

 

 

Other non-current liabilities

 

 

 

Foreign exchange contractsOther non-current assets Other non-current liabilities—  

Total derivative instruments designated as hedges

 

 

 

 

23

 

 

 

 

 

4

 

Total derivative instruments designated as hedges23   

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

Undesignated derivative instruments

Foreign exchange contracts

 

Prepaid expenses and other

 

 

 

 

Accounts payable

and accrued liabilities

 

 

1

 

Foreign exchange contractsPrepaid expenses and other current assets Accounts payable and accrued liabilities 

Total derivative instruments

 

 

 

$

23

 

 

 

 

$

5

 

Total derivative instruments$25  $ 

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


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

20192018

 

June 30, 2019

 

 

December 31, 2018

 

As Restated

(in millions)

 

Asset

 

 

Liability

 

 

Asset

 

 

Liability

 

(in millions)AssetLiabilityAssetLiability

Gross amounts recognized in the consolidated balance sheet

 

$

21

 

 

$

38

 

 

$

23

 

 

$

5

 

Gross amounts recognized in the consolidated balance sheet$27  $96  $25  $ 

Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet

 

 

(1

)

 

 

(1

)

 

 

(5

)

 

 

(5

)

Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet(2) (2) (3) (3) 

Total

 

$

20

 

 

$

37

 

 

$

18

 

 

$

 

Total$25  $94  $22  $ 

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

 

Carrying amount of hedged item

 

 

Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a)

 

Carrying amount of hedged itemCumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a)

(in millions)

 

Balance as of

June 30, 2019

 

 

Balance as of

December 31, 2018

 

 

Balance as of

June 30, 2019

 

 

Balance as of

December 31, 2018

 

(in millions)Balance as of September 30, 2019Balance as of December 31, 2018Balance as of September 30, 2019Balance as of December 31, 2018

Long-term debt

 

$

103

 

 

$

103

 

 

$

6

 

 

$

7

 

Long-term debt$103  $103  $ $ 

(a) These fair value hedges were terminated prior to December 31, 2018.
42


16.

17. FAIR VALUE MEASUREMENTS

The following tables summarize our financial instruments that are measured at fair value on a recurring basis.

 

 

 

 

 

Basis of fair value measurement

 

Basis of fair value measurement

(in millions)

 

Balance as of

June 30, 2019

 

 

Quoted prices in

active markets for

identical assets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

(in millions)Balance as of September 30, 2019Quoted prices in active markets for identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

Foreign exchange contracts

 

$

21

 

 

$

 

 

$

21

 

 

$

 

Foreign exchange contracts$26  $—  $26  $—  
Interest rate contractsInterest rate contracts —   —  

Marketable equity securities

 

 

4

 

 

 

4

 

 

 

 

 

 

 

Marketable equity securities  —  —  

Total

 

$

25

 

 

$

4

 

 

$

21

 

 

$

 

Total$31  $ $27  $—  

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

Foreign exchange contracts

 

$

1

 

 

$

 

 

$

1

 

 

$

 

Foreign exchange contracts$ $—  $ $—  

Interest rate contracts

 

 

37

 

 

 

 

 

 

37

 

 

 

 

Interest rate contracts95  —  95  —  

Contingent payments related to acquisitions

 

 

27

 

 

 

 

 

 

 

 

 

27

 

Contingent payments related to acquisitions27  —  —  27  

Total

 

$

65

 

 

$

 

 

$

38

 

 

$

27

 

Total$123  $—  $96  $27  

 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance as of

December 31, 2018

 

 

Quoted prices in

active markets for

identical assets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

23

 

 

$

 

 

$

23

 

 

$

 

Marketable equity securities

 

 

3

 

 

 

3

 

 

 

 

 

 

 

Total

 

$

26

 

 

$

3

 

 

$

23

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

2

 

 

$

 

 

$

2

 

 

$

 

Interest rate contracts

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Contingent payments related to acquisitions

 

 

32

 

 

 

 

 

 

 

 

 

32

 

Total

 

$

37

 

 

$

 

 

$

5

 

 

$

32

 


As Restated
Basis of fair value measurement
(in millions)Balance as of December 31, 2018Quoted prices in active markets for identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
Assets
Foreign exchange contracts$25  $—  $25  $—  
Marketable equity securities  —  —  
Total$28  $ $25  $—  
Liabilities
Foreign exchange contracts$ $—  $ $—  
Interest rate contracts —   —  
Contingent payments related to acquisitions32  —  —  32  
Total$38  $—  $ $32  
As of JuneSeptember 30, 2019 and December 31, 2018, cash and cash equivalents of $2.9$3.0 billion and $1.8 billion, respectively, included money market and other short-term funds of approximately $1.5$1.6 billion and $169 million, respectively, which are considered Level 2 in the fair value hierarchy.

For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The majority of the derivatives entered into by us are valued using internal valuation techniques as no quoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholes models. The key inputs, which are considered observable and vary depending on the type of derivative, include contractual terms, interest rate yield curves, foreign exchange rates and volatility.

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

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Fair value at beginning of period

 

$

31

 

 

$

23

 

 

$

32

 

 

$

9

 

Additions

 

 

 

 

 

 

 

 

 

 

 

14

 

Change in fair value recognized in earnings

 

 

(4

)

 

 

 

 

 

(4

)

 

 

 

Payments

 

 

 

 

 

 

 

 

(1

)

 

 

 

Fair value at end of period

 

$

27

 

 

$

23

 

 

$

27

 

 

$

23

 

43



Three months ended
September 30,
Nine months ended
September 30,
(in millions)2019201820192018
Fair value at beginning of period$27  $23  $32  $ 
Additions—   —  24  
Change in fair value recognized in earnings—  —  (4) —  
Payments—  —  (1) (1) 
Fair value at end of period$27  $32  $27  $32  
Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $39$38 million at JuneSeptember 30, 2019 and $41 million at December 31, 2018. These amounts are included in Other non-current assets.


Fair Values of Financial Instruments Not Measured at Fair Value

In addition to the financial instruments that we are required to recognize at fair value in the condensed consolidated balance sheets, we have certain financial instruments that are recognized at amortized cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized in the condensed consolidated balance sheets and the estimated fair values as of JuneSeptember 30, 2019 and December 31, 2018.

 

 

Book values

 

 

Fair values(a)

 

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

2

 

 

$

2

 

 

$

2

 

 

$

2

 

Current maturities of long-term debt and finance lease obligations

 

 

2

 

 

 

2

 

 

 

2

 

 

 

2

 

Long-term debt and finance lease obligations

 

 

5,157

 

 

 

3,473

 

 

 

5,440

 

 

 

3,460

 

(a)

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

Book valuesFair values(a)
As Restated
(in millions)2019201820192018
Liabilities
Short-term debt$—  $ $—  $ 
Current maturities of long-term debt and finance lease obligations    
Long-term debt and finance lease obligations5,063  3,481  5,466  3,469  

(a) These fair value amounts are classified as Level 2 within the fair value hierarchy as they are estimated based on observable inputs.
The carrying value of short-term debt approximates its fair value due to the short-term maturities of the obligations. The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instruments. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with our credit risk. The carrying values of other financial instruments approximate their fair values due to the short-term maturities of most of those assets and liabilities.

17.

18. SEGMENT INFORMATION

We manage our business based on three3 geographical segments: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Our segments provide a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products.

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

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

44


Financial information for our segments is as follows.

 

Three months ended

 

 

Six months ended

 

Three months ended
September 30,
Nine months ended
September 30,

 

June 30,

 

 

June 30,

 

As RestatedAs Restated

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(in millions)2019201820192018

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:Net sales:

Americas

 

$

1,520

 

 

$

1,525

 

 

$

2,928

 

 

$

2,967

 

Americas$1,534  $1,497  $4,462  $4,459  

EMEA

 

 

744

 

 

 

758

 

 

 

1,449

 

 

 

1,482

 

EMEA730  707  2,179  2,180  

APAC

 

 

576

 

 

 

559

 

 

 

1,095

 

 

 

1,070

 

APAC587  557  1,682  1,627  

Total net sales

 

$

2,840

 

 

$

2,842

 

 

$

5,472

 

 

$

5,519

 

Total net sales$2,851  $2,761  $8,323  $8,266  

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income:
Operating income:

Americas

 

$

584

 

 

$

619

 

 

$

1,121

 

 

$

1,185

 

Americas$595  $624  $1,715  $1,809  

EMEA

 

 

162

 

 

 

162

 

 

 

307

 

 

 

313

 

EMEA162  164  465  475  

APAC

 

 

137

 

 

 

131

 

 

 

258

 

 

 

248

 

APAC138  137  394  383  

Total segment operating income

 

$

883

 

 

$

912

 

 

$

1,686

 

 

$

1,746

 

Total segment operating income$895  $925  $2,574  $2,667  


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

 

Three months ended

 

 

Six months ended

 

Three months ended
September 30,
Nine months ended
September 30,

 

June 30,

 

 

June 30,

 

As RestatedAs Restated

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(in millions)2019201820192018

Total segment operating income

 

$

883

 

 

$

912

 

 

$

1,686

 

 

$

1,746

 

Total segment operating income$895  $925  $2,574  $2,667  

Corporate and other

 

 

(528

)

 

 

(528

)

 

 

(947

)

 

 

(930

)

Corporate and other(392) (543) (1,338) (1,474) 

Total operating income

 

 

355

 

 

 

384

 

 

 

739

 

 

 

816

 

Total operating income503  382  1,236  1,193  

Net interest expense

 

 

20

 

 

 

11

 

 

 

38

 

 

 

23

 

Net interest expense13  11  51  34  

Other income, net

 

 

(28

)

 

 

(31

)

 

 

(53

)

 

 

(49

)

Other (income) expense, netOther (income) expense, net (1) (8) (45) 

Income before income taxes

 

$

363

 

 

$

404

 

 

$

754

 

 

$

842

 

Income before income taxes$481  $372  $1,193  $1,204  

Refer to Note 1011 for additional information on Net Sales by GBU.


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

45


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Refer to our restated financial statements as of and for the year ended December 31, 2018 included in our Annual Report on Form 10-K for the year ended December 31, 2018 (20182019 (2019 Annual Report) filed on March 17, 2020 for management’s discussion and analysis of our financial condition and results of operations. The following is management’s discussion and analysis of our financial condition and results of operations for the three and sixnine months ended JuneSeptember 30, 2019 and 2018.

RESULTS OF OPERATIONS

Our net income

Restatement of Previously Issued Consolidated Financial Statements
We have restated our previously issued condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. Refer to the “Explanatory Note” preceding Item 1, Financial Statements, for background on the restatement, the periods impacted, control considerations, and other information. In addition, we have restated certain previously reported financial information as of September 30, 2018 and for the three and sixnine months ended JuneSeptember 30, 2018 in this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to information within the Results of Operations section. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 1, Financial Statements, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our condensed consolidated financial statements.
RESULTS OF OPERATIONS
Our net income attributable to Baxter stockholders for the three and nine months ended September 30, 2019 totaled $343$369 million, or $0.66$0.71 per diluted share, and $690 million,$1.0 billion, or $1.33$1.97 per diluted share, compared to $343$518 million, or $0.63$0.95 per diluted share, and $732 million,$1.2 billion, or $1.33$2.26 per diluted share, for the three and sixnine months ended JuneSeptember 30, 2018. Net income for the three and sixnine months ended JuneSeptember 30, 2019 included special items which decreased net income by $121$17 million and $173$192 million, respectively, or $0.23$0.03 and $0.33$0.37 per diluted share, respectively, as further discussed below. Net income for the three and sixnine months ended JuneSeptember 30, 2018 included special items which decreasedincreased net income by $78$111 million and $77$37 million, respectively, or $0.14$0.20 and $0.06 per diluted share, respectively, as further discussed below.


46



Special Items

The following table provides a summary of our special items and the related impact by line item on our results for the three and sixnine months ended JuneSeptember 30, 2019 and 2018.

 

Three months ended June 30,

 

 

Six months ended June 30,

 

Three months ended
September 30,
Nine months ended
September 30,

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(in millions)2019201820192018

Gross Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

Intangible asset amortization expense

 

$

(45

)

 

$

(44

)

 

$

(88

)

 

$

(85

)

Intangible asset amortization expense$(48) $(42) $(136) $(127) 

Intangible asset impairment 1

 

 

(31

)

 

 

 

 

 

(31

)

 

 

 

Intangible asset impairment 1
—  —  (31) —  

Business optimization items 2

 

 

(10

)

 

 

(3

)

 

 

(29

)

 

 

(9

)

Business optimization items 2
(10) (21) (39) (30) 

Acquisition and integration expenses 3

 

 

(12

)

 

 

(6

)

 

 

(17

)

 

 

(9

)

Acquisition and integration expenses 3
(8) (7) (25) (16) 

Litigation 4

 

 

 

 

 

 

 

 

 

 

 

(8

)

Litigation 4
—  —  —  (8) 

European medical devices regulation 5

 

 

(6

)

 

 

 

 

 

(10

)

 

 

 

European medical devices regulation 5
(7) —  (17) —  
Product-related items 6
Product-related items 6
—   —   
Hurricane Maria insurance recoveries 7
Hurricane Maria insurance recoveries 7
—  23  —  23  

Total Special Items

 

$

(104

)

 

$

(53

)

 

$

(175

)

 

$

(111

)

Total Special Items$(73) $(44) $(248) $(155) 

Impact on Gross Margin Ratio

 

(3.7 pts)

 

 

(1.9 pts)

 

 

(3.2 pts)

 

 

(2.0 pts)

 

Impact on Gross Margin Ratio(2.6 pts) (1.6 pts) (3.0 pts) (1.8 pts) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General and Administrative (SG&A) Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General and Administrative (SG&A) Expenses

Business optimization items 2

 

$

32

 

 

$

34

 

 

$

40

 

 

$

63

 

Business optimization items 2
$10  $59  $50  $122  

Acquisition and integration expenses 3

 

 

 

 

 

6

 

 

 

5

 

 

 

10

 

Acquisition and integration expenses 3
   14  

Litigation 4

 

 

 

 

 

 

 

 

 

 

 

2

 

Litigation 4
—  —  —   

Total Special Items

 

$

32

 

 

$

40

 

 

$

45

 

 

$

75

 

Total Special Items$13  $63  $58  $138  

Impact on SG&A Ratio

 

1.1 pts

 

 

1.4 pts

 

 

0.8 pts

 

 

1.3 pts

 

Impact on SG&A Ratio0.5 pts  2.3 pts  0.7 pts  1.7 pts  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and Development (R&D) Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and Development (R&D) Expenses

Business optimization items 2

 

$

23

 

 

$

10

 

 

$

34

 

 

$

13

 

Business optimization items 2
$ $10  $42  $23  

Acquisition and integration expenses 3

 

 

2

 

 

 

 

 

 

6

 

 

 

 

Acquisition and integration expenses 3
 —   —  
European medical devices regulation 5
European medical devices regulation 5
—   —   

Total Special Items

 

$

25

 

 

$

10

 

 

$

40

 

 

$

13

 

Total Special Items$10  $13  $50  $26  

Impact on R&D Ratio

 

0.8 pts

 

 

0.3 pts

 

 

0.7 pts

 

 

0.2 pts

 

Impact on R&D Ratio0.4 pts  0.5 pts  0.6 pts  0.3 pts  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operating Income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operating Income, net

Acquisition and integration expenses 3

 

$

(4

)

 

$

 

 

$

(4

)

 

$

 

Acquisition and integration expenses 3
$—  $—  $(4) $—  

Insurance recovery from legacy product-related matter 6

 

 

 

 

 

 

 

 

(33

)

 

 

 

Claris settlement 7

 

 

 

 

 

 

 

 

 

 

 

(80

)

Insurance recoveries from a legacy product-related matter 8
Insurance recoveries from a legacy product-related matter 8
(4) —  (37) —  
Hurricane Maria insurance recoveries 7
Hurricane Maria insurance recoveries 7
(40) —  (40) —  
Claris settlement 9
Claris settlement 9
—  —  —  (80) 

Total Special Items

 

$

(4

)

 

$

 

 

$

(37

)

 

$

(80

)

Total Special Items$(44) $—  $(81) $(80) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense

Tax effects of special items and impact of U.S. Tax Reform 8

 

$

(36

)

 

$

(25

)

 

$

(50

)

 

$

(42

)

Tax effects of special items and impact of U.S. Tax Reform 10
Tax effects of special items and impact of U.S. Tax Reform 10
$(35) $(231) $(83) $(276) 

Total Special Items

 

$

(36

)

 

$

(25

)

 

$

(50

)

 

$

(42

)

Total Special Items$(35) $(231) $(83) $(276) 

Impact on Effective Tax Rate

 

(5.3 pts)

 

 

(1.9 pts)

 

 

(3.2 pts)

 

 

(2.7 pts)

 

Impact on Effective Tax Rate(4.5 pts) (56.5 pts) (3.1 pts) (19.7 pts) 

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

1

Our results in 2019 included a $31 million asset impairment related to a developed-technology intangible asset.  


47


21Our results in 2019 included a $31 million asset impairment related to a developed-technology intangible asset.

In 2019 and 2018, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure on a global basis. These actions included streamlining our international operations, rationalizing our manufacturing facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. Our results in 2019 included business optimization charges of $65 million in the second quarter and $103 million in the first half.  Our results in 2018 included business optimization charges of $47 million in the second quarter and $85 million in the first half.  Refer to Note 11 within Item 1 for more information.  

32In 2019 and 2018, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure on a global basis. These actions included streamlining our international operations, rationalizing our manufacturing facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. Our results in 2019 included business optimization charges of $28 million in the third quarter and $131 million in the first nine months. Our results in 2018 included business optimization charges of $90 million in the third quarter and $175 million in the first nine months. Refer to Note 12 within Item 1 for more information.

Our results in 2019 included $10 million in the second quarter and $24 million in the first half of acquisition and integration expenses. This included integration expenses related to our acquisitions of Claris Injectables Limited (Claris) and the RECOTHROM and PREVELEAK products in prior periods, as well as the 2019 acquisitions of in-process R&D assets, partially offset by a benefit related to the change in the estimated fair value of contingent consideration liabilities. Our results in 2018 included $12 million in the second quarter and $19 million in the first half of acquisition and integration expenses related to our acquisitions of Claris and the RECOTHROM and PREVELEAK products.

43Our results in 2019 included $13 million in the third quarter and $37 million in the first nine months of acquisition and integration expenses. This included integration expenses related to our acquisitions of Claris and the RECOTHROM and PREVELEAK products in prior periods, as well as the 2019 acquisitions of in-process R&D assets, partially offset by a benefit related to the change in the estimated fair value of contingent consideration liabilities. Our results in 2018 included $11 million in the third quarter and $30 million in the first nine months of acquisition and integration expenses related to our acquisitions of Claris and the RECOTHROM and PREVELEAK products.

Our results in the first half of 2018 included a charge of $10 million related to certain product litigation.

54Our results in the first nine months of 2018 included a charge of $10 million related to certain product litigation.

Our results in 2019 included costs of $6 million in the second quarter and $10 million in the first half related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that will become effective in 2020.

65Our results in 2019 included $7 million in the third quarter and $17 million in the first nine months of costs related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that will become effective in 2020. Our results in 2018 included $3 million of costs related to these requirements.

Our results in the first half of 2019 included a benefit of $33 million for our allocation of insurance proceeds received pursuant to a settlement and cost-sharing arrangement for a legacy product-related matter.

76Our results in 2018 included a net benefit of $3 million related to an adjustment to our accrual for SIGMA SPECTRUM infusion pump inspection and remediation activities.

Our results in the first half of 2018 included a benefit of $80 million for the settlement of certain claims related to the acquired operations of Claris.

87Our results in 2019 and 2018 included benefits of $40 million and $23 million, respectively, related to insurance recoveries as a result of losses incurred due to Hurricane Maria. Refer to Note 8 within Item 1 for more information.

Reflected in this item is the income tax impact of the special items identified in this table.  Additionally, our results in the first half of 2018 included a tax benefit of $8 million related to updates to the estimated impact of U.S. Federal tax reform previously made in 2017. The tax effect of each adjustment is based on the jurisdiction in which the adjustment is incurred and the tax laws in effect for each such jurisdiction.

8Our results in the third quarter and first nine months of 2019 included benefits of $4 million and $37 million, respectively, for our allocation of insurance proceeds received pursuant to a settlement and cost-sharing arrangement for a legacy product-related matter. Refer to Note 8 within Item 1 for more information.
9Our results in the first nine months of 2018 included a benefit of $80 million for the settlement of certain claims related to the acquired operations of Claris.
10Reflected in this item is the income tax impact of the special items identified in this table. Additionally, our results in 2019 included a benefit of $16 million related to an adjustment for U.S. tax reform. Our results in 2018 included a benefit of $200 million in the third quarter and $208 million in the first nine months related to updates to the estimated impact of U.S. federal tax reform previously made in 2017. The tax effect of each adjustment is based on the jurisdiction in which the adjustment is incurred and the tax laws in effect for each such jurisdiction.
NET SALES

 

 

Three months ended

 

 

 

 

 

 

June 30,

 

 

Percent change

 

(in millions)

 

2019

 

 

2018

 

 

At actual currency rates

 

 

At constant currency rates

 

 

U.S. cyclophosphamide(1)

 

United States

 

$

1,193

 

 

$

1,210

 

 

 

(1

)%

 

 

(1

)%

 

 

(1

)%

International

 

 

1,647

 

 

 

1,632

 

 

 

  1

%

 

 

8

%

 

 

0

%

Total net sales

 

$

2,840

 

 

$

2,842

 

 

 

(0

)%

 

 

4

%

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Percent change

 

(in millions)

 

2019

 

 

2018

 

 

At actual

currency rates

 

 

At constant currency rates

 

 

U.S. cyclophosphamide(1)

 

United States

 

$

2,313

 

 

$

2,357

 

 

 

           (2

)%

 

 

(2

)%

 

 

(1

)%

International

 

 

3,159

 

 

 

3,162

 

 

(0

)%

 

 

7

%

 

 

0

%

Total net sales

 

$

5,472

 

 

$

5,519

 

 

 

(1

)%

 

 

3

%

 

 

0

%

(1)

The amounts reflect the impact of U.S. cyclophosphamide net sales on constant currency sales growth for the current period.

Three months ended
September 30,
Percent change
(in millions)20192018 (as restated)At actual
currency rates
At constant currency rates
United States$1,224  $1,194  %%
International$1,627  1,567  %%
Total net sales$2,851  $2,761  %%


48


Nine months ended
September 30,
Percent change
(in millions)20192018 (as restated)At actual
currency rates
At constant currency rates
United States$3,537  $3,551  (0)%(0)%
International$4,786  4,715%%
Total net sales$8,323  $8,266  %%

Foreign currency unfavorably impacted net sales by 42 percentage points during the secondthird quarter and first half of 2019 respectively,compared to the prior period principally due to the strengthening of the U.S. Dollar relative to the Euro, Australian Dollar, British Pound, Chinese Yuan and Colombian Peso. Foreign currency unfavorably impacted net sales by 3 percentage points during the first nine months of 2019 compared to the prior period principally due to the strengthening of the U.S. Dollar relative to the Euro, Australian Dollar, British Pound, Chinese Yuan, Colombian Peso, Brazilian Real and Brazilian Real.  

Canadian Dollar.

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

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus that recently originated in China (COVID-19). COVID-19 may have an adverse impact on our operations, supply chains and distribution systems and increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. Due to these impacts and measures, we may experience significant and unpredictable reductions or increases in demand for certain of our products as health care customers re-prioritize the treatment of patients. For example, elective surgeries are being de-prioritized which will negatively impact the usage of certain of our products, while other of our products are experiencing an increase in demand which we may not be able to meet in accordance with the customer’s desired timing. In addition to existing travel restrictions, countries may close borders, impose prolonged quarantines, and further restrict travel, which may significantly impact the ability of our employees to get to their places of work to produce products, or may significantly hamper our products from moving through the supply chain. As a result, while the financial impact on us has not been significant to date, given the rapid and evolving nature of the virus, COVID-19 could negatively affect our sales, and it is uncertain how COVID-19 will affect our global operations generally if these impacts persist or exacerbate over an extended period of time. For further discussion, refer to Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 which was filed on March 17, 2020.
Global Business Unit Net Sales Reporting
Our global business units (GBUs) include the following:
• 

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

• Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices.
• Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.
• Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.
• Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.
• Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).
• Other primarily includes sales of contract manufacturing services from our pharmaceutical partnering business.

49


The following is a summary of net sales by GBU. We have disclosed the impact of generic competition for U.S. cyclophosphamide on our net sales to enhance comparability between periods and better identify operating trends.

Global Business Unit Net Sales Reporting

Our global business units (GBUs) include


Three months ended
September 30,
Percent change
(in millions)20192018 (as restated)At actual currency ratesAt constant currency rates
U.S.
cyclophosphamide(1)
Renal Care$918  $907  %%%
Medication Delivery701  652  %%%
Pharmaceuticals527  518  %%%
Clinical Nutrition219  217  %%%
Advanced Surgery216  199  %10 %%
Acute Therapies130  122  %%%
Other140  146  (4)%(2)%%
Total Baxter$2,851  $2,761  %%%

Nine months ended
September 30,
Percent change
(in millions)20192018 (as restated)At actual currency ratesAt constant currency rates
U.S.
cyclophosphamide(1)
Renal Care$2,679  $2,700  (1)%%%
Medication Delivery2,024  2,006  %%%
Pharmaceuticals1,575  1,548  %%(2)%
Clinical Nutrition639  660  (3)%%%
Advanced Surgery646  585  10 %13 %%
Acute Therapies391  379  %%%
Other369  388  (5)%(2)%%
Total Baxter$8,323  $8,266  %%%
(1)The amounts reflect the following:

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

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

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

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

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

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

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

The following is a summaryimpact of U.S. cyclophosphamide net sales by GBU.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

June 30,

 

 

Percent change

 

(in millions)

 

2019

 

 

2018

 

 

At actual

currency rates

 

 

At constant

currency rates

 

 

U.S. cyclophosphamide(1)

 

Renal Care

 

$

910

 

 

$

931

 

 

 

(2

)%

 

 

3

%

 

 

0

%

Medication Delivery

 

 

689

 

 

 

681

 

 

 

1

%

 

 

4

%

 

 

0

%

Pharmaceuticals

 

 

539

 

 

 

537

 

 

 

0

%

 

 

4

%

 

 

(2

)%

Clinical Nutrition

 

 

215

 

 

 

221

 

 

 

(3

)%

 

 

2

%

 

 

0

%

Advanced Surgery

 

 

232

 

 

 

204

 

 

 

14

%

 

 

17

%

 

 

0

%

Acute Therapies

 

 

133

 

 

 

129

 

 

 

3

%

 

 

8

%

 

 

0

%

Other

 

 

122

 

 

 

139

 

 

 

(12

)%

 

 

(9

)%

 

 

0

%

Total Baxter

 

$

2,840

 

 

$

2,842

 

 

(0

)%

 

 

4

%

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

June 30,

 

 

Percent change

 

(in millions)

 

2019

 

 

2018

 

 

At actual

currency rates

 

 

At constant

currency rates

 

 

U.S. cyclophosphamide(1)

 

Renal Care

 

$

1,761

 

 

$

1,799

 

 

 

(2

)%

 

 

3

%

 

 

0

%

Medication Delivery

 

 

1,323

 

 

 

1,357

 

 

 

(3

)%

 

   (0

)%

 

 

0

%

Pharmaceuticals

 

 

1,048

 

 

 

1,033

 

 

 

1

%

 

 

5

%

 

 

(2

)%

Clinical Nutrition

 

 

420

 

 

 

444

 

 

 

(5

)%

 

 

(1

)%

 

 

0

%

Advanced Surgery

 

 

430

 

 

 

386

 

 

 

11

%

 

 

15

%

 

 

0

%

Acute Therapies

 

 

261

 

 

 

258

 

 

 

1

%

 

 

6

%

 

 

0

%

Other

 

 

229

 

 

 

242

 

 

 

(5

)%

 

 

(2

)%

 

 

0

%

Total Baxter

 

$

5,472

 

 

$

5,519

 

 

 

(1

)%

 

 

3

%

 

 

0

%

(1)

The amounts reflect the impact of U.S. cyclophosphamide net sales on constant currency sales growth for the current period.


On a constant currency basis,sales growth for the current period.

Foreign exchange rates negatively impacted Renal Care net sales 3% and 4% in the third quarter and first nine months of 2019, respectively. Excluding the impact of foreign exchange rates, Renal Care net sales increased during the secondthird quarter and first halfnine months of 2019, driven by global patient growth in PD, partially offset by lower U.S. in-center HD sales.

On a constant currency basis,

Foreign exchange rates negatively impacted Medication Delivery net sales 1% and 2% in the third quarter and first nine months of 2019, respectively. Excluding the impact of foreign exchange rates, Medication Delivery net sales increased during the secondthird quarter and were flat during the first halfnine months of 2019. The increase in the second quarter of 2019 was attributable to increased sales of our Spectrum IQ Infusion System in the U.S. and EVO IQ Infusion System internationally and related IV access administration sets. The year-to-date increase in the second quarter was partially offset by a decline in the first quarter compared to the prior year due to higher sales in 2018 of our large volume parenterals (LVPs) as customer demand increased due to industry-wide supply challenges.

On a constant currency basis,

Foreign exchange rates negatively impacted Pharmaceuticals net sales 2% and 3% in the third quarter and first nine months of 2019, respectively. Excluding the impact of foreign exchange rates, Pharmaceuticals net sales increased during the secondthird quarter and first halfnine months of 2019. The increase in 2019 was due to growth in international pharmacy compounding sales and increased sales of our generic injectables. Partially offsetting those increases were reduced sales of U.S. cyclophosphamide and BREVIBLOC due to increased generic competition.

On a constant currency basis, Additionally, net sales in the first nine months of 2019 were negatively impacted by reduced sales of U.S. cyclophosphamide due to increased generic competition.

Foreign exchange rates negatively impacted Clinical Nutrition net sales 3% in the third quarter and first nine months of 2019, respectively. Excluding the impact of foreign exchange rates, Clinical Nutrition net sales increased during the secondthird quarter and decreasedwere flat during the first halfnine months of 2019. The increase in the secondthird quarter was due to the launch
50


of new products. The decreasePositive sales growth in the first half of 2019third quarter was due tooffset by lower U.S. sales of our PN therapies and related products.

On a constant currency basis,products during the first six months of 2019.

Foreign exchange rates negatively impacted Advanced Surgery net sales 1% and 3% in the third quarter and first nine months of 2019, respectively. Excluding the impact of foreign exchange rates, Advanced Surgery net sales increased during the secondthird quarter and first halfnine months of 2019, primarily driven by higher sales as a result of a temporary supply disruption of a competitor.

On a constant currency basis,

Foreign exchange rates negatively impacted Acute Therapies net sales 2% and 4% in the third quarter and first nine months of 2019, respectively. Excluding the impact of foreign exchange rates, Acute Therapies net sales increased during the secondthird quarter and first halfnine months of 2019 due to higher global demand for our CRRT systems to treat acute kidney injuries, including the launch of PrisMax in several countries across the Americas, Europe and Asia.

On a constant currency basis,

Foreign exchange rates negatively impacted Other net sales 2% and 3% in the third quarter and first nine months of 2019, respectively. Excluding the impact of foreign exchange rates, Other net sales decreased during the secondthird quarter and first halfnine months of 2019 in comparison to strong sales performance in the prior year.

Gross Margin and Expense Ratios

 

Three months ended June 30,

 

 

2019

 

 

% of net sales

 

 

2018

 

 

% of net sales

 

 

$ change

 

 

% change

 

Gross margin

 

$

1,159

 

 

 

40.8

%

 

$

1,239

 

 

 

43.6

%

 

$

(80

)

 

 

(6.5

)%

SG&A

 

$

642

 

 

 

22.6

%

 

$

681

 

 

 

24.0

%

 

$

(39

)

 

 

(5.7

)%

R&D

 

$

166

 

 

 

5.8

%

 

$

174

 

 

 

6.1

%

 

$

(8

)

 

 

(4.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

Three months ended September 30,

 

2019

 

 

% of net sales

 

 

2018

 

 

% of net sales

 

 

$ change

 

 

% change

 

2019% of net sales2018 (as restated)% of net sales$ change% change

Gross margin

 

$

2,239

 

 

 

40.9

%

 

$

2,353

 

 

 

42.6

%

 

$

(114

)

 

 

(4.8

)%

Gross margin$1,230  43.1 %$1,232  44.6 %$(2) (0.2)%

SG&A

 

$

1,242

 

 

 

22.7

%

 

$

1,303

 

 

 

23.6

%

 

$

(61

)

 

 

(4.7

)%

SG&A$627  22.0 %$684  24.8 %$(57) (8.3)%

R&D

 

$

295

 

 

 

5.4

%

 

$

314

 

 

 

5.7

%

 

$

(19

)

 

 

(6.1

)%

R&D$144  5.1 %$166  6.0 %$(22) (13.3)%


Nine months ended September 30,
2019% of net sales2018 (as restated)% of net sales$ change% change
Gross margin$3,463  41.6 %$3,576  43.3 %$(113) (3.2)%
SG&A$1,869  22.5 %$1,993  24.1 %$(124) (6.2)%
R&D$439  5.3 %$479  5.8 %$(40) (8.4)%
Gross Margin

The gross margin ratio was 43.1% and 41.6% in the third quarter and first nine months of 2019 and 44.6% and 43.3% in the third quarter and first nine months of 2018, respectively. The special items identified above had an unfavorable impact of approximately 3.72.6 and 3.23.0 percentage points on the gross margin ratio in the secondthird quarter and first halfnine months of 2019, respectively. The unfavorable impact was 1.91.6 and 2.01.8 percentage points in the secondthird quarter and first halfnine months of 2018, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the gross margin ratio decreased in the secondthird quarter and first halfnine months of 2019 compared to the prior year due to an unfavorable product mix as well as inventory write-downs and incremental costs relating to improvements at a dialyzer facility in the U.S. that experienced manufacturing issues during the second quarter of 2019.


SG&A

The SG&A expenses ratio was 22.0% and 22.5% in the third quarter and first nine months of 2019 and 24.8% and 24.1% in the third quarter and first nine months of 2018, respectively. The special items identified above had an unfavorable impact of approximately 1.10.5 and 0.80.7 percentage points on the SG&A expenses ratio in the secondthird quarter and first halfnine months of 2019, respectively. The unfavorable impact was 1.42.3 and 1.31.7 percentage points in the secondthird quarter and first halfnine months of 2018, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the SG&A expenses ratio decreased in the secondthird quarter and first halfnine months of 2019 primarily due to favorable foreign currency translation and actions we took to restructure our cost position and focus on expense management, partially offset bymanagement.
51


R&D
The R&D expenses ratio was 5.1% and 5.3% in the absencethird quarter and first nine months of transition service income that we earned following our spinoff2019 and 6.0% and 5.8% in the third quarter and first nine months of Baxalta Incorporated (Baxalta), as the agreement for those services terminated as of July 1, 2018.

R&D

2018, respectively. The special items identified above had an unfavorable impact of approximately 0.80.4 and 0.70.6 percentage points on the R&D expenses ratio in the secondthird quarter and first halfnine months of 2019, respectively. The unfavorable impact was 0.30.5 and 0.20.3 percentage points in the secondthird quarter and first halfnine months of 2018, respectively. Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, R&D expenses decreased in the secondthird quarter and first halfnine months of 2019 as a result of the timing of project-related expenditures compared to the prior year, actions we took to restructure our cost position and focus on expense management, and favorable foreign currency translation.

Business Optimization Items

Beginning in the second half of 2015, we have undertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through JuneSeptember 30, 2019, we have incurred cumulative pre-tax costs of $899$927 million related to these actions. The costs consisted primarily of employee termination costs, implementation costs, asset impairments, and accelerated depreciation. We currently expect to incur additional pre-tax costs of approximately $70$100 million related to these initiatives, primarily related to employee termination costs and implementation costs. To the extent further cost savings opportunities are identified, we may incur additional business optimization expenses. The reductions in our cost base from these actions in the aggregate are expected to provide cumulative annual pre-tax savings of approximately $1.2 billion once the remaining actions are complete. The savings from these actions will impact cost of sales, SG&A expenses, and R&D expenses. Approximately 9095 percent of the expected annual pre-tax savings are expected to be realized by the end of 2019, with the remainder by the end of 2023.

Other Operating Income, Net

Other operating income, net was $4$44 million and $37$81 million in the secondthird quarter and first halfnine months of 2019, respectively, and $80$89 million in the first halfnine months of 2018. In the secondthird quarter of 2019, we recognized a benefit of $4$40 million related to the change in the estimated fair valueinsurance recoveries as a result of contingent consideration liabilities.losses incurred due to Hurricane Maria. In the first half ofthree and nine months ended September 30, 2019, we recognized a $33gains of $4 million gainand $37 million, respectively, when our share of the proceeds under a cost-sharing agreement became realizable following the resolution of a dispute with an insurer related to a legacy product-related matter. In the prior period, we settled certain claims with the seller related to the acquired operations of Claris, which resulted in a gain of $80 million.

million, and recognized $9 million of transition services income associated with services provided in connection with our separation of Baxalta in 2015. The agreement for these services terminated as of July 1, 2018.

In October 2019, an additional $60 million of Hurricane Maria insurance claims were approved by our insurers and a gain for that amount will be recognized within other operating income, net in the fourth quarter of 2019. No further insurance recoveries are expected.
Interest Expense, Net

Interest expense, net was $20$13 million and $38$51 million in the secondthird quarter and first halfnine months of 2019, respectively, and $11 million and $23$34 million in the secondthird quarter and first halfnine months of 2018, respectively. The increase in the secondthird quarter and first halfnine months of 2019 was primarily driven by higher average debt outstanding as a result of the issuance of €750 million of 0.40% senior notes due May 2024 and €750 million of 1.3% senior notes due May 2029 and lower interest income as a result of lower average cash and cash equivalents balances.


Other Income, Net

Other income, net was $28expense of $9 million and $53income of $8 million in the secondthird quarter and first halfnine months of 2019, respectively, and $31income of $1 million and $49$45 million in the secondthird quarter and first halfnine months of 2018, respectively. The decrease in the secondthird quarter of 2019 compared to the prior year was primarily due to fair value declines in marketable equity securitiesforeign exchange net losses in the current year.period. The increasedecrease in the first halfnine months of 2019 compared to the prior year was primarily due to foreign exchange net losses in the current year, partially offset by higher pension benefits in the current year and an impairment of an investment in the prior-year period and higherperiod.

52


We will recognize a non-cash pretax pension benefitssettlement charge of $755 million in the current-year period, partially offset by lower foreign exchange gains infourth quarter of 2019 related to the current-year period.    

October 2019 transfer of approximately $2.4 billion of our U.S. pension plan liabilities to an insurance company. Refer to Note 13 within Item 1 for more information.

Income Taxes

Our effective income tax rate was 5.5%22.0% and 15.1%(39.2)% in the secondthird quarter and 8.5%13.7% and 13.1%(3.1)% for the first halfnine months of 2019 and 2018, respectively. Our effective income tax rate can differ from the 21% U.S. Federalfederal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.
For the three and six months ended JuneSeptember 30, 2019, the difference between our effective income tax rate andwas substantially consistent with the 21% U.S. Federalfederal statutory rate was primarily attributable to a tax benefit from the resolution of an uncertain tax position (UTP) as a result of a favorable ruling from the related taxing authority andunfavorable return-to-provision adjustments in various jurisdictions were offset by excess tax benefits on stock compensation awards. For the nine months ended September 30, 2019, the difference between our effective tax rate and the U.S. federal statutory rate was primarily attributable to excess tax benefits on stock compensation awards and the recognition of tax benefits associated with a favorable tax ruling.
For the three months ended JuneSeptember 30, 2018, the difference between our effective income tax rate and the U.S. Federalfederal statutory rate was primarily driven by excessa benefit from an adjustment to the 2017 Tax Act provisional amounts as permitted by Staff Accounting Bulletin 118. Specifically, we released a $200 million valuation allowance related to our U.S. foreign tax benefits on stock compensation awards, partially offset by the revaluation of Swedish netcredit deferred tax assets due to legislation reducing the Swedish income tax rate.assets. For the sixnine months ended JuneSeptember 30, 2018, the difference between our effective income tax rate and the U.S. Federalfederal statutory rate was primarily attributable to nontaxable income from the settlement of certain claims with the seller of the acquired operations of Claris, excess tax benefits on stock compensation awards, an adjustment of provisional amounts related to U.S. tax reform,the 2017 Tax Act, a reduction of aan uncertain tax position liability for a UTP as a result of a settlement with the related taxing authority and the reversal of a valuation allowance as a result of continued profit improvements. Partially offsetting the foregoing benefits was interest on the reserve for UTPs,our uncertain tax position liabilities, the revaluation of Swedish net deferred tax assets due to tax rate changes in that jurisdiction and transfer pricing-related income tax accrualsaccruals.

.

Segment Results

We use operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our segments. The following is a summary of significant factors impacting our reportable segments’ financial results.

 

Net sales

 

 

Operating income (loss)

 

 

Three months ended

 

 

Six months ended

 

 

Three months ended

 

 

Six months ended

 

Net sales  Operating income (loss) 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

Three months ended September 30,Nine months ended September 30,Three months ended September 30,Nine months ended September 30,

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(in millions)20192018 (as restated)20192018 (as restated)20192018 (as restated)20192018 (as restated)

Americas

 

$

1,520

 

 

$

1,525

 

 

$

2,928

 

 

$

2,967

 

 

$

584

 

 

$

619

 

 

$

1,121

 

 

$

1,185

 

Americas$1,534  $1,497  $4,462  $4,459  $595  $624  $1,715  $1,809  

EMEA

 

 

744

 

 

 

758

 

 

 

1,449

 

 

 

1,482

 

 

 

162

 

 

 

162

 

 

 

307

 

 

 

313

 

EMEA730  707  2,179  2,180  162  164  465  475  

APAC

 

 

576

 

 

 

559

 

 

 

1,095

 

 

 

1,070

 

 

 

137

 

 

 

131

 

 

 

258

 

 

 

248

 

APAC587  557  1,682  1,627  138  137  394  383  

Corporate and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(528

)

 

 

(528

)

 

 

(947

)

 

 

(930

)

Corporate and other—  —  —  —  (392) (543) (1,338) (1,474) 

Total

 

$

2,840

 

 

$

2,842

 

 

$

5,472

 

 

$

5,519

 

 

$

355

 

 

$

384

 

 

$

739

 

 

$

816

 

Total$2,851  $2,761  $8,323  $8,266  $503  $382  $1,236  $1,193  

Americas

Segment operating income was $584$595 million and $1,121$1,715 million, respectively, in the secondthird quarter and first halfnine months of 2019 and $619$624 million and $1,185$1,809 million, respectively, in the secondthird quarter and first halfnine months of 2018. The decrease in the secondthird quarter of 2019 was primarily driven by lower sales and gross margin in Pharmaceuticals. Lower sales and gross margin in Medication Delivery and Clinical Nutrition in the first quarter of 2019 contributed to the decrease in the first halfnine months of 2019. Partially offsetting the decreases in the secondthird quarter and first halfnine months of 2019 was favorable performance in Advanced Surgery, primarily due to a temporary supply disruption of a competitor.

53


EMEA

Segment operating income was $162 million and $307$465 million, respectively, in the secondthird quarter and first halfnine months of 2019 and $162$164 million and $313$475 million, respectively, in the secondthird quarter and first halfnine months of 2018. The decrease in the first halfnine months of 2019 was primarily driven by unfavorable foreign exchange rates, partially offset by increased sales and gross margin in Renal Care and Pharmaceuticals.


APAC

APAC

Segment operating income was $137$138 million and $258$394 million, respectively, in the secondthird quarter and first halfnine months of 2019 and $131$137 million and $248$383 million, respectively, in the secondthird quarter and first halfnine months of 2018. Results in 2019 were driven by higher sales and gross margin, primarily from China and Australia, in Renal Care and Pharmaceuticals.

Corporate and Other

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include certain foreign currency hedging activities, corporate headquarters costs, certain R&D costs, certain GBU support costs, stock compensation expense, certain employee benefit plan costs, as well asand certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments). The operating loss in the secondthird quarter of 2019 was consistent withlower than the prior-year period as higherdue to lower business optimization charges, Hurricane Maria insurance recoveries and an impairment of a developed-technology intangible asset were offset by lower SG&A and R&D expenses.expense. The operating loss in the first halfnine months of 2019 increaseddecreased over the prior-year period due to an impairment of a developed-technology intangible asset, higher business optimization charges and the benefit from the Claris settlement in the prior year, partially offset by a benefit for our allocation of insurance proceeds received pursuant to a settlement and cost-sharing arrangement for a legacy product-related matter in the current year, and lower SG&A and R&D expenses.

expenses in the current year, lower business optimization charges in the current year and higher Hurricane Maria insurance recoveries in the current year, partially offset by an impairment of a developed-technology intangible asset in the current year and the benefit from the Claris settlement in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash flows for the six-monthnine-month periods ended JuneSeptember 30, 2019 and 2018.

Six months ended

 

June 30,

 

Nine months ended September 30,

(in millions)

2019

 

 

2018

 

(in millions)20192018

Cash flows from operations - continuing operations

$

617

 

 

$

852

 

Cash flows from operations - continuing operations$1,281  $1,308  

Cash flows from investing activities

 

(462

)

 

 

(539

)

Cash flows from investing activities(679) (700) 

Cash flows from financing activities

 

968

 

 

 

(808

)

Cash flows from financing activities614  (1,095) 

Cash Flows from Operations — Continuing Operations

In the first halfnine months of 2019, cash provided by operating activities was $617$1,281 million, as compared to cash provided by operating activities of $852$1,308 million in the first halfnine months of 2018, a decrease of $235$27 million. The decrease was primarily due to the Claris settlement received in 2018 and the timing of customer and vendor payments, partially offset by an insurance recoveryrecoveries received in 2019 from a legacy product-related matter.

matter and Hurricane Maria.

In October 2019, an additional $60 million of insurance claims related to Hurricane Maria were approved by our insurers. These recoveries were collected in the fourth quarter of 2019 and no further insurance recoveries are expected.
Cash Flows from Investing Activities

In the first halfnine months of 2019, cash used for investing activities included payments for acquisitions of $111$186 million, primarily related to the U.S. rights to multiple products we acquired, and capital expenditures of $352$505 million. In the first halfnine months of 2018, cash used for investing activities included payments for acquisitions of $228$255 million, primarily related to RECOTHROM and PREVELEAK and two molecules from Celerity Pharmaceuticals, LLC, and capital expenditures of $311$453 million.

54


In October 2019, we paid $195 million to acquire Cheetah Medical, Inc., net of cash acquired. In December 2019, we entered into a definitive agreement to acquire Seprafilm from Sanofi. The transaction closed in February 2020 and we paid approximately $345 million for the acquired assets, subject to a post-close adjustment. In January 2020, we acquired the U.S. rights to an additional product for $60 million. Refer to Note 3 within Item 1 for more information.
Cash Flows from Financing Activities

In the first halfnine months of 2019, cash generated from financing activities included the$1.7 billion of net proceeds from the issuance of 750€750 million of senior notes due in 2024 and 750€750 million of senior notes due in 2029 along with stock issued under employee benefit plans of $262$334 million, partially offset by payments for stock repurchases of $720 million$1.0 billion and dividend payments of $198$310 million. In the first halfnine months of 2018, cash used for financing activities included payments for stock repurchases of $781 million$1.0 billion and dividend payments of $173$274 million, partially offset by the proceeds from stock issued under employee benefit plans of $170$232 million.


As authorized by the Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018 and by an additional $2.0 billion in November 2018. We paid $720 million$1.0 billion in cash to repurchase approximately 9.513.5 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise in the first halfnine months of 2019 and had $1.4$1.1 billion remaining available under this authorization as of JuneSeptember 30, 2019.

In December 2018, we entered into a $300 million accelerated share repurchase agreement (ASR Agreement) with an investment bank. We funded the ASR Agreement with available cash. Under the ASR Agreement, we received 3.6 million shares upon execution. Based on the volume-weighted average price of our common stock during the term of the ASR Agreement, we received an additional 0.6 million shares from the investment bank at settlement on May 7, 2019.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of JuneSeptember 30, 2019, our U.S. dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $1.5 billion and approximately €200 million, respectively. There were no amounts outstanding under our credit facilities at Juneas of September 30, 2019 or December 31, 2018, respectively. As of JuneSeptember 30, 2019, we were in compliance with the financial covenants in these agreements. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment.

In December 2019, we entered into new U.S. and Euro-denominated revolving credit facilities. Our U.S. dollar-denominated revolving credit facility has capacity of $2.0 billion. Our Euro-denominated senior revolving credit facility has a capacity of approximately €200 million. Both facilities mature in December 2024.
Access to Capital and Credit Ratings

We intend to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations or by issuing additional debt. We had $2.9$3.0 billion of cash and cash equivalents as of JuneSeptember 30, 2019, with adequate cash available to meet operating requirements in each jurisdiction in which we operate. We invest our excess cash in money market funds and diversify the concentration of cash among different financial institutions.

Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives. Between February and JulyOctober 2019, Standard & Poor’s, Fitch, and Moody’s reaffirmed our investment grade credit ratings that we disclosed in our 2018 Annual Report.

ratings.

55


CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our 20182019 Annual Report.Report which was filed on March 17, 2020. Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 20182019 Annual Report. There have been no significant changes in the application of our critical accounting policies during the first halfnine months of 2019.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards CodificationUpdate (ASU) 2016-13, Financial Instruments - Credit Losses, which requires the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard is effective for our financial statements beginning in 2020. We are currently evaluating theThe impact of the adoption of this ASU but it is not expected to have a material effect on our condensed consolidated financial statements.


In August 2018, the FASB issued ASCASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for our financial statements beginning in 2020. WeOur policies for capitalizing implementation costs incurred in a hosting arrangement are currently evaluatingnot expected to be impacted by this ASU. However, we have historically classified those capitalized costs within property, plant and equipment, net on our condensed consolidated balance sheets and as capital expenditures on our condensed consolidated statements of cash flows. Under the new ASU, those capitalized costs will be presented as other non-current assets on our condensed consolidated balance sheets and within operating cash flows on our condensed consolidated statements of cash flows. The impact of those classification changes following the adoption of this ASU but it isare not expected to have a material effect on our condensed consolidated financial statements.

LEGAL CONTINGENCIES

Refer to Note 78 within Item 1 for a discussion of our legal contingencies. Upon resolution of any of these uncertainties, we may incur charges in excess of presently established liabilities. While our liability in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and we may in the future incur material judgments or enter into material settlements of claims.

CERTAIN REGULATORY MATTERS

The U.S. Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India in July 2017, immediately prior to the closing of the Claris acquisition. FDA completed the inspection at which time FDA issued a related Form-483 (Claris 483). In July 2018, FDAand subsequently issued a Warning Letter based on observations identified in the 2017 inspection (Claris Warning Letter).1 The Claris Warning Letter includes a number of observations across a variety of areas. We submitted our response to
While FDA has not yet re-inspected the Claris Warning Letter in August 2018 andfacilities, we are continuing to implement corrective and preventive actions which have included product recalls that are financially immaterial to us, to address FDA’s prior observations as set forth in the Claris 483 or the Claris Warning Letter and other items identified in connection with integrating Claris into our quality systems. We had

While management cannot speculate on when the Claris Warning Letter will be lifted, management continues to pursue and implement other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S. in the meantime. As of December 31, 2019, we have secured alternative locations to produce a Regulatory Meeting with FDA on November 6, 2018 and we continue to cooperate with FDA in connection withmajority of the resolution of these matters.

planned new products for distribution into the U.S.

On May 6, 2019, we received a Show Cause Notice under the Drugs & Cosmetics Act, 1940 and Rules thereunder (Show Cause Notice) from the Commissioner of the Food & Drugs Control Administration in the Gujarat State in
56


Gandhinagar, India (Commissioner). The Show Cause Notice was issued regarding an April 9, 2019 inspection of our Claris facilities in Ahmedabad, India by the Commissioner. The Show Cause Notice containscontained a number of observations of alleged Good Manufacturing Practice related issues across a variety of areas, some of which overlap with the areas covered in the Claris 483 or the Claris Warning Letter. We responded to the Show Cause Notice and are cooperating witha follow up inspection occurred in July 2019. No further action has been undertaken by the regulatoryGujarat authorities.

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

The Warning Letter was closed out in September 2019.

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

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


FORWARD-LOOKING INFORMATION

This quarterly report on Form 10-Q includes forward-looking statements. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events. These forward-looking statements may include statements with respect to accounting estimates and assumptions, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses and the material weakness identified as a result thereof, future regulatory filings and our R&D pipeline, (including estimates regarding our ability to obtain approval for distribution in the U.S. of new products manufactured at our Baxter Ahmedabad facility), strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, potential tax liability associated with the separation of our biopharmaceuticals and medical products businesses, (including the 2016 disposition of our formerly retained shares in Baxalta (Retained Shares)), the impact of competition, future sales growth, business development activities (including the recent acquisitions of Claris InjectablesCheetah and two surgical productsSeprafilm from Mallinckrodt plc)Sanofi), the effects of product recalls or production disruptions, business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the sufficiency of our facilities and financial flexibility, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.


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


failure to achieve our long-term financial improvement goals;

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

57


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

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

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

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

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

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

breaches or failures of our information technology systems or products, including by cyber-attack, data leakage, unauthorized access or theft;

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

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

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

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

failure to achieve our long-term financial improvement goals;

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

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

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

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

product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters (including the Claris Warning Letter), import bans, sanctions, seizures, litigation, or declining sales;

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

inability to create additional production capacity in a timely manner or the occurrence of other manufacturing or supply difficulties (including as a result of natural disaster or otherwise);

breaches or failures of our information technology systems or products, including by cyber-attack, unauthorized access or theft;

future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the DOJ or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities;

proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy (AAKHI) and reimbursement, which may substantially change the U.S. end stage renal disease market and demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures which are difficult to estimate in advance;


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

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


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

global regulatory, trade and tax policies;

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

the impact of any goodwill impairments on our operating results;

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

the impact of global economic conditions (including potential trade wars) on us and our customers and suppliers, including foreign governments in countries in which we operate;

fluctuations in foreign exchange and interest rates;

any changes in law concerning the taxation of income (whether with respect to current or future tax reform), including income earned outside the United States;

actions by tax authorities in connection with ongoing tax audits;

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

the outcome of pending or future litigation;litigation, including the opioid litigation and litigation

related to the investigation of foreign exchange gains and losses;


the adequacy of our cash flows from operations to meet our ongoing cash obligations and fund our investment program; and

other factors identified elsewhere in this report and other filings with the Securities and Exchange Commission, including those factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, all of which are available on our website.

58



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

global regulatory, trade and tax policies;

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

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

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

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

fluctuations in foreign exchange and interest rates;

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

actions by tax authorities in connection with ongoing tax audits;

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

other factors identified elsewhere in this report and other filings with the SEC, including those factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 17, 2020, all of which are available on our website.

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


Item 3.

Quantitative and Qualitative Disclosures About Market Risk

59


Item 3. Quantitative and Qualitative Disclosures About Market Risk
Currency Risk

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

We may use options forwards and cross-currency swapsforwards to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities. The maximum term over which we have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions as of JuneSeptember 30, 2019 is 1815 months. We also enter into derivative instruments to hedge foreign exchange risk on certain intercompanyintra-company and third-party receivables and payables and debt denominated in foreign currencies.

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

A sensitivity analysis of changes in the fair value of foreign exchange option and forward contracts outstanding as of JuneSeptember 30, 2019, while not predictive in nature, indicated that if the U.S. Dollar uniformly weakened by 10% against all currencies, on a net-of-tax basis, the net asset balance of $15$19 million with respect to those contracts would decrease by $26$23 million, resulting in a net liability position.

The sensitivity analysis model recalculates the fair value of the foreign exchange option and forward contracts outstanding at Juneas of September 30, 2019 by replacing the actual exchange rates at Juneas of September 30, 2019 with exchange rates that are 10% weaker compared to the actual exchange rates for each applicable currency. All other factors are held constant. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

Our operations in Argentina are reported using highly inflationary accounting effective July 1, 2018. Changes in the value of the Argentine Peso applied to our peso-denominated net monetary asset positions are recorded in income at the time of the change. As of JuneSeptember 30, 2019, our net monetary assets denominated in Argentine Pesos are not significant.

Interest Rate and Other Risks

Refer to the caption “Interest Rate and Other Risks” in the “Financial Instrument Market Risk” section of the 20182019 Annual Report.Report filed on March 17, 2020. There were no significant changes during the quarter ended JuneSeptember 30, 2019.


Item 4.

Controls and Procedures

60


Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and

Our management, with the participation of our Disclosure Committee and management, including the Chief Executive Officer and our Chief Financial Officer, ofhas evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of JuneSeptember 30, 2019.
Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer, concluded that, as of September 30, 2019, due to the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, concludedas appropriate, to allow timely decisions regarding required disclosure.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our disclosureannual or interim financial statements would not be prevented or detected on a timely basis.
We did not maintain effective controls over the accounting for certain foreign exchange gains and losses. Specifically, we did not have controls in place to monitor and quantify the difference between the foreign exchange gains and losses that we reported and the foreign exchange gains and losses that we would have reported using exchange rates determined in accordance with U.S. GAAP. Additionally, our policies and controls related to approvals and monitoring of intra-company transactions were insufficient to prevent or detect intra-company transactions undertaken solely for the purpose of generating foreign exchange gains or avoiding losses under our historical exchange rate convention. This material weakness resulted in the restatement of our consolidated financial statements as of December 31, 2018 and for the years ended December 31, 2018 and 2017 and each of the quarterly and year-to-date periods in the year ended December 31, 2018 and the first two quarters and related year-to-date interim period in the year ended December 31, 2019. Additionally, this material weakness could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation of the Material Weakness

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

Exchange Rate Policy – We have discontinued the use of our historical exchange rate convention and are using the exchange rates determined in accordance with U.S. GAAP for purposes of measuring foreign currency transactions and remeasuring monetary assets and liabilities denominated in a foreign currency.
Automated Feed – We have implemented an automated feed that extracts foreign exchange rates on a daily basis from a recognized third-party exchange rate source.
Daily Rate Comparison – We have implemented a daily rate comparison control that extracts foreign exchange rates from (a) a third-party exchange rate source, (b) our treasury application, and (c) our enterprise resource planning (ERP) system and compares those rates in order to identify any potential differences and provide assurance that the correct rates were captured and are being used in our financial systems.
Intra-company Transaction Approvals – We have updated our policies to require additional approvals of intra-company transactions and implemented a requirement that such transactions be supported by a documented business purpose.
Personnel - We have made personnel changes including hiring a new treasurer from outside Baxter with more than thirty years of treasury experience and responsibility, including at four publicly traded companies. We have also hired another experienced treasury professional in a newly created director role responsible for treasury governance and controls. Additionally, we have created a treasury controller role within our accounting function and are continuing to add resources as appropriate to improve our financial reporting controls related to treasury activities.

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While we believe that the above actions will ultimately remediate the material weakness, we intend to continue to refine those controls and procedures were effectivemonitor their effectiveness for a sufficient period of time prior to reaching any determination as to whether the material weakness has been remediated.

Notwithstanding the identified material weakness, management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows as of June 30, 2019.

and for the periods presented in accordance with U.S. GAAP.

ChangesChanges in Internal Control over Financial Reporting

We

As previously disclosed, we are currently implementing an upgrade to our enterprise resource planning (ERP)ERP software. In connection with the ERP upgrade, we are updating the processes that constitute our internal control over financial reporting, as necessary. This normal course of business ERP upgrade is being implemented to remain current with the latest release of the software.

In

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

With

Other than as described in the exceptiontwo preceding paragraphs and in the Remediation of theMaterial Weakness section above, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended JuneSeptember 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Review by Independent Registered Public Accounting Firm

A review of the interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three and six monthsquarterly period ended JuneSeptember 30, 2019 and 2018 has been performed by PricewaterhouseCoopers LLP, our independent registered public accounting firm. Its report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and, therefore, the independent accountants’ liability under Section 11 does not extend to it.

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Report of Independent Registered Public Accounting Firm

To theBoard of Directors and Stockholders of Baxter International Inc.

Results of Review of Interim Financial Statements


We have reviewed the condensed consolidated balance sheet of Baxter International Inc. and its subsidiaries (the “Company”) as of JuneSeptember 30, 2019, and the related condensed consolidated statements of income, comprehensive income and changes in equity for the three-month and six-monthnine-month periods ended JuneSeptember 30, 2019 and 2018 and the related condensed consolidated statements of cash flows for the six-monthnine-month periods ended JuneSeptember 30, 2019 and 2018, including the related notes, appearing under Part I, Item 1 of this Quarterly Report on Form 10-Q (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.


We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2018 and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended (not presented herein), and in our report dated February 21, 2019,March 17, 2020, which included a paragraph regarding the correction of a misstatement in the 2018 and 2017 financial statements and a paragraph describing a change in the manner of accounting for certain pension and postretirement net periodic benefit costsleases in the 2018 financial statements,2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the condensed consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


Restatement of Previously Issued Interim Financial Statements

As discussed in Note 2 to the condensed consolidated financial statements, the Company has restated its condensed consolidated financial statements for the three-month and nine-month periods ended September 30, 2018 to correct misstatements.

Basis for Review Results


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



/s/PricewaterhouseCoopers LLP

Chicago, Illinois

July 30, 2019


March 17, 2020

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PART II. OTHER INFORMATION

Item 1.

Item 1. Legal Proceedings
The information in Part I, Item 1, Note 78 is incorporated herein by reference.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 1A. Risk Factors
Risk factors describing the major risks to our business can be found under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 which was filed on March 17, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table includes information about our common stock repurchases during the three-month period ended JuneSeptember 30, 2019.

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total number of shares purchased (1)

 

 

Average price paid per share

 

 

Total number of shares purchased as part of publicly announced program(1)

 

 

Approximate dollar value of shares that may yet be purchased under the program(1)

 

April 1, 2019 through April 30, 2019

 

 

749,300

 

 

$

80.68

 

 

 

749,300

 

 

 

 

 

May 1, 2019 through May 31, 2019 (2)

 

 

1,254,787

 

 

$

76.59

 

 

 

1,254,787

 

 

 

 

 

June 1, 2019 through June 30, 2019

 

 

 

 

$

 

 

 

 

 

 

 

 

Total

 

 

2,004,087

 

 

$

78.12

 

 

 

2,004,087

 

 

$

1,447,516,465

 

Issuer Purchases of Equity Securities

(1)

In July 2012, we announced that our Board of Directors authorized us to repurchase up to $2.0 billion of our common stock on the open market or in private transactions. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018 and by an additional $2.0 billion in November 2018. During the second quarter of 2019, we repurchased 1.4 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise. We had $1.4 billion remaining under this program (as amended and after giving effect to stock repurchases) as of June 30, 2019. This program does not have an expiration date.

Period
Total number of shares purchased (1)
Average price paid per share
Total number of shares purchased as part of publicly announced program(1)
Approximate dollar value of shares that may yet be purchased under the program(1)
July 1, 2019 through July 31, 2019—  $—  —  
August 1, 2019 through August 31, 2019—  $—  —  
September 1, 2019 through September 30, 20193,973,600  $87.14  3,973,600  
Total3,973,600  $87.14  3,973,600  $1,101,245,595  

(2)(1)In July 2012, we announced that our Board of Directors authorized us to repurchase up to $2.0 billion of our common stock on the open market or in private transactions. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018 and by an additional $2.0 billion in November 2018. During the third quarter of 2019, we repurchased 4.0 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise. We had $1.1 billion remaining under this program (as amended and after giving effect to stock repurchases) as of September 30, 2019. This program does not have an expiration date.

In December 2018, we entered into a $300 million accelerated share repurchase agreement (ASR Agreement) with an investment bank. We funded the ASR Agreement with available cash. The ASR Agreement was executed pursuant to the 2012 Repurchase Authorization described above. Under the ASR Agreement, we received 3.6 million shares upon execution.  Based on the volume-weighted average price of our common stock during the term of the ASR Agreement, we received an additional 0.6 million shares from the investment bank at settlement on May 7, 2019.


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Item 6. Exhibits
Exhibit Index:

Item 6.

Exhibits

Exhibit Index:

Exhibit

Number

Description

Exhibit
Number

Description

4.2

15*

15*

Letter Re Unaudited Interim Financial Information

31.1*

31.2*

32.1*

32.2*

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

*

Filed herewith.


66


Signature

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

BAXTER INTERNATIONAL INC.

(Registrant)

Date: March 17, 2020

Date: July 30, 2019

By:

By:

/s/ James K. Saccaro

James K. Saccaro


Executive Vice President and Chief Financial Officer


(duly authorized officer and principal financial officer)

47


67