| RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS We have restated herein our condensed consolidated financial statements for the three and six months ended June 30, 2019. We have also restated impacted amounts within the accompanying notes to the consolidated financial statements, as applicable. The restatement of our condensed consolidated financial statements for the three and six months ended June 30, 2019 was previously reported in our 2019 Annual Report. 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 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 $32 million and $36 million, respectively, for the three and six months ended June 30, 2019. 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 for the three and six months ended June 30, 2019, 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, 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 2019, 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, 2019. The categories of misstatements and their impact on our previously issued condensed consolidated financial statements for the three and six months ended June 30, 2019 are described in more detail below. 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 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 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 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 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 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, the currency translation adjustments component of our other comprehensive income (loss) was misstated in our condensed consolidated statement of comprehensive income (loss) for the six months ended June 30, 2019. The impacts of misstatements related to the translation of the financial position and results of operations of our foreign operations are discussed in restatement reference (e) throughout this note. (f) 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. The impacts of the other miscellaneous adjustments are discussed in restatement reference (f) throughout this note. Description of Restatement Tables The following tables were previously presented in our 2019 Annual Report. See Note 19, Quarterly Financial Data (unaudited), to the consolidated financial statements in our 2019 Annual Report. Below, we have presented reconciliations from our prior periods as previously reported to the restated amounts for each of our condensed consolidated financial statements for the three and six months ended June 30, 2019. The amounts as previously reported were derived from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 filed on July 30, 2019. Baxter International Inc. Condensed Consolidated Statement of Income (in millions, except per share) Three months ended June 30, 2019 As previously reported Restatement impacts Restatement reference As restated Net sales $ 2,840 $ (6) (e) $ 2,834 Cost of sales 1,681 — (c)(e) 1,681 Gross margin 1,159 (6) 1,153 Selling, general and administrative expenses 642 (1) (e) 641 Research and development expenses 166 — 166 Other operating income, net (4) — (4) Operating income 355 (5) 350 Interest expense, net 20 — 20 Other (income) expense, net (28) 32 (a)(b) 4 Income before income taxes 363 (37) 326 Income tax expense 20 (7) (a)(c) 13 Net income $ 343 $ (30) $ 313 Earnings per share Basic $ 0.67 $ (0.06) $ 0.61 Diluted $ 0.66 $ (0.06) $ 0.60 Weighted-average number of shares outstanding Basic 510 — 510 Diluted 519 — 519 (a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in a decrease to other (income) expense, net of $26 million and a decrease to income tax expense of $5 million for the three months ended June 30, 2019. (b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in a decrease to other (income) expense, net of $6 million for the three months ended June 30, 2019. (c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in an increase to cost of sales of $5 million and a decrease to income tax expense of $2 million for the three months ended June 30, 2019. (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 $5 million and selling, general and administrative (SG&A) expense of $1 million for the three months ended June 30, 2019. Baxter International Inc. Condensed Consolidated Statement of Income (in millions, except per share) Six months ended June 30, 2019 As previously reported Restatement impacts Restatement reference As restated Net sales $ 5,472 $ — $ 5,472 Cost of sales 3,233 6 (c)(e) 3,239 Gross margin 2,239 (6) 2,233 Selling, general and administrative expenses 1,242 — 1,242 Research and development expenses 295 — 295 Other operating income, net (37) — (37) Operating income 739 (6) 733 Interest expense, net 38 — 38 Other (income) expense, net (53) 36 (a)(b) (17) Income before income taxes 754 (42) 712 Income tax expense 64 (7) (a)(b)(c) 57 Net income $ 690 $ (35) $ 655 Earnings per share Basic $ 1.35 $ (0.07) $ 1.28 Diluted $ 1.33 $ (0.07) $ 1.26 Weighted-average number of shares outstanding Basic 511 — 511 Diluted 520 — 520 (a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to other (income) expense, net of $31 million and income tax expense of $4 million for the six months ended June 30, 2019. (b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in decreases to other (income) expense, net of $5 million and income tax expense of $1 million for the six months ended June 30, 2019. (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 six months ended June 30, 2019. (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 a decrease to cost of sales of $1 million for the six months ended June 30, 2019. Baxter International Inc. Condensed Consolidated Statement of Comprehensive Income (in millions) Three months ended June 30, 2019 As previously reported Restatement impacts As restated Net income $ 343 $ (30) $ 313 Other comprehensive income (loss), net of tax: Currency translation adjustments (78) 80 2 Pension and other postretirement benefit plans 13 (7) 6 Hedging activities (12) — (12) Total other comprehensive loss, net of tax (77) 73 (4) Comprehensive income $ 266 $ 43 $ 309 The $30 million decrease to net income was driven by the items described above in the condensed consolidated statement of income for the three months ended June 30, 2019 section. The $80 million decrease to currency translation adjustments for the three months ended June 30, 2019 is comprised of a $54 million decrease to correct the foreign exchange rates used to translate the financial position and results of operations of our foreign operations into U.S. dollars and a $26 million decrease from the offsetting balance sheet impact of the adjustments to foreign exchange gains and losses on intra-company receivables and payables. The $7 million decrease to pension and other postretirement benefit plans for the three months ended June 30, 2019 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. Baxter International Inc. Condensed Consolidated Statement of Comprehensive Income (in millions) Six months ended June 30, 2019 As previously reported Restatement impacts As restated Net income $ 690 $ (35) $ 655 Other comprehensive income (loss), net of tax: Currency translation adjustments (48) (47) (95) Pension and other postretirement benefit plans 21 (1) 20 Hedging activities (27) — (27) Total other comprehensive loss, net of tax (54) (48) (102) Comprehensive income $ 636 $ (83) $ 553 The $35 million decrease to net income was driven by the items described above in the condensed consolidated statement of income for the six months ended June 30, 2019 section. The $47 million increase to currency translation adjustments for the six months ended June 30, 2019 is comprised of a $78 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 partially offset by a $31 million decrease from the offsetting balance sheet impact of the adjustments to foreign exchange gains and losses on intra-company receivables and payables. The $1 million decrease to pension and other postretirement benefit plans for the six months ended June 30, 2019 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. Baxter International Inc. Condensed Consolidated Statement of Changes in Equity (in millions) For the Three Months Ended June 30, 2019 Baxter International Inc. stockholders' equity Common stock shares Common stock Common stock shares in treasury Common stock in treasury Additional contributed capital Retained earnings Accumulated other comprehensive income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity As previously reported Balance as of April 1, 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) Changes 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 Restatement impacts Balance as of April 1, 2019 — $ — — $ — $ — $ (556) $ 480 $ (76) $ — $ (76) Net income — — — — — (30) — (30) — (30) Other comprehensive income (loss) — — — — — — 73 73 — 73 Balance as of June 30, 2019 — $ — — $ — $ — $ (586) $ 553 $ (33) $ — $ (33) As restated Balance as of April 1, 2019 683 $ 683 173 $ (10,284) $ 5,839 $ 15,414 $ (4,082) $ 7,570 $ 23 $ 7,593 Net income — — — — — 313 — 313 — 313 Other comprehensive income (loss) — — — — — — (4) (4) — (4) 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) Changes in noncontrolling interests — — — — — — — — 1 1 Balance as of June 30, 2019 683 $ 683 173 $ (10,322) $ 5,906 $ 15,598 $ (4,086) $ 7,779 $ 24 $ 7,803 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 June 30, 2019 sections above. Baxter International Inc. Condensed Consolidated Statement of Changes in Equity (in millions) For the Six Months Ended June 30, 2019 Baxter International Inc. stockholders' equity Common stock shares Common stock Common stock shares in treasury Common stock in treasury Additional contributed capital Retained earnings Accumulated other comprehensive income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity As previously reported 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) — — — Net income — — — — — 690 — 690 — 690 Other comprehensive income (loss) — — — — — — (54) (54) — (54) Purchases of treasury stock — — 10 (743) 46 — — (697) — (697) Stock issued under employee benefit plans and other — — (7) 410 (38) (83) — 289 — 289 Dividends declared on common stock — — — — — (210) — (210) — (210) Changes in noncontrolling interests — — — — — — — — 2 2 Balance as of June 30, 2019 683 $ 683 173 $ (10,322) $ 5,906 $ 16,184 $ (4,639) $ 7,812 $ 24 $ 7,836 Restatement impacts Balance as of January 1, 2019 — $ — — $ — $ — $ (551) $ 601 $ 50 $ — $ 50 Net income — — — — — (35) — (35) — (35) Other comprehensive income (loss) — — — — — — (48) (48) — (48) Balance as of June 30, 2019 — $ — — $ — $ — $ (586) $ 553 $ (33) $ — $ (33) As restated Balance as of January 1, 2019 683 $ 683 170 $ (9,989) $ 5,898 $ 15,075 $ (3,823) $ 7,844 $ 22 $ 7,866 Adoption of new accounting standards — — — — — 161 (161) — — — Net income — — — — — 655 — 655 — 655 Other comprehensive income (loss) — — — — — — (102) (102) — (102) Purchases of treasury stock — — 10 (743) 46 — — (697) — (697) Stock issued under employee benefit plans and other — — (7) 410 (38) (83) — 289 — 289 Dividends declared on common stock — — — — — (210) — (210) — (210) Changes in noncontrolling interests — — — — — — — — 2 2 Balance as of June 30, 2019 683 $ 683 173 $ (10,322) $ 5,906 $ 15,598 $ (4,086) $ 7,779 $ 24 $ 7,803 The adjustments to the January 1, 2019 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, 2019. 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, 2019. 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 six months ended June 30, 2019 sections above. Baxter International Inc. Condensed Consolidated Statement of Cash Flows (in millions) For the Six Months Ended June 30, 2019 As previously reported Restatement impacts Restatement reference As restated Cash flows from operations Net income $ 690 $ (35) $ 655 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 393 (8) (c)(f) 385 Deferred income taxes (55) (8) (c)(f) (63) Stock compensation 57 — 57 Net periodic pension benefit and other postretirement costs 7 — 7 Intangible asset impairment 31 — 31 Other 34 10 (d) 44 Changes in balance sheet items: Accounts receivable, net (60) — (60) Inventories (91) — (91) Accounts payable and accrued liabilities (303) 4 (b) (299) Other (86) — (e)(f) (86) Cash flows from operations - continuing operations 617 (37) 580 Cash flows from operations - discontinued operations (6) — (6) Cash flows from operations 611 (37) 574 Cash flows from investing activities Capital expenditures (352) 14 (c) (338) Acquisitions, net of cash acquired, and investments (111) — (111) Other investing activities, net 1 — 1 Cash flows from investing activities (462) 14 (448) Cash flows from financing activities Issuances of debt 1,661 — 1,661 Cash dividends on common stock (198) — (198) Proceeds from stock issued under employee benefit plans 262 — 262 Purchases of treasury stock (720) — (720) Other financing activities, net (37) — (37) Cash flows from financing activities 968 — 968 Effect of foreign exchange rate changes on cash and cash equivalents (24) 26 (a)(d)(e) 2 Increase (decrease) in cash and cash equivalents 1,093 3 1,096 Cash and cash equivalents at beginning of period 1,832 6 (e) 1,838 Cash and cash equivalents at end of period $ 2,925 $ 9 (e) $ 2,934 The $35 million decrease to net income was driven by the items described above in the condensed consolidated statement of income for the six months ended June 30, 2019 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 $33 million for the six months ended June 30, 2019. (b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in an increase to changes in accounts payable and accrued liabilities of $4 million for the six months ended June 30, 2019. (c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to depreciation and amortization of $7 million, deferred income taxes of $2 million and capital expenditures of $14 million for the six months ended June 30, 2019. (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 $10 million for the six months ended June 30, 2019. (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 $6 million, at the end of the period of $9 million and the effect of foreign exchange rate changes on cash and cash equivalents of $3 million and a decrease to other changes in balance sheet items of $1 million for the six months ended June 30, 2019. (f) Other miscellaneous adjustments—The correction of these misstatements resulted in decreases to depreciation and amortization of $1 million and deferred income taxes of $6 million and an increase to other changes in balance sheet items of $1 million for the six months ended June 30, 2019. |
