RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

3 Months Ended

Mar. 31, 2020

Accounting Changes and Error Corrections [Abstract]

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 months ended March 31, 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 months ended March 31, 2019 was previously reported in our annual report on Form 10-K for the year ended December 31, 2019.

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 $4 million for the three months ended March 31, 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 months ended March 31, 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 months ended March 31, 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 three months ended March 31, 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. 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 are discussed in restatement reference (f) throughout this note.

Description of Restatement Tables

The following tables were previously presented in our Annual Report on Form 10-K for the year ended December 31, 2019. See Note 19, Quarterly Financial Data (unaudited), to the consolidated financial statements in our Annual Report on Form 10-K. 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 months ended March 31, 2019. The amounts as previously reported were derived from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 filed on May 7, 2019.

Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
	Three months ended March 31, 2019
	As previously reported		Restatement impacts		Restatement reference	As restated
Net sales	$	2,632	$	6	(e)	$	2,638
Cost of sales	1,552		6		(c)(e)	1,558
Gross margin	1,080		—			1,080
Selling, general and administrative expenses	600		1		(e)	601
Research and development expenses	129		—			129
Other operating income, net	(33)		—			(33)
Operating income	384		(1)			383
Interest expense, net	18		—			18
Other (income) expense, net	(25)		4		(a)(b)	(21)
Income before income taxes	391		(5)			386
Income tax expense	44		—			44
Net income	$	347	$	(5)		$	342
Earnings per share
Basic	$	0.68	$	(0.01)		$	0.67
Diluted	$	0.66	$	—		$	0.66
Weighted-average number of shares outstanding
Basic	512		—			512
Diluted	522		—			522

(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in a decrease to other (income) expense, net of $5 million for the three months ended March 31, 2019.

(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in an increase to other (income) expense, net of $1 million for the three months ended March 31, 2019.

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in an increase to cost of sales of $2 million for the three months ended March 31, 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 increases to net sales of $6 million, cost of sales of $4 million and selling, general and administrative (SG&A) expense of $1 million for the three months ended March 31, 2019.

Baxter International Inc.
Condensed Consolidated Statement of Comprehensive Income
(in millions)
	Three months ended March 31, 2019
	As previously reported		Restatement impacts		As restated
Net income	$	347	$	(5)	$	342
Other comprehensive (loss) income, net of tax:
Currency translation adjustments	30		(127)		(97)
Pension and other postretirement benefit plans	8		6		14
Hedging activities	(15)		—		(15)
Total other comprehensive loss, net of tax	23		(121)		(98)
Comprehensive income	$	370	$	(126)	$	244

The $5 million decrease to net income was driven by the items described above in the condensed consolidated statement of income for the three months ended March 31, 2019 section.

The $127 million decrease to currency translation adjustments for the three months ended March 31, 2019 is comprised of a $132 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 partially offset by a $5 million increase from the offsetting balance sheet impact of the adjustments to foreign exchange gains and losses on intra-company receivables and payables.

The $6 million increase to pension and other postretirement benefit plans for the three months ended March 31, 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 March 31, 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	—	—		—	—		—		347		—		347		—		347
Other comprehensive income (loss)	—	—		—	—		—		—		23		23		—		23
Purchases of treasury stock	—	—		8	(586)		—		—		—		(586)		—		(586)
Stock issued under employee benefit plans and other	—	—		(5)	291		(59)		(66)		—		166		—		166
Dividends declared on common stock	—	—		—	—		—		(98)		—		(98)		—		(98)
Changes 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
Restatement impacts
Balance as of January 1, 2019	—	$	—	—	$	—	$	—	$	(551)	$	601	$	50	$	—	$	50
Net income	—	—		—	—		—		(5)		—		(5)		—		(5)
Other comprehensive income (loss)	—	—		—	—		—		—		(121)		(121)		—		(121)
Balance as of March 31, 2019	—	$	—	—	$	—	$	—	$	(556)	$	480	$	(76)	$	—	$	(76)
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	—	—		—	—		—		342		—		342		—		342
Other comprehensive income (loss)	—	—		—	—		—		—		(98)		(98)		—		(98)
Purchases of treasury stock	—	—		8	(586)		—		—		—		(586)		—		(586)
Stock issued under employee benefit plans and other	—	—		(5)	291		(59)		(66)		—		166		—		166
Dividends declared on common stock	—	—		—	—		—		(98)		—		(98)		—		(98)
Changes in noncontrolling interests	—	—		—	—		—		—		—		—		1		1
Balance as of March 31, 2019	683	$	683	173	$	(10,284)	$	5,839	$	15,414	$	(4,082)	$	7,570	$	23	$	7,593

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 three months ended March 31, 2019 sections above.

Baxter International Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
	For the Three Months Ended March 31, 2019
	As previously reported		Restatement impacts		Restatement reference	As restated
Cash flows from operations
Net income	$	347	$	(5)		$	342
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	195		(3)		(c)	192
Deferred income taxes	(6)		—			(6)
Stock compensation	22		—			22
Net periodic pension benefit and other postretirement costs	3		—			3
Other	19		(5)		(d)	14
Changes in balance sheet items:
Accounts receivable, net	32		—			32
Inventories	(82)		—			(82)
Accounts payable and accrued liabilities	(333)		(2)		(b)(f)	(335)
Other	(49)		1		(b)(e)(f)	(48)
Cash flows from operations - continuing operations	148		(14)			134
Cash flows from operations - discontinued operations	(6)		—			(6)
Cash flows from operations	142		(14)			128
Cash flows from investing activities
Capital expenditures	(198)		5		(c)	(193)
Acquisitions and investments, net of cash acquired	(109)		—			(109)
Other investing activities, net	1		—			1
Cash flows from investing activities	(306)		5			(301)
Cash flows from financing activities
Net increases in debt obligations with original maturities of three months or less	795		—			795
Cash dividends on common stock	(101)		—			(101)
Proceeds from stock issued under employee benefit plans	173		—			173
Purchases of treasury stock	(597)		—			(597)
Other financing activities, net	(32)		—			(32)
Cash flows from financing activities	238		—			238
Effect of foreign exchange rate changes on cash and cash equivalents	2		(3)		(a)(d)(e)	(1)
Increase (decrease) in cash and cash equivalents	76		(12)			64
Cash and cash equivalents at beginning of period	1,832		6		(e)	1,838
Cash and cash equivalents at end of period	$	1,908	$	(6)	(e)	$	1,902

The $5 million decrease to net income was driven by the items described above in the condensed consolidated statement of income for the three months ended March 31, 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 $4 million for the three months ended March 31, 2019.

(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 and an increase in other changes in balance sheet items of $1 million for the three months ended March 31, 2019.

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to depreciation and amortization of $3 million and capital expenditures of $5 million for the three months ended March 31, 2019.

(d) Classification of Foreign Currency Gains and Losses in our Consolidated Statements of Cash Flows—The corrections of these misstatements resulted in an increase to the effect of foreign exchange rate changes on cash and cash equivalents and a decrease to other adjustments to reconcile net income to net cash from operating activities of $5 million for the three months ended March 31, 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 and decreases to other changes in balance sheet items of $1 million, cash and cash equivalents at the end of the period of $6 million and the effect of foreign exchange rate changes on cash and cash equivalents of $12 million for the three months ended March 31, 2019.

(f) Other miscellaneous adjustments—The correction of these misstatements resulted in an increase to other changes in balance sheet items of $1 million and a decrease in changes in accounts payable and accrued liabilities of $1 million for the three months ended March 31, 2019.