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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

☑

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

For the fiscal year ended December 31, 2017

2019

OR

☐

☐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

bax-20191231_g1.jpg
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)

(Zip Code)

Registrant’s telephone number, including area code 224.948.2000

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

1.3% Senior0.4% Global Notes due 2025

2024

BAX 24

New York Stock Exchange

1.3% Global Notes due 2025BAX 25New York Stock Exchange
1.3% Global Notes due 2029BAX 29New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ☑☐    No  ☐

☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ☐    No  ☑

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  ☑     No  ☐

Indicate by check mark whether registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)     Yes  ☑      No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☑






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

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

(Do not check if a smaller reporting company)

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. ☐

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 201728, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter), based on the per share closing sale price of $60.54$81.90 on that date and the assumption for the purpose of this computation only that all of the registrant’s directors and executive officers are affiliates, was approximately $33$42 billion. The number of shares of the registrant’s common stock, $1.00 par value, outstanding as of January 31, 2018February 29, 2020 was 540,138,815.

507,263,731.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive 20182020 proxy statement for use in connection with its Annual Meeting of Stockholders expected to be held on May 8, 20185, 2020 are incorporated by reference into Part III of this report.




TABLE OF CONTENTS

Page

Number

Item 1.

Business

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Number

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177

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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 Annual Report on Form 10-K for the year ended December 31, 2019 includes the following restated financial information:
•audited consolidated financial statements as of December 31, 2018 and for the years ended December 31, 2018 and 2017;
•unaudited interim financial information as of and for the quarterly periods ended June 30, 2019, March 31, 2019, June 30, 2018, and March 31, 2018, for the quarterly period ended December 31, 2018, for the six months ended June 30, 2019 and 2018, and as of September 30, 2018; and
•unaudited selected financial data as of December 31, 2017 and as of and for the years ended December 31, 2016 and 2015. Selected financial data as of December 31, 2018 and for the years ended December 31, 2018 and 2017 is derived from our audited consolidated financial statements included in this Annual Report on Form 10-K.
Refer to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, filed on March 17, 2020, for our unaudited restated interim financial statements for the three and nine months ended September 30, 2018 and related information.
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 2017 has been recorded as a reduction to our opening retained earnings in the 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 Consolidated Financial Statements
As described above, this Annual Report on Form 10-K includes audited restated financial statements as of December 31, 2018 and for the years ended December 31, 2018 and 2017. 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 Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information.
Unaudited interim financial information as of and for the quarterly periods ended June 30, 2019, March 31, 2019, June 30, 2018, and March 31, 2018, for the quarterly period ended December 31, 2018, for the six months ended June 30, 2019 and 2018, and as of September 30, 2018 has also been restated. See Note 19, Quarterly Financial Data (Unaudited), in Item 8, Financial Statements and Supplementary Data, for additional information.
1

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

Six months ended June 30, 2019Year ended December 31, 2018Year ended December 31, 2017
Income from continuing operations$(35) $(78) $(115) 
Diluted earnings per share from continuing operations$(0.07) $(0.15) $(0.20) 
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 December 31, 2019. See Item 9A, Controls and Procedures, for additional information related to the material weakness in internal control over financial reporting and our related remediation activities.

PART I

Item 1.

Business.

Item 1. Business.

Company Overview

Baxter International Inc., through its subsidiaries, provides a broad portfolio of essential healthcare products, across its portfolio, including acute and chronic dialysis therapies; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products.  In 2017, Baxter added capabilities in the production of essential generic injectable medicines with the acquisition of Claris Injectables Limited (Claris). The company’sOur global footprint and the critical nature of itsour products and services play a key role in expanding access to healthcare in emerging and developed countries. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and by patients at home under physician supervision. As of December 31, 2017, Baxter2019, we manufactured products in over 20 countries and sold them in over 100 countries.

Baxter International Inc. was incorporated under Delaware law in 1931. As used in this report, “Baxter International” means Baxter International Inc. and “Baxter,” the “company”“we", "our” or the “Company”"us" means Baxter International and its consolidated subsidiaries (after giving effect to the separation and distribution of Baxalta Incorporated (Baxalta), as further described below), unless the context otherwise requires.

Business Segments and Products

In 2017, Baxter announced a change in its commercial structure to improve performance, optimize costs, increase speed in the decision-making process and drive improved accountability across the company. As a result, the company now reports its financial performance

We manage our business based on its newthree geographic segments: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific).

Each of the company’sour segments provideprovides a broad portfolio of essential healthcare products, across its portfolio, 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 financial information about Baxter’sour segments, (which includes recast information for earlier periods), see Note 1718 in Item 8 of this Annual Report on Form 10-K.

Sales and Distribution

The company has its

We have our own direct sales force and also makesmake sales to and through independent distributors, drug wholesalers acting as sales agents and specialty pharmacy or other alternate site providers. In the United States, third parties, such as Cardinal Health, Inc., warehouse and ship a significant portion of the company’sour products through their distribution centers. These centers are generally stocked with adequate inventories to facilitate prompt customer service. Sales and distribution methods include frequent contact by sales and customer service representatives, automated communications via various electronic purchasing systems, circulation of catalogs and merchandising bulletins, direct-mail campaigns, trade publication presence and advertising.

2

Sales are made and products are distributed on a direct basis or through independent distributors or sales agents in more than 100 countries as of December 31, 2017.

2019.

International Operations

The majority of the company’sour revenues are generated outside of the United States and geographic expansion remains a component of the company’sour strategy. Baxter’s internationalOur presence includes operations in Europe, (including Eastern and Central Europe), the Middle East, Africa, Asia-Pacific, Latin America and Canada. The company isWe are subject to certain risks inherent in conducting business outside the United States. For more information on these risks, see the information under the captions “Risks Related to Baxter’s Business —We are subject to risks associated with doing business globally” and “— Changes in foreign currency exchange rates and interest rates could have a material adverse effect on our operating results and liquidity” in Item 1A of this Annual Report on Form 10-K.

For financial information about foreign and domestic operations and geographic information, see Note 1718 in Item 8 of this Annual Report on Form 10-K. For more information regarding foreign currency exchange risk, refer to the discussion under the caption entitled “Financial Instrument Market Risk” in Item 7 of this Annual Report on Form 10-K.


Contractual Arrangements

Substantial portions of the company’s

Our products are sold through contracts with customers, both within and outside the United States. Some of these contracts have terms of more than one year and place limits on the company’sour ability to increase prices. In the case of hospitals, governments and other facilities, these contracts may specify minimum quantities of a particular product or categories of products to be purchased by the customer.

In keeping with the increased emphasis on cost-effectiveness in healthcare delivery, many hospitals and other customers of medical products in the United States have joined group purchasing organizations (GPOs), or formed integrated delivery networks (IDNs), to enhance purchasing power. GPOs and IDNs negotiate pricing arrangements with manufacturers and distributors and the negotiated prices are made available to members. Baxter hasWe have purchasing agreements with several of the major GPOs in the United States. GPOs may have agreements with more than one supplier for certain products. Accordingly, in these cases, Baxter faceswe face competition from other suppliers even where a customer is a member of a GPO under contract with Baxter.us. Purchasing power is similarly consolidated in many other countries. For example, public contracting authorities act as the purchasing entities for the hospitals and other customers of medical products in their region and many hospitals and other customers have joined joint procurement entities and buying consortia. The result is that demand for healthcare products is increasingly concentrated across the company’sour markets globally.

Raw Materials

Raw materials essential to Baxter’sour business are purchased from numerous suppliers worldwide in the ordinary course of business. Although most of these materials are generally available, Baxterwe at times may experience shortages of supply. In an effort to manage risk associated with raw materials supply, Baxter workswe work closely with itsour suppliers to help ensure availability and continuity of supply while maintaining high quality and reliability. The companyWe also seeksseek to develop new and alternative sources of supply where beneficial to itsour overall raw materials procurement strategy.

The company also utilizes long-term supply contracts with some suppliers to help maintain continuity of supply and manage the risk of price increases. Baxter is

We are not always able to recover cost increases for raw materials through customer pricing due to contractual limits and market forces.

Accordingly, we utilize long-term supply contracts with some suppliers to help maintain continuity of supply and manage the risk of price increases.

In connection with the separation and distribution of Baxalta, Baxterwe entered into a long-term manufacturing and supply agreement with Baxalta. Baxalta manufactures and supplies Baxterus with ARTISS, TISSEEL, FLOSEAL and stand-alone thrombin, on a cost-plus basis, under thethat manufacturing and supply agreement, on a cost-plus basis.

agreement.

Competition and Healthcare Cost Containment

Baxter’s

Our businesses benefit from a number of competitive advantages, including the breadth and depth of theirour product offerings, as well asour strong relationships with customers, including hospitals and clinics, group purchasing organizations,GPOs, physicians, and patients, many whoof whom self-administer the home-based therapies supplied by Baxter. Baxter as a whole benefitsthat we supply. We also benefit from efficiencies and cost advantages resulting from shared manufacturing facilities and the technological advantages of itsour products.

3

Although no single company competes with Baxterus in all of itsour businesses, Baxter faceswe face substantial competition in each of itsour segments from international and domestic healthcare and pharmaceutical companies and providers of all sizes, and these competitors often differ across our businesses. In addition, global and regional competitors continue to expand their manufacturing capacity and sales and marketing channels. Competition is primarily focused on cost-effectiveness, price, service, product performance, and technological innovation. There has been increasing consolidation in the company’sour customer base and by itsour competitors, which continues to result in pricing and market pressures.

Global efforts toward healthcare cost containment continue to exert pressure on product pricing. Governments around the world use various mechanisms to control healthcare expenditures, such as price controls, the formation of public contracting authorities, product formularies (lists of recommended or approved products), and competitive tenders which require the submission of a bid to sell products. Sales of Baxter’sour products are dependent, in part, on the availability of reimbursement by government agencies and healthcare programs, as well as insurance companies and other private payers. In the United States, the federal and many state governments have adopted or proposed initiatives relating to Medicaid and other health programs that may limit reimbursement or increase rebates that Baxterwe and other providers are required to pay to the state. In addition to government regulation, managed care organizations in the United States, which include medical insurance companies, medical plan administrators, health-maintenance organizations, hospital and physician alliances and pharmacy benefit managers, continue to put pressure on the price and usage of healthcare products. Managed care organizations seek to contain healthcare expenditures, and their purchasing strength has been increasing due to their consolidation into fewer, larger organizations and a growing number of enrolled patients. Baxter facesWe face similar issues outside of the United States. In Europe and Latin America, for example, the government provides healthcare at low cost to


patients, and controls its expenditures by purchasing products through public tenders, collective purchasing, regulating prices, setting reference prices in public tenders or limiting reimbursement or patient access to certain products.

Intellectual Property

Patents and other proprietary rights are essential to Baxter’sour business. Baxter reliesWe rely on patents, trademarks, copyrights, trade secrets, know-how and confidentiality agreements to develop, maintain and strengthen itsour competitive position. Baxter ownsWe own a number of patents and trademarks throughout the world and hashave entered into license arrangements relating to various third-party patents and technologies. Products manufactured by Baxterus are sold primarily under itsour own trademarks and trade names. Some products distributed by the companyus are sold under the company’sour trade names, while others are sold under trade names owned by itsour suppliers or partners. Trade secret protection of unpatented confidential and proprietary information is also important to Baxter. The company maintainsus. We maintain certain details about itsour processes, products and technology as trade secrets and generally requiresrequire employees, consultants, and business partners to enter into confidentiality agreements. These agreements may be breached and Baxterwe may not have adequate remedies for any breach. In addition, Baxter’sour trade secrets may otherwise become known or be independently discovered by competitors. To the extent that Baxter’sour employees, consultants, and business partners use intellectual property owned by others in their work for the company,us, disputes may arise as to the rights in related or resulting know-how and inventions.

Baxter’s

Our policy is to protect itsour products and technology through patents and trademarks on a worldwide basis. This protection is sought in a manner that balances the cost of such protection against obtaining the greatest value for the company. Baxterus. We also recognizesrecognize the need to promote the enforcement of itsour patents and trademarks and takestake commercially reasonable steps to enforce itsour patents and trademarks around the world against potential infringers, including judicial or administrative action where appropriate.

Baxter operates

We operate in an industry susceptible to significant patent litigation. At any given time, the company iswe are involved as either a plaintiff or defendant in a number of patent infringement and other intellectual property-related actions. Such litigation can result in significant royalty or other payments or result in injunctions that can prevent the sale of products. For more information on patent and other litigation, see Note 169 in Item 8 of this Annual Report on Form 10-K.

Research and Development

Baxter’s

Our investment in research and development (R&D), consistent with the company’sour portfolio optimization and capital allocation strategies, helps fuel itsour future growth and itsour ability to remain competitive in each of itsour product categories. Accordingly, Baxter continueswe continue to focus itsour investment on select R&D programs to enhance future growth through clinical differentiation. Expenditures for Baxter’sour R&D activities were $617$595 million in 2017, $6472019, $654 million in 2016,2018, and $603$615 million in 2015.2017. These expenditures include costs associated with R&D activities performed at the company’sour R&D centers located
4

around the world, which include facilities in Belgium, Sweden, India, Italy, Germany, China, Japan and the United States, as well as in-licensing, milestone and reimbursement payments made to partners for R&D work performed at non-Baxter locations.

For more information on the company’sour R&D activities, refer to the discussion under the caption entitled “Strategic Objectives” in Item 7 of this Annual Report on Form 10-K.

Quality Management

Baxter’s

Our continued success depends upon the quality of itsour products. Quality management plays an essential role in determining and meeting customer requirements, preventing defects, facilitating continuous improvement of the company’sour processes, products and services, and assuring the safety and efficacy of the company’sour products. Baxter’sOur quality system enables the design, development, manufacturing, packaging, sterilization, handling, distribution and labeling of the company’sour products to ensure that they conform to customer requirements. In order to continually improve the effectiveness and efficiency of theour quality system, various measurements,measurement, monitoring and analysis methods, such as management reviews and internal, external and vendor audits, are employed at local and central levels.

Each product that Baxter marketswe market is required to meet specific quality standards, both in packaging and in product integrity and quality. If any of those is determined to be compromised at any time, Baxter endeavorswe endeavor to take corrective and preventive actions designed to ensure compliance with regulatory requirements and to meet customer expectations. For more information on corrective actions taken by Baxter,us, refer to the discussion under the caption entitled “Certain Regulatory Matters” in Item 7 of this Annual Report on Form ‑10-K.

10-K.

Government Regulation

The

Our operations of Baxter and many of the products manufactured or sold by the companyus are subject to extensive regulation by numerous government agencies, both within and outside the United States. The Food and Drug Administration (FDA) in the United States, the European Medicines Agency (EMA) in Europe, the China Food and Drug Administration (CFDA) in China and other government agencies, inside and outside of the United States, administer requirements covering the testing, safety, effectiveness, manufacturing, labeling, promotion and advertising, distribution and post-market surveillance of Baxter’sour products. The companyWe must obtain specific approval from FDA and non-U.S. regulatory authorities before itwe can market and sell most of itsour products in a particular country. Even after the company obtainswe obtain regulatory approval to market a product, the product and the company’sour manufacturing processes and quality systems are subject to continued review by FDA and other regulatory authorities globally.globally, including additional 510(k) and other regulatory submissions, and approvals or the time needed to secure approvals are not certain. State agencies in the United States also regulate theour facilities, operations, employees, products and services of the company within their respective states. The company and itsWe, along with our facilities, are subject to periodic inspections and possible administrative and legal actions by FDA and other regulatory agencies inside and outside the United States. Such actions may include warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses. As situations require, the company takeswe take steps to ensure safety and efficacy of itsour products, such as removing products found not to meet applicable requirements from the market and improving the effectiveness of quality systems. For more information on compliance actions taken by the company,us, refer to the discussion under the caption entitled “Certain Regulatory Matters” in Item 7 of this Annual Report on Form 10-K.

The company is

We are also subject to various laws inside and outside the United States concerning itsour relationships with healthcare professionals and government officials, price reporting and regulation, the promotion, sales and marketing of itsour products and services, the importation and exportation of products, the operation of itsour facilities and distribution of products. In the United States, the company iswe are subject to the oversight of FDA, Office of the Inspector General within the Department of Health and Human Services (OIG), the Center for Medicare/Medicaid Services (CMS), the Department of Justice (DOJ), Environmental Protection Agency, Department of Defense and Customs and Border Protection in addition to others. The company suppliesWe supply products and services to healthcare providers that are reimbursed by federally funded programs such as Medicare. As a result, the company’sour activities are subject to regulation by CMS and enforcement by OIG and DOJ. In each jurisdiction outside the United States, the company’sour activities are subject to regulation by government agencies including the EMA in Europe, CFDA in China and other agencies in other jurisdictions. Many of the agencies enforcing these laws have increased their enforcement activities with respect to healthcare companies in recent years. These actions appear to be part of a general trend toward increased enforcement activity globally.

Environmental

5

Our operations involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. Our environmental policies of the company require compliance with all applicable environmental regulations and contemplate, among other things, appropriate capital expenditures for environmental protection.

Separation of Baxalta

On July 1, 2015, Baxterwe completed the distribution of approximately 80.5% of the outstanding common stock of Baxalta to Baxter shareholdersour stockholders (the Distribution). The Distribution was made to Baxter’s shareholdersour stockholders of record as of the close of business on June 17, 2015 (the Record Date), who received one share of Baxalta common stock for each Baxter common shareof our shares held as of the Record Date. As a result of the distribution, Baxalta became an independent public company.

In 2016, Baxterwe disposed of itsour remaining 19.5% interest in Baxalta through a series of transactions, including debt-for-equity exchanges, an equity-for-equity exchange and a contribution to itsour U.S. pension plan. As a result of these transactions, the companywe extinguished approximately $3.65 billion in companyof our indebtedness, repurchased 11,526,638 Baxterof our shares and contributed 17,145,570 Baxalta shares to itsour U.S. pension plan. On June 3, 2016, Baxalta became a wholly-owned subsidiary of Shire plc (Shire).

The local separation of Baxalta’s business in certain countries outside the United States did not occur prior to the distribution date due to regulatory requirements, the need to obtain consents from local governmental authorities and other business reasons. Separation of the remaining three countries has occurred as of December 31, 2017.

In January 2019, Takeda Pharmaceutical Company Limited (Takeda) acquired Shire.

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

Refer to Note 23 in Item 8 of this Annual Report on Form 10-K for additional information regarding the separation of Baxalta.

Employees

As of December 31, 2017,2019, Baxter employed approximately 47,00050,000 people.


Available Information

Baxter makes

We make available free of charge on itsour website at www.baxter.com itsour Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), as soon as reasonably practicable after electronically filing or furnishing such material towith the Securities and Exchange Commission. These reports are also available free of charge via EDGAR through the Securities and Exchange Commission website (www.sec.gov).  In addition, Baxter’sour Corporate Governance Guidelines, Code of Conduct, and the charters for the committees of Baxter’sour Board of Directors are available on Baxter’sour website at www.baxter.com under “About Baxter—About us — Governance.” All the foregoing materials will be made available to stockholders in print upon request by writing to: Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015. Information contained on Baxter’sour website shall not be deemed incorporated into, or to be a part of, this Annual Report on Form 10-K.

Item 1A.Risk Factors.

In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors. If any of the events described below occurs, our business, financial condition, results of operations, future growth prospects and stock price could suffer.

We may not achieve our long-term financial improvement goals.

We have been implementing plans to enhance profitability and returns for our stockholders. These plans include the achievement of certain financial goals (including improved operating margin and earnings per share) in 2018 and beyond. While we are continuing to refine these goals, our plan contemplates significant margin expansion over our long-range plan, which runs through 2020. We have identified certain key strategies to help achieve these targets. These strategies include optimizing our core product portfolio globally, driving operational excellence through the realignment of our cost structure and various restructuring activities and maximizing the value derived from the allocation of our capital.

As part of these strategies, we continue to evaluate the performance of all of our businesses and may sell or acquire a business or product line or exit a particular market. We are also evaluating our corporate and commercial infrastructure in the interest of streamlining costs while maintaining our commitment to quality and safety. Future divestitures may result in significant write-offs, including those related to goodwill and other intangible assets. Future acquisitions may fail to achieve the desired financial results (including return on investment) and synergies and may not provide the desired market access. The restructuring of our operations may not generate targeted savings or may cause unexpected disruptions to our business. As a result, we may not achieve our targeted financial results, which could have a material adverse effect on our business, financial condition or results of operations.

If we are unable to successfully introduce new products or fail to keep pace with advances in technology, our business, financial condition and results of operations could be adversely affected.


We need to successfully introduce new products to achieve our strategic business objectives. Product development requires substantial investment and there is inherent risk in the R&D process. A successful product development process depends on many factors, including our ability to properly anticipate and satisfy customer needs, adapt to new technologies, obtain regulatory approvals on a timely basis, demonstrate satisfactory clinical results, manufacture products in an economical and timely manner and differentiate our products from those of our competitors. If we cannot successfully introduce new products or adapt to changing technologies, our products may become obsolete and our revenue and profitability could suffer.


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Issues with product supply or quality could have an adverse effect uponon our business, subject us to regulatory actions, or cause a loss of customer confidence in us or our products, among other negative consequences.


Our success depends upon the availability and quality of our products. The pharmaceutical and medical products industry isindustries are competitive and subject to complex market dynamics and varying demand levels. These levels vary in response to macro-economic conditions, regulatory requirements (including the availability of private or public reimbursement), seasonality, natural disasters, epidemics and other matters. Additionally, the development of new or enhanced products involves a lengthy regulatory process and is capital intensive. As a result, our ability to match our production levels and capacity to market demand is imprecise and may result in a failure to meet market demand or satisfy customer requirements for our products or, alternatively, an oversupply of inventory. Failure to meet market demand may result in customers transitioning to available competitive products, loss of market share, negative publicity, reputational damage, loss of customer confidence or other negative consequences (including a decline in stock price). In the event of an oversupply, we may be forced to lower our prices, or record asset impairment charges or take other actionactions, which may adversely affect our business, financial condition and results of operations.


Additionally, quality management plays an essential role in determining and meeting customer requirements, preventing defects, improving the company’sour products and services and assuring the safety and efficacy of our products. Our future success depends on our ability to maintain and continuously improve our quality management program. While we have a quality system that covers the


lifecycle of our products, quality and safety issues have and may in the future occur with respect to any of our products. A quality or safety issue may result in adverse inspection reports, voluntary or official action indicated, warning letters, import bans, product recalls (either voluntary or required by the FDA or similar governmental authorities in other countries) or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, costly litigation, refusal of a government to grant approvals and licenses, restrictions on operations or withdrawal of existing approvals and licenses. An inability to address a quality or safety issue in an effective and timely manner may also cause negative publicity, a loss of customer confidence in us or our current or future products, which may result in the loss of sales and difficulty in successfully launching new products. Additionally, Baxter has made and continues to make significant investments in assets, including inventory and property, plant and equipment, which relate to potential new products or modifications to existing products. Product quality or safety issues may restrict the companyus from being able to realize the expected returns from these investments, potentially resulting in asset impairments in the future.


Unaffiliated third party suppliers provide a number of goods and services to our R&D, clinical and manufacturing organizations. Third party suppliers are required to comply with our quality standards. Failure of a third party supplier to provide compliant raw materials or supplies could result in delays, service interruptions or other quality related issues that may negatively impact our business results.


For more information on regulatory matters currently affecting us, including quality-related matters, refer to the discussion under the caption entitled “Certain Regulatory Matters” in Item 7 of this Annual Report on Form 10-K.


If we are unable to obtain sufficient components or raw materials on a timely basis or for a cost-effective price or if we experience other manufacturing, sterilization or supply difficulties, our business and results of operations may be adversely affected.


The manufacture of our products requires, among other things, the timely supply or delivery of sufficient amounts of quality components and materials. We manufacture our products in approximately 50 manufacturing facilities around the world. We acquire our components, materials and other requirements for manufacturing from many suppliers and vendors in various countries, including sometimes from ourselves for self-supplied requirements. We endeavor, either alone or working closely with our suppliers, to ensure the continuity of our inputs and supplies but we cannot guarantee these efforts will always be successful. Further, while efforts are made to diversify certain of our sources of components and materials, in certain instances there is only a sole source or supplier with no alternatives yet identified. For most of our components and materials for which a single source or supplier is used, alternative sources or suppliers may exist, but we have made a strategic determination to use the single source or supplier. Although we do carry strategic inventory and maintain insurance to help mitigate the potential risk related to any related supply disruption, there can be no assurance that such measures will be sufficient or effective. A reduction or interruption in supply and an inability to quickly develop acceptable alternative sources for such supply, could adversely affect our ability to manufacture and distribute our products in a timely or cost-effective manner, and our ability to make product sales. Additionally, volatility in our costs of energy, transportation/freight, components, raw materials and other supply, manufacturing and distribution costs could adversely affect our results of operations. Climate change (including laws or regulations passed in response thereto) could increase our costs, in particular our
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costs of supply, energy and transportation/freight. Material or sustained increases in the price of oil could have an adverse impact on the cost of many of the plastic materials we use to make and package our products, as well as our transportation/freight costs. These outcomes may in turn result in customers transitioning to available competitive products, loss of market share, negative publicity, reputational damage, loss of customer confidence or other negative consequences (including a decline in stock price).


Many of our products are difficult to manufacture. This is due to the complex nature of manufacturing pharmaceuticals, including biologics, and devices, as well as the strict regulatory regime governing our manufacturing operations. Variations in the manufacturing process may result in production failures which could lead to launch delays, product shortage, unanticipated costs, lost revenues and damage to our reputation. A failure to identify and address manufacturing problems prior to the release of products to our customers may also result in a quality or safety issue of the type discussed above.


Some of our products are manufactured at a single manufacturing facility or stored at a single storage site. Loss or damage to a manufacturing facility or storage site due to a natural disaster, such as we experienced as a result of Hurricane Maria, or otherwise could adversely affect our ability to manufacture sufficient quantities of key products or otherwise deliver products to meet customer demand or contractual requirements which may result in a loss of revenue and other adverse business consequences (including those identified in the paragraphparagraphs above). Our manufacturing capacity may also be adversely affected by public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19), as a result of which we may be unable to obtain sufficient components or raw materials on a timely basis or at a cost-effective price. Although we have not experienced significant manufacturing or supply difficulties as a result of COVID-19, the degree and duration of disruptions to business activity are unknown at this time. In addition, several of our manufacturing facilities are leased and we may not be able to renew leases on favorable terms or at all. Because of the time required to approve and license a manufacturing facility, a third party manufacturer may not be available on a timely basis (if at all) to replace production capacity in the event we lose manufacturing capacity or products are otherwise unavailableunavailable. Any of the foregoing could adversely affect our business, financial condition and results of operations.

Some of our products require sterilization prior to sale or distribution, and we utilize both Baxter-owned and third-party facilities for this process. If an event occurs that results in damage to or closure, whether temporarily or permanent, of one or more of these facilities, we may be unable to manufacture or sterilize the relevant products at prior levels or at all, and a third party may not be available on a timely basis (if at all) to replace sterilization capacity. For example, in February 2020, certain air emission control technology used to reduce ethylene oxide emissions from sterilization equipment at our facility in Mountain Home, Arkansas, was tested and determined not to operate in accordance with applicable emission limitations in our state-issued air permit. Although we received a temporary variance and have recommenced operations, these events or other disruptions of manufacturing or sterilization processes that we or third parties may experience, whether due to natural disaster,lack of capacity, environmental, regulatory action or otherwise.

compliance issues or otherwise, could result in product shortage, unanticipated costs, loss of revenues, litigation and damage to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations.


We are increasingly dependent on information technology systems and subject to privacy and security laws, and our systems and infrastructure face certain risks, including from cyber security breaches and data leakage.


We increasingly rely upon technology systems and infrastructure, including support provided by our partners and third parties, to support our business, our products and our customers. For example, we routinely rely on our technology systems and infrastructure to aid us in the collection, use, storage and transfer, disclosure and other processing of voluminous amounts of data (includingincluding confidential, business, financial, personal, patient and other sensitive information)information (collectively, Confidential Information). We also rely on systems for manufacturing, customer orders, shipping, regulatory compliance and various other matters. Certain of our products and systems collect data regarding patients and their therapy and some are internet enabled or connect to our systems for maintenance and other purposes.


Additionally, the legal and regulatory environment surrounding information security and privacy is increasingly demanding, with the imposition of new and changing requirements across businesses. We are required to comply with increasingly complex and changing legal and regulatory requirements that govern the collection, use, storage, security, transfer, disclosure and other processing of personal data in the United States and in other countries, including, but not limited to, The Health Insurance Portability and Accountability Act, as amended, The Health Information Technology for Economic and Clinical Health Act (HIPAA), the California Consumer Privacy Act (CCPA), and the European Union’s General Data Protection Regulation (GDPR). The GDPR imposes stringent European Union data protection requirements and provides for significant penalties for noncompliance. HIPAA also imposes
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stringent data privacy and security requirements and the regulatory authority has imposed significant fines and penalties on organizations found to be out of compliance. CCPA provides consumers with a private right of action against companies who have a security breach due to lack of appropriate security measures.We or our third-party providers and business partners may also be subjected to audits or investigations by one or more domestic or foreign government agencies relating to compliance with information security and privacy laws and regulations, and noncompliance with the laws and regulations could result in substantial and material fines or class action litigation. The increasing use and evolution of technology, including cloud-based computing, and reliance on third parties creates additional opportunities for the unintentional, intentional and/or unauthorized exposure, dissemination and/or destruction of confidential informationConfidential Information stored in our technologydevices, systems, servers, infrastructure and products. Our products devices, computer systems, servers and other technology systems (and those of third parties that we use) are vulnerable to breakdown, interruption, cyber and other security attacks, system malfunction, unauthorized access and other events.(collectively, Technology). Security threats, including cyber and other attacks, are becoming increasingly sophisticated, frequent, and adaptive. Our Technology (and that of third parties that we use) is vulnerable to breakdown, interruption, cyber and other security attacks, system malfunction, unauthorized access, inadvertent exposure or disclosure of information, theft and other events. Any such vulnerability could compromise our technology systems and infrastructureTechnology and could expose personal and/or proprietary information (including sensitive personal information)Confidential Information to unauthorized third parties and/or cause permanent loss of such data. In addition to loss of data,Confidential Information, unauthorized access to or interference with our products that utilize cloud-based computing or otherwise send and receive dataTechnology may cause product functionality issues that may result in risk to patient safety, field actions and/or product recalls. WhileWe have, like other large multi-national companies, experienced cyber incidents in the past and may experience them in the future. Although the prior incidents have not had a material effect on our business and we have invested and continue to invest in the protection of data and information technology,Technology, there can be no assurance that our efforts will prevent breakdowns, attacks, breaches in our systemsTechnology, cyber incidents or other incidents or ensure compliance with all applicable security and privacy laws, regulations and standards.standards, including with respect to third party service providers that host or process Confidential Information on our behalf. Such breakdownsincidents could result in unauthorized access to patient data and other Confidential Information and could pose a risk to patient safety. Any failure to protect against such incidents can lead to substantial and material regulatory fines and penalties, business disruption, reputational harm, financial loss, litigation as well as other damages. Misappropriation or other loss of our intellectual property from any of the foregoing may have an adverse effect on our competitive position and may cause us to incur substantial litigation costs. We could also suffer strained relationships with customers and business partners, increased costs (for security measures, remediation or otherwise), litigation (including class actions and stockholder derivative actions) or other negative consequences (including a decline in stock price) from breaches, cyber and other security attacks, industrial espionage, ransomware, email or phishing scams, malware or other cyber incidents, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers or other business partners.  While we have invested in the protection of data and information technology and in related training, there can be no assurance that our efforts will prevent significant breakdowns, attacks, breaches in our systems or other cyber incidents or ensure compliance with all applicable security and privacy laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information, including protected health information (PHI), on our behalf.

Additionally, the legal and regulatory environment surrounding information security and privacy is increasingly demanding, with the imposition of new and changing requirements across businesses. We are required to comply with increasingly complex and changing legal and regulatory requirements that govern the collection, use, storage, security, transfer, disclosure and other processing of personal data, including The Health Insurance Portability and Accountability Act, The Health Information Technology for Economic and Clinical Health Act and the European Union’s General Data Protection Regulation (GDPR).  In May 2018, the GDPR will supersede current European Union data protection legislation, impose more stringent European Union data protection requirements, and provide for greater penalties for noncompliance.  We or our third-party providers and business partners may also be subjected to audits or investigations by one or more domestic or foreign government agencies relating to compliance with information security and privacy laws and regulations.


In addition, significant implementation issues may arise as we continue to consolidate and outsource certain computer operations and application support activities. We also face all of the same risks listed above and other heightened risks when acquiring a company, in particular if we need to transition or implement certain processes or controls with the acquired company.


We identified certain misstatements to our previously issued financial statements and have restated the financial statements described below, which has exposed us to a number of additional risks and uncertainties.

As discussed in the Explanatory Note, in Note 2, Restatement of Previously Issued Consolidated Financial Statements, and in Note 19, Quarterly Financial Data (Unaudited) in this Annual Report on Form 10-K, we restated our previously issued audited consolidated financial statements as of December 31, 2018 and for the years ended December 31, 2018 and 2017, unaudited interim financial information as of and for the quarterly periods ended June 30, 2019, March 31, 2019, December 31, 2018, June 30, 2018 and March 31, 2018, for the six months ended June 30, 2019 and 2018, and as of September 30, 2018 within the notes to the financial statements, and unaudited selected financial data as of December 31, 2017 and as of and for the years ended December 31, 2016 and 2015 within Item 6, Selected Financial Data. In our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, we also restated our unaudited financial statements for the quarterly and year-to-date periods ended September 30, 2018. We concluded that these previous periods should be restated to correct misstatements of certain foreign exchange gains and losses from foreign currency denominated intra-company loan receivables and payables, cash balances and gains and losses from foreign currency derivative contracts, which we determined were material to these periods. The restatement also included corrections for certain items, including items that affect operating income and operating cash flows, that were immaterial, individually and in the aggregate, to our previously issued financial statements.

As a result of the misstatements and the restatement, we have become subject to a number of additional risks and uncertainties and unanticipated costs for accounting, legal and other fees and expenses, including as a result of a
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pending class-action lawsuit and a stockholder request for inspection of our books and records. 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. We may become subject to enforcement proceedings brought by the SEC or other regulatory or governmental authorities, or subject to other legal proceedings, as a result of the events leading to our internal investigation, the misstatements or the related restatement, and actions and proceedings could also be brought against our current and former employees, officers, or directors. These actions, lawsuits or other legal proceedings related to the misstatements or the restatement could result in reputational harm, additional defense and other costs, regardless of the outcome of the lawsuit or proceeding. If we do not prevail in any such lawsuit or proceeding, we could be subject to substantial damages or settlement costs, criminal and civil penalties and other remedial measures, including, but not limited to, injunctive relief, disgorgement, civil and criminal fines and penalties. In addition, we continue to be at risk for loss of investor confidence, loss of key employees, changes in management or our board of directors and other reputational issues, all of which could have a material adverse effect on our business, financial position and results of operations.

We identified a material weakness in our internal control over financial reporting. If we are unable to remediate the material weakness, or if we experience additional material weaknesses in the future, our business may be harmed.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effectiveness of our system of internal control. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP. As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act, which requires us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting.

Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019 and concluded that our internal control over financial reporting was not effective as of December 31, 2019 due to the material weakness related to 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. We have taken and continue to take remedial steps to improve our internal control over financial reporting. For further discussion of the material weakness identified and our remedial efforts, see Item 9A, Controls and Procedures.

Remediation efforts place a significant burden on management and add increased pressure to our financial resources and processes. If we are unable to successfully remediate our existing material weakness or any additional material weaknesses in our internal control over financial reporting that may be identified in the future in a timely manner, the accuracy and timing of our financial reporting may be adversely affected; our liquidity, our access to capital markets, the perceptions of our creditworthiness and our ability to complete acquisitions may be adversely affected; we may be unable to maintain or regain compliance with applicable securities laws, the listing requirements of the New York Stock Exchange and the covenants under our debt instruments or derivative arrangements regarding the timely filing of periodic reports; we may be subject to regulatory investigations and penalties; investors may lose confidence in our financial reporting; our reputation may be harmed; we may suffer defaults, accelerations or cross-accelerations under our debt instruments or derivative arrangements to the extent we are unable to obtain additional waivers from the required creditors or counterparties or are unable to cure any breaches; and our stock price may decline.

Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to raise debt or equity capital.

We did not file our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 within the timeframe required by the SEC; thus, we have not remained current in our reporting requirements with the SEC. Although we regained status as a current filer on March 17, 2020 by filing this Annual Report on Form 10-K (within
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the extended time period provided for by Rule 12b-25) and our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, we are not currently eligible to use a registration statement on Form S-3 that would allow us to continuously incorporate by reference our SEC reports into the registration statement, or to use “shelf” registration statements to conduct offerings, until approximately one year from the date we regained and maintain status as a current filer. If we wish to pursue an offering now, we would be required to conduct the offering on an exempt basis, such as in accordance with Rule 144A, or file a registration statement on Form S-1. Using a Form S-1 registration statement for a public offering would likely take significantly longer than using a registration statement on Form S-3 and increase our transaction costs, and could, to the extent we are not able to conduct offerings using alternative methods, adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.

We are subject to a number of existing laws and regulations, non-compliance with which could adversely affect our business, financial condition and results of operations, and we are susceptible to a changing regulatory environment.


As a participant in the healthcare industry, our operations and products, and those of our customers, are regulated by numerous government agencies, both inside and outside the United States. The impact of this on us is direct to the extent we are subject to these laws and regulations, and indirect in that in a number of situations, even though we may not be directly regulated by specific healthcare laws and regulations, our products must be capable of being used by our customers in a manner that complies with those laws and regulations.


The manufacture, distribution, marketing and use of our products are subject to extensive regulation and scrutiny by FDA and other regulatory authorities globally. Any new product must undergo lengthy and rigorous testing and other extensive, costly and time-consuming procedures mandated by FDA and foreign regulatory authorities. The same testing and procedures sometimes apply to


current products that are up for authorization or renewal or are subject to changes in lawlaws or regulationregulations (for example certain of our medical devices will have to comply with the new European Union Medical Device Regulation). Changes to current products may be subject to vigorous review, including additional 510(k) and other regulatory submissions, and approvals or the time needed to secure approvals are not certain. Our facilities must be approved and licensed prior to production and remain subject to inspection from time to time thereafter. Failure to comply with the requirements of FDA or other regulatory authorities, including a failed inspection or a failure in our adverse event reporting system, could result in adverse inspection reports, voluntary or official action indicated, warning letters, import bans, product recalls or seizures, monetary sanctions, reputational damage, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses. Any of these actions could cause a loss of customer confidence in us and our products, which could adversely affect our sales. The requirements of regulatory authorities, including interpretative guidance, are subject to change and compliance with additional or changing requirements or interpretative guidance may subject the companyus to further review, result in product launch delays or otherwise increase our costs. For information on current regulatory issues affecting us, please refer to the caption entitled “Certain Regulatory Matters” in Item 7 of this Annual Report on Form 10-K. In connection with these issues, there can be no assurance that additional costs or civil and criminal penalties will not be incurred, that additional regulatory actions with respect to the companyus will not occur, that the companywe will not face civil claims for damages from purchasers or users, that substantial additional charges or significant asset impairments may not be required, that sales of other products may not be adversely affected, or that additional regulation will not be introduced that may adversely affect the company’sour operations and consolidated financial statements.


The sales, marketing and pricing of products and relationships that pharmaceutical and medical device companies have with healthcare providers are under increased scrutiny by federal, state and foreign government agencies. Compliance with the Anti-Kickback Statute, False Claims Act, Food, Drug and Cosmetic Act (including as these laws relate to off-label promotion of products) and other healthcare related laws, as well as competition, data and patient privacy and export and import laws, is under increased focus by the agencies charged with overseeing such activities, including FDA, OIG, DOJ and the Federal Trade Commission. The DOJ and the Securities and Exchange Commission have also increased their focus on the enforcement of the U.S. Foreign Corrupt Practices Act (FCPA), particularly as it relates to the conduct of pharmaceutical and medical product companies. The FCPA and similar anti-bribery laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials for the purpose of obtaining or retaining business. Healthcare professionals in many countries are employed by the government and consequently may be considered government officials. Foreign governments have also increased their scrutiny of pharmaceutical and medical product companies’ sales and marketing activities and relationships with healthcare providers and competitive practices generally. The laws and standards governing the promotion, pricing, sale and reimbursement of our products and those governing our relationships with healthcare providers and governments, including the Sunshine Act enacted under the Patient
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Protection and Affordable Care Act (as amended, the PPACA), can be complicated, are subject to frequent change and may be violated unknowingly.


Additionally, the U.S. Department of the Treasury’s Office of Foreign Control and the Bureau of Industry and Security at the U.S. Department of Commerce administer laws and regulations that restrict U.S. persons and, in some instances, non-U.S. persons, in conducting activities, transacting business or making investments in certain countries, or with governments, entities and individuals subject to U.S. economic sanctions. From time to time, certain of our subsidiaries have limited business dealings inwith countries subject to these sanctions, including Iran, Sudan, Syria, Russia and Cuba. These dealings represent an insignificant amount of our consolidated revenues and income but expose us to an increased risk of operating in these countries, including foreign exchange risks or restrictions or limitations on our ability to access funds generated in these jurisdictions, or the risk of violating applicable sanctions or regulations, which are complex and subject to frequent change. Additional restrictions may be enacted, enforced or interpreted in a way that may adversely affect our operations.


We have compliance programs in place, including policies, training and various forms of monitoring, designed to address the risks discussed above. Nonetheless, these programs and policies may not always protect us from conduct by individual employees that violate these laws. Violations or allegations of violations of these laws may result in large civil and criminal penalties, debarment from participating in government programs, diversion of management time, attention and resources and may otherwise have an adverse effect on our business, financial condition and results of operations. For more information related to the company’sour ongoing government investigations, please refer to Note 169 in Item 8 of this Annual Report on Form 10-K.


The laws and regulations discussed above are broad in scope and subject to evolving interpretations, which could require us to incur substantial cost associated with compliance or to alter one or more of our sales and marketing practices and may subject us to enforcement actions or litigation which could adversely affect our business, financial condition and results of operations.


If reimbursement or other payment for our current or future products is reduced or modified in the United States or abroad,in foreign countries, including through the implementation or repeal of government-sponsored healthcare reform or other similar actions, cost containment measures, or changes to policies with respect to pricing, taxation or rebates, then our business could suffer.


Sales of our products depend, in part, on the extent to which the costs of our products are paid by both public and private payers. These payers include Medicare, Medicaid, and private healthcare insurers in the United States and foreign governments and third-party payers outside the United States. Our work with government payers carries various risks inherent in working with government entities and agencies, including government reporting and auditing, additional regulatory oversight, mandated contractual terms, failure of government appropriations or other complex procedural requirements.

Public and private payers are increasingly challenging the prices charged for medical products


and services. We may continue to experience downward pricing pressures from any or all of these payers which could result in an adverse effect on our business, financial condition and operational results.


Global efforts toward healthcare cost containment continue to exert pressure on product pricing. Governments around the world use various mechanisms to control healthcare expenditures, such as price controls, the formation of public contracting authorities, product formularies, (listswhich are lists of recommended or approved products),products, and competitive tenders which require the submission of a bid to sell products. Sales of our products are dependent, in part, on the availability of reimbursement by government agencies and healthcare programs, as well as insurance companies and other private payers. In much of Europe, Latin America, Asia and Australia, for example, the government provides healthcare at low cost to patients, and controls its expenditures by purchasing products through public tenders, collective purchasing, regulating prices, setting reference prices in public tenders or limiting reimbursement or patient access to certain products. Additionally, austerity measures or other reforms by foreign governments may limit, reduce or eliminate payments for our products and adversely affect both pricing flexibility and demand for our products.


The PPACA includes several provisions which impact our businesses in the United States, including increased Medicaid rebates and an expansion of the 340B Drug Pricing Program which provides certain qualified entities, such as hospitals serving disadvantaged populations, with discounts on the purchase of drugs for outpatient use and an excise tax on the sale of certain drugs. The PPACA reduces Medicare and Medicaid payments to hospitals and other providers, which may cause us to experience downward pricing pressure. Certain portions of the PPACA including Sections 2501(a), 2501(b) and 7101(a), could negatively impact the demand for our products, and therefore our results of operations and financial position.

It is uncertain what


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The eventual impact of the current U.S. presidential administration might have on coverage, reimbursement and other matters related to the PPACA and/or healthcare reform in general, remains uncertain. Following an executive order from President Donald Trump, the U.S. Department of Health and Human Services announced the launch of a new kidney health initiative. Proposed regulatory changes in kidney health policy and reimbursement may substantially change the U.S. end stage renal disease market and could impact demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures. Any such changes and the corresponding impact and related expenses are difficult to estimate in advance.

In addition, a substantial portion of our revenues is dependent on federal healthcare program reimbursement, and any disruptions in federal government operations, including a federal government shutdown or failure of the timingU.S. government to enact annual appropriations, could have a material adverse effect on our business, financial condition and speedresults of any such impact.

operations. Additionally, disruptions in federal government operations may negatively impact regulatory approvals and guidance that are important to our operations, and create uncertainty about the pace of upcoming healthcare regulatory developments or approvals.


As a result of these and other measures, including future measures or reforms that cannot be predicted, reimbursement may not be available or sufficient to allow us to sell our products on a competitive basis. Legislation and regulations affecting reimbursement for our products may change at any time and in ways that may be adverse to us. We cannot predict the impact of these pressures and initiatives, or any negative effects of any additional regulations that may affect our business.


There is substantial competition in the product markets in which we operate.


Although no single company competes with us in all of our businesses, we face substantial competition in all of our markets from international and domestic healthcare and pharmaceutical companies and providers of all sizes, and these competitors often differ across our businesses. Competition is primarily focused on cost-effectiveness, price, service, product performance, and technological innovation.


Competition may increase further as additional companies begin to enter our markets or modify their existing products to compete directly with ours. If our competitors respond more quickly to new or emerging technologies and changes in customer requirements or we do not introduce new versions or upgrades to our product portfolio in response to those requirements, our products may be rendered obsolete or non-competitive. If our competitors develop more effective or affordable products, or achieve earlier patent protection or product commercialization than we do, our business, financial condition and operations will likely be negatively affected. If we are forced to reduce our prices due to increased competition, our business could become less profitable. The company’sOur sales could be adversely affected if any of itsour contracts with GPOs, IDNs or other customers are terminated due to increased competition or otherwise.


In addition, many health care industry companies, including health care systems, distributors, manufacturers, providers, and insurers, are consolidating or have formed strategic alliances. As the health care industry consolidates, competition to provide goods and services to industry participants will become more intense. Further, this consolidation creates larger enterprises with greater negotiating power, which they can use to negotiate price concessions. If we face an increase in costs or must reduce our prices because of industry consolidation, or if we lose customers as a result of consolidation, our business, financial condition and results of operations could be adversely affected.

If our business development activities are unsuccessful, our business could suffer and our financial performance could be adversely affected.

As part of our long-term strategy, we are engagedmay not realize the intended benefits.


We expect to continue to engage in business development activities, including evaluating acquisitions, joint development opportunities, technology licensing arrangements and other opportunities. These activities may result in substantial investment of the company’sour resources. Our success developing products or expanding into new markets from such activities will depend on a number of factors, including our ability to find suitable opportunities for acquisition, investment or alliance; competition from other companies in the industries in which we operate that are seeking similar opportunities; whether we are able to complete an acquisition, investment or alliance on terms that are satisfactory to us; the strength of the other company’s underlying technology, products and ability to execute its business strategies; any intellectual property and litigation related to thesethe other company’s products or technology; and our ability to successfully integrate the acquired company, business, product, technology or research into our existing operations, including the ability to adequately fund acquired in-process R&D projects and to maintain adequate controls over the combined operations. Certain of these activities are subject to antitrust and competition laws, which laws could impact our ability to pursue strategic transactions and could result in mandated divestitures
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in the context of proposed acquisitions. If we are unsuccessful in our business development activities, we may not realize the intended benefits of such activities, including that acquisition and integration costs may be unable to meet our financial targetsgreater than expected or the possibility that expected return on investment, synergies and our financial performance couldaccretion will not be adversely affected.

realized or will not be realized within the expected timeframes.


For more information on recent business development activities, see Note 54 in Item 8 of this Annual Report on Form 10-K.


If we are unable to protect our patents or other proprietary rights, or if we infringe the patents or other proprietary rights of others, our competitiveness and business prospects may be materially damaged.


Patent and other proprietary rights are essential to our business. Our success depends to a significant degree on our ability to obtain and enforce patents and licenses to patent rights, both in the United States and in other countries. We cannot guarantee that pending patent applications will result in issued patents, that patents issued or licensed will not be challenged or circumvented by competitors, that our patents will not be found to be invalid or that the intellectual property rights of others will not prevent the companyus from selling certain products or including key features in the company’sour products.


The patent position of a healthcare company is often uncertain and involves complex legal and factual questions. Significant litigation concerning patents and products is pervasive in our industry. Patent claims include challenges to the coverage and validity of our patents on products or processes as well as allegations that our products infringe patents held by competitors or other third parties. A lossAn unfavorable litigation outcome in any of these types of cases 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. We also rely on trademarks, copyrights, trade secrets and know-how to develop, maintain and strengthen our competitive positions. Third parties may know, discover or independently develop equivalent proprietary information or techniques, or they may gain access to our trade secrets or disclose our trade secrets to the public.


Although our employees, consultants, parties to collaboration agreements and other business partners are generally subject to confidentiality or similar agreements to protect our confidential and proprietary information, these agreements may be breached, and we may not have adequate remedies for any breach. To the extent that our employees, consultants, parties to collaboration agreements and other business partners use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.


Furthermore, our intellectual property, other proprietary technology and other sensitive company data is potentially vulnerable to loss, damage or misappropriation from system malfunction, computer viruses, unauthorized access to our data or misappropriation or misuse thereof by those with permitted access and other events. While we have invested to protect our intellectual property, confidential information and other data, and continue to work diligently in this area, there can be no assurance that our precautionary measures will prevent breakdowns, breaches, cyber incidents or other events. Such events could have a material adverse effect on our reputation, business, financial condition or results of operations.


Misappropriation or other loss of our intellectual property from any of the foregoing would have an adverse effect on our competitive position and may cause us to incur substantial litigation costs.


We are subject to risks associated with doing business globally.


Our operations are subject to risks inherent in conducting business globally and under the laws, regulations and customs of various jurisdictions and geographies. These risks include changes in exchange controls and other governmental actions, loss of business in government and public tenders that are held annually in many cases, increasingly complex labor environments, availability of raw materials, changes in taxation, tariffs, export control restrictions, changes in or violations of U.S. or local laws, including the FCPA, and the United Kingdom Bribery Act, GDPR and other data privacy laws, dependence on a few government entities as customers, pricing restrictions, economic and political instability, monetary or currency volatility or instability (including as it relates to the U.S. dollar, the Euro, the Yuan and currencies in emerging market countries), disputes between countries, trade relationships and conflicts, diminished or insufficient protection of intellectual property, and disruption or destruction of operations in a significant geographic region regardless of cause, including natural disaster, pandemic, power loss, cyber attack,cyber-attack, data breach, war, terrorism, riot, labor disruption, civil insurrection or social unrest. Failure to comply with, or material changes to, the laws and regulations that affect our global operations could have an adverse effect on our business, financial condition or results of operations.


14

The 2016 referendum by British voters to exitUnited Kingdom’s (UK) withdrawal from the European Union (EU) (commonly known as Brexit) effective January 31, 2020 and the UK government’s subsequent initiation of the withdrawal process has createdtransition period through December 31, 2020 continues to create uncertainties affecting business operations in the EU. WithdrawalThe withdrawal by the UK from the EU, particularly if the transition period expires without a trade agreement between the UK and the EU, could result in the deterioration of economic conditions, volatility in currency exchange rates, and increased regulatory complexities.complexities, as well as the potential for product shortages, increased costs or other similar effects. These outcomes could have an adverse effect on our business, financial condition or results of operations.



We are subject to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus that recently originated in China.

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. Any of these impacts could have a material adverse effect on our business, financial condition and results of operations. For further discussion, see the risk factor entitled “—If we are unable to obtain sufficient components or raw materials on a timely basis or for a cost-effective price or if we experience other manufacturing, sterilization or supply difficulties, our business and results of operations may be adversely affected.”

Changes in foreign currency exchange rates and interest rates could have a material adverse effect on our operating results and liquidity.


We generate the majority of our revenue and profit outside the United States. As a result, our financial results have been and may in the future be adversely affected by fluctuations in foreign currency exchange rates. We cannot predict with any certainty changes in foreign currency exchange rates or our ability to mitigate these risks. We may experience additional volatility as a result of inflationary pressures and other macroeconomic factors, including in emerging market countries. We are also exposed to changes in interest rates, and our ability to access the money markets and capital markets could be impeded if adverse liquidity market conditions occur.are not favorable. A discussion of the financial impact of foreign exchange rate and interest rate fluctuations, and the ways and extent to which we attempt to mitigate such impact is contained under the caption “Financial Instrument Market Risk” in Item 7 of this Annual Report on Form 10-K.


Changes in tax laws or exposure to additional income tax liabilities may have a negative impact on our operating results.


Changes to the tax laws in the United States or other countries in which we operate could have an adverse effect on our operating results. In particular, the recently-enacted Tax Cuts and Jobs Act of 2017 (Tax Reform)and the regulations issued thereunder (collectively, 2017 Tax Act), including, among other things, certain changes in tax rates, deductibility of interest, deductibility of executive compensation expense, expensing of capital expenditures, the ability to use certain tax credits, taxation on earnings from international business operations, and the systemtreatment of taxation (from worldwidedeductible payments made by our U.S. affiliates to territorial)our foreign affiliates could adversely affect our financial condition and results of operations. In certain instances, the 2017 Tax ReformAct could have a negative effect on our tax rate and the carrying value of deferred tax balances. Any of these changes could adversely affect our financial performance. There remains some uncertainty regarding the implementation of suchthe 2017 Tax ReformAct and its impact on us. We cannot currently predict the full impact ofthat the 2017 Tax ReformAct may have over time on our business, including revenues, profit margins, profitability, operating cash flows and results of operations. For more information regarding the company’s provisional estimateimpact of the impact of2017 Tax Reform,Act, see Note 1514 in Item 8 of this Annual Report on Form 10-K.

Similarly, the outcome of various initiatives currently being undertaken by the Organization of Economic Cooperation and Development could significantly impact how we allocate profits across multiple jurisdictions, which could adversely impact our global tax obligations.


15

Taxing authorities may audit us from time to time and disagree with certain positions we have taken in respect of our tax liabilities. Our tax liabilities are affected by many factors, including the amounts we charge in intercompanyintra-company transactions for inventory, services, licenses, funding and other items.items, which are subject to the use of assumptions and judgment. Because we operate in multiple income tax jurisdictions both inside and outside the United States, cross border transactions among our affiliates are a significant part of the manner in which we operate. Although we believe that we transact intercompanyintra-company business in accordance with arms-lengtharm's-length principles, tax authorities may disagree with our intercompanyintra-company charges, cross-jurisdictional transfer pricing or other matters, and may assess additional taxes as a result.

result, including in connection with their review of the restated financial statements we have filed as part of this Annual Report on Form 10-K.


We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, we may not accurately predict the outcome of these audits and, as a result, the actual outcome of these audits may have an adverse impact on our financial results. For more information on ongoing audits, see Note 1514 in Item 8 of this Annual Report on Form 10-K.


If we fail to attract and retain key employees our business may suffer.


Our ability to compete effectively depends on our ability to attract and retain key employees, including people in senior management, sales, marketing, information technology and researchR&D positions. Competition for top talent in the healthcare industry can be intense. Our ability to recruit and retain such talent will depend on a number of factors, including hiring practices of our competitors, compensation and benefits, work location, work environment and industry economic conditions. If we cannot effectively recruit and retain qualified employees, our business could suffer.


We are party to a number of pending lawsuits and other disputes which may have an adverse impact on our business, operations or financial condition.


We are party to a number of pending lawsuits, settlement discussions, mediations, arbitrations and other disputes. In addition, in the future we may be party to such disputes, including patent, product liability or other lawsuits. These current and future matters may result in a loss of patent protection, reduced revenue, incurrence of significant liabilities and diversion of our management’s time, attention and resources. Given the uncertain nature of litigation and other disputes generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome in these current matters. In view of these uncertainties, the outcome of these matters may result in charges in excess of any established reserves, and, to the extent available, liability insurance. We also continue to be self-insured with respect to product liability claims. The absence of third-party insurance coverage for current or future claims increases our potential exposure to unanticipated claims and adverse decisions. Protracted litigation and other disputes, including any adverse outcomes, may have an adverse impact on theour business, operations or financial condition of the company.condition. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees. See Note 169 in Item 8 of this Annual Report on Form 10-K for more information regarding current lawsuits.



Our operating results and financial condition may fluctuate.


Our operating results and financial condition may fluctuate from quarter to quarter and year to year for a number of reasons. Events, such as a delay in product development, changes to our expectations or strategy or even a relatively small revenue shortfall may cause financial results for a period to be below our expectations or projections. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful, and these comparisons should not be relied upon as an indication of future performance. Our operating results and financial condition are also subject to fluctuation from all of the risks described throughout this section. These fluctuations may adversely affect our results of operations and financial conditionscondition and our stock price.


We may not achieve our financial goals.

Since the spin-off of Baxalta, we have been executing on plans to enhance profitability and returns for our stockholders. We continue to evaluate and refine both our short-term and long-term financial objectives. Our strategy to achieve these objectives is focused on strengthening our portfolio and extending our impact through transformative innovation that spans prevention to recovery. As part of this strategy, we will be investing in portfolio innovation and market development and entering adjacencies while continuing to drive operational excellence through ongoing business transformation efforts and organization optimization. We will also look to unlock additional
16

value through strategic capital deployment. We may fail to achieve our targeted financial results if we are unsuccessful in implementing our strategies, our estimates or assumptions change or for any other reason. Our failure to achieve our financial goals could have a material adverse effect on our business, financial condition and results of operations.

Future material impairments in the value of our long-lived assets, including goodwill, could negatively affect our operating results.


We regularly review our long-lived assets, including identifiable intangible assets, goodwill (which results from our acquisition activity) and property, plant and equipment, for impairment. Goodwill and acquired indefinite life intangible assets are subject to impairment review on an annual basis and whenever potential impairment indicators are present. Other long-lived assets are reviewed when there is an indication that impairment may have occurred. Changes in market conditions or other changes in the future outlook of value may lead to impairment charges in the future. In addition, we may from time to time sell assets that we determine are not critical to our strategy, including in connection with ourcertain strategic exits. Future events or decisions may lead to asset impairments and/or related charges. Certain non-cash impairments may result from a change in our strategic goals, business direction or other factors relating to the overall business environment. Material impairment charges could negatively affect our results of operations. For more information on the valuation and impairment of long-lived assets, refer to the discussion under the caption entitled “Critical Accounting Policies” in Item 7 of this Annual Report on Form 10-K.


Current or worsening economic conditions may adversely affect our business and financial condition.

The company’s


Our ability to generate cash flows from operations could be affected if there is a material decline in the demand for the company’sour products, in the solvency of itsour customers or suppliers, or deterioration in the company’sour key financial ratios or credit ratings. Current or worsening economic conditions may adversely affect the ability of our customers (including governments) to pay for our products and services, and the amount spent on healthcare generally. This could result in a decrease in the demand for our products and services, declining cash flows, longer sales cycles, slower adoption of new technologies and increased price competition. These conditions may also adversely affect certain of our suppliers, which could cause a disruption in our ability to produce our products. We continue to do business with foreign governments in certain countries, including Greece, Spain, Portugal, and Italy, which have experienced deterioration in credit and economic conditions. As of December 31, 2017, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $149 million. While global economic conditions have not significantly impacted the company’sour ability to collect receivables, liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. These conditions may also impact the stability of the U.S. dollar, Euro or Yuan. For more information on accounts receivable and credit matters with respect to certain of these countries, refer to the discussion under the caption entitled “Credit Facilities, Access to Capital and Credit Ratings” in Item 7 of this Annual Report on Form 10-K.


We may incur operational difficulties or be exposed to claims and liabilities as a result of the separation and distribution of Baxalta.


On July 1, 2015, we distributed approximately 80.5% of the outstanding shares of Baxalta common stock to Baxter stockholders in connection with the separation of our biopharmaceuticals business. We disposed of our remaining 19.5% stake in Baxalta (Retained Shares) in 2016, in connection with a series of transactions, including debt-for-equity exchanges, an equity-for-equity exchange and a contribution to our U.S. pension plan (Retained Shares Transactions). Shire plc (Shire) acquired Baxalta in June 2016, after completion of the last Retained Shares Transaction.Transaction, and in January 2019, Takeda Pharmaceutical Company Limited (Takeda) acquired Shire. In connection with the July 2015 distribution, we entered into a separation and distribution agreement and various other agreements (including a tax matters agreement, a long termlong-term services agreement, a manufacturing and supply agreement, a trademark license agreement, a Galaxy license agreement, an international commercial operations agreement and certain other commercial agreements) with Baxalta. These agreements govern the separation and distribution and the relationship between the companies going forward, including with respect to potential tax-related losses associated with the separation and distribution and the Retained Shares Transactions. They also provide for the performance of services by each company for the benefit of the other for a period of time (including under the manufacturing and supply agreement pursuant to which Shire now manufactures and sells certain products and materials to us).


The separation and distribution agreement provides for indemnification obligations designed to make Baxalta financially responsible for many liabilities that may exist relating to its business activities, whether incurred prior to or after the distribution, including any pending or future litigation. In addition, the separation and distribution agreement provides for certain indemnification obligations of Baxter, which may be significant. It is possible that a court would disregard the allocation agreed to between us and Baxalta and require us


to assume responsibility for obligations allocated to Baxalta. Third parties could also seek to hold us responsible for any of these liabilities or obligations, and we may be unsuccessful in obtaining indemnification or the indemnity rights we have under the separation and

17

distribution agreement may not be sufficient to fully cover all of these liabilities and obligations. Even if we are successful in obtaining indemnification, we may have to bear costs. In addition, our indemnity obligations to Baxalta may be significant. These risks could negatively affect our business, financial condition or results of operations.


The separation and distribution of Baxalta continues to involve a number of risks, including, among other things, the indemnification risks described above. Certain of the agreements described above provide for the performance of services by each company for the benefit of the other for a period of time. ShireTakeda may elect to extend the term for which we provide services to Baxalta under these agreements. If Baxalta is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur losses. These arrangements could also lead to disputes over rights to certain shared property and over the allocation of costs and revenues for products and operations.


There could be significant liability if the separation and distribution or any Retained Shares Transaction is determined to be a taxable transaction. Baxalta has indemnified us for certain potential liabilities that may arise, and such indemnification obligation is guaranteed by Shire, but Baxalta and Shire may be unable to satisfy their indemnification obligations to us in the future.


The separation and distribution and the Retained Shares Transactions (collectively, the Baxter Transactions) qualify for tax-free treatment to Baxter and its stockholders under the Internal Revenue Code of 1986, as amended (the Code). Completion of the separation and distribution was conditioned upon, among other things, the receipt of a private letter ruling from the IRS regarding certain issues relating to the tax-free treatment of the Baxter Transactions. Although the IRS private letter ruling is generally binding on the IRS, the continuing validity of such ruling is subject to the accuracy of factual representations and assumptions made in the ruling. Completion of the distribution was also conditioned upon Baxter’s receipt of a tax opinion from KPMG LLP regarding certain aspects of the Baxalta spin-offseparation not covered by the IRS private letter ruling. The opinion was based upon various factual representations and assumptions, as well as certain undertakings made by Baxter and Baxalta. If any of the factual representations or assumptions in the IRS private letter ruling or tax opinion is untrue or incomplete in any material respect, if any undertaking is not complied with, or if the facts upon which the IRS private letter ruling or tax opinion are based are materially different from the actual facts relating to the Baxter Transactions, the opinion or IRS private letter ruling may not be valid. Moreover, opinions of a tax advisor are not binding on the IRS. As a result, the conclusions expressed in the opinion of a tax advisor could be successfully challenged by the IRS.


If the Baxter Transactions are determined to be taxable, Baxter and its stockholders could incur significant tax liabilities. Pursuant to the tax matters agreement, Baxalta agreed to indemnify us for certain tax-related losses incurred if Baxalta’s actions cause the separation and distribution and certain related transactions to fail to qualify for tax-free status under the applicable provisions of the Code.


In anticipation of the proposedmerger between Baxalta —and Shire merger (the Merger), we entered into a letter agreement with Shire and Baxalta (the Letter Agreement). Under the Letter Agreement, Baxalta agreed to indemnify, and Shire agreed to guarantee such indemnity to, Baxter and each of its affiliates and each of their respective officers, directors and employees against certain tax-related losses attributable to or resulting from (in whole or in part) the mergerMerger as further described in the Letter Agreement. If the Baxter Transactions are determined to be taxable as a result (in whole or in part) of the mergerMerger (for example, if the mergerMerger is deemed to be part of a plan (or series of related transactions) that includes the Baxter Transactions,Transactions), Baxter and its stockholders could incur significant tax liabilities. Although Baxalta and Shire may be required to indemnify Baxter under the tax matters agreement and the Letter Agreement for any such tax liabilities incurred by Baxter, there can be no assurance that the indemnity from Baxalta or the guarantee thereof by Shire will be sufficient to protect us against all or a part of the amount of such liabilities, or that either Baxalta or Shire will be able to fully satisfy their respective obligations.


Even if we ultimately succeed in recovering from Baxalta or Shire any amounts for which we are held liable, we may be required to bear these costs initially, which could negatively affect our business, results of operations and financial condition.

Item 1B.

Unresolved Staff Comments.

None.


Item 2.

Properties.

The company’s

Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate offices are owned and located at One Baxter Parkway, Deerfield, Illinois 60015.

Baxter owns

18

We own or hashave long-term leases on all of itsour manufacturing facilities. The company’slocation of the principal manufacturing facilities byof each of our geographic locationsegments are listed below:

Region

Location

Owned/Leased

Americas

Region

Location

Owned/Leased

Americas

Aibonito, Puerto Rico

Leased

Alliston, Canada

Owned

Cali, Colombia

Owned

Cartago, Costa Rica

Owned

Cuernavaca, Mexico

Owned

Guayama, Puerto Rico

Owned

Haina, Dominican Republic

Leased

Hayward, California

Leased

Round Lake, Illinois

Owned

Bloomington, Indiana

Owned/Leased(1)

Cleveland, Mississippi

Leased

Medina, New York

Leased

Jayuya, Puerto Rico

Leased

Opelika, Alabama

Owned

Brooklyn Park, Minnesota

Leased

Pesa, Mexico

PESA, Mexico

Leased

Sao Paulo, Brazil

Owned

Tijuana, Mexico

Owned

Mountain Home, Arkansas

Owned/Leased(1)

(1)

North Cove, North Carolina

Owned

St. Paul, Minnesota

Leased

Irvine, California

Owned

APAC

Mountain View, California

Leased

APAC

Guangzhou, China

Owned

Ahmedabad, India

Shanghai, China

Owned

Guangzhou, China

Suzhou, China

Owned

Shanghai, China

Toongabbie, Australia

Leased

Owned

Suzhou, China

Woodlands, Singapore

Owned/Leased(2)

Owned

Toongabbie, Australia

Canlubang, Phillipines

Leased

Owned

Woodlands, Singapore

Amata, Thailand

Owned

Owned/Leased(2)

Canlubang, Philippines

Tianjin, China

Owned

Leased

Amata, Thailand

Miyazaki, Japan

Owned

EMEA

Tianjin, China

Owned

Miyazaki, Japan

Castlebar, Ireland

Owned

EMEA

Grosotto, Italy

Owned

Castlebar, Ireland

Halle, Germany

Owned

Grosotto, Italy

Hechingen, Germany

Leased

Owned

Halle, Germany

Lessines, Belgium

Owned

Hechingen, Germany

Leased

Lessines, BelgiumOwned
Liverpool, United Kingdom

Leased

Lund, Sweden

Leased

Marsa, Malta

Owned

Medolla, Italy

Owned

Meyzieu, France

Owned

Rostock, Germany

Leased

Sabinanigo, Spain

Owned

San Vittore, Switzerland

Owned

Sondalo, Italy

Owned

Swinford, Ireland

Owned

Thetford, United Kingdom

Owned

Elstree, United Kingdom

Leased

Tunis, Tunisia

Owned

Owned

(1)

Dammam, Saudi Arabia

Includes both owned and leased facilities.

Owned

(2)

Baxter owns the facility located at Woodlands, Singapore and leases the property upon which it rests.

19

The company

(1)Includes both owned and leased facilities.
(2)We own the facility located at Woodlands, Singapore and lease the property upon which it rests.
We also ownsown or operatesoperate shared distribution facilities throughout the world. In the United States and Puerto Rico, there are six shared distribution facilities with the principal facilities located in Memphis, Tennessee; Catano,Cataño, Puerto Rico; North Cove, North Carolina; and Round Lake, Illinois. Internationally, we have more than 100 shared distribution facilities located in Argentina, Australia, Austria, Benelux,Belgium, Brazil, Canada, Chile, China, Colombia, Costa Rica, the Czech Republic, Ecuador, France, Germany,


Greece, Guatemala, Hong Kong, India, Ireland, Italy, Japan, Korea, Mexico, New Zealand, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Spain, Sweden, Switzerland, Thailand, Turkey, the United Arab Emirates, and the United Kingdom, and Venezuela.

The companyKingdom.

We continually evaluates itsevaluate our plants and production lines and believesbelieve that itsour current facilities plus any planned expansions are generally sufficient to meet itsour expected needs and expected near-term growth. Expansion projects and facility closings will be undertaken as necessary in response to market needs.

Item 3.

Legal Proceedings.

Item 3. Legal Proceedings.
Incorporated by reference to Note 169 in Item 8 of this Annual Report on Form 10-K.

Item 4.

Mine Safety Disclosures.

Item 4. Mine Safety Disclosures.
Not Applicable.

Executive Officers of the Registrant

As of February 23, 2018,March 17, 2020, the following serve as Baxter’s executive officers:

José E. Almeida, age 55,57, is Chairman, President and Chief Executive Officer, having served in that capacity since January 2016. He began serving as an executive officer of the company in October 2015. He served as Senior Advisor with The Carlyle Group from May 2015 until October 2015. Previously, he served as the Chairman, President and Chief Executive Officer of Covidien plc (Covidien) from March 2012 to January 2015, prior to Medtronic plc’s (Medtronic) acquisition of Covidien, and President and Chief Executive Officer of Covidien from July 2011 to March 2012. Mr. Almeida served in other executive roles with Covidien (formerly Tyco Healthcare (Tyco)) between April 2004 and June 2011. Mr. Almeida is a member of the Board of Directors of Walgreens Boots Alliance, Inc.

Giuseppe Accogli, age 47,49, is Senior Vice President and President, Global Businesses.Americas. Prior to his current role, Mr. Accogli served as Senior Vice President and President, Global Businesses, from 2017 to 2019. He also served as Corporate Vice President and President, Renal from 2016 to 2017 and as Head of the U.S. region for Baxter’s Renal business from 2015 to 2016. Mr. Accogli joined Baxter in 2007 as Renal business unit Director in Italy, and assumed positions of increasing responsibility with the Renal business in Europe, including Head of the EMEA region for Renal from 2013 to 2015. Previously he worked as a Business Unit Manager and Sales and Marketing Manager for Medtronic (Italy)plc in Italy, and in several sales, product and marketing roles for Tyco and then Covidien in Italy and EMEA.

Brik V. Eyre, age 54, is Senior Vice President and President, Americas. Prior to his current role, Mr. EyreAccogli has served as Corporate Vice President and President, Hospital Products from 2015a director to 2017. Mr. Eyre joined the company in 2008 as General Manager for BioPharma Solutions, Baxter’s global manufacturing and contract services business. He later served as General Manager for our U.S. Medication Delivery business and then he served as Corporate Vice President and President of Renal. Prior to joining Baxter, he held a variety of senior management positions at Cardinal Health, Inc., including President of Cardinal’s PreSource Products and Services business.

AdvaMed, an American medical device trade association, since September 25, 2019.

Cristiano Franzi, age 55,57, is Senior Vice President and President, EMEA. Mr. Franzi joined Baxter in September 2017 from Medtronic, where he served as Vice President and President, Minimally Invasive Therapies Group EMEA from 2015 to August 2017. He served as President EMEA at Covidien prior to Medtronic’s acquisition of Covidien. He joined Covidien in 2009 and held roles of increasing responsibility during his tenure. He held a number of commercial and functional roles across Europe, the Middle East and Africa at ev3 Endovascular, Inc., Boston Scientific Corporation and Becton, Dickinson & Co. earlier in his career.

He served as a member of the board of Eucomed Medical Technology from 2013 to 2015 and again from 2018 to 2019.

Andrew Frye, age 52,54, is Senior Vice President and President, APAC. Mr. Frye joined Baxter in 2017 from DKSH Holdings Ltd., where he served as Global Head of Healthcare from 2015 to 2017. In that role, he oversaw a portfolio of pharmaceuticals, over-the-counter and device products across 13 countries. Previously, he served as Vice President of Business Development from 2011 to 2014 for DKSH Healthcare. Earlier in his career, he held a number of commercial roles with increasing responsibility at Abbott Laboratories’ Pharmaceutical and Nutrition divisions.


20

Jacqueline Kunzler, age 54, is Senior Vice President and Chief Quality Officer. Ms. Kunzler joined Baxter in 1993 and has served in roles of increasing responsibility across Baxter’s research & development, international marketing, and quality organizations, most recently as Senior Vice President, Chief Quality Officer.
Sean Martin, age 55,57, is Senior Vice President and General Counsel. Mr. Martin joined Baxter in 2017 from Apollo Education Group, Inc., where he served as Senior Vice President, General Counsel and Secretary from 2010 to 2017. Previously, he served as Assistant Secretary (2010), Vice President of Corporate Law (2009 to 2010) and Vice President of Commercial Law (2005 to 2009) for Amgen Inc. He also served as Vice President and Deputy General Counsel at Fresenius Medical Care North America from 2000 to 2005. Mr.


Martin was a Partner at the law firm Foley & Lardner LLP from 1998 to 2000 and served eight years as Assistant U.S. Attorney for the Northern District of Illinois.

Jeanne K. Mason, Ph.D., age 62,64, is Senior Vice President, Human Resources. Ms. Mason joined Baxter in 2006 from GE Insurance Solutions, a primary insurance and reinsurance business, where she was responsible for global human resource functions. Ms. Mason began her career with General Electric (GE) in 1988 after serving with the U.S. General Accounting Office in Washington, D.C. Her GE experience included leadership roles in Europe for GE Information Services and GE Capital Real Estate.

Scott Pleau, age 52, She is Senior Vice President, Operations. Mr. Pleau joined Baxtera member of the Board of Directors of Family Service of Lake County and is a member of the Executive Advisory Council for the Chicago Chapter of National Association of African Americans in 2016 from Medtronic, where he served as Vice President of Global Operations. Previously he held key operations positions of increasing responsibility across multiple businesses at Covidien beginning in 1995, most recently as Vice President, Operations, prior to Medtronic’s 2015 acquisition of Covidien.

Human Resources.

James K. Saccaro, age 45,47, is Executive Vice President and Chief Financial Officer. Mr. Saccaro was Senior Vice President and Chief Financial Officer at Hill-Rom Corporation prior to rejoining Baxter in 2014. He originally joined the company in 2002 as Manager of Strategy for the company’s BioScience business, and over the years assumed positions of increasing responsibility, including Vice President of Financial Planning, Vice President of Finance for the company’s operations in Europe, the Middle East and Africa and Corporate Vice President and Treasurer. He previously held strategy and business development positions at Clear Channel Communications and the Walt Disney Company.

All executive officers hold office until the next annual election of officers and until their respective successors are elected and qualified.


21

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The following table includes information about the company’sour common stock repurchases during the three-month period ended December 31, 2017.

Period

Total Number of Shares Purchased(1)

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Programs(1)

 

Approximate Dollar Value of Shares that may yet be Purchased Under the Program(1)

 

October 1, 2017 through October 31, 2017

 

328,500

 

$

62.41

 

 

328,500

 

 

 

 

November 1, 2017 through November 30, 2017

 

2,332,814

 

$

64.30

 

 

2,332,814

 

 

 

 

December 1, 2017 through December 31, 2017

 

1,834,400

 

$

64.82

 

 

1,834,400

 

 

 

 

Total

 

4,495,714

 

$

64.37

 

 

4,495,714

 

$

1,119,190,080

 

2019.

(1)

On July 25, 2012, the company announced that its Board of Directors authorized the company to repurchase up to $2.0 billion of its common stock on the open market or in private transactions. The Board of Directors increased this authority by $1.5 billion in November 2016. During the fourth quarter of 2017, the company repurchased approximately 4.5 million shares for $289 million in cash pursuant to this authority through Rule 10b5-1 purchase plans. The remaining authorization under this program totaled approximately $1.1 billion at December 31, 2017.  The Board of Directors increased this authority by an additional $1.5 billion in February 2018.  After giving effect to the February 2018 approval and 2018 share repurchases, $2.3 billion of repurchase authority remained available as of February 20, 2018.  This program does not have an expiration date.

PeriodTotal Number of Shares Purchased(1)Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly
Announced Programs(1)		Approximate Dollar Value of Shares that may
yet be Purchased Under the Program(1)
October 1, 2019 through October 31, 20192,369,658  $86.02  2,369,658  
November 1, 2019 through November 30, 2019—  $—  —  
December 1, 2019 through December 31, 2019—  $—  —  
Total2,369,658  $86.02  2,369,658  $897,396,644  

Baxter

(1)On July 25, 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 $1.5 billion in each of November 2016 and February 2018 and by an additional $2.0 billion in November 2018. During the fourth quarter of 2019, we repurchased approximately 2.4 million shares for $204 million in cash pursuant to this authority through Rule 10b5-1 purchase plans. The remaining authorization under this program totaled approximately $897 million at December 31, 2019. This program does not have an expiration date.
Our common stock is listed on the New York, Chicago and SIX Swiss stock exchanges. The New York Stock Exchange is the principal market on which the company’sour common stock is traded.traded under the symbol “BAX”. At January 31, 2018,February 29, 2020, there were 26,37022,818 holders of record of the company’sour common stock.

Performance Graph

The following graph compares the change in Baxter’sour cumulative total shareholderstockholder return (including reinvested dividends) on Baxter’sour common stock with the Standard & Poor’s 500 Composite Index and the Standard & Poor’s 500 Health Care Index over the past five years. Performance through June 30, 2015 has been adjusted for the Baxalta separation which occurred on July 1, 2015.


bax-20191231_g2.jpg

22

Item 6.Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the accompanying notes thereto in Item 8 of this Annual Report on Form 10-K, and the information contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.
As Restated 1
Unaudited
as of or for the years ended December 31
2019 2
2018
2017 3
2016 3,4,5
2015 6
Operating ResultsNet sales$11,362  11,099  10,584  10,133  9,918  
(in millions)Income from continuing operations$1,011  1,552  609  4,936  254  
(Loss) income from discontinued operations, net of tax$—  (6) (7) (1) 571  
Net income attributable to Baxter stockholders$1,001  1,546  602  4,935  825  
Earnings per share from continuing operations
    Basic$1.97  2.91  1.12  9.04  0.47  
    Diluted$1.93  2.84  1.10  8.96  0.46  
(Loss) earnings per share from discontinued 
operations
    Basic$—  (0.01) (0.01) —  1.04  
    Diluted$—  (0.01) (0.02) —  1.04  
Earnings per share
    Basic$1.97  2.90  1.11  9.04  1.51  
    Diluted$1.93  2.83  1.08  8.96  1.50  
Weighted-average 
number of shares outstanding
    Basic509  534  543  546  545  
    Diluted519  546  555  551  549  
Balance Sheet InformationTotal assets$18,193  15,720  17,102  15,459  20,941  
(in millions)Total liabilities$10,281  7,854  7,993  7,238  12,089  
Total equity$7,912  7,866  9,109  8,221  8,852  
Long-term debt and finance lease obligations$4,809  3,481  3,512  2,774  3,923  
Cash Flow InformationCash flows from operations - continuing operations$2,110  2,017  1,730  1,588  1,211  
(in millions)Cash flows from investing activities - continuing operations$(1,100) (916) (1,292) (716) (855) 
Cash flows from financing activities$498  (2,603) 93  (324) (481) 
Capital expenditures - continuing operations$(696) (659) (616) (705) (905) 
Common Stock InformationCash dividends declared per share$0.850  $0.730  $0.610  $0.505  $1.270  

1.We have restated in this Annual Report on Form 10-K our previously issued audited financial statements as of December 31, 2018 and for the years ended December 31, 2018 and 2017 and selected previously reported financial information as of December 31, 2017, 2016 and 2015 and for the years ended December 31, 2016 and 2015. In addition to the correction of misstatements related to non-operating foreign exchange gains and losses, we also corrected other misstatements that were immaterial, individually and in the aggregate, to our previously issued financial statements. See Note 12, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional details regarding basisinformation.
23

2.Income from continuing operations for the year ended December 31, 2019 included a charge of presentation.

as of or for the years ended December 31

 

20172,1

 

 

20163,1

 

 

20154,1

 

 

20145,1

 

 

20136,1

 

Operating Results

 

Net sales

 

$

10,561

 

 

 

10,163

 

 

 

9,968

 

 

 

10,719

 

 

 

9,413

 

(in millions)

 

Income from continuing operations

 

$

724

 

 

 

4,966

 

 

 

393

 

 

 

457

 

 

 

315

 

 

 

(Loss) income from discontinued operations, net of tax

 

$

(7

)

 

 

(1

)

 

 

575

 

 

 

2,040

 

 

 

1,697

 

 

 

Net income

 

$

717

 

 

 

4,965

 

 

 

968

 

 

 

2,497

 

 

 

2,012

 

Balance Sheet

 

Capital expenditures, continuing operations

 

$

634

 

 

 

719

 

 

 

911

 

 

 

925

 

 

 

706

 

Information

 

Total assets

 

$

17,111

 

 

 

15,546

 

 

 

20,962

 

 

 

26,138

 

 

 

25,224

 

(in millions)

 

Long-term debt and lease obligations

 

$

3,509

 

 

 

2,779

 

 

 

3,922

 

 

 

7,331

 

 

 

8,126

 

Common Stock Information

 

Weighted-average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

543

 

 

 

546

 

 

 

545

 

 

 

542

 

 

 

543

 

 

 

Diluted

 

 

555

 

 

 

551

 

 

 

549

 

 

 

547

 

 

 

549

 

 

 

Income from continuing operations per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.33

 

 

 

9.10

 

 

 

0.72

 

 

 

0.84

 

 

 

0.58

 

 

 

Diluted

 

$

1.30

 

 

 

9.01

 

 

 

0.72

 

 

 

0.83

 

 

 

0.57

 

 

 

(Loss) income from discontinued operations per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

 

(0.01

)

 

 

1.06

 

 

 

3.77

 

 

 

3.12

 

 

 

Diluted

 

$

(0.01

)

 

 

—

 

 

 

1.04

 

 

 

3.73

 

 

 

3.09

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.32

 

 

 

9.09

 

 

 

1.78

 

 

 

4.61

 

 

 

3.70

 

 

 

Diluted

 

$

1.29

 

 

 

9.01

 

 

 

1.76

 

 

 

4.56

 

 

 

3.66

 

 

 

Cash dividends declared per common share

 

$

0.610

 

 

 

0.505

 

 

 

1.270

 

 

 

2.050

 

 

 

1.920

 

1

Refer to the notes to the consolidated financial statements for information regarding other charges and income items.

$755 million related to the annuitization of a portion of our U.S. pension plan.

2

Income from continuing operations included charges totaling $169 million for business optimization, $19 million related to the Baxalta separation, $17 million related to SIGMA SPECTRUM infusion pump inspection and remediation reserves and other historical product reserves, $28 million of Claris acquisition and integration expenses, $32 million related to the impact of Hurricane Maria on the company’s operations in Puerto Rico, $21 million related to litigation and contractual disputes for business arrangements in which the company is no longer engaged or a party thereto, $33 million related to the deconsolidation of the company’s Venezuelan operations and $322 million related to the impact of tax reform.  Also included was a benefit of $12 million related to an adjustment to the company’s historical rebates and discount reserves.

3.As of December 31, 2017, total assets have changed from $17,111 million as originally reported to $17,102 million as restated, total liabilities have changed from $7,995 million as originally reported to $7,993 million as restated, total equity has changed from $9,116 million as originally reported to $9,109 million as restated, and long-term debt and finance lease obligations have changed from $3,509 million as originally reported to $3,512 million as restated. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for information related to the restatement impacts on operating results and cash flow information for the year ended December 31, 2017. Balance sheet information as of December 31, 2017 is unaudited.

3

Income from continuing operations included charges totaling $409 million for business optimization, $54 million related to the Baxalta separation, $149 million of debt extinguishment costs related to the March 2016 debt-for-equity exchange for certain company indebtedness and certain debt redemptions, $51 million for impairment primarily related to developed technology and $9 million related to the settlement of an income tax matter in the company’s non-wholly owned joint venture in Turkey. Also included were net realized gains of $4.4 billion related to the Baxalta Retained Shares transactions and a benefit of $18 million primarily related to adjustments to the COLLEAGUE and SIGMA SPECTRUM infusion pump reserves.

4.As of and for the year ended December 31, 2016, net sales have changed from $10,163 million as originally reported to $10,133 million as restated, income from continuing operations has changed from $4,966 million as originally reported to $4,936 million as restated, net income attributable to Baxter stockholders has changed from $4,965 million as originally reported to $4,935 million as restated, basic earnings per share from continuing operations has changed from $9.10 as originally reported to $9.04 as restated, diluted earnings per share from continuing operations has changed from $9.01 as originally reported to $8.96 as restated, basic loss per share from discontinued operations has changed from $(0.01) as originally reported to $0.00 as restated, basic earnings per share has changed from $9.09 as originally reported to $9.04 as restated, diluted earnings per share has changed from $9.01 as originally reported to $8.96 as restated, total assets have changed from $15,546 million as originally reported to $15,459 million as restated, total liabilities have changed from $7,266 million as originally reported to $7,238 million as restated, total equity has changed from $8,280 million as originally reported to $8,221 million as restated, long-term debt and finance lease obligations have changed from $2,779 million as originally reported to $2,774 million as restated, cash inflows from operations - continuing operations has changed from $1,624 million as originally reported to $1,588 million as restated, cash outflows from investing activities - continuing operations has changed from $730 million as originally reported to $716 million as restated, and capital expenditures - continuing operations has changed from $719 million as originally reported to $705 million as restated.

4

Income from continuing operations included charges totaling $200 million for business optimization, $111 million related to the Baxalta separation and $130 million related to Baxter’s July 2015 tender offer for certain outstanding indebtedness. Also included were benefits of $28 million primarily related to adjustments to the COLLEAGUE and SIGMA SPECTRUM infusion pump reserves, $52 million related to a litigation settlement in which Baxter was the beneficiary and $20 million relating to the reversal of contingent consideration milestone liabilities.

5.For the year ended December 31, 2016, income from continuing operations included net realized gains of $4.4 billion related to the disposition of our formerly retained shares in Baxalta (Baxalta Retained Shares).

5

Income from continuing operations included charges totaling $138 million for business optimization, $68 million for SIGMA Spectrum Infusion Pump product remediation efforts, $11 million related to the Baxalta separation and $3 million to account for an additional year of the Branded Prescription Drug Fee in accordance with final regulations issued by the Internal Revenue Service. Also included were benefits of $1 million related to third-party recoveries and reversals of prior reserves.

6.As of and for the year ended December 31, 2015, net sales have changed from $9,968 million as originally reported to $9,918 million as restated, income from continuing operations has changed from $393 million as originally reported to $254 million as restated, net income attributable to Baxter stockholders has changed from $968 million as originally reported to $825 million as restated, basic earnings per share from continuing operations has changed from $0.72 as originally reported to $0.47 as restated, diluted earnings per share from continuing operations has changed from $0.72 as originally reported to $0.46 as restated, basic earnings per share from discontinued operations has changed from $1.06 as originally reported to $1.04 as restated, basic earnings per share has changed from $1.78 as originally reported to $1.51 as restated, diluted earnings per share has changed from $1.76 as originally reported to $1.50 as restated, total assets have changed from $20,962 million as originally reported to $20,941 million as restated, total liabilities have changed from $12,097 million as originally reported to $12,089 million as restated, total equity has changed from $8,865 million as originally reported to $8,852 million as restated, long-term debt and finance lease obligations have changed from $3,922 million as originally reported to $3,923 million as restated, cash inflows from operations - continuing operations has changed from $1,253 million as originally reported to $1,211 million as restated, cash outflows from investing activities - continuing operations has changed from $861 million as originally reported to $855 million as restated, and capital expenditures - continuing operations has changed from $911 million as originally reported to $905 million as restated.

6

Income from continuing operations included charges totaling $148 million for business optimization, $17 million primarily related to remediation efforts associated with modifications to the SIGMA Spectrum Infusion Pump in conjunction with re-filing for 510(k) clearance, $255 million related to the acquisition and integration of Gambro and losses from the derivative instruments used to hedge the anticipated foreign currency cash outflows and $25 million related to an upfront payment


Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

associated with one of the company’s collaboration arrangements. Also included were benefits of $3 million related to tax and legal reserves associated with VAT matters in Turkey.


Item 7.

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

The following commentary should be read in conjunction with the consolidated financial statements and accompanying notes.

EXECUTIVE OVERVIEW

Restatement of Previously Issued Consolidated Financial Statements
24

We have restated our previously issued consolidated financial statements contained in this Annual Report on Form 10-K. Refer to the “Explanatory Note” preceding Item 1, Business, 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 December 31, 2018 and for the fiscal years ended December 31, 2018 and December 31, 2017 in this Item 7, 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 8, Financial Statements and Supplementary Data, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our consolidated financial statements.
Description of the Company and Business Segments

Baxter International Inc.

We manage our business based on three geographic segments: Americas (North and South America), through its subsidiaries,EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific). Each of our segments provides a broad portfolio of essential healthcare products across its portfolio, 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. The company’sOur global footprint and the critical nature of itsour products and services play a key role in expanding access to healthcare in emerging and developed countries. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and by patients at home under physician supervision.

Separation

For financial information about our segments, see Note 18 in Item 8 of Baxalta Incorporated

On July 1, 2015, Baxter completedthis Annual Report on Form 10-K.

Recent Business Combinations and Asset Acquisitions
Cheetah Medical
In October 2019, we acquired 100 percent of Cheetah Medical, Inc. (Cheetah) for total upfront cash consideration of $195 million, net of cash acquired, with the distributionpotential 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 approximately 80.5% of the outstanding common stock of its biopharmaceuticals business, Baxalta Incorporated (Baxalta), to Baxter stockholders (the Distribution). As a result of the separation, the operating results of Baxalta have been reflected as discontinued operations for the years ended December 31, 2017, 2016, and 2015.hemodynamic monitoring technologies. Refer to Note 24 in Item 8 of this Annual Report on Form 10-K for additional information regarding the separationacquisition of Baxalta. Unless otherwise stated, financial results herein reflect continuing operations.

AcquisitionCheetah.

Recothrom and Preveleak
In March 2018, we acquired two hemostat and sealant products from Mallinckrodt plc: RECOTHROM Thrombin topical (Recombinant), the first and only stand-alone recombinant thrombin, and PREVELEAK Surgical Sealant, which is used in vascular reconstruction. The purchase price included an upfront payment of approximately $163 million and potential contingent payments in the future. Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisition of the RECOTHROM and PREVELEAK products.
Claris Injectables Limited

On

In July 27, 2017, Baxterwe acquired 100 percent of Claris Injectables Limited (Claris), a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of approximately $629 million, net of cash acquired. Through the acquisition, Baxterwe added capabilities in production of essential generic injectable medicines, such as anesthesia and analgesics, renal, anti-infectives and critical care in a variety of presentations including bags, vials and ampoules. Refer to Note 5 in Item 8 for additional information regarding the acquisition of Claris.

Pending Acquisition of Recothrom and Preveleak

In January 2018, Baxter agreed to acquire two hemostat and sealant products from Mallinckrodt plc: RECOTHROM Thrombin topical

(Recombinant), the first and only stand-alone recombinant thrombin, and PREVELEAK Surgical Sealant, which is used in vascular

reconstruction. The purchase price includes an upfront payment of approximately $153 million and potential contingent payments in

the future. The transaction is expected to close in the first half of 2018, subject to the satisfaction of regulatory approvals and other closing conditions.  Total sales of both products approximated $56 million during the twelve months ended September 29, 2017.

Segments

In 2017, Baxter announced a change in its commercial structure to improve performance, optimize costs, increase speed in the decision-making process and drive improved accountability across the company. As a result, the company now reports its financial performance based on its new segments: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific).

For financial information about Baxter’s segments, see Note 174 in Item 8 of this Annual Report on Form 10-K.

Baxter had10-K for additional information regarding the acquisition of Claris.

Seprafilm Adhesion Barrier
In December 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 47,000 employees$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 conducted business in over 100 countriesseverity of postoperative adhesions between the abdominal wall and the underlying viscera such as ofomentum, 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 December 31, 2017. In 2017,2019, our consolidated financial statements do not include the company generated approximately 60%financial condition or results of its revenues outsideoperations of Seprafilm in any of the United States.  The company maintained approximately 50 manufacturing facilities and over 100 distribution facilities in the United States, Europe, Asia-Pacific, Latin America and Canada as of December 31, 2017.

periods presented herein.

25

Financial Results

Baxter’s

Our global net sales totaled $10.6$11.4 billion in 2017,2019, an increase of 4%2% over 20162018 on a reported basis and 5% on a constant currency basis. International sales totaled $6.1$6.5 billion in 2017,2019, an increase of 2%3% compared to 20162018 on a reported basis and 7% on a constant currency basis. Sales in the United States totaled $4.5$4.8 billion in 2017,2019, an increase of 6%2% compared to 2016.

2018. Refer to the Net Sales discussion in the Results of Operations section below for more information related to changes in net sales on a constant currency basis.

Baxter’sOur income from continuing operations for 2017 totaled $724 million$1.0 billion, or $1.30 per diluted share, compared to $4,966 million, or $9.01$1.93 per diluted share, in the prior year.2019. Income from continuing operations in 20172019 included special items which resulted in a net decrease to income from continuing operations of $652$716 million, or $1.18$1.38 per diluted share. Income from continuing operations in 2016 included special items which resulted in a net increase to income from continuing operations of $3.9 billion, or $7.05 per diluted share. The company’sOur special items are discussed further in the Results of Operations section below.

Baxter’s

Our financial results included R&D expenses totaling $617$595 million in 2017,2019, which reflects the company’sour focus on balancing increased investments to support the company’sour new product pipeline with efforts to optimize overall R&D spending through continuous evaluation of the portfolio.

The company’sspending.

Our financial position remains strong, with operating cash flows from continuing operations totaling $1.9$2.1 billion in 2017. The company has2019. We have continued to execute on itsour disciplined capital allocation framework, which is designed to optimize stockholder value creation through reinvestment in theour businesses, dividends and share repurchases, as well as acquisitions and other business development initiatives as discussed in the Strategic Objectives section below.

Capital investmentsexpenditures totaled $634$696 million in 20172019 as the company continueswe continue to invest across itsour businesses to support future growth, including additional investments in support of new and existing product capacity expansions. The company’sOur investments in capital expenditures in 20172019 were focused on projects that improve production efficiency and enhance manufacturing capabilities to support itsour strategy of geographic expansion with select investments in growing markets.

The company

We also continued to return value to itsour stockholders in the form of dividends. During 2017, the company2019, we paid cash dividends to its shareholdersour stockholders totaling $315$423 million. Additionally, in 2017 the company2019 we repurchased 9.216.5 million shares through cash repurchases pursuant to Rule 10b5-1 repurchase plans, an accelerated share repurchase plan and otherwise.

For information on our share repurchase plans, see Note 10 in Item 8 of this Annual Report on Form 10-K.

Strategic Objectives

Baxter continues

We continue to focus on several key objectives to successfully execute itsour long-term strategy to achieve sustainable growth and deliver enhanced stockholder value. Baxter’sOur diversified and broad portfolio of medical products that treat life-threatening acute or chronic conditions and itsour global presence are core components of the company’sour strategy to achieve these objectives. The company isWe are focused on three strategic factors as part of itsour pursuit of industry leading performance: optimizing itsour core portfolio globally; operational excellence focused on streamlining theour cost structure and enhancing operational efficiency; and followingmaintaining a disciplined and balanced approach to capital allocation.

Optimizing the Core Portfolio Globally

Baxter has categorized its

Our global product portfolio into four strategic business groupings.  Those groupings includeoptimization strategy identifies products that we believe to have characteristics of core growth, products that we expect to provide us with a core return on capital, products that we intend to maintain or manage differently and products that we consider to be strategic bets. Within theFor products with core growth grouping, Baxter lookscharacteristics, we look to invest for long-term, higher margin growth. Baxter looksFor products that we expect to generate a core return on capital, we seek to optimize itsour return on investment and to maintain or enhance itsour market position with its core return on capital products.  Maintainposition. For products that we intend to maintain or manage differently, products are those for which Baxter lookswe look to sustain or reposition itsour underlying investment. Finally, the strategic bet grouping includes products for which Baxter iswe are evaluating itsour market position and investment strategy.  Thesestrategy for products cover mature and emerging markets.  Baxter continuesthat we consider to evaluate each product category’s placement in light of shifting market dynamics and company priorities and may reassign a product category into a different business grouping from time to time.

be strategic bets.

As part of thisour portfolio review, Baxter seeksmanagement strategy, we seek to optimize itsour position in product areas where the company haswe have a stable, profitable business model, identify and alter investments in products that have reached the end of their life cycles or with respect tofor which market positions have evolved unfavorably. In the course of doing so, Baxter expectswe expect to continue to reallocate capital to more promising opportunities or business groupings, as described above.

26

As part of this strategy, Baxter iswe are shifting itsour investments to drive innovation in product areas where it haswe have compelling opportunities to serve patients and healthcare professionals while advancing the business and will acceleratewe are accelerating the pace in bringingwhich we bring these advances to market. Baxter isWe are in the midst of launching more than 200several new products, geographic expansions and line extensions by 20202023 including in such areas as chronic and acute renal care;care, smart pump technology;technology, hospital pharmaceuticals and nutritionals;nutritionals, surgical sealants, and more. These comprise a mix of entirely new offerings, marked improvements on existing technologies, and the expansion of current products into new geographies.


Operational Excellence

We have undertaken a comprehensive review of all aspects of our operations and are actively implementing changes in line with our business goals. As part of itsour pursuit of improved margin performance, Baxter iswe are working to optimize itsour cost structure and as such iswe are critically assessing optimal support levels in light of the company’sour ongoing portfolio optimization efforts.

The company intends We intend to continue to actively manage itsour cost structure to help ensure it isthat we are committing resources to the highest value uses. Such high value activities include supporting innovation, building out the portfolio, expanding patient access and accelerating growth for the company’sour stockholders.

Baxter has undertaken a comprehensive review of all aspects of its operations and has already begun to implement changes in line with its business goals.

Maintaining Disciplined and Balanced Capital Allocation

Baxter’s

Our capital allocation strategies include the following:

•reinvest in the business by funding opportunities that are positioned to deliver sustainable growth, support the company’sour innovation efforts and improve margin performance;

•return capital to stockholders through stock dividends, which we expect to meaningfully increase with earnings growth;

•share repurchases; and

•identify and pursue accretive M&A opportunities that generate returns above targeted thresholds.

merger and acquisition (M&A) opportunities.

Responsible Corporate Citizen

The company strives

We strive for continued growth and profitability, while furthering itsour focus on acting as a responsible corporate citizen. At Baxter,To us, sustainability means creating lasting social, environmental and economic value by addressing the needs of the company’sour wide-ranging stakeholder base. Baxter’sOur comprehensive sustainability program is focused on areas where the company isin which we are uniquely positioned to make a positive impact. Priorities include providing employees a safe, healthy and inclusive workplace, fostering a culture that drives integrity, strengthening access to healthcare, enhancing math and science education, and driving environmental performance across the product life cycle, including development, manufacturing and transport. Baxter andAlong with the Baxter International Foundation, we provide financial support and product donations in support of critical needs, from assisting underserved communities to providing emergency relief for countries experiencing natural disasters.

Throughout 2017 the company2019, we continued to implement a range of water conservation strategies and facility-based energy saving initiatives. In the area of product stewardship and life cycle management, Baxter iswe are pursuing efforts such as sustainable design and reduced packaging. Baxter isWe are also responding to the challenges of climate change through innovative greenhouse gas emissions-reduction programs, such as shifting to less carbon-intensive energy sources in manufacturing and transport. Additionally, the companywe developed new long-term goals to drive continued environmental stewardship while creating healthier, more sustainable communities where Baxterour employees work and live.

Risk Factors

The company’s

Our ability to sustain long-term growth and successfully execute the strategies discussed above depends in part on the company’sour ability to manage within an increasingly competitive and regulated environment and to address the other risk factors described in Item 1A of this Annual Report on Form 10-K.


27

RESULTS OF OPERATIONS

Special Items

The following table provides a summary of the company’sour special items and the related impact by line item on the company’sour results of continuing operations for 2017, 20162019, 2018 and 2015.

2017.

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Gross Margin

 

 

 

 

 

 

 

 

 

 

 

 

Intangible asset amortization expense

 

$

(154

)

 

$

(163

)

 

$

(158

)

Business optimization items1

 

 

(53

)

 

 

(156

)

 

 

(38

)

Intangible asset impairment2

 

 

—

 

 

 

(51

)

 

 

—

 

Separation-related costs3

 

 

(1

)

 

 

(1

)

 

 

—

 

Product-related items4

 

 

(17

)

 

 

18

 

 

 

28

 

Claris acquisition and integration expenses¹⁰

 

 

(8

)

 

 

—

 

 

 

—

 

Hurricane Maria costs¹¹

 

 

(32

)

 

 

—

 

 

 

—

 

Total Special Items

 

$

(265

)

 

$

(353

)

 

$

(168

)

Impact on Gross Margin Ratio

 

(2.6 pts)

 

 

(3.5 pts)

 

 

(1.7 pts)

 

Marketing and Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Business optimization items1

 

$

116

 

 

$

173

 

 

$

152

 

Separation-related costs3

 

 

18

 

 

 

53

 

 

 

110

 

Claris acquisition and integration expenses¹⁰

 

 

20

 

 

 

—

 

 

 

—

 

Historical reserve adjustments¹²

 

 

(12

)

 

 

—

 

 

 

—

 

Litigation and contractual disputes¹⁴

 

 

21

 

 

 

—

 

 

 

—

 

Total Special Items

 

$

163

 

 

$

226

 

 

$

262

 

Impact on Marketing and Administrative Expense Ratio

 

1.5 pts

 

 

2.3 pts

 

 

2.6 pts

 

Research and Development Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Business optimization items1

 

$

—

 

 

$

80

 

 

$

13

 

Separation-related costs3

 

 

—

 

 

 

—

 

 

 

1

 

Total Special Items

 

$

—

 

 

$

80

 

 

$

14

 

Other Income, Net

 

 

 

 

 

 

 

 

 

 

 

 

Business optimization items1

 

$

—

 

 

$

—

 

 

$

(3

)

Net realized gains on Retained Shares transactions⁵

 

 

—

 

 

 

(4,391

)

 

 

—

 

Loss on debt extinguishment⁶

 

 

—

 

 

 

149

 

 

 

130

 

Reserve items and adjustments⁷

 

 

—

 

 

 

—

 

 

 

(52

)

Business development items⁸

 

 

—

 

 

 

—

 

 

 

(20

)

Tax matter⁹

 

 

—

 

 

 

9

 

 

 

—

 

Venezuela deconsolidation¹³

 

 

33

 

 

 

—

 

 

 

—

 

Total Special Items

 

$

33

 

 

$

(4,233

)

 

$

55

 

Income Tax Expense

 

 

 

 

 

 

 

 

 

 

 

 

Impact of special items⁹

 

$

191

 

 

$

(314

)

 

$

(137

)

Total Special Items

 

$

191

 

 

$

(314

)

 

$

(137

)

Impact on Effective Tax Rate

 

22.5 pts

 

 

(22.1 pts)

 

 

(10.4 pts)

 

years ended December 31 (in millions)201920182017
Gross Margin
Intangible asset amortization expense$(183) $(169) $(154) 
Intangible asset impairment1
(31) —  —  
Business optimization items2
(69) (49) (53) 
Separation-related costs3
—  —  (1) 
Product-related items4
—  6  (17) 
Acquisition and integration expenses5
(30) (27) (8) 
Litigation and contractual disputes6
—  (8) —  
Hurricane Maria insurance recoveries (costs)7
—  32  (32) 
European medical devices regulation8
(25) (6) —  
Total Special Items$(338) $(221) $(265) 
Impact on Gross Margin Ratio(3.0 pts) (2.0 pts) (2.5 pts) 
Selling, General and Administrative (SG&A) Expenses
Business optimization items2
$70  $145  $116  
Separation-related costs3
—  —  18  
Acquisition and integration expenses5
20  23  20  
Litigation and contractual disputes6
—  2  21  
Investigation-related costs13
8  —  —  
Historical reserve adjustments9
—  —  (12) 
Total Special Items$98  $170  $163  
Impact on SG&A Expense Ratio0.9 pts  1.5 pts  1.5 pts  
R&D Expenses
Business optimization items2
$45  $26  $—  
Acquisition and integration expenses5
8  7  —  
European medical devices regulation8
—  3  —  
Total Special Items$53  $36  $—  
Impact on R&D Expense Ratio0.4 pts  0.3 pts  0.0 pts  
Other Operating Income, net
Acquisition and integration expenses5
$(4) $—  $—  
Hurricane Maria insurance recoveries7
(100) (10) —  
Claris Settlement10
—  (80) —  
Insurance recoveries from a legacy product-related matter11
(37) —  —  
Total Special Items$(141) $(90) $—  
Other (Income) Expense, Net
Acquisition and integration activities5
$—  $(24) $—  
Pension settlement14
755  —  —  
Venezuela deconsolidation12
—  —  33  
Total Special Items$755  $(24) $33  
Income Tax Expense
Tax effects of special items and impact of U.S. Tax Reform15
$(387) $(277) $191  
Total Special Items$(387) $(277) $191  
Impact on Effective Tax Rate(20.9 pts) (13.7) pts 25.4 pts  

28

Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is similar toconsistent with how management and our Board of Directors internally assessesassess performance. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact the company’s reportedour results of operations for a period. Management believes that providing the separate impact of the above items on the company’sour results in accordance with generally accepted accounting principles (GAAP) in the United StatesU.S. GAAP may provide a more complete understanding of the company’sour operations and can facilitate a fuller analysis of the company’sour results of operations, particularly in evaluating performance from one period to another.

1Our results in 2019 included a $31 million asset impairment related to a developed-technology intangible asset.

2In 2019, 2018 and 2017, 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 canceling certain R&D programs. Our results in 2019, 2018 and 2017 included business optimization charges of $184 million, $220 million and $169 million, respectively. Refer to Note 12 of this Annual Report on Form 10-K in Item 8 for further information regarding these charges and related liabilities.

3Our results in 2017 included costs related to the Baxalta separation of $19 million. Refer to Note 3 in Item 8 of this Annual Report on Form 10-K for further information related to the separation of Baxalta.  
4Our results in 2018 included a net benefit of $6 million related to an adjustment to our accrual for SIGMA SPECTRUM infusion pump inspection and remediation activities. Our results in 2017 included a net charge of $17 million related to SIGMA SPECTRUM infusion pump inspection and remediation activities and other historical product reserves.  
5Our results in 2019 included $54 million of acquisition and integration expenses. This included integration expenses relate to our acquisitions of Claris and the RECOTHROM and PREVELEAK products in prior periods, as well as the 2019 acquisitions of Cheetah and 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 $33 million of acquisition and integration costs related to our acquisitions of Claris and the RECOTHROM and PREVELEAK products, upfront payments related to R&D collaborations and license agreements, and a gain from remeasuring our previously held investment to fair value upon acquisition of a controlling interest in our joint venture in Saudi Arabia. Our results in 2017 included acquisition and integration expenses of $28 million related to our acquisition of Claris. Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for further information should be consideredregarding business development activities.
6Our results in addition2018 included charges of $10 million related to certain product litigation. Our results in 2017 included charges of $21 million related to litigation and notcontractual disputes for businesses or arrangements in which we are no longer engaged or a party thereto.
7Our results in 2019 and 2018 included benefits of $100 million and $42 million, respectively, related to insurance recoveries as a substituteresult of losses incurred due to Hurricane Maria. Our results in 2017 included a charge of $32 million related to the impact of Hurricane Maria on our operations in Puerto Rico.  The costs primarily included inventory and fixed asset impairments as well as idle facility costs. Refer to Note 9 in Item 8 of this Annual Report on Form 10-K for further information preparedregarding the impact of Hurricane Maria.
8Our results in accordance2019 and 2018 included costs of $25 million and $9 million, respectively, related to updating our quality systems and product labeling to comply with GAAP.


the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that will become effective in 2020.

1

In 2017, 2016 and 2015, the company’s results were impacted by costs associated with the company’s execution of certain strategies to optimize its organization and cost structure on a global basis. These actions included streamlining the company’s international operations, rationalizing its manufacturing facilities, reducing its general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. The company recorded net business optimization charges of $169 million, $409 million and $203 million in 2017, 2016 and 2015, respectively. The company’s results in 2017 included a net charge of $70 million related to restructuring activities, $89 million of costs to implement business optimization programs which primarily included external consulting and project employee costs and $10 million of accelerated depreciation associated with facilities to be closed. The $70 million of restructuring charges included net $59 million of employee termination costs, $6 million of asset impairment charges related to facility closure costs and $5 million of other exit costs. The company’s results in 2016 included a net charge of $285 million related to restructuring activities, $65 million of costs to implement business optimization programs which primarily included external consulting and project employee costs, $33 million of accelerated depreciation associated with facilities to be closed, and $26 million of Gambro integration costs. The $285 million of restructuring charges included net $180 million of employee termination costs, $54 million of costs related to the discontinuance of the VIVIA home hemodialysis development program, $47 million of asset impairment charges related to acquired in-process R&D and facility closure costs and $4 million of other exit costs. The company’s results in 2015 included a net charge of $130 million related to restructuring activities and $73 million of Gambro integration costs. The $130 million of net restructuring charges included net $83 million of employee termination costs, a $20 million intangible asset impairment and $27 million of other asset impairments and other exit costs. Refer to Note 7 in Item 8 for further information regarding these charges and related reserves.

2

The company’s results in 2016 included a $51 million asset impairment primarily related to developed technology.

3

The company’s results in 2017, 2016 and 2015 included costs related to the Baxalta separation of $19 million, $54 million and $111 million, respectively.

4

The company’s results in 2017 included a net charge of $17 million related to SIGMA SPECTRUM infusion pump inspection and remediation activities and other historical product reserves.  The company’s results in 2016 and 2015 included a net benefit of $18 million and $28 million, respectively, primarily related to adjustments to the COLLEAGUE and SIGMA SPECTRUM infusion pump reserves. Refer to Note 7 in Item 8 for further information regarding these charges and related reserves.

5

The company’s results in 2016 included net realized gains of $4.4 billion related to the debt-for-equity exchanges of the company’s retained shares in Baxalta for certain indebtedness, the exchange of retained shares in Baxalta for Baxter shares and the contribution of retained shares in Baxalta to Baxter’s U.S. pension fund.

6

The company’s results in 2016 included a net debt extinguishment loss totaling $149 million related to the March 2016 debt-for-equity exchange for certain company indebtedness and certain debt redemptions. The company’s results in 2015 included a loss of $130 million related to its July 2015 tender offer for certain of its outstanding indebtedness. Refer to Note 8 in Item 8 for additional information.

7

The company’s results in 2015 included income of $52 million related to a litigation settlement in which Baxter was the beneficiary.

8

The company’s results in 2015 included a benefit of $20 million relating to the reversal of contingent consideration milestone liabilities. Refer to Note 5 in Item 8 for further information regarding the company’s acquisitions and other arrangements.

9

Reflected in this item is the tax impact of the special items identified in this table as well as a net tax charge of $322 million related to the estimated impact of tax reform on the company’s tax related assets and liabilities.  The company’s results in 2016 included a net after-tax benefit of $10 million related to the settlement of an income tax matter in the company’s non-wholly owned joint venture in Turkey. This amount was comprised of $19 million included in income tax expense offset by $9 million in non-controlling interest recorded in other income, net.

10

The company’s results in 2017 include acquisition and integration costs of $28 million related to the company’s acquisition of Claris.

11

The company’s results in 2017 included a charge of $32 million related to the impact of Hurricane Maria on the company’s operations in Puerto Rico.  The costs primarily include inventory and fixed asset impairments as well as idle facility costs.

12

The company's results in 2017 included a benefit of $12 million related to an adjustment to the company's historical rebates and discounts reserve.

13

The company’s results in 2017 included a charge of $33 million related to the deconsolidation of its Venezuelan operations.


9Our results in 2017 included a benefit of $12 million related to an adjustment to our historical rebates and discounts reserve.

14

The company’s results in 2017 included charges of $21 million related to litigation and contractual disputes for businesses or arrangements in which the company is no longer engaged or a party thereto.

29


10Our results in 2018 included a benefit of $80 million for the settlement of certain claims related to the acquired operations of Claris. Refer to Note 4 in Item 8 of this Annual Report on Form 10-K for further information regarding the acquisition of Claris.
11Our results in 2019 included a benefit of $37 million for our allocation of insurance proceeds received pursuant to a settlement and cost-sharing arrangement for a legacy product-related matter. Refer to Note 9 in Item 8 of this Annual Report on Form 10-K for further information.
12Our results in 2017 included a charge of $33 million related to the deconsolidation of our Venezuelan operations. Refer to Note 1 in Item 8 of this Annual Report on Form 10-K for further information regarding the deconsolidation of our Venezuelan operations.
13Our results in 2019 included costs of $8 million related to our internal investigation of foreign exchange gains and losses associated with certain intra-company transactions. Refer to Note 9 in Item 8 of this Annual Report on Form 10-K for further information regarding the internal investigation.
14Our results in 2019 included a charge of $755 million related to the annuitization of a portion of our U.S. pension plan. Refer to Note 13 in Item 8 of this Annual Report on Form 10-K for further information regarding the pension annuitization.
15Reflected in this item is the income tax impact of the special items identified in this table. Additionally, our results in 2019 included a net tax benefit of $125 million related to income tax reform in Switzerland and India and an adjustment for U.S. federal tax reform. Our results in 2018 included a net tax benefit of $196 million related to updates to the estimated impact of U.S. federal tax reform previously made in 2017.  Our results in 2017 included a net tax charge of $322 million related to the estimated impact of U.S. federal tax reform on our tax related assets and liabilities. 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

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent change

 

As restatedPercent change

 

 

 

 

 

 

 

 

 

 

 

 

 

At actual

currency rates

 

 

At constant

currency rates

 

At actual
currency rates		At constant
currency rates

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

years ended December 31 (in millions)2019201820172019201820192018

United States

 

$

4,510

 

 

$

4,259

 

 

$

4,001

 

 

 

6

%

 

 

6

%

 

 

6

%

 

 

6

%

United States$4,826  $4,723  $4,510  2 %5 %2 %5 %

International

 

 

6,051

 

 

 

5,904

 

 

 

5,967

 

 

 

2

%

 

 

(1

)%

 

 

2

%

 

 

3

%

International6,536  6,376  6,074  3 %5 %7 %4 %

Total net sales

 

$

10,561

 

 

$

10,163

 

 

$

9,968

 

 

 

4

%

 

 

2

%

 

 

4

%

 

 

4

%

Total net sales$11,362  $11,099  $10,584  2 %5 %5 %4 %

Net sales for the year ended December 31, 20172019 increased 4%2% at actual rates and 5% at constant currency rates. Net sales for the year ended December 31, 20162018 increased 2%5% at actual currency rates and 4% on aat constant currency basis.

Changes in foreign currency exchange rates had no net impact on net sales during 2017 compared to the prior year. rates.

Foreign currency exchange rates unfavorably impacted 2019 net sales growth by twothree percentage points during 2016 compared to 2015 principally due to the strengthening of the U.S.U.S Dollar relative to the Euro, Australian Dollar, British Pound, Chinese Yuan and Colombian Peso. Changes in foreign currency exchange rates favorably impacted 2018 net sales growth by one percentage point, principally due to the weakening of the U.S dollar relative to the Euro, British Pound Mexican Peso, Colombian Peso and the Chinese Yuan, as well as other currencies, partially offset by the weakeningstrengthening of the U.S. dollarDollar relative to the Japanese Yen.

Brazilian Real, Turkish Lira and Australian Dollar.

The comparisons presented at constant currency rates reflect comparativecurrent year local currency sales at the prior year’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. The company believesWe 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 of the company’s operations and can facilitate a fuller analysis of the company’sour results of operations, particularly in evaluating performance from one period to another.

During 2016, the company made a strategic decision to exit select products in certain markets including Venezuela, India and Turkey.  Overall, these items had a negative impact to the company’s net sales growth rate of one percentage point during 2017.  

In addition, the impact of generic competition for U.S. cyclophosphamide had a negative impact on net sales of $25 million in 2017 compared to 2016.  The company expects net sales of U.S. cyclophosphamide to decrease by approximately $90 million in 2018 due to the entrance of additional competitors.

On July 27, 2017, the company completed2019, the acquisition of Claris, a wholly owned subsidiaryCheetah had an insignificant impact on reported revenues. The RECOTHROM and PREVELEAK products acquired in 2018 contributed $80 million and $52 million of revenues in 2019 and 2018, respectively. The acquisition of Claris Lifesciences Limited, for total cash consideration of $629contributed $140 million net of cash acquired. In 2017, consolidated results includeand $57 million of net sales relatedrevenues in 2018 and 2017, respectively.

30

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the Claris acquisition.

In September 2017, the company’s three Puerto Rico manufacturing facilities sustained minimal structural damage from thenovel strain of coronavirus that recently originated in China (COVID-19). COVID-19 may have an adverse impact of Hurricane Maria.  Notwithstanding intermittenton our operations, supply chains and continuing challenges with local infrastructure, limited production activities resumed soon thereafterdistribution systems and the company is currently back to pre-hurricane production levels at these facilities.  Given the disruptions to the company’s manufacturing facilitiesincrease 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 storm, the company’s net sales in the fourth quartertreatment of 2017 were negatively impacted by approximately $70 million.  The company currently expects these disruptions topatients. For example, elective surgeries are being de-prioritized which will negatively impact netthe 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, in the first quarterand it is uncertain how COVID-19 will affect our global operations generally if these impacts persist or exacerbate over an extended period of 2018 by approximately $25 million.

time. For further discussion, refer to Item 1A of this Annual Report on Form 10-K.

Global Business Unit Net Sales Reporting

The company’s

Our global business units (GBUs) reflect the reorganization of the company’s business consistent with its new strategic framework.  These groupings replace the company’s former franchises and include the following:

•Renal Care includes sales of the company’sour peritoneal dialysis (PD) and, hemodialysis (HD) and additional dialysis therapies and services.

Acute Therapies•Medication Delivery includes sales of the company’s continualour 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).

Medication Delivery •Other primarily includes sales of the company’s IV therapies, infusion pumps, administration sets and drug reconstitution devices.


Pharmaceuticals includes sales of the company’s premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.

Nutrition includes sales of the company’s parenteral nutrition (PN) therapies.

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

Other includes sales primarilycontract manufacturing services from the company’sour pharmaceutical partnering business.

The following is a summary of net sales by GBU.

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent change

 

As restatedPercent change

 

 

 

 

 

 

 

 

 

 

 

 

 

At actual

currency rates

 

 

At constant

currency rates

 

At actual
currency rates		At constant
currency rates

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

years ended December 31 (in millions)2019201820172019201820192018

Renal Care

 

$

3,480

 

 

$

3,421

 

 

$

3,401

 

 

 

2

%

 

 

1

%

 

 

2

%

 

 

4

%

Renal Care$3,639  $3,651  $3,491  — %5 %3 %4 %

Acute Therapies

 

 

456

 

 

 

429

 

 

 

385

 

 

 

6

%

 

 

11

%

 

 

6

%

 

 

14

%

Medication Delivery

 

 

2,698

 

 

 

2,596

 

 

 

2,375

 

 

 

4

%

 

 

9

%

 

 

4

%

 

 

11

%

Medication Delivery2,799  2,664  2,700  5 %(1)%7 %(2)%

Pharmaceuticals

 

 

1,883

 

 

 

1,722

 

 

 

1,801

 

 

 

9

%

 

 

(4

)%

 

 

9

%

 

 

(2

)%

Pharmaceuticals2,155  2,087  1,886  3 %11 %6 %10 %

Nutrition

 

 

882

 

 

 

858

 

 

 

857

 

 

 

3

%

 

 

0

%

 

 

2

%

 

 

2

%

Clinical NutritionClinical Nutrition872  875  885  — %(1)%3 %(3)%

Advanced Surgery

 

 

707

 

 

 

690

 

 

 

693

 

 

 

2

%

 

 

0

%

 

 

2

%

 

 

1

%

Advanced Surgery877  798  708  10 %13 %12 %12 %
Acute TherapiesAcute Therapies535  515  457  4 %13 %7 %12 %

Other

 

 

455

 

 

 

447

 

 

 

456

 

 

 

2

%

 

 

(2

)%

 

 

1

%

 

 

(2

)%

Other485  509  457  (5)%11 %(2)%10 %

Total Baxter

 

$

10,561

 

 

$

10,163

 

 

$

9,968

 

 

 

4

%

 

 

2

%

 

 

4

%

 

 

4

%

Total Baxter$11,362  $11,099  $10,584  2 %5 %5 %4 %

Foreign exchange rates unfavorably impacted Renal Care net sales increased 2%3% in 2019 and favorably impacted net sales 1% in 2017 and 2016,2018, respectively. Excluding the impact of foreign currency,exchange rates, Renal Care net sales increased 2%in 2019 and 4% in 2017 and 2016, respectively.2018.  The increase in 20172019 was driven by continuedglobal patient growth ofin PD, patients and adoption of the company’s new Automated Peritoneal Dialysis Cyclers (APD) AMIA in the U.S. and HomeChoice CLARIA in international markets, partially offset by lower sales ofU.S. in-center HD products internationally.  Additionally, net sales were negatively impacted in 2017 by approximately $50 million as compared to 2016 due to certain international strategic market exits.sales. The increase in 20162018 was primarily driven by continued global growth of patients, new product launches and improved pricing in the U.S. PD business as well as increased international sales in the HD business.

Acute Therapies

Foreign exchange rates unfavorably impacted Medication Delivery net sales increased 6%2% in 2019 and 11%favorably impacted net sales 1% in 2017 and 2016,2018, respectively. Excluding the impact of foreign currency,exchange rates, Medication Delivery net sales
31

increased in 2019 and decreased in 2018. The increase in 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 decrease in 2018 was partially attributable to supply constraints associated with our small volume parenterals (SVPs) due to Hurricane Maria as well as lower international sales resulting from a reallocation of volume to the U.S.
Foreign exchange rates unfavorably impacted Pharmaceuticals net sales 3% in 2019 and favorably impacted net sales 1% in 2018, respectively. Excluding the impact of foreign exchange rates, Pharmaceuticals net sales increased 6%in 2019 and 14%, respectively,2018. 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 inhaled anesthetics as well as BREVIBLOC and U.S. cylophosphamide due to increased generic competition. The increase in 2018 was a result of the benefit from the acquisition of Claris, increased sales of our premixed injectables and inhaled anesthetics, as well as increased demand for pharmacy compounding services.  The acquisition of Claris in 2017 contributed $140 million of net sales in 2018 compared to $57 million of net sales in 2017. Partially offsetting the increase in 2018 was reduced sales of U.S. cyclophosphamide.
Foreign exchange rates unfavorably impacted Clinical Nutrition net sales 3% in 2019 and favorably impacted net sales 2% in 2018, respectively. Excluding the impact of foreign exchange rates, Clinical Nutrition net sales increased in 2019 and decreased in 2018. The increase in 2019 was due to the launch of new products. The decrease in 2018 was driven by the impact of Hurricane Maria related supply constraints which resulted in some customers in the U.S. changing protocols for PN therapies or shifting to outsourced nutrition compounding centers and competitive products, partially offset by improved volumes internationally for our nutritional therapies.
Foreign exchange rates unfavorably impacted Advanced Surgery net sales 2% in 2019 and favorably impacted net sales 1% in 2018, respectively. Excluding the impact of foreign exchange rates, Advanced Surgery net sales increased in 2019 and 2018. The increase in 2019 was primarily driven by higher sales as a result of a temporary supply disruption of a competitor. The increase in 2018 was primarily driven by the company’sacquisition of RECOTHROM and PREVELEAK from Mallinckrodt, which contributed $52 million of net sales in 2018, and improved sales for our core hemostats and sealants. 
Foreign exchange rates unfavorably impacted Acute Therapies net sales 3% in 2019 and favorably impacted net sales 1% in 2018, respectively. Excluding the impact of foreign exchange rates, Acute Therapies net sales increased in 2019 and 2018.  The increase in 2019 was due to higher global demand for our CRRT systems to treat acute kidney injuries.

Medication Deliveryinjuries, including the launch of PrisMax in several countries across the Americas, Europe and Asia. The increase in 2018 was due to higher demand for our CRRT systems to treat acute kidney injuries and higher demand for other products from an intense flu season.

Foreign exchange rates unfavorably impacted Other net sales increased 4%3% in 2019 and 9%favorably impacted net sales 1% in 2017 and 2016,2018, respectively. Excluding the impact of foreign currency,exchange rates, Other net sales increased 4% and 11%, respectively.  The increasedecreased in both years was driven by select pricing and improved volumes for U.S. IV solutions.  This increase was also positively impacted by increased2019 in comparison to strong sales of the company’s IV access administrative sets, reflecting the on-going pull through from the company’s growing SPECTRUM infusion pump base.  Net sales were negatively impacted in 2017 by approximately $35 million as compared to 2016 due to certain international strategic market exits.  Additionally, 2017 net sales were negatively impacted by approximately $45 million due to the impact of Hurricane Maria.

Pharmaceuticals net sales increased 9% in 2017 and decreased 4% in 2016.  Excluding the impact of foreign currency, net sales increased 9% in 2017 and decreased 2% in 2016.  The increase in 2017 was a result of increased sales of pre-mixed injectable drugs (as a result of recent product launches), a one-time benefit from a pharmacy compounding early contract settlement, improved pricing for BREVIBLOC, a fast-acting IV beta blocker, and increased sales of TransDerm Scop resulting from temporary supply disruptions.  The acquisition of Claris in 2017 also contributed $57 million of net sales.  The increase was partially offset by a reduction in sales of U.S. cyclophosphamide from $210 million in 2016 to $185 million in 2017 due to the entry of competitors into the market and an approximate $10 million reduction in sales due to the impact of Hurricane Maria.  Additionally, net sales were negatively impacted in 2017 by approximately $10 million as compared to 2016 due to certain international strategic market exits.  The decrease in 2016 was a result of U.S. Department of Defense PROTOPAM orders in 2015 that did not reoccur in 2016 and a reduction in sales of U.S. cyclophosphamide from $270 million in 2015 to $210 million in 2016.

Nutrition net sales increased 3% in 2017 and were flat in 2016.  Excluding the impact of foreign currency, net sales increased 2% in each period driven by improved volumes, new product launches and ongoing geographic expansion for the company’s PN therapies.  Partially offsetting the increase in 2017 was an approximate $15 million reduction in sales due to the impact of Hurricane Maria.

Advanced Surgery net sales increased 2% in 2017 and were flat in 2016.  Excluding the impact of foreign currency, net sales increased 2% and 1% in 2017 and 2016, respectively, primarily driven by improved volumes internationally.  Offsetting performance in both periods were reduced sales of non-core surgical products Actifuse and Peristrips.


the prior year. On a constant currency basis, Other net sales increased 2% in 2017 and decreased 2% in 2016.  Excluding the impact of foreign currency, net sales increased 1% in 2017 and decreased 2% in 2016.  The increase in 2017 was a result of2018 due primarily to favorable volumes for products manufactured by Baxterus on behalf of itsour pharmaceutical partners, including the benefitimpact of those customers increasing the safety stock levels of select products.  The decrease in 2016 was driven by lower demand for products manufactured by Baxter on behalf of one of its pharmaceutical partners as that partner transitioned to self-manufacture of products previously manufactured by Baxter.  

Gross Margin and Expense Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change

years ended December 31 (as a percent of net sales)

 

2017

 

 

2016

 

 

2015

 

 

2017

 

2016

Gross margin

 

 

42.2

%

 

 

40.4

%

 

 

41.6

%

 

1.8 pts

 

(1.2 pts)

Marketing and administrative expenses

 

 

24.5

%

 

 

27.0

%

 

 

31.0

%

 

(2.5 pts)

 

(4.0 pts)

As restated20192018
years ended December 312019% of net sales2018% of net sales2017% of net sales$ change% change$ change% change
Gross margin$4,761  41.9 %$4,759  42.9 %$4,474  42.3 %$2  — %$285  6.4 %
SG&A$2,535  22.3 %$2,620  23.6 %$2,627  24.8 %$(85) (3.2)%$(7) (0.3)%
R&D$595  5.2 %$654  5.9 %$615  5.8 %$(59) (9.0)%$39  6.3 %

Gross Margin

The gross margin ratio was 41.9%, 42.9% and 42.3% in 2019, 2018 and 2017, respectively. The special items identified above had an unfavorable impact of 2.6, 3.53.0, 2.0 and 1.72.5 percentage points on the gross margin ratio in 2017, 20162019, 2018 and 2015,2017, respectively. Refer to the Special Items section above for additional detail.

32

Excluding the impact of the special items, the gross margin ratio was unchanged in 2019 compared to 2018. The gross margin ratio was impacted by 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, offset by manufacturing efficiencies.
Excluding the impact of the special items, the gross margin ratio increased 0.90.1 percentage points in 2017.2018. The gross margin ratio was impacted by select price increases,increased primarily due to a favorable product mix and manufacturing performance and a benefit from the company’s business transformation initiatives aimed at simplifying the portfolio to drive efficiency and reduce costs,efficiencies, partially offset by the negative impact of foreign currency.

Excludingexchange rates, incremental supply chain costs and the impact of the special items, the gross margin ratio increased 0.6 percentage points in 2016. lost sales due to Hurricane Maria.

SG&A
The gross marginSG&A expenses ratio was impacted by a positive sales mix, improved pricing22.3%, 23.6% and 24.8% in select areas of the portfolio2019, 2018 and favorable manufacturing performance, offset by reduced sales of cyclophosphamide in the United States and foreign exchange.

Marketing and Administrative Expenses

2017, respectively. The special items identified above had an unfavorable impact of 0.9, 1.5 2.3 and 2.61.5 percentage points on the marketing and administrativeSG&A expenses ratio in 2017, 20162019, 2018 and 2015,2017, respectively. Refer to the Special Items section above for additional detail.

Excluding the impact of the special items, the marketing and administrative expenseSG&A expenses ratio decreased 1.70.7 percentage points in 20172019 primarily due to actions we took to restructure our cost position and focus on expense management.
Excluding the impact of the special items, the SG&A expenses ratio decreased 1.2 percentage points in 2018 due to the actions taken by the companyus to restructure itsour cost position and focus on expense management. These savings were partially offset by decreased benefits to the marketing and administrativeSG&A expenses ratio from lower transition service incomeincreased freight expenses as we worked to ensure adequate product availability to meet customer needs.  In addition, a change in the agreement with Baxaltaestimated useful life of our ERP systems in 2018 contributed to the reduction in the SG&A expenses ratio.
R&D
The R&D expenses ratio was 5.2%, 5.9% and 5.8% in 2019, 2018 and 2017, respectively. The special items identified above had an unfavorable impact of 0.4, 0.3 and 0.0 percentage points on the R&D expenses ratio in 2019, 2018 and 2017, respectively. Refer to the Special Items section above for these services continues to wind down.

additional detail.

Excluding the impact of the special items, the marketing and administrative expenseR&D expenses ratio decreased 3.7by 0.8 percentage points in 20162019 as a result of reduced project-related expenditures compared to the prior year and was impacted by reduced pension expense, benefits from the company’s actions takenwe took to restructure itsour cost position and continued focus on expense management, and a reduction to expense undermanagement.
Excluding the transition services agreement with Baxalta.

Pension and Other Postemployment Benefit Plan Expense

Expense related toimpact of special items, the company’s pension and other postemployment benefit (OPEB) plans increased $9 million in 2017 primarily due to a reduction in the expected return on assets.  Expense related to the company’s pension and other postemployment benefit plansR&D expenses ratio decreased $111 million in 2016 primarily due to a change in approach to estimating employer service and interest costs and a $706 million voluntary, non-cash contribution to the U.S. qualified plan using Retained Shares.  The company expects expenses from pension and other postemployment benefit plans to decreaseby 0.2 percentage points in 2018 as a result of the splitactions we took to restructure our cost position and freeze of its U.S. pension plans announcedfocus on expense management, partially offset by an increase in January 2018 coupled with stronger investment returns as a result of additional contributions made in 2017 and better-than expected investment returns realized in 2017.  Refer to Notes 1 and 13 in Item 8 for further information regarding pension and other postemployment benefit plan expenses and a change in income statement presentation for these expenses.

project-related expenditures.

Business Optimization Items

Beginning in the second half of 2015, the company has initiated

In recent years, we have undertaken actions to transform the company’sour cost structure and enhance our operational efficiency. These efforts include restructuring the organization, optimizing theour manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. ThroughFrom the commencement of our business optimization actions in the second half of 2015 through December 31, 2017, the company2019, we have incurred cumulative pre-tax costs of $576$980 million related to these actions. The costs consisted primarily of employee termination costs, implementation costs, asset impairments, and accelerated depreciation. The company expectsWe currently expect to incur additional pretaxpre-tax costs of approximately $240 million and capital expenditures of $50 million related to these initiatives, by the end of 2018. These costs will primarily includerelated to employee termination costs and implementation costs. TheseTo 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 futurecumulative annual pretax savings of approximately $975 million.$1.2 billion once the remaining actions are complete. The savings from these actions will impact cost of sales, marketing and administrativeSG&A expenses, and R&D expenses. The company estimates that actions taken through December 31,


2017 have resulted in approximately $730 million of savings in 2017. Approximately 9095 percent of the expected annual pretaxpre-tax savings arehas been realized through December 31, 2019, with the remainder expected to be realized by the end of 2018, with the remainder by the end of 2020.

In addition to the programs above, the company recorded additional net business optimization charges of $125 million in 2016. These charges primarily include employee termination costs, contract termination costs, asset impairments, and Gambro integration costs.  Approximately 40% of these costs were non-cash. The company does not anticipate incurring any additional costs related to these programs in the future. The actions in the aggregate are expected to provide future annual pre-tax savings of approximately $19 million. The savings from these actions will impact cost of sales, marketing and administrative expenses, and R&D expenses.

2023. Refer to Note 712 in Item 8 of this Annual Report on Form 10-K for additional information regarding the company’sour business optimization initiatives.

Researchprograms.

33

Other Operating Income, Net
Other operating income, net was $141 million, $99 million and Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent change

 

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

Research and development expenses

 

$

617

 

 

$

647

 

 

$

603

 

 

 

(5

)%

 

 

7

%

as a percent of net sales

 

 

5.8

%

 

 

6.4

%

 

 

6.0

%

 

(0.6) pts

 

 

0.4 pts

 

The special items identified above had$56 million in 2019, 2018 and 2017, respectively. In 2019 and 2018, we recognized $100 million and $10 million, respectively, of insurance recoveries related to losses incurred due to Hurricane Maria within Other operating income, net. In 2019, we also recognized a benefit of $37 million when our share of the proceeds under a cost-sharing agreement became realizable following the resolution of a dispute with an unfavorable impactinsurer related to a legacy product-related matter. In 2018, we settled certain claims with the seller related to the acquired operations of Claris, which resulted in a benefit of $80 million. Additionally, included in other operating income in 2018 and 2017 was $9 million and $56 million, respectively, of transition service income earned in connection with our separation of Baxalta in 2015. The agreement for these services terminated as of July 1, 2018.

Interest Expense, Net
Interest expense, net was $71 million, $45 million and $55 million in 2019, 2018 and 2017, respectively. The increase in 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. The decrease in 2018 was primarily driven by higher interest income earned as a result of favorable interest rates. Refer to Note 5 in Item 8 of this Annual Report on Form 10-K for a summary of the components of interest expense, net for 2019, 2018 and 2017.
Other (Income) Expense, Net
Other (income) expense, net was an expense of $731 million in 2019, income of $78 million in 2018 and an expense of $133 million in 2017. The increase in expense in 2019 was primarily driven by a $755 million pension settlement charge related to the transfer of U.S. pension plan liabilities to an insurance company and $37 million of foreign exchange net losses in the current year, partially offset by an impairment of an investment in the prior year. Favorable results in 2018 were primarily driven by $49 million of pension and other postretirement (OPEB) benefits resulting from the split and freeze of our U.S. pension plans announced in January 2018, a $24 million gain from remeasuring our previously held investment to fair value upon acquisition of a controlling interest in our joint venture in Saudi Arabia and $14 million of foreign exchange net gains.
We expect expenses from pension and OPEB plans to increase in 20162020 primarily due to lower discount rates and 2015,a lower expected return on assets attributable to the transfer of U.S. pension plan liabilities to an insurance company. Refer to Note 13 in Item 8 of this Annual Report on Form 10-K for further information regarding pension and OPEB plan expenses.
The following unaudited quarterly financial information is presented to update our previous discussion and analysis giving effect to our restated results, which primarily impacted other (income) expense, net. The related misstatements are described in more detail in Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data.
As Restated
(in millions)For the six months ended June 30, 2019For the three months ended June 30, 2019For the three months ended March 31, 2019
Foreign exchange losses (gains)$14  $15  $(1) 
Pension and other postretirement benefit plans(31) (15) (16) 
Other—  4  (4) 
Other (income) expense, net$(17) $4  $(21) 

34

As Restated
(in millions)For the six months ended June 30, 2018For the three months ended June 30, 2018For the three months ended March 31, 2018
Foreign exchange losses (gains)$(29) $(26) $(3) 
Pension and other postretirement benefit plans(26) (14) (12) 
Other11  2  9  
Other (income) expense, net$(44) $(38) $(6) 

As Restated
(in millions)For the six months ended June 30, 2017For the three months ended June 30, 2017For the three months ended March 31, 2017
Foreign exchange losses (gains)$42  $19  $23  
Pension and other postretirement benefit plans17  8  9  
Venezuela deconsolidation33  33  —  
Other5  3  2  
Other (income) expense, net$97  $63  $34  
Other (income) expense, net was an expense of $4 million in the three months ended June 30, 2019 compared to income of $38 million in the three months ended June 30, 2018. The change was primarily due to $15 million of foreign exchange net losses in 2019 compared to $26 million of foreign exchange net gains in 2018. Other (income) expense, net was income of $21 million and $6 million in the three months ended March 31, 2019 and 2018, respectively.

Excluding The increase in 2019 was primarily due to favorable fair value adjustments on marketable equity securities in 2019, an investment impairment in 2018, and higher pension benefits in 2019.

Other (income) expense, net was income of $38 million in the impactthree months ended June 30, 2018 compared to expense of $63 million in the special items,three months ended June 30, 2017. The change was primarily due to a $33 million charge related to the researchdeconsolidation of our Venezuelan subsidiary in 2017 and development expenses ratio increased$26 million of foreign exchange net gains in 2018 compared to $19 million of foreign exchange net losses in 2017. Other (income) expense was income of $6 million and expense of $34 million in the three months ended March 31, 2018 and 2017, respectively. The increase in 2018 was primarily due to $3 million of foreign exchange net gains in 2018 compared to $23 million of foreign exchange net losses in 2017. Additionally, we recognized a benefit related to pension and OPEB plans in 2018 compared to a charge in 2017 as a result of the company’s increased investmentsplit and freeze of our U.S. pension plans announced in new product development and geographic expansion.

Excluding the impact of special items, the research and development expenses ratio decreased in 2016 primarily due to the optimization of the infrastructure, the exit of certain programs and the impact of foreign currency.

Net Interest Expense

Net interest expense was $55 million, $66 million and $126 million in 2017, 2016 and 2015, respectively. The decrease in 2017 was principally driven by lower outstanding debt as a result of the first quarter 2016 debt-for-equity exchanges and reduced coupon rates resulting from the third quarter 2016 and second quarter 2017 debt issuances, partially offset by lower capitalized interest compared to 2016.  The decrease in 2016 was principally driven by lower outstanding debt as a result of the first quarter 2016 debt-for-equity exchanges and reduced coupon rates resulting from the third quarter 2016 debt issuance, partially offset by lower capitalized interest compared to 2015. Refer to Note 3 in Item 8 for a summary of the components of net interest expense for 2017, 2016 and 2015.

Other Income, Net

Other income, net was $14 million, $4,296 million and $105 million in 2017, 2016 and 2015, respectively. The current year results included $50 million of income related to foreign currency fluctuations principally relating to intercompany receivables, payables and monetary assets denominated in a foreign currency, partially offset by the $33 million loss on the deconsolidation of the company’s Venezuela operations and $8 million of losses related to investment impairments. The 2016 results included net realized gains of $4.4 billion on the Retained Shares transactions, dividend income of $16 million from the Retained Shares, and $28 million of income related to foreign currency fluctuations principally relating to intercompany receivables, payables and monetary assets denominated in a foreign currency. These income items were partially offset by net debt extinguishment losses of $153 million. The 2015 results were driven primarily by $52 million of income related to a favorable litigation settlement, $38 million income from the sale of available-for-sale securities, and $113 million of income related to foreign currency fluctuations principally relating to intercompany receivables, payables and monetary assets denominated in a foreign currency, partially offset by a $130 million loss on extinguishment of debt related to the July 2015 debt tender offer.

January 2018.

Income Taxes

Effective Income Tax Rate

The effective income tax rate for continuing operations was 40.5% in 2017, (0.2%(4.2%) in 20162019, 4.0% in 2018, and 8.2%44.6% in 2015.2017. The special items identified above had an unfavorablea favorable impact of 22.520.9 and 13.7 percentage points on the effective income tax rate in 20172019 and a favorable2018 and an unfavorable impact of 22.1 and 10.425.4 percentage points in 2016 and 2015, respectively.2017.  Refer to the Special Items section above for additional detail.

The company’s

Our provision for income taxes and itsour effective rate increaseddecreased in 20172019 compared to 20162018 primarily due to special items, including the most significant of which was the impact of recently enacted Tax Cutstax reform in Switzerland and Jobs ActIndia. We recognized a deferred tax benefit of 2017 (the 2017 Tax Act),$90 million to reflect a tax basis step-up, net of a valuation allowance, partially offset by a $5 million deferred tax revaluation to reflect an increase in the tax-freestatutory tax rate, under the newly enacted Swiss tax laws. We also recognized a net realized gains recognizeddeferred tax benefit of $24 million associated with deferred tax revaluation in 2016 onIndia to reflect a decrease in the Baxalta Retained Shares and resolution of uncertainstatutory tax positions relatedrate.
In addition to the company’s former Turkish joint venture in 2016.  In addition, the company’sSwiss and Indian tax reform impacts, our provision for income taxes and itsour effective tax rate decreased in 2017 increased2019 compared to 2018 due to the recognition of tax benefits recognized


in 2016 from partially settling an IRS (2008-2013) incomeassociated with a favorable tax audit, settlingruling, a German (2008-2011) income tax audit, and other miscellaneous transfer pricing matters including partial settlement of interest expense deductionsbenefit related to a notional interest deduction on the company’s acquisitionshare capital of Gambro.a foreign subsidiary, and excess tax benefits on stock compensation awards. Partially offsetting the increasedecrease in the effective tax rate was a partial valuation allowance release against our U.S. foreign deferred tax assets in 2018 which did not recur in 2019.

35

Our provision for income taxes and our effective rate decreased in 2018 compared to 2017 primarily due to special items, the most significant of which was our finalization of our provisional adjustments resulting from the 2017 Tax Act.  SEC Staff Accounting Bulletin 118 (SAB 118) allowed a one-year measurement period from the December 22, 2017 Tax Act enactment date to refine the provisional amounts recognized in the 2017 financial statements.  
We recorded several SAB 118 measurement period provisional adjustments in 2018.  First, after further studying the 2017 Tax Act and related U.S. Treasury Regulations, we refined our provisional estimate of a full valuation allowance against our U.S. foreign tax credit deferred tax assets and released a $194 million valuation allowance due to our ability to utilize a portion of our U.S. foreign tax credit deferred tax assets. Second, the 2017 Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. In 2017, we recognized a provisional charge for our one-time transitional tax expense of $529 million, the majority of which was non-cash.  During 2018, we refined our estimated one-time transition tax expense, recognizing a benefit of $56$5 million. Third, the 2017 Tax Act lowered the U.S. federal rate from 35% to 21% and generally exempts foreign income from U.S. taxation. We finalized our provisional revaluation of U.S. deferred tax assets, recording an additional $8 million benefit.  
Our tax provisions for 2019 and 2018 do not include any tax charges related to either the Base Erosion and Anti-Abuse Tax (BEAT) or Global Intangible Low Taxed Income (GILTI) provisions, except for the inability to fully utilize foreign tax credits against such GILTI.  
In addition to the 2017 Tax Act SAB 118 measurement period adjustments, our provision for income taxes and our effective rate decreased in 2018 compared to 2017 due to a settlement of a 2008 through 2010 transfer pricing Competent Authority proceeding between the U.S. and Germany, the reversal of a foreign valuation allowance as a result of continued profit improvements, and the receipt of tax-free income from the settlement of Claris contingent matters.  Partially offsetting the decrease in the effective tax rate was a decrease in benefits related to deductions in excess of share-based compensation costs (windfall tax benefits), the revaluation of Swedish net deferred tax assets and the mix of earnings in lowermiscellaneous transfer pricing-related income tax jurisdictions relative to higher tax jurisdictions.accruals. Refer to Note 1514 in Item 8 of this Annual Report on Form 10-K for further information related to the 2017 Tax Act.

The company’s provision for income taxes and its effective tax rate in 2016 decreased compared to 2015 primarily due to special items in 2016 including the tax-free net realized gains recognized on the Baxalta Retained Shares and resolution of uncertain tax positions related to the company’s former Turkish joint venture.  In addition, the company’s provision for income taxes and its effective tax rate decreased in 2016 compared to 2015 due to tax benefits recognized in 2016 from partially settling an IRS (2008-2013) income tax audit, settling a German (2008-2011) income tax audit, other miscellaneous transfer pricing matters including partial settlement of interest expense deductions related to the company’s acquisition of GambroAct and the mixfinalization of earnings in lower tax jurisdictions relative to higher tax jurisdictions.  Also, the 2016 effective tax rate decreased from 2015 due to charges recognized in 2015 related to contingent tax matters primarily related to transfer pricing and the separation of Baxalta as well as the need to record valuation allowances for loss-making entities.  Partially offsetting the decrease were benefits recognized in 2015 from reaching a settlement of a Puerto Rico excise tax matter as well as the U.S. R&D credit resulting from the retroactive reinstatement in December 2015 of the Protecting Americans from Tax Hikes Act of 2015.

The company anticipatesassociated SAB 118 provisional adjustments.

We anticipate that theour effective income tax rate from continuing operations, calculated in accordance with U.S. GAAP, will be approximately 19.5%17.5% in 2018.2020.  This rate may be further impacted by a number of factors including discrete items, such as tax windfalls or deficiencies attributable to stock compensation exercises as well as additional audit developments, or the tax effecteffects of otherany future special items.  The company’s future effective tax rate will be affected by the 2017 Tax Act. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax (GILTI) and the base erosion and anti-abuse tax (BEAT), respectively.  The company is currently evaluating whether it will be subject to either of these taxes and it will continue to review guidance as it is released.  The company’s future effective tax rate could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates, changes in the valuation of the company’s deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.  In addition, the charge recognized in 2017 related to the 2017 Tax Act is provisional and any changes recognized during the one-year measurement period may have an impact on the 2018 effective tax rate.

Income from Continuing Operations and Earnings per Diluted Share

Income from continuing operations was $724$1.0 billion in 2019, $1.6 billion in 2018 and $609 million in 2017, $5.0 billion in 2016 and $393 million in 2015. Income2017. Earnings per share from continuing operations per diluted share was $1.30$1.93 in 2017, $9.012019, $2.84 in 20162018 and $0.72$1.10 in 2015.2017. The significant factors and events causing the net changes from 20162018 to 2019 and 2017 and 2015 to 20162018 are discussed above. Additionally, incomeearnings per share from continuing operations per diluted share was positively impacted by the repurchase of 17.8 million shares through cash repurchases and an equity-for-equity exchange of Retained Shares for outstanding Baxter shares in 2016, and the repurchase of 9.235.8 million shares in 20172018 through Rule 10b5-1 purchase plans, an accelerated share repurchase plan and otherwise and the repurchase of 16.5 million shares in 2019 through Rule 10b5-1 purchase plans, an accelerated share repurchase plan and otherwise. Refer to Note 1210 in Item 8 of this Annual Report on Form 10-K for further information regarding the company’sour stock repurchases.

(Loss) Income

Loss from Discontinued Operations

The following table is a summary

Loss from discontinued operations, net of thetax was $6 million in 2018 and $7 million in 2017. The operating results ofrelated to Baxalta, which have been reflected as discontinued operations, for the years ended December 31, 2017, 2016on a net of tax basis, were a loss of $6 million in 2018 and 2015.

Years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Net sales

 

$

7

 

 

$

148

 

 

$

2,895

 

(Loss) income from discontinued operations before income taxes

 

 

1

 

 

 

(10

)

 

 

752

 

Gain on disposal of discontinued operations

 

 

2

 

 

 

19

 

 

 

—

 

Income tax expense

 

 

—

 

 

 

10

 

 

 

177

 

Total (loss) income from discontinued operations

 

$

3

 

 

$

(1

)

 

$

575

 

income of $3 million in 2017. Refer to Note 23 in Item 8 of this Annual Report on Form 10-K for additional information regarding the separation of Baxalta.

In addition, the companywe recognized additionalan expense of $10 million, net of tax, within discontinued operations in 2017 related to environmental clean-up costs at a former location.  Refer to Note 169 in Item 8 of this Annual Report on Form 10-K for additional information regarding environmental liabilities.


36


Segment results

The company uses

We use operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of the company’sour segments. Refer to Note 1718 in Item 8 of this Annual Report on Form 10-K for additional details regarding the company’sour segments. The following is a summary of significant factors impacting theour reportable segments’ financial results.

As restatedAs restated

 

Net sales

 

 

Operating income

 

Net salesOperating income

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2015

 

years ended December 31 (in millions)201920182017201920182017

Americas

 

$

5,720

 

 

$

5,437

 

 

$

5,222

 

 

$

2,227

 

 

$

2,070

 

 

$

1,816

 

Americas$6,094  $5,951  $5,718  $2,374  $2,411  $2,238  

EMEA

 

 

2,731

 

 

 

2,697

 

 

$

2,774

 

 

 

564

 

 

 

476

 

 

 

342

 

EMEA2,968  2,946  2,752  652  666  562  

APAC

 

 

2,110

 

 

 

2,029

 

 

 

1,972

 

 

 

512

 

 

 

464

 

 

 

405

 

APAC2,300  2,202  2,114  549  532  510  

Corporate and other

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,045

)

 

 

(2,286

)

 

 

(2,114

)

Corporate and other—  —  —  (1,803) (2,025) (2,022) 

Total

 

$

10,561

 

 

$

10,163

 

 

$

9,968

 

 

$

1,258

 

 

$

724

 

 

$

449

 

Total$11,362  $11,099  $10,584  $1,772  $1,584  $1,288  

Americas

Segment operating income was $2,227$2,374 million, $2,070$2,411 million and $1,816$2,238 million in 2019, 2018 and 2017, 2016respectively. The decrease in 2019 was primarily driven by lower sales and 2015, respectively.gross margin in Pharmaceuticals and lower U.S. in-center HD sales, partially offset by favorable performance in Medication Delivery and Advanced Surgery, primarily due to a temporary supply disruption of a competitor. Additionally, results in 2019 were adversely impacted by unfavorable foreign exchange rates. The increase in 20172018 was primarily driven by increased net sales and gross margin largely dueas a result of the Claris and RECOTHROM and PREVELEAK acquisitions and higher net sales related to strengthpremix injectables. Also driving performance was improved performance in the Medication Delivery, Renal Care, driven primarily by PD growth, and Pharmaceuticals GBUs.  In addition, marketing and administrative expensesAcute Therapies. Negatively impacting performance in 2018 were lower as cost savings were realized from the company’s business optimization programs and continued focus on expense management. Operating income improved in 2016 due to strong performancesales challenges in the Medication Delivery and Renal CareClinical Nutrition GBUs partially offset by weaker performance in the Pharmaceuticals GBU.  Performance in the Pharmaceuticals GBU was impacted by reduced sales of U.S. cyclophosphamide and a U.S. Department of Defense PROTOPAM order from 2015 that did not reoccur in 2016.

as previously described.

EMEA

Segment operating income was $564$652 million, $476$666 million and $342$562 million in 2019, 2018 and 2017, 2016respectively. The decrease in 2019 was primarily driven by unfavorable foreign exchange rates, partially offset by increased local currency sales and 2015, respectively.gross margin in Renal Care and Pharmaceuticals. The increase in 20172018 was largelyprimarily driven by lower marketinghigher net sales across multiple GBUs, and administrative expensesimproved margins primarily as cost savings were realized from the company’s business optimization programs and continued focus on expense management. Improved performance in 2016 compared to 2015 was largely a result of lower marketing and administrative expenses from the company’s business optimization programs and continued focus on expense management.  These savings were partially offset by reduced sales and margin within the Renal Care GBU resulting from the decision to forgo certain lower margin sales opportunities, increased austerity measures in Western Europe and competitive pressures for dialyzers.

product mix.

APAC

Segment operating income was $512$549 million, $464$532 million and $405$510 million in 2019, 2018 and 2017, 2016 and 2015, respectively. The increaseResults in 2017 was largely2019 were driven by strong performancehigher sales and gross margin, primarily from China and Australia, in the Renal Care and Acute Therapies GBUs along with lower marketingPharmaceuticals. Results in 2018 were driven by higher sales, primarily from China, in Renal Care and administrative expenses as cost savings were realized from the company’s business optimization programs and continued focus on expense management.  Improved performance in 2016 was the result of stronger sales in the Pharmaceuticals GBU as a result of new contracts and lower marketing and administrative expenses from the company’s business optimization programs and continued focus on expense management.  

Clinical Nutrition.

Corporate and other

Certain incomeitems are maintained at Corporate and expense amounts are not allocated to a segment. These amountsThey primarily include certain foreign currency hedging activities, corporate headquarters costs, certain R&D costs, certain GBU support costs, stock compensation expense, non-strategic investments and related income and 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 2019 decreased due to higher Hurricane Maria insurance recoveries in the current year, 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, lower SG&A and R&D expenses in the current year and lower business optimization charges 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. The operating loss in 2018 increased due to higher acquisition and integration costs, higher intangible asset amortization expense and higher business optimization charges, partially offset by Hurricane Maria insurance recoveries and a benefit from the Claris settlement.

37

LIQUIDITY AND CAPITAL RESOURCES

The company’s cash flows reflect both continuing and discontinued operations.

Cash Flows from Operations — Continuing Operations

In 2019, 2018 and 2017, cash provided by operating activities was $2.1 billion, $2.0 billion and $1.7 billion, respectively.  Operating cash flows from continuing operations totaled $1.9 billion in 2017, $1.6 billion in 2016 and $1.3 billion in 2015.  The increases were driven by the factors described below.

Net Income

Net income, as adjusted for certain non-cash items, such as depreciation and amortization, net periodic pension benefit and OPEB costs, stock compensation, deferred income taxes and other items increased in 2017 compared2019 primarily due to 2016 as well as in 2016 as compared to 2015.  Additionally, non-cash items in 2016 included net realized gains of $4.4 billion related to the debt-for-equity exchanges of Baxalta Retained Shares for certain company indebtedness and for the equity-for-equity exchange.

Accounts Receivable

Cash flows relating to accounts receivable increased in 2017 and 2016 as the days sales outstanding decreased in each period. Days sales outstanding were 53.0 days, 54.5 days and 56.2 days for 2017, 2016 and 2015, respectively. Days sales outstanding decreased in 2017 and 2016 primarily driven by timing of collections in certain international markets.

Inventories

Cash flows relating to inventory decreased from an inflow of $80 million in 2016 to an inflow of $76 million in 2017. The following is a summary of inventories at December 31, 2017 and 2016, as well as inventory turns for 2017, 2016 and 2015. Inventory turns for the year are calculated as the annualized fourth quarter cost of sales divided by the year-end inventory balance.

 

 

Inventories

 

 

Inventory turns

 

(in millions, except inventory turn data)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2015

 

Total company

 

$

1,475

 

 

$

1,430

 

 

 

4.2

 

 

 

4.1

 

 

 

3.6

 

Other

The changes in accounts payable and accrued liabilities were an inflow of $84 million in 2017, an outflow of $197 million in 2016 and a $236 million inflow in 2015. The changes were primarily driven by an increase in tax paymentsour operating income, which included the insurance recoveries related to Hurricane Maria and a legacy product-related matter. Operating cash flows increased in 20162018 compared to 2017 primarily due to a taxan increase in our operating income, which included the Claris settlement as well as the timing of paymentsreceived in 2018, and due to suppliers. Refer to Note 15 in Item 8 for additional details regarding the tax settlement.

Payments related to the execution of the company’s business optimization initiatives were $143 million in 2017, $164 million in 2016 and $89 million in 2015. Refer to Note 7 in Item 8 for further information regarding the business optimization initiatives.

Other balance sheet items had net cash outflows of $229 million in 2017, a net inflow of $90 million in 2016 and a net outflow of $364 million in 2015, respectively. In 2016, the company received a U.S. federal income tax refund of $250 million. Additionally, cash contributions to the company’slower pension plans totaled $242 million, $66 million and $157 million in 2017, 2016 and 2015, respectively. Additional changes in 2015 were primarily driven by prepaid expenses and hedging activity.

contributions.

Cash Flows from Investing Activities — Continuing Operations

Capital Expenditures

Capital expenditures relating

In 2019, cash used for investing activities included payments for acquisitions of $418 million, primarily related to continuing operations totaled $634 million in 2017, $719 million in 2016Cheetah and $911 million in 2015. The company’smultiple product acquisitions, and capital expenditures consisted of targeted investments in projects$696 million. In 2018, cash used for investing activities included payments for acquisitions of $268 million, primarily related to support production of PDRECOTHROM and IV solutions as well as expansion activities for dialyzers. The decline inPREVELEAK and certain molecules from Celerity Pharmaceuticals, LLC (Celerity), and capital expenditures over the three years was due to a reductionof $659 million. In 2017, cash used in spendinginvesting activities included payments for acquisitions of $686 million, primarily related to ongoing projects and the completion of certain expansion activities.

Acquisitions and Investments

Net cash outflows related to acquisitions and investments were $686 million in 2017, $48 million in 2016 and $34 million in 2015. The cash outflows in 2017 were driven by the acquisition of Claris and the rights to certain molecules from Celerity.Celerity, and capital expenditures of $616 million.

In December 2019, we entered into a definitive agreement to acquire Seprafilm from Sanofi. The cash outflowstransaction closed in 2016 were driven primarily byFebruary 2020 and we paid approximately $345 million for the acquisitionacquired assets, subject to a post-close adjustment. In January 2020, we acquired the U.S. rights to an additional product for $60 million.
We expect that our capital expenditures will increase in 2020 as we make investments in our manufacturing capacity in response to proposed regulatory changes of the rights to vancomycin from Celerity. The cash outflowsU.S. Department of Health and Human Services in 2015 were driven bykidney health policy and reimbursement, which may substantially change the acquisition of the rights to cefazolin injection in GALAXY Container (2g/100mL) from Celerity.

U.S. end stage renal disease market and demand for our peritoneal dialysis products.

Refer to Note 54 in Item 8 of this Annual Report on Form 10-K for further information about the company’sour significant acquisitions and other arrangements.

Divestitures

Cash Flows from Financing Activities
In 2019, cash generated from financing activities included $1.7 billion in net proceeds from the issuance of €750 million of senior notes due in 2024 and Other Investing Activities

Net€750 million of senior notes due in 2029, $222 million of borrowings under our Euro-denominated credit facility, and stock issued under employee benefit plans of $356 million, partially offset by payments for stock repurchases of $1.3 billion and dividend payments of $423 million. In 2018, cash inflows relating to divestituresused for financing activities included payments for stock repurchases of $2.5 billion and other investing activities were $10dividend payments of $376 million, in 2017, $37 million in 2016 and $84 million in 2015. The net inflow in 2017 was driven by proceeds received from asset sales partially offset by the impactproceeds from stock issued under employee benefit plans of the deconsolidation of the company’s Venezuelan operations.  The decrease$258 million. In 2017, cash generated from 2015 to 2016 was primarily driven by the sale of certain investments and other assets in 2015.

Cash Flows from Financing Activities

Debt Issuances, Net of Payments of Obligations

Net cash inflows related to debt and other financing obligations totaled $632activities included $665 million in 2017 primarily related tonet proceeds from the issuance of €600 million of senior notes at a fixed coupon rate of 1.30% due in May 2025. Refer to Note 8 in Item 8 for additional details regarding the debt transactions in 2017.

Net cash inflows related to debt and other financing obligations totaled $56 million in 2016 primarily related to a $190 million repayment of the company’s 0.95% senior unsecured notes that matured in June 2016, a $130 million repayment of the company’s 5.9% senior unsecured notes that matured in September 2016 and the redemption of approximately $1 billion in aggregate principal amount of senior notes in September 2016, as well as the repayment of other short-term obligations. The company also had $300 million of net repayments related to its commercial paper program. These cash outflows were partially offset by issuances of debt totaling $1.6 billion of senior notes in August 2016. Refer to Note 8 in Item 8 for additional details regarding the debt transactions in 2016.

Net cash outflows related to debt and other financing obligations totaled $2.4 billion in 2015 driven by approximately $6.9 billion in issuances of debt primarily related to the Baxalta senior notes and borrowings under the company’s revolving credit facilities. The company purchased an aggregate of approximately $2.7 billion in principal amount of its notes in 2015. Additionally, the company repaid $600 million of 4.625% senior unsecured notes that matured in March 2015 and borrowings under the company’s Euro-denominated revolving credit facility. The company issued and redeemed commercial paper throughout the year, and had $300 million outstanding as of December 31, 2015.

The company’s debt instruments discussed above are unsecured and contain certain covenants, including restrictions relating to the company’s issuance of secured debt.

Other Financing Activities

In connection2025 along with the separation, Baxter transferred $2.1 billion of cash to Baxalta in 2015.

Cash dividend payments totaled $315 million in 2017, $268 million in 2016 and $910 million in 2015. The decrease in cash dividend payments in 2017 and 2016 was primarily due to the decrease of the quarterly dividend after the separation of Baxalta in 2015, from $0.52 per share for quarterly dividends beginning after May 2014 to $0.115 per share for quarterly dividends beginning after July 2015. The Baxter cash dividend was increased to $0.13 per share for quarterly dividends beginning after May 2016 and to $0.16 per share for quarterly dividends after May 2017.

Proceeds from stock issued under employee benefit plans totaledof $347 million, $286partially offset by payments for stock repurchases of $564 million and $193 million in 2017, 2016 and 2015, respectively.

Total realized excess tax benefits, which were $39 million in 2016 and $7 million in 2015, are presented in the consolidated statementsdividend payments of cash flows as an inflow in the financing section.  Total realized excess tax benefits of $56 million in 2017 are presented as an inflow from operating activities as required under new accounting guidance implemented in 2017.  Refer to Note 2 in Item 8 for additional information regarding the change in accounting.

In 2016, the company executed an equity-for-equity exchange of Retained Shares for 11.5 million outstanding Baxter shares. $315 million.

As authorized by the Board of Directors, the company repurchases itswe repurchase our stock depending on the company’supon our cash flows, net debt levellevels and market conditions. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of the company’sour common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016. The company2016 and February 2018 and by an additional $2.0 billion in November 2018. We paid $287 million$1.3 billion in cash to repurchase approximately 6.3 million shares pursuant to this authority in 2016.  In 2017, the company paid $564 million to repurchase approximately 9.216.5 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise in 2019 and had $1.1 billion$897 million remaining available under this authorization as of December 31, 2017. The Board2019.
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 Directors increased this authority byour common stock during the term of the ASR Agreement, we received an


additional $1.5 billion in February 2018.  After giving effect to0.6 million shares from the February 2018 approval and 2018 share repurchases, $2.3 billion of repurchase authority remained available as of February 20, 2018.

investment bank at settlement on May 7, 2019.

38

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of December 31, 2017, the company’s2019, our U.S. dollar-denominated senior revolving credit facility andhad capacity of $2.0 billion. As of December 31, 2019, our Euro-denominated senior revolving credit facility had a maximum capacity of $1.5 billion and approximately €200 million. Each of the facilities matures in 2024. There was no amount outstanding under our U.S. dollar-denominated credit facility as of December 31, 2019 and €200 million respectively, both maturing in 2020.($224 million) outstanding at a 0.9% interest rate under our Euro-denominated credit facility as of December 31, 2019. There were no amounts outstanding under our credit facilities as of December 31, 2018. As of December 31, 2017, the company was2019, 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.  The company may, at its option, seek to increase the aggregate commitment under the U.S. facility by up to an additional $750 million. The facilities enable the company to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net leverage ratio and maximum interest coverage ratio.

The company

We also maintainsmaintain other credit arrangements, as described in Note 87 in Item 8.

8 of this Annual Report on Form 10-K.

Access to Capital

The company intends and Credit Ratings

We intend to fund short-term and long-term obligations as they mature through cash on hand and future cash flows from operations or by issuing additional debt. The companyWe had $3.4$3.3 billion of cash and cash equivalents as of December 31, 2017,2019, with adequate cash available to meet operating requirements in each jurisdiction in which the company operates. The company invests itswe operate. We invest our excess cash in certificates of deposit and money market funds and diversifiesdiversify the concentration of cash among different financial institutions.

The company’s

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

The company continues to do business with foreign governments in certain countries, including Greece, Spain, Portugal and Italy, which have experienced deterioration in credit and economic conditions. As of December 31, 2017, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $149 million.

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

Credit Ratings

The company’s

Our credit ratings at December 31, 20172019 were as follows:

Standard & Poor’s

Fitch

Fitch

Moody’s

Ratings

Senior debt

A-

A-

BBB+

Baa2

Baa1

Short-term debt

A2

A2

F2

F2

P2

Outlook

Stable

Stable

Stable

Stable


Contractual Obligations

As of December 31, 2017, the company2019, we had contractual obligations, excluding accounts payable and accrued liabilities, payable or maturing in the following periods.

(in millions)

 

Total

 

 

Less than

one year

 

 

One to

three years

 

 

Three to

five years

 

 

More than

five years

 

Long-term debt and capital lease obligations, including current maturities

 

$

3,531

 

 

$

3

 

 

$

304

 

 

$

612

 

 

$

2,612

 

Interest on short- and long-term debt and capital lease obligations 1

 

 

1,522

 

 

 

99

 

 

 

195

 

 

 

180

 

 

 

1,048

 

Operating leases

 

 

698

 

 

 

129

 

 

 

191

 

 

 

132

 

 

 

246

 

Other long-term liabilities2

 

 

611

 

 

 

—

 

 

 

118

 

 

 

39

 

 

 

454

 

Purchase obligations3

 

 

571

 

 

 

358

 

 

 

184

 

 

 

20

 

 

 

9

 

Contractual obligations4

 

$

6,933

 

 

$

589

 

 

$

992

 

 

$

983

 

 

$

4,369

 

1

Interest payments on debt and capital lease obligations are calculated for future periods using interest rates in effect at the end of 2017. Projected interest payments include the related effects of interest rate swap agreements. Certain of these projected interest payments may differ in the future based on changes in floating interest rates, foreign currency fluctuations or other factors or events. The projected interest payments only pertain to obligations and agreements outstanding at December 31, 2017. Refer to Note 8 and Note 9 in Item 8 for further discussion regarding the company’s debt instruments and related interest rate agreements outstanding at December 31, 2017.

2

The primary components of other long-term liabilities in the company’s consolidated balance sheet are liabilities relating to pension and other postemployment benefit plans, litigation, and foreign currency hedges. The company projected the timing of the future cash payments based on contractual maturity dates (where applicable) and estimates of the timing of payments (for liabilities with no contractual maturity dates). The actual timing of payments could differ from the estimates.

(in millions)TotalLess than
one year		One to
three years		Three to
five years		More than
five years
Short-term debt$226  $226  $—  $—  $—  
Long-term debt and finance lease obligations, including current maturities5,160  315  609  843  3,393  
Interest on short- and long-term debt and finance lease obligations 1
1,436  112  209  194  921  
Operating leases676  112  176  121  267  
Other non-current liabilities2
407  —  127  50  230  
Purchase obligations3
571  311  163  90  7  
Contractual obligations2
$8,476  $1,076  $1,284  $1,298  $4,818  

39

1.Interest payments on debt and finance lease obligations are calculated for future periods using interest rates in effect at the end of 2019. Certain of these projected interest payments may differ in the future based on changes in floating interest rates, foreign currency fluctuations or other factors or events. The companyprojected interest payments only pertain to obligations and agreements outstanding at December 31, 2019. Refer to Note 7 and Note 8, respectively, in Item 8 of this Annual Report on Form 10-K for further discussion regarding our debt instruments outstanding and finance lease obligations at December 31, 2019.
2.The primary components of other non-current liabilities in our consolidated balance sheet as of December 31, 2019 are pension and other postretirement benefits, deferred tax liabilities, long-term tax liabilities, interest rate contracts, and litigation and environmental reserves. We projected the timing of the related future cash payments based on contractual maturity dates (where applicable) and estimates of the timing of payments (for liabilities with no contractual maturity dates). The actual timing of payments could differ from our estimates.
We contributed $260$69 million, $772$51 million, and $178$242 million to itsour defined benefit pension and OPEB plans in 2017, 20162019, 2018, and 2015,2017, respectively. The timing of funding in the future periods is uncertain and is dependent on future movements in interest rates, and investment returns, changes in laws and regulations, and other variables. Therefore, the table above excludes cash outflows related to our pension plan cash outflows.plans. The pension plan balanceamount included inwithin other long-termnon-current liabilities (and excluded from the table above) totaled $952 million atrelated to our pension plan liabilities was $1.1 billion as of December 31, 2017.

3

Includes the company’s significant contractual unconditional purchase obligations. For cancelable agreements, any penalty due upon cancellation is included. These commitments do not exceed the company’s projected requirements and are in the normal course of business. Examples include firm commitments for raw material purchases, utility agreements and service contracts.

2019. In 2020, we have no obligation to fund our principal plans in the United States and we expect to make contributions of at least $5 million to our Puerto Rico plans and $41 million to our foreign pension plans. Additionally, we have excluded long-term tax liabilities related to unrecognized tax positions and deferred tax liabilities from the table above because we are unable to estimate the timing of the related cash outflows. The amounts of long-term tax liabilities related to unrecognized tax positions and deferred tax liabilities included within other non-current liabilities (and excluded from the table above) were $81 million and $192 million, respectively, as of December 31, 2019.

4

Excludes contingent liabilities and uncertain tax positions. These amounts have been excluded from the contractual obligations above due to uncertainty regarding the timing and amount of future payments. Refer to Notes 10 and 15 in Item 8 for additional information regarding these commitments.

3.Includes our significant contractual unconditional purchase obligations. For cancellable agreements, any penalty due upon cancellation is included. These commitments do not exceed our projected requirements and are in the normal course of business. Examples include firm commitments for raw material purchases, utility agreements and service contracts.

Off-Balance Sheet Arrangements

Baxter

We periodically entersenter into off-balance sheet arrangements. Certain contingencies arise in the normal course of business and are not recorded in the consolidated balance sheetsheets in accordance with U.S. GAAP (such as contingent joint development and commercialization arrangement payments). Also, upon resolution of uncertainties, the companywe may incur charges in excess of presently established liabilities for certain matters (such as contractual indemnifications). For a discussion of the company’sour significant off-balance sheet arrangements, refer to Note 1016 in Item 8 of this Annual Report on Form 10-K for information regarding receivable securitizations,transactions, and Note 114 and Note 9 in Item 8 of this Annual Report on Form 10-K regarding joint development and commercialization arrangements, and indemnifications and Note 16 in Item 8 regarding legal contingencies.

FINANCIAL INSTRUMENT MARKET RISK

The company operates

We operate on a global basis and isare exposed to the risk that itsour earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The company’sOur hedging policy attempts to manage these risks to an acceptable level based on the company’sour judgment of the appropriate trade-off between risk, opportunity and costs. Refer to Note 916 and Note 1017 in Item 8 of this Annual Report on Form 10-K for further information regarding the company’sour financial instruments and hedging strategies.


Currency Risk

The company is

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 New Zealand Dollar. The company manages itsSwedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows the companyus to net exposures and take advantage of any natural offsets. In addition, the company useswe 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
40

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 the company’sour ability to cost-effectively hedge these exposures.

The company may

We 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 the company haswe have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions atas of December 31, 20172019 is 12 months. The companyWe also entersenter 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 itsour risk-management program, the company performswe perform sensitivity analyses to assess potential changes in the fair value of itsour 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 atas of December 31, 2017,2019, 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 $7 million with respect to those contracts would decrease by $25$15 million, resulting in a net liability position. A similar analysis performed with respect to option and forward contracts outstanding atas of December 31, 20162018 indicated that, on a net-of-tax basis, the net asset balance of $13$16 million would decrease by $34$26 million, resulting in a net liability position.

The sensitivity analysis model recalculates the fair value of the foreign exchange option and forward contracts outstanding atas of December 31, 20172019 by replacing the actual exchange rates atas of December 31, 20172019 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 December 31, 2019, our net monetary assets denominated in Argentine pesos are not significant.
Interest Rate and Other Risks

The company is

We are also exposed to the risk that itsour earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company’sOur policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believeswe believe is appropriate. To manage this mix in a cost-efficient manner, the companywe periodically entersenter into interest rate swaps in which the company agreeswe agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. The companyWe also periodically usesuse forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of term debt.

As part of its risk management program, the company performs sensitivity analyses to assess potential gainsDecember 31, 2019, $4.8 billion of our outstanding debt obligations were at fixed interest rates, representing approximately 94 percent of our total debt. We had interest rate derivative instruments outstanding with a notional amount of $550 million and losses in earnings relating to hypothetical movements in interest rates.$150 million as of December 31, 2019 and 2018, respectively. A 15 basis-point increaseone percent change in interest rates (approximately 10% of the company’s weighted-average interest rate during 2017) affecting the company’s financial instruments, including debt obligations and related derivatives, would have an immaterial effect on the company’s 2017, 2016 and 2015 earnings and onimpact the fair value of the company’s fixed-rate debt as of the end of each fiscal year.

our interest rate derivative contracts by approximately $116 million.

CHANGES IN ACCOUNTING STANDARDS

Refer to Note 1 in Item 8 of this Annual Report on Form 10-K for information on changes in accounting standards.

RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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
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by a reporting entity at each reporting date. The standard is effective for our financial statements beginning in 2020. The impact of the adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
In August 2018, the FASB issued ASU 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. Our policies for capitalizing implementation costs incurred in a hosting arrangement are not expected to be impacted by this ASU. However, we have historically classified those capitalized costs within property, plant and equipment, net on our consolidated balance sheets and as capital expenditures on our consolidated statements of cash flows. Under the new ASU, those capitalized costs will be presented as other non-current assets on our consolidated balance sheets and within operating cash flows on our consolidated statements of cash flows. The impact of those classification changes following the adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP requires the companymanagement to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of the company’sour significant accounting policies is included in Note 1 in Item 8.8 of this Annual Report on Form 10-K. Certain of the company’sour accounting policies are considered critical, becauseas these policies are the most important to the depiction of the company’sour financial statements and require significant, difficult or complex judgments by the company,us, often requiringemploying the use of estimates about the effects of matters that are inherently uncertain. Actual results that differ from


the company’s our estimates could have an unfavorable effect on the company’sour results of operations and financial position. The following is a summary of accounting policies that the company considerswe consider critical to the consolidated financial statements.

Revenue Recognition and Related Provisions and Allowances

The company’s policy is to recognize revenues

Revenues from product sales and services when earned. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectability is reasonably assured. For product sales, revenue is not recognized until title and risk of loss have transferred to the customer. The shipping terms for the majority of the company’s revenue arrangements are free on board (FOB) destination. The company sometimes enters into arrangements in which it commits to delivering multiple products or services to its customers. In these cases, total arrangement consideration is allocated to the deliverables based on their relative selling prices. Then the allocated consideration is recognized as revenue in accordance with the principles described above. Selling prices are determined by applying a selling price hierarchy. Selling prices are determined using vendor specific objective evidence (VSOE), if it exists. Otherwise, selling prices are determined using third party evidence (TPE). If neither VSOE nor TPE is available, the company uses its best estimate of selling prices.

Provisions for rebates, chargebacks to wholesalers and distributors, returns, and discounts (collectively, sales deductions) are provided forrecorded at the time thenet sales price (transaction price), which includes estimates of variable consideration related to rebates, product returns, sales are recorded,discounts and are reflected as a reduction of sales. The sales deductionswholesaler chargebacks. These reserves are based primarily on estimates of the amounts earned or that willto be claimed on suchthe related sales.

Our 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. The company periodically and systematically evaluatesamount of variable consideration included in the collectability of accounts receivable and determinesnet sales price is limited to the appropriate reserve for doubtful accounts. In determiningamount that is probable not to result in a significant reversal in the amount of the reserve, the company considerscumulative revenue recognized in a future period. Additionally, our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment.

The new standard related to revenue recognition that was effective January 1, 2018 has not had a material impact on our consolidated financial statements as compared to historical credit losses, the past-due statusrevenue recognition guidelines. Refer to Note 1 within Item 8 of receivables, payment history and other customer-specific information, and any other relevant factors or considerations.

The company also providesthis Annual Report on Form 10-K for the estimated costs that may be incurred under its warranty programs when the cost is both probable and reasonably estimable, which is at the time the related revenue is recognized. The cost is determined based on actual company experience for the same or similar products as well as other relevantfurther information. Estimates of future costs under the company’s warranty programs could change based on developments in the future. The company is not able to estimate the probability or amount of any future developments that could impact the reserves, but believes presently established reserves are adequate.

Pension and OPEB Plans

The company provides

We provide pension and other postemploymentpostretirement benefits to certain of itsour employees. TheseThe service component of employee benefit expenses areis reported in the same line items in the consolidated income statementstatements as the applicable employee’s compensation expense. All other components of these employee benefit expenses are reported in other (income) expense, net in our consolidated statements of income. The valuation of the funded status and net periodic benefit cost for the plans is calculated using actuarial assumptions. These assumptions are reviewed annually and revised if appropriate. The significant assumptions include the following:

•interest rates used to discount pension and OPEB plan liabilities;

•the long-term rate of return on pension plan assets;

•rates of increases in employee compensation (used in estimating liabilities);

•anticipated future healthcare trend rates (used in estimating the OPEB plan liability); and

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•other assumptions involving demographic factors such as retirement, mortality and turnover (used in estimating liabilities).

Selecting assumptions involves an analysis of both short-term and long-term historical trends and known economic and market conditions at the time of the valuation (also called the measurement date). The use of different assumptions would result in different measures of the funded status and net cost. Actual results in the future could differ from expected results. The company is not able to estimate the probability of actual results differing from expected results, but believes its assumptions are appropriate.

The company’s

Our key assumptions are listed in Note 13 in Item 8.8 of this Annual Report on Form 10-K. The most critical assumptions relate to the plans covering U.S. and Puerto Rico employees, because these plans are the most significant to the company’sour consolidated financial statements.

Discount Rate Assumption

Effective for the December 31, 20172019 measurement date, the companywe utilized discount rates of 3.62%3.44% and 3.51%3.16% to measure itsour benefit obligations for the U.S. and Puerto Rico pension plans and OPEB plan, respectively. The companyWe used a broad population of approximately 200 Aa-rated corporate bonds as of December 31, 20172019 to determine the discount rate assumption. All bonds were


denominated in U.S. Dollars,dollars, with a minimum amount outstanding of $50 million. This population of bonds was narrowed from a broader universe of approximately 700 Moody’s Aa rated, non-callable (or callable with make-whole provisions) bonds by eliminating the top 10th percentile and bottom 40th percentile to adjust for any pricing anomalies and to represent the bonds Baxterwe would most likely select if itwe were to actually annuitize itsour pension and OPEB plan liabilities. This portfolio of bonds was used to generate a yield curve and associated spot rate curve to discount the projected benefit payments for the U.S. and Puerto Rico plans. The discount rate is the single level rate that produces the same result as the spot rate curve.

For plans in Canada, Japan, the United Kingdom and the Eurozone, the company usesother European countries, we use a method essentially the same as that described for the U.S. and Puerto Rico plans. For the company’sour other international plans, the discount rate is generally determined by reviewing country- and region-specific government and corporate bond interest rates.

To understand the impact of changes in discount rates on pension and OPEB plan cost, the company performswe perform a sensitivity analysis. Holding all other assumptions constant, for each 50 basis point (i.e., one-half of one percent) increase in the discount rate, global pre-tax pension and OPEB plan cost would decrease by approximately $40$22 million, and for each 50 basis point decrease in the discount rate, global pre-tax pension and OPEB plan cost would increase by approximately $44$28 million.

Effective January 1, 2016, the company changed its approach used to calculate the service and interest components of net periodic benefit cost. Previously, the company calculated the service and interest components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The company elected an alternative approach that utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The company believes this approach provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The company accounted for this change prospectively as a change in estimate. As a result of this change, the service cost and interest cost for these plans was reduced by $40 million in 2016 compared to the previous method.

Return on Plan Assets Assumption

In measuring the net periodic cost for 2017, the company2019, we used a long-term expected rate of return of 6.50%6.29% for the pension plans covering U.S. and Puerto Rico employees. This assumption will decreaseincrease to 6.25%6.50% in 2018.2020. This assumption is not applicable to the company’sour OPEB plan because it is not funded.

The company establishes

We establish the long-term asset return assumption based on a review of historical compound average asset returns, both company-specific and relating to the broad market (based on the company’sour asset allocation), as well as an analysis of current market and economic information and future expectations. The current asset return assumption is supported by historical market experience for both the company’sour actual and targeted asset allocation. In calculating net pension cost, the expected return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. The difference between this expected return and the actual return on plan assets is a component of the total net unrecognized gain or loss and is subject to amortization in the future.

To understand the impact of changes in the expected asset return assumption on net cost, the company performswe perform a sensitivity analysis. Holding all other assumptions constant, for each 50 basis point increase (decrease) in the asset return assumption, global pre-tax pension plan cost would decrease (increase) by approximately $22$13 million.

Other Assumptions

For the U.S. and Puerto Rico plans, beginning with the December 31, 20142019 measurement date, the companywe used the RP 2014Pri-2012 combined mortality table adjusted to reflect Baxter specific past experience with improvements projected using the generational BB-2DMP-2019 projection scale adjusted to a long term
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long-term improvement of 0.8% in 2027.. For all other pension plans, the companywe utilized country- and region-specific mortality tables to calculate the plans’ benefit obligations. The companyWe periodically analyzesanalyze and updates itsupdate our assumptions concerning demographic factors such as retirement, mortality and turnover, considering historical experience as well as anticipated future trends.

The assumptions relating to employee compensation increases and future healthcare costs are based on historical experience, market trends, and anticipated future company actions. Refer to Note 13 in Item 8 of this Annual Report on Form 10-K for information regarding the sensitivity of the OPEB plan obligation and the total of the service and interest cost components of OPEB plan cost to potential changes in future healthcare trend rates.


Legal Contingencies

The company is involved in product liability, patent, commercial, regulatory and other legal proceedings that arise in the normal course of business. Refer to Note 16 in Item 8 for further information. The company records a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. The company has established reserves for certain of its legal matters. At December 31, 2017, total legal liabilities were $41 million.

The company’s loss estimates are generally developed in consultation with outside counsel and are based on analyses of potential outcomes. With respect to the recording of any insurance recoveries, after completing the assessment and accounting for the company’s legal contingencies, the company separately and independently analyzes its insurance coverage and records any insurance recoveries that are probable of occurring at the gross amount that is expected to be collected. In performing the assessment, the company reviews available information, including historical company-specific and market collection experience for similar claims, current facts and circumstances pertaining to the particular insurance claim, the financial viability of the applicable insurance company or companies, and other relevant information.

While the liability of the company in connection with certain claims cannot be estimated and although the resolution in any reporting period of one or more of these matters could have a significant impact on the company’s results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on the company’s consolidated financial position. While the company believes it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments or enter into material settlements of claims.

Deferred Tax Asset Valuation Allowances, Reserves for Uncertain Tax Positions and Tax Reform

The company maintains

We maintain valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. Changes in valuation allowances are included in the company’sour tax provision in the period of change. In determining whether a valuation allowance is warranted, the company evaluateswe evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The realizability assessments made at a given balance sheet date are subject to change in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if the company takeswe take operational or tax planning actions that could impact the future taxable earnings of a subsidiary.

In the normal course of business, the company iswe are audited by federal, state and foreign tax authorities, and isare periodically challenged regarding the amount of taxes due. These challenges relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. The company believes itsWe believe our tax positions comply with applicable tax law and the company intendswe intend to defend itsour positions. In evaluating the exposure associated with various tax filing positions, the company recordswe record reserves for uncertain tax positions in accordance with U.S. GAAP based on the technical support for the positions, the company’sour past audit experience with similar situations, and potential interest and penalties related to the matters. The company’sOur results of operations and effective tax rate in a given period could be impacted if, upon final resolution with taxing authorities, the company prevailedwe prevail in positions for which reserves have been established, or waswe are required to pay amounts in excess of established reserves.

On December 22, 2017, the 2017 Tax Act was enacted into law and the new legislation contains several key tax provisions that affected the company,us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the U.S. corporate income tax rate to 21% effective January 1, 2018, among others. The company isWe were required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring itsour U.S. deferred tax assets and liabilities as well asand reassessing the net realizability of itsour deferred tax assets and liabilities.assets. In December 2017, the SEC staff issued Staff Accounting Bulletin No.SAB 118 Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows the companyallowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed lateWe completed our analysis in the fourth quarter of 2017,accordance with SAB 118 and ongoing guidance and accounting interpretations are expected over the next 12 months, the company considersfinalized the accounting for the transition tax, deferred tax re-measurements, and other itemsinitial impact of the 2017 Tax Act in 2018. Refer to be incomplete due to the forthcoming guidance and its ongoing analysisNote 14 within Item 8 of final year-end data and tax positions. The company expects to complete its analysis within the measurement period in accordance with SAB 118.

this Annual Report on Form 10-K for further information.

Valuation of Intangible Assets, Including IPR&D

The company acquires

We record acquired intangible assets and records them at fair value.value in business combinations and at cost in asset acquisitions. Valuations are generally completed for intangible assets acquired in business acquisitions using a discounted cash flow analysis, incorporating the stage of completion and consideration of market participant assumptions. The most significant estimates and assumptions inherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, and the competitive and other trends impacting the asset, including consideration of technical, legal, regulatory, economic and other factors. Each of these factors and assumptions can significantly affect the value of the intangible asset.

Acquired in-process R&D (IPR&D) is the value assigned to acquired technology or products under development which have not received regulatory approval and have no alternative future use. Acquired IPR&D included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the R&D project is abandoned, the indefinite-lived intangible asset is charged to expense.

R

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IPR&D acquired in transactions that are not business combinations is expensed immediately. For such transactions, payments made to third parties on or after regulatory approval are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.

Due to the inherent uncertainty associated with R&D projects, there is no assurance that actual results will not differ materially from the underlying assumptions used to prepare discounted cash flow analyses, nor that the R&D project will result in a successful commercial product.

Impairment of Assets

Goodwill and other indefinite-lived intangible assets are subject to impairment reviews annually, and whenever indicators of impairment exist. The company assesses goodwill for impairment based on its reporting units, which are the same as its operating segments. As of December 31, 2017, the date of the company’s annual impairment review, the fair value of the company’s reporting units were in excess of their carrying values. As discussed in Note 6 of Item 8, the company performed the goodwill impairment test both prior to and after the reallocation of its goodwill to its new reporting units based on a change in operating segments.  The company performs a qualitative assessment of other indefinite-lived intangible assets, including IPR&D, at least annually. If the intangible asset is determined to be more likely than not impaired as a result of the assessment, the company completes a quantitative impairment test. Intangible assets with definite lives and other long-lived assets (such as fixed assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Refer to Note 1 in Item 8 for further information. The company’s impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, foreign currency exchange rates, the selection of an appropriate discount rate, asset groupings, and other assumptions and estimates. The estimates and assumptions used are consistent with the company’s business plans and when applicable, market participant’s views of the company and similar companies. The use of alternative estimates and assumptions could increase or decrease the estimated fair values of the assets, and potentially result in different impacts to the company’s results of operations. Actual results may differ from the company’s estimates.

Stock-Based Compensation Plans

Stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the substantive vesting period. The company’s stock compensation costs primarily relate to awards of stock options, restricted stock units (RSUs), and performance share units (PSUs). The company uses the Black-Scholes model for estimating the fair value of stock options, and significant assumptions include long-term projections regarding stock price volatility, employee exercise, post-vesting termination and pre-vesting forfeiture behaviors, interest rates and dividend yields. The company’s expected volatility assumption is based on a weighted-average of the historical volatility of Baxter’s stock and the implied volatility from traded options on Baxter’s stock, with historical volatility more heavily weighted. The expected life assumption is primarily based on the vesting terms of the stock option, historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield reflects historical experience as well as future expectations over the expected life of the option.

The fair value of RSUs is equal to the quoted price of the company’s common stock on the date of grant.


PSUs granted in 2017 are based either on adjusted operating margin or are based upon Baxter stock performance relative to the company’s peer group. The vesting condition for such PSUs based on adjusted operating margin have annual performance targets set at the beginning of the year for each tranche of the award during the three-year service period. The holder of the adjusted operating margin PSUs is entitled to receive a number of shares of common stock equal to a percentage, ranging from 0% to 200%, of the adjusted operating margin PSUs granted, depending on the actual results compared to the annual performance targets. Such results may be further adjusted based on an assessment of the individual’s future potential. Compensation cost for the adjusted operating margin PSUs is measured based on the fair value of the awards on the date that the specific vesting terms for each tranche of the award are established. The fair value of the awards is determined based on the quoted price of the company’s stock on the grant date for each tranche of the award. The compensation cost for adjusted operating margin PSUs is adjusted at each reporting date to reflect the estimated probability of achieving the adjusted operating margin vesting condition. The probability of achieving the operating margin vesting condition is such that the compensation cost has been adjusted to reflect 200% attainment as of the year ended December 31, 2017. The vesting condition for PSUs based on Baxter stock performance relative to the company’s peer group is fair valued using a Monte Carlo model. A Monte Carlo model uses stock price volatility and other variables to estimate the probability of satisfying the market conditions and the resulting fair value of the award. Refer to Note 12 in Item 8 for additional information.

CERTAIN REGULATORY MATTERS

The U.S. Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India onin July 27, 2017, immediately prior to the closing of the Claris acquisition. FDA completed the inspection on August 4, 2017, at which time FDAand subsequently issued a related Form-483 (Claris 483).  The Claris 483 includes a number ofWarning Letter based on observations across a variety of areas.  The company submitted its timely response to the Claris 483 and isidentified in the process of implementing2017 inspection (Claris Warning Letter).1 While FDA has not yet re-inspected the facilities, we are continuing to implement corrective and preventive actions which have included product recalls that are financially immaterial to the company, to address FDA’s prior observations and other items identified in connection with integrating Claris into the company’sour quality systems.

In January 2014,

While management cannot speculate on when the companyClaris 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 majority of the planned new products for distribution into the U.S.
On May 6, 2019, we received a Warning LetterShow Cause Notice under the Drugs & Cosmetics Act, 1940 and Rules thereunder (Show Cause Notice) from FDA primarily directed to quality systems for the company’s Round Lake, Illinois, facility, particularly in that facility’s capacity as a specification developer for certainCommissioner of the company’s medical devices. ThisFood & Drugs Control Administration in the Gujarat State in 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 contained 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 was lifted in February 2017.

The company received a Warning Letter in December 2013 that included observations relatedLetter. We responded to the company’s ambulatory infuser businessShow Cause Notice and a follow up inspection occurred in Irvine, California, which previously hadJuly 2019.No further action has been subject to agency action.  This Warning Letter was lifted in May 2017.

undertaken by the Gujarat authorities.

In June 2013, the companywe received a Warning Letter from FDA regarding operations and processes at itsour North Cove, North Carolina and Jayuya, Puerto Rico facilities. The companyWe attended Regulatory Meetings with the FDA regarding one or both of these facilities in October 2014, November 2015, (concerning the Jayuya facility).  The company also requestedJuly 2017, April 2018 and participated in a Regulatory Meeting regarding both facilities in July 2017.October 2018. The Warning Letter addresses observations related to Current Good Manufacturing Practice violations at the two facilities.

In June 2010, the company received a Warning Letter from FDA in connection with an inspection of its McGaw Park, Illinois facility, which previously supported the Renal franchise. The company’s Round Lake facility now provides the related capacity for the Renal franchise. The Warning Letter pertains towas closed out in September 2019.

As previously disclosed, in the processesfourth quarter of 2012, we received two investigative demands from the United States Attorney for the Western District of North Carolina for information regarding our quality and manufacturing practices and procedures at our North Cove facility. In January 2017, the parties resolved the matter by which the company analyzesentering into a deferred prosecution agreement and addresses product complaints through corrective and preventative action, and reports relevant information to FDA. This Warning Letter was lifted in February 2017.

On October 9, 2014, the company had a Regulatory Meeting with FDA to discuss the Warning Letters described above. At the meeting, the companycivil settlement whereby we agreed to work closely with FDA to provide regular updatespay approximately $18 million and implement certain enhanced compliance measures. In July 2019, the deferred prosecution agreement expired and, based on its progress to meet all requirements and resolve all matters identifiedour fulfillment of the terms of the agreement, the court dismissed the criminal information previously filed in the Warning Letters described above.

case with prejudice.

Refer to Item 1A of this Annual Report on Form 10-K for additional discussion of regulatory matters and how they may impact the company.

us.

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

This annual report includes forward-looking statements. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to 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
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material weakness identified as a result thereof, future regulatory filings and the company’sour R&D pipeline, 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, the company’sour exposure to financial market volatility and foreign currency and


interest rate risks, potential tax liability associated with the separation of the company’sour biopharmaceuticals and medical products businesses, (including the 2016 disposition of the company’s Retained Shares in Baxalta), the impact of competition, future sales growth, the impact on sales of Hurricane Maria related production disruptions, future U.S. cyclophosphamide sales, business development activities (including the future pipelineacquisitions of Cheetah and recent acquisitions, including that of Claris Injectables)Seprafilm from Sanofi), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the sufficiency of the company’sour facilities and financial flexibility, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.


These forward-looking statements are based on certain assumptions and analyses made in light of the company’sour experience and perception of historical trends, current conditions, and expected future developments as well as other factors that the company believeswe believe are appropriate in the circumstances. While these statements represent the company’s currentour judgment on what the future may hold, and the company believeswe 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;


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 therefore the related continuity of our manufacturing and distribution;


inability to repair existing production capacity or 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 the company’sour information technology systems or products, including by cyber attack;

cyber-attack, data leakage, unauthorized access or theft;

future actions of (or failures to act or delays in acting by) the 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;

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;

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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 the company’sour environmental, quality, compliance or ethics programs;


future actions of third parties, including third-party payers;

payers, the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to third-party payers, 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 company’s business;

California Consumer Privacy Act of 2018, 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 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, for example);

•
the outcome of pending or future litigation or government investigations, including the opioid litigation and litigation related to our internal investigation of foreign exchange gains and losses;


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


global regulatory, trade and tax policies;

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


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

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


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



the impact of any future tax liability with respect to the separation and distribution, including with respect to the Baxter Transactions (including the company’s prior disposition of the Retained Shares);

any failure by Baxalta or Shire to satisfy its obligationobligations under the separation agreements, including the tax matters agreement, or the Letter Agreement;

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 the companyus and itsour customers and suppliers, including foreign governments in countries in which the company operates;

we operate;

fluctuations in foreign exchange and interest rates;


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

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;


the outcome of pending or future litigation;

47

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

•other factors identified elsewhere in this Annual Report on Form 10-K including those factors described in Item 1A and other filings with the SEC, all of which are available on our website.

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

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

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Incorporated by reference to the section entitled “Financial Instrument Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.


Item 8.

Financial Statements and Supplementary Data.


48

Item 8. Financial Statements and Supplementary Data.
CONSOLIDATED BALANCE SHEETS

as of December 31 (in millions, except share information)

 

2017

 

 

2016

 

Current assets

 

Cash and equivalents

 

$

3,394

 

 

$

2,801

 

 

 

Accounts and other current receivables, net

 

 

1,793

 

 

 

1,691

 

 

 

Inventories

 

 

1,475

 

 

 

1,430

 

 

 

Prepaid expenses and other

 

 

601

 

 

 

602

 

 

 

Current assets held for disposition

 

 

—

 

 

 

50

 

 

 

Total current assets

 

 

7,263

 

 

 

6,574

 

Property, plant and equipment, net

 

 

4,588

 

 

 

4,289

 

Other assets

 

Goodwill

 

 

3,099

 

 

 

2,595

 

 

 

Other intangible assets, net

 

 

1,374

 

 

 

1,111

 

 

 

Other

 

 

787

 

 

 

977

 

 

 

Total other assets

 

 

5,260

 

 

 

4,683

 

 

 

Total assets

 

$

17,111

 

 

$

15,546

 

Current liabilities

 

Current maturities of long-term debt and lease obligations

 

$

3

 

 

$

3

 

 

 

Accounts payable and accrued liabilities

 

 

2,733

 

 

 

2,612

 

 

 

Current income taxes payable

 

 

85

 

 

 

126

 

 

 

Current liabilities held for disposition

 

 

—

 

 

 

3

 

 

 

Total current liabilities

 

 

2,821

 

 

 

2,744

 

Long-term debt and lease obligations

 

 

3,509

 

 

 

2,779

 

Other long-term liabilities

 

 

 

 

1,665

 

 

 

1,743

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity

 

Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2017 and 2016

 

 

683

 

 

 

683

 

 

 

Common stock in treasury, at cost, 142,017,600 shares in 2017 and 143,890,064 shares in 2016

 

 

(7,981

)

 

 

(7,995

)

 

 

Additional contributed capital

 

 

5,940

 

 

 

5,958

 

 

 

Retained earnings

 

 

14,483

 

 

 

14,200

 

 

 

Accumulated other comprehensive (loss) income

 

 

(4,001

)

 

 

(4,556

)

 

 

Total Baxter shareholders’ equity

 

 

9,124

 

 

 

8,290

 

 

 

Noncontrolling interests

 

 

(8

)

 

 

(10

)

 

 

Total equity

 

 

9,116

 

 

 

8,280

 

 

 

Total liabilities and equity

 

$

17,111

 

 

$

15,546

 

As Restated
as of December 31 (in millions, except share information)20192018
Current assets:
Cash and cash equivalents$3,335  $1,838  
Accounts receivable, net1,896  1,840  
Inventories1,653  1,667  
Prepaid expenses and other current assets619  614  
Total current assets7,503  5,959  
Property, plant and equipment, net4,512  4,530  
Goodwill3,030  3,002  
Other intangible assets, net1,471  1,410  
Operating lease right-of-use assets608  —  
Other non-current assets1,069  819  
Total assets$18,193  $15,720  
Current liabilities:
Short-term debt$226  $2  
Current maturities of long-term debt and finance lease obligations315  2  
Accounts payable and accrued liabilities2,689  2,810  
Total current liabilities3,230  2,814  
Long-term debt and finance lease obligations4,809  3,481  
Operating lease liabilities510  —  
Other non-current liabilities1,732  1,559  
Total liabilities10,281  7,854  
Commitments and contingencies
Equity:
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, 177,340,358 shares in 2019 and 170,495,859 shares in 2018(10,764) (9,989) 
Additional contributed capital5,955  5,898  
Retained earnings15,718  15,075  
Accumulated other comprehensive (loss) income(3,710) (3,823) 
Total Baxter stockholders’ equity7,882  7,844  
Noncontrolling interests30  22  
Total equity7,912  7,866  
Total liabilities and equity$18,193  $15,720  

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


49

CONSOLIDATED STATEMENTSSTATEMENTS OF INCOME

As Restated

years ended December 31 (in millions, except per share data)

 

2017

 

 

2016

 

 

2015

 

years ended December 31 (in millions, except per share data)201920182017

Net sales

 

$

10,561

 

 

$

10,163

 

 

$

9,968

 

Net sales$11,362  $11,099  $10,584  

Cost of sales

 

 

6,099

 

 

 

6,053

 

 

 

5,822

 

Cost of sales6,601  6,340  6,110  

Gross margin

 

 

4,462

 

 

 

4,110

 

 

 

4,146

 

Gross margin4,761  4,759  4,474  

Marketing and administrative expenses

 

 

2,587

 

 

 

2,739

 

 

 

3,094

 

Selling, general and administrative expensesSelling, general and administrative expenses2,535  2,620  2,627  

Research and development expenses

 

 

617

 

 

 

647

 

 

 

603

 

Research and development expenses595  654  615  
Other operating income, netOther operating income, net(141) (99) (56) 

Operating income

 

 

1,258

 

 

 

724

 

 

 

449

 

Operating income1,772  1,584  1,288  

Net interest expense

 

 

55

 

 

 

66

 

 

 

126

 

Other income, net

 

 

(14

)

 

 

(4,296

)

 

 

(105

)

Interest expense, netInterest expense, net71  45  55  
Other (income) expense, netOther (income) expense, net731  (78) 133  

Income from continuing operations before income taxes

 

 

1,217

 

 

 

4,954

 

 

 

428

 

Income from continuing operations before income taxes970  1,617  1,100  

Income tax (benefit) expense

 

 

493

 

 

 

(12

)

 

 

35

 

Income tax expense (benefit)Income tax expense (benefit)(41) 65  491  

Income from continuing operations

 

 

724

 

 

 

4,966

 

 

 

393

 

Income from continuing operations1,011  1,552  609  

(Loss) income from discontinued operations, net of tax

 

 

(7

)

 

 

(1

)

 

 

575

 

Loss from discontinued operations, net of taxLoss from discontinued operations, net of tax—  (6) (7) 

Net income

 

$

717

 

 

$

4,965

 

 

$

968

 

Net income1,011  1,546  602  

Income from continuing operations per common share

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interestsLess: Net income attributable to noncontrolling interests10  —  —  
Net income attributable to Baxter stockholdersNet income attributable to Baxter stockholders$1,001  $1,546  $602  
Earnings per share from continuing operationsEarnings per share from continuing operations

Basic

 

$

1.33

 

 

$

9.10

 

 

$

0.72

 

Basic$1.97  $2.91  $1.12  

Diluted

 

$

1.30

 

 

$

9.01

 

 

$

0.72

 

Diluted$1.93  $2.84  $1.10  

(Loss) income from discontinued operations per common share

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share from discontinued operationsLoss per share from discontinued operations

Basic

 

$

(0.01

)

 

$

(0.01

)

 

$

1.06

 

Basic$—  $(0.01) $(0.01) 

Diluted

 

$

(0.01

)

 

$

—

 

 

$

1.04

 

Diluted$—  $(0.01) $(0.02) 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per shareEarnings per share

Basic

 

$

1.32

 

 

$

9.09

 

 

$

1.78

 

Basic$1.97  $2.90  $1.11  

Diluted

 

$

1.29

 

 

$

9.01

 

 

$

1.76

 

Diluted$1.93  $2.83  $1.08  

Weighted-average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

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

Basic

 

 

543

 

 

 

546

 

 

 

545

 

Basic509  534  543  

Diluted

 

 

555

 

 

 

551

 

 

 

549

 

Diluted519  546  555  

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


50

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Net income

 

$

717

 

 

$

4,965

 

 

$

968

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments, net of tax expense (benefit) of $91 in 2017, ($39) in 2016 and ($107) in 2015

 

 

425

 

 

 

(247

)

 

 

(1,094

)

Pension and other employee benefits, net of tax expense (benefit) of $62 in 2017, ($36) in 2016, and $104 in 2015

 

 

141

 

 

 

(97

)

 

 

165

 

Hedging activities, net of tax (benefit) expense of ($6) in 2017, ($2) in 2016, and $9 in 2015

 

 

(13

)

 

 

(4

)

 

 

15

 

Available-for-sale securities, net of tax expense of zero in 2017, zero in 2016, and $6 in 2015

 

 

2

 

 

 

(4,432

)

 

 

4,438

 

Total other comprehensive income (loss), net of tax

 

 

555

 

 

 

(4,780

)

 

 

3,524

 

Comprehensive income

 

$

1,272

 

 

$

185

 

 

$

4,492

 

As Restated
years ended December 31 (in millions)201920182017
Net income$1,011  $1,546  $602  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments, net of tax expense (benefit) of ($5) in 2019, ($52) in 2018 and $89 in 2017(95) (323) 599  
Pension and other postretirement benefit plans, net of tax expense of $130 in 2019, $10 in 2018, and $60 in 2017408  33  134  
Hedging activities, net of tax expense (benefit) of ($11) in 2019, $3 in 2018, and ($6) in 2017(39) 9  (13) 
Available-for-sale securities, net of tax expense of 0 in 2019, 2018 and 2017, respectively—  —  2  
Total other comprehensive (loss) income, net of tax274  (281) 722  
Comprehensive income1,285  1,265  1,324  
Less: Comprehensive income attributable to noncontrolling interests10  —  —  
Comprehensive income attributable to Baxter stockholders$1,275  $1,265  $1,324  

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


51

CONSOLIDATED STATEMENTSSTATEMENTS OF CASH FLOWS

CHANGES IN EQUITY

years ended December 31 (in millions) (brackets denote cash outflows)

 

2017

 

 

2016

 

 

2015

 

Cash flows from

 

Net income

 

$

717

 

 

$

4,965

 

 

$

968

 

operations

 

Adjustments to reconcile income from continuing operations to

   net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss (income) from discontinued operations, net of tax

 

 

7

 

 

 

1

 

 

 

(575

)

 

 

Depreciation and amortization

 

 

761

 

 

 

800

 

 

 

759

 

 

 

Deferred income taxes

 

 

211

 

 

 

(302

)

 

 

(50

)

 

 

Stock compensation

 

 

107

 

 

 

115

 

 

 

126

 

 

 

Realized excess tax benefits from stock issued under

   employee benefit plans

 

 

—

 

 

 

(39

)

 

 

(7

)

 

 

Net periodic pension benefit and OPEB costs

 

 

126

 

 

 

116

 

 

 

227

 

 

 

Business optimization items

 

 

70

 

 

 

285

 

 

 

130

 

 

 

Net realized gains on Baxalta common stock

 

 

—

 

 

 

(4,387

)

 

 

—

 

 

 

Infusion pump and other product-related charges

 

 

(4

)

 

 

(18

)

 

 

(28

)

 

 

Other

 

 

40

 

 

 

264

 

 

 

42

 

 

 

Changes in balance sheet items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts and other current receivables, net

 

 

30

 

 

 

15

 

 

 

(4

)

 

 

Inventories

 

 

76

 

 

 

80

 

 

 

(118

)

 

 

Accounts payable and accrued liabilities

 

 

84

 

 

 

(197

)

 

 

236

 

 

 

Business optimization payments

 

 

(143

)

 

 

(164

)

 

 

(89

)

 

 

Other

 

 

(229

)

 

 

90

 

 

 

(364

)

 

 

Cash flows from operations – continuing operations

 

 

1,853

 

 

 

1,624

 

 

 

1,253

 

 

 

Cash flows from operations – discontinued operations

 

 

(16

)

 

 

30

 

 

 

518

 

 

 

Cash flows from operations

 

 

1,837

 

 

 

1,654

 

 

 

1,771

 

Cash flows from

 

Capital expenditures

 

 

(634

)

 

 

(719

)

 

 

(911

)

investing activities

 

Acquisitions and investments, net of cash acquired

 

 

(686

)

 

 

(48

)

 

 

(34

)

 

 

Divestitures and other investing activities

 

 

10

 

 

 

37

 

 

 

84

 

 

 

Cash flows from investing activities – continuing operations

 

 

(1,310

)

 

 

(730

)

 

 

(861

)

 

 

Cash flows from investing activities – discontinued  operations

 

 

—

 

 

 

15

 

 

 

(946

)

 

 

Cash flows from investing activities

 

 

(1,310

)

 

 

(715

)

 

 

(1,807

)

Cash flows from

 

Issuances of debt

 

 

633

 

 

 

1,641

 

 

 

6,868

 

financing activities

 

Payments of obligations

 

 

(1

)

 

 

(1,381

)

 

 

(3,786

)

 

 

Debt extinguishment costs

 

 

—

 

 

 

(16

)

 

 

(114

)

 

 

Decrease in debt with original maturities of

   three months or less, net

 

 

—

 

 

 

(300

)

 

 

(575

)

 

 

Transfer of cash and equivalents to Baxalta

 

 

—

 

 

 

—

 

 

 

(2,122

)

 

 

Cash dividends on common stock

 

 

(315

)

 

 

(268

)

 

 

(910

)

 

 

Proceeds from stock issued under employee benefit plans

 

 

347

 

 

 

286

 

 

 

193

 

 

 

Purchases of treasury stock

 

 

(564

)

 

 

(292

)

 

 

—

 

 

 

Other

 

 

(39

)

 

 

6

 

 

 

(35

)

 

 

Cash flows from financing activities

 

 

61

 

 

 

(324

)

 

 

(481

)

Effect of foreign exchange rate changes on cash and equivalents

 

 

5

 

 

 

(27

)

 

 

(195

)

Increase (decrease) in cash and equivalents

 

 

593

 

 

 

588

 

 

 

(712

)

Cash and equivalents at beginning of year

 

 

2,801

 

 

 

2,213

 

 

 

2,925

 

Cash and equivalents at end of year

 

$

3,394

 

 

$

2,801

 

 

$

2,213

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Net proceeds on Retained Shares transactions

 

$

—

 

 

$

4,387

 

 

$

—

 

Payment of obligations in exchange for Retained Shares

 

$

—

 

 

$

3,646

 

 

$

—

 

Exchange of Baxter shares with Retained Shares

 

$

—

 

 

$

611

 

 

$

—

 

Other supplemental information

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid, net of portion capitalized

 

$

80

 

 

$

99

 

 

$

178

 

Income taxes paid

 

$

255

 

 

$

500

 

 

$

466

 

Baxter International Inc. stockholders' equity  
(in millions)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, 2017 (As Restated)683  $683  144  $(7,995) $5,958  $13,846  $(4,261) $8,231  $(10) $8,221  
Net income—  —  —  —  —  602  —  $602  —  $602  
Other comprehensive income (loss)—  —  —  —  —  —  722  722  —  722  
Purchases of treasury stock—  —  9  (564) —  —  —  (564) —  (564) 
Stock issued under employee benefit plans and other—  —  (11) 578  (18) (134) —  426  —  426  
Dividends declared on common stock—  —  —  —  —  (334) —  (334) —  (334) 
Distribution of Baxalta—  —  —  —  —  34  —  34  —  34  
Changes in noncontrolling interests—  —  —  —  —  —  —  —  2  2  
Balance as of December 31, 2017 (As Restated)683  $683  $142  $(7,981) $5,940  $14,014  $(3,539) $9,117  $(8) $9,109  
Adoption of new accounting standards—  —  —  —  —  (22) (3) (25) —  (25) 
Net income—  —  —  —  —  1,546  —  1,546  —  1,546  
Other comprehensive income (loss)—  —  —  —  —  —  (281) (281) —  (281) 
Purchases of treasury stock—  —  36  (2,415) (60) —  —  (2,475) —  (2,475) 
Stock issued under employee benefit plans and other—  —  (8) 407  18  (71) —  354  —  354  
Dividends declared on common stock—  —  —  —  —  (392) —  (392) —  (392) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  30  30  
Balance as of December 31, 2018 (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—  —  —  —  —  1,001  —  1,001  10  1,011  
Other comprehensive income (loss)—  —  —  —  —  —  274  274  —  274  
Purchases of treasury stock—  —  16  (1,293) 46  —  —  (1,247) —  (1,247) 
Stock issued under employee benefit plans and other—  —  (9) 518  11  (84) —  445  —  445  
Dividends declared on common stock—  —  —  —  —  (435) —  (435) —  (435) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  (2) (2) 
Balance as of December 31, 2019683  $683  177  $(10,764) $5,955  $15,718  $(3,710) $7,882  $30  $7,912  

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


52

CONSOLIDATED STATEMENTSSTATEMENTS OF CHANGES IN EQUITY

CASH FLOWS

 

 

2017

 

 

2016

 

 

2015

 

as of and for the years ended December 31 (in millions)

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning and end of year

 

 

683

 

 

$

683

 

 

 

683

 

 

$

683

 

 

 

683

 

 

$

683

 

Common stock in treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

 

144

 

 

 

(7,995

)

 

 

136

 

 

 

(7,646

)

 

 

141

 

 

 

(7,993

)

Purchases of common stock

 

 

9

 

 

 

(564

)

 

 

18

 

 

 

(902

)

 

 

—

 

 

 

—

 

Stock issued under employee benefit plans and other

 

 

(11

)

 

 

578

 

 

 

(10

)

 

 

553

 

 

 

(5

)

 

 

347

 

End of year

 

 

142

 

 

 

(7,981

)

 

 

144

 

 

 

(7,995

)

 

 

136

 

 

 

(7,646

)

Additional contributed capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

 

 

 

 

 

5,958

 

 

 

 

 

 

 

5,902

 

 

 

 

 

 

 

5,853

 

Stock issued under employee benefit plans and other

 

 

 

 

 

 

(19

)

 

 

 

 

 

 

43

 

 

 

 

 

 

 

49

 

Other

 

 

 

 

 

 

1

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

—

 

End of year

 

 

 

 

 

 

5,940

 

 

 

 

 

 

 

5,958

 

 

 

 

 

 

 

5,902

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

 

 

 

 

 

14,200

 

 

 

 

 

 

 

9,683

 

 

 

 

 

 

 

13,227

 

Net income

 

 

 

 

 

 

717

 

 

 

 

 

 

 

4,965

 

 

 

 

 

 

 

968

 

Dividends declared on common stock

 

 

 

 

 

 

(334

)

 

 

 

 

 

 

(276

)

 

 

 

 

 

 

(695

)

Stock issued under employee benefit plans

 

 

 

 

 

 

(134

)

 

 

 

 

 

 

(190

)

 

 

 

 

 

 

(90

)

Distribution of Baxalta

 

 

 

 

 

 

34

 

 

 

 

 

 

 

18

 

 

 

 

 

 

 

(3,727

)

End of year

 

 

 

 

 

 

14,483

 

 

 

 

 

 

 

14,200

 

 

 

 

 

 

 

9,683

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

 

 

 

 

 

(4,556

)

 

 

 

 

 

 

224

 

 

 

 

 

 

 

(3,650

)

Other comprehensive income (loss)

 

 

 

 

 

 

555

 

 

 

 

 

 

 

(4,780

)

 

 

 

 

 

 

3,524

 

Distribution of Baxalta

 

 

 

 

 

 

—

 

 

 

 

 

 

 

—

 

 

 

 

 

 

 

350

 

End of year

 

 

 

 

 

 

(4,001

)

 

 

 

 

 

 

(4,556

)

 

 

 

 

 

 

224

 

Total Baxter shareholders’ equity

 

 

 

 

 

$

9,124

 

 

 

 

 

 

$

8,290

 

 

 

 

 

 

$

8,846

 

Noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

 

 

 

 

$

(10

)

 

 

 

 

 

$

19

 

 

 

 

 

 

$

36

 

Change in noncontrolling interests

 

 

 

 

 

 

2

 

 

 

 

 

 

 

(29

)

 

 

 

 

 

 

(17

)

End of year

 

 

 

 

 

$

(8

)

 

 

 

 

 

$

(10

)

 

 

 

 

 

$

19

 

Total equity

 

 

 

 

 

$

9,116

 

 

 

 

 

 

$

8,280

 

 

 

 

 

 

$

8,865

 

As Restated
years ended December 31 (in millions)201920182017
Cash flows from operations
Net income$1,011  $1,546  $602  
Adjustments to reconcile income from continuing operations to net cash from operating activities:
Loss from discontinued operations, net of tax—  6  7  
Depreciation and amortization789  771  750  
Pension settlement charges755  1  2  
Net periodic pension benefit and other postretirement costs22  39  123  
Deferred income taxes(310) (263) 211  
Stock compensation122  115  107  
Intangible asset impairment31  —  —  
Other115  50  38  
Changes in balance sheet items:
Accounts receivable, net(65) (12) 30  
Inventories4  (197) 76  
Accounts payable and accrued liabilities(212) 60  11  
Other(152) (99) (227) 
Cash flows from operations – continuing operations2,110  2,017  1,730  
Cash flows from operations – discontinued operations(6) —  (16) 
Cash flows from operations2,104  2,017  1,714  
Cash flows from investing activities
Capital expenditures(696) (659) (616) 
Acquisitions and investments, net of cash acquired(418) (268) (686) 
Other investing activities, net14  11  10  
Cash flows from investing activities(1,100) (916) (1,292) 
Cash flows from financing activities
Issuances of long-term debt1,661  —  665  
Borrowings under revolving credit facility222  —  —  
Cash dividends on common stock(423) (376) (315) 
Proceeds from stock issued under employee benefit plans356  258  347  
Purchases of treasury stock(1,270) (2,452) (564) 
Other financing activities, net(48) (33) (40) 
Cash flows from financing activities498  (2,603) 93  
Effect of foreign exchange rate changes on cash and cash equivalents(5) (63) 102  
Increase (decrease) in cash and cash equivalents1,497  (1,565) 617  
Cash and cash equivalents at beginning of year1,838  3,403  2,786  
Cash and cash equivalents at end of year$3,335  $1,838  $3,403  
Other supplemental information
Interest paid, net of portion capitalized$103  $94  $80  
Income taxes paid$294  $301  $253  

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


53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations

Baxter International Inc., through itsour subsidiaries (collectively, Baxter, we, our or us), provides a broad portfolio of essential healthcare products, across its portfolio, including acute and chronic dialysis therapies; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. The company’sOur global footprint and the critical nature of itsour products and services play a key role in expanding access to healthcare in emerging and developed countries. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and by patients at home under physician supervision. The company operatesWe operate in three3 segments: Americas, EMEA and APAC, which are described in Note 17.

18.

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles (GAAP)U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires the companyus to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.

Basis of Presentation

The consolidated financial statements include the accounts of Baxter and itsour majority-owned subsidiaries that Baxter controls,we control, after elimination of intercompanyintra-company transactions. Certain reclassifications have been made to conform the prior period consolidated financial statements to the current period presentation.

On October 25, 2019, we acquired 100 percent 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. Beginning October 25, 2019, our financial statements include the assets, liabilities and operating results of Cheetah. Refer to Note 4 for additional information.
On November 18, 2018, we acquired a controlling financial interest in our joint venture in Saudi Arabia. The acquisition allows us to increase manufacturing output and utilize the facilities for additional capacity for certain products in the region. Beginning November 18, 2018, we consolidated the financial statements of the joint venture with our consolidated financial statements. Refer to Note 4 for additional information.
On March 16, 2018, we acquired 2 hemostat and sealant products from Mallinckrodt plc: RECOTHROM Thrombin topical (Recombinant) and PREVELEAK Surgical Sealant for total consideration of $184 million.  Beginning March 16, 2018, our financial statements include the assets, liabilities and operating results of RECOTHROM and PREVELEAK.  Refer to Note 4 for additional information.
On July 27, 2017, Baxterwe acquired 100 percent of Claris Injectables Limited (Claris), a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of approximately $629 million, net of cash acquired.  Beginning July 27, 2017, Baxter’sour financial statements include the assets, liabilities and operating results of Claris.  Refer to Note 54 for additional information.

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

In 2016, Baxter disposed of its remaining 19.5% interest in Baxalta through a series of transactions including debt-for-equity exchanges, an equity-for-equity exchange and a contribution to its U.S. pension plan. As a result of these transactions, the company extinguished approximately $3.65 billion in company indebtedness, repurchased 11,526,638 Baxter shares and contributed 17,145,570 Baxalta shares to its U.S. pension plan. On June 3, 2016, Baxalta became a wholly-owned subsidiary of Shire plc (Shire).  

References in this report to Baxalta prior to the Merger closing date refers to Baxalta as a stand-alone public company. References in this report to Baxalta subsequent to the Merger closing date refer to Baxalta as a subsidiary of Shire.

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

Currency restrictions enacted in Venezuela require Baxter to obtain approval from the Venezuelan government to exchange Venezuelan bolivars for U.S. dollars and require such exchange to be made at the official exchange rate established by the government. In the first quarter of 2016, the Venezuelan government moved from the three-tier exchange rate system to a two-tiered exchange rate system and the official rate for food and medicine imports was adjusted from 6.3 to 10 bolivars per U.S. dollar.dollars. Due to a recent decline in transactions settled at the official rate or the secondary rateto exchange Venezuelan bolivars for U.S. dollars, and limitations on the company’sour ability to repatriate funds generated by itsour Venezuela operations, the companywe concluded in the second quarter of 2017 that itwe no longer met the accounting criteria for control over itsour business in Venezuela and the companywe deconsolidated itsour Venezuelan operations on June 30, 2017. As a result of deconsolidating the Venezuelan operations, the companywe recorded a pre-tax charge of $33 million in other income,(income) expense, net in 2017. This charge included the write-off of the company’sour investment in itsour Venezuelan operations, related cumulative unrealized translation adjustments and elimination of intercompanyintra-company amounts. Beginning in the third quarter of 2017, the companywe no longer includesincluded the results of itsour Venezuelan business in itsour consolidated financial statements.


In September 2017, Hurricane Maria caused damage2018, we liquidated our subsidiary in

54

Venezuela and currently sell direct to certaindistributors in that country through legal entities outside of Venezuela.  The distributors purchase our products in U.S. dollars and are responsible for importing those products into Venezuela.
Revenue Recognition
We adopted Accounting Standards Update (ASU) No. 2014-9, Revenue from Contracts with Customers (Topic 606) as of January 1, 2018.  Results for the company's assets in Puerto Rico and disrupted operations. Insurance, less applicable deductibles and subject to any coverage exclusions, covers the repair or replacement of the company's assets that suffered loss or damage, and the company is working with its insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to the company as a result of the damages and the loss the company suffered. The company's insurance policies also provide coverage for interruption to the company’s business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. In 2017, the Company recorded $32 million of pre-tax charges related to damages caused by the hurricane, including $11 million related to the impairment of damaged inventory and fixed assets as well as $21 million of idle facility and other costs. These amounts were recorded as a component of cost of sales in the consolidated statement of income for yearyears ended December 31, 2017. At this time,2019 and 2018 are presented under Topic 606, while the full2017 period is presented under previous guidance. See further discussion of the impact of Topic 606 below under the header “New Accounting Standards.”
Revenue is measured as the amount of business interruption costsconsideration 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 recoveries cannotis 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 estimated,fulfillment activities and accordingly, no additionalare not considered to be a separate performance obligation.
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 when our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.
As of December 31, 2019, we had $8.6 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 25% of this amount as revenue in each of 2020 and 2021, 20% in each of 2022 and 2023, 5% in 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 related to rebates, product returns, sales discounts and wholesaler chargebacks. These reserves are based on estimates of the amounts including amounts for anticipated insurance recoveries, have been recordedearned or to be claimed on the related sales and are included in accounts receivable, net and accounts payable and accrued liabilities on the 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 in years ended December 31, 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 consolidated balance sheets. Net trade accounts receivable was $1.8 billion as of December 31, 2017

Revenue Recognition

The company recognizes revenues2019 and 2018.

55

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 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 certain of those arrangements, a contract asset is created for the difference between the amount of equipment revenue recognized upon delivery and the amount of consideration initially receivable from productthe customer. In those arrangements, the contract asset becomes a trade account receivable as consumable medical products are provided and billed, generally over one to seven years. Our contract asset balances totaled $131 million as of December 31, 2019, of which $36 million related to contract manufacturing services, $43 million related to software sales and $52 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 receivable, net ($63 million and $50 million as of December 31, 2019 and 2018, respectively) and other non-current assets ($68 million and $30 million as of December 31, 2019 and 2018, respectively) on the consolidated balance sheets. Contract liabilities were $12 million as of December 31, 2019 and were included in other non-current liabilities on the consolidated balance sheet. Contract liabilities as of December 31, 2018 were 0t significant.
Practical Expedients
We apply a practical expedient to expense as incurred costs to obtain a contract with a customer when earned. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or servicesthe amortization period would have been rendered),one year or less. We do not disclose the price is fixed or determinable, and collectability is reasonably assured. For product sales, revenue is not recognized until title and risk of loss have transferred to the customer. The shipping terms for the majorityvalue of the company’s revenue arrangements are FOB destination. The recognition of revenue is delayed if there are significant post-delivery obligations, such as training, installation or other services. Provisions for discounts, rebates to customers, chargebacks to wholesalers and returns are provided for at the time the related sales are recorded, and are reflected as a reduction to gross sales to arrive at net sales.

The company sometimes enters into arrangements in which it commits to delivering multiple products or services to its customers. In these cases, total arrangement considerationtransaction price that is allocated to unsatisfied performance obligations for contracts with an original expected length of one year or less. We have elected to use the deliverables based on their relative selling prices. Thenpractical expedient to not adjust the allocatedpromised amount of consideration is recognized as revenue in accordance withfor the principles described above. Selling prices are determined by applyingeffects of a selling price hierarchy and by using vendor specific objective evidence (VSOE),significant financing component if it exists. Otherwise, selling pricesis expected, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Additionally, all taxes assessed by a governmental authority that are determined using third party evidence (TPE). If neither VSOE nor TPE is available,both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer are excluded from revenue.

Disaggregation of Net Sales
The following tables disaggregate our net sales from contracts with customers by Global Business Unit (GBU) between the company uses its best estimateU.S. and international:
As Restated
201920182017
years ended December 31 (in millions)U.S.InternationalTotalU.S.InternationalTotalU.S.InternationalTotal
Renal Care1
$791  $2,848  $3,639  $816  $2,835  $3,651  $754  $2,737  $3,491  
Medication Delivery2
1,822  977  2,799  1,690  974  2,664  1,698  1,002  2,700  
Pharmaceuticals3
940  1,215  2,155  996  1,091  2,087  892  994  1,886  
Clinical Nutrition4
320  552  872  321  554  875  359  526  885  
Advanced Surgery5
535  342  877  466  332  798  403  305  708  
Acute Therapies6
184  351  535  174  341  515  147  310  457  
Other7
234  251  485  260  249  509  257  200  457  
Total Baxter$4,826  $6,536  $11,362  $4,723  $6,376  $11,099  $4,510  $6,074  $10,584  
1 Renal Care includes sales of selling prices.

our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.

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.
4 Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.
56

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.
Accounts Receivable and Allowance for Doubtful Accounts

In the normal course of business, the company provideswe provide credit to itsour customers, performsperform credit evaluations of these customers and maintainsmaintain reserves for potential credit losses. In determining the amount of the allowance for doubtful accounts, the company considers,we consider, among other items, historical credit losses, the past-due status of receivables, payment histories and other customer-specific information. Receivables are written off when the company determineswe determine they are uncollectible. The allowance for doubtful accounts was $120$112 million atand $110 million as of December 31, 2019 and 2018, respectively.
Shipping and Handling Costs
Shipping costs, which are costs incurred to physically move product from our premises to the customer’s premises, are classified as selling, general and administrative (SG&A) expenses. Handling costs, which are costs incurred to store, move and prepare products for shipment, are classified as cost of sales. Approximately $324 million in 2019, $329 million in 2018 and $292 million in 2017 and $127 million at December 31, 2016.

Product Warranties

The company provides for the estimatedof shipping costs relating to product warranties at the time the related revenue is recognized. The cost is determined based on actual company experience for the same or similar products, as well as other relevant information. Product warranty liabilities are adjusted based on changeswere classified in estimates.

SG&A expenses.

Cash and Cash Equivalents

Cash and cash equivalents include cash, certificates of deposit and money market and other short-term funds with an original maturitymaturities of three months or less.

Inventories

as of December 31 (in millions)

 

2017

 

 

2016

 

Raw materials

 

$

347

 

 

$

319

 

Work in process

 

 

116

 

 

 

122

 

Finished goods

 

 

1,012

 

 

 

989

 

Inventories

 

$

1,475

 

 

$

1,430

 

Inventories are stated at the lower of cost (first-in,or net realizable value determined by the first-in, first-out method) or market value. Market value for raw materials is based on replacement costs, and market value for work in process and finished goods is based on net realizable value. The company reviews


method. We review inventories on hand at least quarterly and recordsrecord provisions for estimated excess, slow-moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value.

Property, Plant and Equipment, Net

as of December 31 (in millions)

 

2017

 

 

2016

 

Land

 

$

144

 

 

$

118

 

Buildings and leasehold improvements

 

 

1,687

 

 

 

1,486

 

Machinery and equipment

 

 

6,220

 

 

 

5,551

 

Equipment with customers

 

 

1,403

 

 

 

1,297

 

Construction in progress

 

 

694

 

 

 

710

 

Total property, plant and equipment, at cost

 

 

10,148

 

 

 

9,162

 

Accumulated depreciation

 

 

(5,560

)

 

 

(4,873

)

Property, plant and equipment (PP&E), net

 

$

4,588

 

 

$

4,289

 

Property, plant and equipment are stated at cost. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets, which range from 20 to 50 years for buildings and improvements and from three to 15 years for machinery and equipment. Leasehold improvements are amortized over the life of the related facility lease (including any renewal periods, if appropriate) or the asset, whichever is shorter. Baxter capitalizesWe capitalize certain computer software and software development costs incurred in connection with developing or obtaining software for internal use as part ofuse. Capitalized software costs are included within machinery and equipment. Capitalized software costsequipment and are amortized on a straight-line basis over the estimated useful lives of the software, which generally range from three to five years.

Research and Development
Research and development (R&D) costs, including R&D acquired in transactions that are not business combinations, are expensed as incurred. Pre-regulatory approval contingent milestone obligations to counterparties in collaborative arrangements, which include acquired R&D, are expensed when the milestone is achieved. Contingent milestone payments made to such counterparties on or after regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in depreciationother intangible assets, net.
Acquired in-process R&D (IPR&D) is the value assigned to technology or products under development acquired in a business combination which have not received regulatory approval and have no alternative future use. Acquired IPR&D is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is accounted for as a finite-lived intangible asset and amortized on a straight-line basis over the
57

estimated economic life of the related technology or product, subject to annual impairment reviews as discussed below. If the R&D project is abandoned, the indefinite-lived asset is charged to expense. Straight-line
Collaborative Arrangements
We enter into collaborative arrangements in the normal course of business. These collaborative arrangements take a number of forms and accelerated methodsstructures and are designed to enhance and expedite long-term sales and profitability growth. These arrangements may provide for us to obtain commercialization rights to a product under development, and require us to make upfront payments, contingent milestone payments, profit-sharing, and/or royalty payments. We may be responsible for ongoing costs associated with the arrangements, including R&D cost reimbursements to the counterparty. See the R&D section of this note regarding the accounting treatment of upfront and contingent milestone payments. Any royalty and profit-sharing payments during the commercialization phase are expensed as cost of sales when they become due and payable.
Restructuring Charges
We record liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. Employee termination costs are primarily recorded when actions are probable and estimable. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. Refer to the discussion below regarding the accounting for asset impairment charges.
Goodwill, Intangible Assets, and Other Long-Lived Assets
Goodwill is the excess of the purchase price over the fair value of acquired assets and liabilities in a business combination.  Goodwill is not amortized but is subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess goodwill for impairment by initially performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the two-step goodwill impairment test is not required to be performed. If we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform the two-step goodwill impairment test.  In the first step, the fair value of the reporting unit is compared with its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is not impaired and no further analysis is necessary. If the fair value of the reporting unit is less than its book value, there is an indication of potential impairment and a second step is performed. When required, the second step of testing involves calculating the implied fair value of goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of its net assets, including identifiable intangible assets, as if the reporting unit had been acquired. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
Indefinite-lived intangible assets, such as IPR&D acquired in business combinations and certain trademarks with indefinite lives, are subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess indefinite-lived intangible assets for impairment by first performing qualitative assessments to determine whether it is more-likely-than-not that the fair values of its indefinite-lived intangible assets are less than the carrying amounts. If we determine that it is more-likely-than-not that an indefinite-lived intangible asset is impaired, or if we elect not to perform an initial qualitative assessment, we then perform the quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds the fair value of the indefinite-lived intangible asset, we write the carrying amount down to the fair value.
We review the carrying amounts of long-lived assets, other than goodwill and intangible assets not subject to amortization, for potential impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating recoverability, we group assets and liabilities at the lowest level such that the identifiable cash flows relating to the group are largely independent of the cash flows of other assets and liabilities. We then compare the carrying amounts of the assets or asset groups with the related estimated undiscounted future cash flows. In the event impairment exists, an impairment charge is recorded as the amount by which the carrying amount of the asset or asset group exceeds the fair value.
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Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. We maintain valuation allowances unless it is more-likely-than-not that the deferred tax asset will be realized. With respect to uncertain tax positions, we determine whether the position is more-likely-than-not to be sustained upon examination based on the technical merits of the position. Any tax position that meets the more-likely-than-not recognition threshold is measured and recognized in the consolidated financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The liability relating to uncertain tax positions is classified as current in the consolidated balance sheets to the extent that we anticipate making a payment within one year. Interest and penalties associated with income taxes are classified in the income tax expense line in the consolidated statements of income.
Refer to the Recently Adopted Accounting Pronouncements section of this note and Note 14 for additional information related to the Tax Cuts and Jobs Act of 2017 (2017 Tax Act).
Foreign Currency Translation
Currency translation adjustments (CTA) related to foreign operations are included in other comprehensive income (OCI). For foreign operations in highly inflationary economies, translation gains and losses are included in other (income) expense, net, and were not material in 2019, 2018 and 2017.
Derivatives and Hedging Activities
All derivative instruments are recognized as either assets or liabilities at fair value in the consolidated balance sheets and are classified as short-term or long-term based on the scheduled maturity of the instrument. We designate certain of our derivatives and foreign-currency denominated debt instruments as hedging instruments in cash flow, fair value or net investment hedges.
For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is recorded in accumulated other comprehensive income (AOCI) and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid are initially recorded as assets and reclassified to OCI over the life of the option, and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in cost of sales and interest expense, net, and are primarily related to forecasted third-party sales denominated in foreign currencies, forecasted intra-company sales denominated in foreign currencies and anticipated issuances of debt, respectively.
For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets changes in fair value attributable to a particular risk, such as changes in interest rates, of the hedged item, which are also recognized in earnings. Fair value hedges are classified in interest expense, net, as they hedge the interest rate risk associated with certain of our fixed-rate debt.
We have designated our Euro-denominated senior notes as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments on the outstanding debt balances are recorded as a component of AOCI.
For derivative instruments that are not designated as hedges, the change in fair value is recorded directly to other (income) expense, net.
If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, we discontinue hedge accounting prospectively. Gains or losses relating to terminations of effective cash flow hedges generally 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. If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged item at the date of termination is amortized to earnings over the remaining term of the hedged item. If we remove a net investment hedge designation, any gains or losses recognized in AOCI are not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged.
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Derivatives, including those that are not designated as a hedge, are principally classified in the operating section of the consolidated statements of cash flows.
Refer to Note 16 for further information regarding our derivative and hedging activities.
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 consolidated statements of income was not material and there was no net impact to the 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 consolidated financial statements.
As of January 1, 2019, we adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from 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.
As of January 1, 2018, we adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory (ASU No. 2016-16) using the modified retrospective method. ASU No. 2016-16 generally accelerates the recognition of income tax consequences for intra-company asset transfers other than inventory. We recorded a $70 million reduction to retained earnings upon adoption of the standard on January 1, 2018 related to the unrecognized income tax effects of asset transfers that occurred prior to adoption. Net income increased $14 million for the year ended December 31, 2018 as a result of the adoption of the standard.
As of January 1, 2018, we adopted ASU No. 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Liabilities. The new standard amends certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair values be measured at fair value with changes in fair value recognized in earnings. For privately-held securities, we elected the measurement alternative approach for our investments, which is applied prospectively upon adoption. This approach requires entities to measure their investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The adoption of this standard did not have a material impact on our consolidated financial statements.
As of January 1, 2018, we adopted Topic 606, which amends the existing accounting standards for revenue recognition. ASU No. 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to receive when products are transferred to customers. The primary impact of the new standard relates to our contract manufacturing operations and software arrangements. Certain contract manufacturing arrangements require revenue recognition over-time in situations in which we produce products that have no alternative use and we have an enforceable right to payment for performance completed to date, inclusive of a reasonable profit margin. This results in an acceleration of revenue recognition for certain contractual arrangements as compared to recognition under prior accounting literature. The new guidance also impacts our arrangements subject to previous software revenue recognition guidance, as we are required to recognize as revenue a significant portion of the contract consideration upon delivery of the software compared to the previous practice of recognizing the contract consideration ratably over time for certain arrangements. We adopted Topic 606 using the modified retrospective method. The adjustment upon adoption increased our opening balance of retained
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earnings by approximately $45 million, net of tax, on January 1, 2018. The impact to net sales as a result of the adoption was an increase of $7 million for the year ended December 31, 2018.  The impact to cost of sales was not material for the year ended December 31, 2018.
In December 2017, the SEC issued guidance for situations where the accounting for certain elements of the 2017 Tax Act could not be completed prior to the release of a company's financial statements. For specific elements of the 2017 Tax Act, we determined a reasonable estimate for certain effects and recorded that estimate as a provisional amount in 2017. The guidance provided a measurement period to allow a company to account for these specific elements, which began in the reporting period that included the enactment of the 2017 Tax Act and ended when we obtained, prepared and analyzed the information needed in order to complete its accounting assessments or one year, whichever occurred sooner. The resulting tax effects were to be recognized in the period the assessment was complete, and included in income tax expense, accompanied by appropriate disclosures.  The measurement period closed in 2018 and we recorded adjustments to reduce income tax expense by $207 million in 2018. Refer to Note 14 for additional information related to the 2017 Tax Act.
NOTE 2
RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
We have restated herein our consolidated financial statements as of December 31, 2018 and for the years ended December 31, 2018 and 2017. 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.
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 then 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 from continuing operations before income taxes to be overstated by $59 million and $113 million, respectively, for the years ended December 31, 2018 and 2017. 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 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 consolidated financial statements.
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In order to correct our previously issued financial statements, we have restated herein our consolidated financial statements as of December 31, 2018 and for the years ended December 31, 2018 and 2017, 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 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 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 2017, 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, 2017.
Restated interim financial information for the quarterly periods ended June 30, 2019, March 31, 2019, December 31, 2018, June 30, 2018, and March 31, 2018 is included in Note 19, Quarterly Financial Results (Unaudited).
The categories of misstatements and their impact on our previously issued consolidated financial statements 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 on each period are discussed in restatement reference (a) throughout this note and in Note 19, Quarterly Financial Results (Unaudited).
(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 and in Note 19, Quarterly Financial Results (Unaudited).
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 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 consolidated financial statements. Those adjustments include corrections of depreciation expense and accumulated depreciation resulting from the decreases to the carrying amounts of the
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related leased equipment. The impacts of the operating lease misstatements on each period are useddiscussed in restatement reference (c) throughout this note and in Note 19, Quarterly Financial Results (Unaudited).
(d) Classification of Foreign Currency Gains and Losses in our 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 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 and in Note 19, Quarterly Financial Results (Unaudited).
(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 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 and in Note 19, Quarterly Financial Results (Unaudited).
(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 and $56 million, respectively, under the TSA for the years ended December 31, 2018 and 2017. 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 consolidated statements of income. The accompanying restated consolidated statements of income for the years ended December 31, 2018 and 2017 present 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 and in Note 19, Quarterly Financial Results (Unaudited).
(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 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 and in Note 19, Quarterly Financial Results (Unaudited).
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Description of Restatement Tables
The following tables present the impact of the adjustments described above to our previously reported consolidated balance sheet as of December 31, 2018 and the consolidated statements of income, comprehensive income, changes in equity, and cash flows for the years ended December 31, 2018 and 2017.
Following the restated 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 years ended December 31, 2018 and 2017 were derived from our Annual Report on Form 10-K for the year ended December 31, 2018 filed on February 21, 2019.

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Baxter International Inc.
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  $6  (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$2  $—  $2  
Current maturities of long-term debt and finance lease obligations2  —  2  
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  8  (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.
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(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.


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Baxter International Inc.
Consolidated Statement of Income
(in millions, except per share)
Year ended December 31, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$11,127  $(28) (e)$11,099  
Cost of sales6,346  (6) (c)(e)6,340  
Gross margin4,781  (22) 4,759  
Selling, general and administrative expenses2,617  3  (e)(f)2,620  
Research and development expenses655  (1) (e)654  
Other operating income, net(90) (9) (f)(99) 
Operating income1,599  (15) 1,584  
Interest expense, net45  —  45  
Other (income) expense, net(139) 61  (a)(b)(e)(78) 
Income from continuing operations before income taxes1,693  (76) 1,617  
Income tax expense (benefit)63  2  (c)(e)(g)65  
Income from continuing operations1,630  (78) 1,552  
Loss from discontinued operations, net of tax(6) —  (6) 
Net income$1,624  $(78) $1,546  
Earnings per share from continuing operations
Basic$3.05  $(0.14) $2.91  
Diluted$2.99  $(0.15) $2.84  
Loss per share from discontinued operations
Basic$(0.01) $—  $(0.01) 
Diluted$(0.02) $0.01  $(0.01) 
Earnings per share
Basic$3.04  $(0.14) $2.90  
Diluted$2.97  $(0.14) $2.83  
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 a decrease to other (income) expense, net of $64 million for the year ended December 31, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in an increase to other (income) expense, net of $5 million for the year ended December 31, 2018.
(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in an increase to cost of sales of $11 million and a decrease to income tax purposes. Depreciation expense of $3 million for the year ended 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 decreases to net sales of $28 million, cost of sales of $17 million, SG&A expense of $6 million, R&D expense of $1 million, other (income) expense, net of $2 million, and income tax expense of $2 million for the year ended December 31, 2018.
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(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 year ended December 31, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in an increase to income tax expense of $7 million for the year ended December 31, 2018.



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Baxter International Inc.
Consolidated Statement of Income
(in millions, except per share)
Year ended December 31, 2017
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$10,561  $23  (e) $10,584  
Cost of sales6,091  19  (c)(e) 6,110  
Gross margin4,470  4  4,474  
Selling, general and administrative expenses2,566  61  (e)(f) 2,627  
Research and development expenses613  2  (e) 615  
Other operating income, net—  (56) (f) (56) 
Operating income1,291  (3) 1,288  
Interest expense, net55  —  55  
Other (income) expense, net19  114  (a)(b)(e) 133  
Income from continuing operations before income taxes1,217  (117) 1,100  
Income tax expense (benefit)493  (2) (c)(e) 491  
Income from continuing operations724  (115) 609  
Loss from discontinued operations, net of tax(7) $—  (7) 
Net income$717  $(115) $602  
Earnings per share from continuing operations
Basic$1.33  $(0.21) $1.12  
Diluted$1.30  $(0.20) $1.10  
Loss per share from discontinued operations
Basic$(0.01) $—  $(0.01) 
Diluted$(0.01) $(0.01) $(0.02) 
Earnings per share
Basic$1.32  $(0.21) $1.11  
Diluted$1.29  $(0.21) $1.08  
Weighted-average number of shares outstanding
Basic543—  543  
Diluted555—  555  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in an increase to other (income) expense, net of $96 million.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in an increase to other (income) expense, net of $17 million.
(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in an increase to cost of sales of $8 million and a decrease to income tax expense of $3 million for the year ended December 31, 2017.
(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 $23 million, cost of sales of $11 million, SG&A expense of $5 million, R&D expense of $2 million, other (income) expense, net of $1 million and income tax expense of $1 million for the year ended December 31, 2017.
69

(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 $56 million for the year ended December 31, 2017.


70

Baxter International Inc.
Consolidated Statement of Comprehensive Income
(in millions)
Year ended December 31, 2018
As previously reportedRestatement impactsAs restated
Net income$1,624  $(78) $1,546  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments(461) 138  (323) 
Pension and other postretirement benefit plans32  1  33  
Hedging activities9  —  9  
Total other comprehensive (loss) income, net of tax(420) 139  (281) 
Comprehensive income$1,204  $61  $1,265  
The $78 million decrease to net income was $607driven by the items described above in the consolidated statement of income for the year ended December 31, 2018 section.
The $138 million decrease to currency translation adjustments for the year ended December 31, 2018 is comprised of a $74 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 $64 million decrease from the offsetting balance sheet impact of the adjustments to foreign exchange gains and losses.
The $1 million increase to pension and other postretirement benefit plans for the year ended December 31, 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.


71

Baxter International Inc.
Consolidated Statement of Comprehensive Income
(in millions)
Year ended December 31, 2017
As previously reportedRestatement impactsAs restated
Net income$717  $(115) $602  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments425  174  599  
Pension and other postretirement benefit plans141  (7) 134  
Hedging activities(13) —  (13) 
Available-for-sale securities2  —  2  
Total other comprehensive (loss) income, net of tax555  167  722  
Comprehensive income$1,272  $52  $1,324  
The $115 million decrease to net income was driven by the items described above in the consolidated statement of income for the year ended December 31, 2017 $632section.
The $174 million increase to currency translation adjustments for the year ended December 31, 2017 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 and a $96 million increase from the offsetting balance sheet impact of the adjustments to foreign exchange gains and losses.
The $7 million decrease to pension and other postretirement benefit plans for the year ended December 31, 2017 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.


72

Baxter International Inc.
Consolidated Statement of Changes in Equity
(in millions)
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—  —  —  —  —  (18) (3) (21) —  (21) 
Net income—  —  —  —  —  1,624  —  1,624  —  1,624  
Other comprehensive income (loss)—  —  —  —  —  —  (420) (420) —  (420) 
Purchases of treasury stock—  —  36  (2,415) (60) —  —  (2,475) —  (2,475) 
Stock issued under employee benefit plans and other—  —  (8) 407  18  (71) —  354  —  354  
Dividends declared on common stock—  —  —  —  —  (392) —  (392) —  (392) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  30  30  
Balance as of December 31, 2018683  $683  170  $(9,989) $5,898  $15,626  $(4,424) $7,794  $22  $7,816  
Restatement impacts
Balance as of January 1, 2018—  $—  —  $—  $—  $(469) $462  $(7) $—  $(7) 
Adoption of new accounting standards—  —  —  —  —  (4) —  (4) —  (4) 
Net income—  —  —  —  —  (78) —  (78) —  (78) 
Other comprehensive income (loss)—  —  —  —  —  —  139  139  —  139  
Balance as of December 31, 2018—  $—  —  $—  $—  $(551) $601  $50  $—  $50  
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—  —  —  —  —  (22) (3) (25) —  (25) 
Net income—  —  —  —  —  1,546  —  1,546  —  1,546  
Other comprehensive income (loss)—  —  —  —  —  —  (281) (281) —  (281) 
Purchases of treasury stock—  —  36  (2,415) (60) —  —  (2,475) —  (2,475) 
Stock issued under employee benefit plans and other—  —  (8) 407  18  (71) —  354  —  354  
Dividends declared on common stock—  —  —  —  —  (392) —  (392) —  (392) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  30  30  
Balance as of December 31, 2018683  683  170  (9,989) 5,898  15,075  (3,823) 7,844  22  7,866  
See descriptions of the net income and other comprehensive income impacts in 2016the consolidated statement of income and $597consolidated statement of comprehensive income for the year ended December 31, 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.
73

Baxter International Inc.
Consolidated Statement of Changes in Equity
(in millions)
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, 2017683  $683  144  $(7,995) $5,958  $14,200  $(4,556) $8,290  $(10) $8,280  
Net income—  —  —  —  —  717  —  $717  —  $717  
Other comprehensive income (loss)—  —  —  —  —  —  555  555  —  555  
Purchases of treasury stock—  —  9  (564) —  —  —  (564) —  (564) 
Stock issued under employee benefit plans and other—  —  (11) 578  (18) (134) —  426  —  426  
Dividends declared on common stock—  —  —  —  —  (334) —  (334) —  (334) 
Distribution of Baxalta—  —  —  —  —  34  —  34  —  34  
Changes in noncontrolling interests—  —  —  —  —  —  —  —  2  2  
Balance as of December 31, 2017683  $683  142  $(7,981) $5,940  $14,483  $(4,001) $9,124  $(8) $9,116  
Restatement impacts
Balance as of January 1, 2017—  $—  —  $—  $—  $(354) $295  $(59) $—  $(59) 
Net income—  —  —  —  —  (115) —  (115) —  (115) 
Other comprehensive income (loss)—  —  —  —  —  —  167  167  —  167  
Balance as of December 31, 2017—  $—  —  $—  $—  $(469) $462  $(7) $—  $(7) 
As restated
Balance as of January 1, 2017683  $683  144  $(7,995) $5,958  $13,846  $(4,261) $8,231  $(10) $8,221  
Net income—  —  —  —  —  602  —  602  —  602  
Other comprehensive income (loss)—  —  —  —  —  —  722  722  —  722  
Purchases of treasury stock—  —  9  (564) —  —  —  (564) —  (564) 
Stock issued under employee benefit plans and other—  —  (11) 578  (18) (134) —  426  —  426  
Dividends declared on common stock—  —  —  —  —  (334) —  (334) —  (334) 
Distribution of Baxalta—  —  —  —  —  34  —  34  —  34  
Changes in noncontrolling interests—  —  —  —  —  —  —  —  2  2  
Balance as of December 31, 2017683  $683  142  $(7,981) $5,940  $14,014  $(3,539) $9,117  $(8) $9,109  
The adjustment to the January 1, 2017 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, 2017. 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, 2017.
See descriptions of the net income and other comprehensive income impacts in the consolidated statement of income and consolidated statement of comprehensive income for the year ended December 31, 2017 sections above.

74

Baxter International Inc.
Consolidated Statement of Cash Flows
(in millions)
Year ended December 31, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Cash flows from operations
Net income$1,624  $(78) $1,546  
Adjustments to reconcile income from continuing operations to net cash from operating activities:
Loss from discontinued operations, net of tax6  —  6  
Depreciation and amortization785  (14) (c)(g) 771  
Pension settlement charges1  —  1  
Net periodic pension benefit and other postretirement costs39  —  39  
Deferred income taxes(267) 4  (c)(g) (263) 
Stock compensation115  —  115  
Other43  7  (d) 50  
Changes in balance sheet items:
Accounts receivable, net(12) —  (12) 
Inventories(197) —  (197) 
Accounts payable and accrued liabilities64  (4) (b) 60  
Other(105) 6  (b)(e)(g) (99) 
Cash flows from operations2,096  (79) 2,017  
Cash flows from investing activities
Capital expenditures(681) 22  (c) (659) 
Acquisitions and investments, net of cash acquired(268) —  (268) 
Other investing activities, net11  —  11  
Cash flows from investing activities(938) 22  (916) 
Cash flows from financing activities
Cash dividends on common stock(376) —  (376) 
Proceeds from stock issued under employee benefit plans258  —  258  
Purchases of treasury stock(2,452) —  (2,452) 
Other financing activities, net(33) —  (33) 
Cash flows from financing activities(2,603) —  (2,603) 
Effect of foreign exchange rate changes on cash and cash equivalents(117) 54  (a)(d)(e) (63) 
Increase (decrease) in cash and cash equivalents(1,562) (3) (1,565) 
Cash and cash equivalents at beginning of year3,394  9  (e) 3,403  
Cash and cash equivalents at end of year$1,832  $6  (e) $1,838  
Other supplemental information
Interest paid, net of portion capitalized$94  —  $94  
Income taxes paid$302  (1) (e) $301  



The $78 million decrease to net income was driven by the items described above in 2015. Depreciation expensethe consolidated statement of income for the year ended December 31, 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 $64 million for the year ended December 31, 2018.

(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in decreases to changes in accounts payable and accrued liabilities of $4 million and other changes in balance sheet items of $1 million for the year ended December 31, 2018.

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to depreciation and amortization of $11 million, deferred income taxes of $3 million and capital expenditures of $22 million for the year ended December 31, 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 $7 million for the year ended December 31, 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 increases to cash and cash equivalents at the beginning of the period of $9 million, at the end of the period of $6 million, and to other changes in balance sheet items of $4 million and decreases in the effect of foreign exchange rate changes on cash and cash equivalents of $3 million and income taxes paid of $1 million for the year ended December 31, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in a decrease to depreciation and amortization of $3 million and increases to deferred income taxes of $7 million and other changes in balance sheet items of $3 million for the year ended December 31, 2018.




Baxter International Inc.
Consolidated Statement of Cash Flows
(in millions)
Year ended December 31, 2017
As previously reportedRestatement impactsRestatement referenceAs restated
Cash flows from operations
Net income$717  $(115) $602  
Adjustments to reconcile income from continuing operations to net cash from operating activities:
Loss from discontinued operations, net of tax7  —  7  
Depreciation and amortization761  (11) (c)(g) 750  
Pension settlement charges2  —  2  
Net periodic pension benefit and other postretirement costs123  —  123  
Deferred income taxes211  —  211  
Stock compensation107  —  107  
Other43  (5) (d)(g) 38  
Changes in balance sheet items:
Accounts receivable, net30  —  30  
Inventories76  —  76  
Accounts payable and accrued liabilities5  6  (b) 11  
Other(229) 2  (b)(c)(e) (227) 
Cash flows from operations - continuing operations1,853  (123) 1,730  
Cash flows from operations - discontinued operations(16) —  (16) 
Cash flows from operations1,837  (123) 1,714  
Cash flows from investing activities
Capital expenditures(634) 18  (c) (616) 
Acquisitions and investments, net of cash acquired(686) —  (686) 
Other investing activities, net10  —  10  
Cash flows from investing activities(1,310) 18  (1,292) 
Cash flows from financing activities
Issuances of debt633  32  (a) 665  
Cash dividends on common stock(315) —  (315) 
Proceeds from stock issued under employee benefit plans347  —  347  
Purchases of treasury stock(564) —  (564) 
Other financing activities, net(40) —  (40) 
Cash flows from financing activities61  32  93  
Effect of foreign exchange rate changes on cash and cash equivalents5  97  (a)(d)(e) 102  
Increase (decrease) in cash and cash equivalents593  24  617  
Cash and cash equivalents at beginning of year2,801  (15) (e) 2,786  
Cash and cash equivalents at end of year$3,394  $9  (e) $3,403  
Other supplemental information
Interest paid, net of portion capitalized$80  —  $80  
Income taxes paid$255  (2) (e) $253  


The $115 million decrease to net income was driven by the items described above in the consolidated statement of income for the year ended December 31, 2017 section.

(a) Foreign Currency Denominated Monetary Assets and 2016 included acceleratedLiabilities—The correction of these misstatements resulted in an increase to the effect of foreign exchange rate changes on cash and cash equivalents of $99 million for the year ended December 31, 2017. Additionally, issuances of debt increased $32 million with an offsetting decrease to the effect of foreign exchange rate changes on cash and cash equivalents to remeasure the proceeds received from the issuance of our Euro-denominated senior notes in May 2017.

(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to changes in accounts payable and accrued liabilities of $6 million and other changes in balance sheet items of $8 million for the year ended December 31, 2017.

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to depreciation and amortization of $10 million, other changes in balance sheet items of $3 million and capital expenditures of $18 million for the year ended December 31, 2017.

(d) Classification of Foreign Currency Gains and $48Losses 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 $6 million for the year ended December 31, 2017.

(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 increases in cash and cash equivalents at the end of the period of $9 million and the effect of foreign exchange rate changes on cash and cash equivalents of $24 million and decreases to cash and cash equivalents at the beginning of the period of $15 million, other changes in balance sheet items of $3 million and income taxes paid of $2 million for the year ended December 31, 2017.

(g) Other miscellaneous adjustments - The correction of these misstatements resulted in a decrease to depreciation and amortization and an increase to other adjustments to reconcile net income to net changes from operating activities of $1 million for the year ended December 31, 2017.

NOTE 3
SEPARATION OF BAXALTA
On July 1, 2015, we completed the distribution of approximately 80.5% of the outstanding common stock of Baxalta to our stockholders (the Distribution). After giving effect to the Distribution, we retained 19.5% of the outstanding common stock, or 131,902,719 shares of Baxalta (Retained Shares).  The Distribution was made to our stockholders of record as of the close of business on June 17, 2015 (Record Date), who received 1 share of Baxalta common stock for each of our shares held as of the Record Date. As a result of the Distribution, Baxalta became an independent public company. In 2016, we disposed of our remaining 19.5% interest in Baxalta through a series of transactions including debt-for-equity exchanges, an equity-for-equity exchange and a contribution to our U.S. pension plan.
We entered into several additional agreements with Baxalta as a result of the July 1, 2015 separation, including a transition services agreement (TSA), separation and distribution agreement, manufacturing and supply agreements (MSA), tax matters agreement and a long-term services agreement.
Pursuant to the TSA, we and our subsidiaries, along with Baxalta and their respective subsidiaries, provided to each other, on an interim, transitional basis, various services. Services provided by us included, among others, finance, information technology, human resources, quality, supply chain and certain other administrative services. The services generally commenced on the Distribution date and terminated as of July 1, 2018. Billings by us under the TSA are presented within other operating income, net in the consolidated statements of income. In 2018 and 2017, we recognized approximately $9 million and $56 million, respectively, related to business optimizationthe TSA.
Cash outflows of $6 million, 0 and $16 million in 2019, 2018 and 2017, respectively, were reported in cash flows from operations – discontinued operations. These cash flows relate to payments under the tax matters agreement, non-assignable tenders whereby we remained the seller of Baxalta products, transactions related to importation services we provided in certain countries and trade payables settled following local separation costs.

Acquisitions

on Baxalta’s behalf.



NOTE 4
ACQUISITIONS AND OTHER ARRANGEMENTS
Results of operations of acquired companies are included in the company’sour results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.

Contingent consideration related to business combinations is recognized at theits estimated fair value on the acquisition date. Subsequent changes to the fair value of those contingent paymentsconsideration arrangements are recognized in earnings as a component of other income, net.earnings. Contingent paymentsconsideration related to acquisitions may consist of development, regulatory and commercial milestone payments, in addition to sales-basedand sales or earnings-based payments, and are valued using discounted cash flow techniques. The fair value of development, regulatory and commercial milestone payments reflects management’s expectations of the probability of payment, and increases or decreases as the probability of payment or expectation of timing or amount of payments changes. The fair value of sales-based payments is based upon probability-weighted future revenue estimates and increases or decreases as revenue estimates or expectation of timing or amount of payments changes.

Research

Cheetah Medical, Inc.
On October 25, 2019, we acquired 100 percent 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 Development

Research and development (R&D) costs, including R&D acquired in transactions that are not business combinations, are expensed as incurred. Pre-regulatory approval contingent milestone obligations to counterparties in collaborative arrangementscommercial milestones for which include acquired R&D are expensed when the milestoneacquisition date fair value was $18 million. Cheetah is achieved. Contingent milestone payments made to such counterparties on or after regulatory approval are capitalized and amortized over the remaining useful lifea leading provider of hemodynamic monitoring technologies. The fair value of the related product. Amounts capitalizedpotential contingent consideration payments was estimated by applying a probability-weighted expected payment model for such payments arethe 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:
(in millions)
Assets acquired and liabilities assumed
Cash$2 
Accounts receivable, net3 
Inventories1 
Prepaid expenses and other current assets1 
Property, plant and equipment1 
Goodwill111 
Other intangible assets131 
Operating lease right-of-use assets1 
Accounts payable and other accrued liabilities(4)
Other non-current liabilities(32)
Total assets acquired and liabilities assumed$215 
79

The results of operations of the acquired business have been included in other intangible assets, netour consolidated statement of accumulated amortization.

Acquired in-process R&D (IPR&D) isincome since the value assigned to technology or products under developmentdate the business was acquired in a business combination which haveand were not received regulatory approvalsignificant. Acquisition and have no alternative future use.

Acquired IPR&D is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is accounted for as a finite-lived intangible asset and amortized on a straight-line basis over the estimated economic life of the related technology or product, subject to annual impairment reviews as discussed below. If the R&D project is abandoned, the indefinite-lived asset is charged to expense.


Collaborative Arrangements

The company enters into collaborative arrangements in the normal course of business. These collaborative arrangements take a number of forms and structures, and are designed to enhance and expedite long-term sales and profitability growth. These arrangements may provide that Baxter obtain commercialization rights to a product under development, and require Baxter to make upfront payments, contingent milestone payments, profit-sharing, and/or royalty payments. Baxter may be responsible for ongoingintegration costs associated with the arrangements, including R&D cost reimbursementsacquisition were $3 million in 2019.

We allocated $123 million of the total consideration to the counterparty. See above regardingdeveloped 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 accounting treatment of upfrontintangible assets were determined using the income approach. The discount rates used to measure the intangible assets were 11.0% for developed product rights and contingent payments. Any royalty and profit-sharing payments during the commercialization phase are expensed as cost of sales when they become due and payable.

Business Optimization Charges

The company records liabilities10.0% for costs associated with exit or disposal activities in the period in which the liability is incurred. Employee termination costs are primarily recorded when actions are probable and estimable. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. Refer to the discussion below regarding the accounting for asset impairment charges.

Goodwill, Intangible Assets, and Other Long-Lived Assets

Goodwill is the excess of purchase price over the fair value of acquired assets and liabilities in a business combination.  Goodwill is not amortized, but is subject to an impairment review annually and whenever indicators of impairment exist. Goodwill would be impaired if the carrying amount of a reporting unit exceeded the fair value of that reporting unit, calculated as the present value of estimated cash flows discounted using a risk-free market rate adjusted for a market participant’s view of similar companies and perceived risks in the cash flows. The implied fair value of goodwill is then determined by subtracting the fair value of all identifiable net assets other than goodwill fromcustomer relationships. We consider the fair value of the reporting unit,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.
RECOTHROM and PREVELEAK
On March 16, 2018, we acquired 2 hemostat and sealant products from Mallinckrodt plc: RECOTHROM Thrombin topical (Recombinant), the first and only stand-alone recombinant thrombin, and PREVELEAK Surgical Sealant, which is used in vascular reconstruction. We concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. The purchase price included an upfront payment of approximately $163 million in 2018. In addition, the purchase price included new and assumed contingent payments in the future related to inventory and technology transfer milestones and net revenue royalty payments with an impairment charge recordedestimated fair value of $21 million as of the acquisition date. The maximum aggregate amounts payable for the excess, if any, of carrying amount of goodwill over the impliedinventory and technology transfer and net revenue royalties were $7 million, $15 million and $143 million, respectively. The fair value.

Indefinite-lived intangible assets, such as IPR&D acquired in business combinations and certain trademarks with indefinite lives, are subject to an impairment review annually and whenever indicators of impairment exist. Indefinite-lived intangible assets are impaired if the carrying amountvalue of the asset exceededpotential contingent consideration payments was estimated by applying a probability-weighted expected payment model for the inventory and technology transfer payments and a Monte Carlo simulation model for contingent royalty payments, which were then discounted to present value.

The following table summarizes the fair value of consideration transferred:
(in millions)
Cash consideration transferred$163 
Contingent consideration21 
Total consideration$184 
The following table summarizes the fair value of the asset.

The company reviews the carrying amounts of long-lived assets other than goodwill and intangible assets not subject to amortization, for potential impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating recoverability, the company groups assets and liabilities at the lowest level such that the identifiable cash flows relating to the group are largely independentacquired as of the cash flowsacquisition date:

(in millions)
Assets acquired
Accounts receivable, net$2 
Inventory80 
Goodwill2 
Other intangible assets100 
Total assets acquired$184 
The results of other assets and liabilities. The company then compares the carrying amountsoperations of the assets or asset groups withacquired business have been included in our consolidated statement of income since the related estimated undiscounted future cash flows. Indate the event impairment exists, an impairment charge is recorded as the amount by which the carrying amountbusiness was acquired. The RECOTHROM and PREVELEAK acquisitions contributed $80 million and $52 million of the asset or asset group exceeds the fair value.

Shipping and Handling Costs

Shipping costs, which are costs incurred to physically move product from Baxter’s premises to the customer’s premises, are classified as marketing and administrative expenses. Handling costs, which are costs incurred to store, move and prepare products for shipment, are classified as cost of sales. Approximately $291 million in 2017, $311 million in 2016 and $272 million in 2015 of shipping costs were classified in marketing and administrative expenses.

Income Taxes

Deferred taxes are recognizednet sales for the future tax effects of temporary differences between financialyears ended December 31, 2019 and income tax reporting based on enacted tax laws2018, respectively. Acquisition and rates. The company maintains valuation allowances unless it is more likely than not that the deferred tax asset will be realized. With respect to uncertain tax positions, the company determines whether the position is more likely than not to be sustained upon examination, based on the technical merits of the position. Any tax position that meets the more likely than not recognition threshold is measured and recognized in the consolidated financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The liability relating to uncertain tax positions is classified as current in the consolidated balance sheets to the extent the company anticipates making a payment within one year. Interest and penalties associated with income taxes are classified in the income tax expense line in the consolidated statements of income.

Refer to the Recently Adopted Accounting Pronouncements section of this note and Note 15 for additional information related to the 2017 Tax Act.


Foreign Currency Translation

Currency translation adjustments (CTA) related to foreign operations are included in other comprehensive income (OCI). For foreign operations in highly inflationary economies, translation gains and losses are included in other income, net, and were not material in 2017, 2016 and 2015.    

Derivatives and Hedging Activities

All derivative instruments are recognized as either assets or liabilities at fair value in the consolidated balance sheets and are classified as short-term or long-term based on the scheduled maturity of the instrument. Based upon the exposure being hedged, the company designates its hedging instruments as cash flow, fair value or net investment hedges.

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

For each derivative instrument that is designated and effective as ainventory fair value hedge,step-ups, associated with the gain or loss onacquisition were $20 million and $17 million, respectively, in 2019 and 2018.

We allocated $100 million of the derivative is recognized into earnings,total consideration to the RECOTHROM and PREVELEAK developed product rights with an offsetting loss or gain recognized againsta weighted-average useful life of 10 years. The fair value of the carrying value onintangible assets was determined using the underlying hedged item. Changes inincome approach. The discount rates used to measure the RECOTHROM and PREVELEAK intangible assets were 12.5% and 13.0%, respectively. We consider the fair value of the hedges are classifiedintangible assets to be Level 3 measurements due to the significant estimates and assumptions used by management in netestablishing the estimated fair values.
80

The goodwill, which is deductible for tax purposes, includes the value of potential future technologies as well as the overall strategic benefits provided to our surgical portfolio of hemostats and sealants, and is included in the Americas segment.
Saudi Arabia Joint Venture
In November 2018, we acquired additional equity to obtain a 51% controlling financial interest expense, as they hedgeof our joint venture in Saudi Arabia that was previously accounted for under the interest rate risk associated withequity method of accounting. The acquisition allows us to increase manufacturing output and utilize the facilities for additional capacity for certain products in the region. Beginning in the fourth quarter of 2018, we consolidated the financial statements of the company’s fixed-rate debt.

For a portion of the company’s senior notes, the company has designated this debt as a hedge of its net investment in its European operations, and, as a result, mark to spot rate adjustments of the outstanding debt balances have been and will be recorded as a component of AOCI.

For derivative instruments that are not designated as hedges, the change in fair value is recorded directly to other income, net.

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. If the company removes the cash flow hedge designation because the hedged forecasted transactions are no longer probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions are still probable of occurring are deferred and recognized consistentjoint venture with the income or loss recognition of the underlying hedged items. If the company terminates a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged items at the date of termination is amortized to earnings over the remaining term of the hedged item. If the company removes the net investment hedge designation, any gains or losses recognized in AOCI are not reclassified to earnings until the company sells, liquidates, or deconsolidates the foreign investments that were being hedged.

Derivatives, including those that are not designated as a hedge, are principally classified in the operating section of theour consolidated statements of cash flows.

Refer to Note 9 for further information regarding the company’s derivative and hedging activities.

New Accounting Standards

Recently issued accounting standards not yet adopted

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  As a result of the enactment of the 2017 Tax Act, the FASB issued new accounting guidance on the reclassification of certain tax effects from AOCI to retained earnings.financial statements. The optional guidance is effective January 1, 2019, with early adoption permitted. The Company is evaluating whether it will adopt the new guidance along with any impacts on the company’s financial position, results of operations of the joint venture have been included in our consolidated statement of income since the date the business was acquired and cash flows.

were not significant.

In August 2017,The guidance on accounting for business combinations requires that an acquirer remeasure its previously held equity interest in an acquiree at its acquisition date fair value and recognize the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815, Derivatives and Hedging. The purposeresulting gain or loss in earnings. Thus, in connection with the acquisition, the carrying amount 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 effective date for this ASU is January 1, 2019, with early adoption permitted. The company is evaluating the potential effects on its consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends ASC 715, Compensation – Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic postretirement benefit cost in operating expenses. The service cost component of net periodic postretirement benefit cost should be presentedour previously held equity interest in the same operating expense line items as other employee compensation costs arising from services rendered duringjoint venture was remeasured to fair value at the period. The other componentsacquisition date, resulting in a gain in the fourth quarter of net benefit cost, including interest costs, expected return on assets, amortization2018 of prior service cost/credit, and settlement and curtailment effects, are to be$24 million, which was included separately and outside of any subtotal of operating income. The company will adopt the standard effective January 1, 2018.  This guidance will impact the presentation of the company’s consolidated statements of income with no significant impact on net income.  Upon adoption of the standard on January 1, 2018, operating income for 2017 and 2016 will be recast to increase $33 million and $21 million, respectively, with a corresponding decrease in other income, net.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. ASU No. 2016-16 generally accelerates the recognition of income tax consequences for asset transfers between entities under common control. Entities are required to adopt using a modified retrospective approach with a cumulative adjustment to opening retained earnings in the year of adoption for previously unrecognized income tax expense. The company anticipates a negative retained earnings adjustment of approximately $66 million upon adoption of the standard on January 1, 2018 related to the unrecognized income tax effects of asset transfers that occurred prior to adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, other than those that meet the definition of a short-term lease.  This update will establish a lease asset and lease liability by lessees for those leases classified as operating under current GAAP. Leases will be classified as either operating or finance under the new guidance. Operating leases will result in straight-line(income) expense, in the income statement, similar to current operating leases, and finance leases will result in more expense being recognized in the earlier years of the lease term, similar to current capital leases.  This ASU is effective for the company beginning January 1, 2019. The company is currently evaluating the impact of this standard on its consolidated financial statements. 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU No. 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU No. 2014-09 will be effective for the company beginning on January 1, 2018. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The company has completed an assessment of the new standard and is currently executing its detailed implementation plan and developing processes and controls for gathering information for required disclosures. The company will adopt the standard using the modified retrospective method.  The primary impact of the new standard relates to the company’s contract manufacturing operations and software arrangements.  Certain contract manufacturing arrangements may require revenue recognition over-time in situations in which the company produces products that have no alternative use and the company has an enforceable right to payment for performance completed to date, inclusive of a reasonable profit margin. This may result in an acceleration of revenue recognition for certain contractual arrangements as compared to recognition under current accounting literature.  The new guidance is also expected to impact the company’s arrangements subject to current software revenue recognition guidance, as the company may be required to recognize as revenue a significant portion of the contract consideration upon delivery of the software compared to the current practice of recognizing the contract consideration ratably over time for certain arrangements. The company expects the adjustment to increase its opening balance of retained earnings by approximately $50 million, net of tax, upon adoption.  The company does not expect ASU 2014-09 to have a material impact to reported revenue in subsequent reporting periods.


Recently adopted accounting pronouncements

As of January 1, 2017, the company adopted on a prospective basis ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The updated guidance requires all tax effects related to share-based payments to be recorded in income tax expense in the consolidated statement of income. Previous guidance required that tax effects of deductions in excess of share-based compensation costs (windfall tax benefits) be recorded in additional paid-in capital, and tax deficiencies be recorded in additional paid-in capital to the extent of previously recognized windfall tax benefits, with the remainder recorded in income tax expense. The new guidance also requires the cash flows resulting from windfall tax benefits to be reported as operating activities in the consolidated statement of cash flows, rather than the previous requirement to present windfall tax benefits as an inflow from financing activities. As a resultfair value of the adoption, net income and operating cash flow for 2017 increased by approximately $56 million.  The prior periods have not been restated and therefore, windfall tax benefits ofequity interest on the acquisition date was $39 million and $7 million, respectively, for 2016 and 2015 were not included in net income and were included as cash flows from financing activities inwe consider the consolidated statement of cash flows.

In December 2017, the SEC issued guidance for situations where the accounting for certain elements of the 2017 Tax Act cannotfair value to be completed priora Level 3 measurement due to the releasesignificant estimates and assumptions used by management in establishing the estimated fair value.

The following table summarizes the fair value of a company's financial statements. For specific elementsconsideration transferred:
(in millions)
Consideration transferred
Cash$2 
Fair value of equity investment39 
Noncontrolling interest39 
Total consideration transferred$80 
The following table summarizes the fair value of the 2017 Tax Act, the company has determined a reasonable estimate for certain effectsassets acquired and has recorded that estimate as a provisional amount. The guidance provides a measurement period to allow a company to account for these specific elements, which begins in the reporting period that includes the enactment of the 2017 Tax Act and ends when the company has obtained, prepared and analyzed the information needed in order to complete its accounting assessments. The resulting tax effects must be recognized in the period the assessment is complete, and included in income tax (benefit) expense, accompanied by appropriate disclosures.  The measurement period shall not exceed one year from enactment, December 22, 2018.

NOTE 2

SEPARATION OF BAXALTA INCORPORATED

On July 1, 2015, Baxter completed the distribution of approximately 80.5% of the outstanding common stock of Baxalta Incorporated (Baxalta) to Baxter shareholders (the Distribution). After giving effect to the Distribution, the company retained 19.5% of the outstanding common stock, or 131,902,719 shares of Baxalta (Retained Shares).  The Distribution was made to Baxter’s shareholders of recordliabilities assumed as of the closeacquisition date:

(in millions)
Assets acquired and liabilities assumed
Cash$4 
Accounts receivable, net25 
Inventories8 
Property, plant and equipment12 
Goodwill17 
Other intangible assets40 
Other non-current assets2 
Short-term debt(4)
Accounts payable and accrued liabilities(16)
Other non-current liabilities(8)
Total assets acquired and liabilities assumed$80 
The goodwill, which is not deductible for tax purposes, includes the value to create a more fully integrated supply chain and go-to-market business model and is included in the EMEA segment.
In connection with the acquisition, we reacquired certain license rights which had provided the joint venture with the exclusive and perpetual rights to manufacture and distribute our products for sale in specified territories. Reacquired license rights with fair values totaling $10 million were assigned a useful life of business on June 17, 2015 (Record Date)12 years. Other amortizable intangible assets consist of customer relationships and have a weighted-average estimated useful life of 10 years.  The intangible assets were valued using the income approach. The discount rates used to measure the reacquired rights and customer relationship intangible assets were 13.0% and 14.0%, who received one sharerespectively. We consider the
81

fair value of Baxalta common stock for each Baxter common share held as of the Record Date. As a result of the Distribution, Baxalta became an independent public company trading under the symbol “BXLT” on the New York Stock Exchange.

On Juneacquired intangible assets to be Level 3 2016, Baxalta became a wholly-owned subsidiary of Shire plc (Shire) through a merger of a wholly-owned Shire subsidiary with and into Baxalta, with Baxalta as the surviving subsidiary (the Merger). References in this report to Baxalta prior to the Merger closing date refer to Baxalta as a stand-alone public company. References in this report to Baxalta subsequent to the Merger closing date refer to Baxalta as a subsidiary of Shire.

On July 1, 2015, Baxter transferred net assets of $4.1 billion to Baxalta as a result of the separation.  In 2016 and 2017, Baxter recorded certain separation related adjustments within equity of $18 million and $34 million, respectively.  For a portion of Baxalta’s operations, the legal transfer of Baxalta’s assets and liabilities did not occur with the separation of Baxalta on July 1, 2015measurements due to the time required to transfer marketing authorizationssignificant estimates and other regulatory requirementsassumptions used by management in certain countries. Underestablishing the termsestimated fair values.

The fair value of the International Commercial Operations Agreement (ICOA), Baxalta49% noncontrolling interest in the joint venture is subjectestimated to be $39 million. The fair value of the noncontrolling interest was estimated using the income approach applied to the risks and entitled toprojected cash flows of the benefits generated by these operations and assets until legal transfer; therefore,joint venture. As the net economic benefit and any cash collected by these entities by Baxter are transferred to Baxalta. As of December 31, 2016, Baxter recorded a liability of $47 million for its obligation to transfer these net assets, primarily accounts and other current receivables, net, to Baxalta.  As of December 31, 2017, all operations and assets in all countries have been separated.


The following tablejoint venture is a summary ofprivate company, the operating results of Baxalta, which have been reflected as discontinued operations for the years ended December 31, 2017, 2016 and 2015.

Years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Major classes of line items constituting income from

   discontinued operations before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

7

 

 

$

148

 

 

$

2,895

 

Cost of sales

 

 

(5

)

 

 

(139

)

 

 

(1,214

)

Marketing and administrative expenses

 

 

(1

)

 

 

(20

)

 

 

(547

)

Research and development expenses

 

 

—

 

 

 

—

 

 

 

(389

)

Other income and expense items that are not major

 

 

—

 

 

 

1

 

 

 

7

 

Total (loss) income from discontinued operations before income taxes

 

 

1

 

 

 

(10

)

 

 

752

 

Gain on disposal of discontinued operations

 

 

2

 

 

 

19

 

 

 

—

 

Income tax expense

 

 

—

 

 

 

10

 

 

 

177

 

Total (loss) income from discontinued operations

 

$

3

 

 

$

(1

)

 

$

575

 

In 2016, the company transferred $161 million of net assets to Baxalta resulting in a pre-tax gain of $19 million.  In 2017, the remaining assets were transferred resulting in a pre-tax gain of $2 million.  These gainsfair value measurement is based on significant inputs that are recorded within (loss) income from discontinued operations, net of tax.

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

Pursuant to the TSA, Baxter and Baxalta and their respective subsidiaries are providing to each other, on an interim, transitional basis, various services. Services being provided by Baxter include, among others, finance, information technology, human resources, quality, supply chain and certain other administrative services. The services generally commenced on the Distribution date and are expected to terminate within 36 months of the Distribution date. Billings by Baxter under the TSA are recorded as a reduction of the costs to provide the respective servicenot observable in the applicable expense category, primarily in marketingmarket and administrative expenses, in the consolidated statements of income. In 2017, 2016 and 2015, the company recognized approximately $56 million, $101 million and $75 million, respectively, asthus represents a reduction to marketing and administrative expenses related to the TSA.

Pursuant to the MSA, Baxalta or Baxter, as the case may be, manufactures, labels, and packages products for the other party. The terms of the agreements range in initial duration from five to 10 years. In 2017, 2016 and 2015, Baxter recognized approximately $22 million, $39 million and $37 million, respectively, in sales to Baxalta. In addition, in 2017, 2016 and 2015, Baxter recognized approximately $170 million, $189 million and $100 million, respectively, in cost of sales related to purchases from Baxalta pursuant to the MSA. The cash flows associated with these agreements are included in cash flows from operations — continuing operations.

In December 2015, Baxter sold to Baxalta certain assets for approximately $28 million with no resulting impact to net income.

Cash outflows of $16 million in 2017, inflows of $30 million in 2016, and inflows of $518 million in 2015 were reported in cash flows from operations – discontinued operations. These cash flows relate to non-assignable tenders whereby Baxter remains the seller of Baxalta products, transactions related to importation services Baxter provides in certain countries, in addition to trade payables settled following local separation on Baxalta’s behalf.

NOTELevel 3

SUPPLEMENTAL FINANCIAL INFORMATION

Prepaid Expenses and Other

as of December 31 (in millions)

 

2017

 

 

2016

 

Prepaid value added taxes

 

$

134

 

 

$

114

 

Prepaid income taxes

 

 

99

 

 

 

147

 

Other

 

 

368

 

 

 

341

 

Prepaid expenses and other

 

$

601

 

 

$

602

 

 measurement.

Other Long-Term Assets

as of December 31 (in millions)

 

2017

 

 

2016

 

Deferred income taxes

 

$

408

 

 

$

629

 

Other long-term receivables

 

 

187

 

 

 

181

 

All other

 

 

192

 

 

 

167

 

Other long-term assets

 

$

787

 

 

$

977

 

Accounts Payable and Accrued Liabilities

as of December 31 (in millions)

 

2017

 

 

2016

 

Accounts payable, principally trade

 

$

920

 

 

$

791

 

Common stock dividends payable

 

 

87

 

 

 

70

 

Employee compensation and withholdings

 

 

548

 

 

 

542

 

Property, payroll and certain other taxes

 

 

143

 

 

 

143

 

Business optimization reserves

 

 

100

 

 

 

153

 

Accrued rebates

 

 

218

 

 

 

206

 

Separation-related reserves

 

 

—

 

 

 

46

 

All other

 

 

717

 

 

 

661

 

Accounts payable and accrued liabilities

 

$

2,733

 

 

$

2,612

 

Other Long-Term Liabilities

as of December 31 (in millions)

 

2017

 

 

2016

 

Pension and other employee benefits

 

$

1,211

 

 

$

1,492

 

Deferred tax liabilities

 

 

280

 

 

 

93

 

Litigation reserves

 

 

27

 

 

 

19

 

Business optimization reserves

 

 

12

 

 

 

11

 

All other

 

 

135

 

 

 

128

 

Other long-term liabilities

 

$

1,665

 

 

$

1,743

 

Net Interest Expense

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Interest costs

 

$

98

 

 

$

107

 

 

$

197

 

Interest costs capitalized

 

 

(13

)

 

 

(18

)

 

 

(51

)

Interest expense

 

 

85

 

 

 

89

 

 

 

146

 

Interest income

 

 

(30

)

 

 

(23

)

 

 

(20

)

Net interest expense

 

$

55

 

 

$

66

 

 

$

126

 

Other Income, net

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Foreign exchange

 

$

(50

)

 

$

(28

)

 

$

(113

)

Net loss on debt extinguishment

 

 

—

 

 

 

153

 

 

 

130

 

Net realized gains on Retained Shares transaction

 

 

—

 

 

 

(4,387

)

 

 

—

 

Gain on litigation settlement

 

 

—

 

 

 

—

 

 

 

(52

)

Gain on sale of investments and other assets

 

 

(3

)

 

 

(3

)

 

 

(38

)

Venezuela deconsolidation

 

 

33

 

 

 

—

 

 

 

—

 

All other

 

 

6

 

 

 

(31

)

 

 

(32

)

Other income, net

 

$

(14

)

 

$

(4,296

)

 

$

(105

)


NOTE 4

EARNINGS PER SHARE

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

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

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Basic shares

 

 

543

 

 

 

546

 

 

 

545

 

Effect of dilutive securities

 

 

12

 

 

 

5

 

 

 

4

 

Diluted shares

 

 

555

 

 

 

551

 

 

 

549

 

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 2 million, nil, and 18 million equity awards in  2017, 2016, and 2015, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to Note 12 for additional information regarding items impacting basic shares.

NOTE 5

ACQUISITIONS AND OTHER ARRANGEMENTS

Claris Injectables Limited

On July 27, 2017, Baxterwe acquired 100 percent of Claris, a wholly owned subsidiary of Claris Lifesciences Limited, for total cash consideration of approximately $629 million, net of cash acquired. Through the acquisition, Baxterwe added capabilities in production of essential generic injectable medicines, such as anesthesia and analgesics, renal, anti-infectives and critical care in a variety of presentations including bags, vials and ampoules.

In the fourththird quarter of 2017, the company adjusted its preliminary estimates2018, we finalized our valuation of the fair value ofacquisition date assets acquired and liabilities assumed as of the acquisition date.assumed. The measurement period adjustments in 2018 included a $45$2 million reduction in property, plant and equipment, a $1 million increase to other intangible assetsin accounts payable and accrued liabilities and a $26$2 million increase to deferred tax and uncertain tax positionin other non-current liabilities. TheThese adjustments resulted in a corresponding decrease inincrease to goodwill of $19$5 million. The measurement period adjustments did not have a material impact on Baxter’sour results of operations in 2017.

2018.

The following table summarizes the fair value of the assets acquired and liabilities assumed as of the acquisition date for the company’sour acquisition of Claris:

(in millions)

 

 

 

 

Assets acquired and liabilities assumed

 

 

 

 

Cash

 

$

11

 

Accounts and other current receivables

 

 

16

 

Inventories

 

 

30

 

Prepaid expenses and other

 

 

16

 

Property, plant and equipment

 

 

132

 

Goodwill

 

 

291

 

Other intangible assets

 

 

280

 

Other

 

 

20

 

Accounts payable and accrued liabilities

 

 

(22

)

Other long-term liabilities

 

 

(134

)

Total assets acquired and liabilities assumed

 

$

640

 

(in millions)
Assets acquired and liabilities assumed
Cash$11 
Accounts receivable, net16 
Inventories30 
Prepaid expenses and other current assets16 
Property, plant and equipment130 
Goodwill296 
Other intangible assets280 
Other non-current assets20 
Accounts payable and accrued liabilities(23)
Other non-current liabilities(136)
Total assets acquired and liabilities assumed$640 

The valuation of total assets acquired and liabilities assumed are preliminary and measurement period adjustments may be recorded in the future as the company finalizes its fair value estimates.  

The results of operations of Claris have been included in the company’sour consolidated statement of income since the date the business was acquiredacquired. The Claris acquisition contributed $140 million and were not material.$57 million, respectively, of net sales for the years ended December 31, 2018 and 2017. Acquisition and integration costs associated with the Claris acquisition were $27 million in 2019, $33 million in 2018 and $28 million in 2017, and were primarily included within marketing and administrative expensesSG&A in the consolidated statements of income.


BaxterWe allocated $280 million of the total consideration to acquired intangible assets. The acquired intangible assets include $140 million of developed technology with a weighted-average useful life of 8 years and $140 million of IPR&D with an indefinite useful life. For the IPR&D, additional R&D will be required prior to technological feasibility.

The fair value of intangible assets was determined using the income approach.  The income approach is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset will generate over its remaining useful life, discounted to present value at a rate to reflect the internal rate of return and uncertainty in the cash flow projections.value. The discount rates used to measure the developed technology and IPR&D intangible assets were 12%12.0% and 13%13.0%, respectively. The company considersWe consider the fair value of each of the acquired intangible assets to be Level 3 assetsmeasurements due to the significant estimates and assumptions used by management in establishing the estimated fair values.  Refer to Note 10 for additional information regarding fair value measurements.

82

The goodwill, which is not deductible for tax purposes, includes the value of potential future technologies as well as the overall strategic benefits to Baxterus in the injectables market, and is included in the Americas segment.

Baxter and

In the first quarter of 2018, we settled certain claims with Claris Lifesciences Limited have reached an agreement to settle certain claims related to the acquired operations and to terminateterminated a development agreement with Dorizoe Lifesciences Limited. As a result, Baxterwe received cash of $73 million in February 2018 and were released from an accrued liability to Claris Lifesciences Limited of $7 million. The total of $80 million will beis reflected as a benefit within other operating income, net in the 2018 consolidated income statement.  

RECOTHROM and PREVELEAK

In January 2018, Baxter agreed to acquire two hemostat and sealant products from Mallinckrodt plc: RECOTHROM Thrombin topical (Recombinant), the first and only stand-alone recombinant thrombin, and PREVELEAK Surgical Sealant, which is used in vascular reconstruction.  The purchase price includes an upfront paymentstatement of approximately $153income.  

Other Business Combinations
Total consideration transferred for other acquisitions totaled $10 million, $36 million and potential contingent payments$16 million in 2019, 2018 and 2017, respectively, and primarily resulted in the future.  The transaction is expectedrecognition of intangible assets. These acquisitions did not materially affect our results of operations.
We have not presented pro forma financial information for any of the 2019, 2018 or 2017 acquisitions because their results are not material to close in the first half of 2018, subject to the satisfaction of regulatory approvals and other closing conditions.  

our consolidated financial statements.

Other Business Development Activities
Celerity Pharmaceuticals, LLC

In September 2013, Baxterwe entered into an agreement with Celerity Pharmaceutical, LLC (Celerity) to develop certain acute care generic injectable premix and oncolytic molecules through regulatory approval. BaxterWe transferred itsour rights in these molecules to Celerity and Celerity assumed ownership and responsibility for development of the molecules. Baxter isWe are obligated to purchase the individual product rights from Celerity if the products obtain regulatory approval. In 2019, 2018 and 2017, 2016 and 2015, Baxterwe paid $20$86 million, $23$72 million and $14$20 million, respectively, to acquire the rights to various molecules. Baxtermolecules that have received regulatory approval. The payment in 2018 for one of the molecules was based on tentative approval from the U.S. Food and Drug Administration (FDA). Full approval from FDA was received in the third quarter of 2018. We capitalized the purchase prices of products that were purchased upon regulatory approval as intangible assets and isare amortizing the assets over their estimated economicuseful lives of 12 years. As of December 31, 2017, Baxter’s estimated2019, our contingent future payments total up to $243$79 million upon Celerity’s achievement of specified regulatory approvals.

Seprafilm Adhesion Barrier
In December 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 December 31, 2019, our 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

Intangible Acquisitions

During the year ended December 31, 2019, we acquired the rights to multiple products for an aggregate purchase price of $80 million. The purchase prices were capitalized primarily as developed-technology intangible assets and are being amortized over a weighted-average useful of 10 years. Net sales related to these products for the year ended December 31, 2019 were not material.
In January 2020, we acquired the U.S. rights to an additional product for $60 million. The purchase price will be capitalized as a developed-technology intangible asset in the quarter ending March 31, 2020 and will be amortized over its estimated useful life of 11 years.
83

Other
In addition to the significant arrangements described above, Baxter haswe have entered into several other collaborative arrangements. BaxterWe could make additional payments of up to $25$26 million upon the achievement of certain development and regulatory milestones, in addition to future payments related to contingent commercialization milestones, profit-sharing and royalties.

NOTE 5
SUPPLEMENTAL FINANCIAL INFORMATION
Inventories
As Restated
as of December 31 (in millions)20192018
Raw materials$377  $367  
Work in process185  207  
Finished goods1,091  1,093  
Inventories$1,653  $1,667  
Prepaid Expenses and Other Current Assets
As Restated
as of December 31 (in millions)20192018
Prepaid value added taxes$140  $131  
Prepaid income taxes90  79  
Other389  404  
Prepaid expenses and other current assets$619  $614  
Property, Plant and Equipment, Net
As Restated
as of December 31 (in millions)20192018
Land$148  $142  
Buildings and leasehold improvements1,761  1,703  
Machinery and equipment6,671  6,423  
Equipment with customers1,489  1,364  
Construction in progress591  701  
Total property, plant and equipment, at cost10,660  10,333  
Accumulated depreciation(6,148) (5,803) 
Property, plant and equipment (PP&E), net$4,512  $4,530  
Purchases of property, plant and equipment included in accounts payable and accrued liabilities as of December 31, 2019 and 2018 was $87 million and $97 million, respectively. Depreciation expense was $606 million in 2019, $602 million in 2018 and $596 million in 2017.
84

Other Non-Current Assets
As Restated
as of December 31 (in millions)20192018
Deferred tax assets$621  $483  
Non-current receivables, net163  146  
Contract assets68  30  
Investments76  44  
Other141  116  
Other non-current assets$1,069  $819  
Accounts Payable and Accrued Liabilities
As Restated
as of December 31 (in millions)20192018
Accounts payable$892  $998  
Common stock dividends payable111  101  
Employee compensation and withholdings456  486  
Property, payroll and certain other taxes113  131  
Restructuring reserves83  90  
Accrued rebates208  193  
Operating lease liabilities101  —  
Income taxes payable85  104  
Other640  707  
Accounts payable and accrued liabilities$2,689  $2,810  
Other Non-Current Liabilities
As Restated
as of December 31 (in millions)20192018
Pension and other postretirement benefits$1,260  $1,087  
Deferred tax liabilities192  215  
Long-term tax liabilities81  77  
Interest rate contracts52  3  
Litigation and environmental reserves30  31  
Restructuring reserves9  11  
Other108  135  
Other non-current liabilities$1,732  $1,559  
Interest Expense, net
years ended December 31 (in millions)201920182017
Interest costs$120  $105  $98  
Interest costs capitalized(9) (12) (13) 
Interest expense111  93  85  
Interest income(40) (48) (30) 
Interest expense, net$71  $45  $55  
85

Other (Income) Expense, net
As Restated
years ended December 31 (in millions)201920182017
Foreign exchange losses (gains), net$37  $(14) $63  
Gain on sale of investments(1) (3) (3) 
Saudi Arabia joint venture gain—  (24) —  
Venezuela deconsolidation—  —  33  
Pension settlement755  1  2  
Pension and other postretirement benefit plans(53) (49) 31  
Other, net(7) 11  7  
Other (income) expense, net$731  $(78) $133  

NOTE 6

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill

The following table is a summary of the activity in goodwill by segment.

(in millions)

 

Americas

 

 

EMEA

 

 

APAC

 

 

Total

 

(in millions)AmericasEMEAAPACTotal

December 31, 2015

 

$

2,144

 

 

$

341

 

 

$

202

 

 

$

2,687

 

December 31, 2017 (As Restated)December 31, 2017 (As Restated)$2,476  $393  $233  $3,102  

Additions

 

 

3

 

 

 

—

 

 

 

—

 

 

$

3

 

Additions15  17  —  $32  

Currency translation and other adjustments

 

 

(76

)

 

 

(12

)

 

 

(7

)

 

$

(95

)

Currency translation and other adjustments(105) (17) (10) $(132) 

December 31, 2016

 

$

2,071

 

 

$

329

 

 

$

195

 

 

$

2,595

 

December 31, 2018 (As Restated)December 31, 2018 (As Restated)$2,386  $393  $223  $3,002  

Additions

 

 

242

 

 

 

38

 

 

 

23

 

 

 

303

 

Additions101  10  —  111  

Currency translation and other adjustments

 

 

161

 

 

 

25

 

 

 

15

 

 

 

201

 

Currency translation and other adjustments(59) (18) (6) (83) 

December 31, 2017

 

$

2,474

 

 

$

392

 

 

$

233

 

 

$

3,099

 

December 31, 2019December 31, 2019$2,428  $385  $217  $3,030  


As of December 31, 2017,2019, there were no0 reductions in goodwill relating to impairment losses.

As discussed in Note 17 – Segment Information, in 2017, Baxter announced a change in its commercial structure to improve performance, optimize costs, increase speed in the decision-making process and drive improved accountability across the company. This resulted in a change in the company’s operating segments and reporting units. The company allocated goodwill to its new reporting units using a relative fair value approach. In addition, the company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and after the reallocation and determined that no impairment existed.

Other Intangible Assets, Net

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

(in millions)

 

Developed technology,

including patents

 

 

Other amortized

intangible assets

 

 

Indefinite-lived

intangible assets

 

 

Total

 

(in millions)Developed technology,
including patents		Other amortized
intangible assets		Indefinite-lived
intangible assets		Total

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019December 31, 2019

Gross other intangible assets

 

$

2,002

 

 

$

435

 

 

$

172

 

 

$

2,609

 

Gross other intangible assets$2,309  $464  $173  $2,946  

Accumulated amortization

 

 

(1,010

)

 

 

(225

)

 

 

—

 

 

 

(1,235

)

Accumulated amortization(1,190) (285) —  $(1,475) 

Other intangible assets, net

 

$

992

 

 

$

210

 

 

$

172

 

 

$

1,374

 

Other intangible assets, net$1,119  $179  $173  $1,471  

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Gross other intangible assets

 

$

1,690

 

 

$

384

 

 

$

57

 

 

$

2,131

 

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

Accumulated amortization

 

 

(855

)

 

 

(165

)

 

 

—

 

 

 

(1,020

)

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

Other intangible assets, net

 

$

835

 

 

$

219

 

 

$

57

 

 

$

1,111

 

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

Intangible asset amortization expense was $183 million in 2019, $169 million in 2018, and $154 million in 2017, $163 million in 2016, and $158 million in 2015.2017. The anticipated annual amortization expense for definite-lived intangible assets recorded as of December 31, 20172019 is $163 million in 2018, $158 million in 2019, $152$188 million in 2020, $147$184 million in 2021, $179 million in 2022, $167 million in 2023 and $145 million in 2022.

2024.

In 2016, the company recorded an impairment charge of $27 million related to an indefinite-lived intangible asset (acquired IPR&D) relating to its in-center hemodialysis program. The asset was written down to estimated fair value and recorded in R&D expenses. Additionally, the company recorded an impairment charge of $51 million, of which $41 million was related to a developed technology asset, relating to the company’s synthetic bone repair products business which was acquired from ApaTech Limited in 2010. The assets of the business were written down to estimated fair value and the impairment charge was recorded in cost of sales.

In 2015, the company recorded impairments of approximately $10 million related to acquired IPR&D and $13 million related to developed technology.

NOTE 7

INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES

Infusion Pump Charges

In 2017, the company recorded a charge of $22 million related to a second field corrective action with respect to the SIGMA Spectrum Infusion Pump, which is predominantly sold in the United States. Remediation primarily includes inspection and repair charges as well as a temporary replacement pump in a limited number of cases. The charge includes estimated cash costs associated with remediation efforts and $2 million of these charges have been utilized as of December 31, 2017.

In 2014, the company recorded a charge of $93 million related to a field corrective action with respect to the SIGMA Spectrum Infusion Pump. The United States Food and Drug Administration (FDA) categorized the action as a Class 1 recall during the second quarter of 2014. Remediation primarily included software-related corrections and2019, we recognized a replacement pump in a limited number of cases. In 2014,the company utilized $4 million of the established reserve. During 2015, the company refined its expectations relating to the costs associated with the remediation effort and recorded partial reversals of the cash and non-cash reserves totaling $26 million and $10 million, respectively. Additionally, the company utilized $13 million of the cash reserves during 2015. In 2016, the company recorded utilization of cash and non-cash reserves of $22 million and $3 million, respectively, as well as partial reversals of cash and non-cash reserves of $11 million and $1 million, respectively. As of December 31, 2016, the remediation efforts were substantially complete and the remaining costs and reserves were considered immaterial to the company.


Business Optimization Charges

Beginning in the second half of 2015, the company has initiated actions to transform the company’s 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 December 31, 2017 the company incurred cumulative pre-tax costs of $576 million related to these actions. The costs consisted primarily of employee termination, implementation costs, and accelerated depreciation. The company expects to incur additional pre-tax cash costs of approximately $240 million and capital expenditures of $50 million through the completion of these initiatives. These costs will primarily include employee termination costs, implementation costs, and accelerated depreciation.  

In addition to the programs above, the company recorded additional net business optimization charges of $125 million in 2016. These charges primarily include employee termination costs, contract termination costs, asset impairments, and Gambro integration costs. Approximately 40% of these costs were non-cash. The company does not anticipate incurring any additional costs related to these programs in the future and these programs were substantially complete by the end of 2017.

The company recorded the following charges related to business optimization programs in 2017, 2016, and 2015:

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Restructuring charges, net

 

$

70

 

 

$

285

 

 

$

130

 

Costs to implement business optimization programs

 

 

89

 

 

 

65

 

 

 

—

 

Gambro integration costs

 

 

—

 

 

 

26

 

 

 

73

 

Accelerated depreciation

 

 

10

 

 

 

33

 

 

 

—

 

Total business optimization charges

 

$

169

 

 

$

409

 

 

$

203

 

For segment reporting, business optimization charges are unallocated expenses.

Included in the restructuring charges for 2017 were net employee termination costs of $59 million which primarily consisted of a global workforce reduction program.  In addition, $6 million of asset impairment charges related to facility closure costs and $5 million of other exit costs were incurred.

Included in the restructuring charges for 2016 were net employee termination costs of $180 million which primarily consisted of a global workforce reduction program and $27 million related to the impairment of acquired IPR&D as described in Note 6. Restructuring charges for 2016 also included $54 million for costs associated with the discontinuation of the VIVIA home hemodialysis development program. These costs consist of contract termination costs of $21 million, asset impairments of $31 million and other exit costs of $2 million.

Included in the restructuring charges for 2015 were net employee termination costs of $83 million which primarily related to the global workforce reduction program mentioned above. Additionally, asset impairments of $13 million and $29 million were recordedimpairment charge related to a developed technologydeveloped-technology intangible assetsasset 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 consolidated statement of income for the year ended December 31, 2019. We consider the fair

86

value of the asset to be a manufacturing facility rationalization program, respectively.

The company recorded the following components of restructuring costs in 2017, 2016 and 2015:


 

 

2017

 

(in millions)

 

COGS

 

 

SGA

 

 

R&D

 

 

Total

 

Employee termination costs

 

$

31

 

 

$

47

 

 

$

—

 

 

$

78

 

Contract termination costs

 

 

—

 

 

 

5

 

 

 

—

 

 

 

5

 

Asset impairments

 

 

5

 

 

 

1

 

 

 

—

 

 

 

6

 

Reserve adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

 

(9

)

 

 

(8

)

 

 

(2

)

 

 

(19

)

Total restructuring charges

 

$

27

 

 

$

45

 

 

$

(2

)

 

$

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

(in millions)

 

COGS

 

 

SGA

 

 

R&D

 

 

Total

 

Employee termination costs

 

$

72

 

 

$

109

 

 

$

13

 

 

$

194

 

Contract termination costs

 

 

9

 

 

 

5

 

 

 

13

 

 

 

27

 

Asset impairments

 

 

38

 

 

 

—

 

 

 

40

 

 

 

78

 

Reserve adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

 

(1

)

 

 

(11

)

 

 

(2

)

 

 

(14

)

Total restructuring charges

 

$

118

 

 

$

103

 

 

$

64

 

 

$

285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

(in millions)

 

COGS

 

 

SGA

 

 

R&D

 

 

Total

 

Employee termination costs

 

$

14

 

 

$

86

 

 

$

15

 

 

$

115

 

Contract termination costs

 

 

3

 

 

 

2

 

 

 

—

 

 

 

5

 

Asset impairments

 

 

40

 

 

 

—

 

 

 

2

 

 

 

42

 

Reserve adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

 

(19

)

 

 

(10

)

 

 

(3

)

 

 

(32

)

Total restructuring charges

 

$

38

 

 

$

78

 

 

$

14

 

 

$

130

 

Costs to implement business optimization programs in 2017 were $89 million. These costs consisted primarily of external consulting and transition costs, as well as employee salary and related costs. The costs were included within marketing and administrative and R&D expense.

Costs relatedLevel 3 measurement due to the integration of Gambro were included within marketingsignificant estimates and administrative expense for all referenced periods.

In 2017 and 2016,assumptions we used in establishing the company recognized accelerated depreciation primarily associated with facilities to be closed of $10 million and $33 million, respectively. The costs were recorded in cost of sales.

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

(in millions)

 

 

 

 

Reserve at December 31, 2014

 

$

127

 

2015 charges

 

 

120

 

Reserve adjustments

 

 

(32

)

Utilization in 2015

 

 

(89

)

Currency translation

 

 

(10

)

Reserve at December 31, 2015

 

 

116

 

2016 charges

 

 

221

 

Reserve adjustments

 

 

(14

)

Utilization in 2016

 

 

(164

)

Currency translation

 

 

5

 

Reserve at December 31, 2016

 

 

164

 

2017 charges

 

 

83

 

Reserve adjustments

 

 

(19

)

Utilization in 2017

 

 

(143

)

Currency translation

 

 

27

 

Reserve at December 31, 2017

 

$

112

 

estimated fair value.

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

Approximately 90% of the company’s restructuring reserves as of December 31, 2017 relate to employee termination costs, with the remaining reserves attributable to contract termination costs.  Of the $112 million liability, $100 million is included within accounts payable and accrued liabilities and $12 million is included within other long-term liabilities on the consolidated balance sheet.  The reserves are expected to be substantially utilized by the end of 2020. 

NOTE 8

DEBT, CREDIT FACILITIES AND LEASE COMMITMENTS

7

DEBT AND CREDIT FACILITIES
Debt Outstanding

At December 31, 20172019 and 2016, the company2018, we had the following debt outstanding:

as of December 31 (in millions)

 

Effective interest

rate in 20171

 

 

20172

 

 

20162

 

Variable-rate loan due 2020

 

 

1.0

%

 

$

300

 

 

$

294

 

1.7% notes due 2021

 

 

1.9

%

 

 

398

 

 

 

397

 

2.4% notes due 2022

 

 

2.5

%

 

 

206

 

 

 

208

 

1.3% notes due in 2025

 

 

1.2

%

 

 

714

 

 

 

—

 

2.6% notes due 2026

 

 

2.7

%

 

 

744

 

 

 

744

 

7.65% debentures due 2027

 

 

7.7

%

 

 

5

 

 

 

5

 

6.625% debentures due 2028

 

 

6.7

%

 

 

99

 

 

 

99

 

6.25% notes due 2037

 

 

6.3

%

 

 

265

 

 

 

265

 

3.65% notes due 2042

 

 

3.7

%

 

 

6

 

 

 

6

 

4.5% notes due 2043

 

 

4.5

%

 

 

255

 

 

 

255

 

3.5% notes due 2046

 

 

3.6

%

 

 

439

 

 

 

439

 

Other

 

 

—

 

 

 

81

 

 

 

70

 

Total debt and capital lease obligations

 

 

 

 

 

 

3,512

 

 

 

2,782

 

Current portion

 

 

 

 

 

 

(3

)

 

 

(3

)

Long-term portion

 

 

 

 

 

$

3,509

 

 

$

2,779

 

1

Excludes the effect of any related interest rate swaps.

2

Book values include any discounts, premiums and adjustments related to hedging instruments.

As Restated
as of December 31 (in millions)Effective interest rate in 2019
20191
20181
Variable-rate loan due 20201.0 %$313  $310  
1.7% notes due 20211.9 %398  398  
2.4% notes due 20222.5 %203  202  
0.40% notes due 20240.6 %834  —  
1.3% notes due in 20251.4 %669  684  
2.6% notes due 20262.7 %746  745  
7.65% debentures due 20277.7 %5  5  
6.625% debentures due 20286.7 %98  98  
1.3% notes due 20291.3 %830  —  
6.25% notes due 20376.3 %265  265  
3.65% notes due 20423.7 %6  6  
4.5% notes due 20434.5 %255  255  
3.5% notes due 20463.6 %440  439  
Finance leases and other10.0 %  62  76  
Total debt5,124  3,483  
Current portion(315) (2) 
Long-term portion$4,809  $3,481  

1Book values include any discounts, premiums and adjustments related to hedging instruments.
Significant Debt Issuances

In May 2017, Baxterwe issued €600 million of 1.3% senior notes at a fixed coupon rate of 1.30% due in May 2025. The company hasIn May 2019, we issued €750 million of 0.40% senior notes due May 2024 and €750 million of 1.3% senior notes due May 2029. We have designated thisthese debt instruments as a nonderivative net investment hedgehedges of itsour European operationsoperations. Refer to Note 16 for accounting purposes.

In August 2016, Baxter issued senior notes with a total aggregate principal amount of $1.6 billion, comprised of $400 million at a fixed coupon rate of 1.70% due in August 2021, $750 million at a fixed coupon rate of 2.60% due in August 2026 and $450 million at a fixed coupon rate of 3.50% due in August 2046.

Debt Redemption

In September 2016, Baxter redeemed an aggregate of approximately $1 billion in principal amount of its 1.850% Senior Notes due 2017, 1.850% Senior Notes due 2018, 5.375% Senior Notes due 2018, 4.500% Senior Notes due 2019, 4.250% Senior Notes due 2020 and 3.200% Senior Notes due 2023. Baxter paid approximately $1 billion, including accrued and unpaid interest and tender premium, to redeem such notes. As a result of the debt redemptions, the company recognized a loss on extinguishment of debt in 2016 of approximately $52 million, which is included in other income, net.

additional information.

Debt-for-Equity Exchanges

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

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

Debt Maturities

In 2016, the company repaid the $190 million outstanding balance of its 0.95% senior unsecured notes that matured in June 2016. In addition, the company repaid the $130 million outstanding balance of its 5.9% senior unsecured notes that matured in September 2016.

Debt Tender Offer

On July 6, 2015 and July 21, 2015 the company purchased an aggregate of approximately $2.7 billion in principal amount of its 5.900% Notes due September 2016, 6.625% Debentures due February 2028, 6.250% Notes due December 2037, 3.650% Notes due August 2042, 4.500% Notes due June 2043, 3.200% Notes due June 2023, and 2.400% Notes due August 2022 pursuant to a debt tender offer. Baxter paid approximately $2.9 billion, including accrued and unpaid interest and tender premium, to purchase such notes. As a result of the debt tender offers the company recognized a loss on extinguishment of debt in 2015 of $130 million, which is included in other income, net within the consolidated statements of income.

Credit Facilities

The company’s

In December 2019, we entered into new U.S. and Euro-denominated credit facilities. Our U.S. dollar-denominated revolving credit facility has a capacity of $2.0 billion and our Euro-denominated senior revolving credit facility havehas a maximum capacity of $1.5 billion and approximately €200 million, respectively.million. Each of the facilities matures in 2024. As of December 31, 20172019, we had €200 million ($224 million) outstanding under our Euro-denominated facility at a 0.91% interest rate and 2016, there were no0 borrowings outstanding under the company’s revolvingour U.S. dollar-denominated credit facilities.facility. The facilities enable the companyus to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net leverage ratio and maximum interest coverage ratio.

The company also maintains other Fees under the credit arrangements, which totaled $134 million atfacilities are 0.09% annually as of December 31, 2017,2019 and $271are based on our credit ratings and the total capacity of the facility. Prior to entering into these new credit facilities, our previous U.S. dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $1.5 billion and €200 million, atrespectively. Fees under these credit facilities were 0.10% annually as of December 31, 2016.2018 and were based on our credit ratings and the total capacity of the facility. There were no borrowings outstanding under these arrangements atcredit facilities as of December 31, 2017 and2018.

87

We also maintain other credit arrangements, which totaled approximately $200 million as of December 31, 2016.

At2019 and 2018, respectively. We had $2 million outstanding under these arrangements as of December 31, 2017, the company was2019 and 2018, respectively.

As of December 31, 2019, we were in compliance with the financial covenants in these agreements. The non-performance of any financial institution supporting any of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment

Leases

The companycommitment.

Future Debt Maturities
as of and for the years ended December 31 (in millions)Debt maturities
2020$315  
2021402  
2022207  
20231  
2024842  
Thereafter3,393  
Total obligations and commitments5,160  
Discounts, premiums, and adjustments relating to hedging instruments(36) 
Total debt$5,124  

NOTE 8
LEASES
Lessee Activity
We have entered into operating and finance leases primarily for office, manufacturing and R&D facilities, vehicles and equipment. Our leases have remaining terms from one to 25 years and some of those leases include options that provide us with the ability to extend the lease term for periods ranging from one to 16 years. Such options are included in the lease term when it is reasonably certain facilitiesthat the option will be exercised.
Certain of our leases include provisions for variable lease payments which are based on, but not limited to, maintenance, insurance, taxes, index escalations and equipment under capitalusage-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, expiring at various dates. The leases generally provide forwe recognize lease cost on a straight-line basis over the company to pay taxes, maintenance, insurance and certain other operating coststerm of the leased property. Most oflease.
Lease liabilities and right-of-use assets are recognized at the operating leases contain renewal options. For the years ending December 31, 2017, 2016, and 2015 operating lease rent expense was $154 million, $174 million, and $184 million, respectively.


Future Minimum Lease Payments and Debt Maturities

as of and for the years ended December 31 (in millions)

 

Operating

leases

 

 

Debt maturities

and capital

leases

 

2018

 

$

129

 

 

$

3

 

2019

 

 

107

 

 

 

2

 

2020

 

 

84

 

 

 

302

 

2021

 

 

69

 

 

 

402

 

2022

 

 

63

 

 

 

210

 

Thereafter

 

 

246

 

 

 

2,612

 

Total obligations and commitments

 

 

698

 

 

 

3,531

 

Discounts, premiums, and adjustments relating to hedging instruments

 

 

—

 

 

 

(19

)

Total debt and lease obligations

 

$

698

 

 

$

3,512

 

NOTE 9

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

Foreign Currency and Interest Rate Risk Management

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

lease commencement date. The companyincremental borrowing rate is primarily exposedequal to foreign exchange risk with respectthe rate of interest that we would have 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 New Zealand Dollar. The company manages its foreign currency exposurespay to borrow on a consolidatedcollateralized basis which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from foreign exchange. Financial market and currency volatility may limit the company’s ability to cost-effectively hedge these exposures.

The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuationsover a similar term in interest rates. The company’s policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believes is appropriate. To manage this mix in a cost-efficient manner, the company periodically enters into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.

The company does not hold any instruments for trading purposes and none of the company’s outstanding derivative instruments contain credit-risk-related contingent features.

Cash Flow Hedges

The company may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities. The company periodically uses forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt. Certain other firm commitments and forecasted transactions are also periodically hedged. Cash flow hedges primarily related to forecasted intercompany sales denominated in foreign currencies, and anticipated issuances of debt.

The notional amounts of foreign exchange contracts were $660 million and $561million as of December 31, 2017 and 2016, respectively. The company did not have any interest rate contracts designated as cash flow hedges outstanding at December 31, 2017 and 2016. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions at December 31, 2017 is 12 months.


Fair Value Hedges

The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These instruments hedge the company’s earnings from changes in the fair value of debt due to fluctuations in the designated benchmark interest rate.

The total notional amount of interest rate contracts designated as fair value hedges was $200 million as of December 31, 2017 and 2016, respectively.

Net Investment Hedges

In May 2017, the company issued €600 million of senior notes due May 2025. The company has designated this debt as a hedge of a portion of its net investment in its European operations and, as a result, mark to spot rate adjustments of the outstanding debt balances have been and will be recorded as a component of AOCI. As of December 31, 2017, the company had an accumulated pre-tax unrealized translation loss in AOCI of $79 million related to the Euro-denominated senior notes.

Dedesignations

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

There were no hedge dedesignations in 2017, 2016 or 2015 resulting from changes in the company’s assessment of the probability that the hedged forecasted transactions would occur.

If the company terminates a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged items at the date of termination is amortized to earnings over the remaining term of the hedged item. In 2016, the company terminated a total notional value of $765 million of interest rate contracts in connection with the March 2016 debt tender offers, resultinglease payments in a $34 million reductionsimilar economic environment. For operating leases that commenced prior to our adoption of Topic 842, we measured the debt extinguishment loss.

If the company terminates a net investments hedge, any gain or loss recognized in AOCI is not reclassified to earnings until the company sells, liquidates, or deconsolidates the foreign investments that were being hedged.

Undesignated Derivative Instruments

The company uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the company’s intercompanylease liabilities 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 $885 millionright-of-use assets using our incremental borrowing rate as of December 31, 2017 and $822 million asJanuary 1, 2019.

88

The components of December 31, 2016.

Gains and Losses on Derivative Instruments

The following table summarizes the gains and losses on the company’s derivative instruments for the years ended December 31, 2017, 2016, and 2015.

 

 

Gain (loss)

recognized in OCI

 

 

Location of gain

(loss) in

 

Gain (loss) reclassified from

AOCI into income

 

(in millions)

 

2017

 

 

2016

 

 

2015

 

 

income statement

 

2017

 

 

2016

 

 

2015

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

(3

)

 

$

—

 

 

$

—

 

 

Other income, net

 

$

—

 

 

$

9

 

 

$

—

 

Foreign exchange contracts

 

 

—

 

 

—

 

 

 

(1

)

 

Net sales

 

 

—

 

 

 

—

 

 

 

—

 

Foreign exchange contracts

 

 

(24

)

 

 

1

 

 

 

4

 

 

Cost of sales

 

 

(8

)

 

 

(3

)

 

 

47

 

Net investment hedge

 

 

(79

)

 

 

—

 

 

 

—

 

 

Other income, net

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

(106

)

 

$

1

 

 

$

3

 

 

 

 

$

(8

)

 

$

6

 

 

$

47

 


 

 

Location of gain (loss) in

income statement

 

Gain (loss) recognized

in income

 

(in millions)

 

 

 

2017

 

 

2016

 

 

2015

 

Fair value hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Net interest expense

 

$

(3

)

 

$

9

 

 

$

(43

)

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income, net

 

$

(20

)

 

$

4

 

 

$

(13

)

For the company’s fair value hedges, equal and offsetting gains of $3 million, losses of $9 million and gains of $43 million were recognized in net interest expense in 2017, 2016 and 2015, respectively, as adjustments to the underlying hedged items, fixed-rate debt. Ineffectiveness related to the company’s cash flow and fair value hedgeslease cost for the year ended December 31, 2017 was not material.

2019 were:

(in millions)2019
Operating lease cost$121 
Finance lease cost
Amortization of right-of-use assets5 
Interest on lease liabilities5 
Variable lease cost89 
Lease cost$220 
The following table summarizes net-of-tax activity in AOCI, a component of shareholders’ equity,contains supplemental cash flow information related to leases for the company’s cash flow hedges.

as of and for the years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Accumulated other comprehensive income (loss) balance at beginning of year

 

$

3

 

 

$

7

 

 

$

34

 

(Loss) gain in fair value of derivatives during the year

 

 

(18

)

 

 

1

 

 

 

4

 

Amount reclassified to earnings during the year

 

 

5

 

 

 

(5

)

 

 

(31

)

Accumulated other comprehensive income balance at end of year

 

 

(10

)

 

$

3

 

 

$

7

 

As ofyear ended December 31, 2017, $8 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

The following table summarizes the classification and fair value amounts of derivative instruments reported in the consolidated balance sheet2019:

(in millions)2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$119 
Operating cash flows from finance leases4 
Financing cash flows from finance leases4 
Right-of-use operating lease assets obtained in exchange for lease obligations207 
There were no material lease transactions that we entered into but have not yet commenced as of December 31, 2017.

 

 

Derivatives in asset positions

 

 

Derivatives in liability positions

 

(in millions)

 

Balance sheet location

 

Fair value

 

 

Balance sheet location

 

Fair value

 

Derivative instruments designated as

   hedges

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Other long-term assets

 

 

4

 

 

Other long-term

liabilities

 

 

—

 

Foreign exchange contracts

 

Prepaid expenses

and other

 

 

14

 

 

Accounts payable

and accrued liabilities

 

 

3

 

Total derivative instruments designated

   as hedges

 

 

 

$

18

 

 

 

 

$

3

 

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Prepaid expenses

and other

 

$

1

 

 

Accounts payable

and accrued liabilities

 

$

1

 

Total derivative instruments

 

 

 

$

19

 

 

 

 

$

4

 


The following table summarizes the classification and fair value amounts of derivative instruments reported in the consolidated2019. Supplemental balance sheet information related to leases as of December 31, 2016.

2019 includes:

 

Derivatives in asset positions

 

 

Derivatives in liability positions

 

(in millions)

Balance sheet location

 

Fair value

 

 

Balance sheet location

 

Fair value

 

Derivative instruments designated as

   hedges

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

Other long-term assets

 

$

7

 

 

Other long-term

liabilities

 

$

—

 

Foreign exchange contracts

Prepaid expenses

and other

 

 

22

 

 

Accounts payable

and accrued liabilities

 

 

1

 

Total derivative instruments designated

   as hedges

 

 

$

29

 

 

 

 

$

1

 

Undesignated derivative instruments

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

Prepaid expenses

and other

 

$

1

 

 

Accounts payable

and accrued liabilities

 

$

2

 

Total derivative instruments

 

 

$

30

 

 

 

 

$

3

 

(in millions)December 31, 2019
Operating leases
Operating lease right-of-use assets$608 
Accounts payable and accrued liabilities$101 
Operating lease liabilities510 
Total operating lease liabilities$611 
Finance leases
Property, plant and equipment, at cost$63 
Accumulated depreciation(19)
Property, plant and equipment, net$44 
Current maturities of long-term debt and finance lease obligations$— 
Long-term debt and finance lease obligations54 
Total finance lease liabilities$54 

While the company’s derivatives are all subject to master netting arrangements, the company presents its assets

Lease term and liabilities related to derivative instruments on a gross basis within the consolidated balance sheets. Additionally, the company is not required to post collateral for any of its outstanding derivatives. The following table provides information on the company’s derivative positions as if they were presented on a net basis, allowing for the right of offset by counterparty.

 

 

December 31, 2017

 

 

December 31, 2016

 

(in millions)

 

Asset

 

 

Liability

 

 

Asset

 

 

Liability

 

Gross amounts recognized in the consolidated balance sheet

 

$

19

 

 

$

4

 

 

$

30

 

 

$

3

 

Gross amount subject to offset in master netting

   arrangements not offset in the consolidated balance sheet

 

 

(4

)

 

 

(4

)

 

 

(3

)

 

 

(3

)

Total

 

$

15

 

 

$

—

 

 

$

27

 

 

$

—

 

NOTE 10

FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE MEASUREMENTS

Receivable Securitizations

For trade receivables originated in Japan, the company has entered into agreements with financial institutions in which the entire interest in and ownership of the receivable is sold. The company continues to service the receivables in its Japanese securitization arrangement. Servicing assets or liabilities are not recognized because the company receives adequate compensation to service the sold receivables. The Japanese securitization arrangement includes limited recourse provisions, which are not material.

The following is a summary of the activity relating to the securitization arrangement.

as of and for the years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Sold receivables at beginning of year

 

$

68

 

 

$

81

 

 

$

104

 

Proceeds from sales of receivables

 

 

270

 

 

 

348

 

 

 

361

 

Cash collections (remitted to the owners of the receivables)

 

 

(270

)

 

 

(367

)

 

 

(384

)

Effect of currency exchange rate changes

 

 

3

 

 

 

6

 

 

 

—

 

Sold receivables at end of year

 

$

71

 

 

$

68

 

 

$

81

 

The net losses relating to the sales of receivables were immaterial for each year.

Concentrations of Credit Risk

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


The company continues to do business with foreign governments in certain countries, including Greece, Spain, Portugal and Italy, which have experienced deterioration in credit and economic conditions. As of December 31, 2017 and 2016, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $149 million and $137 million, respectively.

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

Fair Value Measurements

The fair value hierarchy under the accounting standard for fair value measurements consists of the following three levels:

Level 1 — Quoted prices in active markets that the company has the ability to access for identical assets or liabilities;

Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and

Level 3 — Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability.

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

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance as of

December 31,

2017

 

 

Quoted prices

in active

markets for

identical assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedges

 

$

15

 

 

$

—

 

 

$

15

 

 

$

—

 

Interest rate hedges

 

 

4

 

 

 

—

 

 

 

4

 

 

 

—

 

Available-for-sale securities

 

 

8

 

 

 

8

 

 

 

—

 

 

 

—

 

Total assets

 

$

27

 

 

$

8

 

 

$

19

 

 

$

—

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedges

 

$

4

 

 

$

—

 

 

$

4

 

 

$

—

 

Contingent payments related to acquisitions

 

 

9

 

 

 

—

 

 

 

—

 

 

 

9

 

Total liabilities

 

$

13

 

 

$

—

 

 

$

4

 

 

$

9

 

 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance as of

December 31,

2016

 

 

Quoted prices

in active

markets for

identical assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedges

 

$

23

 

 

$

—

 

 

$

23

 

 

$

—

 

Interest rate hedges

 

 

7

 

 

 

—

 

 

 

7

 

 

 

—

 

Available-for-sale securities

 

 

9

 

 

 

9

 

 

 

—

 

 

 

—

 

Total assets

 

$

39

 

 

$

9

 

 

$

30

 

 

$

—

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedges

 

$

3

 

 

$

—

 

 

$

3

 

 

$

—

 

Contingent payments related to acquisitions

 

 

19

 

 

 

—

 

 

 

—

 

 

 

19

 

Total liabilities

 

$

22

 

 

$

—

 

 

$

3

 

 

$

19

 

As of December 31, 2017, cash and equivalents of $3.4 billion included money market funds of approximately $0.7 billion, which are considered Level 2 in the fair value hierarchy.


Contingent payments related to acquisitions consist of commercial milestone payments and sales-based payments, and are valued using discounted cash flow techniques. The fair value of commercial milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or expectation of timing of payments is accelerated. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increase or expectation of timing of payment is accelerated.

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.

(in millions)

 

Contingent

payments

 

Fair value as of December 31, 2015

 

$

20

 

Additions

 

 

—

 

Payments

 

 

(1

)

Net gains recognized in earnings

 

 

—

 

Fair value as of December 31, 2016

 

 

19

 

Additions

 

 

—

 

Payments

 

 

(9

)

Net gains recognized in earnings

 

 

(1

)

Fair value as of December 31, 2017

 

$

9

 

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

(in millions)

 

Amortized cost

 

 

Unrealized gains

 

 

Unrealized losses

 

 

Fair value

 

December 31, 2017

 

$

8

 

 

$

—

 

 

$

—

 

 

$

8

 

December 31, 2016

 

$

13

 

 

$

—

 

 

$

4

 

 

$

9

 

Book Values and Fair Values of Financial Instruments

In addition to the financial instruments that the company is required to recognize at fair value in the consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized in the consolidated balance sheets and the approximate fair values.

 

 

Book values

 

 

Approximate fair values

 

as of December 31 (in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

43

 

 

$

31

 

 

$

43

 

 

$

31

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease obligations

 

 

3

 

 

 

3

 

 

 

3

 

 

 

3

 

Long-term debt and lease obligations

 

 

3,509

 

 

 

2,779

 

 

 

3,595

 

 

 

2,756

 

The following table summarizes the bases used to measure the approximate fair value of the financial instrumentsdiscount rates as of December 31, 20172019 were:

December 31, 2019
Weighted-average remaining lease term (years)
Operating leases10
Finance leases15
Weighted-average discount rate
Operating leases2.8 %
Finance leases10.6 %


Maturities of operating and 2016.

 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance as of

December 31,

2017

 

 

Quoted prices

in active

markets for

identical assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

43

 

 

$

—

 

 

$

—

 

 

$

43

 

Total assets

 

$

43

 

 

$

—

 

 

$

—

 

 

$

43

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease obligations

 

 

3

 

 

 

—

 

 

 

3

 

 

 

—

 

Long-term debt and lease obligations

 

 

3,595

 

 

 

—

 

 

 

3,595

 

 

 

—

 

Total liabilities

 

$

3,598

 

 

$

—

 

 

$

3,598

 

 

$

—

 


 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance as of

December 31,

2016

 

 

Quoted prices

in active

markets for

identical assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

31

 

 

$

—

 

 

$

—

 

 

$

31

 

Total assets

 

$

31

 

 

$

—

 

 

$

—

 

 

$

31

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease obligations

 

 

3

 

 

 

—

 

 

 

3

 

 

 

—

 

Long-term debt and lease obligations

 

 

2,756

 

 

 

—

 

 

 

2,756

 

 

 

—

 

Total liabilities

 

$

2,759

 

 

$

—

 

 

$

2,759

 

 

$

—

 

Investments in 2017 and 2016 include certain cost method investments.

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

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

In 2017, the company recorded $8 million of other-than-temporary impairment charges within other income, net related to the company’s investments.  In 2016, the company recorded net $4.4 billion of realized gains within other income, net related to exchanges of available-for-sale equity securities, which represented gains from the Retained Shares transactions. On May 6, 2016, Baxter made a voluntary non-cash contribution of 17,145,570 Retained Shares to the company’s U.S. pension fund. The company recorded $611 million of realized gains within other income, net related to the contribution of Retained Shares. On May 26, 2016, Baxter completed an exchange of 13,360,527 Retained Shares for 11,526,638 outstanding shares of Baxter common stock. The company recorded $537 million of realized gains within other income, net related to the exchange of the Retained Shares. The company held no shares of Baxaltafinance lease liabilities as of December 31, 2016. Refer2019 were:

(in millions)Finance LeasesOperating Leases
2020$7  $112  
20217  96  
20227  80  
20236  67  
20246  54  
Thereafter78  267  
Total minimum lease payments111  676  
Less: imputed interest(57) (65) 
Present value of lease liabilities$54  $611  
Maturities of operating and finance lease liabilities as of December 31, 2018 were:
As Restated
(in millions)Capital LeasesOperating Leases
2019$7  $123  
20207  94  
20218  86  
20228  72  
20236  64  
Thereafter88  212  
Total minimum lease payments124  $651  
Less: imputed interest(62) 
Present value of lease liabilities$62  
For the years ended December 31, 2018 and 2017, rent expense was $152 million and $155 million, respectively.
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 debt-for-equity exchange sectionremainder 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 year ended December 31, 2019 were:
(in millions)2019
Sales-type lease revenue$35 
Operating lease revenue61 
Variable lease revenue85 
Total lease revenue$181 
The components of our net investment in Note 8 for discussion related tosales-type leases as of December 31, 2019 were:
(in millions)2019
Minimum lease payments$110 
Unguaranteed residual values11 
Net investment in leases$121 


Our net investment in sales-type leases is classified as follows in the 2016 Retained Shares transactions.

accompanying consolidated balance sheets:

(in millions)December 31, 2019
Accounts receivable, net$45 
Other non-current assets76 
Total$121 
Maturities of sales-type and operating leases as of December 31, 2019 were:
(in millions)Sales-type LeasesOperating Leases
2020$45  $61  
202132  60  
202222  60  
202314  33  
20247  15  
Thereafter1  4  
Total minimum lease payments121  $233  
Less: imputed interest(11) 
Present value of minimum lease payments$110  

NOTE 11

COMMITMENTS AND CONTINGENCIES

Collaborative and Other Arrangements

9

COMMITMENTS AND CONTINGENCIES
Refer to Note 54 for information regarding the company’sour unfunded contingent payments associated with collaborative and other arrangements.

Indemnifications

During the normal course of business, Baxter makeswe make indemnities, commitments and guarantees pursuant to which the companywe may be required to make payments related to specific transactions. Indemnifications include: (i) intellectual property indemnities to customers in connection with the use, sales or license of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises; (iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; (iv) indemnities involving the representations and warranties in certain contracts; (v) contractual indemnities related to the separation and distribution as set forth in certain of the agreements entered into in connection with such transactions (including the separation and distribution agreement and the tax matters agreement with Baxalta); and (vi) contractual indemnities for itsour directors and certain of itsour executive officers for services provided to or at the request of Baxter.us. In addition, under Baxter’sour Amended and Restated Certificate of Incorporation, and consistent with Delaware General Corporation Law, the company haswe have agreed to indemnify itsour directors and officers for certain losses and expenses upon the occurrence of certain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential for future payments that the companywe could be obligated to make. To help address some of these risks, the company maintainswe maintain various insurance


coverages. Based on historical experience and evaluation of the agreements, the company doeswe do not believe that any significant payments related to itsour indemnities will have a material impact on our financial condition or results of operations.

Legal 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 December 31, 2019 and 2018, our total recorded reserves with respect to legal and environmental matters were $56 million and $46 million, respectively, and there were 0 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 thereforewe may incur material judgments or enter into material settlements of claims.  
In addition to the company has notmatters 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
We are involved as a potentially responsible party (PRP) for environmental clean-up costs at 6 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. In 2017, we recorded any associated liabilities.

Legal Contingencies

Refera pre-tax charge of $15 million related to Note 16 for a discussionformer location and included that charge within loss from discontinued operations, net of tax, on the consolidated statement of income. As of December 31, 2019 and 2018, our environmental reserves, which are measured on an undiscounted basis, were $18 million and $19 million, respectively. After considering these reserves, management is of the company’s legal contingencies.

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 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
92

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 2019, following the resolution of an insurance dispute, we received cash proceeds of $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 $37 million gain in connection with the resolution of the dispute with the insurer that is classified within other operating income, net on the consolidated statement of income for the year ended December 31, 2019.
In September 2017, Hurricane Maria caused damage to certain of our assets in Puerto Rico and disrupted operations. Insurance, less applicable deductibles and subject to any coverage exclusions, covered the repair or replacement of our assets that suffered loss or damage, and also provided coverage for interruption to our business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. In 2017, we recorded $32 million of pre-tax charges related to damages caused by the hurricane, including $11 million related to the impairment of damaged inventory and fixed assets as well as $21 million of idle facility and other costs. These amounts were recorded as a component of cost of sales in the consolidated statement of income for year ended December 31, 2017. In 2019 and 2018, we recognized $100 million and $42 million, respectively, of insurance recoveries related to the previously mentioned asset impairments and idle facility and other costs suffered as a result of the hurricane. These benefits were recorded as a reduction of cost of sales and within other operating income, net on the consolidated statements of income for the years ended December 31, 2019 and 2018. No further insurance recoveries are expected.
NOTE 12

SHAREHOLDERS’ EQUITY

10

STOCKHOLDERS’ EQUITY
Stock-Based Compensation

The company’s

Our stock-based compensation generally includes stock options, restricted stock units (RSUs), performance share units (PSUs) and purchases under the company’sour employee stock purchase plan. Shares issued relating to the company’sour stock-based plans are generally issued out of treasury stock.

Approved in 2015, the Baxter International Inc. 2015 Incentive Plan provided for 35 million additional shares of common stock available for issuance with respect to awards for participants.

As of December 31, 2017,2019, approximately 3624 million authorized shares are available for future awards under the company’sour stock-based compensation plans.

Stock Compensation Expense

Stock compensation expense was $107$122 million, $115 million and $126$107 million in 2017, 20162019, 2018 and 2015,2017, respectively. The related tax benefit recognized was $31$70 million in 2017, $342019, $61 million in 20162018 and $38$87 million in 2015.

2017. Included in the benefit in 2019, 2018 and 2017 were realized excess tax benefits for stock-based compensation of $54 million, $40 million and $56 million, respectively.

93

Stock compensation expense is recorded at the corporate level and is not allocated to the segments. Approximately 70%80% of stock compensation expense is classified in marketing and administrativeSG&A expenses, with the remainder classified in cost of sales and R&D expenses. Costs capitalized in the consolidated balance sheets at December 31, 20172019 and 20162018 were not material.

Stock compensation expense is based on awards expected to vest, and therefore has been reduced by estimated forfeitures.

Stock Options

Stock options are granted to employees and non-employee directors with exercise prices equal to 100% of the market value on the date of grant. Stock options granted to employees generally vest in one-third increments over a three-yearthree-year period. Stock options granted to non-employee directors generally vest immediately on the grant date and are issued with a six-monthsix-month claw-back provision. Stock options typically have a contractual term of 10 years. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the substantive vesting period.

The fair value of stock options is determined using the Black-Scholes model. The weighted-average assumptions used in estimating the fair value of stock options granted during each year, along with the weighted-average grant-date fair values, were as follows:

years ended December 31

 

2017

 

 

2016

 

 

2015

 

years ended December 31201920182017

Expected volatility

 

 

19

%

 

 

20

%

 

 

20

%

Expected volatility19 %18 %19 %

Expected life (in years)

 

 

5.5

 

 

 

5.5

 

 

 

5.5

 

Expected life (in years)5.55.5

Risk-free interest rate

 

 

2.1

%

 

 

1.4

%

 

 

1.7

%

Risk-free interest rate2.5 %2.6 %2.1 %

Dividend yield

 

 

1.0

%

 

 

1.2

%

 

 

2.9

%

Dividend yield1.0 %1.0 %1.0 %

Fair value per stock option

 

$

10

 

 

$

7

 

 

$

9

 

Fair value per stock option$15  $13  $10  

The following table summarizes stock option activity for the year ended December 31, 20172019 and the outstanding stock options as of December 31, 2017.

2019.

(options and aggregate intrinsic values in thousands)OptionsWeighted-
average
exercise
price		Weighted-
average
remaining
contractual
term
(in years)		Aggregate
intrinsic
value
Outstanding as of January 1, 201925,314  $43.76  
Granted3,801  $75.03  
Exercised(8,043) $38.52  
Forfeited(596) $66.91  
Expired(132) $46.44  
Outstanding as of December 31, 201920,344  $50.99  6.1$663,620  
Vested or expected to vest as of December 31, 201920,029  $50.66  6.0$660,342  
Exercisable as of December 31, 201912,945  $41.74  4.9$542,128  

(options and aggregate intrinsic values in thousands)

 

Options

 

 

Weighted-

average

exercise

price

 

 

Weighted-

average

remaining

contractual

term

(in years)

 

 

Aggregate

intrinsic

value

 

Outstanding as of January 1, 2017

 

 

33,076

 

 

$

35.73

 

 

 

 

 

 

 

 

 

Granted

 

 

5,822

 

 

$

51.42

 

 

 

 

 

 

 

 

 

Exercised

 

 

(9,031

)

 

$

33.80

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(1,605

)

 

$

41.81

 

 

 

 

 

 

 

 

 

Expired

 

 

(54

)

 

$

34.25

 

 

 

 

 

 

 

 

 

Outstanding as of December 31, 2017

 

 

28,208

 

 

$

39.25

 

 

 

6.2

 

 

$

715,900

 

Vested or expected to vest as of December 31, 2017

 

 

27,712

 

 

$

39.07

 

 

 

6.1

 

 

$

708,533

 

Exercisable as of December 31, 2017

 

 

16,364

 

 

$

35.51

 

 

 

4.8

 

 

$

476,756

 

The aggregate intrinsic value in the table above represents the difference between the exercise price and the company’sour closing stock price on the last trading day of the year. The total intrinsic value of options exercised in 2019, 2018 and 2017 2016was $272 million, $222 million and 2015 were $203 million, $162 million and $43 million, respectively.

As of December 31, 2017,2019, $55 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of approximately 1.81.7 years.

RSUs

RSUs are granted to employees and non-employee directors. RSUs granted to employees generally vest in one-third increments over a three-yearthree-year period. RSUs granted to non-employee directors generally vest immediately on the grant date and are issued with a six-monthsix-month claw-back provision. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the substantive vesting period. The fair
94

value of RSUs is determined based on the number of shares granted and the closeclosing price of the company’sour common stock on the date of grant.

The following table summarizes nonvested RSU activity for the year ended December 31, 2017.

2019.

(share units in thousands)

 

Share units

 

 

Weighted-

average

grant-date

fair value

 

(share units in thousands)Share unitsWeighted-
average
grant-date
fair value

Nonvested RSUs as of January 1, 2017

 

 

2,698

 

 

$

32.90

 

Nonvested RSUs as of January 1, 2019Nonvested RSUs as of January 1, 20191,611  $56.45  

Granted

 

 

1,145

 

 

$

55.11

 

Granted537  $75.60  

Vested

 

 

(1,355

)

 

$

29.84

 

Vested(740) $51.82  

Forfeited

 

 

(287

)

 

$

38.41

 

Forfeited(134) $63.90  

Nonvested RSUs as of December 31, 2017

 

 

2,201

 

 

$

45.65

 

Nonvested RSUs as of December 31, 2019Nonvested RSUs as of December 31, 20191,274  $66.46  

As of December 31, 2017 $652019, $46 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over a weighted-average period of approximately 2.01.7 years. The weighted-average grant-date fair value of RSUs granted in 2019, 2018 and 2017 2016was $75.60, $67.11 and 2015 was $55.11, $40.32 and $66.65, respectively. The fair value of RSUs vested in 2019, 2018 and 2017 2016was $57 million, $69 million and 2015 was $88 million, $50 million and $73 million, respectively.

PSUs

The company’s

Our annual equity awards stock compensation program for senior management includes the issuance of PSUs based on adjusted operating margin as well as stock performance relative to the company’sour peer group. Fifty percent of the PSUs granted in 2015 were based on return on invested capital (ROIC) instead of adjusted operating margin. The vesting condition for adjusted operating margin or ROIC PSUs is set at the beginning of the year for each tranche of the award during the three-year3-year service period. Compensation cost for the adjusted operating margin or ROIC PSUs is measured based on the fair value of the awards on the date that the specific vesting terms for each tranche of the award are established. The fair value of the awards is determined based on the quoted price of the company’sour stock on the grant date for each tranche of the award. The compensation cost for adjusted operating margin or ROIC PSUs is adjusted at each reporting date to reflect the estimated probability of achieving the vesting condition.

outcome.

The fair value for PSUs based on stock performance relative to the company’sour peer group is determined using a Monte Carlo model. The assumptions used in estimating the fair value of these PSUs granted during the period, along with the grant-date fair values, were as follows:

years ended December 31

 

2017

 

 

2016

 

 

2015

 

years ended December 31201920182017

Baxter volatility

 

 

19%

 

 

 

20%

 

 

 

19%

 

Baxter volatility19 %19 %19 %

Peer group volatility

 

16%-54%

 

 

17%-51%

 

 

16%-38%

 

Peer group volatility18%-113%16%-53%16%-54%

Correlation of returns

 

0.19-0.58

 

 

0.22-0.73

 

 

0.24-0.55

 

Correlation of returns0.13-0.630.16-0.610.19-0.58

Risk-free interest rate

 

 

1.6%

 

 

 

1.0%

 

 

 

1.1%

 

Risk-free interest rate2.5 %2.3 %1.6 %

Fair value per PSU

 

$

69

 

 

$

51

 

 

$

46

 

Fair value per PSU$106  $90  $69  

Unrecognized compensation cost related to all unvested PSUs of $23$18 million at December 31, 20172019 is expected to be recognized as expense over a weighted-average period of 1.71.6 years.

The following table summarizes nonvested PSU activity for the year ended December 31, 2017.

2019.

(share units in thousands)

 

Share units

 

 

Weighted-

average

grant-date

fair value

 

(share units in thousands)Share unitsWeighted-
average
grant-date
fair value

Nonvested PSUs as of January 1, 2017

 

 

278

 

 

$

46.82

 

Nonvested PSUs as of January 1, 2019Nonvested PSUs as of January 1, 2019913  $63.88  

Granted

 

 

461

 

 

$

62.22

 

Granted626  $69.36  

Vested

 

 

(194

)

 

$

34.35

 

Vested(559) $46.47  

Forfeited

 

 

(85

)

 

$

52.31

 

Forfeited(50) $77.70  

Nonvested PSUs as of December 31, 2017

 

 

460

 

 

$

66.50

 

Nonvested PSUs as of December 31, 2019Nonvested PSUs as of December 31, 2019930  $75.50  

Realized Excess Income Tax Benefits and the Impact on the Statements of Cash Flows

Realized excess tax benefits associated with stock compensation are presented in the consolidated statements of cash flows as an inflow within the operating section for 2017 and as an inflow within the financing section in 2016 and 2015, respectively. Realized excess tax benefits from stock-based compensation related to continuing operations were $56 million, $39 million and $7 million in 2017, 2016 and 2015, respectively.

95

Employee Stock Purchase Plan

Nearly all employees are eligible to participate in the company’sour employee stock purchase plan. The employee purchase price is 85% of the closing market price on the purchase date.

The Baxter International Inc. Employee Stock Purchase Plan provides for 10 million shares of common stock available for issuance to eligible participants, of which approximately four3 million shares were available for future purchases as of December 31, 2017.

2019.

During 2019, 2018, and 2017, 2016, and 2015, the companywe issued approximately 0.7 million, 0.8 million 1.0 million and 1.10.8 million shares, respectively, under the employee stock purchase plan. The number of shares under subscription at December 31, 2017 totaled approximately 1 million.

Cash Dividends

Total cash dividends declared per common share for 2019, 2018, and 2017 2016,were $0.85, $0.73 and 2015 were $0.61, $0.51 and $1.27, respectively.

A quarterly dividend of $0.13$0.19 per share ($0.520.76 on an annualized basis) was declared in February 20172019 and was paid in April 2017.2019. Quarterly dividends of $0.16$0.22 per share ($0.640.88 on an annualized basis) were declared in May and July of 20172019 and were paid in July and October of 2017,2019, respectively. Baxter’s boardOur Board of directorsDirectors declared a quarterly dividend of $0.16$0.22 per share in November of 2017,2019, which was paid in January of 2018.

2020.

Stock Repurchase Programs

As authorized by the boardBoard of directors, the company repurchases itsDirectors, we repurchase our stock depending on the company’sour cash flows, net debt level and market conditions. The company repurchased 9.2 million shares for $564 million in cash in 2017 and 6.3 million shares for $287 million in cash in 2016. The company did not repurchase shares in 2015. In July 2012, the boardBoard of directorsDirectors authorized the repurchase of up to $2$2.0 billion of the company’sour common stock. The boardBoard of directorsDirectors 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. $1.1We repurchased 16.5 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise for $1.3 billion in cash in 2019, 35.8 million shares under this authority pursuant to Rule 10b5-1 plans and otherwise for $2.5 billion in cash in 2018 and 9.2 million shares under this authority pursuant to Rule 10b5-1 plans for $564 million in cash in 2017. As of December 31, 2018, we recognized a liability within accounts payable and accrued liabilities of $23 million for share repurchases that settled in early January 2019. We had $897 million of purchase authority remained available as of December 31, 2017.  After

2019.  

Accelerated Share Repurchase Agreement

giving effect

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 February2012 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.
NOTE 11
ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders’ equity that do not arise from transactions with stockholders, and consists of net income, CTA, certain gains and losses from other postretirement benefit (OPEB) plans, gains and losses on cash flow hedges and, prior to 2018, approvalunrealized 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 years ended December 31, 2019 and 2018.
96

(in millions)CTAPension and OPEB plansHedging
activities		Total
Gains (losses)
Balance as of December 31, 2018 (as restated)$(2,868) $(954) $(1) $(3,823) 
Adoption of new accounting standard9  (169) (1) (161) 
Other comprehensive (loss) income before reclassifications(95) (184) (36) (315) 
Amounts reclassified from AOCI (a)—  592  (3) 589  
Net other comprehensive (loss) income(95) 408  (39) 274  
Balance as of December 31, 2019$(2,954) $(715) $(41) $(3,710) 

As Restated
(in millions)CTAPension and OPEB plansHedging
activities		Available-for-
sale-equity
securities		Total
Gains (losses)
Balance as of December 31, 2017$(2,545) $(987) $(10) $3  $(3,539) 
Adoption of new accounting standard—  —  —  (3) (3) 
Other comprehensive income (loss) before reclassifications(323) (23) (1) —  (347) 
Amounts reclassified from AOCI (a)—  56  10  —  66  
Net other comprehensive (loss) income(323) 33  9  —  (281) 
Balance as of December 31, 2018$(2,868) $(954) $(1) $—  $(3,823) 
(a) See table below for details about these reclassifications.
The following table is a summary of the amounts reclassified from AOCI to net income during the years ended December 31, 2019 and 2018.
Amounts reclassified from
AOCI (a)
As Restated
(in millions)20192018Location of impact
in income statement
Pension and OPEB items
Amortization of net losses and prior service costs or credits$(31) $(69) Other (income) expense, net
Settlement charge(755) (1) Other (income) expense, net
(786) (70) Total before tax
Less: Tax effect194  14  Income tax expense
$(592) $(56) Net of tax
Gains (losses) on hedging activities 
Foreign exchange contracts$4  $(12) Cost of sales
Less: Tax effect(1) 2  Income tax expense
$3  $(10) Net of tax
Total reclassification for the period$(589) $(66) Total net of tax
(a)Amounts in parentheses indicate reductions to net income.
Refer to Note 13 for additional information regarding the amortization of pension and OPEB items and Note 16 for additional information regarding hedging activity.
97

NOTE 12
BUSINESS OPTIMIZATION CHARGES
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. From the commencement of our business optimization activities through December 31, 2019, we have incurred cumulative pre-tax costs of approximately $980 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 cash costs of approximately $50 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.
We recorded the following charges related to business optimization programs in 2019, 2018, share repurchases, $2.3 billionand 2017:
years ended December 31 (in millions)201920182017
Restructuring charges$134  $117  $70  
Costs to implement business optimization programs45  94  89  
Accelerated depreciation5  9  10  
Total business optimization charges$184  $220  $169  
For segment reporting, business optimization charges are unallocated expenses.
Costs to implement business optimization programs for the years ended December 31, 2019, 2018 and 2017, consisted primarily of repurchase authority remained availableexternal consulting and transition costs, including employee compensation and related costs. The costs were generally included within cost of sales, SG&A expense and R&D expense.
For the years ended December 31, 2019, 2018 and 2017, 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 years ended December 31, 2019, 2018 and 2017, we recorded the following restructuring charges:
2019
(in millions)COGSSG&AR&DTotal
Employee termination costs$13  $37  $25  $75  
Contract termination and other costs10  1  —  11  
Asset impairments37  2  9  48  
Total restructuring charges$60  $40  $34  $134  
2018
(in millions)COGSSG&AR&DTotal
Employee termination costs$30  $51  $19  $100  
Contract termination and other costs4  6  —  10  
Asset impairments1  6  —  7  
Total restructuring charges$35  $63  $19  $117  
2017
(in millions)COGSSG&AR&DTotal
Employee termination costs$22  $39  $(2) $59  
Contract termination and other costs—  5  —  5  
Asset impairments5  1  —  6  
Total restructuring charges$27  $45  $(2) $70  
98

The following table summarizes activity in the liability related to our restructuring initiatives.
(in millions)
Liability balance as of December 31, 2016 (As Restated)$164 
Charges83 
Payments(140)
Reserve adjustments(19)
Currency translation24 
Liability balance as of December 31, 2017 (As Restated)112 
Charges126 
Payments(96)
Reserve adjustments(16)
Currency translation(25)
Liability balance as of December 31, 2018 (As Restated)101 
Charges113 
Payments(93)
Reserve adjustments(27)
Currency translation(2)
Liability balance as of December 31, 2019$92 
Reserve adjustments primarily relate to employee termination cost reserves established in prior periods.
Substantially all of our restructuring liabilities as of February 20, 2018.

December 31, 2019 relate to employee termination costs, with the remaining liabilities attributable to contract termination costs. Substantially all of the cash payments for those liabilities are expected to be disbursed by the end of 2020.

NOTE 13

RETIREMENT AND OTHER BENEFIT PROGRAMS

The company sponsors

PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS
We sponsor a number of qualified and nonqualified pension plans for eligible employees. The companyWe also sponsorssponsor certain unfunded contributory healthcare and life insurance benefits for substantially all domestic retired employees. Newly hired employees in the United States and Puerto Rico are not eligible to participate in the pension plans but receive a higher level of company contributions in the defined contribution plans.

In 2017, the company made a $115 million voluntary cash contribution to the qualified U.S. pension plan.

In 2016, the company made a $706 million voluntary, non-cash contribution to the qualified U.S. pension plan using Retained Shares. Refer to Note 2 for additional information regarding Retained Shares Transactions.

Reconciliation of Pension and OPEBOther Postretirement Benefit Plan Obligations, Assets and Funded Status

The benefit plan information in the table below pertains to all of the company’sour pension and OPEB plans, both in the United States and in other countries.

 

 

Pension benefits

 

 

OPEB

 

as of and for the years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Benefit obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

$

5,717

 

 

$

5,423

 

 

$

243

 

 

$

266

 

Service cost

 

 

91

 

 

 

93

 

 

 

1

 

 

 

2

 

Interest cost

 

 

180

 

 

 

183

 

 

 

7

 

 

 

8

 

Participant contributions

 

 

5

 

 

 

5

 

 

 

—

 

 

 

—

 

Actuarial loss

 

 

333

 

 

 

298

 

 

 

2

 

 

 

10

 

Benefit payments

 

 

(251

)

 

 

(234

)

 

 

(18

)

 

 

(20

)

Settlements

 

 

(9

)

 

 

(6

)

 

 

—

 

 

 

—

 

Acquisitions

 

 

2

 

 

 

—

 

 

 

—

 

 

 

—

 

Plan amendments

 

 

(7

)

 

 

—

 

 

 

—

 

 

 

(23

)

Foreign exchange and other

 

 

98

 

 

 

(45

)

 

 

—

 

 

 

—

 

End of period

 

 

6,159

 

 

 

5,717

 

 

 

235

 

 

 

243

 

Fair value of plan assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

4,501

 

 

 

3,698

 

 

 

—

 

 

 

—

 

Actual return on plan assets

 

 

708

 

 

 

309

 

 

 

—

 

 

 

—

 

Employer contributions

 

 

242

 

 

 

752

 

 

 

18

 

 

 

20

 

Participant contributions

 

 

5

 

 

 

5

 

 

 

—

 

 

 

—

 

Benefit payments

 

 

(251

)

 

 

(234

)

 

 

(18

)

 

 

(20

)

Settlements

 

 

(9

)

 

 

(6

)

 

 

—

 

 

 

—

 

Foreign exchange and other

 

 

52

 

 

 

(23

)

 

 

—

 

 

 

—

 

End of period

 

 

5,248

 

 

 

4,501

 

 

 

—

 

 

 

—

 

Funded status at December 31

 

$

(911

)

 

$

(1,216

)

 

$

(235

)

 

$

(243

)

Amounts recognized in the consolidated balance sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent asset

 

$

65

 

 

$

42

 

 

$

—

 

 

$

—

 

Current liability

 

 

(24

)

 

 

(23

)

 

 

(19

)

 

 

(19

)

Noncurrent liability

 

 

(952

)

 

 

(1,235

)

 

 

(216

)

 

 

(224

)

Net liability recognized at December 31

 

$

(911

)

 

$

(1,216

)

 

$

(235

)

 

$

(243

)

99


Pension benefitsOPEB
As Restated
as of and for the years ended December 31 (in millions)2019201820192018
Benefit obligations
Beginning of period$5,635  $6,182  $211  $235  
Service cost74  87  1  1  
Interest cost172  178  8  7  
Participant contributions4  5  —  —  
Actuarial (gain) loss924  (431) 26  (14) 
Benefit payments(267) (259) (18) (18) 
Settlements(2,550) (6) —  —  
Curtailment(13) (56) —  —  
Foreign exchange and other(6) (65) —  —  
End of period3,973  5,635  228  211  
Fair value of plan assets
Beginning of period4,774  5,261  —  —  
Actual return on plan assets939  (237) —  —  
Employer contributions69  51  18  18  
Participant contributions4  5  —  —  
Benefit payments(267) (259) (18) (18) 
Settlements(2,550) (6) —  —  
Foreign exchange and other4  (41) —  —  
End of period2,973  4,774  —  —  
Funded status at December 31$(1,000) $(861) $(228) $(211) 
Amounts recognized in the consolidated balance sheets
Noncurrent asset$77  $60  $—  $—  
Current liability(25) (25) (20) (20) 
Noncurrent liability(1,052) (896) (208) (191) 
Net liability recognized at December 31$(1,000) $(861) $(228) $(211) 
The pension obligation information in the table above represents the projected benefit obligation (PBO). The PBO incorporates assumptions relating to future compensation levels. The accumulated benefit obligation (ABO) is the same as the PBO except that it includes no assumptions relating to future compensation levels. The ABO for all of the company’sour pension plans was $5.9$3.7 billion and $5.4 billion at the 20172019 and 20162018 measurement dates, respectively.


The information in the funded status table above represents the totals for all of the company’sour pension plans. The following table is information relating to the individual plans in the funded status table above that have an ABO in excess of plan assets.

as of December 31 (in millions)

 

2017

 

 

2016

 

ABO

 

$

5,398

 

 

$

5,153

 

Fair value of plan assets

 

 

4,674

 

 

 

4,190

 


As Restated
as of December 31 (in millions)20192018
ABO$3,240  $4,981  
Fair value of plan assets$2,339  $4,246  
The following table ispresents information relating to the individual plans in the funded status table above that have a PBO in excess of plan assets (many of which also have an ABO in excess of assets and are therefore also included in the table directly above).

as of December 31 (in millions)

 

2017

 

 

2016

 

PBO

 

$

5,875

 

 

$

5,523

 

Fair value of plan assets

 

 

4,899

 

 

 

4,265

 


100

As Restated
as of December 31 (in millions)20192018
PBO$3,688  $5,386  
Fair value of plan assets$2,611  $4,465  
Expected Net Pension and OPEB Plan Payments for the Next 10 Years

(in millions)

 

Pension benefits

 

 

OPEB

 

(in millions)Pension benefitsOPEB

2018

 

$

250

 

 

$

20

 

2019

 

 

260

 

 

 

19

 

2020

 

 

271

 

 

 

18

 

2020$86  $20  

2021

 

 

283

 

 

 

17

 

2021104  18  

2022

 

 

294

 

 

 

17

 

2022118  17  

2023 through 2027

 

 

1,626

 

 

 

73

 

20232023132  17  
20242024149  16  
2024 through 20282024 through 2028917  71  

Total expected net benefit payments for next 10 years

 

$

2,984

 

 

$

164

 

Total expected net benefit payments for next 10 years$1,506  $159  

The expected net benefit payments above reflect the company’s share of the total net benefits expected to be paid from the plans’ assets (for funded plans) or from the company’sour assets (for unfunded plans). The federal subsidies relating to the Medicare Prescription Drug, Improvement and Modernization Act are not expected to be significant.

Amounts Recognized in AOCI

The pension and OPEB plans’ gains or losses, prior service costs or credits, and transition assets or obligations not yet recognized in net periodic benefit cost are recognized on a net-of-tax basis in AOCI and will be amortized from AOCI to net periodic benefit cost in the future. The company utilizesFor active employees, we utilize the average future working lifetime as the amortization period for prior service.

For inactive employees, we utilize the average remaining life expectancy as the amortization period for prior service.

The following table is a summary of the pre-tax losses included in AOCI at December 31, 20172019 and December 31, 2016.

2018.

(in millions)

 

Pension benefits

 

 

OPEB

 

(in millions)Pension benefitsOPEB

Actuarial loss (gain)

 

$

1,660

 

 

$

(76

)

Actuarial loss (gain)$1,025  $(41) 

Prior service credit and transition obligation

 

 

(12

)

 

 

(88

)

Prior service credit and transition obligation(9) (59) 

Total pre-tax loss recognized in AOCI at December 31, 2017

 

$

1,648

 

 

$

(164

)

Total pre-tax loss recognized in AOCI at December 31, 2019Total pre-tax loss recognized in AOCI at December 31, 2019$1,016  $(100) 

Actuarial loss (gain)

 

$

1,885

 

 

$

(89

)

Actuarial loss (gain)$1,607  $(79) 

Prior service credit and transition obligation

 

 

(5

)

 

 

(103

)

Prior service credit and transition obligation(10) (74) 

Total pre-tax loss recognized in AOCI at December 31, 2016

 

$

1,880

 

 

$

(192

)

Total pre-tax loss (gain) recognized in AOCI at December 31, 2018 (As Restated)Total pre-tax loss (gain) recognized in AOCI at December 31, 2018 (As Restated)$1,597  $(153) 

Refer to Note 1411 for the net-of-tax balances included in AOCI as of each of the year-end dates. The following table is a summary of the net-of-tax amounts recorded in OCI relating to pension and OPEB plans.

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Gain (loss) arising during the year, net of tax expense (benefit) of $16 in 2017, ($72) in 2016 and $44 in 2015

 

$

50

 

 

$

(191

)

 

$

45

 

Distribution to Baxalta, net of tax expense of $73

 

 

—

 

 

 

—

 

 

 

198

 

Amortization of loss to earnings, net of tax benefit of $46 in 2017, $36 in 2016 and $61 in 2015

 

 

91

 

 

 

94

 

 

 

120

 

Pension and other employee benefits (loss) gain

 

$

141

 

 

$

(97

)

 

$

363

 

As Restated
Year ended December 31 (in millions)201920182017
Gain (loss) arising during the year, net of tax expense (benefit) of $(64) in 2019, $(4) in 2018 and $25 in 2017$(184) $(22) $32  
Amortization of loss to earnings, net of tax benefit of $6 in 2019, $14 in 2018 and $35 in 201725  55  102  
Settlement charge, net of tax benefit of $188 in 2019$567  $—  $—  
Pension and other employee benefits gain$408  $33  $134  


In 20172019, OCI activity for pension and 2016,OPEB plans was primarily related to the U.S. pension settlement charge, further discussed below, and actuarial gains and losses. In 2018 and 2017, OCI activity for pension and OPEB plans was primarily related to actuarial gains and losses.

101

Amounts Expected to be Amortized from AOCI to Net Periodic Benefit Cost in 2018

2020

With respect to the AOCI balance at December 31, 2017,2019, the following table is a summary of the pre-tax amounts expected to be amortized to net periodic benefit cost in 2018.

2020.

(in millions)

 

Pension benefits

 

 

OPEB

 

(in millions)Pension benefitsOPEB

Actuarial loss/(gain)

 

$

174

 

 

$

(10

)

Actuarial loss/(gain)$78  $(4) 

Prior service credit and transition obligation

 

 

(1

)

 

 

(15

)

Prior service credit and transition obligation(1) (14) 

Total pre-tax amount expected to be amortized from AOCI to net pension and OPEB cost in 2018

 

$

173

 

 

$

(25

)

Total pre-tax amount expected to be amortized from AOCI to net pension and OPEB cost in 2020Total pre-tax amount expected to be amortized from AOCI to net pension and OPEB cost in 2020$77  $(18) 

Net Periodic Benefit Cost – Continuing Operations

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

As Restated
Year ended December 31 (in millions)Year ended December 31 (in millions)201920182017

Pension benefits

 

 

 

 

 

 

 

 

 

 

 

 

Pension benefits

Service cost

 

$

91

 

 

$

93

 

 

$

128

 

Service cost$74  $87  $91  

Interest cost

 

 

180

 

 

 

183

 

 

 

211

 

Interest cost172  178  180  

Expected return on plan assets

 

 

(291

)

 

 

(298

)

 

 

(270

)

Expected return on plan assets(264) (303) (291) 

Amortization of net losses and other deferred amounts

 

 

163

 

 

 

149

 

 

 

192

 

Amortization of net losses and other deferred amounts58  94  163  

Settlement losses

 

 

—

 

 

 

2

 

 

 

2

 

Net pension costs related to discontinued operations

 

 

—

 

 

 

—

 

 

 

(43

)

Settlement chargesSettlement charges755  1  2  
OtherOther—  —  (2) 

Net periodic pension benefit cost

 

$

143

 

 

$

129

 

 

$

220

 

Net periodic pension benefit cost$795  $57  $143  

OPEB

 

 

 

 

 

 

 

 

 

 

 

 

OPEB

Service cost

 

$

1

 

 

$

2

 

 

$

4

 

Service cost$1  $1  $1  

Interest cost

 

 

7

 

 

 

8

 

 

 

14

 

Interest cost8  7  7  

Amortization of net loss and prior service credit

 

 

(26

)

 

 

(19

)

 

 

(11

)

Curtailment

 

 

—

 

 

 

(4

)

 

 

—

 

Amortization of net losses and prior service creditAmortization of net losses and prior service credit(27) (25) (26) 

Net periodic OPEB cost

 

$

(18

)

 

$

(13

)

 

$

7

 

Net periodic OPEB cost$(18) $(17) $(18) 

Weighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date

 

Pension benefits

 

 

OPEB

 

Pension benefitsOPEB

 

2017

 

 

2016

 

 

2017

 

 

2016

 

2019201820192018

Discount rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

U.S. and Puerto Rico plans

 

 

3.62

%

 

 

4.09

%

 

 

3.51

%

 

 

3.89

%

U.S. and Puerto Rico plans3.44 %4.31 %3.16 %4.20 %

International plans

 

 

2.02

%

 

 

2.05

%

 

n/a

 

 

n/a

 

International plans1.34 %2.02 %n/a  n/a  

Rate of compensation increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate of compensation increase

U.S. and Puerto Rico plans

 

 

3.65

%

 

 

3.75

%

 

n/a

 

 

n/a

 

U.S. and Puerto Rico plans3.68 %3.66 %n/a  n/a  

International plans

 

 

3.05

%

 

 

3.08

%

 

n/a

 

 

n/a

 

International plans3.03 %3.08 %n/a  n/a  

Annual rate of increase in the per-capita cost

 

n/a

 

 

n/a

 

 

 

6.25

%

 

 

6.25

%

Annual rate of increase in the per-capita costn/a  n/a  6.75 %7.00 %

Rate decreased to

 

n/a

 

 

n/a

 

 

 

5.00

%

 

 

5.00

%

Rate decreased ton/a  n/a  5.00 %5.00 %

by the year ended

 

n/a

 

 

n/a

 

 

2023

 

 

2022

 

by the year endedn/a  n/a  20272027

The assumptions above, which were used in calculating the December 31, 20172019 measurement date benefit obligations, will be used in the calculation of net periodic benefit cost in 2018.

2020.

102

Effective January 1, 2016, the company changed its approach used to calculate the service and interest components of net periodic benefit cost. Previously, the company calculated the service and interest components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The company has elected an alternative approach that utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The company believes this approach provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The company accounted for this change prospectively as a change in estimate.


Weighted-Average Assumptions Used in Determining Net Periodic Benefit Cost

 

Pension benefits

 

 

OPEB

 

Pension benefitsOPEB

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2015

 

201920182017201920182017

Discount rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

U.S. and Puerto Rico plans

 

 

4.09

%

 

 

4.36

%

 

 

4.00

%

 

 

3.89

%

 

 

4.12

%

 

 

3.95

%

U.S. and Puerto Rico plans4.18 %3.60 %4.09 %4.20 %3.51 %3.89 %

International plans

 

 

2.03

%

 

 

2.60

%

 

 

2.26

%

 

n/a

 

 

n/a

 

 

n/a

 

International plans2.02 %2.02 %2.03 %n/a  n/a  n/a  

Expected return on plan assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected return on plan assets

U.S. and Puerto Rico plans

 

 

6.50

%

 

 

7.00

%

 

 

7.25

%

 

n/a

 

 

n/a

 

 

n/a

 

U.S. and Puerto Rico plans6.29 %6.25 %6.50 %n/a  n/a  n/a  

International plans

 

 

5.77

%

 

 

6.07

%

 

 

6.20

%

 

n/a

 

 

n/a

 

 

n/a

 

International plans5.45 %5.58 %5.77 %n/a  n/a  n/a  

Rate of compensation increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate of compensation increase

U.S. and Puerto Rico plans

 

 

3.75

%

 

 

3.75

%

 

 

3.76

%

 

n/a

 

 

n/a

 

 

n/a

 

U.S. and Puerto Rico plans3.66 %3.42 %3.75 %n/a  n/a  n/a  

International plans

 

 

3.11

%

 

 

3.37

%

 

 

3.33

%

 

n/a

 

 

n/a

 

 

n/a

 

International plans3.08 %3.05 %3.11 %n/a  n/a  n/a  

Annual rate of increase in the per-capita cost

 

n/a

 

 

n/a

 

 

n/a

 

 

 

6.25

%

 

 

6.50

%

 

 

6.00

%

Annual rate of increase in the per-capita costn/a  n/a  n/a  6.75 %7.00 %6.25 %

Rate decreased to

 

n/a

 

 

n/a

 

 

n/a

 

 

 

5.00

%

 

 

5.00

%

 

 

5.00

%

Rate decreased ton/a  n/a  n/a  5.00 %5.00 %5.00 %

by the year ended

 

n/a

 

 

n/a

 

 

n/a

 

 

2023

 

 

2022

 

 

2019

 

by the year endedn/a  n/a  n/a  202720272023

The 2015 actuarial gain for the OPEB plan was primarily related to adjustments to the assumptions for retirees who are age 65 and older and receive a subsidy to be utilized on a medical insurance exchange.

The company establishes

We established the expected return on plan assets assumption primarily based on a review of historical compound average asset returns, both company-specific and relating to the broad market (based on the company’sour asset allocation), as well as an analysis of current market and economic information and future expectations. The company plansWe plan to use a 6.25%6.50% assumption for itsour U.S. and Puerto Rico plans for 2018.

2020.

Actuarial gains and losses result from changes in actuarial assumptions (such as changes in the discount rate and revised mortality rates). Actuarial losses in 2019 and gains in 2018 related to plan benefit obligations were primarily the result of changes in discount rates.
Effect of a One-Percent Change in Assumed Healthcare Cost Trend Rate on the OPEB Plan

The effect of a one-percent change in the assumed healthcare cost trend rate on the service and interest cost components of OPEB cost as well as the OPEB obligation were not significant for 20172019 or 2016,2018, respectively.

Pension Plan Assets

An investment committee of members of senior management is responsible for supervising, monitoring and evaluating the invested assets of the company’sour funded pension plans. The investment committee, which meets at least quarterly, abides by documented policies and procedures relating to investment goals, targeted asset allocations, risk management practices, allowable and prohibited investment holdings, diversification, use of derivatives, the relationship between plan assets and benefit obligations, and other relevant factors and considerations.

The investment committee’s policies and procedures include the following:

•Ability to pay all benefits when due;

•Targeted long-term performance expectations relative to applicable market indices, such as Russell, MSCI EAFE, and other indices;

•Targeted asset allocation percentage ranges (summarized below), and periodic reviews of these allocations;

•Diversification of assets among third-party investment managers, and by geography, industry, stage of business cycle and other measures;


•Specified investment holding and transaction prohibitions (for example, private placements or other restricted securities, securities that are not traded in a sufficiently active market, short sales, certain derivatives, commodities and margin transactions);

•Specified portfolio percentage limits on holdings in a single corporate or other entity (generally 5% at time of purchase, except for holdings in U.S. government or agency securities);

103

•Specified average credit quality for the fixed-income securities portfolio (at least A- by Standard & Poor’s or A3 by Moody’s);

•Specified portfolio percentage limits on foreign holdings; and

•Periodic monitoring of investment manager performance and adherence to the investment committee’s policies.

Plan assets are invested using a total return investment approach whereby a mix of equity securities, debt securities and other investments are used to preserve asset values, diversify risk and exceed the planned benchmark investment return. Investment strategies and asset allocations are based on consideration of plan liabilities, the plans’ funded status and other factors, such as the plans’ demographics and liability durations. Investment performance is reviewed by the investment committee on a quarterly basis and asset allocations are reviewed at least annually.

Plan assets are managed in a balanced portfolio comprised of two major components: return-seeking investments and liability hedging investments. The target allocations for plan assets are 53% in return-seeking investments and 47% in liability hedging investments and other holdings. The documented policy includes an allocation range based on each individual investment type within the major components that allows for a variance from the target allocations of approximately two to five percentage points depending on the investment type. Return-seeking investments primarily include common stock of U.S. and international companies, common/collective trust funds, mutual funds, hedge funds, and partnership investments. Liability hedging investments and other holdings primarily include cash, money market funds with an original maturity of three months or less, U.S. and foreign government and governmental agency issues, corporate bonds, municipal securities, derivative contracts and asset-backed securities.

While the investment committee provides oversight over plan assets for U.S. and international plans, the summary above is specific to the plans in the United States. The plan assets for international plans are managed and allocated by the entities in each country, with input and oversight provided by the investment committee. The plan assets for the U.S. and international plans are included in the table below.


The following tables summarize the bases used to measure theour pension plan assets and liabilitiesfinancial instruments that are carriedmeasured at fair value on a recurring basis.

 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance at

December 31, 2017

 

 

Quoted prices

in active

markets for

identical assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

Measured at NAV

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

230

 

 

$

12

 

 

$

218

 

 

$

—

 

 

$

—

 

U.S. government and government agency issues

 

 

641

 

 

 

—

 

 

 

641

 

 

 

—

 

 

 

—

 

Corporate bonds

 

 

1,052

 

 

 

16

 

 

 

1,036

 

 

 

—

 

 

 

—

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large cap

 

 

711

 

 

 

711

 

 

 

—

 

 

 

—

 

 

 

—

 

Mid cap

 

 

406

 

 

 

406

 

 

 

—

 

 

 

—

 

 

 

—

 

Small cap

 

 

89

 

 

 

89

 

 

 

—

 

 

 

—

 

 

 

—

 

Total common stock

 

 

1,206

 

 

 

1,206

 

 

 

—

 

 

 

—

 

 

 

—

 

Mutual funds

 

 

390

 

 

 

144

 

 

 

246

 

 

 

—

 

 

 

—

 

Common/collective trust funds

 

 

1,174

 

 

 

—

 

 

 

217

 

 

 

8

 

 

 

949

 

Partnership investments

 

 

413

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

413

 

Other holdings

 

 

142

 

 

 

10

 

 

 

122

 

 

 

10

 

 

 

—

 

Collateral held on loaned securities

 

 

193

 

 

 

—

 

 

 

193

 

 

 

—

 

 

 

—

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral to be paid on loaned securities

 

 

(193

)

 

 

(53

)

 

 

(140

)

 

 

—

 

 

 

—

 

Fair value of pension plan assets

 

$

5,248

 

 

$

1,335

 

 

$

2,533

 

 

$

18

 

 

$

1,362

 

104

 

 

 

 

 

 

Basis of fair value measurement

 

(in millions)

 

Balance at

December 31, 2016

 

 

Quoted prices

in active

markets for

identical assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

Measured at NAV

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

443

 

 

$

16

 

 

$

427

 

 

$

—

 

 

$

—

 

U.S. government and government agency issues

 

 

457

 

 

 

—

 

 

 

457

 

 

 

—

 

 

 

—

 

Corporate bonds

 

 

850

 

 

 

13

 

 

 

837

 

 

 

—

 

 

 

—

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large cap

 

 

545

 

 

 

545

 

 

 

—

 

 

 

—

 

 

 

—

 

Mid cap

 

 

371

 

 

 

371

 

 

 

—

 

 

 

—

 

 

 

—

 

Small cap

 

 

94

 

 

 

94

 

 

 

—

 

 

 

—

 

 

 

—

 

Total common stock

 

 

1,010

 

 

 

1,010

 

 

 

—

 

 

 

—

 

 

 

—

 

Mutual funds

 

 

336

 

 

 

118

 

 

 

218

 

 

 

—

 

 

 

—

 

Common/collective trust funds

 

 

900

 

 

 

—

 

 

 

143

 

 

 

6

 

 

 

751

 

Partnership investments

 

 

388

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

388

 

Other holdings

 

 

117

 

 

 

10

 

 

 

97

 

 

 

10

 

 

 

—

 

Collateral held on loaned securities

 

 

126

 

 

 

—

 

 

 

126

 

 

 

—

 

 

 

—

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral to be paid on loaned securities

 

 

(126

)

 

 

(37

)

 

 

(89

)

 

 

—

 

 

 

—

 

Fair value of pension plan assets

 

$

4,501

 

 

$

1,130

 

 

$

2,216

 

 

$

16

 

 

$

1,139

 



Basis of fair value measurement
(in millions)Balance at December 31, 2019Quoted prices
in active
markets for
identical assets
(Level 1)		Significant
other
observable
inputs
(Level 2)		Significant
unobservable
inputs
(Level 3)		Measured at NAV
Assets
Fixed income securities
Cash and cash equivalents$224  $72  $152  $—  $—  
U.S. government and government agency issues452  —  452  —  —  
Corporate bonds352  —  352  —  —  
Equity securities
Common stock:
Large cap231  231  —  —  —  
Mid cap158  158  —  —  —  
Small cap37  37  —  —  —  
Total common stock426  426  —  —  —  
Mutual funds442  189  253  —  —  
Common/collective trust funds668  19  272  —  377  
Partnership investments333  —  —  —  333  
Other holdings76  8  58  10  —  
Collateral held on loaned securities9  —  9  —  —  
Liabilities
Collateral to be paid on loaned securities(9) (9) —  —  —  
Fair value of pension plan assets$2,973  $705  $1,548  $10  $710  


105

As Restated
Basis of fair value measurement
(in millions)Balance at December 31, 2018Quoted prices
in active
markets for
identical assets
(Level 1)		Significant
other
observable
inputs
(Level 2)		Significant
unobservable
inputs
(Level 3)		Measured at NAV
Assets
Fixed income securities
Cash and cash equivalents$145  $21  $124  $—  $—  
U.S. government and government agency issues735  —  735  —  —  
Corporate bonds1,127  —  1,127  —  —  
Equity securities
Common stock:
Large cap541  541  —  —  —  
Mid cap298  298  —  —  —  
Small cap91  91  —  —  —  
Total common stock930  930  —  —  —  
Mutual funds356  135  221  —  —  
Common/collective trust funds919  —  210  —  709  
Partnership investments390  —  —  —  390  
Other holdings172  11  151  10  —  
Collateral held on loaned securities196  —  196  —  —  
Liabilities
Collateral to be paid on loaned securities(196) (34) (162) —  —  
Fair value of pension plan assets$4,774  $1,063  $2,602  $10  $1,099  
The following table is a reconciliation of changes in fair value measurements that used significant unobservable inputs (Level 3).

(in millions)

 

Total

 

 

Common/collective

trust funds

 

 

Other

holdings

 

Balance at December 31, 2015

 

$

8

 

 

$

6

 

 

$

2

 

Purchases, sales and settlements

 

 

8

 

 

 

—

 

 

 

8

 

Balance at December 31, 2016

 

 

16

 

 

 

6

 

 

 

10

 

Actual return on plan assets still held at year end

 

 

2

 

 

 

2

 

 

 

—

 

Balance at December 31, 2017

 

$

18

 

 

$

8

 

 

$

10

 

(in millions)TotalCommon/collective
trust funds		Other
holdings
Balance at December 31, 2017$18  $8  $10  
Transfers out(8) (8) —  
Balance at December 31, 201810  —  10  
Purchases—  —  —  
Balance at December 31, 2019$10  $—  $10  

106

The assets and liabilities of the company’sour pension plans are valued using the following valuation methods:

Investment category

Valuation methodology

Investment category

Valuation methodology

Cash and cash equivalents

These largely consist of a short-term investment fund, U.S. Dollarsdollars and foreign currency. The fair value of the short-term investment fund is based on the net asset value

U.S. government and government agency issues

Values are based on reputable pricing vendors, who typically use pricing matrices or models that use observable inputs

Corporate bonds

Values are based on reputable pricing vendors, who typically use pricing matrices or models that use observable inputs

Common stock

Values are based on the closing prices on the valuation date in an active market on national and international stock exchanges

Mutual funds

Values are based on the net asset value of the units held in the respective fund which are obtained from national and international exchanges or based on the net asset value of the underlying assets of the fund provided by the fund manager

Common/collective trust funds

Values are based on the net asset value of the units held at year end

Partnership investments

Values are based on the net asset value of the participation by the companyus in the investment as determined by the general partner or investment manager of the respective partnership

Other holdings

The value of these assets vary by investment type, but primarily are determined by reputable pricing vendors, who use pricing matrices or models that use observable inputs

Collateral held on loaned securities

Values are based on the net asset value per unit of the fund in which the collateral is invested

Collateral to be paid on loaned securities

Values are based on the fair value of the underlying securities loaned on the valuation date

Expected Pension and OPEB Plan Funding

The company’s

Our funding policy for itsour pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the companywe may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flows generated by the company,us, and other factors. Volatility in the global financial markets could have an unfavorable impact on future funding requirements. The company hasWe have no obligation to fund itsour principal plans in the United States in 2018. The company2020. We continually reassessesreassess the amount and timing of any discretionary contributions. In 2018, the company does not2020, we expect to make a contributioncontributions of at least $5 million to itsour Puerto Rico pension plan and expects to make a contribution of at least $26$41 million to itsour foreign pension plans. The company expectsWe expect to have net cash outflows relating to itsour OPEB plan of approximately $20 million in 2018.

2020.

The following table details the funded status percentage of the company’sour pension plans as of December 31, 2017,2019, including certain plans that are unfunded in accordance with the guidelines of the company’sour funding policy outlined above.

 

United States and Puerto Rico

 

 

International

 

 

 

 

 

as of December 31, 2017 (in millions)

 

Qualified

plans

 

 

Nonqualified

plan

 

 

Funded

plans

 

 

Unfunded

plans

 

 

Total

 

United States and Puerto RicoInternational
as of December 31, 2019 (in millions)as of December 31, 2019 (in millions)Qualified
plans		Nonqualified
plan		Funded
plans		Unfunded
plans		Total

Fair value of plan assets

 

$

4,426

 

 

n/a

 

 

$

822

 

 

n/a

 

 

$

5,248

 

Fair value of plan assets$2,060  n/a  $913  n/a  $2,973  

PBO

 

 

4,629

 

 

$

223

 

 

 

908

 

 

$

399

 

 

 

6,159

 

PBO2,278  $243  1,001  $451  3,973  

Funded status percentage

 

 

96

%

 

n/a

 

 

 

91

%

 

n/a

 

 

 

85

%

Funded status percentage90 %n/a  91 %n/a  75 %

Pension Annuitization
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 recognized a non-cash pretax pension settlement charge of $755 million in the fourth quarter of 2019.
107

Pension Plan Amendments

and Other Events

In January 2018, the companywe announced changes to itsour U.S. pension plans.  The companyWe spun off the assets and liabilities of the qualified plan attributable to current employees into a new plan and will freeze the pay and service amounts used to calculate pension benefits for active participants in the U.S. pension plans as of December 31, 2022. The assets and liabilities attributable to retired and former company employees remained with the original qualified plan. Years of additional service earned and eligible compensation received after December 31, 2022 will not be included in the determination of the benefits payable to participants. These changes resulted in a $57 million decline in the PBO upon the effective date of the changes. As a result of these changes, net periodic pension and OPEB expense is expected to decreasedecreased in 2018. Refer to Note 1 for more information related to a change in income statement presentation for net periodic pension2019 and OPEB costs.

2018.

U.S. Defined Contribution Plan

Most U.S. employees are eligible to participate in a qualified defined contribution plan. ExpenseWe recognized by the company wasexpense of $53 million in 2019, $50 million in 2018 and $45 million in 2017 $50 million in 2016 and $46 million in 2015.

related to contributions to this plan.

NOTE 14

ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income includes all changes in shareholders’ equity that do not arise from transactions with stockholders, and consists of net income, CTA, pension and other employee benefits, unrealized gains and losses on cash flow hedges and unrealized gains and losses on available-for-sale equity securities. The following table is a net-of-tax summary of the changes in AOCI by component for the years ended December 31, 2017 and 2016.

(in millions)

 

CTA

 

 

Pension and

other employee

benefits

 

 

Hedging

activities

 

 

Available-

for-sale

securities

 

 

Total

 

Gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

$

(3,438

)

 

$

(1,122

)

 

$

3

 

 

$

1

 

 

$

(4,556

)

Other comprehensive income (loss) before reclassifications

 

 

396

 

 

 

50

 

 

 

(18

)

 

 

(1

)

 

 

427

 

Amounts reclassified from AOCI

 

 

29

 

 

 

91

 

 

 

5

 

 

 

3

 

 

 

128

 

Net other comprehensive (loss) income

 

 

425

 

 

 

141

 

 

 

(13

)

 

 

2

 

 

 

555

 

Balance as of December 31, 2017

 

$

(3,013

)

 

$

(981

)

 

$

(10

)

 

$

3

 

 

$

(4,001

)

(in millions)

 

CTA

 

 

Pension and

other employee

benefits

 

 

Hedging

activities

 

 

Available-

for-sale

securities

 

 

Total

 

Gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

$

(3,191

)

 

$

(1,025

)

 

$

7

 

 

$

4,433

 

 

$

224

 

Other comprehensive income (loss) before reclassifications

 

 

(247

)

 

 

(191

)

 

 

1

 

 

 

104

 

 

 

(333

)

Amounts reclassified from AOCI

 

 

—

 

 

 

94

 

 

 

(5

)

 

 

(4,536

)

 

 

(4,447

)

Net other comprehensive (loss) income

 

 

(247

)

 

 

(97

)

 

 

(4

)

 

 

(4,432

)

 

 

(4,780

)

Balance as of December 31, 2016

 

$

(3,438

)

 

$

(1,122

)

 

$

3

 

 

$

1

 

 

$

(4,556

)


The following table is a summary of the amounts reclassified from AOCI to net income during the years ended December 31, 2017 and 2016.

 

 

Amounts reclassified from

AOCI (a)

 

 

 

(in millions)

 

2017

 

 

2016

 

 

Location of impact

in income statement

Translation adjustments

 

 

 

 

 

 

 

 

 

 

Loss on Venezuela deconsolidation

 

$

(29

)

 

$

—

 

 

Other income, net

 

 

 

(29

)

 

 

—

 

 

Total before tax

 

 

 

—

 

 

 

—

 

 

Income tax expense (benefit)

 

 

$

(29

)

 

$

—

 

 

Net of tax

Amortization of pension and other employee benefits items

 

 

 

 

 

 

 

 

 

 

Actuarial losses and other(b)

 

$

(137

)

 

$

(130

)

 

 

 

 

 

(137

)

 

 

(130

)

 

Total before tax

 

 

 

46

 

 

 

36

 

 

Income tax expense (benefit)

 

 

$

(91

)

 

$

(94

)

 

Net of tax

Gains (losses) on hedging activities

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

—

 

 

$

9

 

 

Other income, net

Foreign exchange contracts

 

 

(8

)

 

 

(3

)

 

Cost of sales

 

 

 

(8

)

 

 

6

 

 

Total before tax

 

 

 

3

 

 

 

(1

)

 

Income tax expense (benefit)

 

 

$

(5

)

 

$

5

 

 

Net of tax

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment of equity securities

 

$

(5

)

 

$

—

 

 

Other income, net

Gain on available-for-sale equity securities

 

 

—

 

 

 

4,536

 

 

Other income, net

 

 

 

(5

)

 

 

4,536

 

 

Total before tax

 

 

 

2

 

 

 

—

 

 

Income tax expense (benefit)

 

 

$

(3

)

 

$

4,536

 

 

Net of tax

Total reclassification for the period

 

$

(128

)

 

$

4,447

 

 

Total net of tax

(a)

Amounts in parentheses indicate reductions to net income.

INCOME TAXES

(b)

These AOCI components are included in the computation of net periodic benefit cost disclosed in Note 13.

Refer to Note 9 for additional information regarding hedging activity and Note 13 for additional information regarding the amortization of pension and other employee benefits items.


NOTE 15

INCOME TAXES

Income from Continuing Operations Before Income Tax Expense by Category

As Restated

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

years ended December 31 (in millions)201920182017

United States

 

$

(291

)

 

$

3,906

 

 

$

(738

)

United States$(586) $7  $(320) 

International

 

 

1,508

 

 

 

1,048

 

 

 

1,166

 

International1,556  1,610  1,420  

Income from continuing operations before income taxes

 

$

1,217

 

 

$

4,954

 

 

$

428

 

Income from continuing operations before income taxes$970  $1,617  $1,100  

Income Tax Expense Related to Continuing Operations

As Restated

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

years ended December 31 (in millions)201920182017

Current

 

 

 

 

 

 

 

 

 

 

 

 

Current

United States

 

 

 

 

 

 

 

 

 

 

 

 

United States

Federal

 

$

8

 

 

$

10

 

 

$

(251

)

Federal$8  $21  $8  

State and local

 

 

18

 

 

 

(3

)

 

 

(6

)

State and local3  (1) 11  

International

 

 

273

 

 

 

282

 

 

 

345

 

International258  308  261  

Current income tax expense

 

 

299

 

 

 

289

 

 

 

88

 

Current income tax expense269  328  280  

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

Deferred

United States

 

 

 

 

 

 

 

 

 

 

 

 

United States

Federal

 

 

233

 

 

 

(286

)

 

 

(9

)

Federal(140) (228) 230  

State and local

 

 

(7

)

 

 

3

 

 

 

(20

)

State and local(29) —  1  

International

 

 

(32

)

 

 

(18

)

 

 

(24

)

International(141) (35) (20) 

Deferred income tax expense

 

 

194

 

 

 

(301

)

 

 

(53

)

Deferred income tax expense (benefit)Deferred income tax expense (benefit)(310) (263) 211  

Income tax expense (benefit)

 

$

493

 

 

$

(12

)

 

$

35

 

Income tax expense (benefit)$(41) $65  $491  

108

Deferred Tax Assets and Liabilities

As Restated

as of December 31 (in millions)

 

2017

 

 

2016

 

as of December 31 (in millions)20192018

Deferred tax assets

 

 

 

 

 

 

 

 

Deferred tax assets

Accrued expenses

 

$

269

 

 

$

377

 

Retirement benefits

 

 

248

 

 

 

411

 

Tax credits and net operating losses

 

 

834

 

 

 

747

 

Accrued liabilities and otherAccrued liabilities and other$209  $227  
Pension and other postretirement benefitsPension and other postretirement benefits258  222  
Tax credit and net operating loss carryforwardsTax credit and net operating loss carryforwards928  862  
Swiss tax reform net asset basis step-upSwiss tax reform net asset basis step-up159  —  
Operating lease liabilitiesOperating lease liabilities153  —  

Valuation allowances

 

 

(483

)

 

 

(150

)

Valuation allowances(420) (310) 

Total deferred tax assets

 

 

868

 

 

 

1,385

 

Total deferred tax assets1,287  1,001  

Deferred tax liabilities

 

 

 

 

 

 

 

 

Deferred tax liabilities

Subsidiaries’ unremitted earnings

 

 

35

 

 

 

145

 

Subsidiaries’ unremitted earnings57  43  

Asset basis differences

 

 

705

 

 

 

704

 

Long-lived assets and otherLong-lived assets and other649  690  
Operating lease right-of-use assetsOperating lease right-of-use assets152  —  

Total deferred tax liabilities

 

 

740

 

 

 

849

 

Total deferred tax liabilities858  733  

Net deferred tax asset

 

$

128

 

 

$

536

 

Net deferred tax asset$429  $268  

At December 31, 2017, the company2019, we had U.S. state operating loss carryforwards totaling $413$1.1 billion, U.S. federal operating loss carryforwards totaling $58 million and tax credit carryforwards totaling $348$410 million, which includes a U.S. foreign tax credit carryforward of $395 million. The U.S. federal and state operating loss carryforwards expire between 20182020 and 20372038 and the tax credits expire between 20182020 and 2037. 2038.
At December 31, 2017,2019, with respect to our operations outside the companyU.S., we had foreign operating loss carryforwards totaling $1.6$1.3 billion and foreign tax credit carryforwards totaling $59$49 million. Of theseThe foreign amounts, $3operating loss carryforwards expire between 2020 and 2031 with $814 million expires in 2018, $2 million expires in 2019, $37 million expires in 2020, $47 million expires in 2021, $4 million expires in 2022, $440 million expires after 2022 and $1.1 billion hashaving no expiration date. The foreign tax credits expire between 2021 and 2027 with $48 million having no expiration date.
Realization of these operating loss and tax credit carryforwards depends on generating sufficient taxable income in future periods.earnings. A valuation allowance of $483$420 million and $150$310 million was recorded atrecognized as of December 31, 20172019 and 2016,2018, respectively, to reduce the deferred tax assets associated with net operating loss and tax credit carryforwards because the company doeswe do not believe it is more likely than not that these assets will be fully realized prior to expiration. The companyAfter evaluating the 2017 Tax Act and related U.S. Treasury Regulations, any elections or other opportunities that may be available, and the future expiration of certain U.S. tax provisions that will impact the utilization of our U.S. foreign tax credit carryforwards, management expects to be able to realize some, but not all, of the U.S. foreign tax credit deferred tax assets up to its overall domestic loss balance plus other recurring and non-recurring foreign inclusions. Therefore, a valuation allowance of $180 million and $175 million was recognized with respect to the foreign tax credit carryforwards as of December 31, 2019 and 2018, respectively. We will continue to evaluate the need for additional valuation allowances and, as circumstances change, the valuation allowance may change.  In the narrative following the “Income Tax Expense Related
As a result of Swiss tax reform legislation enacted during 2019, we recognized an $863 million net asset basis step-up that is amortizable as a tax deduction ratably over tax years 2025 through 2029. The net asset basis step-up resulted in a $159 million deferred tax asset. We expect to Continuing Operations Reconciliation” table below, the company indicates which balances in the above table are provisional due to the enactmentrealize some, but not all, of the 2017 Tax Act.

Swiss deferred tax assets based principally on expected future earnings generated by the Swiss subsidiary during the period in which the tax basis will be amortized. Therefore, a valuation allowance of $69 million was recognized on the Swiss deferred tax assets as of December 31, 2019, resulting in a net deferred tax benefit of $90 million for the year ended December 31, 2019.  

109


Income Tax Expense Related to Continuing Operations(Benefit) Reconciliation

years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Income tax expense at U.S. statutory rate

 

$

424

 

 

$

1,734

 

 

$

150

 

Retained shares tax free exchange gains

 

 

—

 

 

 

(1,587

)

 

 

—

 

Tax incentives

 

 

(140

)

 

 

(126

)

 

 

(133

)

State and local taxes

 

 

(6

)

 

 

1

 

 

 

(13

)

Foreign tax expense (benefit)

 

 

(80

)

 

 

5

 

 

 

11

 

Valuation allowances

 

 

4

 

 

 

3

 

 

 

5

 

Contingent tax matters

 

 

(1

)

 

 

(48

)

 

 

9

 

Branded Prescription Drug Fee

 

 

—

 

 

 

1

 

 

 

1

 

Deferred tax charge on intangible intra-group transfers

 

 

14

 

 

 

13

 

 

 

14

 

R&D tax credit

 

 

(4

)

 

 

(2

)

 

 

(4

)

Puerto Rico excise tax credit

 

 

(2

)

 

 

(5

)

 

 

(9

)

Deferred Tax Revaluation due to 2017 Tax Act

 

 

(283

)

 

 

—

 

 

 

—

 

Transition Tax due to 2017 Tax Act

 

 

529

 

 

 

—

 

 

 

—

 

U.S. Valuation Allowance due to 2017 Tax Act

 

 

339

 

 

 

—

 

 

 

—

 

Stock options windfall tax benefits

 

 

(56

)

 

 

—

 

 

 

—

 

Foreign tax credits generated

 

 

(246

)

 

 

—

 

 

 

—

 

Other factors

 

 

1

 

 

 

(1

)

 

 

4

 

Income tax expense (benefit)

 

$

493

 

 

$

(12

)

 

$

35

 

As Restated
years ended December 31 (in millions)201920182017
Income tax expense at U.S. statutory rate$204  $340  $383  
Tax incentives(140) (161) (139) 
State and local taxes, net of federal benefit(17) 5  (6) 
Impact of foreign taxes65  122  (41) 
Swiss tax reform net asset basis step-up(159) —  —  
Deferred tax revaluation due to 2017 Tax Act and foreign tax reform(19) (8) (283) 
Transition tax due to 2017 Tax Act(16) (5) 529  
U.S. valuation allowance due to 2017 Tax Act—  (194) 339  
Other valuation allowances110  21  (6) 
Stock compensation windfall tax benefits(54) (40) (56) 
Foreign tax credits—  —  (246) 
Research and development tax credits(13) (17) (5) 
Other, net(2) 2  22  
Income tax expense (benefit)$(41) $65  $491  

In the above reconciliation, the Deferred Tax Revaluation,2017 income tax expense associated with deferred tax revaluation, the Transition Taxtransition tax and the U.S. Valuation Allowance,valuation allowance, all of which result directly or indirectly from the enactment of the 2017 Tax Act, include,included, or are,were, provisional amounts. As additional US Treasury guidanceIn 2018, we completed our one-year measurement period adjustments to the 2017 Tax Act provisional amounts in accordance with SAB 118. In addition, the tax impact of non-deductible corrections of misstatements related to foreign exchange gains and losses for the years ended December 31, 2018 and 2017 is issued and more accurate earnings and tax estimates are available during 2018,included above within the company expects to update its provisional tax amounts. 

impact of foreign taxes.

The 2017 Tax Act reducesreduced the U.S. statutory tax rate from 35% to 21% for years after 2017. Accordingly, the company hasupon its enactment in 2017, we remeasured itsour deferred tax assets and liabilities as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. The companyWe recognized a SAB 118 provisional deferred tax benefit of $283 million to reflect the reduced U.S. tax rate and other effects of the 2017 Tax Act. Although the tax rate reduction is known, the company has notIn 2018, we collected all of the necessary data to complete itsour analysis of the effect of the 2017 Tax Act on the remeasurement of the underlying deferred taxes and as such, the amounts recorded asrecognized an additional deferred tax benefit of December 31, 2017 are provisional.

$8 million. 

The 2017 Tax Act requires the companyus to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. The company recordedWe recognized a $529 million provisional charge in 2017 for itsthat one-time transitional tax, expense of $529 million, the majority of which was non-cash. This charge iswas inclusive of relevant non-U.S. withholding taxes and U.S. state income taxes on the portion of the earnings expected to be repatriated. The company has recorded provisional amounts based on estimates of the effectsIn 2018, after further study of the 2017 Tax Act and related U.S. Treasury Regulations, and further analysis of historical earnings and profits and tax pools, as well as refinements of the analysis requires significant data from itscash portion of the charge, which was provisional due to certain foreign subsidiaries that has not yet been finalized as of December 31, 2017.

The U.S. Valuation Allowance was recorded in respect of the company’s foreignwith non-calendar tax credit deferredyear-ends, we reduced our one-time transitional tax assets (DTAs).  The 2017 Tax Act moves the U.S. from a worldwide system of taxation to a territorial system; additionally,expense by $5 million.

Additionally, the 2017 Tax Act changed the rules that enabled taxpayers to generate foreign source income related to export sales that waswere eligible to utilize foreign tax credits. Consequently, the company doeswe did not believe at this timein 2017 that it iswould be more likely than not that we would be able to utilize itsour existing foreign tax credit DTAsdeferred tax assets within the applicable carryforward periods. As such, the company recorded a provisional adjustment to its$339 million U.S. valuation allowance was recognized in respect of $339 million.  As the Transition Tax amount changes, the U.S. Valuation Allowance amount is expected to changeour foreign tax credit deferred tax assets in a like amount.  Moreover, the company isaccordance with SAB118. After studying the 2017 Tax Act and related U.S. Treasury Regulations and evaluating any elections or other opportunities that may be available, as well as updating its U.S. legal entity earnings projections,we currently expect to determine if it will be able to monetizerealize some, orbut not all, of the foreign tax credit DTAs.  The company will also continuedeferred tax assets up to monitor state incomeour overall domestic loss (ODL) balance plus recurring and non-recurring foreign inclusions. Accordingly, we reduced our provisional foreign tax law developments in lightcredit deferred tax asset valuation allowance and recognized a 2018 benefit of $194 million.

Our tax provisions for 2019 and 2018 do not include any tax charges related to either the Base Erosion and Anti-Abuse Tax (BEAT) or Global Intangible Low Taxed Income (GILTI) provisions, except for the inability to fully utilize
110

foreign tax credits against such GILTI. While we are not expecting to be subject to a tax charge under the 2017 Tax Act and some state income tax DTAs may requireGILTI provisions in the near term, our accounting policy is to recognize this charge as a partial or full valuation allowance.    

period cost.


The company previously did not recognize U.S. income tax expense related to earnings outside the United States that were deemed indefinitely reinvested. U.S. federal and state income taxes, net of applicable credits, on these foreign unremitted earnings from continuing operations of $9.3 billion as of December 31, 2016 would be approximately $2.6 billion.  As noted above, the enactment of the 2017 Tax Act created a territorial tax system that allows companies to repatriate certain foreign earnings without incurring additional U.S. federal tax by providing for a 100% dividend exemption. Under the dividend-exemption provision, 100% of the foreign sourceforeign-source portion of dividends paid by certain foreign corporations to a U.S. corporate shareholderstockholder are exempt from U.S. federal


taxation. As a result of the U.S. change to a territorial tax system and the incurrence of the one-time transition tax charge, (discussed above), the company now planswe plan to repatriate our foreign earnings that were previously considered indefinitely reinvested.Moreover,reinvested with the company continuesexception of approximately $192 million of accumulated earnings as of December 31, 2019 related to evaluateone of our foreign operations. Additional withholding taxes of $19 million would be incurred if any portionsuch earnings were remitted currently.

In 2019, Switzerland and India enacted tax reform legislation that had a material impact on our effective tax rate. We recognized a deferred tax benefit of its outside$90 million to reflect a tax basis difference not attributablestep-up, net of a valuation allowance, partially offset by a $5 million deferred tax revaluation to earnings will reversereflect an increase in the statutory tax rate, under the newly enacted Swiss tax laws. We also recognized a taxable manner and whether it can identify and quantify those differencesnet deferred tax benefit of $24 million associated with deferred tax revaluation in India to reflect a decrease in the statutory tax rate. Our effective tax rate was also favorably impacted by $57 million in 2019 related to a notional interest deduction on the share capital of a foreign subsidiary. The gross tax benefit of the deduction is included in the table above within impact of foreign taxes and the related U.S. deferred tax charges.  

portion not expected to be realized is included within other valuation allowances.

Unrecognized Tax Benefits

The company classifies

We classify interest and penalties associated with income taxes in the income tax expense line in(benefit) within the consolidated statements of income. Net interest and penalties recordedrecognized were not significant during 2017, 20162019, 2018 and 2015 were $3 million, $6 million and $3 million, respectively.2017. The liability recorded at December 31, 2017 and 2016recognized related to interest and penalties was $15$21 million and $11$22 million as of December 31, 2019 and 2018, respectively. The total amount of gross unrecognized tax benefits that, if recognized, would impact the effective tax rate is approximately $108 million.

are $70 million, $84 million and $88 million as of December 31, 2019, 2018 and 2017, respectively.

The following table is a reconciliation of the company’sour unrecognized tax benefits, including those related to discontinued operations, for the years ended December 31, 2017, 20162019, 2018 and 2015.

2017. 

as of and for the years ended (in millions)

as of and for the years ended (in millions)

 

2017

 

 

2016

 

 

2015

 

as of and for the years ended (in millions)201920182017

Balance at beginning of the year

Balance at beginning of the year

 

$

82

 

 

$

191

 

 

$

206

 

Balance at beginning of the year$127  $108  $82  

Increase associated with tax positions taken during the current year

Increase associated with tax positions taken during the current year

 

 

33

 

 

 

7

 

 

 

24

 

Increase associated with tax positions taken during the current year8  33  33  

Increase (decrease) associated with tax positions taken during a prior year

Increase (decrease) associated with tax positions taken during a prior year

 

 

2

 

 

 

(31

)

 

 

(26

)

Increase (decrease) associated with tax positions taken during a prior year(3) 13  2  

Settlements

Settlements

 

 

(6

)

 

 

(75

)

 

 

(3

)

Settlements(20) (5) (6) 

Decrease associated with lapses in statutes of limitations

Decrease associated with lapses in statutes of limitations

 

 

(3

)

 

 

(10

)

 

 

(10

)

Decrease associated with lapses in statutes of limitations(1) (22) (3) 

Balance at end of the year

Balance at end of the year

 

$

108

 

 

$

82

 

 

$

191

 

Balance at end of the year$111  $127  $108  

 

 

 

 

 

 

 

 

 

Of the gross unrecognized tax benefits, $107$62 million and $74$68 million were recognized as liabilities in the consolidated balance sheets as of December 31, 20172019 and 2016,2018, respectively. Baxter has recordedWe have recognized net indemnification receivables from Baxalta in the amount of $48$6 million, $28$6 million and $93$13 million as of December 31, 2017, 20162019, 2018 and 2015,2017, respectively, related to the unrecognized tax benefits for which Baxter iswe are the primary obligor but economically relate to Baxalta operations. Additionally, in the table above amounts related to 2015 included as a decrease a gross liability transferred to Baxalta in the amount of $10 million for which Baxalta is the primary obligor.  

None of the positions included in the liability for uncertain tax positions related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

Tax Incentives

The company has

We have received tax incentives in Puerto Rico, Switzerland, Dominican Republic, Costa Rica and certain other taxingtax jurisdictions outside the United States. The financial impact of the reductions as compared to the statutory tax rates is indicated in the income tax expense reconciliation table above. The Puerto Rico grant providestax reductions as compared to the local statutory rate favorably impacted earnings per diluted share from continuing operations by $0.27 in 2019, $0.29 in 2018, and $0.25 in 2017. The above grants provide that the company’sour manufacturing operations are and will be partially exempt from local taxes until the year 2026.

with varying expirations from 2025 to 2027.

111

Examinations of Tax Returns

As of December 31, 2017, Baxter2019, we had ongoing audits in the United States, Germany, Sweden, Belgium and other jurisdictions. During 2019, Baxter expects to reduce itsobtained a settlement in a transfer pricing Competent Authority proceeding, covering the period from 2009 through 2013, between the U.S. and Switzerland.  Tax years 2009 and forward remain under examination by the IRS while additional Competent Authority proceedings take place.  We believe that it is reasonably possible that our gross unrecognized tax benefits will be reduced within the next 12 months by $20 million due principally to the resolution of non-U.S. matters incident to the separation of Baxalta.$27 million. While the final outcome of these matters is inherently uncertain, the company believes it haswe believe we have made adequate tax provisions for all years subject to examination.

During 2016,

NOTE 15
EARNINGS PER SHARE
The numerator for both basic and diluted earnings per share (EPS) is either net income, income from continuing operations, or loss from discontinued operations. The denominator for basic EPS is the weighted-average number of shares outstanding during the period. The dilutive effect of outstanding stock options, RSUs and PSUs is reflected in the denominator for diluted EPS using the treasury stock method.
The following table is a reconciliation of income from continuing operations to net income attributable to Baxter paid approximately $303stockholders.
years ended December 31(in millions)201920182017
Income from continuing operations$1,011  $1,552  $609  
Less: Income from continuing operations attributable to noncontrolling interests$10  $—  $—  
Income from continuing operations attributable to Baxter stockholders$1,001  $1,552  $609  
Loss from discontinued operations attributable to Baxter stockholders$—  $(6) $(7) 
Net income attributable to Baxter stockholders$1,001  $1,546  $602  
The following table is a reconciliation of basic shares to diluted shares.
years ended December 31(in millions)201920182017
Basic shares509  534  543  
Effect of dilutive securities10  12  12  
Diluted shares519  546  555  
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, 3 million, and 2 million equity awards in 2019, 2018, and 2017, respectively, because their inclusion would have had an anti-dilutive effect on diluted EPS. Refer to partially settleNote 10 for additional information regarding items impacting basic shares.
NOTE 16
FINANCIAL INSTRUMENTS, DERIVATIVES AND HEDGING ACTIVITIES
Accounts Receivable Sales
For accounts receivable originated in Japan, we have entered into agreements with financial institutions in which the entire interest in and ownership of the receivable is sold. We continue to service the receivables in this arrangement. Servicing assets or liabilities are not recognized because we receive adequate compensation to service the sold receivables. The Japanese arrangement includes limited recourse provisions, which are not material.

112

The following is a U.S. federal income tax auditsummary of the activity relating to the arrangement.

As Restated
as of and for the years ended December 31 (in millions)201920182017
Sold receivables at beginning of year$69  $70  $67  
Proceeds from sales of receivables$292  $267  $270  
Cash collections (remitted to the owners of the receivables)$(282) $(270) $(270) 
Effect of foreign exchange rate changes$—  $2  $3  
Sold receivables at end of year$79  $69  $70  

The net losses relating to the sales of accounts receivable were immaterial for each year.
Concentrations of Credit Risk
We invest excess cash in certificates of deposit or money market funds and diversify the period 2008-2013. Additionally,concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, we have diversified our selection of counterparties, and have arranged collateralization and master-netting agreements to minimize the company settledrisk of loss.
Global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. Global economic conditions, governmental actions and customer-specific factors may require us to re-evaluate the collectability of our receivables and we could potentially incur additional credit losses. These conditions may also impact the stability of the Euro.
Foreign Currency and Interest Rate Risk Management
We operate on a German income tax auditglobal 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.
Cash Flow Hedges
We may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the period 2008-2011foreign exchange risk to earnings relating to forecasted transactions and settled an Italian auditrecognized 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.
The notional amounts of foreign exchange contracts designated as cash flow hedges were $617 million and $706 million as of December 31, 2019 and 2018, respectively. The maximum term over which we have cash flow hedge
113

contracts in place related to forecasted transactions at December 31, 2019 is 12 months for foreign exchange contracts. The total notional amounts of interest rate contracts designated as cash flow hedges were $550 million and $150 million as of December 31, 2019 and 2018, respectively. The interest rate contracts have maturity dates in 2022 and hedge the period 2010-2012. Asvariability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt.
Fair Value Hedges
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.
There were 0 outstanding interest rate contracts designated as fair value hedges as of December 31, 2019 and 2018.  
Net Investment Hedges
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, of these settlements, the company reduced its gross unrecognized tax benefits by $75 million. Pursuantmark to the tax matters agreement with Baxalta, Baxalta paid the company approximately $37 million related to its tax indemnity obligations in respect of its portionspot rate adjustments of the settled gross unrecognized tax benefits. See Note 2 for additional details regarding the separationoutstanding debt balances are recorded as a component of Baxalta.


NOTE 16

LEGAL PROCEEDINGS

Baxter is involved in product liability, patent, commercial, and other legal matters that arise in the normal course of the company’s business. The company records a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded.AOCI. As of December 31, 2019, we had an accumulated pre-tax unrealized translation loss in AOCI of $21 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. Gains or losses relating to terminations of effective cash flow hedges generally 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 hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings. There were 0 cash flow hedge dedesignations in 2019, 2018 or 2017 resulting from changes in our assessment of the probability that the hedged forecasted transactions would occur.
If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged item at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated in 2019 or 2017. In 2018, we terminated our interest rate fair value hedges and 2016, the company’scumulative 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 2019, we dedesignated €1.2 billion of forward contracts designated as a net investment hedge of our European operations. There were no net investment hedge dedesignations in 2018 or 2017.
Undesignated Derivative Instruments
We use forward contracts to hedge foreign exchange gains and losses relating to certain of our intra-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 $619 million and $487 million as of December 31, 2019 and 2018, respectively.
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Gains and Losses on Hedging Instruments and Undesignated Derivative Instruments
The following table summarizes the income statement locations and gains and losses on our hedging instruments for the years ended December 31, 2019, 2018, and 2017.
(in millions)Gain (loss)
recognized in OCI		Location of gain
(loss) in
income statement		Gain (loss) reclassified from
AOCI into income
As Restated
201920182017201920182017
Cash flow hedges
Interest rate contracts$(37) $(3) $(3) Interest expense, net$—  $—  $—  
Foreign exchange contracts(9) 3  (24) Cost of sales4  (12) (8) 
Net investment hedges12  32  (65) Other (income) expense, net—  —  —  
Total$(34) $32  $(92) $4  $(12) $(8) 

Location of gain (loss) in
income statement		Gain (loss) recognized
in income
As Restated
(in millions)201920182017
Fair value hedges
Interest rate contractsInterest expense, net$—  $(4) $(3) 
Undesignated derivative instruments
Foreign exchange contractsOther (income) expense, net$(17) $—  $(37) 
For our fair value hedges, equal and offsetting gains of $4 million and $3 million were recognized in interest expense, net as an adjustment to the underlying hedged items, fixed-rate debt, in 2018 and 2017, respectively.
The following table summarizes net-of-tax activity in AOCI, a component of stockholders’ equity, related to our cash flow hedges.
as of and for the year ended December 31 (in millions)201920182017
Accumulated other comprehensive income (loss) balance at beginning of year$(1) $(10) $3  
Adoption of new accounting standard(1) —  —  
(Loss) gain in fair value of derivatives during the year(36) (1) (18) 
Amount reclassified to earnings during the year(3) 10  5  
Accumulated other comprehensive income (loss) balance at end of year$(41) $(1) $(10) 
As of December 31, 2019, $6 million of deferred, net after-tax losses on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.
115

Derivative Assets and Liabilities
The following table summarizes the classification and fair value amounts of derivative instruments reported in the consolidated balance sheet as of December 31, 2019.
Derivatives in asset positionsDerivatives in liability positions
(in millions)Balance sheet locationFair valueBalance sheet locationFair value
Derivative instruments designated as hedges
Interest rate contractsOther non-current assets$10  Other non-current liabilities$52  
Foreign exchange contractsPrepaid expenses and other current assets10  Accounts payable and 
accrued liabilities		—  
Foreign exchange contractsOther non-current assets—  Other non-current liabilities—  
Total derivative instruments designated as hedges20  52  
Undesignated derivative instruments
Foreign exchange contractsPrepaid expenses and other current assets1  Accounts payable and 
accrued liabilities		2  
Total derivative instruments$21  $54  
The following table summarizes the classification and fair values of derivative instruments reported in the consolidated balance sheet as of December 31, 2018.
Derivatives in asset positionsDerivatives in liability positions
As RestatedAs Restated
(in millions)Balance sheet locationFair valueBalance sheet locationFair value
Derivative instruments designated as hedges
Interest rate contractsOther non-current assets$—  Other non-current
liabilities		$3  
Foreign exchange contractsPrepaid expenses and other current assets22  Accounts payable and 
accrued liabilities		1  
Foreign exchange contractsOther non-current assets1  Other non-current liabilities—  
Total derivative instruments designated as hedges23  4  
Undesignated derivative instruments
Foreign exchange contractsPrepaid expenses and other current assets2  Accounts payable and 
accrued liabilities		2  
Total derivative instruments$25  $6  
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 consolidated balance sheets. Additionally, we are not required to post collateral for any of our outstanding derivatives.
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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.
December 31, 2019December 31, 2018
As Restated
(in millions)AssetLiabilityAssetLiability
Gross amounts recognized in the consolidated balance sheets$21  $54  $25  $6  
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheets(11) (11) (3) (3) 
Total$10  $43  $22  $3  
The following table presents the amounts recorded reserves with respecton the consolidated balance sheets related to legal mattersfair value hedges:
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 December 31, 2019Balance as of December 31, 2018Balance as of December 31, 2019Balance as of December 31, 2018
Long-term debt$103  $103  $6  $7  
(a) These fair value hedges were terminated prior to December 31, 2018.

NOTE 17
FAIR VALUE MEASUREMENTS
The fair value hierarchy under the accounting standard for fair value measurements consists of the following three levels:
•Level 1 — Quoted prices in active markets that we have the ability to access for identical assets or liabilities;
•Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and
•Level 3 — Valuations using significant inputs that are unobservable in the market and include the use of judgment by management about the assumptions market participants would use in pricing the asset or liability.
117

The following table summarizes financial instruments that are measured at fair value on a recurring basis.
Basis of fair value measurement
(in millions)Balance as of December 31,
2019		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$11  $—  $11  $—  
Interest rate contracts10  —  10  —  
Marketable equity securities3  3  —  —  
Total$24  $3  $21  $—  
Liabilities
Foreign exchange contracts$2  $—  $2  $—  
Interest rate contracts52  —  52  —  
Contingent payments related to acquisitions39  —  —  39  
Total$93  $—  $54  $39  

As Restated
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$25  $—  $25  $—  
Marketable equity securities3  3  —  —  
Total$28  $3  $25  $—  
Liabilities
Foreign exchange contracts$3  $—  $3  $—  
Interest rate contracts3  —  3  —  
Contingent payments related to acquisitions32  —  —  32  
Total$38  $—  $6  $32  
As of December 31, 2019 and 2018, cash and cash equivalents of $3.3 billion and $1.8 billion, respectively, included money market and other short-term funds of approximately $1.7 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 our recurring
118

fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions.
as of and for the years ended December 31 (in millions)20192018
Fair value at beginning of period$32  $9  
Additions18  24  
Change in fair value recognized in earnings(4) —  
Payments(7) (1) 
Fair value at end of period$39  $32  
Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $73 million and $41 million at December 31, 2019 and $53 million, respectively, and the total related receivables were nil and $10 million,2018, respectively.

Baxter has established reserves for certain  These amounts are included in Other non-current assets.

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

Financial Instruments Not Measured at Fair Value

In addition to the matters described below,financial instruments that we are required to recognize at fair value in the company remains subjectconsolidated 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 consolidated balance sheets and the estimated fair values.
Book valuesFair values(a)
As RestatedAs Restated
as of December 31 (in millions)2019201820192018
Liabilities
Short-term debt$226  $2  $226  $2  
Current maturities of long-term debt and finance lease obligations315  2  315  2  
Long-term debt and finance lease obligations4,809  3,481  5,156  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 risk of future administrative and legal actions. With respect to governmental and regulatory matters, these actions may lead to product recalls, injunctions, and other restrictions on the company’s operations and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, the company may be exposed to significant litigation concerning the scopeshort-term maturities of the company’sobligations. The estimated fair values of current and others’ rights. Such litigation could result in a loss of patent protection orlong-term debt were computed by multiplying price by the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations.

Environmental

Baxter is involved as a potentially responsible party (PRP) for environmental clean-up costs at seven 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, Baxter is involved in an ongoing voluntary environmental remediation associated with historic operations at the company’s Irvine, California, United States, facility. As of December 31, 2017 and 2016, environmental reserves of approximately $21 million and $7 million, respectively, were established to address these specific estimated potential liabilities. In 2017, the company recorded a pre-tax charge of $15 million related to a former location and included that charge within (loss) income from discontinued operations, net of tax, on the consolidated statement of income.  Such reserves are undiscounted and do not include anticipated recoveries, if any, from insurance companies. After considering these reserves, management isnotional amount of the opinion thatrespective debt instruments. Price is calculated using the outcome of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

General litigation

On July 31, 2015, DaVita Inc. (f/k/a DaVita Healthcare Partners Inc.) filed suit against Baxter Healthcare Corporation in the District Courtstated terms of the Staterespective debt instrument and yield curves commensurate with our credit risk. The carrying values of Colorado regarding an ongoing commercial dispute relatingother financial instruments approximate their fair values due to the provisionshort-term maturities of peritoneal dialysis products.  A bench trial concluded in third quarter 2016most of those assets and the parties were awaiting the court’s decision.  On February 16, 2018, the parties entered into a settlement agreement providing for a full and final release of all claims and damages that were or could have been asserted in the commercial dispute in connection with their entry into a new peritoneal dialysis products supply agreement.  The court granted an order to dismiss the litigation on February 21, 2018. 

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. The company filed a motion to dismiss the consolidated complaint in February 2017.  The parties await ruling.

In April 2017, the company became aware of a criminal investigation by the U.S. Department of Justice, Antitrust Division and a federal grand jury in the United States District Court for the Eastern District of Pennsylvania.   The company 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 the company) and communications with competitors regarding the same.  The company is cooperating with the investigation.  The New York Attorney General has also

liabilities.

requested that Baxter provide information regarding business practices in the IV saline industry. The company is cooperating with the New York Attorney General.  

Other

In the fourth quarter of 2012, the company received two investigative demands from the United States Attorney for the Western District of North Carolina for information regarding its quality and manufacturing practices and procedures at its North Cove facility. In January 2017, the parties resolved this matter by entering into a deferred prosecution agreement and a civil settlement whereby the company agreed to pay approximately $18 million and implement certain enhanced compliance measures.

In December 2016, the company received a civil investigative demand from the Commercial Litigation Branch of the United States Department of Justice primarily relating to contingent discount arrangements for, and other promotion of, the company’s TISSEEL and ARTISS products. The company is cooperating in this matter.

NOTE 17

SEGMENT INFORMATION

In 2017, Baxter announced a change in its commercial structure to improve performance, optimize costs, increase speed in the decision-making process and drive improved accountability across the company. As a result, the company now reports its financial performance18

SEGMENT INFORMATION
We manage our business based on its new3 geographical segments: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific)(Asia Pacific).

The company’s Our segments provide a broad portfolio of essential healthcare products, across its portfolio, 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.

The company uses

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

Certain items are maintained at Corporate and are not allocated to a segment. They primarily include most of the company’s debt and cash and equivalents and related net interest expense, foreign exchange rate fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency hedging activities, corporate headquarters costs, certain research and developmentR&D costs, certain Global Business Unit (GBU)GBU support costs, stock compensation expense, nonstrategic investments and related income and expense, certain employee benefit plan costs, as well asand certain gains, losses, and other charges (such as business optimization, acquisition and integration and separation-related costs, intangible asset amortization and asset impairments).  The company’sOur chief operating decision maker does not receive any asset information by operating segment and, accordingly, the company doeswe do not report asset information by operating segment.


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Financial information for the company’sour segments is as follows:

As Restated

for the years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

for the years ended December 31 (in millions)201920182017

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:Net sales: 

Americas

 

$

5,720

 

 

$

5,437

 

 

$

5,222

 

Americas$6,094  $5,951  $5,718  

EMEA

 

 

2,731

 

 

 

2,697

 

 

 

2,774

 

EMEA2,968  2,946  2,752  

APAC

 

 

2,110

 

 

 

2,029

 

 

 

1,972

 

APAC2,300  2,202  2,114  

Total net sales

 

$

10,561

 

 

$

10,163

 

 

$

9,968

 

Total net sales$11,362  $11,099  $10,584  

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

Operating income:Operating income:

Americas

 

$

2,227

 

 

$

2,070

 

 

$

1,816

 

Americas$2,374  $2,411  $2,238  

EMEA

 

 

564

 

 

 

476

 

 

 

342

 

EMEA652  666  562  

APAC

 

 

512

 

 

 

464

 

 

 

405

 

APAC549  532  510  

Total segment operating income

 

$

3,303

 

 

$

3,010

 

 

$

2,563

 

Total segment operating income$3,575  $3,609  $3,310  

Depreciation Expense

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation Expense:Depreciation Expense:

Americas

 

$

224

 

 

$

217

 

 

$

210

 

Americas$255  $229  $231  

EMEA

 

 

166

 

 

 

178

 

 

 

179

 

EMEA149  158  149  

APAC

 

 

85

 

 

 

86

 

 

 

78

 

APAC85  95  84  

Corporate and other

 

 

132

 

 

 

151

 

 

 

130

 

Corporate and other117  120  132  

Total depreciation expense

 

$

607

 

 

$

632

 

 

$

597

 

Total depreciation expense$606  $602  $596  

Capital expenditures

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures:Capital expenditures:

Americas

 

$

267

 

 

$

332

 

 

$

408

 

Americas$325  $296  $269  

EMEA

 

 

161

 

 

 

140

 

 

 

212

 

EMEA143  140  141  

APAC

 

 

96

 

 

 

103

 

 

 

149

 

APAC98  122  95  

Corporate and other

 

 

101

 

 

 

116

 

 

 

137

 

Corporate and other120  134  101  

Total capital expenditures

 

$

625

 

 

$

691

 

 

$

906

 

Total capital expenditures$686  $692  $606  

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

As Restated

for the years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

for the years ended December 31 (in millions)201920182017

Total segment operating income

 

$

3,303

 

 

$

3,010

 

 

$

2,563

 

Total segment operating income$3,575  $3,609  $3,310  

Corporate and other

 

 

(2,045

)

 

 

(2,286

)

 

 

(2,114

)

Corporate and other(1,803) (2,025) (2,022) 

Total operating income

 

 

1,258

 

 

 

724

 

 

 

449

 

Total operating income1,772  1,584  1,288  

Net interest expense

 

 

55

 

 

 

66

 

 

 

126

 

Net interest expense71  45  55  

Other income, net

 

 

(14

)

 

 

(4,296

)

 

 

(105

)

Other (income) expense, netOther (income) expense, net731  (78) 133  

Income from continuing operations before income taxes

 

$

1,217

 

 

$

4,954

 

 

$

428

 

Income from continuing operations before income taxes$970  $1,617  $1,100  


Geographic information

Net Sales

As Restated
for the years ended December 31 (in millions)201920182017
Net sales:   
United States$4,826  $4,723  $4,510  
Latin America and Canada1,268  1,228  1,208  
Total Americas$6,094  $5,951  $5,718  
EMEA2,968  2,946  2,752  
APAC2,300  2,202  2,114  
Total net sales$11,362  $11,099  $10,584  

120

As Restated
as of December 31 (in millions)20192018
PP&E and operating lease right-of-use assets, net:  
United States$1,889  $1,786  
EMEA1,447  1,204  
APAC959  892  
Latin America and Canada825  648  
Consolidated PP&E and operating lease right-of-use assets, net$5,120  $4,530  

NOTE 19
QUARTERLY FINANCIAL DATA (UNAUDITED)

As Restated
years ended December 31 (in millions, except per share data)First quarterSecond quarterThird quarterFourth quarter¹Full year
2019     
Net sales$2,638  $2,834  $2,851  $3,039  $11,362  
Gross margin1,080  1,153  1,230  1,298  4,761  
Net income (loss) attributable to Baxter stockholders342  313  369  (23) 1,001  
Earnings (loss) per share
Basic0.67  0.61  0.72  (0.05) 1.97  
Diluted0.66  0.60  0.71  (0.05) 1.93  
Cash dividends declared per share0.190  0.220  0.220  0.220  0.850  
Market price per share
High81.31  82.41  89.78  88.45  89.78  
Low64.48  73.44  81.40  76.70  64.48  
As RestatedAs Restated
First quarterSecond quarterThird quarterFourth quarterFull year
2018
Net sales$2,692  $2,813  $2,761  $2,833  $11,099  
Gross margin1,121  1,223  1,232  1,183  4,759  
Income from continuing operations382  341  518  311  1,552  
Earnings per share from continuing operations
Basic0.71  0.64  0.97  0.59  2.91  
Diluted0.69  0.62  0.95  0.58  2.84  
Loss from discontinued operations, net of tax—  —  —  (6) (6) 
Loss per share from discontinued operations
Basic—  —  —  (0.01) (0.01) 
Diluted—  —  —  (0.01) (0.01) 
Net income382  341  518  305  1,546  
Earnings per share
Basic0.71  0.64  0.97  0.58  2.90  
Diluted0.69  0.62  0.95  0.57  2.83  
Cash dividends declared per share0.160  0.190  0.190  0.190  0.730  
Market price per share
High72.26  75.41  77.75  77.80  77.80  
Low62.56  63.43  70.71  61.45  61.45  
121

¹Results for the fourth quarter and full year of 2019 include a $755 million pre-tax charge related to the annuitization of a portion of our U.S. pension plan.
We are presenting herein restated unaudited condensed consolidated financial information for each quarterly and year-to-date interim period within the six months ended June 30, 2019 and the year ended December 31, 2018, except for the three and nine months ended September 30, 2018. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, for additional information and refer to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, filed on March 17, 2020, for information about the restatement of our unaudited interim financial statements for the three and nine months ended September 30, 2018.
The amounts as previously reported for the quarters ended June 30, 2019 and March 31, 2019 were derived from our Quarterly Reports on Form 10-Q filed on July 30, 2019 and May 8, 2019, respectively. The amounts as previously reported for the quarter ended December 31, 2018 were derived from our Annual Report on Form 10-K for the year ended December 31, 2018 filed on February 21, 2019. The amounts as previously reported as of September 30, 2018 and for the quarters and year-to-date interim periods ended June 30, 2018 and March 31, 2018 were derived from our Quarterly Reports on Form 10-Q filed on November 5, 2018, August 6, 2018 and May 9, 2018, respectively. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, for a description of the misstatements in each category of restatements referenced by GBU

(a) through (g).


122

Baxter International Inc.
Condensed Consolidated Balance Sheets
(in millions, except per share)
As Restated
June 30,
2019		March 31,
2019
Current assets:
Cash and cash equivalents$2,934  $1,902  
Accounts receivable, net1,897  1,801  
Inventories1,756  1,743  
Prepaid expenses and other current assets642  614  
Total current assets7,229  6,060  
Property, plant and equipment, net4,485  4,476  
Goodwill2,937  2,929  
Other intangible assets, net1,363  1,440  
Operating lease right-of-use assets595  513  
Other non-current assets894  823  
Total assets$17,503  $16,241  
Current liabilities:
Short-term debt$2  $796  
Current maturities of long-term debt and finance lease obligations2  2  
Accounts payable and accrued liabilities2,553  2,478  
Total current liabilities2,557  3,276  
Long-term debt and finance lease obligations5,157  3,451  
Operating lease liabilities496  417  
Other non-current liabilities1,490  1,504  
Total liabilities9,700  8,648  
Commitments and contingencies
Equity:
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares at June 30, 2019 and March 31, 2019683  683  
Common stock in treasury, at cost, 173,275,586 shares at June 30, 2019 and 173,447,198 shares at March 31, 2019(10,322) (10,284) 
Additional contributed capital5,906  5,839  
Retained earnings15,598  15,414  
Accumulated other comprehensive (loss) income(4,086) (4,082) 
Total Baxter stockholders’ equity7,779  7,570  
Noncontrolling interests24  23  
Total equity7,803  7,593  
Total liabilities and equity$17,503  $16,241  




123

Baxter International Inc.
Condensed Consolidated Balance Sheets
(in millions, except per share)
As Restated
September 30,
2018		June 30,
2018		March 31,
2018
Current assets:
Cash and cash equivalents$2,863  $2,858  $2,949  
Accounts receivable, net1,837  1,789  1,818  
Inventories1,716  1,616  1,578  
Prepaid expenses and other current assets615  621  610  
Total current assets7,031  6,884  6,955  
Property, plant and equipment, net4,476  4,486  4,576  
Goodwill2,978  2,981  3,103  
Other intangible assets, net1,400  1,424  1,505  
Other non-current assets918  744  704  
Total assets$16,803  $16,519  $16,843  
Current liabilities:
Current maturities of long-term debt and finance lease obligations$3  $3  $3  
Accounts payable and accrued liabilities2,660  2,583  2,598  
Total current liabilities2,663  2,586  2,601  
Long-term debt and finance lease obligations3,480  3,491  3,550  
Other non-current liabilities1,570  1,612  1,630  
Total liabilities7,713  7,689  7,781  
Commitments and contingencies
Equity:
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares at September 30, 2018, June 30, 2018 and March 31, 2018683  683  683  
Common stock in treasury, at cost, 150,213,621 shares at September 30, 2018, 148,485,202 shares at June 30, 2018 and 146,993,164 shares at March 31, 2018(8,639) (8,485) (8,354) 
Additional contributed capital5,931  5,916  5,912  
Retained earnings14,886  14,484  14,254  
Accumulated other comprehensive (loss) income(3,754) (3,756) (3,427) 
Total Baxter stockholders’ equity9,107  8,842  9,068  
Noncontrolling interests(17) (12) (6) 
Total equity9,090  8,830  9,062  
Total liabilities and equity$16,803  $16,519  $16,843  

124

Baxter International Inc.
Condensed Consolidated Statements of Income
(in millions, except per share)
As Restated  
June 30,
2019		March 31,
2019
Six months endedThree months endedThree months ended
Net sales$5,472  $2,834  $2,638  
Cost of sales3,239  1,681  1,558  
Gross margin2,233  1,153  1,080  
Selling, general and administrative expenses1,242  641  601  
Research and development expenses295  166  129  
Other operating income, net(37) (4) (33) 
Operating income733  350  383  
Interest expense, net38  20  18  
Other (income) expense, net(17) 4  (21) 
Income before income taxes712  326  386  
Income tax expense57  13  44  
Net income$655  $313  $342  
Earnings per share
Basic$1.28  $0.61  $0.67  
Diluted$1.26  $0.60  $0.66  
Weighted-average number of shares outstanding
Basic511  510  512  
Diluted520  519  522  

125

Baxter International Inc.
Condensed Consolidated Statements of Income
(in millions, except per share)
As Restated  
December 31,
2018		June 30,
2018		March 31,
2018
Three months endedSix months endedThree months endedThree months ended
Net sales$2,833  $5,505  $2,813  $2,692  
Cost of sales1,650  3,161  1,590  1,571  
Gross margin1,183  2,344  1,223  1,121  
Selling, general and administrative expenses627  1,309  676  633  
Research and development expenses175  313  172  141  
Other operating income, net(10) (89) (2) (87) 
Operating income391  811  377  434 ��
Interest expense, net11  23  11  12  
Other (income) expense, net(33) (44) (38) (6) 
Income from continuing operations before income taxes413  832  404  428  
Income tax expense102  109  63  46  
Income from continuing operations311  723  341  382  
Loss from discontinued operations, net of tax(6) —  —  —  
Net income$305  $723  $341  $382  
Earnings per share from continuing operations
Basic$0.59  $1.35  $0.64  $0.71  
Diluted$0.58  $1.32  $0.62  $0.69  
Loss per share from discontinued operations
Basic$(0.01) $—  $—  $—  
Diluted$(0.01) $—  $—  $—  
Earnings per share
Basic$0.58  $1.35  $0.64  $0.71  
Diluted$0.57  $1.32  $0.62  $0.69  
Weighted-average number of shares outstanding
Basic528  537  535  539  
Diluted538  549  547  551  

126

Baxter International Inc.
Condensed Consolidated Statements of Comprehensive Income
(in millions)
As Restated  
June 30,
2019		March 31,
2019
Six months endedThree months endedThree months ended
Net income$655  $313  $342  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments(95) 2  (97) 
Pension and other postretirement benefit plans20  6  14  
Hedging activities(27) (12) (15) 
Total other comprehensive (loss) income, net of tax(102) (4) (98) 
Comprehensive income$553  $309  $244  

Baxter International Inc.
Condensed Consolidated Statements of Comprehensive Income
(in millions)
As Restated  
June 30,
2018		March 31,
2018
Six months endedThree months endedThree months ended
Net income$723  $341  $382  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments(305) (368) 63  
Pension and other postretirement benefit plans85  28  57  
Hedging activities6  11  (5) 
Total other comprehensive (loss) income, net of tax(214) (329) 115  
Comprehensive income$509  $12  $497  

127

Baxter International Inc.
Condensed Consolidated Statements of Changes in Equity
(in millions)
As Restated
For the Three Months Ended June 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 April 1, 2019683  $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) 
Change in noncontrolling interests—  —  —  —  —  —  —  —  1  1  
Balance as of June 30, 2019683  $683  173  $(10,322) $5,906  $15,598  $(4,086) $7,779  $24  $7,803  




Baxter International Inc.
Condensed Consolidated Statements of Changes in Equity
(in millions)
As Restated
For the Six Months Ended June 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, 2019683  $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) 
Change in noncontrolling interests—  —  —  —  —  —  —  —  2  2  
Balance as of June 30, 2019683  $683  173  $(10,322) $5,906  $15,598  $(4,086) $7,779  $24  $7,803  



Baxter International Inc.
Condensed Consolidated Statements of Changes in Equity
(in millions)
As Restated
For the Three Months Ended March 31, 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, 2019683  $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) 
Change in noncontrolling interests—  —  —  —  —  —  —  —  1  1  
Balance as of March 31, 2019683  $683  173  $(10,284) $5,839  $15,414  $(4,082) $7,570  $23  $7,593  





Baxter International Inc.
Condensed Consolidated Statements of Changes in Equity
(in millions)
As Restated
For the Three Months Ended June 30, 2018
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 April 1, 2018683  $683  147  $(8,354) $5,912  $14,254  $(3,427) $9,068  $(6) $9,062  
Net income—  —  —  —  —  341  —  341  —  341  
Other comprehensive income (loss)—  —  —  —  —  —  (329) (329) —  (329) 
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, 2018683  683  148  (8,485) 5,916  14,484  (3,756) 8,842  (12) 8,830  




Baxter International Inc.
Condensed Consolidated Statements of Changes in Equity
(in millions)
As Restated
For the Six Months Ended June 30, 2018
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, 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—  —  —  —  —  723  —  723  —  723  
Other comprehensive income (loss)—  —  —  —  —  —  (214) (214) —  (214) 
Purchases of treasury stock—  —  11  (781) —  —  —  (781) —  (781) 
Stock issued under employee benefit plans and other—  —  (5) 277  (24) (45) —  208  —  208  
Dividends declared on common stock—  —  —  —  —  (188) —  (188) —  (188) 
Change in noncontrolling interests—  —  —  —  —  —  —  —  (4) (4) 
Balance as of June 30, 2018683  $683  148  $(8,485) $5,916  $14,484  $(3,756) $8,842  $(12) $8,830  



Baxter International Inc.
Condensed Consolidated Statements of Changes in Equity
(in millions)
As Restated
For the Three Months Ended March 31, 2018
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, 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—  —  —  —  —  382  —  382  —  382  
Other comprehensive income (loss)—  —  —  —  —  —  115  115  —  115  
Purchases of treasury stock—  —  8  (522) —  —  —  (522) —  (522) 
Stock issued under employee benefit plans and other—  —  (3) 149  (28) (36) —  85  —  85  
Dividends declared on common stock—  —  —  —  —  (86) —  (86) —  (86) 
Change in noncontrolling interests—  —  —  —  —  —  —  —  2  2  
Balance as of March 31, 2018683  $683  147  $(8,354) $5,912  $14,254  $(3,427) $9,068  $(6) $9,062  




Baxter International Inc.
Condensed Consolidated Statements of Cash Flows
(in millions)
As Restated
Six months ended June 30, 2019Three months ended March 31, 2019
Cash flows from operations
Net income$655  $342  
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization385  192  
Deferred income taxes(63) (6) 
Stock compensation57  22  
Net periodic pension benefit and other postretirement costs7  3  
Intangible asset impairment31  —  
Other44  14  
Changes in balance sheet items:
Accounts receivable, net(60) 32  
Inventories(91) (82) 
Accounts payable and accrued liabilities(299) (335) 
Other(86) (48) 
Cash flows from operations – continuing operations580  134  
Cash flows from operations – discontinued operations(6) (6) 
Cash flows from operations574  128  
Cash flows from investing activities
Capital expenditures(338) (193) 
Acquisitions and investments, net of cash acquired(111) (109) 
Other investing activities, net1  1  
Cash flows from investing activities(448) (301) 
Cash flows from financing activities
Issuances of debt1,661  —  
Net increases in debt obligations with original maturities of three months or less—  795  
Cash dividends on common stock(198) (101) 
Proceeds from stock issued under employee benefit plans262  173  
Purchases of treasury stock(720) (597) 
Other financing activities, net(37) (32) 
Cash flows from financing activities968  238  
Effect of foreign exchange rate changes on cash and cash equivalents2  (1) 
Increase in cash and cash equivalents1,096  64  
Cash and cash equivalents at beginning of period1,838  1,838  
Cash and cash equivalents at end of period$2,934  $1,902  


134

Baxter International Inc.
Condensed Consolidated Statements of Cash Flows
(in millions)
As Restated
Six months ended June 30, 2018Three months ended March 31, 2018
Cash flows from operations
Net income$723  $382  
Adjustments to reconcile income from continuing operations to net cash from operating activities:
Depreciation and amortization382  190  
Deferred income taxes(51) (38) 
Stock compensation54  20  
Net periodic pension benefit and other postretirement costs21  10  
Other—  (1) 
Changes in balance sheet items:
Accounts receivable, net43  76  
Inventories(134) (56) 
Accounts payable and accrued liabilities(124) (119) 
Other(82) (34) 
Cash flows from operations832  430  
Cash flows from investing activities
Capital expenditures(303) (152) 
Acquisitions and investments, net of cash acquired(228) (219) 
Cash flows from investing activities(531) (371) 
Cash flows from financing activities
Cash dividends on common stock(173) (87) 
Proceeds from stock issued under employee benefit plans170  82  
Purchases of treasury stock(781) (522) 
Other financing activities, net(24) (18) 
Cash flows from financing activities(808) (545) 
Effect of foreign exchange rate changes on cash and cash equivalents(38) 32  
Decrease in cash and cash equivalents(545) (454) 
Cash and cash equivalents at beginning of period3,403  3,403  
Cash and cash equivalents at end of period$2,858  $2,949  




135

Baxter International Inc.
Condensed Consolidated Balance Sheet
(in millions, except per share)
June 30, 2019
As previously reportedRestatement impactsRestatement referenceAs restated
Current assets:
Cash and cash equivalents$2,925  $9  (e) $2,934  
Accounts receivable, net1,885  12  (e)(g) 1,897  
Inventories1,757  (1) (e)(g) 1,756  
Prepaid expenses and other current assets651  (9) (b)(e)(g) 642  
Total current assets7,218  11  7,229  
Property, plant and equipment, net4,541  (56) (c)(e) 4,485  
Goodwill2,938  (1) (e) 2,937  
Other intangible assets, net1,364  (1) (g) 1,363  
Operating lease right-of-use assets588  7  (e) 595  
Other non-current assets895  (1) (a)(c)(e)(g) 894  
Total assets$17,544  $(41) $17,503  
Current liabilities:
Short-term debt$2  $—  $2  
Current maturities of long-term debt and finance lease obligations2  —  2  
Accounts payable and accrued liabilities2,593  (40) (b)(e)(g) 2,553  
Total current liabilities2,597  (40) 2,557  
Long-term debt and finance lease obligations5,157  —  5,157  
Operating lease liabilities490  6  (e) 496  
Other non-current liabilities1,464  26  (a)(c)(e)(g) 1,490  
Total liabilities9,708  (8) 9,700  
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, 173,275,586 shares(10,322) —  (10,322) 
Additional contributed capital5,906  —  5,906  
Retained earnings16,184  (586) (a)(b)(c)(e)(g) 15,598  
Accumulated other comprehensive (loss) income(4,639) 553  (a)(e) (4,086) 
Total Baxter stockholders’ equity7,812  (33) 7,779  
Noncontrolling interests24  —  24  
Total equity7,836  (33) 7,803  
Total liabilities and equity$17,544  $(41) $17,503  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The following table representscorrection of these misstatements resulted in decreases to retained earnings of $514 million and accumulated other comprehensive loss of $514 million and increases to other non-current assets of $12 million and other non-current liabilities of $12 million as of June 30, 2019.
136

(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to prepaid expenses and other current assets of $2 million and accounts payable and other accrued liabilities of $4 million and a decrease to retained earnings of $2 million as of June 30, 2019.
(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to property, plant and equipment, net of $61 million, other non-current liabilities of $6 million, and retained earnings of $44 million and an increase to other non-current assets of $11 million as of 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 increases to cash and cash equivalents of $9 million, accounts receivable, net of $6 million, inventories of $4 million, prepaid expenses and other current assets of $1 million, property, plant and equipment, net of $5 million, operating lease right-of-use assets of $7 million, other non-current assets of $5 million, accounts payable and accrued liabilities of $3 million, operating lease liabilities of $6 million, and other non-current liabilities of $4 million and decreases to goodwill of $1 million, retained earnings of $16 million, and accumulated other comprehensive loss of $39 million as of June 30, 2019.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in increases to accounts receivable, net of $6 million and other non-current liabilities of $16 million and 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 as of June 30, 2019.


137

Baxter International Inc.
Condensed Consolidated Balance Sheet
(in millions, except per share)
March 31, 2019
As previously reportedRestatement impactsRestatement referenceAs restated
Current assets:
Cash and cash equivalents$1,908  $(6) (e) $1,902  
Accounts receivable, net1,802  (1) (e)(g) 1,801  
Inventories1,751  (8) (e)(g) 1,743  
Prepaid expenses and other current assets626  (12) (b)(e)(g) 614  
Total current assets6,087  (27) 6,060  
Property, plant and equipment, net4,539  (63) (c)(e) 4,476  
Goodwill2,930  (1) (e) 2,929  
Other intangible assets, net1,441  (1) (g) 1,440  
Operating lease right-of-use assets517  (4) (e) 513  
Other non-current assets836  (13) (a)(c)(e)(g) 823  
Total assets$16,350  $(109) $16,241  
Current liabilities:
Short-term debt$796  $—  $796  
Current maturities of long-term debt and finance lease obligations2  —  2  
Accounts payable and accrued liabilities2,529  (51) (e)(g) 2,478  
Total current liabilities3,327  (51) 3,276  
Long-term debt and finance lease obligations3,451  —  3,451  
Operating lease liabilities420  (3) (e) 417  
Other non-current liabilities1,483  21  (a)(c)(e)(g) 1,504  
Total liabilities8,681  (33) 8,648  
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, 173,447,198 shares(10,284) —  (10,284) 
Additional contributed capital5,839  —  5,839  
Retained earnings15,970  (556) (a)(b)(c)(e)(g) 15,414  
Accumulated other comprehensive (loss) income(4,562) 480  (a)(e) (4,082) 
Total Baxter stockholders’ equity7,646  (76) 7,570  
Noncontrolling interests23  —  23  
Total equity7,669  (76) 7,593  
Total liabilities and equity$16,350  $(109) $16,241  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to retained earnings of $491 million and accumulated other comprehensive loss of $487 million and increases to other non-current assets of $9 million and other non-current liabilities of $13 million as of March 31, 2019.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to prepaid expenses and other current assets of $1 million and retained earnings of $1 million as of March 31, 2019.
138

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to property, plant and equipment, net of $55 million, other non-current liabilities of $5 million, and retained earnings of $40 million and an increase to other non-current assets of $10 million as of 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 decreases to cash and cash equivalents of $6 million, accounts receivable, net of $7 million, inventories of $3 million, prepaid expenses and other current assets of $1 million, property, plant and equipment, net of $8 million, goodwill of $1 million, operating lease right-of-use assets of $4 million, other non-current assets of $3 million, accounts payable and accrued liabilities of $4 million, operating lease liabilities of $3 million, other non-current liabilities of $3 million, retained earnings of $16 million and an increase to accumulated other comprehensive loss of $7 million as of March 31, 2019.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in increases to accounts receivable, net of $6 million and other non-current liabilities of $16 million and 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 as of March 31, 2019.


139

Baxter International Inc.
Condensed Consolidated Balance Sheet
(in millions, except per share)
September 30, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Current assets:
Cash and cash equivalents$2,860  $3  (e) $2,863  
Accounts receivable, net1,826  11  (e)(g) 1,837  
Inventories1,718  (2) (e)(g) 1,716  
Prepaid expenses and other current assets624  (9) (b)(g) 615  
Total current assets7,028  3  7,031  
Property, plant and equipment, net4,520  (44) (c)(e) 4,476  
Goodwill2,980  (2) (e) 2,978  
Other intangible assets, net1,402  (2) (e)(g) 1,400  
Other non-current assets917  1  (a)(c)(e)(g) 918  
Total assets$16,847  $(44) $16,803  
Current liabilities:
Current maturities of long-term debt and finance lease obligations$3  $—  $3  
Accounts payable and accrued liabilities2,701  (41) (b)(e)(g) 2,660  
Total current liabilities2,704  (41) 2,663  
Long-term debt and finance lease obligations3,485  (5) (e) 3,480  
Other non-current liabilities1,545  25  (a)(c)(e)(g) 1,570  
Total liabilities7,734  (21) 7,713  
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, 150,213,621 shares(8,639) —  (8,639) 
Additional contributed capital5,931  —  5,931  
Retained earnings15,394  (508) (a)(b)(c)(e)(g) 14,886  
Accumulated other comprehensive (loss) income(4,239) 485  (a)(e) (3,754) 
Total Baxter stockholders’ equity9,130  (23) 9,107  
Noncontrolling interests(17) —  (17) 
Total equity9,113  (23) 9,090  
Total liabilities and equity$16,847  $(44) $16,803  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to retained earnings of $448 million and accumulated other comprehensive loss of $456 million and increases to other non-current assets of $20 million and other non-current liabilities of $12 million as of September 30, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to prepaid expenses and other current assets of $3 million and accounts payable and accrued liabilities of $4 million and a decrease to retained earnings of $1 million as of September 30, 2018.
140

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to property, plant and equipment, net of $49 million, other non-current liabilities of $2 million, and retained earnings of $35 million and an increase to other non-current assets of $12 million as of 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 increases to cash and cash equivalents of $3 million, accounts receivable, net of $5 million, inventories of $3 million, property, plant and equipment, net of $5 million and accounts payable and accrued liabilities of $2 million and decreases to goodwill of $2 million, other intangible assets, net of $1 million, other non-current assets of $2 million, long-term debt and finance lease obligations of $5 million, other non-current liabilities of $1 million, retained earnings of $14 million, and accumulated other comprehensive loss of $29 million as of September 30, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in increases to accounts receivable, net of $6 million and other non-current liabilities of $16 million and 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 as of September 30, 2018.

141

Baxter International Inc.
Condensed Consolidated Balance Sheet
(in millions, except per share)
June 30, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Current assets:
Cash and cash equivalents$2,857  $1  (e) $2,858  
Accounts receivable, net1,783  6  (g) 1,789  
Inventories1,622  (6) (e)(g) 1,616  
Prepaid expenses and other current assets628  (7) (b)(e)(g) 621  
Total current assets6,890  (6) 6,884  
Property, plant and equipment, net4,531  (45) (c) 4,486  
Goodwill2,984  (3) (e) 2,981  
Other intangible assets, net1,427  (3) (e)(g) 1,424  
Other non-current assets746  (2) (a)(c)(g) 744  
Total assets$16,578  $(59) $16,519  
Current liabilities:
Current maturities of long-term debt and finance lease obligations$3  $—  $3  
Accounts payable and accrued liabilities2,626  (43) (b)(g) 2,583  
Total current liabilities2,629  (43) 2,586  
Long-term debt and finance lease obligations3,495  (4) (e) 3,491  
Other non-current liabilities1,585  27  (a)(c)(g) 1,612  
Total liabilities7,709  (20) 7,689  
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, 148,485,202 shares(8,485) —  (8,485) 
Additional contributed capital5,916  —  5,916  
Retained earnings14,966  (482) (a)(c)(e)(g) 14,484  
Accumulated other comprehensive (loss) income(4,199) 443  (a)(e) (3,756) 
Total Baxter stockholders’ equity8,881  (39) 8,842  
Noncontrolling interests(12) —  (12) 
Total equity8,869  (39) 8,830  
Total liabilities and equity$16,578  $(59) $16,519  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to retained earnings of $425 million and accumulated other comprehensive loss of $428 million and increases to other non-current assets of $16 million and other non-current liabilities of $13 million as of June 30, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to prepaid expenses and other current assets of $4 million and accounts payable and accrued liabilities of $4 million as of June 30, 2018.
142

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to property, plant and equipment, net of $45 million, other non-current liabilities of $2 million, and retained earnings of $32 million and an increase to other non-current assets of $11 million as of June 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 increases to cash and cash equivalents of $1 million and prepaid expenses and other current assets of $1 million and decreases to inventories of $1 million, goodwill of $3 million, other intangible assets, net of $2 million, long-term debt and finance lease obligations of $4 million, retained earnings of $15 million, and accumulated other comprehensive loss of $15 million as of June 30, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in increases to accounts receivable, net of $6 million and other non-current liabilities of $16 million and 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 as of June 30, 2018.

143


Baxter International Inc.
Condensed Consolidated Balance Sheet
(in millions, except per share)
March 31, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Current assets:
Cash and cash equivalents$2,947  $2  (e) $2,949  
Accounts receivable, net1,807  11  (e)(g) 1,818  
Inventories1,581  (3) (e)(g) 1,578  
Prepaid expenses and other current assets621  (11) (b)(g) 610  
Total current assets6,956  (1) 6,955  
Property, plant and equipment, net4,614  (38) (c)(e) 4,576  
Goodwill3,107  (4) (e) 3,103  
Other intangible assets, net1,507  (2) (e)(g) 1,505  
Other non-current assets706  (2) (a)(c)(e)(g) 704  
Total assets$16,890  $(47) $16,843  
Current liabilities:
Current maturities of long-term debt and finance lease obligations$3  $—  $3  
Accounts payable and accrued liabilities2,639  (41) (b)(e)(g) 2,598  
Total current liabilities2,642  (41) 2,601  
Long-term debt and finance lease obligations3,550  —  3,550  
Other non-current liabilities1,605  25  (a)(c)(e)(g) 1,630  
Total liabilities7,797  (16) 7,781  
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, 146,993,164 shares(8,354) —  (8,354) 
Additional contributed capital5,912  —  5,912  
Retained earnings14,734  (480) (a)(b)(c)(e)(g) 14,254  
Accumulated other comprehensive (loss) income(3,876) 449  (a)(e) (3,427) 
Total Baxter stockholders’ equity9,099  (31) 9,068  
Noncontrolling interests(6) —  (6) 
Total equity9,093  (31) 9,062  
Total liabilities and equity$16,890  $(47) $16,843  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to retained earnings of $426 million and accumulated other comprehensive loss of $432 million and increases to other non-current assets of $20 million and other non-current liabilities of $14 million as of March 31, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to prepaid expenses and other current assets of $1 million and accounts payable and accrued liabilities of $4 million and a decrease to retained earnings of $3 million as of March 31, 2018.
144

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to property, plant and equipment, net of $44 million, other non-current liabilities of $2 million, and retained earnings of $31 million and an increase to other non-current assets of $11 million as of March 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 $2 million, accounts receivable, net of $5 million, inventories of $2 million, property, plant and equipment, net of $6 million, and accounts payable and accrued liabilities of $2 million and decreases to goodwill of $4 million, other intangible assets, net of $1 million, other non-current assets of $4 million, other non-current liabilities of $3 million, retained earnings of $10 million, and accumulated other comprehensive loss of $17 million as of March 31, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in increases to accounts receivable, net of $6 million and other non-current liabilities of $16 million and 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 as of March 31, 2018.


145

Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
Three months ended June 30, 2019
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$2,840  $(6) (e) $2,834  
Cost of sales1,681  —  (c)(e) 1,681  
Gross margin1,159  (6) 1,153  
Selling, general and administrative expenses642  (1) (e) 641  
Research and development expenses166  —  166  
Other operating income, net(4) —  (4) 
Operating income355  (5) 350  
Interest expense, net20  —  20  
Other (income) expense, net(28) 32  (a)(b) 4  
Income before income taxes363  (37) 326  
Income tax expense20  (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
Basic510  —  510  
Diluted519  —  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 SG&A expense of $1 million for the three months ended June 30, 2019.
146

Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
Six months ended June 30, 2019
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$5,472  $—  $5,472  
Cost of sales3,233  6  (c)(e) 3,239  
Gross margin2,239  (6) 2,233  
Selling, general and administrative expenses1,242  —  1,242  
Research and development expenses295  —  295  
Other operating income, net(37) —  (37) 
Operating income739  (6) 733  
Interest expense, net38  —  38  
Other (income) expense, net(53) 36  (a)(b) (17) 
Income before income taxes754  (42) 712  
Income tax expense64  (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
Basic511  —  511  
Diluted520  —  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.
147

Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
Three months ended March 31, 2019
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$2,632  $6  (e) $2,638  
Cost of sales1,552  6  (c)(e) 1,558  
Gross margin1,080  —  1,080  
Selling, general and administrative expenses600  1  (e) 601  
Research and development expenses129  —  129  
Other operating income, net(33) —  (33) 
Operating income384  (1) 383  
Interest expense, net18  —  18  
Other (income) expense, net(25) 4  (a)(b) (21) 
Income before income taxes391  (5) 386  
Income tax expense44  —  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
Basic512  —  512  
Diluted522  —  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 SG&A expense of $1 million for the three months ended March 31, 2019.


148

Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
Three months ended December 31, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$2,841  $(8) (e) $2,833  
Cost of sales1,649  1  (c)(e) 1,650  
Gross margin1,192  (9) 1,183  
Selling, general and administrative expenses629  (2) (e) 627  
Research and development expenses175  —  175  
Other operating income, net(10) —  (10) 
Operating income398  (7) 391  
Interest expense, net11  —  11  
Other (income) expense, net(58) 25  (a)(b) (33) 
Income from continuing operations before income taxes445  (32) 413  
Income tax expense91  11  (a)(c)(g) 102  
Income from continuing operations354  (43) 311  
Loss from discontinued operations(6) —  (6) 
Net income$348  $(43) $305  
Earnings per share from continuing operations
Basic$0.67  $(0.08) $0.59  
Diluted$0.66  $(0.08) $0.58  
Loss per share from discontinued operations
Basic$(0.01) $—  $(0.01) 
Diluted$(0.01) $—  $(0.01) 
Earnings per share
Basic$0.66  $(0.08) $0.58  
Diluted$0.65  $(0.08) $0.57  
Weighted-average number of shares outstanding
Basic528  —  528  
Diluted538  —  538  
(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 an increase to income tax expense of $5 million for the three months ended December 31, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in an increase to other (income) expense, net of $1 million.
(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 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 decreases to net sales of $8 million, cost of sales of $3 million and SG&A expense of $2 million for the three months ended December 31, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in an increase to income tax expense of $7 million for the year ended December 31, 2018.

149

Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
Three months ended June 30, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$2,842  $(29) (e) $2,813  
Cost of sales1,603  (13) (c)(e) 1,590  
Gross margin1,239  (16) 1,223  
Selling, general and administrative expenses681  (5) (e)(f) 676  
Research and development expenses174  (2) (e) 172  
Other operating income, net—  (2) (f) (2) 
Operating income384  (7) 377  
Interest expense, net11  —  11  
Other (income) expense, net(31) (7) (b)(e) (38) 
Income before income taxes404  —  404  
Income tax expense61  2  (b)(c)(e) 63  
Net income$343  $(2) $341  
Earnings per share
Basic$0.64  $—  $0.64  
Diluted$0.63  $(0.01) $0.62  
Weighted-average number of shares outstanding
Basic535  —  535  
Diluted547  —  547  
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to other (income) expense, net of $8 million and income tax expense of $4 million for the three months ended June 30, 2018.
(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in an increase to cost of sales of $2 million and a decrease to income tax expense of $1 million for the three months ended June 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 $29 million, cost of sales of $15 million, SG&A expense of $7 million, R&D expense of $2 million, other (income) expense, net of $1 million and income tax expense of $1 million for the three months ended June 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 $2 million for the three months ended June 30, 2018.

150

Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
Six months ended June 30, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$5,519  $(14) (e) $5,505  
Cost of sales3,166  (5) (c)(e) 3,161  
Gross margin2,353  (9) 2,344  
Selling, general and administrative expenses1,303  6  (e)(f) 1,309  
Research and development expenses314  (1) (e) 313  
Other operating income, net(80) (9) (f) (89) 
Operating income816  (5) 811  
Interest expense, net23  —  23  
Other (income) expense, net(49) 5  (a)(b)(e) (44) 
Income before income taxes842  (10) 832  
Income tax expense110  (1) (a)(b)(c)(e) 109  
Net income$732  $(9) $723  
Earnings per share
Basic$1.36  $(0.01) $1.35  
Diluted$1.33  $(0.01) $1.32  
Weighted-average number of shares outstanding
Basic537  —  537  
Diluted549  —  549  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to other (income) expense, net of $9 million and income tax expense of $3 million for the six months ended June 30, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in increases to other (income) expense, net of $5 million and income tax of $4 million for the six months ended June 30, 2018.
(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in an increase to cost of sales of $3 million and a decrease to income tax expense of $1 million for the six months ended June 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 $14 million, cost of sales of $8 million, SG&A expense of $3 million, R&D expense of $1 million, other (income) expense, net of $1 million and income tax expense of $1 million for the six months ended June 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 six months ended June 30, 2018.

151

Baxter International Inc.
Condensed Consolidated Statement of Income
(in millions, except per share)
Three months ended March 31, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Net sales$2,677  $15  (e) $2,692  
Cost of sales1,563  8  (c)(e) 1,571  
Gross margin1,114  7  1,121  
Selling, general and administrative expenses622  11  (e)(f) 633  
Research and development expenses140  1  (e) 141  
Other operating income, net(80) (7) (f) (87) 
Operating income432  2  434  
Interest expense, net12  —  12  
Other (income) expense, net(18) 12  (a)(b) (6) 
Income before income taxes438  (10) 428  
Income tax expense49  (3) (a) 46  
Net income$389  $(7) $382  
Earnings per share
Basic$0.72  $(0.01) $0.71  
Diluted$0.71  $(0.02) $0.69  
Weighted-average number of shares outstanding
Basic539  —  539  
Diluted551  —  551  
(a) Foreign Currency Denominated Monetary Assets and Liabilities—The correction of these misstatements resulted in decreases to other (income) expense, net of $9 million and income tax expense of $3 million for the three months ended March 31, 2018.
(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in a decrease to other (income) expense, net of $3 million for the three months ended March 31, 2018.
(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in an increase to cost of sales of $1 million for the three months ended March 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 net sales of $15 million, cost of sales of $7 million, SG&A expense of $4 million and R&D expense of $1 million for the three months ended March 31, 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 $7 million for the three months ended March 31, 2018.







152

Baxter International Inc.
Condensed Consolidated Statement of Comprehensive Income
(in millions)
Three months ended June 30, 2019
As previously reportedRestatement impactsAs restated
Net income$343  $(30) $313  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments(78) 80  2  
Pension and other postretirement benefit plans13  (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 GBU.

years ended December 31

 

2017

 

 

2016

 

 

2015

 

Renal Care1

 

 

3,480

 

 

 

3,421

 

 

 

3,401

 

Acute Therapies2

 

 

456

 

 

 

429

 

 

 

385

 

Medication Delivery3

 

 

2,698

 

 

 

2,596

 

 

 

2,375

 

Pharmaceuticals⁴

 

 

1,883

 

 

 

1,722

 

 

 

1,801

 

Nutrition⁵

 

 

882

 

 

 

858

 

 

 

857

 

Advanced Surgery⁶

 

 

707

 

 

 

690

 

 

 

693

 

Other⁷

 

 

455

 

 

 

447

 

 

 

456

 

Total Baxter

 

$

10,561

 

 

$

10,163

 

 

$

9,968

 

1

Renal Care includes sales of the company’s peritoneal dialysis (PD) and hemodialysis (HD) and additional dialysis therapies and services.

the items described above in the consolidated statement of income for the three months ended June 30, 2019 section.

2

Acute Therapies includes sales of the company’s continuous renal replacement therapies (CRRT) and other organ support therapies focused in the ICU.

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.

3

Medication Delivery includes sales of the company’s IV therapies, infusion pumps, administration sets and drug reconstitution devices.

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.

4

Pharmaceuticals includes sales of the company’s premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.


5

Nutrition includes sales of the company’s parenteral nutrition (PN) therapies.


⁶

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

153

⁷

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

Geographic information

for the years ended December 31 (in millions)

 

2017

 

 

2016

 

 

2015

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

4,510

 

 

$

4,259

 

 

$

4,001

 

Latin America and Canada

 

 

1,210

 

 

 

1,178

 

 

 

1,221

 

   Total Americas

 

$

5,720

 

 

$

5,437

 

 

$

5,222

 

Europe

 

 

2,731

 

 

 

2,697

 

 

 

2,774

 

Asia-Pacific

 

 

2,110

 

 

 

2,029

 

 

 

1,972

 

Total net sales

 

$

10,561

 

 

$

10,163

 

 

$

9,968

 

as of December 31 (in millions)

 

2017

 

 

2016

 

PP&E, net

 

 

 

 

 

 

 

 

United States

 

$

1,772

 

 

$

1,751

 

Europe

 

 

1,268

 

 

 

1,166

 

Asia-Pacific

 

 

903

 

 

 

752

 

Latin America and Canada

 

 

645

 

 

 

620

 

Consolidated PP&E, net

 

$

4,588

 

 

$

4,289

 


NOTE 18

QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY’S STOCK (UNAUDITED)

years ended December 31 (in millions, except per share data)

 

First quarter

 

 

Second quarter

 

 

Third quarter

 

 

Fourth quarter

 

 

Full year

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,475

 

 

$

2,605

 

 

$

2,707

 

 

$

2,774

 

 

$

10,561

 

Gross margin1

 

 

1,042

 

 

 

1,130

 

 

 

1,128

 

 

 

1,162

 

 

 

4,462

 

Income (loss) from continuing operations1

 

 

273

 

 

 

264

 

 

 

248

 

 

 

(61

)

 

 

724

 

Income (loss) from continuing operations per common share1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

0.50

 

 

 

0.49

 

 

 

0.46

 

 

 

(0.11

)

 

 

1.33

 

Diluted

 

 

0.50

 

 

 

0.48

 

 

 

0.45

 

 

 

(0.11

)

 

 

1.30

 

(Loss) income from discontinued operations, net of tax

 

 

(1

)

 

 

1

 

 

 

3

 

 

 

(10

)

 

 

(7

)

(Loss) income from discontinued operations per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

0.00

 

 

 

0.00

 

 

 

0.00

 

 

 

(0.02

)

 

 

(0.01

)

Diluted

 

 

(0.01

)

 

 

0.00

 

 

 

0.00

 

 

 

(0.02

)

 

 

(0.01

)

Net income (loss)1

 

 

272

 

 

 

265

 

 

 

251

 

 

 

(71

)

 

 

717

 

Net income (loss) per common share1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

0.50

 

 

 

0.49

 

 

 

0.46

 

 

 

(0.13

)

 

 

1.32

 

Diluted

 

 

0.49

 

 

 

0.48

 

 

 

0.45

 

 

 

(0.13

)

 

 

1.29

 

Cash dividends declared per common share

 

 

0.130

 

 

 

0.160

 

 

 

0.160

 

 

 

0.160

 

 

 

0.610

 

Market price per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

52.30

 

 

 

61.38

 

 

 

64.61

 

 

 

66.05

 

 

 

66.05

 

Low

 

 

44.44

 

 

 

52.29

 

 

 

59.50

 

 

 

61.45

 

 

 

44.44

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,375

 

 

$

2,585

 

 

$

2,558

 

 

$

2,645

 

 

$

10,163

 

Gross margin2

 

 

965

 

 

 

972

 

 

 

1,071

 

 

 

1,102

 

 

 

4,110

 

Income from continuing operations2

 

 

3,387

 

 

 

1,212

 

 

 

127

 

 

 

240

 

 

 

4,966

 

Income from continuing operations per common share2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

6.17

 

 

 

2.21

 

 

 

0.23

 

 

 

0.44

 

 

 

9.10

 

Diluted

 

 

6.13

 

 

 

2.19

 

 

 

0.23

 

 

 

0.44

 

 

 

9.01

 

(Loss) income from discontinued operations, net of tax

 

 

(7

)

 

 

—

 

 

 

3

 

 

 

3

 

 

 

(1

)

(Loss) income from discontinued operations per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

(0.01

)

 

 

0.00

 

 

 

0.01

 

 

 

0.01

 

 

 

(0.01

)

Diluted

 

 

(0.01

)

 

 

0.00

 

 

 

0.01

 

 

 

0.00

 

 

 

0.00

 

Net income2

 

 

3,380

 

 

 

1,212

 

 

 

130

 

 

 

243

 

 

 

4,965

 

Net income per common share2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

6.16

 

 

 

2.21

 

 

 

0.24

 

 

 

0.45

 

 

 

9.09

 

Diluted

 

 

6.12

 

 

 

2.19

 

 

 

0.24

 

 

 

0.44

 

 

 

9.01

 

Cash dividends declared per common share

 

 

0.115

 

 

 

0.130

 

 

 

0.130

 

 

 

0.130

 

 

 

0.505

 

Market price per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

41.28

 

 

 

46.39

 

 

 

49.03

 

 

 

49.16

 

 

 

49.16

 

Low

 

 

34.76

 

 

 

41.31

 

 

 

45.09

 

 

 

43.63

 

 

 

34.76

 

Baxter International Inc.
Condensed Consolidated Statement of Comprehensive Income
(in millions)
Six months ended June 30, 2019
As previously reportedRestatement impactsAs restated
Net income$690  $(35) $655  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments(48) (47) (95) 
Pension and other postretirement benefit plans21  (1) 20  
Hedging activities(27) —  (27) 
Total other comprehensive loss, net of tax(54) (48) (102) 
Comprehensive income$636  $(83) $553  

1

The first quarter of 2017 included charges of $17 million related to business optimization, separation-related costs and historical rebate and discount adjustments. The second quarter of 2017 included charges of $57 million related to business optimization, separation-related costs, Venezuela deconsolidation costs, Claris acquisition and integration expenses and adjustments to historical product reserves. The third quarter of 2017 included charges of $82 million related to business optimization, separation-related costs, Hurricane Maria costs, Claris acquisition and integration expenses and SIGMA SPECTRUM infusion pump inspection and remediation activities. The fourth quarter of 2017 included charges of $388 million related to business optimization, separation-related costs, Claris acquisition and integration expenses, Hurricane Maria costs, litigation and contractual disputes for business arrangements in which the company is no longer engaged or a party thereto and the impact of tax reform in the United States.


2

The first quarter of 2016 included benefits of $3.1 billion related to business optimization, separation-related costs, Retained Shares transactions, a loss on debt extinguishment, and product-related items. The second quarter of 2016 included benefits of $1.0 billion related to business optimization, separation-related costs, Retained Shares transactions, and asset impairment. The third quarter of 2016 included charges of $155 million related to business optimization, separation-related costs, a loss on debt extinguishment, and a tax matter. The fourth quarter of 2016 included charges of $47 million related to business optimization, Gambro integration costs, product-related items, separation-related costs, and reserve items and adjustments.

The $35 million decrease to net income was driven by the items described above in the 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.



154

Baxter International Inc.
Condensed Consolidated Statement of Comprehensive Income
(in millions)
Three months ended March 31, 2019
As previously reportedRestatement impactsAs restated
Net income$347  $(5) $342  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments30  (127) (97) 
Pension and other postretirement benefit plans8  6  14  
Hedging activities(15) —  (15) 
Total other comprehensive (loss) income, net of tax23  (121) (98) 
Comprehensive income$370  $(126) $244  
The $5 million decrease to net income was driven by the items described above in the 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.

155


Baxter International Inc.
Condensed Consolidated Statement of Comprehensive Income
(in millions)
Three months ended June 30, 2018
As previously reportedRestatement impactsAs restated
Net income$343  $(2) $341  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments(363) (5) (368) 
Pension and other postretirement benefit plans29  (1) 28  
Hedging activities11  —  11  
Total other comprehensive loss, net of tax(323) (6) (329) 
Comprehensive income$20  $(8) $12  
The $2 million decrease to net income was driven by the items described above in the consolidated statement of income for the three months ended June 30, 2018 section.
The $5 million increase to currency translation adjustments for the three months ended June 30, 2018 is comprised of a $5 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 decrease to pension and other postretirement benefit plans for the three months ended June 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.

156

Baxter International Inc.
Condensed Consolidated Statement of Comprehensive Income
(in millions)
Six months ended June 30, 2018
As previously reportedRestatement impactsAs restated
Net income$732  $(9) $723  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments(282) (23) (305) 
Pension and other postretirement benefit plans81  4  85  
Hedging activities6  —  6  
Total other comprehensive loss, net of tax(195) (19) (214) 
Comprehensive income$537  $(28) $509  
The $9 million decrease to net income was driven by the items described above in the consolidated statement of income for the six months ended June 30, 2018 section.
The $23 million increase to currency translation adjustments for the six months ended June 30, 2018 is comprised of a $32 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 $9 million decrease from the offsetting balance sheet impact of the adjustments to foreign exchange gains and losses on intra-company receivables and payables.
The $4 million increase to pension and other postretirement benefit plans for the six months ended June 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.

157

Baxter International Inc.
Condensed Consolidated Statement of Comprehensive Income
(in millions)
Three months ended March 31, 2018
As previously reportedRestatement impactsAs restated
Net income$389  $(7) $382  
Other comprehensive (loss) income, net of tax:
Currency translation adjustments81  (18) 63  
Pension and other postretirement benefit plans52  5  57  
Hedging activities(5) —  (5) 
Total other comprehensive income, net of tax128  (13) 115  
Comprehensive income$517  $(20) $497  
The $7 million decrease to net income was driven by the items described above in the consolidated statement of income for the three months ended March 31, 2018 section.
The $18 million decrease to currency translation adjustments for the three months ended March 31, 2018 is comprised of a $27 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 $9 million increase from the offsetting balance sheet impact of the adjustments to foreign exchange gains and losses on intra-company receivables and payables.
The $5 million increase to pension and other postretirement benefit plans for the three months ended March 31, 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.

158

Baxter International Inc.
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 earningsAccumulated other comprehensive income (loss) Total Baxter stockholders' equityNoncontrolling interests  Total equity
As previously reported
Balance as of April 1, 2019683  $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, 2019683  $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, 2019683  $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, 2019683  $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 consolidated statement of income and consolidated statement of comprehensive income for the three months ended June 30, 2019 sections above.

159

Baxter International Inc.
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 earningsAccumulated other comprehensive income (loss) Total Baxter stockholders' equityNoncontrolling interests  Total equity
As previously reported
Balance as of January 1, 2019683  $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, 2019683  $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, 2019683  $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, 2019683  $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 consolidated statement of income and consolidated statement of comprehensive income for the six months ended June 30, 2019 sections above.

160

Baxter International Inc.
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 earningsAccumulated other comprehensive income (loss) Total Baxter stockholders' equityNoncontrolling interests  Total equity
As previously reported
Balance as of January 1, 2019683  $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, 2019683  $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, 2019683  $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, 2019683  $683  173  $(10,284) $5,839  $15,414  $(4,082) $7,570  $23  $7,593  
See descriptions of the net income and other comprehensive income impacts in the consolidated statement of income and consolidated statement of comprehensive income for the three months ended March 31, 2019 sections above.



161

Baxter International Inc.
Consolidated Statement of Changes in Equity
(in millions)
For the Three Months Ended June 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 April 1, 2018683  $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) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  (6) (6) 
Balance as of June 30, 2018683  $683  148  $(8,485) $5,916  $14,966  $(4,199) $8,881  $(12) $8,869  
Restatement impacts
Balance as of April 1, 2018—  $—  —  $—  $—  $(480) $449  $(31) $—  $(31) 
Net income—  —  —  —  —  (2) —  (2) —  (2) 
Other comprehensive income (loss)—  —  —  —  —  —  (6) (6) —  (6) 
Balance as of June 30, 2018—  $—  —  $—  $—  $(482) $443  $(39) $—  $(39) 
As restated
Balance as of April 1, 2018683  $683  147  $(8,354) $5,912  $14,254  $(3,427) $9,068  $(6) $9,062  
Net income—  —  —  —  —  341  —  341  —  341  
Other comprehensive income (loss)—  —  —  —  —  —  (329) (329) —  (329) 
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) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  (6) (6) 
Balance as of June 30, 2018683  $683  148  $(8,485) $5,916  $14,484  $(3,756) $8,842  $(12) $8,830  
See descriptions of the net income and other comprehensive income impacts in the consolidated statement of income and consolidated statement of comprehensive income for the three months ended June 30, 2018 sections above.

162

Baxter International Inc.
Consolidated Statement of Changes in Equity
(in millions)
For the Six Months Ended June 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—  —  —  —  —  732  —  732  —  732  
Other comprehensive income (loss)—  —  —  —  —  —  (195) (195) —  (195) 
Purchases of treasury stock—  —  11  (781) —  —  —  (781) —  (781) 
Stock issued under employee benefit plans and other—  —  (5) 277  (24) (45) —  208  —  208  
Dividends declared on common stock—  —  —  —  —  (188) —  (188) —  (188) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  (4) (4) 
Balance as of June 30, 2018683  $683  148  $(8,485) $5,916  $14,966  $(4,199) $8,881  $(12) $8,869  
Restatement impacts
Balance as of January 1, 2018—  $—  —  $—  $—  $(469) $462  $(7) $—  $(7) 
Adoption of new accounting standards—  —  —  —  —  (4) —  (4) —  (4) 
Net income—  —  —  —  —  (9) —  (9) —  (9) 
Other comprehensive income (loss)—  —  —  —  —  —  (19) (19) —  (19) 
Balance as of June 30, 2018—  $—  —  $—  $—  $(482) $443  $(39) $—  $(39) 
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—  —  —  —  —  723  —  723  —  723  
Other comprehensive income (loss)—  —  —  —  —  —  (214) (214) —  (214) 
Purchases of treasury stock—  —  11  (781) —  —  —  (781) —  (781) 
Stock issued under employee benefit plans and other—  —  (5) 277  (24) (45) —  208  —  208  
Dividends declared on common stock—  —  —  —  —  (188) —  (188) —  (188) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  (4) (4) 
Balance as of June 30, 2018683  $683  148  $(8,485) $5,916  $14,484  $(3,756) $8,842  $(12) $8,830  
See descriptions of the net income and other comprehensive income impacts in the consolidated statement of income and consolidated statement of comprehensive income for the six months ended June 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.


163

Baxter International Inc.
Consolidated Statement of Changes in Equity
(in millions)
For the Three Months Ended March 31, 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—  —  —  —  —  389  —  389  —  389  
Other comprehensive income (loss)—  —  —  —  —  —  128  128  —  128  
Purchases of treasury stock—  —  8  (522) —  —  —  (522) —  (522) 
Stock issued under employee benefit plans and other—  —  (3) 149  (28) (36) —  85  —  85  
Dividends declared on common stock—  —  —  —  —  (86) —  (86) —  (86) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  2  2  
Balance as of March 31, 2018683  $683  147  $(8,354) $5,912  $14,734  $(3,876) $9,099  $(6) $9,093  
Restatement impacts
Balance as of January 1, 2018—  $—  —  $—  $—  $(469) $462  $(7) $—  $(7) 
Adoption of new accounting standards—  —  —  —  —  (4) —  (4) —  (4) 
Net income—  —  —  —  —  (7) —  (7) —  (7) 
Other comprehensive income (loss)—  —  —  —  —  —  (13) (13) —  (13) 
Balance as of March 31, 2018—  $—  —  $—  $—  $(480) $449  $(31) $—  $(31) 
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—  —  —  —  —  382  —  382  —  382  
Other comprehensive income (loss)—  —  —  —  —  —  115  115  —  115  
Purchases of treasury stock—  —  8  (522) —  —  —  (522) —  (522) 
Stock issued under employee benefit plans and other—  —  (3) 149  (28) (36) —  85  —  85  
Dividends declared on common stock—  —  —  —  —  (86) —  (86) —  (86) 
Changes in noncontrolling interests—  —  —  —  —  —  —  —  2  2  
Balance as of March 31, 2018683  $683  147  $(8,354) $5,912  $14,254  $(3,427) $9,068  $(6) $9,062  
See descriptions of the net income and other comprehensive income impacts in the consolidated statement of income and consolidated statement of comprehensive income for the three months ended March 31, 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.

164

Baxter International Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
For the Six Months Ended June 30, 2019
As previously reportedRestatement impactsRestatement referenceAs restated
Cash flows from operations
Net income$690  $(35) $655  
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization393  (8) (c)(g) 385  
Deferred income taxes(55) (8) (c)(g) (63) 
Stock compensation57  —  57  
Net periodic pension benefit and other postretirement costs7  —  7  
Intangible asset impairment31  —  31  
Other34  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)(g) (86) 
Cash flows from operations - continuing operations617  (37) 580  
Cash flows from operations - discontinued operations(6) —  (6) 
Cash flows from operations611  (37) 574  
Cash flows from investing activities
Capital expenditures(352) 14  (c) (338) 
Acquisitions and investments, net of cash acquired(111) —  (111) 
Other investing activities, net1  —  1  
Cash flows from investing activities(462) 14  (448) 
Cash flows from financing activities
Issuances of debt1,661  —  1,661  
Cash dividends on common stock(198) —  (198) 
Proceeds from stock issued under employee benefit plans262  —  262  
Purchases of treasury stock(720) —  (720) 
Other financing activities, net(37) —  (37) 
Cash flows from financing activities968  —  968  
Effect of foreign exchange rate changes on cash and cash equivalents(24) 26  (a)(d)(e) 2  
Increase in cash and cash equivalents1,093  3  1,096  
Cash and cash equivalents at beginning of period1,832  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 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.
(g) 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.



Baxter International Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
For the Three Months Ended March 31, 2019
As previously reportedRestatement impactsRestatement referenceAs restated
Cash flows from operations
Net income$347  $(5) $342  
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization195  (3) (c) 192  
Deferred income taxes(6) —  (6) 
Stock compensation22  —  22  
Net periodic pension benefit and other postretirement costs3  —  3  
Other19  (5) (d) 14  
Changes in balance sheet items:
Accounts receivable, net32  —  32  
Inventories(82) —  (82) 
Accounts payable and accrued liabilities(333) (2) (b)(g) (335) 
Other(49) 1  (b)(e)(g) (48) 
Cash flows from operations - continuing operations148  (14) 134  
Cash flows from operations - discontinued operations(6) —  (6) 
Cash flows from operations142  (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, net1  —  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 of less795  —  795  
Cash dividends on common stock(101) —  (101) 
Proceeds from stock issued under employee benefit plans173  —  173  
Purchases of treasury stock(597) —  (597) 
Other financing activities, net(32) —  (32) 
Cash flows from financing activities238  —  238  
Effect of foreign exchange rate changes on cash and cash equivalents2  (3) (a)(d)(e) (1) 
Increase (decrease) in cash and cash equivalents76  (12) 64  
Cash and cash equivalents at beginning of period1,832  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 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.
(g) 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.


Baxter International Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
For the Six Months Ended June 30, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Cash flows from operations
Net income$732  $(9) $723  
Adjustments to reconcile income from continuing operations to net cash from operating activities:
Depreciation and amortization387  (5) (c) 382  
Deferred income taxes(51) —  (c)(g) (51) 
Stock compensation54  —  54  
Net periodic pension benefit and other postretirement costs21  —  21  
Other10  (10) (d) —  
Changes in balance sheet items:
Accounts receivable, net43  —  43  
Inventories(134) —  (134) 
Accounts payable and accrued liabilities(126) 2  (b) (124) 
Other(84) 2  (e) (82) 
Cash flows from operations852  (20) 832  
Cash flows from investing activities
Capital expenditures(311) 8  (c) (303) 
Acquisitions and investments, net of cash acquired(228) —  (228) 
Cash flows from investing activities(539) 8  (531) 
Cash flows from financing activities
Cash dividends on common stock(173) —  (173) 
Proceeds from stock issued under employee benefit plans170  —  170  
Purchases of treasury stock(781) —  (781) 
Other financing activities, net(24) —  (24) 
Cash flows from financing activities(808) —  (808) 
Effect of foreign exchange rate changes on cash and cash equivalents(42) 4  (a)(d)(e) (38) 
Decrease in cash and cash equivalents(537) (8) (545) 
Cash and cash equivalents at beginning of period3,394  9  (e) 3,403  
Cash and cash equivalents at end of period$2,857  $1  (e) 2,858  



The $9 million decrease to net income was driven by the items described above in the consolidated statement of income for the six months ended June 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 $2 million for the six months ended June 30, 2018.

(b) Foreign Currency Derivative Contracts—The correction of these misstatements resulted in an increase to changes in accounts payable and accrued liabilities of $2 million for the six months ended June 30, 2018.

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to depreciation and amortization of $5 million, deferred income taxes of $1 million and capital expenditures of $8 million for the six months ended June 30, 2018.

(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 $10 million for the six months ended June 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 increases in other changes in balance sheet items of $2 million, cash and cash equivalents at the beginning of the period of $9 million and at the end of the period of $1 million and a decrease to the effect of foreign exchange rate changes on cash and cash equivalents of $8 million for the six months ended June 30, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in an increase to deferred income taxes of $1 million for the six months ended June 30, 2018.


Baxter International Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
For the Three Months Ended March 31, 2018
As previously reportedRestatement impactsRestatement referenceAs restated
Cash flows from operations
Net income$389  $(7) $382  
Adjustments to reconcile income from continuing operations to net cash from operating activities:
Depreciation and amortization192  (2) (c) 190  
Deferred income taxes(33) (5) (g) (38) 
Stock compensation20  —  20  
Net periodic pension benefit and other postretirement costs10  —  10  
Other2  (3) (d) (1) 
Changes in balance sheet items:
Accounts receivable, net76  —  76  
Inventories(56) —  (56) 
Accounts payable and accrued liabilities(120) 1  (b)(g) (119) 
Other(33) (1) (b)(e) (34) 
Cash flows from operations447  (17) 430  
Cash flows from investing activities
Capital expenditures(155) 3  (c) (152) 
Acquisitions and investments, net of cash acquired(219) —  (219) 
Cash flows from investing activities(374) 3  (371) 
Cash flows from financing activities
Cash dividends on common stock(87) —  (87) 
Proceeds from stock issued under employee benefit plans82  —  82  
Purchases of treasury stock(522) —  (522) 
Other financing activities, net(18) —  (18) 
Cash flows from financing activities(545) —  (545) 
Effect of foreign exchange rate changes on cash and cash equivalents25  7  (a)(d)(e) 32  
Decrease in cash and cash equivalents(447) (7) (454) 
Cash and cash equivalents at beginning of period3,394  9  (e) 3,403  
Cash and cash equivalents at end of period$2,947  $2  (e) 2,949  


The $7 million decrease to net income was driven by the items described above in the consolidated statement of income for the three months ended March 31, 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 $11 million for the three months ended March 31, 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 and an increase to other changes in balance sheet items of $2 million for the three months ended March 31, 2018.

(c) Equipment Leased to Customers under Operating Leases—The correction of these misstatements resulted in decreases to depreciation and amortization of $2 million and capital expenditures of $3 million for the three months ended March 31, 2018.

(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 $3 million for the three months ended March 31, 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 increases in cash and cash equivalents at the beginning of the period of $9 million and at the end of the period of $2 million and decreases to other changes in balance sheet items of $3 million and the effect of foreign exchange rate changes on cash and cash equivalents of $7 million for the three months ended March 31, 2018.
(g) Other miscellaneous adjustments - The correction of these misstatements resulted in a decrease to deferred income taxes of $5 million and an increase to changes in accounts payable and accrued liabilities of $2 million for the three months ended March 31, 2018.


Report of Independent RegisteredRegistered Public Accounting Firm



To theBoard of Directors and ShareholdersStockholders of Baxter International Inc.



Opinions on the Financial Statements and Internal Control over Financial Reporting


We have audited the accompanying consolidated balance sheets of Baxter International Inc. and its subsidiaries (the “Company”) as of December 31, 20172019 and 2016,2018, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes and financial statement schedule listed in the index appearing under Item 15(2) of this Form 10-K(collectively(collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained,did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

COSO because a material weakness in internal control over financial reporting existed as of that date related to the accounting for certain foreign exchange gains and losses arising from intra-company transactions.


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 the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management’s Assessment of Internal Control Over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Restatement of Previously Issued Financial Statements

As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2018 and 2017 financial statements to correct misstatements.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.


Basis for Opinions


The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Assessment of Internal Control Over Financial Reporting appearing under Item 9A of this Form 10-K.management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(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 audits inin accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.


173

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Assessment of Internal Control Over Financial Reporting, management has excluded Claris Injectables Limited (Claris) from its assessment of internal control over financial reporting as of December 31, 2017 because it was acquired by the Company in a purchase business combination during 2017. We have also excluded Claris from our audit of internal control over financial reporting. Claris is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 2% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.




Definition and Limitations of Internal Control over Financial Reporting


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Foreign exchange gains and losses

As described in Notes 2 and 5 to the consolidated financial statements, on October 24, 2019, the Company reported that it had commenced an internal investigation into certain intra-Company transactions that impacted the Company’s previously reported non-operating foreign exchange gains and losses. As further disclosed by management, 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. In connection with the internal investigation, the Company identified misstatements relating to foreign currency denominated monetary assets and liabilities and foreign currency derivative contracts that caused Other income (expense), net and Income from continuing operations before income taxes to be overstated by $59 million and $113 million, respectively, for the years ended December 31, 2018 and 2017 and the Company has restated its consolidated financial statements as of December 31, 2018 and for the years ended December 31, 2018 and 2017 to correct misstatements to the Company’s previously reported foreign exchange gains and losses. The quantification of misstatements to the 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, management identified every legal entity within the Company’s consolidated group that had foreign exchange gains or losses above an immaterial threshold and for those entities management 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. Management also quantified misstatements to its previously reported gains and losses on
174

foreign currency derivative contracts, which used foreign exchange rates determined under its historical exchange rate convention as inputs to the fair value measurements of those contracts. The Company recorded foreign exchange losses, net, of $37 million for the year ended December 31, 2019.

The principal considerations for our determination that performing procedures relating to foreign exchange gains and losses is a critical audit matter are a high degree of auditor judgment and subjectivity was necessary to evaluate the audit evidence obtained related to the Company’s internal investigation into certain intra-Company transactions that impacted the Company’s non-operating foreign exchange gains and losses, significant audit effort was necessary to evaluate the audit evidence relating to the foreign exchange gains and losses, and the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures. As described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, a material weakness was identified related to this matter.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These proceduresincluded, among others, evaluating the scope and extent of management’s quantification of the misstatements of foreign exchange gains and losses, testing management’s calculation of the misstatements of foreign exchange gains and losses, agreeing foreign exchange rates used by management to third party sources, and agreeing a sample of foreign currency denominated cash balances, intra-Company loan receivables and payables, and foreign currency derivative contracts to source documents. Professionals with specialized skill and knowledge were used to assist in evaluating the audit evidence related to the scope and extent of management’s quantification of the misstatements of foreign exchange gains and losses.

Valuation Allowances on United States (U.S.) Foreign Tax Credit Carryforwards and Swiss Deferred Tax Assets

As described in Note 14 to the consolidated financial statements, as of December 31, 2019, the Company has $1,707 million of total deferred tax assets, including $395 million of deferred tax assets for U.S. foreign tax credit carryforwards in the United States and $159 million of Swiss deferred tax assets which were established for a step-up in tax basis that resulted from the enactment of new tax laws in Switzerland during 2019. The deferred tax assets for U.S. foreign tax credit carryforwards and Swiss deferred tax assets are partially offset by valuation allowances of $180 million and $69 million, respectively. Management maintains valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. In determining whether a valuation allowance is warranted, management evaluates factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. After evaluating the 2017 Tax Act and related U.S. Treasury Regulations, any elections or other opportunities that may be available, and the future expiration of certain U.S. tax provisions that will impact the utilization of the Company’s U.S. foreign tax credit carryforwards, management expects to be able to realize some, but not all, of the U.S. foreign tax credit deferred tax assets up to its overall domestic loss balance plus other recurring and non-recurring foreign inclusions. With regards to the Swiss deferred tax assets, management expects to realize some, but not all, of the Swiss deferred tax assets based principally on expected future earnings generated by the Swiss subsidiary during the period in which the tax basis may be amortized.

The principal considerations for our determination that performing procedures relating to the valuation allowances on U.S. foreign tax credit carryforwards and Swiss deferred tax assets is a critical audit matter are the significant judgment by management when developing assumptions related to expected future earnings, which in turn led to a high degree of auditor judgment, subjectivity and audit effort in performing procedures and evaluating evidence related to management’s expected future earnings.

175

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls over the valuation allowances on U.S. foreign tax credit carryforwards and Swiss deferred tax assets, including controls over the development of assumptions related to expected future earnings. These procedures alsoincluded, among others, evaluating management’s assessment of the realizability of the deferred tax assets, including evaluating the reasonableness of assumptions relating to expected future earnings during the applicable periods. Evaluating management’s assumptions related to expected future earnings involved evaluating whether the assumptions used by management related to expected future earnings were reasonable considering the current and past performance of the Company and whether the assumptions were consistent with evidence obtained in other areas of the audit.



/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 23, 2018

March 17, 2020

We have served as the Company’s auditor since 1985.


Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

176

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

Item 9A.

Controls and Procedures.

Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures

Baxter carried out an evaluation, under the supervision and


Our management, with the participation of its Disclosure Committee and management, including theour Chief Executive Officer and our Chief Financial Officer, ofhas evaluated the effectiveness of Baxter’sour 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 December 31, 2017. Baxter’s2019.

Based on that evaluation, Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2019, due to the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures are designedwere not effective to ensureprovide reasonable assurance that the information we are required to be disclosed by Baxterdisclose in the reports it filesthat we file or submitssubmit under the Exchange Act is recorded, processed, summarized, and reported on a timely basiswithin the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including theour Chief Executive Officer and Chief Financial Officer, and its Board of Directors,as appropriate, to allow timely decisions regarding required disclosure.

Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures were effective as of December 31, 2017.

Management’s Assessment of Internal Control Over Financial Reporting

Management


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in RulesRule 13a-15(f) and 15d-15(f) underof the Securities Exchange Act of 1934, as amended. The company’sAct. Our internal control over financial reporting is a process designed under the supervision of the principal executive and financial officers, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

In 2017, Baxter acquired 100 percentAmerica (U.S. GAAP).


Because of Claris Injectables Limited (Claris). As partits inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the post-closing integration,risk that controls may become inadequate because of changes in conditions, or that the company is engaged in refining and harmonizing the internal controls and processesdegree of the acquired businesscompliance with those of the company. policies may deteriorate.

Management has excluded the internal controls of Claris associated with total assets of approximately 2% and total revenues of 1% included in the Consolidated Financial Statements as of and for the year ended December 31, 2017 from its annualperformed an assessment of the effectiveness of the company’sour internal control over financial reporting as of December 31, 2017. This exclusion is in accordance with the general guidance issued by the Securities and Exchange Commission that an assessment of a recent business combination may be omitted from management’s report on internal control over financial reporting in the year of consolidation.

Management performed an assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2017.2019. In making this assessment, management used the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment under the framework in Internal Control-Integrated Framework (2013), management concluded that the company’sour internal control over financial reporting was not effective as of December 31, 2017.

The effectiveness2019.


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 annual 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 company’squarterly 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.

Because of this material weakness, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 20172019.

177

The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.


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.

While we believe that the above actions will ultimately remediate the material weakness, we intend to continue to refine those controls and monitor 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 consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented in accordance with U.S. GAAP.

Changes in Internal Control over Financial Reporting

As previously disclosed, we are currently implementing an upgrade to our 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.
As previously disclosed, since 2017, related to its overall business optimization initiatives, the company began implementation ofwe have 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.  The company isWe are transitioning some processes to itsour shared services centers while others are movinghave been moved to outsourced providers.  This multi-year initiative will be conducted in phases and include 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 Baxter’sour 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 December 31, 20172019 that have materially affected, or are reasonably likely to materially affect, Baxter’sour internal control over financial reporting.


Item 9B.

Other Information.

Item 9B. Other Information.

New Almeida Offer Letter

178

On February 20, 2018, the Board of Directors amended and restated the company’s Bylaws (effective immediately) to clarify the abilityMarch 12, 2020, Baxter entered into a new offer letter with Mr. Almeida that replaced his prior offer letter. The terms of the lead directornew offer letter will be effective until December 31, 2023. Under the new letter, Mr. Almeida will continue to serve as Chairman of the Board of Directors or a majorityand President and Chief Executive Officer of the independent directorsCompany. Mr. Almeida’s base salary will remain $1,300,000 per annum. His target bonus and target long-term incentive opportunity were increased starting in 2020 commensurate with such compensation elements for Chief Executive Officers in Baxter’s peer group. Specifically, Mr. Almeida’s target bonus opportunity was increased from 145% of base salary to instruct165% of base salary, and his long-term incentive opportunity was increased from $10,000,000 to $11,000,000. Mr. Almeida remains eligible to receive benefits to the Corporate Secretarysame extent and on the same terms as those benefits provided to callother senior executives. The offer letter also continues to provide Mr. Almeida with the right to receive cash severance equal to two years’ base salary and target bonus in the event of an involuntary termination without cause or termination with good reason prior to December 31, 2023. In addition, beginning with Mr. Almeida’s 2020 equity award grants and for all future annual equity awards granted through the end of 2023, Mr. Almeida will be eligible to receive Baxter’s equity award retirement treatment when he attains 60 years of age (as opposed to 65 years of age), which will provide for continued vesting of his stock option and PSU awards and a special meetinglonger period of time to exercise his outstanding stock options upon his retirement.

In addition to these benefits, in accordance with the independent directorsterms of his change of control agreement, Mr. Almeida remains eligible for certain payments in the Boardevent of Directors. The amendmentshis termination for good reason or termination without cause following a change in control. Mr. Almeida is also reflect the removalsubject to certain restrictive covenants, including non-competition, non-solicitation of the Corporate Vice President title.  customers, suppliers and employees and non-disparagement.

The foregoing summary does not purport to be complete and is qualified in its entirety by reference to the full text of the amended and restated Bylaws, a copy ofoffer letter, which is attached heretofiled as Exhibit 3.310.23 to this Annual Report on Form 10-K and is incorporated hereininto this filing by reference.


PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

Item 10. Directors, Executive Officers and Corporate Governance.

Refer to information under the captions entitled “Corporate Governance at Baxter International Inc. — Proposal 1 — Election of Directors,” “— Directors Continuing in Office,” “— Board of Directors — Nomination of Directors,” “— Committees of the Board — Audit Committee,” “— Board Responsibilities — Code of Conduct,” and “Ownership of Our Stock — Section 16(a) Beneficial Ownership Reporting Compliance” in Baxter’s definitive proxy statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders expected to be held on May 8, 20185, 2020 (the Proxy Statement), all of which information is incorporated herein by reference. Also refer to information regarding executive officers of Baxter under the caption entitled “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K.

Item 11.

Executive Compensation.

Item 11. Executive Compensation.
Refer to information under the captions entitled “Executive Compensation,” and “Corporate Governance at Baxter International—Director Compensation” in the Proxy Statement, all of which information is incorporated herein by reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table provides information relating to shares of common stock that may be issued under Baxter’sour existing equity compensation plans as of December 31, 2017.

Plan Category

 

Number of Shares

to be Issued upon

Exercise of

Outstanding

Options,

Warrants and

Rights(a)

 

 

 

Weighted-Average

Exercise Price of

Outstanding

Options, Warrants

and Rights(b)

 

 

 

Number of Shares

Remaining

Available for

Future Issuance

Under Equity

Compensation Plans

(Excluding

Shares Reflected in

Column(a))(c)

 

 

Equity Compensation Plans Approved by

   Shareholders

 

 

30,771,865

 

(1)

 

$

39.40

 

(2)

 

 

36,030,108

 

(3)

Equity Compensation Plans Not Approved by

   Shareholders

 

 

461,283

 

(4)

 

$

30.50

 

 

 

 

—

 

 

Total

 

 

31,233,148

 

(5)

 

$

39.25

 

(2)

 

 

36,030,108

 

 

(1)

Excludes purchase rights under the Employee Stock Purchase Plan. Under the Employee Stock Purchase Plan, eligible employees may purchase shares of common stock through payroll deductions of up to 15 percent of base pay at a purchase price equal to 85 percent of the closing market price on the purchase date (as defined by the Employee Stock Purchase Plan). A participating employee may not purchase more than $25,000 in fair market value of common stock under the Employee Stock Purchase Plan in any calendar year and may withdraw from the Employee Stock Purchase Plan at any time.

2019.

(2)

Restricted stock units and performance share units are excluded when determining the weighted-average exercise price of outstanding options.

179

(3)

Includes (i) 4,155,853 shares of common stock available for purchase under the Employee Stock Purchase Plan; (ii) 287,512 shares of common stock available under the 2007 Incentive Plan; (iii) 8,571,623 shares of common stock available under the 2011 Incentive Plan; and (iv) 23,015,120 shares of common stock available under the 2015 Incentive Plan.

Plan CategoryNumber of Shares
to be Issued upon
Exercise of
Outstanding
Options,
Warrants and
Rights(a)		Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights(b)		Number of Shares
Remaining
Available for
Future Issuance
Under Equity
Compensation Plans
(Excluding
Shares Reflected in
Column(a)(b))
Equity Compensation Plans Approved by
Stockholders
22,507,640  (1) $51.08  (2) 23,664,836  (3) 
Equity Compensation Plans Not Approved by
Stockholders
86,227  (4) $28.97  —  
Total22,593,867  (5) $50.99  (2) 23,664,836  

(4)

Includes shares of common stock issuable upon exercise of options granted under the 2001 Incentive Compensation Program. These shares were made available pursuant to an amendment thereto not approved by shareholders. These additional shares were approved by the company’s board of directors, not the company’s shareholders, although the company shareholders have approved the 2001 Incentive Compensation Program.

(1)Excludes purchase rights under the Employee Stock Purchase Plan. Under the Employee Stock Purchase Plan, eligible employees may purchase shares of common stock through payroll deductions of up to 15 percent of base pay at a purchase price equal to 85 percent of the closing market price on the purchase date (as defined by the Employee Stock Purchase Plan). A participating employee may not purchase more than $25,000 in fair market value of common stock under the Employee Stock Purchase Plan in any calendar year and may withdraw from the Employee Stock Purchase Plan at any time.

(5)

Includes outstanding awards of 28,208,052 stock options, which have a weighted-average exercise price of $39.25 and a weighted-average remaining term of 6.2 years, 2,200,782 shares of common stock issuable upon vesting of restricted stock units, and 459,623 shares of common stock reserved for issuance in connection with performance share unit grants.

(2)Restricted stock units and performance share units are excluded when determining the weighted-average exercise price of outstanding options.

(3)Includes (i) 2,702,381 shares of common stock available for purchase under the Employee Stock Purchase Plan; (ii) 427,682 shares of common stock available under the 2007 Incentive Plan; (iii) 8,597,492 shares of common stock available under the 2011 Incentive Plan; and (iv) 11,937,281 shares of common stock available under the 2015 Incentive Plan.
(4)Includes shares of common stock issuable upon exercise of options granted under the 2001 Incentive Compensation Program. These shares were made available pursuant to an amendment thereto not approved by stockholders. These additional shares were approved by our Board of Directors, not our stockholders, although our stockholders have approved the 2001 Incentive Compensation Program.
(5)Includes outstanding awards of 20,343,699 stock options, which have a weighted-average exercise price of $50.99 and a weighted-average remaining term of 6.1 years, 1,274,436 shares of common stock issuable upon vesting of restricted stock units, and 929,665 shares of common stock reserved for issuance in connection with performance share unit grants.
Refer to information under the captions entitled “Ownership of Our Stock — Security Ownership by Directors and Executive Officers” and “— Security Ownership by Certain Beneficial Owners” in the Proxy Statement, all of which information is incorporated herein by reference.


Item 13.

Certain Relationships and Related Transactions, and Director Independence.

Item 13. Certain Relationships and RelatedTransactions, and Director Independence.
Refer to the information under the first paragraph of the caption entitled “Corporate Governance—at Baxter International Inc.—Board of Directors” and the captions entitled “Corporate Governance at Baxter International Inc.—Board of Directors—Director Independence” and “Corporate Governance at Baxter International Inc.—Other Corporate Governance Information—Certain Relationships and Related Person Transactions” in the Proxy Statement, all of which information is incorporated herein by reference.

Item 14.

Principal Accountant Fees and Services.

Item 14. Principal Accountant Fees and Services.
Refer to the information under the caption entitled “Audit Matters — Audit and Non-Audit Fees” and “—Pre-Approval of Audit and Permissible Non-Audit Fees” in the Proxy Statement, all of which information is incorporated herein by reference.


PART IV

Item 15.

Exhibits and Financial Statement Schedules.

Item 15. Exhibits and Financial Statement Schedules.

The following documents are filed as a part of this report:

180

Page

Number

(1)

Financial Statements:

Page
Number

(1)

Financial Statements:

49 

43

50 

44

51 

45

Consolidated Statements of Cash Flows

46

52 

47

53 

54 

48

173 

91

(2)

Schedules required by Article 12 of Regulation S-X:

188 

103

All other schedules have been omitted because they are not applicable or not required.

(3)

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference. Exhibits in the Exhibit Index marked with a “C” in the left margin constitute management contracts or compensatory plans or arrangements contemplated by Item 15(b) of Form 10-K.



Item 16. Form10-K Summary.
Not applicable.
181

EXHIBIT INDEX

Item 16.

Form 10-K Summary.

Not applicable.


EXHIBIT INDEX

Number and Description of Exhibit

2.1

3.1

      3.2


3.2

      3.3*

3.3 

4.1(P)

Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit(a) to the Company’s Registration Statement on Form S-16 (Registration No. 02-65269), filed on August 17, 1979).

4.2

4.3

4.4

4.5

      4.6


4.6

      4.7

4.7 

    10.1

4.8 

4.9* 
10.1

10.2

    10.3

10.3* 


182

Number and Description of Exhibit
10.4 
10.5 

    10.4

10.6 


Number and Description of Exhibit

    10.5

10.7* 

10.8* 
10.9 
10.10 

    10.6

10.11 

    10.7

10.12 

C 10.8(P)

10.13

C 10.9

10.14

C 10.10

10.15

C 10.11

10.16

 
C 10.12

10.17

C 10.13

10.18

Baxter International Inc. 2015 Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on March 25, 2015).

C 10.14

10.19

C 10.15

10.20

183

Number and Description of Exhibit
C 10.16

10.21

C 10.22*
C 10.23

C 10.17

10.24

C 10.18

10.25*

C 10.26*
C 10.27

C 10.19

10.28

C 10.20

C 10.21

10.29

C 10.30

C 10.22

10.31

Separation Agreement, dated as of March 2, 2017, by and between Baxter International Inc. and David Scharf (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on March 3, 2017).

  C 10.23

Baxter International Inc. 2017 Equity Plan, effective as of March 2, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on March 3, 2017).


Number and Description of Exhibit

  C 10.24

Form of Non-Competition, Non-Solicitation and Confidentiality Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on April 14, 2017).

C 10.25

10.32*R

C 10.33

C 10.26

10.34*

C 10.35*
C 10.36*

C 10.27

10.37

C 10.28

10.38

    12*

21*

Computation of Ratio of Earnings to Fixed Charges.

    21*

23*

31.1*

31.2*

184

    32.1*

Number and Description of Exhibit
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*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

*

* Filed herewith.

C

Management contract or compensatory plan or arrangement.

*R Filed herewith with redactions.

(P)

Paper exhibit.

C Management contract or compensatory plan or arrangement.


(P)Paper exhibit

SIGNATURES

185

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BAXTER INTERNATIONAL INC.

By:

/s/ José E. Almeida

José E. Almeida

Chairman and Chief Executive Officer

DATE: February 23, 2018

March 17, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 23, 2018.

March 17, 2020.
186

Signature

Title

Signature

Title

/s/ José E. Almeida

Chairman and Chief Executive Officer

José E. Almeida

(principal executive officer)

/s/ James K. Saccaro

Executive Vice President and Chief Financial Officer

James K. Saccaro

(principal financial officer)

/s/ Caroline D. Karp

Brian C. Stevens

Senior Vice President, Chief Accounting Officer and Controller

Caroline D. Karp

Brian C. Stevens

(principal accounting officer)

/s/ Thomas F. Chen

Director

Thomas F. Chen

/s/ John D. Forsyth

Director

John D. Forsyth

/s/ James R. Gavin III, M.D., Ph.D.

Director

James R. Gavin III, M.D., Ph.D.

/s/ Peter S. Hellman

Director

Peter S. Hellman

/s/ Munib Islam

Director

Munib Islam

/s/ Michael F. Mahoney

Director

Michael F. Mahoney

/s/ Patricia B. Morrison

Director
Patricia B. Morrison
/s/ Stephen N. Oesterle, M.D.

Director

Stephen N. Oesterle, M.D.

/s/ Carole J. Shapazian

Director

Carole J. Shapazian

/s/ Cathy R. Smith

Director

Cathy R. Smith

/s/ Thomas T. Stallkamp

Director

Thomas T. Stallkamp

/s/ K.J. Storm

Director

K.J. Storm

/s/ Albert P. L. Stroucken

Director

Albert P. L. Stroucken

/s/ Amy A. WendellDirector
Amy A. Wendell



SCHEDULE

187

SCHEDULE II – Qualifying and Valuation accounts for each of the three years in the period ended December 31, 2017

2019
Additions
Valuation and Qualifying Accounts (in millions)Balance at
beginning
of period		Charged to
costs and
expenses		(Credited)
charged
to other
accounts (1)		DeductionsBalance at
end of
period
Year ended December 31, 2019:
Allowance for doubtful accounts$110  18  (8) (8) $112  
Deferred tax asset valuation allowance$310  117  —  (7) $420  
Year ended December 31, 2018:
Allowance for doubtful accounts$120  4  (7) (7) $110  
Deferred tax asset valuation allowance (as restated)$483  20  (4) (189) $310  
Year ended December 31, 2017:
Allowance for doubtful accounts$127  4  8  (19) $120  
Deferred tax asset valuation allowance$150  350  —  (17) $483  

 

 

 

 

 

 

Additions

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation and Qualifying Accounts (in millions)

 

Balance at

beginning

of period

 

 

Charged to

costs and

expenses

 

 

Charged

(credited)

to other

accounts (1)(2)

 

 

Deductions

from

reserves

 

 

Balance at

end of

period

 

Year ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

127

 

 

 

4

 

 

 

8

 

 

 

(19

)

 

$

120

 

Deferred tax asset valuation allowance

 

$

150

 

 

 

350

 

 

 

—

 

 

 

(17

)

 

$

483

 

Year ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

110

 

 

 

16

 

 

 

11

 

 

 

(10

)

 

$

127

 

Deferred tax asset valuation allowance

 

$

135

 

 

 

16

 

 

 

3

 

 

 

(4

)

 

$

150

 

Year ended December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

119

 

 

 

30

 

 

 

(10

)

 

 

(29

)

 

$

110

 

Deferred tax asset valuation allowance

 

$

129

 

 

 

30

 

 

 

(16

)

 

 

(8

)

 

$

135

 

(1)

Valuation accounts of acquired or divested companies and foreign currency translation adjustments.

(1)Valuation accounts of acquired or divested companies and foreign currency translation adjustments.

(2)

Amounts include adjustments related to the divestiture of the BioSciences business.

Reserves are deducted from assets to which they apply.

103

188