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Delaware | 36-0781620 | |||||||||||||||||||
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One Baxter Parkway, | Deerfield, | Illinois | 60015 | |||||||||||||||||
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Common Stock, $1.00 par value | BAX (NYSE) |
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| 0.4% Global Notes due 2024 | BAX 24 | New York Stock Exchange | ||||||||||||
| 1.3% Global Notes due 2025 | BAX 25 | New York Stock Exchange | ||||||||||||
| 1.3% Global Notes due 2029 | BAX 29 | New York Stock Exchange | ||||||||||||
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Emerging growth company | ☐ | ||||||||||||||
2020 Item 1A. March 31, December 31, 2019 2018 Current assets Cash and cash equivalents $ 1,908 $ 1,832 Accounts and other current receivables, net 1,802 1,812 Inventories 1,751 1,653 Prepaid expenses and other 626 622 Total current assets 6,087 5,919 Property, plant and equipment, net Property, plant and equipment, net 4,539 4,542 Goodwill Goodwill 2,930 2,958 Other intangible assets, net Other intangible assets, net 1,441 1,398 Operating lease right-of-use assets Operating lease right-of-use assets 517 — Other 836 824 Total assets $ 16,350 $ 15,641 Current liabilities Short-term debt $ 796 $ 2 Current maturities of long-term debt and finance lease obligations 2 2 Accounts payable and accrued liabilities 2,529 2,832 Total current liabilities 3,327 2,836 Long-term debt and finance lease obligations Long-term debt and finance lease obligations 3,451 3,473 Operating lease liabilities Operating lease liabilities 420 — Other long-term liabilities 1,483 1,516 Total liabilities 8,681 7,825 Equity Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2019 and 2018 683 683 Common stock in treasury, at cost, 173,447,198 shares in 2019 and 170,495,859 shares in 2018 (10,284 ) (9,989 ) Additional contributed capital 5,839 5,898 Retained earnings 15,970 15,626 Accumulated other comprehensive (loss) income (4,562 ) (4,424 ) Total Baxter stockholders’ equity 7,646 7,794 Noncontrolling interests 23 22 Total equity 7,669 7,816 Total liabilities and equity Total liabilities and equity $ 16,350 $ 15,641 Three months ended March 31, 2019 2018 Net sales $ 2,632 $ 2,677 Cost of sales 1,552 1,563 Gross margin 1,080 1,114 Selling, general and administrative expenses 600 622 Research and development expenses 129 140 Other operating income, net (33 ) (80 ) Operating income 384 432 Net interest expense 18 12 Other income, net (25 ) (18 ) Income before income taxes 391 438 Income tax expense 44 49 Net income $ 347 $ 389 Net income per common share Basic $ 0.68 $ 0.72 Diluted $ 0.66 $ 0.71 Weighted-average number of common shares outstanding Basic 512 539 Diluted 522 551 Three months ended March 31, 2019 2018 Net income $ 347 $ 389 Other comprehensive (loss) income, net of tax: Currency translation adjustments, net of tax expense (benefit) of $6 and ($7) for the three months ended March 31, 2019 and 2018, respectively 30 81 Pension and other postretirement benefits, net of tax expense of $3 and $13 for the three months ended March 31, 2019 and 2018, respectively 8 52 Hedging activities, net of tax expense (benefit) of ($5) and $1 for the three months ended March 31, 2019 and 2018, respectively (15 ) (5 ) Total other comprehensive income, net of tax 23 128 Comprehensive income $ 370 $ 517 Three months ended March 31, 2019 2018 Cash flows from operations Net income $ 347 $ 389 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 195 192 Deferred income taxes (6 ) (33 ) Stock compensation 22 20 Net periodic pension benefit and other postretirement costs 3 10 Other 34 12 Changes in balance sheet items Accounts and other current receivables, net 32 76 Inventories (82 ) (56 ) Accounts payable and accrued liabilities (310 ) (103 ) Restructuring payments (38 ) (27 ) Other (49 ) (33 ) Cash flows from operations – continuing operations 148 447 Cash flows from operations – discontinued operations (6 ) — Cash flows from operations 142 447 Cash flows from investing activities Capital expenditures (198 ) (155 ) Acquisitions and investments (109 ) (219 ) Other investing activities, net 1 — Cash flows from investing activities (306 ) (374 ) Cash flows from financing activities Net increase in debt obligations with original maturities of three months or less 795 — Cash dividends on common stock (101 ) (87 ) Proceeds from stock issued under employee benefit plans 173 82 Purchases of treasury stock (597 ) (522 ) Other financing activities, net (32 ) (18 ) Cash flows from financing activities 238 (545 ) Effect of foreign exchange rate changes on cash and cash equivalents 2 25 Increase (decrease) in cash and cash equivalents 76 (447 ) Cash and cash equivalents at beginning of period 1,832 3,394 Cash and cash equivalents at end of period $ 1,908 $ 2,947 Supplemental schedule of non-cash activities Decrease in liabilities for capital expenditures $ 57 $ 25 Decrease in liability for treasury stock purchases $ 11 $ — Three months ended March 31, 2019 2018 Shares Amount Shares Amount Common stock Balance, beginning and end of period 683 $ 683 683 $ 683 Common stock in treasury Beginning of period 170 (9,989 ) 142 (7,981 ) Purchases of common stock 8 (586 ) 8 (522 ) Stock issued under employee benefit plans and other (5 ) 291 (3 ) 149 End of period 173 (10,284 ) 147 (8,354 ) Additional contributed capital Beginning of period 5,898 5,940 Stock issued under employee benefit plans and other (59 ) (28 ) End of period 5,839 5,912 Retained earnings Beginning of period 15,626 14,483 Net income 347 389 Dividends declared on common stock (98 ) (86 ) Stock issued under employee benefit plans (66 ) (36 ) Adoption of new accounting standards �� 161 (16 ) End of period 15,970 14,734 Accumulated other comprehensive income (loss) Beginning of period (4,424 ) (4,001 ) Other comprehensive income (loss) 23 128 Adoption of new accounting standards (161 ) (3 ) End of period (4,562 ) (3,876 ) Total Baxter stockholders’ equity $ 7,646 $ 9,099 Noncontrolling interests Beginning of period $ 22 $ (8 ) Change in noncontrolling interests 1 2 End of period $ 23 $ (6 ) Total equity $ 7,669 $ 9,093 Three months ended March 31, 2019 (in millions) U.S. International Total Renal Care 1 $ 192 $ 659 $ 851 Medication Delivery 2 406 228 634 Pharmaceuticals 3 232 277 509 Clinical Nutrition 4 77 128 205 Advanced Surgery 5 120 78 198 Acute Therapies 6 48 80 128 Other 7 45 62 107 Total Baxter $ 1,120 $ 1,512 $ 2,632 Three months ended March 31, 2018 (in millions) U.S. International Total Renal Care 1 $ 196 $ 672 $ 868 Medication Delivery 2 436 240 676 Pharmaceuticals 3 243 253 496 Clinical Nutrition 4 83 140 223 Advanced Surgery 5 99 83 182 Acute Therapies 6 46 83 129 Other 7 44 59 103 Total Baxter $ 1,147 $ 1,530 $ 2,677 Three months ended March 31, (in millions) 2019 2018 Interest expense, net of capitalized interest $ 25 $ 22 Interest income (7 ) (10 ) Net interest expense $ 18 $ 12 Three months ended March 31, (in millions) 2019 2018 Foreign exchange gains, net $ (5 ) $ (15 ) Pension and other postretirement benefits (16 ) (12 ) All other (4 ) 9 Other income, net $ (25 ) $ (18 ) March 31, December 31, (in millions) 2019 2018 Raw materials $ 378 $ 363 Work in process 213 203 Finished goods 1,160 1,087 Inventories $ 1,751 $ 1,653 March 31, December 31, (in millions) 2019 2018 Property, plant and equipment, at cost $ 10,470 $ 10,327 Accumulated depreciation (5,931 ) (5,785 ) Property, plant and equipment, net $ 4,539 $ 4,542 Three months ended March 31, (in millions) 2019 2018 Basic shares 512 539 Effect of dilutive securities 10 12 Diluted shares 522 551 (in millions) Americas EMEA APAC Total Balance as of December 31, 2018 $ 2,351 $ 387 $ 220 $ 2,958 Adjustments — (4 ) — (4 ) Currency translation adjustments (19 ) (3 ) (2 ) (24 ) Balance as of March 31, 2019 $ 2,332 $ 380 $ 218 $ 2,930 (in millions) Developed technology, including patents Other amortized intangible assets Indefinite-lived intangible assets Total March 31, 2019 Gross other intangible assets $ 2,197 $ 450 $ 188 $ 2,835 Accumulated amortization (1,137 ) (257 ) — (1,394 ) Other intangible assets, net $ 1,060 $ 193 $ 188 $ 1,441 December 31, 2018 Gross other intangible assets $ 2,115 $ 451 $ 188 $ 2,754 Accumulated amortization (1,106 ) (250 ) — (1,356 ) Other intangible assets, net $ 1,009 $ 201 $ 188 $ 1,398 Three months ended March 31, (in millions) 2019 2018 Restructuring charges $ 25 $ 12 Costs to implement business optimization programs 10 25 Accelerated depreciation 3 1 Total business optimization charges $ 38 $ 38 Three months ended March 31, 2019 (in millions) COGS SG&A R&D Total Employee termination costs $ 6 $ 1 $ 9 $ 16 Contract termination and other costs 7 — — 7 Asset impairments 9 1 — 10 Reserve adjustments (6 ) (2 ) — (8 ) Total restructuring charges $ 16 $ — $ 9 $ 25 Three months ended March 31, 2018 (in millions) COGS SG&A R&D Total Employee termination costs $ 1 $ 6 $ 3 $ 10 Asset impairments 1 1 — 2 Total restructuring charges $ 2 $ 7 $ 3 $ 12 (in millions) Reserve as of December 31, 2018 $ 101 Charges 23 Reserve adjustments (8 ) Utilization (38 ) Currency translation (1 ) Reserve as of March 31, 2019 $ 77 Gain (loss) recognized in OCI Location of gain (loss) Gain (loss) reclassified from AOCI into income (in millions) 2019 2018 in income statement 2019 2018 Cash flow hedges Interest rate contracts $ (11 ) $ — Net interest expense $ — $ — Foreign exchange contracts (9 ) (9 ) Cost of sales — (4 ) Net investment hedge 14 (21 ) Other income, net — — Total $ (6 ) $ (30 ) $ — $ (4 ) Gain (loss) recognized in income (in millions) Location of gain (loss) in income statement 2019 2018 Fair value hedges Interest rate contracts Net interest expense $ — $ (4 ) Undesignated derivative instruments Foreign exchange contracts Other income, net $ (9 ) $ (17 ) 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 $ — Other long-term liabilities $ 14 Foreign exchange contracts Prepaid expenses and other 14 Accounts payable and accrued liabilities — Foreign exchange contracts Other 1 Other long-term liabilities — Total derivative instruments designated as hedges 15 14 Total derivative instruments $ 15 $ 14 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 $ — Other long-term liabilities $ 3 Foreign exchange contracts Prepaid expenses and other 22 Accounts payable and accrued liabilities 1 Foreign exchange contracts Other 1 Other long-term liabilities — Total derivative instruments designated as hedges 23 4 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other — Accounts payable and accrued liabilities 1 Total derivative instruments $ 23 $ 5 March 31, 2019 December 31, 2018 (in millions) Asset Liability Asset Liability Gross amounts recognized in the consolidated balance sheet $ 15 $ 14 $ 23 $ 5 Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet (14 ) (14 ) (5 ) (5 ) Total $ 1 $ — $ 18 $ — Carrying amount of hedged item Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a) (in millions) Balance as of March 31, 2019 Balance as of December 31, 2018 Balance as of March 31, 2019 Balance as of December 31, 2018 Long-term debt $ 103 $ 103 $ 7 $ 7 Basis of fair value measurement (in millions) Balance as of March 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 $ 15 $ — $ 15 $ — Marketable equity securities 8 8 — — Total $ 23 $ 8 $ 15 $ — Liabilities Interest rate contracts $ 14 $ — $ 14 $ — Contingent payments related to acquisitions 31 — — 31 Total $ 45 $ — $ 14 $ 31 Basis of fair value measurement (in millions) Balance as of December 31, 2018 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets Foreign exchange contracts $ 23 $ — $ 23 $ — Marketable equity securities 3 3 — — Total $ 26 $ 3 $ 23 $ — Liabilities Foreign exchange contracts $ 2 $ — $ 2 $ — Interest rate contracts 3 — 3 — Contingent payments related to acquisitions 32 — — 32 Total $ 37 $ — $ 5 $ 32 Three months ended March 31, (in millions) 2019 2018 Fair value at January 1 $ 32 $ 9 Additions — 14 Payments (1 ) — Fair value at March 31 $ 31 $ 23 Book values Fair values(a) (in millions) 2019 2018 2019 2018 Liabilities Short-term debt $ 796 $ 2 $ 796 $ 2 Current maturities of long-term debt and finance lease obligations 2 2 2 2 Long-term debt and finance lease obligations 3,451 3,473 3,561 3,460 Three months ended March 31, 2019 2018 Expected volatility 19 % 18 % Expected life (in years) 5.5 5.5 Risk-free interest rate 2.6 % 2.6 % Dividend yield 1.0 % 1.0 % Fair value per stock option $ 15 $ 13 (in millions) Three months ended March 31, 2019 Operating lease cost $ 31 Finance lease cost Amortization of right-of-use assets 1 Interest on lease liabilities 1 Variable lease cost 22 Lease cost $ 55 (in millions) Three months ended March 31, 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 34 Operating cash flows from finance leases 1 Financing cash flows from finance leases 1 Right-of-use operating lease assets obtained in exchange for lease obligations 42 March 31, 2019 Operating leases Operating lease right-of-use assets $ 517 Accounts payable and accrued liabilities $ 97 Operating lease liabilities 420 Total operating lease liabilities $ 517 Finance leases Property, plant and equipment, at cost $ 78 Accumulated depreciation (24 ) Property, plant and equipment, net $ 54 Current maturities of long-term debt and finance lease obligations $ 1 Long-term debt and finance lease obligations 57 Total finance lease liabilities $ 58 (in millions) Finance Leases Operating Leases 2019 $ 6 $ 83 2020 7 87 2021 7 71 2022 8 58 2023 6 48 Thereafter 82 243 Total lease payments 116 590 Less: imputed interest (58 ) (73 ) Present value of lease liabilities $ 58 $ 517 (in millions) Capital Leases Operating Leases 2019 $ 8 $ 122 2020 7 93 2021 7 86 2022 8 71 2023 6 64 Thereafter 88 210 Total lease payments 124 $ 646 Less: imputed interest (62 ) Present value of lease liabilities $ 62 (in millions) Three months ended March 31, 2019 Sales-type lease revenue $ 6 Operating lease revenue 15 Variable lease revenue 21 Total lease revenue $ 42 (in millions) March 31, 2019 Minimum lease payments $ 93 Unguaranteed residual values 13 Unearned income (9 ) Net investment in leases $ 97 (in millions) March 31, 2019 Accounts and other current receivables, net $ 33 Other 64 Total $ 97 (in millions) Sales-type Leases Operating Leases 2019 $ 22 $ 38 2020 28 50 2021 22 48 2022 14 24 2023 7 8 Thereafter — 1 Total minimum lease payments $ 93 $ 169 Three months ended March 31, (in millions) 2019 2018 Pension benefits Service cost $ 19 $ 22 Interest cost 47 46 Expected return on plan assets (73 ) (78 ) Amortization of net losses and prior service costs 15 24 Net periodic pension benefit cost $ 8 $ 14 OPEB Service cost $ — $ — Interest cost 2 2 Amortization of net loss and prior service credit (7 ) (6 ) Net periodic OPEB cost (credit) $ (5 ) $ (4 ) (in millions) CTA Pension and OPEB plans Hedging activities Total Gains (losses) Balance as of December 31, 2018 $ (3,474 ) $ (949 ) $ (1 ) $ (4,424 ) Adoption of new accounting standard 9 (169 ) (1 ) (161 ) Other comprehensive income before reclassifications 30 1 (15 ) 16 Amounts reclassified from AOCI (a) — 7 — 7 Net other comprehensive income (loss) 30 8 (15 ) 23 Balance as of March 31, 2019 $ (3,435 ) $ (1,110 ) $ (17 ) $ (4,562 ) (in millions) CTA Pension and OPEB plans Hedging activities Available- for-sale- equity securities Total Gains (losses) Balance as of December 31, 2017 $ (3,013 ) $ (981 ) $ (10 ) $ 3 $ (4,001 ) Adoption of new accounting standard — — — (3 ) (3 ) Other comprehensive income before reclassifications 81 37 (8 ) — 110 Amounts reclassified from AOCI (a) — 15 3 — 18 Net other comprehensive income (loss) 81 52 (5 ) — 128 Balance as of March 31, 2018 $ (2,932 ) $ (929 ) $ (15 ) $ — $ (3,876 ) Amounts reclassified from AOCI (a) (in millions) Three months ended March 31, 2019 Three months ended March 31, 2018 Location of impact in income statement Amortization of pension and OPEB items Amortization of net losses and prior service costs or credits (b) $ (8 ) $ (18 ) Other income, net (8 ) (18 ) Total before tax 1 3 Income tax expense $ (7 ) $ (15 ) Net of tax Gains (losses) on hedging activities Foreign exchange contracts $ — $ (4 ) Cost of sales — (4 ) Total before tax — 1 Income tax expense $ — $ (3 ) Net of tax Total reclassification for the period $ (7 ) $ (18 ) Total net of tax In addition to the matters described below, we remain subject to the risk of future administrative and legal actions. With respect to governmental and regulatory matters, these actions may lead to product recalls, injunctions, and other restrictions on our operations and monetary sanctions, including significant civil or criminal penalties. With respect to intellectual property, we may be exposed to significant litigation concerning the scope of our and others’ rights. Such litigation could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations. April 3, 2020. 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. Three months ended March 31, (in millions) 2019 2018 Net sales Americas $ 1,408 $ 1,442 EMEA 705 724 APAC 519 511 Total net sales $ 2,632 $ 2,677 Operating Income Americas $ 537 $ 566 EMEA 145 151 APAC 121 117 Total segment operating income $ 803 $ 834 Three months ended March 31, (in millions) 2019 2018 Total segment operating income $ 803 $ 834 Corporate and other (419 ) (402 ) Total operating income 384 432 Net interest expense 18 12 Other income, net (25 ) (18 ) Income before income taxes $ 391 $ 438 Three months ended March 31, (in millions) 2019 2018 Gross Margin Intangible asset amortization expense $ (43 ) $ (41 ) Business optimization items 1 (19 ) (6 ) Acquisition and integration expenses 2 (5 ) (3 ) Litigation 3 — $ (8 ) European medical devices regulation 4 (4 ) — Total Special Items $ (71 ) $ (58 ) Impact on Gross Margin Ratio (2.7 pts) (2.2 pts) Selling, General and Administrative Expenses Business optimization items 1 $ 8 $ 29 Acquisition and integration expenses 2 5 4 Litigation 3 — 2 Total Special Items $ 13 $ 35 Impact on Selling, General and Administrative Expense Ratio 0.5 pts 1.3 pts Research and Development Expenses Business optimization items 1 $ 11 $ 3 Acquisition and integration expenses 2 4 — Total Special Items $ 15 $ 3 Impact on Research and Development Expense Ratio 0.6 pts 0.1 pts Other Operating Income, net Insurance recovery from legacy product-related matter5 $ (33 ) $ — Claris settlement 6 — (80 ) Total Special Items $ (33 ) $ (80 ) Income Tax Expense Tax effects of special items and impact of U.S. Tax Reform 7 $ (14 ) $ (17 ) Total Special Items $ (14 ) $ (17 ) Impact on Effective Tax Rate 1.4 pts 3.3 pts Three months ended March 31, Percent change (in millions) 2019 2018 At actual currency rates At constant currency rates U.S. Cyclophosphamide(1) United States $ 1,120 $ 1,147 (2 )% (2 )% (1 )% International 1,512 1,530 (1 )% 5 % 0 % Total net sales $ 2,632 $ 2,677 (2 )% 2 % 0 % Foreign currency unfavorably impacted net sales by The comparisons presented at constant currency rates reflect local currency sales at the prior period’s foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S. GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another. the Global Business Unit Net Sales Reporting section below and Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019. • Renal Careincludes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services. • Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices. • Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services. • Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products. • Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention. • Acute Therapiesincludes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU). • Other primarily includes sales of contract manufacturing services from our pharmaceutical partnering business. Three months ended March 31, Percent change (in millions) 2019 2018 At actual currency rates At constant currency rates U.S. Cyclophosphamide(1) Renal Care $ 851 $ 868 (2 )% 3 % 0 % Medication Delivery 634 676 (6 )% (4 )% 0 % Pharmaceuticals 509 496 3 % 6 % (2 )% Clinical Nutrition 205 223 (8 )% (5 )% 0 % Advanced Surgery 198 182 9 % 12 % 0 % Acute Therapies 128 129 (1 )% 4 % 0 % Other 107 103 4 % 8 % 0 % Total Baxter $ 2,632 $ 2,677 (2 )% 2 % 0 % contract manufacturing services, partially offset by a 2% adverse impact from foreign exchange rate changes. Three months ended March 31, 2019 % of net sales 2018 % of net sales $ change % change Gross margin $ 1,080 41.0 % $ 1,114 41.6 % $ (34 ) (3.1%) Selling, general and administrative expenses (SG&A) $ 600 22.8 % $ 622 23.2 % $ (22 ) (3.5%) R&D $ 129 4.9 % $ 140 5.2 % $ (11 ) (7.9%) mix, additional compensation costs, primarily for our manufacturing employees, and incremental logistics costs in response to the COVID-19 pandemic. 2019, respectively. The special items identified above had an unfavorable impact of approximately Net higher interest expense as a result of the $1.25 billion of senior notes issued in March 2020. current year. Net sales Operating income Three months ended Three months ended March 31, March 31, (in millions) 2019 2018 2019 2018 Americas $ 1,408 $ 1,442 $ 537 $ 566 EMEA 705 724 145 151 APAC 519 511 121 117 Corporate and other — — (419 ) (402 ) Total $ 2,632 $ 2,677 $ 384 $ 432 Nutrition. Advanced Surgery due to the Seprafilm acquisition. The operating loss in the first quarter of 2020 was higher than the prior-year period due to the prior-year gain recognized when our share of the proceeds under a cost-sharing agreement became realizable following the resolution of a dispute with an insurer related to a legacy product-related matter and higher investigation and other related costs, acquisition and integration costs and intangible asset amortization in the current year, partially offset by the gain recognized in the current year related to the sale of property in connection with our business optimization initiatives. Three months ended March 31, (in millions) 2019 2018 Cash flows from operations - continuing operations $ 148 $ 447 Cash flows from investing activities (306 ) (374 ) Cash flows from financing activities 238 (545 ) In the first three months of 2019, cash generated from financing activities included net proceeds from short-term debt of $795 million and stock issued under employee benefit plans of $173 million, partially offset by payments for stock repurchases of $597 million and dividend payments of $101 million. 2020. our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2020. planned new products for distribution into the U.S. facilities in October 2014, November 2015, July 2017, April 2018 and October 2018. The Warning Letter addresses observations related to Current Good Manufacturing Practice violations at the two facilities. The Warning Letter was closed out in September 2019. 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; the continuity, availability and pricing of acceptable raw materials and component supply, and the related continuity of our manufacturing and distribution; future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the SEC, DOJ or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities, including the continued delay in lifting the warning letter at our Ahmedabad facility or proceedings related to the misstatements in previously reported non-operating income related to foreign exchange gains and losses; fluctuations in foreign exchange and interest rates; other factors identified elsewhere in this report and other filings with the $2 million. Report of Issuer Purchases of Equity Securities Period Total number of shares purchased (1) Average price paid per share Total number of shares purchased as part of publicly announced program(1) Approximate dollar value of shares that may yet be purchased under the program(1) January 1, 2019 through January 31, 2019 3,127,500 $ 68.15 3,127,500 February 1, 2019 through February 28, 2019 2,663,800 $ 72.99 2,663,800 March 1, 2019 through March 31, 2019 2,336,304 $ 76.36 2,336,304 Total 8,127,604 $ 72.09 8,127,604 $ 1,558,077,943 In July 2012, we announced that our Board of Directors authorized us to repurchase up to $2.0 billion 31.1* 31.2* 32.1* 32.2* 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document * Filed herewith. (Registrant) /s/ James K. Saccaro James K. Saccaro2019Page NumberPage Number 5627373839404141414243FINANCIALFINANCIAL INFORMATIONItem 1.shares)share information)March 31,
2020December 31,
2019Current assets: Current assets: Cash and cash equivalents Cash and cash equivalents $ 4,110 $ 3,335 Accounts receivable, net of allowances of $114 in 2020 and $112 in 2019 Accounts receivable, net of allowances of $114 in 2020 and $112 in 2019 1,892 1,896 Inventories Inventories 1,694 1,653 Prepaid expenses and other current assets Prepaid expenses and other current assets 637 619 Total current assets Total current assets 8,333 7,503 Property, plant and equipment, net 4,340 4,512 Goodwill 2,961 3,030 Other intangible assets, net 1,759 1,471 Operating lease right-of-use assets 577 608 Other non-current assets Other non-current assets 1,105 1,069 Total assets $ 19,075 $ 18,193 Current liabilities: Current liabilities: Short-term debt Short-term debt $ 221 $ 226 Current maturities of long-term debt and finance lease obligations Current maturities of long-term debt and finance lease obligations 315 315 Accounts payable and accrued liabilities Accounts payable and accrued liabilities 2,500 2,689 Total current liabilities Total current liabilities 3,036 3,230 Long-term debt and finance lease obligations 5,996 4,809 Operating lease liabilities 486 510 Other non-current liabilities Other non-current liabilities 1,827 1,732 Total liabilities Total liabilities 11,345 10,281 Commitments and contingencies Commitments and contingencies Equity: Equity: Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2020 and 2019 Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2020 and 2019 683 683 Common stock in treasury, at cost, 175,106,170 shares in 2020 and 177,340,358 shares in 2019 Common stock in treasury, at cost, 175,106,170 shares in 2020 and 177,340,358 shares in 2019 (10,677) (10,764) Additional contributed capital Additional contributed capital 5,935 5,955 Retained earnings Retained earnings 15,935 15,718 Accumulated other comprehensive (loss) income Accumulated other comprehensive (loss) income (4,177) (3,710) Total Baxter stockholders’ equity Total Baxter stockholders’ equity 7,699 7,882 Noncontrolling interests Noncontrolling interests 31 30 Total equity Total equity 7,730 7,912 Total liabilities and equity $ 19,075 $ 18,193 Three months ended
March 31,As Restated 2020 2019 Net sales $ 2,802 $ 2,638 Cost of sales 1,639 1,558 Gross margin 1,163 1,080 Selling, general and administrative expenses 628 601 Research and development expenses 146 129 Other operating income, net (20) (33) Operating income 409 383 Interest expense, net Interest expense, net 21 18 Other (income) expense, net Other (income) expense, net 10 (21) Income before income taxes 378 386 Income tax expense 45 44 Net income 333 342 Net income attributable to noncontrolling interests Net income attributable to noncontrolling interests 1 — Net income attributable to Baxter stockholders Net income attributable to Baxter stockholders $ 332 $ 342 Earnings per share Earnings per share Basic $ 0.65 $ 0.67 Diluted $ 0.64 $ 0.66 Weighted-average number of shares outstanding Weighted-average number of shares outstanding Basic 507 512 Diluted 516 522 Three months ended
March 31,As Restated 2020 2019 Net income $ 333 $ 342 Other comprehensive (loss) income, net of tax: Currency translation adjustments, net of tax benefit of ($8) and 0 for the three months ended March 31, 2020 and 2019, respectively (359) (97) Pension and other postretirement benefits, net of tax expense of $6 and $4 for the three months ended March 31, 2020 and 2019, respectively 22 14 Hedging activities, net of tax benefit of ($39) and ($5) for the three months ended March 31, 2020 and 2019, respectively (130) (15) Total other comprehensive (loss) income, net of tax (467) (98) Comprehensive (loss) income (134) 244 Less: Comprehensive income attributable to noncontrolling interests 1 — Comprehensive (loss) income attributable to Baxter stockholders $ (135) $ 244 Cash FlowsChanges in Equity (unaudited)For the three months ended March 31, 2020 Baxter International Inc. stockholders' equity Common stock shares Common stock Common stock shares
in treasuryCommon stock in
treasuryAdditional contributed capital Retained earnings Accumulated other comprehensive
income (loss)Total Baxter stockholders' equity Noncontrolling interests Total equity Balance as of January 1, 2020 683 $ 683 177 $ (10,764) $ 5,955 $ 15,718 $ (3,710) $ 7,882 $ 30 $ 7,912 Adoption of new accounting standards — — — — — (4) — (4) — (4) Net income — — — — — 332 — 332 1 333 Other comprehensive (loss) income — — — — — — (467) (467) — (467) Stock issued under employee benefit plans and other — — (2) 87 (20) — — 67 — 67 Dividends declared on common stock — — — — — (111) — (111) — (111) Balance as of March 31, 2020 683 $ 683 175 $ (10,677) $ 5,935 $ 15,935 $ (4,177) $ 7,699 $ 31 $ 7,730 For the three months ended March 31, 2019 Baxter International Inc. stockholders' equity Common stock shares Common stock Common stock shares in treasury Common stock in treasury Additional contributed capital Retained earnings Accumulated other comprehensive income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity Balance as of January 1, 2019 (As Restated) 683 $ 683 170 $ (9,989) $ 5,898 $ 15,075 $ (3,823) $ 7,844 $ 22 $ 7,866 Adoption of new accounting standards — — — — — 161 (161) — — — Net income — — — — — 342 — 342 — 342 Other comprehensive (loss) income — — — — — — (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, 2019 (As Restated) 683 $ 683 173 $ (10,284) $ 5,839 $ 15,414 $ (4,082) $ 7,570 $ 23 $ 7,593 Changes in EquityCash Flows (unaudited)Three months ended
March 31,As Restated 2020 2019 Cash flows from operations Net income $ 333 $ 342 Adjustments to reconcile net income to cash flows from operations: Depreciation and amortization 199 192 Deferred income taxes (17) (6) Stock compensation 29 22 Net periodic pension benefit and other postretirement costs 20 3 Other 13 14 Changes in balance sheet items: Accounts receivable, net (60) 32 Inventories (83) (82) Accounts payable and accrued liabilities (110) (335) Other (50) (48) Cash flows from operations – continuing operations 274 134 Cash flows from operations – discontinued operations (2) (6) Cash flows from operations 272 128 Cash flows from investing activities Capital expenditures (172) (193) Acquisitions and investments, net of cash acquired (443) (109) Other investing activities, net 11 1 Cash flows from investing activities (604) (301) Cash flows from financing activities Issuances of debt 1,240 — Net increases in debt with original maturities of three months or less — 795 Cash dividends on common stock (111) (101) Proceeds from stock issued under employee benefit plans 66 173 Purchases of treasury stock — (597) Other financing activities, net (25) (32) Cash flows from financing activities 1,170 238 Effect of foreign exchange rate changes on cash and cash equivalents (63) (1) Increase in cash and cash equivalents 775 64 Cash and cash equivalents at beginning of period 3,335 1,838 Cash and cash equivalents at end of period $ 4,110 $ 1,902 InternationalInternational Inc.(GAAP)(U.S. GAAP) in the United States have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (20182019 (2019 Annual Report).2019,2020, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under this guidance, lessees are required to recognize a right-of-use asset2016-13, Financial Instruments - Credit Losses, which requires the measurement of expected lifetime credit losses, rather than incurred losses, for financial instruments held at the reporting date based on historical experience, current conditions 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.reasonable forecasts. The adjustment to record operating lease right-of-use assets and operating lease liabilities was $502 million as of January 1, 2019. The impact to the condensed consolidated statements of income was not material and there was no net impact to the condensed consolidated statements of cash flows.As of January 1, 2019, we adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The purposemain objective of this ASU is to better alignprovide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a company’s risk management activities and financial reporting for hedging relationships, simplifyentity at each reporting date. We adopted this ASU using the hedge accounting requirements, and improve the disclosures of hedging arrangements. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.As of January 1, 2019, we adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI). As a result of the enactment of the U.S. Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act), this guidance provides for a reclassification of certain tax effects from AOCI to retained earnings.modified retrospective approach. The impact of the adoption of this standardASU was a $161 millionan increase to our allowance for doubtful accounts and a decrease to retained earnings.2. REVENUESRevenue is measured as the amountearnings of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation$4 million.promisesummary of the changes in our allowance for doubtful accounts for the three months ended March 31, 2020:(in millions) March 31,
2020Balance at beginning of period $ 112 Adoption of new accounting standard 4 Charged to costs and expenses 7 Currency translation adjustments (9) Balance at end of period $ 114 transferdevelop or obtain internal-use software. Our policies for capitalizing implementation costs incurred in a distinct good or service to the customer,hosting arrangement were not impacted by this ASU. However, we have historically classified those capitalized costs within property, plant and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of our contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Our global payment terms are typically between 30-90 days.The majority of our performance obligations are satisfied at a point in time. This includes sales of our broad portfolio of essential healthcare products across our geographic segments including acute and chronic dialysis therapies; sterile IVsolutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. For a majority of these sales, our performance obligation is satisfied upon delivery to the customer. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation.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 dependingnet on our evaluation of when the customer obtains control of the promised goods or services. Revenue is recognized over time when we are creating or enhancing an asset that the customer controls as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.On March 31, 2019, we had $9.3 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 20% of this amount as revenue over the remainder of 2019 and in each year between 2020 and 2022, 10% in 2023, and the remaining balance thereafter.Significant JudgmentsRevenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for reserves related to rebates, product returns, sales discounts and wholesaler chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are included in accounts payable and accrued liabilities on the condensed consolidated balance sheets. Management's estimates take into consideration historical experience, current contractualsheets and statutory requirements, specific known market eventsas capital expenditures on our condensed consolidated statements of cash flows. Under the new ASU, those capitalized costs are presented as other non-current assets on our condensed consolidated balance sheets and trends, industry data,within operating cash flows on our condensed consolidated statements of cash flows. We adopted this ASU on a prospective basis and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimatescapitalized $8 million of the amount of considerationimplementation costs related to which wehosting arrangements that 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 recognizedservice contracts during the three months ended March 31, 2019 and 2018 related to performance obligations satisfied in prior periods was not material.Contract BalancesThe 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) on2020.balance sheets. Net trade accounts receivable were $1.7 billion as offinancial statements for the three months ended March 31, 2019 and December 31, 2018.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. Our contract asset balances totaled $73 million as of March 31, 2019, of which $34 million related to contract manufacturing services and $39 million related to software sales. 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 presented2019. We have also restated impacted amounts within accounts and other receivables, net ($50 million as of March 31, 2019 and December 31, 2018) and other ($23 million and $30 million as of March 31, 2019 and December 31, 2018, respectively) in the accompanying notes to the consolidated financial statements, as applicable. The restatement of our condensed consolidated balance sheets. Contract liabilities as of March 31, 2019 and December 31, 2018 were not significant.Disaggregation of Net SalesThe following tables disaggregate our net sales from contracts with customers by Global Business Unit (GBU) between the U.S. and international:1Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.2Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices.3Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services.4Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products.5Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.6Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).7Other primarily includes sales of contract manufacturing services from our pharmaceutical partnering business.3. SUPPLEMENTAL FINANCIAL INFORMATIONNet Interest ExpenseOther Income, NetProperty, Plant and Equipment, Net4. EARNINGS PER SHAREThe numerator for both basic and diluted earnings per share (EPS) is net income. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The dilutive effect of outstanding stock options, restricted stock units (RSUs) and performance share units (PSUs) is reflected in the denominator for diluted EPS using the treasury stock method.The following table is a reconciliation of basic shares to diluted shares.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 and 2 million equity awardsfinancial statements for the three months ended March 31, 2019 was previously reported in our annual report on Form 10-K for the year ended December 31, 2019.respectively, because their inclusion wouldthe currency translation adjustments component of our other comprehensive income (loss) was misstated in our condensed consolidated statement of comprehensive income (loss) for the three months ended March 31, 2019.hadpresented reconciliations from our prior periods as previously reported to the restated amounts for each of our condensed consolidated financial statements for the three months ended March 31, 2019. The amounts as previously reported were derived from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 filed on May 7, 2019.Baxter International Inc. Condensed Consolidated Statement of Income (in millions, except per share) Three months ended March 31, 2019 As previously reported Restatement impacts Restatement reference As restated Net sales $ 2,632 $ 6 (e) $ 2,638 Cost of sales 1,552 6 (c)(e) 1,558 Gross margin 1,080 — 1,080 Selling, general and administrative expenses 600 1 (e) 601 Research and development expenses 129 — 129 Other operating income, net (33) — (33) Operating income 384 (1) 383 Interest expense, net 18 — 18 Other (income) expense, net (25) 4 (a)(b) (21) Income before income taxes 391 (5) 386 Income tax expense 44 — 44 Net income $ 347 $ (5) $ 342 Earnings per share Basic $ 0.68 $ (0.01) $ 0.67 Diluted $ 0.66 $ — $ 0.66 Weighted-average number of shares outstanding Basic 512 — 512 Diluted 522 — 522 anti-dilutiveincrease to other (income) expense, net of $1 million for the three months ended March 31, 2019.Baxter International Inc. Condensed Consolidated Statement of Comprehensive Income (in millions) Three months ended March 31, 2019 As previously reported Restatement impacts As restated Net income $ 347 $ (5) $ 342 Other comprehensive (loss) income, net of tax: Currency translation adjustments 30 (127) (97) Pension and other postretirement benefit plans 8 6 14 Hedging activities (15) — (15) Total other comprehensive loss, net of tax 23 (121) (98) Comprehensive income $ 370 $ (126) $ 244 Baxter International Inc. Condensed Consolidated Statement of Changes in Equity (in millions) For the Three Months Ended March 31, 2019 Baxter International Inc. stockholders' equity Common stock shares Common stock Common stock shares in treasury Common stock in treasury Additional contributed capital Retained earnings Accumulated other comprehensive income (loss) Total Baxter stockholders' equity Noncontrolling interests Total equity As previously reported Balance as of January 1, 2019 683 $ 683 170 $ (9,989) $ 5,898 $ 15,626 $ (4,424) $ 7,794 $ 22 $ 7,816 Adoption of new accounting standards — — — — — 161 (161) — — — Net income — — — — — 347 — 347 — 347 Other comprehensive income (loss) — — — — — — 23 23 — 23 Purchases of treasury stock — — 8 (586) — — — (586) — (586) Stock issued under employee benefit plans and other — — (5) 291 (59) (66) — 166 — 166 Dividends declared on common stock — — — — — (98) — (98) — (98) Changes in noncontrolling interests — — — — — — — — 1 1 Balance as of March 31, 2019 683 $ 683 173 $ (10,284) $ 5,839 $ 15,970 $ (4,562) $ 7,646 $ 23 $ 7,669 Restatement impacts Balance as of January 1, 2019 — $ — — $ — $ — $ (551) $ 601 $ 50 $ — $ 50 Net income — — — — — (5) — (5) — (5) Other comprehensive income (loss) — — — — — — (121) (121) — (121) Balance as of March 31, 2019 — $ — — $ — $ — $ (556) $ 480 $ (76) $ — $ (76) As restated Balance as of January 1, 2019 683 $ 683 170 $ (9,989) $ 5,898 $ 15,075 $ (3,823) $ 7,844 $ 22 $ 7,866 Adoption of new accounting standards — — — — — 161 (161) — — — Net income — — — — — 342 — 342 — 342 Other comprehensive income (loss) — — — — — — (98) (98) — (98) Purchases of treasury stock — — 8 (586) — — — (586) — (586) Stock issued under employee benefit plans and other — — (5) 291 (59) (66) — 166 — 166 Dividends declared on common stock — — — — — (98) — (98) — (98) Changes in noncontrolling interests — — — — — — — — 1 1 Balance as of March 31, 2019 683 $ 683 173 $ (10,284) $ 5,839 $ 15,414 $ (4,082) $ 7,570 $ 23 $ 7,593 Baxter International Inc. Condensed Consolidated Statement of Cash Flows (in millions) For the Three Months Ended March 31, 2019 As previously reported Restatement impacts Restatement reference As restated Cash flows from operations Net income $ 347 $ (5) $ 342 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 195 (3) (c) 192 Deferred income taxes (6) — (6) Stock compensation 22 — 22 Net periodic pension benefit and other postretirement costs 3 — 3 Other 19 (5) (d) 14 Changes in balance sheet items: Accounts receivable, net 32 — 32 Inventories (82) — (82) Accounts payable and accrued liabilities (333) (2) (b)(f) (335) Other (49) 1 (b)(e)(f) (48) Cash flows from operations - continuing operations 148 (14) 134 Cash flows from operations - discontinued operations (6) — (6) Cash flows from operations 142 (14) 128 Cash flows from investing activities Capital expenditures (198) 5 (c) (193) Acquisitions and investments, net of cash acquired (109) — (109) Other investing activities, net 1 — 1 Cash flows from investing activities (306) 5 (301) Cash flows from financing activities Net increases in debt obligations with original maturities of three months or less 795 — 795 Cash dividends on common stock (101) — (101) Proceeds from stock issued under employee benefit plans 173 — 173 Purchases of treasury stock (597) — (597) Other financing activities, net (32) — (32) Cash flows from financing activities 238 — 238 Effect of foreign exchange rate changes on cash and cash equivalents 2 (3) (a)(d)(e) (1) Increase (decrease) in cash and cash equivalents 76 (12) 64 Cash and cash equivalents at beginning of period 1,832 6 (e) 1,838 Cash and cash equivalents at end of period $ 1,908 $ (6) (e) $ 1,902 diluted EPS. Refercash and cash equivalents of $4 million for the three months ended March 31, 2019.Note 9changes in accounts payable and accrued liabilities of $1 million and an increase in other changes in balance sheet items of $1 million for additional information regardingthe three months ended March 31, 2019.impacting basicof $1 million, cash and diluted shares.5.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.first quarterproduct rights to Seprafilm Adhesion Barrier (Seprafilm) from Sanofi. The transaction closed in February 2020 and we paid approximately $342 million in cash for the acquired assets. Seprafilm is indicated for use in patients undergoing abdominal or pelvic laparotomy as an adjunct intended to reduce the incidence, extent and severity of 2019,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. 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.(in millions) Assets acquired Inventories $ 16 Goodwill 29 Other intangible assets 297 Total assets acquired $ 342 multiple productsan additional product for an aggregate purchase price of $94$60 million. The purchase prices wereprice was capitalized as a developed-technology intangible assetsasset in the quarter ended March 31, 2020 and areis being amortized over a weighted-averageits estimated useful life of 1011 years. Net sales related to thesein the first quarterthat have not yet obtained regulatory approval for upfront cash payments of 2019 were not material. Additionally, we acquired an in-process research and development asset for $4 million and immediately expensed the purchase price$21 million. The cash paid was treated as part of research and development (R&D) expenses on our condensed consolidated statement of income. We could make additional payments of up to $41 million upon the achievement of certain development, regulatory or commercial milestones.Three months ended
March 31,(in millions) 2020 2019 Interest expense, net of capitalized interest $ 30 $ 25 Interest income (9) (7) Interest expense, net $ 21 $ 18 Three months ended
March 31,As Restated (in millions) 2020 2019 Foreign exchange losses (gains), net $ 11 $ (1) Pension and other postretirement benefit plans (1) (15) Other, net — (5) Other (income) expense, net $ 10 $ (21) (in millions) March 31,
2020December 31,
2019Raw materials $ 402 $ 377 Work in process 188 185 Finished goods 1,104 1,091 Inventories $ 1,694 $ 1,653 (in millions) March 31,
2020December 31,
2019Property, plant and equipment, at cost $ 10,443 $ 10,660 Accumulated depreciation (6,103) (6,148) Property, plant and equipment, net $ 4,340 $ 4,512 the product is not yet fully approved by the U.S. Foodof March 31, 2020 and Drug Administration (FDA).2019 was $49 million and $39 million, respectively.6.(in millions) Americas EMEA APAC Total Balance as of December 31, 2019 $ 2,428 $ 385 $ 217 $ 3,030 Acquisitions 32 — 7 39 Currency translation adjustments (86) (14) (8) (108) Balance as of March 31, 2020 $ 2,374 $ 371 $ 216 $ 2,961 2019,2020, there were no reductions in goodwill relating to impairment losses.(in millions) Developed technology, including patents Other amortized intangible assets Indefinite-lived intangible assets
TotalMarch 31, 2020 March 31, 2020 Gross other intangible assets $ 2,612 $ 461 $ 179 $ 3,252 Accumulated amortization (1,209) (284) — (1,493) Other intangible assets, net $ 1,403 $ 177 $ 179 $ 1,759 December 31, 2019 December 31, 2019 Gross other intangible assets $ 2,309 $ 464 $ 173 $ 2,946 Accumulated amortization (1,190) (285) — (1,475) Other intangible assets, net $ 1,119 $ 179 $ 173 $ 1,471 $43$52 million and $41$43 million for the first quarters of 2019 and 2018, respectively.7. BUSINESS OPTIMIZATION CHARGESBeginning in the second half of 2015, we initiated actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through March 31, 2019, we have incurred cumulative pre-tax costs of $834 million related to these actions. The costs consisted primarily of employee termination, implementation costs and accelerated depreciation. We expect to incur additional pre-tax costs of approximately $35 million through the completion of these initiatives under our current program. These costs will primarily include employee termination costs, implementation costs, and accelerated depreciation. During the three months ended March 31, 2019 and 2018, we recorded the following charges related to business optimization programs.For segment reporting, business optimization charges are unallocated expenses.Costs to implement business optimization programs for the three months ended March 31, 2020 and 2019, respectively.2018 consisted primarily$500 million of external consulting3.95% senior notes due in March 2030 (collectively, the senior notes). Pursuant to a registration rights agreement (the Registration Rights Agreement) with the initial purchasers of the senior notes, we agreed to use our commercially reasonable efforts to file a registration statement with respect to a registered offer to exchange the senior notes for new notes with terms substantially identical in all material respects to the senior notes and transition costs, including employee salaryto have such registration statement declared effective under the U.S. Securities Act of 1933. If we fail to have such registration statement declared effective by September 17, 2021 (a registration default), the annual interest rate on the senior notes would increase by 0.25% for the 90-day period immediately following such registration default and related costs.by an additional 0.25% thereafter. The costs were generally included within costmaximum additional interest rate is 0.50% per annum and if a registration default is corrected, the senior notes would revert to the original interest rates. The payment of sales, selling, general and administrative expense (SG&A) and R&D expense.Foradditional interest is the three months ended March 31, 2019 and 2018, we recognized accelerated depreciation, primarily associated with facilities to be closed,sole remedy for the holders of $3 million and $1 million, respectively. The costs were recorded within SG&A expense.During the three months ended March 31, 2019 and 2018, we recorded the following restructuring charges.The following table summarizes activitysenior notes in the reserves related to our restructuring initiatives.Reserve adjustments primarily related to employee termination cost reserves established in prior periods.Substantially allevent of our restructuring reserves as of March 31, 2019 relate to employee termination costs, with the remaining reserves attributable to contract termination costs. The reserves are expected to be substantially utilized by the end of 2019.
Credit Facilities8. DEBT, FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTSShort-term Debt2019, we had $695 million of commercial paper2020 and $101 million of other short-term borrowings outstanding with a weighted average interest rate of 2.37% and maturities of less than 30 days. No commercial paper was outstanding as of December 31, 2018.Derivatives and Hedging ActivitiesWe operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. Our hedging policy attempts to manage these risks to an acceptable level based on our judgment of the appropriate trade-off between risk, opportunity and costs.We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, British Pound, Chinese Yuan, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative instruments to further reduce the net exposure to foreign exchange risk. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from changes in foreign exchange rates. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.We are also exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates. Our policy is to manage interest costs using a mix of fixed- and floating-rate debt that we believe is appropriate.To manage this mix in a cost-efficient manner, we periodically enter into interest rate swaps in which we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.We do not hold any instruments for trading purposes and none of our outstanding derivative instruments contain credit-risk-related contingent features.All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets and are classified as short-term or long-term based on the scheduled maturity of the instrument. We designate certain of our hedging instruments as cash flow, fair value, or net investment hedges.Cash Flow HedgesWe may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities. We periodically use treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt.For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is recorded in AOCI and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid are initially recorded as assets and reclassified to other comprehensive income (OCI) over the life of the option, and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in net sales, cost of sales and net interest expense, and are primarily related to forecasted third-party sales denominated in foreign currencies, forecasted intercompany sales denominated in foreign currencies, and anticipated issuances of debt, respectively.The notional amounts of foreign exchange contracts were $703 million and $775 million as of March 31, 2019 and December 31, 2018, respectively. The total notional amounts of interest rate contracts designated as cash flow hedges were $300 million and $150 million as of March 31, 2019 and December 31, 2018, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at March 31, 2019 is 18 months for foreign exchange contracts and 30 years for interest rate contracts.We use interest rate swaps to convert a portion of our fixed-rate debt into variable-rate debt. These instruments hedge our earnings from changes in the fair value of debt due to fluctuations in the designated benchmark interest rate. For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets the loss or gain on the underlying hedged item. Fair value hedges are classified in net interest expense, as they hedge the interest rate risk associated with certain of our fixed-rate debt.There were no outstanding interest rate swap contracts designated as a fair value hedge as of March 31, 2019 and December 31, 2018.Net Investment HedgesIn May 2017, we issued €600 million of senior notes due May 2025. We have designated this debt as a hedge of a portion of our net investment in our 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 March 31, 2019, we had an accumulated pre-tax unrealized translation loss in AOCI of $33€200 million related to the Euro-denominated senior notes.DedesignationsIf it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, we discontinue hedge accounting prospectively. If we remove the cash flow hedge designation because the hedged forecasted transactions are no longer probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions are still probable of occurring are deferred and recognized consistent with the loss or income recognition of the underlying hedged items.There were no hedge dedesignations in the first quarters of 2019 or 2018 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 items at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated during the first quarters of 2019 and 2018.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.Undesignated Derivative InstrumentsWe use forward contracts to hedge earnings from the effects of foreign exchange relating to certain of our intercompany 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 $482 million as of March 31, 2019 and $485 million as of December 31, 2018.Gains and Losses on Derivative InstrumentsThe following tables summarize the income statement locations and gains and losses on our derivative instruments for the three months ended March 31, 2019 and 2018.For our fair value hedges, an equal and offsetting gain of $4 million was recognized in net interest expense as an adjustment to the underlying hedged item, fixed-rate debt, in the first quarter of 2018.As of March 31, 2019, $10 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 InstrumentsThe following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of March 31, 2019.The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2018.While our derivatives are all subject to master netting arrangements, we present our assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, we are not required to post collateral for any of our outstanding derivatives.The following table provides information on our derivative positions as if they were presented on a net basis, allowing for the right of offset by counterparty.The following table presents the amounts recorded on the condensed consolidated balance sheet related to fair value hedges:(a)These fair value hedges were terminated prior to December 31, 2018.The following tables summarize our financial instruments that are measured at fair value on a recurring basis.As of March 31, 2019 and December 31, 2018, cash and cash equivalents of $1.9 billion and $1.8 billion, respectively, included money market funds of approximately $7($220 million and $169$224 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,respectively) outstanding under our Euro-denominated credit facility at a 0.91% interest rate yield curves, foreign exchange rates and volatility.Contingent payments related to acquisitions, which consist of milestone payments and sales-based payments, are valued using discounted cash flow techniques. The fair value of milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or the expected timing of payments is accelerated. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increases or the expected timing of payment is accelerated. The following table is a reconciliation of the fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions.no borrowings outstanding under our U.S. dollar-denominated credit facility.
Equity investments not measured at fair value are comprised of other equity investments without readily determinable fair values and were $39 million at March 31, 2019 and $41 million at December 31, 2018. These amounts are included in Other assets.Fair Values of Financial Instruments Not Measured at Fair ValueIn addition to the financial instruments that we are required to recognize at fair value in the condensed consolidated balance sheets, we have certain financial instruments that are recognized at historical cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized in the condensed consolidated balance sheets and the estimated fair values as of March 31, 2019 and December 31, 2018.(a)These fair value amounts are classified as Level 2 within the fair value hierarchy as they are estimated based on observable inputs.The carrying value of short-term debt approximates its fair value due to the short-term maturities of the obligations. The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instruments. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with our credit risk. The carrying values of other financial instruments approximate their fair values due to the short-term maturities of most of these assets and liabilities.9. STOCKHOLDERS’ EQUITYStock-Based CompensationStock compensation expense totaled $22 million and $20 million in the first quarter of 2019 and 2018, respectively. Approximately 80% of stock compensation expense is classified within SG&A expenses with the remainder classified in cost of sales and R&D expenses.We awarded stock compensation grants which consisted of 3.6 million stock options, 0.5 million RSUs and 0.3 million PSUs during the first quarter of 2019. The grant date fair value of stock options, RSUs and PSUs awarded in the first quarter of 2019 were $55 million, $34 million and $28 million, respectively. Stock options and RSUs generally vest in one-third increments over a three-year period. Fifty percent of the PSUs granted were based on adjusted operating margin. The performance condition for these awards is set at the beginning of the year for each tranche of the award during the three-year service period. The remaining PSUs granted were based on stock performance relative to our peer group and vest at the end of the three-year service period.Stock OptionsThe weighted-average Black-Scholes assumptions used in estimating the fair value of stock options granted during the period, along with weighted-average grant-date fair values, were as follows.The total intrinsic value of stock options exercised was $153 million and $66 million during the first quarters of 2019 and 2018, respectively.As of March 31, 2019, the unrecognized compensation cost related to all unvested stock options of $96 million is expected to be recognized as expense over a weighted-average period of 2.1 years.Restricted Stock UnitsAs of March 31, 2019, the unrecognized compensation cost related to all unvested RSUs of $77 million is expected to be recognized as expense over a weighted-average period of 2.0 years.Performance Share UnitsAs of March 31, 2019, the unrecognized compensation cost related to all unvested and awarded PSUs of $46 million is expected to be recognized as expense over a weighted-average period of 1.8 years.Cash DividendsCash dividends declared per common share for the three months ended March 31, 2019 and 2018 were $0.19 and $0.16, respectively.Stock Repurchase ProgramsIn July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018 and by an additional $2.0 billion in November 2018. During the first three months of 2019, we repurchased 8.1 million shares under this authority pursuant to Rule 10b5-1 plans for $586 million. During the first three months of 2018, we repurchased 7.7 million shares for $522 million in cash. We had $1.6 billion remaining available under the authorization as of March 31, 2019.Accelerated Share Repurchase AgreementIn December 2018, we entered into a $300 million accelerated share repurchase agreement (ASR Agreement) with an investment bank. We funded the ASR Agreement with available cash. The ASR Agreement was executed pursuant to the 2012 Repurchase Authorization described above. Under the ASR Agreement, we received 3.6 million shares upon execution. Based on the volume-weighted average price of our common stock during the term of the ASR Agreement, we received an additional 0.6 million shares from the investment bank at settlement on May 7, 2019.10. LEASESLessee ActivityWe 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 provideus with the ability to extend the lease term for periods ranging from one to 12 years. Such options are included in the lease term when it is reasonably certain that the option will be exercised.Certain lease contracts include other services, such as operations and maintenance. 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 the underlying asset’s fair value or will use the asset for all or a major part of its economic life, including circumstances in which we will ultimately own the asset. All other leases are operating leases. For finance leases, we recognize interest expense using the effective interest method and we recognize amortization expense on the right-of-use asset over the shorter of the lease term or the useful life of the asset. For operating leases, we recognize lease cost on a straight-line basis over the term of the lease.Lease liabilities and right-of-use assets are recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. We determine the present value of payments under a lease based on our incremental borrowing rate as of the lease commencement date. The incremental borrowing rate is equal to the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. For operating leases that commenced prior to our adoption of Topic 842, we measured the lease liabilities and right-of-use assets using our incremental borrowing rate as of January 1, 2019.There were no material lease transactions that we entered into but have not yet commenced as of March 31, 2019.The components of lease cost for the three months ended March 31, 2019 were:The following table contains supplemental cash flow information related to leases for the three months ended March 31, 2019:Supplemental balance sheet information related to leases as of March 31, 2019 includes:Lease term and discount rates as of March 31, 2019 were:March 31, 2019Weighted-average remaining lease term (years)Operating leases10Finance leases15Weighted-average discount rateOperating leases2.7%Finance leases10.5%Maturities of operating and finance lease liabilities as of March 31, 2019 were:Future minimum lease payments as of December 31, 2018, as disclosed in our 2018 Annual Report, were: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, IV fluids and inhaled anesthetics. Certain of our equipment leases are classified as sales-type leases and the remainder are operating leases. The terms of the related contracts, including the proportion of fixed versus variable payments and any options to shorten or extend the lease term, vary by customer. We allocate revenue between equipment leases and medical products based on their standalone selling prices. The components of lease revenue for the three months ended March 31, 2019 were:The components of our net investment in sales-type leases as of March 31, 2019 were:Our net investment in sales-type leases is classified as follows in the accompanying condensed consolidated balance sheets:Maturities of sales-type and operating leases as of March 31, 2019 were:11. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMSThe following is a summary of net periodic benefit cost relating to our pension and other postretirement employee benefit (OPEB) plans.12. ACCUMULATED OTHER COMPREHENSIVE INCOMEComprehensive income includes all changes in stockholders’ equity that do not arise from transactions with shareholders, and consists of net income, currency translation adjustments (CTA), pension and OPEB plans, unrealized gains and losses on cash flow hedges and prior to 2018, unrealized gains and losses on available-for-sale equity securities. As a result of changes in accounting guidance related to available-for-sale equity securities, the unrealized gains and losses associated with these assets are no longer recognized in AOCI beginning January 1, 2018. The following table is a net-of-tax summary of the changes in AOCI by component for the three months ended March 31, 2019 and 2018.(a)See table below for details about these reclassifications.The following is a summary of the amounts reclassified from AOCI to net income during the three months ended March 31, 2019 and 2018.(a)Amounts in parentheses indicate reductions to net income.(b)These AOCI components are included in the computation of net periodic benefit cost disclosed in Note 11.Refer to Note 8 for additional information regarding hedging activity and Note 11 for additional information regarding the amortization of pension and OPEB items.13. INCOME TAXESOur effective income tax rate was 11.3% and 11.2% for the three months ended March 31, 2019 and 2018, respectively. Our effective income tax rate can differ from the 21% U.S. Federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards. For the three months ended March 31, 2019, the difference between our effective income tax rate and the U.S. Federal statutory rate was primarily attributable to excess tax benefits on stock compensation awards. For the three months ended March 31, 2018, the difference between our effective income tax rate and the U.S. Federal statutory rate was primarily attributable to nontaxable income from the settlement of certain claims related to the acquired operations of Claris Injectables Limited, excess tax benefits on stock compensation awards, an adjustment of provisional amounts related to U.S. tax reform and a reduction of a liability for an uncertain tax position as a result of a settlement with the related taxing authority.14.7. COMMITMENTS AND CONTINGENCIES20192020 and December 31, 2018,2019, our total recorded reserves including the environmental matters discussed below, with respect to legal and environmental matters were $39$53 million and $34$56 million, respectively, and there were no0 related receivables.seven6 Superfund sites. Under the U.S. Superfund statute and many state laws, generators of hazardous waste sent to a disposal or recycling site are liable for site cleanup if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Separate from the Superfund cases noted above, we are involved in an ongoing voluntary environmental remediation associated with historic operations at our Irvine, California, United States facility. As of March 31, 20192020 and December 31, 2018,2019, our environmental reserves, which are measured on an undiscounted basis, were $20 million and $19 million, respectively.$18 million. After considering these reserves, management is of the opinion that the outcome of these matters will not have a material adverse effect on our financial position or results of operations.purportedputative 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, which we moved to dismiss on September 6,November 9, 2018. We filed aThe court granted our motion to dismiss the amended complaint with prejudice on November 9, 2018.are cooperatinghave cooperated with the New York Attorney General.quarterthree months of 2019, following the resolution of an insurance dispute, we received cash proceeds of $35 million for our allocation of the insurance proceeds under a settlement and cost-sharing agreement related to the defense of the heparin product liability cases. We recognized a $33 million gain in connection with the resolution of the dispute with the insurer that is classified within other operating income, net on the condensed consolidated statement of income for the three months ended March 31, 2019.In December 2016, we receivedcivil investigative demand from the Commercial Litigation Branchthree-year period. One-fourth of the U.S. DOJ primarily relatingPSUs granted related to contingent discount arrangementsthe establishment of the adjusted operating margin vesting condition for awards issued in 2018 and 2019 whereas the remainder were related to awards made in March 2020, which are equally divided into PSUs based on our compound annual sales growth rate performance, our adjusted return on invested capital performance and on our stock performance relative to our peer group. All of the PSUs granted vest at the end of the applicable three-year service period.Three months ended
March 31,2020 2019 Expected volatility 26 % 19 % Expected life (in years) 5.5 5.5 Risk-free interest rate 0.6 % 2.6 % Dividend yield 1.2 % 1.0 % Fair value per stock option $ 16 $ 15 promotionpostretirement employee benefit (OPEB) plans and gains and losses on cash flow hedges.(in millions) CTA Pension and OPEB plans Hedging activities Total Gains (losses) Balance as of December 31, 2019 $ (2,954) $ (715) $ (41) $ (3,710) Other comprehensive income (loss) before reclassifications (359) 10 (131) (480) Amounts reclassified from AOCI (a) — 12 1 13 Net other comprehensive income (loss) (359) 22 (130) (467) Balance as of March 31, 2020 $ (3,313) $ (693) $ (171) $ (4,177) As Restated (in millions) CTA Pension and OPEB plans Hedging activities Total Gains (losses) Balance as of December 31, 2018 $ (2,868) $ (954) $ (1) $ (3,823) Adoption of new accounting standard 9 (169) (1) (161) Other comprehensive income (loss) before
reclassifications(97) 7 (15) (105) Amounts reclassified from AOCI (a) — 7 — 7 Net other comprehensive income (loss) (97) 14 (15) (98) Balance as of March 31, 2019 $ (2,956) $ (1,109) $ (17) $ (4,082) Amounts reclassified from AOCI (a) As Restated (in millions) Three months ended March 31, 2020 Three months ended March 31, 2019 Location of impact in income statement Amortization of pension and OPEB items Amortization of net losses and prior service costs or credits $ (15) $ (8) Other (income) expense, net Less: Tax effect 3 1 Income tax expense $ (12) $ (7) Net of tax Gains on hedging activities Foreign exchange contracts $ (1) $ — Cost of sales Less: Tax effect — — Income tax expense $ (1) $ — Net of tax Total reclassifications for the period $ (13) $ (7) Total net of tax TISSEELcontracts 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.ARTISSchronic dialysis therapies; sterile IV solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; and surgical hemostat and sealant products. In April 2018,For a majority of these sales, our performance obligation is satisfied upon delivery to the DOJ filedcustomer. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a noticeseparate performance obligation.its decisionour segments, we enter into other types of contracts including contract manufacturing arrangements, equipment leases, and certain subscription software and licensing arrangements. We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services. Revenue is recognized over time when we are creating or enhancing an asset that the customer controls as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to intervene andpayment for performance completed.underlying qui tam complaint (U.S. ex rel. Andrew Capp v. Baxter) was unsealedoriginal duration of one year or more, which are primarily included in the Americas segment. Some contracts in the United States District Courtincluded in this amount contain index-dependent price increases, which are not known at this time. We expect to recognize approximately 20% of this amount as revenue over the remainder of 2020, 25% in 2021, 20% in each of 2022 and 2023, 5% in each of 2024 and 2025, and the remaining balance thereafter.Districtdifference between the amount of Columbia. equipment revenue recognized upon delivery and the amount of consideration initially receivable from the 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 $133 million as of March 31, 2020, of which $37 million related to contract manufacturing services, $47 million related to software sales and $49 million related to bundled equipment and consumable medical products contracts. 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. Contract assets are presented within accounts receivable, net ($66 million and $63 million as of March 31, 2020 and December 31, 2019, respectively) and other non-current assets ($67 million and $68 million as of March 31, 2020 and December 31, 2019, respectively) in the accompanying condensed consolidated balance sheets. Contract liabilities as of March 31, 2020 and December 31, 2019 were $19 million and $12 million, respectively, and were included in accounts payable and other accrued liabilities ($7 million as of March 31, 2020) and other non-current liabilities ($12 million as of March 31, 2020 and December 31, 2019, respectively) in the accompanying condensed consolidated balance sheets.attorneyfollowing tables disaggregate our net sales from contracts with customers by Global Business Unit (GBU) between the U.S. and international:Three months ended March 31, As Restated 2020 2019 (in millions) U.S. International Total U.S. International Total $ 204 $ 666 $ 870 $ 192 $ 662 $ 854 461 229 690 406 228 634 231 296 527 232 278 510 82 138 220 77 128 205 137 87 224 120 79 199 60 96 156 48 81 129 42 73 115 45 62 107 Total Baxter $ 1,217 $ 1,585 $ 2,802 $ 1,120 $ 1,518 $ 2,638 relator/plaintiff voluntarily dismissedthree months ended March 31, 2020 and March 31, 2019 were:(in millions) Three months ended March 31, 2020 Three months ended March 31, 2019 Sales-type lease revenue $ 6 $ 6 Operating lease revenue 14 15 Variable lease revenue 18 21 Total lease revenue $ 38 $ 42 qui tam complaint on June 16, 2018. The complaint which is now fully resolved,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 in the second half of 2015 through March 31, 2020, we have incurred cumulative pre-tax costs of $1.0 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, asset impairments and accelerated depreciation. We currently expect to incur additional pre-tax costs of approximately $30 million through the completion of these initiatives underThree months ended
March 31,(in millions) 2020 2019 Restructuring charges $ 25 $ 25 Costs to implement business optimization programs 7 10 Accelerated depreciation — 3 Total business optimization charges $ 32 $ 38 Three months ended March 31, 2020 (in millions) COGS SG&A R&D Total Employee termination costs $ 2 $ 16 $ 1 $ 19 Asset impairments 6 — — 6 Total restructuring charges $ 8 $ 16 $ 1 $ 25 Three months ended March 31, 2019 (in millions) COGS SG&A R&D Total Employee termination costs $ — $ (1) $ 9 $ 8 Contract termination costs 7 — — 7 Asset impairments 9 1 — 10 Total restructuring charges $ 16 $ — $ 9 $ 25 (in millions) Liability balance as of December 31, 2019 $ 92 Charges 19 Payments (21) Currency translation (2) Liability balance as of March 31, 2020 $ 88 Three months ended
March 31,As Restated (in millions) 2020 2019 Pension benefits Service cost $ 21 $ 18 Interest cost 24 47 Expected return on plan assets (41) (72) Amortization of net losses and prior service costs 19 15 Net periodic pension benefit cost $ 23 $ 8 OPEB Interest cost $ 1 $ 2 Amortization of net loss and prior service credit (4) (7) Net periodic OPEB cost (income) $ (3) $ (5) Three months ended
March 31,(in millions) 2020 2019 Basic shares 507 512 Effect of dilutive securities 9 10 Diluted shares 516 522 discountfeatures.Gain (loss) recognized in OCI Location of gain (loss)
in income statementGain (loss) reclassified from AOCI into income (in millions) 2020 2019 2020 2019 Cash flow hedges Interest rate contracts $ (184) $ (11) Interest expense, net $ — $ — Foreign exchange contracts 14 (9) Cost of sales (1) — Net investment hedges 49 14 Other (income) expense, net — — Total $ (121) $ (6) $ (1) $ — Location of gain (loss) in income statement Gain (loss) recognized in income As Restated (in millions) 2020 2019 Undesignated derivative instruments Foreign exchange contracts Other (income) expense, net $ 2 $ (8) 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 non-current assets $ — Other non-current liabilities $ 226 Foreign exchange contracts Prepaid expenses and other current assets 24 Accounts payable and accrued liabilities 3 Total derivative instruments designated as hedges 24 229 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other current assets 5 Accounts payable and accrued liabilities 4 Total derivative instruments $ 29 $ 233 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 non-current assets $ 10 Other non-current liabilities $ 52 Foreign exchange contracts Prepaid expenses and other current assets 10 Accounts payable and accrued liabilities — Total derivative instruments designated as hedges 20 52 Undesignated derivative instruments Foreign exchange contracts Prepaid expenses and other current assets 1 Accounts payable and accrued liabilities 2 Total derivative instruments $ 21 $ 54 March 31, 2020 December 31, 2019 (in millions) Asset Liability Asset Liability Gross amounts recognized in the consolidated balance sheet $ 29 $ 233 $ 21 $ 54 Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet (7) (7) (11) (11) Total $ 22 $ 226 $ 10 $ 43 Carrying amount of hedged item Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a) (in millions) Balance as of March 31, 2020 Balance as of December 31, 2019 Balance as of March 31, 2020 Balance as of December 31, 2019 Long-term debt $ 103 $ 103 $ 6 $ 6 Basis of fair value measurement (in millions) Balance as of March 31, 2020 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 $ 29 $ — $ 29 $ — Marketable equity securities 3 3 — — Total $ 32 $ 3 $ 29 $ — Liabilities Foreign exchange contracts $ 7 $ — $ 7 $ — Interest rate contracts 226 — 226 — Contingent payments related to acquisitions 39 — — 39 Total $ 272 $ — $ 233 $ 39 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 contracts 10 — 10 — Marketable equity securities 3 3 — — Total $ 24 $ 3 $ 21 $ — Liabilities Foreign exchange contracts $ 2 $ — $ 2 $ — Interest rate contracts 52 — 52 — Contingent payments related to acquisitions 39 — — 39 Total $ 93 $ — $ 54 $ 39 promotionshort-term funds of approximately $2.3 billion and $1.7 billion, respectively, which are considered Level 2 in the fair value hierarchy.Three months ended
March 31,(in millions) 2020 2019 Fair value at beginning of period $ 39 $ 32 Additions 4 — Change in fair value recognized in earnings (3) — Payments (1) (1) Fair value at end of period $ 39 $ 31 Book values Fair values(a) (in millions) 2020 2019 2020 2019 Liabilities Short-term debt $ 221 $ 226 $ 221 $ 226 Current maturities of long-term debt and finance lease obligations 315 315 315 315 Long-term debt and finance lease obligations 5,996 4,809 6,324 5,156 TISSEEL, ARTISScredit risk. The carrying values of other financial instruments approximate their fair values due to the short-term maturities of most of those assets and VERITAS products.15.liabilities.three3 geographical segments: Americas (North and South America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Our segments provide a broad portfolio of essential healthcare products,most of our debt and cash and cash 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 R&D costs, certain 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 costs, intangible asset amortization and asset impairments). Our chief operating decision maker does not receive any asset information by operating segment and, accordingly, we do not report asset information by operating segment.Three months ended
March 31,As Restated (in millions) 2020 2019 Net sales: Net sales: Americas $ 1,499 $ 1,409 EMEA 754 707 APAC 549 522 Total net sales $ 2,802 $ 2,638 Americas $ 544 $ 538 EMEA 161 144 APAC 128 120 Total segment operating income $ 833 $ 802 Three months ended
March 31,As Restated (in millions) 2020 2019 Total segment operating income $ 833 $ 802 Corporate and other (424) (419) Total operating income 409 383 Net interest expense 21 18 Other (income) expense, net Other (income) expense, net 10 (21) Income before income taxes $ 378 $ 386 210 for additional information on Net Sales by GBU.2018 (20182019 (2019 Annual Report), for management’s discussion and analysis of our financial condition and results of operations. The following is management’s discussion and analysis of our financial condition and results of operations for the three months ended March 31, 20192020 and 2018.RESULTS OF OPERATIONSOur net income2019.$347$332 million, or $0.66$0.64 per diluted share, compared to $389$342 million, or $0.71$0.66 per diluted share, for the three months ended March 31, 2018.2019. Net income for the three months ended March 31, 2020 included special items which decreased net income by $93 million, or $0.18 per diluted share, as further discussed below. Net income for the three months ended March 31, 2019 included special items which decreased net income by $52 million, or $0.10$0.09 per diluted share, as further discussed below. Net income for the three months ended March 31, 2018 included special items which increased net income by $1 million, or $0.01 per diluted share, as further discussed below.20192020 and 2018.Three months ended
March 31,(in millions) 2020 2019 Gross Margin Intangible asset amortization expense $ (52) $ (43) (10) (19) (7) (5) (6) (4) (3) — Total Special Items $ (78) $ (71) Impact on Gross Margin Ratio (2.8 pts) (2.7 pts) Selling, General and Administrative (SG&A) Expenses $ 21 $ 8 3 5 14 — Total Special Items $ 38 $ 13 Impact on SG&A Ratio 1.3 pts 0.5 pts Research and Development (R&D) Expenses $ 1 $ 11 21 4 1 — Total Special Items $ 23 $ 15 Impact on R&D Ratio 0.8 pts 0.6 pts Other Operating Income, net $ (17) $ — (3) — — (33) Total Special Items $ (20) $ (33) Income Tax Expense $ (26) $ (14) Total Special Items $ (26) $ (14) Impact on Effective Tax Rate (2.4 pts) (1.4 pts) Three months ended
March 31,Percent change As Restated (in millions) 2020 2019 At actual
currency ratesAt constant currency rates United States $ 1,217 $ 1,120 9 % 9 % International $ 1,585 1,518 4 % 8 % Total net sales $ 2,802 $ 2,638 6 % 8 % 1In 2019 and 2018, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure on a global basis. These actions included streamlining our international operations, rationalizing our manufacturing facilities, reducing our general and administrative infrastructure, re-aligning certain research and development (R&D) activities and cancelling certain R&D programs. We recorded business optimization charges of $38 million in 2019 and 2018, respectively. Our results in 2019 included charges of $25 million related to restructuring activities, $10 million of costs to implement business optimization programs, which primarily included external consulting and internal transition costs, and $3 million of accelerated depreciation associated with facilities to be closed. The $25 million of restructuring charges included $8 million of employee termination costs, $10 million of asset impairment charges related to facility closures and $7 million of other exit costs. Our results in 2018 included charges of $12 million related to restructuring activities, $25 million of costs to implement business optimization programs, which primarily included external consulting and internal transition costs, and $1 million of accelerated depreciation associated with facilities to be closed. The $12 million of restructuring charges included $10 million of employee termination costs and $2 million of asset impairment charges related to facility closures.2Our results in 2019 included $10 million of acquisition and integration expenses related to our acquisitions of Claris Injectables Limited (Claris) and the RECOTHROM and PREVELEAK products in prior periods, as well as the 2019 acquisition of an in-process R&D asset of $4 million. Our results in 2018 included acquisition and integration expenses of $7 million related to our acquisition of Claris.3Our results in 2018 included a charge of $10 million related to certain product litigation4Our results in 2019 included costs of $4 million related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that will become effective in 20205Our results in 2019 included a benefit of $33 million for our allocation of insurance proceeds received pursuant to a settlement and cost-sharing arrangement for a legacy product-related matter.6Our results in 2018 included a benefit of $80 million for the settlement of certain claims related to the acquired operations of Claris.7Reflected in this item is the income tax impact of the special items identified in this table. Additionally, our results in 2018 included a tax benefit of $8 million related to updates to the estimated impact of U.S. federal tax reform previously made in 2017. The tax effect of each adjustment is based on the jurisdiction in which the adjustment is incurred and the tax laws in effect for each such jurisdiction.NET SALES(1)The amounts reflect the impact of U.S. cyclophosphamide net sales on constant currency sales growth for the current period.42 percentage points induring the first quarter of 20192020 compared to the priorprior-year period principally due to the strengthening of the U.S. dollarDollar relative to the Euro, Australian Dollar, British Pound, Chinese YuanBrazilian Real and Brazilian Real. We are presentingimpactnovel strain of generic competition for U.S. cyclophosphamidecoronavirus (COVID-19). COVID-19 may have an adverse impact on our netoperations, 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 have experienced and may continue to experience 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 has negatively impacted 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 desiredenhance comparability between periods and better identify operating trends. (1)The amounts reflect the impact of U.S. cyclophosphamide net sales on constant currency sales growth for the current period.On a constant currency basis, Three months ended
March 31,Percent change As Restated (in millions) 2020 2019 At actual currency rates At constant currency rates Renal Care $ 870 $ 854 2 % 4 % Medication Delivery 690 634 9 % 10 % Pharmaceuticals 527 510 3 % 6 % Clinical Nutrition 220 205 7 % 10 % Advanced Surgery 224 199 13 % 14 % Acute Therapies 156 129 21 % 23 % Other 115 107 7 % 9 % Total Baxter $ 2,802 $ 2,638 6 % 8 % 2019,the first quarter of 2020, as compared to the prior-year period. That increase was driven by global patient growth in PD, partially offset by lower U.S. in-center HD sales.On a constant currency basis, 2% adverse impact from foreign exchange rate changes. The COVID-19 pandemic contributed to the increase in demand for PD products in the current period.decreasedincreased 9% in 2019. The decrease in 2019the first quarter of 2020, as compared to the prior-year period. That increase was attributable to higherincreased sales in early 2018 of our large volume parenterals (LVPs) as customersSpectrum IQ Infusion System in the U.S. and EVO IQ Infusion System internationally and related IV administration sets and solutions, partially offset by a 1% adverse impact from foreign exchange rate changes. The COVID-19 pandemic contributed to the increases in demand for those products in the current period and we currently anticipate that increased purchases due to industry-wide supply challenges. On a constant currency basis, demand will continue in the second quarter of 2020.2019. Thethe first quarter of 2020, as compared to the prior-year period. That increase in 2019 was due todriven by growth in international pharmacy compounding sales and increased sales of our generic injectables as well as anesthesia and critical care products. Partially offsetting those increases were reducedU.S. cyclophosphamide, partially offset by lower sales of U.S. cyclophosphamideinhaled anesthesia products and BREVIBLOC due toTransderm Scop and by a 3% adverse impact from foreign exchange rate changes. The COVID-19 pandemic increased demand for our generic competition.injectables and decreased demand for our inhaled anesthesia products in the current period and we currently anticipate that such demand trends will continue in the second quarter of 2020.decreasedincreased 7% in 2019. Results werethe first quarter of 2020, as compared to the prior-year period. That increase was driven by lower U.S. sales asincreased demand for our PN therapies and related products, partially offset by a 3% adverse impact from foreign exchange rate changes. The COVID-19 pandemic contributed to the increases in demand for those therapies and related products in the current period and we currently anticipate that increased demand will continue to recover fromin the impactsecond quarter of supply constraints arising from Hurricane Maria in 2017 and the phasing of certain orders outside the U.S.On a constant currency basis, 2020.in 2019, primarily13% the first quarter of 2020, as compared to the prior-year period. Most of the increase was driven by improvedthe acquisition of Seprafilm, which contributed $13 million in net sales during the quarter. Additionally, contributing to the increase in the first two months of the quarter was increased demand for our core hemostats and sealants includingdue, in part, to competitive supply disruptions. Those increases were partially offset by a contribution1% adverse impact from foreign exchange rate changes. The COVID-19 pandemic began to have a significant adverse impact on Advanced Surgery net sales during the latter part of $17 million from the RECOTHROMquarter and PREVELEAK products acquiredwe currently anticipate a substantial decline in 2018.On a constant currency basis, those net sales in the second quarter of 2020 as many elective surgeries have been and continue to be postponed.2019 duethe first quarter of 2020, as compared to higherthe prior-year period. The increase was driven by increased global demand for our CRRT systems to treat acute kidney injuries.Oninjuries, partially offset by a constant currency basis, 2% adverse impact from foreign exchange rate changes. The COVID-19 pandemic drove the increases in demand for those products in the current period and we currently anticipate that increased demand will continue in the second quarter of 2020.2019 due primarilythe first quarter 2020, as compared to favorable volumes manufacturedthe prior-year period. The increase was driven by us on behalf ofincreased demand for our pharmaceutical partners.Three months ended March 31, As Restated 2020 % of net sales 2019 % of net sales $ change % change Gross margin $ 1,163 41.5 % $ 1,080 40.9 % $ 83 7.7 % SG&A SG&A $ 628 22.4 % $ 601 22.8 % $ 27 4.5 % R&D $ 146 5.2 % $ 129 4.9 % $ 17 13.2 % 2.72.8 and 2.22.7 percentage points on the gross margin ratio in the first quartersquarter of 20192020 and 2018,2019, respectively. Refer to the Special Items caption above for additional detail.was flatincreased in the first quarter of 2020 compared to the prior year asdue to a favorable foreign currency translationproduct mix and manufacturing improvements were offsetefficiencies.mix.0.51.3 and 1.30.5 percentage points on the SG&A expenses ratio in the first quartersquarter of 20192020 and 2018,2019, respectively. Refer to the Special Items caption above for additional detail.increaseddecreased in the first quarter of 20192020 primarily due to lower transition service income thatactions we earned followingtook to restructure our spinoffcost position and focus on expense management and reduced travel and related expenses due to the COVID-19 pandemic.Baxalta Incorporated (Baxalta), as the agreement with Baxalta for these services terminated as of July 1, 2018,2020 and select investments we are making to support the commercial success of upcoming product launches.R&D0.60.8 and 0.10.6 percentage points on the R&D expenseexpenses ratio in the first quartersquarter of 20192020 and 2018,2019, respectively. Refer to the Special Items caption above for additional detail.decreasedratio increased in the first quarter of 20192020 as a result of the timing of project-related expenditures compared to the prior year, partially offset by actions we took to restructure our cost position and focus on expense management, and favorable foreign currency translation.management.initiatedundertaken actions to transform our cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through March 31, 2019,2020, we have incurred cumulative pre-tax costs of $834 million$1.0 billion related to these actions. The costs consisted primarily of employee termination costs, implementation costs, asset impairments, and accelerated depreciation. We currently expect to incur additional pre-tax costs of approximately $35$30 million related to these initiatives. These costs willinitiatives, primarily includerelated to employee termination costs and implementation costs. To the extent further cost savings opportunities are identified, we may incur additional business optimization expenses. The reductions in our cost base from these actions in the aggregate are expected to provide cumulative annual pre-tax savings of approximately $1.2 billion once the remaining actions are complete. The savings from these actions will impact cost of sales, SG&A expenses, and R&D expenses. Approximately 9095 percent of the expected annual pre-tax savings are expected to be realized by the end of 2019,2020, with the remainder by the end of 2023.Forthree months ended March 31, 2019first quarter of 2020 as we recognized a $17 million gain on the sale of property in conjunction with our business optimization initiatives and 2018, othera $3 million gain as a result of a change in the estimated fair value of contingent consideration liabilities. Other operating income, net was $33 million and $80 million, respectively. Inin the current period,first quarter of 2019 as we recognized a $33 million gain when our share of the proceeds under a cost-sharing agreement became realizable following the resolution of a dispute with an insurer related to a legacy product-related matter. In the prior period, we settled certain claims with the seller related to the acquired operations of Claris, which resulted in a gain of $80 million.Net interest$18$21 million and $12$18 million in the first quartersquarter of 20192020 and 2018,2019, respectively. The increase in the first quarter of 20192020 was primarily driven by higher average debt outstanding as a result of the March 2020 issuance of $750 million of 3.75% senior notes due March 2025 and lower$500 million of 3.95% senior notes due March 2030 and the May 2019 issuance of €750 million of 0.40% senior notes due May 2024 and €750 million of 1.3% senior notes due May 2029. The increase in interest expense, net was partially offset by higher interest income as a result of higher average cash and cash equivalents balances.cash equivalents balances. Income,(Income) Expense, Netincome,(income) expense, net was $25expense of $10 million and $18income of $21 million in the first quartersquarter of 20192020 and 2018,2019, respectively. The increasedecrease in the first quarter of 2020 compared to the prior year was primarily due to a benefitlower pension benefits and foreign exchange net losses in the current-year period from fair value adjustments in marketable equity securities, an impairment of an investment in the prior-year period, and higher pension benefits in the current-year period. Partially offsetting the benefits were lower foreign exchange gains in the current-year period. 11.3%11.9% and 11.2% for11.4% in the three months ended March 31,first quarter of 2020 and 2019, and 2018, respectively. Our effective income tax rate can differ from the 21% U.S. Federalfederal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.Federalfederal statutory rate was primarily attributable to excess tax benefits on stock compensation awards. For the three months ended March 31, 2018, the difference between our effective income tax rate and the U.S. Federal statutory rate was primarily attributable to nontaxable income from the settlement of certain claims related to the acquired operations of Claris, excess tax benefits on stock compensation awards, an adjustment of provisional amounts related to U.S. tax reform and a reduction in a liability for an uncertain tax position as a result of a settlement with the related taxing authority.significant factors impactingfinancial information for our reportable segments’ financial results.segments:
Net sales Operating income (loss) Three months ended March 31, Three months ended March 31, As Restated As Restated (in millions) 2020 2019 2020 2019 Americas $ 1,499 $ 1,409 $ 544 $ 538 EMEA 754 707 161 144 APAC 549 522 �� 128 120 Corporate and other — — (424) (419) Total $ 2,802 $ 2,638 $ 409 $ 383 Americaswas $537were $1.5 billion and $544 million, and $566 millionrespectively, in the first quarter of 20192020 and 2018, respectively.$1.4 billion and $538 million, respectively, in the first quarter of 2019. The decreaseincreases in 2019 wasthe first quarter of 2020 were primarily driven by reducedincreased sales and gross margin in themultiple GBUs, particularly Medication Delivery, PharmaceuticalsAdvanced Surgery due to the Seprafilm acquisition, Acute Therapies and Clinical Nutrition GBUs. Partially offsetting the decrease was favorable performance in Advanced Surgery.was $145were $754 million and $151$161 million, respectively, in the first quarter of 20192020 and 2018, respectively. The decrease in 2019 was primarily driven by unfavorable foreign exchange rates partially offset by favorable performance in the Renal Care and Pharmaceuticals GBUs.APACSegment operating income was $121$707 million and $117$144 million, respectively, in the first quarter of 2019 and 2018, respectively. Results2019. The increases in 2019the first quarter of 2020 were primarily driven by higherincreased sales primarily from China and Australia,gross margin in multiple GBUs, particularly Pharmaceuticals, Clinical Nutrition, Medication Delivery and Acute Therapies.Pharmaceuticals GBUs. most of our debt and cash and cash equivalents and related net interest expense, foreign exchange rate fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and certain foreign currency hedging activities, corporate headquarters costs, certain R&D costs, certain GBU support costs, stock compensation expense, income and expense from minority investments, 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).20192020 and 2018.2019.Three months ended March 31, As Restated (in millions) 2020 2019 Cash flows from operations - continuing operations $ 274 $ 134 Cash flows from investing activities (604) (301) Cash flows from financing activities 1,170 238 2019,2020, cash provided by operating activities was $148$274 million, as compared to cash provided by operating activities of $447$134 million in the first three months of 2018, a decrease2019, an increase of $299$140 million. The decreaseincrease was primarily due to the Claris settlement received in 2018 and the timing of vendor payments and lower employee compensation payments in the current year, partially offset by an insurance recoveryrecoveries received in 2019 from a legacy product-related matter.matter and Hurricane Maria.
While we have not yet experienced any significant collection issues related to our receivables to date, we expect that the timing of collection of our receivables may be adversely impacted by the COVID-19 pandemic in the remainder of 2020.acquired, and capital expenditures of $198 million. acquired.2018,2020, cash used for investinggenerated from financing activities included $1.2 billion of net proceeds from the issuance of $750 million of senior notes due in 2025 and $500 million of senior notes due in 2030. We will use the net proceeds from the senior notes issuances for general corporate purposes, including to strengthen our balance sheet as a precautionary measure in light of the COVID-19 pandemic. Cash generated from financing activities in the three months ended March 31, 2020 also included stock issued under employee benefit plans of $66 million and was partially offset by dividend payments for acquisitions of $219 million, primarily related to RECOTHROM and PREVELEAK and two molecules from Celerity Pharmaceuticals, LLC, and capital expenditures of $155$111 million.Cash Flows from Financing Activities In the first three months of 2018, cash used for financing activities included payments for stock repurchases of $522 million and dividend payments of $87 million, partially offset by the proceeds from stock issued under employee benefit plans of $82 million.an additional $1.5 billion inand February 2018 and by an additional $2.0 billion in November 2018. We paid $597 million in cash todid not repurchase approximately 8.1 millionany shares under this authority pursuant to Rule 10b5-1 plans in the first quarterthree months of 20192020 and had $1.6 billion$897 million remaining available under this authorization as of March 31, 2019.In December 2018, we entered into a $300 million accelerated share repurchase agreement (ASR Agreement) with an investment bank. We funded the ASR Agreement with available cash. Under the ASR Agreement, we received 3.6 million shares upon execution. Based on the volume-weighted average price of our common stock during the term of the ASR Agreement, we received an additional 0.6 million shares from the investment bank at settlement on May 7, 2019.2019,2020, our U.S. dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $1.5$2.0 billion and approximately €200 million, respectively. There werewas no amountsamount outstanding under our U.S. dollar-denominated credit facilities atfacility as of March 31, 20192020 or December 31, 2018, respectively.2019, There was €200 million ($220 million and $224 million, respectively) outstanding at a 0.9% interest rate under our Euro-denominated credit facility as of March 31, 2020 and December 31, 2019. As of March 31, 2019,2020, we were in compliance with the financial$1.9$4.1 billion of cash and cash equivalents as of March 31, 2019,2020, with adequate cash available to meet operating requirements in each jurisdiction in which we operate. We invest our excess cash in money market and other funds and diversify the concentration of cash among different financial institutions.FebruaryMarch and April 2019,2020, Standard & Poor’s, Fitch, and Moody’s reaffirmed our investment grade credit ratings asthat we disclosed in our 20182019 Annual Report.20182019 Annual Report. Certain of20182019 Annual Report. There have been no significant changes in the application of our critical accounting policies during the first quarter of 2019.In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (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 objectiveASU is to provide financial statement users with more decision-usefulQuarterly Report on Form 10-Q for information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard isregarding recently adopted accounting pronouncements. There are no accounting standards issued but not yet effective for our financial statements beginning in 2020. We are currently evaluating the impact of adoption of this ASU, but it is not expected tothat we believe will have a material effectimpact on our condensed consolidated financial statements.In August 2018, the FASB issued ASC 2018-15, Intangibles-Goodwill and Other Internal-Use Software, which reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and 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. We are currently evaluating the impact of adoption of this ASU, but it is not expected to have a material effect on our condensed consolidated financial statements.147 within Item 1 for a discussion of our legal contingencies. Upon resolution of any of these uncertainties, we may incur charges in excess of presently established liabilities. While our liability in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and we may in the future incur material judgments or enter into material settlements of claims.at which time FDA issued a related Form-483 (Claris 483). In July 2018, FDAand subsequently issued a Warning Letter based on observations identified in the 2017 inspection (Claris Warning Letter).1 The Claris Warning Letter includes a number of observations across a variety of areas. We submitted our response toClaris Warning Letter in August 2018 andfacilities, we are continuing to implement corrective and preventive actions which have included product recalls that are financially immaterial to us, to address FDA’s prior observations as set forth in the Claris 483 or the Claris Warning Letter and other items identified in connection with integrating Claris into our quality systems. We hadRegulatory Meeting with FDA on November 6, 2018 and we continue to cooperate with FDA in connection withmajority of the resolution of these matters.containscontained a number of observations of alleged Good Manufacturing Practice related issues across a variety of areas, some of which overlap with the areas covered in the Claris 483 or the Claris Warning Letter. We will respondresponded to the Show Cause Notice and a follow up inspection occurred in the specified time frameJuly 2019. This matter resulted in a two-day suspension order for certain manufacturing operations, which occurred on March 19 and cooperate with the regulatory authorities. (including estimates regarding our ability to obtain approval for distribution in the U.S. of new products manufactured at our Baxter Ahmedabad facility), strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, potential tax liability associated with the separation of our biopharmaceuticals and medical products businesses, (including the 2016 disposition of our formerly retained shares in Baxalta (Retained Shares)), the impact of competition, future sales growth, business development activities (including the recent acquisitions of Claris InjectablesCheetah and two surgical productsSeprafilm from Mallinckrodt plc)Sanofi), Hurricane Maria related production disruptions, business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the sufficiency of our facilities and financial flexibility, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts. current judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:failure to achieve our long-term financial improvement goals;product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters (including the Claris Warning Letter), import bans, sanctions, seizures, litigation, or declining sales;• product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales; • the impact of global economic conditions (including potential trade wars) and public health crises and epidemics, such as the novel strain of coronavirus (COVID-19), on us and our customers and suppliers, including foreign governments in countries in which we operate; delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities;future actions of third parties, including third-party payers, the impact of healthcare reform and the implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018 and the European Union’s General Data Protection Regulation which became effective in May 2018 for example);• future actions of third parties, including third-party 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 pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, 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); • • failure to achieve our long-term financial improvement goals; plc to satisfy its obligationobligations under the separation agreements, including the tax matters agreement, or that certain letter agreement entered into with Shire plc and Baxalta;the impact of global economic conditions (including potential trade wars) on us and our customers and suppliers, including foreign governments in countries in which we operate;States;States and potential taxes associated with the Base Erosion and Anti-Abuse Tax;the outcome of pending or future litigation;the adequacy of our cash flows from operations to meet our ongoing cash obligations and fund our investment program; andSecurities and Exchange Commission,SEC, including those factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, all of which are available on our website. may use options forwards and cross-currency swapsforwards to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities. The maximum term over which we have cash flow hedge contracts in place related to foreign exchange risk on forecasted transactions as of March 31, 20192020 is 1812 months. We also enter into derivative instruments to hedge foreign exchange risk on certain intercompanyintra-company and third-party receivables and payables and debt denominated in foreign currencies.atas of March 31, 2019,2020, 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 $11$17 million with respect to those contracts would decreaseincrease by $21 million, resulting in a net liability position.atas of March 31, 20192020 by replacing the actual exchange rates atas of March 31, 20192020 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.pesoPeso applied to our peso-denominated net monetary asset positions are recorded in income at the time of the change. As of March 31, 2019,2020, our net monetary assets denominated in Argentine pesosPesos are not significant.20182019 Annual Report. There were no significant changes during the quarter ended March 31, 2019.
2020.We carried out an evaluation, under the supervision andDisclosure Committee and management, including the Chief Executive Officer and our Chief Financial Officer, ofhas evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of March 31, 2019. 2020.concludedas appropriate, to allow timely decisions regarding required disclosure.disclosureannual or interim financial statements would not be prevented or detected on a timely basis.procedures were effectivemonitor their effectiveness for a sufficient period of time prior to reaching any determination as to whether the material weakness has been remediated.March 31, 2019.Changesand for the periods presented in accordance with U.S. GAAP.During the quarter ended March 31, 2019,beganare currently implementing an upgrade to our enterprise resource planning (ERP)ERP software. In connection with the ERP upgrade, we are updating the processes that constitute our internal control over financial reporting, as necessary. This normal course of business ERP upgrade is being implemented to remain current with the latest release of the software.Inrelated to our overall business optimization initiatives, we began implementation ofhave been implementing a long-term business transformation project within the finance, human resources, purchasing and information technology functions which will further centralize and standardize business processes and systemsystems across the company. We are transitioning some processes to our shared services centers while others are movinghave been moved to outsourced providers. This multi-year initiative will beis being conducted in phases and includeincludes modifications to the design and operation of controls over financial reporting.Withexceptiontwo preceding paragraphs and in the Remediation of theMaterial Weakness section above, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.AccountingAccounting Firminformationstatements included in this Quarterly Report on Form 10-Q for the three monthsquarterly periods ended March 31, 20192020 and 20182019 has been performed by PricewaterhouseCoopers LLP, our independent registered public accounting firm. Its report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and, therefore, the independent accountants’ liability under Section 11 does not extend to it.IndependentIndependent Registered Public Accounting FirmShareholdersStockholders of Baxter International Inc. (the(the “Company”) as of March 31, 2019,2020, and the related condensed consolidated statements of income, comprehensive income (loss), changes in equity and cash flows for the three-month periods ended March 31, 20192020 and 2018, 2019,including the related notes, appearing under Part I, Item 1 of this Quarterly Report on Form 10-Q (collectively referred to as the “interim financialstatements”).Based on our reviews, we are not aware of any material modifications that should be made to the interim financial statements referred to abovefor them to be in conformity with accounting principles generally accepted in the United States of America.20182019 and the related consolidated statements of income, comprehensive income, changes in equityand cash flowsfor the year then ended (not presented herein), and in our report dated February 21, 2019,March 17, 2020, which includeda paragraph regarding the correction of misstatements in the 2018 and 2017 financial statements and a paragraph describing a change in the manner of accounting for certain pension and postretirement net periodic benefit costsleases in the 2018 financial statements,2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the condensed consolidated balance sheet as of December 31, 2018,2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.May 7, 2019
April 30, 2020INFORMATIONINFORMATIONItem 1.147 is incorporated herein by reference.The following table includes information about our common stock repurchases during the three-month period ended March 31, 2019.(1) of our common stock on the open market or in private transactions. The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018 and by an additional $2.0 billion in November 2018. During the first quarter of 2019, we repurchased 8.1 million shares pursuant to Rule 10b5-1 plans for $586 million under this program. We had $1.6 billion remaining under this program (as amended and after giving effect to stock repurchases) as of March 31, 2019. This program does not have an expiration date.In December 2018, we entered into a $300 million accelerated share repurchase agreement (ASR Agreement) with an investment bank. We funded the ASR Agreement with available cash. The ASR Agreement was executed pursuant to the 2012 Repurchase Authorization described above. Under the ASR Agreement, we received 3.6 million shares upon execution. Based on the volume-weighted average price of our common stock duringon the termopen market or in private transactions. The Board of the ASR Agreement, we receivedDirectors increased this authority by an additional 0.6$1.5 billion in each of November 2016 and February 2018 and by an additional $2.0 billion in November 2018. During the first quarter of 2020 we did not repurchase any shares pursuant to Rule 10b5-1 plans. We had $897 million shares from the investment bank at settlement on May 7, 2019.Exhibit Index:ExhibitNumberDescriptionExhibit
NumberDescription C 10.16*4.2 4.3 10.1 15*10.2 15* 101.LAB* 101.LAB*101.PRE* 101.PRE*101.DEF* 101.DEF**CManagement contract or compensatory plan or arrangement.BAXTER INTERNATIONAL INC. Date: April 30, 2020 Date: May 7, 2019By: By:
Executive Vice President and Chief Financial Officer
(duly authorized officer and principal financial officer)43