Baxter International Inc. Form 8-K Summary
Business Context and Reporting Period
This Current Report on Form 8-K, dated February 13, 2020, addresses a material accounting restatement by Baxter International Inc. The filing discloses the conclusion of an internal investigation into non-operating foreign exchange gains and losses. The investigation revealed that the Company utilized a longstanding convention for measuring foreign exchange transactions that was inconsistent with U.S. GAAP, involving intra-Company transactions undertaken solely to generate gains or avoid losses after exchange rates were known.
Key Financial Metrics and Misstatements
The filing does not provide current period revenue, profit, or cash flow figures. Instead, it details preliminary, unaudited estimates of misstatements affecting Income From Continuing Operations Before Income Taxes for prior periods. The cumulative impact of correcting these misstatements will reduce the Company's opening retained earnings.
| Period | Previously Reported Income (in millions) | FX Misstatement Impact (in millions) | Other Immaterial Misstatements (in millions) | Restated Income (in millions) |
|---|---|---|---|---|
| 2016 | $4,954 | $(42) | $2 | $4,914 |
| 2017 | $1,217 | $(113) | $(4) | $1,100 |
| 2018 | $1,693 | $(60) | $(17) | $1,616 |
| First Half 2019 | $754 | $(36) | $(6) | $712 |
Other immaterial misstatements identified include issues related to equipment leases, translation of foreign operations, cash flow classification, and income tax effects.
Material Changes and Restatement Scope
The Company concluded that its consolidated financial statements for the years ended December 31, 2018, 2017, and 2016, as well as interim periods within those years and the interim periods ended June 30 and March 31, 2019, should no longer be relied upon. The misstatements of foreign exchange gains and losses are estimated to have occurred for at least ten years. Management has determined that one or more material weaknesses in internal control over financial reporting existed as of December 31, 2018, specifically related to foreign exchange gains and losses.
Outlook, Risks, and Management Commentary
The Company expects to file restated financial statements, including the 2019 Annual Report on Form 10-K and the Q3 2019 Quarterly Report on Form 10-Q, no later than March 31, 2020. Complete financial results for the third and fourth quarters and full year 2019 are also expected by this date. The Company has voluntarily advised the SEC of the investigation and is cooperating with the staff. Disclosure controls and procedures were deemed ineffective as of December 31, 2018, March 31, 2019, and June 30, 2019, due to the identified material weaknesses.
Investor Verification Checklist
- Verify the final restated financial statements for 2016, 2017, 2018, and 2019 when filed by March 31, 2020.
- Monitor the Company's remediation efforts regarding the material weakness in internal controls over foreign exchange reporting.
- Review the upcoming Q3 and Q4 2019 earnings announcement for updated guidance and full-year results.
- Assess potential regulatory actions or litigation outcomes related to the accounting irregularities.
- Confirm the impact of the restatement on opening retained earnings and any subsequent adjustments to equity.