Baxter International (BAX) 10-Q 28 Jul 09 2009 Q2 Quarterly report Financial data

Document and Company Informatio

Document and Company Information (USD $)
	6 Months Ended Jun. 30, 2009	Jul. 23, 2009	Jun. 30, 2008
Document and Company Information
Entity Registrant Name	Baxter International Inc.
Entity Central Index Key	0000010456
Document Type	10-Q
Document Period End Date	2009-06-30
Amendment Flag	false
Amendment Description	Not applicable
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float			$39,942,814,856
Entity Common Stock, Shares Outstanding		602,710,587

Condensed Consolidated Statemen

Condensed Consolidated Statements of Income (USD $)
In Millions	3 Months Ended Jun. 30, 2009	3 Months Ended Jun. 30, 2008	6 Months Ended Jun. 30, 2009	6 Months Ended Jun. 30, 2008
Net sales	$3,123	$3,189	$5,947	$6,066
Cost of sales	1,485	1,562	2,821	3,059
Gross margin	1,638	1,627	3,126	3,007
Marketing and administrative expenses	660	703	1,271	1,343
Research and development expenses	231	222	443	412
Net interest expense	24	25	50	42
Other (income) expense, net	(1)	1	1	(3)
Income before income taxes	724	676	1,361	1,213
Income tax expense	135	128	254	233
Net income	589	548	1,107	980
Less: Noncontrolling interests	2	4	4	7
Net income attributable to Baxter International Inc. (Baxter)	$587	$544	$1,103	$973
Net income attributable to Baxter per common share
Basic	0.97	0.87	1.81	1.55
Diluted	0.96	0.85	1.79	1.52
Weighted-average number of common shares outstanding
Basic	607	626	610	629
Diluted	612	638	616	641
Cash dividends declared per common share	0.26	0.218	0.52	0.435

Condensed Consolidated Balance

Condensed Consolidated Balance Sheets (USD $)
In Millions	Jun. 30, 2009	Dec. 31, 2008
Current assets
Cash and equivalents	$1,802	$2,131
Accounts and other current receivables	2,133	1,980
Inventories	2,496	2,361
Prepaid expenses and other	641	676
Total current assets	7,072	7,148
Property, plant and equipment, net	4,757	4,609
Other assets
Goodwill	1,756	1,654
Other intangibles, net	511	390
Other	1,647	1,604
Total other assets	3,914	3,648
Total assets	15,743	15,405
Current liabilities
Short-term debt	234	388
Current maturities of long-term debt and lease obligations	5	6
Accounts payable and accrued liabilities	3,156	3,241
Total current liabilities	3,395	3,635
Long-term debt and lease obligations	3,593	3,362
Other long-term liabilities	1,981	2,117
Equity
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2009 and 2008	683	683
Common stock in treasury, at cost, 80,278,449 shares in 2009 and 67,501,988 shares in 2008	(4,600)	(3,897)
Additional contributed capital	5,641	5,533
Retained earnings	6,580	5,795
Accumulated other comprehensive loss	(1,752)	(1,885)
Total Baxter shareholders' equity	6,552	6,229
Noncontrolling interests	222	62
Total equity	6,774	6,291
Total liabilities and equity	$15,743	$15,405

1_Condensed Consolidated Balanc

Condensed Consolidated Balance Sheets (Parentheticals) (USD $)
	Jun. 30, 2009	Dec. 31, 2008
Common stock, par value	1	1
Common stock, shares authorized	2,000,000,000	2,000,000,000
Common stock, shares issued	683,494,944	683,494,944
Common stock in treasury, at cost	80,278,449	67,501,988

2_Condensed Consolidated Statem

Condensed Consolidated Statements of Cash Flows (USD $)
In Millions	6 Months Ended Jun. 30, 2009	6 Months Ended Jun. 30, 2008
Cash flows from operations
Net income	$1,107	$980
Adjustments
Depreciation and amortization	302	316
Deferred income taxes	135	110
Stock compensation	74	73
Realized excess tax benefits from stock issued under employee benefit plans	(81)	0
Infusion pump charge	0	53
Other	14	16
Changes in balance sheet items
Accounts and other current receivables	(58)	(93)
Inventories	(85)	(155)
Accounts payable and accrued liabilities	(264)	(254)
Restructuring payments	(28)	(26)
Other	(68)	62
Cash flows from operations	1,048	1,082
Cash flows from investing activities
Capital expenditures	(387)	(364)
Acquisitions of and investments in businesses and technologies	(102)	(61)
Other	(8)	42
Cash flows from investing activities	(497)	(383)
Cash flows from financing activities
Issuances of debt	361	509
Payments of obligations	(183)	(675)
Cash dividends on common stock	(318)	(275)
Proceeds and realized excess tax benefits from stock issued under employee benefit plans	204	245
Purchases of treasury stock	(866)	(933)
Cash flows from financing activities	(802)	(1,129)
Effect of currency exchange rate changes on cash and equivalents	(78)	38
Decrease in cash and equivalents	(329)	(392)
Cash and equivalents at beginning of period	2,131	2,539
Cash and equivalents at end of period	$1,802	$2,147

Summary of Significant Accounti

Summary of Significant Accounting Policies
	6 Months Ended Jun. 30, 2009
Summary of Significant Accounting Policies
Summary of significant accounting policies	1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (the company or Baxter) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the company's 2008 Annual Report to Shareholders (2008 Annual Report). In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the interim periods. All such adjustments, unless otherwise noted herein, are of a normal, recurring nature. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. As of the financial statements issuance date, no events or transactions have occurred subsequent to the consolidated balance sheet date of June 30, 2009 that required recognition or disclosure.
Adoption of new accounting standards and issued but not yet effective accounting standards	Adoption of new accounting standards Refer to Note 4 for disclosures related to the companys adoption of Statement of Financial Accounting Standards (SFAS) No. 161, Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 and Financial Accounting Standards Board (FASB) Staff Position (FSP) FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. Refer to Note 2 for disclosures related to the companys adoption of Emerging Issues Task Force (EITF) Issue No. 07-1, Accounting for Collaborative Arrangements (EITF No. 07-1) and the companys adoption of FSP FAS No. 140-4 and FIN 46(R)-8, Disclosure by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities as it relates to the April 2009 arrangement with SIGMA International General Medical Apparatus, LLC (SIGMA). SFAS No. 141-R On January 1, 2009, the company adopted SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141-R). The new standard changes the accounting for business combinations in a number of significant respects. The key changes include the expansion of transactions that will qualify as business combinations, the capitalization of in-process research and development (IPRD) as an indefinite-lived asset, the recognition of certain acquired contingent assets and liabilities at fair value, the expensing of acquisition costs, the expensing of costs associated with restructuring the acquired company, the recognition of contingent consideration at fair value on the acquisition date, and the recognition of post-acquisition date changes in deferred tax asset valuation allowances and acquired income tax uncertainties as income tax expense or benefit. The new standard was applicable for acquisitions made by the company on or after January 1, 2009, including the April 2009 arrangement with SIGMA. Refer to Note 2 for further information. SFAS No. 160 On January 1, 2009, the company adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). The new standard changed the accounting and reporting of noncontrolling interests, which have historically been referred to as minority interests. SFAS No. 160 requires that noncontrolling interests be presented in the consolidated balance sheets within equity, but separate from Baxter shareholders equity, and that the amount of consolidated net income attributable to Baxter and to the noncontrolling interests be clearly identified and presented in the consolidated statements of income. Any losses in excess of the noncontrolling interests equity interest continue to be allocated to the noncontrolling interest. Purchases or sales of equity interests that do not result in a change of control are accounted for as equity transactions. Upon a loss of control the interest sold, as well as any interest retained, is measured at fair value, with any gain or loss recognized in earnings. In partial acquisitions, when control is obtained, 100% of the assets and liabilities, including goodwill, are recognized at fair value as if the en

Supplemental Financial Informat

Supplemental Financial Information
	6 Months Ended Jun. 30, 2009
Supplemental Financial Information
Net pension and other postemployment benefits expense	2. SUPPLEMENTAL FINANCIAL INFORMATION Net pension and other postemployment benefits expense The following is a summary of net expense relating to the companys pension and other postemployment benefit (OPEB) plans. Three months ended Six months ended June 30, June 30, (in millions) 2009 2008 2009 2008 Pension benefits Service cost $22 $22 $43 $43 Interest cost 55 51 109 102 Expected return on plan assets (63) (58) (125) (116) Amortization of net losses and other deferred amounts 24 20 49 40 Net pension plan expense $38 $35 $76 $69 OPEB Service cost $1 $1 $2 $2 Interest cost 8 7 16 15 Amortization of net losses and other deferred amounts - - (1) - Net OPEB plan expense $9 $8 $17 $17
Net interest expense	Net interest expense Three months ended Six months ended June 30, June 30, (in millions) 2009 2008 2009 2008 Interest expense, net of capitalized interest $29 $39 $60 $76 Interest income (5) (14) (10) (34) Net interest expense $24 $25 $50 $42
Comprehensive income	Comprehensive income Three months ended Six months ended June 30, June 30, (in millions) 2009 2008 2009 2008 Comprehensive income $819 $590 $1,241 $1,206 Less: Comprehensive income attributable to noncontrolling interests 7 8 5 4 Comprehensive income attributable to Baxter $812 $582 $1,236 $1,202 The increase in comprehensive income attributable to Baxter for the three months ended June 30, 2009 was principally due to favorable movements in currency translation adjustments and higher net income attributable to Baxter. The increase in comprehensive income attributable to Baxter for the six months ended June 30, 2009 was due to higher net income attributable to Baxter, partially offset by less favorable movements in currency translation adjustments compared to the first half of 2008.
Effective tax rate	Effective tax rate The companys effective income tax rate was 18.6% and 18.9% in the second quarters of 2009 and 2008, respectively, and 18.7% and 19.2% in the six-month periods ended June 30, 2009 and 2008, respectively. The decline in the effective tax rates for both the three- and six-month periods ended June 30, 2009 was the result of favorable earnings mix compared to their respective prior year periods. Baxter expects to reduce the gross amount of its liability for uncertain tax positions within the next 12 months by approximately $330 million due to the expiration of a loss carryforward, the expiration of certain statutes of limitations related to tax benefits taken in respect of losses from restructuring certain international operations, and the settlements of certain multi-jurisdictional transfer pricing issues. While there continues to be a reasonable possibility that the resolution of these items will be at amounts other than the amounts of the liabilities, the company also believes the reserves are adequate.
Earnings per share	Earnings per share The numerator for both basic and diluted earnings per share (EPS) is net income attributable to Baxter. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The dilutive effect of outstanding employee stock options, performance share units and restricted stock units is reflected in the denominator for diluted EPS using the treasury stock method. The following is a reconciliation of basic shares to diluted shares. Three months ended Six months ended June 30, June 30, (in millions) 2009 2008 2009 2008 Basic shares 607 626 610 629 Effect of employee stock options and other dilutive securities 5 12 6 12 Diluted shares 612 638 616 641 The computation of diluted EPS excludes employee stock options to purchase 23 million and 8 million shares for the three months ended June 30, 2009 and 2008, respectively, and 17 million and 8 million shares for the six months ended June 30, 2009 and 2008, respectively, because the assumed proceeds were greater than the average market price of the companys common stock, resulting in an anti-dilutive effect on diluted EPS.
Inventories	Inventories June 30, December 31, (in millions) 2009 2008 Raw materials $622 $600 Work in process 795 737 Finished goods 1,079 1,024 Inventories $2,496 $2,361
Property, plant and equipment, net	Property, plant and equipment, net June 30, December 31, (in millions) 2009 2008 Property, plant and equipment, at cost $9,410 $9,021 Accumulated depreciation and amortization (4,653) (4,412) Property, plant and equipment, net (PPE) $4,757 $4,609
Goodwill	Goodwill The following is a summary of the activity in goodwill by business segment. Medication (in millions) BioScience Delivery Renal Total Balance as of December 31, 2008 $585 $917 $152 $1,654 Goodwill acquired during the period - 87 - 87 Cumulative translation adjustment 2 11 2 15 Balance as of June 30, 2009 $587 $1,015 $154 $1,756 Goodwill acquired during the period related to the consolidation of SIGMA within the Medication Delivery segment. See Acquisitions of and investments in businesses and technologies below for further information regarding SIGMA. As of June 30, 2009, the company has recorded no goodwill impairment losses since its adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
Other intangible assets, net	Other intangible assets, net The following is a summary of the companys intangible assets subject to amortization at June 30, 2009 and December 31, 2008. Developed technology, (in millions) including patents Other Total June 30, 2009 Gross other intangible assets $894 $98 $992 Accumulated amortization (458) (54) (512) Other intangible assets, net $436 $44 $480 December 31, 2008 Gross other intangible assets $777 $117 $894 Accumulated amortization (444) (67) (511) Other intangible assets, net $333 $50 $383 The amortization expense for these intangible assets was $16 million and $14 million for the three months ended June 30, 2009 and 2008, respectively, and $28 million and $27 million for the six months ended June 30, 2009 and 2008, respectively. The anticipated annual amortization expense for intangible assets recorded as of June 30, 2009 is $62 million in 2009, $61 million in 2010, $57 million in 2011, $53 million in 2012, $50 million in 2013 and $46 million in 2014. The increase in gross other intangible assets primarily related to the consolidation of SIGMA. See Acquisitions of and investments in businesses and technologies below for further information regarding SIGMA.
Collaborative arrangements	Collaborative arrangements On January 1, 2009, the company adopted EITF No. 07-1, which was required to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. The adoption of EITF No.07-1 did not result in a change to the companys historical consolidated financial statements. In the normal course of business, Baxter enters into collaborative arrangements with third parties. Certain of these collaborative arrangements include joint operating activities involving active participation by both partners, where both Baxter and the other entity are exposed to risks and rewards dependent on the commercial success of the activity. These collaborative arrangements exist in all three of the companys segments, take a number of forms and structures, principally pertain to the joint development and commercialization of new products, and are designed to enhance and expedite long-term sales and profitability growth. The collaborative arrangements can broadly be grouped into two categories: those relating to new product development, and those relating to existing commercial products. New Product Development Arrangements The companys joint new product development and commercialization arrangements generally provide that Baxter license certain rights to manufacture, market or distribute a specified technology or product under development. Baxters consideration for the rights generally consists of some combination of up-front payments, ongoing research and development (RD) cost reimbursements, royalties, and contingent payments relating to the achievement of specified pre-clinical, clinical, regulatory approval or sales milestones. Joint steering committees often exist to manage the various stages and activities of the arrangement. Control over the RD activities may be shared or may be performed by Baxter. Baxter generally controls the commercialization phase, sometimes purchasing raw materials from the collaboration partner. During the development phase, Baxters RD costs are expensed as incurred. These costs may include RD cost reimbursements to the partner, as well as up-front and milestone payments to the partner prior to the date the product receives regulatory approval. Milestone payments made to the partner subsequent to regulatory approval are capitalized as intangible assets and amortized to cost of sales over the useful life of the related asset. Royalty payments are expensed as cost of sales when they become due and payable. Any purchases of raw materials from the partner during the development stage are expensed as RD, while such purchases during the commercialization phase are capitalized as inventory and recognized as cost of sales when the related finished products are sold. Baxter generally records the amount invoiced to the third-party customer for the finished product as sales, as Baxter is the principal and primary obligor in the arrangement. Payments to collaborative partners classified in cost of sales were not significant in the six months ended June 30, 2009 and 2008. Payments to collaborative partners totaled approximately 6% of total
Acquisitions of and investments in businesses and technologies	Acquisitions of and investments in businesses and technologies SIGMA In April 2009, the company entered an exclusive three-year distribution agreement with SIGMA covering the United States and international markets. The agreement, which enables Baxter to immediately provide SIGMAs Spectrum large volume infusion pumps to customers, as well as future products under development, complements Baxters infusion systems portfolio and next generation technologies. The arrangement also included a 40 percent equity stake in SIGMA, and an option to purchase the remaining equity of SIGMA, exercisable at any time over a three-year term. Baxter paid $100 million up-front and may make additional payments of up to $130 million for the exercise of the purchase option as well as for SIGMAs achievement of specified regulatory and commercial milestones. Because Baxters option to purchase the remaining equity of SIGMA limits the ability of the existing equity holders to participate significantly in SIGMAs profits and losses, and because the existing equity holders have the ability to make decisions about SIGMAs activities that have a significant effect on SIGMAs success, the company concluded that SIGMA is a VIE. Baxter is the primary beneficiary of the VIE due to its exposure to the majority of SIGMAs expected losses or expected residual returns and the relationship between Baxter and SIGMA created by the exclusive distribution agreement, and the significance of that agreement. Accordingly, the company consolidated the financial statements of SIGMA beginning in April 2009 (the acquisition date), with the fair value of the equity owned by the existing SIGMA equity holders reported as noncontrolling interests. The creditors of SIGMA do not have recourse to the general credit of Baxter. The following table summarizes the preliminary allocation of fair value related to the arrangement at the acquisition date. (in millions) Assets Goodwill $87 IPRD 24 Other intangible assets 94 Purchase option (other long-term assets) 111 Other assets 30 Liabilities Contingent payments $62 Other liabilities 25 Noncontrolling interests $159 The amount allocated to IPRD will be accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. The other intangible assets primarily relate to developed technology and will be amortized on a straight-line basis over an estimated useful life of eight years. The fair value of the purchase option was estimated using the Black-Scholes model. The contingent payments of up to $70 million associated with SIGMAs achievement of specified regulatory and commercial milestones were recorded at their estimated fair value of $62 million. Future changes in the estimated fair value of the contingent payments will be recognized immediately in earnings. The results of operations and assets and liabil

Restructuring and Other Charges

Restructuring and Other Charges
	6 Months Ended Jun. 30, 2009
Restructuring and Other Charges
Restructuring charges	3. RESTRUCTURING AND OTHER CHARGES Baxter has made and continues to make significant investments in assets, including inventory and PPE, which relate to potential new products or modifications to existing products. The companys ability to realize value from these investments is contingent on, among other things, regulatory approval and market acceptance of these new products. The company may not be able to realize the expected returns from these investments, potentially resulting in asset impairments in the future. Restructuring charges The company recorded restructuring charges of $70 million and $543 million in 2007 and 2004, respectively. The 2007 charge was principally associated with the consolidation of certain commercial and manufacturing operations outside of the United States. The 2004 charge was principally associated with managements decision to implement actions to reduce the companys overall cost structure and to drive sustainable improvements in financial performance. Refer to Note 5 to the companys consolidated financial statements in the 2008 Annual Report for additional information about these charges. Included in the 2007 and 2004 restructuring charges were $53 million and $347 million of cash costs, respectively. The following table summarizes the current year cash activity and outstanding reserves related to the companys 2007 and 2004 restructuring charges. Employee- Contractual related and other (in millions) costs costs Total Reserves at December 31, 2008 $25 $14 $39 Utilization (19) (3) (22) Reserves at June 30, 2009 $6 $11 $17 The 2007 and 2004 reserves are expected to be substantially utilized by the end of 2009. The company believes that the reserves are adequate. However, adjustments may be recorded in the future as the programs are completed. Transfusion Therapies During 2007, the company divested substantially all of the assets and liabilities of its Transfusion Therapies (TT) business. In connection with the TT divestiture, the company recorded a $35 million charge principally associated with severance and other employee-related costs. Reserve utilization through June 30, 2009 was $18 million. The reserve is expected to be substantially utilized by the end of 2009. The company believes that the reserve is adequate; however, adjustments may be recorded in the future as the transition is completed. Refer to Note 3 to the companys consolidated financial statements in the 2008 Annual Report for further information regarding the TT divestiture.
Other charges	Other charges The COLLEAGUE and SYNDEO infusion pump and heparin charges discussed below were classified in cost of sales in the companys consolidated statements of income, and were included in the Medication Delivery segments pre-tax income. With respect to COLLEAGUE, the company remains in active dialogue with the U.S. Food and Drug Administration (FDA) about various matters, including the companys remediation plan and reviews of the companys facilities, processes and quality controls by the companys outside expert pursuant to the requirements of the companys Consent Decree. The outcome of these discussions with the FDA is uncertain and may impact the nature and timing of the companys actions and decisions with respect to the COLLEAGUE pump. The companys estimates of the costs related to these matters are based on the current remediation plan and information currently available. It is possible that additional charges related to COLLEAGUE may be required in future periods, based on new information, changes in estimates, and modifications to the current remediation plan as a result of ongoing dialogue with the FDA. While the company continues to work to resolve the issues associated with COLLEAGUE infusion pumps and its heparin products described below, there can be no assurance that additional costs or civil and criminal penalties will not be incurred, that additional regulatory actions with respect to the company will not occur, that the company will not face civil claims for damages from purchasers or users, that substantial additional charges or significant asset impairments may not be required, that sales of any other product may not be adversely affected, or that additional legislation or regulation will not be introduced that may adversely affect the companys operations and consolidated financial statements. COLLEAGUE and SYNDEO Infusion Pumps The company began to hold shipments of COLLEAGUE infusion pumps in July 2005 and continues to hold shipments of new pumps in the United States. Refer to Note 5 to the companys consolidated financial statements in the 2008 Annual Report for further information on COLLEAGUE and SYNDEO infusion pumps. In 2008, the company recorded charges totaling $125 million ($53 million in the first quarter and $72 million in the third quarter) related to issues associated with its COLLEAGUE infusion pumps. From 2005 through 2007, the company recorded charges and other costs totaling $185 million related to its COLLEAGUE and SYNDEO infusion pumps. In aggregate, these charges included $256 million of cash costs and $54 million principally related to asset impairments. The reserves for cash costs related to customer accommodations, estimated expenditures for the materials, labor and freight costs expected to be incurred to remediate the design issues, additional warranty and other commitments made to customers. The following table summarizes cash activity in the companys COLLEAGUE and SYNDEO infusion pump reserves through June 30, 2009. (in millions) Charges in 2005 through 2008 $256 Utilization in 2005 through 2008 (141)

Debt, Financial Instruments and

Debt, Financial Instruments and Related Fair Value Measurements
	6 Months Ended Jun. 30, 2009
Debt, Financial Instruments and Related Fair Value Measurements
Debt	4. DEBT, FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE MEASUREMENTS Debt In February 2009, the company issued $350 million of senior unsecured notes, maturing in March 2014 and bearing a 4.0% coupon rate. The net proceeds were used for general corporate purposes, including the repayment of approximately $160 million of outstanding borrowings related to the companys Euro-denominated credit facility. There were no borrowings outstanding under the companys primary revolving or Euro-denominated credit facilities as of June 30, 2009. In addition, during the first six months of 2009, the company issued and redeemed commercial paper, of which $200 million was outstanding as of June 30, 2009, with a weighted-average interest rate of 0.34%.
Securitization arrangements	Securitization arrangements For the three months ended June 30, 2009, the companys securitization arrangements did not result in any net cash flows. The companys securitization arrangements resulted in net cash inflows of $6 million for the three months ended June 30, 2008, and net cash outflows of $19 million and $10 million for the six months ended June 30, 2009 and 2008, respectively. A summary of the activity is as follows. Three months ended Six months ended June 30, June 30, (in millions) 2009 2008 2009 2008 Sold receivables at beginning of period $127 $129 $154 $129 Proceeds from sales of receivables 129 116 253 220 Cash collections (remitted to the owners of the receivables) (129) (110) (272) (230) Effect of currency exchange rate changes 1 (11) (7) 5 Sold receivables at end of period $128 $124 $128 $124
Derivatives and hedging activities	Derivatives and hedging activities The company operates on a global basis and is exposed to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The companys hedging policy attempts to manage these risks to an acceptable level based on the companys judgment of the appropriate trade-off between risk, opportunity and costs. The company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar and certain Latin American currencies. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from foreign exchange. The recent financial market and currency volatility may reduce the benefits of the companys natural hedges and limit the companys ability to cost-effectively hedge these exposures. The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The companys policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believes is appropriate. To manage this mix in a cost-efficient manner, the company periodically enters into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. The company does not hold any instruments for trading purposes and none of the companys outstanding derivative instruments contain credit-risk-related contingent features. All derivative instruments are recognized as either assets or liabilities at fair value in the consolidated balance sheets and are classified as short-term or long-term based on the scheduled maturity of the instrument. Based upon the exposure being hedged, the company designates its hedging instruments as cash flow or fair value hedges. Cash Flow Hedges The company uses options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities. The company periodically uses forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt. Certain other firm commitments and forecasted transactions are also periodically hedged. Cash flow hedges primarily relate to forecasted intercompany sales denominated in foreign currencies, anticipated issuances of debt and a hedge of U.S. Dollar-denominated debt issued by a f
Fair value measurements	Fair value measurements The following table summarizes the bases used to measure financial assets and liabilities that are carried at fair value on a recurring basis in the balance sheet. Basis of fair value measurement Balance at Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs (in millions) June 30, 2009 (Level 1) (Level 2) (Level 3) Assets Foreign exchange contracts $64 $- $64 $- Interest rate contracts 87 - 87 - Equity securities 16 16 - - Total assets $167 $16 $151 $- Liabilities Foreign exchange contracts $84 $- $84 $- Interest rate contracts 3 - 3 - Total liabilities $87 $- $87 $- 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 the company 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 are considered observable and vary depending on the type of derivative, and include contractual terms, interest rate yield curves, foreign exchange rates and volatility. On January 1, 2009, the company completed the adoption of SFAS No. 157, Fair Value Measurements, as it relates to nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. There were no adjustments in the first six months of 2009 for nonfinancial assets or liabilities that are measured at fair value on a nonrecurring basis. Book Values and Fair Values of Financial Instruments In addition to the financial instruments that the company is required to recognize at fair value on the consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. For these financial instruments, the following table provides the value recognized on the consolidated balance sheets and the approximate fair value as of June 30, 2009. (in millions) Book value Approximate fair value Assets Short-term investments $34 $34 Long-term insurance receivables 67 63 Cost basis investments 19 19 Liabilities Short-term debt $234 $234 Current maturities of long-term debt and lease obligations 5 5 Other long-term debt and lease obligations 3,593 3,678 Long-term litigation liabilities 61 58 The estimated fair v

Common Stock

Common Stock
	6 Months Ended Jun. 30, 2009
Common Stock
Stock-based compensation plans	5. COMMON STOCK Stock-based compensation plans Stock compensation expense totaled $36 million and $35 million for the three months ended June 30, 2009 and 2008, respectively, and $74 million and $73 million for the six months ended June 30, 2009 and 2008, respectively. Approximately three-quarters of stock compensation expense is classified in marketing and administrative expenses, with the remainder classified in cost of sales and RD expenses. In March 2009, the company awarded its annual stock compensation grants, which consisted of approximately 6.7 million stock options and 580,000 performance share units (PSUs). Stock compensation grants made in the second quarter of 2009 were not material. Stock Options The weighted-average assumptions used in estimating the fair value of stock options granted during the period, along with the weighted-average grant date fair values, were as follows. Six months ended June 30, 2009 2008 Expected volatility 30% 24% Expected life (in years) 4.5 4.5 Risk-free interest rate 1.8% 2.4% Dividend yield 2.0% 1.5% Fair value per stock option $12 $12 The total intrinsic value of stock options exercised was $16 million and $71 million during the three months ended June 30, 2009 and 2008, respectively, and $45 million and $132 million during the six months ended June 30, 2009 and 2008, respectively. As of June 30, 2009, $119 million of unrecognized compensation cost related to all unvested stock options is expected to be recognized as expense over a weighted-average period of 2.1 years. Performance Share and Restricted Stock Units The assumptions used in estimating the fair value of PSUs granted during the period, along with the fair values, were as follows. Six months ended June 30, 2009 2008 Baxter volatility 25% 20% Peer group volatility 20% - 59% 12% - 37% Correlation of returns 0.30 - 0.61 0.12 - 0.40 Risk-free interest rate 1.6% 1.9% Fair value per PSU $65 $64 As of June 30, 2009, unrecognized compensation cost related to all unvested PSUs of $53 million is expected to be recognized as expense over a weighted-average period of 1.9 years, and unrecognized compensation cost related to all unvested restricted stock units of $11 million is expected to be recognized as expense over a weighted-average period of 1.7 years.
Stock repurchases	Stock repurchases As authorized by the board of directors, from time to time the company repurchases its stock depending upon the companys cash flows, net debt level and current market conditions. During the three- and six-month periods ended June 30, 2009, the company repurchased 6.1 million shares and 16.2 million shares for $300 million and $866 million, respectively, under the board of directors March 2008 $2.0 billion share repurchase authorization. At June 30, 2009, $300 million remained available under this authorization.

Legal Proceedings

Legal Proceedings
	6 Months Ended Jun. 30, 2009
Legal Proceedings
Legal proceedings	6. LEGAL PROCEEDINGS Baxter is involved in product liability, patent, commercial, and other legal proceedings that arise in the normal course of the companys business. The company records a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. Baxter has established reserves for certain of the matters discussed below. The company is not able to estimate the amount or range of any loss for certain of the legal contingencies for which there is no reserve or additional loss for matters already reserved. While the liability of the company in connection with the claims cannot be estimated with any certainty and although the resolution in any reporting period of one or more of these matters could have a significant impact on the companys results of operations for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on the companys consolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments or enter into material settlements of claims. In addition to the matters described below, the company remains subject to other potential administrative and legal actions. With respect to regulatory matters, these actions may lead to product recalls, injunctions to halt manufacture and distribution, and other restrictions on the companys operations and monetary sanctions. With respect to intellectual property, the company may be exposed to significant litigation concerning the scope of the companys 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. Patent litigation Sevoflurane Litigation In September2005, the U.S.D.C. for the Northern District of Illinois ruled that a patent owned by Abbott Laboratories and the Central Glass Company, U.S. Patent No.5,990,176, was not infringed by Baxters generic version of sevoflurane. Abbott and Central Glass appealed and Baxter filed a cross-appeal as to the validity of the patent. In November2006, the Court of Appeals for the Federal Circuit granted Baxters cross-appeal and held the patent invalid. Abbotts motions to have that appeal re-heard were denied in January2007. In June 2005, Baxter filed suit in the High Court of Justice in London, England seeking revocation of the U.K. part of the related European patent and a declaration of non-infringement. In March 2007, the High Court ruled in Baxters favor, concluding that the U.K. portion of the European patent was invalid. In December 2008, the Board of Appeals for the European Patent Office similarly revoked this European patent in its entirety. In May2005, Abbot

Segment Information

Segment Information
	6 Months Ended Jun. 30, 2009
Segment Information
Segment information	7. SEGMENT INFORMATION Baxter operates in three segments, each of which is a strategic business that is managed separately because each business develops, manufactures and markets distinct products and services. The segments and a description of their products and services are as follows: The BioScience business manufactures recombinant and plasma-based proteins to treat hemophilia and other bleeding disorders; plasma-based therapies to treat immune deficiencies, alpha 1-antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions; products for regenerative medicine, such as biosurgery products and technologies used in adult stem-cell therapies; and vaccines. The Medication Delivery business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, infusion pumps, and inhalation anesthetics, as well as products and services related to pharmacy compounding and pharmaceutical partnering, drug formulation and packaging technologies. The Renal business provides products to treat end-stage renal disease, or irreversible kidney failure. The business manufactures solutions and other products for peritoneal dialysis, a home-based therapy, and also distributes products for hemodialysis, which is generally conducted in a hospital or clinic. The company uses more than one measurement and multiple views of data to measure segment performance and to allocate resources to the segments. However, the dominant measurements are consistent with the companys consolidated financial statements and, accordingly, are reported on the same basis herein. The company evaluates the performance of its segments and allocates resources to them primarily based on pre-tax income along with cash flows and overall economic returns. Intersegment sales are generally accounted for at amounts comparable to sales to unaffiliated customers and are eliminated in consolidation. Certain items are maintained at the corporate level (corporate) and are not allocated to the segments. They primarily include most of the companys debt and cash and equivalents and related net interest expense, certain foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency and interest rate hedging activities, corporate headquarters costs, stock compensation expense, certain non-strategic investments and related income and expense, certain employee benefit plan costs, certain nonrecurring gains and losses, deferred income taxes, certain litigation liabilities and related insurance receivables, and the revenues and costs related to the manufacturing, distribution and other transition agreements with Fenwal Inc. (Fenwal) in connection with the divestiture of the TT business. Included in the Medication Delivery segments pre-tax income in the first half of 2008 were first quarter charges of $53 million related to COLLEAGUE infusion pumps and $19 million related to the companys recall of its heparin