EXHIBIT 13
FINANCIAL REVIEW
This discussion and analysis presents the factors that had a material effect on
Baxter International Inc.'s ("Baxter" or the "company") results of operations
during the three years ended December 31, 1993, and the company's financial
position at that date. Trends of a material nature are discussed to the extent
known and considered relevant.
In November 1993, Baxter announced that its board of directors approved a
series of strategic actions to improve shareholder value, to extend positions of
leadership in health-care markets and to reduce costs. These actions are
designed to make the company's domestic medical/laboratory products and
distribution segment more efficient and more responsive in addressing the
sweeping changes occurring in the U.S. health-care system and accelerate
growth of its medical specialties businesses worldwide. The company recorded a
$700 million pre-tax provision to cover costs associated with these
restructuring initiatives.
The actions include:
- - Realigning the company's U.S. sales organization;
- - Restructuring the distribution organization and investing in new systems to
improve manufacturing and distribution efficiencies worldwide;
- - Seeking to divest diagnostics-products manufacturing businesses and exiting
selected non-strategic product lines in other businesses; and
- - Reducing corporate staff and layers of management to give business units
more autonomy.
These actions are expected to result in a reduction of the company's work
force by approximately 7 percent, or 4,500 positions, most of which will occur
over the next two to three years.
The pre-tax restructuring charge of $700 million includes approximately
$300 million for non-cash valuation adjustments as a result of the company's
decision to close facilities or exit non-strategic businesses and investments.
The company expects to spend approximately $400 million in cash related to the
restructuring programs described above, with most of that expended over the next
two to three years. In return, the company expects to generate annual pre-tax
savings of approximately $100 million in 1994, $200 million in 1995, $275
million in 1996, $325 million in 1997 and exceeding $350 million in 1998.
Management anticipates that these savings will be partially invested in
increased research and development spending and the company's expansion into
growing international markets.
RESULTS OF CONTINUING OPERATIONS
Sales from continuing operations of $8.9 billion in 1993 were 5% higher than in
1992. The $8.5 billion sales level in 1992 represented a 9% increase over the
$7.8 billion level achieved in 1991. Domestic sales of $6.5 billion in 1993 were
6% higher than 1992. Domestic sales were $6.1 billion in 1992 and $5.7 billion
in 1991. Sales in international markets rose approximately 2% to $2,428 million
in 1993. International sales were $2,391 million in 1992 and $2,131 million in
1991. International sales growth in local currency was approximately 7% in 1993
and 9% in both 1992 and 1991.
Despite the impact of health-care reform proposals in the U.S. which are
driving significant cost containment measures and consolidations throughout the
health-care industry, and with decreased surgical procedures and increased
participation in managed care networks, demand for the company's products
worldwide remains relatively strong.
The company received some adverse publicity during 1993 arising from a
notice of suspension by the Department of Veteran's Affairs ("DVA"). This
suspension stemmed from a dispute between the DVA and Baxter Healthcare
Corporation, a subsidiary of Baxter International Inc., over alleged
misrepresentations concerning the status of products on its Federal Supply
Schedule contracts and from the company's earlier guilty plea to an information
charging it with one count of violating the anti-boycott statute of the U.S.
Export Administration Act. This suspension was lifted in December,
NET SALES
[Graphic Omitted]
SALES PER EMPLOYEE
[Graphic Omitted]
35
1993. As a result of the publicity on the original consent decree, certain
customers have decreased their business with the company or publicly expressed
their intent to reduce future purchases of the company's products and services.
Based on information available to management, such customer actions did not have
a material effect on the company's sales and earnings for the year ended
December 31, 1993, and are not expected to have a material impact on future
sales and earnings.
Operating income declined from $1,045 million in 1992 to $239 million (2.7%
of sales) in 1993 largely as a result of the $700 million restructuring charge
mentioned previously. Operating income in 1993, excluding the restructuring
charge, decreased 10% to $939 million, compared with $1,045 million in 1992 and
$960 million in 1991. Operating income, excluding restructuring charges, as a
percent of sales was 10.6% in 1993, 12.3% in 1992 and 12.3% in 1991. The
decrease in 1993 operating income, excluding the restructuring charge, is
primarily due to lower gross profit margins, negative swings in foreign-exchange
rates and costs associated with other downsizing programs. The other downsizing
programs cost $53 million and were primarily incurred to combine sales staffs
and streamline administrative functions in the company's hospital and
diagnostics businesses.
Operating income as a percent of sales remained flat in 1992 as compared to
1991 as an improved gross profit rate, which was primarily driven by the
benefits from the 1990 restructuring program (which concentrated on the
elimination of excess manufacturing capacity), was offset by the first-time
recognition of the additional costs associated with the new accounting rule
covering retiree health benefits. Excluding the effects of this accounting
change on continuing operations, operating income for 1992 would have increased
11% over 1991.
The gross margin rate was 36.3% in 1993, 38.1% in 1992 and 38.0% in 1991.
The decline in this rate in 1993 in the U.S. reflects lower prices on certain
product lines, a heavier mix of lower-margin distributed and manufactured
products and unfavorable manufacturing variances related to the rebalancing of
inventories which caused some manufacturing plants to operate at reduced
capacity levels. The mix shift towards distributed products is consistent with
the company's strategy of being a broad-based distributor of health-care
supplies and services in the U.S. The adverse impact of foreign currency
exchange rates also reduced the total company gross margin rate by
approximately .7% in 1993.
The company's marketing and administrative expenses were $1,879 million in
1993, $1,798 million in 1992 and $1,648 million in 1991. As a percent of sales,
these expenses were 21.2% in both 1993 and 1992 and 21.1% in 1991. Excluding the
$53 million in downsizing costs discussed previously, the 1993 percent of
marketing and administrative expenses to sales would have been approximately
20.6%.
Research and development ("R&D") expenses increased 6% to $337 million in
1993. R&D spending rose 10% in 1992. As a percent of self-manufactured product
sales R&D expenses were approximately 5.6% in 1993 compared to 5.4% in both 1992
and 1991. The company concentrates its R&D expenditures in potentially
high-growth, high-return areas which include biotechnology products and
treatments for kidney failure, blood disorders and cardiovascular disease.
Baxter's R&D programs are directed at developing new and improved products for
both new and emerging markets as well as technological improvements in the
company's manufacturing processes. New self-manufactured products introduced to
worldwide markets in the last five years comprised approximately 35% of the
company's total 1993 self-manufactured sales compared to 34% for 1992.
Interest expense was $222 million in 1993, $211 million in 1992 and $222
million in 1991. The increase in 1993 was primarily due to higher debt levels
offset by lower interest rates. The decrease in 1992 was primarily due to
declining interest rates.
OPERATING INCOME
[Graphic Omitted]
MARKETING AND ADMINISTRATIVE EXPENSES
[Graphic Omitted]
36
During 1993, the company incurred significant charges for major litigation
settlements and minimum liability exposures, and recorded significant estimated
insurance recoveries with respect to those liabilities. The net results of the
charges and recoveries are as follows (in millions):
Gross Estimated Net
litigation insurance litigation
charge recoveries charge
- ----------------------------------------------------------------------------
Mammary implant product liabilities $556 $426 $130
HIV/hemophilia product liabilities 131 83 48
Patent infringement settlement 105 - 105
Legal fees and other 47 - 47
- ----------------------------------------------------------------------------
Total $839 $509 $330
- ----------------------------------------------------------------------------
The provision for mammary implant product liabilities pertains to the
company's share of a proposed global settlement of class action litigation. The
provision for HIV/hemophilia product liabilities pertains to worldwide
litigation and settlement expenses involving anti-hemophilic Factor Concentrate
cases for HIV-positive hemophiliacs. The patent infringement settlement pertains
to patent litigation with Scripps Research Institute and Rhone-Poulenc Rorer,
Inc. relating to certain anti-hemophilic Factor VIII products manufactured and
sold prior to January 1, 1993. The provision for legal fees pertains primarily
to the product liability litigation. See the accompanying Notes to Consolidated
Financial Statements titled "Legal Proceedings" for a more detailed description
of these litigation issues.
Other non-operating expenses were $47 million in 1993, $105 million in 1992
and $80 million in 1991. Other non-operating expenses include approximately $44
million in net gains associated with the disposal of several minor,
non-strategic business units and assets as compared to losses of $21 million in
1992 and $6 million in 1991. Also included in other non-operating expenses in
1993 was a provision for $8 million in costs related to Baxter's settlement of
anti-boycott investigations under the U.S. Export Administration Act.
Income (loss) from continuing operations before income taxes was a loss of
$330 million in 1993 compared to income of $753 million in 1992 and income of
$688 million in 1991. The loss in 1993 primarily results from the $700 million
restructuring charge, the $330 million litigation charges and the decline in the
gross margin, discussed previously.
The company recorded an income tax benefit of $62 million in 1993 compared
to expense of $192 million in 1992 and $181 million in 1991. The effective tax
rate in 1993 was 19% compared to 25% in 1992 and 26% in 1991. The change in the
1993 effective tax rate was primarily due to the tax benefits associated with
the restructuring and litigation charges discussed previously, offset by a
provision for U.S. taxes on previously unremitted foreign earnings which the
company intends to utilize for the cash requirements of its restructuring
program. Without these charges, the 1993 effective tax rate would have been
approximately 23%. This decrease, as compared to the prior year, is primarily
due to the mix of earnings generated in jurisdictions with a lower tax rate and
the utilization of tax credits.
Net earnings (loss) from continuing operations was a net loss of $268
million in 1993 compared to net earnings of $561 million in 1992 and net
earnings of $507 million in 1991. Earnings (loss) per common share from
continuing operations was a loss of 97 cents in 1993 compared to earnings of
$1.99 in 1992 and $1.73 in 1991. The loss in 1993 primarily reflects the
provisions for restructuring and litigation charges. The company estimates that
earnings per share in 1993, excluding these charges, would have been
approximately $1.95. The decline in 1993 earnings per share is primarily due to
the factors discussed previously.
DISCONTINUED OPERATIONS
Net earnings from discontinued operations were $45 million in 1992 and $84
million in 1991. Earnings per common share attributable to discontinued
operations totaled 16 cents
R&D EXPENSES
[Graphic Omitted]
EARNINGS (LOSS) PER COMMON SHARE
FROM CONTINUING OPERATIONS
[Graphic Omitted]
37
in 1992 and 30 cents in 1991. The lower level of earnings from discontinued
operations in 1992 reflects the distribution of Caremark International Inc. to
Baxter stockholders as of November 30, 1992, and provisions for costs associated
with this distribution. The company's portion of costs incurred to effect the
distribution were $18 million (net of $6 million in related income tax
benefits).
ADOPTION OF NEW ACCOUNTING STANDARDS
The 1993 benefit for the cumulative effect of adopting FASB Statement No. 109,
"Accounting for Income Taxes" was $81 million, or 29 cents per common share. The
1993 charge for the cumulative effect of adopting FASB Statement No. 112,
"Accounting for Postemployment Benefits" which requires accrual accounting for
postemployment benefits such as disability-related and workers compensation
payments was $11 million (net of $7 million in income tax benefits), or 4 cents
per common share. The 1992 charge for the cumulative effect of adopting FASB
Statement No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions" covering the accounting for retiree benefits other than pensions was
$165 million (net of $50 million in income tax benefits), or 59 cents per common
share.
IMPACT OF INFLATION
In recent years, the company has experienced increases in its labor and material
cost base which are influenced, in part, by general inflationary trends. While
not directly related to inflationary trends, the company's revenue base, on
average, over recent years has been adversely affected by lower average selling
prices on certain products as a result of changes in Medicare reimbursement
regulations and economic pressures in the hospital marketplace. There is little
correlation between general inflation rates directly affecting costs and
expenses and the company's pricing levels for products sold to health-care
customers. Management expects that these trends will continue.
FINANCIAL CONDITION
Management assesses the company's liquidity in terms of its overall ability to
mobilize cash to support ongoing business levels and to fund its growth.
Cash flow provided by continuing operations (which include working capital
components) increased to $765 million in 1993 from a level of $742 million in
1992 and $697 million in 1991. The increase in 1993 compared to 1992 is due to a
variety of items including an improvement in the collection of accounts
receivable balances. The increase in 1992 compared to 1991 is primarily due to
higher earnings. Management believes that the company will generate cash flow
sufficient to support normal ongoing business requirements.
Investment transactions for the three years ended December 31, 1993 are as
follows:
(in millions) 1993 1992 1991
- ----------------------------------------------------------------------------
Capital expenditures and additions $605 $640 $592
to the pool of equipment leased
or rented to customers
Acquisitions 120 125 115
Proceeds from asset dispositions (70) (39) (36)
- ----------------------------------------------------------------------------
Total investment transactions, net $655 $726 $671
- ----------------------------------------------------------------------------
Major capital projects funded in 1993 include the expansion of
manufacturing capacity for renal products in Puerto Rico and Singapore, a
Recombinant Factor VIII manufacturing facility in Thousand Oaks, California for
the Biotech group and expenditures for a distribution center in Orange County,
New York. The higher level of capital expenditures in 1992 were to fund programs
for expansion of distribution centers and manufacturing capacity for blood
products. The company expects to spend approximately $600 million in total
capital expenditures in 1994.
The acquisitions summarized in the above table involved no significant
change to the company's strategic direction, and were made for the purpose of
acquiring technologies,
CASH FLOW PROVIDED BY CONTINUING OPERATIONS
[Graphic Omitted]
CAPITAL EXPENDITURES
[Graphic Omitted]
38
broadening product lines or expanding market coverage. The proceeds received
from asset dispositions were from the sale or discontinuance of several minor
non-strategic or unprofitable business units and investments. The majority of
these transactions resulted in the disposition of the company's entire interest
in such businesses.
The company's current assets exceeded current liabilities by $1.5 billion
at December 31, 1993 compared to an excess of $1.2 billion at December 31, 1992.
This increase reflects increases in cash and equivalents, inventories and
short-term deferred income tax assets offset by increases in current liabilities
related to the restructuring and litigation costs. Current assets included
receivables of $1.7 billion and inventories of $1.8 billion. These assets are
convertible into cash over a relatively short period of time and are a source to
help the company satisfy normal operating cash requirements. Inventory levels
increased from $1,632 million at December 31, 1992 to $1,772 million at December
31, 1993 primarily reflecting the increase in inventories needed to support
ValueLink and national brand distribution agreements.
Short-term and long-term deferred income tax assets and liabilities
increased due to the adoption of FASB Statement No. 109 which also required
certain reclassifications, and to temporary differences associated with the
restructuring and litigation charges accrued during 1993. The company has
assessed the need for establishing valuation allowances pertaining to its
deferred tax assets with respect to its anticipated future taxable income levels
and tax planning strategies. Based on that assessment, the company has provided
a valuation allowance for certain state and foreign jurisdictions where there is
uncertainty regarding the realization of a portion of the deferred tax assets.
Other intangible assets increased in 1993 due to the tax-benefit "gross-up"
related to past acquisitions as required by FASB Statement No. 109 and a $20
million increase related to the change in the minimum pension liability.
The insurance receivable included in other assets in the December 31, 1993
balance sheet is related to amounts expected to be recoverable by the company in
connection with the accrual of estimated payments to be made related to the
mammary implant and HIV/hemophilia litigation matters. See accompanying Notes to
Consolidated Financial Statements titled "Legal Proceedings" for more details.
To meet its net financing requirements during the two years ended December
31, 1993, the company utilized short-term borrowings as required. For purposes
of covenant compliance and rating agency reviews the company's credit
arrangements permit it to reduce its debt to capital ratio by a percentage of
cash and equivalents. (Also see the accompanying Notes to Consolidated Financial
Statements titled "Credit Facilities"). Long-term debt was issued or re-financed
when conditions were considered favorable. The results of these activities on
the company's capital structure are shown below (in millions):
December 31,
1993 1992
- ----------------------------------------------------------------------------
Long-term obligations $2,800 $2,433
Stockholder's equity 3,185 3,795
- ----------------------------------------------------------------------------
Long-term debt as a percent of total capital 46.8% 39.1%
- ----------------------------------------------------------------------------
At December 31, 1993, approximately 70% of the company's net debt was
effectively at fixed rates.
Net debt (after consideration of cash and equivalents) rose approximately
$242 million since the start of 1993. A patent litigation settlement of $105
million and $124 million in purchases of the company's common stock to fund
benefit plans contributed to this increase. At December 31, 1993, the company's
net debt to net capital ratio was approximately 50% compared to 43% at December
31, 1992. This increase was also due to the adverse effect on capital due to the
restructuring and litigation provisions discussed previously. The company
expects to fund its restructuring and litigation cash needs through cash flow
from operations and by repatriation of previously unremitted foreign earnings.
In 1994 and beyond, the company will have an increased
TOTAL CAPITAL
[Graphic Omitted]
39
focus on improving its cash flows from operations. Management expects that net
debt at the end of 1994 will be the same as the 1993 year-end level, before the
consideration of net proceeds from divestitures. The company also intends to
utilize the net proceeds from the planned divestiture of the
diagnostics-products manufacturing and other non-strategic businesses to reduce
net debt, and thus, anticipates that its net debt to net capital will decline
during 1994, with the goal of reaching the 40% range in the years ahead.
The company's debt ratings of A3 on senior debt by Moody's, A- by Standard
& Poor's and A by Duff & Phelps were reaffirmed by each rating agency after the
1993 restructuring announcement. Standard & Poor's and Duff & Phelps have
indicated that continuation of these ratings in the future is dependent on
Baxter's successful implementation of the restructuring program announced in
November 1993 (discussed previously) and the reduction of its financial leverage
which is expected to result from the planned divestiture of its
diagnostics-products manufacturing businesses.
At December 31, 1993, the company could issue up to $300 million in
aggregate principal amount of additional senior unsecured debt securities under
an effective registration statement filed with the Securities and Exchange
Commission.
The company intends to fund its long-term obligations as they mature by
issuing additional debt or through cash flow from operations. The company
believes it has lines of credit adequate to support ongoing operational and
restructuring requirements. Beyond that, the company believes it has sufficient
financial flexibility to attract long-term capital on acceptable terms as may be
needed to support its growth objectives.
The company's board of directors authorized the purchase of common stock to
fund various employee-benefit plans and for other corporate purposes. The
company purchased 4.5 million shares of common stock for $124 million in 1993,
and may purchase up to an additional 11 million shares under this authority.
Common stock in treasury increased due to the purchases mentioned above,
partially offset by shares issued in connection with employee benefit programs.
In February 1994, the board of directors declared the dividend on the
company's common stock at an annualized rate of $1.00 per share. The company
plans to increase future dividends in line with improvements in earnings and
cash flow performance.
LITIGATION
See the accompanying Notes to Consolidated Financial Statements titled "Legal
Proceedings" for a detailed description of the company's litigation.
The company has been named as a potentially responsible party for unsettled
claims for cleanup costs at 18 hazardous waste sites. The company was a
significant contributor to waste disposed on only one of these sites, the
Thermo-Chem site in Muskegon, Michigan. The company expects that the total
cleanup costs for this site will be between $37 million and $82 million, of
which the company's share will be approximately $5 million. This amount has been
reserved and reflected in the company's financial statements.
In all of the other sites, the company was a minor contributor and
therefore, does not have information on the total cleanup cost. The company has,
however, in most of these cases, been advised by the potentially responsible
party of its roughly estimated exposure at these sites, which, in the aggregate,
totals approximately $5 million.
The company is a defendant in a number of other claims, investigations and
lawsuits. Based on the advice of counsel, management does not believe that these
actions, individually or in the aggregate, will have a material adverse effect
on the company's operations or its consolidated financial condition.
DIVIDENDS PER COMMON SHARE
[Graphic Omitted]
40
REVIEW OF BUSINESS SEGMENTS
In November 1993, the company announced a significant restructuring, and as a
result, it redefined the industry segments for which it reports financial
results. The new definitions are consistent with the company's strategic
direction. The company now reports its operations in two industry segments:
Medical Specialties and Medical/Laboratory Products and Distribution.
MEDICAL SPECIALTIES
The company develops, manufactures and markets on a global basis highly
specialized medical products for treating kidney and heart disease and blood
disorders and for collecting and processing blood. These products include
dialysis equipment and supplies; prosthetic heart valves and cardiac catheters;
blood-clotting therapies; and machines and supplies for collecting, separating
and storing blood. These products require extensive research and development,
and investment in worldwide distribution, marketing, and administrative
infrastructure. The company's International Hospital unit, which manufactures
and distributes intravenous solutions and other medical products outside the
United States, is also included in this segment because it shares facilities,
resources and customers with the other medical specialty businesses in several
locations worldwide.
This segment represents approximately one-third of the company's sales and
approximately two-thirds of the company's operating income excluding the
restructuring charge. International sales comprise two-thirds of the sales in
this segment.
NET SALES
Sales of the company's medical specialties products increased 5% to $3,250
million in 1993. The $3,096 million sales level in 1992 was approximately 11%
higher than the $2,785 million level achieved in 1991. U.S. sales were $1,108
million in 1993, $1,020 million in 1992 and $932 million in 1991. International
sales were $2,142 million in 1993, $2,076 million in 1992 and $1,853 million in
1991. Sales growth in all periods is generally attributable to normal market
growth, new product introductions and increased market penetration in selected
areas. Foreign exchange fluctuations negatively affected sales growth in 1993
and positively contributed to sales increases in 1991 and 1992. International
sales of this segment's products, excluding the effects of foreign currency
values, increased 8% in 1993 and 10% in 1992. Sales trends for the medical
specialty segment are outlined below (in millions):
Unit 1993 1992 1991
- ------------------------------------------------------------------------
Renal $1,061 $ 978 $ 857
Biotech 849 805 719
Cardiovascular 562 540 504
International Hospital 778 773 705
- ------------------------------------------------------------------------
Total $3,250 $3,096 $2,785
- ------------------------------------------------------------------------
Worldwide sales of renal products and services were strong over the past
three years, reflecting a growing patient base and increased acceptance of
peritoneal dialysis ("PD") therapy. Sales penetration of PD products was
especially strong in international markets, where many national governments
recognize the therapy's low start-up and operating costs relative to traditional
hemodialysis. Sales of the company's UltraBag-TM- system, designed to reduce the
incidence of infection and improve convenience for the patient, contributed to
increased sales in Europe in 1992 and 1993 and in the U.S. and Japan in 1993.
The company will launch its HomeChoice-TM- Automated PD System in North America,
Japan and Europe in early 1994. The system simplifies the PD process and may
yield 20% to 30% more dialysis in a given amount of time.
The company experienced strong demand domestically for its therapeutic
blood products, especially in the U.S.
MEDICAL SPECIALTIES NET SALES
[Graphic Omitted]
41
Recombinante-TM- Anti-hemophilic Factor (Recombinant) was launched in the U.S.
early in 1993. The product was recommended by the European Community's Committee
for Proprietary Medicinal Products for approval for market and sales in the
European Community in May, 1993 and has received technical and reimbursement
approval in several countries. The product is a genetically engineered
blood-clotting factor for people with hemophilia, an inherited blood disorder.
The market for the company's blood-collection products slowed in 1993, as
the number of whole-blood-collections declined in the U.S. and in Europe. Sales
of manual collection products were flat. The demand for automated blood
collections was strong in 1993, 1992 and 1991, as the company's automated
CS-3000-R-, blood cell separator machines and its Autopheresis-C-R-,
plateletpheresis system grew at double-digit levels.
Sales growth of the company's cardiovascular products moderated in 1993,
primarily due to the reduced level of hospital activity in the United States.
Sales growth outside the United States remained strong. The company continued
to experience particularly strong demand for its Carpentier-Edwards-R-
Pericardial tissue valves. The company also received U.S. Food and Drug
Administration approval for its Vigilance-R- Continuous Cardiac
Output/SvO2 monitor in late 1993. This represents the first
technology ever to provide continuously, rather than intermittently, the very
desirable combination of data about cardiac output and venous oxygen-saturation
and is expected to strengthen the company's position in the specialty
cardiac-monitoring market. The company is expanding its growing position in
Latin America with the 1994 acquisition of Macchi Engenharia Biomedica Ltda.
Macchi is a Brazilian-based manufacturer and marketer of oxygenators and other
cardiovascular products used in open-heart surgery.
Sales of the company's hospital products in international markets increased
modestly in 1993 due to weakening of foreign currencies. Additionally, the
company's sales in Canada slowed as hospital cost containment in that country
put downward pressure on the consumption of health-care products and services.
Sales of specialty IV products, including infusion pumps, were strong as the
company broadened its base product offering to international markets. Unit
demand for the company's products continued to increase.
OPERATING INCOME
Operating income was $543 million (16.7% of sales) in 1993, $606 million in 1992
and $535 million in 1991. Operating income in 1993 includes a restructuring
charge of $100 million (approximately $42 non-cash) to rationalize manufacturing
capacity in the U.S. and Canada, consolidate distribution facilities in Europe
and streamline administrative efficiency in several countries. As a percent of
sales, operating income was 19.8% in 1993 (excluding restructuring program
charges), 19.6% in 1992 and 19.2% in 1991.
Excluding the restructuring program charges, operating income increased as
a result of lower manufacturing costs, improved expense control and improved
pricing in selected product lines offset by the adverse impact of foreign
currency rates.
Operating income in 1992 increased as the company benefited from plant
rationalization, reductions in administrative staff, sales-force realignments
and a shift in product sourcing to lower-cost manufacturing sites. The company's
European operations were especially strong across all product areas, reflecting
the benefits of the company's realignment of its sales and marketing
organization for each business on a Pan-European basis. In 1992, the increase
in operating income was partially offset by the first-time recognition of the
additional cost associated with a new accounting rule covering retiree
health-care benefits and expanded investments in marketing programs for
cardiovascular products.
Significant R&D investments were made in 1993 for prod-
MEDICAL SPECIALTIES OPERATING INCOME
[Graphic Omitted]
42
ucts to treat kidney and heart disease and blood disorders and to collect and
process blood. The company implanted its Novacor-R-, wearable left-ventricular
assist system ("LVAS") in 33 recipients in the U.S. and Europe during 1993. The
electrically powered LVAS acts as a "bridge" to a heart transplant while
patients await suitable donors. Baxter began clinical trials of its
hemoglobin-based blood substitute on victims of hemorrhagic shock in the U.S.
and in Europe in 1993. The blood substitute is designed to carry oxygen
throughout the body of a patient who has lost a large amount of blood because of
an accident or some other cause. In 1993, the company successfully completed a
multi-center phase I/II clinical trial for anti-CD45, a drug that is being
studied as a preventative for acute organ rejection following organ
transplantation. The study involved patients in the United Kingdom who were
undergoing kidney transplants. The company is collaborating with Cantab
Pharmaceuticals, plc. to develop and market the drug. R&D expenses increased 11%
in 1993 as compared with 15% in 1992. The company spent 8.3% of this segment's
self-manufactured product sales on R&D for this segment in 1993, 7.9% in 1992
and 7.6% in 1991.
CAPITAL EXPENDITURES
Capital expenditures, including additions to the pool of equipment leased or
rented to customers for the medical specialties segment were $266 million in
1993, $259 million in 1992 and $195 million in 1991. Major capital investments
in 1993 were made for the expansion of manufacturing capacity for renal products
in Puerto Rico and Singapore and a manufacturing facility in Thousand Oaks,
California for recombinant blood-therapy products. In 1994, the company expects
to spend approximately $350 million in capital expenditures for the medical
specialties segment. The 32% expected increase is due to the completion of the
renal plant expansion in Singapore and the completion of a plant to manufacture
disposable products used in the automated collection of blood components in
Puerto Rico.
MEDICAL/LABORATORY PRODUCTS AND DISTRIBUTION
Baxter manufactures medical and laboratory supplies and equipment, including
intravenous fluids and pumps, diagnostic-testing equipment and reagents,
surgical instruments and procedure kits, and a range of disposable and reusable
medical products. These self-manufactured products, as well as a significant
volume of third party manufactured medical and laboratory products, are
primarily distributed throughout the company's extensive distribution system to
U.S. hospitals, alternate-site care facilities, medical laboratories, and
industrial and educational facilities.
NET SALES
Sales of the company's medical/laboratory products and distribution segment
increased 5% to $5,629 million in 1993. The $5,375 million sales level in 1992
was 7% higher than the $5,014 million level achieved in 1991. Sales growth in
all periods reflects market growth and increased market penetration.
Additionally, in 1991 and 1992, sales growth was aided by more favorable product
pricing in selected areas. U.S. sales were $5,343 million in 1993, $5,060
million in 1992 and $4,736 million in 1991. Sales in international markets were
$286 million in 1993, $315 million in 1992 and $278 million in 1991.
Demand for many of the company's medical/laboratory products and
distribution services depends on hospital utilization, as measured by surgical
procedures and adjusted patient days (a measure of both hospital inpatient days
and outpatient visits). The rate of growth of surgical procedures overall,
including hospital-based inpatient and outpatient activity, has slowed. In
addition, adjusted patient days have declined. The growth in outpatient surgical
activity continues to outpace the growth in inpatient procedures. Demand for the
company's products sold to industrial and educational facilities is in part
influenced by the strength of the U.S. economy.
There is fundamental change occurring in the U.S. health-
MEDICAL SPECIALTIES R&D EXPENSES
[Graphic Omitted]
MEDICAL SPECIALTIES CAPITAL EXPENDITURES
[Graphic Omitted]
43
care system and significant change occurring in the company's marketplace.
Competition among all health-care providers is becoming much more intense as
they attempt to gain patients on the basis of quality, service and price. Each
is under pressure to decrease the total cost of health-care delivery, and
therefore, are looking for ways to reduce materials handling costs, decrease
supply utilization, increase product standardization per procedure, and control
closely capital expenditures. There has been increased consolidation in the
company's customer base and by its competitors and these trends are expected to
continue. In recent years, the company's overall price increases have been below
the Consumer Price Index, and these industry trends may inhibit the company's
ability to increase its supply prices in the future. In response to the
significant changes occurring in the company's marketplace, the company's board
of directors approved a series of strategic actions designed to make the
company's domestic hospital supply operations more efficient and responsive in
addressing the sweeping changes occurring in the U.S. health-care system. These
actions include realigning the company's U.S. sales organization, consolidating
the hospital and laboratory distribution organizations, and divesting its
diagnostics products manufacturing business. The company intends to continue the
distribution of diagnostic products in the U.S.
The company is focused on helping to drive down health-care costs while
maintaining and improving quality of care. In addition to the company's
Corporate Program, the unique services outlined below describe some of the
company's efforts toward helping customers reduce overall health-care delivery
costs.
By providing cost-effective products and logistical support services, the
company strives to help hospitals maintain a strategic edge in an increasingly
competitive marketplace without sacrificing the quality of patient care. The
company's Corporate Program provides over 2,000 hospitals and multihospital
systems with a single point of contact for all products, services and
proprietary value-added programs. Such programs, include Baxter Corporate
Consulting ("BCC") and the Access-TM- program. In 1993, sales to all customers
under the Baxter Corporate Program grew to $2.7 billion. Sales to these
customers increased 9% over 1992. Other programs of strategic value to customers
in today's cost containment environment include ValueLink-R- services, the
Quality Enhanced Distribution ("QED") services program and the Procedure-Based
Delivery System-TM- ("PBDS"). All of these programs are discussed below.
BCC provides a range of programs and services to assist hospitals in
reducing costs while increasing the quality of care. In every case, continuous
quality-improvement techniques are used and services are customized to satisfy
individual customer needs. On average, BCC has identified $813,000 of financial
savings per customer engagement. And, in 1993, the company's sales to customers
who use its consulting service increased over 10%, more than three times the
growth to non-Corporate Program customers.
The Access program brings additional resources to Baxter's corporate
customer to address specific health-care issues that lie outside Baxter's
product and service offerings. As of December 31, 1993, over 1,000 corporate
customers were taking advantage of these Access programs.
Five years ago, Baxter developed the ValueLink services program, a
hospital-logistics management service designed to improve supply-chain quality
and create total inventory system economies. ValueLink services are designed to
permit hospitals to dramatically reduce inventories and related warehousing
costs for medical-surgical supplies, relying on Baxter for frequent,
standardized deliveries and improved service levels. As of December 31, 1993, 53
hospitals across the United States, averaging 450 to 500 beds per hospital, were
participating in Baxter's ValueLink program as compared to 30 hospitals in 1992
and 22 hospitals in 1991.
The Quality Enhanced Distribution services program, started in late 1991,
reduces the time it takes for a hospital to
MEDICAL/LABORATORY PRODUCTS NET SALES
[Graphic Omitted]
44
receive and store supplies and to process accounts payable. As a result, many of
the company's hospital customers have been able to reduce, by as much as 90%,
the amount of labor associated with the receipt and storage of medical and
laboratory supplies. At the end of 1993, Baxter had 724 QED initiatives serving
U.S. hospitals versus 536 in 1992 and 117 in 1991.
While cost pressures on U.S. hospitals have increased interest in programs
like ValueLink and QED, the revolutionary changes in the way hospitals are
likely to be reimbursed in the new health-care environment led the company to
pilot even bolder programs during 1993 to help its customers take costs out of
their system. A natural next step from helping hospitals manage logistics costs
is helping them manage supply utilization. While the goal of these
"managed-cost" initiatives is to reduce customers' total supply costs, the
company also benefits by earning a larger share of the business that remains. A
primary building block of these programs is the Procedure-Based Delivery
System-TM-, in which Baxter assembles both sterile and non-sterile supplies into
individual kits for surgical and obstetrical procedures that are delivered
"just-in-time" in ready-to-use fashion, saving the hospital inventory costs and
labor-handling costs.
In January, 1993 the company signed a distribution agreement with Johnson
and Johnson Medical, Inc. ("JJMI") allowing Baxter to distribute all products
manufactured by JJMI and the fracture-management product line of Johnson
Orthopaedics, Inc. Additionally, in 1993, the company began to distribute a
variety of products from 3M Health Care through its regular channels. Previously
the company distributed 3M's products only through certain ValueLink accounts.
The company also signed hospital-specific distribution agreements with U.S.
Surgical for disposable products used in laparoscopic surgery. These
arrangements are consistent with the company's goal of serving as a preferred
distributor for products manufactured outside the company and contributed to the
strong increase in the company's medical products purchased for resale.
Sales of products purchased for resale, which represented 43% of the
company's sales of its medical/laboratory products and distribution segment,
increased 9% in 1993. In 1992, sales of these products represented 41% of the
segment's sales; these sales increased 6% in 1992 over 1991. Sales of the
company's self-manufactured products increased more than 1% in 1993 and
increased 8% in 1992. These products were negatively affected by overall
cost-containment pressures on the company from customers and by lower demand
for some of the company's products.
Baxter anticipates hospital, laboratory and alternate-site care supply
markets will continue to grow. Baxter expects to grow its sales faster than
these markets and therefore gain market share. The company expects to capitalize
on its unique broad offering of products and value-added services including its
ValueLink, QED, Access, BCC, Corporate Program and PBDS managed-cost initiatives
described above. The primary focus of the company's services is to help its
customers reduce the cost of delivering quality health care. By doing so, the
company expects to further penetrate its corporate accounts and enroll more
customers in its ValueLink and QED programs.
OPERATING INCOME (LOSS)
There was an operating loss in 1993 of $132 million compared to operating income
of $551 million in 1992 and $539 million in 1991. The loss in 1993 reflects
restructuring charges of $550 million ($231 non-cash) designed to make the
company's domestic hospital-supply operations more efficient and more responsive
in addressing the sweeping changes occurring in the U.S. health-care system.
Operating income as a percent of sales was 7.4% in 1993 (excluding restructuring
program charges), 10.3% in 1992 and 10.7% in 1991.
Operating income in 1993 decreased, excluding restructuring program costs,
as a result of a lower sales growth
MEDICAL/LABORATORY PRODUCTS NET SALES
[Graphic Omitted]
45
of the company's manufactured products and higher sales of the company's
distributed products, the impact of an inventory reduction program that caused
some manufacturing plants to operate at reduced capacity utilization levels and
the company's inability to recover raw material and other cost increases through
product pricing, and downsizing costs discussed previously. In 1992, operating
income increased in most major product areas due to manufacturing efficiencies
associated with the company's 1990 restructuring program and modestly higher
pricing on selected products. Similar trends were experienced in 1991.
The lower cost of manufacturing due to plant closures contributed to the
company's increased operating income in 1992 and 1991. In addition, the company
benefited from initiatives implemented during its 1990 restructuring program,
including several administrative consolidations in its customer service,
purchasing and field finance operations which created significant operating
expense savings during that time.
In 1992, operating income was adversely affected by the first-time
recognition of the additional cost associated with a new accounting rule
covering retiree health-care benefits. Additionally, expense levels increased
slightly as the company broadened its logistical service offering to hospitals
and invested in new programs to improve market penetration and operating
efficiency.
CAPITAL EXPENDITURES
Capital expenditures, including additions to the pool of equipment leased or
rented to customers, for the segment were $300 million in 1993, $365 million in
1992 and $363 million in 1991. Baxter expects to further automate existing
distribution functions and consolidate less efficient manufacturing facilities.
In 1993, the company opened a new highly automated facility in Waukegan,
Illinois designed especially to meet customer requirements. It opened a similar
facility in Ontario, California in 1991. Baxter plans to open one additional
such facility in Orange County, New York in 1994. As a result of these new
centers, smaller facilities in the region will be closed. The company plans to
increase its investments in logistics and information technology to enhance its
level of customer support. The company expects to spend approximately $250
million in capital expenditures in 1994. The decline in expenditures is due to
the completion of the company's investments in very large, strategically located
distribution centers.
MEDICAL/LABORATORY PRODUCTS OPERATING INCOME
[Graphic Omitted]
MEDICAL/LABORATORY PRODUCTS CAPITAL EXPENDITURES
[Graphic Omitted]
46
MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING
The consolidated balance sheets of Baxter International Inc. and subsidiaries as
of December 31, 1993 and 1992, and the related consolidated statements of
income, cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 1993, have been prepared by management,
which is responsible for their integrity and objectivity. The statements have
been prepared in conformity with generally accepted accounting principles and
include some amounts that are based upon management's best estimates and
judgments. The financial information contained elsewhere in this annual report
is consistent with that contained in the financial statements.
Management is responsible for establishing and maintaining a system of
internal control designed to provide reasonable assurance as to the integrity
and reliability of financial reporting. The concept of reasonable assurance is
based on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits to be derived therefrom.
Management believes that the foundation of an appropriate system of
internal control is a strong ethical company culture and climate. To this end
the Corporate Responsibility office was created in 1993 to recommend to the
Public Policy Committee of the Board of Directors, revisions to the company's
existing ethics and compliance policies, and to direct the implementation of and
compliance with the company's ethics and compliance policies and procedures. The
Corporate Responsibility office monitors compliance through audit programs and
the requirement for annual representations by senior managers. Additionally, a
professional staff of corporate auditors reviews the related internal control
system design, the accounting policies and procedures supporting this system and
compliance therewith. The results of these reviews are reported annually to the
Public Policy and Audit Committees.
Independent certified public accountants perform audits, in accordance with
generally accepted auditing standards, which include a review of the system of
internal controls and result in assurance that the financial statements are, in
all material respects, fairly presented.
The board of directors, through its audit committee composed solely of
non-employee directors, is responsible for overseeing the integrity and
reliability of the company's accounting and financial reporting practices and
the effectiveness of its system of internal controls. The independent certified
public accountants and corporate auditors meet regularly with, and have access
to, this committee, with and without management present, to discuss the results
of the audit work.
Management assessed the company's system of internal control as of
December 31, 1993, in relation to criteria for effective internal control over
financial reporting described in "Internal Control-Integrated Framework" issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, it is management's opinion that, as of December 31, 1993,
the company maintained an effective system of internal controls over the
preparation of its published interim and annual financial statements.
/s/ Vernon R. Loucks Jr.
- ------------------------
Vernon R. Loucks Jr.
Chairman and
Chief Executive Officer
/s/ Harry M. Jansen Kramer, Jr.
- -------------------------------
Harry M. Jansen Kramer, Jr.
Senior Vice President
and Chief Financial Officer
/s/Brian P. Anderson
- --------------------
Brian P. Anderson
Controller
47
REPORT OF INDEPENDENT ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
BAXTER INTERNATIONAL INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholders' equity present
fairly, in all material respects, the financial position of Baxter International
Inc. (the company) and its subsidiaries at December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Effective January 1, 1993, as discussed in the Income Taxes Note, the
company adopted Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" and as discussed in the Retirement and Other Benefit Programs
Note, the company also adopted Statement No. 112, "Employers Accounting for
Postemployment Benefits." Additionally, as discussed in the Retirement and Other
Benefit Programs Note, effective January 1, 1992, the company adopted Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
PRICE WATERHOUSE
Chicago, Illinois
February 10, 1994
48
CONSOLIDATED BALANCE SHEETS
December 31 (in millions, except shares) 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS Cash and equivalents $ 479 $ 32
Accounts receivable, net of allowance for
doubtful accounts of $32 in 1993 and $29 in 1992 1,594 1,572
Notes and other current receivables 82 95
Inventories 1,772 1,632
Short-term deferred income taxes 341 132
Prepaid expenses 154 126
------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,422 3,589
- -------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 2,655 2,647
- -------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS Goodwill and other intangibles 2,490 2,488
Non-current receivables 180 158
Insurance receivables 509 --
Investment in affiliates 180 195
Other 109 78
------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 3,468 2,919
------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,545 $9,155
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES Notes payable to banks $271 $351
Current maturities of long-term debt and lease obligations 551 149
Accounts payable and accrued liabilities 1,783 1,479
Income taxes payable 328 389
------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,933 2,368
- -------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT AND LEASE OBLIGATIONS 2,800 2,433
- -------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEFERRED INCOME TAXES 201 174
- -------------------------------------------------------------------------------------------------------------------------------
LONG-TERM LITIGATION LIABILITIES 674 --
- -------------------------------------------------------------------------------------------------------------------------------
OTHER NON-CURRENT LIABILITIES 752 385
- -------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 350,000,000 shares,
issued 287,701,247 shares in 1993 and 1992 288 288
Additional contributed capital 1,883 1,889
Retained earnings 1,452 1,928
Common stock in treasury, at cost, 11,187,278 shares in 1993
and 8,367,792 shares in 1992 (350) (281)
Cumulative foreign currency adjustment (88) (29)
------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,185 3,795
------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,545 $9,155
- -------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
49
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 (in millions, except per share data) 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
OPERATIONS Net Sales $8,879 $8,471 $7,799
Operating costs and expenses
Cost of goods sold 5,657 5,244 4,836
Marketing and administrative expenses 1,879 1,798 1,648
Research and development expenses 337 317 288
Goodwill amortization 67 67 67
Restructuring charge 700 -- --
------------------------------------------------------------------------------------------------------
Total operating costs and expenses 8,640 7,426 6,839
------------------------------------------------------------------------------------------------------
Operating income 239 1,045 960
Non-operating expenses (income)
Interest expense 222 211 222
Interest income (30) (24) (30)
Litigation 330 -- --
Other 47 105 80
------------------------------------------------------------------------------------------------------
Total non-operating expenses 569 292 272
------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes and cumulative effect of accounting changes (330) 753 688
Income tax expense (benefit) (62) 192 181
------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
cumulative effect of accounting changes (268) 561 507
Discontinued operations
Income from discontinued operations net of
applicable income taxes of $31 and $32 for
1992 and 1991, respectively -- 63 84
Costs associated with effecting the business discontinuance
net of income tax benefit of $6 for 1992 -- (18) --
------------------------------------------------------------------------------------------------------
Total discontinued operations -- 45 84
------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting changes (268) 606 591
Cumulative effect of change in accounting for:
Income taxes 81 -- --
Other postemployment/postretirement
benefits net of income tax benefits of $7
and $50 for 1993 and 1992, respectively (11) (165) --
------------------------------------------------------------------------------------------------------
Net income (loss) ($198) $441 $591
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA Earnings (loss) per common share
Continuing operations $(0.97) $1.99 $1.73
Discontinued operations
Income from discontinued operations -- 0.22 0.30
Costs associated with effecting the
business discontinuance -- (0.06) --
------------------------------------------------------------------------------------------------------
Total discontinued operations -- 0.16 0.30
------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting for:
Income taxes 0.29 -- --
Other postemployment/postretirement benefits (0.04) (0.59) --
------------------------------------------------------------------------------------------------------
Net income (loss) $(0.72) $1.56 $2.03
------------------------------------------------------------------------------------------------------
Average number of common shares
and equivalents outstanding 277 279 280
- -------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
50
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 (in millions) (Brackets denote cash outflows) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED Income (loss) from continuing operations $ (268) $ 561 $ 507
BY CONTINUING OPERATIONS Adjustments
Depreciation and amortization 494 447 411
Deferred income taxes (172) 32 78
Asset dispositions, net (pre-tax) (44) 21 6
Provision for restructuring and litigation charges 925 -- --
Minority and equity interests, net of distributions 27 35 26
Other 24 13 6
Changes in balance sheet items
Accounts receivable (42) (171) (168)
Inventories (167) (139) (66)
Accounts payable and accrued liabilities 61 63 111
Income taxes payable 4 (14) 9
Restructuring program payments (29) (63) (158)
Other (48) (43) (65)
------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED BY CONTINUING OPERATIONS 765 742 697
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED BY DISCONTINUED OPERATIONS -- 21 13
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS Capital expenditures (516) (537) (503)
Additions to the pool of equipment leased or
rented to customers (89) (103) (89)
Acquisitions (net of cash received) and
investments in affiliates (120) (125) (115)
Proceeds from asset dispositions 70 39 36
------------------------------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS, NET (655) (726) (671)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING TRANSACTIONS Issuances of debt and lease obligations 2,437 3,203 1,374
Redemption of debt and lease obligations (2,021) (2,684) (1,122)
Increase (decrease) in debt with maturities of
three months or less 274 (215) 249
Redemption of preferred stock -- (337) --
Common stock cash dividends (278) (240) (208)
Preferred stock cash dividend -- (5) (23)
Stock issued under employee benefit plans 52 85 81
Purchase of treasury stock (124) (123) (109)
------------------------------------------------------------------------------------------------------
FINANCING TRANSACTIONS, NET 340 (316) 242
- -------------------------------------------------------------------------------------------------------------------------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS (3) 12 1
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 447 (267) 282
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 32 299 17
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $479 $32 $299
- -------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
51
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31 (in millions) 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE Balance, beginning of year $-- $339 $339
PREFERRED STOCK Redemption of preferred stock -- (339) --
------------------------------------------------------------------------------------------------------
Balance, end of year -- -- 339
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK Balance, beginning of year 288 288 285
Stock issued under employee benefit plans -- -- 3
------------------------------------------------------------------------------------------------------
Balance, end of year 288 288 288
- -------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL Balance, beginning of year 1,889 1,859 1,799
CONTRIBUTED CAPITAL Stock issued under employee benefit plans (6) 30 60
------------------------------------------------------------------------------------------------------
Balance, end of year 1,883 1,889 1,859
- -------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS Balance, beginning of year 1,928 2,083 1,723
Net income (loss) (198) 441 591
Common stock cash dividends (278) (240) (208)
Preferred stock cash dividends -- (5) (23)
Stock dividend of Caremark International Inc. -- (351) --
------------------------------------------------------------------------------------------------------
Balance, end of year 1,452 1,928 2,083
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK Balance, beginning of year (281) (234) (130)
IN TREASURY Purchases (124) (123) (109)
Stock issued under employee benefit plans 55 76 5
------------------------------------------------------------------------------------------------------
Balance, end of year (350) (281) (234)
- -------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE FOREIGN Balance, beginning of year (29) 38 76
CURRENCY ADJUSTMENT Currency fluctuations (59) (67) (38)
------------------------------------------------------------------------------------------------------
Balance, end of year (88) (29) 38
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $3,185 $3,795 $4,373
- -------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial statements.
These policies are in conformity with generally accepted accounting principles
and have been applied consistently in all material respects.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Baxter
International Inc. and its majority-owned subsidiaries ("Baxter" or the
"company"). Operations outside the United States and its territories are
included in the consolidated financial statements on the basis of fiscal years
ending November 30.
CASH AND EQUIVALENTS
Cash and equivalents include cash, cash investments and marketable securities
with a maturity of three months or less.
Cash payments for interest were $217 million in 1993, $193 million in 1992
and $201 million in 1991. Cash payments made by Baxter for income taxes related
to continuing operations in 1993, 1992 and 1991 were $79, $157 and $67 million,
respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Market for raw materials is based on replacement costs and for other
inventory classifications on net realizable value. Appropriate consideration is
given to deterioration, obsolescence and other factors in evaluating net
realizable value.
Inventories consisted of the following at December 31 (in millions):
1993 1992
- -------------------------------------------------
Raw materials $ 238 $ 240
Work in process 221 201
Finished products 1,313 1,191
- -------------------------------------------------
Total inventories $1,772 $1,632
- -------------------------------------------------
- -------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided for financial reporting purposes principally on the straight-line
method over the estimated useful lives of the assets or, for leasehold
improvements, over the terms of the related facility leases, if shorter.
Straight-line and accelerated methods of depreciation are used for income tax
purposes.
Property, plant and equipment consisted of the following at December 31 (in
millions):
1993 1992
- ----------------------------------------------------------------
Land $ 203 $ 195
Buildings and leasehold improvements 1,051 976
Machinery and equipment 2,508 2,298
Equipment leased or rented to customers 390 343
Construction in progress 339 397
- ----------------------------------------------------------------
Total property, plant and equipment,at cost 4,491 4,209
Accumulated depreciation and amortization (1,836) (1,562)
- ----------------------------------------------------------------
Net property, plant and equipment $2,655 $2,647
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Interest costs capitalized to property, plant and equipment were $10 million
in 1993, $10 million in 1992 and $9 million in 1991.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over estimated useful lives
not exceeding 40 years. Based upon management's assessment of the future cash
flows of acquired businesses, the carrying value of goodwill at December 31,
1993 has not been impaired. As of December 31, 1993 and 1992, goodwill was
$2,098 million and $2,167 million, respectively, net of accumulated amortization
of $538 million and $471 million, respectively.
Other intangible assets include purchased patents, trademarks, deferred
charges and other identified rights which are amortized on a straight-line basis
over their legal or estimated useful lives, whichever is shorter (generally not
exceeding 17 years). As of December 31, 1993 and 1992, other intangibles were
$392 million and $321 million, respectively, net of accumulated amortization of
$226 million and $183 million, respectively.
INCOME TAXES
Effective January 1, 1993, the company adopted Financial Accounting Standards
Board ("FASB") Statement No. 109, "Accounting for Income Taxes." Under this
standard, deferred income taxes reflect the impact of temporary differences
between the assets and liabilities recognized for financial reporting purposes
and amounts recognized for tax purposes. Deferred income tax accounts are
adjusted to reflect changes in tax rates made from time to time by taxing
authorities in the jurisdiction in which the company operates.
53
EARNINGS PER SHARE
Earnings per share of common stock are computed by dividing the net income
available for common stock by the weighted average number of common shares
outstanding during the period.
RECLASSIFICATIONS
Certain immaterial reclassifications have been made to conform the 1992 and
1991 financial statements to the 1993 presentation.
RESTRUCTURING CHARGE
In November 1993, the company announced that its board of directors approved a
series of strategic actions to improve shareholder value, to extend positions of
leadership in health-care markets and to reduce costs. These actions are
designed to make the company's domestic medical/laboratory products and
distribution segment more efficient and more responsive in addressing the
sweeping economic changes occurring in the U.S. health-care system and
accelerate growth of its medical specialties businesses worldwide. The company
recorded a $700 million pre-tax provision to cover costs associated with these
restructuring initiatives.
ACQUISITIONS, INVESTMENTS IN AFFILIATES, DIVESTITURES AND
DISCONTINUED OPERATIONS
The company invested $52 million in 1993, $41 million in 1992 and $7 million
in 1991 for acquisitions accounted for as purchase transactions. Had these
acquisitions taken place on January 1, consolidated results in the year of
acquisition would not have been materially different from reported results.
These acquisitions involved no significant change to the company's strategic
direction. They were made to acquire technologies, broaden product lines and
expand market coverage. The company also invested $52 million in 1993, $72
million in 1992 and $77 million in 1991 in affiliated companies. Additionally,
the company paid previously recorded acquisition-related liabilities associated
with the 1985 acquisition of American Hospital Supply Corporation ("American")
of $16 million in 1993, $12 million in 1992 and $31 million in 1991.
The company disposed of or discontinued several minor non-strategic or
unprofitable business units and investments which resulted in a net gain of
$27 million (net of $17 million related tax expense) in 1993, as compared to net
losses of $16 million and $2 million (net of related income tax benefits of
$5 million and $4 million) in 1992 and 1991, respectively. The majority of these
transactions resulted in the disposition of the company's entire interest in
such businesses. The aggregate net sales proceeds for such dispositions were
$70 million in 1993, $30 million in 1992 and $34 million in 1991.
On October 28, 1992, the board of directors of Baxter declared a dividend to
the company's common stockholders of all the common stock of Caremark
International Inc. ("Caremark," formerly a wholly-owned subsidiary of Baxter).
This dividend was distributed to holders of record on November 30, 1992. The
primary purpose for the stock dividend was to eliminate a developing strategic
competitive conflict between the customers of Baxter's hospital business and
Caremark's alternate site health-care businesses.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at
December 31 (in millions):
1993 1992
- ----------------------------------------------------------------
Accounts payable, principally trade $ 738 $ 650
Employee compensation and withholdings 339 229
Restructuring and merger consolidation 237 34
Pension and other deferred benefits 64 73
Property, payroll and other taxes 93 89
Other current obligations 312 404
- ----------------------------------------------------------------
Accounts payable and accrued liabilities $1,783 $1,479
- ----------------------------------------------------------------
- ----------------------------------------------------------------
CREDIT FACILITIES
At December 31, 1993, Baxter's revolving credit facilities enabled the company
to borrow funds on an unsecured basis at variable interest rates. The banks
participating in these facilities are committed to maintain a $1 billion
facility through August 1996 (with two one-year extensions) and a $500 million
facility through August 1994. The amended agreements contain covenants which
include a maximum debt-to-capital ratio (as defined) and a minimum interest
coverage ratio. At December 31, 1993, there were no borrowings outstanding
under this facility.
Baxter also maintains short-term credit arrangements totaling approximately
$1.4 billion in support of international operations. At December 31, 1993,
approximately $311 million of borrowings were outstanding under these
facilities, of which $122 million is classified as long-term debt.
54
BAXTER INTERNATIONAL
LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt and lease obligations consisted of the following at December 31
(in millions):
1993
Unamortized
deferred
financing Effective
discounts/costs Interest
(premiums/gains) Rate 1993 1992
- -------------------------------------------------------------------------------
Commercial paper $ 833 $ 475
- -------------------------------------------------------------------------------
Short-term notes 467 465
- -------------------------------------------------------------------------------
5% notes due 1995 $ 3 6.3% 147 146
- -------------------------------------------------------------------------------
7 1/2 % notes due 1997 (2) 7.3% 202 202
- -------------------------------------------------------------------------------
8 1/8 % notes due 2001 1 8.3% 149 149
- -------------------------------------------------------------------------------
9 1/4 % notes due 1996 2 9.7% 148 148
- -------------------------------------------------------------------------------
Swapped notes due 1997,
2002 and 2008 (13) 3.4% 418 221
- -------------------------------------------------------------------------------
9 1/2 % notes due 2008
(redeemable by holders
in 1998) 1 10.0% 99 98
- --------------------------------------------------------------------------------
Industrial development
obligations, due 1994
through 2013 (1) 8.5% 74 74
- -------------------------------------------------------------------------------
Notes and capitalized lease
obligations due 1994
through 2020 83 7.4% 814 604
- -------------------------------------------------------------------------------
Total long-term debt and
lease obligations 3,351 2,582
Current portion (551) (149)
- -------------------------------------------------------------------------------
Long-term portion $2,800 $2,433
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At December 31, 1993 and 1992, commercial paper and certain short-term notes
together totaling $1 billion and $830 million respectively, have been classified
with long-term debt as they are supported by long-term credit facilities and
will continue to be refinanced.
The company leases certain facilities and equipment under capital and
operating leases expiring at various dates. Most of the operating leases
contain renewal options. Total expense for all operating leases was $132
million in 1993, $128 million in 1992, and $109 million in 1991.
Future minimum lease payments (including interest) under capital and
noncancelable operating leases and aggregate debt maturities at December 31,
1993, were as follows (in millions):
Aggregate
debt
maturities
Operating and capital
leases leases
- --------------------------------------------------------------------
1994 $ 99 $ 553
1995 61 436
1996 45 1,163
1997 28 228
1998 19 27
Thereafter 68 1,018
- --------------------------------------------------------------------
Total obligations and commitments $320 $3,425
- ------------------------------------------------
Amounts representing interest, discounts,
premiums and deferred financing costs 74
- --------------------------------------------------------------------
Present value of long-term debt and
lease obligations $3,351
- --------------------------------------------------------------------
- --------------------------------------------------------------------
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities, approximate fair value due to the short-term
maturities of these assets and liabilities.
Investments in affiliates are accounted for by both the cost and equity
methods and pertain to several minor equity investments in privately-held
companies for which fair values are not readily available, but are believed to
exceed carrying amounts. The assets and liabilities of the company also include
the following categories of financial instruments as of December 31, 1993 (in
millions):
Carrying Approximate
Amounts Fair Values
- -----------------------------------------------------------------------------
December 31, December 31,
1993 1992 1993 1992
- -----------------------------------------------------------------------------
Insurance receivables $ 509 -- $ 222 --
- ----------------------------------------------------------------------------
Total short-term debt 271 $ 351 271 $ 351
- ----------------------------------------------------------------------------
Total long-term debt and
lease obligations 3,351 2,582 3,489 2,714
- ----------------------------------------------------------------------------
Long-term litigation liabilities 674 -- 384 --
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
55
The aggregate fair value of total short-term debt approximates its carrying
amount because of the recent and frequent repricing based on market conditions.
The fair value of long-term debt and lease obligations was based on quoted
market prices for the same or similar issues, giving consideration to quality,
interest rates, maturity and other significant characteristics. Although the
company's litigation has not yet been settled, the estimated fair values of
insurance receivables and long-term litigation liabilities were computed by
discounting the expected cash flows based on currently available information.
CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
The company provides credit, in the normal course of business, to hospitals,
private and government institutions, health-care agencies, insurance agencies
and doctors' offices. The company performs ongoing credit evaluations of its
customers and maintains reserves for potential credit losses which, when
realized, have been within the range of management's expectations.
Baxter utilizes forward contracts, options and interest rate swaps to
minimize the company's exposure to adverse movements in interest rates related
to various debt instruments. Gains, losses and premiums paid on financial
instruments designated as hedges are deferred and amortized as a discount or
premium over the expected life of the respective issues.
The company had $500 million in interest rate swaps hedging its floating rate
debt (at approximately 6.5%) which terminated on December 31, 1993. In
October 1993, the company entered into new swaps effective through December 31,
1998 totaling $300 million (at fixed rates approximating 4.8%) and in
January 1994 totaling an additional $200 million effective through December 31,
1996 (1994 fixed rate approximating 4.3%) to hedge its floating rate debt. The
company also had interest rate agreements which had the effect of changing the
fixed rate on $405 million outstanding swapped notes due 1997, 2002 and 2008 to
a floating rate. In addition, $325 million in interest rate swaps will become
effective after December 31, 1994, which provide protection against adverse
movements in interest rates through December 31, 2003.
The company also utilizes forward and option contracts to hedge exposure to
fluctuations in foreign currency rates. At December 31, 1993, firm commitments
and balance sheet exposures were hedged with forward contracts totaling a
notional $191 million.
The counterparties to the interest rate and foreign currency hedging
agreements are characterized as well-respected, major financial institutions.
To decrease the risk of nonperformance, the company diversifies its selection of
counterparties.
The company invests the majority of its excess cash, primarily generated
through operations in Puerto Rico, in certificates of deposit with major banks
there. These certificates typically have a maturity of 30 to 45 days. The
company has not experienced any losses on its certificate of deposit
investments.
PREFERRED STOCK
The stockholders have authorized the issuance of 100 million shares of no par
value preferred stock. This stock can be issued in series with varying terms as
determined by the board of directors.
PREFERRED STOCK PURCHASE RIGHTS
During 1989, common stockholders received a dividend of one preferred stock
purchase right (collectively, the "Rights") for each share of common stock held
of record. Each Right entitles the registered holder to purchase from the
company one one-hundredth of a share of Series A Junior Participating Preferred
Stock for $70. The Rights will become exercisable (and transferable apart from
the common stock) on the earlier of (1) 10 days following a public announcement
that a person or group has acquired 20% or more of the common stock, or
(2) 10 business days following the commencement or announcement of an offer to
acquire 20% or more of the common stock.
If, after the Rights become exercisable, any person or group (the "Acquirer")
acquires 20% or more of the common stock (except pursuant to an offer for all
outstanding shares of common stock which the independent directors determine to
be fair to and otherwise in the best interests of the company and its
stockholders), each Right may be exercised for common stock (or, in certain
circumstances, cash, other property or securities) having a value of $140. In
specified circumstances, each Right may be exercised for common stock of an
acquiring entity having a value of $140. All Rights held by the Acquirer will be
null and void. The company may generally redeem the Rights at a price of
$.01 per Right at any time until 10 days following a public
56
announcement that a person or group has acquired 20% or more of the common
stock. The Rights will expire on March 20, 1999, unless earlier redeemed.
ADJUSTABLE RATE PREFERRED STOCK
On April 1, 1992, the company redeemed all of the 6,771,408 outstanding shares
of its adjustable rate preferred stock, no par value, $50 liquidation value, for
a redemption price of $50 per share together with the regular quarterly dividend
of 78.75 cents per share. No shares of this security may be issued in the
future.
COMMON STOCK
All common stock prices and outstanding shares for unfulfilled employee benefit
plan obligations were, as of November 30, 1992, equitably adjusted to maintain
the value of the benefits by taking into consideration the market price of
Baxter stock before and after the Caremark distribution. The following tables
reflect this adjustment.
The company has employee stock purchase plans under which the sale of its
common stock has been authorized. The purchase price is the lower of 85% of the
closing market price on the date of subscription or 85% of the closing market
price on the date sufficient funds have been withheld to purchase 20 shares.
Stock purchase plan transactions for the three years ended December 31, 1993,
are summarized below:
Shares subscribed 1993 1992 1991
- --------------------------------------------------------------------------
Beginning of year 1,704,735 1,726,738 1,899,589
Subscriptions 3,303,465 1,993,581 1,721,133
Equitable adjustment -- 479,477 --
Purchases (1,592,102) (1,488,925) (1,554,416)
Cancellations (919,395) (1,006,136) (339,568)
- --------------------------------------------------------------------------
End of year 2,496,703 1,704,735 1,726,738
- --------------------------------------------------------------------------
Subscription price per
share outstanding,
end of year $17.21-$32.78 $19.59-$32.78 $17.54-$34.32
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
At December 31, 1993, approximately 7,500 of approximately 37,000 eligible
employees in the U.S. and Canada and approximately 1,000 of approximately 13,000
other eligible employees were participating in the plans. Expiration dates for
these subscriptions run from 1994 to 1996. The weighted average subscription
price approximated $21.35 for U.S. and Canadian employees and $20.87 for other
employees at December 31, 1993.
The company has various employee stock option plans. All outstanding options
under these plans have been granted at 100% of market value on the dates of
grant.
Stock option transactions for employees and directors for the three years
ended December 31, 1993, are summarized below:
Option shares outstanding 1993 1992 1991
- --------------------------------------------------------------------------
Beginning of year 8,887,657 9,125,182 8,728,413
Granted 3,496,709 2,166,200 2,480,800
Equitable adjustment -- 555,223 --
Exercised (466,105) (1,590,324) (1,760,151)
Cancelled/Expired (692,696) (1,368,624) (323,880)
- --------------------------------------------------------------------------
End of year 11,225,565 8,887,657 9,125,182
- --------------------------------------------------------------------------
Option price per share
Exercised $10.32-$24.36 $8.74-$35.75 $7.94-$25.50
Outstanding,
end of year $8.35-$36.66 $8.35-$36.66 $8.63-$37.13
- --------------------------------------------------------------------------
As of December 31, 1993, options were held by approximately 6,700 employees, of
which 5,934,730 shares were exercisable. Expiration dates for these options
range from 1994 to 2003. The weighted average option price approximated $28.02
at December 31, 1993.
In addition, stock options were granted to The Baxter Foundation (a
philanthropic organization), as follows: an option to purchase 1,047,000 shares
of common stocks, at $33.78 per share (both equitably adjusted) was granted on
April 22, 1991, and expires in 2001; and an option to purchase 1 million shares
of common stock, at $33.75 per share, was granted on December 2, 1992, and
expires in 2002. The Baxter Foundation sold its option to purchase 250,000
shares of common stock, exercisable at $18.1875 per share, to an unrelated
not-for-profit organization, which then exercised the option during 1992.
Certain plans provided for the discretionary grant of stock appreciation
rights ("SAR") or limited rights in conjunction with stock options. SARs permit
the holder to receive an amount, in cash and/or stock, equal to the difference
between the current market value of a share of stock and the option price of
such share of stock. There were 14,000 SARs outstanding on January 1, 1991; the
SARs expired on December 31, 1991.
57
Under various plans, the company has made grants of restricted stock and
performance shares in the form of the company's common stock to provide
incentive compensation to key employees and non-employee directors.
Restricted stock transactions for the three years ended December 31, 1993,
are summarized below:
Restricted stock outstanding 1993 1992 1991
- -------------------------------------------------------------------------------
Beginning of year 2,052,777 2,336,023 2,593,430
Granted 5,400 858,211 149,691
Vested (free of
restrictions) (313,353) (904,488) (353,644)
Cancelled (278,624) (236,969) (53,454)
- -------------------------------------------------------------------------------
End of year 1,466,200 2,052,777 2,336,023
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At December 31, 1993, 373,633 shares were subject to restrictions which lapse
between 1994 and 1998, and 1,092,567 shares were subject to restrictions that
lapse upon achievement of future performance objectives.
Performance share transactions for the three years ended December 31, 1993,
are summarized below:
Performance shares
outstanding 1993 1992 1991
- ----------------------------------------------------------------------------
Beginning of the year 57,736 57,736 293,434
Granted/awarded 12,000 12,000 12,000
Issued (20,189) (12,000) (127,813)
Cancelled -- -- (119,885)
- ----------------------------------------------------------------------------
End of year 49,547 57,736 57,736
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
The company's board of directors authorized the purchase of common stock to fund
various employee-benefit plans, for conversion of convertible securities and for
other corporate purposes. The company purchased 4.5 million shares of common
stock for $124 million in 1993, and may purchase up to an additional 11 million
shares under this authority.
At December 31, 1993, the company's common stock was reserved for issuance
as follows:
- -------------------------------------------------------------------------
Acquisitions 986,525
Stock purchase plans 6,458,994
Management incentive compensation programs 12,423,784
Other 2,047,000
- -------------------------------------------------------------------------
Total shares reserved 21,916,303
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
RETIREMENT AND OTHER BENEFIT PROGRAMS
The company and its subsidiaries sponsor qualified and non-qualified
non-contributory, defined benefit pension plans covering substantially all
employees in the U.S. and Puerto Rico. The benefits are based on years of
service and the employee's compensation during 5 of the last 10 years of
employment as defined by the plans. The company's funding policy is to make
contributions to the trust of the Qualified Plan which meet or exceed the
minimum requirements of the Employee Retirement Income Security Act of 1974.
Assets held by the trusts of the plans consist primarily of equity and fixed
income securities. The company also has various retirement plans in locations
outside the U.S. and Puerto Rico.
The assumed discount rate applied to benefit obligations to determine 1993
pension expense was 8% and the assumed long-term rate of return on assets was
10.5% for the U.S. and Puerto Rico plans. These rates averaged 7.7% and 8.4%
respectively, for the foreign plans. Pension expense includes the following
components (in millions):
1993 1992 1991
- -------------------------------------------------------------------------------
Service cost-benefits earned during the period $50 $42 $29
Interest cost on projected benefit obligations 72 63 55
Actual return on assets (67) (50) (45)
Net amortization and deferral 21 7 13
- -------------------------------------------------------------------------------
Total pension expense $76 $62 $52
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Assumptions used in determining the funded status of these plans as of
December 31, 1993 and 1992 were:
December 31,
1993 1992
- -------------------------------------------------------------------------------
Annual rate of increase in compensation levels:
U.S. plans 4.5% 6.5%
Puerto Rico plan 4.0% 4.0%
Foreign plans (average) 4.6% 5.5%
Discount rate applied to benefit obligations:
U.S. plans 7.5% 8.0%
Puerto Rico plan 7.5% 8.0%
Foreign plans (average) 7.7% 7.8%
- -------------------------------------------------------------------------------
58
The following table sets forth the funded status and amount included in the
consolidated balance sheets at December 31, 1993 and 1992 (in millions):
Plans whose Plans whose
accumulated assets exceed
benefits exceed accumulated
assets benefits
- -----------------------------------------------------------------------------
December 31, December 31,
1993 1992 1993 1992
- -----------------------------------------------------------------------------
Actuarial present value of
benefit obligations:
Vested benefits $789 $616 $46 $55
- ---------------------------------------------------------------------------
Accumulated benefits $817 $645 $48 $59
- ---------------------------------------------------------------------------
Projected benefits $924 $797 $61 $84
Less plan assets at fair value 675 520 73 80
- ---------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets 249 277 (12) 4
Unrecognized net gains
and unrecognized prior
service cost (100) (119) (4) (8)
Unrecognized obligation
at January 1, net of
amortization (59) (61) 4 (2)
Additional minimum liability 62 42 -- --
- ----------------------------------------------------------------------------
Net pension liability (asset) $152 $139 $(12) $(6)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Most U.S. Employees are eligible to participate in a qualified 401(k) plan.
Participants may contribute up to 12% of their annual compensation (limited in
1993 to $8,994 per individual) to the plan and the company matches the
participants' contributions, up to 3% of compensation. Matching contributions
made by the company were $28 million in 1993, $27 million in 1992 and $24
million in 1991.
In addition to pension benefits, the company sponsors certain contributory
health-care and life insurance benefits for substantially all domestic retired
employees. Effective January 1, 1992, the company adopted FASB Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
which requires companies to accrue costs for postretirement benefits over the
service years of employees. The company recorded the transition obligation as a
cumulative effect of an accounting change for $165 million (net of $50 million
in related income tax benefits).
Net postretirement health-care and life insurance expense includes the
following components (in millions):
1993 1992
- --------------------------------------------------------------------------
Service cost-benefits earned during the period $7 $8
Interest cost on projected benefit obligation 16 17
- --------------------------------------------------------------------------
Net postretirement benefits cost $23 $25
- --------------------------------------------------------------------------
Assumptions used in determining the net postretirement benefits cost in 1993
and 1992 were:
1993 1992
- ---------------------------------------------------------------------------
Discount rate 8% 8%
Annual rate of increase in the per capita cost 14% 16%
Rate to decrease to 6% 6%
by the year ended 2003 2002
- ---------------------------------------------------------------------------
The expense in 1991, under the prior method, which recognized the expense as
benefits to retirees when actually paid, was $4 million.
The postretirement benefit plans are not funded. The present value of the
company's obligation included in the consolidated balance sheets at December 31,
1993 and 1992 is as follows (in millions):
December 31,
1993 1992
- --------------------------------------------------------------------------
Accumulated postretirement benefit obligation ("APBO"):
Retirees $112 $110
Fully eligible active participants 11 16
Other active participants 85 111
Unrecognized net gains 45 --
- --------------------------------------------------------------------------
Accrued postretirement benefit liability $253 $237
- --------------------------------------------------------------------------
Assumptions used in determining the APBO at December 31, 1993 and 1992 were:
December 31,
1993 1992
- --------------------------------------------------------------------------
Discount rate applied to APBO 7.5% 8%
Annual rate of increase in the per capita cost 13% 16%
Rate to decrease to 5% 6%
By the year ended 2003 2002
Increase if health-care trend rates increase
by 1% each year (in millions)
APBO $30 $32
Expense $ 3 $ 3
- -------------------------------------------------------------------------
59
Effective January 1, 1993, the company adopted FASB Statement No. 112,
"Employers' Accounting for Postemployment Benefits" which requires accrual
accounting for postemployment benefits such as disability-related and workers
compensation payments. The company recorded the obligation as a cumulative
effect of an accounting change for $11 million (net of $7 million in related
income tax benefits). The effect of this change on 1993 operating income versus
the prior method of accounting for these benefits was not material. At
December 31, 1993, the company's liability for these benefits was approximately
$29 million.
OTHER NON-OPERATING EXPENSES
For the three years ended December 31, 1993, the components of other
non-operating expenses (income) are as follows (in millions):
1993 1992 1991
- --------------------------------------------------------------------------
Equity in losses of affiliates $ 25 $ 32 $32
Asset dispositions, net (44) 21 6
Minority interests 11 13 11
Foreign exchange 28 26 25
Settlement of anti-boycott investigations 8 -- --
Sundry 19 13 6
- --------------------------------------------------------------------------
Total other non-operating expenses $ 47 $105 $80
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
INCOME TAXES
U.S. federal income tax returns filed by Baxter International Inc. through
December 31, 1986, have been examined and closed by the Internal Revenue
Service. In the opinion of management, the company has made adequate provisions
for tax expenses for all open years. Income (loss) before tax expenses by
category is as follows (in millions):
1993 1992 1991
- --------------------------------------------------------------------------
Domestic $(585) $390 $363
Foreign 255 363 325
- --------------------------------------------------------------------------
Income (loss) from continuing
operations before income
tax expense $(330) $753 $688
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Income tax expense (benefit) related to continuing operations and before
cumulative effect of accounting changes by category and by income statement
classification is as follows (in millions):
1993 1992 1991
- --------------------------------------------------------------------------
Current
Domestic
Federal $ 15 $ 55 $ 20
State and local 35 55 32
Foreign 60 50 51
- ---------------------------------------------------------------------------
Current income tax expense 110 160 103
- ---------------------------------------------------------------------------
Deferred
Domestic
Federal (137) 4 33
State and local (24) 4 12
Foreign (11) 24 33
- --------------------------------------------------------------------------
Deferred income tax
expense (benefit) (172) 32 78
- -------------------------------------------------------------------------
Income tax expense (benefit) $ (62) $192 $181
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Effective January 1, 1993, the company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Baxter recorded a tax benefit of $81 million, or
29 cents per common share reflecting the cumulative effect of the accounting
change. The components of deferred tax assets and liabilities at December 31,
1993 and January 1, 1993 are as follows (in millions):
DECEMBER 31, January 1,
1993 1993
- --------------------------------------------------------------------------
Deferred tax assets
Accrued expenses $302 $237
Accrued postretirement benefits 90 82
Merger and restructuring costs 262 46
Alternative minimum tax credit 75 73
Tax credits and net operating losses 24 16
Valuation allowances (37) (23)
- --------------------------------------------------------------------------
Total deferred tax assets 716 431
- --------------------------------------------------------------------------
Deferred tax liabilities
Asset basis differences 337 317
Subsidiaries, unremitted earnings 195 87
Other 47 81
- --------------------------------------------------------------------------
Total deferred tax liabilities 579 485
- ---------------------------------------------------------------------------
Net deferred tax assets (liabilities) $137 $(54)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
60
Prior to 1993, deferred income taxes were provided under the accounting rules
then in effect. The components of the deferred income tax provisions were (in
millions):
1992 1991
- --------------------------------------------------------------------------
Accelerated depreciation and amortization $ 15 $ 9
Restructuring costs 27 77
Alternative minimum tax (2) (7)
Asset dispositions (3) (11)
Accrued expenses (16) 11
Other timing differences 11 (1)
- --------------------------------------------------------------------------
Deferred income tax expense $32 $78
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Income tax expense before cumulative effect of accounting changes applicable to
consolidated income from continuing operations differs from income tax expense
calculated by using the U.S. federal income tax rate for the following reasons
(in millions):
1993 1992 1991
- -------------------------------------------------------------------------------
Income tax expense (benefit) at statutory rate $(116) $256 $234
Tax-exempt operations (128) (123) (94)
Unremitted foreign earnings 151 -- --
Nondeductible goodwill 30 22 23
State and local taxes (18) 12 3
Tax credit carryforwards -- 12 7
Foreign tax expense 20 8 7
Other factors (1) 5 1
- -------------------------------------------------------------------------------
Income tax expense (benefit) $(62) $192 $181
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The company has received a tax exemption grant from Puerto Rico which provides
that manufacturing operations will be partially exempt from local taxes until
the year 2002. Appropriate taxes have been provided for these operations
assuming repatriation of all available earnings. In addition, the Company has
other manufacturing operations outside the U.S. which benefit from reductions in
local tax rates under tax incentives that will continue at least through 1997.
U.S. federal income taxes, net of available foreign tax credits, on
unremitted earnings deemed permanently reinvested would be approximately $86
million as of December 31, 1993. A federal tax provision of $151 million was
made in 1993 for unremitted foreign earnings to allow the transfer of $430
million cash to the U.S. for restructuring costs. Approximately $150 million of
this cash was transferred in 1993.
LEGAL PROCEEDINGS
During 1993, the company incurred significant charges for major litigation
settlements and minimum liability exposures, and recorded significant estimated
insurance recoveries with respect to those liabilities. The net results of the
charges and recoveries are as follows (in millions):
Gross Estimated Net
litigation insurance litigation
charge recoveries charge
- -------------------------------------------------------------------------------
Mammary implant product
liabilities $556 $426 $130
HIV/hemophilia product
liabilities 131 83 48
Patent infringement settlement 105 -- 105
Legal fees and other 47 -- 47
- -------------------------------------------------------------------------------
Total litigation, net of
insurance recoveries $839 $509 $330
- -------------------------------------------------------------------------------
As of December 31, 1993, the company was a defendant, together with other
defendants, in 3,445 lawsuits and had 1,425 pending claims from individuals, all
of which seek damages for injuries allegedly caused by silicone mammary
prostheses ("mammary implants") manufactured by the American Heyer-Schulte
division of American. The company's responsibility for mammary implants results
from the American Heyer-Schulte division of American which manufactured these
products from 1974 until 1984, at which time the products and related assets
were sold to Mentor Corporation. American retained the product liability
responsibility for products sold before the divestiture, and that responsibility
was assumed by a subsidiary of the company as part of the 1985 acquisition of
American. The company has not manufactured or sold this product since 1984 nor
does it have any of the product in its inventory.
The typical case or claim alleges that the individual's mammary implants
caused one or more of a wide range of ailments, including non-specific
autoimmune disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia,
mixed connective tissue disease, Sjogren's Syndrome, dermatomyositis,
polymyositis, and chronic fatigue. The comparable number of cases and claims
was 137 as of December 31, 1991 and 1,612 as of December 31, 1992. In 1991, 76
cases and claims were disposed of; in 1992, 309 cases and claims were disposed
of; and in 1993, 634 cases and claims were disposed of.
61
In addition to the individual suits against the company, a class action on
behalf of all women with mammary implants filed against all manufacturers of
such implants has been conditionally certified and is pending (DANTE, ET AL.
V. DOW CORNING, ET AL., part of IN RE: SILICONE GEL BREAST IMPLANT PRODUCT
LIABILITY LITIGATION, U.S.D.C., N. Dist. Ala., MDL 926). The company has been
named in several other similar certified or purported class actions.
Additionally, the company has been served with a purported class action
brought on behalf of children allegedly exposed to silicone in utero and through
breast milk. The suit names all mammary implant manufacturers as defendants and
seeks to establish a medical monitoring fund.
These implant cases and claims generally raise difficult and complex factual
and legal issues and are subject to many uncertainties and complexities,
including, but not limited to, the facts and circumstances of each particular
case or claim, the jurisdiction in which each suit is brought, and differences
in applicable law. Many of the cases and claims are at very preliminary stages,
and the company has not been able to obtain information sufficient to evaluate
each case and claim.
There also are issues concerning which of the company's insurers is
responsible for covering each matter and the extent of the company's claims for
contribution against third parties. The company believes that a substantial
portion of the liability and defense costs related to mammary implant cases and
claims will be covered by insurance, subject to self-insurance retentions,
exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most
of the company's insurers have reserved (i.e., neither admitted nor denied), and
may attempt to reserve in the future, the right to deny coverage, in whole or in
part, due to differing theories regarding, among other things, the applicability
of coverage and when coverage may attach. The company has been, and will
continue to be, engaged in active negotiations with its insurers concerning
coverages and the potential settlement described below. Also, some of the
mammary implant cases pending against the company seek punitive damages and
compensatory damages arising out of alleged intentional torts. Depending on
policy language, applicable law and agreements with insurers, the damages
awarded pursuant to such claims may or may not be covered, in whole or in part,
by insurance. On February 7, 1994, the company filed suit against all of the
insurance companies which issued product liability policies to American,
American Heyer Schulte and Baxter for a declaratory judgment that: the policies
cover each year of injury or claim; the company may choose among multiple
coverages; coverage begins with the date of implant; and legal fees and punitive
damages are covered.
Representatives of the plaintiffs and defendants in these cases have
negotiated a global settlement of the issues under the jurisdiction of the Court
in the DANTE V. DOW CORNING case. The monetary provisions of the settlement
proposal providing compensation for all present and future plaintiffs and
claimants based on a series of specific funds and scheduled medical conditions
have been agreed upon by most of the significant defendants and representatives
of the plaintiffs. Under the proposal, the total of all of the specific funds,
which would be paid-in and made available over approximately thirty years
following final approval of the settlement by the Courts, is capped at $4.75
billion. The settling defendants have agreed to fund $4 billion of this amount.
The company's share of this settlement has been established by the settlement
negotiations at $556 million. This settlement is subject to a series of court
proceedings, including a court review of its fairness, and the opportunity for
individual plaintiffs and claimants to elect to remove themselves from the
settlement ("opt-out"). At present the company is not able to estimate the
nature and extent of its potential or ultimate future liability with respect to
opt-outs.
In the fourth quarter of 1993, the company accrued $556 million for its
estimated liability resulting from a potential global settlement of the mammary
implant class action and recorded a receivable for estimated insurance recovery
of $426 million, resulting in a net charge of $130 million. The reserves for the
settlement do not include any provisions for opt-outs and are in addition to the
general reserves for the mammary implant cases discussed below.
In connection with its acquisition of American, the company had established
reserves at the time of the merger for product liability, including mammary
implant cases and claims. At December 31, 1993 the reserve allocated to mammary
implant cases and claims was approximately $42 million. Based on current
information, management believes that this reserve represents the company's
minimum net exposure in connection with future mammary implant cases and claims
beyond the effect of the global settlement described above.
Upon resolution of any of the uncertainties concerning these cases, the
company may ultimately incur charges in excess of presently established
reserves. While such a future charge could
62
have a material adverse impact on the company's net income in the period in
which it is recorded, management believes that any outcome of this litigation
will not have a material adverse effect on the company's consolidated financial
position.
As of December 31, 1993, the company was a defendant, together with other
defendants, in 121 lawsuits, and has one pending claim, in the United States and
Canada involving individuals who have hemophilia, or their representatives.
Those cases and claims seek damages for injuries allegedly caused by
antihemophilic factor concentrates VIII and IX derived from human blood plasma
processed and sold by the company. Furthermore, 58 lawsuits seeking damages
based on similar allegations are pending in Ireland and Japan.
The typical case or claim alleges that the individual with hemophilia was
infected with HIV by infusing Factor VIII or Factor IX concentrates ("Factor
Concentrates") containing HIV. The total number of cases and claims asserted
against the company as of December 31, 1991, was 16, and as of December 31,
1992, was 52. In 1991, 11 cases and claims were disposed of; in 1992, 9 cases
and claims were disposed of; and in 1993, 11 cases and claims were disposed of.
In addition to the individual suits against the company, a purported class
action was filed on September 30, 1993, on behalf of all U.S. residents with
hemophilia (and their families) who were treated with Factor Concentrates and
who allegedly are infected with HIV as a result of the use of such Factor
Concentrates (WADLEIGH, ET AL., V. RHONE-POULENC RORER, ET AL., U.S.D.C.,
N. Dist., Ill., 93C 5969). A state-wide class action also has been filed on
behalf of all New Jersey residents with hemophilia and HIV. Neither class action
has yet been certified.
Many of the cases and claims are at very preliminary stages, and the company
has not been able to obtain information sufficient to evaluate each case and
claim. In most states, the company's potential liability is limited by laws
which provide that the sale of blood or blood derivatives, including Factor
Concentrates, is not the sale of a "good" and thus is not covered by the
doctrine of strict liability. As a result, each claimant will have to prove that
his or her injuries were caused by the company's negligence. The WADLEIGH case
alleges that the company was negligent in failing: to use available purification
technology; to promote research and development for product safety; to withdraw
Factor Concentrates once it knew or should have known of viral contamination of
such concentrates; to screen plasma donors properly; to recall contaminated
Factor Concentrates; and to warn of risks known at the time the product was
used. The company denies these allegations and will file a challenge to the
class proceedings later in 1994. The company is not able to estimate the nature
and extent of its potential or ultimate future liability with respect to these
cases and claims, but as a result of settlement discussions and opinions of
litigation counsel, has established the reserve described below.
The company believes that a substantial portion of the liability and defense
costs related to anti-hemophilic factor concentrates cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. Most of the
company's insurers have reserved (i.e., neither admitted nor denied), and may
attempt to reserve in the future, the right to deny coverage, in whole or in
part, due to differing theories regarding, among other things, the applicability
of coverage and when coverage may attach. Zurich Insurance Co., one of the
company's comprehensive general liability insurance carriers, on February 1,
1994, filed a suit against the company seeking a declaratory judgment that the
policies it had issued do not cover the losses that the company has notified it
of for a number of reasons, including that Factor Concentrates are products, not
services, and are, therefore, excluded from the policy coverage, and that the
company has failed to comply with various obligations of tender, notice, and the
like under the policies. On February 8, 1994, the company filed suit against all
of the insurance companies which issued comprehensive general liability and
product liability policies to the company for a declaratory judgment that the
policies for all of the excess insurance carriers covered both products and
services. In that suit, the company also sued Zurich for failure to defend it
and Zurich and Columbia Casualty Company for failure to indemnify it.
The company is engaged in notifying its insurers concerning coverages and the
potential settlement discussed below. Also, some of the anti-hemophilic factor
concentrates cases pending against the company seek punitive damages and
compensatory damages arising out of alleged intentional torts. Depending on
policy language, applicable law and agreements with insurers, the damages
awarded pursuant to such claims may or may not be covered, in whole or in part,
by insurance. Accordingly, the company is not currently in a position to
estimate the amount of the potential future recoveries from its insurers, but
has estimated
63
its recovery with respect to the reserves it has established.
The National Hemophilia Foundation ("NHF") asked the U.S. commercial
producers of anti-hemophilic factor concentrates (Alpha Therapeutics, Armour
Pharmaceuticals, Baxter Healthcare Corporation and Miles Laboratories) to
provide $1.5 billion as part of a fund for HIV positive hemophiliacs. The
company and some of the other producers made a counter-proposal that the NHF
rejected. The company is vigorously defending each of the cases and claims
against it. At the same time, it is likely that the company will continue to
seek ways to resolve pending and threatened litigation concerning these issues
through a negotiated resolution.
In Canada, the provincial governments created a settlement fund to which all
of the fractionators, including the company, have contributed. The company's
contribution to the fund was approximately $3 million. Those Canadian claimants
who avail themselves of this fund must sign releases in favor of the company
against further litigation. The period in which to file a claim against the fund
expires on March 15, 1994.
In the fourth quarter of 1993, the company accrued $131 million for its
estimated worldwide liability for litigation and settlement expenses involving
anti-hemophilic Factor Concentrate cases, and recorded a receivable for
insurance coverage of $83 million, resulting in a net charge of $48 million. The
expense of the Canadian settlement is covered by this reserve.
Upon resolution of any of the uncertainties concerning these cases, or if the
company, along with the other defendants, enters into a comprehensive settlement
of the class actions described above, the company may incur charges in excess of
presently established reserves. While such a future charge could have a material
adverse impact on the company's net income in the period in which it is
recorded, management believes that any outcome of this litigation will not have
a material adverse effect on the company's consolidated financial position.
At the start of 1993, the company was a defendant in patent litigation
brought by Scripps Clinic and Research Foundation ("Scripps") and
Rhone-Poulenc Rorer, Inc. (formerly Rorer Group, Inc.) ("Rorer") in which the
plaintiffs alleged that the company's monoclonal anti-hemophilic Factor VIII and
its recombinant Factor VIII infringed a patent originally owned by Scripps and
subsequently licensed to Rorer. Trial of this litigation before a judge without
a jury was concluded in 1992. Before a ruling on the trial was received, the
company entered into a worldwide settlement of the litigation with Scripps and
Rorer. The settlement agreement required Baxter to pay $105 million to Rorer to
settle claims relating to certain anti-hemophilic Factor VIII products
manufactured and sold prior to January 1, 1993. As part of this agreement,
Baxter was also granted a non-exclusive sub-license for future use of the
related patents. This license agreement is royalty-bearing when used in
conjunction with the company's monoclonally purified and Recombinant Factor VIII
products.
Baxter Healthcare Corporation ("BHC") has been named as a defendant in a
purported class action on behalf of all medical and dental personnel in the
State of California who suffered allergic reactions to natural rubber latex
gloves and other protective equipment or who have been exposed to natural rubber
latex products. (KENNEDY, ET AL. V. BAXTER HEALTHCARE CORPORATION, ET AL.,
Sup. Ct., Sacramento Co., Cal., #535832.) The case, which was filed in
August, 1993, alleges that users of various natural rubber latex products,
including medical gloves made and sold by BHC and other manufacturers, suffered
allergic reactions to the products ranging from skin irritation to systemic
anaphylaxis. BHC filed a demurrer to the complaint, which was granted, and the
complaint was dismissed with leave to file an amended complaint. The amended
complaint was filed in December, 1993, and BHC has filed a demurrer to the
amended complaint. Management believes that the outcome of this matter will not
have a material adverse effect on the company's results of operations or
consolidated financial position.
The company is a defendant in a number of other claims, investigations and
lawsuits. Based on the advice of counsel, management does not believe that the
other claims, investigations and lawsuits individually or in the aggregate, will
have a material adverse effect on the company's operations or its consolidated
financial condition.
64
SEGMENT INFORMATION
INDUSTRY SEGMENTS
Baxter is a world leader in global manufacturing and distribution of health-care
products and services for use in hospitals and other health-care and industrial
settings. It offers a broad array of products and services. Baxter announced a
significant restructuring in the fourth quarter of 1993 designed to make the
company's domestic medical/laboratory products and distribution segment more
efficient and more responsive in addressing the sweeping changes occurring in
the U.S. healthcare system and to accelerate growth of its medical specialties
business worldwide. As a consequence, the company has redefined its industry
segments to be consistent with its strategic direction and management process.
The company's operations are reported in the following two industry segments:
MEDICAL SPECIALTIES
Baxter develops, manufactures and markets on a global basis highly specialized
medical products for treating kidney and heart disease and blood disorders and
for collecting and processing blood. These products include dialysis equipment
and supplies; prosthetic heart valves and cardiac catheters; blood-clotting
therapies; and machines and supplies for collecting, separating and storing
blood. These products require extensive research and development and investment
in worldwide distribution, marketing, and administrative infrastructure. The
company's International Hospital unit, which manufactures and distributes
intravenous solutions and other medical products outside the United States is
also included in this segment because it shares facilities, resources and
customers with the other medical specialty businesses in several locations
worldwide.
MEDICAL/LABORATORY PRODUCTS AND DISTRIBUTION
Baxter manufactures medical and laboratory supplies and equipment, including
intravenous fluids and pumps, diagnostic-testing equipment and reagents,
surgical instruments and procedure kits, and a range of disposable and reusable
medical products. These self-manufactured products, as well as a significant
volume of third party manufactured medical products, are primarily distributed
through the company's extensive distribution system to U.S. hospitals,
alternate-site care facilities, medical laboratories, and industrial and
educational facilities.
Financial information by industry segments for the three years ended
December 31, 1993, is summarized as follows (in millions):
Medical/laboratory
Medical products and General
1993 specialties distribution corporate Total
- -----------------------------------------------------------------------------------------------------------------------
Net sales $3,250 5,629 -- $ 8,879
Operating income before restructuring charge $ 643 418 (122) $ 939
Restructuring charge $ (100) (550) (50) $ (700)
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 543 (132) (172) $ 239
Identifiable assets $2,946 4,788 2,811 $10,545
Capital expenditures(1) $ 266 300 39 $ 605
Depreciation and amortization $ 170 253 71 $ 494
- -----------------------------------------------------------------------------------------------------------------------
1992
- -----------------------------------------------------------------------------------------------------------------------
Net sales $3,096 5,375 -- $ 8,471
Operating income $ 606 551 (112) $ 1,045
Identifiable assets $2,783 4,589 1,783 $ 9,155
Capital expenditures(1) $ 259 365 16 $ 640
Depreciation and amortization $ 150 226 71 $ 447
- -----------------------------------------------------------------------------------------------------------------------
1991
- -----------------------------------------------------------------------------------------------------------------------
Net sales $2,785 5,014 -- $ 7,799
Operating income $ 535 539 (114) $ 960
Identifiable assets $2,640 4,234 2,297 $ 9,171
Capital expenditures(1) $ 195 363 34 $ 592
Depreciation and amortization $ 140 200 71 $ 411
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes additions to the pool of equipment leased to customers.
65
GEOGRAPHIC SEGMENTS
Financial information by geographic area for the three years ended December 31,
1993, is summarized as follows (in millions):
Other General Inter-area
1993 United States Europe international corporate eliminations Total
- ------------------------------------------------------------------------------------------------------------------------
Trade sales $6,581 1,177 1,121 -- -- $ 8,879
Inter-area sales $ 524 107 329 -- (960) --
- ------------------------------------------------------------------------------------------------------------------------
Total sales $7,105 1,284 1,450 -- (960) $ 8,879
Operating income (loss) $ (80) 224 275 (172) (8) $ 239
Identifiable assets $5,925 1,045 884 2,811 (120) $10,545
- ------------------------------------------------------------------------------------------------------------------------
1992
- ------------------------------------------------------------------------------------------------------------------------
Trade sales $6,215 1,227 1,029 -- -- $ 8,471
Inter-area sales $ 559 86 278 -- (923) --
- ------------------------------------------------------------------------------------------------------------------------
Total sales $6,774 1,313 1,307 -- (923) $ 8,471
Operating income $ 539 296 329 (112) (7) $ 1,045
Identifiable assets $5,570 1,094 813 1,783 (105) $ 9,155
- ------------------------------------------------------------------------------------------------------------------------
1991
- ------------------------------------------------------------------------------------------------------------------------
Trade sales $5,792 1,044 963 -- -- $ 7,799
Inter-area sales $ 486 82 189 -- (757) --
- ------------------------------------------------------------------------------------------------------------------------
Total sales $6,278 1,126 1,152 -- (757) $ 7,799
Operating income $ 532 283 255 (114) 4 $ 960
Identifiable assets $5,130 1,077 748 2,297 (81) $ 9,171
- ------------------------------------------------------------------------------------------------------------------------
Inter-area transactions are accounted for using arm's-length principles.
Identifiable assets are those assets associated with a specific industry segment
or geographic area. General corporate assets consist primarily of cash and
equivalents, the corporate headquarters facility and various other investments
and assets that are not specific to an industry segment or geographic area.
Goodwill and amortization have been allocated to industry segments as
applicable.
Foreign net sales (including U.S. export sales) and net assets (including
advances from the company and its subsidiaries) of all consolidated foreign
subsidiaries and branches located outside the U.S., its territories and
possessions for the three years ended December 31, 1993, are as follows (in
millions):
1993 1992 1991
- ------------------------------------------------------------------------
Foreign net sales $2,428 $2,391 $2,131
Foreign assets net of
liabilities at end of year $1,248 $1,287 $1,104
- ------------------------------------------------------------------------
66
QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY'S STOCK
First Second Third Fourth Total
(Unaudited, in millions, except per share data) Quarter Quarter Quarter Quarter year
- ------------------------------------------------------------------------------------------------------------------------
1993
Net sales $2,041 $2,215 $2,228 $2,395 $8,879
Gross profit(3) 748 802 805 867 3,222
Income (loss) from continuing operations before
cumulative effect of accounting changes(2) 57 132 135 (592) (268)
Net income (loss)(2) 127 132 135 (592) (198)
Per common share
Income (loss) from continuing operations(2) .20 .48 .49 (2.14) (.97)
Net income (loss)(2) .45 .48 .49 (2.14) (.72)
Dividends .25 .25 .25 .25 1.00
Market price
High 32.75 30.63 29.00 24.75
Low 27.13 27.25 20.00 21.38
- ------------------------------------------------------------------------------------------------------------------------
1992
Net sales $1,972 $2,080 $2,116 $2,303 $8,471
Gross profit(3) 735 792 803 897 3,227
Income from continuing operations before
cumulative effect of accounting changes 109 129 148 175 561
Net income (loss) (37) 124 170 184 441
Per common share
Income from continuing operations .37 .46 .53 .63 1.99
Net income (loss) (.15) .44 .61 .66 1.56
Dividends(1) .215 .215 .215 .215 .86
Market price(1)
High 40.50 39.38 38.88 36.63
Low 34.25 33.75 31.50 30.50
- ------------------------------------------------------------------------------------------------------------------------
<FN>
1. On April 1, 1992, the company redeemed all of the outstanding shares of
its adjustable rate preferred stock. During the first quarter of 1992, the
stock traded at a high market price of $50.63 and a low market price of
$43.00, and a dividend of $.7875 per share was declared.
2. In the fourth quarter of 1993, the company recorded pre-tax charges of
$925 million against earnings. The charges include $700 million to
cover the costs associated with restructuring initiatives (see
"Restructuring Charge" note) and $225 million for future costs of
litigation (see "Legal Proceedings" note).
3. Includes certain immaterial reclassifications.
Baxter common stock is listed on the New York, Midwest and Pacific Stock
Exchanges, on The London Stock Exchange and on the Swiss stock exchanges of
Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on
which the company's common stock is traded. Until April 1992, the adjustable
rate preferred stock was traded on the New York Stock Exchange also. At
January 28, 1994, there were approximately 81,000 holders of record of the
company's common stock.
67
SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Year ended December 31 1993(1) 1992 1991 1990(2) 1989 1988
- ----------------------------------------------------------------------------------------------------------------------
Operations Net sales $ 8,879 8,471 7,799 7,234 6,740 6,359
(in millions) Operating income $ 239 1,045 960 262 698 616
Income (loss) from continuing operations $ (268) 561 507 (24) 410 360
Net income (loss) $ (198) 441 591 40 446 388
Depreciation and amortization $ 494 447 411 368 356 327
Research and development expenses $ 337 317 288 262 245 237
- ----------------------------------------------------------------------------------------------------------------------
Capital Employed Working capital $ 1,489 1,221 1,470 1,007 1,378 1,233
(in millions) Capital expenditures(3) $ 605 640 592 417 370 483
Net property, plant and equipment $ 2,655 2,647 2,387 2,122 2,058 1,983
Total assets $ 10,545 9,155 9,171 8,407 8,401 8,442
Net debt(4) $ 3,143 2,901 2,336 2,143 2,388 2,661
Long-term obligations $ 2,800 2,433 2,246 1,727 2,048 2,311
Stockholders' equity--continuing operations $ 3,185 3,795 4,086 3,877 4,032 3,750
--discontinued operations $ -- -- 287 215 214 226
--total $ 3,185 3,795 4,373 4,092 4,246 3,976
Total capitalization $ 5,985 6,228 6,619 5,819 6,294 6,287
- ----------------------------------------------------------------------------------------------------------------------
Per Common Average number of common shares
Share outstanding (in millions)(5) 277 279 280 253 248 243
Earnings (loss)
Continuing operations $ (0.97) 1.99 1.73 (0.30) 1.37 1.21
Net income $ (0.72) 1.56 2.03 (0.05) 1.50 1.31
Cash dividends declared $ 1.00 0.86 0.74 0.64 0.56 0.50
Market price--high $ 32.75 40.50 40.88 29.38 25.88 26.13
Market price--low $ 20.00 30.50 25.63 20.50 17.63 16.25
Net book value $ 11.52 13.59 14.45 13.45 13.49 12.61
- ----------------------------------------------------------------------------------------------------------------------
Productivity Employees at year-end 60,400 61,300 60,400 60,600 61,000 61,500
Measures Sales per year-end employee $147,003 138,189 129,123 119,373 110,492 103,398
Operating income per employee $ 3,957 17,047 15,894 4,323 11,443 10,016
Operating assets per employee(6) $101,043 96,988 90,613 82,937 82,000 76,407
- ----------------------------------------------------------------------------------------------------------------------
Growth Statistics Net sales 4.8% 8.6 7.8 7.3 6.0 9.1
(percent change Income (loss) from continuing operations (147.8%) 10.7 N/A (105.9) 13.9 19.6
from prior year) Cash dividends per common share 16.3% 16.2 15.6 14.3 12.0 13.6
Net book value per year-end common share (15.2%) (5.9) 7.4 (0.3) 7.0 7.0
- ----------------------------------------------------------------------------------------------------------------------
Financial Returns Operating income as a percent of sales 2.7% 12.3 12.3 3.6 10.4 9.7
and Statistics Income from continuing operations
as a percent of sales (3.0%) 6.6 6.5 (0.3) 6.1 5.7
Return on average common
stockholders' equity--continuing operations (7.7%) 14.7 13.3 (1.3) 10.9 10.1
Long-term debt as a percent of
total year-end capital 46.8% 39.1 33.9 29.7 32.5 36.8
- ----------------------------------------------------------------------------------------------------------------------
<FN>
1. Results include a provision for restructuring charges of a pre-tax amount of
$700 million and a provision for litigation charges of a pre-tax amount of
$330 million.
2. Results include a provision for restructuring program costs of a pre-tax
amount of $562 million.
3. Includes additions to the pool of equipment leased or rented to customers.
4. Total debt and lease obligations net cash and equivalents.
5. Excludes common stock equivalents.
6. Accounts receivable, notes and other current receivables, inventories and
net property, plant and equipment.
Inside Back Cover
Appendix of Graphs:
The following is a listing of the graphs contained within the Annual Report,
pages 35-46, section entitled "Financial Review" which is incorporated by
reference.
NET SALES
On page 35 of the annual report there is a graphical representation of the
relationship between total company international net sales and total company
domestic net sales. The data points in billions of dollars are as follows:
International Domestic
Sales Sales
-----------------------
1989 1.7 5.0
1990 1.9 5.3
1991 2.1 5.7
1992 2.4 6.1
1993 2.4 6.5
SALES PER EMPLOYEE
On page 35 of the annual report there is a graphical representation of the sales
per employee. The data points in thousands of dollars are as follows:
1989 110
1990 119
1991 129
1992 138
1993 147
OPERATING INCOME
On page 36 of the annual report there is a graphical representation of total
company operating income. The data points in millions of dollars are as follows:
1989 698
1990 262
1991 960
1992 1,045
1993 239
MARKETING AND ADMINISTRATIVE EXPENSES
On page 36 of the annual report there is a graphical representation of total
company marketing and administrative expenses as a percentage of total company
net sales. The data points are as follows:
1989 21.3%
1990 21.3%
1991 21.1%
1992 21.2%
1993 21.2%
R&D EXPENSES
On page 37 of the annual report there is a graphical representation of total
company research and development expenses. The data points in millions of
dollars are as follows:
1989 245
1990 262
1991 288
1992 317
1993 337
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS
On page 37 of the annual report there is a graphical representation of earnings
(loss) per common share from continuing operations. The data points in dollars
are as follows:
1989 1.37
1990 (0.30)
1991 1.73
1992 1.99
1993 (0.97)
CASH FLOW PROVIDED BY CONTINUING OPERATIONS
On page 38 of the annual report there is a graphical representation of cash flow
provided by continuing operations. The data points in millions of dollars are
as follows:
1989 545
1990 716
1991 697
1992 742
1993 765
CAPITAL EXPENDITURES
On page 38 of the annual report there is a graphical representation of total
company capital expenditures. The data points in millions of dollars are as
follows:
1989 370
1990 417
1991 592
1992 640
1993 605
TOTAL CAPITAL
On page 39 of the annual report there is a graphical representation of the
relationship between long-term obligations and stockholders' equity in the
company's total capital structure. The data points in billions of dollars are
as follows:
Long-Term Stockholders'
Obligations Equity
-----------------------
1989 2.1 4.2
1990 1.7 4.1
1991 2.2 4.4
1992 2.4 3.8
1993 2.8 3.2
DIVIDENDS PER COMMON SHARE
On page 40 of the annual report there is a graphical representation of dividends
per common share. The data points in dollars are as follows:
1989 0.56
1990 0.64
1991 0.74
1992 0.86
1993 1.00
MEDICAL SPECIALITIES NET SALES
On page 41 of the annual report there is a graphical representation of the
relationship between domestic net sales and foreign net sales in the medical
specialities segment. The data points in billions of dollars are as follows:
Domestic Foreign
Sales Sales
--------------------
1991 0.9 1.9
1992 1.0 2.1
1993 1.1 2.2
MEDICAL SPECIALITIES OPERATING INCOME
On page 42 of the annual report there is a graphical representation of operating
income for the medical specialities segment. The data points in millions of
dollars are as follows:
1991 535
1992 606
1993 543
MEDICAL SPECIALITIES R&D EXPENSE
On page 43 of the annual report there is a graphical representation of R&D
expense for the medical specialities segment as a percentage of
self-manufactured net sales for the medical specialties segment. The data
points are as follows:
1991 7.6%
1992 7.9%
1993 8.3%
MEDICAL SPECIALITIES CAPITAL EXPENDITURES
On page 43 of the annual report there is a graphical representation of capital
expenditures for the medical specialities segment. The data points in millions
of dollars are as follows:
1991 195
1992 259
1993 266
MEDICAL/LABORATORY PRODUCTS NET SALES
On page 44 of the annual report there is a graphical representation of the
relationship between foreign net sales and domestic net sales in the
medical/laboratories segment. The data points in billions of dollars are as
follows:
Foreign Domestic
Sales Sales
--------------------
1991 0.3 4.7
1992 0.3 5.1
1993 0.3 5.3
MEDICAL/LABORATORY PRODUCTS NET SALES
On page 45 of the annual report there is a graphical representation of the
relationship between manufacturing net sales and distribution net sales in the
medical/laboratories segment. The data points in billions of dollars are as
follows:
Manufacturing Distribution
--------------------------
1991 2.9 2.1
1992 3.2 2.2
1993 3.2 2.4
MEDICAL/LABORATORY PRODUCTS OPERATING INCOME
On page 46 of the annual report there is a graphical representation of operating
income for the medical/laboratory segment. The data points in millions of
dollars are as follows:
1991 539
1992 551
1993 (132)
MEDICAL/LABORATORY PRODUCTS CAPITAL EXPENDITURES
On page 46 of the annual report there is a graphical representation of capital
expenditures for the medical/laboratory segment. The data points in millions of
dollars are as follows:
1991 363
1992 365
1993 300