Management's Discussion 29 Consolidated Balance Sheets 33 Notes to Consolidated Financial
and Analysis Statements
28 Management's Responsibilities 30 Consolidated Statements of Income 49 Directors and Executive Officers
for Financial Reporting
28 Report of Independent Accountants 31 Consolidated Statements 50 Company Information
of Cash Flows
32 Consolidated Statements
of Stockholders' Equity and
Comprehensive Income
19
Management's Discussion and Analysis
This discussion and analysis presents the factors that had a material effect on
Baxter International Inc.'s (Baxter or the company) results of operations and
cash flows during the three years ended December 31, 2000, and the company's
financial position at that date. This discussion and analysis should be read in
conjunction with the consolidated financial statements of the company and
related notes.
The matters discussed in this Annual Report include forward-looking
statements that involve risks and uncertainties, including, but not limited to,
currency exchange rates, interest rates, technological advances in the medical
field, economic conditions, demand and market acceptance risks for new and
existing products, technologies and health-care services, the impact of
competitive products and pricing, manufacturing capacity, new plant start-ups,
global regulatory, trade and tax policies, continued price competition, product
development risks, including technological difficulties, ability to enforce
patents, unforeseen commercialization and regulatory factors, and other risks
more completely reflected in the company's filings with the Securities and
Exchange Commission. In particular, the company, as well as other companies in
its industry, has experienced increased regulatory activity by the U.S. Food and
Drug Administration with respect to its plasma-based biologicals. It is not
possible to predict the extent to which the company or the health-care industry
might be adversely affected by these factors in the future.
Management's financial objectives for 2000, which were outlined in last
year's Annual Report and are summarized below, were established based on
Baxter's results excluding the cardiovascular business, the stock of which was
distributed to shareholders on March 31, 2000. Refer to Note 2 to the
consolidated financial statements for further information regarding the spin-off
of the cardiovascular business. The company's consolidated financial statements
and related notes have been restated to reflect the financial position, results
of operations and cash flows of the cardiovascular business as a discontinued
operation. The results presented below reflect the results of continuing
operations only.
Key Financial Objectives and Results
2000 OBJECTIVES RESULTS
- --------------------------------------------------------------------------------
Increase net sales approximately 10 percent. Net sales increased eight percent
in 2000. Excluding fluctuations in
currency exchange rates, net sales
increased 12 percent.
- --------------------------------------------------------------------------------
Grow net earnings in the mid-teens. Net earnings from continuing
operations increased 17 percent in
2000, excluding the cumulative
effect of a change in accounting
principle in 1999 and the charge
for in-process research and
development (IPR&D) and
acquisition-related costs in 2000.
- --------------------------------------------------------------------------------
Generate a minimum of $500 million in The company generated operational
operational cash flow after investing cash flow of $588 million during
more than $1 billion in capital 2000. The total of capital
improvements and research and development. expenditures and research and
development expenses was more than
$1 billion.
Company and Industry Overview
Baxter is a global leader in providing critical therapies for life-threatening
conditions and operates in three segments, which are described in Note 13. The
company manufactures and markets products and services used to treat patients
with hemophilia, immune deficiencies, infectious diseases, cancer, kidney
disease, trauma and other disorders. The company generates more than 50 percent
of its revenues outside the United States. While health-care cost containment
continues to be a focus around the world, demand for health-care products and
services continues to be strong worldwide, particularly in developing markets.
The company's strategies emphasize global expansion and technological innovation
to advance medical care worldwide.
The company's primary markets are highly competitive and subject to
substantial regulation. There has been consolidation in the company's customer
base and by its competitors, which has resulted in pricing and market share
pressures. The company has experienced increases in its labor and material
costs, which are partly influenced by general inflationary trends. Competitive
market conditions have minimized inflation's impact on the selling prices of the
company's products and services. Management expects these trends to continue.
The company will continue to manage these issues by capitalizing on its market-
leading positions, developing innovative products and services, investing in
human resources, upgrading and expanding facilities, leveraging its cost
structure, making acquisitions, and entering into alliances and joint venture
arrangements.
20
Results of Continuing Operations
Net Sales Trends
Percent increase
--------------------
years ended December 31 (in millions) 2000 1999 1998 2000 1999
- --------------------------------------------------------------------------------
Medication Delivery $2,719 $2,524 $2,314 8% 9%
BioScience 2,353 2,176 1,862 8% 17%
Renal 1,824 1,680 1,530 9% 10%
- --------------------------------------------------------------------------------
Total net sales $6,896 $6,380 $5,706 8% 12%
======================================
Percent increase
--------------------
years ended December 31 (in millions) 2000 1999 1998 2000 1999
- --------------------------------------------------------------------------------
United States $3,194 $2,921 $2,609 9% 12%
International 3,702 3,459 3,097 7% 12%
- --------------------------------------------------------------------------------
Total net sales $6,896 $6,380 $5,706 8% 12%
======================================
Excluding fluctuations in currency exchange rates, which impacted sales growth
unfavorably for all three segments, total net sales growth was 12 percent in
2000. The company's sales growth was unfavorably impacted by fluctuations in
currency exchange rates in 2000 principally due to the weakening of the Euro
relative to the United States Dollar, partially offset by the strengthening of
the Japanese Yen.
Medication Delivery The Medication Delivery segment generated eight percent and
nine percent sales growth in 2000 and 1999, respectively. Excluding the impact
of fluctuations in currency exchange rates, sales growth was 11 percent in 2000.
Of the constant-currency sales growth, approximately two points and four points
of growth in 2000 and 1999, respectively, was generated by recent acquisitions,
principally the January 2000 acquisition of a domestic ambulatory and infusion
pump business, the September 1999 acquisition of a nutrition and fluid therapy
business in Europe and the April 1998 acquisition of a domestic manufacturer of
inhalants and drugs used for general and local anesthesia. Approximately three
points of growth in both 2000 and 1999 was generated from the segment's late-
1999 exclusive agreement to sell the first generic formulation of Propofol
approved by the United States Food and Drug Administration. Propofol is an
intravenous drug used for the induction or maintenance of anesthesia in surgery,
and as a sedative in monitored anesthesia care. The remaining sales growth in
both periods was principally due to increased sales of Colleague(R) electronic
infusion pumps and intravenous fluids and administration sets used with
electronic infusion pumps, as well as growth in products for nutrition-based
therapies. Such sales growth in 2000 was partially offset by the effect of
terminations of certain distribution agreements that were not part of the
segment's core businesses. Sales in the United States and Western Europe have
been impacted by competitive pricing pressures and cost pressures from health-
care providers. These factors were more than offset by increased penetration and
new product introductions in emerging markets, as well as increased sales due to
new distribution and alliance agreements, new products and acquisitions.
Management expects these trends to continue.
BioScience Sales in the BioScience segment increased eight percent and 17
percent in 2000 and 1999, respectively. Excluding the impact of fluctuations in
currency exchange rates, sales growth was 14 percent in 2000, with growth
particularly strong outside the United States. The June 2000 acquisition of
North American Vaccine, Inc. (NAV), which is further discussed in Note 3,
contributed approximately three points to the segment's constant-currency sales
growth rate in 2000. As a result of the company's increase in manufacturing
capacity for Recombinate Antihemophilic Factor (rAHF) in late 1998 and late
2000, and the strong demand for this product, sales of Recombinate contributed
approximately three points and nine points to the segment's constant-currency
percentage sales growth in 2000 and 1999, respectively. Strong sales growth is
expected to continue as a result of the recent capacity expansions and
anticipated demand for this product. Approximately six points of the growth in
both 2000 and 1999 was due to increased sales of plasma-derived products,
primarily as a result of improved product supply and strong growth of
Gammagard(R) S/D IGIV. Sales in the blood-collection and processing businesses
also grew in both 2000 and 1999, principally due to an increase in sales of
products that
21
provide for leukoreduction, which is the removal of white blood cells from blood
products used for transfusion. Sales growth in these businesses has been
negatively affected by regulatory and production issues facing certain of the
company's customers in the plasma-fractionation industry. The effects of
regulatory, supply, competitive and other pressures on the BioScience segment
are expected to continue to be more than offset by the effects of global
expansion, technological advancement and innovation, increases in manufacturing
capacity, and strategic alliances, joint ventures and acquisitions.
Renal The Renal segment generated sales growth of nine percent and 10 percent in
2000 and 1999, respectively. Excluding the impact of fluctuations in currency
exchange rates, sales growth was 11 percent in 2000 and six percent in 1999.
Sales related to the March 2000 acquisition of Althin Medical A.B. (Althin), a
manufacturer of hemodialysis products, contributed approximately four points to
the segment's growth rate in 2000. Significant growth was generated by the
segment's Renal Therapy Services business, which operates dialysis clinics in
partnership with local physicians in international markets, and the Renal
Management Strategies business, which is a renal-disease management
organization, with revenues from these businesses increasing over $60 million in
2000 and over $80 million in 1999. The remaining sales growth in the Renal
segment was driven principally by continued penetration of products for
peritoneal dialysis. Penetration of products used for peritoneal dialysis
continues to be strongest in emerging markets such as Latin America and Asia,
where many people with end-stage renal disease are currently under-treated.
Sales in certain geographic markets continue to be affected by strong pricing
pressures and the effects of market consolidation. These issues are expected to
continue to be more than offset by increased penetration of peritoneal dialysis,
growth in sales of hemodialysis products, continued expansion into developing
markets, and alliances and acquisitions.
Gross Margin and Expense Ratios
years ended December 31 (as a percent of sales) 2000 1999 1998
- --------------------------------------------------------------------------------
Gross margin 44.4% 44.1% 44.9%
Marketing and administrative expenses 20.1% 20.5% 21.2%
=========================
The change in the gross margin in both 2000 and 1999 was partly due to changes
in the products and services mix and fluctuations in currency exchange rates.
The improved sales mix in 2000 was principally due to significantly higher sales
of Recombinate and vaccines within the BioScience segment. The reduction in 1999
was impacted by higher costs related to increased investments and reduced
production in the BioScience segment in response to heightened FDA regulatory
activity with respect to safety and quality systems.
The reduction in the expense ratio in both 2000 and 1999 was due to a
number of factors. The company has been making significant investments in order
to attract and retain a highly talented workforce. Such investments include
increased cash compensation as well as increased long-term Baxter stock
incentives. The effect of these strategic investments was more than offset by
the company's aggressive management of expenses, leveraging of recent
acquisitions, improved pension plan asset returns and hedging activities.
In addition, various recently implemented e-business and strategic sourcing
initiatives have resulted in significant efficiencies and cost savings to the
company, which has contributed to an improved gross margin and expense ratio,
particularly in 2000, and have allowed management to redeploy valuable resources
within the company. Management expects to continue to make strategic investments
while leveraging and closely managing costs in 2001.
Research and Development
Percent increase
-------------------
years ended December 31 (in millions) 2000 1999 1998 2000 1999
- -------------------------------------------------------------------------------------
Research and development expenses $379 $332 $323 14% 3%
as a percent of sales 5% 5% 6%
======================
22
Research and development (R&D) expenses above exclude in-process R&D (IPR&D)
charges, which principally consisted of a $250 million IPR&D charge relating to
the acquisition of NAV in 2000 and a $116 million IPR&D charge relating to the
acquisition of Somatogen, Inc. in 1998. Refer to Note 3 for a discussion of
significant acquisitions, along with related IPR&D charges. R&D expenses
increased in all three segments in both 2000 and 1999. The overall increase was
primarily due to spending in the BioScience segment, principally relating to the
next-generation recombinant product, the next-generation oxygen-therapeutics
program, initiatives in the wound management and plasma-based products areas,
and, in 2000, to the acquisition of NAV. Management plans to continue to make
significant investments in the R&D initiatives mentioned above as well as other
projects across the three segments in 2001.
Exit and Other Reorganization Costs
Refer to Note 4 for a discussion of a charge recorded in 1998 for exit and other
reorganization costs. The company recorded a $122 million charge in 1998
principally related to the decisions to end the clinical development of the
company's first-generation oxygen-carrying therapeutic program, exit certain
non-strategic investments, primarily in Asia, and reorganize certain other
activities. The program is substantially complete as originally planned.
Management believes remaining reserves for exit and other reorganization
programs are adequate to complete the actions contemplated by the programs.
Future cash expenditures will be funded with cash generated from operations.
Management anticipates employee compensation and other cost savings from the
programs will be invested in R&D, new business initiatives, and expansion into
growing international markets.
Acquisition Reserves Based on plans formulated at acquisition date, reserves
have been established for certain acquisitions as part of the allocation of
purchase price. The reserves, which are further discussed in Note 3, principally
consisted of employee severance costs associated with headcount reductions at
the acquired companies, and the costs of exiting activities and terminating
distribution, lease and other contracts of the acquired companies that existed
prior to the respective dates of acquisition and either continued with no
economic benefit or required payment of a cancellation penalty. Management
believes remaining reserves are adequate to complete the actions contemplated by
the plans.
Net Litigation Charge
As further discussed in Note 12, the company recorded $29 million of income in
2000, which was principally a result of favorable adjustments to the mammary
implant insurance receivables due to settlements negotiated with certain
insurance companies during 2000. The company recorded a $178 million net
litigation charge in 1998 relating to mammary implants, plasma-based therapies
(relating to the BioScience segment) and other litigation.
Goodwill Amortization
Goodwill amortization increased in 2000 principally due to the acquisition of
NAV.
Other Income and Expense
Net interest expense declined in 2000 and 1999 due principally to the impact of
a greater mix of foreign currency denominated debt, which bears a lower average
interest rate, and to lower average debt levels. In 2000, these factors were
partially offset by the impact of increased interest rates, principally in the
United States and Europe. Management does not expect net interest expense to
change significantly in 2001.
As further discussed in Note 10, other income in 2000 consisted principally of
net gains relating to foreign currency hedging instruments, partially offset by
losses relating to the early termination of debt. Other expense in 1999
principally related to losses on disposals of nonstrategic investments and
fluctuations in currency exchange rates. Included in other income in 1998 was a
pretax gain of $20 million relating to the disposal of a nonstrategic investment
in the Medication Delivery segment.
Pretax Income
Refer to Note 13 for a summary of financial results by segment. Certain items
are maintained at the company's corporate headquarters and are not allocated to
the segments. They primarily include hedging activities, certain foreign
currency fluctuations, net interest expense, corporate headquarters costs, and
certain nonrecurring gains and losses.
23
Medication Delivery Growth in pretax income of one percent and eight percent in
2000 and 1999, respectively, was primarily a result of strong sales, and the
leveraging of expenses in conjunction with recent acquisitions, partially offset
by the unfavorable impact of fluctuations in currency exchange rates in both
periods, increased pump service costs in 2000 and the termination of certain
non-core distribution agreements in 2000.
BioScience The 23 percent and eight percent growth in pretax income in 2000 and
1999, respectively, was principally driven by strong sales, improved
manufacturing efficiencies, and the leveraging and close management of marketing
and administrative expenses, partially offset by the unfavorable impact of
fluctuations in currency exchange rates and significantly increased R&D
expenditures. The impact of eased supply constraints and manufacturing capacity
expansions for Recombinate also contributed to the growth in pretax income.
Renal Pretax income declined three percent and increased 43 percent in 2000 and
1999, respectively. A significant contributor to the increase in 1999 was the
impact of the strengthening Japanese Yen. In 2000, the effect of the
strengthening Japanese Yen was more than offset by the effect of the
significantly weakening Euro. Excluding the effects of currency exchange rate
fluctuations, pretax income increased due to strong sales, partially offset by a
less favorable mix of sales and services, and higher R&D and sales and marketing
investments in the business.
Income Taxes
Excluding the 2000 charge for IPR&D and acquisition-related costs and the 1998
charges for IPR&D, exit and other reorganization costs and net litigation, along
with a related provision in 1998 for U.S. taxes on previously unremitted foreign
earnings (collectively, "special charges"), the effective income tax rate from
continuing operations was approximately 26 percent, 26 percent and 24 percent in
2000, 1999 and 1998, respectively. Management does not expect a significant
change in the effective tax rate in 2001.
Income from Continuing Operations Before Cumulative Effect of Accounting Change
and Special Charges
Percent increase
------------------
years ended December 31 (in millions) 2000 1999 1998 2000 1999
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations
before cumulative effect of accounting change
in 1999 and special charges in 2000 and 1998 $915 $779 $688 17% 13%
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative effect of accounting change
per the consolidated statements of income was $738 million, $779 million and
$275 million in 2000, 1999 and 1998, respectively.
Earnings Per Share from Continuing Operations
Excluding the cumulative effect of an accounting change in 1999 and the special
charges in 2000 and 1998, earnings per diluted share in 2000, 1999 and 1998 were
$3.06, $2.64 and $2.38, respectively, and the growth in earnings per diluted
share was 16 percent and 11 percent in 2000 and 1999, respectively.
Discontinued Operation
As further discussed in Note 2, on March 31, 2000, Baxter stockholders of record
on March 29, 2000 received all of the outstanding stock of Edwards Lifesciences
Corporation (Edwards), the company's cardiovascular business, in a tax-free
spin-off. Income from the discontinued operation grew 60 percent in 1999, or
approximately $24 million, largely due to favorable currency exchange rate
fluctuations, principally due to the strengthening of the Japanese Yen, and an
improved mix of sales.
Change in Accounting Principle
In the first quarter of 1999, the company recorded a $27 million after-tax
charge for the cumulative effect of a change in accounting principle related to
the adoption of AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs
of Start-up Activities." Excluding the initial effect of adopting this standard,
the SOP does not have a material impact on the company's results of operations.
24
Liquidity and Capital Resources
Cash flows from continuing operations per the consolidated statements of cash
flows increased during 2000 principally as a result of higher earnings (before
non-cash items), decreased cash payments pertaining to the company's litigation,
a decrease in receivables and a higher liabilities balance. These increases in
cash flows were partially offset by the effect of higher inventories. Cash flows
from continuing operations increased in 1999 due principally to higher earnings,
lower inventories and lower other asset balances. These increases were partially
offset principally by higher net cash outflows relating to litigation and lower
liabilities balances. Accounts receivable balances generally increase as the
company generates sales growth in certain regions outside the United States,
which have longer collection periods. As further discussed in Note 6, cash flows
benefited from the sales of certain trade accounts receivable whereby the
company realized net cash inflows of $195 million, $65 million and $150 million
in 2000, 1999 and 1998, respectively. Such receivables were sold to reduce the
overall costs of financing the receivables.
Cash flows related to the discontinued operation decreased in 2000 due to
the effect of the spin-off of Edwards on March 31, 2000.
Cash outflows from investing activities increased in 2000 and decreased in
1999. Capital expenditures (including additions to the pool of equipment leased
or rented to customers) increased three and 13 percent in 2000 and 1999,
respectively, as the company increased its investments in various capital
projects across all three segments. The growth in capital expenditures
principally reflected increases in manufacturing capacity in the BioScience
segment, and, in 1999, to the implementation of a new integrated operational
system. Capital expenditures are made at a sufficient level to support the
strategic and operating needs of the businesses. Management expects to invest
between $600 million and $700 million in capital expenditures in 2001.
Net cash outflows relating to acquisitions increased in 2000 and decreased
in 1999. In 2000, net cash outflows relating to acquisitions included
approximately $55 million related to the acquisition of Althin and approximately
$63 million related to the acquisition of NAV. As further discussed in Note 3, a
portion of the purchase price for both of these acquisitions was paid in Baxter
International Inc. common stock. Approximately $131 million of the total
outflows in 2000 related to several acquisitions and investments in the
Medication Delivery segment, principally the acquisition of a domestic
ambulatory and infusion pump business and a contingent purchase price payment
associated with the 1998 acquisition of a domestic manufacturer of inhalants and
drugs used for general and local anesthesia. Approximately $15 million of the
company's net cash outflows relating to acquisitions in 2000 related to the
acquisition of dialysis centers in international markets. In 1999, net cash
outflows relating to acquisitions included approximately $36 million for a
contingent purchase price payment pertaining to the 1997 acquisition of Immuno
International AG. Approximately $22 million of the 1999 total related to
acquisitions of dialysis centers in international markets and approximately $88
million related to the acquisition of a nutrition and fluid therapy business in
Europe. In 1998, net cash outflows relating to acquisitions included
approximately $142 million pertaining to the acquisition of Bieffe Medital
S.p.A., a manufacturer of dialysis and intravenous solutions and containers,
approximately $94 million related to an acquisition of a domestic manufacturer
of inhalants and drugs used for general and local anesthesia, and the remainder
primarily related to acquisitions of dialysis centers in international markets.
Refer to Note 3 for further information regarding significant acquisitions.
The cash flows relating to divestitures and other asset dispositions in
2000 principally related to the spin-off of Edwards on March 31, 2000. In 1999,
the company generated approximately $30 million of cash relating to a prior year
divestiture in the BioScience segment and approximately $42 million of cash
relating to the sale and leaseback of certain assets.
Cash flows from financing activities increased in 2000 and decreased in
1999. Common stock dividends decreased in 2000 due to the company's change from
a quarterly to an annual dividend payout schedule effective at the beginning of
the year, and increased in 1999 due to a higher number of shares outstanding. As
further discussed in Note 8, included in total outflows in 1999 was $198 million
in cash inflows relating to the Shared Investment Plan. Cash received for stock
issued under employee benefit plans increased in 2000 and 1999 primarily due to
a higher level of employee stock option exercises, coupled with a higher average
stock option exercise price. A portion of the increase in 2000 was due to
required exercises of stock options by employees transferring to Edwards as a
result of the March 31, 2000 spin-off of that business, as well as to increased
stock purchases by employees. Purchases of treasury stock increased in both 2000
and 1999, as more shares were purchased at higher market prices.
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.
Management uses an internal performance measure called operational cash flow
that evaluates each operating business and geographic region on all aspects of
cash flow under its direct control. Operational cash flow, as defined, reflects
all litigation payments and related insurance recoveries except for those
payments and recoveries relating to mammary implants, which the company never
manufactured or sold. The company expects to generate more than $500 million in
operational cash flow in 2001.
25
The following table reconciles cash flows from continuing operations, as
determined by generally accepted accounting principles (GAAP), to operational
cash flow, which is not a measure defined by GAAP:
Brackets denote cash outflows
years ended December 31 (in millions) 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Cash flows from continuing operations per the $1,233 $977 $837
company's consolidated statements of cash flows
Capital expenditures (648) (631) (556)
Net interest after tax 51 52 74
Other (48) 190 24
- --------------------------------------------------------------------------------------------------
Operational cash flow-continuing operations $ 588 $588 $379
============================
The company's net-debt-to-capital ratio was 40.1 percent and 40.2 percent at
December 31, 2000 and 1999, respectively. In order to better match the currency
denomination of its assets and liabilities, the company rebalanced certain of
its debt during 2000. The company acquired approximately $878 million of its
U.S. Dollar denominated debt securities during 2000 and increased its non-U.S.
Dollar denominated debt. During 1998, a wholly-owned subsidiary of the company
entered into an $800 million revolving credit facility. Due to the subsidiary's
covenants under the facility, certain assets are restricted to the parent
company. Refer to Note 5 for further information regarding the company's credit
facilities, long-term debt and lease obligations, and related restrictions and
covenants.
As authorized by the board of directors, the company repurchases its stock
to optimize its capital structure depending upon its operational cash flows, net
debt level and current market conditions. In November 1995, the company's board
of directors authorized the repurchase of up to $500 million of common stock
over a period of several years, all of which was repurchased by early 2000. In
November 1999, the board of directors authorized the repurchase of an additional
$500 million over a period of several years, of which approximately two-thirds
has been repurchased as of December 31, 2000.
As of December 31, 2000, the company can issue up to $550 million in
aggregate principal amount of additional senior unsecured debt securities under
effective registration statements filed with the Securities and Exchange
Commission. The company's debt ratings on senior debt are A3 by Moody's, A by
Standard & Poor's and A by Duff & Phelps. The company intends to fund its short-
term and 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 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.
In November 2000, the board of directors declared an annual dividend on the
company's common stock of $1.164 per share. The dividend, which was payable on
January 8, 2001 to stockholders of record as of December 15, 2000, is a
continuation of the current annual rate.
Euro Conversion
On January 1, 1999, certain member countries of the European Union introduced a
new currency called the "Euro." The conversion rates between the Euro and the
participating nations' currencies were fixed irrevocably as of January 1, 1999.
Prior to full implementation of the new currency on January 1, 2002, there is a
transition period during which parties may use either the existing currencies or
the Euro for financial transactions.
Action plans are currently being implemented which are expected to result
in compliance with all laws and regulations relating to the Euro conversion.
Management expects that the adaptation of its information technology and other
systems to accommodate Euro-denominated transactions as well as the requirements
of the transition period will not have a material impact on the company's
results of operations or financial condition. The company is also addressing the
impact of the Euro on currency exchange-rate risk, taxation, contracts,
competition and pricing. While it is not possible to accurately predict the
impact the Euro will have on the company's business, management does not
anticipate that the Euro conversion will have a material adverse impact on the
company's results of operations or financial condition.
26
Financial Instrument Market Risk
The company's business and financial results are affected by fluctuations in
world financial markets, including currency exchange rates and interest rates.
The company's hedging policy attempts to manage these risks to an acceptable
level based on management's judgment of the appropriate trade-off between risk,
opportunity and costs. In hedging its currency and interest rate risks, the
company utilizes primarily forward contracts, options and swaps. The company
does not hold financial instruments for trading or speculative purposes. Refer
to Note 6 for further information regarding the company's financial instruments.
Currency Risk The company operates on a global basis and is exposed to the risk
that its earnings, cash flows and equity could be adversely impacted by
fluctuations in currency exchange rates. The company is primarily exposed to
currency exchange-rate risk with respect to its transactions and net assets
denominated in Japanese Yen, Euro, British Pound and Swiss Franc. The company
manages its foreign currency exposures and capital structure on a consolidated
basis, which allows the company to net exposures and take advantage of any
natural offsets. The company also utilizes derivative financial instruments to
further reduce the net exposure to currency fluctuations. The company
principally enters into foreign currency option and forward agreements to hedge
firm commitments and anticipated but not yet committed sales expected to be
denominated in foreign currencies. The company enters into foreign currency
forward agreements to hedge certain receivables and payables denominated in
foreign currencies. The company also hedges certain of its net investments in
international affiliates principally using cross-currency swap agreements.
As part of its risk-management program, the company performs sensitivity
analyses to assess potential changes in fair value relating to hypothetical
movements in currency exchange rates. A sensitivity analysis of changes in the
fair value of foreign exchange option and forward contracts outstanding at
December 31, 2000 indicated that, if the U.S. Dollar uniformly fluctuated
unfavorably by 10 percent against all currencies, the fair value of those
contracts would decrease by $20 million. A similar analysis performed with
respect to option and forward contracts outstanding at December 31, 1999
indicated that the fair value of such contracts would decrease by $16 million.
With respect to the company's cross-currency swap agreements, if the U.S. Dollar
uniformly weakened by 10 percent, the fair value of the contracts would decrease
by $83 million and $295 million as of December 31, 2000 and 1999, respectively.
Any increase or decrease in the fair value of cross-currency swap agreements as
a result of fluctuations in currency exchange rates is offset almost completely
by the change in the value of the hedged net investments in foreign affiliates.
The amount above for 2000 is less than that for 1999 due to the significantly
lower notional amount of cross-currency swap agreements outstanding at December
31, 2000 as compared to the prior year-end. These sensitivity analyses disregard
the possibility that currency exchange rates can move in opposite directions and
that gains from one currency may or may not be offset by losses from another
currency.
Interest Rate Risk As part of its risk-management program, the company performs
sensitivity analyses to assess potential gains and losses in earnings relating
to hypothetical movements in interest rates. A 44 basis-point increase in
interest rates (approximately 10 percent of the company's weighted-average
interest rate) affecting the company's financial instruments, including debt
obligations and related derivatives, and investments, would have an immaterial
effect on the company's 2000 and 1999 earnings and on the fair value of the
company's fixed-rate financial instruments as of the end of such fiscal years.
As discussed in Note 6, the fair values of the company's long-term
litigation liabilities and related insurance receivables were computed by
discounting the expected cash flows based on currently available information. A
10 percent movement in the assumed discount rate would have an immaterial effect
on the fair values of those assets and liabilities.
Other Risks With respect to the company's unconsolidated investments, management
believes any reasonably possible near-term losses in earnings, cash flows and
fair values would not be material to the company's consolidated financial
position.
27
Legal Proceedings
See Note 12 for a discussion of the company's legal contingencies and related
insurance coverage with respect to cases and claims relating to the company's
plasma-based therapies and mammary implants, as well as other matters. Upon
resolution of any of these uncertainties, the company may incur charges in
excess of presently established reserves. While such a future charge could have
a material adverse effect on the company's net income or cash flows in the
period in which it is recorded or paid, based on the advice of counsel,
management believes that any outcome of these actions, individually or in the
aggregate, will not have a material adverse effect on the company's consolidated
financial position.
Based on the company's assessment of the costs associated with its
environmental responsibilities, including recurring administrative costs,
capital expenditures and other compliance costs, such costs have not had, and in
management's opinion, will not have in the foreseeable future, a material effect
on the company's financial position, results of operations, cash flows or
competitive position.
New Accounting and Disclosure Standards
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Hedging
Activities" (collectively, SFAS No. 133), is effective for the company as of
January 1, 2001. SFAS No. 133 requires that a company recognize all derivatives
as assets or liabilities measured at fair value. The accounting for changes in
the fair value of a derivative depends on the use of the derivative. Adoption of
SFAS No. 133 will result in a cumulative after-tax reduction in net income of
approximately $52 million and a cumulative after-tax increase in other
comprehensive income of approximately $8 million, both of which will be recorded
at the beginning of fiscal year 2001. The ongoing impact of SFAS No. 133 is not
expected to be material. SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 140) was issued in September 2000 and is effective for transfers,
servicings and extinguishments occurring after March 31, 2001. SFAS No. 140
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (SFAS No. 125). Although SFAS No. 140
clarifies or amends various aspects of SFAS No. 125, most of the fundamental
concepts from SFAS No. 125 have been brought forward without modification. SFAS
No. 140 is not expected to have a material impact on the company's consolidated
financial statements.
28
Management's Responsibilities for Financial Reporting
The accompanying financial statements and other financial data have been
prepared by management, which is responsible for their integrity and
objectivity. The statements have been prepared in conformity with accounting
principles generally accepted in the United States and include amounts that are
based upon management's best estimates and judgments.
Management is responsible for establishing and maintaining a system of
internal control over financial reporting and safeguarding assets against
unauthorized acquisition, use or disposition. This system is designed to provide
reasonable assurance as to the integrity and reliability of financial reporting
and safeguarding of assets. 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 from them.
Management believes that the foundation of an appropriate system of internal
control is a strong ethical company culture and climate. The Corporate
Responsibility Office, which reports to the Public Policy Committee of the board
of directors, is responsible for developing and communicating appropriate
business practices, policies and initiatives; maintaining independent channels
of communication for providing guidance and reporting potential business
practice violations; and monitoring compliance with the company's business
practices, including annual compliance certifications by senior managers
worldwide. Additionally, a professional staff of corporate auditors reviews the
design of the related internal control system and the accounting policies and
procedures supporting this system and compliance with them. The results of these
reviews are reported at least annually to the Public Policy and/or Audit
Committees of the board of directors.
PricewaterhouseCoopers LLP performs 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 comprised 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. PricewaterhouseCoopers LLP and
the corporate auditors meet regularly with, and have access to, this committee,
with and without management present, to discuss the results of the audit work.
/s/ Harry M. Jansen Kraemer, Jr. /s/ Brian P. Anderson
Harry M. Jansen Kraemer, Jr. Brian P. Anderson
Chairman and Chief Senior Vice President and
Executive Officer Chief Financial Officer
Report of Independent Accountants
To the Board of Directors and Stockholders of Baxter International Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholders' equity and
comprehensive income present fairly, in all material respects, the financial
position of Baxter International Inc. (the company) and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. 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 auditing standards generally accepted in the United States of
America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
February 16, 2001, except for Note 14,
which is as of February 28, 2001
29
Consolidated Balance Sheets
as of December 31 (in millions, except share information) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Current Assets Cash and equivalents $ 579 $ 606
Accounts receivable 1,387 1,504
Notes and other current receivables 155 148
Inventories 1,159 1,116
Short-term deferred income taxes 159 216
Prepaid expenses 212 229
-----------------------------------------------------------------------------------
Total current assets 3,651 3,819
- ------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, Net 2,807 2,650
- ------------------------------------------------------------------------------------------------------------------------
Other Assets Net assets of discontiued operation - 1,231
Goodwill and other intangible assets 1,239 921
Insurance receivables 160 301
Other 876 722
-----------------------------------------------------------------------------------
Total other assets 2,275 3,175
-----------------------------------------------------------------------------------
Total assets $ 8,733 $ 9,644
========================================================================================================================
Current Liabilities Short-term $ 576 $ 125
Current maturities of long-term debt and
lease obligations 58 130
Accounts payable and accrued liabilities 1,990 1,805
Income taxes payable 748 640
-----------------------------------------------------------------------------------
Total current liabilities 3,372 2,700
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Debt and Lease Obligations 1,726 2,601
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Deferred Income Taxes 160 311
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Litigation Liabilities 184 273
- ------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities 632 411
- ------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity Common stock, $1 par value, authorized
350,000,000 shares, issued 298,133,251 shares
in 2000 and 294,363,251 shares in 1999 298 294
Common stock in treasury, at cost,
4,953,062 shares in 2000 and
4,163,737 shares in 1999 (349) (269)
Additional contributed capital 2,506 2,282
Retained earnings 853 1,415
Accumulated other comprehensive loss (649) (374)
-----------------------------------------------------------------------------------
Total stockholders' equity 2,659 3,348
-----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,733 $ 9,644
========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
30
Consolidated Statements of Income
years ended December 31 (in millions, except per share data) 2000 1999 1998
- ------------------------------------------------------------------------------------------
Operations Net sales $ 6,896 $ 6,380 $ 5,706
Costs and expenses
Cost of goods sold 3,833 3,568 3,142
Marketing and administrative expenses 1,385 1,311 1,208
Research and development expenses 379 332 323
In-process research and development
and acquisition-related costs 286 - 116
Exit and other reorganization costs - - 122
Net litigation (income) costs (29) - 178
Goodwill amortization 31 19 18
-------------------------------------------------------------------------
Operating income 1,011 1,150 599
-------------------------------------------------------------------------
Interest expense, net 85 87 124
Other (income) expense (20) 11 (18)
-------------------------------------------------------------------------
Income from continuing operations
before income taxes and cumulative
effect of accounting change 946 1,052 493
Income tax expense 208 273 218
-------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of accounting change 738 779 275
Discontinued operation 2 45 40
-------------------------------------------------------------------------
Income before cumulative effect
of accounting change 740 824 315
Cumulative effect of accounting change,
net of income tax benefit of $7 - (27) -
-------------------------------------------------------------------------
Net income $ 740 $ 797 $ 315
==========================================================================================
Per Share Data Earnings per basic common share
Continuing operations $ 2.52 $ 2.69 $ 0.97
Discontinued operation 0.01 0.15 0.14
Cumulative effect of accounting change - (0.09) -
-------------------------------------------------------------------------
Net income $ 2.53 $ 2.75 $ 1.11
-------------------------------------------------------------------------
Earnings per diluted common share
Continuing operations $ 2.47 $ 2.64 $ 0.95
Discontinued operation 0.01 0.15 0.14
Cumulative effect of accounting change - (0.09) -
-------------------------------------------------------------------------
Net income $ 2.48 $ 2.70 $ 1.09
-------------------------------------------------------------------------
Weighted average number of
common shares outstanding
Basic 292 290 284
Diluted 299 295 289
==========================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
31
Consolidated Statements of Cash Flows
as of or for the years ended December 31 (in millions) (brackets denote cash outflows) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operations Income from continuing operations before
cumulative effect of accounting change $ 738 $ 779 $ 275
Adjustments
Depreciation and amortization 405 372 344
Deferred income taxes (170) 92 (56)
Loss (gain) on asset dispositions 6 13 (23)
In-process research and development
and acquisition-related costs 286 - 116
Exit and other reorganization costs - - 122
Net litigation (income) charge (29) - 178
Other 55 20 2
Changes in balance sheet items
Accounts receivable 54 103) (153)
Inventories (114) 17 (79)
Accounts payable and accrued liabilities 60 30 165
Net litigation payments and other (58) (243) (54)
---------------------------------------------------------------------------------
Cash flows from continuing operations 1,233 977 837
---------------------------------------------------------------------------------
Cash flows from discontinued operation (19) 106 102
---------------------------------------------------------------------------------
Cash flows from operations 1,214 1,083 939
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities Capital expenditures (547) (529) (461)
Additions to the pool of equipment leased
or rented to customers (101) (102) (95)
Acquisitions (net of cash received)
and investments in affiliates (345) (179) (319)
Divestitures and other asset dispositions (60) 75 3
---------------------------------------------------------------------------------
Cash flows from investing activities (1,053) (735) (872)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities Issuances of debt obligations 1,180 764 1,143
Redemption of debt obligations (1,953) (481) (598)
Increase (decrease) in debt with
maturities of three months or less, net 879 (552) (159)
Common stock cash dividends (84) (338) (331)
Stock issued under Shared Investment Plan - 198 -
Stock issued under employee benefit plans 233 148 118
Purchases of treasury stock (375) (184) -
---------------------------------------------------------------------------------
Cash flows from financing activities (120) (445) 173
- -----------------------------------------------------------------------------------------------------------------------
Effect of Foreign Exchange Rate Changes on Cash and Equivalents (68) (6) 4
- -----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents (27) (103) 244
- -----------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at Beginning of Year 606 709 465
- -----------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of year $ 579 $ 606 $ 709
- -----------------------------------------------------------------------------------------------------------------------
Supplemental information:
Interest paid, net of portion capitalized $ 110 $ 150 $ 191
Income taxes paid $ 279 $ 197 $ 143
=======================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
32
Consolidated Statements of Stockholders' Equity and Comprehensive Income
years ended December 31 (in millions) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock $ 294 $ 291 $ 288
Beginning of year
Common stock issued for acquisitions 4 -- 3
Stock issued under Shared Investment Plan -- 3 --
- ----------------------------------------------------------------------------------------------------------------------------
End of year 298 294 291
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock in Treasury
Beginning of year (269) (210) (329)
Common stock issued for acquisitions 47 -- --
Purchase of common stock (375) (184) --
Common stock issued under employee benefit plans 248 125 119
- ----------------------------------------------------------------------------------------------------------------------------
End of year (349) (269) (210)
- ----------------------------------------------------------------------------------------------------------------------------
Additional Contributed Capital
Beginning of year 2,282 2,064 1,876
Common stock issued for acquisitions 239 -- 189
Stock issued under Shared Investment Plan -- 195 --
Common stock issued under employee benefit plans (15) 23 (1)
- ----------------------------------------------------------------------------------------------------------------------------
End of year 2,506 2,282 2,064
- ----------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Beginning of year 1,415 990 1,006
Net income 740 797 315
Elimination of reporting lag for certain international operations -- (34) --
Common stock cash dividends (341) (338) (331)
Distribution of Edwards Lifesciences Corporation common stock to stockholders (961) -- --
- ----------------------------------------------------------------------------------------------------------------------------
End of year 853 1,415 990
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss
Beginning of year (374) (296) (222)
Other comprehensive loss (275) (78) (74)
- ----------------------------------------------------------------------------------------------------------------------------
End of year (649) (374) (296)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 2,659 $ 3,348 $ 2,839
============================================================================================================================
Comprehensive Income
Net income $ 740 $ 797 $ 315
Currency translation adjustments, net of tax expense (benefit)
of $82 in 2000, $87 in 1999 and $(56) in 1998 (297) (80) (75)
Unrealized net gain on marketable equity securities, net of tax
of $15 in 2000, $1 in 1999 and $1 in 1998 22 2 1
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (275) (78) (74)
Elimination of reporting lag for certain international
operations, net of tax benefit of $22 -- (34) --
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 465 $ 685 $ 241
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
33
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies
Financial statement presentation
The preparation of the financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
Basis of consolidation
The consolidated financial statements include the accounts of Baxter
International Inc. and its majority-owned, controlled subsidiaries (Baxter or
the company). Effective in the first quarter of 1999 and in conjunction with the
implementation of new financial systems, the company eliminated the one-month
lag in reporting certain international operations to facilitate more timely
consolidation. The December 1998 net loss of $34 million for these operations
was recorded directly to retained earnings in the first fiscal quarter of 1999.
Effective in the first quarter of 2001, the one-month lag was eliminated for the
remaining international operations.
Foreign currency translation
The results of operations for non-U.S. subsidiaries, other than those located in
highly inflationary countries, are translated into U.S. dollars using the
average exchange rates during the year, while assets and liabilities are
translated using period-end rates. Resulting translation adjustments are
recorded as currency translation adjustments within other comprehensive income.
Where foreign affiliates operate in highly inflationary economies, non-monetary
amounts are remeasured at historical exchange rates while monetary assets and
liabilities are remeasured at the current rate with the related adjustments
reflected in the consolidated statements of income.
Revenue recognition
The company's policy is to recognize revenues from product sales and services
when earned, as defined by GAAP, and in accordance with SEC Staff Accounting
Bulletin No. 101. Revenue is recognized when persuasive evidence of the
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed or determinable, and collectibility is reasonably assured. For
product sales, revenue is not recognized until title and risk of loss have
transferred. Prior to revenue recognition, the company substantially completes
the terms specified in the arrangement, and any remaining obligations are
inconsequential or perfunctory. Provisions for discounts, rebates to customers,
and returns are provided for at the time the related sales are recorded, and are
classified as adjustments to sales.
Warranty expense
The company provides for the estimated costs that may be incurred under its
warranty programs at the time revenue is recognized.
Inventories
as of December 31 (in millions) 2000 1999
- -----------------------------------------------------------------------
Raw materials $ 261 $ 251
Work in process 174 193
Finished products 724 672
- -----------------------------------------------------------------------
Total inventories $ 1,159 $ 1,116
==========================
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Market value for raw materials is based on replacement costs and,
for other inventory classifications, on net realizable value. Reserves for
excess and obsolete inventory were $110 million and $78 million at December 31,
2000 and 1999, respectively.
Property, plant and equipment
as of December 31 (in millions) 2000 1999
- -------------------------------------------------------------------------
Land $ 113 $ 93
Buildings and leasehold improvements 967 987
Machinery and equipment 2,822 2,615
Equipment with customers 484 489
Construction in progress 592 525
- -------------------------------------------------------------------------
Total property, plant and equipment, at cost 4,978 4,709
Accumulated depreciation and amortization (2,171) (2,059)
- -------------------------------------------------------------------------
Property, plant and equipment, net $ 2,807 $ 2,650
========================
Depreciation and amortization are principally calculated on the straight-line
method over the estimated useful lives of the related assets, which range from
20 to 50 years for buildings and improvements and from three to 15 years for
machinery and equipment. Leasehold improvements are amortized over the life of
the related facility lease or the asset, whichever is shorter. Straight-line and
accelerated methods of depreciation are used for income tax purposes.
Accumulated amortization for assets under capital lease was $11 million and $10
million at December 31, 2000 and 1999, respectively. Depreciation expense was
$308 million, $290 million and $269 million in 2000, 1999 and 1998,
respectively. Repairs and maintenance expense was $105 million, $97 million and
$93 million in 2000, 1999 and 1998, respectively.
34
Goodwill and other intangible assets
as of December 31 (in millions) 2000 1999
- ------------------------------------------------------------------
Goodwill $1,094 $ 737
Accumulated amortization (138) (113)
- ------------------------------------------------------------------
Net goodwill 956 624
- ------------------------------------------------------------------
Other intangible assets 701 677
Accumulated amortization (418) (380)
- ------------------------------------------------------------------
Net other intangible assets 283 297
- ------------------------------------------------------------------
Goodwill and other intangible assets $1,239 $ 921
===================
Intangible assets are amortized on a straight-line basis. Goodwill is amortized
over estimated useful lives ranging from 15 to 40 years; other intangible
assets, consisting of purchased patents, trademarks and other identified rights,
are amortized over their legal or estimated useful lives, whichever is shorter
(generally not exceeding 17 years). The company's policy is to review the
carrying amounts of goodwill and other intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Such events or circumstances might include a significant decline in
market share, a significant decline in profits, rapid changes in technology,
significant litigation or other items. In evaluating the recoverability of
goodwill and other intangible assets, management's policy is to compare the
carrying amounts of such assets with the estimated undiscounted future operating
cash flows. In the event impairment exists, an impairment charge would be
determined by comparing the carrying amounts of the asset to the applicable
estimated future cash flows, discounted at a risk-adjusted interest rate. In
addition, the remaining amortization period for the impaired asset would be
reassessed and revised if necessary. Management does not believe the carrying
amounts of goodwill and other intangible assets are impaired at December 31,
2000.
Earnings per share (EPS)
The numerator for both basic and diluted EPS is net earnings available to common
shareholders. The denominator for basic EPS is the weighted-average number of
common shares outstanding during the period. The following is a reconciliation
of the shares (denominator) of the basic and diluted per-share computations.
years ended December 31
(in million of shares) 2000 1999 1998
- ------------------------------------------------------------------------
Basic 292 290 284
Effect of dilutive securities
Employee stock options 6 4 5
Employee stock purchase plans
and equity forward agreements 1 1 -
- ------------------------------------------------------------------------
Diluted 299 295 289
======================
Comprehensive income
Comprehensive income encompasses all changes in stockholders' equity other than
those arising from stockholders, and generally consists of net income, currency
translation adjustments and unrealized net gains and losses on marketable equity
securities. Accumulated currency translation adjustments were ($674) million and
($377) million at December 31, 2000 and 1999, respectively. Accumulated
unrealized net gains on unrestricted marketable equity securities were $25
million and $3 million at December 31, 2000 and 1999, respectively.
Start-up costs
Effective at the beginning of 1999, the company adopted AICPA Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." This SOP
required that the costs of start-up and organization activities previously
capitalized be expensed and reported as a cumulative effect of a change in
accounting principle and that such costs subsequent to adoption be expensed as
incurred. The after-tax cumulative effect of this accounting change was $27
million.
Derivatives
Gains and losses relating to foreign currency purchased options and forward
agreements that are designated and effective as hedges of firm commitments and
anticipated transactions are deferred and recognized in income as offsets of
gains and losses resulting from the underlying hedged items. Purchased option
premiums are deferred and recognized in income to the extent considered
effective. Premiums and discounts related to forward agreements are capitalized
and amortized over the period of the underlying agreement. Deferred amounts are
classified in inventories. Gains, losses and option premiums relating to foreign
currency derivative instruments not qualifying as hedges for accounting purposes
are recognized in income immediately. Such instruments are classified in
accounts payable and accrued liabilities. Gains, losses relating to terminations
of qualifying hedges are generally deferred and recognized consistent with the
income or loss recognition of the underlying hedged items. In circumstances
where the underlying hedged items are sold or no longer exist, any remaining
gains or losses are recognized immediately in income. The effective portions of
gains and losses on hedges of net investments in foreign affiliates are reported
as currency translation adjustments in stockholders' equity. The interest rate
differentials relating to interest rate swaps used to hedge debt obligations and
cross-currency swap contracts used to hedge net investments in foreign
affiliates are reflected as an adjustment to interest expense over the lives of
the financial instruments. Gains or losses relating to terminations of cross-
currency swap contracts used to hedge net investments in foreign affiliates are
recognized immediately and recorded in other income or expense. Instruments that
are indexed to and potentially settled in the company's stock are accounted for
in accordance with Emerging Issues Task Force Issue Nos. 00-7 and 00-19. Cash
flows from derivatives are classified in the same category as the cash flows
from the related hedged activity.
35
Cash and equivalents
Cash and equivalents include cash, certificates of deposit and marketable
securities with an original maturity of three months or less.
Shipping and handling costs
Shipping and handling costs are classified in either cost of goods sold or
marketing and administrative expenses based on their nature. Approximately $200
million of shipping and handling costs were classified in marketing and
administrative expenses in each of 2000, 1999 and 1998.
Reclassifications
Certain reclassifications have been made to conform the 1999 and 1998 financial
statements and notes to the 2000 presentation.
New accounting pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Hedging
Activities" (collectively, SFAS No. 133), is effective for the company as of
January 1, 2001. SFAS No. 133 requires that a company recognize all derivatives
as assets or liabilities measured at fair value. The accounting for changes in
the fair value of a derivative depends on the use of the derivative. Adoption of
SFAS No. 133 will result in a cumulative after-tax reduction in net income of
approximately $52 million and a cumulative after-tax increase in other
comprehensive income of approximately $8 million, both of which will be recorded
at the beginning of fiscal year 2001. The ongoing impact of SFAS No. 133 is not
expected to be material.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS No. 140) was issued in September 2000
and is effective for transfers, servicings and extinguishments occurring after
March 31, 2001. SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125). Although SFAS No. 140 clarifies or amends various aspects of SFAS No. 125,
most of the fundamental concepts from SFAS No. 125 have been brought forward
without modification. SFAS No. 140 is not expected to have a material impact on
the company's consolidated financial statements.
2 Discontinued Operation
On March 31, 2000, Baxter stockholders of record on March 29, 2000, received all
of the outstanding stock of Edwards Lifesciences Corporation (Edwards), the
company's cardiovascular business, in a tax-free spin-off. The company's
consolidated financial statements and related notes have been adjusted and
restated to reflect the financial position, results of operations and cash flows
of Edwards as a discontinued operation.
In 2000, 1999 and 1998, the company recorded income from the discontinued
operation of $14 million, $64 million and $40 million, respectively, which was
net of income tax expense of $5 million, $19 million and $16 million,
respectively. In addition, in 2000 and 1999 the company recorded $12 million
(including tax of $6 million) and $19 million, respectively, of net costs
directly associated with effecting the business distribution. The impact of
these costs on basic earnings per share was $.04 and $.07 in 2000 and 1999,
respectively, and the impact on diluted earnings per share was $.04 and $.06 in
2000 and 1999, respectively. Net sales of the discontinued operation were $906
million in 1999, $893 million in 1998, and $252 million for the three-month
period ended March 31, 2000.
Through the issuance of new third-party debt, approximately $502 million of
Baxter's debt was indirectly assumed by Edwards upon spin-off. The distribution
of Edwards stock totaled $961 million.
The cardiovascular business in Japan was not transferred to Edwards at the
time of distribution due to Japanese regulatory requirements and business
culture considerations. The business is operated pursuant to a contractual joint
venture under which a Japanese subsidiary of Baxter retains ownership of the
business assets, but a subsidiary of Edwards holds a 90 percent profit interest.
Edwards has an option to purchase the Japanese assets, which option may be
exercised no earlier than 28 months following the spin-off date and no later
than 60 months following the spin-off date. The exercise price of the option is
approximately 26.4 billion Japanese Yen, of which Edwards would obtain
approximately 23.2 billion Japanese Yen upon termination of the joint venture
for the return of its fair value in the joint venture at inception. Included in
Baxter's consolidated balance sheet at December 31, 2000 was a $203 million
liability relating to this contractual joint venture, which was established in
connection with the accounting for the spin-off of Edwards.
3 Acquisitions and Divestitures
Accounting for acquisitions
All acquisitions during the three years ended December 31, 2000 were accounted
for under the purchase method. Results of operations of acquired companies are
included in the company's results of operations as of the respective acquisition
dates. The purchase price of each acquisition was allocated to the net assets
acquired based on estimates of their fair values at the date of the acquisition.
The excess of the purchase price over the fair values of the net tangible
assets, identifiable intangible assets and liabilities acquired was allocated to
goodwill. As further discussed below, a portion of the purchase price for
certain of the acquisitions was allocated to in-process research and development
(IPR&D) which, under GAAP, was immediately expensed.
36
Significant acquisitions
The following is a summary of the company's significant recent acquisitions
along with the allocation of the purchase price to IPR&D and intangible assets.
Acquisition Purchase Intangible assets
-----------------
(in millions) date price IPR&D Goodwill Other
- -----------------------------------------------------------------------------
North American June
Vaccine, Inc. 2000 $328 $250 $245 $10
May
Somatogen, Inc. 1998 206 116 2 3
December
Bieffe Medital S.p.A. 1997 188 - 124 15
=============================================================================
North American Vaccine, Inc. (NAV) was engaged in the research, development,
production and sales of vaccines for the prevention of human infectious
diseases. Somatogen, Inc. (Somatogen) was a developer of recombinant
hemoglobin-based technology, and no revenue had ever been generated from
commercial product sales. Somatogen shareholders are entitled to a contingent
deferred cash payment of up to $2.00 per Somatogen share, or approximately $42
million, based on a percentage of sales of future products through the year
2007. The acquisitions of NAV and Somatogen are included in the BioScience
segment. Bieffe Medital S.p.A. (Bieffe), which was a manufacturer of dialysis
and intravenous solutions and containers, is included in both the Renal and the
Medication Delivery segments. The purchase prices of NAV and Somatogen were
principally paid in approximately 3,770,000 and 3,547,000 shares, respectively,
of Baxter International Inc. common stock. A portion of the purchase price of
the Renal segment's acquisition of Althin Medical A.B. was paid in approximately
592,000 shares of Baxter common stock.
The $286 million charge for IPR&D and acquisition-related costs recorded in
2000 consisted principally of the above-mentioned $250 million charge relating
to NAV, insignificant IPR&D charges pertaining to three other acquisitions, as
well as certain charges associated with one of the Medication Delivery segment's
acquisitions.
IPR&D
Amounts allocated to IPR&D were determined on the basis of independent
valuations using the income approach, which measures the value of an asset by
the present value of its future economic benefits. Estimated cash flows were
discounted to their present values at rates of return that incorporate the risk-
free rate, the expected rate of inflation, and risks associated with the
particular projects. The valuations incorporated the stages of completion of the
IPR&D projects. Projected revenue and cost assumptions were determined
considering the company's historical experience and industry trends and
averages. No value was assigned to any IPR&D project unless it was probable of
being further developed.
The following is a summary of significant amounts allocated to IPR&D during
the last several years, by significant project category.
(in millions) NAV Somatogen Immuno
- --------------------------------------------------------------------------
Oxygen-carrying therapeutics $116
Plasma-based therapies $142
Vaccines $250 78
- --------------------------------------------------------------------------
Total $250 $116 $220
=================================
Material net cash inflows for significant IPR&D projects for NAV were
forecasted in the valuation to commence between 2002 and 2005. A discount rate
of 20 percent was used for all projects, which include Streptococcal B,
Pneumococcal, Meningococcal B/C/Y and other vaccines. Assumed additional
research and development (R&D) expenditures prior to the dates of product
introductions totaled approximately $85 million. The status of development,
stage of completion, assumptions, nature and timing of remaining efforts for
completion, risks and uncertainties, and other key factors varied by individual
vaccine project. The percentage completion rate for significant projects ranged
in the valuation from approximately 65 percent to over 90 percent, with the
weighted-average completion rate approximately 70 percent. Subsequent to the
June 2000 acquisition date, the projects have been proceeding in accordance with
the original projections. Approximately $8 million of R&D costs were expensed in
2000 subsequent to the acquisition date relating to these projects.
Material net cash inflows relating to Somatogen's IPR&D were forecasted to
begin in 2004. A discount rate of 22 percent was used in the valuation.
Estimated R&D costs to be incurred prior to 2004 were forecasted to total
approximately $100 million. As the R&D efforts progress, it is currently
forecasted that material net cash inflows relating to Somatogen's IPR&D as of
acquisition date will not begin until after 2006. Also, it is currently
estimated that over $200 million of R&D costs will be incurred between the date
of acquisition and 2006. During 2000, the results of preclinical studies were
submitted to the U.S. Food and Drug Administration as part of an investigational
new drug application. Pending the outcome of the FDA's review of the
application, the company plans to begin human clinical trials in 2001.
Approximately $18 million, $18 million and $10 million of R&D costs were
expended in 2000, 1999 and 1998, respectively, relating to these projects.
Immuno International AG (Immuno), a manufacturer of biopharmaceutical
products and services for transfusion medicine, was acquired by the company in
December 1996, and is included in the BioScience segment. The two project
categories were comprised of 18 projects, many of which were comprised of
multiple sub-projects. As part of the post-acquisition integration and R&D
rationalization process, management reassessed all of Immuno's ongoing R&D
projects in conjunction with a re-evaluation of Baxter's existing R&D projects,
and re-prioritized certain projects,
37
resulting in modifications to originally planned timetables for certain of the
projects and terminations of other projects. Such revisions to original plans
were also significantly influenced by marketplace trends and competitive factors
occurring since the acquisition date. Most significantly, the timetables for
certain of the plasma-based therapies projects have been altered in order to
accelerate the development of the next-generation recombinant Factor VIII
concentrate for hemophilia treatment, given the strong and accelerating demand
for recombinant products in the marketplace. As a result of the timetable
revisions and terminations, actual R&D expenditures since acquisition date have
been over 40 percent lower than that assumed in the model. Total additional R&D
expenditures are currently forecasted to be less than those assumed in the
model. Approximately $15 million, $30 million and $25 million of R&D costs have
been expensed in 2000, 1999 and 1998, respectively, relating to these projects.
With respect to NAV, Somatogen and Immuno IPR&D, the products currently
under development are at various stages of development, and substantial further
research and development, pre-clinical testing and clinical trials will be
required to determine their technical feasibility and commercial viability.
There can be no assurance such efforts will be successful. Delays in the
development, introduction or marketing of the products under development could
result either in such products being marketed at a time when their cost and
performance characteristics would not be competitive in the market-place or in a
shortening of their commercial lives. If the products are not completed on time,
the expected return on the company's investments could be significantly and
unfavorably impacted.
Pro forma information
The following unaudited pro forma information presents a summary of the
company's consolidated results of operations as if acquisitions had occurred as
of the beginning of fiscal years 2000 and 1999, respectively, giving effect to
purchase accounting adjustments but excluding the 2000 charge for IPR&D and
acquisition-related costs.
years ended December 31
(in millions, except per share data) 2000 1999
- --------------------------------------------------------------------
Net sales $7,005 $8,614
Income from continuing operations before
cumulative effect of accounting change $ 896 $ 781
Net income $ 896 $ 754
Net income per diluted common share $ 2.99 $ 2.52
----------------
These pro forma results of operations have been presented for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on the date
indicated, or which may result in the future. The diluted pro forma earnings and
per-share earnings included in the table above primarily reflect the historical
pre-acquisition net losses reported by NAV.
Acquisition reserves
Based on plans formulated at acquisition date, as part of the allocation of
purchase price, reserves have been established for certain acquisitions. The
following is a summary of the reserves and related activity pertaining to the
acquisition of Immuno. Reserves established for certain of the company's
acquisitions during the period are not included below as such reserves were not
material. Actions executed to date and anticipated in the future with respect to
the acquisition-related plans are substantially consistent with the original
plans. Management believes remaining reserves are adequate to complete the
actions contemplated by the plans.
as of or for the years ended
December 31 (in millions) Immuno
- -----------------------------------------------------------------------------
Original reserve
Employee-related costs $ 38
Contract termination and other costs 41
- -----------------------------------------------------------------------------
Total original reserve 79
- -----------------------------------------------------------------------------
1998 and prior reserve utilization (26)
1999 reserve utilization (11)
2000 reserve utilization (16)
- -----------------------------------------------------------------------------
Balance at December 31, 2000 $ 26
=====
Employee-related costs consisted principally of employee severance associated
with headcount reductions in Europe and primarily impacted the sales and
marketing functions. Utilization of reserves for employee-related costs totaled
$3 million, $6 million and $16 million in 2000, 1999 and 1998, respectively.
Contract termination and other costs related principally to the exiting of
activities and termination of distribution, lease and other contracts of the
acquired company that existed prior to the acquisition date that either
continued with no economic benefit or required payment of a cancellation
penalty.
38
[4] Exit and Other Reorganization Costs
In 1998, the company decided to end the clinical development of the BioScience
segment's first-generation oxygen-carrying therapeutic, HemAssist (DCLHb), which
was based on human hemoglobin, and focus on the next-generation program, which
is based on genetically engineered hemoglobin molecules. The company also
decided to exit certain non-strategic investments, primarily in Asia, and
reorganize certain other activities. As a result of these decisions, the company
recorded a $122 million pretax charge in 1998. Included in the total charge was
a $74 million charge to write down certain assets to estimated sales or salvage
value due to impairment. The majority of the asset writedowns related to
machinery and equipment located in a manufacturing facility in Neuchatel,
Switzerland, that were used solely in the development and manufacture of
HemAssist (DCLHb), and had no alternative future use. Activities ceased upon the
decision to end the clinical development of HemAssist (DCLHb). In 1999, the
company began modifications to this manufacturing facility, which was designed
to manufacture a human hemoglobin product, to produce recombinant
biopharmaceutical products. Such alternate production is expected to commence at
the Neuchatel facility in the next two years.
The following is a summary of the components of the remainder of the charge and
the utilization of such reserves.
as of or for the years ended Employee- Other
December 31 (in millions) related costs costs Total
- ---------------------------------------------------------------------
Original charge $ 34 $ 14 $ 48
1998 utilization (12) (6) (18)
1999 utilization (16) (7) (23)
2000 utilization (4) - (4)
- --------------------------------------------------------------------
Reserves at December 31, 2000 $ 2 $ 1 $ 3
============================
Employee-related costs consisted principally of employee severance resulting
from the elimination of approximately 375 positions worldwide. The headcount
reductions affected various functions and pertained principally to the
BioScience and Medication Delivery segments. Approximately 360 positions have
been eliminated through December 31, 2000. The other costs related principally
to contractual obligations that existed prior to the date of the charge that
either continued with no economic benefit or required payment of a cancellation
penalty. The majority of such costs related to the terminated HemAssist (DCLHb)
program and included cancellation costs associated with a minimum purchase
agreement.
[5] Long-Term Debt, Credit Facilities and Lease Obligations
Effective
as of December 31 (in millions) interest rate 2000 1999
- -------------------------------------------------------------------------
Commercial paper 6.4% $ 800 $ 668
Short-term notes 3.5% 513 646
Zero coupon notes
due 2000 (unamortized original
issue discount of $9) 10.3% - 120
8.125% notes due 2001 6.2% 40 155
7.625% notes due 2002 7.5% 46 151
7.125% notes due 2007 7.1% 54 251
7.25% notes due 2008 7.5% 29 198
9.5% notes due 2008 9.5% 75 75
7.65% debentures due 2027 7.6% 5 202
6.625% debentures due 2028 6.7% 147 249
Other 75 16
- ----------------------------------------------------------------------
Total long-term debt and
lease obligations 1,784 2,731
Current portion (58) (130)
- ----------------------------------------------------------------------
Long-term portion $ 1,726 $ 2,601
===========================
In order to better match the currency denomination of its assets and
liabilities, the company rebalanced certain of its debt during 2000. The company
acquired approximately $878 million of its U.S. Dollar denominated debt
securities during 2000 and increased its Japanese Yen and Euro denominated debt.
The net costs associated with the early termination of the U.S. Dollar
denominated debt of $15 million were recorded in other expense as they were not
material. The increase in debt denominated in Japanese Yen and Euro was
classified in short-term debt as of December 31, 2000. Management intends to
replace the majority of this short-term debt with long-term debt during 2001.
The company leases certain facilities and equipment under capital and operating
leases expiring at various dates. Most of the operating leases contain renewal
options. Rent expense under operating leases was $99 million, $91 million and
$79 million in 2000, 1999 and 1998, respectively.
39
Future minimum lease payments and debt maturities
Aggregate debt
maturities
as of and for the years ended Operating and capital
December 31 (in millions) leases leases
- ---------------------------------------------------------------------
2001 $ 82 $ 62
2002 66 50
2003 52 1,336/1/
2004 42 3
2005 36 2
Thereafter 70 341
- ---------------------------------------------------------------------
Total obligations and commitments $ 348 1,794
-------------------------
Amounts representing interest,
discounts, premiums and deferred
financing costs (10)
- ---------------------------------------------------------------------
Total long-term debt and present
value of lease obligations $ 1,784
=========================
1. Includes approximately $1.3 billion of commercial paper and short-term notes
supported by long-term credit facilities expiring in 2003.
The company maintains two revolving credit facilities, which total $1.5 billion.
Of this total, $700 million will expire in 2001 and $800 million will expire in
2003. The facilities enable the company to borrow funds in U.S. Dollars or Euros
on an unsecured basis at variable interest rates and contain various covenants,
including a maximum debt-to-capital ratio and a minimum interest coverage ratio.
There were no borrowings outstanding under these facilities at December 31, 2000
or 1999. Baxter also maintains or guarantees other short-term credit
arrangements which totaled approximately $418 million at December 31, 2000.
Approximately $61 million and $93 million of borrowings were outstanding under
these facilities at December 31, 2000 and 1999, respectively.
During 1998, a wholly-owned subsidiary of the company entered into an $800
million revolving credit facility, which expires in 2003 and enables the
subsidiary to borrow funds at variable interest rates. The agreement contains
various covenants, including a minimum interest coverage ratio, a maximum
debt-to-adjusted earnings ratio and a minimum adjusted net worth amount. There
were $513 million and $596 million in borrowings outstanding under this facility
at December 31, 2000 and 1999, respectively, and they were denominated in Swiss
Francs. These borrowings are secured and guaranteed by a pledge of the shares of
the borrower and certain of its subsidiaries.
At December 31, 2000 and 1999, commercial paper and short-term notes together
totaling approximately $1.3 billion have been classified with long-term debt as
they are supported by the long-term credit facilities discussed above, which
management intends to continue to refinance.
[6] Financial Instruments and Risk Management
Accounts receivable
In the normal course of business, the company provides credit to customers in
the health-care industry, performs credit evaluations of these customers and
maintains reserves for potential credit losses which, when realized, have been
within the range of management's allowance for doubtful accounts. The allowance
for doubtful accounts was $43 million and $34 million at December 31, 2000 and
1999, respectively.
In order to reduce its overall financing costs, the company periodically sells
its trade accounts receivable. In 2000, the company generated net operating cash
inflows of approximately $195 million relating to such sales. Under the terms of
the sales arrangements, the company has the ability to sell certain accounts
receivable on an ongoing basis, continues to service the sold receivables, and
is subject to recourse provisions. Management believes the company is adequately
reserved with respect to the recourse provisions. In 2000, proceeds from new
sales totaled approximately $1.5 billion and cash collections reinvested totaled
approximately $1.3 billion. The portfolio of accounts receivable that the
company services totaled approximately $590 million at December 31, 2000. The
net gains and losses recognized upon sale of the receivables, amounts relating
to the company's servicing of the receivables, and delinquencies were not
material to the consolidated financial statements.
Other concentrations of risk
The company invests the majority of its excess cash in certificates of deposit
or money market accounts and, where appropriate, diversifies the concentration
of cash among different financial institutions. With respect to financial
instruments, where appropriate, the company has diversified its selection of
counterparties, and has arranged collateralization and master-netting agreements
to minimize the risk of loss.
Interest rate risk management
Baxter uses interest rate swaps generally from less than one year to three years
in duration to manage the company's exposure to adverse movements in interest
rates. The book values of debt at December 31, 2000 and 1999 reflect deferred
hedge gains of $2 million and $11 million, respectively, offset by $2 million of
deferred hedge losses at December 31, 1999.
Foreign exchange risk management
The company enters into various types of foreign exchange contracts to protect
the company from risks associated with the fluctuation in currency exchange
rates. The company principally enters into foreign currency option and forward
contracts, with terms generally less than three years, to hedge firm commitments
and anticipated but not yet committed sales expected to be
40
denominated in foreign currencies. Deferred hedging gains on hedges of
anticipated but not yet committed sales totaled $20 million and $7 million at
December 31, 2000 and 1999, respectively. The company also enters into foreign
currency forward agreements to hedge certain receivables and payables
denominated in foreign currencies. The company principally hedges the following
currencies: Japanese Yen, Euro, British Pound and Swiss Franc.
The company also enters into cross-currency swap agreements, with original
maturities up to 10 years, to hedge certain of its net investments in foreign
affiliates. In conjunction with the company's rebalancing of its debt portfolio
and in anticipation of the adoption of SFAS No. 133, certain of such contracts
were terminated in 2000, and a gain was recognized in other income. Refer to
Note 10 for further information. In order to hedge certain of its net
investments in foreign affiliates in the future, the company plans to designate
a portion of its debt denominated in foreign currencies as hedges of these net
investments, as well as use cross-currency swap agreements.
Interest rate and foreign exchange contracts
2000 1999
-------------------------------------------------------------
Notional Market Notional Market
as of December 31 (in millions) amounts values amounts values
- ---------------------------------------------------------------------------------------------------------
Interest rate contracts
Floating to fixed rate swaps $ 100 $ - $ 300 $ 3
Average pay rate 5.1% in
2000 and 7.4% in 1999
Average receive rate 6.3% in
2000 and 5.8% in 1999
=========================================================================================================
Foreign exchange contracts
Forwards and options used to
hedge firm commitments
and anticipated sales
Japanese Yen $ 578 $ 26 $ 483 $ (1)
Euro 439 12 610 15
Other currencies 69 2 34 1
- ---------------------------------------------------------------------------------------------------------
Total $1,086 $ 40 $ 1,127 $ 15
- ---------------------------------------------------------------------------------------------------------
Forwards and swaps used to
hedge net investments in
foreign affiliates
Japanese Yen $ 115 $ (6) $ 315 $ (113)
Euro 650 (64) 2,650 175
Other currencies 68 (3) 15 -
- ---------------------------------------------------------------------------------------------------------
Total $ 833 $ (73) $ 2,980 $ 62
- ---------------------------------------------------------------------------------------------------------
Forwards used to hedge certain
receivables and payables
(primarily Japanese Yen,
Euro and Swiss Franc) $ 21 $ 14 $ 58 $ -
- ---------------------------------------------------------------------------------------------------------
Equity risk management
In order to partially offset the potentially dilutive effect of employee stock
options, the company has entered into forward agreements with independent third
parties related to the company's common stock. The forward agreements require
the company to purchase its common stock from the counterparties on specified
future dates and at specified prices. The company can, at its option, require
settlement of the agreements with shares of its common stock or, in some cases,
cash, in lieu of physical settlement. The company may, at its option, terminate
and settle these agreements early at any time before maturity. At December 31,
2000, agreements related to approximately 2.5 million shares mature in 2001 at
an average exercise price of approximately $58 per share and agreements related
to approximately 3.7 million shares mature in 2002 at exercise prices ranging
from $70 to $78 per share. At December 31, 1999, agreements related to
approximately 7.0 million shares were outstanding.
In connection with the company's stock repurchase program, during 2000 the
company issued put options and purchased call options on shares of its common
stock. The put options give the purchaser the right to sell Baxter common stock
to the company at contractually specified prices. The call options give the
company the right to purchase Baxter common stock at contractually specified
prices. The agreements were executed with independent third parties, and the
cost of the call options was offset by the premium from the put options. The
company can, at its option, require settlement of the agreements with shares of
its common stock or, in some cases, cash, in lieu of physical settlement. The
company may, at its option, terminate and settle these agreements at any time
before maturity. In conjunction with its stock repurchase program, the company
terminated certain of these contracts during the 2000. At December 31, 2000, put
options for approximately 1.5 million shares of common stock and call options
for approximately 1.0 million shares of common stock were outstanding. The
exercise prices of the outstanding put options were $56 per share and the
exercise prices of the outstanding call options were $62 per share. The
contracts mature in 2001.
41
The following is a summary of the carrying amounts and approximate fair
values of the company's financial instruments included in the consolidated
balance sheets.
Fair values of financial instruments
Approximate
as of December 31 Carrying amounts fair values
---------------- ----------------
(in millions) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------
Assets
Long-term insurance
receivables $ 160 $ 301 $ 145 $ 248
Investments in affiliates 195 145 312 158
Foreign exchange hedges 65 20 51 15
Liabilities
Short-term debt 576 125 576 125
Short-term borrowings
classified as long term/1/ 1,313 1,314 1,313 1,311
Other long-term debt
and lease obligations/2/ 471 1,417 487 1,326
Long-term litigation
liabilities 184 273 170 237
=============================================================================================
1. Includes interest rate hedging instruments
2. Includes swaps used to hedge net investments in foreign affiliates.
The fair values of certain of the investments in affiliates are not readily
determinable as the investments are not traded in a market. For these
investments, fair value is assumed to approximate carrying value. With respect
to the approximate fair values of the company's unrestricted marketable
investments in affiliates, the total net unrealized gain at December 31, 2000
consists of gross unrealized gains of $50 million net of gross unrealized losses
of $9 million, and the total at December 31, 1999 consists of gross unrealized
gains of $7 million net of gross unrealized losses of $2 million. Although the
company's litigation remains unresolved by final orders or settlement agreements
in some cases, 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. The approximate fair values of other
assets and liabilities are based on quoted market prices, where available.
The carrying values of all other financial instruments approximate their fair
values due to the short-term maturities of these assets and liabilities.
7 Accounts Payable and Accrued Liabilities
as of December 31 (in millions) 2000 1999
- ----------------------------------------------------------
Accounts payable, principally trade $ 659 $ 612
Employee compensation and withholdings 238 260
Litigation 177 183
Pension and other deferred benefits 17 40
Property, payroll and other taxes 77 105
Other 822 605
- ----------------------------------------------------------
Accounts payable and accrued liabilities $1,990 $1,805
===============
8 Common and Preferred Stock
Baxter has several stock-based compensation plans, which are described below.
The company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans. No
compensation cost has been recognized for fixed stock option plans and stock
purchase plans. The compensation expense recognized for continuing operations
for performance-based, restricted and other stock plans was $23 million, $26
million and $15 million in 2000, 1999 and 1998, respectively. Had compensation
cost for all of the company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method of SFAS
No. 123, "Accounting for Stock-Based Compensation," the company's net income and
related earnings per share (EPS) would have been reduced to the pro forma
amounts indicated below.
Pro forma net income and EPS
years ended December 31
(in millions, except per share data) 2000 1999 1998
- -------------------------------------------------------------------
Pro forma net income $ 68 $ 746 $ 262
Pro forma basic EPS $ 2.33 $ 2.57 $ .92
Pro forma diluted EPS $ 2.29 $ 2.54 $ .91
============================
Pro forma compensation expense for stock options and employee-stock
subscriptions was calculated using the Black-Scholes model.
All outstanding options were modified as a result of the spin-off of Edwards.
Equitable adjustments were made to the number of shares and exercise price for
each option and employee stock subscription outstanding.
Fixed stock option plans
Stock options have been granted at various dates. All
grants have a 10-year initial term and have an exercise price at least equal to
100% of market value on the date of grant. Vesting terms vary, with most
outstanding options vesting 100% in one year or 100% in three years.
Stock options outstanding at December 31, 2000
(option shares in thousands)
Options outstanding Options exercisable
- ---------------------------------------------------------------------------------------------------------
Weighted-
average
remaining Weighted- Weighted-
Range of contractual average average
exercise life exercise exercise
prices Outstanding (years) price Exercisable price
- ---------------------------------------------------------------------------------------------------------
$20-39 2,495 3.5 $ 29.42 2,495 $ 29.42
40-49 4,583 6.2 45.45 4,583 45.45
50-59 5,934 8.1 54.72 247 53.87
60-79 4,556 8.2 64.53 - -
80-83 6,933 9.8 82.53 - -
- ---------------------------------------------------------------------------------------------------------
$20-83 24,501 7.8 $ 60.21 7,325 $ 40.66
=========================================================================================================
As of December 31, 1999 and 1998, there were 8,755,000 and 4,565,000 options
exercisable, respectively, at weighted-average exercise prices of $41.06 and
$30.27, respectively.
42
Stock option activity
Weighted-
average
exercise
(option shares in thousands) Shares price
- -------------------------------------------------------------------------
Options outstanding at January 1, 1998 13,882 $ 39.64
Granted 4,806 59.83
Exercised (1,728) 28.69
Forfeited (587) 49.51
- -------------------------------------------------------------------------
Options outstanding at December 31, 1998 16,373 46.37
Granted 5,013 66.73
Exercised (1,958) 39.18
Forfeited (619) 56.73
- -------------------------------------------------------------------------
Options outstanding at December 31, 1999 18,809 52.20
Granted 9,520 75.32
Exercised (2,853) 39.47
Forfeited (1,921) 57.81
Equitable adjustment 946 -
- -------------------------------------------------------------------------
Options outstanding at December 31, 2000 24,501 $ 60.21
========================
Included in the tables above are certain premium-priced options. During 1998,
approximately 470,000 premium-priced stock options were granted with a
weighted-average exercise price of $73 and a weighted-average fair value of
approximately $13 per option. During 1996, approximately 2.5 million
premium-stock options were granted with an exercise price of $49 and a
weighted-average fair value of approximately $11 per option. All of such options
granted in 1998 and 1.4 million of such options granted in 1996 are outstanding
at December 31, 2000.
Pro forma compensation expense was calculated with the following weighted-
average assumptions for grants in 2000, 1999 and 1998, respectively: dividend
yield of 1.25%, 1.5% and 1.5%; expected life of six years for all periods;
expected volatility of 31%, 29% and 29%; and risk-free interest rates of 6.1%,
5.4% and 5.3%. The weighted-average fair value of options granted during the
year were $27.49, $22.59 and $18.58 in 2000, 1999 and 1998, respectively.
Employees of Edwards were required to exercise any vested options within 90
days from the date of spin-off, which occurred on March 31, 2000. All unvested
options were canceled 90 days after the date of spin-off.
Employee stock purchase plans
The company has employee stock purchase plans whereby it is authorized, as of
December 31, 2000, to issue up to 10 million shares of common stock to its
employees, nearly all of whom are eligible to participate. The purchase price is
the lower of 85 percent of the closing market price on the date of subscription
or 85 percent of the closing market price as defined by the plans. The total
subscription amount for each participant cannot exceed 25 percent of current
annual pay. Under the plans, the company sold 1,387,022 and 777,618 and 810,855
shares to employees in 2000, 1999 and 1998, respectively. Pro forma compensation
expense was estimated with the following weighted-average assumptions for 2000,
1999 and 1998, respectively: dividend yield of 1.4%, 1.5% and 1.5%: expected
volatility of 33% for all periods, and risk-free interest rates of 6.2%, 5.4%
and 4.4%. The weighted-average fair value of those purchase rights granted in
2000, 1999 and 1998 was $22.98, $20.09 and $15.16, respectively.
Restricted stock and performance-share plans
The long-term incentive plan includes both stock options and restricted stock.
Under the plan, grants of restricted stock are generally made annually and are
earned based on the achievement of financial performance targets. The restricted
stock component of the long-term incentive plan is being eliminated effective in
2001 and, instead, a greater number of stock options will be granted to
participants in the plan with terms and conditions similar to existing stock
option plans. The year 2000 was a transition year whereby most participants in
the plan elected to receive incremental stock options and were no longer
eligible to earn restricted stock. The number of stock options granted pursuant
to the revised plan is based on the achievement of financial performance
objectives.
The company also has other incentive compensation plans whereby grants of
restricted stock and performance shares are made to key employees and
non-employee directors. At December 31, 2000, approximately 84,000 shares of
stock were subject to restrictions, the majority of which lapse in 2001 and
2002. During 2000, 1999 and 1998, approximately 249,500, 542,500 and 242,700
shares, respectively, of restricted stock and performance shares were granted at
weighted-average grant-date fair values of $65.75, $63.99 and $58.74 per share,
respectively. The majority of the restricted stock granted in 2000 was forfeited
pursuant to the long-term incentive plan transition discussed above.
Shared Investment Plan
In 1999, the company sold approximately 3.1 million shares of the company's
common stock to 142 of Baxter's senior managers for approximately $198 million
in cash. This plan directly aligns management and shareholder interests. The
Baxter managers used full-recourse personal bank loans to purchase the stock at
the May 3, 1999 closing price of $63.63. Baxter has agreed to guarantee
repayment to the banks in the event of default by a participant in the plan. The
total outstanding participant loan amount at December 31, 2000 was $188 million.
Stock repurchase programs
In November 1995, the company's board of directors authorized the repurchase of
up to $500 million of common stock over a period of several years, all of which
was repurchased by early 2000. In November 1999, the board of directors
authorized the repurchase of an additional $500 million over a period of several
years, of which approximately two-thirds has been repurchased as of December 31,
2000.
Other
Approximately 100 million shares of no par value preferred stock are authorized
for issuance in series with varying terms as determined by the board of
directors.
43
In March 1999, common stockholders received a dividend of one preferred stock
purchase right (collectively, the Rights) for each share of common stock. These
Rights replaced similar rights that expired in March 1999. The Rights may become
exercisable at a specified time after (1) a person or group acquires 15 percent
or more of the company's common stock or (2) a tender or exchange offer for 15
percent or more of the company's common stock. Once exercisable, the holder of
each Right is entitled to purchase, upon payment of the exercise price, shares
of the company's common stock having a market value equal to two times the
exercise price of the Rights. The Rights have a current exercise price of $275.
The Rights expire on March 23, 2009, unless earlier redeemed by the company
under certain circumstances at a price of $0.01 per Right.
[9] Retirement and Other Benefit Programs
The company sponsors several qualified and nonqualified pension plans for its
employees. The company also sponsors certain unfunded contributory health-care
and life insurance benefits for substantially all domestic retired employees.
Reconciliation of plans' benefit obligations,
assets and funded status
as of and for the years Pension benefits Other benefits
----------------- ----------------
ended December 31 (in millions) 2000 1999 2000 1999
- ---------------------------------------------------------------------------
Benefit obligations
Beginning of year $1,344 $1,427 $ 175 $ 200
Service cost 41 48 3 3
Interest cost 113 102 14 12
Participant contributions 2 2 3 3
Actuarial loss (gain) 147 (148) 35 (30)
Acquisitions (divestitures), net (10) 1 - -
Curtailments and settlements (10) (7) - (3)
Benefit payments (78) (76) (11) (11)
Currency exchange-rate
changes and other 6 (5) - 1
- ---------------------------------------------------------------------------
End of year 1,555 1,344 219 175
- ---------------------------------------------------------------------------
Fair value of plan assets
Beginning of year 1,724 1,472 - -
Actual return on plan assets 173 302 - -
Employer contributions 19 13 8 8
Participant contributions 2 2 3 3
Acquisitions (divestitures), net (8) 11 - -
Curtailments and settlements (11) - - -
Benefit payments (78) (76) (11) (11)
Currency exchange-rate
changes and other (14) - - -
- ---------------------------------------------------------------------------
End of year 1,807 1,724 - -
- ---------------------------------------------------------------------------
Funded status
Funded status at December 31 252 380 (219) (175)
Unrecognized
transition obligation 4 9 - -
Unrecognized net gains (252) (390) (56) (98)
Unrecognized prior-service cost - (3) - -
- ---------------------------------------------------------------------------
Net amount recognized $ 4 $ (4) $ (275) $ (273)
- ---------------------------------------------------------------------------
Prepaid benefit cost $ 143 $ 121 $ - $ -
Accrued benefit liability (139) (125) (275) (273)
- ---------------------------------------------------------------------------
Net amount recognized $ 4 $ (4) $ (275) $ (273)
===========================================================================
Assets held by the trusts of the plans consist primarily of equity securities.
The accumulated benefit obligation is in excess of plan assets for certain of
the company's pension plans. The projected benefit obligation, accumulated
benefit obligation, and fair value of plan assets for these plans was $159
million, $142 million and $17 million, respectively, at December 31, 2000, and
$140 million, $128 million and $23 million, respectively, at December 31, 1999.
Net periodic benefit cost
years ended December 31 (in millions) 2000 1999 1998
- -------------------------------------------------------------------------
Pension benefits
Service cost $ 41 $ 48 $ 41
Interest cost 113 102 96
Expected return on plan assets (159) (133) (117)
Amortization of prior service cost - 1 1
Amortization of transition obligation 5 6 6
- -------------------------------------------------------------------------
Net periodic pension benefit cost $ - $ 24 $ 27
=========================
Other benefits
Service cost $ 3 $ 3 $ 3
Interest cost 14 12 14
Recognized actuarial gain (7) (7) (6)
- -------------------------------------------------------------------------
Net periodic other benefit cost $ 10 $ 8 $ 11
=========================
The net periodic benefit cost amounts principally pertain to continuing
operations.
Assumptions used in determining benefit obligations
Pension benefits Other benefits
------------------ ----------------
2000 1999 2000 1999
- -----------------------------------------------------------------------------
Discount rate
U.S. and Puerto Rico plans 7.75% 8.25% 7.75% 8.25%
International plans (average) 5.8% 5.7% n/a n/a
Expected return on plan assets
U.S. and Puerto Rico plans 11.0% 10.5% n/a n/a
International plans (average) 8.1% 6.9% n/a n/a
Rate of compensation increase
U.S. and Puerto Rico plans 4.5% 4.5% n/a n/a
International plans (average) 4.0% 4.1% n/a n/a
Annual rate of increase in the
per-capita cost n/a n/a 7.5% 7.5%
Rate decreased to n/a n/a 5.5% 5.5%
by the year ended n/a n/a 2003 2002
=============================================================================
Effect of a one-percent change in assumed health-care cost trend rate
One percent One percent
increase decrease
------------- -------------
(in millions) 2000 1999 2000 1999
- ---------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 3 $ 2 $ 2 $ 2
Effect on postretirement
benefit obligation $ 29 $ 21 $ 24 $ 18
===========================================================================
44
With respect to the employees of Edwards, the company froze benefits at the date
of spin-off under the U.S. defined benefit pension plan and under plans that
provide retirees with health-care and life insurance benefits. The pension
liabilities related to such employees' service prior to the spin-off date remain
with Baxter. Included in net costs associated with effecting the business
distribution in 1999 was a $5 million gain (net of tax of $4 million) relating
to these benefit plan curtailments. Most U.S. employees are eligible to
participate in a qualified defined contribution plan. Company matching
contributions relating to continuing operations were $15 million, $14 million
and $14 million in 2000, 1999 and 1998, respectively.
10 Interest and Other (Income) Expense
Interest expense, net
years ended December 31 (in millions) 2000 1999 1998
- ---------------------------------------------------------------------------
Interest expense, net
Interest costs $ 146 $ 165 $ 198
Interest costs capitalized (15) (13) (5)
- ---------------------------------------------------------------------------
Interest expense 131 152 193
Interest income (39) (35) (32)
- ---------------------------------------------------------------------------
Total interest expense, net $ 92 $ 117 $ 161
- ---------------------------------------------------------------------------
Allocated to discontinued operation $ 7 $ 30 $ 37
Allocated to continuing operations $ 85 $ 87 $ 124
============================
The allocation of interest to continuing and discontinued operations was based
on relative net assets of these operations.
Other (income) expense
years ended December 31 (in millions) 2000 1999 1998
- ---------------------------------------------------------------------
Equity in losses of affiliates
and minority interests $ 9 $ 5 $ 3
Asset dispositions, net 6 13 (23)
Foreign currency (57) (8) -
Loss on early extinguishments of debt 15 - -
Other 7 1 2
- ---------------------------------------------------------------------
Total other (income) expense $ (20) $ 11 $ (18)
==========================
Included in foreign currency income in 2000 was approximately $66 million of
gains associated with the termination of cross-currency swap agreements, as
further discussed in Note 6.
11 Income Taxes
U.S. federal income tax returns filed by Baxter International Inc. through
December 31, 1994, have been examined and closed by the Internal Revenue
Service. The company has ongoing audits in U.S. and international jurisdictions.
In the opinion of management, the company has made adequate provisions for tax
expenses for all years subject to examination.
Income before income tax expense by category
years ended December 31 (in millions) 2000 1999 1998
- ----------------------------------------------------------------------------
U.S. $ 353 $ 330 $ 78
International 593 722 415
Income from continuing operations
before income taxes and cumulative
effect of accounting change $ 946 $ 1,052 $ 493
==============================
Income tax expense
years ended December 31 (in millions) 2000 1999 1998
- ----------------------------------------------------------------------------
Current
U.S
Federal $ 142 $ (13) $ 119
State and local 47 38 3
International 189 156 152
- ----------------------------------------------------------------------------
Current income tax expense 378 181 274
- ----------------------------------------------------------------------------
Deferred
U.S
Federal (98) 69 (3)
State and local (21) 14 5
International (51) 9 (58)
- ----------------------------------------------------------------------------
Deferred income tax expense (benefit) (170) 92 (56)
- ----------------------------------------------------------------------------
Income tax expense $ 208 $ 273 $ 218
==============================
The income tax for continuing operations was calculated as if Baxter were a
stand-alone entity (without income from the discontinued operation).
Deferred tax assets and liabilities
years ended December 31 (in millions) 2000 1999 1998
- ----------------------------------------------------------------------------
Deferred tax assets
Accrued expenses $ 374 $ 389 $ 349
Accrued postretirement benefits 102 102 103
Alternative minimum tax credit 146 162 164
Tax credits and net operating losses 92 100 179
Valuation allowances (50) (43) (34)
- ----------------------------------------------------------------------------
Total deferred tax assets 664 710 761
- ----------------------------------------------------------------------------
Deferred tax liabilities
Asset basis differences 410 471 473
Subsidiaries' unremitted earnings 85 160 188
Other 38 35 13
- ----------------------------------------------------------------------------
Total deferred tax liabilities 533 666 674
- ----------------------------------------------------------------------------
Net deferred tax asset $ 131 $ 44 $ 87
==============================
45
Income tax expense rate reconciliation
years ended December 31 (in millions) 2000 1999 1998
- ------------------------------------------------------------------------------
Income tax expense at statutory rate $ 331 $ 368 $ 172
Tax-exempt operations (147) (134) (120)
State and local taxes 9 23 (3)
Repatriation of foreign earnings - - 87
Foreign tax expense 31 18 46
IPR&D expense - - 41
Other factors (16) (2) (5)
- -----------------------------------------------------------------------------
Income tax expense $ 208 $ 273 $ 218
=======================
The company has received a tax-exemption grant from Puerto Rico, which provides
that its manufacturing operations will be partially exempt from local taxes
until the year 2013. Appropriate taxes have been provided for these operations
assuming repatriation of all available earnings. In addition, the company has
other manufacturing operations outside the United States, which benefit from
reductions in local tax rates under tax incentives that will continue at least
until 2002.
U.S. federal income taxes, net of available foreign tax credits, on
unremitted earnings deemed permanently reinvested would be approximately $424
million as of December 31, 2000.
[12] Legal Proceedings, Commitments and Contingencies
Baxter International Inc. and certain of its subsidiaries are named as
defendants in a number of lawsuits, claims and proceedings, including product
liability claims involving products now or formerly manufactured or sold by the
company or by companies that were acquired by the company. These cases and
claims 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 and claim, the jurisdiction in which
each suit is brought, and differences in applicable law. Accordingly, in many
cases, the company is not able to estimate the amount of its liabilities with
respect to such matters.
Upon resolution of any pending legal matters, Baxter 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 and net cash flows in the
period in which it is recorded or paid, management believes that no such charge
would have a material adverse effect on Baxter's consolidated financial
position.
Following is a summary of certain legal matters pending against the company.
For a more extensive description of such matters and other lawsuits, claims and
proceedings against the company, see Baxter's Form 10-K for the year ended
December 31, 2000.
Mammary implant litigation
The company, together with certain of its subsidiaries, is a defendant in
various courts in a number of lawsuits brought by individuals, all seeking
damages for injuries of various types allegedly caused by silicone mammary
implants formerly manufactured by the Heyer-Schulte division (Heyer-Schulte) of
American Hospital Supply Corporation (AHSC). AHSC, which was acquired by the
company in 1985, divested its Heyer-Schulte division in 1984.
Settlement of a class action on behalf of all women with silicone mammary
implants was approved by the U.S. District Court (U.S.D.C.) for the Northern
District of Alabama in December 1995. The monetary provisions of the settlement
provide compensation for all present and future plaintiffs and claimants through
a series of specific funds and a disease- compensation program involving certain
specified medical conditions. In addition to the class action, there are a large
number of individual suits currently pending against the company, primarily
consisting of plaintiffs who have opted out of the class action.
The mammary implant litigation includes issues related to which of Baxter's
insurers are responsible for covering each matter and the extent of the
company's claims for contribution against third parties. Baxter believes that a
substantial portion of its liability and defense costs for mammary implant
litigation will be covered by insurance, subject to self-insurance retentions,
exclusions, conditions, coverage gaps, policy limits and insurer solvency.
Plasma-based therapies litigation
Baxter is a defendant in a number of claims
and lawsuits brought by individuals who have hemophilia, all seeking damages for
injuries allegedly caused by antihemophilic factor concentrates VIII or IX
derived from human blood plasma (factor concentrates) processed by the company
from the late 1970s to the mid-1980s. The typical case or claim alleges that the
individual was infected with the HIV virus by factor concentrates, which
contained the HIV virus. None of these cases involves factor concentrates
currently processed by the company.
In addition, Immuno has unsettled claims for damages for injuries allegedly
caused by its plasma-based therapies. A portion of the liability and defense
costs related to these claims will be covered by insurance, subject to
exclusions, conditions, policy limits and other factors. Pursuant to the stock
purchase agreement between the company and Immuno, as revised in April 1999 for
consideration by the company of a 29 million Swiss Franc payment to Immuno as
additional purchase price, approximately 26 million Swiss Francs of the purchase
price is being withheld to cover these contingent liabilities.
Baxter is also a defendant in a number of claims and lawsuits, including one
certified class action in the U.S.D.C. for the Central District of California,
brought by individuals who infused the company's Gammagard(R) IVIG (intravenous
immunoglobulin), all of whom are seeking damages for Hepatitis C infections
allegedly
46
caused by infusing Gammagard(R) IVIG. In September 2000, the U.S. D.C. for the
Central District of California approved a settlement of the class action that
would provide financial compensation for U.S. individuals who used Gammagard(R)
IVIG between January 1993 and February 1994.
Baxter believes that a substantial portion of the liability and defense costs
related to its plasma-based therapies litigation will be covered by insurance,
subject to self-insurance retentions, exclusions, conditions, coverage gaps,
policy limits and insurer solvency.
Net litigation charges
Baxter began accruing for its estimated liability resulting from the settlement
of the mammary implant-related class action and to litigate or settle cases and
claims involving opt-outs in 1993. In 1998, the company accrued an additional
$250 million for its estimated liability resulting from the class action
settlement and remaining opt-out cases and claims, and recorded a receivable for
related estimated insurance recoveries of $121 million, resulting in an
additional net charge of $129 million.
Baxter began accruing for its estimated worldwide liability for litigation and
settlement costs involving plasma-based therapies in 1993. The company revised
its estimate of liabilities and insurance recoveries in 1998, and accrued an
additional $180 million for its estimated liability for plasma-based therapies
litigation and other litigation and recorded a receivable for related estimated
insurance recoveries of $131 million, for a net charge of $49 million.
In 2000, the company recorded $29 million of income relating to its mammary
implant and plasma-based therapies litigation. The income was principally a
result of favorable adjustments to the mammary implant insurance receivables due
to settlements negotiated with certain insurance companies during 2000.
Other
Allegiance Corporation (Allegiance) was spun off from the company in a
tax-free distribution to shareholders on September 30, 1996. As of September 30,
1996, Allegiance assumed the defense of litigation involving claims related to
its businesses, including certain claims of alleged personal injuries as a
result of exposure to natural rubber latex gloves. Although Allegiance has not
been named in all of this litigation, it will be defending and indemnifying
Baxter pursuant to certain contractual obligations for all expenses and
potential liabilities associated with claims pertaining to latex gloves.
In addition to the cases discussed above, Baxter is a defendant in a number of
other claims, investigations and lawsuits, including certain environmental
proceedings. Based on the advice of counsel, management does not believe that,
individually or in the aggregate, these other claims, investigations and
lawsuits will have a material adverse effect on the company's results of
operations, cash flows or consolidated financial position.
In November 1999, the company and Nexell Therapeutics Inc. (Nexell) entered
into an agreement whereby Baxter agreed to issue put rights in connection with a
$63 million private placement by Nexell of preferred stock. This preferred stock
is convertible at the option of the holders into common stock of Nexell at $11
per share at any time until November 2006. The put rights provide the holders of
the preferred stock with the ability to cause Baxter to purchase the preferred
stock from November 2002 until November 2004. The purchase price to be paid by
Baxter would reflect a per annum compounded return to the holders of the
preferred stock of 5.91%.
In connection with the spin-off of its cardiovascular business, Baxter
obtained a ruling from the Internal Revenue Service to the effect that the
distribution should qualify as a tax-free spin-off in the United States. In many
countries throughout the world, Baxter has not sought similar rulings from the
local tax authorities and has taken the position that the spin-off was a tax-
free event to Baxter. In the event that one or more countries' taxing
authorities successfully challenge this position, Baxter would be liable for any
resulting liability. Baxter believes that it has established adequate reserves
to cover the expected tax liabilities. There can be no assurance, however, that
Baxter will not incur losses in excess of such reserves.
[13] Segment Information
Baxter operates in three segments, each of which are strategic businesses that
are managed separately because each business develops, manufactures and sells
distinct products and services. The segments are as follows: Medication
Delivery, medication delivery products and services, including intravenous
infusion pumps and solutions, anesthesia-delivery devices and pharmaceutical
agents; BioScience, biopharmaceutical and blood-collection, separation and
storage products and technologies; and Renal, products and services to treat
end-stage kidney disease. As discussed in Note 2, the company spun off Edwards
on March 31, 2000. Financial information for Edwards, which is substantially the
same as the former CardioVascular segment, is reflected in the consolidated
financial statements as a discontinued operation.
Management utilizes more than one measurement and multiple views of data to
measure segment performance and to allocate resources to the segments. However,
the dominant measurements are consistent with the company's consolidated
financial statements and, accordingly, are reported on the same basis herein.
Management evaluates the performance of its segments and allocates resources to
them primarily based on pretax income along with cash flows and overall economic
returns. Intersegment sales are generally accounted for at amounts comparable to
sales to unaffiliated customers, and are eliminated in consolidation. The
accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies, as discussed in
Note 1.
Certain items are maintained at the company's corporate headquarters
(Corporate) and are not allocated to the segments. They primarily include most
of the company's debt and cash and equivalents and related net interest expense,
corporate headquarters costs, certain non-strategic investments and
47
nonrecurring gains and losses, deferred income taxes, certain foreign currency
fluctuations, hedging activities, and certain litigation liabilities and related
insurance receivables. With respect to depreciation and amortization, and
expenditures for long-lived assets, the difference between the segment totals
and the consolidated totals principally related to assets maintained at
Corporate.
Segment information
as of and for the years ended December 31 (in millions)
Medication
Delivery BioScience Renal Other Total
- ---------------------------------------------------------------------------
2000
Net sales $2,719 $2,353 $1,824 $ - $6,896
Depreciation
and amortization 147 125 96 37 405
Pretax income 426 533 310 (323) 946
Assets 2,453 2,935 1,591 1,754 8,733
Expenditures for
long-lived assets 185 248 126 89 648
- ---------------------------------------------------------------------------
1999
Net sales $2,524 $2,176 $1,680 $ - $6,380
Depreciation
and amortization 145 114 81 32 372
Pretax income 424 435 318 (125) 1,052
Assets 2,447 2,632 1,342 3,223 9,644
Expenditures for
long-lived assets 175 235 125 96 631
- ---------------------------------------------------------------------------
1998
Net sales $2,314 $1,862 $1,530 $ - $5,706
Depreciation
and amortization 137 101 81 25 344
Pretax income 392 404 223 (526) 493
Assets 2,257 2,655 1,353 3,608 9,873
Expenditures for
long-lived assets 146 212 129 69 556
- ---------------------------------------------------------------------------
Pretax income reconciliation
for the years ended
December 31 (in millions) 2000 1999 1998
- ---------------------------------------------------------------------------
Total pretax income from segments $ 1,269 $ 1,177 $ 1,019
Unallocated amounts:
In-process research and
development expense and
acquisition-related costs (286) - (116)
Charge for exit and other
reorganization costs - - (122)
Net litigation income (costs) 29 - (178)
Interest expense, net (85) (87) (124)
Certain currency exchange
rate fluctuations 15 25 27
Other Corporate items 4 (63) (13)
- ---------------------------------------------------------------------------
Consolidated income from continuing
operations before income taxes
and cumulative effect of
accounting change $ 946 $ 1,052 $ 493
==============================
Assets reconciliation
as of December 31 (in millions) 2000 1999 1998
- ------------------------------------------------------------------------
Total segment assets $6,979 $6,421 $6,265
Unallocated assets
Cash and equivalents 579 606 709
Deferred income taxes 308 417 583
Insurance receivables 277 417 639
Net assets of discontinued operation - 1,231 1,275
Other Corporate assets 590 552 402
- ------------------------------------------------------------------------
Consolidated total assets $8,733 $9,644 $9,873
==========================
Geographic information
Net sales are based on product shipment destination and long-lived assets are
based on physical location.
as of and for the years ended
December 31 (in millions) 2000 1999 1998
- ---------------------------------------------------------
Net sales
United States $3,194 $2,921 $2,609
Japan 485 482 405
Other countries 3,217 2,977 2,692
- ---------------------------------------------------------
Consolidated net sales $6,896 $6,380 $5,706
========================
Long-lived assets
United States $1,543 $1,361 $1,250
Austria 294 344 326
Other countries 970 945 869
- ---------------------------------------------------------
Consolidated long-lived assets $2,807 $2,650 $2,445
========================
[14] Subsequent Event
On February 27, 2001, Baxter's board of directors approved a 2 for 1 stock split
of the company's common shares. This approval is subject to shareholder approval
of the authorization of additional shares at the company's annual meeting to be
held on May 1, 2001.
Baxter's historical earnings per share for the years ended December 31, on a
pro forma basis assuming the stock split had occurred as of January 1, 1998,
would be as follows (unaudited).
2000 1999 1998
- -----------------------------------------------------------------
Pro forma earnings per basic
common share
Continuing operations $ 1.26 $ 1.35 $ 0.49
Discontinued operation 0.01 0.08 0.07
Cumulative effect of
accounting change - (0.05) -
- -----------------------------------------------------------------
Net income $ 1.27 $ 1.38 $ 0.56
=========================
Pro forma earnings per diluted
common share
Continuing operations $ 1.23 $ 1.32 $ 0.48
Discontinued operation 0.01 0.08 0.07
Cumulative effect of
accounting change - (0.05) -
- -----------------------------------------------------------------
Net income $ 1.24 $ 1.35 $ 0.55
=========================
48
15 Quarterly Financial Results and Market for the Company's Stock (Unaudited)
First Second Third Fourth Total
years ended December 31 (in millions, except per share data) quarter quarter quarter quarter year
- --------------------------------------------------------------------------------------------------------------------------------
2000
Net sales $ 1,583 $ 1,694 $ 1,687 $ 1,932 $ 6,896
Gross profit 687 747 762 867 3,063
Income from continuing operations/1/ 191 46 231 270 738
Net income/1/ 191 48 231 270 740
Per common share
Income from continuing operations/1/
Basic .66 .15 .78 .92 2.52
Diluted .65 .15 .77 .90 2.47
Net income/1/
Basic .66 .16 .78 .92 2.53
Diluted .65 .16 .77 .90 2.48
Dividends declared - - - 1.164 1.164
Market price
High 67.56 72.00 84.75 88.62 88.62
Low 51.81 56.44 69.50 75.75 51.81
- --------------------------------------------------------------------------------------------------------------------------------
1999
Net sales $ 1,462 $ 1,560 $ 1,589 $ 1,769 $ 6,380
Gross profit 625 690 713 784 2,812
Income from continuing operations before cumulative
effect of accounting change 162 189 197 231 779
Net income/2/ 151 207 210 229 797
Per common share
Income from continuing operations before cumulative
effect of accounting change
Basic .56 .65 .67 .80 2.69
Diluted .55 .64 .67 .78 2.64
Net income/2/
Basic .53 .71 .72 .79 2.75
Diluted .52 .70 .71 .77 2.70
Dividends declared .2910 .2910 .2910 .2910 1.164
Market price
High 75.94 68.63 70.75 68.75 75.94
Low 62.56 60.38 58.69 59.31 58.69
- --------------------------------------------------------------------------------------------------------------------------------
1. The second quarter of 2000 includes a $286 million charge for in-process
research and development and acquisition-related costs. The fourth quarter of
2000 includes income of $29 million relating to litigation.
2. The first quarter of 1999 includes a $27 million charge for the cumulative
effect of an accounting change. The fourth quarter of 1999 includes a $19
million in net costs associated with effecting the distribution of the
cardiovascular business.
Baxter common stock is listed on the New York, Chicago 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. At January 31, 2001, there were
approximately 58,800 holders of record of the company's common stock.
49
Directors and Executive Officers
Board of Directors
Walter E. Boomer
President and
Chief Executive Officer
Rogers Corporation
Pei-yuan Chia
Retired Vice Chairman
Citicorp and Citibank, N.A.
John W. Colloton
Director Emeritus
University of Iowa
Hospitals & Clinics
Susan Crown
Vice President
Henry Crown and Company
Brian D. Finn
Partner
Clayton, Dubilier & Rice, Inc.
Frank R. Frame
Retired Deputy Chairman
The Hongkong and Shanghai
Banking Corporation Limited
Martha R. Ingram
Chairman of the Board
Ingram Industries Inc.
Harry M. Jansen Kraemer, Jr.
Chairman and
Chief Executive Officer
Baxter International Inc.
Arnold J. Levine, Ph.D.
President
The Rockefeller University
Thomas T. Stallkamp
Vice Chairman and
Chief Executive Officer
MSX International
Monroe E. Trout, M.D.
Chairman of the Board
Cytyc Corporation
Fred L. Turner
Senior Chairman
McDonald's Corporation
Honorary Director
William B. Graham
Chairman Emeritus
of the Board
Baxter International Inc.
Executive Officers
Baxter International Inc.
- -------------------------
Brian P. Anderson/1,2/
Senior Vice President
and Chief Financial Officer
Timothy B. Anderson/1,2/
Group Vice President
Corporate Strategy and
Development
Neville J. Jeharajah
Corporate Vice President
Investor Relations and
Financial Planning
Harry M. Jansen Kraemer, Jr./1,2/
Chairman and
Chief Executive Officer
Karen J. May
Corporate Vice President
Human Resources
Steven J. Meyer/1,2/
Treasurer
J. Robert Hurley
Corporate Vice President
Integration Management
John L. Quick
Corporate Vice President
Quality/Regulatory
Jan Stern Reed/1,2/
Corporate Secretary and
Associate General Counsel
Thomas J. Sabatino, Jr./1,2/
Corporate Vice President
and General Counsel
Michael J. Tucker
Senior Vice President
Human Resources and
Communications
Baxter World Trade Corporation
- ------------------------------
Eric A. Beard
Corporate Vice President
and President-Europe, Africa
and Middle East
Carlos del Salto
Senior Vice President
Intercontinental / Asia
and President-Latin America
Thomas H. Glanzmann/1/
Corporate Vice President
and President-Hyland Immuno
Baxter Healthcare Corporation
- -----------------------------
David F. Drohan
Corporate Vice President and
President-Medication Delivery
J. Michael Gatling
Corporate Vice President
Global Manufacturing Operations
Alan L. Heller/2/
Group Vice President
and President-Global Renal
David C. McKee/2/
Corporate Vice President
and Deputy General Counsel
Gregory P. Young
Corporate Vice President
and President-Fenwal
1. Also an executive officer of
Baxter Healthcare Corporation
2. Also an executive officer of
Baxter World Trade Corporation
As of February 28, 2001
50
Company Information
Corporate Headquarters
Baxter International Inc.
One Baxter Parkway
Deerfield, IL 60015-4633
Telephone: (847) 948-2000
Internet: www.baxter.com
Stock Exchange Listings
Ticker Symbols: BAX, BXL, bax
Baxter common stock is listed on the New York, Chicago
and Pacific Stock Exchanges, on the London Stock Exchange
and on the SWX Swiss Exchange. The New York Stock
Exchange is the principal market on which the company's
common stock is traded.
Annual Meeting
The 2001 Annual Meeting of Shareholders will be held
on Tuesday, May 1, at 10:30 a.m. at the Drury Lane Theatre
in Oakbrook Terrace, Illinois.
Stock Transfer Agent
Correspondence concerning Baxter International stock holdings,
lost or missing certificates or dividend checks, duplicate mailings
or changes of address should be directed to:
Equiserve
P.O. Box 2500
Jersey City, NJ 07303-2500
Telephone: (800) 446.2617 / (201) 324-0498
Internet: www.equiserve.com
Correspondence concerning Baxter International Contingent
Payment Rights related to the acquisition of Somatogen, Inc.
should be directed to:
U.S. Bank Trust National Association
Telephone: (800) 934-6802 / (312) 228-9455
Dividend Reinvestment
The company offers an automatic dividend-reinvestment
program to all holders of Baxter International Inc. common
stock. A detailed brochure is available upon request from:
Equiserve
P.O. Box 2598
Jersey City, NJ 07303-2598
Telephone: (800) 446-2617 / (201) 324-0498
Internet: www.equiserve.com
Information Resources
Internet
www.baxter.com
Please visit our Internet site for:
. General company information
. Corporate news or earnings releases
. Annual report
. Form 10-Q
. Form 10-K
. Proxy statement
. Annual environmental report
Shareholders may elect to receive future proxy materials
and annual reports on-line via the Internet instead of receiving
them by mail. To sign up for this service, please go to
http://www.econsent.com/bax. When the next proxy materials
and annual reports are distributed, you will be supplied with a
proxy control number and a link to the Web site where you can
cast your proxy vote on-line. Once you provide your consent
to receive electronic delivery of proxy materials via the Internet,
your consent will remain in effect until you revoke it.
Shareholders also may access personal account information
on-line via the Internet by visiting www.equiserve.com and
selecting the "Account Access" menu.
Investor Relations
Securities analysts, investment professionals and investors
seeking additional investor information should contact:
Baxter Investor Relations
Telephone: (847) 948-4551
Customer Inquiries / General Information
Customers who would like general information about
Baxter's products and services may call the Center for
One Baxter toll free in the United States at (800) 422-9837,
or by dialing (847)
948-4770.
___________________________________________
(C)Baxter International Inc., 2001. All rights reserved.
References in this report to Baxter are intended to refer collectively
to Baxter International Inc. and its U.S. and international subsidiaries
and their operating divisions.
Aurora, Colleague, Extraneal, Ipump, Meridian, NeisVac-C, Physioneal,
Recombinate, Tina and Tisseel are trademarks of Baxter International
Inc., its subsidiaries or affiliates.
PSA 4000 is a trademark of Physiometrix Inc.
AGGRASTAT is a trademark of Merck & Co.
Baxter would like to thank Cornerstone Medical in Wheaton, Illinois,
for the use of its facility in taking the photo that appears on the cover
of this report.
Design / Paragraphs Design Inc., Chicago
Printing / George Rice & Sons, Los Angeles
Five-Year Summary of Selected Financial Data
as of or for the years ended December 31 2000/1,2/ 1999 1998/3/ 1997/4/ 1996/2/
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Operating Net sales $ 6,896 6,380 5,706 5,259 4,583
Results Income from continuing operations $ 738 779 275 371 505
(in millions) Depreciation and amortization $ 405 372 344 318 269
Research and development expenses/5/ $ 379 332 323 339 291
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Balance Sheet Capital expenditures $ 648 631 556 454 362
and Cash Flow Total assets $ 8,733 9,644 9,873 8,511 7,407
Information Long-term debt and lease obligations $ 1,726 2,601 3,096 2,635 1,695
(in millions) Cash flows from continuing operations $ 1,233 977 837 472 530
Cash flows from discontinued operation $ (19) 106 102 86 108
Cash flows from investing activities $ (1,053) (735) (872) (1,083) (552)
Cash flows from financing activities $ (120) (445) 173 265 216
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Common Stock Average number of common shares
Information outstanding (in millions)/6/ 292 290 284 278 272
Income from continuing operations
per common share
Basic $ 2.52 2.69 0.97 1.34 1.85
Diluted $ 2.47 2.64 0.95 1.31 1.82
Cash dividends declared
per common share $ 1.164 1.164 1.164 1.139 1.17
Year-end market price
per common share $ 88.31 62.81 64.31 50.44 41.00
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Other Net-debt-to-capital ratio 40.1% 40.2% 48.4% 46.9% 33.8%
Information "Operational cash flow" from
continuing operations (in millions)/7/ $ 588 588 379 153 341
Total shareholder return/8/ 48.1% (0.5%) 30.1% 25.9% 13.9%
Common stockholders of record
at year-end 59,100 61,200 61,000 62,900 65,400
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1. Income from continuing operations includes a charge for in-process research
and development and acquisition-related costs of $286 million and income from
litigation of $29 million.
2. Certain balance sheet and other data are affected by the spin-off of Edwards
Lifesciences Corporation in 2000 and the spin-off of Allegiance Corporation
in 1996.
3. Income from continuing operations includes charges for in-process research
and development, net litigation, and exit and other reorganization costs of
$116 million, $178 million and $122 million, respectively.
4. Income from continuing operations includes a charge for in-process research
and development of $220 million.
5. Excludes charges for in-process research and development, as noted above.
6. Excludes common stock equivalents.
7. The company's internal "operational cash flow" measurement is defined on page
24 and is not a measure defined by generally accepted accounting principles.
8. Represents the total of appreciation in market price plus cash dividends
declared on common shares plus the effect of any stock dividends for the
year.