UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
-------- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
-------- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0781620
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015-4633
- ---------------------------------------- ----------
(Address of principal executive offices (Zip Code)
(847) 948-2000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -------
The number of shares of the registrant's Common Stock, par value $1.00 per
share, outstanding as of August 3, 2001 was 588,515,197 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended June 30, 2001
TABLE OF CONTENTS
Page Number
-----------
Part I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Condensed Consolidated Statements of Income................ 2
Condensed Consolidated Balance Sheets...................... 3
Condensed Consolidated Statements of Cash Flows............ 4
Notes to Condensed Consolidated Financial Statements....... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 21
Review by Independent Accountants....................................... 22
Report of Independent Accountants....................................... 23
Part II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings............................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.......... 27
Item 6. Exhibits and Reports on Form 8-K............................. 28
Signature ............................................................. 29
Exhibits ............................................................. 30
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
(in millions, except per share data)
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
---------------------------- ----------------------------
Net sales $1,870 $1,694 $3,627 $3,277
Costs and expenses
Cost of goods sold 1,044 947 2,030 1,843
Marketing and administrative expenses 361 336 704 651
Research and development expenses 104 93 207 176
In-process research and development and acquisition-
related charges -- 286 -- 286
Goodwill amortization 11 6 23 11
Interest, net 17 19 36 34
Other expense (income) (9) (6) (2) 6
- ---------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,528 1,681 2,998 3,007
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change 342 13 629 270
Income tax expense (benefit) 89 (33) 162 33
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of accounting change 253 46 467 237
Discontinued operation
Income from discontinued operation, net of applicable
income tax expense of $1 and $5 in 2000 -- 2 -- 14
Costs associated with effecting the business distribution -- -- -- (12)
- ---------------------------------------------------------------------------------------------------------------------------
Total discontinued operation -- 2 -- 2
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change 253 48 467 239
Cumulative effect of accounting change, net of
income tax benefit of $32 -- -- (52) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 253 $ 48 $ 415 $ 239
===========================================================================================================================
Earnings per basic common share
Continuing operations, before cumulative effect of
accounting change $ .43 $ .08 $ .79 $ .41
Cumulative effect of accounting change -- -- (.09) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ .43 $ .08 $ .70 $ .41
===========================================================================================================================
Earnings per diluted common share
Continuing operations, before cumulative effect of
accounting change $ .42 $ .08 $ .77 $ .40
Cumulative effect of accounting change -- -- (.09) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ .42 $ .08 $ .68 $ .40
===========================================================================================================================
Weighted average number of common shares outstanding
Basic 590 583 589 582
===========================================================================================================================
Diluted 608 594 607 592
===========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except shares)
June 30, December 31,
2001 2000
(unaudited)
---------------------------------------
Current assets Cash and equivalents $ 431 $ 579
Accounts receivable 1,527 1,387
Notes and other current receivables 162 155
Inventories 1,358 1,159
Short-term deferred income taxes 97 159
Prepaid expenses 416 212
---------------------------------------------------------------------------------------------------
Total current assets 3,991 3,651
- ----------------------------------------------------------------------------------------------------------------------
Property, At cost 5,241 4,978
plant and Accumulated depreciation and amortization (2,319) (2,171)
equipment ---------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,922 2,807
- ----------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,397 1,239
Insurance receivables 122 160
Other 850 876
---------------------------------------------------------------------------------------------------
Total other assets 2,369 2,275
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 9,282 $ 8,733
======================================================================================================================
Current Short-term debt $ 324 $ 576
liabilities Current maturities of long-term debt and lease obligations 50 58
Accounts payable and accrued liabilities 1,344 1,990
Income taxes payable 631 748
---------------------------------------------------------------------------------------------------
Total current liabilities 2,349 3,372
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,378 1,726
- ----------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 280 160
- ----------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 161 184
- ----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 700 632
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 1,000,000,000
equity shares in 2001 and 700,000,000 in 2000, issued
599,161,212 shares in 2001 and 596,266,502 shares
in 2000 599 596
Common stock in treasury, at cost, 10,914,183
shares in 2001 and 9,906,124 shares in 2000 (341) (349)
Additional contributed capital 2,281 2,208
Retained earnings 1,245 853
Accumulated other comprehensive loss (370) (649)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 3,414 2,659
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,282 $ 8,733
======================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
Six months ended June 30,
(brackets denote cash outflows) 2001 2000
--------------------------------
Cash flows Income from continuing operations before cumulative
from effect of non-cash accounting change $ 467 $ 237
operations Adjustments
Depreciation and amortization 217 183
Deferred income taxes 124 (87)
In-process research and development and acquisition-
related charges -- 286
Other (8) 7
Changes in balance sheet items
Accounts receivable (204) 12
Inventories (227) (175)
Accounts payable and other accrued liabilities (237) (268)
Net litigation payments and other (169) (43)
-----------------------------------------------------------------------------------------------------
Cash flows from continuing operations (37) 152
Cash flows relating to discontinued operation -- (43)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operations (37) 109
- ------------------------------------------------------------------------------------------------------------------------
Cash flows Capital expenditures (306) (256)
from investing Acquisitions (net of cash received)
activities and investments in affiliates (88) (211)
Divestitures and other asset dispositions 19 --
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities (375) (467)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows Issuances of debt and lease obligations 1,928 588
from financing Redemptions of debt and lease obligations (992) (842)
activities Increase (decrease) in debt with maturities
of three months or less, net (304) 639
Common stock cash dividends (340) (84)
Stock issued under employee benefit plans 101 140
Purchases of treasury stock (143) (141)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities 250 300
- ------------------------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and equivalents 14 (52)
- ------------------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (148) (110)
Cash and equivalents at beginning of period 579 606
- ------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 431 $ 496
========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Baxter International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. FINANCIAL INFORMATION
- ------------------------
The unaudited interim condensed consolidated financial statements of Baxter
International Inc. and its subsidiaries (the company or Baxter) have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles (GAAP) have been condensed or omitted. These interim
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes included in the company's 2000
Annual Report to Stockholders.
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments, unless otherwise noted herein, are of a
normal, recurring nature. The results of operations for the interim period are
not necessarily indicative of the results of operations to be expected for the
full year.
Basis of consolidation
- ----------------------
Prior to fiscal 2001, certain operations outside the United States and its
territories were included in the consolidated financial statements on the basis
of fiscal years ending November 30. In conjunction with the implementation of
new financial systems, this one-month lag was eliminated as of the beginning of
fiscal 2001. The December 2000 net loss from operations of $23 million for
these operations was recorded directly to retained earnings.
Comprehensive income
- --------------------
Total comprehensive income (loss) was $265 million and $(22) million for the
three months ended June 30, 2001 and 2000, respectively, and was $605 million
and $195 million for the six months ended June 30, 2001 and 2000, respectively.
The increase in 2001 as compared to 2000 was principally related to currency
translation adjustments and foreign currency hedging instruments.
Derivatives and hedging activities
- ----------------------------------
All derivatives are recognized on the consolidated balance sheet at fair value.
When the company enters into a derivative contract, it designates and documents
the derivative as (1) a hedge of a forecasted transaction, including a hedge of
a foreign currency denominated transaction (a cash flow hedge); (2) a hedge of
the fair value of a recognized asset or liability (a fair value hedge); (3) a
hedge of a net investment in a foreign operation; or (4) an instrument that is
not formally being designated as a hedge. The company also uses and designates
certain nonderivative financial instruments as hedges of net investments in
foreign operations. Changes in the fair value of a derivative that is highly
effective and is designated and qualifies as a cash flow hedge, are recorded in
other comprehensive income (OCI), with such changes in fair value reclassified
to earnings when the hedged transaction affects earnings. Changes in the fair
value of a derivative that is highly effective and is designated and qualifies
as a fair value hedge, along with changes in the fair value of the hedged asset
or liability which are attributable to the hedged risk, are recorded directly to
earnings. Changes in the fair value of a derivative or nonderivative instrument
that is highly effective and is designated and qualifies as a hedge of a net
investment in a foreign operation are recorded in the cumulative translation
adjustment (CTA) account within OCI. Any hedge ineffectiveness is recorded in
earnings. If it is determined that a derivative or nonderivative hedging
instrument is not or ceases to be highly
5
effective as a hedge, the company discontinues hedge accounting prospectively.
In certain circumstances, the company enters into derivative contracts and does
not formally designate them as fair value, cash flow or net investment hedges.
Changes in the fair value of undesignated instruments are reported directly to
earnings. The company does not hold any instruments for trading purposes.
New accounting standards
- ------------------------
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," was issued in July 2001. The Statement addresses financial
accounting and reporting for business combinations and supersedes Accounting
Principles Board (APB) Opinion No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." All
business combinations in the scope of this Statement are to be accounted for
using the purchase method. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001 and all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or later.
The company is in the process of assessing the impact of adoption on its
consolidated financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets," was issued in July 2001.
The Statement addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 is effective for fiscal years beginning after December 15,
2001, and applies to all goodwill and other intangible assets recognized in the
financial statements. The Statement addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for upon acquisition, and how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The company is in the
process of assessing the impact of adoption on its consolidated financial
statements.
2. INVENTORIES
- --------------
Inventories consisted of the following:
June 30, December 31,
(in millions) 2001 2000
- --------------------------------------------------------------------
Raw materials $ 367 $ 261
Work in process 196 174
Finished products 795 724
- --------------------------------------------------------------------
Total inventories $1,358 $1,159
====================================================================
3. INTEREST, NET
- ----------------
Net interest expense consisted of the following:
Three months Six months
ended ended
June 30, June 30,
(in millions) 2001 2000 2001 2000
- ---------------------------------------------------------------------
Interest expense $ 28 $ 29 $ 56 $ 61
Interest income (11) (10) (20) (20)
- ---------------------------------------------------------------------
Interest expense, net $ 17 $ 19 $ 36 $ 41
=====================================================================
Allocated to continuing
operations $ 17 $ 19 $ 36 $ 34
=====================================================================
Allocated to discontinued
operation $ -- $ -- $ -- $ 7
=====================================================================
6
The allocation of interest to continuing operations and the discontinued
operation was based on estimated relative net assets of these operations.
4. OTHER INCOME
- ----------------
Other income for the quarter and six months ended June 30, 2001 included a gain
of approximately $100 million from the disposal of a non-strategic investment by
contribution to the company's pension trust. This gain was substantially offset
by impairment charges for other assets and investments whose decline in value is
deemed to be other than temporary.
5. STOCK SPLIT
- ---------------
On February 27, 2001, Baxter's board of directors approved a 2 for 1 stock split
of the company's common shares. This approval was subject to shareholder
approval of an increase in the number of authorized shares of common stock,
which was received at the company's annual meeting on May 1, 2001. On May 30,
2001, shareholders of record on May 9, 2001 received one additional share of
Baxter common stock for each share held on May 9, 2001. All share and per share
data in the condensed consolidated financial statements and notes have been
adjusted and restated to reflect the stock split.
6. EARNINGS PER SHARE
- ----------------------
The numerator for both basic and diluted earnings per share (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:
- ------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------
Basic EPS shares 590 583 589 582
- ------------------------------------------------------------------------------------------------
Effect of dilutive securities
Employee stock options 17 9 17 8
Employee stock purchase plans and equity
forward agreements 1 2 1 2
- ------------------------------------------------------------------------------------------------
Diluted EPS shares 608 594 607 592
================================================================================================
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- -------------------------------------------------
The company operates on a global basis, and is exposed to the risk that its
earnings, cash flows and equity could be adversely impacted by fluctuations in
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. The
company does not hold financial instruments for trading or speculative purposes.
The company is primarily exposed to currency exchange-rate risk with respect to
firm commitments, forecasted transactions and net assets denominated in Japanese
Yen, the Euro, British Pound and Swiss Franc. The company manages its foreign
currency exposures on a consolidated basis, which allows the company to net
exposures and take advantage of any natural offsets. In addition, the company
utilizes derivative and nonderivative financial instruments to further reduce
the net exposure to currency fluctuations. Gains and losses on the hedging
instruments are intended to offset losses and gains on the hedged transactions
7
with the goal of reducing the earnings volatility resulting from fluctuations in
currency exchange rates.
The company is also exposed to the risk that its earnings and cash flows could
be adversely impacted by fluctuations in interest rates. The company's policy is
to manage interest costs using a mix of fixed and floating rate debt that
management believes is appropriate. To manage this mix in a cost efficient
manner, the company enters into interest rate swaps, in which the company agrees
to exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated by reference to an agreed-upon notional amount.
Adoption of SFAS 133
- --------------------
The company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and its amendments at the beginning of fiscal year 2001. In
accordance with the transition provisions of SFAS No. 133, upon adoption the
company recorded a cumulative effect reduction to earnings of approximately $52
million (net of income tax benefit of approximately $32 million), and a
cumulative effect increase to OCI of approximately $8 million (net of income tax
of approximately $5 million).
Cash flow hedges
- ----------------
The company principally uses option and forward contracts to hedge the risk to
earnings associated with fluctuations in currency exchange rates relating to the
company's firm commitments and forecasted transactions expected to be
denominated in foreign currencies. The company also uses forward-starting
interest rate swaps to hedge the risk to earnings associated with fluctuations
in interest rates relating to anticipated issuances of term debt.
The following table summarizes activity (net-of-tax) in accumulated other
comprehensive income (loss) (AOCI) related to cash flow hedges held by the
company:
- ----------------------------------------------------------------------------------
Three months ended Six months ended
(in millions) June 30, 2001 June 30, 2001
- ----------------------------------------------------------------------------------
Balance at beginning of period $ 78 $ --
Cumulative effect of accounting change -- 8
Net gain in fair value of derivatives 32 104
Net gain reclassified to earnings (6) (8)
- ----------------------------------------------------------------------------------
Balance at June 30, 2001 $104 $104
==================================================================================
For the six months ended June 30, 2001, the net amount recorded in other income
and expense relating to hedge ineffectiveness and the component of the
derivative instruments' gain or loss excluded from the assessment of hedge
effectiveness were immaterial to the company's condensed consolidated financial
statements.
As of June 30, 2001, approximately $52 million of deferred net after-tax gains
on derivative instruments accumulated in AOCI are expected to be reclassified to
earnings during the next twelve months, coinciding with when the hedged items
are expected to impact earnings. The hedged items principally include
intercompany sales and interest payments on third-party debt. The maximum term
over which the company has hedged exposures to the variability of cash flows,
excluding interest payments on term debt, is four years.
8
Fair value hedges
- -----------------
The company uses interest rate swaps to convert a portion of its fixed-rate debt
into variable-rate debt. These instruments serve to hedge the company's
earnings from fluctuations in interest rates. For the six months ended June 30,
2001, no portion of the change in fair value of the company's fair value hedges
was ineffective or excluded from the assessment of hedge effectiveness.
Hedges of net investments in foreign operations
- -----------------------------------------------
The company uses cross currency interest rate swaps and foreign currency
denominated debt to hedge its stockholders' equity balance from the effects of
fluctuations in currency exchange rates. The company measures ineffectiveness
on the swaps based upon changes in spot foreign exchange rates. Approximately
$206 million of net after-tax gains related to the derivative and nonderivative
instruments were included in the company's CTA account as of June 30, 2001.
Other
- -----
The company uses forward contracts to hedge earnings from the effects of
fluctuations in currency exchange rates relating to certain of the company's
intercompany and third-party receivables and payables denominated in a foreign
currency. These derivative instruments are not formally designated as hedges,
and the change in fair value of the instruments, which substantially offsets the
change in book value of the hedged items, is recorded directly to other income
or expense.
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. The put rights were
issued in conjunction with Nexell's repayment of amounts owed to the company.
The 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%. The changes in fair
value of the put rights are recorded directly to other income or expense. Such
changes were not significant for the three or six months ended June 30, 2001.
8. ACQUISITIONS
- ---------------
Acquisitions during the six months ended June 30, 2001 and 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 preliminary 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. The allocation of purchase price is subject to revision
based on the final determination of fair values.
9
Sera-Tec Biologicals, L.P.
- --------------------------
In February 2001, the company acquired Sera-Tec Biologicals, L.P. (Sera-Tec) for
approximately $127 million, which was paid in approximately 2.8 million shares
of Baxter International Inc. common stock. Sera-Tec owns and operates 80 plasma
centers in 28 states, and a central testing laboratory. Approximately $141
million of the purchase price was allocated to goodwill. Goodwill is being
amortized on a straight-line basis over 40 years.
Pro forma information
- ---------------------
The following unaudited pro forma information presents a summary of the
company's consolidated results of operations as if acquisitions during 2001 and
2000 had taken place as of the beginning of the current and preceding fiscal
year.
- ------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions, except per share data) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------
Net sales $1,871 $1,756 $3,646 $3,428
Income from continuing operations before cumulative
effect of accounting change $ 253 $ 32 $ 469 $ 207
Net income $ 253 $ 34 $ 417 $ 209
Earnings per diluted common share $ .42 $ .06 $ .68 $ .35
- ------------------------------------------------------------------------------------------------
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 for 2000 primarily reflect the
historical pre-acquisition net losses reported by North American Vaccine, Inc.,
which was acquired in June 2000. The pro forma information above also includes
certain other recent acquisitions.
Acquisition reserves
- --------------------
Based on plans formulated at acquisition date, as part of the allocation of
purchase price, reserves have been established related to certain acquisitions.
Actions executed to date and anticipated in the future with respect to these
acquisitions are substantially consistent with the original plans. Management
believes remaining reserves are adequate to complete the actions contemplated by
the plans.
9. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
- ---------------------------------------------------
Refer to "Part II - Item 1. Legal Proceedings" below.
10. SEGMENT INFORMATION
- -----------------------
The company 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 and a description of their
businesses are as follows: Medication Delivery: medication delivery products and
services, including intravenous infusion pumps and solutions, anesthesia-
delivery devices and pharmaceutical agents; BioScience: biopharmaceuticals and
blood-collection, separation and storage products and technologies; and Renal:
products and services to treat end-stage kidney disease.
10
Certain items are maintained at 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 related income and expense,
deferred income taxes, the majority of hedging activities, and certain
litigation liabilities and related insurance receivables.
Financial information for the company's segments for the three and six months
ended June 30 is as follows:
Medication
(in millions) Delivery BioScience Renal Other Total
- ----------------------------------------------------------------------------
For the three months ended
- --------------------------
June 30,
- --------
2001
- ----
Net sales $ 708 $ 686 $476 -- $1,870
Pretax income 113 131 72 $ 26 342
2000
- ----
Net sales $ 667 $ 575 $452 -- $1,694
Pretax income 99 131 78 ($295) 13
For the six months ended
- ------------------------
June 30,
- --------
2001
- ----
Net sales $1,377 $1,317 $933 -- $3,627
Pretax income 215 244 138 $ 32 629
2000
- ----
Net sales $1,287 $1,117 $873 -- $3,277
Pretax income 183 244 156 ($313) 270
- ----------------------------------------------------------------------------
The following are reconciliations of total segment amounts to amounts per the
condensed consolidated income statements:
Three months
ended June 30,
--------------
(in millions) 2001 2000
- -------------------------------------------------------------------------------
Pretax income
- -------------
Total pretax income from segments $316 $ 308
Unallocated amounts
Interest expense, net (17) (19)
In-process research and development and acquisition-
related charges -- (286)
Other Corporate items 43 10
- --------------------------------------------------------------------------------
Income from continuing operations before income
taxes $342 $ 13
- --------------------------------------------------------------------------------
11
Six months
ended June 30,
--------------
(in millions) 2001 2000
- ---------------------------------------------------------------------------
Pretax income
- -------------
Total pretax income from segments $597 $ 583
Unallocated amounts
Interest expense, net (36) (34)
In-process research and development and acquisition-
related charges -- (286)
Other Corporate items 68 7
- ---------------------------------------------------------------------------
Income from continuing operations before income
taxes and cumulative effect of accounting change $629 $ 270
- ---------------------------------------------------------------------------
11. SUBSEQUENT EVENT
- --------------------
In August 2001, Baxter signed an agreement with Degussa AG to acquire its ASTA
Medica Oncology subsidiary, Asta Medica Onkologie GmbH & CoKG ("ASTA") for
approximately 525 million Euros ($470 million). Pending approval by relevant
authorities, the transaction is expected to close before the end of 2001. ASTA
develops, produces and markets oncology products worldwide, with significant
market presence in Europe, North America and Latin America. ASTA's net sales,
primarily of chemotherapy agents, totaled approximately $130 million in 2000. It
is estimated that a substantial portion of the purchase price will be allocated
to in-process research and development (IPR&D) which, under GAAP, will be
immediately expensed by the company. Excluding the IPR&D charge, the acquisition
is not expected to have a significant impact on 2001 earnings and is expected to
be accretive to earnings in 2002.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Baxter International Inc.'s (the company or Baxter) 2000 Annual Report to
Stockholders (Annual Report) contains management's discussion and analysis of
financial condition and results of operations for the year ended December 31,
2000. In the Annual Report, management outlined its key financial objectives for
2001. The table below reflects these objectives and the company's results
through June 30, 2001.
- -----------------------------------------------------------------------------------------------------
RESULTS THROUGH
FULL YEAR 2001 OBJECTIVES JUNE 30, 2001
- -----------------------------------------------------------------------------------------------------
. Increase net sales in the low double . Net sales during the six months ended
digits. June 30, 2001 increased 11 percent.
Excluding the effects of changes in currency
exchange rates, net sales increased 16
percent.
- -----------------------------------------------------------------------------------------------------
. Increase net earnings in the mid-teens. . Net earnings from continuing operations
increased 13 percent for the first half of
the year, excluding the first quarter 2001
cumulative effect of a change in accounting
principle and second quarter 2000 charge for
in-process research and development (IPR&D)
and acquisition-related costs.
- -----------------------------------------------------------------------------------------------------
. Generate $500 million in operational cash . The company had operational cash outflow of
flow, after investing more than $1 billion $279 million during the six months ended
in capital expenditures and research and June 30, 2001. Cash outflows are typical
development. during the first half of the year based on
the timing of receipts and disbursements.
The total of capital expenditures and
research and development expenses for the
six months ended June 30, 2001 was $513
million.
- -----------------------------------------------------------------------------------------------------
13
RESULTS OF OPERATIONS
- ---------------------
The following management discussion and analysis pertains to continuing
operations, unless otherwise noted.
NET SALES
- -----------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 2001 2000 increase 2001 2000 increase
- -----------------------------------------------------------------------------------------
International $ 932 $ 930 -- $1,834 $1,789 2%
United States 938 764 23% 1,793 1,488 21%
- -----------------------------------------------------------------------------------------
Total net sales $1,870 $1,694 10% $3,627 $3,277 11%
=========================================================================================
Excluding the effect of fluctuations in currency exchange rates, which impacted
sales growth unfavorably for all three segments, total net sales growth was 15
percent and 16 percent for the three months and six months ended June 30, 2001,
respectively. The United States dollar strengthened principally relative to the
Euro and the Japanese Yen. Refer to Note 10 to the Condensed Consolidated
Financial Statements for a summary of net sales by segment.
Medication Delivery
The Medication Delivery segment generated six percent and seven percent sales
growth during the three months and six months ended June 30, 2001, respectively.
Excluding the impact of fluctuations in currency exchange rates, sales growth
was nine percent and 10 percent for the quarter and year-to-date period,
respectively, with sales in both the domestic and international markets
contributing strongly to the growth rate. Of the constant-currency sales growth,
approximately two points and three points of growth in the quarter and six-month
period, respectively, were generated from the anesthesia business, with a
portion of such growth driven by the segment's sales of 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 majority of the remaining sales growth was due to increased sales of
Colleague(R) electronic infusion pumps and intravenous fluids and administration
sets used with electronic infusion pumps. In addition, sales of the segment's
nutrition products and specialty therapies generated strong growth during both
the quarter and year-to-date period.
BioScience
Sales in the BioScience segment increased 19 percent and 18 percent for the
three months and six months ended June 30, 2001, respectively. Excluding the
impact of fluctuations in currency exchange rates, sales growth was 25 percent
and 24 percent for the quarter and year-to-date period, respectively, with the
strongest sales growth in the domestic market. Of the constant-currency sales
growth, approximately 17 points and 12 points of growth in the quarter and six-
month period, respectively, were due to the increased sales of plasma-derived
products, which was principally due to increased sales of plasma Factor VIII,
improved pricing and the first quarter 2001 acquisition of Sera-Tec Biologicals,
L.P. (Sera-Tec), which owns and operates 80 plasma centers in 28 states. Sales
of recombinant products increased the segment's constant-currency growth rate by
approximately eight points during both the quarter and year-to-date period, due
principally to the company's recent increases in manufacturing capacity. Sales
in the blood-collection and processing businesses also grew modestly during the
quarter and year-to-date period, principally due to an increase in sales of
products that provide for leukoreduction, which is the removal of white blood
cells from blood products used for transfusion.
14
Renal
The Renal segment generated sales growth of five percent and seven percent
during the three-month period and six-month period ended June 30, 2001,
respectively. Excluding the impact of fluctuations in currency exchange rates,
sales growth was 13 percent and 14 percent for the quarter and year-to-date
period, respectively. The March 2000 acquisition of Althin Medical A.B.
(Althin), a manufacturer of hemodialysis products, continues to be integrated
into the segment's operations. Sales of Althin products contributed
approximately one point to the segment's growth rate for the six months ended
June 30, 2001. Strong 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 approximately $30 million and $55 million during the
quarter and six-month period, respectively. The remaining growth in the Renal
segment was driven principally by hemodialysis product sales as well as
continued penetration of products for peritoneal dialysis, particularly in Latin
America, Europe and Asia.
The following tables show key ratios of certain income statement items as a
percent of sales:
GROSS MARGIN AND EXPENSE RATIOS
Three months ended Six months ended
June 30, Increase June 30, Increase
2001 2000 (decrease) 2001 2000 (decrease)
- -----------------------------------------------------------------------------------------------------
Gross profit margin 44.2% 44.1% .1 pts 44.0% 43.8% .2 pts
Marketing and
administrative expenses 19.3% 19.8% (.5 pts) 19.4% 19.9% (.5 pts)
- -----------------------------------------------------------------------------------------------------
The increase in the gross profit margin for the quarter and year-to-date period
was due principally to a more favorable products and services mix, with the
higher-margin BioScience segment generating strong sales for the quarter and
year-to-date period. The gross profit margin is expected to continue to increase
during the remainder of the year.
Marketing and administrative expenses decreased as a percent of sales in both
the quarter and year-to-date period as compared to the prior year as the company
continues to offset significant investments in attracting and retaining a
talented workforce, by aggressively managing expenses and leveraging
acquisitions. Management expects the expense ratio to continue to decline during
the remainder of the year.
RESEARCH AND DEVELOPMENT
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 2001 2000 increase 2001 2000 increase
- ---------------------------------------------------------------------------------------------------
Research and
development expenses $ 104 $ 93 12% $ 207 $ 176 18%
As a percent of sales 6% 5% 6% 5%
- ---------------------------------------------------------------------------------------------------
Research and development (R&D) expenses above exclude the IPR&D charge recorded
in June 2000, which principally related to the acquisition of North American
Vaccine, Inc. (NAV). Refer to Baxter's 2000 Annual Report for a complete
discussion of this charge. The increase in
15
R&D expenses for both the quarter and year-to-date period was primarily due to
spending in the BioScience segment, and principally related to the next-
generation recombinant product, vaccines, the next-generation oxygen-
therapeutics program, as well as other R&D projects. Management expects R&D
expenses to be incurred at approximately the same level for the remainder of
2001 as they were during the first half of 2001.
GOODWILL AMORTIZATION
Goodwill amortization increased for the three months and six months ended June
30, 2001 as compared to the prior year periods primarily due to the acquisitions
of NAV in June 2000 and Sera-Tec in February 2001. For the three months and six
months ended June 30, 2001, goodwill amortization on a net-of-tax basis was
approximately $9 million and $19 million, respectively, or approximately $0.02
and $0.03 per diluted common share, respectively.
OTHER INCOME AND EXPENSE
Other income for the quarter and six months ended June 30, 2001 included a gain
of approximately $100 million from the disposal of a non-strategic investment by
contribution to the company's pension trust. This gain was substantially offset
by impairment charges for other assets and investments whose decline in value is
deemed to be other than temporary.
Net interest expense decreased for the three months ended June 30, 2001 as
compared to the prior year period principally due to the May 2001 issuance of
convertible debt, which bears a lower interest rate than the debt balances
repaid with the proceeds from the issuance. See further discussion below. Net
interest expense increased for the six months ended June 30, 2001 as compared to
the prior year principally due to increased interest rates related to foreign
currency denominated debt, partially offset by the effect of the second quarter
2001 issuance of convertible debt.
PRETAX INCOME
Refer to Note 10 to the Condensed Consolidated Financial Statements 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 the majority of the hedging activities, certain foreign
currency fluctuations, net interest expense, income and expense related to
certain non-strategic investments, and corporate headquarters costs. The
following is a summary of the significant factors impacting the segments'
financial results.
Medication Delivery
Pretax income increased 14 percent and 17 percent for the three months and six
months ended June 30, 2001, respectively. The growth in pretax income was
primarily a result of solid sales growth, the close management of costs, and the
leveraging of expenses in conjunction with recent acquisitions, partially offset
by the unfavorable impact of fluctuations in currency exchange rates and, for
the six-month period, increased pump service costs.
BioScience
Pretax income was approximately flat for the three months and six months ended
June 30, 2001. The effect of strong sales growth and an improved gross margin
due to a change in product mix was offset by significantly increased R&D
investments in the business and the unfavorable impact of fluctuations in
currency exchange rates.
16
Renal
Pretax income decreased eight percent and 11 percent for the three months and
six months ended June 30, 2001, respectively. The decrease in pretax income was
principally due to an unfavorable product mix, unfavorable fluctuations in
currency exchange rates, and sales and marketing investments in the business,
partially offset by the effect of closely managing administrative costs.
INCOME TAXES FROM CONTINUING OPERATIONS
Excluding the 2000 charge for IPR&D and acquisition-related costs, the effective
income tax rate for the three months and six months ended June 30, 2001 was
substantially unchanged as compared to the prior year. Management expects the
effective tax rate to remain at approximately the same level for the rest of the
year.
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 first quarter
2000 income related to the discontinued operation was offset by costs directly
associated with effecting the business distribution. The income statement
activity during the second quarter of 2000 related to certain operations outside
the United States.
CHANGE IN ACCOUNTING PRINCIPLE
As further discussed in Note 7 to the Condensed Consolidated Financial
Statements, the company adopted Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
and its amendments at the beginning of fiscal year 2001. In accordance with the
transition provisions of SFAS No. 133, upon adoption the company recorded a
cumulative effect reduction to earnings of approximately $52 million (net of tax
benefit of approximately $32 million), and a cumulative effect increase to OCI
of approximately $8 million (net of tax of approximately $5 million).
SUBSEQUENT EVENT
In August 2001, the company signed an agreement with Degussa AG to acquire its
ASTA Medica Oncology subsidiary, Asta Medica Onkologie GmbH & CoKG ("ASTA").
ASTA develops, produces and markets oncology products worldwide, with
significant market presence in Europe, North America and Latin America. Refer
to Note 11 to the Condensed Consolidated Financial Statements for further
information.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flows from continuing operations per the company's Condensed Consolidated
Statements of Cash Flows decreased for the six months ended June 30, 2001. The
effect of increased earnings (before non-cash items) in 2001 was more than
offset by the effect of decreases in accounts payable balances, increases in
accounts receivable and inventories, and cash payments relating to the company's
litigation.
Cash flows from investing activities increased for the six months ended June 30,
2001. Capital expenditures were higher for the six months ended June 30, 2001
as compared to the prior year as the company increased its investments in
various capital projects across the three
17
segments. The increased investments principally pertained to the BioScience
segment, as the company is in the process of increasing manufacturing capacity
for vaccines and plasma-based and recombinant products. Net cash outflows
relating to acquisitions decreased during the first six months of 2001 as
compared to the prior year period. Approximately $21 million of the 2001 total
related to acquisitions of dialysis centers in international markets, with the
remainder pertaining to individually insignificant items. As further discussed
in Note 8 to the Condensed Consolidated Financial Statements, the purchase price
of the March 2001 Sera-Tec acquisition was paid with Baxter International Inc.
common stock. In 2000, net cash outflows relating to acquisitions included
approximately $55 million related to the Renal segment's above-mentioned
acquisition of Althin. A portion of this purchase price was paid in Baxter
International Inc. common stock. Approximately $110 million of the 2000 total
related to several acquisitions and investments in the Medication Delivery
segment, the largest of which was the January 2000 acquisition of certain assets
of Sabratek Corporation, a domestic ambulatory and infusion pump business. In
addition, the company made certain minor acquisitions and investments across the
various businesses and product lines.
Cash flows from financing activities decreased for the six months ended June 30,
2001. The change in cash flows from financing activities was impacted by the
change in net cash used in operations and investing activities, which in total
increased during the first six months of 2001 as compared to the prior year.
During May 2001, the company issued $800 million in convertible debt. The
securities mature in 20 years, bear a 1.25 percent coupon, are convertible into
common shares of Baxter stock under specified conditions, and carry certain call
and put provisions. The proceeds from the convertible debt issuance were used to
refinance certain of the company's short-term debt. Cash outflows relating to
common stock dividends increased for the six-month period due to the company's
change from a quarterly to an annual dividend payout schedule. Cash received for
stock issued under employee benefit plans decreased principally due to the first
quarter 2000 required exercise of stock options by employees transferring to
Edwards as a result of the March 31, 2000 spin-off of that business. Cash
outflows in 2001 relating to purchases of treasury stock were comparable to the
prior year. The company's net-debt-to-capital ratio was 40.5 percent and 40.1
percent at June 30, 2001 and December 31, 2000, respectively.
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 following table reconciles cash flow provided by continuing operations, as
determined by generally accepted accounting principles, to operational cash flow
provided by continuing operations:
- ---------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
(in millions) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from continuing operations per the company's
Condensed Consolidated Statements of Cash Flows $ (37) $ 152
Capital expenditures (306) (256)
Net interest after tax 21 21
Other, including mammary implant litigation 43 (9)
- ---------------------------------------------------------------------------------------------------------------------
Operational cash flow - continuing operations $(279) $ (92)
=====================================================================================================================
18
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 1999, the board of
directors authorized the repurchase of $500 million of common stock. The
company began repurchasing under this program in 2000, and approximately $430
million of the authorized amount was repurchased as of June 30, 2001. In June
2001, the board of directors authorized the repurchase of an additional $500
million of common stock. Such repurchases will begin sometime after the 1999
authorization has been completed.
On February 27, 2001, Baxter's board of directors approved a 2 for 1 stock split
of the company's common shares. This approval was subject to shareholder
approval of an increase in the number of authorized shares of common stock,
which was received at the company's annual meeting on May 1, 2001. On May 30,
2001, shareholders of record on May 9, 2001 received one additional share of
Baxter common stock for each share held on May 9, 2001. All share and per share
data in the Condensed Consolidated Financial Statements and accompanying notes
has been adjusted and restated to reflect the stock split.
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.
See "Part II - Item 1. Legal Proceedings" 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
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation, as well as other matters. Upon resolution of any of these matters,
the company may incur charges in excess of presently established reserves.
While such future charges could have a material adverse impact on the company's
net income or cash flows in the period in which they are recorded or paid,
management believes that the outcomes of these actions, individually or in the
aggregate, will not have a material adverse effect on the company's consolidated
financial position.
FORWARD-LOOKING INFORMATION
- ---------------------------
The matters discussed above that are not historical facts include forward-
looking statements. These statements are based on the company's current
expectations and involve numerous risks and uncertainties. Some of these risks
and uncertainties are factors that affect all international businesses, while
some are specific to the company and the health-care arenas in which it
operates. The factors below in some cases have affected and could affect the
company's actual results, causing results to differ, and possibly differ
materially, from those expressed in any such forward-looking statements. These
factors include technological advances in the medical field, unforeseen
information technology issues related to the company or third parties, 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 and unforeseen
commercialization and regulatory factors. 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.
19
Currency fluctuations are also a significant variable for global companies,
especially fluctuations in local currencies where hedging opportunities are
unreasonably expensive, or altogether unavailable. If the United States dollar
continues to strengthen against most foreign currencies, the company's growth
rates in its sales and net earnings will be negatively impacted.
Management believes that its expectations with respect to forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of the company's business and operations, but there can be no
assurance that the actual results or performance of the company will conform to
any future results or performance expressed or implied by such forward-looking
statements.
NEW ACCOUNTING STANDARDS
- ------------------------
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," was issued in July 2001. The Statement addresses financial
accounting and reporting for business combinations and supersedes Accounting
Principles Board (APB) Opinion No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." All
business combinations in the scope of this Statement are to be accounted for
using the purchase method. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001 and all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or later.
The company is in the process of assessing the impact of adoption on its
consolidated financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets," was issued in July 2001.
The Statement addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 is effective for fiscal years beginning after December
15, 2001, and applies to all goodwill and other intangible assets recognized in
the financial statements. The Statement addresses how intangible assets that
are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for upon acquisition,
and how goodwill and other intangible assets should be accounted for after they
have been initially recognized in the financial statements. The company is in
the process of assessing the impact of adoption on its consolidated financial
statements.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a complete discussion, refer to the caption "Financial Instrument Market
Risk" in the company's 2000 Annual Report to Stockholders on Form 10-K. Also,
refer to Note 7 in Item 1. Financial Statements in this Form 10-Q for a
discussion of the company's derivative instruments and hedging activities. 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 June 30, 2001
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 approximately $221 million. With respect to the company's cross-currency
swap agreements used to hedge net investments in foreign affiliates, if the U.S.
Dollar uniformly weakened by 10 percent, the fair value of the contracts would
decrease by approximately $218 million as of June 30, 2001. Any increase or
decrease in the fair value of the financial instruments is substantially offset
by a change in value of the hedged items. 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.
21
Review by Independent Accountants
- ---------------------------------
Reviews of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q for the three months and six months ended
June 30, 2001 and 2000 have been performed by PricewaterhouseCoopers LLP, the
company's independent accountants. Their report on the interim condensed
consolidated financial information follows. This report is not considered a
report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and
therefore, the independent accountants' liability under Section 11 does not
extend to it.
22
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet of Baxter
International Inc. and its subsidiaries as of June 30, 2001, and the related
condensed consolidated statements of income for each of the three-month and six-
month periods ended June 30, 2001 and 2000 and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 2001 and 2000.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2000 and the related consolidated statements of income, cash flows and
stockholders' equity for the year then ended (not presented herein), and in our
report dated February 16, 2001 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2000,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Chicago, Illinois
August 9, 2001
23
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
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. The most significant
of these are reported in the company's Annual Report on Form 10-K for the year
ended December 31, 2000, and material developments in such matters for the
quarter ended June 30, 2001 are described below. Upon resolution of any such
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.
Mammary implant litigation
- --------------------------
As previously reported in the company's Annual Report on Form 10-K, the company,
together with certain of its subsidiaries, is currently 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 of American Hospital Supply
Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested
its Heyer-Schulte division in 1984. It is not known how many of these claims
and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed
to other manufacturers. In December 1998, a panel of independent medical
experts appointed by a federal judge announced its findings that reported
medical studies contained no clear evidence of a connection between silicone
mammary implants and traditional or atypical systemic diseases. In June 1999, a
similar conclusion was announced by a committee of independent medical experts
from the Institute of Medicine, an arm of the National Academy of Sciences.
As of June 30, 2001, Baxter, together with certain of its subsidiaries, had been
named as a defendant or co-defendant in 382 lawsuits and four claims relating to
mammary implants, brought by approximately 1,161 plaintiffs, of which 855 are
implant plaintiffs and the remainder are consortium or second generation
plaintiffs. Of those plaintiffs, 32 currently are included in the Lindsey class
action Revised Settlement described below, which accounts for approximately 17
of the pending lawsuits against the company. Additionally, 723 plaintiffs have
opted out of the Revised Settlement (representing approximately 299 pending
lawsuits), and the status of the remaining plaintiffs with pending lawsuits is
unknown. Some of the opt-out plaintiffs filed their cases naming multiple
defendants and without product identification; thus, not all of the opt-out
plaintiffs will have viable claims against the company. As of June 30, 2001,
289 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant
product identification. Furthermore, during the second quarter of 2001, Baxter
obtained dismissals, or agreements for dismissals, with respect to 262
plaintiffs.
In addition to the individual suits against the company, a class action on
behalf of all women with silicone mammary implants is pending in the United
States District Court (U.S.D.C.) for the Northern District of Alabama involving
most manufacturers of such implants, including Baxter, as successor to AHSC
(Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala., CV
94-P-11558-S). The class action was certified for settlement purposes only by
the court on September 1, 1994, and the settlement terms were subsequently
revised and approved on December 22, 1995 (the Revised Settlement). All appeals
directly challenging the Revised Settlement have been dismissed.
24
In addition to the Lindsey class action, the company also has been named in four
other purported class actions in various state and provincial courts, only one
of which is certified.
On March 31, 2000, the United States Department of Justice filed an action
against Baxter and other manufacturers of breast implants, as well as the escrow
agent for the revised settlement fund. The action is pending in the federal
district court in Birmingham, Alabama and seeks reimbursement under various
federal statutes for medical care provided to various women with mammary
implants. The company is defending this litigation.
Plasma-based therapies litigation
- ----------------------------------
As previously reported in the company's Annual Report on Form 10-K, Baxter
currently is a defendant in a number of claims and lawsuits brought by
individuals who have hemophilia, all seeking damages for injuries allegedly
caused by anti-hemophilic 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.
As of June 30, 2001, Baxter had been named in 61 lawsuits and 86 claims in the
United States, Ireland, Italy, Taiwan, Japan, Spain, Sweden, France, and the
Netherlands. The U.S.D.C. for the Northern District of Illinois has approved a
settlement of all U.S. federal court factor concentrates cases. As of June 30,
2001, approximately 6,220 claimant groups had been found eligible to participate
in the settlement, and approximately 300 claimants had opted out of the
settlement. Approximately 6,217 of the claimant groups had received payments as
of June 30, 2001 and payments are expected to continue through 2001 as releases
are received from the remaining claimant groups. The company also has been
named in four purported class actions. None of these class actions has been
certified for trial.
In Japan, Baxter is a defendant, along with the Japanese government and four
other co-defendants, in factor concentrates cases in Osaka, Tokyo, Nagoya,
Tohoku, Fukuoka, Sapporo and Kumamoto. As of June 30, 2001, the cases involved
1,348 plaintiffs, of whom 1,337 have settled their claims.
In addition, Immuno International AG (Immuno), acquired by Baxter in 1996, has
unsettled claims for damages for injuries allegedly caused by its plasma-based
therapies. The typical claim alleges that the individual with hemophilia was
infected with HIV by factor concentrates containing the HIV virus.
Additionally, Immuno faces multiple claims stemming from its vaccines and other
biologically derived 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 in
consideration for a payment by the company of 29 million Swiss Francs to Immuno
as additional purchase price, approximately 26 million Swiss Francs of the
purchase price is being withheld to cover these contingent liabilities.
As previously reported in the company's Annual Report on Form 10-K, Baxter is
currently a defendant in a number of claims and lawsuits brought by individuals
who infused the company's Gammagard(R) IVIG (intravenous immuno-globulin), all
of whom are seeking damages for Hepatitis C infections allegedly caused by
infusing Gammagard(R) IVIG. As of June 30, 2001, Baxter was a defendant in 20
lawsuits and 21 claims in the United States, Denmark, France, Germany, Italy,
Spain and the United Kingdom. One class action in the United States has been
certified. In September 2000, the U.S.D.C. for the Central District of
California approved a
25
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.
Other
- ------
As of September 30, 1996, the date of the spin-off of Allegiance Corporation
(Allegiance) from Baxter, Allegiance assumed the defense of litigation involving
claims related to Allegiance's businesses, including certain claims of alleged
personal injuries as a result of exposure to natural rubber latex gloves.
Allegiance has not been named in most of this litigation but will be defending
and indemnifying Baxter pursuant to certain contractual obligations for all
expenses and potential liabilities associated with claims pertaining to latex
gloves. As of June 30, 2001, the company had been named as a defendant in 608
lawsuits, including the following purported class action: Swartz v. Baxter
Healthcare Corporation, et al. Court of Common Pleas, Jefferson County, PA, 656-
1997 C.D.
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 this position was successfully challenged by one or
more countries' taxing authorities, 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.
26
Item 4. Submission of Matters to a Vote of Security Holders
The company's annual meeting of stockholders was held on May 1, 2001 for the
purpose of electing directors, approving an amendment to Baxter's Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock, approving the incentive compensation program and the appointment
of auditors, and voting on the stockholder proposal listed below. Proxies for
the meeting were solicited pursuant to Section 14(a) of the Securities Exchange
Act of 1934 and there was no solicitation in opposition to management's
solicitation. Each of management's nominees for directors, as listed in the
proxy statement, were elected with the number of votes set forth below.
- --------------------------------------------------------------------------------------------------------------------------------
Number of Votes
-----------------------------------------------
Abstained/
In Favor Withheld
----------- ----------
Pei-yuan Chia 239,592,165 3,184,493
Arnold J. Levine, Ph.D. 238,559,320 4,217,338
Monroe E. Trout, M.D. 239,520,691 3,255,967
The results of other matters voted upon at the annual meeting are as follows:
- --------------------------------------------------------------------------------------------------------------------------------
Number of Votes
-----------
Broker
In Favor Against Abstained Non-Votes
----------- ----------- --------- ----------
The appointment of 231,619,228 10,233,161 924,269 0
PricewaterhouseCoopers LLP
as independent accountants for
the company in 2001 was approved.
The proposal to amend Baxter's 228,479,348 13,142,728 1,154,582 0
Restated Certificate of
Incorporation, as amended,
to increase the number of
authorized shares of
common stock was approved.
The Baxter International Inc. 211,877,236 29,150,437 1,748,985 0
2001 Incentive Compensation
Program was approved.
The stockholder proposal relating 125,996,959 76,650,737 4,195,911 35,933,051
to the declassification of the Board
of Directors was approved.
27
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index hereto.
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 1, 2001, under "Item 5 - Other
Events," which reported that the shareholders of Baxter International Inc.
(Baxter) approved an amendment to Baxter's Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares of
common stock from 350,000,000 to one billion.
A report on Form 8-K was filed on May 22, 2001, under "Item 5 - Other
Events," which reported that Baxter had issued $800 million of convertible
debentures.
A report on Form 8-K was filed on June 27, 2001, under "Item 5 - Other
Events," which reported that the number of shares of common stock of Baxter
registered by certain registration statements on Forms S-3 are deemed to
cover additional shares of common stock issued or issuable to the selling
stockholders there under as a result of Baxter's 2 for 1 stock split.
28
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
------------------------------------
(Registrant)
Date: August 9, 2001 By: /s/ Brian P. Anderson
-------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
29
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
- --------------------------------------------------------------------------------
Number Description of Exhibit
- ------ ----------------------
10.28 Non-Employee Director Stock Option Plan
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter Re Unaudited Interim Financial Information
(All other exhibits have been omitted because they are not applicable or not
required)
30