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 September 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 October 31, 2001 was 590,351,181 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended September 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 .................................................. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................... 24
Review by Independent Accountants ........................................................ 25
Report of Independent Accountants ........................................................ 26
Part II. OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings ............................................................. 27
Item 2. Change in Securities and Use of Proceeds....................................... 30
Item 6. Exhibits and Reports on Form 8-K .............................................. 30
Signature ................................................................................ 31
Exhibits ................................................................................. 32
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 Nine months ended
September 30, September 30,
2001 2000 2001 2000
----------------------- ------------------------
Net sales $1,900 $1,687 $5,527 $4,964
Costs and expenses
Cost of goods sold 1,045 925 3,075 2,768
Marketing and administrative expenses 352 328 1,056 979
Research and development expenses 105 97 312 273
In-process research and development and acquisition-
related charges -- -- -- 286
Goodwill amortization 12 9 35 20
Interest, net 19 25 55 59
Other income (1) (9) (3) (3)
------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,532 1,375 4,530 4,382
------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change 368 312 997 582
Income tax expense 96 81 258 114
------------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of accounting change 272 231 739 468
Discontinued operation
Income from discontinued operation, net of applicable
income tax expense of $5 in 2000 -- -- -- 14
Costs associated with effecting the business distribution -- -- -- (12)
------------------------------------------------------------------------------------------------------------------
Total discontinued operation -- -- -- 2
------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change 272 231 739 470
Cumulative effect of accounting change, net of
income tax benefit of $32 -- -- (52) --
------------------------------------------------------------------------------------------------------------------
Net income $ 272 $ 231 $ 687 $ 470
==================================================================================================================
Earnings per basic common share
Continuing operations, before cumulative effect of
accounting change $ .46 $ .39 $ 1.25 $ .80
Cumulative effect of accounting change -- -- (.09) --
------------------------------------------------------------------------------------------------------------------
Net income $ .46 $ .39 $ 1.16 $ .80
==================================================================================================================
Earnings per diluted common share
Continuing operations, before cumulative effect of
accounting change $ .45 $ .38 $ 1.22 $ .79
Cumulative effect of accounting change -- -- (.09) --
------------------------------------------------------------------------------------------------------------------
Net income $ .45 $ .38 $ 1.13 $ .79
==================================================================================================================
Weighted average number of common shares outstanding
Basic 589 590 589 584
==================================================================================================================
Diluted 609 604 607 595
==================================================================================================================
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)
---------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2001 2000
(unaudited)
-------------------------------------
Current assets Cash and equivalents $ 470 $ 579
Accounts receivable 1,519 1,387
Notes and other current receivables 167 155
Inventories 1,415 1,159
Short-term deferred income taxes 116 159
Prepaid expenses 377 212
---------------------------------------------------------------------------------------------------
Total current assets 4,064 3,651
---------------------------------------------------------------------------------------------------------------------
Property, At cost 5,539 4,978
plant and Accumulated depreciation and amortization (2,411) (2,171)
equipment ---------------------------------------------------------------------------------------------------
Net property, plant and equipment 3,128 2,807
---------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,592 1,239
Insurance receivables 104 160
Other 775 876
---------------------------------------------------------------------------------------------------
Total other assets 2,471 2,275
---------------------------------------------------------------------------------------------------------------------
Total assets $9,663 $8,733
=====================================================================================================================
Current Short-term debt $ 522 $ 576
liabilities Current maturities of long-term debt and lease obligations 43 58
Accounts payable and accrued liabilities 1,297 1,990
Income taxes payable 683 748
---------------------------------------------------------------------------------------------------
Total current liabilities 2,545 3,372
---------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,576 1,726
---------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 117 160
---------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 133 184
---------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 714 632
---------------------------------------------------------------------------------------------------------------------
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, 9,062,515
shares in 2001 and 9,906,124 shares in 2000 (292) (349)
Additional contributed capital 2,332 2,208
Retained earnings 1,516 853
Accumulated other comprehensive loss (577) (649)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 3,578 2,659
---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $9,663 $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)
---------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(brackets denote cash outflows) 2001 2000
-------------------------------------
Cash flows Income from continuing operations before cumulative
from effect of non-cash accounting change $ 739 $ 468
operations Adjustments
Depreciation and amortization 328 301
Deferred income taxes 90 (48)
In-process research and development and acquisition-
related charges -- 286
Other (25) 24
Changes in balance sheet items
Accounts receivable (199) 31
Inventories (223) (174)
Accounts payable and other accrued liabilities (251) (359)
Net litigation payments and other (98) (63)
---------------------------------------------------------------------------------------------------
Cash flows from continuing operations 361 466
Cash flows relating to discontinued operation -- (19)
---------------------------------------------------------------------------------------------------------------------
Cash flows from operations 361 447
---------------------------------------------------------------------------------------------------------------------
Cash flows Capital expenditures (493) (398)
from investing Acquisitions (net of cash received)
activities and investments in affiliates (248) (321)
Divestitures and other asset dispositions (9) (34)
---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities (750) (753)
---------------------------------------------------------------------------------------------------------------------
Cash flows Issuances of debt and lease obligations 1,790 863
from financing Redemptions of debt and lease obligations (783) (1,088)
activities Increase (decrease) in debt with maturities
of three months or less, net (323) 785
Common stock cash dividends (341) (84)
Stock issued under employee benefit plans 150 194
Purchases of treasury stock (219) (350)
---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities 274 320
---------------------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and equivalents 6 (52)
---------------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (109) (38)
Cash and equivalents at beginning of period 579 606
---------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 470 $ 568
=====================================================================================================================
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 was $65 million and $223 million for the three months
ended September 30, 2001 and 2000, respectively, and was $670 million and $418
million for the nine months ended September 30, 2001 and 2000, respectively. The
decline in comprehensive income in the quarter was principally related to
foreign currency hedges. The increase in comprehensive income for the nine-month
period was principally related to currency translation adjustments, partially
offset by foreign currency hedges.
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
5
is determined that a derivative or nonderivative hedging instrument is not or
ceases to be highly 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.
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 will adopt
the standard in its entirety at the beginning of 2002. As required by the
Statement, certain provisions will be applied to goodwill and other acquired
intangible assets 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. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
was issued in August 2001. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001, and addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement supersedes SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
The company plans to adopt the standard at the beginning of 2002, and is in the
process of assessing the impact of adoption on its consolidated financial
statements.
2. INVENTORIES
--------------
Inventories consisted of the following:
------------------------------------------------------------------------------
September 30, December 31,
(in millions) 2001 2000
------------------------------------------------------------------------------
Raw materials $ 384 $ 261
Work in process 225 174
Finished products 806 724
------------------------------------------------------------------------------
Total inventories $1,415 $1,159
==============================================================================
6
3. INTEREST, NET
----------------
Net interest expense consisted of the following:
-------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------
Interest expense $27 $ 35 $ 83 $ 96
Interest income (8) (10) (28) (30)
-------------------------------------------------------------------------------------------------
Interest expense, net $19 $ 25 $ 55 $ 66
=================================================================================================
Allocated to continuing operations $19 $ 25 $ 55 $ 59
=================================================================================================
Allocated to discontinued operation $-- $ -- $ -- $ 7
=================================================================================================
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 nine months ended September 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
was 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. On May 1, 2001, the split was approved by the
company's shareholders. 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 Nine months ended
September 30, September 30,
(in millions) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------
Basic EPS shares 589 590 589 584
-------------------------------------------------------------------------------------------------
Effect of dilutive securities
Employee stock options 19 13 17 10
Employee stock purchase plans and equity
forward agreements 1 1 1 1
-------------------------------------------------------------------------------------------------
Diluted EPS shares 609 604 607 595
=================================================================================================
7
7. FINANCIAL 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
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 periodically 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 Nine months ended
(in millions) September 30, 2001 September 30, 2001
---------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $104 $ --
Cumulative effect of accounting change -- 8
Net (loss) gain in fair value of derivatives (53) 51
Net gain reclassified to earnings (11) (19)
---------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 $ 40 $ 40
=====================================================================================================================
8
For the nine months ended September 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 September 30, 2001, approximately $24 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, which principally include intercompany sales and interest payments
on third-party debt, are expected to impact earnings. The maximum term over
which the company has hedged exposures to the variability of cash flows is four
years.
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 nine months ended September 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 $4
million of net after-tax gains related to the derivative and nonderivative
instruments were included in the company's CTA account as of September 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 company and Nexell entered
into a separate agreement whereby the purchase price of the preferred stock will
be adjusted downward in accordance with the terms of the agreement in the event
that the put rights are exercised by the holders. The changes in fair value of
the put rights and the separate agreement are recorded directly to other income
or expense. Such changes were not material for the three or nine months ended
September 30, 2001.
9
In order to reduce its overall financing costs, the company periodically sells
its trade accounts receivable. During the nine months ended September 30, 2001,
the company generated net operating cash flows of approximately $90 million
relating to such sales. The portfolio of accounts receivable that the company
services totaled approximately $680 million at September 30, 2001. 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 condensed consolidated financial statements.
8. ACQUISITIONS
---------------
Acquisitions during the nine months ended September 30, 2001 and 2000 were
accounted for under the purchase method. The company applied the provisions of
SFAS No. 141 in accounting for acquisitions for which the date of acquisition is
after June 30, 2001. In accordance with SFAS No.142, goodwill related to
acquisitions for which the date of acquisition is after June 30, 2001 is not
being amortized. 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.
Cook Pharmaceutical Solutions
-----------------------------
In August 2001, the company acquired Cook Pharmaceutical Solutions, formerly a
unit of Cook Group Incorporated (Cook) for approximately $220 million, which was
paid in approximately 2.1 million shares of Baxter International Inc. common
stock and $111 million in cash. The acquisition of Cook, which was a business
that provides contract manufacturing filling of syringes and vials, supports the
company's strategic initiative to become a full-line provider of drug delivery
solutions. The following condensed balance sheet summarizes the estimated fair
values of the net assets acquired at the date of acquisition (in millions):
---------------------------------------------------------
Current assets $ 5
Property, plant and equipment 69
Goodwill 136
Other intangible assets 10
---------------------------------------------------------
Net assets acquired $220
=========================================================
The purchase price allocation has not been finalized and is subject to
adjustment. The acquired intangible assets consist of customer relationships and
have a ten-year weighted-average life. The goodwill was allocated to the
Medication Delivery segment and is expected to be fully deductible for tax
purposes.
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.
10
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 Nine months ended
September 30, September 30,
(in millions, except per share data) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
Net sales $1,905 $1,775 $5,592 $5,250
Income from continuing operations before cumulative
effect of accounting change $ 270 $ 233 $ 736 $ 438
Net income $ 270 $ 233 $ 684 $ 440
Earnings per diluted common share $ .44 $ .38 $ 1.12 $ .72
--------------------------------------------------------------------------------------------------------------------
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 pro forma net income relating
to acquisitions for which the date of acquisition is after June 30, 2001 does
not include amortization of goodwill. The diluted pro forma earnings and
per-share earnings for the nine-month period ended September 30, 2000 included
in the table above primarily reflect the historical pre-acquisition net losses
reported by North American Vaccine, Inc., which was acquired in June 2000.
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.
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.
11
Financial information for the company's segments for the three and nine months
ended September 30 is as follows:
Medication
(in millions) Delivery BioScience Renal Other Total
-------------------------------------------------------------------------------------------------------------
For the three months ended
--------------------------
September 30,
-------------
2001
----
Net sales $ 716 $ 680 $ 504 -- $1,900
Pretax income 124 142 81 $ 21 368
2000
----
Net sales $ 682 $ 546 $ 459 -- $1,687
Pretax income 108 114 74 $ 16 312
For the nine months ended
-------------------------
September 30,
-------------
2001
----
Net sales $2,093 $1,997 $1,437 -- $5,527
Pretax income 339 386 219 $ 53 997
2000
----
Net sales $1,969 $1,663 $1,332 -- $4,964
Pretax income 291 358 230 ($297) 582
------------------------------------------------------------------------------------------------------------
The following are reconciliations of total segment amounts to amounts per the
condensed consolidated income statements:
Three months
ended September 30,
-------------------
(in millions) 2001 2000
------------------------------------------------------------------------------------------------------------
Pretax income
-------------
Total pretax income from segments $347 $296
Unallocated amounts
Interest expense, net (19) (25)
Other Corporate items 40 41
------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes $368 $312
------------------------------------------------------------------------------------------------------------
12
Nine months
ended September 30,
-------------------
(in millions) 2001 2000
------------------------------------------------------------------------------------------------
Pretax income
-------------
Total pretax income from segments $944 $ 879
Unallocated amounts
Interest expense, net (55) (59)
In-process research and development and acquisition-
related charges -- (286)
Other Corporate items 108 48
-------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and cumulative effect of accounting change $997 $ 582
-------------------------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS
---------------------
Acquisition of ASTA
-------------------
On October 30, 2001, Baxter acquired a subsidiary of Degussa AG, ASTA Medica
Onkologie GmbH & CoKG (ASTA), for approximately 525 million Euros ($470
million). ASTA, which develops, produces and markets oncology products
worldwide, offers the company a stronger presence in the oncology market as well
as a significant drug development pipeline. ASTA's net sales, which consist
primarily of chemotherapy agents, totaled approximately $130 million in 2000.
The company is in the process of performing the purchase price allocation. 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. A substantial portion of the purchase price
is also expected to be allocated to developed technology and goodwill. 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.
Dialyzers
---------
Following reports in October 2001 of patient deaths in Croatia, Baxter
immediately initiated a voluntary global recall of its A series dialyzers, and
an independent panel of world-renowned dialysis experts was established to
investigate the circumstances surrounding these events. In addition, Baxter has
been conducting its own investigation into these reports and has been fully
cooperating with the United States Food and Drug Administration (U.S. FDA) and
other health authorities around the world.
Preliminary tests lead the company to believe that a processing fluid used in
the manufacturing operation in the company's Ronneby, Sweden facility may have
played a role in the deaths. While a number of confirmatory tests are in the
process of being conducted, Baxter has decided to permanently cease
manufacturing these dialyzers. Baxter has also advised the U.S. FDA, other
health authorities, the manufacturer of the fluid and other dialyzer producers
of its findings. The processing fluid, a perfluorohydrocarbon, is used in the
manufacturing process of certain dialyzer fibers. This process was used by
Baxter only in its Ronneby, Sweden, facility and was used in the manufacture of
fewer than 10 percent of the A series dialyzers. The fluid is not used in the
manufacturing process for other dialyzers that Baxter manufactures or
distributes.
13
The company expects to record a fourth quarter, 2001 after-tax charge of
approximately $100 to $150 million to cover the costs of discontinuing this
product line and other related costs. The after-tax cash impact is estimated to
be no more than $50 million.
14
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 September 30, 2001.
----------------------------------------------------------------------------------------------------------------
RESULTS THROUGH
FULL YEAR 2001 OBJECTIVES SEPTEMBER 30, 2001
-----------------------------------------------------------------------------------------------------------------
. Increase net sales in the low double . Net sales during the nine months ended
digits. September 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- . Net earnings from continuing operations
teens. increased 15 percent for the first nine
months 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 . The company had operational cash outflow
cash flow, after investing more than of $81 million during the nine months ended
$1 billion in capital expenditures and September 30, 2001. The company typically
research and developement generates the majority of its annual cash flow
during the fourth quarter of the year. The
total of capital expenditures and research and
development expenses for the nine months ended
September 30, 2001 was $805 million.
------------------------------------------------------------------------------------------------------------------
15
RESULTS OF OPERATIONS
---------------------
The following management discussion and analysis pertains to continuing
operations.
NET SALES
---------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2001 2000 increase 2001 2000 increase
---------------------------------------------------------------------------------------------------------------------
International $ 915 $ 911 -- $2,749 $2,700 2%
United States 985 776 27% 2,778 2,264 23%
---------------------------------------------------------------------------------------------------------------------
Total net sales $1,900 $1,687 13% $5,527 $4,964 11%
=====================================================================================================================
Excluding the effect of fluctuations in currency exchange rates, which impacted
sales growth unfavorably for all three segments, total net sales growth was 16
percent for both the three months and nine months ended September 30, 2001. 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 five percent and six percent sales
growth during the three months and nine months ended September 30, 2001,
respectively. Excluding the impact of fluctuations in currency exchange rates,
sales growth was seven percent and nine 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 three points of growth in the quarter and nine-month period were
generated from the anesthesia business, with a portion of such growth driven by
the segment's sales of Propofol, 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 for the quarter was driven by
sales of specialty products, particularly premixed drugs and nutrition products.
In addition to strong sales of specialty products, sales of the Colleague(R)
electronic infusion pumps, and intravenous fluids and administration sets used
with electronic infusion pumps, contributed to the growth rate in the
year-to-date period.
BioScience
Sales in the BioScience segment increased 25 percent and 20 percent for the
three months and nine months ended September 30, 2001, respectively. Excluding
the impact of fluctuations in currency exchange rates, sales growth was 28
percent and 25 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 15 points and 10 points of growth in the quarter and
nine-month period, respectively, were due to increased sales of recombinant
products, particularly recombinant Factor VIII, and were principally a result of
improved supply. Sales of plasma-derived products increased the segment's
constant-currency growth rate by approximately 14 points and 13 points during
the quarter and year-to-date period, respectively, due principally to strong
sales of plasma Factor VIII and the first quarter 2001 acquisition of Sera-Tec
Biologicals, L.P. (Sera-Tec). Sera-Tec owned and operated 80 plasma centers in
28 states. The transfusion therapy business also generated solid sales growth
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. Partially offsetting these
increases were reduced sales of vaccines for both the quarter and year-to-date
period.
16
Renal
The Renal segment generated sales growth of 10 percent and eight percent during
the three-month period and nine-month period ended September 30, 2001,
respectively. Excluding the impact of fluctuations in currency exchange rates,
sales growth was 17 percent and 15 percent for the quarter and year-to-date
period, respectively. 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 $40 million and $95 million during the
quarter and nine-month period, respectively. The remaining growth in the Renal
segment was driven principally by continued penetration of products for
peritoneal dialysis, particularly in Latin America, Europe and Asia, as well as
growth in sales of hemodialysis products.
The following tables show key ratios of certain income statement items as a
percent of sales:
GROSS MARGIN AND EXPENSE RATIOS
---------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30, Increase
2001 2000 Decrease 2001 2000 (decrease)
---------------------------------------------------------------------------------------------------------------------
Gross profit margin 45.0% 45.2% (.2) pts 44.4% 44.2% .2 pts
Marketing and
administrative expenses 18.5% 19.4% (.9) pts 19.1% 19.7% (.6) pts
---------------------------------------------------------------------------------------------------------------------
The gross profit margin was relatively consistent for both the quarter and
year-to-date period, with changes in the products and services mix driving the
changes. 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 aggressively manage expenses and leverage acquisitions.
RESEARCH AND DEVELOPMENT
--------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2001 2000 increase 2001 2000 increase
---------------------------------------------------------------------------------------------------------------------
Research and
development expenses $105 $ 97 8% $312 $273 14%
As a percent of sales 6% 6% 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 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 full year 2001 R&D expense percentage growth to be in the low
double digits.
17
GOODWILL AMORTIZATION
Goodwill amortization increased for the three months and nine months ended
September 30, 2001 as compared to the prior year periods primarily due to the
acquisitions of North American Vaccine, Inc. (NAV) in June 2000 and Sera-Tec in
February 2001. For the three months and nine months ended September 30, 2001,
goodwill amortization on a net-of-tax basis was approximately $11 million and
$30 million, respectively, or approximately $0.02 and $0.05 per diluted common
share, respectively. In accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (the Statement),
goodwill relating to acquisitions for which the date of acquisition is after
June 30, 2001 is not being amortized. Effective January 1, 2002, all goodwill
will no longer be amortized, but will be subject to impairment reviews in
accordance with the Statement.
OTHER INCOME AND EXPENSE
Other income for the nine months ended September 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 and nine months ended
September 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.
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 15 percent and 16 percent for the three months and nine
months ended September 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 and, for the
three-month period, decreased pump service costs, partially offset by the
unfavorable impact of fluctuations in currency exchange rates.
BioScience
Pretax income increased 25 percent and eight percent for the three months and
nine months ended September 30, 2001, respectively. The growth in pretax income
was primarily a result of strong sales growth, improved gross margin due to a
change in product mix, and the leveraging of expenses, particularly during the
three-month period ended September 30, 2001. Partially offsetting these
increases was the unfavorable impact of fluctuations in currency exchange rates,
as well as increased R&D investments in the business.
18
Renal
Pretax income increased nine percent for the three months ended September
30, 2001 and decreased five percent for the nine months ended September 30,
2001. The increase in pretax income during the quarter was principally due to
the close management of expenses, partially offset by the unfavorable impact of
fluctuations in currency exchange rates and a change in product mix. The
decrease in pretax income for the year-to-date period was principally due to
unfavorable fluctuations in currency exchange rates and an unfavorable change in
product mix, partially offset by the effect of closely managing administrative
and other 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 nine months ended September 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 EVENTS
In October 2001, the company acquired a subsidiary of Degussa AG, ASTA Medica
Onkologie GmbH & CoKG (ASTA). ASTA develops, produces and markets oncology
products worldwide, and will be included in the Medication Delivery segment.
Also, in the fourth quarter of 2001, the company recalled certain dialyzers and
made a decision to permanently cease manufacturing the dialyzers. 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 nine months ended September 30, 2001.
The effect of increased earnings (before non-cash items) in 2001 and improved
cash flows relating to accounts payable and accrued liabilities was more than
offset by the effect of increases in
19
accounts receivable and inventories, and cash payments relating to the company's
litigation. As further discussed in Note 7 to the Condensed Consolidated
Financial Statements, cash flows benefited from the sales of certain trade
accounts receivables. Such receivables were sold to reduce the overall costs of
financing the receivables.
Cash flows from investing activities were relatively flat for the nine months
ended September 30, 2001. Capital expenditures were higher for the nine months
ended September 30, 2001 as compared to the prior year as the company increased
its investments in various capital projects across the three 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 nine months of 2001 as compared to the
prior year period. Approximately $111 million of the 2001 total related to the
Medication Delivery segment's August 2001 acquisition of Cook Pharmaceutical
Solutions, formerly a unit of Cook Group Incorporated (Cook). A portion of the
purchase price of Cook was paid with Baxter International Inc. common stock.
Refer to Note 8 of the Condensed Consolidated Financial Statements for further
information. Approximately $31 million of the 2001 total related to acquisitions
of dialysis centers in international markets, with the remainder pertaining to
individually insignificant acquisitions. As further discussed in Note 8, the
purchase price of the February 2001 acquisition of Sera-Tec was paid with Baxter
International Inc. common stock. In 2000, net cash outflows relating to
acquisitions included approximately $54 million related to the Renal segment's
March 2000 acquisition of Althin Medical A.B and approximately $48 million
related to the BioScience segment's acquisition of NAV. A portion of the
purchase price for both of these acquisitions was paid in Baxter International
Inc. common stock. Approximately $148 million of the company's acquisitions and
investments for the nine months ended September 30, 2000 related to 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
other minor acquisitions and investments across the various businesses and
product lines.
Cash flows from financing activities decreased for the nine months ended
September 30, 2001. 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 nine-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. Repurchases of common stock were lower in 2001 as compared to
2000. The company's net-debt-to-capital ratio was 42.7 percent and 40.1 percent
at September 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.
20
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:
---------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(in millions) 2001 2000
---------------------------------------------------------------------------------------------------------------------
Cash flows from continuing operations per the company's
Condensed Consolidated Statements of Cash Flows $ 361 $ 466
Capital expenditures (493) (398)
Net interest after tax 33 35
Other, including mammary implant litigation 18 (28)
---------------------------------------------------------------------------------------------------------------------
Operational cash flow - continuing operations $ (81) $ 75
=====================================================================================================================
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 completed the program during
the third quarter of 2001. In June 2001, the board of directors authorized the
repurchase of an additional $500 million of common stock. The company began
repurchasing under this program in the third quarter of 2001.
On February 27, 2001, Baxter's board of directors approved a 2 for 1 stock split
of the company's common shares. On May 1, 2001, the split was approved by the
company's shareholders. 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.
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.
21
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. Many factors 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, but are not limited to,
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, ongoing product testing, regulatory, legal or other developments
relating to the company's A series dialyzers, continued price competition,
product development risks, including technological difficulties, ability to
enforce patents, unforeseen commercialization and regulatory factors and other
factors described in this report. 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.
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 could 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.
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 will adopt
the standard in its entirety at the beginning of 2002. As required by the
Statement, certain provisions will be applied to goodwill and other acquired
intangible assets for which the date of acquisition is July 1, 2001, or
22
later. The company is in the process of assessing the impact of adoption on its
consolidated financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
was issued in August 2001. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001, and addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement supersedes SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
The company plans to adopt the standard at the beginning of 2002, and is in the
process of assessing the impact of adoption on its consolidated financial
statements.
23
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 September 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 $237 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 $255 million as of September 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.
24
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 nine months ended
September 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.
25
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 September 30, 2001, and the
related condensed consolidated statements of income for each of the three-month
and nine-month periods ended September 30, 2001 and 2000 and the condensed
consolidated statements of cash flows for the nine-month periods ended September
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
November 5, 2001
26
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 September 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 September 30, 2001, Baxter, together with certain of its subsidiaries, was
named as a defendant or co-defendant in 346 lawsuits and seven claims relating
to mammary implants, brought by approximately 819 plaintiffs, of which 629 are
implant plaintiffs and the remainder are consortium or second generation
plaintiffs. Of those plaintiffs, 18 currently are included in the Lindsey class
action Revised Settlement described below, which accounts for approximately 16
of the pending lawsuits against the company. Additionally, 514 plaintiffs have
opted out of the Revised Settlement (representing approximately 263 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 September 30,
2001, 317 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant
product identification. Furthermore, during the third quarter of 2001, Baxter
obtained dismissals, or agreements for dismissals, with respect to 252
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.
27
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 in
the federal district court in Birmingham, Alabama against Baxter and other
manufacturers of breast implants, as well as the escrow agent for the revised
settlement fund, seeking reimbursement under various federal statutes for
medical care provided to various women with mammary implants. On September 26,
2001 the district court granted the motion of all defendants, including Baxter,
to dismiss the action.
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 September 30, 2001, Baxter was named in 61 lawsuits and 92 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 September
30, 2001, approximately 6,247 claimant groups had been found eligible to
participate in the settlement, and approximately 300 claimants had opted out of
the settlement. Approximately 6,220 of the claimant groups had received payments
as of September 30, 2001 and payments are expected to continue through 2001 as
releases are received from the remaining claimant groups.
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 September 30, 2001, the cases
involved 1,352 plaintiffs, of whom 1,339 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 September 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 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.
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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 September 30, 2001, the company was named as a defendant in 603
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.
29
Item 2. Change in Securities and Use of Proceeds
On August 20, 2001, pursuant to the exemption from registration under
Section 4(2) of the Securities Act, the company sold approximately 2.1
million shares of its common stock to a qualified institutional buyer in
order to fund a portion of the company's acquisition of Cook
Pharmaceutical Solutions, formerly a unit of Cook Group Incorporated.
The shares are subject to transfer restrictions.
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 November 5, 2001, under "Item 5 --
Other Events," and "Item 7 -- Exhibits," which reported that a Baxter
subsidiary announced that preliminary tests lead the company to
believe that a processing fluid used in the manufacturing operation in
its Ronneby, Sweden facility may have played a role in recent
hemodialysis patient deaths.
30
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: November 6, 2001 By: /s/ Brian P. Anderson
-----------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
31
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
--------------------------------------------------------------------------------
Number Description of Exhibit
------ ----------------------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter Re Unaudited Interim Financial Information
32