EXHIBIT 13
Financial Information
Management's Discussion and Analysis 25
Report of Management 42
Report of Independent Accountants 43
Consolidated Balance Sheets 44
Consolidated Statements of Income 45
Consolidated Statements of Cash Flow 46
Consolidated Statements of Stockholders' Equity
and Comprehensive Income 47
Notes to Consolidated Financial Statements 48
Directors and Executive Officers 74
Company Information 75
Five-Year Summary of Selected Financial Data 76
MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion and analysis presents the factors that had a material effect on
Baxter International Inc.'s (Baxter or the company) results of operations and
cash flows during the three years ended December 31, 2002, and the company's
financial position at that date. The information below pertains to continuing
operations only. As further discussed below and in Note 2 to the consolidated
financial statements, during the fourth quarter of 2002, management decided to
divest certain businesses, principally the majority of the services businesses
previously included in the Renal segment. On March 31, 2000, the cardiovascular
business was distributed to shareholders. The company's consolidated statements
of income and cash flows have been restated to reflect the results of operations
and cash flows of the businesses to be divested and the former cardiovascular
business as discontinued operations. The consolidated balance sheets have not
been restated as the assets and liabilities of the businesses to be divested are
immaterial to the consolidated balance sheets.
The matters discussed in this Annual Report that are not historical facts
include forward-looking statements that involve risks and uncertainties. Actual
results could differ materially. Factors that could cause actual results to
differ include but are not limited to currency exchange rates; interest rates;
technological advances in the medical field; economic conditions; demand and
market acceptance risks for new and existing products, technologies and
health-care services; the impact of competitive products and pricing;
manufacturing capacity; availability of acceptable raw materials and component
supply; new plant start-ups; global regulatory, trade and tax policies;
regulatory, legal or other developments relating to the company's A, AF and AX
series dialyzers; the ability to obtain adequate insurance coverage at
reasonable cost; continued price competition; product development risks,
including technological difficulties; ability to enforce patents; patents of
third parties preventing or restricting the company's manufacture, sale or use
of affected products or technology; actions of regulatory bodies and other
government authorities; reimbursement policies of government agencies and
private payers; commercialization factors; results of product testing;
unexpected quality or safety concerns, whether or not justified, leading to
product launch delays, recalls, withdrawals, or declining sales; and other
factors described elsewhere in this report or in the company's filings with the
Securities and Exchange Commission (SEC).
Management's financial objectives for 2002 were outlined in last year's Annual
Report. The table below reflects these objectives, as well as management's
revised expectations, and the company's results.
KEY FINANCIAL OBJECTIVES AND RESULTS
2002 Objectives per 2001 Annual Report Results
- ----------------------------------------------------------------------------------------------------------------------
Accelerate sales growth to the low-teens. The company's Form 10-Q for the quarterly period ended September 30,
2002 included management's revised expectation that sales growth for
full-year 2002 would be in the low-double digits. Actual net sales
increased 10% in 2002.
- ----------------------------------------------------------------------------------------------------------------------
Grow earnings per share in the mid-teens. Net earnings per diluted share increased 26% in 2002. Net earnings
per diluted share from continuing operations before the cumulative
effect of an accounting change increased 50% in 2002. Earnings increased
from continuing operations in 2002 included charges for in-process
research and development (IPR&D) and other special charges, which in
total reduced 2002 earnings by $0.33 per diluted share. Earnings from
continuing operations in 2001 also included charges for IPR&D and other
special charges, as well as a charge relating to the discontinuance of
the company's A, AF and AX series dialyzers, which in total reduced 2001
earnings by $0.66 per diluted share. Excluding these 2002 and 2001
charges, earnings from continuing operations before cumulative effect of
accounting change per diluted share grew 13% in 2002.
- ----------------------------------------------------------------------------------------------------------------------
Generate at least $500 million in The company generated "operational cash flow" of $427 million
"operational cash flow." Management also during 2002, with continuing operations generating cash inflows of
expects to invest more than $1.3 billion $468 million, and discontinued operations generating cash outflows of
in capital expenditures and research and $41 million. The total of capital expenditures and research
development. and development expenses (excluding the charges for IPR&D and research
and development (R&D) prioritization costs discussed below) was $1.4
billion, of which more than $1.3 billion was from continuing operations.
- ----------------------------------------------------------------------------------------------------------------------
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
Refer to the consolidated financial statements and accompanying notes for
information regarding the company's financial position, results of operations
and cash flows prepared in accordance with generally accepted accounting
principles (GAAP). See below for a quantification of the IPR&D and other special
charges, and the charge relating to the A, AF and AX series dialyzers, along
with a tabular reconciliation of the adjusted earnings per diluted share to
earnings per diluted share calculated in accordance with GAAP. In addition, see
below for a tabular reconciliation of "operational cash flow," which is not a
financial measure defined by GAAP, to cash flows from continuing operations per
the consolidated statements of cash flows.
COMPANY AND INDUSTRY OVERVIEW
Baxter is a global medical products and services company with expertise in
medical devices and supplies, pharmaceuticals and biotechnology that, through
its subsidiaries, assists health-care professionals and their patients with the
treatment of complex medical conditions, including hemophilia, immune
deficiencies, infectious diseases, cancer, kidney disease, trauma and other
conditions. The company generates approximately 50% of its revenues outside the
United States. While health-care cost containment continues to be a focus around
the world, with the aging population and the availability of new and better
medical treatments, demand for health-care products and services continues to be
strong worldwide, particularly in developing markets. The company's strategies
emphasize global expansion and technological innovation to advance medical care
worldwide.
The company's primary markets are highly competitive and subject to substantial
regulation. There has been consolidation in the company's customer base and by
its competitors, which has resulted in pricing and market share pressures. The
company has experienced increases in its labor and material costs, which are
partly influenced by general inflationary trends. Competitive market conditions
have minimized inflation's impact on the selling prices of the company's
products and services. In addition, there are foreign currency fluctuation and
other risks associated with operating on a global basis, such as price and
currency-exchange controls, import restrictions, and volatile economic, social
and political conditions in certain countries, particularly in the Latin
American region. Management expects these trends and risks to continue. The
company will continue to manage these issues by capitalizing on its
market-leading positions, developing innovative products and services, investing
in human resources, upgrading and expanding facilities, leveraging its cost
structure, making acquisitions, and entering into alliances and joint venture
arrangements. The company will also continue to hedge foreign currency risks
where appropriate, and seek opportunities where appropriate to limit any
potential unfavorable impacts of operating in countries with weakened economic
conditions.
RESULTS OF CONTINUING OPERATIONS
Net Sales
Percent
increase
------------
years ended December 31 (in millions) 2002 2001 2000 2002 2001
- --------------------------------------------------------------------------------
Medication Delivery $3,317 $2,905 $2,703 14% 7%
BioScience 3,096 2,786 2,353 11% 18%
Renal 1,697 1,665 1,641 2% 1%
- --------------------------------------------------------------------------------
Total net sales $8,110 $7,356 $6,697 10% 10%
================================================================================
Percent
increase
------------
years ended December 31 (in millions) 2002 2001 2000 2002 2001
- --------------------------------------------------------------------------------
United States $3,974 $3,721 $3,120 7% 19%
International 4,136 3,635 3,577 14% 2%
- --------------------------------------------------------------------------------
Total net sales $8,110 $7,356 $6,697 10% 10%
================================================================================
Fluctuations in currency exchange rates did not have a material impact on
consolidated sales growth in 2002. Such fluctuations unfavorably impacted sales
growth in 2001 by approximately 4 points, and affected all three segments. The
unfavorable impact was principally due to the weakening of the Euro and the
Japanese Yen relative to the U.S. Dollar.
Medication Delivery The Medication Delivery segment generated 14% and 7% sales
growth in 2002 and 2001, respectively. Approximately 4 points of growth in 2002
and 2 points in 2001 were generated by recent acquisitions. Refer to Note 3 for
further information on the company's significant acquisitions. Excluding the
impact of acquisitions, increased sales of certain generic and branded pre-mixed
drugs and drug delivery products contributed 3 points and less than 1 point of
sales growth in 2002 and 2001, respectively. Anesthesia and critical care
products contributed 2 points and 3 points of growth in 2002 and 2001,
respectively, primarily due to increased sales of inhaled anesthetics and
certain generic drugs, as well as geographic expansion in this business. A
26 Baxter International Inc. 2002 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
significant contributor to the growth rate in both years was increased sales of
propofol, an intravenous drug used for the induction or maintenance of
anesthesia in surgery, and as a sedative in monitored anesthesia care. Sales of
electronic infusion pumps and sets contributed approximately 1 point of sales
growth in both 2002 and 2001. The majority of the remaining sales growth in 2002
and 2001 was driven by increased sales of intravenous therapies (which are
described in Note 13), which was largely due to continued geographic expansion.
Sales in the United States and Western Europe have been impacted by competitive
pricing pressures and cost pressures from health-care providers. These factors
are expected to continue to be more than offset by expansion of higher-margin
specialty products outside the United States, as well as increased sales and a
broadening of the portfolio of products and technologies for medication delivery
as a result of internal development, new distribution and alliance agreements,
and acquisitions. As further discussed in Note 3, in late December 2002, the
company acquired the majority of the assets of ESI Lederle (ESI), a division of
Wyeth, a manufacturer and distributor of injectable drugs used in the U.S.
hospital market, for approximately $308 million. This acquisition is expected to
contribute significantly to sales of anesthesia and critical care products in
2003.
BioScience Sales in the BioScience segment increased 11% and 18% in 2002 and
2001, respectively. Approximately 7 points and 8 points of growth in 2002 and
2001, respectively, were due to increased sales of recombinant therapies,
particularly Recombinate Antihemophilic Factor (rAHF) (Recombinate), with such
growth principally a result of yield and cycle time improvements, improved
pricing, continued strong demand for this product and, in 2001, increased
capacity. In late 2002, the BioScience segment experienced a decrease in supply
of bulk recombinant due to a third-party supplier's lower than expected
manufacturing yields. This decrease in supply unfavorably impacted the sales
growth for Recombinate during the fourth quarter of 2002, but is not expected to
continue to impact sales growth in 2003. During both 2002 and 2001, sales of
products that provide for leukoreduc-tion, which is the removal of white blood
cells from blood products used for transfusion, contributed approximately 1
point to the segment's growth rate. Sales of vaccines contributed 5 points to
the segment's growth rate in 2002, principally due to sales of NeisVac-C vaccine
for the prevention of meningitis C and sales of crude bulk vaccine to Acambis,
Inc. (Acambis) in conjunction with its smallpox vaccine contract with the U. S.
Government. Reduced sales of vaccines in 2001 decreased the segment's growth
rate by 3 points in 2001, principally due to the company not receiving a license
for its tick-borne encephalitis product in Germany, and a nonrecurring sale of a
vaccine in 2000. Sales of plasma-based products (which are described in Note 13)
had an insignificant impact on the segment's sales growth rate in 2002,
primarily due to the re-entry of certain competitors in the United States who
were out of the market in the prior year, increased pricing pressures, and a
continuing shift in the market from plasma to recombinant hemophilia products.
During 2001, sales of plasma-based products increased the segment's growth rate
by 9 points principally due to strong sales of plasma-based Factor VIII as a
result of a shortage of recombinant Factor VIII products in the marketplace, the
February 2001 acquisition of Sera-Tec Biologicals, L.P. (Sera-Tec), and improved
raw material supply. The effects of regulatory, supply, competitive and other
pressures on the BioScience segment are expected to continue to be more than
offset by the effects of global expansion, technological advancement and
innovation, product differentiation, increases in manufacturing capacity, yield
and cycle time improvements, and strategic alliances, joint ventures and
acquisitions. Sales of the segment's advanced recombinant therapy, ADVATE,
Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method (rAHF-PFM),
which is subject to approval by regulatory authorities, is expected to
contribute to the segment's future sales growth rate. The impact on sales growth
in 2003 is dependent on the timing of regulatory approvals for this therapy in
the United States and Europe.
Renal Sales from continuing operations in the Renal segment increased 2% and 1%
in 2002 and 2001, respectively. The sales growth in 2002 was driven principally
by continued penetration of products for peritoneal dialysis. The penetration
continues to be strongest in emerging markets such as Latin America and Asia,
where many people with end-stage renal disease are currently under-treated. This
sales growth was partially offset by a decline in sales of hemodialysis
products, primarily due to decreased sales outside the United States. The growth
in 2001 was principally due to the acquisition of Althin Medical A.B. (Althin),
a manufacturer of hemodialysis products, in March 2000. Sales in certain
geographic markets continue to be affected by strong pricing pressures and the
effects of market consolidation. These issues are expected to be offset in the
future by increased penetration of peritoneal dialysis, growth in sales of
hemodialysis products, continuous renal replacement therapy and renal-related
pharmaceuticals, product innovation, and acquisitions and alliances.
Gross Margin and Expense Ratios
years ended December 31 (as a percent of sales) 2002 2001 2000
- --------------------------------------------------------------------------------
Gross margin 46.8% 46.4% 45.6%
Marketing and administrative expenses 19.3% 19.6% 19.9%
================================================================================
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
The improvement in the gross margin in both 2002 and 2001 was primarily due to
changes in the products and services mix, with sales of the company's
higher-margin products, such as Recombinate, generating strong growth across the
company's businesses.
The company has been increasing its investments in sales and marketing programs
in conjunction with the launch of new products, and to continue to drive overall
sales growth. Management is also making other investments in order to enhance
the technological infrastructure of the company and attract and retain a highly
talented workforce. These increased costs were partially offset by more
favorable insurance recoveries related to plasma-based therapies and mammary
implant litigation that, as a percentage of net sales, benefited the expense
ratio by 0.7% in 2002 and 0.3% in 2001.
In late 2002, the company changed its employee vacation policy, which will
result in a reduction of expenses in 2003 of approximately $30 million. This
reduction is expected to be offset by increased expenses in 2003 related to
certain of the company's other benefit plans. The increased benefit plan
expenses are resulting from a reduction in the long-term rate of return expected
on pension assets and a lower discount rate assumption used to calculate pension
and other postretirement benefit costs. Refer to the Critical Accounting
Policies discussion below for further information on these assumptions.
Management is also leveraging recent acquisitions and aggressively managing
costs throughout the company.
Research and Development
Percent increase
----------------
years ended December 31 (in millions) 2002 2001 2000 2002 2001
- -------------------------------------------------------------------------------------------
Research and development expenses $501 $426 $378 18% 13%
as a percent of sales 6.2% 5.8% 5.6%
===========================================================================================
R&D expenses above exclude charges for R&D prioritization costs and IPR&D
relating to acquisitions, which are further discussed below and in Note 3. R&D
expenses increased across all three segments in both 2002 and 2001. The overall
increase was primarily due to spending in the BioScience segment, principally
relating to the development of ADVATE, a next-generation oxygen-therapeutics
program, the pathogen inactivation program, and initiatives in the biosurgery
and plasma-based products areas. Also contributing to the growth rate in 2002
was the Medication Delivery segment's October 2001 acquisition of a subsidiary
of Degussa AG, ASTA Medica Onkologie GmbH & CoKG (ASTA). The status of
development, stage of completion, nature and timing of remaining efforts for
completion, risks and uncertainties, and other key factors vary by R&D project.
In many cases, substantial further R&D will be required to determine the
technical feasibility and commercial viability of the projects. At December 31,
2002, the company had approximately 30 significant R&D projects in its pipeline,
with the projects in various stages of development, from the development or
pre-clinical stage through the final regulatory review stage. Management's
growth strategy is to continue to make significant investments in R&D
initiatives.
R&D Prioritization Costs In 2002, the company recorded a pre-tax charge of $26
million to prioritize its investments in certain of its R&D programs. The
decision was based on management's comprehensive assessment of the company's R&D
pipeline with the goal of having a more focused and balanced strategic
portfolio, which maximizes the company's resources and generates the most
significant return on the company's investment. The charge principally included
severance costs and certain non-cash costs, primarily to write down certain
property, plant and equipment, intangible assets and other assets due to
impairment. Approximately 160 R&D positions were eliminated and $2 million of
cash costs were paid during the fourth quarter of 2002. The remaining cash costs
are expected to be paid in early 2003. Management believes the established
reserve is adequate to complete the contemplated actions. Total cash
expenditures for this plan are being funded with cash generated from operations.
IPR&D The IPR&D charges in 2002 principally consisted of $51 million relating to
the BioScience segment's acquisition of Fusion Medical Technologies, Inc.
(Fusion), $52 million relating to the Medication Delivery segment's November
2002 acquisition of Epic Therapeutics, Inc. (Epic), a drug delivery company
specializing in the formulation of drugs for injection or inhalation, and $56
million relating to the December 2002 acquisition of ESI. The IPR&D charge in
2001 principally consisted of $250 million relating to the Medication Delivery
segment's acquisition of ASTA. The IPR&D charge in 2000 principally consisted of
the $250 million charge relating to North American Vaccine, Inc. (NAV), which is
included in the BioScience segment.
The nature of the acquired R&D projects, timing of projected material net cash
inflows, assumptions used in the valuation, risks associated with the projects,
and other key information, are described in Note 3. The projects are at various
stages of completion, and material net cash inflows are projected to commence
between 2003 and 2009, depending on the particular project. Estimated additional
R&D expenditures prior to the dates of the initial product introductions totaled
over $200 million at the respective
28 Baxter International Inc. 2002 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
acquisition dates. Risk-adjusted discount rates ranging from 16% to 30% were
used to discount projected cash flows. Two of the projects included in the ASTA
IPR&D charge and several of the projects included in the NAV IPR&D charge have
been terminated during 2002, partially in conjunction with the company's
above-mentioned overall assessment and prioritization of its R&D programs. The
in-process values assigned at the 2001 acquisition date and the 2000 acquisition
date to these subsequently terminated ASTA and NAV projects were $53 million and
$216 million, respectively. With respect to NAV, while the acquired projects
were terminated, a considerable portion of the acquired technology is being
utilized in new R&D projects initiated subsequent to the acquisition date. These
ASTA and NAV project terminations, as well as modified timetables for certain
other projects acquired in recent acquisitions, have been due to
post-acquisition evaluations and prioritizations, which were influenced by cost
management considerations, marketplace trends and competitive factors occurring
subsequent to the respective acquisition dates. However, except for the
terminations discussed above, the majority of the acquired R&D projects are
proceeding substantially in accordance with original projections. There can be
no assurance, however, that these efforts will be successful. Delays in the
development, introduction or marketing of a product can result either in such
product being marketed at a time when its cost and performance characteristics
might not be competitive in the marketplace or in a shortening of its commercial
life. If a product is not completed on time, the expected return on the
company's investments could be significantly and unfavorably impacted.
Charge Relating to A, AF and AX Series Dialyzers
As further discussed in Note 4, in October 2001, the company recorded a $189
million pre-tax charge ($156 million on an after-tax basis) related to the
decision to initiate a global recall and permanently cease manufacturing its
Renal segment's A, AF and AX series dialyzers. Testing led the company to
conclude that a processing fluid used during the manufacturing of a limited
number of dialyzers produced in the company's Ronneby, Sweden facility may have
played a role in patient deaths reported in Croatia and other countries.
Included in the pre-tax charge was $116 million related to non-cash costs. These
asset impairment charges principally related to goodwill and other intangible
assets, inventory and property, plant and equipment, and were required based on
management's estimates of the fair values (less costs to sell, as applicable) of
the assets. Also included in the charge was $73 million related to cash costs,
principally pertaining to legal costs, recall costs, contractual commitments,
and severance and other employee-related costs associated with the elimination
of approximately 360 positions. During 2002, the company increased its reserve
for cash costs by $41 million, which was offset by a $41 million increase in
expected insurance recoveries. Of the total reserve for cash costs of $114
million, $13 million was paid during the fourth quarter of 2001, and $63 million
was paid during 2002. Refer to Note 4 for a summary of the activity in the
reserve. Remaining cash costs, which principally pertain to legal matters, are
expected to be paid in 2003 and 2004. Management believes the established
reserve for this exit program is adequate to complete the contemplated actions.
Total cash expenditures for this exit program are being funded with cash
generated from operations. The operating results relating to the A, AF and AX
series dialyzers were not significant.
Goodwill Amortization
In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142), effective January 1,
2002, goodwill is no longer amortized, but is subject to periodic impairment
reviews. Management is increasing R&D and marketing spending to drive the
company's future sales growth, offsetting the reduced expense due to the
elimination of goodwill amortization.
Net Interest Expense
Net interest expense decreased in both 2002 and 2001, principally due to the
effect of lower interest rates, partially offset by the effect of higher average
net debt balances. Contributing to the decrease in net interest expense in both
years was the May 2001 issuance of convertible debt, which bears a lower
interest rate than the debt balances repaid with the proceeds from the issuance.
Other Expense (Income)
As further discussed in Note 10, other expense in 2002 included a $70 million
pre-tax charge for two investments with declines in value deemed to be other
than temporary. Other income in 2001 included a pre-tax gain from the disposal
of an investment which was substantially offset by impairment charges for other
assets and investments with declines in value deemed to be other than temporary.
Other income in 2000 consisted principally of net gains relating to foreign
currency hedging instruments, partially offset by losses relating to the early
termination of debt. Also included in other income and expense in 2002, 2001 and
2000 were amounts relating to minority interests and fluctuations in currency
exchange rates.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
Pre-Tax Income
Refer to Note 13 for a summary of financial results by segment. Certain items
are maintained at the company's corporate headquarters and are not allocated to
the segments. They primarily include the majority of the foreign currency and
interest rate hedging activities, certain foreign currency fluctuations, net
interest expense, income and expense related to certain non-strategic
investments, corporate headquarters costs, and certain nonrecurring gains and
losses (including charges relating to IPR&D, the R&D prioritization, the A, AF
and AX series dialyzers and the impaired investments). The following is a
summary of significant factors impacting the segments' financial results.
Medication Delivery Growth in pre-tax income of 25% and 9% in 2002 and 2001,
respectively, was primarily the result of strong sales growth, particularly in
2002, an improved gross margin due to a change in product mix, the close
management of costs, and the leveraging of expenses in conjunction with recent
acquisitions, partially offset by increased R&D spending, which was primarily
related to the October 2001 acquisition of ASTA, and the impact of fluctuations
in currency exchange rates.
BioScience The 19% and 4% growth in pre-tax income in 2002 and 2001,
respectively, was primarily the result of strong sales growth, an improved gross
margin primarily due to a change in product mix, and the continued leveraging of
costs and expenses. These increases were partially offset by the impact of
foreign currency fluctuations and increased R&D spending, particularly in 2001,
as the business continues to make investments in R&D initiatives consistent with
management's growth strategy.
Renal Pre-tax income increased 13% in 2002 and declined 6% in 2001. Impacting
the change in pre-tax income in both years were unfavorable fluctuations in
currency exchange rates, particularly with respect to Latin American currencies,
and increased R&D spending. Offsetting these factors was the effect of an
improved sales mix, particularly in 2002, and the close management of expenses.
Income Taxes
The effective income tax rate relating to continuing operations was 26%, 31% and
22% in 2002, 2001 and 2000, respectively. The change in the effective income tax
rate from year to year is principally due to varying tax rates applicable to the
above-mentioned charges for IPR&D, R&D prioritization costs and asset
impairments in 2002, and IPR&D and other special charges and the company's A, AF
and AX series dialyzers in 2001.
Income From Continuing Operations Before the Cumulative Effect of an Accounting
Change and Related per Diluted Share Amounts
Income from continuing operations, before the cumulative effect of an accounting
change, was $1,033 million, $675 million and $754 million in 2002, 2001 and
2000, respectively. Excluding special charges, income from continuing
operations, before the cumulative effect of an accounting change, was $1,236
million, $1,074 million and $931 million in 2002, 2001 and 2000, respectively,
and the growth rate was 15% in both 2002 and 2001. The following is a
reconciliation of the earnings from continuing operations adjusted for special
charges to the earnings reported under GAAP.
years ended December 31 (in millions) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative effect of
accounting change, before charges $ 1,236 $ 1,074 $ 931
IPR&D and other special charges (155) (243) (177)
Charge relating to A, AF and AX series dialyzers -- (156) --
Asset impairment charges (48) -- --
- -----------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative effect of
accounting change, per GAAP $ 1,033 $ 675 $ 754
=====================================================================================================
Net earnings per diluted share from continuing operations, before the cumulative
effect of an accounting change, was $1.67, $1.11 and $1.26 in 2002, 2001 and
2000, respectively. Excluding special charges, net earnings per diluted share
from continuing operations, before the cumulative effect of an accounting
change, was $2.00, $1.77 and $1.56 in 2002, 2001 and 2000, respectively, and the
growth rate was 13% in both 2002 and 2001. The following is a reconciliation of
net earnings per diluted share from continuing operations adjusted for special
charges to the earnings per diluted share reported under GAAP.
30 Baxter International Inc. 2002 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
years ended December 31 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative effect of
accounting change, before charges $ 2.00 $ 1.77 $ 1.56
IPR&D and other special charges (0.25) (0.40) (0.30)
Charge relating to A, AF and AX series dialyzers -- (0.26) --
Asset impairment charges (0.08) -- --
- -------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative effect of
accounting change, per GAAP $ 1.67 $ 1.11 $ 1.26
=======================================================================================================
Management believes the presentation and analysis of adjusted earnings and
per-share earnings is useful to investors and others as it provides a view of
the results of the company's operations without unusual or special items.
Similar unusual or special items may or may not occur in the future. Management
believes that the presentation of these non-GAAP measures, along with
reconciliations to the most directly comparable GAAP measures, facilitates a
complete analysis of the company's results of operations.
Loss From Discontinued Operations
As noted above and further discussed in Note 2, in 2002 management decided to
divest certain businesses, principally the majority of the services businesses
included in the Renal segment. Management's decision was based on an evaluation
of the company's business strategy and the economic conditions in certain
geographic markets. Management decided that the Renal segment's long-term sales
growth and profitability would be enhanced by increasing focus and resources on
expanding the product portfolio in peritoneal dialysis, hemodialysis, continuous
renal replacement therapy and renal-related pharmaceuticals. Included in the
loss from discontinued operations in 2002 was a $294 million pre-tax charge
($229 million on an after-tax basis) associated with this decision. The charge
principally pertained to Renal Therapy Services (RTS), and the majority of the
centers to be sold are located in Latin America and Europe. Included in the
pre-tax charge was $269 million for non-cash costs, principally to write down
certain property and equipment, goodwill and other intangible assets due to
impairment. Also included in the pre-tax charge was $25 million for cash costs,
principally relating to severance and other employee-related costs associated
with the elimination of approximately 75 positions, as well as legal and
contractual commitment costs. Additional severance costs may be incurred in 2003
depending on the finalization of the divestiture arrangements. The majority of
the cash costs are expected to be paid in 2003. Management believes the
established reserve for this exit program is adequate to complete the
contemplated actions. Total cash expenditures are being funded with cash
generated from operations. In each of the last three years, these businesses
generated modest operating losses.
Changes in Accounting Principles
Refer to Note 1 regarding the company's adoption in 2002 of SFAS No. 141,
"Business Combinations," SFAS No. 142, and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
The company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133), and its amendments at the beginning of 2001.
In accordance with the transition provisions of SFAS No. 133, the difference
between the fair values and the book values of all freestanding derivatives at
the adoption date was reported as the cumulative effect of a change in
accounting principle. In accordance with the standard, the company recorded a
cumulative effect reduction to earnings of $52 million (net of tax benefit of
$32 million), and a cumulative effect increase to other comprehensive income
(OCI) of $8 million (net of tax of $5 million).
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. A summary of the company's
significant accounting policies is included in Note 1 to the consolidated
financial statements. Certain of the company's accounting policies are
considered critical, as these policies are the most important to the depiction
of the company's financial statements and require significant, difficult or
complex judgments by management, often employing the use of estimates about the
effects of matters that are inherently uncertain. The company uses outside
experts where appropriate. The company applies estimation methodologies
consistently from year to year. Other than changes required due to the issuance
of new accounting pronouncements, there have been no significant changes in
critical accounting policies in the past year. The company's critical accounting
policies have been reviewed with the Audit Committee of the Board of Directors.
The following is a summary of accounting policies management considers critical
to the company's consolidated financial statements.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
Revenue Recognition and Related Provisions and Allowances
As further discussed in Note 1, the company's policy is to recognize revenues
from product sales and services when earned, as defined by GAAP. Specifically,
revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred (or services have been rendered), the price is fixed or
determinable, and collectibility is reasonably assured. For product sales, which
represent the vast majority of the company's consolidated net sales, revenue is
not recognized until title and risk of loss have transferred to the customer.
The company also enters into certain arrangements in which it commits to provide
multiple elements to its customers. Revenue related to an individual element is
deferred unless delivery of the element represents a separate earnings process.
Total revenue for these arrangements is allocated among the elements based on
the fair value of the individual elements, with the fair values determined based
on objective evidence (generally sales of the individual element to other third
parties).
The recognition of revenue requires application of accounting policies for which
GAAP provides numerous models, and for which management must use judgment to
determine the most appropriate model to apply, given the particular facts and
circumstances. In evaluating these transactions, management assesses all
relevant GAAP and chooses the model that most accurately reflects the nature of
the transactions. Management has not determined how reported amounts may differ
based on the application of different models.
Provisions for discounts, rebates to customers, and returns are accrued at the
time the related sales are recorded, and are reflected as a reduction of sales.
These estimates are reviewed periodically and, if necessary, revised, with any
revisions recognized immediately as adjustments to sales. The company
periodically and systematically evaluates the collectibility of accounts
receivable and determines the appropriate reserve for doubtful accounts. In
determining the amount of the reserve, management considers historical credit
losses, the past due status of receivables, payment history and other
customer-specific information, and any other relevant factors or considerations.
Receivables are written off when management determines they are uncollectible.
If the financial condition of the company's customers were to deteriorate,
additional reserves might be required. The company also provides for the
estimated costs that may be incurred under its warranty programs when the cost
is both probable and reasonably estimable, which is at the time the related
revenue is recognized. The cost is determined based upon actual company
experience for the same or similar products as well as any relevant current
information. Estimates of future costs under the company's warranty programs
could change based on developments in the future. Management is not able to
estimate the probability or amount of any future developments that could impact
its reserves, but believes its presently established reserves are adequate based
on all currently available information.
Stock-Based Compensation
As further discussed in Note 1, the company has elected to apply the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans. In accordance with this
intrinsic value method, no compensation expense is recognized for the company's
fixed stock option plans and employee stock purchase plans. Included in Note 1
are disclosures of pro forma net income and earnings per share as if the company
had accounted for employee stock options and stock purchase plans based on the
fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123). The fair value method requires management to make assumptions,
including estimated option and purchase plan lives and future volatilities. The
use of different assumptions would result in different pro forma amounts of net
income and earnings per share. Management believes its assumptions are
appropriate based on all presently available information.
Pension and Other Postretirement Benefit Plans
As further discussed in Note 9, the company provides pension and other
postretirement benefits to certain of its employees. The valuation of the funded
status and net periodic pension and other postretirement benefit costs are
calculated using actuarial assumptions, which are reviewed annually and include
rates of increase in employee compensation, interest rates used to discount
liabilities, the long-term rate of return on plan assets, anticipated future
health-care costs, and other assumptions. The selection of assumptions is based
on both short-term and long-term historical trends and known economic and market
conditions at the time of the valuation. The use of different assumptions would
have resulted in different measures of the funded status and net periodic
pension and other postretirement benefit expenses. Actual results in the future
could differ from expected results. Management is not able to estimate the
probability of actual results differing from expected results, but believes its
assumptions are appropriate based on all presently available information.
The assumptions selected as of the 2002 measurement date, which are used in
measuring pension and other postretirement benefits expense for 2003, are listed
in Note 9. The most critical assumptions pertain to the plans covering domestic
and Puerto Rican employees, as these plans are the most significant to the
company's consolidated financial statements. The assumptions relating to
employee compensation increases and future health-care costs are based on
historical experience, market trends, and anticipated
32 Baxter International Inc. 2002 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
future management actions. As of the 2002 measurement date, the company is using
a discount rate of 6.75%, versus the 7.5% used in the prior year. The discount
rate represents the market return on high-quality fixed-income investments.
Baxter sets the discount rate based on AA corporate bond yields, adjusted for
differences in duration between the bonds and Baxter's pension plan liabilities.
The change in the discount rate assumption from 2001 to 2002 reflects changes in
market interest rates. As of the 2002 measurement date, the company is using a
long-term rate of return of 10%, versus the 11% used in the prior year. Assets
held by the trusts of the plans consist primarily of equity securities.
Management revised this long-term asset return assumption based on a review of
historical compound average asset returns, both company-specific and relating to
the broad market (based on the company's asset allocation), as well as an
analysis of current market information and future expectations. In calculating
net periodic pension cost, the expected return on assets is developed by
applying the assumed long-term rate of return to the market-related value of the
assets. The market-related value of assets is determined by recognizing the
difference between actual returns (based on the fair value of the assets) and
expected returns over a period of five years.
Holding all other assumptions constant, for each 50 basis point increase in the
discount rate, domestic pension and other postretirement benefit pre-tax
expenses would decrease by approximately $8 million. For each 50 basis point
decrease in the discount rate, domestic pension and other postretirement benefit
pre-tax expenses would increase by approximately $12 million. For each 50 basis
point increase (decrease) in the assumed long-term asset rate of return, such
expenses would decrease (increase) by approximately $8 million.
Legal Contingencies
Baxter is currently involved in certain legal proceedings, lawsuits and other
claims, which are further discussed in Note 12. Management assesses the
likelihood of any adverse judgments or outcomes for these matters, as well as
potential ranges of reasonably possible losses, and has established reserves in
accordance with GAAP for certain of these legal proceedings. Management also
records any insurance recoveries that are probable of occurring. The loss
estimates are developed in consultation with outside counsel and are based upon
analyses of potential results. There is a possibility that resolution of these
matters could result in an additional loss in excess of presently established
reserves. Also, there is a possibility that resolution of certain of the
company's legal contingencies for which there is no reserve could result in a
loss. Management is not able to estimate the amount of such loss or additional
loss (or range of loss or additional loss). It is possible, however, that future
results of operations or net cash flows could be materially affected by changes
in management's assumptions or estimates related to these proceedings.
Management believes that, 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, no such charge would have a material adverse
effect on Baxter's consolidated financial position.
Tax Audits and Valuation Reserves
In the normal course of business, the company is regularly audited by federal,
state and foreign tax authorities, and is periodically challenged regarding the
amount of taxes due. These challenges include questions regarding the timing and
amount of deductions and the allocation of income among various tax
jurisdictions. Management believes the company's tax positions comply with
applicable tax law and intends to defend its positions. In evaluating the
exposure associated with various tax filing positions, the company records
reserves for probable exposures, and management believes these reserves are
adequate. The company's effective tax rate in a given financial statement period
could be impacted if the company prevailed in matters for which reserves have
been established, or were required to pay amounts in excess of established
reserves.
The company maintains valuation allowances, which totaled $67 million and $58
million at December 31, 2002 and 2001, respectively, where it is likely that all
or a portion of a deferred tax asset will not be realized. Changes in valuation
allowances are included in the company's tax provision in the period of change.
In determining whether a valuation allowance is warranted, management evaluates
such factors as prior earnings history, expected future earnings, carry-back and
carry-forward periods, tax strategies that could potentially enhance the
likelihood of realization of a deferred tax asset, and other factors.
Accounting for Business Combinations
Assumptions and estimates are employed in determining the fair value of assets
acquired and liabilities assumed in a business combination. A significant
portion of the purchase price of many of the company's acquisitions is assigned
to intangible assets, including IPR&D. Management must use significant judgment
in determining the fair values of these acquired assets. Third-party valuation
consultants are generally used in this process. The income approach is used in
estimating the fair value of IPR&D and other intangible assets (excluding
goodwill). The income approach requires management to make estimates of future
cash flows and to select an appropriate discount rate. Key factors that
management considers are the status of development, stage of completion, nature
and timing of remaining efforts for completion, risks and uncertainties, and
other factors. Management projects future cash flows considering the company's
historical experience and industry trends and averages. No value is assigned to
any IPR&D project unless it is probable
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
of being further developed. The use of alternative purchase price allocations
and alternative estimated useful lives could result in different intangible
asset amortization expense in current and future periods. Intangible
amortization expense is included in the results of operations of the applicable
segment. IPR&D charges are recorded at the corporate level, and are not included
in the results of operations of the segments.
Impairment of Assets
Pursuant to SFAS No. 142, goodwill is subject to impairment reviews at least
annually, or whenever indicators of impairment arise. Intangible assets other
than goodwill and other long-lived assets are reviewed for impairment in
accordance with SFAS No. 144. Refer to Note 1 for further information. The
company's impairment review is based on a discounted cash flow approach that
requires significant management judgment with respect to future volume, revenue
and expense growth rates, changes in working capital use, foreign exchange
rates, appropriate discount rates and other assumptions and estimates. The
estimates and assumptions used are consistent with the company's business plans.
The use of alternative estimates and assumptions could increase or decrease the
estimated fair value of the asset, and potentially result in different impacts
to the company's results of operations. Actual results may differ from
management's estimates.
Hedging Activities
As further discussed below and in Note 6, the company utilizes derivative
instruments to hedge certain of its risks. As Baxter operates on a global basis,
there is a 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. Compliance with SFAS No. 133
and the company's hedging policies requires management to make judgments as to
the probability of anticipated hedged transactions. In making these estimates
and assessments of probability, management analyzes historical trends and
expected future cash flows and plans. The estimates and assumptions used are
consistent with the company's business plans. The use of different estimates and
assumptions would result in different impacts to the company's results of
operations. If, based on these periodic and regular analyses, management
determines that anticipated hedged transactions are no longer probable, the
hedges are immediately dedesignated and discontinued, and the related
net-of-tax gains or losses are immediately reclassified from accumulated OCI to
earnings. If management were to make different assessments of probability or
make the assessments during a different fiscal period, the company's results of
operations for a given period would be different.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows from continuing operations Cash flows from continuing operations
increased in 2002 and decreased in 2001. In 2002, the effect of increased
earnings (before non-cash items) was partially offset by reduced cash flows
principally relating to accounts receivable and inventories, as the company
continues to grow its businesses, particularly outside the United States. In
2001, higher earnings (before non-cash items) were offset by higher net cash
outflows relating to accounts receivable, inventories and other balance sheet
accounts. Accounts receivable balances generally increase as the company
generates sales growth in certain regions outside the United States, which have
longer collection periods. Inventory balances have increased partially in
anticipation of the launch of new products. As further discussed in Note 6, cash
flows benefited from the sales of certain accounts receivable in each year.
Cash flows from discontinued operations Cash flows from discontinued operations
increased in 2002 and decreased in 2001. The increase in 2002 was principally
due to management's decision to reduce the level of acquisitions of RTS centers
due to the economic and currency volatility in Latin America, where RTS
primarily operates. The level of acquisitions of RTS centers had increased from
2000 to 2001. Also contributing to the decrease in cash flows in 2001 was the
spin-off of Edwards Lifesciences Corporation (Edwards) on March 31, 2000.
Cash flows from investing activities Cash flows from investing activities
increased in 2002 and decreased in 2001. Capital expenditures (including
additions to the pool of equipment placed with or leased to customers) increased
12% and 21% in 2002 and 2001, respectively, 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. Capital expenditures are made at a
sufficient level to support the strategic and operating needs of the businesses.
Management expects to invest approximately $850 million in capital expenditures
in 2003.
Net cash outflows relating to acquisitions decreased in 2002 and increased in
2001. In 2002, net cash outflows relating to acquisitions related primarily to
acquisitions and investments in the Medication Delivery segment, with $308
million relating to the December 2002 acquisition of ESI, $59 million relating
to the acquisition of Epic, $43 million relating to the July 2002 acquisition of
Wock-hardt Life Sciences Limited, an Indian manufacturer and distributor of
intravenous fluids, and $24 million relating to the January
34 Baxter International Inc. 2002 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
2002 acquisition of Autros Healthcare Solutions Inc., a developer of automated
patient information and medication management systems. The remainder of the
outflows relating to acquisitions in 2002 consisted of individually small
acquisitions. As further discussed in Note 3, in May 2002, the company acquired
Fusion in a non-cash transaction, with the purchase price paid in Baxter common
stock.
In 2001, net cash outflows relating to acquisitions included $455 million
related to the acquisition of ASTA and $111 million related to the acquisition
of Cook Pharmaceutical Solutions (Cook), formerly a unit of Cook Group
Incorporated. Also included in the 2001 total was $38 million related to the
Renal segment's acquisition of assets and rights to technology pertaining to a
proprietary recombinant erythropoietin drug for the treatment of anemia. The
remainder of the outflows relating to acquisitions in 2001 consisted of
individually small acquisitions. As further discussed in Note 3, the purchase
price of Sera-Tec and a portion of the purchase price of Cook were paid with
Baxter common stock.
In 2000, net cash outflows relating to acquisitions included $55 million related
to the Renal segment's acquisition of Althin and $63 million related to the
BioScience segment's acquisition of NAV, a company engaged in the research,
development, production and sales of vaccines for the prevention of human
infectious diseases. A portion of the purchase price for both of these
acquisitions was paid in company common stock. Approximately $131 million of the
total outflows in 2000 related to several acquisitions and investments in the
Medication Delivery segment, principally the acquisition of a domestic
ambulatory and infusion pump business and a contingent purchase price payment
associated with the 1998 acquisition of a domestic manufacturer of inhalants and
drugs used for general and local anesthesia. The remainder of the outflows
relating to acquisitions in 2000 consisted of individually insignificant
acquisitions.
The cash inflows relating to divestitures and other asset dispositions in 2002
principally consisted of $41 million relating to the sales of certain land and
office space, $15 million relating to the transfer of assets to Edwards, as
further discussed in Note 2, and a final cash receipt related to a prior year
divestiture in the Medication Delivery segment. These cash inflows were
partially offset by a payment made to extinguish the company's liability
relating to the Nexell put rights, as further discussed in Note 6. In 2001, the
company generated $44 million of cash relating to the sale and leaseback of
certain assets. The cash flows relating to divestitures and other asset
dispositions in 2000 principally related to the spin-off of Edwards on March 31,
2000.
Cash flows from financing activities Cash flows from financing activities
increased in both 2002 and 2001. Debt issuances, net of redemptions and other
payments of debt, increased in both years. In December 2002, the company issued
25 million 7% equity units in an underwritten public offering and received net
proceeds of $1.213 billion. Refer to Note 5 for a detailed description of the
equity units. As further described in Note 8, in conjunction with this issuance,
the company issued 14.95 million shares of common stock pursuant to an
underwritten offering and received net proceeds of $414 million. The proceeds
from these concurrent offerings were used to fund acquisitions, settle certain
equity forward agreements and retire a portion of existing debt. In April 2002,
the company issued $500 million of term debt, maturing in May 2007, and bearing
a 5.25% coupon rate. The net proceeds were used for working capital, to repay
certain existing debt, for capital expenditures and for general corporate
purposes.
As further described in Note 5, in May 2001 the company issued $800 million of
callable convertible debentures, bearing an initial 1.25% coupon rate, and
maturing in May 2021, in order to balance its capital structure and reduce net
interest expense. The proceeds of the debt were used to refinance certain of the
company's short-term debt. As of December 31, 2002, the holders can require the
company to repurchase the debt in May of 2003, 2006, 2011 and 2016. The company
also issued other debt during 2001, principally to fund its investing
activities.
In order to better match the currency denomination of its assets and
liabilities, the company rebalanced certain of its debt during 2000, acquiring
$878 million of its U.S. Dollar denominated debt securities and increasing its
non-U.S. Dollar denominated debt.
The company's net-debt-to-capital ratio was 40.3% and 35.9% at December 31, 2002
and 2001, respectively. The net-debt-to-capital ratio is not a measure defined
by GAAP. The ratio is calculated as net debt (short-term and long-term debt and
lease obligations, net of cash and equivalents) divided by capital (the total of
net debt and stockholders' equity). The net-debt-to-capital ratio in 2002 was
calculated in accordance with the company's primary credit agreements, which
give 70% equity credit to the company's equity units.
Common stock cash dividends increased in both 2002 and 2001. Effective at the
beginning of 2000, the company changed from a quarterly to an annual dividend
payout schedule, resulting in lower cash dividends paid during 2000. Aside from
this change, common stock cash dividends increased in both 2002 and 2001 due to
a higher number of shares outstanding. In November 2002, the board of directors
declared an annual dividend on the company's common stock of $0.582 per share.
The dividend, which was
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
payable on January 6, 2003 to stockholders of record as of December 13, 2002, is
a continuation of the current annual rate. Cash received for stock issued under
employee benefit plans decreased in both 2002 and 2001. The decrease in 2002 was
primarily due to a lower level of stock option exercises. The decrease in 2001
was primarily due to an unusually high level of stock option exercises in 2000
as employees transferring to Edwards as a result of the March 31, 2000 spin-off
of that business were required to exercise their options by June 30, 2000. In
order to rebalance the company's capital structure following the acquisition of
ASTA, the company issued 9,656,237 shares of Baxter common stock for $500
million in December 2001. Stock repurchases increased in 2002 and decreased in
2001. The increase in repurchases in 2002 was principally related to the
company's decision to exit substantially all of its equity forward agreements,
which is further discussed below.
"Operational cash flow" 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. Management believes
providing this supplemental non-GAAP measure facilitates a complete analysis of
the company's cash flows.
The following table reconciles cash flows from continuing operations, as
determined by GAAP, to "operational cash flow," which is not a measure defined
by GAAP:
Brackets denote cash outflows
years ended December 31 (in millions) 2002 2001 2000
- ----------------------------------------------------------------------------------------
Cash flows from continuing operations under GAAP $1,251 $1,181 $1,259
Capital expenditures (848) (759) (625)
Net interest after tax 40 54 51
Other 25 80 (48)
- ----------------------------------------------------------------------------------------
"Operational cash flow" - continuing operations $ 468 $ 556 $ 637
========================================================================================
Long-Term Debt, Credit Facilities, Access to Capital, Commitments and
Contingencies
In the normal course of business, the company enters into contracts and
commitments which obligate the company to make payments in the future. The table
below sets forth the company's significant future obligations by time period.
Excluded from this table are accounts payable and accrued expenses, and certain
other short-term and long-term liabilities included in the consolidated balance
sheet, as well as the contingent liabilities discussed below.
years ended December 31 (in millions) 2003 2004 2005 2006 2007 Thereafter Total
- -----------------------------------------------------------------------------------------------------------
Short-term debt $ 112 $ -- $ -- $ -- $ -- $ -- $ 112
Long-term debt 919/1/ 480 149 1,928 674 320 4,470
Leases, principally operating 116 93 70 68 76 104 527
- -----------------------------------------------------------------------------------------------------------
Total contractual cash obligations $1,147 $573 $219 $1,996 $750 $424 $5,109
===========================================================================================================
/1/ Includes $800 million of convertible debt which may be put to Baxter in May
2003 and $12 million of commercial paper. As reflected in the Future Minimum
Lease Payments and Debt Maturities table in Note 5, this debt is supported
by existing credit facilities with funding expiration dates in 2004 and
2007, and management intends to refinance this debt on a long-term basis.
The company intends to fund its short-term and long-term obligations as they
mature through cash flows from operations, by issuing additional debt, by
entering into other financing arrangements or by issuing common stock. 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. The company's ability to generate cash flows from
operations, issue additional debt, enter into other financing arrangements, or
raise additional long-term capital on acceptable terms could be adversely
affected in the event there is a material decline in the demand for the
company's products, deterioration in the company's key financial ratios or
credit ratings, or other significantly unfavorable changes in conditions. While
a deterioration in the company's credit rating could unfavorably impact the
financing costs associated with the credit arrangements and debt outstanding,
such a downgrade would not affect the company's ability to draw on the credit
arrangements, and would not result in an acceleration of the scheduled
maturities of the outstanding debt.
36 Baxter International Inc. 2002 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
Refer to Note 5 for further discussion of the company's long-term debt, credit
facilities and other commitments. The company maintains two revolving credit
facilities, which totaled $1.6 billion at December 31, 2002, and have funding
expiration dates in 2004 and 2007. The facilities enable the company to borrow
funds in U.S. Dollars, Euros or Swiss Francs on an unsecured basis at variable
interest rates and contain various covenants, including a maximum
debt-to-capital ratio and a minimum interest coverage ratio. The company has
never drawn on these facilities and does not intend to do so in the foreseeable
future. Baxter also maintains other short-term credit arrangements, which
totaled $722 million at December 31, 2002, of which $112 million of borrowings
were outstanding. As of December 31, 2002, the company can issue up to $70
million of securities, including debt, preferred stock, common stock, warrants,
purchase contracts and other securities, under effective registration statements
filed with the SEC. Management intends to file a registration statement in 2003
to increase the amount of the securities available for issuance. The company's
debt ratings on senior debt are A3 by Moody's, A by Standard & Poor's and A by
Fitch. The company's debt ratings on short-term debt are P2 by Moody's, A1 by
Standard & Poor's and F1 by Fitch.
As further discussed in Note 5, the company periodically enters into off-balance
sheet financing arrangements where economical and consistent with the company's
business strategy. At December 31, 2002 the company maintains operating lease
agreements relating to facilities and equipment used in the operations of the
company and its affiliates. Two of the lease agreements are with special-purpose
entities which, in accordance with GAAP, are not consolidated by the company.
Under each lease, the company has the right to renegotiate renewal terms,
exercise a purchase option with respect to the leased property or arrange for
the sale of the leased property. In the event the leased property is sold on
behalf of the lessor and the sales proceeds are less than the lessor's
investment in the property, the company is responsible for the shortfall, up to
an aggregate maximum recourse amount under all of the leases of $220 million. At
December 31, 2002, management believes the fair values of the properties equal
or exceed the lessors' investments in the leased properties.
As further discussed in Note 6, the company has also entered into agreements
with financial institutions whereby it periodically securitizes an undivided
interest in certain pools of trade accounts receivable (including lease
receivables). Pursuant to its primary securitization agreement, a subsidiary of
the company has irrevocably sold accounts receivable to a special-purpose
bankruptcy-remote entity that finances these purchases by issuing beneficial
interests in the receivables to third-party investors. Subject to certain
conditions, the subsidiary may sell additional eligible receivables from time to
time in the future. In accordance with GAAP, the special-purpose
bankruptcy-remote entity is not consolidated by the company. Under the company's
other securitization facilities, the company may transfer, on an ongoing basis,
undivided ownership interests in eligible accounts receivables directly to
certain third-party investors. Certain of the arrangements include limited
recourse provisions, which are not material to the consolidated financial
statements. Neither the buyers of the receivables nor the investors in these
transactions have recourse to assets other than the transferred receivables. The
company continues to service the receivables under all of the arrangements, and
retains a subordinated residual interest in the receivables under certain of the
arrangements. The carrying amount of the retained interests, which approximates
fair value, was $78 million at December 31, 2002. The amount of the retained
interests and the costs of certain of the securitization arrangements vary with
the company's credit rating. Under one of the agreements, the company is
required to maintain compliance with various covenants, including a maximum
debt-to-capital ratio and a minimum interest coverage ratio. The company was in
compliance with all covenants at December 31, 2002. Another arrangement requires
that the company post modest cash collateral in the event of a specified
unfavorable change in credit rating. The potential cash collateral, which was
not required as of December 31, 2002, totals less than $20 million. The
portfolio of receivables sold totaled $721 million and $683 million at December
31, 2002 and 2001, respectively. The proceeds from the receivable sales were
used to reduce borrowings.
As further discussed in Note 6, in order to partially offset the dilutive effect
of employee stock options, the company has periodically entered into forward
agreements with independent third parties related to the company's common stock.
The forward agreements, which have a fair value of zero at inception, require
the company to purchase its common stock from the counterparties on specified
future dates and at specified prices. The company may, at its option, terminate
and settle these agreements early at any time before maturity. The agreements
include certain Baxter stock price thresholds, below which the counterparty has
the right to terminate the agreements. If the thresholds were met in the future,
the number of shares that could potentially be issued by the company under all
of the agreements is subject to contractual maximums, and the maximum at
December 31, 2002 is 115 million shares. The contracts give the company the
choice of net-share, net-cash or physical settlement upon maturity or upon any
earlier settlement date. In accordance with GAAP, these contracts are not
recorded in the financial statements until they are settled. The settlements
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
of these contracts (whether by net-share, net-cash or physical settlement) are
classified within stockholders' equity. At December 31, 2002, the company had
outstanding forward agreements related to 15 million shares, which all mature in
2003, and have exercise prices ranging from $33 to $52 per share, with a
weighted-average exercise price of $49 per share (the company's common stock
closed at $28 on December 31, 2002). In 2002, management decided to exit
substantially all of the forward agreements and the company completed a
significant amount of the terminations during 2002. Management expects to
complete the exit strategy during 2003. As discussed above, a portion of the net
proceeds from the December 2002 issuance of equity units was used to fund the
exit of the equity forward agreements.
As discussed in Note 5, the company has guaranteed repayment of certain shared
investment plan participant obligations, in the amount of $219 million at
December 31, 2002. The plan also includes certain risk-sharing provisions
whereby, after May 3, 2002, the company shares 50% in any loss incurred by the
participants relating to a stock price decline. The maximum loss under this
risk-sharing provision, assuming the company's stock price declines to zero, is
$90 million. The company may take actions relating to participants and their
assets to obtain full reimbursement for any amounts the company pays to the
banks pursuant to the loan guarantee, in excess of the obligation under the
risk-sharing provision. No liability has been recorded relating to these
contingencies.
As further discussed in Note 3, the company has contingent liabilities to pay
additional purchase price on certain recent business acquisitions of up to $292
million based on a percentage of future revenues and profits and the achievement
of certain regulatory approval milestones.
As discussed in Note 5, in the normal course of business, Baxter enters into
certain joint development and commercialization arrangements with third parties,
often with investees of the company. The arrangements are varied but generally
provide that Baxter will receive certain rights to manufacture, market or
distribute a specified technology or product under development by the third
party, in exchange for payments by Baxter. At December 31, 2002, the unfunded
milestone payments under these arrangements totaled less than $150 million, and
the majority of them were contingent upon the third parties' achievement of
contractually specified milestones.
As discussed in Note 5, as part of its financing program, the company had
commitments to extend credit, two of which were to investees, of $180 million
and $68 million at December 31, 2002 and 2001, respectively, of which $81
million and $30 million was drawn and outstanding at December 31, 2002 and 2001,
respectively. Included in the total commitment amount at December 31, 2002 was a
commitment to extend a $50 million five-year loan to Cerus Corporation (Cerus).
Baxter owns approximately 2% of the common stock of Cerus. The loan commitment,
which was completely funded in early 2003, bears a 12% interest rate, with no
interest or principal payments due until 2008. The loan is secured with
first-priority liens on Cerus' accounts receivable arising from the future sale
of certain of Cerus' products. Also included in the total commitment amount at
both December 31, 2002 and 2001 was a commitment to Acambis to provide financing
of $40 million, of which approximately $21 million was drawn and outstanding at
both December 31, 2002 and 2001. Baxter owns approximately 17% of the common
stock of Acambis. The financing arrangement includes an initial term of five
years, and renewal options.
As discussed in Note 9, as a result of recent unfavorable asset returns and a
decline in market interest rates, at December 31, 2002 the company recorded a
net-of-tax reduction of $517 million to accumulated OCI, which is a component of
stockholders' equity, in order to establish an additional minimum liability in
the consolidated balance sheet for its defined benefit pension plans. This had
no impact on the company's results of operations. As required by SFAS No. 87,
"Employers' Accounting for Pensions," if the accumulated benefit obligation
relating to a pension plan exceeds the fair value of the plan's assets, the
company's established liability for the plan must be at least equal to the
unfunded accumulated benefit obligation. Depending on market conditions and
interest rate movements in the future, additional charges to accumulated OCI
might be required in the future based on valuations performed on future
measurement dates. Based on the 2002 measurement of plan assets and liabilities,
management expects to have minimal, if any, cash requirements related to the
company's plans during 2003. Cash requirements, if any, during 2004 and beyond,
will depend on future market conditions.
Refer to Note 12 for a discussion of the company's legal contingencies. Upon
resolution of any of these uncertainties, the company may incur charges in
excess of presently established reserves. While such a future charge could have
a material adverse effect on the company's net income or cash flows in the
period in which it is recorded or paid, based on the advice of counsel,
management believes that any outcome of these actions, individually or in the
aggregate, will not have a material adverse effect on the company's consolidated
financial position.
38 Baxter International Inc. 2002 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
Based on the company's assessment of the costs associated with its environmental
responsibilities, including recurring administrative costs, capital expenditures
and other compliance costs, such costs have not had, and in management's
opinion, will not have in the foreseeable future, a material effect on the
company's financial position, results of operations, cash flows or competitive
position.
Stock Repurchase Program
As authorized by the board of directors, from time to time the company
repurchases its stock on the open market to optimize its capital structure,
depending upon its operational cash flows, net debt level and current market
conditions. As further discussed in Note 6, the company also periodically
repurchases its stock from counterparty financial institutions in conjunction
with the settlement of its equity forward agreements. Effective December 1,
2002, the company will no longer treat settlements of equity forward agreements
as repurchases under the board-authorized open market repurchase program, as
such settlements are not open market transactions. As of December 31, 2002, $243
million was remaining under the board of directors' October 2002 authorization.
Total stock repurchases were $1,169 million, $288 million and $375 million in
2002, 2001 and 2000, respectively. The stock repurchases in 2002 included $1,138
million to settle equity forward agreements.
Authorized Shares
In May 2002, shareholders of record on March 8, 2002 approved an amendment to
the company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock to two billion shares from one billion shares.
The additional shares enhance the company's flexibility in connection with
possible future actions, such as stock splits, stock dividends, acquisitions of
property and securities of other companies, financings and other corporate
purposes.
Stock Split
On February 27, 2001, Baxter's board of directors approved a two-for-one 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 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 this report has been
adjusted and restated to reflect the split.
FINANCIAL INSTRUMENT MARKET RISK
The company operates on a global basis, and is exposed to the risk that its
earnings, cash flows and stockholders' equity could be adversely impacted by
fluctuations in currency exchange rates, interest rates and the market price of
the company's common stock. 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. Refer to Note 6 for
further information regarding the company's financial instruments and hedging
strategies.
Currency Risk
The company is primarily exposed to currency exchange-rate risk with respect to
firm commitments, forecasted transactions and net assets denominated in Japanese
Yen, 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 and stockholders' equity volatility
resulting from fluctuations in currency exchange rates.
The company principally uses forward and option 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 enters into foreign currency
forward agreements and cross-currency swap agreements to hedge certain
receivables, payables and debt denominated in foreign currencies. The company
also periodically hedges certain of its net investments in international
affiliates using a combination of debt denominated in foreign currencies and
cross-currency swap agreements. Certain other firm commitments and forecasted
transactions are also periodically hedged with forward and option contracts.
In adopting SFAS No. 133, management reassessed its hedging strategies, and, in
some cases, increased the company's use of derivative instruments or changed the
type of derivative instrument used to manage currency exchange-rate risk, in
part because the new accounting standard allows for increased opportunities and
different approaches for managing the volatility in earnings and stockholders'
equity resulting from fluctuations in currency exchange rates.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
As part of its risk-management program, the company performs sensitivity
analyses to assess potential changes in the fair value of its foreign exchange
financial instruments relating to hypothetical and reasonably possible near-term
movements in currency exchange rates. A sensitivity analysis of changes in the
fair value of foreign exchange forward and option contracts outstanding at
December 31, 2002, while not predictive in nature, indicated that if the U.S.
Dollar uniformly fluctuated unfavorably by 10% against all currencies, the net
fair value of those contracts of $18 million would decrease by approximately
$176 million. A similar analysis performed with respect to forward and option
contracts outstanding at December 31, 2001 indicated that the fair value of such
contracts of $163 million would decrease by $157 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%, the fair value
of the contracts, which was a negative $498 million as of December 31, 2002,
would decrease by approximately $389 million. A similar analysis performed with
respect to the cross-currency swap agreements outstanding at December 31, 2001
indicated that the fair value of such contracts, which was a negative $1
million, would decrease by $72 million. Any increase or decrease in the fair
value of cross-currency swap agreements as a result of fluctuations in currency
exchange rates is substantially offset by the change in the value of the hedged
net investments in foreign affiliates. The models recalculate the fair value of
the contracts outstanding by replacing the actual exchange rates at December 31,
2002 and 2001, respectively, with exchange rates that are 10% unfavorable to the
actual exchange rates for each applicable currency. All other factors are held
constant. 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. The analyses also
disregard the offsetting change in value of the underlying hedged transactions
and balances.
Equity Risk
As further discussed above and in Note 6, in order to partially offset the
potentially dilutive effect of employee stock options, the company periodically
enters into forward agreements with independent third parties related to the
company's common stock. The forward agreements, which have a fair value of zero
at inception, are not recorded in the financial statements until they are
settled, and are classified within stockholders' equity. As part of its
risk-management program, the company performs sensitivity analyses to assess
potential changes in the fair value of its forward agreements relating to
hypothetical and reasonably possible near-term movements in the company's stock
price. If the company's stock price as of December 31, 2002 were to decline by
10%, the fair value of these contracts, which were in a negative position of
$302 million at December 31, 2002 (based on a common stock price of $28 at
December 31, 2002), would be reduced by approximately $42 million. Performing a
similar analysis as of December 31, 2001, if the company's stock price as of
December 31, 2001 were to decline by 10%, the fair value of these contracts,
which were in a positive position of $167 million at December 31, 2001 (based on
a common stock price of $53.63 at December 31, 2001), would be reduced by
approximately $165 million.
Interest Rate and Other Risks
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 periodically enters into interest rate swaps, in which the
company agrees to exchange, at specified intervals, the difference between fixed
and floating interest amounts calculated by reference to an agreed-upon notional
amount. The company also uses forward-starting interest rate swaps and treasury
rate locks to hedge the risk to earnings associated with fluctuations in
interest rates relating to anticipated issuances of term debt.
As part of its risk-management program, the company performs sensitivity
analyses to assess potential gains and losses in earnings relating to
hypothetical movements in interest rates. A 17 basis-point increase in interest
rates (approximately 10% of the company's weighted-average interest rate during
2002) affecting the company's financial instruments, including debt obligations
and related derivatives, and investments, would have an immaterial effect on the
company's 2002 and 2001 earnings and on the fair value of the company's
fixed-rate financial instruments as of the end of such fiscal years.
As discussed in Note 6, the fair values of the company's long-term litigation
liabilities and related insurance receivables were computed by discounting the
expected cash flows based on currently available information. A 10% movement in
the assumed discount rate would have an immaterial effect on the fair values of
those assets and liabilities.
With respect to the company's investments in affiliates, management believes any
reasonably possible near-term losses in earnings, cash flows and fair values
would not be material to the company's consolidated financial position.
40 Baxter International Inc. 2002 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING AND DISCLOSURE STANDARDS
SFAS No. 149, "Accounting for Certain Financial Instruments with Characteristics
of Liabilities and Equity," which is expected to be issued in 2003, will require
that certain financial instruments that have characteristics of both liabilities
and equity be classified as liabilities in the issuing company's balance sheet.
Many of these instruments were previously classified as equity. The new rules
will be effective immediately for all contracts created or modified after the
date the pronouncement is issued, and will be otherwise effective for Baxter at
the beginning of the third quarter of 2003. The new rules are to be applied
prospectively with a cumulative-effect adjustment for contracts that were
created before the pronouncement was issued and that still exist at the
beginning of that first interim period. Under the new rules, the balance sheet
classification of the company's equity forward agreements, which are described
above and in Note 6, will change from equity to liabilities. As discussed above,
the company is in the process of exiting these agreements and expects to
complete the exit strategy during 2003. Management will analyze this accounting
pronouncement, and does not anticipate that the new standard will have a
material impact on the company's consolidated financial statements.
Financial Accounting Standards Board (FASB) Interpretation No. 46,
"Consolidation of Variable Interest Entities" (Interpretation No. 46), was
issued in January 2003. The Interpretation defines variable interest entities
(VIE) and requires that the assets, liabilities, noncontrolling interests, and
results of activities of a VIE be consolidated if certain conditions are met.
For VIE's created on or after January 31, 2003, the guidance will be applied
immediately. For VIE's created before that date, the guidance will be applied at
the beginning of the third quarter of 2003. The new rules may be applied
prospectively with a cumulative-effect adjustment as of the beginning of the
period in which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated. Management is in the process of analyzing
the potential effect of this recently issued accounting pronouncement on the
company's future consolidated financial statements, including the impact on
certain of the company's operating leases, which are described in Note 5, and
the accounts receivable securitization arrangements, which are described in Note
6.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS No. 148), which amends SFAS No. 123, was issued in December
2002. The new standard provides alternative methods for transition for a
voluntary change from the intrinsic method of accounting to the fair value-based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require more
prominent and frequent disclosures in financial statements about the effects of
stock-based compensation. The transition guidance and annual disclosure
provisions are effective for 2002. The new interim disclosure provisions are
effective beginning in the first quarter of 2003. The company has implemented
the annual disclosure provisions in these consolidated financial statements.
Management does not have immediate plans for the company to voluntarily elect to
adopt the fair value-based method of accounting for stock-based employee
compensation.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others"
(Interpretation No. 45), was issued in November 2002. The initial recognition
and measurement provisions of this new standard, which require a guarantor to
recognize a liability at inception of a guarantee at fair value, are effective
on a prospective basis to guarantees issued or modified on or after January 1,
2003. Management is in the process of analyzing the recognition and measurement
provisions of Interpretation No. 45, and has not estimated the potential impact
on the company's future consolidated financial statements, as the impact will
depend on the nature and amount of future transactions. The disclosure
provisions, which increase the required disclosures relating to guarantees, have
been adopted in these consolidated financial statements.
Emerging Issues Task Force (EITF) No. 00-21, "Revenue Arrangements with Multiple
Deliverables" (EITF No. 00-21), was issued in November 2002. The EITF No. 00-21
consensus, which is effective for revenue arrangements entered into on or after
July 1, 2003, outlines the approach to be used to determine when a revenue
arrangement for multiple deliverables should be divided into separate units of
accounting and, if separation is appropriate, how the arrangement consideration
should be allocated to the identified accounting units. Management is in the
process of analyzing the new rules and has not determined the potential impact
on the company's future consolidated financial statements, as the impact will
depend on the nature and amount of future transactions.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS No. 146), was issued in June 2002. SFAS No. 146 is effective for exit or
disposal activities initiated on or after January 1, 2003, and requires that
costs associated with exit or disposal activities be recognized when they are
incurred rather than on the date the company commits to an exit or disposal
plan. SFAS No. 146 also establishes that the liability should be measured and
recorded at fair value. Accordingly, the new standard changes the amount and
timing of expense recognition related to any future exit or disposal activities.
41
REPORT OF MANAGEMENT
Management is responsible for the integrity and accuracy of the consolidated
financial statements of Baxter International Inc. (Baxter) and other financial
data included in this Annual Report. The financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America and include amounts based on the best estimates and judgments of
management with appropriate consideration given to materiality.
Management believes that the foundation of an effective system of internal
controls is a strong ethical company culture. The Corporate Responsibility
Office, which was established in 1993 and reports to the Public Policy Committee
of the Board of Directors, is responsible for developing and communicating
Baxter's business practice standards and policies; providing guidance and
reporting potential business practice violations through multiple channels,
including a confidential toll-free telephone number; and monitoring global
compliance through, among other processes, its structure of regional business
practice committees. The monitoring process includes an annual certification of
compliance with Baxter's business practice standards by senior managers and
thousands of other employees worldwide. These activities are coordinated and
implemented by Baxter's Business Practices staff.
Management maintains a system of internal controls designed to provide
reasonable assurance that Baxter's assets are protected and that transactions
are appropriately authorized and recorded to permit the preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America. The concept of reasonable
assurance is based on the recognition that there are inherent limitations in all
systems of internal controls, and the cost of such systems should not exceed the
benefits derived. The system of internal controls, as well as Baxter's other
disclosure controls and procedures, are supported by qualified personnel,
organizational assignments that provide appropriate delegation of authority and
division of responsibility, written policies and procedures, and Baxter's
Disclosure Committee. Internal controls are monitored by a staff of corporate
auditors who recommend changes to the system in response to changes in business
conditions and operations.
The Audit Committee of the Board of Directors, which is composed entirely of
independent directors, meets periodically with management, the corporate
auditors and the independent accountants to review audit plans and results,
internal controls, financial reports and related matters. Both the corporate
auditors and the independent accountants report directly to the Audit Committee
and periodically meet privately with the committee and have unrestricted access
to its individual members. The Audit Committee has established policies and
practices consistent with the recently enacted corporate reform laws to ensure
auditor independence.
PricewaterhouseCoopers LLP, independent accountants, are engaged by the Audit
Committee to audit Baxter's consolidated financial statements in accordance with
auditing standards generally accepted in the United States of America. Their
opinion is based on procedures that they believe to be sufficient to provide
reasonable assurance that the consolidated financial statements contain no
material errors.
/s/ Harry M. Jansen Kraemer, Jr. /s/ Brian P. Anderson
Harry M. Jansen Kraemer, Jr. Brian P. Anderson
Chairman and Chief Senior Vice President and
Executive Officer Chief Financial Officer
42 Baxter International Inc. 2002 Annual Report
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Baxter International Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholders' equity and
comprehensive income present fairly, in all material respects, the financial
position of Baxter International Inc. (the company) and its subsidiaries at
December 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the company adopted Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," on January 1, 2002 for all goodwill and intangible assets acquired
prior to July 1, 2001. Effective January 1, 2001, the company adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
February 14, 2003
43
CONSOLIDATED BALANCE SHEETS
as of December 31 (in millions, except share information) 2002 2001
- ------------------------------------------------------------------------------------------------
Current Assets Cash and equivalents $ 1,169 $ 582
Accounts and other current receivables 1,838 1,622
Inventories 1,745 1,341
Short-term deferred income taxes 125 82
Prepaid expenses and other 283 350
-------------------------------------------------------------------------
Total current assets 5,160 3,977
- ------------------------------------------------------------------------------------------------
Property, Plant and Equipment, Net 3,907 3,306
- ------------------------------------------------------------------------------------------------
Other Assets Goodwill 1,494 1,349
Other intangible assets 526 349
Other 1,391 1,362
-------------------------------------------------------------------------
Total other assets 3,411 3,060
-------------------------------------------------------------------------
Total assets $12,478 $10,343
================================================================================================
Current Liabilities Short-term debt $ 112 $ 149
Current maturities of long-term debt
and lease obligations 108 52
Accounts payable and accrued liabilities 3,043 2,432
Income taxes payable 588 661
-------------------------------------------------------------------------
Total current liabilities 3,851 3,294
- ------------------------------------------------------------------------------------------------
Long-Term Debt and Lease Obligations 4,398 2,486
- ------------------------------------------------------------------------------------------------
Long-Term Deferred Income Taxes 29 218
- ------------------------------------------------------------------------------------------------
Other Long-Term Liabilities 1,261 588
- ------------------------------------------------------------------------------------------------
Commitments and Contingencies
- ------------------------------------------------------------------------------------------------
Stockholders' Equity Common stock, $1 par value, authorized
2,000,000,000 shares in 2002 and 1,000,000,000 shares
in 2001, issued 626,574,109 shares in 2002 and
608,817,449 shares in 2001 627 609
Common stock in treasury, at cost, 27,069,808 shares
in 2002 and 9,924,459 shares in 2001 (1,326) (328)
Additional contributed capital 3,223 2,815
Retained earnings 1,689 1,093
Accumulated other comprehensive loss (1,274) (432)
-------------------------------------------------------------------------
Total stockholders' equity 2,939 3,757
-------------------------------------------------------------------------
Total liabilities and stockholders' equity $12,478 $10,343
================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
44 Baxter International Inc. 2002 Annual Report
CONSOLIDATED STATEMENTS OF INCOME
years ended December 31 (in millions, except per share data) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Operations Net sales $8,110 $7,356 $6,697
Costs and expenses
Cost of goods sold 4,318 3,944 3,641
Marketing and administrative expenses 1,562 1,440 1,330
Research and development expenses 501 426 378
In-process R&D (IPR&D) and other
special charges 189 280 286
Charge relating to A, AF and
AX series dialyzers -- 189 --
Goodwill amortization -- 43 28
Interest expense, net 51 68 84
Other expense (income) 92 (13) (20)
-------------------------------------------------------------------------------
Total costs and expenses 6,713 6,377 5,727
-------------------------------------------------------------------------------
Income from continuing operations
before income taxes and cumulative
effect of accounting change 1,397 979 970
Income tax expense 364 304 216
-------------------------------------------------------------------------------
Income from continuing operations
before cumulative effect of
accounting change 1,033 675 754
Loss from discontinued operations,
including exit charge in 2002 of $229,
net of income tax benefit (255) (11) (14)
-------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 778 664 740
Cumulative effect of accounting change,
net of income tax benefit -- (52) --
-------------------------------------------------------------------------------
Net income $ 778 $ 612 $ 740
===================================================================================================
Per Share Data Earnings per basic common share
Continuing operations, before cumulative
effect of accounting change $ 1.72 $ 1.15 $ 1.29
Discontinued operations (0.43) (0.02) (0.03)
Cumulative effect of accounting change -- (0.09) --
-------------------------------------------------------------------------------
Net income $ 1.29 $ 1.04 $ 1.26
===============================================================================
Earnings per diluted common share
Continuing operations, before cumulative
effect of accounting change $ 1.67 $ 1.11 $ 1.26
Discontinued operations (0.41) (0.02) (0.02)
Cumulative effect of accounting change -- (0.09) --
-------------------------------------------------------------------------------
Net income $ 1.26 $ 1.00 $ 1.24
===============================================================================
Weighted average number of
common shares outstanding
Basic 600 590 585
Diluted 618 609 597
===================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
years ended December 31 (in millions) (brackets denote cash outflows) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operations Income from continuing operations before
cumulative effect of accounting change $ 1,033 $ 675 $ 754
Adjustments
Depreciation and amortization 439 427 394
Deferred income taxes 72 116 (171)
Loss (gain) on asset dispositions and
impairments, net 26 (20) 6
IPR&D and other special charges 189 280 286
Charge relating to A, AF and AX
series dialyzers -- 189 --
Other 40 7 25
Changes in balance sheet items
Accounts receivable (276) (114) 58
Inventories (269) (177) (113)
Accounts payable and accrued liabilities 37 (84) 65
Net litigation payable and other (40) (118) (45)
------------------------------------------------------------------------------------------
Cash flows from continuing operations 1,251 1,181 1,259
------------------------------------------------------------------------------------------
Cash flows from discontinued operations (58) (95) (83)
------------------------------------------------------------------------------------------
Cash flows from operations 1,193 1,086 1,176
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities Capital expenditures (734) (641) (524)
Additions to the pool of equipment
placed with or leased to customers (114) (118) (101)
Acquisitions (net of cash received) and
investments in affiliates (492) (805) (330)
Divestitures and other asset dispositions 34 35 (60)
------------------------------------------------------------------------------------------
Cash flows from investing activities (1,306) (1,529) (1,015)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities Issuances of debt obligations 2,412 2,108 1,180
Redemption of debt obligations (633) (946) (1,953)
Increase (decrease) in debt with
maturities of three months or less, net (185) (756) 879
Common stock cash dividends (349) (341) (84)
Proceeds from stock issued under
employee benefit plans 180 192 233
Other issuances of stock 414 500 --
Purchases of treasury stock (1,169) (288) (375)
------------------------------------------------------------------------------------------
Cash flows from financing activities 670 469 (120)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of Foreign Exchange Rate Changes on Cash and Equivalents 30 (23) (68)
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents 587 3 (27)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at Beginning of Year 582 579 606
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Year $ 1,169 $ 582 $ 579
=================================================================================================================================
Supplemental schedule of noncash investing activities
Fair value of assets acquired, net of liabilities assumed $ 652 $ 1,042 $ 620
Common stock issued at fair value 160 237 290
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash paid $ 492 $ 805 $ 330
=================================================================================================================================
Other supplemental information
Interest paid, net of portion capitalized $ 83 $ 109 $ 110
Income taxes paid $ 312 $ 243 $ 279
=================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
46 Baxter International Inc. 2002 Annual Report
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
2002 2001 2000
-----------------------------------------------------------
as of and for the years ended December 31 (in millions) Shares Amount Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
Common Stock
Beginning of year 609 $ 609 298 $ 298 294 $ 294
Common stock issued 15 15 10 10 -- --
Common stock issued for acquisitions 3 3 3 3 4 4
Two-for-one stock split -- -- 298 298 -- --
- --------------------------------------------------------------------------------------------------------------------------
End of year 627 627 609 609 298 298
- --------------------------------------------------------------------------------------------------------------------------
Common stock in Treasury
Beginning of year 10 (328) 5 (349) 4 (269)
Common stock issued for acquisitions -- -- (2) 63 (1) 39
Purchases of common stock 23 (1,169) 9 (288) 6 (375)
Common stock issued under employee benefit plans (6) 171 (7) 246 (4) 256
Two-for-one stock split -- -- 5 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
End of year 27 (1,326) 10 (328) 5 (349)
- --------------------------------------------------------------------------------------------------------------------------
Additional Contributed Capital
Beginning of year 2,815 2,506 2,282
Common stock issued 399 490 --
Common stock issued for acquisitions 157 171 247
Equity units issued (157) -- --
Common stock issued under employee benefit plans 9 (54) (23)
Two-for-one stock split -- (298) --
- --------------------------------------------------------------------------------------------------------------------------
End of year 3,223 2,815 2,506
- --------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Beginning of year 1,093 853 1,415
Net income 778 612 740
Elimination of reporting lag for international
operations -- (23) --
Common stock cash dividends (346) (349) (341)
Distribution of Edwards Lifesciences Corporation
common stock to stockholders 164 -- (961)
- --------------------------------------------------------------------------------------------------------------------------
End of year 1,689 1,093 853
- --------------------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss
Beginning of year (432) (649) (374)
Other comprehensive (loss) income (842) 217 (275)
- --------------------------------------------------------------------------------------------------------------------------
End of year (1,274) (432) (649)
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 2,939 $ 3,757 $ 2,659
==========================================================================================================================
Comprehensive Income (Loss)
Net income $ 778 $ 612 $ 740
Cumulative effect of accounting change,
net of tax of $5 -- 8 --
Currency translation adjustments, net of
tax expense (benefit) of ($223) in 2002, $58 in 2001
and $82 in 2000 (203) 155 (297)
Unrealized net gain (loss) on hedging activities,
net of tax expense (benefit) of ($67) in 2002
and $45 in 2001 (114) 74 --
Unrealized net gain (loss) on marketable equity
securities, net of tax expense (benefit) of ($5)
in 2002, ($14) in 2001 and $15 in 2000 (8) (20) 22
Additional minimum pension liability, net of tax
benefit of $287 (517) -- --
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (842) 217 (275)
Elimination of reporting lag for international
operations, net of tax benefit of $8 -- (23) --
- --------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ (64) $ 806 $ 465
==========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting Policies
The Company and Financial Statement Presentation
Baxter International Inc. (Baxter or the company) is a global medical products
and services company with expertise in medical devices and supplies,
pharmaceuticals and biotechnology that, through its subsidiaries, assists
health-care professionals and their patients with the treatment of complex
medical conditions, including hemophilia, immune deficiencies, infectious
diseases, cancer, kidney disease, trauma and other conditions. The company's
products and services are described in Note 13.
The preparation of the financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
Baxter and its majority-owned subsidiaries, and any minority-owned subsidiaries
that Baxter controls. All significant intercompany balances and transactions
have been eliminated in consolidation. Historically, certain operations outside
the United States 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, and the December 2000 net loss of $23 million for these entities
was recorded directly to retained earnings. As further discussed in Notes 5 and
6, the company enters into certain leasing and securitization arrangements with
special-purpose entities. In accordance with GAAP, these entities are not
consolidated by the company.
Revenue Recognition
The company's policy is to recognize revenues from product sales and services
when earned, as defined by GAAP. Specifically, revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred (or services
have been rendered), the price is fixed or determinable, and collectibility is
reasonably assured. For product sales, revenue is not recognized until title and
risk of loss have transferred to the customer. The company enters into certain
arrangements in which it commits to provide multiple elements to its customers.
Revenue related to an individual element is deferred unless delivery of the
element represents a separate earnings process. Total revenue for these
arrangements is allocated among the elements based on the fair value of the
individual elements, with the fair values determined based on objective evidence
(generally based on sales of the individual element to other third parties).
Provisions for discounts, rebates to customers, and returns are accrued at the
time the related sales are recorded, and are reflected as a reduction of sales.
Stock Compensation Plans
The company has a number of stock-based employee compensation plans, including
stock option, stock purchase and restricted stock plans, which are described in
Note 8. The company applies the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for these plans. In
accordance with this intrinsic value method, no compensation expense is
recognized for the company's fixed stock option plans and employee stock
purchase plans. The following table illustrates the effect on net income and
earnings per share (EPS) if the company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), to all stock-based
employee compensation.
years ended December 31
(in millions, except per share data) 2002 2001 2000
- -----------------------------------------------------------------------
Net income, as reported $ 778 $ 612 $ 740
Add: Stock-based employee
compensation expense included
in reported net income, net of tax 2 3 14
Deduct: Total stock-based employee
compensation expense determined
under the fair value method,
net of tax (159) (167) (73)
- -----------------------------------------------------------------------
Pro forma net income $ 621 $ 448 $ 681
=======================================================================
Earnings per basic common share
As reported $1.29 $1.04 $1.26
Pro forma $1.04 $0.76 $1.16
Earnings per diluted common share
As reported $1.26 $1.00 $1.24
Pro forma $1.02 $0.74 $1.14
=======================================================================
Pro forma compensation expense for stock options and employee stock purchase
subscriptions was calculated using the Black-Scholes model. The pro forma
expense for stock option grants was calculated with the following
weighted-average assumptions for grants in 2002, 2001 and 2000, respectively:
dividend yield of 2%, 1% and 1.25%; expected life of six years for all periods;
expected volatility of 37%, 36% and 31%; and risk-free interest rates of 4.1%,
4.9% and 6.1%. The weighted-average fair values of stock options granted during
the year were $15.61, $18.21 and $13.75 in 2002, 2001 and 2000, respectively.
The pro forma expense for employee stock purchase subscriptions was calculated
with the following weighted-average assumptions for 2002, 2001 and 2000,
respectively: dividend yield of 2%, 1% and 1.4%; expected term of one year for
all periods; expected volatility of 38%, 43% and 33%; and risk-free interest
rates of 1.8%, 4.1% and 6.2%. The weighted-average fair values of the purchase
rights granted in 2002, 2001 and 2000 were $12.41, $18.56 and $11.49,
respectively.
48 Baxter International Inc. 2002 Annual Report
..
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation
The results of operations for non-U.S. subsidiaries, other than those located in
highly inflationary countries or for which the U.S. dollar is the functional
currency, are translated into U.S. dollars using the average exchange rates
during the year, while assets and liabilities are translated using period-end
rates. Resulting translation adjustments are recorded as currency translation
adjustments (CTA) within other comprehensive income (OCI). Where foreign
affiliates operate in highly inflationary economies, non-monetary amounts are
remeasured at historical exchange rates while monetary assets and liabilities
are remeasured at the current rate with the related adjustments reflected in the
consolidated statements of income.
Allowance for Doubtful Accounts
In the normal course of business, the company provides credit to customers in
the health-care industry, performs credit evaluations of these customers and
maintains reserves for potential credit losses. In determining the amount of the
allowance for doubtful accounts, management considers historical credit losses,
the past due status of receivables, payment history and other customer-specific
information, and any other relevant factors or considerations. The past due
status of a receivable is based on its contractual terms. Receivables are
written off when management determines they are uncollectible. Credit losses,
when realized, have been within the range of management's allowance for doubtful
accounts.
Securitizations of Accounts Receivable
The company accounts for the securitization of accounts receivables in
accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." When the company sells
accounts receivable in connection with these securitizations, a subordinated
interest in the securitized portfolio and servicing responsibilities for the
portfolio are generally retained by the company. The carrying value of the
transferred receivables is allocated between the portion sold and the portion
retained by Baxter based on their relative fair values. The difference between
the net cash proceeds received and the allocated carrying value of the
receivables sold, which is recognized immediately in the consolidated statement
of operations, is generally not material. The retained interests are classified
in other assets. The fair values of the retained interests are estimated based
on expected future cash flows, factoring in expected future losses, and
discounted at an appropriate rate of interest. Assumptions used in estimating
future net cash flows take into consideration both historical experience and
current projections. Servicing assets or liabilities are not recognized because
the company receives adequate compensation to service the sold receivables.
Product Warranties
The company provides for the estimated costs that may be incurred under its
warranty programs when the cost is both probable and reasonably estimable, which
is at the time the related revenue is recognized. The cost is determined based
upon actual company experience for the same or similar products as well as any
other relevant information. The following is a summary of activity in the
product warranty liability.
as of and for the year ended
December 31, 2002 (in millions)
- -------------------------------------------------------------------------------
Beginning of year $ 45
New warranties and adjustments to existing warranties 45
Payments in cash or in kind (37)
- -------------------------------------------------------------------------------
End of year $ 53
===============================================================================
Inventories
as of December 31 (in millions) 2002 2001
- -------------------------------------------------------------------------------
Raw materials $ 439 $ 353
Work in process 511 244
Finished products 795 744
- -------------------------------------------------------------------------------
Total inventories $1,745 $1,341
===============================================================================
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Market value for raw materials is based on replacement costs and,
for other inventory classifications, on net realizable value. Reserves for
excess and obsolete inventory were $118 million and $125 million at December 31,
2002 and 2001, respectively.
Property, Plant and Equipment
as of December 31 (in millions) 2002 2001
- -------------------------------------------------------------------------------
Land $ 129 $ 115
Buildings and leasehold improvements 1,300 1,111
Machinery and equipment 3,671 3,214
Equipment with customers 567 538
Construction in progress 1,012 754
- -------------------------------------------------------------------------------
Total property, plant and equipment, at cost 6,679 5,732
Accumulated depreciation and amortization (2,772) (2,426)
- -------------------------------------------------------------------------------
Property, plant and equipment, net $ 3,907 $ 3,306
===============================================================================
Depreciation and amortization are calculated on the straight-line method over
the estimated useful lives of the related assets, which range from 20 to 50
years for buildings and improvements and from 3 to 15 years for machinery and
equipment. Leasehold improvements are amortized over the life of the related
facility lease or the asset, whichever is shorter. Straight-line and accelerated
methods of depreciation are used for income tax purposes. Accumulated
amortization for assets under capital leases was $11 million and $10 million at
December 31, 2002 and 2001, respectively. Depreciation expense was $359 million,
$326
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million and $301 million in 2002, 2001 and 2000, respectively. Repairs and
maintenance expense was $167 million, $167 million and $121 million in 2002,
2001 and 2000, respectively.
Acquisitions
Acquisitions are accounted for under the purchase method. The company applies
the provisions of SFAS No. 141, "Business Combinations," in accounting for
acquisitions completed after June 30, 2001. 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 is
allocated to the net assets acquired based on estimates of their fair values at
the date of the acquisition. The excess of the purchase price over the fair
values of the tangible assets, identifiable intangible assets and liabilities
acquired is allocated to goodwill. The allocation of purchase price in certain
cases may be subject to revision based on the final determination of fair
values. Contingent purchase price payments are generally recorded when the
contingencies are resolved, as the outcomes of the contingencies are not
determinable beyond a reasonable doubt on the acquisition date. The contingent
consideration, if paid, is recorded as an additional element of the cost of the
acquired company. A portion of the purchase price for certain acquisitions is
allocated to in-process research and development (IPR&D) and immediately
expensed.
IPR&D
Amounts allocated to IPR&D are determined using the income approach, which
measures the value of an asset by the present value of its future economic
benefits. Estimated cash flows are discounted to their present values at rates
of return that reflect the risks associated with the particular projects. The
status of development, stage of completion, assumptions, nature and timing of
remaining efforts for completion, risks and uncertainties, and other key factors
may vary by individual project. The valuations incorporate the stage of
completion for each individual project. Projected revenue and cost assumptions
are determined considering the company's historical experience and industry
trends and averages. No value is assigned to any IPR&D project unless it is
probable of being further developed.
Long-Lived Asset Impairment Reviews
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142),
goodwill related to acquisitions completed after June 30, 2001 and all goodwill
effective January 1, 2002 is not being amortized, but is subject to at least
annual impairment reviews, beginning on January 1, 2002. Other intangible assets
and long-lived assets are reviewed for impairment in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective
January 1, 2002.
In reviewing goodwill for impairment under SFAS No. 142, potential impairment is
identified by comparing the fair value of a reporting unit with its carrying
amount, and if the fair value is less than the carrying amount, an impairment
loss is recorded as the excess of the carrying amount of the goodwill over the
implied value. The implied fair value is determined by allocating the fair value
of the entire unit to all of its assets and liabilities, with any excess of fair
value over the amount allocated representing the implied fair value of that
unit's goodwill. The company's reporting units are the same as its reportable
operating segments, Medication Delivery, BioScience and Renal.
The company reviews the carrying amounts of long-lived assets other than
goodwill for potential impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Such
events or circumstances might include a significant sustained decline in the
market price of an asset, a significant adverse change in the extent or manner
in which the asset is used, a significant adverse change in legal factors or the
business climate, or recurring or projected operating losses or cash outflows.
In evaluating the recoverability of assets, management compares the carrying
amounts of such assets with the estimated undiscounted future operating cash
flows. In the event impairment exists, an impairment charge would be recorded as
the amount by which the carrying amount of the long-lived asset exceeds its fair
value. In addition, the remaining amortization period for the impaired asset
would be reassessed and revised if necessary.
Earnings per Share
The numerator for both basic and diluted EPS is net earnings available to common
shareholders. The denominator for basic EPS is the weighted-average number of
common shares outstanding during the period. The dilutive effect of outstanding
employee stock options, employee stock purchase plans and the company's equity
units is reflected in the denominator for diluted EPS by application of the
treasury stock method under SFAS No. 128, "Earnings per Share." Under this
method, the number of shares of common stock is increased by the excess, if any,
of the number of shares issuable upon exercise of the employee stock options,
purchase of the employee stock purchase subscriptions or settlement of the
purchase contracts included in the equity units, over the number of shares that
could be purchased by Baxter in the market, at the average market price during
the period, using the proceeds received upon employees' exercises or purchases,
or upon settlement of the equity unit purchase contracts. The equity units,
which are further discussed in Note 5, will not have a dilutive effect on
earnings per diluted share except during periods when the average market price
of a share of Baxter common stock exceeds $35.69. The dilutive effect of
outstanding equity forward agreements is reflected in the denominator for
diluted EPS by application of the reverse treasury stock method. The following
is a reconciliation of the shares (denominator) of the basic and diluted
per-share computations:
50 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31
(in millions) 2002 2001 2000
- -------------------------------------------------------------------------------
Basic 600 590 585
- -------------------------------------------------------------------------------
Effect of dilutive securities
Employee stock options 11 18 11
Equity forward agreements 6 -- --
Employee stock purchase plans 1 1 1
- -------------------------------------------------------------------------------
Diluted 618 609 597
===============================================================================
Comprehensive Income
Comprehensive income encompasses all changes in stockholders' equity other than
those arising from transactions with stockholders, and consists of net income,
CTA, unrealized gains and losses on certain hedging activities, unrealized gains
and losses on unrestricted available-for-sale marketable equity securities and
additional minimum pension liabilities. The net-of-tax components of accumulated
OCI (AOCI) were as follows:
as of December 31 (in millions) 2002 2001 2000
- -------------------------------------------------------------------------------
CTA $ (722) $(519) $(674)
Hedging activities (32) 82 --
Marketable equity securities (3) 5 25
Additional minimum pension liability (517) -- --
- -------------------------------------------------------------------------------
Total AOCI $(1,274) $(432) $(649)
===============================================================================
Derivatives and Hedging Activities
Effective at the beginning of 2001, the company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133),
and its amendments. In accordance with the transition provisions of SFAS No.
133, the difference between the fair values and the book values of all
freestanding derivatives at the adoption date was reported as the cumulative
effect of a change in accounting principle. In accordance with the standard, the
company recorded a cumulative effect reduction to earnings of $52 million (net
of tax benefit of $32 million) and a cumulative effect increase to OCI of $8
million (net of tax of $5 million).
All derivatives subject to SFAS No. 133 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. In certain
circumstances, while a derivative may be used to economically hedge a
transaction, asset or liability, the company may not formally designate it as a
fair value, cash flow or net investment hedge. The company does not hold any
instruments for trading purposes.
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 OCI, with such
changes in fair value reclassified to earnings when the hedged transaction
affects earnings. Such hedges are principally classified in cost of sales and
primarily relate to inter-company sales denominated in foreign currencies.
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 attributable to the hedged risk, are
recorded directly to net interest expense, as they hedge the interest rate risk
associated with certain of the company's fixed-rate debt. 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 CTA account within OCI, with any hedge
ineffectiveness recorded in net interest expense. Changes in the fair value of
undesignated instruments are reported directly to other income or expense or net
interest expense, depending on the classification of the item being economically
hedged.
If it is determined that a derivative or nonderivative hedging instrument ceases
to be highly effective as a hedge, the company discontinues hedge accounting
prospectively. Gains or losses relating to terminations of effective cash flow
hedges are deferred and recognized consistent with the income or loss
recognition of the underlying hedged items. If the company removes the
designation for cash flow hedges because the hedged forecasted transactions are
no longer probable of occurring, any gains or losses relating to such
dedesignated hedges are immediately reclassified from AOCI to earnings, and are
principally classified in cost of sales, consistent with the classification of
the previously hedged item.
Derivatives are classified in the consolidated balance sheets in other assets or
other liabilities, as applicable, and are classified as short-term or long-term
based on the scheduled maturity of the instrument. Derivatives are classified in
the consolidated statements of cash flows in the same category as the cash flows
of the hedged items.
Instruments that are indexed to and potentially settled in the company's common
stock are accounted for in accordance with Emerging Issues Task Force (EITF) No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The contracts, which consist of
equity forward agreements and have a fair value of zero
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
at inception, give the company the choice of net-share, net-cash or physical
settlement upon maturity or any earlier settlement date. In accordance with
GAAP, the contracts are not recorded in the consolidated financial statements
until they are settled. The settlements of these contracts (whether by
net-share, net-cash or physical settlement) are classified within stockholders'
equity.
Cash and Equivalents
Cash and equivalents include cash, certificates of deposit and marketable
securities with an original maturity of three months or less.
Shipping and Handling Costs
Shipping and handling costs are classified in either cost of goods sold or
marketing and administrative expenses based on their nature. Approximately $222
million, $218 million and $200 million of shipping and handling costs were
classified in marketing and administrative expenses in 2002, 2001 and 2000,
respectively.
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting based upon enacted tax
laws and rates. Deferred tax assets are reduced by a valuation allowance unless
it is more likely than not that such assets will be realized.
Reclassifications
Certain reclassifications have been made to conform the 2001 and 2000
consolidated financial statements and notes to the 2002 presentation.
New Accounting and Disclosure Standards
SFAS No. 149, "Accounting for Certain Financial Instruments with Characteristics
of Liabilities and Equity," which is expected to be issued in 2003, will require
that certain financial instruments that have characteristics of both liabilities
and equity be classified as liabilities in the issuing company's balance sheet.
Many of these instruments were previously classified as equity. The new rules
will be effective immediately for all contracts created or modified after the
date the pronouncement is issued, and will be otherwise effective for Baxter at
the beginning of the third quarter of 2003. The new rules are to be applied
prospectively with a cumulative-effect adjustment for contracts that were
created before the pronouncement is issued and that still exist at the beginning
of that first interim period. Under the new rules, the balance sheet
classification of the company's equity forward agreements, which are described
in Note 6, will change from equity to liabilities. As disclosed in Note 6, the
company is in the process of exiting these agreements and expects to complete
the exit strategy during 2003. Management will analyze this accounting
pronouncement, and does not anticipate that the standard will have a material
impact on the company's consolidated financial statements.
Financial Accounting Standards Board (FASB) Interpretation No. 46,
"Consolidation of Variable Interest Entities" (Interpretation No. 46), was
issued in January 2003. Interpretation No. 46 defines variable interest entities
(VIE) and requires that the assets, liabilities, noncontrolling interests, and
results of activities of a VIE be consolidated if certain conditions are met.
For VIE's created on or after January 31, 2003, the guidance will be applied
immediately. For VIE's created before that date, the guidance will be applied at
the beginning of the third quarter of 2003. The new rules may be applied
prospectively with a cumulative-effect adjustment as of the beginning of the
period in which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated. Management is in the process of analyzing
the potential effect of this recently issued accounting pronouncement on the
company's future consolidated financial statements, including the impact on
certain of the company's operating leases, which are described in Note 5, and
the accounts receivable securitization arrangements, which are described in Note
6.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS No. 148), which amends SFAS No. 123, was issued in December
2002. The new standard provides alternative methods for transition for a
voluntary change from the intrinsic method of accounting to the fair value-based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require more
prominent and frequent disclosures in financial statements about the effects of
stock-based compensation. The transition guidance and annual disclosure
provisions are effective for 2002. The new interim disclosure provisions are
effective beginning in the first quarter of 2003. The company has implemented
the annual disclosure provisions in these consolidated financial statements.
Management does not have immediate plans for the company to voluntarily elect to
adopt the fair value-based method of accounting for stock-based employee
compensation.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others"
(Interpretation No. 45), was issued in November 2002. The initial recognition
and measurement provisions of this new standard, which require a guarantor to
recognize a liability at inception of a guarantee at fair value, are effective
on a prospective basis to guarantees issued or modified on or after January 1,
2003. Management is in the process of analyzing the recognition and measurement
provisions of Interpretation No. 45, and has not estimated the potential impact
on the company's future consolidated financial statements, as the impact will
depend on the nature and amount of future transactions. The disclosure
provisions, which increase the required disclosures relating to guarantees, have
been adopted in these consolidated financial statements.
52 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EITF No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF No.
00-21), was issued in November 2002. The EITF No. 00-21 consensus, which is
effective for revenue arrangements entered into on or after July 1, 2003,
outlines the approach to be used to determine when a revenue arrangement for
multiple deliverables should be divided into separate units of accounting and,
if separation is appropriate, how the arrangement consideration should be
allocated to the identified accounting units. Management is in the process of
analyzing the new rules and has not determined the potential impact on the
company's future consolidated financial statements, as the impact will depend on
the nature and amount of future transactions.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS No. 146), was issued in June 2002. SFAS No. 146 is effective for exit or
disposal activities initiated on or after January 1, 2003, and requires that
costs associated with exit or disposal activities be recognized when they are
incurred rather than on the date the company commits to an exit or disposal
plan. SFAS No. 146 also establishes that the liability should be measured and
recorded at fair value. Accordingly, the new standard changes the amount and
timing of expense recognition related to any future exit or disposal activities.
Note 2
Discontinued Operations
Divestiture of Certain Businesses
During the fourth quarter of 2002, the company recorded a $294 million pre-tax
charge ($229 million on an after-tax basis) principally associated with
management's decision to divest the majority of the services businesses included
in the Renal segment. The Renal segment's services portfolio consists of Renal
Therapy Services (RTS), which operates dialysis clinics in partnership with
local physicians in international markets, RMS Disease Management, Inc., which
is a renal-disease management organization, and RMS Lifeline, Inc., which
provides management services to renal access care centers. The charge
principally pertains to RTS, and the majority of the centers to be sold are
located in Latin America and Europe. Management's decision was based on an
evaluation of the company's business strategy and the economic conditions in
certain geographic markets. Management decided that the Renal segment's
long-term sales growth and profitability would be enhanced by increasing focus
and resources on expanding the product portfolio in peritoneal dialysis,
hemodialysis, continuous renal replacement therapy and renal-related
pharmaceuticals. Also included in the pre-tax charge were $16 million of costs
associated with exiting the Medication Delivery segment's offsite pharmacy
admixture products and services business.
Included in the total pre-tax charge was $269 million for non-cash costs,
principally to write down certain property and equipment, goodwill and other
intangible assets due to impairment. Also included in the pre-tax charge was $25
million for cash costs, principally relating to severance and other
employee-related costs associated with the elimination of approximately 75
positions, as well as legal and contractual commitment costs. Additional
severance costs may be incurred in 2003 depending on the finalization of the
divestiture arrangements. The majority of the cash costs are expected to be paid
in 2003, and the divestiture plan is expected to be completed in 2003.
The company's consolidated statements of income and cash flows have been
restated to reflect the results of operations and cash flows of the businesses
to be divested as discontinued operations. The consolidated balance sheets have
not been restated as the assets and liabilities of the businesses to be divested
are immaterial to the company's consolidated balance sheets. Net revenues
relating to the discontinued businesses were $274 million, $307 million and $199
million in 2002, 2001 and 2000, respectively. Losses from these discontinued
operations were $26 million, $11 million and $16 million in 2002, 2001 and 2000,
respectively, which were net of income tax benefits of $10 million, $4 million
and $8 million in 2002, 2001 and 2000, respectively.
Spin-Off of Edwards Lifesciences Corporation
On March 31, 2000, Baxter stockholders of record on March 29, 2000 received all
of the outstanding stock of Edwards Lifesciences Corporation (Edwards), the
company's cardiovascular business, in a tax-free spin-off. The company's
consolidated financial statements and related notes have been restated to
reflect the financial position, results of operations and cash flows of Edwards
as a discontinued operation. The distribution of Edwards stock in 2000 totaled
$961 million, and was charged directly to retained earnings.
The cardiovascular business in Japan was not legally transferred to Edwards in
2000 due to Japanese regulatory requirements and business culture
considerations. The business had been operated pursuant to a contractual joint
venture under which a Japanese subsidiary of Baxter retained ownership of the
business assets, but a subsidiary of Edwards held a 90% profit interest. Edwards
had an option to purchase the Japanese assets. Included in current liabilities
at December 31, 2001 was $181 million relating to this contractual joint
venture. In October 2002 Baxter and Edwards consummated an agreement whereby the
joint venture and option were terminated and Edwards purchased the Japanese
assets from Baxter. As part of this transaction, Baxter settled the $181 million
liability and Edwards paid Baxter $202 million. The transaction resulted in net
credit of $164 million directly to retained earnings, and a net cash inflow of
$15 million, which is subject to change based on an audit of the business' net
assets. The transaction had no impact on the company's results of operations.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2000, the company recorded income from the discontinued operation of $14
million, which was net of income tax expense of $5 million. The company also
recorded $12 million (including tax of $6 million), or $0.02 per diluted common
share, of net costs directly associated with effecting the business
distribution. Net sales of the discontinued operation were $252 million for the
three-month period ended March 31, 2000.
Note 3
Acquisitions, Intangible Assets and Research & Development Costs
Significant Acquisitions
The following is a summary of the company's significant acquisitions during the
three years ended December 31, 2002, along with the allocation of the purchase
price to intangible assets.
Intangible assets
Acquisition Purchase -----------------------
(in millions) date price IPR&D Goodwill Other
- -----------------------------------------------------------------
ESI December
2002 $308 $ 56 $ 55 $78
Fusion May
2002 161 51 45 88
ASTA October
2001 455 250 131 49
Cook August
2001 220 -- 138 10
Sera-Tec February
2001 127 -- 152 --
NAV June
2000 328 250 246 9
=================================================================
In late December 2002, the company acquired the majority of the assets of ESI
Lederle (ESI), a division of Wyeth, for approximately $308 million. ESI is a
leading manufacturer and distributor of injectable drugs used in the U.S.
hospital market, and it offers a complete range of sterile injectable
manufacturing capabilities, including ampules and vials. ESI primarily
manufactures injectable generic drugs, which leverages Baxter's injectable
expertise, channel strength, manufacturing processes, customer relationships,
and research and development. The other intangible assets consisted primarily of
developed technology of $76 million, which is being amortized on a straight-line
basis over an estimated useful life of 15 years. In addition to the IPR&D and
intangible assets, $107 million of property, plant and equipment and $33 million
of inventories and other assets were acquired, and $21 million of liabilities,
which consisted principally of accounts payable and accrued liabilities, were
assumed. The goodwill is expected to be fully deductible for tax purposes. The
purchase price is subject to adjustment based on an audit of the acquired assets
and assumed liabilities. With the exception of the IPR&D charge, which was
recorded at the corporate level, the results of operations and assets and
liabilities, including goodwill, of ESI are included in the Medication Delivery
segment. The IPR&D charge pertained principally to generic anesthesia and
critical care drugs. Material net cash inflows were forecasted in the valuation
to commence in 2004. A discount rate of 16% was used in the valuation. Assumed
additional research and development (R&D) expenditures prior to the date of the
initial product introductions totaled approximately $17 million.
In May 2002, the company acquired Fusion Medical Technologies, Inc. (Fusion) for
a purchase price of $161 million. The acquisition of Fusion, a business that
develops and commercializes proprietary products used to control bleeding during
surgery, supports the company's strategic initiative to expand and enhance its
portfolio of innovative therapeutic solutions for biosurgery and tissue
regeneration. Fusion's expertise in collagen- and gelatin-based products
complements Baxter's fibrin-based technologies. With the combination, the
company can now offer surgeons a broader array of solutions to seal tissue,
enhance wound healing and manage hemostasis, including active bleeding. The
purchase price was paid in 2,806,660 shares of Baxter common stock. The other
intangible assets consisted of developed technology, which is being amortized on
a straight-line basis over an estimated useful life of 20 years. In addition to
the IPR&D, developed technology and goodwill, $14 million of other assets, which
consisted of cash and investments, accounts receivable, inventories, and
property and equipment, were acquired, and $37 million of liabilities, which
consisted principally of accounts payable, accrued liabilities and deferred
taxes, were assumed. The goodwill is not deductible for tax purposes. With the
exception of the IPR&D charge, which was recorded at the corporate level, the
results of operations, and assets and liabilities, including goodwill, of Fusion
are included in the BioScience segment. With respect to the IPR&D charge,
material net cash inflows were forecasted in the valuation to commence between
2003 and 2004. A discount rate of 28% was used in the valuation. Assumed
additional R&D expenditures prior to the date of the initial product
introduction totaled $3 million. Subsequent to the acquisition date, the project
has been proceeding substantially in accordance with the original projections.
Approximately $2 million of R&D costs relating to this project were expensed in
2002 subsequent to the acquisition date.
In October 2001, the company acquired a subsidiary of Degussa AG, ASTA Medica
Onkologie GmbH & CoKG (ASTA), which develops, produces and markets oncology
products worldwide, for $455 million. This acquisition provides the company with
a stronger presence in the oncology market as well as a significant drug
development pipeline. The other intangible assets consisted of developed
technology and are being amortized on a straight-line basis over an estimated
useful life of 15 years. In
54 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
addition to the intangible assets and IPR&D, $22 million of accounts receivable,
$25 million of inventories, and $50 million of property, plant and equipment and
other assets were acquired, and $72 million of liabilities were assumed. A
substantial portion of the goodwill is expected to be deductible for tax
purposes. With the exception of the IPR&D charge, which was recorded at the
corporate level, the results of operations and assets and liabilities, including
goodwill, of ASTA are included in the Medication Delivery segment. The IPR&D
charge pertained to several oncology therapeutics projects. Material net cash
inflows were forecasted in the valuation to commence between 2004 and 2009.
Discount rates used in the valuations of the projects, which included tubulin
inhibitor, mafosfamide, glu-fosfamide and other oncology-related projects,
ranged from 20% to 30%. Assumed additional R&D expenditures prior to the dates
of product introductions totaled over $100 million. The percentage completion
rate for significant projects ranged in the valuation from 40% to 90%, with the
weighted-average completion rate approximately 50%. Two of the projects included
in the IPR&D charge, mafosfamide and glufosfamide, were terminated during the
fourth quarter of 2002 in conjunction with the company's overall assessment and
prioritization of its R&D programs, as further discussed below. The in-process
value assigned at the 2001 acquisition date to these subsequently terminated
projects was $53 million. Subsequent to the October 2001 acquisition date, the
other projects have been proceeding substantially in accordance with the
original projections. Approximately $13 million and $3 million of R&D costs
relating to these projects were expensed in 2002 and 2001, respectively,
subsequent to the acquisition date.
In August 2001, the company acquired Cook Pharmaceutical Solutions (Cook),
formerly a unit of Cook Group Incorporated, which provides contract filling of
syringes and vials. This acquisition supports the company's strategic initiative
to become a full-line provider of drug delivery solutions. The purchase price of
$220 million was paid in 2,111,047 shares of Baxter common stock and $111
million in cash. The other intangible assets consisted of customer relationships
and are being amortized on a straight-line basis over an estimated useful life
of 10 years. In addition to the intangible assets, $72 million of property,
plant and equipment and other assets were acquired. The goodwill is expected to
be fully deductible for tax purposes. The results of operations and assets and
liabilities, including goodwill, of Cook are included in the Medication Delivery
segment.
Sera-Tec Biologicals, L.P. (Sera-Tec) owned and operated 80 plasma centers in 28
states, and a central testing laboratory, and is included in the BioScience
segment. The purchase price of Sera-Tec of $127 million was paid in 2,894,710
shares of Baxter common stock.
North American Vaccine, Inc. (NAV) was engaged in the research, development,
production and sales of vaccines for the prevention of human infectious
diseases, and is included in the BioScience segment. The purchase price of NAV
of $328 million was principally paid in 7,540,000 shares of Baxter common stock.
The IPR&D charge pertained to several vaccines projects. Material net cash
inflows were forecasted in the valuation to commence between 2002 and 2005. A
discount rate of 20% was used for all projects, which included Streptococcal B,
Pneumococcal, Meningococcal B/C/Y and other vaccines. Assumed additional R&D
expenditures prior to the dates of product introductions totaled approximately
$85 million. The percentage completion rate for significant projects ranged in
the valuation from 65% to over 90%, with the weighted-average completion rate
approximately 70%. During 2002, and partially in conjunction with the
below-mentioned overall assessment and prioritization of its R&D programs,
several of the acquired projects were terminated. The in-process value assigned
at the June 2000 acquisition date to these subsequently terminated projects was
$216 million. While these acquired projects were terminated, a considerable
portion of the acquired technology is being utilized in new R&D projects
initiated subsequent to the June 2000 acquisition date. Approximately $6
million, $14 million and $8 million of R&D costs relating to the acquired
projects were expensed in 2002, 2001 and 2000, respectively, subsequent to the
acquisition date.
IPR&D and Other Special Charges
The $189 million pre-tax charge for IPR&D and other special charges in 2002
consisted of $163 million of IPR&D charges relating to acquisitions and a $26
million charge relating to the prioritization of certain of the company's R&D
programs. In addition to the IPR&D charges relating to ESI and Fusion, the total
included a $52 million charge relating to the November 2002 acquisition of Epic
Therapeutics, Inc. (Epic) and other insignificant IPR&D charges. Epic, which is
included in the Medication Delivery segment, was acquired for $59 million, and
is a drug delivery company specializing in the formulation of drugs for
injection or inhalation. Epic's IPR&D charge pertained principally to
controlled-release protein therapeutics using the proprietary PROMAXX
microsphere technology. Material net cash inflows were forecasted in the
valuation to commence between 2003 and 2005. A discount rate of 20% was used in
the valuation. Assumed additional R&D expenditures prior to the date of the
initial product introduction totaled approximately $16 million. Subsequent to
the November 2002 acquisition date, the projects have been proceeding
substantially in accordance with the original projections. Less than $1 million
of R&D costs relating to these projects were expensed in 2002 subsequent to the
acquisition date.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The charge of $26 million to prioritize the company's investments in certain of
the company's R&D programs across the three operating segments was a result of
management's comprehensive assessment of the company's R&D pipeline with the
goal of having a focused and balanced strategic portfolio, which maximizes the
company's resources and generates the most significant return on the company's
investment. The charge included $14 million of cash costs, primarily relating to
employee severance, and $12 million of non-cash costs to write down certain
property, plant and equipment and other assets due to impairment. Approximately
160 R&D positions were eliminated, and $2 million of cash costs were paid during
the fourth quarter of 2002. The remaining cash costs are expected to be paid in
2003.
The $280 million pre-tax charge for IPR&D and other special charges recorded in
2001 consisted of the $250 million ASTA IPR&D charge and acquisition costs
associated with several acquisitions in the three segments.
The $286 million pre-tax charge for IPR&D and other special charges recorded in
2000 consisted of the $250 million NAV IPR&D charge, a total of $15 million in
IPR&D charges pertaining to three other acquisitions, as well as $21 million of
acquisition costs related to an acquisition in the Medication Delivery segment.
With respect to the IPR&D charges, the products currently under development are
at various stages of development, and substantial further research and
development, pre-clinical testing and clinical trials will be required to
determine their technical feasibility and commercial viability. There can be no
assurance such efforts will be successful. Delays in the development,
introduction or marketing of the products under development could result either
in such products being marketed at a time when their cost and performance
characteristics would not be competitive in the marketplace or in a shortening
of their commercial lives. If the products are not completed on time, the
expected return on the company's investments could be significantly and
unfavorably impacted.
Contingent Purchase Price Payments
With respect to the January 2002 acquisition of the majority of the assets of
Autros Healthcare Solutions Inc., a developer of automated patient information
and medication management systems, for $24 million, the company could make
additional purchase price payments of up to $30 million, primarily based on the
sales and profits generated from existing and future products through the year
2005. Sales relating to this acquisition, which are included in the Medication
Delivery segment, were insignificant in 2002.
With respect to the October 2001 acquisition of certain assets relating to the
proprietary recombinant erythropoietin therapeutic for treating anemia in
dialysis patients from Elanex Pharma Group (Elanex) for $38 million, the company
could make additional purchase price payments of up to $40 million, contingent
on the receipt of specified regulatory approvals of the product under
development, and payments of up to $180 million, contingent on the achievement
of specified sales levels in the future relating to the product under
development ($60 million, $60 million and $60 million upon the first year annual
sales reach $1 billion, $2 billion and $3 billion, respectively). The technology
acquired from Elanex is under development and sales relating to this
acquisition, which are included in the Renal segment, were insignificant in 2002
and 2001.
With respect to the acquisition in 1998 of Somatogen, Inc. (Somatogen), a
developer of recombinant hemoglobin-based technology, for $206 million, former
Somatogen shareholders could be paid contingent deferred cash payments of up to
approximately $42 million, based on a percentage of sales of future products
through the year 2007. The technology acquired from Somatogen is under
development and there are no saleable products at December 31, 2002. Somatogen
is included in the BioScience segment.
Pending Acquisition
In December 2002, the company signed a definitive agreement to acquire certain
assets from Alpha Therapeutic Corporation. The assets to be acquired include
Aralast, a plasma-derived Alpha-1 Antitrypsin (A1P1) product, 42 plasma
collection centers in the United States, and a central testing laboratory. A1P1
will expand the BioScience segment's product portfolio of bio-pharmaceuticals,
as well as broaden its therapeutic focus in the pulmonology area. The
transaction will also further enhance the economics of the segment's plasma
business by increasing the number of products Baxter obtains from a liter of
plasma. Closing of the transaction is subject to regulatory approvals and is
expected to occur during 2003.
Pro Forma Information
The following unaudited pro forma information presents a summary of the
company's consolidated results of operations as if significant acquisitions
during 2002 and 2001 had taken place as of the beginning of the current and
preceding fiscal year, giving effect to purchase accounting adjustments but
excluding the charges for IPR&D and other special charges.
56 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31
(in millions, except per share data) 2002 2001
- -------------------------------------------------------------
Net sales $8,330 $7,781
Income from continuing operations before
cumulative effect of accounting change $1,077 $ 688
Net income $ 822 $ 625
Net income per diluted common share $ 1.24 $ 0.94
- -------------------------------------------------------------
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 earnings above
relating to acquisitions completed after June 30, 2001 do not include
amortization of goodwill.
Goodwill
The carrying amount of goodwill at December 31, 2002 was $797 million, $551
million and $146 million for the Medication Delivery, BioScience and Renal
segments, respectively. The carrying amount of goodwill at December 31, 2001 was
$643 million, $482 million and $224 million for the Medication Delivery,
BioScience and Renal segments, respectively. The change in the carrying value of
the company's goodwill during the year was principally related to the
acquisitions discussed above, the above-mentioned impairment charge associated
with the decision to divest certain businesses, as well as the impact of changes
in currency exchange rates on foreign entities' goodwill balances. The goodwill
impairment loss relating to the discontinued operations was $84 million and
pertained entirely to the Renal segment. The company recorded this and the other
asset impairment charges relating to the businesses to be divested based on
management's estimate of the net cash proceeds that will be received upon sale
of the businesses. Management developed these estimates based on prices of
comparable businesses and other relevant information. Based on management's SFAS
No. 142 review, other than the charge associated with the discontinued
businesses, there has been no impairment of goodwill during the year.
Other Intangible Assets
Intangible assets other than goodwill are separated into two categories.
Intangible assets with finite useful lives are amortized on a straight-line
basis over their estimated useful lives. Intangible assets with indefinite
useful lives are not amortized, are subject to periodic impairment tests, and
totaled $7 million at both December 31, 2002 and 2001. The following is a
summary of the company's intangible assets subject to amortization.
Weighted-
as of December 31, 2002 average
(in millions, except Accumulated amortization
amortization period data) Gross amortization Net period (years)
- ---------------------------------------------------------------------
Developed technology,
including patents $693 $234 $459 15
Manufacturing,
distribution and
other contracts 30 9 21 7
Other 48 9 39 18
- ---------------------------------------------------------------------
Total amortized
intangible assets $771 $252 $519 15
=====================================================================
The amortization expense for these intangible assets was $41 million, $29
million and $40 million for 2002, 2001 and 2000, respectively. The anticipated
annual amortization expense for these intangible assets is $48 million, $48
million, $45 million, $43 million and $38 million in 2003, 2004, 2005, 2006 and
2007, respectively. Intangible assets other than goodwill totaled $349 million
at December 31, 2001, and consisted of gross assets of $564 million net of
accumulated amortization of $215 million.
Earnings and Per Share Earnings for 2001 and 2000 Excluding Amortization
The following is earnings and per share earnings information for 2001 and 2000
on an adjusted basis, assuming, consistent with 2002, goodwill and
indefinite-lived assets are not amortized.
years ended December 31
(in millions, except per share data) 2001 2000
- -------------------------------------------------------------
Reported income from continuing
operations before cumulative effect
of accounting change $ 675 $ 754
Goodwill and indefinite-lived
assets amortization 37 25
- -------------------------------------------------------------
Adjusted income from continuing
operations before cumulative effect
of accounting change $ 712 $ 779
=============================================================
Reported net income $ 612 $ 740
Goodwill and indefinite-lived
assets amortization 37 25
- -------------------------------------------------------------
Adjusted net income $ 649 $ 765
=============================================================
Reported earnings per basic
common share $1.04 $1.26
Goodwill and indefinite-lived
assets amortization 0.06 0.04
- -------------------------------------------------------------
Adjusted earnings per basic
common share $1.10 $1.30
=============================================================
Reported earnings per diluted
common share $1.00 $1.24
Goodwill and indefinite-lived
assets amortization 0.06 0.04
- -------------------------------------------------------------
Adjusted earnings per diluted
common share $1.06 $1.28
=============================================================
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4
Charge Relating to A, AF and AX Series Dialyzers
Following reports in October 2001 of patient deaths in Croatia, Baxter initiated
a global recall of its A, AF and AX series Renal segment dialyzers. Testing led
the company to conclude that a processing fluid used during the manufacturing of
a limited number of dialyzers produced in the company's Ronneby, Sweden facility
may have played a role in the deaths reported in Croatia and other countries.
Baxter decided to permanently cease manufacturing the A, AF and AX series
dialyzers. The fluid is not used in the manufacturing process for other
dialyzers that Baxter manufactures or distributes. The company ceased production
of the discontinued dialyzers and closed its Ronneby facility. The Miami Lakes,
Florida facility, which provided materials used in the discontinued dialyzers,
has also been closed. Refer to Note 12 for a discussion of legal proceedings and
investigations relating to this matter. The company has been fully cooperating
with governmental authorities.
In the fourth quarter of 2001, the company recorded a pre-tax charge of $189
million ($156 million on an after-tax basis) to cover the costs of discontinuing
this product line and other related costs. Included in the total pre-tax charge
was $116 million for non-cash costs, principally for the write-down of goodwill
and other intangible assets, inventory and property, plant and equipment. Also
included in the charge was $73 million for cash costs, principally pertaining to
legal costs, recall costs, contractual commitments, and severance and other
employee-related costs associated with the elimination of approximately 360
positions, the majority of which were located in the manufacturing facilities.
Approximately $13 million of the cash costs were paid during the fourth quarter
of 2001, and the remaining balance in the reserve was $60 million at December
31, 2001. The revenues and profits relating to these products were not material
to the consolidated financial statements.
The following summarizes the company's utilization of the reserve for cash costs
during 2002.
Reserve at Reserve at
December 31, December 31,
(in millions) 2001 Additions Utilization 2002
- --------------------------------------------------------------------------------
Employee-related costs $ 9 $-- $ (6) $ 3
Legal costs 36 41 (44) 33
Recall and
contractual costs 15 -- (13) 2
- --------------------------------------------------------------------------------
Total $60 $41 $(63) $38
================================================================================
Based on a review of additional information, management revised its initial
estimates of the probable and estimable cash payments and related insurance
recoveries relating to the legal contingencies associated with this matter. In
conjunction with this, an additional $41 million reserve for legal costs was
recorded in 2002. At the same time, a $41 million insurance receivable was
recognized, and therefore there was no net impact on the company's results of
operations for the period. Certain legal payments and related insurance
recoveries are expected to occur in 2003 and 2004.
Note 5
Long-Term Debt, Credit Facilities and Commitments
Debt Outstanding
Effective
as of December 31 (in millions) interest rate/1/ 2002 2001
- --------------------------------------------------------------------------
Commercial paper 1.8% $ 12 $ 230
Short-term notes 0.7% -- 273
7.625% notes due 2002 4.3% -- 47
Variable-rate loan due 2004 4.1% 566 209
Variable-rate loan due 2005 0.6% 132 --
5.75% notes due 2006 4.5% 699 594
7.125% notes due 2007 7.1% 55 55
1.02% loan due 2007 1.0% 116 --
5.25% notes due 2007 5.2% 503 --
7.25% notes due 2008 7.4% 29 29
9.5% notes due 2008 6.0% 84 76
3.6% notes due 2008 3.8% 1,250 --
1.25% convertible debentures
due 2021 1.3% 800 800
6.625% debentures due 2028 2.8% 172 152
Other 88 73
- --------------------------------------------------------------------------
Total debt and lease obligations 4,506 2,538
Current portion (108) (52)
- --------------------------------------------------------------------------
Long-term portion $4,398 $2,486
==========================================================================
/1/ Includes the effect of related interest rate swaps, as applicable.
Equity Units
In December 2002 the company issued 25 million 7% equity units in an
underwritten public offering (listed on the New York Stock Exchange under the
symbol "BAX Pr") and received net proceeds of $1.213 billion. Each equity unit
contains $50 principal amount of senior notes that will mature in February 2008
and a purchase contract obligating the holder to purchase and the company to
sell a variable number of newly issued shares of Baxter common stock in February
2006. Upon settlement of the purchase contracts the company will receive
proceeds of $1.25 billion and will deliver between 35.0 million and 43.4 million
shares based upon the then-current price of Baxter's common stock (if the price
is equal to or less than $28.78, 1.7373 shares per unit will be delivered; if
the price is between $28.78 and $35.69, shares equal to $50 divided by the
then-current price will be delivered; if the price is equal to or greater than
$35.69, 1.4011 shares per unit will be delivered). Baxter will make quarterly
contract adjustment payments to the equity unit holders at a rate of 3.4% per
year until the purchase contracts are settled. The present value of these
payments of $127 million was
58 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
charged to additional contributed capital and is included in other liabilities.
Payments to the holders will be allocated between this liability and interest
expense based on a constant rate calculation over the life of the instruments.
Equity unit issuance costs totalling $30 million were allocated to the purchase
contracts and charged to additional contributed capital.
The aggregate maturity value of the senior notes, which will mature in February
2008, is $1.25 billion. The notes are initially pledged by the holders to secure
their obligations under the purchase contracts. The holders may separate the
notes and contracts by pledging U.S. Treasury securities as collateral. Baxter
will make quarterly interest payments to the holders of the notes initially at
an annual rate of 3.6%. On or after November 2005, the notes are to be
remarketed and the interest rate will be re-set. If the senior notes are not
remarketed by February 16, 2006, the holders will have the right to put the
notes to Baxter at $50 per senior note plus accrued and unpaid interest, but
only after the holders have satisfied their obligations under the purchase
contracts.
Other Debt Issuances
In April 2002, the company issued $500 million of term debt, which matures in
May 2007, and bears a 5.25% coupon rate. The net proceeds were used for working
capital, to repay certain existing debt, for capital expenditures and for
general corporate purposes.
In May 2001, the company issued $800 million of convertible debentures. The
debentures bear an initial 1.25% coupon, mature in 20 years, are callable on or
after June 5, 2006 at a price equal to 100% of the principal amount plus accrued
interest up to the redemption date, allow the holders to require the company to
repurchase the debt on specified dates at a price equal to 100% of the principal
amount plus accrued interest up to the repurchase date, and are convertible into
Baxter common stock at a conversion price of $65.18 per share if the closing
price of Baxter common stock exceeds $71.70 for a specified period of time. As
of December 31, 2002, the holders can require the company to repurchase the debt
in May of 2003, 2006, 2011 and 2016. The initial interest rate will be reset on
specified future dates, subject to a maximum of 2.9%. The proceeds from the
convertible debt issuance were used to refinance certain of the company's
short-term debt. The company also issued other debt during 2001, principally to
fund its investing activities.
In order to better match the currency denomination of its assets and
liabilities, the company rebalanced certain of its debt during 2000. The company
acquired approximately $878 million of its U.S. Dollar denominated debt
securities during 2000 and increased its Japanese Yen and Euro denominated debt.
The net costs associated with the early termination of the U.S. Dollar
denominated debt were recorded in other expense as they were not material.
Future Minimum Lease Payments and Debt Maturities
Aggregate
debt maturities
as of and for the years ended Operating and capital
December 31 (in millions) leases/1/ leases
- -----------------------------------------------------------------------
2003 $115 $ 108
2004 89 656/2/
2005 66 153
2006 64 1,932/3/
2007 72 1,318/2/
Thereafter 64 360
- -----------------------------------------------------------------------
Total obligations and
commitments $470
==========================================
Amounts representing interest,
discounts and premiums (21)
- -----------------------------------------------------------------------
Total long-term debt and present
value of lease obligations $4,506
=======================================================================
/1/ Excludes discontinued operations.
/2/ Includes $160 million of convertible debt and $12 million of commercial
paper in 2004 and $640 million of convertible debt in 2007, supported by
long-term credit facilities with funding expiration dates in 2004 and 2007.
/3/ Includes $1.25 billion 3.6% notes due 2008 as holders of notes have
potential put rights in 2006, as discussed above.
Credit Facilities
The company maintains two revolving credit facilities, which totaled $1.6
billion at December 31, 2002, and have funding expiration dates in 2004 and
2007. The facilities enable the company to borrow funds in U.S. Dollars, Euros
or Swiss Francs on an unsecured basis at variable interest rates and contain
various covenants, including a maximum debt-to-capital ratio and a minimum
interest coverage ratio. There were no borrowings outstanding under the
company's primary credit facilities at December 31, 2002 or 2001. Baxter also
maintains other short-term credit arrangements, which totaled $722 million and
$337 million at December 31, 2002 and 2001, respectively. Approximately $112
million and $146 million of borrowings were outstanding under these facilities
at December 31, 2002 and 2001, respectively.
Commercial paper, short-term notes and convertible debt, together totaling $812
million and $1,303 million at December 31, 2002 and 2001, respectively, have
been classified with long-term debt as they are supported by the long-term
credit facilities, and management intends to refinance this debt on a long-term
basis.
Leases
The company leases certain facilities and equipment under capital and operating
leases expiring at various dates. The leases generally provide for the company
to pay taxes, maintenance, insurance and certain other operating costs of the
leased property. Most of the operating leases contain renewal options. Rent
expense under operating leases was $138 million, $107 million and $96 million in
2002, 2001 and 2000, respectively.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company has entered into off-balance sheet financing arrangements where
economical and consistent with the company's business strategy, principally
relating to an existing office building in California and plasma collection
centers to be constructed in various locations throughout the United States. Two
of the lease agreements are with special-purpose entities which, in accordance
with GAAP, are not consolidated by the company. As discussed in Note 1,
management is in the process of analyzing FASB Interpretation No. 46 to
determine whether the company may be required to consolidate these entities
effective at the beginning of the third quarter of 2003. The maximum amount
committed by the lessors under these transactions is $277 million. Of this
total, the unfunded commitment available from the lessors was $70 million at
December 31, 2002. The leases generally have an initial term of five years, with
renewal options. Rent obligations will commence for certain of the leases upon
the completion of construction of the assets in the future, which is expected to
occur on various dates between January 2003 and December 2006. The minimum lease
payments, which are included in the table above, are determined based on the
funded amounts and will fluctuate based on actual interest rates. The company
expects to receive $33 million of minimum lease payments from two subleases, one
of which was executed with a third party in which the company holds a minority
equity interest. These sublease receipts, which are included in the table above,
are currently estimated to be $4 million in 2003, $10 million in 2004, $9
million in 2005 and 2006 and $1 million in 2007. With respect to its leases, the
company has the right to renegotiate renewal terms, exercise a purchase option
with respect to the leased property or arrange for the sale of the leased
property. Under each lease, in the event the property is sold on behalf of the
lessor and the sales proceeds are less than the lessor's investment in the
property, the company is responsible for the shortfall, up to an aggregate
maximum recourse amount under all of the leases of $220 million. The potential
recourse amounts are not included in the minimum lease payments above as
management believes the fair values of the properties equal or exceed the
lessors' investments in the leased properties at December 31, 2002. One of the
agreements requires that the company collateralize the outstanding lease balance
in December 2007. The potential cash collateral obligation, which is not
included in the minimum lease payments above, totals less than $20 million. The
company is required to maintain compliance with covenants under certain of the
leases, including a minimum interest coverage ratio. The company was in
compliance with all covenants at December 31, 2002.
Contingent and Other Commitments
In order to further align management and shareholder interests, in 1999 the
company sold approximately 6.1 million shares of the company's common stock to
142 of Baxter's senior managers for $198 million in cash. The participants used
five-year full-recourse market-rate personal bank loans to purchase the stock at
the May 3, 1999 closing price (adjusted for the stock split) of $31.81. Baxter
has guaranteed repayment to the banks in the event a participant in the plan
defaults on his or her obligations. The guaranteed amount totaled $219 million
at December 31, 2002. The plan also includes certain risk-sharing provisions
whereby, after May 3, 2002, the company shares 50% in any loss incurred by the
participants relating to a stock price decline. Any such loss reimbursements
would represent taxable income to the participants. The maximum pre-tax loss
under this risk-sharing provision, assuming the company's stock price declines
to zero, is $90 million. The company may take actions relating to participants
and their assets to obtain full reimbursement for any amounts the company pays
to the banks pursuant to the loan guarantee, in excess of the obligation under
the risk-sharing provision. No liability has been recorded relating to these
contingencies.
In the normal course of business, Baxter enters into certain joint development
and commercialization arrangements with third parties, often with investees of
the company. The arrangements are varied but generally provide that Baxter will
receive certain rights to manufacture, market or distribute a specified
technology or product under development by the third party, in exchange for
payments by Baxter. At December 31, 2002, the unfunded milestone payments under
these arrangements totaled less than $150 million, and the majority of them were
contingent upon the third parties' achievement of contractually specified
milestones.
As part of its financing program, the company had commitments to extend credit,
including commitments to two investees. The company's total credit commitment
was $180 million and $68 million at December 31, 2002 and 2001, respectively, of
which $81 million and $30 million was drawn and outstanding at December 31, 2002
and 2001, respectively. Included in the total commitment amount at December 31,
2002 was a commitment to extend a $50 million five-year loan to Cerus
Corporation (Cerus). Baxter owns approximately 2% of the common stock of Cerus.
The loan commitment, which was completely funded in early 2003, bears a 12%
interest rate, with no interest or principal payments due until 2008. The loan
is secured with first-priority liens on Cerus' accounts receivable arising from
the future sale of certain of Cerus' products. Also included in the total
commitment amount at both December 31, 2002 and December 31, 2001 was a
commitment to Acambis, Inc. (Acambis) to provide financing of $40 million, of
which approximately $21 million was drawn and outstanding at both December 31,
2002 and 2001. Baxter owns approximately 17% of the common stock of Acambis. The
financing arrangement includes an initial term of five years, and renewal
options.
Refer to Note 12 for a discussion of the company's legal contingencies.
60 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6
Financial Instruments and Risk Management
Receivables
Customer Credit
In the normal course of business, the company provides credit to customers in
the health-care industry, performs credit evaluations of these customers and
maintains reserves for potential credit losses which, when realized, have been
within the range of management's allowance for doubtful accounts. The allowance
for doubtful accounts was $62 million and $57 million at December 31, 2002 and
2001, respectively.
Securitizations
The company has entered into agreements with various financial institutions
whereby it periodically securitizes an undivided interest in certain pools of
trade accounts receivable (including lease receivables). Pursuant to its primary
securitization agreement, a subsidiary of the company has irrevocably sold
accounts receivable to a special-purpose bankruptcy-remote entity that finances
these purchases by issuing beneficial interests in the receivables to
third-party investors. Subject to certain conditions, the subsidiary may sell
additional eligible receivables from time to time in the future. In accordance
with GAAP, the special-purpose bankruptcy-remote entity is not consolidated by
the company. Under the company's other securitization facilities, the company
may transfer, on an ongoing basis, undivided ownership interests in eligible
accounts receivable directly to certain third-party investors. Certain of the
arrangements include limited recourse provisions, which are not material to the
consolidated financial statements. Neither the buyers of the receivables nor the
investors in these transactions have recourse to assets other than the
transferred receivables. The company continues to service the receivables under
all of the arrangements, and retains a subordinated residual interest in the
receivables under certain of the arrangements. The amount of the retained
interests and the costs of certain of the securitization arrangements vary with
the company's credit rating. Under one of the agreements, the company is
required to maintain compliance with various covenants, including a maximum
debt-to-capital ratio and a minimum interest coverage ratio. The company was in
compliance with all covenants at December 31, 2002. Another arrangement requires
that the company post modest cash collateral in the event of a specified
unfavorable change in credit rating. The potential cash collateral, which was
not required as of December 31, 2002, totals less than $20 million.
In 2002, 2001 and 2000 the company generated net operating cash inflows of $57
million, $118 million and $195 million, respectively, relating to such sales of
receivables. A summary of the activity is as follows.
as of and for the years ended
December 31 (in millions) 2002 2001 2000
- --------------------------------------------------------------------------------
Sold receivables at beginning
of year $ 683 $ 590 $ 400
Proceeds from sales of receivables 2,152 2,340 1,506
Cash collections (remitted to the
owners of the receivables) (2,095) (2,222) (1,311)
Effect of currency exchange-
rate changes (19) (25) (5)
- --------------------------------------------------------------------------------
Sold receivables at end of year $ 721 683 $ 590
================================================================================
The company recognized net gains relating to the sales of receivables of $7
million, $12 million and $2 million in 2002, 2001 and 2000, respectively. Credit
losses, net of recoveries, relating to the retained interests were not material
to the consolidated financial statements.
The subordinate interests retained in the transferred receivables are carried at
amounts that approximate fair value and totaled $78 million at December 31,
2002. The key economic assumptions used in estimating the fair value of the
retained interests are expected annual credit losses and the rate utilized to
discount the residual cash flows. An immediate 10% and 20% adverse change in
these assumptions would reduce the fair value of the retained interests by $1
million and $2 million, respectively. These sensitivity analyses are
hypothetical and should be used with caution. Changes in fair value based on a
10% or 20% variation in assumptions generally cannot be extrapolated because the
relationship of the change in each assumption to the change in fair value may
not be linear.
Other Concentrations of Risk
The company invests the majority of its excess cash in certificates of deposit
or money market accounts and, where appropriate, diversifies the concentration
of cash among different financial institutions. With respect to financial
instruments, where appropriate, the company has diversified its selection of
counterparties, and has arranged collateralization and masternetting
agreements to minimize the risk of loss.
Foreign Currency and Interest Rate Risk Management
The company operates on a global basis, and is exposed to the risk that its
earnings, cash flows and stockholders' 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 is primarily exposed to currency exchange-rate risk with respect to
firm commitments, forecasted transactions and net assets denominated in Japanese
Yen, Euro, British Pound and Swiss Franc. The company manages its foreign
currency
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and stockholders' equity 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 periodically enters into interest rate swaps, in which the
company agrees to exchange, at specified intervals, the difference between fixed
and floating interest amounts calculated by reference to an agreed-upon notional
amount.
In adopting SFAS No. 133 in 2001, management reassessed its hedging strategies,
and, in some cases, increased the company's use of derivative instruments or
changed the type of derivative instrument used to manage currency exchange-rate
and interest rate risk, in part because the new accounting standard allows for
increased opportunities and different approaches for reducing earnings and
stockholders' equity volatility resulting from fluctuations in currency exchange
rates and interest rates.
Cash Flow Hedges
The company uses forward and option 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 uses forward-starting interest
rate swaps and treasury rate locks to hedge the risk to earnings associated with
fluctuations in interest rates relating to anticipated issuances of term debt.
Certain other firm commitments and forecasted transactions are also periodically
hedged with forward and option contracts.
The following table summarizes activity (net-of-tax) in 2002 in AOCI related to
the company's cash flow hedges.
as of and for the years ended December 31
(in millions) 2002 2001
- --------------------------------------------------------------------------
AOCI balance at beginning of year $ 82 $ --
Cumulative effect of accounting change -- 8
Net gain (loss) in fair value of derivatives (10) 126
Net gain reclassified to earnings (104) (52)
- --------------------------------------------------------------------------
AOCI (loss) balance at end of year $ (32) $ 82
==========================================================================
The net amounts recorded during 2002 and 2001 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 consolidated financial
statements. During 2002 and 2001, certain foreign currency hedges were
dedesignated and discontinued principally due to changes in the company's
anticipated net exposures. This was partially as a result of recent business
acquisitions, whereby the company gained natural offsets to previously existing
currency exposures, as well as planned changes to intercompany product flows.
The net-of-tax gains reclassified to earnings relating to these discontinued
hedges, which are included in the table above, were $24 million and $21 million
in 2002 and 2001, respectively. As of December 31, 2002, $6 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 maximum term over
which the company has hedged exposures to the variability of cash flows,
excluding interest payments on third-party debt, is 4 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. 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 during 2002 or 2001.
Hedges of Net Investments in Foreign Operations
The company periodically 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
effectiveness on the swaps based upon changes in spot currency exchange rates.
Approximately $370 million of net after-tax losses and $95 million of net
after-tax gains related to the derivative and nonderivative instruments were
included in the company's CTA account for the years ended December 31, 2002 and
2001, respectively.
Other Foreign Currency Hedges
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 earnings.
62 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Forward Agreements
In order to partially offset the potentially dilutive effect of employee stock
options, the company has periodically entered into forward agreements with
independent third parties related to the company's common stock. The forward
agreements, which have a fair value of zero at inception, require the company to
purchase its common stock from the counterparties on specified future dates and
at specified prices. The company may, at its option, terminate and settle these
agreements at any time before maturity. The agreements include certain Baxter
stock price thresholds, below which the counterparty has the right to terminate
the agreements. If the thresholds were met in the future, the number of shares
that could potentially be issued by the company under all of the agreements is
subject to contractual maximums, and the maximum at December 31, 2002 was 115
million shares. The contracts give the company the choice of net-share, net-cash
or physical settlement upon maturity or upon any earlier settlement date. In
accordance with GAAP, these contracts are not recorded in the financial
statements until they are settled. The settlements of these contracts (whether
by net-share, net-cash or physical settlement) are classified within
stockholders' equity.
At December 31, 2002, the company had outstanding forward agreements related to
15 million shares, which all mature in 2003, and have exercise prices ranging
from $33 to $52 per share, with a weighted-average exercise price of $49 per
share (the company's common stock closed at $28 on December 31, 2002). At
December 31, 2001, agreements related to 31 million shares were outstanding at
exercise prices ranging from $33 to $55 per share, with a weighted-average
exercise price of $49 per share. In 2002, management decided to exit
substantially all of the forward agreements and the company completed a
significant amount of the terminations during 2002. During 2002, the company
physically settled forward agreements related to 22 million shares. Management
expects to complete the exit strategy during 2003. Consistent with its strategy
for funding the company's other obligations, management is funding the exit of
the forward agreements through cash flows from operations, by issuing additional
debt, by entering into other financing arrangements, or by issuing common stock.
As noted above, a portion of the proceeds from the December 2002 issuance of the
equity units was used to settle certain of the forward agreements. The
settlement of the outstanding forward agreements has not had and is not expected
to have a material impact on the company's earnings per diluted common share.
The fair values of the equity forward agreements at December 31, 2002 and 2001
are presented in the table below. The fair value is the same for all settlement
methods. With respect to the agreements outstanding at December 31, 2002, for
each one dollar decrease in the price of a share of Baxter common stock (the
stock price was $28 at December 31, 2002), the fair value of these agreements
would be reduced by $15 million.
Book Values and Fair Values of Financial Instruments
Approximate
Book values fair values
as of December 31 ----------------------------------
(in millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------
Assets
Long-term insurance
receivables $ 126 $ 93 $ 119 $ 87
Investments in affiliates 107 173 149 208
Foreign currency hedges 91 181 91 181
Interest rate hedges 47 14 47 14
Equity forward agreements -- -- -- 167
Liabilities
Short-term debt 112 149 112 149
Current maturities of
long-term debt and
lease obligations 108 52 108 52
Short-term borrowings
classified as long term 812 1,303 809 1,303
Other long-term debt
and lease obligations 3,586 1,183 3,769 968
Foreign currency hedges 73 18 73 18
Interest rate hedges 24 -- 24 --
Net investment hedges 498 1 498 1
Equity forward agreements -- -- 302 --
Nexell put rights liability -- 57 -- 57
Long-term litigation
liabilities 147 140 142 131
==============================================================================
The fair values of certain of the company's cost method investments in
affiliates are not readily determinable as the securities are not traded in a
market. For those investments, fair value is assumed to approximate carrying
value. With respect to the company's unrestricted available-for-sale marketable
securities, the total net unrealized losses at December 31, 2002 totaled less
than $5 million. With respect to the Nexell put rights, in November 2002 the
company made a payment that completely extinguished its liability.
Although the company's litigation remains unresolved by final orders or
settlement agreements in some cases, the estimated fair values of insurance
receivables and long-term litigation liabilities were computed by discounting
the expected cash flows based on currently available information. The
approximate fair values of other assets and liabilities are based on quoted
market prices, where available. The carrying values of all other financial
instruments approximate their fair values due to the short-term maturities of
these assets and liabilities.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7
Accounts Payable and Accrued Liabilities
- --------------------------------------------------------------------------------
as of December 31 (in millions) 2002 2001
- --------------------------------------------------------------------------------
Accounts payable, principally trade $ 829 $ 708
Employee compensation and withholdings 254 233
Litigation 85 147
Pension and other deferred benefits 53 49
Property, payroll and other taxes 103 99
Common stock dividends payable 346 349
Net investment hedges 498 1
Product warranties 53 45
Foreign currency hedges 33 8
Edwards joint venture liability -- 181
Nexell put rights -- 57
Other 789 555
- --------------------------------------------------------------------------------
Accounts payable and accrued liabilities $3,043 $2,432
================================================================================
Refer to Note 2 for further information regarding the reduction of the Edwards
joint venture liability. Refer to Note 6 regarding the company's extinguishment
of its liability associated with the Nexell put rights, and for information on
the company's net investment hedges.
Note 8
Common and Preferred Stock
Stock Split
On February 27, 2001, Baxter's board of directors approved a two-for-one 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 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, and option and per option
data, in the consolidated financial statements and notes, except the
consolidated statements of stockholders' equity and comprehensive income, have
been adjusted and restated to retroactively reflect the stock split.
Stock Compensation Plans
Fixed Stock Option Plans
Stock options have been granted at various dates. Most grants have a 10-year
term and have an exercise price at least equal to 100% of market value on the
date of grant. Vesting terms vary, with the majority of outstanding options
vesting 100% in three years. As of December 31, 2002, 9,291,223 authorized
shares remain available for future awards under the company's fixed stock option
plans.
Stock Options Outstanding
The following is a summary of stock options outstanding at December 31, 2002.
(option shares in thousands)
Options outstanding Options exercisable
- -------------------------------------------------------------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise contractual exercise exercise
prices Outstanding life (years) price Exercisable price
- -------------------------------------------------------------------------
$10-27 14,779 4.9 $23.03 10,225 $21.38
28-38 13,932 7.1 31.22 9,734 31.56
39-42 12,610 7.8 41.27 4,000 41.29
43-49 14,793 8.2 45.56 479 46.67
50-56 13,716 9.1 52.08 -- --
- -------------------------------------------------------------------------
$10-56 69,830 7.4 $38.44 24,438 $29.19
=========================================================================
As of December 31, 2001 and 2000, there were 19,884,000 and 14,651,000 options
exercisable, respectively, at weighted-average exercise prices of $26.66 and
$20.33, respectively.
Stock Option Activity
- ---------------------
Weighted-
average
exercise
(option shares in thousands) Shares price
- -----------------------------------------------------------------------------
Options outstanding at
December 31, 1999 37,618 $ 26.10
Granted 19,040 37.66
Exercised (5,706) 19.73
Forfeited (3,842) 28.91
Equitable adjustment 1,892 --
- -----------------------------------------------------------------------------
Options outstanding at
December 31, 2000 49,002 30.11
Granted 23,862 46.54
Exercised (5,225) 21.65
Forfeited (1,933) 35.56
- -----------------------------------------------------------------------------
Options outstanding at
December 31, 2001 65,706 36.59
Granted 11,832 45.87
Exercised (4,112) 25.46
Forfeited (3,596) 43.96
- -----------------------------------------------------------------------------
Options outstanding at
December 31, 2002 69,830 $ 38.44
=============================================================================
Employee Stock Purchase Plans
The company has employee stock purchase plans whereby it is authorized to issue
shares of common stock to its employees, nearly all of whom are eligible to
participate. As of December 31, 2002, 13,731,538 authorized shares of common
stock are available for purchase under the employee stock purchase plans. The
purchase price is the lower of 85% of the closing market price on the date of
subscription or 85% of the closing market price on the purchase dates, as
defined by the plans. The total subscription amount for each participant cannot
exceed 25% of current annual pay. Under the plans, the company sold
64 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1,552,797, 1,423,806 and 2,774,044 shares to employees in 2002, 2001 and 2000,
respectively.
Equitable Adjustments
As a result of the spin-off of Edwards in March 2000, equitable adjustments were
made to the number of shares and exercise price of outstanding employee stock
options and employee stock subscriptions. These adjustments did not impact the
company's results of operations. Employees of Edwards were required to exercise
any vested options within 90 days from the date of spin-off, which occurred on
March 31, 2000. All unvested options were canceled 90 days after the date of
spin-off.
Restricted Stock Plans
Effective in 2001, the restricted stock component of the management long-term
incentive plan was eliminated and the plan consists solely of fixed stock
options, the terms and conditions of which are similar to the company's other
stock option plans. The number of stock options granted pursuant to the revised
plan is based on the participant's stock option target, the participant's
individual performance, as well as the performance of Baxter common stock
relative to a comparator index. The company also has other incentive
compensation plans whereby grants of restricted stock are made to key employees
and non-employee directors. Effective in 2001, the restricted stock component of
the non-employee director compensation plan was eliminated and the plan at
December 31, 2002 consists solely of stock options, the terms and conditions of
which are not substantially different from those under the management long-term
incentive plan. During 2002, 2001 and 2000, 25,171, 11,960 and 499,020 shares,
respectively, of restricted stock were granted at weighted-average grant-date
fair values of $44.96, $49.39 and $32.88 per share, respectively. At December
31, 2002, 44,671 shares of stock were subject to restrictions, the majority of
which lapse in 2003, 2005 and 2010. The majority of the restricted stock granted
in 2000 was forfeited pursuant to the long-term incentive plan transition
discussed above, and none is outstanding at December 31, 2002.
Shared Investment Plan
Refer to Note 5 for a discussion of the Shared Investment Plan and related
contingencies.
Stock Repurchase Program
As authorized by the board of directors, from time to time the company
repurchases its stock on the open market to optimize its capital structure
depending upon its operational cash flows, net debt level and current market
conditions. As further discussed in Note 6, the company also periodically
repurchases its stock from counterparty financial institutions in conjunction
with the settlement of its equity forward agreements. Effective December 1,
2002, the company will no longer treat settlements of equity forward agreements
as repurchases under the board-authorized open market repurchase program, as
such settlements are not open market transactions. As of December 31, 2002, $243
million was remaining under the board of directors' October 2002 authorization.
Total stock repurchases were $1,169 million, $288 million and $375 million in
2002, 2001 and 2000, respectively.
Issuances of Stock and Equity Units
In December 2002, the company issued 14,950,000 shares of common stock pursuant
to an underwritten offering and received net proceeds of $414 million.
Concurrent with this issuance, the company issued 25 million 7% equity units.
Refer to Note 5 for further discussion of this issuance, as well as the May 2001
issuance of convertible debt. In December 2001, the company issued 9,656,237
shares of common stock in a private placement and received net proceeds of $500
million. The net proceeds from these issuances are principally being used to
fund acquisitions, retire a portion of the company's debt and, in 2002, settle
certain equity forward agreements.
Authorized Shares
In May 2002, shareholders of record on March 8, 2002 approved an amendment to
the company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock to two billion shares from one billion shares.
The additional shares enhance the company's flexibility in connection with
possible future actions, such as stock splits, stock dividends, acquisitions of
property and securities of other companies, financings and other corporate
purposes.
Common Stock Dividends
In November 2002, the board of directors declared an annual dividend on the
company's common stock of $0.582 per share. The dividend, which was payable on
January 6, 2003 to stockholders of record as of December 13, 2002, is a
continuation of the current annual rate.
Other
The board of directors is authorized to issue up to 100 million shares of no par
value preferred stock in series with varying terms as it determines. In March
1999, common stockholders received a dividend of one preferred stock purchase
right (collectively, the Rights) for each share of common stock. As a result of
the two-for-one split of the company's common stock in May 2001, each
outstanding share of common stock is now accompanied by one-half of one Right.
The Rights may become exercisable at a specified time after (1) a person or
group acquires 15 percent or more of the company's common stock or (2) a tender
or exchange offer for 15 percent or more of the company's common stock. Once
exercisable, the holder of each Right is entitled to purchase, upon payment of
the exercise price, shares of the company's common stock having a market value
equal to two times the exercise price of the Rights. The Rights have a current
exercise price of $275. The Rights expire on March 23, 2009, unless earlier
redeemed by the company under certain circumstances at a price of $0.01 per
Right.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9
Retirement and Other Benefit Programs
The company sponsors several qualified and nonqualified pension plans for its
employees. The company also sponsors certain unfunded contributory health-care
and life insurance benefits for substantially all domestic retired employees.
The company uses a September 30 measurement date for substantially all of its
pension plans.
Reconciliation of Plans' Benefit Obligations, Assets and Funded Status
as of and for the years
ended December 31 Pension benefits Other benefits
-------------------------------------
(in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Benefit obligations
Beginning of year $1,692 $1,555 $ 304 $ 219
Service cost 50 40 5 3
Interest cost 125 115 24 16
Participant contributions 3 3 4 3
Actuarial loss 253 55 85 74
Benefit payments (81) (79) (15) (11)
Currency exchange-rate changes and other 33 3 -- --
- --------------------------------------------------------------------------------
End of year 2,075 1,692 407 304
- --------------------------------------------------------------------------------
Fair value of plan assets
Beginning of year 1,530 1,807 -- --
Actual return on plan assets (204) (351) -- --
Employer contributions 21 147 11 8
Participant contributions 3 3 4 3
Benefit payments (81) (79) (15) (11)
Currency exchange-rate changes and other 6 3 -- --
- --------------------------------------------------------------------------------
End of year 1,275 1,530 -- --
- --------------------------------------------------------------------------------
Funded status
Funded status at December 31 (800) (162) (407) (304)
Unrecognized net losses (gains) 1,000 340 110 (26)
- --------------------------------------------------------------------------------
Net amount recognized $ 200 $ 178 $(297) $(278)
- --------------------------------------------------------------------------------
Amounts recognized in the
consolidated balance sheets
Prepaid benefit cost $ 369 $ 320 $ -- $ --
Accrued benefit liability (169) (142) (297) (278)
Additional minimum liability (804) -- -- --
AOCI (a component of stockholders'
equity) 804 -- -- --
- --------------------------------------------------------------------------------
Net amount recognized $ 200 $ 178 $(297) $(278)
================================================================================
Assets held by the trusts of the plans consist primarily of equity securities.
At December 31, 2002, the accumulated benefit obligation (ABO) is in excess of
plan assets for certain of the company's pension plans. The projected benefit
obligation, ABO, and fair value of plan assets for these plans were $1.95
billion, $1.80 billion and $1.19 billion, respectively, at December 31, 2002,
and $262 million, $230 million and $83 million, respectively, at December 31,
2001. Under SFAS No. 87, "Employers' Accounting for Pensions," if the ABO
relating to a pension plan exceeds the fair value of the plan's assets, the
company's established liability for the plan must be at least equal to the
unfunded ABO. As a result of recent unfavorable asset returns and a decline in
interest rates, at December 31, 2002 the company recorded a net-of-tax reduction
of $517 million to AOCI, which is a component of stockholders' equity, in order
to establish an additional minimum liability. The establishment of the liability
had no impact on the company's results of operations.
Net Periodic Benefit Cost (Income)
years ended December 31
(in millions) 2002 2001 2000
- --------------------------------------------------------------------------
Pension benefits
Service cost $ 50 $ 40 $ 41
Interest cost 125 115 113
Expected return on plan assets (193) (177) (158)
Amortization of net loss (gain) 1 (5) (1)
Amortization of prior service
cost and transition obligation 1 3 5
- --------------------------------------------------------------------------
Net periodic pension
benefit income $ (16) $ (24) $ --
==========================================================================
Other benefits
Service cost $ 5 $ 3 $ 3
Interest cost 24 16 14
Recognized actuarial loss (gain) 2 (4) (7)
- --------------------------------------------------------------------------
Net periodic other benefit cost $ 31 $ 15 $ 10
==========================================================================
The net periodic benefit cost amounts principally pertain to continuing
operations.
66 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assumptions Used in Determining Benefit Obligations
Pension benefits Other benefits
----------------------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------
Discount rate
U.S. and Puerto Rico plans 6.75% 7.50% 6.75% 7.50%
International plans (average) 5.42% 5.68% n/a n/a
Expected return on plan assets
U.S. and Puerto Rico plans 10.00% 11.00% n/a n/a
International plans (average) 7.33% 7.76% n/a n/a
Rate of compensation increase
U.S. and Puerto Rico plans 4.50% 4.50% n/a n/a
International plans (average) 3.15% 3.64% n/a n/a
Annual rate of increase in the
per-capita cost n/a n/a 10.20% 11.39%
Rate decreased to n/a n/a 5.00% 5.00%
by the year ended n/a n/a 2007 2007
===============================================================================
Effect of a One-Percent Change in
Assumed Health-Care Cost Trend Rate
One-percent One-percent
increase decrease
years ended December 31 ------------------------------
(in millions) 2002 2001 2002 2001
- -----------------------------------------------------------------------------
Effect on total of service
and interest cost components $ 5 $ 2 $ 4 $ 3
Effect on postretirement
benefit obligation $46 $23 $38 $23
=============================================================================
With respect to the employees of Edwards, the company froze benefits at the date
of spin-off under the U.S. defined benefit pension plan and under plans that
provide retirees with health-care and life insurance benefits. The pension
liabilities related to such employees' service prior to the spin-off date remain
with Baxter.
Most U.S. employees are eligible to participate in a qualified defined
contribution plan. Company matching contributions relating to continuing
operations were $22 million, $18 million and $15 million in 2002, 2001 and 2000,
respectively.
Note 10
Interest and Other Expense (Income)
- -----------------------------------------------------------------------------
Interest Expense, Net
years ended December 31 (in millions) 2002 2001 2000
- -----------------------------------------------------------------------------
Interest expense, net
Interest costs $101 $130 $146
Interest costs capitalized (30) (22) (15)
- -----------------------------------------------------------------------------
Interest expense 71 108 131
Interest income (19) (39) (39)
- -----------------------------------------------------------------------------
Total interest expense, net $ 52 $ 69 $ 92
- -----------------------------------------------------------------------------
Continuing operations $ 51 $ 68 $ 84
Discontinued operations $ 1 $ 1 $ 8
==============================================================================
Other Expense (Income)
years ended December 31 (in millions) 2002 2001 2000
- ------------------------------------------------------------------------------
Equity in losses of affiliates
and minority interests $19 $ 14 $ 9
Asset dispositions and
impairments, net 68 (16) 6
Foreign currency (6) (12) (57)
Loss on early extinguishment of debt -- -- 15
Other 11 1 7
- -----------------------------------------------------------------------------
Total other expense (income) $92 $(13) $(20)
==============================================================================
Included in asset dispositions and impairments, net in 2002 was a $70 million
impairment charge for two investments with declines in value deemed to be other
than temporary, with the investments written down to their market values. All
available information is evaluated in management's analyses of whether any
declines in the fair values of individual securities are considered other than
temporary. With respect to these impairment charges, significant unfavorable
events occurred during 2002, causing management to conclude the declines in
value were other than temporary. Most significantly, one of the investees
announced during the quarter its decision to immediately commence a wind-down of
operations principally due to its unsuccessful efforts to raise capital or to
effect a business combination with another company, and the other investee
received information from regulatory entities regarding the absence of material
progress regarding one of its products under development. The company does not
have significant unrealized losses relating to investments held at December 31,
2002. Also included in asset dispositions and impairments, net, were write-offs
of certain fixed assets and gains on the sale of certain land.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in asset dispositions and impairments, net, in 2001 was a gain of $105
million from the disposal of an investment in the common stock of Cerus by
contribution to the company's pension trust. The cost basis used in the
determination of the gain was average cost. Partially offsetting this gain in
2001 were charges for asset impairments, which primarily consisted of charges
for investments with declines in value deemed to be other than temporary, with
the investments written down to their market values.
Included in foreign currency income in 2000 were gains of $66 million associated
with the termination of cross-currency swap agreements. The contracts were
terminated in conjunction with the company's rebalancing of its debt portfolio
and in anticipation of the adoption of SFAS No. 133.
Note 11
Taxes
- --------------------------------------------------------------------------------
Income Before Income Tax Expense by Category
years ended December 31 (in millions) 2002 2001 2000
- --------------------------------------------------------------------------------
U.S. $ 502 $330 $378
International 895 649 592
- -------------------------------------------------------------------------------
Income from continuing
operations before income taxes
and cumulative effect of accounting change $1,397 $979 $970
===============================================================================
Income Tax Expense
years ended December 31 (in millions) 2002 2001 2000
- -------------------------------------------------------------------------------
Current
U.S.
Federal $102 $(13) $153
State and local -- 76 48
International 195 125 185
- -------------------------------------------------------------------------------
Current income tax expense 297 188 386
- -------------------------------------------------------------------------------
Deferred
U.S.
Federal 33 72 (98)
State and local 39 (18) (21)
International (5) 62 (51)
- -------------------------------------------------------------------------------
Deferred income tax expense (benefit) 67 116 (170)
- -------------------------------------------------------------------------------
Income tax expense $364 $304 $216
===============================================================================
The income tax expense for continuing operations was calculated as if Baxter
were a stand-alone entity (without income from the discontinued operations).
Deferred Tax Assets and Liabilities
as of December 31 (in millions) 2002 2001 2000
- ------------------------------------------------------------------------------
Deferred tax assets
Accrued expenses $443 $257 $374
Accrued postretirement benefits 107 101 102
Alternative minimum tax credit 138 139 146
Tax credits and net operating losses 122 102 92
Valuation allowances (67) (58) (50)
- ------------------------------------------------------------------------------
Total deferred tax assets 743 541 664
- ------------------------------------------------------------------------------
Deferred tax liabilities
Asset basis differences 79 456 410
Subsidiaries' unremitted earnings 38 38 85
Other 79 57 38
- ------------------------------------------------------------------------------
Total deferred tax liabilities 196 551 533
- ------------------------------------------------------------------------------
Net deferred tax asset (liability) $547 $(10) $131
==============================================================================
Income Tax Expense Rate Reconciliation
years ended December 31 (in millions) 2002 2001 2000
- ------------------------------------------------------------------------------
Income tax expense at statutory rate $ 489 $ 343 $ 340
Operations subject to
tax incentives (161) (157) (147)
State and local taxes 21 31 10
Foreign tax expense (income) (3) 38 29
IPR&D expense 36 62 --
Other factors (18) (13) (16)
- ------------------------------------------------------------------------------
Income tax expense $ 364 $ 304 $ 216
==============================================================================
The company has received a tax-exemption grant from Puerto Rico, which provides
that its manufacturing operations will be partially exempt from local taxes
until the year 2013. Appropriate taxes have been provided for these operations
assuming repatriation of all available earnings. In addition, the company has
other manufacturing operations outside the United States, which benefit from
reductions in local tax rates under tax incentives that will continue at least
until 2006.
U.S. federal income taxes, net of available foreign tax credits, on unremitted
earnings deemed permanently reinvested would be $725 million as of December 31,
2002.
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 spinoff in the United States. In many countries
throughout the world, Baxter has not sought similar rulings from the local tax
authorities and has taken the position that the spin-off was a tax-free event to
Baxter. In the event that one or more countries'
68 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
taxing authorities successfully challenge this position, Baxter would be liable
for any resulting liability. Baxter believes that it has established adequate
reserves to cover the expected tax liabilities. There can be no assurance,
however, that Baxter will not incur losses in excess of such reserves.
U.S. federal income tax returns filed by Baxter through December 31, 1997, have
been examined and closed by the Internal Revenue Service. The company has
ongoing audits in U.S. and international jurisdictions, including Belgium,
France, Japan, India, Mexico and Singapore. In the opinion of management, the
company has made adequate tax provisions for all years subject to examination.
Note 12
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. These cases and
claims raise difficult and complex factual and legal issues and are subject to
many uncertainties and complexities, including, but not limited to, the facts
and circumstances of each particular case and claim, the jurisdiction in which
each suit is brought, and differences in applicable law. Baxter has established
reserves in accordance with GAAP for certain of the matters discussed below. For
these matters, there is a possibility that resolution of the matters could
result in an additional loss in excess of presently established reserves. Also,
there is a possibility that resolution of certain of the company's legal
contingencies for which there is no reserve could result in a loss. Management
is not able to estimate the amount of such loss or additional loss (or range of
loss or additional loss). However, management believes that, 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, no such charge would
have a material adverse effect on Baxter's consolidated financial position.
Based on recent developments and a review of additional information, the
liabilities and related insurance receivables pertaining to the company's
mammary and plasma-based therapies litigation described below, were adjusted at
various points during 2002 and 2001 based primarily on more favorable insurance
recoveries. The pre-tax impact was recorded as a reduction of marketing and
administrative expenses in the consolidated statements of income, decreasing the
expenses as a percentage of sales by 0.7% in 2002 and 0.3% in 2001.
Mammary Implant Litigation
The company, together with certain of its subsidiaries, is a defendant in
various courts in a number of lawsuits brought by individuals, all seeking
damages for injuries of various types allegedly caused by silicone mammary
implants formerly manufactured by the Heyer-Schulte division (Heyer-Schulte) of
American Hospital Supply Corporation (AHSC). AHSC, which was acquired by the
company in 1985, divested its Heyer-Schulte division in 1984.
Settlement of a class action on behalf of all women with silicone mammary
implants was approved by the U.S. District Court (U.S.D.C.) for the Northern
District of Alabama in December 1995. The monetary provisions of the settlement
provide compensation for all present and future plaintiffs and claimants through
a series of specific funds and a disease-compensation program involving certain
specified medical conditions. In addition to the class action, there are a
number of individual suits currently pending against the company, primarily
consisting of plaintiffs who have opted-out of the class action.
Baxter believes that a substantial portion of its liability and defense costs
for mammary implant litigation will be covered by insurance, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency.
Plasma-Based Therapies Litigation
Baxter is a defendant in a number of claims and lawsuits brought by individuals
who have hemophilia, all seeking damages for injuries allegedly caused by
antihemophilic factor concentrates VIII or IX derived from human blood plasma
(factor concentrates) processed by the company from the late 1970s to the
mid-1980s. The typical case or claim alleges that the individual was infected
with the HIV virus by factor concentrates which contained the HIV virus. None of
these cases involves factor concentrates currently processed by the company.
In addition, Immuno International AG (Immuno), a company acquired by Baxter in
1997, has unsettled claims for damages for injuries allegedly caused by its
plasma-based therapies. A portion of the liability and defense costs related to
these claims will be covered by insurance, subject to exclusions, conditions,
policy limits and other factors. Pursuant to the stock purchase agreement
between the company and Immuno as revised in April 1999, 26 million Swiss Francs
of the purchase price is being withheld to cover these contingent liabilities.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Baxter is also a defendant in a number of claims and lawsuits, including one
certified class action in the U.S.D.C. for the Central District of California,
brought by individuals who infused the company's Gammagard IVIG (intravenous
immunoglobulin), all of whom are seeking damages for Hepatitis C infections
allegedly caused by infusing Gammagard IVIG. In September 2000, the U.S.D.C. for
the Central District of California approved a settlement of the class action
that would provide financial compensation for U.S. individuals who used
Gammagard IVIG between January 1993 and February 1994.
Baxter believes that a substantial portion of the liability and defense costs
related to its plasma-based therapies litigation will be covered by insurance,
subject to self-insurance retentions, exclusions, conditions, coverage gaps,
policy limits and insurer solvency.
Other
In August 2002, six purported class action lawsuits were filed in the U.S.D.C.
for the Northern District of Illinois naming Baxter and its Chief Executive
Officer and Chief Financial Officer as defendants. These lawsuits, which have
been consolidated and seek recovery of unspecified damages, allege that the
defendants violated the federal securities laws by making misleading statements
that allegedly caused Baxter common stock to trade at inflated levels. In
December 2002, plaintiffs filed their consolidated amended class action
complaint, which named nine additional Baxter officers as defendants. On January
24, 2003 all defendants moved for dismissal of the consolidated amended
complaint. In October 2002, Baxter and members of its board of directors were
named as defendants in a lawsuit filed in the U.S.D.C. for the Northern District
of Illinois by an alleged participant in the Baxter Incentive Investment Plan
(the Plan), purportedly on behalf of the Plan and a class of Plan participants
who purchased shares of Baxter common stock. This lawsuit is based on
allegations similar to those made in the securities lawsuits described above and
has been consolidated with the other actions described above.
As of December 31, 2002, Baxter and certain of its subsidiaries were defendants
in six civil lawsuits seeking damages on behalf of persons who allegedly died or
were injured as a result of exposure to Baxter's Althane series dialyzers. The
U.S. Government is investigating the matter and Baxter has received a subpoena
to provide documents. A government criminal investigation concerning the patient
deaths is pending in Spain. Other lawsuits and claims may be filed in the United
States and elsewhere.
As of December 31, 2002, Baxter and certain of its subsidiaries were named as
defendants, along with others, in lawsuits pending in federal and state court
brought on behalf of various classes of purchasers of Medicare and Medicaid
eligible drugs alleged to have been injured as a result of pricing practices for
such drugs, the prices of which are alleged to be artificially inflated. In
addition, the Attorney General of Nevada and the Attorney General of Montana
have filed separate civil suits against a subsidiary of Baxter alleging that
prices for Medicare and Medicaid eligible drugs were artificially inflated in
violation of various state laws. Various state and federal agencies are
conducting civil investigations into the marketing and pricing practices of
Baxter and others with respect to Medicare and Medicaid reimbursement.
As of December 31, 2002, Baxter and certain of its subsidiaries have been served
as defendants, along with others, in lawsuits filed in various state and U.S.
federal courts, some of which are purported class actions, on behalf of
claimants alleged to have contracted autism or other attention deficit disorders
as a result of exposure to vaccines for childhood diseases containing
Thimerosal. Additional Thimerosal cases may be filed in the future against
Baxter and other companies that marketed Thimerosal-containing products.
Allegiance Corporation (Allegiance) was spun off from the company in a tax-free
distribution to shareholders on September 30, 1996. As of September 30, 1996,
Allegiance assumed the defense of litigation involving claims related to its
businesses, including certain claims of alleged personal injuries as a result of
exposure to natural rubber latex gloves. Although Allegiance has not been named
in most of this litigation, it will be defending and indemnifying Baxter
pursuant to certain contractual obligations for all expenses and potential
liabilities associated with claims pertaining to latex gloves.
In addition to the cases discussed above, Baxter is a defendant in a number of
other claims, investigations and lawsuits, including certain environmental
proceedings. Based on the advice of counsel, management does not believe that,
individually or in the aggregate, these other claims, investigations and
lawsuits will have a material adverse effect on the company's consolidated
results of operations, cash flows or financial position.
70 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13
Segment Information
Baxter operates in three segments, each of which is a strategic business that is
managed separately because each business develops, manufactures and sells
distinct products and services. The segments are as follows: Medication
Delivery, medication delivery products and therapies, including intravenous
infusion pumps and solutions, anesthesia-delivery devices and pharmaceutical
agents, and oncology therapies; BioScience, biopharmaceutical and
blood-collection, separation and storage products and technologies; and Renal,
products and services to treat end-stage kidney disease. As discussed in Note 2,
the company spun off Edwards on March 31, 2000. Financial information for
Edwards is reflected in the consolidated financial statements as a discontinued
operation.
Management utilizes more than one measurement and multiple views of data to
measure segment performance and to allocate resources to the segments. However,
the dominant measurements are consistent with the company's consolidated
financial statements and, accordingly, are reported on the same basis herein.
Management evaluates the performance of its segments and allocates resources to
them primarily based on pre-tax income along with cash flows and overall
economic returns. Intersegment sales are generally accounted for at amounts
comparable to sales to unaffiliated customers, and are eliminated in
consolidation. The accounting policies of the segments are substantially the
same as those described in the summary of significant accounting policies in
Note 1.
Certain items are maintained at the company's corporate headquarters (Corporate)
and are not allocated to the segments. They primarily include most of the
company's debt and cash and equivalents and related net interest expense,
corporate headquarters costs, certain non-strategic investments and related
income and expense, certain nonrecurring gains and losses, deferred income
taxes, certain foreign currency fluctuations, the majority of foreign currency
and interest rate hedging activities, and certain litigation liabilities and
related insurance receivables. With respect to depreciation and amortization,
and expenditures for long-lived assets, the difference between the segment
totals and the consolidated totals principally related to assets maintained at
Corporate.
Segment Information
The following segment information is as of and for the years ended December 31.
Medication
(in millions) Delivery BioScience Renal Other Total
- ------------------------------------------------------------------------------------------
2002
Net sales $3,317 $3,096 $1,697 $ -- $ 8,110
Depreciation and amortization 168 128 75 68 439
Pre-tax income (loss) 595 659 342 (199) 1,397
Assets 3,646 4,407 1,299 3,126 12,478
Expenditures for long-lived assets 227 382 135 104 848
- ------------------------------------------------------------------------------------------
2001
Net sales $2,905 $2,786 $1,665 $ -- $ 7,356
Depreciation and amortization 158 148 91 30 427
Pre-tax income (loss) 475 552 304 (352) 979
Assets 3,076 3,559 1,701 2,007 10,343
Expenditures for long-lived assets 218 282 102 157 759
- ------------------------------------------------------------------------------------------
2000
Net sales $2,703 $2,353 $1,641 $ -- $ 6,697
Depreciation and amortization 146 125 86 37 394
Pre-tax income (loss) 436 533 324 (323) 970
Assets 2,453 2,935 1,591 1,754 8,733
Expenditures for long-lived assets 180 248 108 89 625
==========================================================================================
Pre-Tax Income Reconciliation
years ended December 31 (in millions) 2002 2001 2000
- ---------------------------------------------------------------------------------------------
Total pre-tax income from segments $1,596 $1,331 $1,293
Unallocated amounts
IPR&D and other special charges (189) (280) (286)
Charge relating to A, AF and AX series dialyzers -- (189) --
Interest expense, net (51) (68) (84)
Certain currency exchange
rate fluctuations and hedging activities 92 113 15
Asset dispositions and impairments, net (47) 36 --
Other Corporate items (4) 36 32
- ---------------------------------------------------------------------------------------------
Consolidated income from continuing operations before
income taxes and cumulative effect of accounting change $1,397 $ 979 $ 970
=============================================================================================
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Reconciliation
as of December 31 (in millions) 2002 2001 2000
- -----------------------------------------------------------------------
Total segment assets $ 9,352 $ 8,336 $6,979
Unallocated assets
Cash and equivalents 1,169 582 579
Deferred income taxes 607 227 308
Insurance receivables 169 165 277
Property and equipment, net 288 255 217
Other Corporate assets 893 778 373
- -----------------------------------------------------------------------
Consolidated total assets $12,478 $10,343 $8,733
=======================================================================
Geographic Information
Net sales are based on product shipment destination and long-lived assets are
based on physical location.
as of and for the years ended
December 31 (in millions) 2002 2001 2000
- -----------------------------------------------------------------------
Net sales
United States $ 3,974 $ 3,721 $3,120
Japan 388 427 485
Other countries 3,748 3,208 3,092
- -----------------------------------------------------------------------
Consolidated net sales $ 8,110 $ 7,356 $6,697
=======================================================================
Long-lived assets
United States $ 2,041 $ 1,769 $1,543
Austria 433 344 294
Other countries 1,433 1,193 970
- -----------------------------------------------------------------------
Consolidated long-lived assets $ 3,907 $ 3,306 $2,807
=======================================================================
Significant Product Sales
The following is a summary of net sales as a percentage of consolidated net
sales for the company's principal products.
years ended December 31 2002 2001 2000
- -----------------------------------------------------------------------
Recombinant products 12.3% 11.0% 9.3%
Plasma-based products/1/ 12.4% 13.9% 12.0%
Peritoneal dialysis therapies 15.6% 16.7% 18.3%
Intravenous therapies/2/ 12.1% 12.6% 13.6%
=======================================================================
/1/ Includes plasma-derived hemophilia (FVII, FVIII, FIX and FEIBA), albumin,
bio-surgery and other plasma-based products. Excludes anti-body therapies.
/2/ Principally includes intravenous solutions and nutritional products.
Significant Relationship
Sales by various Baxter businesses to members of a large hospital buying group,
Premier Purchasing Partners L.P. (Premier), pursuant to various contracts with
Premier, represented approximately 8.9%, 10.1% and 10.0% of the company's
consolidated net sales from continuing operations in 2002, 2001 and 2000,
respectively. The company has a number of contracts with Premier that expire on
various dates in 2003 and 2004. Sales to members of Premier could be impacted if
any of the company's contracts with Premier are not renewed in part or in their
entirety. However, Baxter's contracts with Premier are independently negotiated,
members of the Premier group are free to purchase from the suppliers of their
choice, and a loss of any contract would not necessarily mean the loss of all
sales under that contract to all members of the group.
72 Baxter International Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14
Quarterly Financial Results and Market for the Company's Stock (Unaudited)
- -------------------------------------------------------------------------------------------------------
years ended December 31 First Second Third Fourth Total
(in millions, except per share data) quarter quarter quarter quarter year
- -------------------------------------------------------------------------------------------------------
2002
Net sales $1,875 $1,945 $2,029 $2,261 $8,110
Gross profit 880 914 940 1,058 3,792
Income from continuing operations/1/ 253 204 317 259 1,033
Net income/1/ 253 200 316 9 778
Per common share
Income from continuing operations/1/
Basic 0.42 0.34 0.52 0.43 1.72
Diluted 0.41 0.33 0.51 0.42 1.67
Net income/1/
Basic 0.42 0.33 0.52 0.01 1.29
Diluted 0.41 0.32 0.51 0.02 1.26
Dividends declared -- -- -- 0.582 0.582
Market price
High 59.60 59.48 43.41 32.09 59.60
Low 51.43 44.09 30.55 24.22 24.22
- -------------------------------------------------------------------------------------------------------
2001
Net sales $1,689 $1,796 $1,809 $2,062 $7,356
Gross profit 768 821 847 976 3,412
Income (loss) from continuing operations
before cumulative effect of accounting
change/2/ 218 255 274 (72) 675
Net income (loss)/2/ 162 253 272 (75) 612
Per common share
Income (loss) from continuing operations
before cumulative effect of
accounting change/2/
Basic 0.37 0.44 0.46 (0.12) 1.15
Diluted 0.36 0.43 0.45 (0.12) 1.11
Net income (loss)/2/
Basic 0.27 0.43 0.46 (0.13) 1.04
Diluted 0.27 0.42 0.45 (0.13) 1.00
Dividends declared -- -- -- 0.582 0.582
Market price
High 47.60 54.00 55.05 55.50 55.50
Low 40.75 43.95 47.50 45.95 40.75
- --------------------------------------------------------------------------------------------------------
/1/ The second quarter of 2002 includes a $70 million pre-tax impairment charge
for investments whose decline in value was deemed other than temporary, and
a $51 million pre-tax IPR&D charge relating to the acquisition of Fusion.
The fourth quarter of 2002 includes a $112 million pre-tax IPR&D charge
principally relating to the acquisitions of ESI and Epic, and a $26 million
charge relating to the prioritization of the company's R&D activities.
/2/ The second quarter of 2001 includes a pre-tax gain of $105 million from the
disposal of a common stock investment, which was substantially offset by
impairment charges for other assets and investments whose decline in value
was deemed to be other than temporary. The fourth quarter of 2001 includes
a $280 million pre-tax charge for IPR&D and a $189 million pre-tax charge
relating to the company's A, AF and AX series dialyzers.
Baxter common stock is listed on the New York, Chicago, Pacific, London and SWX
Swiss stock exchanges. The New York Stock Exchange is the principal market on
which the company's common stock is traded. At January 30, 2003, there were
approximately 62,900 holders of record of the company's common stock. The equity
units discussed in Note 5 are also listed on the New York Stock Exchange.
73
DIRECTORS AND EXECUTIVE OFFICERS
Board of Directors
Walter E. Boomer
Chairman and
Chief Executive Officer
Rogers Corporation
Pei-yuan Chia
Retired Vice Chairman
Citicorp and Citibank, N.A.
John W. Colloton
Director Emeritus
University of Iowa
Hospitals and Clinics
Susan Crown
Vice President
Henry Crown and Company
Gail D. Fosler
Senior Vice President and
Chief Economist
The Conference Board
James R. Gavin III, M.D., Ph.D.
President
Morehouse School of Medicine
Harry M. Jansen Kraemer, Jr.
Chairman and
Chief Executive Officer
Baxter International Inc.
Joseph B. Martin, M.D., Ph.D.
Dean of the Faculty of Medicine
Harvard Medical School
Thomas T. Stallkamp
Vice Chairman and
Chief Executive Officer
MSX International
Monroe E. Trout, M.D.
Chairman Emeritus
Cytyc Corporation
Fred L. Turner
Senior Chairman
McDonald's Corporation
Honorary Director
William B. Graham
Chairman Emeritus
of the Board
Baxter International Inc.
Executive Officers
BAXTER INTERNATIONAL INC.
Brian P. Anderson/1,2/
Senior Vice President and
Chief Financial Officer
J. Robert Hurley/1/
Corporate Vice President
Integration and Alliance
Management
Neville J. Jeharajah
Corporate Vice President
Investor Relations and
Financial Planning
Harry M. Jansen Kraemer, Jr./1,2/
Chairman and
Chief Executive Officer
Karen J. May
Corporate Vice President
Human Resources
Steven J. Meyer/1,2/
Treasurer
John C. Moon
Coporate Vice President
Chief Information Officer
John L. Quick
Corporate Vice President
Quality/Regulatory
Jan Stern Reed/1,2/
Corporate Secretary and
Associate General Counsel
Norbert G. Riedel
Corporate Vice President
Chief Scientific Officer
Thomas J. Sabatino, Jr./1,2/
Senior Vice President and
General Counsel
Michael J. Tucker
Senior Vice President
BAXTER HEALTHCARE CORPORATION
David F. Drohan
Senior Vice President and
President-Medication Delivery
J. Michael Gatling
Corporate Vice President
Global Manufacturing
Operations
Alan L. Heller/2/
Senior Vice President and
President-Renal
David C. McKee/2/
Corporate Vice President and
Deputy General Counsel
Gregory P. Young
Corporate Vice President and
President-Transfusion
Therapies
BAXTER WORLD TRADE CORPORATION
Eric A. Beard
Corporate Vice President and
President-Europe, Africa and
Middle East
Carlos del Salto
Senior Vice President and
President-Intercontinental/
Asia
Thomas H. Glanzmann/1/
Senior Vice President and
President-BioScience
/1/ Also an executive officer of
Baxter Healthcare Corporation
/2/ Also an executive officer of
Baxter World Trade Corporation
As of February 25, 2003
74 Baxter International Inc. 2002 Annual Report
COMPANY INFORMATION
Corporate Headquarters
Baxter International Inc.
One Baxter Parkway
Deerfield, IL 60015-4633
Telephone: (847) 948-2000
Internet: www.baxter.com
Stock Exchange Listings
Common Stock Ticker Symbol: BAX
Baxter common stock is listed on the New York, Chicago, Pacific, London and SWX
Swiss stock exchanges. The New York Stock Exchange is the principal market on
which the company's common stock is traded.
7% Equity Unit Ticker Symbol: BAX Pr
Baxter 7% Equity Units are listed on the New York Stock Exchange.
Annual Meeting
The 2003 Annual Meeting of Stockholders will be held on Tuesday, May 6, at
10:30 a.m. at the Drury Lane Theatre in Oakbrook Terrace, Illinois.
Stock Transfer Agent
Correspondence concerning Baxter International common stock holdings, lost or
missing certificates or dividend checks, duplicate mailings or changes of
address should be directed to:
Baxter Common Stock
Equiserve
P.O. Box 43069
Providence, RI 02940-3069
Telephone: (781) 575-2723
Hearing Impaired Telephone: (800) 952-9245
Internet: www.equiserve.com
Baxter 7% Equity Units
Bank One Corporate Trust Services
Telephone: (312)407-1871
Correspondence concerning Baxter International Inc. Contingent Payment Rights
related to the 1998 acquisition of Somatogen, Inc. should be directed to:
U.S. Bank Trust National Association Telephone:
(651) 244-8677
Dividend Reinvestment
The company offers an automatic dividend-reinvestment program to all holders of
Baxter International Inc. common stock. A detailed brochure is available upon
request from:
Equiserve
P.O. Box 43081
Providence, RI 02940-3081
Telephone: (781) 575-2723
Internet: www.equiserve.com
Independent Public Accountants
PricewaterhouseCoopers LLP
Chicago, IL
INFORMATION RESOURCES
Internet
www.baxter.com
Please visit our Internet site for information on the company, corporate
governance, annual report, Form 10-K, proxy statement, SEC filings and the
sustainability report.
Information regarding corporate governance at Baxter, including Baxter's
corporate governance guidelines, global business practice standards, and the
charters for the committees of Baxter's board of directors, is available on
Baxter's website at www.baxter.com under "Corporate Governance" and in print
upon request by writing to Baxter International Inc., Corporate Secretary, One
Baxter Parkway, Deerfield, Illinois 60015-4633.
Stockholders may elect to view proxy materials and annual reports on-line via
the Internet instead of receiving them by mail. To sign up for this service,
please go to www.econsent.com/bax. When the next proxy materials and annual
report are available, you will be sent an e-mail message with a proxy control
number and a link to a website where you can cast your vote on-line. Once you
provide your consent to receive electronic delivery of proxy materials via the
Internet, your consent will remain in effect until you revoke it.
Registered stockholders also may access personal account information on-line via
the Internet by visiting www.equiserve.com and selecting the "Account Access"
menu.
Investor Relations
Securities analysts, investment professionals and investors seeking additional
investor information should contact:
Baxter Investor Relations
Telephone: (847) 948-4551
Fax: (847) 948-4498
Customer Inquiries
Customers who would like general information about Baxter's products and
services may call the Center for One Baxter toll free in the United States at
(800) 422-9837 or by dialing (847) 948-4770.
Form 10-K
A paper copy of the company's Form 10-K for the year ended December 31, 2002,
may be obtained without a charge by writing to Baxter International Inc.,
Investor Relations, One Baxter Parkway, DF2-2E, Deerfield, IL 60015-4633. A copy
of the company's Form 10-K and other filings with the U.S. Securities and
Exchange Commission may be obtained from the Securities and Exchange
Commission's website at www.sec.gov or the company's website at
www.baxter.com.
(R)Baxter International Inc., 2003. All rights reserved.
References in this report to Baxter are intended to refer collectively to
Baxter International Inc. and its U.S. and international subsidiaries.
Accura, ADVATE, Althane, ALYX, Aralast, Arena, Baxter, Ceprotin,
COLLEAGUE CX, EPOMAX, Extraneal, Gammagard, Hemofil, HomeChoice, Immunate,
INTERCEPT, Mesnex, NeisVac-C, Physioneal, PROMAXX, Recombinate and Syntra are
trademarks of Baxter International Inc. and its affiliates.
NEUPREX is a trademark of XOMA Ltd.
Design / Paragraphs Design Inc., Chicago
Printing / Lithographix, Los Angeles
[LOGO] Printed on Recycled Paper
75
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
as of or for the years ended December 31 2002/1/ 2001/2/ 2000/3,4/ 1999 1998/5/
- ----------------------------------------------------------------------------------------------------------------
Operating Results (in millions)
Net sales $ 8,110 7,356 6,697 6,224 5,607
Income from continuing operations before
cumulative effect of accounting change $ 1,033 675 754 805 298
Depreciation and amortization $ 439 427 394 364 337
Research and development expenses/6/ $ 501 426 378 331 323
- -------------------------------------------------------------------------------------------------------------
Balance Sheet and Cash Flow Information
(in millions)
Capital expenditures $ 848 759 625 614 538
Total assets $ 12,478 10,343 8,733 9,644 9,873
Long-term debt and lease obligations $ 4,398 2,486 1,726 2,601 3,096
- -------------------------------------------------------------------------------------------------------------
Common Stock Information/7/
Average number of common shares
outstanding (in millions)/8/ 600 590 585 579 567
Income from continuing operations before
cumulative effect of accounting change
per common share
Basic $ 1.72 1.15 1.29 1.39 0.53
Diluted $ 1.67 1.11 1.26 1.36 0.52
Cash dividends declared per common share $ 0.582 0.582 0.582 0.582 0.582
Year-end market price per common share/9/ $ 28.00 53.63 44.16 31.41 32.16
- -------------------------------------------------------------------------------------------------------------
Other Information
Net-debt-to-capital ratio/10/ 40.3% 35.9% 40.1% 40.2% 48.4%
Total shareholder return/11/ (46.7%) 22.8% 48.1% (0.5%) 30.1%
Common stockholders of record at year-end 62,996 60,662 59,100 61,200 61,000
=============================================================================================================
/1/ Income from continuing operations includes in-process research and
development (IPR&D) and other special charges of $189 million.
/2/ Income from continuing operations includes IPR&D and other special charges,
and a charge relating to A, AF and AX series dialyzers of $280 million and
$189 million, respectively.
/3/ Income from continuing operations includes IPR&D and other special charges
of $286 million.
/4/ Certain balance sheet data are affected by the spin-off of Edwards
Lifesciences Corporation in 2000.
/5/ Income from continuing operations includes charges for IPR&D, net
litigation, and exit and other reorganization costs of $116 million, $178
million and $122 million, respectively.
/6/ Excludes charges for IPR&D and a special charge to prioritize certain of
the company's research and development programs, as applicable in each
year.
/7/ All share and per share data have been restated for the company's
two-for-one stock split in May 2001.
/8/ Excludes common stock equivalents.
/9/ Market prices are adjusted for the company's stock dividend and stock
split.
/10/ The net-debt-to-capital ratio represents net debt (short-term and long-term
debt and lease obligations, net of cash and equivalents) divided by capital
(the total of net debt and stockholders' equity). Management uses this
ratio to assess and optimize the company's capital structure. The
net-debt-to-capital ratio is not a measurement of capital structure defined
under generally accepted accounting principles. The ratio was calculated in
2002 in accordance with the company's primary credit agreements, which give
70% equity credit to the company's equity units. Refer to Note 5 to the
consolidated financial statements for further information.
/11/ Represents the total of appreciation in market price plus cash dividends
declared on common shares plus the effect of any stock dividends for the
year.
76 Baxter International Inc. 2002 Annual Report