UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
---------------
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
---------------
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0781620
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015-4633
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(847) 948-2000
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the registrant's Common Stock, par value $1.00 per
share, outstanding as of August 5, 1998, the latest practicable date, was
285,405,010 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended June 30, 1998
TABLE OF CONTENTS
Page Number
-----------
Part I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Statements of Income....................... 2
Condensed Consolidated Balance Sheets............................. 3
Condensed Consolidated Statements of Cash Flows................... 4
Notes to Condensed Consolidated Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
Review by Independent Public Accountants....................................16
Report of Independent Accountants...........................................17
Part II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings..................................................18
Item 4. Submission of Matters to a Vote of Security Holders................21
Item 6. Exhibits and Reports on Form 8-K...................................21
Signature...................................................................22
Exhibits ...................................................................23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
(in millions, except per share data)
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
----------------------- -------------------------
Operations
Net sales $1,646 $1,569 $3,114 $3,012
Costs and expenses
Cost of goods sold 883 855 1,689 1,637
Marketing and administrative expenses 361 347 668 670
Research and development expenses 99 95 185 185
Acquired research and development 116 0 116 352
Interest, net 43 44 85 82
Goodwill amortization 14 11 26 21
Other expense (income) 11 (1) 7 (3)
- -------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,527 1,351 2,776 2,944
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 119 218 338 68
Income tax expense 56 56 111 109
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 63 $162 $227 ($41)
- -------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic $.22 $.58 $.81 ($.15)
=========================================================================================================================
Diluted $.22 $.57 $.79 ($.15)
=========================================================================================================================
Weighted average number
of common shares outstanding:
Basic 283 278 282 276
=========================================================================================================================
Diluted 288 282 287 276
=========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except shares)
- ----------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1998 1997
(unaudited)
------------------------------------
Current assets Cash and equivalents $ 428 $ 465
Accounts receivable 1,556 1,372
Notes and other current receivables 430 367
Inventories 1,366 1,208
Short-term deferred income taxes 180 253
Prepaid expenses 277 205
---------------------------------------------------------------------------------------------------
Total current assets 4,237 3,870
- ----------------------------------------------------------------------------------------------------------------------
Property, At cost 4,609 4,407
plant and Accumulated depreciation and amortization (2,146) (2,047)
equipment ---------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,463 2,360
- ----------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,775 1,622
Insurance receivables 286 409
Other 514 446
---------------------------------------------------------------------------------------------------
Total other assets 2,575 2,477
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 9,275 $ 8,707
======================================================================================================================
Current Notes payable to banks $ 300 $ 102
liabilities Current maturities of long-term debt and lease obligations 15 42
Accounts payable and accrued liabilities 1,804 1,963
Income taxes payable 415 450
---------------------------------------------------------------------------------------------------
Total current liabilities 2,534 2,557
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,964 2,635
- ----------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 369 316
- ----------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 147 210
- ----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 386 370
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 350,000,000
equity shares, issued 291,248,251 shares in 1998 and
287,701,247 shares in 1997 291 288
Additional contributed capital 2,056 1,876
Retained earnings 1,068 1,006
Common stock in treasury, at cost, 6,130,929
shares in 1998 and 7,662,187 shares in 1997 (263) (329)
Accumulated other comprehensive income (277) (222)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 2,875 2,619
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,275 $ 8,707
======================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
- ----------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
(brackets denote cash outflows) 1998 1997
------------------------------
Cash flow Net income (loss) $ 227 ($41)
from Adjustments
operations Depreciation and amortization 211 202
Deferred income taxes 66 37
Acquired research and development 116 352
Other 3 29
Changes in balance sheet items
Accounts receivable (116) (42)
Inventories (136) (123)
Accounts payable and other accrued liabilities (142) (170)
Net litigation payments (97) (67)
Other (41) (31)
--------------------------------------------------------------------------------------------------------
Cash flow from operations 91 146
- --------------------------------------------------------------------------------------------------------------------------
Investment Capital expenditures (221) (149)
activities Acquisitions, net of cash received,
and investments in affiliates (239) (375)
Proceeds from asset dispositions - (18)
--------------------------------------------------------------------------------------------------------
Investment activities, net (460) (542)
- --------------------------------------------------------------------------------------------------------------------------
Financing Issuance of debt and lease obligations 879 491
activities Redemption of debt and lease obligations (117) (365)
(Decrease) increase in debt with maturities
of three months or less, net (310) 449
Common stock dividends (165) (156)
Stock issued under employee benefit plans 57 77
-------------------------------------------------------------------------------------------------------
Financing activities, net 344 496
- --------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and equivalents (12) (30)
- --------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and equivalents (37) 70
Cash and equivalents at beginning of period 465 761
- --------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 428 $ 831
==========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Baxter International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. FINANCIAL INFORMATION
- -------------------------
The unaudited interim condensed consolidated financial statements of Baxter
International Inc. and its subsidiaries (the "Company" or "Baxter") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Company's 1997
Annual Report to Stockholders.
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments, except for the in-process research and
development charges relating to the acquisitions discussed below, are of a
normal, recurring nature. The results of operations for the interim period are
not necessarily indicative of the results of operations to be expected for the
full year.
Certain reclassifications have been made to conform the 1997 financial
statements to the 1998 presentation.
2. EARNINGS PER SHARE
- ----------------------
The numerator for both basic and diluted earnings per share (EPS) is net income
(loss). The denominator for basic EPS is the weighted-average number of common
shares outstanding during the period. The denominator for diluted EPS is
increased for the effect of dilutive securities, which consist primarily of
employee stock options, unless the effect would be anti-dilutive. Earnings per
share amounts for 1997 have been restated to conform to the requirements of SFAS
No. 128, "Earnings per Share," which was adopted in 1997. For Baxter, diluted
earnings per share amounts under the new standard are the same as primary
earnings per share amounts previously presented.
3. COMPREHENSIVE INCOME
- ------------------------
In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income. This statement establishes rules for
the reporting of comprehensive income and its components. Comprehensive income
consists of net income and foreign currency translation adjustments and will be
presented in the Consolidated Statement of Stockholders' Equity for the year
ended December 31, 1998. Prior year financial statements will be reclassified to
conform to the SFAS No. 130 requirements. The adoption of SFAS No. 130 had no
impact on total stockholders' equity. Comprehensive income (loss) for the three
and six months ended June 30, 1998 was $49 million and $172 million,
respectively, and for the three and six months ended June 30, 1997 was $156
million and ($197) million, respectively.
6
4. ACQUISITIONS
- -----------------
All acquisitions during the six months ended June 30, 1998 and 1997 were
accounted for under the purchase method. The purchase price of each acquisition
was allocated to the net assets acquired based on estimates of their fair values
at the date of the acquisition. The excess of the purchase price over the fair
values of the net tangible assets and liabilities acquired is allocated to
intangible assets. On the basis of independent appraisals, a portion of the
purchase price for certain of the acquisitions was allocated to in-process
research and development (R&D) which, under generally accepted accounting
principles, was immediately expensed.
Results of operations of acquired companies are included in the Company's
results of operations as of the respective acquisition dates. Excluding the in-
process R&D charges, had the 1998 and the 1997 acquisitions taken place on
January 1 of 1998 or 1997, consolidated sales, net income (loss) and earnings
(loss) per share for the quarters and six-month periods ended June 30, 1998 and
1997, respectively, would not have been significantly different from reported
amounts.
Somatogen, Inc.
- ---------------
In May 1998, the Company acquired Somatogen, Inc. (Somatogen), a
biopharmaceutical company which is developing recombinant hemoglobin technology.
The purchase price was approximately $206 million and was principally settled
with 3,547,004 shares of Baxter International Inc. common stock. In addition,
Somatogen shareholders are entitled to a contingent deferred cash payment of up
to $2.00 per Somatogen share, or approximately $42 million, based on a
percentage of sales of certain future products through the year 2007.
Approximately $116 million of the purchase price was allocated to in-process
R&D, and immediately expensed, as discussed above. In connection with the
acquisition, the Company recorded a $37 million net deferred tax asset for the
tax effect of Somatogen's net operating loss carryforward.
Pharmaceutical Products Division of the BOC Group
- -------------------------------------------------
In April 1998, the Company acquired the Pharmaceutical Products Division of the
BOC Group's Ohmeda health-care business, a manufacturer of gases and drugs used
for general and local anesthesia, for approximately $91 million. The fair value
of the identifiable net assets acquired exceeded the purchase price by
approximately $149 million. Such excess was allocated to reduce the values
assigned to noncurrent assets in determining their fair values.
Bieffe Medital S.p.A.
- ---------------------
In early 1998, the Company acquired a majority interest in Bieffe Medital
S.p.A., a European manufacturer of dialysis and intravenous solutions and
containers, with the remaining shares purchased in July 1998. The total purchase
price was approximately $244 million, which included assumption of debt.
Approximately $40 million and $13 million of the purchase price was allocated to
existing product technology and trademarks, respectively, and is being amortized
on a straight-line basis over 25 years. Approximately $75 million of the
purchase price was allocated to goodwill and is being amortized on a straight-
line basis over 40 years.
7
Research Medical, Inc.
- ----------------------
In March 1997, Baxter acquired Research Medical, Inc., a provider of specialized
products used in open-heart surgery. The purchase price was approximately $239
million and was principally settled with 4,801,711 shares of Baxter
International Inc. common stock. Approximately $132 million of the purchase
price was allocated to in-process R&D, and immediately expensed, as discussed
above. Approximately $40 million of the purchase price was allocated to
existing product technology and is being amortized on a straight-line basis over
14 years. Approximately $38 million of the purchase price was allocated to
goodwill and is being amortized on a straight-line basis over 20 years.
Immuno International AG
- -----------------------
In the first fiscal quarter of 1997, the Company acquired Immuno International
AG, a global manufacturer of biopharmaceutical products and services for
transfusion medicine. The acquisition cost was approximately $600 million plus
assumption of $280 million of net debt. Approximately $55 million of the
purchase price is being withheld to cover certain legal contingencies.
Approximately $220 million of the purchase price was allocated to in-process
R&D, and immediately expensed, as discussed above. Approximately $95 million of
the purchase price was allocated to existing product technology and is being
amortized on a straight-line basis over 20 years. Approximately $82 million of
the purchase price was allocated to goodwill and is being amortized on a
straight-line basis over 40 years.
5. INVENTORIES
- ----------------
Inventories consisted of the following:
- ------------------------------------------------------------------------------
June 30, December 31,
1998 1997
(in millions) (unaudited)
- ------------------------------------------------------------------------------
Raw materials $ 323 $ 279
Work in process 287 243
Finished products 756 686
- ------------------------------------------------------------------------------
Total inventories $1,366 $1,208
==============================================================================
6. RESTRUCTURING RESERVE
- -------------------------
In September 1995, the Company recorded a restructuring charge of $103 million
primarily to eliminate excess plant capacity and reduce manufacturing costs, as
well as to initiate certain organizational structure changes. The charge
predominantly relates to the closure of the intravenous-solutions plant and
warehouse in Carolina, Puerto Rico. Production and warehousing will be
transferred and consolidated into other facilities. The Company currently
estimates that approximately 1,200 positions will be eliminated in total.
Approximately 500 positions have been eliminated to date and substantial
completion of the plan is anticipated in 1999. The original timetable for the
program has been affected by delays in required governmental regulatory reviews
relating to the transfer of equipment and production processes to other
facilities in Puerto Rico and the United States. During the first half of 1998,
approximately $2 million in reserves were utilized.
8
The restructuring program initiated in 1993 is substantially complete and
achieved all employee headcount reduction and savings goals established at
inception.
7. LEGAL PROCEEDINGS
- ---------------------
Refer to "Part II - Item 1. Legal Proceedings" below for the status of lawsuits
and claims involving the Company.
8. INTEREST, NET
- -------------------
Net interest expense consisted of the following (unaudited):
- ------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
Interest expense $49 $52 $102 $ 98
Interest income (6) (8) (17) (16)
- ------------------------------------------------------------------------------
Interest, net $43 $44 $ 85 $ 82
==============================================================================
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Baxter International Inc.'s ("Baxter" or the "Company") 1997 Annual Report to
Stockholders ("Annual Report") contains management's discussion and analysis of
financial condition and results of operations for the year ended December 31,
1997. In the Annual Report, management outlined its key financial objectives
for 1998. These objectives and the results achieved through June 30, 1998 are
summarized as follows:
---------------------------------------------------------------------------------------------------------------------------
RESULTS THROUGH
FULL YEAR 1998 OBJECTIVES JUNE 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------
. Increase net sales approximately 10%, . Net sales during the six months ended June 30,
before 1998 acquisitions and the impact of 1998 increased 6% before 1998 acquisitions and before
foreign exchange. the effect of the strengthening U.S. dollar, and
increased 3% including acquisitions and at actual
currency translation rates.
- ---------------------------------------------------------------------------------------------------------------------------
. Grow earnings in the mid-teens, before . Excluding the in-process research and development
the impact of foreign exchange, and in the charges, net income for the first half of the year
low double digits after absorbing the increased approximately 17% before the impact of
impact of foreign exchange. foreign exchange, and increased 10% after absorbing
the impact of foreign exchange.
- ---------------------------------------------------------------------------------------------------------------------------
. Generate at least $500 million in . The Company had operational cash flow of $5
operational cash flow, after investing million during the six months ended June 30, 1998.
approximately $1 billion in capital Operational cash flows are typically significantly
improvements and research and development. higher in the latter two quarters of the year based
on the timing of receipts and disbursements. The
total of capital expenditures and research and
development expenses for the six months ended June
30, 1998 was $406 million.
- ---------------------------------------------------------------------------------------------------------------------------
10
RESULTS OF OPERATIONS
- ---------------------
NET SALES TRENDS
- ------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 1998 1997 Increase 1998 1997 Increase
- ------------------------------------------------------------------------------------------------------------------------------
International $ 888 $ 832 7% $1,652 $1,597 3%
United States 758 737 3% 1,462 1,415 3%
- ------------------------------------------------------------------------------------------------------------------------------
Total net sales $1,646 $1,569 5% $3,114 $3,012 3%
==============================================================================================================================
Without the effect of changes in foreign exchange rates, total net sales growth
was 8% for both the three- and six-month periods ended June 30, 1998.
Growth in international sales for the three- and six-month periods ended June
30, 1998, excluding the impact of the strengthened U.S. dollar, was 13% and 11%,
respectively. Contributing to the 1998 sales growth rates was the 1998
acquisition of Bieffe Medital S.p.A. (Bieffe). Refer to "Item 1. Financial
Statements" - Note 4 to the Condensed Consolidated Financial Statements for
further information regarding this acquisition. Partially offsetting the impact
of this acquisition were reduced sales due to the termination of the European
distribution agreement with Allegiance Corporation. Strong sales of the
Company's peritoneal dialysis products and services used to treat kidney disease
and tissue valves used in heart-valve therapy contributed to the international
sales growth rate for both the three- and six-month periods ended June 30, 1998.
Growth was particularly strong in Latin America, where sales rose more than 20%
over the prior year quarter and year-to-date period.
Favorably impacting domestic sales growth in the second quarter was the April
1998 acquisition of the Pharmaceutical Products Division of the BOC Group's
Ohmeda health-care business (Ohmeda). Refer to "Item 1. Financial Statements"
- - Note 4 to the Condensed Consolidated Financial Statements for further
information regarding this acquisition. Continued strong demand for the
Company's tissue heart valves, increased sales as a result of the multiyear
agreement with Premier, a major U.S. group of customers, and sales of the
Colleague(TM) volumetric infusion pump, which was introduced in 1997, also
contributed to domestic sales growth in both the quarter and year-to-date
period. Competitive pressures in the United States continue to unfavorably
affect sales growth across various product lines. In addition, sales growth in
the Blood Therapies business was unfavorably affected during the quarter and
year-to-date period by regulatory and production issues that have impacted the
supply of factor concentrates in the entire industry.
GROSS MARGIN AND EXPENSE RATIOS
- --------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Increase June 30, Increase
1998 1997 (decrease) 1998 1997 (decrease)
- ---------------------------------------------------------------------------------------------------------------------
Gross profit margin 46.4% 45.5% .9 pts 45.8% 45.7% .1 pt
Marketing and
administrative expenses 21.9% 22.1% (.2 pts) 21.5% 22.2% (.7 pts)
- ---------------------------------------------------------------------------------------------------------------------
11
The acquisition of Ohmeda favorably impacted the gross profit margin for the
three months ended June 30, 1998. The gross profit margin also increased in
both the three- and six-month periods ended June 30, 1998 due to a more
favorable mix of sales, with the most significant growth being generated from
the higher-margin tissue heart valve and peritoneal dialysis product lines.
Marketing and administrative expenses decreased as a percent of sales for both
the three- month and six-month periods ended June 30, 1998. The Company has
more than offset the incremental costs of expanding into developing markets and
new business initiatives with a continued focus on cost control across all
business units, coupled with realizing benefits of integrating recent
acquisitions and implementing the restructuring programs discussed below.
RESEARCH AND DEVELOPMENT
- ----------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 1998 1997 Increase 1998 1997 Increase
- ----------------------------------------------------------------------------------------------------------------
Research and
development expenses $99 $95 4% $185 $185 0%
As a percent of sales 6.0% 6.1% 5.9% 6.1%
- ----------------------------------------------------------------------------------------------------------------
Research and development ("R&D") expenses above exclude the in-process R&D
charges recorded in 1998 and 1997 relating to the acquisitions of Somatogen,
Inc. (Somatogen), Immuno International AG (Immuno) and Research Medical, Inc.
(RMI). Refer to "Item 1. Financial Statements" Note 4 to the Condensed
Consolidated Financial Statements for further information regarding these
charges. Excluding the impact of the strengthening U.S. dollar, R&D expenses
increased 6% and 2% for the three- and six-month periods ended June 30, 1998,
respectively. The Company has been rationalizing R&D spending with the 1997
acquisition of Immuno. In addition, year-to-date R&D expenses in 1998 do not
include expenditures relating to the Company's Immunotherapy division, due to
the divestiture of that business during 1997.
During the first six months of 1998, the Company suspended enrollment in its
United States and European clinical trials of its hemoglobin therapeutic, or
"blood substitute", which is an oxygen-carrying intravenous solution derived
from human hemoglobin (HemAssist). The Company suspended the trials in order to
further analyze the data gathered to date and assess if the trials as currently
designed can meet the established endpoints for efficacy and to ensure patient
safety. This decision will delay the Company's ability to receive marketing
clearance for HemAssist in the United States or Europe, which it had been
expecting by late 1999 or early 2000. The Company will continue to work with
clinical investigators and regulatory authorities to determine its options and,
at this time, there has been no decision to terminate the HemAssist program.
The Company is in the process of constructing a manufacturing facility in
Switzerland principally for HemAssist. The book value of the facility totaled
approximately $92 million at June 30, 1998. In the event that, after further
analysis, the Company decides to terminate or materially change the HemAssist
program, management believes there would be alternative future uses for this
facility. However, there is a risk that certain specialized assets within the
facility could be impaired. The magnitude of the impairment, if any, has not
been determined.
12
OTHER INCOME AND EXPENSE
Goodwill amortization increased in 1998 primarily as a result of the acquisition
of Bieffe.
The increase in other expense for both the quarter and year-to-date periods
primarily relates to the impact of changes in currency exchange rates.
PRETAX AND NET INCOME
Excluding the 1998 and 1997 in-process R&D charges relating to the acquisitions
of Somatogen, Immuno and RMI, pretax income increased 8% during both the three-
and six-month periods ended June 30, 1998.
Excluding the in-process R&D charges, the Company's effective income tax rate
was 24% for the three- and six-month periods ended June 30, 1998 and 26% for the
three- and six-month periods ended June 30, 1997. The effective income tax rate
is lower in 1998 as compared to 1997 because a larger portion of the Company's
earnings are being generated in lower tax jurisdictions.
RESTRUCTURING PROGRAMS
- ----------------------
Refer to "Item 1. Financial Statements" --Note 6 to the Condensed Consolidated
Financial Statements for a discussion of the Company's restructuring charge,
utilization of the reserves and headcount reductions to date. Management
believes remaining restructuring reserves are adequate to complete the actions
contemplated by the programs. Future cash expenditures will be funded by cash
generated from operations.
The Company has substantially completed the 1993 program. Originally targeted
annual pretax savings of approximately $130 million are being achieved.
Management is partially investing these savings in R&D, new business
initiatives, and expansion into growing international markets.
The Company is in the process of implementing the 1995 program, which is
designed to eliminate excess plant capacity and reduce manufacturing costs.
Management expects that the plant closures and consolidations in Puerto Rico
will be substantially completed in 1999, and will help mitigate any future
exposure to gross margin erosion arising from pricing pressures, primarily in
the United States.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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.
Certain amounts on the Condensed Consolidated Balance Sheet, including accounts
receivable and inventory, have increased significantly since December 31, 1997
primarily due to the acquisitions discussed above. Also contributing to the
increase in total inventory are the regulatory and production issues impacting
the Blood Therapies business' industry. In addition,
13
the increase in accounts receivable reflects increased sales outside the United
States, which have longer collection periods.
The following table reconciles cash flow provided by operations, as determined
by generally accepted accounting principles, to operational cash flow:
- -----------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
(in millions) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Cash flow from operations per the Company's
Condensed Consolidated Statements of Cash Flows $ 91 $ 146
Capital expenditures (221) (149)
Net interest after tax 51 49
Mammary implant litigation, net 84 30
- -----------------------------------------------------------------------------------------------------------------------
Operational cash flow $ 5 $ 76
=======================================================================================================================
The Company has exceeded its annual operational cash flow goals for the last
three years. Management expects to achieve its goal of generating at least $500
million in operational cash flow in 1998.
Approximately $114 million of the total net cash flows used for acquisitions and
investments in affiliates for the six months ended June 30, 1998 related to the
acquisition of Bieffe, with the most of the remaining amount relating to the
acquisition of Ohmeda. Net cash flows used for acquisitions and investments in
affiliates for the six months ended June 30, 1997 related primarily to the
acquisition of Immuno. Refer to "Item 1. Financial Statements" -- Note 4 to
the Condensed Consolidated Financial Statements for further information
regarding these acquisitions.
The Company's net-debt-to-capital ratio was 49.8% and 46.9% at June 30, 1998 and
December 31, 1997, respectively. The increase in the ratio was primarily due to
increased net debt as a result of the acquisition of Bieffe and Ohmeda.
Management expects the ratio to decline to the low-40% range over time as a
result of ongoing operations.
As authorized by the board of directors, the Company repurchases its stock to
optimize its capital structure depending upon its operational cash flows, net
debt level and current market conditions. In November 1995, the board of
directors authorized the repurchase of up to $500 million over a period of
several years, of which $267 million was repurchased as of December 31, 1996.
No shares have been repurchased since the end of 1996. As discussed above, the
Company's net-debt-to-capital ratio is currently 49.8% and, therefore,
management does not presently intend to repurchase shares.
The Company intends to fund its short-term and long-term obligations as they
mature by issuing additional debt or through cash flow from operations. The
Company believes it has lines of credit adequate to support ongoing operational
requirements. Beyond that, the Company believes it has sufficient financial
flexibility to attract long-term capital on acceptable terms as may be needed to
support its growth objectives.
See "Part II - Item 1. Legal Proceedings" for a discussion of the Company's
legal contingencies and related insurance coverage with respect to cases and
claims relating to the Company's plasma-based therapies and mammary implants
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation, as well as other matters. Upon resolution of any of
14
these matters, the Company may incur charges in excess of presently established
reserves. While such future charges could have a material adverse impact on the
Company's net income or cash flows in the period in which they are recorded or
paid, management believes that the outcomes of these actions, individually or in
the aggregate, will not have a material adverse effect on the Company's
consolidated financial position.
The matters discussed in this section that are not historical facts include
forward-looking statements. These statements are based on the Company's current
expectations and involve numerous risks and uncertainties. Some of these risks
and uncertainties are factors that affect all international businesses, while
some are specific to the Company and the health-care arenas in which it
operates. The factors below in some cases have affected and could affect the
Company's actual results, causing results to differ, and possibly differ
materially, from those expressed in any such forward-looking statements. These
factors include technological advances in the medical field, economic
conditions, demand and market acceptance risks for new and existing products,
technologies and health-care services, the impact of competitive products and
pricing, manufacturing capacity, new plant start-ups, the global regulatory,
trade and tax policies, continued price competition, product development risks,
including technological difficulties, ability to enforce patents and unforeseen
commercialization and regulatory factors. In particular, the Company, as well as
other companies in its industry, is experiencing increased regulatory activity
by the U.S. Food and Drug Administration with respect to its plasma-based
biologicals and its complaint-handling systems.
Currency fluctuations are also a significant variable for global companies,
especially fluctuations in local currencies where hedging opportunities are
unreasonably expensive, or altogether unavailable. If the United States dollar
continues to strengthen against most foreign currencies, the Company's growth
rates in its sales and net earnings will continue to be negatively impacted.
Management believes that its expectations with respect to forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of the Company's business and operations, but there can be no
assurance that the actual results or performance of the Company will conform to
any future results or performance expressed or implied by such forward-looking
statements.
NEW ACCOUNTING STANDARDS
- ------------------------
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997,
and requires reclassification of prior-period financial statements. Statement
No. 130 requires the presentation of comprehensive income, which consists of net
income and other comprehensive income, and its components in a full set of
financial statements. The Company's other comprehensive income consists of
foreign currency translation adjustments, which currently are reported as a
component of stockholders' equity. Additional items may be included in other
comprehensive income in the future. The Company plans to display comprehensive
income and its components in the Consolidated Statement of Stockholders' Equity
in the year-end 1998 financial statements. The total of comprehensive income for
the three- and six-month periods ended June 30, 1998 and 1997 is disclosed in
"Item 1. Financial Statements" - Note 3 to the Condensed Consolidated Financial
Statements.
15
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997, and requires reclassification of prior-period
financial statements. Statement No. 131 established standards for reporting
information about operating segments and related disclosures about products and
services, geographic areas and major customers in annual financial statements
and interim financial reports. Management currently is evaluating its reportable
segments under the new Statement and anticipates disclosure for four operating
segments under the new rules: Blood Therapies, CardioVascular, I.V.
Systems/Medical Products and Renal. The Company will adopt the new disclosure
rules in its year-end 1998 financial statements.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which is effective for fiscal
years beginning after December 15, 1997, and requires restatement of prior year
periods presented. The Statement does not change the measurement or recognition
of pension and other postretirement plans. It standardizes the disclosure
requirements, requires additional information on changes in benefit obligations
and fair values of plan assets, and eliminates certain disclosures. The Company
will adopt the new disclosure rules in its year-end 1998 financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for fiscal
years beginning after December 15, 1998. This SOP provides guidance on when
costs incurred for internal-use computer software should and should not be
capitalized. The SOP requires that costs incurred prior to initial application
of the SOP, whether capitalized or not, should not be adjusted to the amounts
that would have been capitalized had this SOP been in effect when those costs
were incurred. Management is in the process of evaluating this standard and does
not anticipate that it will have a material effect on the Company's financial
statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This Statement requires that all
derivatives be recorded in the balance sheet as either assets or liabilities and
be measured at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Management is in the process of evaluating this standard and has not yet
determined the future impact on the Company's consolidated financial statements.
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities," which is effective for fiscal years beginning
after December 15, 1998. This SOP provides guidance on the financial reporting
of start-up costs and organization costs and requires such costs, as defined, to
be expensed as incurred. Initial application of the SOP is required to be
reported as the cumulative effect of a change in accounting principle, as
described in APB Opinion No. 20, "Accounting Changes". Management is in the
process of evaluating this standard and has not yet determined the future impact
on the Company's consolidated financial statements.
16
Review by Independent Public Accountants
- ----------------------------------------
A review of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q for the three months and six months ended
June 30, 1998 has been performed by PricewaterhouseCoopers LLP, the Company's
independent public accountants. Their report on the interim condensed
consolidated financial information follows. There have been no material
adjustments or disclosures proposed by PricewaterhouseCoopers LLP, which have
not been reflected in the interim condensed consolidated financial information.
Their report is not considered a report within the meaning of Sections 7 and 11
of the Securities Act of 1933 and therefore, the independent accountants'
liability under Section 11 does not extend to it.
17
Report of Independent Accountants
---------------------------------
August 10, 1998
Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet as of
June 30, 1998 and the related condensed consolidated statements of income for
the three-month and six-month periods ended June 30, 1998 and 1997, and
condensed consolidated statements of cash flows for the six-month period ended
June 30, 1998 and 1997 of Baxter International Inc. and its consolidated
subsidiaries. This interim financial information is the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1997, and the related
consolidated statements of income, cash flows and stockholders' equity for the
year then ended (not presented herein), and in our report dated February 5, 1998
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1997, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
PricewaterhouseCoopers LLP
18
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
Baxter International Inc. and certain of its subsidiaries are named as
defendants in a number of lawsuits, claims and proceedings, including product
liability claims involving products now or formerly manufactured or sold by the
Company or by companies that were acquired by Baxter. The most significant of
these are reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998. Material developments in such matters for the quarter ended
June 30, 1998 are described below. Upon resolution of any of such matters,
Baxter may incur charges in excess of presently established reserves. While
such future charges could have a material adverse impact on the Company's net
income or cash flows in the period in which they are recorded or paid,
management believes that the outcomes of these actions, individually or in
aggregate, will not have a material adverse effect on the Company's consolidated
financial position.
Mammary Implant Litigation
- --------------------------
As previously reported in the Company's Annual Report on Form 10-K, the Company,
together with certain of its subsidiaries, is currently a defendant in various
courts in a number of lawsuits brought by individuals, all seeking damages for
injuries of various types allegedly caused by silicone mammary implants formerly
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation (AHSC). AHSC, which was acquired by the Company in 1985, divested
its Heyer-Schulte division in 1984. It is not known how many of these claims
and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed
to other manufacturers.
As of June 30, 1998, Baxter, together with certain of its subsidiaries, had been
named as a defendant or co-defendant in 7,606 lawsuits and 2,386 claims relating
to mammary implants, brought by approximately 15,385 plaintiffs. Of those
plaintiffs, 8,131 are currently included in the Revised Settlement described
below, which accounts for 3,375 of the pending lawsuits against the Company.
Additionally, 7,490 plaintiffs have opted out of the Revised Settlement
(representing 4,187 pending lawsuits), and the status of the remaining
plaintiffs with pending lawsuits is unknown. Some of the opt-out plaintiffs
filed their cases naming multiple defendants and without product identification;
thus, not all of the opt-out plaintiffs will have viable claims against the
Company. As of June 30, 1998, 2,869 of the opt-out plaintiffs had confirmed
Heyer-Schulte product identification. Furthermore, during the second quarter of
1998, Baxter obtained dismissals, or agreements for dismissals, with respect to
741 plaintiffs.
In addition to the individual suits against the Company, a class action on
behalf of all women with silicone mammary implants is pending in the United
States District Court (U.S.D.C.) for the Northern District of Alabama involving
most manufacturers of such implants, including Baxter (Lindsey, et al. v. Dow
Corning, et al, U.S.D.C., N. Dist. Ala., CV 94-P-11558-S). The class action was
certified for settlement purposes only on September 1, 1994, and the settlement
terms were subsequently revised and approved on December 22, 1995 (the Revised
Settlement). All appeals directly challenging the Revised Settlement have been
dismissed.
19
Factor Concentrates Litigation
- ------------------------------
As previously reported in the Company's Annual Report on Form 10-K, Baxter is
currently a defendant in a number of claims and lawsuits brought by individuals
who have hemophilia, all seeking damages for injuries allegedly caused by anti-
hemophilic factor concentrates VIII or IX derived from human blood plasma
(factor concentrates) processed by the Company from the late 1970s to the mid-
1980s. None of these cases involves factor concentrates currently processed by
the Company.
As of June 30, 1998, Baxter had been named in approximately 346 lawsuits and 411
claims in the United States, Canada, Ireland, Italy, Taiwan, Japan, Argentina
and the Netherlands. The U.S.D.C. for the Northern District of Illinois has
approved a class action settlement of all U.S. factor concentrate claims. As
of June 30, 1998, approximately 6,000 claimant groups had been found eligible to
participate in the settlement, and approximately 350 claimants had opted out of
the settlement. Approximately 5,000 of the claimant groups had received
payments as of June 30, 1998, and payments are expected to continue through the
end of 1998 as releases are received from the remaining claimant groups.
In Japan, Baxter, the Japanese government and four other co-defendants have
settled factor concentrates cases in Osaka, Tokyo, Nagoya, Tohoku, Fukuoka,
Sapporo and Kuramoto. As of June 30, 1998, these Japanese cases involved 1,282
plaintiffs, of whom 1,252 had entered into settlements.
Other Litigation
- ----------------
As previously reported in the Company's Annual Report on Form 10-K, Baxter is
currently a defendant in a number of claims and lawsuits brought by individuals
who infused the Company's Gammagard(R) IVIG. As of June 30, 1998, Baxter was a
defendant in 83 lawsuits and 65 claims in the United States, Denmark, France,
Germany, Italy, Spain, Sweden and the United Kingdom. Five suits currently
pending in the United States have been filed as purported class actions, but
only one has been certified. All U.S. federal court Gammagard(R) IVIG cases have
been transferred to the U.S.D.C. for the Central District of California for case
management under the Multi District Litigation rules. On February 21, 1996, the
court certified a nationwide class of persons who had infused Gammagard(R) IVIG
(Fayne, et al. v. Baxter Healthcare Corporation, U.S.D.C., C.D. Calif., ML-95-
160-R). The Company sought and received an immediate stay of the class notice
from the 9th Circuit Court of Appeals and subsequently filed a Writ of Mandamus
seeking class decertification. On August 5, 1997, the 9th Circuit Court of
Appeals denied the Writ of Mandamus but invited Baxter to challenge the class
issues in the trial court. On July 20, 1998, the trial court again denied
Baxter's challenge to the class certification. Baxter intends to challenge the
trial court's decision.
As of September 30, 1996, Allegiance Corporation assumed the defense of
litigation involving claims related to Allegiance's businesses, including
certain claims of alleged personal injuries as a result of exposure to natural
rubber latex gloves. Allegiance has not been named in most of this litigation
but will be defending and indemnifying Baxter pursuant to certain contractual
obligations for all expenses and potential liabilities associated with claims
pertaining to latex gloves. As of June 30, 1998, the Company had been named as
a defendant in 267 lawsuits, including the following purported class action:
Swartz v. Baxter Healthcare Corp., et al., Court of Common Pleas, Jefferson
County, PA, 656-1997 C.D.
20
A purported class action was filed against Baxter, Caremark International Inc.
(Caremark), C.A. (Lance) Piccolo, James G. Connelly and Thomas W. Hodson (all
former officers of Caremark) alleging securities law disclosure violations in
connection with the November 30, 1992 spin-off of Caremark in the Registration
and Information Statement and subsequent SEC filings submitted by Caremark
(Isquith v. Caremark International Inc., et al., U.S.D.C., N. Dist. Ill., 94C
5534). The trial court dismissed the action against the Company essentially on
the ground that the plaintiffs lacked standing to bring this action, and on
February 10, 1998, the 7th Circuit Court of Appeals affirmed the trial court's
ruling. The plaintiffs have filed a petition for certiorari with the United
States Supreme Court. Additionally, in February 1997, the plaintiffs served a
separate state court action, styled as a class action, against Mr. Piccolo,
Vernon R. Loucks Jr., William H. Gantz, William B. Graham and James R. Tobin,
alleging violations of various state laws pertaining to the Caremark spin-off
(Isquith, et. al. v. C.A. (Lance) Piccolo, et al., Circuit Court, Cook County,
IL, Chancery Division, 96CH0013652). On April 9, 1998, the trial court
dismissed the plaintiffs' case with prejudice.
21
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 5, 1998 for the
purpose of electing directors, approving the appointment of auditors, and voting
on the other proposals listed below. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was
no solicitation in opposition to management's solicitation. Each of
management's nominees for directors as listed in the proxy statement were
elected with the number of votes set forth below:
- -----------------------------------------------------------------------------------------------------------
Number of Votes
-----------------------------------------
Abstained/
In Favor Withheld
-----------------------------------------
Pei-yuan Chia 242,030,212 3,024,373
Mary Johnston Evans 241,935,587 3,118,998
Frank R. Frame 241,979,007 3,075,578
Arnold J. Levine, Ph.D. 242,092,662 2,961,923
Monroe E. Trout, M.D. 242,027,620 3,026,965
- ------------------------------------------------------------------------------------------------------------------------
The results of other matters voted upon at the annual meeting are as follows:
- ------------------------------------------------------------------------------------------------------------------------------
Number of Votes
----------------------------------------------------------------------------
Broker
In Favor Against Abstained Non-Votes
----------------------------------------------------------------------------
Approval of Price Waterhouse LLP (subsequently
renamed PricewaterhouseCoopers LLP) as
independent accountant for the Company for
1998 244,093,140 573,655 387,790 0
Approval of proposal to adopt the Company's
1998 Incentive Compensation Program 196,216,719 47,307,782 1,530,084 0
Approval of proposal to adopt the Company's
Long-Term Incentive Plan 216,580,459 26,846,887 1,627,239 0
Defeat of the stockholder proposal relating to
cumulative voting in the election of directors 67,761,708 138,736,425 18,247,641 20,308,811
- ------------------------------------------------------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index hereto.
(b) Reports on Form 8-K
A report on Form 8-K was filed on June 2, 1998, which reported under "Item
5 Other Events" the suspension of the European trauma trial for the
Company's Hemoglobin Therapeutic.
22
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
-------------------------
(Registrant)
Date: August 11, 1998 By: Brian P. Anderson
-----------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
23
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
- -------------------------------------------------------------------------------
Number Description of Exhibit
- ------ ----------------------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter Re Unaudited Interim Financial Information
27 Financial Data Schedule
(All other exhibits have been omitted because they are not
applicable or not required.)