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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, 2002
______ 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 July 31, 2002 was 603,073,736 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended June 30, 2002
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 ......................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 21
Review by Independent Accountants ............................................... 22
Report of Independent Accountants ............................................... 23
Part II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings .................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders .................. 28
Item 6. Exhibits and Reports on Form 8-K ..................................... 29
Signature ....................................................................... 30
Exhibits ........................................................................ 31
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,
2002 2001 2002 2001
----------------------- ------------------------
Net sales $2,022 $1,870 $3,972 $3,627
Costs and expenses
Cost of goods sold 1,101 1,044 2,165 2,030
Marketing and administrative expenses 390 361 790 704
Research and development expenses 123 104 238 207
In-process research and development expense 51 -- 51 --
Goodwill amortization -- 11 -- 23
Interest, net 14 17 30 36
Other expense (income) 66 (9) 79 (2)
- ------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,745 1,528 3,353 2,998
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 277 342 619 629
Income tax expense 77 89 166 162
- ------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 200 253 453 467
Cumulative effect of accounting change, net of
income tax benefit of $32 -- -- -- (52)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 200 $ 253 $ 453 $ 415
==================================================================================================================
Earnings per basic common share
Before cumulative effect of accounting change $ .33 $ .43 $ .75 $ .79
Cumulative effect of accounting change -- -- -- (.09)
- ------------------------------------------------------------------------------------------------------------------
Net income $ .33 $ .43 $ .75 $ .70
==================================================================================================================
Earnings per diluted common share
Before cumulative effect of accounting change $ .32 $ .42 $ .73 $ .77
Cumulative effect of accounting change -- -- -- (.09)
- ------------------------------------------------------------------------------------------------------------------
Net income $ .32 $ .42 $ .73 $ .68
==================================================================================================================
Weighted average number of common shares outstanding
Basic 602 590 601 589
==================================================================================================================
Diluted 622 608 622 607
==================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except shares)
- ------------------------------------------------------------------------------------------------------------
June 30, December 31,
2002 2001
(unaudited)
---------------------------
Current assets Cash and equivalents $ 472 $ 582
Accounts receivable 1,712 1,493
Notes and other current receivables 121 129
Inventories 1,664 1,341
Short-term deferred income taxes 46 82
Prepaid expenses 368 350
---------------------------------------------------------------------------------------------
Total current assets 4,383 3,977
- ------------------------------------------------------------------------------------------------------------
Property, At cost 6,086 5,732
plant and Accumulated depreciation and amortization (2,571) (2,426)
equipment ---------------------------------------------------------------------------------------------
Net property, plant and equipment 3,515 3,306
- -----------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,862 1,698
Insurance receivables 132 93
Other 1,296 1,269
---------------------------------------------------------------------------------------------
Total other assets 3,290 3,060
- ------------------------------------------------------------------------------------------------------------
Total assets $11,188 $10,343
============================================================================================================
Current Short-term debt $ 166 $ 149
liabilities Current maturities of long-term debt and lease obligations 51 52
Accounts payable and accrued liabilities 2,341 2,432
Income taxes payable 574 661
---------------------------------------------------------------------------------------------
Total current liabilities 3,132 3,294
- ------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 3,290 2,486
- ------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 82 218
- ------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 125 140
- ------------------------------------------------------------------------------------------------------------
Other long-term liabilities 482 448
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 2,000,000,000
equity shares in 2002 and 1,000,000,000 shares in 2001, issued
611,632,739 shares in 2002 and 608,817,449 shares
in 2001 612 609
Common stock in treasury, at cost, 8,883,039 shares
in 2002 and 9,924,459 shares in 2001 (346) (328)
Additional contributed capital 2,980 2,815
Retained earnings 1,546 1,093
Accumulated other comprehensive loss (715) (432)
---------------------------------------------------------------------------------------------
Total stockholders' equity 4,077 3,757
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $11,188 $10,343
============================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
- ----------------------------------------------------------------------------------------------
Six months ended June 30,
(brackets denote cash outflows) 2002 2001
-------------------------
Cash flows Income before cumulative effect of non-cash
from accounting change $453 $467
operations Adjustments
Depreciation and amortization 212 217
Deferred income taxes 62 124
In-process research and development 51 --
Other 93 (8)
Changes in balance sheet items
Accounts receivable (251) (204)
Inventories (257) (227)
Accounts payable and other accrued liabilities (266) (237)
Net litigation payable and other (128) (169)
------------------------------------------------------------------------------
Cash flows from operations (31) (37)
- ----------------------------------------------------------------------------------------------
Cash flows Capital expenditures (339) (306)
from investing Acquisitions (net of cash received)
activities and investments in affiliates (65) (88)
Divestitures and other asset dispositions 5 19
------------------------------------------------------------------------------
Cash flows from investing activities (399) (375)
- ----------------------------------------------------------------------------------------------
Cash flows Issuances of debt and lease obligations 687 1,928
from financing Redemptions of debt and lease obligations (367) (992)
activities Increase in debt with maturities
of three months or less, net 348 (304)
Common stock cash dividends (348) (340)
Stock issued under employee benefit plans 131 101
Purchases of treasury stock (141) (143)
------------------------------------------------------------------------------
Cash flows from financing activities 310 250
- ----------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and equivalents 10 14
- ----------------------------------------------------------------------------------------------
Decrease in cash and equivalents (110) (148)
Cash and equivalents at beginning of period 582 579
- ----------------------------------------------------------------------------------------------
Cash and equivalents at end of period $472 $431
==============================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Baxter International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. FINANCIAL INFORMATION
The unaudited interim condensed consolidated financial statements of Baxter
International Inc. and its subsidiaries (the company or Baxter) have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles (GAAP) have been condensed or omitted. These interim
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes included in the company's 2001
Annual Report to Stockholders.
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments, unless otherwise noted herein, are of a
normal, recurring nature. The results of operations for the interim period are
not necessarily indicative of the results of operations to be expected for the
full year.
Comprehensive income
Total comprehensive income was $43 million and $265 million for the three months
ended June 30, 2002 and 2001, respectively, and was $171 million and $605
million for the six months ended June 30, 2002 and 2001, respectively. The
decline in comprehensive income in the quarter was principally related to
unfavorable foreign currency fluctuations and a decrease in net income. The
decline in the year-to-date period was principally related to unfavorable
foreign currency fluctuations, partially offset by increased net 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.
Other expense (income)
Other expense for the quarter and year-to-date period ended June 30, 2002
included a $70 million impairment charge for two investments whose decline in
value was deemed to be other than temporary, with the investments written down
to their market values. As of June 30, 2002, the company did not hold any
investments with significant unrealized losses. Other income for the quarter and
year-to-date period ended June 30, 2001 included a gain of approximately $105
million from the disposal of a non-strategic investment. This gain was
substantially offset by impairment charges for other assets and investments
whose decline in value was deemed to be other than temporary. Also included in
other income and expense for both the quarter and year-to-date period of both
2002 and 2001 were amounts relating to minority interests and fluctuations in
currency exchange rates.
5
2. CHANGE IN ACCOUNTING PRINCIPLE IN 2001
Effective at the beginning of 2001, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and its amendments. In accordance with the transition
provisions of SFAS No. 133, upon adoption the company recorded a cumulative
effect after-tax reduction to earnings of $52 million and a cumulative effect
after-tax increase to other comprehensive income of $8 million.
3. INVENTORIES
Inventories consisted of the following.
- --------------------------------------------------------------------------------
June 30, December 31,
(in millions) 2002 2001
- --------------------------------------------------------------------------------
Raw materials $ 426 $ 353
Work in process 316 244
Finished products 922 744
- --------------------------------------------------------------------------------
Total inventories $1,664 $1,341
================================================================================
4. INTEREST, NET
Net interest expense consisted of the following.
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Interest expense $22 $28 $40 $56
Interest income (8) (11) (10) (20)
- --------------------------------------------------------------------------------
Interest expense, net $14 $17 $30 $36
================================================================================
5. STOCK SPLIT
On February 27, 2001, Baxter's board of directors approved a two-for-one stock
split of the company's common shares. On May 1, 2001, the split was approved by
the company's shareholders. On May 30, 2001, shareholders of record on May 9,
2001 received one additional share of Baxter common stock for each share held on
May 9, 2001. All share and per share data in the condensed consolidated
financial statements and notes have been adjusted and restated to reflect the
stock split.
6
6. EARNINGS PER SHARE
The numerator for both basic and diluted earnings per share (EPS) is net
earnings available to common shareholders. The denominator for basic EPS is the
weighted-average number of common shares outstanding during the period. The
following is a reconciliation of the shares (denominator) of the basic and
diluted per-share computations.
- -----------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------
Basic EPS shares 602 590 601 589
- ----------------------------------------------------------------------------------------------
Effect of dilutive securities
Employee stock options 19 17 20 17
Employee stock purchase plans and equity
forward agreements 1 1 1 1
- ----------------------------------------------------------------------------------------------
Diluted EPS shares 622 608 622 607
==============================================================================================
7. ACQUISITIONS AND INTANGIBLE ASSETS
Adoption of new accounting standards
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets," were issued in July 2001. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting. The amortization provisions of SFAS No. 142,
including nonamortization of goodwill, apply to goodwill and intangible assets
acquired after June 30, 2001. With the adoption of SFAS No. 142 in its entirety
on January 1, 2002, all of the company's goodwill is no longer being amortized,
but is subject to periodic impairment reviews, beginning on January 1, 2002.
In performing the reviews, potential impairment is to be identified by comparing
the fair value of a reporting unit with its carrying amount. 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 its implied fair 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 and
are referred to as Medication Delivery, BioScience and Renal. The company
completed its initial goodwill impairment review by reporting unit as of the
January 1, 2002 adoption date and determined that goodwill was not impaired.
Goodwill
The carrying amount of goodwill as of June 30, 2002 was $679 million, $512
million and $220 million for Medication Delivery, BioScience and Renal,
respectively. The change in goodwill during the three- and six-month periods
ended June 30, 2002 was not significant, and was partially due to the impact of
changes in currency exchange rates on foreign entities' goodwill balances. There
was no impairment of goodwill during the quarter or year-to-date period.
Other intangible assets
Intangible assets other than goodwill are separated into two categories.
Intangible assets with finite useful lives are recorded on the condensed
consolidated balance sheet and amortized over the estimated useful life of the
asset. Intangible assets with indefinite useful lives are recorded on the
condensed consolidated balance sheet, are not amortized, and are subject to
periodic impairment tests. The amount of intangible assets with indefinite lives
is immaterial.
7
The following is a summary of the company's intangible assets subject to
amortization at June 30, 2002.
- ---------------------------------------------------------------------------------------------------------------
As of June 30, 2002
-----------------------------------------------------
Weighted-
Average
Accumulated Amortization
($ in millions) Gross Amortization Net Period
- ---------------------------------------------------------------------------------------------------------------
Amortized intangible assets
Developed technology, including patents $590 $212 $378 15
Manufacturing, distribution and other
contracts 35 9 26 12
Other 46 7 39 18
- ---------------------------------------------------------------------------------------------------------------
Total amortized intangible assets $671 $228 $443 15
===============================================================================================================
The amortization expense for these intangible assets was $9 million and $18
million for the three months and six months ended June 30, 2002, respectively.
The anticipated annual amortization expense for these intangible assets is $42
million, $40 million, $41 million, $37 million, $36 million and $32 million in
2002, 2003, 2004, 2005, 2006 and 2007, respectively.
Earnings and per share earnings in 2001 excluding amortization
Net-of-tax amortization expense relating to goodwill and indefinite-lived assets
was $9 million or $.02 per basic and diluted common share for the three months
ended June 30, 2001, and $19 million or $.03 per basic and diluted common share
for the six months ended June 30, 2001. Adjusted for this amortization expense,
income before cumulative effect of accounting change, net income, net income per
basic common share and net income per diluted common share were $262 million,
$262 million, $.45 and $.44, respectively, for the three months ended June 30,
2001, and $486 million, $434 million, $.73 and $.71, respectively, for the six
months ended June 30, 2001.
Acquisitions
Acquisitions during the six months ended June 30, 2002 and 2001 were accounted
for under the purchase method. Results of operations of acquired companies are
included in the company's results of operations as of the respective acquisition
dates. The purchase price of each acquisition 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 and
identifiable intangible assets acquired and liabilities assumed 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. A portion of the
purchase price for certain acquisitions is allocated to in-process research and
development (IPR&D) which, under GAAP, is immediately expensed.
Amounts allocated to IPR&D are determined on the basis of independent valuations
using the income approach, which measures the value of an asset by the present
value of its future economic benefits. Estimated cash flows 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.
8
Fusion Medical Technologies, Inc.
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. The purchase price was paid in 2,806,660 shares of Baxter common
stock. Approximately $169 million of assets were acquired and approximately $8
million of liabilities were assumed. Included in the assets acquired were $51
million of IPR&D, $88 million of developed technology, $16 million of goodwill,
and $14 million of other assets, which principally consisted of cash and
investments, accounts receivable, inventories and property and equipment.
Assumed liabilities principally consisted of accounts payable and accrued
liabilities. The developed technology is being amortized on a straight-line
basis over an estimated useful life of 20 years. The goodwill is not deductible
for tax purposes. The results of operations and assets and liabilities,
including goodwill, of Fusion, are included in the BioScience segment.
The $51 million IPR&D charge pertains to a product used to control bleeding
during surgery. Material net cash inflows were forecasted in the valuation to
commence between 2003 and 2004. A discount rate of 28 percent was used in the
valuation. Assumed additional research and development (R&D) expenditures prior
to the date of the initial product introduction totaled approximately $3
million. The project is proceeding in accordance with the original projections.
Pending acquisition
In June 2002, Baxter signed a definitive agreement with Wyeth to acquire the
majority of ESI Lederle (ESI), a division of Wyeth, for approximately $305
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. The
acquisition, which would be included in the Medication Delivery segment, is
subject to approval by regulatory authorities.
Pro forma information
The following pro forma information presents a summary of the company's
consolidated results of operations as if 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. No adjustments were made for the
charge for IPR&D.
- --------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions, except per share data) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Net sales $2,024 $1,936 $3,978 $3,777
Income from continuing operations before cumulative
effect of accounting change $ 200 $ 244 $ 448 $ 450
Net income $ 200 $ 244 $ 448 $ 398
Earnings per diluted common share $ .32 $ .40 $ .72 $ .65
- --------------------------------------------------------------------------------------------------------------------------
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.
8. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
Refer to "Part II - Item 1. Legal Proceedings" below.
9
9. SEGMENT INFORMATION
The company operates in three segments, each of which are strategic businesses
that are managed separately because each business develops, manufactures and
sells distinct products and services. The segments and a description of their
businesses are as follows: Medication Delivery: medication delivery products and
therapies, including intravenous infusion pumps and solutions,
anesthesia-delivery devices and pharmaceutical agents, and oncology therapies;
BioScience: biopharmaceuticals and blood-collection, separation and storage
products and technologies; and Renal: products and services to treat end-stage
kidney disease.
Certain items are maintained at corporate headquarters (Corporate) and are not
allocated to the segments. They primarily include most of the company's debt and
cash and equivalents and related net interest expense, corporate headquarters
costs, certain non-strategic investments and related income and expense, certain
nonrecurring gains and losses, deferred income taxes, the majority of hedging
activities, and certain litigation liabilities and related insurance
receivables.
Financial information for the company's segments for the three and six months
ended June 30 is as follows.
Medication
(in millions) Delivery BioScience Renal Other Total
- -------------------------------------------------------------------------------------------------------------------
For the three months ended
- --------------------------
June 30,
- --------
2002
- ----
Net sales $ 817 $ 732 $473 -- $2,022
Pretax income 147 138 76 ($84) 277
2001
- ----
Net sales $ 708 $ 686 $476 -- $1,870
Pretax income 113 131 72 $26 342
- -------------------------------------------------------------------------------------------------------------------
For the six months ended
- ------------------------
June 30,
- --------
2002
- ----
Net sales $1,556 $1,478 $938 -- $3,972
Pretax income 267 309 132 ($89) 619
2001
- ----
Net sales $1,377 $1,317 $933 -- $3,627
Pretax income 215 244 138 $32 629
- -------------------------------------------------------------------------------------------------------------------
10
The following are reconciliations of total segment amounts to amounts per the
condensed consolidated income statements.
Three months
ended June 30,
--------------
(in millions) 2002 2001
- --------------------------------------------------------------------------------------
Pretax income
- -------------
Total pretax income from segments $361 $316
Unallocated amounts
Interest expense, net (14) (17)
IPR&D (51) --
Other Corporate items (19) 43
- --------------------------------------------------------------------------------------
Income before income taxes $277 $342
- --------------------------------------------------------------------------------------
Six months
ended June 30,
--------------
(in millions) 2002 2001
- --------------------------------------------------------------------------------------
Pretax income
- -------------
Total pretax income from segments $708 $597
Unallocated amounts
Interest expense, net (30) (36)
IPR&D (51) --
Other Corporate items (8) 68
- --------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change $619 $629
- --------------------------------------------------------------------------------------
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Baxter International Inc.'s (the company or Baxter) 2001 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,
2001. In the Annual Report, management outlined its key financial objectives for
2002. The table below reflects these objectives and the company's results
through June 30, 2002.
- --------------------------------------------------------------------------------
RESULTS THROUGH
FULL YEAR 2002 OBJECTIVES JUNE 30, 2002
- --------------------------------------------------------------------------------
.. Accelerate sales growth . Net sales for the six months ended
to the low-teens. June 30, 2002 increased 10 percent.
Excluding the effects of changes in
currency exchange rates, net sales
increased 11 percent. Management
expects the sales growth rate to
increase during the second half of the
year.
- --------------------------------------------------------------------------------
.. Grow earnings per share in the . Earnings per diluted common share
mid-teens. increased seven percent for the first
half of the year. Earnings in the
first quarter of 2001 included the
cumulative effect of a change in
accounting principle, which reduced
2001 earnings by $.09 per diluted
share. Earnings in the second quarter
of 2002 included an in-process
research and development (IPR&D)
charge and asset impairment charges,
which in total reduced 2002 earnings
by $.16 per diluted share. Excluding
the 2001 change in accounting
principle and the 2002 IPR&D and asset
impairment charges, earnings per
diluted share grew 15 percent during
the first half of the year.
- --------------------------------------------------------------------------------
.. Generate at least $500 million in . The company had operational cash
operational cash flow. Management outflow of $351 million during the six
also expects to invest more than months ended June 30, 2002. The
$1.3 billion in capital company typically generates the
expenditures and research and majority of its annual cash flow
development. during the second half of the year.
The total of capital expenditures and
research and development (R&D)
expenses for the six months ended June
30, 2002, excluding the second quarter
charge for IPR&D, was $577 million.
-------------------------------------------------------------------------------
12
Refer to the condensed 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.
RESULTS OF OPERATIONS
NET SALES
- ---------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 2002 2001 increase 2002 2001 increase
- ---------------------------------------------------------------------------------------------------------------
International $1,020 $ 932 10% $2,011 $1,834 10%
United States 1,002 938 7% 1,961 1,793 9%
- ---------------------------------------------------------------------------------------------------------------
Total net sales $2,022 $1,870 8% $3,972 $3,627 10%
===============================================================================================================
Excluding the effect of fluctuations in currency exchange rates, total net sales
growth was 9 percent and 11 percent for the three months and six months ended
June 30, 2002, respectively. The United States dollar strengthened principally
relative to the Japanese Yen, as well as certain Latin American currencies.
Refer to Note 9 to the condensed consolidated financial statements for a summary
of net sales by segment.
Medication Delivery
The Medication Delivery segment generated 15 percent and 13 percent sales growth
during the three months and six months ended June 30, 2002. Excluding the impact
of fluctuations in currency exchange rates, sales growth was 16 percent and 14
percent for the quarter and year-to-date period, respectively, with the
strongest sales growth in the international market. Of the constant-currency
sales growth in the quarter and year-to-date period, six points and seven
points, respectively, of growth were generated by the October 2001 acquisition
of a subsidiary of Degussa AG, ASTA Medica Onkologie GmbH & CoKG (ASTA), which
develops, produces and markets oncology products worldwide, and the August 2001
acquisition of Cook Pharmaceutical Solutions, formerly a unit of Cook Group
Incorporated (Cook), which provides contract filling of syringes and vials. The
drug delivery business, excluding the impact of the acquisition of Cook,
contributed two points and one point of sales growth in the quarter and
year-to-date period, respectively. The anesthesia business contributed four
points and two points of sales growth in the quarter and year-to-date period,
respectively, primarily due to increased sales of certain generic drugs and
recent new product launches. The remaining sales growth for the quarter was
principally driven by increased sales of specialty products, particularly
outside the United States. In June 2002, the company signed a definitive
agreement to acquire the majority of ESI Lederle, a division of Wyeth, for
approximately $305 million. This acquisition, the closing of which is subject to
approval by regulatory authorities, will expand the segment's anesthesia and
critical care business by expanding its injectable drug portfolio and
manufacturing capabilities.
BioScience
Sales in the BioScience segment increased seven percent and 12 percent for the
three months and six months ended June 30, 2002, respectively. Excluding the
impact of fluctuations in currency exchange rates, sales growth was seven
percent and 14 percent for the quarter and year-to-date period, respectively.
The constant-currency sales growth for both the quarter and year-to-date period
was principally driven by increased sales of recombinant products, particularly
Recombinate Antihemophilic Factor (rAHF) (Recombinate). Sales of Recombinate
grew more than 25 percent for both the quarter and year-to-date period. Such
growth was principally a result of yield and cycle time improvements, improved
pricing, and continued strong demand for this product. Sales of products that
provide for leukoreduction, which is the removal of white blood cells from blood
products used for transfusion, also contributed strongly
13
to the segment's growth rate in both the quarter and year-to-date period, as
well as strong sales of vaccines. Sales of plasma-derived products for
hemophilia and other conditions declined, particularly in the second quarter,
primarily due to a decline in sales of albumin, the re-entry of certain
competitors who were out of the market in the prior year, and a continuing shift
in the market from plasma to recombinant hemophilia products. As further
discussed in Note 7 to the condensed consolidated financial statements, in May
2002 the company acquired Fusion Medical Technologies, Inc. (Fusion), a business
that develops and commercializes proprietary products used to control bleeding
during surgery. The acquisition of Fusion, which will enhance the segment's
portfolio of innovative therapeutic solutions for biosurgery and tissue
regeneration in the future, did not significantly impact the segment's sales for
the quarter or six-month period.
Renal
The Renal segment had a sales decline of one percent during the three months
ended June 30, 2002 and a sales increase of one percent during the six months
ended June 30, 2002. Excluding the impact of fluctuations in currency exchange
rates, sales growth was one percent and four percent for the quarter and
year-to-date period, respectively. Of the constant-currency sales growth, the
majority of the growth was due to increased penetration of products for
peritoneal dialysis. The penetration continues to be strongest in emerging
markets, where many people with end-stage renal disease are currently
under-treated. Sales in the segment's Renal Therapy Services (RTS) business,
which operates dialysis clinics in partnership with local physicians in
international markets, primarily in Latin America, and in the Renal Management
Strategies business, which is a renal-disease management organization, were
relatively flat as compared to the prior year periods. Partially due to the
economic and currency volatility in Latin America, where RTS primarily operates,
management has reduced its level of acquisitions in this business, which has
reduced sales growth.
The following tables show key ratios of certain income statement items as a
percent of sales.
GROSS MARGIN AND EXPENSE RATIOS
- -----------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2002 2001 Increase 2002 2001 Increase
- -----------------------------------------------------------------------------------------------------------
Gross margin 45.5% 44.2% 1.3 pts 45.5% 44.0% 1.5 pts
Marketing and
administrative expenses 19.3% 19.3% 0 pts 19.9% 19.4% 0.5 pts
- -----------------------------------------------------------------------------------------------------------
The improvement in the gross margin during the quarter and year-to-date period
was primarily due to a change in the products and services mix in all three
segments, and was particularly a result of increased sales of higher-margin
products in the BioScience and Medication Delivery segments. Foreign currency
fluctuations and related hedging activities did not have a significant impact on
the change in gross margin for the quarter and six-month period.
Marketing and administrative expenses were flat as a percent of sales in the
quarter and increased as a percent of sales for the year-to-date period. 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, including enhancing
the technological infrastructure of the company and attracting and retaining a
highly talented workforce. To offset these investments, management is
aggressively managing expenses and leveraging recent acquisitions.
14
RESEARCH AND DEVELOPMENT
- -----------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Percent June 30, Percent
($ in millions) 2002 2001 increase 2002 2001 increase
- -----------------------------------------------------------------------------------------------------
Research and
development expenses $123 $104 18% $238 $207 15%
As a percent of sales 6.1% 5.6% 6.0% 5.7%
- -----------------------------------------------------------------------------------------------------
R&D expenses above exclude the $51 million IPR&D charge relating to the
acquisition of Fusion in the second quarter of 2002. Refer to Note 7 to the
condensed consolidated financial statements for a discussion of this acquisition
and the related charge. The increase in R&D expenses for both the quarter and
year-to-date period was due to increased spending in all three segments.
Contributing to the growth rate was the Medication Delivery segment's October
2001 acquisition of ASTA, as well as increased spending relating to the
development of a next-generation recombinant clotting factor for hemophilia, a
next-generation oxygen-therapeutics program, initiatives in the wound
management, vaccines and plasma-based products areas, as well as other R&D
projects across the three segments. Management expects R&D spending to continue
to grow during the remainder of the year.
GOODWILL AMORTIZATION
In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002, goodwill is
no longer amortized, but is subject to periodic impairment reviews. Management
expects to continue to increase R&D spending, offsetting the reduced expense due
to the elimination of goodwill amortization.
INTEREST, NET AND OTHER EXPENSE (INCOME)
Net interest expense decreased for both the three months and six months ended
June 30, 2002 as compared to the prior year periods principally due to the May
2001 issuance of convertible debt, which bears a lower interest rate than the
debt balances repaid with the proceeds from the issuance, partially offset by
the effect of higher average net debt balances.
Other expense in the quarter and year-to-date period ended June 30, 2002
included a $70 million charge for two investments whose decline in value was
deemed to be other than temporary, with the investments written down to their
market values. As of June 30, 2002, the company did not hold any investments
with significant unrealized losses. Other income for the quarter and
year-to-date period ended June 30, 2001 included a gain of approximately $105
million from the disposal of a non-strategic investment. This gain was
substantially offset by impairment charges for other assets and investments
whose decline in value was deemed to be other than temporary. Also included in
other income and expense for both the quarter and year-to-date period of both
2002 and 2001 were amounts relating to minority interests and fluctuations in
currency exchange rates.
PRETAX INCOME
Refer to Note 9 to the condensed consolidated financial statements for a summary
of financial results by segment. Certain items are maintained at the company's
corporate headquarters and are not allocated to the segments. They primarily
include the majority of the hedging activities, certain foreign currency
fluctuations, net interest expense, income and expense related to certain
non-strategic investments, corporate headquarters costs, and certain
15
nonrecurring gains and losses. The following is a summary of the significant
factors impacting the segments' financial results.
Medication Delivery
Pretax income increased 30 percent and 24 percent for the three months and six
months ended June 30, 2002, respectively. The growth in pretax income was
primarily the result of strong sales growth, an improved gross margin due to a
change in product mix, the close management of costs, the leveraging of expenses
in conjunction with recent acquisitions, and decreased pump service costs,
partially offset by the impact of foreign exchange rates and increased R&D
spending, which was primarily related to the acquisition of ASTA.
BioScience
Pretax income increased five percent and 27 percent for the three months and six
months ended June 30, 2002, respectively. The growth in pretax income was
primarily a result of strong sales growth and an improved gross margin due to a
change in product mix, as well as the continued leveraging of expenses.
Partially offsetting these increases were increased R&D investments in the
business, particularly for the three months ended June 30, 2002, as well as the
impact of foreign exchange rates.
Renal
Pretax income increased six percent and decreased four percent for the three
months and six months ended June 30, 2002, respectively. Impacting the change in
pretax income for both the quarter and year-to-date period were unfavorable
fluctuations in currency exchange rates, particularly with respect to Latin
American currencies, and increased R&D spending. Offsetting these factors in
both periods was the effect of an improved sales mix and the close management of
expenses.
INCOME TAXES
The effective income tax rate for the three- and six-month periods ended June
30, 2002 was 28 percent and 27 percent, respectively. The effective income tax
rate for the three- and six-month periods ended June 30, 2001, excluding the
impact of the first quarter 2001 change in accounting principle, was 26 percent.
The effective income tax rate was higher in 2002 principally due to the
nondeductibility of the second quarter 2002 IPR&D charge relating to the
acquisition of Fusion.
CHANGES IN ACCOUNTING PRINCIPLES
Refer to Note 7 to the condensed consolidated financial statements regarding the
company's adoption in 2002 of SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets."
The company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and its amendments at the beginning of 2001. In accordance
with the transition provisions of SFAS No. 133, upon adoption the company
recorded a cumulative effect reduction to earnings of approximately $52 million
(net of tax benefit of approximately $32 million), and a cumulative effect
increase to other comprehensive income of approximately $8 million (net of tax
of approximately $5 million).
16
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations per the company's condensed consolidated statements
of cash flows increased for the six months ended June 30, 2002. The effect of
increased earnings in 2002 (before non-cash items) and decreased net cash
payments relating to the company's litigation were partially offset by reduced
cash flows principally relating to accounts receivable and inventories, as the
company continues to grow its businesses.
Cash flows from investing activities decreased for the six months ended June 30,
2002. Capital expenditures increased 11 percent during the six months ended June
30, 2002 as compared to the prior year period as the company increased its
investments in various capital projects across the three segments. The increased
investments principally pertained to the BioScience segment, as the company is
in the process of increasing manufacturing capacity for vaccines, and
plasma-based and recombinant products. Net cash outflows relating to
acquisitions decreased during the first six months of 2002 as compared to the
prior year period. Approximately $24 million of the 2002 total related to the
Medication Delivery segment's January 2002 acquisition of Autros Healthcare
Solutions Inc., a developer of automated patient information and medication
management systems designed to reduce medication errors, with the remainder
pertaining to individually insignificant acquisitions. In May 2002 the company
acquired Fusion, with the purchase price paid in 2,806,660 shares of Baxter
International Inc. common stock. Approximately $21 million of the 2001 total
related to acquisitions of dialysis centers in international markets, with the
remainder pertaining to individually insignificant acquisitions. In February
2001, the company acquired Sera-Tec Biologicals, L.P., which owned and operated
80 plasma centers in 28 states, and a central testing laboratory. The $127
million purchase price of this acquisition, which is included in the BioScience
segment, was paid with Baxter International Inc. common stock. The cash flows
relating to divestitures and other asset dispositions in 2001 principally
related to the sale and leaseback of certain assets.
Cash flows from financing activities increased for the six months ended June 30,
2002. Debt issuances, net of redemptions and other payments of debt, increased
as compared to the prior year period. Cash outflows relating to common stock
dividends increased for the six-month period due to an increase in the number of
shares outstanding. Cash received for stock issued under employee benefit plans
increased due to a higher level of stock option exercises coupled with a higher
average exercise price. Cash outflows in 2002 relating to purchases of company
common stock were comparable to the prior year. The company's
net-debt-to-capital ratio was 42.7 percent and 35.9 percent at June 30, 2002 and
December 31, 2001, respectively.
Management assesses the company's liquidity in terms of its overall ability to
mobilize cash to support ongoing business levels and to fund its growth.
Management uses an internal performance measure called operational cash flow
that evaluates each operating business and geographic region on all aspects of
cash flow under its direct control. Operational cash flow, as defined, reflects
all litigation payments and related insurance recoveries except for those
payments and recoveries relating to mammary implants, which the company never
manufactured or sold.
17
The following table reconciles cash flow provided by operations, as determined
by generally accepted accounting principles (GAAP), to operational cash flow,
which is not a measure defined by GAAP.
- ------------------------------------------------------------------------------------------------
Six months ended June 30,
(in millions) 2002 2001
- ------------------------------------------------------------------------------------------------
Cash flows from operations per the company's
condensed consolidated statements of cash flows ($31) ($37)
Capital expenditures (339) (306)
Net interest after tax 23 21
Other, including mammary implant litigation (4) 43
- ------------------------------------------------------------------------------------------------
Operational cash flow ($351) ($279)
================================================================================================
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 July 2001, the board of directors
authorized the repurchase of $500 million of common stock. The company began
repurchasing under this program in 2001, and repurchased approximately three
million shares of common stock during the first six months of 2002. Stock
repurchases totaled $217 million under this program at June 30, 2002.
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 will 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.
On February 27, 2001, Baxter's board of directors approved a two-for-one stock
split of the company's common shares. On May 1, 2001, the split was approved by
the company's shareholders. On May 30, 2001, shareholders of record on May 9,
2001 received one additional share of Baxter common stock for each share held on
May 9, 2001. All share and per share data in the condensed consolidated
financial statements and notes have been adjusted and restated to reflect the
stock split.
The company intends to fund its short-term and long-term obligations as they
mature through cash flow from operations, by issuing additional debt, by
entering into other financing arrangements or by issuing common stock. 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 are being used for working
capital, to repay certain existing debt, for capital expenditures and for
general corporate purposes. With respect to the company's convertible
debentures, which were issued in May of 2001 in the amount of $800 million, in
May 2002 the company amended the outstanding debentures to allow the holders to
require the company to repurchase the debt in May 2003, in addition to the
original June 2006, June 2011 and June 2016 put dates. The repurchase amount
would be equal to 100 percent of the principal amount plus accrued interest up
to the repurchase date. In July 2002 the company closed a five-year operating
lease agreement with a special purpose entity relating to company office space.
The maximum amount committed by the lessor is $98 million, of which $16 million
had been funded as of December 31, 2001. The company has the right to
renegotiate renewal terms, exercise a purchase option with respect to the leased
property or arrange for sale of the leased property. 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 of approximately $88
million.
18
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 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 change in conditions. Refer to Item 3. Quantitative and Qualitative
Disclosures about Market Risk, for a discussion of certain of the company's
financial instruments. With respect to the company's credit arrangements and
debt outstanding at June 30, 2002, while a deterioration in the company's credit
rating could unfavorably impact the financing costs associated with the credit
arrangements, 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.
See "Part II - Item 1. Legal Proceedings" for a discussion of the company's
legal contingencies and related insurance coverage with respect to cases and
claims relating to the company's plasma-based therapies and mammary implants
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation, as well as other matters. Upon resolution of any of these matters,
the company may incur charges in excess of presently established reserves. While
such future charges could have a material adverse impact on the company's net
income or cash flows in the period in which they are recorded or paid,
management believes that the outcomes of these actions, individually or in the
aggregate, will not have a material adverse effect on the company's consolidated
financial position.
FORWARD-LOOKING INFORMATION
The matters discussed above that are not historical facts include
forward-looking statements. These statements are based on the company's current
expectations and involve numerous risks and uncertainties. Some of these risks
and uncertainties are factors that affect all international businesses, while
some are specific to the company and the health-care arenas in which it
operates. Many factors could affect the company's actual results, causing
results to differ, and possibly differ materially, from those expressed in any
such forward-looking statements. These factors include, but are not limited to,
interest rates; technological advances in the medical field; economic
conditions; demand and market acceptance risks for new and existing products,
technologies and health-care services; the impact of competitive products and
pricing; manufacturing capacity; new plant start-ups; global regulatory, trade
and tax policies; regulatory, legal or other developments relating to the
company's Series A, AF and AX dialyzers; continued price competition; product
development risks, including technological difficulties; ability to enforce
patents; actions of regulatory bodies and other government authorities;
reimbursement policies of government agencies; commercialization factors;
results of product testing; and other factors described in this report or in the
company's other filings with the Securities and Exchange Commission.
Additionally, as discussed in "Legal Proceedings" below, upon the resolution of
certain legal matters, the company may incur charges in excess of presently
established reserves. Any such charge could have a material adverse effect on
the company's results of operations or cash flows in the period in which it is
recorded.
Currency fluctuations are also a significant variable for global companies,
especially fluctuations in local currencies where hedging opportunities are
unreasonably expensive or unavailable. If the United States dollar strengthens
against most foreign currencies, the company's growth rates in its sales and net
earnings could be negatively impacted.
Management believes that its expectations with respect to forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of the company's
19
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.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a complete discussion, refer to the caption "Financial Instrument Market
Risk" in the company's 2001 Annual Report to Stockholders on Form 10-K. As part
of its risk-management program, the company performs sensitivity analyses to
assess potential changes in fair value relating to hypothetical movements in
currency exchange rates. A sensitivity analysis of changes in the fair value of
foreign exchange option and forward contracts outstanding at June 30, 2002
indicated that if the U.S. Dollar uniformly fluctuated unfavorably by 10 percent
against all currencies, the fair value of those contracts of $71 million would
decrease by approximately $186 million. With respect to the company's
cross-currency swap agreements used to hedge net investments in foreign
affiliates, if the U.S. Dollar uniformly weakened by 10 percent, the fair value
of those contracts, which was a negative $333 million as of June 30, 2002, would
decrease by approximately $359 million. 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.
As also discussed in the 2001 Annual Report to Stockholders on Form 10-K, in
order to partially offset the dilutive effect of employee stock options, the
company periodically enters into forward agreements with independent third
parties related to the company's common stock. In accordance with generally
accepted accounting principles, these contracts are not carried on the balance
sheet at fair value, but are recorded upon maturity, or at an earlier
termination date, and are classified within stockholders' equity. If the
company's stock price as of June 30, 2002 were to decline, the fair value of
these contracts, which were in a negative position of $190 million at June 30,
2002 (based on a common stock price of $44.45 at June 30, 2002), would be
reduced by approximately $155 million for each 10 percent decline in stock
price.
21
Review by Independent Accountants
Reviews of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q for the three months and six months ended
June 30, 2002 and 2001 have been performed by PricewaterhouseCoopers LLP, the
company's independent accountants. Their report on the interim condensed
consolidated financial information follows. This report is not considered a
report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and
therefore, the independent accountants' liability under Section 11 does not
extend to it.
22
Report of Independent Accountants
To the Board of Directors and Stockholders of
Baxter International Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Baxter
International Inc. and its subsidiaries as of June 30, 2002 and the related
condensed consolidated statements of income for each of the three-month and
six-month periods ended June 30, 2002 and 2001 and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 2002 and 2001.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2001 and the related consolidated statements of income, cash flows and
stockholders' equity and comprehensive income for the year then ended (not
presented herein), and in our report dated February 14, 2002 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, 2001, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Chicago, Illinois
July 31, 2002
23
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
Baxter International Inc. (Baxter or the company) and certain of its
subsidiaries are named as defendants in a number of lawsuits, claims and
proceedings, including product liability claims involving products now or
formerly manufactured or sold by the company or by companies that were acquired
by the company. The most significant of these are reported in the company's
Annual Report on Form 10-K for the year ended December 31, 2001, and material
developments in such matters for the quarter ended June 30, 2002 are described
below. Upon resolution of any such matters, Baxter may incur charges in excess
of presently established reserves. While such a future charge could have a
material adverse impact on the company's net income and net cash flows in the
period in which it is recorded or paid, management believes that no such charge
would have a material adverse effect on Baxter's consolidated financial
position.
Mammary implant litigation
As previously reported in the company's Annual Report on Form 10-K, the company,
together with certain of its subsidiaries, is currently a defendant in various
courts in a number of lawsuits brought by individuals, all seeking damages for
injuries of various types allegedly caused by silicone mammary implants formerly
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested
its Heyer-Schulte division in 1984. It is not known how many of these claims and
lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed to
other manufacturers. In December 1998, a panel of independent medical experts
appointed by a federal judge announced its findings that reported medical
studies contained no clear evidence of a connection between silicone mammary
implants and traditional or atypical systemic diseases. In June 1999, a similar
conclusion was announced by a committee of independent medical experts from the
Institute of Medicine, an arm of the National Academy of Sciences.
As of June 30, 2002, Baxter, together with certain of its subsidiaries, was
named as a defendant or co-defendant in 185 lawsuits and three claims relating
to mammary implants, brought by approximately 408 plaintiffs, of which 319 are
implant plaintiffs and the remainder are consortium or second generation
plaintiffs. Of those plaintiffs, ten currently are included in the Lindsey class
action Revised Settlement described below, which accounts for approximately nine
of the pending lawsuits against the company. Additionally, 234 plaintiffs have
opted out of the Revised Settlement (representing approximately 143 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, 2002, 105
of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product
identification. Furthermore, during the second quarter of 2002, Baxter obtained
dismissals, or agreements for dismissals, with respect to 47 plaintiffs.
In addition to the individual suits against the company, a class action on
behalf of all women with silicone mammary implants is pending in the United
States District Court (U.S.D.C.) for the Northern District of Alabama involving
most manufacturers of such implants, including Baxter, as successor to AHSC
(Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala., CV
94-P-11558-S). The class action was certified for settlement purposes only by
the court on September 1, 1994, and the settlement terms were subsequently
revised and approved on December 22, 1995 (the Revised Settlement). All appeals
directly challenging the Revised Settlement have been dismissed.
24
In addition to the Lindsey class action, the company also has been named in
three other purported class actions in various state and provincial courts, only
one of which is certified.
On March 31, 2000, the United States Department of Justice filed an action in
the federal district court in Birmingham, Alabama against Baxter and other
manufacturers of breast implants, as well as the escrow agent for the revised
settlement fund, seeking reimbursement under various federal statutes for
medical care provided to various women with mammary implants. On September 26,
2001 the district court granted the motion of all defendants, including Baxter,
to dismiss the action. The federal government has appealed the dismissal.
Plasma-based therapies litigation
As previously reported in the company's Annual Report on Form 10-K, Baxter
currently is a defendant in a number of claims and lawsuits brought by
individuals who have hemophilia, all seeking damages for injuries allegedly
caused by anti-hemophilic factor concentrates VIII or IX derived from human
blood plasma (factor concentrates) processed by the company from the late 1970s
to the mid-1980s. The typical case or claim alleges that the individual was
infected with the HIV virus by factor concentrates, which contained the HIV
virus. None of these cases involves factor concentrates currently processed by
the company.
As of June 30, 2002, Baxter was named in 29 lawsuits and 83 claims in the United
States, Ireland, Italy, Japan and Taiwan. The U.S.D.C. for the Northern District
of Illinois has approved a settlement of all U.S. federal court factor
concentrates cases. As of June 30, 2002, approximately 6,241 claimant groups had
been found eligible to participate in the settlement. Approximately 6,236 of the
claimant groups had received payments as of June 30, 2002.
In Japan, Baxter is a defendant, along with the Japanese government and other
co-defendants, in factor concentrates cases in Osaka, Tokyo, Nagoya, Tohoku,
Fukuoka, Sapporo and Kumamoto. As of June 30, 2002, the cases involved 1,353
plaintiffs, of whom 1,340 have settled their claims.
In addition, Immuno International AG (Immuno), a company acquired by Baxter in
fiscal year 1997, has unsettled claims for damages for injuries allegedly caused
by its plasma-based therapies. The typical claim alleges that the individual
with hemophilia was infected with HIV by factor concentrates containing the HIV
virus. Additionally, Immuno faces multiple claims stemming from its vaccines and
other biologically derived therapies. A portion of the liability and defense
costs related to these claims will be covered by insurance, subject to
exclusions, conditions, policy limits and other factors. Pursuant to the stock
purchase agreement between the company and Immuno, as revised in April 1999 in
consideration for payment by the company of 29 million Swiss Francs to Immuno as
additional purchase price, approximately 26 million Swiss Francs of the purchase
price is being withheld to cover these contingent liabilities.
As previously reported in the company's Annual Report on Form 10-K, Baxter is
currently a defendant in a number of claims and lawsuits brought by individuals
who infused the company's Gammagard(R) IVIG (intravenous immuno-globulin), all
of whom are seeking damages for Hepatitis C infections allegedly caused by
infusing Gammagard(R) IVIG. As of June 30, 2002, Baxter was a defendant in
eleven lawsuits and twelve claims in the United States, Denmark, France,
Germany, Italy, Spain and the United Kingdom. One class action in the United
States has been certified. In September 2000, the U.S.D.C. for the Central
District of California approved a settlement of the class action that would
provide financial compensation for U.S. individuals who used Gammagard(R) IVIG
between January 1993 and February 1994.
25
Other
As of June 30, 2002, Baxter International Inc. and certain of its subsidiaries
were named as defendants in five civil lawsuits seeking damages on behalf of
persons who allegedly died or were injured as a result of exposure to Baxter's
A, AF and AX series dialyzers. Three of these cases were filed during the second
quarter of 2002. One of these cases was filed during the fourth quarter of 2001,
but the company has not been served. Two cases, which had been pending in the in
the U.S.D.C. for the Middle District of Louisiana and the U.S.D.C. for the
Northern District of Illinois, respectively, have been dismissed. The company
has reached settlements with a number of the families of patients who died in
Spain, Croatia and the United States after undergoing hemodialysis on Baxter
Althane series dialyzers. Government criminal investigations concerning the
patient deaths are pending in Spain and Croatia. Other lawsuits and claims may
be filed in the United States and elsewhere.
As of June 30, 2002, Baxter International Inc. and certain of its subsidiaries
have been named as defendants, along with others, in eight lawsuits brought in
U.S. federal courts on behalf of various classes of purchasers of Medicare and
Medicaid eligible drugs alleged to have been injured by Baxter and other
defendants as a result of pricing practices for such drugs, which are alleged to
be artificially inflated. All eight of these U.S. federal court cases have been
transferred to the U.S.D.C. for the District of Massachusetts for consolidated
pretrial case management under Multi District Litigation rules. Claimants seek
damages and declaratory and injunctive relief under various state and/or federal
statutes. In addition, in January 2002, the Attorney General of Nevada filed a
civil suit in the Second Judicial District Court of Washoe County, Nevada. In
February 2002, the Attorney General of Montana filed a civil suit in the First
Judicial District Court of Lewis and Clark County, Montana. These lawsuits in
Nevada and Montana, which each name a subsidiary of Baxter International as a
defendant and seek damages, injunctive relief, civil penalties, disgorgement,
forfeiture and restitution, allege 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 June 30, 2002, Baxter International Inc. and certain of its subsidiaries
have been served as defendants, along with others, in 28 lawsuits filed in
various state and U.S. federal courts, twelve of which are purported class
actions, seeking damages, injunctive relief and medical monitoring for claimants
alleged to have contracted autism or other attention deficit disorders as a
result of exposure to vaccines for childhood diseases containing Thimerosal. In
June 2002, the U.S.D.C. for the Southern District of Texas dismissed with
prejudice one suit brought against Baxter and others based on the application of
the National Vaccine Injury Compensation Act. Additional Thimerosal cases may be
filed in the future against Baxter and other companies that marketed
Thimerosal-containing products.
As of September 30, 1996, the date of the spin-off of Allegiance Corporation
(Allegiance) from Baxter, Allegiance assumed the defense of litigation involving
claims related to Allegiance's businesses, including certain claims of alleged
personal injuries as a result of exposure to natural rubber latex gloves.
Allegiance has not been named in most of this litigation but will be defending
and indemnifying Baxter pursuant to certain contractual obligations for all
expenses and potential liabilities associated with claims pertaining to latex
gloves. As of June 30, 2002, the company was named as a defendant in 434
lawsuits, including the following purported class action: Swartz v. Baxter
Healthcare Corporation, et al. Court of Common Pleas, Jefferson County, PA,
656-1997 C.D.
In connection with the spin-off of its cardiovascular business, Baxter obtained
a ruling from the Internal Revenue Service to the effect that the distribution
should qualify as a tax-free spin-off in the United States. In many countries
throughout the world, Baxter has not sought similar
26
rulings from the local tax authorities and has taken the position that the
spin-off was a tax-free event to Baxter. In the event that this position was
successfully challenged by one or more countries' taxing authorities, Baxter
would be liable for any resulting liability. Baxter believes that it has
established adequate reserves to cover the expected tax liabilities. There can
be no assurance, however, that Baxter will not incur losses in excess of such
reserves.
27
Item 4. Submission of Matters to a Vote of Security Holders
The company's annual meeting of stockholders was held on May 7, 2002 for the
purpose of electing directors, ratifying the appointment of
PricewaterhouseCoopers LLP as independent accountants, approving an amendment to
Baxter's Restated Certificate of Incorporation, as amended, to increase the
number of authorized shares of common stock, approving Baxter's Officer
Incentive Compensation Plan, and voting on the stockholder proposal listed
below. Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and there was no solicitation in opposition to
management's solicitation. Each of management's nominees for directors, as
listed in the proxy statement, was elected with the number of votes set forth
below.
Abstained/
In Favor Withheld
-------- ---------
Harry M. Jansen Kraemer, Jr. 366,522,338 130,120,178
Joseph B. Martin, M.D., Ph.D. 484,074,680 12,567,836
Thomas T. Stallkamp 384,779,550 111,862,966
Fred L. Turner 383,757,078 112,885,438
The results of the other matters voted upon at the annual meeting are as
follows:
Broker
In Favor Against Abstained Non-Votes
-------- ------- --------- ---------
The appointment of 469,278,887 24,917,214 2,446,415 -0-
PricewaterhouseCoopers LLP
as independent accountants for
the Company in 2002 was approved.
The proposal to amend Baxter's 450,715,987 43,120,274 2,806,255 -0-
Restated Certificate of Incorporation,
as amended, to increase the number of
authorized shares of common stock
was approved.
Baxter's Officer Incentive 466,576,363 25,785,189 4,280,964 -0-
Compensation Plan was approved.
The stockholder proposal relating to 165,777,930 258,246,784 6,039,163 66,578,639
cumulative voting in the election of
directors was not approved.
28
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
None.
29
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 7, 2002 By: /s/ Brian P. Anderson
---------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
30
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Number Description of Exhibit
- ------ ----------------------
3.1 Restated Certificate of Incorporation, as amended, including Certificate
of Designation of Series B Junior Participating Preferred Stock and
Certificate of Elimination of Series A Junior Participating Preferred
Stock
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter Re Unaudited Interim Financial Information
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350
31