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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 September 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 October 30, 2002 was 593,286,545 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended September 30, 2002
TABLE OF CONTENTS
Page Number
-----------
Part I. FINANCIAL INFORMATION
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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 .................................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................... 25
Item 4. Controls and Procedures ...................................................... 26
Review by Independent Accountants ...................................................... 27
Report of Independent Accountants ...................................................... 28
Part II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings ............................................................ 29
Item 6. Exhibits and Reports on Form 8-K ............................................. 33
Signature .............................................................................. 34
Certifications ......................................................................... 35
Exhibits ............................................................................... 39
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
(in millions, except per share data)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
-------------------- --------------------
Net sales $2,102 $1,900 $6,074 $5,527
Costs and expenses
Cost of goods sold 1,156 1,045 3,321 3,075
Marketing and administrative expenses 385 352 1,175 1,056
Research and development expenses 122 105 360 312
In-process research and development expense -- -- 51 --
Goodwill amortization -- 12 -- 35
Interest, net 11 19 41 55
Other expense (income) 6 (1) 85 (3)
- ------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,680 1,532 5,033 4,530
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 422 368 1,041 997
Income tax expense 106 96 272 258
- ------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 316 272 769 739
Cumulative effect of accounting change, net of
income tax benefit of $32 -- -- -- (52)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 316 $ 272 $ 769 $ 687
==================================================================================================================
Earnings per basic common share
Before cumulative effect of accounting change $ 0.52 $ 0.46 $ 1.28 $ 1.25
Cumulative effect of accounting change -- -- -- (0.09)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 0.52 $ 0.46 $ 1.28 $ 1.16
==================================================================================================================
Earnings per diluted common share
Before cumulative effect of accounting change $ 0.51 $ 0.45 $ 1.24 $ 1.22
Cumulative effect of accounting change -- -- -- (0.09)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 0.45 $ 1.24 $ 1.13
==================================================================================================================
Weighted average number of common shares outstanding
Basic 603 589 602 589
==================================================================================================================
Diluted 624 609 620 607
==================================================================================================================
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)
- ---------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2002 2001
(unaudited)
------------------------------------
Current assets Cash and equivalents $ 278 $ 582
Accounts receivable 1,677 1,493
Notes and other current receivables 184 129
Inventories 1,713 1,341
Short-term deferred income taxes 36 82
Prepaid expenses 323 350
---------------------------------------------------------------------------------------------------
Total current assets 4,211 3,977
- ---------------------------------------------------------------------------------------------------------------------
Property, At cost 6,279 5,732
plant and Accumulated depreciation and amortization (2,629) (2,426)
equipment ---------------------------------------------------------------------------------------------------
Net property, plant and equipment 3,650 3,306
- ---------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,894 1,698
Insurance receivables 91 93
Other 1,321 1,269
---------------------------------------------------------------------------------------------------
Total other assets 3,306 3,060
- ---------------------------------------------------------------------------------------------------------------------
Total assets $11,167 $10,343
=====================================================================================================================
Current Short-term debt $ 152 $ 149
liabilities Current maturities of long-term debt and lease obligations 50 52
Accounts payable and accrued liabilities 2,355 2,432
Income taxes payable 609 661
---------------------------------------------------------------------------------------------------
Total current liabilities 3,166 3,294
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,935 2,486
- ---------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 77 218
- ---------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 143 140
- ---------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 488 448
- ---------------------------------------------------------------------------------------------------------------------
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 611,624,109 shares in 2002 and 608,817,449
shares in 2001 612 609
Common stock in treasury, at cost, 7,862,251 shares
in 2002 and 9,924,459 shares in 2001 (317) (328)
Additional contributed capital 2,984 2,815
Retained earnings 1,862 1,093
Accumulated other comprehensive loss (783) (432)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 4,358 3,757
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $11,167 $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)
- --------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(brackets denote cash outflows) 2002 2001
------------------------------------
Cash flows Income before cumulative effect of non-cash
from accounting change $769 $739
operations Adjustments
Depreciation and amortization 332 328
Deferred income taxes 78 90
In-process research and development 51 --
Other 90 (25)
Changes in balance sheet items
Accounts receivable (255) (199)
Inventories (310) (223)
Accounts payable and other accrued liabilities (254) (251)
Net litigation payable and other (84) (98)
---------------------------------------------------------------------------------------------------
Cash flows from operations 417 361
- ---------------------------------------------------------------------------------------------------------------------
Cash flows Capital expenditures (578) (493)
from investing Acquisitions (net of cash received)
activities and investments in affiliates (120) (248)
Divestitures and other asset dispositions 32 (9)
---------------------------------------------------------------------------------------------------
Cash flows from investing activities (666) (750)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows Issuances of debt and lease obligations 689 1,790
from financing Redemptions of debt and lease obligations (541) (783)
activities Increase in debt with maturities
of three months or less, net 92 (323)
Common stock cash dividends (348) (341)
Proceeds from stock issued under employee benefit
plans 165 150
Purchases of treasury stock (141) (219)
---------------------------------------------------------------------------------------------------
Cash flows from financing activities (84) 274
- ---------------------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and equivalents 29 6
- ---------------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (304) (109)
Cash and equivalents at beginning of period 582 579
- ---------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $278 $470
=====================================================================================================================
Supplemental schedule of noncash investing activities
- -----------------------------------------------------
Fair value of assets acquired, net of liabilities assumed $280 $484
Common stock issued at fair value 160 236
- ---------------------------------------------------------------------------------------------------------------------
Net cash paid $120 $248
=====================================================================================================================
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 $248 million and $65 million for the three months
ended September 30, 2002 and 2001, respectively, and was $418 million and $670
million for the nine months ended September 30, 2002 and 2001, respectively. The
increase in comprehensive income in the quarter was principally related to
increased net income and favorable foreign currency fluctuations. 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 year-to-date period ended September 30, 2002 included a
$70 million impairment charge recorded during the second quarter for two
investments whose decline in value was deemed to be other than temporary, with
the investments written down to their market values. All available information
is evaluated in management's quarterly analysis of whether any declines in the
fair values of individual securities are considered other than temporary. With
respect to these impairment charges, significant unfavorable events occurred
during the second quarter of 2002, causing management to conclude the declines
in value were other than temporary. Most significantly, one of the investees
announced during the quarter its decision to immediately commence a wind-down of
operations principally due to its unsuccessful efforts to raise capital or to
effect a business combination with another company, and the other investee
received information from regulatory entities regarding the absence of material
progress regarding one of its products under development. The company does not
have significant unrealized losses relating to investments held at September 30,
2002.
5
Other income for the year-to-date period ended September 30, 2001 included a
$105 million gain 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.
Recently issued accounting pronouncement
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," was issued in June 2002.
SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002, and requires that costs associated with exit or disposal
activities be recognized when they are incurred rather than on the date the
company commits to an exit or disposal plan. While the standard changes the
timing of expense recognition related to any future exit or disposal activities,
the standard does not affect the total expense recognized over time, and is not
expected to have a material impact on the company's consolidated financial
statements.
2. CHANGE IN ACCOUNTING PRINCIPLE IN 2001
Effective at the beginning of 2001, the company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and its
amendments. In accordance with the transition provisions of SFAS No. 133, the
difference between the fair values and the book values of all freestanding
derivatives at the adoption date was reported as the cumulative effect of a
change in accounting principle. In accordance with the standard, the company
recorded a cumulative effect reduction to earnings of $52 million (net of tax
benefit of $32 million) and a cumulative effect increase to other comprehensive
income of $8 million (net of tax of $5 million).
3. INVENTORIES
Inventories consisted of the following.
- --------------------------------------------------------------------------------
September 30, December 31,
(in millions) 2002 2001
- --------------------------------------------------------------------------------
Raw materials $ 447 $ 353
Work in process 453 244
Finished products 813 744
- --------------------------------------------------------------------------------
Total inventories $1,713 $1,341
================================================================================
4. INTEREST, NET
Net interest expense consisted of the following.
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Interest expense $14 $27 $54 $83
Interest income (3) (8) (13) (28)
- --------------------------------------------------------------------------------
Interest expense, net $11 $19 $41 $55
================================================================================
6
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. EARNINGS PER SHARE
The numerator for both basic and diluted earnings per share (EPS) is net
earnings available to common shareholders. The denominator for basic EPS is the
weighted-average number of common shares outstanding during the period. The
following is a reconciliation of the shares (denominator) of the basic and
diluted per-share computations.
- --------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
Basic EPS shares 603 589 602 589
- --------------------------------------------------------------------------------------------------
Effect of dilutive securities
Employee stock option plans 7 19 15 17
Equity forward agreements 14 - 2 -
Employee stock purchase plans - 1 1 1
- --------------------------------------------------------------------------------------------------
Diluted EPS shares 624 609 620 607
==================================================================================================
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 at September 30, 2002 was $710 million, $512
million and $223 million for the Medication Delivery, BioScience and Renal
segments, respectively. The change in goodwill during the three- and nine-month
periods ended September 30, 2002 was not significant, and was partially due to
the impact of changes in currency exchange rates on
7
foreign entities' goodwill balances. There was no impairment of goodwill during
the quarter or year-to-date period.
Other intangible assets
Intangible assets other than goodwill are separated into two categories.
Intangible assets with finite useful lives are recorded on the condensed
consolidated balance sheet and amortized over the estimated useful life of the
asset. Intangible assets with indefinite useful lives are recorded on the
condensed consolidated balance sheet, are not amortized, and are subject to
periodic impairment tests. The amount of intangible assets with indefinite lives
is immaterial. The following is a summary of the company's intangible assets
subject to amortization at September 30, 2002.
- ---------------------------------------------------------------------------------------------------------------
As of September 30, 2002
--------------------------------------------------
Weighted-
average
Accumulated amortization
($ in millions) Gross amortization Net period
- ---------------------------------------------------------------------------------------------------------------
Amortized intangible assets
Developed technology, including patents $598 $224 $374 14
Manufacturing, distribution and other
contracts 39 10 29 11
Other 47 8 39 18
- ---------------------------------------------------------------------------------------------------------------
Total amortized intangible assets $684 $242 $442 14
===============================================================================================================
The amortization expense for these intangible assets was $13 million and $31
million for the three months and nine months ended September 30, 2002,
respectively. The anticipated annual amortization expense for these intangible
assets is $42 million, $40 million, $40 million, $37 million, $36 million and
$31 million in 2002, 2003, 2004, 2005, 2006 and 2007, respectively.
Earnings and per share earnings for interim periods in 2001 excluding
amortization
The following is earnings and per share earnings information for 2001 on a pro
forma basis, assuming goodwill and indefinite-lived assets are not amortized.
- -----------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
($ in millions, except per share data) September 30, 2001 September 30, 2001
- -----------------------------------------------------------------------------------------------------------
Reported income before accounting change $ 272 $ 739
Goodwill and indefinite-lived assets amortization 11 30
- -----------------------------------------------------------------------------------------------------------
Adjusted income before accounting change $ 283 $ 769
===========================================================================================================
Reported net income $ 272 $ 687
Goodwill and indefinite-lived assets amortization 11 30
- -----------------------------------------------------------------------------------------------------------
Adjusted net income $ 283 $ 717
===========================================================================================================
Reported earnings per basic common share $0.46 $1.16
Goodwill and indefinite-lived assets amortization 0.02 0.05
- -----------------------------------------------------------------------------------------------------------
Adjusted earnings per basic common share $0.48 $1.21
===========================================================================================================
Reported earnings per diluted common share $0.45 $1.13
Goodwill and indefinite-lived assets amortization 0.02 0.05
- -----------------------------------------------------------------------------------------------------------
Adjusted earnings per diluted common share $0.47 $1.18
===========================================================================================================
8
Earnings and per share earnings for full year 2001, 2000 and 1999 excluding
amortization
The following is earnings and per share earnings information for full year 2001,
2000 and 1999 on a pro forma basis, assuming goodwill and indefinite-lived
assets are not amortized.
- -----------------------------------------------------------------------------------------------------
($ in millions, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Reported income before accounting change $ 664 $ 738 $ 779
Goodwill and indefinite-lived assets amortization 41 28 17
- -----------------------------------------------------------------------------------------------------
Adjusted income before accounting change $ 705 $ 766 $ 796
=====================================================================================================
Reported net income $ 612 $ 740 $ 797
Goodwill and indefinite-lived assets amortization 41 28 17
- -----------------------------------------------------------------------------------------------------
Adjusted net income $ 653 $ 768 $ 814
=====================================================================================================
Reported earnings per basic common share $1.04 $1.26 $1.37
Goodwill and indefinite-lived assets amortization 0.07 0.05 0.03
- -----------------------------------------------------------------------------------------------------
Adjusted earnings per basic common share $1.11 $1.31 $1.40
=====================================================================================================
Reported earnings per diluted common share $1.00 $1.24 $1.35
Goodwill and indefinite-lived assets amortization 0.07 0.05 0.03
- -----------------------------------------------------------------------------------------------------
Adjusted earnings per diluted common share $1.07 $1.29 $1.38
=====================================================================================================
Acquisitions
Acquisitions during the nine months ended September 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 using the income valuation 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.
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. Fusion's expertise in collagen- and gelatin-based products
complements Baxter's fibrin-based technologies. With the combination, the
company can now offer surgeons a broader array of solutions to seal tissue,
enhance wound healing and manage hemostasis, including active bleeding. The
purchase price was paid in 2,806,660 shares of Baxter common stock.
Approximately $169 million of assets were acquired and approximately
9
$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. With the exception of the IPR&D charge, which was recorded at
the corporate level, the results of operations and assets and liabilities,
including goodwill, of Fusion, are included in the BioScience segment.
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.
However, there can be no assurance such efforts will be successful. Delays in
the development, introduction or marketing of a product can result either in
such product being marketed at a time when its cost and performance
characteristics might not be competitive in the marketplace or in a shortening
of its commercial life. If a product is not completed on time, the expected
return on the company's investments could be significantly and unfavorably
impacted.
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. ESI
primarily manufactures injectable generic drugs, which leverages Baxter's
injectable expertise, channel strength, manufacturing processes, customer
relationships and research and development. The acquisition, which will be
included in the Medication Delivery segment, and is subject to approval by
regulatory authorities, is expected to close during the fourth quarter of 2002.
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 Nine months ended
September 30, September 30,
(in millions, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
Net sales $2,102 $1,953 $6,084 $5,734
Income from continuing operations before cumulative
effect of accounting change $ 316 $ 263 $ 764 $ 713
Net income $ 316 $ 263 $ 764 $ 661
Earnings per diluted common share $ 0.51 $ 0.43 $ 1.23 $ 1.08
- ------------------------------------------------------------------------------------------------------------
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.
10
8. 2001 SPECIAL CHARGE - A, AF AND AX SERIES DIALYZERS
Following reports in October 2001 of patient deaths in Croatia, Baxter initiated
a global recall of its A, AF and AX series Renal segment dialyzers. Testing led
the company to conclude that a processing fluid used during the manufacturing of
a limited number of dialyzers produced in the company's Ronneby, Sweden facility
may have played a role in the deaths reported in Croatia and other countries.
Baxter decided to permanently cease manufacturing the A, AF and AX series
dialyzers. The fluid is not used in the manufacturing process for other
dialyzers that Baxter manufactures or distributes. The company ceased production
of the discontinued dialyzers and closed its Ronneby facility. The Miami Lakes,
Florida facility, which provided materials used in the discontinued dialyzers,
is also in the process of being closed. The company has been fully cooperating
with the United States Food and Drug Administration and other health authorities
around the world.
In the fourth quarter of 2001 the company recorded a pretax charge of $189
million ($156 million on an after-tax basis) to cover the costs of discontinuing
this product line and other related costs. Included in the total pretax charge
was $116 million for non-cash costs, principally for the write-down of goodwill
and other intangible assets, inventories and property, plant and equipment. Also
included in the charge was $73 million for cash costs, principally pertaining to
legal costs, recall costs, contractual commitments, and severance and other
employee-related costs associated with the elimination of approximately 360
positions, the majority of which were located in the manufacturing facilities.
Approximately $13 million of the cash costs were paid during the fourth quarter
of 2001, and the remaining balance in the reserve was $60 million at December
31, 2001.
The following is a rollforward of the company's utilization of the reserve for
cash costs from December 31, 2001 through September 30, 2002.
- -------------------------------------------------------------------------------------------
Reserve at Reserve at
December 2002 2002 September 30,
(in millions) 31, 2001 Utilization Additions 2002
- -------------------------------------------------------------------------------------------
Employee-related costs $ 9 ($ 3) -- $ 6
Legal costs 36 (45) $41 32
Recall and contractual costs 15 (11) -- 4
- -------------------------------------------------------------------------------------------
Total $60 ($59) $41 $42
===========================================================================================
During the three months ended September 30, 2002, utilization was $1 million,
$27 million, and $5 million for employee-related costs, legal costs and recall
and contractual costs, respectively.
In conjunction with the recording of the additional $41 million reserve for
legal costs in 2002, a $41 million insurance receivable was recognized, and
therefore there was no net impact on the company's results of operations for the
period. Based on a review of additional information, management revised its
initial estimates of the probable and estimable cash payments and related
insurance recoveries relating to this legal contingency. Refer to Note 9 for a
discussion of legal proceedings relating to this matter. Except for legal costs,
the remaining balance in the reserve at September 30, 2002 is expected to be
substantially utilized by the end of the year. Certain legal payments and
related insurance recoveries are expected to occur in 2003 and 2004.
9. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
Refer to Part II - Item 1. Legal Proceedings below.
11
10. SEGMENT INFORMATION
The company operates in three segments, each of which are strategic businesses
that are managed separately because each business develops, manufactures and
sells distinct products and services. The segments and a description of their
businesses are as follows: Medication Delivery: medication delivery products and
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 nine months
ended September 30 is as follows.
Medication
(in millions) Delivery BioScience Renal Other Total
- -----------------------------------------------------------------------------------
For the three months ended
- --------------------------
September 30,
- -------------
2002
- ----
Net sales $ 832 $ 776 $ 494 -- $2,102
Pretax income 146 173 96 $ 7 422
2001
- ----
Net sales $ 716 $ 680 $ 504 -- $1,900
Pretax income 124 142 81 $21 368
- -----------------------------------------------------------------------------------
For the nine months ended
- -------------------------
September 30,
- -------------
2002
- ----
Net sales $2,388 $2,254 $1,432 -- $6,074
Pretax income 413 482 228 ($82) 1,041
2001
- ----
Net sales $2,093 $1,997 $1,437 -- $5,527
Pretax income 339 386 219 $53 997
- -----------------------------------------------------------------------------------
12
The following are reconciliations of total segment amounts to amounts per the
condensed consolidated income statements.
Three months ended
September 30,
---------------------------
(in millions) 2002 2001
- -----------------------------------------------------------------------------------
Pretax income
- -------------
Total pretax income from segments $415 $347
Unallocated amounts
Interest expense, net (11) (19)
Other Corporate items 18 40
- -----------------------------------------------------------------------------------
Income before income taxes $422 $368
===================================================================================
Nine months ended
September 30,
--------------------------
(in millions) 2002 2001
- -----------------------------------------------------------------------------------
Pretax income
- -------------
Total pretax income from segments $1,123 $944
Unallocated amounts
Interest expense, net (41) (55)
IPR&D (51) --
Other Corporate items 10 108
- -----------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change $1,041 $997
===================================================================================
11. SUBSEQUENT EVENT
In October 2002 the company completed the spin-off of Edwards Lifesciences
Corporation (Edwards) by transferring the cardiovascular business in Japan to
Edwards.
On March 31, 2000, Baxter stockholders of record on March 29, 2000 received all
of the outstanding stock of Edwards, the company's cardiovascular business, in a
tax-free spin-off. The cardiovascular business in Japan was not legally
transferred to Edwards in 2000 due to Japanese regulatory requirements and
business culture considerations. The business had been operated pursuant to a
contractual joint venture under which a Japanese subsidiary of Baxter retained
ownership of the business assets, but a subsidiary of Edwards held a 90 percent
profit interest.
Edwards had an option to purchase the Japanese assets. In October 2002 Baxter
and Edwards consummated an agreement whereby the joint venture and option were
terminated and Edwards purchased the Japanese assets from Baxter. The transfer
of the net assets of the Japan cardiovascular business to Edwards will result in
a net cash inflow to the company in the fourth quarter of 2002 of $20 million.
Upon completion of the transfer in the fourth quarter, a net credit of $167
million will be recorded to stockholders' equity. The transfer will have no
impact on the company's results of operations.
13
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, as well as management's revised
expectations, and the company's results through September 30, 2002.
- --------------------------------------------------------------------------------
FULL YEAR 2002 OBJECTIVES PER RESULTS THROUGH
2001 ANNUAL REPORT SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
.. Accelerate sales growth to the low- . Management now expects sales
teens. growth for full-year 2002 to be
in the low-double digits. Net
sales for the nine months ended
September 30, 2002 increased 10
percent. Excluding the effects of
changes in currency exchange
rates, net sales increased 11
percent.
- --------------------------------------------------------------------------------
.. Grow earnings per share in the mid- . Earnings per diluted common share
teens. increased 10 percent for the
first nine months 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
common 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 common share.
Excluding nonrecurring charges,
earnings per diluted common share
grew 15 percent during the first
nine months of the year.
- --------------------------------------------------------------------------------
.. Generate at least $500 million in . The company had operational cash
operational cash flow. Management outflow of $146 million during
also expects to invest more than the nine months ended September
$1.3 billion in capital expenditures 30, 2002. Due to certain seasonal
and research and development. patterns with respect to Baxter
and its customers, the company
typically generates a large
portion of its annual cash flow
during the fourth quarter of the
year. The total of capital
expenditures and research and
development (R&D) expenses for
the nine months ended September
30, 2002, excluding the second
quarter 2002 charge for IPR&D,
was $938 million.
- --------------------------------------------------------------------------------
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 (GAAP).
14
RESULTS OF OPERATIONS
NET SALES
- ----------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2002 2001 increase 2002 2001 increase
- ----------------------------------------------------------------------------------------------
International $1,085 $ 915 19% $3,096 $2,749 13%
United States 1,017 985 3% 2,978 2,778 7%
- ----------------------------------------------------------------------------------------------
Total net sales $2,102 $1,900 11% $6,074 $5,527 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 nine months ended
September 30, 2002, respectively. During the quarter, the United States Dollar
weakened principally relative to the Euro, partially offset by a strengthening
principally relative to certain Latin American currencies. For the year-to-date
period, the United States Dollar strengthened principally relative to the
Japanese Yen and certain Latin American currencies. Refer to Note 10 to the
condensed consolidated financial statements for a summary of net sales by
segment.
Medication Delivery
The Medication Delivery segment generated 16 percent and 14 percent sales growth
during the three months and nine months ended September 30, 2002, respectively.
Excluding the impact of fluctuations in currency exchange rates, sales growth
was 15 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 both the quarter and year-to-date period,
seven points of growth was 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 three points and two points of sales growth in the quarter and
year-to-date period, respectively, principally as a result of increased sales of
certain generic and branded premixed drugs. The anesthesia business contributed
two points of sales growth in both the quarter and year-to-date period,
primarily due to increased sales of inhaled anesthetics and certain generic
drugs, as well as improved pricing. The remaining sales growth for the quarter
was principally driven by increased sales of parenteral nutrition products and
specialty products, partially offset by the impact of the termination of certain
distribution agreements. Refer to Note 7 regarding a pending acquisition
relating to the Medication Delivery segment.
BioScience
Sales in the BioScience segment increased 14 percent and 13 percent for the
three months and nine months ended September 30, 2002, respectively. Excluding
the impact of fluctuations in currency exchange rates, sales growth was 10
percent and 12 percent for the quarter and year-to-date period, respectively,
with the strongest sales growth in the international market. 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, as well as continued strong demand for this product. The BioScience
segment is experiencing a decrease in supply of bulk recombinant due to a
third-party supplier's lower than expected manufacturing yields. Managment
anticipates that this decrease in supply will unfavorably impact the sales
growth for Recombinate in the fourth quarter of 2002 and in the first quarter
of 2003. Sales of products that provide for leukoreduction, which is the removal
of white blood cells from blood products used for transfusion, as well as strong
sales of vaccines, also contributed significantly to the segment's growth rate
in the year-to-date period. Sales of plasma-derived products declined in both
the quarter and year-to-date period. The decline in sales of plasma-derived
products was primarily due to the re-entry of certain competitors who were out
of the market in
15
the prior year, increased pricing pressures, and a continuing shift in
the market from plasma to recombinant hemophilia products. As further discussed
in Note 7, 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 enhances
the segment's portfolio of innovative therapeutic solutions for biosurgery and
tissue regeneration, did not significantly impact the segment's sales for the
quarter or nine-month period.
Renal
Sales in the Renal segment declined 2 percent during the three months ended
September 30, 2002 and remained flat during the nine months ended September 30,
2002. Excluding the impact of fluctuations in currency exchange rates, sales
declined 1 percent for the quarter and grew 2 percent for the year-to-date
period. Sales of peritoneal dialysis products contributed percentage sales
growth in the low- to mid-single digits in both the quarter and year-to-date
period. This sales growth was principally driven by increased penetration of
peritoneal dialysis in emerging markets, where many people with end-stage renal
disease are currently under-treated. This sales growth was partially offset by a
decline in sales of hemodialysis products in the quarter, primarily due to
decreased sales outside the United States. Sales in the segment's services
businesses, which are Renal Therapy Services (RTS), which operates dialysis
clinics in partnership with local physicians in international markets, and Renal
Management Strategies, which is a renal-disease management organization,
declined by approximately $15 million and $4 million in the quarter and
year-to-date period, respectively. RTS growth has declined as management has
reduced its level of acquisitions in this business due to the economic and
currency volatility in Latin America, where RTS primarily operates.
The following tables show key ratios of certain income statement items as a
percent of sales.
GROSS MARGIN AND EXPENSE RATIOS
- -------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Increase September 30,
2002 2001 (decrease) 2002 2001 Increase
- -------------------------------------------------------------------------------------------------------------
Gross margin 45.0% 45.0% 0 pts 45.3% 44.4% .9 pts
Marketing and
administrative expenses 18.3% 18.5% (.2 pts) 19.3% 19.1% .2 pts
- -------------------------------------------------------------------------------------------------------------
The improvement in the gross margin for the nine-month period ended September
30, 2002 was primarily due to a change in the products and services mix, with
sales of the company's higher-margin products, such as Recombinate, generating
strong growth across the company's businesses. For the quarter, an improvement
in the products and services mix was offset by the effects of changes in
currency exchange rates and other items. Marketing and administrative expenses
as a percent of sales were relatively unchanged in both the quarter and
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 in order to enhance
the technological infrastructure of the company and attract and retain a highly
talented workforce. In conjunction with the annual remeasurement of pension and
other post-employment benefit plan assets and obligations, management intends to
change the long-term investment return and discount rate assumptions used to
calculate the related benefit plan expenses for 2003, and estimates that
these changes will increase such expenses by approximately $24 million in 2003.
To offset these increases in costs and expenses, management is leveraging recent
acquisitions and aggressively managing costs and expenses throughout the
company.
16
RESEARCH AND DEVELOPMENT
- ------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Percent September 30, Percent
($ in millions) 2002 2001 increase 2002 2001 increase
- ------------------------------------------------------------------------------------------------------------
Research and
development expenses $122 $105 16% $360 $312 15%
As a percent of sales 5.8% 5.5% 5.9% 5.6%
- ------------------------------------------------------------------------------------------------------------
R&D expenses for the year-to-date period exclude the $51 million IPR&D charge
relating to the acquisition of Fusion in the second quarter of 2002. Refer to
Note 7 for a discussion of this acquisition. The IPR&D charge pertained to a
product used to control bleeding during surgery. Material net cash inflows were
forecasted in the valuation of the IPR&D charge to commence between 2003 and
2004. Assumed additional R&D expenditures prior to the date of the initial
product introduction totaled approximately $3 million in the valuation. The
project is proceeding in accordance with the original projections. However,
there can be no assurance such efforts will be successful. Delays in the
development, introduction or marketing of a product can result either in such
product being marketed at a time when its cost and performance characteristics
might not be competitive in the marketplace or in a shortening of its commercial
life. If a product is not completed on time, the expected return on the
company's investments could be significantly and unfavorably impacted.
Excluding the second quarter 2002 IPR&D 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. Primarily contributing to the growth rate was the Medication
Delivery segment's October 2001 acquisition of ASTA, as well as increased
spending in the BioScience segment relating to the development of a
next-generation recombinant clotting factor for hemophilia, a next-generation
oxygen-therapeutics program, and initiatives in the wound management, vaccines
and plasma-based products areas. Management expects similar R&D growth rates for
the remainder of the year. Refer to Note 7 regarding an expected IPR&D charge in
the fourth quarter of 2002 relating to a pending acquisition.
2001 SPECIAL CHARGE - A, AF AND AX SERIES DIALYZERS
As further discussed in Note 8, in October 2001, the company recorded a $189
million pretax charge ($156 million on an after-tax basis) related to the
decision to initiate a global recall and permanently cease manufacturing its
Renal segment's A, AF and AX series dialyzers. Testing led the company to
conclude that a processing fluid used during the manufacturing of a limited
number of dialyzers produced in the company's Ronneby, Sweden facility may have
played a role in patient deaths reported in Croatia and other countries.
Included in the total pretax charge was $116 million related to non-cash costs.
These asset impairment charges principally related to goodwill and other
intangible assets, inventories and property, plant and equipment, and were
required based on management's estimates of the fair values (less costs to sell,
as applicable) of the assets. Also included in the charge was $73 million
related to cash costs, principally pertaining to legal costs, recall costs,
contractual commitments, and severance and other employee-related costs
associated with the elimination of approximately 360 positions. During 2002
certain adjustments were made to the reserve for legal costs and related
insurance receivables, and the adjusted reserve for cash costs is $114
million. Of the $114 million cash charge (after adjustments), $13 million was
paid during the fourth quarter of 2001, and $59 million was paid during the nine
months ended September 30, 2002. Refer to Note 8 for a detailed summary of the
activity in the reserve. Except for legal costs, the remaining balance in the
reserve is expected to be substantially utilized by the end of the year. Certain
legal payments and related insurance recoveries are expected to occur in
17
2003 and 2004. Management believes the established reserve for this exit program
is adequate to complete the actions contemplated by the program. Total cash
expenditures for this exit program are being funded with cash generated from
operations. The operating results relating to the A, AF and AX series dialyzers
were not significant.
GOODWILL AMORTIZATION
In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002, goodwill is
no longer amortized, but is subject to periodic impairment reviews. Management
is increasing R&D spending in order to drive the company's future sales growth,
partially 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 nine months ended
September 30, 2002 as compared to the prior year periods. The decrease in both
periods was principally due to the effect of lower interest rates, partially
offset by the effect of higher average net debt balances. The decrease in net
interest expense in the year-to-date period was impacted by the May 2001
issuance of convertible debt, which bears a lower interest rate than the debt
balances repaid with the proceeds from the issuance.
Other expense in the year-to-date period ended September 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. Refer
to Note 1 for further information regarding these charges. Other income for the
year-to-date period ended September 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 10 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 nonrecurring gains and losses (including IPR&D). The following is a
summary of the significant factors impacting the segments' financial results.
Medication Delivery
Pretax income increased 18 percent and 22 percent for the three months and nine
months ended September 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, and the leveraging of
expenses in conjunction with recent acquisitions. Partially offsetting these
factors was increased R&D spending, particularly in the quarter, which was
primarily related to the acquisition of ASTA.
BioScience
Pretax income increased 22 percent and 25 percent for the three months and nine
months ended September 30, 2002, respectively. The growth in pretax income was
primarily a result of strong sales growth, the continued leveraging of expenses,
and an improved gross margin due to a change in product mix in the year-to-date
period. These increases were partially offset by
18
increased R&D spending in both the quarter and nine-month period, as the
business segment continues to make investments in R&D initiatives consistent
with management's growth strategy.
Renal
Pretax income increased 19 percent and 4 percent for the three months and nine
months ended September 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, particularly in the nine-month
period. Offsetting these factors was the effect of an improved sales mix,
particularly for the quarter, and the close management of expenses.
INCOME TAXES
The effective income tax rate did not change significantly for the quarter or
year-to-date period. The effective income tax rate for the three- and nine-month
periods ended September 30, 2002 was 25 percent and 26 percent, respectively.
The effective income tax rate for the three- and nine-month periods ended
September 30, 2001, excluding the impact of the first quarter 2001 change in
accounting principle, was 26 percent.
CHANGES IN ACCOUNTING PRINCIPLES
Refer to Note 7 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, the difference between the fair
values and the book values of all freestanding derivatives at the adoption date
was reported as the cumulative effect of a change in accounting principle. In
accordance with the standard, the company recorded a cumulative effect reduction
to earnings of $52 million (net of tax benefit of $32 million), and a cumulative
effect increase to other comprehensive income of $8 million (net of tax of $5
million).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002, and requires that costs
associated with exit or disposal activities be recognized when they are incurred
rather than on the date the company commits to an exit or disposal plan. While
the standard changes the timing of expense recognition related to any future
exit or disposal activities, the standard does not affect the total expense
recognized over time, and is not expected to have a material impact on the
company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations per the company's condensed consolidated statements
of cash flows increased for the nine months ended September 30, 2002. The effect
of increased earnings in 2002 was partially offset by reduced cash flows
principally relating to accounts receivable and inventories, as the company
continues to grow its businesses, particularly outside the United States.
Accounts receivable balances generally increase as the company generates sales
growth in certain regions outside the United States, which have longer
collection periods. Inventory balances have increased partially in anticipation
of the launch of new products.
19
Cash flows from investing activities increased for the nine months ended
September 30, 2002. Capital expenditures increased 17 percent during the nine
months ended September 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 and investments decreased during the first nine months
of 2002 as compared to the prior year period. In 2002, the majority of the cash
outflows related to acquisitions and investments in the Medication Delivery
segment, with $42 million relating to the July 2002 acquisition of Wockhardt
Life Sciences Limited, an Indian manufacturer and distributor of intravenous
fluids, and $24 million relating to the January 2002 acquisition of Autros
Healthcare Solutions Inc., a developer of automated patient information and
medication management systems designed to reduce medication errors. The
remainder of the 2002 cash outflows relating to acquisitions and investments
were individually insignificant. In May 2002 the company acquired Fusion in a
non-cash transaction, with the purchase price paid in 2,806,660 shares of Baxter
International Inc. common stock. Approximately $111 million of the 2001 net cash
outflows related to acquisitions and investments pertained to the Medication
Delivery segment's August 2001 acquisition of Cook. A portion of the purchase
price of Cook was paid with company common stock. Approximately $31 million of
the 2001 total related to acquisitions of dialysis centers in international
markets, with the remainder of the cash outflows pertaining to individually
insignificant acquisitions and investments. 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
company common stock. The cash inflows relating to divestitures and other asset
dispositions in 2002 principally related to the final cash receipt related to a
prior year divestiture in the Medication Delivery segment.
Cash flows from financing activities decreased for the nine months ended
September 30, 2002. Debt issuances, net of redemptions and other payments of
debt, decreased as compared to the prior year period. Cash outflows relating to
common stock dividends increased for the nine-month period due to an increase in
the number of shares outstanding. Cash received for stock issued under employee
benefit plans increased principally 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 lower than in the prior year
period. The company's net-debt-to-capital ratio was 39.6 percent and 35.9
percent at September 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.
The following table reconciles cash flow provided by operations, as determined
by GAAP, to operational cash flow, which is not a measure defined by GAAP.
20
- ---------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operations per the company's
condensed consolidated statements of cash flows $417 $361
Capital expenditures (578) (493)
Net interest after tax 32 33
Other, including mammary implant litigation (17) 18
- ---------------------------------------------------------------------------------------------------------------------
Operational cash flow ($146) ($ 81)
=====================================================================================================================
As discussed above, due to certain seasonal patterns with respect to Baxter and
its customers, the company typically generates a large portion of its annual
cash flow during the fourth quarter of the year.
With respect to certain of the company's defined benefit pension plans, as a
result of recent unfavorable asset returns and a decline in interest rates, at
December 31, 2002 the company will record a reduction of approximately $509
million to other comprehensive income, which is a component of stockholders'
equity, in order to establish an additional minimum liability on the
consolidated balance sheet. This entry will have no impact on the company's
results of operations. As required by SFAS No. 87, "Employers' Accounting for
Pensions," if the accumulated benefit obligation relating to a pension plan
exceeds the fair value of the plan's assets, the company's established liability
for the plan must be at least equal to the unfunded accumulated benefit
obligation.
As discussed in the 2001 Annual Report to Stockholders on Form 10-K and in Item
3. Quantitative and Qualitative Disclosures about Market Risk in this Form 10-Q,
in order to partially offset the dilutive effect of employee stock options, the
company has periodically entered into forward agreements with independent third
parties related to the company's common stock. The forward agreements, which
have a fair value of zero at inception, require the company to purchase its
common stock from the counterparties on specified future dates and at specified
prices. The company may, at its option, terminate and settle these agreements
early at any time before maturity. The agreements include certain Baxter stock
price thresholds, below which the counterparty has the right to terminate the
agreements. If the thresholds were met in the future, the number of shares that
could potentially be issued by the company under all of the agreements is
subject to contractual maximums, and the maximum at September 30, 2002 is 239
million shares. The contracts give the company the choice of net-share, net-cash
or physical settlement upon maturity or upon any earlier settlement date. In
accordance with GAAP, these contracts are not recorded in the financial
statements until they are settled. The settlements of these contracts (whether
by net-share, net-cash or physical settlement) are classified within
stockholders' equity. At September 30, 2002, the company had outstanding forward
agreements related to approximately 35 million shares, which mature no later
than 2003, and have a weighted-average exercise price of $51 per share (the
company's common stock closed at $30.55 on September 30, 2002). Management
intends to exit substantially all of the forward agreements and has commenced
doing so during the fourth quarter of 2002. Consistent with its strategy for
funding the company's other obligations, management intends to fund the exit of
the forward agreements through cash flow from operations, by issuing additional
debt, by entering into other financing arrangements, or by issuing common stock.
The company may elect to net-share, net-cash or physically settle these
agreements (or some combination of the three settlement options). The settlement
of the outstanding forward agreements would not be expected to have a material
impact on the company's earnings per diluted common share.
See Part II - Item 1. Legal Proceedings for a discussion of the company's legal
contingencies 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.
Baxter has established reserves in accordance with GAAP for certain of the
matters discussed therein. For these matters, there is a possibility that
resolution of the matters could result in an additional loss in excess of
presently established reserves. Also, there is a possibility that resolution of
certain of the company's legal contingencies for which there is no reserve could
result in a loss. Management is not able to estimate the amount of such loss or
additional loss (or range of loss or additional loss).
21
However, management believes that, while such a future charge could have a
material adverse impact on the company's net income and net cash flows in the
period in which it is recorded or paid, no such charge would have a material
adverse effect on Baxter's consolidated financial position.
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 percent 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 at
1.25% per year (interest is paid semi-annually) 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.
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 and meet its short-term and long-term
obligations, including the exit of its equity forward agreements. At September
30, 2002, the company can issue up to $500 million in aggregate principal amount
of additional senior unsecured debt securities under effective registration
statements filed with the Securities and Exchange Commission. In addition, the
company has two credit facilities, which were renewed and increased in October
2002, that total $1.6 billion. These credit facilities contain various
covenants, including a maximum debt-to-capital ratio and a minimum interest
coverage ratio. There are no borrowings outstanding under these facilities at
September 30, 2002. 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. With respect to the company's credit facilities and debt
outstanding, 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.
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 3 million
shares of common stock during the first nine months of 2002. Stock repurchases
totaled $217 million under this program at September 30, 2002. In October 2002,
the board of directors authorized the repurchase of an additional $500 million
of common stock.
22
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.
23
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 Part II - Item 1. 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 or paid.
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 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.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Currency 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 the fair value of its foreign exchange financial
instruments relating to hypothetical and reasonably possible near-term movements
in currency exchange rates. A sensitivity analysis of changes in the fair value
of foreign exchange option and forward contracts outstanding at September 30,
2002, while not predictive in nature, indicated that if the U.S. Dollar
uniformly fluctuated unfavorably by 10 percent against all currencies, the fair
value of those contracts of $86 million would decrease by approximately $170
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
$346 million as of September 30, 2002, would decrease by approximately $383
million. The model recalculates the fair value of the contracts outstanding at
September 30, 2002 by replacing the actual exchange rates at September 30, 2002
with exchange rates that are 10 percent unfavorable to the actual exchange rates
for each applicable currency. All other factors are held constant. These
sensitivity analyses disregard the possibility that currency exchange rates can
move in opposite directions and that gains from one currency may or may not be
offset by losses from another currency. The analyses also disregard the
offsetting change in value of the underlying hedged transactions and asset and
liability balances.
Equity risk
As further discussed in the 2001 Annual Report to Stockholders on Form 10-K as
well as in Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations of this Form 10-Q, 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. As part of its risk-management program, the company performs
sensitivity analyses to assess potential changes in the fair value of its
forward agreements relating to hypothetical and reasonably possible near-term
movements in the company's stock price. If the company's stock price as of
September 30, 2002 were to decline by 10 percent, the fair value of these
contracts, which were in a negative position of $683 million at September 30,
2002 (based on a common stock price of $30.55 at September 30, 2002), would be
reduced by approximately $106 million.
Interest rate and other risks
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. There
have been no significant changes from the information discussed therein.
25
Item 4. Controls and Procedures
Within 90 days of the filing date of this report, the company carried out an
evaluation, under the supervision and with the participation of the company's
Disclosure Committee and the company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the company's
disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")). The company's disclosure controls and procedures are designed
to ensure that information required to be disclosed by the company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported on a timely basis. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the company's
disclosure controls and procedures are effective in alerting them in a timely
fashion to material information relating to Baxter required to be included in
the reports that the company files under the Exchange Act. There have been no
significant changes in Baxter's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.
26
Review by Independent Accountants
Reviews of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q for the three months and nine months ended
September 30, 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.
27
Report of Independent Accountants
To the Board of Directors and Stockholders of
Baxter International Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Baxter
International Inc. and its subsidiaries as of September 30, 2002 and the related
condensed consolidated statements of income for each of the three-month and
nine-month periods ended September 30, 2002 and 2001 and the condensed
consolidated statements of cash flows for the nine-month periods ended September
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
November 4, 2002
28
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 below, and
material developments for the quarter ended September 30, 2002 are described
below. These cases and claims raise difficult and complex factual and legal
issues and are subject to many uncertainties and complexities, including, but
not limited to, the facts and circumstances of each particular case and claim,
the jurisdiction in which each suit is brought, and differences in applicable
law. Baxter has established reserves in accordance with generally accepted
accounting principles for certain of the matters discussed below. For these
matters, there is a possibility that resolution of the matters could result in
an additional loss in excess of presently established reserves. Also, there is a
possibility that resolution of certain of the company's legal contingencies for
which there is no reserve could result in a loss. Management is not able to
estimate the amount of such loss or additional loss (or range of loss or
additional loss). However, management believes that, while such a future charge
could have a material adverse impact on the company's net income and net cash
flows in the period in which it is recorded or paid, no such charge would have a
material adverse effect on Baxter's consolidated financial position.
Mammary implant litigation
As previously reported in the company's Annual Report on Form 10-K, the company,
together with certain of its subsidiaries, is currently a defendant in various
courts in a number of lawsuits brought by individuals, all seeking damages for
injuries of various types allegedly caused by silicone mammary implants formerly
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested
its Heyer-Schulte division in 1984. It is not known how many of these claims and
lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed to
other manufacturers. In December 1998, a panel of independent medical experts
appointed by a federal judge announced its findings that reported medical
studies contained no clear evidence of a connection between silicone mammary
implants and traditional or atypical systemic diseases. In June 1999, a similar
conclusion was announced by a committee of independent medical experts from the
Institute of Medicine, an arm of the National Academy of Sciences.
As of September 30, 2002, Baxter, together with certain of its subsidiaries, was
named as a defendant or co-defendant in 133 lawsuits and two claims relating to
mammary implants, brought by approximately 296 plaintiffs, of which 247 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, 162 plaintiffs have
opted out of the Revised Settlement (representing approximately 92 pending
lawsuits), and the status of the remaining plaintiffs with pending lawsuits is
unknown. Some of the opt-out plaintiffs filed their cases naming multiple
defendants and without product identification; thus, not all of the opt-out
plaintiffs will have viable claims against the company. As of September 30,
2002, 91 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant
product identification. Furthermore, during the third quarter of 2002, Baxter
obtained dismissals, or agreements for dismissals, with respect to 72
plaintiffs.
29
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.
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 September 30, 2002, Baxter was named in 24 lawsuits and 87 claims in the
United States, Ireland, Italy, Japan, Spain, France 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 September 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 September
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 September 30, 2002, the cases involved
1,356 plaintiffs, of whom 1,347 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
30
Hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. As of
September 30, 2002, Baxter was a defendant in thirteen lawsuits and 24 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.
Other
In August 2002, six purported class action lawsuits were filed in the U.S.D.C.
for the Northern District of Illinois naming Baxter and its Chief Executive
Officer and Chief Financial Officer as defendants. These lawsuits, which have
been consolidated and seek recovery of unspecified damages, allege that the
defendants violated the federal securities laws by making misleading statements
that allegedly caused Baxter common stock to trade at inflated levels. In
October 2002, Baxter and members of its Board of Directors were named as
defendants in a lawsuit filed in the U.S.D.C. for the Northern District of
Illinois by an alleged participant in the Baxter Incentive Investment Plan (the
"Plan"), purportedly on behalf of the Plan and a class of Plan participants who
purchased shares of Baxter common stock. This lawsuit sets forth claims for
unspecified damages under the Employee Retirement Income Security Act of 1974,
as amended, and is based on allegations similar to those made in the securities
lawsuits described above. The Company believes that all of these lawsuits are
without merit and intends to defend itself vigorously against these claims.
As of September 30, 2002, Baxter International Inc. and certain of its
subsidiaries were named as defendants in six civil lawsuits seeking damages on
behalf of persons who allegedly died or were injured as a result of exposure to
Baxter's A, AF and AX series dialyzers. One of these cases was filed during the
third quarter of 2002. 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. A government
criminal investigation concerning the patient deaths is pending in Spain. The
Croatian government has closed its criminal investigation without initiating any
criminal action against the Company. Other lawsuits and claims may be filed in
the United States and elsewhere.
As of September 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 two lawsuits, 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. In
October 2002, the Judicial Panel on Multi District Litigation issued an order
denying plaintiffs' motions to vacate orders transferring the actions brought in
Nevada and Montana to the U.S.D.C. for the District of Massachusetts for
consolidated pretrial case management under the Multi District Litigation rules.
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.
31
As of September 30, 2002, Baxter International Inc. and certain of its
subsidiaries have been served as defendants, along with others, in 71 lawsuits
filed in various state and U.S. federal courts, eight 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 September 30, 2002, the company was named as a defendant in 416
lawsuits, including the following purported class action: Swartz v. Baxter
Healthcare Corporation, et al. Court of Common Pleas, Jefferson County, PA,
656-1997 C.D.
In connection with the spin-off of its cardiovascular business, Baxter obtained
a ruling from the Internal Revenue Service to the effect that the distribution
should qualify as a tax-free spin-off in the United States. In many countries
throughout the world, Baxter has not sought similar rulings from the local tax
authorities and has taken the position that the spin-off was a tax-free event to
Baxter. In the event that this position was successfully challenged by one or
more countries' taxing authorities, Baxter would be liable for any resulting
liability.
32
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
On August 7, 2002, Baxter International Inc. filed a current report on
Form 8-K under Item 9 which reported that the Chief Executive Officer
and Chief Financial Officer filed with the Securities and Exchange
Commission sworn statements pursuant to the SEC Order requiring the
filing of the statements under Section 21(a)(1) of the Securities
Exchange Act of 1934.
On September 13, 2002, Baxter International Inc. filed a current
report on Form 8-K under Item 5 attaching a press release relating to
a hemodialysis treatment investigation.
33
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
--------------------------------------------
(Registrant)
Date: November 12, 2002 By: /s/ Brian P. Anderson
---------------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
34
CERTIFICATION OF CHIEF EXECUTIVE OFFICER ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Harry M. Jansen Kraemer, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baxter
International Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
35
Date: November 12, 2002 By: /s/ Harry M. Jansen Kraemer, Jr.
---------------------------------
Harry M. Jansen Kraemer, Jr.
Chairman of the Board and Chief Executive
Officer
36
CERTIFICATION OF CHIEF FINANCIAL OFFICER ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Brian P. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baxter
International Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
37
Date: November 12, 2002 By: /s/ Brian P. Anderson
-------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
38
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Number Description of Exhibit
- ------ ----------------------
3.3 Amended and Restated Bylaws dated September 24, 2002
10.10 First Amendment to Baxter International Inc. and Subsidiaries Deferred
Compensation Plan
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
39