10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF -------- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF -------- THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 1-4448 BAXTER INTERNATIONAL INC. ------------------------ (Exact name of registrant as specified in its charter) Delaware 36-0781620 ------------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Baxter Parkway, Deerfield, Illinois 60015-4633 ---------------------------------------- ---------- (Address of principal executive offices (Zip Code) (847) 948-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------- The number of shares of the registrant's Common Stock, par value $1.00 per share, outstanding as of August 3, 2001 was 588,515,197 shares. BAXTER INTERNATIONAL INC. FORM 10-Q For the quarterly period ended June 30, 2001 TABLE OF CONTENTS
Page Number ----------- Part I. FINANCIAL INFORMATION ------- --------------------- Item 1. Financial Statements Condensed Consolidated Statements of Income................ 2 Condensed Consolidated Balance Sheets...................... 3 Condensed Consolidated Statements of Cash Flows............ 4 Notes to Condensed Consolidated Financial Statements....... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 21 Review by Independent Accountants....................................... 22 Report of Independent Accountants....................................... 23 Part II. OTHER INFORMATION -------- ----------------- Item 1. Legal Proceedings............................................ 24 Item 4. Submission of Matters to a Vote of Security Holders.......... 27 Item 6. Exhibits and Reports on Form 8-K............................. 28 Signature ............................................................. 29 Exhibits ............................................................. 30
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Baxter International Inc. and Subsidiaries Condensed Consolidated Statements of Income (unaudited) (in millions, except per share data)
Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 ---------------------------- ---------------------------- Net sales $1,870 $1,694 $3,627 $3,277 Costs and expenses Cost of goods sold 1,044 947 2,030 1,843 Marketing and administrative expenses 361 336 704 651 Research and development expenses 104 93 207 176 In-process research and development and acquisition- related charges -- 286 -- 286 Goodwill amortization 11 6 23 11 Interest, net 17 19 36 34 Other expense (income) (9) (6) (2) 6 --------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 1,528 1,681 2,998 3,007 --------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change 342 13 629 270 Income tax expense (benefit) 89 (33) 162 33 --------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before cumulative effect of accounting change 253 46 467 237 Discontinued operation Income from discontinued operation, net of applicable income tax expense of $1 and $5 in 2000 -- 2 -- 14 Costs associated with effecting the business distribution -- -- -- (12) --------------------------------------------------------------------------------------------------------------------------- Total discontinued operation -- 2 -- 2 --------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 253 48 467 239 Cumulative effect of accounting change, net of income tax benefit of $32 -- -- (52) -- --------------------------------------------------------------------------------------------------------------------------- Net income $ 253 $ 48 $ 415 $ 239 =========================================================================================================================== Earnings per basic common share Continuing operations, before cumulative effect of accounting change $ .43 $ .08 $ .79 $ .41 Cumulative effect of accounting change -- -- (.09) -- --------------------------------------------------------------------------------------------------------------------------- Net income $ .43 $ .08 $ .70 $ .41 =========================================================================================================================== Earnings per diluted common share Continuing operations, before cumulative effect of accounting change $ .42 $ .08 $ .77 $ .40 Cumulative effect of accounting change -- -- (.09) -- --------------------------------------------------------------------------------------------------------------------------- Net income $ .42 $ .08 $ .68 $ .40 =========================================================================================================================== Weighted average number of common shares outstanding Basic 590 583 589 582 =========================================================================================================================== Diluted 608 594 607 592 ===========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Baxter International Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in millions, except shares)
June 30, December 31, 2001 2000 (unaudited) --------------------------------------- Current assets Cash and equivalents $ 431 $ 579 Accounts receivable 1,527 1,387 Notes and other current receivables 162 155 Inventories 1,358 1,159 Short-term deferred income taxes 97 159 Prepaid expenses 416 212 --------------------------------------------------------------------------------------------------- Total current assets 3,991 3,651 ---------------------------------------------------------------------------------------------------------------------- Property, At cost 5,241 4,978 plant and Accumulated depreciation and amortization (2,319) (2,171) equipment --------------------------------------------------------------------------------------------------- Net property, plant and equipment 2,922 2,807 ---------------------------------------------------------------------------------------------------------------------- Other assets Goodwill and other intangibles 1,397 1,239 Insurance receivables 122 160 Other 850 876 --------------------------------------------------------------------------------------------------- Total other assets 2,369 2,275 ---------------------------------------------------------------------------------------------------------------------- Total assets $ 9,282 $ 8,733 ====================================================================================================================== Current Short-term debt $ 324 $ 576 liabilities Current maturities of long-term debt and lease obligations 50 58 Accounts payable and accrued liabilities 1,344 1,990 Income taxes payable 631 748 --------------------------------------------------------------------------------------------------- Total current liabilities 2,349 3,372 ---------------------------------------------------------------------------------------------------------------------- Long-term debt and lease obligations 2,378 1,726 ---------------------------------------------------------------------------------------------------------------------- Long-term deferred income taxes 280 160 ---------------------------------------------------------------------------------------------------------------------- Long-term litigation liabilities 161 184 ---------------------------------------------------------------------------------------------------------------------- Other long-term liabilities 700 632 ---------------------------------------------------------------------------------------------------------------------- Commitments and contingencies ---------------------------------------------------------------------------------------------------------------------- Stockholders' Common stock, $1 par value, authorized 1,000,000,000 equity shares in 2001 and 700,000,000 in 2000, issued 599,161,212 shares in 2001 and 596,266,502 shares in 2000 599 596 Common stock in treasury, at cost, 10,914,183 shares in 2001 and 9,906,124 shares in 2000 (341) (349) Additional contributed capital 2,281 2,208 Retained earnings 1,245 853 Accumulated other comprehensive loss (370) (649) --------------------------------------------------------------------------------------------------- Total stockholders' equity 3,414 2,659 ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 9,282 $ 8,733 ======================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Baxter International Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in millions)
Six months ended June 30, (brackets denote cash outflows) 2001 2000 -------------------------------- Cash flows Income from continuing operations before cumulative from effect of non-cash accounting change $ 467 $ 237 operations Adjustments Depreciation and amortization 217 183 Deferred income taxes 124 (87) In-process research and development and acquisition- related charges -- 286 Other (8) 7 Changes in balance sheet items Accounts receivable (204) 12 Inventories (227) (175) Accounts payable and other accrued liabilities (237) (268) Net litigation payments and other (169) (43) ----------------------------------------------------------------------------------------------------- Cash flows from continuing operations (37) 152 Cash flows relating to discontinued operation -- (43) ------------------------------------------------------------------------------------------------------------------------ Cash flows from operations (37) 109 ------------------------------------------------------------------------------------------------------------------------ Cash flows Capital expenditures (306) (256) from investing Acquisitions (net of cash received) activities and investments in affiliates (88) (211) Divestitures and other asset dispositions 19 -- ------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities (375) (467) ------------------------------------------------------------------------------------------------------------------------ Cash flows Issuances of debt and lease obligations 1,928 588 from financing Redemptions of debt and lease obligations (992) (842) activities Increase (decrease) in debt with maturities of three months or less, net (304) 639 Common stock cash dividends (340) (84) Stock issued under employee benefit plans 101 140 Purchases of treasury stock (143) (141) ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities 250 300 ------------------------------------------------------------------------------------------------------------------------ Effect of currency exchange rate changes on cash and equivalents 14 (52) ------------------------------------------------------------------------------------------------------------------------ Decrease in cash and equivalents (148) (110) Cash and equivalents at beginning of period 579 606 ------------------------------------------------------------------------------------------------------------------------ Cash and equivalents at end of period $ 431 $ 496 ========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Baxter International Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) 1. FINANCIAL INFORMATION ------------------------ The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (the company or Baxter) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the company's 2000 Annual Report to Stockholders. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the interim periods. All such adjustments, unless otherwise noted herein, are of a normal, recurring nature. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. Basis of consolidation ---------------------- Prior to fiscal 2001, certain operations outside the United States and its territories were included in the consolidated financial statements on the basis of fiscal years ending November 30. In conjunction with the implementation of new financial systems, this one-month lag was eliminated as of the beginning of fiscal 2001. The December 2000 net loss from operations of $23 million for these operations was recorded directly to retained earnings. Comprehensive income -------------------- Total comprehensive income (loss) was $265 million and $(22) million for the three months ended June 30, 2001 and 2000, respectively, and was $605 million and $195 million for the six months ended June 30, 2001 and 2000, respectively. The increase in 2001 as compared to 2000 was principally related to currency translation adjustments and foreign currency hedging instruments. Derivatives and hedging activities ---------------------------------- All derivatives are recognized on the consolidated balance sheet at fair value. When the company enters into a derivative contract, it designates and documents the derivative as (1) a hedge of a forecasted transaction, including a hedge of a foreign currency denominated transaction (a cash flow hedge); (2) a hedge of the fair value of a recognized asset or liability (a fair value hedge); (3) a hedge of a net investment in a foreign operation; or (4) an instrument that is not formally being designated as a hedge. The company also uses and designates certain nonderivative financial instruments as hedges of net investments in foreign operations. Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a cash flow hedge, are recorded in other comprehensive income (OCI), with such changes in fair value reclassified to earnings when the hedged transaction affects earnings. Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability which are attributable to the hedged risk, are recorded directly to earnings. Changes in the fair value of a derivative or nonderivative instrument that is highly effective and is designated and qualifies as a hedge of a net investment in a foreign operation are recorded in the cumulative translation adjustment (CTA) account within OCI. Any hedge ineffectiveness is recorded in earnings. If it is determined that a derivative or nonderivative hedging instrument is not or ceases to be highly 5 effective as a hedge, the company discontinues hedge accounting prospectively. In certain circumstances, the company enters into derivative contracts and does not formally designate them as fair value, cash flow or net investment hedges. Changes in the fair value of undesignated instruments are reported directly to earnings. The company does not hold any instruments for trading purposes. New accounting standards ------------------------ Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," was issued in July 2001. The Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using the purchase method. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The company is in the process of assessing the impact of adoption on its consolidated financial statements. SFAS No. 142, "Goodwill and Other Intangible Assets," was issued in July 2001. The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and applies to all goodwill and other intangible assets recognized in the financial statements. The Statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition, and how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The company is in the process of assessing the impact of adoption on its consolidated financial statements. 2. INVENTORIES -------------- Inventories consisted of the following:
June 30, December 31, (in millions) 2001 2000 -------------------------------------------------------------------- Raw materials $ 367 $ 261 Work in process 196 174 Finished products 795 724 -------------------------------------------------------------------- Total inventories $1,358 $1,159 ====================================================================
3. INTEREST, NET ---------------- Net interest expense consisted of the following:
Three months Six months ended ended June 30, June 30, (in millions) 2001 2000 2001 2000 --------------------------------------------------------------------- Interest expense $ 28 $ 29 $ 56 $ 61 Interest income (11) (10) (20) (20) --------------------------------------------------------------------- Interest expense, net $ 17 $ 19 $ 36 $ 41 ===================================================================== Allocated to continuing operations $ 17 $ 19 $ 36 $ 34 ===================================================================== Allocated to discontinued operation $ -- $ -- $ -- $ 7 =====================================================================
6 The allocation of interest to continuing operations and the discontinued operation was based on estimated relative net assets of these operations. 4. OTHER INCOME ---------------- Other income for the quarter and six months ended June 30, 2001 included a gain of approximately $100 million from the disposal of a non-strategic investment by contribution to the company's pension trust. This gain was substantially offset by impairment charges for other assets and investments whose decline in value is deemed to be other than temporary. 5. STOCK SPLIT --------------- On February 27, 2001, Baxter's board of directors approved a 2 for 1 stock split of the company's common shares. This approval was subject to shareholder approval of an increase in the number of authorized shares of common stock, which was received at the company's annual meeting on May 1, 2001. On May 30, 2001, shareholders of record on May 9, 2001 received one additional share of Baxter common stock for each share held on May 9, 2001. All share and per share data in 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 Six months ended June 30, June 30, (in millions) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------ Basic EPS shares 590 583 589 582 ------------------------------------------------------------------------------------------------ Effect of dilutive securities Employee stock options 17 9 17 8 Employee stock purchase plans and equity forward agreements 1 2 1 2 ------------------------------------------------------------------------------------------------ Diluted EPS shares 608 594 607 592 ================================================================================================
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ------------------------------------------------- The company operates on a global basis, and is exposed to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations in currency exchange rates and interest rates. The company's hedging policy attempts to manage these risks to an acceptable level based on management's judgment of the appropriate trade-off between risk, opportunity and costs. The company does not hold financial instruments for trading or speculative purposes. The company is primarily exposed to currency exchange-rate risk with respect to firm commitments, forecasted transactions and net assets denominated in Japanese Yen, the Euro, British Pound and Swiss Franc. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company utilizes derivative and nonderivative financial instruments to further reduce the net exposure to currency fluctuations. Gains and losses on the hedging instruments are intended to offset losses and gains on the hedged transactions 7 with the goal of reducing the earnings volatility resulting from fluctuations in currency exchange rates. The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company's policy is to manage interest costs using a mix of fixed and floating rate debt that management believes is appropriate. To manage this mix in a cost efficient manner, the company enters into interest rate swaps, in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Adoption of SFAS 133 -------------------- The company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments at the beginning of fiscal year 2001. In accordance with the transition provisions of SFAS No. 133, upon adoption the company recorded a cumulative effect reduction to earnings of approximately $52 million (net of income tax benefit of approximately $32 million), and a cumulative effect increase to OCI of approximately $8 million (net of income tax of approximately $5 million). Cash flow hedges ---------------- The company principally uses option and forward contracts to hedge the risk to earnings associated with fluctuations in currency exchange rates relating to the company's firm commitments and forecasted transactions expected to be denominated in foreign currencies. The company also uses forward-starting interest rate swaps to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of term debt. The following table summarizes activity (net-of-tax) in accumulated other comprehensive income (loss) (AOCI) related to cash flow hedges held by the company:
---------------------------------------------------------------------------------- Three months ended Six months ended (in millions) June 30, 2001 June 30, 2001 ---------------------------------------------------------------------------------- Balance at beginning of period $ 78 $ -- Cumulative effect of accounting change -- 8 Net gain in fair value of derivatives 32 104 Net gain reclassified to earnings (6) (8) ---------------------------------------------------------------------------------- Balance at June 30, 2001 $104 $104 ==================================================================================
For the six months ended June 30, 2001, the net amount recorded in other income and expense relating to hedge ineffectiveness and the component of the derivative instruments' gain or loss excluded from the assessment of hedge effectiveness were immaterial to the company's condensed consolidated financial statements. As of June 30, 2001, approximately $52 million of deferred net after-tax gains on derivative instruments accumulated in AOCI are expected to be reclassified to earnings during the next twelve months, coinciding with when the hedged items are expected to impact earnings. The hedged items principally include intercompany sales and interest payments on third-party debt. The maximum term over which the company has hedged exposures to the variability of cash flows, excluding interest payments on term debt, is four years. 8 Fair value hedges ----------------- The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These instruments serve to hedge the company's earnings from fluctuations in interest rates. For the six months ended June 30, 2001, no portion of the change in fair value of the company's fair value hedges was ineffective or excluded from the assessment of hedge effectiveness. Hedges of net investments in foreign operations ----------------------------------------------- The company uses cross currency interest rate swaps and foreign currency denominated debt to hedge its stockholders' equity balance from the effects of fluctuations in currency exchange rates. The company measures ineffectiveness on the swaps based upon changes in spot foreign exchange rates. Approximately $206 million of net after-tax gains related to the derivative and nonderivative instruments were included in the company's CTA account as of June 30, 2001. Other ----- The company uses forward contracts to hedge earnings from the effects of fluctuations in currency exchange rates relating to certain of the company's intercompany and third-party receivables and payables denominated in a foreign currency. These derivative instruments are not formally designated as hedges, and the change in fair value of the instruments, which substantially offsets the change in book value of the hedged items, is recorded directly to other income or expense. In November 1999, the company and Nexell Therapeutics Inc. (Nexell) entered into an agreement whereby Baxter agreed to issue put rights in connection with a $63 million private placement by Nexell of preferred stock. The put rights were issued in conjunction with Nexell's repayment of amounts owed to the company. The preferred stock is convertible at the option of the holders into common stock of Nexell at $11 per share at any time until November 2006. The put rights provide the holders of the preferred stock with the ability to cause Baxter to purchase the preferred stock from November 2002 until November 2004. The purchase price to be paid by Baxter would reflect a per annum compounded return to the holders of the preferred stock of 5.91%. The changes in fair value of the put rights are recorded directly to other income or expense. Such changes were not significant for the three or six months ended June 30, 2001. 8. ACQUISITIONS --------------- Acquisitions during the six months ended June 30, 2001 and 2000 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 was allocated to the net assets acquired based on preliminary estimates of their fair values at the date of the acquisition. The excess of the purchase price over the fair values of the net tangible assets, identifiable intangible assets and liabilities acquired was allocated to goodwill. The allocation of purchase price is subject to revision based on the final determination of fair values. 9 Sera-Tec Biologicals, L.P. -------------------------- In February 2001, the company acquired Sera-Tec Biologicals, L.P. (Sera-Tec) for approximately $127 million, which was paid in approximately 2.8 million shares of Baxter International Inc. common stock. Sera-Tec owns and operates 80 plasma centers in 28 states, and a central testing laboratory. Approximately $141 million of the purchase price was allocated to goodwill. Goodwill is being amortized on a straight-line basis over 40 years. Pro forma information --------------------- The following unaudited pro forma information presents a summary of the company's consolidated results of operations as if acquisitions during 2001 and 2000 had taken place as of the beginning of the current and preceding fiscal year.
------------------------------------------------------------------------------------------------ Three months ended Six months ended June 30, June 30, (in millions, except per share data) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------ Net sales $1,871 $1,756 $3,646 $3,428 Income from continuing operations before cumulative effect of accounting change $ 253 $ 32 $ 469 $ 207 Net income $ 253 $ 34 $ 417 $ 209 Earnings per diluted common share $ .42 $ .06 $ .68 $ .35 ------------------------------------------------------------------------------------------------
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 diluted pro forma earnings and per-share earnings included in the table above for 2000 primarily reflect the historical pre-acquisition net losses reported by North American Vaccine, Inc., which was acquired in June 2000. The pro forma information above also includes certain other recent acquisitions. Acquisition reserves -------------------- Based on plans formulated at acquisition date, as part of the allocation of purchase price, reserves have been established related to certain acquisitions. Actions executed to date and anticipated in the future with respect to these acquisitions are substantially consistent with the original plans. Management believes remaining reserves are adequate to complete the actions contemplated by the plans. 9. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES --------------------------------------------------- Refer to "Part II - Item 1. Legal Proceedings" below. 10. SEGMENT INFORMATION ----------------------- The company operates in three segments, each of which are strategic businesses that are managed separately because each business develops, manufactures and sells distinct products and services. The segments and a description of their businesses are as follows: Medication Delivery: medication delivery products and services, including intravenous infusion pumps and solutions, anesthesia- delivery devices and pharmaceutical agents; BioScience: biopharmaceuticals and blood-collection, separation and storage products and technologies; and Renal: products and services to treat end-stage kidney disease. 10 Certain items are maintained at corporate headquarters (Corporate) and are not allocated to the segments. They primarily include most of the company's debt and cash and equivalents and related net interest expense, corporate headquarters costs, certain non-strategic investments and related income and expense, deferred income taxes, the majority of hedging activities, and certain litigation liabilities and related insurance receivables. Financial information for the company's segments for the three and six months ended June 30 is as follows:
Medication (in millions) Delivery BioScience Renal Other Total ---------------------------------------------------------------------------- For the three months ended -------------------------- June 30, -------- 2001 ---- Net sales $ 708 $ 686 $476 -- $1,870 Pretax income 113 131 72 $ 26 342 2000 ---- Net sales $ 667 $ 575 $452 -- $1,694 Pretax income 99 131 78 ($295) 13 For the six months ended ------------------------ June 30, -------- 2001 ---- Net sales $1,377 $1,317 $933 -- $3,627 Pretax income 215 244 138 $ 32 629 2000 ---- Net sales $1,287 $1,117 $873 -- $3,277 Pretax income 183 244 156 ($313) 270 ----------------------------------------------------------------------------
The following are reconciliations of total segment amounts to amounts per the condensed consolidated income statements:
Three months ended June 30, -------------- (in millions) 2001 2000 ------------------------------------------------------------------------------- Pretax income ------------- Total pretax income from segments $316 $ 308 Unallocated amounts Interest expense, net (17) (19) In-process research and development and acquisition- related charges -- (286) Other Corporate items 43 10 -------------------------------------------------------------------------------- Income from continuing operations before income taxes $342 $ 13 --------------------------------------------------------------------------------
11
Six months ended June 30, -------------- (in millions) 2001 2000 --------------------------------------------------------------------------- Pretax income ------------- Total pretax income from segments $597 $ 583 Unallocated amounts Interest expense, net (36) (34) In-process research and development and acquisition- related charges -- (286) Other Corporate items 68 7 --------------------------------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change $629 $ 270 ---------------------------------------------------------------------------
11. SUBSEQUENT EVENT -------------------- In August 2001, Baxter signed an agreement with Degussa AG to acquire its ASTA Medica Oncology subsidiary, Asta Medica Onkologie GmbH & CoKG ("ASTA") for approximately 525 million Euros ($470 million). Pending approval by relevant authorities, the transaction is expected to close before the end of 2001. ASTA develops, produces and markets oncology products worldwide, with significant market presence in Europe, North America and Latin America. ASTA's net sales, primarily of chemotherapy agents, totaled approximately $130 million in 2000. It is estimated that a substantial portion of the purchase price will be allocated to in-process research and development (IPR&D) which, under GAAP, will be immediately expensed by the company. Excluding the IPR&D charge, the acquisition is not expected to have a significant impact on 2001 earnings and is expected to be accretive to earnings in 2002. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Baxter International Inc.'s (the company or Baxter) 2000 Annual Report to Stockholders (Annual Report) contains management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2000. In the Annual Report, management outlined its key financial objectives for 2001. The table below reflects these objectives and the company's results through June 30, 2001.
----------------------------------------------------------------------------------------------------- RESULTS THROUGH FULL YEAR 2001 OBJECTIVES JUNE 30, 2001 ----------------------------------------------------------------------------------------------------- . Increase net sales in the low double . Net sales during the six months ended digits. June 30, 2001 increased 11 percent. Excluding the effects of changes in currency exchange rates, net sales increased 16 percent. ----------------------------------------------------------------------------------------------------- . Increase net earnings in the mid-teens. . Net earnings from continuing operations increased 13 percent for the first half of the year, excluding the first quarter 2001 cumulative effect of a change in accounting principle and second quarter 2000 charge for in-process research and development (IPR&D) and acquisition-related costs. ----------------------------------------------------------------------------------------------------- . Generate $500 million in operational cash . The company had operational cash outflow of flow, after investing more than $1 billion $279 million during the six months ended in capital expenditures and research and June 30, 2001. Cash outflows are typical development. during the first half of the year based on the timing of receipts and disbursements. The total of capital expenditures and research and development expenses for the six months ended June 30, 2001 was $513 million. -----------------------------------------------------------------------------------------------------
13 RESULTS OF OPERATIONS --------------------- The following management discussion and analysis pertains to continuing operations, unless otherwise noted. NET SALES
----------------------------------------------------------------------------------------- Three months ended Six months ended June 30, Percent June 30, Percent (in millions) 2001 2000 increase 2001 2000 increase ----------------------------------------------------------------------------------------- International $ 932 $ 930 -- $1,834 $1,789 2% United States 938 764 23% 1,793 1,488 21% ----------------------------------------------------------------------------------------- Total net sales $1,870 $1,694 10% $3,627 $3,277 11% =========================================================================================
Excluding the effect of fluctuations in currency exchange rates, which impacted sales growth unfavorably for all three segments, total net sales growth was 15 percent and 16 percent for the three months and six months ended June 30, 2001, respectively. The United States dollar strengthened principally relative to the Euro and the Japanese Yen. Refer to Note 10 to the Condensed Consolidated Financial Statements for a summary of net sales by segment. Medication Delivery The Medication Delivery segment generated six percent and seven percent sales growth during the three months and six months ended June 30, 2001, respectively. Excluding the impact of fluctuations in currency exchange rates, sales growth was nine percent and 10 percent for the quarter and year-to-date period, respectively, with sales in both the domestic and international markets contributing strongly to the growth rate. Of the constant-currency sales growth, approximately two points and three points of growth in the quarter and six-month period, respectively, were generated from the anesthesia business, with a portion of such growth driven by the segment's sales of the first generic formulation of Propofol approved by the United States Food and Drug Administration. Propofol is an intravenous drug used for the induction or maintenance of anesthesia in surgery, and as a sedative in monitored anesthesia care. The majority of the remaining sales growth was due to increased sales of Colleague(R) electronic infusion pumps and intravenous fluids and administration sets used with electronic infusion pumps. In addition, sales of the segment's nutrition products and specialty therapies generated strong growth during both the quarter and year-to-date period. BioScience Sales in the BioScience segment increased 19 percent and 18 percent for the three months and six months ended June 30, 2001, respectively. Excluding the impact of fluctuations in currency exchange rates, sales growth was 25 percent and 24 percent for the quarter and year-to-date period, respectively, with the strongest sales growth in the domestic market. Of the constant-currency sales growth, approximately 17 points and 12 points of growth in the quarter and six- month period, respectively, were due to the increased sales of plasma-derived products, which was principally due to increased sales of plasma Factor VIII, improved pricing and the first quarter 2001 acquisition of Sera-Tec Biologicals, L.P. (Sera-Tec), which owns and operates 80 plasma centers in 28 states. Sales of recombinant products increased the segment's constant-currency growth rate by approximately eight points during both the quarter and year-to-date period, due principally to the company's recent increases in manufacturing capacity. Sales in the blood-collection and processing businesses also grew modestly during the quarter and year-to-date period, principally due to an increase in sales of products that provide for leukoreduction, which is the removal of white blood cells from blood products used for transfusion. 14 Renal The Renal segment generated sales growth of five percent and seven percent during the three-month period and six-month period ended June 30, 2001, respectively. Excluding the impact of fluctuations in currency exchange rates, sales growth was 13 percent and 14 percent for the quarter and year-to-date period, respectively. The March 2000 acquisition of Althin Medical A.B. (Althin), a manufacturer of hemodialysis products, continues to be integrated into the segment's operations. Sales of Althin products contributed approximately one point to the segment's growth rate for the six months ended June 30, 2001. Strong growth was generated by the segment's Renal Therapy Services business, which operates dialysis clinics in partnership with local physicians in international markets, and the Renal Management Strategies business, which is a renal-disease management organization, with revenues from these businesses increasing approximately $30 million and $55 million during the quarter and six-month period, respectively. The remaining growth in the Renal segment was driven principally by hemodialysis product sales as well as continued penetration of products for peritoneal dialysis, particularly in Latin America, Europe and Asia. The following tables show key ratios of certain income statement items as a percent of sales: GROSS MARGIN AND EXPENSE RATIOS
Three months ended Six months ended June 30, Increase June 30, Increase 2001 2000 (decrease) 2001 2000 (decrease) ----------------------------------------------------------------------------------------------------- Gross profit margin 44.2% 44.1% .1 pts 44.0% 43.8% .2 pts Marketing and administrative expenses 19.3% 19.8% (.5 pts) 19.4% 19.9% (.5 pts) -----------------------------------------------------------------------------------------------------
The increase in the gross profit margin for the quarter and year-to-date period was due principally to a more favorable products and services mix, with the higher-margin BioScience segment generating strong sales for the quarter and year-to-date period. The gross profit margin is expected to continue to increase during the remainder of the year. Marketing and administrative expenses decreased as a percent of sales in both the quarter and year-to-date period as compared to the prior year as the company continues to offset significant investments in attracting and retaining a talented workforce, by aggressively managing expenses and leveraging acquisitions. Management expects the expense ratio to continue to decline during the remainder of the year. RESEARCH AND DEVELOPMENT
Three months ended Six months ended June 30, Percent June 30, Percent (in millions) 2001 2000 increase 2001 2000 increase --------------------------------------------------------------------------------------------------- Research and development expenses $ 104 $ 93 12% $ 207 $ 176 18% As a percent of sales 6% 5% 6% 5% ---------------------------------------------------------------------------------------------------
Research and development (R&D) expenses above exclude the IPR&D charge recorded in June 2000, which principally related to the acquisition of North American Vaccine, Inc. (NAV). Refer to Baxter's 2000 Annual Report for a complete discussion of this charge. The increase in 15 R&D expenses for both the quarter and year-to-date period was primarily due to spending in the BioScience segment, and principally related to the next- generation recombinant product, vaccines, the next-generation oxygen- therapeutics program, as well as other R&D projects. Management expects R&D expenses to be incurred at approximately the same level for the remainder of 2001 as they were during the first half of 2001. GOODWILL AMORTIZATION Goodwill amortization increased for the three months and six months ended June 30, 2001 as compared to the prior year periods primarily due to the acquisitions of NAV in June 2000 and Sera-Tec in February 2001. For the three months and six months ended June 30, 2001, goodwill amortization on a net-of-tax basis was approximately $9 million and $19 million, respectively, or approximately $0.02 and $0.03 per diluted common share, respectively. OTHER INCOME AND EXPENSE Other income for the quarter and six months ended June 30, 2001 included a gain of approximately $100 million from the disposal of a non-strategic investment by contribution to the company's pension trust. This gain was substantially offset by impairment charges for other assets and investments whose decline in value is deemed to be other than temporary. Net interest expense decreased for the three months ended June 30, 2001 as compared to the prior year period principally due to the May 2001 issuance of convertible debt, which bears a lower interest rate than the debt balances repaid with the proceeds from the issuance. See further discussion below. Net interest expense increased for the six months ended June 30, 2001 as compared to the prior year principally due to increased interest rates related to foreign currency denominated debt, partially offset by the effect of the second quarter 2001 issuance of convertible debt. PRETAX INCOME Refer to Note 10 to the Condensed Consolidated Financial Statements for a summary of financial results by segment. Certain items are maintained at the company's corporate headquarters and are not allocated to the segments. They primarily include the majority of the hedging activities, certain foreign currency fluctuations, net interest expense, income and expense related to certain non-strategic investments, and corporate headquarters costs. The following is a summary of the significant factors impacting the segments' financial results. Medication Delivery Pretax income increased 14 percent and 17 percent for the three months and six months ended June 30, 2001, respectively. The growth in pretax income was primarily a result of solid sales growth, the close management of costs, and the leveraging of expenses in conjunction with recent acquisitions, partially offset by the unfavorable impact of fluctuations in currency exchange rates and, for the six-month period, increased pump service costs. BioScience Pretax income was approximately flat for the three months and six months ended June 30, 2001. The effect of strong sales growth and an improved gross margin due to a change in product mix was offset by significantly increased R&D investments in the business and the unfavorable impact of fluctuations in currency exchange rates. 16 Renal Pretax income decreased eight percent and 11 percent for the three months and six months ended June 30, 2001, respectively. The decrease in pretax income was principally due to an unfavorable product mix, unfavorable fluctuations in currency exchange rates, and sales and marketing investments in the business, partially offset by the effect of closely managing administrative costs. INCOME TAXES FROM CONTINUING OPERATIONS Excluding the 2000 charge for IPR&D and acquisition-related costs, the effective income tax rate for the three months and six months ended June 30, 2001 was substantially unchanged as compared to the prior year. Management expects the effective tax rate to remain at approximately the same level for the rest of the year. DISCONTINUED OPERATION On March 31, 2000, Baxter stockholders of record on March 29, 2000 received all of the outstanding stock of Edwards Lifesciences Corporation (Edwards), the company's cardiovascular business, in a tax-free spin-off. The first quarter 2000 income related to the discontinued operation was offset by costs directly associated with effecting the business distribution. The income statement activity during the second quarter of 2000 related to certain operations outside the United States. CHANGE IN ACCOUNTING PRINCIPLE As further discussed in Note 7 to the Condensed Consolidated Financial Statements, the company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments at the beginning of fiscal year 2001. In accordance with the transition provisions of SFAS No. 133, upon adoption the company recorded a cumulative effect reduction to earnings of approximately $52 million (net of tax benefit of approximately $32 million), and a cumulative effect increase to OCI of approximately $8 million (net of tax of approximately $5 million). SUBSEQUENT EVENT In August 2001, the company signed an agreement with Degussa AG to acquire its ASTA Medica Oncology subsidiary, Asta Medica Onkologie GmbH & CoKG ("ASTA"). ASTA develops, produces and markets oncology products worldwide, with significant market presence in Europe, North America and Latin America. Refer to Note 11 to the Condensed Consolidated Financial Statements for further information. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Cash flows from continuing operations per the company's Condensed Consolidated Statements of Cash Flows decreased for the six months ended June 30, 2001. The effect of increased earnings (before non-cash items) in 2001 was more than offset by the effect of decreases in accounts payable balances, increases in accounts receivable and inventories, and cash payments relating to the company's litigation. Cash flows from investing activities increased for the six months ended June 30, 2001. Capital expenditures were higher for the six months ended June 30, 2001 as compared to the prior year as the company increased its investments in various capital projects across the three 17 segments. The increased investments principally pertained to the BioScience segment, as the company is in the process of increasing manufacturing capacity for vaccines and plasma-based and recombinant products. Net cash outflows relating to acquisitions decreased during the first six months of 2001 as compared to the prior year period. Approximately $21 million of the 2001 total related to acquisitions of dialysis centers in international markets, with the remainder pertaining to individually insignificant items. As further discussed in Note 8 to the Condensed Consolidated Financial Statements, the purchase price of the March 2001 Sera-Tec acquisition was paid with Baxter International Inc. common stock. In 2000, net cash outflows relating to acquisitions included approximately $55 million related to the Renal segment's above-mentioned acquisition of Althin. A portion of this purchase price was paid in Baxter International Inc. common stock. Approximately $110 million of the 2000 total related to several acquisitions and investments in the Medication Delivery segment, the largest of which was the January 2000 acquisition of certain assets of Sabratek Corporation, a domestic ambulatory and infusion pump business. In addition, the company made certain minor acquisitions and investments across the various businesses and product lines. Cash flows from financing activities decreased for the six months ended June 30, 2001. The change in cash flows from financing activities was impacted by the change in net cash used in operations and investing activities, which in total increased during the first six months of 2001 as compared to the prior year. During May 2001, the company issued $800 million in convertible debt. The securities mature in 20 years, bear a 1.25 percent coupon, are convertible into common shares of Baxter stock under specified conditions, and carry certain call and put provisions. The proceeds from the convertible debt issuance were used to refinance certain of the company's short-term debt. Cash outflows relating to common stock dividends increased for the six-month period due to the company's change from a quarterly to an annual dividend payout schedule. Cash received for stock issued under employee benefit plans decreased principally due to the first quarter 2000 required exercise of stock options by employees transferring to Edwards as a result of the March 31, 2000 spin-off of that business. Cash outflows in 2001 relating to purchases of treasury stock were comparable to the prior year. The company's net-debt-to-capital ratio was 40.5 percent and 40.1 percent at June 30, 2001 and December 31, 2000, respectively. Management assesses the company's liquidity in terms of its overall ability to mobilize cash to support ongoing business levels and to fund its growth. Management uses an internal performance measure called operational cash flow that evaluates each operating business and geographic region on all aspects of cash flow under its direct control. Operational cash flow, as defined, reflects all litigation payments and related insurance recoveries except for those payments and recoveries relating to mammary implants, which the company never manufactured or sold. The following table reconciles cash flow provided by continuing operations, as determined by generally accepted accounting principles, to operational cash flow provided by continuing operations:
--------------------------------------------------------------------------------------------------------------------- Six months ended June 30, (in millions) 2001 2000 --------------------------------------------------------------------------------------------------------------------- Cash flows from continuing operations per the company's Condensed Consolidated Statements of Cash Flows $ (37) $ 152 Capital expenditures (306) (256) Net interest after tax 21 21 Other, including mammary implant litigation 43 (9) --------------------------------------------------------------------------------------------------------------------- Operational cash flow - continuing operations $(279) $ (92) =====================================================================================================================
18 As authorized by the board of directors, the company repurchases its stock to optimize its capital structure depending upon its operational cash flows, net debt level and current market conditions. In November 1999, the board of directors authorized the repurchase of $500 million of common stock. The company began repurchasing under this program in 2000, and approximately $430 million of the authorized amount was repurchased as of June 30, 2001. In June 2001, the board of directors authorized the repurchase of an additional $500 million of common stock. Such repurchases will begin sometime after the 1999 authorization has been completed. On February 27, 2001, Baxter's board of directors approved a 2 for 1 stock split of the company's common shares. This approval was subject to shareholder approval of an increase in the number of authorized shares of common stock, which was received at the company's annual meeting on May 1, 2001. On May 30, 2001, shareholders of record on May 9, 2001 received one additional share of Baxter common stock for each share held on May 9, 2001. All share and per share data in the Condensed Consolidated Financial Statements and accompanying notes has been adjusted and restated to reflect the stock split. The company intends to fund its short-term and long-term obligations as they mature by issuing additional debt or through cash flow from operations. The company believes it has lines of credit adequate to support ongoing operational requirements. Beyond that, the company believes it has sufficient financial flexibility to attract long-term capital on acceptable terms as may be needed to support its growth objectives. See "Part II - Item 1. Legal Proceedings" for a discussion of the company's legal contingencies and related insurance coverage with respect to cases and claims relating to the company's plasma-based therapies and mammary implants manufactured by the Heyer-Schulte division of American Hospital Supply Corporation, as well as other matters. Upon resolution of any of these matters, the company may incur charges in excess of presently established reserves. While such future charges could have a material adverse impact on the company's net income or cash flows in the period in which they are recorded or paid, management believes that the outcomes of these actions, individually or in the aggregate, will not have a material adverse effect on the company's consolidated financial position. 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. The factors below in some cases have affected and could affect the company's actual results, causing results to differ, and possibly differ materially, from those expressed in any such forward-looking statements. These factors include technological advances in the medical field, unforeseen information technology issues related to the company or third parties, economic conditions, demand and market acceptance risks for new and existing products, technologies and health-care services, the impact of competitive products and pricing, manufacturing capacity, new plant start-ups, global regulatory, trade and tax policies, continued price competition, product development risks, including technological difficulties, ability to enforce patents and unforeseen commercialization and regulatory factors. In particular, the company, as well as other companies in its industry, has experienced increased regulatory activity by the U.S. Food and Drug Administration with respect to its plasma- based biologicals. 19 Currency fluctuations are also a significant variable for global companies, especially fluctuations in local currencies where hedging opportunities are unreasonably expensive, or altogether unavailable. If the United States dollar continues to strengthen against most foreign currencies, the company's growth rates in its sales and net earnings will be negatively impacted. Management believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of the company's business and operations, but there can be no assurance that the actual results or performance of the company will conform to any future results or performance expressed or implied by such forward-looking statements. NEW ACCOUNTING STANDARDS ------------------------ Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," was issued in July 2001. The Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using the purchase method. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The company is in the process of assessing the impact of adoption on its consolidated financial statements. SFAS No. 142, "Goodwill and Other Intangible Assets," was issued in July 2001. The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and applies to all goodwill and other intangible assets recognized in the financial statements. The Statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition, and how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The company is in the process of assessing the impact of adoption on its consolidated financial statements. 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk For a complete discussion, refer to the caption "Financial Instrument Market Risk" in the company's 2000 Annual Report to Stockholders on Form 10-K. Also, refer to Note 7 in Item 1. Financial Statements in this Form 10-Q for a discussion of the company's derivative instruments and hedging activities. As part of its risk management program, the company performs sensitivity analyses to assess potential changes in fair value relating to hypothetical movements in currency exchange rates. A sensitivity analysis of changes in the fair value of foreign exchange option and forward contracts outstanding at June 30, 2001 indicated that, if the U.S. Dollar uniformly fluctuated unfavorably by 10 percent against all currencies, the fair value of those contracts would decrease by approximately $221 million. With respect to the company's cross-currency swap agreements used to hedge net investments in foreign affiliates, if the U.S. Dollar uniformly weakened by 10 percent, the fair value of the contracts would decrease by approximately $218 million as of June 30, 2001. Any increase or decrease in the fair value of the financial instruments is substantially offset by a change in value of the hedged items. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. 21 Review by Independent Accountants --------------------------------- Reviews of the interim condensed consolidated financial information included in this Quarterly Report on Form 10-Q for the three months and six months ended June 30, 2001 and 2000 have been performed by PricewaterhouseCoopers LLP, the company's independent accountants. Their report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and therefore, the independent accountants' liability under Section 11 does not extend to it. 22 Report of Independent Accountants --------------------------------- To the Board of Directors and Stockholders of Baxter International Inc. We have reviewed the accompanying condensed consolidated balance sheet of Baxter International Inc. and its subsidiaries as of June 30, 2001, and the related condensed consolidated statements of income for each of the three-month and six- month periods ended June 30, 2001 and 2000 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2000 and the related consolidated statements of income, cash flows and stockholders' equity for the year then ended (not presented herein), and in our report dated February 16, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2000, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Chicago, Illinois August 9, 2001 23 PART II. OTHER INFORMATION Baxter International Inc. and Subsidiaries Item 1. Legal Proceedings Baxter International Inc. and certain of its subsidiaries are named as defendants in a number of lawsuits, claims and proceedings, including product liability claims involving products now or formerly manufactured or sold by the company or by companies that were acquired by the company. The most significant of these are reported in the company's Annual Report on Form 10-K for the year ended December 31, 2000, and material developments in such matters for the quarter ended June 30, 2001 are described below. Upon resolution of any such matters, Baxter may incur charges in excess of presently established reserves. While such a future charge could have a material adverse impact on the company's net income and net cash flows in the period in which it is recorded or paid, management believes that no such charge would have a material adverse effect on Baxter's consolidated financial position. Mammary implant litigation -------------------------- As previously reported in the company's Annual Report on Form 10-K, the company, together with certain of its subsidiaries, is currently a defendant in various courts in a number of lawsuits brought by individuals, all seeking damages for injuries of various types allegedly caused by silicone mammary implants formerly manufactured by the Heyer-Schulte division of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested its Heyer-Schulte division in 1984. It is not known how many of these claims and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed to other manufacturers. In December 1998, a panel of independent medical experts appointed by a federal judge announced its findings that reported medical studies contained no clear evidence of a connection between silicone mammary implants and traditional or atypical systemic diseases. In June 1999, a similar conclusion was announced by a committee of independent medical experts from the Institute of Medicine, an arm of the National Academy of Sciences. As of June 30, 2001, Baxter, together with certain of its subsidiaries, had been named as a defendant or co-defendant in 382 lawsuits and four claims relating to mammary implants, brought by approximately 1,161 plaintiffs, of which 855 are implant plaintiffs and the remainder are consortium or second generation plaintiffs. Of those plaintiffs, 32 currently are included in the Lindsey class action Revised Settlement described below, which accounts for approximately 17 of the pending lawsuits against the company. Additionally, 723 plaintiffs have opted out of the Revised Settlement (representing approximately 299 pending lawsuits), and the status of the remaining plaintiffs with pending lawsuits is unknown. Some of the opt-out plaintiffs filed their cases naming multiple defendants and without product identification; thus, not all of the opt-out plaintiffs will have viable claims against the company. As of June 30, 2001, 289 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. Furthermore, during the second quarter of 2001, Baxter obtained dismissals, or agreements for dismissals, with respect to 262 plaintiffs. In addition to the individual suits against the company, a class action on behalf of all women with silicone mammary implants is pending in the United States District Court (U.S.D.C.) for the Northern District of Alabama involving most manufacturers of such implants, including Baxter, as successor to AHSC (Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala., CV 94-P-11558-S). The class action was certified for settlement purposes only by the court on September 1, 1994, and the settlement terms were subsequently revised and approved on December 22, 1995 (the Revised Settlement). All appeals directly challenging the Revised Settlement have been dismissed. 24 In addition to the Lindsey class action, the company also has been named in four other purported class actions in various state and provincial courts, only one of which is certified. On March 31, 2000, the United States Department of Justice filed an action against Baxter and other manufacturers of breast implants, as well as the escrow agent for the revised settlement fund. The action is pending in the federal district court in Birmingham, Alabama and seeks reimbursement under various federal statutes for medical care provided to various women with mammary implants. The company is defending this litigation. Plasma-based therapies litigation ---------------------------------- As previously reported in the company's Annual Report on Form 10-K, Baxter currently is a defendant in a number of claims and lawsuits brought by individuals who have hemophilia, all seeking damages for injuries allegedly caused by anti-hemophilic factor concentrates VIII or IX derived from human blood plasma (factor concentrates) processed by the company from the late 1970s to the mid-1980s. The typical case or claim alleges that the individual was infected with the HIV virus by factor concentrates, which contained the HIV virus. None of these cases involves factor concentrates currently processed by the company. As of June 30, 2001, Baxter had been named in 61 lawsuits and 86 claims in the United States, Ireland, Italy, Taiwan, Japan, Spain, Sweden, France, and the Netherlands. The U.S.D.C. for the Northern District of Illinois has approved a settlement of all U.S. federal court factor concentrates cases. As of June 30, 2001, approximately 6,220 claimant groups had been found eligible to participate in the settlement, and approximately 300 claimants had opted out of the settlement. Approximately 6,217 of the claimant groups had received payments as of June 30, 2001 and payments are expected to continue through 2001 as releases are received from the remaining claimant groups. The company also has been named in four purported class actions. None of these class actions has been certified for trial. In Japan, Baxter is a defendant, along with the Japanese government and four other co-defendants, in factor concentrates cases in Osaka, Tokyo, Nagoya, Tohoku, Fukuoka, Sapporo and Kumamoto. As of June 30, 2001, the cases involved 1,348 plaintiffs, of whom 1,337 have settled their claims. In addition, Immuno International AG (Immuno), acquired by Baxter in 1996, has unsettled claims for damages for injuries allegedly caused by its plasma-based therapies. The typical claim alleges that the individual with hemophilia was infected with HIV by factor concentrates containing the HIV virus. Additionally, Immuno faces multiple claims stemming from its vaccines and other biologically derived therapies. A portion of the liability and defense costs related to these claims will be covered by insurance, subject to exclusions, conditions, policy limits and other factors. Pursuant to the stock purchase agreement between the company and Immuno, as revised in April 1999 in consideration for a payment by the company of 29 million Swiss Francs to Immuno as additional purchase price, approximately 26 million Swiss Francs of the purchase price is being withheld to cover these contingent liabilities. As previously reported in the company's Annual Report on Form 10-K, Baxter is currently a defendant in a number of claims and lawsuits brought by individuals who infused the company's Gammagard(R) IVIG (intravenous immuno-globulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. As of June 30, 2001, Baxter was a defendant in 20 lawsuits and 21 claims in the United States, Denmark, France, Germany, Italy, Spain and the United Kingdom. One class action in the United States has been certified. In September 2000, the U.S.D.C. for the Central District of California approved a 25 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 ------ As of September 30, 1996, the date of the spin-off of Allegiance Corporation (Allegiance) from Baxter, Allegiance assumed the defense of litigation involving claims related to Allegiance's businesses, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Allegiance has not been named in most of this litigation but will be defending and indemnifying Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. As of June 30, 2001, the company had been named as a defendant in 608 lawsuits, including the following purported class action: Swartz v. Baxter Healthcare Corporation, et al. Court of Common Pleas, Jefferson County, PA, 656- 1997 C.D. In connection with the spin-off of its cardiovascular business, Baxter obtained a ruling from the Internal Revenue Service to the effect that the distribution should qualify as a tax-free spin-off in the United States. In many countries throughout the world, Baxter has not sought similar rulings from the local tax authorities and has taken the position that the spin-off was a tax-free event to Baxter. In the event that this position was successfully challenged by one or more countries' taxing authorities, Baxter would be liable for any resulting liability. Baxter believes that it has established adequate reserves to cover the expected tax liabilities. There can be no assurance, however, that Baxter will not incur losses in excess of such reserves. 26 Item 4. Submission of Matters to a Vote of Security Holders The company's annual meeting of stockholders was held on May 1, 2001 for the purpose of electing directors, approving an amendment to Baxter's Restated Certificate of Incorporation to increase the number of authorized shares of common stock, approving the incentive compensation program and the appointment of auditors, and voting on the stockholder proposal listed below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitation. Each of management's nominees for directors, as listed in the proxy statement, were elected with the number of votes set forth below.
-------------------------------------------------------------------------------------------------------------------------------- Number of Votes ----------------------------------------------- Abstained/ In Favor Withheld ----------- ---------- Pei-yuan Chia 239,592,165 3,184,493 Arnold J. Levine, Ph.D. 238,559,320 4,217,338 Monroe E. Trout, M.D. 239,520,691 3,255,967 The results of other matters voted upon at the annual meeting are as follows: -------------------------------------------------------------------------------------------------------------------------------- Number of Votes ----------- Broker In Favor Against Abstained Non-Votes ----------- ----------- --------- ---------- The appointment of 231,619,228 10,233,161 924,269 0 PricewaterhouseCoopers LLP as independent accountants for the company in 2001 was approved. The proposal to amend Baxter's 228,479,348 13,142,728 1,154,582 0 Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of common stock was approved. The Baxter International Inc. 211,877,236 29,150,437 1,748,985 0 2001 Incentive Compensation Program was approved. The stockholder proposal relating 125,996,959 76,650,737 4,195,911 35,933,051 to the declassification of the Board of Directors was approved.
27 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto. (b) Reports on Form 8-K A report on Form 8-K was filed on May 1, 2001, under "Item 5 - Other Events," which reported that the shareholders of Baxter International Inc. (Baxter) approved an amendment to Baxter's Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of common stock from 350,000,000 to one billion. A report on Form 8-K was filed on May 22, 2001, under "Item 5 - Other Events," which reported that Baxter had issued $800 million of convertible debentures. A report on Form 8-K was filed on June 27, 2001, under "Item 5 - Other Events," which reported that the number of shares of common stock of Baxter registered by certain registration statements on Forms S-3 are deemed to cover additional shares of common stock issued or issuable to the selling stockholders there under as a result of Baxter's 2 for 1 stock split. 28 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BAXTER INTERNATIONAL INC. ------------------------------------ (Registrant) Date: August 9, 2001 By: /s/ Brian P. Anderson ------------------------------- Brian P. Anderson Senior Vice President and Chief Financial Officer (Chief Accounting Officer) 29 EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION --------------------------------------------------------------------------------
Number Description of Exhibit ------ ---------------------- 10.28 Non-Employee Director Stock Option Plan 12 Computation of Ratio of Earnings to Fixed Charges 15 Letter Re Unaudited Interim Financial Information
(All other exhibits have been omitted because they are not applicable or not required) 30