FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
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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)
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Delaware
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36-0781620 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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One Baxter Parkway, Deerfield, Illinois
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60015-4633 |
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(Address of principal executive offices)
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(Zip Code) |
847-948-2000
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares of the registrants Common Stock, par value $1.00 per share, outstanding as of
July 23, 2009 was 602,710,587 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended June 30, 2009
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
Baxter International Inc.
Condensed Consolidated Statements of Income (unaudited)
(in millions, except per share data)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net sales |
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$ |
3,123 |
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$ |
3,189 |
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$ |
5,947 |
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$ |
6,066 |
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Cost of sales |
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1,485 |
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1,562 |
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2,821 |
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3,059 |
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Gross margin |
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1,638 |
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1,627 |
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3,126 |
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3,007 |
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Marketing and administrative expenses |
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660 |
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703 |
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1,271 |
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1,343 |
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Research and development expenses |
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231 |
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222 |
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443 |
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412 |
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Net interest expense |
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24 |
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25 |
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50 |
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42 |
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Other (income) expense, net |
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(1 |
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1 |
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1 |
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(3 |
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Income before income taxes |
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724 |
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676 |
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1,361 |
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1,213 |
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Income tax expense |
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135 |
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128 |
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254 |
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233 |
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Net income |
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589 |
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548 |
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1,107 |
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980 |
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Less: Noncontrolling interests |
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2 |
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4 |
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4 |
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7 |
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Net income attributable to Baxter
International Inc. (Baxter) |
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$ |
587 |
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$ |
544 |
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$ |
1,103 |
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$ |
973 |
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Net income attributable to Baxter per common share |
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Basic |
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$ |
0.97 |
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$ |
0.87 |
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$ |
1.81 |
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$ |
1.55 |
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Diluted |
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$ |
0.96 |
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$ |
0.85 |
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$ |
1.79 |
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$ |
1.52 |
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Weighted-average number of common shares outstanding |
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Basic |
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607 |
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626 |
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610 |
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629 |
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Diluted |
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612 |
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638 |
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616 |
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641 |
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Cash dividends declared per
common share |
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$ |
0.260 |
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$ |
0.218 |
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$ |
0.520 |
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$ |
0.435 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Baxter International Inc.
Condensed Consolidated Balance Sheets (unaudited)
(in millions, except shares)
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June 30, |
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December 31, |
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2009 |
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2008 |
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Current assets |
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Cash and equivalents |
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$ |
1,802 |
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$ |
2,131 |
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Accounts and other current receivables |
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2,133 |
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1,980 |
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Inventories |
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2,496 |
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2,361 |
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Prepaid expenses and other |
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641 |
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676 |
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Total current assets |
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7,072 |
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7,148 |
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Property, plant and equipment, net |
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4,757 |
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4,609 |
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Other assets |
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Goodwill |
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1,756 |
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1,654 |
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Other intangible assets, net |
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511 |
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390 |
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Other |
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1,647 |
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1,604 |
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Total other assets |
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3,914 |
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3,648 |
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Total assets |
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$ |
15,743 |
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$ |
15,405 |
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Current liabilities |
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Short-term debt |
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$ |
234 |
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$ |
388 |
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Current maturities of long-term debt and lease obligations |
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5 |
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6 |
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Accounts payable and accrued liabilities |
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3,156 |
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3,241 |
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Total current liabilities |
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3,395 |
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3,635 |
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Long-term debt and lease obligations |
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3,593 |
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3,362 |
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Other long-term liabilities |
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1,981 |
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2,117 |
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Commitments and contingencies |
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Equity |
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Common stock, $1 par value, authorized 2,000,000,000 shares,
issued
683,494,944 shares in 2009 and 2008 |
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683 |
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683 |
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Common stock
in treasury, at cost, 80,278,449 shares in 2009 and
67,501,988 shares in 2008 |
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(4,600 |
) |
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(3,897 |
) |
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Additional contributed capital |
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5,641 |
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5,533 |
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Retained earnings |
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6,580 |
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5,795 |
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Accumulated other comprehensive loss |
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(1,752 |
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(1,885 |
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Total Baxter shareholders equity |
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6,552 |
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6,229 |
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Noncontrolling interests |
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222 |
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62 |
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Total equity |
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6,774 |
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6,291 |
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Total liabilities and equity |
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$ |
15,743 |
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$ |
15,405 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Baxter International Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
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Six months ended |
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June 30, |
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2009 |
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2008 |
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Cash flows from operations |
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Net income |
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$ |
1,107 |
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$ |
980 |
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Adjustments |
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Depreciation and amortization |
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302 |
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316 |
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Deferred income taxes |
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135 |
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110 |
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Stock compensation |
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74 |
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73 |
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Realized excess tax benefits from stock issued under employee
benefit plans |
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(81 |
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Infusion pump charge |
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53 |
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Other |
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14 |
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16 |
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Changes in balance sheet items |
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Accounts and other current receivables |
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(58 |
) |
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(93 |
) |
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Inventories |
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(85 |
) |
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(155 |
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Accounts payable and accrued liabilities |
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(264 |
) |
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(254 |
) |
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Restructuring payments |
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(28 |
) |
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(26 |
) |
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Other |
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(68 |
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62 |
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Cash flows from operations |
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1,048 |
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1,082 |
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Cash flows from investing activities |
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Capital expenditures |
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(387 |
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(364 |
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Acquisitions of and investments in businesses and technologies |
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(102 |
) |
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(61 |
) |
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Other |
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(8 |
) |
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42 |
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Cash flows from investing activities |
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(497 |
) |
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(383 |
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Cash flows from financing activities |
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Issuances of debt |
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361 |
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509 |
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Payments of obligations |
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(183 |
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(675 |
) |
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Cash dividends on common stock |
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(318 |
) |
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(275 |
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Proceeds and realized excess tax benefits from stock issued under
employee benefit plans |
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204 |
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245 |
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Purchases of treasury stock |
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(866 |
) |
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(933 |
) |
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Cash flows from financing activities |
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(802 |
) |
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(1,129 |
) |
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Effect of currency exchange rate changes on cash and equivalents |
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(78 |
) |
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38 |
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Decrease in cash and equivalents |
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(329 |
) |
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(392 |
) |
Cash and equivalents at beginning of period |
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2,131 |
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2,539 |
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Cash and equivalents at end of period |
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$ |
1,802 |
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$ |
2,147 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Baxter International Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 companys 2008 Annual Report to Shareholders (2008 Annual
Report).
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.
As of the financial statements issuance date, no events or transactions have occurred subsequent
to the consolidated balance sheet date of June 30, 2009 that required recognition or disclosure.
Adoption of new accounting standards
Refer to Note 4 for disclosures related to the companys adoption of Statement of Financial
Accounting Standards (SFAS) No. 161, Disclosure about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 and Financial Accounting Standards Board (FASB)
Staff Position (FSP) FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments. Refer to Note 2 for disclosures related to the companys adoption of Emerging Issues
Task Force (EITF) Issue No. 07-1, Accounting for Collaborative Arrangements (EITF No. 07-1) and
the companys adoption of FSP FAS No. 140-4 and FIN 46(R)-8, Disclosure by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities as
it relates to the April 2009 arrangement with SIGMA International General Medical Apparatus, LLC
(SIGMA).
SFAS No. 141-R
On January 1, 2009, the company adopted SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141-R). The new standard changes the accounting for business combinations in a number of
significant respects. The key changes include the expansion of transactions that will qualify as
business combinations, the capitalization of in-process research and development (IPR&D) as an
indefinite-lived asset, the recognition of certain acquired contingent assets and liabilities at
fair value, the expensing of acquisition costs, the expensing of costs associated with
restructuring the acquired company, the recognition of contingent consideration at fair value on
the acquisition date, and the recognition of post-acquisition date changes in deferred tax asset
valuation allowances and acquired income tax uncertainties as income tax expense or benefit. The
new standard was applicable for acquisitions made by the company on or after January 1, 2009,
including the April 2009 arrangement with SIGMA. Refer to Note 2 for further information.
SFAS No. 160
On January 1, 2009, the company adopted SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). The new standard changed the
accounting and reporting of noncontrolling interests, which have historically been referred to as
minority interests. SFAS No. 160 requires that noncontrolling interests be presented in the
consolidated balance sheets within equity, but separate from Baxter shareholders equity, and that
the amount of consolidated net income attributable to Baxter and to the noncontrolling interests be
clearly identified and presented in the consolidated statements of income. Any losses in excess of
the noncontrolling interests equity interest continue to be allocated to the noncontrolling
interest. Purchases or sales of equity interests that do not result in a change of control are
accounted for as equity transactions. Upon a loss of control the interest sold, as well as any
interest retained, is measured at fair value, with any gain or loss recognized in earnings. In
partial acquisitions, when control is obtained, 100% of the assets and liabilities, including
goodwill, are recognized at fair value as if the entire target company had been acquired.
The new standard has been applied prospectively as of January 1, 2009, except for the
presentation and disclosure requirements, which have been applied retrospectively for prior periods
presented. Prior to the adoption of SFAS No. 160, the noncontrolling interests share of net
income was included in other (income) expense, net in the
5
consolidated statement of income and the noncontrolling interests equity was included in other
long-term liabilities in the consolidated balance sheet.
Issued but not yet effective accounting standards
FSP FAS No. 132(R)-1
In December 2008, the FASB issued FSP FAS No. 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets. This FSP expands the disclosure requirements relating to
pension and other postretirement benefits to require enhanced disclosures about how investment
allocation decisions are made and the investment policies and strategies that support those
decisions, major categories of plan assets, the input and valuation techniques used in measuring
plan assets at fair value, and significant concentrations of credit risk within plan assets. The
company will include the disclosures required by this standard beginning with its 2009 year-end
consolidated financial statements.
SFAS No. 166
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140 (SFAS No. 166). The standard eliminates the concept of a
qualifying special-purpose entity and clarifies existing GAAP as it relates to determining whether
a transferor has surrendered control over transferred financial assets. SFAS No. 166 limits the
circumstances in which a financial asset, or portion of a financial asset, should be derecognized
when the transferor has not transferred the entire original financial asset to an entity that is
not consolidated with the transferor in the financial statements presented and/or when the
transferor has continuing involvement with the transferred financial asset. The standard also
requires enhanced disclosures about transfers of financial assets and a transferors continuing
involvement with transferred financial assets. SFAS No. 166 is effective for fiscal years, and
interim periods within those fiscal years, beginning after November 15, 2009, with early adoption
prohibited. The new standard will be applied prospectively, except for the disclosure
requirements, which will be applied retrospectively for all periods presented. The company is in
the process of analyzing the impact of this standard, which will be adopted by the company at the
beginning of 2010.
SFAS No. 167
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No.
167), which changes the consolidation model for variable interest entities (VIEs). The standard
requires an enterprise to qualitatively assess the determination of the primary beneficiary of a
VIE as the enterprise that has both the power to direct the activities of the VIE that most
significantly impact the entitys economic performance and has the obligation to absorb losses or
the right to receive benefits from the entity that could potentially be significant to the VIE.
SFAS No. 167 requires ongoing reassessments of whether an enterprise is the primary beneficiary of
a VIE. SFAS No. 167 expands the disclosure requirements for enterprises with a variable interest
in a VIE. SFAS No. 167 is effective for fiscal years, and interim periods within those fiscal
years, beginning after November 15, 2009, with early adoption prohibited. The company is in the
process of analyzing the impact of this standard, which will be adopted by the company at the
beginning of 2010.
Reclassifications
Certain reclassifications have been made to conform the prior periods consolidated financial
statements and notes to the current period presentation, including reclassifications related to the
companys adoption of SFAS No. 160.
6
2. SUPPLEMENTAL FINANCIAL INFORMATION
Net pension and other postemployment benefits expense
The following is a summary of net expense relating to the companys pension and other
postemployment benefit (OPEB) plans.
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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(in millions) |
|
2009 |
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|
2008 |
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2009 |
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|
2008 |
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|
Pension benefits |
|
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|
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|
|
|
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|
Service cost |
|
$ |
22 |
|
|
$ |
22 |
|
|
$ |
43 |
|
|
$ |
43 |
|
Interest cost |
|
|
55 |
|
|
|
51 |
|
|
|
109 |
|
|
|
102 |
|
Expected return on plan assets |
|
|
(63 |
) |
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|
(58 |
) |
|
|
(125 |
) |
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|
(116 |
) |
Amortization of net losses
and other deferred amounts |
|
|
24 |
|
|
|
20 |
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|
|
49 |
|
|
|
40 |
|
|
Net pension plan expense |
|
$ |
38 |
|
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$ |
35 |
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$ |
76 |
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$ |
69 |
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OPEB |
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Service cost |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest cost |
|
|
8 |
|
|
|
7 |
|
|
|
16 |
|
|
|
15 |
|
Amortization of net losses
and other deferred amounts |
|
|
|
|
|
|
|
|
|
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(1 |
) |
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|
|
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Net OPEB plan expense |
|
$ |
9 |
|
|
$ |
8 |
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|
$ |
17 |
|
|
$ |
17 |
|
|
Net interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Interest expense, net of capitalized interest |
|
$ |
29 |
|
|
$ |
39 |
|
|
$ |
60 |
|
|
$ |
76 |
|
Interest income |
|
|
(5 |
) |
|
|
(14 |
) |
|
|
(10 |
) |
|
|
(34 |
) |
|
Net interest expense |
|
$ |
24 |
|
|
$ |
25 |
|
|
$ |
50 |
|
|
$ |
42 |
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Comprehensive income |
|
$ |
819 |
|
|
$ |
590 |
|
|
$ |
1,241 |
|
|
$ |
1,206 |
|
Less: Comprehensive income attributable to
noncontrolling interests |
|
|
7 |
|
|
|
8 |
|
|
|
5 |
|
|
|
4 |
|
|
Comprehensive income attributable to Baxter |
|
$ |
812 |
|
|
$ |
582 |
|
|
$ |
1,236 |
|
|
$ |
1,202 |
|
|
The increase in comprehensive income attributable to Baxter for the three months ended June 30,
2009 was principally due to favorable movements in currency translation adjustments and higher net
income attributable to Baxter. The increase in comprehensive income attributable to Baxter for
the six months ended June 30, 2009 was due to higher net income attributable to Baxter, partially
offset by less favorable movements in currency translation adjustments compared to the first half
of 2008.
Effective tax rate
The companys effective income tax rate was 18.6% and 18.9% in the second quarters of 2009 and
2008, respectively, and 18.7% and 19.2% in the six-month periods ended June 30, 2009 and 2008,
respectively. The decline in the effective tax rates for both the three- and six-month periods
ended June 30, 2009 was the result of favorable earnings mix compared to their respective prior
year periods.
7
Baxter
expects to reduce the gross amount of its liability for uncertain tax
positions within the next 12 months by
approximately $330 million due to the expiration of a loss carryforward, the expiration of certain
statutes of limitations related to tax benefits taken in respect of losses from restructuring
certain international operations, and the settlements of certain multi-jurisdictional transfer
pricing issues. While there continues to be a reasonable possibility that the resolution of these
items will be at amounts other than the amounts of the liabilities, the company also believes the
reserves are adequate.
Earnings per share
The numerator for both basic and diluted earnings per share (EPS) is net income attributable to
Baxter. The denominator for basic EPS is the weighted-average number of common shares outstanding
during the period. The dilutive effect of outstanding employee stock options, performance share
units and restricted stock units is reflected in the denominator for diluted EPS using the treasury
stock method.
The following is a reconciliation of basic shares to diluted shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Basic shares |
|
|
607 |
|
|
|
626 |
|
|
|
610 |
|
|
|
629 |
|
Effect of employee
stock options and
other dilutive
securities |
|
|
5 |
|
|
|
12 |
|
|
|
6 |
|
|
|
12 |
|
|
Diluted shares |
|
|
612 |
|
|
|
638 |
|
|
|
616 |
|
|
|
641 |
|
|
The computation of diluted EPS excludes employee stock options to purchase 23 million and 8 million
shares for the three months ended June 30, 2009 and 2008, respectively, and 17 million and 8
million shares for the six months ended June 30, 2009 and 2008, respectively, because the assumed
proceeds were greater than the average market price of the companys common stock, resulting in an
anti-dilutive effect on diluted EPS.
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
Raw materials |
|
$ |
622 |
|
|
$ |
600 |
|
Work in process |
|
|
795 |
|
|
|
737 |
|
Finished goods |
|
|
1,079 |
|
|
|
1,024 |
|
|
Inventories |
|
$ |
2,496 |
|
|
$ |
2,361 |
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
Property, plant and equipment, at cost |
|
$ |
9,410 |
|
|
$ |
9,021 |
|
Accumulated depreciation and amortization |
|
|
(4,653 |
) |
|
|
(4,412 |
) |
|
Property, plant and equipment, net (PP&E) |
|
$ |
4,757 |
|
|
$ |
4,609 |
|
|
Goodwill
The following is a summary of the activity in goodwill by business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medication |
|
|
|
|
|
|
|
(in millions) |
|
BioScience |
|
|
Delivery |
|
|
Renal |
|
|
Total |
|
|
Balance as of December 31, 2008 |
|
$ |
585 |
|
|
$ |
917 |
|
|
$ |
152 |
|
|
$ |
1,654 |
|
Goodwill acquired during the period |
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
87 |
|
Cumulative translation adjustment |
|
|
2 |
|
|
|
11 |
|
|
|
2 |
|
|
|
15 |
|
|
Balance as of June 30, 2009 |
|
$ |
587 |
|
|
$ |
1,015 |
|
|
$ |
154 |
|
|
$ |
1,756 |
|
|
8
Goodwill acquired during the period related to the consolidation of SIGMA within the Medication
Delivery segment. See Acquisitions of and investments in businesses and technologies below for
further information regarding SIGMA. As of June 30, 2009, the company has recorded no goodwill
impairment losses since its adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
Other intangible assets, net
The following is a summary of the companys intangible assets subject to amortization at June 30,
2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed |
|
|
|
|
|
|
|
|
|
technology, |
|
|
|
|
|
|
|
(in millions) |
|
including patents |
|
|
Other |
|
|
Total |
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross other intangible assets |
|
$ |
894 |
|
|
$ |
98 |
|
|
$ |
992 |
|
Accumulated amortization |
|
|
(458 |
) |
|
|
(54 |
) |
|
|
(512 |
) |
|
Other intangible assets, net |
|
$ |
436 |
|
|
$ |
44 |
|
|
$ |
480 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross other intangible assets |
|
$ |
777 |
|
|
$ |
117 |
|
|
$ |
894 |
|
Accumulated amortization |
|
|
(444 |
) |
|
|
(67 |
) |
|
|
(511 |
) |
|
Other intangible assets, net |
|
$ |
333 |
|
|
$ |
50 |
|
|
$ |
383 |
|
|
The amortization expense for these intangible assets was $16 million and $14 million for the three
months ended June 30, 2009 and 2008, respectively, and $28 million and $27 million for the six
months ended June 30, 2009 and 2008, respectively. The anticipated annual amortization expense for
intangible assets recorded as of June 30, 2009 is $62 million in 2009, $61 million in 2010, $57
million in 2011, $53 million in 2012, $50 million in 2013 and $46 million in 2014. The increase in
gross other intangible assets primarily related to the consolidation of SIGMA. See Acquisitions
of and investments in businesses and technologies below for further information regarding SIGMA.
Collaborative arrangements
On January 1, 2009, the company adopted EITF No. 07-1, which was required to be applied
retrospectively to all periods presented for all collaborative arrangements existing as of the
effective date. The adoption of EITF No. 07-1 did not result in a change to the companys
historical consolidated financial statements.
In the normal course of business, Baxter enters into collaborative arrangements with third parties.
Certain of these collaborative arrangements include joint operating activities involving active
participation by both partners, where both Baxter and the other entity are exposed to risks and
rewards dependent on the commercial success of the activity. These collaborative arrangements
exist in all three of the companys segments, take a number of forms and structures, principally
pertain to the joint development and commercialization of new products, and are designed to enhance
and expedite long-term sales and profitability growth.
The collaborative arrangements can broadly be grouped into two categories: those relating to new
product development, and those relating to existing commercial products.
New Product Development Arrangements
The companys joint new product development and commercialization arrangements generally provide
that Baxter license certain rights to manufacture, market or distribute a specified technology or
product under development. Baxters consideration for the rights generally consists of some
combination of up-front payments, ongoing research and development (R&D) cost reimbursements,
royalties, and contingent payments relating to the achievement of specified pre-clinical, clinical,
regulatory approval or sales milestones. Joint steering committees often exist to manage the
various stages and activities of the arrangement. Control over the R&D activities may be shared or
may be performed by Baxter. Baxter generally controls the commercialization phase, sometimes
purchasing raw materials from the collaboration partner.
During the development phase, Baxters R&D costs are expensed as incurred. These costs may include
R&D cost reimbursements to the partner, as well as up-front and milestone payments to the partner
prior to the date the product
9
receives regulatory approval. Milestone payments made to the partner
subsequent to regulatory approval are capitalized as intangible assets and amortized to cost of
sales over the useful life of the related asset. Royalty payments are expensed as cost of sales
when they become due and payable. Any purchases of raw materials from the partner during the
development stage are expensed as R&D, while such purchases during the commercialization phase are
capitalized as inventory and recognized as cost of sales when the related finished products are
sold. Baxter generally records the amount invoiced to the third-party customer for the finished
product as sales, as Baxter is the principal and primary obligor in the arrangement.
Payments to collaborative partners classified in cost of sales were not significant in the six
months ended June 30, 2009 and 2008. Payments to collaborative partners totaled approximately 6%
of total R&D expense in both the six months ended June 30, 2009 and 2008. The payments principally
related to the development of tissue repair products, longer-acting forms of blood clotting
proteins to treat hemophilia and a next-generation home hemodialysis device.
Commercial Product Arrangements
The companys commercial product collaborative arrangements generally provide for a sharing of
manufacturing, marketing or distribution activities between Baxter and the partner, along with a
sharing of the related profits. The nature and split of the shared activities varies, sometimes
split by type of activity and sometimes split by geographic area.
The entity that invoices the third-party customer is generally the principal and primary obligor in
the arrangement and therefore records the invoiced amount as a sale. Cost-sharing payments are
generally recorded in cost of sales. Baxters payments to partners under these types of
arrangements totaled less than 1% of total cost of sales in both the six months ended June 30, 2009
and 2008.
Acquisitions of and investments in businesses and technologies
SIGMA
In April 2009, the company entered an exclusive three-year distribution agreement with SIGMA
covering the United States and international markets. The agreement, which enables Baxter to
immediately provide SIGMAs Spectrum large volume infusion pumps to customers, as well as future
products under development, complements Baxters infusion systems portfolio and next generation
technologies. The arrangement also included a 40 percent equity stake in SIGMA, and an option to
purchase the remaining equity of SIGMA, exercisable at any time over a three-year term. Baxter
paid $100 million up-front and may make additional payments of up to $130 million for the exercise
of the purchase option as well as for SIGMAs achievement of specified regulatory and commercial
milestones.
Because Baxters option to purchase the remaining equity of SIGMA limits the ability of the
existing equity holders to participate significantly in SIGMAs profits and losses, and because the
existing equity holders have the ability to make decisions about SIGMAs activities that have a
significant effect on SIGMAs success, the company concluded that SIGMA is a VIE. Baxter is the
primary beneficiary of the VIE due to its exposure to the majority of SIGMAs expected losses or expected
residual returns and the relationship between Baxter and SIGMA created by the exclusive
distribution agreement, and the significance of that agreement. Accordingly, the company
consolidated the financial statements of SIGMA beginning in April 2009 (the acquisition date), with
the fair value of the equity owned by the existing SIGMA equity holders reported as noncontrolling
interests. The creditors of SIGMA do not have recourse to the general credit of Baxter.
10
The following table summarizes the preliminary allocation of fair value related to the arrangement
at the acquisition date.
|
|
|
|
|
(in millions) |
|
|
|
|
|
Assets |
|
|
|
|
Goodwill |
|
$ |
87 |
|
IPR&D |
|
|
24 |
|
Other intangible assets |
|
|
94 |
|
Purchase
option (other long-term assets) |
|
|
111 |
|
Other assets |
|
|
30 |
|
|
Liabilities |
|
|
|
|
Contingent payments |
|
$ |
62 |
|
Other liabilities |
|
|
25 |
|
|
Noncontrolling interests |
|
$ |
159 |
|
|
The amount allocated to IPR&D will be accounted for as an indefinite-lived intangible asset until
regulatory approval or discontinuation. The other intangible assets primarily relate to developed
technology and will be amortized on a straight-line basis over an estimated useful life of eight
years. The fair value of the purchase option was estimated using the Black-Scholes model. The
contingent payments of up to $70 million associated with SIGMAs achievement of specified
regulatory and commercial milestones were recorded at their estimated fair value of $62 million.
Future changes in the estimated fair value of the contingent payments will be recognized
immediately in earnings. The results of operations and assets and liabilities of SIGMA are
included in the Medication Delivery segment, and the goodwill is included in this reporting unit.
The goodwill is deductible for tax purposes. The pro forma impact of the arrangement with SIGMA
was not significant to the results of the company for the three and six months ended June 30, 2009
and 2008.
Edwards
Lifesciences Corporation
In
June 2009, the company signed a definitive agreement with Edwards Lifesciences Corporation
(Edwards) for the acquisition of certain assets related to
Edwards hemofiltration product line,
also known as Continuous Renal Replacement Therapy (CRRT). CRRT
mimics the function of the kidneys
24 hours a day for patients with life-threatening kidney injuries or
edema (fluid overload). The
transaction is expected to close in the third quarter of 2009,
pending regulatory approvals. Under
the terms of the agreement, Baxter will provide Edwards an initial
cash payment of approximately
$56 million upon the close of the transaction. Additionally,
Baxter will receive transition
services from Edwards and is expected to pay Edwards up to an
additional $9 million based on
revenue objectives expected to be achieved over the next two years.
This Renal segment transaction
is not expected to have a material impact on Baxters 2009 consolidated financial statements.
3. RESTRUCTURING AND OTHER CHARGES
Baxter has made and continues to make significant investments in assets, including inventory and
PP&E, which relate to potential new products or modifications to existing products. The companys
ability to realize value from these investments is contingent on, among other things, regulatory
approval and market acceptance of these new products. The company may not be able to realize the
expected returns from these investments, potentially resulting in asset impairments in the future.
Restructuring charges
The company recorded restructuring charges of $70 million and $543 million in 2007 and 2004,
respectively. The 2007 charge was principally associated with the consolidation of certain
commercial and manufacturing operations outside of the United States. The 2004 charge was
principally associated with managements decision to implement actions to reduce the companys
overall cost structure and to drive sustainable improvements in financial performance. Refer to
Note 5 to the companys consolidated financial statements in the 2008 Annual Report for additional
information about these charges.
Included in the 2007 and 2004 restructuring charges were $53 million and $347 million of cash
costs, respectively. The following table summarizes the current year cash activity and outstanding
reserves related to the companys 2007 and 2004 restructuring charges.
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee- |
|
|
Contractual |
|
|
|
|
|
|
related |
|
|
and other |
|
|
|
|
(in millions) |
|
costs |
|
|
costs |
|
|
Total |
|
|
Reserves at December 31, 2008 |
|
$ |
25 |
|
|
$ |
14 |
|
|
$ |
39 |
|
Utilization |
|
|
(19 |
) |
|
|
(3 |
) |
|
|
(22 |
) |
|
Reserves at June 30, 2009 |
|
$ |
6 |
|
|
$ |
11 |
|
|
$ |
17 |
|
|
The 2007 and 2004 reserves are expected to be substantially utilized by the end of 2009. The
company believes that the reserves are adequate. However, adjustments may be recorded in the
future as the programs are completed.
Transfusion Therapies
During 2007, the company divested substantially all of the assets and liabilities of its
Transfusion Therapies (TT) business. In connection with the TT divestiture, the company recorded a
$35 million charge principally associated with severance and other employee-related costs. Reserve
utilization through June 30, 2009 was $18 million. The reserve is expected to be substantially
utilized by the end of 2009. The company believes that the reserve is adequate; however,
adjustments may be recorded in the future as the transition is completed. Refer to Note 3 to the
companys consolidated financial statements in the 2008 Annual Report for further information
regarding the TT divestiture.
Other charges
The COLLEAGUE and SYNDEO infusion pump and heparin charges discussed below were classified in cost
of sales in the companys consolidated statements of income, and were included in the Medication
Delivery segments pre-tax income.
With respect to COLLEAGUE, the company remains in active dialogue with the U.S. Food and Drug
Administration (FDA) about various matters, including the companys remediation plan and reviews of
the companys facilities, processes and quality controls by the companys outside expert pursuant
to the requirements of the companys Consent Decree. The outcome of these discussions with the FDA
is uncertain and may impact the nature and timing of the companys actions and decisions with
respect to the COLLEAGUE pump. The companys estimates of the costs related to these matters are
based on the current remediation plan and information currently available. It is possible that
additional charges related to COLLEAGUE may be required in future periods, based on new
information, changes in estimates, and modifications to the current remediation plan as a result of
ongoing dialogue with the FDA.
While the company continues to work to resolve the issues associated with COLLEAGUE infusion pumps
and its heparin products described below, there can be no assurance that additional costs or civil
and criminal penalties will not be incurred, that additional regulatory actions with respect to the
company will not occur, that the company will not face civil claims for damages from purchasers or
users, that substantial additional charges or significant asset impairments may not be required,
that sales of any other product may not be adversely affected, or that additional legislation or
regulation will not be introduced that may adversely affect the companys operations and
consolidated financial statements.
COLLEAGUE and SYNDEO Infusion Pumps
The company began to hold shipments of COLLEAGUE infusion pumps in July 2005 and continues to hold
shipments of new pumps in the United States. Refer to Note 5 to the companys consolidated
financial statements in the 2008 Annual Report for further information on COLLEAGUE and SYNDEO
infusion pumps.
In 2008, the company recorded charges totaling $125 million ($53 million in the first quarter and
$72 million in the third quarter) related to issues associated with its COLLEAGUE infusion pumps.
From 2005 through 2007, the company recorded charges and other costs totaling $185 million related
to its COLLEAGUE and SYNDEO infusion pumps. In aggregate, these charges included $256 million of
cash costs and $54 million principally related to asset impairments. The reserves for cash costs
related to customer accommodations, estimated expenditures for the materials, labor and freight
costs expected to be incurred to remediate the design issues, additional warranty and other
commitments made to customers.
The following table summarizes cash activity in the companys COLLEAGUE and SYNDEO infusion pump
reserves through June 30, 2009.
12
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Charges in 2005 through 2008 |
|
|
|
|
|
$ |
256 |
|
Utilization in 2005 through 2008 |
|
|
|
|
|
|
(141 |
) |
|
Reserves at December 31, 2008 |
|
|
|
|
|
|
115 |
|
Utilization |
|
|
|
|
|
|
(16 |
) |
|
Reserves at June 30, 2009 |
|
|
|
|
|
$ |
99 |
|
|
The remaining infusion pump reserves are expected to be substantially utilized by 2010.
Heparin
In the first quarter of 2008, the company recorded a charge of $19 million related to the companys
recall of its heparin sodium injection products in the United States. During the first quarter of
2008, the company identified an increasing level of allergic-type and hypotensive adverse reactions
occurring in patients using its heparin sodium injection products in the United States and
initiated a field corrective action with respect to these products. The charge principally related
to asset impairments. The reserve established for cash costs has been substantially utilized.
4. DEBT, FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE MEASUREMENTS
Debt
In February 2009, the company issued $350 million of senior unsecured notes, maturing in March 2014
and bearing a 4.0% coupon rate. The net proceeds were used for general corporate purposes,
including the repayment of approximately $160 million of outstanding borrowings related to the
companys Euro-denominated credit facility. There were no borrowings outstanding under the
companys primary revolving or Euro-denominated credit facilities as of June 30, 2009. In
addition, during the first six months of 2009, the company issued and redeemed commercial paper, of
which $200 million was outstanding as of June 30, 2009, with a weighted-average interest rate of
0.34%.
Securitization arrangements
For the three months ended June 30, 2009, the companys securitization arrangements did not result
in any net cash flows. The companys securitization arrangements resulted in net cash inflows of
$6 million for the three months ended June 30, 2008, and net cash outflows of $19 million and $10
million for the six months ended June 30, 2009 and 2008, respectively. A summary of the activity
is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Sold receivables at beginning of period |
|
$ |
127 |
|
|
$ |
129 |
|
|
$ |
154 |
|
|
$ |
129 |
|
Proceeds from sales of receivables |
|
|
129 |
|
|
|
116 |
|
|
|
253 |
|
|
|
220 |
|
Cash collections (remitted to the owners
of the receivables) |
|
|
(129 |
) |
|
|
(110 |
) |
|
|
(272 |
) |
|
|
(230 |
) |
Effect of currency exchange rate changes |
|
|
1 |
|
|
|
(11 |
) |
|
|
(7 |
) |
|
|
5 |
|
|
Sold receivables at end of period |
|
$ |
128 |
|
|
$ |
124 |
|
|
$ |
128 |
|
|
$ |
124 |
|
|
Derivatives 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 foreign exchange and interest rates. The
companys hedging policy attempts to manage these risks to an acceptable level based on the
companys judgment of the appropriate trade-off between risk, opportunity and costs.
The company is primarily exposed to foreign exchange risk with respect to recognized assets and
liabilities, forecasted transactions and net assets denominated in the Euro, Japanese Yen, British
Pound, Australian Dollar, Canadian Dollar and certain Latin American currencies. 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 uses derivative and nonderivative instruments to further reduce
the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses
and gains on the hedged transactions and
13
reduce the earnings and equity volatility resulting from
foreign exchange. The recent financial market and currency volatility may reduce the benefits of
the companys natural hedges and limit the companys ability to cost-effectively hedge these
exposures.
The company is also exposed to the risk that its earnings and cash flows could be adversely
impacted by fluctuations in interest rates. The companys policy is to manage interest costs using
a mix of fixed- and floating-rate debt that the company believes is appropriate. To manage this
mix in a cost-efficient manner, the company periodically enters into interest rate swaps in which
the company agrees to exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated by reference to an agreed-upon notional amount.
The company does not hold any instruments for trading purposes and none of the companys
outstanding derivative instruments contain credit-risk-related contingent features.
All derivative instruments are recognized as either assets or liabilities at fair value in the
consolidated balance sheets and are classified as short-term or long-term based on the scheduled
maturity of the instrument. Based upon the exposure being hedged, the company designates its
hedging instruments as cash flow or fair value hedges.
Cash Flow Hedges
The company uses options, including collars and purchased options, forwards and cross-currency
swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions
denominated in foreign currencies and recognized assets and liabilities. The company periodically
uses forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings
associated with movements in interest rates relating to anticipated issuances of debt. Certain
other firm commitments and forecasted transactions are also periodically hedged. Cash flow hedges
primarily relate to forecasted intercompany sales denominated in foreign currencies, anticipated
issuances of debt and a hedge of U.S. Dollar-denominated debt issued by a foreign subsidiary.
For each derivative instrument that is designated and effective as a cash flow hedge, the gain or
loss on the derivative is accumulated in accumulated other comprehensive income (AOCI), a component
of equity, and then recognized in earnings consistent with the underlying hedged item. Option
premiums or net premiums paid are initially recorded as assets and reclassified to other
comprehensive income (OCI) over the life of the option, and then recognized in earnings consistent
with the underlying hedged item.
The notional amounts of foreign exchange contracts, interest rate contracts and cross-currency
swaps (used to hedge U.S. Dollar-denominated debt issued by a foreign subsidiary) were $1.7
billion, $450 million and $500 million, respectively, as of June 30, 2009.
As of June 30, 2009, $10 million of deferred, net after-tax gains on derivative instruments
included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding
with when the hedged items are expected to impact earnings.
The maximum term over which the company has cash flow hedge contracts in place related to
forecasted transactions at June 30, 2009 is 18 months.
Fair Value Hedges
The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate
debt. These instruments hedge the companys earnings from changes in the fair value of debt due to
fluctuations in the designated benchmark interest rate. For each derivative instrument that is
designated and effective as a fair value hedge, the gain or loss on the derivative is recognized
immediately to earnings, and offsets the gain or loss on the underlying hedged item.
The total notional amount of interest rate contracts designated as fair value hedges was $1.6
billion as of June 30, 2009.
Dedesignations
If it is determined that a derivative or nonderivative hedging instrument is no longer highly
effective as a hedge, the company discontinues hedge accounting prospectively. If the company
removes the cash flow hedge designation because the hedged forecasted transactions are no longer
probable of occurring, any gains or losses are immediately
reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash
flow hedges in which the forecasted transactions are still probable of occurring are deferred and
recognized consistent with the income or loss recognition of the underlying hedged items. If the
company terminates a fair value hedge, an amount equal to
14
the cumulative fair value adjustment to
the hedged items at the date of termination is amortized to earnings over the remaining term of the
hedged item. In the second quarter of 2009, the company terminated $250 million of its interest
rate contracts, resulting in a net gain of $5 million that was deferred in AOCI.
Undesignated Derivative Instruments
The company uses forward contracts to hedge earnings from the effects of foreign exchange relating
to certain of the companys intercompany and third-party receivables and payables denominated in a
foreign currency. These derivative instruments are generally 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) expense, net. Generally, the
terms of these instruments do not exceed one month.
The total notional amount of undesignated derivative instruments was $399 million as of June 30,
2009.
Gains and Losses on Derivative Instruments
The following tables summarize the locations and gains and losses on the companys derivative
instruments for the three and six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss reclassified from |
|
|
|
(Gain) loss recognized in OCI |
|
|
|
|
|
|
AOCI into income |
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of (gain) loss |
|
|
|
(in millions) |
|
June 30, 2009 |
|
|
in income statement |
|
June 30, 2009 |
|
|
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
$ |
(56 |
) |
|
$ |
(76 |
) |
|
Net interest expense |
|
$ |
|
|
|
$ |
1 |
|
Foreign exchange contracts |
|
|
|
|
|
|
1 |
|
|
Net sales |
|
|
(2 |
) |
|
|
(4 |
) |
Foreign exchange contracts |
|
|
30 |
|
|
|
18 |
|
|
Cost of sales |
|
|
(20 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
Other (income) |
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
17 |
|
|
|
19 |
|
|
expense, net |
|
|
15 |
|
|
|
6 |
|
|
Total |
|
$ |
(9 |
) |
|
$ |
(38 |
) |
|
|
|
|
|
$ |
(7 |
) |
|
$ |
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in income |
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
(in millions) |
|
Location of loss in income statement |
|
|
June 30, 2009 |
|
|
Fair value hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
Net interest expense |
|
|
$66 |
|
|
|
$83 |
|
|
Undesignated derivative
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Other (income) expense, net |
|
|
$17 |
|
|
|
$44 |
|
|
For the companys fair value hedges, equal and offsetting gains of $66 million and $83 million
were recognized in net interest expense for the second quarter and first half of 2009,
respectively, as an adjustment to the underlying hedged item, fixed-rate debt.
Ineffectiveness related to the companys cash flow and fair value hedges in the six months ended
June 30, 2009 was not material.
15
Fair
Values of Derivative Instruments
The
following table summarizes the location and fair value amounts of derivative instruments
reported in the consolidated balance sheet as of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in asset positions |
|
|
Derivatives in liability positions |
|
(in millions) |
|
Balance sheet location |
|
Fair value |
|
|
Balance sheet location |
|
Fair value |
|
|
Derivative instruments
designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
Prepaid expenses and other |
|
$ |
28 |
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
Other long-term assets |
|
|
59 |
|
|
Other long-term liabilities |
|
$ |
3 |
|
Foreign exchange contracts |
|
Prepaid expenses and other |
|
|
56 |
|
|
Accounts payable and accrued liabilities |
|
|
5 |
|
Foreign exchange contracts |
|
Other long-term assets |
|
|
8 |
|
|
Other long-term liabilities |
|
|
79 |
|
|
Total derivative
instruments designated as
hedges |
|
|
|
|
|
$ |
151 |
|
|
|
|
|
|
$ |
87 |
|
|
Undesignated derivative
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Prepaid expenses and other |
|
$ |
|
|
|
Accounts payable and accrued liabilities |
|
$ |
|
|
|
Total derivative instruments |
|
|
|
|
|
$ |
151 |
|
|
|
|
|
|
$ |
87 |
|
|
Presentation in the Statement of Cash Flows
Derivatives, including those that are not designated as hedges under GAAP, are principally
classified in the operating section of the consolidated statements of cash flows, in the same
category as the related consolidated balance sheet account. Derivatives that include an
other-than-insignificant financing element at inception are classified in the financing section of
the consolidated statements of cash flows.
Fair
value measurements
The following table summarizes the bases used to measure financial assets and liabilities that are
carried at fair value on a recurring basis in the balance sheet.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement |
|
|
|
|
|
|
|
Quoted prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets for |
|
|
Significant other |
|
|
Significant |
|
|
|
Balance at |
|
|
identical assets |
|
|
observable inputs |
|
|
unobservable inputs |
|
(in millions) |
|
June 30, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
64 |
|
|
|
$ |
|
|
$ |
64 |
|
|
|
$ |
|
Interest rate contracts |
|
|
87 |
|
|
|
|
|
|
|
87 |
|
|
|
|
|
Equity securities |
|
|
16 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
167 |
|
|
|
$16 |
|
|
$ |
151 |
|
|
|
$ |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
84 |
|
|
|
$ |
|
|
$ |
84 |
|
|
|
$ |
|
Interest rate contracts |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
Total liabilities |
|
$ |
87 |
|
|
|
$ |
|
|
$ |
87 |
|
|
|
$ |
|
|
For assets that are measured using quoted prices in active markets, the fair value is the published
market price per unit multiplied by the number of units held, without consideration of transaction
costs. The majority of the derivatives entered into by the company are valued using internal
valuation techniques as no quoted market prices exist for such instruments. The principal
techniques used to value these instruments are discounted cash flow and Black-Scholes models. The
key inputs are considered observable and vary depending on the type of derivative, and include
contractual terms, interest rate yield curves, foreign exchange rates and volatility.
On January 1, 2009, the company completed the adoption of SFAS No. 157, Fair Value Measurements,
as it relates to nonfinancial assets and liabilities that are measured at fair value on a
nonrecurring basis. There were no adjustments in the first six months of 2009 for nonfinancial
assets or liabilities that are measured at fair value on a nonrecurring basis.
16
Book Values and Fair Values of Financial Instruments
In addition to the financial instruments that the company is required to recognize at fair value on
the consolidated balance sheets, the company has certain financial instruments that are recognized
at historical cost or some basis other than fair value. For these financial instruments, the
following table provides the value recognized on the consolidated balance sheets and the
approximate fair value as of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
(in millions) |
|
Book value |
|
|
fair value |
|
|
Assets |
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
34 |
|
|
$ |
34 |
|
Long-term insurance receivables |
|
|
67 |
|
|
|
63 |
|
Cost basis investments |
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
234 |
|
|
$ |
234 |
|
Current maturities of long-term debt and lease obligations |
|
|
5 |
|
|
|
5 |
|
Other long-term debt and lease obligations |
|
|
3,593 |
|
|
|
3,678 |
|
Long-term litigation liabilities |
|
|
61 |
|
|
|
58 |
|
|
The estimated fair values of insurance receivables and long-term litigation liabilities were
computed by discounting the expected cash flows based on currently available information, which in
many cases does not include final orders or settlement agreements. The discount factors used in
the calculations reflect the non-performance risk of the insurance providers and the company,
respectively. The estimated fair values of current and long-term debt and lease obligations were
computed by multiplying price by the notional amount of the respective debt instrument. Price is
calculated using the stated terms of the respective debt instrument and yield curves commensurate
with the companys credit risk. The carrying values of the other financial instruments approximate
their fair values due to the short-term maturities of most of these assets and liabilities.
5. COMMON STOCK
Stock-based
compensation plans
Stock compensation expense totaled $36 million and $35 million for the three months ended June 30,
2009 and 2008, respectively, and $74 million and $73 million for the six months ended June 30, 2009
and 2008, respectively. Approximately three-quarters of stock compensation expense is classified
in marketing and administrative expenses, with the remainder classified in cost of sales and R&D
expenses.
In March 2009, the company awarded its annual stock compensation grants, which consisted of
approximately 6.7 million stock options and 580,000 performance share units (PSUs). Stock
compensation grants made in the second quarter of 2009 were not material.
Stock
Options
The
weighted-average assumptions used in estimating the fair value of stock options granted during
the period, along with the weighted-average grant date fair values, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Expected volatility |
|
|
30% |
|
|
|
24% |
|
Expected life (in years) |
|
|
4.5 |
|
|
|
4.5 |
|
Risk-free interest rate |
|
|
1.8% |
|
|
|
2.4% |
|
Dividend yield |
|
|
2.0% |
|
|
|
1.5% |
|
Fair value per stock option |
|
|
$12 |
|
|
|
$12 |
|
|
The total intrinsic value of stock options exercised was $16 million and $71 million during the
three months ended June 30, 2009 and 2008, respectively, and $45 million and $132 million during
the six months ended June 30, 2009 and 2008, respectively.
17
As of June 30, 2009, $119 million of unrecognized compensation cost related to all unvested stock
options is expected to be recognized as expense over a weighted-average period of 2.1 years.
Performance Share and Restricted Stock Units
The assumptions used in estimating the fair value of PSUs granted during the period, along with the
fair values, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Baxter volatility |
|
|
25% |
|
|
|
20% |
|
Peer group volatility |
|
|
20% - 59% |
|
|
|
12% - 37% |
|
Correlation of returns |
|
|
0.30 - 0.61 |
|
|
|
0.12 - 0.40 |
|
Risk-free interest rate |
|
|
1.6% |
|
|
|
1.9% |
|
Fair value per PSU |
|
|
$65 |
|
|
|
$64 |
|
|
As of June 30, 2009, unrecognized compensation cost related to all unvested PSUs of $53 million is
expected to be recognized as expense over a weighted-average period of 1.9 years, and unrecognized
compensation cost related to all unvested restricted stock units of $11 million is expected to be
recognized as expense over a weighted-average period of 1.7 years.
Stock repurchases
As authorized by the board of directors, from time to time the company repurchases its stock
depending upon the companys cash flows, net debt level and current market conditions. During the
three- and six-month periods ended June 30, 2009, the company repurchased 6.1 million shares and
16.2 million shares for $300 million and $866 million, respectively, under the board of directors
March 2008 $2.0 billion share repurchase authorization. At June 30, 2009, $300 million remained
available under this authorization.
6. LEGAL PROCEEDINGS
Baxter is involved in product liability, patent, commercial, and other legal proceedings that arise
in the normal course of the companys business. The company records a liability when a loss is
considered probable and the amount can be reasonably estimated. If the reasonable estimate of a
probable loss is a range, and no amount within the range is a better estimate, the minimum amount
in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably
estimated, no liability is recorded.
Baxter has established reserves for certain of the matters discussed below. The company is not
able to estimate the amount or range of any loss for certain of the legal contingencies for which
there is no reserve or additional loss for matters already reserved. While the liability of the
company in connection with the claims cannot be estimated with any certainty and although the
resolution in any reporting period of one or more of these matters could have a significant impact
on the companys results of operations for that period, the outcome of these legal proceedings is
not expected to have a material adverse effect on the companys consolidated financial position.
While the company believes that it has valid defenses in these matters, litigation is inherently
uncertain, excessive verdicts do occur, and the company may in the future incur material judgments
or enter into material settlements of claims.
In addition to the matters described below, the company remains subject to other potential
administrative and legal actions. With respect to regulatory matters, these actions may lead to
product recalls, injunctions to halt manufacture and distribution, and other restrictions on the
companys operations and monetary sanctions. With respect to intellectual property, the company
may be exposed to significant litigation concerning the scope of the companys and others rights.
Such litigation could result in a loss of patent protection or the ability to market products,
which could lead to a significant loss of sales, or otherwise materially affect future results of
operations.
18
Patent litigation
Sevoflurane Litigation
In September 2005, the U.S.D.C. for the Northern District of Illinois ruled that a patent owned by
Abbott Laboratories and the Central Glass Company, U.S. Patent No. 5,990,176, was not infringed by
Baxters generic version of sevoflurane. Abbott and Central Glass appealed and Baxter filed a
cross-appeal as to the validity of the patent. In November 2006, the Court of Appeals for the
Federal Circuit granted Baxters cross-appeal and held the patent invalid. Abbotts motions to have
that appeal re-heard were denied in January 2007.
In June 2005, Baxter filed suit in the High Court of Justice in London, England seeking revocation
of the U.K. part of the related European patent and a declaration of non-infringement. In March
2007, the High Court ruled in Baxters favor, concluding that the U.K. portion of the European
patent was invalid. In December 2008, the Board of Appeals for the European Patent Office
similarly revoked this European patent in its entirety.
In May 2005, Abbott and Central Glass filed suit in the Tokyo District Court on a counterpart
Japanese patent and in September 2006, the Tokyo District Court ruled in favor of Abbott and
Central Glass on this matter. Baxter appealed this decision, and in April 2009 the appellate court
reversed the District Court, lifting the injunction against Baxters sales of sevoflurane in Japan.
Related actions remain pending in the U.S. and Colombia. Another patent infringement action against
Baxter is pending in the U.S.D.C. for the Northern District of Illinois on a second patent owned by
Abbott and Central Glass. Baxter has filed a motion asserting that judgment of non-infringement and
invalidity should be entered based in part on findings made in the earlier case. In 2007, Abbott
brought a patent infringement action against Baxter in the Cali Circuit Court of Colombia based on
a Colombian counterpart patent, and obtained an injunction preliminarily prohibiting the approval
of Baxters generic sevoflurane in Colombia during the pendency of the infringement suit. In May
2008, the Court issued a decision maintaining the injunction, but suspending it during an appeal of
the Courts decision, which appeal is pending.
Peritoneal Dialysis Litigation
On October 16, 2006, Baxter Healthcare Corporation, a direct wholly-owned subsidiary of Baxter, and
DEKA Products Limited Partnership (DEKA) filed a patent infringement lawsuit against Fresenius
Medical Care Holdings, Inc. and Fresenius USA, Inc. The complaint alleges that Fresenius sale of
the Liberty Cycler peritoneal dialysis systems and related disposable items and equipment infringes
nine U.S. patents, which are owned by Baxter or exclusively licensed in the peritoneal dialysis
field to Baxter from DEKA. The case is pending in the U.S.D.C. for the Northern District of
California with a trial anticipated in mid-2010.
Hemodialysis Litigation
Since April 2003, Baxter has been pursuing a patent infringement action against Fresenius Medical
Care Holdings, Inc. for infringement of certain Baxter patents. The patents cover Fresenius 2008K
hemodialysis instrument. In 2007, the court entered judgment in Baxters favor holding the patents
valid and infringed, and a jury assessed damages at $14 million for past sales only. On April 4,
2008, the U.S.D.C. for the Northern District of California granted Baxters motion for permanent
injunction, granted Baxters request for royalties on Fresenius sales of the 2008K hemodialysis
machines during a nine-month transition period before the permanent injunction took effect, and
granted a royalty on disposables. Fresenius has appealed and a decision is expected later in the
year.
Other
In October 2004, a purported class action was filed in the U.S.D.C. for the Northern District of
Illinois against Baxter and its current Chief Executive Officer and then current Chief Financial
Officer and their predecessors for alleged violations of the Employee Retirement Income Security
Act of 1974, as amended. Plaintiff alleges that these defendants, along with the Administrative
and Investment Committees of the companys 401(k) plans, breached their fiduciary duties to the
plan participants by offering Baxter common stock as an investment option in each of the plans
during the period of January 2001 to October 2004. In March 2006, the trial court certified a
class of plan participants who elected to acquire Baxter common stock through the plans between
January 2001 and the present. In April 2008, the Court of Appeals for the Seventh Circuit denied
Baxters interlocutory appeal and upheld the trial courts denial of Baxters motion to dismiss.
Baxter has filed a motion for judgment on the pleadings. Fact discovery has been completed in this
matter and expert discovery is proceeding.
19
On October 12, 2005 the United States filed a complaint in the U.S.D.C. for the Northern District
of Illinois to effect the seizure of COLLEAGUE and SYNDEO pumps that were on hold in Northern
Illinois. Customer-owned pumps were not affected. On June 29, 2006, Baxter Healthcare
Corporation, a direct wholly-owned subsidiary of Baxter, entered into a Consent Decree for
Condemnation and Permanent Injunction with the United States to resolve this seizure litigation.
The Consent Decree also outlines the steps the company must take to resume sales of new pumps in
the United States. Additional third party claims may be filed in connection with the COLLEAGUE
matter.
On July 15, 2009, a hospital customer filed suit in the U.S.D.C. for the Eastern District of
Pennsylvania alleging that Baxter and a competitor conspired to restrict output and artificially
increase the price of plasma-derived therapies since late 2004. The complaint attempts to state a
claim for class action relief and demands treble damages.
In connection with the recall of heparin products in the United States described in Note 3,
approximately 165 lawsuits, some of which are purported class actions, have been filed alleging
that plaintiffs suffered various reactions to a heparin contaminant, in some cases resulting in
fatalities. In June 2008, a number of these federal cases were consolidated in the U.S.D.C. for
the Northern District of Ohio for pretrial case management under the Multi District Litigation
rules. In September 2008, a number of state court cases were consolidated in Cook County, Illinois
for pretrial case management. Discovery is ongoing and a trial date is scheduled for October 2010.
The company is a defendant, along with others, in over 50 lawsuits brought in various state and
U.S. federal courts, which allege that Baxter and other defendants reported artificially inflated
average wholesale prices for Medicare and Medicaid eligible drugs. These cases have been brought
by private parties on behalf of various purported classes of purchasers of Medicare and Medicaid
eligible drugs, as well as by state attorneys general. A number of these cases were consolidated
in the U.S.D.C. for the District of Massachusetts for pretrial case management under Multi District
Litigation rules. In April 2008, the court preliminarily approved a class settlement resolving
Medicare Part B claims and independent health plan claims against Baxter and others, which had
previously been reserved for by the company. Final approval of this settlement is expected later
in 2009. Remaining lawsuits against Baxter include a number of cases brought by state attorneys
general and New York entities, which seek unspecified damages, injunctive relief, civil penalties,
disgorgement, forfeiture and restitution. 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. These investigations may result in additional cases being
filed by various state attorneys general.
Baxter currently is a defendant in a number of lawsuits and subject to additional claims brought by
individuals who have hemophilia and their families, 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 and other acquired entities from the late 1970s to the
mid-1980s. The typical case or claim alleges that the individual was infected with the HIV or HCV
virus by factor concentrates that contained one or both viruses. None of these cases involves
factor concentrates currently processed by the company.
7. SEGMENT INFORMATION
Baxter operates in three segments, each of which is a strategic business that is managed separately
because each business develops, manufactures and markets distinct products and services. The
segments and a description of their products and services are as follows:
The BioScience business manufactures recombinant and plasma-based proteins to treat hemophilia and
other bleeding disorders; plasma-based therapies to treat immune deficiencies, alpha 1-antitrypsin
deficiency, burns and shock, and other chronic and acute blood-related conditions; products for
regenerative medicine, such as biosurgery products and technologies used in adult stem-cell
therapies; and vaccines.
The Medication Delivery business manufactures intravenous (IV) solutions and administration sets,
premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs,
IV nutrition products, infusion pumps, and inhalation anesthetics, as well as products and services
related to pharmacy compounding and pharmaceutical partnering, drug formulation and packaging
technologies.
The Renal business provides products to treat end-stage renal disease, or irreversible kidney
failure. The business manufactures solutions and other products for peritoneal dialysis, a
home-based therapy, and also distributes products for hemodialysis, which is generally conducted in
a hospital or clinic.
20
The company uses more than one measurement and multiple views of data to measure segment
performance and to allocate resources to the segments. However, the dominant measurements are
consistent with the companys consolidated financial statements and, accordingly, are reported on
the same basis herein. The company evaluates the performance of its segments and allocates
resources to them primarily based on pre-tax income along with cash flows and overall economic
returns. Intersegment sales are generally accounted for at amounts comparable to sales to
unaffiliated customers and are eliminated in consolidation.
Certain items are maintained at the corporate level (corporate) and are not allocated to the
segments. They primarily include most of the companys debt and cash and equivalents and related
net interest expense, certain foreign exchange fluctuations (principally relating to intercompany
receivables, payables and loans denominated in a foreign currency) and the majority of the foreign
currency and interest rate hedging activities, corporate headquarters costs, stock compensation
expense, certain non-strategic investments and related income and expense, certain employee benefit
plan costs, certain nonrecurring gains and losses, deferred income taxes, certain litigation
liabilities and related insurance receivables, and the revenues and costs related to the
manufacturing, distribution and other transition agreements with Fenwal Inc. (Fenwal) in connection
with the divestiture of the TT business.
Included in the Medication Delivery segments pre-tax income in the first half of 2008 were first
quarter charges of $53 million related to COLLEAGUE infusion pumps and $19 million related to the
companys recall of its heparin sodium injection products in the United States. Refer to Note 3
for further information on these charges.
Financial information for the companys segments for the three and six months ended June 30 is
as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioScience |
|
$ |
1,418 |
|
|
$ |
1,385 |
|
|
$ |
2,670 |
|
|
$ |
2,595 |
|
Medication Delivery |
|
|
1,134 |
|
|
|
1,164 |
|
|
|
2,169 |
|
|
|
2,229 |
|
Renal |
|
|
550 |
|
|
|
598 |
|
|
|
1,065 |
|
|
|
1,156 |
|
Transition services to Fenwal |
|
|
21 |
|
|
|
42 |
|
|
|
43 |
|
|
|
86 |
|
|
Total |
|
$ |
3,123 |
|
|
$ |
3,189 |
|
|
$ |
5,947 |
|
|
$ |
6,066 |
|
|
Pre-tax income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioScience |
|
$ |
565 |
|
|
$ |
565 |
|
|
$ |
1,074 |
|
|
$ |
1,065 |
|
Medication Delivery |
|
|
207 |
|
|
|
209 |
|
|
|
375 |
|
|
|
303 |
|
Renal |
|
|
77 |
|
|
|
86 |
|
|
|
127 |
|
|
|
164 |
|
|
Total pre-tax income from segments |
|
$ |
849 |
|
|
$ |
860 |
|
|
$ |
1,576 |
|
|
$ |
1,532 |
|
|
Transition services to Fenwal represent revenues associated with manufacturing, distribution and
other services provided by the company to Fenwal subsequent to the divestiture of the TT business
in 2007. Refer to Note 3 to the companys consolidated financial statements in the 2008 Annual
Report for further information regarding the TT divestiture.
|
The following is a reconciliation of segment pre-tax income to income before income taxes per the
consolidated income statements.
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Total pre-tax income from segments |
|
|
$849 |
|
|
|
$ 860 |
|
|
$ |
1,576 |
|
|
$ |
1,532 |
|
Unallocated amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
(24 |
) |
|
|
(25 |
) |
|
|
(50 |
) |
|
|
(42 |
) |
Certain foreign currency
fluctuations and hedging activities |
|
|
34 |
|
|
|
9 |
|
|
|
76 |
|
|
|
10 |
|
Stock compensation |
|
|
(36 |
) |
|
|
(35 |
) |
|
|
(74 |
) |
|
|
(73 |
) |
Other corporate items |
|
|
(99 |
) |
|
|
(133 |
) |
|
|
(167 |
) |
|
|
(214 |
) |
|
Income before income taxes |
|
|
$724 |
|
|
|
$ 676 |
|
|
$ |
1,361 |
|
|
$ |
1,213 |
|
|
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Refer to the companys 2008 Annual Report to Shareholders (2008 Annual Report) for managements
discussion and analysis of the financial condition and results of operations of the company for the
year ended December 31, 2008. The following is managements discussion and analysis of the
financial condition and results of operations of the company for the three and six months ended
June 30, 2009.
RESULTS OF OPERATIONS
NET SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
June 30, |
|
|
Percent |
|
|
June 30, |
|
|
Percent |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
change |
|
|
2009 |
|
|
2008 |
|
|
change |
|
|
BioScience |
|
$ |
1,418 |
|
|
$ |
1,385 |
|
|
|
2% |
|
|
$ |
2,670 |
|
|
$ |
2,595 |
|
|
|
3% |
|
Medication Delivery |
|
|
1,134 |
|
|
|
1,164 |
|
|
|
(3% |
) |
|
|
2,169 |
|
|
|
2,229 |
|
|
|
(3% |
) |
Renal |
|
|
550 |
|
|
|
598 |
|
|
|
(8% |
) |
|
|
1,065 |
|
|
|
1,156 |
|
|
|
(8% |
) |
Transition
services to Fenwal Inc. |
|
|
21 |
|
|
|
42 |
|
|
|
(50% |
) |
|
|
43 |
|
|
|
86 |
|
|
|
(50% |
) |
|
Total net sales |
|
$ |
3,123 |
|
|
$ |
3,189 |
|
|
|
(2% |
) |
|
$ |
5,947 |
|
|
$ |
6,066 |
|
|
|
(2% |
) |
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
June 30, |
|
|
Percent |
|
|
June 30, |
|
|
Percent |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
change |
|
|
2009 |
|
|
2008 |
|
|
change |
|
|
International |
|
$ |
1,798 |
|
|
$ |
1,948 |
|
|
|
(8% |
) |
|
$ |
3,381 |
|
|
$ |
3,646 |
|
|
|
(7% |
) |
United States |
|
|
1,325 |
|
|
|
1,241 |
|
|
|
7% |
|
|
|
2,566 |
|
|
|
2,420 |
|
|
|
6% |
|
|
Total net sales |
|
$ |
3,123 |
|
|
$ |
3,189 |
|
|
|
(2% |
) |
|
$ |
5,947 |
|
|
$ |
6,066 |
|
|
|
(2% |
) |
|
Foreign currency unfavorably impacted net sales by 10 and 9 percentage points in the three- and
six-month periods ended June 30, 2009, respectively, principally due to the strengthening of the
U.S. Dollar relative to other currencies, including the Euro and the British Pound in both periods.
|
BioScience
|
The following is a summary of sales by product category in the BioScience segment.
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
June 30, |
|
|
Percent |
|
|
June 30, |
|
|
Percent |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
change |
|
|
2009 |
|
|
2008 |
|
|
change |
|
|
Recombinants |
|
$ |
515 |
|
|
$ |
508 |
|
|
|
1% |
|
|
$ |
966 |
|
|
$ |
944 |
|
|
|
2% |
|
Plasma Proteins |
|
|
353 |
|
|
|
291 |
|
|
|
21% |
|
|
|
627 |
|
|
|
551 |
|
|
|
14% |
|
Antibody Therapy |
|
|
344 |
|
|
|
315 |
|
|
|
9% |
|
|
|
681 |
|
|
|
601 |
|
|
|
13% |
|
Regenerative Medicine |
|
|
109 |
|
|
|
109 |
|
|
|
|
|
|
|
208 |
|
|
|
203 |
|
|
|
2% |
|
Other |
|
|
97 |
|
|
|
162 |
|
|
|
(40% |
) |
|
|
188 |
|
|
|
296 |
|
|
|
(36% |
) |
|
Total net sales |
|
$ |
1,418 |
|
|
$ |
1,385 |
|
|
|
2% |
|
|
$ |
2,670 |
|
|
$ |
2,595 |
|
|
|
3% |
|
|
Net sales in the BioScience segment increased 2% and 3% during the three- and six-month periods
ended June 30, 2009 (including an 11 and 9 percentage point unfavorable foreign currency impact in
the three- and six-month periods ended June 30, 2009, respectively). Excluding the impact of
foreign currency, net sales increased in both the second quarter and first half of 2009 driven by
increased demand across the majority of the product categories and improved pricing for select
products. Sales growth was the result of increased demand for ADVATE [Antihemophilic Factor
(Recombinant), Plasma/Albumin-Free Method] in the Recombinants product category, while increased
demand for albumin, FEIBA (an anti-inhibitor coagulant complex), plasma-derived factor VIII and
ARALAST [alpha 1-proteinase inhibitor (human)], as well as improved pricing for various
plasma-derived products, drove sales growth in the Plasma Proteins product category. Also
contributing to sales growth were increased
22
demand and improved pricing for GAMMAGARD LIQUID, the liquid formulation of the
antibody-replacement therapy IGIV (immune globulin intravenous), in the Antibody Therapies product
category; increased demand for FLOSEAL, a fibrin sealant product in the Regenerative Medicine
product category; and, in the Other product category, increased sales of NEISVAC-C (for the
prevention of meningitis C) and increased revenue related to advanced purchase agreements for
pandemic vaccines. Partially offsetting this sales growth were lower sales of FSME-IMMUN (a
tick-borne encephalitis vaccine) in Europe, primarily in Germany, as a result of seasonal factors,
lower market demand and increased competition.
Medication Delivery
The following is a summary of sales by product category in the Medication Delivery segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
June 30, |
|
|
Percent |
|
|
June 30, |
|
|
Percent |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
change |
|
|
2009 |
|
|
2008 |
|
|
change |
|
|
IV Therapies |
|
$ |
384 |
|
|
$ |
408 |
|
|
|
(6% |
) |
|
$ |
728 |
|
|
$ |
779 |
|
|
|
(7% |
) |
Global Injectables |
|
|
418 |
|
|
|
393 |
|
|
|
6% |
|
|
|
789 |
|
|
|
761 |
|
|
|
4% |
|
Infusion Systems |
|
|
205 |
|
|
|
229 |
|
|
|
(10% |
) |
|
|
404 |
|
|
|
449 |
|
|
|
(10% |
) |
Anesthesia |
|
|
120 |
|
|
|
122 |
|
|
|
(2% |
) |
|
|
229 |
|
|
|
221 |
|
|
|
4% |
|
Other |
|
|
7 |
|
|
|
12 |
|
|
|
(42% |
) |
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
Total net sales |
|
$ |
1,134 |
|
|
$ |
1,164 |
|
|
|
(3% |
) |
|
$ |
2,169 |
|
|
$ |
2,229 |
|
|
|
(3% |
) |
|
Net sales in the Medication Delivery segment decreased 3% during the three- and six-month periods
ended June 30, 2009 (including an 11 and 10 percentage point unfavorable foreign currency impact in
the three- and six-month periods ended June 30, 2009, respectively). Excluding the impact of
foreign currency, net sales increased in both periods as a result of increased demand and improved
pricing for intravenous (IV) solutions and nutritional products in the IV Therapies product
category; strong sales of multi-source generics and growth in the companys international pharmacy
compounding and U.S. pharmaceutical partnering businesses in the Global Injectables product
category; and growth in anesthesia products driven by increased sales of sevoflurane and SUPRANE
(desflurane) in the first half of 2009. Partially offsetting this sales growth in both periods was
a decline in Infusion Systems sales due to lower revenues from access sets, disposable tubing used
with infusion pumps for the administration of IV solutions.
|
Renal
|
The following is a summary of sales by product category in the Renal segment.
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
June 30, |
|
|
Percent |
|
|
June 30, |
|
|
Percent |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
change |
|
|
2009 |
|
|
2008 |
|
|
change |
|
|
PD Therapy |
|
|
$454 |
|
|
|
$479 |
|
|
|
(5% |
) |
|
$ |
874 |
|
|
$ |
924 |
|
|
|
(5% |
) |
HD Therapy |
|
|
96 |
|
|
|
119 |
|
|
|
(19% |
) |
|
|
191 |
|
|
|
232 |
|
|
|
(18% |
) |
|
Total net sales |
|
|
$550 |
|
|
|
$598 |
|
|
|
(8% |
) |
|
$ |
1,065 |
|
|
$ |
1,156 |
|
|
|
(8% |
) |
|
Net sales in the Renal segment decreased 8% during the three- and six-month periods ended June 30,
2009 (including a 12 and 10 percentage point unfavorable foreign currency impact in the three- and
six-month periods ended June 30, 2009, respectively). Excluding the impact of foreign currency,
net sales in both periods grew due to gains in the number of peritoneal dialysis (PD) patients,
especially in Asia (particularly in China), Latin America and Eastern Europe. Penetration of PD
Therapy products continues to be strong in emerging markets where many people with end-stage renal
disease are currently under-treated. Partially offsetting the growth in PD Therapy product line
sales was a decline in Hemodialysis (HD) Therapy sales, primarily as a result of lower sales
volumes of saline in the United States.
23
Transition Services to Fenwal Inc.
Net sales in this category represents revenues associated with manufacturing, distribution and
other services provided by the company to Fenwal Inc. (Fenwal) subsequent to the divestiture of the
Transfusion Therapies (TT) business in 2007. Refer to Note 3 to the companys consolidated
financial statements in the 2008 Annual Report for additional information regarding the TT
divestiture.
GROSS MARGIN AND EXPENSE RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
June 30, |
|
|
|
|
(as a percentage of net sales) |
|
2009 |
|
|
2008 |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Gross margin |
|
|
52.4% |
|
|
|
51.0% |
|
|
1.4 pts |
|
|
|
52.6% |
|
|
|
49.6% |
|
|
3.0 pts |
|
Marketing and administrative
expenses |
|
|
21.1% |
|
|
|
22.0% |
|
|
(0.9 pts |
) |
|
|
21.4% |
|
|
|
22.1% |
|
|
(0.7 pts |
) |
|
Gross Margin
|
The improvement in the gross margin in the second quarter and first half of 2009 was principally
driven by an improvement in sales mix, pricing and manufacturing cost improvements, partially
offset by the unfavorable impact of lower FSME-IMMUN vaccine revenues. Foreign currency
unfavorably impacted gross margin in the second quarter but had a modestly favorable impact for the
first half of 2009.
|
Included in the companys gross margin in the first half of 2008 were first quarter charges of $53
million related to COLLEAGUE infusion pumps and $19 million related to the companys recall of its
heparin sodium injection products in the United States. These charges decreased the gross margin
in the first half of 2008 by 1.2 percentage points. Refer to Note 3 for further information on the
COLLEAGUE and heparin charges.
|
Marketing and Administrative Expenses
|
The marketing and administrative expense ratio for the second quarter and first half of 2009
decreased compared to 2008 as the company benefited from stronger cost controls, partially offset
by investments in sales and promotional activities and the impact of foreign currency.
|
RESEARCH AND DEVELOPMENT
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
June 30, |
|
|
Percent |
|
|
June 30, |
|
|
Percent |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
change |
|
|
2009 |
|
|
2008 |
|
|
change |
|
|
Research and development expenses |
|
|
$231 |
|
|
|
$222 |
|
|
|
4% |
|
|
|
$443 |
|
|
|
$412 |
|
|
|
8% |
|
As a percentage of net sales |
|
|
7.4% |
|
|
|
7.0% |
|
|
|
|
|
|
|
7.4% |
|
|
|
6.8% |
|
|
|
|
|
|
Research and development (R&D) expenses increased during the second quarter and first half of 2009
as the company continued to advance and expand its product pipeline across its business portfolio.
The companys investment in R&D in the first half of 2009 principally related to the development of
home HD therapy; increased spending on clinical trials for the evaluation of GAMMAGARD LIQUID for
additional indications; and investments in recombinant proteins, vaccines, formulation and delivery
technologies, and new therapies to broaden the companys regenerative medicine portfolio.
Partially offsetting the increase in R&D spending was the impact of foreign currency in both
periods. Refer to the 2008 Annual Report for a discussion of the companys R&D pipeline.
NET INTEREST EXPENSE
Net interest expense was $24 million and $25 million in the second quarters of 2009 and 2008,
respectively, and $50 million and $42 million for the six months ended June 30, 2009 and 2008,
respectively. The increase in the first half of 2009 was driven by a reduction in interest income,
partially offset by lower gross interest expense.
OTHER (INCOME) EXPENSE, NET
Other (income) expense, net was $1 million of income and $1 million of expense during the second
quarters of 2009 and 2008, respectively, and $1 million of expense and $3 million of income during
the first half of 2009 and 2008,
24
respectively. Included in both periods were amounts related to foreign currency fluctuations,
principally relating to intercompany receivables, payables and loans denominated in foreign
currencies. The first half of 2008 included $16 million of income related to the finalization of
the net assets transferred in the divestiture of the TT business. Refer to Note 3 to the companys
consolidated financial statements in the 2008 Annual Report for further information regarding the
TT divestiture.
PRE-TAX INCOME
Refer to Note 7 for a summary of financial results by segment. The following is a summary of
significant factors impacting the segments financial results.
BioScience
Pre-tax income was flat and increased 1% for the three- and six-month periods ended June 30, 2009,
respectively. Continued gross margin expansion was driven by strong sales of higher-margin
products, fueled by the continued customer adoption of ADVATE and GAMMAGARD LIQUID, increased
demand and improved pricing of certain plasma protein products, and continued manufacturing cost
improvements. Offsetting this growth was the unfavorable impact of foreign currency, increased R&D
spending and lower sales of FSME-IMMUN vaccine for the three and six-month periods ended June 30,
2009.
Medication Delivery
Pre-tax income decreased 1% for the three-month period ended June 30, 2009 and increased 24% for
the six-month period ended June 30, 2009. Gross margin improvements resulting from favorable
product mix, were offset by the unfavorable impact of foreign currency for the three- and six-month
periods ended June 30, 2009. The pre-tax income for the six months ended June 30, 2008 included
first quarter charges of $53 million related to COLLEAGUE infusion pumps and $19 million related to
the companys recall of its heparin sodium injection products in the United States. See Note 3 for
further information about the COLLEAGUE and heparin charges.
Renal
Pre-tax income decreased 10% and 23% for the three- and six-month periods ended June 30, 2009,
respectively. The gross margin impact from continued gains in PD
Therapy patients was more than
offset by lower saline revenues, increased R&D costs primarily related to the development of home
HD therapy, and an unfavorable impact from foreign currency for the three- and six-month periods
ended June 30, 2009.
Other
Certain items are maintained at the companys corporate level and are not allocated to the
segments. These items primarily include net interest expense, certain foreign currency
fluctuations (principally relating to intercompany receivables, payables and loans denominated in a
foreign currency) and the majority of the foreign currency and interest rate hedging activities,
corporate headquarters costs, stock compensation expense, income and expense related to certain
non-strategic investments, certain employee benefit plan costs, certain nonrecurring gains and
losses and revenues and costs related to the manufacturing, distribution and other transition
agreements with Fenwal. Refer to Note 7 for a reconciliation of segment pre-tax income to income
before income taxes per the consolidated statements of income. Refer to the discussion above
regarding net interest expense and Note 5 regarding stock compensation expense.
INCOME TAXES
The companys effective income tax rate was 18.6% and 18.9% in the second quarters of 2009 and
2008, respectively, and 18.7% and 19.2% in the six-month periods ended June 30, 2009 and 2008,
respectively. The decline in the effective tax rates for both the three- and six-month period
ended June 30, 2009 was the result of favorable earnings mix compared to their respective prior
year periods. The company anticipates that the effective tax rate, calculated in accordance with
generally accepted accounting principles (GAAP), will be approximately 18.5% to 19.0% for the
full-year 2009, excluding any impact from additional audit developments and other special items.
Baxter
expects to reduce the gross amount of its liability for uncertain tax
positions within the next 12 months by
approximately $330 million due to the expiration of a loss carryforward, the expiration of certain
statutes of limitations related to tax benefits
25
taken in respect of losses from restructuring certain international operations, and the settlements
of certain multi-jurisdictional transfer pricing issues. While there continues to be a reasonable
possibility that the resolution of these items will be at amounts other than the amounts of the
liabilities, the company also believes the reserves are adequate.
INCOME AND EARNINGS PER DILUTED SHARE
Net income attributable to Baxter was $587 million and $544 million for the three months ended June
30, 2009 and 2008, respectively, and $1.1 billion and $973 million for the six months ended June
30, 2009 and 2008, respectively. Net income attributable to Baxter per diluted common share was
$0.96 and $0.85 for the three months ended June 30, 2009 and 2008, respectively, and $1.79 and
$1.52 for the six months ended June 30, 2009 and 2008, respectively. The significant factors and
events contributing to the changes are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash flows from operations
Cash flows from operations decreased during the first half of 2009 as compared to the prior year,
totaling $1,048 million in 2009 and $1,082 million in 2008. Included in cash flows from operations
in the first half of 2009 were outflows of $81 million related to realized excess tax benefits from
stock issued under employee benefit plans and a planned discretionary cash contribution of $100
million to the companys pension plans in the United States. Realized excess tax benefits are
required to be presented in the statement of cash flows as an outflow within the operating section
and an inflow within the financing section. The other factors impacting cash flows from operations
are discussed below.
Accounts
Receivable
Cash
outflows relating to accounts receivable decreased during the first
half of 2009 as compared to the prior year. Days sales outstanding decreased from 56.8 days at June 30, 2008 to 53.9 days at June 30, 2009, primarily due to improved collection periods
in the United States and certain international locations, partially
offset by a decrease in cash proceeds from the factoring of receivables.
Inventories
Cash
outflows relating to inventories decreased in 2009. The following is
a summary of inventories at June 30, 2009 and December 31, 2008, as well as annualized inventory turns for the three months
ended June 30, 2009 and 2008, by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized inventory |
|
|
|
Inventories |
|
|
turns for the three |
|
|
|
June 30, |
|
|
December 31, |
|
|
months ended June 30, |
|
(in millions, except inventory turn data) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
BioScience |
|
$ |
1,459 |
|
|
|
$1,346 |
|
|
|
1.48 |
|
|
|
1.45 |
|
Medication Delivery |
|
|
779 |
|
|
|
771 |
|
|
|
3.18 |
|
|
|
3.12 |
|
Renal |
|
|
248 |
|
|
|
227 |
|
|
|
4.09 |
|
|
|
3.91 |
|
Other |
|
|
10 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
Total company |
|
$ |
2,496 |
|
|
|
$2,361 |
|
|
|
2.27 |
|
|
|
2.30 |
|
|
Other
Cash outflows related to liabilities, restructuring payments and other items increased in the first
six months of 2009 as compared to the prior year period, principally driven by the planned
discretionary cash contribution discussed above. Also contributing to the increase in cash
outflows was the timing of payment of accounts payable and an increase in prepaid expenses.
Cash flows from investing activities
Capital Expenditures
Capital expenditures increased $23 million for the six months ended June 30, 2009, from $364
million in 2008 to $387 million in 2009. The company makes investments in capital expenditures at
a level sufficient to support the
26
strategic and operating needs of the businesses and continues to improve capital allocation
discipline in making investments to enhance long-term growth.
Acquisitions of and Investments in Businesses and Technologies
Cash outflows relating to acquisitions of and investments in businesses and technologies of $102
million in the first half of 2009 principally related to an agreement with SIGMA International
General Medical Apparatus, LLC (SIGMA) for the exclusive distribution of SIGMAs infusion pumps in
the United States and international markets, a 40 percent equity stake in SIGMA, and an option to
purchase the remaining portion of SIGMA. Cash outflows relating to acquisitions of and investments
in businesses and technologies of $61 million in the first half of 2008 principally related to an
IV solutions business in China, payments related to the companys fourth quarter 2007 agreements
with Nycomed Pharma AS (Nycomed) and Nektar Therapeutics (Nektar), and certain smaller acquisitions
and investments. Refer to Note 2 for further information about the agreement with SIGMA and Note 4
to the companys consolidated financial statements in the 2008 Annual Report for further
information about the arrangements with Nycomed and Nektar.
Other
Cash flows relating to other investing activities in the first half of 2009 decreased as a result
of an increase in short-term investments and a reduction in the amount of cash collected from
customers relating to previously securitized receivables. In 2007, the company repurchased the
third party interest in receivables previously sold under the European securitization arrangement,
and the European facility was not renewed.
Cash flows from financing activities
Debt Issuances, Net of Payments of Obligations
Net cash inflows related to debt and other financing obligations in the first half of 2009 totaled
$178 million. The company issued $350 million of senior unsecured notes, which mature in March
2014 and bear a 4.0% coupon rate. The net proceeds from this issuance were used for general
corporate purposes, including the repayment of approximately $160 million of outstanding borrowings
related to its Euro-denominated credit facility (further discussed below). Net cash outflows
related to debt and other financing obligations in the first half of 2008 totaled $166 million.
Included in the cash outflows was the repayment of the companys 5.196% notes, which approximated
$250 million, upon their maturity in February 2008. Debt issuances in the first half of 2008
principally related to the May 2008 issuance of $500 million of senior unsecured notes, maturing in
June 2018 and bearing a 5.375% coupon rate. The net proceeds were used for general corporate
purposes, including the settlement of $300 million of cross-currency swaps. There were no
settlements of net investment cross-currency swaps in 2009, as all of the companys net investment
hedges were settled by the end of 2008. Refer to Note 7 to the companys consolidated financial
statements in the 2008 Annual Report for further information regarding these swaps.
Other Financing Activities
Cash dividend payments totaled $318 million in the first half of 2009 and $275 million in the first
half of 2008. The increase in cash dividend payments is primarily the result of a 20% increase in
the quarterly dividend rate compared to the prior year. In May 2009, the board of directors
declared a quarterly dividend of $0.26 per share, payable on July 1, 2009 to shareholders of record
on June 10, 2009. In July 2009, the board of directors declared
a quarterly dividend of $0.26 per share, payable on October 1,
2009 to shareholders of record on September 10, 2009.
Proceeds and realized excess tax benefits from stock issued under employee benefit plans decreased
by $41 million, from $245 million in the first half of 2008 to $204 million in the first half of
2009, primarily due to a decrease in stock option exercises, partially offset by $81 million of
realized excess tax benefits (as further discussed above). No excess tax benefits were realized
from stock issued under employee benefit plans during the first half of 2008.
Stock repurchases totaled $866 million in the first half of 2009 as compared to $933 million in the
prior year period. As authorized by the board of directors, from time to time the company
repurchases its stock depending upon the companys cash flows, net debt level and current market
conditions. In March 2008, the board of directors authorized the repurchase of up to $2.0 billion of the companys common stock. At June 30, 2009, $300 million remained available
under this authorization. In July 2009, the board of directors
authorized the repurchase of up to an additional $2.0 billion of
the companys common stock. No repurchases have been made under
this authorization.
27
CREDIT
FACILITIES, ACCESS TO CAPITAL AND CREDIT RATINGS
Credit facilities
The companys primary revolving credit facility has a maximum capacity of $1.5 billion and matures
in December 2011. The company also maintains a credit facility denominated in Euros with a maximum
capacity of approximately $420 million at June 30, 2009, which matures in January 2013. These
facilities enable the company to borrow funds on an unsecured basis at variable interest rates, and
contain various covenants, including a maximum net-debt-to-capital ratio. At June 30, 2009, the
company was in compliance with the financial covenants in these agreements. There were no
borrowings outstanding under either of the two outstanding facilities at June 30, 2009. The
non-performance of any financial institution supporting the credit facility would reduce the
maximum capacity of these facilities by each institutions respective commitment. Refer to Note 6
to the companys consolidated financial statements in the 2008 Annual Report for further discussion
of the companys credit facilities.
Access to capital
The company intends to fund short-term and long-term obligations as they mature through cash on
hand, future cash flows from operations, or by issuing additional debt or common stock. The
company had $1.8 billion of cash and equivalents at June 30, 2009. The company invests its excess
cash in certificates of deposit and money market funds, and diversifies the concentration of cash
among different financial institutions.
The global financial markets have recently experienced unprecedented levels of volatility. The
companys ability to generate cash flows from operations, issue debt or enter into other financing
arrangements on acceptable terms could be adversely affected if there is a material decline in the
demand for the companys products or in the solvency of its customers or suppliers, deterioration
in the companys key financial ratios or credit ratings, or other significantly unfavorable changes
in conditions. In addition, continuing volatility in the global financial markets could increase
borrowing costs or affect the companys ability to access the capital markets. However, the
company believes it has sufficient financial flexibility in the future to issue debt, enter into
other financing arrangements, and attract long-term capital on acceptable terms to support the
companys growth objectives.
Credit ratings
There were no changes in the companys credit ratings in the first half of 2009. Refer to the 2008
Annual Report for further discussion of the companys credit ratings.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. A summary of the companys significant accounting policies is included in Note 1 to the
companys consolidated financial statements in the 2008 Annual Report. Significant accounting
standards adopted in 2009 are summarized in Note 1 to the consolidated financial statements
included in this report. Certain of the companys accounting policies are considered critical, as
these policies are the most important to the depiction of the companys financial statements and
require significant, difficult or complex judgments, often employing the use of estimates about the
effects of matters that are inherently uncertain. Such policies are summarized in the Managements
Discussion and Analysis of Financial Condition and Results of Operations section in the 2008 Annual
Report.
LEGAL CONTINGENCIES
Refer to Note 6 for a discussion of the companys legal contingencies. Upon resolution of any of
these uncertainties, the company may incur charges in excess of presently established liabilities.
While the liability of the company in connection with the claims cannot be estimated with any
certainty, and although the resolution in any reporting period of one or more of these matters
could have a significant impact on the companys results of operations for that period, the outcome
of these legal proceedings is not expected to have a material adverse effect on the companys
consolidated financial position. While the company believes that it has valid defenses in these
matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in
the future incur material judgments or enter into material settlements of claims.
28
CERTAIN REGULATORY MATTERS
The company began to hold shipments of COLLEAGUE infusion pumps in July 2005, and continues to hold
shipments of new pumps in the United States. Following a number of Class I recalls (recalls at the
highest priority level for the U.S. Food and Drug Administration (FDA)) relating to the performance
of the pumps, as well as the seizure litigation described in Note 6, the company entered into a
Consent Decree in June 2006 outlining the steps the company must take to resume sales of new pumps
in the United States. Additional Class I recalls related to remediation and repair and maintenance
activities were addressed by the company in 2007 and 2009. The Consent Decree provides for reviews
of the companys facilities, processes and controls by the companys outside expert, followed by
the FDA. In December 2007, following the outside experts
review, the FDA performed an inspection and remains in
a dialogue with the company. As discussed in Note 3, the company has recorded a number of charges
in connection with its COLLEAGUE infusion pumps. It is possible that additional charges related to
COLLEAGUE may be required in future periods, based on new information, changes in estimates, and
modifications to the current remediation plan as a result of ongoing dialogue with the FDA.
The company received a Warning Letter from the FDA in March 2005 regarding observations, primarily
related to dialysis equipment, that arose from the FDAs inspection of the companys manufacturing
facility located in Largo, Florida. During 2007, the FDA re-inspected the Largo manufacturing
facility and, in a follow-up regulatory meeting, indicated that a number of observations remain
open.
In the first quarter of 2008, the company identified an increasing level of allergic-type and
hypotensive adverse reactions occurring in patients using its heparin sodium injection products in
the United States. The company initiated a field corrective action with respect to the products;
however, due to users needs for the products, the company and the FDA concluded that public health
considerations warranted permitting selected dosages of the products to remain in distribution for
use where medically necessary until alternate sources became available in the quarter, at which
time the companys products were removed from distribution.
While the company continues to work to resolve the issues described above, there can be no
assurance that additional costs or civil and criminal penalties will not be incurred, that
additional regulatory actions with respect to the company will not occur, that the company will not
face civil claims for damages from purchasers or users, that substantial additional charges or
significant asset impairments may not be required, that sales of any other product may not be
adversely affected, or that additional legislation or regulation will not be introduced that may
adversely affect the companys operations. Please see Item 1A. Risk Factors in the companys
Form 10-K for the year ended December 31, 2008 for additional discussion of regulatory matters.
NEW ACCOUNTING STANDARDS
Refer to Note 4 for disclosures related to the companys adoption of Statement of Financial
Accounting Standards (SFAS) No. 161, Disclosure about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 and Financial Accounting Standards Board (FASB)
Staff Position (FSP) FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments. Refer to Note 2 for disclosures related to the companys adoption of Emerging Issues
Task Force Issue No. 07-1, Accounting for Collaborative Arrangements and the companys adoption
of FSP FAS No. 140-4 and FIN 46(R)-8, Disclosure by Public Entities (Enterprises) about Transfers
of Financial Assets and Interests in Variable Interest Entities as it relates to the April 2009
arrangement with SIGMA.
SFAS
No. 141-R
On January 1, 2009, the company adopted SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141-R). The new standard changes the accounting for business combinations in a number of
significant respects. The key changes include the expansion of transactions that will qualify as
business combinations, the capitalization of in-process research and development as an
indefinite-lived asset, the recognition of certain acquired contingent assets and liabilities at
fair value, the expensing of acquisition costs, the expensing of costs associated with
restructuring the acquired company, the recognition of contingent consideration at fair value on
the acquisition date, and the recognition of post-acquisition date changes in deferred tax asset
valuation allowances and acquired income tax uncertainties as income tax expense or benefit. The
new standard was applicable for acquisitions made by the company on or after January 1, 2009,
including the April 2009 arrangement with SIGMA. Refer to Note 2 for further information.
29
SFAS
No. 160
On January 1, 2009, the company adopted SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). The new standard changed the
accounting and reporting of noncontrolling interests, which have historically been referred to as
minority interests. SFAS No. 160 requires that noncontrolling interests be presented in the
consolidated balance sheets within equity, but separate from Baxter shareholders equity, and that
the amount of consolidated net income attributable to Baxter and to the noncontrolling interests be
clearly identified and presented in the consolidated statements of income. Any losses in excess of
the noncontrolling interests equity interest continue to be allocated to the noncontrolling
interest. Purchases or sales of equity interests that do not result in a change of control are
accounted for as equity transactions. Upon a loss of control the interest sold, as well as any
interest retained, is measured at fair value, with any gain or loss recognized in earnings. In
partial acquisitions, when control is obtained, 100% of the assets and liabilities, including
goodwill, are recognized at fair value as if the entire target company had been acquired.
The new standard has been applied prospectively as of January 1, 2009, except for the
presentation and disclosure requirements, which have been applied retrospectively for prior periods
presented. Prior to the adoption of SFAS No. 160, the noncontrolling interests share of net
income was included in other (income) expense, net in the consolidated statement of income and the
noncontrolling interests equity was included in other long-term liabilities in the consolidated
balance sheet.
FSP
FAS No. 132(R)-1
In December 2008, the FASB issued FSP FAS No. 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets. This FSP expands the disclosure requirements relating to
pension and other postretirement benefits to require enhanced disclosures about how investment
allocation decisions are made and the investment policies and strategies that support those
decisions, major categories of plan assets, the input and valuation techniques used in measuring
plan assets at fair value, and significant concentrations of credit risk within plan assets. The
company will include the disclosures required by this standard beginning with its 2009 year-end
consolidated financial statements.
SFAS
No. 166
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140 (SFAS No. 166). The standard eliminates the concept of a
qualifying special-purpose entity and clarifies existing GAAP as it relates to determining whether
a transferor has surrendered control over transferred financial assets. SFAS No. 166 limits the
circumstances in which a financial asset, or portion of a financial asset, should be derecognized
when the transferor has not transferred the entire original financial asset to an entity that is
not consolidated with the transferor in the financial statements presented and/or when the
transferor has continuing involvement with the transferred financial asset. The standard also
requires enhanced disclosures about transfers of financial assets and a transferors continuing
involvement with transferred financial assets. SFAS No. 166 is effective for fiscal years, and
interim periods within those fiscal years, beginning after November 15, 2009, with early adoption
prohibited. The new standard will be applied prospectively, except for the disclosure
requirements, which will be applied retrospectively for all periods presented. The company is in
the process of analyzing the impact of this standard, which will be adopted by the company at the
beginning of 2010.
SFAS
No. 167
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No.
167), which changes the consolidation model for variable interest entities (VIEs). The standard
requires an enterprise to qualitatively assess the determination of the primary beneficiary of a
VIE as the enterprise that has both the power to direct the activities of the VIE that most
significantly impact the entitys economic performance and has the obligation to absorb losses or
the right to receive benefits from the entity that could potentially be significant to the VIE.
SFAS No. 167 requires ongoing reassessments of whether an enterprise is the primary beneficiary of
a VIE. SFAS No. 167 expands the disclosure requirements for enterprises with a variable interest
in a VIE. SFAS No. 167 is effective for fiscal years, and interim periods within those fiscal
years, beginning after November 15, 2009, with early adoption prohibited. The company is in the
process of analyzing the impact of this standard, which will be adopted by the company at the
beginning of 2010.
30
FORWARD-LOOKING INFORMATION
This quarterly report includes forward-looking statements, including statements with respect to
accounting estimates and assumptions, future litigation outcomes, the companys efforts to
remediate its infusion pumps and other regulatory matters, expectations with respect to
restructuring programs, strategic plans, product mix, promotional efforts, geographic expansion,
sales and pricing forecasts, expectations with respect to business development activities,
potential developments with respect to credit and credit ratings, estimates of liabilities,
ongoing tax audits and related tax provisions, deferred tax assets, future pension plan expense,
the companys hedging policy and expectations with respect to the companys exposure to foreign
currency and interest rate risk, the companys internal R&D pipeline, future capital and R&D
expenditures, the sufficiency of the companys financial flexibility and the adequacy of credit
facilities and reserves, the effective tax rate in 2009, expected revenues from the Fenwal
transition services agreements, and all other statements that do not relate to historical facts.
The statements are based on assumptions about many important factors, including assumptions
concerning:
|
|
|
demand for and market acceptance risks for new and existing products, such as
ADVATE and IGIV, and other therapies; |
|
|
|
the companys ability to identify business development and growth opportunities for
existing products; |
|
|
|
product quality or patient safety issues, leading to product recalls, withdrawals,
launch delays, sanctions, seizures, litigation, or declining sales; |
|
|
|
future actions of regulatory bodies and other government authorities that could delay,
limit or suspend product development, manufacturing or sale or result in seizures,
injunctions, monetary sanctions or criminal or civil liabilities, including any sanctions
available under the Consent Decree entered into with the FDA concerning the COLLEAGUE and
SYNDEO pumps; |
|
|
|
foreign currency fluctuations, particularly due to reduced benefits from the companys
natural hedges and limitations on the ability to cost-effectively hedge resulting from the
recent financial market and currency volatility; |
|
|
|
fluctuations in supply and demand for plasma protein products; |
|
|
|
reimbursement policies of government agencies and private payers; |
|
|
|
changes in healthcare legislation and regulation, including through healthcare reform in
the United States or globally, which may affect pricing, reimbursement or other elements of
the companys business; |
|
|
|
production yields, regulatory clearances and customers final purchase commitments with
respect to the companys pandemic vaccine; |
|
|
|
product development risks, including satisfactory clinical performance, the ability to
manufacture at appropriate scale, and the general unpredictability associated with the
product development cycle; |
|
|
|
the ability to enforce the companys patent rights or patents of third parties
preventing or restricting the companys manufacture, sale or use of affected products or
technology; |
|
|
|
the impact of geographic and product mix on the companys sales; |
|
|
|
the impact of competitive products and pricing, including generic competition, drug
reimportation and disruptive technologies; |
|
|
|
inventory reductions or fluctuations in buying patterns by wholesalers or distributors; |
|
|
|
the availability and pricing of acceptable raw materials and component supply; |
|
|
|
global regulatory, trade and tax policies; |
|
|
|
any changes in law concerning the taxation of income, including income earned outside
the United States; |
|
|
|
actions by tax authorities in connection with ongoing tax audits; |
|
|
|
the companys ability to realize the anticipated benefits of restructuring initiatives; |
|
|
|
the companys ability to realize the anticipated benefits from its joint product
development and commercialization arrangements, including the SIGMA transaction; |
|
|
|
changes in credit agency ratings; |
|
|
|
any impact of the commercial and credit environment on the company and its customers and
suppliers; |
|
|
|
continued developments in the market for transfusion therapies products and Fenwals
ability to execute with respect to the acquired business; and |
|
|
|
other factors identified elsewhere in this report and other filings with the Securities
and Exchange Commission, including those factors described under the caption Item 1A. Risk
Factors in the companys Form 10-K for the year ended December 31, 2008, all of which are
available on the companys website. |
Actual results may differ materially from those projected in the forward-looking statements.
The company does not undertake to update its forward-looking statements.
31
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Currency Risk
The company is primarily exposed to foreign exchange risk with respect to recognized assets and
liabilities, forecasted transactions and net assets denominated in the Euro, Japanese Yen, British
Pound, Australian Dollar, Canadian Dollar and certain Latin American currencies. 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 uses derivative and
nonderivative financial instruments to further reduce the net exposure to foreign exchange. Gains
and losses on the hedging instruments offset losses and gains on the hedged transactions and
reduce the earnings and equity volatility relating to foreign exchange.
The company uses options, forwards and cross-currency swaps to hedge the foreign exchange risk to
earnings relating to forecasted transactions denominated in foreign currencies and recognized
assets and liabilities. The maximum term over which the company has cash flow hedge contracts in
place related to forecasted transactions at June 30, 2009 is 18 months. The company also enters
into undesignated derivative instruments to hedge certain intercompany and third-party receivables
and payables in foreign currencies. The recent financial market and currency volatility may
reduce the benefits of the companys natural hedges and limit the companys ability to
cost-effectively hedge these exposures.
As part of its risk-management program, the company performs sensitivity analyses to assess
potential changes in the fair value of its foreign exchange instruments relating to hypothetical
and reasonably possible near-term movements in foreign exchange rates.
A sensitivity analysis of changes in the fair value of foreign exchange option, forward and
cross-currency swap contracts outstanding at June 30, 2009, while not predictive in nature,
indicated that if the U.S. Dollar uniformly fluctuated unfavorably by 10% against all currencies,
on a net-of-tax basis, the net liability balance of $21 million, which principally relates to a
hedge of U.S. Dollar-denominated debt issued by a foreign subsidiary, would decrease by $80
million.
The sensitivity analysis model recalculates the fair value of the foreign exchange option, forward
and cross-currency swap contracts outstanding at June 30, 2009 by replacing the actual exchange
rates at June 30, 2009 with exchange rates that are 10% unfavorable to the actual exchange rates
for each applicable currency. All other factors are held constant. These sensitivity analyses
disregard the possibility that currency exchange rates can move in opposite directions and that
gains from one currency may or may not be offset by losses from another currency. The analyses
also disregard the offsetting change in value of the underlying hedged transactions and balances.
Interest Rate and Other Risks
Refer to the caption Interest Rate and Other Risks in the Financial Instrument Market Risk
section of the companys 2008 Annual Report. There were no significant changes during the quarter
ended June 30, 2009.
32
|
|
|
Item 4. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Baxter carried out an evaluation, under the supervision and with the participation of its
Disclosure Committee and management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of Baxters disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act))
as of June 30, 2009. Baxters disclosure controls and procedures are designed to ensure that
information required to be disclosed by Baxter in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported on a timely basis and that such
information is communicated to management, including the Chief Executive Officer, Chief Financial
Officer and its Board of Directors to allow timely decisions regarding required disclosure.
Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the
companys disclosure controls and procedures were effective as of June 30, 2009.
Changes in Internal Control over Financial Reporting
There has been no change in Baxters internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30,
2009 that has materially affected, or is reasonably likely to materially affect, Baxters internal
control over financial reporting.
33
Review by Independent Registered Public Accounting Firm
Reviews of the interim condensed consolidated financial information included in this Quarterly
Report on Form
10-Q for the three and six months ended June 30, 2009 and 2008 have been performed by
PricewaterhouseCoopers LLP, the companys independent registered public accounting firm. Its
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.
34
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Baxter International Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Baxter International Inc.
and its subsidiaries as of June 30, 2009, and the related condensed consolidated statements of
income for each of the three- and six-month periods ended June 30, 2009 and 2008 and the condensed
consolidated statements of cash flows for the six-month periods ended June 30, 2009 and 2008.
These interim financial statements are the responsibility of the companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), 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 the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet as of December 31, 2008, and the related
consolidated statements of income, cash flows and shareholders equity and comprehensive income for
the year then ended, and in our report dated February 19, 2009, we expressed an unqualified opinion
on those consolidated financial statements. The consolidated financial statements referred to
above are not presented herein. As discussed in Note 1 to the accompanying condensed consolidated
financial statements, the company changed its method of accounting and reporting for noncontrolling
interests. The accompanying December 31, 2008 condensed consolidated balance sheet reflects this
change.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
July 28, 2009
35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information in Part I, Item 1, Note 6 is incorporated herein by reference.
36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table includes information about the companys common stock repurchases during the
three-month period ended June 30, 2009.
Issuer Purchases of Equity Securities
|
|
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|
|
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|
|
Total number |
|
|
|
|
|
|
Total number of shares |
|
|
Approximate dollar value of |
|
|
|
of shares |
|
|
Average price |
|
|
purchased as part of publicly |
|
|
shares that may yet be purchased |
|
Period |
|
purchased(1) |
|
|
paid per share |
|
|
announced program(1) |
|
|
under the program(1) |
|
|
April 1, 2009
through April 30, 2009 |
|
|
3,352,767 |
|
|
$ |
49.24 |
|
|
|
3,352,767 |
|
|
|
|
|
May 1, 2009
through May 31, 2009 |
|
|
780,456 |
|
|
$ |
49.63 |
|
|
|
780,456 |
|
|
|
|
|
June 1, 2009
through June 30, 2009 |
|
|
1,982,415 |
|
|
$ |
48.52 |
|
|
|
1,982,415 |
|
|
|
|
|
|
Total |
|
|
6,115,638 |
|
|
$ |
49.05 |
|
|
|
6,115,638 |
|
|
$ |
300,013,660 |
|
|
|
|
|
(1) |
|
In March 2008, the company announced that its board of directors authorized the company to
repurchase up to $2.0 billion of its common stock on the open market. During the second quarter of
2009, the company repurchased 6.1 million shares for $300 million under this program, and the
remaining authorization totaled $300 million at June 30, 2009. This program does not have an
expiration date. |
37
Item 4. Submission of Matters to a Vote of Security Holders
The companys annual meeting of shareholders was held on May 5, 2009. The results of the matters
voted upon at the annual meeting of shareholders are as follows:
Election of Directors
Each of managements nominees for directors, as listed in the proxy statement, was elected with the
number of votes set forth below.
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|
|
|
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|
|
|
|
|
|
|
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Director |
|
For |
|
|
Against |
|
|
Abstain |
|
|
|
|
|
Walter E. Boomer |
|
|
514,307,473 |
|
|
|
11,427,449 |
|
|
|
910,684 |
|
|
|
|
|
James R. Gavin III, M.D., Ph.D. |
|
|
521,764,537 |
|
|
|
4,009,532 |
|
|
|
871,537 |
|
|
|
|
|
Peter S. Hellman |
|
|
519,084,440 |
|
|
|
6,637,488 |
|
|
|
923,677 |
|
|
|
|
|
K. J. Storm |
|
|
513,020,468 |
|
|
|
12,597,107 |
|
|
|
1,028,030 |
|
|
|
|
|
The directors listed above have terms that expire in 2012. Directors with terms expiring in 2010
are Blake E. Devitt, John D. Forsyth, Gail D. Fosler and Carole J. Shapazian. The remaining
directors, Wayne T. Hockmeyer, Ph.D., Joseph B. Martin, M.D., Ph.D., Robert L. Parkinson, Jr.,
Thomas T. Stallkamp and Albert P.L. Stroucken have terms expiring in 2011.
|
Management Proposal
|
|
Proposal |
|
For |
|
|
Against |
|
|
Abstain |
|
|
|
|
|
Appointment of
PricewaterhouseCoopers LLP as the
companys
independent registered
public accounting firm |
|
|
511,756,462 |
|
|
|
14,045,359 |
|
|
|
843,784 |
|
|
|
|
|
Shareholder Proposal
|
|
Proposal |
|
For |
|
|
Against |
|
|
Abstain |
|
|
Broker Non-Votes |
|
|
Shareholder
proposal relating
to animal testing |
|
|
21,246,084 |
|
|
|
364,668,775 |
|
|
|
95,705,135 |
|
|
|
45,025,612 |
|
38
Item 6. Exhibits
Exhibit Index:
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
15 |
|
Letter Re: Unaudited Interim Financial Information |
|
|
|
31.1 |
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934 |
|
|
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934 |
|
|
|
32.1 |
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
32.2 |
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
101.INS* |
|
XBRL Instance Document |
|
|
|
101.SCH* |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL* |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF* |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB* |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE* |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
39
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.
|
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|
BAXTER INTERNATIONAL INC.
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(Registrant) |
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Date:
July 28, 2009 |
|
By: |
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/s/ Robert M. Davis |
|
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|
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|
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Robert M. Davis
Corporate Vice President and Chief Financial Officer
(duly authorized officer and principal financial officer) |
|
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40