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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended
December 31,
2010
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OR
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from to
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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
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(Address of Principal Executive
Offices)
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(Zip Code)
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Registrants
telephone number, including area code 847.948.2000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, $1.00 par value
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New York Stock Exchange
Chicago Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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 registrant has submitted
electronically and posted on its corporate website, 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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 the 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
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting common equity held by
non-affiliates of the registrant as of June 30, 2010 (the
last business day of the registrants most recently
completed second fiscal quarter), based on the per share closing
sale price of $40.64 on that date and the assumption for the
purpose of this computation only that all of the
registrants directors and executive officers are
affiliates, was approximately $24 billion. There is no
non-voting common equity held by non-affiliates of the
registrant.
The number of shares of the registrants common stock,
$1.00 par value, outstanding as of January 31, 2011
was 579,426,016.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive 2011 proxy
statement for use in connection with its Annual Meeting of
Shareholders to be held on May 3, 2011 are incorporated by
reference into Part III of this report.
TABLE OF
CONTENTS
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Page
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Number
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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6
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Item 1B.
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Unresolved Staff Comments
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12
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Item 2.
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Properties
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12
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Item 3.
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Legal Proceedings
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14
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Item 4.
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Reserved
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14
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Item 5.
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Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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16
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Item 6.
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Selected Financial Data
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17
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results
of Operations
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18
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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43
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Item 8.
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Financial Statements and Supplementary Data
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44
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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95
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Item 9A.
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Controls and Procedures
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95
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Item 9B.
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Other Information
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95
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Item 10.
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Directors, Executive Officers and Corporate Governance
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Item 11.
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Executive Compensation
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96
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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96
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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96
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Item 14.
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Principal Accountant Fees and Services
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96
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Item 15.
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Exhibits and Financial Statement Schedules
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96
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PART I
Company
Overview
Baxter International Inc., through its subsidiaries, develops,
manufactures and markets products that save and sustain the
lives of people with hemophilia, immune disorders, infectious
diseases, kidney disease, trauma, and other chronic and acute
medical conditions. As a global, diversified healthcare company,
Baxter applies a unique combination of expertise in medical
devices, pharmaceuticals and biotechnology to create products
that advance patient care worldwide. These products are used by
hospitals, kidney dialysis centers, nursing homes,
rehabilitation centers, doctors offices, clinical and
medical research laboratories, and by patients at home under
physician supervision. Baxter manufactures products in 27
countries and sells them in more than 100 countries.
Baxter International Inc. was incorporated under Delaware law in
1931. As used in this report, except as otherwise indicated in
information incorporated by reference, Baxter
International means Baxter International Inc. and
Baxter, the company or the
Company means Baxter International and its
consolidated subsidiaries.
Business
Segments and Products
The BioScience, Medication Delivery and Renal segments comprise
Baxters continuing operations.
BioScience. The BioScience business processes
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
select vaccines.
Medication Delivery. 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.
The business also provides products and services related to
pharmacy compounding, drug formulation and packaging
technologies. In October 2010, the company announced an
agreement providing for the divestiture of its U.S. generic
injectables business to Hikma Pharmaceuticals PLC. For more
information on this divestiture, see Note 3 in Item 8
of this Annual Report on
Form 10-K.
Renal. 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 (PD), a home-based therapy, and also
distributes products for hemodialysis, which is generally
conducted in a hospital or clinic.
In October 2010, the company announced the combination of its
Medication Delivery and Renal businesses into a single global
business unit, Medical Products.
For financial information about Baxters segments and
principal product categories, see Note 12 in Item 8 of
this Annual Report on
Form 10-K.
Sales and
Distribution
The company has its own direct sales force and also makes sales
to and through independent distributors, drug wholesalers acting
as sales agents and specialty pharmacy or homecare companies. In
the United States, Cardinal Health, Inc. warehouses and ships a
significant portion of the companys products through its
distribution centers. These centers are generally stocked with
adequate inventories to facilitate prompt customer service.
Sales and distribution methods include frequent contact by sales
representatives, automated communications via various electronic
purchasing systems, circulation of catalogs and merchandising
bulletins, direct-mail campaigns, trade publication presence and
advertising.
1
International sales are made and products are distributed on a
direct basis or through independent local distributors or sales
agents in more than 100 countries.
International
Operations
Baxter products are manufactured and sold worldwide.
Approximately 60% of the companys revenues are generated
outside of the United States and geographic expansion remains a
core component of the companys strategy. Baxters
international presence includes operations in Europe,
Asia-Pacific, Latin America and Canada. The company is subject
to certain risks inherent in conducting business outside the
United States. For more information on these risks, see the
information under the captions We are subject to risks
associated with doing business globally and We are
subject to foreign currency risk in Item 1A of this
Annual Report on
Form 10-K
all of which information is incorporated herein by reference.
For financial information about foreign and domestic operations
and geographic information, see Note 12 in Item 8 of
this Annual Report on
Form 10-K.
For more information regarding foreign currency exchange risk,
refer to the discussion under the caption entitled
Financial Instrument Market Risk in Item 7 of
this Annual Report on
Form 10-K.
Contractual
Arrangements
Substantial portions of the companys products are sold
through contracts with customers, both within and outside the
United States. Some of these contracts have terms of more than
one year and place limits on the companys ability to
increase prices. In the case of hospitals, governments and other
facilities, these contracts may specify minimum quantities of a
particular product or categories of products to be purchased by
the customer.
In keeping with the increased emphasis on cost-effectiveness in
healthcare delivery, many hospitals and other customers of
medical products in the United States and in other countries
have joined group purchasing organizations (GPOs), or formed
integrated delivery networks (IDNs), to enhance purchasing
power. GPOs and IDNs negotiate pricing arrangements with
manufacturers and distributors, and the negotiated prices are
made available to members. Baxter has purchasing agreements with
several of the major GPOs in the United States. GPOs may have
agreements with more than one supplier for certain products.
Accordingly, in these cases, Baxter faces competition from other
suppliers even where a customer is a member of a GPO under
contract with Baxter.
Raw
Materials
Raw materials essential to Baxters business are purchased
from numerous suppliers worldwide in the ordinary course of
business. Although most of these materials are generally
available, certain raw materials used in producing some of the
companys products are available only from one or a limited
number of suppliers, and Baxter at times may experience
shortages of supply. In an effort to manage risk associated with
raw materials supply, Baxter works closely with its suppliers to
help ensure availability and continuity of supply while
maintaining high quality and reliability. The company also seeks
to develop new and alternative sources of supply where
beneficial to its overall raw materials procurement strategy.
The company also utilizes long-term supply contracts with some
suppliers to help maintain continuity of supply and manage the
risk of price increases. Baxter is not always able to recover
cost increases for raw materials through customer pricing due to
contractual limits and market forces.
Competition
and Healthcare Cost Containment
Baxters BioScience, Medication Delivery and Renal
businesses enjoy leading positions based on a number of
competitive advantages. The BioScience business benefits from
continued innovation in its products and therapies, consistency
of its supply of products, and strong customer relationships.
The Medication Delivery business benefits from the breadth and
depth of its product offering, as well as strong relationships
with customers, including hospitals, customer purchasing groups
and pharmaceutical and biotechnology companies. The Renal
business benefits from its position as one of the worlds
leading manufacturers of PD products, as
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well as its strong relationships with customers and patients,
including the many patients who self-administer the home-based
therapy supplied by Baxter. Baxter as a whole benefits from
efficiencies and cost advantages resulting from shared
manufacturing facilities and the technological advantages of its
products.
Although no single company competes with Baxter in all of its
businesses, Baxter faces substantial competition in each of its
segments from international and domestic healthcare and
pharmaceutical companies of all sizes. BioScience continues to
face competitors from pharmaceutical, biotechnology and other
companies. Medication Delivery faces competition from medical
device manufacturers and pharmaceutical companies. In Renal,
global and regional competitors continue to expand their
manufacturing capacity for PD products and their PD sales and
marketing channels. Competition is primarily focused on
cost-effectiveness, price, service, product performance, and
technological innovation. There has been increasing
consolidation in the companys customer base and by its
competitors, which continues to result in pricing and market
share pressures.
Global efforts toward healthcare cost containment continue to
exert pressure on product pricing. Governments around the world
use various mechanisms to control healthcare expenditures, such
as price controls, product formularies (lists of recommended or
approved products), and competitive tenders which require the
submission of a bid to sell products. Sales of Baxters
products are dependent, in part, on the availability of
reimbursement by government agencies and healthcare programs, as
well as insurance companies and other private payers. In the
United States, the federal and many state governments have
adopted or proposed initiatives relating to Medicaid and other
health programs that may limit reimbursement or increase rebates
that Baxter and other providers are required to pay to the
state. In addition to government regulation, managed care
organizations in the United States, which include medical
insurance companies, medical plan administrators,
health-maintenance organizations, hospital and physician
alliances and pharmacy benefit managers, continue to put
pressure on the price and usage of healthcare products. Managed
care organizations seek to contain healthcare expenditures, and
their purchasing strength has been increasing due to their
consolidation into fewer, larger organizations and a growing
number of enrolled patients. Baxter faces similar issues outside
of the United States. In Europe and Latin America, for example,
the government provides healthcare at low cost to patients, and
controls its expenditures by purchasing products through public
tenders, regulating prices, setting reference prices in public
tenders or limiting reimbursement or patient access to certain
products.
Intellectual
Property
Patents and other proprietary rights are essential to
Baxters business. Baxter relies on patents, trademarks,
copyrights, trade secrets, know-how and confidentiality
agreements to develop, maintain and strengthen its competitive
position. Baxter owns a number of patents and trademarks
throughout the world and has entered into license arrangements
relating to various third-party patents and technologies.
Products manufactured by Baxter are sold primarily under its own
trademarks and trade names. Some products distributed by the
company are sold under the companys trade names, while
others are sold under trade names owned by its suppliers. Trade
secret protection of unpatented confidential and proprietary
information is also important to Baxter. The company maintains
certain details about its processes, products and technology as
trade secrets and generally requires employees, consultants,
parties to collaboration agreements and other business partners
to enter into confidentiality agreements.
Baxters policy is to protect its products and technology
through patents and trademarks on a worldwide basis. This
protection is sought in a manner that balances the cost of such
protection against obtaining the greatest value for the company.
Baxter also recognizes the need to promote the enforcement of
its patents and trademarks and takes commercially reasonable
steps to enforce its patents and trademarks around the world
against potential infringers, including judicial or
administrative action where appropriate.
Baxter operates in an industry susceptible to significant patent
litigation. At any given time, the company is involved as either
a plaintiff or defendant in a number of patent infringement and
other intellectual property-related actions. Such litigation can
result in significant royalty or other payments or result in
injunctions that
3
can prevent the sale of products. For more information on patent
and other litigation, see Note 11 in Item 8 of this
Annual Report on
Form 10-K.
Research
and Development
Baxters investment in research and development (R&D)
is essential to its future growth and its ability to remain
competitive in each of its business segments. Accordingly,
Baxter continues to focus its investment in R&D programs to
enhance future growth through clinical differentiation.
Expenditures for Baxters R&D activities were
$915 million in 2010, $917 million in 2009 and
$868 million in 2008. These expenditures include costs
associated with R&D activities performed at the
companys R&D centers located around the world, which
include facilities in Austria, Belgium, Japan and the United
States, as well as in-licensing, milestone and reimbursement
payments made to partners for R&D work performed at
non-Baxter locations.
Principal areas of strategic focus for R&D include
recombinant and plasma-based therapeutics, vaccines, initiatives
in regenerative medicine, kidney dialysis, formulation of small
molecule drugs, enhanced packaging systems for medication
delivery, and parenteral nutrition. The companys research
efforts emphasize self-manufactured product development, and
portions of that research relate to multiple product categories.
Baxter supplements its own R&D efforts by acquiring various
technologies and entering into development and other
collaboration agreements with third parties. For more
information on the companys R&D activities, refer to
the discussion under the caption entitled Research and
Development contained in Item 7 of this Annual Report
on
Form 10-K.
Quality
Management
Baxters success depends upon the quality of its products.
Quality management plays an essential role in determining and
meeting customer requirements, preventing defects, improving the
companys products and services and maintaining the
integrity of the data that supports the safety and efficacy of
the companys products. Baxter has a network of quality
systems throughout the companys business units and
facilities that relate to the design, development,
manufacturing, packaging, sterilization, handling, distribution
and labeling of the companys products. To assess and
facilitate compliance with applicable requirements, the company
regularly reviews its quality systems to determine their
effectiveness and identify areas for improvement. Baxter also
performs assessments of its suppliers of raw materials,
components and finished goods. In addition, the company conducts
quality management reviews designed to inform management of key
issues that may affect the quality of products and services.
From time to time, the company may determine that products
manufactured or marketed by the company do not meet company
specifications, published standards, such as those issued by the
International Organization for Standardization, or regulatory
requirements. When a quality issue is identified, Baxter
investigates the issue and takes appropriate corrective action,
such as notice to the customer of revised labeling, correction
of the product at the customer location, withdrawal of the
product from the market and other actions. For more information
on corrective actions taken by Baxter, refer to the discussion
under the caption entitled Certain Regulatory
Matters in Item 7 of this Annual Report on
Form 10-K.
Government
Regulation
The operations of Baxter and many of the products manufactured
or sold by the company are subject to extensive regulation by
numerous government agencies, both within and outside the United
States. In March 2010, the Patient Protection and Affordable
Care Act was enacted in the United States. While this
legislation provides for a number of changes in how companies
are compensated for providing healthcare products and services,
many of these changes will be implemented by regulations which
have yet to be established. For more information on the expected
impact of healthcare reform on the company, refer to the
information under the caption The implementation of
healthcare reform in the United States may adversely affect our
business in Item 1A of this Annual Report on
Form 10-K.
4
In the United States, the federal agencies that regulate the
companys facilities, operations, employees, products
(their manufacture, sale, import and export) and services
include: the U.S. Food and Drug Administration (FDA), the
Drug Enforcement Agency, the Environmental Protection Agency,
the Occupational Health & Safety Administration, the
Department of Agriculture, the U.S. Department of Justice, the
Department of Labor, the Department of Defense, Customs and
Border Protection, the Department of Commerce, the Department of
Treasury and others. Because Baxter supplies products and
services to healthcare providers that are reimbursed by
federally funded programs such as Medicare, its activities are
also subject to regulation by the Center for Medicare/Medicaid
Services and enforcement by the Office of the Inspector General
within the Department of Health and Human Services (OIG). State
agencies in the United States also regulate the facilities,
operations, employees, products and services of the company
within their respective states. Outside the United States, the
companys products and operations are subject to extensive
regulation by government agencies, including the European
Medicines Agency (EMA) in the European Union. International
government agencies also regulate public health, product
registration, pricing, manufacturing, environmental conditions,
labor, exports, imports and other aspects of the companys
global operations.
The FDA in the United States, the EMA in Europe, and other
government agencies inside and outside of the United States,
administer requirements covering the testing, safety,
effectiveness, manufacturing, labeling, promotion and
advertising, distribution and post-market surveillance of
Baxters products. The company must obtain specific
approval from the FDA and
non-U.S. regulatory
authorities before it can market and sell most of its products
in a particular country. Even after the company obtains
regulatory approval to market a product, the product and the
companys manufacturing processes are subject to continued
review by the FDA and other regulatory authorities worldwide.
The company is subject to possible administrative and legal
actions by the FDA and other regulatory agencies inside and
outside the United States. Such actions may include warning
letters, product recalls or seizures, monetary sanctions,
injunctions to halt manufacture and distribution of products,
civil or criminal sanctions, refusal of a government to grant
approvals or licenses, restrictions on operations or withdrawal
of existing approvals and licenses. From time to time, the
company takes steps to ensure safety and efficacy of its
products, such as removing products from the market found not to
meet applicable requirements and improving the effectiveness of
quality systems. For more information on compliance actions
taken by the company, refer to the discussion under the caption
entitled Certain Regulatory Matters in Item 7
of this Annual Report on
Form 10-K.
Environmental policies of the company require compliance with
all applicable environmental regulations and contemplate, among
other things, appropriate capital expenditures for environmental
protection.
Employees
As of December 31, 2010, Baxter employed approximately
48,000 people.
Available
Information
Baxter makes available free of charge on its website at
www.baxter.com its Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (Exchange Act), as soon as reasonably
practicable after electronically filing or furnishing such
material to the Securities and Exchange Commission.
In addition, Baxters Corporate Governance Guidelines, Code
of Conduct, and the charters for the required committees of
Baxters board of directors are available on Baxters
website at www.baxter.com under Corporate Governance
and in print upon request by writing to: Corporate Secretary,
Baxter International Inc., One Baxter Parkway, Deerfield,
Illinois 60015. Information contained on Baxters website
shall not be deemed incorporated into, or to be a part of, this
Annual Report on
Form 10-K.
5
In addition to the other information in this Annual Report on
Form 10-K,
shareholders or prospective investors should carefully consider
the following risk factors. If any of the events described below
occurs, our business, financial condition and results of
operations and future growth prospects could suffer.
If we
are unable to successfully introduce new products or fail to
keep pace with advances in technology, our business, financial
condition and results of operations could be adversely
affected.
The successful and timely implementation of our business model
depends on our ability to adapt to changing technologies and
introduce new products. As our competitors will continue to
introduce competitive products, the development and acquisition
of innovative products and technologies that improve efficacy,
safety, patients and clinicians ease of use and
cost-effectiveness are important to our success. The success of
new product offerings will depend on many factors, including our
ability to properly anticipate and satisfy customer needs,
obtain regulatory approvals on a timely basis, develop and
manufacture products in an economic and timely manner, obtain or
maintain advantageous positions with respect to intellectual
property, and differentiate our products from those of our
competitors. Failure by us to introduce planned products or
other new products or to introduce products on schedule could
have an adverse effect on our business, financial condition and
results of operations.
The development and acquisition of innovative products and
technologies that improve efficacy, safety, patients and
clinicians ease of use and cost-effectiveness involve
significant technical and business risks. If we cannot adapt to
changing technologies or anticipate changes in our current and
potential customers requirements our products may become
obsolete, and our business could suffer. Our success will
depend, in part, on our ability to continue to enhance our
existing products, develop new technology that addresses the
increasingly sophisticated and varied needs of our prospective
customers, license or acquire leading technologies and respond
to technological advances and emerging industry standards and
practices on a timely and cost-effective basis.
We are
subject to a number of existing laws and regulations,
non-compliance with which could adversely affect our business,
financial condition and results of operations, and we are
susceptible to a changing regulatory environment.
As a participant in the healthcare industry, our operations and
products, and those of our customers, are regulated by numerous
government agencies, both inside and outside the United States.
The impact of this on us is direct, to the extent we are subject
to these laws and regulations, and indirect in that in a number
of situations, even though we may not be directly regulated by
specific healthcare laws and regulations, our products must be
capable of being used by our customers in a manner that complies
with those laws and regulations.
The manufacture, distribution, marketing and use of our products
are subject to extensive regulation and increasing scrutiny by
the FDA and other regulatory authorities both inside and outside
the United States. Any new product must undergo lengthy and
rigorous testing and other extensive, costly and time-consuming
procedures mandated by the FDA and foreign regulatory
authorities. Our facilities must be approved and licensed prior
to production and remain subject to inspection from time to time
thereafter. Failure to comply with the requirements of the FDA
or other regulatory authorities, including a failed inspection
or a failure in our adverse event reporting system, could result
in warning letters, product recalls or seizures, monetary
sanctions, injunctions to halt the manufacture and distribution
of products, civil or criminal sanctions, refusal of a
government to grant approvals or licenses, restrictions on
operations or withdrawal of existing approvals and licenses. Any
of these actions could cause a loss of customer confidence in us
and our products, which could adversely affect our sales.
We continue to address a number of regulatory issues as
discussed further under the caption entitled Certain
Regulatory Matters in Item 7 of this Annual Report on
Form 10-K.
In connection with these issues, 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
6
damages from purchasers or users, that substantial additional
charges or significant asset impairments may not be required,
that sales of other products may not be adversely affected, or
that additional regulation will not be introduced that may
adversely affect the companys operations and consolidated
financial statements.
The sales and marketing of our products and our relationships
with healthcare providers are under increasing scrutiny by
federal, state and foreign government agencies. The FDA, the
OIG, the U.S. Department of Justice (DOJ) and the Federal
Trade Commission have each increased their enforcement efforts
(including joint efforts) with respect to the Anti-Kickback
Statute, False Claims Act, off-label promotion of products,
other healthcare related laws, antitrust and other competition
laws. The DOJ also has increased its focus on the enforcement of
the U.S. Foreign Corrupt Practices Act (FCPA), particularly
as it relates to the conduct of pharmaceutical companies. The
FCPA prohibits certain individuals and entities, including the
company, from promising, offering, or giving anything of value
to foreign officials with the intent of influencing the foreign
official for the purpose of helping the company obtain or retain
business or gain an improper advantage. Outside of the United
States, our business involves significant interaction with
foreign officials. The FCPA also imposes recordkeeping and
internal controls requirements on the company. Foreign
governments have also increased their scrutiny of pharmaceutical
companies sales and marketing activities and relationships
with healthcare providers. The laws and standards governing the
promotion, sale and reimbursement of our products and those
governing our relationships with healthcare providers and
governments can be complicated, are subject to frequent change
and may be violated unknowingly. We have compliance programs in
place, including policies, training and various forms of
monitoring, designed to address these risks. Nonetheless, these
programs and policies may not always protect us from conduct by
our employees that violate these laws. Violations, or
allegations of violations, of these laws may result in large
civil and criminal penalties, debarment from participating in
government programs, diversion of management time, attention and
resources and may otherwise have an adverse effect on our
business, financial condition and results of operations. Refer
to Note 11 in Item 8 of this Annual Report on
Form 10-K
for a discussion of the requests that the company received in
2010 from certain federal government agencies.
Issues
with product quality could have an adverse effect upon our
business, subject us to regulatory actions and costly litigation
and cause a loss of customer confidence in us or our
products.
Our success depends upon the quality of our products. Quality
management plays an essential role in determining and meeting
customer requirements, preventing defects, improving the
companys products and services and maintaining the
integrity of the data that supports the safety and efficacy of
our products. Our future operating results will depend on our
ability to implement and improve our quality management program,
and effectively train and manage our employee base with respect
to quality management. While we have a network of quality
systems throughout our business units and facilities that relate
to the design, development, manufacturing, packaging,
sterilization, handling, distribution and labeling of our
products, quality and safety issues may occur with respect to
any of our products. In addition, some of the raw materials
employed in our production processes are derived from human and
animal origins. Though great care is taken to assure the safety
of these raw materials, the nature of their origin elevates the
potential for the introduction of pathogenic agents or other
contaminants.
A quality or safety issue could have an adverse effect on our
business, financial condition and results of operations and may
result in warning letters, product recalls or seizures, monetary
sanctions, injunctions to halt manufacture and distribution of
products, civil or criminal sanctions, refusal of a government
to grant approvals and licenses, restrictions on operations or
withdrawal of existing approvals and licenses. An inability to
address a quality or safety issue in an effective and timely
manner may also cause negative publicity, a loss of customer
confidence in us or our current or future products, which may
result in the loss of sales and difficulty in successfully
launching new products. In addition, we may be named as a
defendant in product liability or other lawsuits, which could
result in costly litigation, reduced sales, significant
liabilities and diversion of our managements time,
attention and resources. We continue to be self-insured with
respect to product liability claims. The absence of third-party
insurance coverage for such claims increases our potential
exposure to unanticipated claims and adverse decisions. Even
claims without merit could subject us to adverse publicity and
require us to incur significant legal fees.
7
For more information on regulatory matters currently being
addressed by the company, refer to the discussion under the
caption entitled Certain Regulatory Matters in
Item 7 of this Annual Report on
Form 10-K.
Implementation
of the FDA order to recall our COLLEAGUE infusion pumps in the
United States may adversely affect our business.
Pursuant to the Consent Decree entered into by the company in
June 2006, the FDA issued a final order in July 2010 regarding
the recall of the companys COLLEAGUE infusion pumps
currently in use in the United States. The company is executing
the recall over the two years following the final order by
offering its customers an option to replace their COLLEAGUE
infusion pumps or receive monetary consideration. Under the
replacement option, the companys customers may receive the
Sigma International General Medical Apparatus, LLC (SIGMA)
Spectrum infusion pumps in exchange for their COLLEAGUE infusion
pumps. For more information on the COLLEAGUE recall, refer to
the discussion under the caption entitled Certain
Regulatory Matters in Item 7 of this Annual Report on
Form 10-K.
The company cannot be certain that SIGMA will have sufficient
production capacity to meet the demand for SIGMA Spectrum
infusion pumps. Customers choosing a refund or for whom
sufficient replacement pumps are unavailable are likely to move
to a competitive infusion pump platform. Many of the
companys COLLEAGUE customers also purchase a variety of
the companys other Medication Delivery products. If a
significant number of COLLEAGUE customers move to a competitive
pump platform, our business may suffer and sales of other
products in the companys Medication Delivery product
portfolio may be adversely affected. In addition, it is possible
that substantial additional cash and non-cash charges, including
significant asset impairments related to the COLLEAGUE infusion
pumps and related businesses, may be required in future periods
based on new information, changes in estimates, the
implementation of the recall in the United States, and other
actions the company may be required to undertake in markets
outside the United States.
The
implementation of healthcare reform in the United States may
adversely affect our business.
The Patient Protection and Affordable Care Act (Act), which was
signed into law in March 2010, includes several provisions which
impact the companys businesses in the United States,
including increased Medicaid rebates and an expansion of the
340B Drug Pricing Program which provides certain qualified
entities, such as hospitals serving disadvantaged populations,
with discounts on the purchase of drugs for outpatient use and
an excise tax on the sale of certain drugs and medical devices.
The company will also be required to pay a tax on the sales of
its pharmaceutical products to the government beginning in 2011
and a 2.3% tax on certain of its medical devices beginning in
2013. The impact of the increased Medicaid rebates and the
expanded 340B Drug Pricing Program is largely expected to impact
the companys Bioscience business, while the additional
taxes are expected to impact each of the companys business
segments. We may also experience downward pricing pressure as
the Act reduces Medicare and Medicaid payments to hospitals.
While it is intended to expand health insurance coverage and
increase access to medical care generally, additional
regulations need to be established to implement many of the
Acts provisions. As a result, the full impact of the Act
is uncertain.
If
reimbursement for our current or future products is reduced or
modified, our business could suffer.
Sales of our products depend, in part, on the extent to which
the costs of our products are paid by health maintenance,
managed care, pharmacy benefit and similar healthcare management
organizations, or reimbursed by government health administration
authorities, private health coverage insurers and other
third-party payors. These healthcare management organizations
and third-party payors are increasingly challenging the prices
charged for medical products and services. Additionally, as
discussed above, the containment of healthcare costs has become
a priority of federal and state governments, and the prices of
drugs and other healthcare products have been targeted in this
effort. We also face challenges, including austerity measures
being taken by governments, in certain foreign markets where the
pricing and profitability of our products generally are subject
to government controls. Government controls in foreign markets
also impact our ability to collect accounts receivable in a
timely manner. Accordingly, our current and potential products
may not be considered cost effective, and reimbursement to the
consumer may not be available or sufficient to allow us to
8
sell our products on a competitive basis. Legislation and
regulations affecting reimbursement for our products may change
at any time and in ways that are difficult to predict and these
changes may be adverse to us. Further reductions in Medicare,
Medicaid or other third-party payor reimbursements could have a
negative effect on our operating results.
Consolidation
in the healthcare industry could adversely affect our business,
financial condition and results of operations.
There has been consolidation in our customer base, and by our
competitors, which has resulted in pricing and sales pressures.
As these consolidations occur, competition to provide products
like ours will become more intense, and the importance of
establishing relationships with key industry participants
including GPOs, IDNs and other customers will become greater.
Customers will continue to work and organize to negotiate price
reductions for our products and services. To the extent we are
forced to reduce our prices, our business will become less
profitable unless we are able to achieve corresponding
reductions in costs. The companys sales could be adversely
affected if any of its contracts with its GPOs, IDNs or other
customers are terminated in part or in their entirety, or
members decide to purchase from another supplier.
We
face substantial competition and many of our competitors have
significantly greater financial and other
resources.
Although no single company competes with us in all of our
businesses, we face substantial competition in each of our
segments from international and domestic healthcare and
pharmaceutical companies of all sizes. Competition is primarily
focused on cost-effectiveness, price, service, product
performance, and technological innovation. Some competitors,
principally large pharmaceutical companies, have greater
financial, R&D and marketing resources than us. Competition
may increase further as additional companies begin to enter our
markets or modify their existing products to compete directly
with ours. Greater financial, R&D and marketing resources
may allow our competitors to respond more quickly to new or
emerging technologies and changes in customer requirements that
may render our products obsolete or non-competitive. If our
competitors develop more effective or affordable products, or
achieve earlier patent protection or product commercialization
than we do, our operations will likely be negatively affected.
We also face competition for marketing, distribution and
collaborative development agreements, for establishing
relationships with academic and research institutions, and for
licenses to intellectual property. In addition, academic
institutions, government agencies and other public and private
research organizations may also conduct research, seek patent
protection and establish collaborative arrangements for
discovery, research, clinical development and marketing of
products similar to ours. These companies and institutions
compete with us in recruiting and retaining qualified scientific
and management personnel as well as in acquiring technologies
complementary to our programs. If we are unable to successfully
compete with these companies and institutions, our business may
suffer.
The
nature of producing plasma-based products may prevent us from
timely responding to market forces and effectively managing our
production capacity.
The production of plasma-based products is a lengthy and complex
process. Efforts to increase the collection of plasma may
include the construction and regulatory approval of additional
plasma collection facilities, which can be a lengthy regulatory
and capital intensive process. As a result, our ability to match
our collection and production of plasma-based products to market
demand is imprecise and may result in a failure to meet the
market demand of our plasma-based products or potentially an
oversupply of inventory. Failure to meet market demand for our
plasma-based products may result in customers transitioning to
available competitive products resulting in a loss of segment
share. In the event of an oversupply we may be forced to lower
the prices we charge for some of our plasma-based products,
close collection and processing facilities, record asset
impairment charges or take other action which may adversely
affect our business, financial condition and results of
operations.
9
If we
are unable to obtain sufficient components or raw materials on a
timely basis or if we experience other manufacturing
difficulties, our business may be adversely
affected.
The manufacture of our products requires the timely delivery of
sufficient amounts of quality components and materials. We
manufacture our products in over 50 manufacturing facilities
around the world. We acquire our components and materials from
many suppliers in various countries. While efforts are made to
diversify our sources of components and materials, in certain
instances we acquire components and materials from a sole
supplier. We work closely with our suppliers to ensure the
continuity of supply but we cannot guarantee these efforts will
continue to be successful. In addition, due to the regulatory
environment in which we operate, we may be unable to quickly
establish additional or replacement sources for some components
or materials. A reduction or interruption in supply, and an
inability to develop alternative sources for such supply, could
adversely affect our ability to manufacture our products in a
timely or cost-effective manner, and our ability to make product
sales.
Many of our products are difficult to manufacture. This is due
to the complex nature of manufacturing pharmaceuticals,
including biologics, and devices as well as the strict
regulatory regime governing our manufacturing operations.
Variations in the manufacturing process may result in production
failures which could lead to launch delays, product shortage,
unanticipated costs, lost revenues and damage to our reputation.
A failure to identify and address manufacturing problems prior
to the release of products to our customers may also result in
warning letters, product recalls or seizures, monetary
sanctions, injunctions to halt manufacture and distribution of
products, civil or criminal sanctions, refusal of a government
to grant approvals or licenses, restrictions on operations or
withdrawal of existing approvals or licenses.
Some of our manufacturing facilities are located in areas that
are subject to hurricanes, earthquakes or other natural
disasters. Loss or damage to a manufacturing facility could
adversely affect our ability to manufacture sufficient
quantities of key products to meet customer demand or
contractual requirements which may result in a loss of revenue
and other adverse business consequences. Because of the time
required to approve and license a manufacturing facility a third
party manufacturer may not be available on a timely basis to
replace production capacity in the event we lose manufacturing
capacity due to natural disaster, regulatory action or otherwise.
If we
are unable to protect our patents or other proprietary rights,
or if we infringe the patents or other proprietary rights of
others, our competitiveness and business prospects may be
materially damaged.
Patent and other proprietary rights are essential to our
business. Our success depends to a significant degree on our
ability to obtain and enforce patents and licenses to patent
rights, both in the United States and in other countries. We
cannot guarantee that pending patent applications will result in
issued patents, that patents issued or licensed will not be
challenged or circumvented by competitors, that our patents will
not be found to be invalid or that the intellectual property
rights of others will not prevent the company from selling
certain products or including key features in the companys
products.
The patent position of a healthcare company is often uncertain
and involves complex legal and factual questions. Significant
litigation concerning patents and products is pervasive in our
industry. Patent claims include challenges to the coverage and
validity of our patents on products or processes as well as
allegations that our products infringe patents held by
competitors or other third parties. A loss in any of these types
of cases 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.
We also rely on trademarks, copyrights, trade secrets and
know-how to develop, maintain and strengthen our competitive
positions. While we protect our proprietary rights to the extent
possible, we cannot guarantee that third parties will not know,
discover or independently develop equivalent proprietary
information or techniques, or that they will not gain access to
our trade secrets or disclose our trade secrets to the public.
Therefore, we cannot guarantee that we can maintain and protect
unpatented proprietary information and trade secrets.
Misappropriation or other loss of our intellectual property
would have an adverse effect on our competitive position and may
cause us to incur substantial litigation costs.
10
If our
business development activities are unsuccessful, our business
could suffer and our financial performance could be adversely
affected.
As part of our long-term growth strategy, we are engaged in
business development activities including evaluating
acquisitions, joint development opportunities, technology
licensing arrangements and other opportunities. These activities
may result in substantial investment of the companys
resources. Our success developing products or expanding into new
markets from such activities will depend on a number of factors,
including our ability to find suitable opportunities for
acquisition, investment or alliance; whether we are able to
complete an acquisition, investment or alliance on terms that
are satisfactory to us; the strength of the other companys
underlying technology, products and ability to execute its
business strategies; any intellectual property and litigation
related to these products or technology; and our ability to
successfully integrate the acquired company, business, product,
technology or research into our existing operations, including
the ability to adequately fund acquired in-process research and
development projects. If we are unsuccessful in our business
development activities, we may be unable to meet our financial
targets and our financial performance could be adversely
affected.
If we
are unsuccessful in identifying growth opportunities or exiting
low margin businesses or discontinuing low profit products, our
business, financial condition and results could be adversely
affected.
Successful execution of our business strategy depends, in part,
on improving the profit margins we earn with respect to our
current and future products. A failure to identify and take
advantage of opportunities that allow us to increase our profit
margins or a failure by us to exit low profit margin businesses
or discontinue low profit margin products, may result in us
failing to meet our financial targets and may otherwise have an
adverse effect on our business, financial condition and results
of operations.
We are
subject to risks associated with doing business
globally.
Our operations, both inside and outside the United States, are
subject to risks inherent in conducting business globally and
under the laws, regulations and customs of various jurisdictions
and geographies. These risks include fluctuations in currency
exchange rates, changes in exchange controls, loss of business
in government and public tenders that are held annually in many
cases, nationalization, increasingly complex labor environments,
expropriation and other governmental actions, availability of
raw materials, changes in taxation, including legislative
changes in United States and international taxation of income
earned outside of the United States, importation limitations,
export control restrictions, changes in or violations of
U.S. or local laws, including the FCPA, dependence on a few
government entities as customers, pricing restrictions, economic
and political instability, disputes between countries,
diminished or insufficient protection of intellectual property,
disruption or destruction of operations in a significant
geographic region due to the location of
manufacturing facilities, distribution facilities or
customers regardless of cause, including war,
terrorism, riot, civil insurrection or social unrest, or natural
or man-made disasters, including famine, flood, fire,
earthquake, storm or disease. Failure to comply with the laws
and regulations that affect our global operations could have an
adverse effect on our business, financial condition or results
of operations.
We are
subject to foreign currency exchange risk.
In 2010, we generated approximately 60% of our revenue outside
the United States. We anticipate that revenue from outside the
United States will continue to be significant. As a result, our
financial results may continue to be adversely affected by
fluctuations in foreign currency exchange rates. Market
volatility and currency fluctuations may also reduce the
benefits from our natural hedges and limit our ability to
cost-effectively hedge against our foreign currency exposure.
Governments may impose currency restrictions restricting our
ability to manage our foreign currency exposure. We cannot
predict with any certainty changes in foreign currency exchange
rates or the degree to which we can mitigate these risks. A
discussion of the financial impact of foreign exchange rate
fluctuations, and the ways and extent to which we attempt to
mitigate such impact, including the impact of restrictions on
currency exchange imposed by the Venezuelan government, is
contained under the heading Financial Instrument Market
Risk in Item 7 of this Annual Report on
Form 10-K.
11
We may
experience difficulties implementing our new global enterprise
resource planning system.
We are engaged in a multi-year implementation of a new global
enterprise resource planning system (ERP). The ERP is designed
to accurately maintain the companys books and records and
provide information to the companys management team
important to the operation of the business. The companys
ERP has required, and will continue to require, the investment
of significant human and financial resources. We may not be able
to successfully implement the ERP without experiencing delays,
increased costs and other difficulties. Any significant
disruption or deficiency in the design and implementation of the
ERP could adversely affect our ability to process orders, ship
product, send invoices and track payments, fulfill contractual
obligations or otherwise operate our business.
We are
subject to a number of pending lawsuits.
We are a defendant in a number of pending lawsuits, including
with respect to patent and product liability matters, and could
be subject to additional lawsuits in the future. See
Note 11 in Item 8 of this Annual Report on
Form 10-K
for more information regarding these lawsuits. Given the
uncertain nature of litigation generally, we are not able in all
cases to estimate the amount or range of loss that could result
from an unfavorable outcome of the litigation to which we are a
party. In view of these uncertainties, we cannot assure that the
outcome of these matters will not result in charges in excess of
any established reserves, and, to the extent available,
liability insurance. Protracted litigation, including any
adverse outcomes, may have an adverse impact on the business,
operations or financial condition of the company.
Current
or worsening economic conditions may adversely affect our
business and financial condition.
The companys ability to generate cash flows from
operations could be affected if there is a material decline in
the demand for the companys products, in the solvency of
its customers or suppliers, or deterioration in the
companys key financial ratios or credit ratings. Current
or worsening economic conditions may adversely affect our
business and the business of our customers, including their
ability to pay for our products and services, and the amount
spent on healthcare generally. This could result in a decrease
in the demand for our products and services, declining cash
flows, longer sales cycles, slower adoption of new technologies
and increased price competition. These conditions may also
adversely affect certain of our suppliers, which could cause a
disruption in our ability to produce our products.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
The companys corporate offices are owned and located at
One Baxter Parkway, Deerfield, Illinois 60015.
Baxter owns or has long-term leases on all of its manufacturing
facilities. The company maintains 14 manufacturing facilities in
the United States and its territories, including three in Puerto
Rico. The company also manufactures in Australia, Austria,
Belgium, Brazil, Canada, Chile, China, Colombia, Costa Rica, the
Czech Republic, Germany, India, Ireland, Italy, Japan, Malta,
Mexico, the Philippines, Poland, Saudi Arabia, Singapore, Spain,
Switzerland, Tunisia, Turkey and the United Kingdom. The
majority of these facilities are shared by more than one of the
companys business segments. The companys principal
manufacturing facilities by segment are listed below:
|
|
|
|
|
Business
|
|
Location
|
|
Owned/Leased
|
|
BioScience
|
|
|
|
|
|
|
Orth, Austria
|
|
Owned
|
|
|
Vienna, Austria
|
|
Owned
|
|
|
Lessines, Belgium
|
|
Owned
|
12
|
|
|
|
|
Business
|
|
Location
|
|
Owned/Leased
|
|
|
|
Hayward, California
|
|
Leased
|
|
|
Los Angeles, California
|
|
Owned
|
|
|
Thousand Oaks, California
|
|
Owned
|
|
|
Bohumil, Czech Republic
|
|
Owned
|
|
|
Pisa, Italy
|
|
Owned
|
|
|
Rieti, Italy
|
|
Owned
|
|
|
Neuchatel, Switzerland
|
|
Owned
|
|
|
Elstree, United Kingdom
|
|
Leased
|
Medication Delivery
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|
|
|
|
|
|
Mountain Home, Arkansas
|
|
Owned
|
|
|
Toongabbie, Australia
|
|
Owned
|
|
|
Lessines, Belgium
|
|
Owned
|
|
|
Sao Paulo, Brazil
|
|
Owned
|
|
|
Alliston, Canada
|
|
Owned
|
|
|
Shanghai, China
|
|
Owned
|
|
|
Suzhou, China
|
|
Owned
|
|
|
Cali, Colombia
|
|
Owned
|
|
|
Cartago, Costa Rica
|
|
Owned
|
|
|
Halle, Germany
|
|
Owned
|
|
|
Round Lake, Illinois
|
|
Owned
|
|
|
Bloomington, Indiana
|
|
Owned/Leased(1)
|
|
|
Grosotto, Italy
|
|
Owned
|
|
|
Cleveland, Mississippi
|
|
Leased
|
|
|
Cherry Hill, New Jersey
|
|
Owned/Leased(1)(4)
|
|
|
North Cove, North Carolina
|
|
Owned
|
|
|
Aibonito, Puerto Rico
|
|
Leased
|
|
|
Guayama, Puerto Rico
|
|
Owned
|
|
|
Jayuya, Puerto Rico
|
|
Leased
|
|
|
Woodlands, Singapore
|
|
Owned/Leased(2)
|
|
|
Sabinanigo, Spain
|
|
Owned
|
|
|
San Vittore, Switzerland
|
|
Owned
|
|
|
Thetford, United Kingdom
|
|
Owned
|
Renal
|
|
|
|
|
|
|
Mountain Home, Arkansas
|
|
Owned
|
|
|
Toongabbie, Australia
|
|
Owned
|
|
|
Sao Paulo, Brazil
|
|
Owned
|
|
|
Alliston, Canada
|
|
Owned
|
|
|
Guangzhou, China
|
|
Owned(3)
|
|
|
Suzhou, China
|
|
Owned
|
|
|
Cali, Colombia
|
|
Owned
|
|
|
Castlebar, Ireland
|
|
Owned
|
|
|
Miyazaki, Japan
|
|
Owned
|
|
|
Cuernavaca, Mexico
|
|
Owned
|
|
|
North Cove, North Carolina
|
|
Owned
|
|
|
Woodlands, Singapore
|
|
Owned/Leased(2)
|
|
|
San Vittore, Switzerland
|
|
Owned
|
|
|
Liverpool, United Kingdom
|
|
Owned
|
13
|
|
|
(1)
|
|
The Bloomington, Indiana and Cherry
Hill, New Jersey locations include both owned and leased
facilities.
|
|
(2)
|
|
Baxter owns the facility located at
Woodlands, Singapore and leases the property upon which it rests.
|
|
(3)
|
|
The Guangzhou, China facility is
owned by a joint venture in which Baxter owns a majority share.
|
|
(4)
|
|
The Cherry Hill, New Jersey
facilities are included in the pending divestiture of the
companys U.S. generic injectables business which was
announced in October 2010.
|
The company also owns or operates shared distribution facilities
throughout the world. In the United States and Puerto Rico,
there are 12 shared distribution facilities with the
principal facilities located in Memphis, Tennessee; Catano,
Puerto Rico; North Cove, North Carolina; and Round Lake,
Illinois. Internationally, we have more than 100 shared
distribution facilities located in Argentina, Australia,
Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Costa
Rica, the Czech Republic, Ecuador, France, Germany, Greece,
Guatemala, Hong Kong, India, Ireland, Italy, Japan, Korea,
Mexico, New Zealand, Panama, Peru, the Philippines, Poland,
Portugal, Russia, Singapore, Spain, Sweden, Switzerland, Taiwan,
Thailand, Turkey, the United Arab Emirates, the United Kingdom
and Venezuela.
The company continually evaluates its plants and production
lines and believes that its current facilities plus any planned
expansions are generally sufficient to meet its expected needs
and expected near-term growth. Expansion projects and facility
closings will be undertaken as necessary in response to market
needs.
|
|
Item 3.
|
Legal
Proceedings.
|
Incorporated by reference to Note 11 in Item 8 of this
Annual Report on
Form 10-K.
Executive
Officers of the Registrant
Robert L. Parkinson, Jr., age 60, is Chairman
and Chief Executive Officer of Baxter, having served in that
capacity since April 2004. Prior to joining Baxter,
Mr. Parkinson was Dean of Loyola University Chicago School
of Business Administration and Graduate School of Business from
2002 to 2004. He retired from Abbott Laboratories in 2001
following a
25-year
career, having served in a variety of domestic and international
management and leadership positions, including as President and
Chief Operating Officer. Mr. Parkinson also serves on the
Board of Directors of Chicago-based Northwestern Memorial
HealthCare as well as Loyola University Chicago Board of
Trustees.
Phillip L. Batchelor, age 49, is Corporate Vice
President, Quality, having served in that capacity since April
2010. From April 2005 to April 2010, Mr. Batchelor served
as Vice President for BioScience Global Operations. Prior to
that, Mr. Batchelor served in a variety of positions in
quality management and manufacturing.
Michael J. Baughman, age 46, is Corporate Vice
President and Controller, having served in that capacity since
May 2006. Mr. Baughman joined Baxter in 2003 as Vice
President of Corporate Audit and was appointed Controller in
March 2005. Before joining Baxter, Mr. Baughman spent
16 years at PricewaterhouseCoopers LLP, in roles of
increasing responsibility, which included audit partner and
partner in the firms mergers and acquisitions practice.
Robert M. Davis, age 44, is Corporate Vice President
and President, Medical Products, having served in that capacity
since October 2010. From May 2006 to July 2010, Mr. Davis
served as Corporate Vice President and Chief Financial Officer
and from July to October 2010, he was Corporate Vice President
and President, Renal. Prior to joining Baxter as Treasurer in
2004, Mr. Davis was with Eli Lilly and Company from 1990.
J. Michael Gatling, age 61, is Corporate Vice
President, Manufacturing, having served in that capacity since
December 1996. Mr. Gatling is also responsible for the
supply chain and environment, health and safety functions.
Ludwig N. Hantson, Ph.D., age 48, is Corporate
Vice President and President, BioScience, having served in that
capacity since October 2010. Dr. Hantson joined Baxter in
May 2010 as Corporate Vice President and President,
International. From 2001 to May 2010, Dr. Hantson held
various positions at Novartis
14
Pharmaceuticals Corporation, the most recent of which was Chief
Executive Officer, Pharma North America. Prior to Novartis,
Dr. Hantson spent 13 years with Johnson &
Johnson in roles of increasing responsibility in marketing and
clinical research and development.
Robert J. Hombach, age 45, is Corporate Vice
President, Chief Financial Officer and Treasurer, having served
in that capacity since July 2010. From February 2007 to July
2010, Mr. Hombach served as Corporate Vice President and
Treasurer and from December 2004 to February 2007, he was Vice
President of Finance, Europe. Prior to that, Mr. Hombach
served in a number of finance positions with increasing
responsibility in the planning, manufacturing, operations and
treasury areas.
Jeanne K. Mason, Ph.D., age 55, is Corporate
Vice President, Human Resources. Prior to joining Baxter in May
2006, Dr. Mason was with General Electric from 1988,
holding various leadership positions, the most recent of which
was with GE Insurance Solutions, a primary insurance and
reinsurance business, where she was responsible for global human
resource functions.
Norbert G. Riedel, Ph.D., age 53, is
Corporate Vice President and Chief Scientific Officer, having
served in that capacity since May 2001. From 1998 to 2001, he
served as President of the recombinant business unit of
BioScience. Prior to joining Baxter, Dr. Riedel was head of
worldwide biotechnology and worldwide core research functions at
Hoechst Marion Roussel, now Sanofi-Aventis.
David P. Scharf, age 43, is Corporate Vice President
and General Counsel, having served in that capacity since August
2009. Mr. Scharf joined Baxter in July 2005 and served in a
number of positions, including Deputy General Counsel and
Corporate Secretary. Prior to joining Baxter, Mr. Scharf
was with Guidant Corporation from 2002, in roles of increasing
responsibility.
All executive officers hold office until the next annual
election of officers and until their respective successors are
elected and qualified.
15
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
The following table includes information about the
companys common stock repurchases during the three-month
period ended December 31, 2010.
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Value of Shares
|
|
|
|
Total Number of
|
|
|
|
|
|
Purchased as Part of
|
|
|
that may yet be
|
|
|
|
Shares
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased(1)
|
|
|
Paid per Share
|
|
|
Programs(1)
|
|
|
Programs(1)(2)
|
|
|
|
|
October 1, 2010 through
October 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2010 through
November 30, 2010
|
|
|
2,340,200
|
|
|
|
$51.28
|
|
|
|
2,340,200
|
|
|
|
|
|
December 1, 2010 through
December 31, 2010
|
|
|
1,189,100
|
|
|
|
$50.45
|
|
|
|
1,189,100
|
|
|
|
|
|
|
|
Total
|
|
|
3,529,300
|
|
|
|
$51.00
|
|
|
|
3,529,300
|
|
|
|
$2,996,598,697
|
|
|
|
|
|
|
(1) |
|
In July 2009, 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 or in private transactions.
During the fourth quarter of 2010, the company repurchased
3.5 million shares for $180 million under this
program. The remaining authorization under this program totaled
approximately $500 million at December 31, 2010. This
program does not have an expiration date. |
|
(2) |
|
In December 2010, the company announced that its board of
directors authorized the company to repurchase up to
$2.5 billion of its common stock on the open market or in
private transactions. No shares had been repurchased under this
authorization as of December 31, 2010. This program does
not have an expiration date. |
Additional information required by this item is incorporated by
reference to Note 13 in Item 8 of this Annual Report
on
Form 10-K.
16
|
|
Item 6.
|
Selected
Financial Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of or for the years ended December 31
|
|
20101,6
|
|
|
20092,6
|
|
|
20083,6
|
|
|
20074,6
|
|
|
20065,6
|
|
|
|
|
Operating Results
|
|
Net sales
|
|
$
|
12,843
|
|
|
|
12,562
|
|
|
|
12,348
|
|
|
|
11,263
|
|
|
|
10,378
|
|
(in millions)
|
|
Income from continuing operations attributable to Baxter7
|
|
$
|
1,420
|
|
|
|
2,205
|
|
|
|
2,014
|
|
|
|
1,707
|
|
|
|
1,398
|
|
|
|
Depreciation and amortization
|
|
$
|
685
|
|
|
|
638
|
|
|
|
631
|
|
|
|
581
|
|
|
|
575
|
|
|
|
Research and development expenses
|
|
$
|
915
|
|
|
|
917
|
|
|
|
868
|
|
|
|
760
|
|
|
|
614
|
|
|
|
Balance Sheet and
|
|
Capital expenditures
|
|
$
|
963
|
|
|
|
1,014
|
|
|
|
954
|
|
|
|
692
|
|
|
|
526
|
|
Cash Flow Information
|
|
Total assets
|
|
$
|
17,489
|
|
|
|
17,354
|
|
|
|
15,405
|
|
|
|
15,294
|
|
|
|
14,686
|
|
(in millions)
|
|
Long-term debt and lease obligations
|
|
$
|
4,363
|
|
|
|
3,440
|
|
|
|
3,362
|
|
|
|
2,664
|
|
|
|
2,567
|
|
|
|
Common Stock
Information
|
|
Average number of common shares outstanding (in millions)8
|
|
|
590
|
|
|
|
607
|
|
|
|
625
|
|
|
|
644
|
|
|
|
651
|
|
|
|
Income from continuing operations attributable to Baxter per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.41
|
|
|
|
3.63
|
|
|
|
3.22
|
|
|
|
2.65
|
|
|
|
2.15
|
|
|
|
Diluted
|
|
$
|
2.39
|
|
|
|
3.59
|
|
|
|
3.16
|
|
|
|
2.61
|
|
|
|
2.13
|
|
|
|
Cash dividends declared per common share
|
|
$
|
1.180
|
|
|
|
1.070
|
|
|
|
0.913
|
|
|
|
0.720
|
|
|
|
0.582
|
|
|
|
Year-end market price per common share
|
|
$
|
50.62
|
|
|
|
58.68
|
|
|
|
53.59
|
|
|
|
58.05
|
|
|
|
46.39
|
|
|
|
Other Information
|
|
Total shareholder
return9
|
|
|
(11.6%)
|
|
|
|
11.6%
|
|
|
|
(6.3%)
|
|
|
|
26.8%
|
|
|
|
24.8%
|
|
|
|
Common shareholders of record at year-end
|
|
|
43,715
|
|
|
|
48,286
|
|
|
|
48,492
|
|
|
|
47,661
|
|
|
|
49,097
|
|
|
|
|
|
|
1 |
|
Income from continuing operations attributable to Baxter
included a $588 million charge related to the recall of
infusion pumps from the U.S. market and other actions the
company is undertaking outside the United States. The charge
impacted net sales by $213 million. Income from continuing
operations attributable to Baxter also included a
$257 million business optimization charge, a
$112 million impairment charge associated with the
companys agreement to divest its U.S. generic injectables
business, a $62 million litigation-related charge, a
$39 million charge to write off a deferred tax asset,
acquired in-process research and development (IPR&D)
charges of $34 million and a $28 million charge to
write down accounts receivable in Greece. |
|
2 |
|
Income from continuing operations attributable to Baxter
included a $79 million business optimization charge, an
impairment charge of $54 million and a charge of
$27 million relating to infusion pumps. |
|
3 |
|
Income from continuing operations attributable to Baxter
included charges of $125 million relating to infusion
pumps, an impairment charge of $31 million and charges
totaling $19 million relating to IPR&D. |
|
4 |
|
Income from continuing operations attributable to Baxter
included a restructuring charge of $70 million, a charge of
$56 million relating to litigation and IPR&D charges
of $61 million. |
|
5 |
|
Income from continuing operations attributable to Baxter
included a charge of $76 million relating to infusion pumps. |
|
6 |
|
Refer to the notes to the consolidated financial statements for
information regarding other charges and income items. |
|
7 |
|
Excludes income from continuing operations attributable to
noncontrolling interests of $7 million, $10 million,
$11 million, $14 million and $14 million for
2010, 2009, 2008, 2007 and 2006, respectively. |
|
8 |
|
Excludes common stock equivalents. |
|
9 |
|
Represents the total of (decline) appreciation in market price
plus cash dividends declared on common shares. |
17
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following commentary should be read in conjunction with the
consolidated financial statements and accompanying notes.
EXECUTIVE
OVERVIEW
Description
of the Company and Business Segments
Baxter International Inc. (Baxter or the company), through its
subsidiaries, develops, manufactures and markets products that
save and sustain the lives of people with hemophilia, immune
disorders, infectious diseases, kidney disease, trauma, and
other chronic and acute medical conditions. As a global,
diversified healthcare company, Baxter applies a unique
combination of expertise in medical devices, pharmaceuticals and
biotechnology to create products that advance patient care
worldwide. The company operates in three segments. BioScience
processes 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 select vaccines. Medication Delivery
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 provides products and services related to pharmacy
compounding, drug formulation and packaging technologies. In
October 2010, the company entered into an agreement to divest
its U.S. generic injectables business. Refer to Note 3
for further information regarding this divestiture. Renal
provides products to treat end-stage renal disease, or
irreversible kidney failure. The business manufactures solutions
and other products for peritoneal dialysis (PD), a home-based
therapy, and also distributes products for hemodialysis (HD),
which is generally conducted in a hospital or clinic. In October
2010, the company announced the formation of a new Medical
Products business, combining the companys Medication
Delivery and Renal businesses into a single global business unit.
Baxter has approximately 48,000 employees and conducts
business in over 100 countries. The company generates
approximately 60% of its revenues outside the United States, and
maintains over 50 manufacturing facilities and over 100
distribution facilities in the United States, Europe,
Asia-Pacific, Latin America and Canada.
Financial
Results
Baxter faced a number of significant challenges in 2010,
including the impact of the global economic environment,
healthcare reform in the United States and abroad, and dynamics
in the plasma proteins market. While these challenges negatively
impacted the companys sales growth and profitability,
Baxter delivered solid financial results and executed on key
commercial, operational and organizational strategies in 2010.
Baxters global net sales totaled $12.8 billion in
2010, an increase of 2% over 2009, including a favorable foreign
currency impact of 1 percentage point. International sales
totaled $7.6 billion, an increase of 5% over 2009,
including a favorable foreign currency impact of
2 percentage points.
Baxters net income for 2010 totaled $1.4 billion, or
$2.39 per diluted share, compared to $2.2 billion, or $3.59
per diluted share, in the prior year. Net income in 2010
included after-tax asset impairment, business optimization,
litigation-related, in-process research and development
(IPR&D) and other charges which reduced net sales by
$213 million and net income by $946 million, or $1.59
per diluted share. Net income in 2009 included after-tax
impairment, business optimization and other charges which
reduced net income by $125 million, or $0.21 per diluted
share. On an adjusted basis, excluding these special charges in
both years, Baxters net income in 2010 was
$2.4 billion, which represents an increase of 2% from
$2.3 billion in 2009, while earnings per diluted share of
$3.98 increased 5% from $3.80 in 2009. Adjusted net income and
adjusted earnings per share, each excluding special items, are
non-GAAP (generally accepted accounting principles) financial
measures. The company believes that these non-GAAP measures may
provide a more complete understanding of the companys
operations and may facilitate a fuller analysis of the
companys results of operations, particularly in evaluating
performance from one period to another.
18
Significant items impacting the companys results in 2010
included a $588 million pre-tax charge associated with the
recall of the companys COLLEAGUE infusion pumps from the
U.S. market and other actions the company is undertaking
outside of the United States, with $213 million recorded as
a reduction of net sales and $375 million in cost of sales.
This charge primarily reflected the costs associated with the
execution of the final order issued in July 2010 by the
U.S. Food and Drug Administration (FDA), which allows
Baxter to offer replacement infusion pumps or monetary
consideration to owners of COLLEAGUE pumps. Under the
replacement option, customers may receive Spectrum infusion
pumps manufactured by Sigma International General Medical
Apparatus, LLC (SIGMA), a company in which Baxter has an equity
stake. Net income in 2009 also included a $27 million
pre-tax charge primarily related to planned retirement costs
associated with the SYNDEO PCA Syringe Pump.
Also impacting the companys results were costs associated
with the companys execution of certain strategies to
optimize its business portfolio and organizational structure,
including the following.
|
|
|
|
|
The company entered into a definitive agreement to divest its
U.S. generic injectables business. The determination to
divest this business was based on the companys strategic
decision to redirect resources toward its proprietary, enhanced
packaging offerings and formulation technologies, consistent
with the companys focus on product differentiation. As a
result of the divestiture agreement, the company recorded a
pre-tax impairment charge of $112 million in 2010.
|
|
|
|
The company took actions to optimize its overall cost structure
on a global basis, including streamlining its international
operations, rationalizing its manufacturing facilities and
enhancing its general and administrative infrastructure. The
company recorded a pre-tax charge of $257 million in 2010
related to these actions. The company also recorded a business
optimization charge of $79 million in 2009.
|
The company also recorded pre-tax charges in 2010 of
$62 million related to litigation, $34 million related
to IPR&D, $28 million to write down accounts
receivable in Greece, and $39 million to write off a
deferred tax asset as a result of a change in the tax treatment
of reimbursements under the Medicare Part D retiree
prescription drug subsidy program. In 2009, the company recorded
a pre-tax impairment charge of $54 million associated with
the discontinuation of the companys SOLOMIX drug delivery
system in development.
Baxters financial results included research and
development (R&D) expenses totaling $915 million in
2010. This significant investment in R&D reflects the
companys efforts to enhance future growth through clinical
differentiation, including the broadening of its hemophilia
portfolio with continued innovation; exploration of alternative
routes of administration of GAMMAGARD LIQUID (marketed as KIOVIG
in most markets outside the United States), the liquid
formulation of the companys antibody replacement therapy,
IGIV (immune globulin intravenous); and the development of home
HD therapy. During the year, the company advanced a number of
Phase III clinical trials and numerous earlier stage
clinical trials of therapies that have the potential to impact
the treatment and delivery of care for chronic diseases like
Alzheimers disease, hemophilia, end-stage renal disease
and immune deficiencies.
The companys financial position remains strong, with cash
flows from operations totaling $3.0 billion in 2010, a
record level for the company, driven by strong working capital
management. The company has continued to execute on its
disciplined capital allocation framework, which was designed to
optimize shareholder value creation through targeted investments
in working capital and capital investments, share repurchases
and dividends, and acquisitions and other business development
initiatives to accelerate the companys growth.
Capital investments totaled $963 million in 2010 as the
company continues to invest in capacity across its businesses to
support future growth. In addition, these investments were
focused on projects that enhance the companys cost
structure and manufacturing capabilities, particularly as they
relate to the companys nutritional, anesthesia and PD
products, as well as plasma and recombinant manufacturing
platforms. A significant portion of the companys
investment in capital expenditures supports the companys
strategy of geographic expansion with select investments in
growing markets. In addition, the company continues to invest to
support the companys ongoing strategic focus on R&D
with the expansion of research facilities, manufacturing sites
and laboratories.
19
The company also continued to return value to its shareholders
in the form of share repurchases and dividends. During 2010, the
company repurchased 30 million shares of common stock for
$1.5 billion, and paid cash dividends to its shareholders
totaling $688 million. Since 2007, the company has
consistently raised the quarterly dividend rate, with increases
of 20% in 2008, 12% in 2009 and 7% in 2010.
The companys strong financial position also enabled
several business development initiatives in 2010, including the
following:
|
|
|
|
|
The acquisition of ApaTech Limited (ApaTech), a U.K.-based
orthobiologics company and leader in the research and
development of bone graft technologies, which includes ACTIFUSE,
a synthetic bone graft material enabling the companys
entry in the bone fusion market;
|
|
|
|
The completion of an agreement with Takeda Pharmaceutical
Company Limited to jointly pursue development and licensure of
an H5N1 influenza vaccine in Japan;
|
|
|
|
The acquisition and licensing of the hemophilia-related
intellectual property and other assets of Archemix Corp.
(Archemix), including the lead product within the agreement,
ARC19499, a synthetic subcutaneously-administered hemophilia
therapy currently in a Phase I trial in the United
Kingdom; and
|
|
|
|
The acquisition of exclusive distribution and licensing rights
in the United States, Australia, New Zealand and Canada to
GLASSIA [Alpha1-Proteinase Inhibitor (Human)], the first
ready-to-use
liquid alpha1-proteinase inhibitor used to treat alpha-1
antitrypsin deficiency, as a result of an agreement with Kamada
Ltd. (Kamada).
|
Strategic
Objectives
Baxter is focusing on several key objectives to successfully
execute its long-term strategy to achieve sustainable growth and
deliver shareholder value. Baxters diversified healthcare
model, its broad portfolio of products that treat
life-threatening acute or chronic conditions, and its global
presence are core components of the companys strategy to
achieve these objectives. R&D innovation and scientific
productivity will continue to be a key strategic priority. In
2011, the company will continue to invest in its R&D
pipeline while enhancing the prioritization and management of
R&D projects, ensuring that R&D expenditures match
business growth strategies and leveraging the companys
core strengths to expand into new therapeutic areas.
In 2011, Baxter launched a global, multi-year business
transformation initiative, with the goal of strengthening the
companys focus on disciplined innovation, commercial
effectiveness, operational excellence, organizational
effectiveness and accelerated growth. As part of this
initiative, the company will seek opportunities to maximize its
deployment of sales and marketing resources, and re-engineer
certain global systems and processes, including quality,
regulatory and financial systems, as the company reinvigorates
its commitment to continuous improvement. The company also plans
to pursue accelerated growth by fully capitalizing on
Baxters diversified healthcare model in its business
development opportunities, including acquisitions,
collaborations and alliances. Through continued innovation,
investment and collaboration, Baxter seeks to advance new
therapies, improve the safety and cost-effectiveness of
treatments and expand access to care.
The companys ability to sustain long-term growth and
successfully execute the strategies discussed above depends in
part on the companys ability to manage within an
increasingly competitive and regulated environment and to
address the other risk factors described in Item 1A of this
Annual Report on
Form 10-K.
20
RESULTS
OF OPERATIONS
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
|
|
BioScience
|
|
$
|
5,640
|
|
|
$
|
5,573
|
|
|
$
|
5,308
|
|
|
|
1%
|
|
|
|
5%
|
|
Medication Delivery
|
|
|
4,768
|
|
|
|
4,649
|
|
|
|
4,560
|
|
|
|
3%
|
|
|
|
2%
|
|
Renal
|
|
|
2,389
|
|
|
|
2,266
|
|
|
|
2,306
|
|
|
|
5%
|
|
|
|
(2%
|
)
|
Transition services to Fenwal Inc.
|
|
|
46
|
|
|
|
74
|
|
|
|
174
|
|
|
|
(38%
|
)
|
|
|
(57%
|
)
|
|
|
Total net sales
|
|
$
|
12,843
|
|
|
$
|
12,562
|
|
|
$
|
12,348
|
|
|
|
2%
|
|
|
|
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
|
|
United States
|
|
$
|
5,264
|
|
|
$
|
5,317
|
|
|
$
|
5,044
|
|
|
|
(1%
|
)
|
|
|
5%
|
|
International
|
|
|
7,579
|
|
|
|
7,245
|
|
|
|
7,304
|
|
|
|
5%
|
|
|
|
(1%
|
)
|
|
|
Total net sales
|
|
$
|
12,843
|
|
|
$
|
12,562
|
|
|
$
|
12,348
|
|
|
|
2%
|
|
|
|
2%
|
|
|
|
Foreign currency favorably impacted net sales by
1 percentage point in 2010, as the impact of the
strengthening of the U.S. Dollar relative to the Euro was
more than offset by the weakening of the U.S. Dollar
relative to other currencies, including the Australian Dollar,
the Canadian Dollar and the Japanese Yen. Foreign currency
unfavorably impacted net sales by 5 percentage points in
2009 due to the strengthening of the U.S. Dollar relative
to other currencies, including the Euro and the British Pound.
Total net sales growth in 2010 was unfavorably impacted by
2 percentage points due to the COLLEAGUE infusion pump
charge, which reduced net sales in the Medication Delivery
segment by $213 million. Refer to Note 5 for further
information regarding this charge. In addition, healthcare
reform unfavorably impacted sales growth in 2010 by
approximately 0.5 percentage points. Healthcare reform
legislation enacted in the United States in the first quarter of
2010 increased Medicaid rebates and expanded the 340B Drug
Pricing Program, primarily impacting the Recombinants, Plasma
Proteins and Antibody Therapy product categories in the
BioScience segment. Similar reform actions undertaken by
governments outside the United States also unfavorably impacted
sales growth.
BioScience The following is a summary of sales
by product category in the BioScience segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Recombinants
|
|
$
|
2,095
|
|
|
$
|
2,058
|
|
|
$
|
1,966
|
|
|
|
2%
|
|
|
|
5%
|
|
Plasma Proteins
|
|
|
1,368
|
|
|
|
1,338
|
|
|
|
1,219
|
|
|
|
2%
|
|
|
|
10%
|
|
Antibody Therapy
|
|
|
1,354
|
|
|
|
1,368
|
|
|
|
1,217
|
|
|
|
(1%
|
)
|
|
|
12%
|
|
Regenerative Medicine
|
|
|
527
|
|
|
|
442
|
|
|
|
408
|
|
|
|
19%
|
|
|
|
8%
|
|
Other
|
|
|
296
|
|
|
|
367
|
|
|
|
498
|
|
|
|
(19%
|
)
|
|
|
(26%
|
)
|
|
|
Total net sales
|
|
$
|
5,640
|
|
|
$
|
5,573
|
|
|
$
|
5,308
|
|
|
|
1%
|
|
|
|
5%
|
|
|
|
Net sales in the BioScience segment increased 1% and 5% in 2010
and 2009, respectively (with no impact from foreign currency in
2010 and an unfavorable foreign currency impact of
5 percentage points in 2009). Sales growth in the
BioScience segment in both years was driven by increased demand
across a majority of the product categories. The principal
drivers were the following:
|
|
|
|
|
Sales growth in the Recombinants product category in both 2010
and 2009 was the result of the continued adoption of the
companys advanced recombinant therapy, ADVATE
[Antihemophilic Factor (Recombinant), Plasma/Albumin-Free
Method]. In 2010, this growth was partially offset by lower
tender sales in the United Kingdom and a reduction in
distributor inventory levels in the United States.
|
21
|
|
|
|
|
In the Plasma Proteins product category, sales growth in both
years was driven by strong international demand for FEIBA (an
anti-inhibitor coagulant complex) and continued market
penetration in the United States of ARALAST NP [Alpha
1-Proteinase Inhibitor (Human)]. Partially offsetting this
growth in 2010 were a reduction in international sales of
plasma-derived factor VIII and lower U.S. sales of albumin.
In 2009, strong demand for plasma-derived factor VIII and
improved pricing and increased demand for albumin contributed to
sales growth.
|
|
|
|
In the Antibody Therapy product line, strong sales growth in
2009 was driven by improved pricing and increased demand for
GAMMAGARD LIQUID therapy. In 2010, sales in this product line
were unfavorably impacted by market share loss versus the prior
year and pricing actions the company took during the year,
offset by increased sales due to a competitor being out of the
market in the fourth quarter. Sales were also unfavorably
impacted by the termination of a distribution agreement for
WinRho®
SDF [Rho(D) Immune Globulin Intravenous (Human)] effective
July 1, 2010 and healthcare reform.
|
|
|
|
In the Regenerative Medicine product category, sales growth in
2010 was driven by sales of ACTIFUSE as a result of the
companys first quarter acquisition of ApaTech. Also
significantly contributing to the sales growth in this product
category in both years was increased demand for the
companys fibrin sealant product, FLOSEAL. Refer to
Note 4 for additional information regarding the ApaTech
acquisition.
|
|
|
|
The sales decline in the Other product category in both years
was primarily due to lower international sales of FSME-IMMUN (a
tick-borne encephalitis vaccine) and NEISVAC-C (for the
prevention of meningitis C).
|
Medication Delivery The following is a summary
of sales by product category in the Medication Delivery segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
|
|
IV Therapies
|
|
$
|
1,678
|
|
|
$
|
1,562
|
|
|
$
|
1,575
|
|
|
|
7%
|
|
|
|
(1%
|
)
|
Global Injectables
|
|
|
1,891
|
|
|
|
1,701
|
|
|
|
1,584
|
|
|
|
11%
|
|
|
|
7%
|
|
Infusion Systems
|
|
|
655
|
|
|
|
858
|
|
|
|
906
|
|
|
|
(24%
|
)
|
|
|
(5%
|
)
|
Anesthesia
|
|
|
525
|
|
|
|
492
|
|
|
|
464
|
|
|
|
7%
|
|
|
|
6%
|
|
Other
|
|
|
19
|
|
|
|
36
|
|
|
|
31
|
|
|
|
47%
|
|
|
|
16%
|
|
|
|
Total net sales
|
|
$
|
4,768
|
|
|
$
|
4,649
|
|
|
$
|
4,560
|
|
|
|
3%
|
|
|
|
2%
|
|
|
|
Net sales in the Medication Delivery segment increased 3% and 2%
in 2010 and 2009, respectively (with a favorable foreign
currency impact of 2 percentage points in 2010 and an
unfavorable foreign currency impact of 5 percentage points
in 2009). The principal drivers were the following:
|
|
|
|
|
In the IV Therapies product line, sales growth in 2010 was
driven by improved pricing and increased demand for IV
solutions and nutritional products. Contributing to growth were
market share gains in the United States, partially as a result
of competitor supply issues. In 2009, the unfavorable impact of
foreign currency more than offset organic sales growth due to
increased demand, particularly in international markets, and
improved pricing in the United States.
|
|
|
|
In 2010, sales growth in the Global Injectables product line was
driven by strong sales of certain enhanced packaging products.
Also contributing to sales growth in both years were sales of
select multi-source generic products, as well as growth in the
companys international pharmacy compounding and
U.S. pharmaceutical partnering businesses. In October 2010,
the company entered into an agreement to divest its
U.S. generic injectables business. Refer to Note 3 for
further information regarding this divestiture.
|
|
|
|
The sales decline in the Infusion Systems product line in 2010
was principally due to the $213 million charge against
sales related to the recall of the COLLEAGUE infusion pump. Also
contributing to the sales decline in both years were lower sales
of disposable tubing sets used in the administration of IV
|
22
|
|
|
|
|
solutions and COLLEAGUE infusion pumps, partially offset by
increased sales of SIGMA Spectrum infusion pumps. Refer to
Note 5 for further information on the COLLEAGUE infusion
pump charge.
|
|
|
|
|
|
Growth in both 2010 and 2009 in the Anesthesia product line was
driven by increased sales of sevoflurane and SUPRANE
(desflurane). The company continues to benefit from its position
as the only global supplier of all three modern inhaled
anesthetics (SUPRANE, sevoflurane and isoflurane).
|
Renal The following is a summary of sales by
product category in the Renal segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
|
|
PD Therapy
|
|
$
|
1,955
|
|
|
$
|
1,856
|
|
|
$
|
1,862
|
|
|
|
5%
|
|
|
|
|
|
HD Therapy
|
|
|
434
|
|
|
|
410
|
|
|
|
444
|
|
|
|
6%
|
|
|
|
(8%
|
)
|
|
|
Total net sales
|
|
$
|
2,389
|
|
|
$
|
2,266
|
|
|
$
|
2,306
|
|
|
|
5%
|
|
|
|
(2%
|
)
|
|
|
Net sales in the Renal segment increased 5% in 2010 and
decreased 2% in 2009 (with a favorable foreign currency impact
of 3 percentage points in 2010 and an unfavorable foreign
currency impact of 6 percentage points in 2009). The
principal drivers were the following:
|
|
|
|
|
Net sales in the PD Therapy product line grew in 2010 as the
result of gains in the number of PD patients in the United
States, Latin America and Asia, with particularly strong patient
growth in China. Penetration of PD Therapy products continues to
be strong in emerging markets where many people with end-stage
renal disease have historically been under-treated. In 2009,
sales growth from PD patient gains was more than offset by the
unfavorable impact of foreign currency.
|
|
|
|
In the HD Therapy product line, sales growth in 2010 was driven
by international sales related to the companys 2009
acquisition of Edwards Lifesciences Corporation, also known as
Continuous Renal Replacement Therapy (Edwards CRRT). In 2009,
sales growth related to the Edwards CRRT acquisition was more
than offset by the unfavorable impact of foreign currency and
lower saline sales. Refer to Note 4 for additional
information regarding the acquisition of Edwards CRRT.
|
Transition Services to Fenwal Inc. Net sales
in this category represent 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 February 2007.
Revenues declined in 2010 and 2009 as Baxter provided less
transition services to Fenwal. See Note 3 for additional
information regarding the TT business divestiture.
Gross
Margin and Expense Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (as a percent of net sales)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Gross margin
|
|
|
46.4%
|
|
|
|
51.9%
|
|
|
|
49.6%
|
|
Marketing and administrative expenses
|
|
|
22.6%
|
|
|
|
21.7%
|
|
|
|
21.8%
|
|
|
|
Gross
Margin
Gross margin declined in 2010 and increased in 2009. Included in
the companys gross margin percentages were the unfavorable
impact of infusion pump charges and costs totaling
$588 million (of which $375 million was recorded to
cost of sales), $27 million and $125 million in 2010,
2009 and 2008, respectively, and the 2010 and 2009 business
optimization charges, of which $132 million and
$30 million were recorded in cost of sales in 2010 and
2009, respectively. These charges unfavorably impacted the gross
margin by 4.7, 0.5 and 1.1 percentage points in 2010, 2009
and 2008, respectively. Refer to Note 5 for additional
information on these charges and costs.
Also unfavorably impacting the gross margin percentage in 2010
were lower prices for certain plasma protein (including Antibody
Therapy) products, cost inefficiencies driven by lower volume
throughput for plasma-based therapies and vaccines, lower sales
of high margin vaccines, increased inventory reserves and
healthcare
23
reform in the United States and abroad. These items were
partially offset by improved sales mix across other product
lines, as well as a benefit from foreign currency.
The increase in gross margin in 2009 was principally driven by
improvements in sales mix across all three segments,
manufacturing cost and yield improvements, as well as improved
pricing for select products. Contributing to the gross margin
improvement was the continued customer conversion to ADVATE
therapy; increased demand and improved pricing for GAMMAGARD
LIQUID therapy and certain other plasma protein and nutritional
products; and increased demand for IV solutions, global
injectables and anesthesia products. Partially offsetting the
gross margin improvement was the unfavorable impact of lower
FSME-IMMUN vaccine revenues.
Marketing
and Administrative Expenses
The marketing and administrative expense ratio increased in 2010
and declined in 2009. The increase in the marketing and
administrative expense ratio in 2010 was driven by the
$588 million COLLEAGUE infusion pump charge (of which
$213 million was recorded to sales), the $257 million
business optimization charge (of which $125 million was
recorded in marketing and administrative expenses), and a
$28 million charge to write down accounts receivable in
Greece. These charges unfavorably impacted the marketing and
administrative expense ratio by 1.5 percentage points in
2010.
The ratio in both years was favorably impacted by leverage from
higher sales and the companys continued focus on
controlling discretionary spending, partially offset by
increased spending relating to certain sales and promotional
programs. Also impacting the marketing and administrative
expense ratio in 2009 was the unfavorable impact of foreign
currency and the $79 million business optimization charge (of
which $49 million was recorded in marketing and
administrative expenses), which increased the marketing and
administrative expense ratio by 0.3 percentage points in
2009.
Refer to Note 1 for further information regarding the
Greece receivable charge and Note 5 for further information
about the COLLEAGUE infusion pump charge and the 2010 and 2009
business optimization charges.
Pension
Plan Costs
Fluctuations in pension plan costs impacted the companys
gross margin and expense ratios. Pension plan costs increased
$15 million in 2010 and $18 million in 2009, as
detailed in Note 9. The $15 million increase in 2010
was principally due to lower interest rates used to discount the
plans projected benefit obligations and an increase in
loss amortization, partially offset by the impact of
$350 million of cash contributions made to the pension plan
in the United States in 2010. The $18 million increase in
2009 was principally due to an increase in loss amortization
related to asset performance and demographic experience,
partially offset by the impact of the companys
contributions to its pension plans and higher interest rates
used to discount the plans projected benefit obligations
as compared to the prior year.
Costs of the companys pension plans are expected to
increase from $170 million in 2010 to approximately
$220 million in 2011, principally due to lower interest
rates used to discount the plans projected benefit
obligations, a decrease in the expected return on plan assets
assumption, and an increase in loss amortization, partially
offset by the impact of $150 million of discretionary cash
contributions made to the pension plan in the United States in
January 2011. Refer to Note 9 for further information on
the funding of pension plans. For the domestic plans, the
discount rate will decrease to 5.45% from 6.05% and the expected
return on plan assets will decrease to 8.25% from 8.5% for 2011.
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Research and development expenses
|
|
|
$915
|
|
|
|
$917
|
|
|
|
$868
|
|
|
|
|
|
|
|
6%
|
|
as a percent of net sales
|
|
|
7.1%
|
|
|
|
7.3%
|
|
|
|
7.0%
|
|
|
|
|
|
|
|
|
|
|
|
24
R&D expenses decreased slightly in 2010 and increased in
2009. The reduction in R&D expenses in 2010 was due to the
completion of clinical work on late-stage programs, lower
milestone payments to partners and efforts to reposition
projects to gain organizational efficiencies. The company
continues to invest in all key R&D programs across the
product pipeline. The increase in 2009 reflected the
companys continued focus on innovation and investments
across its business portfolio to advance and expand its product
pipeline. Foreign currency had an unfavorable impact on R&D
expense growth in 2010 and a favorable impact in 2009.
R&D expenses in 2010 included IPR&D charges totaling
$34 million, principally related to the licensing and
acquisition of the hemophilia-related intellectual property and
other assets of Archemix. Refer to Note 4 for more
information regarding this transaction. R&D expenses in
2008 included IPR&D charges totaling $19 million,
principally related to an in-licensing agreement with Innocoll
Pharmaceuticals Ltd. (Innocoll).
The companys investments in R&D reflect its efforts
to enhance future growth through clinical differentiation,
including broadening the hemophilia portfolio with continued
innovation, exploring alternative routes of administration of
GAMMAGARD LIQUID, and developing a home hemodialysis system. Key
developments in 2010 included the following R&D milestones,
product approvals and product launches:
|
|
|
|
|
FDA approval of
TachoSil®
(Absorbable Fibrin Sealant Patch) for use as an adjunct to
hemostasis in cardiovascular surgery, the only adjunctive
hemostatic agent available in the United States that combines a
collagen patch with a coating of human coagulation factors;
|
|
|
|
Expansion of the launch of OLIMEL, the triple-chamber container
system for parenteral nutrition, throughout Europe, and the
launch of ADVATE in Brazil;
|
|
|
|
Approval in Austria and the Czech Republic for PREFLUCEL, the
vaccine which uses the companys Vero cell culture platform
and was shown to be effective in preventing seasonal influenza
and indicated for prophylaxis of influenza in adults and the
elderly;
|
|
|
|
FDA approval of the Investigational Device Exemption (IDE)
application for a home hemodialysis system, developed through
collaboration between DEKA Research and Development Corp., HHD
LLC and DEKA Products Limited Partnership (collectively, DEKA)
and the company, allowing the company to initiate a clinical
study in patients undergoing hemodialysis therapy;
|
|
|
|
Receipt of promising results of an eighteen-month Phase II
trial of GAMMAGARD LIQUID and GAMMAGARD S/D (Immune Globulin
Intravenous) in treating
mild-to-moderate
Alzheimers disease;
|
|
|
|
Completion of a Phase III clinical trial of GAMMAGARD
LIQUID with ENHANZE (HyQ), providing antibody replacement with
an immune globulin therapy combined with recombinant human
hyaluronidase to increase the subcutaneous spreading and
absorption of immune globulin for patients with primary immune
deficiency;
|
|
|
|
Completion of Phase II trials of CD34, a product that
demonstrated significant benefit in pain reduction and exercise
capacity in patients with Chronic Myocardial Ischemia, a
narrowing of the coronary arteries as a result of
atherosclerosis; the Phase II trials also indicated a
significant reduction in amputation rates for patients with
Critical Limb Ischemia, a severe arterial obstruction of blood
flow to the extremities;
|
|
|
|
Completion of a Phase III trial evaluating TISSEEL (Fibrin
Sealant) as a hemostatic agent in vascular surgery, and filing
for regulatory approval for ARTISS [(Fibrin Sealant (Human)] for
use in facial surgery in the United States; and
|
|
|
|
Receipt of interim data from a Phase I clinical study of
recombinant von Willebrand factor indicating it may be safe and
well tolerated in patients with type 3 and severe type 1 von
Willebrand disease.
|
Net
Interest Expense
Net interest expense decreased $11 million in 2010,
principally due to an increase in interest income. Net interest
expense increased $22 million in 2009, principally due to
the impact of lower interest rates on interest income. Also
contributing to the increase in net interest expense in 2009 was
the impact of a higher average net debt balance due to the
February 2009 issuance of $350 million of senior unsecured
notes due in 2014 and
25
the August 2009 issuance of $500 million of senior
unsecured notes due in 2019. Refer to Note 2 for a summary
of the components of net interest expense for the three years
ended December 31, 2010.
Other
Expense, Net
Other expense, net was $159 million in 2010,
$45 million in 2009 and $26 million in 2008. Refer to
Note 2 for a table that details the components of other
expense, net for the three years ended December 31, 2010.
Other expense, net in each year included amounts relating to
equity method investments and foreign currency fluctuations,
principally relating to intercompany receivables, payables and
loans denominated in a foreign currency.
Included in other expense, net in 2010 was an impairment charge
of $112 million associated with the companys
agreement to divest its U.S. generic injectables business and a
charge of $62 million associated with litigation related to
the companys 2008 recall of its heparin sodium injection
products in the United States. In 2009, other expense, net
included a charge of $54 million associated with the
discontinuation of the companys SOLOMIX drug delivery
system in development. In 2008, other expense, net included a
charge of $31 million associated with the discontinuation
of the companys CLEARSHOT pre-filled syringe program.
Refer to Note 2 for further information on the
litigation-related, SOLOMIX and CLEARSHOT charges.
Pre-Tax
Income
Refer to Note 12 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 decreased 2% in 2010
and increased 5% in 2009. Sales growth for select higher-margin
products in 2010 was more than offset by pricing pressures for
certain plasma protein (including Antibody Therapy) products,
manufacturing cost inefficiencies for plasma-based therapies and
vaccines, the impact of healthcare reform and increased
inventory reserves. Also contributing to the decline in pre-tax
income was an expansion of certain sales resources and increased
spending on new marketing and promotional programs.
The primary drivers of the increase in pre-tax income in 2009
were continued gross margin expansion driven by strong sales of
higher-margin products, fueled principally by the continued
customer adoption of ADVATE therapy and increased demand and
improved pricing for GAMMAGARD LIQUID therapy and certain other
plasma protein products, as well as continued manufacturing
improvements. Partially offsetting the growth in 2009 was
increased R&D spending, the unfavorable impact of lower
FSME-IMMUN vaccine sales and the unfavorable impact of foreign
currency.
Medication Delivery Pre-tax income decreased
59% in 2010 and increased 28% in 2009. The decrease in 2010 was
due to a $588 million COLLEAGUE infusion pump charge, an
impairment charge of $112 million associated with the
companys agreement to divest its U.S. generic
injectables business and a charge of $62 million associated
with litigation related to the companys 2008 recall of its
heparin sodium injection products in the United States.
Partially offsetting the negative impact of these charges were
sales growth across multiple product categories, gross margin
improvements, a reduction in R&D spending due to
optimization efforts and the favorable impact of foreign
currency.
Included in pre-tax income in 2009 and 2008 were
$27 million and $125 million, respectively, of charges
and other costs relating to the COLLEAGUE and SYNDEO infusion
pumps. Also included in pre-tax income was a $54 million
charge in 2009 related to the discontinuation of the
companys SOLOMIX drug delivery system in development and a
$31 million charge in 2008 related to the discontinuation
of the CLEARSHOT pre-filled syringe program. Aside from the
impact of these items, pre-tax earnings in 2009 benefited from
gross margin improvements resulting from favorable product mix,
principally from increased sales of IV solutions, global
injectables, anesthesia and nutritional products. Foreign
currency had an unfavorable impact on growth in 2009.
Refer to Note 3 for further information on the U.S. generic
injectables business impairment charge, Note 5 for further
information on the infusion pump charges and Note 2 for
further information on the litigation-related charge.
26
Renal Pre-tax income increased 15% in 2010 and
decreased 4% in 2009. The increase in 2010 was primarily due to
continued growth of PD Therapy patients, partially offset by an
inventory impairment charge due to manufacturing issues with
certain PD solutions at the companys Castlebar, Ireland
facility. R&D spending in the Renal segment increased in
both years, driven by costs associated with the development of a
home hemodialysis system.
Other Certain income and expense amounts are
not allocated to a segment. These amounts are detailed in the
table in Note 12 and include 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
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, certain charges (such as
the Greece receivables, business optimization and certain
IPR&D charges), and the revenues and costs related to the
manufacturing, distribution and other transition agreements with
Fenwal.
Refer to the previous discussions for further information
regarding net interest expense, the Greece receivables, business
optimization and IPR&D charges, and Note 8 for further
information regarding stock compensation expense.
Income
Taxes
Effective
Income Tax Rate
The effective income tax rate was 25% in 2010, 19% in 2009 and
18% in 2008. The company anticipates that the effective income
tax rate, calculated in accordance with GAAP, will be
approximately 20.5% to 21.5% in 2011, excluding any impact from
additional audit developments or other special items.
The companys effective tax rate differs from the
U.S. federal statutory rate each year due to certain
operations that are subject to tax incentives, state and local
taxes and foreign taxes that are different than the
U.S. federal statutory rate. In addition, as discussed
further below, the companys effective income tax rate can
be impacted in each year by discrete factors or events. Refer to
Note 10 for further information regarding the
companys income taxes.
2010
The increase in the effective tax rate in 2010 was principally
due to a $588 million charge related to the recall of
COLLEAGUE infusion pumps from the U.S. market for which
there was no tax benefit recognized, a $39 million
write-off of a deferred tax asset as a result of a change in the
tax treatment of reimbursements under the Medicare Part D
retiree prescription drug subsidy program under healthcare
reform legislation enacted in the United States, a charge
related to contingent tax matters, and $34 million of
IPR&D charges for which the tax benefit was lower than the
U.S. statutory rate. These items were partially offset by
the tax benefits from the U.S. generic injectables business
impairment charge, the business optimization charge and a charge
related to litigation associated with the companys 2008
recall of its heparin sodium injection products in the United
States, in addition to a change in the earnings mix from higher
tax to lower tax rate jurisdictions compared to the prior year
period.
2009
The effective tax rate for 2009 was impacted by greater income
in jurisdictions with higher tax rates, partially offset by
$51 million of income tax benefit from the use of foreign
tax losses.
2008
The effective tax rate for 2008 was impacted by $29 million
of valuation allowance reductions on net operating loss
carryforwards in foreign jurisdictions due to profitability
improvements, $8 million of income tax benefit related to
the extension of R&D tax credits in the United States and
$14 million of additional U.S. income tax expense
related to foreign earnings which were no longer considered
indefinitely reinvested outside of the United States because the
company planned to remit these earnings to the United States in
the foreseeable future.
27
Uncertain
Tax Positions
Baxter expects to reduce the amount of its liability for
uncertain tax positions within the next 12 months by
approximately $280 million due principally to the
resolution of certain multi-jurisdictional transfer pricing
issues and the expiration of certain statutes of limitation.
While the final outcome of these matters is inherently
uncertain, the company believes it has made adequate tax
provisions for all years subject to examination.
Income
and Earnings per Diluted Share Amounts
Net income attributable to Baxter was $1.4 billion in 2010,
$2.2 billion in 2009 and $2.0 billion in 2008. The
corresponding net earnings per diluted share were $2.39 in 2010,
$3.59 in 2009 and $3.16 in 2008. The significant factors and
events causing the net changes from 2009 to 2010 and from 2008
to 2009 are discussed above.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows from Operations
Cash flows from operations increased in both 2010 and 2009,
totaling $3.0 billion in 2010, $2.9 billion in 2009
and $2.5 billion in 2008. The increases in cash flows in
2010 and 2009 were primarily due to higher earnings (before
non-cash items) and the other factors discussed below.
Accounts
Receivable
Cash flows relating to accounts receivable increased in 2010 and
decreased in 2009. Days sales outstanding increased from
51.2 days at December 31, 2009 to 52.5 days at
December 31, 2010, primarily due to longer collection
periods in certain international markets and the geographic mix
of sales. Days sales outstanding in the United States were less
than 30 days. The decrease in cash flows in 2009 was
primarily due to the geographic mix of sales, an increase in
collection periods in certain international locations and a
decrease in factoring of receivables, partially offset by
improved collection periods in the United States.
Inventories
Cash flows from inventories improved in both 2010 and 2009. The
following is a summary of inventories at December 31, 2010
and 2009, as well as inventory turns by segment for 2010, 2009
and 2008. Inventory turns for the year are calculated as the
annualized fourth quarter cost of sales divided by the year-end
inventory balance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
Inventory turns
|
|
(in millions, except inventory turn data)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
BioScience
|
|
$
|
1,455
|
|
|
$
|
1,592
|
|
|
|
1.90
|
|
|
|
1.41
|
|
|
|
1.46
|
|
Medication Delivery
|
|
|
636
|
|
|
|
705
|
|
|
|
4.91
|
|
|
|
4.32
|
|
|
|
3.68
|
|
Renal
|
|
|
278
|
|
|
|
257
|
|
|
|
4.71
|
|
|
|
4.62
|
|
|
|
4.53
|
|
Other
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
2,371
|
|
|
$
|
2,557
|
|
|
|
3.04
|
|
|
|
2.53
|
|
|
|
2.48
|
|
|
|
The higher inventory turns for the total company in 2010 were
driven by a reduction of plasma-related inventories in the
BioScience segment, as well as the favorable impact of the 2010
business optimization charge. Of the total charge,
$132 million was recorded in cost of sales, which increased
total company turns by 0.23. Refer to Note 5 for further
information regarding this charge. The higher inventory turns
for the total company in 2009 were principally due to increased
sales in the Medication Delivery segment, partially offset by an
increase of plasma-related inventories in the BioScience segment.
Other
Cash outflows related to liabilities, business optimization and
restructuring payments and other increased in 2010 and decreased
in 2009. Cash contributions to the companys pension plans,
which totaled $416 million, $170 million and
$287 million in 2010, 2009 and 2008, respectively, were
partially offset in each year by lower outflows relating to
accounts payable and accrued liabilities.
28
Cash
Flows from Investing Activities
Capital
Expenditures
Capital expenditures totaled $963 million in 2010,
$1.0 billion in 2009 and $954 million in 2008. The
companys investments in capital expenditures in 2010 were
focused on projects that enhance the companys cost
structure and manufacturing capabilities, particularly as they
relate to the companys nutritional, anesthesia and PD
products, as well as plasma and recombinant manufacturing
platforms. A significant portion of the companys
investment in capital expenditures supports its strategy of
geographic expansion with select investments in growing markets.
In addition, the company continues to invest to support the
companys ongoing strategic focus on R&D with the
expansion of research facilities, manufacturing sites and
laboratories. Capital expenditures also included the
companys multi-year initiative to implement a global
enterprise resource planning system that will consolidate and
standardize business processes, data and systems.
The company makes investments in capital expenditures at a level
sufficient to support the strategic and operating needs of the
businesses, and continues to improve capital allocation
discipline in making investments to enhance long-term growth.
The company expects to invest approximately $1.0 billion in
capital expenditures in 2011.
Acquisitions
and Investments
Net cash outflows relating to acquisitions and investments were
$319 million in 2010, $156 million in 2009 and
$99 million in 2008.
The cash outflows in 2010 principally included a net cash
outflow of $235 million related to the acquisition of
ApaTech. Also included in net cash outflows in 2010 were
payments of $30 million related to the licensing and
acquisition of hemophilia-related intellectual property and
other assets from Archemix, $28 million related to a
manufacturing, supply and distribution agreement with Kamada for
GLASSIA, and $18 million related to the companys
collaboration agreement for the development of a home HD machine
with DEKA.
The cash outflows in 2009 principally related to a
$100 million payment 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.
Additionally, in 2009 the company acquired Edwards CRRT for
$56 million. Refer to Note 4 for further information
regarding the acquisitions of and investments in ApaTech,
Archemix, SIGMA and Edwards CRRT.
The cash outflows in 2008 principally related to an IV
solutions business in China, the companys in-licensing
agreement to market and distribute Innocolls gentamicin
surgical implant in the United States, the acquisition of
certain technology applicable to the BioScience business, and
payments related to the companys agreements with Nycomed
Pharma AS and Nektar Therapeutics.
Divestitures
and Other
Net cash inflows relating to divestitures and other activities
were $18 million in 2010, $24 million in 2009 and
$60 million in 2008. Cash inflows in 2010 principally
consisted of proceeds from the divestiture of certain Renal
Therapy Services centers in Australia. Cash inflows in 2009 and
2008 principally consisted of cash collections related to the
companys securitization arrangements.
Cash
Flows from Financing Activities
Debt
Issuances, Net of Payments of Obligations
Debt issuances, net of payments of obligations, were net inflows
totaling $91 million in 2010 and $473 million in 2009
and net outflows totaling $79 million in 2008.
In March 2010, the company issued $600 million of senior
unsecured notes, with $300 million maturing in March 2013
and bearing a 1.8% coupon rate, and $300 million maturing
in March 2020 and bearing a 4.25% coupon rate. In February 2009,
the company issued $350 million of senior unsecured notes,
which mature in March 2014 and bear a 4.0% coupon rate. In
August 2009, the company issued $500 million of senior
unsecured notes, which mature in August 2019 and bear a 4.5%
coupon rate. In May 2008, the company issued $500 million
of senior unsecured notes, maturing in June 2018 and bearing a
5.375% coupon rate. In
29
addition, during 2008, the company issued commercial paper, of
which $200 million was outstanding as of December 31,
2008, with a weighted-average interest rate of 2.55%. The net
proceeds from these issuances were used for general corporate
purposes, including the refinancing of indebtedness, the
repayment of $200 million of outstanding commercial paper
in 2009 and the settlement of cross-currency swaps in 2008. In
2010, the company repaid its 4.75% $500 million notes and
settled related cross-currency swaps, both upon their maturity
in October 2010, resulting in a cash outflow of
$545 million. In 2009, the company repaid approximately
$160 million of outstanding borrowings related to the
companys Euro-denominated credit facility (further
discussed below). The company repaid its 5.196% notes,
which approximated $250 million, upon their maturity in
February 2008.
Other
Financing Activities
Cash dividend payments totaled $688 million in 2010,
$632 million in 2009 and $546 million in 2008. In
November 2008, the board of directors declared a quarterly
dividend of $0.26 per share ($1.04 per share on an annualized
basis), representing an increase of 20% over the previous
quarterly rate. In November 2009, the board of directors
declared a quarterly dividend of $0.29 per share ($1.16 per
share on an annualized basis), representing an increase of 12%
over the previous quarterly rate. In November 2010, the board of
directors declared a quarterly dividend of $0.31 per share
($1.24 per share on an annualized basis), which was paid on
January 5, 2011 to shareholders of record as of
December 10, 2010. The dividend represented an increase of
7% over the previous quarterly rate of $0.29 per share.
Proceeds and realized excess tax benefits from stock issued
under employee benefit plans totaled $381 million in both
2010 and 2009 and $680 million in 2008. In 2010, an
increase in stock option exercises was offset by a decrease in
realized excess tax benefits. The decrease in 2009 was due to a
decrease in stock option exercises. Realized excess tax
benefits, which were $41 million in 2010, $96 million
in 2009 and $112 million in 2008, are presented in the
consolidated statements of cash flows as an outflow in the
operating section and an inflow in the financing section.
As authorized by the board of directors, the company repurchases
its stock from time to time depending on the companys cash
flows, net debt level and market conditions. The company
purchased 30 million shares for $1.5 billion in 2010,
23 million shares for $1.2 billion in 2009 and
32 million shares for $2.0 billion in 2008. In July
2009, the board of directors authorized the repurchase of up to
$2.0 billion of the companys common stock. At
December 31, 2010, approximately $500 million remained
available under the July 2009 authorization. In December 2010,
the board of directors authorized the repurchase of up to an
additional $2.5 billion of the companys common stock.
No shares had been repurchased under this authorization as of
December 31, 2010.
Credit
Facilities, Access to Capital, Credit Ratings and Net Investment
Hedges
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 Euro-denominated credit
facility with a maximum capacity of approximately
$400 million at December 31, 2010, which matures in
January 2013. As of December 31, 2010 and 2009, there were
no outstanding borrowings under either of the two outstanding
facilities. The companys facilities enable the company to
borrow funds on an unsecured basis at variable interest rates
(determined, in part, by the companys credit ratings) and
contain various covenants, including a maximum
net-debt-to-capital ratio. At December 31, 2010, the
company was in compliance with the financial covenants in these
agreements. The non-performance of any financial institution
supporting either of the credit facilities would reduce the
maximum capacity of these facilities by each institutions
respective commitment. The company also maintains other credit
arrangements, as described in Note 6.
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 $2.7 billion of cash and equivalents at
December 31, 2010, with adequate cash available to meet
operating requirements in each jurisdiction in which the company
operates. The company invests its excess cash in
30
certificates of deposit and money market funds, and diversifies
the concentration of cash among different financial institutions.
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. However, the company believes it has sufficient
financial flexibility to issue debt, enter into other financing
arrangements and attract long-term capital on acceptable terms
to support the companys growth objectives.
The company continues to do business with foreign governments in
certain countries, including Greece, Spain, Portugal and Italy,
that have experienced a deterioration in credit and economic
conditions. While the economic downturn has not significantly
impacted the companys ability to collect receivables,
global economic conditions and liquidity issues in certain
countries have resulted, and may continue to result, in delays
in the collection of receivables and credit losses. In 2010, the
company recorded a charge of $28 million to write down its
accounts receivable in Greece principally as a result of the
Greek governments plan to convert certain past due
receivables into non-interest bearing bonds with maturities of
one to three years. Refer to Note 1 for further information
regarding this charge. Global economic conditions and
customer-specific factors may require the company to
re-evaluate
the collectibility of its receivables and the company could
potentially incur additional charges.
Credit
Ratings
The companys credit ratings at December 31, 2010 were
as follows.
|
|
|
|
|
|
|
|
|
Standard & Poors
|
|
Fitch
|
|
Moodys
|
|
|
Ratings
|
|
|
|
|
|
|
Senior debt
|
|
A+
|
|
A
|
|
A3
|
Short-term debt
|
|
A1
|
|
F1
|
|
P2
|
Outlook
|
|
Stable
|
|
Stable
|
|
Stable
|
|
|
There were no changes in the companys credit ratings in
2010. Standard & Poors downgraded the
companys outlook from Positive to Stable in 2010.
If Baxters credit ratings or outlooks were to be
downgraded, the companys financing costs related to its
credit arrangements and any future debt issuances could be
unfavorably impacted. However, any future credit rating
downgrade or change in outlook would not affect the
companys ability to draw on its credit facilities, and
would not result in an acceleration of the scheduled maturities
of any of the companys outstanding debt, unless, with
respect to certain debt instruments, preceded by a change in
control of the company.
Net
Investment Hedges
In 2008, the company terminated its remaining net investment
hedge portfolio and no longer has any outstanding net investment
hedges. Of the net settlement payments in 2008,
$540 million of cash outflows were included as payments of
obligations in the financing section and $12 million of
cash inflows were included in the operating section of the
consolidated statement of cash flows. The net after-tax losses
related to net investment hedge instruments recorded in other
comprehensive income were $33 million in 2008.
31
Contractual
Obligations
As of December 31, 2010, the company had contractual
obligations, excluding accounts payable, accrued liabilities
(other than the current portion of unrecognized tax benefits)
and contingent liabilities, including contingent milestone
payments associated with joint development and commercialization
arrangements, payable or maturing in the following periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
One to
|
|
|
Three to
|
|
|
More than
|
|
(in millions)
|
|
Total
|
|
|
one year
|
|
|
three years
|
|
|
five years
|
|
|
five years
|
|
|
|
|
Short-term debt
|
|
$
|
15
|
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Long-term debt and capital lease obligations, including current
maturities
|
|
|
4,252
|
|
|
|
9
|
|
|
|
479
|
|
|
|
1,201
|
|
|
|
2,563
|
|
Interest on short- and long-term debt and
capital lease
obligations1
|
|
|
1,466
|
|
|
|
105
|
|
|
|
208
|
|
|
|
203
|
|
|
|
950
|
|
Operating leases
|
|
|
748
|
|
|
|
162
|
|
|
|
239
|
|
|
|
175
|
|
|
|
172
|
|
Other long-term
liabilities2
|
|
|
1,178
|
|
|
|
|
|
|
|
477
|
|
|
|
140
|
|
|
|
561
|
|
Purchase
obligations3
|
|
|
1,596
|
|
|
|
699
|
|
|
|
511
|
|
|
|
282
|
|
|
|
104
|
|
Unrecognized tax
benefits4
|
|
|
284
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations
|
|
$
|
9,539
|
|
|
$
|
1,274
|
|
|
$
|
1,914
|
|
|
$
|
2,001
|
|
|
$
|
4,350
|
|
|
|
|
|
|
1 |
|
Interest payments on debt and capital lease obligations are
calculated for future periods using interest rates in effect at
the end of 2010. Projected interest payments include the related
effects of interest rate swap agreements. Certain of these
projected interest payments may differ in the future based on
changes in floating interest rates, foreign currency
fluctuations or other factors or events. The projected interest
payments only pertain to obligations and agreements outstanding
at December 31, 2010. Refer to Notes 6 and 7 for
further discussion regarding the companys debt instruments
and related interest rate swap agreements outstanding at
December 31, 2010. |
|
2 |
|
The primary components of other long-term liabilities in the
companys consolidated balance sheet are liabilities
relating to pension and other postemployment benefit plans,
litigation, foreign currency hedges, and certain income
tax-related liabilities. The company projected the timing of the
future cash payments based on contractual maturity dates (where
applicable) and estimates of the timing of payments (for
liabilities with no contractual maturity dates). The actual
timing of payments could differ from the estimates. |
|
|
|
The company contributed $416 million, $170 million and
$287 million to its defined benefit pension plans in 2010,
2009 and 2008, respectively. Most of the companys plans
are funded. The timing of funding in the future is uncertain and
is dependent on future movements in interest rates and
investment returns, changes in laws and regulations, and other
variables. Therefore, the table above excludes pension plan cash
outflows. The pension plan balance included in other long-term
liabilities (and excluded from the table above) totaled
$963 million at December 31, 2010. |
|
3 |
|
Includes the companys significant contractual
unconditional purchase obligations. For cancelable agreements,
includes any penalty due upon cancellation. These commitments do
not exceed the companys projected requirements and are in
the normal course of business. Examples include firm commitments
for raw material purchases, utility agreements and service
contracts. |
|
4 |
|
Due to the uncertainty related to the timing of the reversal of
uncertain tax positions, the long-term liability relating to
unrecognized tax benefits of $148 million at
December 31, 2010 has been excluded from the table above. |
Off-Balance
Sheet Arrangements
Baxter periodically enters into off-balance sheet arrangements.
Certain contingencies arise in the normal course of business,
and are not recorded in the consolidated balance sheet in
accordance with GAAP (such as contingent joint development and
commercialization arrangement payments). Also, upon resolution
of uncertainties, the company may incur charges in excess of
presently established liabilities for certain matters (such as
contractual indemnifications). For a discussion of the
companys significant off-balance sheet arrangements, refer
to Note 6 to
32
the consolidated financial statements regarding joint
development and commercialization arrangements and
indemnifications, Note 7 regarding receivable
securitizations and Note 11 regarding legal contingencies.
FINANCIAL
INSTRUMENT MARKET RISK
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.
Refer to Note 7 for further information regarding the
companys financial instruments and hedging strategies.
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,
Brazilian Real and Colombian Peso. 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 shareholders equity volatility
relating to foreign exchange. 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 may use 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 December 31, 2010 is
18 months. The company also enters into derivative
instruments to hedge certain intercompany and third-party
receivables and payables and debt denominated in foreign
currencies. The company historically hedged certain of its net
investments in international affiliates, using a combination of
debt denominated in foreign currencies and cross-currency swap
agreements. As further discussed in Note 7, in 2008, the
company terminated all of its remaining net investment hedges.
Currency restrictions enacted in Venezuela require Baxter to
obtain approval from the Venezuelan government to exchange
Venezuelan Bolivars for U.S. Dollars and require such
exchange to be made at the official exchange rate established by
the government. On January 8, 2010, the Venezuelan
government devalued the official exchange rate of 2.15 relative
to the U.S. Dollar. The official exchange rate for imported
goods classified as essential, such as food and medicine, was
changed to 2.6, while the rate for payments for non-essential
goods was changed to 4.3. In 2010, the majority of the
companys products imported into Venezuela were classified
as essential goods and qualified for the 2.6 rate. Effective
January 1, 2011, the Venezuelan government devalued the
official currency for imported goods classified as essential to
4.3. Since January 1, 2010, Venezuela has been designated
as a highly inflationary economy under GAAP and as a result, the
functional currency of the companys subsidiary in
Venezuela is the U.S. Dollar. The devaluation of the
Venezuelan Bolivar and designation of Venezuela as highly
inflationary did not have a material impact on the financial
results of the company. As of December 31, 2010, the
companys subsidiary in Venezuela had net assets of
$23 million denominated in the Venezuelan Bolivar. In 2010,
net sales in Venezuela represented less than 1% of Baxters
total net sales.
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 and forward contracts outstanding at
December 31, 2010, 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 asset balance of $6 million with respect to
those contracts would decrease by $41 million, resulting in
a net liability position. A similar analysis performed with
respect to option, forward and cross-currency swap contracts
outstanding at December 31, 2009 indicated that, on a
net-of-tax
basis, the net liability balance of $69 million would
increase by $69 million.
33
The sensitivity analysis model recalculates the fair value of
the foreign exchange option and forward contracts outstanding at
December 31, 2010 by replacing the actual exchange rates at
December 31, 2010 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
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 also periodically uses
forward-starting interest rate swaps and treasury rate locks to
hedge the risk to earnings associated with fluctuations in
interest rates relating to anticipated issuances of term debt.
As part of its risk management program, the company performs
sensitivity analyses to assess potential gains and losses in
earnings relating to hypothetical movements in interest rates. A
43 basis-point increase in interest rates (approximately 10% of
the companys weighted-average interest rate during
2010) affecting the companys financial instruments,
including debt obligations and related derivatives, would have
an immaterial effect on the companys 2010, 2009 and 2008
earnings and on the fair value of the companys fixed-rate
debt as of the end of each fiscal year.
As discussed in Note 7, the fair values of the
companys long-term litigation liabilities and related
insurance receivables were computed by discounting the expected
cash flows based on currently available information. A 10%
movement in the assumed discount rate would have an immaterial
effect on the fair values of those assets and liabilities.
With respect to the companys investments in affiliates,
the company believes any reasonably possible near-term losses in
earnings, cash flows and fair values would not be material to
the companys consolidated financial position.
CHANGES
IN ACCOUNTING STANDARDS
Refer to Note 1 to the consolidated financial statements
for recently adopted accounting pronouncements.
CRITICAL
ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP
requires the company 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. Certain of the
companys accounting policies are considered critical
because these policies are the most important to the depiction
of the companys financial statements and require
significant, difficult or complex judgments by the company,
often requiring the use of estimates about the effects of
matters that are inherently uncertain. Actual results that
differ from the companys estimates could have an
unfavorable effect on the companys results of operations
and financial position. The company applies estimation
methodologies consistently from year to year. Other than changes
required due to the issuance of new accounting pronouncements,
there have been no significant changes in the companys
application of its critical accounting policies during 2010. The
companys critical accounting policies have been reviewed
with the Audit Committee of the Board of Directors. The
following is a summary of accounting policies that the company
considers critical to the consolidated financial statements.
34
Revenue
Recognition and Related Provisions and Allowances
The companys policy is to recognize revenues from product
sales and services when earned. Specifically, revenue is
recognized when persuasive evidence of an arrangement exists,
delivery has occurred (or services have been rendered), the
price is fixed or determinable, and collectibility is reasonably
assured. The shipping terms for the majority of the
companys revenue arrangements are FOB destination. The
recognition of revenue is delayed if there are significant
post-delivery obligations, such as training, installation or
other services.
The company sometimes enters into arrangements in which it
commits to delivering multiple products or services to its
customers. In these cases, total arrangement consideration is
allocated to the deliverables based on their relative selling
prices. Then the allocated consideration is recognized as
revenue in accordance with the principles described above.
Selling prices are determined by applying a selling price
hierarchy. Selling prices are determined using vendor specific
objective evidence (VSOE), if it exists. Otherwise, selling
prices are determined using third party evidence (TPE). If
neither VSOE nor TPE is available, the company uses its best
estimate of selling prices.
Provisions for discounts, rebates to customers, chargebacks to
wholesalers, and returns are provided for at the time the
related sales are recorded, and are reflected as a reduction of
sales. These estimates are reviewed periodically and, if
necessary, revised, with any revisions recognized immediately as
adjustments to sales.
The company periodically and systematically evaluates the
collectibility of accounts receivable and determines the
appropriate reserve for doubtful accounts. In determining the
amount of the reserve, the company considers historical credit
losses, the past-due status of receivables, payment history and
other customer-specific information, and any other relevant
factors or considerations.
The company also provides for the estimated costs that may be
incurred under its warranty programs when the cost is both
probable and reasonably estimable, which is at the time the
related revenue is recognized. The cost is determined based on
actual company experience for the same or similar products as
well as other relevant information. Estimates of future costs
under the companys warranty programs could change based on
developments in the future. The company is not able to estimate
the probability or amount of any future developments that could
impact the reserves, but believes presently established reserves
are adequate.
Pension
and Other Postemployment Benefit (OPEB) Plans
The company provides pension and other postemployment benefits
to certain of its employees. These employee benefit expenses are
reported in the same line items in the consolidated income
statement as the applicable employees compensation
expense. The valuation of the funded status and net periodic
benefit cost for the plans are calculated using actuarial
assumptions. These assumptions are reviewed annually, and
revised if appropriate. The significant assumptions include the
following:
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interest rates used to discount pension and OPEB plan
liabilities;
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the long-term rate of return on pension plan assets;
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rates of increases in employee compensation (used in estimating
liabilities);
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anticipated future healthcare costs (used in estimating the OPEB
plan liability); and
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other assumptions involving demographic factors such as
retirement, mortality and turnover (used in estimating
liabilities).
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Selecting assumptions involves an analysis of both short-term
and long-term historical trends and known economic and market
conditions at the time of the valuation (also called the
measurement date). The use of different assumptions would result
in different measures of the funded status and net cost. Actual
results in the future could differ from expected results. The
company is not able to estimate the probability of actual
results differing from expected results, but believes its
assumptions are appropriate.
35
The companys key assumptions are listed in Note 9.
The most critical assumptions relate to the plans covering
U.S. and Puerto Rico employees, because these plans are the
most significant to the companys consolidated financial
statements.
Discount
Rate Assumption
For the U.S. and Puerto Rico plans, at the measurement date
(December 31, 2010), the company used a discount rate of
5.45% and 5.40% to measure its benefit obligations for the
pension plans and OPEB plan, respectively. This discount rate
will be used in calculating the net periodic benefit cost for
these plans for 2011. The company used a broad population of
approximately 260 Aa-rated corporate bonds as of
December 31, 2010 to determine the discount rate
assumption. All bonds were denominated in U.S. Dollars,
with a minimum amount outstanding of $50 million. This
population of bonds was narrowed from a broader universe of over
500 Moodys Aa rated, non-callable (or callable with
make-whole provisions) bonds by eliminating the top
10th percentile and bottom 40th percentile to adjust
for any pricing anomalies and to represent the bonds Baxter
would most likely select if it were to actually annuitize its
pension and OPEB plan liabilities. This portfolio of bonds was
used to generate a yield curve and associated spot rate curve,
to discount the projected benefit payments for the U.S. and
Puerto Rico plans. The discount rate is the single level rate
that produces the same result as the spot rate curve.
For plans in Canada, Japan, the United Kingdom and the Eurozone,
the company uses a method essentially the same as that described
for the U.S. and Puerto Rico plans. For the companys
other international plans, the discount rate is generally
determined by reviewing country- and region-specific government
and corporate bond interest rates.
To understand the impact of changes in discount rates on pension
and OPEB plan cost, the company performs a sensitivity analysis.
Holding all other assumptions constant, for each 50 basis
point (i.e., one-half of one percent) increase (decrease) in the
discount rate, global pre-tax pension and OPEB plan cost would
decrease (increase) by approximately $37 million.
Return on
Plan Assets Assumption
In measuring net periodic cost for 2010, the company used a
long-term expected rate of return of 8.50% for the pension plans
covering U.S. and Puerto Rico employees. For measuring the
net periodic benefit cost for these plans for 2011, this
assumption will decrease to 8.25%. This assumption is not
applicable to the companys OPEB plan because it is not
funded.
The company establishes the long-term asset return assumption
based on a review of historical compound average asset returns,
both company-specific and relating to the broad market (based on
the companys asset allocation), as well as an analysis of
current market and economic information and future expectations.
The current asset return assumption is supported by historical
market experience for both the companys actual and
targeted asset allocation. In calculating net pension cost, the
expected return on assets is applied to a calculated value of
plan assets, which recognizes changes in the fair value of plan
assets in a systematic manner over five years. The difference
between this expected return and the actual return on plan
assets is a component of the total net unrecognized gain or loss
and is subject to amortization in the future.
To understand the impact of changes in the expected asset return
assumption on net cost, the company performs a sensitivity
analysis. Holding all other assumptions constant, for each
50 basis point increase (decrease) in the asset return
assumption, global pre-tax pension plan cost would decrease
(increase) by approximately $17 million.
Other
Assumptions
The company used the Retirement Plan 2000 mortality table to
calculate the pension and OPEB plan benefit obligations for its
plans in the United States and Puerto Rico. For all other
pension plans, the company utilized country and region-specific
mortality tables to calculate the plans benefit
obligations. The company periodically analyzes and updates its
assumptions concerning demographic factors such as retirement,
mortality and turnover, considering historical experience as
well as anticipated future trends.
36
The assumptions relating to employee compensation increases and
future healthcare costs are based on historical experience,
market trends, and anticipated future company actions. Refer to
Note 9 for information regarding the sensitivity of the
OPEB plan obligation and the total of the service and interest
cost components of OPEB plan cost to potential changes in future
healthcare costs.
Legal
Contingencies
The company is involved in product liability, patent,
commercial, regulatory and other legal proceedings that arise in
the normal course of business. Refer to Note 11 for further
information. 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.
The company has established reserves for certain of its legal
matters. 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. The company also records any insurance recoveries that
are probable of occurring. At December 31, 2010, total
legal liabilities were $170 million and total insurance
receivables were $87 million.
The companys loss estimates are generally developed in
consultation with outside counsel and are based on analyses of
potential results. With respect to the recording of any
insurance recoveries, after completing the assessment and
accounting for the companys legal contingencies, the
company separately and independently analyzes its insurance
coverage and records any insurance recoveries that are probable
of occurring at the gross amount that is expected to be
collected. In performing the assessment, the company reviews
available information, including historical company-specific and
market collection experience for similar claims, current facts
and circumstances pertaining to the particular insurance claim,
the financial viability of the applicable insurance company or
companies, and other relevant information.
While the liability of the company in connection with certain
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 and cash flows 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 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.
Inventories
The company values its inventories at the lower of cost,
determined using the
first-in,
first-out method, or market value. Market value for raw
materials is based on replacement costs and market value for
work in process and finished goods is based on net realizable
value. The company reviews inventories on hand at least
quarterly and records provisions for estimated excess,
slow-moving and obsolete inventory, as well as inventory with a
carrying value in excess of net realizable value. The regular
and systematic inventory valuation reviews include a current
assessment of future product demand, anticipated release of new
products into the market (either by the company or its
competitors), historical experience and product expiration.
Uncertain timing of product approvals, variability in product
launch strategies, product recalls and variation in product
utilization all impact the estimates related to inventory
valuation. Additional inventory provisions may be required if
future demand or market conditions are less favorable than the
company has estimated. The company is not able to estimate the
probability of actual results differing from expected results,
but believes its estimates are appropriate.
Deferred
Tax Asset Valuation Allowances and Reserves for Uncertain Tax
Positions
The company maintains valuation allowances unless it is more
likely than not that all or a portion of the deferred tax asset
will be realized. Changes in valuation allowances are included
in the companys tax provision in the period of change. In
determining whether a valuation allowance is warranted, the
company evaluates factors such as prior earnings history,
expected future earnings, carryback and carryforward periods,
and tax strategies that could potentially enhance the likelihood
of realization of a deferred tax asset. The
37
realizability assessments made at a given balance sheet date are
subject to change in the future, particularly if earnings of a
subsidiary are significantly higher or lower than expected, or
if the company takes operational or tax planning actions that
could impact the future taxable earnings of a subsidiary.
In the normal course of business, the company is audited by
federal, state and foreign tax authorities, and is periodically
challenged regarding the amount of taxes due. These challenges
relate to the timing and amount of deductions and the allocation
of income among various tax jurisdictions. The company believes
the companys tax positions comply with applicable tax law
and the company intends to defend its positions. In evaluating
the exposure associated with various tax filing positions, the
company records reserves for uncertain tax positions in
accordance with GAAP, based on the technical support for the
positions, the companys past audit experience with similar
situations, and potential interest and penalties related to the
matters. The companys results of operations and effective
tax rate in a given period could be impacted if, upon final
resolution with taxing authorities, the company prevailed in
positions for which reserves have been established, or was
required to pay amounts in excess of established reserves.
Fair
Value Measurements of Financial Assets and Liabilities
For financial 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, which are observable, depend on the type
of derivative, and include contractual terms, counterparty
credit risk, interest rate yield curves, foreign exchange rates
and volatility. Refer to the Financial Instrument Market Risk
section above for disclosures regarding sensitivity analyses
performed by the company and Note 7 for further information
regarding the companys financial instruments.
In addition, the companys pension plan assets and
contingent payments related to acquisitions and investments are
valued at fair value on a recurring basis. The valuation of
pension assets, which are recorded net of the plans
liabilities, depends on the type of security the plan holds.
Principally, the securities are valued using quoted prices in
active markets or pricing matrices or models that incorporate
observable market data inputs. Refer to the Pension and OPEB
Plans section above and Note 9 for further information on
the companys pension plans. Contingent payments are valued
using a discounted cash flow technique that reflects
managements expectations about probability of payment.
Refer to Note 4 for further information on the
companys contingent payments relating to acquisitions and
investments.
Valuation
of Intangible Assets, Including IPR&D
The company acquires intangible assets and records them at fair
value. Valuations are generally completed for business
acquisitions using a discounted cash flow analysis,
incorporating the stage of completion. The most significant
estimates and assumptions inherent in the discounted cash flow
analysis include the amount and timing of projected future cash
flows, the discount rate used to measure the risks inherent in
the future cash flows, the assessment of the assets life
cycle, and the competitive and other trends impacting the asset,
including consideration of technical, legal, regulatory,
economic and other factors. Each of these factors and
assumptions can significantly affect the value of the intangible
asset.
Acquired IPR&D is the value assigned to acquired technology
or products under development which have not received regulatory
approval and have no alternative future use.
Beginning in 2009, the company adopted a new accounting standard
for accounting for business combinations. Under this accounting
standard, acquired IPR&D included in a business combination
is capitalized as an indefinite-lived intangible asset and is no
longer expensed at the time of the acquisition. Development
costs incurred after the acquisition are expensed as incurred.
Upon receipt of regulatory approval of the related technology or
product, the indefinite-lived intangible asset is then accounted
for as a finite-lived intangible asset and amortized on a
straight-line basis over its estimated useful life. If the
R&D project is abandoned, the indefinite-lived asset is
charged to expense.
38
IPR&D acquired in transactions that are not business
combinations is expensed immediately. For such transactions,
payments made to third parties subsequent to regulatory approval
are capitalized and amortized over the remaining useful life of
the related asset, and are classified as intangible assets.
Due to the inherent uncertainty associated with R&D
projects, there is no assurance that actual results will not
differ materially from the underlying assumptions used to
prepare discounted cash flow analyses, nor that the R&D
project will result in a successful commercial product.
Impairment
of Assets
Goodwill is subject to impairment reviews annually, and whenever
indicators of impairment exist. Intangible assets other than
goodwill and other long-lived assets (such as fixed assets) are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Refer to Note 1 for further
information. The companys impairment reviews are based on
an estimated future cash flow approach that requires significant
judgment with respect to future volume, revenue and expense
growth rates, changes in working capital use, foreign currency
exchange rates, the selection of an appropriate discount rate,
asset groupings, and other assumptions and estimates. The
estimates and assumptions used are consistent with the
companys business plans and a market participants
views of the company and similar companies. The use of
alternative estimates and assumptions could increase or decrease
the estimated fair values of the assets, and potentially result
in different impacts to the companys results of
operations. Actual results may differ from the companys
estimates.
Stock-Based
Compensation Plans
Stock-based compensation cost is estimated at the grant date
based on the fair value of the award, and the cost is recognized
as expense ratably over the substantive vesting period.
Determining the appropriate fair value model to use requires
judgment. Determining the assumptions that enter into the model
is highly subjective and also requires judgment. The
companys stock compensation costs principally relate to
awards of stock options, and the significant assumptions include
long-term projections regarding stock price volatility, employee
exercise, post-vesting termination and pre-vesting forfeiture
behaviors, interest rates and dividend yields.
The company uses the Black-Scholes model for estimating the fair
value of stock options. The companys expected volatility
assumption is based on an equal weighting of the historical
volatility of Baxters stock and the implied volatility
from traded options on Baxters stock. The expected life
assumption is primarily based on historical employee exercise
patterns and employee post-vesting termination behavior. The
risk-free interest rate for the expected life of the option is
based on the U.S. Treasury yield curve in effect at the
time of grant. The dividend yield reflects historical experience
as well as future expectations over the expected life of the
option. The forfeiture rate used to calculate compensation
expense is primarily based on historical pre-vesting employee
forfeiture patterns. In finalizing its assumptions, the company
also reviews comparable companies assumptions, as
available in published surveys and in publicly available
financial filings.
The pre-vesting forfeitures assumption is ultimately adjusted to
the actual forfeiture rate. Therefore, changes in the
forfeitures assumption would not impact the total amount of
expense ultimately recognized over the vesting period. Estimated
forfeitures are reassessed each period based on historical
experience and current projections for the future.
The use of different assumptions would result in different
amounts of stock compensation expense. The fair value of an
option is particularly impacted by the expected volatility and
expected life assumptions. To understand the impact of changes
in these assumptions on the fair value of an option, the company
performs sensitivity analyses. Holding all other variables
constant, if the expected volatility assumption used in valuing
the stock options granted in 2010 was increased by
100 basis points (i.e., one percent), the fair value of a
stock option relating to one share of common stock would
increase by approximately 4%, from $10.08 to $10.52. Holding all
other variables constant (including the expected volatility
assumption), if the expected life assumption used in valuing the
stock options granted in 2010 was increased by one year, the
fair value of a stock option relating to one share of common
stock would increase by approximately 8%, from $10.08 to $10.90.
39
The company also grants performance share units (PSUs) as part
of its stock compensation program. PSUs are earned by comparing
the companys growth in shareholder value relative to a
performance peer group over a three-year period. Based on the
companys relative performance, the recipient of a PSU may
earn a total award ranging from 0% to 200% of the initial grant.
The fair value of a PSU is estimated by the company at the grant
date using a Monte Carlo model. A Monte Carlo model uses stock
price volatility and other variables to estimate the probability
of satisfying the market conditions and the resulting fair value
of the award. The three primary inputs for the Monte Carlo model
are the risk-free rate, volatility of returns and correlation of
returns. The determination of the risk-free rate is similar to
that described above relating to the valuation of stock options.
The expected volatility and correlation assumptions are based on
historical information.
The company is not able to estimate the probability of actual
results differing from expected results, but believes the
companys assumptions are appropriate, based upon the
requirements of accounting standards for stock compensation and
the companys historical and expected future experience.
Hedging
Activities
As further discussed in Note 7 and in the Financial
Instrument Market Risk section above, the company uses
derivative instruments to hedge certain risks. As Baxter
operates on a global basis, there is a risk to earnings
associated with foreign exchange relating to the companys
recognized assets and liabilities and forecasted transactions
denominated in foreign currencies. Compliance with accounting
standards for derivatives and hedging activities and the
companys hedging policies requires the company to make
judgments regarding the probability of anticipated hedged
transactions. In making these estimates and assessments of
probability, the company analyzes historical trends and expected
future cash flows and plans. The estimates and assumptions used
are consistent with the companys business plans. If the
company were to make different assessments of probability or
make the assessments during a different fiscal period, the
companys results of operations for a given period would be
different.
CERTAIN
REGULATORY MATTERS
In July 2005, the company stopped shipment of COLLEAGUE infusion
pumps in the United States. Following a number of Class I
recalls (recalls at the highest priority level for the FDA)
relating to the performance of the pumps, as well as the seizure
litigation described in Note 11, the company entered into a
Consent Decree in June 2006. Additional Class I recalls
related to remediation and repair and maintenance activities
were addressed by the company in 2007 and 2009. Pursuant to the
Consent Decree, in July 2010 the FDA issued a final order
regarding the recall of the companys COLLEAGUE infusion
pumps currently in use in the United States. The company is
executing the recall over the two years following the final
order by offering its customers an option to replace their
COLLEAGUE infusion pumps or receive monetary consideration.
Under the replacement option, the companys customers may
receive SIGMA Spectrum infusion pumps in exchange for their
COLLEAGUE infusion pumps. Alternatively, COLLEAGUE pump owners
may receive the lesser of the pumps depreciated value,
which will be no less than $1,500 per single-channel pump and
$3,000 per triple-channel pump, or the purchase price. The
company will permit lessees to terminate their leases without
penalty and will refund any prepaid, unused lease portion upon
the return of the devices. As discussed in Note 5,
following the FDAs issuance of its initial order dated
April 30, 2010, the company recorded a charge in the first
quarter of 2010 related to the FDAs order and other
actions the company is undertaking outside the United States, in
addition to a number of earlier charges in connection with its
COLLEAGUE infusion pumps. As discussed in Note 11, the
company received a subpoena from the Office of the United States
Attorney for the Northern District of Illinois relating to the
COLLEAGUE infusion pump in September 2009. It is possible that
substantial additional cash and non-cash charges, including
significant asset impairments related to the COLLEAGUE infusion
pumps and related businesses, may be required in future periods
based on new information, changes in estimates, the
implementation of the recall in the United States, and other
actions the company may be required to undertake in markets
outside of the United States.
In June 2010, the company received a Warning Letter from the FDA
in connection with an inspection of its Renal businesss
McGaw Park, Illinois headquarters facility. The Warning Letter
pertains to the processes by
40
which the company analyzes and addresses product complaints
through corrective and preventative actions, and reports
relevant information to the FDA. The company is working with the
FDA to resolve these matters.
In January 2011, the company received a Warning Letter from the
San Juan District Office of the FDA in connection with
inspections of its Guayama and Jayuya, Puerto Rico facilities.
The Warning Letter pertains to violations of Current Good
Manufacturing Practices and the distribution of materials
intended to assist customers with the use of certain nutrition
products. Concerns about how the company investigates issues and
reports relevant information to the FDA are also addressed. The
company is working with the FDA to resolve these matters.
In January 2011, the European Medicines Agency (EMA) announced
the review of Dianeal, Extraneal and Nutrineal peritoneal
dialysis solutions manufactured in the companys Castlebar,
Ireland facility due to the potential presence of endotoxins in
certain batches. The company is increasing supply of these
products in its other manufacturing facilities as the EMA has
allowed the company to temporarily import these products into
the European Union. The company is working with the EMA to
resolve these matters.
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 other products may not be adversely affected, or
that additional regulation will not be introduced that may
adversely affect the companys operations and consolidated
financial statements. See Item 1A of this Annual Report on
Form 10-K
for additional discussion of regulatory matters.
FORWARD-LOOKING
INFORMATION
This annual report includes forward-looking statements,
including statements with respect to accounting estimates and
assumptions, litigation-related matters including outcomes,
clinical trials, future regulatory filings and the
companys R&D pipeline, strategic plans including with
respect to the global, multi-year business transformation
initiative launched in 2011, credit exposure to foreign
governments, potential developments with respect to credit
ratings, estimates of liabilities including those related to
uncertain tax positions, contingent payments, future pension
plan contributions, costs, minimum funding requirements and
rates of return, the companys exposure to financial market
volatility and foreign currency and interest rate risk,
geographic expansion, business development activities, future
capital and R&D expenditures, the impact of healthcare
reform, the sufficiency of the companys financial
flexibility, the adequacy of credit facilities, tax provisions,
properties and reserves, the effective tax rate in 2011, and all
other statements that do not relate to historical facts. The
statements are based on assumptions about many important
factors, including assumptions concerning:
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demand for and market acceptance risks for and competitive
pressures related to new and existing products, such as ADVATE
and plasma-based therapies (including Antibody Therapy), and
other therapies;
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fluctuations in supply and demand and the pricing of
plasma-based therapies;
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healthcare reform in the United States including its effect on
pricing, reimbursement, taxation and rebate policies;
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future actions of governmental authorities and other third
parties including third party payers as healthcare reform and
other similar measures are implemented in the United States and
globally;
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additional legislation, regulation and other governmental
pressures in the United States or globally, which may affect
pricing, reimbursement, taxation and rebate policies of
government agencies and private payers or other elements of the
companys business;
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|
|
the companys ability to identify business development and
growth opportunities for existing products;
|
41
|
|
|
|
|
product quality or patient safety issues, leading to product
recalls, withdrawals, launch delays, sanctions, seizures,
litigation, or declining sales;
|
|
|
|
future actions of the FDA, EMA or any other regulatory body or
government authority 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 infusion pumps;
|
|
|
|
implementation of the FDAs final July 2010 order to recall
all of the companys COLLEAGUE infusion pumps currently in
use in the United States as well as any additional actions
required globally;
|
|
|
|
the companys ability to fulfill demand for SIGMAs
Spectrum infusion pump;
|
|
|
|
foreign currency fluctuations, particularly due to reduced
benefits from the companys natural hedges and limitations
on the ability to cost-effectively hedge resulting from
financial market and currency volatility;
|
|
|
|
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 and optimization initiatives;
|
|
|
|
the successful implementation of the companys global
enterprise resource planning system;
|
|
|
|
the companys ability to realize the anticipated benefits
from its joint product development and commercialization
arrangements, including the SIGMA transaction;
|
|
|
|
satisfaction of the closing conditions of the divestiture of the
companys U.S. generic injectables business;
|
|
|
|
changes in credit agency ratings;
|
|
|
|
any impact of the commercial and credit environment on the
company and its customers and suppliers; and
|
|
|
|
other factors identified elsewhere in this Annual Report on
Form 10-K
including those factors described in Item 1A and other
filings with the Securities and Exchange Commission, 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.
42
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Incorporated by reference to the section entitled
Financial Instrument Market Risk in
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this
Annual Report on
Form 10-K.
43
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
as of December 31 (in millions, except share information)
|
|
2010
|
|
|
2009
|
|
|
|
Current Assets
|
|
Cash and equivalents
|
|
$
|
2,685
|
|
|
$
|
2,786
|
|
|
|
Accounts and other current receivables
|
|
|
2,265
|
|
|
|
2,302
|
|
|
|
Inventories
|
|
|
2,371
|
|
|
|
2,557
|
|
|
|
Short-term deferred income taxes
|
|
|
323
|
|
|
|
226
|
|
|
|
Prepaid expenses and other
|
|
|
345
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,989
|
|
|
|
8,271
|
|
|
|
Property, Plant and Equipment, Net
|
|
|
5,260
|
|
|
|
5,159
|
|
|
|
Other Assets
|
|
Goodwill
|
|
|
2,015
|
|
|
|
1,825
|
|
|
|
Other intangible assets, net
|
|
|
500
|
|
|
|
513
|
|
|
|
Other
|
|
|
1,725
|
|
|
|
1,586
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
4,240
|
|
|
|
3,924
|
|
|
|
|
|
Total assets
|
|
$
|
17,489
|
|
|
$
|
17,354
|
|
|
|
Current Liabilities
|
|
Short-term debt
|
|
$
|
15
|
|
|
$
|
29
|
|
|
|
Current maturities of long-term debt and lease obligations
|
|
|
9
|
|
|
|
682
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
4,017
|
|
|
|
3,753
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,041
|
|
|
|
4,464
|
|
|
|
Long-Term Debt and Lease Obligations
|
|
|
4,363
|
|
|
|
3,440
|
|
|
|
Other Long-Term Liabilities
|
|
|
2,289
|
|
|
|
2,030
|
|
|
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2010 and 2009
|
|
|
683
|
|
|
|
683
|
|
|
|
Common stock in treasury, at cost, 102,761,588 shares in 2010 and 82,523,243 shares in 2009
|
|
|
(5,655
|
)
|
|
|
(4,741
|
)
|
|
|
Additional contributed capital
|
|
|
5,753
|
|
|
|
5,683
|
|
|
|
Retained earnings
|
|
|
7,925
|
|
|
|
7,343
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(2,139
|
)
|
|
|
(1,777
|
)
|
|
|
|
|
|
|
|
|
Total Baxter International Inc. (Baxter) shareholders equity
|
|
|
6,567
|
|
|
|
7,191
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests
|
|
|
229
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
6,796
|
|
|
|
7,420
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
17,489
|
|
|
$
|
17,354
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions, except per share data)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Net sales
|
|
$
|
12,843
|
|
|
$
|
12,562
|
|
|
$
|
12,348
|
|
Cost of sales
|
|
|
6,885
|
|
|
|
6,037
|
|
|
|
6,218
|
|
|
|
Gross margin
|
|
|
5,958
|
|
|
|
6,525
|
|
|
|
6,130
|
|
|
|
Marketing and administrative expenses
|
|
|
2,907
|
|
|
|
2,731
|
|
|
|
2,698
|
|
Research and development expenses
|
|
|
915
|
|
|
|
917
|
|
|
|
868
|
|
Net interest expense
|
|
|
87
|
|
|
|
98
|
|
|
|
76
|
|
Other expense, net
|
|
|
159
|
|
|
|
45
|
|
|
|
26
|
|
|
|
Income before income taxes
|
|
|
1,890
|
|
|
|
2,734
|
|
|
|
2,462
|
|
Income tax expense
|
|
|
463
|
|
|
|
519
|
|
|
|
437
|
|
|
|
Net income
|
|
|
1,427
|
|
|
|
2,215
|
|
|
|
2,025
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
7
|
|
|
|
10
|
|
|
|
11
|
|
|
|
Net income attributable to Baxter
|
|
$
|
1,420
|
|
|
$
|
2,205
|
|
|
$
|
2,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Baxter per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.41
|
|
|
$
|
3.63
|
|
|
$
|
3.22
|
|
|
|
Diluted
|
|
$
|
2.39
|
|
|
$
|
3.59
|
|
|
$
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
590
|
|
|
|
607
|
|
|
|
625
|
|
|
|
Diluted
|
|
|
594
|
|
|
|
614
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
1.180
|
|
|
$
|
1.070
|
|
|
$
|
0.913
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
45
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions) (brackets denote cash
outflows)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Cash Flows
from Operations
|
|
Net income
|
|
$
|
1,427
|
|
|
$
|
2,215
|
|
|
$
|
2,025
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
685
|
|
|
|
638
|
|
|
|
631
|
|
|
|
Deferred income taxes
|
|
|
76
|
|
|
|
267
|
|
|
|
280
|
|
|
|
Stock compensation
|
|
|
120
|
|
|
|
140
|
|
|
|
146
|
|
|
|
Realized excess tax benefits from stock issued
under employee benefit plans
|
|
|
(41
|
)
|
|
|
(96
|
)
|
|
|
(112
|
)
|
|
|
Infusion pump charges
|
|
|
588
|
|
|
|
27
|
|
|
|
125
|
|
|
|
Business optimization charges
|
|
|
257
|
|
|
|
79
|
|
|
|
|
|
|
|
Impairment charges
|
|
|
112
|
|
|
|
54
|
|
|
|
31
|
|
|
|
Litigation-related charge
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
34
|
|
|
|
|
|
|
|
19
|
|
|
|
Other
|
|
|
51
|
|
|
|
1
|
|
|
|
40
|
|
|
|
Changes in balance sheet items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and other current
receivables
|
|
|
(122
|
)
|
|
|
(167
|
)
|
|
|
(98
|
)
|
|
|
Inventories
|
|
|
20
|
|
|
|
(60
|
)
|
|
|
(163
|
)
|
|
|
Accounts payable and accrued
liabilities
|
|
|
(5
|
)
|
|
|
(85
|
)
|
|
|
(239
|
)
|
|
|
Business optimization and
restructuring payments
|
|
|
(79
|
)
|
|
|
(45
|
)
|
|
|
(50
|
)
|
|
|
Other
|
|
|
(182
|
)
|
|
|
(59
|
)
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
Cash flows from operations
|
|
|
3,003
|
|
|
|
2,909
|
|
|
|
2,515
|
|
|
|
Cash Flows from
Investing Activities
|
|
Capital expenditures (including additions to the pool
of equipment placed with or leased to customers
of $112 in 2010, $119 in 2009 and $146 in 2008)
|
|
|
(963
|
)
|
|
|
(1,014
|
)
|
|
|
(954
|
)
|
|
|
Acquisitions and investments
|
|
|
(319
|
)
|
|
|
(156
|
)
|
|
|
(99
|
)
|
|
|
Divestitures and other
|
|
|
18
|
|
|
|
24
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
(1,264
|
)
|
|
|
(1,146
|
)
|
|
|
(993
|
)
|
|
|
Cash Flows from
Financing Activities
|
|
Issuances of debt
|
|
|
658
|
|
|
|
872
|
|
|
|
671
|
|
|
Payments of obligations
|
|
|
(567
|
)
|
|
|
(199
|
)
|
|
|
(950
|
)
|
|
|
(Decrease) increase in debt with original maturities of
three months or less, net
|
|
|
|
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
Cash dividends on common stock
|
|
|
(688
|
)
|
|
|
(632
|
)
|
|
|
(546
|
)
|
|
|
Proceeds and realized excess tax benefits from stock
issued under employee benefit plans
|
|
|
381
|
|
|
|
381
|
|
|
|
680
|
|
|
|
Purchases of treasury stock
|
|
|
(1,453
|
)
|
|
|
(1,216
|
)
|
|
|
(1,986
|
)
|
|
|
Other
|
|
|
(47
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
(1,716
|
)
|
|
|
(1,012
|
)
|
|
|
(1,931
|
)
|
|
|
Effect of Foreign Exchange Rate Changes on Cash and
Equivalents
|
|
|
(124
|
)
|
|
|
(96
|
)
|
|
|
1
|
|
|
|
(Decrease) Increase in Cash and Equivalents
|
|
|
(101
|
)
|
|
|
655
|
|
|
|
(408
|
)
|
|
|
Cash and Equivalents at Beginning of Year
|
|
|
2,786
|
|
|
|
2,131
|
|
|
|
2,539
|
|
|
|
Cash and Equivalents at End of Year
|
|
$
|
2,685
|
|
|
$
|
2,786
|
|
|
$
|
2,131
|
|
|
|
Other supplemental information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of portion capitalized
|
|
$
|
109
|
|
|
$
|
113
|
|
|
$
|
159
|
|
Income taxes paid
|
|
$
|
353
|
|
|
$
|
246
|
|
|
$
|
247
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
as of and for the years ended December 31 (in millions)
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning and end of year
|
|
|
683
|
|
|
$
|
683
|
|
|
|
683
|
|
|
$
|
683
|
|
|
|
683
|
|
|
$
|
683
|
|
|
|
Common Stock in Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
83
|
|
|
|
(4,741
|
)
|
|
|
68
|
|
|
|
(3,897
|
)
|
|
|
50
|
|
|
|
(2,503
|
)
|
Purchases of common stock
|
|
|
30
|
|
|
|
(1,453
|
)
|
|
|
23
|
|
|
|
(1,216
|
)
|
|
|
32
|
|
|
|
(1,986
|
)
|
Stock issued under employee benefit plans and other
|
|
|
(10
|
)
|
|
|
539
|
|
|
|
(8
|
)
|
|
|
372
|
|
|
|
(14
|
)
|
|
|
592
|
|
|
|
End of year
|
|
|
103
|
|
|
|
(5,655
|
)
|
|
|
83
|
|
|
|
(4,741
|
)
|
|
|
68
|
|
|
|
(3,897
|
)
|
|
|
Additional Contributed Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
5,683
|
|
|
|
|
|
|
|
5,533
|
|
|
|
|
|
|
|
5,297
|
|
Stock issued under employee benefit plans and other
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
236
|
|
|
|
End of year
|
|
|
|
|
|
|
5,753
|
|
|
|
|
|
|
|
5,683
|
|
|
|
|
|
|
|
5,533
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
7,343
|
|
|
|
|
|
|
|
5,795
|
|
|
|
|
|
|
|
4,379
|
|
Net income attributable to Baxter
|
|
|
|
|
|
|
1,420
|
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
2,014
|
|
Cash dividends declared on common stock
|
|
|
|
|
|
|
(695
|
)
|
|
|
|
|
|
|
(648
|
)
|
|
|
|
|
|
|
(571
|
)
|
Stock issued under employee benefit plans
|
|
|
|
|
|
|
(143
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
Adjustment to change measurement date for certain employee
benefit plans, net of tax benefit of ($15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
End of year
|
|
|
|
|
|
|
7,925
|
|
|
|
|
|
|
|
7,343
|
|
|
|
|
|
|
|
5,795
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
(1,777
|
)
|
|
|
|
|
|
|
(1,885
|
)
|
|
|
|
|
|
|
(940
|
)
|
Other comprehensive (loss) income attributable to Baxter
|
|
|
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
(957
|
)
|
Adjustment to change measurement date for certain employee
benefit plans, net of tax expense of $8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
End of year
|
|
|
|
|
|
|
(2,139
|
)
|
|
|
|
|
|
|
(1,777
|
)
|
|
|
|
|
|
|
(1,885
|
)
|
|
|
Total Baxter shareholders equity
|
|
|
|
|
|
$
|
6,567
|
|
|
|
|
|
|
$
|
7,191
|
|
|
|
|
|
|
$
|
6,229
|
|
|
|
Noncontrolling Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
$
|
229
|
|
|
|
|
|
|
$
|
62
|
|
|
|
|
|
|
$
|
91
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
11
|
|
Other comprehensive (loss) income attributable to noncontrolling
interests
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
(14
|
)
|
Additions (reductions) in noncontrolling ownership
interests, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
(20
|
)
|
Other activity with noncontrolling interests
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
End of year
|
|
|
|
|
|
$
|
229
|
|
|
|
|
|
|
$
|
229
|
|
|
|
|
|
|
$
|
62
|
|
|
|
Total equity
|
|
|
|
|
|
$
|
6,796
|
|
|
|
|
|
|
$
|
7,420
|
|
|
|
|
|
|
$
|
6,291
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
1,427
|
|
|
|
|
|
|
$
|
2,215
|
|
|
|
|
|
|
$
|
2,025
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments, net of tax (benefit) expense
of ($5) in 2010, $98 in 2009 and ($125) in 2008
|
|
|
|
|
|
|
(342
|
)
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
(370
|
)
|
Pension and other employee benefits, net of tax benefit of ($32)
in 2010, ($18) in 2009 and ($319) in 2008
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
(591
|
)
|
Hedging activities, net of tax (benefit) expense of ($2) in
2010, ($1) in 2009 and $2 in 2008
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
25
|
|
Other, net of tax expense (benefit) of $2 in 2010, $2 in 2009
and ($20) in 2008
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
Total other comprehensive (loss) income, net of tax
|
|
|
|
|
|
|
(402
|
)
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
(971
|
)
|
|
|
Comprehensive income
|
|
|
|
|
|
|
1,025
|
|
|
|
|
|
|
|
2,326
|
|
|
|
|
|
|
|
1,054
|
|
|
|
Less: Comprehensive income (loss) attributable to
noncontrolling interests
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
Comprehensive income attributable to Baxter
|
|
|
|
|
|
$
|
1,019
|
|
|
|
|
|
|
$
|
2,313
|
|
|
|
|
|
|
$
|
1,057
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Operations
Baxter International Inc. (Baxter or the company) develops,
manufactures and markets products that save and sustain the
lives of people with hemophilia, immune disorders, infectious
diseases, kidney disease, trauma, and other chronic and acute
medical conditions. As a global, diversified healthcare company,
Baxter applies a unique combination of expertise in medical
devices, pharmaceuticals and biotechnology to create products
that advance patient care worldwide. The company operates in
three segments, which are described in Note 12.
Use of
Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles (GAAP) requires the
company to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ
from those estimates.
Basis of
Consolidation
The consolidated financial statements include the accounts of
Baxter and its majority-owned subsidiaries, any minority-owned
subsidiaries that Baxter controls, and variable interest
entities (VIEs) in which Baxter is the primary beneficiary,
after elimination of intercompany transactions. As of
December 31, 2010, the carrying amounts of consolidated
VIEs assets and liabilities were not material to
Baxters consolidated financial statements.
Revenue
Recognition
The company recognizes revenues from product sales and services
when earned. Specifically, revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred (or
services have been rendered), the price is fixed or
determinable, and collectibility is reasonably assured. For
product sales, revenue is not recognized until title and risk of
loss have transferred to the customer. The shipping terms for
the majority of the companys revenue arrangements are FOB
destination. The recognition of revenue is delayed if there are
significant post-delivery obligations, such as training,
installation or other services. Provisions for discounts,
rebates to customers, chargebacks to wholesalers and returns are
provided for at the time the related sales are recorded, and are
reflected as a reduction of net sales.
The company sometimes enters into arrangements in which it
commits to delivering multiple products or services to its
customers. In these cases, total arrangement consideration is
allocated to the deliverables based on their relative selling
prices. Then the allocated consideration is recognized as
revenue in accordance with the principles described above.
Selling prices are determined by applying a selling price
hierarchy. Selling prices are determined using vendor specific
objective evidence (VSOE), if it exists. Otherwise, selling
prices are determined using third party evidence (TPE). If
neither VSOE nor TPE is available, the company uses its best
estimate of selling prices.
Accounts
Receivable and Allowance for Doubtful Accounts
In the normal course of business, the company provides credit to
its customers, performs credit evaluations of these customers
and maintains reserves for potential credit losses. In
determining the amount of the allowance for doubtful accounts,
the company considers, among other items, historical credit
losses, the past-due status of receivables, payment histories
and other customer-specific information. Receivables are written
off when the company determines they are uncollectible. The
allowance for doubtful accounts was $139 million at
December 31, 2010 and $118 million at
December 31, 2009.
The company recorded a charge of $28 million in the second
quarter of 2010 to write down its accounts receivable in Greece
principally as a result of the Greek governments plan to
convert certain past due receivables into non-interest bearing
bonds with maturities of one to three years. The charge,
computed by taking into consideration, among other factors, the
imputed discount of the outstanding receivables based upon
48
publicly traded Greek government bonds with similar terms, was
included in marketing and administrative expenses. As it relates
to these and other receivables, changes in economic conditions
and customer-specific factors may require the company to
re-evaluate the collectibility of its receivables and the
company could potentially incur additional charges.
Product
Warranties
The company provides for the estimated costs relating to product
warranties at the time the related revenue is recognized. The
cost is determined based on actual company experience for the
same or similar products, as well as other relevant information.
Product warranty liabilities are adjusted based on changes in
estimates.
Cash and
Equivalents
Cash and equivalents include cash, certificates of deposit and
money market funds with an original maturity of three months or
less.
Inventories
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
Raw materials
|
|
$
|
536
|
|
|
$
|
598
|
|
Work in process
|
|
|
787
|
|
|
|
842
|
|
Finished goods
|
|
|
1,048
|
|
|
|
1,117
|
|
|
|
Inventories
|
|
$
|
2,371
|
|
|
$
|
2,557
|
|
|
|
Inventories are stated at the lower of cost
(first-in,
first-out method) or market value. Market value for raw
materials is based on replacement costs, and market value for
work in process and finished goods is based on net realizable
value. The inventory amounts above are stated net of reserves
for excess and obsolete inventory, which totaled
$359 million at December 31, 2010 and
$273 million at December 31, 2009. The increase in
inventory reserves in 2010 was principally driven by excess
vaccine inventory in the BioScience segment.
Property,
Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
Land
|
|
$
|
183
|
|
|
$
|
163
|
|
Buildings and leasehold improvements
|
|
|
2,063
|
|
|
|
1,921
|
|
Machinery and equipment
|
|
|
6,330
|
|
|
|
5,962
|
|
Equipment with customers
|
|
|
1,105
|
|
|
|
1,039
|
|
Construction in progress
|
|
|
910
|
|
|
|
975
|
|
|
|
Total property, plant and equipment, at cost
|
|
|
10,591
|
|
|
|
10,060
|
|
Accumulated depreciation and amortization
|
|
|
(5,331
|
)
|
|
|
(4,901
|
)
|
|
|
Property, plant and equipment (PP&E), net
|
|
$
|
5,260
|
|
|
$
|
5,159
|
|
|
|
Depreciation and amortization expense is calculated using the
straight-line method over the estimated useful lives of the
related assets, which range from 20 to 50 years for
buildings and improvements and from three to 15 years for
machinery and equipment. Leasehold improvements are amortized
over the life of the related facility lease (including any
renewal periods, if appropriate) or the asset, whichever is
shorter. Baxter capitalizes in machinery and equipment certain
computer software and software development costs incurred in
connection with developing or obtaining software for internal
use. Capitalized software costs are amortized on a straight-line
basis over the estimated useful lives of the software.
Straight-line and accelerated methods of depreciation are used
for income tax purposes. Depreciation and amortization expense
was $592 million in 2010, $557 million in 2009 and
$553 million in 2008. Repairs and maintenance expense was
$254 million in 2010, $251 million in 2009 and
$242 million in 2008.
49
Acquisitions
Results of operations of acquired companies are included in the
companys results of operations as of the respective
acquisition dates. The purchase price of each acquisition is
allocated to the net assets acquired based on estimates of their
fair values at the date of the acquisition. Contingent
consideration is recognized at the estimated fair value on the
acquisition date. Any purchase price in excess of these net
assets is recorded as goodwill. The allocation of purchase price
in certain cases may be subject to revision based on the final
determination of fair values.
Business
Optimization and Restructuring Costs
The company records liabilities for costs associated with exit
or disposal activities in the period in which the liability is
incurred. Employee termination costs are primarily recorded when
actions are probable and estimable. Costs for one-time
termination benefits in which the employee is required to render
service until termination in order to receive the benefits are
recognized ratably over the future service period.
Research
and Development
Research and development (R&D) costs are expensed as
incurred. Acquired in-process R&D (IPR&D) is the value
assigned to acquired technology or products under development
which have not received regulatory approval and have no
alternative future use. Valuations are generally completed for
business acquisitions using a discounted cash flow analysis,
incorporating the stage of completion and consideration of
market participant assumptions. The most significant estimates
and assumptions inherent in a discounted cash flow analysis
include the amount and timing of projected future cash flows,
the discount rate used to measure the risks inherent in the
future cash flows, the assessment of the assets life
cycle, and the competitive and other trends impacting the asset,
including consideration of technical, legal, regulatory,
economic and other factors. Each of these factors can
significantly affect the value of the IPR&D.
Beginning in 2009, the company adopted a new accounting standard
for accounting for business combinations. Under the new
accounting standard, acquired IPR&D included in a business
combination is capitalized as an indefinite-lived intangible
asset and is no longer expensed at the time of the acquisition.
Development costs incurred after the acquisition are expensed as
incurred. Upon receipt of regulatory approval of the related
technology or product, the indefinite-lived intangible asset is
then accounted for as a finite-lived intangible asset and
amortized on a straight-line basis over its estimated useful
life, subject to impairment reviews as discussed below. If the
R&D project is abandoned, the indefinite-lived asset is
charged to expense.
IPR&D acquired in transactions that are not business
acquisitions is expensed immediately. Payments made to third
parties subsequent to regulatory approval are capitalized and
amortized over the remaining useful life of the related asset,
and are classified as intangible assets.
Impairment
Reviews
Baxter has made and continues to make significant investments in
assets, including inventory and property, plant and equipment,
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 or
modified products. The company may not be able to realize the
expected returns from these investments, potentially resulting
in asset impairments in the future.
Goodwill
Goodwill is not amortized, but is subject to an impairment
review annually and whenever indicators of impairment exist. An
impairment would occur if the carrying amount of a reporting
unit exceeded the fair value of that reporting unit. The company
measures goodwill for impairment based on its reportable
segments, which are BioScience, Medication Delivery and Renal.
An impairment charge would be recorded for the difference
between the carrying value and the present value of estimated
future cash flows discounted using a risk-free market rate
adjusted for a market participants view of similar
companies and perceived risks in the cash flows, which
represents the estimated fair value of the reporting unit. As of
December 31, 2010, the fair
50
values of the companys reporting units were substantially
in excess of their carrying values. Baxters market
capitalization as of December 31, 2010 was approximately
$29 billion.
Other
Long-Lived Assets
The company reviews the carrying amounts of long-lived assets
other than goodwill for potential impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Examples of such a change in
circumstances include a significant decrease in market price, a
significant adverse change in the extent or manner in which an
asset is being used, or a significant adverse change in the
legal or business climate. In evaluating recoverability, the
company groups assets and liabilities at the lowest level such
that the identifiable cash flows relating to the group are
largely independent of the cash flows of other assets and
liabilities. The company then compares the carrying amounts of
the assets or asset groups with the related estimated
undiscounted future cash flows. In the event impairment exists,
an impairment charge would be recorded as the amount by which
the carrying amount of the asset or asset group exceeds the fair
value. Depending on the asset and the availability of
information, fair value may be determined by reference to
estimated selling values of assets in similar condition, or by
using a discounted cash flow model. In addition, the remaining
amortization period for the impaired asset would be reassessed
and, if necessary, revised.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Basic shares
|
|
|
590
|
|
|
|
607
|
|
|
|
625
|
|
Effect of dilutive securities
|
|
|
4
|
|
|
|
7
|
|
|
|
12
|
|
|
|
Diluted shares
|
|
|
594
|
|
|
|
614
|
|
|
|
637
|
|
|
|
The computation of diluted EPS excluded employee stock options
to purchase 27 million, 16 million and 8 million
shares in 2010, 2009 and 2008, respectively, because the effect
would have been anti-dilutive.
Shipping
and Handling Costs
Shipping costs, which are costs incurred to physically move
product from Baxters premises to the customers
premises, are classified as marketing and administrative
expenses. Handling costs, which are costs incurred to store,
move and prepare products for shipment, are classified as cost
of sales. Approximately $233 million in 2010,
$220 million in 2009 and $237 million in 2008 of
shipping costs were classified in marketing and administrative
expenses.
Income
Taxes
Deferred taxes are recognized for the future tax effects of
temporary differences between financial and income tax reporting
based on enacted tax laws and rates. The company maintains
valuation allowances unless it is more likely than not that all
or a portion of the deferred tax asset will be realized. With
respect to uncertain tax positions, the company determines
whether the position is more likely than not to be sustained
upon examination, based on the technical merits of the position.
Any tax position that meets the more-likely-than-not recognition
threshold is measured and recognized in the consolidated
financial statements at the largest amount of benefit that is
greater than 50% likely of being realized upon ultimate
settlement. The liability relating to uncertain tax positions is
classified as current in the consolidated balance sheets to the
extent the company anticipates making a payment within one year.
Interest and penalties associated with income taxes are
classified in the income tax expense line in the consolidated
statements of income and were not material.
51
Foreign
Currency Translation
Currency translation adjustments (CTA) related to foreign
operations are principally included in other comprehensive
income (OCI). For foreign operations in highly inflationary
economies, translation gains and losses are included in other
expense, net, and were not material.
Accumulated
Other Comprehensive Income
Comprehensive income includes all changes in shareholders
equity that do not arise from transactions with shareholders,
and consists of net income, CTA, pension and other employee
benefits, realized net losses on hedges of net investments in
foreign operations, unrealized gains and losses on cash flow
hedges and unrealized gains and losses on unrestricted
available-for-sale
marketable equity securities. The
net-of-tax
components of accumulated other comprehensive income (AOCI), a
component of shareholders equity, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
CTA
|
|
$
|
(934
|
)
|
|
$
|
(593
|
)
|
|
$
|
(787
|
)
|
Pension and other employee benefits
|
|
|
(1,245
|
)
|
|
|
(1,188
|
)
|
|
|
(1,134
|
)
|
Hedging activities
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
39
|
|
Other
|
|
|
43
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(2,139
|
)
|
|
$
|
(1,777
|
)
|
|
$
|
(1,885
|
)
|
|
|
Derivatives
and Hedging Activities
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.
For each derivative instrument that is designated and effective
as a cash flow hedge, the gain or loss on the derivative is
accumulated in AOCI 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 OCI
over the life of the option, and then recognized in earnings
consistent with the underlying hedged item. Cash flow hedges are
classified in other expense, net, cost of sales, and net
interest expense, and primarily related to a hedge of
U.S. Dollar-denominated debt issued by a foreign
subsidiary, forecasted intercompany sales denominated in foreign
currencies and anticipated issuances of debt, respectively.
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. Fair value hedges are classified
in net interest expense, as they hedge the interest rate risk
associated with certain of the companys fixed-rate debt.
For each derivative or nonderivative instrument that is
designated and effective as a hedge of a net investment in a
foreign operation, the gain or loss is recorded in OCI, with any
hedge ineffectiveness recorded immediately in net interest
expense. As with CTA, upon sale or liquidation of an investment
in a foreign entity, the amount attributable to that entity and
accumulated in AOCI would be removed from AOCI and reported as
part of the gain or loss in the period during which the sale or
liquidation of the investment occurs.
For derivative instruments that are not designated as hedges,
the change in fair value, which substantially offsets the change
in book value of the hedged items, is recorded directly to other
expense, net.
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 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.
52
Derivatives, including those that are not designated as a hedge,
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.
Refer to the Foreign Currency and Interest Rate Risk Management
section of Note 7 for information regarding the
companys derivative and hedging activities.
Changes
in Accounting Standards
Transfers
of Financial Assets
On January 1, 2010, the company adopted a new accounting
standard relating to the accounting for transfers of financial
assets. The new 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. The standard 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. The
new standard was applied prospectively on January 1, 2010,
except for the disclosure requirements, which have been applied
retrospectively for all periods presented. The new standard did
not impact the companys consolidated financial statements.
Refer to Note 7 for disclosures provided in connection with
this new standard.
Variable
Interest Entities
On January 1, 2010, the company adopted a new standard that
changes the consolidation model for VIEs. The new 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. The standard requires ongoing reassessments of
whether an enterprise is the primary beneficiary of a VIE. The
standard expands the disclosure requirements for enterprises
with a variable interest in a VIE. With respect to the VIEs that
were consolidated by the company as of December 31, 2009,
the first quarter 2010 adoption of a new accounting standard on
VIEs did not change the companys determination that it is
the primary beneficiary of those VIEs. During 2010, the company
did not enter into any new arrangements in which it determined
that the company is the primary beneficiary of a VIE.
NOTE 2
SUPPLEMENTAL FINANCIAL INFORMATION
Goodwill
and Other Intangible Assets
Goodwill
The following is a summary of the activity in goodwill by
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medication
|
|
|
|
|
|
|
|
(in millions)
|
|
BioScience
|
|
|
Delivery
|
|
|
Renal
|
|
|
Total
|
|
|
|
|
December 31, 2008
|
|
$
|
585
|
|
|
$
|
917
|
|
|
$
|
152
|
|
|
$
|
1,654
|
|
Additions
|
|
|
|
|
|
|
89
|
|
|
|
29
|
|
|
|
118
|
|
Currency translation and other adjustments
|
|
|
10
|
|
|
|
37
|
|
|
|
6
|
|
|
|
53
|
|
|
|
December 31, 2009
|
|
|
595
|
|
|
|
1,043
|
|
|
|
187
|
|
|
|
1,825
|
|
Additions
|
|
|
226
|
|
|
|
6
|
|
|
|
22
|
|
|
|
254
|
|
Currency translation and other adjustments
|
|
|
(12
|
)
|
|
|
(42
|
)
|
|
|
(10
|
)
|
|
|
(64
|
)
|
|
|
December 31, 2010
|
|
$
|
809
|
|
|
$
|
1,007
|
|
|
$
|
199
|
|
|
$
|
2,015
|
|
|
|
53
Goodwill additions in 2010 principally related to the
acquisition of ApaTech Limited (ApaTech) in the BioScience
segment. Additional goodwill recognized in 2009 principally
related to the consolidation of Sigma International General
Medical Apparatus, LLC (SIGMA) within the Medication Delivery
segment and the acquisition of certain assets of Edwards
Lifesciences Corporation related to the hemofiltration business
(Edwards CRRT) within the Renal segment. See Note 4 for
further information regarding ApaTech, SIGMA and Edwards CRRT.
As of December 31, 2010, there were no accumulated goodwill
impairment losses.
Other
Intangible Assets, Net
Intangible assets with finite useful lives are amortized on a
straight-line basis over their estimated useful lives. The
following is a summary of the companys intangible assets
subject to amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology,
|
|
|
|
|
|
|
|
(in millions)
|
|
including patents
|
|
|
Other
|
|
|
Total
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross other intangible assets
|
|
$
|
916
|
|
|
$
|
144
|
|
|
$
|
1,060
|
|
Accumulated amortization
|
|
|
(522
|
)
|
|
|
(69
|
)
|
|
|
(591
|
)
|
|
|
Other intangible assets, net
|
|
$
|
394
|
|
|
$
|
75
|
|
|
$
|
469
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross other intangible assets
|
|
$
|
904
|
|
|
$
|
125
|
|
|
$
|
1,029
|
|
Accumulated amortization
|
|
|
(489
|
)
|
|
|
(58
|
)
|
|
|
(547
|
)
|
|
|
Other intangible assets, net
|
|
$
|
415
|
|
|
$
|
67
|
|
|
$
|
482
|
|
|
|
The amortization expense for intangible assets was
$79 million in 2010, $63 million in 2009 and
$53 million in 2008. At December 31, 2010, the
anticipated annual amortization expense for intangible assets
recorded as of December 31, 2010 is $66 million in
2011, $63 million in 2012, $61 million in 2013,
$58 million in 2014 and $56 million in 2015. The
decrease in other intangible assets, net primarily related to
amortization expense for the year and an impairment charge
associated with the companys agreement to divest its U.S.
generic injectables business, partially offset by the
acquisition of ApaTech and the agreement with Kamada Ltd.
(Kamada). The manufacturing, supply and distribution agreement
with Kamada for GLASSIA [Alpha1-Proteinase Inhibitor (Human)],
the first ready-to-use liquid alpha1-proteinase inhibitor,
provides the company with exclusive distribution rights in the
United States, Australia, New Zealand and Canada. This
BioScience segment arrangement included up-front and milestone
payments of $28 million, which are included in the other
intangible asset category and are principally being amortized on
a straight-line basis over an estimated useful life of five
years. Refer to Note 4 for further information regarding
ApaTech and Note 3 regarding the U.S. generic injectables
business impairment charge. Additionally, as of
December 31, 2010 and 2009, intangible assets not subject
to amortization, which included a trademark with an indefinite
life and certain acquired IPR&D associated with products
that have not yet received regulatory approval, totaled
$31 million.
Other
Long-Term Assets
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
Deferred income taxes
|
|
$
|
1,139
|
|
|
$
|
1,095
|
|
Insurance receivables
|
|
|
31
|
|
|
|
49
|
|
Other long-term receivables
|
|
|
126
|
|
|
|
66
|
|
Other
|
|
|
429
|
|
|
|
376
|
|
|
|
Other long-term assets
|
|
$
|
1,725
|
|
|
$
|
1,586
|
|
|
|
54
Accounts
Payable and Accrued Liabilities
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
Accounts payable, principally trade
|
|
$
|
745
|
|
|
$
|
807
|
|
Income taxes payable
|
|
|
346
|
|
|
|
375
|
|
Deferred income taxes
|
|
|
635
|
|
|
|
482
|
|
Common stock dividends payable
|
|
|
180
|
|
|
|
174
|
|
Employee compensation and withholdings
|
|
|
500
|
|
|
|
494
|
|
Property, payroll and certain other taxes
|
|
|
155
|
|
|
|
201
|
|
Infusion pump reserves
|
|
|
258
|
|
|
|
99
|
|
Business optimization reserves
|
|
|
158
|
|
|
|
64
|
|
Accrued rebates
|
|
|
241
|
|
|
|
216
|
|
Other
|
|
|
799
|
|
|
|
841
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
4,017
|
|
|
$
|
3,753
|
|
|
|
Other
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
Pension and other employee benefits
|
|
$
|
1,524
|
|
|
$
|
1,688
|
|
Litigation reserves
|
|
|
76
|
|
|
|
45
|
|
Infusion pump reserves
|
|
|
255
|
|
|
|
|
|
Business optimization reserves
|
|
|
22
|
|
|
|
|
|
Other
|
|
|
412
|
|
|
|
297
|
|
|
|
Other long-term liabilities
|
|
$
|
2,289
|
|
|
$
|
2,030
|
|
|
|
Net
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Interest costs
|
|
$
|
148
|
|
|
$
|
145
|
|
|
$
|
165
|
|
Interest costs capitalized
|
|
|
(33
|
)
|
|
|
(28
|
)
|
|
|
(17
|
)
|
|
|
Interest expense
|
|
|
115
|
|
|
|
117
|
|
|
|
148
|
|
Interest income
|
|
|
(28
|
)
|
|
|
(19
|
)
|
|
|
(72
|
)
|
|
|
Net interest expense
|
|
$
|
87
|
|
|
$
|
98
|
|
|
$
|
76
|
|
|
|
Other
Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Equity method investments
|
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
14
|
|
Foreign exchange
|
|
|
(67
|
)
|
|
|
(51
|
)
|
|
|
(29
|
)
|
Securitization and factoring arrangements
|
|
|
11
|
|
|
|
11
|
|
|
|
19
|
|
Impairment charges
|
|
|
112
|
|
|
|
54
|
|
|
|
31
|
|
Litigation-related charge
|
|
|
62
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
29
|
|
|
|
19
|
|
|
|
(9
|
)
|
|
|
Other expense, net
|
|
$
|
159
|
|
|
$
|
45
|
|
|
$
|
26
|
|
|
|
During 2010, the company recorded a $112 million impairment
charge associated with the companys agreement to divest
its U.S. generic injectables business. See Note 3 for
further information about this charge.
55
During 2009, the company recorded a $54 million charge
associated with the discontinuation of the companys
SOLOMIX drug delivery system in development based on technical
issues which negatively impacted the expected profitability of
the product. During 2008, the company recorded a
$31 million charge related to the companys decision
to discontinue its CLEARSHOT pre-filled syringe program based on
managements assessment of the market demand and expected
profitability for this product. Substantially all of the SOLOMIX
and CLEARSHOT charges related to asset impairments, principally
to write off manufacturing equipment. The litigation charge in
2010 related to litigation associated with the companys
2008 recall of its heparin sodium injection products in the
United States. All three impairment charges and the
litigation-related charge were included in the Medication
Delivery segments pre-tax income.
NOTE 3
SALE OF BUSINESSES
Generic
Injectables Business
In October 2010, the company entered into a definitive agreement
to divest its U.S. generic injectables business to Hikma
Pharmaceuticals PLC (Hikma). The consideration for the
divestiture arrangement totaled approximately $112 million,
subject to closing adjustments. Hikma will acquire Baxters
high-volume, generic injectable products in vials and ampoules,
including chronic pain, anti-infective and anti-emetic products,
along with a manufacturing facility located in Cherry Hill, New
Jersey, and a warehouse and distribution center located in
Memphis, Tennessee. Approximately 750 employees will also
transfer as part of the transaction. The determination to sell
this business was based on the companys strategic decision
to redirect resources toward its proprietary, enhanced packaging
offerings and formulation technologies, consistent with the
companys focus on product differentiation. The transaction
is subject to customary closing conditions, including applicable
regulatory approvals.
As a result of the divestiture agreement, the company recorded a
$112 million impairment charge. The charge principally
related to impairments of PP&E and intangible assets
(primarily developed technology) to reflect the fair values of
these assets based on the expected sale price of the business.
Net sales related to the U.S. generic injectables business,
which are reported in the Medication Delivery segment, totaled
$198 million, $170 million and $205 million in
2010, 2009 and 2008, respectively. Pre-tax earnings related to
this business were not significant to Baxters consolidated
financial statements. The impairment charge was included in
other expense, net in the consolidated statement of income, and
was included in the Medication Delivery segments pre-tax
income.
Transfusion
Therapies Business
In February 2007, the company divested substantially all of the
assets and liabilities of its Transfusion Therapies (TT)
business to an affiliate of TPG Capital, L.P. (TPG). TPG
acquired the net assets of the TT business, including its
product portfolio of manual and automated blood-collection
products and storage equipment, as well as five manufacturing
facilities, and established the new company as Fenwal Inc.
(Fenwal). In 2008, as a result of the finalization of the net
assets transferred in the divestiture, the company recorded an
income adjustment to the gain on the sale of the business of
$16 million.
Included in the arrangement were transition agreements to
provide post-divestiture manufacturing, distribution and support
services to Fenwal. Post-divestiture revenues associated with
these transition agreements, which are reported at the corporate
headquarters level and not allocated to a segment, totaled
$46 million, $74 million and $174 million in
2010, 2009 and 2008, respectively.
56
NOTE 4
ACQUISITIONS AND INVESTMENTS
In 2010, 2009 and 2008, cash outflows related to the
acquisitions of and investments in businesses and technologies
totaled $319 million, $156 million and
$99 million, respectively, and the company recorded
IPR&D charges of $34 million in 2010 and
$19 million in 2008. There were no IPR&D charges in
2009. The following are the more significant acquisitions and
investments, including licensing agreements, that require
significant contingent milestone payments.
2010
ApaTech
In March 2010, Baxter acquired ApaTech, an orthobiologic
products company based in the United Kingdom. As a result of the
acquisition, Baxter acquired ACTIFUSE, a silicate substituted
calcium phosphate synthetic bone graft material which is
currently marketed in the United States, Europe and other select
markets around the world, and manufacturing and R&D
facilities located in the United Kingdom, the United States and
Germany. This acquisition complements the companys
existing commercial and technical capabilities in regenerative
medicine. The total purchase price of up to $337 million
was comprised of $247 million in up-front payments, as
adjusted for closing date cash and net working capital-related
adjustments, and contingent payments of up to $90 million,
which are associated with the achievement of specified
commercial milestones.
The following table summarizes the preliminary allocation of the
fair value of assets acquired and liabilities assumed at the
acquisition date. The final allocation of the purchase price may
result in adjustment to the recognized amounts of assets and
liabilities; however, no material adjustments are anticipated.
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
Current assets, including cash of $12
|
|
$
|
31
|
|
Property, plant and equipment, net
|
|
|
13
|
|
Goodwill
|
|
|
226
|
|
Other intangible assets
|
|
|
77
|
|
Other assets
|
|
|
7
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
15
|
|
Contingent payments
|
|
|
70
|
|
Other long-term liabilities
|
|
|
22
|
|
|
|
Goodwill includes expected synergies and other benefits the
company believes will result from the acquisition. The other
intangible assets primarily relate to developed technology and
are being amortized on a straight-line basis over an estimated
average useful life of nine years. The contingent payments of up
to $90 million were recorded at their estimated fair value
of $70 million. As of December 31, 2010, the estimated
fair value of the contingent payments was $73 million, with
changes in the estimated fair value recognized in earnings. The
results of operations and assets and liabilities of ApaTech are
included in the BioScience segment, and the goodwill is included
in this reporting unit. A majority of the goodwill is not
deductible for tax purposes. The pro forma impact of the ApaTech
acquisition was not significant to the results of operations of
the company.
Archemix
In December 2010, Baxter acquired all of the hemophilia-related
assets of Archemix Corp. (Archemix), a privately-held
biopharmaceutical company, and entered into an exclusive license
agreement for certain related intellectual property assets. The
lead product associated with the arrangement is ARC19499, a
synthetic subcutaneously-administered hemophilia therapy which
recently entered a Phase 1 clinical trial in the United Kingdom.
This anti-tissue factor pathway inhibitor program is an
important addition to Baxters hemophilia development
programs, which focus on longer-acting recombinant factor VIII,
recombinant factor IX and non-intravenous therapies. The
up-front payment associated with the transaction of
$30 million was recognized as
57
an IPR&D expense as the technology had not received
regulatory approval and has no alternative future use. Baxter
may, in the future, be required to make contingent payments of
up to $285 million based on the achievement of specified
development and regulatory milestones.
2009
SIGMA
In April 2009, the company entered into 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% equity stake in SIGMA, and an option to purchase
the remaining equity of SIGMA, exercisable at any time over a
three-year term. The arrangement included a $100 million
up-front payment and 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.
The following table summarizes the final 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 is being accounted for as an
indefinite-lived intangible asset until regulatory approval or
discontinuation. The other intangible assets primarily relate to
developed technology and are being amortized on a straight-line
basis over an estimated average useful life of eight years. The
fair value of the purchase option was estimated using the
Black-Scholes model, and the fair value of the noncontrolling
interests was estimated using a discounted cash flow 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. As of December 31, 2010, the estimated
fair value of the contingent payments was $52 million, with
the change in the estimated fair value since inception
principally due to Baxters payment of $15 million for
the achievement of commercial milestones in 2010 and 2009. Other
changes in the estimated fair value of the contingent payments
are being 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 operations of the company.
58
Edwards
CRRT
In August 2009, the company acquired Edwards CRRT. Continuous
Renal Replacement Therapy (CRRT) provides a method of continuous
yet adjustable fluid removal that can gradually remove excess
fluid and waste products that build up with the acute impairment
of kidney function, and is usually administered in an intensive
care setting in the hospital. The acquisition expands
Baxters existing CRRT business into new markets. The
purchase price of $56 million was primarily allocated to
other intangible assets and goodwill. The identified intangible
assets of $28 million consisted of customer relationships
and developed technology and are being amortized on a
straight-line basis over an estimated average useful life of
eight years. The goodwill of $28 million is deductible for
tax purposes. The purchase price also included contingent
payments of up to an additional $9 million based on the
achievement of revenue objectives. These contingent purchase
payments, which were recorded at their estimated fair value on
the acquisition date, have been substantially paid as of
December 31, 2010. The results of operations and assets and
liabilities of Edwards CRRT are included in the Renal segment,
and the goodwill is included in this reporting unit. The pro
forma impact of the Edwards CRRT acquisition was not significant
to the results of operations of the company.
NOTE 5
INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES
Infusion
Pump Charges
In July 2005, the company stopped shipment of COLLEAGUE infusion
pumps in the United States. Following a number of Class I
recalls relating to the performance of the pumps, as well as the
seizure litigation described in Note 11, the company
entered into a Consent Decree with the U.S. Food and Drug
Administration (FDA) in June 2006. Additional Class I
recalls related to remediation and repair and maintenance
activities were addressed by the company in 2007 and 2009.
On July 13, 2010, the FDA issued a final order requiring
the company to recall its approximately 200,000 COLLEAGUE
infusion pumps currently in use in the U.S. market.
Pursuant to the terms of the order, Baxter is offering
replacement infusion pumps or monetary consideration to owners
of COLLEAGUE pumps and is executing the recall through
July 13, 2012. Under the replacement option, customers may
receive SIGMA Spectrum infusion pumps in exchange for COLLEAGUE
infusion pumps.
In 2010, following the FDAs issuance of its initial order
dated April 30, 2010, the company recorded a charge of
$588 million in connection with this recall and other
actions the company is undertaking outside of the United States.
Included in the charge were $142 million relating to asset
impairments and $446 million for cash costs. The asset
impairments principally related to inventory, lease receivables
and other assets relating to the recalled pumps. The reserve for
cash costs included an estimate of cash refunds or replacement
infusion pumps that are being offered to current owners in
exchange for their COLLEAGUE infusion pumps. Cash costs also
included costs associated with the execution of the recall
program and customer accommodations. It is possible that
substantial additional cash and non-cash charges may be required
in future periods based on new information, changes in
estimates, the implementation of the recall in the United
States, and other actions the company may be required to
undertake in markets outside the United States.
Of the total charge, $213 million was recorded as a
reduction of net sales and $375 million was recorded in
cost of sales. The amount recorded in net sales principally
related to estimated cash payments to customers.
Prior to the charge recorded in 2010, from 2005 through 2009,
the company recorded charges and other costs totaling
$337 million related to its COLLEAGUE and SYNDEO infusion
pumps. In aggregate, these charges included $270 million of
cash costs and $67 million principally related to asset
impairments. These reserves for cash costs related to estimated
expenditures for the materials, labor and freight costs expected
to be incurred to remediate the design issues, customer
accommodations, and additional warranty and other commitments
made to customers.
While the company continues to work to resolve the issues
associated with COLLEAGUE infusion pumps globally, 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
59
impairments may not be required, that sales of other products
may not be adversely affected, or that additional regulation
will not be introduced that may adversely affect the
companys operations and consolidated financial statements.
The following table summarizes cash activity in the
companys COLLEAGUE and SYNDEO infusion pump reserves
through December 31, 2010.
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
Charges and adjustments in 2005 through 2007
|
|
$
|
171
|
|
Utilization in 2005 through 2007
|
|
|
(101
|
)
|
|
|
Reserves at December 31, 2007
|
|
|
70
|
|
Charges
|
|
|
85
|
|
Utilization
|
|
|
(40
|
)
|
|
|
Reserves at December 31, 2008
|
|
|
115
|
|
Charge
|
|
|
14
|
|
Utilization
|
|
|
(30
|
)
|
|
|
Reserves at December 31, 2009
|
|
|
99
|
|
Charge
|
|
|
446
|
|
Utilization
|
|
|
(32
|
)
|
|
|
Reserves at December 31, 2010
|
|
$
|
513
|
|
|
|
The remaining infusion pump reserves are expected to be
substantially utilized by the end of 2012.
Business
Optimization Charges
In 2010 and 2009, the company recorded charges of
$257 million and $79 million, respectively, primarily
related to costs associated with optimizing its overall cost
structure on a global basis, as the company streamlines its
international operations, rationalizes its manufacturing
facilities and enhances its general and administrative
infrastructure. The charges included severance costs, as well as
asset impairments and contract terminations associated with
discontinued products and projects, the terminations of which
will not have a material impact on the companys future
results of operations.
Included in the 2010 and 2009 charges were cash costs of
$184 million and $69 million, respectively,
principally pertaining to severance and other employee-related
costs in Europe and the United States.
Also included in the charges were asset impairments relating to
fixed assets, inventory and other assets associated with
discontinued products and projects. These other costs totaled
$73 million and $10 million in 2010 and 2009,
respectively.
Of the total 2010 charge, $132 million was recorded in cost
of sales and $125 million was recorded in marketing and
administrative expenses. Of the total 2009 charge,
$30 million was recorded in cost of sales and
$49 million was recorded in marketing and administrative
expenses. The charges were recorded at the corporate level and
were not allocated to a segment.
60
The following summarizes cash activity in the reserves related
to the companys business optimization initiatives.
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
2009 Charge
|
|
$
|
69
|
|
Utilization in 2009
|
|
|
(5
|
)
|
|
|
Reserve at December 31, 2009
|
|
|
64
|
|
2010 Charge
|
|
|
184
|
|
Utilization in 2010
|
|
|
(68
|
)
|
|
|
Reserve at December 31, 2010
|
|
$
|
180
|
|
|
|
The reserves are expected to be substantially utilized by the
end of 2011. The company believes that the reserves are
adequate. However, adjustments may be recorded in the future as
the programs are completed.
NOTE 6
DEBT, CREDIT FACILITIES, AND COMMITMENTS AND
CONTINGENCIES
Debt
Outstanding
At December 31, 2010 and 2009, the company had the
following debt outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
rate in
20101
|
|
|
20102
|
|
|
20092
|
|
|
|
|
4.75% notes due 2010
|
|
|
4.9%
|
|
|
$
|
|
|
|
$
|
500
|
|
Variable-rate loan due 2010
|
|
|
0.7%
|
|
|
|
|
|
|
|
180
|
|
Variable-rate loan due 2012
|
|
|
0.6%
|
|
|
|
168
|
|
|
|
157
|
|
1.8% notes due 2013
|
|
|
2.0%
|
|
|
|
306
|
|
|
|
|
|
4.0% notes due 2014
|
|
|
4.2%
|
|
|
|
364
|
|
|
|
350
|
|
Variable-rate loan due 2015
|
|
|
0.3%
|
|
|
|
240
|
|
|
|
|
|
4.625% notes due 2015
|
|
|
4.8%
|
|
|
|
664
|
|
|
|
641
|
|
5.9% notes due 2016
|
|
|
6.0%
|
|
|
|
647
|
|
|
|
615
|
|
5.375% notes due 2018
|
|
|
5.5%
|
|
|
|
499
|
|
|
|
499
|
|
4.5% notes due 2019
|
|
|
4.6%
|
|
|
|
501
|
|
|
|
498
|
|
4.25% notes due 2020
|
|
|
4.5%
|
|
|
|
299
|
|
|
|
|
|
6.625% debentures due 2028
|
|
|
6.7%
|
|
|
|
135
|
|
|
|
136
|
|
6.25% notes due 2037
|
|
|
6.3%
|
|
|
|
499
|
|
|
|
499
|
|
Other
|
|
|
|
|
|
|
50
|
|
|
|
47
|
|
|
|
Total debt and capital lease obligations
|
|
|
|
|
|
|
4,372
|
|
|
|
4,122
|
|
Current portion
|
|
|
|
|
|
|
(9
|
)
|
|
|
(682
|
)
|
|
|
Long-term portion
|
|
|
|
|
|
$
|
4,363
|
|
|
$
|
3,440
|
|
|
|
|
|
|
1 |
|
Excludes the effect of any related interest rate swaps. |
|
2 |
|
Book values include any discounts, premiums and adjustments
related to hedging instruments. |
In addition, as further discussed below, the company had
short-term debt totaling $15 million at December 31,
2010 and $29 million at December 31, 2009.
Significant
Debt Issuances
In March 2010, the company issued $600 million of senior
unsecured notes, with $300 million maturing in March 2013
and bearing a 1.8% coupon rate, and $300 million maturing
in March 2020 and bearing a 4.25% coupon rate. In February 2009,
the company issued $350 million of senior unsecured notes,
maturing in March
61
2014 and bearing a 4.0% coupon rate. In August 2009, the company
issued $500 million of senior unsecured notes, maturing in
August 2019 and bearing a 4.5% coupon rate. In May 2008, the
company issued $500 million of senior unsecured notes,
maturing in June 2018 and bearing a 5.375% coupon rate. The
notes are redeemable, in whole or in part, at the companys
option, subject to a make-whole redemption premium. In addition,
during 2008, the company issued commercial paper, of which
$200 million was outstanding as of December 31, 2008,
with a weighted-average interest rate of 2.55%. There was no
commercial paper outstanding as of December 31, 2010 and
2009.
The net proceeds of the debt issuances noted above were used for
general corporate purposes, including the repayment of
$200 million of outstanding commercial paper in 2009 and
for the settlement of cross-currency swaps in 2008. See
Note 7 for further information regarding the settlement of
net investment hedges. The debt instruments include certain
covenants, including restrictions relating to the companys
creation of secured debt.
Future
Minimum Lease Payments and Debt Maturities
|
|
|
|
|
|
|
|
|
|
|
Debt maturities
|
|
|
Operating
|
|
and capital
|
as of and for the years ended December 31 (in millions)
|
|
leases
|
|
leases
|
|
|
2011
|
|
$
|
162
|
|
$
|
9
|
2012
|
|
|
133
|
|
|
175
|
2013
|
|
|
106
|
|
|
304
|
2014
|
|
|
93
|
|
|
358
|
2015
|
|
|
82
|
|
|
843
|
Thereafter
|
|
|
172
|
|
|
2,563
|
|
|
Total obligations and commitments
|
|
|
748
|
|
|
4,252
|
Interest on capital leases, discounts and premiums, and
adjustments
relating to hedging instruments
|
|
|
n/a
|
|
|
120
|
|
|
Long-term debt and lease obligations
|
|
$
|
748
|
|
$
|
4,372
|
|
|
Credit
Facilities
The company had $2.7 billion of cash and equivalents at
December 31, 2010. The companys primary revolving
credit facility has a maximum capacity of $1.5 billion and
matures in December 2011. The company also maintains a
Euro-denominated credit facility with a maximum capacity of
approximately $400 million at December 31, 2010, which
matures in January 2013. As of December 31, 2010 and 2009,
there were no outstanding borrowings under these facilities. As
of December 31, 2008, there was $164 million
outstanding under the Euro-denominated facility, which was
repaid in 2009. The companys 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 December 31, 2010, the
company was in compliance with the financial covenants in these
agreements. The non-performance of any financial institution
supporting either of the credit facilities would reduce the
maximum capacity of these facilities by each institutions
respective commitment.
The company also maintains other credit arrangements, which
totaled $272 million at December 31, 2010 and
$454 million at December 31, 2009. Borrowings
outstanding under these facilities totaled $15 million at
December 31, 2010 and $29 million at December 31,
2009.
Leases
The company leases certain facilities and equipment under
capital and operating leases expiring at various dates. The
leases generally provide for the company to pay taxes,
maintenance, insurance and certain other operating costs of the
leased property. Most of the operating leases contain renewal
options. Operating lease rent expense was $184 million in
2010, $172 million in 2009 and $161 million in 2008.
62
Collaborative
Arrangements
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 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 receives
regulatory approval. Milestone payments made to the partner
subsequent to regulatory approval are capitalized as other
intangible assets and amortized to cost of sales over the
estimated 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 2010, 2009 and 2008. Payments to
collaborative partners classified in R&D expense were 6%,
6% and 7% of total R&D expense in 2010, 2009 and 2008,
respectively. The payments principally related to the
development of tissue repair products, longer-acting forms of
blood clotting proteins to treat hemophilia and a 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 were less
than 1% of total cost of sales in 2010, 2009 and 2008.
Other
Commitments and Contingencies
Joint
Development and Commercialization Arrangements
In addition to the new product development arrangements
discussed above, the company has entered into certain other
arrangements which include contingent milestone payments. At
December 31, 2010, the companys unfunded milestone
payments associated with all of its arrangements totaled
$960 million. This total excludes any contingent royalties.
Based on the companys projections, any contingent payments
made in the future will be more than offset over time by the
estimated net future cash flows relating to the rights
63
acquired for those payments. The majority of the contingent
payments relate to arrangements in the BioScience segment.
Included in the total are contingent milestone payments related
to the Archemix hemophilia-related asset agreement discussed in
Note 4, as well as significant collaborations related to
the development of hard and soft tissue-repair products to
position the company to enter the orthobiologic market, and the
development of longer-acting forms of blood clotting proteins to
treat hemophilia A.
Indemnifications
During the normal course of business, Baxter makes indemnities,
commitments and guarantees pursuant to which the company may be
required to make payments related to specific transactions.
Indemnifications include: (i) intellectual property
indemnities to customers in connection with the use, sales or
license of products and services; (ii) indemnities to
customers in connection with losses incurred while performing
services on their premises; (iii) indemnities to vendors
and service providers pertaining to claims based on negligence
or willful misconduct; and (iv) indemnities involving the
representations and warranties in certain contracts. In
addition, under Baxters Amended and Restated Certificate
of Incorporation, and consistent with Delaware General
Corporation Law, the company has agreed to indemnify its
directors and officers for certain losses and expenses upon the
occurrence of certain prescribed events. The majority of these
indemnities, commitments and guarantees do not provide for any
limitation on the maximum potential for future payments that the
company could be obligated to make. To help address some of
these risks, the company maintains various insurance coverages.
Based on historical experience and evaluation of the agreements,
the company does not believe that any significant payments
related to its indemnifications will result, and therefore the
company has not recorded any associated liabilities.
Legal
Contingencies
Refer to Note 11 for a discussion of the companys
legal contingencies.
NOTE 7
FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE
MEASUREMENTS
Receivable
Securitizations
For trade receivables originated in Japan, the company has
entered into agreements with financial institutions in which the
entire interest in and ownership of the receivable is sold. The
company continues to service the receivables in its Japanese
securitization arrangement. Servicing assets or liabilities are
not recognized because the company receives adequate
compensation to service the sold receivables. The Japanese
securitization arrangement includes limited recourse provisions,
which are not material.
The following is a summary of the activity relating to the
securitization arrangement.
|
|
|
|
|
|
|
|
|
|
|
|
|
as of and for the years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Sold receivables at beginning of year
|
|
$
|
147
|
|
|
$
|
154
|
|
|
$
|
129
|
|
Proceeds from sales of receivables
|
|
|
557
|
|
|
|
535
|
|
|
|
467
|
|
Cash collections (remitted to the owners of the receivables)
|
|
|
(555
|
)
|
|
|
(542
|
)
|
|
|
(470
|
)
|
Foreign exchange
|
|
|
8
|
|
|
|
|
|
|
|
28
|
|
|
|
Sold receivables at end of year
|
|
$
|
157
|
|
|
$
|
147
|
|
|
$
|
154
|
|
|
|
The net gains and losses relating to the sales of receivables
were immaterial for each year.
Concentrations
of Risk
The company invests excess cash in certificates of deposit or
money market funds and diversifies the concentration of cash
among different financial institutions. With respect to
financial instruments, where appropriate, the company has
diversified its selection of counterparties, and has arranged
collateralization and
master-netting
agreements to minimize the risk of loss.
64
The company continues to do business with foreign governments in
certain countries, including Greece, Spain, Portugal and Italy,
that have experienced a deterioration in credit and economic
conditions. While the economic downturn has not significantly
impacted the companys ability to collect receivables,
global economic conditions and liquidity issues in certain
countries have resulted, and may continue to result, in delays
in the collection of receivables and credit losses. In 2010, the
company recorded a charge of $28 million to write down its
accounts receivable in Greece principally as a result of the
Greek governments plan to convert certain past due
receivables into non-interest bearing bonds with maturities of
one to three years. Refer to Note 1 for further information
regarding this charge. Global economic conditions and
customer-specific factors may require the company to
re-evaluate
the collectibility of its receivables and the company could
potentially incur additional charges.
Foreign
Currency and Interest Rate Risk Management
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,
Brazilian Real and Colombian Peso. 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 reduce
the earnings and equity volatility resulting from foreign
exchange. 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.
Cash Flow
Hedges
The company may use options, including collars and purchased
options, forwards and cross-currency swaps to hedge the foreign
exchange risk to earnings relating to forecasted transactions
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 related to
forecasted intercompany sales denominated in foreign currencies,
a hedge of U.S. Dollar-denominated debt issued by a foreign
subsidiary and anticipated issuances of debt.
The notional amounts of foreign exchange contracts were
$1.6 billion and $1.2 billion as of December 31,
2010 and December 31, 2009, respectively. The notional
amount of cross-currency swaps (used to hedge
U.S. Dollar-denominated debt issued by a foreign
subsidiary) was $500 million as of December 31, 2009.
In 2010, in conjunction with the maturity of $500 million
of U.S. Dollar-denominated debt held by a foreign
subsidiary, the company terminated related cross-currency swaps.
The cash outflow resulting from this termination was
$45 million, which was reported in the financing section of
the consolidated statements of cash flows. The notional amount
of interest rate contracts outstanding as of December 31,
2009 was $200 million. In the first quarter of 2010, in
conjunction with the 2010 debt issuance disclosed in
Note 6,
65
these contracts were terminated, resulting in a gain of
$18 million that is being amortized to net interest expense
over the life of the related debt.
The maximum term over which the company has cash flow hedge
contracts in place related to forecasted transactions at
December 31, 2010 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.
The total notional amount of interest rate contracts designated
as fair value hedges was $1.9 billion and $1.6 billion
as of December 31, 2010 and 2009, respectively.
Dedesignations
In 2009, the company terminated $500 million of its
interest rate contracts, resulting in a net gain of
$10 million that was deferred in AOCI. There were no hedge
dedesignations in 2010, 2009 or 2008 resulting from changes in
the companys assessment of the probability that the hedged
forecasted transactions would occur.
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 terms of these instruments generally do not exceed one month.
The total notional amount of undesignated derivative instruments
was $445 million and $419 million as of
December 31, 2010 and 2009, respectively.
Gains and
Losses on Derivative Instruments
The following tables summarize the gains and losses on the
companys derivative instruments for the years ended
December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss)
|
|
|
|
Gain (loss)
|
|
|
Location of gain
|
|
|
reclassified from
|
|
|
|
recognized in OCI
|
|
|
(loss) in income
|
|
|
AOCI into income
|
|
(in millions)
|
|
2010
|
|
|
2009
|
|
|
statement
|
|
|
2010
|
|
|
2009
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(7
|
)
|
|
$
|
78
|
|
|
|
Net interest expense
|
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
Foreign exchange contracts
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
Net sales
|
|
|
|
(3
|
)
|
|
|
5
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
(53
|
)
|
|
|
Cost of sales
|
|
|
|
(7
|
)
|
|
|
43
|
|
Foreign exchange contracts
|
|
|
52
|
|
|
|
(42
|
)
|
|
|
Other expense, net
|
|
|
|
60
|
|
|
|
(28
|
)
|
|
|
Total
|
|
$
|
43
|
|
|
$
|
(20
|
)
|
|
|
|
|
|
$
|
51
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss)
|
|
|
|
Location of gain (loss) in
|
|
|
recognized in income
|
|
(in millions)
|
|
income statement
|
|
|
2010
|
|
|
2009
|
|
|
|
Fair value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
Net interest expense
|
|
|
$
|
76
|
|
|
$
|
(80
|
)
|
|
|
Undesignated derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Other expense, net
|
|
|
$
|
(9
|
)
|
|
$
|
(47
|
)
|
|
|
For the companys fair value hedges, an equal and
offsetting loss of $76 million and a gain of
$80 million were recognized in net interest expense in 2010
and 2009, respectively, as adjustments to the underlying
66
hedged item, fixed-rate debt. Ineffectiveness related to the
companys cash flow and fair value hedges for the year
ended December 31, 2010 was not material.
The following table summarizes
net-of-tax
activity in AOCI, a component of shareholders equity,
related to the companys cash flow hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
as of and for the years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Accumulated other comprehensive income balance at beginning of
year
|
|
$
|
3
|
|
|
$
|
39
|
|
|
$
|
14
|
|
Gain (loss) in fair value of derivatives during the year
|
|
|
45
|
|
|
|
(19
|
)
|
|
|
93
|
|
Amount reclassified to earnings during the year
|
|
|
(51
|
)
|
|
|
(17
|
)
|
|
|
(68
|
)
|
|
|
Accumulated other comprehensive (loss) income balance at end of
year
|
|
$
|
(3
|
)
|
|
$
|
3
|
|
|
$
|
39
|
|
|
|
As of December 31, 2010, $12 million of deferred, net
after-tax losses 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.
Fair
Values of Derivative Instruments
The following table summarizes the classification and fair value
amounts of derivative instruments reported in the consolidated
balance sheet as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in asset positions
|
|
|
Derivatives in liability positions
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
(in millions)
|
|
Balance sheet location
|
|
|
value
|
|
|
Balance sheet location
|
|
|
value
|
|
|
|
|
Derivative instruments designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
Other long-term assets
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Prepaid expenses and other
|
|
|
|
23
|
|
|
|
and accrued liabilities
|
|
|
$
|
19
|
|
Foreign exchange contracts
|
|
|
Other long-term assets
|
|
|
|
8
|
|
|
|
Other long-term liabilities
|
|
|
|
2
|
|
|
|
Total derivative instruments designated as hedges
|
|
$
|
167
|
|
|
|
|
|
|
$
|
21
|
|
|
|
Undesignated derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Prepaid expenses and other
|
|
|
$
|
|
|
|
|
and accrued liabilities
|
|
|
$
|
|
|
|
|
Total derivative instruments
|
|
$
|
167
|
|
|
|
|
|
|
$
|
21
|
|
|
|
The following table summarizes the classification and fair value
amounts of derivative instruments reported in the consolidated
balance sheet as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in asset positions
|
|
|
Derivatives in liability positions
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
(in millions)
|
|
Balance sheet location
|
|
|
value
|
|
|
Balance sheet location
|
|
|
value
|
|
|
|
|
Derivative instruments designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
Prepaid expenses and other
|
|
|
$
|
25
|
|
|
|
Other long-term liabilities
|
|
|
$
|
1
|
|
Interest rate contracts
|
|
|
Other long-term assets
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Prepaid expenses and other
|
|
|
|
20
|
|
|
|
accrued liabilities
|
|
|
|
112
|
|
|
|
Total derivative instruments designated as hedges
|
|
$
|
105
|
|
|
|
|
|
|
$
|
113
|
|
|
|
Undesignated derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Prepaid expenses and other
|
|
|
$
|
|
|
|
|
accrued liabilities
|
|
|
$
|
|
|
|
|
Total derivative instruments
|
|
$
|
105
|
|
|
|
|
|
|
$
|
113
|
|
|
|
67
Hedges of
Net Investments in Foreign Operations
In 2008, the company terminated its remaining net investment
hedge portfolio and no longer has any outstanding net investment
hedges. Of the $528 million of net settlement payments in
2008, $540 million of cash outflows were included as
payments of obligations in the financing section and
$12 million of cash inflows were included in the operating
section of the consolidated statement of cash flows. The net
after-tax losses related to net investment hedge instruments
recorded in OCI were $33 million in 2008.
Fair
Value Measurements
The fair value hierarchy under the accounting standard for fair
value measurements consists of the following three levels:
|
|
|
|
|
Level 1 Quoted prices in active markets that
the company has the ability to access for identical assets or
liabilities;
|
|
|
|
Level 2 Quoted prices for similar instruments
in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based
valuations in which all significant inputs are observable in the
market; and
|
|
|
|
Level 3 Valuations using significant inputs
that are unobservable in the market and include the use of
judgment by the companys management about the assumptions
market participants would use in pricing the asset or liability.
|
The following tables summarize the bases used to measure
financial assets and liabilities that are carried at fair value
on a recurring basis in the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets for
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
identical assets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
(in millions)
|
|
December 31, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
31
|
|
|
$
|
|
|
|
$
|
31
|
|
|
$
|
|
|
Interest rate hedges
|
|
|
136
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
Equity securities
|
|
|
18
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
185
|
|
|
$
|
18
|
|
|
$
|
167
|
|
|
$
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
|
|
Contingent payments related to acquisitions and investments
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
Total liabilities
|
|
$
|
146
|
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
125
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets for
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
identical assets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
(in millions)
|
|
December 31, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
20
|
|
|
$
|
|
|
Interest rate hedges
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
Equity securities
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
118
|
|
|
$
|
13
|
|
|
$
|
105
|
|
|
$
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
112
|
|
|
$
|
|
|
|
$
|
112
|
|
|
$
|
|
|
Interest rate hedges
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Contingent payments related to acquisitions and investments
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
Total liabilities
|
|
$
|
172
|
|
|
$
|
|
|
|
$
|
113
|
|
|
$
|
59
|
|
|
|
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. The contingent
payments are valued using a discounted cash flow technique that
reflects managements expectations about probability of
payment.
Refer to Note 4 for further information regarding changes
in fair value of the contingent payments related to acquisitions
and investments. Refer to Note 9 for fair value disclosures
related to the companys pension plans.
The following table is a reconciliation of the fair value
measurements that use significant unobservable inputs
(Level 3), which consist of contingent payments related to
acquisitions and investments.
|
|
|
|
|
(in millions)
|
|
|
|
|
Fair value as of December 31, 2008
|
|
$
|
|
|
Additions, net of payments
|
|
|
57
|
|
Unrealized loss recognized in earnings
|
|
|
2
|
|
|
|
Fair value as of December 31, 2009
|
|
|
59
|
|
Additions, net of payments
|
|
|
60
|
|
Unrealized loss recognized in earnings
|
|
|
6
|
|
|
|
Fair value as of December 31, 2010
|
|
$
|
125
|
|
|
|
The unrealized loss recognized in earnings relates to
liabilities held at December 31, 2010 and is reported in
cost of sales and R&D expense. The additions during 2010
principally relate to the fair value of contingent payments
associated with the companys acquisition of ApaTech. Refer
to Note 4 for more information regarding ApaTech.
As discussed further in Note 5, the company recorded asset
impairment charges related to its COLLEAGUE and SYNDEO infusion
pumps in 2010, 2009 and 2008, and its business optimization
initiatives in 2010 and 2009. Also, as further discussed in
Note 2, the company recorded asset impairment charges
associated with its SOLOMIX drug delivery system in 2009 and its
CLEARSHOT pre-filled syringe program in 2008. As the assets had
no alternative use and no salvage value, the fair values,
measured using significant unobservable inputs (Level 3),
were assessed to be zero.
69
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 values recognized on the consolidated balance
sheets and the approximate fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
Book values
|
|
|
fair values
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term insurance receivables
|
|
$
|
31
|
|
|
$
|
49
|
|
|
$
|
30
|
|
|
$
|
47
|
|
Investments
|
|
|
32
|
|
|
|
31
|
|
|
|
32
|
|
|
|
31
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
15
|
|
|
|
29
|
|
|
|
15
|
|
|
|
29
|
|
Current maturities of long-term debt and lease obligations
|
|
|
9
|
|
|
|
682
|
|
|
|
9
|
|
|
|
697
|
|
Other long-term debt and lease obligations
|
|
|
4,363
|
|
|
|
3,440
|
|
|
|
4,666
|
|
|
|
3,568
|
|
Long-term litigation liabilities
|
|
|
76
|
|
|
|
45
|
|
|
|
74
|
|
|
|
44
|
|
|
|
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 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. In determining the fair value of cost method
investments, the company takes into consideration recent
transactions, as well as the financial information of the
investee. 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.
NOTE 8
COMMON STOCK
Stock-Based
Compensation
The companys stock-based compensation generally includes
stock options, performance share units (PSUs), restricted stock
units (RSUs) and purchases under employee stock purchase plans.
Shares issued relating to the companys stock-based plans
are generally issued out of treasury stock. As of
December 31, 2010, approximately 18 million authorized
shares are available for future awards under the companys
stock-based compensation plans.
Stock
Compensation Expense
Stock compensation expense recognized in the consolidated
statements of income was $120 million, $140 million
and $146 million in 2010, 2009 and 2008, respectively. The
related tax benefit recognized was $36 million,
$40 million and $46 million in 2010, 2009 and 2008,
respectively.
Stock compensation expense is recorded at the corporate level
and is not allocated to a segment. Approximately 70% of stock
compensation expense is classified in marketing and
administrative expenses, with the remainder classified in cost
of sales and R&D expenses. Costs capitalized in the
consolidated balance sheet at December 31, 2010 were not
significant.
Stock compensation expense is based on awards expected to vest,
and therefore has been reduced by estimated forfeitures.
Forfeitures are estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ
from those estimates.
70
Stock
Options
Stock options are granted to employees and non-employee
directors with exercise prices at least equal to 100% of the
market value on the date of grant. Stock options generally vest
in one-third increments over a three-year period. Stock options
granted to non-employee directors generally cliff-vest 100% one
year from the grant date. Stock options typically have a
contractual term of 10 years. The grant-date fair value,
adjusted for estimated forfeitures, is recognized as expense on
a straight-line basis over the substantive vesting period.
The fair value of stock options is determined using the
Black-Scholes model. The weighted-average assumptions used in
estimating the fair value of stock options granted during each
year, along with the weighted-average grant-date fair values,
were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Expected volatility
|
|
|
22%
|
|
|
|
30%
|
|
|
|
24%
|
|
Expected life (in years)
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.5
|
|
Risk-free interest rate
|
|
|
2.0%
|
|
|
|
1.8%
|
|
|
|
2.4%
|
|
Dividend yield
|
|
|
2.0%
|
|
|
|
2.0%
|
|
|
|
1.5%
|
|
Fair value per stock option
|
|
|
$10
|
|
|
|
$12
|
|
|
|
$12
|
|
|
|
The companys expected volatility assumption is based on an
equal weighting of the historical volatility of Baxters
stock and the implied volatility from traded options on
Baxters stock. The expected life assumption is primarily
based on the vesting terms of the stock option, historical
employee exercise patterns and employee post-vesting termination
behavior. The risk-free interest rate for the expected life of
the option is based on the U.S. Treasury yield curve in
effect at the time of grant. The dividend yield reflects
historical experience as well as future expectations over the
expected life of the option.
The following table summarizes stock option activity for the
year ended December 31, 2010 and stock option information
at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
remaining
|
|
|
|
|
|
|
|
|
|
average
|
|
|
contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
exercise
|
|
|
term
|
|
|
intrinsic
|
|
(options and aggregate intrinsic values in thousands)
|
|
Options
|
|
|
price
|
|
|
(in years)
|
|
|
value
|
|
|
|
|
Outstanding at January 1, 2010
|
|
|
43,139
|
|
|
|
$46.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
8,173
|
|
|
|
58.73
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7,422
|
)
|
|
|
40.07
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,107
|
)
|
|
|
56.50
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(718
|
)
|
|
|
51.03
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
42,065
|
|
|
|
$49.15
|
|
|
|
5.9
|
|
|
|
$198,921
|
|
|
|
Vested or expected to vest as of December 31, 2010
|
|
|
41,240
|
|
|
|
$48.99
|
|
|
|
5.8
|
|
|
|
$198,854
|
|
|
|
Exercisable at December 31, 2010
|
|
|
28,174
|
|
|
|
$45.37
|
|
|
|
4.6
|
|
|
|
$197,784
|
|
|
|
The aggregate intrinsic value in the table above represents the
difference between the exercise price and the companys
closing stock price on the last trading day of the year. The
total intrinsic value of options exercised was
$110 million, $108 million and $328 million in
2010, 2009 and 2008, respectively.
As of December 31, 2010, $72 million of unrecognized
compensation cost related to stock options is expected to be
recognized as expense over a weighted-average period of
approximately 1.7 years.
PSUs
The companys annual equity awards stock compensation
program for senior management includes the issuance of PSUs with
market-based conditions. The companys overall mix of
annual stock compensation awards for senior management is
approximately 50% stock options and 50% PSUs.
71
The payout resulting from the vesting of the PSUs is based on
Baxters growth in shareholder value versus the growth in
shareholder value of the healthcare companies in Baxters
peer group during the three-year performance period commencing
with the year in which the PSUs are granted. Depending on
Baxters growth in shareholder value relative to the peer
group, a holder of PSUs is entitled to receive a number of
shares of common stock equal to a percentage, ranging from 0% to
200%, of the PSUs granted. The grant-date fair value, adjusted
for estimated forfeitures, is recognized as expense on a
straight-line basis over the substantive vesting period.
The fair value of PSUs is determined using a Monte Carlo model.
A Monte Carlo model uses stock price volatility and other
variables to estimate the probability of satisfying the market
conditions and the resulting fair value of the award. The
assumptions used in estimating the fair value of PSUs granted
during each year, along with the weighted-average grant-date
fair values, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Baxter volatility
|
|
|
26%
|
|
|
|
25%
|
|
|
|
20%
|
|
Peer group volatility
|
|
|
20%-59%
|
|
|
|
20%-59%
|
|
|
|
12%-37%
|
|
Correlation of returns
|
|
|
0.29-0.63
|
|
|
|
0.30-0.61
|
|
|
|
0.12-0.40
|
|
Risk-free interest rate
|
|
|
1.3%
|
|
|
|
1.6%
|
|
|
|
1.9%
|
|
Fair value per PSU
|
|
|
$63
|
|
|
|
$65
|
|
|
|
$67
|
|
|
|
The company granted approximately 590,000, 580,000 and 650,000
PSUs in 2010, 2009 and 2008, respectively. Unrecognized
compensation cost related to all unvested PSUs of
$28 million at December 31, 2010 is expected to be
recognized as expense over a weighted-average period of
1.7 years.
The following table summarizes nonvested PSU activity for the
year ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
grant-date
|
|
(share units in thousands)
|
|
Share units
|
|
|
fair value
|
|
|
|
|
Nonvested PSUs at January 1, 2010
|
|
|
1,124
|
|
|
|
$66.10
|
|
Granted
|
|
|
588
|
|
|
|
63.10
|
|
Vested
|
|
|
(524
|
)
|
|
|
66.79
|
|
Forfeited
|
|
|
(184
|
)
|
|
|
65.40
|
|
|
|
Nonvested PSUs at December 31, 2010
|
|
|
1,004
|
|
|
|
$64.12
|
|
|
|
RSUs
The company periodically grants RSUs to employees for
recognition and retention purposes. These RSUs principally vest
in one-third increments over a three-year period. The company
also annually grants RSUs to non-employee directors. These
awards vest one year from the grant date. The grant-date fair
value, adjusted for estimated forfeitures, is recognized as
expense on a straight-line basis over the substantive vesting
period. The fair value of RSUs is determined based on the number
of shares granted and the quoted price of the companys
common stock on the date of grant.
The following table summarizes nonvested RSU activity for the
year ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
grant-date
|
|
(share units in thousands)
|
|
Share units
|
|
|
fair value
|
|
|
|
|
Nonvested RSUs at January 1, 2010
|
|
|
367
|
|
|
|
$56.41
|
|
Granted
|
|
|
148
|
|
|
|
47.06
|
|
Vested
|
|
|
(168
|
)
|
|
|
53.14
|
|
Forfeited
|
|
|
(12
|
)
|
|
|
58.29
|
|
|
|
Nonvested RSUs at December 31, 2010
|
|
|
335
|
|
|
|
$53.85
|
|
|
|
72
As of December 31, 2010, $8 million of unrecognized
compensation cost related to RSUs is expected to be recognized
as expense over a weighted-average period of approximately
2.3 years. The weighted-average grant-date fair value of
RSUs in 2010, 2009 and 2008 was $47.06, $52.51 and $62.55,
respectively. The fair value of RSUs and restricted stock vested
in 2010, 2009 and 2008 was $9 million, $19 million and
$34 million, respectively.
Employee
Stock Purchase Plans
Nearly all employees are eligible to participate in the
companys employee stock purchase plans. For subscriptions
beginning on or after January 1, 2008, the employee
purchase price is 85% of the closing market price on the
purchase date.
During 2010, 2009 and 2008, the company issued approximately
1.0 million, 875,000 and 727,000 shares, respectively,
under employee stock purchase plans. The number of shares under
subscription at December 31, 2010 totaled approximately
1.1 million.
Realized
Excess Income Tax Benefits and the Impact on the Statement of
Cash Flows
Realized excess tax benefits associated with stock compensation
are presented in the consolidated statement of cash flows as an
outflow within the operating section and an inflow within the
financing section. Realized excess tax benefits from stock-based
compensation were $41 million, $96 million and
$112 million in 2010, 2009 and 2008, respectively.
Stock
Repurchase Programs
As authorized by the board of directors, the company repurchases
its stock from time to time depending on the companys cash
flows, net debt level and market conditions. The company
purchased 30 million shares for $1.5 billion in 2010,
23 million shares for $1.2 billion in 2009 and
32 million shares for $2.0 billion in 2008. In March
2008, the board of directors authorized the repurchase of up to
$2.0 billion of the companys common stock. There is
no remaining availability under the March 2008 authorization as
of December 31, 2010. In July 2009, the board of directors
authorized the repurchase of up to $2.0 billion of the
companys common stock. At December 31, 2010,
approximately $500 million remained available under the
July 2009 authorization. In December 2010, the board of
directors authorized the repurchase of up to an additional
$2.5 billion of the companys common stock. No shares
had been repurchased under this authorization as of
December 31, 2010.
Cash
Dividends
In November 2008, the board of directors declared a quarterly
dividend of $0.26 per share ($1.04 per share on an annualized
basis), representing an increase of 20% over the previous
quarterly rate. In November 2009, the board of directors
declared a quarterly dividend of $0.29 per share ($1.16 per
share on an annualized basis), representing an increase of 12%
over the previous quarterly rate. In November 2010, the board of
directors declared a quarterly dividend of $0.31 per share
($1.24 per share on an annualized basis), which was paid on
January 5, 2011 to shareholders of record as of
December 10, 2010. The dividend represented an increase of
7% over the previous quarterly rate of $0.29 per share.
NOTE 9
RETIREMENT AND OTHER BENEFIT PROGRAMS
The company sponsors a number of qualified and nonqualified
pension plans for eligible employees. The company also sponsors
certain unfunded contributory healthcare and life insurance
benefits for substantially all domestic retired employees. Newly
hired employees in the United States and Puerto Rico are not
eligible to participate in the pension plans but receive a
higher level of company contributions in the defined
contribution plans.
As required by a new accounting standard, on December 31,
2008, the company changed the measurement date for its defined
benefit pension and other postemployment benefit (OPEB) plans
from September 30 to December 31, the companys fiscal
year-end. The company elected to use the
15-month
remeasurement
73
approach, whereby a
net-of-tax
decrease to retained earnings of $27 million was recognized
on December 31, 2008 equal to three-fifteenths of the net
cost determined for the period from September 30, 2007 to
December 31, 2008. The adjustment resulted in a
net-of-tax
increase to AOCI of $12 million. The remaining
twelve-fifteenths of the net cost was recognized as expense in
2008 as part of the net periodic benefit cost.
Reconciliation
of Pension and OPEB Plan Obligations, Assets and Funded
Status
The benefit plan information in the table below pertains to all
of the companys pension and OPEB plans, both in the United
States and in other countries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
OPEB
|
|
as of and for the years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
3,965
|
|
|
$
|
3,475
|
|
|
$
|
506
|
|
|
$
|
477
|
|
Service cost
|
|
|
99
|
|
|
|
87
|
|
|
|
6
|
|
|
|
5
|
|
Interest cost
|
|
|
228
|
|
|
|
219
|
|
|
|
30
|
|
|
|
30
|
|
Participant contributions
|
|
|
8
|
|
|
|
8
|
|
|
|
14
|
|
|
|
13
|
|
Actuarial loss
|
|
|
335
|
|
|
|
268
|
|
|
|
11
|
|
|
|
24
|
|
Benefit payments
|
|
|
(168
|
)
|
|
|
(151
|
)
|
|
|
(35
|
)
|
|
|
(33
|
)
|
Foreign exchange and other
|
|
|
(29
|
)
|
|
|
59
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
End of period
|
|
|
4,438
|
|
|
|
3,965
|
|
|
|
532
|
|
|
|
506
|
|
|
|
Fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
2,822
|
|
|
|
2,381
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
413
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
416
|
|
|
|
170
|
|
|
|
21
|
|
|
|
20
|
|
Participant contributions
|
|
|
8
|
|
|
|
8
|
|
|
|
14
|
|
|
|
13
|
|
Benefit payments
|
|
|
(168
|
)
|
|
|
(151
|
)
|
|
|
(35
|
)
|
|
|
(33
|
)
|
Foreign exchange and other
|
|
|
(12
|
)
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
3,479
|
|
|
|
2,822
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at December 31
|
|
$
|
(959
|
)
|
|
$
|
(1,143
|
)
|
|
$
|
(532
|
)
|
|
$
|
(506
|
)
|
|
|
Amounts recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent asset
|
|
$
|
21
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
|
|
Current liability
|
|
|
(17
|
)
|
|
|
(16
|
)
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Noncurrent liability
|
|
|
(963
|
)
|
|
|
(1,147
|
)
|
|
|
(507
|
)
|
|
|
(481
|
)
|
|
|
Net liability recognized at December 31
|
|
$
|
(959
|
)
|
|
$
|
(1,143
|
)
|
|
$
|
(532
|
)
|
|
$
|
(506
|
)
|
|
|
Accumulated
Benefit Obligation Information
The pension obligation information in the table above represents
the projected benefit obligation (PBO). The PBO incorporates
assumptions relating to future compensation levels. The
accumulated benefit obligation (ABO) is the same as the PBO
except that it includes no assumptions relating to future
compensation levels. The ABO for all of the companys
pension plans was $4.1 billion and $3.6 billion at the
2010 and 2009 measurement dates, respectively.
74
The information in the funded status table above represents the
totals for all of the companys pension plans. The
following is information relating to the individual plans in the
funded status table above that have an ABO in excess of plan
assets.
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
ABO
|
|
$
|
3,751
|
|
|
$
|
3,392
|
|
Fair value of plan assets
|
|
|
3,053
|
|
|
|
2,520
|
|
|
|
The following is information relating to the individual plans in
the funded status table above that have a PBO in excess of plan
assets (many of which also have an ABO in excess of assets, and
are therefore also included in the table directly above).
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
|
PBO
|
|
$
|
4,212
|
|
|
$
|
3,845
|
|
Fair value of plan assets
|
|
|
3,232
|
|
|
|
2,682
|
|
|
|
Expected
Net Pension and OPEB Plan Payments for the Next
10 Years
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
(in millions)
|
|
benefits
|
|
|
OPEB
|
|
|
|
|
2011
|
|
$
|
166
|
|
|
$
|
25
|
|
2012
|
|
|
182
|
|
|
|
27
|
|
2013
|
|
|
196
|
|
|
|
29
|
|
2014
|
|
|
212
|
|
|
|
30
|
|
2015
|
|
|
226
|
|
|
|
31
|
|
2016 through 2020
|
|
|
1,351
|
|
|
|
175
|
|
|
|
Total expected net benefit payments for next 10 years
|
|
$
|
2,333
|
|
|
$
|
317
|
|
|
|
The expected net benefit payments above reflect the
companys share of the total net benefits expected to be
paid from the plans assets (for funded plans) or from the
companys assets (for unfunded plans). The total expected
OPEB benefit payments for the next ten years are net of
approximately $53 million of expected federal subsidies
relating to the Medicare Prescription Drug, Improvement and
Modernization Act, including $3 million, $4 million,
$4 million, $5 million and $5 million in each of
the years 2011, 2012, 2013, 2014 and 2015, respectively.
Amounts
Recognized in AOCI
The pension and OPEB plans gains or losses, prior service
costs or credits, and transition assets or obligations not yet
recognized in net periodic benefit cost are recognized on a
net-of-tax
basis in AOCI and will be amortized from AOCI to net periodic
benefit cost in the future. The following is a summary of the
pre-tax losses included in AOCI at December 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
(in millions)
|
|
benefits
|
|
|
OPEB
|
|
|
|
|
Actuarial loss
|
|
$
|
1,805
|
|
|
$
|
84
|
|
Prior service cost (credit) and transition obligation
|
|
|
3
|
|
|
|
(8
|
)
|
|
|
Total pre-tax loss recognized in AOCI at December 31, 2010
|
|
$
|
1,808
|
|
|
$
|
76
|
|
|
|
Actuarial loss
|
|
$
|
1,731
|
|
|
$
|
75
|
|
Prior service cost (credit) and transition obligation
|
|
|
4
|
|
|
|
(15
|
)
|
|
|
Total pre-tax loss recognized in AOCI at December 31, 2009
|
|
$
|
1,735
|
|
|
$
|
60
|
|
|
|
75
Refer to Note 1 for the
net-of-tax
balances included in AOCI as of each of the year-end dates. The
following is a summary of the
net-of-tax
amounts recorded in OCI relating to pension and OPEB plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Charge arising during the year, net of tax expense
of ($74) in 2010, ($53) in 2009 and ($348) in 2008
|
|
$
|
(135
|
)
|
|
$
|
(116
|
)
|
|
$
|
(641
|
)
|
Amortization of loss to earnings, net of tax benefit of $42
in 2010, $35 in 2009 and $29 in 2008
|
|
|
78
|
|
|
|
62
|
|
|
|
50
|
|
|
|
Pension and other employee benefits charge
|
|
$
|
(57
|
)
|
|
$
|
(54
|
)
|
|
$
|
(591
|
)
|
|
|
The OCI activity for pension and OPEB plans related almost
entirely to actuarial losses. Activity relating to prior service
costs and credits and transition obligations was insignificant.
Amounts
Expected to be Amortized From AOCI to Net Periodic Benefit Cost
in 2011
With respect to the AOCI balance at December 31, 2010, the
following is a summary of the pre-tax amounts expected to be
amortized to net periodic benefit cost in 2011.
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
(in millions)
|
|
benefits
|
|
|
OPEB
|
|
|
|
|
Actuarial loss
|
|
$
|
174
|
|
|
$
|
3
|
|
Prior service cost (credit) and transition obligation
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
Total pre-tax amount expected to be amortized from AOCI to
net pension and OPEB cost in 2011
|
|
$
|
175
|
|
|
$
|
(2
|
)
|
|
|
Net
Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Pension benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
99
|
|
|
$
|
87
|
|
|
$
|
86
|
|
Interest cost
|
|
|
228
|
|
|
|
219
|
|
|
|
202
|
|
Expected return on plan assets
|
|
|
(282
|
)
|
|
|
(250
|
)
|
|
|
(230
|
)
|
Amortization of net losses and other deferred amounts
|
|
|
125
|
|
|
|
99
|
|
|
|
79
|
|
|
|
Net periodic pension benefit cost
|
|
$
|
170
|
|
|
$
|
155
|
|
|
$
|
137
|
|
|
|
OPEB
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
5
|
|
Interest cost
|
|
|
30
|
|
|
|
30
|
|
|
|
30
|
|
Amortization of prior service costs and net loss
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
Net periodic OPEB cost
|
|
$
|
31
|
|
|
$
|
33
|
|
|
$
|
35
|
|
|
|
76
Weighted
-Average Assumptions Used in Determining Benefit Obligations at
the Measurement Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
OPEB
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Discount rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Puerto Rico plans
|
|
|
5.45%
|
|
|
|
6.05%
|
|
|
|
5.40%
|
|
|
|
5.95%
|
|
International plans
|
|
|
4.57%
|
|
|
|
4.81%
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Rate of compensation increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Puerto Rico plans
|
|
|
4.50%
|
|
|
|
4.50%
|
|
|
|
n/a
|
|
|
|
n/a
|
|
International plans
|
|
|
3.57%
|
|
|
|
3.58%
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Annual rate of increase in the per-capita cost
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
7.50%
|
|
|
|
7.00%
|
|
Rate decreased to
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
5.00%
|
|
|
|
5.00%
|
|
by the year ended
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
2016
|
|
|
|
2014
|
|
|
|
The assumptions above, which were used in calculating the
December 31, 2010 measurement date benefit obligations,
will be used in the calculation of net periodic benefit cost in
2011.
Weighted-Average
Assumptions Used in Determining Net Periodic Benefit
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
OPEB
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Discount rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Puerto Rico plans
|
|
|
6.05%
|
|
|
|
6.50%
|
|
|
|
6.35%
|
|
|
|
5.95%
|
|
|
|
6.50%
|
|
|
|
6.30%
|
|
International plans
|
|
|
4.81%
|
|
|
|
5.17%
|
|
|
|
5.10%
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Expected return on plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Puerto Rico plans
|
|
|
8.50%
|
|
|
|
8.50%
|
|
|
|
8.50%
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
International plans
|
|
|
6.81%
|
|
|
|
7.44%
|
|
|
|
7.00%
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Rate of compensation increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Puerto Rico plans
|
|
|
4.50%
|
|
|
|
4.50%
|
|
|
|
4.50%
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
International plans
|
|
|
3.58%
|
|
|
|
3.57%
|
|
|
|
3.69%
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Annual rate of increase in the
per-capita cost
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
7.00%
|
|
|
|
7.50%
|
|
|
|
8.00%
|
|
Rate decreased to
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
5.00%
|
|
|
|
5.00%
|
|
|
|
5.00%
|
|
by the year ended
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
2014
|
|
|
|
2014
|
|
|
|
2014
|
|
|
|
The company establishes the expected return on plan assets
assumption primarily based on a review of historical compound
average asset returns, both company-specific and relating to the
broad market (based on the companys asset allocation), as
well as an analysis of current market and economic information
and future expectations. The company plans to use an 8.25%
assumption for its U.S. and Puerto Rico plans for 2011.
Effect of
a One-Percent Change in Assumed Healthcare Cost Trend Rate on
the OPEB Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One percent
|
|
|
One percent
|
|
|
|
increase
|
|
|
decrease
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Effect on total of service and interest cost components
of OPEB cost
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
Effect on OPEB obligation
|
|
$
|
63
|
|
|
$
|
58
|
|
|
$
|
(53
|
)
|
|
$
|
(49
|
)
|
|
|
Pension
Plan Assets
An investment committee of members of senior management is
responsible for supervising, monitoring and evaluating the
invested assets of the companys funded pension plans. The
investment committee, which meets
77
at least quarterly, abides by documented policies and procedures
relating to investment goals, targeted asset allocations, risk
management practices, allowable and prohibited investment
holdings, diversification, use of derivatives, the relationship
between plan assets and benefit obligations, and other relevant
factors and considerations.
The investment committees documented policies and
procedures include the following:
|
|
|
|
|
Ability to pay all benefits when due;
|
|
|
|
Targeted long-term performance expectations relative to
applicable market indices, such as Standard &
Poors, Russell, MSCI EAFE, and other indices;
|
|
|
|
Targeted asset allocation percentage ranges (summarized below),
and periodic reviews of these allocations;
|
|
|
|
Diversification of assets among third-party investment managers,
and by geography, industry, stage of business cycle and other
measures;
|
|
|
|
Specified investment holding and transaction prohibitions (for
example, private placements or other restricted securities,
securities that are not traded in a sufficiently active market,
short sales, certain derivatives, commodities and margin
transactions);
|
|
|
|
Specified portfolio percentage limits on holdings in a single
corporate or other entity (generally 5%, except for holdings in
U.S. government or agency securities);
|
|
|
|
Specified average credit quality for the fixed-income securities
portfolio (at least A- by Standard & Poors or A3
by Moodys);
|
|
|
|
Specified portfolio percentage limits on foreign
holdings; and
|
|
|
|
Periodic monitoring of investment manager performance and
adherence to the investment committees policies.
|
Plan assets are invested using a total return investment
approach whereby a mix of equity securities, debt securities and
other investments are used to preserve asset values, diversify
risk and exceed the planned benchmark investment return.
Investment strategies and asset allocations are based on
consideration of plan liabilities, the plans funded status
and other factors, such as the plans demographics and
liability durations. Investment performance is reviewed by the
investment committee on a quarterly basis and asset allocations
are reviewed at least annually.
Plan assets are managed in a balanced portfolio comprised of two
major components: equity securities and fixed income securities.
The target allocations for plan assets are 60 percent in
equity securities and 40 percent in fixed income securities
and other holdings. The documented policy includes an allocation
range based on each individual investment type within the major
components that allows for a variance from the target
allocations of approximately 10 percentage points. Equity
securities primarily include common stock of U.S. and
international companies, common/collective trust funds, mutual
funds, and partnership investments. Fixed income securities and
other holdings primarily include cash, money market funds with
an original maturity of three months or less, U.S. and
foreign government and governmental agency issues, corporate
bonds, municipal securities, derivative contracts and
asset-backed securities.
78
The following tables summarize the bases used to measure the
pension plan assets and liabilities that are carried at fair
value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
active markets for
|
|
|
Significant other
|
|
|
unobservable
|
|
|
|
Balance at
|
|
|
identical assets
|
|
|
observable inputs
|
|
|
inputs
|
|
(in millions)
|
|
December 31, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
118
|
|
|
$
|
13
|
|
|
$
|
105
|
|
|
$
|
|
|
U.S. government and government agency issues
|
|
|
375
|
|
|
|
|
|
|
|
375
|
|
|
|
|
|
Corporate bonds
|
|
|
555
|
|
|
|
|
|
|
|
555
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large cap
|
|
|
930
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
Mid cap
|
|
|
438
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
Small cap
|
|
|
171
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
Total common stock
|
|
|
1,539
|
|
|
|
1,539
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
259
|
|
|
|
125
|
|
|
|
134
|
|
|
|
|
|
Common/collective trust funds
|
|
|
409
|
|
|
|
|
|
|
|
404
|
|
|
|
5
|
|
Partnership investments
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
151
|
|
Other holdings
|
|
|
73
|
|
|
|
2
|
|
|
|
69
|
|
|
|
2
|
|
Collateral held on loaned securities
|
|
|
271
|
|
|
|
|
|
|
|
271
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral to be paid on loaned securities
|
|
|
(271
|
)
|
|
|
(93
|
)
|
|
|
(178
|
)
|
|
|
|
|
|
|
Fair value of pension plan assets
|
|
$
|
3,479
|
|
|
$
|
1,586
|
|
|
$
|
1,735
|
|
|
$
|
158
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
active markets for
|
|
|
Significant other
|
|
|
unobservable
|
|
|
|
Balance at
|
|
|
identical assets
|
|
|
observable inputs
|
|
|
inputs
|
|
(in millions)
|
|
December 31, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
97
|
|
|
$
|
5
|
|
|
$
|
92
|
|
|
$
|
|
|
U.S. government and government agency issues
|
|
|
261
|
|
|
|
|
|
|
|
261
|
|
|
|
|
|
Corporate bonds
|
|
|
466
|
|
|
|
|
|
|
|
466
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large cap
|
|
|
787
|
|
|
|
787
|
|
|
|
|
|
|
|
|
|
Mid cap
|
|
|
276
|
|
|
|
275
|
|
|
|
1
|
|
|
|
|
|
Small cap
|
|
|
147
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
Total common stock
|
|
|
1,210
|
|
|
|
1,209
|
|
|
|
1
|
|
|
|
|
|
|
Mutual funds
|
|
|
230
|
|
|
|
111
|
|
|
|
119
|
|
|
|
|
|
Common/collective trust funds
|
|
|
351
|
|
|
|
|
|
|
|
348
|
|
|
|
3
|
|
Partnership investments
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
Other holdings
|
|
|
63
|
|
|
|
|
|
|
|
61
|
|
|
|
2
|
|
Collateral held on loaned securities
|
|
|
332
|
|
|
|
|
|
|
|
332
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral to be paid on loaned securities
|
|
|
(332
|
)
|
|
|
(173
|
)
|
|
|
(159
|
)
|
|
|
|
|
|
|
Fair value of pension plan assets
|
|
$
|
2,822
|
|
|
$
|
1,152
|
|
|
$
|
1,521
|
|
|
$
|
149
|
|
|
|
The following is a reconciliation of changes in fair value
measurements that used significant unobservable inputs
(Level 3).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective
|
|
|
Partnership
|
|
|
|
|
(in millions)
|
|
Total
|
|
|
trust funds
|
|
|
investments
|
|
|
Other holdings
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
143
|
|
|
$
|
3
|
|
|
$
|
138
|
|
|
$
|
2
|
|
Actual return on plan assets still held at year end
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Actual return on plan assets sold during the year
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
Purchases, sales and settlements
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
149
|
|
|
|
3
|
|
|
|
144
|
|
|
|
2
|
|
Actual return on plan assets still held at year end
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
Actual return on plan assets sold during the year
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
Purchases, sales and settlements
|
|
|
6
|
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
158
|
|
|
$
|
5
|
|
|
$
|
151
|
|
|
$
|
2
|
|
|
|
80
The assets and liabilities of the companys pension plans
are valued using the following valuation methods:
|
|
|
Investment category
|
|
Valuation methodology
|
|
|
Cash and cash equivalents
|
|
Values are based on cost, including the effects of foreign
currency, which approximates fair value
|
U.S. government and government agency issues
|
|
Values are based on reputable pricing vendors, who typically use
pricing matrices or models that use observable inputs
|
Corporate bonds
|
|
Values are based on reputable pricing vendors, who typically use
pricing matrices or models that use observable inputs
|
Common stock
|
|
Values are based on the closing prices on the valuation date in
an active market on national and international stock exchanges
|
Mutual funds
|
|
Values are based on the net asset value of the units held in the
respective fund which are obtained from national and
international exchanges or based on the net asset value of the
underlying assets of the fund provided by the fund manager
|
Common/collective trust funds
|
|
Values are based on the net asset value of the units held at
year end
|
Partnership investments
|
|
Values are based on the estimated fair value of the
participation by the company in the investment as determined by
the general partner or investment manager of the respective
partnership
|
Other holdings
|
|
The value of these assets vary by investment type, but primarily
are determined by reputable pricing vendors, who use pricing
matrices or models that use observable inputs
|
Collateral held on loaned securities
|
|
Values are based on the net asset value per unit of the fund in
which the collateral is invested
|
Collateral to be paid on loaned securities
|
|
Values are based on the fair value of the underlying securities
loaned on the valuation date
|
|
|
Expected
Pension and OPEB Plan Funding
The companys funding policy for its pension plans is to
contribute amounts sufficient to meet legal funding
requirements, plus any additional amounts that the company may
determine to be appropriate considering the funded status of the
plans, tax deductibility, the cash flows generated by the
company, and other factors. Volatility in the global financial
markets could have an unfavorable impact on future funding
requirements. The company has no obligation to fund its
principal plans in the United States and Puerto Rico in 2011.
The company continually reassesses the amount and timing of any
discretionary contributions. The company expects to make cash
contributions to its pension plans of at least $214 million
in 2011, which includes a $150 million discretionary cash
contribution made to its pension plan in the United States in
January 2011. The company expects to have net cash outflows
relating to its OPEB plan of approximately $25 million in
2011.
The table below details the funded status percentage of the
companys pension plans as of December 31, 2010,
including certain plans that are unfunded in accordance with the
guidelines of the companys funding policy outlined above.
The table excludes the $150 million discretionary cash
contribution made to the pension plan in the United States in
January 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Puerto Rico
|
|
|
International
|
|
|
|
|
|
|
Qualified
|
|
|
Nonqualified
|
|
|
|
|
|
Unfunded
|
|
|
|
|
as of December 31, 2010 (in millions)
|
|
plans
|
|
|
plan
|
|
|
Funded plans
|
|
|
plans
|
|
|
Total
|
|
|
|
|
Fair value of plan assets
|
|
$
|
2,959
|
|
|
|
n/a
|
|
|
$
|
520
|
|
|
|
n/a
|
|
|
$
|
3,479
|
|
PBO
|
|
|
3,391
|
|
|
$
|
164
|
|
|
|
655
|
|
|
$
|
228
|
|
|
|
4,438
|
|
Funded status percentage
|
|
|
87%
|
|
|
|
n/a
|
|
|
|
79%
|
|
|
|
n/a
|
|
|
|
78%
|
|
|
|
81
U.S.
Defined Contribution Plan
Most U.S. employees are eligible to participate in a
qualified defined contribution plan. Company contributions were
$39 million in 2010, $40 million in 2009 and
$36 million in 2008.
NOTE 10
INCOME TAXES
Income
Before Income Tax Expense by Category
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
United States
|
|
$
|
191
|
|
|
$
|
445
|
|
|
$
|
262
|
|
International
|
|
|
1,699
|
|
|
|
2,289
|
|
|
|
2,200
|
|
|
|
Income before income taxes
|
|
$
|
1,890
|
|
|
$
|
2,734
|
|
|
$
|
2,462
|
|
|
|
Income
Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
73
|
|
|
$
|
67
|
|
|
$
|
|
|
State and local
|
|
|
17
|
|
|
|
(4
|
)
|
|
|
2
|
|
International
|
|
|
297
|
|
|
|
189
|
|
|
|
155
|
|
|
|
Current income tax expense
|
|
|
387
|
|
|
|
252
|
|
|
|
157
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
178
|
|
|
|
186
|
|
|
|
174
|
|
State and local
|
|
|
16
|
|
|
|
24
|
|
|
|
29
|
|
International
|
|
|
(118
|
)
|
|
|
57
|
|
|
|
77
|
|
|
|
Deferred income tax expense
|
|
|
76
|
|
|
|
267
|
|
|
|
280
|
|
|
|
Income tax expense
|
|
$
|
463
|
|
|
$
|
519
|
|
|
$
|
437
|
|
|
|
Deferred
Tax Assets and Liabilities
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
210
|
|
|
$
|
173
|
|
Retirement benefits
|
|
|
506
|
|
|
|
570
|
|
Alternative minimum tax credit
|
|
|
67
|
|
|
|
67
|
|
Tax credits and net operating losses
|
|
|
303
|
|
|
|
254
|
|
Valuation allowances
|
|
|
(118
|
)
|
|
|
(144
|
)
|
|
|
Total deferred tax assets
|
|
|
968
|
|
|
|
920
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Subsidiaries unremitted earnings
|
|
|
212
|
|
|
|
177
|
|
Asset basis differences
|
|
|
47
|
|
|
|
31
|
|
Other
|
|
|
|
|
|
|
5
|
|
|
|
Total deferred tax liabilities
|
|
|
259
|
|
|
|
213
|
|
|
|
Net deferred tax asset
|
|
$
|
709
|
|
|
$
|
707
|
|
|
|
82
At December 31, 2010, the company had U.S. operating
loss carryforwards totaling $21 million and foreign tax
credit carryforwards totaling $80 million. The operating
loss carryforwards expire between 2011 and 2021. The foreign tax
credits expire in 2018. At December 31, 2010, the company
had foreign net operating loss carryforwards totaling
$437 million. Of this amount, $1 million expires in
2011, $4 million expires in 2012, $9 million expires
in 2013, $11 million expires in 2014, $12 million
expires in 2015, $1 million expires in 2016,
$37 million expires after 2016 and $362 million has no
expiration date. Realization of these operating loss and tax
credit carryforwards depends on generating sufficient taxable
income in future periods. A valuation allowance of
$118 million and $144 million was recorded at
December 31, 2010 and 2009, respectively, to reduce the
deferred tax assets associated with net operating loss and tax
credit carryforwards, because the company does not believe it is
more likely than not that these assets will be fully realized
prior to expiration. The company will continue to evaluate the
need for additional valuation allowances and, as circumstances
change, the valuation allowance may change.
Income
Tax Expense Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Income tax expense at U.S. statutory rate
|
|
$
|
662
|
|
|
$
|
957
|
|
|
$
|
862
|
|
Operations subject to tax incentives
|
|
|
(325
|
)
|
|
|
(433
|
)
|
|
|
(402
|
)
|
State and local taxes
|
|
|
18
|
|
|
|
26
|
|
|
|
20
|
|
Foreign tax benefit
|
|
|
(40
|
)
|
|
|
(56
|
)
|
|
|
(26
|
)
|
Tax on repatriations of foreign earnings
|
|
|
38
|
|
|
|
|
|
|
|
14
|
|
Contingent tax matters
|
|
|
39
|
|
|
|
(4
|
)
|
|
|
(23
|
)
|
Medicare Part D subsidies
|
|
|
39
|
|
|
|
|
|
|
|
|
|
Valuation allowance reductions, net
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
Other factors
|
|
|
32
|
|
|
|
29
|
|
|
|
21
|
|
|
|
Income tax expense
|
|
$
|
463
|
|
|
$
|
519
|
|
|
$
|
437
|
|
|
|
The company recognized income tax expense of $93 million
during 2010 relating to 2010 and prior earnings outside the
United States that are not deemed indefinitely reinvested, of
which $38 million related to earnings from years prior to
2010. The company continues to evaluate whether to indefinitely
reinvest earnings in certain foreign jurisdictions as it
continues to analyze the companys global financial
structure. Currently, management intends to continue to reinvest
past earnings in several jurisdictions outside of the United
States indefinitely, and therefore has not recognized
U.S. income tax expense on these earnings.
U.S. federal and state income taxes, net of applicable
credits, on these foreign unremitted earnings of
$7.5 billion as of December 31, 2010 would be
approximately $2.4 billion. As of December 31, 2009
the foreign unremitted earnings and U.S. federal and state
income tax amounts were $6.8 billion and $2.1 billion,
respectively.
Effective
Income Tax Rate
The effective income tax rate was 25% in 2010, 19% in 2009 and
18% in 2008. As detailed in the income tax expense
reconciliation table above, the companys effective tax
rate differs from the U.S. federal statutory rate each year
due to certain operations that are subject to tax incentives,
state and local taxes, and foreign taxes that are different than
the U.S. federal statutory rate. In addition, the effective
tax rate can be impacted each period by discrete factors and
events. The increase in the effective tax rate in 2010 was
principally due to a $588 million charge related to the
recall of COLLEAGUE infusion pumps from the U.S. market for
which there was no net tax benefit recognized, a
$39 million write-off of a deferred tax asset as a result
of a change in the tax treatment of reimbursements under the
Medicare Part D retiree prescription drug subsidy program
under healthcare reform legislation enacted in the United
States, a charge related to contingent tax matters, and
$34 million of IPR&D charges for which the tax benefit
was lower than the U.S. statutory rate. These items were
partially offset by the tax benefits from the U.S. generic
injectables business impairment charge, the business
optimization charge and a charge related to litigation
associated with the companys 2008
83
recall of its heparin sodium injection products in the United
States, in addition to a change in the earnings mix from higher
tax to lower tax rate jurisdictions compared to the prior year
period. The effective tax rate for 2009 was impacted by greater
income in jurisdictions with higher tax rates, partially offset
by $51 million of income tax benefit from the use of
foreign tax losses.
Unrecognized
Tax Benefits
The company classifies interest and penalties associated with
income taxes in the income tax expense line in the consolidated
statements of income. Interest and penalties recorded during
2010, 2009 and 2008 were not material. The liability recorded at
December 31, 2010 and 2009 related to interest and
penalties was $49 million and $41 million,
respectively.
The following is a reconciliation of the companys
unrecognized tax benefits for the years ended December 31,
2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
as of and for the years ended (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
458
|
|
|
$
|
509
|
|
|
$
|
490
|
|
Increase associated with tax positions taken during the current
year
|
|
|
78
|
|
|
|
7
|
|
|
|
15
|
|
Increase (decrease) associated with tax positions taken during a
prior year
|
|
|
12
|
|
|
|
(26
|
)
|
|
|
34
|
|
Settlements
|
|
|
(15
|
)
|
|
|
(22
|
)
|
|
|
(23
|
)
|
Decrease associated with lapses in statutes of limitations
|
|
|
(43
|
)
|
|
|
(10
|
)
|
|
|
(7
|
)
|
|
|
Balance at end of the year
|
|
$
|
490
|
|
|
$
|
458
|
|
|
$
|
509
|
|
|
|
Of the gross unrecognized tax benefits, $432 million and
$396 million were recognized as liabilities in the
consolidated balance sheets as of December 31, 2010 and
2009, respectively.
None of the positions included in the liability for uncertain
tax positions related to tax positions for which the ultimate
deductibility is highly certain but for which there is
uncertainty about the timing of such deductibility. Also, the
reduction of the unrecognized tax benefits in each year did not
significantly affect the companys effective tax rate.
Tax
Incentives
The company has received tax incentives in Puerto Rico,
Switzerland, and certain other taxing jurisdictions outside the
United States. The financial impact of the reductions as
compared to the U.S. federal statutory rate is indicated in
the income tax expense reconciliation table above. The tax
reductions as compared to the local statutory rate favorably
impacted earnings per diluted share by $0.51 in 2010, $0.50 in
2009 and $0.45 in 2008. The Puerto Rico grant provides that the
companys manufacturing operations will be partially exempt
from local taxes until the year 2018. The Switzerland grant
provides that the companys manufacturing operations will
be partially exempt from local taxes until the year 2017. The
tax incentives in the other jurisdictions continue through at
least 2011.
Examinations
of Tax Returns
As of December 31, 2010, Baxter had ongoing audits in the
United States, Canada, Germany and the United Kingdom, as well
as bilateral Advance Pricing Agreement proceedings that the
company voluntarily initiated between the U.S. government
and the government of Switzerland with respect to intellectual
property, product, and service transfer pricing arrangements.
Baxter expects to reduce the amount of its liability for
uncertain tax positions within the next 12 months by
approximately $280 million due principally to the
resolution of certain multi-jurisdictional transfer pricing
issues and the expiration of certain statutes of limitation.
While the final outcome of these matters is inherently
uncertain, the company believes it has made adequate tax
provisions for all years subject to examination.
84
NOTE 11
LEGAL PROCEEDINGS
Baxter is involved in product liability, patent, commercial, and
other legal matters 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 and cash flows 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 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 governmental and regulatory matters, these
actions may lead to product recalls, injunctions, and other
restrictions on the companys operations and monetary
sanctions, including significant civil or criminal penalties.
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.
Patent
Litigation
Sevoflurane
Litigation
Since 2000, Baxters generic sevoflurane has been the
subject of several patent infringement actions initiated by
Abbott Laboratories and Central Glass Company. Both lawsuits in
the United States were resolved in Baxters favor, the
first in 2006 by the Court of Appeals for the Federal
Circuits decision that the asserted patent was invalid;
the second in 2009 by a ruling of the U.S.D.C for the Northern
District of Illinois that Baxters product did not infringe
a related patent. This later ruling was upheld on
reconsideration in 2010 and was not appealed by Abbott or
Central Glass. In 2009, a lawsuit filed in Japan alleging
infringement of a counterpart Japanese patent was also resolved
in Baxters favor by the appellate courts
non-infringement determination. A related action remains pending
in Colombia.
Peritoneal
Dialysis Litigation
In October 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 alleged that Fresenius sale of the Liberty
Cycler peritoneal dialysis systems and related disposable items
and equipment infringed nine U.S. patents, which are owned
by Baxter or exclusively licensed in the peritoneal dialysis
field to Baxter from DEKA. During the pendency of the
litigation, Fresenius agreed to remove certain functionality
from the Liberty Cycler and the parties agreed to stay or
dismiss seven of the patents. In July 2010, a jury in the
U.S.D.C. for the Northern District of California found that the
remaining two patents were not infringed by Fresenius. In
February 2011, the court denied Baxters post trial motions
requesting that the verdict be overturned and a new trial be
ordered.
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
85
a jury assessed damages at $14 million for past sales only.
In April 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. In September
2009, the appellate court affirmed Fresenius liability for
infringing valid claims of Baxters main patent,
invalidated certain claims of other patents, and remanded the
case to the district court to finalize the scope of the
injunction and the amount of damages owed to Baxter. In November
2009, the appellate court denied Fresenius petition for
re-hearing of the appeal. In January 2010, Fresenius consented
to reentry of the injunction and sought a new trial to determine
royalties, which the company is opposing.
In March 2010, the United States Patent and Trademark
Offices (USPTO) appellate board affirmed the previous
determination by the USPTO patent examiner that the remaining
patent was invalid. The board denied a request for
reconsideration and the company has appealed the USPTOs
decision to the same appellate court that affirmed the validity
of the patent in September 2009. Fresenius has asked the trial
court to stay further court proceedings during the pendency of
the companys appeal of the USPTOs negative
determination.
Product
Liability Litigation
Heparin
Litigation
In connection with the recall of heparin products in the United
States, approximately 770 lawsuits 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, with a scheduled trial date for the
first of these cases in May 2011. Discovery is ongoing with
respect to these matters.
Propofol
Litigation
The company is a defendant, along with others, in numerous
lawsuits filed in state court in Las Vegas, Nevada. These
lawsuits allege that health care workers improperly reused vials
of propofol during endoscopy procedures, which resulted in the
transmission of Hepatitis C to patients. These lawsuits allege
that Teva Pharmaceuticals USA, Inc. (Teva) (as the manufacturer)
and the company (as the distributor) improperly designed,
manufactured and sold larger vials of propofol to these
endoscopy centers. The first case went to trial against Teva and
the company in April 2010. The jury awarded the plaintiffs
$5 million in compensatory damages and $500 million in
punitive damages ($356 million against Teva and
$144 million against the company). Teva and the company
have appealed this decision. Additionally, Baxter believes it is
entitled to indemnity in these matters pursuant to an indemnity
agreement entered into with Teva in 2009. The next trial is
scheduled for April 2011.
Factor
Concentrates Litigation
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. The vast majority of these claims have been
resolved.
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)
86
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. Summary judgment
in the companys favor was granted by the trial court in
May 2010. The plaintiffs have appealed the decision to the
U.S. Court of Appeals for the Seventh Circuit.
In May 2010, a shareholder derivative action was brought on
behalf of the company in the Circuit Court of Lake County,
Illinois against the companys board of directors, its
Chief Executive Officer and its then current Chief Financial
Officer and President of Medication Delivery. The complaint
alleges that the defendants breached their fiduciary duties to
the company and caused substantial damage to the company in
connection with addressing the COLLEAGUE infusion pump matter.
Since October 2010, four additional derivative actions have been
filed on behalf of the company against the companys board
of directors and certain current and former executive officers
in the U.S.D.C. for the Northern District of Illinois. In
January 2011, the Lake County action was stayed at the request
of the Federal Court plaintiffs. The complaints allege breach of
fiduciary duties and substantial damage to the company arising
from the manner in which the COLLEAGUE matter has been addressed
under state law as well as in some cases violations of the
federal securities laws. Plaintiffs seek monetary damages for
the company and corporate governance reform and attorneys
fees.
In September 2010, a purported class action was filed in the
U.S.D.C. for the Northern District of Illinois against the
company and certain of its current executive officers. The
complaint alleges that, from September 17, 2009 to
May 3, 2010, the defendants issued materially false and
misleading statements regarding the companys plasma-based
therapies business and the companys remediation of its
COLLEAGUE infusion pumps causing the companys common stock
to trade at artificially high levels. A similar suit was filed
against the company and certain of its executive officers in the
U.S.D.C. for the Northern District of Illinois in November 2010.
These suits seek to recover the lost value of investors
stock as damages. These suits have been consolidated for further
proceedings.
In October 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 infusion pumps that were on hold
in Northern Illinois. Customer-owned pumps were not affected. In
June 2006, Baxter Healthcare Corporation entered into a Consent
Decree for Condemnation and Permanent Injunction with the United
States to resolve this seizure litigation. Pursuant to the
Consent Decree, on July 13, 2010 the FDA issued a final
order regarding the recall of the companys COLLEAGUE
infusion pumps currently in use in the United States. The
company is executing the recall through July 13, 2012 by
offering its customers an option to replace their COLLEAGUE
infusion pumps or receive monetary consideration. The company
will permit lessees to terminate their leases without penalty
and refund any prepaid, unused lease portion upon the return of
the devices. Additional third-party claims may be filed in
connection with the COLLEAGUE matter. In September 2009, the
company received a subpoena from the Office of the United States
Attorney for the Northern District of Illinois requesting
production of documents relating to the COLLEAGUE infusion pump.
The company is fully cooperating with the request.
The company is a defendant, along with others, in nineteen
lawsuits brought in various U.S. federal courts alleging
that Baxter and certain of its competitors conspired to restrict
output and artificially increase the price of plasma-derived
therapies since 2003. The complaints attempt to state a claim
for class action relief and in some cases demand treble damages.
These cases have been consolidated for pretrial proceedings
before the U.S.D.C. for the Northern District of Illinois.
The company is a defendant, along with others, in less than a
dozen lawsuits which allege that Baxter and other defendants
manipulated product reimbursements by, among other things,
reporting artificially inflated average wholesale prices (AWP)
for Medicare and Medicaid eligible drugs. The cases have been
consolidated for pretrial purposes before the U.S.D.C. for the
District of Massachusetts. 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 in 2011.
Baxter has also resolved a number of other AWP cases brought by
state
87
attorneys general and other plaintiffs. A small number of
lawsuits against Baxter brought by relators and state attorneys
general remain which seek unspecified damages, injunctive
relief, civil penalties, disgorgement, forfeiture and
restitution.
The company has received a letter request from the Office of the
United States Attorney for the Eastern District of Pennsylvania
to produce documents related to the companys contracting,
marketing and promotional, and historical government price
reporting practices in the United States. In addition, the
company received a request from the Office of the United States
Attorney for the Northern District of California to produce
documents related to the companys marketing and
promotional practices, including relationships between the
company and specialty pharmacies. The company is fully
cooperating with both of these requests.
The company has received an inquiry from the
U.S. Department of Justice and the Securities and Exchange
Commission requesting that the company voluntarily provide
information about its business activities in a number of
countries. The company is fully cooperating with the agencies
and understands that this inquiry is part of a broader review of
industry practices for compliance with the U.S. Foreign
Corrupt Practices Act.
NOTE 12
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 processes 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 select
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. The business also provides products and
services related to pharmacy compounding, drug formulation and
packaging technologies. In October 2010, the company entered
into an agreement to divest its U.S. generic injectables
business. Refer to Note 3 for further information regarding
this divestiture.
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 (PD), a home-based therapy, and also distributes
products for hemodialysis, which is generally conducted in a
hospital or clinic.
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 in this report. 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. The
accounting policies of the segments are substantially the same
as those described in the summary of significant accounting
policies in Note 1.
Certain items are maintained at the corporate level (Corporate)
and are not allocated to a segment. 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 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,
certain IPR&D charges, certain other charges (such as
Greece receivables and business optimization charges), deferred
income taxes, certain litigation liabilities and related
insurance receivables, and the revenues and costs related to the
88
manufacturing, distribution and other transition agreements with
Fenwal. All of the companys Other net sales in the table
below relate to the agreements with Fenwal. With respect to
depreciation and amortization and expenditures for long-lived
assets, the difference between the segment totals and the
consolidated totals principally relate to assets maintained at
Corporate.
In 2010, 2009 and 2008, the Medication Delivery segments
pre-tax income included charges of $588 million,
$27 million and $125 million, respectively, related to
COLLEAGUE and SYNDEO infusion pumps. Refer to Note 5 for
further information regarding these charges. Also included in
the Medication Delivery segments pre-tax income in 2010
was a $112 million impairment charge associated with the
companys agreement to divest its U.S. generic
injectables business and a $62 million charge related to
litigation associated with the companys 2008 recall of its
heparin sodium injection products in the United States. In 2009
and 2008, the Medication Delivery segments pre-tax income
included impairment charges of $54 million and
$31 million, respectively, associated with the
discontinuation of the companys SOLOMIX drug delivery
system in development and the CLEARSHOT pre-filled syringe
program. Refer to Note 2 for further information regarding
SOLOMIX and CLEARSHOT and the litigation-related charge and
Note 3 for further information regarding the
U.S. generic injectables business impairment charge.
Significant charges not allocated to a segment in 2010 included
a $257 million charge related to business optimization
efforts, as further discussed in Note 5, the Greece
receivables charge of $28 million, as further discussed in
Note 1, and IPR&D charges of $34 million, as
further discussed in Note 4. In 2009, the $79 million
charge related to the companys business optimization
efforts, as further discussed in Note 5, was not allocated
to a segment. Significant charges not allocated to a segment in
2008 included IPR&D charges of $19 million.
Segment
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medication
|
|
|
|
|
|
|
|
|
|
|
as of and for the years ended December 31 (in millions)
|
|
BioScience
|
|
|
Delivery
|
|
|
Renal
|
|
|
Other
|
|
|
Total
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,640
|
|
|
$
|
4,768
|
|
|
$
|
2,389
|
|
|
$
|
46
|
|
|
$
|
12,843
|
|
Depreciation and amortization
|
|
|
211
|
|
|
|
275
|
|
|
|
126
|
|
|
|
73
|
|
|
|
685
|
|
Pre-tax income (loss)
|
|
|
2,232
|
|
|
|
314
|
|
|
|
353
|
|
|
|
(1,009
|
)
|
|
|
1,890
|
|
Assets
|
|
|
5,264
|
|
|
|
5,458
|
|
|
|
2,047
|
|
|
|
4,720
|
|
|
|
17,489
|
|
Capital expenditures
|
|
|
367
|
|
|
|
252
|
|
|
|
200
|
|
|
|
144
|
|
|
|
963
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,573
|
|
|
$
|
4,649
|
|
|
$
|
2,266
|
|
|
$
|
74
|
|
|
$
|
12,562
|
|
Depreciation and amortization
|
|
|
181
|
|
|
|
277
|
|
|
|
110
|
|
|
|
70
|
|
|
|
638
|
|
Pre-tax income (loss)
|
|
|
2,283
|
|
|
|
759
|
|
|
|
307
|
|
|
|
(615
|
)
|
|
|
2,734
|
|
Assets
|
|
|
5,093
|
|
|
|
5,629
|
|
|
|
1,935
|
|
|
|
4,697
|
|
|
|
17,354
|
|
Capital expenditures
|
|
|
397
|
|
|
|
291
|
|
|
|
189
|
|
|
|
137
|
|
|
|
1,014
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,308
|
|
|
$
|
4,560
|
|
|
$
|
2,306
|
|
|
$
|
174
|
|
|
$
|
12,348
|
|
Depreciation and amortization
|
|
|
177
|
|
|
|
271
|
|
|
|
115
|
|
|
|
68
|
|
|
|
631
|
|
Pre-tax income (loss)
|
|
|
2,174
|
|
|
|
591
|
|
|
|
319
|
|
|
|
(622
|
)
|
|
|
2,462
|
|
Assets
|
|
|
4,344
|
|
|
|
5,051
|
|
|
|
1,613
|
|
|
|
4,397
|
|
|
|
15,405
|
|
Capital expenditures
|
|
|
298
|
|
|
|
352
|
|
|
|
134
|
|
|
|
170
|
|
|
|
954
|
|
|
|
89
Pre-Tax
Income Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Total pre-tax income from segments
|
|
$
|
2,899
|
|
|
$
|
3,349
|
|
|
$
|
3,084
|
|
Unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
(87
|
)
|
|
|
(98
|
)
|
|
|
(76
|
)
|
Certain foreign exchange fluctuations and hedging activities
|
|
|
52
|
|
|
|
102
|
|
|
|
57
|
|
Stock compensation
|
|
|
(120
|
)
|
|
|
(140
|
)
|
|
|
(146
|
)
|
Business optimization charges
|
|
|
(257
|
)
|
|
|
(79
|
)
|
|
|
|
|
Greece receivable charge
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
IPR&D
|
|
|
(34
|
)
|
|
|
|
|
|
|
(19
|
)
|
Other Corporate items
|
|
|
(535
|
)
|
|
|
(400
|
)
|
|
|
(438
|
)
|
|
|
Consolidated income before income taxes
|
|
$
|
1,890
|
|
|
$
|
2,734
|
|
|
$
|
2,462
|
|
|
|
Assets
Reconciliation
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
Total segment assets
|
|
$
|
12,769
|
|
|
$
|
12,657
|
|
Cash and equivalents
|
|
|
2,685
|
|
|
|
2,786
|
|
Deferred income taxes
|
|
|
1,462
|
|
|
|
1,320
|
|
Insurance receivables
|
|
|
87
|
|
|
|
96
|
|
PP&E, net
|
|
|
373
|
|
|
|
365
|
|
Other Corporate assets
|
|
|
113
|
|
|
|
130
|
|
|
|
Consolidated total assets
|
|
$
|
17,489
|
|
|
$
|
17,354
|
|
|
|
Geographic
Information
Net sales are based on product shipment destination and assets
are based on physical location.
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,264
|
|
|
$
|
5,317
|
|
|
$
|
5,044
|
|
Europe
|
|
|
4,188
|
|
|
|
4,181
|
|
|
|
4,386
|
|
Asia-Pacific
|
|
|
1,873
|
|
|
|
1,613
|
|
|
|
1,444
|
|
Latin America and Canada
|
|
|
1,518
|
|
|
|
1,451
|
|
|
|
1,474
|
|
|
|
Consolidated net sales
|
|
$
|
12,843
|
|
|
$
|
12,562
|
|
|
$
|
12,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,886
|
|
|
$
|
6,628
|
|
|
$
|
6,765
|
|
Europe
|
|
|
6,789
|
|
|
|
7,825
|
|
|
|
5,935
|
|
Asia-Pacific
|
|
|
1,577
|
|
|
|
1,313
|
|
|
|
1,416
|
|
Latin America and Canada
|
|
|
2,237
|
|
|
|
1,588
|
|
|
|
1,289
|
|
|
|
Consolidated total assets
|
|
$
|
17,489
|
|
|
$
|
17,354
|
|
|
$
|
15,405
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
PP&E, net
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,072
|
|
|
$
|
2,026
|
|
|
$
|
1,987
|
|
Austria
|
|
|
787
|
|
|
|
811
|
|
|
|
650
|
|
Other countries
|
|
|
2,401
|
|
|
|
2,322
|
|
|
|
1,972
|
|
|
|
Consolidated PP&E, net
|
|
$
|
5,260
|
|
|
$
|
5,159
|
|
|
$
|
4,609
|
|
|
|
Significant
Product Sales
The following is a summary of net sales as a percentage of
consolidated net sales for the companys principal product
categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Recombinants
|
|
|
16%
|
|
|
|
16%
|
|
|
|
16%
|
|
PD Therapy
|
|
|
15%
|
|
|
|
15%
|
|
|
|
15%
|
|
Global
Injectables1
|
|
|
15%
|
|
|
|
14%
|
|
|
|
13%
|
|
IV
Therapies2
|
|
|
13%
|
|
|
|
12%
|
|
|
|
13%
|
|
Antibody Therapy
|
|
|
11%
|
|
|
|
11%
|
|
|
|
10%
|
|
Plasma
Proteins3
|
|
|
11%
|
|
|
|
11%
|
|
|
|
10%
|
|
|
|
|
|
|
1 |
|
Primarily consists of the companys enhanced packaging,
premixed drugs, pharmacy compounding, pharmaceutical partnering
business and generic injectables. |
|
2 |
|
Principally includes IV solutions and nutritional products. |
|
3 |
|
Includes plasma-derived hemophilia (FVII, FVIII and FEIBA),
albumin and other plasma-based products. |
91
NOTE 13
QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANYS
STOCK (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
years ended December 31 (in millions, except per share data)
|
|
quarter
|
|
|
quarter
|
|
|
quarter
|
|
|
quarter
|
|
|
Full year
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales1
|
|
$
|
2,927
|
|
|
$
|
3,194
|
|
|
$
|
3,224
|
|
|
$
|
3,498
|
|
|
$
|
12,843
|
|
Gross
margin1
|
|
|
1,043
|
|
|
|
1,638
|
|
|
|
1,659
|
|
|
|
1,618
|
|
|
|
5,958
|
|
Net (loss) income attributable to
Baxter1,2
|
|
|
(63
|
)
|
|
|
535
|
|
|
|
525
|
|
|
|
423
|
|
|
|
1,420
|
|
Earnings per common
share1,2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.11
|
)
|
|
|
0.90
|
|
|
|
0.90
|
|
|
|
0.73
|
|
|
|
2.41
|
|
Diluted
|
|
|
(0.11
|
)
|
|
|
0.90
|
|
|
|
0.89
|
|
|
|
0.72
|
|
|
|
2.39
|
|
Dividends declared
|
|
|
0.29
|
|
|
|
0.29
|
|
|
|
0.29
|
|
|
|
0.31
|
|
|
|
1.18
|
|
Market price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
61.71
|
|
|
|
59.92
|
|
|
|
48.02
|
|
|
|
51.98
|
|
|
|
61.71
|
|
Low
|
|
|
55.92
|
|
|
|
40.47
|
|
|
|
41.14
|
|
|
|
47.58
|
|
|
|
40.47
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,824
|
|
|
$
|
3,123
|
|
|
$
|
3,145
|
|
|
$
|
3,470
|
|
|
$
|
12,562
|
|
Gross margin
|
|
|
1,488
|
|
|
|
1,638
|
|
|
|
1,632
|
|
|
|
1,767
|
|
|
|
6,525
|
|
Net income attributable to
Baxter3
|
|
|
516
|
|
|
|
587
|
|
|
|
530
|
|
|
|
572
|
|
|
|
2,205
|
|
Earnings per common
share3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.84
|
|
|
|
0.97
|
|
|
|
0.88
|
|
|
|
0.95
|
|
|
|
3.63
|
|
Diluted
|
|
|
0.83
|
|
|
|
0.96
|
|
|
|
0.87
|
|
|
|
0.94
|
|
|
|
3.59
|
|
Dividends declared
|
|
|
0.26
|
|
|
|
0.26
|
|
|
|
0.26
|
|
|
|
0.29
|
|
|
|
1.07
|
|
Market price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
60.50
|
|
|
|
52.96
|
|
|
|
58.53
|
|
|
|
59.50
|
|
|
|
60.50
|
|
Low
|
|
|
48.57
|
|
|
|
46.41
|
|
|
|
52.34
|
|
|
|
53.92
|
|
|
|
46.41
|
|
|
|
|
|
|
1 |
|
The first quarter of 2010 included a $588 million charge
related to the recall of COLLEAGUE infusion pumps from the U.S.
market and other actions the company is undertaking outside the
United States. The charge decreased net sales and increased cost
of sales by $213 million and $375 million,
respectively. Refer to Note 5 for further information
regarding these charges. |
|
2 |
|
The first quarter of 2010 also included a charge of
$39 million to write off a deferred tax asset as a result
of a change in the tax treatment of reimbursements under the
Medicare Part D retiree prescription drug subsidy program.
The second quarter of 2010 included a charge of $28 million
to write down accounts receivable in Greece. The third quarter
of 2010 included an impairment charge of $112 million
principally to write down assets associated with the
companys agreement to divest its U.S. generic injectables
business. The fourth quarter of 2010 included a
$257 million charge, which primarily related to business
optimization efforts, $34 million in IPR&D charges,
which principally related to the licensing and acquisition of
the hemophilia-related intellectual property and other assets of
Archemix, and a charge of $62 million related to litigation
associated with the companys 2008 recall of its heparin
sodium injection products in the United States. Refer to
Notes 1, 2, 3, 4 and 5 for further information regarding
these charges. |
|
3 |
|
The third quarter of 2009 included a $54 million charge
associated with the discontinuation of the companys
SOLOMIX drug delivery system in development and a
$27 million charge primarily related to planned retirement
costs associated with the SYNDEO PCA Syringe Pump. The fourth
quarter of 2009 included a $79 million charge related to
the companys business optimization efforts. Refer to
Notes 2 and 5 for further information regarding these
charges. |
Baxter common stock is listed on the New York, Chicago and SIX
Swiss stock exchanges. The New York Stock Exchange is the
principal market on which the companys common stock is
traded. At January 31, 2011, there were 44,923 holders of
record of the companys common stock.
92
Managements
Responsibility for Consolidated Financial Statements
Management is responsible for the preparation of the
companys consolidated financial statements and related
information appearing in this report. Management believes that
the consolidated financial statements fairly reflect the form
and substance of transactions and that the financial statements
reasonably present the companys financial position,
results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of
America. Management has also included in the companys
consolidated financial statements amounts that are based on
estimates and judgments, which it believes are reasonable under
the circumstances.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, has audited the companys consolidated
financial statements in accordance with the standards
established by the Public Company Accounting Oversight Board and
provides an opinion on whether the consolidated financial
statements present fairly, in all material respects, the
financial position, results of operations and cash flows of the
company.
Managements
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended. The
companys internal control over financial reporting is a
process designed under the supervision of the principal
executive and financial officers, and effected by the board of
directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America.
Management performed an assessment of the effectiveness of the
companys internal control over financial reporting as of
December 31, 2010. In making this assessment, management
used the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Based on that assessment under the framework in Internal
Control-Integrated Framework, management concluded that the
companys internal control over financial reporting was
effective as of December 31, 2010. The effectiveness of the
companys internal control over financial reporting as of
December 31, 2010 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
|
|
|
Robert L. Parkinson, Jr.
|
|
Robert J. Hombach
|
Chairman of the Board and
|
|
Corporate Vice President,
|
Chief Executive Officer
|
|
Chief Financial Officer and Treasurer
|
93
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Baxter
International Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(1) present fairly, in all
material respects, the financial position of Baxter
International Inc. and its subsidiaries at December 31,
2010 and December 31, 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2010 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The companys management is
responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting incorporated by
reference under Item 9A. Our responsibility is to express
opinions on these financial statements and on the companys
internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 23, 2011
94
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
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 Exchange Act as of December 31, 2010.
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 December 31,
2010.
Assessment
of Internal Control Over Financial Reporting
Baxters report of managements assessment of the
effectiveness of its internal control over financial reporting
as of December 31, 2010 and the audit report regarding the
same of Baxters independent auditor,
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, are included in this Annual Report on
Form 10-K
and are incorporated herein by reference.
Changes
in Internal Control over Financial Reporting
In the second quarter of 2010, the company began the
implementation of a new global enterprise resource planning
system. In addition, the company is consolidating and
outsourcing certain computer operations and application support
activities. These multi-year initiatives will be conducted in
phases and include modifications to the design and operation of
controls over financial reporting. The company is testing
internal controls over financial reporting for design
effectiveness prior to implementation of each phase, and has
monitoring controls in place over the implementation of these
changes. There have been no other changes 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
December 31, 2010 that have materially affected, or are
reasonably likely to materially affect, Baxters internal
control over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Refer to information under the captions entitled Election
of Directors, Committees of the Board
Audit Committee, Corporate
Governance Code of Conduct, Corporate
Governance Director Qualifications and
Section 16(a) Beneficial Ownership Reporting
Compliance in Baxters definitive proxy statement to
be filed with the Securities and Exchange Commission and
delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held on May 3, 2011 (the Proxy
Statement), all of which information is incorporated herein by
reference. Also refer to information regarding executive
officers of Baxter under the caption entitled Executive
Officers of the Registrant in Part I of this Annual
Report on
Form 10-K.
95
|
|
Item 11.
|
Executive
Compensation.
|
Refer to information under the captions entitled Executive
Compensation, Director Compensation and
Compensation Committee Report in the Proxy
Statement, all of which information is incorporated herein by
reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
Refer to information under the captions entitled Equity
Compensation Plan Information, Security Ownership by
Directors and Executive Officers and Security
Ownership by Certain Beneficial Owners in the Proxy
Statement, all of which information is incorporated herein by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Refer to the information under the captions entitled
Certain Relationships and Related Transactions,
Board of Directors and Corporate
Governance Director Independence in the Proxy
Statement, all of which information is incorporated herein by
reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
Refer to the information under the caption entitled Audit
and Non-Audit Fees in the Proxy Statement, all of which
information is incorporated herein by reference.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
The following documents are filed as a part of this report:
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
Number
|
|
|
(1)
|
|
|
Financial Statements:
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
44
|
|
|
|
|
Consolidated Statements of Income
|
|
45
|
|
|
|
|
Consolidated Statements of Cash Flows
|
|
46
|
|
|
|
|
Consolidated Statements of Changes in Equity and Comprehensive
Income
|
|
47
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
48
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
94
|
|
(2)
|
|
|
Schedules required by Article 12 of
Regulation S-X:
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
|
|
102
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts
|
|
103
|
|
|
|
|
All other schedules have been omitted because they are not
applicable or not required.
|
|
|
|
(3)
|
|
|
Exhibits required by Item 601 of
Regulation S-K
are listed in the Exhibit Index, which is incorporated
herein by reference. Exhibits in the Exhibit Index marked
with a C in the left margin constitute management
contracts or compensatory plans or arrangements contemplated by
Item 15(b) of
Form 10-K.
|
|
|
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAXTER INTERNATIONAL INC.
|
|
|
|
By:
|
/s/ ROBERT
L. PARKINSON, JR.
|
Robert L. Parkinson, Jr.
Chairman and Chief Executive Officer
DATE: February 23, 2011
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated on February 23, 2011.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ ROBERT
L. PARKINSON, JR.
Robert
L. Parkinson, Jr.
|
|
Chairman and Chief Executive Officer
(principal executive officer)
|
|
|
|
/s/ ROBERT
J. HOMBACH
Robert
J. Hombach
|
|
Corporate Vice President, Chief Financial Officer and Treasurer
(principal financial officer)
|
|
|
|
/s/ MICHAEL
J. BAUGHMAN
Michael
J. Baughman
|
|
Corporate Vice President and Controller
(principal accounting officer)
|
|
|
|
/s/ WALTER
E. BOOMER
Walter
E. Boomer
|
|
Director
|
|
|
|
/s/ BLAKE
E. DEVITT
Blake
E. Devitt
|
|
Director
|
|
|
|
/s/ JOHN
D. FORSYTH
John
D. Forsyth
|
|
Director
|
|
|
|
/s/ GAIL
D. FOSLER
Gail
D. Fosler
|
|
Director
|
|
|
|
/s/ PETER
S. HELLMAN
Peter
S. Hellman
|
|
Director
|
|
|
|
/s/ WAYNE
T. HOCKMEYER, PH.D.
Wayne
T. Hockmeyer, Ph.D.
|
|
Director
|
|
|
|
/s/ CAROLE
J. SHAPAZIAN
Carole
J. Shapazian
|
|
Director
|
97
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ THOMAS
T. STALLKAMP
Thomas
T. Stallkamp
|
|
Director
|
|
|
|
/s/ K.J.
STORM
K.J.
Storm
|
|
Director
|
|
|
|
/s/ ALBERT
P. L. STROUCKEN
Albert
P. L. Stroucken
|
|
Director
|
98
EXHIBIT INDEX
|
|
|
|
|
Number and Description of Exhibit
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to the Companys Current
Report on
Form 8-K,
filed on May 18, 2006).
|
|
3
|
.2
|
|
Bylaws, as amended and restated on November 11, 2008
(incorporated by reference to Exhibit 3.1 to the
Companys Current Report on
Form 8-K,
filed on November 17, 2008).
|
|
4
|
.1
|
|
Form of Common Stock Certificate of the Company (incorporated by
reference to Exhibit(a) to the Companys Registration
Statement on
Form S-16
(Registration
No. 02-65269),
filed on August 17, 1979).
|
|
4
|
.2
|
|
Indenture, dated as of April 26, 2002, between the Company
and Bank One Trust Company, N.A., as Trustee (incorporated
by reference to Exhibit 4.5 to Amendment No. 1 to
Form 8-A,
filed on December 23, 2002).
|
|
4
|
.3
|
|
Second Supplemental Indenture, dated as of March 10, 2003,
to Indenture dated as of April 26, 2002, between the
Company and Bank One Trust Company, N.A., as Trustee
(including form of 4.625% Notes due 2015) (incorporated by
reference to Exhibit 4.2 to the Companys Registration
Statement on
Form S-4
(Registration
No. 333-109329),
filed on September 30, 2003).
|
|
4
|
.4
|
|
Indenture, dated August 8, 2006, between the Company and
J.P. Morgan Trust Company, National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on
Form 8-K,
filed on August 9, 2006).
|
|
4
|
.5
|
|
First Supplemental Indenture, dated August 8, 2006, between
the Company and J.P. Morgan Trust Company, National
Association, as Trustee (including form of 5.90% Senior
Note due 2016) (incorporated by reference to Exhibit 4.2 to
the Companys Current Report on
Form 8-K,
filed on August 9, 2006).
|
|
4
|
.6
|
|
Second Supplemental Indenture, dated December 7, 2007,
between the Company and The Bank of New York Trust Company,
N.A. (as successor in interest to J.P. Morgan
Trust Company, National Association), as Trustee (including
form of 6.250% Senior Note due 2037) (incorporated by
reference to Exhibit 4.1 to the Companys Current
Report on
Form 8-K,
filed on December 7, 2007).
|
|
4
|
.7
|
|
Third Supplemental Indenture, dated May 22, 2008, between
the Company and The Bank of New York Trust Company, N.A.
(as successor in interest to J.P. Morgan
Trust Company, National Association), as Trustee (including
form of 5.375% Senior Notes due 2018) (incorporated by
reference to Exhibit 4.1 to the Companys Current
Report on
Form 8-K,
filed on May 22, 2008).
|
|
4
|
.8
|
|
Fourth Supplemental Indenture, dated February 26, 2009,
between the Company and The Bank of New York Mellon
Trust Company, N.A. (as successor in interest to
J.P. Morgan Trust Company, National Association), as
Trustee (including form of 4.00% Senior Notes due 2014)
(incorporated by reference to Exhibit 4.1 to the
Companys Current Report on
Form 8-K,
filed on February 26, 2009).
|
|
4
|
.9
|
|
Fifth Supplemental Indenture, dated as of August 20, 2009,
between the Company and The Bank of New York Mellon
Trust Company, N.A. (as successor in interest to
J.P. Morgan Trust Company, National Association), as
Trustee (including form of 4.50% Senior Notes due 2019)
(incorporated by reference to Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on August 20, 2009).
|
|
4
|
.10
|
|
Sixth Supplemental Indenture, dated March 9, 2010 between
the Company and The Bank of New York Mellon
Trust Company, N.A. (as successor in interest to
J.P. Morgan Trust Company, National Association), as
Trustee, (including forms of 1.800% Senior Notes due 2013
and 4.250% Senior Notes due 2020) (incorporated by
reference to Exhibit 4.1 to the Companys Current
Report on
Form 8-K
filed on March 9, 2010).
|
|
10
|
.1
|
|
Credit Agreement, dated December 20, 2006, among Baxter
International Inc. as Borrower, J.P. Morgan Chase Bank, as
Administrative Agent and certain other financial institutions
named therein (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on
Form 8-K,
filed on December 22, 2006).
|
99
|
|
|
|
|
Number and Description of Exhibit
|
|
|
10
|
.2
|
|
Consent Decree for Condemnation and Permanent Injunction with
the United States of America (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
filed on June 29, 2006).
|
|
C 10
|
.3
|
|
Form of Indemnification Agreement entered into with directors
and officers (incorporated by reference to Exhibit 19.4 to
the Companys Quarterly Report on
Form 10-Q,
filed on November 14, 1986).
|
|
C 10
|
.4
|
|
Baxter International Inc. 2001 Incentive Compensation Program
and Amendment No. 1 thereto (incorporated by reference to
Exhibit 10.27 to the Companys Annual Report on
Form 10-K,
filed on March 13, 2002).
|
|
C 10
|
.5
|
|
Baxter International Inc. 2003 Incentive Compensation Program
(incorporated by reference to Exhibit A to the
Companys Definitive Proxy Statement on Schedule 14A,
filed on March 21, 2003).
|
|
C 10
|
.6
|
|
Baxter International Inc. 2007 Incentive Plan (incorporated by
reference to Appendix A to the Companys Definitive
Proxy Statement on Schedule 14A, filed on March 20,
2007).
|
|
C 10
|
.7
|
|
Baxter International Inc. Equity Plan (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on
Form 8-K,
filed on March 16, 2007).
|
|
C 10
|
.8
|
|
2001 Global Stock Option Plan adopted February 27, 2001,
Terms and Conditions (incorporated by reference to
Exhibit 10.4 to the Companys Annual Report on
Form 10-K,
filed on March 12, 2003).
|
|
C 10
|
.9
|
|
Baxter International Inc. Directors Deferred Compensation
Plan (amended and restated effective January 1, 2009)
(incorporated by reference to Exhibit 10.15 to the
Companys Annual Report on
Form 10-K,
filed on February 23, 2010).
|
|
C 10
|
.10
|
|
Amended and Restated Employment Agreement, between Robert L.
Parkinson, Jr. and Baxter International Inc., dated
December 12, 2008 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
filed on December 17, 2008).
|
|
C 10
|
.11
|
|
Form of Severance Agreement entered into with executive officers
(amended and restated effective December 18, 2008)
(incorporated by reference to Exhibit 10.17 to the
Companys Annual Report on
Form 10-K
filed on February 19, 2009).
|
|
C 10
|
.12
|
|
Baxter International Inc. and Subsidiaries Supplemental Pension
Plan (amended and restated effective January 1, 2009)
(incorporated by reference to Exhibit 10.18 to the
Companys Annual Report on
Form 10-K,
filed on February 19, 2009).
|
|
C 10
|
.13
|
|
Baxter International Inc. and Subsidiaries Deferred Compensation
Plan (amended and restated effective January 1, 2009)
(incorporated by reference to Exhibit 10.19 to the
Companys Annual Report on
Form 10-K,
filed on February 19, 2009).
|
|
C 10
|
.14
|
|
Baxter International Inc. Employee Stock Purchase Plan for
United States Employees (as amended and restated effective
January 1, 2008) and Amendment No. 1 thereto
effective as of January 1, 2010 (incorporated by reference
to Exhibit 10.20 to the Companys Annual Report on
Form 10-K,
filed on February 23, 2010).
|
|
C 10
|
.15*
|
|
Baxter International Inc. Non-Employee Director Compensation
Plan (as amended and restated effective January 1, 2009),
Amendment No. 1 thereto effective July 27, 2009 and
Amendment No. 2 thereto effective January 1, 2011.
|
|
C 10
|
.16
|
|
Agreement dated April 23, 2009 between John J. Greisch and
the Company (incorporated by reference to Exhibit 10.22 to
the Companys Current Report on
Form 8-K
filed on April 24, 2009).
|
|
C 10
|
.17
|
|
Agreement dated October 21, 2010 between Joy A. Amundson
and the Company (incorporated by reference to Exhibit 10.23
to the Companys Current Report on
Form 8-K
filed on October 21, 2010).
|
|
12
|
.*
|
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
21
|
.*
|
|
Subsidiaries of Baxter International Inc.
|
|
23
|
.*
|
|
Consent of PricewaterhouseCoopers LLP.
|
100
|
|
|
|
|
Number and Description of Exhibit
|
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
Rules 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
Rules 13a-14(a)
and 15d-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as amended.
|
|
32
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
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
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
|
C |
|
Management contract or compensatory plan or arrangement. |
101
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Baxter International Inc.:
Our audits of the consolidated financial statements and of the
effectiveness of internal control over financial reporting
referred to in our report dated February 23, 2011 listed in
the index appearing under 15(1) in this
Form 10-K
also included an audit of the financial statement schedule
listed in the index appearing under Item 15(2) of this
Annual Report on
Form 10-K.
In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 23, 2011
102
SCHEDULE II
Valuation And Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
Charged/
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
(Credited)
|
|
Deductions
|
|
Balance at
|
Valuation and Qualifying Accounts
|
|
Beginning
|
|
Costs and
|
|
to Other
|
|
From
|
|
End of
|
(in millions of dollars)
|
|
of Period
|
|
Expenses
|
|
Accounts(1)
|
|
Reserves
|
|
Period
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
118
|
|
|
|
41
|
|
|
|
(1
|
)
|
|
|
(19
|
)
|
|
$
|
139
|
|
Inventory reserves
|
|
$
|
273
|
|
|
|
240
|
|
|
|
(3
|
)
|
|
|
(151
|
)
|
|
$
|
359
|
|
Deferred tax asset valuation allowance
|
|
$
|
144
|
|
|
|
13
|
|
|
|
21
|
|
|
|
(60
|
)
|
|
$
|
118
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
103
|
|
|
|
12
|
|
|
|
15
|
|
|
|
(12
|
)
|
|
$
|
118
|
|
Inventory reserves
|
|
$
|
247
|
|
|
|
147
|
|
|
|
24
|
|
|
|
(145
|
)
|
|
$
|
273
|
|
Deferred tax asset valuation allowance
|
|
$
|
140
|
|
|
|
8
|
|
|
|
12
|
|
|
|
(16
|
)
|
|
$
|
144
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
134
|
|
|
|
2
|
|
|
|
(17
|
)
|
|
|
(16
|
)
|
|
$
|
103
|
|
Inventory reserves
|
|
$
|
212
|
|
|
|
158
|
|
|
|
(11
|
)
|
|
|
(112
|
)
|
|
$
|
247
|
|
Deferred tax asset valuation allowance
|
|
$
|
196
|
|
|
|
8
|
|
|
|
(18
|
)
|
|
|
(46
|
)
|
|
$
|
140
|
|
|
|
|
(1) |
|
Valuation accounts of acquired or divested companies and foreign
currency translation adjustments. |
Reserves are deducted from assets to which they apply.
103