UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the
quarterly period ended March 31, 2011
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o
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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
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
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Delaware
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36-0781620
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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One Baxter Parkway, Deerfield, Illinois
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60015-4633
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(Address of principal executive offices)
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(Zip Code)
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847-948-2000
(Registrants
telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See 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 Exchange Act).
Yes
o
No
þ
The number of shares of the registrants Common Stock, par value $1.00 per share, outstanding as of
April 28, 2011 was 570,377,620 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended March 31, 2011
TABLE OF CONTENTS
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Page Number
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PART I.
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Condensed Consolidated Statements of Income (Loss)
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2
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Condensed Consolidated Balance Sheets
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3
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Condensed Consolidated Statements of Cash Flows
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4
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Notes to Condensed Consolidated Financial Statements
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5
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Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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20
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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29
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Item 4.
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Controls and Procedures
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30
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Review by Independent Registered Public Accounting Firm
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31
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Report of Independent Registered Public Accounting Firm
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32
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PART II.
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OTHER INFORMATION
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Item 1.
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Legal Proceedings
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33
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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34
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Item 6.
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Exhibits
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35
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Signature
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36
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc.
Condensed Consolidated Statements of Income (Loss)
(unaudited)
(in millions, except per share data)
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Three months ended
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March 31,
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2011
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2010
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Net sales
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$
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3,284
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$
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2,927
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Cost of sales
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1,609
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1,884
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Gross margin
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1,675
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1,043
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Marketing and administrative expenses
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716
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683
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Research and development expenses
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214
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227
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Net interest expense
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10
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19
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Other expense, net
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4
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2
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Income before income taxes
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731
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112
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Income tax expense
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154
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172
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Net income (loss)
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577
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(60
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Less: Noncontrolling interests
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7
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3
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Net income (loss) attributable to Baxter International Inc. (Baxter)
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$
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570
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$
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(63
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)
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Net income (loss) attributable to Baxter per common share
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Basic
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$
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0.99
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$
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(0.11
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)
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Diluted
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$
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0.98
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$
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(0.11
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)
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Weighted-average number of common shares outstanding
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Basic
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577
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602
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Diluted
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581
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602
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Cash dividends declared per common share
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$
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0.31
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$
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0.29
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Baxter International Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in millions, except shares)
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March 31,
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December 31,
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2011
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2010
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Current assets
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Cash and equivalents
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$
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2,168
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$
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2,685
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Accounts and other current receivables
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2,399
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2,265
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Inventories
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2,517
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2,371
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Prepaid expenses and other
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677
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668
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Total current assets
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7,761
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7,989
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Property, plant and equipment, net
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5,419
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5,260
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Other assets
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Goodwill
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2,060
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2,015
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Other intangible assets, net
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500
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500
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Other
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1,673
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1,725
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Total other assets
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4,233
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4,240
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Total assets
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$
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17,413
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$
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17,489
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Current liabilities
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Short-term debt
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$
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14
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$
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15
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Current maturities of long-term debt and
lease obligations
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9
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9
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Accounts payable and accrued liabilities
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3,866
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4,017
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Total current liabilities
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3,889
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4,041
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Long-term debt and lease obligations
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4,351
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4,363
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Other long-term liabilities
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2,202
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2,289
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Commitments and contingencies
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Equity
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Common stock, $1 par value, authorized
2,000,000,000 shares,
issued 683,494,944 shares
in 2011 and 2010
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683
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683
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Common stock in treasury, at cost,
112,110,796 shares in 2011
and
102,761,588 shares in 2010
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(6,127
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(5,655
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Additional contributed capital
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5,737
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5,753
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Retained earnings
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8,316
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7,925
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Accumulated other comprehensive loss
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(1,875
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(2,139
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)
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Total Baxter shareholders equity
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6,734
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6,567
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Noncontrolling interests
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237
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229
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Total equity
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6,971
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6,796
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Total liabilities and equity
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$
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17,413
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$
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17,489
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Baxter International Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in millions)
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Three months ended
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March 31,
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2011
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2010
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Cash flows from operations
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Net income (loss)
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$
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577
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$
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(60
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)
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Adjustments
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Depreciation and amortization
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158
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166
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Deferred income taxes
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91
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91
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Stock compensation
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28
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30
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Realized excess tax benefits from
stock issued under employee benefit plans
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(5
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(31
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Infusion pump charge
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588
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Other
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8
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9
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Changes in balance sheet items
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Accounts and other current receivables
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(68
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)
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(33
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)
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Inventories
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(61
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)
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(94
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)
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Accounts payable and accrued liabilities
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(135
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)
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(101
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)
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Business optimization and infusion pump payments
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(60
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(23
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Other, including pension contributions
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(162
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)
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(263
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)
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Cash flows from operations
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371
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279
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Cash flows from investing activities
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Capital expenditures
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(198
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)
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(230
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)
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Acquisitions and investments
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(14
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)
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(234
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)
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Cash flows from investing activities
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(212
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)
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(464
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)
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Cash flows from financing activities
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Issuances of debt
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2
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602
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Payments of obligations
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(3
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)
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(13
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)
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Cash dividends on common stock
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(180
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)
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(174
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)
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Proceeds and realized excess tax benefits from
stock issued
under employee benefit plans
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134
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171
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Purchases of treasury stock
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(637
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)
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(435
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)
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Other
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(4
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(32
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)
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Cash flows from financing activities
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(688
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)
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119
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Effect of currency exchange rate changes on cash and equivalents
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12
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(47
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)
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Decrease in cash and equivalents
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(517
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)
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(113
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)
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Cash and equivalents at beginning of period
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2,685
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2,786
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Cash and equivalents at end of period
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$
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2,168
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$
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2,673
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The accompanying notes are an integral part of these condensed consolidated financial
statements.
4
Baxter International Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited interim condensed consolidated financial statements of Baxter International Inc. and
its subsidiaries (the company or Baxter) have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally
accepted accounting principles (GAAP) in the United States have been condensed or omitted. These
interim condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the companys Annual Report on Form 10-K
for the year ended December 31, 2010 (2010 Annual Report).
In the opinion of management, the interim condensed consolidated financial statements reflect all
adjustments necessary for a fair presentation of the interim periods. All such adjustments,
unless otherwise noted herein, are of a normal, recurring nature. The results of operations for
the interim period are not necessarily indicative of the results of operations to be expected for
the full year.
Certain reclassifications have been made to conform the prior period condensed consolidated
financial statements and notes to the current period presentation.
2. SUPPLEMENTAL FINANCIAL INFORMATION
Net pension and other postemployment benefits cost
The following is a summary of net periodic benefit cost relating to the companys pension and other
postemployment benefit (OPEB) plans.
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Three months ended
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March 31,
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(in millions)
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2011
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2010
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Pension benefits
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Service cost
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$
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28
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$
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25
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Interest cost
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59
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58
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Expected return on plan assets
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(76
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)
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(71
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)
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Amortization of net losses and other deferred amounts
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44
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31
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Net periodic pension benefit cost
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$
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55
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$
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43
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OPEB
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Service cost
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$
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2
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$
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1
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Interest cost
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7
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8
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Amortization of prior service credit and net loss
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(1
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)
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(1
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)
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Net periodic OPEB cost
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$
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8
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$
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8
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The company made discretionary cash contributions to its pension plan in the United States
totaling $150 million and $300 million in the first quarters of 2011 and 2010, respectively.
Net interest expense
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Three months ended
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March 31,
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(in millions)
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2011
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2010
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|
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Interest expense, net of capitalized interest
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$
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22
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$
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28
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Interest income
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(12
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)
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|
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(9
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)
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Net interest expense
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$
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10
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$
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19
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5
Comprehensive income (loss)
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|
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|
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Three months ended
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March 31,
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(in millions)
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2011
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2010
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|
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Comprehensive income (loss)
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$
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842
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$
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(317
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)
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Less: Comprehensive income attributable to noncontrolling interests
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8
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|
2
|
|
|
Comprehensive income (loss) attributable to Baxter
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$
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834
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$
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(319
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)
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The increase in comprehensive income attributable to Baxter in the first quarter of 2011 was
principally due to the impact of a $588 million charge recorded in the first quarter of 2010 in
connection with the recall of COLLEAGUE infusion pumps from the U.S. market, as well as favorable
movements in currency translation adjustments (CTA). Refer to Note 3 for further information
regarding the COLLEAGUE infusion pump charge.
Effective tax rate
The companys effective income tax rate was 21.1% and 153.6% in the first quarters of 2011 and
2010, respectively. The companys effective income 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
effective tax rate in the first quarter of 2010 was impacted by a $588 million charge principally
related to the recall of COLLEAGUE infusion pumps from the U.S. market, for which there was no net
tax benefit recognized, and 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 in 2010. Refer to Note 3
for further information regarding the COLLEAGUE charge.
Earnings (loss) per share
The numerator for both basic and diluted earnings (loss) per share (EPS) is net income (loss)
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.
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|
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|
|
|
|
|
|
|
|
|
Three months ended
|
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|
|
March 31,
|
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(in millions)
|
|
2011
|
|
|
2010
|
|
|
Basic shares
|
|
|
577
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|
|
|
602
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Effect of dilutive securities
|
|
|
4
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|
|
|
|
|
|
Diluted shares
|
|
|
581
|
|
|
|
602
|
|
|
The computation of diluted EPS excluded employee stock options to purchase 27 million and 16
million shares for the first quarters of 2011 and 2010, respectively, because their inclusion would
have had an anti-dilutive effect on diluted EPS.
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
Raw materials
|
|
$
|
554
|
|
|
$
|
536
|
|
Work in process
|
|
|
886
|
|
|
|
787
|
|
Finished goods
|
|
|
1,077
|
|
|
|
1,048
|
|
|
Inventories
|
|
$
|
2,517
|
|
|
$
|
2,371
|
|
|
6
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
Property, plant and equipment, at cost
|
|
$
|
10,811
|
|
|
$
|
10,591
|
|
Accumulated depreciation and amortization
|
|
|
(5,392
|
)
|
|
|
(5,331
|
)
|
|
Property, plant and equipment (PP&E), net
|
|
$
|
5,419
|
|
|
$
|
5,260
|
|
|
Goodwill
The following is a reconciliation of goodwill by business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
|
|
(in millions)
|
BioScience
|
|
|
Products
|
|
|
Total
|
|
|
Balance as of December 31, 2010
|
|
$
|
809
|
|
|
$
|
1,206
|
|
|
$
|
2,015
|
|
Additions
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Currency translation and other adjustments
|
|
|
9
|
|
|
|
35
|
|
|
|
44
|
|
|
Balance as of March 31, 2011
|
|
$
|
818
|
|
|
$
|
1,242
|
|
|
$
|
2,060
|
|
|
As of March 31, 2011, there were no accumulated goodwill impairment losses.
Other intangible assets, net
The following is a summary of the companys intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
|
|
|
|
|
|
technology,
|
|
|
|
|
|
|
|
(in millions)
|
including patents
|
|
|
Other
|
|
|
Total
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross other intangible assets
|
|
$
|
926
|
|
|
$
|
151
|
|
|
$
|
1,077
|
|
Accumulated amortization
|
|
|
(533
|
)
|
|
|
(75
|
)
|
|
|
(608
|
)
|
|
Other intangible assets, net
|
|
$
|
393
|
|
|
$
|
76
|
|
|
$
|
469
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross other intangible assets
|
|
$
|
916
|
|
|
$
|
144
|
|
|
$
|
1,060
|
|
Accumulated amortization
|
|
|
(522
|
)
|
|
|
(69
|
)
|
|
|
(591
|
)
|
|
Other intangible assets, net
|
|
$
|
394
|
|
|
$
|
75
|
|
|
$
|
469
|
|
|
The amortization expense for these intangible assets was $17 million in the first quarters of 2011
and 2010. The anticipated annual amortization expense for intangible assets recorded as of March
31, 2011 is $67 million in 2011, $64 million in 2012, $62 million in 2013, $58 million in 2014, $57
million in 2015 and $53 million in 2016. Additionally, as of March 31, 2011 and December 31, 2010,
the company had $31 million of intangible assets not subject to amortization, which included a
trademark with an indefinite life and certain acquired in-process research and development (R&D)
associated with products that have not yet received regulatory approval.
Variable interest entities
The condensed consolidated financial statements include the accounts of variable interest entities
(VIEs) in which Baxter is the primary beneficiary. During the first quarter of 2011, the company
did not enter into any new arrangements in which it determined that the company is the primary
beneficiary of a VIE. As of March 31, 2011, the carrying amounts of the consolidated VIEs assets
and liabilities were not material to Baxters consolidated financial statements. Refer to Note 4
to the companys consolidated financial statements in the 2010 Annual Report for further
information about the VIEs consolidated by the company.
Asset impairments
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
7
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.
3. 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 6, on July 13, 2010, the U.S. Food and Drug Administration
(FDA) issued a final order requiring the company to recall its approximately 200,000 COLLEAGUE
infusion pumps then 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 International General Medical Apparatus, LLC Spectrum infusion pumps in exchange for
COLLEAGUE infusion pumps. Refer to Note 5 to the companys consolidated financial statements in
the 2010 Annual Report for further information regarding the COLLEAGUE and SYNDEO infusion pumps.
In the first quarter of 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. 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. 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.
In aggregate, these charges included $716 million of cash costs and $209 million principally
related to asset impairments. The asset impairments related to inventory, lease receivables and
other assets relating to the recalled pumps. The reserve for cash costs principally 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 remediation and recall programs and customer accommodations.
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 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 March 31, 2011.
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Charges and adjustments in 2005 through 2010
|
|
$
|
716
|
|
Utilization in 2005 through 2010
|
|
|
(203
|
)
|
|
Reserves as of December 31, 2010
|
|
|
513
|
|
Utilization
|
|
|
(29
|
)
|
|
Reserves as of March 31, 2011
|
|
$
|
484
|
|
|
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.
8
Included in the charges were cash costs of $253 million, principally pertaining to severance and
other employee-related costs in Europe and the United States. Also included in the charges were
asset impairments totaling $83 million, which related to fixed assets, inventory and other assets
associated with discontinued products and projects.
Refer to the 2010 Annual Report for further information about these charges.
The following summarizes cash activity in the reserves related to the companys business
optimization initiatives.
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Charges in 2010 and 2009
|
|
$
|
253
|
|
Utilization in 2010 and 2009
|
|
|
(73
|
)
|
|
Reserves as of December 31, 2010
|
|
|
180
|
|
Utilization
|
|
|
(31
|
)
|
CTA
|
|
|
4
|
|
|
Reserves as of March 31, 2011
|
|
$
|
153
|
|
|
The company believes that these reserves are adequate and expects that the reserves will be
substantially utilized by the end of 2011. However, adjustments may be recorded in the future as
the programs are completed.
4. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Securitization arrangement
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.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
Sold receivables at beginning of period
|
|
$
|
157
|
|
|
$
|
147
|
|
Proceeds from sales of receivables
|
|
|
141
|
|
|
|
117
|
|
Cash collections (remitted to the owners of the
receivables)
|
|
|
(158
|
)
|
|
|
(142
|
)
|
Effect of currency exchange rate changes
|
|
|
4
|
|
|
|
(2
|
)
|
|
Sold receivables at end of period
|
|
$
|
144
|
|
|
$
|
120
|
|
|
Concentrations of credit risk
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.
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 credit
losses.
Derivatives and hedging activities
The company operates on a global basis and is exposed to the risk that its earnings, cash flows and
equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The
companys hedging policy attempts to manage these risks to an acceptable level based on the
companys judgment of the appropriate trade-off between risk, opportunity and costs.
9
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. Market volatility and currency
fluctuations may reduce the benefits of the companys natural hedges and limit the companys
ability to cost-effectively hedge these exposures.
The company is also exposed to the risk that its earnings and cash flows could be adversely
impacted by fluctuations in interest rates. The companys policy is to manage interest costs using
a mix of fixed- and floating-rate debt that the company believes is appropriate. To manage this
mix in a cost-efficient manner, the company periodically enters into interest rate swaps in which
the company agrees to exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated by reference to an agreed-upon notional amount.
The company does not hold any instruments for trading purposes and none of the companys
outstanding derivative instruments contain credit-risk-related contingent features.
All derivative instruments are recognized as either assets or liabilities at fair value in the
condensed consolidated balance sheets and are classified as short-term or long-term based on the
scheduled maturity of the instrument. Based upon the exposure being hedged, the company designates
its hedging instruments as cash flow or fair value hedges.
Cash Flow Hedges
The company 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
denominated in foreign currencies and recognized assets and liabilities. The company periodically
uses forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings
associated with movements in interest rates relating to anticipated issuances of debt. Certain
other firm commitments and forecasted transactions are also periodically hedged. Cash flow hedges
primarily related to forecasted intercompany sales denominated in foreign currencies and, in the
prior year, anticipated issuances of debt and a hedge of U.S. Dollar-denominated debt issued by a
foreign subsidiary.
For each derivative instrument that is designated and effective as a cash flow hedge, the gain or
loss on the derivative is accumulated in accumulated other comprehensive income (AOCI) and then
recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums
paid are initially recorded as assets and reclassified to other comprehensive income (OCI) over the
life of the option, and then recognized in earnings consistent with the underlying hedged item.
Cash flow hedges are classified in cost of sales, net interest expense, and other expense, net, and
primarily relate to forecasted intercompany sales denominated in foreign currencies, anticipated
issuances of debt, and a hedge of U.S. Dollar-denominated debt issued by a foreign subsidiary,
respectively.
The notional amounts of foreign exchange contracts were $1.5 billion and $1.6 billion as of March
31, 2011 and December 31, 2010, respectively. The maximum term over which the company has cash
flow hedge contracts in place related to forecasted transactions as of March 31, 2011 is 18 months.
Fair Value Hedges
The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate
debt. These instruments hedge the companys earnings from changes in the fair value of debt due to
fluctuations in the designated benchmark interest rate. For each derivative instrument that is
designated and effective as a fair value hedge, the gain or loss on the derivative is recognized
immediately to earnings, and offsets the loss or gain 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.
The total notional amount of interest rate contracts designated as fair value hedges was $2.4
billion as of March 31, 2011 and $1.9 billion as of December 31, 2010.
10
Dedesignations
If it is determined that a derivative or nonderivative hedging instrument is no longer highly
effective as a hedge, the company discontinues hedge accounting prospectively. If the company
removes the cash flow hedge designation because the hedged forecasted transactions are no longer
probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings.
Gains or losses relating to terminations of effective cash flow hedges in which the forecasted
transactions are still probable of occurring are deferred and recognized consistent with the loss
or income 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. There were no
hedge dedesignations in the first three months of 2011 or 2010 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 change in fair value, which substantially offsets the change in book value of the
hedged items, is recorded directly to other expense, net. The terms of these instruments generally
do not exceed one month.
The total gross notional amount of undesignated derivative instruments was $423 million as of March
31, 2011 and $445 million as of December 31, 2010.
Gains and Losses on Derivative Instruments
The following table summarizes the gains and losses on the companys derivative instruments for the
three months ended March 31, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from
|
|
|
|
Gain (loss) recognized in OCI
|
|
|
Location of gain (loss)
|
|
AOCI into income
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
in income statement
|
|
2011
|
|
|
2010
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
Net interest expense
|
|
$
|
|
|
|
$
|
1
|
|
Foreign exchange contracts
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
Net sales
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Foreign exchange contracts
|
|
|
(26
|
)
|
|
|
14
|
|
|
Cost of sales
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Foreign exchange contracts
|
|
|
|
|
|
|
37
|
|
|
Other expense, net
|
|
|
|
|
|
|
38
|
|
|
Total
|
|
$
|
(27
|
)
|
|
$
|
43
|
|
|
|
|
|
|
$
|
(6
|
)
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of gain (loss) in
|
|
Gain (loss) recognized in income
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
income statement
|
|
2011
|
|
|
2010
|
|
|
Fair value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
$
|
(24
|
)
|
|
$
|
21
|
|
|
Undesignated derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
For the companys fair value hedges, an equal and offsetting gain of $24 million and loss of
$21 million were recognized in net interest expense in the first quarters of 2011 and 2010,
respectively, as adjustments to the underlying hedged item, fixed-rate debt. Ineffectiveness
related to the companys cash flow and fair value hedges for the first quarter of 2011 was not
material.
As of March 31, 2011, $22 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.
11
Fair Values of Derivative Instruments
The following table summarizes the classification and fair values of derivative instruments
reported in the condensed consolidated balance sheet as of March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in asset positions
|
|
|
Derivatives in liability positions
|
|
(in millions)
|
|
Balance sheet location
|
Fair value
|
|
|
Balance sheet location
|
Fair value
|
|
|
Derivative instruments designated
as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Other long-term assets
|
|
$
|
114
|
|
|
Other long-term liabilities
|
|
$
|
2
|
|
Foreign exchange contracts
|
|
Prepaid expenses and other
|
|
|
19
|
|
|
Accounts payable
and accrued liabilities
|
|
|
22
|
|
Foreign exchange contracts
|
|
Other long-term assets
|
|
|
8
|
|
|
Other long-term liabilities
|
|
|
1
|
|
|
Total derivative instruments
designated as hedges
|
|
|
|
|
|
$
|
141
|
|
|
|
|
|
|
$
|
25
|
|
|
Undesignated derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid expenses and other
|
|
$
|
|
|
|
Accounts payable
and accrued liabilities
|
|
$
|
|
|
|
Total derivative instruments
|
|
|
|
|
|
$
|
141
|
|
|
|
|
|
|
$
|
25
|
|
|
The following table summarizes the classification and fair values of derivative instruments
reported in the consolidated balance sheet as of December 31, 2010.
|
|
|
|
|
Derivatives in asset positions
|
|
|
Derivatives in liability positions
|
|
(in millions)
|
|
Balance sheet location
|
Fair value
|
|
|
Balance sheet location
|
Fair value
|
|
|
Derivative instruments designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Other long-term assets
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid expenses and other
|
|
|
23
|
|
|
Accounts payable
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid expenses and other
|
|
$
|
|
|
|
Accounts payable
and accrued liabilities
|
|
$
|
|
|
|
Total derivative instruments
|
|
|
|
|
|
$
|
167
|
|
|
|
|
|
|
$
|
21
|
|
|
12
Fair value measurements
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 condensed consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
active markets for
|
|
Significant other
|
|
unobservable
|
|
|
Balance as of
|
|
identical assets
|
|
observable inputs
|
|
inputs
|
|
(in millions)
|
March 31, 2011
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
27
|
|
|
$
|
|
|
|
$
|
27
|
|
|
$
|
|
|
Interest rate hedges
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
Equity securities
|
|
|
17
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
158
|
|
|
$
|
17
|
|
|
$
|
141
|
|
|
$
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
23
|
|
|
$
|
|
|
|
$
|
23
|
|
|
$
|
|
|
Interest rate hedges
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Contingent payments
related to
acquisitions and
investments
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
Total liabilities
|
|
$
|
150
|
|
|
$
|
|
|
|
$
|
25
|
|
|
$
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
active markets for
|
|
Significant other
|
|
unobservable
|
|
|
Balance as of
|
|
identical assets
|
|
observable inputs
|
|
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
|
|
|
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.
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 January 1, 2011
|
|
$
|
125
|
|
Additions, net of payments
|
|
|
|
|
Unrealized gain/loss recognized in earnings
|
|
|
|
|
|
Fair value as of March 31, 2011
|
|
$
|
125
|
|
|
As discussed further in Note 3, the company recorded an asset impairment charge related to the
recall of COLLEAGUE infusion pumps from the U.S. market in the first quarter of 2010. As the
assets had no alternative use and no salvage value, the fair value, measured using significant
unobservable inputs (Level 3), was assessed to be zero.
13
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 condensed 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 condensed consolidated
balance sheets and the approximate fair values as of March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book values
|
|
|
Approximate fair values
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term insurance receivables
|
|
$
|
37
|
|
|
$
|
31
|
|
|
$
|
36
|
|
|
$
|
30
|
|
Investments
|
|
|
93
|
|
|
|
32
|
|
|
|
90
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
14
|
|
|
|
15
|
|
|
|
14
|
|
|
|
15
|
|
Current maturities of long-term
debt and lease obligations
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
Other long-term debt and lease
obligations
|
|
|
4,351
|
|
|
|
4,363
|
|
|
|
4,613
|
|
|
|
4,666
|
|
Long-term litigation liabilities
|
|
|
116
|
|
|
|
76
|
|
|
|
112
|
|
|
|
74
|
|
|
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.
Investments principally represent held-to-maturity debt securities, as well as certain cost method
investments. In the first quarter of 2011, as previously announced, certain past due receivables
with the Greek government were converted into non-interest bearing bonds with maturities of one to
three years. The fair value of these bonds, which are classified as held-to-maturity, was
calculated using a discounted cash flow model that incorporates observable inputs, including
interest rate yields. Refer to the 2010 Annual Report for more information on the Greek
governments settlement plan. 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 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.
5.
COMMON STOCK
Stock-based compensation plans
Stock compensation expense totaled $28 million and $30 million in the first quarters of 2011 and
2010, respectively. 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.
In March 2011, the company awarded its annual stock compensation grants, which consisted of 5.7
million stock options, 1.1 million restricted stock units (RSUs) and 436,000 performance share
units (PSUs). Effective with this annual grant, the company changed the overall mix of stock
compensation by reducing the number of options and PSUs granted and introducing RSUs for senior
management and other option-eligible employees. Annual stock compensation grants for the companys
officers continue to include only stock options and PSUs.
14
Stock Options
The weighted-average assumptions used in estimating the fair value of stock options granted during
the period, along with the weighted-average grant-date fair values, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Expected volatility
|
|
|
25%
|
|
|
|
22%
|
|
Expected life (in years)
|
|
|
5.0
|
|
|
|
4.5
|
|
Risk-free interest rate
|
|
|
2.2%
|
|
|
|
2.0%
|
|
Dividend yield
|
|
|
2.3%
|
|
|
|
2.0%
|
|
Fair value per stock option
|
|
|
$10
|
|
|
|
$10
|
|
|
The total intrinsic value of stock options exercised was $21 million and $60 million during the
first quarters of 2011 and 2010, respectively.
As of March 31, 2011, $106 million of unrecognized compensation cost related to all unvested stock
options is expected to be recognized as expense over a weighted-average period of 2.2 years.
Performance Share and Restricted Stock Units
The assumptions used in estimating the fair value of PSUs granted during the period, along with the
grant-date fair values, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Baxter volatility
|
|
|
28%
|
|
|
|
26%
|
|
Peer group volatility
|
|
|
19% - 55%
|
|
|
|
20% - 59%
|
|
Correlation of returns
|
|
|
0.29 - 0.61
|
|
|
|
0.29 - 0.63
|
|
Risk-free interest rate
|
|
|
1.2%
|
|
|
|
1.3%
|
|
Fair value per PSU
|
|
|
$62
|
|
|
|
$64
|
|
|
The fair value per RSU is determined based on the quoted price of the companys common stock on the
date of the grant.
As of March 31, 2011, unrecognized compensation cost related to all unvested PSUs of $47 million is
expected to be recognized as expense over a weighted-average period of 2.1 years, and unrecognized
compensation cost related to all unvested RSUs of $55 million is expected to be recognized as
expense over a weighted-average period of 3.0 years.
Stock repurchases
As authorized by the board of directors, from time to time the company repurchases its stock
depending upon the companys cash flows, net debt level and market conditions. During the
three-month period ended March 31, 2011, the company repurchased 12.4 million shares for $637
million under the board of directors July 2009 $2.0 billion and December 2010 $2.5 billion share
repurchase authorizations. As of March 31, 2011, $2.4 billion remained available under the
December 2010 authorization. No shares remained available under the July 2009 authorization as of
March 31, 2011.
6.
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
15
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
Hemodialysis Litigation
Since April 2003, Baxter has been pursuing a patent infringement action against Fresenius Medical
Care Holdings, Inc. for infringement of certain Baxter patents. The patents cover Fresenius 2008K
hemodialysis instrument. In 2007, the court entered judgment in Baxters favor holding the patents
valid and infringed, and a jury assessed damages at $14 million for past sales only. 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 740 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.
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
July 2011.
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
16
alleged violations of the Employee Retirement Income Security
Act of 1974, as amended. Plaintiff alleges that these defendants, along with the Administrative
and Investment Committees of the companys 401(k) plans, breached their fiduciary duties to the
plan participants by offering Baxter common stock as an investment option in each of the plans
during the period of January 2001 to October 2004. In March 2006, the trial court certified a
class of plan participants who elected to acquire Baxter common stock through the plans between
January 2001 and the present. 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 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 and other quality issues have 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. In February 2011, the court denied the companys motion to dismiss certain of the claims
and the parties are proceeding into discovery.
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. A class settlement resolving Medicare Part B claims and independent health plan
claims against Baxter and others has been preliminarily approved by that court and final approval
is expected in 2011. Baxter has also resolved a number of other AWP cases brought by state
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
17
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 SEC requesting that
the company 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.
7.
SEGMENT INFORMATION
Prior to 2011, the company operated in three segments: BioScience, Medication Delivery and Renal.
The company has combined its former Medication Delivery and Renal businesses into a single global
business unit to form the Medical Products business. Effective January 1, 2011, the company
changed its segment presentation to reflect this new structure, and recast all prior periods
presented to conform to the new presentation.
Baxters two segments, BioScience and Medical Products, are both strategic businesses that are
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-1antitrypsin
deficiency, burns and shock, and other chronic and acute blood-related conditions; products for
regenerative medicine, such as biosurgery products; and select vaccines.
The
Medical Products
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 addition, the Medical Products business provides products and services to treat end-stage renal
disease, or irreversible kidney failure. The business manufactures solutions and other products for
peritoneal dialysis, a home-based therapy, and also distributes products for hemodialysis, which is
generally conducted in a hospital or clinic. In May 2011, the company divested its U.S. generic
injectables business. Refer to Note 8 for further information regarding this divestiture.
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 condensed 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.
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, deferred income taxes, certain litigation liabilities and
related insurance receivables, and the revenues and costs related to the manufacturing,
distribution and other transition agreements with Fenwal Inc. (Fenwal) in connection with the
divestiture of the Transfusion Therapies (TT) business. Refer to Note 3 to the companys
consolidated financial statements in the 2010 Annual Report for further information regarding the
TT divestiture.
Included in the Medical Products segments pre-tax loss in the first quarter of 2010 was a charge
of $588 million related to the recall of COLLEAGUE infusion pumps from the U.S. market. Refer to
Note 3 for further information regarding the COLLEAGUE infusion pump charge.
Financial information for the companys segments is as follows.
18
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
BioScience
|
|
$
|
1,408
|
|
|
$
|
1,362
|
|
Medical Products
|
|
|
1,868
|
|
|
|
1,553
|
|
Transition services to Fenwal
|
|
|
8
|
|
|
|
12
|
|
|
Total
|
|
$
|
3,284
|
|
|
$
|
2,927
|
|
|
Pre-tax income (loss)
|
|
|
|
|
|
|
|
|
BioScience
|
|
$
|
579
|
|
|
$
|
554
|
|
Medical Products
|
|
|
356
|
|
|
|
(257
|
)
|
|
Total pre-tax income from segments
|
|
$
|
935
|
|
|
$
|
297
|
|
|
Transition services to Fenwal represent revenues associated with manufacturing, distribution and
other services provided by the company to Fenwal subsequent to the divestiture of the TT business
in 2007.
The following is a reconciliation of segment pre-tax income to income before income taxes per the
condensed consolidated statements of income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
Total pre-tax income from segments
|
|
$
|
935
|
|
|
$
|
297
|
|
Unallocated amounts
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
(28
|
)
|
|
|
(30
|
)
|
Net interest expense
|
|
|
(10
|
)
|
|
|
(19
|
)
|
Certain foreign currency fluctuations and
hedging activities
|
|
|
(3
|
)
|
|
|
9
|
|
Other Corporate items
|
|
|
(163
|
)
|
|
|
(145
|
)
|
|
Income before income taxes
|
|
$
|
731
|
|
|
$
|
112
|
|
|
8.
SUBSEQUENT EVENTS
Acquisition of Prism Pharmaceuticals
In April 2011, the company entered into a definitive agreement to acquire privately-held Prism
Pharmaceuticals, Inc., a specialty pharmaceutical company. As a result of this acquisition, Baxter
will acquire NEXTERONE (amiodarone HCI), an antiarrhythmic agent used for ventricular
tachyarrhythmias, or fast forms of irregular heartbeat. The NEXTERONE product portfolio includes
the first and only ready-to-use premixed intravenous bag formulations, as well as vials and a
pre-filled syringe, all of which have received FDA approval. This acquisition will expand Baxters
existing portfolio of premixed drugs and solutions for use in the acute care setting. Total
consideration of up to $338 million will consist of an upfront cash payment of $170 million at
closing and contingent payments of up to $168 million, which are associated with the achievement of
specified sales milestones. The transaction is expected to close in the second quarter of 2011,
subject to customary closing conditions including applicable regulatory approvals. The agreement
is not expected to have a material impact on Baxters 2011 financial statements.
Divestiture of Generic Injectables Business
In May 2011, the company completed the divestiture of 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 acquired 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. Refer to the 2010 Annual Report
for further information about this divestiture.
Net sales relating to the generic injectables business, which were reported in the Medical Products
segment, were $38 million and $40 million in the first quarters of 2011 and 2010, respectively.
19
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Refer to the companys Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Annual
Report) for managements discussion and analysis of the financial condition and results of
operations of the company. The following is managements discussion and analysis of the financial
condition and results of operations of the company for the three months ended March 31, 2011.
RESULTS OF OPERATIONS
NET SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
|
|
|
Percent
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
change
|
|
|
BioScience
|
|
$
|
1,408
|
|
|
$
|
1,362
|
|
|
|
3%
|
|
Medical Products
|
|
|
1,868
|
|
|
|
1,553
|
|
|
|
20%
|
|
Transition services to Fenwal Inc.
|
|
|
8
|
|
|
|
12
|
|
|
|
(33%
|
)
|
|
Total net sales
|
|
$
|
3,284
|
|
|
$
|
2,927
|
|
|
|
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
|
|
|
Percent
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
change
|
|
|
International
|
|
$
|
1,862
|
|
|
$
|
1,847
|
|
|
|
1%
|
|
United States
|
|
|
1,422
|
|
|
|
1,080
|
|
|
|
32%
|
|
|
Total net sales
|
|
$
|
3,284
|
|
|
$
|
2,927
|
|
|
|
12%
|
|
|
Foreign currency had no impact on net sales growth for the total company in the first quarter of
2011, as the strengthening of the U.S. Dollar relative to the Euro was offset by the weakening of
the U.S. Dollar relative to other currencies.
Total net sales growth in the first quarter of 2011 was impacted by 7 percentage points due to the
companys first quarter 2010 charge related to the recall of COLLEAGUE infusion pumps from the U.S.
market. The $588 million charge, which was included in the Medical Products segment, reduced net
sales by $213 million. Refer to Note 3 for further information regarding the COLLEAGUE infusion
pump charge.
BioScience
The following is a summary of sales by product category in the BioScience segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
|
|
|
Percent
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
change
|
|
|
Recombinants
|
|
$
|
512
|
|
|
$
|
510
|
|
|
|
|
|
Plasma Proteins
|
|
|
308
|
|
|
|
292
|
|
|
|
5%
|
|
Antibody Therapy
|
|
|
374
|
|
|
|
322
|
|
|
|
16%
|
|
Regenerative Medicine
|
|
|
140
|
|
|
|
119
|
|
|
|
18%
|
|
Other
|
|
|
74
|
|
|
|
119
|
|
|
|
(38%
|
)
|
|
Total net sales
|
|
$
|
1,408
|
|
|
$
|
1,362
|
|
|
|
3%
|
|
|
20
Net sales in the BioScience segment increased 3% during the first quarter of 2011 (including a 1
percentage point unfavorable impact from foreign currency). The principal drivers were the
following:
|
|
|
In the Recombinants product category, the impact of continued customer adoption of the
companys advanced recombinant therapy, ADVATE [Antihemophilic Factor (Recombinant),
Plasma/Albumin-Free Method] was offset by lower tender sales in the United Kingdom and the
unfavorable impact of foreign currency.
|
|
|
|
|
Sales growth in the Plasma Proteins product category reflected increased demand for
plasma-derived factor VIII, albumin and FEIBA (an anti-inhibitor coagulant complex) in the
United States and Europe.
|
|
|
|
|
Sales growth in the Antibody Therapy product line was due to increased sales of
GAMMAGARD LIQUID [Immune Globulin Intravenous (Human)] (marketed as KIOVIG outside of the
United States), the liquid formulation of the antibody-replacement therapy IGIV (immune
globulin intravenous), driven by strong demand resulting from a competitor being out of the
market during the first quarter. This performance was partially offset by pricing actions
implemented by the company, beginning in the second quarter of 2010. Also impacting sales
growth in the first quarter were lower WinRho SDF [Rho(D) Immune Globulin Intravenous
(Human)] sales due to the termination of a distribution agreement effective July 1, 2010.
|
|
|
|
|
Revenues in Regenerative Medicine increased due to sales of ACTIFUSE (a silicate
substituted calcium phosphate synthetic bone graft material) as a result of the companys
first quarter 2010 acquisition of ApaTech Limited (ApaTech), as well as increased sales of
the companys fibrin sealant product, FLOSEAL.
|
|
|
|
|
Sales in the Other product category declined as a result of a reduction in sales of
CELVAPAN H1N1 pandemic vaccine and NEISVAC-C (for the prevention of meningitis C) in
international markets.
|
Medical Products
The following is a summary of sales by product category in the Medical Products segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
|
|
|
Percent
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
change
|
|
|
Renal
|
|
$
|
587
|
|
|
$
|
584
|
|
|
|
1%
|
|
Global Injectables
|
|
|
517
|
|
|
|
451
|
|
|
|
15%
|
|
IV Therapies
|
|
|
428
|
|
|
|
391
|
|
|
|
9%
|
|
Infusion Systems
|
|
|
211
|
|
|
|
(4
|
)
|
|
|
N/M
|
|
Anesthesia
|
|
|
118
|
|
|
|
127
|
|
|
|
(7%
|
)
|
Other
|
|
|
7
|
|
|
|
4
|
|
|
|
75%
|
|
|
Total net sales
|
|
$
|
1,868
|
|
|
$
|
1,553
|
|
|
|
20%
|
|
|
Net sales in the Medical Products segment increased 20% in the first quarter of 2011 (including a 1
percentage point favorable impact from foreign currency). The principal drivers were the
following:
|
|
|
In the Renal product line, the favorable impact of foreign currency and growth in the
number of peritoneal dialysis (PD) patients in Asia, Latin America and the United States
were partially offset by PD patient losses in the United States to another provider and
lower sales of hemodialysis products.
|
|
|
|
|
Within the Global Injectables product category, sales growth was driven by increased
revenues in the companys pharmaceutical partnering and international pharmacy compounding
businesses, as well as strong demand for certain enhanced packaging products and select
multi-source generic products in the United States. In May 2011, the company divested its
U.S. generic injectables business. Refer to Note 8 for further information regarding this
divestiture.
|
|
|
|
|
IV Therapies sales growth was driven by increased demand for intravenous solutions and
nutritional products, particularly due to market share gains in the United States resulting
from new group purchasing organization contracts and competitor supply issues, as well as
greater customer adoption of CLINIMIX sulfite-free (Amino Acid in Dextrose) Injections, a
proprietary dual-chamber parenteral nutrition therapy.
|
21
|
|
|
In the Infusion Systems product category, net sales increased principally as a
result of the impact of the $213 million charge in the first quarter of 2010 related to the
recall of COLLEAGUE infusion pumps, as well as increased sales of Sigma International
General Medical Apparatus, LLC (SIGMA) Spectrum infusion pumps.
|
|
|
|
|
The sales decline in the Anesthesia product category was due to a reduction in
wholesaler inventory levels, as well as competitive pricing pressures related to generic
sevoflurane.
|
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 2007. Refer to Note 3 to the companys consolidated
financial statements in the 2010 Annual Report for additional information regarding the TT
divestiture.
GROSS MARGIN AND EXPENSE RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
(as a percentage of net sales)
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
Gross margin
|
|
|
51.0%
|
|
|
|
35.6%
|
|
|
15.4 pts
|
|
Marketing and administrative expenses
|
|
|
21.8%
|
|
|
|
23.3%
|
|
|
(1.5 pts
|
)
|
|
Gross Margin
Included in the companys gross margin percentage in the first quarter of 2010 was a $588 million
charge related to the recall of COLLEAGUE infusion pumps from the U.S. market, which unfavorably
impacted gross margin by 16.3 percentage points. Refer to Note 3 for further information on the
COLLEAGUE charge.
In the first quarter of 2011, sales growth for select higher margin products in the BioScience and
Medical Products segments and the favorable impact of foreign currency were more than offset by
lower prices for certain plasma protein (including Antibody Therapy) products, cost inefficiencies
driven by lower volume throughput for plasma-based therapies during 2010, lower sales of high
margin vaccines, and costs associated with manufacturing issues at the companys Castlebar, Ireland
facility.
Marketing and Administrative Expenses
The decrease in the marketing and administrative expense ratio in 2011 was principally due to the
charge to net sales related to the recall of COLLEAGUE infusion pumps, which unfavorably impacted
the marketing and administrative expense ratio in the first quarter of 2010 by 1.5 percentage
points. In the first quarter of 2011, the favorable impact of the companys business optimization
initiatives and continued focus on controlling discretionary spending was offset by increased
spending relating to certain marketing and promotional programs and increased pension expense.
Also unfavorably impacting the expense ratio in 2011 was the pharmaceutical products tax, which
became effective in the first quarter of 2011 under healthcare reform legislation enacted in the
United States in the first quarter of 2010.
RESEARCH AND DEVELOPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
|
|
|
Percent
|
|
(in millions)
|
|
2011
|
|
|
2010
|
|
|
change
|
|
|
Research and development expenses
|
|
|
$214
|
|
|
|
$227
|
|
|
|
(6%
|
)
|
As a percentage of net sales
|
|
|
6.5%
|
|
|
|
7.8%
|
|
|
|
|
|
|
Research and development (R&D) expenses decreased by $13 million in the first quarter of 2011 as
the result of the completion of clinical work on late-stage programs, lower milestone payments to
partners and efforts to reposition projects to gain organizational efficiencies, as well as the
impact of foreign currency. The first quarter of 2010 charge to net sales related to the recall of
COLLEAGUE infusion pumps unfavorably impacted the R&D expense
ratio by 0.6 percentage points in the prior year. The company continues to invest in all key R&D
programs across the product pipeline. Refer to the 2010 Annual Report for a discussion of the
companys R&D pipeline.
22
NET INTEREST EXPENSE
Net interest expense was $10 million and $19 million in the first quarters of 2011 and 2010,
respectively. The decrease in the first three months of 2011 was principally driven by lower
interest rates on outstanding debt and an increase in interest income.
OTHER EXPENSE, NET
Other expense, net was $4 million and $2 million in the first quarters of 2011 and 2010,
respectively. Included in other expense, net were amounts related to foreign currency
fluctuations, principally relating to intercompany receivables, payables and loans denominated in a
foreign currency.
PRE-TAX INCOME
Refer to Note 7 for a summary of financial results by segment. The following is a summary of
significant factors impacting the segments financial results.
BioScience
Pre-tax income increased 5% in the first quarter of 2011. The impact of strong sales of certain
higher-margin products and a reduction in R&D expenses, as further discussed above, were partially
offset by lower pricing for certain plasma protein (including Antibody Therapy) products, cost
inefficiencies driven by lower volume throughput for plasma-based therapies during 2010, lower
sales of high margin vaccines, increased spending on marketing and promotional programs, and the
pharmaceutical products tax that became effective in the first quarter of 2011.
Medical Products
Pre-tax income in the first quarter of 2011 was $356 million, compared to a pre-tax loss in the
first quarter of 2010 of $257 million. Included in the pre-tax loss in the prior year was a $588
million charge related to the recall of COLLEAGUE infusion pumps from the U.S. market. Pre-tax
income in the first quarter of 2011 benefited from strong sales growth and favorable product mix,
which was partially offset by costs associated with manufacturing issues at the companys
Castlebar, Ireland facility and the pharmaceutical products tax that became effective in the first
quarter of 2011.
Other
Certain items are maintained at the companys corporate level and are not allocated to the
segments. These amounts are detailed in the table in Note 7 and primarily include most of the
companys debt and cash and equivalents and related net interest expense, certain foreign currency
fluctuations (principally relating to intercompany receivables, payables and loans denominated in a
foreign currency) and the majority of the foreign currency hedging activities, corporate
headquarters costs, stock compensation expense, certain non-strategic investments and related
income and expense, certain employee benefit plan costs, certain nonrecurring gains and losses,
deferred income taxes, certain litigation liabilities and related insurance receivables, and the
revenues and costs related to the manufacturing, distribution and other transition agreements with
Fenwal. Refer to Note 5 regarding stock compensation expense, and the previous discussion for
further information regarding net interest expense.
INCOME TAXES
The companys effective income tax rate was 21.1% and 153.6% in the first quarter of 2011 and 2010,
respectively. The companys effective income 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 effective tax rate in the
first quarter of 2010 was impacted by a $588 million charge principally related to the recall of
COLLEAGUE infusion pumps from the U.S. market, for which there was no net tax benefit recognized,
and 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 in 2010. Refer to Note 3 for further information
regarding the COLLEAGUE charge.
23
The company anticipates that the effective tax rate for the full-year 2011 will be approximately
21.0% to 21.5%, excluding the impact of audit developments and other special items.
INCOME (LOSS) AND EARNINGS (LOSS) PER DILUTED SHARE
Net income attributable to Baxter was $570 million, or $0.98 per diluted share, for the first
quarter of 2011 compared to net loss attributable to Baxter of $63 million, or $0.11 per diluted
share, in the prior year quarter. The significant factors and events contributing to the changes
are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash flows from operations
Cash flows from operations increased during the first quarter of 2011 as compared to the prior
year, totaling $371 million in 2011 and $279 million in 2010. The increase in cash flows from
operations was primarily due to higher earnings (before non-cash items) and the other factors
discussed below.
Accounts Receivable
Cash flows relating to accounts receivable decreased during the first quarter of 2011 as compared
to the prior year. Days sales outstanding increased from 52.5 days as of December 31, 2010 to 56.0
days as of March 31, 2011 due to longer collection periods in certain international markets and, to
a lesser extent, in the United States.
Inventories
Cash outflows relating to inventories decreased in 2011 as compared to the prior year. The
following is a summary of inventories as of March 31, 2011 and December 31, 2010, as well as
annualized inventory turns for the first quarters of 2011 and 2010, by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized inventory
|
|
|
|
Inventories
|
|
|
turns for the three
|
|
|
|
March 31,
|
|
December 31,
|
|
|
months ended March 31,
|
|
(in millions, except inventory turn data)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
BioScience
|
|
$
|
1,547
|
|
|
$
|
1,455
|
|
|
|
1.37
|
|
|
|
1.29
|
|
Medical Products
|
|
|
969
|
|
|
|
914
|
|
|
|
4.15
|
|
|
|
5.77
|
|
Other
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
2,517
|
|
|
$
|
2,371
|
|
|
|
2.44
|
|
|
|
2.93
|
|
|
Lower inventory turns in the Medical Products segment and the total company were principally due to
the impact of the first quarter 2010 charge related to the recall of COLLEAGUE infusion pumps,
which increased the Medical Products and total company turns in the first quarter of 2010 by 2.01
and 0.69 turns, respectively. Inventory turns in the first quarter of 2011 were favorably impacted
by increased sales in BioScience and Medical Products, as well as a reduction in plasma-related
inventories in the BioScience segment.
Other
Cash outflows related to liabilities, business optimization and infusion pump payments, and other
decreased in the first quarter of 2011 as compared to the prior year. The impact of lower
discretionary cash contributions to the companys pension plan in the United States, which were
$150 million and $300 million in the first quarters of 2011 and 2010, respectively, was partially
offset by higher cash outflows relating to the companys business optimization initiatives and the
execution of the COLLEAGUE infusion pump recall. Refer to Note 3 for further information regarding
the business optimization initiatives and the COLLEAGUE infusion pump recall.
24
Cash flows from investing activities
Capital Expenditures
Capital expenditures decreased by $32 million in the first quarter of 2011, from $230 million in
2010 to $198 million in 2011. The companys investments in capital expenditures are focused on
projects that enhance the companys cost structure and manufacturing capabilities and support 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, pilot 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.
Acquisitions and Investments
Cash outflows relating to acquisitions and investments of $234 million in the first quarter of 2010
related to the acquisition of ApaTech, an orthobiologic products company based in the United
Kingdom. Refer to the 2010 Annual Report for further information about this acquisition.
Cash flows from financing activities
Debt Issuances, Net of Payments of Obligations
Net cash outflows related to debt and other financing obligations totaled $1 million in the first
quarter of 2011, as compared to net cash inflows of $589 million in the first quarter of 2010. 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. The net proceeds from this issuance were used for general corporate purposes,
including the refinancing of indebtedness.
Other Financing Activities
Cash dividend payments totaled $180 million and $174 million in the first quarters of 2011 and
2010, respectively. The increase in cash dividend payments was primarily due to a 7% increase in
the quarterly dividend rate compared to the prior year, partially offset by the impact of a lower
number of common shares outstanding as a result of the companys stock repurchase programs. In
February 2011, the board of directors declared a quarterly dividend of $0.31 per share, which was
paid on April 1, 2011 to shareholders of record as of March 10, 2011.
Proceeds and realized excess tax benefits from stock issued under employee benefit plans decreased
by $37 million, from $171 million in the first quarter of 2010 to $134 million in the first quarter
of 2011, due to a decrease in stock option exercises.
Stock repurchases totaled $637 million and $435 million in the first quarters of 2011 and 2010,
respectively. As authorized by the board of directors, from time to time the company repurchases
its stock depending upon the companys cash flows, net debt level and market conditions. In July
2009 and December 2010, the board of directors authorized repurchases of up to $2.0 billion and
$2.5 billion, respectively, of the companys common stock. As of March 31, 2011, $2.4 billion
remained available under the December 2010 authorization. There was no remaining availability
under the July 2009 authorization.
CREDIT FACILITIES, ACCESS TO CAPITAL AND CREDIT RATINGS
Credit facilities
The companys primary revolving credit facility has a maximum capacity of $1.5 billion and matures
in December 2011. The company also maintains a credit facility denominated in Euros with a maximum
capacity of approximately $427 million as of March 31, 2011, which matures in January 2013. These
facilities enable the company to borrow funds on an unsecured basis at variable interest rates, and
contain various covenants, including a maximum net-debt-to-capital ratio. As of March 31, 2011,
the company was in compliance with the financial covenants in these agreements. There were no
borrowings outstanding under either of the two outstanding facilities as of March 31, 2011. The
non-performance of any financial institution supporting the credit facility would reduce the
maximum capacity of these facilities by each institutions respective commitment. Refer to Note 6
to the companys consolidated financial statements in the 2010 Annual Report for further discussion
of the companys credit facilities.
25
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 $2.2 billion of cash and equivalents as of March 31, 2011. The company invests its excess cash
in certificates of deposit and money market funds, and diversifies the concentration of cash among
different financial institutions.
The 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 in the future to issue debt, enter into other financing arrangements and attract
long-term capital on acceptable terms to support the companys growth objectives.
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.
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 credit
losses.
Credit ratings
There were no changes in the companys credit ratings in the first three months of 2011. Refer to
the 2010 Annual Report for further discussion of the companys credit ratings.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. A summary of the companys significant
accounting policies is included in Note 1 to the companys consolidated financial statements in the
2010 Annual Report. Certain of the companys accounting policies are considered critical, as these
policies are the most important to the depiction of the companys financial statements and require
significant, difficult or complex judgments, often employing the use of estimates about the effects
of matters that are inherently uncertain. Such policies are summarized in the Managements
Discussion and Analysis of Financial Condition and Results of Operations section in the 2010 Annual
Report. There have been no significant changes in the companys application of its critical
accounting policies during the first quarter of 2011.
LEGAL CONTINGENCIES
Refer to Note 6 for a discussion of the companys legal contingencies. Upon resolution of any of
these uncertainties, the company may incur charges in excess of presently established liabilities.
While the liability of the company in connection with 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 that it has valid
defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the
company may in the future incur material judgments or enter into material settlements of claims.
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 U.S. Food and
Drug Administration (FDA)) relating to the performance of the pumps, as well as the seizure
litigation described in Note 6, the company entered into a Consent Decree in June 2006. 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,
26
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 3, 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 6, 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 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 EMA has recommended that the
companys manufacturing facilities located in Canada, Poland and Turkey be included in the existing
marketing authorizations for these products to ensure sufficient supply of these products in 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. Please see Item 1A of the
companys 2010 Annual Report for additional discussion of regulatory matters.
27
FORWARD-LOOKING INFORMATION
This quarterly report includes forward-looking statements, including statements with respect to
accounting estimates and assumptions, including those made in connection with the charges related
to the recall of the companys COLLEAGUE infusion pumps, litigation related matters including
outcomes, the companys efforts to recall and remediate its COLLEAGUE infusion pumps and other
regulatory matters, credit exposure to foreign governments, the impact of the acquisition of Prism
Pharmaceuticals, contingent payments, estimates of liabilities, expectations with respect to the
companys hedging activities including its exposure to financial market volatility and foreign
currency risk, future capital and R&D expenditures, the sufficiency of the companys financial flexibility and the adequacy of credit
facilities and reserves, the effective tax rate in 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:
|
|
|
demand for and market acceptance risks for new and existing products, such as ADVATE
and plasma-based therapies (including Antibody Therapy), and other therapies;
|
|
|
|
|
fluctuations in supply and demand and the pricing of plasma-based therapies;
|
|
|
|
|
healthcare reform legislation in the United States including its effect on pricing,
reimbursement, taxation and rebate policies;
|
|
|
|
|
future actions of governmental authorities and other third parties including third party
payers as healthcare reform legislation and other similar measures are implemented in the
United States and globally;
|
|
|
|
|
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;
|
|
|
|
|
the companys ability to identify business development and growth opportunities for new
and existing products;
|
|
|
|
|
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;
|
|
|
|
|
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 report and other filings with the Securities
and Exchange Commission, including those factors described in Item 1A in the companys Form
10-K for the year ended December 31, 2010, 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.
28
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Currency Risk
The company is primarily exposed to foreign exchange risk with respect to recognized assets and
liabilities, forecasted transactions and net assets denominated in the Euro, Japanese Yen, British
Pound, Australian Dollar, Canadian Dollar, 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 uses options, forwards and cross-currency swaps to hedge the foreign exchange risk to
earnings relating to forecasted transactions denominated in foreign currencies and recognized
assets and liabilities. The maximum term over which the company has cash flow hedge contracts in
place related to forecasted transactions as of March 31, 2011 is 18 months. The company also uses
derivative instruments to hedge certain intercompany and third-party receivables and payables and
debt denominated in foreign currencies.
Currency restrictions enacted in Venezuela require Baxter to obtain approval from the Venezuelan
government to exchange Venezuelan Bolivars for U.S. Dollars and requires 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. Effective
January 1, 2011, the Venezuela 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 and as a result, the functional currency of the companys subsidiary in
Venezuela became 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 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 as of March 31, 2011, 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 $2 million with respect to those contracts would decrease by $39 million,
resulting in a net liability position.
The sensitivity analysis model recalculates the fair value of the foreign exchange option and
forward contracts outstanding as of March 31, 2011 by replacing the actual exchange rates as of
March 31, 2011 with exchange rates that are 10% unfavorable to the actual exchange rates for each
applicable currency. All other factors are held constant. The sensitivity analysis disregards 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 analysis also disregards
the offsetting change in value of the underlying hedged transactions and balances.
Interest Rate and Other Risks
Refer to the caption Interest Rate and Other Risks in the Financial Instrument Market Risk
section of the companys 2010 Annual Report. There were no significant changes during the quarter
ended March 31, 2011.
29
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Baxter carried out an evaluation, under the supervision and with the participation of its
Disclosure Committee and management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of Baxters disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act))
as of March 31, 2011. Based on that evaluation the Chief Executive Officer and Chief Financial
Officer concluded that the companys disclosure controls and procedures were effective as of March
31, 2011.
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 March 31, 2011 that have materially affected, or are
reasonably likely to materially affect, Baxters internal control over financial reporting.
30
Review by Independent Registered Public Accounting Firm
Reviews of the interim condensed consolidated financial information included in this Quarterly
Report on Form
10-Q for the three months ended March 31, 2011 and 2010 have been performed by
PricewaterhouseCoopers LLP, the companys independent registered public accounting firm. Its
report on the interim condensed consolidated financial information follows. This report is not
considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and
therefore, the independent accountants liability under Section 11 does not extend to it.
31
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Baxter International Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Baxter International Inc.
and its subsidiaries as of March 31, 2011 and the related condensed consolidated statements of
income (loss) for each of the three-month periods ended March 31, 2011 and 2010 and the condensed
consolidated statements of cash flows for the three-month periods ended March 31, 2011 and 2010.
These interim financial statements are the responsibility of the companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the objective of which
is the expression of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying condensed consolidated interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet as of December 31, 2010, and the related
consolidated statements of income, of cash flows and of changes in equity and comprehensive income
for the year then ended, and in our report dated February 23, 2011, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2010, is fairly stated in
all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
May 3, 2011
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information in Part I, Item 1, Note 6 is incorporated herein by reference.
33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table includes information about the companys common stock repurchases during the
three-month period ended March 31, 2011.
Issuer Purchases of Equity Securities
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number
|
|
|
|
|
|
Total number of shares
|
|
Approximate dollar value of
|
|
|
of shares
|
|
Average price
|
|
purchased as part of publicly
|
|
shares that may yet be purchased
|
|
Period
|
purchased(1)(2)
|
|
paid per share
|
|
announced programs(1)(2)
|
|
under the program(2)
|
|
|
January 1, 2011
through January 31, 2011
|
|
|
2,106,200
|
|
|
$
|
50.14
|
|
|
|
2,106,200
|
|
|
|
|
|
February 1, 2011
through February 28, 2011
|
|
|
5,924,923
|
|
|
$
|
50.63
|
|
|
|
5,924,923
|
|
|
|
|
|
March 1, 2011
through March 31, 2011
|
|
|
4,416,600
|
|
|
$
|
52.44
|
|
|
|
4,416,600
|
|
|
|
|
|
|
Total
|
|
|
12,447,723
|
|
|
$
|
51.19
|
|
|
|
12,447,723
|
|
|
$
|
2,359,153,603
|
|
|
|
|
|
(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 first quarter of 2011, the company repurchased approximately 9.7
million shares for $496 million under this program. No shares remained available under this
authorization as of March 31, 2011.
|
|
(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. During the first quarter of 2011, the company repurchased approximately 2.7
million shares for $141 million under this program. This program does not have an expiration
date.
|
34
Item 6. Exhibits
Exhibit Index:
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
10.1
|
|
Baxter International Inc. Equity
Plan Adopted as of March 4, 2011
|
|
|
|
15
|
|
Letter Re Unaudited Interim Financial Information
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
|
|
|
|
101.INS*
|
|
XBRL Instance Document
|
|
|
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.LAB*
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
35
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
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|
|
|
|
BAXTER INTERNATIONAL INC.
|
|
|
(Registrant)
|
|
Date: May 3, 2011
|
By:
|
/s/ Robert J. Hombach
|
|
|
|
Robert J. Hombach
|
|
|
|
Corporate Vice President and Chief Financial Officer
(duly authorized officer and
principal financial officer)
|
|
|
36
EXHIBIT 10.1
Baxter International Inc.
Equity Plan
Adopted as of March 4, 2011
1. Purpose
This Equity Plan (the
Plan
) has been adopted by the Compensation Committee (the
Committee
) of the Board of Directors (the
Board
) of Baxter International Inc.
(
Baxter
).
2. Participants
Participants in this Plan (each a
Participant
) shall be select employees of Baxter or its
subsidiaries (the
Company
) to whom the Committee may make awards of Stock Options (each
an
Option
), Performance Share Units (each a PSU) and Restricted Stock Units (each a
RSU
, and together with Options and PSUs,
Awards
) under this Plan.
3. Awards
Awards shall be made pursuant to and for the purposes stated in the Company incentive compensation
program or plan (the
Program
) identified in the individual grant materials provided to
the Participant (the
Grant
). Such Grant materials consist of a communication letter to
Participants notifying them of their Awards and may include alternative terms with respect to
vesting, in which case the vesting terms in the Grant communication letter shall govern. All
Awards granted hereunder shall be subject to the Companys Incentive Compensation Recoupment Policy
or Executive Compensation Recoupment Policy, as applicable. Each Award shall be granted as of the
date approved and as provided in the Grant, or for eligible French employees as soon thereafter as
practicable pursuant to applicable French law (as provided in the attached French Addendum which
shall govern such Awards) (the
Grant Date
). Each Award shall be granted as of the date
approved and as provided in the Grant (the
Grant Date
). The purchase price for each
share of Common Stock subject to an Option shall be the Fair Market Value of a share of Common
Stock on the Grant Date. The terms of each Award will be as set forth in this Plan. Unless
otherwise indicated, terms defined in the Program shall have the same meaning in these terms and
conditions. Options are not intended to qualify as Incentive Stock Options within the meaning of
section 422 of the United States Internal Revenue Code, as amended (the
Code
).
4. Options
4.1.
Except for Options granted to employees of the Companys subsidiaries in France, Options shall
become exercisable as follows: (i) one-third on the first anniversary of the Grant Date, (ii)
one-third on the second anniversary of the Grant Date, and (iii) the remainder on the third
anniversary of the Grant Date. Options granted to employees of the Companys subsidiaries in
France shall become exercisable on the fourth anniversary of the Grant Date. If Options would
become exercisable on a date that is not a business day, they will become exercisable on the next
business day. A business day is any day on which the Companys Common Stock is traded on the New
York Stock Exchange. After Options become exercisable (in each case, in whole or in part) and until
they expire, the Options may be exercised in whole
or in part, in the manner specified by the
Committee. Under no circumstances may Options be exercised after they have expired. Shares of
Common Stock may be used to pay the purchase price for shares of Common Stock to be acquired upon
exercise of Options or fulfill any tax withholding obligation, subject to any requirements or
restrictions specified by the Committee.
4.2.
If a Participants employment with the Company terminates before the Participants Options
becomes exercisable, the Options will expire when the Participants employment with the Company
terminates, except (i) in connection with a Qualifying Retirement or death or disability (each as
outlined below) or (ii) if the Participant is rehired by the Company within ninety days of
termination, in which case the Participant shall be construed to have been continuously employed by
the Company for purposes of vesting and exercise.
4.3.
If a Participants employment with the Company terminates after the Participants Options
become exercisable, the Options will not expire immediately but will remain exercisable. Subject
to Section 4.6, and except in the event of a Qualifying Retirement (as provided in Section 4.4),
the Options will expire ninety days after the Participants employment with the Company terminates.
If the Participant dies or becomes disabled during the ninety-day period, the Options will expire
on the first anniversary of the termination date.
4.4.
If the employment of a Participant who is at least 65 years of age, or at least 55 years of
age with at least 10 years of employment with the Company, is terminated other than for Cause or by
reason of the Participants death or disability (a
Qualifying Retirement
) then (i) if the
date of such termination is after the calendar year of the Grant Date, the Options shall continue
to vest as provided in Section 4.1, or (ii) if the date of such termination is in the calendar year
of the Grant Date, a portion of the Options shall continue to vest as provided in Section 4.1,
which portion shall be determined as follows: (# shares covered by Option award) * (# of months
worked in that year, rounded to nearest whole month) / 12. Subject to Section 4.6, the
Participants Options (whether vesting pursuant to (i) or (ii) or previously vested) shall expire
on the fifth anniversary of the termination date.
4.5.
If the employment of a Participant is terminated due to death or disability, then (i) if the
date of such termination is after the calendar year of the Grant Date, the Options shall vest
immediately, or (ii) if the date of such termination is in the calendar year of the Grant Date, a
portion of the Options shall vest immediately, which portion shall be determined as follows: (#
shares covered by Option award) * (# of months worked in that year, rounded to nearest whole month)
/ 12. Subject to Section 4.6, such Options will expire on the first anniversary of the termination
date.
4.6.
Options that have not previously expired will expire at the close of business on the tenth
anniversary of the Grant Date; provided, however, that Options granted to employees residing in
Switzerland on the Grant Date shall expire on the eleventh anniversary of the Grant Date. If
Options would expire on a date that is not a business day, they will expire at the close of
business on the last business day preceding that date. A business day is any day on which the
Common Stock is traded on the New York Stock Exchange.
4.7.
Except as the Committee may otherwise provide, Options may only be exercised by the
Participant, the Participants legal representative, or a person to whom the Participants rights
in the Options are transferred by will or the laws of descent and distribution.
4.8.
A transfer of employment within the Company will not constitute a termination of employment
within the meaning of the Plan.
4.9.
A transfer of employment to a company that assumes an Option or issues a substitute option in
a transaction to which Section 424 of the Code applies will not constitute a termination of
employment within the meaning of the Plan.
4.10.
Except to the extent that it would cause the Option to be subject to Section 409(A) of the
Code, the Committee may, in its sole discretion and without receiving permission from any
Participant, substitute stock appreciation rights (
SARs
) for any or all outstanding
Options. Upon the grant of substitute SARs, the related Options replaced by the substitute SARs
shall be cancelled. The grant price of the substitute SARs shall be equal to the Option Price of
the related Options, the term of the substitute SARs shall not exceed the term of the related
Options, and the terms and conditions applicable to the substitute SARs shall otherwise be
substantially the same as those applicable to the related Options replaced by the substitute SARs.
Upon exercise, the SARs will be settled in Common Stock.
5. Performance Share Units
5.1.
The PSUs will be earned based on the rank of Baxters growth in shareholder value
(
GSV
) relative to the GSV of companies in the healthcare peer group selected by the
Committee. GSV will be measured over a three-year period beginning with the first day of the
calendar year of the Grant Date and ending on the last day of the third calendar year (the
Performance Period
).
The PSUs will pay out in shares of Common Stock in a range of 0% to 200% of the number of PSUs
awarded to the Participant as follows:
|
|
|
|
|
Baxter Rank
|
|
Percentage of Target Grant Earned
|
85th percentile of peer group or above
|
|
|
200
|
%
|
75th percentile
|
|
|
150
|
%
|
60th percentile
|
|
|
100
|
%
|
25th percentile
|
|
|
25
|
%
|
Below 25th percentile
|
|
|
0
|
%
|
The PSUs will pay out linearly between each set of data points. GSV will be measured based on
the average closing stock prices over the last twenty days of the Performance Period (plus
reinvested dividends) divided by average closing stock prices over the twenty trading days prior to
the beginning of the Performance Period.
Following the end of the Performance Period, the Committee shall determine the payout, which
determination shall be final and binding. Shares of Common Stock earned will be delivered or
otherwise made available to the Participant as soon as practical after the Committee makes its
determination but not later than the March 15 after the end of the Performance Period. PSUs will
only be settled in shares of Common Stock. Any other settlement modality shall be considered an
exception, which would have to be approved separately by the Committee.
5.2.
If a Participants employment with the Company terminates before the end of the Performance
Period, any unvested PSUs shall be forfeited on the effective date of termination, except (i) in
connection with a Qualifying Retirement or death or disability (each as outlined below), or (ii) if
the Participant is rehired by the Company within ninety days of termination, in which case the
Participant shall be construed to have been continuously employed by the Company for purposes of
vesting.
5.3.
If the employment of a Participant terminates in a Qualifying Retirement then (i) if the date
of such termination is after the calendar year of the Grant Date, the PSUs will remain eligible for
payout at the end of the Performance Period on the terms provided in Section 5.1, or (ii) if the
date of such termination is in the calendar year of the Grant Date a portion of the PSUs shall
remain eligible for payout at the end of the Performance Period on the terms provided in Section
5.1, which portion shall be determined as follows: (# PSUs awarded) * (# of months worked in that
year, rounded to nearest whole month) / 12.
5.4.
If the employment with the Company of a Participant is terminated due to death or disability,
the PSUs shall vest as follows: (i) if the date of such termination is after the calendar year of
the Grant Date, the PSUs shall pay out within sixty days at 100% of the Target Grant (as depicted
in the table in Section 5.1.), or (ii) if the date of such termination is in the calendar year of
the Grant Date a portion of the PSUs shall pay out as provided in (i), which portion shall be
determined as follows: (# PSUs awarded) * (# of months worked in that year, rounded to nearest
whole month) / 12.
5.5.
The PSUs shall not be transferable and may not be sold, assigned, pledged, hypothecated or
otherwise encumbered.
5.6.
A transfer of employment within the Company will not constitute a termination of employment
within the meaning of the Plan.
5.7.
Until the shares of Common Stock have been delivered or otherwise made available as provided
in Section 5.1, the Participant shall not be treated as a shareholder as to those shares of Common
Stock relating to the PSUs. Notwithstanding the foregoing, the Participant shall be permitted to
receive additional PSUs with respect to the PSUs based upon the dividends and distributions paid on
shares of Common Stock to the same extent as if each PSU were a share of Common Stock (without
adjustment prior to vesting for payment levels set forth in the table in Section 5.1), which
additional PSUs shall be determined in amount and value in the Companys discretion and shall be
delivered or made available at the same time and to the same extent as the PSUs to which they
relate or as otherwise determined by the Company.
6. Restricted Stock Units
6.1.
Except for RSUs granted to the employees of the Companys subsidiaries in France, RSUs are
subject to being earned and vested as follows: (i) one-third on the first anniversary of the Grant
Date, (ii) one-third on the second anniversary of the Grant Date, and (iii) the remainder on the
third anniversary of the Grant Date (as applicable, the
Vesting Date
). RSUs granted to
the employees of the Companys subsidiaries in France are subject to being earned and vested on the
second anniversary of the Grant Date in accordance with the attached French Addendum. If RSUs
would become earned and vested on a date that is not a business day, the next business day shall be
the Vesting Date. The Company will deliver or otherwise make available to the Participant within
2
1
/
2
months following the applicable Vesting Date one share of Common Stock for each RSU that vests.
RSUs will only be settled in shares of Common Stock. Any other settlement method would be
considered an exception and would have to be approved separately by the Committee.
6.2.
If a Participants employment with the Company terminates before an RSU Vesting Date, the RSU
will be forfeited when the Participants employment with the Company terminates, except (i) in
connection with a Qualifying Retirement or death or disability (each as outlined below), or (ii) if
the Participant is rehired by the Company within ninety days of termination, in which case the
Participant shall be construed to have been continuously employed by the Company for purposes of
vesting and payout.
6.3.
If the employment of a Participant terminates in a Qualifying Retirement then (i) if the date
of such termination is after the calendar year of the Grant Date, the RSUs will remain eligible for
payout on the terms provided in Section 6.1, or (ii) if the date of such termination is in the
calendar year of the Grant Date a portion of the RSUs shall remain eligible for payout on the terms
provided in Section 6.1, which portion shall be determined as follows: (# RSUs awarded) * (# of
months worked in that year, rounded to nearest whole month) / 12.
6.4.
If the employment with the Company of a Participant is terminated due to death or disability,
the RSUs shall vest as follows: (i) if the date of such termination is after the calendar year of
the Grant Date, all the RSUs shall pay out within sixty days, or (ii) if the date of such
termination is in the calendar year of the Grant Date a portion of the RSUs shall pay out as
provided in (i), which portion shall be determined as follows: (# RSUs awarded) * (# of months
worked in that year, rounded to nearest whole month) / 12.
6.5.
The RSUs shall not be transferable and may not be sold, assigned, pledged, hypothecated or
otherwise encumbered.
6.6.
A transfer of employment within the Company will not constitute a termination of employment
within the meaning of the Plan.
6.7.
Until the shares of Common Stock have been delivered or otherwise made available as provided
in Section 6.1, the Participant shall not be treated as a shareholder as to those shares of Common
Stock relating to the RSUs. Notwithstanding the foregoing, the Participant shall be permitted to
receive additional RSUs with respect to the RSUs based upon the dividends and distributions paid on
shares of Common Stock to the same extent as if each RSU were a share of Common Stock, which
additional RSUs shall be delivered or made available at the same time and to the same extent as the
RSUs to which they relate or as otherwise determined by the Company.
7. Change in Control
Notwithstanding any other provision of the Program or this Plan (and in lieu of vesting at the
times otherwise provided in the Program), if the termination of employment of a Participant occurs
upon or within twenty-four (24) months following a Change in Control by reason of (a) termination
by the Company for reasons other than for Cause or (b) termination by the Participant for Good
Reason, then (i) all Awards shall become immediately vested and exercisable, and (ii) in the case
of PSUs, all performance targets shall be deemed to be met at 100% of the Target Grant (consistent
with the table in Section 5.1), as may be equitably increased in the discretion of the Committee to
reflect actual performance through the date of the Change in Control.
8. Additional Definitions
For purposes of the Plan, the following capitalized terms shall have the meanings provided below.
Affiliate
shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of
the Securities Exchange Act of 1934, as amended.
Cause
means (i) the willful and continued failure by the Participant to substantially
perform his duties with the Company that has not been cured within 30 days after written demand for
substantial performance is delivered by the Company, which demand specifically identifies the
manner in which the Participant has not substantially performed (other than any such failure
resulting from the Participants incapacity due to physical or mental illness), (ii) the willful
engaging by the Participant in conduct which is demonstrably and materially injurious to the
Company, monetarily or otherwise, or (iii) the engaging by the Participant in egregious misconduct
involving serious moral turpitude, determined in the reasonable judgment of the Committee. For
purposes hereof, no act, or failure to act, on the Participants part shall be deemed willful
unless done, or omitted to be done, by the Participant not in good faith and without reasonable
belief that such action was in the best interest of the Company. Notwithstanding the foregoing, if
a Participant is a party to a Change in Control Agreement, Cause with respect to such Participant
shall have the meaning given to such term in the Change in Control Agreement.
Change in Control
means the first to occur of any of the following: (i) any Person is or
becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of Baxter (not including in the securities beneficially owned by such
Person any securities acquired directly from the Company or its Affiliates) representing 30% or
more of the combined voting power of Baxters then outstanding securities, excluding any Person who
becomes such a beneficial owner in connection with a merger or consolidation of Baxter or any
direct or indirect subsidiary of Baxter with any other corporation immediately following which the
individuals who comprise the Board immediately prior thereto constitute at least a majority of the
board of directors of (A) any parent of Baxter or the entity surviving such merger or consolidation
or (B) if there is no such parent, of Baxter or such surviving entity; (ii) the following
individuals cease for any reason to constitute a majority of the number of directors then serving:
individuals who, on the Grant Date, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation, relating to the election of directors
of Baxter) whose appointment or election by the Board or nomination for election by Baxters
shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on the Grant Date or whose appointment, election or
nomination for election was previously so approved or recommended; (iii) there is consummated a
merger or consolidation of Baxter or any direct or indirect subsidiary of Baxter with any other
corporation or other entity, other than a merger or consolidation immediately following which the
individuals who comprise the Board immediately prior thereto constitute at least a majority of the
board of directors of (A) any parent of Baxter or the entity surviving such merger or consolidation
or (B) if there is no such parent, of Baxter or such surviving entity; or (iv) the shareholders of
Baxter approve a plan of complete liquidation
or dissolution of Baxter or there is consummated an
agreement for the sale or disposition by Baxter of all or substantially all of Baxters assets,
other than a sale or disposition by Baxter of all or substantially all of Baxters assets
immediately following which the individuals who comprise the Board immediately prior thereto
constitute at least a majority of the board of directors of (A) any parent of Baxter or of the
entity to which such assets are sold or disposed or (B) if there is no such parent, of Baxter or
such entity.
Change in Control Agreement
means an employment agreement, change in control agreement or
plan, severance agreement or plan, or other agreement between the Company and a Participant or
Company plan covering a Participant that provides for benefits upon termination for good reason or
cause in connection with a change in control of Baxter and that has been approved by the Board or
the Committee.
Good Reason
means the occurrence (without the Participants express written consent) of
any of the following which occur on or after a Change in Control: (i) reduction by the Company in
the Participants annual base salary as in effect on the Grant Date or as the same may be increased
from time to time; (ii) the relocation of the Participants principal place of employment to a
location more than fifty (50) miles from the Participants principal place of employment
immediately prior to the Change in Control or the Companys requiring the Participant to be based
anywhere other than such principal place of employment (or permitted relocation thereof) except for
required travel on the Companys business to an extent substantially consistent with the
Participants business travel obligations as in effect immediately prior to the Change in Control;
or (iii) the failure by the Company to pay to the Participant any portion of the Participants
current compensation or to pay to the Participant any portion of an installment of deferred
compensation under any deferred compensation program of the Company, within seven (7) days of the
date such compensation is due. Notwithstanding the foregoing, if a Participant is a party to a
Change in Control Agreement, Good Reason with respect to such Participant shall have the meaning
given to such term in the Change in Control Agreement.
Person
shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of
1934, as amended, as modified and used in Sections 13(d) and 14(d) thereof, except that such term
shall not include (i) Baxter or any of its subsidiaries, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of Baxter or any of its Affiliates, (iii) an underwriter
temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by the shareholders of Baxter in substantially the same proportions
as their ownership of stock of Baxter.
9. Withholding
Except as otherwise provided by the Committee, all Awards (including the payout of Awards) under
the Plan are subject to withholding of all applicable taxes, which withholding obligations may be
satisfied, with the consent of the Committee, through the surrender of shares of Company Common
Stock that the Participant already owns or to which a Participant is otherwise entitled under the
Plan; provided, however, with the consent of the Committee, previously-owned Shares that have been
held by the Participant or Shares to which the Participant is entitled under the Plan may only be
used to satisfy the minimum tax withholding required by applicable law (or other rates that will
not have a negative accounting impact).
10. Program Controls
Except as specifically provided in the Plan, in the event of any inconsistency between the Plan and
the Program, the Program will control, but only to the extent such Program provisions will not
violate the provisions of section 409A of the Code.
BAXTER INTERNATIONAL INC.
French Addendum To 2011 Equity Plan
Adopted as of March 4, 2011
1. PURPOSES OF THIS ADDENDUM
The Baxter International Inc. 2007 Incentive Plan (the
Program
) was adopted by the Board
of the Company on February 13, 2007 and approved by the shareholders of the Company on May 1, 2007
for the benefit of employees, officers and directors, of the Company and its Affiliates, including
its French subsidiary(ies).
This Addendum (the
Addendum
) approved on March 4, 2011, sets out the terms for French
Qualified Stock Options and French Qualified Free Shares granted jointly under the 2007 Incentive
Plan (the
Program
) and the Equity Plan (the
Plan
) adopted as of March 4, 2011
by Baxter International Inc. (the
Company
) to Eligible Participants, residents in France,
or otherwise selected by the Committee for participation under this Addendum. This Addendum is
adopted in accordance with Sections 3 Administration and 9 Amendment and Termination of the
Program to benefit from the specific tax and social security treatment applicable in France to
Qualified Option Awards and Qualified Free Share Awards.
For the avoidance of doubt, the present Addendum is not applicable to awards paid in cash and to
awards of Performance Shares, Restricted Shares, Performance Units, Cash Incentive Awards or Stock
Appreciation Rights. Consequently, dispositions of the Program and/or the Plans applicable to these
are not applicable to Awards made further to the present Addendum.
The rules contained in the Program and the Plans will apply to Awards made under this Addendum,
unless specifically stated otherwise. The terms and conditions of the present Addendum are
identical to the Plan except as provided below. Words and expressions used in this Addendum and not
defined herein shall have the same meaning as those words and expressions used in the Program and
Plans. The additional terms and conditions in this Addendum are to be read in conjunction with the
Program and Plans.
To the extent that the Program and the Plans contradict the provisions set forth hereinafter, the
Addendum provisions shall prevail. In addition, to the extent that the terms and conditions
specified in the applicable grant communication letter contradict the provisions set forth
hereinafter, the Addendum provisions shall prevail.
2. OPTION AWARDS
2.1. General
The Addendum contains the term of Qualified Stock Option which refers to the awards of Options
granted as per Section 6 of the Program jointly with Section 4 of the Equity Plan in accordance
with articles L.225-177 to L.225-185 of the French Commercial Code. Consequently, the terms Stock
Option, Options, Qualified Stock Option Awards and Option Award herein shall be construed
and interpreted accordingly.
2.2. Grant of Options
Notwithstanding the provisions of the Plan, the following rules shall apply to Options Awards
granted under this Addendum.
In no event shall the number of shares of Common Stock subject to outstanding unexercised Options
granted pursuant to this Addendum give right to subscribe shares exceeding one-third (1/3) of the
Companys share capital. The total number of shares of Common Stock that may be granted to
Participants under this Addendum shall not exceed 10% of the Granting Companys share capital at
Grant Date, when Options are over existing shares. Outstanding unvested Full Value Awards shall be
treated as shares of Common Stock in order to determine the threshold of 10% of the granting
Companys share capital.
If an Option provides a right to acquired already existing shares / treasury shares, the Company
shall procure sufficient shares to satisfy the Exercise of such Option at least one day prior to
the Participants having the right to Exercise such Option. Shares acquired by the Participant
upon Option Exercise shall be registered in the name of the Participant or held in an identifiable
account. Participants will have the voting and dividend rights attached to the Shares acquired upon
Exercise Date as of that date. Upon Exercise, no cash replacement of shares of Common Stock is
allowed.
Any market repurchased shares of Common Stock to be delivered to Eligible Individuals upon exercise
of Awards granted hereunder shall be acquired by the Company at least one (1) day before the
applicable vesting date. The Vesting Date designates the date upon which options, in full or in
part, become exercisable by the Participant.
2.3. Grant Date
No Options may be granted under this Addendum: (a) before the end of a period of twenty (20)
trading days following (i) a dividend record date for any dividend or (ii) an agreement by the
shareholders of the Company to increase the issued share capital of the Company; (b) within a
period of ten (10) trading days before and after the publication of consolidated accounting results
of the Company (e.g., the filing of an Annual Report on Form 10-K); or (c) within a period
beginning with the date upon which the Companys executive officers become aware of any nonpublic
information that, if it were to become publicly known, would reasonably be expected to affect the
value of the Companys shares of Common Stock and ending ten (10) trading days after that
information has been publicized.
The Grant Date shall be the date upon which the Committee approves grants to Eligible Individuals
or as soon thereafter as possible, ensuring that the above dispositions are respected. The Grant
date shall be stated in the grant documentation letter.
2.4. Eligible Individuals
Notwithstanding the provisions of Sections 2(k) and 4 of the Plan, Section 2 of the Equity Plan,
Options may only be granted under this Addendum to Eligible Individuals. No Option Award may be
made to Eligible Individuals holding more than ten percent (10%) of the issued share capital in the
Company.
2.5. Option Price
The Option Price shall be the greatest of: (a) the Fair Market Value of a share of Common Stock on
the Grant Date; (b) eighty percent (80%) of the average opening price of a share of Common Stock
over the twenty (20) trading days preceding Grant Date; (c) if treasury shares are used to satisfy
exercise of the Options, eighty percent (80%) of the average repurchase price per share paid by the
Company for such treasury shares. The Option Price is stated in the grant documentation letter and
is fixed on the Grant Date.
2.6. Adjustment to Option Price
The number of Options and the Option Price for grants made pursuant to this Addendum may be
adjusted in connection with changes in capital operations described in article L.225-181 of the
French Commercial Code so that economic rights are maintained.
2.7. Vesting and Exercise of Options
Options granted pursuant to this Addendum shall first become exercisable on the fourth (4th)
anniversary of the Grant Date. In case of earlier exercise of Options further notably to Change of
Control or Termination of Employment, the Committee may, upon discretionary decision, impose a
share sale restriction to the Participant until the fourth anniversary of grant to secure
eligibility to the French stock-option regime.
2.8. Termination of Employment
Notwithstanding anything to the contrary, no Option may be exercised before the first anniversary
of the Grant Date and shares underlying Options exercised before the fourth anniversary of the
Grant Date shall be subject to a share sale restriction until the fourth anniversary of grant. By
exception, the Committee may discretionarily decide that Options may be exercised at an earlier
date and / or shares sold at an earlier date.
If a Participants employment with the Company terminates after the Participants Options become
exercisable, the Options will not expire immediately but will remain exercisable. Subject to
Section 4.6 of the Plans, and except in the event of a Qualifying Retirement, the Options will
expire ninety days after the Participants employment with the Company terminates. If the
Participant dies or becomes disabled during the ninety-day period, the Options will expire on the
first anniversary of the termination date.
If the employment of a Participant who is at least 65 years of age, or at least 55 years of age
with at least 10 years of employment with the Company, is terminated other than for Cause or by
reason of the Participants death or disability (a
Qualifying Retirement
) then (i) if the
date of such termination is after the calendar year of the Grant Date, the Options shall continue
to vest as provided in Section 2.7, or (ii) if the date of such termination is in the calendar year
of the Grant Date, a portion of the Options shall continue to vest as provided in Section 2.7,
which portion shall be determined as follows: (# shares covered by Option award) * (# of months
worked in that year, rounded to nearest whole month) / 12. Subject to Section 4.6 of the Plans, the
Participants Options (whether vesting pursuant to (i) or (ii) or previously vested) shall expire
on the fifth anniversary of the termination date.
If the employment of a Participant is terminated due to death, all Options shall vest immediately
and the shares shall be immediately transferable.
If the employment of a Participant is terminated due to disability corresponding to the 2nd or 3rd
categories of Article L.341-4 of the French Social Security Code 1, then (i) if the date of such
termination is after the calendar year of the Grant Date, the Options shall vest immediately, or
(ii) if the date of such termination is in the calendar year of the Grant Date, a portion of the
Options shall vest immediately, which portion shall be determined as follows: (# shares covered by
Option award) * (# of months worked in that year, rounded to nearest whole month) / 12. Subject to
Section 4.6, such Options will expire on the first anniversary of the termination date. The shares
acquired upon option exercise shall be immediately transferable.
If the employment of a Participant is terminated due to disability other than to the 2nd or 3rd
categories of Article L.341-4 of the French Social Security Code, then (i) if the date of such
termination is after the calendar year of the Grant Date, the Options shall continue to vest as
provided in Section 2.7, or (ii) if the date of such termination is in the calendar year of the
Grant Date, a portion of the Options shall continue to vest as provided in Section 2.7, which
portion shall be determined as follows: (# shares covered by Option award) * (# of months worked in
that year, rounded to nearest whole month) / 12. Subject to Section 4.6, such Options will expire
on the first anniversary of the termination date.
2.9. Substitution of SARs for Options Tandem Awards
Neither SARs nor any other incentive may be substituted for Options granted pursuant to this
Addendum. No tandem awards may be made pursuant to this Addendum.
3. FULL VALUE AWARDS
3.1. Definitions
Full Value Award
means a grant made by Baxter International Inc. to the Participant of a
right to receive one Share in the future at a nil cost, in the form of a Restricted Stock Unit.
Such grant can be paid exclusively in shares of Common Stock, is awarded respectively in accordance
with Section 7 of the Program, in accordance with Section 5 of the 2011 Annual Equity Plan for
Restricted Stock Units, and in accordance with articles L.225-197-1 to L.225-197-6 of the French
Commercial Code on Qualified Free Shares Awards. Such grant cannot be subject to conditions,
restrictions and contingencies relating to dividend or dividend equivalent rights and deferred
payment or settlement. The purpose of this Addendum is to ensure that grants over shares of Common
Stock are in conformity with the applicable French legislation, and are entitled to the
corresponding specific French tax and social security treatment. One (1) award gives right to
acquire one (1) share subject to satisfaction of applicable considerations, contingencies,
conditions, restrictions, if any.
Grant Date
means the date on which the Committee designates the Participant eligible to
receive a Full Value Award further to the present Addendum, and specifies the terms and conditions
of such Award, including the maximum number of underlying shares, the Vesting and Share Sale
Restriction Periods. The Grant Date is stated in the grant communication letter.
Vesting Date
means the date on which the Participant acquires the shares of Common Stock.
The Vesting Date is stated in the grant communication letter.
3.2. Grant
Notwithstanding the provisions of the Plan, the following rules shall apply to Full Value Awards
granted under this Addendum.
The total number of shares of Common Stock that may be granted to Participants under this Addendum
shall not exceed 10% of the Granting Companys share capital at Grant Date. Outstanding unvested
Full Value Awards shall be treated as shares of Common Stock in order to determine the threshold of
10% of the granting Companys share capital. Shares of Common Stock of the Company to be delivered
under the Plan may be market repurchased shares (already existing shares) or newly issued shares.
For Full Value Awards granted over already existing shares, corresponding shares shall be
repurchased by the Company at least one day before the applicable Vesting Date.
A Full Value Award may not be made to employees and/or Corporate Officers holding more than 10% of
the issued share capital in the Company or who, after having received shares under a Full Value
Award granted hereunder, would hold more than 10% of the issued share capital in the Company.
Shares acquired by the Participant upon Vesting Date will be registered in the name of the
Participant or be held in an identifiable account. Participants will have the voting and dividend
rights attached to the Shares acquired upon Vesting Date as of that date.
3.3. Vesting period / Performance period
Notwithstanding anything to the contrary, in relation to Full Value Awards, the Vesting Date shall
not be earlier than the second anniversary of the Grant Date, in any circumstances other than in
the event of the death of the Participant or in the event of disability corresponding to the 2nd or
3rd categories of Article L.341-4 of the French Social Security Code
1
.
Unless otherwise stated in the grant documentation letter, the Vesting Date for Restricted Stock
Units shall be the second anniversary of the Grant Date. The Board of Directors or the Committee
reserves the right to reduce or modify the Vesting Date in accordance with and to conform with any
amendments to the French Tax Code and/or to the provisions of the French Commercial Code governing
Qualified Free Shares. By exception, the Board or the Committee may discretionarily decide that
Vesting Date may occur before the second (2nd) anniversary of the Grant Date.
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For information purposes, please note
that
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Second category stands for a disabled person unable to perform any
professional activity; and
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Third category stands for a disabled person unable to perform any
professional activity and requiring third party assistance in order to perform
everyday life tasks.
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3.4. Share Sale Restriction Period
As of the Vesting Date, shares of Common Stock acquired pursuant to Full Value Award are subject to
a minimum of two (2) year share sale restriction, during which the shares may not be sold (the
Share Sale Restriction Period
). If the Participant leaves the employment of the Company
or any Affiliate(s), at any time after the Vesting Date, the shares acquired shall not be freely
transferable before the expiration of the Share Sale Restriction Period.
By exception, in the event of the Participants death, the heirs shall not be subject to the Share
Sale Restriction Period, the shares being freely transferable upon the Participants death. By
exception, notwithstanding any provision of the Plan and the present Addendum to the contrary, in
case of disability corresponding to the 2nd or 3rd categories of Article L.341-4 of the French
Social Security Code1, the Participant is entitled to sell the shares prior to the end of the Share
Sale Restriction Period, if any.
For the avoidance of doubt, if the Participant leaves the employment, the Company or any
Affiliate(s), at any time before the term of the Share Sale Restriction Period, due to his/her
Disability other than of second (2nd) or third (3rd) category as defined in Article L.341-4 of the
French Social Security Code1, the Participant shall not be entitled to sale the shares before the
second (2nd) anniversary of the Vesting Date.
By exception, the Board or the Committee may discretionarily decide that a Participant shall not be
subject to the Share Sale Restriction Period.
3.5. Additional Full Value Awards
Notwithstanding anything to the contrary in the Program or the Plans, the Participant shall not be
permitted to receive additional Full Value Awards with respect to the Restricted Stock Units based
upon the dividends and distributions paid on shares of Common Stock as if each Restricted Stock
Unit was a share of Common Stock.
3.6. Termination of Employment
Notwithstanding anything to the contrary in the Program or the Plans, in case of Participants
death, his/her heirs may request the acquisition of the unvested Restricted Stock Units within six
(6) months following this event.
By exception, if the Participant ceases his employment within the Company or any Affiliate(s) due
to his disability corresponding to the 2nd or 3rd categories of Article L.341-4 of the French
Social Security Code
1
, the Award shall vest as follows: (i) if the date of such
termination is after the calendar year of the Grant Date, all the RSUs shall pay out within sixty
days, or (ii) if the date of such termination is in the calendar year of the Grant Date a portion
of the RSUs shall pay out as provided in (i), which portion shall be determined as follows: (#
RSUs awarded) * (# of months worked in that year, rounded to nearest whole month) / 12.
Notwithstanding anything to the contrary, if the employment with the Company or any Affiliate(s) is
terminated due to disability other than of second (2nd) or third (3rd) category as defined in
Article L.341-4 of the French Social Security Code, (i) if the date of such termination
is after
the calendar year of the Grant Date, the RSUs will remain eligible for payout on the terms provided
in Section 3.3, or (ii) if the date of such termination is in the calendar year of the Grant Date a
portion of the RSUs shall remain eligible for payout on the terms provided in Section 3.3, which
portion shall be determined as follows: (# RSUs awarded) * (# of months worked in that year,
rounded to nearest whole month) / 12.
Notwithstanding anything to the contrary, if the employment with the Company or any Affiliate(s) is
terminated due to Qualified Retirement, (i) if the date of such termination is after the calendar
year of the Grant Date, the RSUs will remain eligible for payout on the terms provided in Section
3.3, or (ii) if the date of such termination is in the calendar year of the Grant Date a portion of
the RSUs shall remain eligible for payout on the terms provided in Section 3.3, which portion shall
be determined as follows: (# RSUs awarded) * (# of months worked in that year, rounded to nearest
whole month) / 12.
4. Non-Transferability of Awards
No Award granted under the Plan shall be transferable other than by will or the law of descent and
distribution.
4.1. Change in Control
When a tax favourable treatment may be available further to French legislation (article 163 bis C-1
bis of the French Tax Code), the Committee, upon discretionary decision, may give the choice to
French participants, but has no obligation to. When the Company decides to exchange shares with no
cash consideration, pursuant to applicable French legal and tax rules and notably, article
L.225-197-1 § III of the French Commercial Code (as amended), then the dispositions of the Plan as
well as the periods of Vesting and Share Sale Restriction will remain applicable to shares or
rights received in exchange.
5. Tax Withholding
Notwithstanding any provision to the contrary, no shares of Common Stock may be used to satisfy any
social security or tax withholding due for Awards granted further to the present Addendum.
The Company or its Affiliates shall have the right to require payment from a Participant to cover
any applicable withholding or other employment taxes due with respect to Awards granted hereunder
or shall have the right to deduct any applicable withholding or other employment taxes due from
other compensation income paid to the Participant.
6. Amendment, Modifications to this Addendum.
No modification can be made to this Addendum, or to outstanding Awards granted hereunder, which is
disadvantageous to the Participant or which is in contradiction to the French Commercial Code and
French Tax Code provisions, unless the modification is the result of a new law or regulation or any
other obligatory disposition or ruling applied to the Company or any other Subsidiary, having
legal, fiscal or social implications.
The terms of this Addendum shall be interpreted in accordance with the relevant provisions set
forth by French tax and social laws, as well as the regulations issued by the French tax and social
administrations.
In the event of any conflict between the provisions of this Addendum and the Plan, the provisions
of the Addendum shall prevail for any Awards made to Participants under this Addendum.
7. Additional Definitions
Affiliate
means any entity:
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in which the Company holds, directly or indirectly, at least 10% of the voting rights
and / or equity;
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that holds, directly or indirectly, at least 10% of the voting rights and / or equity
in the Company;
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in which at least 50% of the equity or voting rights are held, directly or indirectly,
by a company which itself holds at least 50% of the Company.
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Company
means Baxter International Inc., a Delaware corporation.
Corporate Officers
mean Président du Conseil dAdministration (Chairman of the Board);
Directeur Général (Managing Director); Directeurs Généraux Délégués (Delegated Managing
Directors); Members of the Directoire; Gérant of a Société en Commandite par Actions;
Président (if a private individual) dune Société par Actions Simplifiée.
Eligible Individual
means any employee with a valid employment contract (contrat de
travail) at Grant Date, and/or Corporate Officer with or without an employment contract with the
Company or Affiliate(s). For the avoidance of doubt, officers and directors of the Company, or of
Affiliate(s), are eligible Participants if they have a valid employment contract with one of these
entities, or if they are Corporate Officers. Awards cannot be granted under this Addendum to
non-employee members of a Conseil dAdministration (the Board), to consultant, to independent
agent of the Company or Affiliate(s).