<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
TRANSITION REPORT PURSUANT TO SECTION 13
----- OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0781620
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015-4633
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(708) 948-2000
--------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the registrant's Common Stock, $1 par value,
outstanding as of October 31, 1995, the latest practicable date, was
271,492,595 shares.
<PAGE>
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
(in millions, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
<S> <C> <C> <C> <C>
1995 1994 1995 1994
Operations
Net sales $2,456 $2,315 $7,239 $6,824
Costs and expenses
Cost of goods sold 1,637 1,494 4,826 4,431
Marketing and administrative expenses 451 468 1,321 1,367
Research and development expenses 100 88 262 248
Divestitures and restructuring, net (90) 2 (149) (27)
Special charge for litigation 56 0 96 0
Interest, net 47 47 135 143
Goodwill amortization 16 16 49 50
Other (income) expense 8 (2) 39 47
- -------------------------------------------------------------------------------------
Total costs and expenses 2,225 2,113 6,579 6,259
- -------------------------------------------------------------------------------------
Income before income taxes 231 202 660 565
Income tax expense 68 53 187 141
- -------------------------------------------------------------------------------------
Net Income $163 $149 $473 $424
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Earnings per common share $0.59 $0.53 $1.70 $1.52
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Average number of common
shares outstanding 275 283 278 279
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
-3-
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Current assets Cash and equivalents $468 $471
Accounts receivable 1,464 1,543
Notes and other current
receivables 225 373
Inventories 1,653 1,537
Short-term deferred
income taxes 326 271
Prepaid expenses 168 145
--------------------------------------------------------------
Total current assets 4,304 4,340
- -------------------------------------------------------------------------------
Property, At cost 4,589 4,431
plant and Accumulated depreciation
equipment and amortization (2,065) (1,869)
--------------------------------------------------------------
Net property, plant
and equipment 2,524 2,562
- -------------------------------------------------------------------------------
Other assets Goodwill and other
intangibles 2,218 2,290
Insurance receivables 870 446
Other 360 364
--------------------------------------------------------------
Total other assets 3,448 3,100
- -------------------------------------------------------------------------------
Total assets $10,276 $10,002
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Current
liabilities Notes payable to banks $96 $131
Current maturities of
long-term debt and
lease obligations 163 400
Accounts payable and
accrued liabilities 2,018 1,834
Income taxes payable 520 401
--------------------------------------------------------------
Total current liabilities 2,797 2,766
- -------------------------------------------------------------------------------
Long-term debt and lease obligations 2,358 2,341
- -------------------------------------------------------------------------------
Long-term deferred income taxes 158 167
- -------------------------------------------------------------------------------
Long-term litigation liabilities 948 458
- -------------------------------------------------------------------------------
Other non-current liabilities 463 550
- -------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value,
equity authorized 350,000,000
shares, issued 287,701,247
shares in 1995 and 1994 288 288
Additional contributed
capital 1,830 1,810
Retained earnings 2,006 1,762
Common stock in treasury,
at cost, 16,500,377 shares
in 1995 and 5,391,092
shares in 1994 (563) (135)
Cumulative foreign currency
adjustment (9) (5)
--------------------------------------------------------------
Total stockholders' equity 3,552 3,720
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity 10,276 $10,002
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
-4-
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
<TABLE>
<CAPTION>
Nine months ended September 30,
1995 1994
<S> <C> <C>
(Brackets denote cash outflows)
Cash flow provided Income from continuing operations $473 $424
by continuing Adjustments
operations Depreciation and amortization 377 390
Deferred income taxes (72) 31
Gain on asset dispositions (328) (28)
Purchased research and development 18 0
Restructuring and special charge
for litigation 275 0
Other 11 16
Changes in balance sheet items
Accounts receivable 13 97
Inventories (124) 31
Accounts payable and other
current liabilities 64 (125)
Restructuring program payments (73) (74)
Other (26) 40
--------------------------------------------------------------------
Cash flow provided by continuing
operations 608 802
- -------------------------------------------------------------------------------------------
Investment Capital expenditures (315) (301)
transactions Acquisitions (net of cash received)
and investments in affiliates (33) (48)
Proceeds from asset dispositions 650 86
---------------------------------------------------------------------
Investment transactions, net 302 (263)
- -------------------------------------------------------------------------------------------
Financing Issuances of debt and lease
transactions obligations 933 1,524
Redemption of debt and lease
obligations (623) (1,677)
Increase (decrease) in debt with
maturities of three months or
less, net (586) (473)
Stock issued under Shared
Investment Plan 0 121
Stock issued under employee
benefit plans 83 42
Common stock dividends (228) (213)
Purchase of treasury stock (500) 0
---------------------------------------------------------------------
Financing transactions, net (921) (676)
- -------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash
and equivalents 8 7
- -------------------------------------------------------------------------------------------
Decrease in cash and equivalents (3) (130)
Cash and equivalents at beginning of period 471 479
- -------------------------------------------------------------------------------------------
Cash and equivalents at end of period $468 $349
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
-5-
Baxter International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Financial information
- ---------------------
The unaudited interim consolidated financial statements of Baxter
International Inc. and its subsidiaries ("the Company" or "Baxter") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes included in the
Company's 1994 Annual Report to Stockholders.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments necessary for a fair presentation of the interim
periods. All such adjustments 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 amounts in prior year income statements have been reclassified to
conform to current year presentation.
Inventories
- -----------
Inventories consisted of the following (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Raw materials $ 235 $ 219
Work in process 209 191
Finished products 1,209 1,127
----- -----
Total inventories $1,653 $1,537
----- -----
----- -----
</TABLE>
Stock repurchase program
- ------------------------
In February 1995 the Company announced a two-year $500 million stock
repurchase program. As of September 30, 1995, the Company had completed this
program by repurchasing $500 million (or approximately 14 million shares) of
its common stock.
Acquisitions and divestitures
- -----------------------------
On September 15, 1995, Baxter divested its Industrial and Life Sciences
Division to VWR Corporation for approximately $400 million in cash and $29
million in deferred payments, resulting in a net pretax gain of $268 million.
As part of the divestiture, Baxter will continue to supply its
self-manufactured products and supplies sold in non-health-care markets to
VWR Corporation under a long-term distribution agreement.
On September 29, 1995, Baxter acquired the remaining 30 percent of the
Nextran venture that it did not previously own. The acquisition was
accounted for as a purchased research and
<PAGE>
-6-
development. The pretax charge to third quarter earnings for this
acquisition was $18 million and is reflected in the statement of income
as research and development expense.
Restructuring charges
- ---------------------
In November 1993, the Company announced that its board of directors approved
a series of strategic actions to improve shareholder value, to extend
positions of leadership in high-growth health-care markets and to reduce
costs. These actions were designed to make the Company's domestic
medical/laboratory products and distribution segment more efficient and more
responsive in addressing the changes occurring in the U.S. health-care system
and accelerate growth of its medical specialties businesses worldwide. In
November 1993, the Company recorded a $700 million pretax provision to cover
costs associated with these restructuring initiatives.
As part of the restructuring, the Company announced its intent to divest its
diagnostics manufacturing businesses and established a valuation allowance as
a component of the 1993 restructuring charge. In December 1994, subject to
certain settlement provisions, the company completed the divestiture of these
businesses and received net proceeds of approximately $244 million in cash
and $40 million in face value of preferred stock. Throughout 1995, the
Company engaged in active discussions with the buyer related to
interpretations of and responsibility relative to the settlement provisions
contained in the purchase and sale and related agreements. The divestiture
was also significantly complicated by a dispute between the diagnostics
manufacturing businesses and one of its major suppliers, which ultimately led
to a lower than expected final valuation of the business. This dispute has
been settled. In the third quarter of 1995, settlement negotiations were
completed with the buyer of the diagnostics businesses and adjustments to the
purchase price were finalized along with a revision of cost estimates to
complete the divestiture. This resulted in an additional restructuring
charge of approximately $76 million, including non-cash valuation adjustments
of $15 million.
The following table summarizes the Company's 1993 restructuring reserves as
of December 31, 1994 and September 30, 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Divestitures
Employee- and asset Other
related costs write-downs costs Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total restructuring charge $295 $289 $116 $700
Utilization:
Cash (58) -- (66) (124)
Non-cash -- (206) -- (206)
- -------------------------------------------------------------------------------
December 31, 1994 balance 237 83 50 370
- -------------------------------------------------------------------------------
Adjustment to reserve -- 76 -- 76
Utilization:
Cash (33) (38) (27) (98)
Non-cash -- (30) -- (30)
- -------------------------------------------------------------------------------
September 30, 1995 balance $204 $91 $23 $318
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
-7-
The Company recently completed a global study of its manufacturing capacity.
As a result of the study, management approved a plan to consolidate the
Company's manufacturing operations in Puerto Rico in order to eliminate
excess capacity and reduce manufacturing costs. To effect this plan,
management recorded a restructuring charge of $93 million in the third
quarter of 1995. The charge is predominantly comprised of the estimated
costs to close the Company's intravenous solutions plant and warehouse in
Carolina, Puerto Rico. Production and warehousing will be transferred and
consolidated into other facilities in Puerto Rico and the United States.
Implementation of the plan is underway and completion is anticipated by the
end of 1997. Employee related costs consist primarily of severance for the
approximately 1,450 positions that will be eliminated in connection with the
approved plan.
In addition to the consolidation of the Company's manufacturing operations in
Puerto Rico, the Company has initiated plans for other organizational
structure changes which have resulted in a provision for employee severance
in the amount of $10 million.
The following table summarizes the components of these charges:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Employee- Asset Other
related costs write-downs costs Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Puerto Rico facility consolidations $17 $67 $9 $93
Organizational changes 10 0 0 10
- -------------------------------------------------------------------------------
September 30, 1995 balance $27 $67 $9 $103
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Special charge for litigation and legal proceedings
- ---------------------------------------------------
The number of opt-outs for the mammary implant global settlement against
Baxter was reduced by plaintiffs who chose to rescind their opt-out notices,
a right which ended on March 1, 1995. Based on its continuing evaluation of
the remaining opt-outs, the Company accrued an additional $298 million for
its estimated liability to litigate and/or settle cases and claims involving
opt-outs, and recorded an additional receivable for estimated insurance
recovery of $258 million, resulting in an additional net charge of $40
million in the first quarter of 1995.
In the third quarter of 1995, significant developments occurred, primarily in
the United States, Europe and Japan, relative to claims and litigation
pertaining to the Company's plasma based therapies, including Factor
Concentrates. After analyzing circumstances in light of recent developments
and considering various factors and issues unique to each geography, the
Company has revised its estimated exposure from the $131 million previously
recorded for Factor Concentrates to $378 million for all plasma based
therapies. Related estimated insurance recoveries were revised from $83
million for Factor Concentrates to $274 million for all plasma based
therapies. This resulted in a net charge of $56 million in the third quarter
of 1995.
Please refer to "Part II - Item 1. Legal Proceedings" of this document for
the status of cases and claims from individuals seeking damages for injuries
allegedly caused by silicone mammary implants manufactured by a division of
American Hospital Supply Corporation. That section also discusses the status
of lawsuits and claims involving the Company's plasma based therapies and
updates the status of other legal proceedings involving the Company.
<PAGE>
-8-
Credit facilities and interest expense
- --------------------------------------
On June 27, 1995, the Company received confirmation that an amendment to
combine and increase its current $1.4 billion revolving credit facilities
with a new $1.5 billion facility with substantially similar covenants had
been accepted by the participating banks. This revolving credit facility,
which is effective for five years beginning July 11, 1995, is principally
used to support commercial paper and short-term note borrowings. At September
30, 1995 and December 31, 1994, commercial paper and certain short-term notes
together totaling $1,003 and $954 million, respectively, have been classified
with long-term debt as they are supported by long-term credit facilities and
will continue to be refinanced.
Net interest expense consisted of the following (unaudited):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in millions) Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $55 $57 $159 $177
Interest income (8) (10) (24) (34)
- -------------------------------------------------------------------------------
Interest, net $47 $47 $135 $143
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
-9-
Item. 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company's 1994 Annual Report to Stockholders ("ARS") contains
management's discussion and analysis of financial condition and results of
operations as of and for the year ended December 31, 1994. In the ARS,
management outlined its key financial objectives in 1995. These objectives
and the results achieved through September 30, 1995 are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FULL YEAR 1995 OBJECTIVES THIRD-QUARTER RESULTS
------------------------- ---------------------
<S> <C>
- --------------------------------------------------------------------------------
- - Generate $500 million in "operational - The Company generated "operational
cash flow" in 1995. cash flow" of $429 million in the
nine months ended September 30, 1995.
- ---------------------------------------------------------------------------------
- - Achieve net income growth in the - The Company's net income growth was
high single digits. 9.4% for the third quarter of 1995
and 11.6% for the nine-month period.
- ---------------------------------------------------------------------------------
- - Reduce marketing and administrative - The Company's marketing and
expenses as a percent of sales from administrative expenses as a percent
19.9% in 1994 to 18% in 1995 of sales were 18.2% for the nine
months ended September 30, 1995.
- ---------------------------------------------------------------------------------
- - Maintain net-debt-to-net-capital - The Company's net-debt-to-net-capital
ratio between 35-40%. ratio was 37.7% at September 30,
1995.
- ---------------------------------------------------------------------------------
- - Repurchase $500 million of Baxter - The Company completed its
stock over the next 2 years as $500 million stock repurchase
authorized by the Board of Directors program during the first nine months
in February 1995. of 1995.
- ---------------------------------------------------------------------------------
</TABLE>
The following discussion and analysis describes management's progress toward
the above objectives and material changes in the Company's financial
condition since December 31, 1994. Trends of a material nature are discussed
to the extent known and considered relevant. The analysis of results
compares the three months and nine months ended September 30, 1995 with the
corresponding periods of 1994.
<PAGE>
-10-
Results of operations
- ---------------------
The following table shows net sales trends for each industry
segment (unaudited):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(in millions) Three months ended Nine months ended
September 30, Percent September 30, Percent
1995 1994 Increase 1995 1994 Increase
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medical specialties $1,034 $901 15% $2,994 $2,586 16%
Medical/laboratory products
and distribution 1,422 1,414 1% 4,245 4,238 0%
- ---------------------------------------------------------------------------------------------------
Total net sales $2,456 $2,315 6% $7,239 $6,824 6%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
The Company's net sales increased 6% for the three-month and nine-month
periods ended September 30, 1995 over the comparable periods in 1994.
Excluding the effects of favorable foreign exchange rates, the divestiture of
the diagnostics manufacturing businesses (primarily foreign) which occurred
December 19, 1994 and the divestiture of the Industrial and Life Sciences
Division (primarily domestic) which occurred September 15, 1995, growth in
net sales was approximately 9% and 8% for the three-month and nine-month
periods, respectively. This increase in net sales was primarily the result of
growth in the medical specialties segment.
Domestic sales for the third quarter of 1995 were approximately $1.7 billion,
an increase of 5% over the comparable period in 1994. Domestic sales for the
nine months ended September 30, 1995 were approximately $5.2 billion, an
increase of 6% over the comparable period in the prior year. Excluding the
effects of the diagnostics manufacturing and Industrial divestitures,
domestic sales increased 8% and 7% for the quarter and nine months ended
September 30, 1995, respectively. International sales increased 8% to $712
million in the third quarter and 6% to $2.0 billion for the nine-month
period, both over the comparable periods in 1994. International sales growth
was approximately 12% and 11% for the three and nine months ended September
30, 1995, respectively, excluding the effects of foreign exchange rates and
the diagnostics manufacturing divestiture discussed above.
Excluding the impact of favorable foreign exchange rates, net sales in the
medical specialties segment increased 11% for the three and nine months ended
September 30, 1995. The increase in net sales is attributable to higher
sales volume in all the divisions comprising the Company's medical
specialties segment. For the third quarter of 1995, domestic and foreign
sales for the segment (excluding the effects of favorable foreign exchange
rates) grew at 6% and 14%, respectively. For the nine-month period, the
growth rates were 11% and 12%, respectively.
Net sales in the medical/laboratory products and distribution ("med/lab")
segment were generally flat for the three-month and nine-month periods ended
September 30, 1995 as compared to the same periods in 1994, and reflect the
loss of sales related to the divestitures of the diagnostics manufacturing
businesses and the Industrial and Life Sciences Division. The Company will
continue to experience low sales growth in the med/lab segment in 1995 and
1996 due to the loss of sales related to these divestitures. Excluding the
diagnostics manufacturing and industrial divestitures, net sales growth in
the segment was 7% and 6% for the three-month and nine-month periods.
<PAGE>
-11-
The following table gives key ratios of certain income statement
items (as a percent of sales):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
1995 1994 Decrease 1995 1994 Decrease
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross profit margin 33.3% 35.5% 2.2 pts 33.3% 35.1% 1.8 pts
Marketing and
administrative expenses 18.4% 20.2% 1.8 pts 18.2% 20.0% 1.8 pts
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The decline in gross profit margin for both the three and nine months ended
September 30, 1995 is primarily attributable to the diagnostics manufacturing
divestiture discussed above. As part of the divestiture, Baxter retained
distribution rights for the diagnostics products in the U.S. but does not
distribute products internationally. This has resulted in an overall lower
gross profit margin for the Company.
Management's overall objective is to decrease marketing and administrative
expenses as a percent of sales to 18% by the end of 1995. This objective
anticipated a decline in marketing and administrative expenses for the three
and nine months ended September 30, 1995, due to the diagnostics divestiture
and initiatives implemented in connection with the 1993 restructuring and
downsizing programs. The actual decreases in marketing and administrative
expenses are consistent with these expectations. Overall, savings in
marketing and administrative expenses for the Company completely offset
margin erosion for the nine months ended September 30, 1995.
The following table shows research and development expenses for each industry
segment (unaudited):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(in millions) Three months ended Percent Nine months ended Percent
September 30, Increase September 30, Increase
1995 1994 (Decrease) 1995 1994 (Decrease)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medical specialties
Recurring expenses $69 $66 5% $203 $185 10%
Purchased research
and development 18 0 18 0
- ---------------------------------------------------------------------------------------------------
Total medical specialties 87 66 32% 221 185 19%
- ---------------------------------------------------------------------------------------------------
Medical/laboratory products
and distribution 13 22 (41%) 41 63 (35%)
- ---------------------------------------------------------------------------------------------------
Total research and
development expenses $100 $88 14% $262 $248 6%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
The increase in recurring research and development expenses in
medical specialties reflects the Company's continued emphasis on
strategic initiatives such as renal therapy and transplantation,
immunotherapy, gene therapy and Blood Substitutes. Purchased
research and development in medical specialties reflects the
Company's acquisition of an additional 30% of Nextran discussed in
the "Acquisition and Divestitures" footnote to the financial statements.
The decline in research and development expense in med/lab is primarily
the result of the divestiture of the diagnostics manufacturing
businesses. Excluding the effect of the diagnostics divestiture,
research and development expenses in med/lab would have increased 2% and
10% for the three and nine months ended September 30, 1995. These
<PAGE>
-12-
increases are primarily the result of new product development related
to the surgical gloves and intravenous solutions product lines.
The following table shows net divestiture and restructuring
(income) expense for each industry segment (unaudited):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in millions) Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical specialties $0 $0 $(2) $1
Medical/laboratory products
and distribution (89) 8 (86) (1)
General corporate and other (1) (6) (61) (27)
- -------------------------------------------------------------------------------
Total divestitures and
restructuring, net $(90) $2 $(149) $(27)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Net divestitures and restructuring for med/lab for the quarter and nine-month
period ended September 30, 1995, consists of the $268 million gain from the
sale of the Industrial and Life Sciences division offset by restructuring
charges amounting to $179 million. The restructuring charges included a $76
million charge to adjust reserves previously recorded for the divestiture of
the diagnostics manufacturing businesses and $103 million for facility
consolidations in Puerto Rico and other organizational changes. See the
"Acquisitions and divestitures" and "Restructuring charges" footnotes to the
financial statements for additional information relating to the divestiture
of the Industrial and Life Sciences division and the restructuring charges.
The increase in net divestitures and restructuring in the general corporate
and other component for the nine months ended September 30, 1995 as compared
to the same period in the prior year, is primarily attributable to a higher
level of net pretax gains associated with the disposal of investments,
including the disposal of the Company's remaining investment in MediSense,
Inc.
The number of opt-outs for the mammary-implant global settlement against
Baxter was reduced by plaintiffs who chose to rescind their opt-out notices,
a right which ended on March 1, 1995. Based on its continuing evaluation of
the remaining opt-outs, the Company accrued an additional $298 million for
its estimated liability to litigate and/or settle cases and claims involving
opt-outs, and recorded an additional receivable for estimated insurance
recovery of $258 million, resulting in an additional net charge of $40
million in the first quarter of 1995.
Additionally, in the third quarter of 1995, significant developments
occurred, primarily in the United States, Europe and Japan, relative to
claims and litigation pertaining to the Company's plasma based therapies,
including Factor Concentrates. After analyzing circumstances in light of
recent developments and considering various factors and issues unique to each
geography, the Company has revised its estimated exposure from the $131
million previously recorded for Factor Concentrates to $378 million for all
plasma based therapies. Related estimated insurance recoveries were revised
from $83 million for Factor Concentrates to $274 million for all plasma based
therapies. This resulted in a net charge of $56 million in the third quarter
of 1995. See "Part II - Item 1. Legal Proceedings" for further information.
Both interest expense and interest income declined for the three-month and
nine-month periods ended September 30, 1995 over the comparable periods in
1994 as a result of lower debt and investment levels, partially offset by
increases in average rates.
<PAGE>
-13-
The following table shows income before income taxes for the medical
specialties segment (unaudited):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(in millions) Three months ended Percent Nine months ended Percent
September 30, Increase September 30, Increase
1995 1994 (Decrease) 1995 1994 (Decrease)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medical specialties
Pretax income before
special charges $196 $168 17% $553 $445 24%
Purchased research
and development (18) 0 (18) 0
Divestitures and
restructuring, net 0 0 2 (1)
Special charge for
litigation (56) 0 (56) 0
- ---------------------------------------------------------------------------------------------------
Total medical
specialties $122 $168 (27%) $481 $444 8%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
The increase in pretax income before special charges for the medical
specialties segment in the three-month and nine-month periods in 1995 over
the comparable periods in 1994 is a result of increased sales and favorable
foreign currency rates in 1995. Additionally, the 1994 results for the
nine-month period were adversely impacted by the voluntary market withdrawal
of Gammagard-Registered Trademark- IGIV, an immune globulin intravenous product,
which occurred in February 1994. A new product, Gammagard-Registered
Trademark-S/D was introduced in the second quarter of 1994, but had little
impact on reported results until the third quarter of 1994. Therefore, pretax
income before special charges for the nine-month period increased 24% compared
to 17% for the quarter.
The following table shows income before income taxes for the
medical/laboratory products and distribution segment (unaudited):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(in millions) Three months ended Percent Nine months ended Percent
September 30, Increase September 30, Increase
1995 1994 (Decrease) 1995 1994 (Decrease)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medical/laboratory products
and distribution
Pretax income before
special charge $98 $114 (14%) $304 $339 (10%)
Divestitures and
restructuring, net 89 (8) 86 1
- ---------------------------------------------------------------------------------------------------
Total medical/laboratory
products and distribution $187 $106 76% $390 $340 15%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
Pretax income before special charge for the med/lab segment decreased in the
three-month and nine-month periods of 1995 as compared to the same periods in
1994 as a result of the sales loss and margin erosion related to the
diagnostics and industrial divestitures. Excluding the effects of foreign
exchange and the diagnostics and industrial divestitures, pretax income
before special charge decreased by 3% for the quarter and nine months ended
September 30, 1995. This decrease is the result of higher sales growth in
the Company's distributed products (which generate lower gross margins) than
in the Company's higher-margin self-manufactured products, and pricing
pressures.
<PAGE>
-14-
The following table shows (expense) income before income taxes for general
corporate and other (unaudited):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(in millions) Three months ended Percent Nine months ended Percent
September 30, Increase September 30, Increase
1995 1994 (Decrease) 1995 1994 (Decrease)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
General corporate and other
General corporate expenses $(32) $(31) (3%) (97) (103) 6%
Divestitures and
restructuring, net 1 6 61 27
Special charge for litigation 0 0 (40) 0
- ---------------------------------------------------------------------------------------------------
Total general corporate
and other (31) (25) (24%) (76) (76) 0%
- ---------------------------------------------------------------------------------------------------
Interest, net (47) (47) 0% (135) (143) 6%
- ---------------------------------------------------------------------------------------------------
Total general corporate and
other and interest, net $(78) $(72) (8%) $(211) $(219) 4%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
The decrease in general corporate expenses for the nine months ended
September 30, 1995 is primarily the result of expense reductions related to
the Company's 1993 restructuring program discussed below.
The effective income tax rate was 29.4% and 28.3% for the three and nine
months ended September 30, 1995, respectively, compared to 26.2% and 25.0%
for the similar periods in 1994. These increases are primarily due to a
larger portion of the Company's earnings generated in higher tax
jurisdictions, shifts in the portions of income earned in the U.S. and Puerto
Rico due to the diagnostics manufacturing divestiture and a higher effective
income tax rate on the net gain resulting from the Company's divestiture of
the Industrial and Life Sciences division.
The Company's net income increased 9% in the third quarter of 1995 over the
comparable period of 1994 and earnings per common share increased 11%. For
the nine months ended September 30, 1995, total net income and earnings per
share increased 12%. These increases reflect general growth in the Company's
operations, the favorable impact of foreign exchange rates and improved
expense control. Average shares for the third quarter in 1995 decreased
compared to the third quarter in 1994 as a result of the early completion of
the Company's stock repurchase program. This decrease in average shares
caused earnings per share to grow at a higher rate than net income for this
period.
Restructuring programs
- ----------------------
Baxter currently has two restructuring programs in process. The 1993
restructuring program was designed to make the Company's domestic
medical/laboratory products and distribution segment more efficient and more
responsive in addressing the changes occurring in the U.S. health-care system
and accelerate growth of its medical specialties businesses worldwide. In
the third quarter of 1995, the Company initiated a second restructuring
program to consolidate the Company's manufacturing operations in Puerto Rico
in order to eliminate excess capacity and reduce manufacturing costs. See
the "Restructuring programs" footnote to the financial statements for
discussions related to the initial charges for the programs, components of
the charges, any resulting changes in estimates, and cash and non-cash usages
of the related liabilities.
<PAGE>
-15-
Since the announcement of its 1993 restructuring program the Company has
implemented, or is in the process of implementing, all of the major strategic
actions associated with the program. Management is satisfied that such
actions are generally progressing on schedule and that the overall program
will meet previously established financial targets. In the first nine months
of 1995, the Company utilized $128 million of restructuring reserves,
including $98 million in cash payments. Cash outflows pertain primarily to
employee-related costs for severance, outplacement assistance, relocation and
retention payments. The Company currently anticipates that it will achieve
approximately $180 million of savings in 1995, representing a shortfall of
approximately $20 million from its original savings target. This shortfall
is primarily due to timing delays in the implementation of a number of
projects. Management anticipates that these savings will be invested in
increased research and development spending in the medical specialties
segment, the Company's expansion into growing international markets, and
managed care and alternate site sales and distribution initiatives in the
U.S. market.
Since the inception of the 1993 restructuring program, the Company has
eliminated approximately 2,900 positions of the approximately 4,500 positions
affected by the program. The majority of the remaining reductions will occur
throughout the remainder of 1995 and 1996 as facility closures and
consolidations are completed as planned.
Management is in the very early stages of implementing the 1995 restructuring
program. The plant closure and consolidations in Puerto Rico will lower the
Company's manufacturing costs. Management believes these actions will help
mitigate the Company's exposure to future gross margin erosion arising from
pricing pressure primarily in the United States.
Management anticipates that future cash expenditures related to both the 1993
and 1995 restructuring programs will be funded from cash generated from
operations.
Liquidity and capital resources
- -------------------------------
Management assesses the Company's liquidity in terms of its overall ability
to mobilize cash to support ongoing business levels and to fund its growth.
Cash flow provided by continuing operations (which includes working capital
components) was $608 million for the nine months ended September 30, 1995 as
compared to $802 million for the corresponding period in 1994. The difference
primarily reflects net cash outflows for working capital components, offset
by approximately $25 million in proceeds from the sale of certain lease
receivables under a revolving agreement. Management believes that this level
of cash flow is sufficient to support normal ongoing business requirements.
As a result of the Company's increased emphasis on cash flow, management
monitors an internal performance measure called "operational cash flow" which
evaluates each operating business on all aspects of cash flow under its
direct control. The incentive compensation programs for the Company's senior
management in each business include significant emphasis on the attainment of
both "operational cash flow" as well as earnings objectives.
<PAGE>
-16-
The following table reconciles cash flow provided by continuing operations,
as determined by generally accepted accounting principles, to the Company's
internal measure of "operational cash flow" (unaudited):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(in millions) (brackets denote cash outflows) Nine months ended
September 30,
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash flow provided by operations per the Company's
condensed consolidated statements of cash flows $608 $802
Capital expenditures (315) (301)
Net interest after tax 80 86
Other 56 63
- ------------------------------------------------------------------------------
Total operational cash flow $429 $650
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
"Operational cash flow" of $429 million is consistent with the Company's
objective to generate "operational cash flow" of $500 million in 1995.
The following table shows capital expenditures for each industry
segment (unaudited):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(in millions) Nine months ended Percent
September 30, Increase
1995 1994 (Decrease)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Medical specialties $202 $171 18%
Medical/laboratory products
and distribution 107 122 (12%)
General corporate 6 8 (25%)
- -------------------------------------------------------------------------------
Total capital expenditures $315 $301 5%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The 18% increase in the medical specialties segment is consistent with the
Company's strategy to increase its investment in its higher growth
businesses. Incremental capital investments are being made in the medical
specialties segment for the expansion of manufacturing capacity for renal,
cardiovascular and biotech products. Additionally, Baxter has begun
construction on an estimated $110 million, commercial-scale manufacturing
plant for its experimental blood substitute. The Company has made
significant investments in recent years in its U.S. distribution and
manufacturing infrastructure. As a consequence of these investments and the
diagnostics divestiture, the level of capital expenditures in the med/lab
segment has declined as compared to 1994 levels.
The Company's current assets exceeded current liabilities by $1.5 billion at
September 30, 1995 and $1.6 billion at December 31, 1994. Current assets
include accounts receivable of $1.5 billion and inventories of $1.7 billion
at September 30, 1995. These sources of liquidity are convertible into cash
over a relatively short period of time and thus, will help the Company
satisfy normal operating cash requirements.
The increase in long-term insurance receivables and litigation liabilities
was primarily due to the special charges for litigation discussed earlier.
<PAGE>
-17-
Proceeds from asset dispositions of $650 million in the first nine months of
1995 primarily relate to cash received from notes receivable related to the
divestiture of the diagnostics manufacturing business, proceeds from the
divestiture of the Industrial and Life Sciences division and the sale of
common stock in MediSense, Inc. These proceeds have been used for general
operating requirements and the acceleration of the Company's stock repurchase
program discussed below. The decrease in current maturities of long-term
debt and lease obligations primarily relates to lower overall debt levels.
As of September 30, 1995, the Company's net-debt-to-net-capital ratio was
37.7% as compared to 39.2% at December 31, 1994. These results are
consistent with the Company's stated goal of maintaining a
net-debt-to-net-capital ratio of between 35-40%.
During the first quarter of 1995, the Company announced a two-year $500
million stock repurchase program. As of September 30, 1995, the Company had
completed this program by repurchasing $500 million (or approximately 14
million shares) of its common stock. On November 13, 1995, the Company's board
of directors authorized the repurchase of an additional $500 million of the
Company's common stock. Management anticipates that the newly authorized
repurchase program will be completed over several years.
On April 26, 1995, the Company's debt rating of "A" by Duff & Phelps ("D&P")
was reaffirmed. The Company continues to remain on Rating Watch--Down as
developments will be monitored by D&P in product liability litigation and
progress in restructuring initiatives. On March 23, 1995, Standard & Poor's
reaffirmed its "A-" rating and changed its rating outlook to "stable" from
"negative" citing the Company's reduction in leverage and improvement in
operating margins.
The Company intends to fund its short-term and long-term obligations as they
mature by issuing additional debt or through cash flow from operations.
Refer to "Part II - Item 1. Legal Proceedings" in this document for the
status of cases and claims from individuals seeking damages for injuries
allegedly caused by silicone mammary prostheses manufactured by a division of
American Hospital Supply Corporation. That section also discusses the status
of lawsuits and claims involving the Company's plasma based therapies.
Upon resolution of any of the litigation related uncertainties, or if the
Company should, along with the other defendants, enter into a comprehensive
settlement of the related purported class actions, the Company may incur
charges in excess of presently established reserves. While such future
charges could have a material adverse impact on the Company's net income in
the period in which it is recorded, management believes that any outcome of
these actions will not have a material adverse effect on the Company's
consolidated financial position.
The Company believes it has lines of credit adequate to support ongoing
business operations and has sufficient financial flexibility to attract
long-term capital on satisfactory terms to support its obligations and growth
objectives.
<PAGE>
-18-
Review by Independent Public Accountants
- ----------------------------------------
A review of the interim consolidated financial information included in this
Quarterly Report on Form 10-Q for the three months and nine months ended
September 30, 1995 has been performed by Price Waterhouse LLP, the Company's
independent public accountants. Their report on the interim consolidated
financial information follows. There have been no adjustments or disclosures
proposed by Price Waterhouse LLP which have not been reflected in the interim
consolidated financial information. Their 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.
<PAGE>
-19-
Report of Independent Accountants
---------------------------------
November 13, 1995
Board of Directors and Stockholders
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet as of
September 30, 1995 and the related consolidated statements of income for the
three and nine-month periods ended September 30, 1995 and 1994 and condensed
consolidated statements of cash flows for the nine-month periods ended
September 30, 1995 and 1994 of Baxter International Inc. and its subsidiaries.
This interim financial information is the responsibility of the company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying interim financial information for it to be
in conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1994, and the
related consolidated statements of income, cash flows and stockholders'
equity for the year then ended (not presented herein), and in our report
dated February 13, 1995 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,
1994, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
Yours very truly,
Price Waterhouse LLP
<PAGE>
-20-
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
As of September 30, 1995, the Company was a defendant, together with
other defendants, in 6,949 lawsuits and had 1,757 pending claims from
individuals, all of which seek damages for injuries allegedly caused by
silicone mammary implants manufactured by the American Heyer-Schulte division
of American Hospital Supply Corporation ("American"). The comparable number
of cases and claims was 8,099 as of June 30, 1995. In the third quarter of
1995, 12 cases and claims were disposed of.
The typical case or claim alleges that the individual's mammary implants
caused one or more of a wide range of ailments, including non-specific
autoimmune disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia,
mixed connective tissue disease, Sjogren's Syndrome, dermatomyositis,
polymyositis, and chronic fatigue.
In addition to the individual suits against the Company, a class action
on behalf of all women with mammary implants filed against all manufacturers
of such implants has been conditionally certified and is pending in the
United States District Court for the Northern District of Alabama (DANTE, ET
AL., V. DOW CORNING, ET AL., U.S.D.C., N. Dist., Ala., 92-2589; part of IN
RE: SILICONE GEL BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N.
Dist. Ala., MDL 926, (U.S.D.C., N. Dist. Ala., CV 92-P-10000-S)(now held in
abeyance pending settlement proceedings in LINDSEY, ET AL., V. DOW CORNING ET
AL., U.S.D.C., N. Dist. Ala., CV 94-P-11558-S)). Another class action has
been certified and is pending in state court in Louisiana (SPITZFADDEN, ET
AL., V. DOW CORNING CORP., ET AL., Dist. Ct., Parish of Orleans, 92-2589).
Baxter also has been named in ten other purported additional class actions,
none of which is currently certified. A suit seeking class certification on
behalf of all residents of the Province of Ontario, Canada, who received
Heyer-Schulte implants was dismissed as to Baxter (BURKE, V. AMERICAN
HEYER-SCHULTE, ET AL., Ontario Prov. Court, Gen. Div., 15981/93). That case
currently is on appeal. Three other suits seeking class certification on
behalf of all women in the Provinces of Ontario, Quebec and British Columbia,
respectively, who received Heyer-Schulte mammary implants have been filed
(BENNETT V. AMERICAN HEYER-SCHULTE, ET AL., Ontario Prov. Court, Gen. Div.,
18169/94; PELLETIER V. BAXTER HEALTHCARE CORPORATION, ET AL., Quebec Prov.
Court, Dist. of Montreal, 500-06-000005-955; HARRINGTON V. DOW CORNING
CORPORATION, ET AL., Supreme Court, British Columbia, C954330).
Additionally, the Company has been served with a purported class action
brought on behalf of children allegedly exposed to silicone in utero and
through breast milk. (FEUER, ET AL., V. MCGHAN, ET AL., U.S.D.C., E. Dist.
NY, 93-0146.) The suit names all mammary implant manufacturers as defendants
and seeks to establish a medical monitoring fund.
These implant cases and claims generally raise difficult and complex
factual and legal issues and are subject to many uncertainties and
complexities, including, but not limited to, the facts and circumstances of
each particular case or claim, the jurisdiction in which each suit is
brought, and differences in applicable law. Many of the cases and claims are
at very preliminary stages, and the Company has not been able to obtain
information sufficient to evaluate each case and claim.
There also are issues concerning which of the Company's insurers are
responsible for covering each matter and the extent of the Company's claims
for
<PAGE>
-21-
contribution against third parties. The Company believes that a
substantial portion of the liability and defense costs related to mammary
implant cases and claims will be covered by insurance, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy
limits and insurer solvency. Most of the Company's insurers have reserved
(i.e., neither admitted nor denied), and may attempt to reserve in the
future, the right to deny coverage, in whole or in part, due to differing
theories regarding, among other things, the applicability of coverage and
when coverage may attach. The Company is engaged in active negotiations with
its insurers concerning coverages and the settlement described below. The
Company has recently consummated a "Coverage-in-Place" Agreement with certain
London Market Insurers which it believes collectively subscribed the majority
of the Company's solvent London occurrence coverage for the period 1979-1985.
The Agreement resolves the signatory insurers' coverage defenses and
specifies rules and procedures for their allocation and payment of defense
and indemnity costs. The amounts the signatory insurers will pay the Company
depends upon how much loss the Company incurs in connection with breast
implant claims, subject to policy limits. Three of the Company's claims-made
insurers have tendered the full amounts of their policies to the Company and
a fourth has tendered the full amounts of its policy ratably as claims are
paid. Additionally, the Company received certain funds in settlement of
claims pending against a carrier in liquidation. The total amount tendered
from the claims-made insurers exceeds $100 million.
Some of the mammary implant cases pending against the Company seek
punitive damages and compensatory damages arising out of alleged intentional
torts. Depending on policy language, applicable law, and agreements with
insurers, the damages awarded pursuant to such claims may or may not be
covered, in whole or in part, by insurance. On February 7, 1994, the Company
filed suit against all of the insurance companies that issued product
liability policies to American, American Heyer-Schulte and Baxter for a
declaratory judgment that: the policies cover each year of injury or claim;
the Company may choose among multiple coverages; coverage begins with the
date of implant; and legal fees and punitive damages are covered.
Subsequently, certain of the Company's product liability insurance carriers
filed suit against the Company and all of its other carriers for a
declaratory judgment to define various terms in the Company's insurance
policies, the extent of the Company's coverage, the date of the occurrences
giving rise to coverage, and the relative liabilities of the various
insurance carriers involved. In both cases, the parties have entered into a
"stand-still" agreement while negotiations continue.
In 1994, representatives of the plaintiffs and certain defendants in
these cases negotiated a global settlement of the issues under the
jurisdiction of the Court in the LINDSEY V. DOW CORNING, ET AL. case. The
monetary provisions of the settlement, providing compensation for all present
and future plaintiffs and claimants through a series of specific funds and a
disease compensation program involving scheduled medical conditions, were
agreed upon by most of the significant defendants and representatives of the
plaintiffs. The total of all of the specific funds and the disease
compensation program, which would be paid-in and made available over
approximately thirty years following final approval of the settlement by the
courts, is $4.255 billion. The Company's share of this settlement has been
established by the settlement negotiations at $556 million. Appeals have been
filed challenging the global settlement.
The time to file current claims against the fund ended on September 16,
1994. Since that date, the Court's claims administration office has been
evaluating the current claims filed against the scheduled medical conditions.
If those claims exceed the funds available, the settlement agreement
provides for reductions of the amounts payable for
<PAGE>
-22-
scheduled medical conditions (a "ratchet"), and for negotiations among the
representatives of the plaintiffs and the settling defendants with respect to
the shortfall in funding for current claims. The Court has indicated that it
expects that there will be a substantial ratchet downward in the amounts
payable, and this expectation has resulted in further negotiations among the
parties. On October 20, 1995, Baxter, Bristol-Myers Squibb Company and
Minnesota Mining and Manufacturing Company ("the settling defendants")
presented a draft proposal to the Court modifying, among other things, the
compensation program under the current settlement. The settlement continues
to provide compensation for all present and future plaintiffs and claimants
who have, or had at any time, one or more mammary implants manufactured by
any of the settling defendants; however, current claims would be paid
substantially through a claims-made program and all compensation amounts have
been substantially reduced. The Court has set November 15, 1995, as the
deadline for the parties to obtain approval from their Boards of Directors on
any revised settlement. On November 13, 1995, the Company's Board of
Directors authorized the Company to participate in the revised settlement.
The global settlement gave individual plaintiffs and claimants the
opportunity to remove themselves from the settlement ("opt-out"). The
initial opt-out period ended July 1, 1994. As of March 1995, approximately
11,360 individuals have opted out of the global settlement, of which
approximately 2,954 allege claims against Baxter. Of the opt-outs who filed
claims against Baxter, 1,878 represent U.S. claimants and 1,076 represent
foreign claimants. The number of opt-outs against Baxter will change as some
claimants are found to not have valid claims against Baxter, and others are
identified as having claims against Baxter. The Company believes that a
substantial number of the suits filed in the second, third and fourth
quarters of 1994 against Baxter will ultimately be dismissed because it will
be determined that no Heyer-Schulte mammary implant is involved. As a result
of the anticipated substantial ratchet in the global settlement, on October
9, 1995, the Court in the LINDSEY case reopened the right to opt-out,
commencing on December 1, 1995.
On May 15, 1995, Dow Corning Corporation, one of the defendants in the
breast implant cases declared bankruptcy and filed for protection under
Chapter 11. IN RE DOW CORNING CORPORATION, U.S.D.C., E.D. Mich. 95-20512,
95CV72397-DT. ("Dow Corning Bankruptcy"). The full impact of these
proceedings on the global settlement is unclear. As a result of the Dow
Corning bankruptcy, Baxter was able to remove a substantial number of opt-out
claims from state to federal courts. As of June 30, 1995, Baxter had
removed the claims of 2,361 individuals and moved to transfer all of those
cases to the federal district court in Michigan in which the Dow Corning
bankruptcy is pending. The court denied transfer of these cases. Baxter has
filed a notice of appeal.
In the fourth quarter of 1993, the Company accrued $556 million for its
estimated liability resulting from the global settlement of the mammary
implant class action and recorded a receivable for estimated insurance
recovery of $426 million, resulting in a net charge of $130 million. Based on
its continuing evaluation of the remaining opt-outs, the Company accrued an
additional $298 million for its estimated liability to litigate and/or settle
cases and claims involving opt-outs and recorded an additional receivable for
estimated insurance recovery of $258 million, resulting in an additional net
charge of $40 million in the first quarter of 1995.
At present, the Company is not able to estimate the nature and extent of
its further potential future liability with respect to mammary implants. The
Company believes that most of its potential future liability with respect to
mammary implant cases is
<PAGE>
-23-
covered by insurance. The Company intends to continue to litigate pending
mammary implant cases.
Upon resolution of any of the uncertainties concerning these cases, the
Company may ultimately incur charges in excess of presently established
reserves. While such a future charge could have a material adverse impact on
the Company's net income in the period in which it is recorded, management
believes that any outcome of this litigation will not have a material adverse
effect on the Company's consolidated financial position.
As of September 30, 1995, the Company was a defendant, together with
other defendants, in 352 lawsuits, and had 861 pending claims in the United
States, Canada, Ireland, Italy, Spain, Japan and the Netherlands, involving
individuals who have hemophilia, or their representatives. Those cases and
claims seek damages for injuries allegedly caused by anti-hemophilic factor
concentrates VIII and IX derived from human blood plasma processed and sold
by the Company.
The typical case or claim alleges that the individual with hemophilia
was infected with HIV by infusing Factor VIII or Factor IX concentrates
("Factor Concentrates") containing HIV.
All Federal Court Factor Concentrate cases have been transferred to the
U.S.D.C. for the Northern District of Illinois for case management under
Multi District Litigation (MDL) rules. In addition to the individual suits
against the Company, a purported class action was filed on September 30,
1993, on behalf of all U.S. residents with hemophilia (and their families)
who were treated with Factor Concentrates and who allegedly are infected with
HIV as a result of the use of such Factor Concentrates. This lawsuit was
filed in the United States District Court for the Northern District of
Illinois (WADLEIGH, ET AL., V. RHONE-POULENC RORER, ET AL., U.S.D.C., N.
Dist., Ill. 93C 5969). On November 3, 1994, the court certified the class
only for the purpose of determining whether the defendants' actions were
negligent. The defendants in this case filed a petition for a Writ of
Mandamus with the 7th Circuit Court of Appeals seeking an order directing the
district court judge to vacate that certification. On March 16, 1995, the
Court of Appeals granted the petition and stated that it would issue a Writ
of Mandamus directing the District Court to vacate its certification. On
April 28, 1995, the Court of Appeals denied the plaintiffs request for a
rehearing EN BANC, but stayed enforcement of the writ pending a petition for
certiorari by the plaintiffs to the U.S. Supreme Court. On October 2, 1995,
the U.S. Supreme Court denied the plaintiffs petition for certiorari. Baxter
has also been named in five other purported class actions, none of which have
been certified and three of which have been transferred to the MDL for
discovery purposes. The Company denies these allegations.
Many of the cases and claims are at very preliminary stages, and the
Company has not been able to obtain information sufficient to evaluate each
case and claim. In most states, the Company's potential liability is limited
by laws that provide that the sale of blood or blood derivatives, including
Factor Concentrates, is not the sale of a "good," and thus is not covered by
the doctrine of strict liability. As a result, each claimant will have to
prove that his or her injuries were caused by the Company's negligence. The
WADLEIGH case alleges that the Company was negligent in failing: to use
available purification technology; to promote research and development for
product safety; to withdraw Factor Concentrates once it knew or should have
known of viral-contamination of such concentrates; to screen plasma donors
properly; to recall contaminated Factor Concentrates; and to warn of risks
known at the time the Factor Concentrates were used.
<PAGE>
-24-
The Company believes that a substantial portion of the liability and
defense costs related to anti-hemophilic Factor Concentrate cases and claims
will be covered by insurance, subject to self-insurance retentions,
exclusions, conditions, coverage gaps, policy limits and insurer solvency.
Most of the Company's insurers have reserved their rights (i.e., neither
admitted nor denied coverage), and may attempt to reserve in the future, the
right to deny coverage, in whole or in part, due to differing theories
regarding, among other things, the applicability of coverage and when
coverage may attach.
The Company has filed suit in California, against all of the insurance
companies that issued comprehensive general liability and excess liability
policies to the Company for a declaratory judgment that the policies of all
of the carriers provide coverage. In that suit, the Company also sued Zurich
for failure to defend it. The Company subsequently dismissed without
prejudice its claims against all of the excess insurance carriers except
Columbia Casualty Company (one of the Company's excess insurers during part
of the relevant time period). The Company has filed an Amended Complaint in
the California action seeking a declaration that Zurich has a duty to defend
the Company in connection with the Factor Concentrate cases and claims.
Zurich Insurance Co., one of the Company's comprehensive general
liability insurance carriers has filed a suit in Illinois, against the
Company seeking a declaratory judgment that the policies it had issued do not
cover the losses that the Company has notified it of for a number of reasons,
including that Factor Concentrates are products, not services, and are,
therefore, excluded from the policy coverage, and that the Company has failed
to comply with various obligations of notice, and the like under the policies.
The Company's excess liability insurance carriers also brought suit in
Illinois for a declaratory judgment as to the parties' respective
liabilities. That suit has been dismissed without prejudice. The suit filed
by Zurich in Illinois had been stayed pending resolution of the Company's
California case. Zurich appealed that stay and the Illinois Appellate Court
reversed. The Company has filed a motion for a stay pending its filing of a
writ of certiorari to the Illinois Supreme Court. The Illinois Appellate
Court also issued a certificate of importance ensuring the Illinois Supreme
Court will hear the Company's appeal.
The Company has notified its insurers concerning coverages and the
status of the cases. Also, some of the anti-hemophilic Factor Concentrates
cases pending against the Company seek punitive damages and compensatory
damages arising out of alleged intentional torts. Depending on policy
language, applicable law and agreements with insurers, the damages awarded
pursuant to such claims may or may not be covered, in whole or in part, by
insurance. Accordingly, the Company is not currently in a position to
estimate the amount of its potential future recoveries from its insurers, but
has estimated its recovery with respect to the reserves it has established.
The Company is vigorously defending each of the cases and claims against
it. The Company will continue to seek ways to resolve pending and threatened
litigation concerning these issues through a negotiated resolution.
On June 29, 1995, the German parliament approved the creation of an
assistance fund for approximately 1,900 individuals, and their families, who
contracted HIV from blood and blood products in the early 1980's. The fund
of approximately $180 million will be established by contributions from the
German federal and state
<PAGE>
-25-
governments, the German Red Cross and fractionators who sold Factor
Concentrate during the relevant period of time. The Company has agreed to
contribute approximately $12 million over a four year period of time. Claims
against the German federal and state governments, the German Red Cross and
fractionators contributing to the fund are, by law, extinguished.
The Company has been notified that approximately 1,355 HIV positive
hemophiliacs in Spain are investigating the possibility of filing suit both
in the United States and in Spain against the Company and other fractionators
which sold factor concentrate in Spain in the early 1980's. As of this time,
no formal suits have been filed against the Company either in Spain or the
United States. U.S. counsel for these individuals has indicated that Baxter
factor concentrates were used by at least 755 of the 1,355 potential
claimants.
On February 21, 1994, the Company began the voluntary withdrawal
world-wide of its Gammagard-Registered Trademark- IGIV (intravenous immune
globulin) because of indications that it might be implicated in Hepatitis C
infections occurring in users of Gammagard. Gammagard is a concentration of
antibodies derived from human plasma and is used to treat immune-suppressed
patients. A new immune globulin, Gammagard S/D, produced with an additional
viral inactivation process was introduced by the Company after licensure in
the United States and certain other countries.
As of September 30, 1995, the Company had received reports of Hepatitis
C transmission from 331 patients. The exact cause for these reports has not
been determined; however, many of the reports have been associated with
Gammagard injection produced from plasma which was screened for antibodies to
the Hepatitis C virus through second generation testing. The number of
patients receiving Gammagard IGIV produced from the second-generation
screened plasma is not yet known, nor is the number of patients claiming
exposure to Hepatitis C known.
As of September 30, 1995, the Company was a defendant in 74 lawsuits and
had 83 pending claims in United States, Denmark, France, Germany, Italy,
Spain, Sweden and the United Kingdom resulting from this incident. Seven
suits in the United States have been filed as purported class actions, (LOWE
V. BAXTER, U.S.D.C., W.D. KY, C94-0125; MOCK V. BAXTER, ET AL., U.S.D.C., ID,
CIV-94-0524-S-LMV; FAYNE V. BAXTER, U.S.D.C., S.D., NY, 95CIV1129; GUTTERMAN
V. BAXTER, U.S.D.C., S.D., IL, 95-198-WDS; GEARY V. BAXTER, U.S.D.C., W.D.,
PA, 95 0457; KELLEY V. BAXTER, U.S.D.C., M.D., NC, 6:95CV00178; and LOGAN, ET
AL. V. BAXTER, U.S.D.C., Central Dist., CA, 95-3584). The suits allege
infection with the Hepatitis C virus from the use of Gammagard. On June 9,
1995, the judicial panel on multi-district litigation ordered all federal
cases involving Gammagard to be transferred to the Central District of
California for coordinated pretrial proceedings before Judge Manuel L. Real,
MDL docket no. 1060. Of the 71 pending suits in the United States, 48 are
filed in federal court (including the 7 class actions), and all are expected
to be transferred to Judge Real. Judge Real has indicated that he intends to
hold a trial on causation on February 26, 1996. The Company is defending
these cases.
In the fourth quarter of 1993, the Company accrued $131 million for its
estimated worldwide liability for litigation and settlement expenses
involving anti-hemophilic Factor Concentrate cases, and recorded a receivable
for insurance coverage of $83 million, resulting in a net charge of $48
million. The expense associated with the German settlement is covered by
this accrual.
<PAGE>
-26-
In the third quarter of 1995, significant developments occurred,
primarily in the United States, Europe and Japan relative to claims and
litigation pertaining to the Company's plasma based therapies, including
Factor Concentrates. After analyzing circumstances in light of recent
developments and considering various factors and issues unique to each
geography, the Company revised its estimated exposure from the $131 million
previously recorded for Factor Concentrates to $378 million for all plasma
based therapies. Related estimated insurance recoveries were revised from
$83 million for Factor Concentrates to $274 million for all plasma based
therapies. This resulted in a net charge of $56 million in the third quarter
of 1995.
Upon resolution of any of the uncertainties concerning these cases, or
if the Company, along with the other defendants, enters into comprehensive
settlements of the putative class actions described above, the Company may
incur charges in excess of presently established reserves. While such a
future charge could have a material adverse impact on the Company's net
income in the period in which it is recorded, management believes that any
outcome of this litigation will not have a material adverse effect on the
Company's consolidated financial position.
Baxter Healthcare Corporation ("BHC") was one of ten defendants named in
a purported class action filed in August 1993, on behalf of all medical and
dental personnel in the state of California who allegedly suffered allergic
reactions to natural rubber latex gloves and other protective equipment or
who allegedly have been exposed to natural rubber latex products. (KENNEDY,
ET AL., V. BAXTER HEALTHCARE CORPORATION, ET AL., Sup. Ct., Sacramento Co.,
Cal., #535632). The case alleges that users of various natural rubber latex
products, including medical gloves made and sold by BHC and other
manufacturers, suffered allergic reactions to the products ranging from skin
irritation to systemic anaphylaxis. The Court granted defendants' demurrer
to the class action allegations. This is currently on appeal. In April
1994, a similar purported class action, GREEN, ET AL. V. BAXTER HEALTHCARE
CORPORATION, ET AL., (Cir. Ct., Milwaukee Co., WI, 94CV004977) was filed
against Baxter and three other defendants. The class action allegations have
been withdrawn, but additional plaintiffs added individual claims. As of
September 30, 1995, twelve additional lawsuits have been served on the
Company containing similar allegations of sensitization to natural rubber
latex product. The Company will vigorously defend against these actions.
Management believes that the outcome of these matters will not have a
material adverse effect on the Company's results of operations or
consolidated financial position.
A purported class action has been filed against the Company, Caremark
International, Inc. ("Caremark"), C.A. (Lance) Piccolo, James G. Connelly and
Thomas W. Hodson (all current officers of Caremark) alleging securities law
disclosure violations in connection with the November 30, 1992, spin-off of
Caremark in the Registration and Information Statement ("Registration
Statement") and subsequent SEC filings submitted by Caremark (ISQUITH V.
CAREMARK INTERNATIONAL, INC., ET AL., U.S.D.C., N. Dist. Ill., 94C 5534).
The plaintiffs allege, among other things, that the Registration Statement
and subsequent SEC filings contained false and misleading statements
regarding the scope of the Office of Inspector General for the Department of
Health and Human Services' investigation of Caremark's business and
Medicare/Medicaid patient-referral practices. The Company has responded to
the complaint and is vigorously defending this action. Management believes
that the outcome of this matter will not have a material adverse effect on
the Company's results of operations or consolidated financial position.
As of September 30, 1995, the Company has been named as a potentially
responsible party for cleanup costs at 18 hazardous waste sites. The Company
was a
<PAGE>
-27-
significant contributor to waste disposed of at only one of these sites, the
Thermo-Chem site in Muskegon, Michigan. The Company expects that the total
cleanup costs for this site will be between $44 million and $65 million, of
which the Company's share will be approximately $5 million. This amount, net
of payments of approximately $1 million, has been accrued and is reflected in
the Company's financial statements.
In all of the other sites, the Company was a minor contributor and does
not have information on the total cleanup costs. The Company has, however,
in most of these cases been advised by the potentially responsible party of
its roughly estimated exposure at these sites. Those estimated exposures
total approximately $7 million. This amount has been accrued and reflected
in the Company's financial statements.
The Company is a defendant in a number of other claims, investigations
and lawsuits. Based on the advice of counsel, management does not believe
that the other claims, investigations and lawsuits individually or in the
aggregate, will have a material adverse effect on the Company's operations or
its consolidated financial condition.
<PAGE>
-28-
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits thereto.
(b) Report on Form 8-K
None
<PAGE>
-29-
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
-------------------------
(Registrant)
Date: November 13, 1995 By: /s/Harry M. Jansen Kraemer,Jr.
----------------------------------
Harry M. Jansen Kraemer, Jr.
Senior Vice President and
Chief Financial Officer
<PAGE>
-30-
Exhibits Index
Number Description of Exhibit Page Number
- ------ ---------------------- -----------
11.1 Computation of Primary
Earnings Per Common Share
11.2 Computation of Fully Diluted
Earnings Per Common Share
12 Computation of Ratio of
Earnings to Fixed Charges
15 Letter Re Unaudited Interim
Financial Information
27 Financial Data Schedule
(All other exhibits are inapplicable.)
- -------------------------------------------------------------------------------
<PAGE>
-31-
Baxter International Inc. and Subsidiaries
Exhibit 11.1 - Computation of Primary Earnings per Common Share
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(Unaudited - in millions, Three months ended Nine months ended
except per share data) September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income available for common stock $163 $149 $473 $424
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Shares
Weighted average number of common
shares outstanding 275 283 278 279
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Primary earnings per common share $0.59 $0.53 $1.70 $1.52
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-32-
Baxter International Inc. and Subsidiaries
Exhibit 11.2 - Computation of Fully Diluted Earnings per Common Share
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(Unaudited - in millions, Three months ended Six months ended
except per share data) September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income available for common stock $163 $149 $473 $424
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares
outstanding 275 283 278 279
Additional shares assuming exercise of
stock options, performance share awards
and stock purchase plan subscriptions 4 1 5 2
- ----------------------------------------------------------------------------------------------
Average common shares and equivalents
outstanding 279 284 283 281
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Fully diluted earnings per common share $0.58 $0.52 $1.67 $1.51
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-33-
Baxter International Inc. and Subsidiaries
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
(Unaudited - in millions, except ratios)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year ended December 31 1994 1993(2) 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income tax expense and
cumulative effect of accounting
change $801 $(330) $753 $688 $16
Add:
Interest costs 242 232 221 231 264
Estimated interest included
in rentals(1) 43 44 43 36 35
- -------------------------------------------------------------------------------
Fixed charges as defined 285 276 264 267 299
Interest costs capitalized (5) (10) (10) (9) (5)
Losses of less than majority owned
affiliates, net of dividends 18 27 34 32 22
- -------------------------------------------------------------------------------
Income as adjusted $1,099 $(37) $1,041 $978 $332
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Ratio of earnings to fixed charges 3.86 (.13) 3.94 3.66 1.11
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30 1995
<S> <C>
Income before income taxes $660
Add:
Interest costs 163
Estimated interest included in rentals (1) 32
- -------------------------------------------------------------------------------
Fixed charges as defined 195
Interest costs capitalized (4)
Losses of less than majority
owned affiliates, net of dividends 3
- -------------------------------------------------------------------------------
Income as adjusted $854
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Ratio of earnings to fixed charges 4.38
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
- ------------------------
(1) Represents the estimated interest portion of rents.
(2) Earnings were inadequate to cover fixed charges for the
year-ended December 31, 1993, due to the provision for the
restructuring program costs. The amount of the coverage
deficiency is $313 million.
<PAGE>
-34-
EXHIBIT 15
November 13, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We are aware that Baxter International Inc. has included our report dated
November 13, 1995 (issued pursuant to the provisions of Statement on Auditing
Standards No. 71) in the Prospectus constituting part of its Registration
Statements on Form S-8 (Nos. 2-82667, 2- 86993, 2-97607, 33-8812, 33-15523,
33-15787, 33-28428, 33-33750 and 33-54069), on Form S- 3 (Nos. 33-5044,
33-23450, 33-27505, 33-31388 and 33-49820) and on Form S-4 (Nos. 33-808,
33-15357 and 33-53937). We are also aware of our responsibilities under the
Securities Act of 1933.
Yours very truly,
Price Waterhouse LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1995
AND CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 468
<SECURITIES> 0
<RECEIVABLES> 1,728
<ALLOWANCES> 39
<INVENTORY> 1,653
<CURRENT-ASSETS> 4,304
<PP&E> 4,589
<DEPRECIATION> 2,065
<TOTAL-ASSETS> 10,276
<CURRENT-LIABILITIES> 2,797
<BONDS> 2,358
<COMMON> 288
0
0
<OTHER-SE> 3,264
<TOTAL-LIABILITY-AND-EQUITY> 10,276
<SALES> 7,239
<TOTAL-REVENUES> 7,239
<CGS> 4,826
<TOTAL-COSTS> 4,826
<OTHER-EXPENSES> 311<F1>
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 163
<INCOME-PRETAX> 660
<INCOME-TAX> 187
<INCOME-CONTINUING> 473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 473
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.67
<FN>
<F1>For "other costs and expenses" - Ref #5-03(b)3-Includes
R&D & Goodwill amortization.
</FN>
</TABLE>
