<PAGE>
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(d)
OF REGULATION S-T
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 March 31, 1998
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0781620
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015-4633
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(847) 948-2000
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_____
---------
The number of shares of the registrant's Common Stock, par value $1.00 per
share, outstanding as of April 30, 1998, the latest practicable date, was
281,036,115 shares.
<PAGE>
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended March 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
Part I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
<S> <C> <C>
Condensed Consolidated Statements of Income.............................2
Condensed Consolidated Balance Sheets...................................3
Condensed Consolidated Statements of Cash Flows.........................4
Notes to Condensed Consolidated Financial Statements....................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................9
Review by Independent Public Accountants...........................................16
Report of Independent Accountants..................................................17
Part II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings........................................................18
Item 6. Exhibits and Reports on Form 8-K.........................................21
Signature..........................................................................22
Exhibits...........................................................................23
</TABLE>
<PAGE>
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
(in millions, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
-------------------------------
<S> <C> <C>
Operations
Net sales $1,468 $1,443
Costs and expenses
Cost of goods sold 806 782
Marketing and administrative expenses 307 323
Research and development expenses 86 90
Interest, net 42 38
Goodwill amortization 12 10
Acquired research and development - 352
Other income (4) (2)
- ----------------------------------------------------------------------------------------------------
Total costs and expenses 1,249 1,593
- ----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 219 (150)
Income tax expense 55 53
- ----------------------------------------------------------------------------------------------------
Net income (loss) $164 ($203)
- ----------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic $.59 ($.74)
====================================================================================================
Diluted $.58 ($.74)
====================================================================================================
Weighted average number of common shares outstanding:
Basic 280 274
====================================================================================================
Diluted 285 274
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
3
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except shares)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
(unaudited)
-----------------------------------
<S> <C> <C> <C>
Current assets Cash and equivalents $ 431 $ 465
Accounts receivable 1,382 1,372
Notes and other current receivables 382 367
Inventories 1,251 1,208
Short-term deferred income taxes 253 253
Prepaid expenses 295 205
---------------------------------------------------------------------------------------------------
Total current assets 3,994 3,870
- ----------------------------------------------------------------------------------------------------------------------
Property, At cost 4,465 4,407
plant and Accumulated depreciation and amortization (2,079) (2,047)
equipment ---------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,386 2,360
- ----------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,756 1,622
Insurance receivables 368 409
Other 402 446
---------------------------------------------------------------------------------------------------
Total other assets 2,526 2,477
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 8,906 $ 8,707
======================================================================================================================
Current Notes payable to banks $ 168 $ 102
liabilities Current maturities of long-term debt and lease obligations 47 42
Accounts payable and accrued liabilities 1,714 1,963
Income taxes payable 493 450
---------------------------------------------------------------------------------------------------
Total current liabilities 2,422 2,557
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,898 2,635
- ----------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 305 316
- ----------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 215 210
- ----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 372 370
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 350,000,000
equity shares, issued 287,701,247 shares in 1998 and 1997 288 288
Additional contributed capital 1,873 1,876
Retained earnings 1,089 1,006
Common stock in treasury, at cost, 6,756,061
shares in 1998 and 7,662,187 shares in 1997 (293) (329)
Accumulated other comprehensive income (263) (222)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 2,694 2,619
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,906 $ 8,707
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
4
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
(brackets denote cash outflows) 1998 1997
-------------------------------
<S> <C> <C> <C>
Cash flow Net income (loss) $ 164 ($203)
from Adjustments
operations Depreciation and amortization 107 109
Deferred income taxes (11) 4
Acquired research and development - 352
Other 2 31
Changes in balance sheet items
Accounts receivable (10) 8
Inventories (68) (81)
Accounts payable and other accrued liabilities (138) (155)
Net litigation payments (57) (30)
Other (44) (15)
------------------------------------------------------------------------------------------------------
Cash flow from operations (55) 20
- -------------------------------------------------------------------------------------------------------------------------
Investment Capital expenditures (92) (69)
activities Acquisitions, net of cash received,
and investments in affiliates (139) (346)
Proceeds from asset dispositions - (4)
------------------------------------------------------------------------------------------------------
Investment activities, net (231) (419)
- -------------------------------------------------------------------------------------------------------------------------
Financing Issuance of debt and lease obligations 633 508
activities Redemption of debt and lease obligations (104) (142)
Decrease in debt with maturities
of three months or less, net (223) (59)
Common stock dividends (81) (77)
Stock issued under employee benefit plans 33 29
------------------------------------------------------------------------------------------------------
Financing activities, net 258 259
- -------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and equivalents (6) (33)
- -------------------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (34) (173)
Cash and equivalents at beginning of period 465 761
- -------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 431 $ 588
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
5
Baxter International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. FINANCIAL INFORMATION
- -------------------------
The unaudited interim condensed consolidated financial statements of Baxter
International Inc. and its subsidiaries (the "Company" or "Baxter") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Company's 1997
Annual Report to Stockholders.
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments, except for the in-process research and
development charge relating to the acquisitions discussed below, 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 1997 financial
statements to the 1998 presentation.
2. EARNINGS PER SHARE
- ----------------------
The numerator for both basic and diluted earnings per share (EPS) is net income.
The denominator for basic EPS is the weighted-average number of common shares
outstanding during the period. The denominator for diluted EPS is increased for
the effect of dilutive securities, which consist primarily of employee stock
options. Earnings per share amounts for 1997 have been restated to conform to
the requirements of SFAS No. 128, "Earnings per Share," which was adopted in
1997. For Baxter, diluted earnings per share amounts under the new standard are
the same as primary earnings per share amounts previously presented.
3. COMPREHENSIVE INCOME
- ------------------------
In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income. This statement establishes rules for
the reporting of comprehensive income and its components. Comprehensive income
consists of net income and foreign currency translation adjustments and will be
presented in the Consolidated Statement of Stockholders' Equity for the year
ended December 31, 1998. Prior year financial statements will be reclassified
to conform to the SFAS No. 130 requirements. The adoption of SFAS No. 130 had
no impact on total stockholders' equity. Comprehensive income (loss) for the
three months ended March 31, 1998 and 1997 was $123 million and ($353) million,
respectively.
<PAGE>
6
4. ACQUISITIONS
- ----------------
All acquisitions during the three months ended March 31, 1998 and 1997 were
accounted for under the purchase method. The purchase price of each acquisition
was allocated to the net assets acquired based on estimates of their fair values
at the date of the acquisition. The excess of the purchase price over the fair
values of the net tangible assets and liabilities acquired is allocated to
intangible assets. On the basis of independent appraisals, a portion of the
purchase price for certain of the acquisitions was allocated to in-process
research and development (R&D) which, under generally accepted accounting
principles, was immediately expensed.
Results of operations of acquired companies are included in the Company's
results of operations as of the respective acquisition dates. Excluding the in-
process R&D charges, had the first quarter 1998 and the 1997 acquisitions taken
place on January 1 of 1998 or 1997, consolidated sales, net income and earnings
per share for the quarters ended March 31, 1998 and 1997, respectively, would
not have been significantly different from reported amounts.
Bieffe Medital S.p.A.
- ---------------------
In early 1998, the Company acquired a majority interest in Bieffe Medital
S.p.A., a European manufacturer of dialysis and intravenous solutions and
containers, for approximately $244 million, which includes assumption of debt.
The purchase of the remaining shares is expected to be completed in mid-1998.
Approximately $40 million and $13 million of the purchase price was allocated to
existing technology and trademarks, respectively, and is being amortized on a
straight-line basis over 25 years. Approximately $74 million of the purchase
price was allocated to goodwill and is being amortized on a straight-line basis
over 40 years.
Immuno International AG
- -----------------------
In the first fiscal quarter of 1997, the Company acquired Immuno International
AG, a global manufacturer of biopharmaceutical products and services for
transfusion medicine. The acquisition cost was approximately $600 million plus
assumption of $280 million of net debt. Approximately $57 million of the
purchase price is being withheld to cover certain legal contingencies.
Approximately $220 million of the purchase price was allocated to in-process
R&D, and expensed, as discussed above. Approximately $95 million of the
purchase price was allocated to existing product technology and is being
amortized on a straight-line basis over 20 years. Approximately $82 million of
the purchase price was allocated to goodwill and is being amortized on a
straight-line basis over 40 years.
Research Medical, Inc.
- ----------------------
In March 1997, Baxter acquired Research Medical, Inc., a provider of specialized
products used in open-heart surgery. The purchase price was approximately $239
million and was principally settled with 4,801,711 shares of Baxter
International Inc. common stock. Approximately $132 million of the purchase
price was allocated to in-process R&D, and expensed, as discussed above.
Approximately $40 million of the purchase price was allocated to existing
product technology and is being amortized on a straight-line basis over 14
years. Approximately $38 million of the purchase price was allocated to goodwill
and is being amortized on a straight-line basis over 20 years.
<PAGE>
7
5. SUBSEQUENT EVENTS
- ---------------------
Pharmaceutical Products Division of the BOC Group
- -------------------------------------------------
In April 1998, the Company acquired the Pharmaceutical Products Division of the
BOC Group's Ohmeda health-care business, a manufacturer of gases and drugs used
for general and local anesthesia, for approximately $104 million.
Somatogen, Inc.
- ---------------
In May 1998, the Company acquired Somatogen, Inc. (Somatogen), a
biopharmaceutical company which is developing recombinant hemoglobin technology.
The purchase price was approximately $200 million and was principally settled
with 3,547,004 shares of Baxter International Inc. common stock. In addition,
Somatogen shareholders are entitled to a contingent deferred cash payment of up
to $2.00 per Somatogen share, or approximately $42 million, based on a
percentage of sales of certain future products through the year 2007. A
significant portion of the purchase price will be allocated to in-process R&D,
and expensed, as discussed above, in the second quarter of 1998.
6. INVENTORIES
- ---------------
Inventories consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
March 31, December 31,
1998 1997
(in millions) (unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 301 $ 279
Work in process 266 243
Finished products 684 686
- --------------------------------------------------------------------------------
Total inventories $1,251 $1,208
================================================================================
</TABLE>
7. RESTRUCTURING RESERVE
- -------------------------
In September 1995, the Company recorded a restructuring charge of $103 million
primarily to eliminate excess plant capacity and reduce manufacturing costs, as
well as to initiate certain organizational structure changes. The charge
predominantly relates to the closure of the intravenous-solutions plant and
warehouse in Carolina, Puerto Rico. Production and warehousing will be
transferred and consolidated into other facilities. Employee-related costs
consist primarily of severance. The Company currently estimates that
approximately 1,200 positions will be eliminated in total. Approximately 370
positions have been eliminated to date and completion of the plan is anticipated
in 1999. The original timetable for the program has been affected by delays in
required governmental regulatory reviews relating to the transfer of equipment
and production processes to other facilities in Puerto Rico and the United
States. During the first quarter of 1998, approximately $1 million in reserves
were utilized.
<PAGE>
8
The restructuring program initiated in 1993 is substantially complete and
achieved all employee headcount reduction and savings goals established at
inception.
8. LEGAL PROCEEDINGS
Refer to Part II - Item 1. Legal Proceedings below for the status of lawsuits
and claims involving the Company.
9. INTEREST, NET
Net interest expense consisted of the following (unaudited):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three months ended March 31,
(in millions) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Interest expense $ 53 $47
Interest income (11) (9)
- -------------------------------------------------------------------------------
Interest, net $ 42 $38
===============================================================================
</TABLE>
<PAGE>
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Baxter International Inc.'s ("Baxter" or the "Company") 1997 Annual Report to
Stockholders ("Annual Report") contains management's discussion and analysis of
financial condition and results of operations for the year ended December 31,
1997. In the Annual Report, management outlined its key financial objectives for
1998. These objectives and the results achieved through March 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RESULTS THROUGH
FULL YEAR 1998 OBJECTIVES MARCH 31, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C>
. Increase net sales approximately 10%, . Net sales during the first quarter increased 5%
before 1998 acquisitions and the impact of before the 1998 acquisition of Bieffe Medital S.p.A.
foreign exchange. (Bieffe) and before the effect of the strengthening
dollar, and increased 2% including this acquisition
and at actual currency translation rates.
- ------------------------------------------------------------------------------------------------------
. Grow earnings in the mid-teens, before . Excluding the in-process research and development
the impact of foreign exchange, and in the charge recorded in the prior year, net income for the
first quarter increased 21% before the impact of
foreign exchange, and increased 10% after absorbing
the impact of foreign exchange.
- ------------------------------------------------------------------------------------------------------
. Generate at least $500 million in . The Company had an operational cash net outflow of
operational cash flow, after investing $60 million during the first quarter. A net
approximately $1 billion in capital operational cash outflow is typical during the first
improvements and research and development. fiscal quarter of the year based on the timing of
receipts and disbursements. The total of capital
expenditures and research and development expenses
for the three months ended March 31, 1998 was $178
million.
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
10
RESULTS OF OPERATIONS
- ---------------------
NET SALES TRENDS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Three months ended March 31, Percent
(in millions) 1998 1997 Increase
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International $ 764 $ 765 0%
United States 704 678 4%
- -------------------------------------------------------------------------------------------
Total net sales $1,468 $1,443 2%
===========================================================================================
</TABLE>
Without the effect of changes in foreign exchange rates, total net sales growth
was 7% for the three months ended March 31, 1998.
Growth in international sales for the three months ended March 31, 1998,
excluding the impact of the strengthened U.S. dollar, was 10%. As noted above,
the 1998 acquisition of Bieffe contributed to this growth rate. Refer to Item
1. Financial Statements - Note 4 to the Condensed Consolidated Financial
Statements for further information regarding this acquisition. Strong sales of
the Company's peritoneal dialysis products and services used to treat kidney
disease and tissue valves used in heart-valve therapy contributed to the
international sales growth rate. Growth was particularly strong in Latin
America, where it rose more than 20% at actual currency exchange rates and
almost 30%, excluding the impact of foreign exchange.
Continued strong demand for the Company's tissue heart valves was a significant
contributor to domestic sales growth. In addition, increased sales as a result
of the multiyear agreement with Premier, a major U.S. group of customers, and
sales of the Colleague/TM/ volumetric infusion pump, which was introduced in
1997, contributed to domestic sales growth. Competitive and pricing pressures in
the United States continue to affect sales growth across various product lines.
In addition, sales growth in the Blood Therapies business was unfavorably
affected during the quarter by regulatory and production issues that have
impacted the supply of factor concentrates in the entire industry.
The following table shows key ratios of certain income statement items as a
percent of sales:
GROSS MARGIN AND EXPENSE RATIOS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Three months ended March 31,
1998 1997 Decrease
- --------------------------------------------------------------------------------------------
<S> <C>
Gross profit margin 45.1% 45.8% (.7 pts)
Marketing and administrative expenses 20.9% 22.4% (1.5 pts)
- --------------------------------------------------------------------------------------------
</TABLE>
While the actual gross profit margin decreased .7 points as compared to the
prior year quarter, the margin was relatively flat excluding the impact of
changes in currency exchange rates.
Marketing and administrative expenses decreased as a percent of sales by 1.5
points in the three months ended March 31, 1998 as compared to the prior year
quarter. Changes in currency exchange rates did not have an effect on the
change in the ratio from 1997 to 1998. As expected, the Company has more than
offset the incremental costs of expanding into developing markets and new
business initiatives with a continued focus on cost control across
<PAGE>
11
all business units coupled with realizing benefits of integrating recent
acquisitions and implementing the restructuring programs discussed below.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Three months ended March 31, Percent
(in millions) 1998 1997 decrease
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Research and development expenses $86 $90 (4%)
As a percent of sales 6% 6%
- -------------------------------------------------------------------------------------------
</TABLE>
Research and development ("R&D") expenses above exclude the in-process R&D
charge recorded in the first quarter of 1997 relating to the acquisitions of
Immuno International AG (Immuno) and Research Medical, Inc. (RMI). R&D expenses
decreased in 1998 as compared to the first quarter of 1997 due to a
strengthening of the U.S. dollar and the December 1997 divestiture of the
Company's Immunotherapy division. Excluding the impact of foreign exchange and
the first quarter 1997 Immunotherapy division R&D expenses, expenditures
increased 6%.
OTHER INCOME AND EXPENSE
Net interest expense and goodwill amortization increased in 1998 as compared to
the prior year period primarily as a result of the acquisition of Bieffe.
PRETAX AND NET INCOME
Excluding the first quarter 1997 in-process R&D charge relating to the
acquisitions of Immuno and RMI, pretax income increased 8% during the three
months ended March 31, 1998.
The Company's effective income tax rate for the first quarter of 1998 was 25.1%
and, excluding the first quarter 1997 R&D charge, was 26.2% in the corresponding
period of 1997. The effective income tax rate is lower in 1998 as compared to
1997 because a larger portion of the Company's earnings are being generated in
lower tax jurisdictions.
RESTRUCTURING PROGRAMS
- ----------------------
Refer to Item 1. Financial Statements - Note 7 to the Condensed Consolidated
Financial Statements for a discussion of the Company's restructuring charge,
utilization of the reserves and headcount reductions to date. Management
believes remaining restructuring reserves are adequate to complete the actions
contemplated by the programs. Future cash expenditures will be funded by cash
generated from operations.
The Company has substantially completed the 1993 program. Originally targeted
annual pretax savings of approximately $130 million are being achieved.
Management is partially investing these savings in R&D, new business
initiatives, and expansion into growing international markets.
<PAGE>
12
The Company is in the process of implementing the 1995 program. Management
expects that the plant closures and consolidations in Puerto Rico will be
substantially completed in 1999, and will lower manufacturing costs and help
mitigate any future exposure to gross margin erosion arising from pricing
pressures, primarily in the United States.
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.
Management uses an internal performance measure called operational cash flow
which evaluates each operating business and geographic region on all aspects of
cash flow under its direct control.
The following table reconciles cash flow provided by operations, as determined
by generally accepted accounting principles, to operational cash flow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Three months ended March 31,
(in millions) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operations per the Company's
Condensed Consolidated Statements of Cash Flows ($55) $20
Capital expenditures (92) (69)
Net interest after tax 25 23
Mammary implant litigation, net 62 7
- ---------------------------------------------------------------------------------
Operational cash net outflow ($60) ($19)
=================================================================================
</TABLE>
The Company typically has a net operational cash outflow in the first quarter of
the year due to the timing of receipts and disbursements. The Company exceeded
its annual operational cash flow goals for the last three years. Management
expects to achieve its goal of generating at least $500 million in operational
cash flow in 1998.
Approximately $114 million of the total net cash flows used for acquisitions and
investments in affiliates for the three months ended March 31, 1998 related to
the acquisition of Bieffe. Net cash flows used for acquisitions and investments
in affiliates for the three months ended March 31, 1997 related primarily to the
acquisition of Immuno. Refer to Item 1. Financial Statements - Note 4 to the
Condensed Consolidated Financial Statements for further information regarding
these acquisitions.
The Company's net-debt-to-capital ratio was 49.9% and 46.9% at March 31, 1998
and December 31, 1997, respectively. The increase in the ratio was primarily
due to increased net debt as a result of the acquisition of Bieffe. Management
expects the ratio to decline to the low 40% range over time as a result of
ongoing operations.
As authorized by the board of directors, the Company repurchases its stock to
optimize its capital structure depending upon its operational cash flows, net
debt level and current market conditions. In November 1995, the board of
directors authorized the repurchase of up to $500 million over a period of
several years, of which $267 million was repurchased as of December 31, 1996.
As discussed above, the Company's net-debt-to-capital ratio is currently 49.9%
and, therefore, management does not presently intend to repurchase shares.
<PAGE>
13
The Company intends to fund its short-term and long-term obligations as they
mature by issuing additional debt or through cash flow from operations. The
Company believes it has lines of credit adequate to support ongoing operational
requirements. Beyond that, the Company believes it has sufficient financial
flexibility to attract long-term capital on acceptable terms as may be needed to
support its growth objectives.
See Part II - Item 1. Legal Proceedings for a discussion of the Company's legal
contingencies and related insurance coverage with respect to cases and claims
relating to the Company's plasma-based therapies and mammary implants
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation, as well as other matters. Upon resolution of any of these
uncertainties, the Company may incur charges in excess of presently established
reserves. While such future charges could have a material adverse impact on the
Company's net income or cash flows in the period in which it is recorded or
paid, based on the advice of counsel, management believes that any outcome of
these actions, individually or in the aggregate, will not have a material
adverse effect on the Company's consolidated financial position.
The matters discussed in this section that are not historical facts include
forward-looking statements. These statements are based on the Company's current
expectations and involve numerous risks and uncertainties. Some of these risks
and uncertainties are factors that affect all international businesses, while
some are specific to the Company and the health-care arenas in which it
operates. The factors below in some cases have affected and could affect the
Company's actual results, causing results to differ, and possibly differ
materially, from those expressed in any such forward-looking statements. These
factors include technological advances in the medical field, economic
conditions, demand and market acceptance risks for new and existing products,
technologies and health-care services, the impact of competitive products and
pricing, manufacturing capacity, new plant start-ups, the global regulatory,
trade and tax policies, continued price competition, product development risks,
including technological difficulties, ability to enforce patents and unforeseen
commercialization and regulatory factors. In particular, the Company, as well
as other companies in its industry, is experiencing increased regulatory
activity by the U.S. Food and Drug Administration with respect to its plasma-
based biologicals and its complaint-handling systems.
Currency fluctuations are also a significant variable for global companies,
especially fluctuations in local currencies where hedging opportunities are
unreasonably expensive, or altogether unavailable. If the United States dollar
continues to strengthen against most foreign currencies, the Company's growth
rates in its sales and net earnings will be negatively impacted.
Management believes that its expectations with respect to forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of the Company's business and operations, but there can be no
assurance that the actual results or performance of the Company will conform to
any future results or performance expressed or implied by such forward-looking
statements.
<PAGE>
14
NEW ACCOUNTING STANDARDS
- ------------------------
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997,
and requires reclassification of prior-period financial statements. Statement
No. 130 requires the presentation of comprehensive income, which consists of net
income and other comprehensive income, and its components in a full set of
financial statements. The Company's other comprehensive income consists of
foreign currency translation adjustments, which currently are reported as a
component of stockholders' equity. Additional items may be included in other
comprehensive income in the future. The Company plans to display comprehensive
income and its components in the Consolidated Statement of Stockholders' Equity
in the year-end 1998 financial statements. The total of comprehensive income
for the three months ended March 31, 1998 and 1997 is disclosed in Note 3 to
these Condensed Consolidated Financial Statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997, and requires reclassification of prior-period
financial statements. Statement No. 131 established standards for reporting
information about operating segments and related disclosures about products and
services, geographic areas and major customers in annual financial statements
and interim financial reports. Management currently is evaluating its
reportable segments under the new Statement and anticipates disclosure for four
operating segments under the new rules: Blood Therapies, CardioVascular, I.V.
Systems/Medical Products and Renal.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which is effective for fiscal
years beginning after December 15, 1997, and requires restatement of prior year
periods presented. The Statement does not change the measurement or recognition
of pension and other postretirement plans. It standardizes the disclosure
requirements, requires additional information on changes in benefit obligations
and fair values of plan assets, and eliminates certain disclosures. The Company
will adopt the new disclosure rules in its year-end 1998 financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for fiscal
years beginning after December 15, 1998. This SOP provides guidance on when
costs incurred for internal-use computer software should and should not be
capitalized. The SOP requires that costs incurred prior to initial application
of the SOP, whether capitalized or not, should not be adjusted to the amounts
that would have been capitalized had this SOP been in effect when those costs
were incurred. Management is in the process of evaluating this standard and
does not anticipate that it will have a material effect on the Company's
financial statements.
<PAGE>
15
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities," which is effective for fiscal years beginning
after December 15, 1998. This SOP provides guidance on the financial reporting
of start-up costs and organization costs and requires such costs, as defined, to
be expensed as incurred. Initial application of the SOP is required to be
reported as the cumulative effect of a change in accounting principle, as
described in APB Opinion No. 20, "Accounting Changes". Management is in the
process of evaluating this new standard and has not yet determined its effect on
the Company's financial statements.
<PAGE>
16
Review by Independent Public Accountants
- ----------------------------------------
A review of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q for the three months ended March 31, 1998 has
been performed by Price Waterhouse LLP, the Company's independent public
accountants. Their report on the interim condensed consolidated financial
information follows. There have been no material adjustments or disclosures
proposed by Price Waterhouse LLP, which have not been reflected in the interim
condensed 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>
17
Report of Independent Accountants
---------------------------------
May 13, 1998
Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet and the
related condensed consolidated statements of income and condensed consolidated
statements of cash flows of Baxter International Inc. and its subsidiaries as of
March 31, 1998 and 1997 and for the three-month periods then ended. 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, 1997, 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 5, 1998
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, 1997, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
Price Waterhouse LLP
<PAGE>
18
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
Baxter International Inc. and certain of its subsidiaries are named as
defendants in a number of lawsuits, claims and proceedings, including product
liability claims involving products now or formerly manufactured or sold by the
Company or by companies that were acquired by Baxter. The most significant of
these are reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, and material developments in such matters for the
quarter ended March 31, 1998 are described below.
Mammary Implant Litigation
- --------------------------
As previously reported in the Company's Annual Report on Form 10-K, the Company,
together with certain of its subsidiaries, is currently a defendant in various
courts in a number of lawsuits brought by individuals, all seeking damages for
injuries of various types allegedly caused by silicone mammary implants formerly
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation (AHSC). AHSC, which was acquired by the Company in 1985, divested
its Heyer-Schulte division in 1984. It is not known how many of these claims
and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed
to other manufacturers.
As of March 31, 1998, Baxter, together with certain of its subsidiaries, had
been named as a defendant or co-defendant in 7,957 lawsuits and 2,077 claims
relating to mammary implants, brought by approximately 16,106 plaintiffs. Of
those plaintiffs, 8,340 are currently included in the Revised Settlement
described below, which accounts for 3,538 of the pending lawsuits against the
Company. Additionally, 7,545 plaintiffs have opted out of the Revised
Settlement (representing 4,206 pending lawsuits), and the status of the
remaining plaintiffs with pending lawsuits is unknown. Some of the opt-out
plaintiffs filed their cases naming multiple defendants and without product
identification; thus, not all of the opt-out plaintiffs will have viable claims
against the Company. As of March 31, 1998, 2,726 of the opt-out plaintiffs had
confirmed Heyer-Schulte product identification. Furthermore, during the first
quarter of 1998, Baxter obtained dismissals, or agreements for dismissals, with
respect to 1,901 plaintiffs.
In addition to the individual suits against the Company, a class action on
behalf of all women with silicone mammary implants is pending in the United
States District Court (U.S.D.C.) for the Northern District of Alabama involving
most manufacturers of such implants, including Baxter (Lindsey, et al v. Dow
Corning, et al, U.S.D.C., N. Dist. Ala., CV 94-P-11558-S). The class action was
certified for settlement purposes only on September 1, 1994, and the settlement
terms were subsequently revised and approved on December 22, 1995 (the Revised
Settlement). All appeals directly challenging the Revised Settlement have been
dismissed.
In addition to the Lindsey class action, the Company also has been named in 14
other purported class actions in various state and provincial courts, only one
of which has been certified. Baxter has reached a settlement with proposed
classes of mammary implant recipients in Ontario and Quebec, Canada. The
maximum settlement payment, which varies based on the number of settlement
participants, is $15 million, plus administrative and notice costs.
<PAGE>
19
Factor Concentrates Litigation
- ------------------------------
As previously reported in the Company's Annual Report on Form 10-K, Baxter is
currently a defendant in a number of claims and lawsuits brought by individuals
who have hemophilia, all seeking damages for injuries allegedly caused by anti-
hemophilic factor concentrates VIII or IX derived from human blood plasma
(factor concentrates) processed by the Company in the early and mid-1980s. None
of these cases involves factor concentrates currently processed by the Company.
As of March 31, 1998, Baxter had been named in approximately 432 lawsuits and
411 claims in the United States, Canada, Ireland, Italy, Taiwan, Japan and the
Netherlands. The U.S.D.C. for the Northern District of Illinois has approved a
settlement of all U.S. federal court factor concentrate cases. Although the
period for claimants to decide whether or not to participate in the settlement
did not expire until April 30, 1998, the approximate number of eligible
claimants as of March 31, 1998 was 5,583, and the number of eligible opt-outs
was approximately 300. The defendants had paid 2,800 claimants as of March 31,
1998. Payments are expected to continue through the end of 1998 as documents
are sent to all eligible claimants.
In Japan, Baxter is a defendant, along with the Japanese government and four
other co-defendants in factor concentrates cases in Osaka, Tokyo, Nagoya,
Tohoku, Fukuoka, Sapporo and Kuramoto. As of March 31, 1998, these Japanese
cases involved 1,272 plaintiffs, of whom 1,233 allegedly used factor
concentrates manufactured by the Company.
Other Litigation
- ----------------
As previously reported in the Company's Annual Report on Form 10-K, Baxter is
currently a defendant in a number of claims and lawsuits brought by individuals
who infused the Company's Gammagard IVIG. As of March 31, 1998, Baxter was a
defendant in 128 lawsuits and 67 claims in the United States, Denmark, France,
Germany, Italy, Spain, Sweden and the United Kingdom. Nine suits currently
pending in the United States have been filed as purported class actions, but
only one has been certified. All U.S. federal court Gammagard IVIG cases have
been transferred to the U.S.D.C. for the Central District of California for case
management under the Multi District Litigation rules. On February 21, 1996, the
court certified a nationwide class of persons who had infused Gammagard IVIG
(Fayne, et al. v. Baxter Healthcare Corporation, U.S.D.C., C.D. Calif., ML-95-
160-R). The Company sought and received an immediate stay of the class notice
from the 9th Circuit Court of Appeals and subsequently filed a Writ of Mandamus
seeking class decertification. On August 5, 1997, the 9th Circuit Court of
Appeals denied the Writ of Mandamus but invited Baxter to challenge the class
issues in the trial court. Baxter filed its challenge to the class on March 27,
1998.
As of September 30, 1996, Allegiance Corporation assumed the defense of
litigation involving claims related to Allegiance's businesses, including
certain claims of alleged personal injuries as a result of exposure to rubber
latex gloves. Allegiance has not been named in most of this litigation but will
be defending and indemnifying Baxter pursuant to certain contractual obligations
for all expenses and potential liabilities associated with claims pertaining to
latex gloves. As of March 31, 1998, the Company had been named as a defendant
in 222 lawsuits, including the following purported class action: Swartz v.
Baxter Healthcare Corp., et al., Court of Common Pleas, Jefferson County, PA,
656-1997 C.D.
<PAGE>
20
A purported class action was filed against Baxter, Caremark International Inc.
(Caremark), C.A. (Lance) Piccolo, James G. Connelly and Thomas W. Hodson (all
former 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 and subsequent SEC filings submitted by Caremark
(Isquith v. Caremark International Inc., et al., U.S.D.C., N. Dist. Ill., 94C
5534). The trial court dismissed the action against the Company essentially on
the ground that the plaintiffs lacked standing to bring this action, and on
February 10, 1998, the 7th Circuit Court of Appeals affirmed the trial court's
ruling. Additionally, in February 1997, the plaintiffs served a separate state
court action, styled as a class action, against Mr. Piccolo, Vernon R. Loucks
Jr., William H. Gantz, William B. Graham and James R. Tobin, alleging violations
of various state laws pertaining to the Caremark spin-off (Isquith, et. al. v.
C.A. (Lance) Piccolo, et al., Circuit Court, Cook County, IL, Chancery Division,
96CH0013652). On April 9, 1998, the trial court dismissed the plaintiffs' case
with prejudice.
<PAGE>
21
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index hereto.
(b) Reports on Form 8-K
A report on Form 8-K was filed with the SEC on February 12, 1998 reporting
the Company's 1997 financial results.
<PAGE>
22
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: May 13, 1998 By: Brian P. Anderson
-------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
<PAGE>
23
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
- --------------------------------------------------------------------------------
Number Description of Exhibit
- ------ ----------------------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter Re Unaudited Interim Financial Information
27 Financial Data Schedule
(All other exhibits have been omitted because they are not applicable
or not required.)
<PAGE>
EXHIBIT 12
Baxter International Inc. and Subsidiaries
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
(unaudited - in millions, except ratios)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1997 1996 1995 1995 1994 1993 1993
(C) (C) (C)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations
before income tax expense (benefit) $ 523 $ 875 $ 793 $ 524 $ 741 $ 559 ($74) $ 472
- ---------------------------------------------------------------------------------------------------------------
Add:
Interest costs 206 206 133 117 117 120 109 109
Estimated interest in rentals (A) 29 29 27 29 29 31 31 31
- ---------------------------------------------------------------------------------------------------------------
Fixed charges as defined 235 235 160 146 146 151 140 140
- ---------------------------------------------------------------------------------------------------------------
Interest costs capitalized (8) (8) (3) (3) (3) (2) (5) (5)
Losses of less than majority owned
affiliates, net of dividends 0 0 8 10 10 18 27 27
- ---------------------------------------------------------------------------------------------------------------
Income as adjusted $ 750 $1,102 $ 958 $ 677 $ 894 $ 726 $88 $ 634
===============================================================================================================
Ratio of earnings to fixed charges 3.19 4.69 5.99 4.64 6.12 4.80 (B) 4.53
===============================================================================================================
- ---------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1998
- ---------------------------------------------------------------------------------------------------------------
Income before income tax expense $ 219
- ---------------------------------------------------------------------------------------------------------------
Add:
Interest costs 54
Estimated interest in rentals (A) 7
- ---------------------------------------------------------------------------------------------------------------
Fixed charges as defined 61
- ---------------------------------------------------------------------------------------------------------------
Interest costs capitalized (1)
Losses of less than majority owned
affiliates, net of dividends 0
- ---------------------------------------------------------------------------------------------------------------
Income as adjusted $ 279
===============================================================================================================
Ratio of earnings to fixed charges 4.57
===============================================================================================================
</TABLE>
(A) Represents the estimated interest portion of rents.
(B) As a result of the loss incurred during this period, the Company's earnings
did not cover the indicated fixed charges. The earnings required to attain
a ratio of one-to-one are $52 million.
(C) Included in this exhibit are supplemental presentations of the ratio of
earnings to fixed charges which exclude the following significant unusual
charges:
1997: $352 million in-process research and development charge.
1995: $103 million restructuring charge, $96 million net litigation charge
and $18 million in-process research and development charge.
1993: $216 million restructuring charge and $330 million net litigation
charge.
<PAGE>
EXHIBIT 15
May 13, 1998
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 May
13, 1998 (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, 33-53937 and 33-
47927). 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
Consolidated Balance Sheet as of March 31, 1998 and the Consolidated Income
Statement for the three months ended March 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 431
<SECURITIES> 0
<RECEIVABLES> 1,799
<ALLOWANCES> 35
<INVENTORY> 1,251
<CURRENT-ASSETS> 3,994
<PP&E> 4,465
<DEPRECIATION> 2,079
<TOTAL-ASSETS> 8,906
<CURRENT-LIABILITIES> 2,422
<BONDS> 2,898
0
0
<COMMON> 288
<OTHER-SE> 2,406
<TOTAL-LIABILITY-AND-EQUITY> 8,906
<SALES> 1,468
<TOTAL-REVENUES> 1,468
<CGS> 806
<TOTAL-COSTS> 806
<OTHER-EXPENSES> 98<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53
<INCOME-PRETAX> 219
<INCOME-TAX> 55
<INCOME-CONTINUING> 164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164
<EPS-PRIMARY> .59
<EPS-DILUTED> .58
<FN>
<F1> INCLUDES RESEARCH AND DEVELOPMENT EXPENSES AND GOODWILL AMORTIZATION.
</FN>
</TABLE>
