<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 March 31, 1999
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 May 7, 1999, the latest practicable date, was
291,595,569 shares.
<PAGE>
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended March 31, 1999
TABLE OF CONTENTS
Page Number
Part I. FINANCIAL INFORMATION -----------
- --------------------------------
Item 1. Financial Statements
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.....................................10
Review by Independent Public Accountants....................................18
Review Report of Independent Accountants....................................19
Part II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings................................................20
Item 6. Exhibits and Report on Form 8-K..................................23
Signature...................................................................24
Exhibits....................................................................25
<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,
1999 1998
-------------------------------
<S> <C> <C>
Operations
Net sales $1,685 $1,468
Costs and expenses
Cost of goods sold 949 806
Marketing and administrative expenses 362 307
Research and development expenses 87 86
Interest, net 35 42
Goodwill amortization 13 12
Other expense (income) 2 (4)
- -------------------------------------------------------------------------------------------------
Total costs and expenses 1,448 1,249
- -------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change 237 219
Income tax expense 59 55
- -------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 178 164
Cumulative effect of accounting change net of
income tax benefit of $7 (27) --
- -------------------------------------------------------------------------------------------------
Net income $151 $164
=================================================================================================
Earnings per basic common share:
Income before cumulative effect of accounting change $.62 $.59
Cumulative effect of accounting change (.09) --
- -------------------------------------------------------------------------------------------------
Net income $.53 $.59
=================================================================================================
Earnings per diluted common share:
Income before cumulative effect of accounting change $.61 $.58
Cumulative effect of accounting change (.09) --
- -------------------------------------------------------------------------------------------------
Net income $.52 $.58
=================================================================================================
Weighted average number of common shares outstanding:
Basic 287 280
=================================================================================================
Diluted 293 285
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
-3-
<TABLE>
<CAPTION>
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except shares)
- ---------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
(unaudited)
-------------------------------------
<S> <C> <C> <C>
Current assets Cash and equivalents $608 $709
Accounts receivable 1,571 1,588
Notes and other current receivables 258 329
Inventories 1,331 1,324
Short-term deferred income taxes 483 467
Prepaid expenses 281 234
---------------------------------------------------------------------------------------------------
Total current assets 4,532 4,651
- ---------------------------------------------------------------------------------------------------------------------
Property, At cost 4,979 4,989
plant and Accumulated depreciation and amortization (2,346) (2,316)
equipment ---------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,633 2,673
- ---------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,735 1,817
Insurance receivables 350 378
Other 648 566
---------------------------------------------------------------------------------------------------
Total other assets 2,733 2,761
- ---------------------------------------------------------------------------------------------------------------------
Total assets $9,898 $10,085
=====================================================================================================================
Current Notes payable to banks $306 $156
liabilities Current maturities of long-term debt and lease obligations 111 115
Accounts payable and accrued liabilities 1,919 2,181
Income taxes payable 595 536
---------------------------------------------------------------------------------------------------
Total current liabilities 2,931 2,988
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,938 3,096
- ---------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 499 505
- ---------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 277 246
- ---------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 402 411
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 350,000,000
equity shares, issued 291,248,251 shares in 1999 and 1998 291 291
Additional contributed capital 2,047 2,064
Retained earnings 1,023 990
Common stock in treasury, at cost, 2,977,443
shares in 1999 and 4,919,141 shares in 1998 (154) (210)
Accumulated other comprehensive income (356) (296)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 2,851 2,839
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $9,898 $10,085
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
-4-
<TABLE>
<CAPTION>
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
- ---------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
(brackets denote cash outflows) 1999 1998
----------------------------------
<S> <C> <C> <C>
Cash flows Net income $151 $164
from Adjustments
operations Depreciation and amortization 119 107
Deferred income taxes 3 (11)
Cumulative effect of accounting change 34 --
Other -- 2
Changes in balance sheet items
Accounts receivable (13) (10)
Inventories (43) (68)
Accounts payable and other accrued liabilities (82) (138)
Net litigation payments and other (150) (101)
---------------------------------------------------------------------------------------------------
Cash flow from operations 19 (55)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows Capital expenditures (108) (92)
from investing Acquisitions, net of cash received,
activities and investments in affiliates (16) (139)
Divestitures and other asset dispositions 4 --
---------------------------------------------------------------------------------------------------
Investment activities, net (120) (231)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows Issuances of debt and lease obligations 33 633
from financing Redemption of debt and lease obligations (127) (104)
activities Decrease in debt with maturities
of three months or less, net 157 (223)
Common stock dividends (84) (81)
Stock issued under employee benefit plans 39 33
---------------------------------------------------------------------------------------------------
Financing activities, net 18 258
- ---------------------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and equivalents (18) (6)
- ---------------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (101) (34)
Cash and equivalents at beginning of period 709 465
- ---------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $608 $431
=====================================================================================================================
</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 1998
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 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 reclassifications have been made to conform the 1998 financial
statements to the 1999 presentation.
Basis of consolidation
Prior to fiscal 1999, all operations outside the United States and its
territories had been included in the consolidated financial statements on the
basis of fiscal years ending November 30 in order to facilitate timely
consolidation. In conjunction with the implementation of new financial systems,
this one-month lag was eliminated as of the beginning of fiscal 1999 for certain
of these international operations, and the December 1998 results of operations
for these entities were recorded directly to retained earnings. This change does
not have a material impact on the consolidated financial statements.
Start-up costs
Effective at the beginning of 1999, the company adopted AICPA Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." This SOP
requires that, at the date of adoption, costs of start-up and organization
activities previously capitalized be expensed and reported as a cumulative
effect of a change in accounting principle, and requires that such costs
subsequent to adoption be expensed as incurred. The after-tax cumulative effect
of this accounting change was $27 million. Excluding the initial effect of
adopting this standard, management does not anticipate that the new SOP will
have a material impact on future results of operations.
Comprehensive income
Total comprehensive income was $57 million and $123 million for the three months
ended March 31, 1999 and 1998, respectively.
<PAGE>
-6-
2. EARNINGS PER SHARE
- ----------------------
The numerator for both basic and diluted earnings per share (EPS) is income
before cumulative effect of accounting change, cumulative effect of accounting
change or net income, as applicable. The denominator for basic EPS is the
weighted-average number of common shares outstanding during the period. The
following is a reconciliation of the shares (denominator) of the basic and
diluted per-share computations:
<TABLE>
<CAPTION>
quarters ended March 31 (in million of shares) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Basic EPS shares 287 280
- ----------------------------------------------------------------------------
Effect of dilutive securities (principally
employee stock options) 6 5
- ----------------------------------------------------------------------------
Diluted EPS shares 293 285
- ----------------------------------------------------------------------------
</TABLE>
3. COMMON STOCK
- ----------------
Shared Investment Plan
- ----------------------
In connection with a newly implemented Shared Investment Plan, the company
received approximately $198 million in cash in May 1999 from 142 of Baxter's
senior managers, who collectively and voluntarily purchased approximately 3.1
million shares of the company's common stock. This plan, which is similar to one
implemented in 1994, directly aligns management and shareholder interests. The
Baxter managers used full-recourse personal bank loans to purchase the stock at
the May 3, 1999 closing price of $63.625. Baxter has agreed to guarantee
repayment to the banks in the event of default by a participant in the plan.
Equity Forward Agreements
- -------------------------
During the first quarter of 1999, the company entered into forward agreements
with independent third parties related to approximately 2.7 million shares of
its common stock. The purpose of the agreements is to attempt to partially
offset the dilutive effect of stock issuances under the company's employee stock
option plans. The forward agreements require the company to purchase its common
stock from the counterparties on specified future dates and at specified prices.
The company can, at its option, require settlement of the agreements with shares
of its common stock or, in some cases, cash, in lieu of physical settlement. The
agreements mature during the first quarter of 2002 at exercise prices ranging
from $79 to $81 per share. The company may, at its option, terminate these
agreements at any time before maturity.
4. ACQUISITIONS
- ----------------
All acquisitions during the three months ended March 31, 1999 and 1998 were
accounted for under the purchase method. Results of operations of acquired
companies are included in the company's results of operations as of the
respective acquisition dates. 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 was allocated to
goodwill and other intangible assets, and is being amortized on a straight-line
basis over periods ranging from 10 to 40 years.
<PAGE>
-7-
Had the first quarter 1999 and 1998 acquisitions taken place on January 1 of
1999 or 1998, net sales, net income and earnings per share would not have been
materially different from the reported amounts.
Bieffe Medital S.p.A.
- ---------------------
In early 1998, the company acquired Bieffe Medital S.p.A., a manufacturer of
dialysis and intravenous solutions and containers, for approximately $188
million. Approximately $124 million and $15 million of the purchase price was
allocated to goodwill and other intangibles, respectively.
5. INVENTORIES
- ---------------
Inventories consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
March 31, December 31,
1999 1998
(in millions)
- ----------------------------------------------------------------------------
<S> <C> <C>
Raw materials $336 $315
Work in process 260 262
Finished products 735 747
- ----------------------------------------------------------------------------
Total inventories $1,331 $1,324
============================================================================
</TABLE>
6. EXIT AND OTHER REORGANIZATION PROGRAMS
- ------------------------------------------
In September 1998, the company decided to end the clinical development of the
Blood Therapies' segment's first-generation oxygen-carrying therapeutic called
HemAssist(R)(DCLHb) and focus on the next-generation program. While the
first-generation program was based on human hemoglobin, the next-generation
program is based on genetically engineered hemoglobin molecules. The company
also decided to exit certain non-strategic investments, primarily in Asia, and
reorganize certain other activities, principally in the Blood Therapies and I.V.
Systems/Medical Products segments. As a result of these decisions, the company
recorded a $131 million pretax charge primarily for asset writedowns and
employee severance, of which approximately $38 million related to employee
severance resulting from the elimination of approximately 400 positions
worldwide. Approximately 200 positions have been eliminated to date and
approximately $96 million of reserves have been utilized to date, of which
approximately $19 million have pertained to employee-related costs. The majority
of the asset writedowns relate to assets located in a manufacturing facility in
Neuchatel, Switzerland, that were used solely in the development and manufacture
of HemAssist(R) (DCLHb), and have no alternative future use. In 1999, the
company plans to begin modifications to this manufacturing facility, which was
designed to manufacture a human hemoglobin product, to produce certain other
biopharmaceutical products. Such alternate production is expected to commence at
the Neuchatel facility in the next two to four years.
In September 1995, the company recorded a restructuring charge of $103 million
primarily to eliminate excess plant capacity and reduce manufacturing costs. The
charge predominantly related to the closure of the intravenous-solutions plant
and warehouse in Carolina, Puerto Rico and was comprised principally of asset
writedowns and employee severance costs. The original timetable for the program
had 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. As of year-end 1998, production and
warehousing had been consolidated into other facilities. The remaining reserves
were utilized during the first
<PAGE>
-8-
quarter of 1999 as employee severance was paid and other wind-down activities
were completed. Approximately 1,200 positions were eliminated in Puerto Rico.
Certain positions, primarily direct labor, were added to other facilities to
support the increased production levels at those sites.
7. LEGAL PROCEEDINGS
- ---------------------
Refer to Part II - Item 1. Legal Proceedings below for the status of lawsuits
and claims involving the company.
8. INTEREST, NET
- -----------------
Net interest expense consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Three months ended March 31,
(in millions) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Interest expense $41 $53
Interest income (6) (11)
============================================================================
Interest, net $35 $42
============================================================================
</TABLE>
9. SEGMENT INFORMATION
- -----------------------
The company operates in four segments, each of which are strategic businesses
that are managed separately because each business develops, manufactures and
sells distinct products and services. The segments and a description of their
businesses are as follows: I.V. Systems/Medical Products: technologies and
systems to provide intravenous fluid and drug delivery; Blood Therapies:
biopharmaceutical and blood-collection and separation products and technologies;
Renal: products and services to treat end-stage kidney disease; and
CardioVascular: products and services to treat late-stage heart disease and
vascular disorders. Certain items are maintained at corporate headquarters
(Corporate) and are not allocated to the segments. They primarily include most
of the company's debt and cash and equivalents and related net interest expense,
corporate headquarters costs, certain non-strategic investments and nonrecurring
gains and losses, deferred income taxes, certain portions of goodwill, certain
foreign currency fluctuations, hedging activities, and certain litigation
liabilities and related insurance receivables.
Financial information for the company's segments for the three months ended
March 31 is as follows:
<TABLE>
<CAPTION>
I.V. Systems/
Medical Blood Cardio
Products Therapies Renal Vascular Other Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
- ----
Net sales $550 $512 $400 $223 -- $1,685
Pretax income 71 101 71 33 ($39) 237
1998
- ----
Net sales $501 $410 $345 $212 -- $1,468
Pretax income 67 85 68 33 ($34) 219
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-9-
The following are reconciliations of total segment amounts to amounts per the
condensed consolidated financial statements:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Pretax income
Total pretax income from segments $276 $253
Unallocated amounts
Interest expense, net (35) (42)
Other Corporate items (4) 8
-------------------
Income before income taxes and
cumulative effect of accounting change $237 $219
- -----------------------------------------------------------------------------
</TABLE>
<PAGE>
-10-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Baxter International Inc.'s (Baxter or the company) 1998 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,
1998. In the Annual Report, management outlined its key financial objectives for
1999. These objectives and the results achieved through March 31, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
RESULTS THROUGH
FULL YEAR 1999 OBJECTIVES MARCH 31, 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C>
o Increase net sales approximately 10 o Net sales during the first quarter increased 15
percent. percent.
- -----------------------------------------------------------------------------------------------------------
o Grow net earnings in the low double o Net income, before the cumulative effect of a
digits. change in accounting principle, increased 9
percent during the three months ended March 31,
1999.
- -----------------------------------------------------------------------------------------------------------
o Generate $500 million in operational o The company generated operational cash flow of $9
cash flow, after investing million during the first quarter. The total of
approximately $1 billion capital expenditures and research and development
in capital expenditures and expenses for the three months ended March 31, 1999
research and development. was $195 million.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
NET SALES TRENDS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three months ended March 31, Percent
(in millions) 1999 1998 increase
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
International $901 $764 18%
United States 784 704 11%
================================================================================
Total net sales $1,685 $1,468 15%
================================================================================
</TABLE>
Refer to Note 9 to the Condensed Consolidated Financial Statements for a summary
of net sales by segment.
<PAGE>
-11-
Blood Therapies
Sales in the Blood Therapies segment for the three months ended March 31, 1999
increased 25 percent over the prior year quarter. Strong demand for the
segment's therapeutic proteins, especially Recombinate(TM) Antihemophilic Factor
(recombinant), generated significant worldwide growth, particularly in the
United States. Due to the company's recent increase in manufacturing capacity
and the strong demand for Recombinate, sales of this product were unusually
strong during the first quarter of 1999. While sales for the rest of the year
are expected to continue to remain strong, management expects that growth rates
in the second through fourth quarters of 1999 will be less than in the first
quarter. Domestic sales of the segment's plasma-based products also contributed
strongly to the sales growth for the quarter, as the supply constraints that
impacted the entire factor concentrates industry in 1998 have eased somewhat in
1999.
Renal
The Renal segment was a significant contributor to first quarter 1999 sales
growth, generating 16 percent growth over the prior year quarter. International
sales were particularly strong, with significant growth generated from the
segment's Renal Therapy Services (RTS) business, which operates dialysis clinics
in partnership with local physicians and hospitals in international markets.
While RTS sales are expected to remain strong, management expects that growth
rates in the second through fourth quarters of 1999 will be less than in the
first quarter due to a reduction in acquisition-related growth. Domestically,
the Renal Management Services (RMS) business, which is a renal-disease
management organization, contributed to the sales growth rate. The base business
had solid sales growth for the three months ended March 31, 1999, with
particularly strong sales growth in the Latin America region.
I.V. Systems/Medical Products
The I.V. Systems/Medical Products segment generated 10 percent sales growth
during the three months ended March 31, 1999. The April 1998 acquisition of the
Pharmaceutical Products Division of The BOC Group's Ohmeda health-care business
(Ohmeda), a manufacturer of inhalants and drugs used for general and local
anesthesia, was a significant contributor to sales growth for the quarter. The
recent introductions of the Colleague(R) single-channel and triple-channel
volumetric infusion pumps, and increased penetration and new product
introductions in Latin America and other emerging markets also contributed to
sales growth for the quarter. Partially offsetting these factors were the
effects of competitive pricing pressures and cost pressures from health-care
providers in the United States and certain other markets.
CardioVascular
Sales growth in the CardioVascular segment was 5 percent for the three months
ended March 31, 1999. The segment's growth was principally driven by strong
sales growth in the tissue heart valve and valve-repair product lines, both in
international and domestic markets, as well as by sales of new and recently
introduced products. Significant growth in these product lines was partially
offset by the effects of strong pricing pressures in various product lines, loss
of an autotransfusion products distribution agreement, and a reduction in
overall open-heart surgical procedures, particularly in the United States.
<PAGE>
-12-
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, Increase
1999 1998 (decrease)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross profit margin 43.7% 45.1% (1.4pts)
Marketing and administrative expenses 21.5% 20.9% .6pts
- ----------------------------------------------------------------------------------------------
</TABLE>
The gross profit margin decreased 1.4 points for the three months ended March
31, 1999 primarily due to the recognition of unfavorable manufacturing variances
incurred in 1998. These variances relate to increased investments in the Blood
Therapies segment's safety and quality systems in response to heightened FDA
regulatory activity. A less favorable product mix in the first quarter of 1999
as compared to the prior year quarter also impacted the gross profit margin.
Marketing and administrative expenses increased as a percent of sales by .6
points for the three months ended March 31, 1999 as compared to the prior year
quarter, primarily due to the acquisition of Ohmeda. Partially offsetting this
increase was the leveraging of expenses as a result of strong sales,
particularly in the Blood Therapies and Renal segments. Management expects to
decrease the expense ratio during the year as it focuses on cost control across
all business units, integrates recent acquisitions and implements the
reorganization programs discussed below.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Three months ended March 31, Percent
(in millions) 1999 1998 increase
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Research and development expenses $87 $86 1%
As a percent of sales 5% 6%
- ----------------------------------------------------------------------------------------------
</TABLE>
Research and development (R&D) expenses decreased as a percentage of sales in
1999 as compared to 1998, primarily due to the September 1998 decision to end
the clinical development of the company's first-generation oxygen-carrying
therapeutic called HemAssist(R) (DCLHb). Management expects the growth rate in
R&D expenses will increase during the remainder of the year as the company
focuses on the next-generation oxygen-carrying therapeutics program within its
Blood Therapies segment, as well as on other R&D initiatives across the four
segments.
EXIT AND OTHER REORGANIZATION PROGRAMS
Refer to Note 6 to the Condensed Consolidated Financial Statements for a
discussion of the company's charges, utilization of the reserves and headcount
reductions to date. Management believes remaining reserves for exit and other
reorganization programs are adequate to complete the actions contemplated by the
programs. Future cash expenditures related to the programs will be funded with
cash generated from operations.
<PAGE>
-13-
The 1998 program is in process and principally relates to the decision to end
the clinical development of HemAssist (DCLHb), as discussed above, as well as
the decision to exit certain non-strategic investments, primarily in Asia, and
reorganize certain other activities. The 1995 program has been completed. The
plant closures and consolidations in Puerto Rico lower manufacturing costs and
help mitigate any future exposure to gross margin erosion arising from pricing
pressures, primarily in the United States.
OTHER INCOME AND EXPENSE
Net interest expense decreased for the three months ended March 31, 1999 as
compared to the prior year quarter as the effect of higher debt levels was more
than offset by the impact of a higher level of foreign currency denominated
debt, which bears a lower average interest rate.
PRETAX INCOME
Refer to Note 9 to the Condensed Consolidated Financial Statements for a summary
of financial results by segment.
Blood Therapies
The pretax income growth of 19 percent was driven by the strong sales for the
quarter, a reduction in R&D expenses due to the termination of the HemAssist
(DCLHb) program, and leveraging of marketing and administrative expenses. As
discussed above, the gross profit margin for the Blood Therapies segment
declined for the three months ended March 31, 1999 primarily due to the
recognition of unfavorable manufacturing variances incurred in 1998.
Additionally, the blood-collection businesses generated lower profits
principally as a result of a less favorable mix of sales and pricing pressures
due to competition.
Renal
Pretax income increased approximately 4 percent for the quarter. Strong sales
growth for the quarter was partially offset by the effects of a less favorable
product and services mix, and increased investments in the business.
I.V. Systems/Medical Products
Pretax income increased 6 percent for the three months ended March 31, 1999 as
compared to the prior year quarter. This growth in profitability was principally
due to the acquisition of Ohmeda in April 1998, with the base business also
generating solid growth during the quarter.
CardioVascular
Pretax income was approximately flat for the quarter. These results primarily
reflect growth in the higher-margin tissue heart valve and valve-repair product
lines, offset by reduced profits in certain other product and service lines due
to pricing and competitive pressures, and a reduction in the number of
open-heart surgical procedures.
CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, the company recorded a $27 million after-tax
charge for the cumulative effect of a change in accounting principle. The charge
related to the adoption of AICPA Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-up Activities." Excluding the initial effect of adopting this
standard, management does not anticipate that the new SOP will have a material
impact on future results of operations.
<PAGE>
-14-
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) 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operations per the Company's
Condensed Consolidated Statements of Cash Flows $19 ($55)
Capital expenditures (108) (92)
Net interest after tax 21 25
Other, including mammary implant litigation 77 62
- -------------------------------------------------------------------------------------------
Operational cash flow $9 ($60)
===========================================================================================
</TABLE>
The company typically has a modest net operational cash inflow or a net
operational cash outflow in the first quarter of the year due to the timing of
receipts and disbursements. Management expects to achieve its goal of generating
at least $500 million in operational cash flow in 1999.
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 Medital S.p.A. Refer to Note 4 to the Condensed
Consolidated Financial Statements for further information regarding this
acquisition.
The company's net-debt-to-capital ratio was 49.1 percent and 48.4 percent at
March 31, 1999 and December 31, 1998, respectively. The ratio generally
increases in the first quarter from the prior year-end due to low cash flow
typically generated at the beginning of the year. Management expects the ratio
to decline to the low-to-mid 40 percent 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, current market conditions and other factors. 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 has been repurchased to date. No
repurchases have been made since 1996. As discussed above, the company's
net-debt-to-capital ratio is currently 49.1 percent and, therefore, management
does not presently intend to repurchase shares.
Refer to Note 3 to the Condensed Consolidated Financial Statements for
information regarding the company's newly implemented Shared Investment Plan.
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
<PAGE>
-15-
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.
YEAR 2000
- ---------
The company has developed, and is implementing, a comprehensive program to
address Year 2000 issues pertaining to both information technology (IT) and
non-IT systems. The program is monitored by a steering committee comprised of
senior management in key functional areas, which periodically reports to the
audit committee of the board of directors as to the program's status. The
program consists of identification, compliance and post-implementation phases
and considers the effect of the Year 2000 on the company's internal systems,
customers, products and services, and manufacturing systems, as well as on its
suppliers and other critical business partners. The current status of these
areas of scope vary within the post-implementation phase.
The company has been upgrading, replacing or modifying non-compliant internal
systems. All major systems are expected to be Year 2000 compliant, based on a
phased implementation plan, by the end of the third quarter of 1999. To date,
the company has achieved all major milestones relating to this initiative, with
approximately 75 percent of system implementations complete as of the end of the
first quarter of 1999.
Compliance checking of products has been completed and there are fewer than 20
products identified with Year 2000 issues. Product modifications and
replacements are expected to be complete by mid-1999. The company has launched a
Year 2000 website for its customers that includes a complete list of the
company's electronic medical products, detailed and frequently updated
information regarding Year 2000 affected products, a product supply requirements
policy addressing Year 2000 supply chain issues, and other information regarding
the company's Year 2000 program.
The company is actively addressing systems in its manufacturing plants and other
facilities. All remediation decisions for critical items were complete at the
end of 1998 and implementation of required changes for all date-dependent items
is expected to be completed by mid-1999. Approximately 85 percent of the
required changes for critical items have been implemented as of the end of the
first quarter of 1999, consistent with management's expectations. In addition,
the company has initiated communications, which include solicitation of written
responses to questionnaires and follow-up meetings, with critical suppliers and
other business partners to determine the extent to which any Year 2000 issues
affecting such third parties will affect the company. To date, the company has
achieved an over-90 percent response rate from critical
<PAGE>
-16-
supplier questionnaires. Such communications are ongoing and are expected to
continue through the end of 1999, with action plans developed and implemented as
necessary.
The total cost to upgrade or replace IT systems that would not have been Year
2000 ready is estimated to be approximately $135 million. Close to 75 percent of
this total has been expended to date, with the remainder to be substantially
expended by the end of 1999. None of the company's systems are being upgraded or
replaced solely to address Year 2000 issues, although in some cases the timing
of the system upgrades and replacements is being accelerated.
Based upon the company's current estimates, and information available at this
time, incremental out-of-pocket costs of the Year 2000 program, which are
required to be expensed as incurred, have been and are expected to be immaterial
to the company's financial results. A large part of the Year 2000 effort has
been accomplished through the redeployment of existing resources. The cost of
such redeployment or of internal management time has not been specifically
quantified. However, no critical projects of the company have been deferred due
to the Year 2000 program.
Management of the company believes that its program will be effective to resolve
the Year 2000 issue in a timely manner. The company has, however, begun
contingency planning to address any situations that may arise in which the
readiness of the company's internal technology or that of third parties is not
reasonably expected to be adequate, and where practical alternatives are
available. The company has been assessing the viability of the entire supply
chain and is in the process of developing any necessary and feasible contingency
plans accordingly. Current contingency planning centers on human resource
issues, inventory management, and the development of a rapid response capability
and monitoring process for critical communications during the transition into
the Year 2000. To accumulate ongoing input into the contingency planning
process, the company is meeting regularly with key health-care industry leaders,
contacting customs officials and monitoring the Year 2000 status of key
customers, distributors and suppliers.
Management does not believe there has been or will be a significant disruption
to the company's business due to the Year 2000 remediation effort. However,
there can be no assurance that the company's Year 2000 program or the programs
of critical business partners will be successful. Any failure to adequately
address the Year 2000 issue could significantly disrupt the company's operations
and possibly lead to litigation against the company. The costs and expenses
associated with any such failure or litigation, or with any disruptions in the
economy in general as a result of the Year 2000, are not presently estimable,
but could have a material adverse effect on the company's business and results
of operations.
<PAGE>
-17-
FORWARD-LOOKING INFORMATION
- ---------------------------
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, unforeseen
information technology issues related to the Company or third parties, 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, 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 continue to 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.
NEW ACCOUNTING STANDARD
- -----------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This Statement requires that all
derivatives be recorded in the balance sheet as either assets or liabilities and
be measured at fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. Management is in the process of evaluating this standard and has
not yet determined the future impact on the company's consolidated financial
statements.
<PAGE>
-18-
Review by Independent Public Accountants
- ----------------------------------------
Reviews of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q for the three months ended March 31, 1999 and
1998 have been performed by PricewaterhouseCoopers LLP, the Company's
independent accountants. Their report on the interim condensed consolidated
financial information follows. There have been no material adjustments or
disclosures proposed by PricewaterhouseCoopers 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>
-19-
Report of Independent Accountants
---------------------------------
May 11, 1999
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, 1999 and 1998 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, 1998, 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, 1999
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet information as of December 31, 1998, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
PricewaterhouseCoopers LLP
<PAGE>
-20-
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
Baxter International Inc. (Baxter or the company) 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 the company. The most significant of these are reported in the company's
Annual Report on Form 10-K for the year ended December 31, 1998, and material
developments in such matters for the quarter ended March 31, 1999 are described
below. Upon resolution of any such matters, Baxter 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 and net cash flows in the
period in which it is recorded or paid, management believes that no such charge
would have a material adverse effect on Baxter's consolidated financial
position.
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. On December 1, 1998, a panel of independent medical experts
appointed by a federal judge announced their findings that reported medical
studies contained no clear evidence of a connection between silicone mammary
implants and traditional or atypical systemic diseases. It is not yet clear what
effect this report will have on the mammary implant litigation described below.
As of March 31, 1999, Baxter, together with certain of its subsidiaries, had
been named as a defendant or co-defendant in 5,007 lawsuits and 165 claims
relating to mammary implants, brought by approximately 13,009 plaintiffs, of
which 10,323 are implant plaintiffs and the remainder are consortium or
second-generation plaintiffs. Of those plaintiffs, 4,919 currently are included
in the Lindsey class action revised settlement described below, which accounts
for 1,985 of the pending lawsuits against the company. Additionally, 5,203
plaintiffs have opted out of the revised settlement (representing 2,922 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, 1999,
1,813 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant
product identification. Furthermore, during the first quarter of 1999, Baxter
obtained dismissals, or agreements for dismissals, with respect to 1,226
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, as successor to AHSC
(Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala., CV
94-P-
<PAGE>
-21-
11558-S). The class action was certified for settlement purposes only by the
court 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 12
other purported class actions in various state and provincial courts, only one
of which is certified.
Plasma-Based Therapies Litigation
- ---------------------------------
As previously reported in the company's Annual Report on Form 10-K, Baxter
currently is 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 from the late 1970s
to the mid-1980s. The typical case or claim alleges that the individual was
infected with the HIV virus by factor concentrates, which contained the HIV
virus. None of these cases involves factor concentrates currently processed by
the company.
As of March 31, 1999, Baxter had been named in 287 lawsuits and 412 claims in
the United States, Canada, Ireland, Italy, Taiwan, Japan, Argentina, Germany 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 concentrates cases. As of March
31, 1999, approximately 6,500 claimant groups had been found eligible to
participate in the settlement, and approximately 350 claimants had opted out of
the settlement. Approximately 6,005 of the claimant groups had received payments
as of March 31, 1999, and payments are expected to continue through the second
quarter of 1999 as releases are received from the remaining claimant groups. The
company also has been named in four purported class actions. None of these class
actions has been certified.
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 Kumamoto. As of March 31, 1999, the cases involved
1,301 plaintiffs, of whom 1,268 have settled their claims.
In addition, Immuno International AG (Immuno) has unsettled claims for damages
for injuries allegedly caused by its plasma-based therapies. The typical claim
alleges that the individual with hemophilia was infected with HIV by factor
concentrates containing the HIV virus. Additionally, Immuno faces multiple
claims stemming from its vaccines and other biologically derived therapies. A
portion of the liability and defense costs related to these claims will be
covered by insurance, subject to exclusions, conditions, policy limits and other
factors. In addition, pursuant to the stock purchase agreement between the
company and Immuno, approximately 84 million Swiss francs (or approximately $61
million at year-end) of the purchase price was withheld to cover these
contingent liabilities. In April 1999, the stock purchase agreement between the
company and Immuno was amended to revise the holdback amount from 84 million
Swiss francs to 26 million Swiss francs in consideration for an April 1999
payment by the company of 29 million Swiss francs to Immuno as additional
purchase price.
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(R) IVIG (intravenous immunoglobulin), all of
whom are seeking damages for
<PAGE>
-22-
hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. As of
March 31, 1999, Baxter was a defendant in 47 lawsuits and 56 claims in the
United States, Denmark, France, Germany, Italy, Spain and the United Kingdom.
Three suits currently pending in the United States have been filed as purported
class actions but only one has been certified.
Other Litigation
- ----------------
As of September 30, 1996, the date of the spin-off of Allegiance Corporation
(Allegiance) from Baxter, Allegiance 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 natural 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, 1999, the company had been named as a defendant in 386
lawsuits, including the following purported class action: Swartz v. Baxter
Healthcare Corporation, et al. Court of Common Pleas, Jefferson County, PA,
656-1997 C.D.
<PAGE>
-23-
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index hereto.
(b) Report on Form 8-K
A report on Form 8-K was filed on March 31, 1999, which reported under
"Item 5 - Other Events" an amended Exhibit 23 to the company's Annual
Report on Form 10-K for the year ended December 31, 1998.
<PAGE>
-24-
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 11, 1999 By: /s/ Brian P. Anderson
------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
<PAGE>
-25-
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, 1998 1998 1997 1997 1996 1995 1995 1994
(B) (B) (B)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes $549 $974 $523 $875 $793 $524 $741 $559
- ------------------------------------------------------------------------------------------------------------------------
Fixed Charges
Interest costs 198 198 206 206 133 117 117 120
Estimated interest in rentals (A) 29 29 29 29 27 29 29 31
- ------------------------------------------------------------------------------------------------------------------------
Fixed charges as defined 227 227 235 235 160 146 146 151
- ------------------------------------------------------------------------------------------------------------------------
Adjustments to income
Interest costs capitalized (5) (5) (8) (8) (3) (3) (3) (2)
Losses of less than majority owned
affiliates, net of dividends 0 0 0 0 8 10 10 18
- ------------------------------------------------------------------------------------------------------------------------
Income as adjusted $771 $1,196 $750 $1,102 $958 $677 $894 $726
========================================================================================================================
Ratio of earnings to fixed charges 3.40 5.27 3.19 4.69 5.99 4.64 6.12 4.80
========================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1999
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change $237
- ------------------------------------------------------------------------------------------------------------------------
Fixed Charges
Interest costs 41
Estimated interest in rentals (A) 7
- ------------------------------------------------------------------------------------------------------------------------
Fixed charges as defined 48
- ------------------------------------------------------------------------------------------------------------------------
Adjustments to income
Interest costs capitalized (1)
Losses of less than majority owned
affiliates, net of dividends 0
- ------------------------------------------------------------------------------------------------------------------------
Income as adjusted $284
========================================================================================================================
Ratio of earnings to fixed charges 5.92
========================================================================================================================
</TABLE>
(A) Represents the estimated interest portion of rents.
(B) Included in this exhibit are supplemental presentations of the ratio of
earnings to fixed charges which exclude the following significant
unusual charges:
1998: $116 million in-process research and development charge, $178
million net litigation charge, $131 million exit and
reorganization cost charge.
1997: $352 million in-process research and development charge.
1995: $103 million exit and other reorganization costs charge, $96
million net litigation charge and $18 million in-process
research and development charge.
<PAGE>
EXHIBIT 15
May 11, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated May 11, 1999 on our review of interim
financial information of Baxter International Inc. (the "company') as of and for
the period ended March 31, 1999 and included in the company's quarterly report
on Form 10-Q for the quarter then ended is incorporated by reference in its
Registration Statements on Form S-8 (Nos. 2-82667, 2-86993, 2-97607, 33-8812,
33-15523, 33-15787, 33-28428, 33-33750, 33-54069, 333-43563, 333-47019 and
333-71553), on Form S-3 (Nos. 33-5044, 33-23450, 33-27505, 33-31388, 33-49820
and 333-19025) and on Form S-4 (Nos. 33-808, 33-15357, 33-53937, 333-21327 and
333-47927).
Very truly yours,
PricewaterhouseCoopers
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of March 31, 1999 and the Condensed
Consolidated Income Statement for the three months ended March 31, 1999 and
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 608
<SECURITIES> 0
<RECEIVABLES> 1,870
<ALLOWANCES> 41
<INVENTORY> 1,331
<CURRENT-ASSETS> 4,532
<PP&E> 4,979
<DEPRECIATION> 2,346
<TOTAL-ASSETS> 9,898
<CURRENT-LIABILITIES> 2,931
<BONDS> 2,938
0
0
<COMMON> 291
<OTHER-SE> 2,560
<TOTAL-LIABILITY-AND-EQUITY> 9,898
<SALES> 1,685
<TOTAL-REVENUES> 1,685
<CGS> 949
<TOTAL-COSTS> 949
<OTHER-EXPENSES> 100<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 237
<INCOME-TAX> 59
<INCOME-CONTINUING> 178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 27
<NET-INCOME> 151
<EPS-PRIMARY> .53
<EPS-DILUTED> .52
<FN>
<F1>Includes Research and Development Expenses and Goodwill Amortization
</FN>
</TABLE>
