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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from to
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Commission file number 1-4448
Baxter International
Inc.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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36-0781620
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer Identification
No.)
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One Baxter Parkway, Deerfield,
Illinois
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60015
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(Address of Principal Executive
Offices)
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(Zip Code)
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Registrants
telephone number, including area code 847.948.2000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, $1.00 par value
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New York Stock Exchange
Chicago Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether registrant has submitted
electronically and posted on its corporate website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files) Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting common equity held by
non-affiliates of the registrant as of June 30, 2009 (the
last business day of the registrants most recently
completed second fiscal quarter), based on the per share closing
sale price of $52.96 on that date and the assumption for the
purpose of this computation only that all of the
registrants directors and executive officers are
affiliates, was approximately $32 billion. There is no
non-voting common equity held by non-affiliates of the
registrant.
The number of shares of the registrants common stock,
$1.00 par value, outstanding as of January 31, 2010
was 602,667,572.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive 2010 proxy
statement for use in connection with its Annual Meeting of
Shareholders to be held on May 4, 2010 are incorporated by
reference into Part III of this report.
TABLE OF
CONTENTS
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Page
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Number
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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5
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Item 1B.
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Unresolved Staff Comments
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10
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Item 2.
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Properties
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11
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Item 3.
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Legal Proceedings
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12
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Item 4.
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Submission of Matters to a Vote of Security Holders
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12
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Item 5.
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Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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14
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Item 6.
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Selected Financial Data
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15
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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15
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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42
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Item 8.
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Financial Statements and Supplementary Data
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43
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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94
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Item 9A.
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Controls and Procedures
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94
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Item 9B.
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Other Information
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94
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Item 10.
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Directors, Executive Officers and Corporate Governance
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94
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Item 11.
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Executive Compensation
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94
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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95
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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96
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Item 14.
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Principal Accountant Fees and Services
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96
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Item 15.
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Exhibits and Financial Statement Schedules
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97
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PART I
Company
Overview
Baxter International Inc., through its subsidiaries, develops,
manufactures and markets products that save and sustain the
lives of people with hemophilia, immune disorders, infectious
diseases, kidney disease, trauma, and other chronic and acute
medical conditions. As a global, diversified healthcare company,
Baxter applies a unique combination of expertise in medical
devices, pharmaceuticals and biotechnology to create products
that advance patient care worldwide. These products are used by
hospitals, kidney dialysis centers, nursing homes,
rehabilitation centers, doctors offices, clinical and
medical research laboratories, and by patients at home under
physician supervision. Baxter manufactures products in 27
countries and sells them in more than 100 countries.
Baxter International Inc. was incorporated under Delaware law in
1931. As used in this report, except as otherwise indicated in
information incorporated by reference, Baxter
International means Baxter International Inc. and
Baxter, the company or the
Company means Baxter International and its
consolidated subsidiaries.
Business
Segments
The BioScience, Medication Delivery and Renal segments comprise
Baxters continuing operations.
BioScience. The BioScience business processes
recombinant and plasma-based proteins to treat hemophilia and
other bleeding disorders; plasma-based therapies to treat immune
deficiencies, alpha
1-antitrypsin
deficiency, burns and shock, and other chronic and acute
blood-related conditions; products for regenerative medicine,
such as biosurgery products; and vaccines.
Medication Delivery. The Medication Delivery
business manufactures intravenous (IV) solutions and
administration sets, premixed drugs and drug-reconstitution
systems, pre-filled vials and syringes for injectable drugs, IV
nutrition products, infusion pumps, and inhalation anesthetics,
as well as products and services related to pharmacy
compounding, drug formulation and packaging technologies.
Renal. The Renal business provides products to
treat end-stage renal disease, or irreversible kidney failure.
The business manufactures solutions and other products for
peritoneal dialysis (PD), a home-based therapy, and also
distributes products for hemodialysis (HD), which is generally
conducted in a hospital or clinic.
For financial information about Baxters segments and
principal product categories, see Note 12 Segment
Information in Item 8 of this Annual Report on
Form 10-K.
Sales and
Distribution
The company has its own direct sales force and also makes sales
to and through independent distributors, drug wholesalers acting
as sales agents and specialty pharmacy or homecare companies. In
the United States, Cardinal Health, Inc. warehouses and ships a
significant portion of the companys products through its
distribution centers. These centers are generally stocked with
adequate inventories to facilitate prompt customer service.
Sales and distribution methods include frequent contact by sales
representatives, automated communications via various electronic
purchasing systems, circulation of catalogs and merchandising
bulletins, direct-mail campaigns, trade publication presence and
advertising.
International sales are made and products are distributed on a
direct basis or through independent local distributors or sales
agents in more than 100 countries.
International
Markets
Baxter generates approximately 60% of its revenues outside the
United States. While healthcare cost containment continues to be
a focus around the world, demand for healthcare products and
services continues
1
to be strong worldwide. The companys strategies emphasize
global expansion and technological innovation to advance medical
care worldwide. Baxters operations are subject to certain
additional risks inherent in conducting business outside the
United States, such as fluctuations in currency exchange rates,
changes in exchange controls, loss of business in government
tenders, nationalization, increasingly complex labor
environments, availability of raw materials, expropriation and
other governmental actions, changes in taxation, importation
limitations, export control restrictions, changes in or
violations of U.S. or local laws, dependence on a few
government entities as customers, pricing restrictions, economic
and political destabilization or instability, disputes between
countries, diminished or insufficient protection of intellectual
property, disruption or destruction of operations in a
significant geographic region due to the location of
manufacturing facilities, distribution facilities or customers.
For financial information about foreign and domestic operations
and geographic information see Note 12 Segment
Information in Item 8 of this Annual Report on
Form 10-K.
Contractual
Arrangements
Substantial portions of the companys products are sold
through contracts with customers, both within and outside the
United States. Some of these contracts have terms of more than
one year and place limits on our ability to increase prices. In
the case of hospitals, governments and other facilities, these
contracts may specify minimum quantities of a particular product
or categories of products to be purchased by the customer.
In keeping with the increased emphasis on cost-effectiveness in
healthcare delivery, many hospitals and other customers of
medical products in the United States and in other countries
have joined group purchasing organizations (GPOs), or combined
to form integrated delivery networks (IDNs), to enhance
purchasing power. GPOs and IDNs negotiate pricing arrangements
with manufacturers and distributors, and the negotiated prices
are made available to members. Baxter has purchasing agreements
with several of the major GPOs in the United States. GPOs may
have agreements with more than one supplier for certain
products. Accordingly, in these cases, Baxter faces competition
from other suppliers even where a customer is a member of a GPO
under contract with Baxter.
Raw
Materials
Raw materials essential to Baxters business are purchased
from numerous suppliers worldwide in the ordinary course of
business. Although most of these materials are generally
available, certain raw materials used in producing some of the
companys products are available only from one or a limited
number of suppliers, and Baxter at times may experience
shortages of supply. In an effort to manage risk associated with
raw materials supply, Baxter works closely with its suppliers to
help ensure availability and continuity of supply while
maintaining high quality and reliability. The company also seeks
to develop new and alternative sources of supply where
beneficial to its overall raw materials procurement strategy.
The company also utilizes long-term supply contracts with some
suppliers to help maintain continuity of supply and manage the
risk of price increases. Baxter is not always able to recover
cost increases for raw materials through customer pricing due to
contractual limits and market pressure on such price increases.
Competition
Baxters BioScience, Medication Delivery and Renal
businesses enjoy leading positions based on a number of
competitive advantages. The BioScience business benefits from
continued innovation in its products and therapies, consistency
of its supply of products, and strong customer relationships.
The Medication Delivery business benefits from the breadth and
depth of its product offering, as well as strong relationships
with customers, including hospitals, customer purchasing groups
and pharmaceutical and biotechnology companies. The Renal
business benefits from its position as one of the worlds
leading manufacturers of PD products, as well as its strong
relationships with customers and patients, including the many
patients who self-administer the home-based therapy supplied by
Baxter. Baxter as a whole benefits from efficiencies and cost
advantages resulting from shared manufacturing facilities and
the technological advantages of its products.
2
Although no single company competes with Baxter in all of its
businesses, Baxter faces competition in each of its segments
from international and domestic healthcare and pharmaceutical
companies of all sizes. BioScience continues to face competitors
from pharmaceutical, biotechnology and other companies.
Medication Delivery faces competition from medical device
manufacturers and pharmaceutical companies particularly in the
multi-source generics and anesthetics markets. In Renal, global
and regional competitors continue to expand their manufacturing
capacity for PD products and their PD sales and marketing
channels. Competition is primarily focused on
cost-effectiveness, price, service, product performance, and
technological innovation. There has been increasing
consolidation in the companys customer base and by its
competitors, which continues to result in pricing and market
share pressures.
Global efforts toward healthcare cost containment continue to
exert pressure on product pricing. Governments around the world
use various mechanisms to control healthcare expenditures, such
as price controls, product formularies (lists of recommended or
approved products), and competitive tenders which require the
submission of a bid to sell products. Sales of Baxters
products are dependent, in part, on the availability of
reimbursement by government agencies and healthcare programs, as
well as insurance companies and other private payers. In the
United States, the federal and many state governments have
adopted or proposed initiatives relating to Medicaid and other
health programs that may limit reimbursement or increase rebates
that Baxter and other providers are required to pay to the
state. In addition to government regulation, managed care
organizations in the United States, which include medical
insurance companies, medical plan administrators,
health-maintenance organizations, hospital and physician
alliances and pharmacy benefit managers, continue to put
pressure on the price and usage of healthcare products. Managed
care organizations seek to contain healthcare expenditures, and
their purchasing strength has been increasing due to their
consolidation into fewer, larger organizations and a growing
number of enrolled patients. Baxter faces similar issues outside
of the United States. In Europe and Latin America, for example,
the government provides healthcare at low cost to patients, and
controls its expenditures by purchasing products through public
tenders, regulating prices, setting reference prices in public
tenders or limiting reimbursement or patient access to certain
products.
Intellectual
Property
Patents and other proprietary rights are essential to
Baxters business. Baxter relies on patents, trademarks,
copyrights, trade secrets, know-how and confidentiality
agreements to develop, maintain and strengthen its competitive
position. Baxter owns a number of patents and trademarks
throughout the world and has entered into license arrangements
relating to various third-party patents and technologies.
Products manufactured by Baxter are sold primarily under its own
trademarks and trade names. Some products distributed by the
company are sold under the companys trade names while
others are sold under trade names owned by its suppliers. Trade
secret protection of unpatented confidential and proprietary
information is also important to Baxter. The company maintains
certain details about its processes, products, and technology as
trade secrets and generally requires employees, consultants,
parties to collaboration agreements and other business partners
to enter into confidentiality agreements.
Baxters policy is to protect its products and technology
through patents and trademarks on a worldwide basis. This
protection is sought in a manner that balances the cost of such
protection against obtaining the greatest value for the company.
Baxter also recognizes the need to promote the enforcement of
its patents and trademarks. Baxter will continue to take
commercially reasonable steps to enforce its patents and
trademarks around the world against potential infringers,
including taking judicial or administrative action where
appropriate.
Baxter operates in an industry susceptible to significant patent
litigation. At any given time, the company is involved as either
a plaintiff or defendant in a number of patent infringement and
other intellectual property-related actions. Such litigation can
result in significant royalty or other payments or result in
injunctions that can prevent the sale of products. For more
information, see Note 11 Legal Proceedings in
Item 8 of this Annual Report on
Form 10-K.
3
Research
and Development
Baxters investment in research and development (R&D)
is essential to its future growth and its ability to remain
competitive in all three of its business segments. Accordingly,
Baxter continues to increase its investment in R&D programs
to develop innovative therapies, technology platforms and
manufacturing methods. Expenditures for Baxters R&D
activities were $917 million in 2009, $868 million in
2008, and $760 million in 2007. These expenditures include
costs associated with R&D activities performed at the
companys R&D centers located around the world, which
include facilities in Austria, Belgium, Japan and the United
States, as well as in-licensing, milestone and reimbursement
payments made to partners for R&D work performed at
non-Baxter locations.
Principal areas of strategic focus for R&D include
recombinant and plasma-based therapeutics, vaccines, initiatives
in regenerative medicine, kidney dialysis, small molecule drugs,
enhanced packaging systems for medication delivery, drug
formulation technologies, and pharmacy compounding. The
companys research efforts emphasize self-manufactured
product development, and portions of that research relate to
multiple product categories. Baxter supplements its own R&D
efforts by acquiring various technologies and entering into
development and other collaboration agreements with third
parties. For more information on the companys R&D
activities, please refer to our discussion under the caption
entitled Research and Development contained in
Item 7 of this Annual Report on
Form 10-K.
Quality
Management
Baxter places significant emphasis on providing quality products
and services to its customers. Quality management plays an
essential role in determining and meeting customer requirements,
preventing defects and improving the companys products and
services. Baxter has a network of quality systems throughout the
companys business units and facilities that relate to the
design, development, manufacturing, packaging, sterilization,
handling, distribution and labeling of the companys
products. To assess and facilitate compliance with applicable
requirements, the company regularly reviews its quality systems
to determine their effectiveness and identify areas for
improvement. Baxter also performs assessments of its suppliers
of raw materials, components and finished goods. In addition,
the company conducts quality management reviews designed to
inform management of key issues that may affect the quality of
products and services.
From time to time, the company may determine that products
manufactured or marketed by the company do not meet company
specifications, published standards, such as those issued by the
International Organization for Standardization, or regulatory
requirements. When a quality issue is identified, Baxter
investigates the issue and takes appropriate corrective action,
such as withdrawal of the product from the market, correction of
the product at the customer location, notice to the customer of
revised labeling, and other actions. For more information on
corrective actions taken by Baxter, please refer to our
discussion under the caption entitled Certain Regulatory
Matters in Item 7 of this Annual Report on
Form 10-K.
Government
Regulation
The operations of Baxter and many of the products manufactured
or sold by the company are subject to extensive regulation by
numerous government agencies, both within and outside the United
States. In the United States, the federal agencies that regulate
the companys facilities, operations, employees, products
(their manufacture, sale, import and export) and services
include: the U.S. Food and Drug Administration (FDA), the
Drug Enforcement Agency, the Environmental Protection Agency,
the Occupational Health & Safety Administration, the
Department of Agriculture, the Department of Labor, the
Department of Defense, Customs and Border Protection, the
Department of Commerce, the Department of Treasury and others.
Because Baxter supplies products and services to healthcare
providers that are reimbursed by federally funded programs such
as Medicare, its activities are also subject to regulation by
the Center for Medicare/Medicaid Services and enforcement by the
Office of the Inspector General within the Department of Health
and Human Services (OIG). State agencies in the United States
also regulate the facilities, operations, employees, products
and services of the company within their respective states.
Outside the United States, our products and operations are
subject to extensive regulation by government agencies,
including the European Medicines
4
Agency (EMEA) in the European Union. International government
agencies also regulate public health, product registration,
manufacturing, environmental conditions, labor, exports, imports
and other aspects of the companys global operations.
The FDA in the United States, the EMEA in Europe, and other
government agencies inside and outside of the United States,
administer requirements covering the testing, safety,
effectiveness, manufacturing, labeling, promotion and
advertising, distribution and post-market surveillance of
Baxters products. The company must obtain specific
approval from the FDA and
non-U.S. regulatory
authorities before it can market and sell most of its products
in a particular country. Even after the company obtains
regulatory approval to market a product, the product and the
companys manufacturing processes are subject to continued
review by the FDA and other regulatory authorities worldwide.
The company is subject to possible administrative and legal
actions by the FDA and other regulatory agencies inside and
outside the United States. Such actions may include warning
letters, product recalls or seizures, monetary sanctions,
injunctions to halt manufacture and distribution of products,
civil or criminal sanctions, refusal of a government to grant
approvals, restrictions on operations or withdrawal of existing
approvals. From time to time, the company takes steps to ensure
safety and efficacy of its products, such as removing products
from the market found not to meet applicable requirements and
improving the effectiveness of quality systems. For more
information on compliance actions taken by the company, please
refer to our discussion under the caption entitled Certain
Regulatory Matters in Item 7 of this Annual Report on
Form 10-K.
Environmental policies of the company require compliance with
all applicable environmental regulations and contemplate, among
other things, appropriate capital expenditures for environmental
protection.
Employees
As of December 31, 2009, Baxter employed approximately
49,700 people.
Available
Information
Baxter makes available free of charge on its website at
www.baxter.com its Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (Exchange Act), as soon as reasonably
practicable after electronically filing or furnishing such
material to the Securities and Exchange Commission.
In addition, Baxters Corporate Governance Guidelines, Code
of Conduct, and the charters for the required committees of
Baxters board of directors are available on Baxters
website at www.baxter.com under Corporate Governance
and in print upon request by writing to: Corporate Secretary,
Baxter International Inc., One Baxter Parkway, Deerfield,
Illinois 60015. Information contained on Baxters website
shall not be deemed incorporated into, or to be a part of, this
Annual Report on
Form 10-K.
In addition to the other information in this Annual Report on
Form 10-K,
shareholders or prospective investors should carefully consider
the following risk factors. If any of the events described below
occurs, our business, financial condition and results of
operations and future growth prospects could suffer.
If we
are unable to successfully introduce new products or fail to
keep pace with advances in technology, our business, financial
condition and results of operations could be adversely
affected.
The successful and timely implementation of our business model
depends on our ability to adapt to changing technologies and
introduce new products. As our competitors will continue to
introduce competitive products, the development and acquisition
of innovative products and technologies that improve efficacy,
safety, patients and clinicians ease of use and
cost-effectiveness are important to our success. The success of
new product offerings will depend on many factors, including our
ability to properly anticipate and satisfy
5
customer needs, obtain regulatory approvals on a timely basis,
develop and manufacture products in an economic and timely
manner, obtain
and/or
maintain advantageous positions with respect to intellectual
property, and differentiate our products from those of our
competitors. Failure by us to introduce planned products or
other new products or to introduce products on schedule could
have an adverse effect on our business, financial condition and
results of operations.
The development and acquisition of innovative products and
technologies that improve efficacy, safety, patients and
clinicians ease of use and cost-effectiveness involve
significant technical and business risks. If we cannot adapt to
changing technologies or anticipate changes in our current and
potential customers requirements our products may become
obsolete, and our business could suffer. Our success will
depend, in part, on our ability to continue to enhance our
existing products, develop new technology that addresses the
increasingly sophisticated and varied needs of our prospective
customers, license or acquire leading technologies and respond
to technological advances and emerging industry standards and
practices on a timely and cost-effective basis.
We are
subject to a number of existing laws and regulations,
non-compliance with which could adversely affect our business,
financial condition and results of operations, and we are
susceptible to a changing regulatory environment.
As a participant in the healthcare industry, our operations and
products, and those of our customers, are regulated by numerous
government agencies, both inside and outside the United States.
The impact of this on us is direct, to the extent we are subject
to these laws and regulations, and indirect in that in a number
of situations, even though we may not be directly regulated by
specific healthcare laws and regulations, our products must be
capable of being used by our customers in a manner that complies
with those laws and regulations.
The manufacture, distribution, marketing and use of our products
are subject to extensive regulation and increasing scrutiny by
the FDA and other regulatory authorities both inside and outside
the United States. Any new product must undergo lengthy and
rigorous testing and other extensive, costly and time-consuming
procedures mandated by the FDA and foreign regulatory
authorities. We may elect to delay or cancel our anticipated
regulatory submissions for new indications for our current or
proposed new products for a number of reasons. Failure to comply
with the requirements of the FDA or other regulatory authorities
could result in warning letters, product recalls or seizures,
monetary sanctions, injunctions to halt the manufacture and
distribution of products, civil or criminal sanctions, refusal
of a government to grant approvals, restrictions on operations
or withdrawal of existing approvals. Any of these actions could
cause a loss of customer confidence in us and our products,
which could adversely affect our sales.
We continue to address a number of regulatory issues as
discussed further under the caption entitled Certain
Regulatory Matters in Item 7 of this Annual Report on
Form 10-K.
In connection with these issues, there can be no assurance that
additional costs or civil and criminal penalties will not be
incurred, that additional regulatory actions with respect to the
company will not occur, that substantial additional charges or
significant asset impairments may not be required, or that
additional legislation or regulation will not be introduced that
may adversely affect the companys operations. Third
parties may also file claims against us in connection with these
issues. In addition, sales of the related products may continue
to be affected and sales of other Baxter products may be
adversely affected if we do not adequately address these issues.
The sales and marketing of our products and our relationships
with healthcare providers are under increasing scrutiny by
federal, state and foreign government agencies. The FDA, the
OIG, the Department of Justice (DOJ) and the Federal Trade
Commission have each increased their enforcement efforts with
respect to the anti-kickback statute, False Claims Act,
off-label promotion of products, other healthcare related laws,
antitrust and other competition laws. The DOJ has announced an
increased focus on the enforcement of the U.S. Foreign
Corrupt Practices Act (FCPA) particularly as it relates to the
conduct of pharmaceutical companies. Foreign governments have
also increased their scrutiny of pharmaceutical companies
sales and marketing activities and relationships with healthcare
providers. The laws and standards governing the promotion, sale
and reimbursement of our products and those governing our
relationships with healthcare
6
providers and governments can be complicated, are subject to
frequent change and may be violated unknowingly. We have
compliance programs in place, including policies, training and
various forms of monitoring designed to address these risks.
Nonetheless, these programs and policies may not always protect
us from conduct by our employees that violate these laws.
Violations, or allegations of violations, of these laws may
result in large civil and criminal penalties, debarment from
participating in government programs, diversion of management
time, attention and resources and may otherwise have an adverse
effect on our business, financial condition and results of
operations.
Issues
with product quality could have an adverse effect on our
business and subject us to regulatory actions and costly
litigation.
Quality management plays an essential role in determining and
meeting customer requirements, preventing defects and improving
the companys products and services. Our future operating
results will depend on our ability to implement and improve our
quality management program, and effectively train and manage our
employee base with respect to quality management. While we have
a network of quality systems throughout our business units and
facilities that relate to the design, development,
manufacturing, packaging, sterilization, handling, distribution
and labeling of our products, quality and safety issues may
occur with respect to any of our products. In addition, some of
the raw materials employed in our production processes are
derived from human and animal origins. Though great care is
taken to assure the safety of these raw materials, the nature of
their origin elevates the potential for the introduction of
pathogenic agents or other contaminants.
A quality or safety issue could have an adverse effect on our
business, financial condition and results of operations and may
result in warning letters, product recalls or seizures, monetary
sanctions, injunctions to halt manufacture and distribution of
products, civil or criminal sanctions, refusal of a government
to grant approvals, restrictions on operations or withdrawal of
existing approvals. An inability to address a quality or safety
issue in an effective manner on a timely basis may also cause a
loss of customer confidence in us or our products, which may
result in the loss of sales. In addition, we may be named as a
defendant in product liability or other lawsuits, which could
result in costly litigation, reduced sales, significant
liabilities and diversion of our managements time,
attention and resources. We continue to be self-insured with
respect to product liability claims. The absence of third-party
insurance coverage increases our potential exposure to
unanticipated claims and adverse decisions. Even claims without
merit could subject us to adverse publicity and require us to
incur significant legal fees.
For more information on certain regulatory matters currently
being addressed by the company with the FDA, please refer to
Certain Regulatory Matters in Item 7 of this
Annual Report on
Form 10-K.
Changes
in the healthcare regulatory environment, including the pending
healthcare reform being contemplated by the United States
Congress, may adversely affect our business.
Changes currently being contemplated in healthcare regulatory
environments worldwide may restrict our operations or our
growth. Congress is currently debating reforming the current
healthcare system in the United States and the laws and
regulations that will determine how that reform may be
implemented. Some of the laws currently under debate may
adversely affect the revenue generated by our products
and/or the
taxes we pay. These taxes may include a tax related to the sales
(or market share) of our medical devices and drugs. Because each
of our business units sell medical devices and drugs it is
expected that each would be impacted by these proposed taxes. In
addition to possible increases in taxes, there is a provision
currently under consideration which is intended to expand the
use of the 340B Drug Discount Program. The 340B
program provides certain qualified entities, such as hospitals
serving disadvantaged populations, with discounts on the
purchases of drugs for outpatient use. It has been proposed that
eligibility for these discounts be expanded to other entities
and to the purchase of drugs for inpatient use. These additional
taxes and compulsory discounts, if enacted, may adversely affect
our business by decreasing revenues and profits, diminishing our
ability to generate sufficient capital available for R&D
and forcing us to discontinue products that cannot support the
increased tax or discount burden.
7
None of the legislation described above has been enacted. We are
unable to predict with any degree of certainty what, if any,
legislation will be enacted and if so what impact such
legislation will ultimately have on our business.
If
reimbursement for our current or future products is reduced or
modified, our business could suffer.
Sales of our products depend, in part, on the extent to which
the costs of our products are paid by health maintenance,
managed care, pharmacy benefit and similar healthcare management
organizations, or reimbursed by government health administration
authorities, private health coverage insurers and other
third-party payors. These healthcare management organizations
and third-party payors are increasingly challenging the prices
charged for medical products and services. Additionally, as
discussed above, the containment of healthcare costs has become
a priority of federal and state governments, and the prices of
drugs and other healthcare products have been targeted in this
effort. We also face challenges in certain foreign markets where
the pricing and profitability of our products generally are
subject to government controls. Government controls in foreign
markets also impact our ability to collect accounts receivable
in a timely manner. Accordingly, our current and potential
products may not be considered cost effective, and reimbursement
to the consumer may not be available or sufficient to allow us
to sell our products on a competitive basis. Legislation and
regulations affecting reimbursement for our products may change
at any time and in ways that are difficult to predict and these
changes may be adverse to us. Any reduction in Medicare,
Medicaid or other third-party payor reimbursements could have a
negative effect on our operating results.
Consolidation
in the healthcare industry could adversely affect our business,
financial condition and results of operations.
There has been consolidation in our customer base, and by our
competitors, which has resulted in pricing and sales pressures.
As these consolidations occur, competition to provide products
like ours will become more intense, and the importance of
establishing relationships with key industry participants
including GPOs, IDNs and other customers will become greater.
Customers will continue to work and organize to negotiate price
reductions for our products and services. To the extent we are
forced to reduce our prices, our business will become less
profitable unless we are able to achieve corresponding
reductions in costs. The companys sales could be adversely
affected if any of its contracts with its GPOs, IDNs or other
customers are terminated in part or in their entirety, or
members decide to purchase from another supplier.
We
face substantial competition and many of our competitors have
significantly greater financial and other
resources.
Although no single company competes with us in all of our
businesses, we face substantial competition in each of our
segments, from international and domestic healthcare and
pharmaceutical companies of all sizes. Competition is primarily
focused on cost-effectiveness, price, service, product
performance, and technological innovation. Some competitors,
principally large pharmaceutical companies, have greater
financial, R&D and marketing resources than us. Competition
may increase further as additional companies begin to enter our
markets or modify their existing products to compete directly
with ours. Greater financial, R&D and marketing resources
may allow our competitors to respond more quickly to new or
emerging technologies and changes in customer requirements that
may render our products obsolete or non-competitive. If our
competitors develop more effective or affordable products, or
achieve earlier patent protection or product commercialization
than we do, our operations will likely be negatively affected.
We also face competition for marketing, distribution and
collaborative development agreements, for establishing
relationships with academic and research institutions, and for
licenses to intellectual property. In addition, academic
institutions, government agencies and other public and private
research organizations may also conduct research, seek patent
protection and establish collaborative arrangements for
discovery, research, clinical development and marketing of
products similar to ours. These companies and institutions
compete with us in recruiting and retaining qualified scientific
and management personnel as well as in acquiring technologies
complementary to our programs. If we are unable to successfully
compete with these companies and institutions, our business may
suffer.
8
If we
are unable to obtain sufficient components or raw materials on a
timely basis, our business may be adversely
affected.
The manufacture of our products requires the timely delivery of
sufficient amounts of quality components and materials. We
manufacture our products in over 50 manufacturing facilities
around the world. We acquire our components and materials from
many suppliers in various countries. While efforts are made to
diversify our sources of components and materials, in certain
instances we acquire components and materials from a sole
supplier. We work closely with our suppliers to ensure the
continuity of supply but we cannot guarantee these efforts will
continue to be successful. In addition, due to the regulatory
environment in which we operate, we may be unable to quickly
establish additional or replacement sources for some components
or materials. A reduction or interruption in supply, and an
inability to develop alternative sources for such supply, could
adversely affect our ability to manufacture our products in a
timely or cost-effective manner, and our ability to make product
sales.
If we
are unable to protect our patents or other proprietary rights,
or if we infringe on the patents or other proprietary rights of
others, our competitiveness and business prospects may be
materially damaged.
Patent and other proprietary rights are essential to our
business. Our success depends to a significant degree on our
ability to obtain and enforce patents and licenses to patent
rights, both in the United States and in other countries. We
cannot guarantee that pending patent applications will result in
issued patents, that patents issued or licensed will not be
challenged or circumvented by competitors, that our patents will
not be found to be invalid or that the intellectual property
rights of others will not prevent the company from selling
certain products or including key features in the companys
products.
The patent position of a healthcare company is often uncertain
and involves complex legal and factual questions. Significant
litigation concerning patents and products is pervasive in our
industry. Patent claims include challenges to the coverage and
validity of our patents on products or processes as well as
allegations that our products infringe patents held by
competitors or other third parties. A loss in any of these types
of cases could result in a loss of patent protection or the
ability to market products, which could lead to a significant
loss of sales, or otherwise materially affect future results of
operations.
We also rely on trademarks, copyrights, trade secrets and
know-how to develop, maintain and strengthen our competitive
positions. While we protect our proprietary rights to the extent
possible, we cannot guarantee that third parties will not know,
discover or develop independently equivalent proprietary
information or techniques, or that they will not gain access to
our trade secrets or disclose our trade secrets to the public.
Therefore, we cannot guarantee that we can maintain and protect
unpatented proprietary information and trade secrets.
Misappropriation or other loss of our intellectual property
would have an adverse effect on our competitive position and may
cause us to incur substantial litigation costs.
If our
business development activities are unsuccessful, our business
could suffer and our financial performance could be adversely
affected.
We are engaged in business development activities including
evaluating acquisitions, joint development opportunities,
technology licensing arrangements and other opportunities. These
activities may result in substantial investment of the
companys resources. Our success developing products or
expanding into new markets from such activities will depend on a
number of factors, including our ability to find suitable
opportunities for acquisition, investment or alliance; whether
we are able to establish an acquisition, investment or alliance
on terms that are satisfactory to us; the strength of the other
companys underlying technology, products and ability to
execute its business strategies; any intellectual property and
litigation related to these products or technology; and our
ability to successfully integrate the acquired company,
business, product, technology or research into our existing
operations, including the ability to adequately fund acquired
in-process research and development projects. If we are
unsuccessful in our business development activities, we may be
unable to meet our financial targets and we may be required to
record asset impairment charges.
9
If we
are unsuccessful in identifying growth opportunities or exiting
low margin businesses or discontinuing low profit products, our
business, financial condition and results could be adversely
affected.
Successful execution of our business strategy depends, in part,
on improving the profit margins we earn with respect to our
current and future products. A failure to identify and take
advantage of opportunities that allow us to increase our profit
margins or a failure by us to exit low profit margin businesses
or discontinue low profit margin products, may result in us
failing to meet our financial targets and may otherwise have an
adverse effect on our business, financial condition and results
of operations.
We are
subject to risks associated with doing business
globally.
Our operations, both inside and outside the United States, are
subject to risks inherent in conducting business globally and
under the laws, regulations and customs of various jurisdictions
and geographies. These risks include fluctuations in currency
exchange rates, changes in exchange controls, loss of business
in government tenders that are held annually in many cases,
nationalization, increasingly complex labor environments,
expropriation and other governmental actions, availability of
raw materials, changes in taxation, including legislative
changes in United States and international taxation of income
earned outside of the United States, importation limitations,
export control restrictions, changes in or violations of
U.S. or local laws, including the FCPA, dependence on a few
government entities as customers, pricing restrictions, economic
and political destabilization or instability, disputes between
countries, diminished or insufficient protection of intellectual
property, disruption or destruction of operations in a
significant geographic region due to the location of
manufacturing facilities, distribution facilities or
customers regardless of cause, including war,
terrorism, riot, civil insurrection or social unrest, or natural
or man-made disasters, including famine, flood, fire,
earthquake, storm or disease. Failure to comply with the laws
and regulations that affect our global operations could have an
adverse effect on our business, financial condition or results
of operations.
We are
subject to foreign currency exchange risk.
In 2009, we generated approximately 60% of our revenue outside
the United States. We anticipate that revenue from outside the
United States will continue to represent a majority of our total
revenue. As a result, our financial results may continue to be
adversely affected by fluctuations in foreign currency exchange
rates. Market volatility and currency fluctuations may also
reduce the benefits from our natural hedges and limit our
ability to cost-effectively hedge against our foreign currency
exposure. A discussion of the financial impact of foreign
exchange rate fluctuations and the ways and extent to which we
attempt to mitigate such impact is contained under the heading
Financial Instrument Market Risk in Item 7 of
this Annual Report on
Form 10-K.
We cannot predict with any certainty changes in foreign currency
exchange rates or the degree to which we can mitigate these
risks.
Challenges
in the commercial and credit environment may adversely affect
our business and financial condition.
The companys ability to generate cash flows from
operations could be affected if there is a material decline in
the demand for the companys products, in the solvency of
its customers or suppliers, or deterioration in the
companys key financial ratios or credit rating. Current or
worsening economic conditions may adversely affect our business
and the business of our customers, including their ability to
pay for our products and services, and the amount spent on
healthcare generally. This could result in a decrease in the
demand for our products and services, longer sales cycles,
slower adoption of new technologies and increased price
competition. These conditions may also adversely affect certain
of our suppliers, which could cause a disruption in our ability
to produce our products.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
10
The companys corporate offices are owned and located at
One Baxter Parkway, Deerfield, Illinois 60015.
Baxter owns or has long-term leases on all of its manufacturing
facilities. The company maintains 15 manufacturing facilities in
the United States and its territories, including three in Puerto
Rico. The company also manufactures in Australia, Austria,
Belgium, Brazil, Canada, Chile, China, Colombia, Costa Rica, the
Czech Republic, Germany, India, Ireland, Italy, Japan, Malta,
Mexico, the Philippines, Poland, Saudi Arabia, Singapore, Spain,
Switzerland, Tunisia, Turkey and the United Kingdom. The
majority of these facilities are shared by more than one of the
companys business segments. The companys principal
manufacturing facilities by segment are listed below:
|
|
|
|
|
Business
|
|
Location
|
|
Owned/Leased
|
|
BioScience
|
|
|
|
|
|
|
Orth, Austria
|
|
Owned
|
|
|
Vienna, Austria
|
|
Owned
|
|
|
Lessines, Belgium
|
|
Owned
|
|
|
Hayward, California
|
|
Leased
|
|
|
Los Angeles, California
|
|
Owned
|
|
|
Thousand Oaks, California
|
|
Owned
|
|
|
Bohumil, Czech Republic
|
|
Owned
|
|
|
Pisa, Italy
|
|
Owned
|
|
|
Rieti, Italy
|
|
Owned
|
|
|
Beltsville, Maryland
|
|
Leased
|
|
|
Neuchatel, Switzerland
|
|
Owned
|
Medication Delivery
|
|
|
|
|
|
|
Mountain Home, Arkansas
|
|
Owned
|
|
|
Toongabbie, Australia
|
|
Owned
|
|
|
Lessines, Belgium
|
|
Owned
|
|
|
Sao Paulo, Brazil
|
|
Owned
|
|
|
Alliston, Canada
|
|
Owned
|
|
|
Shanghai, China
|
|
Owned
|
|
|
Suzhou, China
|
|
Owned
|
|
|
Cali, Colombia
|
|
Owned
|
|
|
Cartago, Costa Rica
|
|
Owned
|
|
|
Thetford, England
|
|
Owned
|
|
|
Halle, Germany
|
|
Owned
|
|
|
Round Lake, Illinois
|
|
Owned
|
|
|
Bloomington, Indiana
|
|
Owned/Leased(1)
|
|
|
Grosotto, Italy
|
|
Owned
|
|
|
Cleveland, Mississippi
|
|
Leased
|
|
|
Cherry Hill, New Jersey
|
|
Owned/Leased(1)
|
|
|
North Cove, North Carolina
|
|
Owned
|
|
|
Aibonito, Puerto Rico
|
|
Leased
|
|
|
Guayama, Puerto Rico
|
|
Owned
|
|
|
Jayuya, Puerto Rico
|
|
Leased
|
|
|
Woodlands, Singapore
|
|
Owned/Leased(2)
|
|
|
Sabinanigo, Spain
|
|
Owned
|
|
|
San Vittore, Switzerland
|
|
Owned
|
11
|
|
|
|
|
Business
|
|
Location
|
|
Owned/Leased
|
|
Renal
|
|
|
|
|
|
|
Mountain Home, Arkansas
|
|
Owned
|
|
|
Toongabbie, Australia
|
|
Owned
|
|
|
Sao Paulo, Brazil
|
|
Owned
|
|
|
Alliston, Canada
|
|
Owned
|
|
|
Guangzhou, China
|
|
Owned(3)
|
|
|
Suzhou, China
|
|
Owned
|
|
|
Cali, Colombia
|
|
Owned
|
|
|
Liverpool, England
|
|
Owned
|
|
|
Castlebar, Ireland
|
|
Owned
|
|
|
Miyazaki, Japan
|
|
Owned
|
|
|
Cuernavaca, Mexico
|
|
Owned
|
|
|
North Cove, North Carolina
|
|
Owned
|
|
|
Woodlands, Singapore
|
|
Owned/Leased(2)
|
|
|
San Vittore, Switzerland
|
|
Owned
|
|
|
|
(1)
|
|
The Bloomington, Indiana and Cherry
Hill, New Jersey locations include both owned and leased
facilities.
|
|
(2)
|
|
Baxter owns the facility located at
Woodlands, Singapore and leases the property upon which it rests.
|
|
(3)
|
|
The Guangzhou, China facility is
owned by a joint venture in which Baxter owns a majority share.
|
The company also owns or operates shared distribution facilities
throughout the world. In the United States and Puerto Rico,
there are 13 shared distribution facilities with the
principal facilities located in Memphis, Tennessee; Catano,
Puerto Rico; North Cove, North Carolina; and Round Lake,
Illinois. Internationally, we have more than 100 shared
distribution facilities located in Argentina, Australia,
Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Costa
Rica, the Czech Republic, Ecuador, France, Germany, Greece,
Guatemala, Hong Kong, India, Ireland, Italy, Japan, Korea,
Mexico, New Zealand, Panama, Peru, the Philippines, Poland,
Portugal, Russia, Singapore, Spain, Sweden, Switzerland, Taiwan,
Thailand, Turkey, the United Arab Emirates, the United Kingdom
and Venezuela.
The company continually evaluates its plants and production
lines and believes that its current facilities plus any planned
expansions are generally sufficient to meet its expected needs
and expected near-term growth. Expansion projects and facility
closings will be undertaken as necessary in response to market
needs.
|
|
Item 3.
|
Legal
Proceedings.
|
Incorporated by reference to Note 11 Legal
Proceedings in Item 8 of this Annual Report on
Form 10-K.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
Executive
Officers of the Registrant
Robert L. Parkinson, Jr., age 59, is Chairman
and Chief Executive Officer of Baxter, having served in that
capacity since April 2004. Prior to joining Baxter,
Mr. Parkinson was Dean of Loyola University Chicago School
of Business Administration and Graduate School of Business from
2002 to 2004. He retired from Abbott Laboratories in 2001
following a
25-year
career, having served in a variety of domestic and international
management and leadership positions, including as President and
Chief Operating Officer. Mr. Parkinson also serves on the
boards of directors of Chicago-based Northwestern Memorial
Hospital and the Northwestern Memorial Foundation as well as
Loyola University Chicago Board of Trustees.
Joy A. Amundson, age 55, is Corporate Vice
President President, BioScience, having served in
that capacity since August 2004. Prior to joining Baxter in
August 2004, Ms. Amundson was a principal of Amundson
12
Partners, Inc., a healthcare-consulting firm, from 2001. From
1995 to 2001, she served as a Senior Vice President of Abbott
Laboratories.
Peter J. Arduini, age 45, is Corporate Vice
President President, Medication Delivery. Prior to
joining Baxter in March 2005, Mr. Arduini spent
15 years at GE Healthcare in a variety of management roles
for domestic and global businesses, the most recent of which was
global general manager of GE Healthcares computerized
axial tomography scan (CT) and functional imaging business.
Michael J. Baughman, age 45, is Corporate Vice
President and Controller, having served in that capacity since
May 2006. Mr. Baughman joined Baxter in 2003 as Vice
President of Corporate Audit and was appointed Controller in
March 2005. Before joining Baxter, Mr. Baughman spent
16 years at PricewaterhouseCoopers LLP, in roles of
increasing responsibility, which included audit partner and
partner in the firms mergers and acquisitions practice.
Robert M. Davis, age 43, is Corporate Vice President
and Chief Financial Officer, having served in that capacity
since May 2006. Mr. Davis joined Baxter as Treasurer in
November 2004. Prior to joining Baxter, Mr. Davis was with
Eli Lilly and Company from 1990 where he held a number of
financial positions, including Assistant Treasurer, Director of
Corporate Financial Planning and tax counsel.
J. Michael Gatling, age 60, is Corporate Vice
President Manufacturing having served in that
capacity since December 1996. Mr. Gatling is also
responsible for the supply chain and environment, health and
safety functions.
Jeanne K. Mason, Ph.D., age 54, is
Corporate Vice President, Human Resources. Prior to joining
Baxter in May 2006, Dr. Mason was with General Electric
from 1988, holding various leadership positions, the most recent
of which was with GE Insurance Solutions, a primary insurance
and reinsurance business, where she was responsible for global
human resource functions.
Bruce H. McGillivray, age 54, is Corporate Vice
President President, Renal, having served in that
capacity since August 2004. From 2002 until August 2004,
Mr. McGillivray was President of Renal, Europe and from
1997 to 2002, he was President of Baxter Corporation in Canada.
Norbert G. Riedel, Ph.D., age 52, is
Corporate Vice President and Chief Scientific Officer, having
served in that capacity since May 2001. From 1998 to 2001, he
served as President of the recombinant business unit of
BioScience. Prior to joining Baxter, Dr. Riedel was head of
worldwide biotechnology and worldwide core research functions at
Hoechst Marion Roussel, now Sanofi-Aventis.
David P. Scharf, age 42, is Corporate Vice President
and General Counsel, having served in that capacity since August
2009. Mr. Scharf joined Baxter in July 2005 and served in a
number of positions, including Deputy General Counsel and
Corporate Secretary. Prior to joining Baxter, Mr. Scharf
was with Guidant Corporation from 2002, in roles of increasing
responsibility.
Karenann K. Terrell, age 48, is Corporate Vice
President and Chief Information Officer. Prior to joining Baxter
in April 2006, Ms. Terrell was with DaimlerChrysler
Corporation from 2000 where she served in various positions, the
most recent of which was Vice President and Chief Information
Officer, Chrysler Group and Mercedes Benz North America. Prior
to that, she spent 16 years with General Motors with
responsibility for brand development and
e-business
management.
Cheryl L. White, age 56, is Corporate Vice
President, Quality, having served in that capacity since March
2006. From 1997 to 2006, Ms. White held various management
positions in Baxters BioScience business, the most recent
of which was Vice President, Quality Management.
All executive officers hold office until the next annual
election of officers and until their respective successors are
elected and qualified.
13
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
The following table includes information about the
companys common stock repurchases during the three-month
period ended December 31, 2009.
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
Total Number of Shares
|
|
Value of Shares
|
|
|
Total Number of
|
|
Average Price
|
|
Purchased as Part of
|
|
that may yet be
|
|
|
Shares Purchased
|
|
Paid per
|
|
Publicly Announced
|
|
Purchased Under the
|
Period
|
|
(1)(2)
|
|
Share
|
|
Programs(1)(2)
|
|
Program(2)
|
|
|
October 1, 2009 through
October 31, 2009
|
|
|
1,059,905
|
|
|
$
|
55.20
|
|
|
|
1,059,905
|
|
|
|
|
|
November 1, 2009 through
November 30, 2009
|
|
|
1,211,408
|
|
|
$
|
54.80
|
|
|
|
1,211,408
|
|
|
|
|
|
December 1, 2009 through
December 31, 2009
|
|
|
2,205,100
|
|
|
$
|
56.69
|
|
|
|
2,205,100
|
|
|
|
|
|
|
|
Total
|
|
|
4,476,413
|
|
|
$
|
55.82
|
|
|
|
4,476,413
|
|
|
$
|
1,950,003,931
|
|
|
|
|
|
|
(1) |
|
In March 2008, the company announced that its board of directors
authorized the company to repurchase up to $2.0 billion of
its common stock on the open market. During the fourth quarter
of 2009, the company repurchased approximately 3.6 million
shares for approximately $200 million under this program.
No shares remained available under this authorization at
December 31, 2009. |
|
(2) |
|
In July 2009, the company announced that its board of directors
authorized the company to repurchase up to $2.0 billion of
its common stock on the open market. During the fourth quarter
of 2009, the company repurchased approximately 0.9 million
shares for approximately $50 million under this program.
This program does not have an expiration date. |
Additional information required by this item is incorporated by
reference from the section entitled Note 13 Quarterly
Financial Results and Market for the Companys Stock
(Unaudited) in Item 8 of this Annual Report on
Form 10-K.
14
|
|
Item 6.
|
Selected
Financial Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of or for the years ended December 31
|
|
20091,6
|
|
|
20082,6
|
|
|
20073,6
|
|
|
20064,6
|
|
|
20055,6
|
|
|
|
|
Operating Results
|
|
Net sales
|
|
$
|
12,562
|
|
|
|
12,348
|
|
|
|
11,263
|
|
|
|
10,378
|
|
|
|
9,849
|
|
(in millions)
|
|
Income from continuing operations attributable to Baxter7
|
|
$
|
2,205
|
|
|
|
2,014
|
|
|
|
1,707
|
|
|
|
1,398
|
|
|
|
958
|
|
|
|
Depreciation and amortization
|
|
$
|
638
|
|
|
|
631
|
|
|
|
581
|
|
|
|
575
|
|
|
|
580
|
|
|
|
Research and development expenses
|
|
$
|
917
|
|
|
|
868
|
|
|
|
760
|
|
|
|
614
|
|
|
|
533
|
|
|
|
Balance Sheet and
|
|
Capital expenditures
|
|
$
|
1,014
|
|
|
|
954
|
|
|
|
692
|
|
|
|
526
|
|
|
|
444
|
|
Cash Flow Information
|
|
Total assets
|
|
$
|
17,354
|
|
|
|
15,405
|
|
|
|
15,294
|
|
|
|
14,686
|
|
|
|
12,727
|
|
(in millions)
|
|
Long-term debt and lease obligations
|
|
$
|
3,440
|
|
|
|
3,362
|
|
|
|
2,664
|
|
|
|
2,567
|
|
|
|
2,414
|
|
|
|
Common Stock
Information
|
|
Average number of common shares outstanding (in millions)8
|
|
|
607
|
|
|
|
625
|
|
|
|
644
|
|
|
|
651
|
|
|
|
622
|
|
|
|
Income from continuing operations attributable to Baxter per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.63
|
|
|
|
3.22
|
|
|
|
2.65
|
|
|
|
2.15
|
|
|
|
1.54
|
|
|
|
Diluted
|
|
$
|
3.59
|
|
|
|
3.16
|
|
|
|
2.61
|
|
|
|
2.13
|
|
|
|
1.52
|
|
|
|
Cash dividends declared per common share
|
|
$
|
1.070
|
|
|
|
0.913
|
|
|
|
0.720
|
|
|
|
0.582
|
|
|
|
0.582
|
|
|
|
Year-end market price per common share
|
|
$
|
58.68
|
|
|
|
53.59
|
|
|
|
58.05
|
|
|
|
46.39
|
|
|
|
37.65
|
|
|
|
Other Information
|
|
Total shareholder
return9
|
|
|
11.6%
|
|
|
|
(6.3%)
|
|
|
|
26.8%
|
|
|
|
24.8%
|
|
|
|
10.7%
|
|
|
|
Common shareholders of record at year-end
|
|
|
48,286
|
|
|
|
48,492
|
|
|
|
47,661
|
|
|
|
49,097
|
|
|
|
58,247
|
|
|
|
|
|
|
1 |
|
Income from continuing operations attributable to Baxter
included a $79 million cost optimization charge, an
impairment charge of $54 million and a charge of
$27 million relating to infusion pumps. |
|
2 |
|
Income from continuing operations attributable to Baxter
included charges of $125 million relating to infusion
pumps, an impairment charge of $31 million and charges
totaling $19 million relating to acquired in-process and
research and development (IPR&D). |
|
3 |
|
Income from continuing operations attributable to Baxter
included a restructuring charge of $70 million, a charge of
$56 million relating to litigation and IPR&D charges
of $61 million. |
|
4 |
|
Income from continuing operations attributable to Baxter
included a charge of $76 million relating to infusion pumps. |
|
5 |
|
Income from continuing operations attributable to Baxter
included a benefit of $109 million relating to
restructuring charge adjustments, charges of $126 million
relating to infusion pumps, and a charge of $50 million
relating to the exit of hemodialysis instrument manufacturing. |
|
6 |
|
Refer to the notes to the consolidated financial statements for
information regarding other charges and income items. |
|
7 |
|
Excludes income from continuing operations attributable to
noncontrolling interests of $10 million, $11 million,
$14 million, $14 million and $21 million for
2009, 2008, 2007, 2006 and 2005, respectively. |
|
8 |
|
Excludes common stock equivalents. |
|
9 |
|
Represents the total of appreciation (decline) in market price
plus cash dividends declared on common shares. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following commentary should be read in conjunction with the
consolidated financial statements and accompanying notes.
EXECUTIVE
OVERVIEW
Description
of the Company and Business Segments
Baxter International Inc. (Baxter or the company) develops,
manufactures and markets products that save and sustain the
lives of people with hemophilia, immune disorders, infectious
diseases, kidney disease, trauma, and
15
other chronic and acute medical conditions. As a global,
diversified healthcare company, Baxter applies a unique
combination of expertise in medical devices, pharmaceuticals and
biotechnology to create products that advance patient care
worldwide. The company operates in three segments. BioScience
processes recombinant and plasma-based proteins to treat
hemophilia and other bleeding disorders; plasma-based therapies
to treat immune deficiencies, alpha
1-antitrypsin
deficiency, burns and shock, and other chronic and acute
blood-related conditions; products for regenerative medicine,
such as biosurgery products; and vaccines. Medication
Delivery manufactures intravenous (IV) solutions and
administration sets, premixed drugs and drug-reconstitution
systems, pre-filled vials and syringes for injectable drugs, IV
nutrition products, infusion pumps, and inhalation anesthetics,
as well as products and services related to pharmacy
compounding, drug formulation and packaging technologies.
Renal provides products to treat end-stage renal disease,
or irreversible kidney failure. The business manufactures
solutions and other products for peritoneal dialysis (PD), a
home-based therapy, and also distributes products for
hemodialysis (HD), which is generally conducted in a hospital or
clinic.
Baxter has approximately 49,700 employees and conducts
business in over 100 countries. The company generates
approximately 60% of its revenues outside the United States, and
maintains manufacturing and distribution facilities in a number
of locations in the United States, Europe, Canada, Asia-Pacific
and Latin America.
Financial
Results
Baxters 2009 results reflect the companys success in
driving growth through global expansion and leveraging the
benefits of its diversified healthcare model, while increasing
its investment in research and development (R&D). In 2009,
the company achieved record net sales, earnings and cash flows
from operations.
Baxters global net sales totaled $12.6 billion in
2009, an increase of 2% over 2008, and included an unfavorable
foreign currency impact of 5 percentage points.
International sales totaled $7.2 billion and represented
approximately 60% of the companys total sales in 2009.
Contributing to the companys increased sales was the
BioScience segment growth, driven by increased demand and
improved pricing for GAMMAGARD LIQUID (marketed as KIOVIG in
most markets outside the United States), the liquid formulation
of the companys antibody-replacement therapy, IGIV (immune
globulin intravenous), and certain other plasma protein
products, and the continued increase in customer conversion to
the companys advanced recombinant therapy, ADVATE
[Antihemophilic Factor (Recombinant), Plasma/Albumin-Free
Method]. In the Medication Delivery segment, excluding the
impact of foreign currency, growth in the companys
international pharmacy compounding and U.S. pharmaceutical
partnering businesses contributed to the increase in sales,
combined with increased demand for IV solutions and
anesthesia products, including SUPRANE (desflurane) and
sevoflurane, and increased demand and improved pricing for
nutritional products. Also contributing to the increase in net
sales, excluding the impact of foreign currency, were gains in
the number of PD patients in the Renal segment, particularly in
the United States, Latin America and Eastern Europe, with
double-digit growth across Asia.
Baxters net income for 2009 totaled $2.2 billion, or
$3.59 per diluted share, increasing 9% and 14%, respectively,
compared to the prior year. The increase in earnings in 2009
reflects the increased gross margin as a result of improved
sales mix, manufacturing cost and yield improvements, as well as
improved pricing. In 2009, R&D expenses totaled
$917 million, a 6% increase over the prior year, and
represented the highest level of R&D spending in the
companys history. As further discussed below, results of
operations for 2009 included charges associated with the
companys SYNDEO PCA Syringe Pump and COLLEAGUE infusion
pumps, the companys cost optimization efforts, and the
discontinuation of the companys SOLOMIX drug delivery
system in development. Results of operations for 2008 included
charges associated with the companys COLLEAGUE infusion
pumps, the discontinuation of the CLEARSHOT pre-filled syringe
program and acquired in-process R&D (IPR&D).
The companys financial position remains strong, with cash
flows from operations totaling $2.9 billion in 2009, an
increase of $394 million over 2008. At December 31,
2009, Baxter had $2.8 billion in cash and equivalents, and
the companys net debt (debt and lease obligations less
cash and equivalents) represented 19% of shareholders
equity. In 2009, Baxters cash outflows relating to
acquisitions of and investments in
16
businesses and technologies included a $100 million payment
to Sigma International General Medical Apparatus, LLC (SIGMA)
for the exclusive distribution of SIGMAs infusion pumps in
the United States and international markets, a 40 percent
equity stake in SIGMA, and an option to purchase the remaining
portion of SIGMA. Additionally, in 2009 the company acquired
certain assets of Edwards Lifesciences Corporation related to
the hemofiltration business, also known as Continuous Renal
Replacement Therapy (Edwards CRRT), for $56 million.
Capital investments totaled $1.0 billion in 2009 as the
company continues to invest in capacity across its businesses to
support future growth. These investments were focused on
projects that enhance the companys cost structure and
manufacturing capabilities across the three businesses,
particularly as they relate to the companys nutritional,
anesthesia and PD products, and plasma and recombinant
manufacturing platforms. In addition, the company continues to
invest to support its strategy of geographic expansion with
select investments in growing markets, and continues to invest
to support the companys ongoing strategic focus on
R&D with the expansion of research facilities, pilot
manufacturing sites and laboratories.
The companys strong cash flow generation also provided the
company with the flexibility to continue to return value to its
shareholders in the form of share repurchases and dividends.
During 2009, the company repurchased 23 million shares of
common stock for $1.2 billion, and paid cash dividends to
its shareholders totaling $632 million. The company
increased the quarterly dividend rate by 20% in late 2008 and by
an additional 12% in late 2009.
Strategic
Objectives
Baxter remains focused on delivering sustainable growth and
shareholder value, while making appropriate investments for the
future. Baxters diversified healthcare model, its broad
portfolio of products that treat life-threatening acute or
chronic conditions, and its global presence are core components
of the companys strategy to achieve these objectives.
Through continued innovation, investment and collaboration,
Baxter seeks to advance new therapies, improve the safety and
cost-effectiveness of treatments and expand access to care.
The company seeks to expand gross margins by improving product
and business mix, pricing products appropriately, controlling
costs and enhancing productivity throughout the companys
global manufacturing footprint. As part of its approach to
disciplined financial management, Baxter is focused on
controlling general and administrative costs while continuing to
invest in select marketing programs and promotional activities
directed toward higher-growth and higher-margin products.
Strong cash flows generated by Baxters core operations
have allowed the company to increase its investment in its
R&D pipeline. In 2009, the company advanced a number of
Phase III clinical trials and numerous earlier stage
clinical trials of therapies that have the potential to impact
the treatment and delivery of care for chronic diseases like
Alzheimers disease, hemophilia, end-stage renal disease
and immune deficiencies, as well as public health threats like
pandemic and seasonal influenza. Refer to the R&D section
below for more information on these activities. In 2010, the
company will continue to invest in its R&D pipeline and
pursue select business development initiatives, collaborations
and alliances as part of the execution of its long-term growth
strategy.
The companys ability to sustain long-term growth and
successfully execute the strategies discussed above depends in
part on the companys ability to manage the competitive
landscape, the current challenges in the commercial and credit
environment, and other risk factors described under the caption
Item 1A. Risk Factors in the companys
Annual Report on
Form 10-K.
17
RESULTS
OF OPERATIONS
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
|
|
BioScience
|
|
$
|
5,573
|
|
|
$
|
5,308
|
|
|
$
|
4,649
|
|
|
|
5%
|
|
|
|
14%
|
|
Medication Delivery
|
|
|
4,649
|
|
|
|
4,560
|
|
|
|
4,231
|
|
|
|
2%
|
|
|
|
8%
|
|
Renal
|
|
|
2,266
|
|
|
|
2,306
|
|
|
|
2,239
|
|
|
|
(2%
|
)
|
|
|
3%
|
|
Transition services to Fenwal Inc.
|
|
|
74
|
|
|
|
174
|
|
|
|
144
|
|
|
|
(57%
|
)
|
|
|
21%
|
|
|
|
Total net sales
|
|
$
|
12,562
|
|
|
$
|
12,348
|
|
|
$
|
11,263
|
|
|
|
2%
|
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
|
|
United States
|
|
$
|
5,317
|
|
|
$
|
5,044
|
|
|
$
|
4,820
|
|
|
|
5%
|
|
|
|
5%
|
|
International
|
|
|
7,245
|
|
|
|
7,304
|
|
|
|
6,443
|
|
|
|
(1%
|
)
|
|
|
13%
|
|
|
|
Total net sales
|
|
$
|
12,562
|
|
|
$
|
12,348
|
|
|
$
|
11,263
|
|
|
|
2%
|
|
|
|
10%
|
|
|
|
Foreign currency unfavorably impacted net sales by
5 percentage points in 2009 due to the strengthening of the
U.S. Dollar relative to other currencies, including the
Euro and the British Pound. Foreign currency favorably impacted
net sales growth by 4 percentage points in 2008 principally
due to the weakening of the U.S. Dollar relative to other
currencies, including the Euro.
BioScience The following is a summary of sales
by product category in the BioScience segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Recombinants
|
|
$
|
2,058
|
|
|
$
|
1,966
|
|
|
$
|
1,714
|
|
|
|
5%
|
|
|
|
15%
|
|
Plasma Proteins
|
|
|
1,338
|
|
|
|
1,219
|
|
|
|
1,015
|
|
|
|
10%
|
|
|
|
20%
|
|
Antibody Therapy
|
|
|
1,368
|
|
|
|
1,217
|
|
|
|
985
|
|
|
|
12%
|
|
|
|
24%
|
|
Regenerative Medicine
|
|
|
442
|
|
|
|
408
|
|
|
|
346
|
|
|
|
8%
|
|
|
|
18%
|
|
Transfusion Therapies
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
(100%
|
)
|
Other
|
|
|
367
|
|
|
|
498
|
|
|
|
510
|
|
|
|
(26%
|
)
|
|
|
(2%
|
)
|
|
|
Total net sales
|
|
$
|
5,573
|
|
|
$
|
5,308
|
|
|
$
|
4,649
|
|
|
|
5%
|
|
|
|
14%
|
|
|
|
Net sales in the BioScience segment increased 5% and 14% in 2009
and 2008, respectively (including an unfavorable foreign
currency impact of 5 percentage points in 2009 and a
favorable foreign currency impact of 3 percentage points in
2008). Sales growth in the BioScience segment in both years was
driven by increased demand across a majority of the product
categories and improved pricing for select products. Sales
growth in the Recombinants product category in both 2009 and
2008 was the result of the continued adoption of the
companys advanced recombinant therapy, ADVATE. Strong
demand for FEIBA (an anti-inhibitor coagulant complex) and
plasma-derived factor VIII, and improved pricing and increased
demand for albumin drove sales growth in the Plasma Proteins
product category in both years. Also contributing to the 2009
growth was increased market penetration in the United States of
ARALAST [alpha 1-proteinase inhibitor (human)]. Antibody Therapy
product category sales growth in both years was the result of
improved pricing and increased demand for GAMMAGARD LIQUID
therapy. Also contributing to the sales growth in both years was
increased demand for the companys fibrin sealant product,
FLOSEAL, in the Regenerative Medicine product category. Net
sales in the companys Other product category declined in
both years. In 2009, the addition of international sales of
CELVAPAN H1N1 pandemic vaccine and increased sales of NEISVAC-C
(for the prevention of meningitis C) were more than offset
by
18
lower international sales of FSME-IMMUN (a tick-borne
encephalitis vaccine) and a reduction in pandemic influenza
vaccine advance purchase agreements (APAs). In 2008, strong
international sales of FSME-IMMUN and influenza vaccines,
including approximately $50 million of revenue in 2008
relating to a large pandemic influenza vaccine APA, were more
than offset by the negative impact related to the transfer of
marketing and distribution rights for BENEFIX back to Wyeth
effective June 30, 2007. Sales of BENEFIX were
approximately $110 million in 2007. On February 28,
2007, the company sold substantially all of the assets and
liabilities of the Transfusion Therapies (TT) business. Refer to
Note 3 for additional information regarding the TT business.
Medication Delivery The following is a summary
of sales by product category in the Medication Delivery segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
|
|
IV Therapies
|
|
$
|
1,562
|
|
|
$
|
1,575
|
|
|
$
|
1,402
|
|
|
|
(1%
|
)
|
|
|
12%
|
|
Global Injectables
|
|
|
1,701
|
|
|
|
1,584
|
|
|
|
1,504
|
|
|
|
7%
|
|
|
|
5%
|
|
Infusion Systems
|
|
|
858
|
|
|
|
906
|
|
|
|
860
|
|
|
|
(5%
|
)
|
|
|
5%
|
|
Anesthesia
|
|
|
492
|
|
|
|
464
|
|
|
|
422
|
|
|
|
6%
|
|
|
|
10%
|
|
Other
|
|
|
36
|
|
|
|
31
|
|
|
|
43
|
|
|
|
16%
|
|
|
|
(28%
|
)
|
|
|
Total net sales
|
|
$
|
4,649
|
|
|
$
|
4,560
|
|
|
$
|
4,231
|
|
|
|
2%
|
|
|
|
8%
|
|
|
|
Net sales in the Medication Delivery segment increased 2% and 8%
in 2009 and 2008, respectively (including an unfavorable foreign
currency impact of 5 percentage points in 2009 and a
favorable foreign currency impact of 3 percentage points in
2008). Excluding the impact of foreign currency, net sales in
the IV Therapies product category grew in both years as a
result of increased demand, particularly in international
markets, and improved pricing in the United States, for IV
solutions and nutritional products. Strong sales of select
multi-source generic products and growth in the companys
international pharmacy compounding and U.S. pharmaceutical
partnering businesses drove double-digit sales growth in the
Global Injectables product category in 2009, excluding the
impact of foreign currency. In 2008, strong international sales
in the pharmacy compounding business were partially offset by
decreased sales of generic injectables, primarily driven by the
decline in generic propofol and heparin sales. The decline in
generic propofol sales was due to the transfer of marketing and
distribution rights for propofol back to Teva Pharmaceutical
Industries Ltd. effective July 1, 2007. Sales of propofol
totaled approximately $40 million in 2007. The decline in
heparin sales was due to the companys recall of heparin
sodium injection products in the United States in 2008. Sales of
these heparin products totaled approximately $30 million in
2007. In the Infusion Systems product category, sales declined
in 2009 as a result of lower revenues from disposable tubing
sets used in the administration of IV solutions and lower
international sales of COLLEAGUE infusion pumps, partially
offset by sales of SPECTRUM infusion pumps as a result of the
2009 distribution agreement with SIGMA. Sales growth in this
product category in 2008 was due to increased international
sales of COLLEAGUE infusion pumps and increased sales of
disposable tubing sets. Growth in both 2009 and 2008 in the
Anesthesia product category was driven by increased sales of
SUPRANE (desflurane) and sevoflurane. The company continues to
benefit from its position as the only global supplier of all
three modern inhaled anesthetics (SUPRANE, sevoflurane and
isoflurane). Refer to Note 4 for additional information on
the SIGMA arrangement and Note 11 for additional
information regarding heparin.
19
Renal The following is a summary of sales by
product category in the Renal segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
|
|
PD Therapy
|
|
$
|
1,856
|
|
|
$
|
1,862
|
|
|
$
|
1,791
|
|
|
|
|
|
|
|
4%
|
|
HD Therapy
|
|
|
410
|
|
|
|
444
|
|
|
|
448
|
|
|
|
(8%
|
)
|
|
|
(1%
|
)
|
|
|
Total net sales
|
|
$
|
2,266
|
|
|
$
|
2,306
|
|
|
$
|
2,239
|
|
|
|
(2%
|
)
|
|
|
3%
|
|
|
|
Net sales in the Renal segment decreased 2% in 2009 and
increased 3% in 2008 (including an unfavorable foreign currency
impact of 6 percentage points in 2009 and a favorable
foreign currency impact of 5 percentage points in 2008).
Excluding the impact of foreign currency, net sales in the PD
Therapy product category grew in 2009 as the result of gains in
the number of PD patients, particularly in the United States,
Latin America and Eastern Europe, with double-digit growth
across Asia. Penetration of PD Therapy products continues to be
strong in emerging markets where many people with end-stage
renal disease have historically been under-treated. Excluding
the impact of foreign currency, net sales in the PD Therapy
product category declined in 2008 as gains in the number of PD
patients in Asia (particularly in China), Central and Eastern
Europe and the United States were more than offset by the impact
of a government tender loss in Mexico in the first quarter of
2008. The 2008 impact of the lost Mexican tender was estimated
to be approximately $100 million. Excluding the impact of
foreign currency, net sales in the HD Therapy product category
were flat in 2009 and declined in 2008 as lower saline sales in
both years were offset in 2009 by sales related to the
companys acquisition of Edwards CRRT and, in 2008,
partially offset by higher revenues from the companys
Renal Therapy Services (RTS) business, which operates dialysis
centers in partnership with local physicians in select
countries. Refer to Note 4 for additional information
regarding the acquisition of Edwards CRRT.
Transition Services to Fenwal Inc. Net sales
in this category represent revenues associated with
manufacturing, distribution and other services provided by the
company to Fenwal Inc. (Fenwal) subsequent to the divestiture of
the TT business on February 28, 2007. Revenues declined in
2009 as certain of the transition services agreements terminated
in 2008. See Note 3 for additional information regarding
the TT business divestiture.
Gross
Margin and Expense Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (as a percent of net sales)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Gross margin
|
|
|
51.9%
|
|
|
|
49.6%
|
|
|
|
49.0%
|
|
Marketing and administrative expenses
|
|
|
21.7%
|
|
|
|
21.8%
|
|
|
|
22.4%
|
|
|
|
Gross
Margin
The increase in gross margin in 2009 and 2008 was principally
driven by improvements in sales mix across all three segments,
manufacturing cost and yield improvements, as well as improved
pricing for select products. Contributing to the gross margin
improvement was the continued customer conversion to ADVATE
therapy, increased demand and improved pricing for GAMMAGARD
LIQUID therapy and certain other plasma protein and nutritional
products; and increased demand for IV solutions, global
injectables and anesthesia products. Partially offsetting the
gross margin improvement was the unfavorable impact of lower
FSME-IMMUN vaccine revenues.
Included in the companys gross margin in 2009, 2008 and
2007 were $27 million, $125 million and
$14 million, respectively, of charges and other costs
related to COLLEAGUE infusion pumps and the SYNDEO PCA Syringe
Pump. Also included in gross margin in 2009 was $30 million
of the companys $79 million cost optimization charge
recognized in the fourth quarter, which relates to actions the
company is taking to optimize its overall cost structure on a
global basis. These charges decreased the gross margin by
approximately 0.5, 1.1 and 0.1 percentage points in 2009,
2008 and 2007, respectively. Refer to Note 5 for additional
information on these charges and costs.
20
Marketing
and Administrative Expenses
The marketing and administrative expense ratio declined in 2009
and 2008. The ratio in both years was favorably impacted by
leverage from higher sales and stronger cost controls, partially
offset by spending relating to new marketing programs.
Unfavorably impacting the marketing and administrative expense
ratio in 2009 was $49 million of the companys
$79 million cost optimization charge recognized in the
fourth quarter, as discussed in Note 5. Foreign currency
had an unfavorable impact on the marketing and administrative
expense ratio in 2009 and a favorable impact in 2008. Also
unfavorably impacting the marketing and administrative expense
ratio in 2007 was a charge of $56 million to establish
reserves related to the average wholesale pricing (AWP)
litigation, as discussed in Note 11. These charges
increased the marketing and administrative expense ratio by
approximately 0.3 and 0.5 percentage points in 2009 and
2007, respectively.
Pension
Plan Costs
Fluctuations in pension plan costs impacted the companys
gross margin and expense ratios. Pension plan costs increased
$18 million in 2009 and decreased $15 million in 2008,
as detailed in Note 9. The $18 million increase in
2009 was principally due to an increase in loss amortization
related to asset performance and demographic experience,
partially offset by the impact of the companys
contributions to its pension plans and higher interest rates
used to discount the plans projected benefit obligations.
The $15 million decrease in 2008 was principally due to an
increase in the interest rate used to discount the plans
projected benefit obligations and lower loss amortization
related to asset performance from prior years, partially offset
by the impact of changes to certain other assumptions.
Costs of the companys pension plans are expected to
increase from $155 million in 2009 to approximately
$176 million in 2010, principally due to lower interest
rates used to discount the plans projected benefit
obligations and an increase in loss amortization related to
asset performance, partially offset by the impact of a
$300 million discretionary cash contribution made to the
pension plan in the United States in January 2010. Refer to the
Liquidity and Capital Resources section below for further
information on the funding of pension plans. For the domestic
plans, the discount rate will decrease to 6.05% from 6.5% and
the expected return on plan assets will remain at 8.5% for 2010.
Refer to the Critical Accounting Policies section below for a
discussion of how the pension plan assumptions are developed,
mortality tables are selected, and actuarial losses are
amortized, and the impact of these factors on pension plan cost.
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change
|
|
years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Research and development expenses
|
|
|
$917
|
|
|
|
$868
|
|
|
|
$760
|
|
|
|
6%
|
|
|
|
14%
|
|
as a percent of net sales
|
|
|
7.3%
|
|
|
|
7.0%
|
|
|
|
6.7%
|
|
|
|
|
|
|
|
|
|
|
|
R&D expenses increased in both 2009 and 2008, reflecting
the companys continued focus on innovation and investments
across its business portfolio to advance and expand its product
pipeline. Foreign currency had a favorable impact on R&D
expense growth in 2009 and an unfavorable impact in 2008.
In 2009, the company had a number of product launches and
continued to make progress with respect to its internal R&D
pipeline and R&D collaborations with partners. Key
developments included the following:
Product
Approvals and Launches
|
|
|
|
|
Marketing authorization from the European Commission for
CELVAPAN H1N1 pandemic vaccine using Baxters Vero cell
technology; CELVAPAN H1N1 is the first cell culture-based and
non-adjuvanted pandemic influenza vaccine to receive marketing
authorization in the European Union;
|
|
|
|
Launch of HYLENEX recombinant (hyaluronidase human injection) in
the United States for use in pediatric rehydration; providing a
subcutaneous alternative to IV administration of fluids;
|
21
|
|
|
|
|
Launch of OLIMEL, the companys latest triple-chamber
container system for parenteral nutrition, in certain European
markets; and
|
|
|
|
Launch of ADVATE and RECOMBINATE therapies and sevoflurane in
additional international markets.
|
Other
Developments
|
|
|
|
|
Completion of the seasonal influenza Phase III confirmatory
study in healthy adults in the United States;
|
|
|
|
Completed enrollment in the first Phase III trial combining
GAMMAGARD LIQUID therapy with ENHANZE, Halozyme Therapeutics,
Inc.s (Halozyme) proprietary drug delivery technology, for
the subcutaneous delivery of IGIV for patients with primary
immune deficiency, which could allow patients to administer
their dose of IGIV once monthly at home;
|
|
|
|
Expanded the patient enrollment in a Phase III clinical
trial evaluating the use of GAMMAGARD LIQUID therapy for the
treatment of
mild-to-moderate
Alzheimers disease;
|
|
|
|
Expanded the patient enrollment in a Phase I clinical trial
evaluating the safety and tolerability of recombinant von
Willebrand factor for the treatment of von Willebrand disease,
the most common type of inherited bleeding disorder;
|
|
|
|
Initiation of a Phase III clinical trial evaluating the use
of ARTISS [Fibrin Sealant (Human)] in facial surgery in the
United States; ARTISS is the first and only slow-setting fibrin
sealant indicated for use in adhering skin grafts in adult and
pediatric burn patients;
|
|
|
|
Filing of an Investigational Device Exemption with the
U.S. Food and Drug Administration (FDA) to begin a clinical
trial to collect safety and effectiveness data required for a
501(k) application for a home HD system; and
|
|
|
|
Initiation of a Phase III clinical trial evaluating TISSEEL
[Fibrin Sealant] as a hemostatic agent in vascular surgery;
these studies are being conducted for submission to the FDA to
support a broad hemostatic indication for this product in the
United States.
|
R&D expenses in 2008 included IPR&D charges totaling
$19 million principally related to an in-licensing
agreement with Innocoll Pharmaceuticals Ltd. (Innocoll).
R&D expenses in 2007 included IPR&D charges totaling
$50 million, related to a collaboration with HHD, LLC (HHD)
and DEKA Products Limited Partnership and DEKA Research and
Development Corp. (collectively, DEKA); arrangements with
Halozyme; a distribution agreement with Nycomed Pharma AS
(Nycomed); and an amendment of the companys collaboration
with Nektar Therapeutics (Nektar). Refer to Note 4 for more
information regarding the 2008 agreement with Innocoll, as well
as the investments made in 2007.
Restructuring
Charge
In 2007, the company recorded a restructuring charge of
$70 million principally associated with the consolidation
of certain commercial and manufacturing operations outside of
the United States. Based on a review of current and future
capacity needs, the company decided to integrate several
facilities to reduce the companys cost structure and
optimize operations, principally in the Medication Delivery
segment. Refer to Note 5 for additional information,
including details regarding reserve utilization.
Net
Interest Expense
Net interest expense increased $22 million in 2009,
principally due to the impact of lower interest rates on
interest income. Also contributing to the increase in net
interest expense in 2009 was the impact of a higher average net
debt balance due to the February 2009 issuance of
$350 million of senior unsecured notes due 2014 and the
August 2009 issuance of $500 million of senior unsecured
notes due 2019. Net interest expense increased $54 million
in 2008, principally due to lower interest income resulting from
lower U.S. interest rates and a lower average cash balance,
a higher average debt balance and the termination of the
companys cross-currency swap agreements. The higher
average debt balance in 2008 was principally due to the December
2007 issuance of $500 million of senior unsecured notes due
2037 and the May 2008 issuance of $500 million
22
of senior unsecured notes due 2018. Refer to Note 2 for a
summary of the components of net interest expense for the three
years ended December 31, 2009.
Other
Expense, Net
Other expense, net was $45 million in 2009,
$26 million in 2008 and $18 million in 2007. Refer to
Note 2 for a table that details the components of other
expense, net for the three years ended December 31, 2009.
Other expense, net in each year included amounts relating to
equity method investments and foreign currency fluctuations,
principally relating to intercompany receivables, payables and
loans denominated in a foreign currency. In 2009, other expense,
net included a charge of $54 million associated with the
discontinuation of the companys SOLOMIX drug delivery
system in development. In 2008, other expense, net included a
charge of $31 million associated with the discontinuation
of the companys CLEARSHOT pre-filled syringe program and
$16 million of income related to the finalization of the
net assets transferred in the TT divestiture. In 2007, other
expense, net included a gain on the sale of the TT business of
$58 million less a charge of $35 million associated
with severance and other employee-related costs. Refer to
Note 3 for further information regarding the divestiture
and Note 5 for further information on the SOLOMIX and
CLEARSHOT charges.
Pre-Tax
Income
Refer to Note 12 for a summary of financial results by
segment. Certain items are maintained at the companys
corporate level and are not allocated to a segment. The
following is a summary of significant factors impacting the
segments financial results.
BioScience Pre-tax income increased 5% in 2009
and 21% in 2008. The primary drivers of the increase in pre-tax
income in both years were continued gross margin expansion
driven by strong sales of higher-margin products, fueled
principally by the continued customer adoption of ADVATE therapy
and increased demand and improved pricing for GAMMAGARD LIQUID
therapy and certain other plasma protein products, as well as
continued manufacturing improvements. Partially offsetting the
growth in both years was increased R&D spending and, in
2009, the unfavorable impact of lower FSME-IMMUN vaccine sales.
Foreign currency had an unfavorable impact on 2009 growth and a
favorable impact on 2008 growth.
Medication Delivery Pre-tax income increased
28% in 2009 and decreased 15% in 2008. Included in pre-tax
income in 2009, 2008 and 2007, and impacting the earnings trend,
were $27 million, $125 million and $14 million,
respectively, of charges and other costs relating to the
COLLEAGUE and SYNDEO infusion pumps, as discussed above. Also
included in the pre-tax income in 2009 was a $54 million
charge related to the discontinuation of the companys
SOLOMIX drug delivery system in development. Included in pre-tax
income in 2008 was a $31 million charge related to the
discontinuation of the CLEARSHOT pre-filled syringe program.
Aside from the impact of these items, pre-tax earnings in 2009
and 2008 benefited from gross margin improvements resulting from
favorable product mix, principally from increased sales of
IV solutions, global injectables, anesthesia and
nutritional products. Partially offsetting these increases in
2008 were increased spending on R&D and the unfavorable
impact of competition for the companys generic products.
Foreign currency had an unfavorable impact on growth in 2009 and
a favorable impact on growth in 2008. Refer to Note 5 for
further information on the infusion pump, SOLOMIX and CLEARSHOT
charges.
Renal Pre-tax income decreased 4% in 2009 and
17% in 2008. The pre-tax earnings declined in both years
principally due to increased R&D spending, including the
development of home HD therapy, and in 2008, the loss of a PD
tender in Mexico. The Renal segments revenues are
generated principally outside the United States, and foreign
currency had an unfavorable impact in 2009 and a favorable
impact in 2008 to
pre-tax
income.
Other As mentioned above, certain income and
expense amounts are not allocated to a segment. These amounts
are detailed in the table in Note 12 and include net
interest expense, certain foreign exchange fluctuations
(principally relating to intercompany receivables, payables and
loans denominated in a foreign currency) and the majority of the
foreign currency hedging activities, corporate headquarters
costs, stock compensation expense, income and expense related to
certain non-strategic investments, certain employee benefit plan
costs, certain nonrecurring gains and losses, certain charges
(such as cost optimization,
23
restructuring, certain litigation-related and certain IPR&D
charges), and the revenues and costs related to the
manufacturing, distribution and other transition agreements with
Fenwal.
Refer to the previous discussions for further information
regarding net interest expense, the cost optimization and
restructuring charges, IPR&D charges, the charge associated
with the AWP litigation, the net divestiture gain and ongoing
arrangements with Fenwal related to the sale of the TT business
and Note 8 for further information regarding stock
compensation expense.
Income
Taxes
Effective
Income Tax Rate
The effective income tax rate was 19% in 2009, 18% in 2008 and
19% in 2007. The company anticipates that the effective income
tax rate, calculated in accordance with generally accepted
accounting principles (GAAP), will be approximately 19% to 19.5%
in 2010, excluding any impact from additional audit developments
or other special items.
The companys effective tax rate differs from the
U.S. federal statutory rate each year due to certain
operations that are subject to tax incentives, state and local
taxes and foreign taxes that are different than the
U.S. federal statutory rate. In addition, as discussed
further below, the companys effective income tax rate can
be impacted in each year by discrete factors or events. Refer to
Note 10 for further information regarding the
companys income taxes.
2009
The effective tax rate for 2009 was impacted by greater income
in jurisdictions with higher tax rates, partially offset by
$51 million of income tax benefit from planning that
accessed foreign tax losses.
2008
The effective tax rate for 2008 was impacted by $29 million
of valuation allowance reductions on net operating loss
carryforwards in foreign jurisdictions due to profitability
improvements, $8 million of income tax benefit related to
the extension of R&D tax credits in the United States and
$14 million of additional U.S. income tax expense
related to foreign earnings which are no longer considered
indefinitely reinvested outside of the United States because the
company planned to remit these earnings to the United States in
the foreseeable future.
2007
The effective tax rate for 2007 was impacted by a
$38 million net reduction of the valuation allowance on net
operating loss carryforwards primarily due to profitability
improvements in a foreign jurisdiction, a $12 million
reduction in tax expense due to legislation reducing corporate
income tax rates in Germany, the extension of tax incentives,
and the settlement of tax audits in jurisdictions outside of the
United States. Partially offsetting these items was
$82 million of U.S. income tax expense related to
foreign earnings which are no longer considered permanently
reinvested outside of the United States because the company
planned to remit these earnings to the United States in the
foreseeable future.
Uncertain
Tax Positions
Baxter expects to reduce the amount of its liability for
uncertain tax positions within the next 12 months by
$302 million due principally to the expiration of certain
statutes of limitations related to tax benefits recorded in
respect of losses from restructuring certain international
operations and the settlements of certain multi-jurisdictional
transfer pricing issues. While the final outcome of these
matters is inherently uncertain, the company believes it has
made adequate tax provisions for all years subject to
examination.
Income
and Earnings per Diluted Share Amounts
Net income attributable to Baxter was $2.2 billion in 2009,
$2.0 billion in 2008 and $1.7 billion in 2007. The
corresponding net earnings per diluted share were $3.59 in 2009,
$3.16 in 2008 and $2.61 in 2007. The significant factors and
events causing the net changes from 2008 to 2009 and from 2007
to 2008 are discussed above.
24
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows from Operations
Cash flows from operations increased in both 2009 and 2008,
totaling $2.9 billion in 2009, $2.5 billion in 2008
and $2.3 billion in 2007. The increases in cash flows in
2009 and 2008 were primarily due to higher earnings (before
non-cash items) and the other factors discussed below. Included
in cash flows from operations were outflows of $96 million
in 2009 and $112 million in 2008 related to realized excess
tax benefits from stock issued under employee benefit plans.
Realized excess tax benefits are required to be presented in the
consolidated statements of cash flows as an outflow within the
operating section and an inflow within the financing section.
Accounts
Receivable
Cash outflows relating to accounts receivable increased in 2009
and decreased in 2008. Days sales outstanding increased from
50.6 days at December 31, 2008 to 51.2 days at
December 31, 2009, primarily due to the geographic mix of
sales, an increase in collection periods in certain
international locations and a decrease in factoring of
receivables, partially offset by improved collection periods in
the United States. The decrease in cash outflows from accounts
receivables in 2008 was primarily due to an improvement in the
collection of receivables in the United States and in certain
international locations.
Inventories
Cash outflows from inventories decreased in 2009 and 2008. The
following is a summary of inventories at December 31, 2009
and 2008, as well as inventory turns for 2009, 2008 and 2007, by
segment. Inventory turns for the year are calculated as the
annualized fourth quarter cost of sales divided by the year-end
inventory balance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
Inventory turns
|
|
(in millions, except inventory turn data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
BioScience
|
|
$
|
1,592
|
|
|
$
|
1,346
|
|
|
|
1.41
|
|
|
|
1.46
|
|
|
|
1.61
|
|
Medication Delivery
|
|
|
705
|
|
|
|
771
|
|
|
|
4.62
|
|
|
|
3.68
|
|
|
|
3.26
|
|
Renal
|
|
|
257
|
|
|
|
227
|
|
|
|
4.32
|
|
|
|
4.53
|
|
|
|
4.81
|
|
Other
|
|
|
3
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
2,557
|
|
|
$
|
2,361
|
|
|
|
2.53
|
|
|
|
2.48
|
|
|
|
2.53
|
|
|
|
Inventories increased $196 million in 2009, with more than
half of the increase related to the impact of foreign currency.
The higher inventory turns for the total company were
principally due to increased sales in the Medication Delivery
segment, partially offset by an increase in plasma-related
inventories in the BioScience segment.
Other
Cash flows related to liabilities, restructuring payments and
other increased in 2009. This increase was principally driven by
the timing of payments of trade accounts payable and income
taxes payable, partially offset by contributions to the
companys pension plans of $170 million in 2009
compared to $287 million in 2008. Cash flows decreased in
2008 principally due to contributions to the companys
pension plans, the timing of payments of trade accounts payable
and income taxes payable, and increased payments related to the
companys restructuring programs. Included in both 2008 and
2007 were cash outflows related to the settlement of mirror
cross-currency swaps, which resulted in operating cash inflows
of $12 million in 2008 compared to $31 million of cash
outflows in 2007. There were no settlements of cross-currency
swaps during 2009.
Cash
Flows from Investing Activities
Capital
Expenditures
Capital expenditures totaled $1.0 billion in 2009,
$954 million in 2008 and $692 million in 2007. The
investments in 2009 were focused on projects that enhance the
companys cost structure and manufacturing
25
capabilities across the three businesses, particularly as it
relates to the companys nutritional, anesthesia and PD
products and plasma and recombinant manufacturing platforms. In
addition, the company continues to invest to support its
strategy of geographic expansion with select investments in
growing markets, and continues to invest to support the
companys ongoing strategic focus on R&D with the
expansion of research facilities, pilot manufacturing sites and
laboratories.
The company makes investments in capital expenditures at a level
sufficient to support the strategic and operating needs of the
businesses, and continues to improve capital allocation
discipline in making investments to enhance long-term growth.
The company expects to invest approximately $1 billion in
capital expenditures in 2010.
Acquisitions
of and Investments in Businesses and Technologies
Net cash outflows relating to acquisitions of and investments in
businesses and technologies were $156 million in 2009,
$99 million in 2008 and $112 million in 2007. The cash
outflows in 2009 principally related to a $100 million
payment for the exclusive distribution of SIGMAs infusion
pumps in the United States and international markets, a
40 percent equity stake in SIGMA and an option to purchase
the remaining portion of SIGMA. Additionally, in 2009 the
company acquired Edwards CRRT, for $56 million. The cash
outflows in 2008 principally related to an IV solutions
business in China, the companys in-licensing agreement to
market and distribute Innocolls gentamicin surgical
implant in the United States, the acquisition of certain
technology applicable to the BioScience business, payments
related to the companys agreements with Nycomed and
Nektar, and certain smaller acquisitions and investments. The
cash outflows in 2007 principally related to a new arrangement
and the expansion of the companys existing agreements with
Halozyme and the companys collaboration with DEKA. Refer
to Note 4 for further information regarding these
investments.
Divestitures
and Other
Net cash inflows relating to divestitures and other activities
were $24 million in 2009, $60 million in 2008 and
$499 million in 2007. Cash inflows in 2009 and 2008
principally consisted of cash collections from customers
relating to previously securitized receivables under the
companys European receivables securitization facility. In
2007, the company purchased the third party interest in
previously sold receivables under the facility, resulting in net
cash outflows of $157 million. Cash inflows in 2007
included $421 million of cash proceeds from the divestiture
of the TT business. The $421 million represented the
$473 million total cash received upon divestiture less the
$52 million prepayment related to the manufacturing,
distribution and other transition agreements, which was
classified in the operating section of the consolidated
statement of cash flows. Cash inflows in 2009, 2008 and 2007
also included normal collections on retained interests
associated with securitization arrangements.
Cash
Flows from Financing Activities
Debt
Issuances, Net of Payments of Obligations
Debt issuances, net of payments of obligations, were net inflows
totaling $473 million in 2009 compared to net outflows
totaling $79 million in 2008 and $51 million in 2007.
Included in these totals in 2008 and 2007 were $540 million
and $303 million, respectively, of cash outflows related to
the settlement of cross-currency swap agreements, resulting in
the termination of the companys remaining net investment
hedges. There were no settlements of cross-currency swap
agreements in 2009.
The company issued $350 million of senior unsecured notes,
which mature in March 2014 and bear a 4.0% coupon rate in
February 2009 and $500 million of senior unsecured notes,
which mature in August 2019 and bear a 4.5% coupon rate in
August 2009. In May 2008, the company issued $500 million
of senior unsecured notes, maturing in June 2018 and bearing a
5.375% coupon rate. In addition, during 2008, the company issued
commercial paper, of which $200 million was outstanding as
of December 31, 2008, with a weighted-average interest rate
of 2.55%. In December 2007, the company issued $500 million
of senior unsecured notes, maturing in December 2037 and bearing
a 6.25% coupon rate. The net proceeds from these issuances were
used for general corporate purposes, including the repayment of
$200 million of outstanding commercial paper in 2009 and
for the settlement of cross-currency swaps in 2008. In 2009, the
company repaid approximately $160 million of outstanding
borrowings related to the companys Euro-denominated credit
facility (further
26
discussed below). The company repaid its 5.196% notes,
which approximated $250 million, upon their maturity in
February 2008.
Other
Financing Activities
Cash dividend payments totaled $632 million in 2009,
$546 million in 2008 and $704 million in 2007.
Beginning in 2007, the company converted from an annual to a
quarterly dividend and increased the dividend by 15% on an
annualized basis, to $0.1675 per share per quarter. The cash
dividend payments in 2007 included the payments of the 2006
annual dividend and three 2007 quarterly dividends. In November
2007, the board of directors declared a quarterly dividend of
$0.2175 per share ($0.87 per share on an annualized basis),
representing an increase of 30% over the previous quarterly
rate. In November 2008, the board of directors declared a
quarterly dividend of $0.26 per share ($1.04 per share on an
annualized basis), representing an increase of 20% over the
previous quarterly rate of $0.2175 per share. In November 2009,
the board of directors declared a quarterly dividend of $0.29
per share ($1.16 per share on an annualized basis), which was
paid on January 5, 2010 to shareholders of record as of
December 10, 2009. This dividend represented an increase of
12% over the previous quarterly rate of $0.26 per share.
Proceeds and realized excess tax benefits from stock issued
under employee benefit plans totaled $381 million in 2009,
$680 million in 2008 and $639 million in 2007. The
decrease in 2009 was due to a decrease in stock option
exercises. The increase in 2008 was primarily due to increased
participation in the companys employee stock purchase plan
and an increase in realized excess tax benefits from stock
issued under employee benefit plans partially offset by a
decrease in stock option exercises.
As authorized by the board of directors, the company repurchases
its stock from time to time depending on the companys cash
flows, net debt level and market conditions. The company
purchased 23 million shares for $1.2 billion in 2009,
32 million shares for $2.0 billion in 2008 and
34 million shares for $1.9 billion in 2007. In March
2008, the board of directors authorized the repurchase of up to
$2.0 billion of the companys common stock. There is
no remaining availability under the March 2008 authorization as
of December 31, 2009. In July 2009, the board of directors
authorized the repurchase of up to an additional
$2.0 billion of the companys common stock. At
December 31, 2009, $1.95 billion remained available
under the July 2009 authorization.
Credit
Facilities, Access to Capital, Credit Ratings and Net Investment
Hedges
Credit
Facilities
The companys primary revolving credit facility has a
maximum capacity of $1.5 billion and matures in December
2011. The company also maintains a Euro-denominated credit
facility with a maximum capacity of approximately
$435 million at December 31, 2009, which matures in
January 2013. As of December 31, 2008, there was
$164 million outstanding under the Euro-denominated credit
facility, with a weighted-average interest rate of 3.4%. In
2009, the company repaid the outstanding Euro-denominated credit
facility borrowings. As of December 31, 2009, there were no
outstanding borrowings under either of the two outstanding
facilities. The companys facilities enable the company to
borrow funds on an unsecured basis at variable interest rates,
and contain various covenants, including a maximum
net-debt-to-capital ratio. At December 31, 2009, the
company was in compliance with the financial covenants in these
agreements. The non-performance of any financial institution
supporting either of the credit facilities would reduce the
maximum capacity of these facilities by each institutions
respective commitment. The company also maintains other credit
arrangements, as described in Note 6.
Access to
Capital
The company intends to fund short-term and long-term obligations
as they mature through cash on hand, future cash flows from
operations or by issuing additional debt or common stock. The
company had $2.8 billion of cash and equivalents at
December 31, 2009. The company invests its excess cash in
certificates of deposit and money market funds, and diversifies
the concentration of cash among different financial institutions.
27
The companys ability to generate cash flows from
operations, issue debt or enter into other financing
arrangements on acceptable terms could be adversely affected if
there is a material decline in the demand for the companys
products or in the solvency of its customers or suppliers,
deterioration in the companys key financial ratios or
credit ratings or other significantly unfavorable changes in
conditions. However, the company believes it has sufficient
financial flexibility in the future to issue debt, enter into
other financing arrangements and attract long-term capital on
acceptable terms to support the companys growth objectives.
While the current economic downturn has not meaningfully
impacted the companys ability to collect receivables, the
company continues to do business with certain foreign
governments which have recently experienced credit rating
downgrades and may become unable to pay for the companys
products or services.
Credit
Ratings
The companys credit ratings at December 31, 2009 were
as follows.
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|
|
|
|
|
|
|
|
Standard & Poors
|
|
Fitch
|
|
Moodys
|
|
|
Ratings
|
|
|
|
|
|
|
Senior debt
|
|
A+
|
|
A
|
|
A3
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Short-term debt
|
|
A1
|
|
F1
|
|
P2
|
Outlook
|
|
Positive
|
|
Stable
|
|
Stable
|
|
|
There were no changes to the companys credit ratings in
2009.
If Baxters credit ratings or outlooks were to be
downgraded, the companys financing costs related to its
credit arrangements and any future debt issuances could be
unfavorably impacted. However, any future credit rating
downgrade or change in outlook would not affect the
companys ability to draw on its credit facilities, and
would not result in an acceleration of the scheduled maturities
of any of the companys outstanding debt, unless, with
respect to certain debt instruments, preceded by a change in
control of the company.
Net
Investment Hedges
In 2008, the company terminated its remaining net investment
hedge portfolio and no longer has any outstanding net investment
hedges. The company historically hedged the net assets of
certain of its foreign operations using a combination of foreign
currency denominated debt and cross-currency swaps. In 2004, the
company reevaluated its net investment hedge strategy and
elected to reduce the use of these instruments as a risk
management tool. As part of the change in strategy the company
executed offsetting, or mirror, cross-currency swaps relating to
over half of the existing portfolio that effectively fixed the
net amount that the company would ultimately pay to settle the
cross-currency swap agreements subject to this strategy. The net
after-tax losses related to net investment hedge instruments
recorded in other comprehensive income were $33 million and
$48 million in 2008 and 2007, respectively.
When the cross-currency swaps are settled, the cash flows are
reported within the financing section of the consolidated
statement of cash flows. When the mirror swaps are settled, the
cash flows are reported in the operating section of the
consolidated statement of cash flows. Of the $528 million
of net settlement payments in 2008, $540 million of cash
outflows were included in the financing section and
$12 million of cash inflows were included in the operating
section. Of the $334 million of settlement payments in
2007, $303 million of cash outflows were included in the
financing section and $31 million of cash outflows were
included in the operating section.
28
Contractual
Obligations
As of December 31, 2009, the company had contractual
obligations (excluding accounts payable, accrued liabilities
(other than the current portion of unrecognized tax benefits)
and contingent liabilities) payable or maturing in the following
periods.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
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One to
|
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Three to
|
|
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More than
|
|
(in millions)
|
|
Total
|
|
|
one year
|
|
|
three years
|
|
|
five years
|
|
|
five years
|
|
|
|
|
Short-term debt
|
|
$
|
29
|
|
|
$
|
29
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Long-term debt and capital lease obligations, including current
maturities
|
|
|
4,079
|
|
|
|
682
|
|
|
|
168
|
|
|
|
362
|
|
|
|
2,867
|
|
Interest on short- and long-term debt and capital lease
obligations1
|
|
|
1,703
|
|
|
|
143
|
|
|
|
244
|
|
|
|
235
|
|
|
|
1,081
|
|
Operating leases
|
|
|
802
|
|
|
|
163
|
|
|
|
253
|
|
|
|
192
|
|
|
|
194
|
|
Other long-term
liabilities2
|
|
|
789
|
|
|
|
|
|
|
|
175
|
|
|
|
73
|
|
|
|
541
|
|
Purchase
obligations3
|
|
|
1,425
|
|
|
|
620
|
|
|
|
468
|
|
|
|
200
|
|
|
|
137
|
|
Unrecognized tax
benefits4
|
|
|
302
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations
|
|
$
|
9,129
|
|
|
$
|
1,939
|
|
|
$
|
1,308
|
|
|
$
|
1,062
|
|
|
$
|
4,820
|
|
|
|
|
|
|
1 |
|
Interest payments on debt and capital lease obligations are
calculated for future periods using interest rates in effect at
the end of 2009. Projected interest payments include the related
effects of interest rate and cross-currency swap agreements.
Certain of these projected interest payments may differ in the
future based on changes in floating interest rates, foreign
currency fluctuations or other factors or events. The projected
interest payments only pertain to obligations and agreements
outstanding at December 31, 2009. Refer to Notes 6 and
7 for further discussion regarding the companys debt
instruments and related cross-currency and interest rate
agreements outstanding at December 31, 2009. |
|
2 |
|
The primary components of other long-term liabilities in the
companys consolidated balance sheet are liabilities
relating to pension and other postemployment benefit plans,
cross-currency swaps, foreign currency hedges, litigation and
certain income tax-related liabilities. The company projected
the timing of the future cash payments based on contractual
maturity dates (where applicable) and estimates of the timing of
payments (for liabilities with no contractual maturity dates).
The actual timing of payments could differ from the estimates. |
|
|
|
The company contributed $170 million, $287 million and
$47 million to its defined benefit pension plans in 2009,
2008 and 2007, respectively. Most of the companys plans
are funded. The timing of funding in the future is uncertain and
is dependent on future movements in interest rates and
investment returns, changes in laws and regulations, and other
variables. Therefore, the table above excludes pension plan cash
outflows. Refer to the discussion below regarding the Pension
Protection Act of 2006. The pension plan balance included in
other long-term liabilities (and excluded from the table above)
totaled $1.1 billion at December 31, 2009. |
|
3 |
|
Includes the companys significant contractual
unconditional purchase obligations. For cancelable agreements,
includes any penalty due upon cancellation. These commitments do
not exceed the companys projected requirements and are in
the normal course of business. Examples include firm commitments
for raw material purchases, utility agreements and service
contracts. |
|
4 |
|
Due to the uncertainty related to the timing of the reversal of
uncertain tax positions, the long-term liability relating to
unrecognized tax benefits of $94 million at
December 31, 2009 has been excluded from the table above. |
Off-Balance
Sheet Arrangements
Baxter periodically enters into off-balance sheet arrangements
where economical and consistent with the companys business
strategy. Certain contingencies arise in the normal course of
business, and are not recorded in the consolidated balance sheet
in accordance with GAAP (such as contingent joint development
and commercialization arrangement payments). Also, upon
resolution of uncertainties, the company may incur
29
charges in excess of presently established liabilities for
certain matters (such as contractual indemnifications). The
following is a summary of significant off-balance sheet
arrangements and contingencies.
Receivable
Securitizations
Where economical, the company has entered into agreements with
various financial institutions in which the entire interest in
and ownership of the receivable is sold, principally consisting
of trade receivables originated in Japan. The company had also
entered into agreements in which undivided interests in certain
pools of receivables were sold, principally consisting of
hardware lease receivables originated in the United States and
trade receivables originated in Europe. Refer to Note 7 for
a description of these arrangements. The Japanese securitization
arrangement includes limited recourse provisions, which are not
material to the consolidated financial statements.
Joint
Development and Commercialization Arrangements
In the normal course of business, Baxter enters into joint
development and commercialization arrangements with third
parties, sometimes with companies in which the company has
invested. The arrangements vary but generally provide that
Baxter will receive certain rights to manufacture, market or
distribute a specified technology or product under development
in exchange for up-front payments and contingent payments
relating to the achievement of specified pre-clinical, clinical,
regulatory approval or sales milestones. At December 31,
2009, the unfunded milestone payments under these arrangements
totaled $812 million. This total excludes any contingent
royalties. Based on the companys projections, any
contingent payments made in the future will be more than offset
over time by the estimated net future cash flows relating to the
rights acquired for those payments. The majority of the
contingent payments relate to arrangements in the BioScience
segment. Refer to Note 6 for further information.
Indemnifications
During the normal course of business, Baxter makes indemnities,
commitments and guarantees pursuant to which the company may be
required to make payments related to specific transactions.
Indemnifications include: (i) intellectual property
indemnities to customers in connection with the use, sale or
license of products and services; (ii) indemnities to
customers in connection with losses incurred while performing
services on their premises; (iii) indemnities to vendors
and service providers pertaining to claims based on negligence
or willful misconduct; and (iv) indemnities involving the
representations and warranties in certain contracts. In
addition, under Baxters Amended and Restated Certificate
of Incorporation, and consistent with Delaware General
Corporation Law, the company has agreed to indemnify its
directors and officers for certain losses and expenses upon the
occurrence of prescribed events. The majority of these
indemnities, commitments and guarantees do not provide for any
limitation on the maximum potential for future payments that the
company could be obligated to make. To help address some these
risks, the company maintains various insurance coverages. Based
on historical experience and evaluation of the agreements, the
company does not believe that any significant payments related
to its indemnifications will result, and therefore the company
has not recorded any associated liabilities.
Legal
Contingencies
Refer to Note 11 for a discussion of the companys
legal contingencies. Upon resolution of any of these
uncertainties, the company may incur charges in excess of
presently established liabilities. While the liability of the
company in connection with the claims cannot be estimated with
any certainty, and although the resolution in any reporting
period of one or more of these matters could have a significant
impact on the companys results of operations and cash
flows for that period, the outcome of these legal proceedings is
not expected to have a material adverse effect on the
companys consolidated financial position. While the
company believes that it has valid defenses in these matters,
litigation is inherently uncertain, excessive verdicts do occur,
and the company may in the future incur material judgments or
enter into material settlements of claims.
30
Funding
of Pension and Other Postemployment Benefit Plans
The companys funding policy for its pension plans is to
contribute amounts sufficient to meet legal funding
requirements, plus any additional amounts that the company may
determine to be appropriate considering the funded status of the
plans, tax deductibility, the cash flows generated by the
company and other factors. Volatility in the global financial
markets could have an unfavorable impact on future funding
requirements. The company is not legally obligated to fund its
principal plans in the United States and Puerto Rico in 2010.
The company continually reassesses the amount and timing of any
discretionary contributions. The company expects to make cash
contributions to its pension plans of at least $335 million
in 2010, which includes a $300 million discretionary cash
contribution made to its pension plan in the United States in
January 2010. The company expects to have net cash outflows
relating to its other postemployment benefit (OPEB) plan of
approximately $25 million in 2010.
The table below details the funded status percentage of the
companys pension plans as of December 31, 2009,
including certain plans that are unfunded in accordance with the
guidelines of the companys funding policy outlined above.
The table excludes the $300 million discretionary cash
contribution made to the pension plan in the United States in
January 2010. Refer to Note 9 for further information.
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Puerto Rico
|
|
|
International
|
|
|
|
|
as of December 31, 2009 (in millions)
|
|
Qualified plans
|
|
|
Nonqualified plan
|
|
|
Funded plans
|
|
|
Unfunded plans
|
|
|
Total
|
|
|
|
|
Fair value of plan assets
|
|
$
|
2,356
|
|
|
|
n/a
|
|
|
$
|
466
|
|
|
|
n/a
|
|
|
$
|
2,822
|
|
Projected benefit obligation
|
|
|
2,984
|
|
|
$
|
145
|
|
|
|
599
|
|
|
$
|
237
|
|
|
|
3,965
|
|
Funded status percentage
|
|
|
79%
|
|
|
|
n/a
|
|
|
|
78%
|
|
|
|
n/a
|
|
|
|
71%
|
|
|
|
The Pension Protection Act of 2006 (PPA) was signed into law on
August 17, 2006. It is likely that the PPA will accelerate
minimum funding requirements in the future.
Insurance
Coverage
The company discontinued its practice of buying product
liability insurance coverage effective May 1, 2007. The
unavailability of insurance coverage with meaningful limits at a
reasonable cost reflects current trends in product liability
insurance for healthcare manufacturing companies generally. The
company continues to evaluate available coverage levels and
costs as market conditions change. The companys net income
and cash flows may be adversely affected in the future as a
result of losses sustained.
FINANCIAL
INSTRUMENT MARKET RISK
The company operates on a global basis, and is exposed to the
risk that its earnings, cash flows and shareholders equity
could be adversely impacted by fluctuations in foreign exchange
and interest rates. The companys hedging policy attempts
to manage these risks to an acceptable level based on the
companys judgment of the appropriate trade-off between
risk, opportunity and costs. Refer to Note 7 for further
information regarding the companys financial instruments
and hedging strategies.
Currency
Risk
The company is primarily exposed to foreign exchange risk with
respect to recognized assets and liabilities, forecasted
transactions and net assets denominated in the Euro, Japanese
Yen, British Pound, Australian Dollar, Canadian Dollar,
Brazilian Real and Colombian Peso. The company manages its
foreign currency exposures on a consolidated basis, which allows
the company to net exposures and take advantage of any natural
offsets. In addition, the company uses derivative and
nonderivative financial instruments to further reduce the net
exposure to foreign exchange. Gains and losses on the hedging
instruments offset losses and gains on the hedged transactions
and reduce the earnings and shareholders equity volatility
relating to foreign exchange. Financial market and currency
volatility may reduce the benefits of the companys natural
hedges and limit the companys ability to cost-effectively
hedge these exposures.
The company uses options, forwards and cross-currency swaps to
hedge the foreign exchange risk to earnings relating to
forecasted transactions denominated in foreign currencies and
recognized assets and liabilities. The maximum term over which
the company has cash flow hedge contracts in place related to
forecasted
31
transactions at December 31, 2009 is 12 months. The
company also enters into derivative instruments to hedge certain
intercompany and third-party receivables and payables and debt
denominated in foreign currencies. The company historically
hedged certain of its net investments in international
affiliates, using a combination of debt denominated in foreign
currencies and cross-currency swap agreements. As further
discussed in Note 7, in 2008, the company terminated all of
its remaining net investment hedges.
Currency restrictions enacted in Venezuela require Baxter to
obtain approval from the Venezuelan government to exchange
Venezuelan Bolivars for U.S. Dollars and requires such
exchange to be made at the official exchange rate established by
the government. On January 8, 2010, the Venezuelan
government devalued the official exchange rate of 2.15 relative
to the U.S. Dollar. The official exchange rate for imported
goods classified as essential, such as food and medicine, was
changed to 2.6, while the rate for payments for
non-essential
goods was changed to 4.3. The company expects that the majority
of its products imported into Venezuela will be classified as
essential goods and qualify for the 2.6 rate. The 4.3 rate was
used for the translation of the companys Venezuelan
subsidiary at December 31, 2009, because this is the rate
at which dividends are expected to be remitted if and when such
dividends are approved by the Venezuelan government. As of
January 1, 2010, Venezuela has been designated as a highly
inflationary economy under GAAP and as a result, the functional
currency of the companys subsidiary in Venezuela will be
the U.S. Dollar. The devaluation of the Venezuelan Bolivar
and designation of Venezuela as highly inflationary is not
expected to have a material impact on the financial results of
the company. As of December 31, 2009, the companys
subsidiary in Venezuela had net assets of $20 million
denominated in the Venezuelan Bolivar. In 2009, net sales in
Venezuela represented less than 1% of Baxters total net
sales.
As part of its risk-management program, the company performs
sensitivity analyses to assess potential changes in the fair
value of its foreign exchange instruments relating to
hypothetical and reasonably possible near-term movements in
foreign exchange rates.
A sensitivity analysis of changes in the fair value of foreign
exchange option, forward and cross-currency swap contracts
outstanding at December 31, 2009, while not predictive in
nature, indicated that if the U.S. Dollar uniformly
fluctuated unfavorably by 10% against all currencies, on a
net-of-tax
basis, the net liability balance of $69 million with
respect to those contracts, which principally related to a hedge
of U.S. Dollar-denominated debt issued by a foreign
subsidiary, would increase by $69 million. A similar
analysis performed with respect to option and forward contracts
outstanding at December 31, 2008 indicated that, on a
net-of-tax
basis, the net asset balance of $40 million would decrease
by $65 million, resulting in a net liability position.
The sensitivity analysis model recalculates the fair value of
the foreign exchange option, forward and cross-currency swap
contracts outstanding at December 31, 2009 by replacing the
actual exchange rates at December 31, 2009 with exchange
rates that are 10% unfavorable to the actual exchange rates for
each applicable currency. All other factors are held constant.
These sensitivity analyses disregard the possibility that
currency exchange rates can move in opposite directions and that
gains from one currency may or may not be offset by losses from
another currency. The analyses also disregard the offsetting
change in value of the underlying hedged transactions and
balances.
Interest
Rate and Other Risks
The company is also exposed to the risk that its earnings and
cash flows could be adversely impacted by fluctuations in
interest rates. The companys policy is to manage interest
costs using a mix of fixed- and floating-rate debt that the
company believes is appropriate. To manage this mix in a
cost-efficient manner, the company periodically enters into
interest rate swaps in which the company agrees to exchange, at
specified intervals, the difference between fixed and floating
interest amounts calculated by reference to an
agreed-upon
notional amount. The company also periodically uses
forward-starting interest rate swaps and treasury rate locks to
hedge the risk to earnings associated with fluctuations in
interest rates relating to anticipated issuances of term debt.
As part of its risk management program, the company performs
sensitivity analyses to assess potential gains and losses in
earnings relating to hypothetical movements in interest rates. A
52 basis-point increase in interest
32
rates (approximately 10% of the companys weighted-average
interest rate during 2009) affecting the companys
financial instruments, including debt obligations and related
derivatives, would have an immaterial effect on the
companys 2009, 2008 and 2007 earnings and on the fair
value of the companys fixed-rate debt as of the end of
each fiscal year.
As discussed in Note 7, the fair values of the
companys long-term litigation liabilities and related
insurance receivables were computed by discounting the expected
cash flows based on currently available information. A 10%
movement in the assumed discount rate would have an immaterial
effect on the fair values of those assets and liabilities.
With respect to the companys investments in affiliates,
the company believes any reasonably possible near-term losses in
earnings, cash flows and fair values would not be material to
the companys consolidated financial position.
CHANGES
IN ACCOUNTING STANDARDS
Business
Combinations
On January 1, 2009, the company adopted a new accounting
standard which changes the accounting for business combinations
in a number of significant respects. The key changes include the
expansion of transactions that qualify as business combinations,
the capitalization of IPR&D as an indefinite-lived asset,
the recognition of certain acquired contingent assets and
liabilities at fair value, the expensing of acquisition costs,
the expensing of costs associated with restructuring the
acquired company, the recognition of contingent consideration at
fair value on the acquisition date, the recognition of
post-acquisition date changes in deferred tax asset valuation
allowances and acquired income tax uncertainties as income tax
expense or benefit, and the expansion of disclosure
requirements. This standard was applicable for acquisitions made
by the company on or after January 1, 2009, including the
April 2009 consolidation of SIGMA and the August 2009
acquisition of certain assets of Edwards CRRT. Refer to
Note 4 for further information regarding SIGMA and Edwards
CRRT.
Noncontrolling
Interests
On January 1, 2009, the company adopted a new accounting
standard which changes the accounting and reporting of
noncontrolling interests (historically referred to as minority
interests). The standard requires that noncontrolling interests
be presented in the consolidated balance sheets within equity,
but separate from Baxter shareholders equity, and that the
amount of consolidated net income attributable to Baxter and to
the noncontrolling interests be clearly identified and presented
in the consolidated statements of income. Any losses in excess
of the noncontrolling interests equity interest continue
to be allocated to the noncontrolling interest. Purchases or
sales of equity interests that do not result in a change of
control are accounted for as equity transactions. Upon a loss of
control the interest sold, as well as any interest retained, is
measured at fair value, with any gain or loss recognized in
earnings. In partial acquisitions, when control is obtained,
100% of the assets and liabilities, including goodwill, are
recognized at fair value as if the entire target company had
been acquired. The new standard was applied prospectively as of
January 1, 2009, except for the presentation and disclosure
requirements, which have been applied retrospectively for prior
periods presented. Prior to the adoption of the new standard,
the noncontrolling interests share of net income was
included in other expense, net in the consolidated statements of
income and the noncontrolling interests equity was
included in other long-term liabilities in the consolidated
balance sheets. The accounting related provisions of the new
accounting standard did not have a material impact on the
consolidated financial statements.
Revenue
Recognition
In October 2009, the Financial Accounting Standards Board (FASB)
issued two updates to the Accounting Standards Codification
related to revenue recognition. The first update eliminates the
requirement that all undelivered elements in an arrangement with
multiple deliverables have objective and reliable evidence of
fair value before revenue can be recognized for items that have
been delivered. The update also no longer allows
33
use of the residual method when allocating consideration to
deliverables. Instead, arrangement consideration is to be
allocated to deliverables using the relative selling price
method, applying a selling price hierarchy. Vendor specific
objective evidence (VSOE) of selling price should be used if it
exists. Otherwise, third party evidence (TPE) of selling price
should be used. If neither VSOE nor TPE is available, the
companys best estimate of selling price should be used.
The second update eliminates tangible products from the scope of
software revenue recognition guidance when the tangible products
contain software components and non-software components that
function together to deliver the tangible products
essential functionality. Both updates require expanded
qualitative and quantitative disclosures and are effective for
fiscal years beginning on or after June 15, 2010, with
prospective application for new or materially modified
arrangements or retrospective application permitted. Early
adoption is permitted. The same transition method and period of
adoption must be used for both updates. The company adopted
these updates in 2009, prospectively applying them to
arrangements entered into or materially modified on or after
January 1, 2009. The early adoption of these updates did
not have a material impact on the companys consolidated
financial statements and did not result in a change in its
previously reported quarterly consolidated financial statements.
CRITICAL
ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP
requires the company to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and
expenses. A summary of the companys significant accounting
policies is included in Note 1. Certain of the
companys accounting policies are considered critical
because these policies are the most important to the depiction
of the companys financial statements and require
significant, difficult or complex judgments by the company,
often requiring the use of estimates about the effects of
matters that are inherently uncertain. Actual results that
differ from the companys estimates could have an
unfavorable effect on the companys results of operations
and financial position. The company applies estimation
methodologies consistently from year to year. Other than changes
required due to the issuance of new accounting pronouncements,
there have been no significant changes in the companys
application of its critical accounting policies during 2009. The
companys critical accounting policies have been reviewed
with the Audit Committee of the Board of Directors. The
following is a summary of accounting policies that the company
considers critical to the consolidated financial statements.
Revenue
Recognition and Related Provisions and Allowances
The companys policy is to recognize revenues from product
sales and services when earned. Specifically, revenue is
recognized when persuasive evidence of an arrangement exists,
delivery has occurred (or services have been rendered), the
price is fixed or determinable, and collectibility is reasonably
assured. The shipping terms for the majority of the
companys revenue arrangements are FOB destination. The
recognition of revenue is delayed if there are significant
post-delivery obligations, such as training, installation or
other services.
The company sometimes enters into arrangements in which it
commits to delivering multiple products or services to its
customers. In these cases, total arrangement consideration is
allocated to the deliverables based on their relative selling
prices. Then the allocated consideration is recognized as
revenue in accordance with the principles described above.
Selling prices are determined by applying a selling price
hierarchy. Selling prices are determined using VSOE, if it
exists. Otherwise, selling prices are determined using TPE. If
neither VSOE nor TPE is available, the company uses its best
estimate of selling prices.
Provisions for discounts, rebates to customers, chargebacks to
wholesalers, and returns are provided for at the time the
related sales are recorded, and are reflected as a reduction of
sales. These estimates are reviewed periodically and, if
necessary, revised, with any revisions recognized immediately as
adjustments to sales.
The company periodically and systematically evaluates the
collectibility of accounts receivable and determines the
appropriate reserve for doubtful accounts. In determining the
amount of the reserve, the company considers historical credit
losses, the past-due status of receivables, payment history and
other customer-specific information, and any other relevant
factors or considerations. Because of the nature of the
companys customer base and the companys credit and
collection policies and procedures, write-offs of accounts
receivable have historically not been significant (generally
less than 2% of gross receivables).
34
The company also provides for the estimated costs that may be
incurred under its warranty programs when the cost is both
probable and reasonably estimable, which is at the time the
related revenue is recognized. The cost is determined based on
actual company experience for the same or similar products as
well as other relevant information. Estimates of future costs
under the companys warranty programs could change based on
developments in the future. The company is not able to estimate
the probability or amount of any future developments that could
impact the reserves, but believes presently established reserves
are adequate.
Pension
and OPEB Plans
The company provides pension and other postemployment benefits
to certain of its employees. These employee benefit expenses are
reported in the same line items in the consolidated income
statement as the applicable employees compensation
expense. The valuation of the funded status and net benefit cost
for the plans are calculated using actuarial assumptions. These
assumptions are reviewed annually, and revised if appropriate.
The significant assumptions include the following:
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interest rates used to discount pension and OPEB plan
liabilities;
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the long-term rate of return on pension plan assets;
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rates of increases in employee compensation (used in estimating
liabilities);
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anticipated future healthcare costs (used in estimating the OPEB
plan liability); and
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other assumptions involving demographic factors such as
retirement, mortality and turnover (used in estimating
liabilities).
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Selecting assumptions involves an analysis of both short-term
and long-term historical trends and known economic and market
conditions at the time of the valuation (also called the
measurement date). The use of different assumptions would result
in different measures of the funded status and net cost. Actual
results in the future could differ from expected results. The
company is not able to estimate the probability of actual
results differing from expected results, but believes its
assumptions are appropriate.
The companys key assumptions are listed in Note 9.
The most critical assumptions relate to the plans covering
U.S. and Puerto Rico employees, because these plans are the
most significant to the companys consolidated financial
statements.
Discount
Rate Assumption
For the U.S. and Puerto Rico plans, at the measurement date
(December 31, 2009), the company used a discount rate of
6.05% and 5.95% to measure its benefit obligations for the
pension plans and OPEB plan, respectively. This discount rate
will be used in calculating the net periodic benefit cost for
these plans for 2010. The company used a broad population of
approximately 260 Aa-rated corporate bonds as of
December 31, 2009 to determine the discount rate
assumption. All bonds were denominated in U.S. dollars,
with a minimum amount outstanding of $50 million. This
population of bonds was narrowed from a broader universe of over
500 Moodys Aa rated, non-callable (or callable with
make-whole provisions) bonds by eliminating the top
10th percentile and bottom 40th percentile to adjust
for any pricing anomalies and to represent the bonds Baxter
would most likely select if it were to actually annuitize its
pension and OPEB plan liabilities. This portfolio of bonds was
used to generate a yield curve and associated spot rate curve,
to discount the projected benefit payments for the U.S. and
Puerto Rico plans. The discount rate is the single level rate
that produces the same result as the spot rate curve.
For plans in Canada, Japan, the United Kingdom and the Eurozone,
the company uses a method essentially the same as that described
for the U.S. and Puerto Rico plans. For the companys
other international plans, the discount rate is generally
determined by reviewing country- and region-specific government
and corporate bond interest rates.
To understand the impact of changes in discount rates on pension
and OPEB plan cost, the company performs a sensitivity analysis.
Holding all other assumptions constant, for each 50 basis
point (i.e., one-half of one
35
percent) increase (decrease) in the discount rate, global
pre-tax pension and OPEB plan cost would decrease (increase) by
approximately $32 million.
Return on
Plan Assets Assumption
In measuring net periodic cost for 2009, the company used a
long-term expected rate of return of 8.5% for the pension plans
covering U.S. and Puerto Rico employees. This assumption
will also be used to measure net pension cost for 2010. This
assumption is not applicable to the companys OPEB plan
because it is not funded.
The company establishes the long-term asset return assumption
based on a review of historical compound average asset returns,
both company-specific and relating to the broad market (based on
the companys asset allocation), as well as an analysis of
current market and economic information and future expectations.
The current asset return assumption is supported by historical
market experience for both the companys actual and
targeted asset allocation. In calculating net pension cost, the
expected return on assets is applied to a calculated value of
plan assets, which recognizes changes in the fair value of plan
assets in a systematic manner over five years. The difference
between this expected return and the actual return on plan
assets is a component of the total net unrecognized gain or loss
and is subject to amortization in the future.
To understand the impact of changes in the expected asset return
assumption on net cost, the company performs a sensitivity
analysis. Holding all other assumptions constant, for each
50 basis point increase (decrease) in the asset return
assumption, global pre-tax pension plan cost would decrease
(increase) by approximately $15 million.
Other
Assumptions
The company used the Retirement Plan 2000 mortality table to
calculate the pension and OPEB plan benefit obligations for its
plans in the United States and Puerto Rico. For all other
pension plans, the company utilized country and region-specific
mortality tables to calculate the plans benefit
obligations. The company periodically analyzes and updates its
assumptions concerning demographic factors such as retirement,
mortality and turnover, considering historical experience as
well as anticipated future trends.
The assumptions relating to employee compensation increases and
future healthcare costs are based on historical experience,
market trends, and anticipated future company actions. Refer to
Note 9 for information regarding the sensitivity of the
OPEB plan obligation and the total of the service and interest
cost components of OPEB plan cost to potential changes in future
healthcare costs.
Legal
Contingencies
The company is involved in product liability, patent,
commercial, regulatory and other legal proceedings that arise in
the normal course of business. Refer to Note 11 for further
information. The company records a liability when a loss is
considered probable and the amount can be reasonably estimated.
If the reasonable estimate of a probable loss is a range, and no
amount within the range is a better estimate, the minimum amount
in the range is accrued. If a loss is not probable or a probable
loss cannot be reasonably estimated, no liability is recorded.
The company has established reserves for certain of its legal
matters. The company is not able to estimate the amount or range
of any loss for certain of the legal contingencies for which
there is no reserve or additional loss for matters already
reserved. The company also records any insurance recoveries that
are probable of occurring. At December 31, 2009 total legal
liabilities were $112 million and total insurance
receivables were $96 million.
The companys loss estimates are generally developed in
consultation with outside counsel and are based on analyses of
potential results. With respect to the recording of any
insurance recoveries, after completing the assessment and
accounting for the companys legal contingencies, the
company separately and independently analyzes its insurance
coverage and records any insurance recoveries that are probable
of occurring at the gross amount that is expected to be
collected. In performing the assessment, the company reviews
available information, including historical company-specific and
market collection experience for similar claims, current facts
and circumstances pertaining to the particular insurance claim,
the financial viability of the applicable insurance company or
companies, and other relevant information.
36
While the liability of the company in connection with the claims
cannot be estimated with any certainty, and although the
resolution in any reporting period of one or more of these
matters could have a significant impact on the companys
results of operations and cash flows for that period, the
outcome of these legal proceedings is not expected to have a
material adverse effect on the companys consolidated
financial position. While the company believes it has valid
defenses in these matters, litigation is inherently uncertain,
excessive verdicts do occur, and the company may in the future
incur material judgments or enter into material settlements of
claims.
Inventories
The company values its inventories at the lower of cost,
determined using the
first-in,
first-out method, or market value. Market value for raw
materials is based on replacement costs and market value for
work in process and finished goods is based on net realizable
value. The company reviews inventories on hand at least
quarterly and records provisions for estimated excess,
slow-moving and obsolete inventory, as well as inventory with a
carrying value in excess of net realizable value. The regular
and systematic inventory valuation reviews include a current
assessment of future product demand, anticipated release of new
products into the market (either by the company or its
competitors), historical experience and product expiration.
Uncertain timing of product approvals, variability in product
launch strategies, product recalls and variation in product
utilization all impact the estimates related to inventory
valuation. Additional inventory provisions may be required if
future demand or market conditions are less favorable than the
company has estimated. The company is not able to estimate the
probability of actual results differing from expected results,
but believes its estimates are appropriate.
Deferred
Tax Asset Valuation Allowances and Reserves for Uncertain Tax
Positions
The company maintains valuation allowances unless it is more
likely than not that all or a portion of the deferred tax asset
will be realized. Changes in valuation allowances are included
in the companys tax provision in the period of change. In
determining whether a valuation allowance is warranted, the
company evaluates factors such as prior earnings history,
expected future earnings, carryback and carryforward periods,
and tax strategies that could potentially enhance the likelihood
of realization of a deferred tax asset. The realizability
assessments made at a given balance sheet date are subject to
change in the future, particularly if earnings of a subsidiary
are significantly higher or lower than expected, or if the
company takes operational or tax planning actions that could
impact the future taxable earnings of a subsidiary.
In the normal course of business, the company is audited by
federal, state and foreign tax authorities, and is periodically
challenged regarding the amount of taxes due. These challenges
relate to the timing and amount of deductions and the allocation
of income among various tax jurisdictions. The company believes
the companys tax positions comply with applicable tax law
and the company intends to defend its positions. In evaluating
the exposure associated with various tax filing positions, the
company records reserves for uncertain tax positions in
accordance with GAAP, based on the technical support for the
positions, the companys past audit experience with similar
situations, and potential interest and penalties related to the
matters. The companys effective tax rate in a given period
could be impacted if, upon final resolution with taxing
authorities, the company prevailed in positions for which
reserves have been established, or was required to pay amounts
in excess of established reserves.
Fair
Value Measurements of Financial Assets and Liabilities
On January 1, 2008, the company adopted the new accounting
standard for financial assets and financial liabilities
recognized or disclosed at fair value in the consolidated
financial statements on a recurring basis and on January 1,
2009, the company adopted the new accounting standard for
nonfinancial assets and liabilities that are measured at fair
value on a nonrecurring basis.
For assets that are measured using quoted prices in active
markets, the fair value is the published market price per unit
multiplied by the number of units held, without consideration of
transaction costs. The majority of the derivatives entered into
by the company are valued using internal valuation techniques as
no quoted market prices exist for such instruments. The
principal techniques used to value these instruments are
discounted cash flow and Black-Scholes models. The key inputs,
which are observable, depend on the type of derivative, and
37
include contractual terms, counterparty credit risk, interest
rate yield curves, foreign exchange rates and volatility. Refer
to the Financial Instrument Market Risk section above for
disclosures regarding sensitivity analyses performed by the
company and Note 7 for further information regarding the
companys financial instruments.
In addition, the companys pension plan assets and
contingent payments associated with business combinations are
valued at fair value on a recurring basis. The valuation of
pension assets, which are recorded net of the plans
liabilities, depends on the type of security the plan holds.
Principally, the securities are valued using quoted prices in
active markets or pricing matrices or models that incorporate
observable market data inputs. Refer to the Pension and OPEB
Plans section above and Note 9 for further information on
the companys pension plans. Contingent payments are valued
using a discounted cash flow technique that reflects
managements expectations about probability of payment.
Refer to Note 4 for further information on the
companys contingent payments relating to acquisitions.
Valuation
of Intangible Assets, Including IPR&D
The company acquires intangible assets and records them at fair
value. Valuations are generally completed for business
acquisitions using a discounted cash flow analysis,
incorporating the stage of completion. The most significant
estimates and assumptions inherent in the discounted cash flow
analysis include the amount and timing of projected future cash
flows, the discount rate used to measure the risks inherent in
the future cash flows, the assessment of the assets life
cycle, and the competitive and other trends impacting the asset,
including consideration of technical, legal, regulatory,
economic and other factors. Each of these factors and
assumptions can significantly affect the value of the intangible
asset.
Acquired IPR&D is the value assigned to acquired technology
or products under development which have not received regulatory
approval and have no alternative future use.
Beginning in 2009, as discussed further above, the company
adopted a new accounting standard for accounting for business
combinations. Under the new accounting standard, acquired
IPR&D included in a business combination is capitalized as
an indefinite-lived intangible asset and is no longer expensed
at the time of the acquisition. Development costs incurred after
the acquisition are expensed as incurred. Upon receipt of
regulatory approval of the related technology or product, the
indefinite-lived intangible asset is then accounted for as a
finite-lived intangible asset and amortized on a straight-line
basis over its estimated useful life. If the R&D project is
abandoned, the indefinite-lived asset is charged to expense.
IPR&D acquired in transactions that are not business
combinations is expensed immediately. For such transactions,
payments made to third parties subsequent to regulatory approval
are capitalized and amortized over the remaining useful life of
the related asset, and are classified as intangible assets.
Due to the inherent uncertainty associated with R&D
projects, there is no assurance that actual results will not
differ materially from the underlying assumptions used to
prepare discounted cash flow analyses, nor that the R&D
project will result in a successful commercial product.
Impairment
of Assets
Goodwill is subject to impairment reviews annually, and whenever
indicators of impairment exist. Intangible assets other than
goodwill and other long-lived assets (such as fixed assets) are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Refer to Note 1 for further
information. The companys impairment reviews are based on
an estimated future cash flow approach that requires significant
judgment with respect to future volume, revenue and expense
growth rates, changes in working capital use, foreign currency
exchange rates, the selection of an appropriate discount rate,
asset groupings, and other assumptions and estimates. The
estimates and assumptions used are consistent with the
companys business plans and a market participants
views of the company and similar companies. The use of
alternative estimates and assumptions could increase or decrease
the estimated fair values of the assets, and potentially result
in different impacts to the companys results of
operations. Actual results may differ from the companys
estimates.
38
Stock-Based
Compensation Plans
Stock-based compensation cost is estimated at the grant date
based on the fair value of the award, and the cost is recognized
as expense ratably over the substantive vesting period.
Determining the appropriate fair value model to use requires
judgment. Determining the assumptions that enter into the model
is highly subjective and also requires judgment. The
companys stock compensation costs principally relate to
awards of stock options, and the significant assumptions include
long-term projections regarding stock price volatility, employee
exercise, post-vesting termination, and pre-vesting forfeiture
behaviors, interest rates and dividend yields.
The company uses the Black-Scholes model for estimating the fair
value of stock options. The companys expected volatility
assumption is based on an equal weighting of the historical
volatility of Baxters stock and the implied volatility
from traded options on Baxters stock. The expected life
assumption is primarily based on historical employee exercise
patterns and employee post-vesting termination behavior. The
risk-free interest rate for the expected life of the option is
based on the U.S. Treasury yield curve in effect at the
time of grant. The dividend yield reflects historical experience
as well as future expectations over the expected life of the
option. The forfeiture rate used to calculate compensation
expense is primarily based on historical pre-vesting employee
forfeiture patterns. In finalizing its assumptions, the company
also reviews comparable companies assumptions, as
available in published surveys and in publicly available
financial filings.
The pre-vesting forfeitures assumption is ultimately adjusted to
the actual forfeiture rate. Therefore, changes in the
forfeitures assumption would not impact the total amount of
expense ultimately recognized over the vesting period. Estimated
forfeitures are reassessed each period based on historical
experience and current projections for the future.
The use of different assumptions would result in different
amounts of stock compensation expense. The fair value of an
option is particularly impacted by the expected volatility and
expected life assumptions. To understand the impact of changes
in these assumptions on the fair value of an option, the company
performs sensitivity analyses. Holding all other variables
constant, if the expected volatility assumption used in valuing
the stock options granted in 2009 was increased by
100 basis points (i.e., one percent), the fair value of a
stock option relating to one share of common stock would
increase by approximately 3%, from $11.68 to $12.07. Holding all
other variables constant (including the expected volatility
assumption), if the expected life assumption used in valuing the
stock options granted in 2009 was increased by one year, the
fair value of a stock option relating to one share of common
stock would increase by approximately 8%, from $11.68 to $12.61.
The company began granting performance share units (PSUs) in
2007. PSUs are earned by comparing the companys growth in
shareholder value relative to a performance peer group over a
three-year period. Based on the companys relative
performance, the recipient of a PSU may earn a total award
ranging from 0% to 200% of the initial grant. The fair value of
a PSU is estimated by the company at the grant date using a
Monte Carlo model. A Monte Carlo model uses stock price
volatility and other variables to estimate the probability of
satisfying the market conditions and the resulting fair value of
the award. The three primary inputs for the Monte Carlo model
are the risk-free rate, volatility of returns and correlation of
returns. The determination of the risk-free rate is similar to
that described above relating to the valuation of stock options.
The expected volatility and correlation assumptions are based on
historical information.
The company is not able to estimate the probability of actual
results differing from expected results, but believes the
companys assumptions are appropriate, based upon the
requirements of accounting standards for stock compensation and
the companys historical and expected future experience.
Hedging
Activities
As further discussed in Note 7 and in the Financial
Instrument Market Risk section above, the company uses
derivative instruments to hedge certain risks. As Baxter
operates on a global basis, there is a risk to earnings
associated with foreign exchange relating to the companys
recognized assets and liabilities and forecasted transactions
denominated in foreign currencies. Compliance with accounting
standards for derivatives and hedging activities and the
companys hedging policies require the company to make
judgments regarding the
39
probability of anticipated hedged transactions. In making these
estimates and assessments of probability, the company analyzes
historical trends and expected future cash flows and plans. The
estimates and assumptions used are consistent with the
companys business plans. If the company were to make
different assessments of probability or make the assessments
during a different fiscal period, the companys results of
operations for a given period would be different.
NEW
ACCOUNTING STANDARDS
Transfers
of Financial Assets
In June 2009, the FASB issued a new accounting standard relating
to the accounting for transfers of financial assets. The new
standard eliminates the concept of a qualifying special-purpose
entity and clarifies existing GAAP as it relates to determining
whether a transferor has surrendered control over transferred
financial assets. The standard limits the circumstances in which
a financial asset, or portion of a financial asset, should be
derecognized when the transferor has not transferred the entire
original financial asset to an entity that is not consolidated
with the transferor in the financial statements presented
and/or when
the transferor has continuing involvement with the transferred
financial asset. The standard also requires enhanced disclosures
about transfers of financial assets and a transferors
continuing involvement with transferred financial assets. It is
effective for fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2009, with early
adoption prohibited. The new standard will be applied
prospectively, except for the disclosure requirements, which
will be applied retrospectively for all periods presented. The
new standard, which is effective for the company as of
January 1, 2010, is not expected to have a material impact
on the companys consolidated financial statements.
Variable
Interest Entities
In June 2009, the FASB issued a new standard that changes the
consolidation model for variable interest entities (VIEs). The
new standard requires an enterprise to qualitatively assess the
determination of the primary beneficiary of a VIE as the
enterprise that has both the power to direct the activities of
the VIE that most significantly impact the entitys
economic performance and has the obligation to absorb losses or
the right to receive benefits from the entity that could
potentially be significant to the VIE. The standard requires
ongoing reassessments of whether an enterprise is the primary
beneficiary of a VIE. The standard expands the disclosure
requirements for enterprises with a variable interest in a VIE.
It is effective for fiscal years, and interim periods within
those fiscal years, beginning after November 15, 2009, with
early adoption prohibited. The new standard, which is effective
for the company as of January 1, 2010, is not expected to
have material impact on the companys consolidated
financial statements.
CERTAIN
REGULATORY MATTERS
In July 2005, the company stopped shipment of COLLEAGUE infusion
pumps in the United States. Following a number of Class I
recalls (recalls at the highest priority level for the FDA)
relating to the performance of the pumps, as well as the seizure
litigation described in Note 11, the company entered into a
Consent Decree in June 2006. Additional Class I recalls
related to remediation and repair and maintenance activities
were addressed by the company in 2007 and 2009. The Consent
Decree provides for reviews of the companys facilities,
processes and controls by the companys outside expert,
followed by the FDA. In December 2007, following the outside
experts review, the FDA conducted inspections and remains
in a dialogue with the company. As discussed in Note 11,
the company received a subpoena from the Office of the United
States Attorney of the Northern District of Illinois relating to
the COLLEAGUE infusion pump in September 2009. As discussed in
Note 5, the company has recorded a number of charges in
connection with its COLLEAGUE infusion pumps. It is possible
that substantial additional charges, including significant asset
impairments, related to COLLEAGUE may be required in future
periods, based on new information, changes in estimates, and
modifications to the current remediation plan.
In the first quarter of 2008, the company identified an
increasing level of allergic-type and hypotensive adverse
reactions occurring in patients using its heparin sodium
injection products in the United States. The company initiated a
field corrective action with respect to the products; however,
due to users needs for the
40
products, the company and the FDA concluded that public health
considerations warranted permitting selected dosages of the
products to remain in distribution for use where medically
necessary until alternate sources became available in the
quarter, at which time the companys products were removed
from distribution.
In January 2010, the company received a Warning Letter from the
FDA regarding observations made by the agency following
inspections of the companys manufacturing facility in
Lessines, Belgium. The Warning Letter identifies a number of
issues associated with certain fill and finish processes and
controls relating to GAMMAGARD LIQUID therapy. The company is
working with the FDA to address these issues.
While the company continues to work to resolve the issues
described above, there can be no assurance that additional costs
or civil and criminal penalties will not be incurred, that
additional regulatory actions with respect to the company will
not occur, that the company will not face civil claims for
damages from purchasers or users, that substantial additional
charges or significant asset impairments may not be required,
that sales of any other product may not be adversely affected,
or that additional legislation or regulation will not be
introduced that may adversely affect the companys
operations. Please see Item 1A. Risk Factors in
the companys Annual Report on
Form 10-K
for additional discussion of regulatory matters.
FORWARD-LOOKING
INFORMATION
This annual report includes forward-looking statements,
including statements with respect to accounting estimates and
assumptions, future litigation outcomes, the companys
efforts to remediate its infusion pumps and other regulatory
matters, expectations with respect to restructuring programs
(including expected cost savings), strategic plans, product and
business mix, promotional efforts, geographic expansion, sales
and pricing forecasts, credit exposure to foreign governments,
expectations with respect to business development activities,
potential developments with respect to credit and credit
ratings, interest expense in 2010, estimates of liabilities,
ongoing tax audits and related tax provisions, deferred tax
assets, future pension plan contributions, costs, rates of
return and minimum funding requirements, expectations with
respect to the companys exposure to foreign currency risk,
the companys internal R&D pipeline, future capital
and R&D expenditures, the sufficiency of the companys
financial flexibility and the adequacy of credit facilities and
reserves, the effective tax rate in 2010, and all other
statements that do not relate to historical facts. The
statements are based on assumptions about many important
factors, including assumptions concerning:
|
|
|
|
|
demand for and market acceptance risks for new and existing
products, such as ADVATE and IGIV, and other therapies;
|
|
|
|
the companys ability to identify business development and
growth opportunities for existing products;
|
|
|
|
product quality or patient safety issues, leading to product
recalls, withdrawals, launch delays, sanctions, seizures,
litigation, or declining sales;
|
|
|
|
future actions of the FDA or any other regulatory body or
government authority that could delay, limit or suspend product
development, manufacturing or sale or result in seizures,
injunctions, monetary sanctions or criminal or civil
liabilities, including any sanctions available under the Consent
Decree entered into with the FDA concerning the COLLEAGUE and
SYNDEO infusion pumps;
|
|
|
|
foreign currency fluctuations, particularly due to reduced
benefits from the companys natural hedges and limitations
on the ability to cost-effectively hedge resulting from
financial market and currency volatility;
|
|
|
|
fluctuations in supply and demand for plasma protein products;
|
|
|
|
reimbursement or rebate policies of government agencies and
private payers;
|
|
|
|
changes in healthcare legislation and regulation, including
through healthcare reform in the United States or globally,
which may affect pricing, reimbursement or other elements of the
companys business;
|
|
|
|
production yields, regulatory clearances and customers
final purchase commitments with respect to the companys
pandemic vaccine;
|
41
|
|
|
|
|
product development risks, including satisfactory clinical
performance, the ability to manufacture at appropriate scale,
and the general unpredictability associated with the product
development cycle;
|
|
|
|
the ability to enforce the companys patent rights or
patents of third parties preventing or restricting the
companys manufacture, sale or use of affected products or
technology;
|
|
|
|
the impact of geographic and product mix on the companys
sales;
|
|
|
|
the impact of competitive products and pricing, including
generic competition, drug reimportation and disruptive
technologies;
|
|
|
|
inventory reductions or fluctuations in buying patterns by
wholesalers or distributors;
|
|
|
|
the availability and pricing of acceptable raw materials and
component supply;
|
|
|
|
global regulatory, trade and tax policies;
|
|
|
|
any changes in law concerning the taxation of income, including
income earned outside the United States;
|
|
|
|
actions by tax authorities in connection with ongoing tax audits;
|
|
|
|
the companys ability to realize the anticipated benefits
of restructuring and optimization initiatives;
|
|
|
|
the companys ability to realize the anticipated benefits
from its joint product development and commercialization
arrangements, including the SIGMA transaction;
|
|
|
|
changes in credit agency ratings;
|
|
|
|
any impact of the commercial and credit environment on the
company and its customers and suppliers; and
|
|
|
|
other factors identified elsewhere in the companys Annual
Report on
Form 10-K,
including those factors described under the caption
Item 1A. Risk Factors and other filings with
the Securities and Exchange Commission, all of which are
available on the companys website.
|
Actual results may differ materially from those projected in the
forward-looking statements. The company does not undertake to
update its forward-looking statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Incorporated by reference to the section entitled
Financial Instrument Market Risk in
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this
Annual Report on
Form 10-K.
42
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
as of December 31 (in millions, except share information)
|
|
2009
|
|
|
2008
|
|
|
|
Current Assets
|
|
Cash and equivalents
|
|
$
|
2,786
|
|
|
$
|
2,131
|
|
|
|
Accounts and other current receivables
|
|
|
2,302
|
|
|
|
1,980
|
|
|
|
Inventories
|
|
|
2,557
|
|
|
|
2,361
|
|
|
|
Short-term deferred income taxes
|
|
|
226
|
|
|
|
251
|
|
|
|
Prepaid expenses and other
|
|
|
400
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
8,271
|
|
|
|
7,148
|
|
|
|
Property, Plant and Equipment, Net
|
|
|
5,159
|
|
|
|
4,609
|
|
|
|
Other Assets
|
|
Goodwill
|
|
|
1,825
|
|
|
|
1,654
|
|
|
|
Other intangible assets, net
|
|
|
513
|
|
|
|
390
|
|
|
|
Other
|
|
|
1,586
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
3,924
|
|
|
|
3,648
|
|
|
|
|
|
Total assets
|
|
$
|
17,354
|
|
|
$
|
15,405
|
|
|
|
Current Liabilities
|
|
Short-term debt
|
|
$
|
29
|
|
|
$
|
388
|
|
|
|
Current maturities of long-term debt and lease obligations
|
|
|
682
|
|
|
|
6
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
3,753
|
|
|
|
3,241
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,464
|
|
|
|
3,635
|
|
|
|
Long-Term Debt and Lease Obligations
|
|
|
3,440
|
|
|
|
3,362
|
|
|
|
Other Long-Term Liabilities
|
|
|
2,030
|
|
|
|
2,117
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2009 and 2008
|
|
|
683
|
|
|
|
683
|
|
|
|
Common stock in treasury, at cost, 82,523,243 shares in 2009 and 67,501,988 shares in 2008
|
|
|
(4,741
|
)
|
|
|
(3,897
|
)
|
|
|
Additional contributed capital
|
|
|
5,683
|
|
|
|
5,533
|
|
|
|
Retained earnings
|
|
|
7,343
|
|
|
|
5,795
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(1,777
|
)
|
|
|
(1,885
|
)
|
|
|
|
|
|
|
|
|
Total Baxter International Inc. (Baxter) shareholders equity
|
|
|
7,191
|
|
|
|
6,229
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests
|
|
|
229
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
7,420
|
|
|
|
6,291
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
17,354
|
|
|
$
|
15,405
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Net sales
|
|
$
|
12,562
|
|
|
$
|
12,348
|
|
|
$
|
11,263
|
|
Cost of sales
|
|
|
6,037
|
|
|
|
6,218
|
|
|
|
5,744
|
|
|
|
Gross margin
|
|
|
6,525
|
|
|
|
6,130
|
|
|
|
5,519
|
|
|
|
Marketing and administrative expenses
|
|
|
2,731
|
|
|
|
2,698
|
|
|
|
2,521
|
|
Research and development expenses
|
|
|
917
|
|
|
|
868
|
|
|
|
760
|
|
Restructuring charge
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Net interest expense
|
|
|
98
|
|
|
|
76
|
|
|
|
22
|
|
Other expense, net
|
|
|
45
|
|
|
|
26
|
|
|
|
18
|
|
|
|
Income before income taxes
|
|
|
2,734
|
|
|
|
2,462
|
|
|
|
2,128
|
|
Income tax expense
|
|
|
519
|
|
|
|
437
|
|
|
|
407
|
|
|
|
Net income
|
|
|
2,215
|
|
|
|
2,025
|
|
|
|
1,721
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
10
|
|
|
|
11
|
|
|
|
14
|
|
|
|
Net income attributable to Baxter
|
|
$
|
2,205
|
|
|
$
|
2,014
|
|
|
$
|
1,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Baxter per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.63
|
|
|
$
|
3.22
|
|
|
$
|
2.65
|
|
|
|
Diluted
|
|
$
|
3.59
|
|
|
$
|
3.16
|
|
|
$
|
2.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
607
|
|
|
|
625
|
|
|
|
644
|
|
|
|
Diluted
|
|
|
614
|
|
|
|
637
|
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
1.070
|
|
|
$
|
0.913
|
|
|
$
|
0.720
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions) (brackets denote cash
outflows)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Cash Flows
from Operations
|
|
Net income
|
|
$
|
2,215
|
|
|
$
|
2,025
|
|
|
$
|
1,721
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
638
|
|
|
|
631
|
|
|
|
581
|
|
|
|
Deferred income taxes
|
|
|
267
|
|
|
|
280
|
|
|
|
126
|
|
|
|
Stock compensation
|
|
|
140
|
|
|
|
146
|
|
|
|
136
|
|
|
|
Realized excess tax benefits from stock issued
under employee benefit plans
|
|
|
(96
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
Infusion pump charges
|
|
|
27
|
|
|
|
125
|
|
|
|
|
|
|
|
Exit and other charges
|
|
|
133
|
|
|
|
31
|
|
|
|
70
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
19
|
|
|
|
61
|
|
|
|
Average wholesale pricing litigation charge
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
Other
|
|
|
1
|
|
|
|
40
|
|
|
|
(19
|
)
|
|
|
Changes in balance sheet items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and other current
receivables
|
|
|
(167
|
)
|
|
|
(98
|
)
|
|
|
(278
|
)
|
|
|
Inventories
|
|
|
(60
|
)
|
|
|
(163
|
)
|
|
|
(211
|
)
|
|
|
Accounts payable and accrued
liabilities
|
|
|
(85
|
)
|
|
|
(239
|
)
|
|
|
1
|
|
|
|
Restructuring payments
|
|
|
(45
|
)
|
|
|
(50
|
)
|
|
|
(27
|
)
|
|
|
Other
|
|
|
(59
|
)
|
|
|
(120
|
)
|
|
|
88
|
|
|
|
|
|
|
|
|
|
Cash flows from operations
|
|
|
2,909
|
|
|
|
2,515
|
|
|
|
2,305
|
|
|
|
Cash Flows from
Investing Activities
|
|
Capital expenditures (including additions to the pool
of equipment placed with or leased to customers
of $119 in 2009, $146 in 2008 and $166 in 2007)
|
|
|
(1,014
|
)
|
|
|
(954
|
)
|
|
|
(692
|
)
|
|
|
Acquisitions of and investments in
businesses and technologies
|
|
|
(156
|
)
|
|
|
(99
|
)
|
|
|
(112
|
)
|
|
|
Divestitures and other
|
|
|
24
|
|
|
|
60
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
(1,146
|
)
|
|
|
(993
|
)
|
|
|
(305
|
)
|
|
|
Cash Flows from
Financing Activities
|
|
Issuances of debt
|
|
|
872
|
|
|
|
671
|
|
|
|
584
|
|
|
Payments of obligations
|
|
|
(199
|
)
|
|
|
(950
|
)
|
|
|
(635
|
)
|
|
|
(Decrease) increase in debt with original maturities of
three months or less, net
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
|
|
|
|
Cash dividends on common stock
|
|
|
(632
|
)
|
|
|
(546
|
)
|
|
|
(704
|
)
|
|
|
Proceeds and realized excess tax benefits from stock
issued under employee benefit plans
|
|
|
381
|
|
|
|
680
|
|
|
|
639
|
|
|
|
Purchases of treasury stock
|
|
|
(1,216
|
)
|
|
|
(1,986
|
)
|
|
|
(1,855
|
)
|
|
|
Other
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
(1,012
|
)
|
|
|
(1,931
|
)
|
|
|
(1,971
|
)
|
|
|
Effect of Foreign Exchange Rate Changes on Cash and
Equivalents
|
|
|
(96
|
)
|
|
|
1
|
|
|
|
25
|
|
|
|
Increase (Decrease) in Cash and Equivalents
|
|
|
655
|
|
|
|
(408
|
)
|
|
|
54
|
|
|
|
Cash and Equivalents at Beginning of Year
|
|
|
2,131
|
|
|
|
2,539
|
|
|
|
2,485
|
|
|
|
Cash and Equivalents at End of Year
|
|
$
|
2,786
|
|
|
$
|
2,131
|
|
|
$
|
2,539
|
|
|
|
Other supplemental information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of portion capitalized
|
|
$
|
113
|
|
|
$
|
159
|
|
|
$
|
119
|
|
Income taxes paid
|
|
$
|
246
|
|
|
$
|
247
|
|
|
$
|
304
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
45
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
as of and for the years ended December 31 (in millions)
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning and end of year
|
|
|
683
|
|
|
$
|
683
|
|
|
|
683
|
|
|
$
|
683
|
|
|
|
683
|
|
|
$
|
683
|
|
|
|
Common Stock in Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
68
|
|
|
|
(3,897
|
)
|
|
|
50
|
|
|
|
(2,503
|
)
|
|
|
33
|
|
|
|
(1,433
|
)
|
Purchases of common stock
|
|
|
23
|
|
|
|
(1,216
|
)
|
|
|
32
|
|
|
|
(1,986
|
)
|
|
|
34
|
|
|
|
(1,855
|
)
|
Stock issued under employee benefit plans and other
|
|
|
(8
|
)
|
|
|
372
|
|
|
|
(14
|
)
|
|
|
592
|
|
|
|
(17
|
)
|
|
|
785
|
|
|
|
End of year
|
|
|
83
|
|
|
|
(4,741
|
)
|
|
|
68
|
|
|
|
(3,897
|
)
|
|
|
50
|
|
|
|
(2,503
|
)
|
|
|
Additional Contributed Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
5,533
|
|
|
|
|
|
|
|
5,297
|
|
|
|
|
|
|
|
5,177
|
|
Stock issued under employee benefit plans and other
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
236
|
|
|
|
|
|
|
|
120
|
|
|
|
End of year
|
|
|
|
|
|
|
5,683
|
|
|
|
|
|
|
|
5,533
|
|
|
|
|
|
|
|
5,297
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
5,795
|
|
|
|
|
|
|
|
4,379
|
|
|
|
|
|
|
|
3,271
|
|
Net income attributable to Baxter
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
2,014
|
|
|
|
|
|
|
|
1,707
|
|
Cash dividends declared on common stock
|
|
|
|
|
|
|
(648
|
)
|
|
|
|
|
|
|
(571
|
)
|
|
|
|
|
|
|
(463
|
)
|
Stock issued under employee benefit plans and other
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136
|
)
|
Adjustment to change measurement date for certain employee
benefit plans, net of tax benefit of ($15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
|
|
|
|
7,343
|
|
|
|
|
|
|
|
5,795
|
|
|
|
|
|
|
|
4,379
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
(1,885
|
)
|
|
|
|
|
|
|
(940
|
)
|
|
|
|
|
|
|
(1,426
|
)
|
Other comprehensive income (loss) attributable to Baxter
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
(957
|
)
|
|
|
|
|
|
|
486
|
|
Adjustment to change measurement date for certain employee
benefit plans, net of tax expense of $8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
|
|
|
|
(1,777
|
)
|
|
|
|
|
|
|
(1,885
|
)
|
|
|
|
|
|
|
(940
|
)
|
|
|
Total Baxter shareholders equity
|
|
|
|
|
|
$
|
7,191
|
|
|
|
|
|
|
$
|
6,229
|
|
|
|
|
|
|
$
|
6,916
|
|
|
|
Noncontrolling Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
$
|
62
|
|
|
|
|
|
|
$
|
91
|
|
|
|
|
|
|
$
|
79
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
14
|
|
Other comprehensive income (loss) attributable to
noncontrolling interests
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
12
|
|
Additions (reductions) in noncontrolling ownership
interests, net
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(7
|
)
|
Other activity with noncontrolling interests
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
End of year
|
|
|
|
|
|
$
|
229
|
|
|
|
|
|
|
$
|
62
|
|
|
|
|
|
|
$
|
91
|
|
|
|
Total equity
|
|
|
|
|
|
$
|
7,420
|
|
|
|
|
|
|
$
|
6,291
|
|
|
|
|
|
|
$
|
7,007
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
2,215
|
|
|
|
|
|
|
$
|
2,025
|
|
|
|
|
|
|
$
|
1,721
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments, net of tax expense (benefit)
of $98 in 2009, ($125) in 2008 and $89 in 2007
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
259
|
|
Pension and other employee benefits, net of tax (benefit)
expense of ($18) in 2009, ($319) in 2008 and $144 in 2007
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
(591
|
)
|
|
|
|
|
|
|
266
|
|
Hedges of net investments in foreign operations, net of tax
benefit of ($19) in 2008 and ($27) in 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
(48
|
)
|
Other hedging activities, net of tax (benefit) expense of ($1)
in 2009, $2 in 2008 and $6 in 2007
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
23
|
|
Marketable equity securities, net of tax expense of $2 in 2009
and tax benefit of ($1) in each of 2008 and 2007
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
Total other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
(971
|
)
|
|
|
|
|
|
|
498
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
2,326
|
|
|
|
|
|
|
|
1,054
|
|
|
|
|
|
|
|
2,219
|
|
|
|
Less: Comprehensive income (loss) attributable to
noncontrolling interests
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
26
|
|
|
|
Comprehensive income attributable to Baxter
|
|
|
|
|
|
$
|
2,313
|
|
|
|
|
|
|
$
|
1,057
|
|
|
|
|
|
|
$
|
2,193
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Operations
Baxter International Inc. (Baxter or the company) develops,
manufactures and markets products that save and sustain the
lives of people with hemophilia, immune disorders, infectious
diseases, kidney disease, trauma, and other chronic and acute
medical conditions. As a global, diversified healthcare company,
Baxter applies a unique combination of expertise in medical
devices, pharmaceuticals and biotechnology to create products
that advance patient care worldwide. The company operates in
three segments, which are described in Note 12.
Use of
Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles (GAAP) requires the
company to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ
from those estimates.
Basis of
Consolidation
The consolidated financial statements include the accounts of
Baxter and its majority-owned subsidiaries, any minority-owned
subsidiaries that Baxter controls, and variable interest
entities (VIEs) in which Baxter is the primary beneficiary,
after elimination of intercompany transactions.
Revenue
Recognition
The company recognizes revenues from product sales and services
when earned. Specifically, revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred (or
services have been rendered), the price is fixed or
determinable, and collectibility is reasonably assured. For
product sales, revenue is not recognized until title and risk of
loss have transferred to the customer. The shipping terms for
the majority of the companys revenue arrangements are FOB
destination. The recognition of revenue is delayed if there are
significant post-delivery obligations, such as training,
installation or other services. Provisions for discounts,
rebates to customers, chargebacks to wholesalers and returns are
provided for at the time the related sales are recorded, and are
reflected as a reduction of net sales.
The company sometimes enters into arrangements in which it
commits to delivering multiple products or services to its
customers. In these cases, total arrangement consideration is
allocated to the deliverables based on their relative selling
prices. Then the allocated consideration is recognized as
revenue in accordance with the principles described above.
Selling prices are determined by applying a selling price
hierarchy. Selling prices are determined using vendor specific
objective evidence (VSOE), if it exists. Otherwise, selling
prices are determined using third party evidence (TPE). If
neither VSOE nor TPE is available, the company uses its best
estimate of selling prices.
Allowance
for Doubtful Accounts
In the normal course of business, the company provides credit to
its customers, performs credit evaluations of these customers
and maintains reserves for potential credit losses. In
determining the amount of the allowance for doubtful accounts,
the company considers, among other items, historical credit
losses, the past due status of receivables, payment histories
and other customer-specific information. Receivables are written
off when the company determines they are uncollectible. Credit
losses, when realized, have been within the range of the
companys allowance for doubtful accounts. The allowance
for doubtful accounts was $118 million at December 31,
2009 and $103 million at December 31, 2008.
Product
Warranties
The company provides for the estimated costs relating to product
warranties at the time the related revenue is recognized. The
cost is determined based on actual company experience for the
same or similar products, as well as other relevant information.
Product warranty liabilities are adjusted based on changes in
estimates.
47
Cash and
Equivalents
Cash and equivalents include cash, certificates of deposit and
money market funds with an original maturity of three months or
less.
Inventories
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Raw materials
|
|
$
|
598
|
|
|
$
|
600
|
|
Work in process
|
|
|
842
|
|
|
|
737
|
|
Finished goods
|
|
|
1,117
|
|
|
|
1,024
|
|
|
|
Inventories
|
|
$
|
2,557
|
|
|
$
|
2,361
|
|
|
|
Inventories are stated at the lower of cost
(first-in,
first-out method) or market value. Market value for raw
materials is based on replacement costs, and market value for
work in process and finished goods is based on net realizable
value. The inventory amounts above are stated net of reserves
for excess and obsolete inventory, which totaled
$273 million at December 31, 2009 and
$247 million at December 31, 2008.
Property,
Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Land
|
|
$
|
163
|
|
|
$
|
154
|
|
Buildings and leasehold improvements
|
|
|
1,921
|
|
|
|
1,743
|
|
Machinery and equipment
|
|
|
5,962
|
|
|
|
5,425
|
|
Equipment with customers
|
|
|
1,039
|
|
|
|
916
|
|
Construction in progress
|
|
|
975
|
|
|
|
783
|
|
|
|
Total property, plant and equipment, at cost
|
|
|
10,060
|
|
|
|
9,021
|
|
Accumulated depreciation and amortization
|
|
|
(4,901
|
)
|
|
|
(4,412
|
)
|
|
|
Property, plant and equipment (PP&E), net
|
|
$
|
5,159
|
|
|
$
|
4,609
|
|
|
|
Depreciation and amortization expense is calculated using the
straight-line method over the estimated useful lives of the
related assets, which range from 20 to 50 years for
buildings and improvements and from three to 15 years for
machinery and equipment. Leasehold improvements are amortized
over the life of the related facility lease (including any
renewal periods, if appropriate) or the asset, whichever is
shorter. Baxter capitalizes in machinery and equipment certain
computer software and software development costs incurred in
connection with developing or obtaining software for internal
use. Capitalized software costs are amortized on a straight-line
basis over the estimated useful lives of the software.
Straight-line and accelerated methods of depreciation are used
for income tax purposes. Depreciation and amortization expense
was $557 million in 2009, $553 million in 2008 and
$501 million in 2007. Repairs and maintenance expense was
$251 million in 2009, $242 million in 2008 and
$227 million in 2007.
Acquisitions
Results of operations of acquired companies are included in the
companys results of operations as of the respective
acquisition dates. The purchase price of each acquisition is
allocated to the net assets acquired based on estimates of their
fair values at the date of the acquisition. Contingent
consideration is recognized at the estimated fair value on the
acquisition date. Any purchase price in excess of these net
assets is recorded as goodwill. The allocation of purchase price
in certain cases may be subject to revision based on the final
determination of fair values.
Research
and Development
Research and development (R&D) costs are expensed as
incurred. Acquired in-process R&D (IPR&D) is the value
assigned to acquired technology or products under development
which have not received regulatory
48
approval and have no alternative future use. Valuations are
generally completed for business acquisitions using a discounted
cash flow analysis, incorporating the stage of completion. The
most significant estimates and assumptions inherent in a
discounted cash flow analysis include the amount and timing of
projected future cash flows, the discount rate used to measure
the risks inherent in the future cash flows, the assessment of
the assets life cycle, and the competitive and other
trends impacting the asset, including consideration of
technical, legal, regulatory, economic and other factors. Each
of these factors can significantly affect the value of the
IPR&D.
Payments made to third parties subsequent to regulatory approval
are capitalized and amortized over the remaining useful life of
the related asset, and are classified as intangible assets.
Beginning in 2009, as discussed further below, the company
adopted a new accounting standard for accounting for business
combinations. Under the new accounting standard, acquired
IPR&D included in a business combination is capitalized as
an indefinite-lived intangible asset and is no longer expensed
at the time of the acquisition. Development costs incurred after
the acquisition are expensed as incurred. Upon receipt of
regulatory approval of the related technology or product, the
indefinite-lived intangible asset is then accounted for as a
finite-lived intangible asset and amortized on a straight-line
basis over its estimated useful life. If the R&D project is
abandoned, the indefinite-lived asset is charged to expense.
Impairment
Reviews
Goodwill
Goodwill is not amortized, but is subject to an impairment
review annually and whenever indicators of impairment exist. An
impairment would occur if the carrying amount of a reporting
unit exceeded the fair value of that reporting unit. The company
measures goodwill for impairment based on its reportable
segments, which are BioScience, Medication Delivery and Renal.
An impairment charge would be recorded for the difference
between the carrying value and the present value of estimated
future cash flows discounted using a risk-free market rate
adjusted for a market participants view of similar
companies and perceived risks in the cash flows, which
represents the estimated fair value of the reporting unit.
Other
Long-Lived Assets
The company reviews the carrying amounts of long-lived assets
other than goodwill for potential impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Examples of such a change in
circumstances include a significant decrease in market price, a
significant adverse change in the extent or manner in which an
asset is being used, or a significant adverse change in the
legal or business climate. In evaluating recoverability, the
company groups assets and liabilities at the lowest level such
that the identifiable cash flows relating to the group are
largely independent of the cash flows of other assets and
liabilities. The company then compares the carrying amounts of
the assets or asset groups with the related estimated
undiscounted future cash flows. In the event impairment exists,
an impairment charge would be recorded as the amount by which
the carrying amount of the asset or asset group exceeds the fair
value. Depending on the asset and the availability of
information, fair value may be determined by reference to
estimated selling values of assets in similar condition, or by
using a discounted cash flow model. In addition, the remaining
amortization period for the impaired asset would be reassessed
and, if necessary, revised.
Earnings Per Share
The numerator for both basic and diluted earnings per share
(EPS) is net income attributable to Baxter. The denominator for
basic EPS is the weighted-average number of common shares
outstanding during the period. The dilutive effect of
outstanding employee stock options, performance share units,
restricted stock units and restricted stock is reflected in the
denominator for diluted EPS using the treasury stock method.
49
The following is a reconciliation of basic shares to diluted
shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Basic shares
|
|
|
607
|
|
|
|
625
|
|
|
|
644
|
|
Effect of dilutive securities
|
|
|
7
|
|
|
|
12
|
|
|
|
10
|
|
|
|
Diluted shares
|
|
|
614
|
|
|
|
637
|
|
|
|
654
|
|
|
|
The computation of diluted EPS excluded employee stock options
to purchase 16 million, 8 million and 11 million
shares in 2009, 2008 and 2007, respectively, because the assumed
proceeds were greater than the average market price of the
companys common stock, resulting in an anti-dilutive
effect on diluted EPS.
Shipping
and Handling Costs
Shipping costs, which are costs incurred to physically move
product from Baxters premises to the customers
premises, are classified as marketing and administrative
expenses. Handling costs, which are costs incurred to store,
move and prepare products for shipment, are classified as cost
of sales. Approximately $220 million in 2009,
$237 million in 2008 and $231 million in 2007 of
shipping costs were classified in marketing and administrative
expenses.
Income
Taxes
Deferred taxes are recognized for the future tax effects of
temporary differences between financial and income tax reporting
based on enacted tax laws and rates. The company maintains
valuation allowances unless it is more likely than not that all
or a portion of the deferred tax asset will be realized. With
respect to uncertain tax positions, the company determines
whether the position is more likely than not to be sustained
upon examination, based on the technical merits of the position.
Any tax position that meets the more-likely-than-not recognition
threshold is measured and recognized in the consolidated
financial statements at the largest amount of benefit that is
greater than 50% likely of being realized upon ultimate
settlement. The liability relating to uncertain tax positions is
classified as current in the consolidated balance sheets to the
extent the company anticipates making a payment within one year.
Interest and penalties associated with income taxes are
classified in the income tax expense line in the consolidated
statements of income and were not material.
Foreign
Currency Translation
Currency translation adjustments (CTA) related to foreign
operations are principally included in other comprehensive
income (OCI). For foreign operations in highly inflationary
economies, translation gains and losses are included in other
expense, net, and were not material.
Accumulated
Other Comprehensive Income
Comprehensive income includes all changes in shareholders
equity that do not arise from transactions with shareholders,
and consists of net income, CTA, pension and other employee
benefits, realized net losses on hedges of net investments in
foreign operations, unrealized gains and losses on cash flow
hedges and unrealized gains and losses on unrestricted
available-for-sale
marketable equity securities. The
net-of-tax
components of accumulated other comprehensive income (AOCI), a
component of shareholders equity, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
CTA
|
|
$
|
164
|
|
|
$
|
(30
|
)
|
|
$
|
326
|
|
Pension and other employee benefits
|
|
|
(1,188
|
)
|
|
|
(1,134
|
)
|
|
|
(555
|
)
|
Hedges of net investments in foreign operations
|
|
|
(757
|
)
|
|
|
(757
|
)
|
|
|
(724
|
)
|
Other hedging activities
|
|
|
3
|
|
|
|
39
|
|
|
|
14
|
|
Marketable equity securities
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(1,777
|
)
|
|
$
|
(1,885
|
)
|
|
$
|
(940
|
)
|
|
|
50
Derivatives
and Hedging Activities
All derivative instruments are recognized as either assets or
liabilities at fair value in the consolidated balance sheets and
are classified as short-term or long-term based on the scheduled
maturity of the instrument. Based upon the exposure being
hedged, the company designates its hedging instruments as cash
flow or fair value hedges.
For each derivative instrument that is designated and effective
as a cash flow hedge, the gain or loss on the derivative is
accumulated in AOCI and then recognized in earnings consistent
with the underlying hedged item. Option premiums or net premiums
paid are initially recorded as assets and reclassified to OCI
over the life of the option, and then recognized in earnings
consistent with the underlying hedged item. Cash flow hedges are
classified in other expense, net, cost of sales, and net
interest expense, and primarily relate to a hedge of
U.S. Dollar-denominated debt issued by a foreign
subsidiary, forecasted intercompany sales denominated in foreign
currencies and anticipated issuances of debt, respectively.
For each derivative instrument that is designated and effective
as a fair value hedge, the gain or loss on the derivative is
recognized immediately to earnings, and offsets the gain or loss
on the underlying hedged item. Fair value hedges are classified
in net interest expense, as they hedge the interest rate risk
associated with certain of the companys fixed-rate debt.
For each derivative or nonderivative instrument that is
designated and effective as a hedge of a net investment in a
foreign operation, the gain or loss is recorded in OCI, with any
hedge ineffectiveness recorded immediately in net interest
expense. As with CTA, upon sale or liquidation of an investment
in a foreign entity, the amount attributable to that entity and
accumulated in AOCI would be removed from AOCI and reported as
part of the gain or loss in the period during which the sale or
liquidation of the investment occurs.
For derivative instruments that are not designated as hedges,
the change in fair value, which substantially offsets the change
in book value of the hedged items, is recorded directly to other
expense, net.
If it is determined that a derivative or nonderivative hedging
instrument is no longer highly effective as a hedge, the company
discontinues hedge accounting prospectively. If the company
removes the cash flow hedge designation because the hedged
forecasted transactions are no longer probable of occurring, any
gains or losses are immediately reclassified from AOCI to
earnings. Gains or losses relating to terminations of effective
cash flow hedges in which the forecasted transactions are still
probable of occurring are deferred and recognized consistent
with the income or loss recognition of the underlying hedged
items. If the company terminates a fair value hedge, an amount
equal to the cumulative fair value adjustment to the hedged
items at the date of termination is amortized to earnings over
the remaining term of the hedged item.
Derivatives, including those that are not designated as a hedge,
are principally classified in the operating section of the
consolidated statements of cash flows, in the same category as
the related consolidated balance sheet account. With respect to
the companys net investment hedges, cross-currency swap
agreements that included a financing element at inception were
classified in the financing section of the consolidated
statements of cash flows when settled and cross-currency swap
agreements that did not include a financing element at inception
were classified in the operating section.
Refer to Note 7 for information regarding the
companys derivative and hedging activities.
Reclassifications
Certain reclassifications have been made to conform the prior
period consolidated financial statements and notes to the
current period presentation, including reclassifications related
to the companys adoption of a new accounting standard
related to noncontrolling interests.
Changes
in Accounting Standards
Business
Combinations
On January 1, 2009, the company adopted a new accounting
standard which changes the accounting for business combinations
in a number of significant respects. The key changes include the
expansion of transactions that qualify as business combinations,
the capitalization of IPR&D as an indefinite-lived asset,
the
51
recognition of certain acquired contingent assets and
liabilities at fair value, the expensing of acquisition costs,
the expensing of costs associated with restructuring the
acquired company, the recognition of contingent consideration at
fair value on the acquisition date, the recognition of
post-acquisition date changes in deferred tax asset valuation
allowances and acquired income tax uncertainties as income tax
expense or benefit, and the expansion of disclosure
requirements. This standard was applicable for acquisitions made
by the company on or after January 1, 2009, including the
April 2009 consolidation of Sigma International General Medical
Apparatus, LLC (SIGMA) and the August 2009 acquisition of
certain assets of Edwards Lifesciences Corporation (Edwards
CRRT) related to the hemofiltration business, also known as
Continuous Renal Replacement Therapy (CRRT). Refer to
Note 4 for further information regarding SIGMA and Edwards
CRRT.
Noncontrolling
Interests
On January 1, 2009, the company adopted a new accounting
standard which changes the accounting and reporting of
noncontrolling interests (historically referred to as minority
interests). The standard requires that noncontrolling interests
be presented in the consolidated balance sheets within equity,
but separate from Baxter shareholders equity, and that the
amount of consolidated net income attributable to Baxter and to
the noncontrolling interests be clearly identified and presented
in the consolidated statements of income. Any losses in excess
of the noncontrolling interests equity interest continue
to be allocated to the noncontrolling interest. Purchases or
sales of equity interests that do not result in a change of
control are accounted for as equity transactions. Upon a loss of
control the interest sold, as well as any interest retained, is
measured at fair value, with any gain or loss recognized in
earnings. In partial acquisitions, when control is obtained,
100% of the assets and liabilities, including goodwill, are
recognized at fair value as if the entire target company had
been acquired. The new standard was applied prospectively as of
January 1, 2009, except for the presentation and disclosure
requirements, which have been applied retrospectively for prior
periods presented. Prior to the adoption of the new standard,
the noncontrolling interests share of net income was
included in other expense, net in the consolidated statements of
income and the noncontrolling interests equity was
included in other long-term liabilities in the consolidated
balance sheets. The accounting related provisions of the new
accounting standard did not have a material impact on the
consolidated financial statements.
Revenue
Recognition
In October 2009, the Financial Accounting Standards Board (FASB)
issued two updates to the Accounting Standards Codification
related to revenue recognition. The first update eliminates the
requirement that all undelivered elements in an arrangement with
multiple deliverables have objective and reliable evidence of
fair value before revenue can be recognized for items that have
been delivered. The update also no longer allows use of the
residual method when allocating consideration to deliverables.
Instead, arrangement consideration is to be allocated to
deliverables using the relative selling price method, applying a
selling price hierarchy. VSOE of selling price should be used if
it exists. Otherwise, TPE of selling price should be used. If
neither VSOE nor TPE is available, the companys best
estimate of selling price should be used. The second update
eliminates tangible products from the scope of software revenue
recognition guidance when the tangible products contain software
components and non-software components that function together to
deliver the tangible products essential functionality.
Both updates require expanded qualitative and quantitative
disclosures and are effective for fiscal years beginning on or
after June 15, 2010, with prospective application for new
or materially modified arrangements or retrospective application
permitted. Early adoption is permitted. The same transition
method and period of adoption must be used for both updates. The
company adopted these updates in 2009, prospectively applying
them to arrangements entered into or materially modified on or
after January 1, 2009. The early adoption of these updates
did not have a material impact on the companys
consolidated financial statements and did not result in a change
in its previously reported quarterly consolidated financial
statements.
Other
Refer to Note 6 for disclosures provided in connection with
a new accounting and disclosure standard related to
collaborative arrangements. Refer to Note 7 for disclosures
provided in connection with a new disclosure standard related to
derivative and hedging activities and the fair value of
financial instruments. Refer to
52
Note 9 for disclosures provided in connection with a new
disclosure standard related to defined benefit pension plan
assets.
New
Accounting Standards
Transfers
of Financial Assets
In June 2009, the FASB issued a new accounting standard relating
to the accounting for transfers of financial assets. The new
standard eliminates the concept of a qualifying special-purpose
entity and clarifies existing GAAP as it relates to determining
whether a transferor has surrendered control over transferred
financial assets. The standard limits the circumstances in which
a financial asset, or portion of a financial asset, should be
derecognized when the transferor has not transferred the entire
original financial asset to an entity that is not consolidated
with the transferor in the financial statements presented
and/or when
the transferor has continuing involvement with the transferred
financial asset. The standard also requires enhanced disclosures
about transfers of financial assets and a transferors
continuing involvement with transferred financial assets. It is
effective for fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2009, with early
adoption prohibited. The new standard will be applied
prospectively, except for the disclosure requirements, which
will be applied retrospectively for all periods presented. The
new standard, which is effective for the company as of
January 1, 2010, is not expected to have a material impact
on the companys consolidated financial statements.
Variable
Interest Entities
In June 2009, the FASB issued a new standard that changes the
consolidation model for VIEs. The new standard requires an
enterprise to qualitatively assess the determination of the
primary beneficiary of a VIE as the enterprise that has both the
power to direct the activities of the VIE that most
significantly impact the entitys economic performance and
has the obligation to absorb losses or the right to receive
benefits from the entity that could potentially be significant
to the VIE. The standard requires ongoing reassessments of
whether an enterprise is the primary beneficiary of a VIE. The
standard expands the disclosure requirements for enterprises
with a variable interest in a VIE. It is effective for fiscal
years, and interim periods within those fiscal years, beginning
after November 15, 2009, with early adoption prohibited.
The new standard, which is effective for the company as of
January 1, 2010, is not expected to have material impact on
the companys consolidated financial statements.
NOTE 2
SUPPLEMENTAL FINANCIAL INFORMATION
Goodwill
and Other Intangible Assets
Goodwill
The following is a summary of the activity in goodwill by
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medication
|
|
|
|
|
|
|
|
(in millions)
|
|
BioScience
|
|
|
Delivery
|
|
|
Renal
|
|
|
Total
|
|
|
|
|
December 31, 2007
|
|
$
|
587
|
|
|
$
|
948
|
|
|
$
|
155
|
|
|
$
|
1,690
|
|
Additions
|
|
|
11
|
|
|
|
13
|
|
|
|
8
|
|
|
|
32
|
|
CTA
|
|
|
(13
|
)
|
|
|
(44
|
)
|
|
|
(11
|
)
|
|
|
(68
|
)
|
|
|
December 31, 2008
|
|
|
585
|
|
|
|
917
|
|
|
|
152
|
|
|
|
1,654
|
|
Additions
|
|
|
|
|
|
|
89
|
|
|
|
29
|
|
|
|
118
|
|
CTA
|
|
|
10
|
|
|
|
37
|
|
|
|
6
|
|
|
|
53
|
|
|
|
December 31, 2009
|
|
$
|
595
|
|
|
$
|
1,043
|
|
|
$
|
187
|
|
|
$
|
1,825
|
|
|
|
Additional goodwill recognized in 2009 principally related to
the consolidation of SIGMA within the Medication Delivery
segment and the acquisition of Edwards CRRT within the Renal
segment. See Note 4 for further information regarding SIGMA
and Edwards CRRT. As of December 31, 2009, there were no
accumulated goodwill impairment losses.
53
Other
Intangible Assets, Net
Intangible assets with finite useful lives are amortized on a
straight-line basis over their estimated useful lives.
Intangible assets with indefinite useful lives are not material
to the company. The following is a summary of the companys
intangible assets subject to amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology,
|
|
|
|
|
|
|
|
(in millions)
|
|
including patents
|
|
|
Other
|
|
|
Total
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross other intangible assets
|
|
$
|
904
|
|
|
$
|
125
|
|
|
$
|
1,029
|
|
Accumulated amortization
|
|
|
(489
|
)
|
|
|
(58
|
)
|
|
|
(547
|
)
|
|
|
Other intangible assets, net
|
|
$
|
415
|
|
|
$
|
67
|
|
|
$
|
482
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross other intangible assets
|
|
$
|
777
|
|
|
$
|
117
|
|
|
$
|
894
|
|
Accumulated amortization
|
|
|
(444
|
)
|
|
|
(67
|
)
|
|
|
(511
|
)
|
|
|
Other intangible assets, net
|
|
$
|
333
|
|
|
$
|
50
|
|
|
$
|
383
|
|
|
|
The amortization expense for intangible assets was
$63 million in 2009, $53 million in 2008 and
$57 million in 2007. At December 31, 2009, the
anticipated annual amortization expense for intangible assets
recorded as of December 31, 2009 is $66 million in
2010, $62 million in 2011, $59 million in 2012,
$56 million in 2013 and $52 million in 2014.
Other
Long-Term Assets
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Deferred income taxes
|
|
$
|
1,095
|
|
|
$
|
1,132
|
|
Insurance receivables
|
|
|
49
|
|
|
|
58
|
|
Other long-term receivables
|
|
|
66
|
|
|
|
87
|
|
Other
|
|
|
376
|
|
|
|
327
|
|
|
|
Other long-term assets
|
|
$
|
1,586
|
|
|
$
|
1,604
|
|
|
|
Accounts
Payable and Accrued Liabilities
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Accounts payable, principally trade
|
|
$
|
807
|
|
|
$
|
829
|
|
Income taxes payable
|
|
|
375
|
|
|
|
255
|
|
Deferred income taxes
|
|
|
482
|
|
|
|
265
|
|
Common stock dividends payable
|
|
|
174
|
|
|
|
161
|
|
Employee compensation and withholdings
|
|
|
494
|
|
|
|
478
|
|
Property, payroll and certain other taxes
|
|
|
201
|
|
|
|
177
|
|
Other
|
|
|
1,220
|
|
|
|
1,076
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
3,753
|
|
|
$
|
3,241
|
|
|
|
54
Other
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Pension and other employee benefits
|
|
$
|
1,688
|
|
|
$
|
1,595
|
|
Litigation reserves
|
|
|
45
|
|
|
|
63
|
|
Other
|
|
|
297
|
|
|
|
459
|
|
|
|
Other long-term liabilities
|
|
$
|
2,030
|
|
|
$
|
2,117
|
|
|
|
Net
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Interest costs
|
|
$
|
145
|
|
|
$
|
165
|
|
|
$
|
136
|
|
Interest costs capitalized
|
|
|
(28
|
)
|
|
|
(17
|
)
|
|
|
(12
|
)
|
|
|
Interest expense
|
|
|
117
|
|
|
|
148
|
|
|
|
124
|
|
Interest income
|
|
|
(19
|
)
|
|
|
(72
|
)
|
|
|
(102
|
)
|
|
|
Net interest expense
|
|
$
|
98
|
|
|
$
|
76
|
|
|
$
|
22
|
|
|
|
Other
Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Equity method investments
|
|
$
|
12
|
|
|
$
|
14
|
|
|
$
|
13
|
|
Foreign exchange
|
|
|
(51
|
)
|
|
|
(29
|
)
|
|
|
3
|
|
Securitization and factoring arrangements
|
|
|
11
|
|
|
|
19
|
|
|
|
14
|
|
Impairment charges
|
|
|
54
|
|
|
|
31
|
|
|
|
|
|
Gain on sale of Transfusion Therapies business, related
charges
and adjustments
|
|
|
|
|
|
|
(16
|
)
|
|
|
(23
|
)
|
Other
|
|
|
19
|
|
|
|
7
|
|
|
|
11
|
|
|
|
Other expense, net
|
|
$
|
45
|
|
|
$
|
26
|
|
|
$
|
18
|
|
|
|
NOTE 3
SALE OF TRANSFUSION THERAPIES BUSINESS
On February 28, 2007, the company divested substantially
all of the assets and liabilities of its Transfusion Therapies
(TT) business to an affiliate of TPG Capital, L.P. (TPG) for
$540 million. TPG acquired the net assets of the TT
business, including its product portfolio of manual and
automated blood-collection products and storage equipment, as
well as five manufacturing facilities, and established the new
company as Fenwal Inc. (Fenwal). Cash proceeds were
$473 million, representing the $540 million net of
certain items, principally international receivables that were
retained by the company post-divestiture.
During 2007, the company recorded a net gain on the sale of the
TT business of $58 million. Of the net cash proceeds,
$52 million was allocated to transition agreements to
provide post-divestiture manufacturing, distribution and support
services to Fenwal because these agreements provide for
below-market consideration for those services. In 2008, the
company recorded an income adjustment to the gain of
$16 million as a result of the finalization of the net
assets transferred in the divestiture. In connection with the TT
divestiture, the company recorded a $35 million charge in
2007 principally associated with severance and other
employee-related costs. Reserve utilization through
December 31, 2009 was $25 million. The reserve is
expected to be substantially utilized by the end of 2010.
TT business sales included in the BioScience segment totaled
$79 million in 2007 through the February 28 sale date.
Post-divestiture revenue associated with the transition
agreements with Fenwal totaled $74 million,
$174 million and $144 million in 2009, 2008 and 2007,
respectively. Included in the post-divestiture revenue
55
were $3 million, $25 million and $23 million in
2009, 2008 and 2007, respectively, of deferred revenue related
to the transition agreements, and as of December 31, 2009,
substantially all of the deferred revenue has been recognized.
The gain on the sale of the TT business and the related charges
and adjustments were recorded in other expense, net in the
consolidated statements of income. These amounts along with the
post-divestiture revenues were reported at the corporate
headquarters level and were not allocated to a segment.
NOTE 4
ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND
TECHNOLOGIES
In 2009, 2008 and 2007, cash outflows related to the
acquisitions of and investments in businesses and technologies
totaled $156 million, $99 million and
$112 million, respectively. The following are the more
significant acquisitions and investments, including licensing
agreements that require significant contingent milestone
payments, entered into in 2009, 2008 and 2007.
2009
SIGMA
In April 2009, the company entered into an exclusive three-year
distribution agreement with SIGMA covering the United States and
international markets. The agreement, which enables Baxter to
immediately provide SIGMAs SPECTRUM large volume infusion
pumps to customers, as well as future products under
development, complements Baxters infusion systems
portfolio and next generation technologies. The arrangement also
included a 40% equity stake in SIGMA, and an option to purchase
the remaining equity of SIGMA, exercisable at any time over a
three-year term. The arrangement included a $100 million
up-front payment and additional payments of up to
$130 million for the exercise of the purchase option as
well as for SIGMAs achievement of specified regulatory and
commercial milestones.
Because Baxters option to purchase the remaining equity of
SIGMA limits the ability of the existing equity holders to
participate significantly in SIGMAs profits and losses,
and because the existing equity holders have the ability to make
decisions about SIGMAs activities that have a significant
effect on SIGMAs success, the company concluded that SIGMA
is a VIE. Baxter is the primary beneficiary of the VIE due to
its exposure to the majority of SIGMAs expected losses or
expected residual returns and the relationship between Baxter
and SIGMA created by the exclusive distribution agreement, and
the significance of that agreement. Accordingly, the company
consolidated the financial statements of SIGMA beginning in
April 2009 (the acquisition date), with the fair value of the
equity owned by the existing SIGMA equity holders reported as
noncontrolling interests. The creditors of SIGMA do not have
recourse to the general credit of Baxter.
The following table summarizes the preliminary allocation of
fair value related to the arrangement at the acquisition date.
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
Goodwill
|
|
$
|
87
|
|
IPR&D
|
|
|
24
|
|
Other intangible assets
|
|
|
94
|
|
Purchase option (other long-term assets)
|
|
|
111
|
|
Other assets
|
|
|
30
|
|
Liabilities
|
|
|
|
|
Contingent payments
|
|
|
62
|
|
Other liabilities
|
|
|
25
|
|
Noncontrolling interests
|
|
|
159
|
|
|
|
The amount allocated to IPR&D is being accounted for as an
indefinite-lived intangible asset until regulatory approval or
discontinuation. The other intangible assets primarily relate to
developed technology and are being
56
amortized on a straight-line basis over an estimated average
useful life of eight years. The fair value of the purchase
option was estimated using the Black-Scholes model, and the fair
value of the noncontrolling interests was estimated using a
discounted cash flow model. The contingent payments of up to
$70 million associated with SIGMAs achievement of
specified regulatory and commercial milestones were recorded at
their estimated fair value of $62 million. As of
December 31, 2009, the estimated fair value of the
contingent payments was $59 million, with the change in the
estimated fair value since inception principally due to
Baxters payment of $5 million for the achievement of
a commercial milestone in 2009. Other changes in the estimated
fair value of the contingent payments are being recognized
immediately in earnings. The results of operations and assets
and liabilities of SIGMA are included in the Medication Delivery
segment, and the goodwill is included in this reporting unit.
The goodwill is deductible for tax purposes. The pro forma
impact of the arrangement with SIGMA was not significant to the
results of operations of the company.
Edwards
CRRT
In August 2009, the company acquired Edwards CRRT. CRRT provides
a method of continuous yet adjustable fluid removal that can
gradually remove excess fluid and waste products that build up
with the acute impairment of kidney function, and is usually
administered in an intensive care setting in the hospital. The
acquisition expands Baxters existing CRRT business into
new markets. The purchase price of $56 million was
primarily allocated to other intangible assets and goodwill. The
identified intangible assets of $28 million consisted of
customer relationships and developed technology and are being
amortized on a straight-line basis over an estimated average
useful life of eight years. The goodwill of $28 million is
deductible for tax purposes. Baxter will pay Edwards up to an
additional $9 million in purchase price based on revenue
objectives which are expected to be achieved over the next two
years, and such contingent purchase price was recorded at its
estimated fair value on the acquisition date. The results of
operations and assets and liabilities of Edwards CRRT are
included in the Renal segment, and the goodwill is included in
this reporting unit. The pro forma impact of the Edwards CRRT
acquisition was not significant to the results of operations of
the company.
2008 and
2007
In 2008 and 2007, the company recorded IPR&D charges of
$19 million and $50 million, respectively, relating to
up-front obligations for technology that had not received
regulatory approval and had no alternative future use.
The IPR&D charge in 2008 principally related to an
in-licensing agreement with Innocoll Pharmaceuticals Ltd.
(Innocoll), a division of Innocoll, Inc., granting Baxter
exclusive rights to market and distribute Innocolls
gentamicin surgical implant in the United States.
The IPR&D charge in 2007 principally related to a
collaboration for the development of a home hemodialysis (HD)
machine, as further discussed below. The charge also included
costs associated with an in-licensing agreement with Nycomed
Pharma AS (Nycomed) that grants Baxter exclusive rights to
market and distribute Nycomeds TACHOSIL surgical patch in
the United States; an amendment to the companys exclusive
R&D, license and manufacturing agreement with Nektar
Therapeutics (Nektar), expanding its existing BioScience
business relationship to include the use of Nektars
proprietary PEGylation technology in the development of
longer-acting forms of blood clotting proteins; and an
in-licensing arrangement with Halozyme Therapeutics, Inc.
(Halozyme) to apply Halozymes ENHANZE technology to the
development of a subcutaneous route of administration for
Baxters liquid formulation of IGIV (immune globulin
intravenous).
In connection with the arrangements with Innocoll, Nycomed,
Nektar and Halozyme, the company may be required to make
additional payments of up to $220 million based on the
successful completion of specified development, regulatory and
sales milestones, in addition to, in certain cases, royalty
payments on future sales of the related products. See
Note 6 for further information regarding the companys
contingent milestone payment arrangements.
57
HHD/DEKA
In August 2007, the company entered into a collaboration with
HHD, LLC (HHD) and DEKA Products Limited Partnership and DEKA
Research and Development Corp. (collectively, DEKA) for the
development of a home HD machine.
In connection with this Renal segment collaboration, the company
purchased an option for $25 million to acquire the assets
of HHD, and is reimbursing HHD for R&D services performed
by DEKA, as well as other of HHDs costs associated with
developing the home HD machine. Pursuant to the option agreement
with HHD, as amended, the company can exercise the option at any
time between the effective date of the agreement and the earlier
of U.S. Food and Drug Administration (FDA) approval of the
product for home use or June 30, 2011. The company may be
required to pay $18 million in advance of the exercise of
the option, as specified in the amended agreement. Upon exercise
of the option, the company would pay an additional
$16 million (or $34 million in total to exercise the
option), as well as additional payments of up to approximately
$5 million based on contractual relationships between HHD
and third parties. Because the company is the primary
beneficiary of the risks and rewards of HHDs activities,
the company is consolidating the financial results of HHD from
the date of the option purchase.
HHDs assets and technology had not yet received regulatory
approval and no alternative future use had been identified. In
conjunction with the execution of the option agreement with HHD
and the related payment of $25 million, the company
recognized a net IPR&D charge of $25 million in 2007.
The project was principally valued through discounted cash flow
analysis, utilizing the income approach.
NOTE 5
INFUSION PUMP, EXIT AND OTHER CHARGES
Baxter has made and continues to make significant investments in
assets, including inventory and PP&E, which relate to
potential new products or modifications to existing products.
The companys ability to realize value from these
investments is contingent on, among other things, regulatory
approval and market acceptance of these new products. The
company may not be able to realize the expected returns from
these investments, potentially resulting in asset impairments in
the future.
Infusion
Pump Charges
The company remains in active dialogue with the FDA regarding
various matters with respect to the companys COLLEAGUE
infusion pumps, including the companys remediation plan
and reviews of the companys facilities, processes and
quality controls by the companys outside expert pursuant
to the requirements of the companys Consent Decree. The
outcome of these discussions with the FDA is uncertain and may
impact the nature and timing of the companys actions and
decisions with respect to the COLLEAGUE pump. The companys
estimates of the costs related to these matters are based on the
current remediation plan and information currently available. It
is possible that substantial additional charges, including
significant asset impairments, related to COLLEAGUE may be
required in future periods, based on new information, changes in
estimates, and modifications to the current remediation plan.
While the company continues to work to resolve the issues
associated with COLLEAGUE infusion pumps, there can be no
assurance that additional costs or civil and criminal penalties
will not be incurred, that additional regulatory actions with
respect to the company will not occur, that the company will not
face civil claims for damages from purchasers or users, that
substantial additional charges or significant asset impairments
may not be required, that sales of any other product may not be
adversely affected, or that additional legislation or regulation
will not be introduced that may adversely affect the
companys operations and consolidated financial statements.
COLLEAGUE
and SYNDEO Infusion Pumps
The company recorded charges and other costs of
$27 million, $125 million, $14 million,
$94 million and $77 million in 2009, 2008, 2007, 2006
and 2005, respectively, related to issues associated with its
COLLEAGUE and SYNDEO infusion pumps.
58
The company stopped shipment of COLLEAGUE infusion pumps in July
2005 in the United States. Following a number of Class I
recalls (recalls at the highest priority level for the FDA)
relating to the performance of the pumps, as well as the seizure
litigation described in Note 11, the company entered into a
Consent Decree in June 2006. Additional Class I recalls
related to remediation and repair and maintenance activities
were addressed by the company in 2007 and 2009. The Consent
Decree provides for reviews of the companys facilities,
processes and controls by the companys outside expert,
followed by the FDA. In December 2007, following the outside
experts review, the FDA conducted its inspection and
remains in a dialogue with the company with respect to
observations from its inspection as well as the validation of
modifications to the pump required to remediate certain of the
pumps.
Included in the 2005 charge was $4 million relating to
asset impairments and $73 million for cash costs,
representing an estimate of the cash expenditures for the
materials, labor and freight costs expected to be incurred to
remediate the design issues. Included in the 2006 charge was
$3 million relating to asset impairments and
$73 million for cash costs, which related to additional
customer accommodations and adjustments to the previously
established reserves for remediation costs based on further
definition of the potential remediation requirements and the
companys experience remediating pumps outside of the
United States. Also, in 2006, the company recorded an additional
$18 million of expense, of which $7 million related to
asset impairments and $11 million related to additional
warranty and other commitments made to customers. The
$14 million of costs recorded in 2007 represented changes
in estimates relating to the previously established reserves for
cash costs based on the companys experience executing the
remediation plan.
As a result of delays in the remediation plan, principally due
to additional software modifications, validation, evaluation and
testing required to remediate the pumps, and other changes in
the estimated costs to execute the remediation plan, the company
recorded a charge associated with the COLLEAGUE infusion pump of
$53 million in the first quarter of 2008. This charge
consisted of $39 million for cash costs and
$14 million principally relating to asset impairments. The
reserve for cash costs principally related to customer
accommodations, including extended warranties, and other costs
associated with these delays.
In the third quarter of 2008, as a result of the companys
decision to upgrade the global pump base to a standard software
platform and other changes in the estimated costs to execute the
remediation plan, the company recorded a charge of
$72 million. This charge consisted of $46 million for
cash costs and $26 million principally relating to asset
impairments and inventory used in the remediation plan. The
reserve for cash costs primarily consisted of costs associated
with the deployment of the new software and additional repair
and warranty costs.
In 2009, the company recorded a charge of $27 million
related to planned retirement costs associated with SYNDEO and
additional costs related to the COLLEAGUE infusion pump. This
charge consisted of $14 million for cash costs and
$13 million related to asset impairments. The reserve for
cash costs primarily related to customer accommodations and
additional warranty costs.
The charges were recorded in cost of sales in the companys
consolidated statements of income, and were included in the
Medication Delivery segments pre-tax income.
59
The following summarizes cash activity in the companys
COLLEAGUE and SYNDEO infusion pump reserves through
December 31, 2009.
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
2005 and 2006 Charges
|
|
$
|
157
|
|
Utilization in 2005 and 2006
|
|
|
(46
|
)
|
|
|
December 31, 2006
|
|
|
111
|
|
Utilization
|
|
|
(55
|
)
|
Adjustments
|
|
|
14
|
|
|
|
December 31, 2007
|
|
|
70
|
|
Charges
|
|
|
85
|
|
Utilization
|
|
|
(40
|
)
|
|
|
December 31, 2008
|
|
|
115
|
|
Charges
|
|
|
14
|
|
Utilization
|
|
|
(30
|
)
|
|
|
December 31, 2009
|
|
$
|
99
|
|
|
|
The ultimate timing of the utilization of the reserves is
uncertain.
Exit and
Other Charges
2009 Cost
Optimization Charge
In 2009, the company recorded a charge of $79 million
related to costs associated with optimizing its overall cost
structure on a global basis. The charge included severance costs
and asset impairments associated with the discontinuation of
certain insignificant products and projects, the termination of
which will not have a material impact on the companys
future results of operations.
Included in the charge was $69 million of cash costs,
principally pertaining to severance and other employee-related
costs associated with the elimination of less than 2% of the
companys workforce. Also included in the charge were asset
impairments of $10 million, relating to inventory and fixed
assets associated with discontinued products and projects.
Of the total charge, $30 million was recorded in cost of
sales and $49 million was recorded in marketing and
administrative expenses. The charge was recorded at the
corporate level and was not allocated to a segment. Reserve
utilization through December 31, 2009 was $5 million.
The reserve is expected to be substantially utilized by the end
of 2010.
SOLOMIX
Drug Delivery System
During 2009, the company recorded a $54 million charge
associated with the discontinuation of the companys
SOLOMIX drug delivery system in development based on technical
issues which negatively impacted the expected profitability of
the product. Substantially all of the charge related to asset
impairments, principally to write off equipment intended to be
used to manufacture the SOLOMIX drug delivery system. The charge
was recorded in other expense, net in the companys
consolidated statement of income, and was included in the
Medication Delivery segments pre-tax income.
CLEARSHOT
Pre-Filled Syringes
During 2008, the company recorded a $31 million charge
related to the companys decision to discontinue its
CLEARSHOT pre-filled syringe program based on managements
assessment of the market demand and expected profitability for
this product. Substantially all of the charge related to asset
impairments, principally to write off equipment used to
manufacture the CLEARSHOT syringes. The charge was recorded in
other expense, net in the companys consolidated statement
of income, and was included in the Medication Delivery
segments pre-tax income.
60
2007
Restructuring Charge
In 2007, the company recorded a restructuring charge of
$70 million principally associated with the consolidation
of certain commercial and manufacturing operations outside of
the United States. Based on a review of current and future
capacity needs, the company decided to integrate several
facilities to reduce the companys cost structure and
optimize operations, principally in the Medication Delivery
segment. Included in the charge was $17 million related to
asset impairments, principally to write down PP&E based on
market data for the assets. Also included in the charge was
$53 million for cash costs, principally pertaining to
severance and other employee-related costs associated with the
elimination of approximately 1% of the companys total
workforce. Reserve utilization related to the 2007 program was
$22 million, $14 million and $5 million in 2009,
2008 and 2007, respectively. As of the end of 2009, the 2007
restructuring reserve has been substantially utilized.
2004
Restructuring Charge
In 2004, the company recorded a restructuring charge of
$543 million principally associated with the companys
decision to implement actions to reduce the companys
overall cost structure and to drive sustainable improvements in
financial performance. Included in the 2004 charge was
$196 million relating to asset impairments, almost all of
which was to write down PP&E. Also included in the 2004
charge was $347 million for cash costs, principally
pertaining to severance and other employee-related costs.
Reserve utilization related to the 2004 program was
$5 million, $28 million and $22 million in 2009,
2008 and 2007, respectively. As of the end of 2009, the 2004
restructuring reserve has been substantially utilized.
NOTE 6
DEBT, CREDIT FACILITIES, AND COMMITMENTS AND
CONTINGENCIES
Debt
Outstanding
At December 31, 2009 and 2008, the company had the
following debt outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31 (in millions)
|
|
|
Effective
interest rate
|
1
|
|
|
2009
|
2
|
|
|
2008
|
2
|
|
|
4.75% notes due 2010
|
|
|
4.9%
|
|
|
$
|
500
|
|
|
$
|
499
|
|
Variable-rate loan due 2010
|
|
|
0.8%
|
|
|
|
180
|
|
|
|
177
|
|
Variable-rate loan due 2012
|
|
|
0.6%
|
|
|
|
157
|
|
|
|
155
|
|
4.0% notes due 2014
|
|
|
4.2%
|
|
|
|
350
|
|
|
|
|
|
4.625% notes due 2015
|
|
|
4.8%
|
|
|
|
641
|
|
|
|
675
|
|
5.9% notes due 2016
|
|
|
6.0%
|
|
|
|
615
|
|
|
|
661
|
|
5.375% notes due 2018
|
|
|
5.5%
|
|
|
|
499
|
|
|
|
499
|
|
4.5% notes due 2019
|
|
|
4.7%
|
|
|
|
498
|
|
|
|
|
|
6.625% debentures due 2028
|
|
|
6.7%
|
|
|
|
136
|
|
|
|
154
|
|
6.25% notes due 2037
|
|
|
6.3%
|
|
|
|
499
|
|
|
|
499
|
|
Other
|
|
|
|
|
|
|
47
|
|
|
|
49
|
|
|
|
Total debt and capital lease obligations
|
|
|
|
|
|
|
4,122
|
|
|
|
3,368
|
|
Current portion
|
|
|
|
|
|
|
(682
|
)
|
|
|
(6
|
)
|
|
|
Long-term portion
|
|
|
|
|
|
$
|
3,440
|
|
|
$
|
3,362
|
|
|
|
|
|
|
1 |
|
Excludes the effect of related interest rate swaps, as
applicable. |
|
2 |
|
Book values include discounts, premiums and adjustments related
to hedging instruments, as applicable. |
In addition, as further discussed below, the company had
short-term debt totaling $29 million at December 31,
2009 and $388 million at December 31, 2008.
61
Significant
Debt Issuances
In February 2009, the company issued $350 million of senior
unsecured notes, maturing in March 2014 and bearing a 4.0%
coupon rate. In August 2009, the company issued
$500 million of senior unsecured notes, maturing in August
2019 and bearing a 4.5% coupon rate. In May 2008, the company
issued $500 million of senior unsecured notes, maturing in
June 2018 and bearing a 5.375% coupon rate. In December 2007,
the company issued $500 million of senior unsecured notes,
maturing in December 2037, and bearing a 6.25% coupon rate. The
notes are redeemable, in whole or in part, at the companys
option, subject to a make-whole redemption premium. In addition,
during 2008, the company issued commercial paper, of which
$200 million was outstanding as of December 31, 2008,
with a weighted-average interest rate of 2.55%. There was no
commercial paper outstanding as of December 31, 2009.
The net proceeds of the debt issuances noted above were used for
general corporate purposes, including the repayment of
$200 million of outstanding commercial paper in 2009 and
for the settlement of cross-currency swaps in 2008. See
Note 7 for further information regarding the settlement of
cross-currency swaps. The debt instruments include certain
covenants, including restrictions relating to the companys
creation of secured debt.
Future
Minimum Lease Payments and Debt Maturities
|
|
|
|
|
|
|
|
|
|
|
Debt maturities
|
|
|
Operating
|
|
and capital
|
as of and for the years ended December 31 (in millions)
|
|
leases
|
|
leases
|
|
|
2010
|
|
$
|
163
|
|
$
|
682
|
2011
|
|
|
138
|
|
|
7
|
2012
|
|
|
115
|
|
|
161
|
2013
|
|
|
100
|
|
|
4
|
2014
|
|
|
92
|
|
|
358
|
Thereafter
|
|
|
194
|
|
|
2,867
|
|
|
Total obligations and commitments
|
|
|
802
|
|
|
4,079
|
Interest on capital leases, discounts and premiums, and
adjustments
relating to hedging instruments
|
|
|
n/a
|
|
|
43
|
|
|
Long-term debt and lease obligations
|
|
$
|
802
|
|
$
|
4,122
|
|
|
Credit
Facilities
The company had $2.8 billion of cash and equivalents at
December 31, 2009. The companys primary revolving
credit facility has a maximum capacity of $1.5 billion and
matures in December 2011. As of December 31, 2009, there
were no outstanding borrowings under this facility. The company
also maintains a Euro-denominated credit facility with a maximum
capacity of approximately $435 million at December 31,
2009, which matures in January 2013. As of December 31,
2009, there were no outstanding borrowings under this facility.
As of December 31, 2008, there was $164 million
outstanding under this facility, which was repaid in 2009. The
companys facilities enable the company to borrow funds on
an unsecured basis at variable interest rates, and contain
various covenants, including a maximum net-debt-to-capital
ratio. At December 31, 2009, the company was in compliance
with the financial covenants in these agreements. The
non-performance of any financial institution supporting either
of the credit facilities would reduce the maximum capacity of
these facilities by each institutions respective
commitment.
The company also maintains other credit arrangements, which
totaled $454 million at December 31, 2009 and
$409 million at December 31, 2008. Borrowings
outstanding under these facilities totaled $29 million at
December 31, 2009 and $24 million at December 31,
2008.
Leases
The company leases certain facilities and equipment under
capital and operating leases expiring at various dates. The
leases generally provide for the company to pay taxes,
maintenance, insurance and certain other
62
operating costs of the leased property. Most of the operating
leases contain renewal options. Operating lease rent expense was
$172 million in 2009, $161 million in 2008 and
$157 million in 2007.
Collaborative
Arrangements
On January 1, 2009, the company adopted a new accounting
standard related to collaborative arrangements, which was
required to be applied retrospectively to all periods presented
for all collaborative arrangements existing as of the effective
date. The adoption of this new standard did not result in a
change to the companys historical consolidated financial
statements.
In the normal course of business, Baxter enters into
collaborative arrangements with third parties. Certain of these
collaborative arrangements include joint operating activities
involving active participation by both partners, where both
Baxter and the other entity are exposed to risks and rewards
dependent on the commercial success of the activity. These
collaborative arrangements exist in all three of the
companys segments, take a number of forms and structures,
principally pertain to the joint development and
commercialization of new products, and are designed to enhance
and expedite long-term sales and profitability growth.
The collaborative arrangements can broadly be grouped into two
categories: those relating to new product development, and those
relating to existing commercial products.
New
Product Development Arrangements
The companys joint new product development and
commercialization arrangements generally provide that Baxter
license certain rights to manufacture, market or distribute a
specified technology or product under development. Baxters
consideration for the rights generally consists of some
combination of up-front payments, ongoing R&D cost
reimbursements, royalties, and contingent payments relating to
the achievement of specified pre-clinical, clinical, regulatory
approval or sales milestones. Joint steering committees often
exist to manage the various stages and activities of the
arrangement. Control over the R&D activities may be shared
or may be performed by Baxter. Baxter generally controls the
commercialization phase, sometimes purchasing raw materials from
the collaboration partner.
During the development phase, Baxters R&D costs are
expensed as incurred. These costs may include R&D cost
reimbursements to the partner, as well as up-front and milestone
payments to the partner prior to the date the product receives
regulatory approval. Milestone payments made to the partner
subsequent to regulatory approval are capitalized as other
intangible assets and amortized to cost of sales over the
estimated useful life of the related asset. Royalty payments are
expensed as cost of sales when they become due and payable. Any
purchases of raw materials from the partner during the
development stage are expensed as R&D, while such purchases
during the commercialization phase are capitalized as inventory
and recognized as cost of sales when the related finished
products are sold. Baxter generally records the amount invoiced
to the third-party customer for the finished product as sales,
as Baxter is the principal and primary obligor in the
arrangement.
Payments to collaborative partners classified in cost of sales
were not significant in 2009, 2008 and 2007. Payments to
collaborative partners classified in R&D expense were 6%,
7% and 8% of total R&D expense in 2009, 2008 and 2007,
respectively. The payments principally related to the
development of tissue repair products, longer-acting forms of
blood clotting proteins to treat hemophilia and a home HD device.
Commercial
Product Arrangements
The companys commercial product collaborative arrangements
generally provide for a sharing of manufacturing, marketing or
distribution activities between Baxter and the partner, along
with a sharing of the related profits. The nature and split of
the shared activities varies, sometimes split by type of
activity and sometimes split by geographic area.
The entity that invoices the third-party customer is generally
the principal and primary obligor in the arrangement and
therefore records the invoiced amount as a sale. Cost-sharing
payments are generally recorded in cost of sales. Baxters
payments to partners under these types of arrangements were less
than 1% of total cost of sales in 2009, 2008 and 2007.
63
Other
Commitments and Contingencies
Joint
Development and Commercialization Arrangements
In addition to the new product development arrangements
discussed above, the company has entered into certain other
arrangements which include contingent milestone payments. At
December 31, 2009, the companys unfunded milestone
payments associated with all of its arrangements totaled
$812 million. This total excludes any contingent royalties.
Based on the companys projections, any contingent payments
made in the future will be more than offset over time by the
estimated net future cash flows relating to the rights acquired
for those payments. The majority of the contingent payments
relate to arrangements in the BioScience segment. Included in
the total are contingent milestone payments of $220 million
relating to arrangements entered into during 2008 and 2007 that
are discussed in Note 4. Aside from the items discussed in
Note 4, significant collaborations relate to the
development of hard and soft tissue-repair products to position
the company to enter the orthobiologic market, the development
of longer-acting forms of blood clotting proteins to treat
hemophilia A and other arrangements.
Indemnifications
During the normal course of business, Baxter makes indemnities,
commitments and guarantees pursuant to which the company may be
required to make payments related to specific transactions.
Indemnifications include: (i) intellectual property
indemnities to customers in connection with the use, sales or
license of products and services; (ii) indemnities to
customers in connection with losses incurred while performing
services on their premises; (iii) indemnities to vendors
and service providers pertaining to claims based on negligence
or willful misconduct; and (iv) indemnities involving the
representations and warranties in certain contracts. In
addition, under Baxters Amended and Restated Certificate
of Incorporation, and consistent with Delaware General
Corporation Law, the company has agreed to indemnify its
directors and officers for certain losses and expenses upon the
occurrence of certain prescribed events. The majority of these
indemnities, commitments and guarantees do not provide for any
limitation on the maximum potential for future payments that the
company could be obligated to make. To help address some of
these risks, the company maintains various insurance coverages.
Based on historical experience and evaluation of the agreements,
the company does not believe that any significant payments
related to its indemnifications will result, and therefore the
company has not recorded any associated liabilities.
Legal
Contingencies
Refer to Note 11 for a discussion of the companys
legal contingencies.
NOTE 7
FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE
MEASUREMENTS
Receivable
Securitizations
Where economical, the company has entered into agreements with
various financial institutions in which the entire interest in
and ownership of the receivable is sold, principally consisting
of trade receivables originated in Japan. The company had also
entered into agreements in which undivided interests in certain
pools of receivables were sold, principally consisting of
hardware lease receivables originated in the United States and
trade receivables originated in Europe.
In November 2007, the company purchased the third party interest
in the previously sold receivables under the companys
European securitization facility, resulting in a net cash
outflow of $157 million, consisting of $225 million of
receivables and $68 million of retained interests. The
$157 million net cash outflow was classified as an
investing activity in the consolidated statement of cash flows.
Subsequent cash collections from customers relating to these
receivables are also classified in the investing section of the
consolidated statements of cash flows, and totaled $14 million,
$46 million and $161 million for the years ended 2009,
2008 and 2007, respectively. The European facility matured in
November 2007 and was not renewed.
The U.S. securitization facility matured in December 2007
and was not renewed. The company continues to service the
receivables in its Japanese securitization arrangements.
Servicing assets or liabilities are not
64
recognized because the company receives adequate compensation to
service the sold receivables. The Japanese securitization
arrangement includes limited recourse provisions, which are not
material.
The securitization arrangements resulted in net cash outflows of
$7 million, $3 million and $240 million (of which
$225 million was classified as an investing activity and
$15 million as an operating activity in the consolidated
statement of cash flows) in 2009, 2008 and 2007, respectively. A
summary of the securitization activity is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
as of and for the years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Sold receivables at beginning of year
|
|
$
|
154
|
|
|
$
|
129
|
|
|
$
|
348
|
|
Proceeds from sales of receivables
|
|
|
535
|
|
|
|
467
|
|
|
|
1,395
|
|
Purchase of interest in receivables in the European
securitization facility
|
|
|
|
|
|
|
|
|
|
|
(225
|
)
|
Cash collections (remitted to the owners of the receivables)
|
|
|
(542
|
)
|
|
|
(470
|
)
|
|
|
(1,410
|
)
|
Foreign exchange
|
|
|
|
|
|
|
28
|
|
|
|
21
|
|
|
|
Sold receivables at end of year
|
|
$
|
147
|
|
|
$
|
154
|
|
|
$
|
129
|
|
|
|
The net gains and losses relating to the sales of receivables
were immaterial for each year.
Concentrations
of Risk
The company invests excess cash in certificates of deposit or
money market funds and diversifies the concentration of cash
among different financial institutions. With respect to
financial instruments, where appropriate, the company has
diversified its selection of counterparties, and has arranged
collateralization and
master-netting
agreements to minimize the risk of loss.
While the current economic downturn has not meaningfully
impacted the companys ability to collect receivables, the
company continues to do business with certain foreign
governments which have recently experienced credit rating
downgrades and may become unable to pay for our products or
services.
Foreign
Currency and Interest Rate Risk Management
The company operates on a global basis and is exposed to the
risk that its earnings, cash flows and equity could be adversely
impacted by fluctuations in foreign exchange and interest rates.
The companys hedging policy attempts to manage these risks
to an acceptable level based on the companys judgment of
the appropriate trade-off between risk, opportunity and costs.
The company is primarily exposed to foreign exchange risk with
respect to recognized assets and liabilities, forecasted
transactions and net assets denominated in the Euro, Japanese
Yen, British Pound, Australian Dollar, Canadian Dollar,
Brazilian Real and Colombian Peso. The company manages its
foreign currency exposures on a consolidated basis, which allows
the company to net exposures and take advantage of any natural
offsets. In addition, the company uses derivative and
nonderivative instruments to further reduce the net exposure to
foreign exchange. Gains and losses on the hedging instruments
offset losses and gains on the hedged transactions and reduce
the earnings and equity volatility resulting from foreign
exchange. Market volatility and currency fluctuations may reduce
the benefits of the companys natural hedges and limit the
companys ability to cost-effectively hedge these exposures.
The company is also exposed to the risk that its earnings and
cash flows could be adversely impacted by fluctuations in
interest rates. The companys policy is to manage interest
costs using a mix of fixed- and floating-rate debt that the
company believes is appropriate. To manage this mix in a
cost-efficient manner, the company periodically enters into
interest rate swaps in which the company agrees to exchange, at
specified intervals, the difference between fixed and floating
interest amounts calculated by reference to an
agreed-upon
notional amount.
The company does not hold any instruments for trading purposes
and none of the companys outstanding derivative
instruments contain credit-risk-related contingent features.
65
Cash Flow
Hedges
The company may use options, including collars and purchased
options, forwards and cross-currency swaps to hedge the foreign
exchange risk to earnings relating to forecasted transactions
denominated in foreign currencies and recognized assets and
liabilities. The company periodically uses forward-starting
interest rate swaps and treasury rate locks to hedge the risk to
earnings associated with movements in interest rates relating to
anticipated issuances of debt. Certain other firm commitments
and forecasted transactions are also periodically hedged. Cash
flow hedges primarily relate to forecasted intercompany sales
denominated in foreign currencies, a hedge of
U.S. Dollar-denominated debt issued by a foreign subsidiary
and anticipated issuances of debt.
The notional amounts of foreign exchange contracts,
cross-currency swaps (used to hedge U.S. Dollar-denominated
debt issued by a foreign subsidiary) and interest rate contracts
were $1.2 billion, $500 million and $200 million,
respectively, as of December 31, 2009.
The maximum term over which the company has cash flow hedge
contracts in place related to forecasted transactions at
December 31, 2009 is 12 months.
Fair
Value Hedges
The company uses interest rate swaps to convert a portion of its
fixed-rate debt into variable-rate debt. These instruments hedge
the companys earnings from changes in the fair value of
debt due to fluctuations in the designated benchmark interest
rate.
The total notional amount of interest rate contracts designated
as fair value hedges was $1.6 billion as of
December 31, 2009.
Dedesignations
In 2009, the company terminated $500 million of its
interest rate contracts, resulting in a net gain of
$10 million that was deferred in AOCI.
Undesignated
Derivative Instruments
The company uses forward contracts to hedge earnings from the
effects of foreign exchange relating to certain of the
companys intercompany and third-party receivables and
payables denominated in a foreign currency. These derivative
instruments are generally not formally designated as hedges and
the terms of these instruments generally do not exceed one month.
The total notional amount of undesignated derivative instruments
was $222 million as of December 31, 2009.
Gains and
Losses on Derivative Instruments
The following tables summarize the income statement
classification and gains and losses on the companys
derivative instruments for the year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss)
|
|
|
|
|
|
|
Location of gain
|
|
|
reclassified from
|
|
|
|
Gain (loss)
|
|
|
(loss) in the income
|
|
|
AOCI into the
|
|
(in millions)
|
|
recognized in OCI
|
|
|
statement
|
|
|
income statement
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
78
|
|
|
|
Net interest expense
|
|
|
$
|
(3
|
)
|
Foreign exchange contracts
|
|
|
(3
|
)
|
|
|
Net sales
|
|
|
|
5
|
|
Foreign exchange contracts
|
|
|
(53
|
)
|
|
|
Cost of sales
|
|
|
|
43
|
|
Foreign exchange contracts
|
|
|
(42
|
)
|
|
|
Other expense, net
|
|
|
|
(28
|
)
|
|
|
Total
|
|
$
|
(20
|
)
|
|
|
|
|
|
$
|
17
|
|
|
|
66
|
|
|
|
|
|
|
|
|
Location of loss in
|
|
Loss recognized in
|
|
(in millions)
|
|
the income statement
|
|
the income statement
|
|
|
|
Fair value hedges
|
|
|
|
|
|
|
Interest rate contracts
|
|
Net interest expense
|
|
|
$(80
|
)
|
|
|
Undesignated derivative instruments
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other expense, net
|
|
|
$(47
|
)
|
|
|
The net loss recognized in OCI for cash flow hedges resulted in
a tax benefit of $1 million that is not reflected in the
table above. For the companys fair value hedges, equal and
offsetting gains of $80 million were recognized in net
interest expense in 2009 as adjustments to the underlying hedged
item, fixed-rate debt. Ineffectiveness related to the
companys cash flow and fair value hedges for the year
ended December 31, 2009 was not material.
The following table summarizes
net-of-tax
activity in AOCI, a component of shareholders equity,
related to the companys cash flow hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
as of and for the years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Accumulated other comprehensive income (loss) balance at
beginning of year
|
|
$
|
39
|
|
|
$
|
14
|
|
|
$
|
(9
|
)
|
(Loss) gain in fair value of derivatives during the year
|
|
|
(19
|
)
|
|
|
93
|
|
|
|
(43
|
)
|
Amount reclassified to earnings during the year
|
|
|
(17
|
)
|
|
|
(68
|
)
|
|
|
66
|
|
|
|
Accumulated other comprehensive income balance at end of year
|
|
$
|
3
|
|
|
$
|
39
|
|
|
$
|
14
|
|
|
|
As of December 31, 2009, $10 million of deferred, net
after-tax losses on derivative instruments included in AOCI are
expected to be recognized in earnings during the next
12 months, coinciding with when the hedged items are
expected to impact earnings.
Fair
Values of Derivative Instruments
The following table summarizes the classification and fair value
amounts of derivative instruments reported in the consolidated
balance sheet as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in asset positions
|
|
|
Derivatives in liability positions
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
(in millions)
|
|
Balance sheet location
|
|
|
value
|
|
|
Balance sheet location
|
|
|
value
|
|
|
|
|
Derivative instruments designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
Prepaid expenses and other
|
|
|
$
|
25
|
|
|
|
Other long-term liabilities
|
|
|
$
|
1
|
|
Interest rate contracts
|
|
|
Other long-term assets
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Prepaid expenses and other
|
|
|
|
20
|
|
|
|
Accounts payable and
accrued liabilities
|
|
|
|
112
|
|
|
|
Total derivative instruments designated as hedges
|
|
$
|
105
|
|
|
|
|
|
|
$
|
113
|
|
|
|
Undesignated derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Prepaid expenses and other
|
|
|
$
|
|
|
|
|
Accounts payable and
accrued liabilities
|
|
|
$
|
|
|
|
|
Total derivative instruments
|
|
|
|
|
|
$
|
105
|
|
|
|
|
|
|
$
|
113
|
|
|
|
Hedges of
Net Investments in Foreign Operations
In 2008, the company terminated its remaining net investment
hedge portfolio and no longer has any outstanding net investment
hedges. The company historically hedged the net assets of
certain of its foreign operations using a combination of foreign
currency denominated debt and cross-currency swaps. In 2004, the
company reevaluated its net investment hedge strategy and
elected to reduce the use of these instruments as a risk
management tool. As part of the change in strategy, the company
executed offsetting, or mirror, cross-currency swaps relating to
over half of the existing portfolio that effectively fixed the
net amount that the
67
company would ultimately pay to settle the cross-currency swap
agreements subject to this strategy. The net after-tax losses
related to net investment hedge instruments recorded in OCI were
$33 million and $48 million in 2008 and 2007,
respectively.
When the cross-currency swaps were settled, the cash flows were
reported within the financing section of the consolidated
statement of cash flows. When the mirror swaps were settled, the
cash flows were reported in the operating section of the
consolidated statement of cash flows. Of the $528 million
of net settlement payments in 2008, $540 million of cash
outflows were included in the financing section and
$12 million of cash inflows were included in the operating
section. Of the $334 million of settlement payments in
2007, $303 million of cash outflows were included in the
financing section and $31 million of cash outflows were
included in the operating section.
Fair
Value Measurements
On January 1, 2008, the company adopted a new accounting
standard relating to assets and liabilities that are measured at
fair value on a recurring basis. The standard clarifies the
definition of fair value whenever another standard requires or
permits assets or liabilities to be measured at fair value.
Specifically, the standard clarifies that fair value should be
based on the assumptions market participants would use when
pricing the asset or liability, and establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. On January 1, 2009, the company completed the
adoption of the accounting standard for fair value measurements
as it related to nonfinancial assets and liabilities that are
measured at fair value on a nonrecurring basis.
The fair value hierarchy under the accounting standard for fair
value measurements consists of the following three levels:
|
|
|
|
|
Level 1 Quoted prices in active markets that
the company has the ability to access for identical assets or
liabilities;
|
|
|
|
Level 2 Quoted prices for similar instruments
in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based
valuations in which all significant inputs are observable in the
market; and
|
|
|
|
Level 3 Valuations using significant inputs
that are unobservable in the market and include the use of
judgment by the companys management about the assumptions
market participants would use in pricing the asset or liability.
|
68
The following table summarizes the bases used to measure
financial assets and liabilities that are carried at fair value
on a recurring basis in the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets for
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
identical assets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
(in millions)
|
|
December 31, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
20
|
|
|
$
|
|
|
Interest rate hedges
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
Equity securities
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
118
|
|
|
$
|
13
|
|
|
$
|
105
|
|
|
$
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
112
|
|
|
$
|
|
|
|
$
|
112
|
|
|
$
|
|
|
Interest rate hedges
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Contingent payments related to SIGMA
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
Total liabilities
|
|
$
|
172
|
|
|
$
|
|
|
|
$
|
113
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurement
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets for
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
identical assets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
(in millions)
|
|
December 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
148
|
|
|
$
|
|
|
|
$
|
148
|
|
|
$
|
|
|
Interest rate hedges
|
|
|
140
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
Equity securities
|
|
|
14
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
302
|
|
|
$
|
14
|
|
|
$
|
288
|
|
|
$
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
$
|
77
|
|
|
$
|
|
|
|
$
|
77
|
|
|
$
|
|
|
Interest rate hedges
|
|
|
43
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
120
|
|
|
$
|
|
|
|
$
|
120
|
|
|
$
|
|
|
|
|
For assets that are measured using quoted prices in active
markets, the fair value is the published market price per unit
multiplied by the number of units held, without consideration of
transaction costs. The majority of the derivatives entered into
by the company are valued using internal valuation techniques as
no quoted market prices exist for such instruments. The
principal techniques used to value these instruments are
discounted cash flow and Black-Scholes models. The key inputs
are considered observable and vary depending on the type of
derivative, and include contractual terms, interest rate yield
curves, foreign exchange rates and volatility. The contingent
payments are valued using a discounted cash flow technique that
reflects managements expectations about probability of
payment.
Refer to Note 4 for further information regarding changes
in fair value of the contingent payments related to SIGMA. Refer
to Note 9 for fair value disclosures related to the
companys pension plans.
As discussed further in Note 5, the company recorded asset
impairment charges related to SYNDEO, SOLOMIX and its cost
optimization efforts in 2009. As the assets had no alternative
use and no salvage value, the fair value, measured using
significant unobservable inputs (Level 3), was assessed to
be zero.
69
Book
Values and Fair Values of Financial Instruments
In addition to the financial instruments that the company is
required to recognize at fair value on the consolidated balance
sheets, the company has certain financial instruments that are
recognized at historical cost or some basis other than fair
value. For these financial instruments, the following table
provides the value recognized on the consolidated balance sheets
and the approximate fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
Book values
|
|
|
fair values
|
|
as of December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term insurance receivables
|
|
$
|
49
|
|
|
$
|
58
|
|
|
$
|
47
|
|
|
$
|
54
|
|
Cost basis investments
|
|
|
31
|
|
|
|
20
|
|
|
|
31
|
|
|
|
20
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
29
|
|
|
|
388
|
|
|
|
29
|
|
|
|
388
|
|
Current maturities of long-term debt and lease obligations
|
|
|
682
|
|
|
|
6
|
|
|
|
697
|
|
|
|
6
|
|
Other long-term debt and lease obligations
|
|
|
3,440
|
|
|
|
3,362
|
|
|
|
3,568
|
|
|
|
3,409
|
|
Long-term litigation liabilities
|
|
|
45
|
|
|
|
63
|
|
|
|
44
|
|
|
|
60
|
|
|
|
The estimated fair values of insurance receivables and long-term
litigation liabilities were computed by discounting the expected
cash flows based on currently available information, which in
many cases does not include final orders or settlement
agreements. The discount factors used in the calculations
reflect the
non-performance
risk of the insurance providers and the company, respectively.
The estimated fair values of current and long-term debt and
lease obligations were computed by multiplying price by the
notional amount of the respective debt instrument. Price is
calculated using the stated terms of the respective debt
instrument and yield curves commensurate with the companys
credit risk. In determining the fair value of cost method
investments, the company takes into consideration recent
transactions, as well as the financial information of the
investee. The carrying values of the other financial instruments
approximate their fair values due to the short-term maturities
of most of these assets and liabilities.
NOTE 8
COMMON AND PREFERRED STOCK
Stock-Based
Compensation
The companys stock-based compensation generally includes
stock options, performance share units (PSUs), restricted stock
units (RSUs) and purchases under employee stock purchase plans.
Shares issued relating to the companys stock-based plans
are generally issued out of treasury stock. As of
December 31, 2009, approximately 28 million authorized
shares are available for future awards under the companys
stock-based compensation plans. The following is a summary of
the companys significant stock compensation plans.
Stock
Compensation Expense
Stock compensation expense recognized in the consolidated
statements of income was $140 million, $146 million
and $136 million in 2009, 2008 and 2007, respectively. The
related tax benefit recognized was $40 million,
$46 million and $46 million in 2009, 2008 and 2007,
respectively.
Stock compensation expense is recorded at the corporate level
and is not allocated to a segment. Approximately three-quarters
of stock compensation expense is classified in marketing and
administrative expenses, with the remainder classified in cost
of sales and R&D expenses. Costs capitalized in the
consolidated balance sheet at December 31, 2009 were not
significant.
Stock compensation expense is based on awards expected to vest,
and therefore has been reduced by estimated forfeitures.
Forfeitures are required to be estimated at the time of grant
and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.
70
Stock
Options
Stock options are granted to employees and non-employee
directors with exercise prices at least equal to 100% of the
market value on the date of grant. Beginning in 2007, stock
options granted generally vest in one-third increments over a
three-year period. Options granted prior to 2007 generally
cliff-vest 100% three years from the grant date. Stock options
granted to non-employee directors generally cliff-vest 100% one
year from the grant date. Stock options granted typically have a
contractual term of 10 years. The grant-date fair value,
adjusted for estimated forfeitures, is recognized as expense on
a straight-line basis over the substantive vesting period.
The fair value of stock options is determined using the
Black-Scholes model. The weighted-average assumptions used in
estimating the fair value of stock options granted during each
year, along with the weighted-average grant-date fair values,
were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Expected volatility
|
|
|
30%
|
|
|
|
24%
|
|
|
|
23%
|
|
Expected life (in years)
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.5
|
|
Risk-free interest rate
|
|
|
1.8%
|
|
|
|
2.4%
|
|
|
|
4.5%
|
|
Dividend yield
|
|
|
2.0%
|
|
|
|
1.5%
|
|
|
|
1.2%
|
|
Fair value per stock option
|
|
|
$12
|
|
|
|
$12
|
|
|
|
$13
|
|
|
|
The companys expected volatility assumption is based on an
equal weighting of the historical volatility of Baxters
stock and the implied volatility from traded options on
Baxters stock. The expected life assumption is primarily
based on the vesting terms of the stock option, historical
employee exercise patterns and employee post-vesting termination
behavior. The risk-free interest rate for the expected life of
the option is based on the U.S. Treasury yield curve in
effect at the time of grant. The dividend yield reflects
historical experience as well as future expectations over the
expected life of the option.
The following table summarizes stock option activity for the
year ended December 31, 2009 and stock option information
at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
remaining
|
|
|
|
|
|
|
|
|
|
average
|
|
|
contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
exercise
|
|
|
term
|
|
|
intrinsic
|
|
(options and aggregate intrinsic values in thousands)
|
|
Options
|
|
|
price
|
|
|
(in years)
|
|
|
value
|
|
|
|
|
Outstanding at January 1, 2009
|
|
|
44,027
|
|
|
$
|
44.13
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,885
|
|
|
|
52.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,368
|
)
|
|
|
38.45
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,405
|
)
|
|
|
53.45
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
43,139
|
|
|
$
|
46.00
|
|
|
|
5.7
|
|
|
$
|
549,542
|
|
|
|
Vested or expected to vest as of December 31, 2009
|
|
|
42,265
|
|
|
$
|
45.83
|
|
|
|
5.7
|
|
|
$
|
545,320
|
|
|
|
Exercisable at December 31, 2009
|
|
|
29,684
|
|
|
$
|
42.26
|
|
|
|
4.5
|
|
|
$
|
488,259
|
|
|
|
The aggregate intrinsic value in the table above represents the
difference between the exercise price and the companys
closing stock price on the last trading day of the year. The
total intrinsic value of options exercised was
$108 million, $328 million and $294 million in
2009, 2008 and 2007, respectively.
As of December 31, 2009, $78 million of unrecognized
compensation cost related to stock options is expected to be
recognized as expense over a weighted-average period of
approximately 1.7 years.
PSUs
In 2007, the company restructured its annual equity awards stock
compensation program for senior management to include PSUs with
market-based conditions rather than RSUs. This change reflects
the companys view that as senior management has more
responsibility for the companys performance, the payout
71
of a portion of their equity awards should be completely
at-risk. The company also changed the overall mix of
stock compensation, from a weighting of 70% stock options and
30% RSUs, to 50% stock options and 50% PSUs. The mix of stock
options was adjusted downward in order to reflect the market
shift away from stock options in favor of alternative
performance-based awards. Certain members of senior management
received a one-time transitional award of RSUs in 2007 as part
of their annual equity awards.
The payout resulting from the vesting of the PSUs is based on
Baxters growth in shareholder value versus the growth in
shareholder value of the healthcare companies in Baxters
peer group during the three-year performance period commencing
with the year in which the PSUs are granted. Depending on
Baxters growth in shareholder value relative to the peer
group, a holder of PSUs is entitled to receive a number of
shares of common stock equal to a percentage, ranging from 0% to
200%, of the PSUs granted. The grant-date fair value, adjusted
for estimated forfeitures, is recognized as expense on a
straight-line basis over the substantive vesting period.
The fair value of PSUs is determined using a Monte Carlo model.
A Monte Carlo model uses stock price volatility and other
variables to estimate the probability of satisfying the market
conditions and the resulting fair value of the award. The
assumptions used in estimating the fair value of PSUs granted
during each year, along with the fair values, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
years ended December 31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Expected volatility
|
|
|
25%
|
|
|
|
20%
|
|
|
|
18%
|
|
Peer group volatility
|
|
|
20%-59%
|
|
|
|
12%-37%
|
|
|
|
13%-39%
|
|
Correlation of returns
|
|
|
0.30-0.61
|
|
|
|
0.12-0.40
|
|
|
|
0.09-0.34
|
|
Risk-free interest rate
|
|
|
1.6%
|
|
|
|
1.9%
|
|
|
|
4.5%
|
|
Fair value per PSU
|
|
|
$65
|
|
|
|
$67
|
|
|
|
$67
|
|
|
|
The company granted approximately 580,000, 650,000 and 780,000
PSUs in 2009, 2008 and 2007, respectively. Pre-tax unrecognized
compensation cost related to all unvested PSUs of
$32 million at December 31, 2009 is expected to be
recognized as expense over a weighted-average period of
1.6 years.
The following table summarizes nonvested PSU activity for the
year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
grant-date
|
|
(share units in thousands)
|
|
Share units
|
|
|
fair value
|
|
|
|
|
Nonvested PSUs at January 1, 2009
|
|
|
1,370
|
|
|
$
|
66.74
|
|
Granted
|
|
|
582
|
|
|
|
65.37
|
|
Vested
|
|
|
(717
|
)
|
|
|
66.71
|
|
Forfeited
|
|
|
(111
|
)
|
|
|
66.27
|
|
|
|
Nonvested PSUs at December 31, 2009
|
|
|
1,124
|
|
|
$
|
66.10
|
|
|
|
RSUs
The company periodically grants RSUs to employees and
non-employee directors for recognition and retention purposes.
RSUs principally vest in one-third increments over a three-year
period. However, awards for non-employee directors vest one year
from the grant date. The grant-date fair value, adjusted for
estimated forfeitures, is recognized as expense on a
straight-line basis over the substantive vesting period. Prior
to 2007, the company granted restricted stock to non-employee
directors, which also vested one year from the grant date.
The fair value of RSUs is determined based on the number of
shares granted and the quoted price of the companys common
stock on the date of grant.
72
The following table summarizes nonvested RSU activity for the
year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
grant-date
|
|
(share units in thousands)
|
|
Share units
|
|
|
fair value
|
|
|
|
|
Nonvested RSUs at January 1, 2009
|
|
|
655
|
|
|
$
|
50.19
|
|
Granted
|
|
|
112
|
|
|
|
52.51
|
|
Vested
|
|
|
(368
|
)
|
|
|
44.21
|
|
Forfeited
|
|
|
(32
|
)
|
|
|
55.58
|
|
|
|
Nonvested RSUs at December 31, 2009
|
|
|
367
|
|
|
$
|
56.41
|
|
|
|
As of December 31, 2009, $9 million of unrecognized
compensation cost related to RSUs is expected to be recognized
as expense over a weighted-average period of approximately
1.9 years. The weighted-average grant-date fair value of
RSUs in 2009, 2008 and 2007 was $52.51, $62.55 and $52.41,
respectively. The fair value of RSUs and restricted stock vested
in 2009, 2008 and 2007 was $19 million, $34 million
and $26 million, respectively.
Employee
Stock Purchase Plans
Nearly all employees are eligible to participate in the
companys employee stock purchase plans (ESPPs). Effective
January 1, 2008, the ESPPs were amended and restated as a
result of the companys periodic reassessment of the nature
and level of employee benefits.
For subscriptions beginning on or after January 1, 2008,
the employee purchase price is 85% of the closing market price
on the purchase date. For subscriptions that began on or after
April 1, 2005 through the end of 2007, the employee
purchase price was 95% of the closing market price on the
purchase date.
No compensation expense was recognized for subscriptions that
began on or after April 1, 2005 through the end of 2007.
The company is recognizing compensation expense relating to
subscriptions beginning on or after January 1, 2008.
During 2009, 2008 and 2007, the company issued approximately
875,000, 727,000 and 193,000 shares, respectively, under
employee stock purchase plans. The number of shares under
subscription at December 31, 2009 totaled approximately
1.4 million.
Realized
Excess Income Tax Benefits and the Impact on the Statement of
Cash Flows
Realized excess tax benefits associated with stock compensation
are presented in the consolidated statement of cash flows as an
outflow within the operating section and an inflow within the
financing section. Realized excess tax benefits from stock-based
compensation were $96 million in 2009 and $112 million
in 2008. No income tax benefits were realized from stock-based
compensation during 2007. The company uses the alternative
transition method for calculating the tax effects of stock-based
compensation, and applies the tax law ordering approach.
Stock
Repurchase Programs
As authorized by the board of directors, the company repurchases
its stock from time to time depending on the companys cash
flows, net debt level and market conditions. The company
purchased 23 million shares for $1.2 billion in 2009,
32 million shares for $2.0 billion in 2008 and
34 million shares for $1.9 billion in 2007. In March
2008, the board of directors authorized the repurchase of up to
$2.0 billion of the companys common stock. There is
no remaining availability under the March 2008 authorization as
of December 31, 2009. In July 2009, the board of directors
authorized the repurchase of up to an additional
$2.0 billion of the companys common stock. At
December 31, 2009, $1.95 billion remained available
under the July 2009 authorization.
73
Cash
Dividends
Beginning in 2007, the company converted from an annual to a
quarterly dividend and increased the dividend by 15% on an
annualized basis, to $0.1675 per share per quarter. In November
2007, the board of directors declared a quarterly dividend of
$0.2175 per share ($0.87 per share on an annualized basis),
representing an increase of 30% over the previous quarterly
rate. In November 2008, the board of directors declared a
quarterly dividend of $0.26 per share ($1.04 per share on an
annualized basis), representing an increase of 20% over the
previous quarterly rate. In November 2009, the board of
directors declared a quarterly dividend of $0.29 per share
($1.16 per share on an annualized basis), which was paid on
January 5, 2010 to shareholders of record as of
December 10, 2009. This dividend represented an increase of
12% over the previous quarterly rate of $0.26 per share.
NOTE 9
RETIREMENT AND OTHER BENEFIT PROGRAMS
The company sponsors a number of qualified and nonqualified
pension plans for eligible employees. The company also sponsors
certain unfunded contributory healthcare and life insurance
benefits for substantially all domestic retired employees.
As required by a new accounting standard, on December 31,
2008, the company changed the measurement date for its defined
benefit pension and other postemployment benefit (OPEB) plans
from September 30 to December 31, the companys fiscal
year-end. The company elected to use the
15-month
remeasurement approach, whereby a net-of-tax decrease to
retained earnings of $27 million was recognized on
December 31, 2008 equal to three-fifteenths of the net cost
determined for the period from September 30, 2007 to
December 31, 2008. The adjustment resulted in a net-of-tax
increase to AOCI of $12 million. The remaining
twelve-fifteenths of the net cost was recognized as expense in
2008 as part of the net periodic benefit cost.
74
Reconciliation
of Pension and OPEB Plan Obligations, Assets and Funded
Status
The benefit plan information in the table below pertains to all
of the companys pension and OPEB plans, both in the United
States and in other countries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
OPEB
|
|
as of and for the years ended December 31 (in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
3,475
|
|
|
$
|
3,307
|
|
|
$
|
477
|
|
|
$
|
479
|
|
Effect of eliminating early measurement date
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
3
|
|
Service cost
|
|
|
87
|
|
|
|
86
|
|
|
|
5
|
|
|
|
5
|
|
Interest cost
|
|
|
219
|
|
|
|
202
|
|
|
|
30
|
|
|
|
30
|
|
Participant contributions
|
|
|
8
|
|
|
|
8
|
|
|
|
13
|
|
|
|
12
|
|
Actuarial loss (gain)
|
|
|
268
|
|
|
|
53
|
|
|
|
24
|
|
|
|
(17
|
)
|
Benefit payments
|
|
|
(151
|
)
|
|
|
(153
|
)
|
|
|
(33
|
)
|
|
|
(35
|
)
|
Foreign exchange and other
|
|
|
59
|
|
|
|
(67
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
End of period
|
|
|
3,965
|
|
|
|
3,475
|
|
|
|
506
|
|
|
|
477
|
|
|
|
Fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
2,381
|
|
|
|
2,998
|
|
|
|
|
|
|
|
|
|
Effect of eliminating early measurement date
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
377
|
|
|
|
(744
|
)
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
170
|
|
|
|
287
|
|
|
|
20
|
|
|
|
23
|
|
Participant contributions
|
|
|
8
|
|
|
|
8
|
|
|
|
13
|
|
|
|
12
|
|
Benefit payments
|
|
|
(151
|
)
|
|
|
(153
|
)
|
|
|
(33
|
)
|
|
|
(35
|
)
|
Foreign exchange and other
|
|
|
37
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
2,822
|
|
|
|
2,381
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at December 31
|
|
$
|
(1,143
|
)
|
|
$
|
(1,094
|
)
|
|
$
|
(506
|
)
|
|
$
|
(477
|
)
|
|
|
Amounts recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent asset
|
|
$
|
20
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
|
|
Current liability
|
|
|
(16
|
)
|
|
|
(15
|
)
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Noncurrent liability
|
|
|
(1,147
|
)
|
|
|
(1,086
|
)
|
|
|
(481
|
)
|
|
|
(452
|
)
|
|
|
Net liability recognized at December 31
|
|
$
|
(1,143
|
)
|
|
$
|
(1,094
|
)
|
|
$
|
(506
|
)
|
|
$
|
(477
|
)
|
|
|
Accumulated
Benefit Obligation Information
The pension obligation information in the table above represents
the projected benefit obligation (PBO). The PBO incorporates
assumptions relating to future compensation levels. The
accumulated benefit obligation (ABO) is the same as the PBO
except that it includes no assumptions relating to future
compensation levels. The ABO for all of the companys
pension plans was $3.6 billion and $3.0 billion at the
2009 and 2008 measurement dates, respectively.
The information in the funded status table above represents the
totals for all of the companys pension plans. The
following is information relating to the individual plans in the
funded status table above that have an ABO in excess of plan
assets.
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
ABO
|
|
$
|
3,392
|
|
|
$
|
3,017
|
|
Fair value of plan assets
|
|
|
2,520
|
|
|
|
2,168
|
|
|
|
75
The following is information relating to the individual plans in
the funded status table above that have a PBO in excess of plan
assets (many of which also have an ABO in excess of assets, and
are therefore also included in the table directly above).