UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
| Delaware | 36-0781620 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| One Baxter Parkway, Deerfield, Illinois | 60015-4633 | |
| (Address of principal executive offices) | (Zip Code) | |
(847) 948-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares of the registrant’s Common Stock, par value $1.00 per share,
outstanding as of April 30, 2004 was 612,918,400 shares.
FORM 10-Q
For the quarterly period ended March 31, 2004
TABLE OF CONTENTS
| Page Number | ||||
| Item 1. |
||||
| 2 | ||||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
14 | ||
| Item 3. |
24 | |||
| Item 4. |
25 | |||
| 26 | ||||
| 27 | ||||
| Item 1. |
28 | |||
| Item 2(e). |
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
33 | ||
| Item 6. |
34 | |||
| 35 | ||||
| 36 | ||||
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
(in millions, except per share data)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net sales |
$ | 2,209 | $ | 1,997 | ||||
| Costs and expenses |
||||||||
| Cost of goods sold |
1,315 | 1,117 | ||||||
| Marketing and administrative expenses |
464 | 413 | ||||||
| Research and development expenses |
136 | 136 | ||||||
| Net interest expense |
21 | 19 | ||||||
| Other expense, net |
21 | 26 | ||||||
| Total costs and expenses |
1,957 | 1,711 | ||||||
| Income from continuing operations before income taxes |
252 | 286 | ||||||
| Income tax expense |
63 | 69 | ||||||
| Income from continuing operations |
189 | 217 | ||||||
| Discontinued operations |
(11 | ) | (1 | ) | ||||
| Net income |
$ | 178 | $ | 216 | ||||
| Earnings per basic common share |
||||||||
| Continuing operations |
$ | 0.31 | $ | 0.36 | ||||
| Discontinued operations |
(0.02 | ) | — | |||||
| Net income |
$ | 0.29 | $ | 0.36 | ||||
| Earnings per diluted common share |
||||||||
| Continuing operations |
$ | 0.31 | $ | 0.36 | ||||
| Discontinued operations |
(0.02 | ) | (0.01 | ) | ||||
| Net income |
$ | 0.29 | $ | 0.35 | ||||
| Weighted average number of common shares outstanding |
||||||||
| Basic |
612 | 598 | ||||||
| Diluted |
616 | 611 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(in millions, except shares)
| March 31, 2004 |
December 31, 2003 |
|||||
| Current assets |
||||||
| Cash and equivalents |
$ 648 | $ 927 | ||||
| Accounts and other current receivables |
2,097 | 1,979 | ||||
| Inventories |
2,166 | 2,101 | ||||
| Short-term deferred income taxes |
209 | 140 | ||||
| Prepaid expenses and other |
280 | 290 | ||||
| Total current assets |
5,400 | 5,437 | ||||
| Property, plant and equipment | ||||||
| At cost |
7,815 | 7,781 | ||||
| Accumulated depreciation and amortization |
(3,261 | ) | (3,196 | ) | ||
| Net property, plant and equipment |
4,554 | 4,585 | ||||
| Other assets | ||||||
| Goodwill |
1,648 | 1,648 | ||||
| Other intangible assets |
605 | 611 | ||||
| Other |
1,523 | 1,498 | ||||
| Total other assets |
3,776 | 3,757 | ||||
| Total assets | $13,730 | $13,779 | ||||
| Current liabilities | ||||||
| Short-term debt |
$177 | $153 | ||||
| Accounts payable and accrued liabilities |
2,532 | 3,105 | ||||
| Income taxes payable |
567 | 561 | ||||
| Total current liabilities |
3,276 | 3,819 | ||||
| Long-term debt and lease obligations | 4,630 | 4,421 | ||||
| Other long-term liabilities | 2,289 | 2,216 | ||||
| Commitments and contingencies | ||||||
| Stockholders’ equity | ||||||
| Common stock, $1 par value, authorized 2,000,000,000 shares, issued 648,574,109 shares in 2004 and 2003 |
649 | 649 | ||||
| Common stock in treasury, at cost, 36,110,243 shares in 2004 and 37,273,424 shares in 2003 |
(1,799 | ) | (1,863 | ) | ||
| Additional contributed capital |
3,728 | 3,773 | ||||
| Retained earnings |
2,372 | 2,194 | ||||
| Accumulated other comprehensive loss |
(1,415 | ) | (1,430 | ) | ||
| Total stockholders’ equity |
3,535 | 3,323 | ||||
| Total liabilities and stockholders’ equity | $13,730 | $13,779 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
| Three months ended March 31, |
||||||||
| (brackets denote cash outflows) | 2004 |
2003 |
||||||
| Cash flows from operations | ||||||||
| Income from continuing operations |
$ | 189 | $ | 217 | ||||
| Adjustments |
||||||||
| Depreciation and amortization |
148 | 128 | ||||||
| Deferred income taxes |
10 | (70 | ) | |||||
| Other |
23 | 8 | ||||||
| Changes in balance sheet items |
||||||||
| Accounts receivable |
(99 | ) | (56 | ) | ||||
| Inventories |
(68 | ) | (135 | ) | ||||
| Accounts payable and accrued liabilities |
(196 | ) | (78 | ) | ||||
| Restructuring payments |
(37 | ) | (7 | ) | ||||
| Contributions to pension trust |
(54 | ) | — | |||||
| Other |
30 | (30 | ) | |||||
| Cash flows from continuing operations |
(54 | ) | (23 | ) | ||||
| Cash flows from discontinued operations |
(1 | ) | (6 | ) | ||||
| Cash flows from operations |
(55 | ) | (29 | ) | ||||
| Cash flows from investing activities | ||||||||
| Capital expenditures |
(89 | ) | (174 | ) | ||||
| Acquisitions (net of cash received) and investments in and advances to affiliates |
(14 | ) | (71 | ) | ||||
| Divestitures and other |
26 | — | ||||||
| Cash flows from investing activities |
(77 | ) | (245 | ) | ||||
| Cash flows from financing activities | ||||||||
| Issuances of debt |
87 | 610 | ||||||
| Redemptions of debt and lease obligations |
(33 | ) | (119 | ) | ||||
| Increase in debt with maturities of three months or less, net |
137 | 527 | ||||||
| Common stock cash dividends |
(361 | ) | (346 | ) | ||||
| Proceeds from stock issued under employee benefit plans |
31 | 16 | ||||||
| Purchases of treasury stock |
(11 | ) | (153 | ) | ||||
| Cash flows from financing activities |
(150 | ) | 535 | |||||
| Effect of currency exchange rate changes on cash and equivalents |
3 | (22 | ) | |||||
| Increase (decrease) in cash and equivalents |
(279 | ) | 239 | |||||
| Cash and equivalents at beginning of period |
927 | 1,169 | ||||||
| Cash and equivalents at end of period |
$ | 648 | $ | 1,408 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Baxter International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (the company or Baxter) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the company’s 2003 Annual Report to Stockholders (2003 Annual Report).
In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the interim periods. All such adjustments, unless otherwise noted herein, are of a normal, recurring nature. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year.
Certain reclassifications have been made to conform the 2003 financial statements and notes to the 2004 presentation.
Stock compensation plans
The company has a number of stock-based employee compensation plans, including stock option, stock purchase and restricted stock plans. The company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for these plans. In accordance with this intrinsic value method, no compensation expense is recognized for the company’s fixed stock option plans and employee stock purchase plans. The following table illustrates the effect on net income and earnings per share (EPS) if the company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to all stock-based employee compensation.
| Three months ended March 31, | ||||||
| (in millions, except per share data) |
2004 |
2003 | ||||
| Net income, as reported |
$ | 178 | $ | 216 | ||
| Add: Stock-based employee compensation expense included in reported net income, net of tax |
— | — | ||||
| Deduct: Total stock-based employee compensation expense determined under the fair value method, net of tax |
28 | 37 | ||||
| Pro forma net income |
$ | 150 | $ | 179 | ||
| Earnings per basic share |
||||||
| As reported |
$ | 0.29 | $ | 0.36 | ||
| Pro forma |
$ | 0.25 | $ | 0.30 | ||
| Earnings per diluted share |
||||||
| As reported |
$ | 0.29 | $ | 0.35 | ||
| Pro forma |
$ | 0.24 | $ | 0.29 | ||
5
Changes in accounting principles
Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) was adopted July 1, 2003. Refer to the 2003 Annual Report for further information. In December 2003 the FASB revised and reissued FIN 46 (FIN 46-R). The provisions of FIN 46-R were required to be adopted no later than March 31, 2004. Baxter adopted FIN 46-R on March 31, 2004, and adoption of the revised standard did not have a material impact on the company’s consolidated financial statements.
2. SUPPLEMENTAL FINANCIAL INFORMATION
Net interest expense
Net interest expense consisted of the following.
| Three months ended March 31, |
||||||
| (in millions) |
2004 |
2003 |
||||
| Interest expense |
$ 28 | $ 30 | ||||
| Interest income |
(7 | ) | (10 | ) | ||
| Interest expense, net |
$ 21 | $ 20 | ||||
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