SECURITIES AND EXCHANGE COMMISSION Delaware (I.R.S. Employer Noþ xþ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934JuneSeptember 30, 2005¨o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Delaware 36-078162036-0781620 (State or other jurisdiction of
incorporation or organization)
Identification No.)One Baxter Parkway, Deerfield, Illinois 60015-4633 (Address of principal executive offices) (Zip Code) 15 (d)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.xþ Noo¨xþ Noo¨oJuly 29,October 31, 2005 was 622,507,876623,621,610 shares.
FORM 10-Q
For the quarterly period ended JuneSeptember 30, 2005
TABLE OF CONTENTS
Net sales Cost and expenses Cost of goods sold Marketing and administrative expenses Research and development expenses Restructuring Infusion pump charge Net interest expense Other expense, net Total costs and expenses Income (loss) from continuing operations before income taxes Income tax expense (benefit) Income (loss) from continuing operations Discontinued operations Net income (loss) Earnings (loss) per basic common share Continuing operations Discontinued operations Net income (loss) Earnings (loss) per diluted common share Continuing operations Discontinued operations Net income (loss) Weighted average number of common shares outstanding Basic Diluted 2 and Subsidiaries Three months
ended
June 30, Six months
ended
June 30, 2005 2004 2005 2004 $ 2,577 $ 2,379 $ 4,960 $ 4,588 �� 1,464 1,440 2,878 2,756 537 532 1,020 998 133 129 266 265 (104 ) 543 (104 ) 543 77 — 77 — 33 25 64 46 25 42 49 63 2,165 2,711 4,250 4,671 412 (332 ) 710 (83 ) 88 (163 ) 162 (101 ) 324 (169 ) 548 18 (2 ) (1 ) — (12 ) $ 322 $ (170 ) $ 548 $ 6 $ 0.52 $ (0.28 ) $ 0.88 $ 0.03 — — — (0.02 ) $ 0.52 $ (0.28 ) $ 0.88 $ 0.01 $ 0.51 $ (0.28 ) $ 0.88 $ 0.03 — — — (0.02 ) $ 0.51 $ (0.28 ) $ 0.88 $ 0.01 621 613 620 613 626 613 624 617 Three months ended Nine months ended September 30, September 30, 2005 2004 2005 2004 Net sales $ 2,398 $ 2,320 $ 7,358 $ 6,908 Cost and expenses Cost of goods sold 1,388 1,357 4,266 4,113 Marketing and administrative expenses 491 462 1,511 1,460 Research and development expenses 133 124 399 389 Restructuring charge, net (5 ) — (109 ) 543 Infusion pump charge — — 77 — Net interest expense 31 20 95 66 Other expense, net 10 11 59 74 Total costs and expenses 2,048 1,974 6,298 6,645 Income from continuing operations before income taxes 350 346 1,060 263 Income tax expense (benefit) 234 87 396 (14 ) Income from continuing operations 116 259 664 277 Discontinued operations — 17 — 5 Net income $ 116 $ 276 $ 664 $ 282 Earnings per basic common share Continuing operations $ 0.19 $ 0.42 $ 1.07 $ 0.45 Discontinued operations — 0.03 — 0.01 Net income $ 0.19 $ 0.45 $ 1.07 $ 0.46 Earnings per diluted common share Continuing operations $ 0.18 $ 0.42 $ 1.06 $ 0.45 Discontinued operations — 0.03 — 0.01 Net income $ 0.18 $ 0.45 $ 1.06 $ 0.46 Weighted average number of common shares outstanding Basic 622 615 621 613 Diluted 632 619 627 617
June 30, 2005 | December 31, 2004 | ||||||
Current assets | |||||||
Cash and equivalents | $ | 1,428 | $ 1,109 | ||||
Accounts and other current receivables | 1,959 | 2,091 | |||||
Inventories | 1,944 | 2,135 | |||||
Short-term deferred income taxes | 235 | 297 | |||||
Prepaid expenses and other | 273 | 387 | |||||
Total current assets | 5,839 | 6,019 | |||||
Property, plant and equipment | |||||||
At cost | 7,831 | 7,991 | |||||
Accumulated depreciation and amortization | (3,674 | ) | (3,622 | ) | |||
Net property, plant and equipment | 4,157 | 4,369 | |||||
Other assets | |||||||
Goodwill | 1,560 | 1,648 | |||||
Other intangible assets | 502 | 547 | |||||
Other | 1,568 | 1,564 | |||||
Total other assets | 3,630 | 3,759 | |||||
Total assets | $ | 13,626 | $14,147 | ||||
Current liabilities | |||||||
Short-term debt | $ | 500 | $ 207 | ||||
Current maturities of long-term debt and lease obligations | 950 | 154 | |||||
Accounts payable and accrued liabilities | 2,501 | 3,531 | |||||
Income taxes payable | 410 | 394 | |||||
Total current liabilities | 4,361 | 4,286 | |||||
Long-term debt and lease obligations | 3,039 | 3,933 | |||||
Other long-term liabilities | 2,016 | 2,223 | |||||
Commitments and contingencies | |||||||
Stockholders’ equity | |||||||
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 648,414,492 shares in 2005 and 2004 | 648 | 648 | |||||
Common stock in treasury, at cost, 26,856,182 shares in 2005 and 30,489,183 shares in 2004 | (1,323 | ) | (1,511 | ) | |||
Additional contributed capital | 3,514 | 3,597 | |||||
Retained earnings | 2,807 | 2,259 | |||||
Accumulated other comprehensive loss | (1,436 | ) | (1,288 | ) | |||
Total stockholders’ equity | 4,210 | 3,705 | |||||
Total liabilities and stockholders’ equity | $ | 13,626 | $14,147 | ||||
September 30, | December 31, | |||||||||
2005 | 2004 | |||||||||
Current assets | Cash and equivalents | $ | 1,712 | $ | 1,109 | |||||
Accounts and other current receivables | 1,863 | 2,091 | ||||||||
Inventories | 1,948 | 2,135 | ||||||||
Short-term deferred income taxes | 272 | 297 | ||||||||
Prepaid expenses and other | 284 | 387 | ||||||||
Total current assets | 6,079 | 6,019 | ||||||||
Property, plant and equipment | At cost | 7,854 | 7,991 | |||||||
Accumulated depreciation and amortization | (3,740 | ) | (3,622 | ) | ||||||
Net property, plant and equipment | 4,114 | 4,369 | ||||||||
Other assets | Goodwill | 1,560 | 1,648 | |||||||
Other intangible assets | 499 | 547 | ||||||||
Other | 1,531 | 1,564 | ||||||||
Total other assets | 3,590 | 3,759 | ||||||||
Total assets | $ | 13,783 | $ | 14,147 | ||||||
Current liabilities | Short-term debt | $ | 423 | $ | 207 | |||||
Current maturities of long-term debt and obligations | 931 | 154 | ||||||||
Accounts payable and accrued liabilities | 2,415 | 3,531 | ||||||||
Income taxes payable | 502 | 394 | ||||||||
Total current liabilities | 4,271 | 4,286 | ||||||||
Long-term debt and lease obligations | 3,008 | 3,933 | ||||||||
Other long-term liabilities | 2,128 | 2,223 | ||||||||
Commitments and contingencies | ||||||||||
Stockholders’ equity | Common stock, $1 par value, authorized 2,000,000,000 shares, issued 648,414,492 shares in 2005 and 2004 | 648 | 648 | |||||||
Common stock in treasury, at cost, 25,049,482 shares in 2005 and 30,489,183 shares in 2004 | (1,224 | ) | (1,511 | ) | ||||||
Additional contributed capital | 3,472 | 3,597 | ||||||||
Retained earnings | 2,923 | 2,259 | ||||||||
Accumulated other comprehensive loss | (1,443 | ) | (1,288 | ) | ||||||
Total stockholders’ equity | 4,376 | 3,705 | ||||||||
Total liabilities and stockholders’ equity | $ | 13,783 | $ | 14,147 | ||||||
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Cash flows from operations Income from continuing operations Adjustments Depreciation and amortization Deferred income taxes Restructuring Infusion pump charge Other Changes in balance sheet items Accounts receivable Inventories Accounts payable and accrued liabilities Restructuring payments Other Cash flows from continuing operations Cash flows from discontinued operations Cash flows from operations Cash flows from investing activities Capital expenditures Acquisitions (net of cash received) and investments in and advances to affiliates Divestitures and other Cash flows from investing activities Cash flows from financing activities Issuances of debt Payments of obligations Increase in debt with maturities of three months or less, net Common stock cash dividends Proceeds from stock issued under employee benefit plans Purchases of treasury stock Cash flows from financing activities Effect of currency exchange rate changes on cash and equivalents Increase (decrease) in cash and equivalents Cash and equivalents at beginning of period Cash and equivalents at end of period 4 and Subsidiaries Six months
ended
June 30, 2005 2004 $ 548 $ 18 292 295 119 (203 ) (104 ) 543 77 — 33 147 20 (162 ) 90 (75 ) (325 ) (229 ) (73 ) (62 ) 102 (20 ) 779 252 (1 ) 15 778 267 (163 ) (229 ) — (20 ) 49 31 (114 ) (218 ) 41 333 (443 ) (337 ) 312 81 (359 ) (361 ) 90 75 — (18 ) (359 ) (227 ) 14 13 319 (165 ) 1,109 925 $ 1,428 $ 760 Nine months ended September 30, 2005 2004 Cash flows from operations Income from continuing operations $ 664 $ 277 Adjustments Depreciation and amortization 437 445 Deferred income taxes 199 (238 ) Restructuring, hemodialysis instrument and infusion pump charges, net (4 ) 543 Other 57 151 Changes in balance sheet items Accounts and other current receivables 118 (155 ) Inventories 68 (44 ) Accounts payable and accrued liabilities (273 ) (270 ) Restructuring payments (95 ) (136 ) Other 144 (44 ) Cash flows from continuing operations 1,315 529 Cash flows from discontinued operations (1 ) 17 Cash flows from operations 1,314 546 Cash flows from investing activities Capital expenditures (279 ) (363 ) Acquisitions and investments in and advances to affiliates (14 ) (20 ) Divestitures and other 49 31 Cash flows from investing activities (244 ) (352 ) Cash flows from financing activities Issuances of debt 52 519 Payments of obligations (561 ) (596 ) Increase in debt with maturities of three months or less, net 265 64 Common stock cash dividends (359 ) (361 ) Proceeds from stock issued under employee benefit plans 135 108 Purchases of treasury stock — (18 ) Cash flows from financing activities (468 ) (284 ) Effect of currency exchange rate changes on cash and equivalents 1 (13 ) Increase (decrease) in cash and equivalents 603 (103 ) Cash and equivalents at beginning of period 1,109 925 Cash and equivalents at end of period $ 1,712 $ 822
5
Six months June 30, (in millions, except per share data) Net income (loss), as reported 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 Pro forma net income (loss) Earnings (loss) per basic share As reported Pro forma Earnings (loss) per diluted share As reported Pro forma Three months
ended
June 30,
ended 2005 2004 2005 2004 $ 322 $ (170 ) $ 548 $ 6 2 12 2 12 (18 ) (32 ) (30 ) (60 ) $ 306 $ (190 ) $ 520 $ (42 ) $ 0.52 $ (0.28 ) $ 0.88 $ 0.01 $ 0.49 $ (0.31 ) $ 0.84 $ (0.07 ) $ 0.51 $ (0.28 ) $ 0.88 $ 0.01 $ 0.49 $ (0.31 ) $ 0.83 $ (0.07 )
The effect of adopting the new standard on earnings in future periods is dependent upon a number of variables, including the number of stock options and other stock awards granted in the future, the terms of those awards, and their fair values. 6 Three months ended Nine months ended September 30, September 30, (in millions, except per share data) 2005 2004 2005 2004 Net income, as reported $ 116 $ 276 $ 664 $ 282 Add: Stock-based employee compensation expense included in reported net income, net of tax 2 1 4 13 Deduct: Total stock-based employee compensation expense determined under the fair value method, net of tax (15 ) (19 ) (45 ) (79 ) Pro forma net income $ 103 $ 258 $ 623 $ 216 Earnings per basic share As reported $ 0.19 $ 0.45 $ 1.07 $ 0.46 Pro forma $ 0.16 $ 0.42 $ 1.00 $ 0.35 Earnings per diluted share As reported $ 0.18 $ 0.45 $ 1.06 $ 0.46 Pro forma $ 0.16 $ 0.42 $ 0.99 $ 0.35 2006. The2006, and the new rules provide for one of two transition elections, either prospective application or restatement (back to January 1, 1995). The company plans to adopt SFAS No. 123-R on January 1, 2006 and has not yet decided whichplans to use the prospective transition option the company will use.method. Management is in the process of analyzing the provisions of SFAS No. 123-R and assessing the impact on the company’s future consolidated financial statements.
(in millions) Pension benefits Service cost Interest cost Expected return on plan assets Amortization of net loss, prior service cost and transition obligation Net pension plan expense OPEB Service cost Interest cost Amortization of net loss and prior service cost Net OPEB plan expense Three months
ended
June 30, Six months
ended
June 30, 2005 2004 2005 2004 $ 20 $ 20 $ 41 $ 40 40 37 81 76 (42 ) (46 ) (85 ) (94 ) 21 15 42 31 $ 39 $ 26 $ 79 $ 53 $ 1 $ 2 $ 3 $ 4 7 7 15 15 1 3 4 5 $ 9 $ 12 $ 22 $ 24
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Pension benefits | ||||||||||||||||
Service cost | $ | 20 | $ | 19 | $ | 61 | $ | 59 | ||||||||
Interest cost | 40 | 38 | 121 | 114 | ||||||||||||
Expected return on plan assets | (43 | ) | (47 | ) | (128 | ) | (141 | ) | ||||||||
Amortization of net loss, prior service cost and transition obligation | 21 | 16 | 63 | 47 | ||||||||||||
Net pension plan expense | $ | 38 | $ | 26 | $ | 117 | $ | 79 | ||||||||
OPEB | ||||||||||||||||
Service cost | $ | 2 | $ | 3 | $ | 5 | $ | 7 | ||||||||
Interest cost | 6 | 7 | 21 | 22 | ||||||||||||
Amortization of net loss and prior service cost | 1 | 2 | 5 | 7 | ||||||||||||
Net OPEB plan expense | $ | 9 | $ | 12 | $ | 31 | $ | 36 | ||||||||
million.
7
Three months ended June 30, | Six months ended June 30, | |||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||
Interest expense, net of capitalized interest | $ 43 | $ 30 | $ 84 | $ 58 | ||||||||
Interest income | (10 | ) | (5 | ) | (20 | ) | (12 | ) | ||||
Net interest expense | $ 33 | $ 25 | $ 64 | $ 46 | ||||||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Interest expense, net of capitalized interest | $ | 43 | $ | 29 | $ | 127 | $ | 87 | ||||||||
Interest income | (12 | ) | (9 | ) | (32 | ) | (21 | ) | ||||||||
Net interest expense | $ | 31 | $ | 20 | $ | 95 | $ | 66 | ||||||||
Plan).
8
Three months ended June 30, | Six months ended June 30, | |||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||
Basic shares | 621 | 613 | 620 | 613 | ||||
Effect of dilutive securities | ||||||||
Employee stock options | 4 | — | 4 | 3 | ||||
Other | 1 | — | — | 1 | ||||
Diluted shares | 626 | 613 | 624 | 617 | ||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Basic shares | 622 | 615 | 621 | 613 | ||||||||||||
Effect of dilutive securities | ||||||||||||||||
Employee stock options | 6 | 3 | 5 | 3 | ||||||||||||
Equity units and other | 4 | 1 | 1 | 1 | ||||||||||||
Diluted shares | 632 | 619 | 627 | 617 | ||||||||||||
(in millions) | June 30, 2005 | December 31, 2004 | |||
Raw Materials | $ | 419 | $ 456 | ||
Work in process | 624 | 754 | |||
Finished products | 901 | 925 | |||
Total inventories | $ | 1,944 | $2,135 | ||
September 30, | December 31, | |||||||
(in millions) | 2005 | 2004 | ||||||
Raw materials | $ | 432 | $ | 456 | ||||
Work in process | 624 | 754 | ||||||
Finished products | 892 | 925 | ||||||
Total inventories | $ | 1,948 | $ | 2,135 | ||||
Developed | Manufacturing, | |||||||||||||||
(in millions, except amortization | technology, | distribution and | ||||||||||||||
period data) | including patents | other contracts | Other | Total | ||||||||||||
September 30, 2005 | ||||||||||||||||
Gross intangible assets | $ | 782 | $ | 29 | $ | 81 | $ | 892 | ||||||||
Accumulated amortization | 357 | 15 | 28 | 400 | ||||||||||||
Net intangible assets | $ | 425 | $ | 14 | $ | 53 | $ | 492 | ||||||||
Weighted-average amortization period (in years) | 14 | 8 | 19 | 15 | ||||||||||||
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(in millions, except amortization period data) | Developed technology, including patents | Manufacturing, distribution and other contracts | Other | Total | ||||||
June 30, 2005 | ||||||||||
Gross intangible assets | $778 | $29 | $ | 75 | $ | 882 | ||||
Accumulated amortization | 346 | 14 | 27 | 387 | ||||||
Net intangible assets | $432 | $15 | $ | 48 | $ | 495 | ||||
Weighted-average amortization period (in years) | 14 | 8 | 20 | 15 | ||||||
December 31, 2004 | ||||||||||
Gross intangible assets | $804 | $28 | $ | 80 | $ | 912 | ||||
Accumulated amortization | 333 | 14 | 25 | 372 | ||||||
Net intangible assets | $471 | $14 | $ | 55 | $ | 540 | ||||
Weighted-average amortization period (in years) | 14 | 8 | 20 | 15 | ||||||
December 31, 2004 | ||||||||||||||||
Gross intangible assets | $ | 804 | $ | 28 | $ | 80 | $ | 912 | ||||||||
Accumulated amortization | 333 | 14 | 25 | 372 | ||||||||||||
Net intangible assets | $ | 471 | $ | 14 | $ | 55 | $ | 540 | ||||||||
Weighted-average amortization period (in years) | 14 | 8 | 20 | 15 | ||||||||||||
As of and for the June 30, | As of and for the six months June 30, | |||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||
Beginning of period | $ 57 | $ 50 | $ 57 | $ 53 | ||||||||
New warranties and adjustments to existing warranties | 5 | 7 | 12 | 10 | ||||||||
Payments in cash or in kind | (5 | ) | (5 | ) | (12 | ) | (11 | ) | ||||
End of period | $ 57 | $ 52 | $ 57 | $ 52 | ||||||||
As of and for the | As of and for the | |||||||||||||||
three months ended | nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Beginning of period | $ | 57 | $ | 52 | $ | 57 | $ | 53 | ||||||||
New warranties and adjustments to existing warranties | (2 | ) | 6 | 10 | 16 | |||||||||||
Payments in cash or in kind | (6 | ) | (6 | ) | (18 | ) | (17 | ) | ||||||||
End of period | $ | 49 | $ | 52 | $ | 49 | $ | 52 | ||||||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Sold receivables at beginning of period | $ | 485 | $ | 547 | $ | 594 | $ | 742 | ||||||||
Proceeds from sales of receivables | 348 | 307 | 1,086 | 1,000 | ||||||||||||
Cash collections (remitted to the owners of the receivables) | (360 | ) | (391 | ) | (1,184 | ) | (1,274 | ) | ||||||||
Effect of currency exchange rate changes | (6 | ) | (1 | ) | (29 | ) | (6 | ) | ||||||||
Sold receivables at end of period | $ | 467 | $ | 462 | $ | 467 | $ | 462 | ||||||||
10
Three months June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Sold receivables at beginning of period | $ | 539 | $ | 704 | $ | 594 | $ | 742 | ||||||||
Proceeds from sales of receivables | 382 | 318 | 738 | 693 | ||||||||||||
Cash collections (remitted to the owners of the receivables) | (416 | ) | (465 | ) | (824 | ) | (883 | ) | ||||||||
Effect of currency exchange rate changes | (20 | ) | (10 | ) | (23 | ) | (5 | ) | ||||||||
Sold receivables at end of period | $ | 485 | $ | 547 | $ | 485 | $ | 547 | ||||||||
No provision has been made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as these earnings are currently deemed to be permanently invested.
Total proceeds from the repatriation will be reinvested in the company’s domestic operations in accordance with the legislation. Management plans to use the proceeds to reduce the company’s debt, contribute to its pension plans, and fund capital investments.
11
varying rates, depending on the particular tax jurisdictions. The effective tax rate for the three- and nine-month periods ended September 30, 2005 was also impacted by the $163 million tax charge related to the planned repatriation of foreign earnings.
$20 million and $5 million, respectively.
estimates and completion of planned actions.
12
estimates and completion of planned actions.
(in millions) | Employee- related costs | Contractual and other costs | Total | ||||||
2003 Restructuring Charge | |||||||||
Charge | $160 | $ 49 | $209 | ||||||
Utilization | (63 | ) | (6 | ) | (69 | ) | |||
Reserve at December 31, 2003 | 97 | 43 | 140 | ||||||
Utilization | (74 | ) | (17 | ) | (91 | ) | |||
Reserve at December 31, 2004 | 23 | 26 | 49 | ||||||
Utilization | (5 | ) | (1 | ) | (6 | ) | |||
Reserve at March 31, 2005 | 18 | 25 | 43 | ||||||
Utilization | (5 | ) | — | (5 | ) | ||||
Adjustments | (8 | ) | (20 | ) | (28 | ) | |||
Reserve at June 30, 2005 | $ 5 | $ 5 | $10 | ||||||
2004 Restructuring Charge | |||||||||
Charge | $212 | $135 | $347 | ||||||
Utilization | (60 | ) | (32 | ) | (92 | ) | |||
Reserve at December 31, 2004 | 152 | 103 | 255 | ||||||
Utilization | (26 | ) | (11 | ) | (37 | ) | |||
Reserve at March 31, 2005 | 126 | 92 | 218 | ||||||
Utilization | (19 | ) | (6 | ) | (25 | ) | |||
Adjustments | (40 | ) | (16 | ) | (56 | ) | |||
Reserve at June 30, 2005 | $ 67 | $ 70 | $137 | ||||||
Employee- | Contractual | |||||||||||
related | and other | |||||||||||
(in millions) | costs | costs | Total | |||||||||
2003 Restructuring Charge | ||||||||||||
Charge | $ | 160 | $ | 49 | $ | 209 | ||||||
Utilization | (63 | ) | (6 | ) | (69 | ) | ||||||
Reserve at December 31, 2003 | 97 | 43 | 140 | |||||||||
Utilization | (74 | ) | (17 | ) | (91 | ) | ||||||
Reserve at December 31, 2004 | 23 | 26 | 49 | |||||||||
Utilization | (5 | ) | (1 | ) | (6 | ) | ||||||
Reserve at March 31, 2005 | 18 | 25 | 43 | |||||||||
Utilization | (5 | ) | — | (5 | ) | |||||||
Adjustments | (8 | ) | (20 | ) | (28 | ) | ||||||
Reserve at June 30, 2005 | 5 | 5 | 10 | |||||||||
Utilization | (1 | ) | (2 | ) | (3 | ) | ||||||
Reserve at September 30, 2005 | $ | 4 | $ | 3 | $ | 7 | ||||||
2004 Restructuring Charge | ||||||||||||
Charge | $ | 212 | $ | 135 | $ | 347 | ||||||
Utilization | (60 | ) | (32 | ) | (92 | ) | ||||||
Reserve at December 31, 2004 | 152 | 103 | 255 | |||||||||
Utilization | (26 | ) | (11 | ) | (37 | ) | ||||||
Reserve at March 31, 2005 | 126 | 92 | 218 | |||||||||
Utilization | (19 | ) | (6 | ) | (25 | ) | ||||||
Adjustments | (40 | ) | (16 | ) | (56 | ) | ||||||
Reserve at June 30, 2005 | 67 | 70 | 137 | |||||||||
Utilization | (16 | ) | (4 | ) | (20 | ) | ||||||
Adjustments | — | (5 | ) | (5 | ) | |||||||
Reserve at September 30, 2005 | $ | 51 | $ | 61 | $ | 112 | ||||||
2006 and beyond for certain long-term leases.
13
In the third quarter of 2005, the company recorded an additional $5 million pre-tax benefit relating to the adjustment of restructuring reserves, as the implementation of the program progressed, actions were completed, and management refined its estimates of remaining spending.
Additional adjustments may be recorded in the future as the restructuring program is completed.
The company also decided to hold shipments of new SYNDEO PCA syringe pumps due to design issues associated with those pumps. On October 13, 2005, the company further announced that the FDA had seized approximately 6,000 Baxter-owned COLLEAGUE pumps, as well as 850 SYNDEO PCA Syringe Pumps, which were on hold at two facilities in Northern Illinois. This action did not affect customer-owned pumps, of which there are approximately 250,000 COLLEAGUE pumps and 5,000 SYNDEO pumps in use worldwide. However, the company is unable to provide loaner pumps to customers who have removed their pumps from service in connection with the previously communicated field corrective actions, or which may have been removed for other reasons.
14
15
16
5. LEGAL PROCEEDINGS
17
“Part II - Item 1. Legal Proceedings”
private parties on behalf of various purported classes of purchasers of Medicare and Medicaid eligible drugs, as well as by state attorneys general. A number of these cases were consolidated in the U.S.D.C. for the District of Massachusetts for pretrial case management under Multi District Litigation rules. Others are pending in state courts in Alabama, Arizona, Montana, Nevada, Texas, and Wisconsin. The lawsuits against Baxter include eight lawsuits brought by state attorneys general, which seek unspecified damages, injunctive relief, civil penalties, disgorgement, forfeiture and restitution. Various state and federal agencies are conducting civil investigations into the marketing and pricing practices of Baxter and others with respect to Medicare and Medicaid reimbursement. These investigations may result in additional cases being filed by various state attorneys general.
18
Three months June 30, | Six months June 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Net sales | ||||||||||||||||
Medication Delivery | $ | 1,083 | $ | 1,006 | $ | 2,061 | $ | 1,932 | ||||||||
BioScience | 990 | 893 | 1,892 | 1,703 | ||||||||||||
Renal | 504 | 480 | 1,007 | 953 | ||||||||||||
Total | $ | 2,577 | $ | 2,379 | $ | 4,960 | $ | 4,588 | ||||||||
Pre-tax income from continuing operations | ||||||||||||||||
Medication Delivery | $ | 120 | $ | 182 | $ | 277 | $ | 333 | ||||||||
BioScience | 265 | 137 | 469 | 259 | ||||||||||||
Renal | 94 | 93 | 191 | 172 | ||||||||||||
Other | (67 | ) | (744 | ) | (227 | ) | (847 | ) | ||||||||
Total | $ | 412 | $ | (332 | ) | $ | 710 | $ | (83 | ) | ||||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Net sales | ||||||||||||||||
Medication Delivery | $ | 957 | $ | 986 | $ | 3,018 | $ | 2,918 | ||||||||
BioScience | 950 | 849 | 2,842 | 2,552 | ||||||||||||
Renal | 491 | 485 | 1,498 | 1,438 | ||||||||||||
Total | $ | 2,398 | $ | 2,320 | $ | 7,358 | $ | 6,908 | ||||||||
Pre-tax income from continuing operations | ||||||||||||||||
Medication Delivery | $ | 168 | $ | 191 | $ | 445 | $ | 524 | ||||||||
BioScience | 251 | 181 | 720 | 440 | ||||||||||||
Renal | 62 | 87 | 253 | 259 | ||||||||||||
Other | (131 | ) | (113 | ) | (358 | ) | (960 | ) | ||||||||
Total | $ | 350 | $ | 346 | $ | 1,060 | $ | 263 | ||||||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Total pre-tax income from segments | $ | 481 | $ | 459 | $ | 1,418 | $ | 1,223 | ||||||||
Unallocated amounts | ||||||||||||||||
Interest expense, net | (31 | ) | (20 | ) | (95 | ) | (66 | ) | ||||||||
Restructuring income (charge) | 5 | — | 109 | (543 | ) | |||||||||||
Certain foreign exchange fluctuations and hedging activities | (13 | ) | (21 | ) | (65 | ) | (91 | ) | ||||||||
Other corporate items | (92 | ) | (72 | ) | (307 | ) | (260 | ) | ||||||||
Income from continuing operations before income taxes | $ | 350 | $ | 346 | $ | 1,060 | $ | 263 | ||||||||
19
Three months June 30, | Six months June 30, | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Total pre-tax income from segments | $ | 479 | $ | 412 | $ | 937 | $ | 764 | ||||||||
Unallocated amounts | ||||||||||||||||
Interest expense, net | (33 | ) | (25 | ) | (64 | ) | (46 | ) | ||||||||
Restructuring | 104 | (543 | ) | 104 | (543 | ) | ||||||||||
Certain currency exchange rate fluctuations and hedging activities | (19 | ) | (39 | ) | (43 | ) | (73 | ) | ||||||||
Asset dispositions and impairments, net | — | (56 | ) | — | (56 | ) | ||||||||||
Other corporate items | (119 | ) | (81 | ) | (224 | ) | (129 | ) | ||||||||
Income (loss) from continuing operations before income taxes | $ | 412 | $ | (332 | ) | $ | 710 | $ | (83 | ) | ||||||
7. SUBSEQUENT EVENT—DECISION TO CEASE MANUFACTURING HEMODIALYSIS INSTRUMENTS
In July 2005, the company decided to discontinue the manufacture of HD instruments. Separately, the company entered into an agreement with Gambro to distribute Gambro’s HD instruments and related ancillary products. The company will have exclusive distribution rights throughout most of Latin America, and a non-exclusive arrangement in the United States and the rest of the world, excluding Japan where the company does not participate in the HD market. The decision to stop manufacturing HD instruments and the execution of the agreement with Gambro is consistent with the company’s strategy to optimize and improve the financial performance of the Renal business, focusing resources on peritoneal dialysis therapies while maintaining a broad portfolio of HD products. The company will continue to distribute its existing line of HD dialyzers, and provide HD solutions and concentrates that are manufactured by Baxter.
As a result of the decision to stop manufacturing HD instruments, management anticipates that charges for severance, contract termination and other costs will be incurred in future periods. While management has not finalized its exit plans, it currently estimates that the pre-tax cost will total between $40 million and $50 million.
Three months June 30, Percent change Percent change (in millions) Medication Delivery BioScience Renal Total net sales Three months June 30, (in millions) International United States Total net sales 20
ended Six months
ended
June 30, 2005 2004 2005 2004 $ 1,083 $ 1,006 8% $ 2,061 $ 1,932 7% 990 893 11% 1,892 1,703 11% 504 480 5% 1,007 953 6% $ 2,577 $ 2,379 8% $ 4,960 $ 4,588 8%
ended Percent
change Six months
ended
June 30, Percent
change 2005 2004 2005 2004 $ 1,421 $ 1,285 11% $ 2,760 $ 2,475 12% 1,156 1,094 6% 2,200 2,113 4% $ 2,577 $ 2,379 8% $ 4,960 $ 4,588 8% Three months ended Nine months ended September 30, Percent September 30, Percent (in millions) 2005 2004 change 2005 2004 change Medication Delivery $ 957 $ 986 (3% ) $ 3,018 $ 2,918 3 % BioScience 950 849 12% 2,842 2,552 11 % Renal 491 485 1% 1,498 1,438 4 % Total net sales $ 2,398 $ 2,320 3% $ 7,358 $ 6,908 7 % Three months ended Nine months ended September 30, Percent September 30, Percent (in millions) 2005 2004 change 2005 2004 change International $ 1,322 $ 1,218 9% $ 4,082 $ 3,693 11 % United States 1,076 1,102 (2% ) 3,276 3,215 2 % Total net sales $ 2,398 $ 2,320 3% $ 7,358 $ 6,908 7 % both the three- and six-month periodsnine-month period ended JuneSeptember 30, 2005,2005. The impact was principally becausedue to the weaker United States Dollar weakenedrelative to the Euro during the quarter, and the weakening relative to the Euro and Japanese Yen during the Japanese Yen.year-to-date period. Foreign currency fluctuations favorably impacted sales growth for all three segments.Thegenerated 8% and 7% sales growthdeclined 3% for the three-third quarter of 2005 and six-month periodsincreased 3% for the nine months ended JuneSeptember 30, 2005 respectively (including 3(with the percentage points due to the favorable impact ofchange in sales favorably impacted by foreign currency fluctuations for bothby 1 percentage point in the quarter and 2 percentage points in the year-to-date period). Three months ended Nine months ended September 30, Percent September 30, Percent (in millions) 2005 2004 change 2005 2004 change IV Therapies $ 301 $ 275 9% $ 909 $ 845 8% Drug Delivery 192 198 (3% ) 622 588 6% Infusion Systems 184 248 (26% ) 659 669 (1% ) Anesthesia 259 248 4% 772 749 3% Other 21 17 24% 56 67 (16% ) Total net sales $ 957 $ 986 (3% ) $ 3,018 $ 2,918 3%
Three months June 30, | Percent change | Six months ended June 30, | Percent change | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||||
IV Therapies | $ | 312 | $ | 288 | 8% | $ | 608 | $ | 570 | 7% | ||||||||
Drug Delivery | 226 | 202 | 12% | 430 | 390 | 10% | ||||||||||||
Infusion Systems | 245 | 233 | 5% | 475 | 421 | 13% | ||||||||||||
Anesthesia | 282 | 259 | 9% | 513 | 501 | 2% | ||||||||||||
Other | 18 | 24 | (25% | ) | 35 | 50 | (30% | ) | ||||||||||
Total net sales | $ | 1,083 | $ | 1,006 | 8% | $ | 2,061 | $ | 1,932 | 7% | ||||||||
States and international markets.
2004.
2004.
21
BioScience
Three months June 30, | Percent change | Six months ended June 30, | Percent change | ||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Recombinants | $ | 397 | $ | 320 | 24% | $ | 741 | $ | 612 | 21% | |||||||
Plasma Proteins | 266 | 267 | — | 525 | 505 | 4% | |||||||||||
Antibody Therapy | 93 | 90 | 3% | 182 | 170 | 7% | |||||||||||
Transfusion Therapies | 140 | 136 | 3% | 273 | 276 | (1% | ) | ||||||||||
Other | 94 | 80 | 18% | 171 | 140 | 22% | |||||||||||
Total net sales | $ | 990 | $ | 893 | 11% | $ | 1,892 | $ | 1,703 | 11% | |||||||
Three months ended | Nine months ended | |||||||||||||||||||||||
September 30, | Percent | September 30, | Percent | |||||||||||||||||||||
(in millions) | 2005 | 2004 | change | 2005 | 2004 | change | ||||||||||||||||||
Recombinants | $ | 392 | $ | 341 | 15% | $ | 1,133 | $ | 953 | 19 | % | |||||||||||||
Plasma Proteins | 242 | 254 | (5% | ) | 767 | 759 | 1 | % | ||||||||||||||||
Antibody Therapy | 123 | 82 | 50% | 305 | 252 | 21 | % | |||||||||||||||||
Transfusion Therapies | 134 | 124 | 8% | 407 | 400 | 2 | % | |||||||||||||||||
Other | 59 | 48 | 23% | 230 | 188 | 22 | % | |||||||||||||||||
Total net sales | $ | 950 | $ | 849 | 12% | $ | 2,842 | $ | 2,552 | 11 | % | |||||||||||||
Aside from the impact of the American Red Cross agreement, sales increased for FEIBA, an anti-inhibitor coagulant complex, in both the quarter and year-to-date period. Sales of TISSEEL, the company’s plasma-based sealant, also contributed to the growth rate in both the quarter and year-to-date period. In addition, sales of plasma to third parties declined in both the quarter and year-to-date period as a result of management’s decision to exit certain lower-margin contracts.
22
Transfusion Therapies
Sales of transfusion therapies products,product line, which areincludes products and systems for use in the collection and preparation of blood and blood components, was favorably impacted in both the quarter and year-to-date period by continued to be unfavorably impactedpenetration in the United States of ALYX, a system for the automated collection of red blood cells and plasma. Partially offsetting growth in sales volume in this product line was the unfavorable pricing impact of consolidation by consolidationcustomers in the plasma industry during the second quarter and first half of 2005.
industry.
period).
Three months June 30, | Percent change | Six months June 30, | Percent change | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||||
PD Therapy | $ | 385 | $ | 357 | 8% | $ | 759 | $ | 702 | 8% | ||||||||
HD Therapy | 114 | 118 | (3% | ) | 240 | 242 | (1% | ) | ||||||||||
Other | 5 | 5 | — % | 8 | 9 | (11% | ) | |||||||||||
Total net sales | $ | 504 | $ | 480 | 5% | $ | 1,007 | $ | 953 | 6% | ||||||||
Three months ended | Nine months ended | |||||||||||||||||||||||
September 30, | Percent | September 30, | Percent | |||||||||||||||||||||
(in millions) | 2005 | 2004 | change | 2005 | 2004 | change | ||||||||||||||||||
PD Therapy | $ | 381 | $ | 361 | 6% | $ | 1,140 | $ | 1,063 | 7% | ||||||||||||||
HD Therapy | 105 | 123 | (15% | ) | 345 | 365 | (5% | ) | ||||||||||||||||
Other | 5 | 1 | 400% | 13 | 10 | 30% | ||||||||||||||||||
Total net sales | $ | 491 | $ | 485 | 1% | $ | 1,498 | $ | 1,438 | 4% | ||||||||||||||
23
RTS business in Taiwan totaled approximately $20 million per quarter in 2004). The remainderimpact of the declinedivestiture was partially offset by the favorable impact of foreign exchange, particularly in the quarteryear-to-date period. As further discussed below and year-to-date period was due to lower sales of dialyzers and related hardware. Inin Note 5, in July 2005, the company decided to discontinue the manufacture of HD instruments. Separately, the company entered into an agreement with Gambro Renal Products (Gambro) to distribute Gambro’s HD instruments and related ancillary products. Refer to further discussion below. The decision and new agreement are not expected to have a significant impact on sales.
Three months June 30, | Change | Six months June 30, | Change | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
Gross margin | 43.2% | 39.5% | 3.7 pts | 42.0% | 39.9% | 2.1 pts | ||||||||
Marketing and administrative expenses | 20.8% | 22.4% | (1.6 pts | ) | 20.6% | 21.8% | (1.2 pts | ) |
Three months ended | Nine months ended | |||||||||||||||||||||||
September 30, | Percent | September 30, | Percent | |||||||||||||||||||||
2005 | 2004 | change | 2005 | 2004 | change | |||||||||||||||||||
Gross Margin | 42.1% | 41.5% | 0.6% | 42.0% | 40.5% | 1.5% | ||||||||||||||||||
Marketing and administrative expenses | 20.5% | 19.9% | 0.6% | 20.5% | 21.1% | (0.6% | ) | |||||||||||||||||
of 2005 relating to the Medication Delivery segment’s COLLEAGUE infusion pumps.
24
Three months June 30, | Percent change | Six months June 30, | Percent change | ||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Research and development (R&D) expenses | $ | 133 | $ | 129 | 3% | $ | 266 | $ | 265 | — | % | ||||||
As a percent of sales | 5.2% | 5.4% | 5.4% | 5.8% |
Three months ended | Nine months ended | |||||||||||||||||||||||
September 30, | Percent | September 30, | Percent | |||||||||||||||||||||
(in millions) | 2005 | 2004 | change | 2005 | 2004 | change | ||||||||||||||||||
Research and development | ||||||||||||||||||||||||
(R&D) expenses | $ | 133 | $ | 124 | 7% | $ | 399 | $ | 389 | 3% | ||||||||||||||
As a percent of sales | 5.5% | 5.3% | 5.4% | 5.6% | ||||||||||||||||||||
hemophilia A.
25
estimates and completion of planned actions.
estimates and completion of planned actions.
26
SUBSEQUENT EVENT – DECISION TO CEASE MANUFACTURING
In July CHARGE
As a result of the decision Refer to stop manufacturing HD instruments, management anticipates that chargesNote 5 for severance, contract termination and other costs will be incurred in future periods. While management has not finalized its exit plans, it currently estimates that the pre-tax cost will total between $40 million and $50 million.
additional information.
27
BioScience
Pre-tax
Renal
Pre-tax income increased 1% and 11%declines in expenses, including lower corporate headquarters spending, as management implemented actions designed to reduce the company’s expense base. In addition, the total other corporate items expense for the three and six months ended June 30,prior nine-month period included certain of the second quarter 2004 special charges discussed in Note 2.
28
INCOME TAXES
The American Jobs Creation Act of 2004
No provision has been made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as these earnings are currently deemed to be permanently invested.
In October 2004, the American Jobs Creation Act of 2004 (the Act) was enacted. The Act allows U.S. companies a one-time opportunity to repatriate non-U.S. earnings through 2005 at a 5.25% tax rate rather than the normal U.S. tax rate of 35%, provided that certain criteria, including qualified reinvestment, are met. Management is analyzing the provisions of the Act. Detailed final guidance necessary to implement the Act has not yet been issued by the Internal Revenue Service. Management has not yet determined the effects on the company’s plans or its consolidated financial statements. Management expects to complete its evaluation by the end of the third quarter of 2005.
$20 million and $5 million, respectively.
29
Inventories | Inventory turns for the six months ended June 30, | ||||||||
(in millions, except inventory turn data) | June 30, 2005 | December 31, 2004 | 2005 | 2004 | |||||
BioScience | $ | 1,136 | $1,332 | 1.78 | 1.66 | ||||
Medication Delivery | 581 | 587 | 4.30 | 3.83 | |||||
Renal | 227 | 216 | 4.00 | 3.71 | |||||
Total | $ | 1,944 | $2,135 | 2.90 | 2.61 | ||||
Inventories | Inventory turns for the nine | |||||||||||||||
September 30, | December 31, | months ended September 30, | ||||||||||||||
(in millions, except inventory turn data) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
BioScience | $ | 1,115 | $ | 1,332 | 1.75 | 1.51 | ||||||||||
Medication Delivery | 625 | 587 | 3.50 | 3.70 | ||||||||||||
Renal | 208 | 216 | 4.83 | 4.13 | ||||||||||||
Total | $ | 1,948 | $ | 2,135 | 2.74 | 2.48 | ||||||||||
As discussed below, management expects to make additional pension contributions with cash repatriated in conjunction with the American Jobs Creation Act of 2004.
30
There were no net
31
32
| ||||||||||||||
Standard & Poor’s (S&P) | Fitch | Moody’s | ||||||||||||
Ratings | ||||||||||||||
Senior debt | A- | BBB+ | Baa1 | |||||||||||
Short-term debt | A2 | F2 | P2 | |||||||||||
Outlook | Stable | Positive | Stable | |||||||||||
33
the market value of the fixed portion of the original portfolio decreases, the market value of the mirror swaps increases by an approximately offsetting amount, and vice versa. The mirror swaps will be settled when the offsetting existing swaps are settled. The following is a summary, by maturity date, of the mark-to-market position of the original cross-currency swaps portfolio, as well as the mirror swap portfolio, and the total mark-to-market position as of JuneSeptember 30, 2005 (in millions).
Maturity date | Original swaps | Mirror swaps | Total | ||||
2005 | $ 67 | $ 4 | $ | 71 | |||
2007 | 28 | 9 | 37 | ||||
2008 | 222 | 76 | 298 | ||||
2009 | 327 | — | 327 | ||||
Total | $644 | $89 | $ | 733 | |||
Maturity date | Original swaps | Mirror swaps | Total | |||||||||
2007 | $ | 25 | $ | 12 | $ | 37 | ||||||
2008 | 208 | 90 | 298 | |||||||||
2009 | 307 | — | 307 | |||||||||
Total | $ | 540 | $ | 102 | $ | 642 | ||||||
34
January 1, 2006. The2006, and the new rules provide for one of two transition elections, either prospective application or restatement (back to January 1, 1995). The company plans to adopt SFAS No. 123-R on January 1, 2006 and has not yet decided whichplans to use the prospective transition option the company will use.method. Management is in the process of analyzing the provisions of SFAS No. 123-R and assessing the impact on the company’s future consolidated financial statements.
The effect of adopting the new standard on earnings in future periods is dependent upon a number of variables, including the number of stock options and other stock awards granted in the future, the terms of those awards, and their fair values.
The matters discussed
35
• | the impact of geographic and product mix on the company’s sales; | ||
• | actions of regulatory bodies and other government authorities, including the Food and Drug Administration and foreign counterparts that could delay, limit or suspend product sales or result in seizures, injunctions and monetary sanctions, including with respect to the COLLEAGUE infusion pump; | ||
• | product quality and patient safety concerns, leading to product recalls, withdrawals, launch delays, litigation, or declining sales; | ||
• | product development risks; | ||
• | demand for and market acceptance risks for new and existing products, such as ADVATE (Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method) rAHF-PFM, and other technologies; | ||
• | 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 of acceptable raw materials and component supply; | ||
• | global regulatory, trade and tax policies; | ||
• | the ability to enforce patents; | ||
• | patents of third parties preventing or restricting the company’s manufacture, sale or use of affected products or technology; | ||
• | reimbursement policies of government agencies and private payers; | ||
• | internal and external factors that could impact commercialization; | ||
• | results of product testing; and | ||
• | other factors described elsewhere in this report or in the company’s other filings with the Securities and Exchange Commission. |
36
37For a complete discussion, referJuneSeptember 30, 2005, while not predictive in nature, indicated that if the United States Dollar uniformly fluctuated unfavorably by 10% against all currencies, on a net-of-tax basis, the net liability balance of $44$33 million with respect to those contracts would increase by $65$62 million.$462$405 million with respect to those contracts outstanding at JuneSeptember 30, 2005 would increase by $66$85 million. Any increase or decrease in the fair value of cross-currency swap agreements designated as hedges of the net assets of foreign operations relating to changes in spot currency exchange rates is offset by the change in the value of the hedged net assets relating to changes in spot currency exchange rates. With respect to the portion of the cross-currency swap portfolio that is no longer designated as a net investment hedge, but is fixed via the mirror swaps, as the fair value of this fixed portion of the portfolio decreases, the fair value of the mirror swaps increases by an approximately offsetting amount, and vice versa.JuneSeptember 30, 2005 by replacing the actual exchange rates at JuneSeptember 30, 2005 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.For a complete discussion, refer There have been no significant changes from the information discussed therein.
38JuneSeptember 30, 2005.During the first quarter of 2005, the company began to outsource the transaction processing activities of the company’s business in one European country and certain previously centralized activities (expense report processing, accounts payable, accounts receivable, fixed asset and intercompany accounting). After an analysis of the limited outsourcing that began during the first quarter, the company decided to discontinue this outsourcing initiative and to continue to perform these activities internally. Other than the item mentioned above, thereJuneSeptember 30, 2005 that has materially affected, or is reasonably likely to materially affect, Baxter’s internal control over financial reporting.
39sixnine months ended JuneSeptember 30, 2005 and 2004 have been performed by PricewaterhouseCoopers LLP, the company’s independent registered public accounting firm. TheirIts report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and therefore, the independent accountants’ liability under Section 11 does not extend to it.
40
Baxter International Inc.:JuneSeptember 30, 2005, and the related condensed consolidated statements of income for each of the three-month and six-monthnine-month periods ended JuneSeptember 30, 2005 and 2004 and the condensed consolidated statements of cash flows for the six-monthnine-month periods ended JuneSeptember 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.
Chicago, Illinois
October 31, 2005
August1, 2005
reference. NAME To hold office for two years: Blake E. Devitt To hold office for three years: Joseph B. Martin, M.D., Ph.D. Robert L. Parkinson, Jr. Thomas T. Stallkamp Albert P.L. Stroucken PROPOSAL FOR AGAINST ABSTAINED BROKER NON-VOTES The appointment of PricewaterhouseCoopers LLP as the company’s independent registered public accounting firm in 2005 was approved. The stockholder proposal relating to cumulative voting in the election of directors was not approved. The stockholder proposal relating to restrictions on services performed by the independent registered public accounting firm was not approved. The stockholder proposal relating to the annual election of directors was approved. discussion of this issue, which discussion is incorporated herein by reference. 41Baxter and certain of its subsidiaries are named as defendantsa number of lawsuits, claims and proceedings. These cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case and claim, the jurisdiction in which each suitPart I, Item 1, Note 6 is brought, and differences in applicable law. Baxter has established reserves in accordance with generally accepted accounting principles for certain of the matters discussed below. For these matters, there is a possibility that resolution of the matters could result in an additional loss in excess of presently established reserves. Also, there is a possibility that resolution of certain of the company’s legal contingencies for which there is no reserve could result in a loss. Management is not able to estimate the amount of such loss or additional loss (or range of loss or additional loss). However, management believes that, while such a future charge could have a material adverse impact on the company’s net income and net cash flows in the period in which it is recorded or paid, no such charge would have a material adverse effect on Baxter’s consolidated financial position.Product LiabilityMammary Implant LitigationBaxter, together with certain of its subsidiaries, is currently a defendant in various courts in a number of lawsuits seeking damages for injuries of various types allegedly causedincorporated herein by silicone mammary implants previously manufactured by the Heyer-Schulte division of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by Baxter in 1985, divested its Heyer-Schulte division in 1984. It is not known how many of these claims and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed to other manufacturers. In December 1998, a panel of independent medical experts appointed by a federal judge announced its findings that reported medical studies contained no clear evidence of a connection between silicone mammary implants and traditional or atypical systemic diseases. In June 1999, a similar conclusion was announced by a committee of independent medical experts from the Institute of Medicine, an arm of the National Academy of Sciences. The majority of the claims and lawsuits against the company have been resolved. Certain of the proceedings are ongoing, as described below.As of June 30, 2005, Baxter International, together with certain of its subsidiaries, was named as a defendant or co-defendant in 35 lawsuits relating to mammary implants, brought by approximately 91 plaintiffs, of which 80 are implant plaintiffs and the remainder are consortium or second generation plaintiffs. Of those plaintiffs, two currently are included in the Lindsey class action Revised Settlement described below, which accounts for one of the pending lawsuits against the company. Additionally, 34 plaintiffs have opted out of the Revised Settlement (representing approximately 21 pending lawsuits), and the status of the remaining plaintiffs with pending lawsuits is unknown. Some of the opt-out plaintiffs filed their cases naming multiple defendants and without product identification; thus, the company believes that not all of the opt-out plaintiffs will have viable claims against the company. As of June 30, 2005, 25 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. Furthermore, during the second quarter of 2005, Baxter obtained dismissals, or agreements for dismissals, with respect to 9 plaintiffs.In addition to the individual suits against the company, a class action on behalf of all women with silicone mammary implants was filed on March 23, 1994 and is pending in the United States District Court (U.S.D.C.) for the Northern District of Alabama involving most manufacturers of such implants, including Baxter as successor to AHSC (Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala.,CV 94-P-11558-S). The class action was certified for settlement purposes only by the court on September 1, 1994, and the settlement terms were subsequently revised and approved on December 22, 1995 (the Revised Settlement). All appeals directly challenging the Revised Settlement have been dismissed. In addition to the Lindsey class action, the company also has been named in three other purported class actions in various state and provincial courts, only one of which is certified.Baxter believes that a substantial portion of its liability and defense costs for mammary implant litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer insolvency.Plasma-Based Therapies LitigationBaxter currently is a defendant in a number of claims and lawsuits brought by individuals who have hemophilia, and their families, all seeking damages for injuries allegedly caused by anti-hemophilic factor concentrates VIII or IX derived from human blood plasma (factor concentrates) processed by the company from the late 1970s to the mid-1980s. The typical case or claim alleges that the individual was infected with the HIV virus by factor concentrates, which contained the HIV virus. None of these cases involves factor concentrates currently processed by the company.As of June 30, 2005, Baxter was named as a defendant in 82 lawsuits most of which have been or are expected to be consolidated in the U.S.D.C. for the Northern District of Illinois and has received 161 claims in the United States, France, Ireland, Italy, Japan, Spain and Argentina. Among the lawsuits, the company and other manufacturers have been named as defendants in 70 lawsuits pending or expected to be transferred to the U.S.D.C. for the Northern District of Illinois on behalf of claimants, who are primarily non-U.S. residents, seeking unspecified damages for HIV and/or Hepatitis C infections from their use of plasma-based factor concentrates. In March 2005, the District Court denied plaintiff’s motion to certify the purported classes. Thereafter, plaintiffs have filed additional lawsuits on behalf of individual claimants outside of the United States. The defendants, including Baxter, have filed motions to dismiss these lawsuits based onforum non conveniens grounds. The U.S.D.C. for the Northern District of Illinois has approved a settlement of U.S. federal court HIV factor concentrate cases. As of December 31, 2004, all 6,246 claimant groups eligible to participate in the settlement have been paid.In addition, Immuno International AG (Immuno), acquired by Baxter in 1996, has unsettled claims and lawsuits for damages for injuries allegedly caused by its plasma-based therapies. The typical claim alleges that the individual with hemophilia was infected with HIV and/or Hepatitis C by factor concentrates. Immuno’s successor is a participant in a foundation that would make payments to Italian applicants who are HIV positive. At least 370 applications are pending before that foundation. Additionally, Immuno faces multiple claims stemming from its vaccines and other biologically derived therapies. A portion of the liability and defense costs related to these claims will be covered by insurance, subject to exclusions, conditions, policy limits and other factors. Pursuant to the stock purchase agreement between the company and Immuno, as revised in April 1999, approximately 26 million Swiss Francs, which is the equivalent of approximately $20 million based on the exchange rate as of June 30, 2005, of the purchase price is being withheld to cover these contingent liabilities.Baxter is currently named in a number of claims and lawsuits brought by individuals who infused the company’s GAMMAGARD IVIG (intravenous immunoglobulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing GAMMAGARD IVIG. As of June 30, 2005, Baxter was a defendant in nine lawsuits and has received notice of four claims in the United States, France, Denmark, Italy, Germany and Spain. One class action in the United States has been certified. In September 2000, the U.S.D.C. for the Central District of California approved a settlement of the class action that would provide financial compensation for U.S. individuals who used GAMMAGARD IVIG between January 1993 and February 1994.The company believes that a substantial portion of the liability and defense costs related to its plasma-based therapies litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer insolvency.Althane Dialyzers LitigationBaxter was named as a defendant in a number of civil cases seeking unspecified damages for alleged injury from exposure to Baxter’s Althane series of dialyzers, which were withdrawn from the market in 2001. All of these suits have been resolved, although the possibility of additional suits being filed cannot be excluded. Currently, there are a number of claims from Croatian citizens and one from the Spanish Ministry of Health, although suits have not been filed. The company previously reached settlements with a number of families of patients who died or were injured in Spain, Croatia and the United States allegedly after undergoing hemodialysis on an Althane dialyzer. The U.S. government is investigating the matter and Baxter received a subpoena in December 2002 to provide documents. Baxter is fully cooperating with the Department of Justice.Vaccines LitigationAs of June 30, 2005, Baxter and certain of its subsidiaries have been named as defendants, along with others, in 142 lawsuits filed in various state and U.S. federal courts, four of which are purported class actions, seeking damages, injunctive relief and medical monitoring for claimants alleged to have contracted autism or other attention deficit disorders as a result of exposure to vaccines for childhood diseases containing the preservative, Thimerosal. These vaccines were formerly manufactured and sold by North American Vaccine, Inc., which was acquired by Baxter in June 2000, as well as other companies. As of December 31, 2004, ten suits have been dismissed based on the application of the National Vaccine Injury Compensation Act. Additional Thimerosal cases may be filed in the future against Baxter and companies that marketed Thimerosal-containing products.OtherAs of September 30, 1996, the date of the spin-off of Allegiance Corporation (Allegiance) from Baxter, Allegiance assumed the defense of litigation involving claims related to Allegiance’s businesses, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Allegiance, which merged with Cardinal Health in 1999, has not been named in most of this litigation but has defended and indemnified Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. As of June 30, 2005, the company has been named as a defendant in 10 lawsuits.PricingAs of June 30, 2005, Baxter International and certain of its subsidiaries were named as defendants, along with others, in approximately 40 lawsuits brought in various state and U.S. federal courts which allege that Baxter and other defendants reported artificially inflated average wholesale prices for Medicare and Medicaid eligible drugs. These cases have been brought by private parties on behalf of various purported classes of purchasers of Medicare and Medicaid eligible drugs, as well as by state attorneys general. As further explained below, all but nine of these cases were consolidated in the U.S.D.C. for the District of Massachusetts for pretrial case management under Multi District Litigation rules. In July 2005, the defendants, including Baxter, removed an additional five lawsuits from state courts to the U.S.D.C. forthe District of Massachusetts. Claimants seek unspecified damages and declaratory and injunctive relief under various state and/or federal statutes. After the partial dismissal of the consolidated amended complaint, Plaintiffs filed an amended master consolidated class action complaint that the defendants, including Baxter, moved to dismiss. In February 2004, the court granted in part and denied in part defendants’ motion to dismiss. The lawsuits against Baxter include eight lawsuits brought by state attorneys general, which allege that prices for Medicare and Medicaid eligible drugs were artificially inflated and seek unspecified damages, injunctive relief, civil penalties, disgorgement, forfeiture and restitution. Specifically, in January 2002, the Attorney General of Nevada filed a civil suit in the Second Judicial District Court of Washoe County, Nevada. In February 2002, the Attorney General of Montana filed a civil suit in the First Judicial District Court of Lewis and Clark County, Montana. In June 2003, the U.S.D.C. for the District of Massachusetts remanded the Nevada case to Washoe County, Nevada and denied plaintiffs’ motion to remand the Montana case. In January 2004, the District Court remanded another case filed in state court to the Superior Court of Maricopa County, Arizona. In March 2004, the Attorney General of Pennsylvania filed a civil suit in the Commonwealth Court of Pennsylvania. That action was dismissed in February 2005. In March 2005, the Attorney General of Pennsylvania filed an amended complaint. In May 2004, the Attorney General of Texas filed a civil suit in the District Court of Travis County, Texas. In June 2004, the Attorney General of Wisconsin filed a civil suit in the Circuit Court of Dane County, Wisconsin. In November 2004, the Attorney General of Kentucky filed a civil suit in the Circuit Court of Franklin County, Kentucky. During the first quarter of 2005, Baxter was named as a defendant in 14 additional cases, 13 of which have been served upon the company. Additionally, during April 2005 Baxter was named as a defendant in eight cases, five of which have been served. In January 2005, the Attorney General of Alabama filed a civil suit in the Circuit Court of Montgomery County, Alabama. In February 2005, the Attorney General of Illinois filed a civil suit in the Circuit Court of Cook County, Illinois. In July 2005, the lawsuits filed by the attorneys general of Pennsylvania, Wisconsin, Kentucky, Alabama and Illinois were removed by the defendants to the U.S.D.C. for the District of Massachusetts. Each of the state attorneys general has moved to remand these cases. Various state and federal agencies are conducting civil investigations into the marketing and pricing practices of Baxter and others with respect to Medicare and Medicaid reimbursement. These investigations may result in additional cases being filed by various state attorneys general.Securities Laws and OtherIn July 2003, the Midwest Regional Office of the Securities and Exchange Commission (SEC) requested that the company voluntarily provide information concerning certain revisions to the company’s growth and earnings forecasts during 2003. In connection with this inquiry, in July 2004 the SEC sought information regarding the establishment of certain reserves as well as events in connection with the company’s restatement of its consolidated financial statements, previously announced in July 2004. The company is cooperating fully with the SEC.In August 2002, six purported class action lawsuits were filed in the U.S.D.C. for the Northern District of Illinois naming Baxter and its then Chief Executive Officer and then Chief Financial Officer as defendants. These lawsuits, which were consolidated and sought recovery of unspecified damages, alleged that the defendants violated the federal securities laws by making misleading statements that allegedly caused Baxter common stock to trade at inflated levels. In December 2002, plaintiffs filed their consolidated amended class action complaint which named nine additional Baxter officers as defendants. In July 2003, the U.S.D.C. for the Northern District of Illinois dismissed in its entirety the consolidated amended class action complaint. In July 2004, the Seventh Circuit Court of Appeals reversed the order of dismissal and remanded the case to the District Court. In September 2004, the Seventh Circuit Court of Appeals denied motions by Baxter for rehearing, rehearing en banc and to stay the order to remand the case pending a petition for a writ of certiorari to the U.S. Supreme Court. In December 2004, Baxter filed its petition for a writ of certiorari in the U.S. Supreme Court. Plaintiffs filed a revised consolidatedamended complaint in the District Court in November 2004. Baxter filed its motion to dismiss the complaint in December 2004. The District Court denied Baxter’s motion to dismiss in February 2005. In March 2005, the U.S. Supreme Court denied Baxter’s petition for certiorari.In July 2004, a purported class action lawsuit was filed in the U.S.D.C. for the Northern District of Illinois, in connection with the previously disclosed restatement, naming Baxter and its current Chief Executive Officer and Chief Financial Officer and their predecessors as defendants. The lawsuit, which seeks recovery of unspecified damages, alleges that the defendants violated the federal securities laws by making false and misleading statements regarding the company’s financial results, which allegedly caused Baxter common stock to trade at inflated levels during the period between April 2001 and July 2004. Three similar purported class action lawsuits were filed in the third quarter of 2004 in the U.S.D.C. for the Northern District of Illinois against the same defendants. These cases have been consolidated before a single judge. In January 2005, plaintiffs filed a consolidated amended complaint in the District Court. In February 2005, Baxter filed its motion to dismiss. In May 2005, the District Court granted Baxter’s motion to dismiss this action in its entirety. One of the consolidated plaintiffs has moved to alter the judgment terminating its case and to file an amended complaint. That motion is pending before the District Court.In October 2004, a solitary plaintiff filed a purported class action against Baxter in the Circuit Court of Cook County, Illinois alleging a breach of federal securities law through Baxter International’s secondary offering of common stock in September 2003. The plaintiff alleges that the offering price of these shares was artificially inflated by virtue of the financial statements that the company filed prior to and concurrent with the offering, which the company later amended in connection with the restatement, and seeks unspecified damages. In November 2004, Baxter removed this case to the U.S.D.C. for the Northern District of Illinois. In December 2004, plaintiff moved to remand the proceeding to state court. In May 2005, the District Court remanded the case back to state court.The company believes that it may be subject to additional class action litigation and regulatory proceedings in connection with the events preceding the restatement announced in the third quarter of 2004.In October 2004, a sole plaintiff filed a purported class action in the U.S.D.C. for the Northern District of Illinois against Baxter and its current Chief Executive Officer and Chief Financial Officer and their predecessors for alleged violations of the Employee Retirement Income Security Act of 1974, as amended. Plaintiff alleges that these defendants, along with the Administrative and Investment Committees of the company’s Incentive Investment Plan and Puerto Rico Savings and Investment Plan (the Plans), which are the company’s 401(k) plans, breached their fiduciary duties to the Plans’ participants by offering Baxter common stock as an investment option in each of the Plans during the period of January 2001 to October 2004. Plaintiff alleges that Baxter common stock traded at artificially inflated prices during this period and seeks unspecified damages and declaratory and equitable relief. The plaintiff seeks to represent a class of the Plans’ participants who elected to acquire Baxter common stock through the Plans between January 2001 and the present. The defendants have moved to dismiss this action and the motion currently is pending before the District Court.In August and September 2004, three plaintiffs filed separate derivative complaints in the Circuit Court of Cook County, Illinois against the company’s Chief Executive Officer and Chief Financial Officer and certain other current and former officers and directors of the company. These actions, which plaintiffs purport to bring on the company’s behalf, seek unspecified damages for alleged breaches of fiduciary duty in connection with the company’s disclosures of its financial results between April 2001 and July 2004. These three cases have been consolidated before one judge in the state court.During the first quarter of 2005, Baxter and Haemonetics Corporation (Haemonetics) have been engaged in a binding arbitration proceeding brought by Haemonetics. Haemonetics alleged that Baxter breached supply contracts assigned to it in connection with Baxter’s acquisition of assets from Alpha Corporation in 2003. Baxter denied the allegations. In May 2005, the arbitration panel awarded Haemonetics $27.7 million, plus attorneys’ fees.In April 2003, A. Nattermann & Cie GmbH and Aventis Behring L.L.C. filed a patent infringement lawsuit in the U.S.D.C. for the District of Delaware naming Baxter Healthcare Corporation as the defendant. In November 2003, plaintiffs dismissed the lawsuit without prejudice. The complaint, which sought injunctive relief, alleged that Baxter’s planned manufacture and sale of ADVATE would infringe United States Patent No. 5,565,427. A reexamination of the patent is pending before the United States Patent and Trademark Office.Baxter has been named a potentially responsible party (PRP) for environmental clean-up at a number of sites. Under the United States Superfund statute and many state laws, generators of hazardous waste that is sent to a disposal or recycling site are liable for clean-up of the site if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site.In addition to the cases discussed above, Baxter is a defendant in a number of other claims, investigations and lawsuits. Based on the advice of counsel, management does not believe that, individually or in the aggregate, these other claims, investigations and lawsuits will have a material adverse effect on the company’s results of operations, cash flows or consolidated financial position.Item 4. Submission of Matters to a Vote of Security HoldersThe company’s annual meeting of stockholders was held on May 3, 2005, for the purpose of electing directors, ratifying the appointment of PricewaterhouseCoopers LLP as the company’s independent registered public accounting firm and voting on the stockholder proposals listed below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management’s solicitation. Each of management’s nominees for directors, as listed in the proxy statement, was elected with the number of votes set forth below. FOR ABSTAINED/WITHHELD 533,080,996 5,669,605 533,121,028 5,629,573 530,476,516 8,274,085 519,885,857 18,864,744 533,077,273 5,673,328 In addition to the directors listed above, directors whose term of office as a director continued after the meeting are: Walter E. Boomer, John D. Forsyth, Gail D. Fosler, James R. Gavin III, M.D., Ph.D., Peter S. Hellman, Carole Shapazian and K.J. Storm.The results of the other matters voted upon at the annual meeting are as follows: 508,806,791 26,293,567 3,650,243 — 194,496,478 223,116,699 56,747,620 64,389,804 55,680,412 412,250,755 6,429,630 64,389,804 368,378,655 47,954,339 58,027,803 64,389,804 On JulyMarch 15,February 25, 2005 company voluntary notice to customers regarding certain user interface and failure code issues relating towith the company’s COLLEAGUE® Volumetric Infusion Pumppump’s batteries as a Class I recall (FDA’s(the FDA’s highest priority level) and that there had been reports of threefour deaths and sixten serious injuries that may have been associated with the issues identified in the March 15,notice. On October 13, 2005, voluntary notice. The same announcement also described a field corrective action letter sent to customers on July 20, 2005 (also designated a Class I recall), notifying customersthe company further announced that the company is in the process of developing an action plan to address design issues relating to COLLEAGUE pump failure codes (with which one of the three previously described deaths may have been associated). While these actions do not require customers to return theirFDA had seized approximately 6,000 Baxter-owned COLLEAGUE pumps, theas well as 850 SYNDEO PCA Syringe Pumps, which were on hold at two facilities in Northern Illinois (the company will voluntarilyhaving placed a hold on shipments of new COLLEAGUE and SYNDEO pumps until design issuesearlier in the year). The latter action did not affect customer-owned pumps, of which there are resolved. Refer toapproximately 250,000 COLLEAGUE pumps and 5,000 SYNDEO pumps in use worldwide. See Part I, Item 2I, Notes 4 and 6 for additional information.thepump issues and with the COLLEAGUE pump.FDA concerning these issues. Nevertheless, as more fully described in the company’s filing on Form 10-K, Part I, Item 1, “Government Regulation,” the operations of the company and many of its products are subject to extensive regulation and review. Thus, the company is subject to possible administrative and legal actions by the FDA and other agencies. Such actions may include product recalls, additional product seizures, injunctions to halt manufacture and distribution, and other civil sanctions, including monetary sanctions, as well as in certain circumstances criminal sanctions. From time to time, the company has instituted voluntary compliance actions, such as removing products from the market and efforts to improve the effectiveness of quality systems. The company continues to work with the FDA with respect to its observations and investigation of these issues and remains committed to enhancing quality systems and processes across the company.
/s/ John J. Greisch 42BAXTER INTERNATIONAL INC. (Registrant)Date: August8, 2005 BAXTER INTERNATIONAL INC. (Registrant) Date: November 3, 2005 By: John J. Greisch Corporate Vice President and Chief Financial Officer (duly authorized officer and chief financial officer)
Number | Description of Exhibit | |
15 | Letter Re Unaudited Interim Financial Information | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 | |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | |
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
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