The following commentary should be read in conjunction with the consolidated
financial statements and accompanying notes.
Description of the Company and Business Segments
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.
The company operates in two segments: BioScience and Medical Products.
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; biosurgery products; and select vaccines. The Medical Products 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. The business also provides products and services related to pharmacy compounding, drug formulation and packaging technologies. In addition, the Medical Products business provides products and services to treat end-stage renal disease, or irreversible kidney failure, along with other renal therapies, which was enhanced in 2013 through the acquisition of Gambro AB (Gambro). The Medical Products business now offers a comprehensive portfolio to meet the needs of patients across the treatment continuum, including technologies and therapies for peritoneal dialysis (PD), in-center hemodialysis (HD), home hemodialysis (HHD), continuous renal replacement therapy (CRRT) and additional dialysis services.
Baxter has approximately 61,000 employees and conducts business in over 100 countries. The company generates approximately 60% of its revenues outside
Baxter's 2013 results reflect the company's success in meeting its financial objectives while navigating a challenging and complex macroeconomic environment. Baxter has continued to improve operational and commercial execution, while deriving significant benefits leveraging existing opportunities to bring products and therapies to various markets more effectively. Further, the company has made investments to further advance the product pipeline and position Baxter for future growth and success. The company generated significant cash flows in 2013 while maintaining a disciplined capital allocation strategy of returning value to shareholders through both share repurchases and increased dividends. Baxter's global net sales totaled
$15.3 billionin 2013, an increase of 8% over 2012, with no significant foreign currency impact. The acquisition of Gambro in September 2013resulted in additional net sales of $513 million, which contributed four percentage points towards total Baxter net sales growth. International sales totaled $8.8 billion, an increase of 8% compared to 2012, including an unfavorable foreign currency impact of one percentage point. Sales in the United Statestotaled $6.5 billionin 2013, an increase of 7% over 2012. 20
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Baxter's net income for 2013 totaled
$2.0 billion, or $3.66per diluted share, compared to $2.3 billion, or $4.18per diluted share, in the prior year. Net income in 2013 included special items which reduced income before income taxes by $744 millionand net income by $555 million, or $1.01per diluted share, as further discussed in the Results of Operations section below. Net income in 2012 included special items which reduced income before income taxes by $334 millionand net income by $190 million, or $0.35per diluted share, as further discussed in the Results of Operations section below. Baxter's financial results included R&D expenses totaling $1.2 billionin 2013, which reflects the acceleration of R&D spending to drive late-stage development programs through product approvals in both developed and emerging markets, while also focusing on enhancing the company's early-stage and exploratory R&D. During the year, Baxter continued to transform the new product pipeline into a robust portfolio of products and therapies that improve the quality of care and address key high-potential areas of unmet medical need. Additionally, included in R&D expenses in 2013 were upfront and milestone payments of $103 millionrelated to the company's various collaboration arrangements and $73 millionrelated to business optimization charges.
The company's financial position remains strong, with cash flows from operations totaling
Capital investments totaled
$1.5 billionin 2013 as the company continues to invest across its businesses to support future growth, including additional investments in support of new and existing product capacity expansions in the BioScience segment. The company's investments in capital expenditures in 2013 were focused on projects that improve the company's cost structure and manufacturing capabilities and support its strategy of geographic expansion with select investments in growing markets. The company also continued to return value to its shareholders in the form of share repurchases and dividends. During 2013, the company repurchased 13 million shares of common stock for $913 million, and paid cash dividends to its shareholders totaling $1.0 billion.
Baxter continues to focus on several key objectives to successfully execute its long-term strategy to achieve sustainable growth and deliver shareholder value. Baxter's 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 company's strategy to achieve these objectives. The company continues to focus on four key strategic growth vectors: advancing the core portfolio globally, driving innovation through the R&D pipeline, enhancing growth with acquisitions and collaborations, and developing unique public-private partnerships.
Advancing the Core Portfolio Globally
Baxter is well-positioned in the market, despite challenging global economic conditions, due to the breadth and diversity of the company's portfolio, which will serve as a solid foundation for future growth. In the BioScience business, the company's products treat bleeding disorders and a range of immune disorders. The Medical Products business offers innovative products for treatment of end-stage renal disease and other therapies and technologies supporting the work of hospital pharmacies and serving the needs of patients in acute care settings. While Baxter is a leader in several of the markets noted above, there is significant potential to expand across the company's core portfolio by ensuring the cost effectiveness and improved access to Baxter's products and therapies globally.
Baxter remains committed to meeting patient demands by enhancing its plasma manufacturing footprint. The company completed planned modifications at an existing
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during 2013 and continues to invest in a new manufacturing facility in
Driving Innovation through the R&D Pipeline
R&D innovation and scientific productivity continue to be key strategic priorities for Baxter. Key developments in 2013 included the following:
Product Approvals and Launches
• Approval by the
Baxter's FEIBA [
frequency of bleeding episodes in patients with hemophilia A or B who have
prophylactic treatment, control of bleeding episodes, and perioperative
management in adults with hemophilia B.
• Marketing authorization received by the
HyQvia (solution for subcutaneous use) as replacement therapy for adult patients with primary and secondary immunodeficiencies.
• Completion of CE marking in
deliver more frequent, extended duration, short daily or nocturnal home HD
therapy, known as High Dose HD therapy.
• Launch of HEMOPATCH Sealing Hemostat, a novel collagen-based hemostatic
device, following CE mark approval in
Connectors featuring bonded and standard bore extension sets for use with
low pressure power injectors.
Other Developments • Authorization by the
European Medicines Agencyfor an update to the
Summary of Product Characteristics for Baxter's ADVATE [Antihemophilic
Factor (Recombinant) Plasma/Albumin Free Method, (in the
ADVATE, octocog alfa)] to include findings of the Phase IV prophylaxis
study. • Submission of a biologics license application (BLA) to
FDAfor the approval of OBI-1, a recombinant antihemophilic porcine sequence factor VIII, for use by patients with acquired hemophilia A.
• Completion of enrollment in Phase III clinical trial of BAX 855, an
investigational extended half-life, recombinant factor VIII (rFVIII)
treatment for hemophilia A. The ongoing trial is aimed at assessing the
efficacy of the compound in reducing annual bleed rates in both
prophylaxis and on-demand treatment schedules, and will also evaluate its
safety and pharmacokinetic profile.
• Initiation of global Phase III study of BAX 817, a recombinant factor VIIa
to treat severe bleeding in hemophilia A or B patients with inhibitors to
factor VIII or factor IX.
Enhancing Growth with Acquisitions and Collaborations
Acquisition of Gambro
September 6, 2013, Baxter acquired 100 percent of the voting equity interests in Indap Holding AB, the holding company for Gambro, a privately held dialysis product company based in Lund, Sweden. Gambro is a global medical technology company focused on developing, manufacturing and supplying dialysis products and 22
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therapies for patients with acute or chronic kidney disease. The transaction provides Baxter with a broad and complementary dialysis product portfolio, while further advancing the company's geographic footprint in the dialysis business. In addition, the company has augmented its pipeline with Gambro's next-generation monitors, dialyzers, devices and dialysis solutions. The total cash consideration for the acquisition, as reduced by assumed debt of
$221 million, was $3.7 billion.
The acquisition of Gambro enhances Baxter's global leadership in renal therapies and provides a number of longer-term opportunities and significant cost synergies.
Other Acquisitions and Collaboration Arrangements
Baxter has accelerated its pace of acquisitions and collaborations in recent years. Key developments in 2013 included the following:
• The acquisition of the investigational hemophilia compound OBI-1 and
related assets from
well as certain other OBI-1 related assets, including manufacturing
operations, from Ipsen Pharma S.A.S. (Ipsen) in conjunction with Inspiration's bankruptcy proceedings.
• The execution of a global licensing agreement with Cell Therapeutics, Inc.
(Cell Therapeutics) to develop and commercialize pacritinib, a novel
investigational JAK2/FLT3 inhibitor with activity against genetic
mutations linked to myelofibrosis, leukemia and certain solid tumors. • The execution of an exclusive collaboration agreement with Coherus
Europe, Canada, Braziland certain other markets. Baxter may select additional products in the collaboration.
• The execution of an exclusive collaboration agreement with JW Holdings
Corporation (JW Holdings) for parenteral nutrition products containing a
novel formulation of omega 3 lipids, which provides Baxter with exclusive
rights to co-develop and distribute the products globally (with the exception of
Korea). During 2013, Baxter accelerated its equity investments in companies developing high-potential technologies through Baxter Ventures, a strategic initiative established in 2011 to invest in early-stage companies developing products and therapies to accelerate innovation and growth for the company. The company expects to continue to further supplement its internal R&D activities and pursue accelerated growth by fully capitalizing on Baxter's diversified healthcare model with its investment in other business development opportunities, including acquisitions, collaborations and alliances, that complement our current businesses, enhance our portfolio, and leverage our core strengths. Public-Private Partnerships In addition to the company's business development activities, Baxter is focused on pursuing innovation through unique business models and the development of public-private partnerships. During 2013, Baxter made advances in its existing public-private partnerships primarily through the exclusive 20-year partnership with HemobrÁs to provide hemophilia patients in Brazilgreater access to rFVIII therapy for the treatment of hemophilia A. Baxter recently became Brazil'sexclusive provider of rFVIII and will facilitate a technology transfer to support local manufacturing capacity and technical expertise. During 2013, Baxter commenced shipments of recombinant factor VIII therapy for treatment of hemophilia. Baxter expects peak annual sales related to this partnership to reach $200 millionby 2017. 23
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Responsible Corporate Citizen
The company strives for continued growth and profitability, while furthering its focus on acting as a responsible corporate citizen. At Baxter, sustainability means creating a lasting social, environmental and economic value by addressing the needs of the company's wide-ranging stakeholder base. Baxter's comprehensive sustainability program is focused on areas where the company is uniquely positioned to make a positive impact. Baxter and the
Baxter International Foundationprovide financial support and product donations in support of critical needs, from assisting underserved communities to providing emergency relief for countries experiencing natural disasters. Baxter's priorities also include sound environmental stewardship. Throughout 2013 the company continued to implement a range of water conservation strategies and facility-based energy saving initiatives. In the area of product stewardship and life cycle management, Baxter is pursuing efforts such as sustainable design and reduced packaging. Baxter is also responding to the challenges of climate change through innovative greenhouse gas emissions-reduction programs, such as shifting to less carbon-intensive energy sources and modes of product transport.
The company's ability to sustain long-term growth and successfully execute the strategies discussed above depends in part on the company's ability to manage within an increasingly competitive and regulated environment and to address the other risk factors described in Item 1A of this Annual Report on Form 10-K. 24
Table of Contents RESULTS OF OPERATIONS Special Items The following table provides a summary of the company's special items and the related impact by line item on the company's results of operations for 2013, 2012, and 2011. years ended December 31 (in millions) 2013 2012 2011 Gross Margin Gambro acquisition and integration items
$ (62 )$ - $ - Currency-related items (1 ) - - Product-related items (17 ) - - Business optimization charges (including certain asset impairments) (125 ) (62 ) (95 ) COLLEAGUE infusion pump items - 23 - Business development charges - (6 ) - Total Special Items $ (205 )$
Impact on Gross Margin Ratio (1.3 pts ) (0.3
pts ) (0.7 pts )
Marketing and Administrative Expenses Gambro acquisition and integration items
$ 115$ - $ - Tax and legal reserves 124 - - Business optimization charges (including certain asset impairments) 82 60 97 Business development charges - 9 - Pension-related items - 170 - AWP litigation and historical rebate and discount items - - 79 Asset impairment and other charges - - 41 Total Special Items $ 321 $ 239 $ 217Impact on Marketing and Administrative Expense Ratio 2.1 pts 1.7 pts 1.6 pts Research and Development Expenses Business optimization charges (including certain asset impairments) $ 73 $ 28$ - Business development charges 103 113 - Total Special Items $ 176 $ 141$ - Other (Income) Expense, Net Gambro acquisition and integration items $ 15$ - $ - Currency-related items 62 - - Tax and legal reserves (35 ) - - Gains on the reduction of contingent payment liabilities - (91 ) - Asset impairment and other charges - - 62 Total Special Items $ 42 $ (91 ) $ 62Income Tax Expense Impact of special items $ (189 ) $ (144 ) $ (127 )Total Special Items $ (189 ) $ (144 ) $ (127 )Impact on Effective Tax Rate (0.9 pts ) (2.4 pts ) (1.7 pts ) Special items are identified above because they are highly variable, difficult to predict, and of a size that may substantially impact the company's reported operations for a period. Management believes that providing the separate impact of the above items on the company's GAAP results may provide a more complete understanding of the company's operations and can facilitate a fuller analysis of the company's results of operations, particularly in evaluating performance from one period to another. Upfront and milestone payments related to 25
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collaborative arrangements that have been expensed as R&D are uncertain and often result in a different payment and expense recognition pattern than internal R&D activities and therefore are typically excluded as special items.
In 2013, the company recorded pre-tax charges of
$192 millionassociated with the acquisition and integration of Gambro and business development charges of $103 millionrelated to upfront and milestone payments for collaboration agreements. Additionally, Baxter recorded pre-tax currency-related charges totaling $63 millionin 2013 principally related to derivative instruments used to hedge the anticipated foreign currency cash outflows for the Gambro acquisition and the Venezuelan currency devaluation announced by the government of Venezuelain February 2013. In 2013, the company also recorded pre-tax charges of $17 millionprimarily related to remediation efforts associated with modifications to the SIGMA Spectrum Infusion Pump in conjunction with re-filing for 510(k) clearance. Marketing and administrative expenses in 2013 included charges totaling $124 millionrelated to tax and legal reserves associated with VAT matters in Turkeyand existing class-action and other related litigation, including litigation fees. Income tax expense in 2013 included a net benefit of $6 millionrelated to uncertain tax positions in Switzerlandand Turkey. Other (income) expense, net in 2013 included the offsetting impact of $35 millionin noncontrolling interest for the VAT and tax items above associated with the company's non-wholly owned joint venture in Turkey. In 2013, 2012 and 2011, the company's results were impacted by costs associated with the company's execution of certain strategies to optimize its organizational structure, as the company implemented actions to optimize its overall cost structure on a global basis. These actions included streamlining the company's international operations, rationalizing its manufacturing facilities, improving its general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. The company recorded pre-tax business optimization charges of $280 million, $150 million, and $192 millionin 2013, 2012, and 2011, respectively, which impacted cost of sales, marketing and administrative expenses and, in 2012 and 2013, R&D expenses. The 2013 business optimization charge also included a benefit of $20 millionrelated to an adjustment to a business optimization reserve recorded in a prior period. Refer to Note 6 for further information regarding these charges. In 2012, the company recognized a net benefit of $23 millionin cost of sales primarily related to an adjustment to the COLLEAGUE infusion pump reserve when the company substantially completed its recall activities in the United States. Refer to Note 6 for further information regarding the COLLEAGUE infusion pump charge and related reserve adjustment. In 2012, the company also recorded pre-tax charges of $170 millionprimarily related to pension settlement charges and other pension-related items, and business development charges of $128 millionprincipally related to upfront payments for collaboration agreements. Also included in 2012 results were gains of $91 millionrelated to the reduction of certain contingent payment liabilities. Refer to Note 12 for further information regarding the pension settlement charges, Note 4 for further information regarding the business development charges, and Note 9 for further information regarding the gains from reductions of contingent payment liabilities. In 2011, the company also recorded pre-tax charges of $79 millionrelated to the resolution of litigation pertaining to average wholesale prices (AWP) and certain historical rebate and discount adjustments, $62 millionin asset impairments primarily related to the write-down of Greek government bonds, and $41 millionprincipally related to a contribution to the Baxter International Foundation. 26
Table of Contents Net Sales Percent change At actual At constant currency rates currency rates
2013 2012 2013 2012 BioScience
$ 6,564 $ 6,237 $ 6,0535% 3% 6% 6% Medical Products 8,695 7,953 7,840 9% 1% 10% 4% Total net sales $ 15,259 $ 14,190 $ 13,8938% 2% 8% 5% Percent change At actual At constant currency rates currency rates
2013 2012 2013 2012 United States
$ 6,451 $ 6,056 $ 5,7097% 6% 7% 6% International 8,808 8,134 8,184 8% (1% ) 9% 4% Total net sales $ 15,259 $ 14,190 $ 13,8938% 2% 8% 5% Foreign currency did not have a significant impact on net sales in 2013 as the weakening of the U.S. Dollar relative to the Euro was offset by the strengthening of the U.S. Dollar relative to the Japanese Yen and certain other currencies. Foreign currency unfavorably impacted net sales by 3 percentage points in 2012 principally due to the strengthening of the U.S. Dollar relative to the Euro. Excluding the impact of foreign currency, total net sales growth was 8% and 5% in 2013 and 2012, respectively, primarily driven by improved sales volumes (demand). In 2013, the acquisition of Gambro in September 2013contributed 4 percentage points towards sales growth. In 2012, the acquisitions of Synovis and Baxa contributed 2 percentage points towards sales growth. Additionally, included in net sales in the Medical Products segment were sales of $58 millionin 2011 related to the U.S. multi-source generic injectables business, which was divested by the company in the first half of 2011. The divestiture of this business unfavorably impacted total net sales growth by 1 percentage point in 2012. Refer to Note 2 for further information regarding this divestiture and Note 4 for further information regarding the Gambro, Synovis, and Baxa acquisitions. The comparisons presented at constant currency rates reflect comparative local currency sales at the prior year's foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. The company believes that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding of the company's operations and can facilitate a fuller analysis of the company's results of operations, particularly in evaluating performance from one period to another. Franchise Net Sales Reporting Effective January 1, 2013, Baxter transitioned to a commercial franchise structure for reporting net sales within each segment. Prior period net sales have been reclassified to reflect the new commercial franchise structure. Refer to the segment net sales discussions below for a description of each commercial franchise. 27
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The BioScience segment includes four commercial franchises: Hemophilia, BioTherapeutics, BioSurgery and Vaccines.
• Hemophilia includes sales of recombinant factor VIII products and
plasma-derived hemophilia products (primarily plasma-derived factor IX,
factor VIII and inhibitor therapies). Recombinant and plasma-based hemophilia products were previously reported in separate product categories.
• BioTherapeutics includes sales of the company's antibody-replacement
immunoglobulin therapies and other plasma-based therapies, such as albumin
and alpha-1 antitrypsin products. Antibody therapies and other plasma-based products were previously reported in separate product categories.
• BioSurgery consists of biological products and medical devices used in
surgical procedures for hemostasis, tissue sealing, adhesion prevention
and hard tissue repair, as well as soft tissue repair and microsurgery
• Vaccines consists primarily of vaccines for meningitis C and tick-borne
encephalitis, as well as ongoing collaborations for the development of
seasonal and pandemic influenza vaccines.
The following is a summary of net sales by franchise in the BioScience segment. Percent change At actual At constant currency rates currency rates years ended December 31 (in millions) 2013 2012 2011 2013 2012 2013 2012 Hemophilia
$ 3,437 $ 3,241 $ 3,2166% 1% 7% 4% BioTherapeutics 2,118 2,069 2,002 2% 3% 2% 4% BioSurgery 717 673 580 7% 16% 6% 19% Vaccines 292 254 255 15% -% 18% 8% Total BioScience net sales $ 6,564 $ 6,237 $ 6,0535% 3% 6% 6% Net sales in the BioScience segment increased 5% and 3% in 2013 and 2012, respectively (with an unfavorable foreign currency impact of 1 percentage point in 2013 and an unfavorable foreign currency impact of 3 percentage points in 2012). Excluding the impact of foreign currency, the principal drivers impacting net sales were the following:
• In the Hemophilia franchise, sales growth in 2013 was driven primarily by
strong demand globally for the company's advanced recombinant therapy,
ADVATE, and the company's plasma-based inhibitor bypass therapy, FEIBA.
Also contributing to sales growth in 2013 were shipments to
of Baxter's ongoing partnership with HemobrÁs. Sales growth in 2012 was
driven primarily by strong U.S. demand for ADVATE, which was partially
offset by lower tender sales in
Australiain 2012. • In the BioTherapeutics franchise, sales increased during 2013 primarily
due to growth of immunoglobulin therapies resulting from improved product
availability and accelerated demand for GAMMAGARD LIQUID [Immune Globulin
Intravenous (Human)], albumin and Alpha-1 treatments. Sales growth was partially offset in 2013 by lower international sales as a result of an
exit from certain markets due to previous supply constraints. Sales growth
in 2012 was primarily the result of demand in
GAMMAGARD LIQUID and the favorable impact from pricing benefits related to
geographic mix as the company optimized its global supply in light of a planned, temporary shutdown during the second half of 2012.
• Sales in the BioSurgery franchise in both years were favorably impacted by
sales growth for Synovis, which Baxter acquired during the first quarter
of 2012, and solid growth for the company's surgical sealants TISSEEL and
• In the Vaccines franchise, sales growth in both years was primarily driven
by higher international sales of FSME-IMMUN (a tick-borne encephalitis
vaccine) and milestone payments from ongoing collaborations relating to
the development of influenza vaccines. 28
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The Medical Products segment includes four commercial franchises: Fluid Systems, Renal,
• Fluid Systems principally includes IV therapies, infusion pumps,
administration sets and premixed and oncology drug platforms. IV therapies
were previously reported with nutrition products in IV Therapies, and Infusion Systems and Global Injectables were previously reported in separate product categories.
• Renal consists of therapies for PD, HD, HHD and CRRT. Effective September
2013, the Renal franchise includes the results of Gambro. Refer to Note 4 for additional information.
products. Nutrition products were previously reported within the IV Therapies product category and anesthesia products were previously reported as a separate product category.
• BioPharma Solutions principally includes sales from the pharmaceutical
partnering business and pharmacy compounding services, which were
previously reported with the Global Injectables product category.
The following is a summary of net sales by franchise in the Medical Products segment. Percent change At actual At constant currency rates currency rates
2013 2012 2013 2012 Fluid Systems
$ 3,106 $ 2,937 $ 2,9736% (1% ) 6% 0% Renal 3,089 2,527 2,530 22% -% 24% 2% Specialty Pharmaceuticals 1,508 1,475 1,328 2% 11% 2% 14% BioPharma Solutions 992 1,014 1,009
(2% ) 1% (2% ) 2%
Total Medical Products net sales
9% 1% 10% 4%
Net sales in the Medical Products segment increased 9% and 1% in 2013 and 2012, respectively (with an unfavorable foreign currency impact of 1 percentage point in 2013 and an unfavorable foreign currency impact of 3 percentage points in 2012). Excluding the impact of foreign currency, the principal drivers impacting net sales were the following:
• In the Fluid Systems franchise, sales growth in 2013 was primarily driven
by increased sales of cyclophosphamide (a generic oncology drug) due to
improved pricing in
Sales growth in 2013 was partially offset by an expected decline in SIGMA
Spectrum Infusion Pump sales due to suspension of sales to new accounts
commencing with the receipt of the FDA Warning Letter in
to Certain Regulatory Matters for additional information. In 2012, the favorable impact of price increases for cyclophosphamide in
the United Stateswas offset by lower global sales of access sets used in the
administration of IV solutions and lower sales of SIGMA Spectrum Infusion
Pumps, which principally related to the substantial completion of the COLLEAGUE infusion pump recall activities in
the United Statesin the third quarter of 2012. • In the Renal franchise, sales in 2013 included $513 millionfrom Gambro following the acquisition in September 2013. Excluding the impact of Gambro, sales grew 2 percent (or 4 percent on a constant currency basis) during 2013 driven by growth in the number of PD patients in the United Statesand emerging markets. During 2012, the favorable impact of PD
patient growth in
offset by lower sales of HD products. 29
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• In the
favorably impacted by strong, global sales of anesthetics. During 2012,
sales also benefited from a favorable contribution from the fourth quarter
2011 acquisition of Baxa. During 2013, sales growth was partially offset
by lower sales of nutrition products due to supplier shortages of distributed vitamins and lipids.
• Sales in the BioPharma Solutions franchise declined during 2013 as a
result of delayed shipments from the company's
facility, which was partially offset by an improvement in sales during the
fourth quarter of 2013 as a result of timing of orders and shipments as
supply constraints were alleviated. Sales during 2012 grew primarily due
to improved sales in the international pharmacy compounding business.
Gross Margin and Expense Ratios
Change years ended
December 31(as a percent of net sales) 2013 2012 2011 2013 2012 Gross margin 49.8% 51.5% 50.7% (1.7 pts ) 0.8 pts Marketing and administrative expenses 24.1% 23.4% 22.7% 0.7 pts 0.7 pts Gross Margin
The special items identified above had an unfavorable impact of 1.3, 0.3 and 0.7 percentage points on the gross margin percentage in 2013, 2012, and 2011, respectively. Refer to the Special Items caption above for additional detail.
In addition to the impact of the special items, the gross margin percentage in 2013 declined compared to 2012 primarily as a result of the integration of the lower margin Gambro business, which had an unfavorable impact of 0.5 percentage points on the gross margin percentage in 2013. Also contributing to the decline in the gross margin percentage during 2013 was an unfavorable impact from foreign currency, increased pension plan costs, government austerity measures and the realization of additional costs associated with modifications and the ramp-up of production at the company's
Los Angelesfractionation facilities. These declines were partially offset by improved product mix and price improvements, particularly for cyclophosphamide. In addition to the impact of the special items, the gross margin percentage in 2012 improved compared to 2011 due to the benefit from sales growth in higher margin products in the BioScience segment, the resolution of prior year manufacturing issues at the company's Castlebar, Irelandfacility, and a modest favorable impact of foreign currency. These improvements in gross margin were partially offset by margin dilution from business development activities, increased pension plan costs and government austerity measures.
Marketing and Administrative Expenses
The special items identified above had an unfavorable impact of 2.1, 1.7 and 1.6 percentage points on the marketing and administrative expenses ratio in 2013, 2012, and 2011, respectively. Refer to the Special Items caption above for additional detail. In addition to the unfavorable impact of the special items, the marketing and administrative expenses ratio in 2013 increased primarily as a result of the impact of Gambro's operations since the
September 2013acquisition, which reflects a higher marketing and administrative expenses ratio for Gambro compared to Baxter. In addition to the impact of the Gambro acquisition, the marketing and administrative expenses ratio in 2013 increased as the company's focus on controlling discretionary spending was offset by increased pension costs and select investments and spending on marketing and promotional programs for new launches and to enhance the company's global presence in international markets.
In addition to the unfavorable impact of the special items, the marketing and administrative expenses ratio in 2012 increased as a result of incremental expenses from the operations of Baxa and Synovis, acquisition-related
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expenses, additional spending on marketing and promotional programs, and an increase in pension plan costs as described below. These factors were partially offset by savings from the company's business optimization initiatives and the company's continued focus on controlling discretionary spending.
Pension Plan Costs
Fluctuations in pension plan costs impacted the company's gross margin and expense ratios. The pension cost in 2012 included settlement charges of
$168 millionprimarily related to the settlement of certain U.S. pension obligations. Excluding the impact of the 2012 settlement charges, pension plan costs increased $70 millionin 2013 and $43 millionin 2012 due to lower interest rates used to discount the plans' projected benefit obligations and an increase in amortization of actuarial losses. The 2012 pension settlements resulted in savings to pre-tax income of $20 millionin 2013. The costs of the company's pension plans are expected to decrease from $336the plans' projected benefit obligations. The amortization of deferred losses is expected to decrease to $144 millionfrom $245 millionin 2013.
Business Optimization Items
The company has implemented certain business optimization initiatives in an effort to streamline its international operations, rationalize its manufacturing facilities, enhance its general and administrative infrastructure and re-align certain R&D activities. In 2013, the company recorded business optimization charges of
$314 million. The company estimates that the new initiatives will yield annualized savings of approximately $0.17per diluted share when the program is fully implemented in 2015. The savings from these actions will impact cost of sales, marketing and administrative expenses and R&D expenses, and benefit both the BioScience and Medical Products segments. Refer to Note 6 for additional information regarding the company's business optimization initiatives. The company has previously recognized business optimization charges of $150 millionand $192 millionin 2012 and 2011, respectively, associated with initiatives that the company estimates have resulted in annualized savings of approximately $0.13per diluted share in 2013. The company expects additional annualized savings of approximately $0.11per diluted share when these programs are fully implemented in 2015. Research and Development Percent change years ended December 31 (in millions) 2013 2012
2011 2013 2012
Research and development expenses
$1,246 $1,156 $9468% 22% as a percent of net sales 8.2% 8.1% 6.8% R&D expenses increased in both 2013 and 2012. In addition to the special items identified above, R&D expenses increased in 2013 principally as a result of the acquisition of Gambro. Additionally, R&D expenses grew in both years due to investments made by the company to advance a number of key R&D programs in the pipeline. Refer to the discussion under Strategic Objectives above for additional detail.
Net Interest Expense
Net interest expense increased by
$41 millionin 2013 and increased by $33 millionin 2012. The increase in 2013 was principally driven by an increase in debt from the issuance of $1.0 billionof senior notes in August 2012and $3.5 billionof senior notes in June 2013. The increase in 2012 was principally driven by an increase in debt from the issuances of $500 million1.85% senior unsecured notes in December 2011, and $700 million2.40% senior unsecured notes and $300 million3.65% senior unsecured notes in August 2012, as well as lower interest income. Refer to Note 2 for a summary of the components of net interest expense for 2013, 2012 and 2011. 31
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Other (Income) Expense, Net
Other (income) expense, net was
$9 millionand $155 millionof income in 2013 and 2012, respectively, and $83 millionof expense in 2011. Refer to Note 2 for a table that details the components of other (income) expense, net for the years ended December 31, 2013, 2012 and 2011. Other (income) 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.
During 2013, other (income) expense, net included the benefit from a net loss attributable to noncontrolling interests of
During 2012, other (income) expense, net included gains of
$53 millionand $38 millionfor the reduction of certain contingent payment liabilities related to the prior acquisitions of Prism and ApaTech, respectively. Additionally, other (income) expense, net included the benefit from a net loss attributable to noncontrolling interests of $28 millionin 2012, which was prospectively classified as other (income) expense, net effective January 1, 2012.
During 2011, other (income) expense, net included asset impairment charges totaling
Refer to Note 16 for a summary of financial results by segment. The following is a summary of significant factors impacting the segments' financial results.
Pre-tax income increased 5% in 2013 and decreased 4% in 2012. Included in pre-tax income during 2013 were R&D charges of
$78 millionprimarily related to upfront and milestone payments associated with the company's collaborations with Cell Therapeutics and Coherus. Included in pre-tax income during 2012 were business development charges of $123 million, primarily related to R&D charges associated with the company's collaborations with Onconova, Chathamand Momenta, and a gain of $38 millionrelated to the reduction of a contingent payment liability for certain milestones associated with the 2010 acquisition of ApaTech.
Excluding the impact of the above items, pre-tax income in 2013 increased by 5% primarily due to sales growth of higher margin products and the receipt of milestone payments related to ongoing collaborations for the development of influenza vaccines. The increase in pre-tax income for both periods was partially offset by increased spending on marketing and promotional programs.
Excluding the impact of the above items, pre-tax income in 2012 declined by 1% as sales growth of certain higher margin products was more than offset by an increase in spending on R&D driven by funding of key programs and the achievement of certain milestones, increased spending on new marketing and promotional programs, and the unfavorable impact of foreign currency.
Pre-tax income decreased 12% in 2013 and increased 5% in 2012. Included in pre-tax income in 2013 were Gambro acquisition and integration-related costs of
$192 million, in addition to product-related charges of $16 millionprincipally related to remediation efforts associated with modifications to the SIGMA Spectrum Infusion Pump in conjunction with re-filing for 510(k) clearance. Also included in pre-tax income in 2013 was an R&D charge of $25 millionrelated to the company's collaboration arrangement with JW Holdings. 32
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Included in pre-tax income in 2012 was a gain of
$53 millionrelated to the reduction of the contingent payment liability for certain milestones associated with the 2011 acquisition of Prism and a net benefit from reserve adjustments of $23 million, which primarily related to an adjustment to the COLLEAGUE infusion pump reserves. Excluding the impact of the above items, pre-tax income in 2013 increased by 7% primarily due to a favorable impact of sales growth of higher margin products and the favorable impact from foreign currency. Excluding the impact of the above items from 2012, pre-tax income in 2012 was flat to 2011 as the favorable impact of the resolution of prior year manufacturing issues at the company's Castlebar, Irelandfacility was offset by increases in R&D spending, increases in marketing and administrative expenses, and the unfavorable impact of foreign currency.
Certain income and expense amounts are not allocated to a segment. These amounts are detailed in the table in Note 16 and primarily include net interest expense, certain foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in foreign currency) and certain foreign currency hedging activities, corporate headquarters costs, stock compensation expense, income and expense related to certain non-strategic investments, certain employee benefit plan costs (including the 2012 pension settlement charges), certain nonrecurring gains and losses, certain charges (such as business optimization, litigation, and asset impairment), and contributions to the
Baxter International Foundation.
Effective Income Tax Rate
The effective income tax rate was 21.1% in 2013 and 20% in both 2012 and 2011. The company anticipates that the effective income tax rate, calculated in accordance with GAAP, will be approximately 21.7% in 2014, excluding any impact from additional audit developments or other special items. The company's 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. The average foreign effective tax rate on International pre-tax income was 18%, 17% and 15% for the years ended
December 31, 2013, 2012 and 2011, respectively. The company's average foreign effective tax rate was lower than the U.S. federal statutory rate as a result of the impact of tax incentives in Puerto Rico, Switzerlandand certain other tax jurisdictions outside of the United States, as well as foreign earnings in tax jurisdictions with lower statutory rates than the United States. In addition, as discussed further below, the company's effective income tax rate can be impacted in each year by discrete factors or events. Refer to Note 14 for further information regarding the company's income taxes. Factors impacting the company's effective tax rate in 2013 included the favorable settlement of the company's bilateral Advance Pricing Agreement proceedings between the U.S. government and the government of Switzerlandwith respect to intellectual property, product, and service transfer pricing arrangements, which was offset by other contingent tax matters principally related to transfer pricing. Additionally, the effective tax rate was unfavorably impacted by increases in valuation allowances in respect of the tax benefit from losses that the company does not believe that it is more likely than not to realize and interest expense related to the company's unrecognized tax benefits. Partially offsetting these unfavorable items were $16 millionof U.S. R&D credits. Additionally, the company's effective tax rate was impacted by a change in the earnings mix from lower tax to higher tax rate jurisdictions compared to the prior year.
Factors impacting the company's effective tax rate in 2012 were gains of
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respectively, for which there were no tax charges. Also impacting the effective tax rate was a cost of sales reduction of
$37 millionfor an adjustment to the COLLEAGUE infusion pump reserves when the company substantially completed the recall in the United Statesin 2012, for which there was no tax charge. These items were offset by a change in the earnings mix from lower tax to higher tax rate jurisdictions compared to the prior year period.
Factors impacting the company's effective tax rate in 2011 were tax benefits from the business optimization charge, the average wholesale price (AWP) litigation and historical price reporting charge, and other charges in 2011 which were incurred in jurisdictions with rates higher than the effective rate.
Income and Earnings per Diluted Share
Net income attributable to Baxter was
$2.0 billionin 2013, $2.3 billionin 2012 and $2.2 billionin 2011. The corresponding net earnings per diluted share were $3.66in 2013, $4.18in 2012 and $3.88in 2011. The significant factors and events causing the net changes from 2012 to 2013 and from 2011 to 2012 are discussed above. Additionally, net income attributable to Baxter per diluted share was positively impacted by the repurchase of 13 million shares in 2013, 25 million shares in 2012 and 30 million shares in 2011. Refer to Note 11 for further information regarding the company's stock repurchases.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operations
Cash flows from operations totaled
$3.2 billionin 2013, $3.1 billionin 2012 and $2.8 billionin 2011. The increase in cash flows in 2013 from 2012 was primarily due to the factors discussed below and was partially offset by lower earnings before non-cash items and adjustments. The increase in cash flows in 2012 from 2011 was primarily due to the factors discussed below and was partially offset by lower earnings before non-cash items and adjustments. Other non-cash items and adjustments of $42 millionin 2012 included non-cash gains of $91 millionfrom the reduction of certain contingent payment liabilities from prior acquisitions. Also included in other non-cash items and adjustments in 2012 was $113 millionin R&D charges associated with upfront payments made for the execution of 2012 collaboration agreements, which have been included in cash flows from investing activities.
Cash flows relating to accounts receivable increased in both 2012 and 2013. Days sales outstanding were 55.9 days, 53.3 days and 53.5 days for 2013, 2012 and 2011, respectively. Days sales outstanding in 2013 included an unfavorable impact of 3.4 days from the acquisition of Gambro in
September 2013. Excluding the impact of Gambro, days sales outstanding declined to 52.5 days in 2013 reflecting an improvement in collection periods in both the United Statesand certain international markets. The decrease in 2012 was due to collections of certain past due balances in Europe, partially offset by longer collection periods in the United Statesand the unfavorable impact of foreign currency.
Cash outflows for inventories increased in 2013 and decreased in 2012. The following is a summary of inventories at
December 31, 2013and 2012, as well as inventory turns by segment for 2013, 2012 and 2011. 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) 2013 2012 2013
2012 2011 BioScience
$ 2,078 $ 1,7451.49 1.48 1.52 Medical Products 1,421 1,058 4.36 4.25 4.52 Total company $ 3,499 $ 2,8032.66 2.52 2.66 34
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The increase in inventories in 2013 was principally due to additional inventories acquired as part of the Gambro transaction and higher levels of plasma protein-related inventories in the BioScience segment to meet growing demand.
Inventory turns for the total company increased during 2013 compared to 2012 primarily due to strong sales and inventory management efforts. Inventory turns in 2013 also included the favorable impacts from purchase accounting related to the acquisition of Gambro and the business optimization charge recorded in cost of sales in 2013. Inventory turns for the total company in 2012 were unfavorably impacted by the increase in inventories and the lower business optimization charge recorded in cost of sales in 2012 as compared to 2011. Refer to Note 6 for further information regarding these charges.
Cash inflows related to accounts payable and accrued liabilities were
Payments related to the execution of the COLLEAGUE infusion pump recall and the company's business optimization initiatives decreased by
$158 millionand $64 millionin 2013 and 2012, respectively, as the company completed its recall activities in the United Statesin the third quarter of 2012. Refer to Note 6 for further information regarding the COLLEAGUE infusion pump recall and the business optimization initiatives. Cash outflows related to other balance sheet items were $103 millionin 2013 compared to $171 millionin 2012. The decrease in cash outflows during 2013 was primarily driven by hedging activity and lower pension plan contributions during 2013. Cash contributions to the company's pension plans totaled $67 million, $78 millionand $251 millionin 2013, 2012 and 2011, respectively, and included a discretionary cash contribution to the company's U.S. pension plan of $150 millionin 2011.
Cash Flows from Investing Activities
Capital expenditures totaled
$1.5 billionin 2013, $1.2 billionin 2012 and $960 millionin 2011. The company's investments in capital expenditures in 2013 were primarily driven by additional investments in support of new and existing product capacity expansions in the BioScience segment. The company also invested in projects that enhance the company's cost structure and manufacturing capabilities and support the company's strategy of geographic expansion with select investments in growing markets. In addition, the company continues to invest to support an ongoing strategic focus on R&D with the expansion of facilities, pilot manufacturing sites and laboratories. Capital expenditures also included the company's multi-year initiative to implement a global enterprise resource planning system designed to consolidate and standardize business processes, data and systems. 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 $1.8 billionin capital expenditures in 2014, which includes Gambro-related expenditures and expected capital expenditures related to the construction of the plasma manufacturing facility in Covington, Georgia.
Acquisitions and Investments
Net cash outflows related to acquisitions and investments were
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Cash outflows relating to acquisitions and investments of
$3.9 billionin 2013 principally included $3.6 billionfor the third quarter acquisition of Gambro (net of cash acquired of $88 million) and a cash outflow of $51 millionfor the first quarter acquisition of the investigational hemophilia compound OBI-1 and related net assets from Inspiration BioPharmaceuticals, Inc.and Ipsen PharmaS.A.S. Refer to Note 4 for further information about these acquisitions. Also included in cash outflows relating to acquisitions and investments in 2013 were $130 millionprincipally related to upfront and milestone-related payments associated with the company's collaboration arrangements with Cell Therapeutics, Coherusand JW Holdings. The cash outflows in 2012 included $304 millionassociated with the acquisition of Synovis, $19 millionrelated to the acquisition of Laboratoire Fasonut, and $50 millionfor an investment in the preferred stock of Onconova. Also included in cash outflows related to acquisitions and investments in 2012 were upfront payments of $113 millionmade to execute collaboration agreements during the period. Refer to Note 4 for further information about these acquisitions and investments. The cash outflows in 2011 principally included $360 millionrelated to the acquisition of Baxa (which excludes a working capital adjustment received in 2012) and $170 millionassociated with the acquisition of Prism, as well as an $18 millionpayment to exercise an option related to the company's collaboration agreement for the development of a home HD machine. Also included in cash outflows in 2011 were $18 millionrelated to an investment in the common stock of Enobia Pharma Corporation(Enobia) and a $10 millionpayment related to the arrangement with Ceremed, Inc.Refer to Note 4 for further information about the Baxa and Prism acquisitions.
Divestitures and Other Investing Activities
Net cash inflows relating to divestitures and other investing activities were
$14 millionin 2013, $107 millionin 2012 and $123 millionin 2011. Cash inflows in 2013 primarily related to various sales of certain investments and other assets. Cash inflows in 2012 primarily related to proceeds of $59 millionfrom the sale and maturity of available-for-sale securities (including the sale of Greek government bonds) and $19 millionfrom the sale of the common stock of Enobia.
Cash Flows from Financing Activities
Debt Issuances, Net of Payments of Obligations
Net cash inflows related to debt and other financing obligations were
June 2013, the company issued $3.5 billionof senior notes with various maturities to finance the acquisition of Gambro. Approximately $3.0 billionof the net proceeds of these debt issuances was used to finance the acquisition of Gambro in 2013 and the remainder was used for general corporate purposes, including the repayment of commercial paper. This issuance was partially offset by the repayment of $300 millionof 1.8% senior unsecured notes that matured in March 2013and payment of assumed Gambro debt of $221 millionafter completion of the acquisition in September 2013. Refer to Note 7 for additional information regarding the debt issuance and Note 4 regarding the Gambro acquisition.
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The company's debt instruments discussed above are unsecured and include certain covenants, including restrictions relating to the company's creation of secured debt. Other Financing Activities Cash dividend payments totaled
$1.0 billionin 2013, $804 millionin 2012 and $709 millionin 2011. The increase in cash dividend payments was primarily due to an increase in the quarterly dividend rate of approximately 9% to $0.49per share, as announced in May 2013, and the July 2012quarterly dividend rate increase of approximately 34% to $0.45per share, first payable on October 1, 2012, partially offset by the impact of fewer common shares outstanding as a result of the company's stock repurchase program. Proceeds and realized excess tax benefits from stock issued under employee benefit plans totaled $508 million, $512 millionand $448 millionin 2013, 2012 and 2011, respectively. The significant increase in 2012 was mainly due to increases in stock option exercises and the weighted-average exercise price. Realized excess tax benefits, which were $34 millionin 2013, $24 millionin 2012 and $21 millionin 2011, are presented in the consolidated statements of cash flows as an outflow in the operating section and an inflow in the financing section. As authorized by the board of directors, the company repurchases its stock depending on the company's cash flows, net debt level and market conditions. The company repurchased 13 million shares for $913 millionin 2013, 25 million shares for $1.5 billionin 2012 and 30 million shares for $1.6 billionin 2011. In December 2010, the board of directors authorized the repurchase of up to $2.5 billionof the company's common stock, which was fully utilized as of December 31, 2012. In July 2012, the board of directors authorized the repurchase of up to an additional $2.0 billionof the company's common stock and $1.0 billionremained available as of December 31, 2013.
Also included in financing activities in 2012 was a payment of
Credit Facilities, Access to Capital and Credit Ratings
The company's primary revolving credit facility has a maximum capacity of
$1.5 billionand matures in June 2015. The company also maintains a Euro-denominated revolving credit facility with a maximum capacity of approximately $413 millionat December 31, 2013. In 2013, the company amended the agreement related to this facility to extend the maturity date to December 2014. The terms of the Euro-denominated credit facility did not substantially change, however certain provisions were amended to more closely align with the company's primary credit facility. As of December 31, 2013approximately $124 millionwas outstanding under the Euro-denominated facility and there were no outstanding borrowings under the primary revolving credit facility. In 2012, there were no outstanding borrowings under either of these facilities. The company's 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, 2013, 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 institution's respective commitment. In January 2013, Baxter entered into an agreement related to a 364-day bridge loan facility with a maximum capacity of $3.1 billionin connection with the planned acquisition of Gambro. This facility was terminated in the second quarter of 2013 as a result of the company's June 2013issuance of debt. The company recognized a $13 millionexpense related to bridge loan facility structuring and commitment fees in other (income) expense, net during the second quarter of 2013.
The company also maintains other credit arrangements, as described in Note 7.
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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. The company had
$2.7 billionof cash and equivalents at December 31, 2013, with adequate cash available to meet operating requirements in each jurisdiction in which the company operates. The company invests its excess cash in certificates of deposit and money market funds, and diversifies the concentration of cash among different financial institutions. The company's 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 company's products or in the solvency of its customers or suppliers, deterioration in the company's key financial ratios or credit ratings or other significantly unfavorable changes in conditions. However, the company believes it has sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support the company's growth objectives. The company continues to do business with foreign governments in certain countries, including Greece, Spain, Portugaland Italy, that have experienced a deterioration in credit and economic conditions. As of December 31, 2013and 2012, the company's net accounts receivable from the public sector in Greece, Spain, Portugaland Italytotaled $561 millionand $385 million, respectively, (of which $29 millionand $66 million, respectively, related to Greece). The company's net accounts receivable from the public sector for the countries identified above increased by $176 millionduring 2013 primarily as a result of the acquisition of Gambro. While the economic downturn has not significantly impacted the company's ability to collect receivables, global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses.
The company's credit ratings at
Standard & Poor's Fitch Moody's Ratings Senior debt A A A3 Short-term debt A1 F1 P2 Outlook Stable Negative Stable
In 2013, Moody's upgraded the Company's outlook from negative to stable.
If Baxter's credit ratings or outlooks were to be downgraded, the company's 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 company's ability to draw on its credit facilities, and would not result in an acceleration of the scheduled maturities of any of the company's outstanding debt, unless, with respect to certain debt instruments, preceded by a change in control of the company. 38
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Less than One to Three to More than (in millions) Total one year three years five years five years Short-term debt
$ 181 $ 181$ - $ - $ - Long-term debt and capital lease obligations, including current maturities 9,020 859 1,924 1,909 4,328 Interest on short- and long-term debt and capital lease obligations1 2,843 271 470 336 1,766 Operating leases 1,085 216 338 260 271 Other long-term liabilities2 1,630 - 331 139 1,160 Purchase obligations3 1,686 914 617 145 10 Unrecognized tax benefits4 118 118 - - - Contractual obligations5 $ 16,563 $ 2,559 $ 3,680 $ 2,789 $ 7,535
1 Interest payments on debt and capital lease obligations are calculated for
future periods using interest rates in effect at the end of 2013. Projected
interest payments include the related effects of interest rate 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
to Note 7 and Note 8 for further discussion regarding the company's debt
instruments and related interest rate agreements outstanding at
2013. 2 The primary components of other long-term liabilities in the company's consolidated balance sheet are liabilities relating to pension and other
postemployment benefit plans, litigation, foreign currency hedges, 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
$67 million, $78 millionand $251 millionto its defined benefit pension plans in 2013, 2012 and 2011, respectively. Most of the company's 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. The pension plan balance included in other long-term liabilities (and excluded from the table above) totaled $1.4 billionat December 31, 2013.
3 Includes the company's significant contractual unconditional purchase
obligations. For cancelable agreements, includes any penalty due upon
cancellation. These commitments do not exceed the company's 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
5 Excludes contingent liabilities, including contingent milestone payments of
arrangements and contingent milestone payments of
acquisitions, as well as the company's unfunded commitment at
These amounts have been excluded from the contractual obligations above due to
uncertainty regarding the timing and amount of future payments. Refer to Note
4, Note 9 and Note 10 for additional information regarding these commitments.
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Off-Balance Sheet Arrangements
Baxter periodically enters into off-balance sheet arrangements. 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 charges in excess of presently established liabilities for certain matters (such as contractual indemnifications). For a discussion of the company's significant off-balance sheet arrangements, refer to Note 10 for information regarding joint development and commercialization arrangements and indemnifications, Note 9 regarding receivable securitizations and Note 15 regarding legal contingencies.
FINANCIAL INSTRUMENT MARKET RISK
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 company's hedging policy attempts to manage these risks to an acceptable level based on the company's judgment of the appropriate trade-off between risk, opportunity and costs. Refer to Note 8 and Note 9 for further information regarding the company's 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, Colombian Peso, and Swedish Krona. 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 limit the company's ability to cost-effectively hedge these exposures. The company may use 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 transactions at
December 31, 2013is 24 months. The company also enters into derivative instruments to hedge certain intercompany and third-party receivables and payables and debt denominated in foreign currencies. In 2012, the company entered into option contracts with a total notional amount of $2.8 billionto hedge anticipated foreign currency cash outflows associated with the acquisition of Gambro. In the first quarter of 2013, the company entered into an additional $900 millionof Gambro-related option contracts. These contracts matured in the second quarter of 2013 and the company entered into forward contracts with a total notional amount of $1.5 billionto also hedge anticipated foreign currency cash outflows associated with the acquisition of Gambro, which matured in the third quarter of 2013. Currency restrictions enacted in Venezuelarequire Baxter to obtain approval from the Venezuelan government to exchange Venezuelan Bolivars for U.S. Dollars and require such exchange to be made at the official exchange rate established by the government. Since January 1, 2010, Venezuelahas been designated as a highly inflationary economy under GAAP and as a result, the functional currency of the company's subsidiary in Venezuelais the U.S. Dollar. Effective February 8, 2013, the Venezuelan government devalued the official exchange rate from 4.3 to 6.3, which resulted in a charge of $11 millionduring 2013. As of December 31, 2013, the company's subsidiary in Venezuelahad net assets of $30 milliondenominated in the Venezuelan Bolivar. In 2013, net sales in Venezuelarepresented less than 1% of Baxter's 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. 40
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A sensitivity analysis of changes in the fair value of foreign exchange option and forward contracts outstanding at
December 31, 2013, while not predictive in nature, indicated that if the U.S. Dollar uniformly weakened by 10% against all currencies, on a net-of-tax basis, the net asset balance of $18 millionwith respect to those contracts would decrease by $71 million, resulting in a net liability position. A similar analysis performed with respect to option and forward contracts outstanding at December 31, 2012indicated that, on a net-of-tax basis, the net asset balance of $37 millionwould increase by $10 million. The sensitivity analysis model recalculates the fair value of the foreign exchange option and forward contracts outstanding at December 31, 2013by replacing the actual exchange rates at December 31, 2013with exchange rates that are 10% weaker compared 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 company's 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 31 basis-point increase in interest rates (approximately 10% of the company's weighted-average interest rate during 2013) affecting the company's financial instruments, including debt obligations and related derivatives, would have an immaterial effect on the company's 2013, 2012 and 2011 earnings and on the fair value of the company's fixed-rate debt as of the end of each fiscal year. As discussed in Note 9, the fair values of the company's 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 company's 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 company's consolidated financial position.
CHANGES IN ACCOUNTING STANDARDS
Refer to Note 1 for information on changes in accounting standards.
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 company's significant accounting policies is included in Note 1. Certain of the company's accounting policies are considered critical because these policies are the most important to the depiction of the company's 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 company's estimates could have an unfavorable effect on the company's 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 company's 41
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application of its critical accounting policies during 2013. The company's 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 company's policy is to recognize revenues from product sales and services when earned. Refer to Note 1 for additional information regarding the company's accounting policy for revenue recognition, including the company's accounting for arrangements in which it commits to delivering multiple products or services to its customers. 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.
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 company's 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 Other Postemployment Benefit (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 employee's compensation expense. The valuation of the funded status and net periodic benefit cost for the plans is calculated using actuarial assumptions. These assumptions are reviewed annually, and revised if appropriate. The significant assumptions include the following: • interest rates used to discount pension and OPEB plan liabilities; • the long-term rate of return on pension plan assets; • rates of increases in employee compensation (used in estimating liabilities);
• anticipated future healthcare costs (used in estimating the OPEB plan
• other assumptions involving demographic factors such as retirement,
mortality and turnover (used in estimating liabilities).
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 company's key assumptions are listed in Note 12. The most critical assumptions relate to the plans covering U.S. and
Puerto Ricoemployees, because these plans are the most significant to the company's consolidated financial statements. 42
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Discount Rate Assumption
For the U.S. and
Puerto Ricoplans, at the measurement date ( December 31, 2013), the company used a discount rate of 4.85% and 4.90% to measure its benefit obligations for the pension plans and OPEB plan, respectively. These discount rates will be used in calculating the net periodic benefit cost for these plans for 2014. The company used a broad population of approximately 240 Aa-rated corporate bonds as of December 31, 2013to 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 490 Moody's 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 Ricoplans. 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 Kingdomand the Eurozone, the company uses a method essentially the same as that described for the U.S. and Puerto Ricoplans. For the company's 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 percent) increase (decrease) in the discount rate, global pre-tax pension and OPEB plan cost would decrease (increase) by approximately $53 million.
Return on Plan Assets Assumption
In measuring net periodic cost for 2013, the company used a long-term expected rate of return of 7.50% for the pension plans covering U.S. and
Puerto Ricoemployees. For measuring the net periodic benefit cost for these plans for 2014, this assumption will remain at 7.50%. This assumption is not applicable to the company's 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 company's 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 company's 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 $18 million. Other Assumptions The company used the RP 2000 mortality table to calculate the pension and OPEB plan benefit obligations for its plans in the United Statesand 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 12 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. 43
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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 15 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, 2013, total legal liabilities were $160 millionand total related receivables were $7 million. The company's 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 company's 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. While the liability of the company in connection with certain 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 company's 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 company's 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.
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 company's 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 its 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 company's past audit experience with similar situations, and potential interest and penalties related to the matters. The company's results of operations and 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.
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 and consideration of market participant assumptions. The most significant estimates and assumptions inherent in a 44
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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 asset's 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 in-process R&D (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. Acquired IPR&D included in a business combination is capitalized as an indefinite-lived intangible asset. 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. R&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 and other indefinite-lived intangible assets are subject to impairment reviews annually, and whenever indicators of impairment exist. Intangible assets with definite lives 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 company's 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 company's business plans and a market participant's 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 company's results of operations. Actual results may differ from the company's estimates.
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 company's stock compensation costs primarily relate to awards of stock options, restricted stock units (RSUs), and performance share units (PSUs). The company uses the Black-Scholes model for estimating the fair value of stock options, and 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 fair value of RSUs is equal to the quoted price of the company's common stock on the date of grant. In 2013, the company changed the vesting condition for 50% of the PSUs granted to senior management beginning with its 2013 annual equity awards. The vesting condition for the new PSUs is based on return on invested capital, with annual performance targets set at the beginning of the year for each tranche of the award during the three-year service period. The remaining 50% of the PSUs continued to include conditions for vesting based on Baxter stock performance relative to the company's peer group, similar to previous years. Compensation cost for the new PSUs is measured based on the fair value of the awards on the date that the 45
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specific vesting terms for each tranche of the award are established, and the company adjusts compensation cost at each reporting date to reflect the estimated probability of achieving the vesting condition. For the remaining PSUs, the company uses a
Monte Carlomodel for estimating the fair value of PSUs, and significant inputs include the risk-free rate, volatility of returns and correlation of returns. Refer to Note 11 for additional information.
CERTAIN REGULATORY MATTERS
January 2014, the company received a Warning Letter from FDAprimarily directed to quality systems for the company's Round Lake, Illinois, facility, particularly in that facility's capacity as a specification developer for certain of the company's medical devices. The letter also included observations related to the company's ambulatory infusor business in Irvine, California, which previously had been subject to agency action. The company is working with FDAto resolve this matter, as well as each of the matters listed below. In June 2013, the company received a Warning Letter from FDAregarding operations and processes at its North Cove, North Carolinaand Jayuya, Puerto Ricofacilities. The Warning Letter addresses observations related to Current Good Manufacturing Practice (CGMP) violations at the two facilities. In April 2013, the company received a Warning Letter from FDAregarding the 510(k) clearance status of modifications to the SIGMA Spectrum Infusion Pump. The company subsequently has completed a new 510(k) submission related to the SIGMA Spectrum Infusion Pump. In June 2010, the company received a Warning Letter from FDAin connection with an inspection of its Renal franchise's McGaw Park, Illinoisfacility. The Warning Letter pertains to the processes by which the company analyzes and addresses product complaints through corrective and preventative actions, and reports relevant information to FDA.
Please see Item 1A of the 2013 Annual Report for additional discussion of regulatory matters and how they may impact the company.
This annual report includes forward-looking statements, including statements with respect to accounting estimates and assumptions, litigation-related matters including outcomes, future regulatory filings and the company's R&D pipeline, strategic objectives, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, the company's exposure to financial market volatility and foreign currency and interest rate risks, geographic expansion, the integration of Gambro, future sales related to the Hemobras partnership, business development activities, business optimization initiatives, future capital and R&D expenditures, future stock repurchases and debt issuances, the impact of healthcare reform, the sufficiency of the company's facilities and financial flexibility, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate in 2014, the impact on the company of recent tax legislation and all other statements that do not relate to historical facts. The statements are based on assumptions about many important factors, including:
• demand for and market acceptance risks for and competitive pressures
related to new and existing products, such as ADVATE and plasma-based
therapies (including Antibody Therapy), and other therapies;
• fluctuations in supply and demand and the pricing of plasma-based therapies;
• the impact of U.S. healthcare reform and other similar actions undertaken
by foreign governments with respect to pricing, reimbursement, taxation
and rebate policies;
• additional legislation, regulation and other governmental pressures in the
taxation and rebate policies of government agencies and private payers or
other elements of the company's business; 46
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• future actions of third parties, including third-party payors, as
healthcare reform and other similar measures are implemented in the United
States and globally; • the company's ability to identify business development and growth opportunities; • product quality or patient safety issues, leading to product recalls,
withdrawals, launch delays, sanctions, seizures, litigation, or declining
• future actions of
authority that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities; • the company's ability to successfully integrate and realize the anticipated benefits of the Gambro acquisition; • fluctuations in foreign exchange and interest rates;
• 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 company's patent rights or patents of third parties preventing or restricting the company's manufacture, sale or use of affected products or technology; • the impact of geographic and product mix on the company's 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 company's ability to realize the anticipated benefits of its business
optimization and transformation initiatives; • the successful implementation of the company's global enterprise resource planning system; • the company's ability to realize the anticipated benefits from its joint
product development and commercialization arrangements, governmental
collaborations and other business development activities; • changes in credit agency ratings;
• the impact of global economic conditions on the company and its customers
and suppliers, including foreign governments in certain countries in which
the company operates; and • other factors identified elsewhere in this Annual Report on Form 10-K
including those factors described in Item 1A and other filings with the
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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K.
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