Company Announces Plan to Restate Results Related to Incorrect Revenue Recognition and Other Items Primarily in Brazil, Decreasing Net Income by up to $40 Million From 2001 Through 2003
Company Revises Full-year Guidance
DEERFIELD, Ill., July 22, 2004 – Baxter International Inc. (NYSE:BAX) today reported its financial results for the second quarter. The company reported a loss from continuing operations of $169 million, or $0.28 per diluted share, which includes after-tax charges of $414 million, or $0.68 per diluted share related to the 2004 restructuring initiatives and other items detailed below. Excluding these special charges, earnings from continuing operations totaled $245 million, or $0.40 per diluted share, which is within the range of the company’s previous guidance for the quarter of $0.37 to $0.41 per diluted share.
Given the company’s announced plans to restate its financial results, all comparisons in this news release to prior quarters or years do not reflect the effects of the restatement.
Baxter’s sales totaled $2.4 billion in the second quarter, increasing 10 percent over the prior year. Foreign exchange favorably impacted sales by 4 percentage points in the quarter. Sales within the United States grew 10 percent to $1.1 billion, while sales outside the United States grew 10 percent (including a 7 percentage point benefit from foreign exchange) to $1.3 billion. Sales from Baxter’s BioScience business increased 16 percent to $893 million, including ADVATE Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method (rAHF-PFM) sales of $51 million during the quarter. The company’s Medication Delivery business increased 7 percent in the second quarter to $1 billion, and Renal sales increased 6 percent to $480 million.
“We saw solid performance across all of our businesses during the second quarter with strong sales of ADVATE, particularly in Europe where the product is still being introduced across the region,” said Robert L. Parkinson, Jr., chairman and chief executive officer. “Despite special charges that impacted earnings and the restatement to our financials, I am confident that we are taking the right steps to strengthen the performance of our company and our businesses.”
Restructuring Initiatives
As previously announced in January 2004, the company is implementing a number of initiatives to drive sustainable improvements in financial performance. These actions include the elimination of approximately 4,000 positions, or eight percent of Baxter’s current global workforce. Approximately 50 percent of the positions being eliminated are located in the United States. Approximately three-quarters of the estimated savings are within general and administrative expenses.
In addition, consistent with the company’s previously announced plans, plasma production has been reduced by an additional 400,000 liters, or 13 percent, on an annual basis and additional plasma collection centers have been closed to further enhance the future profitability and cash flow of the company’s plasma business.
As a result of these actions, the company recorded an after-tax charge in the second quarter of $394 million, or $0.64 per diluted share, which is in line with previously announced expectations. Approximately 60 percent of the charge is cash, principally related to severance payments, and 40 percent is non-cash and relates primarily to costs associated with the closing of facilities. As previously announced, Baxter expects that these initiatives will yield savings of $0.05 per diluted share in the second half of 2004, $0.20 to $0.25 per diluted share in 2005, and $0.30 to $0.35 per diluted share when fully implemented in 2006.
Other Charges
In addition to the restructuring charge, during the second quarter the company recorded an after-tax, non-cash charge of $20 million, or $0.04 per diluted share, related to other items, including adjustments to receivable and inventory reserves, certain hedged positions, and asset impairments. These adjustments, which totaled approximately $115 million on a pre-tax basis, were reduced by the reversal into income of tax reserves of approximately $55 million as a result of tax audits completed in the second quarter.
“While the results for the quarter from an operational perspective met our expectations, special charges have negatively impacted our earnings,” said John J. Greisch, chief financial officer. “Going forward, I am confident that our strong cash flow and a disciplined approach will provide us with the opportunity to strengthen our financial position, and enable us to focus on implementing our business strategies to secure a strong future for the company.”
Restatement of Financials
The company also announced that it plans to restate its financial results for the years 2001 through 2003, and for the first quarter of 2004. The restatement is primarily the result of incorrect revenue recognition and inadequate provisions for bad debts in Brazil during that period, which will result in a decrease in net income over the restatement period by an amount expected to be no more than $40 million, or $0.07 per diluted share. The restatement is expected to result in adjustments to sales over the period of an amount not more than $70 million, representing less than 0.5 percent of sales in any year.
Greisch added, “While the adjustments to any of the individual years subject to restatement may not seem significant to Baxter’s overall operations, the company concluded that a restatement is the most appropriate action.”
Upon becoming aware of the issue in Brazil, senior management, with the assistance of the company’s internal audit team, conducted a preliminary investigation, which was followed by a more comprehensive investigation by the Audit Committee of Baxter’s Board of Directors with the assistance of external legal counsel and accountants. As a result of those investigations, two members of senior management in the company’s Brazilian operations are being terminated. In addition, the company has looked for similar issues within its Latin America region and, aside from some minor issues in one other country, no similar issues have surfaced.
“The situation we discovered in Brazil was very troubling and we took it very seriously,” Parkinson said. “We will not tolerate noncompliance with company policy or with the company´s code of business conduct. We are committed to having strong leadership and a disciplined control environment in all of our operations on a worldwide basis.”
As a result of the restatement, previously issued financial statements for the period from 2001 through the first quarter of 2004 should no longer be relied upon. Details of the company’s restatements will be reported in its second quarter 10-Q filing.
Future Outlook
For full-year 2004, Baxter expects reported sales growth to be between 5 to 7 percent with sales on an organic basis of 3 to 4 percent. Baxter expects 2004 earnings per diluted share from continuing operations of $0.96 to $1.03, inclusive of special charges in the second quarter. Excluding the impact of special charges in the second quarter, the company expects to achieve earnings per diluted share from continuing operations of $1.65 to $1.72. The company also expects to generate cash flow from continuing operations of approximately $1.4 billion. The company is reducing guidance for the year based primarily on lower earnings expectations in Brazil, reduced wholesaler inventory levels, and the impact of additional exposure of foreign exchange on earnings.
The company expects its organic sales growth to be between 3 to 5 percent in the third quarter, and flat compared to the prior year for the fourth quarter. For the second half of the year, at current rates foreign currency is expected to benefit sales growth by approximately 3 to 4 percentage points. Earnings per diluted share from continuing operations is expected to be $0.41 to $0.44 for the third quarter, and $0.54 to $0.58 for the fourth quarter.
A webcast of Baxter´s second quarter conference call for investors can be accessed live from a link on Baxter´s website at www.baxter.com beginning at 7:30 a.m. CDT on July 22, 2004.
Also see Baxter’s website for a schedule of future investor events. The company’s third quarter cash flow and earnings conference call is scheduled for October 21, 2004.
Baxter International Inc., through its subsidiaries, assists health-care professionals and their patients with the treatment of complex medical conditions, including cancer, hemophilia, immune disorders, kidney disease and trauma. The company applies its expertise in medical devices, pharmaceuticals and biotechnology to make a meaningful difference in patients´ lives.
(ADVATE and Baxter are registered trademarks of Baxter International Inc. and its affiliates.)
This news release contains forward-looking statements that involve risks and uncertainties, including the company´s ability to realize in a timely fashion the anticipated benefits of restructuring initiatives, the final impact of the financial restatement described in this news release, the effect of economic conditions, the impact of the geographic mix of the company´s sales, actions of regulatory bodies, product development risks, product demand and market acceptance, the impact of competitive products and pricing, foreign currency exchange rates and other risks detailed in the company´s filings with the Securities and Exchange Commission. These forward-looking statements are based on estimates and assumptions made by management of the company and are believed to be reasonable, though are inherently uncertain and difficult to predict. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, changed assumptions or otherwise; and all forward-looking statements speak only as of the time when made. Actual results or experience could differ materially from the forward-looking statements. This news release contains certain non-GAAP financial measures as defined by SEC rules. A reconciliation of these measures to the most directly comparable GAAP measure is included in the schedules entitled “Pro Forma Consolidated Statements of Income” and “GAAP to Pro Forma Reconciliation for Selected Income Statement Lines.”
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