BAX » Topics » Employee Benefit Plan Expenses

This excerpt taken from the BAX 10-Q filed May 6, 2005.

Employee Benefit Plan Expenses


Pension and OPEB plan expenses increased $14 million during the first quarter of 2005, as detailed in Note 2, partially offsetting the above-mentioned improvements to the company’s gross margin and expense ratios. The increased pension and OPEB plan expenses were due to changes in the discount rate and expected return on assets assumptions, as well as increased amortization of unrecognized losses. Refer to the 2004 Annual Report for further information.


This excerpt taken from the BAX 10-K filed Mar 16, 2005.

Employee Benefit Plan Expenses

Pension and OPEB plan expenses increased $59 million in 2004 and $76 million in 2003, as detailed in Note 9, and contributed to the company’s lower gross margin ratio and higher expense ratio in both 2004 and 2003. The increased expenses were partially due to a change in assumptions. For the company’s domestic plans, which represent over three-quarters of the company’s total pension assets and obligations, the discount rate decreased from 6.75% to 6% in 2004, and from 7.5% to 6.75% in 2003, and the expected return on assets decreased from 11% to 10% in 2003. The increased expenses were also due to changes in demographics and investment returns, which increased actuarial loss amortization expense. The $76 million increase in pension and OPEB plan expenses in 2003 was partially offset by reduced expenses of $16 million as a result of a change in the company’s employee vacation policy.


Pension and OPEB plan expenses are expected to further increase in 2005, by approximately $65 million, primarily due to changes in pension assumptions and higher actuarial loss amortization expense. For the domestic plans, the discount rate will be reduced from 6% to 5.75% and the expected return on plan assets will be lowered from 10% to 8.5%. The discount rate assumption change is due to reductions in market interest rates used to determine the appropriate pension and OPEB discount rate. The change in the expected return on assets assumption is principally a result of anticipated changes in the company’s pension trust asset allocation. Refer to the Critical Accounting Policies section below for a discussion of how the pension and OPEB plan assumptions are developed, and how they impact the company’s net expense.


Research and Development


                          Percent change

years ended December 31 (in millions)

   2004      2003      2002          2004      2003

Research and development expenses

   $517      $553      $501      (7% )    10%

as a percent of sales

   5.4%      6.2%      6.2%              


The company’s in-process R&D (IPR&D) charges in 2002, which are discussed in Note 3, are reported separately in the consolidated income statements and are not included in the R&D amounts above.


R&D expenses declined in 2004, with increased spending on certain projects across the three segments more than offset by restructuring-related cost savings and the termination of certain programs (such as the recombinant hemoglobin protein project, which was terminated in the second quarter of 2003). In 2004, R&D activities resulted in the expanded approval of ADVATE in Europe. The company also filed for approval of ADVATE in Japan. Other significant R&D activities in 2004 include filing for approval in the United States and Europe with respect to the company’s next-generation liquid IVIG product, and filing for approval in the United States for the expanded use of the company’s ALYX system for the automated collection of red blood cells and plasma.


The increase in R&D expenses in 2003 was primarily due to increased investments in the Medication Delivery segment. Recent acquisitions, principally the late 2002 acquisitions of ESI and Epic Therapeutics, Inc. (Epic), a business specializing in the formulation of drugs for injection or inhalation, contributed 4 points to the 2003 R&D growth rate. Also contributing to the growth rate in 2003 was increased spending relating to a number of other projects across the three segments.


Management’s strategy is to focus investments on key R&D initiatives, which management believes will maximize the company’s resources and generate the most significant return on the company’s investment.


IPR&D Charges    The IPR&D charges in 2002 primarily included $51 million relating to the acquisition of Fusion Medical Technologies, Inc. (Fusion), a business that developed and commercialized proprietary products used to control bleeding during surgery, which is included in the BioScience segment, $52 million relating to the acquisition of Epic and $56 million relating to the acquisition of ESI.


The nature of the acquired R&D projects, timing of projected material net cash inflows, assumptions used in the valuation, risks associated with the projects, and other key information, such as post-acquisition terminations and delays of certain projects, are described in Note 3. There can be no assurance that these R&D efforts will be successful. As with all R&D projects, delays in the development, introduction or marketing of a product can result either in such product being marketed at a time when its cost and performance characteristics might not be competitive in the marketplace or in a shortening of its commercial life. If a product is not completed on time, the expected return on the company’s investments could be significantly and unfavorably impacted.






Special Charges

Restructuring Charges    The company recorded restructuring charges totaling $543 million in 2004, $337 million in 2003 and $26 million in 2002. The net-of-tax impact of the charges was $394 million ($0.64 per diluted share) in 2004, $202 million ($0.33 per diluted share) in 2003 and $15 million ($0.02 per diluted share) in 2002. The following is a summary of these charges.



May 6, 2005
Mar 16, 2005
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