Baxter International Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and reporting period
Baxter provides healthcare products and services across renal care, medication delivery, pharmaceuticals, nutrition, surgery, acute therapies and biopharma services. Results include Hillrom, acquired in December 2021; prior-year comparisons do not. The company reports Americas, EMEA, APAC and Hillrom segments.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $3,773 | $3,226 | $11,226 | $9,270 |
| Gross margin | $1,133 | $1,321 | $3,934 | $3,699 |
| Gross margin percentage | 30.0% | 40.9% | 35.0% | 39.9% |
| Operating income (loss) | $(2,799) | $513 | $(2,296) | $1,327 |
| Net income (loss) attributable to Baxter | $(2,937) | $450 | $(2,614) | $1,046 |
| Diluted EPS | $(5.83) | $0.89 | $(5.20) | $2.06 |
Q3 sales increased 17% as reported and 23% at constant currency; Hillrom contributed 23 percentage points while foreign exchange reduced growth by 6 points. Nine-month sales increased 21% as reported and 26% at constant currency, with Hillrom contributing 24 points and foreign exchange reducing growth by 5 points. The filing does not provide a comparable prior-year Hillrom segment.
Q3 results included $2.785 billion of goodwill impairment and $332 million of indefinite-lived intangible impairment, primarily related to Hillrom. These charges, alongside acquisition-related costs and other special items, drove the reported loss. Management said the Q3 gross margin decline also reflected raw-material inflation and higher supply-chain costs. Interest expense was $104 million in Q3 and $278 million year to date, up from $50 million and $118 million, respectively, mainly due to higher debt following the Hillrom acquisition.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $772 million, down from $1.529 billion. Baxter attributed the decline mainly to lower net income, higher inventory and higher incentive-compensation payouts.
- Investing cash outflow was $675 million, including $479 million of capital expenditures and $206 million for acquisitions and investments. Financing cash outflow was $1.319 billion, including $953 million of debt repayments and $427 million of dividends.
- At September 30, cash and cash equivalents were $1.601 billion, versus $2.951 billion at year-end 2021. Current assets were $7.810 billion and current liabilities were $3.708 billion.
- Total debt and finance lease obligations, including current maturities and short-term debt, were approximately $16.4 billion. Long-term debt and finance leases, less current portion, were $16.153 billion; commercial paper outstanding was $275 million.
- Undrawn revolving credit facilities totaled $2.5 billion plus €200 million; there were no revolver borrowings, and Baxter reported compliance with financial covenants. Credit outlooks were downgraded from stable to negative by two rating agencies during Q3, while investment-grade ratings were unchanged.
- Goodwill fell to $6.639 billion from $9.836 billion at year-end 2021, mainly due to impairment and currency translation. Total equity declined to $5.579 billion from $9.121 billion.
Material changes and management commentary
- Hillrom added $735 million of Q3 sales and $2.205 billion for the nine-month period. Q3 segment operating income was $215 million; year-to-date was $564 million.
- Reported sales in several legacy product categories were pressured by foreign exchange, supply constraints, and lower demand in certain areas. Acute Therapies and BioPharma Solutions declined at constant currency in Q3; management cited lower COVID-related demand for acute therapies and a difficult comparison for COVID-vaccine-related biopharma services.
- Hillrom forecasts were reduced amid component shortages, raw-material inflation and supply costs. Baxter said further adverse changes in macroeconomic conditions or forecasts could result in additional material impairments.
- Management expects ongoing supply-chain challenges, inflation and foreign-exchange effects to weigh on operations and says these may limit sales where demand cannot be fully served. The filing provides no specific full-year revenue or earnings guidance.
- Other unusual items included a $54 million loss on a product-rights divestiture and a $65 million charge from reclassifying Argentina cumulative translation losses to earnings.
Risks, contingencies and controls
Risks include supply shortages and cost inflation, COVID-19-related volatility, currency and interest-rate movements, geopolitical disruption, product quality and regulatory matters, competition, and execution of Hillrom integration and cost-saving plans. Baxter disclosed opioid, ethylene-oxide exposure, antitrust and other legal matters; it stated that outcomes are not expected to materially adversely affect consolidated financial position, while acknowledging that certain losses cannot be estimated and individual resolutions could affect period results or cash flows. Legal and environmental reserves totaled $31 million at quarter-end.
The FDA classified its 2022 inspection of the Claris Ahmedabad facility as voluntary action indicated (VAI); Baxter reported corrective actions and production support from other sites. Management concluded disclosure controls were effective at September 30, 2022. Finance activities were transferred to new service centers during the quarter, with related control-design and operating changes; additional transfers are planned.
Most important facts for investors to verify
- Whether Hillrom sales, margins and forecasts recover, and whether further goodwill or intangible impairments are required.
- Whether supply constraints, inflation and foreign exchange continue to affect product availability, revenue and gross margins.
- Cash generation, inventory levels, debt reduction, interest expense and the implications of negative credit outlooks.
- Progress on the new infusion-pump platform and FDA clearance, Claris facility remediation, and other regulatory or product-quality matters.
- Potential outcomes and financial exposure from legal proceedings and other contingencies, including matters for which Baxter cannot estimate a loss.