Baxter International Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. The quarter reflects the first full quarter of Hillrom results following its December 2021 acquisition. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $3.707 billion | $2.946 billion |
| Gross margin | $1.348 billion; 36.4% of sales | $1.145 billion; 38.9% of sales |
| Operating income | $163 million | $390 million |
| Net income attributable to Baxter stockholders | $71 million | $298 million |
| Diluted EPS | $0.14 | $0.58 |
| Cash from operations | $208 million | $377 million |
| Capital expenditures | $140 million | $171 million |
Sales rose 26% at actual exchange rates and 29% at constant currency. Management attributed 26 percentage points of reported growth to Hillrom; foreign exchange reduced growth by 3 percentage points. Gross margin fell 2.5 percentage points, while SG&A increased to $1.052 billion from $627 million. Interest expense, net, rose to $85 million from $34 million, primarily due to higher average debt following the Hillrom acquisition.
Management reported that special items reduced Q1 2022 net income by $400 million, or $0.79 per diluted share, compared with a $88 million, or $0.18 per share, impact in Q1 2021. Q1 2022 items included acquisition and integration costs, acquired-intangible amortization, business optimization charges, and infusion-pump warranty and remediation costs. The $159 million cost-of-sales charge from Hillrom inventory fair-value step-ups was not expected to recur significantly after Q1.
Revenue mix and material changes
- Hillrom contributed $755 million of sales and $200 million of segment operating income. Its acquisition was funded as part of a transaction with a $10.5 billion purchase price and approximately $12.8 billion enterprise value.
- Americas sales were $1.626 billion, up from $1.560 billion; EMEA sales were $699 million, down from $738 million; and APAC sales were $627 million, down from $648 million.
- Among legacy product categories, Medication Delivery grew 8% and BioPharma Solutions 16% at actual currency rates. Renal Care declined 3%, Pharmaceuticals 6%, Clinical Nutrition 3%, and Acute Therapies 9%.
- Management cited recovering hospital admissions and elective procedures as support for Medication Delivery and Advanced Surgery. Pharmaceuticals faced new competition and supply constraints; lower COVID-related demand weighed on Acute Therapies. BioPharma Solutions benefited from COVID-19 vaccine-related manufacturing services.
Cash, debt and liquidity
Cash and cash equivalents were $2.294 billion at March 31, 2022, down from $2.951 billion at year-end 2021. Operating cash flow was $208 million; investing activities used $304 million, including $140 million of capital expenditures and $174 million for acquisitions and investments, primarily the Zosyn rights transaction. Financing activities used $548 million, including $404 million of debt repayments and $140 million of dividends. Cash, cash equivalents and restricted cash decreased $657 million during the quarter.
Total debt and finance lease obligations, including current maturities and short-term debt, were approximately $17.2 billion. The company repaid $345 million of term loans in March and had $200 million of commercial paper outstanding. It reported no borrowings under its $2.5 billion U.S. dollar and €200 million revolving credit facilities and stated it was in compliance with their financial covenants. Management said available cash and financial flexibility were adequate to meet obligations.
Outlook, risks and contingencies
- No specific quarterly or full-year revenue or earnings guidance is provided in the filing. Management expects ongoing volatility and adverse effects from COVID-19 and other supply-chain pressures, including raw-material and component availability, inflation, freight costs and labor constraints.
- Business optimization actions had incurred $1.3 billion of cumulative pretax costs. Baxter expected about $25 million of additional costs for initiatives underway and projected more than $1.2 billion of cumulative annual pretax savings once actions are complete; approximately 99% of expected savings were anticipated by the end of 2022, with the remainder by the end of 2023.
- The company paid an $18 million SEC civil penalty in Q1 2022, settling an investigation into certain intercompany transactions affecting foreign-exchange gains and losses, without admitting or denying the SEC’s findings.
- Other disclosed matters include a DHHS subpoena concerning Hillrom compliance, antitrust litigation brought by Linet, opioid-related litigation, and environmental remediation. Recorded reserves for legal and environmental matters totaled $57 million at quarter-end. Baxter said certain potential losses cannot be estimated and litigation outcomes could affect results or cash flows in a period, though the proceedings were not expected to materially adversely affect consolidated financial position.
- The FDA warning letter concerning the Claris Ahmedabad facility remained in place; the agency had not yet re-inspected the site. Baxter also disclosed two infusion-pump field corrective actions and related Q1 charges of $23 million.
- Management identified the Ukraine conflict, sanctions, foreign-exchange and interest-rate movements, regulatory matters, product quality, competition, and integration of Hillrom among risks. Turkey’s subsidiary was to begin highly inflationary accounting on April 1, 2022; the impact was not quantified.
Important facts for investors to verify
- How much of reported sales growth and future performance reflects Hillrom, and whether integration delivers the stated savings.
- Whether margins and operating cash flow recover as acquisition-related charges, supply constraints, inflation and freight costs evolve.
- The trajectory of debt, interest expense and cash after acquisition-related repayments and ongoing investment.
- Developments in the Claris FDA warning letter, infusion-pump corrective actions, DHHS inquiry, Linet antitrust case and other contingencies.
- The realization and timing of the projected cost savings, and any additional restructuring or integration costs.