Baxter International Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
Baxter sells healthcare products and services across Renal Care, Medication Delivery, Pharmaceuticals, Clinical Nutrition, Advanced Surgery, Acute Therapies and BioPharma Solutions. Net sales rose as hospital and elective-surgery activity recovered, foreign exchange rates helped reported growth, and BioPharma Solutions provided services related to COVID-19 vaccine production. Management cautions that COVID-19 continues to affect operations, supply chains and costs.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $3.098 billion | $2.718 billion | $6.044 billion | $5.520 billion |
| Operating income | $424 million | $331 million | $814 million | $740 million |
| Net income attributable to Baxter | $298 million | $246 million | $596 million | $578 million |
| Diluted EPS | $0.59 | $0.48 | $1.17 | $1.12 |
| Gross margin | 39.8% | 38.2% | 39.3% | 39.9% |
Reported sales increased 14% in Q2 and 9% in the first half; at constant currency, growth was 9% and 5%, respectively. Foreign exchange contributed 5 and 4 percentage points to reported growth. Q2 gross margin improved, with management citing favorable product mix; first-half margin declined, reflecting higher manufacturing and supply-chain costs associated with the pandemic. Reported results include special items: they reduced net income by $111 million in Q2 and $199 million in the first half of 2021.
Cash flow and balance sheet: First-half operating cash flow from continuing operations was $854 million, versus $648 million. Capital expenditures were $329 million; acquisitions and investments used $417 million. Cash and cash equivalents were $3.136 billion at June 30, down from $3.730 billion at year-end 2020. Debt and finance lease obligations, including current maturities, plus short-term debt were approximately $6.2 billion; no revolving-credit-facility borrowings were outstanding. First-half financing cash outflow was $707 million, including $565 million of share repurchases and $249 million of dividends.
Material changes and management outlook
- Growth varied by product category: Q2 Advanced Surgery sales rose 52% and BioPharma Solutions 58% year over year, while Renal Care was flat at constant currency. Advanced Surgery benefited from resumed elective procedures; BioPharma Solutions benefited from vaccine-related manufacturing and packaging work.
- Q2 Medication Delivery sales rose 15%, partly reflecting an easier comparison with pandemic-affected hospital demand in Q2 2020. Acute Therapies grew 1% in Q2 after unusually strong COVID-related demand in the prior-year quarter.
- Business optimization actions had generated cumulative pre-tax costs of $1.2 billion through June 30. Baxter expected approximately $16 million of additional costs for initiatives underway and projected more than $1.2 billion in cumulative annual pre-tax savings once completed; about 99% of expected savings were anticipated by the end of 2021, with the remainder by the end of 2023.
- The filing provides no specific consolidated revenue or EPS guidance for the year. It says COVID-19 impacts, restrictions, supply-chain disruption and related expenses are expected to continue.
- After quarter-end, Baxter acquired PerClot assets for $25 million upfront, with up to $36 million of potential milestone consideration, and redeemed $400 million of 1.7% notes due August 2021, partially funded with commercial paper.
Risks, contingencies and unusual items
- Legal and environmental reserves totaled $72 million at June 30, 2021; the company also reported a $7 million insurance receivable. Baxter states that certain potential losses cannot be estimated and that litigation outcomes remain uncertain.
- A proposed $16 million settlement of a shareholder class action concerning previously disclosed foreign-exchange transactions was fully reserved, subject to final court approval. Baxter also continued cooperating with the SEC staff on the related investigation. Ethylene-oxide exposure and opioid-related litigation are among other disclosed matters.
- The FDA warning letter concerning the Ahmedabad, India facility remained outstanding; management could not predict when it would be lifted. Baxter reported ongoing corrective actions and alternative manufacturing arrangements.
- Baxter began winding down its Argentina operations. Upon substantial liquidation, it expects to reclassify accumulated currency translation adjustments exceeding $60 million and recognize a non-cash charge.
- A foreign court ruling on an uncertain tax position contributed to a $22 million Q2 tax charge and a 23.2% Q2 effective tax rate, compared with 14.5% in Q2 2020.
- Other notable exposures include foreign-exchange and interest-rate volatility, potential supply and product-quality disruption, and the transition away from LIBOR. The company said its investment-grade credit ratings had not changed and it was compliant with credit-facility covenants.
Investor verification priorities
- Reconcile reported growth and margins with constant-currency results and the special-item adjustments.
- Track whether vaccine-related BioPharma Solutions demand, elective-surgery recovery and product-category trends persist.
- Compare planned cost savings and remaining optimization charges with realized results.
- Monitor operating cash conversion, acquisition spending, repurchases, dividends and debt after the July note redemption.
- Check final approval and payment of the shareholder settlement, developments in other litigation, and the status of the Ahmedabad FDA warning letter.