Baxter International Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise stated. Financial statements are unaudited. PwC performed an interim review and reported no material modifications needed for GAAP conformity.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $3.448B | $3.388B | +2% |
| Gross margin | $1.756B; 50.9% | $1.714B; 50.6% | +0.3 percentage points |
| Income before taxes | $693M | $732M | -5% |
| Net income | $552M | $588M | -6% |
| Diluted EPS | $1.00 | $1.04 | -4% |
| Cash from operations | $386M | $446M | -$60M |
| Capital expenditures | $292M | $239M | +$53M |
Operating cash flow less capital expenditures was $94M, compared with $207M in Q1 2012. Cash and equivalents were $2.689B at quarter-end, down from $3.270B at December 31, 2012. Current assets were $8.814B and current liabilities $4.778B (derived current ratio: approximately 1.84).
Debt and lease obligations totaled approximately $5.867B at March 31, including $333M short-term debt, $377M current maturities and $5.157B long-term debt and leases. The comparable December 31 total was approximately $5.930B. Net debt, calculated as debt and lease obligations less cash, was approximately $3.178B at quarter-end.
The effective tax rate was 20.3%, versus 19.7%. The company declared a $0.45 per-share dividend, compared with $0.335 a year earlier, and repurchased 7.8M shares for $534M.
Business results and changes
- BioScience sales rose 5% to $1.530B; segment pretax income increased to $590M from $503M. Growth came across franchises, led by Vaccines (+25%) and BioSurgery (+12%), alongside Hemophilia (+3%) and BioTherapeutics (+2%).
- Medical Products sales were essentially flat at $1.918B; segment pretax income fell to $322M from $405M. BioPharma Solutions sales declined 10%, partly due to delayed shipments from the Bloomington facility; Baxter said the constraints had been resolved and expected shipments to recover during the rest of the year. Renal sales were flat, while Fluid Systems grew 3%.
- Consolidated net income declined despite higher sales and gross margin. Contributing factors included higher marketing and administrative expense (23.1% of sales versus 22.2%), higher net interest expense ($25M versus $18M), and lower other income ($3M versus $57M). Q1 2012 included a $53M gain on a Prism acquisition contingent liability; Q1 2013 included Gambro-related currency charges and a Venezuelan devaluation charge.
- R&D expense was $246M, down from $269M, largely because Q1 2012 included a $33M Momenta collaboration charge. Excluding that prior-year item, R&D spending increased.
Outlook, transactions and key risks
- Management expected the effective tax rate for full-year 2013 to be approximately 22%, excluding audit developments and other special items.
- Baxter expected to close its planned Gambro acquisition at the end of Q2 2013, subject to regulatory approvals and other conditions. Consideration was approximately $4B, excluding net debt and working-capital adjustments. The company planned to use offshore cash and issue at least $3B of term debt; it said it did not anticipate using its $3.1B bridge facility. The acquisition will materially increase debt.
- In March, Baxter acquired the OBI-1 investigational hemophilia business for $51M upfront, with contingent regulatory and sales-related payments. The recorded fair value of contingent payment liabilities was $325M, and acquired in-process R&D was valued at $343M. Approval and commercial success are uncertain.
- Risks include product quality and patient safety, regulatory approvals and restrictions, pricing and reimbursement pressure, competition, foreign-exchange and interest-rate volatility, and customer credit and collection risk. Public-sector receivables in Greece, Spain, Portugal and Italy totaled $405M, including $69M in Greece.
- In April 2013, FDA issued a Warning Letter concerning the 510(k) clearance status of modifications to the SIGMA Spectrum Infusion Pump. Baxter said it was working with FDA to resolve the matter. A separate 2010 FDA Warning Letter concerning Renal complaint-handling and reporting processes remained unresolved.
- Legal matters include approximately 400 pending heparin-related lawsuits, patent litigation, securities and derivative suits, and plasma-therapy antitrust claims. Baxter also reported cooperating with DOJ and SEC inquiries into activities in several countries and a U.S. Attorney investigation of quality and manufacturing practices at its North Cove facility.
- COLLEAGUE and SYNDEO infusion-pump reserves were $120M at March 31; business-optimization reserves were $202M. Management considered the reserves adequate but noted future adjustments or additional charges could occur.
Important facts for investors to verify
- Whether Gambro closed on the expected timetable and the final purchase price, funding mix and resulting leverage.
- Whether BioPharma Solutions shipments recovered as management anticipated and how Medical Products profitability developed.
- Cash conversion, inventory growth and turns: inventory rose to $2.963B from $2.803B, while total annualized inventory turns declined to 2.18 from 2.33.
- Progress in resolving the SIGMA Spectrum and Renal FDA matters, and any related costs or operating restrictions.
- Changes in OBI-1 regulatory prospects and the fair value of its contingent payment obligations.
- Developments in material litigation, government inquiries, infusion-pump remediation and restructuring reserves.