Baxter International Inc. — 2012 Form 10-K
Business context and period. Fiscal year ended December 31, 2012; this is an annual report, not a standalone fourth-quarter filing. Baxter develops and sells healthcare products through BioScience and Medical Products, operating in more than 100 countries. Approximately 60% of revenue was generated outside the United States.
Financial performance
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Net sales | $14.19 billion | $13.89 billion | Up 2% reported; up 5% at constant currency. Foreign exchange reduced growth by 3 percentage points. |
| BioScience sales | $6.24 billion | $6.05 billion | Up 3% reported, 6% constant currency. |
| Medical Products sales | $7.95 billion | $7.84 billion | Up 1% reported, 4% constant currency. |
| Net income attributable to Baxter | $2.33 billion | $2.22 billion | Up about 5%. |
| Diluted EPS | $4.18 | $3.88 | Up about 8%; adjusted EPS, excluding specified special items, was $4.53 versus $4.31, up 5%. |
| Gross margin | 51.5% | 50.7% | Improved 0.8 percentage points. |
| Operating cash flow | $3.11 billion | $2.82 billion | Up from the prior year. |
| Capital expenditures | $1.16 billion | $960 million | Higher investment, including BioScience capacity expansion. |
| Cash and equivalents | $3.27 billion | $2.91 billion | At year-end. |
| Total debt and capital lease obligations | $5.90 billion | $4.94 billion | Increased, including $1.0 billion of 2022 and 2042 notes issued in 2012. |
Fourth-quarter 2012 net sales were $3.75 billion versus $3.59 billion in fourth-quarter 2011. Net income attributable to Baxter was $494 million versus $463 million, while diluted EPS was $0.89 versus $0.82. Fourth-quarter 2012 included approximately $170 million of pension-related charges and $150 million of business optimization charges.
Material changes versus prior year
- Reported sales growth was restrained by currency; U.S. sales rose 6%, while international sales fell 1% reported but increased 4% at constant currency.
- BioScience pretax income declined 4%; Medical Products pretax income increased 5%. Medical Products benefited from the resolution of prior manufacturing issues and reserve adjustments, while BioScience faced higher R&D and commercial spending.
- R&D expense rose 22% to $1.16 billion, including upfront collaboration payments. Capital expenditures increased to $1.16 billion.
- Inventory rose to $2.80 billion from $2.63 billion, reflecting plasma-related stock build and higher infusion-pump and Baxa inventory.
- The company repurchased 25 million shares for $1.48 billion and paid $804 million in cash dividends. Quarterly dividends were raised to $0.45 per share in 2012.
Outlook, risks, and unusual items
- Gambro acquisition: Announced in December 2012 for approximately $4 billion, including assumed debt, with closing expected at the end of the second quarter of 2013 subject to approvals and other conditions. Baxter planned to issue at least $3 billion of debt; the acquisition was expected to dilute 2013 EPS by $0.10–$0.15. Repurchases were expected to decline from 2012 and 2011 levels.
- Investment and costs: 2013 capital expenditures were expected to be approximately $1.7 billion. Excluding the 2012 settlement charge, pension plan costs were expected to rise from $266 million in 2012 to approximately $330 million in 2013. Management expected a 2013 GAAP effective tax rate of approximately 22%, excluding audit developments and other special items.
- Growth initiatives: Baxter began construction of a plasma fractionation facility in Covington, Georgia, planning to invest more than $1 billion over five years; commercial production was expected in 2018. The 2012 strategy emphasized global portfolio growth, R&D, acquisitions and collaborations, and public-private partnerships.
- Regulatory and product matters: FDA closed the U.S. COLLEAGUE pump recall in November 2012 after substantial completion in July; $127 million remained in related reserves at year-end. Baxter was working with FDA to resolve a 2010 Warning Letter concerning complaint handling and corrective and preventive actions at its Renal business headquarters.
- Investigations and litigation: The SEC completed its inquiry into COLLEAGUE/SYNDEO pump accounting and reporting with no recommendation for enforcement. Separate DOJ/SEC inquiries into business activities in several countries and a U.S. Attorney investigation into quality and manufacturing practices at the North Cove facility were ongoing. Approximately 400 heparin-related lawsuits remained pending; other shareholder and plasma-therapy competition litigation also continued. Recorded legal reserves were $113 million, but Baxter said potential losses in certain matters could not be estimated.
- Other key exposures: Pricing and reimbursement pressure, healthcare reform taxes and rebates, foreign exchange, supply and manufacturing interruptions, plasma-capacity matching, product quality and approvals, patent disputes, pension assumptions, tax audits, and collection risk from public-sector customers. Receivables from public-sector customers in Greece, Spain, Portugal and Italy totaled $385 million at year-end.
- 2012 reported results included $334 million of pretax special items and a $91 million gain from reduced contingent acquisition-payment liabilities; adjusted figures are non-GAAP measures. The 2012 pension settlement charge was primarily non-cash, while the settlement paid $377 million from plan assets.
Most important facts for investors to verify
- Whether Gambro closed on schedule, how it was financed, and its realized earnings contribution, synergies and integration costs.
- Whether revenue and margins sustain growth after currency effects, competitive pricing, reimbursement changes and the 2013 medical-device excise tax.
- Progress on the Covington plasma facility, capacity additions, inventory levels and returns on elevated capital and R&D spending.
- Resolution and cash-cost trajectory of the COLLEAGUE recall reserve, FDA Warning Letter, North Cove investigation, FCPA-related inquiry and outstanding litigation.
- Debt, credit ratings, pension funding and expense, and collectibility of public-sector receivables as the company funds acquisitions and other investments.