Baxter International Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Dollar amounts are in millions unless noted. Interim financial statements are unaudited; PwC performed a review, not an audit.
Business context
Baxter reported two segments: BioScience and Medical Products. In 2011, the company combined its former Medication Delivery and Renal businesses into Medical Products and recast prior-period segment data. In May, Baxter acquired specialty pharmaceutical company Prism and divested its U.S. generic injectables business.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $3,536 | $3,194 | $6,820 | $6,121 |
| Gross margin | $1,835 | $1,638 | $3,510 | $2,681 |
| Gross margin rate | 51.9% | 51.3% | 51.5% | 43.8% |
| Income before taxes | $803 | $670 | $1,534 | $782 |
| Net income attributable to Baxter | $615 | $535 | $1,185 | $472 |
| Diluted EPS | $1.07 | $0.90 | $2.05 | $0.78 |
| Operating cash flow | Not separately reported by quarter | $1,003 | $1,062 |
- Sales increased 11% in both the quarter and first half. Q2 growth was 14% in BioScience and 8% in Medical Products; first-half growth was 9% and 14%, respectively. Foreign exchange added 5 percentage points to Q2 sales growth and 2 points to first-half growth.
- First-half segment pretax income was $1,200 for BioScience and $754 for Medical Products, versus $1,069 and $115, respectively, in 2010. The prior-year Medical Products result included the $588 COLLEAGUE pump recall charge.
- Q2 marketing and administrative expense was 21.6% of sales, down from 22.6%; R&D was 6.8% of sales versus 6.9%. Net interest expense was $15 in Q2 and $25 for the first half, down from $25 and $44, respectively.
- At June 30, cash and equivalents were $2,018, current assets $7,809, and current liabilities $4,031. Total debt and lease obligations were approximately $4,400, comprising $13 short-term, $9 current maturities, and $4,378 long-term. No borrowings were outstanding under the revolving facilities.
- Cash declined $667 to $2,018 during the first half. Investing cash outflow was $504 and financing cash outflow was $1,186, including $1,115 of treasury-stock purchases and $358 of dividends. Capital expenditures were $408.
Changes, outlook, risks and unusual items
- Comparability is significantly affected by the first-quarter 2010 $588 COLLEAGUE recall charge, including $213 recorded as a reduction of sales and $375 in cost of sales. The charge had no net tax benefit recognized. Baxter reported $423 remaining in COLLEAGUE/SYNDEO cash reserves at June 30, 2011 and expected substantial utilization by the end of 2012.
- Management expected a full-year 2011 effective tax rate of approximately 21.0%–21.5%, excluding audit developments and other special items. The filing provides no specific sales or earnings guidance.
- Management attributed margin improvement to higher sales of selected higher-margin products and favorable currency, partly offset by manufacturing issues at the Castlebar, Ireland facility and plasma-related cost inefficiencies. Receivables days sales outstanding rose to 57.8 from 54.3 a year earlier; inventories increased to $2,648 from $2,371 at year-end.
- Prism consideration was up to $338, including $170 paid at closing and contingent payments up to $168 through 2017; the contingent amount was recorded at estimated fair value of $67. The generic injectables divestiture generated $104 cash proceeds.
- Key exposures include execution of the FDA-ordered COLLEAGUE recall through July 2012; product quality and regulatory matters, including a Renal business FDA warning letter and EMA review of certain Castlebar-made dialysis solutions; and litigation involving heparin, propofol, patents, securities, pricing and other claims. Baxter disclosed $159 in legal reserves and $68 in related insurance receivables. It cautioned that additional charges, penalties, claims or adverse sales effects could occur.
- Other risks include collection delays or losses from foreign-government customers, currency and interest-rate movements, pricing and reimbursement changes, competition, product supply and acceptance, and execution of restructuring and ERP initiatives. Management stated that disclosure controls were effective at June 30, 2011 and that the company complied with credit-facility covenants.
Important facts for investors to verify
- How much of reported sales and EPS growth reflects underlying demand versus favorable currency and the absence of the 2010 COLLEAGUE charge.
- Progress, costs and reserve adequacy for the COLLEAGUE recall, and whether further regulatory action, litigation or impairment charges arise.
- Whether the rise in receivables and inventories reverses, and how it affects operating cash flow and working capital.
- Performance and contingent-payment assumptions for Prism, and the effects of the generic injectables divestiture on segment comparisons.
- Whether the expected tax-rate range and stated liquidity flexibility remain supportable as legal, regulatory and foreign-government credit risks develop.