Baxter International Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless otherwise noted. Baxter operates in BioScience, Medication Delivery and Renal. The interim financial statements were reviewed, not audited, by PwC.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Net sales | $2.927 billion | $2.824 billion; up 4% |
| Gross margin | $1.043 billion; 35.6% of sales | $1.488 billion; 52.7% |
| Income before tax | $112 million | $637 million |
| Income tax expense / effective tax rate | $172 million / 153.6% | $119 million / 18.7% |
| Net income (loss) attributable to Baxter | $(63) million; $(0.11) diluted EPS | $516 million; $0.83 diluted EPS |
| Cash from operations | $279 million | $237 million |
| Capital expenditures | $230 million | $171 million |
| Cash and equivalents | $2.673 billion at March 31 | $2.786 billion at December 31, 2009 |
| Total debt and lease obligations | $4.753 billion at March 31 | $4.151 billion at December 31, 2009 |
Operating cash flow less capital expenditures was $49 million, compared with $66 million in Q1 2009. Cash declined $113 million during the quarter. Current assets were $8.015 billion and current liabilities $4.284 billion at quarter-end. The company issued $600 million of senior unsecured notes in March: $300 million due 2013 at 1.8% and $300 million due 2020 at 4.25%. No borrowings were outstanding under its two revolving credit facilities, and Baxter reported compliance with their covenants.
Material changes and segment performance
- A $588 million COLLEAGUE infusion-pump charge dominated the results: $213 million reduced sales and $375 million was recorded in cost of sales. The charge included $142 million of asset impairments and $446 million of estimated cash costs. Baxter recognized no net tax benefit for the charge.
- BioScience sales rose 9% to $1.362 billion; segment pre-tax income rose 9% to $554 million. ADVATE, regenerative medicine products and foreign exchange supported growth; antibody therapy sales faced weaker market growth, share erosion and higher Medicaid rebates.
- Medication Delivery sales fell 6% to $969 million, and the segment recorded a $342 million pre-tax loss versus $168 million income. The pump charge was the principal cause; sales in IV Therapies and Global Injectables grew.
- Renal sales rose 13% to $584 million, and pre-tax income increased 70% to $85 million, supported by growth in peritoneal dialysis patients and favorable product mix.
- Foreign currency favorably affected consolidated sales growth by 6 percentage points. International sales rose 17%, while U.S. sales fell 13%.
Marketing and administrative expense increased 12% to $683 million; R&D expense rose 7% to $227 million. Gross margin fell 17.1 percentage points, with the pump charge alone reducing the margin rate by 16.3 points. The Q1 effective tax rate was also affected by a $39 million deferred-tax-asset write-off associated with healthcare reform legislation.
Outlook, risks and unusual items
- Management expected 2010 R&D expense growth to be flat and projected a full-year effective tax rate of approximately 19.5%, excluding audit developments and other special items. The filing gives no clear full-year revenue or EPS guidance.
- The FDA ordered a recall of approximately 200,000 COLLEAGUE pumps in U.S. use on April 30, 2010. Recall terms and customer remedies remained under discussion; Baxter anticipated offering replacement pumps or monetary consideration and identified SIGMA SPECTRUM pumps as a possible replacement. The company warned that further charges, impairments, penalties, litigation, regulatory action or adverse effects on other sales could follow.
- The FDA classified a recall involving overfill associated with HomeChoice and HomeChoice Pro peritoneal dialysis cyclers as Class I in March 2010. Baxter was working with the FDA to address it.
- A Nevada jury awarded $5 million compensatory and $500 million punitive damages in a propofol-related case in April 2010. Baxter and Teva planned to appeal; Baxter said it believed it was entitled to indemnity from Teva under a 2009 agreement.
- Other disclosed matters include approximately 740 heparin-related lawsuits, plasma-therapy price-fixing litigation, product reimbursement investigations and claims, and hemophilia-related claims. Baxter said some legal losses could materially affect a period’s results or cash flows, though it did not expect the proceedings to materially adversely affect consolidated financial position.
- Management cited healthcare reform effects on rebates, pricing and reimbursement; volatility in plasma-therapy demand and pricing; foreign-exchange exposure; and potential collection risk from foreign government customers. Management expected Medicaid rebates and expansion of the 340B program to continue weighing on sales growth.
- Baxter acquired ApaTech for an upfront payment of $245 million, with contingent payments up to $90 million; the acquisition’s pro forma effect on results was not significant. The company also repurchased 7.5 million shares for $435 million and declared a quarterly dividend of $0.29 per share.
Important facts for investors to verify
- Final FDA recall terms, replacement-pump supply and total cash and non-cash costs for COLLEAGUE, including any additional global actions.
- Whether litigation outcomes, including the Nevada propofol verdict and heparin claims, lead to appeals, settlements, indemnification or additional liabilities.
- How healthcare reform, Medicaid rebates and 340B expansion affect BioScience pricing, sales and the full-year tax outlook.
- Whether reported sales and operating cash flow trends persist after adjusting for foreign exchange and the unusual pump charge.
- Debt levels, cash usage for acquisitions, capital spending, dividends and buybacks, alongside the company’s stated liquidity and covenant position.