Baxter International Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless stated otherwise, amounts are in U.S. dollars. The filing presents BioPharma Solutions (BPS) as discontinued operations following the pending sale agreement; continuing-operations sales therefore exclude BPS.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $3.707B | $3.594B | $7.220B | $7.152B |
| Gross margin | $1.111B; 30.0% | $1.371B; 38.1% | $2.386B; 33.0% | $2.633B; 36.8% |
| Operating income (loss) | $(17)M | $264M | $112M | $347M |
| Continuing-operations income (loss) | $(193)M | $185M | $(193)M | $193M |
| Net income (loss) attributable to Baxter | $(141)M | $252M | $(97)M | $323M |
| Diluted EPS | $(0.28) | $0.50 | $(0.19) | $0.64 |
Sales increased 3% at actual currency rates in Q2 (4% at constant currency) and 1% in the first half (3% at constant currency). Q2 growth was led by Medication Delivery, Front Line Care and Global Surgical Solutions; Patient Support Systems sales declined. Foreign exchange reduced reported sales growth.
For the first half, cash from continuing operations was $780M, versus $369M a year earlier. Continuing-operations investing cash outflow was $326M, including $328M of capital expenditures; financing cash outflow was $492M. Cash and cash equivalents were $1.722B at June 30. Debt and finance lease obligations, including current maturities, plus short-term debt totaled approximately $16.48B. Commercial paper outstanding was $249M; Baxter reported approximately $2.63B of capacity to draw under its credit facilities, less commercial paper borrowings. It was in compliance with financial covenants at quarter-end.
Changes, unusual items and management commentary
- Profitability deteriorated despite modest sales growth. Management cited raw-material inflation, higher supply-chain costs, product mix, interest expense and unusual charges. Net interest expense rose to $124M in Q2 and $241M in the first half, primarily reflecting higher rates on floating-rate debt.
- Business optimization charges were $293M in Q2 and $427M in the first half. These included a $243M noncash impairment after Baxter decided to cease dialyzer production at its Opelika, Alabama facility near year-end 2023. Management expects about $20M of additional costs to complete initiatives currently underway, with further charges possible if additional savings actions are identified.
- Special items reduced Baxter-attributable net income by $476M in Q2 and $729M in the first half, according to management. Other notable items included investment impairments and a $30M tax valuation allowance related to Swiss tax reform.
- Baxter agreed to sell BPS for $4.25B cash, subject to specified adjustments. It expects approximately $3.92B of net pre-tax proceeds (about $3.40B after tax), a pre-tax gain of approximately $2.97B, and plans to use after-tax proceeds to repay debt. Closing was expected in the second half of 2023, subject to approvals and other customary conditions. BPS reported net sales of $142M and $278M, and after-tax income of $54M and $99M, for Q2 and the first half, respectively.
- The proposed separation of Renal Care and Acute Therapies into a publicly traded company was targeted for July 2024 or earlier, subject to customary conditions. Those categories represented about 30% of consolidated sales in Q2 and the first half. Baxter expected separation and transaction costs to continue through the remainder of 2023 and first half of 2024, and warned of potential post-transaction dis-synergies.
- Management cited continuing supply constraints, inflation, freight and labor costs, foreign-exchange exposure, geopolitical uncertainty and customer capital-spending constraints. It reported sequential improvement in Patient Support Systems capital orders from Q1 to Q2, while expecting customer capital-spending constraints to persist through much of 2023. No specific consolidated financial guidance is provided in the supplied filing text.
Risks, contingencies and other developments
A July 25, 2023 FDA Warning Letter followed an inspection of Baxter’s Ahmedabad, India facility. Baxter said it intended to respond and implement additional corrective actions; regulatory actions could affect manufacturing or product sales. The filing also describes ongoing legal and regulatory matters, including a DOJ investigation concerning Hillrom compliance and an ethylene-oxide-related lawsuit. Baxter stated that certain outcomes could materially affect results or cash flows in a particular period, although it did not expect the proceedings to materially adversely affect consolidated financial position. The company was voluntarily dismissed without prejudice from the Fayette County opioid litigation in July 2023.
Baxter said it had not identified material changes to the risk factors in its 2022 Form 10-K. Its credit outlook had been revised by Fitch to rating watch negative in January 2023; the filing reported no change to its disclosed investment-grade ratings. Management said Patient Support Systems goodwill was not impaired at June 30 but would continue to monitor performance. Disclosure controls were assessed as effective.
Investor verification priorities
- Track the BPS sale’s regulatory approvals, final proceeds, closing date and actual debt repayment.
- Assess the Renal Care and Acute Therapies separation timeline, costs, financing structure and expected dis-synergies.
- Reconcile reported results to special items, especially the Opelika impairment and recurring restructuring costs, and monitor underlying gross margins.
- Monitor cash generation, upcoming debt maturities, interest expense, covenant headroom and credit-rating developments.
- Follow supply availability, Patient Support Systems orders and the consequences of the Ahmedabad FDA Warning Letter.