Baxter International Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Unless otherwise noted, amounts are in U.S. dollars.
Business context and reporting period
Baxter develops and sells healthcare products across two segments: BioScience, including therapies for bleeding and immune disorders, biosurgery products and vaccines; and Medical Products, including IV products, pharmaceuticals and renal therapies. The company operates in more than 100 countries, and approximately 60% of revenue is generated outside the United States.
In September 2013, Baxter acquired Gambro, expanding its dialysis portfolio and international renal business. Gambro contributed $513 million of reported 2013 sales from the acquisition date through year-end.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $15.259 billion | $14.190 billion |
| Net income attributable to Baxter | $2.012 billion | $2.326 billion |
| Diluted earnings per share | $3.66 | $4.18 |
| Gross margin | 49.8% | 51.5% |
| Cash flows from operations | $3.198 billion | $3.106 billion |
| Capital expenditures | $1.525 billion | $1.161 billion |
| Cash and equivalents at year-end | $2.733 billion | $3.270 billion |
| Total debt and capital lease obligations | $8.985 billion | $5.903 billion |
- Sales increased 8% year over year; constant-currency growth was also 8%. Gambro contributed four percentage points to total sales growth. BioScience sales rose 5%; Medical Products sales rose 9%.
- Net income fell about 13%, and diluted EPS declined about 12%. The filing attributes $555 million, or $1.01 per diluted share, of 2013 net-income reduction to special items, compared with $190 million, or $0.35 per share, in 2012.
- Gross margin declined 1.7 percentage points. The filing cites special charges, Gambro’s lower margins, foreign currency, pension costs and other cost pressures, partly offset by product mix and pricing improvements.
- Investing cash outflow was $5.362 billion, including $3.851 billion for acquisitions and investments. Financing cash flow was $1.645 billion, reflecting debt issuance alongside dividends and share repurchases.
- At year-end, current assets were $10.004 billion and current liabilities were $5.906 billion. Baxter had $2.7 billion cash, no borrowings on its $1.5 billion primary revolving facility, and approximately $124 million outstanding on its Euro-denominated facility; it reported compliance with credit-facility covenants.
- 2013 fourth-quarter sales were $4.368 billion versus $3.753 billion in fourth-quarter 2012. Quarterly net income attributable to Baxter was $326 million versus $494 million; diluted EPS was $0.59 versus $0.89.
Material changes versus the prior comparable period
- The Gambro acquisition materially expanded assets and debt: total assets rose to $25.869 billion from $20.390 billion, and total debt and lease obligations increased by about $3.1 billion. The acquisition was financed in part with $3.5 billion of senior notes issued in June 2013.
- Medical Products Renal sales rose 22%, principally reflecting Gambro; excluding Gambro, Renal sales grew 2% on a reported basis. BioScience growth was led by Hemophilia and BioSurgery.
- Research and development expense increased 8% to $1.246 billion. Baxter said it accelerated investment in late-stage programs and pipeline development.
- Dividends paid increased to $1.023 billion from $804 million. Share repurchases declined to $913 million from $1.480 billion.
- Inventory increased to $3.499 billion from $2.803 billion, in part due to Gambro and higher plasma-protein inventory. Net public-sector receivables in Greece, Spain, Portugal and Italy rose to $561 million from $385 million, primarily due to Gambro.
Outlook, commentary, risks and unusual items
- Management forecast 2014 GAAP effective tax rate of approximately 21.7%, excluding additional audit developments or special items, and expected approximately $1.8 billion of 2014 capital expenditures.
- Business optimization programs were expected to generate annualized savings of approximately $0.17 per diluted share when the 2013 program was fully implemented in 2015. The filing also describes expected savings from prior programs.
- Baxter cited potential benefits and integration costs from Gambro, including expected synergies, but warned that unsuccessful integration could lead to higher costs, slower growth or impairment charges. Gambro’s acquisition-date consideration was $3.704 billion; 2013 acquisition and integration charges were $192 million.
- Regulatory and quality matters include FDA Warning Letters received in April and June 2013, and another received in January 2014, covering the SIGMA Spectrum pump and certain facility quality systems. Baxter said it was working with FDA to resolve the matters. The pump’s sales to new accounts had been suspended following the April 2013 letter.
- The company recorded $160 million of legal reserves at year-end. A provisional $64 million settlement with direct purchasers of plasma-derived therapies awaited court approval. Approximately 30 heparin product-liability suits remained pending, most subject to settlement agreements. DOJ and SEC investigations related to FCPA matters were closed as to Baxter in January 2014 without further action.
- Key risks include healthcare pricing and reimbursement pressure, regulation and product quality, competition, plasma supply and production capacity, dependence on suppliers and certain manufacturing sites, foreign exchange exposure, international public-sector collection delays, litigation, and ERP implementation. The filing states that loss estimates for some legal matters cannot be determined; contingent milestone commitments for collaborations totaled $2.0 billion, excluding royalties.
- Other 2013 unusual items included $103 million of collaboration-related business-development charges, currency-related charges including a $11 million Venezuela devaluation charge, $124 million in tax and legal reserves, and $17 million of SIGMA pump remediation charges. The company reported a $89 million net charge related to Turkish VAT matters and existing class-action and related litigation in its selected financial data.
Important facts for investors to verify
- Whether Gambro integration delivers anticipated synergies and supports renal growth, and how debt service affects capital allocation.
- Progress in resolving FDA Warning Letters, the SIGMA Spectrum pump clearance and sales status, and any resulting costs or business restrictions.
- Cash conversion, working-capital trends, and collection risk on the $561 million of public-sector receivables in Greece, Spain, Portugal and Italy.
- Actual 2014 capital spending, tax rate and realization of optimization savings versus management’s stated expectations.
- Final disposition of the $64 million plasma-therapy settlement, other litigation and tax matters, and the timing and potential cost of contingent collaboration and acquisition payments.