Baxter International Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data. The interim statements were reviewed, not audited, by the independent accounting firm.
Business context and results
Baxter reported two segments: BioScience and Medical Products. Third-quarter net sales rose 8% to $3.479 billion; nine-month sales rose 10% to $10.299 billion. Foreign currency contributed 5 and 3 percentage points to growth, respectively. International sales increased 13% in the quarter and 10% year to date; U.S. sales grew 1% and 11%.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $3,479 | $3,224 | $10,299 | $9,345 |
| Gross margin | $1,771 | $1,659 | $5,281 | $4,340 |
| Gross margin percentage | 50.9% | 51.5% | 51.3% | 46.4% |
| Income before taxes | $727 | $641 | $2,261 | $1,423 |
| Net income attributable to Baxter | $576 | $525 | $1,761 | $997 |
| Diluted EPS | $1.01 | $0.89 | $3.06 | $1.67 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,925 | $2,068 |
BioScience sales grew 9% in both periods; Medical Products sales rose 7% in Q3 and 11% year to date. Antibody Therapy and Renal, Global Injectables, and IV Therapies contributed to growth, while product-level performance varied. Q3 gross margin declined 0.6 percentage points, including effects from currency and manufacturing issues at the Castlebar, Ireland facility; year-to-date margin improved primarily because 2010 included the infusion-pump recall charge.
Cash flow, balance sheet and financing
- Cash and equivalents were $2.338 billion at September 30, down from $2.685 billion at December 31, 2010. Current assets were $8.002 billion and current liabilities $4.165 billion.
- Total debt and lease obligations were approximately $4.542 billion, including $87 million short-term debt, $8 million current maturities and $4.447 billion long-term. Cash exceeded short-term borrowings, but total debt exceeded cash by approximately $2.204 billion.
- Nine-month operating cash flow was $1.925 billion, down from $2.068 billion. Investing outflow was $766 million; financing outflow was $1.492 billion. Capital expenditures were $643 million.
- Cash use included $1.413 billion of share repurchases and $534 million of dividends. Baxter repurchased 26.3 million shares during the first nine months; $1.6 billion remained under its December 2010 authorization.
- Inventory increased to $2.621 billion from $2.371 billion at year-end, principally due to higher plasma-related inventories and inventories of SIGMA pumps and peritoneal dialysis solutions.
- The company had no borrowings under its revolving credit facilities and reported compliance with their financial covenants. Its $1.5 billion primary facility was refinanced to mature in June 2015.
Material changes, outlook and management commentary
- Nine-month earnings comparisons benefited significantly from 2010 charges: a $588 million COLLEAGUE infusion-pump recall charge and a $112 million impairment related to the U.S. generic injectables divestiture. The 2010 recall charge included $213 million recorded as a reduction of sales.
- Q3 2011 included a $79 million charge for resolving AWP litigation and adjusting historical rebate and discount reporting. Baxter said it was making further historical price-reporting adjustments.
- Management expected a full-year 2011 effective tax rate of approximately 21.5%, excluding audit developments and other special items. The filing provides no clear full-year revenue or EPS guidance.
- Baxter acquired Prism Pharmaceuticals in May for $170 million upfront, with up to $168 million in sales-milestone payments. In August it agreed to acquire Baxa for $380 million at closing, with completion expected in Q4 2011 subject to customary conditions and regulatory approvals; the acquisition was not expected to materially affect 2011 financial statements.
- The company completed the sale of its U.S. multi-source generic injectables business in May for $104 million. It also reported a positive European regulatory opinion in September regarding actions addressing potential endotoxins in certain dialysis-solution batches produced at Castlebar.
Risks, contingencies and unusual items
- COLLEAGUE pumps: The FDA recall of approximately 200,000 pumps in the U.S. was being carried out through July 13, 2012. The remaining reserve was $338 million; Baxter said it expected substantial utilization by the end of 2012, while warning that additional costs, penalties, claims or regulatory actions could occur.
- Litigation and investigations: Recorded legal reserves were $239 million, with related insurance receivables of $67 million. More than 600 heparin-related lawsuits were pending. Propofol cases had produced jury awards of $39 million compensatory and $751 million punitive damages; Baxter cited an indemnity agreement with Teva. The company also disclosed plasma-therapy antitrust claims, shareholder and securities actions, and government requests for information concerning pricing, marketing and possible Foreign Corrupt Practices Act compliance. Outcomes and possible additional losses were uncertain.
- Regulatory and operating risks: The filing cited an FDA Warning Letter concerning Renal complaint-handling processes, ongoing pump-remediation obligations, manufacturing issues at Castlebar and risks of further quality-related actions. Baxter cautioned that additional charges, penalties, recalls or sales impacts could result.
- Other exposures: Greek government bonds held at quarter-end had a $78 million book value and $40 million fair value. Baxter warned that foreign-government payment delays, credit losses, currency volatility, product demand, pricing, regulation and product quality could affect results.
Most important facts for investors to verify
- How much of sales and earnings growth reflects underlying performance versus foreign exchange and the absence of prior-year recall and impairment charges.
- Progress, cash costs and reserve adequacy for the COLLEAGUE recall through its July 2012 deadline.
- Developments in litigation, government investigations and the $79 million historical pricing-related charge, including potential additional exposure.
- Whether the Castlebar manufacturing issues, inventory build and regional sales trends affect future margins and cash conversion.
- Completion and eventual performance of the Baxa acquisition, Prism milestone payments, and the effect of ongoing repurchases and dividends on liquidity and debt.