Baxter International Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Baxter develops and sells biopharmaceutical, medication-delivery, and renal-care products in more than 100 countries. Approximately 60% of revenue came from outside the United States.
Financial performance
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $12.562 billion | $12.348 billion |
| Gross margin | $6.525 billion; 51.9% of sales | $6.130 billion; 49.6% of sales |
| Income before tax | $2.734 billion | $2.462 billion |
| Net income attributable to Baxter | $2.205 billion | $2.014 billion |
| Diluted earnings per share | $3.59 | $3.16 |
| Operating cash flow | $2.909 billion | $2.515 billion |
| Cash and equivalents at year-end | $2.786 billion | $2.131 billion |
| Total debt and capital lease obligations | $4.122 billion | $3.368 billion |
| Capital expenditures | $1.014 billion | $954 million |
Management described 2009 as a record year for sales, earnings, and operating cash flow. Net sales rose 2%, despite a 5-percentage-point unfavorable foreign-exchange impact; diluted EPS rose 14%. Gross-margin improvement reflected product mix, pricing, and manufacturing and yield improvements. R&D spending increased 6% to a record $917 million, or 7.3% of sales.
Fourth quarter: Sales were $3.470 billion versus $3.131 billion in Q4 2008. Net income attributable to Baxter was $572 million versus $569 million; diluted EPS was $0.94 versus $0.91. The 2009 fourth quarter included a $79 million cost-optimization charge.
Segments and changes
- BioScience: Sales of $5.573 billion, up 5%. Growth was led by recombinant therapies, plasma proteins, and antibody therapy, including ADVATE and GAMMAGARD LIQUID.
- Medication Delivery: Sales of $4.649 billion, up 2%. Growth in injectables and anesthesia was partly offset by declines in infusion systems and IV therapies.
- Renal: Sales of $2.266 billion, down 2% as reported; foreign exchange was a major headwind. PD patient growth was positive excluding currency effects, while hemodialysis sales declined.
- International sales were $7.245 billion, down 1%; U.S. sales were $5.317 billion, up 5%. The stronger U.S. dollar materially affected reported international results.
Liquidity, debt, and capital allocation
Cash from operations increased by $394 million to $2.909 billion. Year-end cash was $2.786 billion; management reported net debt at 19% of shareholders’ equity. No borrowings were outstanding under the $1.5 billion revolving facility or the approximately $435 million Euro facility at year-end, and Baxter reported compliance with credit-facility covenants. Long-term debt and lease obligations were $3.440 billion; $682 million of debt and lease obligations was classified as current maturities.
Baxter repurchased 23 million shares for $1.2 billion and paid $632 million in cash dividends during 2009. The annual dividend declared was $1.07 per share. The company expected approximately $1 billion of capital expenditures in 2010.
Outlook, risks, and unusual items
- Outlook: Baxter gave no specific 2010 sales or earnings guidance in the provided filing text. It expected a GAAP effective tax rate of approximately 19%–19.5% and pension-plan contributions of at least $335 million in 2010, including a $300 million contribution made in January. Management planned continued R&D investment and selective business-development activity.
- Regulatory and product issues: COLLEAGUE infusion pumps remained subject to a 2006 FDA consent decree and remediation process. The company recorded $27 million of 2009 pump-related charges and warned that further costs or asset impairments were possible. In January 2010, the FDA issued a warning letter concerning fill-and-finish processes and controls at the Lessines, Belgium facility relating to GAMMAGARD LIQUID.
- Other unusual charges: 2009 results included the $79 million cost-optimization charge, $27 million of infusion-pump charges, and a $54 million impairment charge after discontinuing the SOLOMIX development program. The 2008 comparison included $125 million of pump-related charges and a $31 million CLEARSHOT program impairment.
- Litigation and contingencies: Matters included approximately 650 heparin-related lawsuits, plasma-therapy pricing allegations, patent disputes, and a U.S. government subpoena concerning COLLEAGUE pumps. Management said outcomes could materially affect results or cash flows in a period, though it did not expect the proceedings to materially adversely affect consolidated financial position. Legal liabilities were $112 million and insurance receivables $96 million at year-end.
- Other risks: Pricing and reimbursement pressure, customer and competitor consolidation, foreign-exchange exposure, constrained or single-source materials, product quality and safety, intellectual-property disputes, and credit exposure to some foreign governments. Baxter no longer purchased product-liability insurance, increasing exposure to claims.
Most important facts for investors to verify
- Whether pump remediation, the consent decree, and the January 2010 FDA warning letter lead to further restrictions, expenses, impairments, or sales effects.
- Whether BioScience growth and margin gains persist, and whether currency movements continue to weigh on international sales.
- Whether cash conversion and liquidity remain strong after planned capital investment, pension funding, dividends, and share repurchases.
- The timing and outcome of significant litigation, including heparin claims, pricing matters, and patent cases; several potential losses were not estimable.
- Whether reported 2010 cost, tax, pension, and capital-spending expectations are achieved; the filing does not provide clear quantified sales or EPS guidance.
The independent auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2009.