Baxter International Inc. — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. Financial figures are in U.S. dollars; income-statement and cash-flow figures are in millions unless otherwise noted. The interim statements were reviewed by the independent accountant, not audited.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Net sales | $3,123 | $3,189 | $5,947 | $6,066 |
| Gross margin | $1,638; 52.4% | $1,627; 51.0% | $3,126; 52.6% | $3,007; 49.6% |
| Income before taxes | $724 | $676 | $1,361 | $1,213 |
| Net income attributable to Baxter | $587 | $544 | $1,103 | $973 |
| Diluted EPS | $0.96 | $0.85 | $1.79 | $1.52 |
| Operating cash flow | Not separately provided for quarter | $1,048 | $1,082 |
- Q2 sales fell 2%; first-half sales fell 2%. Foreign currency reduced sales growth by 10 percentage points in Q2 and 9 points in the first half.
- Gross margin improved 1.4 percentage points in Q2 and 3.0 points in the first half, helped by mix, pricing and manufacturing cost improvements. The first-half comparison also benefited from $72 million of 2008 infusion-pump and heparin charges.
- Marketing and administrative expense was 21.1% of sales in Q2 versus 22.0%; first-half ratio was 21.4% versus 22.1%. R&D rose 4% in Q2 and 8% in the first half.
- Effective tax rates were 18.6% for Q2 and 18.7% for the first half, down from 18.9% and 19.2%, respectively.
Business and segment trends
- BioScience: Sales increased 2% in Q2 and 3% in the first half; segment pretax income was flat in Q2 and up 1% in the first half. Growth included plasma proteins and antibody therapy; lower FSME-IMMUN vaccine sales were a partial offset.
- Medication Delivery: Sales declined 3% in both periods, though management reported growth excluding currency effects. First-half pretax income rose 24%, partly because the 2008 period included COLLEAGUE pump and heparin charges. Infusion Systems sales remained weak.
- Renal: Sales declined 8% in both periods, but grew excluding currency effects, supported by peritoneal dialysis patient growth. Pretax income fell 10% in Q2 and 23% in the first half, reflecting lower saline sales, higher R&D and currency pressure.
Balance sheet, debt and liquidity
- At June 30, cash and equivalents were $1,802, down from $2,131 at December 31, 2008. Current assets were $7,072 and current liabilities $3,395; reported current ratio was approximately 2.1.
- Short-term debt was $234; current maturities of long-term debt and leases were $5; long-term debt and leases were $3,593. Total reported debt and lease obligations were approximately $3,832, versus $3,756 at year-end.
- Operating cash flow was $1,048 versus $1,082 in the first half of 2008. Capital expenditures were $387; cash dividends were $318; treasury-stock purchases were $866. Cash decreased $329 during the period.
- Baxter issued $350 of 4.0% senior notes due March 2014. It reported no borrowings under its $1.5 billion revolving or Euro-denominated credit facilities at quarter-end and compliance with facility covenants.
Outlook, notable items and risks
- Management expected a full-year 2009 GAAP effective tax rate of approximately 18.5%–19.0%, excluding additional audit developments and other special items. The filing does not provide clear full-year revenue or EPS guidance.
- Baxter expected to reduce gross uncertain-tax-position liabilities by approximately $330 within 12 months, subject to tax matters and settlements; management considered reserves adequate.
- In April, Baxter began consolidating SIGMA after obtaining a 40% stake, an exclusive three-year distribution agreement and an option to acquire the remaining equity. The preliminary allocation included $87 goodwill, $24 in-process R&D, $94 other intangible assets and $62 estimated contingent payments. SIGMA creditors have no recourse to Baxter’s general credit.
- A planned acquisition of Edwards Lifesciences’ CRRT assets was expected to close in Q3 2009, subject to regulatory approval, for an initial payment of about $56 plus up to $9 tied to revenue objectives.
- COLLEAGUE infusion-pump shipments remained on hold in the U.S. under an FDA Consent Decree; $99 of related reserves remained at June 30. Baxter warned of possible further costs, regulatory actions, penalties, claims and impairment charges. Heparin-related litigation and other product, pricing, patent and legal matters also remain potential exposures.
- Management cited foreign-exchange volatility and uncertainty in financial markets as risks to earnings, hedging benefits, borrowing costs and access to capital. It nevertheless stated that it believed it had adequate financial flexibility.
- The board authorized an additional $2.0 billion share-repurchase program in July 2009; no purchases had yet been made under that new authorization.
Investor verification priorities
- Confirm whether reported sales and margin improvement persist after separating currency effects and the prior-year pump and heparin charges.
- Track cash conversion, inventory growth, capital spending, buybacks and debt levels against operating cash flow.
- Monitor FDA progress and potential incremental costs, penalties or litigation related to COLLEAGUE pumps and heparin.
- Verify SIGMA milestone liabilities, purchase-option decisions and the economics of the distribution arrangement, as well as the status and cost of the planned CRRT acquisition.
- Follow the $330 expected tax-liability reduction and whether the projected tax-rate range is maintained.