Baxter International Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Unless noted, financial amounts are in U.S. dollars. Comparisons are with Q1 2023.
Business context
Baxter operates in Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals, and Kidney Care. The company is exploring a sale of Kidney Care in place of its previously proposed spinoff and expects a separation in the second half of 2024, subject to customary conditions. Kidney Care generated $1.10 billion, approximately 31% of Q1 sales. Baxter sold BioPharma Solutions (BPS) in September 2023; its prior-year results are presented as discontinued operations.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 | Change / context |
|---|---|---|---|
| Net sales | $3.592 billion | $3.513 billion | +2% reported; +3% at constant currency |
| Gross margin | $1.387 billion; 38.6% | $1.275 billion; 36.3% | +2.3 percentage points reported; excluding special items, +1.7 points |
| Operating income | $187 million | $129 million | Up $58 million |
| Continuing operations income | $39 million | $0 million | 2023 had a $1 million loss attributable to Baxter stockholders from continuing operations |
| Net income attributable to Baxter stockholders | $37 million; $0.07 diluted EPS | $44 million; $0.09 diluted EPS | 2023 included $45 million of after-tax income from discontinued BPS operations |
| Effective tax rate | 66.4% | 100.0% | 2024 included $37 million of tax expense from Kidney Care separation-related internal reorganizations |
| Operating cash flow, continuing operations | $163 million | $469 million | Down $306 million |
| Capital expenditures | $176 million | $165 million | Cash flow less capital expenditures was negative $13 million in Q1 2024 |
| Cash and cash equivalents | $3.026 billion | $3.194 billion at Dec. 31, 2023 | Quarter-end balance |
| Debt and finance lease obligations | $13.726 billion | $13.798 billion at Dec. 31, 2023 | Includes current maturities; no commercial paper or revolving-facility borrowings at quarter-end |
Q1 sales by segment were $1.229 billion for Medical Products and Therapies (+6%), $667 million for Healthcare Systems and Technologies (-9%), $578 million for Pharmaceuticals (+11%), and $1.102 billion for Kidney Care (+3%). Segment operating income was $227 million, $67 million, $78 million, and $159 million, respectively.
Material changes and unusual items
- Reported gross margin improved, with management attributing the improvement excluding special items mainly to pricing and manufacturing and supply-chain cost reductions.
- Healthcare Systems and Technologies sales and segment operating income declined, reflecting capital-order timing, deferred installations, lower rental revenue, softer primary-care demand, backlog comparisons, and commercial-execution challenges. Pharmaceuticals operating income also declined despite sales growth, partly due to higher costs for products manufactured by the divested BPS business and launch-related spending.
- Business optimization charges were $57 million versus $134 million. Kidney Care separation-related costs rose to $92 million from $9 million. The company said total special items reduced Q1 2024 net income attributable to Baxter stockholders by $294 million, or $0.58 per diluted share.
- Operating cash flow was lower year over year, in part due to higher incentive compensation payouts, Kidney Care separation costs, inventory investment, and restructuring payments.
- Foreign currency reduced reported sales growth by approximately one percentage point. The quarter also included a $184 million currency-translation loss in other comprehensive income.
Outlook, liquidity, and risks
- Management expects Healthcare Systems and Technologies growth rates to improve meaningfully in the second half of 2024. The Novum IQ large-volume infusion pump received FDA 510(k) clearance in April and is expected to support second-half Infusion Therapies and Technologies sales.
- The Kidney Care sale-or-spinoff separation is expected in the second half of 2024, but completion, structure, and timing are not assured. Baxter expects continued separation costs and anticipates some dis-synergies if the separation is completed.
- Baxter expects approximately $15 million of additional pre-tax costs to complete business-optimization initiatives currently underway. It expects the impact of Pillar Two tax legislation on 2024 income tax expense to be approximately $10 million to $15 million.
- Cash was $3.026 billion. Undrawn facilities had stated capacity of $2.50 billion and €200 million, and Baxter reported covenant compliance and capacity to draw the full amounts at quarter-end. Amendments increased the maximum net-leverage covenant for six quarters through September 2025; U.S. revolving capacity is scheduled to fall to $2.00 billion by September 30, 2024, or earlier upon the Kidney Care sale or spinoff.
- Fitch lowered Baxter’s senior debt rating from BBB to BBB- in January 2024 and revised the outlook to stable. Management intends to use substantially all remaining net after-tax BPS proceeds to repay debt through the first half of 2024.
- Risks include supply interruptions and cost inflation, geopolitical and foreign-exchange exposure, regulatory and product-quality issues, and litigation. The filing discusses an FDA Warning Letter concerning the Ahmedabad facility and ongoing corrective actions, as well as new ethylene-oxide exposure claims, a DOJ investigative demand, and antitrust litigation. Recorded legal and environmental reserves totaled $30 million; the company says some potential losses cannot be estimated.
Important facts for investors to verify
- Whether Kidney Care is sold or spun off, the timing and proceeds, related costs, and resulting dis-synergies and capital structure.
- Whether lower Healthcare Systems and Technologies sales and operating performance improve as management expects in the second half of 2024.
- Whether operating cash flow recovers and debt repayment, liquidity, and leverage remain consistent with the company’s plans and amended covenants.
- The trajectory of supply constraints, manufacturing costs, FDA remediation, and litigation exposure, including any developments beyond recorded reserves.
- How much reported earnings remain affected by separation, optimization, amortization, and tax items; reported Q1 EPS was $0.07 versus $0.09 in the prior-year quarter, which included discontinued BPS income.