Baxter International Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; compared with the corresponding 2022 periods. Amounts are in U.S. dollars. Baxter reports medical products and therapies, healthcare systems and technologies, pharmaceuticals, and kidney care. Its segment structure was reorganized in Q3 2023.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3.708bn | $3.609bn | $10.928bn | $10.761bn |
| Gross margin | $1.117bn; 30.1% | $1.045bn; 29.0% | $3.503bn; 32.1% | $3.678bn; 34.2% |
| Operating income (loss), continuing operations | $(51)m | $(2.880)bn | $61m | $(2.533)bn |
| Income (loss) from continuing operations | $51m | $(2.991)bn | $(142)m | $(2.798)bn |
| Net income (loss) attributable to Baxter stockholders | $2.508bn | $(2.937)bn | $2.411bn | $(2.614)bn |
| Diluted earnings (loss) per share | $4.93 | $(5.83) | $4.76 | $(5.20) |
Q3 sales increased 3% year over year (2% at constant currency); nine-month sales rose 2% (3% at constant currency). Q3 gross margin improved year over year, but the nine-month margin declined. Management attributed underlying gross-margin pressure primarily to raw-material inflation; reported margins also reflect special items, including asset impairments, amortization, and optimization costs.
Reported net income was dominated by the BPS divestiture: Baxter recorded a $2.89bn pretax gain ($2.60bn after tax) in discontinued operations. Continuing operations generated $51m of Q3 income but a $142m nine-month loss. Q3 continuing-operations operating loss included $267m of HD-related long-lived asset impairments and $77m of separation-related costs, among other items.
Q3 segment sales were $1.258bn for Medical Products and Therapies, $744m for Healthcare Systems and Technologies, $580m for Pharmaceuticals, and $1.109bn for Kidney Care. Q3 segment operating income was $245m, $115m, $108m, and $96m, respectively. Pharmaceuticals sales grew 10%; Kidney Care sales rose 1%, while Kidney Care operating income fell to $96m from $103m.
Cash flow, debt, and liquidity
- For the first nine months, operating cash flow from continuing operations was $1.097bn, versus $594m in 2022. Capital expenditures were $502m; continuing-operations investing cash outflow was $489m.
- Total cash, cash equivalents, and restricted cash increased to $5.792bn at September 30, 2023, from $1.722bn at December 31, 2022. The increase included $3.932bn of investing cash flow from discontinued operations, principally BPS sale proceeds.
- At September 30, short-term debt was $514m; current maturities of long-term debt and finance leases were $1.912bn; and long-term debt and finance leases were $14.067bn. Baxter reported approximately $16.49bn in total debt and finance lease obligations, including current and short-term amounts.
- In October 2023, using BPS sale proceeds, Baxter repaid $950m of term loans and all $514m of outstanding commercial paper. It expected to use substantially all of the estimated $3.70bn net after-tax BPS proceeds to repay or retire debt through the first half of 2024.
- Current assets were $12.034bn and current liabilities were $6.209bn. Baxter reported compliance with financial covenants and access to revolving facilities of $2.50bn and €200m, subject to outstanding commercial paper and covenant capacity.
Material changes and management outlook
- Baxter completed the sale of BioPharma Solutions on September 29, 2023, for $3.96bn cash proceeds after adjustments. BPS results, cash flows, and sale gain are presented as discontinued operations.
- Baxter is targeting a Kidney Care spinoff by July 2024 or earlier, subject to customary conditions. Kidney Care represented about 30% of consolidated sales in both Q3 and the first nine months of 2023. Management cautioned that completion, timing, and structure are not assured and anticipates potential dis-synergies and further cost actions after a separation.
- The new operating model and four-segment structure were implemented in Q3. Baxter recorded $508m of business-optimization charges in the first nine months and expects about $25m of additional pretax costs to complete initiatives already underway; further actions could add costs.
- Baxter plans to cease dialyzer production at its Opelika, Alabama facility near year-end 2023, citing excess global supply and efforts to streamline manufacturing. It recorded a $243m impairment in Q2 and $267m of additional HD-related asset impairments in Q3.
- No specific consolidated sales or earnings guidance is provided in the filing text. Management expects separation costs to continue through the rest of 2023 and the first half of 2024, adversely affecting earnings and operating cash flow; it expects net interest expense to decline following debt repayment.
Risks, contingencies, and unusual items
- Supply constraints, raw-material and freight inflation, component shortages, and geopolitical events may limit production, sales, or profitability. Management noted some improvement in component availability and raw-material pricing, but challenges remain.
- Q3 2023 included $267m of HD asset impairments; the first nine months included $243m of Opelika-related impairment, $508m of business-optimization charges, and $123m of separation-related costs in continuing operations.
- The Ahmedabad, India facility received an FDA Warning Letter in July 2023 following an inspection. Baxter said it responded and implemented corrective and preventive actions; regulatory matters could affect manufacturing, approvals, or product availability.
- Legal matters include a DOJ investigation concerning alleged False Claims Act and Anti-Kickback Statute issues involving legacy Hillrom, an antitrust suit, and a securities class action alleging misleading statements about supply chain and financial guidance. Legal and environmental reserves totaled $33m at September 30; some potential losses cannot be estimated.
- Fitch revised Baxter’s senior debt rating outlook to rating watch negative in January 2023. Baxter amended leverage covenants in 2023; it reported covenant compliance at quarter-end. Foreign-exchange, interest-rate, credit, regulatory, litigation, and potential further impairment risks remain.
Key facts for investors to verify
- Separate recurring performance from the $2.60bn after-tax BPS disposal gain when assessing 2023 earnings and EPS.
- Track cash conversion, working capital, capital spending, and execution of announced debt repayments against the $16.49bn debt and finance-lease balance reported at quarter-end.
- Monitor Kidney Care performance and the status, timing, costs, and potential dis-synergies of the proposed spinoff.
- Assess whether supply-chain improvements and pricing can offset inflation, and whether HD and other businesses avoid further asset impairments.
- Follow FDA remediation at Ahmedabad, unresolved legal proceedings, and any changes to credit ratings or covenant terms.