Baxter International Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Amounts are in millions of dollars except per-share data and percentages. Baxter reports healthcare products and services across the Americas, EMEA, and APAC.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net sales | $2,946 | $2,802; up 5% at reported currency, 1% at constant currency |
| Gross margin | $1,145; 38.9% | $1,163; 41.5% |
| Operating income | $390 | $409 |
| Net income attributable to Baxter stockholders | $298 | $332 |
| Diluted EPS | $0.58 | $0.64 |
| Cash from continuing operations | $377 | $274 |
| Capital expenditures | $171 | $172 |
| Cash and cash equivalents at March 31 | $3,182 | $3,730 at December 31, 2020 |
| Debt and finance lease obligations | $6,088, including $407 current | $6,192 at December 31, 2020 |
Gross margin fell 2.6 percentage points. Management cited unfavorable product mix and higher manufacturing and supply-chain costs associated with COVID-19. SG&A was $627 versus $628, and R&D was $128 versus $146. Interest expense, net rose to $34 from $21, primarily due to higher average debt and lower interest income. The effective tax rate was 14.5%, compared with 11.9%.
Operating cash flow improved by $103, mainly from stronger receivable collections and lower incentive-compensation payments, partly offset by inventory growth and vendor-payment timing. Investing cash outflow was $538, including $381 for acquisitions. Financing cash outflow was $358, including $253 of cash share repurchases and $125 of dividends; Q1 2020 financing inflow included $1.2 billion of net debt proceeds. Cash, cash equivalents, and restricted cash decreased by $550 during the quarter. Baxter reported no borrowings on its $2.0 billion U.S. and approximately €200 million Euro revolving facilities and stated it was in compliance with their covenants.
Changes and business developments
- International sales increased 11% at reported currency and 5% at constant currency; U.S. sales declined 3%. Foreign exchange added 4 percentage points to total reported sales growth.
- By product category, Acute Therapies grew 33% (28% constant currency), BioPharma Solutions 18% (11%), Renal Care 6% (2%), Pharmaceuticals 7% (1%), and Clinical Nutrition 8% (3%). Medication Delivery declined 4% and Advanced Surgery declined 3% at reported currency.
- Management attributed Acute Therapies growth to demand for continuous renal replacement therapy in COVID-19 care, and BioPharma Solutions growth to contract manufacturing and packaging for COVID-19 vaccines. Medication Delivery and Advanced Surgery were affected by lower hospital admissions and postponed elective procedures; some categories also faced comparisons with customer stocking in Q1 2020.
- Segment sales were $1,560 Americas, $738 EMEA, and $648 APAC. Segment operating income increased to $872 from $833, while corporate and other costs rose to $482 from $424, bringing consolidated operating income down to $390 from $409.
- Baxter acquired specified non-U.S. rights to Caelyx and Doxil for $325, including $314 allocated to developed technology; the acquired rights contributed $13 of sales after acquisition. It also acquired Transderm Scop rights for $60 upfront plus contingent consideration with a fair value of $24. The latter acquisition’s results were insignificant in the quarter.
Outlook, commentary, and risks
- The filing provides no specific quarterly or full-year sales or earnings guidance. Management expects ongoing adverse effects from COVID-19 on operations, supply chains, distribution, demand, and expenses.
- Baxter reported $1.1 billion of cumulative pre-tax business-optimization costs since 2015 and expected approximately $12 more through completion of initiatives underway. It expects more than $1.2 billion in cumulative annual pre-tax savings once actions are complete, with approximately 99% expected by the end of 2021 and the remainder by the end of 2023. Further initiatives could create additional charges.
- A foreign tax court decision received April 23, 2021, after quarter-end, is expected to result in a $22 tax expense in Q2 2021.
- Baxter began winding down operations in Argentina. On substantial liquidation, it expects to reclassify accumulated currency translation adjustments and recognize a non-cash charge; the related CTA exceeded $60 at March 31, 2021.
- Legal and environmental reserves were $53 at March 31, including a $7 insurance receivable. A proposed $16 settlement of shareholder litigation related to the foreign-exchange investigation was fully reserved at quarter-end; preliminary court approval followed on April 20, 2021. Baxter continues to cooperate with the SEC regarding that investigation. The filing says certain additional contingency losses cannot be estimated and could affect results or cash flows in a period.
- The FDA Warning Letter concerning the Ahmedabad, India facility remained outstanding; management could not predict when it would be lifted. Baxter cited regulatory, product-quality, supply, competition, currency, interest-rate, litigation, and pandemic risks. It also noted that LIBOR-linked credit arrangements will need successor-rate provisions.
Most important facts for investors to verify
- Whether sales momentum and product-category trends persist after separating foreign-exchange effects, COVID-related demand, and prior-year customer stocking.
- Whether gross margin recovers from the reported decline and whether announced cost savings are realized on schedule without further material restructuring costs.
- Cash generation, working-capital needs, acquisition spending, share repurchases, and the effect of debt and interest costs on liquidity.
- The final outcome and financial consequences of the shareholder settlement, SEC investigation, other litigation, and the $22 foreign tax expense expected in Q2.
- Developments in Argentina’s wind-down and the potential non-cash CTA charge, as well as the status of the Ahmedabad FDA Warning Letter.