Baxter International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Unless noted, financial figures are in U.S. dollars; dollar amounts are in millions.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $4,197 | $3,710 | $12,199 | $10,645 |
| Gross margin | $2,073 | $1,906 | $5,933 | $5,476 |
| Gross margin percentage | 49.4% | 51.4% | 48.6% | 51.4% |
| Income from continuing operations | $447 | $528 | $1,422 | $1,603 |
| Diluted EPS from continuing operations | $0.82 | $0.96 | $2.60 | $2.91 |
| Net income, including discontinued operations | $468 | $544 | $1,544 | $1,686 |
| Operating cash flow | Not presented by quarter | $2,072 | $2,115 |
- Sales rose 13% in Q3 and 15% year to date, at actual and constant currency rates. Medical Products grew 17% and 21%, respectively; BioScience grew 8% and 6%.
- Gambro contributed $391 million of Q3 sales and $1.2 billion year to date, accounting for a substantial portion of reported growth. Its lower margins reduced gross margin percentage by 1.2 points in both periods.
- Continuing-operations income declined about 15% in Q3 and 11% year to date. The filing attributes pressure to collaboration-related R&D, product remediation, separation and integration costs, among other items. Management’s special-item adjustments reduced continuing-operations income by $268 million in Q3 and $528 million year to date.
- R&D expense was $455 million in Q3, up 64%, and $1.086 billion year to date, up 41%. This included collaboration payments, including a $100 million upfront payment for the Merrimack agreement.
- Operating cash flow was nearly flat year over year. Capital expenditures were $1.325 billion, versus $1.037 billion, making operating cash flow less capital expenditures approximately $747 million, versus $1.078 billion.
Balance sheet, debt and liquidity
- At September 30, cash and equivalents were $2.078 billion; current assets were $9.631 billion and current liabilities $5.990 billion.
- Debt and lease obligations totaled approximately $9.268 billion, including $392 million short-term debt, $1.123 billion current maturities and $7.753 billion long-term. The filing reports no borrowings under its revolving credit facilities; $350 million of commercial paper was outstanding at a weighted-average rate of 0.23%.
- Cash declined $655 million from year-end 2013. The company reported adequate liquidity and said it intended to fund obligations with cash, operating cash flow or additional debt. Revolving credit facilities were extended to December 31, 2015; the company reported compliance with their covenants.
- Year-to-date dividends were $813 million and share repurchases were $500 million. The quarterly dividend was raised 6% to $0.52 per share.
Material changes, outlook and risks
- Portfolio changes: Baxter agreed to sell its commercial vaccines business and committed to divest the remainder of its Vaccines franchise; completion was expected in Q4 2014. It also planned a tax-free spin-off of the biopharmaceuticals business by mid-2015, subject to approvals and other conditions.
- Outlook: Management expected a full-year 2014 continuing-operations effective tax rate of approximately 22%, excluding audit developments and other special items. Optimization programs were expected to deliver an additional annualized $0.13 per diluted share of savings when fully implemented in 2015.
- Product and regulatory exposure: The SIGMA Spectrum infusion pump Class I recall generated a $93 million charge; remediation was expected through March 2016, and further charges may be required. The filing also identifies multiple FDA warning letters concerning facility, manufacturing and quality systems.
- Other risks and contingencies: Baxter reported $417 million of net public-sector receivables from Greece, Spain, Portugal and Italy, with potential collection delays or losses. Legal reserves were $76 million; additional losses could arise, although management did not expect the proceedings to materially affect consolidated financial position. A proposed derivative-suit settlement included spending at least $4 million annually for three years on quality and regulatory initiatives, subject to court approval.
- Additional risks include generic competition for cyclophosphamide, Gambro integration, product quality and safety, clinical and regulatory outcomes, foreign exchange and interest-rate movements, and execution of the planned separation.
Important facts for investors to verify
- How much sales growth and profitability are attributable to Gambro versus underlying, comparable business growth.
- The expected costs, timing and operational effects of the SIGMA pump remediation and FDA warning-letter responses.
- Progress, costs, approvals and expected financial effects of the biopharmaceuticals spin-off and vaccine divestitures.
- Whether cash conversion improves as inventories and capital investment remain elevated, and how debt and liquidity evolve.
- Whether the stated tax-rate and cost-savings expectations are achieved, and how special items affect reported earnings.
- The collection status of European public-sector receivables and the final outcome and cost of significant legal matters.