Baxter International Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited; amounts below are in millions of dollars except per-share data. The independent accountant performed a review, not an audit.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $3,477 | $3,479 | $10,437 | $10,299 |
| Gross margin | $1,810 | $1,771 | $5,396 | $5,281 |
| Gross margin rate | 52.1% | 50.9% | 51.7% | 51.3% |
| Income before taxes | $766 | $727 | $2,315 | $2,261 |
| Net income attributable to Baxter | $583 | $576 | $1,832 | $1,761 |
| Diluted EPS | $1.06 | $1.01 | $3.29 | $3.06 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $2,161 | $1,925 |
- Q3 reported sales were essentially flat year over year; at constant currency, sales rose 5%. Nine-month reported sales increased 1%, or 4% at constant currency. Currency reduced reported sales growth by 5 percentage points in Q3 and 3 points year to date.
- Q3 gross margin improved 1.2 percentage points; year-to-date gross margin improved 0.4 points. Management attributed improvement to higher-margin BioScience sales, favorable currency and resolution of prior manufacturing issues, partly offset by business-development costs, pension expense and austerity measures.
- R&D expense rose 21% in Q3 to $290 and 25% year to date to $865, including upfront collaboration charges. Net interest expense increased to $25 in Q3 and $65 year to date, partly due to debt issuance and lower interest income.
- Other income was $14 in Q3 and $133 for the first nine months, including $91 of gains from reduced contingent acquisition-payment liabilities. The year-to-date result also included a $37 infusion-pump reserve reduction within cost of sales.
Segments and material changes
- BioScience: Sales were $1,522 in Q3 and $4,550 year to date; constant-currency growth was 5% in both periods. Segment pretax income declined 8% in Q3 and 10% year to date, including collaboration-related R&D charges. Growth in recombinant therapies, antibody therapy and regenerative medicine was offset in part by weakness in plasma proteins and tender sales.
- Medical Products: Sales were $1,955 in Q3 and $5,887 year to date; constant-currency growth was 4% in both periods. Pretax income declined 4% in Q3 and increased 5% year to date, the latter including acquisition-liability gains and infusion-pump reserve benefits. Infusion Systems sales fell 16% in Q3, with recall-related effects among the cited factors.
- Share repurchases reduced the weighted-average diluted share count; Baxter repurchased 18.9 million shares for $1.1 billion in the first nine months. Cash dividends paid were $558. The quarterly dividend was raised to $0.45 per share, approximately 34% above the prior rate.
Cash, debt and liquidity
- At September 30, cash and equivalents were $3,191, versus $2,905 at December 31, 2011. Current assets were $9,105 and current liabilities $4,458.
- Short-term debt was $16; current maturities of long-term debt and leases were $317; long-term debt and leases were $5,614. The company issued $1.0 billion of senior notes in August: $700 million due 2022 at 2.40% and $300 million due 2042 at 3.65%.
- Operating cash flow was $2,161, capital expenditures $762, and cash outflows for acquisitions and investments $495 for the first nine months. Financing cash outflow was $664, including $1,065 of treasury-stock purchases and $558 of dividends. Cash increased by $286 over the period.
- No borrowings were outstanding under the company’s credit facilities at quarter-end; it reported compliance with facility covenants. Management said it expects to fund obligations with cash, operating cash flow or additional debt and believes it has adequate financial flexibility.
- Receivables from public-sector customers in Greece, Spain, Portugal and Italy totaled $424, including $69 from Greece. Baxter cautioned that collection delays and credit losses could continue. Days sales outstanding increased to 57.0 from 53.5 at year-end 2011; inventory rose to $2,831 from $2,628.
Outlook, risks and unusual items
- Management estimated a full-year 2012 effective tax rate of approximately 22%, excluding audit developments, discrete items and other special items. The filing provides no clear numerical full-year sales or earnings guidance.
- Baxter expects the U.S. COLLEAGUE pump recall reserves to be substantially used by year-end 2012; remaining reserves include activity outside the U.S. and may require future adjustments. The recall was substantially completed in July, but formal FDA closure remained pending. The company warned of possible additional costs, regulatory actions, penalties, claims and effects on other product sales.
- A U.S. pension lump-sum offer to terminated-vested participants could produce a fourth-quarter settlement charge of up to $400 and payments from plan assets of up to $820, depending on participant acceptance and remeasurement factors.
- Planned plasma-treatment capacity expansion includes a new Georgia facility. Baxter expects to invest more than $1 billion over five years; commercial production is planned for 2018.
- Material risks include product quality and patient safety, regulatory approvals and compliance, competition and pricing, foreign exchange, government-customer credit exposure, product-development outcomes, and litigation. The filing describes ongoing heparin product-liability cases, plasma-therapy antitrust litigation, shareholder suits, and SEC and Department of Justice inquiries. Baxter said it was cooperating with the agencies. Legal reserves were $124, with related receivables of $36; some potential losses could not be estimated.
- Other unusual items include $50 of Q3 R&D expense and a $50 investment in Onconova preferred stock, plus collaboration charges of $30 for Chatham and $33 for Momenta earlier in 2012. Baxter also acquired Synovis for net consideration of $304 and exercised its remaining SIGMA purchase option for $90.
Important facts for investors to verify
- Whether constant-currency growth and segment trends continue, particularly BioScience profitability and the decline in Infusion Systems.
- Final COLLEAGUE recall costs, reserve adequacy and timing of formal FDA closure; status of the FDA Warning Letter involving the Renal business.
- Actual pension-offer acceptance, settlement charge and cash effects in Q4 2012.
- Collection performance and credit exposure to public-sector customers in Greece, Spain, Portugal and Italy.
- Progress, costs and commercial milestones for the Georgia capacity expansion and the Onconova, Chatham and Momenta collaborations.
- Developments in pending litigation and the SEC and DOJ inquiries, as well as any effect on financial results or disclosures.