Baxter International Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial figures are unaudited; dollar amounts are in millions unless noted.
Business context and performance
Baxter operates BioScience and Medical Products businesses. Q2 net sales increased 3% year over year (4% at constant currency); first-half sales rose 2% (3% at constant currency). Foreign currency reduced sales growth by about one percentage point in both periods.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $3,669 | $3,572 | $7,117 | $6,960 |
| Gross margin | 52.8% | 52.4% | 51.9% | 51.5% |
| Income before taxes | $743 | $817 | $1,436 | $1,549 |
| Net income | $590 | $661 | $1,142 | $1,249 |
| Diluted EPS | $1.07 | $1.19 | $2.07 | $2.24 |
| Cash from operations | — | — | $1,149 | $1,414 |
| Capital expenditures | — | — | $639 | $503 |
Marketing and administrative expense was 22.8% of sales in Q2 and 22.9% for the first half, up 0.7 and 0.8 percentage points, respectively. R&D expense fell 11% in Q2 and 10% in the first half, largely because of prior-year collaboration charges.
Material changes and drivers
- BioScience: Sales grew 5% in both Q2 and the first half. Growth reflected demand for ADVATE and FEIBA, immunoglobulin and albumin products, international surgical sealants, and vaccines. Segment pretax income increased 14% in Q2 and 16% in the first half.
- Medical Products: Sales rose 1% in Q2 and were flat for the first half. Renal and Fluid Systems growth was partly offset by lower BioPharma Solutions sales and Specialty Pharmaceuticals supplier shortages. Segment pretax income declined 11% in Q2 and 16% in the first half, including Gambro pre-acquisition costs.
- Consolidated earnings declined despite higher sales and gross margin. Q2 other expense was $68, versus $62 of other income in Q2 2012; first-half other expense was $65, versus $119 of other income. The 2013 amounts included losses on Gambro-related currency hedges and Venezuelan currency devaluation; 2012 included gains from reductions in acquisition-related contingent liabilities.
- Operating cash flow fell to $1,149 from $1,414 in the first half. Higher inventory absorbed $306 of cash, and inventory increased to $3,069 from $2,803 at year-end 2012. The prior-year comparison benefited from substantial collections of overdue Spanish receivables.
Financial position, debt and liquidity
At June 30, cash and equivalents were $5,989, up from $3,270 at December 31, 2012. Total debt and lease obligations were $9,035, compared with $5,930 at year-end; cash exceeded current liabilities of $4,516, while the current ratio was approximately 2.7. The debt increase primarily reflected $3.5 billion of senior notes issued in June to support the planned Gambro acquisition and general corporate purposes. No amounts were outstanding under the main revolving credit facilities or commercial paper at quarter-end.
First-half investing cash outflow was $716, including $639 of capital expenditures; financing cash inflow was $2,295. Baxter paid $490 in dividends and repurchased $717 of stock during the first half. The board’s quarterly dividend was raised to $0.49 per share.
Outlook, risks and unusual items
- Baxter expected the approximately $4 billion Gambro acquisition to close in Q3 2013, subject to regulatory approvals and other conditions. The June debt notes include a mandatory redemption provision for most notes if the acquisition does not close by March 17, 2014 or the agreement is terminated.
- Management anticipated a 2013 effective tax rate of approximately 22%, excluding audit developments and other special items. Business optimization initiatives were estimated to yield approximately $0.24 per diluted share in savings when fully implemented in 2015. The filing provides no full-year sales or EPS guidance.
- FDA Warning Letters received in April and June 2013 concerned SIGMA Spectrum Infusion Pump clearance and CGMP observations at North Cove and Jayuya facilities. Baxter said it was working with FDA to resolve these matters. Management cited an expected decline in SIGMA pump sales related to the April letter.
- Other risks include regulatory approval and integration of Gambro, product quality and patient safety, competitive and pricing pressures, foreign exchange and interest-rate exposure, collection risk in certain European public-sector markets, and potential legal losses. Net public-sector receivables in Greece, Spain, Portugal and Italy were $414, including $49 in Greece.
- Unusual items included $40 of first-half Gambro pre-acquisition costs, $18 of Q2 Alzheimer’s program exit costs, and a $20 benefit from releasing business optimization reserves. Remaining COLLEAGUE infusion-pump reserves were $117; Baxter noted further charges could arise as remediation continues.
Most important facts for investors to verify
- Whether Gambro closed as expected, its final purchase price and financing, and the impact on debt and earnings.
- Whether FDA findings are resolved and whether they lead to product, manufacturing, sales or compliance costs.
- Whether inventory growth and lower operating cash flow reverse, particularly in BioScience and Renal.
- Whether constant-currency sales growth and BioScience profitability persist while Medical Products performance improves.
- How acquisition-related currency hedges, contingent payments, legal matters and infusion-pump remediation affect future reported results and cash flows.
The independent accountant performed an interim review, not an audit, and reported no material modifications that should be made to the interim financial statements.