Baxter International Inc. — 2009 Third-Quarter Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2009, compared with the same periods in 2008. Baxter operates in BioScience, Medication Delivery and Renal. The interim financial statements were reviewed by PwC, not audited.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $3.145 billion | $3.151 billion | $9.092 billion | $9.217 billion |
| Gross margin | $1.632 billion; 51.9% | $1.521 billion; 48.3% | $4.758 billion; 52.3% | $4.528 billion; 49.1% |
| Income before taxes | $658 million | $562 million | $2.019 billion | $1.775 billion |
| Net income attributable to Baxter | $530 million | $472 million | $1.633 billion | $1.445 billion |
| Diluted EPS | $0.87 | $0.74 | $2.66 | $2.26 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $1.923 billion | $1.895 billion |
Marketing and administrative expense was $672 million in Q3 and $1.943 billion for the nine months; R&D expense was $228 million and $671 million, respectively. The effective tax rate was 19.1% for Q3 and 18.8% year to date.
At September 30, cash and equivalents were $2.571 billion; current assets were $8.064 billion and current liabilities $3.468 billion. Short-term debt, current maturities and long-term debt totaled approximately $4.169 billion, versus $3.756 billion at December 31, 2008. No borrowings were outstanding under the $1.5 billion revolving facility or approximately $445 million Euro facility. Nine-month capital expenditures were $634 million; dividends paid were $475 million and treasury-stock purchases were $966 million.
Material changes versus the prior comparable period
- Q3 sales were essentially flat; nine-month sales declined 1%. Foreign currency reduced reported sales growth by 6 percentage points in Q3 and 8 points year to date.
- Gross margin improved 3.6 percentage points in Q3 and 3.2 points year to date, reflecting better mix, pricing and manufacturing costs, partly offset by weaker vaccine revenue and specified product charges.
- Q3 segment sales: BioScience rose 2% to $1.385 billion; Medication Delivery rose 1% to $1.168 billion; Renal fell 3% to $576 million. Year-to-date, BioScience rose 3%, while Medication Delivery fell 1% and Renal fell 6%.
- Net income attributable to Baxter rose 12% in Q3 and 13% year to date; diluted EPS increased to $0.87 and $2.66, respectively. Weighted-average diluted shares declined year over year.
- Operating cash flow was broadly unchanged year to date. Cash increased $440 million from year-end, while debt rose; Baxter issued $350 million of 4.0% notes due 2014 and $500 million of 4.5% notes due 2019.
Outlook, commentary, risks and unusual items
- Management expected a full-year 2009 GAAP effective tax rate of approximately 18.5%–19.0%, excluding additional audit developments and other special items. No full-year sales or EPS guidance is stated in the provided filing text.
- Q3 charges included $54 million for discontinuing the SOLOMIX development program and $27 million related to planned SYNDEO retirement and COLLEAGUE pump costs. The charges weighed on Medication Delivery results; the SOLOMIX charge was recorded in other expense.
- COLLEAGUE pump shipments remain halted in the United States under an FDA Consent Decree. Baxter reported continuing FDA discussions and a September 2009 U.S. Attorney subpoena; management warned of possible further charges, impairments, regulatory action, penalties and effects on other product sales. A separate September FDA Warning Letter concerned ISOLEX 300i observations.
- Other contingencies include approximately 280 heparin-related lawsuits, plasma-therapy pricing litigation, product-liability and patent matters, and a proposed settlement involving claims related to historical blood-derived factor concentrates. The company said certain losses cannot be estimated and that legal outcomes could materially affect results in a reporting period, although it did not expect a material adverse effect on consolidated financial position.
- Management cited foreign-exchange volatility, potential customer or supplier weakness and possible limits on capital-market access as risks, while stating it believed financial flexibility was sufficient. It expected uncertain-tax-position liabilities to decline by about $330 million within 12 months; reserves were considered adequate.
- Acquisitions and investments included consolidation of SIGMA, with a 40% stake, purchase option and exclusive distribution agreement, and a $56 million Edwards CRRT asset acquisition. Their pro forma impact was described as not significant.
Important facts for investors to verify
- Whether margin and earnings improvement is sustainable after separating currency effects, product mix and nonrecurring charges.
- Progress, timing and potential incremental cost of COLLEAGUE remediation, FDA review and the U.S. Attorney investigation; assess the ISOLEX warning letter separately.
- Renal and infusion-system sales trends, BioScience product demand, and inventory and receivables growth (inventory was $2.628 billion; days sales outstanding rose to 58.4 from 55.6).
- Debt, cash deployment and capital returns, including share repurchases and the remaining $2.2 billion authorization.
- Resolution and potential financial effects of tax matters, litigation and other contingencies; the filing does not quantify a clear maximum exposure for several matters.