Baxter International Inc. — 2015 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unless noted, financial amounts are in millions of dollars. Results are compared with the three months ended March 31, 2014.
Business context and reporting period
Baxter reported two continuing segments: BioScience and Medical Products. The company realigned biosurgery products and services to Medical Products and recast prior-period segment figures. Vaccines results are presented as discontinued operations following divestitures. Baxter was preparing to separate its biopharmaceuticals and medical products businesses, with completion targeted by mid-2015, subject to market, regulatory, tax and other conditions.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $3,764 | $3,848; down 2% at actual currency rates, up 4% at constant currency |
| Gross margin | $1,801; 47.8% of sales | $1,891; 49.1% |
| Income from continuing operations | $420; diluted EPS $0.76 | $507; diluted EPS $0.92 |
| Net income | $430; diluted EPS $0.78 | $556; diluted EPS $1.01 |
| Cash from operations | $96 | $559 |
| Capital expenditures | $521 | $421 |
| Cash and equivalents at period-end | $2,530 | $2,925 at December 31, 2014 |
| Total debt and lease obligations | $10,005 | $9,305 at December 31, 2014 |
| Current assets / current liabilities | $9,734 / $6,074 | $10,351 / $6,042 at December 31, 2014 |
Continuing-operations income included special items that reduced income by $129, or $0.24 per diluted share, versus $88, or $0.17 per share, in Q1 2014. The reported effective tax rate was 20.8%, compared with 22.4%. Other income, net was $74, including $89 of foreign-currency-related income and $9 of investment impairment losses.
BioScience sales were $1,361, up 2% at actual rates and 8% at constant currency; segment pretax income was $436, down from $484. Medical Products sales were $2,403, down 5% at actual rates but up 2% at constant currency; segment pretax income was $272, down from $342. Foreign currency reduced consolidated sales growth by six percentage points. The strong U.S. dollar also contributed to a $1,138 currency-translation loss in other comprehensive income; comprehensive loss was $629.
Material changes versus the prior comparable period
- Revenue growth at constant currency was offset by foreign-exchange effects; actual reported sales declined. The largest segment-level pressure was Medical Products, including the impact of lower cyclophosphamide sales following generic competition.
- Gross margin fell 1.3 percentage points. Management cited lower cyclophosphamide sales, higher manufacturing costs for plasma-derived products, and increased investments in manufacturing, quality systems and processes.
- Marketing and administrative expense rose to 27.0% of sales from 23.6%, including $108 of separation-related costs. Management also cited product-launch spending, emerging-market bad debt and higher pension expense.
- Operating cash flow decreased by $463. Management cited lower net income, timing of customer collections and supplier payments, among other factors. Days sales outstanding increased to 54.8 from 53.6 a year earlier.
- Investing cash outflow increased, reflecting $521 of capital spending and $235 of acquisitions and investments, including the $228 SuppreMol acquisition. Financing included $900 of revolving-credit borrowings and higher commercial-paper balances.
- Discontinued Vaccines operations contributed net income of $10, including a $9 after-tax purchase-price adjustment, compared with $49 in Q1 2014.
Outlook, management commentary, risks and unusual items
- Management expected the 2015 effective tax rate for continuing operations to be approximately 21.5%, excluding audit developments and other special items. The filing does not provide a clear consolidated full-year revenue or EPS forecast.
- Management expected Hemophilia growth to face competition from newer extended-half-life therapies, while citing underlying demand, international penetration, tenders and future product launches as longer-term growth drivers. Baxter had submitted BAX 855 to the FDA. Management also noted expected continued pricing and demand pressure from additional generic competitors to cyclophosphamide.
- The planned biopharmaceuticals separation was expected by mid-2015 but depended on market and regulatory conditions, board approval, tax-related opinions or rulings, and effectiveness of the registration statement. Moody’s placed Baxter’s A3 senior debt and Prime-2 short-term ratings under review for possible downgrade in connection with separation-related uncertainty.
- Baxter reported multiple outstanding FDA Warning Letters involving quality systems and manufacturing at several facilities, and said it was working with the FDA to address them. A separate U.S. Department of Justice investigation into alleged off-label pulmonary-treatment sales was closed in February 2015; another investigation concerning quality and manufacturing practices at the North Cove facility remained ongoing.
- Recorded legal reserves were $64. Baxter stated that certain losses could not be estimated and that litigation outcomes could materially affect results or cash flows in a period, though it did not expect the matters discussed to materially adversely affect consolidated financial position.
- Net public-sector receivables from Greece, Spain, Portugal and Italy totaled $328. Management warned that economic and liquidity conditions could delay collections or cause credit losses. Other key risks include foreign-exchange and interest-rate volatility, product quality and safety, competition, supply and manufacturing constraints, and successful execution of the planned separation.
- Business optimization reserves were $127 at quarter-end and were expected to be substantially used by the end of 2016. Management reported cumulative savings of about $0.36 per diluted share from 2011–2014 initiatives and expected a further $0.08 per share as programs were completed through 2016.
- SuppreMol added $179 of acquired in-process R&D; further development was required, with projected incremental R&D costs exceeding $400. Baxter also increased unfunded investment commitments to $85 from $38 at year-end.
Important facts for investors to verify
- Whether constant-currency growth translates into reported growth, particularly given exchange rates and segment mix.
- Whether operating cash flow recovers from $96 and whether capital spending and working-capital needs remain elevated.
- Progress, costs, tax treatment and final timing of the planned business separation, and any resulting credit-rating changes.
- Competitive and pricing effects on cyclophosphamide and Hemophilia products, and the progress and regulatory status of pipeline products including BAX 855.
- Resolution of FDA Warning Letters and the North Cove investigation, as well as developments in pending litigation and product-related contingencies.
- Collection of the $328 in public-sector receivables and the assumptions underlying acquisition-related contingent payments.