BAXTER INTERNATIONAL INC annual report, FY2014

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Baxter International Inc. — FY 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone Q4 filing; selected Q4 figures are included below. Baxter operated BioScience and Medical Products and generated approximately 60% of revenue outside the United States.

Financial performance and liquidity

  • Revenue: $16.671 billion, up 11% reported and 13% at constant currency versus 2013. Foreign exchange reduced growth by 2 percentage points. Gambro contributed $1.6 billion of 2014 sales and approximately 7 percentage points of reported growth.
  • Segments: BioScience revenue was $6.699 billion, up 7%; Medical Products revenue was $9.972 billion, up 15%. Medical Products growth was substantially supported by the full-year inclusion of Gambro.
  • Profit: Continuing-operations income was $1.946 billion, down from $2.012 billion; diluted continuing-operations EPS was $3.56 versus $3.66. Net income was $2.497 billion, including $551 million from discontinued operations, principally the vaccines-business sale gain.
  • Margins and expenses: Gross margin was 48.9%, down 1.0 percentage point from 2013. R&D expense rose 22% to $1.421 billion, or 8.5% of sales. The reported continuing-operations effective tax rate was 20.2%.
  • Cash flow and investment: Operating cash flow was $3.215 billion, broadly flat with 2013. Capital expenditures were $1.898 billion. Cash and equivalents totaled $2.925 billion at year-end.
  • Debt and liquidity: Total debt and capital lease obligations were $8.392 billion, including $875 million of commercial paper; long-term debt and lease obligations were $7.606 billion. No borrowings were outstanding under the revolving credit facilities, which had aggregate capacity of about $3.675 billion and matured in December 2015. Current assets were $10.351 billion and current liabilities $6.042 billion.
  • Shareholder returns: Baxter paid $1.095 billion in dividends and repurchased 8 million shares for $550 million in 2014. Annual dividends declared were $2.05 per share.
  • Q4 context: Q4 revenue was $4.472 billion; continuing-operations income was $524 million and diluted continuing-operations EPS was $0.96. Discontinued-operations income was $429 million, contributing to Q4 net income of $953 million.

Material changes versus prior periods

  • Annual revenue growth was driven in part by the 2013 Gambro acquisition; excluding Gambro, Renal sales were flat at actual currency rates and up 2% at constant currency.
  • Continuing-operations income and diluted EPS declined from 2013 despite higher sales. Management attributed pressure to items including lower-margin Gambro integration, foreign exchange, product mix, expedited freight and manufacturing inefficiencies.
  • Gross margin fell from 49.9% in 2013 and 51.2% in 2012. The company cited Gambro mix, foreign exchange, freight and manufacturing factors, partly offset by product mix, lower pension expense and optimization savings.
  • Operating cash flow remained near $3.2 billion, while capital expenditures increased from $1.525 billion in 2013. Year-end inventory rose to $3.559 billion from $3.499 billion, and total-company inventory turns declined to 2.42 from 2.66.
  • Long-term debt and lease obligations decreased to $7.606 billion from $8.126 billion, while short-term debt increased to $913 million from $181 million, mainly reflecting commercial paper outstanding at year-end.

Outlook, management commentary, risks and unusual items

  • Management expected the GAAP effective tax rate for 2015 to be approximately 21.5%, excluding further audit developments or special items.
  • Management expected Hemophilia growth to moderate in 2015 amid new competition, including a competitor’s extended half-life factor VIII product. Baxter anticipated completing its biopharmaceuticals/medical-products separation by mid-2015, subject to approvals and other conditions; completion and timing were not assured.
  • Baxter expected the SIGMA Spectrum pump remediation to continue through mid-2016. The FDA had categorized the corrective action as a Class I recall; the company recorded a $93 million 2014 charge and cautioned that additional charges could be required.
  • The filing reports FDA Warning Letters concerning facilities and quality systems, including Aibonito, Round Lake, North Cove/Jayuya and McGaw Park. Baxter said it was working with FDA to resolve them. Separate government inquiries included requests concerning alleged off-label pulmonary-treatment sales and North Cove quality and manufacturing practices.
  • Unusual 2014 items included $167 million of separation-related costs; $217 million of collaboration upfront and milestone payments; a $45 million impairment of an investment; $124 million of increased acquisition-related contingent-payment liabilities; and a $417 million after-tax gain on the commercial vaccines divestiture. Management said special items reduced continuing-operations income by $737 million, or $1.34 per diluted share.
  • Risks include pricing and reimbursement pressure, generic competition for cyclophosphamide, foreign-exchange exposure, supply and plasma-production constraints, regulatory and product-quality matters, litigation, tax audits, and execution risks from the planned separation. Net public-sector receivables from Greece, Spain, Portugal and Italy were $363 million at year-end.
  • Contingent milestone payments excluded from contractual-obligation totals included $2.6 billion associated with collaborations and $2.6 billion associated with acquisitions; actual timing and amounts depend on milestones and other conditions.

Key investor verification points

  • Assess continuing-operations earnings and margins separately from the vaccines disposal gain and other special items; reconcile the stated $737 million net special-item impact.
  • Evaluate how much sales and earnings growth is attributable to Gambro, and whether integration, margin and operating-efficiency trends improve.
  • Track FDA remediation and Warning Letter resolution, pump-related spending, and the status and outcome of government investigations.
  • Verify the timing, approvals, costs and pro forma financial effects of the planned separation, including implications for credit ratings and financing.
  • Monitor 2015 competition and pricing for cyclophosphamide and hemophilia therapies, along with foreign-exchange effects and reimbursement changes.
  • Review future cash demands from debt maturities, capital investment, pensions, legal matters and contingent milestone commitments; the filing does not establish that all contingent payments will be made.