Baxter International Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Figures are unaudited and in U.S. dollars; amounts are in millions except per-share data. Comparisons are with the corresponding 2020 periods unless stated otherwise.
Business context
Baxter develops and sells healthcare products and services across Renal Care, Medication Delivery, Pharmaceuticals, Clinical Nutrition, Advanced Surgery, Acute Therapies and BioPharma Solutions. It reports three geographic segments: Americas, EMEA and APAC. The company announced a proposed acquisition of Hillrom in September 2021.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $3,226 | $2,972 | $9,270 | $8,492 |
| Gross margin | $1,321 | $1,195 | $3,699 | $3,396 |
| Gross margin percentage | 40.9% | 40.2% | 39.9% | 40.0% |
| Operating income | $513 | $470 | $1,327 | $1,210 |
| Net income attributable to Baxter stockholders | $450 | $356 | $1,046 | $934 |
| Diluted EPS | $0.89 | $0.69 | $2.06 | $1.81 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $1,529 | $1,156 |
Reported sales rose 9% in both periods; growth at constant currency was 7% in Q3 and 6% for the first nine months. Foreign exchange added 2 and 3 percentage points, respectively. Q3 SG&A was $680 (21.1% of sales), versus $601 (20.2%); nine-month SG&A was $1,982 (21.4%), versus $1,819 (21.4%). R&D was $129 (4.0% of sales) in Q3 and $396 (4.3%) year to date.
At September 30, cash and cash equivalents were $3,258, total current assets $8,167 and current liabilities $3,441. Short-term debt was $301; long-term debt and finance lease obligations were $5,446, with $209 of current maturities. Management reported approximately $6.0 billion of debt and finance lease obligations, including current maturities and short-term debt. Nine-month investing cash outflow was $933, including $508 of capital expenditures and $463 for acquisitions and investments. Financing cash outflow was $1,031, including $600 of share repurchases and $390 of dividends.
Material changes and drivers
- Q3 sales growth was broad-based, led by BioPharma Solutions (+46% reported; +45% constant currency) and Medication Delivery (+12%; +11%). BioPharma growth reflected vaccine-related manufacturing and packaging services. Nine-month growth was strongest in BioPharma Solutions (+41% reported), Advanced Surgery (+15%) and Acute Therapies (+12%).
- Management said gross margin improved year over year in Q3 and for the first nine months excluding special items, primarily due to favorable product mix, partly offset by higher manufacturing and supply-chain costs. Reported nine-month gross margin percentage edged down to 39.9% from 40.0%.
- Net income included special items that reduced earnings by $66 in Q3 ($0.13 per diluted share) and $265 year to date ($0.52 per diluted share). These included intangible-asset amortization, business optimization, acquisition-related expenses and other items. Q3 and nine-month 2021 results also included a $58 tax benefit related to a foreign subsidiary investment; the nine-month period included a $22 charge from an unfavorable uncertain-tax-position ruling.
- Operating cash flow increased by $371 year to date, which management attributed mainly to a smaller inventory build, higher net income and lower incentive-compensation payments.
- Cash declined by $472 from December 31, 2020. The company repurchased 7.3 million shares for $600 in the first nine months; $1.3 billion remained under the repurchase authorization.
Outlook, risks and unusual items
- Hillrom transaction: Baxter agreed to acquire Hillrom for approximately $10.5 billion in cash, implying enterprise value of about $12.4 billion including Hillrom debt. Closing was expected in early 2022, subject to shareholder and regulatory approvals and other conditions. Baxter arranged $4.0 billion of term-loan commitments and had $7.4 billion of bridge commitments remaining; it expected to replace those commitments with cash and/or permanent financing before closing. The filing provides no specific consolidated sales or EPS guidance.
- The company expects a credit-rating downgrade from acquisition financing. It identifies increased leverage, higher borrowing costs, reduced financial flexibility and potential integration costs as risks to the transaction’s benefits.
- Baxter reported $3.3 billion in cash and said it had adequate cash for operating needs. Its $2.5 billion U.S.-dollar and €200 million euro revolving facilities mature in 2026; there were no borrowings under them at September 30, and Baxter said it was in compliance with their financial covenants.
- Management estimated approximately $35 million of additional pre-tax costs to complete current business-optimization initiatives. Expected cumulative annual pre-tax savings exceed $1.2 billion, with about 99% expected by the end of 2021 and the remainder by the end of 2023.
- COVID-19, Delta-variant resurgence, labor availability, raw-material and component shortages, transportation costs and other supply-chain disruptions may continue to affect operations and expenses. Management noted that vaccine mandates could contribute to labor shortages.
- Legal and environmental reserves were $73 million at September 30, compared with $40 million at year-end 2020; a $7 million insurance receivable was recorded. Baxter said some exposures cannot be estimated and a resolution could materially affect a particular period, though it did not expect the proceedings to materially harm consolidated financial position. A $16 million securities-class-action settlement received court approval and was fully reserved.
- The FDA warning letter concerning the Ahmedabad, India facility remained outstanding; the filing gives no expected timing for its removal. Baxter also expected a future non-cash charge exceeding $60 million when it substantially liquidates its Argentina operations and reclassifies accumulated currency translation adjustments.
Important facts for investors to verify
- Hillrom approval and closing conditions, final financing mix, post-close leverage, credit-rating effects and integration/synergy progress.
- Whether revenue momentum—particularly vaccine-related BioPharma services and recovery-sensitive categories—continues, and whether supply constraints or costs pressure margins.
- Cash conversion, inventory levels, capital spending, debt repayment capacity and the balance between dividends, buybacks and acquisition financing.
- Timing and amount of remaining optimization costs and realization of the stated cost savings.
- Developments in legal matters, the Ahmedabad FDA warning letter, Argentina liquidation and any related charges or operational restrictions.