Baxter International Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Amounts are in U.S. dollars.
Business context and reporting period
Baxter supplies essential healthcare products, including dialysis therapies, IV solutions and infusion systems, injectable pharmaceuticals, parenteral nutrition, inhaled anesthetics, and surgical hemostats and sealants. It operates in the Americas, EMEA, and APAC, selling in more than 100 countries. Approximately 58% of 2018 revenue was generated outside the United States. Baxalta is presented as discontinued operations.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $11.127 billion | $10.561 billion |
| Gross margin | $4.781 billion; 43.0% | $4.470 billion; 42.3% |
| Operating income | $1.599 billion | $1.291 billion |
| Income from continuing operations | $1.630 billion; $2.99 diluted EPS | $724 million; $1.30 diluted EPS |
| Net income | $1.624 billion | $717 million |
| Operating cash flow, continuing operations | $2.096 billion | $1.853 billion |
| Capital expenditures, continuing operations | $681 million | $634 million |
| Cash and cash equivalents at year-end | $1.832 billion | $3.394 billion |
| Debt and lease obligations | $3.475 billion | $3.512 billion |
Sales increased 5% on a reported basis and 4% at constant currency. Gross margin improved 0.7 percentage points; excluding special items, management reported a 0.2-point improvement, citing product mix and manufacturing efficiencies, partly offset by foreign exchange, supply-chain costs, and Hurricane Maria-related lost sales. Cash dividends paid were $376 million. Baxter repurchased 35.8 million shares for approximately $2.5 billion during 2018, including $1.4 billion of repurchases in Q4.
Year-end current assets were $5.919 billion and current liabilities were $2.836 billion. The company reported $1.8 billion of cash, undrawn revolving facilities of $1.5 billion and approximately €200 million, and compliance with credit-facility covenants. Credit outlooks were stable. The 2018 cash balance declined by $1.562 billion, with share repurchases a major financing outflow.
Material changes and unusual items
- Revenue grew across most business groups. Pharmaceuticals rose 11%, Advanced Surgery 13%, and Acute Therapies 13% on reported currency. Medication Delivery and Clinical Nutrition each declined 1%, with supply constraints among the cited factors.
- Claris, acquired in 2017, contributed $140 million of 2018 sales; RECOTHROM and PREVELEAK, acquired in 2018, contributed $52 million.
- Reported 2018 continuing-operations income included a $196 million net tax benefit, an $80 million benefit from settling certain Claris-related claims, and $42 million of Hurricane Maria insurance recoveries, among other items. Management said special items reduced continuing-operations income by a net $36 million, or $0.06 per diluted share.
- The 2017 comparison included a $322 million tax-reform charge and other special-item costs; 2016 results were substantially affected by approximately $4.4 billion of gains on Baxalta retained-share transactions. Reported earnings comparisons across these years are therefore unusually affected by nonrecurring items.
- Gross margin and reported operating income improved, while annual R&D expense increased 7% to $655 million. Cash from operations rose to $2.096 billion.
Outlook, management commentary, and risks
- Management forecast a GAAP effective tax rate of approximately 18% for 2019, subject to discrete items, audits, and other special items.
- The company expects U.S. in-center hemodialysis sales to decline in 2019, partly offsetting global Renal Care growth. It also anticipated 2019 sales declines of approximately $70 million for U.S. cyclophosphamide and $75 million for BREVIBLOC.
- The ongoing cost-optimization program had incurred $796 million of cumulative pretax costs through 2018. Baxter expected about $75 million of additional pretax costs and $50 million of capital expenditures through 2020; projected cumulative annual pretax savings are approximately $1.2 billion, with about 90% expected by the end of 2019.
- Hurricane Maria-related supply constraints affected Medication Delivery and Clinical Nutrition, and some customers shifted protocols or suppliers. The filing also identifies supply concentration, manufacturing interruptions, quality problems, pricing and reimbursement pressure, foreign-exchange exposure, cyber and privacy risks, and regulatory uncertainty as material risks.
- FDA issued a Warning Letter in 2018 concerning Claris’ Ahmedabad facility; Baxter reported corrective actions and cooperation with FDA. A prior FDA Warning Letter concerning North Cove and Jayuya facilities remained relevant. DOJ closed its investigation into IV-solution manufacturing, pricing, and shortages in November 2018; a New York Attorney General inquiry continued.
- Other contingencies include litigation and environmental matters. Recorded legal reserves were $34 million at year-end, but the company said some potential losses could not be estimated. Baxter also disclosed possible indemnification and tax risks related to the Baxalta separation and subsequent transactions.
- Auditors gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and financial reporting controls were effective at year-end.
Q4 2018 snapshot
Fourth-quarter net sales were $2.841 billion, compared with $2.774 billion in Q4 2017. Income from continuing operations was $354 million, or $0.66 diluted EPS; Q4 2017 reported a $61 million loss from continuing operations. Q4 2018 results included a net $34 million of charges from business optimization, acquisition and integration expenses, European medical-device regulation costs, and tax-reform updates, partly offset by Maria-related insurance recoveries and a pump-remediation reserve reduction.
Important facts for investors to verify
- Reconcile reported earnings with the tax benefit and other special items; assess whether operating improvement persists without those items.
- Track FDA remediation and any effects on Claris product approvals, manufacturing capacity, or sales at the cited facilities.
- Monitor recovery from Maria-related supply disruptions, customer losses, and the ability to restore product availability.
- Test the assumptions behind the $1.2 billion annual savings target, remaining restructuring costs, and expected timing of savings.
- Assess the impact of expected product-specific sales declines and competitive or reimbursement-driven pricing pressure on 2019 growth.
- Review cash deployment, including the scale of repurchases, year-end cash reduction, debt maturities, and ongoing investment needs.
- Follow the NY Attorney General inquiry, unresolved litigation and environmental contingencies, and Baxalta-related indemnity and tax exposures.