Baxter International Inc. — Q1 2012 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. Baxter operates BioScience and Medical Products. The interim statements were reviewed by PricewaterhouseCoopers, not audited.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $3.388 billion | $3.284 billion | +3% reported; +4% at constant currency |
| Gross margin | $1.714 billion; 50.6% | $1.675 billion; 51.0% | Margin down 0.4 percentage points |
| Income before taxes | $732 million | $731 million | Approximately flat |
| Net income attributable to Baxter | $588 million | $570 million | +3% |
| Diluted EPS | $1.04 | $0.98 | +6% |
| Operating cash flow | $413 million | $371 million | +$42 million |
| Capital expenditures | $239 million | $198 million | +$41 million |
- Marketing and administrative expense was $752 million, versus $716 million; R&D was $269 million, up 26%, and 7.9% of sales versus 6.5%.
- Cash and equivalents were $2.272 billion at March 31, down from $2.905 billion at year-end. Current assets were $8.117 billion and current liabilities $4.857 billion.
- Short-term debt, current maturities and long-term debt and lease obligations totaled $5.209 billion, compared with $5.195 billion at December 31. No borrowings were outstanding under the revolving credit facilities; $300 million of commercial paper was outstanding at quarter-end. Baxter reported compliance with facility covenants.
- Cash dividends paid were $188 million; 10.1 million shares were repurchased for $575 million. Cash declined by $633 million during the quarter.
Changes and management commentary
- Sales growth was driven primarily by improved demand; foreign currency reduced reported growth by one percentage point. BioScience sales rose 4% reported, led by regenerative medicine (+10%) and demand for recombinant and antibody therapies. Medical Products sales rose 3%, with IV Therapies up 10% and Anesthesia up 17%; Global Injectables declined 2% and Infusion Systems declined 1%.
- Gross margin benefited from higher-margin product growth and resolution of prior manufacturing issues at Castlebar, but these benefits were more than offset by business-development costs and dilution, austerity measures, higher pension expense, and recombinant factor VIII tenders.
- BioScience pretax income fell 13%, including $43 million of business-development charges, principally related to the Momenta collaboration and acquisition costs. Medical Products pretax income rose 13%, including a $53 million gain from reducing a Prism acquisition contingent liability and $5 million of business-development charges; excluding these items, segment pretax income was flat.
- Q1 included the $304 million Synovis acquisition, whose products expand Baxter’s regenerative-medicine portfolio. Baxter also paid Momenta $33 million upfront for biosimilar development; additional payments exceeding $100 million are possible subject to options and milestones.
- Management expected a full-year 2012 effective tax rate of approximately 22%, excluding audit developments and other special items. The filing provides no overall revenue or earnings guidance.
Risks, contingencies, and unusual items
- The FDA-ordered COLLEAGUE pump recall was expected to be completed by July 2012. The remaining reserve was $219 million at March 31; management considered it adequate but warned that additional cash or noncash charges, penalties, claims, regulatory action, and effects on other product sales remained possible.
- In March, Baxter received an SEC subpoena concerning accounting, reporting, and disclosures related to COLLEAGUE and SYNDEO pump remediation and recall; the company said it was cooperating. The filing also describes government inquiries into business activities in several countries under review for possible Foreign Corrupt Practices Act compliance issues.
- Other disclosed legal matters include heparin product-liability litigation, plasma-therapy antitrust suits, securities and derivative actions, and government inquiries into pricing and marketing. Recorded legal reserves were $214 million, with $93 million of related receivables. Baxter said outcomes were not expected to materially harm consolidated financial position, while noting that individual periods could be significantly affected.
- Net income benefited from a $53 million Prism contingent-liability gain; other income also included a $5 million loss on restructured Greek government bonds. Receivables from public-sector customers in Greece, Spain, Portugal, and Italy totaled $592 million, including $49 million from Greece; delayed collections and credit losses were identified as risks.
- Management identified foreign exchange, pricing and reimbursement pressure, competition, product quality and regulatory matters, supply and demand, and the ability to realize acquisition and R&D returns as risks. The filing notes potential impairment risk for development-related inventory, property, and intangible assets.
Important facts for investors to verify
- Whether sales growth and segment profitability persist after adjusting for currency, acquisitions, and the Prism gain and business-development charges.
- Progress and final costs of the COLLEAGUE recall, including the SEC inquiry and any further regulatory or legal developments.
- Collection trends in international markets, particularly public-sector receivables, and whether working-capital demands continue.
- Expected returns and contingent obligations associated with Synovis, Prism, Baxa, and the Momenta collaboration.
- Whether 2012 results support management’s approximately 22% full-year tax-rate expectation and planned capital investment.