Baxter International Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Baxter combined its former Medication Delivery and Renal businesses into Medical Products effective January 1, 2011; prior periods were recast.
Business context and performance
Baxter develops and sells medical devices, pharmaceuticals and biotechnology products, including therapies for bleeding and immune disorders, intravenous products, infusion systems and dialysis. It operates in more than 100 countries; approximately 60% of revenue is generated outside the United States.
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $13.893 billion | $12.843 billion |
| Gross margin | $7.046 billion; 50.7% of sales | $5.958 billion; 46.4% of sales |
| Income before income taxes | $2.809 billion | $1.890 billion |
| Net income attributable to Baxter | $2.224 billion | $1.420 billion |
| Diluted earnings per share | $3.88 | $2.39 |
| Cash flows from operations | $2.817 billion | $3.003 billion |
| Capital expenditures | $960 million | $963 million |
- Sales increased 8% as reported and 6% at constant currency. BioScience sales rose 7% to $6.053 billion; Medical Products sales rose 9% to $7.804 billion. Favorable foreign exchange added two percentage points to consolidated sales growth.
- GAAP net income rose substantially against a 2010 comparison burdened by large COLLEAGUE infusion-pump recall charges. Excluding special items in both years, management reported 2011 adjusted net income of $2.5 billion, up 4%, and adjusted diluted EPS of $4.31, up 8%. These are non-GAAP measures.
- Gross margin improved from 2010, principally because 2010 included the COLLEAGUE recall charge. 2011 also benefited from product mix and the divestiture of the lower-margin U.S. generic injectables business; manufacturing issues in Ireland and higher pension costs partly offset the improvement.
- Fourth-quarter 2011 sales were $3.594 billion, net income attributable to Baxter was $463 million, and diluted EPS was $0.82. Fourth-quarter 2010 figures were $3.498 billion, $423 million and $0.72, respectively. The 2011 quarter included business-optimization and other charges.
Liquidity, debt and capital allocation
- Cash and equivalents were $2.905 billion at year-end, versus $2.685 billion in 2010. Total assets were $19.073 billion.
- Balance-sheet short-term debt, current maturities of long-term debt and leases, and long-term debt and lease obligations totaled approximately $5.195 billion. The company reported no borrowings under its revolving credit facilities and was in compliance with their financial covenants.
- Operating cash flow was $2.817 billion, down from $3.003 billion. The filing attributes the decline primarily to working-capital movements and higher payments for infusion-pump recall and business-optimization programs, partly offset by higher earnings.
- Baxter repurchased 30 million shares for $1.583 billion and paid $709 million in cash dividends during 2011. The annual dividend declared was $1.265 per share; the quarterly rate was raised to $0.335.
- Management expected 2012 capital expenditures of approximately $1.0 billion and a GAAP effective tax rate of approximately 22%, excluding additional audit developments or special items.
Material changes, outlook and unusual items
- 2011 special charges included $192 million for business optimization, $79 million related to AWP litigation and historical rebate and discount adjustments, and $62 million in asset impairments, principally involving Greek government bonds. The filing also reports a $41 million contribution to the Baxter International Foundation. Together, these items reduced 2011 net income by $247 million, or $0.43 per diluted share.
- The 2010 COLLEAGUE recall charge was $588 million, including $213 million recorded as a reduction of sales and $375 million in cost of sales. Baxter expected to complete the U.S. recall by July 2012; the remaining recall reserve was $276 million at year-end 2011, and further charges could be required.
- Growth plans emphasized R&D, product launches, geographic expansion and acquisitions. 2011 R&D expense reached $946 million. Baxter reported acquisitions of Prism and Baxa, and completed its acquisition of Synovis in February 2012. Baxter Ventures was established with plans to invest up to $200 million in early-stage companies.
- The FDA had issued a Warning Letter concerning complaint handling and corrective and preventive actions at the Renal business headquarters. Separately, the European review of certain dialysis solutions associated with the Castlebar, Ireland facility was formally closed in December 2011, and the facility began transitioning back to European supply.
- Risks include pricing and reimbursement pressure, healthcare reform, regulation and product quality, competition, reliance on limited suppliers and manufacturing sites, plasma supply and inventory management, foreign-exchange exposure, pension costs, and execution of the global ERP implementation. Net public-sector receivables in Greece, Spain, Portugal and Italy were $524 million; Greek bond impairments and collection delays remain relevant credit risks.
- Legal and government matters include heparin product-liability suits, securities and derivative litigation, plasma-therapy antitrust claims, and U.S. government investigations concerning contracting, marketing, price reporting and possible FCPA compliance. Baxter reported $300 million in legal reserves and $145 million in related receivables; it stated that certain losses cannot be estimated and outcomes remain uncertain.
Important facts for investors to verify
- Reconcile reported GAAP earnings with management’s adjusted net income and EPS, including the charges excluded and their tax effects.
- Review the COLLEAGUE recall’s completion, remaining reserve, replacement-pump capacity and any additional charges or customer-retention effects.
- Assess cash conversion and working capital, particularly rising inventories, receivable collection periods and exposure to public-sector customers in stressed European markets.
- Track debt maturities, acquisition-related contingent payments, pension funding and the effect of lower discount rates and expected asset returns on future costs.
- Monitor outcomes of regulatory matters and investigations, litigation exposure, and progress on the ERP implementation and product-development pipeline.