Baxter International Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are with the three months ended March 31, 2022 unless otherwise stated. Amounts are in U.S. dollars.
Business context and strategic actions
Baxter sells healthcare products and services across four reporting segments: Americas, EMEA, APAC and Hillrom. In January 2023, it announced plans to separate Renal Care and Acute Therapies into a publicly traded company, targeting completion by July 2024 or earlier, and to pursue strategic alternatives, including a possible sale, for BioPharma Solutions (BPS). The company is implementing a new operating model and expects reporting segments to change when it is fully implemented, currently anticipated in the second half of 2023.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change or context |
|---|---|---|---|
| Net sales | $3.649 billion | $3.707 billion | Down 2% at reported currency; up 2% at constant currency. Foreign exchange reduced sales growth by 4 percentage points. |
| Gross margin | $1.347 billion; 36.9% | $1.348 billion; 36.4% | Reported margin improved 0.5 percentage points; excluding special items, margin decreased, mainly due to raw-material inflation. |
| Operating income | $186 million | $163 million | Up from prior year; includes significant special items. |
| Net income attributable to Baxter | $44 million | $71 million | Down 38%. |
| Diluted EPS | $0.09 | $0.14 | Q1 2023 net income included special items reducing earnings by $253 million, or $0.50 per diluted share; Q1 2022 special items reduced earnings by $400 million, or $0.79 per diluted share. |
| Operating cash flow | $479 million | $208 million | Increase of $271 million; management cites lower incentive payouts and timing of accounts-payable payments. |
| Capital expenditures | $172 million | $140 million | Investing cash outflow was $170 million, versus $304 million. |
Special items in Q1 2023 included $134 million of business optimization charges, $110 million of intangible amortization in cost of sales, $12 million of EU medical-device regulatory costs, and $16 million of divestiture-related costs. The company reported that strategic separation and transaction costs will continue to affect earnings and operating cash flows.
Segments and notable sales movements
- Americas sales were $1.602 billion, down from $1.626 billion; segment operating income fell to $481 million from $610 million.
- EMEA sales rose to $714 million from $699 million, while segment operating income declined to $106 million from $119 million.
- APAC sales declined to $602 million from $627 million; segment operating income fell to $107 million from $151 million.
- Hillrom sales declined to $731 million from $755 million; segment operating income fell to $158 million from $200 million.
- Advanced Surgery sales increased 8% at reported currency. BPS declined 11%, Patient Support Systems 9%, and Medication Delivery 3%. Management cited lower COVID-related BPS demand, customer capital-spending constraints for hospital beds, and infusion-pump supply constraints, among other factors.
Debt, liquidity and capital resources
At March 31, 2023, cash and cash equivalents were $1.673 billion. Total current assets were $8.099 billion and current liabilities were $4.760 billion. Short-term debt was $50 million; long-term debt and finance lease obligations, including current maturities, were approximately $16.4 billion. The company had about $2.2 billion of capacity to draw under its credit facilities, less $50 million of commercial paper outstanding.
During Q1, Baxter amended credit agreements to increase maximum net-leverage covenant limits for the four quarters of 2023. It reported compliance with financial covenants at March 31. Fitch revised its senior debt outlook to rating watch negative in January; the filing reports no change to the investment-grade credit ratings disclosed in the 2022 Form 10-K. Net cash decreased $45 million during the quarter. Dividends paid were $146 million; no shares were repurchased.
Outlook, risks and contingencies
- Strategic execution: The proposed spinoff and BPS strategic review are subject to conditions and may not occur on the stated terms or timing. Baxter expects continuing transaction costs and possible post-transaction dis-synergies.
- Costs and supply: Management expects ongoing supply-chain and inflation-related challenges, including raw-material, component, freight and labor costs, with potential adverse effects on sales and profitability.
- Regulatory matter: After quarter-end, on April 26, 2023, the FDA classified its inspection of the Ahmedabad, India facility as official action indicated (OAI). Baxter reported corrective actions and plans to support U.S. production from other locations, including contract manufacturers.
- Impairment monitoring: Patient Support Systems faced lower customer orders amid capital-spending constraints expected to continue through much of 2023. Baxter did not consider goodwill impairment more likely than not at March 31, but said a significant adverse outlook change could result in impairment.
- Legal matters: Recorded reserves for legal and environmental matters were $29 million. Baxter said some losses cannot be estimated and outcomes could materially affect results or cash flows in a particular period, though it did not expect the proceedings to materially adversely affect consolidated financial position. Matters include opioid-related allegations, an ethylene-oxide claim, DOJ/HHS inquiries concerning Hillrom, and an antitrust suit.
- Other exposures: The filing cites foreign exchange, interest-rate, credit-rating, cybersecurity, product-quality, regulatory, litigation and geopolitical risks. Management reported no material change in risk factors from the 2022 Form 10-K.
No quantified full-year earnings or revenue guidance is provided in the supplied filing text. Management’s stated timing expectations concern the planned strategic actions and operating-model implementation, not financial guidance.
Most important facts for investors to verify
- Progress, conditions and expected costs for the Renal Care/Acute Therapies separation and the BPS strategic review.
- Whether operating cash flow improvement is sustained, given management’s cited timing and incentive-payment factors.
- Sales, margins and demand trends in Patient Support Systems, Medication Delivery and BPS, and the effects of supply constraints and inflation.
- Compliance with amended leverage covenants, debt reduction plans and any further credit-rating developments.
- Regulatory developments at the Ahmedabad facility following the FDA’s OAI classification, including any effects on product supply.
- Developments in legal and regulatory contingencies, and whether Patient Support Systems performance triggers a goodwill impairment test.