Baxter International Inc. — 2010 Form 10-K
Business context and reporting period: Annual report for the fiscal year ended December 31, 2010, with fourth-quarter results included. Baxter develops and sells medical devices, pharmaceuticals and biotechnology products through BioScience, Medication Delivery and Renal. Approximately 60% of revenue came from outside the United States.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $12.843 billion | $12.562 billion |
| Gross margin | $5.958 billion; 46.4% of sales | $6.525 billion; 51.9% of sales |
| Income before tax | $1.890 billion | $2.734 billion |
| Net income attributable to Baxter | $1.420 billion | $2.205 billion |
| Diluted earnings per share | $2.39 | $3.59 |
| Cash flow from operations | $3.003 billion | $2.909 billion |
| Capital expenditures | $963 million | $1.014 billion |
| Cash and equivalents at year-end | $2.685 billion | $2.786 billion |
| Debt and capital lease obligations | $4.372 billion | $4.122 billion |
- Sales grew 2% year over year; foreign currency contributed 1 percentage point. International sales rose 5% to $7.579 billion, while U.S. sales declined 1% to $5.264 billion.
- Segment sales: BioScience $5.640 billion (+1%); Medication Delivery $4.768 billion (+3%); Renal $2.389 billion (+5%). Segment pre-tax income changed by -2%, -59% and +15%, respectively.
- Fourth-quarter sales were $3.498 billion versus $3.470 billion in 2009; quarterly net income attributable to Baxter was $423 million versus $572 million.
- Management reported adjusted 2010 net income of $2.4 billion and adjusted diluted EPS of $3.98, up 2% and 5%, respectively, from 2009. These are non-GAAP measures excluding special items.
- Current assets were $7.989 billion and current liabilities $4.041 billion. Operating cash flow reached a company record, which management attributed in part to working-capital management.
- Cash dividends paid were $688 million; Baxter repurchased 30 million shares for $1.5 billion during 2010. The declared annual dividend was $1.18 per share.
Material changes and unusual items
- Reported income fell substantially despite modest sales growth, principally reflecting the $588 million pre-tax COLLEAGUE infusion-pump recall charge. It reduced sales by $213 million and increased cost of sales by $375 million.
- Other 2010 charges included $257 million for business optimization, $112 million impairment tied to the planned U.S. generic injectables divestiture, $62 million related to heparin litigation, $34 million of acquired in-process R&D, $28 million for Greek receivables and a $39 million deferred-tax-asset write-off.
- Gross margin declined 5.5 percentage points to 46.4%; pump and optimization charges accounted for 4.7 percentage points of the decline. Lower plasma-product pricing, production inefficiencies, inventory reserves and healthcare reform also weighed on margin.
- In October 2010, Baxter agreed to sell its U.S. generic injectables business to Hikma for approximately $112 million, subject to closing adjustments and customary conditions. It also combined Medication Delivery and Renal into a global Medical Products unit.
- In 2010 Baxter acquired ApaTech, entered a hemophilia-asset agreement with Archemix, and made other development and licensing investments. R&D spending was $915 million, compared with $917 million in 2009.
Outlook, risks and contingencies
- Baxter forecast 2011 capital expenditures of approximately $1.0 billion and a GAAP effective tax rate of approximately 20.5%–21.5%, excluding audit developments and special items. It expected pension-plan costs to rise to approximately $220 million in 2011 from $170 million in 2010. The filing does not provide clear 2011 revenue or earnings guidance.
- The company launched a multi-year transformation initiative in 2011, focused on innovation, commercial and operational effectiveness, organizational effectiveness and growth.
- The COLLEAGUE recall covers approximately 200,000 U.S. pumps, with replacements or monetary consideration offered through July 2012. Baxter reported $513 million of related cash reserves at year-end and warned additional charges or impairments may be required; replacement-pump supply and customer retention remain risks.
- Regulatory matters include an FDA warning letter concerning Renal complaint-handling and reporting processes (June 2010), a January 2011 warning letter concerning Puerto Rico facilities, and an EMA review of certain peritoneal-dialysis solutions made at Castlebar, Ireland, over potential endotoxins in certain batches.
- Litigation includes approximately 770 heparin-related lawsuits, ongoing infusion-pump matters and other product, patent and commercial cases. In propofol litigation, a jury awarded $144 million in punitive damages against Baxter and $5 million in compensatory damages; Baxter appealed and asserted an indemnity right against Teva. The company also disclosed government information requests, including an FCPA-related inquiry, and stated it was cooperating.
- Other material risks include healthcare cost containment and reimbursement changes, foreign exchange exposure, price and market-share pressure, plasma supply and demand, manufacturing and product-quality issues, patent disputes, pension funding, customer credit and implementation of the multi-year ERP system.
Important facts for investors to verify
- Progress, final costs and customer retention effects of the COLLEAGUE recall, including whether SIGMA can supply enough replacement pumps.
- Resolution and financial exposure from regulatory actions, the propofol verdict and appeals, heparin claims, other litigation and government investigations.
- Completion and proceeds of the U.S. generic injectables divestiture, and the execution and savings from business optimization and transformation plans.
- Whether BioScience pricing, plasma manufacturing efficiency and inventory levels recover, and whether Renal growth is sustained amid the Castlebar product review.
- Cash conversion, receivable collections in Greece and other government markets, debt levels, capital returns and the assumptions underlying adjusted non-GAAP results.