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| BAX > SEC Filings for BAX > Form 10-Q on 5-May-2009 | All Recent SEC Filings |
5-May-2009
Quarterly Report
RESULTS OF OPERATIONS
NET SALES
Three months ended
March 31, Percent
(in millions) 2009 2008 change
BioScience $ 1,252 $ 1,210 3%
Medication Delivery 1,035 1,065 (3% )
Renal 515 558 (8% )
Transition services to Fenwal Inc. 22 44 (50% )
Total net sales $ 2,824 $ 2,877 (2% )
Three months ended
March 31, Percent
(in millions) 2009 2008 change
International $ 1,583 $ 1,698 (7% )
United States 1,241 1,179 5%
Total net sales $ 2,824 $ 2,877 (2% )
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During the first quarter of 2009, foreign currency unfavorably impacted net sales by 8 percentage points,
principally due to the strengthening of the U.S. Dollar relative to other currencies, including the Euro and
the British Pound.
BioScience
The following is a summary of sales by significant product line in the BioScience segment.
Three months ended
March 31, Percent
(in millions) 2009 2008 change
Recombinants $ 451 $ 436 3%
Plasma Proteins 274 260 5%
Antibody Therapy 337 286 18%
Regenerative Medicine 99 94 5%
Other 91 134 (32% )
Total net sales $ 1,252 $ 1,210 3%
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Net sales in the BioScience segment increased 3% during the first quarter of 2009 (including an 8 percentage point unfavorable foreign currency impact). Excluding the impact of foreign currency, net sales increased across the majority of the product lines. Increased sales in Antibody Therapy were driven by demand and improved pricing for GAMMAGARD LIQUID (marketed as KIOVIG in most markets outside the United States), the liquid formulation of the antibody-replacement therapy IGIV (immune globulin intravenous). Recombinants sales growth reflected increased demand for ADVATE [Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method] fueled by continued customer adoption, with strong patient conversion in both the United States and international markets, and increased demand for new dosage forms that provide more precise dosing and convenience for patients. Sales growth in the Plasma Proteins product line was driven by demand for albumin, FEIBA (an anti-inhibitor coagulant complex), plasma-derived factor VIII and ARALAST [alpha 1-proteinase inhibitor (human)], as well as improved pricing for various plasma-derived products. Also contributing to the growth were increased sales of FLOSEAL and COSEAL, fibrin sealant products in Regenerative Medicine. Partially offsetting this sales growth were lower sales of FSME-IMMUN (a tick-borne encephalitis vaccine), reflected in the Other product line, as a result of seasonal factors in Europe.
Medication Delivery
The following is a summary of sales by significant product line in the
Medication Delivery segment.
Three months ended
March 31, Percent
(in millions) 2009 2008 change
IV Therapies $ 344 $ 371 (7% )
Global Injectables 371 368 1%
Infusion Systems 199 220 (10% )
Anesthesia 109 99 10%
Other 12 7 71%
Total net sales $1,035 $1,065 (3% )
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Net sales for the Medication Delivery segment decreased 3% during the first quarter of 2009 (including
a 9 percentage point unfavorable foreign currency impact). Excluding the impact of foreign currency,
net sales increased as a result of strong sales growth in the international pharmacy compounding and
the U.S. pharmaceutical partnering businesses in Global Injectables, and increased sales of the
company's anesthesia products, SUPRANE (desflurane) and sevoflurane. Also contributing to the sales
growth was increased demand in Intravenous (IV) Therapies for nutritional products, particularly for
the company's proprietary multi-chamber containers, and IV solutions, particularly in Asia and Latin
America.
Renal
The following is a summary of sales by significant product line in the Renal segment.
Three months ended
March 31, Percent
(in millions) 2009 2008 change
PD Therapy $420 $445 (5% )
HD Therapy 95 113 (16% )
Total net sales $515 $558 (8% )
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Net sales in the Renal segment decreased 8% during the first quarter of 2009 (including a 9 percentage
point unfavorable foreign currency impact). Excluding the impact of foreign currency, net sales
increased due to an increase in the number of peritoneal dialysis (PD) patients in Asia (particularly
in China), Latin America and Eastern Europe. Penetration of PD Therapy products continues to be strong
in emerging markets where many people with end-stage renal disease are currently under-treated.
Partially offsetting the increase was a decline in Hemodialysis (HD) Therapy sales from lower sales
volumes of saline, principally in the United States.
Transition services to Fenwal Inc.
Net sales in this category represents revenues associated with manufacturing, distribution and other
services provided by the company to Fenwal Inc. (Fenwal) subsequent to the divestiture of the
Transfusion Therapies (TT) business in 2007. Refer to Note 3 to the company's consolidated financial
statements in the 2008 Annual Report for additional information regarding the TT divestiture.
GROSS MARGIN AND EXPENSE RATIOS
Three months ended
March 31,
(as a percentage of net sales) 2009 2008 Change
Gross margin 52.7% 48.0% 4.7 pts
Marketing and administrative expenses 21.6% 22.2% (0.6 pts )
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Gross Margin
The improvement in the gross margin in the first quarter of 2009 was principally
driven by an improvement in sales mix, with increased sales of higher-margin
products, as well as manufacturing and yield improvements. Contributing to the
gross margin improvement was continued customer conversion to ADVATE and
GAMMAGARD LIQUID, improved volumes and pricing for certain plasma protein and
other products, and a favorable foreign currency impact.
Included in the company's gross margin in 2008 was a charge of $53 million
related to COLLEAGUE infusion pumps and $19 million related to the company's
recall of its heparin sodium injection products in the United States. These
charges decreased the gross margin in the first quarter of 2008 by
2.5 percentage points. Refer to Note 3 for further information on the COLLEAGUE
and heparin charges.
Marketing and Administrative Expenses
The marketing and administrative expense ratio for the first quarter of 2009
decreased compared to 2008 as the company benefited from stronger cost controls
and lower product distribution costs, partially offset by an unfavorable foreign
currency impact.
RESEARCH AND DEVELOPMENT
Three months ended
March 31, Percent
(in millions) 2009 2008 change
Research and development expenses $212 $190 12%
As a percent of net sales 7.5% 6.6%
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Research and development (R&D) expenses increased during the first quarter of
2009, reflecting the company's strategy to accelerate R&D investments with
respect to both the company's internal pipeline, including several clinical
trials for the evaluation of GAMMAGARD LIQUID for a number of potential
indications, as well as collaborations with partners, including programs
relating to the development of tissue-repair products, longer-acting forms of
blood clotting proteins to treat hemophilia and a next-generation home HD
device. Partially offsetting the increase in R&D spending was a favorable
foreign currency impact. Refer to the 2008 Annual Report for a discussion of the
company's R&D pipeline.
NET INTEREST EXPENSE
Net interest expense was $26 million in the first quarter of 2009, compared to
$17 million in the first quarter of 2008. The increase was principally driven by
a reduction in interest income as a result of lower interest rates and a lower
average cash balance, and a higher average debt balance, partially offset by
lower weighted-average interest rates on outstanding debt.
OTHER EXPENSE (INCOME), NET
Other expense (income), net was $2 million of expense in the first quarter of
2009 compared to $4 million of income in the first quarter of 2008. Included in
both periods were amounts related to foreign currency fluctuations, principally
relating to intercompany receivables, payables and loans denominated in a
foreign currency. The first quarter of 2008 included $16 million of income
related to the finalization of the net assets transferred in the divestiture of
the TT business. Refer to Note 3 to the company's consolidated financial
statements in the 2008 Annual Report for further information regarding the TT
divestiture.
PRE-TAX INCOME
Refer to Note 7 for a summary of financial results by segment. Certain items are
maintained at the company's corporate level and are not allocated to the
segments. The following is a summary of significant factors impacting the
segments' financial results.
BioScience
Pre-tax income increased 2% in the first quarter of 2009. Continued gross margin
expansion was driven by strong sales of higher-margin products, fueled by the
continued customer adoption of ADVATE and GAMMAGARD
LIQUID, improved pricing and volumes of certain plasma protein products, and
continued cost and yield improvements. Substantially offsetting this growth was
the unfavorable impact of foreign currency and an approximately 25% increase in
R&D spending, particularly related to several clinical trials for the evaluation
of GAMMAGARD LIQUID for a number of potential indications.
Medication Delivery
Pre-tax income increased 79% in the first quarter of 2009. Pre-tax income in the
first quarter of 2008 included charges of $53 million related to COLLEAGUE
infusion pumps and $19 million related to the company's recall of its heparin
sodium injection products in the United States. See Note 3 for further
information about the COLLEAGUE and heparin charges. In addition, the gross
margin improvement resulting from favorable product mix was partially offset by
the unfavorable impact of foreign currency.
Renal
Pre-tax income decreased 36% in the first quarter of 2009. The decrease was
primarily due to lower sales of saline, increased costs, including R&D spending
related to the development of the next-generation home HD device, and an
unfavorable impact from foreign currency, partially offset by the continued
increase in PD Therapy patients.
Other
Certain items are maintained at the company's corporate level and are not
allocated to the segments. These items primarily include net interest expense,
certain foreign currency fluctuations (principally relating to intercompany
receivables, payables and loans denominated in a foreign currency) and the
majority of the foreign currency and interest rate hedging activities, corporate
headquarters costs, stock compensation expense, income and expense related to
certain non-strategic investments, certain employee benefit plan costs, certain
nonrecurring gains and losses and revenues and costs related to the
manufacturing, distribution and other transition agreements with Fenwal. Refer
to Note 7 for a reconciliation of segment pre-tax income to income before income
taxes per the consolidated statements of income. Refer to the discussion above
regarding net interest expense and Note 5 regarding stock compensation expense.
INCOME TAXES
The company's effective income tax rate was 18.7% and 19.6% in the first
quarters of 2009 and 2008, respectively. The effective tax rate in the first
quarter of 2008 was higher due to a lower tax rate associated with the COLLEAGUE
infusion pump charge recorded in that period. Refer to Note 3 for further
information on the COLLEAGUE charge. The company anticipates that the effective
tax rate, calculated in accordance with generally accepted accounting principles
(GAAP), will be approximately 18.5% to 19.0% for the full-year 2009, excluding
any impact from additional audit developments and other special items.
INCOME AND EARNINGS PER DILUTED SHARE
Net income attributable to Baxter was $516 million, or $0.83 per diluted share,
for the first quarter of 2009 and $429 million, or $0.67 per diluted share, in
the prior year quarter. The significant factors and events contributing to the
changes are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash flows from operations
Cash flows from operations decreased during the first quarter of 2009 as
compared to the prior year, totaling $237 million in the first quarter of 2009
and $362 million in the first quarter of 2008. Higher earnings were more than
offset by non-cash items and other factors discussed below, resulting in a
decrease in cash flows from operations. Included in cash flows from operations
in the first quarter of 2009 were outflows of $78 million related to realized
excess tax benefits from stock issued under employee benefit plans. Realized
excess tax benefits are required to be presented in the statement of cash flows
as an outflow within the operating section and an inflow within the financing
section.
Accounts Receivable
Cash flows relating to accounts receivable increased during the first quarter of
2009 as compared to the prior year. Days sales outstanding decreased from
56.3 days at March 31, 2008 to 52.1 days at March 31, 2009, primarily due to
improved collection periods in certain international locations and the United
States, partially offset by a decrease in cash proceeds from the factoring of
receivables.
Inventories
Cash outflows relating to inventories decreased in 2009. The following is a
summary of inventories at March 31, 2009 and December 31, 2008, as well as
inventory turns for the three months ended March 31, 2009 and 2008, by segment.
Annualized inventory
Inventories turns for the three
March 31, December 31, months ended March 31,
(in millions, except inventory turn data) 2009 2008 2009 2008
BioScience $ 1,406 $ 1,346 1.28 1.44
Medication Delivery 763 771 2.98 2.98
Renal 235 227 4.16 4.18
Other 17 17 - -
Total company $ 2,421 $ 2,361 2.10 2.27
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Inventory turns in the Medication Delivery and Renal segments were consistent
with the prior year. The lower inventory turns in the BioScience segment were
the result of measured steps to provide safe and reliable supplies of critical
therapies for patients.
Other
Cash outflows related to liabilities, restructuring payments and other increased
in the first three months of 2009 as compared to the prior year period,
principally driven by a planned discretionary cash contribution of $100 million
to the company's pension plan in the United States in the first quarter of 2009.
Also contributing to the increase in cash outflows were the timing of payment of
trade accounts payable and increased payments related to the company's
restructuring programs.
Cash flows from investing activities
Capital Expenditures
Capital expenditures increased $14 million for the three months ended March 31,
2009, from $157 million in 2008 to $171 million in 2009. The company makes
investments in capital expenditures at a level sufficient to support the
strategic and operating needs of the businesses and continues to improve capital
allocation discipline in making investments to enhance long-term growth.
Acquisitions of and Investments in Businesses and Technologies
Cash outflows relating to acquisitions of and investments in businesses and
technologies of $61 million in the first quarter of 2008 principally related to
an IV solutions business in China, payments related to the company's fourth
quarter 2007 agreements with Nycomed Pharma AS (Nycomed) and Nektar Therapeutics
(Nektar), and certain smaller acquisitions and investments. Refer to Note 4 to
the company's consolidated financial statements in the 2008 Annual Report for
further information about the arrangements with Nycomed and Nektar.
Other
Cash flows relating to other investing activities in the first quarter of 2009
decreased as a result of an increase in short-term investments and a reduction
in the amount of cash collected from customers relating to previously
securitized receivables. In 2007, the company repurchased the third party
interest in receivables previously sold under the European securitization
arrangement, and the European facility was not renewed.
Cash flows from financing activities
Debt Issuances, Net of Payments of Obligations
Net cash inflows related to debt and other financing obligations in the first
quarter of 2009 totaled $194 million. The company issued $350 million of senior
unsecured notes, which mature in March 2014 and bear a 4.0% coupon rate. The net
proceeds from this issuance were used for general corporate purposes, including
the repayment of
approximately $160 million of outstanding borrowings related to its
Euro-denominated credit facility (further discussed below). Net cash outflows
related to debt and other financing obligations in the first quarter of 2008
totaled $455 million. Included in the cash outflows was the repayment of the
company's 5.196% notes, which approximated $250 million, upon their maturity in
February 2008. Also included in the financing cash outflows in 2008 were
$169 million of settlements related to certain cross-currency swaps. There were
no settlements of net investment cross-currency swaps in 2009, as all of the
company's net investment hedges were settled by the end of 2008. Refer to Note 7
to the company's consolidated financial statements in the 2008 Annual Report for
further information regarding these swaps.
Other Financing Activities
Cash dividend payments totaled $160 million in the first quarter of 2009 and
$138 million in the first quarter of 2008. In February 2009, the board of
directors declared a quarterly dividend of $0.26 per share, payable on April 1,
2009 to shareholders of record on March 10, 2009.
Proceeds and realized excess tax benefits from stock issued under employee
benefit plans increased by $27 million, from $112 million in the first quarter
of 2008 to $139 million in the first quarter of 2009, primarily due to
$78 million of realized excess tax benefits (as further discussed above),
partially offset by a decrease in stock option exercises. No excess tax benefits
were realized from stock issued under employee benefit plans during the first
quarter of 2008.
Stock repurchases totaled $566 million in the first quarter of 2009 as compared
to $545 million in the prior year quarter. As authorized by the board of
directors, from time to time the company repurchases its stock depending upon
the company's cash flows, net debt level and market conditions. In March 2008,
the board of directors authorized the repurchase of up to an additional
$2.0 billion of the company's common stock. At March 31, 2009, $600 million
remained available under this authorization.
CREDIT FACILITIES, ACCESS TO CAPITAL AND CREDIT RATINGS
Credit facilities
The company's primary revolving credit facility has a maximum capacity of
$1.5 billion and matures in December 2011. The company also maintains a credit
facility denominated in Euros with a maximum capacity of approximately
$400 million at March 31, 2009, which matures in January 2013. These facilities
enable the company to borrow funds on an unsecured basis at variable interest
rates, and contain various covenants, including a maximum net-debt-to-capital
ratio. At March 31, 2009, the company was in compliance with the financial
covenants in these agreements. There were no borrowings outstanding under either
of the two outstanding facilities at March 31, 2009. The non-performance of any
financial institution supporting the credit facility would reduce the maximum
capacity of these facilities by each institution's respective commitment. Refer
to Note 6 to the company's consolidated financial statements in the 2008 Annual
Report for further discussion of the company's credit facilities.
Access to capital
The company intends to fund short-term and long-term obligations as they mature
through cash on hand, future cash flows from operations, or by issuing
additional debt or common stock. The company had $1.7 billion of cash and
equivalents at March 31, 2009. The company invests its excess cash in
certificates of deposit and money market funds, and diversifies the
concentration of cash among different financial institutions.
The global financial markets have recently experienced unprecedented levels of
volatility. The company's ability to generate cash flows from operations, issue
debt or enter into other financing arrangements on acceptable terms could be
adversely affected if there is a material decline in the demand for the
company's products or in the solvency of its customers or suppliers,
deterioration in the company's key financial ratios or credit ratings, or other
significantly unfavorable changes in conditions. In addition, continuing
volatility in the global financial markets could increase borrowing costs or
affect the company's ability to access the capital markets. However, the company
believes it has sufficient financial flexibility in the future to issue debt,
enter into other financing arrangements, and attract long-term capital on
acceptable terms to support the company's growth objectives.
Credit ratings
There were no changes in the company's credit ratings in the first three months
of 2009. Refer to the 2008 Annual Report for further discussion of the company's
credit ratings.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. A summary of the company's
significant accounting policies is included in Note 1 to the company's
consolidated financial statements in the 2008 Annual Report. Certain of the
company's accounting policies are considered critical, as these policies are the
most important to the depiction of the company's financial statements and
require significant, difficult or complex judgments, often employing the use of
estimates about the effects of matters that are inherently uncertain. Such
policies are summarized in the Management's Discussion and Analysis of Financial
Condition and Results of Operations section in the 2008 Annual Report.
LEGAL CONTINGENCIES
Refer to Note 6 for a discussion of the company's legal contingencies. Upon
resolution of any of these uncertainties, the company may incur charges in
excess of presently established liabilities. While the liability of the company
in connection with the claims cannot be estimated with any certainty, and
although the resolution in any reporting period of one or more of these matters
could have a significant impact on the company's results of operations for that
period, the outcome of these legal proceedings is not expected to have a
material adverse effect on the company's consolidated financial position. While
the company believes that it has valid defenses in these matters, litigation is
inherently uncertain, excessive verdicts do occur, and the company may in the
future incur material judgments or enter into material settlements of claims.
CERTAIN REGULATORY MATTERS
The company began to hold shipments of COLLEAGUE infusion pumps in July 2005,
. . .
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