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| BAX > SEC Filings for BAX > Form 10-Q on 28-Jul-2009 | All Recent SEC Filings |
28-Jul-2009
Quarterly Report
RESULTS OF OPERATIONS
NET SALES
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 2009 2008 change 2009 2008 change
BioScience $ 1,418 $ 1,385 2% $ 2,670 $ 2,595 3%
Medication Delivery 1,134 1,164 (3% ) 2,169 2,229 (3% )
Renal 550 598 (8% ) 1,065 1,156 (8% )
Transition services to Fenwal Inc. 21 42 (50% ) 43 86 (50% )
Total net sales $ 3,123 $ 3,189 (2% ) $ 5,947 $ 6,066 (2% )
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 2009 2008 change 2009 2008 change
International $ 1,798 $ 1,948 (8% ) $ 3,381 $ 3,646 (7% )
United States 1,325 1,241 7% 2,566 2,420 6%
Total net sales $ 3,123 $ 3,189 (2% ) $ 5,947 $ 6,066 (2% )
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Foreign currency unfavorably impacted net sales by 10 and 9 percentage points in the three- and six-month periods ended June 30, 2009, respectively, principally due to the strengthening of the
U.S. Dollar relative to other currencies, including the Euro and the British Pound in both periods.
BioScience
The following is a summary of sales by product category in the BioScience segment.
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 2009 2008 change 2009 2008 change
Recombinants $ 515 $ 508 1% $ 966 $ 944 2%
Plasma Proteins 353 291 21% 627 551 14%
Antibody Therapy 344 315 9% 681 601 13%
Regenerative Medicine 109 109 - 208 203 2%
Other 97 162 (40% ) 188 296 (36% )
Total net sales $ 1,418 $ 1,385 2% $ 2,670 $ 2,595 3%
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Net sales in the BioScience segment increased 2% and 3% during the three- and six-month periods ended June 30, 2009 (including an 11 and 9 percentage point unfavorable foreign currency impact in the three- and six-month periods ended June 30, 2009, respectively). Excluding the impact of foreign currency, net sales increased in both the second quarter and first half of 2009 driven by increased demand across the majority of the product categories and improved pricing for select products. Sales growth was the result of increased demand for ADVATE [Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method] in the Recombinants product category, while increased 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, drove sales growth in the Plasma Proteins product category. Also contributing to sales growth were increased
demand and improved pricing for GAMMAGARD LIQUID, the liquid formulation of the
antibody-replacement therapy IGIV (immune globulin intravenous), in the Antibody
Therapies product category; increased demand for FLOSEAL, a fibrin sealant
product in the Regenerative Medicine product category; and, in the Other product
category, increased sales of NEISVAC-C (for the prevention of meningitis C) and
increased revenue related to advanced purchase agreements for pandemic vaccines.
Partially offsetting this sales growth were lower sales of FSME-IMMUN (a
tick-borne encephalitis vaccine) in Europe, primarily in Germany, as a result of
seasonal factors, lower market demand and increased competition.
Medication Delivery
The following is a summary of sales by product category in the Medication
Delivery segment.
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 2009 2008 change 2009 2008 change
IV Therapies $ 384 $ 408 (6% ) $ 728 $ 779 (7% )
Global Injectables 418 393 6% 789 761 4%
Infusion Systems 205 229 (10% ) 404 449 (10% )
Anesthesia 120 122 (2% ) 229 221 4%
Other 7 12 (42% ) 19 19 -
Total net sales $ 1,134 $ 1,164 (3% ) $ 2,169 $ 2,229 (3% )
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Net sales in the Medication Delivery segment decreased 3% during the three- and six-month periods ended June 30, 2009 (including an 11 and
10 percentage point unfavorable foreign currency impact in the three- and six-month periods ended June 30, 2009, respectively). Excluding the
impact of foreign currency, net sales increased in both periods as a result of increased demand and improved pricing for intravenous
(IV) solutions and nutritional products in the IV Therapies product category; strong sales of multi-source generics and growth in the
company's international pharmacy compounding and U.S. pharmaceutical partnering businesses in the Global Injectables product category; and
growth in anesthesia products driven by increased sales of sevoflurane and SUPRANE (desflurane) in the first half of 2009. Partially
offsetting this sales growth in both periods was a decline in Infusion Systems sales due to lower revenues from access sets, disposable
tubing used with infusion pumps for the administration of IV solutions.
Renal
The following is a summary of sales by product category in the Renal segment.
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 2009 2008 change 2009 2008 change
PD Therapy $454 $479 (5% ) $ 874 $ 924 (5% )
HD Therapy 96 119 (19% ) 191 232 (18% )
Total net sales $550 $598 (8% ) $ 1,065 $ 1,156 (8% )
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Net sales in the Renal segment decreased 8% during the three- and six-month periods ended June 30, 2009 (including a 12 and 10 percentage point unfavorable foreign currency impact in the three- and six-month periods ended June 30, 2009, respectively). Excluding the impact of foreign currency, net sales in both periods grew due to gains in the number of peritoneal dialysis (PD) patients, especially 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 growth in PD Therapy product line sales was a decline in Hemodialysis (HD) Therapy sales, primarily as a result of lower sales volumes of saline 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 Six months ended
June 30, June 30,
(as a percentage of net sales) 2009 2008 Change 2009 2008 Change
Gross margin 52.4% 51.0% 1.4 pts 52.6% 49.6% 3.0 pts
Marketing and administrative expenses 21.1% 22.0% (0.9 pts ) 21.4% 22.1% (0.7 pts )
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Gross Margin
The improvement in the gross margin in the second quarter and first half of 2009 was principally driven by an improvement in sales mix, pricing and manufacturing cost improvements,
partially offset by the unfavorable impact of lower FSME-IMMUN vaccine revenues. Foreign currency unfavorably impacted gross margin in the second quarter but had a modestly favorable
impact for the first half of 2009.
Included in the company's gross margin in the first half of 2008 were first quarter 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. These charges decreased the gross margin in the first half of 2008 by 1.2 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 second quarter and first half of 2009 decreased compared to 2008 as the company benefited from stronger cost controls, partially
offset by investments in sales and promotional activities and the impact of foreign currency.
RESEARCH AND DEVELOPMENT
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 2009 2008 change 2009 2008 change
Research and development expenses $231 $222 4% $443 $412 8%
As a percentage of net sales 7.4% 7.0% 7.4% 6.8%
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Research and development (R&D) expenses increased during the second quarter and
first half of 2009 as the company continued to advance and expand its product
pipeline across its business portfolio. The company's investment in R&D in the
first half of 2009 principally related to the development of home HD therapy;
increased spending on clinical trials for the evaluation of GAMMAGARD LIQUID for
additional indications; and investments in recombinant proteins, vaccines,
formulation and delivery technologies, and new therapies to broaden the
company's regenerative medicine portfolio. Partially offsetting the increase in
R&D spending was the impact of foreign currency in both periods. Refer to the
2008 Annual Report for a discussion of the company's R&D pipeline.
NET INTEREST EXPENSE
Net interest expense was $24 million and $25 million in the second quarters of
2009 and 2008, respectively, and $50 million and $42 million for the six months
ended June 30, 2009 and 2008, respectively. The increase in the first half of
2009 was driven by a reduction in interest income, partially offset by lower
gross interest expense.
OTHER (INCOME) EXPENSE, NET
Other (income) expense, net was $1 million of income and $1 million of expense
during the second quarters of 2009 and 2008, respectively, and $1 million of
expense and $3 million of income during the first half of 2009 and 2008,
respectively. Included in both periods were amounts related to foreign currency
fluctuations, principally relating to intercompany receivables, payables and
loans denominated in foreign currencies. The first half 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. The following is
a summary of significant factors impacting the segments' financial results.
BioScience
Pre-tax income was flat and increased 1% for the three- and six-month periods
ended June 30, 2009, respectively. Continued gross margin expansion was driven
by strong sales of higher-margin products, fueled by the continued customer
adoption of ADVATE and GAMMAGARD LIQUID, increased demand and improved pricing
of certain plasma protein products, and continued manufacturing cost
improvements. Offsetting this growth was the unfavorable impact of foreign
currency, increased R&D spending and lower sales of FSME-IMMUN vaccine for the
three and six-month periods ended June 30, 2009.
Medication Delivery
Pre-tax income decreased 1% for the three-month period ended June 30, 2009 and
increased 24% for the six-month period ended June 30, 2009. Gross margin
improvements resulting from favorable product mix, were offset by the
unfavorable impact of foreign currency for the three- and six-month periods
ended June 30, 2009. The pre-tax income for the six months ended June 30, 2008
included first quarter 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.
Renal
Pre-tax income decreased 10% and 23% for the three- and six-month periods ended
June 30, 2009, respectively. The gross margin impact from continued gains in PD
Therapy patients was more than offset by lower saline revenues, increased R&D
costs primarily related to the development of home HD therapy, and an
unfavorable impact from foreign currency for the three- and six-month periods
ended June 30, 2009.
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 18.6% and 18.9% in the second
quarters of 2009 and 2008, respectively, and 18.7% and 19.2% in the six-month
periods ended June 30, 2009 and 2008, respectively. The decline in the effective
tax rates for both the three- and six-month period ended June 30, 2009 was the
result of favorable earnings mix compared to their respective prior year
periods. 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.
Baxter expects to reduce the gross amount of its liability for uncertain tax
positions within the next 12 months by approximately $330 million due to the
expiration of a loss carryforward, the expiration of certain statutes of
limitations related to tax benefits
taken in respect of losses from restructuring certain international operations,
and the settlements of certain multi-jurisdictional transfer pricing issues.
While there continues to be a reasonable possibility that the resolution of
these items will be at amounts other than the amounts of the liabilities, the
company also believes the reserves are adequate.
INCOME AND EARNINGS PER DILUTED SHARE
Net income attributable to Baxter was $587 million and $544 million for the
three months ended June 30, 2009 and 2008, respectively, and $1.1 billion and
$973 million for the six months ended June 30, 2009 and 2008, respectively. Net
income attributable to Baxter per diluted common share was $0.96 and $0.85 for
the three months ended June 30, 2009 and 2008, respectively, and $1.79 and $1.52
for the six months ended June 30, 2009 and 2008, respectively. 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 half of 2009 as compared
to the prior year, totaling $1,048 million in 2009 and $1,082 million in 2008.
Included in cash flows from operations in the first half of 2009 were outflows
of $81 million related to realized excess tax benefits from stock issued under
employee benefit plans and a planned discretionary cash contribution of $100
million to the company's pension plans in the United States. 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.
The other factors impacting cash flows from operations are discussed below.
Accounts Receivable
Cash outflows relating to accounts receivable decreased during the first half of
2009 as compared to the prior year. Days sales outstanding decreased from
56.8 days at June 30, 2008 to 53.9 days at June 30, 2009, primarily due to
improved collection periods in the United States and certain international
locations, 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 June 30, 2009 and December 31, 2008, as well as
annualized inventory turns for the three months ended June 30, 2009 and 2008, by
segment.
Annualized inventory
Inventories turns for the three
June 30, December 31, months ended June 30,
(in millions, except inventory turn data) 2009 2008 2009 2008
BioScience $ 1,459 $1,346 1.48 1.45
Medication Delivery 779 771 3.18 3.12
Renal 248 227 4.09 3.91
Other 10 17 - -
Total company $ 2,496 $2,361 2.27 2.30
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Other
Cash outflows related to liabilities, restructuring payments and other items
increased in the first six months of 2009 as compared to the prior year period,
principally driven by the planned discretionary cash contribution discussed
above. Also contributing to the increase in cash outflows was the timing of
payment of accounts payable and an increase in prepaid expenses.
Cash flows from investing activities
Capital Expenditures
Capital expenditures increased $23 million for the six months ended June 30,
2009, from $364 million in 2008 to $387 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 $102 million in the first half of 2009 principally related to an
agreement with SIGMA International General Medical Apparatus, LLC (SIGMA) for
the exclusive distribution of SIGMA's infusion pumps in the United States and
international markets, a 40 percent equity stake in SIGMA, and an option to
purchase the remaining portion of SIGMA. Cash outflows relating to acquisitions
of and investments in businesses and technologies of $61 million in the first
half 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 2 for further information about the agreement with
SIGMA and 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 half 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
half of 2009 totaled $178 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 half of
2008 totaled $166 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. Debt issuances in the first half of 2008 principally related
to the May 2008 issuance of $500 million of senior unsecured notes, maturing in
June 2018 and bearing a 5.375% coupon rate. The net proceeds were used for
general corporate purposes, including the settlement of $300 million of
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 $318 million in the first half of 2009 and
$275 million in the first half of 2008. The increase in cash dividend payments
is primarily the result of a 20% increase in the quarterly dividend rate
compared to the prior year. In May 2009, the board of directors declared a
quarterly dividend of $0.26 per share, payable on July 1, 2009 to shareholders
of record on June 10, 2009. In July 2009, the board of directors declared a
quarterly dividend of $0.26 per share, payable on October 1, 2009 to
shareholders of record on September 10, 2009.
Proceeds and realized excess tax benefits from stock issued under employee
. . .
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