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BAX > SEC Filings for BAX > Form 10-Q on 1-May-2013All Recent SEC Filings

Show all filings for BAXTER INTERNATIONAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BAXTER INTERNATIONAL INC


1-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Refer to the company's Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Annual Report) for management's discussion and analysis of the financial condition and results of operations of the company. The following is management's discussion and analysis of the financial condition and results of operations of the company for the three months ended March 31, 2013.

RESULTS OF OPERATIONS

NET SALES



                        Three months ended
                             March 31,                        Percent change
                                                         At actual            At constant
   (in millions)            2013         2012       currency rates         currency rates
   BioScience             $1,530       $1,462                   5%                     5%
   Medical Products        1,918        1,926                   0%                    (1% )
   Total net sales        $3,448       $3,388                   2%                     2%

                         Three months ended
                              March 31,                        Percent change
                                                          At actual           At constant
     (in millions)           2013         2012       currency rates        currency rates
     International         $1,966       $1,920                   2%                    2%
     United States          1,482        1,468                   1%                    1%
     Total net sales       $3,448       $3,388                   2%                    2%

Foreign currency did not have a significant impact on net sales during the three months ended March 31, 2013, as the strengthening of the U.S. Dollar relative to the Japanese Yen and Brazilian Real were fully offset by the weakening of the U.S. Dollar relative to the Euro and certain other currencies.

The comparisons presented at constant currency rates reflect comparative local currency sales at the prior period's foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates have not changed between the prior and the current period. The company believes that the non-GAAP (generally accepted accounting principles) measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding of the company's operations and can facilitate a fuller analysis of the company's results of operations, particularly in evaluating performance from one period to another.

Franchise Net Sales Reporting

Effective January 1, 2013, Baxter has transitioned to a commercial franchise structure for reporting net sales within each segment. Prior period net sales have been reclassified to reflect the new commercial franchise structure. Refer to the segment net sales discussions below for a description of each commercial franchise.


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BioScience

The BioScience segment includes four commercial franchises: Hemophilia, BioTherapeutics, BioSurgery and Vaccines.

Hemophilia includes sales of recombinant factor VIII products and plasma-derived hemophilia products (primarily plasma-derived factor IX, factor VIII and inhibitor therapies). Recombinant and plasma-based hemophilia products were previously reported in separate product categories.

BioTherapeutics includes sales of the company's liquid formulation of the antibody-replacement immunoglobulin therapies and other plasma-based therapies, such as albumin and alpha-1 antitrypsin products. Antibody therapies and other plasma-based products were previously reported in separate product categories.

BioSurgery consists of biological products and medical devices used in surgical procedures for hemostasis, tissue sealing, adhesion prevention and hard tissue repair, as well as soft tissue repair and microsurgery products.

Vaccines consists primarily of vaccines for meningitis C and tick-borne encephalitis, as well as ongoing collaborations for the development of influenza vaccines.

The following is a summary of net sales by franchise in the BioScience segment.

                                             Three months ended
                                                  March 31,                        Percent change
                                                                              At actual           At constant
(in millions)                                    2013         2012       currency rates        currency rates
Hemophilia                                     $  765       $  743                   3%                    3%
BioTherapeutics                                   509          498                   2%                    2%
BioSurgery                                        172          154                  12%                   11%
Vaccines                                           84           67                  25%                   28%
Total BioScience net sales                     $1,530       $1,462                   5%                    5%

Net sales in the BioScience segment increased 5% during the first quarter of 2013 (with no significant impact from foreign currency). The principal drivers impacting net sales were the following:

In the Hemophilia franchise, sales growth was driven primarily by strong demand in the United States for the company's advanced recombinant therapy, ADVATE, and strength from the company's plasma-based inhibitor bypass therapy, FEIBA.

In the BioTherapeutics franchise, sales increased during the first quarter of 2013 primarily due to favorable pricing for immunoglobulin therapy, and improved pricing and demand for albumin and alpha-1 products (for treatment of hereditary emphysema).

In the BioSurgery franchise, sales growth was primarily driven by the favorable impact of a full quarter of sales related to Synovis Life Technologies, Inc. (Synovis), a biological and mechanical products company, which Baxter acquired during the first quarter of 2012, and strong sales of the company's surgical sealant TISSEEL.

In the Vaccines franchise, sales growth during the first quarter of 2013 was primarily driven by higher international sales of FSME-IMMUN (a tick-borne encephalitis vaccine) and milestone payments from ongoing collaborations for the development of influenza vaccines.


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Medical Products

The Medical Products segment includes four commercial franchises: Fluid Systems, Renal, Specialty Pharmaceuticals, and BioPharma Solutions.

Fluid Systems principally includes IV therapies, infusion pumps, administration sets and premixed drugs platforms. IV therapies were previously reported with nutrition products in IV Therapies, and Infusion Systems and Global Injectables were previously reported in separate product categories.

Renal consists of peritoneal dialysis (PD) and hemodialysis (HD) therapies.

Specialty Pharmaceuticals principally includes nutrition and anesthesia products. Nutrition products were previously reported within the IV Therapies product category and anesthesia products were previously reported as a separate product category.

BioPharma Solutions principally includes sales from the pharmaceutical partnering business and pharmacy compounding services, which were previously reported with the Global Injectables product category.

The following is a summary of net sales by franchise in the Medical Products segment.

                                            Three months ended
                                                 March 31,                         Percent change
                                                                               At actual           At constant
(in millions)                                   2013         2012         currency rates        currency rates
Fluid Systems                                 $  740       $  720                     3%                    2%
Renal                                            590          588                     0%                    1%
Specialty Pharmaceuticals                        363          368                    (1% )                 (2% )
BioPharma Solutions                              225          250                   (10% )                (11% )
Total Medical Products net sales              $1,918       $1,926                     0%                   (1% )

Net sales in the Medical Products segment during the first quarter of 2013 were flat compared to the prior period (with a favorable foreign currency impact of 1 percentage point). Excluding the impact of foreign currency, the principal drivers impacting net sales were the following:

In the Fluid Systems franchise, sales growth was primarily driven by increased sales of cyclophosphamide (a generic oncology drug) due to favorable price improvements in the United States. Also contributing to sales growth was an increase in sales volumes for IV solutions products primarily due to competitor supply issues in the United States. Sales growth was partially offset by lower infusion pump and access set sales as the company substantially completed the activities in the United States associated with the COLLEAGUE infusion pump recall in July 2012.

For sales in the Renal franchise, the favorable impact of growth in the number of PD patients in the United States, Asia and Latin America was mostly offset by government austerity measures and lower HD sales.

In the Specialty Pharmaceuticals franchise, sales were unfavorably impacted by lower demand for SUPRANE (desflurane) in the United States. Also contributing to the decrease in sales were lower sales of nutrition products due to supply constraints in the United States. Partially offsetting these factors was the favorable impact from growth in international sales of anesthetics driven by increased penetration in new markets.

Sales in the BioPharma Solutions franchise declined during the first quarter of 2013 as a result of constraints and delayed shipments from the company's Bloomington, Indiana facility, which have been resolved. The company anticipates that shipments during the remainder of the year will recover from the first quarter of 2013.


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GROSS MARGIN AND EXPENSE RATIOS



                                                Three months ended
                                                     March 31,
      (as a percentage of net sales)                2013         2012        Change
      Gross margin                                 50.9%        50.6%       0.3 pts
      Marketing and administrative expenses        23.1%        22.2%       0.9 pts

Gross Margin

The gross margin percentage in the first quarter of 2013 was favorably impacted by sales growth in higher margin products in the BioScience and Medical Products segments, and milestone payments from ongoing collaborations for the development of influenza vaccines. Also contributing to the increase in the gross margin percentage in 2013 was the favorable impact from prior period business development charges. These margin improvements were partially offset by several factors, including increased pension expense, an acceleration of certain inventory-related costs, government austerity measures and the impact of the medical device excise tax in 2013 related to U.S. healthcare reform.

Marketing and Administrative Expenses

The increase in the marketing and administrative expense ratio in the first quarter of 2013 was principally due to pre-acquisition costs of $17 million incurred during the first quarter of 2013 for the planned acquisition of Gambro AB (Gambro), an increase in pension expense and increased spending on marketing and promotional programs in advance of certain key product launches. The factors identified above were partially offset by savings from the company's business optimization initiatives and the company's continued focus on controlling discretionary spending.

RESEARCH AND DEVELOPMENT



                                              Three months ended
                                                   March 31,
                                                                          Percent
        (in millions)                            2013          2012        change
        Research and development expenses        $246          $269           (9% )
        As a percentage of net sales             7.1%          7.9%

Research and development (R&D) expenses decreased by $23 million in the first quarter of 2013 primarily as a result of a prior period R&D charge of $33 million associated with the company's global collaboration with Momenta Pharmaceuticals, Inc. (Momenta) to develop and commercialize follow-on biologic products. Excluding the impact of this prior period charge, R&D expenses increased as a result of the company's continued investment in a number of R&D programs across the product pipeline. Refer to the 2012 Annual Report for a discussion of the company's R&D pipeline.

NET INTEREST EXPENSE

Net interest expense was $25 million and $18 million in the first quarters of 2013 and 2012, respectively. The increase in the first three months of 2013 was principally driven by an increase in debt from the issuances of $700 million 2.40% senior unsecured notes and $300 million 3.65% senior unsecured notes in August 2012, as well as the amortization of deferred financing fees associated with the January 2013 bridge loan facility entered into in connection with the planned acquisition of Gambro. Additionally, the company had lower interest income due to the collection of past-due receivables in Spain during 2012. Partially offsetting the above items was an increase in interest capitalized primarily driven by additional capital spending on key projects.

OTHER INCOME, NET

Other income, net was $3 million and $57 million in the first quarters of 2013 and 2012, respectively. In 2013, other income, net included currency-related charges of $17 million related to derivative instruments entered into by the company in December 2012 and January 2013 to hedge the anticipated foreign currency cash outflows associated with the planned acquisition of Gambro and $10 million related to the February 2013 devaluation of the Venezuelan currency. In 2012, other income, net included a gain of $53 million related to the reduction of a contingent payment liability for certain milestones associated with the 2011 acquisition of Prism Pharmaceuticals, Inc. (Prism).


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Also included in other income, net were other amounts related to foreign currency fluctuations, principally relating to intercompany receivables, payables and loans denominated in a foreign currency, and gains from the sale of certain assets.

PRE-TAX INCOME

Refer to Note 12 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 increased 17% in the first quarter of 2013. Included in pre-tax income during the prior period were charges related to business development activities of $43 million, which principally related to an R&D charge associated with the company's global collaboration with Momenta and other acquisition-related costs.

In addition to the impact of the prior period item above, pre-tax income during the first quarter of 2013 increased primarily due to sales growth of higher margin products and the receipt of milestone payments related to ongoing collaborations for the development of influenza vaccines, partially offset by an increase in spending on R&D and increased spending on marketing and promotional programs.

Medical Products

Pre-tax income decreased 20% in the first quarter of 2013. Included in pre-tax income during the first quarter of 2013 were business development charges of $17 million associated with pre-acquisition costs for the planned acquisition of Gambro. Additionally, pre-tax income in the first quarter of 2012 included a gain of $53 million related to the reduction of a contingent payment liability for certain milestones associated with the 2011 acquisition of Prism and business development charges of $5 million.

In addition to the unfavorable impact of the above items, pre-tax income during the first quarter of 2013 further declined as the favorable impact of sales growth of higher margin products was more than offset by the performance in the BioPharma Solutions franchise, as described above, and an increase in marketing and administrative expenses.

Other

Certain income and expense amounts are not allocated to a segment. These amounts are detailed in the table in Note 12 and primarily include net interest expense, certain foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and certain foreign currency hedging activities, corporate headquarters costs, stock compensation expense, income and expense related to certain non-strategic investments, certain employee benefit plan costs and certain nonrecurring gains and losses. Also included in these items in the first quarter of 2013 were currency-related charges of $17 million related to derivative instruments entered into by the company in December 2012 and January 2013 to hedge the anticipated foreign currency cash outflows associated with the planned acquisition of Gambro and $11 million related to the February 2013 devaluation of the Venezuelan currency.

INCOME TAXES

The company's effective income tax rate was 20.3% and 19.7% in the first quarters of 2013 and 2012, respectively. The company's effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

The effective income tax rate increased during the first quarter of 2013 compared to the prior period primarily as a result of certain prior period items that favorably impacted the effective tax rate in the first quarter of 2012. These items included the impact of the prior period gain of $53 million related to the reduction of a contingent payment liability for milestones associated with the prior acquisition of Prism, for which there was no tax charge, and a tax benefit from the first quarter 2012 business development charges of $48 million, primarily related to an R&D charge associated with the company's global collaboration with Momenta.


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The increase in the effective tax rate from the items noted above was partially offset by current period activity. On January 2, 2013, the President signed the American Taxpayer Relief Act of 2012. The legislation retroactively extended the R&D tax credit for two years, from January 1, 2012 through December 31, 2013. The company's effective income tax rate in the first quarter of 2013 reflected the 2012 R&D tax credit of $8 million. Also favorably impacting the effective income tax rate in the first quarter of 2013 were tax benefits associated with a charge of $11 million related to the Venezuelan currency devaluation announced by the government of Venezuela in February 2013 and deal-related charges of $34 million for pre-acquisition costs and certain foreign currency hedging activities associated with the planned acquisition of Gambro.

The company anticipates that the effective tax rate for the full-year 2013 will be approximately 22%, excluding the impact of audit developments and other special items.

INCOME AND EARNINGS PER DILUTED SHARE

Net income was $552 million, or $1.00 per diluted share, for the first quarter of 2013 and $588 million, or $1.04 per diluted share, in the prior year quarter. The significant factors and events contributing to the changes are discussed above. Additionally, net income per diluted share was positively impacted by the company's stock repurchase program, including the repurchase of 7.8 million shares during the first three months of 2013. Refer to Note 8 for further information regarding the company's stock repurchases.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Cash flows from operations

Cash flows from operations decreased during the first quarter of 2013 as compared to the prior year period, totaling $386 million in 2013 and $446 million in 2012. The change in cash flows from operations was impacted by the factors discussed below, as well as the unfavorable impact of lower earnings (before non-cash items and adjustments). Included in other non-cash items and adjustments in the first quarter of 2012 was an R&D charge of $33 million related to the upfront payment for the execution of the Momenta collaboration, which has been included in cash flows from investing activities. The company had previously classified this payment as cash flows from operations during the first quarter of 2012.

Accounts Receivable

Cash inflows relating to accounts receivable increased during the first quarter of 2013 as compared to the prior year period, primarily due to collections of past due balances in certain markets outside of the United States. However, days sales outstanding increased from 53.3 days as of December 31, 2012 to 53.6 days as of March 31, 2013 as longer collection periods in certain international markets were partially offset by a favorable impact from foreign currency.

Inventories

Cash outflows relating to inventories increased in 2013 as compared to the prior
year. The following is a summary of inventories as of March 31, 2013 and
December 31, 2012, as well as annualized inventory turns for the first quarters
of 2013 and 2012, by segment.




                                                Inventories                        Annualized inventory
                                                                                    turns for the three
                                       March 31,          December 31,            months ended March 31,
(in millions, except inventory
turn data)                                  2013                  2012               2013                2012
BioScience                                $1,863                $1,745               1.24                1.36
Medical Products                           1,100                 1,058               3.79                3.94
Total company                             $2,963                $2,803               2.18                2.33


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The increase in inventories and the associated decrease in inventory turns in 2013 were principally due to higher levels of plasma protein-related inventories in the BioScience segment to meet growing demand, as well as higher inventory levels for the Renal and Specialty Pharmaceuticals franchises in the Medical Products segment.

Other

Cash outflows related to accounts payable and accrued liabilities were $299 million in the first three months of 2013 compared to $288 million in the first three months of 2012, with the increase primarily driven by the settlement of certain interest rate contracts during the first quarter of 2013.

Payments related to the execution of the COLLEAGUE infusion pump recall and the company's business optimization initiatives decreased from $84 million in the first three months of 2012 to $26 million in the first three months of 2013 as the company substantially completed its recall activities in the United States in July 2012. Refer to Note 6 for further information regarding the COLLEAGUE infusion pump recall and the business optimization initiatives.

Cash flows from operations were favorably impacted by $4 million and $53 million from changes in other balance sheet items during the three months ended March 31, 2013 and 2012, respectively, with the decrease principally related to cash outflows associated with hedging activities in the first quarter of 2013.

Cash flows from investing activities

Capital Expenditures

Capital expenditures increased by $53 million in the first quarter of 2013, from $239 million in 2012 to $292 million in 2013. The company's investments in capital expenditures in 2013 were primarily driven by additional investments in support of new and existing product capacity expansions in the BioScience segment, including the construction of the company's new manufacturing facility in Covington, Georgia. The company also invested in projects that enhance the company's cost structure and manufacturing capabilities and support the company's strategy of geographic expansion with select investments in growing markets.

In addition, the company continues to invest to support an ongoing strategic focus on R&D with the expansion of facilities, pilot manufacturing sites and laboratories. Capital expenditures also included the company's multi-year initiative to implement a global enterprise resource planning system designed to consolidate and standardize business processes, data and systems.

Acquisitions and Investments

Cash outflows relating to acquisitions and investments of $67 million in the first quarter of 2013 principally related to the acquisition of the investigational hemophilia compound OBI-1 and related assets from Inspiration BioPharmaceuticals, Inc. and Ipsen Pharma S.A.S. Refer to Note 4 for further information about this acquisition.

Cash outflows in the first quarter of 2012 included $304 million associated with the acquisition of Synovis and $33 million for the upfront payment to execute the Momenta collaboration.

Other

Cash inflows from other investing activities included the sale of certain assets in the first quarter of 2013 and sales and maturities of certain investments in the first quarter of 2012.

Cash flows from financing activities

Debt Issuances, Net of Payments of Obligations

Net cash inflows related to debt and other financing obligations totaled $7 million in the first quarter of 2013 and primarily related to the issuance of commercial paper during the three months ended March 31, 2013, offset by the repayment of $300 million of 1.8% senior unsecured notes that matured in March 2013. Net cash inflows related to debt and other financing obligations totaled $59 million in the first quarter of 2012 and primarily related to the issuance of commercial paper in the first quarter of 2012.

Other Financing Activities

Cash dividend payments totaled $246 million and $188 million in the first quarters of 2013 and 2012, respectively. The increase in cash dividend payments was primarily due to an approximate 34% increase in the quarterly dividend rate compared to the prior year period, as announced in July 2012, partially offset . . .

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