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BAX > SEC Filings for BAX > Form 10-K on 26-Feb-2016All Recent SEC Filings

Show all filings for BAXTER INTERNATIONAL INC

Form 10-K for BAXTER INTERNATIONAL INC


26-Feb-2016

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following commentary should be read in conjunction with the consolidated financial statements and accompanying notes.

EXECUTIVE OVERVIEW

Description of the Company and Business Segments

Baxter International Inc., through its subsidiaries, provides a broad portfolio of essential renal and hospital products, including home, acute and in-center dialysis; sterile IV solutions; infusion systems and devices; parenteral nutrition; biosurgery products and anesthetics; and pharmacy automation, software and services. The company's global footprint and the critical nature of its products and services play a key role in expanding access to healthcare in emerging and developed countries. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors' offices and by patients at home under physician supervision.

Separation of Baxalta Incorporated

On July 1, 2015, Baxter completed the distribution of approximately 80.5% of the outstanding common stock of its biopharmaceuticals business, Baxalta Incorporated (Baxalta), to Baxter stockholders (the Distribution). As a result of the separation, the operating results of Baxalta have been reflected as discontinued operations for the years ended December 31, 2015, 2014 and 2013. Refer to Note 2 in Item 8 for additional information regarding the separation of Baxalta. Unless otherwise stated, financial results herein reflect continuing operations.

Change in Segments

As a result of the separation of Baxalta, Baxter has further realigned its organizational structure under two reportable segments, Renal and Hospital Products. Refer to Note 14 in Item 8 for additional information regarding the company's segments.

The segments and a description of their products and services are as follows:

The Renalbusiness provides products and services to treat end-stage renal disease, or irreversible kidney failure, and acute kidney therapies. The Renal business offers a comprehensive portfolio to meet the needs of patients across the treatment continuum, including technologies and therapies for peritoneal dialysis (PD), in-center hemodialysis (HD), home HD, continuous renal replacement therapy (CRRT) and additional dialysis services.

The Hospital Products business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, infusion pumps, inhalation anesthetics, and biosurgery products. The business also provides products and services related to pharmacy compounding, drug formulation and packaging technologies.

Baxter has approximately 50,000 employees and conducts business in over 100 countries. The company generates approximately 60% of its revenues outside the United States, and maintains approximately 50 manufacturing facilities and over 100 distribution facilities in the United States, Europe, Asia-Pacific, Latin America and Canada.

Financial Results

Baxter's global net sales totaled $10 billion in 2015, a decrease of 7% over 2014, including an unfavorable foreign currency impact of eight percentage points. International sales totaled $6 billion in 2015, a decrease of 11% compared to 2014, including an unfavorable foreign currency impact of thirteen percentage points. Sales in the United States totaled $4 billion in 2015, in line with 2014 sales.

Baxter's income from continuing operations for 2015 totaled $393 million, or $0.72 per diluted share, compared to $457 million, or $0.83 per diluted share, in the prior year. Income from continuing operations in 2015 included special items which resulted in a net reduction to income from continuing operations by $362 million, or $0.66


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per diluted share. Income from continuing operations in 2014 included special items which resulted in a net reduction to income from continuing operations by $245 million, or $0.45 per diluted share. The company's special items are discussed further in the Results of Operations section below.

Baxter's financial results included research and development (R&D) expenses totaling $603 million in 2015, which reflects the company's focus to balance increased investments to support a new product pipeline with efforts to optimize overall R&D spending through continuous evaluation of the portfolio.

The company's financial position remains strong, with operating cash flows from continuing operations totaling $1.1 billion in 2015. The company has continued to execute on its disciplined capital allocation framework, which is designed to optimize stockholder value creation through reinvestment in the businesses, dividends and opportunistic share repurchases, as well as acquisitions and other business development initiatives as discussed in Strategic Objectives below.

Capital investments totaled $911 million in 2015 as the company continues to invest across its businesses to support future growth, including additional investments in support of new and existing product capacity expansions. The company's investments in capital expenditures in 2015 were focused on projects that improve production efficiency and enhance manufacturing capabilities to support its strategy of geographic expansion with select investments in growing markets.

The company also continued to return value to its stockholders in the form of dividends. During 2015, the company paid cash dividends to its shareholders totaling $910 million. Additionally, on July 1, 2015 Baxter completed the distribution of approximately 80.5% of the outstanding common stock of its biopharmaceuticals business, Baxalta, to Baxter stockholders. The distribution positioned both Baxter and Baxalta with improved focus and an ability to innovate and operate more effectively.

Strategic Objectives

Baxter continues to focus on several key objectives to successfully execute its long-term strategy to achieve sustainable growth and deliver enhanced stockholder value. Baxter's diversified and broad portfolio of medical products that treat life-threatening acute or chronic conditions and its global presence are core components of the company's strategy to achieve these objectives. After giving effect to the separation and distribution and Mr. Almeida's appointment as Chief Executive Officer and Chairman effective as of January 1, 2016, the company is now focused on three distinct strategic factors: optimizing its core portfolio globally; operational excellence focused on streamlining the cost structure and enhancing operational efficiency; and following a disciplined and balanced approach to capital allocation.

Optimizing the Core Portfolio Globally

Baxter is in the process of evaluating and categorizing its product portfolio and the markets in which it operates to identify and invest in opportunities in which it has greatest potential to enhance returns. These opportunities include product areas across mature and emerging markets.

Additionally, as part of its portfolio review, Baxter seeks to optimize its position in product areas where the company has a stable, profitable business model, identify and alter investments in products that have reached the end of their life cycles or with respect to which market positions have evolved unfavorably. In the course of doing so, Baxter expects to reallocate capital to more promising opportunities, as described above.

As part of this strategy, Baxter will focus its investments to drive innovation where it has compelling opportunities to serve patients and healthcare professionals while advancing the business and will accelerate the pace in bringing these advances to market. Baxter is in the midst of launching more than 50 products over the next five years in such areas as chronic and acute renal care; smart pump technology; hospital pharmaceuticals and nutritionals; surgical sealants, and more. These comprise a mix of entirely new offerings, marked improvements on existing technologies, and the expansion of current products into new geographies.


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Operational Excellence

As part of its pursuit of improved margin performance, Baxter is working to rebase its cost structure, consistent with its emergence as a stand-alone medical products company after the Baxalta separation and distribution. It is also critically assessing optimal support levels in light of the company's ongoing portfolio optimization efforts.

The company intends to actively manage its cost structure to help ensure it is committing resources to where they will have the greatest value. Such high value activities include supporting innovation, building out the portfolio, expanding patient access and accelerating growth for the company's stockholders.

Baxter is undergoing a comprehensive review of all aspects of its operations and has already begun to implement changes in line with its business goals.

Maintaining Disciplined and Balanced Capital Allocation

Baxter's capital allocation strategies include the following:

reinvest in the business, by funding opportunities that are positioned to deliver sustainable growth, support the company's innovation efforts and improve margin performance;

return capital to stockholders through stock dividends, to meaningfully increase with earnings growth;

opportunistic share repurchases, which may involve utilization of the Retained Shares; and

identify and pursue accretive M&A opportunities that generate returns above targeted thresholds.

Responsible Corporate Citizen

The company strives for continued growth and profitability, while furthering its focus on acting as a responsible corporate citizen. At Baxter, sustainability means creating lasting social, environmental and economic value by addressing the needs of the company's wide-ranging stakeholder base. Baxter's comprehensive sustainability program is focused on areas where the company is uniquely positioned to make a positive impact. Priorities include providing employees a safe, healthy and inclusive workplace, fostering a culture that drives integrity, strengthening access to healthcare, enhancing math and science education, and driving environmental performance across the product life cycle including development, manufacturing and transport. Baxter and the Baxter International Foundation provide financial support and product donations in support of critical needs, from assisting underserved communities to providing emergency relief for countries experiencing natural disasters.

Throughout 2015 the company continued to implement a range of water conservation strategies and facility-based energy saving initiatives. In the area of product stewardship and life cycle management, Baxter is pursuing efforts such as sustainable design and reduced packaging. Baxter is also responding to the challenges of climate change through innovative greenhouse gas emissions-reduction programs, such as shifting to less carbon-intensive energy sources in manufacturing and transport. Additionally, the company developed new long-term goals to drive continued environmental stewardship while creating healthier, more sustainable communities where Baxter employees work and live.

Risk Factors

The company's ability to sustain long-term growth and successfully execute the strategies discussed above depends in part on the company's ability to manage within an increasingly competitive and regulated environment and to address the other risk factors described in Item 1A of this Annual Report on Form 10-K.


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RESULTS OF OPERATIONS

Special Items

The following table provides a summary of the company's special items and the
related impact by line item on the company's results of continuing operations
for 2015, 2014, and 2013.



years ended December 31 (in millions)                    2015              2014             2013
Gross Margin
Intangible asset amortization expense             $      (158 )     $      (168 )     $     (113 )
Business optimization items1                              (38 )              11              (47 )
Product-related items2                                     28               (64 )            (17 )
Gambro acquisition and integration items3                   -                 -              (63 )
Total Special Items                               $      (168 )     $      (221 )     $     (240 )

Impact on Gross Margin Ratio                         (1.7 pts )        (2.1 pts )       (2.6 pts )


Marketing and Administrative Expenses
Reserve items and adjustments5                    $         -       $         -       $       32
Branded Prescription Drug Fee6                              -                 3                -
Business optimization items1                               79                (4 )             78
Product-related items2                                      -                 4                -
Gambro acquisition and integration items3                  73               119              115
Separation-related costs7                                 110                11                -

Total Special Items                               $       262       $       133       $      225

Impact on Marketing and Administrative Expense
Ratio                                                 2.6 pts           1.2 pts          2.4 pts


Research and Development Expenses
Business development items4                       $         -       $         -       $       25
Business optimization items1                               13                 2               23
Separation-related costs7                                   1                 -                -

Total Special Items                               $        14       $         2       $       48


Other Expense (Income), Net
Gambro acquisition and integration items3         $         -       $        25       $       77
Business optimization items1                               (3 )               -                -
Reserve items and adjustments5                            (52 )               1              (35 )
Loss on debt extinguishment8                              130                 -                -
Business development items4                               (20 )               -                -

Total Special Items                               $        55       $        26       $       42


Income Tax Expense
Impact of special items                           $      (137 )     $      (137 )     $      (45 )

Total Special Items                               $      (137 )     $      (137 )     $      (45 )

Impact on Effective Tax Rate                        (10.4 pts )       (12.8 pts )       (0.5 pts )


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Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance, particularly in terms of cash returns, and is similar to how management internally assesses performance. Additional special items are identified above because they are highly variable, difficult to predict, and of a size that may substantially impact the company's reported operations for a period. Management believes that providing the separate impact of the above items on the company's results in accordance with generally accepted accounting principles (GAAP) in the United States 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.

1 In 2015, 2014 and 2013, the company's results were impacted by costs associated with the company's execution of certain strategies to optimize its organization and global cost structure on a global basis. These actions included streamlining the company's international operations, rationalizing its manufacturing facilities, reducing its general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs. The company recorded net business optimization charges (benefits) of $127 million, $(13) million, and $148 million in 2015, 2014, and 2013, respectively. This included the net benefit from adjustments made in 2014 and 2013 for reserves that are no longer probable of being utilized. Refer to Note 7 in Item 8 for further information regarding these charges and related reserves.

2 The company's 2015 results included a net benefit of $28 million primarily related to adjustments to the COLLEAGUE and SIGMA SPECTRUM infusion pump reserves. The company's results in 2014 included charges, net of reversals, of $68 million primarily related to product remediation efforts for the SIGMA SPECTRUM infusion pump. In 2013, the company's results included total charges of $17 million, primarily related to remediation efforts associated with modifications to the SIGMA Spectrum Infusion Pump in conjunction with re-filing for 510(k) clearance. Refer to Note 7 in Item 8 for further information regarding these charges and related reserves.

3 The company's results in 2015 and 2014 included total charges of $73 million and $144 million, respectively, primarily related to the integration of Gambro AB (Gambro). In 2013, the company's results included total charges of $255 million primarily related to the acquisition and integration of Gambro and losses from the derivative instruments used to hedge the anticipated foreign currency cash outflows for the planned acquisition of Gambro. Refer to Note 5 in Item 8 for further information regarding the acquisition of Gambro.

4 The company's results in 2015 included a benefit of $20 million relating to the reversal of contingent consideration milestone liabilities. The company's results in 2013 included total charges of $25 million related to upfront payment associated with the one of company's collaboration arrangements. Refer to Note 5 in Item 8 for further information regarding the company's acquisitions and other arrangements.

5 The company's results in 2015 included income of $52 million related to a litigation settlement in which Baxter was the beneficiary. The company's results in 2014 included income of $1 million related to third-party recoveries and reversals of prior litigation reserves. The company's results in 2013 included income, net of expense, of $3 million related to tax and legal reserves associated with tax and VAT matters in Turkey.

6 The company's results in 2014 included a charge of $3 million to account for an additional year of the Branded Prescription Drug Fee in accordance with final regulations issued in the third quarter of 2014 by the Internal Revenue Service.

7 The company's results in 2015 and 2014 included costs related to the Baxalta separation of $111 million and $11 million, respectively.

8 The company's 2015 results included a loss of $130 million related to its July 2015 tender offer, for certain of its outstanding indebtedness. See Note 8 in Item 8 for additional information.


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Net Sales

                                                                                           Percent change
                                                                                  At actual              At constant
                                                                               currency rates          currency rates
years ended December 31 (in millions)      2015         2014        2013          2015      2014        2015        2014

Renal                                   $ 3,789     $  4,172     $ 3,089          (9)%       35%          1%         38%
Hospital Products                         6,179        6,547       6,324          (6)%        4%          1%          4%

Total net sales                         $ 9,968     $ 10,719     $ 9,413          (7)%       14%          1%         15%


                                                                                           Percent change
                                                                                                         At constant
                                                                                  At actual               currency
                                                                               currency rates               rates
years ended December 31 (in millions)      2015         2014        2013          2015      2014        2015        2014

United States                           $ 4,001     $  3,999     $ 3,584            0%       12%          0%         12%
International                             5,967        6,720       5,829         (11)%       15%          2%         18%

Total net sales                         $ 9,968     $ 10,719     $ 9,413          (7)%       14%          1%         15%

Net sales for the year ended December 31, 2015 declined seven percent at actual currency rates but increased one percent on a constant currency basis. Net sales for the year ended December 31, 2014 included $1.6 billion in Gambro sales compared to $513 million in 2013, from the September 6, 2013 acquisition date. Refer to Note 5 in Item 8 for further information regarding the Gambro acquisition.

Foreign currency unfavorably impacted net sales by eight percentage points during the year ended December 31, 2015 compared to the prior year principally due to the strengthening of the U.S. Dollar relative to the Euro, Australian Dollar, Columbian Peso, and certain other currencies. Foreign currency unfavorably impacted net sales by one percentage point during the year ended December 31, 2014 principally due to the strengthening of the U.S. Dollar relative to the Euro, Swedish Krona and certain other currencies.

The comparisons presented at constant currency rates reflect comparative local currency sales at the prior year's foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. The company believes that the non-GAAP 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, 2015, Baxter modified its commercial franchise structure for reporting net sales. Prior period net sales have been recast to reflect the new commercial franchise structure.

As a result of the segment realignment, the Renal segment is presented as a separate commercial franchise and includes sales of the company's peritoneal dialysis (PD), hemodialysis (HD) and continuous renal replacement therapies (CRRT).

The Hospital Products segment includes four commercial franchises: Fluid Systems, Integrated Pharmacy Solutions, Surgical Care and Other.

Fluid Systems includes sales of the company's intravenous (IV) therapies, infusion pumps and administration sets.

Integrated Pharmacy Solutions includes sales of the company's premixed and oncology drug platforms, nutrition products and pharmacy compounding services.


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Surgical Care includes sales of the company's inhaled anesthesia products as well as biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention.

Other includes sales primarily from the company's pharmaceutical partnering business.

The following is a summary of net sales by commercial franchise.

                                                                                          Percent change
                                                                                 At actual              At constant
                                                                              currency rates          currency rates
years ended December 31 (in millions)      2015        2014        2013         2015       2014        2015        2014

Total Renal net sales                   $ 3,789     $ 4,172     $ 3,089         (9)%        35%          1%         38%

Fluid Systems                           $ 2,106     $ 2,129     $ 2,142         (1)%       (1%)          6%       (11)%
Integrated Pharmacy Solutions             2,297       2,535       2,364         (9)%         7%        (2)%         19%
Surgical Care                             1,323       1,373       1,307         (4)%         5%          3%          6%
Other                                       453         510         511        (11)%         -%        (5)%        (2)%

Total Hospital Products net sales       $ 6,179     $ 6,547     $ 6,324         (6)%         4%          1%          4%

Net sales in the Renal segment decreased 9% in 2015 from 2014 but increased 35% in 2014 compared to 2013. Foreign currencies had an unfavorable foreign currency impact of ten percentage points in 2015 and three percentage points in 2014. Net sales in the Hospital Products segment declined 6% in 2015 but increased 4% in 2014. Foreign currencies had an unfavorable impact of seven percentage points in 2015. Excluding the impact of foreign currency, the principal drivers impacting net sales were the following:

In the Renal segment, sales increased 1% on a constant currency basis in 2015, driven by continued growth in the number of PD patients globally, which contributed approximately three percentage points, and strong demand in the acute business. These factors were partially offset by lower sales in the chronic in-center HD business, resulting from the decision to forgo certain lower margin sales opportunities, increased austerity measures in Western Europe, and competitive pressures for dialyzers. Sales growth in 2014 was impacted by a full year of Gambro revenues of $1.6 billion compared to $513 million from the September 6, 2013 acquisition date through December 31, 2013. Sales in 2014 also benefited from growth in the number of PD patients in the United States and emerging markets, which contributed approximately four percentage points, partially offset by the divestiture of Baxter's legacy CRRT business in the first quarter of 2014.

In the Fluid Systems franchise, sales increased 6% in 2015 on a constant currency basis driven by increased sales of infusion system products, which contributed approximately four percentage points, including the relaunch of the SIGMA Spectrum infusion pump in the United States, Puerto Rico, and Canada during 2015. Additionally, sales growth in 2015 was impacted by favorable pricing and demand in the United States for the company's IV therapies, which contributed approximately one percentage point. Sales growth in 2014 was driven by price improvements and strong United States demand for the company's IV solutions which was offset by a decline in SIGMA Spectrum Infusion Pump sales due to suspension of sales to new accounts commencing with the receipt of an FDA Warning Letter in April 2013.

In the Integrated Pharmacy Solutions franchise, sales declined 2% in 2015 on a constant currency basis driven by decreased sales of cyclophosphamide, a generic oncology drug, following a competitor entering the U.S. market in November 2014 which contributed approximately six . . .

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