Baxter International Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Interim statements were reviewed by the independent accountant, not audited.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $3,194 | $3,123 | $6,121 | $5,947 |
| Gross margin | $1,638 | $1,638 | $2,681 | $3,126 |
| Gross margin rate | 51.3% | 52.4% | 43.8% | 52.6% |
| Income before taxes | $670 | $724 | $782 | $1,361 |
| Net income attributable to Baxter | $535 | $587 | $472 | $1,103 |
| Diluted EPS | $0.90 | $0.96 | $0.78 | $1.79 |
| Cash from operations | Not separately presented quarterly | $1,062 | $1,048 |
Q2 sales increased 2% year over year, while Baxter-attributable net income fell 9% and diluted EPS declined 6%. First-half sales rose 3%, but earnings dropped sharply, principally reflecting the $588 million COLLEAGUE infusion-pump recall charge recorded in Q1; the charge included $213 million as a sales reduction and $375 million in cost of sales. The charge received no net tax benefit. Currency contributed 2 percentage points to Q2 sales growth and 4 points to first-half growth.
Q2 gross margin rate declined 1.1 percentage points year over year; the first-half rate fell 8.8 points, including a 7.8-point adverse effect from the pump charge. Management also cited healthcare reform, lower plasma-therapy and vaccine volume efficiencies, and higher vaccine inventory reserves as margin pressures. Q2 marketing and administrative expense was $721 million, up 9%; R&D was $219 million, down 5%.
Segments and material changes
- BioScience: Q2 sales fell 4% to $1,358 million; first-half sales rose 2% to $2,720 million. Recombinant and regenerative-medicine sales grew, while plasma proteins and antibody therapy declined. Management cited healthcare reform, market/share pressures, lower tender sales, and pricing actions.
- Medication Delivery: Q2 sales rose 9% to $1,239 million; first-half sales increased 2% to $2,208 million. First-half segment pretax loss was $57 million versus $375 million pretax income a year earlier, primarily because of the recall charge. IV therapies and injectables grew; infusion-systems sales were heavily affected by the charge.
- Renal: Q2 sales rose 6% to $585 million and first-half sales rose 10% to $1,169 million, supported by peritoneal-dialysis patient growth and foreign exchange.
Cash, debt and liquidity
- Cash and equivalents were $2,300 million at June 30, down from $2,786 million at December 31, 2009. Current assets were $7,375 million and current liabilities $4,085 million (current ratio approximately 1.8).
- Total reported short- and long-term debt and lease obligations were $4,814 million, up from $4,151 million at year-end. The company issued $600 million of senior notes in March: $300 million at 1.8% due 2013 and $300 million at 4.25% due 2020.
- First-half operating cash flow was $1,062 million; capital expenditures were $467 million. Investing cash outflow totaled $721 million, including $254 million for acquisitions and investments. Financing cash outflow was $670 million, including $1,112 million of treasury-stock purchases and $348 million of dividends.
- No borrowings were outstanding under the $1.5 billion revolving facility or the approximately $370 million euro facility at June 30. Baxter reported compliance with facility covenants and stated it believed it had sufficient financial flexibility.
Outlook, risks and unusual items
- Management expected the full-year 2010 effective tax rate to be approximately 19.5%, excluding audit developments and special items. It expected full-year marketing and administrative expense and R&D expense to be below 2009 levels; no specific full-year revenue or EPS guidance is stated in the provided filing text.
- U.S. healthcare reform was expected to continue to weigh on sales growth in the remainder of 2010, particularly through Medicaid rebates and expansion of the 340B Drug Pricing Program.
- The FDA’s July 2010 final order requires recall of approximately 200,000 COLLEAGUE pumps in U.S. use over two years, with replacement pumps or monetary consideration offered. The company had $535 million remaining in COLLEAGUE/SYNDEO cash reserves at June 30 and warned that additional cash or non-cash charges, penalties, regulatory action, claims, and adverse effects on other product sales remain possible.
- Other regulatory concerns include a Class I recall involving overfill associated with HomeChoice dialysis cyclers and an FDA Warning Letter concerning complaint-handling and corrective-action processes at a Renal facility.
- Legal exposures include approximately 750 heparin-related lawsuits, ongoing pump-related government inquiry and claims, and a Nevada propofol case jury award of $5 million compensatory and $500 million punitive damages against Baxter and Teva. Baxter and Teva plan to appeal; Baxter says it believes it is entitled to indemnity from Teva. The filing states some legal losses cannot be estimated and outcomes could materially affect results or cash flows in a period.
- Baxter recorded a $28 million write-down of Greek receivables after the government announced a plan to convert certain past-due amounts into non-interest-bearing bonds. Further credit deterioration could require additional charges. Standard & Poor’s changed Baxter’s outlook from Positive to Stable during Q2; ratings themselves were unchanged.
- First-half effective tax rate was 39.0%, affected by the pump charge without a net tax benefit, a $39 million deferred-tax-asset write-off related to U.S. healthcare legislation, and earnings mix.
Most important facts for investors to verify
- Execution costs, customer participation, replacement capacity and any additional liabilities under the COLLEAGUE recall; adequacy of the remaining reserve.
- Whether underlying sales and margins recover after excluding the recall charge and currency effects, especially in BioScience and Medication Delivery.
- Collection and valuation of Greek and other government receivables, and any further changes in customer credit quality.
- Developments in the propofol appeal and indemnity, heparin litigation, pump-related investigations, and other material legal or regulatory matters.
- Debt, cash usage and capital allocation, including the pace of repurchases and the effect of the $600 million debt issuance on leverage.