Baxter International Inc. (NYSE:BAX) reported second-quarter 2010 adjusted (excluding one-time items) earnings per share of 93 cents, thereby beating the Zacks Consensus Estimate of 92 cents, but below the year-ago result of 96 cents. The results were in line with Baxter’s earlier guidance in the range of 90 cents to 93 cents. 
 
Revenues
 
Total revenue was $3.2 billion, up 2% year over year, in the second quarter of 2010, in line with the Zacks Consensus Estimate. Domestic revenues were $1.4 billion, up 2%; while overseas sales moved up 2% (down 2% in constant currency) to $1.8 billion. 

Segment Wise Revenue Analysis
 
With regard to segment performance, Bioscience revenues totaled $1.4 billion, down 4% (5% in constant currency) year over year. The negative triggers included higher rebates for Medicaid necessitated by healthcare reform and lower revenues from vaccines, antibody therapies and hemophilia tenders in the overseas markets.
 
The negative trend was partly countered by growth in ADVATE [Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method] utilized for treating hemophilia, ARALAST NP [Alpha 1-Proteinase Inhibitor (Human)] used for hereditary emphysema, as well as growth in biosurgery products.
 
The largest sub-segment, Recombinants, had sales of $525 million, up 2% (1% in constant currency) year over year. The Plasma Proteins business, where Baxter had encountered structural problems in the past, continued to underperform with revenues of $314 million, down 11% (12% in constant currency) year over year. Antibody Therapy also failed to deliver on sales of $310 million, down 10% in both reported and constant currency terms.  
 
Revenue from Medication Delivery went up 9% (6% in constant currency), to $1.2 billion, riding on growth in intravenous therapies, anesthesia items, and sales of the Sigma SPECTRUM infusion pump.
 
The three prominent sub-segments were IV Therapies with sales of $418 million, up 4% in constant currency basis; Global Injectables with revenue of $472 million, up 10% in constant currency; and Infusion Systems with sales of $216 million, up 2% in constant currency.  
 
Renal sales were $585 million, up 6% (1% in constant currency), as Baxter made advances with peritoneal dialysis patients, in the U.S., Latin America and Asia. The company’s recently purchased continuous renal replacement therapy business performed well.
 
Margins
 
Gross margin, as reported, was 51.3% in the second quarter, down from 52.4% a year ago. Marketing and administrative expense increased to 22.6% from 21.1% in the prior-year while research and development expense declined to 6.9% from 7.4%.
 
Balance Sheet and Cash Flow
 
Cash and cash equivalents totaled $2.3 billion, as of June 30, 2010, down 17.9% year over year. Net debt totaled $2.5 billion, up 23.8% year over year. Cash flow from operation was about $1.1 billion in the first half of 2010, after Baxter contributed $300 million to its pension fund in the US. Baxter reiterated its goal of generating cash flow from operations of about $2.7 billion for the fiscal year.
 
Outlook
 
Baxter provided its outlook for the third quarter and confirmed its guidance for fiscal 2010. For the third quarter, the company anticipates growth in revenues in the range of 1% to 3%, on a constant currency basis, and adjusted earnings per share in the range of 96 cents to 99 cents.   
 
Baxter maintains growth in revenues of about 1% to 3%, and adjusted earnings per share of about $3.93 to $3.98, for fiscal 2010. Our Neutral recommendation on Baxter is supported by a Zacks #3 Rank (Hold).

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