What's Next After Baxter International Inc.'s Earnings Beat?

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Baxter (BAX 1.39%) released second-quarter earnings on Tuesday, beating its own expectations and raising its full-year guidance. Investors can't ask for much more than that.

Baxter results: The raw numbers

YOY = year over year. Data source: Baxter press release.

What happened with Baxter this quarter?

• The closing of Shire's acquisition of Baxter's spinout Baxalta, in which it still owned shares, caused some wonky GAAP numbers, with operating income down 22% and GAAP earnings per share up 265%, so adjusted earnings are the best way to look at the company's financial health. The adjusted earnings of $0.46 per share exceeded guidance of $0.38 to $0.40 per share.
• Revenue continues to be hurt by changes in currencies. On a constant currency basis, revenue would have been up 6% year over year.
• Most of the growth came from the U.S., where sales of renal products were up 9% year over year and hospital products were up 10% year over year. International growth was 0% and 2%, respectively, for the two segments, partially due to not renewing foreign contracts because the margins weren't attractive.
• The double-digit sales in the hospital products division were driven by its new next-generation Sigma Spectrum infusion pump and the sale of IV solutions, although the latter increase was partially due to a price jump in addition to more volume.
• Despite the tepid growth in revenue, Baxter's cost-controlling measures and lowered interest payments -- thanks to using the Baxalta proceeds to pay down debt -- continue to help the bottom line. For example, adjusted selling, general, and administrative costs decreased 11% year over year.

What management had to say 

Chairman and CEO Jose Almeida was a bit coy about potential acquisitions when he said, "We don't comment specifically on targets as we want to make sure that that we'll get there first and don't get to pay too much for them." But he assured investors the company will be disciplined and not overpay for external growth. "We also walked away from four deals in the last 90 days; they were too expensive."

CFO James Saccaro made the point that sales of infusion pumps today result in sales of high-margin disposable sets -- tubing, connectors, etc. -- in future quarters even when hospitals might not have the capital for equipment purchases. "This becomes more of an annuity or an ongoing stream of business that's related to pumps, and so I would say that's a more sustainable business than the capital sales, which are a little bit lumpier in nature, if you will," Saccaro said.

Looking forward

After the strong start to the year, management increased revenue guidance to a year-over-year growth of 1% to 2%, which would be 3% to 4% on a constant currency basis. Baxter also increased the bottom line, expecting adjusted earnings of $1.69 to $1.74 per share, compared to previous guidance of $1.59 to $1.67 per share.

In the third quarter, management sees earnings continuing to grow faster than revenue. Adjusted earnings are expected to fall in the range of $0.43 to $0.45 per share. At the low end, that's a 4.9% increase over the year-ago number, faster than sales, which are expected to rise by just 2% to 3% year over year.