Baxter (BAX +1.37%) spun off its biosciences division, Baxalta (NYSE: BXLT), earlier this month, but as those going through breakups are prone to do, Baxter can't quite break away just yet and reported second-quarter earnings, including all of Baxalta's contribution to sales and earnings.
All kidding aside -- it was certainly an amicable breakup, considering Baxter kept a 19.5% stake in the spinoff -- the combined sales report means that investors will have to wait another quarter to see how Baxter is truly performing without its biosciences division.
Baxter breaks out revenue by division, so at least on the top line, investors can get an idea of how the parent company is doing. Sales from the medical-products division, which is remaining with Baxter, declined 9% year over year, although that was entirely due to the stronger dollar. At constant currencies, revenue was flat compared with the year-ago quarter.
Breaking it down further, international sales at constant currencies increased 2%, while U.S. sales decreased by 2% as Baxter faced increased competition for cyclophosphamide, a generic injectable cancer drug. Management noted that strong sales of inhaled anesthetics, infusion pumps, and peritoneal dialysis products helped keep the quarter afloat, as did increased demand for injectable drug compounding services the company offers.
Despite the year-over-year fall in revenue, the earnings line looked good with earnings per share -- after adjusting for one-time adjustments such as costs for the Baxalta split -- increasing 14% year over year to $1.00 per share. The result exceeded management's guidance of $0.92 to $0.96 per share.
It's a little hard to decipher how much of that earnings increase was from Baxter and how much was contributed by Baxalta. It seems safe to assume that Baxalta's adjusted operating margin is higher than the adjusted operating margin of 9% that Baxter's management has previously guided for the second half of the year. But it's a company's ability to expand margins that's key to earnings growing faster than revenue. Baxter has set a goal of increasing adjusted operating margins by 100 basis points annually to eventually get to 14% by 2020.
Looking forward
Baxter will continue to see currency headwinds into the second half of the year, which, combined with a lack of revenue growth, won't have sales headed in the right direction. Management guided for flat revenue at constant currency, which will result in a 9% year-over-year decline in the second half of the year, when currency changes are factored in. Admittedly, the lack of growth is due to the aforementioned competition for cyclophosphamide. Without that competition, Baxter predicts that sales would increase 3% year over year in the second half of the year at constant currencies.
For earnings, management guided for adjusted earnings per share of $0.29 to $0.31 per share for the third quarter and $0.58 to $0.62 per share for second half of 2015.
In conjunction with its earnings release, Baxter declared a dividend of $0.115 per share and reiterated its commitment to sharing approximately 35% of its adjusted net income with shareholders in the form of a dividend.
