Baxalta-Free Earnings at Baxter International Inc

On Tuesday, Baxter (BAX 0.01%) released third-quarter earnings, the first quarter since spinning off its biotech division Baxalta (NYSE: BXLT). The results weren't exceptionally great compared to the year-ago quarter, but they beat management's guidance on the earnings-per-share line. Beating low expectations is certainly better than the alternative.

Baxter results: The raw numbers

Source: Company press release.

What happened with Baxter this quarter?

• It's always better to look at GAAP numbers, but because there were $223 million in special items, primarily associated with spinning off Baxalta, it's best to use the adjusted number when looking at the health of the slimmed-down Baxter.
• The 8% decline in revenue can entirely be explained by the strength of the dollar. At constant currencies, revenue would have gone up by 2%. Not great, but at least sales are growing.
• Baxter's hospital-products group is still being hurt by increased competition from others selling cyclophosphamide, but the company noted strong sales of infusion pumps, anesthetic and parenteral nutritional products, as well as an increased demand for Baxter's injectable drug compounding services.
• The adjusted earnings of $0.41 per share beat the company's guidance of $0.29 to $0.31 per share thanks to better operating margins than management was expecting. Some of the increased margin came from selling higher-margin items, but the company also spent less than it expected.
• You can expect those savings to continue as Baxter continues to reduce its workforce, which should save the company about $130 million annually.

What management had to say 
Bob Parkinson, Baxter's CEO and chairman, reminded investors of the restructuring plan designed to create value that started with spinning off Baxalta, "As you'll recall, we're executing a three-pronged strategy to accelerate profitable growth focused on rebasing our cost structure, optimizing our existing products and services through rigorous portfolio management, and finally, expanding our offering of high-valued, differentiated products through execution of our robust new product pipeline." As mentioned above, the first two categories have already begun with the workforce reduction and selling higher-margin items.

"I wanted to highlight that these statements have inherent complexities associated with them when comparing current results with those of prior periods," said Jay Saccaro, Baxter's CFO. The bad news is that investors have to trust that the company correctly separated out the Baxalta expenses in the historical report for the year-ago quarter, which Saccaro admits is nearly impossible for some expenses. The good news is investors only have to deal with this weird comparison for three more quarters.

Looking forward
Like most turnaround stories, Baxter is a play on management's ability to execute its plan. In the first quarter since the separation, it's certainly a good sign that management exceeded the goal it laid down; but investors would be wise to keep management on a short leash until the plan is fully realized.