Brian Stevens
Senior Vice President, Interim Chief Financial Officer, Chief Accounting Officer and Controller at Baxter International
Thanks, Joe, and good morning, everyone. I'm happy to be joining the call this morning to provide some additional details on Baxter's second quarter financial performance as well as commentary on our updated financial outlook. As Joe mentioned, we are pleased with our second quarter results, which came in ahead of our expectations. Second quarter 2023 global sales included $3.71 billion from continuing operations and $142 million from discontinued operations. Sales in the quarter increased 3% on a reported basis and 4% on a constant currency basis and compared favorably to our guidance.
Sales performance in the quarter benefited from better-than-expected sales across nearly every business line with particular outperformance realized in Medication Delivery, Pharmaceuticals and patient support systems. On a year-over-year basis, we recognized solid growth across much of the portfolio, which was partially offset by a 1% decline in Patient Support Systems, primarily reflecting lower rental revenues and reduced hospital capital spending as compared to prior periods. We also generated lower sales in BPS, which is now reported in discontinued operations due to a reduction in revenues from COVID vaccine manufacturing.
On the bottom line, adjusted earnings in the aggregate, inclusive of both continuing and discontinued operations, decreased 24% to $0.66 reflecting the impact on our results of the increased cost of materials, labor and freight we've absorbed due to the significant inflationary environment experienced over the past few years. Adjusted EPS for the quarter came in ahead of expectations of $0.59 to $0.61 per share, primarily driven by sales and operational performance. A lower-than-expected tax rate offset the negative impacts from foreign exchange and losses on equity investments.
Now I'll walk through performance by our regional segments and key product categories, starting with sales by operating segment. Sales in the Americas grew 5% compared to the prior year on a constant currency basis. Sales in Europe, the Middle East and Africa grew 3% on a constant currency basis, and sales in our APAC region increased 4% constant currency. As we look to the second half of the year, we expect performance in APAC to be negatively impacted by a decline in China sales resulting from the effect of excess mortality on ESRD patient volumes due to the pandemic as well as the impact from the ongoing implementation of value-based procurement initiatives.
Moving on to performance by key product category. Global sales for Renal Care were $936 million increasing 2% on a constant currency basis. Performance in the quarter was driven by mid-single-digit growth in our U.S. PD business, partially offset by lower U.S. in-center HD sales following the exit of a distribution agreement at the end of last year consistent with our optimization plans for this business. Globally, both PD and in-center HD sales advanced low single digits.
Results in the quarter were partially offset by lower sales in China due to the factors just mentioned, including government-based procurement initiatives and the lower patient census in the region due to the pandemic. Sales in Medication Delivery of $761 million grew 7% year-over-year at constant currency rates, driven by strength globally for both infusion systems and IV solutions products. We continue to experience healthy demand in the U.S. for our Spectrum LVP pump.
As we continue to work to improve the availability of components for spectrum, we expect sales to ramp in the second half of the year, and we also continue to focus on growing our NOVUM syringe base. Pharmaceutical sales of $550 million increased 6% on a constant currency basis. Performance in the quarter reflected strength in our U.S. injectables portfolio driven by new product launches, including Zosyn, Norepinephrine room temperature and Bendamustine as well as increased sales internationally for our hospital compounding portfolio. Total sales for Clinical Nutrition were $243 million, increasing 7% on a constant currency basis.
Performance in the quarter was driven by a strong performance internationally, partially offset by declines in the U.S., reflecting a difficult comparison against the prior year period. Sales in Advanced Surgery were $272 million, advancing 4% on a constant currency basis. Growth in the quarter reflects an improvement of surgical procedures globally with particular strength internationally partially offset by the impact from exiting a distribution agreement in the U.S. as well as select supply constraints that hampered performance in the quarter. Sales in our Acute Therapies business were $180 million, representing growth of 6% on a constant currency basis and represented a return to growth in the U.S. and strength in our APAC region.
Sales in our Patient Support Systems business were $359 million, decreasing 1% on a constant currency basis primarily driven by lower contribution from rental revenues and lower hospital capital spending as compared to the prior year period. In the quarter, we realized better-than-expected sales for ICU beds in the U.S., driven by the launch of Progressa+. We have experienced positive demand for that new entrant to our smart bed portfolio since its debut.
As Joe mentioned, we saw a significant sequential improvement in orders, increasing approximately 30% driven by demand for our segment-leading hospital beds and care communications products. We currently expect this momentum to continue with orders increasing in the second half of the year as compared to the first half. Front Line Care sales in the quarter were $307 million, increasing 9% on a constant currency basis. This growth reflects demand for our intelligent diagnostics, respiratory health and connected monitoring portfolios.
We saw continued improvement in supply availability of electromechanical components during the quarter, which enabled us to address a portion of the backlog associated with the Front Line Care business. While we are pleased to see improvements in our supply constraints, the business continues to have an elevated backlog level, which we will continue to work down over the course of the year as anticipated demand remains strong for this portfolio of products. Global Surgical Solutions sales in the quarter were $77 million, increasing 9% on a constant currency basis.
Performance in the quarter was driven by continued geographic expansion and increased hospital access. BPS second quarter sales, which are now reported as discontinued operations, were $142 million, decreasing 7% on a constant currency basis. This decline was in line with expectations due to lower COVID vaccine-related revenues of approximately $27 million compared to the prior year period. Underlying business momentum continues to build with strong growth, excluding the vaccine impact realized in the quarter.
Moving to the rest of the P&L. Our adjusted gross margin from continuing operations totaled 40.4% in line with our expectations and represented a decline of 160 basis points over the prior year. The year-over-year decrease reflects increased cost of goods sold, primarily driven by material and labor inflation, freight and supply constraints partially offset by favorable pricing in select areas of the portfolio. The impact of discontinued operations reduced Q2 2023 adjusted gross margins by 40 basis points and Q2 2022 adjusted gross margins by 50 basis points.
Adjusted SG&A totaled $844 million or 22.8% as a percentage of sales, a decrease of 40 basis points versus the prior year period. Performance in the quarter benefited from our ongoing transformation initiatives to enhance operational efficiencies, partially offset by higher bonus accruals under our annual employee incentive compensation plans versus the prior year. On an aggregate basis, inclusive of discontinued operations, adjusted SG&A was 22.1% as a percentage of sales in Q2 '23 and 22.4% as a percentage of sales in Q2 '22. Adjusted R&D spending in the quarter totaled $165 million and represented 4.5% as a percentage of sales, an increase of 40 basis points versus the prior year.
We have ramped up our R&D efforts, particularly increasing our investments in advancing our connected care technologies on an aggregate basis, inclusive of discontinued operations, adjusted R&D was 4.3% as a percentage of sales in Q2 '23 and 4.0% as a percentage of sales in Q2 of '22. These factors resulted in an adjusted operating margin of 13.2% and a decrease of 150 basis points versus the prior year. On an aggregate basis, inclusive of discontinued operations adjusted operating margin was 14.4% as a percentage of sales in Q2 of '23 and 16.2% as a percentage of sales in Q2 of '22.
Operating margin came in ahead of our expectations primarily driven by top line performance and enhanced execution on our transformational initiatives driving improved operational efficiency. Net interest expense totaled $124 million in the quarter, an increase of $35 million versus the prior year, driven by the impact of increased interest rates on our variable rate debt. Adjusted other nonoperating expense totaled $22 million in the quarter compared to $33 million of income in the prior year period. Results were unfavorable to expectations and driven by losses in both foreign exchange and marketable securities compared to gains in the prior year.
The adjusted tax rate in the quarter was 17.8% compared to 20.5% in the prior year period. The year-over-year decrease was primarily driven by changes in geographic earnings mix. With respect to cash flow, in the first half of 2023, we generated free cash flow of $485 million, including discontinued operations compared to $171 million in the prior year period. We expect to remain on track to more than double our free cash flow year-over-year in 2023. And as previously mentioned, adjusted earnings from continuing operations totaled $0.55 and declined 25% versus the prior year.
Adjusted earnings, including discontinued operations of $0.66 per diluted share declined 24% versus the prior year period, reflecting the increased cost of raw materials freight and labor as well as the impact of higher interest rates on variable rate debt, foreign exchange headwinds and higher bonus accruals. With respect to our original guidance, earnings favorability was driven by better-than-expected sales and SG&A savings as the benefit from the lower tax rate offset the negative impacts from FX and losses on marketable securities. Let me conclude my comments by discussing our outlook for the third quarter and full year 2023, including some key assumptions underpinning the guidance.
As mentioned, we are pleased with the operational performance to date and positive momentum we have seen through the first half of the year. While we continue to work to mitigate the macroeconomic challenges that have impacted our results to date, the latest signs are reassuring. Our business fundamentals remain solid and demand for the portfolio is broad-based. Taking into account our positive second quarter results, I'll now walk through our updated guidance. Our current expectation is that the pending sale of BPS is likely to close towards the end of the third quarter.
However, as the ultimate timing of completion is uncertain, we are providing adjusted operating margin and EPS guidance for full year 2023 that contemplates two scenarios, one where the deal does not close in 2023 and another that assumes it closes at the end of the third quarter. For full year 2023, Baxter now expects total sales growth from continuing operations of 1% to 2% on a reported basis and approximately 2% on a constant currency basis. We now expect foreign exchange to be a 50 basis point headwind to reported results on a full year basis.
Assuming that BPS were to remain a part of Baxter through year-end 2023, our outlook for sales growth in the aggregate, including discontinued operations, would be the same as continuing operations growth on both a reported and constant currency basis. If BPS were to remain a part of Baxter through year-end, we will continue to expect full year adjusted operating margin in the aggregate, including discontinued operations, of 15.5% to 16%. On a continuing operations basis, we expect full year adjusted operating margin of 14.1% to 14.6%, which would not be significantly impacted by the timing of the pending BPS closure.
If the pending BPS transaction does not close by year-end, we would expect to incur interest expense of approximately $500 million for fiscal 2023. However, if the BPS transaction closes by the end of September as currently anticipated, we would expect a reduction of interest expense of approximately $40 million, which would result in a benefit to continuing operations in the fourth quarter. We now anticipate a full year adjusted tax rate of 20.5% to 21% on both an aggregate and continuing operations basis. Given current foreign exchange rates, we expect to absorb a negative earnings impact of $0.05 to $0.07 per share in the second half of the year relative to prior expectations.
Lastly, we expect a diluted average share count of 508 million shares. Under this scenario, where BPS remains a part of Baxter through year-end 2023, we now expect 2023 adjusted earnings on an aggregate basis, including discontinued operations to total $2.92 to $3 per diluted share, which includes adjusted earnings from continuing operations of $2.49 to $2.57 and adjusted earnings from discontinued operations of $0.43.
If the pending BPS sale were to close at the end of the third quarter as currently anticipated, we would expect full year adjusted earnings in the aggregate, including discontinued operations of $2.87 to $2.95 per diluted share, adjusted earnings from continuing operations of $2.54 to $2.62 and adjusted earnings from discontinued operations of $0.33. This outlook excludes estimated fourth quarter adjusted earnings attributed to BPS consistent with the assumed September 30 closing date and includes a benefit of approximately $0.05, primarily due to reduced interest expense after giving effect to the anticipated debt repayment plan associated with closing of the pending BPS sale.
Specific to the third quarter of 2023, we expect global sales growth from continuing operations of approximately 2% on a reported basis and 1% on a constant currency basis and we expect adjusted earnings from continuing operations, excluding special items, of $0.65 to $0.67 per diluted share. We expect adjusted earnings of $0.13 per diluted share from discontinued operations. Taking this into account, we would expect adjusted earnings in aggregate of $0.78 to $0.80 per diluted share.
With that, we can now open up the call for Q&A.
