Baxter International, Inc. (BAX: NYSE).

This
assignment explores the information communicated by companies on a quarterly
basis including the content of the interactive quarterly conference call that
company executives conduct with analysts and the content of research reports
prepared by analysts for their clients.

Case background information

A company’s annual report is only one source of information about a company’s financial performance. Given that the annual report is released well after year-end (to allow time for closing the books and the annual audit), other sources of more timely information are of great interest to investors. Two key sources are quarterly earnings announcements and conference calls by a company’s management team and equity analyst reports. This assignment explores both important alternative sources of information.

Baxter International, Inc. (BAX) recently released its quarterly earnings information for the 3rd quarter of its 2023 fiscal year. Like most companies, Baxter’s management team holds a quarterly conference call with the analysts that follow the company to present the key results of earnings and performance for the quarter and allow analysts to ask questions about recent performance and plans for the coming quarter, year, and beyond. Baxter held such a conference call on November 2, 2023 to discuss its third quarter earnings report. Analysts often will update the information they share with investors about a company’s stock after an earnings announcement and interactions with management in the conference calls.

This assignment has two parts:

1)Reviewing the press release of the earnings announcement, the accompanying financial schedules, and listening to the webcast of the conference call between Baxter management and the equity analysts that follow Baxter.

2)Assessing the analysts’ reactions to the quarterly earnings announcement.

Materials needed are part of Assignment 2 on Blackboard website under the Assessments link.

Under the Blackboard Assessments link for Individual Assignment #2:

• Baxter’s Q3 2023 Earnings Press Release
• Financial Schedules to accompany the press release.
• Analyst reports Baxter from: Argus Research, Price Target Research, and SADIF Research

Case assignment

You are asked to read the Earnings Press Release, associated Financial Schedules of Baxter International. You are then asked to listen in on the webcast replay of the quarterly earnings conference call of the company. These materials are available in the Past Events (2023) section of the Investor Relations portion of Baxter’s website, at the address below. The webcast you are to listen to is called was held on Nov 2, 2023. The conference call webinar lasts for approximately 60 minutes. Click on the ‘Webcast-Replay” link in the events page to be redirected to the webcast. Access is free, but you will need to register with your UIC email address.

Investor Relations Website: (

https://investor.baxter.com/investors/events-and-news/events/default.aspx

). Cut and Paste this Link and then change to year to 2023 and You should see the Link to the Webcast of the Conference call.

Please answer the following questions after reviewing the case materials and listening to the conference call. Be sure to complete all parts of the case assignment for full credit. I would advise reading ALL the questions before listening to the conference call so that you can make notes as you listen to the call.

Part 1) Earnings announcement and the conference call with analysts

• Who are the key players on the conference call?
• What information was relayed in press release and earnings presentation and in the executive team’s discussion of the results during the call?

• Which members of Baxter’s management team were involved on the call? What are their roles with the company? Which played a more active role in the call?
• Which other members of management do you think would have been helpful to have on the call? What types of information or insights do you think these additional participants might have been able to provide? Be specific.

• What were the key financial performance metrics that Baxter’s management emphasized when presenting the results of the quarter in the accompanying press release and earnings presentation? You should include at least 3 metrics. Are any of the key metrics considered non-GAAP measures?
• Summarize Baxter’s performance for the quarter on each of the key metrics discussed in part (a). How does performance for each of the three metrics compare to the results for the metric for the third quarter of last year (Q3, FY 2023)?
• What do each of these metrics tell you about Baxter’s performance (i.e., why are they useful metrics)? Which of the metrics do you find to be the most useful and meaningful in evaluating Baxter’s performance and why? Be specific.
• Did management provide guidance for future sales and/or earnings in the press release, conference call slides or on the call? If so, describe which items are forecasted and for which future period(s). How does the guidance compare with the results of the recent performance (e.g., what is the % increase or decrease in the forecasted metric from its prior period)?

Baxter assignment (Part 1 continued)

Interaction between management and analysts

Note: The question-and-answer portion of the conference call begins at approximately the 18:45 minute mark in the webinar.

• Describe the nature of the questions posted by analysts (i.e., what were some of the key issues they focused on)? Which aspects of Baxter’s performance or business operations were most heavily probed? Discuss at least 3 distinct issues or questions in your answer.
• Which analyst questions did you find most insightful to help you understand the drivers of Baxter’s recent performance? Be specific about the questions and what you learned from the questions and/or response by management.
• Which questions did you find most insightful to help you think about Baxter’s future performance (for example, if you were asked to forecast future sales and profits)? Discuss why you found these to be useful questions.
• What questions do you wish had been asked by the analysts to help interpret Baxter’s results or assess future performance expectations? Create at least 3 questions and discuss why you would find them useful.

Part 2) Analysts role and responses to the earnings information and conference call exchange

• Financial analysts employed at brokerage houses are typically assigned to follow individual firms within an industry (e.g. most of the analysts who wrote the reports you are reading will cover Baxter and other companies that compete with Baxter). Based on the analyst reports from Argus, Price Target and SADIF, included in the case, describe the type of information that is included in the reports.
• What information in the reports do you think would be most useful to investors? Be specific about the information and why you think it would be useful.
• Discuss any link you see between the new information in the analysts’ reports and both the Q3 2023 earnings announcement detail and the discussion in the conference call.
• Stock markets are constantly updating expectations of a company’s performance. In that vein, a company’s stock price prior to an earnings announcement captures an expectation of the valuation impact of the news that will be released in the announcement. Much of the stock market’s expectation is formed by a consensus analyst forecast.

• Describe what is meant by the term “consensus analyst forecast?”
• Other than consensus analyst forecast, what other information affects the market’s expectations (name at least 2 others and explain how they affect expectations)
• Did the Market Value of Baxter go up or down in the 3 days window surrounding the earnings announcement and conference call? (3 Day window begins the business day before the conference call and ends the day after.)
• If you had invested in Baxter’s stock the day before the conference call and sold your stock the days after what would your percentage return over the 3 day window be. (use a website such as yahoo finance to get daily stock price data)
• How does the return on Baxter’s stock over the 3 day window compare to the returns on the S&P 500 over the same 3 day period?

BAXTER — PAGE 10
BAXTER INTERNATIONAL INC.
Consolidated Statements of Income (Loss)
(unaudited)
(in millions, except per share and percentage data)
Three Months Ended
September 30,
NET SALES
$
2023
3,708
$
2022
3,609
Change
3%
COST OF SALES
2,591
2,564
1%
GROSS MARGIN
1,117
1,045
7%
% of Net Sales
30.1 %
1,002
29.0 %
941
1.1 pts
27.0 %
166
26.1 %
151
0.9 pts
4.5 %
—
4.2 %
2,785
0.3 pts
GOODWILL IMPAIRMENTS
OTHER OPERATING INCOME, NET
—
48
NM
OPERATING INCOME (LOSS)
(51)
(2,880)
% of Net Sales
(1.4)%
128
(79.8)%
104
(7)
61
NM
(172)
(223)
(3,045)
(54)
NM
INCOME TAX BENEFIT
% of Income (Loss) from Continuing Operations Before Income Taxes
129.7 %
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
% of Net Sales
RESEARCH AND DEVELOPMENT EXPENSES
% of Net Sales
INTEREST EXPENSE, NET
OTHER (INCOME) EXPENSE, NET
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
INCOME (LOSS) FROM CONTINUING OPERATIONS
1.8 %
6%
10 %
NM
NM
78.4 pts
23 %
NM
NM
51
(2,991)
NM
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
2,460
57
NM
NET INCOME (LOSS)
2,511
(2,934)
NM
3
3
0%
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
NET INCOME (LOSS) ATTRIBUTABLE TO BAXTER STOCKHOLDERS
$
2,508
$
(2,937)
NM
Basic
$
0.09
$
(5.94)
NM
Diluted
$
0.09
$
(5.94)
NM
Basic
$
4.85
$
0.11
NM
Diluted
$
4.83
$
0.11
NM
Basic
$
4.95
$
(5.83)
NM
Diluted
$
4.93
$
(5.83)
NM
INCOME (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE
INCOME FROM DISCONTINUED OPERATIONS PER COMMON SHARE
NET INCOME (LOSS) PER COMMON SHARE
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING
Basic
507
504
Diluted
509
504
ADJUSTED OPERATING INCOME (excluding special items)¹
$
565
$
568
(1)%
ADJUSTED INCOME FROM CONTINUING OPERATIONS (excluding special
items)¹
$
347
$
365
(5)%
ADJUSTED INCOME FROM DISCONTINUED OPERATIONS (excluding special
items)1
$
71
$
52
37 %
415
$
414
0%
0.68
$
0.71
(4)%
0.14
$
0.10
40 %
0.82
$
0.82
0%
ADJUSTED NET INCOME ATTRIBUTABLE TO BAXTER STOCKHOLDERS
(excluding special items)¹
$
ADJUSTED DILUTED EPS FROM CONTINUING OPERATIONS (excluding special
items)¹
$
ADJUSTED DILUTED EPS FROM DISCONTINUED OPERATIONS (excluding
special items)¹
$
ADJUSTED DILUTED EPS (excluding special items)¹
1
Refer to page 11 for a description of the adjustments and a reconciliation to U.S. GAAP measures.
NM – Not Meaningful
$
BAXTER — PAGE 11
BAXTER INTERNATIONAL INC.
Description of Adjustments and Reconciliation of U.S. GAAP to Non-GAAP Measures
(unaudited, in millions)
The company’s U.S. GAAP results for the three months ended September 30, 2023 included special items which impacted the U.S. GAAP measures as follows:
Gross
Margin
$ 1,117
Reported
Selling, General
and
Administrative
Expenses
Research and
Development
Expenses
Operating
Income
(Loss)
Loss From
Continuing
Income
Income From
Operations
Income Tax (Loss) From Discontinued
Before Income
Expense
Continuing Operations,
Taxes
(Benefit)
Operations
Net of Tax
$
$
$
$
1,002
166
(51)
(172)
$
(223)
$
51
Reported percent of net sales (or effective
tax rate for income tax expense (benefit))
30.1 %
27.0 %
4.5 %
(1.4) %
(4.6) %
129.7 %
Intangible asset amortization1
111
(51)
—
162
162
35
127
2
Business optimization items
26
(50)
(5)
81
81
19
Acquisition and integration items3
1
(1)
—
2
2
1
10
(67)
—
77
77
—
14
—
—
14
14
4
—
(13)
—
13
13
Long-lived asset impairments
267
—
—
267
Gain on BPS Sale8
—
—
—
—
4
Separation-related costs
5
European medical devices regulation
6
Legal matters
7
—
Tax matters13
Adjusted
$ 1,546
Adjusted percent of net sales (or effective
tax rate for income tax expense (benefit))
—
$
41.7 %
820
22.1 %
$
—
—
161
$ 565
4.3 %
15.2 %
$
Income (loss) from continuing operations attributable to Baxter stockholders
0.09 $
4.83 $
4.93
127
127
0.25
0.00
0.25
62
1
63
63
0.12
0.00
0.12
1
—
1
1
0.00
0.00
0.00
77
4
81
81
0.15
0.01
0.16
10
—
10
10
0.02
0.00
0.02
3
10
—
10
10
0.02
0.00
0.02
267
62
205
—
205
205
0.40
0.00
0.40
—
—
—
(2,603)
(2,603)
(2,603)
0.00
(5.11)
(5.11)
(0.39)
0.41
0.03
0.68 $
0.14 $
0.82
196
$
51
48
97
21.8 %
Adjusted
$
3
$
$
—
12.0 %
Less: Net income attributable to noncontrolling interests
2,508
67.6 %
Reported
Income (loss) from continuing operations
$
67.7 %
444
1.4 %
$ 2,511
66.3 %
—
$
$ 2,460
Net
Income
(Loss)
Net Income
Diluted
Diluted
(Loss)
Earnings Per Earnings Per Diluted
Attributable Share from
Share from Earnings
to Baxter
Continuing Discontinued
Per
Stockholders Operations
Operations
Share
347
3
$
344
(196)
$
347
9.4 %
$
209
13
71
$ 418
1.9 %
11.3 %
13
$
415
11.2 %
$
BAXTER — PAGE 11
The company’s U.S. GAAP results for the three months ended September 30, 2022 included special items which impacted the U.S. GAAP measures as follows:
Income
(Loss) From
Continuing
Selling,
Other
Other
Operations
General and Research and
Operating Operating (Income)
Before
Gross Administrative Development Goodwill Expense, Income Expense,
Income
Margin
Expenses
Expenses
Impairment
Net
(Loss)
Net
Taxes
Income
Tax
Expense
(Benefit)
Income
(Loss)
From
Income From
Continuing Discontinued
Operations Operations
Net
Income
(Loss)
Diluted
Net Income
Earnings
Diluted
(Loss)
Per Share Earnings Per Diluted
Attributable
from
Share from Earnings
to Baxter
Continuing Discontinued
Per
Stockholders Operations Operations
Share
$1,045 $
Reported percent of net 29.0 %
941
$
26.1 %
151
$ 2,785
$ 48
$(2,880) $ 61
$ (3,045) $ (54) $ (2,991) $
4.2 %
77.2 %
1.3 % (79.8)%
1.7 %
(84.4)%
1.8 %
(82.9)%
57
$(2,934) $ (2,937) $
1.6 % (81.3)%
(81.4)%
(5.94) $
0.11 $ (5.83)
Intangible asset
amortization1
110
(58)
—
—
—
168
—
168
42
126
—
126
126
0.25
0.00
0.25
Business optimization
items2
13
(57)
(3)
—
—
73
—
73
21
52
—
52
52
0.10
0.00
0.10
Acquisition and
integration items3
(2)
(11)
(1)
—
6
4
—
4
2
2
—
2
2
0.00
0.00
0.00
European medical
devices regulation5
12
—
—
—
—
12
—
12
3
9
—
9
9
0.02
0.00
0.02
Product-related items9
20
—
—
—
—
20
—
20
2
18
—
18
18
0.04
0.00
0.04
Long-lived asset
impairments7
332
—
—
—
—
332
—
332
78
254
—
254
254
0.50
0.00
0.50
Goodwill
impairments10
—
—
—
(2,785)
—
2,785
—
2,785
—
2,785
—
2,785
2,785
5.49
0.00
5.49
Loss on product
divestiture
arrangement11
—
—
—
—
(54)
54
—
54
14
40
—
40
40
0.08
0.00
0.08
Reclassification of
cumulative translation
loss to earnings12
—
—
—
—
—
—
(65)
65
—
65
—
65
65
0.13
0.00
0.13
—
—
—
—
—
—
—
—
(5)
5
(5)
—
—
0.01
(0.01)
0.00
147
$
4.1 %
—
$ —
$ 568
$ (4) $
0.0 %
0.0 % 15.7 % (0.1)%
414
$
11.5 %
0.71 $
0.10 $ 0.82
Reported
sales (or effective tax
rate for income tax
expense (benefit))
13
Tax matters
$1,530 $
42.4 %
Adjusted percent of net
Adjusted
815
$
22.6 %
468
$ 103
$ 365
$
13.0 % 22.0 %
10.1 %
sales (or effective tax
rate for income tax
expense)
Income (loss) from continuing operations
Less: Net income attributable to noncontrolling interests
Income (loss) from continuing operations attributable to Baxter stockholders
Weighted-average diluted shares as reported
Effect of dilutive securities that were anti-dilutive to dilutive EPS as reported
Weighted-average diluted shares as adjusted
Reported
Adjusted
$(2,991) $
365
3
3
$(2,994) $
362
504
3
507
52
$ 417
$
1.4 % 11.6 %
BAXTER — PAGE 11
1
The company’s results in 2023 and 2022 included intangible asset amortization expense of $162 million ($127 million, or $0.25 per diluted share, on an after-tax basis) and $168 million
($126 million, or $0.25 per diluted share, on an after-tax basis), respectively.
2
The company’s results in 2023 and 2022 included charges of $81 million ($62 million, or $0.12 per diluted share, on an after-tax basis) and $73 million ($52 million, or $0.10 per
diluted share, on an after-tax basis), respectively, associated with its execution of programs to optimize its organization and cost structure. These restructuring and other business
optimization costs included actions related to its current implementation of a new operating model intended to simplify and streamline its operations, its integration of Hill-Rom
Holdings, Inc. (Hillrom), the decision to cease production of dialyzers at one of its U.S.-based manufacturing facilities later this year, which resulted in a $243 million noncash
impairment of property, plant and equipment in the second quarter of 2023, rationalization of certain other manufacturing and distribution facilities and transformation of certain general
and administrative functions.
3
The company’s results in 2023 included $2 million ($1 million, or $0.00 per diluted share, on an after-tax basis) of acquisition and integration-related items. That amount includes $2
million of integration costs, which included costs related to its integration of Hillrom. The company’s results in 2022 included $4 million ($2 million, or $0.00 per diluted share, on an
after-tax basis) of acquisition and integration-related items. That amount includes $10 million of costs related to its acquisition of Hillrom, partially offset by a $6 million benefit from a
change in the estimated fair value of contingent consideration liabilities.
4
The company’s results of continuing operations in 2023 included $77 million ($77 million, or $0.15 per diluted share, on an after-tax basis) of separation-related costs. This amount
includes costs of external advisors supporting its activities to prepare for the proposed spinoff of its Kidney Care segment, which are reported in continuing operations. The company’s
results of discontinued operations in 2023 included $4 million ($4 million, or $0.01 per diluted share, on an after-tax basis) of separation-related costs related to the sale of its BioPharma
Solutions (BPS) business.
5
The company’s results in 2023 and 2022 included costs of $14 million ($10 million, or $0.02 per diluted share, on an after-tax basis) and $12 million ($9 million, or $0.02 per diluted
share, on an after-tax basis), respectively, of incremental costs to comply with the European Union’s medical device regulations for previously registered products, which primarily
consist of contractor costs and other direct third-party costs. The company considers the adoption of these regulations to be a significant one-time regulatory change and believes that the
costs of initial compliance for previously registered products over the implementation period are not indicative of its core operating results.
6
The company’s results in 2023 included costs, including associated legal fees, of $13 million ($10 million, or $0.02 per diluted share, on an after-tax basis) related to matters involving
alleged violations of the False Claims Act related to a now-discontinued legacy Hillrom sales line, and alleged injury from environmental exposure.
7
The company’s results in 2023 included long-lived asset impairment charges of $267 million ($205 million, or $0.40 per diluted share, on an after-tax basis) related to the Hemodialysis
business within its Kidney Care segment. The company’s results in 2022 included charges of $332 million ($254 million, or $0.50) per diluted share, on an after-tax basis) related to
indefinite-lived intangible asset impairments.
8
The company’s results of discontinued operations in 2023 included a gain of $2.89 billion ($2.60 billion, or $5.11 per diluted share, on an after-tax basis) from the sale of its BPS
business.
9
The company’s results in 2022 included charges of $20 million ($18 million, or $0.04 per diluted share, on an after-tax basis) related to warranty and remediation activities from a field
corrective action on certain of our infusion pumps.
10
The company’s results in 2022 included a charge of $2.79 billion (2.79 billion, or $5.49 per diluted share, on an after-tax basis) related to a goodwill impairment.
11
The company’s results in 2022 included a loss of $54 million ($40 million, or $0.08 per diluted share, on an after-tax basis) related to an arrangement to divest certain product rights for
an amount that is less than the cost of those product rights which was triggered by U.S. and European Union regulatory approvals of the related products.
12
The company’s results in 2022 included a charge of $65 million ($65 million, or $0.13 per diluted share, on an after-tax basis) related to cumulative translation adjustments reclassified
from accumulated other comprehensive income (loss) as a result of the substantial liquidation of its operations in Argentina.
13
The company’s results of continuing operations in 2023 included tax items totaling a $196 million ($0.39 per diluted share), primarily comprised of a $209 million reallocation of income
tax expense between discontinued operations and continuing operations resulting from the application of intraperiod tax allocation to the company’s adjusted results. That item was
partially offset by $13 million of separation-related tax costs. The company’s results of continuing operations in 2022 included a $5 million reallocation of income taxes between
continuing operations and discontinued operations resulting from the application of intraperiod tax allocation to the company’s adjusted results.
For more information on the company’s use of non-GAAP financial measures, please see the Non-GAAP Financial Measures section of this press release.
BAXTER — PAGE 12
BAXTER INTERNATIONAL INC.
Consolidated Statements of Income (Loss)
(unaudited)
(in millions, except per share and percentage data)
Nine Months Ended
September 30,
NET SALES
$
2023
10,928
$
2022
10,761
Change
2%
COST OF SALES
7,425
7,083
5%
GROSS MARGIN
3,503
3,678
(5)%
% of Net Sales
32.1 %
2,961
34.2 %
2,958
(2.1 pts)
27.1 %
495
27.5 %
448
(0.4 pts)
4.2 %
2,785
0.3 pts
GOODWILL IMPAIRMENTS
4.5 %
—
OTHER OPERATING INCOME, NET
(14)
20
NM
OPERATING INCOME (LOSS)
61
(2,533)
% of Net Sales
INTEREST EXPENSE, NET
0.6 %
369
(23.5)%
278
OTHER (INCOME) EXPENSE, NET
33
1
NM
(341)
(199)
(2,812)
(14)
(88)%
INCOME TAX EXPENSE
% of Income (Loss) from Continuing Operations Before Income Taxes
58.4 %
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
% of Net Sales
RESEARCH AND DEVELOPMENT EXPENSES
% of Net Sales
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
0.5 %
0%
10 %
NM
NM
24.1 pts
33 %
NM
(57.9 pts)
LOSS FROM CONTINUING OPERATIONS
(142)
(2,798)
NM
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
2,559
192
NM
NET INCOME (LOSS)
2,417
(2,606)
NM
6
8
(25)%
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
NET INCOME (LOSS) ATTRIBUTABLE TO BAXTER STOCKHOLDERS
$
2,411
$
(2,614)
NM
Basic
$
(0.29)
$
(5.58)
(95)%
Diluted
$
(0.29)
$
(5.58)
(95)%
Basic
$
5.06
$
0.38
NM
Diluted
$
5.06
$
0.38
NM
Basic
$
4.76
$
(5.20)
NM
Diluted
$
4.76
$
(5.20)
NM
INCOME (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE
INCOME FROM DISCONTINUED OPERATIONS PER COMMON SHARE
NET INCOME (LOSS) PER COMMON SHARE
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING
1
Basic
506
503
Diluted
506
503
ADJUSTED OPERATING INCOME (excluding special items)¹
ADJUSTED INCOME (LOSS) FROM CONTINUING OPERATIONS (excluding
special items)¹
ADJUSTED INCOME FROM DISCONTINUED OPERATIONS (excluding special
items)1
ADJUSTED NET INCOME ATTRIBUTABLE TO BAXTER STOCKHOLDERS
(excluding special items)¹
ADJUSTED DILUTED EPS FROM CONTINUING OPERATIONS (excluding special
items)1
ADJUSTED DILUTED EPS FROM DISCONTINUED OPERATIONS (excluding
special items)1
$
1,493
$
1,683
(11)%
$
878
$
1,149
(24)%
$
175
$
187
(6)%
$
1,047
$
1,328
(21)%
$
1.72
$
2.25
(24)%
$
0.35
$
0.37
(5)%
ADJUSTED DILUTED EPS (excluding special items)¹
$
2.07
$
2.61
(21)%
Refer to page 13 for a description of the adjustments and a reconciliation to U.S. GAAP measures.
NM – Not Meaningful
BAXTER — PAGE 13
BAXTER INTERNATIONAL INC.
Description of Adjustments and Reconciliation of U.S. GAAP to Non-GAAP Measures
(unaudited, in millions)
The company’s U.S. GAAP results for the nine months ended September 30, 2023 included special items which impacted the U.S. GAAP measures as follows:
Reported
Income
(Loss) From
Continuing
Selling,
Other
Other
Operations
General and Research and Operating Operating (Income)
Before
Gross Administrative Development Income,
Income Expense,
Income
Margin
Expenses
Expenses
Net
(Loss)
Net
Taxes
Diluted
Income
Net Income
Earnings
Diluted
Income
(Loss)
Income From
(Loss)
Per Share Earnings Per Diluted
Tax
From
Discontinued
Net
Attributable
From
Share from Earnings
Expense Continuing Operations, Income
to Baxter
Continuing Discontinued
Per
(Benefit) Operations Net of Tax
(Loss) Stockholders Operations Operations
Share
$3,503 $
$ (199)
2,961
$
495
$ (14)
$
61
$ 33
$
(341)
$ (142)
$
2,559
$2,417 $ 2,411
(0.29) $
5.06 $ 4.76
Reported percent of net sales (or 32.1 %
effective tax rate for income tax
expense)
27.1 %
4.5 %
(0.1)%
0.6 %
0.3 %
(3.1)%
58.4 %
(1.3)%
Intangible asset amortization1
326
(155)
—
—
481
—
481
106
375
—
375
375
0.74
0.00
0.74
2
Business optimization items
327
(169)
(12)
—
508
—
508
92
416
1
417
417
0.82
0.00
0.82
Acquisition and integration
items3
1
(15)
—
14
2
—
2
1
1
—
1
1
0.00
0.00
0.00
Separation-related costs
15
(108)
—
—
123
—
123
—
123
19
142
142
0.24
0.04
0.28
European medical devices
regulation5
38
—
—
—
38
—
38
11
27
—
27
27
0.05
0.00
0.05
Investment Impairments6
—
—
—
—
—
(20)
20
5
15
—
15
15
0.03
0.00
0.03
Legal matters
—
(13)
—
—
13
—
13
3
10
—
10
10
0.02
0.00
0.02
Long-lived asset impairments8
267
—
—
—
267
—
267
62
205
—
205
205
0.40
0.00
0.40
—
—
—
—
—
—
—
—
—
(2,603)
(2,603)
(2,603)
0.00
(5.13)
(5.13)
—
—
—
—
—
152
(152)
199
47
47
(0.30)
0.39
0.09
878
$
8.0 %
175
$1,053 $ 1,047
$
1.6 % 9.6 %
9.6 %
1.72 $
0.35 $ 2.07
4
7
9
Gain on BPS Sale
15
Tax Matters
Adjusted
—
$4,477 $
Adjusted percent of net sales (or 41.0 %
effective tax rate for income tax
expense)
—
2,501
$
22.9 %
483
$ —
$1,493
$ 13
$
4.4 %
0.0 % 13.7 %
0.1 %
Income (loss) from continuing operations
Less: Net income attributable to noncontrolling interests
Income (loss) from continuing operations attributable to Baxter stockholders
Weighted-average diluted shares as reported
Effect of dilutive securities that were anti-dilutive to dilutive EPS as reported
Weighted-average diluted shares as adjusted
$
$
1,111
$ 233
$
10.2 % 21.0 %
Reported
Adjusted
(142)
6
(148)
$ 878
6
$ 872
506
1
507
23.4 % 22.1 %
$
22.1 %
BAXTER — PAGE 13
The company’s U.S. GAAP results for the nine months ended September 30, 2022 included special items which impacted the U.S. GAAP measures as follows:
Income
(Loss) From
Continuing
Selling,
Other
Other
Operations
General and Research and
Operating Operating (Income)
Before
Gross Administrative Development Goodwill Expense, Income Expense,
Income
Margin
Expenses
Expenses
Impairment
Net
(Loss)
Net
Taxes
Reported
$3,678 $
Reported percent of 34.2 %
net sales (or
effective tax rate for
income tax
expense)
Income
Tax
Expense
(Benefit)
Net Income
Diluted
Diluted
Income
Income From
(Loss)
Earnings Per Earnings Per Diluted
(Loss) From Discontinued
Net
Attributable Share From Share From Earnings
Continuing Operations, Income
to Baxter
Continuing Discontinued
Per
Operations
Net of Tax
(Loss) Stockholders Operations
Operations
Share
2,958
$
27.5 %
448
$ 2,785
$ 20
$(2,533) $ 1
$ (2,812) $
4.2 %
25.9 %
0.2 % (23.5)% 0.0 %
(26.1)%
(14) $ (2,798) $
0.5 %
(26.0)%
192
$(2,606) $ (2,614) $
1.8 % (24.2)%
(24.3)%
(5.58) $
0.38 $ (5.20)
Intangible asset
amortization1
344
(234)
—
—
—
578
—
578
137
441
—
441
441
0.87
0.00
0.87
Business
optimization items2
21
(171)
(4)
—
—
196
—
196
52
144
—
144
144
0.28
0.00
0.28
Acquisition and
integration items3
171
(55)
(1)
—
34
193
—
193
36
157
—
157
157
0.31
0.00
0.31
European medical
devices regulation5
35
—
—
—
—
35
—
35
8
27
—
27
27
0.05
0.00
0.05
Product-related
items10
43
—
—
—
—
43
—
43
5
38
—
38
38
0.07
0.00
0.07
Pension
curtailment11
—
—
—
—
—
—
11
(11)
(2)
(9)
—
(9)
(9)
(0.02)
0.00
(0.02)
Long-lived asset
impairments8
332
—
—
—
332
—
332
78
254
—
254
254
0.50
0.00
0.50
Goodwill
impairments11
—
—
—
(2,785)
—
2,785
—
2,785
—
2,785
—
2,785
2,785
5.48
0.00
5.48
Loss on product
divestiture
arrangement13
—
—
—
—
(54)
54
—
54
14
40
—
40
40
0.08
0.00
0.08
Reclassification of
cumulative
translation loss to
earnings14
—
—
—
—
—
—
(65)
65
—
65
—
65
65
0.13
0.00
0.13
Tax matters15
—
—
—
—
—
—
—
—
(5)
5
(5)
—
—
0.01
(0.01)
0.00
$4,624 $
2,498
$
23.2 %
443
$
4.1 %
—
$ —
$1,683
$ (53) $ 1,458
$ 309
$ 1,149
$
0.0 %
0.0 % 15.6 % (0.5)%
13.5 %
21.2 %
10.7 %
1,328
12.3 %
2.25
0.37
2.62
Adjusted
Adjusted percent of 43.0 %
net sales (or
effective tax rate for
income tax
expense)
187
$1,336 $
1.7 % 12.4 %
BAXTER — PAGE 13
Income (loss) from continuing operations
Less: Net income attributable to noncontrolling interests
Income (loss) from continuing operations attributable to Baxter stockholders
Weighted-average diluted shares as reported
Effect of dilutive securities that were anti-dilutive to dilutive EPS as reported
Weighted-average diluted shares as adjusted
Reported
Adjusted
$(2,798)
$ 1,149
8
8
$(2,806)
$ 1,141
503
5
508
1
The company’s results in 2023 and 2022 included intangible asset amortization expense of $481 million ($375 million, or $0.74 per diluted share, on an after-tax basis) and $578 million
($441 million, or $0.87 per diluted share, on an after-tax basis), respectively.
2
The company’s results in 2023 and 2022 included charges of $508 million ($416 million, or $0.82 per diluted share, on an after-tax basis) and $196 million ($144 million, or $0.28 per
diluted share, on an after-tax basis), respectively, associated with its execution of programs to optimize its organization and cost structure. These restructuring and other business
optimization costs included actions related to its implementation of a new operating model intended to simplify and streamline its operations, its integration of Hillrom, the decision to
cease production of dialyzers at one its U.S.-based manufacturing facilities later this year, which resulted in a $243 million noncash impairment of property, plant and equipment in the
first half of 2023, rationalization of certain other manufacturing and distribution facilities and transformation of certain general and administrative functions.
3
The company’s results in 2023 included a $2 million ($1 million, or $0.00 per diluted share, on an after-tax basis) of acquisition and integration-related expenses. That amount included
$16 million of costs related to its integration of Hillrom, partially offset by a $14 million benefit from changes in the estimated fair values of contingent consideration liabilities. The
company’s results in 2022 included $193 million ($157 million, or $0.31 per diluted share, on an after-tax basis) of acquisition and integration-related expenses. That amount includes
$227 million of costs related to its acquisition of Hillrom, including $159 million of incremental costs of sales from the fair value step-ups on acquired Hillrom inventory that was sold in
the first quarter. The acquisition and integration-related expenses related to Hillrom were partially offset by $34 million of benefits from changes in the estimated fair value of contingent
consideration liabilities.
4
The company’s results of continuing operations in 2023 included costs of $123 million ($123 million, or $0.24 per diluted share, on an after-tax basis) of separation-related costs. This
amount includes costs of external advisors supporting its activities to prepare for the proposed spinoff of its Kidney Care segment, which are reported in continuing operations. The
company’s results of discontinued operations in 2023 included $19 million ($19 million, or $0.04 per diluted share, on an after-tax basis) of separation-related costs related to the sale of
its BioPharma Solutions (BPS) business.
5
The company’s results in 2023 and 2022 included costs of $38 million ($27 million, or $0.05 per diluted share, on an after-tax basis) and $35 million ($27 million, or $0.05 per diluted
share, on an after-tax basis), respectively, of incremental costs to comply with the European Union’s medical device regulations for previously registered products, which primarily
consist of contractor costs and other direct third-party costs. The company considers the adoption of these regulations to be a significant one-time regulatory change and believes that the
costs of initial compliance for previously registered products over the implementation period are not indicative of its core operating results.
6
The company’s results in 2023 included losses of $20 million ($15 million, or $0.03 per diluted share, on an after-tax basis) from non-marketable investments in several early stage
companies, consisting of $23 million of noncash impairment write-downs, partially offset by a $3 million gain from the sale of an investment.
7
The company’s results of continuing operations in 2023 included costs, including associated legal fees, of $13 million ($10 million, or $0.02 per diluted share, on an after-tax basis) are
related to matters involving alleged violations of the False Claims Act related to a now-discontinued legacy Hillrom sales line, and alleged injury from environmental exposure.
8
The company’s results in 2023 included long-lived asset impairment charges of $267 million ($205 million, or $0.40 per diluted share, on an after-tax basis) related to the Hemodialysis
business within its Kidney Care segment. The company’s results in 2022 included charges of $332 million ($254 million, or $0.50 per diluted share, on an after-tax basis) related to
indefinite-lived intangible asset impairments.
BAXTER — PAGE 13
9
The company’s results of discontinued operations in 2023 included a gain of $2.89 billion ($2.60 billion, or $5.13 per diluted share, on an after-tax basis) from the sale of its BPS
business.
10
The company’s results in 2022 included charges of $43 million ($38 million, or $0.07 per diluted share, on an after-tax basis) related to warranty and remediation activities from two
field corrective actions on certain of its infusion pumps.
11
The company’s results in 2022 included a curtailment gain of $11 million ($9 million, or $0.02 per diluted share, on an after-tax basis) on an announced change for active non-bargaining
participants in our U.S. Hillrom pension plan.
12
The company’s results in 2022 included charges of $2.79 billion ($2.79 billion, or $5.48 per diluted share, on an after-tax basis) related to goodwill and indefinite-lived intangible asset
impairments.
13
The company’s results in 2022 included a loss of $54 million ($40 million, or $0.08 per diluted share, on an after-tax basis) related to an arrangement to divest certain product rights for
an amount that is less than the cost of those product rights which was triggered by U.S. and European Union regulatory approvals of the related products.
14
The company’s results in 2022 included a charge of $65 million ($65 million, or $0.13 per diluted share, on an after-tax basis) related to cumulative translation adjustments reclassified
from accumulated other comprehensive income (loss) as a result of the substantial liquidation of its operations in Argentina.
15
The company’s results of continuing operations in 2023 included tax expense items totaling $152 million ($0.30 per diluted share), primarily comprised of a $199 million reallocation of
income tax expense between discontinued operations and continuing operations resulting from the application of intraperiod tax allocation to the company’s adjusted results. That item
was partially offset by a $30 million valuation allowance recorded to reduce the carrying amount of a deferred tax asset for a tax basis step-up related to previously enacted Swiss tax
legislation and $17 million of separation-related tax costs. The company’s results of continuing operations in 2022 included a $5 million reallocation of income taxes between continuing
operations and discontinued operations resulting from the application of intraperiod tax allocation to the company’s adjusted results.
For more information on the company’s use of non-GAAP financial measures, please see the Non-GAAP Financial Measures section of this press release.
BAXTER — PAGE 14
BAXTER INTERNATIONAL INC.
Sales by Operating Segment
(unaudited)
($ in millions)
The Medical Products and Therapies segment includes sales of our sterile IV solutions, infusion systems, administration sets,
parenteral nutrition therapies and surgical hemostat, sealant and adhesion prevention products. The Healthcare Systems and
Technologies segment includes sales of our connected care solutions and collaboration tools, including smart bed systems,
patient monitoring systems and diagnostic technologies, respiratory health devices and advanced equipment for the surgical
space, including surgical video technologies, precision positioning devices and other accessories. The Pharmaceuticals segment
includes sales of specialty injectable pharmaceuticals, inhaled anesthesia and drug compounding. The Kidney Care segment
includes sales of chronic and acute dialysis therapies and services, including peritoneal dialysis, hemodialysis, continuous renal
replacement therapies (CRRT) and other organ support therapies. Other sales not allocated to a segment primarily include sales
of products and services provided directly through certain of our manufacturing facilities.
Three Months Ended
September 30,
2023
Infusion Therapies and Technologies
Advanced Surgery
$ 1,003 $
2022
Nine Months Ended
September 30,
% Growth % Growth
@ Actual @ Constant
Rates
Rates
956
5%
4%
2023
2022
$ 2,918 $ 2,829
% Growth
@ Actual
Rates
% Growth
@ Constant
Rates
3%
4%
255
247
3%
3%
773
738
5%
6%
Medical Products and Therapies
1,258
1,203
5%
4%
3,691
3,567
3%
4%
Care and Connectivity Solutions
443
456
(3)%
(4)%
1,307
1,350
(3)%
(3)%
Front Line Care
301
279
8%
8%
911
855
7%
7%
Healthcare Systems and Technologies
744
735
1%
0%
2,218
2,205
1%
1%
Injectables and Anesthesia
351
325
8%
7%
987
961
3%
4%
Drug Compounding
229
200
15 %
13 %
665
613
8%
12 %
Pharmaceuticals
580
525
10 %
9%
1,652
1,574
5%
7%
Chronic Therapies
921
934
(1)%
(3)%
2,730
2,744
(1)%
1%
Acute Therapies
188
166
13 %
12 %
564
542
4%
6%
Kidney Care
1,109
1,100
1%
0%
3,294
3,286
0%
2%
17
46
(63)%
(61)%
73
129
(43)%
(46)%
$ 3,708 $ 3,609
3%
2%
$ 10,928 $ 10,761
2%
3%
Other
Total – Continuing Operations
In connection with our segment change in the third quarter of 2023, we made the following reclassifications of prior period sales amounts to
conform to the current period presentation. We reclassified $16 million of sales from the first half of 2023 and $8 million and $23 million for the
three and nine months ended September 30, 2022, respectively, from Chronic Therapies to Acute Therapies. Additionally, in connection with the
reclassification of our BPS business to discontinued operations during the second quarter of 2023, we reclassified $2 million of contract
manufacturing revenues from the first quarter of 2023 and $8 million and $26 million for the three and nine months ended September 30, 2022,
respectively, from BPS to Other (within continuing operations), as the related manufacturing facility was not part of that divestiture transaction.
Constant currency growth is a non-GAAP measure. For more information on the company’s use of non-GAAP financial measures, please see
the Non-GAAP Financial Measures section of this press release.
BAXTER — PAGE 15
BAXTER INTERNATIONAL INC.
Segment Operating Income
(unaudited)
($ in millions)
Three months ended
September 30,
(in millions)
Medical Products and Therapies
2023
$
Nine months ended
September 30,
2022
245
$
2023
257
$
2022
706
$
703
% of Segment Net Sales
19.5 %
21.4 %
19.1 %
19.7 %
Healthcare Systems and Technologies
115
108
327
367
% of Segment Net Sales
15.5 %
14.7 %
14.7 %
16.6 %
Pharmaceuticals
108
82
284
295
% of Segment Net Sales
18.6 %
15.6 %
17.2 %
18.7 %
Kidney Care
96
103
208
307
% of Segment Net Sales
8.7 %
9.4 %
6.3 %
9.3 %
6
17
19
52
Total
Unallocated corporate costs
Other
570
(5)
567
1
1,544
(51)
1,724
(41)
Intangible asset amortization expense
(162)
(168)
(481)
(578)
Long-lived asset impairments
(267)
(332)
(267)
(332)
Legal matters
(13)
—
(13)
—
Goodwill impairments
—
(2,785)
—
(2,785)
Business optimization items
(81)
(73)
(508)
(196)
Acquisition and integration items
(2)
(4)
(2)
(193)
Loss on product divestiture arrangement
—
(54)
—
(54)
Divestiture-related costs
(77)
—
(123)
—
European Medical Devices Regulation
(14)
(12)
(38)
(35)
Product-related items
—
(20)
—
(43)
Total operating income (loss)
(51)
(2,880)
61
(2,533)
Interest expense, net
128
104
369
278
Other (income) expense, net
(7)
61
33
1
Loss from continuing operations before
income taxes
$
(172)
$
(3,045)
$
(341)
$
(2,812)
BAXTER — PAGE 16
BAXTER INTERNATIONAL INC.
Operating Segment Sales by U.S. and International
(unaudited)
($ in millions)
Three Months Ended September 30,
2023
U.S.
Infusion Therapies and
Technologies
Total
U.S.
Total
U.S.
International
Total
570 $
433 $ 1,003
567 $
389 $
956
1 %
11 %
5 %
139
116
255
141
106
247
(1) %
9 %
3 %
Medical Products and
Therapies
709
549
1,258
708
495
1,203
0 %
11 %
5 %
Care and Connectivity
Solutions
317
126
443
339
117
456
(6) %
8 %
(3) %
Front Line Care
234
67
301
209
70
279
12 %
(4) %
8 %
Healthcare Systems and
Technologies
551
193
744
548
187
735
1 %
3 %
1 %
Injectables and Anesthesia
195
156
351
173
152
325
13 %
3 %
8 %
Drug Compounding
—
229
229
—
200
200
0 %
15 %
15 %
Pharmaceuticals
195
385
580
173
352
525
13 %
9 %
10 %
Chronic Therapies
233
688
921
236
698
934
(1) %
(1) %
(1) %
Acute Therapies
66
122
188
57
109
166
16 %
12 %
13 %
Kidney Care
299
810
1,109
293
807
1,100
2 %
0 %
1 %
Other
12
5
17
36
10
46
(67) %
(50) %
(63) %
1,851 $ 3,609
0%
5%
3%
$ 1,766 $
1,942 $ 3,708
$
% Growth
International
Advanced Surgery
Total – Continuing
Operations
$
2022
International
$ 1,758 $
BAXTER — PAGE 17
BAXTER INTERNATIONAL INC.
Operating Segment Sales by U.S. and International
(unaudited)
($ in millions)
Nine Months Ended September 30,
2023
2022
U.S. International
Infusion Therapies and
Technologies
1,264 $ 2,918
% Growth
U.S. International
$ 1,672 $
Total
1,157 $ 2,829
U.S. International
Total
(1)%
9%
3%
433
340
773
428
310
738
1%
10 %
5%
Medical Products and
Therapies
2,087
1,604
3,691
2,100
1,467
3,567
(1)%
9%
3%
Care and Connectivity
Solutions
926
381
1,307
991
359
1,350
(7)%
6%
(3)%
Front Line Care
10 %
(3)%
7%
Advanced Surgery
$ 1,654 $
Total
681
230
911
618
237
855
Healthcare Systems and
Technologies
1,607
611
2,218
1,609
596
2,205
(0)%
3%
1%
Injectables and Anesthesia
550
437
987
494
467
961
11 %
(6)%
3%
Drug Compounding
—
665
665
—
613
613
0%
8%
8%
Pharmaceuticals
550
1,102
1,652
494
1,080
1,574
11 %
2%
5%
Chronic Therapies
689
2,041
2,730
675
2,069
2,744
2%
(1)%
(1)%
Acute Therapies
194
370
564
194
348
542
0%
6%
4%
Kidney Care
883
2,411
3,294
869
2,417
3,286
2%
(0)%
0%
Other
56
17
73
98
31
129
(43)%
(45)%
(43)%
5,591 $10,761
0%
3%
2%
Total – Continuing
Operations
$ 5,183 $
5,745 $10,928
$ 5,170 $
BAXTER — PAGE 18
BAXTER INTERNATIONAL INC.
Reconciliation of Non-GAAP Financial Measure
Operating Cash Flow to Free Cash Flow
(unaudited)
($ in millions)
Nine Months Ended September 30,
2023
Cash flows from operations – continuing operations
$
2022
1,097
$
594
Cash flows from investing activities – continuing operations
(489)
(634)
Cash flows from financing activities – continuing operations
(554)
(1,319)
Cash flows from operations – continuing operations
$
1,097
Capital expenditures – continuing operations
$
594
(502)
Free cash flow – continuing operations
$
595
(438)
$
156
Nine Months Ended September 30,
2023
Cash flows from operations – discontinued operations
$
Cash flows from investing activities – discontinued operations
Cash flows from operations – discontinued operations
$
98
178
3,932
(41)
98 $
Capital expenditures – discontinued operations
Free cash flow – discontinued operations
2022
$
178
(27)
(41)
71 $
137
Nine Months Ended September 30,
2023
1,195 $
772
Cash flows from investing activities – Total Baxter
3,443
(675)
Cash flows from financing activities – Total Baxter
(554)
(1,319)
1,195 $
772
(529)
(479)
666 $
293
Cash flows from operations – Total Baxter
Cash flows from operations – Total Baxter
$
2022
$
Capital expenditures – Total Baxter
Free cash flow – Total Baxter
$
Free cash flow is a non-GAAP measure. For more information on the company’s use of non-GAAP financial measures, please see the NonGAAP Financial Measures section of this press release.
BAXTER — PAGE 19
BAXTER INTERNATIONAL INC.
Reconciliation of Non-GAAP Financial Measure
Change in Net Sales Growth As Reported to Constant Currency Sales Growth
From The Three Months Ended September 30, 2022 to The Three Months Ended September 30, 2023
(unaudited)
Net Sales
Growth
As Reported
Infusion Therapies and Technologies
Advanced Surgery
Medical Products and Therapies
Care and Connectivity Solutions
Front Line Care
Healthcare Systems and Technologies
Injectables and Anesthesia
Drug Compounding
Pharmaceuticals
Chronic Therapies
Acute Therapies
Kidney Care
Other
Total – Continuing Operations
Discontinued Operations
Total – Continuing and Discontinued Operations
5 %
3 %
5%
(3) %
8 %
1%
8 %
15 %
10 %
(1) %
13 %
1%
(63)%
3%
16 %
3%
Constant
Currency Sales
Growth*
FX
(1) %
4 %
0 %
3 %
(1) %
4 %
(1) %
(4) %
0 %
8 %
(1) %
0 %
(1) %
(2) %
(1)%
(2) %
(1) %
(1)%
2%
7 %
13 %
9%
(3) %
12 %
0%
(61)%
(1) %
2 %
(5) %
11 %
(1) %
2 %
U.S. – Continuing Operations
0%
0%
0%
U.S. – Discontinued Operations
(13)%
0%
(13)%
U.S. Total – Continuing and Discontinued Operations
0%
0%
0%
International – Continuing Operations
5%
(2)%
3%
International – Discontinued Operations
53 %
(12)%
41 %
International Total – Continuing and Discontinued Operations
7%
(3)%
4%
*Totals may not add across due to rounding
Constant currency sales growth is a non-GAAP measure. For more information on the company’s use of non-GAAP financial measures,
please see the Non-GAAP Financial Measures section of this press release.
BAXTER — PAGE 20
BAXTER INTERNATIONAL INC.
Reconciliation of Non-GAAP Financial Measure
Change in Net Sales Growth As Reported to Constant Currency Sales Growth
From The Nine Months Ended September 30, 2022 to The Nine Months Ended September 30, 2023
(unaudited)
Net Sales
Growth
As Reported
Infusion Therapies and Technologies
Advanced Surgery
Medical Products and Therapies
Care and Connectivity Solutions
Front Line Care
Healthcare Systems and Technologies
Injectables and Anesthesia
Drug Compounding
Pharmaceuticals
Chronic Therapies
Acute Therapies
Kidney Care
Other
Total – Continuing Operations
Discontinued Operations
Total – Continuing and Discontinued Operations
3 %
5 %
3%
(3) %
7 %
1%
3 %
8 %
5%
(1) %
4 %
0%
(43)%
2%
1 %
2%
Constant
Currency Sales
Growth*
FX
1 %
4 %
1 %
6 %
1 %
4 %
0 %
(3) %
0 %
7 %
0 %
1 %
1 %
4 %
4 %
12 %
2 %
7 %
2 %
1 %
2 %
6 %
2%
(3)%
2%
(46)%
1 %
3 %
(1) %
0 %
0 %
2 %
U.S. – Continuing Operations
0%
0%
0%
U.S. – Discontinued Operations
6%
0%
6%
U.S. Total – Continuing and Discontinued Operations
0%
0%
0%
International – Continuing Operations
3%
2%
5%
International – Discontinued Operations
(3)%
(2)%
(5)%
International Total – Continuing and Discontinued Operations
3%
1%
4%
*Totals may not add across due to rounding
Constant currency sales growth is a non-GAAP measure. For more information on the company’s use of non-GAAP financial measures,
please see the Non-GAAP Financial Measures section of this press release.
BAXTER — PAGE 21
BAXTER INTERNATIONAL INC.
Reconciliation of Non-GAAP Financial Measures
Projected Fourth Quarter and Full Year 2023 Continuing Operations U.S. GAAP Sales Growth to Projected Continuing
Operations Constant Currency Sales Growth and Projected Fourth Quarter and Full Year 2023 Adjusted Earnings Per
Share
(unaudited)
Sales Growth Guidance**
Q4 2023
FY 2023*
Continuing operations sales growth – U.S. GAAP
1 – 2%
1 – 2%
Foreign Exchange
~(0.5)%
~ 0.5%
Continuing operations sales growth – Constant currency
~ 1%
~ 2%
Q4 2023
FY 2023
Adjusted Earnings Per Share Guidance
Adjusted diluted EPS – Continuing operations
$0.85 – $0.88 $2.57 – $2.60
*Totals may not foot due to rounding
Baxter calculates forward-looking non-GAAP financial measures based on forecasts that omit certain amounts that would be
included in GAAP financial measures. For instance, forward-looking adjusted diluted EPS guidance excludes potential charges
or gains that would be reflected as non-GAAP adjustments to earnings. Baxter provides forward-looking adjusted diluted EPS
guidance because it believes that this measure provides useful information for the reasons noted in the accompanying release.
Baxter has not provided reconciliations of forward-looking adjusted EPS guidance to forward-looking GAAP EPS guidance
because the company is unable to predict with reasonable certainty the impact of legal proceedings, future business
optimization actions, separation-related costs, integration-related costs, asset impairments and unusual gains and losses, and the
related amounts are unavailable without unreasonable efforts (as specified in the exception provided by Item 10(e)(1)(i)(B) of
Regulation S-K). In addition, Baxter believes that such reconciliations would imply a degree of precision and certainty that
could be confusing to investors. Such items could have a substantial impact on GAAP measures of financial performance.
REFINITIV STREETEVENTS
EDITED TRANSCRIPT
BAX.N – Q3 2023 Baxter International Inc Earnings Call
EVENT DATE/TIME: NOVEMBER 02, 2023 / 12:30PM GMT
OVERVIEW:
Company Summary
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
CORPORATE PARTICIPANTS
Brian Stevens
Clare Trachtman Baxter International Inc. – VP of IR
Joel T. Grade Baxter International Inc. – Executive VP & CFO
Jose E. Almeida Baxter International Inc. – Chairman of the Board, President & CEO
CONFERENCE CALL PARTICIPANTS
Danielle Joy Antalffy UBS Investment Bank, Research Division – Analyst
Frederick Allen Wise Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Equity Research Analyst
Joanne Karen Wuensch Citigroup Inc., Research Division – MD
Matthew Stephan Miksic Barclays Bank PLC, Research Division – Research Analyst
Philip Chickering Deutsche Bank AG, Research Division – Research Analyst
Robert Justin Marcus JPMorgan Chase & Co, Research Division – Analyst
Travis Lee Steed BofA Securities, Research Division – MD
Vijay Muniyappa Kumar Evercore ISI Institutional Equities, Research Division – Senior MD and Head of Medical Supplies & Devices and Life Science Tools & Diagnostics Team
PRESENTATION
Operator
Good morning, ladies and gentlemen, and welcome to Baxter International’s Third Quarter 2023 Earnings Conference Call. (Operator Instructions)
As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter’s permission.
If you have any objections, please disconnect at this time.
I would now like to turn the call over to Ms. Clare Trachtman, Senior Vice President, Chief Investor Relations Officer at Baxter International. Ms.
Trachtman, you may begin.
Clare Trachtman – Baxter International Inc. – VP of IR
Good morning, and welcome to our third quarter 2023 earnings conference call. Joining me today are Joe Almeida, Baxter’s Chairman and Chief
Executive Officer; Joel Grade, Baxter’s newly appointed Executive Vice President and Chief Financial Officer; and Brian Stevens, Baxter’s Senior Vice
President, Chief Accounting Officer, Controller and former Interim CFO.
On the call this morning, we will be discussing Baxter’s third quarter 2023 financial results along with our financial outlook for the fourth quarter
and full year 2023. Please note that we closed the sale of our BioPharma Solutions or BPS business at the end of the third quarter and results in the
current and prior periods have been adjusted to reflect BPS as discontinued operations.
Restated schedules reflecting net discontinued operations presentation are included in the appendix to our earnings presentation and available
in the IR section of our website.
With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook
for the fourth quarter and full year 2023, new product developments, including the impact and status of pending regulatory approvals, the status
and potential impact of our ongoing strategic and recent pricing actions, business development, regulatory matters and the macroeconomic
2
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
environment, including commentary on continuing supply chain challenges and evolving customer capital spending trends, contain forward-looking
statements that involve risks and uncertainties and, of course, our actual results could differ materially from our current expectations.
Please refer to today’s press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In
addition, on today’s call, non-GAAP financial measures will be used to help investors understand Baxter’s ongoing business performance. A
reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in the accompanying
investor presentation and in our earnings release issued this morning, which are both available on our website.
Now I’d like to turn the call over to Joe. Joe?
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Thank you, Clare, and good morning, everyone. We appreciate you taking the time to join us today. I am pleased to be joined this morning by Chief
Accounting Officer and Controller, Brian Stevens, and to welcome our new Chief Financial Officer, Joel Grade, to the call.
I will begin the call today with an overview of our third quarter performance and the continuing momentum of our ongoing transformational
initiatives. I will also share a perspective on the progress and potential of our proposed Kidney Care spin-off, including some context around recent
developments in that therapeutic area.
Brian will provide a more detailed account of Baxter’s third quarter and financial outlook. And as always, we will close with your questions. To get
started, Baxter reported solid third quarter results that came in ahead of our projections, both on the top and bottom line, sales from continuing
operations rose 3% on a reported basis and 2% on a constant currency basis.
As Clare noted earlier, sales from continuing operations exclude Baxter’s BioPharma Solutions, or BPS business, which Baxter divested at the close
of the quarter. Sales in the aggregate, including discontinued operations also increased 3% on a reported basis and 2% on a constant currency
basis.
Our better-than-expected topline performance was driven by positive demand for many of Baxter’s products combined with continued abatement
of supply chain challenges. On the bottom line, third quarter aggregate adjusted earnings per share totaled $0.82, comprising EPS of $0.68 for
continuing operations and $0.14 for discontinued operations. Adjusted EPS from continuing operations exceeded the top end of our outlook range
of $0.65 to $0.67, driven by end market stabilization and good sequential margin improvement across our business, which reflects strong execution
against our strategic priorities.
Overall, and especially when compared to what we’ve seen in recent quarters, we view the current market environment as relatively stable, though
we continue to monitor hospital capital spending, particularly in light of an elevated interest rate environment.
While we have seen sequential improvement in orders within our Care and Connectivity Solutions division, we continue to expect hospitals to
exercise some degree of caution with their capital budgets.
The momentum we are building in financial performance is also reflected in the progress we’re experiencing across the strategic priorities we laid
out for you earlier this year, these initiatives, in combination are focused on enhancing strategic clarity, increasing operational efficiency and
accelerating innovation to deliver greater value for all of our stakeholders.
During the third quarter, we achieved some pivotal milestones towards driving this improved performance. First, we’ve been hard at work realigning
the businesses to simplify and streamline our operating model. These efforts are resulting in a more agile company with better visibility to our
global markets and customers.
In line with this realignment, today is the first time we formally report our results under the new operating model as 4 global vertically integrated
business segments; Medical Products & Therapies, Healthcare Systems & Technologies, Pharmaceuticals and Kidney Care. Each segment now has
3
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
global profit and loss accountability, dedicated commercial operations and fully aligned research and development, manufacturing, supply chain
and functional support teams.
This reorganization is already creating meaningful advantages in helping us set priorities, build alignment and operationalize our strategy, advantages
they have already and our expected to continue to pay dividends going forward. Our new segments are also a reminder of our highly diversified
portfolio with strong brands, a global presence and high trust among clinicians and patients.
The diversity and durability of our portfolio focused on essential healthcare needs helps fuel sustained demand on multiple fronts, allowing us to
better weather challenges that can emerge while continuing to deliver on our mission of saving and sustaining lives.
As discussed, this quarter, we also completed the divestiture of our BioPharma Solutions business, further streamlining our focus on our core
businesses. We are deploying substantially all of our estimated net after-tax cash proceeds of approximately $3.7 billion to pay down debt in
accordance with our stated capital allocation priorities.
The third transformational actions we laid out at the start of the year was the planned separation what is now our Kidney Care segment. We are
making significant progress and currently expect to launch Kidney Care as an independent publicly traded company by July 2024.
I continue to be impressed with the leadership of Chris Toth, who joined us in June as President of our Kidney Care segment and designated CEO
of Vantive. In just 5 months, he has already proven himself as an astute, decisive, engaging leader. He has already surrounded himself with an
outstanding team of experienced direct reports drawn from across Baxter and externally, and we expect to finalize the organizational structure for
the new company by the end of the year.
Meanwhile, the hard work of separating Kidney Care from Baxter is ongoing across commercial, legal, regulatory, supply chain and numerous other
key operational channels.
Just like Baxter, post-separation, Kidney Care will be positioned to benefit from heightened focus and the ability to pursue its unique investment
priorities to serve patients and clinicians drive growth and innovation and create added value for shareholders.
With this as context, I wanted to briefly share some perspectives on recent headlines regarding GLP-1s including Novo Nordisk’s October
announcement about its Flow study and broader speculation about the future of dialysis therapy.
We, like the rest of the dialysis community, continue to follow developments closely. And we are eager to see the Flow study results, which are
expected to be published in the first half of 2024. Given Baxter’s life-sustaining mission, we welcome any new therapeutic approaches that have
the potential to improve the lives of patients, particularly those with chronic conditions.
We also believe that it’s premature to assume that these drugs, particularly given the full trial results have yet to be published, will bring about any
material shift in the need for dialysis services from a global market perspective. We believe that dialysis therapy will remain in demand and a critical
element of patient care for the foreseeable future.
Let me highlight a couple of data points that we believe are relevant. The existing data on demographics and disease patterns continue to consistently
suggest that the global incidence of end-stage kidney disease or ESKD will continue to rise over the next 15 to 20-years. To provide a bit more
context, current data suggests that the global ESKD incidence, overall, will continue to grow, driven by a greater than 35% expected increase in
the prevalence of diabetes by 2040.
At the same time, global demographic data show that the number of people over 65-years old should be increasing by approximately 75% globally
between now and 2040, which is also expected to increase the number of potential patients at risk of developing ESKD. Collectively, these macro
changes suggest the global incidence of ESKD is expected to continue to rise over the next 15 to 20-years, even with important innovations in CKD
therapeutics.
4
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
We also believe these new drugs are doing important work in raising the awareness and prevalence of primary care discussions about CKD diagnosis
and management. We welcome this focus because better informed and empowered patients drive better preparation for dialysis. And studies
have shown that the more informed the patient is about their treatment options, the more likely they are to choose home dialysis over other forms
of dialysis when given the option.
To that end, we are looking forward to seeing the new study data and understanding how it may provide additional options and benefits for
patients with CKD. My excitement for the trajectory of Kidney Care remains high. Our thesis and sense of opportunity for an independent stand-alone
Kidney Care business remain unchanged from the day we first announced the spin.
This has been a year of investment of transformation of important and sometimes difficult steps taken to strengthen our present and redefine our
future. We knew when we first laid out this transformation in January that we had to get it right. And less than a year later, our progress is evident
and our path forward is clear.
We have delivered on our BPS divestiture. We have implemented our verticalized segment structure, and we are well on our way towards achieving
the planned Kidney Care separation. Our continued progress on this transformational journey is a credit to the exceptional hard work and commitment
of our Baxter colleagues worldwide, who, as always, have my profound thanks.
I’m confident that these actions are strongly positioning Baxter and in turn, Kidney Care to unlock meaningful long-term value for all stakeholders.
Now before we take a closer look at our third quarter financials and outlook for the remainder of the year, I want to recognize Brian Stevens for
serving so well as interim CFO for over the past 5-months. We’re also pleased to welcome incoming CFO, Joel Grade, whose wide-ranging experience
and track record make him an outstanding fit at this time of transformation. I will first hand the call over to Joel for a few introductory comments
before Brian then provides a more detailed overview of our results for the quarter.
Joel T. Grade – Baxter International Inc. – Executive VP & CFO
Thanks, Joe. Let me start by saying how excited I am to join all of you today for my first earnings call as Baxter’s new CFO, and more importantly,
how motivated I am to be joining Baxter during such an important point in its transformational journey.
For many years, I’ve admired Baxter as an iconic company with an incredible mission to save and sustain lives. When the opportunity arose to join
the team, I recognized that this is the right next step in my career. The position presented me with the ability to utilize my broad experiences in
finance, operations, strategy and transformation to help the company deliver on its strategic actions that Joe outlined earlier.
While early, I’ve been extremely impressed with the talented and dedicated employees at Baxter and their unwavering passion for and commitment
to our mission. In addition, I’m very optimistic about the numerous opportunities that exist for the company to increase long-term value for our
stakeholders.
Finally, I look forward to both speaking with and meeting many of you over the next coming months. Your perspective on our business and the
surrounding market landscape will be incredibly valuable as we move forward in our transformation journey. With that, I’ll turn it over to Brian to
take us through the Q3 results. Brian, over to you.
Brian Stevens
Thanks, Joel, and good morning, everyone. I’m happy to be joining the call this morning to provide some additional details on Baxter’s third quarter
financial performance as well as commentary on our updated financial outlook.
5
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
As Joe mentioned, we are pleased with our third quarter results, which came in ahead of our expectations. Third quarter 2023 global sales included
$3.71 billion from continuing operations and $191 million from discontinued operations. Sales in the quarter increased 3% on a reported basis and
2% on a constant currency basis and compared favorably to our guidance.
Sales performance in the quarter benefited from better-than-expected sales in Medical Products & Therapies, particularly our infusion systems and
IV Solutions products as well as continued strength in our Pharmaceuticals business, driven by injectables and drug compounding.
On the bottom line, adjusted earnings from continuing operations totaled $0.68 a share, decreasing 4% versus the prior year period and reflecting
the ongoing operational improvements, primarily offset by the impact of increased interest expense.
Adjusted EPS from continuing operations for the quarter came in ahead of our expectations of $0.65 to $0.67 per share, primarily driven by sales
and operational performance and partially offset by higher-than-expected tax rate. In the aggregate, inclusive of both continuing and discontinued
operations, adjusted EPS was flat year-over-year and totaled $0.82 per share.
Now walk through the performance by our new reportable segments. Sales in our Medical Products & Therapies segment were $1.26 billion,
increasing 4% on a constant currency basis. Within Medical Products & Therapies, sales from our Infusion Therapies and Technologies division,
which includes our former Medication Delivery and Nutrition businesses totaled $1 billion and increased 4% on a constant currency basis. Sales in
the quarter benefited from strong growth in our infusion systems portfolio, driven by continued demand for our infusion pump hardware, including
the spectrum LVP.
Sales from Advanced Surgery totaled $255 million and grew 3% on a constant currency basis, in line with expectations and surgical procedure
growth.
Moving on to Kidney Care. Sales in the quarter were $1.1 billion and were flat year-over-year on a constant currency basis. Within Kidney Care,
global sales for chronic therapies were $921 million, declining 3% on a constant currency basis. Sales performance in the quarter was impacted by
a difficult comparison to the prior year period which benefited from certain discrete items that totaled approximately $20 million.
In addition, and consistent with our plans to enhance performance in our HD business, sales in the quarter reflect the exit of a distribution agreement
in the U.S. earlier this year.
Finally, performance in Chronic Therapies continues to be impacted by government-based procurement initiatives in China and the lower patient
census in the region due to the pandemic. We estimate that collectively, these region-specific factors negatively impacted sales by more than $40
million in the quarter.
Sales in our Acute Therapies business were $188 million, representing growth of 12% on a constant currency basis, with double-digit growth across
all regions and reflecting a more stabilized environment for this business following significant heightened demand during the pandemic. For our
Healthcare Systems & Technology segment, sales in the quarter were $744 million and were flat to the prior year on a constant currency basis.
Within this segment, sales in our Care and Connectivity Solutions division, which includes our former Patient Support Systems and Surgical Solutions
businesses were $443 million, decreasing 4% on a constant currency basis, primarily driven by a lower contribution from rental revenues and lower
hospital capital spending as compared to the prior year period. Orders within our Care and Connectivity Solutions division continued to improve
sequentially, increasing more than 10% as compared to the second quarter.
Front Line Care sales in the quarter were $301 million, increasing 8% on a constant currency basis and reflecting the continued benefit of easing
supply constraints. During the quarter, the business was able to continue to reduce its backlog, and we expect to exit the year with a more normalized
backlog level.
6
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
Sales in our Pharmaceuticals segment were $580 million, increasing 9% on a constant currency basis. Performance in the quarter reflected continued
strength in our U.S. injectables portfolio driven by new product launches as well as continued strong demand for our services within our hospital
compounding portfolio internationally.
Other sales, which represent sales not allocated to a segment and primarily include sales of products and services provided directly through certain
of our manufacturing facilities, declined more than 50% during the quarter. This lower level of sales reflects reduced demand in 2023 for certain
contract manufacturing volumes and the termination of a royalty arrangement following our acquisition of the rights to the underlying product.
BPS third quarter sales reported as discontinued operations, were $191 million, increasing 11% on a constant currency basis.
Now moving to the rest of the P&L. Our adjusted gross margin from continuing operations totaled 41.7% and represented a decline of 70 basis
points over the prior year, but improved 130 basis points sequentially. The year-over-year decline in gross margin reflects the impact of higher
costs for raw materials overhead and labor driven by the elevated inflationary impacts we’ve absorbed over the last couple of years. We were able
to partially offset these cost increases through pricing and ongoing margin improvement programs in our integrated supply chain network.
Adjusted SG&A totaled $820 million or 22.1% of sales, a decrease of 50 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 compared to the prior year.
Adjusted R&D spending in the quarter totaled $161 million and represented 4.3% of sales, an increase of 20 basis points versus the prior year. We
have ramped up our R&D efforts particularly increasing our investments in advancing our connected care technologies.
And like SG&A, R&D expenses include the impact of higher employee incentive accruals as compared to the prior period. These factors resulted in
an adjusted operating margin of 15.2%, a decrease of 50 basis points versus the prior year but a sequential improvement of 200 basis points in
operating margin as compared to the second quarter. Operating margin came in ahead of our expectations, primarily driven by topline performance
and enhanced execution on our initiatives focused on driving improved operational efficiency.
Net interest expense totaled $128 million in the quarter, an increase of $24 million versus the prior year, driven by the impact of higher interest
rates on our variable rate debt. Adjusted other non-operating income totaled $7 million in the quarter compared to $4 million in the prior year
period. Results were unfavorable to expectations driven mostly by losses in foreign exchange.
The adjusted tax rate in the quarter was 21.8% compared to 22% in the prior year period. The year-over-year decrease as well as the unfavorability
versus expectations was primarily driven by changes in geographic earnings mix. And as previously mentioned, adjusted earnings from continuing
operations totaled $0.68 and declined 4% versus the prior year, primarily reflecting the increase in cost of goods sold due to inflation as well as
higher interest expense and foreign exchange headwinds.
With respect to our prior guidance, earnings favorability was driven by better-than-expected sales and operational efficiencies, partially offset by
negative impacts from FX and a higher-than-expected tax rate in the quarter.
Total company adjusted earnings of $0.82 per diluted share, which includes discontinued operations, was flat versus the prior year period. With
respect to cash flow, in the first 9-months of 2023, we’ve generated free cash flow of $666 million, including discontinued operations, compared
to $293 million in the prior year period. And we remain on track to more than double our free cash flow in 2023 from prior year levels.
Now let me conclude my remarks by discussing our outlook for the fourth quarter and full year 2023, including some key assumptions underpinning
that guidance. For full year 2023, Baxter expects total sales growth from continuing operations of 1% to 2% on a reported basis and approximately
2% on a constant currency basis.
Foreign exchange is expected to be an approximate 50 basis point headwind to reported results on a full year basis. On a continuing operations
basis, we expect full year adjusted operating margin of 14.3% to 14.5%. With the closing of the BPS transaction and related debt paid down, we
7
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
expect a reduction of net interest expense of approximately $45 million in the fourth quarter. For the full year, we expect net interest expense to
be approximately $450 million.
We anticipate a full year adjusted tax rate of 20.5% to 21%. And lastly, we expect diluted average share count of 508 million shares. We now expect
full year adjusted earnings from continuing operations of $2.57 to $2.60 per share.
Specific to the fourth quarter of 2023, we expect global sales growth of approximately 1% to 2% on a reported basis and approximately 1% on a
constant currency basis. And we expect adjusted earnings, excluding special items, of $0.85 to $0.88 per diluted share.
With that, we can now open up the call for Q&A.
QUESTIONS AND ANSWERS
Operator
(Operator Instructions) Your first question comes from the line of Matt Miksic from Barclays.
Matthew Stephan Miksic – Barclays Bank PLC, Research Division – Research Analyst
Congrats on a really strong quarter here. I appreciate all the color around dialysis and your position on all these concerns around GLP-1, that’s super
helpful.
Wondering if you could talk a little bit about the hoops and hurdles such that they are in front of you still to complete this spin of Kidney Care that
if you could maybe just comment on where you’re at, what the next steps are? And I would follow up.
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Matt, our preparations for the proposed spinoff of the Kidney Care segment into its own company, Vantive, continues to progress well. We’ve made
significant progress in Vantive’s operating model. We are designing the organization, finished actually, and we are allocating personnel to the
company in our operational levels, and so it continues to progress well.
But consistent with Board’s exercise of its fiduciary duties, we’ll continue to pressure test the related financials, including as a result of the evolving
market conditions, to ensure we proceed in the interest of maximizing shareholder value.
Matthew Stephan Miksic – Barclays Bank PLC, Research Division – Research Analyst
Of course. And any timeline for that sort of approval presentation? Does that happen in the first half of next year around the time of the Board
meeting? What should we expect?
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Matt, July 2024 is — the end of July 2024 is where we stand today as the date. As far as we know today, the plan is July 2024.
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
Matthew Stephan Miksic – Barclays Bank PLC, Research Division – Research Analyst
Fair enough. And then maybe just if I could ask a business line question. The Hillrom businesses had been kind of been under some pressure last
year. Obviously, everyone is aware of that for a variety of reasons. I’m just wondering if you could speak a little bit about how the back half is shaping
up relative to your expectations and if we should expect things to continue to improve into year end. Can you give us some idea of the cadence
into the fourth quarter here or any sort of puts and takes or updates as to how the sort of the bounce back in that company in that part of the
business has progressed?
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Yes. Matt, we’ve made a lot of progress. We redesigned the organization. We put some really good people. We had to replace key positions as we
thought that we needed higher caliber in some areas of the business, and we have those folks in place. We put Reaz Rasul as the Segment President.
We had Julie Brewer, came in and brought a new team in place. So we feel that we’ve seen steady momentum in our Front Line Care business as
well. The Front Line Care managed by Jim O’Connell is doing well with improved supply chain availability for electro-mechanical components, up
8% in the quarter and 7% year-to-date and is doing well.
CCS, which is — we have the PSS and GSS and the care communications, the former group that we used to call, it’s called CCS today, as you see in
your financial, has been impacted by lower rental revenues and a bit of softness in the capital spending. We’re seeing improved in order sequentially
and expect that to continue in the fourth quarter into 2024.
We have increased our investments in HST. As you notice, our research and development has increased. And we’re going to continue to increase
to get more innovation out. But I have to say that the whole overall business of HST is going to have a very large fourth quarter in terms of growth
compared to the rest of the year and bring them more in line with our expectations, including its profitability, which will increase in the fourth
quarter as the rest of the company.
Operator
Your next question comes from the line of Vijay Kumar from Evercore ISI.
Vijay Muniyappa Kumar – Evercore ISI Institutional Equities, Research Division – Senior MD and Head of Medical Supplies & Devices and Life Science
Tools & Diagnostics Team
I had one financial question and one on fiscal ’24. On — the updated guidance here, what is fourth quarter assuming for interest expense, is that
stepping down? I’m getting to implied operating margins of close to 18%. That’s a pretty big sequential step up. Does that math make sense to
you?
Clare Trachtman – Baxter International Inc. – VP of IR
So Vijay, I’ll just quickly — obviously, interest expense would be kind of below the line item, so it would not be part of our operating margin. But
we are expecting — I’ll let Brian get into the details in terms of what we’re expecting. But as we said in the prepared remarks, we expect interest to
be down about $45 million, net interest expense about $45 million in the fourth quarter.
Brian Stevens
Yes. And speaking to operating margin, you’re correct. Our full year operating margin guidance that we gave of 14.3% to 14.5%, implies a fourth
quarter adjusted operating margin that exceeds 16% versus the 15.2% adjusted operating margin we landed at in the third quarter.
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
Really, the primary driver of that increase is the sequential improvement in our sales, which is typical seasonally that provides us a lot better
operating leverage against our cost base, and we’re really encouraged to see the progress we’ve made in significantly expanding our margins in
the second half of the year compared to the first half.
And as we discussed on our last 2 earnings calls, that expansion is driven not just by the higher sales but also by cost favorability in our supply
chain network as we sold through a lot of our higher cost inventory during the first half of the year, and we’re starting to see the savings from our
margin improvement initiatives, we think, is going to begin to slightly outpace inflation starting in the fourth quarter. And then finally, driven by
cost savings from the operational efficiency initiatives we’ve been undertaking in recent periods.
Vijay Muniyappa Kumar – Evercore ISI Institutional Equities, Research Division – Senior MD and Head of Medical Supplies & Devices and Life Science
Tools & Diagnostics Team
Understood. And maybe just off of that question, Joe, for you on fiscal ’24. Can you talk about the big variables, like what gets better, what gets
worse in ’24? When can Baxter get back to a mid-single LRP (inaudible), I think the Street’s modeling 100 basis points of margin expansion based
on some of Joel’s comments here. Does that seem reasonable for you for the Street to be modeling 100-basis points margin expansion?
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
So Vijay, let’s start with the topline. We see stability in the market in admissions, market growth rates. You saw some of the published numbers
from other companies, and hospitals. We’re starting to — we see that as well. And we continue to have a pretty stable topline growth and consistently
into 2024. So I’m confident about that. We have, ex our Kidney Care, the other 3 business of Baxter have steady growth into next year. They will
probably be higher than in 2023.
Talking about the bottom line. If you see the sequential improvement in our bottom line, that will continue into 2024. We continue to have cost
reductions in our manufacturing facilities. We also get more stable volume and growth in volume, absorption of overhead and some pricing
opportunities in couple of our business as I just highlight, for instance, the turnaround that we are seeing in our Pharmaceutical business that we’ll
continue with new product launches from ’23 into ’24 and also the good demand for a SIGMA SPECTRUM pump from ’23 into ’24. Just to mention
a couple of things.
And also with stabilization of our HST business that we see in terms of anniversarying some of the differences, in end of fiscal years, between Hillrom
and Baxter, we start seeing the stabilization and the successful launch of our Progressa+, Just to give you a couple of things that give us more
confidence in 2024 in terms of top and bottom line.
Operator
Your next question comes from the line of Rick Wise from Stifel.
Frederick Allen Wise – Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Equity Research Analyst
It’s a funny place to start maybe, but — and I know that Joel is fairly new to the job, but it’s hard to resist asking, both from your perspective, Joe,
what did you charge Joel, what are you tasking him. Maybe talk about your requests of him as he’s stepped into the role. And Joel, I’d be curious
to hear what kind of special sauce you’re going to bring to the job and where your priorities lie? And just your initial thoughts there?
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Rick, good to hear your voice. Listen, when we’re in the process of selecting the CFO for the company, we’re looking for the ability for the person
to get operationally into the details and continue to help the transformation of the finance organization.
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
And if you look back at the finance organization in Baxter, we had a lot of things that we changed. We have initiated and have done successfully
shared service organizations across the board. Also the development of new talent, the culture and the people are very important to Baxter. So
Joel coming to the company needs to understand that we are a complex operating company. We have a lot of manufacturing sites. We have a
significant amount of R&D sites across the globe. It is a company that spans over 100 different countries in terms of sales in more than 25 to 30
countries in terms of manufacturing and distribution alone.
So somebody who had the intellect to combine that ability to understand complexity and get through it and get operational efficiencies out of it,
but continue to transform the finance organization and bring the talent and the culture to the point that we need the agility and the ability to cope
with different inputs.
Also experience in the M&A space that would continue to rotate the portfolio of Baxter, look at opportunities to transform Baxter’s WAMGR into a
higher WAMGR to better value for our shareholders. But I pass on to Joel to answer the other side of your question.
Joel T. Grade – Baxter International Inc. – Executive VP & CFO
Thank you. Great to be on the call with you this morning, and I really look forward to meeting all of you in person hopefully in the near future. So
look, first of all, I’m really excited to be here. I think all the things that I thought about when I was going through the process with Joe and with the
team have only been reiterated to me as I’ve gotten here, I realized the wonderful opportunities that we have here at Baxter.
Yes, I’d say early impressions, certainly, as I said, lots ahead of us. There’s lots to do, but we have great people here and incredibly passionate people
as it relates to the initiative of this company. And again, really a lot of talent as well in my early view.
I’d say my really focus, first of all is about learning the business. As you know, I’m newer to the industry, but certainly, we’ll be focused heavily on
making sure I understand and learn this complex, interesting business, so I can really make the best decisions to support the team. And from there,
we’re going to focus a lot on how we continue to accelerate growth, how we accelerate our consistent execution of things. And how do we think
about where those mechanisms are to ultimately fund growth and value creation.
Certainly, we’re spending time understanding our talent and really just the focus of the organization, as Joe said, the background, I’ve gotten has
both well rounded in finance, ops strategy, M&A, and in transformation. And so bringing all those things to the table here for all the opportunities
we have at Baxter, just really thrilled to be here. And those are some of the areas I’m going to be spending time focusing on looking forward.
Frederick Allen Wise – Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Equity Research Analyst
That’s great. And one quick follow-up if I could, sort of pick up on Vijay’s question earlier on ’24. Just from one angle, when we think about current
consensus ex Kidney Care, how do we think about the impact of the spin relative to dyssynergy. Does consensus adequately reflect numbers
inclusive of the dyssynergy costs for — when you think about the separation of the 2 companies and stand-alone standup costs? Said differently,
will numbers need to come down? That’s what I think people are — or I’m concerned about. I think that’s what folks are concerned about.
Brian Stevens
Rick, maybe a few comments on that. As Joe mentioned earlier, the process of the spin is going between now and we’re planning to wrap up in
July of 2024. All the models are still in progress, and we are refining our dyssynergy and stand-alone cost estimates. We do plan to be providing
additional information on this in connection with our 2024 guidance that we provide at year-end, as well as in connection with an Investor Day
that we intend to have in advance of that spin taking place. So no specific guidance on the particular quantification of the synergies at this time.
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
And I want to underscore the fact that we’re going to continue to see progress on Baxter’s topline and bottom line ex those synergies because we
continue to accumulate the cost improvements that we’ve put in place, also margin improvement programs, new product launches, the turnaround,
the pharmaceuticals and the great demand that we’re having for our SIGMA SPECTRUM pump.
So there are some really good catalytic — catalyzers I would say, in place that will make ’24 a better year than ’23. But I want to make sure that you
understand that we will have the dyssynergies, we’re in process of putting them in place.
Operator
Your next question comes from the line of Pito Chickering from Deutsche Bank.
Philip Chickering – Deutsche Bank AG, Research Division – Research Analyst
On the NOVUM IQ pump, you announced competitors with next-gen pump on the market right now. Your pump sales remain pretty robust in the
quarter. At what point do you get worried about sort of losing market share to the other pumps? And then on your pump approval, any updates
there? Is it worth pulling the 510(k) and refile it helps you to process? Or any updates there?
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
On the current infusion market, we have really good demand, really, really good demand. We haven’t lost 1% of market share at all. As a matter of
fact, we gained market share. Our growth, our infusion hardware growth has increased in the mid-teens. And for next year, the demand is pretty
solid for our product.
Remember, our product has — SIGMA SPECTRUM has the right precision. The pump has the right precision and it’s very well liked in the marketplace,
and we continue to get significant income interest from competitive accounts to our pump, okay? On specifically Novum, I want to make sure that
we continue to work with the FDA. We have given them all the information required. We submitted with a package.
We also give them all the — all the incremental changes that we’ve made to the product, and we are in continued and regular conversations with
them during their review period. This is where we are with Novum. But I just want to let you know, we really want to get this pump approved, we’re
doing everything we can.
But in the meantime, we have a very capable and really good pump out there that continues to gain market share and has very good demand, as
you see this year, and you’re going to see next year as well. So it’s altogether a good situation for Baxter. Of course, we are working very hard to
have the other pump approved, we want to have that approved.
Philip Chickering – Deutsche Bank AG, Research Division – Research Analyst
Okay. And then next question, oil and diesel have been very volatile over the last few months. And why aren’t giving 2024 guidance. If oil and diesel
stay in this range, can you help us quantify the headwind for 2024 as the costs roll through the balance sheet and on the P&L in any way, how
you’re going to offset those costs?
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Yes. We have put a significant amount of operational efficiencies in place, primarily in our logistics and transportation and supply group. We see
the headwinds in parts of the business about the cost of energy, primarily fuel. But that has been more than offset by the programs that we put in
place. So our initiatives are expected to, as I said, more than offset an incremental impact from rising of oil and diesel prices.
Operator
Your next question comes from the line of Robbie Marcus from JPMorgan.
Robert Justin Marcus – JPMorgan Chase & Co, Research Division – Analyst
Congrats on a nice quarter. Maybe to start, I know there’s been a couple of questions on ’24 that have been centered around margins. But I wanted
to ask on the topline. At the Analyst Day, your long-range plan was for 4% to 5% organic topline growth. The Street is modeling 4% next year,
coming off a year of around 2%. And what’s your confidence level in being able to reach your long-range plan targets?
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Robbie, we expect, as I said, ex our Kidney business, that our margin will be in line with the expectations, okay, of the short term. And our objective
for mid to long-term for the company is 4% to 5% as we improve November as well. But we have plans ex renal to get back at a growth close to
what is today expect. So it is a good story there as we have momentum in several different areas of the company with some product launches.
As I said, one of the biggest headwinds that we had experienced in the past few years have been our Pharmaceutical business that we were able
to turn around with great launches. So not giving guidance in 2024, but our expectation is to be around the expectations of the market in terms
of growth and our mid- to long-term expectations is to be 4% to 5%.
Robert Justin Marcus – JPMorgan Chase & Co, Research Division – Analyst
Great. I appreciate that. And I want to say it’s really helpful to get the segment margins. But I want to ask on sort of the trends here. We got
year-to-date in third quarter and as well as ’22. How should we think about maybe some of the past few years and your expectations for margins
in the segments here?
And now with the four segments and more ownership on the leadership within each, what are some of the examples of things they could do that
weren’t able to be done before to help improve margins on a segment basis?
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Robbie, we have a significant amount of programs in our manufacturing team and logistics team, also pricing initiatives as well as new product
launches. So it’s a mix volume and cost reduction story, we will be improving sequentially our margins. As you’ve seen, as we said, remember, we’re
executing on everything that we said we’re going to do. We’re improving our margins. You’re going to see that in the fourth quarter as we have
guided, as well as you’re going to see that in 2024.
So our confidence in continuing to improve our margins. And once we have the business spun off, the remaining Baxter will have even further
ability to continue to grow its margins, okay? So because it’s all about mix and new products and also pricing.
So, our story is about the same, is the aspiration to 4% to 5% in the top and the bottom — topline, I’m sorry. And the bottom line continue to improve
sequentially and continue to find ways of getting productivity improvement through volume, mix, and pricing.
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
Brian Stevens
And Robbie, our plan right now, this third quarter, completing our verticalization and reporting out segment profitability was a big milestone for
us, and we’re extremely excited to be able to share that with you. And I think our long-term plan is when we get to year-end and we’re putting out
information, we do plan to go back and provide supplemental information on history to provide some better comparability as we’ve done in other
situations in the past.
But I think the way to generally think about it, as you’re looking at the overall directionality of where Baxter margins have trended from the first
half of the year as we’re selling through some of our higher cost inventory to the second half of the year, pretty much across all of our segments,
you’re going to see sequential margin increases in the back half contributing not just to the items I’ve pointed out before, but also to additional
operating leverage just from higher sales in the back half of the year. So stay tuned and we will be providing you more of that information.
Operator
Your next question comes from the line of Travis Steed from Bank of America Securities.
Travis Lee Steed – BofA Securities, Research Division – MD
I just wanted to follow up on something you said earlier in the call about on the renal spend pressure testing and evolving market conditions to
maximize shareholder value. I assume current market conditions, you’re still okay with the [renal] thing going forward given you’re still talking
about it. But maybe just talk about what’s left of an analysis to pressure test the renal spend and kind of what you meant by that comment.
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Well, as I mentioned before, it’s the same answer. We are very much into the preparations. We have the team in place. We had to put all the things
in place. The company is working very hard. It is a complex separation primarily not from the point of view of sales and marketing and the company
itself, but it’s all the manufacturing and distribution. So we’re working on that. We have put people in place.
We always, always have the fiduciary responsibility and duty as our Board has it as well to continue to pressure test the related financials and
including as a result of evolving market conditions in the interest of maximum shareholder value to ensure that we proceed with that in mind. That
is our #1 responsibility when we do anything in Baxter. So yes, we’re moving forward, but we are always making sure that, that step is taken and
being analyzed and checked.
Joel T. Grade – Baxter International Inc. – Executive VP & CFO
Travis, one thing I would just say — it’s Joel. There’s also an opportunity to get me up to speed on all this. Again, I think there’s — again a very sound
strategic rationale on the spin. And that obviously, team is taking me through a lot of financial, a lot of those things. So part of it is also on bringing
me up to speed in terms of some of the financial implications as well. So just to add that to this.
Travis Lee Steed – BofA Securities, Research Division – MD
Helpful clarification. And then on 2024, I guess it sounds like you’re confident in accelerating growth kind of above this 1% to 2% that you’re doing
now, but not quite back to 4 to 5. So is there any examples you can give on the reason we should believe in kind of a little bit better growth in ’24.
I guess Novum would be one of those. Anything else to really kind of point out that can give some confidence that ’24 revenue growth can be
above this kind of 1% to 2% that you’re seeing right now?
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NOVEMBER 02, 2023 / 12:30PM, BAX.N – Q3 2023 Baxter International Inc Earnings Call
Jose E. Almeida – Baxter International Inc. – Chairman of the Board, President & CEO
Well, we’re going to anniversary some headwinds that we had in HST, primarily in the CCS business is one of them. Then we have some good
launches in our Pharmaceutical business, and we have continued demand increase for our SIGMA SPECTRUM pump, not even taking into consideration
Novum on this, okay? Just by what we currently have today, give us confidence in our growth next year, ex renal to be higher than what we have
today across all the 3 segments, MPT, HST and Pharma.
Clare Trachtman – Baxter International Inc. – VP of IR
Travis, I want to just add a little context here because the 1% to 2% you’re pointing out, remember, does have some of the Kidney Care impact in
it this year from some of those one-time payments we’ve received last year. So that is kind of putting some pressure, if you think about just how
much Kidney Care represents of Baxter contributing to that 1% to 2%. In addition, within our other segment, you’ll see that down pretty significantly.
So I think for the base Baxter business, this is what Joe was alluding to, you are seeing nice progression this year. Within the HST business, I think
you’re seeing some momentum within the Front Line Care.
I think as we get to next year, within the CCS business, we’ll see some of that momentum going into 2024. Now wi…