BAXTER THIRD-QUARTER 2026 FINANCIAL RESULTS - HILL-ROM HOLDINGS INC

Financial Performance:

• Global sales totaled $3 billion in Q3 2026, representing a 5% increase on both reported and organic bases.
• Adjusted earnings per diluted share (EPS) were $0.58, a 16% year-over-year decline attributed to the absence of discrete tax benefits from the prior year; non-GAAP basis used throughout.
• Free cash flow was $448 million in Q3, bringing year-to-date free cash flow to $705 million.
• Adjusted operating margin was 14.5%, down 40 basis points year-over-year due to sales mix changes (strong drug compounding/advanced surgery vs. lower injectables) and lower pricing contribution.
• Gross margin was 38.3% (down 110 bps); SG&A as a percentage of sales improved to 21.4% (down 80 bps).
• Net leverage is on track to reach approximately 3.0x by year-end following a $600 million cash tender offer that retired $864 million of debt.

Guidance and Future Outlook:

• Full-year 2026 organic sales growth raised to 3%–4% (from 2%–3%), driven by broad-based growth and strong execution.
• Full-year adjusted EPS range narrowed and raised to $2.05–$2.15 (from $1.95–$2.15); full-year reported sales growth expected at 4%–5%.
• Full-year adjusted operating margin guidance remains 13%–14%; non-operating expenses expected at $245–$255 million due to reduced interest expense.
• Q4 2026 implied growth is consistent with Q3's mid-single-digit organic rate, supported by operating leverage and continued cost action benefits.
• 2027 guidance to be provided in February; expected headwinds include inflation (salary/materials), tariffs (loss of refund benefit), TSA/Vantiv agreement conclusion, and planned product exits.

Business Segments and Product Lines:

• Medical Products & Therapy (MPT): Sales $2.1 billion (+6% organic); infusion systems (+4%) driven by SpectrumIQ and digital solutions; drug compounding grew 9%; injectables declined 3% due to price deflation and supply issues.
• Healthcare Systems & Technology (HST): Sales $806 million (+4% organic); Care and Connectivity Solutions (CCS) grew 5% (strong U.S. backlog, international strength); Frontline Care (FLC) grew 3% driven by Connect360 monitoring.
• Advanced Surgery: Sales $342 million (+12% organic), driven by hemostats/sealants and competitor supply disruptions.
• Product Strategy: Discontinued production of Cephalosporin (CEF) products at Round Lake, IL, to simplify operations and address FDA observations; expected to impact 2026 by $50M sales and $30M operating income.
• Innovation: Connect360 driving FLC growth; Dynamo Series Smart Stretcher recognized for design; ongoing integration of Baxter GPS for continuous improvement.

Market and Competitive Landscape:

• Advanced surgery market growing at low-to-mid single digits; Baxter capitalized on a competitor's supply challenges to gain share.
• Demand for drug compounding services remains strong globally as health systems seek outsourced, quality-focused solutions.
• Hospital capital spending in the U.S. remains stable with a solid order book in CCS, though inflation and interest rates are monitored.
• General injectables market faces pressure; Baxter's strategic exit from CEFs aims to improve supply reliability and regulatory compliance.

Risks and Challenges:

• Regulatory & Quality: Addressing FDA warning letter related to Round Lake facility; implementing corrective actions to improve quality systems.
• Supply Chain: Mitigating impacts from a contract manufacturer for injectables; transitioning away from complex CEF production.
• Macroeconomic: Inflationary pressures on labor, materials, and logistics expected to increase in 2027; tariff uncertainty and potential loss of 2026 refund benefits.
• Product Mix: Lower pricing contribution year-over-year and planned exits (e.g., specific FLC products) creating near-term top-line headwinds.

Management Commentary and Tone:

• Tone: Optimistic and confident regarding the turnaround; Andrew Heider (CEO) noted results are "proof points" that the business is gaining traction.
• Leadership Transition: John Rogers (new CFO) expressed strong alignment with the strategy, impressed by existing BFS GPS integration, and committed to sharpening execution and capital allocation.
• Strategic Priorities: Focus remains on stabilizing the business, strengthening the balance sheet, and embedding continuous improvement (Baxter GPS) across all operations.
• Execution: Emphasis on improving the "say-do ratio" and delivering consistent performance in Q4 to finish the year strong.

Analyst Questions and Answers:

• FDA & CEF Discontinuation: Management clarified that removing CEFs simplifies the Round Lake site, aids FDA compliance, and does not cause market shortages; offsets will be pursued via other portfolio products.
• M&A Strategy: Potential acquisitions will be "tuck-ins" focused on strategic fit (technology, geography), operational integration via Baxter GPS, and financial returns (ROIC); focus on 3x leverage target before major deals.
• 2027 Margins: Management acknowledged significant headwinds (inflation, tariffs, product exits) but emphasized a pipeline of efficiency savings and cost actions to neutralize them; detailed 2027 outlook deferred to Q4.
• Competitive Dynamics: Advanced surgery growth boosted by competitor supply issues; injectables recovery expected as contract manufacturer issues resolve.
• Inflation: Primary cost pressures identified as salaries and electronics/materials; management commits to matching inflation with equal efficiency savings.

Other Key Points:

• Restructuring Costs: $39 million recorded in Q3 for restructuring related to the Round Lake facility changes (excluded from non-GAAP earnings).
• Debt Reduction: $253 million pre-tax gain recognized on early debt extinguishment (excluded from non-GAAP).
• Vantiv (TSA): TSA income and reimbursements expected at $165–$175 million for the full year, with costs largely offsetting these benefits; agreement to conclude by end of January 2027.
• Product Exits: Planned exits in FLC and CEF discontinuation will impact 2026 but are part of a broader portfolio rationalization strategy.