Baxter International Inc. (BAX) Earnings

Management highlights

Overall Quarterly Performance - Q2 2026 global total sales reached $3 billion, with 5% growth on both reported and organic bases, exceeding analyst expectations, with broad-based growth across all segments and both U.S. and international markets. Three Core Strategic Priorities Progress - **Stabilize the business**: Consolidated the former pharmaceuticals business and Infusion Therapies and Technologies into the new combined Infusion Therapies and Platforms (ITP) division under a single leader to improve coordination, execution, and innovation across shared pharmacy customer and workflow operations. - **Strengthen the balance sheet**: Generated positive $181 million free cash flow in Q2, bringing year-to-date free cash flow to $257 million, with continued improvement in working capital management. The company remains on track to hit its target net leverage ratio of ~3x by the end of 2026, which will unlock future capital allocation optionality including tuck-in M&A and potential share repurchases. - **Drive continuous improvement**: The company's internal Baxter Growth and Performance System (Baxter GPS) continuous improvement framework is now embedded across the organizational culture. Over 400 improvement events have been completed year-to-date, with ~200 in progress and another 400 planned. The framework supports early risk identification and mitigation and improves efficiency across working capital, commercial, manufacturing, and R&D operations. New Product Launches and Innovation - Launched Peerview, a digital benchmarking application for hospitals that enables infusion data comparison and adoption of best practices, a strategic value-add for the ITP business. - Continued strong early commercial momentum for Dynamo, the company's new smart hospital stretcher, with a strong sales funnel and positive customer feedback, and completed the first international launch of the product in Canada. - Connex360 in the frontline care segment continues to resonate well with customers and improve sales funnel performance.

Guidance

- Full year 2026 reported total sales growth guidance is set at 3% to 4%, with organic sales growth (excluding foreign exchange and Vantiv MSA impacts) guidance revised upward to 2% to 3% from prior ranges, reflecting stronger year-to-date performance. Current foreign exchange rates are expected to add 100 basis points to reported full-year growth, while the loss of Vantiv MSA revenue will create a $25 million, 30 basis point headwind to reported growth. - Full year organic sales growth is expected to be low single digits for both MPT (driven by stronger year-to-date drug compounding performance, with easier year-over-year comparisons for infusion systems in the second half as the company laps the initial Novum IQ LVP shipment hold) and HST (supported by contributions from both CCS and frontline care). - Full year adjusted operating margin guidance is maintained at 13% to 14%. The $11 cents per diluted share Q2 IEPA tariff benefit is non-recurring, and the full-year net impact of Section 122 tariffs after mitigation is expected to be ~$40 million in the second half of 2026. - Full year non-operating expenses (including net interest) are projected to be between $260 million and $280 million. TSA income and reimbursements are projected to total $155 to $165 million for the full year, with higher income offset by higher related expenses resulting in no material net impact to full year earnings. - The company reaffirms its expectation that full year 2026 free cash flow will improve relative to 2025, driven by improved operational performance and working capital execution. Management continues to expect margin expansion in the second half of 2026, driven by seasonal higher volume, operating leverage from cost structure actions, and the completion of rolling higher-cost 2025 year-end inventory through the income statement.

Segment performance

1. Medical Products and Therapy (MPT): Q2 2026 sales were $2.1 billion, representing 5% organic growth, accounting for 70% of total company revenue. Within MPT, the newly combined Infusion Therapies and Platforms (ITP) division posted sales of $1.7 billion, 4% organic growth; growth from drug compounding (double-digit growth) and IV solutions was partially offset by lower sales in infusion systems (due to the ongoing Novum IQ LVP shipment/installation hold and customer returns) and injectables (supply constraints and soft premixed product demand). MPT adjusted operating margin was 19.3%, a 350 basis point decrease year-over-year. Advanced surgery within MPT posted sales of $331 million, 12% organic growth, driven by strong demand for hemostats and sealants and steady procedure volumes. 2. Healthcare Systems and Technology (HST): Q2 2026 sales were $801 million, representing 4% organic growth, accounting for 26.7% of total company revenue. Within HST, Care and Connectivity Solutions (CCS) posted sales of $502 million, 5% organic growth, driven by strong global patient support systems volumes and solid U.S. backlog execution. Frontline care posted sales of $299 million, 2% organic growth, driven by Connex360 momentum partially offset by planned non-core product exits. HST adjusted operating margin was 20.3%, flat year-over-year. 3. Other: Q2 2026 sales were $83 million (solely MSA revenue from Vantiv), accounting for 2.8% of total company revenue, excluded from organic growth calculations.

Risks & headwinds

- Ongoing shipment and installation hold for the Novum IQ LVP infusion pump, paired with customer returns and transitions to Spectrum, which creates continued downward pressure on infusion systems sales and lingering customer uncertainty. - Persistent supply constraints for injectable products that have driven lower sales in that segment, with output at a key contract manufacturer remaining constrained. - Broader macroeconomic uncertainty that could impact U.S. hospital capital spending, which could negatively affect demand for HST segment products. While the current order book remains solid, management is actively monitoring the evolving environment. - Potential changes to customer procedure volume and buying behavior driven by ACA policy changes; while management has not observed any impact to date, policy shifts could create future demand pressure. - Input cost pressure from commodities like oil and shipping costs, though management notes that these pressures remain within guidance and have been partially offset by proactive mitigating actions.

Analyst Q&A

• Q: What drove the upside Q2 revenue beat, why did EPS guidance rise only modestly despite the large beat, and does management still expect EPS growth in 2027?

  A: The upside came from broad-based strength across all segments, with double-digit growth in drug compounding, strong performance in advanced surgery, solid IV solutions growth on the new lower baseline, and strong demand for care and connectivity solutions and Connex360. The 19 cent Q2 EPS beat included a one-time 11 cent unanticipated tariff refund, so management maintained a conservative underlying second half outlook, and the non-recurring benefit will not repeat in 2027. Management remains focused on executing 2026 performance, especially in the second half, and will provide 2027 guidance at the appropriate time.

• Q: What is the update on the Novum IQ LVP pump regulatory process, and how durable is Spectrum IQ as a replacement if Novum cannot return to the market?

  A: Management confirms that progress is being made, and the company continues to work closely with regulatory authorities while supporting existing Novum customers with ongoing mitigation. The broader pump portfolio is strong: Novum Syringe and Spectrum LVP on the IQX platform remain competitive, and the new Peerview digital tool adds incremental value for customers regardless of the Novum timeline. Management remains focused on returning Novum LVP to market when it is ready, while continuing to expand the current value proposition for customers.

• Q: What is the current status of U.S. hospital capital spending and are there any signs of a slowdown driven by broader economic or policy changes?

  A: Management notes that demand for capital equipment remains stable, supported by a strong U.S. order book and solid visibility across patient support systems and other product lines. While management is closely monitoring the environment and is not immune to broader shifts, it has not observed any material changes in hospital capital spending behavior to date. Hospitals remain focused on investing in workflow and process improvements that align with Baxter's product offerings.

• Q: What areas of the business have progressed faster than expected during the turnaround, and what is the core driver of this improvement?

  A: The fastest and most encouraging progress has been the organizational adoption of the Baxter GPS continuous improvement framework. Faster than expected buy-in across teams has led to over 400 completed improvement events year-to-date, with hundreds more in progress and planned. The cumulative impact of small, consistent improvements across all parts of the business, rather than any single large change, is building long-term operational momentum that will drive sustained performance improvement.