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Baxter International Inc.'s Cost-Cutting Efforts Pay Off in the Third Quarter

When Baxter International (NYSE: BAX) reported quarterly results in July, there was a stark contrast between the company's top and bottom lines. Revenue growth was essentially flat, but the medical products supplier posted strong adjusted earnings growth thanks to operational efficiencies.

Sales must grow at some point for a company to be successful, though. Baxter announced its third-quarter results before the market opened on Wednesday. This time, the company did achieve better revenue growth, but the main story once again was on Baxter's tight control of costs. Here are the highlights.

Image source: Getty Images.

Baxter results: The raw numbers

Metric 

Q3 2017 

Q3 2016 

Year-Over-Year Change

Sales

 $2.71 billion  $2.56 billion

5.8%

Net income from continuing operations

 $251 million  $130 million

93.1%

Earnings per share (EPS)

$0.45 $0.23

95.7%

Adjusted EPS

 $0.64  $0.60

6.7%

Data source: Baxter International. 

What happened with Baxter this quarter?

Sales increased by nearly 6% year over year in the third quarter for Baxter, although that wasn't all organic growth. Baxter acquired Claris Injectables on July 27, 2017. This acquisition added roughly $27 million in revenue from injectable pharmaceuticals. 

Still, Baxter managed to overcome headwinds, including generic competition in the U.S. for its cyclophosphamide chemotherapy. While the company made more money in international markets (around $1.6 billion), Baxter grew sales somewhat faster in the U.S., where it made $1.1 billion.

Hospital products continued to be the biggest winner for Baxter, with revenue increasing 7% year over year to $1.7 billion. There were several factors behind this growth, including strength for the U.S. fluid systems business, anesthesia and critical care products, hospital pharmacy compounding services, and the Claris Injectables acquisition. Baxter's renal business posted revenue of $1 billion, up 3% from the prior-year period. 

Baxter's tremendous improvement in earnings stemmed yet again from belt-tightening. The company cut its marketing and administrative expenses to $685 million, down 6% from the same quarter of 2016. Baxter also reduced research and development spending by 5% year over year to $151 million. 

Prior-year-period comparisons, however, were skewed by large special items in the third quarter of 2016. The most significant of these was a $325 million charge in the year-ago period for restructuring-related expenses. Adjusting for these costs brought Baxter year-over-year adjusted earnings-per-share growth more in line with its revenue growth. However, the company still topped its previous guidance for the third quarter of adjusted earnings between $0.58 and $0.60 per diluted shared.

What management had to say

Baxter International chairman and CEO Jose (Joe) Almeida highlighted the company's efforts in controlling costs. Almeida said:

Baxter's solid performance in the third quarter reflects our continued focus on disciplined execution. We are advancing innovation and operational excellence across the organization to deliver positive results for our stakeholders -- even as we respond to extraordinary challenges like the recent natural disasters across the Americas and the Caribbean. I'm proud of how our employees continuously step up to make a difference for our patients, healthcare providers, global communities and fellow colleagues.

Looking forward

Baxter has three manufacturing facilities in Puerto Rico. The aftermath of Hurricane Maria, which hit Puerto Rico very hard, will linger for the company. Baxter expects that the temporary manufacturing disruptions will shave around $70 million off its fourth-quarter revenue. However, the company still projects sales growth next quarter between 4% and 5%, with earnings from continuing operations, before special items, of $0.56 to $0.59 per diluted share.

For full-year 2017, Baxter still anticipates sales growth of 4%. The company boosted its adjusted earnings per share outlook for 2017 to between $2.40 and $2.43 per diluted shared. Baxter's previous guidance called for adjusted earnings per share of $2.34 to $2.40.

Baxter won't be able to keep cutting costs indefinitely. Investors will want to watch for the company's efforts in growing revenue. Full integration of Claris Injectables should help. So should launches of new products, such as its three-in-one set for use in continuous renal replacement therapy (CRRT) and sepsis management protocols recently introduced in some international markets. There's also the possibility that Baxter might make additional acquisitions to fuel growth. 

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Baxter. The Motley Fool has a disclosure policy.