Baxter International Inc Q4 2025 Earnings Call Transcript

Baxter International Inc (NYSE: BAX) Q4 2025 Earnings Call dated Feb. 12, 2026

Presentation

Operator

Until the Question and Answer segment of today’s call. At that time, if you have a question, you will need to press the Star then one keys on your touchtone phone. If anyone should require assistance during the conference, please press Star then zero on your touchtone phone. 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 Mr. Kevin Moran, Vice President, Investor Relations at Baxter International.

Mr. Moran, you may begin.

Kevin Moran — Vice President, Investor Relations

Good morning and welcome. Today we will discuss Baxter’s fourth quarter results along with our financial outlook for the full year 2026. This morning, a press release was issued with our preliminary earnings results and updated outlook. The press release and investor presentation are available on the Investors section of the Baxter website. Joining me today are Andrew Heider, President and Chief Executive Officer, and Joel Grade, Executive Vice President and Chief Financial Officer. During the call we will be making forward looking statements including comments regarding our financial outlook for the full year 2026 and anticipated timing and impact of our deleveraging efforts the amount and timing of charges related to recent operating models and cost structure actions the anticipated impact of various regulatory and operational matters, including ones related to our infusion pump platform and to clinical practice changes following Hurricane Helene and commentary regarding the global macroeconomic environment including tariffs and proposed mitigating actions.

Forward looking statements involve risks and uncertainties. Which could cause our actual results to. Differ materially from our current expectations. Please refer to today’s press release, the forward looking statement slide at the beginning of our investor presentation and our SEC filings for more detail. In addition, please note that on today’s call all our comments will be on a non GAAP basis unless they are specifically called out as gaap. Non GAAP financial measures are used to help investors understand Baxter’s ongoing business performance. GAAP to non GAAP reconciliations can be found in the schedules attached to our press release and our investor presentation. On the call we will reference operational growth, which excludes the impact of foreign exchange, MSA revenues from Vantos and the previously announced exit of IV Solutions from China.

We will also reference organic growth, which excludes the impact of foreign exchange, MMSA revenues from Vantv and any impact from future business acquisitions or divestitures. We plan to utilize the organic growth measure going forward. Finally, as a reminder, continuing operations excludes Baxter’s kidney care business which is now reported as discontinued operations. With that, I’d like to turn the call over to Andrew.

Andrew Hider — President and Chief Executive Officer

Thank you Kevin and Good morning everyone. Fourth quarter 2025 global sales from continuing operations totaled $3 billion and increased 8% on a reported basis and 3% on an operational basis. Total company adjusted earnings from continuing operations were $0.44 per diluted share. While the Top Line exceeded our expectations, adjusted EPS fell short. Joel will get into greater detail on the results, but there were a few areas that differed from our expectations we provided in October. On Top Line we saw more modest net impact from Novum IQ large volume pump customer returns which was favorable to results.

While responses have varied in general, customers are waiting for additional clarity on the nature and timing of the additional corrections that we will look to deploy. Margins were pressured by both an unfavorable mix of sales as well as some non reoccurring items including inventory adjustments and finally we saw a higher tax rate. The results in the quarter are disappointing and underscore the work ahead to improve performance and execute more consistently. I stepped into this role in August with confidence in the potential of the business given the central role Baxter plays in health care, but also with a practical sense of the hurdles before us.

As I’ve continued to visit our sites and engage directly with the team and customers, I’ve deepened my understanding of both the challenges and opportunities facing Baxter. We’re in the early stages of a turnaround and have more work to do to deliver strategically, operationally and commercially and recognize that it will take time to implement real long term solutions. That said, there’s a strong thesis on where we can take this business, and we saw some examples of this in the quarter’s results. For example, the advanced surgery business capped off a great year with a strong quarter growing 11% with contributions both across the portfolio and around the globe.

And the healthcare systems and technology segment had another quarter of consistent performance, including a contribution from the recently launched Connect360 monitor in the frontline care division. We are also preparing for the launch of the recently announced Dynamo Series stretcher, the latest innovation in our portfolio of smart beds, services and connected care solutions. Innovation will be a critical element to our success and we recognize the importance of bringing new innovation into the market. Accordingly, you should expect a heightened focus going forward and continued investment in R and D at or above historical levels. As I said during our last earnings call and reiterated last month, I am focused on three main priorities.

These are stabilizing the areas of the business that require increased focus, strengthening our balance sheet and driving a culture of continuous improvement and efficiency. We are moving with focus and urgency on each of these and our teams are driving relentlessly to improve execution and performance across the enterprise. It is with this in mind that we have decided to hold off on our investor day. Let me share a few updates on our priorities and the actions we have taken Stabilize Just a few weeks ago we internally announced a new operating model that is designed to simplify our organization, accelerate innovation and improve performance.

Most significantly, we are delayering levers of leadership including removing the segment management layer and embedding critical functional roles directly in each of our businesses. This will allow each leader to have full P and L responsibility for their business with fully aligned commercial, R and D manufacturing, medical and targeted functional support and importantly, full accountability to the results. These changes are significant and are designed to reduce complexity, eliminate barriers for decision making, bringing us closer to our customers and help us to improve our seduce ratio. We’ve also taken actions within our IV solution business to right size a support footprint to align to the lower demand environment which we believe is a new baseline in the market in Pharma.

In addition to market demand softness, supply and backorder challenges have impacted revenue and driven unfavorable product mix. Specific initiatives to address these are in progress, however it will take some time to bear fruit. Overall, across the enterprise, we are taking actions to further strengthen our focus on quality and improving on time delivery. Our two Customer Value Creators Balance Sheet we continue to focus on improving our cash generation and leverage in line with our expectations. Free cash flow generation exceeded 450 million in the quarter and continuous improvement. As a reminder, operational efficiency is at the center of what we are driving.

As you know, a key element of this is our Baxter Growth and Performance System, Baxter gps which we rolled out in October to ensure continuous improvement. Enterprise efficiency and a growth and performance mindset are integrated into our day to day work. We recently held our first annual President’s Kaizen where I was impressed by the result each of our leaders demonstrated in driving change for the better. With a focus on 10 events that will drive cross business impact through focused week long sprints, teams tackled critical opportunities aligned to our eight value creators. The work underway is helping us reduce complexity better, anticipate customer needs, accelerate innovation, commercialize faster and deliver value sooner.

We are focused on improving every aspect of our operations and we will be consistently measuring our performance to deliver just that. Importantly, this is not a one off event, it’s how we’re building a continuous improvement culture where everyone is empowered to make things better every day. Before I turn it over to Joel, I just wanted to reiterate the key steps we’re taking. We have streamlined the organization for greater accountability, we have launched GPS to drive continuous improvement and we have heightened our focus on innovation to better meet customer needs. All to drive improved performance and long term shareholder value creation.

Now I will turn it over to Joel. Joel over to you.

Joel Grade — Executive Vice President and Chief Financial Officer

Thanks Andrew and Good morning everyone. Fourth quarter 2025 global sales from continuing operations totaled $3 billion and increased 8% on a reported basis and 3% on an operational basis. Performance in the quarter reflects growth across all segments. On the bottom line, total company adjusted earnings from continuing operations were $0.44 per share. Results in the quarter reflect unfavorable product and geographic mix, some non recurring items including inventory adjustments and a higher tax rate partially offset by by the positive impact from pricing in select segments. Now I’ll walk through our results by reportable segment commentary regarding sales growth in 2025 will be on an operational basis.

Sales in our medical products and therapy segments OR MPT were $1.4 billion and increased 4% in the quarter. Performance in the quarter reflects growth in infusion therapies and technologies or ITT, as well as continued strength in advanced surgery. Within MPT, fourth quarter sales from our ICT division totaled $1.1 billion and grew 1%. Performance in the quarter was driven by growth in IV solutions which benefited from a favorable comparison to the prior year period, partially offset by lower infusion pump sales due to the previously discussed shipment and installation hold of Novum LVP within IV Solutions. Underlying US Demand remained below historical levels.

As previously discussed, fluid conservation practices embedded with clinical practice changes in the market following Hurricane Helene remain and continue to weigh on volumes in infusion systems. Results in the quarter reflected the net impact of lost sales due to the ongoing shipment and installation hold of the Novum ldp customer returns and transition to spectrum. Relative to our prior guidance, this net impact was more modest in the quarter. While customer responses have varied in general, many are understandably waiting for additional clarity on the nature and timing of additional corrections that we will look to deploy and of the release of the ship and installation hold.

Sales of Advanced surgery totaled $328 million and grew an impressive 11%. Results in the quarter reflect continued solid demand for our portfolio of hemostats and sealants, strong commercial execution across regions, and steady procedure volumes. MPT’s adjusted operating margin totaled 15.4% for the quarter, decreasing 110 basis points over the prior year period and reflect increased manufacturing and supply costs, unfavorable product mix inventory adjustments, and higher costs related to tariffs. These factors were partially offset by positive pricing in the quarter. Kidney care TSA income positively contributed as well in healthcare systems and Technologies or HST. Sales in the quarter totaled $827 million, increasing 4% within HST.

Sales of our care and Connectivity Solutions or CCS division were $537 million and grew 4% globally. Performance in the quarter was driven by double digit growth in our surgical solutions business and continued momentum across our patient support Systems portfolio. Total US capital orders for CCs increased nearly 30% compared to the prior year, driven by broad based strength across patient support systems, care communications and surgical solutions, and our order book remains strong. To date, we have not observed a slowdown in US Hospital capital spending. However, given the broader macroeconomic uncertainty, we continue to closely monitor the situation.

Frontline care sales in the quarter were $290 million and increased 3%. Performance in the quarter reflects increased demand in our cardiology and patient monitoring portfolios which includes our recent launch of Connext360. HST adjusted operating margin sold 15.2% for the quarter, decreasing 330 basis points compared to the prior year. These results reflect unfavorable product and geographic mix, increased corporate allocation expenses and higher costs related to tariffs. TSA income partially offset these increased expenses. Moving on to our pharmaceutical segment, sales in the quarter totaled $668 million, increasing 2%. Within pharmaceuticals, sales of our injectables and anesthesia division were $352 million and declined 9%.

Performance in the quarter reflects a decline in our injectables portfolio driven by a difficult comparison to the prior year period as well as softness in certain premix products. Largely consistent with the dynamics discussed last quarter related to IV infusion protocols and increased use of IV push in select hospital settings. Our anesthesia portfolio declined high single digits, reflecting softer demand for select inhaled anesthesia products. Drug compounding grew 18% and reflects continued strong demand for our services outside the US pharmaceuticals adjusted operating margin totaled 5.8% for the quarter. These results reflect increased manufacturing and supply costs, an unfavorable product mix, price erosion, inventory adjustments, and increased corporate allocation expenses following the sale of kidney care.

These expenses were partially offset by kidney care TSA income. Finally, other sales, which represent sales not allocated to a segment and primarily include sales of products and services provided directly through certain manufacturing facilities, were $7 million in the quarter. MSA revenue from Vantiv totaled $84 million. As a reminder, these sales are included in our reported growth. However, they are not reflected in our operational growth for the quarter before moving on to the rest of the P and L. An important reminder on our continuing operations reporting following the sale of our kidney care business, certain corporate costs that did not convey with the business are now allocated across our segments in both cost of goods sold and sga, along with income from the tsa, which is currently recognized with an other operating income.

In addition, as previously discussed, we reclassified certain functional expenses from SGA to cost of goods sold beginning earlier this year. These costs support manufacturing and are now treated as indirect expenses subject to inventory capitalization and recognizing cost of sales when sold. Fourth quarter adjusted gross margins from continuing operations or 35.5%, a decrease of 900 basis points compared to the prior year. Fourth quarter adjusted SGA from continuing operations totaled $637 million or 21.4 as a percentage of sales, a decrease of 330 basis points from the prior year period. Results reflect disciplined expense management and the benefits of the reclassification of certain functional costs.

Adjusted R and D spending from continuing operations in the quarter totaled $116 million or 3.9 as a percentage of sales, which came in lower than our expectations. This reflects the reclassification of certain product support and sustaining activities in the cost of sales and therefore does not reflect our anticipated level of of R and D spend going forward. TSA income and other reimbursements totaled $50 million in the quarter and came in line with our expectations. As previously discussed, the associated expenses related to this income are reflected in other lines of the P and L, including cost of goods sold and sga.

Altogether, these factors resulted in an adjusted operating margin of 11.8% on a continuing operations basis, a decrease of 340 basis points compared to the prior year period. Results reflect unfavorable product mix and non recurring items, including inventory adjustments partially offset by positive pricing in select segments and the benefits of TSA income. Net interest expense from continuing operations totaled $58 million in the quarter, a decrease of $32 million versus the prior year period reflecting lower interest expense following the paydown of existing debt with proceeds from the vant of sale. Adjusted other non operating income totaled $15 million, driven primarily by amortization of pension benefits compared to the prior period.

The continuing operations adjusted tax rate for the quarter was 27.2%, driven primarily by mix of earnings across jurisdictions. In total, adjusted earnings from continuing operations were $0.44 per share for the quarter. Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. Fourth quarter free cash flow was $456 million, bringing full year free cash flow to $438 million. Performance in the quarter reflects improved cash flow generation and seasonality, including progress across select areas of working capital as well as continued focus on execution. As we close out the year, we continue to focus on strengthening cash flow generation and maintaining discipline around working capital, foundational elements of our financial strategy.

Improving the balance sheet continues to be a key area of emphasis and we intend to deploy cash towards reducing leverage in line with our capital allocation framework. Now our outlook for the full year 2026 including some key assumptions underpinning the guidance for full year 2026 we expect total sales growth to be flat to 1% growth on a reported basis. This reflects current foreign exchange rates which are expected to contribute approximately 100 basis points to to top line growth for the year. In addition, reported sales are expected to include a headwind of approximately $25 million from MSA revenues from Vantiv.

This represents approximately 30 basis points of impact on reported growth excluding the impact of foreign exchange and MSA revenues. We expect organic sales growth of approximately flat for 2026. As it relates to the segments in MPT, we expect full year organic sales to be flat to slightly up. This reflects the continued uncertainty around the novum situation including the potential impact from various customer responses. It also reflects the assumption that the ship and installation hold will remain in place for the full year and as previously discussed, we believe that the market is at a new baseline in our IV Solutions business.

In hst we expect full year organic sales to grow low single digits. This reflects expected contributions from both the Care and Connectivity Solutions and Frontline Care divisions. In pharmaceuticals, we expect full year organic sales to be approximately flat. This reflects continued pressure in injectables and anesthesia related to softer market demand, supply challenges and ongoing IV push utilization trends that have been discussed in prior quarters. Turning to our outlook for other P and L line items before beginning with tariffs, we estimate a full year impact net of mitigating actions to be approximately $80 million which is a year over year headwind of approximately $40 million.

TSA income and other reimbursements are expected to range between 130 to 140 million dollars. We expect full year adjusted operating margin from continuing operations to range between 13 to 14%. This primarily reflects lower gross margins driven by unfavorable product mix including the impact of lower manufacturing volumes and reduced contribution from pricing. These pressures are expected to be partially offset by improvements in SGA including the recent restructuring actions. We expect our non operating expenses which include net interest expense and other income and expense to total between $280 to $300 million. This reflects higher interest expense from the recently completed debt neutral transactions and lower contribution from other income.

On a continuing operations basis, we anticipate a full year tax rate to range between 18.5% and 19.5%. We expect our diluted share count to average approximately 518 million shares for the year. Based on all these factors, we now anticipate full year adjusted earnings on a continuing operations basis of $1.85 to $2.05 per diluted share. While we will not be providing explicit quarterly guidance, I want to offer some perspectives on the expected cadence of results over the course of the year. Overall, we expect the first quarter to be the most challenging with improving performance thereafter. Specifically, the ITT division has an unfavorable year over year comparison in Q1 due to the one time distributor build in the prior year.

Additionally, ITT results in the first half are expected to reflect absorption headwinds from the rollout of higher cost inventory produced in the second half of 2025. We also expect to see a second half benefit from from the recently taken actions to rightsize our cost structure. Therefore, we expect ITT performance to improve throughout the year assuming relatively stable demand within hst. New product launches are expected to contribute to stronger growth in the second half of the year compared to the first half, including Conext360 and Dynamo in pharmaceuticals. We expect the previously mentioned headwinds to continue in the first half of the year.

As we move into the back half of the year, we anticipate a more favorable comparison and improved performance. Finally, as a reminder, the first half of the prior year saw benefit to operating margins related to the timing of certain functional costs being reclassified in the cost of goods sold. Collectively, these factors support our expectation that organic sales growth, operating margin and adjusted earnings per share will be back half weighted with respect to free cash flow. Similar to 2025, we expect it to be back half weighted due to our normal seasonality, expected gains of earnings as well as recent cost structure actions.

With that, we can now open up the call for Q and A.

Question & Answers

Operator

Thank you. We will now begin the question and answer session. If you have a question, please press the Star then one keys on your touchtone phone. If you wish to remove yourself from the queue again, press Star then one. If you are using a speakerphone, please lift the handset to ask your question so that we may be respectful of everyone’s time. Please limit your comments to one question with One follow up question if necessary. We appreciate everyone’s patience and would like to provide as many of you as possible the opportunity to ask a question. We will pause for a moment while the list is being compiled.

I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. our first question comes from David Roman of Goldman Sachs. Your question please.

David Roman — Analyst, Goldman Sachs

Thank you. Good morning everybody. I wanted to start one strategic question that had one financial follow up. Maybe firstly for you, Andrew, as you just think about the number of moving parts you’re trying to navigate here. Strategic review, catching up on innovation, deleveraging. What are you doing to ensure sustainability of the business as it relates to the competitive dynamic? And how are you gaining sufficient visibility to drive the forecasting process?

Andrew Hider — President and Chief Executive Officer

Yeah. So, good morning, David. Let me start by just walking through. Part of my standard work as a CEO is to visit customers on an ongoing basis. And I’ll tell you that the message is loud and clear that we are essential to not only supporting but to enabling their ability to bring high level patient care. And we’re an essential and trusted brand through that. As a reminder, we touch over 350 million patients per year. All that said, we need to get better and we are not satisfied with our current performance. And you’ve heard me consistently talk about not only near term and to walk through it starts with stabilizing the business and I’ve outlined that in my prepared remarks to get more specific.

But we are driving the accountability at the lowest levels in the organization. Additionally, it’s about strengthening our balance sheet and lastly our focus on continuous improvement and really enabling that such that we focus on the customer and streamline the organization to be able to execute at the pace we expect. We’re early in our journey, but we’re making progress now. To date we’ve aligned around streamlining the organization, we’ve launched gps and we’ve heightened our focus on innovation and then back to listening to our customers and launching products. It starts with our Connects360 that I talked about and then additionally we launched earlier in the year or talked about launching earlier in the year the Dynamo stretcher platform.

So while we’re making progress, we have a lot more work to do.

Joel Grade — Executive Vice President and Chief Financial Officer

Yeah, David, and it’s Joel. I’ll take the forecasting piece of this thing and clearly proving our forecasting accuracy is a major priority and we’re attacking that in a very structured way through Baxter gps. And look, I certainly understand and appreciate the frustration and the volatility of our historical results. We’re going to, we have and will continue to be transparent about the challenges we’re facing and the actions we’re taking to address those challenges as well as obviously the assumptions underpinning the guidance. But GPS gives us a more disciplined operating rhythm, clear accountability and a lot more continued visibility to the drivers of our performance.

So as we, you’ve heard us talk about focusing on demand planning, we also focus, you know, really around our cross functional alignment between our commercial teams, our operational teams, our finance teams and just building a more rigorous daily weekly operating mechanisms that really surface issues earlier and allow us to course correct more quickly. So all this is designed to reduce volatility, improve the predictability of our results over time and as Andrew likes to say, drive a really consistent saving ratio as an organization. So we know we have work to do and we’re attacking it head on.

David Roman — Analyst, Goldman Sachs

And then maybe just as a follow up here, can you just remind us on where you are and the progress you’re making on reducing the GNA and support costs that today are getting reimbursed by Vanta via the TSA and how we should think about the runoff of the TSA over the course of the year and into next year and your retained costs. Can that be a one for one offset and maybe just help us think through the nature of the operating dynamics there?

Joel Grade — Executive Vice President and Chief Financial Officer

Yeah, sure. So a couple of things there. Number one for 2025, one of the things we’ve said is that we had including cost takeout and TSA income, we had about a 40 basis point, I’ll say remaining impact on the year. We are on track to that and so I think that’s been successful that way. We continue to make good progress on our cost takeout. And you’ve heard Andrew talk about the streamlining the operating model. That’s a continued work stream on this. We continue to streamline our operations to meet demand. We talked about that as well from a volume perspective.

Then again, this work is done in relation to our stranded costs as well. And so our TSAs do start to tail off some in 2026. Obviously they really go into 2027. As we’ve said, we are committed to eliminating our stranded cost by the end of 2027 and we remain on track to do that. So I again feel good about that progress and again a lot of this work that you’re hearing us talk about today is targeting that goal. So hopefully that helps.

David Roman — Analyst, Goldman Sachs

Yes, thank you for taking the questions.

Operator

Robbie Marcus of JPMorgan is on the line with a question. Please state your question.

Robbie Marcus

Yes, great. Thanks for taking the questions and good morning. Two for me. Joel, maybe just to follow up on David’s question, especially as the TSAs roll off and I know it’s early here, but do you think you’ll be able to grow earnings next year as the TSAs roll off where you sit today?

Joel Grade — Executive Vice President and Chief Financial Officer

Just to be really clear, next year meaning 2027 or 2026?

Robbie Marcus

2027.

Joel Grade — Executive Vice President and Chief Financial Officer

2027. But we’re certainly not forecasting or issuing guidance on that today. Do I anticipate growth? Yes, but I don’t know that we as we’ve talked about Ravi, the TSA typically are 24 months. Our deal was closed on January 31st of 2025. So the the majority, I’ll say the TSAs fall off in the early part of 2027 and again we do expect to continue to work through that the year and again finish that off by the end of 2027. But again we’re not giving specific guidance on growth at this point.

Robbie Marcus

Great. Maybe follow up question. The gross margins obviously came in well below where the street was and operating margin as well. I was hoping you could just bridge us from the fourth quarter 25 to the 2026 guide. How much shifted from below gross cost of goods into cost of goods. And if you could also help put a finer point on first quarter so we could get a better sense of. Cadence through the year. Thanks.

Joel Grade — Executive Vice President and Chief Financial Officer

Sure. So maybe I’ll start again. We haven’t provided specific numerical guidance, but I’d certainly reiterate that I Q1 is going to be our most challenging quarter. There’s a number of reasons for that, Robby. I mean number one, number one I call just our normal seasonality. Obviously Q4 tends to be a lot larger quarter than Q1, so our margin pass through again there is some to the typical detriment there. Now there’s also a prior year comparison, remember in ITT and while that’s not a sequential driver, it does mess a little bit with the seasonality we talked about because our comparison in Q1 year over year with the one time distributor bill in 2025 was a little bit wonky.

So at the time we sized that as about 150 basis points to total company sales. So call that a 40 $50 million impact and that will be a headwind in year to year growth in Q1. There’s also continued uncertainty on Novum. One of the things we talked about the last quarter was sort of an uncertainty around Customer behavior. That uncertainty I’d say still exists to a degree and really carries into this year. And so our customers are a bit of a wait and see mode still. And therefore as we referenced last quarter, there’s an ongoing risk for customer responses there.

Again, this is all top line but drug compounding in Q4, 18% growth, probably not necessarily sustainable from that number. So obviously expecting that to be lower in Q1. And then from a margin perspective again I already referenced some of the lower volume. There’s also what I’ll call absorption headwinds. So again in 2025 we had some of these higher manufacturing costs and that ended up in our inventory capitalization that is then rolling out as we sell those products obviously in the first half of the year really, but also certainly in Q1. And so that’s an incremental headwind to margins.

We haven’t given specific guidance around the number on that. And then the other thing is we continue to expect fauna margins to remain pressured due to softness in injectables and anesthesia and then really just the overall mix of the business. So I guess finally what I’d say from an EPS perspective, Robbie, the interest, incremental interest expense kicks in in Q1 so that’s certainly something to expect there. So that’s. So again hopefully that helps with the guidance there .

Robbie Marcus

Very much. Thanks a lot.

Operator

Vijay Kumar of Evercore ISI is on the line with a question. Please state your question.

Vijay Kumar

Hey guys, thank you for taking my question. Andrew, maybe my first one for you is you mentioned customers are awaiting how you resolve gnome, right? But your guidance assumes GNOME shiphold remains in place for the full year. Have you communicated this to customers? Like what have you told customers? I understand the guidance assumption but I’m curious, are customers willing to wait for a year for known to result?

Andrew Hider — President and Chief Executive Officer

Yeah. Good morning Vijay. So let me walk this through a little bit here. So first and foremost customers can and are continuing to use the device according to existing instructions and mitigating actions. We’ve continued to make progress on our novum solution and the corrections and we’re staying close. And as we go through testing, as we go through really identifying the longer term solutions that we will update as a reminder, we have a strong pump portfolio. We have our Spectrum LVP that we utilize through this transition and I even walked through earlier in the year we’ve launched Spectrum with the IQX platform and it enables us to really not only work with our customers but to have a total pump portfolio with Spectrum being our LVP and Novum being our syringe and Novum being a newer product set that we’ve launched in the recent history.

And so while we’re going through our Novum updates, we have a strong platform that we can bring to market. And as a reminder, we’re also launching early Q2 peerview on the IQX platform and Purview is designed to really support our customers and their ability to identify and work on fluid processing. So we’re continuing to innovate, continuing to build on and given our pump platform we are in a position to support our customers through this.

Vijay Kumar

Understood. And maybe my second one for you. Andrew, you mentioned the operating model change. Curious on you know, what has changed from prior model rate, how is this model better and what’s the impact or implication of free cash flow. I know you mentioned P and L responsibility. Is free cash flow going to improve from fiscal 25?

Andrew Hider — President and Chief Executive Officer

Yeah. So I guess I’ll take the first part and then I’ll let Joe walk through a little bit around the cash process. Look, just a few weeks ago we internally announced the new operative model and it’s designed around simplifying our organization, accelerating innovation and improving performance. And we are putting the accountability at the lower levels in the organization and I would say most significantly or one of the areas is delayering at the top level, removing the segment management, embedding critical functional roles directly into the business. And so this allows us to really further eliminate the barriers for decision making and it’s streamlining to listening to our customers and ultimately helping us improve our say do ratio and execute on a more consistent basis.

So this approach is really moving down that decentralizing and streamlining the organization with black debt accountability.

Joel Grade — Executive Vice President and Chief Financial Officer

Yeah Vijay and then I’ll take in the cash piece of this. Certainly as you’ve heard Andrew talk about regularly and myself as well, improving our balance sheet cash generation continues to be a top priority for the company. We do expect in 26 that free cash flow will improve versus 2025 driven primarily by stronger working capital performance and as well obviously what we don’t expect to repeat is some of the one time hits that happened in 2025, specifically the expenses for the hurricane from a free cash flow perspective we do. Also similar to 2025 we do expect it to be somewhat back gap related.

That includes a charge in Q1 related recent operating model and cost structure actions as well as some of the seasonality that we typically show. But we also do expect again we’ve talked about from a PNL standpoint our earnings tend to be skewed towards the second half of the year due to some of the structural impacts that have been recognized and expect to recognize in H2 again as well as some of the impacts from the manufacturing side of our business in terms of adjusting to better volumes. Confident in that. Why? Because again some of the impacts are driven by actions that are in flight.

So again the structural cost work in flight, the work around adjusting our manufacturing operations for better long volume in flight. And so I think and then the biggest again year over year drivers I mentioned really around working capital, inventory management, improved receivable collection processes and tighter control over payables processes including I’ll say commercial terms. So but GPS is playing a role in this as well, giving us a more consistent operating cadence, better visibility to reduce volatility and that overall strength in our cash conversion. So again we do expect cash flow to continue to move in the right direction as we execute through 2026.

We saw some of that already in the fourth quarter of 2025.

Vijay Kumar

Thank you.

Operator

Larry Biegelsen of Wells Fargo is on the line with a question. Please state your question.

Larry Biegelsen

Good morning. Thanks for taking the question. Two for me, one on the gross margin, one on pharma. Joel, could you please give us a. Little bit more color on the Q4 gross margin? How much of the year over year decline was due to you know, tariffs mix reclassifications and the one time items you called out. And how much lower do you expect the gross margin to be in 26 versus 25? I assume it’s more than the decline we see in the operating margin guidance. And I had one follow up.

Joel Grade — Executive Vice President and Chief Financial Officer

Yeah, thanks Larry, appreciate the question. So from again I’ll call gross margin and again overall operating margin standpoint certainly a few factors played into this. I mean an unfavorable mix of sales. So again with business mix I’ll say a geographic mix, a product mix certainly was a key element to this. We also had as was referred to earlier, some higher manufacturing and supply costs really for a couple different reasons. One obviously some of the challenges we had aligning again our labor to the volumes but also some of the impacts that Andrew mentioned related to some of the challenges that we’ve seen in PhRMA.

Those factored into this as well the non recurring items, again I would classify that as is around $40 million of impact that were related to gross and operating margins in the quarter. So certainly those are things to contemplate as part of that. So I would say that’s really the main, the main drivers there. Again as I indicated about 40 million of that not recurring.

Larry Biegelsen

Joel 2026. Versus 25 gross margin. I didn’t hear that.

Joel Grade — Executive Vice President and Chief Financial Officer

Yeah, we haven’t given specific guidance on that. I guess what I would say a little bit to the commentary that I had as it relates to sort of the Q4 to Q1, you know, I’d say, you know, there’s some of these impacts that we expect to continue into 2026 and I think about little of this as a H1, H2 kind of part of the year. In other words, this is going to continue to improve over the second half of the year. But there’s really two factors I’d say in H1 that I would consider as part of the one is called mathematical and then one is more just kind of actions that are driving outcomes.

So the mathematical piece, again, we do have some normal seasonality in our company between H1 and H2 from a pure volume perspective that certainly we’d expect to continue. And then our cadence reflects a more challenging first half with the improvement in the second half. ICT absorption, headwinds. Again, this is something that in the first half we had higher cost of inventory that we capitalized and that obviously we saw benefits there. That’s going to then roll into the first half of this year. So that’s essentially a headwind in the first half of 2026. So those are the mathematical pieces as well as tariffs.

Remember we didn’t have tariffs in the first half of last year. Then as it relates to the actions driving outcomes, there’s a couple elements to this. One is the structural cost takeout that we’ve talked about. The impact of that is obviously again, those actions are in flight. Again, confident in the work that we’re doing. But the outcomes of that are primarily going to be impacted in the second half of the year. And then in terms of aligning our manufacturing labor with our volumes and our production costs, again, that impact will start to show itself in the second half of the year because again we’re still, I would say, taking the hit, if you will, from the cap and mill as we sell those products in the first half of the year.

Larry Biegelsen

That’s helpful. And Andrew, thanks for giving us the P&LS Bisecbit. You know, pharma has an operating margin of 9% was even lower in Q4. My guess is compounding, which is your fastest growing business, doesn’t make a lot of money. What are you doing to improve the. Margins in this business? And why does it make sense to keep a low margin business like compounding that seems to hurt your kind of mix every quarter. Thanks.

Andrew Hider — President and Chief Executive Officer

Yeah. And I’ll just, I’ll walk through kind of the fundamentals, fundamentals of Pharma and really outline. So overall we like the fundamentals of this business and just a couple items. We’ve also taken this part of the organization, we’ve combined it with our ITT business and the reason being is it’s synergistic with that organization and it’s common customers, common call points and there’s an opportunity to improve the business and we have and we’re continuing to take actions to do so. Additionally, there’s been some areas that have been in our control that we’ve been challenged with and through GPS and through this identification with driving the accountability at the lowest levels.

We’ve taken critical actions around aligning to improve and one of them is around operational execution and not to get into too much specifics, but we saw one of our facilities really hindered by the ability to drive output and we took an action team around this. They’ve already improved, they’re continuing to improve. We’re going to see that performance through the, you know, improve through the first half of the year. But more importantly it’s around how do we not get back into this situation, how do we build this and have this being sustained performance and, and the role GPS plays in that is around identification and critical action.

The second piece within our control is we had a supplier challenge and to be quite candid, it was an area that we identified. We are working through. It is going to take us a part of the year to get through this and we’re identifying how we have alternatives to continue to support. We are continuing to shift. That said, we are looking to identify for long term solutions. So you know, to answer your question head on, we like the fundamentals of the business. We’ve got some work to do here and we need to continue to align around the value creation we have for our customers.

Andrew Hider — President and Chief Executive Officer

And Larry, two other things I would. Maybe just add to that. I think number one is in the, you know, some of the margin challenges that we saw in Q4, certainly as Andrews that that starts to improve over the second part of the year. But we still anticipate that being an impact in Q1 and then the second piece of this, just the one reminder as it relates to the compounding business. I mean yes, certainly that mix impact is a margin impactor as well in terms of the relative level of growth in compounding to our injectable anesthesia. The one thing about that business. It is our fastest cash cycle in the business.

So that is one area that just as a reminder that is a benefit from that particular business.

Larry Biegelsen

Thank you.

Operator

Travis Steed of Bank of America is on the line with a question. Please state your question.

Travis Steed

Joel, just a little confused on what to put in the model for Q1 and to understand kind of the slope of the recovery in 26 and is revenue kind of down low single digits, down mid single digits? Are gross margins op margins flat down sequentially? What percent of earnings should fall in Q1 versus kind of the second half of the year? Just any more details on how to model the Q1?

Joel Grade — Executive Vice President and Chief Financial Officer

Yeah, thanks for the question. So again we haven’t specifically given numerical guidance on the quarters. Again, the thing I would just continue to reiterate is the fact that again there’s, there’s a number of these key elements that are impacting Q1. Again even I’d say as we even contemplated that relative to Q4 again I’ll just run through a couple of them. Again, there’s a volume and seasonality impact that occurs. There’s the continued elements of uncertainty around our novum customer behavior around our novum LVP returns. Again, there’s a likely as I just referenced on the last continued challenges from a pharma perspective as it relates to our overall margin and again the headwinds from an absorption standpoint.

Again we capitalized into our inventory costs, some of the higher costs that we experienced in 2025 as we head into 2026 and we say again those are going into our cogs. And so as we sell those products, those are essentially selling higher priced inventory as we head into the first quarter and H2 in general. So those are some of the main issues that are driving that. And again on EPS level interest expense kicking in, I think that’s those are really the main key drivers I would think about as to why our first half and specifically first quarter remains particularly challenging.

Travis Steed

Okay, we’ll hopefully get more offline. Two little kind of nitpicky questions. One, just kind of curious if you’re assuming share gains or share losses in infusion pumps this year and OUS Care and Connectivity Solutions was up $50 million sequentially. Was there anything kind of one time in that line item?

Andrew Hider — President and Chief Executive Officer

Yeah, so I guess I’ll start with the first question here. Look, we have good opportunities as we go into the year and you know, as a reminder, Spectrum is a workhorse in the space and not only is it a workhorse, we continue to innovate on the Platform and now that it’s it speaks with Novum Syringe, we’re continuing to be confident in our ability to bring high value to the market we serve.

Joel Grade — Executive Vice President and Chief Financial Officer

Can you repeat the second part of your question? I’m sorry? Yeah.

Travis Steed

International Carrying Connectivity solutions was up $50 million sequentially. I didn’t know if there was anything. One time in there it looked like a big growth rate in the international business.

Joel Grade — Executive Vice President and Chief Financial Officer

Yeah, I mean I would just say in general that business has been performing well. I don’t know that there’s any one time I would say in general in the overall CPS business. Again, we’ve had a strong order book, we’ve talked about that. We’ve had some competitive wins from a customer standpoint. Again, capital spend in general remains really kind of strong, strong across our geographies. So I don’t know if there’s anything unusual at one time there, just that that business has continued strong business and they continue to improve outside the US which was somewhat of a headwind last year.

Travis Steed

Okay, thank you.

Operator

Danielle Antalffy of UBS is on the line with a question. Please state your question.

Danielle Antalffy

Hey, good morning guys. Thank you so much for taking the question, Andrew. I appreciate it’s not been terribly long, but I guess I’m just curious about looking at the Baxter portfolio and its total totality. Sort of how you feel about the state of the portfolio today. Appreciating, you know, you’re not going to be doing probably M and A anytime soon, but A sort of where you see the most exciting opportunities with the current portfolio that might be underappreciated by investors and then B, where you think there’s opportunity to sort of vamp up the product portfolio.

Thanks so much.

Joel Grade — Executive Vice President and Chief Financial Officer

You bet. And if I miss something, Danielle, certainly feel free to jump in. I’ll take this as you outline in the question. So look, Baxter’s fundamental and it’s fundamental to the healthcare system. And as I mentioned earlier in the call, it’s a trusted partner. We have market leadership across multiple product categories. We have a resilient portfolio and deep customer relationships that really give us a competitive advantage. Now as we go forward, innovation will be a critical element to our success. And you know, as we look at innovation as an enabler, it’s really extremely important as we bring new innovation to the market and not only from listening to our customers and identifying the pain points to solution, but also just that staying in front of our total portfolio of product set so there’s an opportunity to not only improve our performance, but GPS becomes the Foundational and foundation for how we really drive disciplined, not only operating rhythm but also clear accountability and clear enablement to listen to our customers streamline our ability to bring strong capability to the market and really have real time visibility to, to bring innovation to solve issues and to solve challenges that our customers face.

So like the fundamentals of where we sit, certainly areas we need to continue to challenge on and you know there’s some areas internationally that we’re looking at. We do have smaller exits that we’re looking at in 26 as we look at our total portfolio and as far as areas where you know, I just, I called it out in the call. We’re pleased with our, with our performance in our, in many of our businesses but more specifically in how we bring our solution from not only our advanced surgery business but the capability we have in that space and how customers we look to Baxter to support and have high value when they’re treating and working with patients.

But we have many of those NPT has areas we’re looking at as well as HST and as well as pharma. So more to come and if I could just characterize how we think about innovation for the future. It’s a base hit discussion, not walk off grand slam. It’s about that constant drive to launch products, to launch solutions that really enable our customers to bring higher level of care at a more efficient pace. And lastly on capital allocation, you know it is a critical element. We talked as direct on capital allocation as we do around our market strategy and I’ve outlined it starts with delevering our balance sheet and we’ve taken critical actions around that.

When we look at the other levers reinvesting in the business and I walk through, we’re going to be at or above on our innovation reinvestment, expecting new product launches, expecting areas to drive R and D, not just sustainment but also as we get into future and we delever identifying targets that can add high value from an M and A perspective. And we have a strong funnel but we need to delever first. So hopefully I answered your question.

Danielle Antalffy

Yeah, no, very helpful. Thanks Andrew. Appreciate it.

Operator

We have time for one more question. Joanne Wuensch of Citi is on the line with a question. Please state your question.

Joanne Wuensch

Good morning and thank you for squeezing me in. I’m just curious when you went to. Put guidance together for 2026, what was. Sort of your philosophy of how to deliver it so you can deliver on the guidance? Thank you.

Joel Grade — Executive Vice President and Chief Financial Officer

Thanks Joanne. I’ll take a stab at that. Anyone say anything you can look I always view, I think he and I collectively view guidance as prudent and reflective of the best and most current information we have available. And so you know we think about these things as trying to continue to be very transparent about the challenges we’re facing. This is certainly apparent in our Q4 results but also about the actions we’re taking to address those issues. We try to talk about some of the things that are market conditions but also things that are in our control to deal with.

And so and obviously all that kind of falls into the underlying assumptions underpinning the guidance. And so you know as we sort of put all that together and think about some of the key factors in the year that are happening again we certainly talked about the fact that you know there’s a key novum assumption that was in there. You know we talked about our IV solutions that we rebased that we’ve talked about some of the challenges in our injectables and our anesthesia, some of the product mix impacts again the manufacturing volumes that we had to adjust to and some of the you know what we say in that 2026 is going to be a reduced contribution from pricing as well as the EPS impact.

So Joanne, I guess I’d say when we pull that all together that’s where our guidance shakes out. Certainly again I’ve said you know I said earlier in the call I certainly understand the frustration some of our volatility in the way we hit this Again it matters to us a ton for our state do ratio to be in a place where we actually you get here’s what we say and then here’s what we do in terms of that relative to our guidance but you know hopefully that I don’t answers there anything.

Andrew Hider — President and Chief Executive Officer

And I would just say you know I’ll echo So it’s a view of the market, it’s our prudent view of how we will operate But I just, I want to reiterate GPS will become who we are and how we operate and it will allow and enable us to go very deep in the organization and drive accountability and it’s part of our journey around the continuous improvement model and how we need to continue to improve our safety ratio and you know it’s an area that we’ll continue to update as we go throughout the year.

Operator

Thank you. And at this time I will now hand the call back over to Andrew for some final closing comments.

Andrew Hider — President and Chief Executive Officer

Yeah, thanks operator. Look, in closing we’re not where we want to be but we’re confronting our challenges head on and taking deliberate steps each day to better position Baxter for the long term. I’m energized by the opportunities ahead, driven by the essential role Baxter plays in patient care and our mission driven team that is committed to driving stronger and performing over a long period of time. Thank you very much. Stay safe and goodbye for now.

Operator

Ladies and gentlemen, this concludes today’s conference call with Baxter International. Thank you for participating.