When Baxter International, Inc. (NYSE:BAX) reported its third-quarter results in October, the main story focused on the company's cost-cutting efforts. The medical products supplier's earnings growth was much higher than its revenue growth as a result of those efforts.

Baxter announced its fourth-quarter and full-year 2017 earnings results on Thursday before the market opened. This time around, the top line looked a lot better than the bottom line -- but there was a good reason why. Here are the highlights from Baxter's fourth-quarter update. 

Red 4th quarter button on computer keyboard

Image source: Getty Images.

Baxter results: The raw numbers

Metric 

Q4 2017 

Q4 2016 

Year-Over-Year Change

Sales

$2.77 billion $2.65 billion

4.5%

Net income (loss) from continuing operations

($71 million) $243 million

N/A

Adjusted EPS

$0.64 $0.57

12.3%

Data source: Baxter. EPS = earnings per share.

What happened with Baxter this quarter?

One number particularly jumps out with Baxter's fourth-quarter performance: the loss of $71 million. What happened? It's not nearly as bad as it first looks. 

Baxter recorded a net tax charge of $322 million related to the estimated impact of U.S. tax reform. This one-time charge caused the net loss for the period. However, adjusting for this tax hit and other special items, Baxter's bottom-line performance in the fourth quarter looked better. The company announced adjusted net income from continuing operations of $354 million, or $0.64 per diluted share, which topped guidance provided in October.

However, revenue growth wasn't as good as it might appear. Although the company reported a 4.5% year-over year sales increase, currency fluctuations helped pad that number. On a constant currency basis, revenue grew 3% year over year. And on an operational basis, revenue increased only 2% above the prior-year period.

In addition to the impact of foreign exchange, operational sales growth was lower than reported growth due to generic competition for Baxter's chemotherapy cyclophosphamide in the U.S., the Claris Injectables acquisition, and the several strategic product exits that are underway. As predicted in October, Baxter's sales were also  negatively impacted to the tune of around $70 million by temporary manufacturing disruptions in Puerto Rico due to the impact of Hurricane Maria.

The bright spot for Baxter in the fourth quarter was its international hospital products sales, which grew 10% year over year to $809 million. This growth was driven in large part from the company's international integrated pharmacy solutions business.

What management had to say

Baxter chairman and CEO Jose (Joe) E. Almeida said:

Baxter's solid performance in 2017 reflects the ongoing impact of strategic, disciplined execution. We are combining an unwavering focus on operational excellence with an increased emphasis on innovation and portfolio expansion to deliver positive results for patients and investors. Looking ahead, our continued transformation will help support our aspiration of delivering industry-leading performance for our investors and other stakeholders in 2018 and beyond.

Looking forward

First-quarter sales growth is expected to land between 5% and 6% on a reported basis and 1% to 2% on a constant currency basis. Baxter projects that operational sales will be flat in the first quarter of 2018 compared to the prior-year period. Adjusted earnings per diluted share are expected to be between $0.60 and $0.62, a 5% year-over-year increase at the midpoint of the range.

Baxter also projects sales growth of 6% to 7% on a reported basis for full-year 2018, with around 4% growth on a constant currency and operational basis. It expects adjusted earnings per diluted share for the full year between $2.72 and $2.80, an 11% year-over-year increase at the midpoint of the range.

Perhaps the most important thing for investors to watch are Baxter's new product launches. Several new products contributed to Baxter becoming one of the top medical instrument stocks in 2017. It recently received Food and Drug Administration approval for Bivalirudin, an anticoagulant that comes in a frozen, premixed, and ready-to-use formulation. The company is also acquiring two hemostat and sealant products from Mallinckrodt.

The dynamics are different in 2018 for Baxter than they were last year. However, the company is stronger operationally and is generating more cash flow to invest in the business. That's news investors can feel good about.

 

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