Baxter's first quarter was in line with management's expectations, keeping it on track for reiterated full-year guidance, though adjusted EPS fell 35% to $0.36 against an unfavorable prior-year cost-timing comparison and organic sales declined 1%. Margins contracted on tariffs and higher manufacturing costs, with weakness in Infusion Therapies, injectables and anesthesia partly offset by 10% growth in Advanced Surgery and 20% in Drug Compounding. Full-year organic sales are expected to be approximately flat with second-half-weighted growth, and guidance assumes the Novum LVP ship-and-installation hold remains in place all year.
Good morning and welcome. Today, we'll discuss Baxter's first 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 reiterated outlook. The press release and investor presentation are available on the investor section of the Baxter website. Joining me today are Andrew Hider, President and Chief Executive Officer, and Anita Zielinski, Interim Chief Financial Officer, Chief Accounting Officer and Controller. During the call, we will be making forward-looking statements, including comments regarding our reiterated financial outlook for the full year 2026, and the anticipated drivers of the second quarter and second half 2026 performance.
The anticipated impact of various regulatory and operational matters, including ones related to our infusion pump platform and ongoing supply chain challenges, and commentary regarding the global macroeconomic environment, including estimated impacts of tariffs and broader inflationary pressures.
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 of 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 in our press release and our investor presentation.
On the call, we will reference organic growth, which excludes the impact of foreign exchange, MSA revenues from Vantive, and impacts associated with business acquisitions or divestitures. As a reminder, continuing operations excludes Baxter's kidney care business, which is now reported as discontinued operations.
Finally, Andrew, Anita, and I will take questions following the prepared remarks, and we kindly ask that you limit yourself to one question and one brief follow-up so that we can give as many people on the queue an opportunity. With that, I'd like to turn the call over to Andrew.
Thank you, Kevin. Good morning, everyone. Welcome, Anita, who is serving as interim CFO until we appoint a permanent successor while continuing her duties as Chief Accounting Officer and Controller. I have full confidence that Anita's stewardship, supported by the diligence of our finance team, will help ensure continuity and a seamless transition while also supporting our turnaround, including efforts to strengthen our balance sheet. I'd also like to thank Joel for his contributions and partnership during his time with Baxter. We wish him all the best.
We have launched a comprehensive search for a permanent successor, and I look forward to providing an update when appropriate. In the meantime, my focus remains on executing our turnaround, including stabilizing the business, strengthening the balance sheet, and driving a culture of continuous improvement. The Baxter team is working hard and made progress on all three fronts in the quarter.
I'll cover this in more detail in a few minutes. For the first quarter, financial results were in line with our overall expectations, and we are on track to deliver on our guidance for the full year. Although we are not satisfied with where our performance stands today, we have a roadmap in place to improve results and drive shareholder value. I have clear insights into the challenges facing our business. We believe we are taking the actions necessary to fulfill the company's potential.
As I have come to learn through my immersive nine months as CEO and deep engagement with customers, employees, and our leaders, Baxter is a foundation of good businesses with leading positions and the potential to outgrow our markets, expand margins, and increase cash flow. We are focused on delivering not only better, but also more consistent and predictable performance.
With that, let me provide a high-level overview of our performance within the quarter. First quarter global sales from continuing operations totaled $2.7 billion, representing an increase of 3% year-over-year on a reported basis, and a decline of 1% on an organic basis. Adjusted earnings from continuing operations for the quarter were $0.36 per diluted share versus $0.55 in the prior year period. As we stated in our last call, we expected the first quarter to be challenging, including difficult prior year comps. In the first quarter of 2025, we saw a one-time distributor build following Hurricane Helene, which benefited the MPT segment. In the prior year, operating margins realized a benefit due to the timing of certain functional costs being reclassified.
In the quarter, we saw the expected headwinds from both tariffs and higher manufacturing costs, including absorption pressure operating margin. While we did not see material impact from Novum LVP related returns in the quarter, we believe it's prudent to continue to factor this possibility into our full year guidance. We remain focused on supporting our current Novum customers with their implementation of currently available mitigations. We continue to work diligently to finalize hardware and software corrections to resolve the active field actions. Once available, we will implement the corrections in coordination with regulatory authorities, including any necessary submissions. Looking at the overall demand environment, we continue to believe we are in attractive end markets. Advanced Surgery, for example, had another great quarter, growing 10%, and we are sustaining a strong order book in our Care and Connectivity Solutions business.
We continue to monitor the direct and broader macroeconomic effects of higher oil prices and conflict in the Middle East. Our Middle East exposure is less than 2% of total revenue. Importantly, our exposure to fuel today is less than half of what it was historically, given the divestiture of the Kidney business. That said, this is obviously a fluid situation which we are actively monitoring. In the event the landscape changes, it will not be Baxter specific, and we are prepared to navigate any unforeseen dynamic with rigor and agility. To support our customers, we are continuing to advance innovation in targeted areas of the portfolio. This includes positive response from customers and strong order growth from Dynamo, a smart hospital stretcher designed to improve patient safety and care team efficiency.
In the quarter, we also launched the IV Verify Line Labeling System, an automated solution that supports safer medication administration, and the XR Spine surgical table, which is designed to support surgical teams across a range of spine procedures. We also have an active pipeline of differentiated solutions with integrated AI functionality designed to accelerate future growth. We are already leveraging AI in our Connected Care Foundation, which unifies Baxter's unique data set provided by Internet of Things devices like beds, pumps, and vitals to provide actionable data and analysis. In addition, we are using AI in Front Line Care to develop products that strengthen clinical insights and operational efficiency. Overall, our performance in the first quarter was in line with how we expected the year to begin, with a few puts and takes across the portfolio.
Importantly, our results support the broader framework we laid out for 2026, including known mechanical headwinds and a more challenging comparison to the prior year in the first half and improving performance in the second half. It is still early in our turnaround, but we're on the right track and showing progress on our three strategic priorities. The first of those priorities is stabilizing the business, specifically in areas that require increased focus. As an example, last quarter, we referenced back order challenges at one of our manufacturing facilities that was impacting revenue and driving unfavorable mix within pharma. During the quarter, we made significant progress in clearing back orders in addition to increasing throughput. The second priority is strengthening the balance sheet. That includes improving free cash flow to support deleveraging.
I'm encouraged with the positive free cash flow generation in the quarter, which reflects early success in our effort to improve working capital efficiency. While we still have more work to do, this is a solid step in the right direction and reinforces my confidence that the actions we are taking will strengthen cash generation and our overall financial flexibility over time. Our near-term capital deployment priority is debt paydown, and we continue to target net leverage of approximately 3x by the end of 2026. Once we reach our leverage goal, we will have a stronger balance sheet with more optionality to drive shareholder value, including strategic tuck-in M&A that enhances our customer offerings and growth profile as well as the option to return capital through share repurchases. Turning to our third priority, driving continuous improvement.
It has been almost six months since we rolled out the Baxter Growth and Performance System, or GPS, which is focused on simplifying processes, leveraging data, and strengthening performance management. In the time since launch, we have delayered management teams and pushed down P&L responsibility directly to leaders of each of our operating businesses. We are setting rigorous KPI measures to drive accountability and continuing to embed the operating discipline into our culture to enable better execution, consistency, and improved performance over time. We have also started to deploy AI tools to accelerate efficiency gains within internal quality workflows, such as the customer correspondence portal and AI-assisted corrective field action communications scheduled to be deployed later this year.
Looking forward, we will thoughtfully embed AI directly into internal process improvements, frontline workflows, and manufacturing at enterprise scale with the goal of strengthening speed, consistency, reliability, while also maintaining rigorous governance and a focus on patient safety. Baxter GPS is becoming part of how the company runs the business. We kicked off the year with 10 President Kaizen events, and we've now launched more than 230 continuous improvement events. We're building a stronger culture of continuous improvement through leader training and establishing a lean community of practice. To date, much of our focus has been concentrated on cash flow, service reliability, and speed to market. While we are still in the early stages of organization-wide adoption, we are seeing strong traction.
Thanks, Andrew. Good morning, everyone. I'm happy to be joining the call this morning to cover the details of Baxter's first quarter financial performance, as well as commentary and our outlook for the remainder of 2026. First quarter 2026 global sales from continuing operations totaled $2.7 billion and increased 3% on a reported basis and declined 1% on an organic basis. On the bottom line, adjusted earnings from continuing operations were $0.36 per share, a decrease of 35%. As expected and previously discussed, results reflect an unfavorable comparison to first quarter 2025, which benefited from a timing shift in expense recognition. This benefit in the prior year related to an updated estimate which resulted in the reclassification of certain functional costs from SG&A to cost of sales. This was approximately a $50 million headwind in the quarter.
Additionally and as expected, we saw higher costs related to tariffs which were not present in the prior year period and higher manufacturing costs, including lower absorption. I'll walk through our results by reportable segment. Commentary regarding sales growth will be on an organic basis. Sales in our Medical Products & Therapies segment, or MPT, were $1.3 billion and declined 2% in the quarter. Within MPT, sales of our Infusion Therapies and Technologies, or ITT division, totaled $981 million and declined 5%. Performance in the quarter reflects lower infusion pump sales due to the previously discussed ship and installation hold of Novum LVP and an unfavorable comparison to the prior year due to a one-time distributor build within IV solutions following Hurricane Helene. Within IV solutions, performance in the quarter was in line with our expectations.
As previously shared, clinical practice changes in the market have created a new baseline in demand. In Infusion Systems, results in the quarter reflected the net impact of lower sales due to the ongoing shipment and installation hold of the Novum LVP, customer returns, and transitions to Spectrum. Sales in Advanced Surgery totaled $304 million and grew 10%. Results in the quarter reflected continued strong demand and increased volumes for our global portfolio of hemostats and sealants, strong commercial execution across regions, and steady procedure volumes. MPT's adjusted operating margin totaled 14.5% for the quarter, decreasing 480 basis points. This reflects the same drivers as total Baxter, including the unfavorable year-over-year comparison related to cost timing, tariffs, and higher manufacturing costs, including absorption.
In the Healthcare Systems & Technologies segment, or HST, sales in the quarter totaled $705 million, decreasing 2% due to a decline in the Front Line Care division. Within HST, sales of our Care and Connectivity Solutions, or CCS division, were $435 million, flat compared to the prior year period. The Patient Support Systems, or PSS portfolio, which is the largest business within CCS, saw growth in the quarter and continues to see momentum, including a strong capital order book within the U.S. This was offset by our care communications portfolio, which is impacted by the timing of installations. To date, we have not observed a slowdown in U.S. hospital capital spending. Given the broader macroeconomic uncertainty, we continue to closely monitor the situation. Front Line Care sales were $270 million and declined 4%.
Performance in the quarter reflects the timing of government orders and large customer deals. It also includes planned global exits in the portfolio. HST adjusted operating margin totaled 9.4% for the quarter, decreasing 380 basis points. These results reflect an unfavorable year-over-year comparison related to previously discussed cost timing and higher costs related to tariffs. Moving on to our pharmaceutical segment. Sales in the quarter totaled $621 million, increasing 1%. Within pharmaceuticals, sales of our injectables and anesthesia division were $301 million, a decline of 13%. Consistent with last quarter, the injectables portfolio was negatively impacted by supply constraints and continued softness in certain pre-mixed products. As Andrew referenced, during the quarter, we made significant progress in clearing back orders at one of our manufacturing facilities.
Additionally, supply constraints associated with a disruption at a contract manufacturer contributed to the performance in the quarter. While we are working closely with the manufacturer to help improve supply of these products, we do expect limited supply into 2027. Our anesthesia portfolio also declined low double digits, reflecting continued softer demand for inhaled anesthesia products globally. Drug Compounding grew 20% and continues to reflect strong demand for our services. Pharmaceuticals adjusted operating margin totaled 7.4% for the quarter, decreasing 340 basis points. This reflects the previously discussed unfavorable year-over-year comparison related to cost timing, price erosion, and an unfavorable product mix within injectables, driven in part by supply constraints impacting select higher-margin products.
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 $14 million in the quarter. MSA revenue from Vantive totaled $76 million. As a reminder, these sales are included in our reported growth, but they are not reflected in our organic growth. Now, moving through the rest of the P&L. First quarter adjusted gross margins from continuing operations were 36.8%, a decrease of 500 basis points driven by the previously discussed headwinds and cost of goods sold. First quarter adjusted SG&A from continuing operations totaled $614 million or 22.7% of sales, slightly lower than the prior year. Adjusted R&D spending from continuing operations in the quarter totaled $124 million or 4.6% of sales.
TSA income and other reimbursements totaled $42 million in the quarter, in line with our expectations. Altogether, these factors resulted in an adjusted operating margin of 11% on a continuing operations basis, a decrease of 390 basis points, reflecting the same underlying drivers discussed earlier in relation to earnings per share. Net interest expense and other expense from continuing operations totaled $67 million in the quarter. The continuing operations adjusted tax rate for the quarter was 18.3%, driven primarily by mix of earnings across jurisdictions. In total, adjusted earnings from continuing operations were $0.36 per share for the quarter. Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. First quarter free cash flow was $76 million. This compares to negative $221 million in the first quarter of 2025.
Performance in the quarter reflects improved cash flow generation, including progress across targeted areas of working capital, as well as continued focus on execution. We remain focused on strengthening cash flow generation and maintaining discipline around working capital, which are foundational elements of our financial strategy. Improving the balance sheet continues to be a key priority, and we intend to deploy cash towards reducing leverage in line with our capital allocation framework. Now turning to our outlook for the full year 2026, which we are reiterating. For the full year, we continue to 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 top-line growth for the year.
In addition, reported sales are expected to include a headwind of approximately $25 million from MSA revenues from Vantive, representing approximately 30 basis points of impact on reported growth. Excluding the impact of foreign currency and MSA revenues, we expect approximately flat organic sales growth for 2026. As it relates to the segments, there are no changes to our organic sales assumptions. In MPT, we expect full year organic sales to be flat to slightly up. This reflects the uncertain timing for the resolution of the Novum ship and installation hold.
Although we did not see a material impact from customer returns in the first quarter, we continue to believe it's prudent to include the potential impact from various customer responses in our guidance. Our guidance also assumes that the ship and installation hold will remain in place for the full year.
In HST, we continue to expect full year organic sales to grow low single digits, supported by anticipated contributions from both the Care and Connectivity Solutions and Front Line Care divisions. In pharmaceuticals, we expect full year organic sales to be approximately flat. This reflects ongoing pressures in injectables and anesthesia related to softer market demand, continuing supply challenges, and IV push utilization trends that have been discussed in prior quarters. We expect this to be offset by continued growth in Drug Compounding.