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Bye-bye Baxter (BAX)

Baxter International reported that third-quarter revenue increased a healthy 17% to $3.8 billion with a loss of $2.9 billion or $5.83 per share. This loss reflects impairment charges of $3.1 billion related to Baxter’s acquisition of Hillrom primarily reflecting rising interest rates and broad declines in equity valuations. Excluding special items related to the Hillrom acquisition, Baxter’s adjusted net income was $414 million with EPS of $.82, down 20% from last year.

Year-to-date, free cash flow declined 71% to $293 million, due to working capital changes. During the past nine months, Baxter paid $427 million in dividends and repurchased $32 million of its stock.

For the full-year 2022, Baxter now expects losses of $4.52 to $4.45 per share and adjusted EPS of $3.53 to $3.60. The company expects sales growth of 17% to 18%, or approximately 23% on a constant currency basis and low single digits on an operational basis. Baxter's updated full-year financial outlook reflects the Hillrom impairment charges, the continued impact of supply constraints for electromechanical components, foreign exchange pressures as well as increased interest expenses, and a higher effective tax rate.

The Hillrom acquisition occurred subsequent to our investment in Baxter and changed Baxter’s business fundamentals. The large impairment charge indicates Baxter overpaid for the acquisition while adding significant debt to the balance sheet.

With cash flow declining and the adverse change in business fundamentals, we have decided to bid bye-bye to Baxter International and sell our position for an unhealthy loss of 32% over the last year.
 

Saluting Profits From General Dynamics (GD)

General Dynamics reported third-quarter revenues rose 4% to $10 billion with net earnings up 5% to $902 million and EPS up 6% to $3.26. Orders remained strong across the company with a consolidated book-to-bill ratio, defined as orders divided by revenue, of 1.1 times for the quarter. The company ended the quarter with $88.8 in backlog including an Aerospace backlog of $19.1 billion which increased 29.7% from the prior year's quarter. The total estimated contract value, the sum of all backlog components, was $125.8 billion at the end of the quarter.

Aerospace revenues rose 14% to $2.3 billion as there was broad-based demand by model and geography. Aerospace had the best year-to-date order performance in over a decade with a book-to-bill ratio of 1.2 times. Marine Systems revenue increased 5% during the quarter to $2.8 billion with orders totaling $3.2 billion and a book-to-bill of 1.1 times. Combat Systems revenues increased 3% to $1.8 billion as broad-based demand drove backlog with a book-to-bill of 1.3 times. Technologies revenues declined 2% to $3.07 billion impacted by ongoing supply chain disruptions.

Year-to-date, free cash flow was up 58% to $3.3 billion with the company paying over $1 billion in dividends and repurchasing $1.1 billion of its common shares. General Dynamics ended the quarter with $2.5 billion in cash, $9.2 billion in long-term debt, and $17.7 billion in shareholders’ equity on its com- bat-ready balance sheet.

Over the past three years, General Dynamics’ stock has marched higher and provided a 51% total return. With the stock appearing fully valued, we plan to trim our position and salute General Dynamics’ leadership team and the profits provided.
 

Tax Loss Harvesting Candidates

During market downturns, a silver lining for taxable accounts is the ability to harvest tax losses. Losses may be used to offset capital gains during the year and also be carried forward to future years and to reduce ordinary income by $3,000. Tax loss harvesting candidates this year include 3M (MMM) and Meta Platforms (META) given challenging business fundamental issues as well. We will review all client accounts for opportunities to minimize capital gains by harvesting losses.

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