The Chicago-area company said it’s tapped outside lawyers and consultants to assist with an investigation into intra-company trades designed to create foreign exchange gains or losses.
“These transactions used a foreign exchange rate convention historically applied by the company that was not in accordance with generally accepted accounting principles and enabled intra-company transactions to be undertaken after the related exchange rates were already known,” Baxter said.
The transactions “resulted in certain misstatements” in Baxter’s reporting of non-operating income from foreign exchange gains. Net foreign exchange gains as reported were $8 million in 2014, $113 million in 2015, $28 million in 2016, $50 million in 2017, $73 million in 2018 and $22 million for the first half of this year, the company said.
Those results – and potentially results from other periods – could be adjusted after the investigation has run its course. Baxter said it’s already notified the U.S. Securities & Exchange Commission about its probe, which likely means a delay in filing its quarterly report.
The company also said it expects to “correct certain items that affect operating income and were immaterial to its previously reported results of operations, including the impact of the non-GAAP exchange rate convention on translating foreign results into U.S. dollars and on the accounting for equipment leased to customers.
“Baxter takes this matter very seriously, and the Board along with the Company’s leadership team fully supports a comprehensive investigation,” chairman & CEO Joe Almeida said in prepared remarks. “The company is taking steps to strengthen and enhance its internal controls, and we look forward to sharing our full financial results as soon as possible.”
Baxter said it expects to report third-quarter operating income of $503 million on sales growth of 3% to $2.85 billion. Adjusted Q3 operating income is pegged at $555 million, or 19.5% of sales. Analysts on Wall Street were looking for sales of $2.86 billion.
“Our strong preliminary operating results reflect the positive impact of Baxter’s ongoing transformation, commitment to innovation and continued operational excellence,” Almeida said. “While the company is working diligently and expeditiously to address the non-operating related accounting issue, Baxter’s 50,000 employees remain intently focused on our mission to save and sustain lives as well as executing on our strategy to deliver top quartile performance for all stakeholders.”
BAX shares were off -7.5% to $81.35 apiece today in late-morning trading.