On October 24, 2019 Baxter International Inc. (NYSE:BAX), a leading global medical products company, reported certain preliminary operating results for the quarter ended September 30, 2019 (Press release, Baxter International, OCT 24, 2019, View Source [SID1234542501]). Baxter further indicated that the Company is investigating misstatements in previously reported non-operating income. The internal investigation is described in further detail below.

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"Our strong preliminary operating results reflect the positive impact of Baxter’s ongoing transformation, commitment to innovation and continued operational excellence," said José (Joe) E. Almeida, chairman and chief executive officer. "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."

Preliminary Third Quarter Operating Results

Worldwide sales in the third quarter totaled approximately $2.85 billion, an increase of 3% on a reported basis, and 5% on both a constant currency and operational basis. Operational sales exclude the impact of foreign exchange and generic competition for U.S. cyclophosphamide.

Sales in the U.S. totaled $1.2 billion and International sales totaled $1.6 billion. All Baxter geographic regions contributed to positive sales performance in the quarter. Sales in the Americas were $1.5 billion, sales in Europe, Middle East and Africa (EMEA) were $730 million, and sales in Asia Pacific (APAC) were $587 million.

Key performance drivers in the third quarter included strong sales of Baxter’s peritoneal dialysis (PD) and continuous renal replacement therapies (CRRT), intravenous (IV) infusion systems and solutions, hemostats and sealants, and certain generic injectable pharmaceuticals. In addition, increased international demand for Baxter’s hospital pharmacy compounding services contributed to the strong performance in the quarter. As expected, revenues were partially offset by lower U.S. sales of Brevibloc and in-center hemodialysis (ICHD) products.

Please see the attached schedules accompanying this press release for additional details on performance in the quarter, including sales by Baxter’s six global business units.

Baxter reported operating income of $503 million for the third quarter. This includes special items totaling $52 million, primarily related to intangible asset amortization and business optimization initiatives, partially offset by insurance recoveries related to the impact of Hurricane Maria. On an adjusted basis, Baxter’s third quarter operating income totaled $555 million, or 19.5% of sales, reflecting strong revenues and solid operational performance.

Business Highlights2

Baxter continues to achieve significant milestones in pursuit of its Mission for patients and emphasis on accelerating profitable growth. Among recent highlights, the Company:

Initiated the U.S. and Canadian launches of Baxter’s next-generation PrisMax system for continuous renal replacement therapy (CRRT) and therapeutic plasma exchange (TPE). Among many advanced features, PrisMax incorporates TrueVue Analytics, Baxter’s proprietary data and analytics platform.
Announced the agreement to acquire Cheetah Medical, a leading provider of non-invasive hemodynamic monitoring technologies. Once completed, this acquisition will accelerate Baxter’s presence in the specialized patient monitoring space, expanding the portfolio with key technology used to guide fluid management based on individual patient needs.
Announced a partnership with COSMED srl to commercialize Q-NRG+, a metabolic monitoring device utilizing indirect calorimetry (IC) technology. IC is used to accurately measure resting energy expenditure (REE) – a patient’s caloric needs while at rest – and is recommended in guidelines from nutrition societies around the world.
Broadened its generic injectable pharmaceuticals portfolio with the U.S. launch of Myxredlin (Insulin Human in 0.9% Sodium Chloride Injection), the first and only ready-to-use insulin for IV infusion in the hospital and other acute care settings.
Announced new data associating the use of Baxter’s automated peritoneal dialysis (APD) cyclers and the Sharesource remote patient management platform with a 39% reduction in hospitalizations for home PD patients receiving care at Baxter Renal Care Services clinics in Colombia. The data also show the use of Sharesource is associated with a 54% reduction in the length of hospital stay for home dialysis patients requiring inpatient care. Sharesource is the most widely adopted telehealth platform globally for home dialysis and has helped manage approximately 10 million PD treatments in more than 40 countries.
The Company has also received multiple recognitions in recent months. Among them, Baxter was:

Named to the Dow Jones Sustainability Indices (DJSI) – DJSI World and DJSI North America – recognizing continued leadership in sustainability and corporate responsibility. Baxter has appeared on each of these lists since the introduction of the DJSI in 1999.
Recognized as a 2019 Top 10 Percent Inclusion Index Company, one of just 14 companies cited for superior achievement in creating an inclusive workplace as part of Diversity Best Practices’ annual Inclusion Index.
Honored by Working Mother magazine as one of its 2019 100 Best Companies, and one of its 2019 Best Companies for Dads.
Internal Investigation

Baxter recently began an investigation into certain intra-Company transactions undertaken for the purpose of generating 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. The Company is being assisted in the investigation by experienced external counsel and consultants.

These intra-Company transactions resulted in certain misstatements in the Company’s previously reported non-operating income related to net foreign exchange gains. Within "Other (income) expense, net," the Company previously reported net foreign exchange gains of $8 million, $113 million, $28 million, $50 million, $73 million, and $22 million, for the years 2014, 2015, 2016, 2017, 2018, and the first half of 2019, respectively. The investigation is not limited to these periods and any subsequent adjustments to previously reported foreign exchange gains and losses may alter those non-operating income results.

The Audit Committee of the Company’s Board of Directors is overseeing this investigation with the assistance of independent, experienced external advisors. Baxter voluntarily advised the staff of the Securities and Exchange Commission (SEC) that the internal investigation is underway and intends to provide additional information to the SEC as the investigation progresses. The Company does not expect to file its quarterly report on Form 10-Q for the period ended September 30, 2019 on a timely basis.

The investigation is in its early stages and the Company cannot predict its duration or outcome. Upon completion of the investigation and the Company’s evaluation of the materiality of the misstatements, the Company expects to either amend its periodic reports previously filed with the SEC to include restated financial statements that correct those misstatements, or include in reports for future periods restated comparative financial statements that correct those misstatements. The Company also will consider the extent to which these matters impact the effectiveness of its internal control over financial reporting.

"Baxter takes this matter very seriously, and the Board along with the Company’s leadership team fully supports a comprehensive investigation," Mr. Almeida stated. "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."

As part of any corrections to previously issued financial statements after completion of the non-operating income investigation, Baxter also expects to correct certain items that affect operating income and were immaterial to its previously reported results of operations. These items include the impact of the use of the foreign exchange rate convention to translate the results of the Company’s foreign operations into U.S. dollars and the impact of the incorrect accounting for placed equipment that the Company leases to its customers. Correction of these immaterial misstatements would not affect the reported sales growth rate in the third quarter 2019 or the projected reported growth rate or projected operating margin range for the fourth quarter presented herein.

Fourth Quarter 2019 Sales and Operating Margin Outlook2

For the fourth quarter of 2019, the Company expects sales growth of 3-4% on a reported basis and approximately 5% on a constant currency and operational basis. Baxter expects operating margin to be between 15.2% and 15.9% on a reported basis and between 18.5% and 19% on an adjusted basis.

Conference Call Information

A webcast of Baxter’s third quarter 2019 conference call for investors can be accessed live from a link on the Company’s website at www.baxter.com beginning at 7:30 a.m. CDT on October 24, 2019. Please see www.baxter.com for more information regarding this and future investor events and webcasts.