Baxter International (NYSE:BAX) was trucking along in 2019, with shares climbing steadily. The company beat analysts' estimates with its second-quarter results and even boosted its full-year outlook. But the good times have come to a screeching halt.
The healthcare giant announced its third-quarter preliminary results on Thursday before the market opened. That word "preliminary" came with plenty of negative implications, with Baxter stock falling by more than 10% in early trading. Here's why investors responded negatively to the company's Q3 update.
By the numbers
Baxter reported revenue in the third quarter of $2.85 billion. This reflected a 3% increase from the prior-year period revenue total of $2.8 billion. The consensus among Wall Street analysts projected Q3 revenue of $2.86 billion.
The company announced operating income of $503 million based on generally accepted accounting principles (GAAP). This amount comprised 17.6% of Baxter's total sales.
Baxter's adjusted operating income in Q3 totaled $555 million, up 10% year over year. This figure reflected $52 million in special items, most of which the company said was related to "intangible asset amortization and business optimization initiatives."
Behind the numbers
Most investors probably didn't care about any of Baxter's preliminary Q3 results. Why? The company stated that it has begun an internal investigation into some intracompany transactions made in the past. Anytime the word "investigation" rears its head, it prompts concern.
Baxter said that the intracompany transactions in question used foreign exchange rates that weren't compliant with GAAP. The transactions were made from 2014 through the first half of 2019, although the company added that "the investigation is not limited to these periods."
Because of the investigation, Baxter won't submit its third-quarter regulatory filing to the Securities and Exchange Commission (SEC) on a timely basis. The company has notified the SEC and plans to keep the agency updated about the progress of the internal investigation.
With the investigation underway, all of the results Baxter gave today are only preliminary. As such, investors are likely to take them with a grain of salt until more is known.
Baxter chairman and CEO Jose Almeida said that the company "takes this matter very seriously." He added that Baxter is "taking the steps to strengthen and enhance its internal controls, and we look forward to sharing our full financial results as soon as possible."
Investing in big healthcare stocks like Baxter can sometimes be viewed as a low-risk proposition. However, any company -- no matter how big it is or what industry it's in -- can make serious mistakes. It appears that's exactly what has happened with Baxter. Investors can probably look for some heads to roll as a result of the company's internal investigation and should expect continued volatility with the stock until the matter is put to rest.