Becton, Dickinson and Company (BD) — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022. Unless noted, financial figures are in U.S. dollars; statement amounts are in millions. BD operates through Medical, Life Sciences and Interventional. The April 2022 spin-off of Diabetes Care (Embecta) means prior-year Diabetes Care results are reported as discontinued operations.
Financial performance
| Metric | Q1 FY2023 | Prior-year comparable |
|---|---|---|
| Revenue | $4,586 | $4,718 |
| Operating income | $585 | $692 |
| Net income from continuing operations | $509 | $568 |
| Diluted EPS from continuing operations | $1.70 | $1.90 |
| Continuing operating cash flow | $399 | $530 |
| Capital expenditures | $208 | $183 |
- Reported revenue decreased 2.8%; on a foreign-currency-neutral basis it increased 1.7%. Volume contributed 1.9% and pricing 3.0%, offset by a 3.2% decline from COVID-19-only testing and a 4.5% foreign-exchange headwind.
- Gross margin was 46.5%, down from 47.1%. BD cited inflation in materials, labor and freight, and lower COVID-19 testing and licensing-related contributions; pricing, efficiency improvements and currency effects partly offset these pressures.
- Operating income declined to $585 million. Continuing net income and diluted EPS also fell. The prior-year quarter included $109 million of after-tax discontinued-operations income, so reported total net income was $677 million then versus $509 million in the current quarter.
- The effective tax rate was negative 5.8%, compared with 5.3%, primarily reflecting remeasurement of deferred tax balances after approval of a tax incentive and the tax impact of specified items.
Segments and material changes
| Segment | Revenue | Segment income | Key comparison |
|---|---|---|---|
| Medical | $2,154; +1.6% reported, +6.1% FX-neutral | $554; prior year $572 | Growth in medication management and pharmaceutical systems; margin pressure from higher costs. |
| Life Sciences | $1,302; −12.2% reported, −7.3% FX-neutral | $433; prior year $534 | Lower COVID-19-only testing and prior-year licensing revenue weighed on results; Biosciences grew. |
| Interventional | $1,129; +1.3% reported, +5.6% FX-neutral | $301; prior year $265 | Growth in Peripheral Intervention and Surgery; segment margin improved. |
COVID-19-only diagnostic testing revenue was $32 million versus $185 million in the prior-year quarter. International revenue fell 7.9% as reported but increased 2.7% FX-neutral; U.S. revenue increased 1.0%.
Liquidity, debt and cash flow
- At December 31, 2022, cash and equivalents were $612 million, restricted cash $133 million and short-term investments nil; cash plus restricted cash was reported as $744 million, including rounding.
- Total debt was $16.456 billion, up from $16.065 billion at September 30, 2022. Current debt obligations were $2.188 billion and long-term debt $14.268 billion. Weighted-average debt cost was 2.9%; debt was 37.8% of total capital.
- Continuing operating cash flow was $399 million, with working-capital changes using $665 million of cash. Continuing investing activities used $291 million, including $208 million of capital expenditures. Continuing financing activities used $534 million, including $281 million in dividends; BD also reported $365 million of short-term borrowing and $528 million of debt payments.
- BD had $595 million of commercial paper outstanding and no borrowings under its $2.75 billion revolving credit facility. The company reported compliance with applicable facility covenants.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management describes its BD 2025 strategy as focused on growth, simplification and empowerment, with investment in R&D, acquisitions, geographic expansion and efficiency.
- Management highlighted inflation, constrained availability of labor and certain materials/components, logistics delays, currency movements, healthcare-system budget and staffing pressures, and uncertainty related to COVID-19 and geopolitical conditions. These factors may increase costs, disrupt supply, or affect demand; mitigation efforts may not fully offset the impact.
- BD Alaris infusion pumps remain subject to an FDA consent decree and remediation. U.S. commercial operations are limited to medical-necessity cases and recalled-software remediation; full resumption depends on FDA clearance of the 510(k) submission, with no assurance of timing or approval.
- BD’s Georgia ethylene-oxide sterilization operations remain subject to permit processes and possible additional restrictions. Broader regulatory changes or reduced third-party sterilization capacity could disrupt production.
- BD reported approximately 32,305 hernia-device product-liability claims and about $2.0 billion in product-liability accruals, mainly long-term. The company says additional charges could exceed current accruals and available insurance and could materially affect results, financial condition or cash flows. Other disclosed matters include pelvic-mesh and IVC-filter claims, ethylene-oxide litigation, and Alaris-related securities litigation and government inquiries; outcomes and potential losses are uncertain.
- Specified items totaled $449 million before tax, including $362 million of purchase-accounting adjustments, $44 million of integration and restructuring expense, $33 million of European regulatory initiative costs and $6 million of separation-related items. Management reported restructuring and cost-saving initiatives intended to reduce complexity and improve efficiency.
Important facts for investors to verify
- Whether revenue and segment performance excluding currency effects and COVID-19 testing comparisons are sustained in subsequent quarters.
- Progress on Alaris remediation and FDA 510(k) clearance, and any resulting impact on U.S. sales or costs.
- Developments in product-liability claims, the adequacy of the approximately $2.0 billion accrual, and potential cash or earnings exposure.
- Resolution of ethylene-oxide permits and litigation, and continuity of sterilization capacity and product supply.
- Working-capital trends, cash generation, debt maturities and refinancing needs, including the effect of commercial-paper borrowings.
- Whether inflation, foreign exchange, healthcare customer pressures and restructuring initiatives materially alter margins and the outlook.