Business context and reporting period
Becton, Dickinson and Company (BD) is a global medical technology company operating through BD Medical, BD Life Sciences and BD Interventional. This Form 10-K covers the fiscal year ended September 30, 2019; fiscal fourth-quarter figures are also shown below. Bard, acquired in December 2017, was included in BD’s results for all of FY2019, versus nine months in FY2018.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $17.290 billion | $15.983 billion |
| Gross profit / margin | $8.288 billion / 47.9% | $7.269 billion / 45.5% |
| Operating income | $1.760 billion | $1.509 billion |
| Net income | $1.233 billion | $311 million |
| Diluted EPS | $3.94 | $0.60 |
| Cash from operations | $3.330 billion | $2.865 billion |
| Capital expenditures | $957 million | $895 million |
| Total debt | $19.390 billion | $21.496 billion |
| Cash, equivalents and short-term investments | $620 million, including restricted cash | Not clearly stated on a comparable basis in the provided filing text |
FY2019 operating cash flow less capital expenditures was approximately $2.373 billion. Current assets were $6.664 billion and current liabilities $5.655 billion at year-end. BD paid $984 million in dividends, including $832 million to common shareholders and $152 million to preferred shareholders. The common dividend was $3.08 per share.
Fourth-quarter FY2019 revenue was $4.584 billion, net income $163 million and diluted EPS $0.45, compared with $4.402 billion, a $135 million net loss and diluted EPS of negative $0.64 in fourth-quarter FY2018.
Material changes versus prior comparable period
- Revenue grew 8.2% reported and 10.5% excluding foreign-currency effects. Management attributed growth to approximately 5.4% volume growth, roughly 6% from the additional Bard quarter, foreign exchange headwinds of approximately 2.3%, and price headwinds of approximately 0.3%; Advanced Bioprocessing divestiture reduced growth by almost 1%.
- Gross margin improved to 47.9% from 45.5%, mainly reflecting lower manufacturing costs and comparison with prior-year Bard inventory step-up and asset write-down charges; currency, raw material costs and pricing pressure were offsets.
- Reported net income and EPS rose sharply but are not directly indicative of underlying operating trends: FY2019 included a negative 4.8% effective tax rate, while FY2018 included substantial tax expense. FY2019 also included $2.749 billion of specified items, including $1.499 billion of purchase-accounting adjustments and $646 million of litigation, transaction and other specified items.
- Segment revenue was $9.064 billion for Medical (up 5.2%), $4.300 billion for Life Sciences (down 0.7% reported; up 1.9% FX-neutral) and $3.926 billion for Interventional (up 29.3%). Interventional growth included Bard and should be interpreted in that context.
- Debt declined from FY2018, with total debt at 45.6% of total capital versus 47.8%; weighted average debt cost was 2.9% versus 3.2%. BD issued euro-denominated notes and repaid or repurchased other debt during FY2019.
Outlook, risks, contingencies and unusual items
The filing provides no specific numerical FY2020 revenue or earnings guidance. Management described U.S. healthcare utilization and the European environment as generally stable, while noting global pricing pressure, emerging-market dependence on government healthcare funding and the importance of innovation, integration synergies and operating efficiency. Effective October 1, 2019, BD combined two Life Sciences units into Integrated Diagnostic Solutions.
- Product liability: BD recorded approximately $914 million of FY2019 charges for certain product liability matters and related defense costs. Product liability accruals were approximately $2.5 billion at year-end, versus $2.0 billion a year earlier. The filing identifies substantial litigation exposure, including hernia, women’s health and IVC-filter claims, and says some reasonably possible losses cannot be estimated.
- Regulatory and product risks: The FDA’s March 2019 communication on paclitaxel-coated devices reduced sales of BD’s drug-coated balloons; the duration and extent of future effects are uncertain. BD’s U.S. infusion-pump business remains subject to an FDA consent decree, and a January 2018 FDA Warning Letter related to blood collection tubes remained unresolved in the filing.
- Sterilization and environmental: After year-end, on October 28, 2019, BD entered a Georgia consent order requiring operational changes, including reduced capacity, at its Covington and Madison facilities to further reduce ethylene oxide emissions. BD did not expect a material operational impact but warned further restrictions could affect operations.
- Leverage and liquidity: Bard-related debt remains a significant obligation. BD reported $1.309 billion of short-term debt, $18.081 billion of long-term debt and $485 million drawn on its revolving facility; it said it complied with facility covenants. Contractual obligations totaled $26.931 billion, including stated debt principal and interest obligations.
- Other risks: The filing highlights foreign-exchange exposure, competitive and reimbursement-driven pricing pressure, sole-source supply and manufacturing/sterilization disruptions, cybersecurity, litigation, and regulatory compliance. The U.S. medical-device excise tax was suspended through 2019 and could return in 2020 absent further legislative action. EU medical-device and diagnostic regulations were expected to require significant compliance spending.
- Unusual items: BD recognized a $336 million pre-tax gain on the Advanced Bioprocessing sale, partially offset within other operating expense by litigation and recall-related charges. The income-tax benefit also reflected discrete items, including a $138 million benefit from changing the assertion on reinvestment of foreign earnings.
Most important facts for investors to verify
- Whether revenue growth and Bard synergies continue after separating acquisition-related contributions, foreign exchange, divestitures and pricing effects.
- The development and cash-payment timing of the $2.5 billion product liability reserve, related insurance or indemnification recoveries, and ongoing claims and trials.
- The continuing effect of the paclitaxel-device FDA communication, the infusion-pump consent decree and the blood-collection Warning Letter.
- Whether Georgia sterilization restrictions or other supply-chain constraints affect production, costs or customer service.
- Debt maturities, covenant headroom, cash generation and the company’s progress toward its stated investment-grade capital-structure objective.
- The sustainability of reported earnings given the unusual litigation, acquisition-accounting and tax items; FY2019 GAAP results should not be treated as a clean measure of recurring earnings.