Becton, Dickinson and Company — FY2018 Form 10-K
Business context and reporting period. Fiscal year ended September 30, 2018; the requested fourth quarter ended September 30, 2018. BD is a global medical technology company operating through BD Medical, BD Life Sciences and BD Interventional. The results include C.R. Bard from January 1, 2018, following its December 29, 2017 acquisition for approximately $25.0 billion. Consequently, reported year-over-year growth is not directly comparable with a full-year prior-period business.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $15.983 billion | $12.093 billion |
| Gross profit / gross margin | $7.262 billion / 45.4% | $5.942 billion / 49.1% |
| Operating income | $1.497 billion | $1.478 billion |
| Net income | $311 million | $1.100 billion |
| Diluted EPS | $0.60 | $4.60 |
| Operating cash flow | $2.865 billion | $2.550 billion |
| Capital expenditures | $895 million | $727 million |
| Total debt | $21.496 billion | $18.870 billion |
Revenue rose 32.2%; management attributed approximately 24.5 percentage points to Bard, with volume growth above 5.5%, favorable currency translation of about 2.3%, and pricing impact of approximately negative 0.3%. Operating income increased only modestly despite the revenue growth. Gross margin declined, principally reflecting Bard-related amortization and inventory fair-value step-up costs, asset write-downs, higher material costs and pricing pressure; continuous-improvement savings partly offset these factors. The reported effective tax rate was 73.5%, including a provisional $640 million expense from U.S. tax reform. Together, these factors and acquisition-related items contributed to the sharp decline in net income and EPS.
Fourth quarter: Revenue was $4.402 billion versus $3.166 billion in FY2017 Q4; gross profit was $2.091 billion versus $1.554 billion. BD reported a $135 million net loss and diluted loss per share of $0.64, compared with net income of $327 million and diluted EPS of $1.24 a year earlier. Bard inclusion and other acquisition effects limit comparability.
FY2018 segment revenue was $8.616 billion for Medical, $4.330 billion for Life Sciences and $3.037 billion for Interventional. Reported segment operating income was $2.624 billion, $1.207 billion and $306 million, respectively. Segment comparisons are affected by Bard inclusion, product reclassifications and a change in allocation of corporate costs.
Liquidity, debt and capital allocation
- Operating cash flow was $2.865 billion. Investing cash outflow was $15.829 billion, largely reflecting $15.281 billion of net acquisition spending; financing cash outflow was $58 million.
- Cash and equivalents were $1.140 billion, with restricted cash of $96 million and short-term investments of $17 million at year-end. Cash and short-term investments, including restricted cash, totaled $1.253 billion.
- Short-term debt was $2.601 billion and long-term debt was $18.894 billion. The weighted average cost of total debt was 3.2%. BD paid $927 million in dividends and reported capital expenditures of $895 million.
- Moody’s senior unsecured debt rating was Ba1, below investment grade; S&P rated it BBB and Fitch BBB-. BD reported compliance with its credit-facility financial covenants at year-end.
Changes, outlook and material risks
- Acquisition and integration: Bard added substantial revenue and expanded the Interventional portfolio, but also increased debt, amortization, integration and restructuring expenses. BD cautioned that expected synergies and cost savings may not be achieved. The Bard purchase-price allocation remained provisional.
- Tax reform: The $640 million tax expense was provisional, and BD said its accounting for the legislation was not complete. The company estimated combined-company transition tax liability of approximately $1 billion, with payments expected to begin January 15, 2019.
- Divestiture: BD sold its remaining Vyaire Medical interest in April 2018 for gross proceeds of approximately $435 million and recognized a $303 million pretax gain. The sale of Advanced Bioprocessing closed in October 2018; expected gross proceeds were approximately $475 million, subject to adjustment.
- Litigation: Accruals for Bard-related product liability matters and related defense costs were approximately $2.0 billion, with expected recoveries of about $343 million. Disclosed claims included approximately 3,154 hernia claims, 1,322 pelvic-mesh claims and 4,515 IVC-filter claims. BD stated that loss ranges could not be estimated for some matters and that additional exposure could be material. A pelvic-mesh jury verdict of $68 million was being challenged; IVC-filter trial outcomes were mixed.
- Regulatory and quality: The U.S. infusion-pump business remained subject to an FDA consent decree. BD also disclosed FDA warning letters concerning blood collection tubes and prefilled flush syringes and said resolution timing was uncertain. The company did not believe the matters would materially affect operations but gave no assurance against material adverse effects.
- Other risks and management commentary: Management cited global pricing pressure, raw-material and supply interruptions, currency, reimbursement and economic uncertainty, tariffs, Brexit, cybersecurity, regulatory changes, and execution risks in new products and emerging markets. The medical-device excise tax was suspended through 2019 and could return in 2020. BD emphasized continued investment in R&D, geographic expansion and operating efficiency; it provided no specific numerical FY2019 revenue or earnings guidance in the supplied filing text.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded Bard from the year-end internal-control assessment under the SEC’s recently acquired business provision; Bard represented approximately 5% of assets and 19% of FY2018 revenue.
Important facts for investors to verify
- How much of future growth and profitability comes from Bard, and whether integration benefits offset amortization, restructuring and financing costs.
- The final purchase accounting and tax-reform measurement, including transition-tax payments and any subsequent adjustments.
- Cash generation, debt maturities, refinancing capacity and credit-rating developments, particularly given Moody’s below-investment-grade rating.
- Developments in the Bard product-liability cases, related insurance or indemnity recoveries, and adequacy of the approximately $2.0 billion accrual.
- Progress on FDA warning-letter corrective actions and compliance with the infusion-pump consent decree.