Becton, Dickinson and Company (BD) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2017. Amounts are U.S. dollars; financial statement amounts are in millions unless noted.
Business context and operating results
BD develops, manufactures and sells medical supplies, devices, laboratory equipment and diagnostic products through its Medical and Life Sciences segments. The quarter’s comparisons reflect the October 2016 sale of a controlling interest in Respiratory Solutions and an April 2017 change in accounting for certain dispensing-equipment leases.
- Third-quarter revenue: $3,035, down 5.1% year over year. Continuing-business volume grew more than 2%; foreign currency reduced revenue by about 1%. Pricing had no material impact. The prior-year quarter included $199 of Respiratory Solutions revenue.
- Third-quarter earnings: Operating loss was $223, versus operating income of $516 a year earlier. Net loss was $132; after $32 of preferred dividends, loss applicable to common shareholders was $165, or diluted EPS of $(0.75), versus $1.80 a year earlier.
- Nine-month results: Revenue was $8,927, down 3.5%; net income was $773 versus $958, and diluted EPS was $3.36 versus $4.41.
- Margins and segments: Consolidated gross margin increased to 49.5% from 48.4% in the quarter, helped by operational efficiencies and divestitures. Medical revenue was $2,038, down 8.8%; segment operating income was $553 (27.1% margin). Life Sciences revenue was $997, up 3.5%; segment operating income was $199 (19.9% margin). Life Sciences growth was broad-based, led by Biosciences.
- Cash flow: Nine-month operating cash flow was $1,424, versus $1,854. Capital expenditures were $467, versus $405. Dividends paid were $478.
- Liquidity and debt: June 30 cash and equivalents were $13,852 and short-term investments $17; total debt was $19,016, versus $11,551 at September 30, 2016. The cash balance included proceeds raised for the Bard transaction. Current assets were $18,212 and current liabilities $3,273.
Material changes and unusual items
- A lease-contract modification produced a $741 non-cash pre-tax charge in the quarter. BD derecognized $1,057 of net investment in sales-type leases and recorded $316 of leased equipment as property and equipment. Most amended contracts are now operating leases, with revenue recognized over the remaining lease term rather than substantially at equipment placement.
- Nine-month results included a $336 reversal of reserves after an appellate court reversed an unfavorable attempted-monopolization judgment in the Retractable Technologies litigation. A separate Lanham Act claim remains remanded for consideration of possible disgorgement.
- BD recorded $87 of Bard-related financing costs in the quarter, including $79 of bridge-financing commitment fees, and $31 of losses on third-quarter debt extinguishments. Nine-month debt-extinguishment losses were $73.
- BD’s tax benefit and reported earnings were materially affected by specified items and $60 of year-to-date share-based compensation tax benefits. The filing reports $772 of after-tax specified-item impact for the nine months; reported results should not be read as an underlying run rate.
Outlook, financing, and risks
- BD agreed to acquire C.R. Bard for estimated consideration of approximately $24 billion, comprising cash and BD shares. The transaction was subject to regulatory and Bard shareholder approval and was expected to close in the fourth calendar quarter of 2017. BD said operating cash, together with available cash, was expected to cover normal operating needs for the remainder of fiscal 2017; the filing provides no specific revenue or earnings guidance.
- To finance the acquisition, BD raised approximately $4.8 billion net from common and mandatory convertible preferred stock offerings and approximately $9.6 billion net from debt transactions. Total debt rose substantially. Certain issued notes require redemption at 101% of principal if the acquisition does not close by April 23, 2018, or the agreement is terminated earlier.
- BD noted rating-agency review and downgrade risk following the Bard announcement; lower ratings could raise borrowing costs. It also identified acquisition execution and integration, pricing and reimbursement pressure, foreign exchange, raw-material costs, product safety and regulatory matters, and litigation as risks.
- Management stated the healthcare environment was generally stable, while noting continuing pricing pressure in some products and macroeconomic constraints on healthcare utilization in Europe. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether the Bard acquisition closed as expected, its final financing mix, and resulting leverage, interest costs, and credit ratings.
- How quickly dispensing-equipment lease revenue transitions to the new recognition pattern and the resulting revenue, cash-flow, and margin trends.
- Underlying growth excluding Respiratory Solutions divestiture effects, lease-accounting changes, currency, and specified items.
- The outcome and potential financial exposure from the remaining RTI Lanham Act/disgorgement proceedings and other contingencies.
- Whether operating cash flow, liquidity, and covenant compliance remain adequate after the acquisition and related debt service.