Becton, Dickinson and Company — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. The filing also reports fourth-quarter results. BD is a global medical technology company with BD Medical and BD Life Sciences segments. BD completed its acquisition of CareFusion on March 17, 2015; CareFusion’s operating results were included from April 1, 2015.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $10.282 billion | $8.446 billion |
| Gross profit / gross margin | $4.695 billion / 45.7% | $4.301 billion / 50.9% |
| Operating income | $1.074 billion | $1.606 billion |
| Net income | $695 million | $1.185 billion |
| Diluted continuing-operations EPS | $3.35 | $5.99 |
| Operating cash flow | $1.730 billion | $1.746 billion |
| Capital expenditures | $596 million | $592 million |
| Cash and short-term investments, at year-end | $1.444 billion | $2.745 billion |
| Total debt, at year-end | $12.8 billion | $4.0 billion |
Revenue rose 21.7%, driven primarily by CareFusion, which contributed 24.1 percentage points to reported growth; volume added 5.1 points, while foreign-exchange translation reduced growth by 7.5 points. International revenue increased 3.6% reported, including an estimated 12.6% unfavorable FX effect. Quarterly Q4 revenue was $3.059 billion, net income $181 million, and diluted EPS $0.84.
FY2015 gross margin fell 520 basis points. BD attributed approximately 550 basis points of pressure to CareFusion purchase-accounting effects, including inventory fair-value adjustments and acquired-asset amortization and depreciation; FX reduced margin by about 50 basis points, partly offset by approximately 80 basis points of operating improvements. Operating income and earnings also reflected $1.186 billion of specified pre-tax items, including $426 million in acquisition-related costs and $645 million in purchase-accounting adjustments. Their after-tax impact was $786 million, or $3.79 per diluted share. The effective tax rate was 5.9%, versus 22.1% in 2014, with specified-item tax effects a major factor.
Segments and material changes
- Medical: Revenue was $6.460 billion, up 41.3%; segment operating income was $1.530 billion, or 23.7% of segment revenue. Growth chiefly reflected CareFusion, included for the second half of the fiscal year.
- Life Sciences: Revenue was $3.822 billion, down 1.3% reported, including an estimated 6.3% unfavorable FX impact; segment operating income was $839 million, or 21.9% of revenue. Drivers included safety-engineered products, diagnostic-system growth and a stronger-than-normal flu season, offset by FX and weaker Biosciences sales in Japan.
- CareFusion consideration was $12.538 billion, comprising cash, BD shares and equity awards. CareFusion contributed approximately $2.0 billion of revenue and a $242 million operating loss in the period included in BD’s results.
- Debt increased substantially to fund the acquisition; net interest expense rose to $356 million from $89 million. Debt-to-capitalization increased to 58.4% from 43.4%. Credit ratings were downgraded but remained investment grade, with stable outlooks reported for S&P and Moody’s.
Cash, liquidity and capital allocation
Operating cash flow remained broadly stable at $1.73 billion. Investing activities used $8.318 billion, primarily reflecting $8.414 billion of net acquisition outflows. Financing activities provided $6.190 billion, including proceeds from $6.2 billion of notes and commercial paper borrowings. The company paid $485 million in dividends and suspended share repurchases in connection with the acquisition. Year-end current assets were $6.045 billion against current liabilities of $4.386 billion. BD had $700 million outstanding under its commercial-paper program, a $1 billion syndicated credit facility with no borrowings, and was in compliance with its 5-to-1 interest-coverage covenant.
Outlook, risks and unusual items
- Management emphasized integrating CareFusion, realizing expected synergies and cost savings, investing in R&D and emerging markets, and reducing debt. It expected fairly substantial integration costs to continue through FY2016. The filing provides no clear numerical forward guidance for FY2016.
- Management described U.S. healthcare utilization as stable and slightly improved, Europe as stable amid ongoing constraints, and pricing pressure as continuing for some products. Emerging-market growth depends in part on government healthcare funding.
- Key risks include acquisition integration and elevated leverage; foreign-exchange exposure; reimbursement and healthcare cost-control changes; competition and pricing pressure; dependence on sole-source suppliers; product quality, safety and regulatory matters; cybersecurity; and litigation.
- BD’s U.S. infusion-pump business remains subject to an FDA consent decree inherited from CareFusion. BD reported substantial compliance progress but could not predict the outcome; future violations could prompt manufacturing or distribution restrictions, recalls, or monetary penalties.
- BD continued to appeal the RTI litigation judgment. The filing describes a $341 million final judgment plus $12 million in attorneys’ fees, and a separate $12 million FY2015 charge for RTI attorneys’ fees; BD stated it was challenging the judgment. The company cautioned that litigation losses beyond recorded accruals could materially affect results or cash flows.
- Brazil imposed anti-dumping duties of 45.3% on relevant U.S.-origin blood-collection tubes and 71.5% on U.K.-origin tubes for at least five years; BD said it did not expect a material effect. The acquisition also included a $36 million liability for AVEA ventilator field corrections.
- Other notable items include $72 million of impairment charges on assets held for sale and $575 million of unrecognized tax benefits. BD reported $7.5 billion of foreign earnings as indefinitely reinvested; potential U.S. repatriation tax was not practicably quantified.
Investor verification priorities
- Separate acquired CareFusion revenue and earnings from legacy growth; review the pro forma figures and their assumptions, which exclude anticipated integration benefits.
- Track post-acquisition integration costs, restructuring, realized synergies, and CareFusion’s operating performance.
- Reconcile debt maturities, cash available for debt reduction, interest costs, credit ratings and covenant headroom.
- Assess whether gross-margin recovery can offset acquisition-related amortization, FX pressure and pricing competition.
- Monitor the RTI appeal, FDA consent-decree compliance, product-related matters and other legal contingencies.
- Check subsequent filings for FY2016 guidance and developments in tax exposures, foreign-exchange effects and emerging-market demand.