Becton, Dickinson and Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2015. Unless otherwise stated, amounts are in U.S. dollars; financial statement amounts are in millions. BD is a global medical technology company. Its segments are BD Medical and BD Life Sciences.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $2,051 | $2,072 | $4,102 | $4,086 |
| Operating income | $293 | $381 | $642 | $759 |
| Net income | $216 | $287 | $452 | $558 |
| Diluted EPS | $1.08 | $1.45 | $2.28 | $2.82 |
| Operating margin | 14.3% | 18.4% | 15.7% | 18.6% |
- Q2 revenue declined 1.0% as reported, reflecting approximately 5.9% unfavorable foreign-exchange translation, 5.0% volume growth and a 0.1% price decline. Six-month revenue increased 0.4% as reported.
- Q2 gross margin was 51.0%, versus 50.8%; six-month gross margin was 51.0%, versus 51.1%. Q2 selling and administrative expense was $511 million (24.9% of revenue), and R&D expense was $129 million (6.3%).
- Net interest expense rose to $83 million in Q2 from $23 million, and to $149 million for six months from $43 million, reflecting CareFusion-related financing costs and additional debt.
- Effective tax rates were 3.9% for Q2 and 11.4% for six months, down from 20.9% and 22.7%, respectively. The filing attributes the lower rates in part to tax benefits associated with specified items and, for the six-month period, the extended U.S. R&D tax credit.
- Operating cash flow was $514 million for six months, versus $768 million. Investing cash outflow was $7.829 billion, including $8.307 billion of acquisition spending; financing cash inflow was $7.392 billion. Capital expenditures were $252 million. Cash and equivalents were $1.912 billion at March 31.
- Total debt was $13.8 billion, up from $4.0 billion at September 30, 2014; debt was 58.0% of total capital, versus 43.4%. The weighted-average cost of debt was 3.2%. BD reported covenant compliance and no borrowings on its $1 billion syndicated credit facility.
- Dividends paid in the six-month period were $232 million; dividends per share were $1.20, versus $1.09. BD suspended its share-repurchase program in connection with the CareFusion acquisition.
Material changes and significant transactions
- BD acquired CareFusion on March 17, 2015, for total accounting consideration of $12.538 billion, including $10.085 billion in cash and $2.269 billion in BD shares. CareFusion’s operating results were not material to this quarter and were to be included beginning April 1, 2015.
- The acquisition substantially expanded the balance sheet: goodwill rose to $7.663 billion from $1.090 billion, and total assets to $28.293 billion from $12.447 billion. Preliminary purchase accounting included $6.562 billion of CareFusion goodwill and remains subject to adjustment.
- BD issued $6.2 billion of senior notes and used commercial paper and a term loan to help finance the acquisition. At March 31, commercial paper borrowings were $700 million and term-loan borrowings were $1 billion; BD paid down $650 million of the term loan in April. BD assumed CareFusion debt, recorded at $2.181 billion fair value. Credit ratings were downgraded but remained investment grade.
- Q2 included $180 million of pretax specified items, principally $58 million of financing costs and $113 million of acquisition-related costs. The after-tax impact was $102 million, or $0.51 per diluted share. For six months, specified items totaled $277 million pretax and $169 million after tax, or $0.85 per diluted share. Q2 diluted EPS also included a $0.10 unfavorable currency impact and $0.02 dilution from shares issued for the acquisition.
- Segment Q2 revenue was $1.106 billion for Medical, down 0.9%, and $945 million for Life Sciences, down 1.1%. Segment operating income was $328 million for Medical and $200 million for Life Sciences. U.S. revenue grew 4.5%, while international revenue fell 4.7%, including an estimated 9.9% currency headwind.
Outlook, commentary, risks and contingencies
- Management said operating cash flow and available cash were expected to fund normal operating needs for the rest of FY2015. No specific full-year revenue or earnings guidance is provided in the filing.
- BD expected fairly substantial CareFusion integration costs through FY2016. Management identified successful integration, cost savings, currency movements, pricing pressure, healthcare funding and utilization, and emerging-market conditions as important factors for future performance.
- BD reported a $341 million final judgment in the RTI antitrust case and $12 million in attorneys’ fees; the court later eliminated prejudgment interest. BD appealed the entirety of the judgment. The filing says litigation losses may exceed recorded accruals and could materially affect results or cash flows.
- Brazil imposed anti-dumping duties effective April 30, 2015, of 45.3% on covered U.S.-origin blood-collection tubes and 86.5% on covered U.K.-origin tubes, for at least five years. BD said it did not expect a material effect; a public-interest review could modify or suspend the measures.
- CareFusion’s U.S. infusion-pump business is subject to an FDA consent decree, and an FDA warning letter concerning its Vernon Hills facility remained under resolution. Future regulatory action could disrupt operations or impose significant costs.
- Other stated risks include product safety or recalls, litigation, foreign-exchange exposure, raw-material costs, government funding and collection risks, and execution of the ERP-system upgrade. BD said disclosure controls were effective as of March 31, 2015, and it was extending oversight to CareFusion.
Most important facts for investors to verify
- CareFusion integration progress, realized synergies, ongoing integration costs, and the final purchase-price allocation.
- Debt repayment, interest burden, credit ratings, covenant headroom and the effect of leverage on future capital allocation.
- Underlying revenue and earnings trends excluding currency effects and acquisition-related specified items.
- Status and potential financial exposure of the RTI appeal, FDA consent decree and warning-letter matters, and Brazil’s import duties.
- Cash conversion and working-capital trends, including the factors behind the year-over-year decline in operating cash flow.