Becton, Dickinson and Company — Q1 FY2015 10-Q
Reporting period: Three months ended December 31, 2014; comparative period is the three months ended December 31, 2013. Amounts are in U.S. dollars unless noted.
Business context and results
BD is a global medical technology company. Effective October 1, 2014, it reported two segments: BD Medical and BD Life Sciences. The Life Sciences segment combines the former Diagnostics and Biosciences segments; comparative segment results were recast.
| Metric | Q1 FY2015 | Q1 FY2014 | Change / context |
|---|---|---|---|
| Revenue | $2.051 billion | $2.015 billion | Up 1.8%; volume +5.5%, foreign currency translation −3.5%, price −0.2% |
| Gross profit margin | 50.9% | 51.3% | Down 0.4 percentage points |
| Operating income | $349 million | $378 million | Down 7.7% |
| Net income | $236 million | $271 million | Down 12.9% |
| Diluted EPS | $1.20 | $1.37 | Down 12.4% |
| Operating cash flow | $286 million | $355 million | Down $69 million |
| Capital expenditures | $105 million | $99 million | Up $6 million |
Revenue growth was led by Life Sciences, up 3.0%, while Medical grew 0.8%. U.S. revenue rose 3.7%; international revenue increased 0.4% as reported, with an estimated 6.0% adverse currency impact. Emerging-market revenue grew 7.9% as reported, including a 4.5% adverse currency impact. Segment operating income was $304 million for Medical, up from $294 million, and $214 million for Life Sciences, down from $234 million.
Profitability, cash flow and liquidity
- Operating income and earnings were affected by acquisition-related financing costs of $44 million, CareFusion integration and transaction costs of $23 million, and a $12 million RTI legal-fee charge. The filing reports a combined after-tax adverse impact of $66 million from specified items, versus $13 million a year earlier. It estimates an additional $0.12 per-share adverse currency impact.
- Net interest expense increased to $66 million from $20 million, primarily due to CareFusion financing costs. The effective tax rate was 17.4%, versus 24.4%; BD cited the U.S. R&D tax credit extension, partly offset by one-time discrete items.
- Operating cash flow was $286 million. Investing activities provided $368 million, including $618 million of net investment proceeds, partly offset by $106 million for acquisitions and $105 million of capital expenditures. Financing activities provided $6.033 billion, mainly from debt issuance.
- At December 31, 2014, cash and equivalents were $8.540 billion and short-term investments were $244 million, totaling approximately $8.8 billion. Approximately $2.2 billion was held outside the U.S.; repatriation could have adverse tax consequences.
- Total debt was approximately $10.1 billion, including $202 million of short-term debt and $9.940 billion of long-term debt. Debt was 66.1% of total capital, versus 43.4% at September 30, 2014. Weighted average debt cost was 3.2%.
- BD paid $116 million in dividends. Its share repurchase program was suspended for FY2015 in connection with the CareFusion transaction; no shares were repurchased under the announced program during the quarter.
Material changes and unusual items
- BD agreed to acquire CareFusion for approximately $12.2 billion in cash and stock. CareFusion shareholders approved the transaction on January 21, 2015; regulatory and other conditions remained, including European Commission approval. BD expected closing by the end of FY2015’s second quarter. The final stock consideration could change with BD’s share price.
- To finance the acquisition, BD issued $6.2 billion of senior unsecured notes in December 2014. It also had a $1.0 billion term-loan facility with no borrowings at quarter-end, a reduced $1.4 billion bridge commitment, and $200 million outstanding under its commercial-paper program. The notes are subject to special mandatory redemption at 101% of principal plus accrued interest if the acquisition is not completed within the specified terms.
- S&P downgraded BD’s long-term debt rating to BBB+ and commercial-paper rating to A-2 in December 2014. Moody’s had placed its A3 rating on review and indicated it expected to downgrade to Baa2 when the acquisition closes. BD stated it expected to remain investment grade.
- The RTI antitrust and false-advertising case resulted in a January 2015 final judgment awarding RTI $341 million, plus $12 million in attorneys’ fees, interest and costs. BD intended to challenge the judgment on appeal; an injunction requiring certain corrective statements was also in effect, subject to a limited stay. BD had recorded a $341 million charge in FY2013, and recorded a separate $12 million attorneys’ fee charge in this quarter.
- BD filed a petition for U.S. Supreme Court review of the separate $5 million RTI patent-damages award. Other matters include pending California CareFusion shareholder litigation, a proposed settlement of Delaware shareholder actions, and an ongoing Brazilian anti-dumping investigation; BD did not expect the Brazil matter to materially affect results.
Management commentary, outlook and risks
Management cited stronger-than-expected influenza-season demand, core-business performance, new products, emerging markets and safety-engineered products as growth drivers. It noted unfavorable currency effects, pricing pressure, uneven ordering patterns in certain Medical units, and one-time BD Kiestra platform costs. BD said operating cash flow and available cash were expected to cover normal FY2015 needs, including working capital, capital expenditures and dividends. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
Key risks identified include currency and macroeconomic changes, healthcare pricing and utilization pressures, government funding and collection risks, product safety and regulatory matters, litigation, supply and raw-material costs, emerging-market and compliance risks, competition, execution of the ERP upgrade, pension-related volatility, and completion, financing and integration of the CareFusion acquisition. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when CareFusion received required approvals and closed, and the final acquisition consideration and financing mix.
- The status, appeal outcome and ultimate cash exposure of the RTI judgments, including interest, fees and injunctive requirements.
- Whether currency pressure, pricing and segment-level operating trends persist, particularly the decline in Life Sciences operating income.
- Post-acquisition leverage, financing costs, credit ratings, liquidity and the timing of any debt repayment.
- The basis and sustainability of reported earnings, including specified acquisition and litigation costs and the unusually low effective tax rate.