Becton, Dickinson and Company — Q1 FY2019 10-Q
Reporting period: Three months ended December 31, 2018. BD is a global medical technology company operating through Medical, Life Sciences and Interventional segments. Results include C.R. Bard for the full quarter; Bard was acquired on December 29, 2017, and its operations were included in reported results beginning January 1, 2018.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter |
|---|---|---|
| Revenue | $4.160 billion | $3.080 billion |
| Operating income | $888 million | $235 million |
| Net income (loss) | $599 million | $(136) million |
| Net income (loss) attributable to common shareholders | $562 million | $(174) million |
| Diluted EPS | $2.05 | $(0.76) |
| Operating cash flow | $245 million | $320 million |
- Revenue increased 35.1% reported and 37.1% on a foreign-currency-neutral basis. Management attributed approximately 33 percentage points of growth to Bard; volume contributed about 5%, while foreign exchange, price and divestitures were unfavorable.
- Gross margin was 47.4%, down from 50.4%. The filing cites acquisition-related purchase-accounting amortization and other specified items, foreign exchange, higher raw-material costs and pricing pressure; improved manufacturing costs and product mix partly offset these effects.
- Reported operating income included a $335 million pretax gain from selling the Advanced Bioprocessing business. Amortization expense rose to $378 million from $135 million, primarily due to Bard-acquired intangible assets. Acquisitions and restructuring costs were $91 million, versus $354 million.
- Segment revenue and operating income: Medical $2.135 billion and $665 million; Life Sciences $1.056 billion and $305 million; Interventional $970 million and $209 million. Prior-period Interventional comparisons are affected by product reclassifications and Bard’s absence.
Liquidity, debt and cash flow
- Cash and equivalents were $943 million, restricted cash $98 million and short-term investments $5 million at December 31, 2018. Management described worldwide cash and short-term investments, including restricted cash, as approximately $1.0 billion, primarily held outside the United States.
- Total debt was $21.071 billion, compared with $21.496 billion at September 30, 2018. Short-term debt was $3.254 billion and long-term debt $17.817 billion. The short-term share of debt rose to 15.4%, primarily because certain notes were reclassified as short-term. Weighted-average debt cost was 3.3%.
- Operating cash flow was $245 million, including a $200 million discretionary pension contribution and working-capital cash use. Investing activities provided $299 million, including $476 million in divestiture proceeds; capital expenditures were $167 million. Financing activities used $734 million, including $453 million of debt payments and $245 million of dividends.
- BD said cash generated from operations and available cash were expected to fund normal operating needs for the remainder of FY2019. The company reported compliance with credit-facility covenants at quarter-end.
Changes, outlook and risks
- The Advanced Bioprocessing business sale closed in October 2018 and generated the $335 million pretax gain. The business was not classified as discontinued operations.
- BD adopted ASC 606 revenue recognition in October 2018 using the modified retrospective method; the filing says adoption had no material impact on income-statement or balance-sheet line items. BD planned to adopt the new lease standard on October 1, 2019 and was assessing its effects.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management cited continued investment in R&D, geographic expansion and operating efficiency, alongside global pricing pressure, currency exposure and economic uncertainty.
- Product-liability accruals, including defense costs, were approximately $1.7 billion at quarter-end, with expected recoveries of approximately $164 million. Management warned that losses could exceed accruals and available insurance; some outcomes and loss ranges could not be estimated clearly.
- Major litigation includes hernia-device, pelvic-mesh and IVC-filter claims. The filing reports approximately 4,445 hernia claims, 1,098 pelvic-mesh claims and 5,665 filter claims, with additional proceedings, settlement discussions and trials expected. A $68 million pelvic-mesh jury verdict was being appealed.
- BD disclosed FDA warning letters concerning its Franklin Lakes, New Jersey, and Franklin, Wisconsin, facilities and said corrective actions were underway. It could not assure the timing or outcome of resolution. Government investigations concerning sales and marketing practices were also ongoing.
- Other cited risks include Bard integration and acquisition debt, foreign exchange, competition and pricing, raw-material costs, regulation, product safety, litigation, tariffs, cybersecurity and healthcare funding or reimbursement changes.
Important facts for investors to verify
- How much reported revenue and earnings growth reflects Bard, and how underlying organic growth develops across segments.
- The durability of margins after purchase-accounting amortization, integration spending, pricing pressure and raw-material costs.
- Cash conversion, pension funding needs, debt maturities and the effect of debt reclassification on liquidity.
- Developments in product-liability claims, settlement costs, insurance recoveries and the Medtronic indemnification arrangements.
- Progress on FDA warning-letter corrective actions and the status of related government investigations.