Becton, Dickinson and Company — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. BD is a global medical technology company reporting through BD Medical and BD Life Sciences. Results include CareFusion for the full year in 2016, versus only six months in 2015, materially affecting year-over-year comparisons.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $12.483 billion | $10.282 billion |
| Gross profit / gross margin | $5.991 billion / 48.0% | $4.695 billion / 45.7% |
| Operating income | $1.430 billion | $1.074 billion |
| Net income | $976 million | $695 million |
| Diluted EPS | $4.49 | $3.35 |
| Operating cash flow | $2.559 billion | $1.730 billion |
| Capital expenditures | $693 million | $596 million |
| Total debt at year-end | $11.551 billion | $12.822 billion |
| Cash and short-term investments | $1.568 billion | $1.444 billion |
| Dividends per share | $2.64 | $2.40 |
Revenue increased 21.4% reported and 24.5% on a foreign-currency-neutral basis. Management attributed growth principally to including CareFusion for a full year, alongside approximately 4.2% volume growth; foreign currency reduced reported revenue growth by about 3.1 percentage points. Pricing contributed little. Medical revenue was $8.654 billion, up 34.0%; Life Sciences revenue was $3.829 billion, up 0.2% reported and 3.4% currency-neutral. Segment operating income was $2.052 billion for Medical and $793 million for Life Sciences.
Net interest expense was $367 million, versus $356 million. The effective tax rate was 9.1%, versus 5.9%, with both years’ rates substantially affected by tax benefits on specified items. Current assets were $6.367 billion and current liabilities $4.400 billion. Operating cash flow rose; investing used $669 million and financing used $1.761 billion. BD paid $562 million in dividends and reported no fiscal-year share repurchases.
Comparisons, significant items, and transactions
- Growth comparisons are acquisition-distorted: 2015 included CareFusion only from April 1, 2015. Revenue growth also faced adverse currency effects; international revenue rose 7.2% reported but 13.4% currency-neutral.
- Gross margin improved from 45.7% to 48.0%, reflecting operating efficiencies and a favorable comparison with 2015’s CareFusion inventory fair-value step-up, partly offset by acquired-intangible amortization and currency effects. Life Sciences segment operating margin declined to 20.7% from 21.9%; Medical’s was 23.7% in both years.
- Specified items totaled $1.261 billion pre-tax and $892 million after tax in 2016, including $526 million of restructuring costs, $192 million of integration costs, and $527 million of purchase-accounting items. The 2016 diluted EPS impact was stated as $4.10. The fourth quarter recorded net income of $19 million and diluted EPS of $0.09.
- Restructuring and other charges included a $214 million non-cash impairment of internal-use software assets and $81 million of losses on assets of non-core businesses. R&D expense increased to $828 million from $632 million.
- BD agreed to sell 50.1% of Respiratory Solutions and form a joint venture, retaining 49.9%. The transaction closed October 3, 2016, after year-end; the business was classified as held for sale, not discontinued operations. BD also announced tender offers for certain notes in November 2016.
Liquidity, debt, outlook, and risks
Debt declined year over year, but remained elevated following the CareFusion acquisition; debt was 57.2% of total capital. The weighted average cost of debt was 3.6%, and short-term debt was 8.7% of total debt. BD had $200 million of commercial paper outstanding and no borrowings on its $1.5 billion syndicated credit facility; it was compliant with the facility’s interest-coverage covenant. Ratings were investment grade with stable outlooks: S&P BBB+ and Moody’s Baa2. Management provided no specific quantified FY2017 revenue or earnings guidance in the supplied filing text.
Management described U.S. healthcare utilization as stable to slightly improved and Europe as stable, while noting persistent pricing pressure and constrained European utilization. Emerging-market growth depends in part on government healthcare funding. Key risks include currency and macroeconomic volatility, reimbursement and pricing changes, competition, supply interruptions and sole-source suppliers, cybersecurity, regulatory requirements and product recalls, and execution of CareFusion integration and expected synergies. Brexit added uncertainty to UK/EU operations.
The U.S. infusion-pump business remains subject to an FDA consent decree. The decree permits FDA actions, including restrictions or recalls, and potential penalties of up to $15 million per year for violations. BD stated that a loss was not probable as of September 30, 2016 and recorded no related accrual. BD also faced the RTI litigation: an appeal of a $341 million judgment and $12 million attorneys’ fee award was pending. Management said it could not estimate losses in all legal matters and that future charges could exceed recorded accruals.
BD reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Separate organic and currency-neutral growth from CareFusion’s full-year contribution; assess whether underlying volume and pricing trends persist.
- Reconcile GAAP earnings with the $1.261 billion of specified charges, including the timing and cash/non-cash composition of acquisition and restructuring costs.
- Review debt maturities, refinancing plans, interest costs, and the effect of the post-acquisition debt burden on investment-grade ratings and flexibility.
- Monitor the Respiratory Solutions joint venture’s financial contribution, retained-interest accounting, and any transition-service obligations.
- Track outcomes of the RTI appeal and FDA consent-decree compliance, along with other litigation and regulatory contingencies.
- Assess whether Life Sciences’ margin decline and pressure in HIV-related products in Africa, as well as distribution-contract impacts in Respiratory Solutions, continue.