Becton, Dickinson and Company — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparative period is the three months ended December 31, 2019. BD is a global medical technology company operating in Medical, Life Sciences and Interventional segments. Unaudited results are not necessarily indicative of full-year performance.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 | Change / context |
|---|---|---|---|
| Revenue | $5.315 billion | $4.225 billion | Up 25.8%; volume +23.9%, foreign exchange +1.5%, pricing +0.4% |
| Operating income | $1.241 billion | $501 million | Operating margin 23.4%, versus 11.9% |
| Net income | $1.003 billion | $278 million | Common-shareholder net income: $981 million versus $240 million |
| Diluted EPS | $3.35 | $0.87 | GAAP reported |
| Gross margin | 51.4% | 46.8% | Improved on operating performance and comparison with prior-year Alaris remediation charge |
| Operating cash flow | $1.533 billion | $713 million | Capital expenditures were $246 million versus $173 million |
| Cash, cash equivalents and short-term investments, including restricted cash | $3.464 billion | — | At December 31, 2020 |
| Total debt | $17.818 billion | $17.931 billion at September 30, 2020 | Debt / total capital 40.3%, down from 41.3% |
Q1 diluted EPS included a $1.22 unfavorable impact from specified items, according to the filing’s reconciliation. Specified items totaled $435 million pretax and $357 million after tax, versus $511 million pretax and $489 million after tax in the prior-year quarter. The filing does not provide a single adjusted EPS figure in the supplied text.
Business performance and changes versus prior year
- Life Sciences: Revenue rose 76.2% to $1.979 billion, primarily on COVID-19 diagnostic testing. Testing sales were approximately $867 million and contributed about 20.5 percentage points to company volume growth. Integrated Diagnostic Solutions revenue more than doubled; Biosciences revenue declined 3.5%.
- Medical: Revenue increased 8.2% to $2.261 billion, with growth across all units. Medication Delivery benefited from syringes for COVID-19 vaccination efforts and products used for COVID-19 patients. Medication Management growth reflected infusion pump demand, partly offset by the U.S. hold on other Alaris shipments.
- Interventional: Revenue increased 6.2% to $1.075 billion, led by Peripheral Intervention and Urology and Critical Care; elective procedure weakness weighed on Surgery.
- U.S. revenue increased 28.8%; international revenue increased 21.8% reported and 18.2% foreign-currency neutral. Emerging-market revenue was $650 million, compared with $654 million.
- Margin improvement reflected COVID-test product mix, recovery in healthcare utilization and procedures, manufacturing efficiencies, and the prior-year $59 million Alaris remediation charge. It was partly offset by foreign exchange, cost-saving initiative investments, and $34 million of fixed-asset write-downs.
- Net interest expense declined to $116 million from $134 million. The effective tax rate was 13.3%, compared with 29.6%.
Liquidity, capital allocation and outlook
- Cash and equivalents were $3.248 billion and restricted cash $199 million at December 31; short-term investments were $17 million. The company paid $264 million in dividends, including $242 million to common shareholders. Common dividends were $0.83 per share, up from $0.79.
- Short-term debt was $1.737 billion and long-term debt $16.082 billion. The rise in short-term debt as a share of total debt, to 9.7% from 3.9% at September 30, reflected reclassification of notes. BD had no revolving-credit-facility or commercial-paper borrowings outstanding and was in compliance with facility covenants.
- BD announced a $1.2 billion investment to expand and upgrade manufacturing capacity for prefillable syringes and advanced drug-delivery systems. The filing provides no quantified company-wide revenue or EPS guidance.
- Management expects to submit the Alaris 510(k) filing to the FDA at the end of Q2 or early Q3 FY2021. The company expects most of approximately $1.9 billion in existing service and installation performance obligations to be recognized over the next three years; $2.6 billion of minimum-purchase-related obligations will be recognized over customer relationship periods.
- Management reported that S&P revised its outlook to Stable in January 2021 and Moody’s upgraded its senior unsecured rating to Baa3 and commercial-paper rating to P-3, while affirming a positive outlook.
Risks, contingencies and unusual items
- COVID-19 creates uncertainty around procedure-related demand, supply chains, transportation, vaccine distribution, competition and pricing for diagnostic tests, and the pace of return to normal healthcare and laboratory activity. Management warned that near-term operating performance may be volatile.
- BD Alaris operates under an amended FDA consent decree; other U.S. shipments remain restricted pending 510(k) requirements. An FDA Form 483 followed a 2020 facility inspection, and FDA review remains ongoing. BD also faces a January 2018 FDA Warning Letter concerning its former Preanalytical Systems unit.
- Ethylene oxide sterilization capacity is subject to operational limits and evolving regulation. BD’s Georgia facilities operate under a consent order with reduced capacity; further restrictions or third-party capacity constraints could disrupt production.
- Product-liability accruals were approximately $2.4 billion at December 31, 2020, compared with $2.5 billion at September 30. The company faced approximately 23,260 hernia claims, 465 identified pelvic-mesh claims plus approximately 980 filed or unfiled claims requiring further identification, and approximately 520 filter claims. Many claims remain difficult to estimate; outcomes could materially affect results or cash flows. BD had paid Medtronic $148 million toward potential women’s-health settlements.
- Other matters include a DOJ civil investigation involving certain CareFusion contracts, securities and derivative lawsuits alleging disclosures concerning Alaris, and environmental proceedings. Management said it had made no provisions for these other legal matters; it cannot predict their outcomes.
- Unusual charges included a $10 million loss on redemption of $265 million of notes, $34 million of fixed-asset write-downs, and $50 million of acquisitions and restructuring expense. A $34 million total fixed-asset write-down was recorded in cost of products sold.
Important facts for investors to verify
- How much of the exceptional revenue and margin growth came from COVID-19 testing, and how test competition, pricing and vaccine rollout may change demand.
- Timing and FDA outcome of the Alaris 510(k) submission, shipment restrictions, and any further regulatory action under the consent decree.
- Updates to product-liability accruals, settlement payments, insurance or indemnification recoveries, and trial outcomes.
- Whether sterilization limits, supply-chain disruption, or procedure-volume trends affect production and demand.
- Debt maturities and liquidity following the reclassification to short-term debt, and the funding and execution of the announced $1.2 billion manufacturing investment.