Becton, Dickinson and Company — Q3 FY2020 Form 10-Q
Reporting period: Quarter ended June 30, 2020; year-to-date figures cover the nine months ended that date. BD is a global medical technology company with Medical, Life Sciences and Interventional segments. Amounts are in U.S. dollars unless noted.
Key financial results
| Metric | Q3 FY2020 | Q3 FY2019 | Change |
|---|---|---|---|
| Revenue | $3.855B | $4.350B | -11.4% |
| Operating income | $358M | $626M | -42.8% |
| Net income | $286M | $451M | -36.6% |
| Diluted EPS | $0.97 | $1.51 | -35.8% |
| Gross margin | 43.1% | 47.7% | -4.6 percentage points |
Net income applicable to common shareholders was $277M, after preferred dividends. Q3 revenue declined 9.4% on a foreign-currency-neutral basis; BD estimated COVID-19 reduced quarterly volume growth by approximately 14.1% and reduced revenue by about $600M. Operating margin was approximately 9.3%, compared with 14.4% a year earlier.
For the first nine months, revenue was $12.333B (-2.9%), operating income $1.229B (-25.5%), net income $746M (-30.3%), and diluted EPS $2.38 versus $3.49. Operating cash flow was $2.058B, capital expenditures were $597M, and operating cash flow less capital expenditures was approximately $1.461B (calculated).
Segments and material changes
- Medical: Q3 revenue $2.122B, down 8.2%; segment income $646M versus $744M. Medication Delivery Solutions and Diabetes Care declined; Medication Management Solutions and Pharmaceutical Systems grew.
- Life Sciences: Q3 revenue $951M, down 10.1%; segment income $214M versus $304M. Lower routine testing, specimen collection and research activity were partly offset by COVID-19 diagnostic testing.
- Interventional: Q3 revenue $782M, down 20.3%; segment income $100M versus $183M. Elective procedure deferrals particularly affected Surgery and Peripheral Intervention.
Gross margin fell from 47.7% to 43.1% in Q3, primarily due to product mix and lower factory utilization, which increased manufacturing overhead recognized in the period. Cost controls and operating-efficiency initiatives partly offset these pressures. Q3 included an $18M credit to the Alaris remediation estimate; nine-month results included $240M of Alaris-related remediation costs. Other specified items also affected comparability, including purchase-accounting amortization and restructuring costs.
Cash, debt and capital
- At June 30, 2020, cash and equivalents were $2.882B, restricted cash $82M and short-term investments $22M. Current assets were $8.827B and current liabilities $6.067B.
- Total debt was $18.720B, down from $19.390B at September 30, 2019; weighted-average debt cost was 2.7%. The company reported no borrowings under its $2.63B revolving credit facility and was in compliance with its financial covenants.
- Financing activity included $2.917B net proceeds from common and preferred equity offerings. BD issued $1.5B of long-term notes and used proceeds and cash to repay or redeem existing debt. The new Series B preferred stock carries a 6% annual dividend if declared and is convertible into common shares by June 2023.
- Cash increased by $2.374B over the nine-month period, reflecting operating cash generation and equity financing, partly offset by investing and debt-related uses. Dividends paid were $773M.
Outlook, risks and unusual items
BD gave no quantitative full-year earnings or revenue guidance in the provided filing text. Management said near-term performance would remain volatile, noted sequential improvement in demand for some products from May to June, and expected COVID-19 to continue pressuring margins for the remainder of FY2020. The outlook depends on procedure volumes, routine testing and research activity, pandemic developments, and the pace of healthcare and economic recovery.
- Alaris and regulatory matters: U.S. Alaris pump shipments remain limited pending FDA filing requirements; BD expected to submit its filing around the end of Q2 or early Q3 FY2021. A March 2020 FDA inspection produced a Form 483 with observations; BD had responded and begun corrective actions. The business also operates under an amended FDA consent decree.
- Product liability: Accrued product-liability claims and related defense costs were approximately $2.2B at June 30, 2020. BD disclosed approximately 19,265 hernia claims, 575 pelvic mesh claims (plus about 990 claims lacking sufficient product information), and 2,165 vena cava filter claims. Management said it could not estimate a reasonably possible loss range for certain matters; future charges could exceed accruals and available insurance.
- Other risks: COVID-19 disruption, pricing and procurement pressures (including China’s volume-based procurement), foreign exchange, supply-chain continuity, regulatory compliance, and litigation. BD also disclosed a securities class action alleging omissions concerning Alaris; the company said it considers the claims without merit and intends to defend them.
- Management reported no COVID-related asset impairments and no significant operational or supply-chain disruption to date. The company stated its controls and procedures were effective as of June 30, 2020.
Investor verification priorities
- Track recovery in elective procedures, routine diagnostics and research activity, and compare actual demand with management’s stated pandemic assumptions.
- Verify the timing and outcome of the Alaris FDA submission, remediation costs, and any related regulatory actions.
- Review changes in the $2.2B product-liability accrual, settlement payments, insurance recoveries and the progress of major trials.
- Assess segment margins and the persistence of lower plant utilization and unfavorable product mix.
- Monitor debt maturities, financing costs, preferred-stock dividends and potential common-share dilution from conversion.