Becton, Dickinson and Company — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2016. Figures are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Business context and results
BD operates through BD Medical and BD Life Sciences. Current-period results include CareFusion, acquired in March 2015, while the comparable 2015 reported periods largely exclude its operating results. Accordingly, reported year-over-year growth is not directly comparable.
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $3,067 vs. $2,051; up 49.6% | $6,054 vs. $4,102 |
| Operating income | $466 vs. $293 | $818 vs. $642 |
| Net income | $338 vs. $216 | $567 vs. $452 |
| Diluted EPS | $1.56 vs. $1.08 | $2.62 vs. $2.28 |
| Gross margin | 48.4% vs. 51.0% | 47.8% vs. 51.0% |
Second-quarter Medical revenue was $2,131 million, up 92.8%, primarily reflecting CareFusion. Life Sciences revenue was $936 million, down 1.0% reported but up 3.4% on a foreign-currency-neutral basis. Management attributed legacy-business growth mainly to volume, with some contribution from price, partly offset by unfavorable currency translation. For the six-month period, pro forma results assuming CareFusion was owned from the start of both periods showed revenue of $6,063 million versus $6,168 million, net income of $719 million versus $640 million, and diluted EPS of $3.32 versus $2.98.
Cash flow, liquidity and debt
- Six-month operating cash flow was $1,020 million, compared with $514 million. Capital expenditures were $258 million; investing cash outflow was $170 million and financing cash outflow was $576 million.
- At March 31, cash and equivalents were $1,696 million and short-term investments were $15 million. Total debt was $12,515 million, including $1,651 million of short-term debt; total debt was $12,822 million at September 30, 2015.
- Debt was 58.1% of total capital; weighted-average debt cost was 3.4%. BD had no borrowings under its $1.5 billion syndicated credit facility and reported compliance with its interest-coverage covenant.
- BD paid $280 million in dividends during the six months and reported no share repurchases under its public program. Cash generation and available cash were expected to cover normal operating needs for the rest of FY2016.
Material changes, outlook and risks
- Reported growth reflects the CareFusion acquisition; acquisition-related intangible amortization was a significant offset to margins. Management cited $116 million of CareFusion-related amortization in the quarter and $246 million for the six months. Gross margin also benefited from manufacturing efficiencies, which partly offset acquisition-related depreciation and amortization and currency effects.
- Specified items reduced diluted EPS by $0.62 in the quarter and $1.52 for the six months in FY2016. These included acquisition integration and restructuring costs and purchase-accounting adjustments. The effective tax rates were 10.0% and 11.7%, respectively; tax benefits on specified items materially affected reported rates.
- BD agreed to sell 50.1% of Respiratory Solutions into a joint venture, retaining a 49.9% non-controlling interest. The buyer will control the venture. Closing was expected later in 2016, subject to regulatory approvals and customary conditions; the business was not classified as discontinued operations.
- No numerical full-year earnings or revenue guidance is provided in the supplied filing text. Management described U.S. healthcare conditions as stable to slightly improved and Europe as stable, while noting ongoing pricing pressure, macroeconomic uncertainty, and dependence on government funding in emerging markets.
- Key stated risks include CareFusion integration and acquisition-related debt, foreign exchange, pricing and reimbursement pressure, product safety and regulatory matters (including an FDA consent decree for the U.S. infusion-pump business), raw-material availability and cost, and litigation.
- In the RTI matter, BD appealed a judgment including $341 million in damages and $12 million in attorneys’ fees; pre-judgment interest had been eliminated. BD stated that litigation losses could exceed accruals and insurance and could materially affect results or cash flows. A separate purchaser class action was dismissed, but plaintiffs sought to amend their complaint and BD opposed that request.
Important facts for investors to verify
- How much reported growth and earnings improvement is attributable to CareFusion versus BD’s legacy businesses; compare reported results with the filing’s pro forma figures.
- The expected closing, proceeds, and financial effects of the Respiratory Solutions joint-venture transaction.
- The trajectory of acquisition-related amortization, integration and restructuring costs, and the resulting effect on margins and EPS.
- Debt maturities, refinancing needs, and the implications of elevated leverage and cash held outside the United States.
- Developments in the RTI appeal and other litigation, and any changes in estimated exposure or required accruals.