Becton, Dickinson and Company (BDX) — Q2 FY2020 10-Q
Reporting period: Three and six months ended March 31, 2020. Fiscal Q2 covers the quarter; six-month figures are year to date. Amounts are in U.S. dollars unless noted.
Business context
BD is a global medical technology company operating through Medical, Life Sciences and Interventional segments. The quarter was materially affected by COVID-19 disruptions, including fewer elective procedures, reduced routine testing and laboratory activity, and delays in customer instrument placements. Increased demand for some products, including COVID-19-related testing and certain Diabetes Care products, partly offset declines elsewhere. BD estimated COVID-19 reduced Q2 volume growth by about 1.4 percentage points and lowered consolidated revenue by a net $56 million.
Key financial results
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $4.253B | $4.195B | $8.479B | $8.355B |
| Operating income | $370M | $136M | $871M | $1.024B |
| Net income | $183M | $20M | $461M | $619M |
| Net income attributable to common shareholders | $145M | $(18)M | $385M | $544M |
| Diluted EPS | $0.53 | $(0.07) | $1.40 | $1.98 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1.196B | $1.027B |
- Q2 revenue increased 1.4% reported and 2.4% on a foreign-currency-neutral basis. Six-month revenue grew 1.5% reported.
- Q2 gross margin was 40.8%, down from 47.1%; six-month gross margin was 43.8%, down from 47.2%. The Alaris remediation charge, other specified items, product mix and tariffs pressured margins.
- Q2 operating income improved year over year in part because the prior-year quarter included substantial product-liability and recall charges. Six-month net income and diluted EPS declined from prior year.
- Six-month investing cash outflow was $542M, including $395M of capital expenditures. Financing provided $1.210B, including $1.9B of term-loan proceeds; dividends paid were $505M.
Segments and notable changes
- Medical: Q2 revenue was $2.151B, down 1.4% reported; segment income fell to $443M from $599M. Alaris shipment delays, China procurement changes and pandemic-related utilization declines weighed on results. Pharmaceutical Systems and Diabetes Care grew.
- Life Sciences: Q2 revenue was $1.113B, up 5.8%; segment income was $285M versus $293M. Integrated Diagnostic Solutions grew, while Biosciences declined amid reduced research activity and an unfavorable licensing-revenue comparison.
- Interventional: Q2 revenue was $990M, up 2.8%; segment income was $213M versus $231M. Elective procedure deferrals affected Surgery and Peripheral Intervention.
- BD recorded a $199M Q2 charge for estimated future Alaris infusion-pump remediation costs, in addition to a $59M charge in Q1. Management said the estimate could increase. A separate $39M charge wrote down Biosciences intangible assets.
Liquidity, debt and capital
- At March 31, cash and equivalents were $2.351B, restricted cash $88M, and short-term investments $6M. Total cash, restricted cash and short-term investments were $2.445B.
- Total debt was $21.167B, up from $19.390B at September 30, 2019; short-term debt was $4.357B and long-term debt $16.809B. Debt was 48.1% of total capital, compared with 45.6% at fiscal year-end.
- As a precaution amid COVID-19 uncertainty, BD borrowed $1.9B under a 364-day term-loan facility with $2.0B capacity and had $695M outstanding under its revolving facility at quarter-end. In April, revolving commitments increased by $381M to $2.63B. BD said it considered liquidity sufficient and was in compliance with applicable covenants at March 31.
- Standard & Poor’s affirmed its ratings in March but revised its outlook from Stable to Negative. The filing reports a $0.79 quarterly common dividend.
Outlook, risks and contingencies
- BD provided no quantified full-year financial guidance in this filing. Management cautioned that near-term operating performance would be volatile and that COVID-19 could pressure revenue and margins; the timing and extent of recovery were uncertain.
- BD no longer expected to submit the Alaris 510(k) filing to the FDA in Q4 FY2020, citing COVID-19 and other factors. The FDA’s review of observations from a March 2020 inspection remained ongoing; Alaris also operates under an amended consent decree.
- Product-liability accruals were approximately $2.3B at March 31, versus $2.5B at September 30. Management said losses could exceed accruals and available insurance and could materially adversely affect results or cash flows. Matters include hernia, women’s health and IVC filter product claims.
- Other disclosed risks include a securities class action alleging misstatements concerning Alaris, regulatory and sterilization constraints, foreign-exchange and tariff effects, and uncertainty over elective procedures and research activity.
Most important facts for investors to verify
- Whether elective procedures, routine testing and research activity recover, and how that affects revenue mix and margins.
- The final cost and timing of Alaris remediation, FDA submissions and regulatory actions.
- Debt repayment and liquidity after precautionary borrowing, including the effect of the increased short-term debt balance and S&P’s Negative outlook.
- Changes in product-liability claims, settlements, insurance recoveries and the adequacy of the $2.3B accrual.
- The effect of COVID-19 on BD’s segments and whether COVID-related demand offsets declines in other products.
- The mandatory preferred-stock conversion on May 1, 2020, which converted 2.475 million preferred shares into 11.703 million common shares.