Becton, Dickinson and Company (BDX) — Q3 FY2019 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2019; filed August 6, 2019. BD is a global medical technology company reporting through Medical, Life Sciences and Interventional segments. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $4,350 | $4,278 | $12,706 | $11,581 |
| Operating income | $626 | $512 | $1,649 | $933 |
| Net income | $451 | $594 | $1,071 | $446 |
| Diluted EPS | $1.51 | $2.03 | $3.49 | $1.27 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $1,959 | $1,559 |
Q3 revenue increased 1.7% as reported and 4.7% on a foreign-currency-neutral basis (FXN); management attributed results to approximately 6% volume growth, a 3.0% adverse currency impact, 0.4% pricing pressure and approximately 1% impact from the Advanced Bioprocessing divestiture. Q3 operating margin was approximately 14.4%, versus 12.0%; gross margin was 47.7%, versus 47.1%. Nine-month revenue rose 9.7% as reported, but comparisons reflect Bard results being included for the full first quarter of FY2019 and not the first quarter of FY2018.
Q3 net income and diluted EPS declined year over year despite higher operating income. The prior-year quarter included a $308 million gain on the sale of BD’s Vyaire Medical interest; Q3 FY2019 included other expense, including a $57 million loss on debt extinguishment. The Q3 effective tax rate was 2.0%, compared with 8.2%.
Segments and operating trends
- Medical: Q3 revenue $2,311, up 2.9% reported and 6.0% FXN; segment operating income $744 versus $732. Growth included Medication Management Solutions and Medication Delivery Solutions; margin faced currency, mix, pricing and raw-material headwinds.
- Life Sciences: Q3 revenue $1,058, down 2.0% reported but up 1.7% FXN; operating income $304 versus $241. The reported decline reflected the Advanced Bioprocessing divestiture; management cited growth in Diagnostic Systems and Preanalytical Systems.
- Interventional: Q3 revenue $981, up 2.9% reported and 5.2% FXN; operating income $183 versus $175. Urology and Critical Care and Surgery grew; Peripheral Intervention was affected by the FDA communication on paclitaxel-coated devices.
Liquidity, debt and capital resources
- At June 30, 2019, cash and equivalents were $523, restricted cash $71 and short-term investments $12; together these totaled $606, including restricted cash. Cash and equivalents plus restricted cash were $594, down from $1,236 at September 30, 2018.
- Total debt was $20,184, down from $21,496 at September 30, 2018; short-term debt was $2,168 and long-term debt $18,016. Total debt was 45.9% of total capital, versus 47.8%; weighted-average debt cost was 2.9%, versus 3.2%.
- Nine-month financing cash outflow was $2,300, including $3,882 of debt and term-loan repayments, partly offset by $2,224 of new debt and term-loan proceeds. Dividends paid were $737.
- Capital expenditures were $599. Investing cash outflow was $300, including $477 proceeds from divestitures. The prior-year investing outflow of $15,173 included $14,998 for the Bard acquisition.
- Management stated that operating cash flow and available cash were expected to fund normal operating needs for the remainder of FY2019, including working capital, capital spending and dividends. BD was in compliance with its credit-facility covenants and had no commercial-paper borrowings outstanding.
Material changes, outlook and risks
- Product liability: BD recorded a $331 million pretax charge in the nine months for certain product-liability matters, including related legal defense costs. Accrued product-liability claims and defense costs were approximately $1.9 billion at June 30, 2019; expected recoveries were approximately $152 million. Management cautioned that future charges could exceed accruals and available insurance and could materially affect results and cash flows.
- Litigation exposure: At June 30, BD reported approximately 8,795 hernia-device claims, 985 pelvic-mesh claims and 4,525 IVC-filter claims. It had settlement agreements or agreements in principle covering about 15,160 women’s-health claims and about 4,200 filter cases. Litigation outcomes and losses cannot be reliably estimated in all cases.
- Product and regulatory matters: A product recall in Medical included an estimated $65 million of remediation costs. BD also disclosed an FDA Warning Letter concerning its Preanalytical Systems facility; resolution timing and outcome were uncertain. Following the FDA’s March 2019 communication on paclitaxel-coated devices, BD estimated drug-coated balloon sales would be 50% below its original forecast for the balance of FY2019; impact beyond FY2019 was uncertain.
- Debt transactions: BD issued €2.0 billion of notes in June 2019 and used proceeds and cash to repay €1.0 billion of notes due June 2019 and repurchase $1.1 billion principal amount of other notes. The tender repurchases resulted in a $57 million extinguishment loss.
- Management view and risks: Management described the U.S. healthcare environment as generally stable and Europe as constrained but currently stable. It cited global pricing pressure, currency movements, emerging-market dependence on government healthcare funding, raw-material costs, product development and regulatory risks, and execution of Bard integration as factors affecting performance. The filing provides no specific full-year revenue or EPS guidance.
- Other changes: BD completed the Advanced Bioprocessing business sale in October 2018 and recognized a $336 million pretax gain. The company planned to adopt the new lease accounting standard on October 1, 2019; it expected recognition of operating-lease assets and liabilities but no material impact on operating results.
Important facts for investors to verify
- How reported and FXN revenue trends develop by segment, particularly Life Sciences and the impact of the divestiture.
- Progress and cash consequences of product-liability settlements, legal accruals, insurance and Medtronic indemnification recoveries.
- The actual FY2019 and longer-term effect of the FDA communication on paclitaxel-coated devices, plus the status of the FDA Warning Letter and recall remediation.
- Debt repayment, refinancing and integration progress, and whether operating cash flow remains sufficient for debt service, investment and dividends.
- How much Q3 and nine-month earnings reflect unusual items, including the prior-year Vyaire gain, the current-year product-liability charge, divestiture gain, acquisition-related amortization and debt-extinguishment loss.