Becton, Dickinson and Company (BDX) — Form 10-Q
Reporting period: Second quarter and first six months of fiscal 2019, ended March 31, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. BD is a global medical technology company with Medical, Life Sciences and Interventional segments.
Financial results
| Metric | Three months ended March 31, 2019 | Prior-year quarter | Six months ended March 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $4,195 | $4,222 | $8,355 | $7,302 |
| Operating income | $136 | $186 | $1,024 | $422 |
| Net income (loss) | $20 | $(12) | $619 | $(148) |
| Net income (loss) applicable to common shareholders | $(18) | $(50) | $544 | $(224) |
| Diluted EPS | $(0.07) | $(0.19) | $1.98 | $(0.90) |
| Operating cash flow | Not separately provided | Not separately provided | $1,027 | $1,017 |
Quarterly revenue declined 0.6% as reported, while BD reported 2.1% growth on a foreign-currency-neutral (FXN) basis. Management cited volume growth above 3%, an approximately 2.7% currency headwind and approximately 0.1% pricing pressure; divestiture of Advanced Bioprocessing also reduced the comparison by about 1%. Six-month revenue increased 14.4%, reflecting in part the inclusion of Bard results in the current-year period that were absent from the first quarter of the prior-year period.
Quarterly gross margin was 47.1%, versus 38.0% a year earlier; the comparison benefited substantially from the prior-year Bard inventory fair-value step-up and other specified items. Operating income was $136 million, including $396 million of other operating expense. The quarter included a $331 million product-liability charge and an estimated $65 million infusion-system product-recall charge. The reported quarterly effective tax rate was unusually negative, reflecting specified items and very low pretax income.
Segments and material changes
- Medical: Quarterly revenue was $2.180 billion, up 0.4% reported and 3.3% FXN. Medication Management Solutions grew 5.9% reported; Medication Delivery Solutions declined 3.0%, partly due to U.S. distributor inventory adjustments. Segment operating income was $599 million, including the estimated $65 million recall cost.
- Life Sciences: Quarterly revenue was $1.052 billion, down 4.2% reported and 0.9% FXN. BD cited a less severe influenza season affecting Diagnostic Systems, higher-than-expected rebates in Preanalytical Systems and the Advanced Bioprocessing divestiture. Segment operating income declined to $293 million from $336 million.
- Interventional: Quarterly revenue was $963 million, up 1.1% reported and 2.9% FXN. Peripheral Intervention grew 1.1% reported and Urology and Critical Care grew 4.5%; paclitaxel-coated balloon sales faced FDA-related pressure. Segment operating income was $231 million, compared with a prior-year loss of $154 million, when Bard acquisition inventory accounting materially affected results.
For the six-month period, BD recorded a $335 million pretax gain from selling Advanced Bioprocessing. The sale generated $477 million of investing cash proceeds. Current-period operating results also included $754 million of intangible amortization, up from $505 million, primarily due to Bard-acquired assets.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1.027 billion; capital expenditures were $362 million. Cash flow reflected, among other items, a $200 million discretionary pension contribution and a net use of cash from changes in operating assets and liabilities.
- Cash and equivalents were $686 million, restricted cash $81 million, and short-term investments $10 million at March 31, 2019: $777 million combined. BD said these funds were primarily held outside the United States.
- Total debt was $20.613 billion, down from $21.496 billion at September 30, 2018. It comprised $3.057 billion short-term and $17.556 billion long-term debt. Weighted average debt cost was 3.3%; debt was 46.5% of total capital.
- BD paid $491 million in dividends and repaid $905 million of debt during the six months. It had no commercial-paper or revolving-credit-facility borrowings at quarter-end; $60 million was outstanding under a term loan. BD reported compliance with credit-facility covenants.
- Management said operating cash flow and available cash were expected to fund normal operating needs, including working capital, capital expenditures and dividends, for the remainder of fiscal 2019.
Outlook, risks and contingencies
The filing does not provide a clear consolidated full-year revenue or earnings forecast. BD estimated that the FDA’s March 2019 communication on paclitaxel-coated devices could reduce drug-coated balloon sales by 50% for the balance of fiscal 2019 versus its original forecast; the longer-term effect is uncertain. Management also identified currency movements, global pricing pressure, healthcare utilization and reimbursement, raw-material costs, emerging-market funding, and Bard integration and related debt as factors that could affect results.
Product-liability accruals for the matters discussed in the filing were approximately $2.0 billion at both March 31, 2019 and September 30, 2018. BD recorded the additional $331 million quarterly charge but said it could not estimate reasonably possible losses for certain litigation and investigations; future charges beyond accruals and available insurance could materially affect results and cash flows. At quarter-end BD was defending approximately 6,755 hernia-device claims, 1,050 pelvic-mesh claims (plus approximately 1,015 filed or unfiled claims lacking sufficient product information), and 6,960 IVC-filter claims. The company also disclosed a continuing FDA Warning Letter concerning its Franklin Lakes facility; a separate warning letter concerning its Franklin, Wisconsin facility was closed in February 2019. BD stated that risk factors had not materially changed from its 2018 Form 10-K.
Investor verification priorities
- Review the basis and potential additional exposure behind the $331 million product-liability charge, the roughly $2.0 billion accrual, and the related insurance and Medtronic recoveries.
- Track developments in hernia, pelvic-mesh and IVC-filter litigation, including settlements, trials, appeals and any changes in claim counts or estimates.
- Assess the actual sales and earnings impact of the FDA communication on paclitaxel-coated devices against the stated 50% forecast reduction for the rest of fiscal 2019.
- Separate underlying operating trends from foreign-exchange effects, Bard-related comparison effects, the Advanced Bioprocessing divestiture and other specified items.
- Monitor debt maturities, cash generation, covenant compliance and the resolution of the ongoing FDA Warning Letter.