Becton, Dickinson and Company (BD): Q3 FY2018 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2018. Unless otherwise noted, amounts are in millions of dollars. BD completed its acquisition of C.R. Bard on December 29, 2017; Bard’s results are included from January 1, 2018.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $4,278 | $3,035 | $11,581 | $8,927 |
| Operating income (loss) | $513 | $(223) | $926 | $1,035 |
| Net income (loss) | $594 | $(132) | $446 | $773 |
| Diluted EPS | $2.03 | $(0.75) | $1.27 | $3.36 |
| Gross margin | 47.1% | 49.5% | 44.6% | 49.2% |
- Q3 revenue increased 41.0% reported and 37.6% on a foreign-currency-neutral basis. BD attributed approximately 32.4 percentage points of reported growth to Bard; volume growth exceeded 5.5%, currency added approximately 3.4%, and price reduced growth approximately 0.4%.
- Q3 operating results improved from the prior-year loss, which included a $741 million non-cash charge related to modified dispensing-equipment lease contracts. Nine-month results also reflect substantial acquisition-related amortization, inventory step-up expense, restructuring and integration costs, and tax reform expense.
- Q3 diluted EPS was $2.03, including a $0.88 unfavorable impact from specified items. Nine-month diluted EPS included a $6.51 unfavorable impact from specified items, per the company’s reconciliation.
Segments and material changes
- Medical: Q3 revenue was $2,246, up 20.0% reported and 16.9% FX-neutral. Segment operating income was $732, or 32.6% of revenue, versus $491 and 26.3% a year earlier. BD cited Bard product contributions, operational efficiencies and favorable currency, partly offset by acquired-intangible amortization, inventory step-up expense and higher raw-material costs.
- Life Sciences: Q3 revenue was $1,079, up 8.2% reported and 5.6% FX-neutral. Segment operating income was $241, or 22.4% of revenue, versus $199 and 19.9%; the quarter included write-downs of certain Biosciences assets.
- Interventional: Q3 revenue was $954, primarily reflecting Bard. Segment operating income was $175; nine-month operating income was $102, versus $187 in the prior-year period. The current-year period included $418 million of Bard inventory fair-value step-up expense for the nine months.
- Consolidated gross margin declined, with purchase-accounting adjustments and asset write-downs reducing margin by 6.7 percentage points in Q3 and 7.7 points for the nine months. Operational performance and foreign currency provided offsets.
- BD sold its remaining 49.9% interest in Vyaire Medical in April, receiving approximately $435 million gross proceeds and recording a $308 million pretax gain. Q3 other income also included related transition-services income and other items.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,559, compared with $1,424 a year earlier; capital expenditures were $588. Investing cash outflow was $15,298, mainly reflecting $15,111 of net acquisition spending, primarily for Bard.
- At June 30, cash and equivalents were $1,384, restricted cash was $125, and short-term investments were $15. BD reported approximately $1.5 billion of cash and short-term investments including restricted cash, primarily held outside the United States.
- Total debt was $22,249, up from $18,870 at September 30, 2017; short-term debt was $1,900 and long-term debt was $20,350. Debt was 48.5% of total capital, compared with 57.5% at fiscal year-end. Weighted average debt cost was 3.3%.
- BD reported $200 million drawn on its $2.25 billion revolving facility and $1.23 billion outstanding on its term loan. It was in compliance with the facilities’ financial covenants. The company said operating cash and available funds were expected to cover normal operating needs for the remainder of FY2018, including working capital, capital expenditures and dividends.
- Credit ratings were BBB (S&P), Ba1 (Moody’s) and BBB- (Fitch), each with a stable outlook. S&P and Moody’s had downgraded ratings following the Bard acquisition; BD warned further downgrades could raise borrowing costs.
Outlook, risks and unusual items
- No specific full-year revenue or EPS guidance is provided in the supplied filing text. Management described U.S. healthcare conditions as generally stable and Europe as currently stable, while noting macroeconomic constraints in Europe, dependence on government healthcare funding in emerging markets, and pricing pressure in some geographies.
- The Bard transaction involved approximately $25.0 billion of consideration. Purchase-price allocation remained provisional; acquired goodwill was $15.9 billion and developed technology was valued at $10.5 billion. Integration execution, anticipated synergies and additional debt are material considerations.
- The provisional U.S. tax-reform charge was $275 million for the nine months. The company had not completed its tax accounting; it estimated a combined transition-tax liability of approximately $781 million, with payments expected to begin January 15, 2019.
- Product-liability and legal matters include approximately 2,299 hernia-device claims, 1,522 pelvic-mesh claims plus approximately 1,063 filed or unfiled claims lacking sufficient product information, and approximately 4,192 IVC-filter claims. A New Jersey pelvic-mesh jury verdict against BD totaled $68 million; BD was challenging it. The company recorded approximately $2.0 billion of Bard-related legal accruals and expected recoveries of approximately $294 million. Management cautioned that additional charges could materially affect results or cash flows.
- BD received an FDA Warning Letter concerning quality-system and reporting issues at its Preanalytical Systems facility and certain blood collection tubes. The products remained available for sale; BD was implementing corrective actions but could not assure the timing or outcome of resolution.
- Other stated risks include acquisition integration, foreign exchange, competition and pricing, raw-material availability and cost, regulatory or product-safety actions, healthcare reimbursement changes, and litigation. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported growth and future earnings are attributable to Bard, and whether integration benefits offset acquisition-related costs and amortization.
- The final Bard purchase-price allocation, inventory step-up effects, and ongoing impairment or restructuring charges.
- Developments in pelvic-mesh, hernia and IVC-filter litigation, insurance and indemnification recoveries, and whether recorded accruals remain adequate.
- FDA remediation progress and any effect on product clearances, sales or operations.
- Final U.S. tax-reform accounting and transition-tax payments, together with debt levels, covenant headroom and credit ratings.