Becton, Dickinson and Company — Q1 FY2017 10-Q
Business context and period: The filing covers the three months ended December 31, 2016, compared with the three months ended December 31, 2015. BD is a global medical technology company with Medical and Life Sciences segments. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Revenue | $2.922 billion | $2.986 billion |
| Gross margin | 49.7% | 47.1% |
| Operating income | $811 million | $352 million |
| Net income | $562 million | $229 million |
| Diluted EPS | $2.58 | $1.06 |
| Operating cash flow | $315 million | $463 million |
- Revenue and segments: Reported revenue decreased 2.1%. BD attributed the decline primarily to divestitures, with an approximately 7% unfavorable impact; continuing-business volume grew about 6%, foreign currency translation reduced revenue about 1%, and pricing had no material impact. Medical revenue was $1.964 billion, down 4.4% reported; Life Sciences revenue was $958 million, up 2.7% reported. On a foreign-currency-neutral basis, segment revenue changes were down 3.8% for Medical and up 3.2% for Life Sciences.
- Margins and earnings: Gross margin increased 2.6 percentage points, reflecting operational efficiencies and the divestiture of lower-margin Respiratory Solutions, partly offset by higher raw material costs. Reported operating income and net income benefited materially from a $336 million reserve reversal tied to the RTI litigation appeal. The quarter also included $87 million of acquisition and restructuring costs and a $42 million debt-extinguishment loss. Results therefore include substantial unusual items.
- Cash flow and liquidity: Operating cash flow fell to $315 million, with working-capital changes a significant use of cash. Capital expenditures were $112 million; investing cash flow was positive $48 million, including $167 million of divestiture proceeds. Cash and equivalents were $919 million, and short-term investments were $18 million, at December 31.
- Debt: Total debt was $11.017 billion, down from $11.551 billion at September 30, 2016. Short-term debt rose to $1.974 billion from $1.001 billion; long-term debt was $9.043 billion. BD issued €1.0 billion of notes (approximately $1.062 billion) and repurchased notes with $1.689 billion aggregate principal amount for $1.764 billion, recording a $42 million extinguishment loss.
- Shareholder returns: BD paid $156 million in dividends and repurchased approximately 1.3 million shares for $220 million under an accelerated share repurchase agreement. The quarterly dividend was $0.73 per share, versus $0.66 a year earlier.
Material changes and management commentary
- BD sold a 50.1% controlling interest in Respiratory Solutions in October 2016, retaining 49.9% as an equity-method investment. The disposed business contributed $208 million of revenue in the prior-year quarter; prior-period results were not presented as discontinued operations.
- Management said operating cash flows, together with available cash, were expected to fund normal operating needs for the remainder of FY2017, including working capital, capital expenditures, and dividends. The filing provides no specific revenue or earnings guidance.
- Management cited earlier-than-expected capital placements and customer orders as contributors to Medical growth, and an earlier influenza season and platform sales as contributors to Life Sciences growth. It described healthcare utilization as stable to slightly improved in the U.S. and the European environment as stable, while noting continued pricing pressure and reliance on government funding in emerging markets.
- Management attributed higher Medical operating margin to the divestiture, manufacturing efficiencies, and suspension of the U.S. medical-device excise tax. Life Sciences operating margin declined, reflecting foreign exchange and unfavorable manufacturing variances, partly offset by efficiencies.
Risks, contingencies, and unusual items
- RTI litigation: The appellate court reversed the attempted-monopolization judgment in BD’s favor, prompting the $336 million reserve reversal, but affirmed Lanham Act liability and remanded for consideration of possible disgorgement of profits. The injunction was vacated and remanded. RTI filed a petition for U.S. Supreme Court review on January 31, 2017. BD stated that litigation losses could exceed accruals and could materially adversely affect results or cash flows.
- Other risks discussed include foreign-currency exposure, healthcare pricing and reimbursement pressures, raw-material costs and availability, product safety and regulatory matters, litigation, and acquisition integration. BD noted it operates under an FDA consent decree relating to its U.S. infusion-pump business. It reported no material changes to previously disclosed risk factors.
- Cash and short-term investments held outside the U.S. totaled approximately $0.7 billion; repatriation could have adverse tax consequences. BD reported compliance with its credit-facility interest-coverage covenant.
Important facts for investors to verify
- How much of the reported earnings and EPS increase reflects the RTI reserve reversal and other specified items, versus underlying operating performance.
- The outcome of the RTI remand and Supreme Court petition, including any potential disgorgement or additional legal exposure.
- Whether growth in capital placements, customer orders, and influenza-related sales is sustainable, and how revenue trends develop excluding Respiratory Solutions.
- Whether working-capital cash use reverses and operating cash flow supports the stated FY2017 funding expectations.
- The implications of higher short-term debt, refinancing activity, foreign-exchange exposure, and potential tax costs if foreign cash is repatriated.