Becton, Dickinson and Company — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017; the fourth quarter ended on that date. Amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
BD is a global medical technology company operating through BD Medical and BD Life Sciences. Its products include medical devices and supplies, medication-management systems, diagnostic instruments and reagents, and tools for life-science research.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $12.093 billion | $12.483 billion |
| Gross profit / gross margin | $5.942 billion / 49.1% | $5.991 billion / 48.0% |
| Operating income | $1.478 billion | $1.430 billion |
| Net income | $1.100 billion | $976 million |
| Diluted EPS | $4.60 | $4.49 |
| Cash from operations | $2.550 billion | $2.559 billion |
| Capital expenditures | $727 million | $693 million |
| Total debt | $18.870 billion | $11.551 billion |
| Cash and short-term investments | $14.201 billion | $1.568 billion |
Revenue fell 3.1% year over year, primarily reflecting the October 2016 divestiture of a controlling interest in Respiratory Solutions, which reduced reported revenue by approximately 7%. BD reported more than 4% volume growth in continuing businesses; foreign currency translation reduced revenue by about 0.5 percentage point, while pricing had no material effect. Medical revenue declined 6.4% to $8.105 billion, while Life Sciences revenue increased 4.2% to $3.988 billion. Segment operating income was $2.155 billion for Medical and $772 million for Life Sciences.
For the unaudited fourth quarter, revenue was $3.166 billion versus $3.231 billion a year earlier; net income was $327 million versus $19 million. Full-year net income applicable to common shareholders was $1.030 billion after $70 million of preferred dividends. The filing reports a 12.7% effective tax benefit rate for FY2017, compared with a 9.1% tax provision rate in FY2016.
Material changes and unusual items
- Gross margin rose to 49.1%, helped by manufacturing efficiencies and the exit from lower-margin Respiratory Solutions products, partly offset by currency effects.
- A $748 million non-cash charge followed changes to dispensing-equipment customer leases. Most modified contracts shifted from sales-type to operating-lease accounting, with revenue generally recognized over the lease term.
- A $336 million reserve reversal related to the appellate decision in the Retractable Technologies litigation benefited FY2017 results. BD recorded $73 million of losses on debt extinguishments and $131 million of financing costs related to the proposed Bard transaction.
- Specified items totaled $1.466 billion before tax and reduced earnings by $971 million after tax, or $4.34 per diluted share, according to the company’s reconciliation.
- BD raised approximately $4.8 billion net through equity offerings and $9.6 billion net through debt transactions during the third quarter to help finance the proposed Bard acquisition. Year-end cash and short-term investments therefore reflect substantial transaction-related financing.
Liquidity, debt and capital allocation
Operating cash flow was nearly flat year over year. Financing activities provided $10.977 billion, primarily from debt and equity issuance; investing activities used $883 million. BD’s total debt increased to $18.870 billion and debt-to-capitalization was 57.5%. The company paid $677 million in common dividends and repurchased $220 million of shares during FY2017; its repurchase program was suspended in connection with the Bard agreement. BD reported no commercial-paper borrowings and no borrowings under its existing $1.5 billion syndicated credit facility at year-end.
Outlook, risks and contingencies
BD gave no specific numerical FY2018 revenue or earnings guidance in the supplied filing text. Management described the U.S. healthcare environment as generally stable and Europe as constrained but stable, while noting pricing pressure and reliance on government funding in emerging markets. It expects continued investment in R&D, geographic expansion and product development. Hurricane Maria damage to Puerto Rico facilities could adversely affect FY2018 revenue and earnings.
- Bard acquisition: The proposed approximately $24 billion cash-and-stock acquisition remained subject to regulatory approvals and customary closing conditions; management expected completion in the fourth calendar quarter of 2017. Risks included integration costs, possible regulatory remedies, added interest expense, and a potential credit-rating downgrade. BD expected Moody’s rating to fall below investment grade after closing.
- Regulatory and product risks: BD’s U.S. infusion-pump business remained subject to an FDA consent decree. The company said it did not consider a loss probable at September 30, 2017 and had no related accrual, but future violations could prompt manufacturing restrictions, recalls or penalties.
- Litigation: The RTI case remained subject to appeal after a district court ruled in BD’s favor on monetary disgorgement; other product-liability, antitrust, patent and environmental matters could result in losses beyond recorded accruals. BD also disclosed significant Bard product-liability claims that the combined company could assume upon closing.
- Other exposures: Key risks include foreign exchange, reimbursement and pricing changes, sole-source supply interruptions, cybersecurity incidents, regulatory approval delays, product quality issues, and healthcare or research funding changes.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded that internal controls were effective as of September 30, 2017.
Most important facts for investors to verify
- Whether the Bard transaction closed on the expected terms and timing, and its final financing, integration costs and effect on credit ratings and leverage.
- How the new operating-lease treatment affects Medication Management Solutions revenue, cash flows and margins after the $748 million charge.
- The scale and duration of Hurricane Maria-related manufacturing disruption and any resulting FY2018 financial impact.
- Developments in the FDA infusion-pump consent decree, RTI appeal and other litigation, including any changes to accruals or potential liabilities.
- Underlying sales trends excluding the Respiratory Solutions divestiture, currency movements and other specified items.