Becton, Dickinson and Company — Q1 FY2016 10-Q
Reporting period: Three months ended December 31, 2015. BD is a global medical technology company with BD Medical and BD Life Sciences segments. Results include CareFusion, acquired in March 2015; the prior-year quarter did not include CareFusion.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $2.986 billion | $2.051 billion |
| Operating income | $352 million | $349 million |
| Net income | $229 million | $236 million |
| Diluted EPS | $1.06 | $1.20 |
| Operating cash flow | $463 million | $286 million |
| Capital expenditures | $134 million | $105 million |
| Dividends per share | $0.66 | $0.60 |
- Reported revenue rose 45.6%; management attributed 52.4% growth to CareFusion inclusion, with approximately 1.1% volume growth, flat pricing and a 7.9% unfavorable currency impact. On a foreign-currency-neutral basis, growth was 53.5%.
- Medical revenue was $2.054 billion, up 91.6%; Life Sciences revenue was $933 million, down 4.8% reported but up 1.7% currency-neutral.
- Gross margin declined to 47.1% from 50.9%. Operating income was nearly flat despite the higher reported revenue; consolidated operating margin was approximately 11.8%, versus 17.0%.
- Net income fell 3.0% and diluted EPS fell 11.7%. Current-quarter specified items reduced EPS by $0.90; foreign currency translation had an estimated additional unfavorable EPS impact of $0.26.
- Specified items totaled $274 million pre-tax ($195 million after tax), primarily purchase-accounting adjustments ($153 million), restructuring costs ($85 million) and integration costs ($35 million). These items are not all cash charges.
Cash, debt and liquidity
- Cash and equivalents were $1.583 billion at December 31, 2015; cash and short-term investments totaled approximately $1.6 billion, including $579 million held outside the U.S.
- Total debt was $12.8 billion, unchanged from September 30, 2015. Short-term debt was $1.951 billion and long-term debt $10.858 billion. Short-term debt represented 15.2% of total debt, up from 11.3%, partly reflecting reclassification of $500 million of notes due in November 2016. Weighted-average debt cost was 3.3%; debt was 59.7% of total capital.
- Net interest expense increased to $91 million from $66 million, primarily due to acquisition financing. Cash from operations increased year over year; the prior-year quarter included $6.2 billion of debt proceeds and substantial investment maturities, so investing and financing cash-flow comparisons are not directly indicative of operating trends.
- Management said cash flows and available cash were expected to cover normal operating needs, including working capital, capital spending and dividends, for the remainder of FY2016. In January 2016, BD replaced a $1 billion syndicated facility with a $1.5 billion facility, with potential commitments up to $2 billion; no borrowings were outstanding under the facility at quarter-end.
Material changes, outlook and risks
- CareFusion contributed $1.016 billion of revenue and $137 million of operating income in the quarter. Its acquired intangible-asset amortization and other acquisition accounting effects significantly pressured margins. Pro forma results assuming CareFusion had been acquired before both comparison periods showed revenue of $2.992 billion versus $2.973 billion and net income of $311 million versus $260 million; these non-GAAP-style pro forma figures exclude anticipated integration savings and are not necessarily indicative of future results.
- Management cited growth in legacy Medical products, including infusion therapy, safety-engineered products and pen needles, and in Life Sciences Preanalytical Systems and Biosciences. Life Sciences Diagnostic Systems faced a difficult comparison from a strong prior-year flu season and lower capital spending in China.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management described U.S. healthcare utilization as stable to slightly improved, Europe as stable amid macroeconomic constraints, and pricing pressures as ongoing. Emerging-market growth depends in part on government healthcare funding.
- Risks highlighted include CareFusion integration and elevated indebtedness, currency volatility, healthcare pricing and funding pressures, product safety and regulatory exposure, supply disruptions and litigation. BD operates under an FDA consent decree relating to its U.S. infusion-pump business.
- BD continued to appeal the RTI antitrust and false-advertising judgment, which included a $341 million damages award and $12 million in attorneys’ fees; management says the case could result in additional charges beyond recorded accruals. A separate purchaser class action was dismissed on January 29, 2016. Environmental and other ordinary-course proceedings also remain.
- Foreign currency translation reduced comprehensive income: other comprehensive loss was $101 million, primarily reflecting the stronger U.S. dollar. The company also agreed in December 2015 to sell a non-core asset, recording a related non-cash charge.
Important facts for investors to verify
- How much reported growth and future performance are attributable to CareFusion versus BD’s legacy businesses, and whether integration savings offset acquired-asset amortization and restructuring costs.
- Debt maturities, refinancing needs, interest expense and the effect of leverage on financial flexibility.
- The outcome and potential financial exposure from the RTI appeal and other litigation, including whether recorded accruals are adequate.
- Whether currency headwinds, pricing pressure, healthcare funding and regional demand affect revenue and margins beyond this quarter.
- The filing states that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.