Becton, Dickinson and Company — Q3 FY2015 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2015. Financial figures are in U.S. dollars; unless stated otherwise, amounts are millions. BD acquired CareFusion on March 17, 2015, and included its operating results beginning April 1.
Financial performance and condition
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $3,120 | $2,157 | $7,222 | $6,244 |
| Operating income | $137 | $445 | $779 | $1,204 |
| Net income | $62 | $326 | $514 | $884 |
| Diluted EPS | $0.29 | $1.65 | $2.52 | $4.47 |
| Gross profit margin | 38.1% | 51.5% | 45.4% | 51.2% |
| Operating cash flow | — | $1,052 | $1,207 |
- Q3 revenue rose 44.6%, reflecting CareFusion sales (estimated 50.3% favorable impact) and volume growth of about 4.7%, partly offset by foreign currency translation (about 10.4% unfavorable); pricing had no material impact.
- Medical segment Q3 revenue was $2,199 and operating income $483; Life Sciences revenue was $921 and operating income $197. Life Sciences revenue declined 3.7% year over year, including an estimated 7.9% adverse currency effect. Medical’s reported growth reflects the acquired business.
- Q3 results included $548 of specified pre-tax items ($379 after tax), principally acquisition-related costs and purchase-accounting adjustments. The inventory fair-value step-up and acquired-asset amortization/depreciation reduced Q3 gross margin by an estimated 1,230 basis points. Q3 diluted EPS also reflected a $1.76 adverse impact from specified items and an estimated $0.29 adverse currency impact.
- CareFusion consideration was approximately $12.5 billion, including $10.1 billion cash and BD shares and awards. CareFusion contributed approximately $1.0 billion revenue and a reported $261 million operating loss in the period covered by the acquisition note.
- At June 30, cash and equivalents were $1,559 and short-term investments $29. Total debt was approximately $13.2 billion, versus $4.0 billion at September 30, 2014; debt was 58.3% of total capital versus 43.4%. Weighted average debt cost was 3.2%. Shareholders’ equity was $7,253.
- Nine-month investing cash outflow was $8,003, primarily due to $8,334 of business acquisitions; financing cash inflow was $6,667, mainly reflecting acquisition-related borrowing. Capital expenditures were $387 and dividends paid were $358.
Changes, outlook, and management commentary
- The CareFusion acquisition substantially expanded Medical and drove much of the increase in reported revenue, assets, intangible assets, and debt. BD issued $6.2 billion of senior notes and also used commercial paper and a term loan to fund the transaction.
- Management said operating cash flow and available cash were expected to fund normal operating needs for the remainder of FY2015. It expected fairly substantial CareFusion integration costs to continue through FY2016. The filing provides no specific full-year earnings or revenue guidance.
- BD suspended its share repurchase program for FY2015 in connection with the acquisition; no program repurchases were made in the first nine months. The company reported compliance with its debt covenants and stated that its credit ratings remained investment grade following downgrades.
- Management cited continuing pricing pressure, currency headwinds, uncertain healthcare utilization and government funding, and the need to integrate CareFusion and achieve anticipated benefits. It described the U.S. healthcare environment as stabilized and slightly improved and Europe as stable, while noting macroeconomic constraints.
Risks, contingencies, and unusual items
- BD is appealing a final judgment in the Retractable Technologies (RTI) antitrust and false-advertising litigation, including $341 million in damages and $12 million in attorneys’ fees; the filing says the appeal challenges the entire judgment. The $341 million charge had been recorded in FY2013. Management warns that litigation losses beyond recorded accruals could materially affect results and cash flows.
- A new class-action antitrust complaint was filed July 17, 2015, alleging monopolization of syringe and IV-catheter markets and seeking treble damages; the amount was not specified. CareFusion shareholder litigation in Delaware was proposed for settlement, subject to a hearing scheduled for September 17, 2015; related California actions remained pending.
- Brazil imposed anti-dumping duties, effective April 30, 2015, of 45.3% on relevant U.S.-origin blood collection tubes and 71.5% on U.K.-origin products for at least five years. BD appealed and said it did not expect a material effect; a public-interest review could suspend or modify the measures.
- Risks include CareFusion integration and increased leverage, currency and raw-material exposure, regulatory and product-liability matters, and an FDA consent decree covering the U.S. infusion-pump business acquired with CareFusion. Management reported effective disclosure controls and continued integration of CareFusion into control processes.
Important facts for investors to verify
- How much of reported revenue and future earnings growth is attributable to CareFusion versus BD’s legacy operations, and whether integration benefits offset ongoing costs.
- The final purchase-price allocation, acquired-asset amortization, and the remaining effects of inventory and other purchase-accounting adjustments.
- Debt repayment progress, refinancing and interest costs, covenant headroom, and the effect of ratings downgrades on financing flexibility.
- Developments and potential exposure in the RTI appeal, the new antitrust complaint, CareFusion-related lawsuits, and the Brazilian duties.
- Whether currency, pricing, healthcare utilization, and segment-level demand trends improve; interim results are not necessarily indicative of full-year results.