Becton, Dickinson and Company (BDX) — Q2 FY2022 10-Q
Reporting period: Three and six months ended March 31, 2022. Amounts are in millions of dollars except per-share data. BD is a global medical technology company with Medical, Life Sciences and Interventional segments. On April 1, 2022, it completed the spin-off of its Diabetes Care business as Embecta; the quarter’s results still include that business.
Financial results
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $5,011 | $4,907 | $10,006 | $10,223 |
| Operating income | $652 | $434 | $1,467 | $1,676 |
| Net income | $454 | $299 | $1,131 | $1,302 |
| Diluted EPS | $1.50 | $0.94 | $3.78 | $4.28 |
| Gross margin | 46.0% | 45.8% | 47.3% | 48.7% |
| Operating cash flow | Not stated by quarter | $1,118 | $2,721 |
Q2 revenue rose 2.1% reported (3.9% foreign-currency neutral), reflecting volume growth of 7.3% and pricing of 1.8%, partly offset by a 5.2% decline related to COVID-19-only testing and a 1.8% currency headwind. The Q2 operating margin was approximately 13.0%, versus 8.8% a year earlier. Q2 net income and EPS improved partly because the prior-year quarter included a $296 million product-liability charge. Six-month revenue, operating income, net income and diluted EPS were lower year over year, in part reflecting reduced COVID-19 testing and the prior-year period’s stronger testing sales.
Segments and material changes
| Segment | Q2 revenue change | Q2 segment income | Q2 income comparison |
|---|---|---|---|
| Medical | +$105; +4.5% | $615 | $634 prior year |
| Life Sciences | −$101; −6.4% | $475 | $548 prior year |
| Interventional | +$100; +9.9% | $280 | $209 prior year |
Medical growth came from core delivery, management and pharmaceutical systems products; income was pressured by raw-material and freight costs and a $54 million noncash impairment. Life Sciences revenue fell mainly because COVID-19-only diagnostic testing sales declined to $214 million from $474 million; routine lab recovery and combination flu/COVID testing partly offset the decline. Interventional growth reflected demand across units and acquisitions; prior-year results were affected by COVID-related procedure declines and product-quality expenses.
Company gross margin was slightly higher in Q2 year over year, but lower for the six-month period. Higher raw-material and freight costs, lower COVID-testing profitability and purchase-accounting adjustments weighed on margins. Selling and administrative expense increased to 24.6% of revenue in Q2 from 23.4%; R&D rose to 6.9% from 6.5%.
Liquidity, debt and cash flows
- At March 31, cash and equivalents were $3,147; restricted cash was $173; short-term investments were $15. Total cash, restricted cash and short-term investments were about $3,335.
- Total debt was $18,635, compared with $17,610 at September 30, 2021; weighted average debt cost was 2.6%. Current debt obligations were $1,051. The $2.75 billion revolving credit facility had no borrowings, and BD reported compliance with its covenants.
- Six-month operating cash flow was $1,118, down from $2,721. The change included a $950 million use of cash from operating assets and liabilities, compared with a $55 million source a year earlier, and a $134 million discretionary pension contribution.
- Six-month investing cash outflow was $990, including $415 of capital expenditures and $450 for acquisitions. Financing cash inflow was $804, including $1,424 of debt issued in connection with the spin-off; dividends paid were $541.
Outlook, risks and unusual items
The filing provides no specific full-year revenue or EPS guidance. Management cited inflation in materials, labor, energy and logistics; component and labor shortages; transportation constraints; product backlogs; and continuing COVID-related uncertainty. BD described procurement, efficiency, product-allocation and pricing actions to mitigate cost pressures, but cautioned that mitigation may not fully offset them. Russia-Ukraine operations were not material to results to date, but escalation could worsen inflation and supply-chain disruption.
- Spin-off: Embecta’s $500 million notes and $950 million term loan were included in BD’s March 31 balance sheet before the April 1 separation; Embecta distributed approximately $1.266 billion to BD on March 31. BD’s guarantees of Embecta debt terminated at the spin-off. Future filings will present Diabetes Care as discontinued operations.
- Litigation: BD reported about 28,590 hernia-device claims and approximately $2.3 billion of accrued product-liability claims and defense costs. Management said additional charges beyond accruals and available insurance could materially adversely affect results or cash flows. Other product, securities, antitrust, environmental and government-investigation matters are also described; several potential losses cannot be estimated.
- Regulatory/product matters: BD Alaris infusion pumps remain subject to an FDA consent decree; U.S. shipments are limited to medical necessity and recalled-software remediation pending FDA clearance of a 510(k) submission. Georgia sterilization operations returned to normal capacity under specified conditions, but permit approval and possible further restrictions remain risks.
- Other items: Q2 included a $54 million noncash impairment, $53 million of spin-off-related costs, and $73 million of investment losses and asset impairments as classified among specified items. The filing also reports a $2 million debt-extinguishment loss expected in Q3.
Important facts for investors to verify
- Whether core-product growth and pricing can offset lower COVID-19 testing revenue, foreign exchange and inflationary costs.
- Whether operating cash flow recovers from working-capital pressures and how debt and liquidity evolve after the Embecta separation.
- The timing and outcome of FDA actions on Alaris and the potential operational impact of sterilization restrictions.
- Developments in product-liability litigation, including hernia claims, and whether existing accruals remain adequate.
- How the spin-off affects future reported revenue, earnings, cash flows and comparability with this quarter.