Becton, Dickinson and Company — Q1 FY2022 10-Q
Reporting period: Three months ended December 31, 2021. BD is a global medical technology company reporting through Medical, Life Sciences and Interventional segments. Financial amounts below are in U.S. dollars; statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $4.995 billion | $5.315 billion |
| Operating income | $815 million | $1.241 billion |
| Operating margin | 16.3% | 23.3% |
| Net income | $677 million | $1.003 billion |
| Diluted EPS | $2.28 | $3.35 |
| Gross margin | 48.5% | 51.4% |
| Operating cash flow | $674 million | $1.533 billion |
| Capital expenditures | $188 million | $246 million |
At December 31, 2021, cash and equivalents were $1.903 billion, restricted cash $144 million and short-term investments $8 million. Total debt was $17.424 billion, versus $17.610 billion at September 30, 2021; weighted average debt cost was 2.5%. The current portion of debt was $1.064 billion. BD reported no outstanding borrowings under its $2.75 billion revolving credit facility or commercial paper program and was in compliance with applicable credit covenants.
Common dividends were $0.87 per share, compared with $0.83 a year earlier. Cash dividends paid totaled $271 million, including preferred dividends.
Material changes and segment results
- Revenue fell 6.0% year over year. Core volume growth of 5.8% and pricing growth of 1.1% were more than offset by a 12.8% decline tied to COVID-19 testing comparisons; foreign exchange reduced growth by 0.1%.
- The prior-year quarter included $866 million of COVID-19 testing revenue in Integrated Diagnostic Solutions, compared with $185 million in the current quarter. The company attributed lower operating results in part to this comparison, lower testing profitability, and inflationary raw-material and freight costs.
- Medical revenue rose 6.0% to $2.397 billion; segment income increased to $716 million from $666 million. Life Sciences revenue declined 25.0% to $1.483 billion and segment income fell to $534 million from $972 million. Interventional revenue increased 3.7% to $1.115 billion, while segment income declined to $265 million from $302 million.
- U.S. revenue declined 8.9%; international revenue declined 2.0%. Emerging-market revenue increased 17.8%.
- Specified items totaled $477 million pretax and $389 million after tax, including $364 million of purchase-accounting adjustments, $31 million of European regulatory initiative costs, $25 million of Diabetes Care separation costs, and restructuring and integration expenses. Reported diluted EPS included an unfavorable $1.36 impact from specified items.
Liquidity, outlook and notable developments
Operating cash flow decreased substantially, reflecting lower net income and a net cash use from changes in operating assets and liabilities, including inventory and payables. Investing cash outflow was $686 million, including $415 million for acquisitions; financing cash outflow was $327 million, including dividends. Cash and restricted cash declined by $345 million during the quarter.
BD announced plans to spin off its Diabetes Care business as Embecta. On February 1, 2022, the Board approved the spin-off and an April 1, 2022 distribution date; completion remained subject to customary conditions, including an effective Form 10 registration statement. Embecta arranged to issue $500 million of 5.000% secured notes and expected a $1.150 billion term loan and $500 million revolving facility. The filing does not provide a clear numerical full-year earnings or revenue guidance.
Management cited COVID-19 uncertainty, Omicron-related employee and supplier absenteeism, supply-chain and freight disruptions, raw-material inflation, and potential changes in healthcare utilization as risks to operations and demand. BD said Georgia sterilization operations returned to normal in December 2021 but remained subject to final permit approval and possible restrictions.
Risks, contingencies and unusual items
- BD was defending approximately 26,260 hernia-device product liability claims. Accruals for product liability claims and related defense costs were approximately $2.3 billion at December 31, 2021, down from $2.5 billion at September 30, 2021. Management warned additional charges could exceed recorded accruals and available insurance.
- Other litigation and investigations include pelvic mesh and IVC filter claims, an ongoing securities complaint relating to Alaris infusion pumps, SEC and DOJ inquiries, and approximately 205 lawsuits alleging injuries from ethylene oxide emissions near the Covington, Georgia facility. The company said it could not estimate potential losses for several matters.
- BD Alaris infusion pumps remained subject to an FDA consent decree and ongoing remediation. U.S. commercial operations were limited to medical-necessity cases and recalled-software remediation; full commercial resumption depends on FDA clearance of the 510(k) submission. The FDA’s December 2021 non-compliance letter identified corrective actions that were inadequate or still in progress.
- Ethylene oxide regulation or sterilization-capacity constraints could disrupt production. Other cited exposures include COVID-19, competition and pricing pressure, foreign exchange, debt, inflation, and supply-chain risks.
Key facts for investors to verify
- Whether core demand and margins can offset the reduced COVID-19 testing comparison and ongoing inflationary costs.
- Progress and final terms of the Embecta spin-off, including its financing, distribution and tax treatment.
- FDA clearance timing and remediation progress for Alaris, and any resulting impact on sales or costs.
- Developments in product-liability matters and investigations, particularly whether exposures exceed the recorded accruals.
- Cash-flow recovery, acquisition spending, debt maturities and the company’s liquidity after the spin-off.