Business context and reporting period
Becton, Dickinson and Company (BD) filed this unaudited Form 10-Q for the quarter and six months ended March 31, 2018, its fiscal second quarter. BD operates in Medical, Life Sciences and Interventional. Results include C.R. Bard from January 1, 2018; the acquisition closed December 29, 2017. As a result, reported comparisons with 2017 are not fully comparable.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $4.222 billion, up 42.2% | $7.302 billion, up 23.9% |
| Operating income | $183 million, versus $446 million | $413 million, versus $1.257 billion |
| Net income (loss) | $(12) million, versus $344 million | $(148) million, versus $905 million |
| Net income (loss) applicable to common shareholders | $(50) million; diluted EPS $(0.19) | $(224) million; diluted EPS $(0.90) |
| Gross margin | 38.0%, versus 48.2% | 43.2%, versus 49.0% |
| Operating cash flow | Not presented separately for the quarter | $1.017 billion, versus $1.040 billion |
Quarterly revenue growth included an estimated 33% contribution from Bard and approximately 5% from foreign currency; management also cited volume growth above 5% and price impact of approximately negative 0.5%. Bard acquisition accounting materially weighed on margins: a $422 million inventory fair-value step-up was expensed, alongside acquisition-related amortization and depreciation. The step-up was expected to be expensed over about four months.
Segments and changes versus prior period
- Medical: Q2 revenue was $2.172 billion, up 19.7% reported and 15.3% foreign-currency neutral; operating income was $588 million, up from $475 million. The segment benefited from Bard products, while Bard-related amortization and $53 million of inventory step-up expense reduced gross margin.
- Life Sciences: Q2 revenue was $1.098 billion, up 11.8% reported and 7.3% foreign-currency neutral; operating income was $336 million, versus $177 million. Growth included influenza-related diagnostic sales and newer Biosciences products.
- Interventional: Q2 revenue was $952 million, largely reflecting Bard; operating loss was $154 million, including $369 million of Bard inventory step-up expense. Prior-year segment figures were reclassified for certain products.
Lower manufacturing costs and favorable product mix supported underlying operating performance, but higher raw-material costs and pricing pressure were headwinds. The prior-year six-month comparison also included $336 million of litigation-reserve reversal income, further affecting the year-over-year profit comparison.
Cash, debt and liquidity
At March 31, 2018, cash and equivalents were $1.251 billion, restricted cash $167 million and short-term investments $16 million. Total debt was $22.791 billion, compared with $18.870 billion at September 30, 2017; long-term debt was $22.589 billion. Total debt was 49.1% of total capital, versus 57.5% at fiscal year-end, and the weighted average debt cost was 3.3%. Current assets were $7.512 billion and current liabilities $4.426 billion.
For the six months, investing cash outflow was $15.540 billion, principally reflecting $15.118 billion of net acquisition spending for Bard; financing cash inflow was $1.565 billion. BD paid $449 million in dividends. Management said operating cash flows and available cash were expected to cover normal operating needs for the remainder of fiscal 2018. The company reported compliance with credit-facility covenants at quarter-end. Ratings were downgraded by S&P and Moody’s following the Bard acquisition; all three agencies listed stable outlooks.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management cited continued investment in R&D, geographic expansion and new-product promotion, while noting uncertainty from healthcare utilization, pricing pressure and emerging-market government funding.
- The Tax Cuts and Jobs Act produced a provisional $275 million six-month tax expense. The estimate included a $561 million transition-tax expense partly offset by a $285 million deferred-tax remeasurement benefit; the company had not completed its accounting for the legislation.
- Bard-related litigation reserves and other legal accruals were approximately $1.8 billion; expected recoveries were approximately $303 million, and $165 million was held in qualified settlement funds. The company cautioned that additional charges could materially affect results or cash flows.
- Product-liability matters include approximately 1,280 hernia claims, 3,195 pelvic-mesh claims plus approximately 1,080 claims lacking sufficient product information, and 3,789 inferior vena cava filter claims. A jury returned a $68 million pelvic-mesh verdict in April 2018, after quarter-end. A March 30 filter-trial verdict found BD liable for negligent failure to warn; BD said it would challenge the verdict. Plaintiffs also requested a new hernia multidistrict litigation in April.
- BD received an FDA Warning Letter concerning quality-system and reporting issues at a blood-collection-tube facility. The products remained available for sale; BD was implementing corrective actions, with no assured resolution date.
- In April 2018, BD sold its remaining 49.9% interest in Vyaire Medical for approximately $435 million gross proceeds, subject to adjustments, and expected a pretax gain.
Most important facts for investors to verify
- Underlying organic growth and profitability after separating Bard, foreign exchange, acquisition amortization and the inventory step-up.
- Final purchase-price allocations, integration progress, expected synergies and the effect of acquisition debt on interest costs and ratings.
- Updates to the provisional tax estimates and timing and funding of transition-tax payments.
- Changes in litigation accruals, settlement recoveries, insurance coverage and outcomes of upcoming product-liability trials.
- Progress on FDA corrective actions and any resulting product, regulatory or financial effects.