BECTON DICKINSON & CO quarterly report, Q3 FY2016

Becton, Dickinson and Company — Q3 FY2016 Form 10-Q

Reporting period: Quarter and nine months ended June 30, 2016; fiscal year ends September 30. Amounts are in millions of dollars except per-share data. BD is a global medical technology company with BD Medical and BD Life Sciences segments. CareFusion, acquired in March 2015, is included in consolidated results from April 1, 2015, making year-to-date comparisons materially affected by acquisition timing.

Financial performance and position

Metric	Three months ended June 30, 2016	Prior-year quarter	Nine months ended June 30, 2016	Prior-year period
Revenue	$3,198	$3,120	$9,252	$7,222
Operating income	$516	$137	$1,334	$779
Net income	$390	$62	$958	$514
Diluted EPS	$1.80	$0.29	$4.41	$2.52
Gross margin	48.4%	37.6%	48.0%	45.2%

• Quarterly revenue increased 2.5% reported and 3.4% on a foreign-currency-neutral basis (FXN). Volume contributed 3.5%; currency reduced growth by about 0.9%, while price contributed about 0.1%.
• Quarterly Medical revenue was $2,235, up 1.6% reported and 2.4% FXN; Life Sciences revenue was $963, up 4.6% reported and 6.0% FXN. Quarterly segment operating income was $571 for Medical and $200 for Life Sciences.
• Year-to-date revenue rose 28.1% reported, principally reflecting CareFusion’s inclusion in the current-year period. Pro forma nine-month revenue, as if CareFusion had been included in both periods, was $9,263 versus $9,301; this comparison excludes anticipated integration savings and is not necessarily indicative of future results.
• Quarterly gross margin benefited from lower manufacturing and raw-material costs and from the comparison with the prior-year CareFusion inventory fair-value step-up. Year-to-date gross margin also benefited from operating efficiencies, partly offset by currency. Quarter operating income included $96 of acquisition and restructuring costs.
• Operating cash flow was $1,854 for the first nine months, compared with $1,052 a year earlier. Capital expenditures were $405; operating cash flow less capital expenditures was approximately $1,449. Investing cash use was $318 and financing cash use was $1,276. Cash and equivalents were $1,686 at June 30.
• Total debt was $11,913, down from $12,822 at September 30, 2015; this included $1,351 of short-term debt and $10,561 of long-term debt. Debt was 56.0% of total capital, versus 59.4% at fiscal year-end. Worldwide cash and short-term investments totaled about $1.70 billion, including $1.25 billion held outside the United States.
• Dividends paid during the nine months were $421; no shares were repurchased under the public program during that period.

Material changes, outlook and risks

• Quarterly Medical growth reflected Medication Management Solutions, Diabetes Care and Pharmaceutical Systems; Respiratory Solutions revenue declined 13.9%, including the effect of a terminated distribution agreement and earlier customer orders/capital placements. Life Sciences growth came mainly from Diagnostic Systems and Preanalytical Systems. Biosciences faced pressure in HIV-related clinical products in Africa and delayed government funding in parts of Europe and Japan.
• BD signed an agreement to sell 50.1% of Respiratory Solutions and form a joint venture, retaining 49.9%. The buyer will control operations and governance. Closing was expected later in 2016, subject to regulatory approval and customary conditions. The business was not classified as discontinued operations.
• Management said operating cash flows and available cash were expected to fund normal operating needs for the remainder of FY2016, including working capital, capital expenditures and dividends. The filing provides no specific full-year revenue or EPS guidance.
• Management cited continued product pricing pressure, currency headwinds, constrained healthcare utilization and research funding in some markets, and dependence on government funding in emerging markets. The UK referendum on leaving the EU created uncertainty and potential currency and regional economic volatility.
• CareFusion integration, acquisition-related indebtedness, product safety and regulatory requirements, supply and raw-material costs, competition, and government reimbursement/funding were identified among risks. BD was operating under an FDA consent decree relating to its U.S. infusion pump business.
• In the RTI litigation, a $341 judgment for attempted monopolization and $12 of attorneys’ fees remained subject to BD’s appeal; BD had recorded a charge in 2013. Management said litigation outcomes could result in charges beyond established accruals, potentially materially affecting results or cash flows. A separate purchaser class action was dismissed in January 2016; plaintiffs sought to amend, which BD opposed.
• Specified items were significant: after-tax impact was $120 in the quarter and $449 year to date, versus $379 and $547, respectively, in the prior-year periods. These included acquisition, integration, restructuring and purchase-accounting costs. The filing attributes much of the gross-margin comparison to the prior-year CareFusion inventory step-up.
• BD was in compliance with the financial covenant on its $1.5 billion credit facility at June 30. It reported no material change in market-risk disclosures or previously disclosed risk factors.

Most important facts for investors to verify

• How much reported growth and earnings reflect underlying operations versus CareFusion inclusion, purchase accounting, restructuring and other specified items.
• Whether the Respiratory Solutions joint-venture transaction closed on expected terms and how it affects ongoing revenue, earnings and cash flows.
• The status and potential financial exposure of the RTI appeal and other litigation, including whether accruals remain adequate.
• Progress on CareFusion integration and debt reduction, alongside cash generation, international cash availability and refinancing needs.
• Whether currency, healthcare funding and utilization, pricing pressure, and the infusion-pump consent decree materially affect subsequent results.