Becton, Dickinson and Company — Q3 FY2014 Form 10-Q
Reporting period: Three and nine months ended June 30, 2014; unaudited interim results. Amounts are in U.S. dollars. BD is a global medical technology company with Medical, Diagnostics and Biosciences segments.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $2.157B | $2.053B | $6.244B | $5.953B |
| Operating income | $445M | $405M | $1.204B | $1.178B |
| Continuing-operations income | $326M | $292M | $884M | $838M |
| Diluted continuing-operations EPS | $1.65 | $1.47 | $4.47 | $4.21 |
| Gross margin | 51.5% | 51.6% | 51.2% | 51.8% |
| Net income | $326M | $302M | $884M | $1.203B |
Q3 revenue rose 5.1%, reflecting approximately 4.6% volume growth and 0.5% favorable currency translation; pricing had an immaterial effect. Continuing-operations income and diluted EPS increased about 12% and 12%, respectively. Year-to-date revenue increased 4.9%, while continuing-operations income and diluted EPS rose about 5.5% and 6.2%. Year-to-date net income was lower mainly because FY2013 included $364M of after-tax discontinued-operations income, largely related to the Discovery Labware divestiture.
Q3 segment revenue and operating income were: Medical $1.201B and $356M; Diagnostics $679M and $155M; Biosciences $277M and $66M. Revenue growth was strongest in Biosciences (+7.7%) and Medical (+5.3%); Diagnostics grew 3.7%, but segment operating income declined versus the prior year.
Cash flow, liquidity and capital
- Continuing operating cash flow was $1.207B for the first nine months, versus $989M a year earlier. Capital expenditures were $339M.
- Cash and equivalents were $1.661B and short-term investments $978M at June 30, 2014. Total debt was approximately $4.0B, including $205M short-term and $3.768B long-term debt. Debt was 41.6% of total capital, down from 43.1% at September 30, 2013.
- BD repurchased $400M of shares and paid $316M in dividends year to date. Management estimated approximately $450M of full-year FY2014 repurchases, subject to market conditions.
- Management said operating cash flow and available cash were expected to cover normal operating needs for the rest of FY2014. A $1B credit facility had no borrowings outstanding; commercial paper borrowings were $200M. The facility’s minimum interest coverage covenant was 5-to-1; the reported ratio had ranged from 11-to-1 to 16-to-1 over the last eight measurement dates.
- Of approximately $2.6B in cash and short-term investments, $2.4B was held outside the United States. Repatriation could have adverse tax consequences; BD had changed its reinvestment position for Brazil and certain other Latin American earnings but had not repatriated those earnings.
Material changes, outlook and risks
- International revenue grew 6.7% in Q3; U.S. revenue grew 2.8%. Emerging-market revenue was $530M, up 4.9%, with a 4.0% unfavorable currency impact. International safety-device sales grew 11.6%; U.S. safety-device sales grew 1.2%.
- Medical benefited from safety sales, emerging markets, lower manufacturing costs and favorable product mix. Diagnostics faced continued U.S. weakness in Women’s Health and Cancer, including lower Pap-testing frequency and share losses. Biosciences benefited from instrument placements and a favorable prior-year comparison.
- Q3 gross margin was nearly flat year over year: improved manufacturing efficiency and lower pension costs were offset by unfavorable mix, higher start-up and raw-material costs, and costs to remediate a Pharmaceutical Systems quality issue. Year-to-date margin declined 0.6 percentage points.
- Reported earnings included discrete items: Q3 FY2014 Medical R&D termination charge of $9M; year-to-date Diagnostics distributor-termination charge of $11M; Biosciences product-program write-off of $20M; and an $8M gain on sale of a small equity investment. The FY2013 comparison included a $22M charge for an indirect-purchaser antitrust settlement, which BD paid.
- BD continued investment in R&D, emerging-market expansion and an enterprise resource planning system. The 2.3% U.S. medical-device excise tax increased year-to-date selling and administrative expense by $14M.
- Litigation is a significant uncertainty. In the Retractable Technologies matter, a 2013 jury awarded $113.5M on an attempted-monopolization claim, subject to trebling and attorneys’ fees; the court could also consider equitable relief. BD recorded a $341M pretax charge in FY2013 and planned to appeal. Separately, an appellate court affirmed a $5M patent-damages award on July 7, 2014. BD cautioned that future litigation charges could exceed accruals and materially affect results or cash flows.
- A Brazilian anti-dumping investigation involving imported blood-collection tubes was expected to conclude by November 2014; BD did not expect a material operating impact. Other stated risks included healthcare funding and pricing pressure, foreign exchange, raw-material costs, product quality and safety, regulation, competition, government receivable collection, litigation and execution of the ERP upgrade. Management reported no material change in previously disclosed risk factors.
- No specific full-year revenue or earnings guidance was provided in the filing. A new revenue-recognition standard was issued; BD was evaluating its impact and expected required adoption on October 1, 2017.
Most important facts for investors to verify
- Developments, appeal status and potential total exposure in the Retractable Technologies litigation, including possible treble damages, fees and equitable relief.
- Whether the Pharmaceutical Systems quality issue, remediation costs and related manufacturing investments persist or affect product supply and margins.
- Progress in Diagnostics, particularly the U.S. Women’s Health and Cancer business, and the durability of Medical and Biosciences growth.
- Collection and reserve adequacy for government receivables, especially balances in Italy ($61M) and Spain ($42M) at June 30, 2014.
- Cash deployment, buybacks, debt levels and tax consequences associated with offshore cash and changed reinvestment intentions.