Becton, Dickinson and Company — Q2 FY2023 Form 10-Q
Business context and period: Global medical technology company reporting the quarter and six months ended March 31, 2023. The quarter is the second quarter of fiscal 2023. BD’s three segments are Medical, Life Sciences and Interventional. Diabetes Care was spun off as Embecta on April 1, 2022; prior-year results include it in discontinued operations.
Financial performance
| Metric | Quarter ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $4.821 billion, up 1.5% reported and 4.1% foreign-currency neutral (FXN) | $9.407 billion, down from $9.468 billion |
| Operating income | $628 million, versus $564 million | $1.213 billion, versus $1.256 billion |
| Continuing-operations net income | $460 million, versus $390 million | $969 million, versus $958 million |
| Diluted continuing-operations EPS | $1.53, versus $1.28 | $3.24, versus $3.18 |
| Gross margin | 46.4%, versus 44.5% | 46.4%, versus 45.8% |
| Continuing operating cash flow | Not separately reported for the quarter | $584 million, versus $820 million |
Quarterly revenue growth reflected volume/other (+4.4%) and pricing (+3.9%), offset by lower COVID-19-only testing revenue (-4.2%) and foreign exchange (-2.6%). COVID-19-only testing sales were $16 million, compared with $214 million a year earlier. Six-month total net income was $969 million versus $1.131 billion, but the prior-year figure included $173 million from discontinued operations.
Quarterly segment revenue and operating income were: Medical $2.360 billion and $641 million; Life Sciences $1.275 billion and $394 million; Interventional $1.186 billion and $297 million. Medical revenue grew 9.6% reported (12.2% FXN); Life Sciences declined 14.2% (11.5% FXN); Interventional grew 6.8% (9.3% FXN). Life Sciences’ decline was primarily driven by lower COVID testing and an unfavorable comparison with a stronger respiratory season.
Liquidity, debt and capital allocation
- At March 31, cash and equivalents were $1.981 billion, restricted cash $87 million and short-term investments $6 million. Total debt was $18.223 billion, up from $16.065 billion at September 30, 2022; debt was 40.3% of total capital, versus 37.3%.
- Six-month continuing cash flows: operating +$584 million, investing -$524 million and financing +$835 million. Operating cash flow was reduced by a $1.274 billion use from changes in operating assets and liabilities, including higher inventory and receivables and lower payables/accruals.
- BD issued $800 million of 4.693% notes due 2028 and €800 million ($868 million) of 3.553% notes due 2029. Commercial paper outstanding was $595 million; no revolving-credit-facility borrowings were outstanding. BD reported compliance with applicable facility covenants.
- Six-month dividends paid were $563 million. The quarterly common dividend was $0.91 per share, versus $0.87 a year earlier.
Changes, outlook and management commentary
- Higher quarterly gross margin reflected pricing, manufacturing efficiencies and a favorable comparison with prior-year impairment and product-remediation charges; these benefits were partly offset by higher materials, labor and freight costs, foreign exchange and mix.
- Quarterly operating income improved despite higher acquisition-related integration and restructuring expense ($62 million versus $28 million) and net interest expense ($108 million versus $95 million). Six-month operating income declined, while continuing net income increased slightly.
- BD said it expected inflation to persist through fiscal 2023, while some raw-material and logistics costs were improving. Logistics constraints had eased, but global lead times remained elevated. Management cited supply availability, labor costs, healthcare budget/staffing pressures and currency movements as factors that could create volatility.
- The filing provides no specific numerical full-year revenue or EPS guidance. BD’s stated strategy emphasizes growth, simplification and empowerment, including investment in R&D, product programs and operating efficiency.
- Specified items were $449 million pretax in the quarter ($379 million after tax), including $347 million of purchase-accounting adjustments and integration, restructuring and European regulatory initiative costs.
Risks and contingencies
- Product-liability accruals, including related defense costs, were approximately $1.9 billion at March 31, 2023, compared with $2.1 billion at September 30, 2022. BD was defending approximately 33,285 hernia-device claims; the company warned that future charges could exceed current accruals and available insurance.
- BD Alaris infusion pumps remain subject to an FDA consent decree and remediation. U.S. commercial operations are restricted to medical-necessity cases and recalled-software remediation pending FDA clearance of a 510(k) submission; timing or clearance is not assured.
- Ethylene oxide sterilization at BD’s Georgia facilities remains subject to final air permits and potential further restrictions. Broader proposed EPA rules or reduced third-party sterilization capacity could disrupt production or increase costs.
- Other matters include pelvic-mesh and IVC-filter product claims, securities and derivative litigation, government investigations and demands, and environmental proceedings. In April 2023, the Department of Justice issued a CID concerning Genesis container products. BD said it could not estimate reasonably possible losses for a number of these matters.
- Other key risks include inflation and supply-chain disruption, foreign exchange, higher interest costs and leverage, healthcare cost containment, regulatory and product-quality matters, litigation, and geopolitical or macroeconomic developments.
Important facts for investors to verify
- Whether Medical and Interventional growth can offset the continued normalization of COVID-related testing revenue in Life Sciences.
- How cash generation develops after the reported six-month decline, including working-capital needs and reliance on factoring of receivables.
- Debt maturities, refinancing costs and leverage following the new debt issuance and increase in total debt.
- Developments in the hernia claims and adequacy of the $1.9 billion product-liability accrual, alongside other legal and regulatory exposures.
- FDA progress on Alaris clearance and final Georgia sterilization permits, and any operational or financial effects from delays or restrictions.
- Actual performance against management’s stated strategy and cost-efficiency initiatives; the filing gives no numerical full-year guidance.