Becton, Dickinson and Company — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. BD is a global medical technology company with Medical, Life Sciences and Interventional segments.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $4,907; +15.4% | $4,253 | $10,223 | $8,479 |
| Operating income | $434 | $370 | $1,676 | $871 |
| Net income | $299 | $183 | $1,302 | $461 |
| Diluted EPS | $0.94 | $0.53 | $4.28 | $1.40 |
| Gross margin | 45.8% | 40.8% | 48.7% | 43.8% |
Q2 revenue growth included approximately 12.0% volume growth, 3.2% favorable foreign currency translation and 0.2% favorable pricing. COVID-19 diagnostic testing sales were approximately $480 million in the quarter. International revenue grew 33.0%; U.S. revenue grew 1.9%.
Q2 segment revenue was Medical $2,311 million (+7.4%), Life Sciences $1,586 million (+42.5%) and Interventional $1,011 million (+2.1%). Life Sciences growth was led by COVID-19 testing; Medical benefited from medication delivery and pharmaceutical systems products; Interventional was affected by pandemic-related procedure declines. Reported gross margin improved, partly reflecting the prior-year Alaris remediation charge and current-year COVID-testing product mix.
Cash, debt and liquidity
- Six-month operating cash flow was $2,721 million, versus $1,196 million; investing outflow was $863 million and financing outflow was $893 million.
- Cash and equivalents were $3,734 million and restricted cash $164 million at March 31; short-term investments were $24 million. Total cash, restricted cash and short-term investments were approximately $3,922 million.
- Total debt was $17,719 million, versus $17,931 million at September 30, 2020. Total debt was 40.0% of total capital; weighted average debt cost was 2.8%. No revolving-credit-facility or commercial-paper borrowings were outstanding, and BD reported compliance with credit facility covenants.
- Capital expenditures were $499 million for the six months. BD paid $528 million in dividends. The company announced a planned $1.2 billion investment to expand and upgrade syringe and drug-delivery manufacturing capacity.
Material changes, unusual items and outlook
- BD recorded a $296 million Q2 pretax charge for product-liability reserves and related legal defense costs. Accruals for product-liability claims and defense costs were approximately $2.5 billion at both March 31 and September 30, 2020. The charge reduced Q2 diluted EPS by $2.25, according to the filing’s specified-items presentation.
- COVID-19 testing boosted Life Sciences results, but management noted that test pricing and demand could be pressured by competition and vaccine distribution. Resurgent infections reduced procedure-related demand, particularly in Interventional. Management cited continuing uncertainty around pandemic effects, supply chains, transportation, healthcare utilization and pricing.
- BD submitted an FDA 510(k) notification for the Alaris System in April 2021, after quarter-end, to update clearance and address recall issues. Timing of FDA clearance remains uncertain, and BD stated it cannot fully commercialize the system until clearance.
- On May 6, 2021, BD announced its intention to spin off Diabetes Care as a separate public company, targeted for the first half of calendar 2022, subject to customary conditions and approvals. Completion, timing, tax treatment and expected benefits are not assured.
- The filing provides no specific earnings or revenue guidance for the remainder of FY2021.
Risks and contingencies
BD reported approximately 25,345 hernia-device claims, 390 pelvic-mesh claims and 410 IVC-filter claims at March 31, 2021; certain additional pelvic-mesh claims lacked enough information to classify. Management said it could not estimate reasonably possible losses for certain litigation and warned that future charges beyond accruals and available insurance could materially adversely affect results and cash flows. Product-liability insurance coverage and recoveries may be inadequate.
Other notable exposures include an SEC subpoena relating to Alaris, ongoing Department of Justice information requests concerning certain CareFusion contracts, shareholder litigation, FDA oversight and the Alaris consent decree. BD also highlighted potential sterilization-capacity disruptions related to ethylene oxide regulation and the pandemic, as well as foreign exchange, debt, competition, pricing and spin-off execution risks. Management reported disclosure controls and procedures were effective at period-end.
Important facts for investors to verify
- How much Q2 and year-to-date earnings and cash flow depend on COVID-19 testing demand, pandemic-related procedure trends, and the timing of normalization.
- The assumptions behind the $296 million product-liability charge, the approximately $2.5 billion accrual, potential insurance or indemnity recoveries, and litigation developments.
- FDA progress and commercial implications for Alaris, including remediation costs, clearance timing and any effect of regulatory or legal investigations.
- The funding, capital structure, approvals, tax status, timing and expected value effects of the proposed Diabetes Care spin-off.
- Whether operating cash generation, debt levels, margins and manufacturing investment remain sustainable as unusual items and pandemic-related revenue effects change.