Becton, Dickinson and Company — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended December 31, 2017. BD is a global medical technology company. Results are compared with the three months ended December 31, 2016.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $3.080 billion | $2.922 billion |
| Operating income | $230 million | $811 million |
| Net income (loss) | $(136) million | $562 million |
| Net income (loss) applicable to common shareholders | $(174) million | $562 million |
| Diluted earnings (loss) per share | $(0.76) | $2.58 |
| Operating cash flow | $320 million | $315 million |
| Capital expenditures | $178 million | $112 million |
| Total debt at period-end | $22.798 billion | $18.870 billion at September 30, 2017 |
Revenue increased 5.4% reported, or 3.7% excluding foreign currency effects, reflecting almost 4% volume growth, approximately 1.7% favorable currency impact and a relatively immaterial unfavorable price impact. Gross margin rose to 50.3% from 49.7%. Consolidated operating margin was approximately 7.5%, versus 27.8% in the prior-year quarter; the comparison is heavily affected by unusual items in both periods.
Medical revenue was $2.035 billion, up 3.6% reported (1.9% currency-neutral); Life Sciences revenue was $1.045 billion, up 9.1% reported (7.3% currency-neutral). Reported segment operating income was $705 million for Medical and $316 million for Life Sciences, versus $548 million and $198 million, respectively. Segment comparisons are affected by a change in cost allocations: certain general and administrative costs were excluded from segment results in the current quarter but allocated to segments in the prior-year quarter.
Cash and equivalents were $1.124 billion at December 31, 2017; cash, short-term investments and restricted cash totaled approximately $1.3 billion. Current assets were $7.542 billion and current liabilities $4.895 billion. BD reported $703 million of short-term debt and $22.095 billion of long-term debt. It had no borrowings outstanding on its $2.25 billion revolving credit facility and was in compliance with its credit-facility covenants. The quarterly common dividend was $0.75 per share.
Material changes and unusual items
- BD completed its approximately $25.0 billion acquisition of C.R. Bard on December 29, 2017. Bard contributed no material operating results to this quarter; its results were to be consolidated beginning January 1, 2018. BD expects most Bard offerings to be reported in a new Interventional segment starting in Q2 FY2018.
- The acquisition materially increased assets, goodwill and debt. Preliminary purchase accounting included $15.054 billion of goodwill, $11.738 billion of acquired developed technology and $1.560 billion of assumed product-liability and other legal reserves. Purchase-price allocations remained provisional.
- Acquisitions and other restructuring expense was $354 million, including acquisition-related restructuring, transaction and integration costs. Interest expense increased to $158 million from $95 million, primarily reflecting higher debt.
- The quarter included a provisional $270 million income-tax expense related to the Tax Cuts and Jobs Act. This reflected a $561 million estimated transition-tax charge, partly offset by a $290 million deferred-tax remeasurement benefit. BD had not completed its accounting for the law.
- The prior-year quarter included a $336 million reversal of litigation reserves, a significant favorable comparison item. The current quarter also included $7 million of hurricane-recovery costs.
- Operating cash flow was $320 million, including a discretionary $112 million pension contribution. Investing cash outflow was $15.315 billion, primarily reflecting $15.013 billion of net cash paid for acquisitions. Financing cash inflow was $1.938 billion, including $2.250 billion of term-loan proceeds.
Outlook, risks and contingencies
BD provided no specific full-year revenue or earnings guidance in this filing. Management said operating cash flows and available cash were expected to fund normal FY2018 needs, including working capital, capital expenditures and dividends. Management cited continued investment in R&D, geographic expansion and new products, and anticipated integration benefits from Bard; the filing does not quantify expected savings.
- BD assumed substantial Bard product-liability exposure. At quarter-end it reported approximately 650 hernia-device claims, 3,500 pelvic-mesh claims and 3,480 inferior vena cava filter claims, alongside additional threatened or unfiled claims. It had reached settlement agreements or agreements in principle covering approximately 13,050 women’s-health claims. Litigation outcomes and costs remain uncertain.
- Accruals for Bard-related product liability and other legal matters were approximately $1.6 billion; expected recoveries were approximately $275 million. Management cautioned that future charges could exceed accruals and available insurance and could materially affect results or cash flows.
- BD disclosed government investigations and information requests concerning product sales and marketing, as well as other litigation. It stated that losses for certain proceedings could not be reasonably estimated.
- An FDA Warning Letter received January 11, 2018 cited alleged quality-system and legal violations related to certain blood-collection tubes. The products remained available for sale, but the FDA could restrict certain related Class III submissions and foreign-government certificates pending resolution. BD was implementing corrective actions and could not assure the timing or outcome.
- Acquisition integration, elevated leverage and lowered credit ratings are key risks. S&P and Moody’s downgraded BD’s ratings after the Bard closing; further downgrades could raise borrowing costs. Other stated risks include pricing pressure, foreign exchange, raw-material costs, regulatory and product-safety matters, and hurricane-related manufacturing disruption in Puerto Rico.
Important facts for investors to verify
- Progress and final purchase accounting for Bard, including integration costs, segment reporting and realized synergies.
- Debt reduction, covenant headroom, liquidity and the effect of downgraded credit ratings on financing costs.
- Final tax-reform accounting, including transition-tax estimates and the treatment of GILTI.
- Developments in Bard-related product-liability claims, settlements, insurance and indemnification recoveries.
- Resolution of the FDA Warning Letter and any effects on product clearances or sales.
- Whether revenue growth and margins are sustained after considering currency, product mix, cost allocations and unusual items.