Becton, Dickinson and Company — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2017; fiscal 2017. Amounts are in U.S. dollars unless noted.
Business context and results
BD is a global medical technology company reporting through BD Medical and BD Life Sciences. Comparisons are affected by the October 2016 sale of a controlling interest in Respiratory Solutions; the business contributed $213 million of prior-year Q2 revenue and $421 million for the six-month period, and was not classified as discontinued operations.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2.969 billion | $3.067 billion | $5.892 billion | $6.054 billion |
| Operating income | $446 million | $466 million | $1.257 billion | $818 million |
| Net income | $344 million | $338 million | $905 million | $567 million |
| Diluted EPS | $1.58 | $1.56 | $4.15 | $2.62 |
| Gross margin | 48.2% | 48.4% | 49.0% | 47.8% |
Q2 revenue declined 3.2% reported, reflecting the divestiture and about a 0.8% unfavorable currency impact; management said continuing-business volume grew more than 5%, with pricing not a material factor. Six-month net income includes a $336 million pre-tax reversal of RTI litigation reserves. Q2 operating income and net income were lower and higher, respectively, than the prior year; Q2 diluted EPS increased 1.3%.
Segments and material comparisons
- Medical: Q2 revenue was $1.987 billion, down 6.8% reported (down 5.9% currency-neutral), mainly reflecting Respiratory Solutions’ divestiture. Segment operating income rose to $537 million from $513 million; margin increased to 27.0% from 24.1%, partly because the divested business had relatively lower margins.
- Life Sciences: Q2 revenue was $982 million, up 4.9% reported (up 5.8% currency-neutral). Segment operating income declined to $177 million from $202 million, and margin fell to 18.0% from 21.6%, reflecting damaged-reagent inventory reserves, currency effects and higher selling costs. Biosciences fulfillment delays and instrument-order timing also weighed on growth.
- Consolidated Q2 gross margin eased to 48.2% from 48.4%; lower manufacturing costs and the divestiture benefit were offset by currency and inventory-reserve impacts. Q2 R&D expense was $187 million, or 6.3% of revenue, versus $182 million, or 5.9%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1.040 billion, compared with $1.020 billion. Capital expenditures were $272 million; investing cash outflow was $155 million.
- Financing cash outflow was $1.861 billion, including $2.189 billion of debt payments, $1.054 billion of euro-note proceeds, $220 million of share repurchases and $312 million of dividends.
- Cash and equivalents were $548 million and short-term investments $8 million at March 31, 2017, down from cash of $1.541 billion at September 30, 2016. Management said cash flows and available cash were expected to cover normal operating needs for the remainder of fiscal 2017.
- Total debt was $10.306 billion versus $11.551 billion at September 30, 2016; short-term debt was $1.224 billion and long-term debt $9.082 billion. Debt was 53.3% of total capital, down from 57.2%. The company reported compliance with its credit-facility interest-coverage covenant.
Outlook, unusual items and risks
- No specific full-year revenue or EPS guidance is provided in the filing. Management cited continued investment in R&D, geographic expansion and efficiency, while noting pricing pressure, currency exposure, economic uncertainty and reliance on government funding in emerging markets.
- On April 23, 2017, BD agreed to acquire C.R. Bard for approximately $24 billion, subject to regulatory and shareholder approvals, with closing expected in fall 2017. BD arranged access to $15.7 billion in bridge financing and outlined planned cash, debt and equity financing. The filing notes expected shareholder dilution and anticipated credit-rating downgrades; Moody’s and S&P had announced plans to downgrade BD’s corporate ratings.
- April amendments to U.S. dispensing-equipment leases are expected to cause most affected contracts to be classified as operating leases. BD estimated a non-cash net earnings charge of $400–$500 million in fiscal Q3 2017, with subsequent revenue recognized over the remaining lease term.
- The RTI case returned to the district court to determine whether and how much profit BD must disgorge for affirmed Lanham Act liability. The Supreme Court declined review of the separate antitrust ruling; the potential disgorgement amount is not clear from the filing. BD warns that additional litigation charges could materially affect results or cash flows.
- Other notable items include a $42 million loss on debt extinguishment in the first half and $46 million of restructuring charges. The Q2 effective tax rate was 4.9%, aided by share-based compensation tax benefits and tax-audit settlements; the six-month rate was 14.1%.
Important facts for investors to verify
- Progress, approvals, final financing terms, dilution and credit-rating consequences of the Bard acquisition.
- The eventual Q3 lease-related charge and its effects on revenue, earnings and reported assets.
- The district court’s ruling and any eventual disgorgement or other liability in the RTI matter.
- Underlying revenue and earnings trends after separating the Respiratory Solutions divestiture, currency effects and specified items.
- Liquidity and debt-service capacity after the planned Bard transaction and financing.