Becton, Dickinson and Company (BD) — Q1 FY2020 10-Q
Reporting period: Three months ended December 31, 2019. BD is a global medical technology company with Medical, Life Sciences and Interventional segments. Amounts below are in millions of dollars, except per-share data and percentages.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change / context |
|---|---|---|---|
| Revenue | $4,225 | $4,160 | Up 1.6% reported; 2.5% foreign-currency neutral (FXN) |
| Gross margin | 46.8% | 47.4% | Down 0.6 percentage points |
| Operating income | $501 | $888 | Prior period included a $335 gain on sale of Advanced Bioprocessing |
| Net income | $278 | $599 | Prior-year comparison also reflects the divestiture gain |
| Diluted EPS | $0.87 | $2.05 | Q1 FY2020 specified items reduced EPS by $1.78, per management |
| Operating cash flow | $713 | $245 | Improved year over year |
| Capital expenditures | $173 | $167 | |
| Total debt at period end | $19,405 | $19,390 at September 30, 2019 | Short-term debt rose to $2,456 from $1,309, primarily from reclassification of notes |
| Cash, restricted cash and short-term investments | $617 | $620 at September 30, 2019 | Includes $49 restricted cash |
Revenue growth reflected approximately 3.5% volume growth, offset by 0.9% unfavorable foreign exchange, 0.8% pricing pressure and 0.2% impact from the divestiture. Segment revenue was Medical $2,090 (down 2.1% reported; down 1.1% FXN), Life Sciences $1,123 (up 6.4%; 7.4% FXN), and Interventional $1,012 (up 4.4%; 5.0% FXN). Segment operating income was Medical $564, Life Sciences $361 and Interventional $243.
Operating cash flow benefited from working-capital movements. In the prior-year quarter, cash flow included a $200 pension contribution; investing cash flow included $476 of divestiture proceeds. The company paid $252 in dividends, including $215 to common shareholders; the common dividend was $0.79 per share versus $0.77.
Material developments, outlook and risks
- Alaris infusion pumps: BD delayed shipments pending FDA filing requirements and says it will sell pumps only to existing customers demonstrating medical necessity. Management expects Medication Management Solutions revenue to decline significantly for FY2020 and expects to file with the FDA in Q4. A February 4, 2020 voluntary recall addressed software errors and alarm prioritization; an estimated $59 cost was accrued in this quarter, with possible additional future charges.
- Specified items and margins: Q1 included $348 of purchase-accounting adjustments and other specified items, $62 of integration costs, $23 of restructuring costs, $59 for the pump recall and $17 of European regulatory initiative costs. Management attributed the lower gross margin mainly to the recall charge and pricing pressures, partly offset by manufacturing efficiencies. The prior-year quarter included the $335 divestiture gain.
- Other business factors: China pricing pressure affected Medication Delivery Solutions. Sales of drug-coated balloons remained affected by the FDA’s 2019 communication on paclitaxel-coated devices; the duration and extent of the impact are uncertain. BD cited stable current U.S. healthcare conditions and a generally stable European environment, while noting global pricing pressure and dependence on government healthcare funding in emerging markets.
- Coronavirus: The filing said the outbreak could negatively affect near-term results through deferred medical procedures; the longer-term effect was difficult to assess.
- Litigation: Product-liability accruals were approximately $2.4 billion at December 31, 2019, with expected recoveries of $152. Management warned that future charges could exceed accruals and available insurance and could materially affect results or cash flows. Matters include approximately 14,330 hernia claims, 750 pelvic-mesh claims (plus approximately 1,010 claims lacking sufficient product information), and 2,650 IVC-filter claims. Trials and settlements remain ongoing; outcomes and reasonably possible loss ranges are not clear from the filing.
- Regulatory and operating exposure: BD described an FDA Warning Letter concerning its Franklin Lakes facility and a Georgia consent order requiring operational changes to reduce ethylene oxide emissions, including reduced capacity. Management did not expect the consent order to have a material operational impact but noted additional restrictions could follow a violation.
- Liquidity and outlook: Management expected operating cash and available cash to fund normal FY2020 needs, including working capital, capital expenditures and dividends. No overall revenue or EPS guidance value is provided in the filing text. BD reported compliance with revolving-credit covenants; $695 was outstanding under its $2.25 billion facility.
Investor verification points
- Track Alaris regulatory submissions, shipment restrictions, recall costs and any additional charges.
- Reconcile reported earnings with specified items, especially the prior-year divestiture gain and current-year recall and purchase-accounting costs.
- Monitor segment revenue and margins, China pricing, and the continuing impact of the paclitaxel-device communication.
- Review litigation accruals, insurance and indemnity recoveries, settlement progress, and trial outcomes against the disclosed claim volumes.
- Assess debt maturities and short-term debt reclassification alongside cash generation, dividend commitments and credit-facility covenants.
- Monitor the effects of the FDA Warning Letter, Georgia sterilization restrictions, and coronavirus-related procedure delays.