BECTON, DICKINSON AND COMPANY The following commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes presented in this report. Within the tables presented throughout this discussion, certain columns may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts. Company OverviewBecton, Dickinson and Company ("BD") is a global medical technology company engaged in the development, manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. The Company's organizational structure is based upon three principal business segments, BD Medical ("Medical"), BD Life Sciences ("Life Sciences") and BD Interventional ("Interventional"). BD's products are manufactured and sold worldwide. Our products are marketed inthe United States and internationally through independent distribution channels and directly to end-users by BD and independent sales representatives. We organize our operations outsidethe United States as follows:Europe ; EMA (which includes the Commonwealth of Independent States, theMiddle East andAfrica );Greater Asia (which includes countries inEast Asia ,South Asia ,Southeast Asia and theOceania region);Latin America (which includesMexico ,Central America , theCaribbean , andSouth America ); andCanada . We continue to pursue growth opportunities in emerging markets, which include the following geographic regions:Eastern Europe , theMiddle East ,Africa ,Latin America and certain countries withinGreater Asia . We are primarily focused on certain countries whose healthcare systems are expanding. Recent Developments A novel strain of coronavirus ("COVID-19") was officially declared a pandemic by theWorld Health Organization ("WHO") inMarch 2020 . In efforts to slow the spread of COVID-19, governments around the world have issued travel restrictions as well as recommendations or mandates to avoid large gatherings or to self-quarantine. Such measures have led to a sudden and significant decline in economic activity within a number of countries worldwide. The COVID-19 pandemic has resulted in a decline in elective procedures which has unfavorably impacted our results of operations for the three months endedMarch 31, 2020 . While certain of our organizational units realized positive benefits to revenues from the pandemic for the second quarter, the estimated net impact on total consolidated revenues was an unfavorable impact of$56 million . We are deploying our capabilities, expertise and scale to address critical health needs related to COVID-19. A molecular test for the detection of COVID-19 for clinical laboratories is currently available and we are also currently developing a new point-of-care test that can detect antibodies in blood to confirm current or past exposure to COVID-19. We have been adhering to guidance provided by the WHO, as well as by health officials in various countries affected by the COVID-19 pandemic, to protect the health and safety of BD employees while ensuring continued availability of BD's critical medical devices and technologies at this unprecedented time. We have enacted business continuity plans in order to minimize the risk of disruption to our operations and supply chain, and to date, we have not experienced any significant disruption. We have been working closely with governmental officials in an effort to keep our manufacturing facilities (and those of our suppliers) open due to the essential nature of our products. We continue to generate operating cash flows that are sufficient to meet our short-term liquidity needs. We have taken steps, as a precautionary measure, to preserve our financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic. Such measures included entering into a$2.0 billion term loan agreement and increasing the commitments available under our revolving credit facility by$381 million , as is further discussed in Note 14 in the Notes to Condensed Consolidated Financial Statements. We believe that given our debt ratings and our capital allocation strategy, we would have access to additional short-term and long-term capital should the need arise. We have not observed any impairments of our assets due to the COVID-19 pandemic and the decline in global economic activity. We have enacted certain cost containment measures to mitigate the unfavorable impact of the COVID-19 pandemic to our future results of operations. Such actions have included travel restrictions, temporary reductions in executive compensation, a temporary suspension of matching contributions to certain voluntary defined contribution and other benefit plans, as well as temporary work reductions for certain manufacturing teams. Our business is experiencing weakened demand for our products as a result of a significant decline in medical procedures due to government restrictions and healthcare priorities, particularly with respect to hernia and other elective procedures. We are also seeing delays in instrument placements relating to our medical management solutions, including Pyxis™, as well as decreased non-COVID-19 diagnostic testing and specimen collections, which is being partially offset by higher demand for COVID-19 testing. There has also been a decrease in research activity due to laboratory closures and reduced clinical testing. 22 -------------------------------------------------------------------------------- Accordingly, our future operating performance, particularly in the short-term, will be subject to volatility. The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, which are uncertain at this time, including: • The timing and extent of recovery in the global demand for our products, particularly those sold by our Surgery and Peripheral Interventional units which are used in elective medical procedures;
• The pace at which hospitals resume patient care that is not related to the
COVID-19 pandemic;
• The progress of development for our point-of-care test, which was
previously discussed above, and the degree to which COVID-19 testing
solutions are made available and utilized by governments;
• The timing of when research performed by research laboratories and
institutions will resume to normal operations; and
• The degree of pressure that the weaker macroeconomic environment will put
on future healthcare utilization.
Further discussion regarding the impacts of the COVID-19 pandemic on our results for the three months endedMarch 31, 2020 is provided below. Overview of Financial Results and Financial Condition For the three months endedMarch 31, 2020 , worldwide revenues of$4.253 billion increased 1.4% from the prior-year period which reflected volume growth of approximately 2.3%, an unfavorable impact from foreign currency translation of approximately 1.0% and a favorable impact from pricing of approximately 0.1%. We estimate that the COVID-19 pandemic reduced volume growth in the second quarter by approximately 1.4%. Volume growth in the second quarter of fiscal year 2020 reflected the following: • Medical segment revenues in the second quarter reflected strong growth in
the Pharmaceutical Systems. Revenues in the Diabetes Care unit benefited
from COVID-19 due to increased orders from retailers and distributors in
unfavorably impacted by declines in the Medication Management Solutions
and Medication Delivery Solutions units, as is further discussed below.
• Life Sciences segment revenues in the second quarter reflected growth in
the Integrated Diagnostic Solutions unit that was partially offset by
declines in the Biosciences unit due to the COVID-19 pandemic and an
unfavorable comparison to the prior-year period due to the timing of
licensing revenues.
• Interventional segment revenues in the second quarter reflected sales
growth in all units. Revenues in the Surgery and Peripheral Intervention
units were negatively impacted by the deferral of elective medical
procedures as a result of the COVID-19 pandemic.
Second quarter Medical segment revenues were unfavorably impacted by the Medication Management Solutions unit's delay of shipments of AlarisTM infusion pumps pending compliance with certain 510(k) filing requirements of theU.S. Food and Drug Administration ("FDA"), as previously reported. While we continue to make progress on our regulatory filing related to the AlarisTM infusion pumps, due to the COVID-19 pandemic and other factors, we no longer expect to submit the 510(k) to the FDA in the fourth quarter of fiscal year 2020. We continue to invest in research and development, geographic expansion, and new product development programs to drive further revenue and profit growth. Our ability to sustain our long-term growth will depend on a number of factors, including our ability to expand our core business (including geographical expansion), develop innovative new products, and continue to improve operating efficiency and organizational effectiveness. While the economic environments for the healthcare industry and healthcare utilization inthe United States andEurope have been generally stable, destabilization resulting from the COVID-19 pandemic or other factors has adversely impacted our businesses. Our businesses will continue to be impacted by the COVID-19 pandemic throughout its duration and while government measures implemented in response to the pandemic continue to be in place. In emerging markets, the Company's growth is dependent primarily on government funding for healthcare systems. In addition, pricing pressure exists globally which could adversely impact our businesses. Cash flows from operating activities were$1.196 billion in the first six months of fiscal year 2020. AtMarch 31, 2020 , we had$2.445 billion in cash and equivalents and short-term investments, including restricted cash. We continued to return value to our shareholders in the form of dividends. During the first six months of fiscal year 2020, we paid cash dividends of$505 million , including$430 million paid to common shareholders and$76 million paid to preferred shareholders. Each reporting period, we face currency exposure that arises from translating the results of our worldwide operations to theU.S. dollar at exchange rates that fluctuate from the beginning of such period. A strongerU.S. dollar, compared to the prior-year period, resulted in an unfavorable foreign currency translation impact to our revenues during the second quarter of fiscal year 2020. We evaluate our results of operations on both a reported and a foreign currency-neutral basis, which excludes the impact of fluctuations in foreign currency exchange rates. As exchange rates are an important factor in understanding period-to- 23 -------------------------------------------------------------------------------- period comparisons, we believe the presentation of results on a foreign currency-neutral basis in addition to reported results helps improve investors' ability to understand our operating results and evaluate our performance in comparison to prior periods. Foreign currency-neutral ("FXN") information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a foreign currency-neutral basis as one measure to evaluate our performance. We calculate foreign currency-neutral percentages by converting our current-period local currency financial results using the prior-period foreign currency exchange rates and comparing these adjusted amounts to our current-period results. These results should be considered in addition to, not as a substitute for, results reported in accordance withU.S. generally accepted accounting principles ("GAAP"). Results on a foreign currency-neutral basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance withU.S. GAAP. Results of Operations Medical Segment The following summarizes second quarter Medical revenues by organizational unit: Three months ended March 31, Estimated Total FX (Millions of dollars) 2020 2019 Change Impact FXN Change Medication Delivery Solutions (a)$ 904 $ 928 (2.5 )% (1.2 )% (1.3 )% Medication Management Solutions (a) 568 617 (7.9 )% (0.4 )% (7.5 )% Diabetes Care 278 270 2.9 % (1.3 )% 4.2 % Pharmaceutical Systems 400 366 9.4 % (2.0 )% 11.4 % Total Medical Revenues$ 2,151 $ 2,180 (1.4 )% (1.1 )% (0.3 )%
(a) The presentation of prior-period amounts reflects the reclassification of
certain products from the Medication Delivery Solutions unit to the
Medication Management Solutions unit.
Second quarter Medical segment revenues reflected strong growth in the Pharmaceutical Systems and Diabetes Care units that was offset by declines in the Medication Management Solutions and Medication Delivery Solutions units. As anticipated, the Medication Management Solutions unit's revenues were unfavorably impacted by the delay of shipments of AlarisTM infusion pumps, as previously discussed above. Also as expected, the Medication Delivery Solutions unit's second quarter revenues inChina were unfavorably impacted by a new volume-based procurement process which has been adopted by several ofChina's provinces. The Medication Delivery Solutions unit's second quarter revenues also reflected an unfavorable impact relating to the COVID-19 pandemic, most notably inChina , where healthcare utilization declined significantly. The Diabetes Care unit realized a benefit to second quarter revenues from COVID-19 due to increased orders from retailers and distributors inthe United States . Medical segment total revenues for the six-month period were as follows: Six months endedMarch 31 , Estimated Total FX
(Millions of dollars) 2020 2019 Change Impact FXN Change
Total Medical Revenues
Medical segment income for the three and six-month periods is provided below.
Three months ended March 31, Six months ended March 31,
(Millions of dollars) 2020 2019 2020 2019
Medical segment income $ 443 $ 599 $ 1,007 $ 1,265
Segment income as % of Medical revenues 20.6 % 27.5 % 23.8 % 29.3 %
24-------------------------------------------------------------------------------- The Medical segment's income in the second quarter was driven by its performance with respect to gross profit margin and operating expenses as discussed in greater detail below: • Gross profit margin was lower in the second quarter of 2020 as compared
with the second quarter of 2019 which primarily reflected a charge to
record a probable estimate of future costs associated with incremental
remediation efforts relating to AlarisTM infusion pumps, as further
discussed below. This unfavorable impact to the Medical segment's gross
margin was partially offset by lower manufacturing costs resulting from
continuous improvement projects which enhanced the efficiency of our
operations and favorable foreign currency translation.
• Selling and administrative expense as a percentage of revenues was
slightly lower in the second quarter of 2020 compared with the second
quarter of 2019 primarily due to lower expenses resulting from recently
enacted cost containment measures.
• Research and development expense as a percentage of revenues was higher in
the second quarter of 2020 compared with the second quarter of 2019
primarily due to the timing of project spending.
• The Medical segment's income in the second quarter of 2019 additionally
reflected the estimated cumulative costs of a product recall of
million recorded within Other operating expense, net. The recall related
to a product component, which generally pre-dated our acquisition of
unit's infusion systems platform.
Life Sciences Segment
The following summarizes second quarter Life Sciences revenues by organizational
unit:
Three months ended March 31,
Estimated
Total FX
(Millions of dollars) 2020 2019 Change Impact FXN Change
Integrated Diagnostic Solutions (a)
Preanalytical Systems $ 400 $ 366 9.3 % (1.5 )% 10.8 %
Diagnostic Systems 434 389 11.5 % (1.4 )% 12.9 %
Total Integrated Diagnostic Solutions 833 755 10.4 % (1.5 )% 11.9 %
Biosciences 280 297 (5.9 )% (0.9 )% (5.0 )%
Total Life Sciences Revenues $ 1,113 $ 1,052 5.8 % (1.3 )% 7.1 %
(a) Effective
Systems units were joined to create the new Integrated Diagnostic
Solutions unit. Additional disclosures regarding this change are provided
in Note 7 in the Notes to Condensed Consolidated Financial Statements.
The Life Sciences segment's revenues in the second quarter reflected strong
sales in the Integrated Diagnostic Solutions unit which were driven by a more
severe influenza season in the current year as compared with the prior year's
season. Second quarter revenues in the Biosciences unit primarily reflected a
decline in instrument installations and reagent sales as a result of the
COVID-19 pandemic, as well as an unfavorable comparison to the prior-year period
due to the timing of licensing revenues and tenders in emerging markets.
Life Sciences segment total revenues for the six-month period were as follows:
Six months ended March 31 ,
Estimated
Total FX
(Millions of dollars) 2020 2019 Change Impact FXN Change
Total Life Sciences Revenues
7.3 %
Life Sciences segment income for the three and six-month periods was as follows:
Three months ended March 31, Six months ended March 31,
(Millions of dollars) 2020 2019 2020 2019
Life Sciences segment income $ 285 $ 293
Segment income as % of Life Sciences
revenues 25.6 % 27.8 % 28.9 % 28.4 %
25--------------------------------------------------------------------------------
The Life Sciences segment's income in the second quarter was driven by its performance with respect to gross profit margin and operating expenses as discussed in greater detail below: • Gross margin in the second quarter of 2020 was lower compared with the
second quarter of 2019 which primarily reflected a
write down the carrying value of certain intangible assets in the
Biosciences unit, as well as unfavorable product mix and increased
tariffs. These unfavorable impacts to the Life Sciences segment's gross
margin were partially offset by favorable impacts from pricing and lower
manufacturing costs resulting from continuous improvement projects which
enhanced the efficiency of our operations.
• Selling and administrative expense as a percentage of revenues in the
second quarter of 2020 was lower compared with the prior-year period
primarily due to expense synergies realized from the combination of the
Preanalytical Systems and Diagnostic Systems units, as noted above, andlower expenses resulting from recently enacted cost containment measures.
• Research and development expense as a percentage of revenues was lower in
the second quarter of 2020 compared with the second quarter of 2019
primarily due to the timing of project spending.
Interventional Segment
The following summarizes second quarter Interventional revenues by
organizational unit:
Three months ended March 31,
Estimated
Total FX
(Millions of dollars) 2020 2019 Change Impact FXN Change
Surgery (a) $ 312 $ 308 1.4 % (0.3 )% 1.7 %
Peripheral Intervention (a) 399 387 3.1 % (0.9 )% 4.0 %
Urology and Critical Care (a) 279 268 4.1 % (0.1 )% 4.2 %
Total Interventional Revenues $ 990 $ 963 2.8 % (0.5 )% 3.3 %
(a) The presentation of prior-period amounts reflects the total
reclassifications of
on October 1, 2019 , of certain products from the Surgery unit and the
Urology and Critical Care unit to the Peripheral Intervention unit.
Second quarter revenues in the Interventional segment reflected strong sales of
products in the Peripheral Intervention and Urology and Critical Care units.
Revenue growth in the Peripheral Intervention unit was partially offset by lower
sales of our drug-coated balloon products as compared to the prior-year period
following the previously reported FDA's March 2019 letter to healthcare
professionals regarding the use of paclitaxel-coated devices. The extent and
duration of the impact from the FDA letter on the Peripheral Intervention unit's
future revenues is difficult to predict. Second quarter revenues within the
Surgery and Peripheral Intervention units were negatively impacted by decreased
demand associated with the deferral of elective medical procedures as a result
of the COVID-19 pandemic.
Interventional segment total revenues for the six-month period were as follows:
Six months ended March 31,
Estimated
Total FX
(Millions of dollars) 2020 2019 Change Impact FXN Change
Total Interventional Revenues $ 2,002 $ 1,932 3.6 % (0.5 )% 4.1 %
Interventional segment income for the three and six-month periods is provided below.
Three months ended March 31, Six months ended March 31,
(Millions of dollars) 2020 2019 2020 2019
Interventional segment income $ 213 $ 231
Segment income as % of Interventional
revenues 21.5 % 24.0 % 22.7 % 22.8 %
26--------------------------------------------------------------------------------
The Interventional segment's income in the second quarter was driven by its performance with respect to gross profit margin and operating expenses as discussed in greater detail below: • Gross profit margin was lower in the second quarter of 2020 as compared
with the second quarter of 2019 primarily due to the amortization of
recently acquired intangible assets, which was partially offset by
favorable product mix and favorable foreign currency translation.
• Selling and administrative expense as a percentage of revenues in the
second quarter of 2020 was lower compared with the prior-year period
primarily due to lower expenses resulting from recently enacted cost
containment measures.
• Research and development expense as a percentage of revenues was lower in
the second quarter of 2020 compared with the second quarter of 2019
primarily due to the timing of project spending.
• The Interventional segment's lower income in the second quarter of 2020
additionally reflected the expiration in 2019 of a royalty income stream
acquired in the
Geographic Revenues
BD's worldwide second quarter revenues by geography were as follows:
Three months ended March 31,
Estimated
Total FX
(Millions of dollars) 2020 2019 Change Impact FXN Change
United States $ 2,415 $ 2,341 3.2 % - % 3.2 %
International 1,839 1,854 (0.8 )% (2.3 )% 1.5 %
Total Revenues $ 4,253 $ 4,195 1.4 % (1.0 )% 2.4 %
U.S. revenue growth in the second quarter of 2020 was largely attributable to
sales in the Life Sciences segment's Integrated Diagnostic Solutions unit and
sales in the Medical segment's Medication Delivery Solutions unit. Second
quarter U.S. revenue growth was unfavorably impacted by results in the Medical
segment's Medication Management Solutions unit, as further discussed above.
Second quarter international revenue growth was particularly driven by sales in
the Medical segment's Pharmaceutical Systems unit and sales in the Life Sciences
segment's Integrated Diagnostic Solutions unit. International revenue growth in
the second quarter of 2020 was unfavorably impacted by revenue declines in China
for the Medical segment's Medication Delivery Solutions unit, as further
discussed above.
Emerging market revenues for the second quarter were $568 million , compared with
$637 million in the prior year's quarter. Emerging market revenues in the
current-year period included an estimated $19 million unfavorable impact due to
foreign currency translation. Second quarter revenues in emerging markets were
unfavorably impacted by a decline in healthcare utilization in China as a result
of the COVID-19 pandemic. As previously discussed above, revenues in our
Medication Delivery Solutions unit were unfavorably impacted by a new
volume-based procurement process which has been adopted by several of China's
provinces. To date, the impact of these procurement initiatives to our revenues
in China has been limited to our Medication Delivery Solutions unit.
27
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Specified Items
Reflected in the financial results for the three and six-month periods of fiscal
years 2020 and 2019 were the following specified items:
Six months ended March
Three months ended March 31, 31,
(Millions of dollars) 2020 2019 2020 2019
Integration costs (a) $ 57 $ 70 $ 119 $ 143
Restructuring costs (a) 18 31 41 72
Transaction costs - 1 - 2
Purchase accounting adjustments (b) 340 379 688 757
Transaction gain/loss and product-related
matters (c) 199 396 258 61
European regulatory initiative-related costs
(d) 27 10 44 15
Investment gains/losses and asset
impairments (e) 40 - 41 -
Impacts of debt extinguishment - 1 - 1
Total specified items 680 888 1,191 1,051
Less: tax impact of specified items and tax
reform (f) 124 160 146 143
After-tax impact of specified items $ 557 $ 729 $ 1,045 $ 908
(a) Represents integration and restructuring costs which are primarily
recorded in Acquisitions and other restructurings and are further
discussed below.
(b) Includes amortization and other adjustments related to the purchase
accounting for acquisitions impacting identified intangible assets andvaluation of fixed assets and debt. BD's amortization expense is primarily
recorded in Cost of products sold.
(c) The amounts in the three and six-month periods of fiscal year 2020
included a $199 million charge recognized by the Medical segment in Costof products sold to record a probable estimate of future costs associated
with incremental remediation efforts, as further discussed below. The
amount in the six-month period of fiscal year 2020 additionally included a
in Cost of products sold to record estimated remediation costs. The
amounts in the prior-year periods included a charge relating to certain
product liability matters and the estimated cost of a product recall, as
noted above in the discussion regarding the Medical segment's income.
These amounts were recorded to Other operating expense, net. The amount in
the prior-year six-month period also included the pre-tax gain recognized
in Other operating expense, net on BD's sale of its Advanced Bioprocessing
business.
(d) Represents initial costs required to develop processes and systems tocomply with emerging regulations such as the European Union Medical Device
Regulation ("EUMDR") and General Data Protection Regulation ("GDPR").
These costs were recorded in Cost of products sold and Research and
development expense.
(e) The amounts in 2020 primarily represented a charge of
in Cost of products sold to write down the carrying value of certain
intangible assets in the Biosciences unit.
(f) The amount in the six-month period of fiscal year 2019 included additional
tax expense, net, of
further discussed below.
Gross Profit Margin
Gross profit margin for the three and six-month periods of fiscal year 2020
compared with the prior-year periods in fiscal year 2019 reflected the following
impacts:
Three-month period Six-month period
March 31, 2019 gross profit margin % 47.1 % 47.2 %
Impact of purchase accounting adjustments and
other specified items (5.7 )% (3.3 )%
Operating performance (1.1 )% (0.3 )%
Foreign currency translation 0.5 % 0.2 %
March 31, 2020 gross profit margin % 40.8 % 43.8 %
28-------------------------------------------------------------------------------- The impacts of purchase accounting adjustments and other specified items include the following: • The impacts in the three and six-month periods include a charge of$199
million to record a probable estimate of future costs within the
Medication Management Solutions unit associated with incremental
remediation efforts related to AlarisTM infusion pumps. Based on the
course of our remediation efforts, it is possible that this estimate could
increase over time. Any remediation actions will continue to be guided by
our proactive commitment to patient safety and we will work closely with
our customers to minimize the disruption of patient care.
• The impacts in the three and six-month periods also include a
charge to write down the carrying value of certain intangible assets in
the Biosciences unit.
• The impact in the six-month period additionally includes a
charge recognized in the first quarter by the Medical segment to record
estimated product remediation costs related to the AlarisTM infusion
pumps.
Operating performance for the three-month and six-month periods primarily
reflected unfavorable product mix, some of which was attributable to the
COVID-19 pandemic, and increased tariffs, partially offset by lower
manufacturing costs resulting from continuous operations improvement projects
and synergy initiatives. For the remainder of fiscal year 2020, the COVID-19
pandemic will place pressure on our gross margin due to declines in sales of
products with higher gross margins.
Operating Expenses
A summary of operating expenses for the three and six-month periods of fiscal
years 2020 and 2019 is as follows:
Increase
Increase Six months ended (decrease)
Three months ended March 31, (decrease) in March 31, in basis
2020 2019 basis points 2020 2019 points
(Millions of dollars)
Selling and administrative
expense $ 1,025 $ 1,089 $ 2,146 $ 2,161
% of revenues 24.1 % 25.9 % (180 ) 25.3 % 25.9 % (60 )
Research and development
expense $ 264 $ 252 $ 535 $ 510
% of revenues 6.2 % 6.0 % 20 6.3 % 6.1 % 20
Acquisitions and other
restructurings $ 75 $ 101 $ 161 $ 191
Other operating expense, net $ - $ 396 $ - $ 61
Selling and administrative expense
The decreases in selling and administrative expense as a percentage of revenues
in the current three and six-month periods compared with the prior-year periods
primarily reflected a decrease in the deferred compensation plan liability due
to market performance. The losses on investment assets result in a favorable
impact on expense recorded in Selling and administrative expense. Selling and
administrative expense as a percentage of revenues in the current-year periods
was unfavorably impacted by higher shipping costs. Selling and administrative
expense as a percentage of revenues in the current-year periods also reflected
our ongoing focus on disciplined spending and the achievement of cost synergies
resulting from our acquisition of Bard, as well as a favorable impact from the
cost containment measures we have enacted to mitigate the impact of the COVID-19
pandemic on our results of operations.
Research and development expense
Research and development expense as a percentage of revenues in the three and
six-month periods was higher compared with the prior-year periods primarily due
to higher costs incurred to achieve compliance with emerging regulations, as
further discussed above. Spending in both the current and prior-year periods
reflected our continued commitment to drive innovation with new products and
platforms.
Acquisitions and other restructurings
Costs relating to acquisitions and other restructurings in the three and
six-month periods of 2020 and 2019 largely represented integration and
restructuring costs incurred due to our acquisition of Bard in the first quarter
of fiscal year 2018. For further disclosures regarding restructuring costs,
refer to Note 10 in the Notes to Condensed Consolidated Financial Statements.
29
--------------------------------------------------------------------------------
Other operating expense, net
Other operating expense in the prior-year periods included a charge of
approximately $331 million relating to certain product liability matters as
further discussed in Note 5 in the Notes to Condensed Consolidated Financial
Statements. The amounts in the period-year periods also included the estimated
costs of $65 million relating to a product recall, as noted above in the
discussion regarding the Medical segment's income. The amount in the prior-year
six-month period additionally included the pre-tax gain of $335 million
recognized on BD's sale of its Advanced Bioprocessing business in the first
quarter of fiscal year 2019.
Nonoperating Income
Net interest expense
The components for the three and six-month periods of fiscal years 2020 and 2019
were as follows:
Three months ended March 31, Six months ended March 31,
(Millions of dollars) 2020 2019 2020 2019
Interest expense $ (134 ) $ (171 ) $ (270 ) $ (342 )
Interest income, net 2 18 3 6
Net interest expense $ (132 ) $ (153 ) $ (267 ) $ (336 )
Lower interest expense in the current year's three and six-month periods
compared with the prior-year periods primarily reflected debt repayments during
fiscal year 2019, as well as lower overall interest rates on debt outstanding
during the current-year periods as a result of fiscal year 2019 refinancing
activities.
Income Taxes
The income tax rates for the three and six-month periods of fiscal years 2020
and 2019 are provided below.
Three months ended March
31, Six months ended March 31,
2020 2019 2020 2019
Effective income tax rate 8.5 % (540.4 )% 22.5 % 13.7 %
Impact, in basis points, from specified
items and tax reform (750 ) (55,640 ) 680 10
The effective income tax rates for the three and six-month periods of fiscal
year 2020 reflected tax impacts from specified items that were less favorable
compared with the benefits associated with specified items recognized in the
prior-year periods. The effective income tax rate for the six-month period of
fiscal year 2019 reflected the recognition of additional tax expense of $20
million as a result of U.S. tax legislation that was enacted in December 2017 .
The effective income tax rate for the six-month period of fiscal year 2019 was
favorably impacted by the timing of certain discrete items.
Net Income and Diluted Earnings per Share
Net Income and Diluted Earnings per Share for the three and six-month periods of
fiscal years 2020 and 2019 were as follows:
Three months ended March
31, Six months ended
2020 2019 2020 2019
Net Income (Millions of dollars) $ 183 $ 20 $ 461 $ 619
Diluted Earnings (Loss) per Share $ 0.53 $
(0.07 )
Unfavorable impact-specified items$ (2.02 ) $ (2.70 ) $ (3.80 ) $ (3.31 ) Dilutive impact of BD shares $ -$ 0.04 $ - $ - Favorable (unfavorable) impact-foreign currency translation$ 0.01 $ (0.03 ) The dilutive impact for the three-month period of fiscal year 2019 represented the impact of share equivalents associated with share-based plans that were excluded from the reported diluted shares outstanding calculation because the result would have been antidilutive. 30 -------------------------------------------------------------------------------- Liquidity and Capital Resources The following table summarizes our condensed consolidated statements of cash flows: Six months ended March 31, (Millions of dollars) 2020 2019 Net cash provided by (used for) Operating activities$ 1,196 $ 1,027 Investing activities$ (542 ) $ 30 Financing activities$ 1,210 $ (1,532 ) Net Cash Flows from Operating Activities Cash flows from operating activities in the first six months of fiscal year 2020 reflected net income, adjusted by a change in operating assets and liabilities that was a net use of cash. This net use of cash primarily reflected higher levels of inventory and lower levels of accounts payable and accrued expenses, partially offset by lower levels of trade receivables and prepaid expenses. Cash flows from operating activities in the first six months of fiscal year 2019 reflected net income, adjusted by a change in operating assets and liabilities that was a net use of cash. Cash flows from operating activities in the prior-year period additionally reflected$200 million of discretionary cash contributions to fund our pension obligation. Net Cash Flows from Investing Activities Our investments in capital expenditures are focused on projects that enhance our cost structure and manufacturing capabilities, and support our strategy of geographic expansion with select investments in growing markets. As part of the cost containment measures we have enacted in response to the COVID-19 pandemic, we are currently prioritizing spending for only our most critical capital projects. Net outflows from investing activities in the first six months of fiscal year 2020 included capital expenditure-related outflows of$395 million , compared with$362 million in the prior-year period. Net cash flows from investing activities in the first six months of fiscal year 2019 also included proceeds$477 million from our sale of a business during the period, as further discussed above. Net Cash Flows from Financing Activities Net cash from financing activities in the first six months of fiscal years 2020 and 2019 included the following significant cash flows: Six months ended March 31, (Millions of dollars) 2020 2019
Cash inflow (outflow)
Change in credit facility borrowings $ 210 $ -
Proceeds from long-term debt and term loans
$ (305 ) $ (905 ) Dividends paid$ (505 ) $ (491 ) 31
-------------------------------------------------------------------------------- Certain measures relating to our total debt were as follows: (Millions of dollars) March 31, 2020 September 30, 2019 Total debt$ 21,167 $ 19,390 Short-term debt as a percentage of total debt 20.6 % 6.8 % Weighted average cost of total debt 2.7 % 2.9 % Total debt as a percentage of total capital* 48.1 %
45.6 %
* Represents shareholders' equity, net non-current deferred income tax liabilities, and debt. The increase in the ratio of short-term debt as a percentage of total debt atMarch 31, 2020 was primarily driven by our reclassification of certain notes from long-term to short-term and by borrowings under a term loan agreement which is further discussed below. Cash and Short-term Investments AtMarch 31, 2020 , total worldwide cash and short-term investments, including restricted cash, were approximately$2.445 billion , which were primarily held inthe United States . Financing Facilities While we deemed our liquidity sufficient to fund our operations and meet our obligations prior to taking these actions, BD has taken steps as a precautionary measure to preserve our financial flexibility in light of the uncertainty in the global markets resulting from the COVID-19 pandemic. We have a five-year senior unsecured revolving credit facility in place which will expire inDecember 2022 . The facility agreement includes a provision that enabled BD, subject to additional commitments made by the lenders, to access up to an additional$500 million in financing through the facility for a maximum aggregate commitment of$2.75 billion . InApril 2020 , we entered into a supplement to the facility agreement which increased the revolving commitments available under the facility by$381 million . As such, borrowings provided for under the agreement increased from$2.25 billion to$2.63 billion . We are also able to issue up to$100 million in letters of credit under this revolving credit facility. We use proceeds from this facility to fund general corporate needs. Borrowings outstanding under the revolving credit facility atMarch 31, 2020 were$695 million . The agreement for our revolving credit facility and the supplement entered into inApril 2020 contained the following financial covenants. We were in compliance with these covenants as ofMarch 31, 2020 . • We are required to maintain an interest expense coverage ratio of not less
than 4-to-1 as of the last day of each fiscal quarter.
• We are required to have a leverage coverage ratio of no more than:
• 6-to-1 from the closing date of the Bard acquisition until and
including the first fiscal quarter-end thereafter;
• 5.75-to-1 for the subsequent four fiscal quarters thereafter;
• 5.25-to-1 for the subsequent four fiscal quarters thereafter;
• 4.5-to-1 for the subsequent four fiscal quarters thereafter;
• 4-to-1 for the subsequent four fiscal quarters thereafter;
• 3.75-to-1 thereafter.
InMarch 2020 , we entered into a 364-day$1.4 billion senior unsecured term loan facility and later inMarch 2020 , we amended this agreement to increase the borrowing capacity available under the facility to$2.0 billion . Borrowings under the term loan facility will primarily be used to supplement our cash position. Borrowings outstanding under the 364-day term loan facility were$1.9 billion atMarch 31, 2020 . The agreement for our term loan facility and the amendment to the facility contained the following financial covenants. We were in compliance with these covenants as ofMarch 31, 2020 . • We are required to maintain an interest expense coverage ratio of not less
than 4-to-1 as of the last day of any fiscal quarter.
• We are required to have a leverage ratio of not greater than:
• 5.25-to-1 from the effectiveness of the Term Loan Agreement until
and including the last day of the fiscal quarter ending March 31,
2020 ;
• 4.5-to-1 as of the last day of any fiscal quarter thereafter.
We also have informal lines of credit outsidethe United States . We may, from time to time, access the commercial paper market and/or sell certain trade receivable assets to third parties as we manage working capital over the normal course of our business 32 -------------------------------------------------------------------------------- activities. We had no commercial paper borrowings outstanding as ofMarch 31, 2020 . Additional disclosures regarding sales of trade receivable assets are provided in Note 13 in the Notes to Condensed Consolidated Financial Statements. Access to Capital and Credit Ratings Our corporate credit ratings with the rating agencies Moody's Investor Service and Fitch Ratings atMarch 31, 2020 were unchanged compared with our ratings atSeptember 30, 2019 . InMarch 2020 ,Standard & Poor's Ratings Services affirmed ourSeptember 30, 2019 ratings and revised the agency's outlook regarding the likely direction of these ratings from Stable to Negative. Lower corporate debt ratings and downgrades of our corporate credit ratings or other credit ratings may increase our cost of borrowing. We believe that given our debt ratings, our financial management policies, our ability to generate cash flow and the non-cyclical, geographically diversified nature of our businesses, we would have access to additional short-term and long-term capital should the need arise. A rating reflects only the view of a rating agency and is not a recommendation to buy, sell or hold securities. Ratings can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change. Concentrations of Credit Risk We continually evaluate our accounts receivables for potential collection risks, particularly those resulting from sales to government-owned or government-supported healthcare facilities in certain countries, as payment may be dependent upon the financial stability and creditworthiness of those countries' national economies. We continually evaluate all governmental receivables for potential collection risks associated with the availability of government funding and reimbursement practices. We believe the current reserves related to all governmental receivables are adequate and that these receivables will not have a material adverse impact on our financial position or liquidity. To date, we have not experienced a significant increased risk of collectability of accounts receivables in general as a result of the COVID-19 pandemic. No assurances can be given that the risk of collectability will not increase in the future given the uncertainty around the duration of the pandemic and its economic impact. Regulatory Matters InJanuary 2018 , BD received a Warning Letter from theU.S. FDA, citing certain alleged violations of quality system regulations and of law with respect to our Preanalytical Systems facility inFranklin Lakes, New Jersey . The Warning Letter states that, until BD resolves the outstanding issues covered by the Warning Letter, the FDA will not clear or approve any premarket submissions for Class III devices to which the non-conformances are reasonably related or grant requests for certificates to foreign governments. BD is working closely with the FDA and intends to fully implement corrective actions to address the concerns identified in the Warning Letter. However, BD cannot give any assurances that the FDA will be satisfied with its responses to the Warning Letter or as to the expected date of resolution of matters included in the Warning Letter. While BD does not believe that the issues identified in the Warning Letter will have a material impact on BD's operation, no assurances can be given that the resolution of this matter will not have a material adverse effect on BD's business, results of operations, financial conditions and/or liquidity. InOctober 2019 , BD entered into a consent order with the Environmental Protection Division of theGeorgia Department of Natural Resources ("EPD"), following the filing of a complaint and motion for temporary restraining order by the EPD seeking to enjoin BD from continuing sterilization operations at itsCovington, Georgia facility. Under the terms of the consent order, BD voluntarily agreed to a number of operational changes at itsCovington andMadison, Georgia facilities designed to further reduce ethylene oxide emissions, including but not limited to operating at a reduced capacity. BD does not believe that the consent order will have a material impact on its operations. Violation of the consent order could subject us to additional restrictions on the sterilization operations at ourCovington andMadison facilities. BD has business continuity plans in place to mitigate the impact of any additional restrictions on our operations at these facilities, although it is possible that these plans will not be able to fully offset such impact. As previously reported, our AlarisTM infusion pump organizational unit is operating under an amended consent decree entered into byCareFusion that includes all infusion pumps manufactured by or forCareFusion 303, Inc. , the organizational unit that manufactures and sells AlarisTM infusion pumps inthe United States . Following an inspection that began inMarch 2020 of our Medication Management Systems facility (CareFusion 303, Inc. ) inSan Diego, California , the FDA issued to BD a Form 483 Notice that contains a number of observations of non-conformance. BD has provided the FDA with its response to the Form 483 and has begun to implement certain corrective actions to address the observations. However, theFDA's review of the items raised in the Form 483 remains ongoing and no assurances can be given regarding further action by the FDA as a result of the observations. 33 -------------------------------------------------------------------------------- Cautionary Statement Regarding Forward-Looking Statements This report includes forward-looking statements within the meaning of the federal securities laws. BD and its representatives may also, from time to time, make certain forward-looking statements in publicly released materials, both written and oral, including statements contained in filings with theSecurities and Exchange Commission , press releases, and our reports to shareholders. Forward-looking statements may be identified by the use of words such as "plan," "expect," "believe," "intend," "will,", "may", "anticipate," "estimate" and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance (including volume growth, pricing, sales and earnings per share growth, and cash flows) and statements regarding our strategy for growth, future product development, regulatory approvals, competitive position and expenditures. All statements that address our future operating performance or events or developments that we expect or anticipate will occur in the future are forward-looking statements. Forward-looking statements are, and will be, based on management's then-current views and assumptions regarding future events, developments and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate, or risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events and developments or otherwise, except as required by applicable law or regulations. The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements. For further discussion of certain of these factors, see Item 1A. Risk Factors in this report and in our 2019 Annual Report on Form 10-K. • Any negative impact of the COVID-19 pandemic on our business, including,
without limitation, decreases in the demand for our products or disruptions
to our operations and our supply chain.
• The current weakness in the global economy and financial markets, which
could increase the cost of operating our business, weaken demand for our
products and services, negatively impact the prices we can charge for our
products and services, or impair our ability to produce our products.
• Competitive factors that could adversely affect our operations, including
new product introductions and technologies (for example, new forms of drug
delivery) by our current or future competitors, consolidation or strategic
alliances among healthcare companies, distributors and/or payers of
healthcare to improve their competitive position or develop new models for
the delivery of healthcare, increased pricing pressure due to the impact of
low-cost manufacturers, patents attained by competitors (particularly as
patents on our products expire), new entrants into our markets and changes
in the practice of medicine.
• Risks relating to our acquisition of Bard, including our ability tosuccessfully combine and integrate the Bard operations in order to obtain
the anticipated benefits and costs savings from the transaction, and the
significant additional indebtedness we incurred in connection with thefinancing of the acquisition and the impact it may have on our ability to
operate the combined company.
• The adverse financial impact resulting from unfavorable changes in foreign
currency exchange rates.
• Regional, national and foreign economic factors, including inflation,
deflation, and fluctuations in interest rates, and their potential effect
on our operating performance.
• Our ability to achieve our projected level or mix of product sales, as our
earnings forecasts are based on projected sales volumes and pricing of many
product types, some of which are more profitable than others.
• Changes in reimbursement practices of governments or third-party payers, or
adverse decisions relating to our products by such payers, which could
reduce demand for our products or the price we can charge for such
products.
• Cost containment efforts in the
business, such as alternative payment reform and increased use of
competitive bidding and tenders, including, without limitation, any
expansion of the volume-based procurement process in China .
• Changes in the domestic and foreign healthcare industry or in medical
practices that result in a reduction in procedures using our products or
increased pricing pressures, including the continued consolidation among
healthcare providers.
• The impact of changes in
fiscal and tax policies, healthcare, and international trade, including
import and export regulation and international trade agreements. In
particular, tariffs or other trade barriers imposed by the
countries could adversely impact our supply chain costs or otherwise
adversely impact our results of operations.
34--------------------------------------------------------------------------------
• Increases in operating costs, including fluctuations in the cost and
availability of oil-based resins and other raw materials, as well ascertain components, used in our products, the ability to maintain favorable
supplier arrangements and relationships (particularly with respect to
sole-source suppliers), and the potential adverse effects of any disruption
in the availability of such items.
• Security breaches of our information technology systems or our products,
which could impair our ability to conduct business, result in the loss of
BD trade secrets or otherwise compromise sensitive information of BD or its
customers, suppliers and other business partners, or of customers'
patients, or result in product efficacy or safety concerns for certain of
our products, and result in actions by regulatory bodies or civil
litigation.
• Difficulties inherent in product development, including the potential
inability to successfully continue technological innovation, successfully
complete clinical trials, obtain regulatory approvals in
and abroad, obtain intellectual property protection for our products,
obtain coverage and adequate reimbursement for new products, or gain and
maintain market approval of products, as well as the possibility of
infringement claims by competitors with respect to patents or other
intellectual property rights, all of which can preclude or delaycommercialization of a product. Delays in obtaining necessary approvals or
clearances from
regulatory agencies or changes in the regulatory process may also delay
product launches and increase development costs.
• The impact of business combinations or divestitures, including any
volatility in earnings relating to acquisition-related costs, and our
ability to successfully integrate any business we may acquire.
• Our ability to penetrate or expand our operations in emerging markets,
which depends on local economic and political conditions, and how well we
are able to make necessary infrastructure enhancements to production
facilities and distribution networks.
• Conditions in international markets, including social and political
conditions, civil unrest, terrorist activity, governmental changes,
restrictions on the ability to transfer capital across borders, tariffs and
other protectionist measures, difficulties in protecting and enforcing our
intellectual property rights and governmental expropriation of assets. This
includes the possible impact of the
Union ("EU"), which has created uncertainties affecting our business
operations in the
countries. Our international operations also increase our compliance risks,
including risks under the Foreign Corrupt Practices Act and other
anti-corruption laws, as well as regulatory and privacy laws.
• Deficit reduction efforts or other actions that reduce the availability of
government funding for healthcare and research, which could weaken demand
for our products and result in additional pricing pressures, as well as
create potential collection risks associated with such sales.
• Fluctuations in university or
and policies for life sciences research.
• Fluctuations in the demand for products we sell to pharmaceutical companies
that are used to manufacture, or are sold with, the products of such
companies, as a result of funding constraints, consolidation or otherwise.
• The effects of weather, regulatory or other events that adversely impact
our supply chain, including our ability to manufacture our products
(particularly where production of a product line or sterilization
operations are concentrated in one or more plants), source materials orcomponents or services from suppliers (including sole-source suppliers)
that are needed for such manufacturing (including sterilization), or
provide products to our customers, including events that impact key
distributors.
• Natural disasters (including pandemics), war, terrorism, labor disruptions
and international conflicts that could cause significant economic
disruption and political and social instability, resulting in decreased
demand for our products, adversely affect our manufacturing and
distribution capabilities, or cause interruptions in our supply chain.
• Pending and potential future litigation or other proceedings asserting,
and/or subpoenas seeking information with respect to, alleged violations of
law (including in connection with federal and/or state healthcare programs
(such as Medicare or Medicaid) and/or sales and marketing practices (such
as investigative subpoenas and the civil investigative demands received by
BD and Bard)), antitrust claims, product liability (which may involve
lawsuits seeking class action status or seeking to establish multi-district
litigation proceedings, including claims relating to our hernia repair
implant products, surgical continence products for women and vena cava
filter products), claims with respect to environmental matters, and patent
infringement, and the availability or collectability of insurance relating
to any such claims.
• New or changing laws and regulations affecting our domestic and foreign
operations, or changes in enforcement practices, including laws relating to
trade, monetary and fiscal policies, taxation (including tax reforms that
could adversely impact multinational corporations), sales practices,
environmental protection, price controls, and licensing
35-------------------------------------------------------------------------------- and regulatory requirements for new products and products in the postmarketing phase. In particular, theU.S. and other countries may impose new requirements regarding registration, labeling or prohibited materials that may require us to re-register products already on the market or otherwise impact our ability to market our products. Environmental laws, particularly with respect to the emission of greenhouse gases, are also becoming more stringent throughout the world, which may increase our costs of operations or necessitate changes in our manufacturing plants or processes or those of our suppliers, or result in liability to BD. • Product efficacy or safety concerns regarding our products resulting in
product holds or recalls, regulatory action on the part of the FDA or
foreign counterparts (including restrictions on future product clearances
and civil penalties), declining sales and product liability claims, and
damage to our reputation. As a result of the
operating under a consent decree with the FDA relating to our
pump business. The consent decree authorizes the FDA, in the event of any
violations in the future, to order us to cease manufacturing and
distributing products, recall products or take other actions, and we may be
required to pay significant monetary damages if we fail to comply with any
provision of the consent decree. Also, in 2019, the FDA letter to
healthcare professionals regarding the use of paclitaxel-coated devices in
the treatment of peripheral artery disease resulted in decreased sales of
BD's drug-coated balloons. While we have changed the labeling on our
products as required by the FDA and continue to work with the FDA on
patient data, the extent and duration of the impact from the FDA letter,
and the likelihood of FDA approval of new drug-coated devices, is difficult
to predict.
• The effect of adverse media exposure or other publicity regarding BD'sbusiness or operations, including the effect on BD's reputation or demand
for its products.
• The effect of market fluctuations on the value of assets in BD's pension
plans and on actuarial interest rate and asset return assumptions, which
could require BD to make additional contributions to the plans or increase
our pension plan expense.
• Our ability to obtain the anticipated benefits of restructuring programs,
if any, that we may undertake.
• Issuance of new or revised accounting standards by the Financial Accounting
The foregoing list sets forth many, but not all, of the factors that could
impact our ability to achieve results described in any forward-looking
statements. Investors should understand that it is not possible to predict or
identify all such factors and should not consider this list to be a complete
statement of all potential risks and uncertainties.
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