BECTON, DICKINSON AND COMPANY The following commentary should be read in conjunction with the 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. References to years throughout this discussion relate to our fiscal years, which end onSeptember 30 . Company Overview Description of the Company and Business SegmentsBecton, 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. Strategic Objectives BD remains focused on delivering sustainable growth and shareholder value, while making appropriate investments for the future. BD management operates the business consistent with the following core strategies: • To increase revenue growth by focusing on our core products, services
and solutions that deliver greater benefits to patients, healthcare
workers and researchers;
• To supplement our internal growth through strategic acquisitions;
• To continue investment in research and development for platform
extensions and innovative new products;
• To make investments in growing our operations in emerging markets;
• To improve operating effectiveness and balance sheet productivity;
• To drive an efficient capital structure and strong shareholder returns.
Our strategy focuses on four specific areas within healthcare and life sciences: • Enabling safer, simpler and more effective parenteral drug delivery;
• Improving clinical outcomes through new, more accurate and faster diagnostics;
• Providing tools and technologies to the research community that
facilitate the understanding of the cell, cellular diagnostics, cell
therapy and immunology;
• Enhancing disease management with our product offerings.
We continue to strive to improve the efficiency of our capital structure and follow these guiding principles: • To operate the Company consistent with an investment grade credit profile;
• To ensure access to the debt market for strategic opportunities;
• To optimize the cost of capital based on market conditions.
In assessing the outcomes of these strategies as well as BD's financial condition and operating performance, management generally reviews quarterly forecast data, monthly actual results, segment sales and
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other similar information. We also consider trends related to certain key financial data, including gross profit margin, selling and administrative expense, investment in research and development, return on invested capital, and cash flows. Summary of Financial Results Worldwide revenues in 2019 of$17.290 billion increased 8.2% from the prior-year period. The increase reflected a favorable impact of approximately 6% resulting from the inclusion of revenues from our acquisition of Bard in the first quarter of fiscal year 2019 but not in the first quarter of the prior-year period as operating activities of the business, which was acquired onDecember 29, 2017 , were not included in our consolidated results of operations untilJanuary 1, 2018 . Revenues in 2019 also reflected an unfavorable impact of almost 1% attributable to the Biosciences unit's divestiture of its Advanced Bioprocessing business at the end ofOctober 2018 , as is further discussed in Note 11 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. Revenue growth in 2019 additionally reflected volume growth of approximately 5.4%, an unfavorable impact from foreign currency translation of approximately 2.3% and an unfavorable impact of price of approximately 0.3%. Volume growth in 2019 was as follows: • Medical segment growth was driven by sales growth in all of the segment's
units, particularly by growth in the Medication Management Solutions,
Medication Delivery Solutions and Pharmaceutical Systems units.
• Life Sciences segment growth reflected growth in all of the segment's
units, particularly in the Biosciences unit.
• Interventional segment growth reflected sales growth in all units,
particularly in the Surgery unit and the Urology and Critical Care unit.
We continue to invest in research and development, geographic expansion, and new
product market 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 environment for the
healthcare industry and healthcare utilization in the United States is generally
stable, destabilization in the future could adversely impact our businesses.
Additionally, macroeconomic challenges in Europe continue to constrain
healthcare utilization, although we currently view the environment as stable. 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.
Our financial position remains strong, with cash flows from operating activities
totaling $3.330 billion in 2019. At September 30, 2019 , we had $620 million 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
fiscal year 2019, we paid cash dividends of $984 million , including $832 million
paid to common shareholders and $152 million paid to preferred shareholders.
Each reporting period, we face currency exposure that arises from translating
the results of our worldwide operations to the U.S. dollar at exchange rates
that fluctuate from the beginning of such period. A stronger U.S. dollar in
2019, compared with 2018, resulted in an unfavorable foreign currency
translation impact to our revenues and earnings during 2019. 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-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 with U.S. generally accepted accounting principles ("GAAP"). Results
on a foreign currency-neutral basis, as we present them, may not be comparable
to similarly titled
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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 Medical revenues by organizational unit: 2019 vs. 2018 2018 vs. 2017 Estimated Estimated (Millions of Total FX Total FX dollars) 2019 2018 2017 Change Impact FXN Change Change Impact FXN Change Medication Delivery Solutions$ 3,859 $ 3,644 $ 2,812 5.9 % (2.7 )% 8.6 % 29.6 % 1.9 % 27.7 % Medication Management Solutions 2,629 2,470 2,295 6.4 % (1.1 )% 7.5 % 7.7 % 1.1 % 6.6 % Diabetes Care 1,110 1,105 1,056 0.5 % (2.4 )% 2.9 % 4.6 % 1.7 % 2.9 % Pharmaceutical Systems 1,465 1,397 1,256 4.8 % (3.4 )% 8.2 % 11.2 % 4.8 % 6.4 % Total Medical revenues$ 9,064 $ 8,616 $ 7,419 5.2 % (2.3 )% 7.5 % 16.1 % 2.1 % 14.0 % The Medical segment's revenues in 2019 were favorably impacted by the inclusion of revenues associated with certain Bard products within the Medication Delivery Solutions unit in the first quarter of fiscal year 2019, as noted above, and also reflected strong growth in this unit's global sales of vascular access devices. The Medication Management Solutions unit's revenues in 2019 reflected sales growth attributable to the installations of infusion and dispensing systems, as well as growth in sales of disposables. The Pharmaceutical Systems unit's 2019 revenue growth was driven by sales of prefillable products and self-injection systems. Strength in the Diabetes Care unit's sales of pen needles in emerging markets was partially offset by lower growth inU.S. sales. Medical segment revenue growth in 2018 was favorably impacted by the inclusion of revenues associated with certain Bard products within the Medication Delivery Solutions unit, beginning onJanuary 1, 2018 , as noted above. The Medical segment's underlying revenue growth was largely driven by sales of the Medication Delivery Solutions unit's vascular access and vascular care products as well as by the Medication Management Solutions unit's installations of dispensing and infusion systems. Revenue growth in the Medication Management Solutions unit was partially offset by the unfavorable impact, in the first half of 2018, of a modification to dispensing equipment lease contracts with customers, which took place inApril 2017 . As a result of the lease modification, substantially all new lease contracts are accounted for as operating leases with revenue recognized over the agreement term, rather than upon the placement of capital. The Medical segment's underlying growth also reflected sales of the Pharmaceutical Systems unit's prefillable products and the Diabetes Care unit's pen needles. Medical segment operating income was as follows: (Millions of dollars) 2019 2018
2017
Medical segment operating income (a)$ 2,824 $ 2,624 $
1,907
Segment operating income as % of Medical revenues 31.2 % 30.5 %
25.7 %
(a) Operating income in 2019 and 2018 excluded certain general and
administrative costs, which were allocated to the segment in 2017, due
to a change in our management reporting approach, as is further
discussed in Note 7 to the consolidated financial statements contained
in Item 8. Financial Statements and Supplementary Data.
The Medical segment's operating income was driven by improved gross profit margin and operating expense performance in 2019 and 2018 as discussed in greater detail below:
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•The Medical segment's gross profit margin in 2019 was higher as compared with
2018 primarily due to lower manufacturing costs resulting from continuous
improvement projects which enhanced the efficiency of our operations.
Additionally, the comparison of gross profit margin in 2019 with gross profit
margin in 2018 reflected the unfavorable impacts in 2018 of a fair value step-up
adjustment relating to Bard's inventory on the acquisition date and charges to
write down the value of fixed assets, primarily in the Diabetes Care unit. These
favorable impacts to the Medical segment's gross margin in 2019 were partially
offset by unfavorable foreign currency translation, higher raw material costs
and pricing pressures. The Medical segment's gross profit margin in 2018 was
lower as compared with 2017 primarily due to the expense related to amortization
of intangible assets acquired in the Bard transaction as well as the impact of
the fair value step-up adjustment and write-down charges noted above. The
Medical segment's gross profit margin in 2018 was also unfavorably impacted by
higher raw material costs and pricing pressures. These unfavorable impacts to
the Medical segment's gross margin were partially offset by lower manufacturing
costs resulting from continuous improvement projects which enhanced the
efficiency of our operations and favorable product mix impact relating to the
Bard products reported within the segment.
•Selling and administrative expense as a percentage of revenues in 2019 was
relatively flat compared with 2018. Selling and administrative expense as a
percentage of revenues in 2018 was lower compared with 2017 which primarily
reflected a reduction in the general and administrative costs allocated to the
segment, as noted above.
•Research and development expense as a percentage of revenues was lower in 2019
due to recent completion of projects and the timing of project spending.
Research and development expense as a percentage of revenues in 2018 was higher
compared with 2017 which reflected increased investment in new products and
platforms.
Life Sciences Segment
The following summarizes Life Sciences revenues by organizational unit:
2019 vs. 2018 2018 vs. 2017
Estimated Estimated
(Millions of Total FX Total FX
dollars) 2019 2018 2017 Change Impact
FXN Change Change Impact FXN Change Preanalytical Systems$ 1,558 $ 1,553 $ 1,471 0.3 % (3.0 )% 3.3 % 5.5 % 1.4 % 4.1 % Diagnostic Systems 1,547 1,536 1,378 0.7 % (2.6 )% 3.3 % 11.5 % 1.9 % 9.6 % Biosciences 1,194 1,241 1,139 (3.8 )% (2.2 )% (1.6 )% 9.0 % 2.2 % 6.8 % Total Life Sciences revenues$ 4,300 $ 4,330 $ 3,988 (0.7 )% (2.6 )% 1.9 % 8.6 % 1.8 % 6.8 % The Life Sciences segment's revenues in 2019 reflected continued strength in sales of the Preanalytical Systems unit's sales of core products in emerging markets. The Diagnostic Systems unit's 2019 revenues reflected growth in its BD MAXTM molecular platform as well as growth in sales of core microbiology products. This sales growth in the Diagnostic Systems unit was partially offset by an unfavorable comparison of the unit'sU.S. revenues in 2019 to revenues in 2018, as the prior-year period benefited from a more severe influenza season. Revenues in the Biosciences unit in 2019 reflected growth in research reagent sales, as well as growth inU.S. research instrument sales, but were unfavorably impacted by the divestiture of the Advanced Bioprocessing business, as previously discussed. The Biosciences unit's results for 2018 and 2017 included revenues associated with the Advanced Bioprocessing business of$106 million and$103 million , respectively. The Life Sciences segment's 2018 revenues was driven by growth across all three of its organizational units. The Diagnostic Systems unit's revenues were primarily driven by sales of core microbiology products as well as continued strength in sales of the unit's BD MAXTM molecular platform. Revenue growth in the Diagnostic Systems unit also reflected a more severe influenza season in 2018 compared with 2017. The Life Sciences segment's 2018 revenue growth was also driven by the Biosciences unit's sales of research reagents and recently launched instruments. Growth in the Preanalytical Systems unit reflected global sales of core products. 26
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Life Sciences segment operating income was as follows: (Millions of dollars)
2019 2018 2017
Life Sciences segment operating income (a)$ 1,248 $ 1,207
Segment operating income as % of Life Sciences revenues 29.0 % 27.9 % 19.4 %
(a) Operating income in 2019 and 2018 excluded certain general and
administrative costs, which were allocated to the segment in2017, due
to a change in our management reporting approach, as notedabove.
The Life Sciences segment's operating income was driven by improved gross profit
margin and operating expense performance in 2019 and 2018 as discussed in
greater detail below:
• The Life Sciences segment's gross profit margin as a percentage of
revenues in fiscal year 2019 was relatively flat compared with gross
margin in 2018. Gross margin in 2019 was favorably impacted by lower
manufacturing costs resulting from continuous improvement projects whichenhanced the efficiency of our operations, as well as by the unfavorable
prior-year impact of the Biosciences unit's write-down of certain
intangible and other assets. These favorable impacts to gross margin in
2019 were offset by unfavorable foreign currency translation and higher
raw material costs. The Life Sciences segment's gross profit margin as a
percentage of revenues was higher in fiscal year 2018 as compared with2017 primarily due to lower manufacturing costs resulting from continuous
improvement projects, which enhanced the efficiency of our operations, and
favorable foreign currency translation. These favorable impacts to the
Life Sciences segment's gross margin were partially offset by expense
related to the Biosciences unit's write-down of certain intangible and
other assets, as well as higher raw material costs.
• Selling and administrative expense as a percentage of Life Sciences
revenues in 2019 was lower compared to 2018 primarily due to reduced
general and administrative spending. Selling and administrative expense as
a percentage of Life Sciences revenues in 2018 was lower compared to 2017
primarily due to a reduction in the general and administrative costs
allocated to the segment, as noted above.
• Research and development expense as a percentage of revenues in 2019 was
lower compared with 2018 primarily due to the Biosciences unit's
recognition of write-downs in the prior-year period and also due to the
timing of project spending. Research and development expense as apercentage of revenues in 2018 was higher compared with 2017 primarily due
to the write-downs noted above.
Interventional Segment
The following summarizes Interventional revenues by organizational unit:
2019 vs. 2018 2018 vs. 2017
Estimated
(Millions of Total FX Total
dollars) 2019 2018 2017 Change Impact FXN Change Change
Surgery (a) $ 1,397 $ 1,192 $ 666 17.3 % (1.1 )% 18.4 % NM
Peripheral
Intervention (a) 1,389 1,045 19 33.0 % (2.8 )% 35.8 % NM
Urology and Critical
Care 1,140 800 - 42.4 % (1.6 )% 44.0 % NM
Total Interventional
revenues $ 3,926 $ 3,037 $ 685 29.3 % (1.8 )% 31.1 % NM
"NM" denotes that the percentage is not meaningful. (a) Amounts presented in 2017 are associated with certain product offerings
that were moved from the Medical segment to the Interventional segment in
order to align with the reportable segment structure that became effective
beginning in the second quarter of fiscal year 2018.
The Interventional segment's revenues in 2019 were favorably impacted by the
inclusion of revenues associated with Bard's products in the segment's results
for the first quarter of fiscal year 2019, as noted above.
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Interventional segment revenues in 2019 also reflected growth in the Urology and Critical Care unit's sales of acute urology products and sales by the unit's home care and targeted temperature management businesses. Fiscal year 2019 revenues in the Surgery unit reflected growth in sales of the unit's biosurgery and infection prevention products. The Peripheral Intervention unit's 2019 revenues reflected growth in emerging market sales. This growth was partially offset by an unfavorable impact related to a letter issued inMarch 2019 by the FDA to healthcare professionals regarding the use of paclitaxel-coated devices in the treatment of peripheral artery disease, which impacted sales of our drug-coated balloon products. The extent and duration of the impact from the FDA letter on the Peripheral Intervention unit's future revenues is difficult to predict. Interventional segment operating income was as follows: (Millions of dollars) 2019 2018
2017
Interventional segment operating income (a)$ 903 $ 306
Segment operating income as % of Interventional revenues 23.0 % 10.1 %
NM
(a) The amount presented in 2017 is associated with certain product offerings
that were moved from the Medical segment to the Interventional segment in
order to align with the reportable segment structure that became effective
beginning in the second quarter of fiscal year 2018.
The Interventional segment's operating income was driven by its performance with respect to gross profit margin and operating expenses in 2019 as discussed in greater detail below: • Gross profit margin was higher in 2019 as compared with 2018 primarily due
to the unfavorable prior-year impact of recognizing a fair value step-up
adjustment relating to Bard's inventory on the acquisition date and lower
manufacturing costs resulting from continuous improvement projects, which
enhanced the efficiency of our operations, and synergy initiatives. These
favorable impacts to the Interventional segment's gross margin were
partially offset by unfavorable product mix and unfavorable foreign
currency translation.
• Selling and administrative expense as a percentage of revenues in 2019 was
relatively flat compared with 2018.
• Research and development expense as a percentage of revenues was higher in
2019 as compared with 2018 primarily due to the Surgery unit's recognition
of a write-down in the current-year period, as further discussed below.
The Interventional segment's operating income in 2018 reflected expense related
to the recognition of a fair value step-up adjustment relating to Bard's
inventory on the acquisition date. The fair value adjustment was a required
non-cash adjustment to the value of acquired inventory and was expensed over a
four-month period, consistent with an estimate of the period of time to sell the
acquired inventory.
Geographic Revenues
BD's worldwide revenues by geography were as follows:
2019 vs. 2018 2018 vs. 2017
Estimated Estimated
Total FX Total FX
(Millions of dollars) 2019 2018 2017 Change Impact FXN Change Change Impact FXN Change
United States
11.0 % 34.8 % - 34.8 %
International 7,560 7,215 5,589 4.8 %
(5.0 )% 9.8 % 29.1 % 4.8 % 24.3 %
Total revenues
U.S. revenues in 2019 reflected growth in all three segments.U.S. revenues in 2019 were favorably impacted by the inclusion of revenues associated with Bard's products in results for the first quarter of fiscal year 2019, as noted above. Revenue growth in 2019 was also attributable to sales in the Medical segment's Medication Management Solutions unit as well as to sales in the Interventional segment's Urology and Critical Care and Surgery units.U.S. revenue growth in 2019 was unfavorably impacted by results in the Medical segment's Diabetes Care unit, the Life Sciences segment's Diagnostic Systems unit and the Interventional segment's Peripheral Intervention unit, as previously noted in the discussions above. 28
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U.S. revenues in 2018 benefited from the inclusion of revenues associated with Bard products in our financial results beginning onJanuary 1, 2018 . Underlying 2018 revenue growth inthe United States was driven by revenues in the Medical segment's Medication Delivery Solutions and Medication Management Solutions units, as well as by revenues in the Life Sciences segment's Diagnostic Systems unit. International revenues in 2019 reflected growth in all three segments. International revenues in 2019 were favorably impacted by the inclusion of revenues associated with Bard's products in results for the first quarter of fiscal year 2019, as noted above. Fiscal year 2019 international revenue growth was also driven by sales in the Medical segment's Medication Delivery Solutions and Pharmaceutical Systems units as well as by sales in the Life Sciences segment's Diagnostic Systems and Preanalytical Systems units. International revenue growth in 2018 benefited from the inclusion of revenues associated with Bard products in our financial results. International revenue growth in 2018 also reflected increased sales in the Medical segment's Medication Delivery Solutions, Medication Management Solutions and Pharmaceutical Systems units, as well as growth attributable to sales in all three of the Life Sciences segment's organizational units. Emerging market revenues were$2.71 billion ,$2.53 billion and$1.95 billion in 2019, 2018 and 2017, respectively. Foreign currency translation unfavorably impacted emerging market revenues in 2019 by an estimated$155 million and favorably impacted emerging market revenues in 2018 by an estimated$19 million . Emerging market revenue growth in 2019 was favorably impacted by the inclusion of revenues associated with Bard's products in our results for the first quarter of fiscal year 2019, as noted above. Emerging market revenue growth in 2018 benefited from the inclusion of revenues associated with Bard products in our financial results beginning onJanuary 1, 2018 . Underlying growth in fiscal years 2019 and 2018 was particularly driven by sales inChina and EMA. Specified Items Reflected in the financial results for 2019, 2018 and 2017 were the following specified items: (Millions of dollars) 2019 2018 2017 Integration costs (a)$ 323 $ 344 $ 237 Restructuring costs (a) 180 344 85 Transaction costs (a) 1 56 39 Financing costs (b) - 49 131 Purchase accounting adjustments (c) 1,499 1,733 491 Transaction gain/loss, product and other litigation-related matters (d) 646 -
(337 ) Investment gains/losses and asset impairments (e) 17 (151 )
-
European regulatory initiative-related costs (f) 51 - -
Impacts of debt extinguishment (g) 54 16 73
Hurricane recovery-related impacts (24 ) 17 -
Lease contract modification-related charge (h) - - 748
Total specified items 2,749 2,409 1,466
Less: tax impact of specified items and tax reform (i)
622 (265 ) 495
After-tax impact of specified items $ 2,127 $ 2,674 (a) Represents integration, restructuring and transaction costs, recorded
in Acquisitions and other restructurings, which are further discussed
below.
(b) Represents financing impacts associated with the Bard acquisition, which
were recorded in Interest income and Interest expense.
(c) Primarily represents non-cash amortization expense associated withacquisition-related identifiable intangible assets and other adjustments
related to the purchase accounting for acquisitions. BD's amortization
expense is primarily recorded in Cost of products sold. The amount in
2018 included fair value step-up adjustments of $478 million relating to
Bard's inventory on the acquisition date.
(d) The amount in 2019 includes charges relating to certain product liability
matters and the estimated cost of a product recall, as well as the pre-tax
gain recognized on BD's sale of its Advanced Bioprocessing business. The
amount in 2017 largely represents the reversal of certain reserves related
to an appellate
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court decision recorded in Other operating expense, net. Further discussion regarding these amounts recorded to Other operating expense, net is provided below. (e) The amount in 2019 included an unrealized gain of$13 million recorded
within Other income (expense), net relating to an investment and a
million non-cash charge recorded within Research and development expense to
write down the carrying value of certain intangible assets in the Surgery
unit. The amounts in 2018 included the net amount of
recognized in the period and recorded to Other income (expense),
net, related to BD's sale of its non-controlling interest in Vyaire
Medical. This amount in 2018 was partially offset by
recorded within Cost of products sold and Research and development expense
to write down the carrying value of certain intangible and other assets in
the Biosciences unit as well as
of products sold to write down the value of fixed assets primarily in the
Diabetes Care unit.
(f) 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.
(g) Represents the impacts, which were primarily recorded in Other income(expense), net, of our extinguishment of certain long-term senior notes.
(h) Represents a non-cash charge in 2017, which was recorded in Other operating
expense, net resulting from a modification to our dispensing equipment
lease contracts with customers, as previously discussed.
(i) The amounts in 2019 and 2018 included additional tax (benefit) expense,
net, of
tax legislation which is further discussed in Note 17 to the consolidated
financial statements contained in Item 8. Financial Statements and
Supplementary Data.
Gross Profit Margin
The comparison of gross profit margins in 2019 and 2018 and the comparison of
gross profit margins in 2018 and 2017 reflected the following impacts:
2019 2018
Gross profit margin % prior-year period 45.5 % 49.3 % Impact of purchase accounting adjustments, asset write-downs and other specified items 2.9 % (6.9 )% Operating performance 0.1 % 2.7 % Foreign currency translation (0.6 )% 0.4 % Gross profit margin % current-year period 47.9 %
45.5 %
The impact of purchase accounting adjustments and other specified items in 2019
was favorable due to a comparison to 2018, which included the recognition of
fair value step-up adjustments relating to Bard's inventory on the acquisition
date, as well as write-downs of certain assets in the Biosciences and Diabetes
Care units in 2018 as further discussed above. The operating performance impacts
in 2019 and 2018 reflected lower manufacturing costs resulting from the
continuous improvement projects and synergy initiatives, as well as the
favorable impact of Bard on product mix. Operating performance in 2019 was
unfavorably impacted by higher raw material costs and unfavorable product mix.
Higher raw material costs as well as pricing pressures unfavorably impacted
operating performance in 2018.
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Operating Expenses
Operating expenses in 2019, 2018 and 2017 were as follows:
Increase (decrease) in basis points
(Millions of dollars) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Selling and administrative expense $ 4,332 $ 4,016 $ 2,909
% of revenues 25.1 % 25.1 % 24.1 % - 100
Research and development expense
6.1 % 6.3 % 6.4 % (20 ) (10 )
Acquisitions and other restructurings $ 480 $ 740 $ 354
Other operating expense, net $ 654 $ - $ 410
Selling and administrative
Selling and administrative expense as a percentage of revenues in 2019 was flat
compared with 2018 as higher revenues and the achievement of cost synergies
offset the impact of higher selling and general administrative costs
attributable to Bard, which had a higher selling and administrative spending
profile than BD, in our results for the first quarter of fiscal year 2019, as
noted above. The increase in selling and administrative expense as a percentage
of revenues in 2018 was primarily attributable to the inclusion of Bard in 2018
results beginning on January 1, 2018 .
Research and development
Research and development expense as a percentage of revenues in 2019 and 2018
was relatively flat compared with the prior-year periods. Spending in 2019, 2018
and 2017 reflected our continued commitment to invest in new products and
platforms. As further discussed above, expenses in 2019 included certain
write-down charges in the Surgery unit and expenses in 2018 included write-down
charges in the Biosciences unit.
Acquisitions and other restructurings
Costs relating to acquisitions and other restructurings in 2019 largely
represented integration and restructuring costs incurred due to our acquisition
of Bard in the first quarter of fiscal year 2018. Costs relating to acquisitions
and other restructurings in 2018 included restructuring, integration and
transaction costs incurred due to our acquisition of Bard as well as integration
and restructuring costs related to our fiscal year 2015 CareFusion acquisition
and portfolio rationalization initiatives. Transaction costs incurred in 2017
primarily related to our acquisition of Bard. Substantially all of the
integration and restructuring costs in 2017 were attributable to the CareFusion
acquisition and portfolio rationalization initiatives. For further disclosures
regarding the costs relating to acquisitions and other restructurings, refer to
Notes 10, 11 and 12 to the consolidated financial statements contained in
Item 8. Financial Statements and Supplementary Data.
Other operating expense, net
Other operating expense in 2019 included charges of approximately $914
million relating to certain product liability matters, as well as an estimated
cost of $75 million relating to a product recall in the Medical segment. Net
other operating expense in 2019 additionally included the pre-tax gain of $336
million recognized on BD's sale of its Advanced Bioprocessing business.
Additional disclosures regarding the product liability matters and divestiture
transaction are provided in Notes 5 and 11, respectively, to the consolidated
financial statements contained in Item 8. Financial Statements and Supplementary
Data.
Other operating expense in 2017 included the $748 million non-cash
charge resulting from the modification to our dispensing equipment lease
contracts with customers. Additional disclosures regarding this lease contract
modification are provided in Note 18 to the consolidated financial statements
contained in Item 8.
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Financial Statements and Supplementary Data. Other operating income in 2017 included a$337 million reversal of certain reserves related to an appellate court decision which, among other things, reversed an unfavorable antitrust judgment. Net Interest Expense (Millions of dollars) 2019 2018 2017 Interest expense$ (639 ) $ (706 ) $ (521 ) Interest income 12 65 76
Net interest expense
The decrease in interest expense in 2019 compared with 2018 primarily reflected higher fees incurred in 2018 to draw from our term loan facility, which is further discussed below. Interest expense in 2019 was also favorably impacted by debt repayments during the current year, as well as lower overall interest rates on debt outstanding during the current-year period as a result of refinancing activities. The increase in interest expense in 2018 compared with 2017 reflected higher levels of debt for the full-year period due to our issuances of senior unsecuredU.S. notes during the third quarter of 2017. Additional disclosures regarding our financing arrangements and debt instruments are provided in Note 16 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. The decrease in interest income in 2019 compared with 2018 reflected higher levels of cash on hand in the first quarter of fiscal year 2018 in anticipation of closing the Bard acquisition at the end of the quarter. The decrease in interest income in 2018 compared with 2017 reflected lower cash levels in the remaining quarters of 2018, subsequent to the closing of the Bard acquisition. Income Taxes
The income tax rates in 2019, 2018 and 2017 were as follows:
2019 2018 2017
Effective income tax rate (4.8 )% 73.5 % (12.7 )%
Impact, in basis points, from specified items and
tax reform (1,920 ) 5,680 (2,790 )
The effective income tax rate in 2019 reflected a favorable impact relating to
the timing of certain discrete items, as well as the recognition of $50 million
of tax benefit recorded for the impacts of U.S. tax legislation that was enacted
in December 2017 , compared with additional tax expense of $640 million that was
recognized as a result of this legislation in 2018. For further disclosures
regarding our accounting for this U.S. tax legislation, refer to Note 17 to the
consolidated financial statements contained in Item 8. Financial Statements and
Supplementary Data. The increase in the effective income tax rate in 2018
compared with 2017 reflected the additional tax expense relating to U.S. tax
legislation, as noted above, as well as a less favorable benefit from specified
items in 2018 compared with 2017.
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Net Income and Diluted Earnings per Share Net Income and Diluted Earnings per Share in 2019, 2018 and 2017 were as follows:
2019 2018 2017
Net income (Millions of dollars)$ 1,233 $ 311 $ 1,100 Diluted Earnings per Share$ 3.94 $ 0.60
Unfavorable impact-specified items$ (7.74 ) $ (10.11 ) $ (4.34 ) (Unfavorable) favorable impact-foreign currency translation$ (0.62 ) $ 0.32 $ (0.23 ) Dilutive impact from share issuances $ - $ (0.30
)
The dilutive impacts in 2018 and 2017 include the unfavorable impact of BD shares issued through public offerings of equity securities in the third quarter of fiscal year 2017, in anticipation of the Bard acquisition. The dilutive impact in 2018 additionally includes the unfavorable impact of BD shares issued as consideration transferred in the first quarter of fiscal year 2018 for the Bard acquisition as is further discussed in Note 10 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. Financial Instrument Market Risk We selectively use financial instruments to manage market risk, primarily foreign currency exchange risk and interest rate risk relating to our ongoing business operations. The counterparties to these contracts are highly rated financial institutions. We do not enter into financial instruments for trading or speculative purposes. Foreign Exchange Risk BD and its subsidiaries transact business in various foreign currencies throughoutEurope ,Greater Asia ,Canada andLatin America . We face foreign currency exposure from the effect of fluctuating exchange rates on payables and receivables relating to transactions that are denominated in currencies other than our functional currency. These payables and receivables primarily arise from intercompany transactions. We hedge substantially all such exposures, primarily through the use of forward contracts. We also face currency exposure that arises from translating the results of our worldwide operations, including sales, to theU.S. dollar at exchange rates that have fluctuated from the beginning of a reporting period. From time to time, we may purchase forward contracts and options to hedge certain forecasted transactions that are denominated in foreign currencies in order to partially protect against a reduction in the value of future earnings resulting from adverse foreign exchange rate movements. Gains or losses on derivative instruments are largely offset by the gains or losses on the underlying hedged transactions. We did not enter into contracts to hedge cash flows against foreign currency fluctuations in fiscal year 2019 or 2018. Derivative financial instruments are recorded on our balance sheet at fair value. For foreign currency derivatives, market risk is determined by calculating the impact on fair value of an assumed change in foreign exchange rates relative to theU.S. dollar. Fair values were estimated based upon observable inputs, specifically spot currency rates and foreign currency prices for similar assets and liabilities. With respect to the foreign currency derivative instruments outstanding atSeptember 30, 2019 and 2018, the impact that changes in theU.S. dollar would have on pre-tax earnings was estimated as follows: Increase (decrease) (Millions of dollars) 2019 2018
10% appreciation in
These calculations do not reflect the impact of exchange gains or losses on the underlying transactions that would substantially offset the results of the derivative instruments.
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Interest Rate Risk When managing interest rate exposures, we strive to achieve an appropriate balance between fixed and floating rate instruments. We may enter into interest rate swaps to help maintain this balance and manage debt and interest-bearing investments in tandem, since these items have an offsetting impact on interest rate exposure. For interest rate derivative instruments, fair values are measured based upon the present value of expected future cash flows using market-based observable inputs including credit risk and interest rate yield curves. Market risk for these instruments is determined by calculating the impact to fair value of an assumed change in interest rates across all maturities. The impact that changes in interest rates would have on interest rate derivatives outstanding atSeptember 30, 2019 and 2018, as well as the effect that changes in interest rates would have on our earnings or cash flows over a one-year period, based upon our overall interest rate exposure, were estimated as follows: Increase (decrease) to fair value of interest rate derivatives outstanding Increase (decrease) to earnings or cash flows (Millions of dollars) 2019 2018 2019 2018 10% increase in interest rates$ 19 $ (22 ) $ (4 ) $ (7 ) 10% decrease in interest rates$ (19 ) $ 23 $ 4 $ 7
Liquidity and Capital Resources
The following table summarizes our consolidated statement of cash flows in 2019, 2018 and 2017: (Millions of dollars) 2019 2018 2017 Net cash provided by (used for) Operating activities$ 3,330 $ 2,865 $ 2,550 Investing activities$ (741 ) $ (15,733 ) $ (883 ) Financing activities$ (3,223 ) $ (58 ) $ 10,977
Net Cash Flows from Operating Activities
Cash flows from operating activities in 2019 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 lower levels of accounts payable and accrued expenses and higher levels of inventory, partially offset by lower levels of prepaid expenses. The lower levels of accounts payable and accrued expenses were primarily attributable to cash paid related to income taxes and our product liability matters, as well as the timing and amount of interest payments due in the period. Cash flows from operating activities in 2019 additionally reflected$200 million of discretionary cash contributions to fund our pension obligation. Cash flows from operating activities in 2018 reflected net income, adjusted by a change in operating assets and liabilities that was a net source of cash. This net source of cash primarily reflected higher levels of accounts payable and accrued expenses, primarily due to higher income taxes payable as a result of the newU.S. tax legislation discussed above, as well as lower levels of inventory, partially offset by higher levels of trade receivables. The change in cash flows from operating activities in 2018 also reflected a change to deferred tax asset and liability balances which were remeasured under the recently enacted tax legislation, which is further discussed in Note 17 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. The change in cash flows from operating activities in 2018 additionally reflected discretionary cash contributions of$287 million to fund our pension obligation. Cash flows from operating activities in 2017 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 prepaid expenses, trade receivables and inventory, partially offset by higher levels of accounts payable and accrued expenses. 34
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As previously discussed, cash flows from operating activities in 2019, 2018 and 2017 reflected losses recorded upon our extinguishment of certain long-term notes which are included within Other, net. Net Cash Flows fromInvesting Activities Capital expenditures 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. Capital expenditures of$957 million ,$895 million and$727 million in 2019, 2018 and 2017, respectively, primarily related to manufacturing capacity expansions. Details of spending by segment are contained in Note 7 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. Acquisitions of Businesses Cash outflows for acquisitions in 2018 primarily related to our acquisition of Bard. Cash outflows for acquisitions in 2017 included payments for acquisitions which were immaterial both individually and in the aggregate. For further discussion, refer to Note 10 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. Divestitures Cash inflows relating to divestitures in 2019, 2018 and 2017 were$477 million ,$534 million and$165 million , respectively. For further discussion, refer to Note 11 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. Net Cash Flows from Financing Activities Net cash from financing activities in 2019, 2018 and 2017 included the following significant cash flows: (Millions of dollars) 2019 2018 2017 Cash inflow (outflow) Change in credit facility borrowings$ 485 $ -$ (200 ) Proceeds from long-term debt and term loans$ 2,224 $ 5,086 $ 11,462 Payments of debt and term loans$ (4,744 ) $ (3,996 ) $ (3,980 ) Proceeds from issuances of equity securities $ - $ -$ 4,827 Share repurchases under accelerated share repurchase agreement $ - $ -$ (220 ) Dividends paid$ (984 ) $ (927 ) $ (677 ) Additional disclosures regarding the equity and debt-related financing activities detailed above are provided in Notes 3 and 16 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. 35
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Debt-Related Activities
Certain measures relating to our total debt were as follows:
2019 2018 2017
Total debt (Millions of dollars)$ 19,390 $ 21,496 $
18,870
Short-term debt as a percentage of total debt 6.8 % 12.1 %
1.1 %
Weighted average cost of total debt 2.9 % 3.2 % 3.3 %
Total debt as a percentage of total capital (a) 45.6 % 47.8 % 57.5 %
(a) Represents shareholders' equity, net non-current deferred income tax
liabilities, and debt.
The decrease in short-term debt as a percentage of total debt at September 30,
2019 was primarily driven by the payment of certain short-term notes as well as
the issuance of long-term notes in 2019. The increase in short-term debt as a
percentage of total debt at September 30, 2018 was primarily driven by the
reclassification of certain notes from long-term to short-term. Additional
disclosures regarding our debt instruments are provided in Note 16 to the
consolidated financial statements contained in Item 8. Financial Statements and
Supplementary Data.
Cash and Short-term Investments
At September 30, 2019 , total worldwide cash and short-term investments were $620
million , including restricted cash, which was primarily held in jurisdictions
outside of the United States .
Financing Facilities
In May 2017 , we entered into a five-year senior unsecured revolving credit
facility which provides borrowing of up to $2.25 billion . This facility will
expire in December 2022 . We are able to issue up to $100 million in letters of
credit under this new revolving credit facility and it also includes a provision
that enables 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 . We use proceeds from this
facility to fund general corporate needs. Borrowings outstanding under the
revolving credit facility at September 30, 2019 were $485 million .
The agreement for our revolving credit facility contained the following
financial covenants. We were in compliance with these covenants as
of
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. We also have informal lines of credit outsidethe United States . During the fourth quarter of 2019, the Company fully repaid its borrowings outstanding on a 364-day senior unsecured term loan facility that the Company entered inSeptember 2018 . The Company had no commercial paper borrowings outstanding as ofSeptember 30, 2019 . We may, from time to time, sell certain trade receivable assets to third parties as we manage working capital over the normal course of our business activities. 36
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Access to Capital and Credit Ratings Our corporate credit ratings with the rating agenciesStandard & Poor's Ratings Services ("S&P"), Moody's Investor Service (Moody's) and Fitch Ratings ("Fitch") were as follows atSeptember 30, 2019 : S&P Moody's Fitch Ratings: Senior Unsecured Debt BBB Ba1 BBB- Commercial Paper A-2 NP Outlook Stable Positive Stable InMay 2019 , Moody's Investor Service reaffirmed ourSeptember 30, 2018 ratings and revised the agency's outlook regarding the likely direction of these ratings over the medium term from Stable to Positive. Lower corporate debt ratings and further 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. Contractual Obligations In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. The table below sets forth BD's significant contractual obligations and related scheduled payments as ofSeptember 30, 2019 : 2021 to 2023 to 2025 and Total 2020 2022 2024 Thereafter (Millions of dollars) Short-term debt$ 1,327 $ 1,327 $ - $ - $ - Long-term debt (a) 23,694 527 6,339 5,196 11,632 Operating leases 546 122 187 114 123 Purchase obligations (b) 1,364 1,048 303 13 - Unrecognized tax benefits (c) - - - - - Total (d)$ 26,931 $ 3,025 $ 6,829 $ 5,323 $ 11,755 (a) Long-term debt obligations include expected principal and interest obligations. (b) Purchase obligations are for purchases made in the normal course of business to meet operational and capital requirements. (c) Unrecognized tax benefits at September 30, 2019 of$519 million were all long-term in nature. Due to the uncertainty related to the timing of the
reversal of these tax positions, the related liability has been excluded
from the table.
(d) Required funding obligations for 2020 relating to pension and other
postretirement benefit plans are not expected to be material.
Critical Accounting Policies
The following discussion supplements the descriptions of our accounting policies
contained in Note 1 to the consolidated financial statements contained in
Item 8. Financial Statements and Supplementary Data. The preparation of the
consolidated financial statements requires management to use estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, as well as the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. Some of those judgments can
be subjective and complex and, consequently, actual results could differ from
those estimates. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. For any given estimate
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or assumption made by management, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. Actual results that differ from management's estimates could have an unfavorable effect on our consolidated financial statements. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the consolidated financial statements: Revenue Recognition Our revenues are primarily recognized when the customer obtains control of the product sold, which is generally upon shipment or delivery, depending on the delivery terms specified in the sales agreement. Revenues associated with certain instruments and equipment for which installation is complex, and therefore significantly affects the customer's ability to use and benefit from the product, are recognized when customer acceptance of these installed products has been confirmed. For certain service arrangements, including extended warranty and software maintenance contracts, revenue is recognized ratably over the contract term. The majority of revenues relating to extended warranty contracts associated with certain instruments and equipment is generally recognized within a few years whereas deferred revenue relating to software maintenance contracts is generally recognized over a longer period. Our agreements with customers within certain organizational units including Medication Management Solutions, Diagnostic Systems and Biosciences, contain multiple performance obligations including both products and certain services noted above. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require judgment. The transaction price for these agreements is allocated to each performance obligation based upon its relative standalone selling price. Standalone selling price is the amount at which we would sell a promised good or service separately to a customer. We generally estimate standalone selling prices using its list prices and a consideration of typical discounts offered to customers. The use of alternative estimates could result in a different amount of revenue deferral. Our gross revenues are subject to a variety of deductions, which include rebates and sales discounts. These deductions represent estimates of the related obligations and judgment is required when determining the impact on gross revenues for a reporting period. Additional factors considered in the estimate of our rebate liability include the quantification of inventory that is either in stock at or in transit to our distributors, as well as the estimated lag time between the sale of product and the payment of corresponding rebates. Impairment of AssetsGoodwill assets are subject to impairment reviews at least annually, or whenever indicators of impairment arise. Intangible assets with finite lives, including developed technology, and other long-lived assets, are periodically reviewed for impairment when impairment indicators are present. We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. Our reporting units generally represent one level below reporting segments. Potential impairment of goodwill is generally identified by comparing the fair value of a reporting unit with its carrying value. Our annual goodwill impairment test performed onJuly 1, 2019 did not result in any impairment charges, as the fair value of each reporting unit exceeded its carrying value. We generally use the income approach to derive the fair value for impairment assessments. This approach calculates fair value by estimating future cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. We selected this method because we believe the income approach most appropriately measures our income producing assets. This approach requires significant management judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, appropriate discount rates, terminal values and other assumptions and estimates. The estimates and assumptions used are consistent with BD's business plans. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the asset, and potentially result in different impacts to BD's results of operations. Actual results may differ from management's estimates. Income Taxes BD maintains valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, management evaluates factors such as prior 38
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earnings history, expected future earnings, carry back and carry forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. BD conducts business and files tax returns in numerous countries and currently has tax audits in progress in a number of tax jurisdictions. In evaluating the exposure associated with various tax filing positions, we record accruals for uncertain tax positions based on the technical support for the positions, our past audit experience with similar situations, and the potential interest and penalties related to the matters. BD's effective tax rate in any given period could be impacted if, upon resolution with taxing authorities, we prevailed in positions for which reserves have been established, or we were required to pay amounts in excess of established reserves. We have reviewed our needs inthe United States for possible repatriation of undistributed earnings of our foreign subsidiaries and we continue to invest foreign subsidiaries earnings outside ofthe United States to fund foreign investments or meet foreign working capital and property, plant and equipment expenditure needs. As a result, after reevaluation of the permanent reinvestment assertion, we are permanently reinvested with respect to all of our historical foreign earnings as ofSeptember 30, 2019 . Additional disclosures regarding our accounting for income taxes are provided in Note 17 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. Contingencies We are involved, both as a plaintiff and a defendant, in various legal proceedings that arise in the ordinary course of business, including, without limitation, product liability and environmental matters, as further discussed in Note 5 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. We assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. We establish accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). A determination of the amount of accruals for these contingencies is made after careful analysis of each individual issue. When appropriate, the accrual is developed with the consultation of outside counsel and, as in the case of certain mass tort litigation, the expertise of an actuarial specialist regarding the nature, timing and extent of each matter. The accruals may change in the future due to new developments in each matter or changes in our strategy in dealing with these matters. We record expected recoveries from product liability insurance carriers or other parties when those recoveries are probable and collectible. Given the uncertain nature of litigation generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which we are a party. In view of these uncertainties, we could incur charges in excess of any currently established accruals and, to the extent available, liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on BD's consolidated results of operations and consolidated net cash flows. Benefit Plans We have significant net pension and other postretirement and postemployment benefit costs that are measured using actuarial valuations. These benefit costs include assumptions for the discount rate. Pension benefit costs also include an assumption for the expected return on plan assets. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 9 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data for additional discussion. The discount rate is selected each year based on investment grade bonds and other factors as of the measurement date (September 30 ). Specifically for theU.S. pension plan, we will use a discount rate of 3.21% for 2020, which was based on an actuarially-determined, company-specific yield curve to measure liabilities as of the measurement date. To calculate the pension expense in 2020, we will apply the individual spot rates along the yield curve that correspond with the timing of each future cash outflow for benefit payments in order to calculate interest cost and service cost. Additional disclosures regarding the method to be used in calculating the interest cost and service cost components of pension expense for 2020 are provided in Note 9 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. The expected long-term rate of return on plan assets assumption, although reviewed each year, changes less frequently due to the long-term nature of the assumption. This assumption does not impact the measurement of assets or liabilities as of the measurement date; rather, it is used only in the calculation of pension expense. To 39
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determine the expected long-term rate of return on pension plan assets, we consider many factors, including our historical assumptions compared with actual results; benchmark data; expected returns on various plan asset classes, as well as current and expected asset allocations. We will use a long-term expected rate of return on plan assets assumption of 7.25% for theU.S. pension plan in 2020. We believe our discount rate and expected long-term rate of return on plan assets assumptions are appropriate based upon the above factors. Sensitivity to changes in key assumptions for ourU.S. pension and other postretirement and postemployment plans are as follows: • Discount rate - A change of plus (minus) 25 basis points, with other
assumptions held constant, would have an estimated
(unfavorable) impact on the total
and postemployment benefit plan costs. This estimate assumes no change in
the shape or steepness of the company-specific yield curve used to plot the
individual spot rates that will be applied to the future cash outflows for
future benefit payments in order to calculate interest and service cost.
• Expected return on plan assets - A change of plus (minus) 25 basis points,
with other assumptions held constant, would have an estimated
favorable (unfavorable) impact on
Cautionary Statement Regarding Forward-Looking Statements
BD and its representatives may 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. • 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.
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• 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.
• The impact of the medical device excise tax under the Patient Protection
and Affordable Care Act in
suspended through
will be reinstated in 2020.
• Cost containment efforts in the
business, including alternative payment reform and increased use of
competitive bidding and tenders.
• 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 U.S. could
adversely impact our supply chain costs or otherwise adversely impact our
results of operations.
• 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.
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• 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.
• 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 and regulatory
requirements for new products and products in the postmarketing phase. In
particular, the
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 morestringent 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.
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• 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is included in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations, and in
Notes 1, 14 and 15 to the consolidated financial statements contained in Item 8.
Financial Statements and Supplementary Data, and is incorporated herein by
reference.
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