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 disease ("COVID-19") was officially declared a pandemic by theWorld Health Organization ("WHO") inMarch 2020 . In efforts to slow and control the spread of COVID-19, governments around the world issued stay at home orders, travel restrictions as well as recommendations or mandates to avoid large gatherings or to self-quarantine. Many governments also instituted restrictions on certain businesses and their activities, particularly those that were deemed non-essential. These various measures led to a sudden and significant decline in economic activity within a number of countries worldwide. Whilethe United States and other countries have begun to reopen their economies, the negative economic impacts of the pandemic, including decreased healthcare consumption, continue to persist. As further discussed below, the COVID-19 pandemic has resulted in declines of the following: non-COVID-19 procedures which require general medical devices; elective procedures; instrument placements; routine diagnostic testing and specimen collections; and research activity. These factors have unfavorably impacted our results of operations in fiscal year 2020, including for the three months endedJune 30, 2020 . While certain of our organizational units realized positive benefits to revenues from the pandemic, total consolidated revenues for the three and nine months endedJune 30, 2020 were unfavorably impacted by an estimated$600 million and$656 million , respectively. We have been deploying our capabilities, expertise and scale to address critical health needs related to COVID-19. •We were granted an Emergency Use Authorization by theU.S. Food and Drug Administration ("FDA") for the launch of a COVID-19 antigen detection test that can provide results in 15 minutes using a simple nasal swab and our portable BD VeritorTM Plus System. •In addition to this immunoassay test, BD's portfolio of molecular solutions for COVID-19 testing includes three other tests that have been registered for use with our BD MaxTM molecular system. •We are leveraging our category leading position as a manufacturer of needles and syringes as we enter into partnerships with governments around the world to help prepare for a future COVID-19 vaccination campaign. We have been adhering to guidance provided by theWHO , 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 worked 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 also further secured our financial flexibility by increasing the commitments available under our revolving credit facility by$381 million and issuing$3.0 billion of equity securities. Our fiscal year 2020 debt and equity transactions are further discussed in Notes 3 and 14 in the Notes to Condensed Consolidated Financial Statements. We believe that given our debt ratings and our capital 24 -------------------------------------------------------------------------------- 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 has experienced weakened demand for our products as a result of a significant decline in medical procedures due to government restrictions and a shift in healthcare priorities. There has been a decline in procedure volumes across acute and non-acute settings which has led to a decline in demand for general medical devices. We have also seen a deferral in elective procedures such as hernia repairs and delays in instrument placements relating to our medication management solutions, including Pyxis™. There has also been a decrease in routine diagnostic testing and specimen collections, which is being partially offset by higher demand for COVID-19 testing. Additionally, there has been a decrease in research activity due to laboratory closures and reduced clinical testing. We noted sequential monthly improvement from May toJune 2020 in the demand for certain products, including those products that are driven by the volume of elective procedures. However, due to the continued, significant uncertainty that exists relative to the duration and overall impact of the COVID-19 pandemic, 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 preparedness and effectiveness of countries around the world in preventing or responding to the ongoing spread of COVID-19, or in countries where the spread has been controlled, any resurgence of the virus; •The degree to which COVID-19 testing solutions continue to be made available and are utilized by governments, healthcare providers and institutions, retail pharmacies and the general public; •The pace at which hospitals and clinical laboratories fully resume patient care that is not related to the COVID-19 pandemic; •The timing of when research performed by research laboratories and institutions will resume to normal operations; and •The timing and strength of any global economic recovery and the degree of pressure that the weaker macroeconomic environment will put on future healthcare utilization and the global demand for our products. Further discussion regarding the impacts of the COVID-19 pandemic on our results for the three months endedJune 30, 2020 is provided below. Overview of Financial Results and Financial Condition For the three months endedJune 30, 2020 , worldwide revenues of$3.855 billion decreased 11.4% from the prior-year period which reflected a decline in volume of approximately 9.3%, an unfavorable impact from foreign currency translation of approximately 2.0% and an unfavorable impact from pricing of approximately 0.1%. We estimate that the COVID-19 pandemic reduced volume growth in the third quarter by approximately 14.1%. Volume in the third quarter of fiscal year 2020 reflected the following: •Medical segment revenues in the third quarter reflected declines in the Medication Delivery Solutions and Diabetes Care units that were partially offset by growth in the Medication Management Solutions and Pharmaceutical Systems units. •Life Sciences segment revenues in the third quarter were unfavorably impacted by the COVID-19 pandemic. The pandemic's unfavorable impact on the Integrated Diagnostic Solutions unit's third quarter revenues was partially offset by the unit's sales related to COVID-19 diagnostic testing. •Interventional segment revenues in the third quarter were negatively impacted by decreased demand associated with the deferral of elective medical procedures as a result of the COVID-19 pandemic. The Medication Management Solutions unit continues to delayU.S. shipments of AlarisTM infusion pumps pending compliance with certain 510(k) filing requirements of the FDA, as previously reported. We have been able to ship AlarisTM infusion pumps inthe United States that are ordered with medical necessity certification. We continue to make progress on our regulatory filing related to the AlarisTM infusion pumps and we currently expect the filing to be made with the FDA either at the end of the second quarter or early in the third quarter of BD's fiscal year 2021. 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 25 -------------------------------------------------------------------------------- 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$2.058 billion in the first nine months of fiscal year 2020. AtJune 30, 2020 , we had$2.986 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 nine months of fiscal year 2020, we paid cash dividends of$773 million , including$659 million paid to common shareholders and$114 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 third 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-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 third quarter Medical revenues by organizational unit: Three months ended June 30, Estimated Total FX (Millions of dollars) 2020 2019 Change Impact FXN Change Medication Delivery Solutions (a)$ 781 $ 981 (20.3) % (2.5) % (17.8) % Medication Management Solutions (a) 677 661 2.5 % (1.4) % 3.9 % Diabetes Care 260 275 (5.5) % (2.6) % (2.9) % Pharmaceutical Systems 403 394 2.3 % (2.1) % 4.4 % Total Medical Revenues$ 2,122 $ 2,311 (8.2) % (2.2) % (6.0) % (a)The presentation of prior-period amounts reflects the reclassification of$3 million associated with the movement, effective onOctober 1, 2019 , of certain products from the Medication Delivery Solutions unit to the Medication Management Solutions unit. Third quarter Medical segment revenues reflected declines in the Medication Delivery Solutions and Diabetes Care units that were partially offset by growth in the Medication Management Solutions and Pharmaceutical Systems units. The Medication Delivery Solutions unit's third quarter revenues reflected an unfavorable impact relating to the COVID-19 pandemic due to declines in non-COVID-19 procedures which require general medical devices, particularly inthe United States andChina . As expected, the Medication Delivery Solutions unit's third quarter revenues inChina were also unfavorably impacted by a new volume-based procurement process which has been adopted by several ofChina's provinces. Growth driven by pandemic-related infusion pump orders in the Medication Management Solutions unit was partially offset by the delay of other shipments of AlarisTM infusion pumps inthe United States , as previously discussed above. Third quarter revenues in the Diabetes Care unit primarily reflected a pandemic-related shift ofU.S. orders to the second quarter of fiscal year 2020, which resulted in a lower level of orders in the third quarter. The Pharmaceutical Systems unit's reflected continued strength in demand for prefillable products. 26 --------------------------------------------------------------------------------
Medical segment total revenues for the nine-month period were as follows:
Nine months ended June 30,
Estimated
Total FX
(Millions of dollars) 2020 2019 Change Impact FXN Change
Total Medical Revenues $ 6,362 $ 6,626 (4.0) % (1.5) % (2.5) %
Medical segment income for the three and nine-month periods is provided below.
Nine months ended June
Three months ended June 30, 30,
(Millions of dollars) 2020 2019 2020 2019
Medical segment income $ 646 $ 744 $ 1,653 $ 2,008
Segment income as % of Medical revenues 30.4 % 32.2 % 26.0 % 30.3 %
The Medical segment's income in the third 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 third quarter of 2020 as compared with the
third quarter of 2019 which primarily reflected unfavorable product mix and
increased levels of manufacturing overhead costs that were recognized in the
period, rather than capitalized within inventory, as a result of the COVID-19
pandemic. Gross profit margin in the third quarter of 2020 was also lower
compared with the prior-year period due to unfavorable product mix that was
driven by the decline of sales in China due to the volume-based procurement
process noted above. These unfavorable impacts were partially offset by lower
manufacturing costs resulting from continuous improvement projects which
enhanced the efficiency of our operations.
•Selling and administrative expense as a percentage of revenues was lower in the
third quarter of 2020 compared with the third 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
third quarter of 2020 compared with the third quarter of 2019 which reflected
our continued commitment to drive innovation with new products and platforms.
Life Sciences Segment
The following summarizes third quarter Life Sciences revenues by organizational
unit:
Three months ended June 30,
Estimated
Total FX
(Millions of dollars) 2020 2019 Change Impact FXN Change
Integrated Diagnostic Solutions (a)
Preanalytical Systems $ 312 $ 407 (23.3) % (2.3) % (21.0) %
Diagnostic Systems 402 368 9.3 % (2.8) % 12.1 %
Total Integrated Diagnostic Solutions 714 774 (7.8) % (2.5) % (5.3) %
Biosciences 237 284 (16.4) % (1.7) % (14.7) %
Total Life Sciences Revenues $ 951 $ 1,058 (10.1) % (2.3) % (7.8) %
(a)Effective October 1, 2019 , the Preanalytical Systems and Diagnostic 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 third quarter were unfavorably
impacted by the COVID-19 pandemic. Third quarter revenues in the Integrated
Diagnostic Solutions unit reflected pandemic-related declines in routine
diagnostic testing and specimen collections. The impact of these declines was
partially offset by the Integrated Diagnostic Solutions unit's sales related to
COVID-19 diagnostic testing, primarily on the BD MaxTM platform. Third quarter
revenues in the Biosciences unit reflected a decline in demand for instruments
and reagents as research and clinical lab activity slowed due to the COVID-19
pandemic.
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Life Sciences segment total revenues for the nine-month period were as follows:
Nine months ended
Estimated
Total FX
(Millions of dollars) 2020 2019 Change Impact FXN ChangeTotal Life Sciences Revenues$ 3,187 $ 3,166 0.7 % (1.5) % 2.2 % Life Sciences segment income for the three and nine-month periods was as follows: Nine months ended June Three months ended June 30, 30, (Millions of dollars) 2020 2019 2020 2019 Life Sciences segment income$ 214 $ 304 $ 860 $ 902 Segment income as % of Life Sciences revenues 22.5 % 28.7 % 27.0 % 28.5 % The Life Sciences segment's income in the third 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 third quarter of 2020 was lower compared with the third quarter of 2019 which primarily reflected unfavorable product mix and increased levels of manufacturing overhead costs that were recognized in the period, rather than capitalized within inventory, as a result of the COVID-19 pandemic. •Selling and administrative expense as a percentage of revenues in the third 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, and lower expenses resulting from recently enacted cost containment measures. •Research and development expense as a percentage of revenues was higher in the third quarter of 2020 compared with the third quarter of 2019 primarily due to investments in COVID-19 testing solutions. Interventional Segment The following summarizes third quarter Interventional revenues by organizational unit: Three months ended June 30, Estimated Total FX (Millions of dollars) 2020 2019 Change Impact FXN Change Surgery (a)$ 197 $ 309 (36.5) % (0.7) % (35.8) % Peripheral Intervention (a) 318 396 (19.8) % (1.6) % (18.2) % Urology and Critical Care (a) 268 276 (3.0) % (1.0) % (2.0) % Total Interventional Revenues$ 782 $ 981 (20.3) % (1.1) % (19.2) % (a)The presentation of prior-period amounts reflects the total reclassifications of$46 million associated with the movement, effective onOctober 1, 2019 , of certain products from the Surgery unit and the Urology and Critical Care unit to the Peripheral Intervention unit. Third quarter revenues in each of the Interventional segment's units, particularly the Surgery and Peripheral Intervention units, were negatively impacted by decreased demand associated with the deferral of elective medical procedures as a result of the COVID-19 pandemic. Pandemic-related revenue declines in the Urology and Critical Care unit were partially offset by sales of the unit's home care and targeted temperature management businesses. Interventional segment total revenues for the nine-month period were as follows: Nine months ended June 30, Estimated Total FX (Millions of dollars) 2020 2019 Change Impact FXN Change Total Interventional Revenues$ 2,784 $ 2,914 (4.4) % (0.7) % (3.7) % 28
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Interventional segment income for the three and nine-month periods is provided
below.
Nine months ended June
Three months ended June 30, 30,
(Millions of dollars) 2020 2019 2020 2019
Interventional segment income $ 100 $
183
Segment income as % of Interventional revenues 12.8 % 18.6 % 20.0 % 21.4 % The Interventional segment's income in the third 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 third quarter of 2020 as compared with the third quarter of 2019 primarily due to unfavorable product mix and increased levels of manufacturing overhead costs that were recognized in the period, rather than capitalized within inventory, as a result of the COVID-19 pandemic. •Selling and administrative expense as a percentage of revenues in the third quarter of 2020 was slightly higher compared with the prior-year period primarily due to the pandemic-related decline in segment revenues noted above, partially offset by lower expenses resulting from recently enacted cost containment measures. •Research and development expense as a percentage of revenues was lower in the third quarter of 2020 compared with the third quarter of 2019 primarily due to the unfavorable impact of a write-down recorded by the Surgery unit in the prior-year period. •The Interventional segment's lower income in the third quarter of 2020 additionally reflected the expiration in 2019 of a royalty income stream acquired in theC.R. Bard, Inc. ("Bard") transaction. Geographic Revenues BD's worldwide third quarter revenues by geography were as follows: Three months ended June 30, Estimated Total FX (Millions of dollars) 2020 2019 Change
Impact FXN Change
United States $ 2,119 $ 2,440 (13.1) % - % (13.1) %
International 1,735 1,910 (9.2) % (4.5) % (4.7) %
Total Revenues $ 3,855 $ 4,350 (11.4) % (2.0) % (9.4) %
U.S. revenues in the third quarter of 2020 primarily reflected pandemic-related
declines in the Medical segment's Medication Delivery Solutions unit and the
Interventional segment's Surgery and Peripheral Intervention units, as
previously discussed above. Third quarter U.S. revenues was also unfavorably
impacted by results in the Medical segment's Medication Management Solutions
unit, as previously discussed.
Third quarter international revenues in the third quarter of 2020 were
unfavorably impacted by revenue declines in China for the Medical segment's
Medication Delivery Solutions unit, as previously discussed. International
revenues in the third quarter of 2020 also reflected pandemic-related declines
in the Life Sciences segment's Integrated Diagnostic Solutions unit and the
Interventional segment's Surgery and Peripheral Intervention units. Third
quarter international revenues were favorably impacted by the Medical segment's
Medication Management Solutions unit's pandemic-related orders of infusion
pumps, as further discussed above.
Emerging market revenues for the third quarter were $572 million , compared with
$703 million in the prior year's quarter. Emerging market revenues in the
current-year period included an estimated $40 million unfavorable impact due to
foreign currency translation. Third quarter revenues in emerging markets were
unfavorably impacted by a decline in healthcare utilization as a result of the
COVID-19 pandemic. As previously discussed above, revenues in our Medication
Delivery Solutions unit were also 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.
29
--------------------------------------------------------------------------------Specified Items Reflected in the financial results for the three and nine-month periods of fiscal years 2020 and 2019 were the following specified items:
Nine months ended June
Three months ended June 30, 30,
(Millions of dollars) 2020 2019 2020 2019
Integration costs (a) $ 46 $ 63 $ 165 $ 206
Restructuring costs (a) 28 27 69 99
Transaction costs - - - 1
Purchase accounting adjustments (b) 325 378 1,012 1,135
Transaction gain/loss and product-related matters (c) (10) - 248 61
European regulatory initiative-related costs (d) 33 14 77 29
Investment gains/losses and asset impairments (e) - 30 41 30
Impacts of debt extinguishment 6 52 6 53
Hurricane recovery-related impacts - (10) - (10)
Total specified items 428 553 1,619 1,604
Less: tax impact of specified items and tax reform (f) 72 120 218 263
After-tax impact of specified items $ 356
(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 and valuation
of fixed assets and debt. BD's amortization expense is primarily recorded in
Cost of products sold.
(c)The amounts in the three and nine-month periods of fiscal year 2020 included
charges or credits related to the estimate of probable future product
remediation costs, as further discussed below. Such amounts are recorded within
Cost of products sold, or in some cases, within Other income (expense), net. The
amount in the prior-year nine-month period was recorded within Other operating
(income) expense, net and included the following: a charge relating to certain
product liability matters; the estimated cost of a product recall; and the
pre-tax gain recognized on BD's sale of its Advanced Bioprocessing business.
(d)Represents costs required to develop processes and systems to comply with
emerging regulations such as the European Union Medical Device Regulation
("EUMDR") and General Data Protection Regulation ("GDPR"). These costs were
recorded in Research and development expense and Cost of products sold.
(e)The amount in the nine-month period of fiscal year 2020 primarily represented
a charge of $39 million recorded in Cost of products sold to write down the
carrying value of certain intangible assets in the Biosciences unit. The amounts
in the three and nine-month periods of fiscal year 2019 represented a non-cash
charge recorded to write down the carrying value of certain intangible assets in
the Surgery unit.
(f)The amount in the nine-month period of fiscal year 2019 included tax benefit,
net, of $54 million relating to new U.S. tax legislation, as further discussed
below.
30
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Gross Profit Margin
Gross profit margin for the three and nine-month periods of fiscal year 2020
compared with the prior-year periods in fiscal year 2019 reflected the following
impacts:
Three-month period Nine-month period
June 30, 2019 gross profit margin % 47.7 % 47.4 %
Impact of purchase accounting adjustments and other specified
items (0.7) % (2.4) %
Operating performance (3.4) % (1.4) %
Foreign currency translation (0.5) % - %
June 30, 2020 gross profit margin % 43.1 % 43.6 %
The impacts of purchase accounting adjustments and other specified items include
the following:
•The impact in the nine-month period includes charges in the first and second
quarters of fiscal year 2020 of $59 million and $199 million , respectively, to
record a probable estimate of future costs within the Medication Management
Solutions unit associated with remediation efforts related to AlarisTM infusion
pumps. An $18 million credit adjustment to this estimate was recorded in the
third quarter. Based on the course of our remediation efforts, it is possible
that this estimate could change 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 impact in the nine-month period also includes a $39 million charge to write
down the carrying value of certain intangible assets in the Biosciences unit.
Operating performance for the three-month and nine-month periods primarily
reflected unfavorable product mix and increased levels of manufacturing overhead
costs that were recognized in the period, rather than capitalized within
inventory, as a result of the COVID-19 pandemic. The higher levels of
manufacturing overhead costs incurred in the current-year periods were driven,
to a large extent, by the impact of lower plant utilization in our highly
automated manufacturing sites. These unfavorable impacts to operating
performance were 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 nine-month periods of fiscal
years 2020 and 2019 is as follows:
Nine months ended Increase
Three months ended June 30, Increase (decrease) June 30, (decrease) in
2020 2019 in basis points 2020 2019 basis points
(Millions of dollars)
Selling and administrative expense $ 980 $ 1,076 $ 3,126 $ 3,238
% of revenues 25.4 % 24.7 % 70 25.3 % 25.5 % (20)
Research and development expense $ 262 $ 282 $ 797 $ 792
% of revenues 6.8 % 6.5 % 30 6.5 % 6.2 % 30
Acquisitions and other restructurings $ 74 $ 90 $ 235 $ 281 Other operating (income) expense, net
$ (15) $ 61
Selling and administrative expense
The increase in selling and administrative expense as a percentage of revenues
in the third quarter of 2020 compared with the prior-year period was primarily
driven by the current-period decline in revenues that resulted from the COVID-19
pandemic, as well as an increase in the deferred compensation plan liability due
to market performance. The gains on investment assets result in an unfavorable
impact on expense recorded in Selling and administrative expense. These
unfavorable impacts to selling and administrative expense as a percentage of
revenues were partially offset by cost containment measures we have enacted to
mitigate the impact of the COVID-19 pandemic on our results of operations.
Selling and administrative expense as a
31
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percentage of revenues in the current nine-month period primarily reflected our
ongoing focus on disciplined spending and the achievement of cost synergies
resulting from our acquisition of Bard, as well as 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
nine-month periods of 2020 was higher compared with the prior-year periods
primarily due to investments in 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.
Research and development expense as a percentage of revenues in the three and
nine-month periods of 2019 reflected a charge recorded to write down the
carrying value of certain intangible assets in the Surgery unit.
Acquisitions and other restructurings
Costs relating to acquisitions and other restructurings in the three and
nine-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.
Other operating (income) expense, net
Other operating income in the three and nine-month periods of 2020 represents an
adjustment to a litigation accrual. Other operating expense in the prior-year
nine-month period 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 amount in the period-year
nine-month period also included the estimated costs of $65 million relating to a
product recall in Medical segment as well as the pre-tax gain of $336 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 nine-month periods of fiscal years 2020 and
2019 were as follows:
Nine months ended June
Three months ended June 30, 30,
(Millions of dollars) 2020 2019 2020 2019
Interest expense $ (135) $ (156) $ (405) $ (498)
Interest income, net 2 2 5 8
Net interest expense $ (133) $ (154) $ (400) $ (490)
Lower interest expense in the current year's three and nine-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 nine-month periods of fiscal years 2020
and 2019 are provided below.
Nine months ended
Three months ended June 30, June 30,
2020 2019 2020 2019
Effective income tax rate (15.4) % 2.0 % 11.4 % 9.1 %
Impact, in basis points, from specified items and
tax reform (2,040) (1,080) (140) (420)
The effective income tax rate for the three-month period of fiscal year 2020
reflected a tax impact from specified items that was more favorable compared
with the benefit associated with specified items recognized in the prior-year
period. The impact from specified items in the nine-month period of fiscal year
2020 was less favorable compared with the benefit associated with specified
items in the prior-year period. The effective income tax rate for the nine-month
period of fiscal year 2019 reflected the recognition of $54 million of tax
benefit recorded to adjust our consolidated balance sheet for the impacts of
U.S. tax
32
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legislation that was enacted in December 2017 . The effective income tax rate for
the nine-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 nine-month periods
of fiscal years 2020 and 2019 were as follows:
Nine months ended June
Three months ended June 30, 30,
2020 2019 2020 2019
Net Income (Millions of dollars) $ 286 $ 451 $ 746 $ 1,071
Diluted Earnings per Share $ 0.97 Unfavorable impact-specified items$ (1.25)
$ 0.02 $ - $ - $ - Unfavorable impact-foreign currency translation$ (0.11) $ (0.14) The dilutive impact from share issuances for the three months endedJune 30, 2020 represents the impact of BD shares issued inMay 2020 as is further discussed in Note 3 in the Notes to Condensed Consolidated Financial Statements. Liquidity and Capital Resources The following table summarizes our condensed consolidated statements of cash flows: Nine months ended June 30, (Millions of dollars) 2020 2019
Net cash provided by (used for)
Operating activities $ 2,058 $ 1,959
Investing activities $ (905) $ (300)
Financing activities $ 1,230 $(2,300)
Net Cash Flows from Operating Activities Cash flows from operating activities in the first nine 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 nine 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. Net outflows from investing activities in the first nine months of fiscal year 2020 included capital expenditure-related outflows of$597 million , compared with$599 million in the prior-year period. Net outflows from investing activities in the current-year period reflected our acquisition ofStraub Medical AG in the third quarter. Net cash flows from investing activities in the first nine months of fiscal year 2019 included proceeds$477 million from our sale of a business during the period, as further discussed above. 33 -------------------------------------------------------------------------------- Net Cash Flows from Financing Activities Net cash from financing activities in the first nine months of fiscal years 2020 and 2019 included the following significant cash flows: Nine months ended June 30, (Millions of dollars) 2020 2019 Cash inflow (outflow) Change in credit facility borrowings$ (485)
Proceeds from long-term debt and term loans$ 3,389
Payments of debt and term loans$ (3,711)
Proceeds from issuance of equity securities$ 2,917 $ - Dividends paid$ (773) $ (737) Our fiscal year 2020 debt and equity transactions are further discussed in Notes 3 and 14 in the Notes to Condensed Consolidated Financial Statements. Certain measures relating to our total debt were as follows: (Millions of dollars) June 30, 2020 September 30, 2019 Total debt$ 18,720 $ 19,390 Short-term debt as a percentage of total debt 8.7 %
6.8 %
Weighted average cost of total debt 2.7 %
2.9 %
Total debt as a percentage of total capital* 42.0 %
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 atJune 30, 2020 was largely driven by our reclassification of certain notes from long-term to short-term. Cash and Short-term Investments AtJune 30, 2020 , total worldwide cash and short-term investments, including restricted cash, were approximately$2.986 billion , which were primarily held inthe United States . Financing Facilities 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. There were no borrowings outstanding under the revolving credit facility atJune 30, 2020 . 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 ofJune 30, 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. 34 -------------------------------------------------------------------------------- InMarch 2020 , we entered into a 364-day senior unsecured term loan facility with borrowing capacity available of$2.0 billion . During the third quarter of fiscal year 2020, we repaid$1.9 billion of borrowings outstanding under this term loan with cash on hand and terminated the facility. 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 activities. We had no commercial paper borrowings outstanding as ofJune 30, 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 atJune 30, 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 35 -------------------------------------------------------------------------------- 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. 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, continued decreases in the demand for our products or any 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 to successfully 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 the financing 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 theU.S. or in other countries in which we do 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 inChina . 36 -------------------------------------------------------------------------------- •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 inU.S. federal laws and policy that could affect 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 theU.S. or other countries 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 as certain 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 inthe United States 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 delay commercialization of a product. Delays in obtaining necessary approvals or clearances fromUnited States Food and Drug Administration ("FDA") or other 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 theUnited Kingdom's exit from theEuropean Union ("EU"), which has created uncertainties affecting our business operations in theUnited Kingdom and the EU, and possibly other 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 orU.S. and international governmental funding 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 or components 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 37 -------------------------------------------------------------------------------- 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, 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 theCareFusion acquisition, we are operating under a consent decree with the FDA relating to ourU.S. infusion 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's business 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 theFinancial Accounting Standards Board or theSecurities and Exchange Commission . 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. 38
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