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. References to years throughout this discussion relate to our fiscal years, which end onSeptember 30 .
Company Overview
Becton, 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: EMEA (which includesEurope , theMiddle East andAfrica );Greater Asia (which includes countries inGreater China ,Japan ,South Asia ,Southeast Asia ,Korea ,Australia and New Zealand );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.
BD's Spin-Off of Diabetes Care
Subsequent to the end of our second quarter, onApril 1, 2022 , BD completed the separation and distribution of Embecta, formerly BD's Diabetes Care business, into a separate, publicly-traded company. Additional disclosures regarding our spin-off of the Diabetes Care business are provided in Note 1 in the Notes to Condensed Consolidated Financial Statements.
Key Trends Affecting Results of Operations
As noted above, our products are manufactured and sold worldwide, which exposes our operations, supply chain and suppliers to various global macroeconomic factors. The factors which are currently most impactful to our operating results include the following:
•Inflation, which has increased the costs of raw materials, components, labor, energy, and logistical services;
•Availability of skilled labor, global energy sources, raw materials and electrical components; and
•Constrained logistics capacity related to the movement of goods around the globe.
The shortages of certain raw materials and components, delays in global transportation and the scarcity of labor in our manufacturing facilities are contributing to product backlogs and increasing our lead times in some of our product lines. During our fiscal year 2022, significant inflationary pressures are impacting our supply chain costs in certain areas. Our raw material and freight costs have been particularly impacted and these increased costs are pressuring our operating expenses and the costs of our investments. We are mitigating these inflationary pressures through the following:
•Driving strategic procurement initiatives to leverage alternatives sources of raw material and transportation;
•Intensifying continuous improvement programs in our manufacturing and distribution facilities;
•Continuing strategic rationalization programs across multiple product lines as part of our simplification strategy; and
•Optimizing our sales through product allocation and price initiatives.
The COVID-19 pandemic continues to drive volatility in global economic conditions as governments around the world implement various measures to slow and control the ongoing spread of the virus. Resurgences in COVID-19 infections or new strains of the virus may affect the prioritization of acute and non-acute healthcare utilization, which may temporarily weaken future demand for certain of our products. The pandemic has also contributed to the inflationary pressures and supply chain disruptions discussed above and these challenges could persist if governments continue to impose lockdowns, quarantine requirements and other restrictions in order to control rates of COVID-19 infections, such as inChina . Additionally, the pandemic has escalated challenges that existed for global healthcare systems prior to the pandemic, such as staffing shortages, including nursing shortages, and budget constraints. 20 -------------------------------------------------------------------------------- While resurgences of COVID-19 infections have continued to occur in various countries around the world, demand for our SARS-CoV-2 diagnostics tests and injection devices used for COVID-19 vaccinations has declined from levels reached during the highest peaks in COVID-19 infections. As discussed below, our second quarter fiscal year 2022 revenues in our Life Sciences segment reflected sales related to COVID-19-only diagnostic testing on the BD VeritorTM Plus and BD MaxTM Systems of$214 million , compared with revenues from such testing products in the prior-year period of$474 million . During the second quarter of fiscal year 2022, revenues in our Life Sciences segment benefited from high demand for our new combination influenza/COVID-19 testing assays. Geopolitical conditions may also impact our operations. Our operations inRussia andUkraine are not material to our financial results, and as such, the conflict betweenRussia andUkraine has not materially impacted our results of operations to date. However, the continuation of theRussia -Ukraine military conflict and/or an escalation of the conflict beyond its current scope may weaken the global economy and could result in additional inflationary pressures and supply chain constraints. Due to the significant uncertainty that exists relative to the duration and overall impact of the macroeconomic factors discussed above, our future operating performance, particularly in the short-term, may be subject to volatility. The impacts of macroeconomic conditions on our business, results of operations, financial condition and cash flows is dependent on certain factors, including those discussed in Item 1A. Risk Factors in this report and in our 2021 Annual Report on Form 10-K (the "2021 Annual Report").
Overview of Financial Results and Financial Condition
For the three months endedMarch 31, 2022 , worldwide revenues of$5.011 billion increased 2.1% from the prior-year period. This increase reflected the following impacts:
Increase (decrease) in current-period
revenues
Volume 7.3 %
Period-over-period decline in revenues related to COVID-19-only testing
(5.2) %
Pricing 1.8 %
Foreign currency translation (1.8) %
Increase in revenues from the prior-year period 2.1 %
.
As noted above, our second quarter fiscal year 2022 revenues reflected sales
related to COVID-19-only diagnostic testing on the BD VeritorTM Plus and BD
MaxTM Systems of $214 million , compared with revenues from testing products in
the prior-year period of $474 million .
Volume growth in the second quarter of fiscal year 2022 was driven by demand for our core products and reflected the following:
•Medical segment revenues reflected strong demand in the Medication Delivery Solutions, Medication Management Solutions and Pharmaceutical Systems units.
•The Life Sciences segment revenues reflected strong demand for core products in both units.
•Interventional segment revenues reflected strong demand across all units, as well as a favorable comparison to the prior-year period decline in revenues which resulted from resurgences in COVID-19 infections.
Our BD 2025 strategy for growth is anchored in three pillars: grow, simplify and empower. As we execute this strategy, we continue to invest in research and development, strategic tuck-in acquisitions, geographic expansion, and new product 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. As further discussed above, current global economic conditions have been relatively volatile due to various macroeconomic factors. We have mitigated the inflationary pressures on our businesses through the various strategies discussed above. However, there can be no assurance that we will be able to effectively mitigate such inflationary pressures in future periods, and an inability to offset inflationary pressures, at least in part, through the strategies discussed above could adversely impact our results of operations. Cash flows from operating activities were$1.118 billion in the first six months of fiscal year 2022. AtMarch 31, 2022 , we had$3.335 billion in cash and equivalents and short-term investments, including restricted cash. We continued to return value to our shareholders in the form of dividends. During the first six months of fiscal year 2022, we paid cash dividends of$541 million , including$496 million paid to common shareholders and$45 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 21 -------------------------------------------------------------------------------- period, resulted in an unfavorable foreign currency translation impact to our revenues during the second quarter of fiscal year 2022. A favorable foreign currency impact to our earnings during the second quarter of fiscal year 2022 resulted from current-period sales of inventory recorded on our consolidated balance sheet in fiscal year 2021, when theU.S. dollar was weaker. 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 second quarter Medical revenues by organizational unit:
Three months ended March 31,
Estimated
Total FX
(Millions of dollars) 2022 2021 Change Impact FXN Change
Medication Delivery Solutions $ 1,038 $ 999 3.9 % (1.4) % 5.3 %
Medication Management Solutions 604 566 6.7 % (1.1) % 7.8 %
Diabetes Care 273 284 (3.9) % (2.2) % (1.7) %
Pharmaceutical Systems 501 462 8.5 % (3.7) % 12.2 %
Total Medical Revenues $ 2,416 $ 2,311 4.5 % (1.9) % 6.4 %
The Medication Delivery Solutions unit's revenue growth in the second quarter of
2022 reflected strong U.S. demand for core offerings that was driven by
competitive gains for catheters and vascular care products, as well as by
improved healthcare utilization in the current-year period. This revenue growth
was partially offset by lower vaccination sales compared with the prior-year
period. In the Medication Management Solutions unit, revenue growth reflected
strong growth in global placements of dispensing systems in both acute and
non-acute settings, as well as infusion pump sales and the utilization of sets
in
international markets. The Diabetes Care unit's revenue decline reflected the
accelerated timing of U.S. orders into the first quarter of our fiscal year
2022. The Pharmaceutical Systems unit's revenue growth in the second quarter of
2022 was driven by demand for our pre-filled devices and is enabled by capacity
expansion investments. The Pharmaceutical Systems unit's current-period revenues
also benefited from continued expansion of service offerings.
Six months ended March 31,
Estimated
Total FX
(Millions of dollars) 2022 2021 Change Impact FXN Change
Total Medical Revenues $ 4,813 $ 4,572 5.3 % (0.9) % 6.2 %
Medical segment income for the three and six-month periods is provided below.
Three months ended March 31, Six months ended March 31,
(Millions of dollars) 2022 2021 2022 2021
Medical segment income $ 615 $ 634 $ 1,331 $ 1,300
Segment income as % of Medical revenues 25.5 % 27.4 % 27.6 % 28.4 %
22--------------------------------------------------------------------------------
The Medical segment's income in the second quarter reflected lower gross profit margin and higher operating expenses as discussed in greater detail below:
•The Medical segment's lower gross profit margin in the second quarter of 2022 compared with the second quarter of 2021 primarily reflected higher raw material and freight costs, as well as a noncash asset impairment charge of$54 million . These unfavorable impacts to the Medical segment's second quarter gross margin were partially offset by lower manufacturing costs resulting from continuous improvement projects which enhanced the efficiency of our operations, as well as favorable impacts from foreign currency translation and price initiatives. •Selling and administrative expense as a percentage of revenues was higher in the second quarter of 2022 compared with the second quarter of 2021, which reflected the curtailment of certain selling, travel and other administrative activities in the prior-year period due to the COVID-19 pandemic, as well as higher shipping costs in the current-year period. •Research and development expense as a percentage of revenues was higher in the second quarter of 2022 compared with the second quarter of 2021, which reflected the timing of project spending and our continued reinvestment in the segment's growth initiatives. Life Sciences Segment
The following summarizes second quarter Life Sciences revenues by organizational unit:
Three months ended March 31,
Estimated
Total FX
(Millions of dollars) 2022 2021 Change Impact FXN Change
Integrated Diagnostic Solutions $ 1,150 $ 1,261 (8.8) % (2.0) % (6.8) %
Biosciences 335 325 3.1 % (2.5) % 5.6 %
Total Life Sciences Revenues $ 1,485 $ 1,586 (6.4) % (2.2) % (4.2) %
As previously discussed above, the Integrated Diagnostic Solutions unit's
revenues related to COVID-19-only diagnostic testing on the BD VeritorTM Plus
and BD MaxTM Systems in the second quarter of 2022 were $214 million , compared
with revenues from such testing products in the prior-year period of $474
million . The Integrated Diagnostic Solutions unit's second quarter revenues were
favorably impacted by a recovery of routine lab testing to pre-pandemic levels,
as well as high demand for the new combination influenza/COVID-19 testing assays
which was driven by stronger adoption of our broader respiratory panel and the
timing of dealer stocking. Second quarter revenues in the Integrated Diagnostic
Solutions unit were unfavorably impacted to a limited extent by supply chain
challenges, as well as by pandemic-related lockdowns imposed by China . The
Biosciences unit's revenue growth in the second quarter of 2022 reflected strong
demand for research reagents, which was primarily driven by a return of lab
utilization to pre-pandemic levels. The Biosciences unit's sales of instruments
in the second quarter of 2022 were unfavorably impacted by a backlog which
resulted from constraints on supplies of electronic components.
Six months ended
Estimated
Total FX
(Millions of dollars) 2022 2021 Change Impact FXN Change
Total Life Sciences Revenues $ 2,968 $ 3,565 (16.7) % (1.1) % (15.6) %
Life Sciences segment income for the three and six-month periods is provided
below.
Three months ended March 31, Six months ended March 31,(Millions of dollars) 2022 2021 2022 2021 Life Sciences segment income $ 475$ 548 $ 1,009 $ 1,521 Segment income as % of Life Sciences revenues 32.0 % 34.6 % 34.0 % 42.7 % 23
--------------------------------------------------------------------------------
The Life Sciences segment's income in the second quarter reflected lower gross profit margin and higher operating expenses as discussed in greater detail below:
•The Life Sciences segment's lower gross profit margin in the second quarter of 2022 compared with the second quarter of 2021 primarily reflected the decline in COVID-19-only testing revenues compared with the prior-period, as well as higher raw material and freight costs. These unfavorable impacts were partially offset by lower manufacturing costs resulting from continuous improvement projects, product mix, and price initiatives. •Selling and administrative expense as a percentage of revenues was higher in the second quarter of 2022 compared with the second quarter of 2021, primarily due to the current-period decline in revenues. Higher selling and administrative expense as a percentage of revenues in the current-year period also reflected the curtailment of certain selling, travel and other administrative activities in the prior-year period due to the COVID-19 pandemic. •Research and development expense as a percentage of revenues was higher in the second quarter of 2022 compared with the second quarter of 2021, primarily due to the current-period decline in revenues and our continued reinvestment in the segment's growth initiatives.
Interventional Segment
The following summarizes second quarter Interventional revenues by organizational unit:
Three months ended March 31,
Estimated
Total FX
(Millions of dollars) 2022 2021 Change Impact FXN Change
Surgery $ 340 $ 292 16.5 % (1.0) % 17.5 %
Peripheral Intervention 450 420 7.1 % (1.4) % 8.5 %
Urology and Critical Care 320 298 7.4 % (1.4) % 8.8 %
Total Interventional Revenues $ 1,111 $ 1,011 9.9 % (1.3) % 11.2 %
Second quarter 2022 revenue growth in the Surgery unit reflected double-digit
growth in revenues for hernia, biosurgery and infection prevention platforms;
the unit's prior-period revenues were impacted by a decline that was driven by
resurgences of COVID-19 infections. The Surgery unit's current-period revenues
also benefited from its acquisitions of Tepha, Inc. , which occurred in the
fourth quarter of fiscal year 2021, and Tissuemed, Ltd. , which occurred in the
first quarter of fiscal year 2022. Second quarter revenues in the Peripheral
Intervention unit reflected strong demand across its end-stage kidney disease,
oncology and peripheral vascular platforms, as well as a benefit from the unit's
acquisition of Venclose, Inc. , which occurred in the first quarter of fiscal
year 2022. The Urology and Critical Care unit's revenue growth in the second
quarter of 2022 reflected strong demand for acute urology products and the
unit's targeted temperature management platform. Second quarter revenues in the
Interventional segment also reflected strong international growth across each of
its organizational units.
Six months ended March 31,
Estimated
Total FX
(Millions of dollars) 2022 2021 Change Impact FXN Change
Total Interventional Revenues $ 2,225 $ 2,086 6.7 % (0.7) % 7.4 %
Interventional segment income for the three and six-month periods is provided
below.
Three months ended March 31 , Six months ended March 31 ,(Millions of dollars) 2022 2021 2022 2021 Interventional segment income $ 280$ 209 $ 544 $ 511 Segment income as % of Interventional revenues 25.2 % 20.7 % 24.5 % 24.5 %
The Interventional segment's income in the second quarter reflected higher gross profit margin as discussed in greater detail below:
•The Interventional segment's higher gross profit margin in the second quarter
of 2022 compared with the second quarter of 2021 primarily reflected higher
revenues in the current-year period compared with the prior-year period, as well
as current-period price initiatives. Gross profit margin in the prior-year
period was unfavorably impacted by product quality-related expenses.
24
--------------------------------------------------------------------------------
•Selling and administrative expense as a percentage of revenues was higher in
the second quarter of 2022 compared with the second quarter of 2021, which
benefited from the curtailment of certain selling, travel and other
administrative activities due to the COVID-19 pandemic in the prior year.
•Research and development expense as a percentage of revenues was lower in the
second quarter of 2022 compared with the second quarter of 2021, as the increase
in current-period revenues outpaced the timing of project spending.
Geographic Revenues
BD's worldwide second quarter revenues by geography were as follows:
Three months ended March 31,
Estimated
Total FX
(Millions of dollars) 2022 2021 Change
Impact FXN Change
United States $ 2,807 $ 2,462 14.0 % - % 14.0 %
International 2,204 2,446 (9.9) % (3.7) % (6.2) %
Total Revenues $ 5,011 $ 4,907 2.1 % (1.8) % 3.9 %
U.S. revenue growth in the second quarter of 2022 was primarily driven by a
recovery of routine lab testing to pre-pandemic levels and high demand for the
new combination influenza/COVID-19 testing assays in the Life Sciences segment's
Integrated Diagnostic Solutions unit. U.S. revenues in the second quarter of
2022 also reflected strong sales in the Medical segment's Medication Delivery
Solutions, Medication Management Solutions and Pharmaceutical Systems units, as
well as by strong sales in all three of the Interventional segment's units.
The decline in international revenues in the second quarter of 2022 was
primarily driven by an unfavorable comparison to the prior-year quarter, which
substantially benefited from sales in the Life Sciences segment's Integrated
Diagnostic Solutions unit related to COVID-19 diagnostic testing, as further
discussed above. This decline in international revenues in the second quarter of
2022 was partially offset by strong sales in the Medical segment's Medication
Management Solutions and Pharmaceutical Systems units, as well as by strong
sales in the Life Sciences segment's Biosciences unit. All three of the
Interventional segment's units contributed to international revenue growth in
the second quarter of 2022, particularly the Surgery and Peripheral Intervention
units.
Emerging market revenues were as follows and reflected growth in
Three months ended March 31,
Estimated
Total FX
(Millions of dollars) 2022 2021 Change
Impact FXN Change
Emerging markets $ 753 $ 714 5.4 % (1.3) % 6.7 %
25--------------------------------------------------------------------------------
Specified Items
Reflected in the financial results for the three and six-month periods of fiscal years 2022 and 2021 were the following specified items:
Three months ended March 31, Six months ended March 31,
(Millions of dollars) 2022 2021 2022 2021
Integration costs (a) $ 11 $ 33 $ 28 $ 66
Restructuring costs (a) 17 19 34 36
Separation and related costs (b) 53 - 78 -
Purchase accounting adjustments (c) 356 348 720 700
European regulatory initiative-related costs (d) 36 33 67 59
Investment gains/losses and asset impairments (e) 73 - 90 -
Transaction gain/loss, product and other
litigation-related matters (f) 36 333 41 328
Impacts of debt extinguishment - 20 - 30
Total specified items 582 785 1,059 1,220
Less: tax impact of specified items 99 125 187 204
After-tax impact of specified items $ 483 (a)Represents amounts associated with acquisition-related integration and restructuring activities which are primarily recorded in Acquisition-related integration and restructuring expense and are further discussed below.
(b)Represents costs which were primarily recorded to Other operating expense, net and were incurred for consulting, legal, tax, other advisory services, as well as interest expense that was associated with the spin-off of BD's Diabetes Care business. (c)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. (d)Represents costs incurred to develop processes and systems to establish initial compliance with the European Union Medical Device Regulation and the European Union In Vitro Diagnostic Medical Device Regulation, which represent a significant, unusual change to the existing regulatory framework. We consider these costs to be duplicative of previously incurred costs and/or one-off costs, which are limited to a specific period of time. These expenses, which are recorded in Cost of products sold and Research and development expense, include the cost of labor, other services and consulting (in particular, research and development and clinical trials) and supplies, travel and other miscellaneous costs. (e)Includes a noncash asset impairment charge recorded in Cost of products sold of$54 million in the Medical segment, as well as losses recorded within Other (expense) income, net relating to certain investments. (f)Includes charges of$35 million and$37 million recorded to Cost of products sold in 2022 and 2021, respectively, to adjust the estimate of future product remediation costs. The amounts in 2021 also include charges of$296 million in Other operating expense, net to record product liability reserves, including related legal defense costs, as further discussed below. 26 --------------------------------------------------------------------------------
Gross Profit Margin
Gross profit margin for the three and six-month periods of fiscal year 2022 compared with the prior-year periods in fiscal year 2021 reflected the following impacts:
Three-month period Six-month period
March 31, 2021 gross profit margin % 45.8 % 48.7 %
Impact of purchase accounting adjustments and other specified items
(1.1) % (0.8) %
Period-over-period decline in COVID-19-only testing profitability
(0.1) % (1.3) %
Operating performance 0.2 % (0.2) %
Foreign currency translation 1.2 % 0.9 %
March 31, 2022 gross profit margin % 46.0 % 47.3 %
The impacts of other specified items on gross profit margin in the three and
six-month periods of 2022 included a noncash asset impairment charge of $54
million in the Medical segment. Operating performance in the three and six-month
periods of 2022 reflected our efforts to mitigate higher raw material costs
through leveraging our ongoing continuous improvement projects and implementing
price initiatives.
Operating Expenses
A summary of operating expenses for the three and six-month periods of fiscal years 2022 and 2021 is as follows:
Increase Six months ended Increase
Three months ended March 31, (decrease) in March 31, (decrease) in
2022 2021 basis points 2022 2021 basis points
(Millions of dollars)
Selling and administrative expense $ 1,232 $ 1,148 $ 2,456 $ 2,298
% of revenues 24.6 % 23.4 % 120 24.5 % 22.5 % 200
Research and development expense $ 343 $ 317 $ 673 $ 608
% of revenues 6.9 % 6.5 % 40 6.7 % 5.9 % 80
Acquisition-related integration and
restructuring expense $ 28 $ 52 $ 62 $ 102
Other operating expense, net $ 49 $ 296 $ 70 $ 296 Selling and administrative expense
Higher selling and administrative expense as a percentage of revenues in the three and six-month periods of 2022 compared with the prior-year periods reflected higher shipping costs in the current-year periods, as well as the curtailment of certain selling, travel and other administrative activities in the prior-year periods due to the COVID-19 pandemic. Higher selling and administrative expense as a percentage of revenues in the six-month period of 2022 also reflected the current-period decline in revenues. Selling and administrative expense as a percentage of revenues in the three and six-month periods of 2022 was favorably impacted by foreign currency translation.
Research and development expense
Research and development expense as a percentage of revenues in the three and six-month periods of 2022 was higher compared with the prior-year periods, which primarily reflected the timing of project spending. Spending in both the current and prior-year periods reflected our continued commitment to drive innovation and growth with new products and platforms.
Acquisition-related integration and restructuring expense
Acquisition-related integration and restructuring expense in the three and
six-month periods of 2022 and 2021 included restructuring costs related to
simplification and other cost saving initiatives, as well as system integration
costs. Costs in the three and six-month periods of 2021 also included
integration costs incurred due to our acquisition of
27
--------------------------------------------------------------------------------Other operating expense, net
Other operating expense in the three and six-month periods of 2022 primarily included consulting, legal, tax and other advisory expenses associated with the spin-off of BD's Diabetes Care business. Other operating expense in the three and six-month periods of 2021 represents charges of$296 million to record product liability reserves, including related legal defense costs.
Nonoperating Income
Net interest expense
The components for the three and six-month periods of fiscal years 2022 and 2021 were as follows:
Three months ended March 31, Six months ended March 31,
(Millions of dollars) 2022 2021 2022 2021
Interest expense $ (101) $ (124) $ (199) $ (242)
Interest income 2 2 4 5
Net interest expense $ (100) $
(122) $ (195)
Lower interest expense in the current-year periods compared with the prior-year periods primarily reflected lower overall interest rates on debt outstanding as a result of prior-year refinancing activities.
Income Taxes
The income tax rates for the three and six-month periods of fiscal years 2022 and 2021 are provided below.
Three months ended March 31, Six months ended March 31,
2022 2021 2022 2021
Effective income tax rate 13.6 % 1.9 % 9.4 % 10.9 %
Impact, in basis points, from specified items (180) (1,010) (380) (260)
The effective income tax rate for the three-month period of fiscal year 2022
reflected a tax impact from specified items that was less favorable compared
with the benefit associated with specified items recognized in the prior-year
period. The effective income tax rate for the six-month period reflected a tax
impact from specified items that was more favorable compared with the benefit
recognized in the prior-year period, as well as a favorable impact relating to
the timing of certain discrete items.
Net Income and Diluted Earnings per Share
Net Income and Diluted Earnings per Share for the three and six-month periods of fiscal years 2022 and 2021 were as follows:
Three months ended March 31, Six months ended March 31,
2022 2021 2022 2021
Net Income (Millions of dollars) $ 454 $ 299 $ 1,131 $ 1,302
Diluted Earnings per Share $ 1.50 Unfavorable impact-specified items$ (1.68)
Favorable impact-foreign currency translation $ 0.12
$ 0.19 28 --------------------------------------------------------------------------------
Liquidity and Capital Resources
The following table summarizes our condensed consolidated statements of cash
flows:
Six months ended March 31,
(Millions of dollars) 2022 2021Net cash provided by (used for)
Operating activities $ 1,118
Investing activities $ (990)
Financing activities $ 804 Net Cash Flows from Operating Activities
Cash flows from operating activities in the first six months of fiscal year 2022 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 and prepaid expenses, partially offset by lower levels of trade receivables. Cash flows from operating activities in the current-year period additionally reflected a discretionary cash contribution of$134 million to fund our pension obligation. Cash flows from operating activities in the first six months of fiscal year 2021 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 lower levels of trade receivables, partially offset by higher levels of inventory and prepaid expenses, as well as lower levels of accounts payable and accrued expenses.
Net Cash Flows from Investing Activities
Our investments in capital expenditures are focused on projects that enhance our cost structure and manufacturing capabilities, as well as support our BD 2025 strategy for growth and simplification. Net outflows from investing activities in the first six months of fiscal year 2022 included capital expenditure-related outflows of$415 million , compared with$499 million in the prior-year period. Net outflows from investing activities in the first six months of fiscal year 2022 also included cash payments of$450 million relating to various strategic acquisitions we have executed as part of our growth strategy, including our acquisitions ofScanwell Health, Inc ,Tissuemed, Ltd. , andVenclose, Inc. Net outflows from investing activities in the first six months of fiscal year 2021 included cash payments related to acquisitions of$179 million .
Net Cash Flows from Financing Activities
Net cash from financing activities in the first six months of fiscal years 2022 and 2021 included the following significant cash flows:
Six months ended March 31,
(Millions of dollars) 2022 2021
Cash inflow (outflow)
Proceeds from long-term debt $ - $ 1,715
Proceeds from debt issued in connection with the spin-off $ 1,424 $ -
Payments of debt $ (2) $ (1,998)
Dividends paid $ (541) $ (528) Additional disclosures regarding the debt issued in connection with the spin-off are provided in Note 12 in the Notes to Condensed Consolidated Financial Statements.
29
--------------------------------------------------------------------------------Certain measures relating to our total debt were as follows:
(Millions of dollars) March 31, 2022 September 30, 2021 Total debt$ 18,635 $ 17,610 Weighted average cost of total debt 2.6 %
2.4 %
Total debt as a percentage of total capital* 40.4 %
41.0 %
* Represents shareholders' equity, net non-current deferred income tax liabilities, and debt.
Cash and Short-Term Investments
AtMarch 31, 2022 , total worldwide cash and equivalents and short-term investments, including restricted cash, were approximately$3.335 billion . These assets were largely held inthe United States . We regularly review the amount of cash and short-term investments held outside ofthe United States and our historical foreign earnings are used to fund foreign investments or meet foreign working capital and property, plant and equipment expenditure needs. To fund cash needs inthe United States , we rely on ongoing cash flow fromU.S. operations, access to capital markets and remittances from foreign subsidiaries of earnings that are not considered to be permanently reinvested.
Financing Facilities
We have a five-year senior unsecured revolving credit facility in place which will expire inSeptember 2026 . The credit facility provides borrowings of up to$2.75 billion , with separate sub-limits of$100 million for letters of credit and swingline loans. The expiration date of the credit facility may be extended for up to two additional one year periods, subject to certain restrictions (including the consent of the lenders). The credit facility provides that we may, subject to additional commitments by lenders, request an additional$500 million of financing, for a maximum aggregate commitment under the credit facility of up to$3.25 billion . Proceeds from this facility may be used for general corporate purposes. There were no borrowings outstanding under the revolving credit facility atMarch 31, 2022 . The agreement for our revolving credit facility contains the following financial covenants. We were in compliance with these covenants, as applicable, as ofMarch 31, 2022 . •We are required to have a leverage coverage ratio of no more than: •4.25-to-1 as of the last day of each fiscal quarter following the closing of the credit facility; or •4.75-to-1 for the four full fiscal quarters following the consummation of a material acquisition. We also have informal lines of credit outsidethe United States . We may, from time to time, access the commercial paper market as we manage working capital over the normal course of our business activities. We had no commercial paper borrowings outstanding as ofMarch 31, 2022 . Also, over the normal course of our business activities, we transfer certain trade receivable assets to third parties under factoring agreements. Additional disclosures regarding sales of trade receivable assets are provided in Note 11 in the Notes to Condensed Consolidated Financial Statements.
Access to Capital and Credit Ratings
Our corporate credit ratings with the rating agencies
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 credit losses,
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. In addition to continually evaluating all
governmental receivables for potential credit losses based upon historical loss
experiences, we also evaluate such receivables based upon the availability of
government funding and reimbursement practices. We believe the current reserves
related to all
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--------------------------------------------------------------------------------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 credit losses in general as a result of the COVID-19 pandemic. No assurances can be given that the risk of credit losses will not increase in the future given the uncertainty around the duration of the pandemic and its economic impact.
Other Matters
Critical Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our 2021 Annual Report.
Regulatory Matters FDA Warning Letter OnJanuary 11, 2018 , BD received a Warning Letter from the FDA with respect to our former BD Preanalytical Systems ("PAS") unit, citing certain alleged violations of quality system regulations and of law. 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 has worked closely with the FDA and implemented corrective actions to address the quality management system concerns identified in the warning letter. InMarch 2020 , the FDA conducted a subsequent inspection of PAS, which it classified as Voluntary Action Indicated, which means the FDA will not take or recommend any administrative or regulatory action as a result of the unit's response to the observations associated with the quality management concerns in the inspection. BD continues to work with the FDA to generate additional clinical evidence and file 510(k)s as remaining commitments associated with the Warning Letter. InJanuary 2022 , BD received FDA clearance for its BD Vacutainer® ACD Blood Collection Tubes used in immunohematology. The FDA review of these remaining commitments is ongoing and no assurances can be given regarding further action by the FDA as a result of these commitments, including but not limited to action pursuant to the Warning Letter.
Consent Order -
OnOctober 28, 2019 , BD entered into a consent order with the Environmental Protection Division of theGeorgia Department of Natural Resources (the "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, which has been amended two times upon mutual agreement of BD and EPD, BD voluntarily agreed to a number of operational changes at itsCovington andMadison, Georgia facilities, as well as at its distribution center inCovington , designed to further reduce ethylene oxide emissions, including but not limited to operating at a reduced capacity until successful implementation of fugitive emission control technology, ongoing ambient air monitoring and operational controls at such facilities. Following submission of data relating to the implementation of these operational changes, BD was permitted to return to normal operations inDecember 2021 at its facilities inGeorgia in accordance with the operating conditions set forth in its permit applications, including a condition to continue ambient air monitoring. However, BD's sterilization operations inGeorgia remain subject to the EPD's final approval of BD's permit applications and could be subject to additional restrictions. 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, especially considering the reduced capacity of third-party sterilization service providers and the regulatory timelines associated with transferring sterilization operations for regulated products. At a broader level, several states have increased the regulatory requirements associated with the use and emission of ethylene oxide, the most frequently used sterilant for medical devices and health care products in theU.S. This increased regulation could require BD or sterilization service providers, including providers used by BD, to temporarily suspend operations to install additional fugitive emissions control technology, limit the use of ethylene oxide or take other actions, which would further reduce the available capacity of third-party providers to sterilize medical devices and health care products. A few states have filed lawsuits to require additional air quality controls and expand limitations on the use of ethylene oxide at sterilization facilities. For example, inDecember 2020 , theState of New Mexico filed a lawsuit seeking a temporary restraining order and a preliminary and permanent injunction against a major medical device sterilizer, which sterilizes certain of our surgery products, to reduce ethylene oxide emissions associated with their sterilization process. On the federal level, in late 2019, theU.S. Environmental Protection Agency provided notice that it would be conducting rulemaking to reconsider federal regulations applicable to the use and emission of ethylene oxide. If any such proceedings or rulemaking result in the suspension of sterilization operations at BD or at medical device sterilizers used by BD, or otherwise limit the availability of third-party sterilization capacity, this could interrupt or otherwise adversely impact production of certain of our products. BD has business 31 --------------------------------------------------------------------------------
continuity plans in place to mitigate the impact of any such disruptions, although these plans may not be able to fully offset such impact, for the reasons noted above.
Consent Decree with FDA
As previously reported, our BD AlarisTM infusion pump organizational unit is
operating under an amended consent decree entered into by
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 (the "Form 483 Notice") that contains a number of observations of non-conformance with quality system regulations. In addition, inDecember 2021 , the FDA issued toCareFusion 303, Inc. a letter of non-compliance with respect to the Consent Decree (the "Non-Compliance Letter") stating that, among other things, it had determined that certain of BD's corrective actions with respect to the Form 483 Notice appeared to be adequate, some were still in progress such that adequacy could not be determined yet, and certain others were not adequate (e.g., complaint handling and corrective and preventive actions (CAPA), design verification and medical device reporting). Per the terms of the Non-Compliance Letter,CareFusion 303, Inc. provided the FDA with a proposed comprehensive corrective action plan and has retained an independent expert to conduct periodic audits ofCareFusion 303, Inc. infusion pump facilities over the next four years.CareFusion 303, Inc. will update its corrective action plan to address any observations that may arise during the course of these audits, and these updates, as well as the audit reports, will be shared with FDA in accordance with the terms of the Non-Compliance Letter. TheFDA's review of the items raised in the Form 483 Notice and Non-Compliance Letter remains ongoing, and no assurances can be given regarding further action by the FDA as a result of the observations, including but not limited to action pursuant to the Consent Decree, or that the corrective actions proposed byCareFusion 303, Inc. will be adequate to address these observations. Additionally, we cannot currently predict the amount of additional monetary investment that will be incurred to resolve this matter or the matter's ultimate impact on our business. The Consent Decree authorizes the FDA, in the event of any violations in the future, to order us to cease manufacturing and distributing infusion pumps, recall products and take other actions. We may be required to pay damages of$15,000 per day per violation if we fail to comply with any provision of the Consent Decree, up to$15 million per year. We may also be subject to future proceedings and litigation relating to the matters addressed in the Consent Decree, including, but not limited to, additional fines, penalties, other monetary remedies, and expansion of the terms of the Consent Decree. We are undertaking certain remediation of our BD AlarisTM System, and are currently shipping the product inthe United States , only in cases of medical necessity and to remediate recalled software versions. As previously disclosed, we submitted our 510(k) premarket notification to the FDA for the BD Alaris™ System inApril 2021 . The 510(k) submission is intended to bring the regulatory clearance for the BD Alaris™ System up-to-date, address open recall issues and provide other updates and features, including a new version of BD Alaris™ System software that will provide clinical, operational and cybersecurity updates. We will not be able to fully resume commercial operations for the BD Alaris™ System inthe United States until BD's 510(k) submission relating to the product has been cleared by the FDA. No assurances can be given as to when or if clearance will be obtained from the FDA.
For further discussion of risks relating to the regulations to which we are subject, see Part I, Item 1A, of our 2021 Annual Report.
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 theSEC , 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 32 --------------------------------------------------------------------------------
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. TheRussia andUkraine conflict may also heighten the impact of certain of these factors described below and the Risk Factors in our 2021 Annual Report. For further discussion of certain of these factors, see Item 1A. Risk Factors in this report and in our 2021 Annual Report. •Any impact of the COVID-19 pandemic, including resurgences in COVID-19 infections or new strains of the virus, may have on our business, the global economy's recovery and the global healthcare system, which may include decreases in the demand for our products, disruptions to our operations (including employee absenteeism) or disruptions to our supply chain. •Factors such as the rate of vaccination, the effectiveness of vaccines against different strains, the rate of infections, and competitive factors that could impact the demand and pricing for our COVID-19 diagnostics testing. •The impact of inflation and disruptions in our global supply chain including fluctuations in the cost and availability of oil-based resins and other raw materials, as well as certain components, used in the production or sterilization of our products, transportation constraints, product shortages, energy shortages or increased energy costs, labor shortages inthe United States and elsewhere, increased operating and labor costs, the ability to maintain favorable supplier and service arrangements and relationships (particularly with respect to sole-source suppliers and sterilization services), and the potential adverse effects of any disruption in the availability of such items and services. •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. •The risks associated with the spin-off of our former Diabetes Care business, including factors that could adversely affect our ability to realize the expected benefits of the spin-off, or the qualification of the spin-off as a tax-free transaction forU.S. federal income tax purposes. •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 overall level of indebtedness, including our ability to service our debt and refinance our indebtedness, which is dependent upon the capital markets and our overall financial condition at such time.
•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 or implementation of similar cost containment efforts. •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 cost reduction measures instituted by and the continued consolidation among healthcare providers. •The impact of changes inU.S. federal laws and policies 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. •Security breaches of our information 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 33 --------------------------------------------------------------------------------
other business partners, or of customers' patients, including sensitive personal data, 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 and maintain regulatory approvals and registrations 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 could preclude or delay commercialization of a product. Delays in obtaining necessary approvals or clearances from the 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. Our international operations also increase our compliance risks, including risks under the Foreign Corrupt Practices Act and other anti-corruption laws, as well as regulatory and privacy laws. •Deficit reduction efforts or other actions that reduce the availability of government funding for healthcare and research, which could weaken demand for our products and result in additional pricing pressures, as well as create potential collection risks associated with such sales.
•Fluctuations in university or
•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 climate change, 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 the impacts of climate change, hurricanes, tornadoes, windstorms, fires, earthquakes and floods and other extreme weather events, global health 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, or adversely affecting our manufacturing and distribution capabilities or causing interruptions in our supply chain. •Pending and potential future litigation or other proceedings asserting, and/or investigations concerning and/or subpoenas and requests 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)), potential anti-corruption and related internal control violations under the Foreign Corrupt Practices Act, antitrust claims, securities law claims, product liability (which may involve lawsuits seeking class action status or seeking to establish multi-district litigation proceedings, including pending claims relating to our hernia repair implant products, surgical continence products for women and vena cava filter products), claims with respect to environmental matters, data privacy breaches 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 post-marketing 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. 34 -------------------------------------------------------------------------------- •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, ourU.S. infusion pump business is operating under a Consent Decree with the FDA. The Consent Decree authorizes the FDA, in the event of any violations in the future, to order ourU.S. infusion pump business to cease manufacturing and distributing products, recall products or take other actions, and order the payment of significant monetary damages if the business subject to the decree fails to comply with any provision of the Consent Decree. We are undertaking certain remediation of our BD AlarisTM System, and are currently shipping the product in theU.S. , only in cases of medical necessity and to remediate recalled software versions. We will not be able to fully resume commercial operations for the BD Alaris System in theU.S. until BD's 510(k) submission relating to the product has been cleared by the FDA. No assurances can be given as to when or if clearance will be obtained from the FDA.
•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 the FASB or the
The foregoing list sets forth many, but not all, of the factors that could
impact our ability to achieve results described in any forward-looking
statements. Investors should understand that it is not possible to predict or
identify all such factors and should not consider this list to be a complete
statement of all potential risks and uncertainties.
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