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" or the "Company") 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 , andAustralia 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 Intention to Spin Off Diabetes Care OnMay 6, 2021 , we announced our intention to spin off our Diabetes Care business as a separate publicly traded company to BD's shareholders. The proposed spin-off is intended to be a tax-free transaction forU.S. federal income tax purposes and is expected to be completed in the first half of calendar year 2022, subject to the satisfaction of customary conditions, including final approval from BD's Board of Directors and the effectiveness of a registration statement on Form 10. The Company believes that as an independent, publicly traded entity, the Diabetes Care business will be positioned to more effectively allocate its capital and operational resources with a dedicated growth strategy. COVID-19 Pandemic Impacts and Response A novel strain of coronavirus disease ("COVID-19") was officially declared a pandemic by theWorld Health Organization ("WHO") inMarch 2020 and governments around the world have been implementing various measures to slow and control the ongoing spread of COVID-19. These government measures, as well as a shift in healthcare priorities, resulted in a significant decline in medical procedures in our fiscal year 2020. The pandemic has continued to impact the demand for certain of our products during our fiscal year 2021 and certain areas of non-acute healthcare utilization have still not fully recovered to pre-pandemic levels. Our third quarter fiscal year 2021 revenue growth reflects a favorable comparison to the prior-year quarter, which was most significantly impacted by COVID-19 pandemic-related declines during our fiscal year 2020. Our revenues for the third quarter also reflected a substantial benefit from sales related to COVID-19 diagnostic testing on the BD VeritorTM Plus and BD MaxTM Systems. As we expected, the magnitude of this benefit during the quarter was impacted by pricing pressures for SARS-CoV-2 diagnostic tests, as competitors have entered the COVID-19 diagnostic testing market, and also by a decline in demand for COVID-19 testing. The factors that affected our revenue growth for the three months endedJune 30, 2021 , including those related to the COVID-19 pandemic, are discussed in greater detail further below. Due to the 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, may be subject to volatility. In this regard, we continue to see challenges posed by the pandemic to global transportation channels and other aspects of our supply chain, including the cost and availability of raw materials. As noted above, the pandemic continues to impact demand for certain of our products. TheU.S. and other governments may enact or use laws and regulations, such as the Defense Production Act or export restrictions, to ensure availability of needed COVID-19 testing and vaccination delivery devices. Any such action may impact our global supply chain network.
The impacts of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on certain factors including:
23 -------------------------------------------------------------------------------- •The extent to which resurgences in COVID-19 infections or new strains of the virus, including the Delta variant, result in deferrals of elective medical procedures and/or the imposition of new governmental lockdowns, quarantine requirements or other restrictions that may weaken demand for certain of our products and/or disrupt our operations; •The degree to which demand and pricing for our COVID-19 diagnostics testing solutions continues to be impacted by distribution and utilization of available COVID-19 vaccines and the entry of additional competitive SARS-CoV-2 diagnostic testing products; •The timing of when hospitals, clinical laboratories, research laboratories and institutions fully resume normal operations that are not related to the COVID-19 pandemic; and •The continued strength of the global economic recovery and the degree of pressure that a weaker macroeconomic environment would put on future healthcare utilization, the capital budgets of hospitals and other healthcare institutions, and the global demand for our products. We remain focused on partnering with governments, healthcare systems, and healthcare professionals to navigate the COVID-19 pandemic. This focus includes providing access to our SARS-CoV-2 diagnostics tests and injection devices for global vaccination campaigns, as well as supplying products and solutions for ongoing care for patients around the world. We have also remained focused on protecting the health and safety of BD employees while ensuring continued availability of BD's critical medical devices and technologies during these unprecedented times. Overview of Financial Results and Financial Condition For the three months endedJune 30, 2021 , worldwide revenues of$4.890 billion increased 26.9% from the prior-year period, which reflected an increase in volume, including increases attributable to our core products, of approximately 22.0%. Revenues for the three months endedJune 30, 2021 also reflected a favorable impact from foreign currency translation of approximately 4.9% and an immaterial impact from pricing. Volume in the third quarter of fiscal year 2021 reflected the following: •Medical segment revenues in the third quarter reflected growth in the Medication Delivery Solutions, Pharmaceutical Systems and Diabetes Care units, which was partially offset by a decline in the Medication Management Solutions unit. •Life Sciences segment revenues in the third quarter reflected growth in both units. Growth in the Integrated Diagnostic Solutions unit included approximately$300 million of revenues related to COVID-19 diagnostic testing on the BD VeritorTM Plus and BD MaxTM Systems. •Interventional segment revenues in the third quarter reflected growth in all three units, particularly in the Surgery and Peripheral Intervention units. We continue to invest in research and development, geographic expansion, and new product programs to drive further revenue and profit growth. We have reinvested a portion of the profits from our sales related to COVID-19 diagnostic testing into our BD 2025 strategy, which is anchored in three pillars: grow, simplify and empower. 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 discussed above, current global economic conditions remain relatively volatile due to the COVID-19 pandemic. In addition, pricing pressure exists globally which could adversely impact our businesses. Also, as noted above, the pandemic has posed challenges to global transportation channels and supply chains. These challenges have subjected certain of our costs, specifically raw material and freight costs, to inflationary pressures which have unfavorably impacted our gross profit and operating margins. Additional discussion regarding the impacts of these inflationary pressures on our operating results for the three and nine months endedJune 30, 2021 is provided further below. Cash flows from operating activities were$3.696 billion in the first nine months of fiscal year 2021. AtJune 30, 2021 , we had$3.306 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 2021, we paid cash dividends of$789 million , including$722 million paid to common shareholders and$68 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 weakerU.S. dollar, compared to the prior-year period, resulted in a favorable foreign currency translation impact to our revenues and an unfavorable impact to our expenses during the third quarter of fiscal year 2021. 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 24 -------------------------------------------------------------------------------- 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) 2021 2020 Change Impact FXN Change Medication Delivery Solutions$ 1,007 $ 781 28.9 % 5.0 % 23.9 % Medication Management Solutions 597 677 (11.8) % 2.2 % (14.0) % Diabetes Care 294 260 13.4 % 4.5 % 8.9 % Pharmaceutical Systems 476 403 17.9 % 6.0 % 11.9 % Total Medical Revenues$ 2,375 $ 2,122 11.9 % 4.2 % 7.7 % The Medical segment's revenue growth in the third quarter of 2021 was aided by a favorable comparison to the prior-year period, which was impacted by COVID-19 pandemic-related declines, particularly inthe United States andChina . These prior-period pandemic-related declines impacted our Medication Delivery Solutions and Diabetes Care units. Third quarter revenue growth in the Medication Delivery Solutions unit reflected strong demand for our core offerings, includingU.S. demand for catheters and vascular care products, as well as strong global demand for syringes resulting from COVID-19 vaccination efforts. In the Medication Management Solutions unit, revenue growth in the third quarter of 2021 reflected an unfavorable comparison to the prior-year period, which benefited from global pandemic-related infusion pump orders. Growth in the Diabetes Care unit benefited from the timing of sales, slightly better than expected market demand and a favorable comparison to the prior-year period, which was impacted by pandemic-related declines. The Pharmaceutical Systems unit's revenue growth in the third quarter of 2021 reflected continued strong demand for prefillable products. As previously disclosed, we submitted our 510(k) premarket notification to theUnited States Food and Drug Administration (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, implement new features to address the open recall issues and provide other updates, including a new version of BD Alaris™ System software that will provide clinical, operational and cybersecurity updates.
Medical segment total revenues for the nine-month periods were as follows:
Nine months ended June 30, Estimated Total FX (Millions of dollars) 2021 2020 Change Impact FXN Change Total Medical Revenues$ 6,947 $ 6,362 9.2 % 2.8 % 6.4 %
Medical segment income for the three and nine-month periods is provided below.
Three months ended June 30, Nine months ended June 30, (Millions of dollars) 2021 2020 2021 2020 Medical segment income$ 636 $ 646 $ 1,936 $ 1,653 Segment income as % of Medical revenues 26.8 % 30.4 % 27.9 % 26.0 %
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:
25 -------------------------------------------------------------------------------- •Gross profit margin was lower in the third quarter of 2021 as compared with the third quarter of 2020, primarily due to unfavorable foreign currency translation, higher raw material costs and product quality remediation expenses. These unfavorable impacts to the Medical segment's third 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 a favorable comparison to the prior-year period which was unfavorably impacted by increased levels of manufacturing overhead costs that were recognized in the period as a result of the COVID-19 pandemic, rather than capitalized within inventory. •Selling and administrative expense as a percentage of revenues was higher in the third quarter of 2021 compared with the third quarter of 2020, which benefited from cost containment measures enacted in response to the COVID-19 pandemic. •Research and development expense as a percentage of revenues was higher in the third quarter of 2021 compared with the third quarter of 2020, which primarily reflects our commitment to research and development through continued reinvestment into our growth initiatives. 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) 2021 2020 Change Impact FXN Change Integrated Diagnostic Solutions$ 1,117 $ 714 56.4 % 7.7 % 48.7 % Biosciences 316 237 33.3 % 6.0 % 27.3 % Total Life Sciences Revenues$ 1,433 $ 951 50.7 % 7.3 % 43.4 % The Life Sciences segment's revenue growth in the third quarter of 2021 primarily reflected a favorable comparison to the prior-year period, which was significantly impacted by pandemic-related declines in both units. Revenue growth in the Integrated Diagnostic Solutions unit was also driven by sales related to COVID-19 diagnostic testing on the BD VeritorTM Plus and BD MaxTM Systems. While routine diagnostic testing levels in the Integrated Diagnostic Solutions unit have not yet fully recovered to pre-pandemic levels, demand was higher for our specimen management portfolio, automated blood cultures and ID/AST testing solutions. The Biosciences unit's revenue growth in the third quarter of 2021 benefited from strong demand for research reagents. Life Sciences segment total revenues for the nine-month periods were as follows: Nine months ended June 30, Estimated Total FX (Millions of dollars) 2021 2020 Change Impact FXN Change Total Life Sciences Revenues$ 4,998 $ 3,187 56.8 % 4.6 % 52.2 %
Life Sciences segment income for the three and nine-month periods was as follows:
Three months ended June 30, Nine months ended June 30, (Millions of dollars) 2021 2020 2021 2020 Life Sciences segment income$ 432 $ 214 $ 1,953 $ 860 Segment income as % of Life Sciences revenues 30.1 % 22.5 % 39.1 % 27.0 % 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 2021 was higher compared with the third quarter of 2020, primarily due to the recovery of demand for products with higher margins and a favorable comparison to the prior-year period which was unfavorably impacted by increased levels of manufacturing overhead costs that were recognized in the period as a result of the COVID-19 pandemic, rather than capitalized within inventory. The Life Sciences segment's third quarter 26 -------------------------------------------------------------------------------- gross margin was unfavorably impacted by foreign currency translation and the recognition of approximately$71 million of excess and obsolete inventory expenses related to COVID-19 testing inventory. •Selling and administrative expense as a percentage of revenues was higher in the third quarter of 2021 compared with the third quarter of 2020, which benefited from cost containment measures enacted in response to the COVID-19 pandemic. The increase in selling and administrative expense as a percentage of revenues in the third quarter of 2021 also reflected higher shipping costs and selling costs associated with COVID-19 testing solutions. •Research and development expense as a percentage of revenues was lower in the third quarter of 2021 compared with the third quarter of 2020, primarily due to the increase in revenues in the quarter, partially offset by additional 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) 2021 2020 Change Impact FXN Change Surgery $ 336$ 197 70.9 % 3.2 % 67.7 % Peripheral Intervention 436 318 37.2 % 5.4 % 31.8 % Urology and Critical Care 310 268 16.0 % 2.5 % 13.5 % Total Interventional Revenues$ 1,082 $ 782 38.4 % 3.8 % 34.6 % The Interventional segment's revenue growth in the third quarter of 2021 reflected a favorable comparison to the prior-year period, which was significantly impacted by pandemic-related declines in our Surgery and Peripheral Intervention units. Third quarter revenue growth in the Peripheral Intervention unit reflected sales attributable to the unit's acquisition ofStraub Medical AG , which occurred in the third quarter of fiscal year 2020. Third quarter revenue growth in the Urology and Critical Care unit showed continued strength in demand for acute urology products and the unit's targeted temperature management portfolio.
Interventional segment total revenues for the nine-month periods were as follows:
Nine months ended June 30, Estimated Total FX (Millions of dollars) 2021 2020 Change Impact FXN Change Total Interventional Revenues$ 3,168 $ 2,784 13.8 % 2.3 %
11.5 %
Interventional segment income for the three and nine-month periods is provided below.
Three months ended June 30, Nine months ended June 30, (Millions of dollars) 2021 2020 2021 2020 Interventional segment income$ 214 $ 100 $ 725 $ 556
Segment income as % of Interventional revenues 19.8 % 12.8 %
22.9 % 20.0 % 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 higher in the third quarter of 2021 as compared with the third quarter of 2020, primarily due to the recovery of demand for products with higher margins and a favorable comparison to the prior-year period which was unfavorably impacted by increased levels of manufacturing overhead costs that were recognized in the period as a result of the COVID-19 pandemic, rather than capitalized within inventory. •Selling and administrative expense as a percentage of revenues in the third quarter of 2021 was lower compared with the prior-year period primarily due the recovery of segment revenues. •Research and development expense as a percentage of revenues was higher in the third quarter of 2021 compared with the third quarter of 2020 which primarily reflects reinvestment into our growth initiatives. 27 -------------------------------------------------------------------------------- Geographic Revenues BD's worldwide third quarter revenues by geography were as follows: Three months ended June 30, Estimated Total FX (Millions of dollars) 2021 2020 Change Impact FXN Change United States$ 2,574 $ 2,119 21.5 % - % 21.5 % International 2,316 1,735 33.5 % 10.9 % 22.6 % Total Revenues$ 4,890 $ 3,855 26.9 % 4.9 % 22.0 %U.S. revenue growth in the third quarter of 2021 was driven by the Medical segment's Medication Delivery Solutions unit and the Interventional segment's Surgery and Peripheral Intervention units. Third quarter revenue growth in these units reflected favorable comparisons to prior-year period results, which were impacted by COVID pandemic-related declines, as well as growth attributable to core products. Third quarterU.S. revenue growth also benefited from sales related to COVID-19 diagnostic testing in the Life Sciences segment's Integrated Diagnostic Solutions unit.U.S. revenue growth in the third quarter of 2021 was unfavorably impacted by a decline in the Medical segment's Medication Management Solutions unit, as further discussed above. International revenue growth for the third quarter of 2021 were largely driven by COVID-19 diagnostic testing-related sales in the Life Sciences segment's Integrated Diagnostic Solutions unit, as discussed further above, and by sales in the Medical segment's Pharmaceutical Systems unit. Third quarter international revenue growth was also driven by results in the Medical segment's Medication Delivery Solutions and the Interventional segment's Peripheral Intervention unit due to favorable comparisons to prior-year period results, which were impacted by COVID pandemic-related declines, and growth attributable to core products. Third quarter international revenue growth was unfavorably impacted by a decline in the Medical segment's Medication Management Solutions unit, as further discussed above. Emerging market revenues for the third quarter were$727 million , compared with$572 million in the prior year's quarter. Third quarter revenue growth benefited from a favorable comparison to the prior-year quarter which was impacted by COVID-19 pandemic-related declines inGreater Asia , including inChina . Emerging market revenues in the current-year period included an estimated$40 million favorable impact due to foreign currency translation. Specified Items Reflected in the financial results for the three and nine-month periods of fiscal years 2021 and 2020 were the following specified items: Three months ended June 30, Nine months ended June 30, (Millions of dollars) 2021 2020 2021 2020 Integration costs (a) $ 27$ 46 $ 94$ 165 Restructuring costs (a) (3) 28 33 69 Separation and related costs (b) 16 - 16 - Purchase accounting adjustments (c) 355 325 1,056 1,012 Transaction gain/loss, product and other litigation-related matters (d) (70) (10) 258 248 European regulatory initiative-related costs (e) 32 33 92 77 Investment gains/losses and asset impairments (f) - - - 41 Impacts of debt extinguishment - 6 30 6 Total specified items 358 428 1,578 1,619 Less: tax impact of specified items 61 72 265 218 After-tax impact of specified items $ 296
(a)Represents amounts associated with integration and restructuring activities which are primarily recorded in Acquisitions and other restructurings and are further discussed below. 28 -------------------------------------------------------------------------------- (b)Represents costs recorded to Other operating (income) expense, net which were incurred for consulting, legal, tax and other advisory services associated with the planned 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)The amounts in the three and nine-month periods of fiscal year 2021 include a gain of$88 million on a sale-leaseback transaction. The amount in the nine-month period of fiscal year 2021 additionally includes charges of$296 million relating to product liability reserves, including related legal defense costs, as further discussed below. The product liability-related charges and sale-leaseback gain were recorded to Other operating (income) expense, net. The amount in the nine-month period of 2021, as well as amounts in the three and nine-month periods 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 (expense) income, net. (e)Represents costs required to develop processes and systems to comply with 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. (f)The amount in 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. Gross Profit Margin Gross profit margin for the three and nine-month periods of fiscal year 2021 compared with the prior-year periods in fiscal year 2020 reflected the following impacts: Three-month period Nine-month period June 30, 2020 gross profit margin % 43.1 % 43.6 % Impact of purchase accounting adjustments and other specified items 1.0 % 3.2 % Operating performance 1.1 % 1.1 % Foreign currency translation (1.0) % (0.7) % June 30, 2021 gross profit margin % 44.2 % 47.2 % The impacts of other specified items on gross profit margin reflected the following: •The current-year nine-month period included charges of approximately$37 million , compared with net charges of$240 million in the prior-year period, to record an estimate of future costs within the Medication Management Solutions unit associated with remediation efforts related to AlarisTM infusion pumps. Based on the course of our remediation efforts, it is possible that our estimate of future costs to remediate the AlarisTM infusion pumps could change over time. •The prior-year nine-month period also included a$39 million charge to write down the carrying value of certain intangible assets in the Biosciences unit. Operating performance in the three and nine-month periods of 2021 primarily reflected the following: •Favorable product mix was driven by the recovery of demand for products with higher margins. •The current-year periods benefited from a favorable comparison to the prior-year periods which were unfavorably impacted by increased levels of manufacturing overhead costs that were recognized in the period as a result of the COVID-19 pandemic, rather than capitalized within inventory. •Approximately$71 million of excess and obsolete inventory expenses related to COVID-19 testing inventory were recognized by the Integrated Diagnostic Solutions unit in the third quarter of fiscal year 2021 and we continued to re-invest profits from our sales related to COVID-19 diagnostic testing into our BD 2025 strategy focus on growth, simplification and empowerment. For the nine-month period of 2021, these unfavorable impacts to gross profit margin were offset by favorable product mix that was attributable to the Integrated Diagnostic Solutions unit's COVID-19 testing sales. •Lower manufacturing costs resulting from continuous improvement projects and synergy initiatives were partially offset by higher raw material costs. Operating performance in the nine-month period of 2021 additionally reflected an 29 -------------------------------------------------------------------------------- unfavorable impact from charges of$34 million recorded by the Medical and Interventional segments to write down the carrying value of certain fixed assets. Operating Expenses A summary of operating expenses for the three and nine-month periods of fiscal years 2021 and 2020 is as follows: Increase Nine months ended Increase Three months ended June 30, (decrease) in June 30, (decrease) in 2021 2020 basis points 2021 2020 basis points (Millions of dollars) Selling and administrative expense$ 1,237 $ 980 $ 3,535 $ 3,126 % of revenues 25.3 % 25.4 % (10) 23.4 % 25.3 % (190) Research and development expense$ 344 $ 262 $ 952 $ 797 % of revenues 7.0 % 6.8 % 20 6.3 % 6.5 % (20) Acquisitions and other restructurings$ 24 $ 74 $ 126 $ 235
Other operating (income) expense, net
$ 224 $ (15) Selling and administrative expense Selling and administrative expense as a percentage of revenues in the three and nine-month periods of 2021 was lower compared with the prior-year periods primarily due to the recovery of revenues in the current-year periods. Selling and administrative expense as a percentage of revenues in the three and nine-month periods of 2021 was unfavorably impacted by foreign currency translation and higher shipping costs as a result of expedited shipments relating to COVID-19, as well as by higher selling, travel and other administrative costs compared with the prior-year periods, which benefited from cost containment measures enacted in response to the COVID-19 pandemic. Research and development expense Research and development expense as a percentage of revenues in the three-month period of 2021 was higher compared with the prior-year period which reflected our reinvestment of COVID-19 testing-related sales profits into our growth initiatives and additional investments in COVID-19 testing solutions, as further discussed above. Research and development expense as a percentage of revenues in the nine-month period of 2021 was lower compared with the prior-year period as the increase in current-year revenues outpaced the timing of our reinvestment of COVID-19 testing-related profits into our growth initiatives during the year-to-date period. Spending in both the current and prior-year periods reflected our continued commitment to drive innovation with new products and platforms. Acquisitions and other restructurings Costs relating to acquisitions and other restructurings in the three and nine-month periods of 2021 and 2020 included integration costs incurred due to our acquisition of Bard in the first quarter of fiscal year 2018. Costs in the three and nine-month periods of 2021 additionally included restructuring costs related to simplification and cost saving initiatives. Costs relating to acquisition and other restructurings in the three and nine-month periods of 2020 also included restructuring costs relating to the Bard acquisition. For further disclosures regarding restructuring costs, refer to Note 9 in the Notes to Condensed Consolidated Financial Statements. Other operating (income) expense, net Other operating (income) expense, net in the three and nine-month periods of 2021 included a gain of$88 million on a sale-leaseback transaction, as well as consulting, legal, tax and other advisory expenses associated with the planned spin-off of BD's Diabetes Care business. Additional disclosures regarding the sale-leaseback transaction are provided in Note 14 in the Notes to Condensed Consolidated Financial Statements. The amount in the nine-month period of fiscal year 2021 additionally includes charges of$296 million to record product liability reserves, including related legal defense costs. Additional disclosures regarding the product liability matters are provided in Note 5 in the Notes to Condensed Consolidated Financial Statements. 30 -------------------------------------------------------------------------------- Nonoperating Income Net interest expense The components for the three and nine-month periods of fiscal years 2021 and 2020 were as follows: Three months ended June 30, Nine months ended June 30, (Millions of dollars) 2021 2020 2021 2020 Interest expense $ (115)$ (135) $ (358)$ (405) Interest income 2 2 7 5 Net interest expense $ (113) $
(133) $ (351)
Lower interest expense in the current-year period compared with the prior-year period primarily reflected debt repayments and lower overall interest rates on debt outstanding during the current-year period. Income Taxes The income tax rates for the three and nine-month periods of fiscal years 2021 and 2020 are provided below. Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Effective income tax rate (2.1) % (15.4) % 7.5 % 11.4 % Impact, in basis points, from specified items (790) (2,040) (410) (140) The effective income tax rate for the three-month period of fiscal year 2021 reflected tax impacts from specified items, which are discussed further above, that were less favorable compared with the benefits associated with specified items recognized in the prior-year period, partially offset by the recognition of discrete tax items during the quarter. The effective income tax rate for the nine-month period of fiscal year 2021 reflected the third quarter impact of the discrete tax items, as well as tax impacts from specified items that were more favorable compared with the benefits associated with specified items recognized in the prior-year period. Net Income and Diluted Earnings per Share Net Income and Diluted Earnings per Share for the three and nine-month periods of fiscal years 2021 and 2020 were as follows: Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Net Income (Millions of dollars) $ 525$ 286 $ 1,827 $ 746 Diluted Earnings per Share $ 1.72
Unfavorable impact-specified items$ (1.01) $ (1.25) $ (4.48) $ (5.03) Dilutive impact (a) $ -$ 0.02 $ - $ - Unfavorable impact-foreign currency translation$ (0.04) $ (0.03)
(a)The dilutive impact for the three months ended
31 -------------------------------------------------------------------------------- Liquidity and Capital Resources The following table summarizes our condensed consolidated statements of cash flows: Nine months ended June 30, (Millions of dollars) 2021 2020
Net cash provided by (used for)
Operating activities $ 3,696
Investing activities$ (1,186)
Financing activities$ (2,164)
Net Cash Flows from Operating Activities Cash flows from operating activities in the first nine 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 and higher levels of accounts payable and accrued expenses, partially offset by higher levels of inventory and prepaid expenses. 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. 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 2021 included capital expenditure-related outflows of$766 million , compared with$597 million in the prior-year period. Net outflows from investing activities in the first nine months of fiscal years 2021 and 2020 also included cash payments relating to various strategic acquisitions we have executed as part of our growth strategy. Net Cash Flows from Financing Activities Net cash from financing activities in the first nine months of fiscal years 2021 and 2020 included the following significant cash flows: Nine months ended June 30, (Millions of dollars) 2021 2020 Cash inflow (outflow) Change in credit facility borrowings $ -
Proceeds from long-term debt and term loans$ 1,715
Payments of debt and term loans$ (1,999)
Proceeds from issuance of equity securities $ -$ 2,917 Repurchases of common stock$ (1,000) $ - Dividends paid $ (789)$ (773) Additional disclosures regarding our fiscal year 2021 share repurchases and debt transactions are provided in Notes 3 and 13, respectively, in the Notes to Condensed Consolidated Financial Statements. Certain measures relating to our total debt were as follows: 32 --------------------------------------------------------------------------------
(Millions of dollars) June 30, 2021 September 30, 2020 Total debt$ 17,733 $ 17,931 Short-term debt as a percentage of total debt 11.5 %
3.9 %
Weighted average cost of total debt 2.8 %
2.8 %
Total debt as a percentage of total capital* 40.7 %
41.3 %
* 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, 2021 was driven by our reclassification of certain notes from long-term to short-term. Cash and Short-Term Investments AtJune 30, 2021 , total worldwide cash and short-term investments, including restricted cash, were approximately$3.306 billion , which were largely 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 currently provides for borrowings of up 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, 2021 . The agreements for our revolving credit facility contained the following financial covenants. We were in compliance with these covenants as ofJune 30, 2021 . •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. 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 ofJune 30, 2021 . 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 12 in the Notes to Condensed Consolidated Financial Statements. 33 -------------------------------------------------------------------------------- Access to Capital and Credit Ratings InJanuary 2021 ,Standard & Poor's Ratings Services affirmed ourSeptember 30, 2020 ratings and revised the agency's outlook on our ratings to Stable from Negative. Also inJanuary 2021 , Moody's Investor Service ("Moody's") upgraded our senior unsecured rating to Baa3 from Ba1, as well as our commercial paper rating to P-3 from NP. Moody's also affirmed its positive outlook on our ratings. InMay 2021 , Fitch Ratings affirmed ourSeptember 30, 2020 rating and revised its outlook on our ratings from Stable to Positive. 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 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. Regulatory Matters InJanuary 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. 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. 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. BD does not believe that the consent order will have a material impact on its operations. Violation of the consent order, though, 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, 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 air quality controls, 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. Late last year, theState of New Mexico filed a lawsuit seeking a temporary restraining order and a preliminary and permanent injunction 34 -------------------------------------------------------------------------------- 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 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. As previously reported, our BD AlarisTM infusion pump organizational unit is operating under an amended consent decree entered into byCareFusion (the "Consent Decree") that includes all infusion pumps manufactured by or forCareFusion 303, Inc. , the organizational unit that manufactures and sells AlarisTM infusion pumps inthe United States . We are undertaking remediation of our BD AlarisTM System and cannot fully commercialize the product until a 510(k) filing has been cleared by the FDA. No assurances can be given as to when clearance of the submission will be obtained from the FDA. 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, including but not limited to action pursuant to the Consent Decree. For further discussion of risks relating to the regulations to which we are subject, see Part I, Item 1A, of our 2020 Annual Report on Form 10-K (the "2020 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. This report also includes forward-looking statements regarding the proposed spin-off of the Diabetes Care business, including the anticipated benefits of the spin-off and the expected timing of completion of the spin-off. 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 our 2020 Annual Report and in our Quarterly Report on Form 10-Q for the period endedMarch 31, 2021 . •Any impact of the COVID-19 pandemic on our business, including, without limitation, decreases in the demand for our products or disruptions to our operations or our supply chain, and factors such as vaccine availability and utilization and increased competition that could impact the demand and pricing for our COVID-19 diagnostics testing. •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 proposed spin-off of our Diabetes Care business, including factors that could delay, prevent or otherwise adversely affect the completion, timing or terms of the spin-off, 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. 35 -------------------------------------------------------------------------------- •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 . •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. •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, labor shortages or increased 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. •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 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 can preclude or delay commercialization of a product. Delays in obtaining necessary approvals or clearances from 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. 36 -------------------------------------------------------------------------------- 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, 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 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. •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 remediation of our BD AlarisTM System and cannot fully commercialize the product until a 510(k) filing has been cleared by the FDA. No assurances can be given as to when clearance of the submission 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 theSEC . 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 37 --------------------------------------------------------------------------------
not consider this list to be a complete statement of all potential risks and uncertainties.
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