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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2020
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-4802
Becton, Dickinson and Company
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | | | | | | | |
New Jersey | | 22-0760120 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | |
1 Becton Drive, | Franklin Lakes, | New Jersey | 07417-1880 | | (201) | 847-6800 |
(Address of principal executive offices) (Zip Code) | | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
Common stock, par value $1.00 | | BDX | | New York Stock Exchange |
Depositary Shares, each representing a 1/20th interest in a share of 6.00% Mandatory Convertible Preferred Stock, Series B | | BDXB | | New York Stock Exchange |
1.000% Notes due December 15, 2022 | | BDX22A | | New York Stock Exchange |
1.900% Notes due December 15, 2026 | | BDX26 | | New York Stock Exchange |
1.401% Notes due May 24, 2023 | | BDX23A | | New York Stock Exchange |
3.020% Notes due May 24, 2025 | | BDX25 | | New York Stock Exchange |
0.174% Notes due June 4, 2021 | | BDX/21 | | New York Stock Exchange |
0.632% Notes due June 4, 2023 | | BDX/23A | | New York Stock Exchange |
1.208% Notes due June 4, 2026 | | BDX/26A | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
Emerging growth company | | ☐ | | | | |
| | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 290,559,991 shares of Common Stock, $1.00 par value, outstanding at December 31, 2020.
BECTON, DICKINSON AND COMPANY
FORM 10-Q
For the quarterly period ended December 31, 2020
TABLE OF CONTENTS
| | | | | | | | |
| | Page Number |
Part I. | FINANCIAL INFORMATION | |
| | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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Part II. | | |
| | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
| | |
| | |
ITEM 1. FINANCIAL STATEMENTS
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Millions of dollars
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Assets | (Unaudited) | | |
Current Assets: | | | |
Cash and equivalents | $ | 3,248 | | | $ | 2,825 | |
Restricted cash | 199 | | | 92 | |
Short-term investments | 17 | | | 20 | |
Trade receivables, net | 2,370 | | | 2,398 | |
Inventories: | | | |
Materials | 651 | | | 602 | |
Work in process | 366 | | | 335 | |
Finished products | 1,798 | | | 1,806 | |
| 2,814 | | | 2,743 | |
| | | |
Prepaid expenses and other | 889 | | | 891 | |
Total Current Assets | 9,537 | | | 8,969 | |
Property, Plant and Equipment | 12,273 | | | 11,919 | |
Less allowances for depreciation and amortization | 6,177 | | | 5,996 | |
Property, Plant and Equipment, Net | 6,096 | | | 5,923 | |
Goodwill | 23,758 | | | 23,620 | |
Developed Technology, Net | 9,940 | | | 10,146 | |
Customer Relationships, Net | 3,053 | | | 3,107 | |
Other Intangibles, Net | 564 | | | 560 | |
| | | |
Other Assets | 1,801 | | | 1,687 | |
Total Assets | $ | 54,748 | | | $ | 54,012 | |
Liabilities and Shareholders’ Equity | | | |
Current Liabilities: | | | |
Short-term debt | $ | 1,737 | | | $ | 707 | |
Payables, accrued expenses and other current liabilities | 5,284 | | | 5,129 | |
| | | |
Total Current Liabilities | 7,021 | | | 5,836 | |
Long-Term Debt | 16,082 | | | 17,224 | |
Long-Term Employee Benefit Obligations | 1,434 | | | 1,435 | |
Deferred Income Taxes and Other Liabilities | 5,549 | | | 5,753 | |
Commitments and Contingencies (See Note 5) | | | |
Shareholders’ Equity | | | |
Preferred stock | 2 | | | 2 | |
Common stock | 365 | | | 365 | |
Capital in excess of par value | 19,301 | | | 19,270 | |
Retained earnings | 13,522 | | | 12,791 | |
Deferred compensation | 23 | | | 23 | |
Common stock in treasury - at cost | (6,136) | | | (6,138) | |
Accumulated other comprehensive loss | (2,414) | | | (2,548) | |
Total Shareholders’ Equity | 24,663 | | | 23,765 | |
Total Liabilities and Shareholders’ Equity | $ | 54,748 | | | $ | 54,012 | |
Amounts may not add due to rounding.
See notes to condensed consolidated financial statements
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Millions of dollars, except per share data
(Unaudited)
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| Three Months Ended December 31, | | |
| 2020 | | 2019 | | | | |
Revenues | $ | 5,315 | | | $ | 4,225 | | | | | |
Cost of products sold | 2,583 | | | 2,247 | | | | | |
Selling and administrative expense | 1,149 | | | 1,121 | | | | | |
Research and development expense | 291 | | | 270 | | | | | |
Acquisitions and other restructurings | 50 | | | 86 | | | | | |
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Total Operating Costs and Expenses | 4,074 | | | 3,724 | | | | | |
Operating Income | 1,241 | | | 501 | | | | | |
Interest expense | (118) | | | (136) | | | | | |
Interest income | 2 | | | 1 | | | | | |
Other income, net | 32 | | | 27 | | | | | |
Income Before Income Taxes | 1,157 | | | 394 | | | | | |
Income tax provision | 154 | | | 117 | | | | | |
Net Income | 1,003 | | | 278 | | | | | |
Preferred stock dividends | (23) | | | (38) | | | | | |
Net income applicable to common shareholders | $ | 981 | | | $ | 240 | | | | | |
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Basic Earnings per Share | $ | 3.38 | | | $ | 0.88 | | | | | |
Diluted Earnings per Share | $ | 3.35 | | | $ | 0.87 | | | | | |
Dividends per Common Share | $ | 0.83 | | | $ | 0.79 | | | | | |
Amounts may not add due to rounding.
See notes to condensed consolidated financial statements
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Millions of dollars
(Unaudited)
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| Three Months Ended December 31, | | |
| 2020 | | 2019 | | | | |
Net Income | $ | 1,003 | | | $ | 278 | | | | | |
Other Comprehensive Income, Net of Tax | | | | | | | |
Foreign currency translation adjustments | 64 | | | 26 | | | | | |
Defined benefit pension and postretirement plans | 42 | | | 17 | | | | | |
Cash flow hedges | 28 | | | 39 | | | | | |
Other Comprehensive Income, Net of Tax | 134 | | | 82 | | | | | |
Comprehensive Income | $ | 1,138 | | | $ | 359 | | | | | |
Amounts may not add due to rounding.
See notes to condensed consolidated financial statements
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Millions of dollars
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended December 31, |
| 2020 | | 2019 |
Operating Activities | | | |
Net income | $ | 1,003 | | | $ | 278 | |
Adjustments to net income to derive net cash provided by operating activities: | | | |
Depreciation and amortization | 555 | | | 530 | |
Share-based compensation | 83 | | | 82 | |
Deferred income taxes | (66) | | | (71) | |
Change in operating assets and liabilities | 24 | | | 102 | |
Pension obligation | 26 | | | 24 | |
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Other, net | (91) | | | (231) | |
Net Cash Provided by Operating Activities | 1,533 | | | 713 | |
Investing Activities | | | |
Capital expenditures | (246) | | | (173) | |
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Acquisitions of businesses, net of cash acquired | (67) | | | — | |
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Other, net | (116) | | | (114) | |
Net Cash Used for Investing Activities | (430) | | | (287) | |
Financing Activities | | | |
Change in credit facility borrowings | — | | | 210 | |
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Payments of debt and term loans | (267) | | | (303) | |
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Dividends paid | (264) | | | (252) | |
Other, net | (61) | | | (68) | |
Net Cash Used for Financing Activities | (592) | | | (413) | |
Effect of exchange rate changes on cash and equivalents and restricted cash | 18 | | | 6 | |
Net increase in cash and equivalents and restricted cash | 530 | | | 18 | |
Opening Cash and Equivalents and Restricted Cash | 2,917 | | | 590 | |
Closing Cash and Equivalents and Restricted Cash | $ | 3,447 | | | $ | 609 | |
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Amounts may not add due to rounding.
See notes to condensed consolidated financial statements
BECTON, DICKINSON AND COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of Becton, Dickinson and Company (the "Company" or "BD"), include all adjustments which are of a normal recurring nature, necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and accompanying notes required for a presentation in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2020 Annual Report on Form 10-K. Within the financial statements and tables presented, certain columns and rows 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. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Note 2 – Accounting Changes
New Accounting Principle Adopted
In June 2016, the FASB issued a new accounting standard which requires earlier recognition of credit losses on loans and other financial instruments held by entities, including trade receivables. The new standard requires entities to measure all expected credit losses for financial assets held at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The Company’s adoption of this accounting standard on October 1, 2020, using the modified retrospective method, did not have a material impact on the Company's condensed consolidated financial statements.
Note 3 – Shareholders' Equity
Changes in certain components of shareholders' equity for the first quarters of fiscal years 2021 and 2020 were as follows:
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| Common Stock Issued at Par Value | | Capital in Excess of Par Value | | Retained Earnings | | Deferred Compensation | | Treasury Stock |
(Millions of dollars) | Shares (in thousands) | | Amount |
Balance at September 30, 2020 | $ | 365 | | | $ | 19,270 | | | $ | 12,791 | | | $ | 23 | | | (74,623) | | | $ | (6,138) | |
Net income | — | | | — | | | 1,003 | | | — | | | — | | | — | |
Common dividends ($0.83 per share) | — | | | — | | | (242) | | | — | | | — | | | — | |
Preferred dividends | — | | | — | | | (23) | | | — | | | — | | | — | |
Common stock issued for share-based compensation and other plans, net | — | | | (53) | | | — | | | — | | | 549 | | | 2 | |
Share-based compensation | — | | | 83 | | | — | | | — | | | — | | | — | |
Common stock held in trusts, net (a) | — | | | — | | | — | | | — | | | (7) | | | — | |
Effect of change in accounting principles (see Note 2) | — | | | — | | | (9) | | | — | | | — | | | — | |
Balance at December 31, 2020 | $ | 365 | | | $ | 19,301 | | | $ | 13,522 | | | $ | 23 | | | (74,080) | | | $ | (6,136) | |
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| Common Stock Issued at Par Value | | Capital in Excess of Par Value | | Retained Earnings | | Deferred Compensation | | Treasury Stock |
(Millions of dollars) | Shares (in thousands) | | Amount |
Balance at September 30, 2019 | $ | 347 | | | $ | 16,270 | | | $ | 12,913 | | | $ | 23 | | | (76,260) | | | $ | (6,190) | |
Net income | — | | | — | | | 278 | | | — | | | — | | | — | |
Common dividends ($0.79 per share) | — | | | — | | | (215) | | | — | | | — | | | — | |
Preferred dividends | — | | | — | | | (38) | | | — | | | — | | | — | |
Common stock issued for share-based compensation and other plans, net | — | | | (32) | | | — | | | 1 | | | 758 | | | (38) | |
Share-based compensation | — | | | 82 | | | — | | | — | | | — | | | — | |
Common stock held in trusts, net (a) | — | | | — | | | — | | | — | | | (12) | | | — | |
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Balance at December 31, 2019 | $ | 347 | | | $ | 16,320 | | | $ | 12,938 | | | $ | 24 | | | (75,514) | | | $ | (6,228) | |
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(a)Common stock held in trusts represents rabbi trusts in connection with deferred compensation under the Company’s employee salary and bonus deferral plan and directors’ deferral plan.
The components and changes of Accumulated other comprehensive income (loss) for the first quarters of fiscal years 2021 and 2020 were as follows:
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(Millions of dollars) | Total | | Foreign Currency Translation | | Benefit Plans | | Cash Flow Hedges |
Balance at September 30, 2020 | $ | (2,548) | | | $ | (1,416) | | | $ | (1,040) | | | $ | (91) | |
Other comprehensive income before reclassifications, net of taxes | 115 | | | 64 | | | 24 | | | 27 | |
Amounts reclassified into income, net of taxes | 19 | | | — | | | 18 | | | 2 | |
Balance at December 31, 2020 | $ | (2,414) | | | $ | (1,352) | | | $ | (998) | | | $ | (62) | |
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(Millions of dollars) | Total | | Foreign Currency Translation | | Benefit Plans | | Cash Flow Hedges |
Balance at September 30, 2019 | $ | (2,283) | | | $ | (1,256) | | | $ | (1,005) | | | $ | (23) | |
Other comprehensive income before reclassifications, net of taxes | 63 | | | 26 | | | — | | | 37 | |
Amounts reclassified into income, net of taxes | 19 | | | — | | | 17 | | | 2 | |
Balance at December 31, 2019 | $ | (2,202) | | | $ | (1,230) | | | $ | (988) | | | $ | 16 | |
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The amounts of foreign currency translation recognized in other comprehensive income during the three months ended December 31, 2020 and 2019 included net losses relating to net investment hedges. Other comprehensive income relating to benefit plans during the three months ended December 31, 2020 represented a net gain recognized as a result of the Company’s remeasurement, as of October 31, 2020, of the legacy Bard U.S. defined pension benefit plan upon its merger with the BD defined benefit cash balance pension plan in the first quarter of fiscal year 2021. The amounts recognized in other comprehensive income relating to cash flow hedges during the three months ended December 31, 2020 and 2019 related to forward starting interest rate swaps. Additional disclosures regarding the Company's derivatives are provided in Note 11.
Note 4 – Earnings per Share
The weighted average common shares used in the computations of basic and diluted earnings per share (shares in thousands) were as follows:
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| Three Months Ended December 31, | | |
| 2020 | | 2019 | | | | |
Average common shares outstanding | 290,590 | | | 271,102 | | | | | |
Dilutive share equivalents from share-based plans | 2,522 | | | 3,850 | | | | | |
Average common and common equivalent shares outstanding – assuming dilution | 293,112 | | | 274,952 | | | | | |
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Share equivalents excluded from the diluted shares outstanding calculation because the result would have been antidilutive: | | | | | | | |
Mandatory convertible preferred stock | 5,995 | | | 11,685 | | | | | |
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Note 5 – Contingencies
Given the uncertain nature of litigation generally, the Company is not able, in all cases, to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which the Company is a party. In accordance with U.S. GAAP, the Company establishes accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). With respect to putative class action lawsuits in the United States and certain of the Canadian lawsuits described below relating to product liability matters, the Company is unable to estimate a range of reasonably possible losses for the following reasons: (i) all or certain of the proceedings are in early stages; (ii) the Company has not received and reviewed complete information regarding all or certain of the plaintiffs and their medical conditions; and/or (iii) there are significant factual issues to be resolved. In addition, there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class. With respect to the civil investigative demand (“CID”) served by the Department of Justice, discussed below, the Company is unable to estimate a range of reasonably possible losses for the following reasons: (i) all or certain of the proceedings are in early stages; and/or (ii) there are significant factual and legal issues to be resolved.
In view of the uncertainties discussed below, the Company could incur charges in excess of any currently established accruals and, to the extent available, liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on the Company’s consolidated results of operations and consolidated cash flows.
Product Liability Matters
The Company believes that certain settlements and judgments, as well as legal defense costs, relating to product liability matters are, or may be, covered in whole or in part under its product liability insurance policies. In some circumstances, the Company is covered under indemnification obligations from other parties, which if disputed, the Company intends to vigorously contest. Amounts recovered under the Company’s product liability insurance policies or indemnification arrangements may be less than the stated coverage limits or less than otherwise expected and may not be adequate to cover damages and/or costs relating to claims. In addition, there is no guarantee that insurers or other parties will pay claims or that coverage or indemnity will be otherwise available.
Hernia Product Claims
As of December 31, 2020, the Company is defending approximately 23,260 product liability claims involving the Company’s line of hernia repair devices (collectively, the “Hernia Product Claims”). The majority of those claims are currently pending in a coordinated proceeding in Rhode Island State Court, but claims are also pending in other state and/or federal court jurisdictions. In addition, those claims include multiple putative class actions in Canada. Generally, the Hernia Product Claims seek damages for personal injury allegedly resulting from use of the products. From time to time, the Company engages in resolution discussions with plaintiffs’ law firms regarding certain of the Hernia Product Claims, but the Company also intends to vigorously defend Hernia Product Claims that do not settle, including through litigation. The Company expects additional trials of Hernia Product Claims to take place over the next 12 months. In August 2018, a hernia multi-district litigation (“MDL”) was ordered to be established in the Southern District of Ohio. Trials are scheduled throughout fiscal year 2021 in various state and/or federal courts, with the first trial currently scheduled for April 2021 in the Rhode Island State Court. A second trial is scheduled for April 2021 in the MDL. The Company cannot give any assurances that the resolution of the
Hernia Product Claims that have not settled, including asserted and unasserted claims and the putative class action lawsuits, will not have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity.
Women’s Health Product Claims
As of December 31, 2020, the Company is defending approximately 465 product liability claims involving the Company’s line of pelvic mesh devices. The majority of those claims are currently pending in various federal court jurisdictions, and a coordinated proceeding in New Jersey State Court, but claims are also pending in other state court jurisdictions. In addition, those claims include putative class actions filed in the United States. Not included in the figures above are approximately 980 filed and unfiled claims that have been asserted or threatened against the Company but lack sufficient information to determine whether a pelvic mesh device of the Company is actually at issue.
The claims identified above also include products manufactured by both the Company and two subsidiaries of Medtronic plc (as successor in interest to Covidien plc) (“Medtronic”), each a supplier of the Company. Medtronic has an obligation to defend and indemnify the Company with respect to any product defect liability relating to products its subsidiaries had manufactured. In July 2015, the Company reached an agreement with Medtronic in which Medtronic agreed to take responsibility for pursuing settlement of certain of the Women’s Health Product Claims that relate to products distributed by the Company under supply agreements with Medtronic. In June 2017, the Company amended the agreement with Medtronic to transfer responsibility for settlement of additional Women’s Health Product Claims to Medtronic on terms similar to the July 2015 agreement, including with respect to the obligation to make payments to Medtronic toward these potential settlements. As of December 31, 2020, the Company has paid Medtronic $148 million towards these potential settlements. The Company also may, in its sole discretion, transfer responsibility for settlement of additional Women’s Health Product Claims to Medtronic on similar terms. The agreements do not resolve the dispute between the Company and Medtronic with respect to Women’s Health Product Claims that do not settle, if any. The foregoing lawsuits, unfiled claims, putative class actions, and other claims, together with claims that have settled or are the subject of agreements or agreements in principle to settle, are referred to collectively as the “Women’s Health Product Claims.” The Women’s Health Product Claims generally seek damages for personal injury allegedly resulting from use of the products.
As of December 31, 2020, the Company has reached agreements or agreements in principle with various plaintiffs’ law firms to settle their respective inventories of cases totaling approximately 15,280 of the Women’s Health Product Claims. The Company believes that these Women’s Health Product Claims are not the subject of Medtronic’s indemnification obligation. These settlement agreements and agreements in principle include unfiled and previously unknown claims held by various plaintiffs’ law firms, which are not included in the approximate number of lawsuits set forth in the first paragraph of this section. Each agreement is subject to certain conditions, including requirements for participation in the proposed settlements by a certain minimum number of plaintiffs. The Company continues to engage in discussions with other plaintiffs’ law firms regarding potential resolution of unsettled Women’s Health Product Claims, which may include additional inventory settlements.
Starting in 2014 in the MDL, the court entered certain pre-trial orders requiring trial work up and remand of a significant number of Women’s Health Product Claims, including an order entered in the MDL on January 30, 2018, that requires the work up and remand of all remaining unsettled cases (the “WHP Pre-Trial Orders”). The WHP Pre-Trial Orders may result in material additional costs or trial verdicts in future periods in defending Women’s Health Product Claims. Trials are anticipated throughout 2021 in state and federal courts. A trial in the New Jersey coordinated proceeding began in March 2018, and in April 2018 a jury entered a verdict against the Company in the total amount of $68 million ($33 million compensatory; $35 million punitive). The Company is in the process of appealing that verdict and a hearing before the appellate court was held on January 25, 2021. The Company expects additional trials of Women’s Health Product Claims to take place over the next 12 months, which may potentially include consolidated trials.
During the course of engaging in settlement discussions with plaintiffs’ law firms, the Company has learned, and may in future periods learn, additional information regarding these and other unfiled claims, or other lawsuits, which could materially impact the Company’s estimate of the number of claims or lawsuits against the Company.
Filter Product Claims
As of December 31, 2020, the Company is defending approximately 520 product liability claims involving the Company’s line of inferior vena cava filters (collectively, the “Filter Product Claims”). The majority of those claims were previously pending in an MDL in the United States District Court for the District of Arizona, but those MDL claims either have been, or are in the process of being, remanded to various federal jurisdictions. Filter Product Claims are also pending in various state court jurisdictions, including a coordinated proceeding in Arizona State Court. In addition, those claims include putative class actions filed in the United States and Canada. The Filter Product Claims generally seek damages for personal injury allegedly resulting from use of the products. The Company has limited information regarding the nature and quantity of certain of the
Filter Product Claims. The Company continues to receive claims and lawsuits and may in future periods learn additional information regarding other unfiled or unknown claims, or other lawsuits, which could materially impact the Company’s estimate of the number of claims or lawsuits against the Company. On May 31, 2019, the MDL Court ceased accepting direct filings or transfers into the Filter Product Claims MDL and, as noted above, remands for non-settled cases have begun and are expected to continue over the next three months. Federal and state court trials are scheduled throughout fiscal year 2021. As of December 31, 2020, the Company entered into settlement agreements and/or settlement agreements in principle for approximately 9,280 cases. On March 30, 2018, a jury in the first MDL trial found the Company liable for negligent failure to warn and entered a verdict in favor of plaintiffs. The jury found the Company was not liable for (a) strict liability design defect; (b) strict liability failure to warn; and (c) negligent design. In August 2020, the Ninth Circuit affirmed that verdict on appeal. On June 1, 2018, a jury in the second MDL trial unanimously found in favor of the Company on all claims. On August 17, 2018, the Court entered summary judgment in favor of the Company on all claims in the third MDL trial. On October 5, 2018, a jury in the fourth MDL trial unanimously found in favor of the Company on all claims. The Company expects additional trials of Filter Product Claims may take place over the next 12 months.
In most product liability litigations (like those described above), plaintiffs allege a wide variety of claims, ranging from allegations of serious injury caused by the products to efforts to obtain compensation notwithstanding the absence of any injury. In many of these cases, the Company has not yet received and reviewed complete information regarding the plaintiffs and their medical conditions and, consequently, is unable to fully evaluate the claims. The Company expects that it will receive and review additional information regarding any remaining unsettled product liability matters.
In connection with the settlement of a prior litigation with certain of the Company's insurance carriers, an agreement with the Company's insurance carriers was reached to reimburse the Company for certain future costs incurred in connection with Filter Product Claims up to an agreed amount. For certain product liability claims or lawsuits, the Company does not maintain or has limited remaining insurance coverage.
Other Legal Matters
The Company is a potentially responsible party to a number of federal administrative proceedings in the United States brought under the Comprehensive Environment Response, Compensation and Liability Act, also known as “Superfund,” and similar state laws. The affected sites are in varying stages of development. In some instances, the remedy has been completed, while in others, environmental studies are underway or commencing. For several sites, there are other potentially responsible parties that may be jointly or severally liable to pay all or part of cleanup costs. While it is not feasible to predict the outcome of these proceedings, based upon the Company’s experience, current information and applicable law, the Company does not expect these proceedings to have a material adverse effect on its financial condition and/or liquidity.
On February 27, 2020, a putative class action captioned Kabak v. Becton, Dickinson and Company, et al., Civ. No. 2:20-cv-02155 (SRC) (CLW), was filed in the U.S. District Court for the District of New Jersey against the Company and certain of its officers. The complaint, which purports to be brought on behalf of all persons (other than defendants) who purchased or otherwise acquired the Company's common stock from November 5, 2019 through February 5, 2020, asserts claims for purported violations of Sections 10 and 20 of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder, and seeks, among other things, damages and costs. The complaint alleges that defendants concealed material information regarding AlarisTM infusion pumps, including that (1) certain pumps exhibited software errors, (2) the Company was investing in remediation efforts as opposed to other enhancements and (3) the Company was thus reasonably likely to recall certain pumps and/or experience regulatory delays. These alleged omissions, the complaint asserts, rendered certain public statements about the Company’s business, operations and prospects false or misleading, causing investors to purchase stock at an inflated price. The plaintiff filed a motion to amend the complaint to add certain additional factual allegations on January 14, 2021. The Company believes the claims are without merit and intends to vigorously defend this action.
On November 2, 2020, a civil action captioned Jankowski v. Forlenza, et al., Civ. No. 2:20-cv-15474, was filed in the U.S. District Court for the District of New Jersey by a shareholder, Ronald Jankowski, derivatively on behalf of the Company, against its individual directors and certain of its officers. The complaint seeks recovery for breach of fiduciary duties by directors and various officers; violations of the Securities Exchange Act of 1934; and insider trading. In general, the complaint alleges, among other things, that various directors and/or officers (1) caused the Company to issue purportedly misleading statements and SEC filings regarding AlarisTM infusion pumps (2) issued a misleading proxy statement (3) engaged in improper insider trading and (4) caused or contributed to various violations of the Securities Exchange Act of 1934, including sections 10(b), 14(a) and 21D. The complaint seeks damages, including restitution and disgorgement of profits, and an injunction requiring the Company to undertake remedial measures with respect to certain corporate governance and internal procedures. The Company believes these claims are without merit and intends to vigorously defend this action. Consistent with New Jersey law, this action will be stayed pending a formal response by a special committee of the Board of Directors to the shareholder’s presuit demand for an investigation of his claims.
On January 24, 2021, a civil action captioned Schranz v. Polen, et al., Civ. No 2:21-cv-01081, was filed in the U.S. District Court for the District of New Jersey by a shareholder, Jeff Schranz, derivatively on behalf of the Company. The Complaint largely advances claims, and seeks recovery of damages and other relief, similar to those set forth in the Jankowski action.
In April 2019, the Department of Justice served the Company and CareFusion with CIDs seeking information regarding certain of CareFusion’s contracts with the Department of Veteran’s Affairs for certain products, including AlarisTM and PyxisTM devices, in connection with a civil investigation of possible violations of the False Claims Act, and the government recently expanded the investigation to include several additional contracts. The government has made several requests for documents and interviews or depositions of Company personnel. The Company is cooperating with the government and responding to these requests.
The Company cannot predict the outcome of these matters, nor can it predict whether any outcome will have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity. Accordingly, the Company has made no provisions for these other legal matters in its consolidated results of operations.
The Company is also involved both as a plaintiff and a defendant in other legal proceedings and claims that arise in the ordinary course of business. The Company believes that it has meritorious defenses to these suits pending against the Company and is engaged in a vigorous defense of each of these matters.
Litigation Accruals
The Company regularly monitors and evaluates the status of product liability and other legal matters, and may, from time-to-time, engage in settlement and mediation discussions taking into consideration developments in the matters and the risks and uncertainties surrounding litigation. These discussions could result in settlements of one or more of these claims at any time.
Accruals for the Company's product liability claims which are discussed above, as well as the related legal defense costs, amounted to approximately $2.4 billion at December 31, 2020 and $2.5 billion at September 30, 2020. These accruals, which are generally long-term in nature, are largely recorded within Deferred Income Taxes and Other Liabilities on the Company's condensed consolidated balance sheets. As of December 31, 2020 and September 30, 2020, the Company had $198 million and $92 million, respectively, in qualified settlement funds (“QSFs”), subject to certain settlement conditions, for certain product liability matters. Payments to QSFs are recorded as a component of Restricted cash. The Company's expected recoveries related to product liability claims and related legal defense costs were approximately $111 million and $139 million at December 31, 2020 and September 30, 2020, respectively. A substantial amount of these expected recoveries at December 31, 2020 and September 30, 2020 related to the Company’s agreements with Medtronic related to certain Women’s Health Product Claims. The expected recoveries at December 31, 2020 related to the indemnification obligation are not in dispute with respect to claims that Medtronic settles pursuant to the agreements.
Note 6 – Revenues
The Company’s policies for recognizing sales have not changed from those described in the Company’s 2020 Annual Report on Form 10-K. The Company sells a broad range of medical supplies, devices, laboratory equipment and diagnostic products which are distributed through independent distribution channels and directly by BD through sales representatives. End-users of the Company's products include healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.
Measurement of Revenues
The Company’s allowance for doubtful accounts reflects the current estimate of credit losses expected to be incurred over the life of its trade receivables. Such estimated credit losses are determined based on historical loss experiences, customer-specific credit risk, and reasonable and supportable forward-looking information, such as country or regional risks that are not captured in the historical loss information. The allowance for doubtful accounts for trade receivables is not material to the Company's consolidated financial results.
The Company's gross revenues are subject to a variety of deductions which are recorded in the same period that the underlying revenues are recognized. Such variable consideration includes rebates, sales discounts and sales returns. The impact of other forms of variable consideration, including sales discounts and sales returns, is not material to the Company's revenues.
Effects of Revenue Arrangements on Consolidated Balance Sheets
Capitalized contract costs associated with the costs to fulfill contracts for certain products in the Medication Management Solutions organizational unit are immaterial to the Company's condensed consolidated balance sheets. Commissions relating to revenues recognized over a period longer than one year are recorded as assets which are amortized over the period over which
the revenues underlying the commissions are recognized. Capitalized contract costs related to such commissions are immaterial to the Company's condensed consolidated balance sheets.
Contract liabilities for unearned revenue that is allocable to performance obligations, such as extended warranty and software maintenance contracts, which are performed over time are immaterial to the Company's consolidated financial results. The Company's liability for product warranties provided under its agreements with customers is not material to its condensed consolidated balance sheets.
Remaining Performance Obligations
The Company's obligations relative to service contracts and pending installations of equipment, primarily in the Company's Medication Management Solutions unit, represent unsatisfied performance obligations of the Company. The revenues under existing contracts with original expected durations of more than one year, which are attributable to products and/or services that have not yet been installed or provided are estimated to be approximately $1.9 billion at December 31, 2020. The Company expects to recognize the majority of this revenue over the next three years.
Within the Company's Medication Management Solutions, Medication Delivery Solutions, Integrated Diagnostic Solutions, and Biosciences units, some contracts also contain minimum purchase commitments of reagents or other consumables and the future sales of these consumables represent additional unsatisfied performance obligations of the Company. The revenue attributable to the unsatisfied minimum purchase commitment-related performance obligations, for contracts with original expected durations of more than one year, is estimated to be approximately $2.6 billion at December 31, 2020. This revenue will be recognized over the customer relationship periods.
Disaggregation of Revenues
A disaggregation of the Company's revenues by segment, organizational unit and geographic region is provided in Note 7.
Note 7 – Segment Data
The Company's organizational structure is based upon three worldwide business segments: BD Medical (“Medical”), BD Life Sciences (“Life Sciences”) and BD Interventional ("Interventional"). The Company's segments are strategic businesses that are managed separately because each one develops, manufactures and markets distinct products and services. Segment disclosures are on a performance basis consistent with internal management reporting. The Company evaluates performance of its business segments and allocates resources to them primarily based upon segment operating income, which represents revenues reduced by product costs and operating expenses.
Revenues by segment, organizational unit and geographical areas for the three-month periods are detailed below. The Company has no material intersegment revenues.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, |
(Millions of dollars) | 2020 | | 2019 |
| United States | | International | | Total | | United States | | International | | Total |
Medical | | | | | | | | | | | |
Medication Delivery Solutions | $ | 568 | | | $ | 440 | | | $ | 1,008 | | | $ | 520 | | | $ | 428 | | | $ | 948 | |
Medication Management Solutions | 477 | | | 152 | | | 630 | | | 462 | | | 113 | | | 575 | |
Diabetes Care | 150 | | | 136 | | | 285 | | | 139 | | | 129 | | | 268 | |
Pharmaceutical Systems | 79 | | | 260 | | | 339 | | | 84 | | | 215 | | | 299 | |
Total segment revenues | $ | 1,274 | | | $ | 988 | | | $ | 2,261 | | | $ | 1,204 | | | $ | 886 | | | $ | 2,090 | |
| | | | | | | | | | | |
Life Sciences | | | | | | | | | | | |
Integrated Diagnostic Solutions | $ | 1,014 | | | $ | 653 | | | $ | 1,667 | | | $ | 386 | | | $ | 414 | | | $ | 800 | |
Biosciences | 120 | | | 192 | | | 312 | | | 152 | | | 171 | | | 323 | |
Total segment revenues | $ | 1,134 | | | $ | 845 | | | $ | 1,979 | | | $ | 538 | | | $ | 585 | | | $ | 1,123 | |
| | | | | | | | | | | |
Interventional | | | | | | | | | | | |
Surgery | $ | 262 | | | $ | 70 | | | $ | 332 | | | $ | 256 | | | $ | 70 | | | $ | 326 | |
Peripheral Intervention | 232 | | | 193 | | | 426 | | | 225 | | | 170 | | | 395 | |
Urology and Critical Care | 228 | | | 89 | | | 317 | | | 206 | | | 85 | | | 291 | |
Total segment revenues | $ | 722 | | | $ | 353 | | | $ | 1,075 | | | $ | 688 | | | $ | 325 | | | $ | 1,012 | |
| | | | | | | | | | | |
Total Company revenues | $ | 3,130 | | | $ | 2,186 | | | $ | 5,315 | | | $ | 2,430 | | | $ | 1,795 | | | $ | 4,225 | |
Segment income for the three-month periods was as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
(Millions of dollars) | 2020 | | 2019 | | | | |
Income Before Income Taxes | | | | | | | |
Medical (a) | $ | 666 | | | $ | 564 | | | | | |
Life Sciences | 972 | | | 361 | | | | | |
Interventional | 302 | | | 243 | | | | | |
Total Segment Operating Income | 1,940 | | | 1,167 | | | | | |
Acquisitions and other restructurings | (50) | | | (86) | | | | | |
Net interest expense | (116) | | | (134) | | | | | |
Other unallocated items (b) | (616) | | | (553) | | | | | |
Total Income Before Income Taxes | $ | 1,157 | | | $ | 394 | | | | | |
(a)The amount for the three months ended December 31, 2019 included a $59 million charge recorded to Cost of products sold, related to the estimate of costs associated with remediation efforts for AlarisTM infusion pumps in the Medication Management Solutions unit.
(b)Primarily comprised of foreign exchange, certain general and administrative expenses and share-based compensation expense.
Note 8 – Benefit Plans
The Company has defined benefit pension plans covering certain employees in the United States and certain international locations. The measurement date used for these plans is September 30.
Net pension cost included the following components for the three-month periods:
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
(Millions of dollars) | 2020 | | 2019 | | | | |
Service cost | $ | 43 | | | $ | 40 | | | | | |
Interest cost | 20 | | | 22 | | | | | |
Expected return on plan assets | (48) | | | (49) | | | | | |
Amortization of prior service credit | (4) | | | (3) | | | | | |
Amortization of loss | 27 | | | 25 | | | | | |
| | | | | | | |
Net pension cost | $ | 38 | | | $ | 35 | | | | | |
The amounts provided above for amortization of prior service credit and amortization of loss represent the reclassifications of prior service credits and net actuarial losses that were recognized in Accumulated other comprehensive income (loss) in prior periods. All components of the Company’s net periodic pension cost, aside from service cost, are recorded to Other income, net on its condensed consolidated statements of income.
Note 9 – Business Restructuring Charges
The Company incurred restructuring costs during the three months ended December 31, 2020, primarily in connection with the Company's simplification and other cost saving initiatives, which were largely recorded within Acquisitions and other restructurings. Restructuring liability activity for the three months ended December 31, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Millions of dollars) | Employee Termination | | Other | | Total |
| Bard | | Other Initiatives | | Bard | | Other Initiatives | | Bard | | Other Initiatives |
Balance at September 30, 2020 | $ | 15 | | | $ | 17 | | | $ | 1 | | | $ | 3 | | | $ | 16 | | | $ | 20 | |
| | | | | | | | | | | |
Charged to expense | — | | | 6 | | | 1 | | | 10 | | | 1 | | | 16 | |
Cash payments | (2) | | | (10) | | | (2) | | | (10) | | | (4) | | | (20) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at December 31, 2020 | $ | 13 | | | $ | 13 | | | $ | — | | | $ | 3 | | | $ | 13 | | | $ | 16 | |
Note 10 – Intangible Assets
Intangible assets consisted of:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
(Millions of dollars) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Amortized intangible assets | | | | | | | |
Developed technology | $ | 14,164 | | | $ | 4,223 | | | $ | 14,105 | | | $ | 3,959 | |
Customer relationships | 4,645 | | | 1,592 | | | 4,616 | | | 1,509 | |
Product rights | 128 | | | 80 | | | 119 | | | 73 | |
Trademarks | 408 | | | 125 | | | 408 | | | 120 | |
Patents and other | 515 | | | 329 | | | 500 | | | 320 | |
Amortized intangible assets | $ | 19,860 | | | $ | 6,349 | | | $ | 19,748 | | | $ | 5,981 | |
Unamortized intangible assets | | | | | | | |
Acquired in-process research and development | $ | 44 | | | | | $ | 44 | | | |
Trademarks | 2 | | | | | 2 | | | |
Unamortized intangible assets | $ | 46 | | | | | $ | 46 | | | |
Intangible amortization expense for the three months ended December 31, 2020 and 2019 was $348 million and $345 million, respectively.
The following is a reconciliation of goodwill by business segment:
| | | | | | | | | | | | | | | | | | | | | | | |
(Millions of dollars) | Medical | | Life Sciences | | Interventional | | Total |
Goodwill as of September 30, 2020 | $ | 10,044 | | | $ | 837 | | | $ | 12,739 | | | $ | 23,620 | |
Acquisitions (a) | 50 | | | — | | | — | | | 50 | |
| | | | | | | |
Purchase price allocation adjustments | — | | | — | | | 1 | | | 1 | |
Currency translation | 41 | | | 4 | | | 42 | | | 87 | |
Goodwill as of December 31, 2020 | $ | 10,135 | | | $ | 841 | | | $ | 12,782 | | | $ | 23,758 | |
(a)Represents goodwill recognized relative to certain acquisitions which were not material individually or in the aggregate.
Note 11 – Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate certain exposures. The Company does not enter into derivative financial instruments for trading or speculative purposes. The effects these derivative instruments and hedged items have on financial position, financial performance, and cash flows are provided below.
Foreign Currency Risks and Related Strategies
The Company has foreign currency exposures throughout Europe, Greater Asia, Canada and Latin America. Transactional currency exposures that arise from entering into transactions, generally on an intercompany basis, in non-hyperinflationary countries that are denominated in currencies other than the functional currency are mitigated primarily through the use of forward contracts. In order to mitigate foreign currency exposure relating to its investments in certain foreign subsidiaries, the Company has hedged the currency risk associated with those investments with instruments, such as foreign currency-denominated debt, cross-currency swaps and currency exchange contracts, which are designated as net investment hedges.
Hedges of the transactional foreign exchange exposures resulting primarily from intercompany payables and receivables are undesignated hedges. As such, the gains or losses on these instruments are recognized immediately in income. These gains and losses are largely offset by gains and losses on the underlying hedged items, as well as the hedging costs associated with the derivative instruments. The net amounts recognized in Other income, net, during the three months ended December 31, 2020 and 2019 were immaterial to the Company's consolidated financial results. The total notional amounts of the Company’s outstanding foreign exchange contracts as of December 31, 2020 and September 30, 2020 were $1.5 billion and $2.5 billion, respectively.
Certain of the Company's foreign currency-denominated long-term notes outstanding, which had a total carrying value of $1.6 billion and $1.5 billion as of December 31, 2020 and September 30, 2020, respectively, were designated as, and were effective as, economic hedges of net investments in certain of the Company's foreign subsidiaries. The Company has entered into cross-currency swaps, all of which are designated and effective as economic hedges of net investments in certain of the Company's foreign subsidiaries. The notional amount of the cross-currency swaps was $3.0 billion as of December 31, 2020 and September 30, 2020.
Net gains or losses relating to the net investment hedges, which are attributable to changes in the foreign currencies to U.S. dollar spot exchange rates, are recorded as accumulated foreign currency translation in Other comprehensive income (loss). Upon the termination of a net investment hedge, any net gain or loss included in Accumulated other comprehensive income (loss) relative to the investment hedge remains until the foreign subsidiary investment is disposed of or is substantially liquidated.
Net losses recorded to Accumulated other comprehensive income (loss) relating to the Company's net investment hedges for the three-month periods were as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
(Millions of dollars) | 2020 | | 2019 | | | | |
Foreign currency-denominated debt | $ | (56) | | | $ | (34) | | | | | |
Cross-currency swaps | $ | (124) | | | $ | (52) | | | | | |
| | | | | | | |
Interest Rate Risks and Related Strategies
The Company’s policy is to manage interest rate exposure using a mix of fixed and variable rate debt. The Company periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Company exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated as either fair value or cash flow hedges.
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
The total notional amount of the Company’s outstanding interest rate swaps designated as fair value hedges was $375 million at December 31, 2020 and September 30, 2020. The outstanding swaps represent fixed-to-floating interest rate swap agreements the Company entered into to convert the interest payments on certain long-term notes from the fixed rate to a floating interest rate based on LIBOR. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt. The amounts recorded during the three months ended December 31, 2020 and 2019 for changes in the fair value of these hedges were immaterial to the Company's consolidated financial results.
Changes in the fair value of the interest rate swaps designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk) are recorded in Other comprehensive income (loss). If interest rate derivatives designated as cash flow hedges are terminated, the balance in Accumulated other comprehensive income (loss) attributable to those derivatives is reclassified into earnings over the remaining life of the hedged debt. The net realized loss related to terminated interest rate swaps expected to be reclassified and recorded in Interest expense within the next 12 months is $5 million, net of tax.
The total notional amount of the Company's outstanding forward starting interest rate swaps was $1.5 billion at December 31, 2020 and September 30, 2020. The Company entered into these contracts to mitigate its exposure to interest rate risk. The Company recorded after-tax gains of $27 million and $37 million in Other comprehensive income relating to these interest rate hedges during the three months ended December 31, 2020 and 2019, respectively.
Financial Statement Effects
The fair values of derivative instruments outstanding at December 31, 2020 and September 30, 2020 were not material to the Company's consolidated balance sheets.
The amounts reclassified from accumulated other comprehensive income relating to cash flow hedges during the three months ended December 31, 2020 and 2019 were not material to the Company's consolidated financial results.
Note 12 – Financial Instruments and Fair Value Measurements
The following reconciles cash and equivalents and restricted cash reported within the Company's consolidated balance sheets at December 31, 2020 and September 30, 2020 to the total of these amounts shown on the Company's consolidated statements of cash flows:
| | | | | | | | | | | |
(Millions of dollars) | December 31, 2020 | | September 30, 2020 |
Cash and equivalents | $ | 3,248 | | | $ | 2,825 | |
Restricted cash | 199 | | | 92 | |
Cash and equivalents and restricted cash | $ | 3,447 | | | $ | 2,917 | |
Cash equivalents consist of all highly liquid investments with a maturity of three months or less at time of purchase. Restricted cash consists of cash restricted from withdrawal and usage except for certain product liability matters.
The Company’s cash and equivalents include institutional money market accounts, which permit daily redemption, and an ultra-short bond fund. The fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions, which are considered Level 1 inputs in the fair value hierarchy. The fair values of these accounts were $1.1 billion and $1.5 billion at December 31, 2020 and September 30, 2020, respectively. The Company’s remaining cash and equivalents, excluding restricted cash, were $2.2 billion and $1.3 billion at December 31, 2020 and September 30, 2020, respectively.
Short-term investments are held to their maturities and are carried at cost, which approximates fair value. The short-term investments consist of instruments with maturities greater than three months and less than one year.
Long-term debt is recorded at amortized cost. The fair value of long-term debt is measured based upon quoted prices in active markets for similar instruments, which are considered Level 2 inputs in the fair value hierarchy. The fair value of long-term debt was $18.2 billion and $19.0 billion at December 31, 2020 and September 30, 2020, respectively. The fair value of the current portion of long-term debt was $1.752 billion and $702 million at December 31, 2020 and September 30, 2020, respectively.
All other instruments measured by the Company at fair value, including derivatives and contingent consideration liabilities, are immaterial to the Company's consolidated balance sheets.
Nonrecurring Fair Value Measurements
In the first quarter of fiscal year 2021, the Company recorded charges to Cost of products sold of $34 million to write down the carrying value of certain fixed assets. The amounts recognized were recorded to adjust the carrying amount of assets to the assets' fair values, which were estimated, based upon a market participant's perspective, using Level 3 inputs, including values estimated using the income approach.
Transfers of trade receivables
Over the normal course of its business activities, the Company transfers certain trade receivable assets to third parties under factoring agreements. Per the terms of these agreements, the Company surrenders control over its trade receivables upon transfer. Accordingly, the Company accounts for the transfers as sales of trade receivables by recognizing an increase to Cash and equivalents and a decrease to Trade receivables, net when proceeds from the transactions are received. During the three months ended December 31, 2020 and 2019, the Company transferred $492 million and $816 million, respectively, of its trade receivables to third parties under factoring arrangements. The Company’s balance of Trade receivables, net at December 31, 2020 and September 30, 2020 excluded transferred trade receivables, which were yet to be remitted to the third parties, of $284 million and $256 million, respectively. The costs incurred by the Company in connection with factoring activities were not material to its consolidated financial results.
Note 13 – Debt
In December 2020, the Company redeemed $265 million of the aggregate principal outstanding on the 2.894% notes due June 6, 2022, as well as accrued interest, related premiums, fees and expenses related to these redeemed amounts. Based upon the aggregate $265 million carrying value of the notes redeemed and the $275 million the Company paid to redeem the aggregate principal amount of the notes, the Company recorded a loss on this debt extinguishment transaction in the first quarter of fiscal year 2021 of $10 million within Other income, net, on its condensed consolidated statements of income.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Overview
Becton, 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 in the United States and internationally through independent distribution channels and directly to end-users by BD and independent sales representatives. We organize our operations outside the United States as follows: EMEA (which includes Europe, the Middle East and Africa); Greater Asia (which includes countries in Greater China, Japan, South Asia, Southeast Asia, Korea, and Australia and New Zealand); Latin America (which includes Mexico, Central America, the Caribbean and South America); and Canada. We continue to pursue growth opportunities in emerging markets, which include the following geographic regions: Eastern Europe, the Middle East, Africa, Latin America and certain countries within Greater Asia. We are primarily focused on certain countries whose healthcare systems are expanding.
COVID-19 Pandemic Impacts and Response
A novel strain of coronavirus disease (“COVID-19”) was officially declared a pandemic by the World Health Organization ("WHO") in March 2020 and governments around the world have been implementing various measures to slow and control the ongoing spread of COVID-19. These various measures led to a sudden and significant decline in economic activity within a number of countries worldwide in our fiscal year 2020. As a result of these government restrictions and a shift in healthcare priorities, there was a significant decline in medical procedures which led to weakened demand for our products during our fiscal year 2020. We began to note improvement in the demand for certain products at the end of our third quarter in fiscal year 2020 and demand for these products continued to show recovery throughout the first quarter of our fiscal year 2021. Our first quarter of fiscal year 2021 revenues also reflect a substantial benefit from sales related to COVID-19 diagnostic testing on the BD VeritorTM Plus and BD MaxTM Systems. The impacts which affected our revenue growth for the three months ended December 31, 2020, 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, other aspects of our supply chain and demand for procedure-based products. The U.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:
•The extent to which resurgences in COVID-19 infections or new strains of the virus result in 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 distribution of available COVID-19 vaccines and the entry of additional competitive SARS-CoV-2 diagnostic testing products will impact the demand and pricing for our COVID-19 diagnostics testing solutions;
•The pace at which hospitals, clinical laboratories, research laboratories and institutions fully resume normal operations that are not related to the COVID-19 pandemic;
•The timing and strength of any global economic recovery and the degree of pressure that the weaker macroeconomic environment will put on future healthcare utilization, 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 ended December 31, 2020, worldwide revenues of $5.315 billion increased 25.8% from the prior-year period, which reflected an increase in volume of approximately 23.9%, a favorable impact from foreign currency translation of approximately 1.5% and a favorable impact from pricing of approximately 0.4%. Volume in the first quarter of fiscal year 2021 reflected the following:
•Medical segment revenues in the first quarter reflected growth in all of the segment's units, particularly in the Medication Delivery Solutions, Medication Management Solutions and Pharmaceutical Systems units.
•Life Sciences segment revenues in the first quarter reflected growth that was driven by the Integrated Diagnostic Solutions unit’s sales related to COVID-19 diagnostic testing on the BD VeritorTM Plus and BD MaxTM Systems. Sales related to COVID-19 diagnostic testing in the first quarter were approximately $867 million and increased volume growth in the first quarter by approximately 20.5%.
•Interventional segment revenues in the first quarter was driven by growth in all three units, particularly in the Peripheral Intervention unit as well as in the Urology and Critical Care unit.
We continue to invest in research and development, geographic expansion, and new product market programs to drive further revenue and profit growth. We have reinvested a portion of the proceeds from our sales related to COVID-19 diagnostic testing into our growth initiatives, as well as into our simplification and cost saving initiatives. 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 are highly volatile due to the COVID-19 pandemic. In addition, while price favorably impacted our revenues for the three months ended December 31, 2020, we believe pricing pressure exists globally which could adversely impact our businesses.
Cash flows from operating activities were $1.533 billion in the first three months of fiscal year 2021. At December 31, 2020, we had $3.464 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 three months of fiscal year 2021, we paid cash dividends of $264 million, including $242 million paid to common shareholders and $23 million paid to preferred shareholders.
Each reporting period, we face currency exposure that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that fluctuate from the beginning of such period. A weaker U.S. dollar, compared to the prior-year period, resulted in a favorable foreign currency translation impact to our revenues during the first quarter of fiscal year 2021. The unfavorable foreign currency translation impact to our earnings during the first quarter of fiscal year 2021 reflected the recognition of foreign currency translation associated with our cost of products sold. We evaluate our results of operations on both a reported and a foreign currency-neutral basis, which excludes the impact of fluctuations in foreign currency exchange rates. As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a foreign currency-neutral basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. Foreign currency-neutral ("FXN") information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a foreign currency-neutral basis as one measure to evaluate our performance. We calculate foreign currency-neutral percentages by converting our current-period local currency financial results using the prior-period foreign currency exchange rates and comparing these adjusted amounts to our current-period results. These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. generally accepted accounting principles ("GAAP"). Results on a foreign currency-neutral basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Results of Operations
Medical Segment
The following summarizes first quarter Medical revenues by organizational unit:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended December 31, |
(Millions of dollars) | 2020 | | 2019 | | Total Change | | Estimated FX Impact | | FXN Change |
Medication Delivery Solutions | $ | 1,008 | | | $ | 948 | | | 6.3 | % | | 0.7 | % | | 5.6 | % |
Medication Management Solutions | 630 | | | 575 | | | 9.5 | % | | 1.1 | % | | 8.4 | % |
Diabetes Care | 285 | | | 268 | | | 6.2 | % | | 0.8 | % | | 5.4 | % |
Pharmaceutical Systems | 339 | | | 299 | | | 13.5 | % | | 4.0 | % | | 9.5 | % |
Total Medical Revenues | $ | 2,261 | | | $ | 2,090 | | | 8.2 | % | | 1.3 | % | | 6.9 | % |
The Medication Delivery Solutions unit's revenues in the first quarter of 2021 were primarily driven by global sales of syringes relating to COVID-19 vaccination efforts and U.S. sales of catheters and medication delivery devices that are being used to treat COVID-19 patients. First quarter revenues in the Medication Delivery Solutions unit were also favorably impacted by an acceleration of customers’ orders as they prepared for COVID-19 resurgences.
The Medication Management Solutions unit's revenues in the first quarter of 2021 reflected strong demand for infusion pumps which resulted from COVID-19 resurgences, particularly in Europe, and infusion pump orders placed in the United States with medical necessity certification. This demand offset the unfavorable impact to the unit’s revenues which resulted from a hold on other U.S. shipments of BD AlarisTM infusion pumps pending compliance with certain 510(k) filing requirements of the United States Food and Drug Administration (“FDA”). We continue to make progress on our regulatory filing related to the BD AlarisTM infusion pumps and we continue to expect the filing to be made with the FDA either at the end of the second quarter or early in the third quarter of BD's fiscal year 2021.
First quarter revenues in the Diabetes Care unit were favorably impacted by an accelerated timing of orders within fiscal year 2021, particularly in the United States. The Pharmaceutical Systems unit's revenues in the first quarter of 2021 reflected continued strength in demand for prefillable products.
Medical segment income for the three-month periods is provided below.
| | | | | | | | | | | | | | | |
| Three months ended December 31, | | |
(Millions of dollars) | 2020 | | 2019 | | | | |
Medical segment income | $ | 666 | | | $ | 564 | | | | | |
| | | | | | | |
Segment income as % of Medical revenues | 29.4 | % | | 27.0 | % | | | | |
The Medical segment's income in the first 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 first quarter of 2021 as compared with the first quarter of 2020 primarily due to a favorable comparison to the prior-year period which included a $59 million charge to record a probable estimate of future costs associated with incremental remediation efforts relating to BD AlarisTM infusion pumps. Gross margin in the current-year period also reflected a strong contribution from the segment’s core products that was driven by the continued recovery of healthcare utilization and procedure volumes, as well as lower manufacturing costs resulting from continuous improvement projects which enhanced the efficiency of our operations. The Medical segment’s first quarter gross margin was unfavorably impacted by foreign currency translation, investments in simplification and other cost saving initiatives, as well as charges of $26 million recorded to write down the carrying value of certain fixed assets.
•Selling and administrative expense as a percentage of revenues was lower in the first quarter of 2021 compared with the first quarter of 2020 primarily due to the increase in revenues in the quarter, as well as a reduction of travel and other administrative costs that has resulted from the COVID-19 pandemic.
•Research and development expense as a percentage of revenues was relatively flat in the first quarter of 2021 compared with the first quarter of 2020 primarily due to the increase in revenues in the quarter and the timing of project spending.
Life Sciences Segment
The following summarizes first quarter Life Sciences revenues by organizational unit:
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| Three months ended December 31, |
(Millions of dollars) | 2020 | | 2019 | | Total Change | | Estimated FX Impact | | FXN Change |
Integrated Diagnostic Solutions | $ | 1,667 | | | $ | 800 | | | 108.4 | % | | 2.4 | % | | 106.0 | % |
Biosciences | 312 | | | 323 | | | (3.5) | % | | 1.7 | % | | (5.2) | % |
Total Life Sciences Revenues | $ | 1,979 | | | $ | 1,123 | | | 76.2 | % | | 2.1 | % | | 74.1 | % |
The Life Sciences segment's revenue growth in the first quarter of 2021 was driven by the Integrated Diagnostic Solutions unit's sales related to COVID-19 diagnostic testing on the BD VeritorTM Plus and BD MaxTM Systems. Growth in the Integrated Diagnostic Solutions unit related to COVID-19 testing was partially offset by pandemic-related declines in routine diagnostic testing and specimen collections. The Biosciences unit's revenues in the first quarter of 2021 reflected reduced U.S. demand for instruments and reagents as routine research and clinical lab activity in the United States continues to be below normal levels due to the COVID-19 pandemic. Additionally, current-period revenue growth in the Biosciences unit was negatively impacted by licensing revenues in the prior-year period. As competitors enter the COVID-19 diagnostic testing market, future sales of our SARS-CoV-2 diagnostic tests will be subject to lower pricing.
Life Sciences segment income for the three-month periods was as follows:
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| Three months ended December 31, | | |
(Millions of dollars) | 2020 | | 2019 | | | | |
Life Sciences segment income | $ | 972 | | | $ | 361 | | | | | |
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Segment income as % of Life Sciences revenues | 49.1 | % | | 32.1 | % | | | | |
The Life Sciences segment's income in the first 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 first quarter of 2021 was higher compared with the first quarter of 2020 which primarily reflected a favorable impact on product mix from the Integrated Diagnostic Solutions unit's sales related to COVID-19 testing.
•Selling and administrative expense as a percentage of revenues in the first quarter of 2021 was lower compared with the prior-year period primarily due to the increase in revenues in the quarter, as well as a reduction of travel and other administrative costs that has resulted from the COVID-19 pandemic.
•Research and development expense as a percentage of revenues was lower in the first quarter of 2021 compared with the first 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 first quarter Interventional revenues by organizational unit:
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| Three months ended December 31, |
(Millions of dollars) | 2020 | | 2019 | | Total Change | | Estimated FX Impact | | FXN Change |
Surgery | $ | 332 | | | $ | 326 | | | 1.9 | % | | 0.6 | |