Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following commentary should be read in conjunction with the consolidated financial statements and accompanying notes. Within the tables presented throughout this discussion, certain columns may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts. References to years throughout this discussion relate to our fiscal years, which end on September 30.

Company Overview

Description of the Company and Business Segments

Becton, Dickinson and Company (“BD”) is a global medical technology company engaged in the development, manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. The Company's organizational structure is based upon three principal business segments, BD Medical (“Medical”), BD Life Sciences (“Life Sciences”) and BD Interventional (“Interventional”), as further discussed below.

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: Europe; EMA (which includes the Commonwealth of Independent States, the Middle East and Africa); Greater Asia (which includes Japan and Asia Pacific); 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 Asia Pacific. We are primarily focused on certain countries whose healthcare systems are expanding.

Strategic Objectives

BD remains focused on delivering sustainable growth and shareholder value, while making appropriate investments for the future. BD management operates the business consistent with the following core strategies:

•	To increase revenue growth by focusing on our core products, services and solutions that deliver greater benefits to patients, healthcare workers and researchers;

•	To supplement our internal growth through strategic acquisitions;

•	To continue investment in research and development for platform extensions and innovative new products;

•	To make investments in growing our operations in emerging markets;

•	To improve operating effectiveness and balance sheet productivity;

•	To drive an efficient capital structure and strong shareholder returns.

Our strategy focuses on four specific areas within healthcare and life sciences:

•	Enabling safer, simpler and more effective parenteral drug delivery;

•	Improving clinical outcomes through new, more accurate and faster diagnostics;

•	Providing tools and technologies to the research community that facilitate the understanding of the cell, cellular diagnostics, cell therapy and immunology;

•	Enhancing disease management in diabetes, women’s health and cancer, infectious disease and other targeted conditions.

We continue to strive to improve the efficiency of our capital structure and follow these guiding principles:

•	To operate the Company consistent with an investment grade credit profile;

•	To ensure access to the debt market for strategic opportunities;

•	To optimize the cost of capital based on market conditions.

In assessing the outcomes of these strategies as well as BD’s financial condition and operating performance, management generally reviews quarterly forecast data, monthly actual results, segment sales and other similar information. We also consider trends related to certain key financial data, including gross profit

margin, selling and administrative expense, investment in research and development, return on invested capital, and cash flows.

Acquisition of C.R. Bard, Inc.

On December 29, 2017, BD completed its acquisition of C. R. Bard, Inc. ("Bard") for total consideration transferred, including cash and stock, of approximately $25 billion. The combination created a medical technology company that is uniquely positioned to improve both the treatment of disease for patients and the process of care for health care providers. The operating activities of the acquired businesses were included in our consolidated results of operations beginning on January 1, 2018. BD reports the results associated with the majority of Bard's product offerings within the Interventional segment. Bard's remaining product offerings are reported under the Medical segment. For further discussions regarding the reporting of Bard products within BD's segments and the Bard acquisition, refer to Notes 6 and 9, respectively, to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Impact of Tax Reform Act

On December 22, 2017, new U.S. tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Act") was enacted. The new tax legislation, which became effective January 1, 2018, reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign-sourced earnings. Based upon our determinations regarding the tax effects of the Act, we recognized additional tax expense in 2018 of $640 million, which is reflected in our consolidated statement of income within Income tax provision (benefit). Additional disclosures regarding our accounting for the Act are provided in Note 16 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Summary of Financial Results

Worldwide revenues in 2018 of $15.983 billion increased 32.2% from the prior-year period. The increase reflected an impact of almost 24.5% resulting from the acquisition of Bard. Revenue growth in 2018 also reflected volume growth of over 5.5%, a favorable impact from foreign currency translation of approximately 2.3% and an unfavorable impact of price of approximately 0.3%. Volume growth in 2018 attributable to the Medical and Life Sciences segments was as follows:

•	Medical segment volume growth in 2018 was driven by sales growth in all of the segment's units, particularly by growth in the Medication Delivery Solutions and Medication Management Solutions units.

•	Life Sciences segment volume growth in 2018 was driven by sales growth in all three of its organizational units, particularly in its Diagnostic Systems unit.

We continue to invest in research and development, geographic expansion, and new product market programs to drive further revenue and profit growth. Our ability to sustain our long-term growth will depend on a number of factors, including our ability to expand our core business (including geographical expansion), develop innovative new products, and continue to improve operating efficiency and organizational effectiveness. While the economic environment for the healthcare industry and healthcare utilization in the United States is generally stable, destabilization in the future could adversely impact our businesses. Additionally, macroeconomic challenges in Europe continue to constrain healthcare utilization, although we currently view the environment as stable. In emerging markets, the Company’s growth is dependent primarily on government funding for healthcare systems. In addition, pricing pressure exists globally which could adversely impact our businesses.

Our financial position remains strong, with cash flows from operating activities totaling $2.865 billion in 2018. At September 30, 2018, we had $1.3 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 fiscal year 2018, we paid cash dividends of $927 million.

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 in 2018, compared with 2017, resulted in a favorable foreign currency translation impact to our revenue and earnings during 2018. 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 Medical revenues by organizational unit:

													2018 vs. 2017									2017 vs. 2016
(Millions of dollars)	2018				2017				2016				Total Change			Estimated FX Impact			FXN Change			Total Change			Estimated FX Impact			FXN Change
Medication Delivery Solutions (a)	$	3,644			$	2,812			$	2,724			29.6	%		1.9	%		27.7	%		3.2	%		(0.8	)%		4.0	%
Medication Management Solutions	2,470				2,295				2,197				7.7	%		1.1	%		6.6	%		4.4	%		(0.5	)%		4.9	%
Diabetes Care	1,105				1,056				1,023				4.6	%		1.7	%		2.9	%		3.3	%		(0.3	)%		3.6	%
Pharmaceutical Systems	1,397				1,256				1,199				11.2	%		4.8	%		6.4	%		4.8	%		(0.5	)%		5.3	%
Respiratory Solutions	—				—				822				NM			NM			NM			NM			NM			NM
Total Medical revenues	$	8,616			$	7,419			$	7,965			16.1	%		2.1	%		14.0	%		(6.8	)%		(0.5	)%		(6.3	)%

"NM" denotes that the percentage is not meaningful.

(a)	The presentation of prior-period amounts reflects a reclassification of $685 million and $689 million in 2017 and 2016, respectively, of certain product revenues from the Medical segment to the Interventional segment as further discussed in discussed in Note 6 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Medical segment growth in 2018 was favorably impacted by the inclusion of revenues associated with certain Bard products within the Medication Delivery Solutions unit, beginning on January 1, 2018. The Medical segment's underlying revenue growth was largely driven by sales of the Medication Delivery Solutions unit's vascular access and vascular care products as well as by the Medication Management Solutions unit's installations of dispensing and infusion systems. Revenue growth in the Medication Management Solutions unit was partially offset by the unfavorable impact, in the first half of 2018, of a modification to dispensing equipment lease contracts with customers, which took place in April 2017. As a result of the lease modification, substantially all new lease contracts are accounted for as operating leases with revenue recognized over the agreement term, rather than upon the placement of capital. The Medical segment’s underlying growth also reflected sales of the Pharmaceutical Systems unit's prefillable products and the Diabetes Care unit's pen needles.

Medical segment revenue growth in 2017 was driven by the Medication Delivery Solutions unit's sales of infusion disposables products, particularly in international markets, and the Pharmaceutical Systems unit’s sales of self-injection systems. Revenue growth in 2017 also reflected the Diabetes Care unit's increased sales of pen needles in the United States and emerging markets. International growth in the Diabetes Care unit was impacted by weaker revenues in Europe, primarily in the United Kingdom, due to increasing pressure from government

payers as part of austerity measures. Medical segment revenues in 2017 were unfavorably impacted by the divestiture of the Respiratory Solutions business and the modification to dispensing equipment lease contracts in the Medication Management Solutions unit, as discussed above. In 2017, revenues in the Medication Management Solutions unit included $151 million of revenues relating to amended preexisting lease contracts.

Medical segment operating income was as follows:

(Millions of dollars)	2018				2017				2016
Medical segment operating income (a) (b)	$	2,624			$	1,907			$	1,807
Segment operating income as % of Medical revenues	30.5		%		25.7		%		22.7		%

(a)	Operating income in 2018 excluded certain general and administrative costs, which were allocated to the segment in 2017 and 2016, due to a change in our management reporting approach, as is further discussed in Note 6 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

(b)	The presentation of prior-period amounts reflects reclassifications of $248 million and $245 million in 2017 and 2016, respectively, relating to the movement of certain product offerings from the Medical segment to the Interventional segment as noted above.

The Medical segment's operating income was driven by its performance with respect to gross profit margin and operating expenses as discussed in greater detail below:

• The Medical segment's gross profit margin in 2018 was lower as compared with 2017 primarily due to the expense related to amortization of intangible assets acquired in the Bard transaction and the expense related to the recognition of a fair value step-up adjustment relating to Bard's inventory on the acquisition date. The Medical segment's gross profit margin in 2018 was also unfavorably impacted by charges to write down the value of fixed assets, primarily in the Diabetes Care unit, higher raw material costs and pricing pressures. These unfavorable impacts to the Medical segment's gross margin were partially offset by lower manufacturing costs resulting from continuous improvement projects which enhanced the efficiency of our operations and favorable product mix impact relating to the Bard products reported within the segment. The Medical segment's gross profit margin in 2017 was higher as compared with 2016 primarily due to the divestiture of the Respiratory Solutions business, which had products with relatively lower gross profit margins. Gross profit margin in 2017 also reflected lower manufacturing costs resulting from continuous improvement projects.

• Selling and administrative expense as a percentage of revenues in 2018 was lower compared with 2017 which primarily reflected a reduction in the general and administrative costs allocated to the segment, as noted above. Selling and administrative expense as a percentage of revenues in 2017 was lower compared with 2016, primarily due to the divestiture of the Respiratory Solutions business, as this business generally had a lower operating margin.

• Research and development expense as a percentage of revenues was higher in 2018 which reflected increased investment in new products and platforms. Research and development expense as a percentage of revenues in 2017 reflected ongoing investment in new products and platforms, but was lower compared with 2016 as expense in 2016 included a one-time payment relating to one of the segment's ongoing projects.

Life Sciences Segment

The following summarizes Life Sciences revenues by organizational unit:

													2018 vs. 2017									2017 vs. 2016
(Millions of dollars)	2018				2017				2016				Total Change			Estimated FX Impact			FXN Change			Total Change			Estimated FX Impact			FXN Change
Preanalytical Systems	$	1,553			$	1,471			$	1,409			5.5	%		1.4	%		4.1	%		4.4	%		(0.8	)%		5.2	%
Diagnostic Systems	1,536				1,378				1,301				11.5	%		1.9	%		9.6	%		5.9	%		(0.5	)%		6.4	%
Biosciences	1,241				1,139				1,119				9.0	%		2.2	%		6.8	%		1.8	%		(0.6	)%		2.4	%
Total Life Sciences revenues	$	4,330			$	3,988			$	3,829			8.6	%		1.8	%		6.8	%		4.2	%		(0.6	)%		4.8	%

The Life Sciences segment's revenue growth in 2018 was driven by growth across all three of its organizational units. The Diagnostic Systems unit's revenues were primarily driven by sales of core microbiology products as well as continued strength in sales of the unit's BD MAXTM molecular platform. Revenue growth in the Diagnostic Systems unit also reflected a more severe influenza season in 2018 compared with 2017. The Life Sciences segment's 2018 revenue growth was also driven by the Biosciences unit's sales of research reagents and recently launched instruments. Growth in the Preanalytical Systems unit reflected global sales of core products.

The Life Sciences segment's 2017 revenues reflected growth in global sales of the Preanalytical Systems unit's core products and growth in sales of the Diagnostics Systems unit's microbiology and molecular platforms, particularly in emerging markets. The segment’s 2017 revenue growth was also driven by increased Biosciences unit sales, particularly in developed markets.

Life Sciences segment operating income was as follows:

(Millions of dollars)	2018				2017				2016
Life Sciences segment operating income (a)	$	1,207			$	772			$	793
Segment operating income as % of Life Sciences revenues	27.9		%		19.4		%		20.7		%

(a)	Operating income in 2018 excluded certain general and administrative costs, which were allocated to the segment in 2017 and 2016, due to a change in our management reporting approach, as noted above.

The Life Sciences segment's operating income was driven by its performance with respect to gross profit margin and operating expenses as discussed in greater detail below:

•

The Life Sciences segment's gross profit margin as a percentage of revenues was higher in fiscal year 2018 primarily due to lower manufacturing costs resulting from continuous improvement projects, which enhanced the efficiency of our operations, and favorable foreign currency translation. These favorable impacts to the Life Sciences segment's gross margin were partially offset by expense related to the Biosciences unit's write-down of certain intangible and other assets, as well as higher raw material costs. The Life Sciences segment's gross profit margin as a percentage of revenues was lower in fiscal year 2017 primarily due to unfavorable foreign currency translation, higher raw material costs and unfavorable product mix, partially offset by lower manufacturing costs resulting from operations improvement projects.

•	Selling and administrative expense as a percentage of Life Sciences revenues in 2018 was lower compared to 2017 primarily due to a reduction in the general and administrative costs allocated to the segment, as noted above. Selling and administrative expense as a percentage of Life Sciences revenues in 2017 was higher compared to 2016 primarily due to slightly higher administrative costs.

•	Research and development expense as a percentage of revenues in 2018 was higher compared with 2017 primarily due to write-downs in the Biosciences unit, as noted above. Research and development expense as a percentage of revenues in 2017 was relatively flat compared with 2016.

Interventional Segment

The following summarizes Interventional revenues by organizational unit:

													2018 vs. 2017		2017 vs. 2016
(Millions of dollars)	2018				2017				2016				Total Change		Total Change
Surgery (a)	$	1,192			$	666			$	670			NM		NM
Peripheral Intervention (a)	1,045				19				20				NM		NM
Urology and Critical Care	800				—				—				NM		NM
Total Interventional revenues	$	3,037			$	685			$	689			NM		NM

"NM" denotes that the percentage is not meaningful.

(a)	The presentation of prior-period amounts reflects reclassifications of $685 million and $689 million in 2017 and 2016, respectively, of certain product revenues from the Medical segment to the Interventional segment as noted above.

Interventional segment operating income was as follows:

(Millions of dollars)	2018				2017				2016
Interventional segment operating income (a)	$	306			$	248			$	245
Segment operating income as % of Interventional revenues	10.1		%		NM				NM

(a)	The presentation of prior-period amounts reflects reclassifications of $248 million and $245 million in 2017 and 2016, respectively, relating to the movement of certain product offerings from the Medical segment to the Interventional segment as noted above.

The Interventional segment's operating income was driven by its performance with respect to gross profit margin and operating expenses. The Interventional segment's operating income in 2018 reflected expense related to the recognition of a fair value step-up adjustment relating to Bard's inventory on the acquisition date. The fair value adjustment was a required non-cash adjustment to the value of acquired inventory and was expensed over a four-month period, consistent with an estimate of the period of time to sell the acquired inventory.

Geographic Revenues

BD’s worldwide revenues by geography were as follows:

													2018 vs. 2017									2017 vs. 2016
(Millions of dollars)	2018				2017				2016				Total Change			Estimated FX Impact			FXN Change			Total Change			Estimated FX Impact			FXN Change
United States	$	8,768			$	6,504			$	6,893			34.8	%		—			34.8	%		(5.6	)%		—			(5.6	)%
International	7,215				5,589				5,590				29.1	%		4.8	%		24.3	%		—	%		(1.2	)%		1.2	%
Total revenues	$	15,983			$	12,093			$	12,483			32.2	%		2.3	%		29.9	%		(3.1	)%		(0.5	)%		(2.6	)%

U.S. revenues in 2018 benefited from the inclusion of revenues associated with Bard products in our financial results beginning on January 1, 2018. Underlying 2018 revenue growth in the United States was driven by revenues in the Medical segment's Medication Delivery Solutions and Medication Management Solutions units, as well as by revenues in the Life Sciences segment's Diagnostic Systems unit.

U.S. revenues in 2017 were unfavorably impacted by the Medical segment's divestiture of the Respiratory Solutions business and the modification to dispensing equipment lease contracts with customers in the Medical segment's Medication Management Solutions unit, as previously discussed. These impacts to U.S. revenues in 2017 were partially offset by growth in sales in the Medical segment's Medication Management Solutions and Diabetes Care units, as well as in all of the Life Sciences segment's units.

International revenues in 2018 benefited from the inclusion of revenues associated with Bard products in our financial results. International 2018 revenues also reflected increased sales in the Medical segment's Medication Delivery Solutions, Medication Management Solutions and Pharmaceutical Systems units, as well as growth attributable to sales in all three of the Life Sciences segment's organizational units.

International revenue growth in 2017 were driven by sales in the Medical segment's Medication Delivery Solutions, Medication Management Solutions and Pharmaceutical Systems units, as well as by sales in the Life Sciences segment's Preanalytical Systems and Diagnostic Systems units. International revenue growth in 2017 was partially offset by the impact of the Medical segment's divestiture of the Respiratory Solutions business.

Emerging market revenues were $2.53 billion, $1.95 billion and $1.9 billion in 2018, 2017 and 2016, respectively. Foreign currency translation favorably impacted emerging market revenues in 2018 by an estimated $19 million and unfavorably impacted emerging market revenues in 2017 by an estimated $29 million. Emerging market revenue growth in 2018 benefited from the inclusion of revenues associated with Bard products in our financial results. Underlying growth was particularly driven by sales in China and EMA. Emerging market revenue growth in 2017 was driven by sales in Greater Asia, including China, and Latin America. Emerging market revenues in 2016 related to divested businesses, primarily the Respiratory Solutions business, were approximately $105 million.

Specified Items

Reflected in the financial results for 2018, 2017 and 2016 were the following specified items:

(Millions of dollars)	2018				2017				2016
Integration costs (a)	$	344			$	237			$	192
Restructuring costs (a)	344				85				526
Transaction costs (a)	56				39				10
Financing costs (b)	49				131				—
Purchase accounting adjustments (c)	1,733				491				527
Losses on debt extinguishment (d)	16				73				—
Net impact of gain on sale of investment and asset impairments (e)	(151		)		—				—
Hurricane recovery costs	17				—				—
Lease contract modification-related charge (f)	—				748				—
Litigation-related items (g)	—				(337		)		—
Pension settlement charges	—				—				6
Total specified items	2,409				1,466				1,261
Less: Impact of tax reform and tax impact of specified items (h)	(265		)		495				369
After-tax impact of specified items	$	2,674			$	971			$	892

(a)	Represents integration, restructuring and transaction costs, recorded in Acquisitions and other restructurings, which are further discussed below.

(b)	Represents financing impacts associated with the Bard acquisition, which were recorded in Interest income and Interest expense.

(c)	Primarily represents non-cash amortization expense associated with acquisition-related identifiable intangible assets. BD’s amortization expense is primarily recorded in Cost of products sold. The amount 2018 also included a fair value step-up adjustments of $478 million relating to Bard's inventory on the acquisition date.

(d)	Represents losses recognized in Other income (expense), net upon our extinguishment of certain long-term senior notes.

(e)

Represents the net amount recognized in Other income (expense), net related to BD's sale of its non-controlling interest in Vyaire Medical, including a gain of $303 million recognized on the sale as further discussed below, partially offset by $81 million of charges recorded to write down the carrying value of certain intangible and other assets in the Biosciences unit as well as $58 million of charges to write down the value of fixed assets primarily in the Diabetes Care unit.

(f)	Represents a non-cash charge in 2017, which was recorded in Other operating expense, net resulting from a modification to our dispensing equipment lease contracts with customers, as previously discussed.

(g)	The amount in 2017 largely represents the reversal of certain reserves related to an appellate court decision recorded related to RTI in Other operating expense, net.

(h)	The amount in 2018 includes additional tax expense, net, of $640 million relating to new U.S. tax legislation, as discussed above.

Gross Profit Margin

The comparison of gross profit margins in 2018 and 2017 and the comparison of gross profit margins in 2017 and 2016 reflected the following impacts:

	2018			2017
Gross profit margin % prior-year period	49.1	%		48.0	%
Impact of purchase accounting adjustments, asset write-downs and other specified items	(6.9	)%		—	%
Impact of divestitures	—	%		0.8	%
Operating performance	2.8	%		0.7	%
Foreign currency translation	0.4	%		(0.4	)%
Gross profit margin % current-year period	45.4	%		49.1	%

Further discussion regarding write-downs of certain intangible and other assets in the Biosciences unit and write-downs of fixed assets in the Diabetes Care unit is provided above. The operating performance impacts in 2018 and 2017 reflected lower manufacturing costs resulting from the continuous operations improvement projects discussed above. Operating performance in 2018 also reflected the favorable impact of Bard on product mix and the unfavorable impacts of higher raw material costs and pricing pressures. Gross profit margin in 2017 was favorably impacted by businesses divestitures, primarily the divestiture of the Respiratory Solutions business which had products with relatively lower gross profit margins.

Operating Expenses

Operating expenses in 2018, 2017 and 2016 were as follows:

														Increase (decrease) in basis points
(Millions of dollars)		2018				2017				2016				2018 vs. 2017			2017 vs. 2016
Selling and administrative expense		$	4,015			$	2,925			$	3,005
% of revenues		25.1		%		24.2		%		24.1		%		90			10
Research and development expense		$	1,006			$	774			$	828
% of revenues		6.3		%		6.4		%		6.6		%		(10	)		(20	)
Acquisitions and other restructurings		$	744			$	354			$	728
Other operating expense, net		$	—			$	410			$	—

Selling and administrative

The increase in selling and administrative expense as a percentage of revenues in 2018 compared with 2017 was primarily attributable to the inclusion of Bard, which had a higher selling and administrative spending profile, in 2018 results. Selling and administrative expense as a percentage of revenues in 2017 was relatively flat compared with 2016.

Research and development

Research and development expense as a percentage of revenues in 2018 was relatively flat compared with 2017. Spending in 2018, 2017 and 2016 reflected our continued commitment to invest in new products and platforms. Spending in 2018 also included certain write-down charges in the Biosciences unit, as further discussed above. Research and development expense as a percentage of revenues was slightly lower in 2017 compared to expense in 2016, which reflected increased investment in 2016 in high growth opportunities.

Acquisitions and other restructurings

Costs relating to acquisitions and other restructurings in 2018 included restructuring costs incurred due to our acquisition of Bard, and to a lesser extent, restructuring costs related to our fiscal year 2015 acquisition of CareFusion and other portfolio rationalization initiatives. Integration costs incurred in 2018 were attributable to both the Bard and CareFusion acquisitions. Transaction costs were incurred in 2018 and 2017 primarily due to our acquisition of Bard. Substantially all of the integration and restructuring costs in 2017 and 2016 were attributable to the CareFusion acquisition and other portfolio rationalization initiatives. Restructuring costs in 2016 included a $214 million charge recorded to impair capitalized internal-use software assets held for sale as a result of information technology function transformation efforts. For further disclosures regarding the costs relating to acquisitions and other restructurings, refer to Notes 7, 9, 10 and 11 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Other operating (income) expense, net

Other operating expense in 2017 included the $748 million non-cash charge resulting from the modification to our dispensing equipment lease contracts with customers. Additional disclosures regarding this lease contract modification are provided in Note 17 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. Other operating income in 2017 included a $337 million reversal of certain reserves related to an appellate court decision which, among other things, reversed an unfavorable antitrust judgment in the RTI case. Additional disclosures regarding this legal matter are provided in Note 5 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Net Interest Expense

(Millions of dollars)	2018				2017				2016
Interest expense	$	(706	)		$	(521	)		$	(388	)
Interest income	65				76				21
Net interest expense	$	(641	)		$	(445	)		$	(367	)

The increase in interest expense in 2018 compared with 2017 reflected higher levels of debt for the full-year period due to our issuances of senior unsecured U.S. notes during the third quarter of 2017. The increase in interest expense in 2017 also reflected interest costs related to these issuances of senior unsecured U.S. notes, as well as bridge financing commitment fees of $79 million. Additional disclosures regarding our financing arrangements and debt instruments are provided in Note 15 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

The decrease in interest income in 2018 reflected lower cash levels subsequent to the closing of the Bard acquisition in the first quarter of 2018. The increase in interest income in 2017 compared with 2016 primarily reflected higher levels of cash on hand as a result of our third quarter issuances of debt and equity securities in advance of closing our acquisition of Bard.

Income Taxes

The income tax rates in 2018, 2017 and 2016 were as follows:

	2018			2017			2016
Effective income tax rate	73.5	%		(12.7	)%		9.1	%
Impact, in basis points, from specified items	5,680			(2,790	)		(1,090	)

The increase in the effective income tax rate in 2018 reflected certain effects of new U.S. tax legislation that was enacted in December 2017. As previously discussed above, we recognized additional tax expense in 2018 of $640 million based upon our determinations regarding the effects of the new legislation. The effective income tax rate in 2018 also reflected a less favorable benefit from specified items in the current-year period. The decrease in the effective income tax rate in 2017 largely reflected the more favorable tax impact from specified items recognized in 2017 compared with 2016, as well as the tax benefits recorded upon the settlement of share-based compensation awards in 2017. The share-based compensation-related tax benefits were recognized in connection with BD's adoption of new accounting requirements relating to the income tax effects of share-based compensation awards. Additional disclosures regarding this adoption are provided in Note 2 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Net Income and Diluted Earnings per Share

Net Income and Diluted Earnings per Share in 2018, 2017 and 2016 were as follows:

	2018				2017				2016
Net income (Millions of dollars)	$	311			$	1,100			$	976
Diluted Earnings per Share	$	0.60			$	4.60			$	4.49
Unfavorable impact-specified items	$	(10.11	)		$	(4.34	)		$	(4.10	)
Favorable (unfavorable) impact-foreign currency translation	$	0.32			$	(0.23	)		$	(0.64	)
Dilutive impact from share issuances	$	(0.30	)		$	(0.54	)		$	—

The dilutive impacts in 2018 and 2017 include the unfavorable impact of BD shares issued through public offerings of equity securities in the third quarter of fiscal year 2017, in anticipation of the Bard acquisition. The dilutive impact in 2018 additionally includes the unfavorable impact of BD shares issued as consideration transferred in the first quarter of fiscal year 2018 for the Bard acquisition as is further discussed in Note 9 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Financial Instrument Market Risk

We selectively use financial instruments to manage market risk, primarily foreign currency exchange risk and interest rate risk relating to our ongoing business operations. The counterparties to these contracts are highly rated financial institutions. We do not enter into financial instruments for trading or speculative purposes.

Foreign Exchange Risk

BD and its subsidiaries transact business in various foreign currencies throughout Europe, Greater Asia, Canada and Latin America. We face foreign currency exposure from the effect of fluctuating exchange rates on payables and receivables relating to transactions that are denominated in currencies other than our functional currency. These payables and receivables primarily arise from intercompany transactions. We hedge substantially all such exposures, primarily through the use of forward contracts. We also face currency exposure that arises from translating the results of our worldwide operations, including sales, to the U.S. dollar at exchange rates that have fluctuated from the beginning of a reporting period. From time to time, we may purchase forward contracts and options to hedge certain forecasted transactions that are denominated in foreign currencies in order to partially protect against a reduction in the value of future earnings resulting from adverse

foreign exchange rate movements. Gains or losses on derivative instruments are largely offset by the gains or losses on the underlying hedged transactions. We did not enter into contracts to hedge cash flows against foreign currency fluctuations in fiscal year 2018 or 2017.

Derivative financial instruments are recorded on our balance sheet at fair value. For foreign currency derivatives, market risk is determined by calculating the impact on fair value of an assumed change in foreign exchange rates relative to the U.S. dollar. Fair values were estimated based upon observable inputs, specifically spot currency rates and foreign currency prices for similar assets and liabilities.

With respect to the foreign currency derivative instruments outstanding at September 30, 2018 and 2017, the impact that changes in the U.S. dollar would have on pre-tax earnings was estimated as follows:

	Increase (decrease)
(Millions of dollars)	2018				2017
10% appreciation in U.S. dollar	$	(59	)		$	(38	)
10% depreciation in U.S. dollar	$	59			$	38

These calculations do not reflect the impact of exchange gains or losses on the underlying transactions that would substantially offset the results of the derivative instruments.

Interest Rate Risk

Our primary interest rate risk relates to U.S. dollar borrowings which are partially offset by U.S. dollar cash investments. When managing interest rate exposures, we strive to achieve an appropriate balance between fixed and floating rate instruments. We may enter into interest rate swaps to help maintain this balance and manage debt and interest-bearing investments in tandem, since these items have an offsetting impact on interest rate exposure. For interest rate derivative instruments, fair values are measured based upon the present value of expected future cash flows using market-based observable inputs including credit risk and interest rate yield curves. Market risk for these instruments is determined by calculating the impact to fair value of an assumed change in interest rates across all maturities.

The impact that changes in interest rates would have on interest rate derivatives outstanding at September 30, 2018 and 2017, as well as the effect that changes in interest rates would have on our earnings or cash flows over a one-year period, based upon our overall interest rate exposure, were estimated as follows:

	Increase (decrease) to fair value of interest rate derivatives outstanding						Increase (decrease) to earnings or cash flows
(Millions of dollars)	2018				2017		2018				2017
10% increase in interest rates	$	(22	)		NM		$	(7	)		NM
10% decrease in interest rates	$	23			NM		$	7			NM

"NM" denotes that the impact was not meaningful due to immateriality.

Liquidity and Capital Resources

The following table summarizes our consolidated statement of cash flows in 2018, 2017 and 2016:

(Millions of dollars)	2018				2017				2016
Net cash provided by (used for)
Operating activities	$	2,865			$	2,550			$	2,559
Investing activities	$	(15,829	)		$	(883	)		$	(669	)
Financing activities	$	(58	)		$	10,977			$	(1,761	)

Net Cash Flows from Operating Activities

The fiscal year 2018, 2017 and 2016 changes in net cash provided by operating activities was primarily attributable to net income, as adjusted for depreciation and amortization and other non-cash items. The fiscal year 2018 change in operating assets and liabilities was a net source of cash and primarily reflected higher levels of accounts payable and accrued expenses, primarily due to higher income taxes payable as a result of the

new U.S. tax legislation discussed above, as well as lower levels of inventory, partially offset by higher levels of trade receivables. The change in cash flows from operating activities in 2018 also reflected a change to deferred tax asset and liability balances which were remeasured under the recently enacted tax legislation, which is further discussed in Note 16 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. The change in cash flows from operating activities in 2018 additionally reflected a $303 million gain on the sale of our remaining interest in the Vyaire Medical venture, as well as discretionary cash contributions of $287 million to fund our pension obligation. The fiscal year 2017 change in operating assets and liabilities was a net use of cash and primarily reflected higher levels of prepaid expenses, trade receivables and inventory, partially offset by higher levels of accounts payable and accrued expenses. Net cash provided by operating activities in 2017 reflected an adjustment for the non-cash charge resulting from the modification to our dispensing equipment lease contracts with customers, as previously discussed. As noted above, both 2018 and 2017 reflected losses recorded upon our extinguishment of certain long-term notes which are included within Other, net. The previously discussed non-cash charge recorded to impair capitalized internal-use software assets held for sale is included within Other, net in 2016. Net cash provided by operating activities in 2016 was reduced by changes in the pension obligation resulting primarily from a discretionary cash contribution of $100 million.

Net Cash Flows from Investing Activities

Capital expenditures

Our investments in capital expenditures are focused on projects that enhance our cost structure and manufacturing capabilities, and support our strategy of geographic expansion with select investments in growing markets. Capital expenditures of $895 million, $727 million, $693 million in 2018, 2017 and 2016, respectively, primarily related to manufacturing capacity expansions. Details of spending by segment are contained in Note 6 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Acquisitions of Businesses

Cash outflows for acquisitions in 2018 primarily related to our acquisition of Bard. Cash outflows for acquisitions in 2017 included payments for acquisitions which were immaterial both individually and in the aggregate. For further discussion, refer to Note 9 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Divestitures of Businesses

Cash inflows relating to business divestitures in 2018 and 2017 were $534 million and $165 million, respectively. For further discussion, refer to Note 10 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. Net cash flows from investing activities in 2016 included $158 million of proceeds from the sales of non-core assets.

Net Cash Flows from Financing Activities

Net cash from financing activities in 2018, 2017 and 2016 included the following significant cash flows:

(Millions of dollars)	2018				2017				2016
Cash inflow (outflow)
Change in credit facility borrowings	$	—			$	(200	)		$	(500	)
Proceeds from debt and term loans	$	5,086			$	11,462			$	—
Payments of debt and term loans	$	(3,996	)		$	(3,980	)		$	(752	)
Proceeds from issuances of equity securities	$	—			$	4,827			$	—
Share repurchases under accelerated share repurchase agreement	$	—			$	(220	)		$	—
Dividends paid	$	(927	)		$	(677	)		$	(562	)

Additional disclosures regarding the equity and debt-related financing activities detailed above are provided in Notes 3 and 15 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Debt-Related Activities

Certain measures relating to our total debt were as follows:

	2018				2017				2016
Total debt (Millions of dollars)	$	21,496			$	18,870			$	11,551
Short-term debt as a percentage of total debt	12.1		%		1.1		%		8.7		%
Weighted average cost of total debt	3.2		%		3.3		%		3.6		%
Total debt as a percentage of total capital (a)	47.8		%		57.5		%		57.2		%

(a)	Represents shareholders’ equity, net non-current deferred income tax liabilities, and debt.

The increase in short-term debt as a percentage of total debt at September 30, 2018 was primarily driven by the reclassification of certain notes from long-term to short-term. The decrease in short-term debt as a percentage of total debt at September 30, 2017 was largely driven by our issuance of $9.675 billion of senior unsecured U.S. notes during the third quarter of fiscal year 2017. Additional disclosures regarding our debt instruments are provided in Note 15 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Cash and Short-term Investments

At September 30, 2018, total worldwide cash and short-term investments were $1.253 billion, including restricted cash, which was primarily held in jurisdictions outside of the United States.

Financing Facilities

In May 2017, we entered into a three-year $2.25 billion senior unsecured term loan facility. We used the $2.25 billion of proceeds drawn from this facility in December 2017 to fund a portion of the cash consideration for the Bard acquisition, as well as the fees and expenses incurred in connection with the acquisition. In September 2018, we entered into a 364-day $750 million senior unsecured term loan facility. We used $230 million of proceeds drawn from this facility in September 2018 to repay all borrowings outstanding under the three-year term loan facility discussed above. Borrowings outstanding under the new, 364-day term loan facility were $710 million at September 30, 2018.

Also in May 2017, we entered into a five-year senior unsecured revolving credit facility which became effective upon the closing of the Bard acquisition and which provides borrowing of up to $2.25 billion. This facility will expire in December 2022 and replaced the $1.5 billion syndicated credit facility we previously had in place with an expiration date of January 2022. We will be able to issue up to $100 million in letters of credit under this new revolving credit facility and it also includes a provision that enables BD, subject to additional commitments made by the lenders, to access up to an additional $500 million in financing through the facility for a maximum aggregate commitment of $2.75 billion. We used proceeds from this facility to redeem or repurchase certain of Bard's outstanding senior unsecured notes that were assumed upon the closing of the acquisition and we will also use proceeds from this facility to fund general corporate needs. There were no borrowings outstanding under the revolving credit facility at September 30, 2018.

The agreements for both the new 364-day term loan and revolving credit facility contained the following financial covenants. We were in compliance with these covenants as of September 30, 2018.

•	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, as applicable depending upon commencement and maturity of the facility, 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 outside the United States. The Company had no commercial paper borrowings outstanding as of September 30, 2018. We may, from time to time, sell certain trade receivable assets to third parties as we manage working capital over the normal course of our business activities.

Access to Capital and Credit Ratings

Our corporate credit ratings with the rating agencies Standard & Poor's Ratings Services ("S&P"), Moody's Investor Service (Moody's) and Fitch Ratings ("Fitch") were as follows at September 30, 2018:

		S&P		Moody’s		Fitch
Ratings:
Senior Unsecured Debt		BBB		Ba1		BBB-
Commercial Paper		A-2		NP
Outlook		Stable		Stable		Stable

Upon our closing the Bard acquisition in the first quarter of fiscal year 2018, S&P lowered our corporate credit rating from the previous rating of BBB+. Also upon the acquisition's closing, Moody's downgraded our corporate credit and commercial paper ratings from the previous ratings of Baa2 and P-2, respectively. The rating assigned to our corporate debt by Fitch was unchanged by the closing of the acquisition.

Lower corporate debt ratings and further downgrades of our corporate credit ratings or other credit ratings may increase our cost of borrowing. We believe that given our debt ratings, our financial management policies, our ability to generate cash flow and the non-cyclical, geographically diversified nature of our businesses, we would have access to additional short-term and long-term capital should the need arise. A rating reflects only the view of a rating agency and is not a recommendation to buy, sell or hold securities. Ratings can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change.

Contractual Obligations

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. The table below sets forth BD’s significant contractual obligations and related scheduled payments as of September 30, 2018:

	Total				2019				2020 to 2021				2022 to 2023				2024 and Thereafter
	(Millions of dollars)
Short-term debt	$	2,644			$	2,644			$	—			$	—			$	—
Long-term debt (a)	26,163				677				5,075				5,478				14,933
Operating leases	511				107				171				110				124
Purchase obligations (b)	1,046				863				155				28				—
Unrecognized tax benefits (c)	—				—				—				—				—
Total (d)	$	30,365			$	4,291			$	5,401			$	5,617			$	15,057

(a)	Long-term debt obligations include expected principal and interest obligations.

(b)	Purchase obligations are for purchases made in the normal course of business to meet operational and capital requirements.

(c)	Unrecognized tax benefits at September 30, 2018 of $543 million were all long-term in nature. Due to the uncertainty related to the timing of the reversal of these tax positions, the related liability has been excluded from the table.

(d)	Required funding obligations for 2019 relating to pension and other postretirement benefit plans are not expected to be material.

Critical Accounting Policies

The following discussion supplements the descriptions of our accounting policies contained in Note 1 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. The preparation of the consolidated financial statements requires management to use estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Some of those judgments can be subjective and complex and, consequently, actual results could differ from those estimates. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For any given estimate or assumption made by management, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. Actual results that differ from management’s estimates could have an unfavorable effect on our consolidated financial statements. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the consolidated financial statements:

Revenue Recognition

While our revenue is generally the result of product sales, some of our sales transactions qualify as multiple-element arrangements which require us to identify separate units of accounting within the arrangement and allocate the transaction consideration across these separate accounting units. For arrangements that include software and non-software elements, the transaction consideration is allocated to the software elements as a group as well as to the individual non-software elements that have been separately identified. The identification of accounting units and the allocation of total transaction consideration for multiple-element arrangements may be subjective and requires a degree of management judgment. Management’s judgments relative to multiple-element arrangements may affect the timing of revenue recognition.

Transaction consideration for separately identified non-software units of accounting within an arrangement is recognized upon the completion of each deliverable based on its relative selling price. When applying the relative selling price method, the selling price of each deliverable is determined based upon the following hierarchy of evidence: vendor-specific objective evidence, which is generally based upon historical prices in stand-alone transactions; third-party evidence, which is generally based on market data on sales of similar products and services, if available; and management’s best estimate of selling price. Management’s best estimate of selling price is generally based upon the following considerations: stand-alone sales prices, established price lists, costs to produce, profit margins for similar products, market conditions, and customer stratification.

The revenue allocated to equipment or instruments in multiple-element arrangements is recognized upon transfer of title and risk of loss to the customer. The revenue allocated to extended warranty contracts and software maintenance contracts is deferred and recognized as these deliverables are performed under the arrangement. The majority of deferred revenue relating to extended warranty contracts is generally recognized within a few years whereas deferred revenue relating to software maintenance contracts is generally recognized over a longer period.

Accounting for Sales-Type Leases

In April 2017, in conjunction with the implementation of a new go-to-market business model for our dispensing business within our Medication Management Solutions unit, we amended new and existing leases to provide a limited return option. Prior to the amendment these leases were accounted for as sales-type leases in accordance with Accounting Standards Codification 840, Leases, as the typical non-cancellable lease term of 5 years exceeded 75% of the equipment’s estimated useful life and the present value of the minimum lease payments exceeded 90% of the equipment’s fair value. As sales-type leases, we recognized revenue upon installation of equipment at a customer site based on the present value of the minimum lease payments. As a result of the contract amendment, the amended lease term was shortened and as a result, the majority of leases no longer met the criteria for recognition as sales-type leases. Accordingly, the leases were classified as operating leases as of the modification date and revenue is generally recognized ratably over the lease term.

Accounting for Software Products

We sell and lease products with embedded software and as such, we must evaluate these products to determine if industry-specific revenue recognition requirements apply to these sales transactions. This evaluation process is often complex and subject to significant judgment. If software is considered not essential to the non-software elements of a product but is considered more than incidental to a product as a whole, the product’s software elements must be separated from its non-software elements under the requirements relating to multiple-element arrangements. The product’s software elements must be accounted for under software industry-specific revenue recognition requirements and the application of these requirements may significantly affect the timing and amount of revenue recognized.

While we have determined that the software embedded in the following product groupings is more than incidental to the products as a whole, the non-software elements (i.e., hardware) and software elements work together to deliver the essential functionality of these products as a whole. As such, the accounting for these product offerings does not fall within the scope of software industry-specific accounting requirements:

•	Infusion products (when sold with safety software, patient identification products and certain diagnostic equipment) within our Medication Management Solutions unit;

•	Dispensing products within our Medication Management Solutions unit;

•	Research and clinical instruments within our Biosciences unit.

Our standalone software application sales and any related post-contract support related to these sales are accounted for under the software industry-specific revenue recognition requirements.

Impairment of Assets

Goodwill and in-process research and development assets are subject to impairment reviews at least annually, or whenever indicators of impairment arise. Intangible assets with finite lives, including developed technology, and other long-lived assets, are periodically reviewed for impairment when impairment indicators are present.

We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or

one level below an operating segment, referred to as a component. Our reporting units generally represent one

level below reporting segments. Potential impairment of goodwill is generally identified by comparing the fair value of a reporting unit with its carrying value. Our annual goodwill impairment test performed on July 1, 2018 did not result in any impairment charges, as the fair value of each reporting unit exceeded its carrying value.

We generally use the income approach to derive the fair value for impairment assessments. This approach calculates fair value by estimating future cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. We selected this method because we believe the income approach most appropriately measures our income producing assets. This approach requires significant management judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, appropriate discount rates and other assumptions and estimates. The estimates and assumptions used are consistent with BD’s business plans. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the asset, and potentially result in different impacts to BD’s results of operations. Actual results may differ from management’s estimates.

Income Taxes

BD maintains valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, management evaluates factors such as prior earnings history, expected future earnings, carry back and carry forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

BD conducts business and files tax returns in numerous countries and currently has tax audits in progress in a number of tax jurisdictions. In evaluating the exposure associated with various tax filing positions, we record accruals for uncertain tax positions based on the technical support for the positions, our past audit experience with similar situations, and the potential interest and penalties related to the matters. BD’s effective tax rate in any given period could be impacted if, upon resolution with taxing authorities, we prevailed in positions for which reserves have been established, or we were required to pay amounts in excess of established reserves.

The U.S. Tax Cuts and Job Act (the "Act”) was enacted into law on December 22, 2017. This law reduces the U.S. statutory corporate tax rate from 35% to 21%; requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred; and creates new taxes on certain foreign-sourced earnings. BD has a measurement period of up to one year after the enactment date of the Act to finalize the recognition of the related tax impacts. The final impact of the Act may differ from the provisional amounts recognized in fiscal year 2018, possibly materially, due to, among other things, developing interpretations of the Act or any updates or changes to estimates we have utilized to calculate the impacts.

We have historically asserted indefinite reinvestment of the earnings of certain non-U.S. subsidiaries outside the United States. The Act eliminated certain material tax effects on the repatriation of cash to the United States. Future repatriation of cash and other property held by our foreign subsidiaries will generally not be subject to U.S. federal income tax. As a result, after reevaluation of the permanent reinvestment assertion, we are no longer permanently reinvested with respect to its historic unremitted foreign earnings as of September 30, 2018. Additional disclosures regarding our accounting for income taxes are provided in Note 16 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Contingencies

We are involved, both as a plaintiff and a defendant, in various legal proceedings that arise in the ordinary course of business, including, without limitation, product liability, antitrust and environmental matters, as further discussed in Note 5 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. We assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. We establish accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). A determination of the amount of accruals, if any, for these contingencies is made after careful analysis of each individual issue and, when appropriate, is developed after consultation with outside counsel. The accruals may change in the future due to new developments in each matter or changes in our strategy in dealing with these matters. We record expected recoveries from product liability insurance carriers or other parties when those recoveries are probable and collectible.

Given the uncertain nature of litigation generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which we are a party. In view of these uncertainties, we could incur charges in excess of any currently established accruals and, to the extent available, liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on BD’s consolidated results of operations and consolidated net cash flows.

Benefit Plans

We have significant net pension and other postretirement and postemployment benefit costs that are measured using actuarial valuations. These benefit costs include assumptions for the discount rate. Pension benefit costs also include an assumption for the expected return on plan assets. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 8 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data for additional discussion.

The discount rate is selected each year based on investment grade bonds and other factors as of the measurement date (September 30). Specifically for the U.S. pension plan, we will use a discount rate of 4.26% for 2019, which was based on an actuarially-determined, company-specific yield curve to measure liabilities as of the measurement date. To calculate the pension expense in 2019, we will apply the individual spot rates along the yield curve that correspond with the timing of each future cash outflow for benefit payments in order to calculate interest cost and service cost. Additional disclosures regarding the method to be used in calculating the interest cost and service cost components of pension expense for 2019 are provided in Note 8 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data. The expected long-term rate of return on plan assets assumption, although reviewed each year, changes less frequently due to the long-term nature of the assumption. This assumption does not impact the measurement of assets or liabilities as of the measurement date; rather, it is used only in the calculation of pension expense. To determine the expected long-term rate of return on pension plan assets, we consider many factors, including our historical assumptions compared with actual results; benchmark data; expected returns on various plan asset classes, as well as current and expected asset allocations. We will use a long-term expected rate of return on

plan assets assumption of 7.25% for the U.S. pension plan in 2019. We believe our discount rate and expected long-term rate of return on plan assets assumptions are appropriate based upon the above factors.

Sensitivity to changes in key assumptions for our U.S. pension and other postretirement and postemployment plans are as follows:

•

Discount rate — A change of plus (minus) 25 basis points, with other assumptions held constant, would have an estimated $6 million favorable (unfavorable) impact on the total U.S. net pension and other postretirement and postemployment benefit plan costs. This estimate assumes no change in the shape or steepness of the company-specific yield curve used to plot the individual spot rates that will be applied to the future cash outflows for future benefit payments in order to calculate interest and service cost.

•	Expected return on plan assets — A change of plus (minus) 25 basis points, with other assumptions held constant, would have an estimated $5 million favorable (unfavorable) impact on U.S. pension plan costs.

Share-Based Compensation

Compensation cost relating to share-based payment transactions is recognized in net income using a fair value measurement method. All share-based payments to employees, including grants of employee stock options, are recognized in the statement of operations as compensation expense (based on their fair values) over the vesting period of the awards. We determine the fair value of certain share-based awards using a lattice-based binomial option valuation model that incorporates certain assumptions, such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options. See Note 7 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data for additional discussion.

Cautionary Statement Regarding Forward-Looking Statements

BD and its representatives may from time to time make certain forward-looking statements in publicly released materials, both written and oral, including statements contained in filings with the Securities and Exchange Commission, press releases, and our reports to shareholders. Forward-looking statements may be identified by the use of words such as “plan,” “expect,” “believe,” “intend,” “will,”, “may”, “anticipate,” “estimate” and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance (including volume growth, sales and earnings per share growth, and cash flows) and statements regarding our strategy for growth, future product development, regulatory approvals, competitive position and expenditures. All statements that address our future operating performance or events or developments that we expect or anticipate will occur in the future are forward-looking statements.

Forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events, developments and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate, or risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events and developments or otherwise, except as required by applicable law or regulations.

The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements. For further discussion of certain of these factors, see Item 1A. Risk Factors in this report.

•	Weakness in the global economy and financial markets, which could increase the cost of operating our business, weaken demand for our products and services, negatively impact the prices we can charge for our products and services, or impair our ability to produce our products.

•

Competitive factors that could adversely affect our operations, including new product introductions and technologies (for example, new forms of drug delivery) by our current or future competitors, consolidation or strategic alliances among healthcare companies, distributors and/or payers of healthcare to improve their competitive position or develop new models for the delivery of healthcare, increased pricing pressure due to the impact of low-cost manufacturers, patents attained by competitors (particularly as patents on our products expire), and new entrants into our markets.

•

Risks relating to our acquisition of Bard, including our ability to successfully combine and integrate the Bard operations in order to obtain the anticipated benefits and costs savings from the transaction, and the significant additional indebtedness we incurred in connection with the financing of the acquisition and the impact this increased indebtedness may have on our ability to operate the combined company.

•

The impact resulting from the recent U.S. tax reform, commonly referred to as the Tax Cuts and Job Act (the “Act”), which, among other things, reduces the U.S. federal corporate tax rate, imposes a one-time tax on earnings of certain foreign subsidiaries that were previously tax deferred, and imposes a new minimum tax on foreign earnings. While BD has previously recognized a provisional expense based on what it believes is a reasonable estimate of the income tax effects of the Act, this expense could change as BD refines its analysis.

•	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 third-party payers or adverse decisions relating to our products by such payers, which could reduce demand for our products or the price we can charge for such products.

•	The impact of the medical device excise tax under the Patient Protection and Affordable Care Act in the United States. While this tax has been suspended through December 31, 2019, it is uncertain whether the suspension will be extended beyond that date.

•	Healthcare reform in the U.S. or in other countries in which we do business that may involve changes in government pricing and reimbursement policies or other cost containment reforms.

•	Changes in the domestic and foreign healthcare industry or in medical practices that result in a reduction in procedures using our products or increased pricing pressures, including the continued consolidation among healthcare providers and trends toward managed care and healthcare cost containment.

•

The impact of changes in U.S. federal laws and policy that could affect fiscal and tax policies, healthcare, and international trade, including import and export regulation and international trade agreements. Recently, the U.S., China and other countries have imposed tariffs on certain products imported into their respective countries. Additional tariffs or other trade barriers imposed by the U.S., China or other countries could adversely impact our supply chain costs or otherwise adversely impact our results of operations.

•	Fluctuations in the cost and availability of oil-based resins and other raw materials, as well as certain components, used in our products, the ability to maintain favorable supplier arrangements and relationships (particularly with respect to sole-source suppliers), and the potential adverse effects of any disruption in the availability of such items.

•

Security breaches of our information technology systems or our products, which could impair our ability to conduct business, result in the loss of BD trade secrets or otherwise compromise sensitive information of BD or its customers, suppliers and other business partners, or of customers' patients, or result in product efficacy or safety concerns for certain of our products, and result in actions by regulatory bodies or civil litigation.

•

Difficulties inherent in product development, including the potential inability to successfully continue technological innovation, successfully complete clinical trials, obtain regulatory approvals in the 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 United States Food and Drug Administration (“FDA”) or other regulatory agencies or changes in the regulatory process may also delay product launches and increase development costs.

•	The impact of business combinations or divestitures, including any volatility in earnings relating to acquisition-related costs, and our ability to successfully integrate any business we may acquire.

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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. Our international operations also increase our compliance risks, including risks under the Foreign Corrupt Practices Act and other anti-corruption laws, as well as regulatory and privacy laws.

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Conditions in international markets, including social and political conditions, civil unrest, terrorist activity, governmental changes, trade barriers, restrictions on the ability to transfer capital across borders, difficulties in protecting and enforcing our intellectual property rights and governmental expropriation of assets. This includes the possible impact of the United Kingdom's exit from the European Union, which has created uncertainties affecting our business operations in the United Kingdom and the EU.

•	Deficit reduction efforts or other actions that reduce the availability of government funding for healthcare and research, which could weaken demand for our products and result in additional pricing pressures, as well as create potential collection risks associated with such sales.

•	Fluctuations in university or U.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 events that adversely impact our ability to manufacture our products (particularly where production of a product line is concentrated in one or more plants) or our ability to source materials or components from suppliers (including sole-source suppliers) that are needed for such manufacturing.

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Pending and potential future litigation or other proceedings asserting, and/or subpoenas seeking information with respect to, alleged violations of law (including in connection with federal and/or state healthcare programs (such as Medicare or Medicaid) and/or sales and marketing practices (such as investigative subpoenas and the civil investigative demands received by BD and Bard)), antitrust claims, product liability (which may involve lawsuits seeking class action status or seeking to establish multi-district litigation proceedings, including claims relating to our hernia repair implant products, surgical continence products for women and vena cava filter products), claims with respect to environmental matters, and patent infringement, and the availability or collectability of insurance relating to any such claims.

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New or changing laws and regulations affecting our domestic and foreign operations, or changes in enforcement practices, including laws relating to trade, monetary and fiscal policies, taxation (including tax reforms that could adversely impact multinational corporations), sales practices, environmental protection, price controls, and licensing and regulatory requirements for new products and products in the postmarketing phase. In particular, the U.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.

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Product efficacy or safety concerns regarding our products resulting in product holds or recalls, regulatory action on the part of the FDA or foreign counterparts (including restrictions on future product clearances and civil penalties), declining sales and product liability claims, and damage to our reputation. As a result of the CareFusion acquisition, we are operating under a consent decree with the FDA relating to our U.S. infusion pump business. The consent decree authorizes the FDA, in the event of any violations in the future, to order us to cease manufacturing and distributing products, recall products or take other actions, and we may be required to pay significant monetary damages if we fail to comply with any provision of the consent decree.

•	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 Financial Accounting Standards Board or the Securities and Exchange Commission.

The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. Investors should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties.