filings.toolsItem 1. FINANCIAL STATEMENTS
72K characters. Original on sec.gov · Markdown
Item 1. FINANCIAL STATEMENTS
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Millions of dollars, except per share data
(Unaudited)
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Revenues | $ | 4,995 | $ | 5,315 | |||||||||||||||||||
| Cost of products sold | 2,572 | 2,583 | |||||||||||||||||||||
| Selling and administrative expense | 1,223 | 1,149 | |||||||||||||||||||||
| Research and development expense | 329 | 291 | |||||||||||||||||||||
| Acquisitions and other restructurings | 34 | 50 | |||||||||||||||||||||
| Other operating expense, net | 21 | — | |||||||||||||||||||||
| Total Operating Costs and Expenses | 4,180 | 4,074 | |||||||||||||||||||||
| Operating Income | 815 | 1,241 | |||||||||||||||||||||
| Interest expense | (98) | (118) | |||||||||||||||||||||
| Interest income | 2 | 2 | |||||||||||||||||||||
| Other income, net | 4 | 32 | |||||||||||||||||||||
| Income Before Income Taxes | 723 | 1,157 | |||||||||||||||||||||
| Income tax provision | 46 | 154 | |||||||||||||||||||||
| Net Income | 677 | 1,003 | |||||||||||||||||||||
| Preferred stock dividends | (23) | (23) | |||||||||||||||||||||
| Net income applicable to common shareholders | $ | 655 | $ | 981 | |||||||||||||||||||
| Basic Earnings per Share | $ | 2.30 | $ | 3.38 | |||||||||||||||||||
| Diluted Earnings per Share | $ | 2.28 | $ | 3.35 | |||||||||||||||||||
| Dividends per Common Share | $ | 0.87 | $ | 0.83 |
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)
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Net Income | $ | 677 | $ | 1,003 | |||||||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax | |||||||||||||||||||||||
| Foreign currency translation adjustments | 41 | 64 | |||||||||||||||||||||
| Defined benefit pension and postretirement plans | 11 | 42 | |||||||||||||||||||||
| Cash flow hedges | (7) | 28 | |||||||||||||||||||||
| Other Comprehensive Income, Net of Tax | 45 | 134 | |||||||||||||||||||||
| Comprehensive Income | $ | 722 | $ | 1,138 |
Amounts may not add due to rounding.
See notes to condensed consolidated financial statements
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Millions of dollars
| December 31, 2021 | September 30, 2021 | ||||||||||
| Assets | (Unaudited) | ||||||||||
| Current Assets: | |||||||||||
| Cash and equivalents | $ | 1,903 | $ | 2,283 | |||||||
| Restricted cash | 144 | 109 | |||||||||
| Short-term investments | 8 | 12 | |||||||||
| Trade receivables, net | 2,177 | 2,497 | |||||||||
| Inventories: | |||||||||||
| Materials | 699 | 641 | |||||||||
| Work in process | 393 | 402 | |||||||||
| Finished products | 1,943 | 1,823 | |||||||||
| 3,035 | 2,866 | ||||||||||
| Prepaid expenses and other | 1,040 | 1,072 | |||||||||
| Total Current Assets | 8,307 | 8,838 | |||||||||
| Property, Plant and Equipment | 13,031 | 12,942 | |||||||||
| Less allowances for depreciation and amortization | 6,648 | 6,549 | |||||||||
| Property, Plant and Equipment, Net | 6,384 | 6,393 | |||||||||
| Goodwill | 24,116 | 23,901 | |||||||||
| Developed Technology, Net | 9,302 | 9,417 | |||||||||
| Customer Relationships, Net | 2,765 | 2,818 | |||||||||
| Other Intangibles, Net | 544 | 548 | |||||||||
| Other Assets | 1,945 | 1,952 | |||||||||
| Total Assets | $ | 53,363 | $ | 53,866 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current Liabilities: | |||||||||||
| Current debt obligations | $ | 1,064 | $ | 500 | |||||||
| Payables, accrued expenses and other current liabilities | 5,671 | 6,126 | |||||||||
| Total Current Liabilities | 6,735 | 6,626 | |||||||||
| Long-Term Debt | 16,360 | 17,110 | |||||||||
| Long-Term Employee Benefit Obligations | 1,078 | 1,228 | |||||||||
| Deferred Income Taxes and Other Liabilities | 5,030 | 5,225 | |||||||||
| Commitments and Contingencies (See Note 4) | |||||||||||
| Shareholders’ Equity | |||||||||||
| Preferred stock | 2 | 2 | |||||||||
| Common stock | 365 | 365 | |||||||||
| Capital in excess of par value | 19,435 | 19,272 | |||||||||
| Retained earnings | 14,233 | 13,826 | |||||||||
| Deferred compensation | 24 | 23 | |||||||||
| Common stock in treasury - at cost | (7,855) | (7,723) | |||||||||
| Accumulated other comprehensive loss | (2,043) | (2,088) | |||||||||
| Total Shareholders’ Equity | 24,160 | 23,677 | |||||||||
| Total Liabilities and Shareholders’ Equity | $ | 53,363 | $ | 53,866 |
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, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 677 | $ | 1,003 | |||||||
| Adjustments to net income to derive net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 557 | 555 | |||||||||
| Share-based compensation | 83 | 83 | |||||||||
| Deferred income taxes | (69) | (66) | |||||||||
| Change in operating assets and liabilities | (278) | 24 | |||||||||
| Pension obligation | (144) | 26 | |||||||||
| Other, net | (154) | (91) | |||||||||
| Net Cash Provided by Operating Activities | 674 | 1,533 | |||||||||
| Investing Activities | |||||||||||
| Capital expenditures | (188) | (246) | |||||||||
| Acquisitions, net of cash acquired | (415) | (67) | |||||||||
| Other, net | (84) | (116) | |||||||||
| Net Cash Used for Investing Activities | (686) | (430) | |||||||||
| Financing Activities | |||||||||||
| Payments of debt | — | (267) | |||||||||
| Dividends paid | (271) | (264) | |||||||||
| Other, net | (56) | (61) | |||||||||
| Net Cash Used for Financing Activities | (327) | (592) | |||||||||
| Effect of exchange rate changes on cash and equivalents and restricted cash | (6) | 18 | |||||||||
| Net (decrease) increase in cash and equivalents and restricted cash | (345) | 530 | |||||||||
| Opening Cash and Equivalents and Restricted Cash | 2,392 | 2,917 | |||||||||
| Closing Cash and Equivalents and Restricted Cash | $ | 2,047 | $ | 3,447 | |||||||
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, 2021
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 2021 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.
BD’s Intention to Spin Off Diabetes Care
On May 6, 2021, the Company announced its intention to spin off its Diabetes Care business as a separate publicly traded company named Embecta Corp. (“Embecta”) to BD’s shareholders. The proposed spin-off is intended to be a tax-free transaction for U.S. federal income tax purposes and is expected to be completed in the first half of calendar year 2022, subject to the satisfaction of customary conditions, including the effectiveness of a registration statement on Form 10. On February 1, 2022, BD’s Board of Directors approved the spin-off, as well as the distribution date of April 1, 2022. Subsequent to the spin-off, the historical results of the Diabetes Care business will be reflected as discontinued operations in the Company’s consolidated financial statements. Disclosures pertaining to Embecta’s issuance of debt in connection with the spin-off are provided in Note 12.
Note 2 – Shareholders' Equity
Changes in certain components of shareholders' equity for the first quarters of fiscal years 2022 and 2021 were as follows:
| 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, 2021 | $ | 365 | $ | 19,272 | $ | 13,826 | $ | 23 | (80,164) | $ | (7,723) | ||||||||||||||||||||||||
| Net income | — | — | 677 | — | — | — | |||||||||||||||||||||||||||||
| Common dividends ($0.87 per share) | — | — | (248) | — | — | — | |||||||||||||||||||||||||||||
| Preferred dividends | — | — | (23) | — | — | — | |||||||||||||||||||||||||||||
| Common stock issued for share-based compensation and other plans, net | — | (71) | — | — | 762 | 19 | |||||||||||||||||||||||||||||
| Share-based compensation | — | 83 | — | — | — | — | |||||||||||||||||||||||||||||
| Common stock held in trusts, net (a) | — | — | — | — | (5) | — | |||||||||||||||||||||||||||||
| Repurchase of common stock (b) | — | 150 | — | — | (462) | (150) | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 365 | $ | 19,435 | $ | 14,233 | $ | 24 | (79,869) | $ | (7,855) | ||||||||||||||||||||||||
| 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 | — | — | (9) | — | — | — | |||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 365 | $ | 19,301 | $ | 13,522 | $ | 23 | (74,080) | $ | (6,136) | ||||||||||||||||||||||||
(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.
(b)Represents shares received upon final settlement of an accelerated share repurchase agreement, and the related forward sale contract, entered into during the fourth quarter of fiscal year 2021. The share repurchases were made pursuant to the repurchase program authorized by the Board of Directors on September 24, 2013 for 10 million shares, for which there is no expiration date. In November 2021, the Board of Directors authorized the Company to repurchase up to an additional 10 million shares of BD common stock, for which there is also no expiration date.
The components and changes of Accumulated other comprehensive income (loss) for the first quarters of fiscal years 2022 and 2021 were as follows:
| (Millions of dollars) | Total | Foreign Currency Translation | Benefit Plans | Cash Flow Hedges | |||||||||||||||||||
| Balance at September 30, 2021 | $ | (2,088) | $ | (1,292) | $ | (784) | $ | (10) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of taxes | 34 | 41 | — | (7) | |||||||||||||||||||
| Amounts reclassified into income, net of taxes | 11 | — | 11 | — | |||||||||||||||||||
| Balance at December 31, 2021 | $ | (2,043) | $ | (1,251) | $ | (774) | $ | (17) | |||||||||||||||
| (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) | |||||||||||||||
The amounts of foreign currency translation recognized in other comprehensive income during the three months ended December 31, 2021 and 2020 included net gains (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. Additional disclosures regarding amounts the Company recognized in other comprehensive income relating to cash flow hedges during the three months ended December 31, 2021 and 2020 are provided in Note 10.
The tax impacts for amounts recognized in other comprehensive income (loss) before reclassifications and for reclassifications out of Accumulated other comprehensive income (loss) relating to benefit plans and cash flow hedges during the three months ended December 31, 2021 and 2020 were immaterial to the Company's consolidated financial results.
Note 3 – 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:
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Average common shares outstanding | 284,685 | 290,590 | |||||||||||||||||||||
| Dilutive share equivalents from share-based plans | 2,038 | 2,522 | |||||||||||||||||||||
| Average common and common equivalent shares outstanding – assuming dilution | 286,723 | 293,112 | |||||||||||||||||||||
| Share equivalents excluded from the diluted shares outstanding calculation: | |||||||||||||||||||||||
| Mandatory convertible preferred stock (a) | 5,965 | 5,995 | |||||||||||||||||||||
| Share-based plans (b) | 730 | 1,552 |
(a)Excluded from the diluted shares outstanding calculation because the result would have been antidilutive.
(b)Excluded from the diluted earnings per share calculation as the exercise prices of these awards were greater than the average market price of the Company’s common shares.
Note 4 – Contingencies
The Company is 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 and environmental matters in certain U.S. and international locations. 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 litigation in which the Company is a party. In accordance with U.S. GAAP, the Company establishes accruals to the extent probable future losses are estimable (and 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, 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 any class. With respect to the civil investigative demands (“CIDs”) served by the Department of Justice which are 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.
Product Liability Matters
As of December 31, 2021, the Company is defending approximately 26,260 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 (“RI”) and in a federal multi-district litigation (“MDL”) established in the Southern District of Ohio, 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 first bellwether trial in the hernia MDL began in August 2021, resulting in a complete defense verdict. Trials are scheduled into fiscal year 2022 in various state and/or federal courts, including one trial currently scheduled for March 2022 in the MDL and another scheduled in RI in June 2022. The Company expects additional trials of Hernia Product Claims to take place over the next 12 months.
The Company also continues to be a defendant in certain other mass tort litigation. As of December 31, 2021, the Company is defending product liability claims involving the Company’s line of pelvic mesh products, the majority of which are pending in various federal court jurisdictions and in a coordinated proceeding in New Jersey Superior Court. Also, as of December 31, 2021, the Company is defending product liability claims involving the Company’s line of inferior vena cava (“IVC”) filter products. The majority of those claims are pending in various federal court jurisdictions after having been remanded from the MDL in the United States District Court for the District of Arizona.
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.
Other Legal Matters
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), now captioned Industriens Pensionsforsikring v. Becton, Dickinson and Company, et al., 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 Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, and seeks, among other things, damages and costs. The complaint alleges that defendants concealed certain material information regarding AlarisTM infusion pumps, allegedly rendering certain public statements about the Company’s business, operations and prospects false or misleading, thereby allegedly causing investors to purchase stock at an inflated price. The plaintiff filed a second amended complaint to add certain additional factual allegations on February 3, 2021, which the Company moved to dismiss on March 19, 2021. The motion to dismiss was granted, resulting in the dismissal of the second amended complaint on September 15, 2021. The court’s dismissal order, however, gave plaintiff an opportunity to replead, which it did on October 29, 2021. The Company moved to dismiss the newly amended pleading on December 16, 2021. That motion is pending. The Company believes that these allegations are without merit and it intends to defend itself vigorously.
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, including sections 10(b), 14(a) and 21D; and insider trading. In general, the complaint also alleges, among other things, that various directors and/or officers caused the Company to issue purportedly misleading statements and SEC filings regarding AlarisTM infusion pumps, and issue a purportedly misleading proxy statement. 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. A second derivative action, Schranz v. Polen, et al., Civ. No 2:21-cv-01081 (D. N.J.), was filed on January 24, 2021, and the two actions were consolidated. In March 2021, the Company received letters from two additional shareholders which, in general, mirrored the allegations in the Jankowski and Schranz consolidated actions, and demanded, among other things, that the Board of Directors pursue civil action against members of management for claimed breaches of fiduciary duties. Consistent with New Jersey law, the Board appointed a special committee to review the allegations and demands in the derivative actions and demand letters. Following an investigation, the special committee determined that no action was warranted, and rejected the shareholders’ demands. The special committee’s determination has been communicated to counsel for the shareholders. Should the shareholders continue to pursue their claims in court, the Company will take appropriate steps to seek dismissal of the complaints.
In February 2021, the Company received a subpoena from the Enforcement Division of the SEC requesting information from the Company relating to, among other things, AlarisTM infusion pumps. The Company is cooperating with the SEC and responding to these requests. The Company cannot anticipate the timing, scope, outcome or possible impact of the investigation, financial or otherwise.
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.
In September 2021, the Company received a CID related to an inquiry initiated by the Northern District of Georgia in 2018. The requests concern sales and marketing practices with respect to certain aspects of the Company’s urology business. The government has made requests for documents and has interviewed employees. The inquiry is ongoing and the Company is cooperating with the government and responding to its requests.
In September 2021, the Company was served with a complaint from the New Mexico Attorney General, alleging violations of the state’s consumer protection laws in connection with the sales and marketing of its IVC filters. The Company filed its
motion to dismiss on December 27, 2021 and intends to vigorously defend itself in the litigation. As the case is in its early stages, the Company cannot anticipate the timing, scope, outcome or possible impact at present.
In July 2021, the Company became aware of lawsuits that had been filed against it in state and federal court in Georgia. The suits were filed by plaintiffs who reside near Company facilities in Covington, GA, where ethylene oxide (“EtO”) sterilization activities take place. There are currently approximately 205 of such suits. The claims allege a variety of injuries, including but not limited to multiple types of cancer, allegedly attributable to exposure to EtO in the ambient air. The Company has meritorious defenses and intends to defend itself vigorously.
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.
The Company cannot predict the outcome of these other legal matters discussed above, nor can it predict whether any outcome will have a material adverse effect on the Company’s consolidated results of operations and/or consolidated cash flows. Accordingly, the Company has made no provisions for these other legal matters in its consolidated results of operations.
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 consolidated results of operations and/or consolidated cash flows.
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 $2.3 billion and $2.5 billion at December 31, 2021 and September 30, 2021, respectively. These accruals are largely recorded within Deferred Income Taxes and Other Liabilities on the Company's condensed consolidated balance sheets.
In view of the uncertainties discussed above, 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 /or consolidated cash flows.
Note 5 – Revenues
The Company’s policies for recognizing sales have not changed from those described in the Company’s 2021 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 Company’s
rebate liability at December 31, 2021 and September 30, 2021 was $609 million and $576 million, respectively. 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 $2.1 billion at December 31, 2021. 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 $2.4 billion at December 31, 2021. 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 6.
Note 6 – 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) | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| United States | International | Total | United States | International | Total | ||||||||||||||||||||||||||||||
| Medical | |||||||||||||||||||||||||||||||||||
| Medication Delivery Solutions | $ | 619 | $ | 465 | $ | 1,084 | $ | 568 | $ | 440 | $ | 1,008 | |||||||||||||||||||||||
| Medication Management Solutions | 484 | 143 | 627 | 477 | 152 | 630 | |||||||||||||||||||||||||||||
| Diabetes Care | 151 | 138 | 289 | 150 | 136 | 285 | |||||||||||||||||||||||||||||
| Pharmaceutical Systems | 102 | 294 | 397 | 79 | 260 | 339 | |||||||||||||||||||||||||||||
| Total segment revenues | $ | 1,357 | $ | 1,040 | $ | 2,397 | $ | 1,274 | $ | 988 | $ | 2,261 | |||||||||||||||||||||||
| Life Sciences | |||||||||||||||||||||||||||||||||||
| Integrated Diagnostic Solutions | $ | 615 | $ | 530 | $ | 1,145 | $ | 1,014 | $ | 653 | $ | 1,667 | |||||||||||||||||||||||
| Biosciences | 129 | 209 | 338 | 120 | 192 | 312 | |||||||||||||||||||||||||||||
| Total segment revenues | $ | 744 | $ | 739 | $ | 1,483 | $ | 1,134 | $ | 845 | $ | 1,979 | |||||||||||||||||||||||
| Interventional | |||||||||||||||||||||||||||||||||||
| Surgery | $ | 281 | $ | 80 | $ | 361 | $ | 262 | $ | 70 | $ | 332 | |||||||||||||||||||||||
| Peripheral Intervention | 217 | 197 | 413 | 232 | 193 | 426 | |||||||||||||||||||||||||||||
| Urology and Critical Care | 254 | 87 | 340 | 228 | 89 | 317 | |||||||||||||||||||||||||||||
| Total segment revenues | $ | 752 | $ | 363 | $ | 1,115 | $ | 722 | $ | 353 | $ | 1,075 | |||||||||||||||||||||||
| Total Company revenues | $ | 2,853 | $ | 2,143 | $ | 4,995 | $ | 3,130 | $ | 2,186 | $ | 5,315 |
Segment income for the three-month periods was as follows:
| Three Months Ended December 31, | |||||||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||||||||||||||
| Income Before Income Taxes | |||||||||||||||||||||||
| Medical | $ | 716 | $ | 666 | |||||||||||||||||||
| Life Sciences | 534 | 972 | |||||||||||||||||||||
| Interventional | 265 | 302 | |||||||||||||||||||||
| Total Segment Operating Income | 1,514 | 1,940 | |||||||||||||||||||||
| Acquisitions and other restructurings | (34) | (50) | |||||||||||||||||||||
| Unallocated other operating expense, net (a) | (25) | — | |||||||||||||||||||||
| Net interest expense | (96) | (116) | |||||||||||||||||||||
| Other unallocated items (b) | (636) | (616) | |||||||||||||||||||||
| Total Income Before Income Taxes | $ | 723 | $ | 1,157 |
(a)The amount for the three-months ended December 31, 2021 includes $25 million of costs incurred for consulting, legal, tax and other advisory services associated with the planned spin-off of BD's Diabetes Care business.
(b)Primarily comprised of foreign exchange, certain general and administrative expenses and share-based compensation expense.
Note 7 – 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) | 2021 | 2020 | |||||||||||||||||||||
| Service cost | $ | 35 | $ | 43 | |||||||||||||||||||
| Interest cost | 20 | 20 | |||||||||||||||||||||
| Expected return on plan assets | (48) | (48) | |||||||||||||||||||||
| Amortization of prior service credit | (4) | (4) | |||||||||||||||||||||
| Amortization of loss | 16 | 27 | |||||||||||||||||||||
| Settlements | 5 | — | |||||||||||||||||||||
| Net pension cost | $ | 24 | $ | 38 |
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 8 – Business Restructuring Charges
The Company incurred restructuring costs during the three months ended December 31, 2021, primarily in connection with the Company's simplification and other cost saving initiatives, which were largely recorded within Acquisitions and other restructurings. These simplification and other costs saving initiatives are focused on reducing complexity, enhancing product quality, refining customer experience, and improving cost efficiency across all of the Company’s segments. Restructuring liability activity for the three months ended December 31, 2021 was as follows:
| (Millions of dollars) | Employee Termination | Other | Total | ||||||||||||||
| Balance at September 30, 2021 | $ | 14 | $ | 5 | $ | 19 | |||||||||||
| Charged to expense | 3 | 14 | 17 | ||||||||||||||
| Cash payments | (6) | (14) | (20) | ||||||||||||||
| Balance at December 31, 2021 | $ | 11 | $ | 5 | $ | 16 |
Note 9 – Intangible Assets
Intangible assets consisted of:
| December 31, 2021 | September 30, 2021 | ||||||||||||||||||||||||||||||||||
| (Millions of dollars) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||
| Amortized intangible assets | |||||||||||||||||||||||||||||||||||
| Developed technology | $ | 14,539 | $ | (5,237) | $ | 9,302 | $ | 14,399 | $ | (4,983) | $ | 9,417 | |||||||||||||||||||||||
| Customer relationships | 4,687 | (1,922) | 2,765 | 4,658 | (1,839) | 2,818 | |||||||||||||||||||||||||||||
| Product rights | 118 | (82) | 36 | 123 | (83) | 40 | |||||||||||||||||||||||||||||
| Trademarks | 409 | (142) | 267 | 409 | (137) | 271 | |||||||||||||||||||||||||||||
| Patents and other | 542 | (347) | 195 | 533 | (342) | 191 | |||||||||||||||||||||||||||||
| Amortized intangible assets | $ | 20,295 | $ | (7,730) | $ | 12,565 | $ | 20,122 | $ | (7,385) | $ | 12,737 | |||||||||||||||||||||||
| 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, 2021 and 2020 was $355 million and $348 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, 2021 | $ | 10,255 | $ | 836 | $ | 12,810 | $ | 23,901 | |||||||||||||||
| Acquisitions (a) | — | 46 | 205 | 251 | |||||||||||||||||||
| Currency translation | (14) | (3) | (21) | (37) | |||||||||||||||||||
| Goodwill as of December 31, 2021 | $ | 10,242 | $ | 880 | $ | 12,994 | $ | 24,116 |
(a)Represents goodwill recognized relative to certain acquisitions which were not material individually or in the aggregate.
Note 10 – 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 had on the Company’s balance sheets and the fair values of the derivatives outstanding at December 31, 2021 and September 30, 2021 were not material. The effects on the Company’s 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 certain instruments, such as foreign currency-denominated debt and cross-currency swaps, which are designated as net investment hedges, as well as currency exchange contracts.
The notional amounts of the Company’s foreign currency-related derivative instruments as of December 31, 2021 and September 30, 2021 were as follows:
| (Millions of dollars) | Hedge Designation | December 31, 2021 | September 30, 2021 | ||||||||||||||
| Foreign exchange contracts (a) | Undesignated | $ | 1,451 | $ | 2,735 | ||||||||||||
| Foreign currency-denominated debt (b) | Net investment hedges | 2,478 | 2,543 | ||||||||||||||
| Cross-currency swaps (c) | Net investment hedges | 1,958 | 1,958 |
(a)Represent hedges of transactional foreign exchange exposures resulting primarily from intercompany payables and receivables. Gains and 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. Net amounts recognized in Other income, net, during the three months ended December 31, 2021 and 2020 were immaterial to the Company's consolidated financial results.
(b)Represents foreign currency-denominated long-term notes outstanding which were effective as economic hedges of net investments in certain of the Company's foreign subsidiaries.
(c)Represents cross-currency swaps which were effective as economic hedges of net investments in certain of the Company's foreign subsidiaries.
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 gains (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) | 2021 | 2020 | |||||||||||||||||||||
| Foreign currency-denominated debt | $ | 49 | $ | (56) | |||||||||||||||||||
| Cross-currency swaps | 30 | (124) | |||||||||||||||||||||
Interest Rate Risks and Related Strategies
The Company uses a mix of fixed and variable rate debt to manage its interest rate exposure, and 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 cash flow or fair value hedges.
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, within Interest expense, over the remaining life of the hedged debt. The amounts reclassified from accumulated other comprehensive income relating to cash flow hedges during the three months ended December 31, 2021 and 2020, as well as the amounts expected to be reclassified within the next 12 months, are not material to the Company's consolidated financial results.
The Company recorded $27 million of net after-tax gains during the three months ended December 31, 2020 in Other comprehensive income relating to interest rate hedges. Amounts recorded during the three months ended December 31, 2021 were immaterial to the Company’s consolidated financial results.
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. Amounts recorded during the three months ended December 31, 2021 and 2020 were immaterial to the Company's consolidated financial results.
The notional amounts of the Company’s interest rate-related derivative instruments as of December 31, 2021 and September 30, 2021 were as follows:
| (Millions of dollars) | Hedge Designation | December 31, 2021 | September 30, 2021 | ||||||||||||||
| Interest rate swaps (a) | Fair value hedges | $ | 700 | $ | 700 | ||||||||||||
| Forward starting interest rate swaps (b) | Cash flow hedges | 1,000 | 1,000 |
(a)Represents 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.
(b)Represents interest rate derivatives entered into to mitigate exposure to interest rate risk related to future debt issuances.
Other Risk Exposures
The Company purchases resins, which are oil-based components used in the manufacture of certain products. Significant increases in world oil prices that lead to increases in resin purchase costs could impact future operating results. From time to time, the Company has managed price risks associated with these commodity purchases through commodity derivative forward contracts. The Company's outstanding commodity derivative forward contracts at December 31, 2021 were immaterial to the Company's consolidated financial results and the Company had no outstanding commodity derivative forward contracts at September 30, 2021.
Note 11 – 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, 2021 and September 30, 2021 to the total of these amounts shown on the Company's consolidated statements of cash flows:
| (Millions of dollars) | December 31, 2021 | September 30, 2021 | |||||||||
| Cash and equivalents | $ | 1,903 | $ | 2,283 | |||||||
| Restricted cash | 144 | 109 | |||||||||
| Cash and equivalents and restricted cash | $ | 2,047 | $ | 2,392 |
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 fair values of the Company’s financial instruments are as follows:
| (Millions of dollars) | Basis of fair value measurement | December 31, 2021 | September 30, 2021 | ||||||||||||||
| Institutional money market accounts and ultra-short bond fund (a) | Level 1 | $ | 100 | $ | 200 | ||||||||||||
| Current portion of long-term debt (b) | Level 2 | 1,073 | 503 | ||||||||||||||
| Long-term debt (b) | Level 2 | 17,698 | 18,537 |
(a)These financial instruments are recorded within Cash and equivalents on the consolidated balance sheets. The institutional money market accounts permit daily redemption. The fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions.
(b)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.
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. 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. The costs incurred by the Company in connection with factoring activities were not material to its consolidated financial results. The amounts transferred and yet to be remitted under factoring arrangements are provided below.
| Three Months Ended December 31, | |||||||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||||||||||||||
| Trade receivables transferred to third parties under factoring arrangements | $ | 155 | $ | 492 | |||||||||||||||||||
| December 31, 2021 | September 30, 2021 | ||||||||||||||||||||||
| Amounts yet to be collected and remitted to the third parties | $ | 155 | $ | 130 |
Note 12 – Debt
In January 2022, Embecta, a wholly-owned subsidiary of the Company, agreed to issue $500 million of 5.000% senior secured notes due February 15, 2030, in connection with the Company’s planned spin-off of Embecta, which is further discussed in Note 1. It is expected that the notes will be issued in February 2022. Prior to the spin-off date, the notes will be guaranteed on an unsecured, unsubordinated basis solely by the Company. The Company’s guarantee will automatically and unconditionally terminate upon the earlier of: (1) the consummation of the spin-off and (2) the consummation of a satisfaction and discharge of the indenture, a defeasance or a covenant defeasance related to the notes or otherwise in accordance with the provisions of the indenture.
Also in connection with the spin-off, Embecta expects to enter into an arrangement for a senior secured term loan facility with an aggregate principal amount of $1.150 billion and a senior secured revolving credit facility providing borrowings of up to $500 million, which is expected to be undrawn at the spin-off date. Embecta is expected to use the aggregate proceeds received from the issuance of the senior secured notes and the term loan facility to make a distribution payment of approximately $1.440 billion to the Company in connection with the spin-off.
Previous: Cover and table of contents · Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations