Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2018
COMMISSION FILE NUMBER 1-4802
BECTON, DICKINSON AND COMPANY
(Exact name of registrant as specified in its charter)
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New Jersey | | 22-0760120 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1 Becton Drive Franklin Lakes, New Jersey (Address of principal executive offices) | | 07417-1880 (Zip code) |
Registrant’s telephone number, including area code (201) 847-6800
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name of Each Exchange on Which Registered |
Common Stock, par value $1.00 | | New York Stock Exchange |
Depositary Shares, each representing a 1/20th interest in a share of 6.125% Cumulative Preferred Stock Series A | | New York Stock Exchange |
0.368% Notes due June 6, 2019 | | New York Stock Exchange |
1.000% Notes due December 15, 2022 | | New York Stock Exchange |
1.900% Notes due December 15, 2026 | | New York Stock Exchange |
1.401% Notes due May 24, 2023 | | New York Stock Exchange |
3.020% Notes due May 24, 2025 | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | þ | | Accelerated filer | | ¨ | | Non-accelerated filer | | ¨ |
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Smaller reporting company | | ¨ | | Emerging growth company | | ¨ | | | | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | ¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
As of March 31, 2018, the aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant was approximately $56,903,426,170.
As of October 31, 2018, 268,257,940 shares of the registrant’s common stock were outstanding.
Documents Incorporated by Reference Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held January 22, 2019 are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PART I
Item 1. Business.
General
Becton, Dickinson and Company (also known as “BD”) was incorporated under the laws of the State of New Jersey in November 1906, as successor to a New York business started in 1897. BD’s executive offices are located at 1 Becton Drive, Franklin Lakes, New Jersey 07417-1880, and its telephone number is (201) 847-6800. All references in this Form 10-K to "BD", "the Company", "we", "our" or "us" refer to Becton, Dickinson and Company and its domestic and foreign subsidiaries, unless otherwise indicated by the context.
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. We provide customer solutions that are focused on improving medication management and patient safety; supporting infection prevention practices; equipping surgical and interventional procedures; improving drug delivery; aiding anesthesiology care; enhancing the diagnosis of infectious diseases and cancers; advancing cellular research and applications; and supporting the management of diabetes.
Business Segments
BD’s operations consist of three worldwide business segments: BD Medical, BD Life Sciences and BD Interventional. As is further described below, BD completed its acquisition of C.R. Bard, Inc. ("Bard") on December 29, 2017, and BD Interventional includes the majority of Bard’s product offerings, along with certain product offerings formerly within BD Medical. Additionally, certain of Bard's product offerings are included within BD Medical as part of the Medication Delivery Solutions unit (formerly Medication and Procedural Solutions). Information with respect to BD’s business segments and the Bard acquisition is included in Note 6 and Note 9, respectively, to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data, and is incorporated herein by reference.
BD Medical
BD Medical produces a broad array of medical technologies and devices that are used to help improve healthcare delivery in a wide range of settings. The primary customers served by BD Medical are hospitals and clinics; physicians’ office practices; consumers and retail pharmacies; governmental and nonprofit public health agencies; pharmaceutical companies; and healthcare workers. BD Medical consists of the following
organizational units: |
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Organizational Unit | Principal Product Lines |
Medication Delivery Solutions | Peripheral IV catheters (conventional, safety); advanced peripheral catheters (guidewire assisted peripherally inserted venous catheters, midline catheters, port access); central lines (peripherally inserted central catheters); acute dialysis catheters; vascular access technology (ultrasonic imaging); vascular care (lock solutions, prefilled flush syringes, disinfecting caps); vascular preparation (skin antiseptics, dressings, securement); needle-free IV connectors and extensions sets; IV fluids; closed-system drug transfer devices; hazardous drug detection; conventional and safety hypodermic syringes and needles, anesthesia needles (spinal, epidural) and trays; enteral syringes, sharps disposal systems. |
Medication Management Solutions | Intravenous medication safety and infusion therapy delivery systems, including infusion pumps and dedicated disposables; medication compounding workflow systems; automated medication dispensing; automated supply management systems; medication inventory optimization and tracking systems; and analytics related to all the above products. |
Diabetes Care | Syringes, pen needles and other products related to the injection or infusion of insulin and other drugs used in the treatment of diabetes. |
Pharmaceutical Systems | Prefillable drug delivery systems - prefillable syringes, safety, shielding and self-injection systems - provided to pharmaceutical companies for use as containers for injectable pharmaceutical products, which are then placed on the market as drug/device combinations. |
BD Life Sciences
BD Life Sciences provides products for the safe collection and transport of diagnostics specimens, and instruments and reagent systems to detect a broad range of infectious diseases, healthcare-associated infections (“HAIs”) and cancers. In addition, BD Life Sciences produces research and clinical tools that facilitate the study of cells, and the components of cells, to gain a better understanding of normal and disease processes. That information is used to aid the discovery and development of new drugs and vaccines, and to improve the diagnosis and management of diseases. The primary customers served by BD Life Sciences are hospitals, laboratories and clinics; blood banks; healthcare workers; public health agencies; physicians’ office practices; academic and government institutions; and pharmaceutical and biotechnology companies. BD Life Sciences consists of the following organizational units:
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Organizational Unit | Principal Product Lines |
Preanalytical Systems | Integrated systems for specimen collection; and safety-engineered blood collection products and systems. |
Diagnostic Systems | Automated blood culturing and tuberculosis culturing systems; molecular testing systems for infectious diseases and women’s health; microorganism identification and drug susceptibility systems; liquid-based cytology systems for cervical cancer screening; rapid diagnostic assays; microbiology laboratory automation; and plated media. |
Biosciences | Fluorescence-activated cell sorters and analyzers; monoclonal antibodies and kits for performing cell analysis; reagent systems for life science research; bench-side solutions for high-throughput targeted single-cell gene expression and RNA-Seq analysis; molecular indexing and next-generation sequencing sample preparation for genomics research; and clinical oncology, immunological (HIV) and transplantation diagnostic/monitoring reagents and analyzers. |
BD Interventional
BD Interventional provides vascular, urology, oncology and surgical specialty products that are intended, with the exception of the V. Muller™ surgical and laparoscopic instrumentation products, to be used once and then discarded or are either temporarily or permanently implanted. The primary customers served by BD Interventional are hospitals, individual healthcare professionals, extended care facilities, alternate site facilities and directly to patients via our Homecare business. BD Interventional consists of the following organizational units:
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Organizational Unit | Principal Product Lines |
Surgery | Hernia and soft tissue repair, biological grafts, bioresorbable grafts, biosurgery, and other surgical products; BD ChloraPrep™ surgical infection prevention products, thoracic and abdominal drainage products and V. Mueller™ surgical and laparoscopic instrumentation products, which are products previously included within the former Medication and Procedural Solutions unit of BD Medical. |
Peripheral Intervention | Percutaneous transluminal angioplasty (“PTA”) balloon catheters, peripheral vascular stents, self-expanding and balloon-expandable stent grafts, vascular grafts, drug coated balloons, ports, biopsy, chronic dialysis, feeding, IVC filters, endovascular fistula creation devices and drainage products. |
Urology and Critical Care | Urological drainage products, intermittent catheters, urinary and fecal management devices, kidney stone management devices, and Targeted Temperature Management. |
Acquisitions
TVA Medical, Inc.
In July 2018, BD acquired TVA Medical, Inc., a company that develops minimally invasive vascular access solutions for patients with chronic kidney disease requiring hemodialysis.
C. R. Bard, Inc.
On December 29, 2017, BD completed the acquisition of Bard to create 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. Under the terms of the transaction, Bard common shareholders received approximately $222.93 in cash and 0.5077 shares of BD stock per Bard share. BD financed the cash portion of total consideration transferred with available cash, which included net proceeds raised in the third quarter of fiscal year 2017 through registered public offerings of equity securities and debt transactions. Additional information regarding the Bard acquisition is contained in Note 9 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data, which is incorporated herein by reference.
CareFusion Corporation
On March 17, 2015, BD completed the acquisition of CareFusion Corporation (“CareFusion”), a global medical technology company with a comprehensive portfolio of products in the areas of medication management, infection prevention, operating room and procedural effectiveness, and respiratory care. The CareFusion acquisition positioned BD as a global leader in medication management.
Remaining interest in Caesarea Medical Electronics
Upon its acquisition of CareFusion, BD acquired a 40% ownership interest in Caesarea Medical Electronics ("CME"), an Israeli-based global infusion pump systems manufacturer. On April 3, 2017, BD acquired the remaining 60% ownership interest in CME.
Additional information regarding these acquisitions is contained in Note 9 to the consolidated financial statements contained in Item 8., Financial Statements and Supplementary Data, which is incorporated herein by reference.
Divestitures
Advanced Bioprocessing
In October 2018, BD completed the sale of its Advanced Bioprocessing business pursuant to a definitive agreement that was signed in September 2018.
Respiratory Solutions and Vyaire Medical
On October 3, 2016, BD sold a 50.1% controlling financial interest in its Respiratory Solutions business, a component of the Medical segment, to form a venture, Vyaire Medical. BD retained a 49.9% non-controlling interest in the new standalone entity. BD agreed to various contract manufacturing and certain logistical and transition services agreements with the new entity for a period of up to two years after the sale. In April 2018, BD completed the sale of its remaining interest in Vyaire Medical. BD received gross cash proceeds of approximately $435 million and recognized a pre-tax gain on the sale of approximately $303 million.
Additional information regarding these divestitures is contained in Note 10 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data, which is incorporated herein by reference.
International Operations
BD’s products are manufactured and sold worldwide. For reporting purposes, 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. The principal products sold by BD outside the United States are hypodermic needles and syringes; insulin syringes and pen needles; BD Hypak™ brand prefillable syringe systems; infusion therapy products including Alaris™ infusion pumps; pharmacy automation equipment including Pyxis™ systems; devices and services for the treatment of peripheral arterial and venous disease, cancer detection, and end-stage renal disease and maintenance; synthetic and resorbable mesh, biologic implants and fixation systems to complement innovative techniques for inguinal, ventral and other hernia repair procedures; medical devices for urine drainage in the acute care hospital and home care settings; BD Vacutainer™ brand blood collection products; diagnostic systems and laboratory equipment and products; flow cytometry instruments and reagents. BD has manufacturing operations outside the United States in Bosnia and Herzegovina, Brazil, Canada, China, Dominican Republic, France, Germany, Hungary, India, Ireland, Israel, Italy, Japan, Malaysia, Mexico, the Netherlands, Singapore, Spain, and the United Kingdom. Geographic information with respect to BD’s operations is included under the heading “Geographic Information” in Note 6 to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, and is incorporated herein by reference.
Foreign economic conditions and exchange rate fluctuations have caused the profitability related to foreign revenues to fluctuate more than the profitability related to domestic revenues. BD believes its activities in some countries outside the United States involve greater risk than its domestic business due to the factors cited herein, as well as the economic environment, local commercial and economic policies and political uncertainties. See further discussion of this risk in Item 1A. Risk Factors.
Distribution
BD’s products are marketed and distributed in the United States and internationally through independent distribution channels, and directly to hospitals and other healthcare institutions by BD and independent sales representatives. BD uses acute care, non-acute care, laboratory and drug wholesaler distributors to broadly support our overall disposable product demand from our end user customers in the United States. In international markets, products are distributed either directly or through distributors, with the practice varying by country. Order backlog is not material to BD’s business inasmuch as orders for BD products generally are received and filled on a current basis, except for items temporarily out of stock. BD’s worldwide sales are not generally seasonal, with the exception of certain medical devices in the Medication Delivery Solutions business unit, and flu diagnostic products in the Diagnostic Systems business unit, which relate to seasonal diseases such
as influenza. In order to service its customers, optimize logistics, lower facilities costs and reduce finished goods inventory levels, BD operates consolidated distribution facilities in both the United States and Europe. Orders are normally shipped within a matter of days after receipt.
Raw Materials and Components
BD purchases many different types of raw materials and components, including plastics, glass, metals, textiles, paper products, agricultural products, electronic and mechanical sub-assemblies and various biological, chemical and petrochemical products. BD seeks to ensure continuity of supply by securing multiple options for sourcing. However, there are situations where raw materials and components are only available from one supplier, which are referred to as sole sourced. The use of sole sourced materials and components may be due to sourcing of proprietary and/or patented technology and processes that are intended to provide a unique market differentiation to our product. In other cases, while a raw material or component can be sourced from multiple manufacturers, only one supplier is qualified due to quality assurance, cost or other considerations. In order to provide alternate sources, BD must complete a rigorous qualification process, which most often includes completion of regulatory registration and approval. If clinical trials are not required, this qualification process can take 3-18 months depending on the criticality of the change. When clinical trials are required, this process may lengthen the qualification phase from one to three years. BD continuously assesses its sole sourced raw materials and components, and maintains business continuity plans with its suppliers. BD’s continuity plans may include securing secondary supply with alternate suppliers, qualification of alternate manufacturing facilities, maintaining contingency stock, internal development of supply and establishment of technology escrow accounts. While BD works closely with its suppliers, no assurance can be given that these efforts will be successful, and there may be events that cause supply interruption, reduction or termination that adversely impacts BD’s ability to manufacture and sell certain products.
Research and Development
BD conducts its research and development (“R&D”) activities at its operating units and at BD Technologies in Research Triangle Park, North Carolina. The majority of BD’s R&D activities are conducted in North America. Outside North America, BD primarily conducts R&D activities in China, France, India, Ireland and Singapore. BD also collaborates with certain universities, medical centers and other entities on R&D programs and retains individual consultants and partners to support its efforts in specialized fields. BD spent approximately $1,006 million, $774 million and $828 million on research and development during the fiscal years ended September 30, 2018, 2017, and 2016, respectively.
Intellectual Property and Licenses
BD owns significant intellectual property, including patents, patent applications, technology, trade secrets, know-how, copyrights and trademarks in the United States and other countries. BD is also licensed under domestic and foreign patents, patent applications, technology, trade secrets, know-how, copyrights and trademarks owned by others. In the aggregate, these intellectual property assets and licenses are of material importance to BD’s business. BD believes, however, that no single patent, technology, trademark, intellectual property asset or license is material in relation to BD’s business as a whole, or to any business segment.
Competition
BD operates in the increasingly complex and challenging medical technology marketplace. Technological advances and scientific discoveries have accelerated the pace of change in medical technology, the regulatory environment of medical products is becoming more complex and vigorous, and economic conditions have resulted in a challenging market. Companies of varying sizes compete in the global medical technology field. Some are more specialized than BD with respect to particular markets, and some have greater financial resources than BD. New companies have entered the field, particularly in the areas of molecular diagnostics, safety-engineered devices and in the life sciences, and established companies have diversified their business activities into the medical technology area. Other firms engaged in the distribution of medical technology products have become manufacturers of medical devices and instruments as well. Acquisitions and collaborations by and among companies seeking a competitive advantage also affect the competitive
environment. In addition, the entry into the market of low-cost manufacturers are creating increased pricing pressures. Some competitors have also established manufacturing sites or have contracted with suppliers located in these countries as a means to lower their costs.
BD competes in this evolving marketplace on the basis of many factors, including price, quality, innovation, service, reputation, distribution and promotion. The impact of these factors on BD’s competitive position varies among BD’s various product offerings. In order to remain competitive in the industries in which it operates, BD continues to make investments in research and development, quality management, quality improvement, product innovation and productivity improvement in support of its core strategies.
Third-Party Reimbursement
Reimbursement remains an important strategic consideration in the development and marketing of medical devices and procedures. Difficulty in obtaining coverage, coding and payment can be a significant barrier to the commercial success of a new product or procedure. The consequences can include slow adoption in the marketplace and inadequate payment levels that can continue for months or even years.
A majority of BD’s customers rely on third-party payers, including government programs and private health insurance plans, to reimburse some or all of the cost of the procedures, products and services they provide. These payers in the United States and abroad are increasingly focused on strategies to control spending on healthcare and reward improvements in quality and patient outcomes.
BD is actively engaged in identifying and communicating value propositions of its products for payer, provider, and patient stakeholders, and it employs various efforts and resources to attempt to positively impact coverage, coding and payment pathways. However, BD has no direct control over payer decision-making with respect to coverage and payment levels for BD products. The manner and level of reimbursement in any given case may depend on the site of care, the procedure(s) performed, the final patient diagnosis, the device(s) and/or drug(s) utilized, the available budget, or a combination of these factors, and coverage and payment levels are determined at each payer’s discretion. As BD’s product offerings are diverse across a variety of healthcare settings, they are affected to varying degrees by the many payment pathways that impact the decisions of healthcare providers regarding which medical products they purchase and the prices they are willing to pay for those products. Therefore, changes in reimbursement levels or methods may either positively or negatively impact sales of BD products in any given country for any given product.
As government programs seek to expand healthcare coverage for their citizens, they have at the same time sought to control costs by limiting the amount of reimbursement they will pay for particular procedures, products or services. Many third-party payers have developed specific payment and delivery mechanisms to support these cost control efforts and to focus on paying for value. These mechanisms include payment reductions, pay for performance measures, quality-based performance payments, restrictive coverage policies, bidding and tender mechanics, studies to compare the effectiveness of therapies and use of technology assessments. These changes, whether the result of legislation, new strategic alliances or market consolidations, have created an increased emphasis on the delivery of more cost-effective and quality-driven healthcare.
For example, as a result of the Patient Protection and Affordable Care Act (“PPACA”), the U.S. is implementing value based payment methodologies and seeking to create alternative payment models such as bundled payments to continue to drive improved value. We see other governments around the world considering similar bundling reform measures, including the development of the Diagnosis Related Group (“DRG”) as a payment mechanism to drive toward quality and resource based reimbursement.
Regulation
General
BD’s medical technology products and operations are subject to regulation by the U.S. Food and Drug Administration (“FDA”) and various other federal and state agencies, as well as by foreign governmental agencies. These agencies enforce laws and regulations that govern the development, testing, manufacturing, labeling, advertising, marketing and distribution, and market surveillance of BD’s medical products. The scope of the activities of these agencies, particularly in the Europe, Japan, and Asia Pacific regions in which BD operates, has been increasing.
BD actively maintains FDA/ISO Quality Systems that establish standards for its product design, manufacturing, and distribution processes. Prior to marketing or selling most of its products, BD must secure approval from the FDA and counterpart non-U.S. regulatory agencies. Following the introduction of a product, these agencies engage in periodic reviews and inspections of BD’s quality systems, as well as product performance and advertising and promotional materials. These regulatory controls, as well as any changes in FDA policies, can affect the time and cost associated with the development, introduction and continued availability of new products. Where possible, BD anticipates these factors in its product development and planning processes. These agencies possess the authority to take various administrative and legal actions against BD, such as product recalls, product seizures and other civil and criminal sanctions. BD also undertakes voluntary compliance actions, such as voluntary recalls.
BD also is subject to various federal and state laws, and laws outside the United States, concerning healthcare fraud and abuse (including false claims laws and anti-kickback laws), global anti-corruption, transportation, safety and health, and customs and exports. Many of the agencies enforcing these laws have increased their enforcement activities with respect to medical device manufacturers in recent years. This appears to be part of a general trend toward increased regulation and enforcement activity within and outside the United States.
In addition, as part of PPACA, the federal government has enacted the Sunshine Act provisions requiring BD to publicly report gifts and payments made to physicians and teaching hospitals. Failure to comply with these provisions could result in a range of fines, penalties and/or other sanctions.
Consent Decree
Our infusion pump organizational unit is operating under an amended consent decree entered into by CareFusion with the FDA in 2007. CareFusion’s consent decree with the FDA related to its Alaris™ SE infusion pumps. In February 2009, CareFusion and the FDA amended the consent decree to include all infusion pumps manufactured by or for CareFusion 303, Inc., the organizational unit that manufactures and sells infusion pumps in the United States. The amended consent decree does not apply to intravenous administration sets and accessories.
While this BD organizational unit remains subject to the amended consent decree, which includes the requirements of the original consent decree, it has made substantial progress in its compliance efforts. However, we cannot predict the outcome of this matter, and the amended consent decree authorizes the FDA, in the event of any violations in the future, to order us to cease manufacturing and distributing infusion pumps, recall products and take other actions. We may be required to pay damages of $15,000 per day per violation if we fail to comply with any provision of the amended consent decree, up to $15 million per year.
We also cannot currently predict whether additional monetary investment will be incurred to resolve this matter or the matter’s ultimate impact on our business. We may be obligated to pay more costs in the future because, among other things, the FDA may determine that we are not fully compliant with the amended consent decree and therefore impose penalties under the amended consent decree, and/or we may be subject to future proceedings and litigation relating to the matters addressed in the amended consent decree. As of September 30, 2018, we do not believe that a loss is probable in connection with the amended consent decree, and accordingly, we have no accruals associated with compliance with the amended consent decree.
FDA Warning Letters
In May 2017, the FDA conducted inspections at BD’s Preanalytical Systems (“PAS”) facility in Franklin Lakes, New Jersey. In July 2017, the FDA issued a Form 483 to BD PAS in connection with these inspections that contained observations of non-conformance relating to quality system regulations and medical device reporting relating to certain of our BD Vacutainer™ EDTA blood collection tubes. On January 11, 2018, BD received a Warning Letter from the FDA, citing certain alleged violations of quality system regulations and of law. The Warning Letter states that, until BD resolves the outstanding issues covered by the Warning Letter, the FDA will not clear or approve any premarket submissions for Class III devices to which the non-conformances are reasonably related or grant requests for certificates to foreign governments. We submitted our response to the Warning Letter on January 31, 2018.
The FDA conducted an inspection of BD’s facility located in Franklin, Wisconsin (“BD Franklin site”) from May 16, 2018 through August 1, 2018. On August 1, 2018, the FDA issued a Form 483 to the BD Franklin site in connection with these inspections that contained observations of non-conformance relating to quality system regulations relating to certain pre-filled Heparin lock flush syringes and pre-filled 0.9% sodium chloride lock flush syringes. On September 14, 2018, BD received a Warning Letter from the FDA, citing certain alleged violations of quality system regulations and of law. In the Warning Letter, FDA stated that BD’s response appears to be adequate, but that several of the actions are still in progress and a follow-up inspection by FDA of the site will be necessary to verify compliance. We submitted our response to the Warning Letter on October 1, 2018.
BD is working closely with the FDA and intends to fully implement corrective actions to address the concerns identified in the Warning Letters. However, BD cannot give any assurances that the FDA will be satisfied with its responses to the Warning Letters or as to the expected date of resolution of matters included in the Warning Letters. While BD does not believe that the issues identified in the Warning Letters will have a material impact on BD’s operation, no assurances can be given that the resolution of these matters will not have a material adverse effect on BD’s business, results of operations, financial conditions and/or liquidity.
For further discussion of risks relating to the regulations to which we are subject, see Item 1A. Risk Factors.
Employees
As of September 30, 2018, BD had 76,032 employees, of which 28,734 were employed in the U.S. (including Puerto Rico). BD believes that its employee relations are satisfactory.
Available Information
BD maintains a website at www.bd.com. BD also makes available its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and its Current Reports on Form 8-K (and amendments to those reports) as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). These filings may be obtained and printed free of charge at www.bd.com/investors. In addition, the written charters of the Audit Committee; the Compensation and Management Development Committee; the Corporate Governance and Nominating Committee; the Executive Committee; the Quality and Regulatory Committee; and the Science, Marketing, Innovation and Technology Committee of the Board of Directors, BD’s Corporate Governance Principles and its Code of Conduct, are available and may be printed free of charge at BD’s website at www.bd.com/investors/corporate_governance/. Printed copies of these materials, this 2018 Annual Report on Form 10-K, and BD’s reports and statements filed with, or furnished to, the SEC, may also be obtained, without charge, by contacting the Corporate Secretary, BD, 1 Becton Drive, Franklin Lakes, New Jersey 07417-1880, telephone 201-847-6800. In addition, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
BD also routinely posts important information for investors on its website at www.bd.com/investors. BD may use this website as a means of disclosing material, non-public information and for complying with its disclosure obligations under Regulation FD adopted by the SEC. Accordingly, investors should monitor the Investor Relations portion of BD’s website noted above, in addition to following BD’s press releases, SEC filings, and
public conference calls and webcasts. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this Annual Report.
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 SEC and in its reports to shareholders. Additional information regarding BD’s forward-looking statements is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 1A. Risk Factors.
An investment in BD involves a variety of risks and uncertainties. The following describes some of the significant risks that could adversely affect BD’s business, financial condition, operating results or cash flows.
Risks Relating to BD
A downturn in global economic conditions could adversely affect our operations.
Deterioration in the global economic environment, particularly in emerging markets and countries with government-sponsored healthcare systems, may cause decreased demand for our products and services and increased competition, which could result in lower sales volume and downward pressure on the prices for our products, longer sales cycles, and slower adoption of new technologies. A weakening of macroeconomic conditions may also adversely affect our suppliers, which could result in interruptions in supply. We have previously experienced delays in collecting government receivables in certain countries in Western Europe due to economic conditions, and we may experience similar delays in the future in these and other countries or regions experiencing financial problems.
The medical technology industry is very competitive.
We are a global company that faces significant competition from a wide range of companies. These include large medical device companies with multiple product lines, some of which may have greater financial and marketing resources than we do, and firms that are more specialized than we are with respect to particular markets or product lines. Non-traditional entrants, such as technology companies, are also entering into the healthcare industry, some of which may have greater financial and marketing resources than we do. We face competition across all our product lines and in each market in which our products are sold on the basis of product features, clinical or economic outcomes, product quality, availability, price, services and other factors. In addition, we face changing customer preferences and requirements, including increased customer demand for more environmentally-friendly products, as well as changes in the ways health care services are delivered (including the transition of more care to non-acute settings).
The medical technology industry is also subject to rapid technological change and discovery and frequent product introductions. The development of new or improved products, processes or technologies by other companies (such as needle-free injection technology) that provide better features, pricing or clinical outcomes or economic value may render our products or proposed products obsolete or less competitive. In some instances, competitors, including pharmaceutical companies, also offer, or are attempting to develop, alternative therapies for disease states that may be delivered without a medical device. The entry into the market of manufacturers located in China and other low-cost manufacturing locations has also created pricing pressure, particularly in developing markets.
The medical technology industry has also experienced a significant amount of consolidation, resulting in companies with greater market presence. Health care systems and other health care companies are also consolidating, resulting in greater purchasing power for these companies. As a result, competition among medical device suppliers to provide goods and services has increased. Group purchasing organizations and integrated health delivery networks have also served to concentrate purchasing decisions for some customers, which has led to downward pricing pressure for medical device suppliers. Further consolidation in the industry
could intensify competition among medical device suppliers and exert additional pressure on the prices of our products.
We are subject to foreign currency exchange risk.
A substantial amount of our revenues are derived from international operations, and we anticipate that a significant portion of our sales will continue to come from outside the U.S. in the future. The revenues we report with respect to our operations outside the United States may be adversely affected by fluctuations in foreign currency exchange rates. A discussion of the financial impact of exchange rate fluctuations and the ways and extent to which we may attempt to address any impact is contained in Item 7., Management’s Discussion of Financial Condition and Results of Operations. Any hedging activities we engage in may only offset a portion of the adverse financial impact resulting from unfavorable changes in foreign currency exchange rates. We cannot predict with any certainty changes in foreign currency exchange rates or the degree to which we can mitigate these risks.
Changes in reimbursement practices of third-party payers could affect the demand for our products and the prices at which they are sold.
Our sales depend, in part, on the extent to which healthcare providers and facilities are reimbursed by government authorities, private insurers and other third-party payers for the costs of our products (including Medicare, Medicaid and comparable foreign programs, as well as private payors). The coverage policies and reimbursement levels of third-party payers, which can vary among public and private sources and by country, may affect which products customers purchase and the prices they are willing to pay for those products in a particular jurisdiction. Reimbursement rates can also affect the acceptance rate of new technologies and products. Legislative or administrative reforms to reimbursement systems in the United States or abroad, changes in coverage or reimbursement rates by private payers, or adverse decisions relating to our products by administrators of these systems could significantly reduce reimbursement for procedures using our products or result in denial of reimbursement for those products, which would adversely affect customer demand or the price customers are willing to pay for such products. See “Third-Party Reimbursement” under Item 1. Business.
The reinstatement of the PPACA's medical device tax may adversely affect our results of operations.
The PPACA imposes on medical device manufacturers, such as BD, a 2.3% excise tax on U.S. sales of certain medical devices. While the excise tax has been suspended until the end of 2019, absent further legislative action, it will be reinstated in 2020, which would adversely affect our results of operation.
Cost volatility could adversely affect our operations.
Our results of operations could be negatively impacted by volatility in the cost of raw materials, components, freight and energy that increases the costs of producing and distributing our products. New laws or regulations adopted in response to climate change could also increase energy costs as well as the costs of certain raw materials and components. In particular, we purchase supplies of resins, which are oil-based components used in the manufacture of certain products, and any significant increases in resin costs could adversely impact future operating results. Increases in oil prices can also increase our packaging and transportation costs. We may not be able to offset any increases in these operational costs.
Breaches of our information technology systems could have a material adverse effect on our operations.
We rely on information technology systems to process, transmit, and store electronic information in our day-to-day operations, including sensitive personal information and proprietary or confidential information. In addition, some of our products include information technology that collects data regarding patients and patient therapy on behalf of our customers and some connect to our systems for maintenance purposes. Our information technology systems have been subjected to attack via malicious code execution, and cyber- or phishing- attacks, and we have experienced instances of unauthorized access to our systems in the past and expect to be subject to similar attacks in the future. In addition to our own information, in the course of doing business, we sometimes store information with third parties that could be subject to these types of attacks.
Cyber-attacks could result in our intellectual property and other confidential information being accessed or stolen. Likewise, we could suffer disruption of our operations and other significant negative consequences, including increased costs for security measures or remediation, diversion of management attention, and adverse impact on our relationships with vendors, business partners and customers. Unauthorized tampering, adulteration or interference with our products may also create issues with product functionality that could result in a loss of data, risk to patient safety, and product recalls or field actions. Cyber-attacks could result in unauthorized access to our systems and products which could also result in actions by regulatory bodies or civil litigation. While we will continue to dedicate significant resources to protect against unauthorized access to our systems and work with government authorities to detect and reduce the risk of future cyber incidents, cyber-attacks are becoming more sophisticated, frequent and adaptive. There can be no assurances that our protective measures will prevent future attacks that could have a material adverse impact on our business.
Our future growth is dependent in part upon the development of new products, and there can be no assurance that such products will be developed.
A significant element of our strategy is to increase revenue growth by focusing on innovation and new product development. New product development requires significant investment in research and development, clinical trials and regulatory approvals. The results of our product development efforts may be affected by a number of factors, including our ability to anticipate customer needs, innovate and develop new products and technologies, successfully complete clinical trials, obtain regulatory approvals and reimbursement in the United States and abroad, manufacture products in a cost-effective manner, obtain appropriate intellectual property protection for our products, and gain and maintain market acceptance of our products. In addition, patents attained by others can preclude or delay our commercialization of a product. There can be no assurance that any products now in development or that we may seek to develop in the future will achieve technological feasibility, obtain regulatory approval or gain market acceptance.
We cannot guarantee that any of our strategic acquisitions, investments or alliances will be successful.
We may seek to supplement our internal growth through strategic acquisitions, investments and alliances. Such transactions are inherently risky, and the integration of any newly-acquired business requires significant effort and management attention. The success of any acquisition, investment or alliance may be affected by a number of factors, including our ability to properly assess and value the potential business opportunity or to successfully integrate any business we may acquire into our existing business. There can be no assurance that any past or future transaction will be successful.
The international operations of our business may subject us to certain business risks.
A substantial amount of our sales come from our operations outside the United States, and we intend to continue to pursue growth opportunities in foreign markets, especially in emerging markets. Our foreign operations subject us to certain risks, including, among others, the effects of fluctuations in foreign currency exchange (discussed above), the effects of local economic and political conditions, competition from local companies, trade protectionism and restrictions on the transfer of capital across borders, U.S. relations with the governments of the foreign countries in which we operate, foreign regulatory requirements or changes in such requirements, local product preferences and product requirements, longer payment terms for account receivables than we experience in the U.S., difficulty in establishing, staffing and managing foreign operations, changes to international trade agreements and treaties, changes in tax laws, weakening or loss of the protection of intellectual property rights in some countries, and import or export licensing requirements. The success of our operations outside the United States also depends, in part, on our ability to make necessary infrastructure enhancements to, among other things, our production facilities and sales and distribution networks.
In addition, our international operations are governed by the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws outside the U.S. Global enforcement of anti-corruption laws has increased substantially in recent years, with more enforcement proceedings by U.S. and foreign governmental agencies and the imposition of significant fines and penalties. While we have implemented policies and procedures to enhance compliance with these laws, our international operations, which often involve customer relationships with foreign
governments, create the risk that there may be unauthorized payments or offers of payments made by employees, consultants, sales agents or distributors. Any alleged or actual violations of these laws may subject us to government investigations, significant criminal or civil sanctions and other liabilities, and negatively affect our reputation.
Changes in U.S. policy regarding international trade, including import and export regulation and international trade agreements, could also negatively impact our business. In 2018, the U.S. imposed tariffs on steel and aluminum as well as on goods imported from China and certain other countries, which has resulted in retaliatory tariffs by China and other countries. Additional tariffs imposed by the U.S. on a broader range of imports, or further retaliatory trade measures taken by China or other countries in response, could result in an increase in supply chain costs that we may not be able to offset or otherwise adversely impact our results of operations.
The June 2016 referendum result in the United Kingdom (“UK”) to exit the European Union (“EU”) (commonly known as “Brexit”), and the subsequent commencement of the official withdrawal process by the UK government in March 2017, has created uncertainties affecting business operations in the UK and the EU. Until the terms of the UK’s exit from the EU in March 2019 are determined, including any transition period, it is difficult to predict its impact. It is possible that the withdrawal could, among other things, affect the legal and regulatory environments to which our businesses are subject, impact trade between the UK and the EU and other parties and create economic and political uncertainty in the region.
Reductions in customers’ research budgets or government funding may adversely affect our business.
We sell products to researchers at pharmaceutical and biotechnology companies, academic institutions, government laboratories and private foundations. Research and development spending of our customers can fluctuate based on spending priorities and general economic conditions. A number of these customers are also dependent for their funding upon grants from U.S. government agencies, such as the U.S. National Institutes of Health (“NIH”) and agencies in other countries. The level of government funding of research and development is unpredictable. For instance, there have been instances where NIH grants have been frozen or otherwise unavailable for extended periods. The availability of governmental research funding may be adversely affected by economic conditions and governmental spending reductions. Any reduction or delay in governmental funding could cause our customers to delay or forego purchases of our products.
A reduction or interruption in the supply of certain raw materials and components would adversely affect our manufacturing operations and related product sales.
We purchase many different types of raw materials and components used in our products. Certain raw materials and components are not available from multiple sources. In addition, for quality assurance, cost-effectiveness and other reasons, certain raw materials and components are purchased from sole suppliers. The price and supply of these materials and components may be impacted or disrupted for reasons beyond our control. While we work with suppliers to ensure continuity of supply, no assurance can be given that these efforts will be successful. In addition, due to regulatory requirements relating to the qualification of suppliers, we may not be able to establish additional or replacement sources on a timely basis or without excessive cost. The termination, reduction or interruption in supply of these raw materials and components could adversely impact our ability to manufacture and sell certain of our products.
Interruption of our manufacturing operations could adversely affect our future revenues and operating income.
We have manufacturing sites all over the world. In some instances, however, the manufacturing of certain of our product lines is concentrated in one or more of our plants. Damage to one or more of these facilities from weather or natural disasters, or issues in our manufacturing process, equipment failure or other factors, could adversely affect our ability to manufacture these products, resulting in lost revenues and damage to our relationships with customers.
We are subject to lawsuits.
We are or have been a defendant in a number of lawsuits, including purported class action lawsuits for alleged antitrust violations, product liability claims (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 and pelvic organ prolapse products for women and vena cava filter products), and suits alleging patent infringement. We have also been subject to government 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 the civil investigative demands received by BD and Bard). A more detailed description of the foregoing is contained in Note 5 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. We could be subject to additional lawsuits or governmental investigations in the future. Reserves established for estimated losses with respect to legal proceedings do not represent an exact calculation of our actual liability, but instead represent our estimate of the probable loss at the time the reserve is established. Due to the inherent uncertainty of litigation and our underlying loss reserve estimates, additional reserves may be established from time-to-time. Also, in some instances, we are not able 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 materially in excess of any currently established accruals and, to the extent available, excess liability insurance. Any such future charges, individually or in the aggregate, could have a material adverse effect on our results of operations, financial condition and/or liquidity.
With respect to our existing product liability litigation, we believe that some settlements and judgments, as well as legal defense costs, may be covered in whole or in part under our product liability insurance policies with a limited number of insurance companies, or, in some circumstances, indemnification obligations to us from other parties. However, amounts recovered under these arrangements may be less than the stated coverage limits or less than otherwise expected and may not be adequate to cover damages and/or costs. In addition, there is no guarantee that insurers or other parties will pay claims or that coverage or indemnity will be otherwise available. For certain product liability claims or lawsuits, the Company does not maintain or has limited remaining insurance coverage, and we may not be able to obtain additional insurance on acceptable terms or at all that will provide adequate protection against potential liabilities.
We are subject to extensive regulation.
Our operations are global and are affected by complex state, federal and international laws relating to healthcare, environmental protection, antitrust, anti-corruption, marketing, fraud and abuse (including anti-kickback and false claims laws), export control, employment, privacy and other areas. Violations of these laws can result in criminal or civil sanctions, including substantial fines and, in some cases, exclusion from participation in health care programs such as Medicare and Medicaid. 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. The enactment of additional laws in the future may increase our compliance costs or otherwise adversely impact our operations.
We are also subject to extensive regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act, by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. Most of our products must receive clearance or approval from the FDA or counterpart regulatory agencies in other countries before they can be marketed or sold. The process for obtaining marketing approval or clearance may take a significant period of time and require the expenditure of substantial resources, and these have been increasing due to increased requirements from the FDA for supporting data for submissions. The process may also require changes to our products or result in limitations on the indicated uses of the products. Governmental agencies may also impose new requirements regarding registration, labeling or prohibited materials that may require us to modify or re-register products already on the market or otherwise impact our ability to market our products in those countries. Once clearance or approval has been obtained for a product, there is an obligation to ensure that all applicable FDA and other regulatory requirements continue to be met. Following the introduction of a product, these agencies also periodically review our manufacturing processes and product performance. Our failure to comply with the applicable good manufacturing practices, adverse event reporting, clinical trial and other requirements of these agencies could delay or prevent the production, marketing or sale of our
products and result in fines, delays or suspensions of regulatory clearances, closure of manufacturing sites, seizures or recalls of products and damage to our reputation. More stringent oversight by the FDA and other agencies in recent years has resulted in increased enforcement activity, which increases the compliance risk for us and other companies in our industry.
As a result of the CareFusion acquisition, we are operating under a consent decree with the FDA that was entered into by CareFusion in 2009, that affects our infusion pump business in the United States. We are also currently operating under two warning letters issued by the FDA. For more information regarding the consent decree and warning letters, see “Regulation” under Item 1. Business.
In addition, the European Union (“EU”) has adopted the EU Medical Device Regulation (the “EU MDR”) and the In Vitro Diagnostic Regulation (the “EU IVDR”), each of which impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices will have until May 2020 to meet the requirements of the EU MDR and until May 2022 to meet the EU IVDR. Complying with the requirements of these regulations will require us to incur significant expenditures. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements.
We are also subject to laws in the U.S. and elsewhere regarding privacy and the protection of personal information. For instance, the EU has also adopted the General Data Protection Regulation ("GDPR"), which will apply to personal data involved in our operations in the EU or products and services that we offer to EU users involving personal data. The GDPR creates a range of new compliance obligations that could require us to change our existing business practices policies, and significantly increases financial penalties for noncompliance.
Defects or quality issues associated with our products could adversely affect the results of our operations.
The design, manufacture and marketing of medical devices involve certain inherent risks. Manufacturing or design defects, component failures, unapproved or improper use of our products, or inadequate disclosure of risks or other information relating to the use of our products can lead to injury or other serious adverse events. These events could lead to recalls or safety alerts relating to our products (either voluntary or as required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. A recall could result in significant costs and lost sales and customers, enforcement actions and/or investigations by state and federal governments or other enforcement bodies, as well as negative publicity and damage to our reputation that could reduce future demand for our products. Personal injuries relating to the use of our products can also result in significant product liability claims being brought against us. In some circumstances, such adverse events could also cause delays in regulatory approval of new products or the imposition of post-market approval requirements.
Our operations are dependent in part on patents and other intellectual property assets.
Many of our businesses rely on patent, trademark and other intellectual property assets. These intellectual property assets, in the aggregate, are of material importance to our business. We can lose the protection afforded by these intellectual property assets through patent expirations, legal challenges or governmental action. Patents attained by competitors, particularly as patents on our products expire, may also adversely affect our competitive position. In addition, competitors may seek to invalidate patents on our products or claim that our products infringe upon their intellectual property, which could result in a loss of competitive advantage or the payment of significant legal fees, damage awards and past or future royalties, as well as injunctions against future sales of our products. We also operate in countries that do not protect intellectual property rights to the same extent as in the U.S., which could make it easier for competitors to compete with us in those countries. The loss of a significant portion of our portfolio of intellectual property assets may have an adverse effect on our earnings, financial condition or cash flows.
Natural disasters, war and other events could adversely affect our future revenues and operating income.
Natural disasters (including pandemics), war, terrorism, labor disruptions and international conflicts, and actions taken by the United States and other governments or by our customers or suppliers in response to such events, could cause significant economic disruption and political and social instability in the United States and areas outside of the United States in which we operate. These events could result in decreased demand for our products, adversely affect our manufacturing and distribution capabilities, or increase the costs for or cause interruptions in the supply of materials from our suppliers.
We need to attract and retain key employees to be competitive.
Our ability to compete effectively depends upon our ability to attract and retain executives and other key employees, including people in technical, marketing, sales and research positions. Competition for experienced employees, particularly for persons with specialized skills, can be intense. Our ability to recruit such talent will depend on a number of factors, including compensation and benefits, work location and work environment. If we cannot effectively recruit and retain qualified executives and employees, our business could be adversely affected.
Risks Relating To Our Acquisition of Bard
The integration of the Bard business may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the Bard acquisition may not be realized.
The success of the Bard acquisition, including anticipated benefits and cost savings, will depend, in part, on our ability to successfully combine and integrate our legacy business with the business of Bard. The integration of Bard’s business with our existing business is a complex, costly and time-consuming process. It is possible that a number of factors, including, without limitation, the loss of key employees, higher than expected costs, diversion of management attention and resources, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies, could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits and cost savings of the acquisition. If we experience difficulties with the integration process, the anticipated benefits of the Bard acquisition may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on us for an undetermined period following the acquisition. In addition, the actual cost savings of the Bard acquisition could be less than anticipated.
The future results of the combined company may be adversely impacted if we do not effectively manage our expanded operations.
Following the completion of the Bard acquisition, the size of our business has increased significantly. Our ability to successfully manage this expanded business will depend, in part, upon management’s ability to design and implement strategic initiatives that address not only the integration of the two companies, but also the increased scale and scope of the combined business with its associated increased costs and complexity. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Bard acquisition.
We will incur substantial expenses related to the integration of Bard.
We incurred, and expect to continue to incur, a number of non-recurring costs associated with the Bard integration related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the Bard integration. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
In connection with the Bard acquisition, we incurred significant additional indebtedness, which could adversely affect us, including by decreasing our business flexibility, and will increase our interest expense.
We have substantially increased our indebtedness in connection with the Bard acquisition through the incurrence of new indebtedness to finance the acquisition and the assumption of Bard’s existing indebtedness, in comparison to our indebtedness on a recent historical basis. This could have the effect of, among other things, reducing our flexibility to respond to business challenges and opportunities, and increasing our interest expense.
The amount of cash required to pay interest on our increased indebtedness levels following completion of the Bard acquisition, and thus the demands on our cash resources, are greater than the amount of cash flows required to service our indebtedness prior to the Bard acquisition. The increased levels of indebtedness following completion of the Bard acquisition may also reduce funds available for working capital, capital expenditures, acquisitions, the repayment or refinancing of our indebtedness as it becomes due and other general corporate purposes, and may create competitive disadvantages for us relative to other companies with lower debt levels. In addition, certain of the indebtedness incurred in connection with the Bard acquisition bears interest at variable interest rates. If interest rates increase, variable rate debt will create higher debt service requirements, which could further adversely affect our cash flows. If we do not achieve the expected benefits and cost savings from the Bard acquisition, or if the financial performance as a combined company does not meet current expectations, then our ability to service our indebtedness may be adversely impacted.
In addition, our credit ratings affect the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations. There can be no assurance that we will achieve a particular rating or maintain a particular rating in the future or that we will be able to maintain our current rating. Furthermore, our combined company’s credit ratings were lowered following the Bard acquisition, including below “investment grade” by Moody’s Investors Service, Inc., which may further increase our future borrowing costs and reduce our access to capital.
Moreover, in the future we may be required to raise substantial additional financing to fund working capital, capital expenditures, the repayment or refinancing of our indebtedness, acquisitions or other general corporate requirements. Our ability to arrange additional financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. No assurance can be provided that we will be able to obtain additional financing or refinancing on terms acceptable to us or at all.
We may not be able to service all of our indebtedness.
We depend on cash on hand and cash flows from operations to make scheduled debt payments. However, our ability to generate sufficient cash flow from operations of the combined company and to utilize other methods to make scheduled payments will depend on a range of economic, competitive and business factors, many of which are outside of our control. There can be no assurance that these sources will be adequate. If we are unable to service our indebtedness and fund our operations, we will be forced to reduce or delay capital expenditures, seek additional capital, sell assets or refinance our indebtedness. Any such action may not be successful and we may be unable to service our indebtedness and fund our operations, which could have a material adverse effect on our business, financial condition or results of operations.
The agreements that govern the indebtedness incurred in connection with the Bard acquisition impose restrictions that may affect our ability to operate our businesses.
The agreements that govern the indebtedness incurred in connection with the Bard acquisition contain various affirmative and negative covenants that may, subject to certain significant exceptions, restrict the ability of certain of our subsidiaries to incur debt and the ability of us and certain of our subsidiaries to, among other things, have liens on our property, and/or merge or consolidate with any other person or sell or convey certain of our assets to any one person, engage in certain transactions with affiliates and change the nature of our business. In addition, the agreements also require us to comply with certain financial covenants, including financial ratios. Our ability and the ability of our subsidiaries to comply with these provisions may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations and could result in a default and acceleration under other
agreements containing cross-default provisions. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations.
The mandatory convertible preferred stock underlying the depositary shares issued in connection with the financing of the Bard transaction may adversely affect the market price of BD common stock.
The market price of BD common stock is likely to be influenced by the mandatory convertible preferred stock underlying the depositary shares issued in connection with the financing for the Bard transaction. The market price of BD common stock could become more volatile and could be depressed by:
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• | investors’ anticipation of the potential resale in the market of a substantial number of additional shares of BD common stock received upon conversion of the mandatory convertible preferred stock; |
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• | possible sales of BD common stock by investors who view the mandatory convertible preferred stock as a more attractive means of equity participation in BD than owning shares of BD common stock; and |
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• | hedging or arbitrage trading activity that may develop involving the mandatory convertible preferred stock and BD common stock. |
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
BD’s executive offices are located in Franklin Lakes, New Jersey. As of October 31, 2018, BD owned or leased 380 facilities throughout the world, comprising approximately 24,658,363 square feet of manufacturing, warehousing, administrative and research facilities. The U.S. facilities, including those in Puerto Rico, comprise approximately 8,619,099 square feet of owned and 4,407,539 square feet of leased space. The international facilities comprise approximately 8,484,223 square feet of owned and 3,147,502 square feet of leased space. Sales offices and distribution centers included in the total square footage are also located throughout the world.
Operations in each of BD’s business segments are conducted at both U.S. and international locations. Particularly in the international marketplace, facilities often serve more than one business segment and are used for multiple purposes, such as administrative/sales, manufacturing and/or warehousing/distribution. BD generally seeks to own its manufacturing facilities, although some are leased. The following table summarizes property information by business segment.
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Sites | Corporate | BD Life Sciences | BD Medical | BD Interventional | Mixed(a) | Total |
Leased | 20 | 21 | 81 | 86 | 83 | 291 |
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Owned | 6 | 23 | 31 | 23 | 6 | 89 |
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Total | 26 | 44 | 112 | 109 | 89 | 380 |
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Square feet | 2,281,986 | 3,958,668 | 10,946,766 | 4,651,903 | 2,819,040 | 24,658,363 |
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(a) | Facilities used by more than one business segment. |
BD believes that its facilities are of good construction and in good physical condition, are suitable and adequate for the operations conducted at those facilities, and are, with minor exceptions, fully utilized and operating at normal capacity.
The U.S. facilities are located in Alabama, Arizona, California, Connecticut, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, D.C., Washington, Wisconsin and Puerto Rico.
The international facilities are as follows:
- Europe, Middle East, Africa, which includes facilities in Austria, Belgium, Bosnia and Herzegovina, the Czech Republic, Denmark, England, Finland, France, Germany, Ghana, Greece, Hungary, Ireland, Israel, Italy, Kenya, Luxembourg, Netherlands, Norway, Pakistan, Poland, Portugal, Russia, Saudi Arabia, South Africa, Spain, Sweden, Switzerland, Turkey, the United Arab Emirates and Zambia.
- Greater Asia, which includes facilities in Australia, Bangladesh, China, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.
- Latin America, which includes facilities in Argentina, Brazil, Chile, Colombia, Mexico, Peru and the Dominican Republic.
- Canada.
Item 3. Legal Proceedings.
Information with respect to certain legal proceedings is included in Note 5 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data, and is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
Executive Officers of the Registrant
The following is a list of the executive officers of BD, their ages and all positions and offices held by each of them during the past five years. There is no family relationship between any executive officer or director of BD.
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Name | Age | Position |
Vincent A. Forlenza | 65 | Chairman since July 2012; Chief Executive Officer since October 2011; and President from January 2009 to April 2017. |
Thomas E. Polen | 45 | Chief Operating Officer since October 2018; President since April 2017; Executive Vice President and President - Medical Segment from October 2014 to April 2017; and Group President from October 2013 to October 2014. |
James W. Borzi | 56 | Executive Vice President, Global Operations and Chief Supply Chain Office since October 2017; Senior Vice President, Global Operations from 2015 to October 2017; and Vice President, Global Manufacturing from 2013 to 2015. |
Simon D. Campion | 47 | Executive Vice President and President, Interventional Segment since September 2018; Worldwide President, BD Interventional - Surgery from December 2017 to September 2018; President, Davol (now part of our Surgery business), C.R. Bard, Inc. from July 2015 to December 2017; and prior thereto, Vice President and General Manager, Davol. |
Roland Goette | 56 | Executive Vice President and President, EMEA since May 2017; President, Europe from October 2014 to May 2017; and prior thereto, Vice President and General Manager - Medical Surgical Systems, Western Europe. |
Patrick K. Kaltenbach | 55 | Executive Vice President and President, Life Sciences Segment since May 2018; Senior Vice President and President, Life Sciences and Applied Markets Group, Agilent Technologies, Inc. from November 2014 to April 2018; Vice President and General Manager of Agilent’s Life Sciences Products and Solutions organization from January 2014 to November 2014; and prior thereto, Vice President and General Manager of the Life Sciences Products and Solutions organization. |
Samrat S. Khichi | 51 | Executive Vice President and General Counsel since December 2017; Senior Vice President, General Counsel and Corporate Secretary, C.R. Bard, Inc. from July 2014 to December 2017; and prior thereto, Chief Administrative Officer, Senior Vice President, General Counsel and Secretary, Catalent Pharma Solutions, a portfolio company of The Blackstone Group. |
Betty D. Larson | 42 | Executive Vice President, Human Resources, and Chief Human Resources Officer since July 2018; Senior Vice President of Human Resources, Interventional Segment from December 2017 to July 2018; Vice President, Human Resources, C.R. Bard, Inc. from September 2014 to December 2017; and prior thereto, Vice President, Human Resources - Global Medical Products Business, Baxter International. |
James Lim | 54 | Executive Vice President and President, Greater Asia since June 2012. |
Alberto Mas | 57 | Executive Vice President and President - Medical Segment since June 2018; Executive Vice President and President - Life Sciences Segment from October 2016 to June 2018; and Worldwide President - Diagnostic Systems from October 2013 to October 2016. |
Christopher R. Reidy | 61 | Executive Vice President, Chief Financial Officer and Chief Administrative Officer since July 2013. |
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
BD’s common stock is listed on the New York Stock Exchange under the symbol "BDX". As of October 31, 2018, there were approximately 14,130 shareholders of record.
Issuer Purchases of Equity Securities
The table below sets forth certain information regarding BD’s purchases of its common stock during the fiscal quarter ended September 30, 2018.
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Period | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs(2) |
July 1-31, 2018 | 1,499 |
| | $244.50 | | — |
| | 7,857,742 |
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August 1-31, 2018 | 535 |
| | $247.67 | | — |
| | 7,857,742 |
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September 1-30, 2018 | — |
| | — |
| | — |
| | 7,857,742 |
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Total | 2,034 |
| | $245.33 | | — |
| | 7,857,742 |
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(1) | Includes shares purchased during the quarter in open market transactions by the trust relating to BD’s Deferred Compensation and Retirement Benefit Restoration Plan and 1996 Directors’ Deferral Plan. |
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(2) | Represents shares available under the repurchase program authorized by the Board of Directors on September 24, 2013 for 10 million shares, for which there is no expiration date. |
Item 6. Selected Financial Data.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Becton, Dickinson and Company |
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| Years Ended September 30 |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Dollars in millions, except share and per share amounts |
Operations | | | | | | | | | |
Revenues | $ | 15,983 |
| | $ | 12,093 |
| | $ | 12,483 |
| | $ | 10,282 |
| | $ | 8,446 |
|
Gross Profit | 7,262 |
| | 5,942 |
| | 5,991 |
| | 4,695 |
| | 4,301 |
|
Operating Income | 1,497 |
| | 1,478 |
| | 1,430 |
| | 1,074 |
| | 1,606 |
|
Income Before Income Taxes | 1,173 |
| | 976 |
| | 1,074 |
| | 739 |
| | 1,522 |
|
Income Tax Provision (Benefit) | 862 |
| | (124 | ) | | 97 |
| | 44 |
| | 337 |
|
Net Income | 311 |
| | 1,100 |
| | 976 |
| | 695 |
| | 1,185 |
|
Basic Earnings Per Share | 0.62 |
| | 4.70 |
| | 4.59 |
| | 3.43 |
| | 6.13 |
|
Diluted Earnings Per Share | 0.60 |
| | 4.60 |
| | 4.49 |
| | 3.35 |
| | 5.99 |
|
Dividends Per Common Share | 3.00 |
| | 2.92 |
| | 2.64 |
| | 2.40 |
| | 2.18 |
|
Financial Position | | | | | | | | | |
Total Assets | 53,904 |
| | 37,734 |
| | 25,586 |
| | 26,478 |
| | 12,384 |
|
Total Long-Term Debt | 18,894 |
| | 18,667 |
| | 10,550 |
| | 11,370 |
| | 3,768 |
|
Total Shareholders’ Equity | 20,994 |
| | 12,948 |
| | 7,633 |
| | 7,164 |
| | 5,053 |
|
Additional Data | | | | | | | | | |
Average Common and Common Equivalent Shares Outstanding — Assuming Dilution (millions) | 264.6 |
| | 223.6 |
| | 217.5 |
| | 207.5 |
| | 197.7 |
|
The results above include the net expense associated with specified items as detailed below. Additional discussion regarding the specified items in fiscal years 2018, 2017 and 2016 are provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended September 30 |
Millions of dollars, except per share amounts | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Total specified items | $ | 2,409 |
| | $ | 1,466 |
| | $ | 1,261 |
| | $ | 1,186 |
| | $ | 153 |
|
After-tax impact of specified items | $ | 2,674 |
| | $ | 971 |
| | $ | 892 |
| | $ | 786 |
| | $ | 101 |
|
Impact of specified items on diluted earnings per share | $ | (10.11 | ) | | $ | (4.34 | ) | | $ | (4.10 | ) | | $ | (3.79 | ) | | $ | (0.51 | ) |
Impact of dilution from share issuances | $ | (0.30 | ) | | $ | (0.54 | ) | | $ | — |
| | $ | (0.02 | ) | | $ | — |
|
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; |
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:
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• | 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. |
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• | 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.
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | The adverse financial impact resulting from unfavorable changes in foreign currency exchange rates. |
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• | Regional, national and foreign economic factors, including inflation, deflation, and fluctuations in interest rates, and their potential effect on our operating performance. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | Fluctuations in university or U.S. and international governmental funding and policies for life sciences research. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | Our ability to obtain the anticipated benefits of restructuring programs, if any, that we may undertake. |
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• | 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Notes 1, 13 and 14 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data, and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
Reports of Management
Management’s Responsibilities
The following financial statements have been prepared by management in conformity with U.S. generally accepted accounting principles and include, where required, amounts based on the best estimates and judgments of management. The integrity and objectivity of data in the financial statements and elsewhere in this Annual Report are the responsibility of management.
In fulfilling its responsibilities for the integrity of the data presented and to safeguard the Company’s assets, management employs a system of internal accounting controls designed to provide reasonable assurance, at appropriate cost, that the Company’s assets are protected and that transactions are appropriately authorized, recorded and summarized. This system of control is supported by the selection of qualified personnel, by organizational assignments that provide appropriate delegation of authority and division of responsibilities, and by the dissemination of written policies and procedures. This control structure is further reinforced by a program of internal audits, including a policy that requires responsive action by management.
The Board of Directors monitors the internal control system, including internal accounting and financial reporting controls, through its Audit Committee, which consists of eight independent Directors. The Audit Committee meets periodically with the independent registered public accounting firm, the internal auditors and management to review the work of each and to satisfy itself that they are properly discharging their responsibilities. The independent registered public accounting firm and the internal auditors have full and free access to the Audit Committee and meet with its members, with and without management present, to discuss the scope and results of their audits including internal control, auditing and financial reporting matters.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Act of 1934. Management conducted an assessment of the effectiveness of internal control over financial reporting based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
On December 29, 2017, the Company completed the acquisition of C.R. Bard, Inc. ("Bard"). While the Company has extended its oversight and monitoring processes that support its internal control over financial reporting, as well as its disclosure controls and procedures, the Company continues to integrate the acquired operations of Bard. As such, the Company has excluded Bard from its evaluation of internal control over financial reporting. This exclusion is in accordance with the U.S. Securities and Exchange Commission's general guidance that a recently acquired business may be omitted from the assessment scope for up to one year from the date of acquisition. Bard is a wholly-owned subsidiary with total assets that represented approximately 5% of the Company's consolidated total assets at September 30, 2018 and total revenues that represented approximately 19% of the Company's consolidated revenues for fiscal year 2018.
Based on the Company's assessment of the effectiveness of internal control over financial reporting and the criteria noted above, management concluded that internal control over financial reporting was effective as of September 30, 2018.
The financial statements and internal control over financial reporting have been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young’s reports with respect to fairness of the presentation of the financial statements, and the effectiveness of internal control over financial reporting, are included herein.
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/s/ Vincent A. Forlenza | | /s/ Christopher Reidy | | /s/ Charles Bodner |
Vincent A. Forlenza | | Christopher Reidy | | Charles Bodner |
Chairman and Chief Executive Officer | | Executive Vice President, Chief Financial Officer and Chief Administrative Officer | | Senior Vice President, Corporate Finance and Chief Accounting Officer |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Becton, Dickinson and Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Becton, Dickinson and Company (the Company) as of September 30, 2018 and 2017, the related consolidated statements of income, comprehensive income and cash flows for each of the three years in the period ended September 30, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 21, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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/s/ ERNST & YOUNG LLP | |
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We have served as the Company's auditor since 1959. | |
New York, New York | |
November 21, 2018 | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Becton, Dickinson and Company
Opinion on Internal Control over Financial Reporting
We have audited Becton, Dickinson and Company’s internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Becton, Dickinson and Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on the COSO criteria.
As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of C.R. Bard, Inc., which is included in the 2018 consolidated financial statements of the Company and constituted 5% of total assets as of September 30, 2018 and 19% of net sales for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of C.R. Bard, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2018 consolidated balance sheets of the Company as of September 30, 2018 and 2017, the related consolidated statements of comprehensive income and cash flows for each of the three years in the period ended September 30, 2018, and the related notes and our report dated November 21, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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/s/ ERNST & YOUNG LLP | |
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New York, New York | |
November 21, 2018 | |
Consolidated Statements of Income
Becton, Dickinson and Company
Years Ended September 30
|
| | | | | | | | | | | |
Millions of dollars, except per share amounts | 2018 | | 2017 | | 2016 |
Revenues | $ | 15,983 |
| | $ | 12,093 |
| | $ | 12,483 |
|
| | | | | |
Cost of products sold | 8,721 |
| | 6,151 |
| | 6,492 |
|
Selling and administrative expense | 4,015 |
| | 2,925 |
| | 3,005 |
|
Research and development expense | 1,006 |
| | 774 |
| | 828 |
|
Acquisitions and other restructurings | 744 |
| | 354 |
| | 728 |
|
Other operating expense, net | — |
| | 410 |
| | — |
|
Total Operating Costs and Expenses | 14,487 |
| | 10,615 |
| | 11,053 |
|
Operating Income | 1,497 |
| | 1,478 |
| | 1,430 |
|
Interest expense | (706 | ) | | (521 | ) | | (388 | ) |
Interest income | 65 |
| | 76 |
| | 21 |
|
Other income (expense), net | 318 |
| | (57 | ) | | 11 |
|
Income Before Income Taxes | 1,173 |
| | 976 |
| | 1,074 |
|
Income tax provision (benefit) | 862 |
| | (124 | ) | | 97 |
|
Net Income | 311 |
| | 1,100 |
| | 976 |
|
Preferred stock dividends | (152 | ) | | (70 | ) | | — |
|
Net income applicable to common shareholders | $ | 159 |
| | $ | 1,030 |
| | $ | 976 |
|
| | | | | |
Basic Earnings per Share | $ | 0.62 |
| | $ | 4.70 |
| | $ | 4.59 |
|
| | | | | |
Diluted Earnings per Share | $ | 0.60 |
| | $ | 4.60 |
| | $ | 4.49 |
|
Amounts may not add due to rounding.
See notes to consolidated financial statements.
49
Consolidated Statements of Comprehensive Income
Becton, Dickinson and Company
Years Ended September 30
|
| | | | | | | | | | | |
Millions of dollars | 2018 | | 2017 | | 2016 |
Net Income | $ | 311 |
| | $ | 1,100 |
| | $ | 976 |
|
Other Comprehensive (Loss) Income, Net of Tax | | | | | |
Foreign currency translation adjustments | (161 | ) | | 11 |
| | (50 | ) |
Defined benefit pension and postretirement plans | (26 | ) | | 179 |
| | (141 | ) |
Cash flow hedges | 1 |
| | 17 |
| | 1 |
|
Other Comprehensive (Loss) Income, Net of Tax | (186 | ) | | 206 |
| | (191 | ) |
Comprehensive Income | $ | 125 |
| | $ | 1,306 |
| | $ | 786 |
|
Amounts may not add due to rounding.
See notes to consolidated financial statements.
50
Consolidated Balance Sheets
Becton, Dickinson and Company
September 30
|
| | | | | | | |
Millions of dollars, except per share amounts and numbers of shares | 2018 | | 2017 |
Assets | | | |
Current Assets | | | |
Cash and equivalents | $ | 1,140 |
| | $ | 14,179 |
|
Restricted cash | 96 |
| | — |
|
Short-term investments | 17 |
| | 21 |
|
Trade receivables, net | 2,319 |
| | 1,744 |
|
Inventories | 2,451 |
| | 1,818 |
|
Assets held for sale | 137 |
| | — |
|
Prepaid expenses and other | 1,251 |
| | 871 |
|
Total Current Assets | 7,411 |
| | 18,633 |
|
Property, Plant and Equipment, Net | 5,375 |
| | 4,638 |
|
Goodwill | 23,600 |
| | 7,563 |
|
Developed Technology, Net | 12,184 |
| | 2,478 |
|
Customer Relationships, Net | 3,723 |
| | 2,830 |
|
Other Intangibles, Net | 534 |
| | 585 |
|
Other Assets | 1,078 |
| | 1,007 |
|
Total Assets | $ | 53,904 |
| | $ | 37,734 |
|
Liabilities and Shareholders’ Equity | | | |
Current Liabilities | | | |
Short-term debt | $ | 2,601 |
| | $ | 203 |
|
Accounts payable | 1,106 |
| | 797 |
|
Accrued expenses | 2,255 |
| | 1,393 |
|
Salaries, wages and related items | 910 |
| | 773 |
|
Income taxes | 343 |
| | 176 |
|
Total Current Liabilities | 7,216 |
| | 3,342 |
|
Long-Term Debt | 18,894 |
| | 18,667 |
|
Long-Term Employee Benefit Obligations | 1,056 |
| | 1,168 |
|
Deferred Income Taxes and Other | 5,743 |
| | 1,609 |
|
Commitments and Contingencies (See Note 5) |
|
| |
|
|
Shareholders’ Equity | | | |
Preferred stock | 2 |
| | 2 |
|
Common stock — $1 par value: authorized — 640,000,000 shares; issued — 346,687,160 shares in 2018 and 2017. | 347 |
| | 347 |
|
Capital in excess of par value | 16,179 |
| | 9,619 |
|
Retained earnings | 12,596 |
| | 13,111 |
|
Deferred compensation | 22 |
| | 19 |
|
Common stock in treasury — at cost — 78,462,971 shares in 2018 and 118,744,758 shares in 2017. | (6,243 | ) | | (8,427 | ) |
Accumulated other comprehensive loss | (1,909 | ) | | (1,723 | ) |
Total Shareholders’ Equity | 20,994 |
| | 12,948 |
|
Total Liabilities and Shareholders’ Equity | $ | 53,904 |
| | $ | 37,734 |
|
Amounts may not add due to rounding.
See notes to consolidated financial statements.
51
Consolidated Statements of Cash Flows
Becton, Dickinson and Company
Years Ended September 30
|
| | | | | | | | | | | |
Millions of dollars | 2018 | | 2017 | | 2016 |
Operating Activities | | | | | |
Net income | $ | 311 |
| | $ | 1,100 |
| | $ | 976 |
|
Adjustments to net income to derive net cash provided by operating activities: | | | | | |
Depreciation and amortization | 1,978 |
| | 1,088 |
| | 1,114 |
|
Share-based compensation | 322 |
| | 174 |
| | 196 |
|
Deferred income taxes | (240 | ) | | (236 | ) | | (426 | ) |
Change in operating assets and liabilities: | | | | | |
Trade receivables, net | (170 | ) | | (93 | ) | | (128 | ) |
Inventories | 246 |
| | (46 | ) | | 69 |
|
Prepaid expenses and other | (46 | ) | | (366 | ) | | 90 |
|
Accounts payable, income taxes and other liabilities | 867 |
| | 134 |
| | 368 |
|
Pension obligation | (263 | ) | | 84 |
| | (32 | ) |
Excess tax benefits from payments under share-based compensation plans | 78 |
| | 77 |
| | — |
|
Lease contract modification-related charge | — |
| | 748 |
| | — |
|
Gain on sale of Vyaire interest | (303 | ) | | — |
| | — |
|
Other, net | 85 |
| | (114 | ) | | 332 |
|
Net Cash Provided by Operating Activities | 2,865 |
| | 2,550 |
| | 2,559 |
|
Investing Activities | | | | | |
Capital expenditures | (895 | ) | | (727 | ) | | (693 | ) |
Proceeds from (purchases of) investments, net | 11 |
| | 13 |
| | (1 | ) |
Acquisitions of businesses, net of cash acquired | (15,281 | ) | | (174 | ) | | — |
|
Proceeds from divestitures, net | 534 |
| | 165 |
| | 158 |
|
Other, net | (198 | ) | | (161 | ) | | (133 | ) |
Net Cash Used for Investing Activities | (15,829 | ) | | (883 | ) | | (669 | ) |
Financing Activities | | | | | |
Change in credit facility borrowings |