10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 2, 2017
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2017
OR
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-4802
Becton, Dickinson and Company
(Exact name of registrant as specified in its charter)
New Jersey |
22-0760120 |
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
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1 Becton Drive, Franklin Lakes, New Jersey 07417-1880
(Address of principal executive offices) (Zip Code)
(201) 847-6800
(Registrant’s telephone number, including area code)
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
¨ |
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Non-accelerated filer |
¨ |
(Do not check if a smaller reporting company) |
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Smaller reporting company |
¨ |
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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. |
¨ |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
There were 213,305,385 share of Common Stock, $1.00 par value, outstanding at March 31, 2017.
BECTON, DICKINSON AND COMPANY
FORM 10-Q
For the quarterly period ended March 31, 2017
TABLE OF CONTENTS
Page
Number
|
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Part I. |
FINANCIAL INFORMATION |
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Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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Part II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
ITEM 1. FINANCIAL STATEMENTS
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Millions of dollars
March 31, 2017 |
September 30, 2016 |
||||||
(Unaudited) |
|||||||
Assets |
|||||||
Current Assets: |
|||||||
Cash and equivalents |
$ |
548 |
$ |
1,541 |
|||
Short-term investments |
8 |
27 |
|||||
Trade receivables, net |
1,569 |
1,618 |
|||||
Current portion of net investment in sales-type leases |
355 |
339 |
|||||
Inventories: |
|||||||
Materials |
305 |
316 |
|||||
Work in process |
292 |
274 |
|||||
Finished products |
1,150 |
1,129 |
|||||
1,747 |
1,719 |
||||||
Assets held for sale |
— |
642 |
|||||
Prepaid expenses and other |
664 |
480 |
|||||
Total Current Assets |
4,891 |
6,367 |
|||||
Property, Plant and Equipment |
8,351 |
8,419 |
|||||
Less allowances for depreciation and amortization |
4,411 |
4,518 |
|||||
Property, Plant and Equipment, Net |
3,941 |
3,901 |
|||||
Goodwill |
7,405 |
7,419 |
|||||
Customer Relationships, Net |
2,923 |
3,022 |
|||||
Developed Technology, Net |
2,539 |
2,655 |
|||||
Other Intangibles, Net |
579 |
604 |
|||||
Capitalized Software, Net |
77 |
70 |
|||||
Net Investment in Sales-Type Leases, Less Current Portion |
817 |
796 |
|||||
Other Assets |
948 |
753 |
|||||
Total Assets |
$ |
24,121 |
$ |
25,586 |
|||
Liabilities and Shareholders’ Equity |
|||||||
Current Liabilities: |
|||||||
Short-term debt |
$ |
1,224 |
$ |
1,001 |
|||
Payables and accrued expenses |
2,794 |
3,210 |
|||||
Liabilities held for sale |
— |
189 |
|||||
Total Current Liabilities |
4,018 |
4,400 |
|||||
Long-Term Debt |
9,082 |
10,550 |
|||||
Long-Term Employee Benefit Obligations |
1,356 |
1,319 |
|||||
Deferred Income Taxes and Other |
1,702 |
1,684 |
|||||
Commitments and Contingencies (See Note 5) |
|||||||
Shareholders’ Equity |
|||||||
Common stock |
333 |
333 |
|||||
Capital in excess of par value |
4,742 |
4,693 |
|||||
Retained earnings |
13,321 |
12,727 |
|||||
Deferred compensation |
22 |
22 |
|||||
Common stock in treasury - at cost |
(8,445 |
) |
(8,212 |
) |
|||
Accumulated other comprehensive loss |
(2,009 |
) |
(1,929 |
) |
|||
Total Shareholders’ Equity |
7,963 |
7,633 |
|||||
Total Liabilities and Shareholders’ Equity |
$ |
24,121 |
$ |
25,586 |
Amounts may not add due to rounding.
See notes to condensed consolidated financial statements
3
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Millions of dollars, except per share data
(Unaudited)
Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
Revenues |
$ |
2,969 |
$ |
3,067 |
$ |
5,892 |
$ |
6,054 |
|||||||
Cost of products sold |
1,537 |
1,584 |
3,007 |
3,162 |
|||||||||||
Selling and administrative expense |
724 |
732 |
1,432 |
1,480 |
|||||||||||
Research and development expense |
187 |
182 |
368 |
369 |
|||||||||||
Acquisitions and other restructurings |
76 |
104 |
163 |
225 |
|||||||||||
Other operating income (See Note 5) |
— |
— |
(336 |
) |
— |
||||||||||
Total Operating Costs and Expenses |
2,523 |
2,601 |
4,634 |
5,236 |
|||||||||||
Operating Income |
446 |
466 |
1,257 |
818 |
|||||||||||
Interest expense |
(86 |
) |
(99 |
) |
(181 |
) |
(196 |
) |
|||||||
Interest income |
7 |
3 |
12 |
9 |
|||||||||||
Other (expense) income, net |
(5 |
) |
6 |
(35 |
) |
11 |
|||||||||
Income Before Income Taxes |
362 |
376 |
1,054 |
642 |
|||||||||||
Income tax provision |
18 |
38 |
148 |
75 |
|||||||||||
Net Income |
344 |
338 |
905 |
567 |
|||||||||||
Basic Earnings per Share |
$ |
1.61 |
$ |
1.59 |
$ |
4.24 |
$ |
2.67 |
|||||||
Diluted Earnings per Share |
$ |
1.58 |
$ |
1.56 |
$ |
4.15 |
$ |
2.62 |
|||||||
Dividends per Common Share |
$ |
0.73 |
$ |
0.66 |
$ |
1.46 |
$ |
1.32 |
Amounts may not add due to rounding.
See notes to condensed consolidated financial statements
4
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Millions of dollars
(Unaudited)
Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
Net Income |
$ |
344 |
$ |
338 |
$ |
905 |
$ |
567 |
|||||||
Other Comprehensive Income (Loss), Net of Tax |
|||||||||||||||
Foreign currency translation adjustments |
136 |
179 |
(139 |
) |
63 |
||||||||||
Defined benefit pension and postretirement plans |
15 |
12 |
29 |
24 |
|||||||||||
Cash flow hedges |
2 |
1 |
30 |
4 |
|||||||||||
Other Comprehensive Gain (Loss), Net of Tax |
153 |
193 |
(80 |
) |
91 |
||||||||||
Comprehensive Income |
$ |
497 |
$ |
531 |
$ |
826 |
$ |
658 |
Amounts may not add due to rounding.
See notes to condensed consolidated financial statements
5
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Millions of dollars
(Unaudited)
Six Months Ended March 31, |
|||||||
2017 |
2016 |
||||||
Operating Activities |
|||||||
Net income |
$ |
905 |
$ |
567 |
|||
Adjustments to net income to derive net cash provided by operating activities: |
|||||||
Depreciation and amortization |
523 |
569 |
|||||
Share-based compensation |
99 |
119 |
|||||
Deferred income taxes |
(43 |
) |
(112 |
) |
|||
Change in operating assets and liabilities |
(474 |
) |
(194 |
) |
|||
Pension obligation |
55 |
40 |
|||||
Excess tax benefits from payments under share-based compensation plans |
48 |
— |
|||||
Other, net |
(74 |
) |
30 |
||||
Net Cash Provided by Operating Activities |
1,040 |
1,020 |
|||||
Investing Activities |
|||||||
Capital expenditures |
(272 |
) |
(258 |
) |
|||
Proceeds from sale of investments, net |
26 |
10 |
|||||
Acquisitions of businesses, net of cash acquired |
(40 |
) |
— |
||||
Proceeds from divestitures, net |
165 |
111 |
|||||
Other, net |
(34 |
) |
(33 |
) |
|||
Net Cash Used for Investing Activities |
(155 |
) |
(170 |
) |
|||
Financing Activities |
|||||||
Change in short-term debt |
(50 |
) |
(300 |
) |
|||
Proceeds from long-term debt |
1,054 |
— |
|||||
Payments of debt |
(2,189 |
) |
(1 |
) |
|||
Repurchase of common stock |
(220 |
) |
— |
||||
Excess tax benefits from payments under share-based compensation plans |
— |
51 |
|||||
Dividends paid |
(312 |
) |
(280 |
) |
|||
Other, net |
(144 |
) |
(45 |
) |
|||
Net Cash Used for Financing Activities |
(1,861 |
) |
(576 |
) |
|||
Effect of exchange rate changes on cash and equivalents |
(17 |
) |
(2 |
) |
|||
Net (decrease) increase in cash and equivalents |
(993 |
) |
272 |
||||
Opening Cash and Equivalents |
1,541 |
1,424 |
|||||
Closing Cash and Equivalents |
$ |
548 |
$ |
1,696 |
Amounts may not add due to rounding.
See notes to condensed consolidated financial statements
6
BECTON, DICKINSON AND COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of the Company, include all adjustments which are of a normal recurring nature, necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and accompanying notes required for a presentation in accordance with U.S. generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2016 Annual Report on Form 10-K. Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Note 2 – Accounting Changes
New Accounting Principles Adopted
On October 1, 2016, the Company prospectively adopted amended requirements issued by the Financial Accounting Standards Board ("FASB") relating to the timing of recognition and classification of share-based compensation award-related income tax effects. Upon the settlement of awards in the first and second quarters of fiscal year 2017, the Company recorded tax benefits for the three and six months ended March 31, 2017 of $21 million and $48 million, respectively, to Income tax provision within its consolidated statement of income. The Company expects to record additional tax benefits through the remainder of fiscal year 2017. These tax benefits were recorded within Capital in excess of par value on the Company's condensed consolidated balance sheet in the prior-year period. Because these excess tax benefits are no longer recorded in Capital in excess of par value, the current-period adjustments for the dilutive impact of share equivalents from share-based plans, which is used in the Company's computation of diluted earnings per share, increased by approximately 1 million shares. Also per the amended guidance, the Company classified the $48 million of excess tax benefits for the six months ended March 31, 2017 on its condensed consolidated statement of cash flows within Net Cash Provided by Operating Activities, rather than Net Cash Used for Financing Activities, which included the excess tax benefits for the six months ended March 31, 2016. The amended guidance allows entities to account for award forfeitures as they occur; however, the Company has elected to continue its determination of compensation cost recognized in each period based upon an estimate of expected future forfeitures.
New Accounting Principles Not Yet Adopted
In February 2016, the FASB issued a new lease accounting standard which requires lessees to recognize lease assets and lease liabilities on the balance sheet. The new standard also requires expanded disclosures regarding leasing arrangements. The Company is currently evaluating the impact that this new lease accounting standard will have on its consolidated financial statements upon its adoption of the standard on October 1, 2019.
In May 2014, the FASB issued a new revenue recognition standard. Under this standard, revenue will be recognized upon the transfer of goods or services to customers and the amount of revenue recognized will reflect the consideration to which a reporting entity expects to be entitled in exchange for those goods or services. The Company intends to adopt the standard, as required, on October 1, 2018 and is currently in the process of completing the initial assessment of the impact that this new revenue recognition standard will have on its consolidated financial statements. As part of the initial assessment, the Company is reviewing a representative sample of its contracts across its various businesses and geographies to identify potential differences that could result from applying the requirements of the new standard. The analysis includes identifying whether there may be differences in timing of revenue recognition under the new standard as well as assessing performance obligations, variable consideration, and contract costs. The Company has not yet estimated the impact, if any, of the new standard on the timing and pattern of its revenue recognition. The Company continues to evaluate the available adoption methods, and apprises both management and its audit committee of the project status regularly.
7
Note 3 – Accumulated Other Comprehensive Income (Loss)
The components and changes of Accumulated other comprehensive income (loss) for the six-month period ended March 31, 2017 were as follows:
(Millions of dollars) |
Total |
Foreign Currency
Translation
|
Benefit Plans |
Cash Flow Hedges
|
||||||||||||
Balance at September 30, 2016 |
$ |
(1,929 |
) |
$ |
(1,011 |
) |
$ |
(883 |
) |
$ |
(35 |
) |
||||
Other comprehensive (loss) income before reclassifications, net of taxes |
(114 |
) |
(139 |
) |
— |
25 |
||||||||||
Amounts reclassified into income, net of taxes |
34 |
— |
29 |
5 |
||||||||||||
Balance at March 31, 2017 |
$ |
(2,009 |
) |
$ |
(1,151 |
) |
$ |
(853 |
) |
$ |
(5 |
) |
The amount of foreign currency translation recognized in other comprehensive income during the six months ended March 31, 2017 included a loss relating to net investment hedges, as further discussed in Note 12. The amount recognized in other comprehensive income during the six months ended March 31, 2017 relating to cash flow hedges represented gains on forward starting interest rate swaps entered into in fiscal year 2016, which are also further discussed in Note 12. The tax provision relating to these gains was $1 million and $16 million for the three and six months ended March 31, 2017, respectively.
Reclassifications out of Accumulated other comprehensive income (loss) were as follows:
Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Benefit Plans |
|||||||||||||||
Reclassification of losses into income |
$ |
22 |
$ |
19 |
$ |
44 |
$ |
37 |
|||||||
Associated tax benefits |
(7 |
) |
(6 |
) |
(14 |
) |
(13 |
) |
|||||||
Amounts reclassified into income, net of taxes (A) |
$ |
15 |
$ |
12 |
$ |
29 |
$ |
24 |
|||||||
Cash Flow Hedges |
|||||||||||||||
Reclassification of losses into income |
$ |
2 |
$ |
5 |
$ |
8 |
$ |
9 |
|||||||
Associated tax benefits |
(1 |
) |
(2 |
) |
(3 |
) |
(3 |
) |
|||||||
Amounts reclassified into income, net of taxes (B) |
$ |
1 |
$ |
3 |
$ |
5 |
$ |
6 |
(A) |
These reclassifications were not recorded into income in their entirety and were included in the computation of net periodic benefit plan costs. Additional details regarding the Company's benefit plans are provided in Note 8.
|
(B) |
These reclassifications were recorded to Interest expense and Cost of products sold. Additional details regarding the Company's cash flow hedges are provided in Note 12.
|
Note 4 – Earnings per Share
The weighted average common shares used in the computations of basic and diluted earnings per share (shares in thousands) were as follows:
Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||
Average common shares outstanding |
213,583 |
212,469 |
213,321 |
212,077 |
|||||||
Dilutive share equivalents from share-based plans (A) |
4,283 |
4,069 |
4,665 |
4,618 |
|||||||
Average common and common equivalent shares outstanding – assuming dilution |
217,866 |
216,538 |
217,986 |
216,695 |
(A) |
The prior-period adjustments to calculate diluted share equivalents from share-based plans included excess tax benefits relating to share-based compensation awards. Upon the Company's adoption, as discussed in Note 2, of new accounting requirements relating to share-based compensation award-related income tax effects, the adjustments in the current-year periods excluded these excess tax benefits. |
8
Using proceeds received from the divestiture of the Respiratory Solutions business in the first quarter of fiscal year 2017, the Company repurchased approximately 1.3 million shares of its common stock under an accelerated share repurchase agreement. The repurchased shares were recorded as a $220 million increase to Common stock in treasury.
Note 5 – Contingencies
Given the uncertain nature of litigation generally, the Company is not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which the Company is a party. In accordance with U.S. generally accepted accounting principles, the Company establishes accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). In view of the uncertainties discussed below, the Company could incur charges in excess of any currently established accruals and, to the extent available, liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on the Company’s consolidated results of operations and consolidated cash flows.
In June 2007, Retractable Technologies, Inc. (“RTI”) filed a complaint against the Company under the caption Retractable Technologies, Inc. vs. Becton Dickinson and Company (Civil Action No. 2:07-cv-250, U.S. District Court, Eastern District of Texas) alleging that the BD Integra™ syringes infringe patents licensed exclusively to RTI. In its complaint, RTI also alleged that the Company engaged in false advertising with respect to certain of the Company’s safety-engineered products in violation of the Lanham Act; acted to exclude RTI from various product markets and to maintain its market share through, among other things, exclusionary contracts in violation of state and federal antitrust laws; and engaged in unfair competition. In January 2008, the Court severed the patent and non-patent claims into separate cases, and stayed the non-patent claims during the pendency of the patent claims at the trial court level. On April 1, 2008, RTI filed a complaint against BD under the caption Retractable Technologies, Inc. and Thomas J. Shaw v. Becton Dickinson and Company (Civil Action No. 2:08-cv-141, U.S. District Court, Eastern District of Texas) alleging that the BD Integra™ syringes infringe another patent licensed exclusively to RTI. On August 29, 2008, the Court ordered the consolidation of the patent cases. RTI was subsequently awarded $5 million in damages at a jury trial with respect to the patent claims, which has been paid, and the patent cases are now concluded.
On September 19, 2013, a jury returned a verdict against BD with respect to RTI’s Lanham Act claim and claim for attempted monopolization based on deception in the safety syringe market. The jury awarded RTI $113.5 million for its attempted monopolization claim (which would be trebled under the antitrust statute). The jury’s verdict rejected RTI’s monopolization claims in the markets for safety syringes, conventional syringes and safety IV catheters; its attempted monopolization claims in the markets for conventional syringes and safety IV catheters; and its claims for contractual restraint of trade and exclusive dealing in the markets for safety syringes, conventional syringes and safety IV catheters. In connection with the verdict, the Company recorded a pre-tax charge of approximately $341 million in the fourth quarter of fiscal year 2013. With respect to RTI's requested injunction relief, in November 2014, the Court granted RTI’s request that BD be ordered to issue certain corrective statements regarding its advertising and enjoined from making certain advertising claims. The Court denied RTI’s request for injunctive relief relating to BD’s contracting practices and BD’s safety syringe advertising, finding that RTI failed to prove that BD’s contracting practices violated the antitrust laws or that BD’s safety syringe advertising is false. On January 14, 2015, the Court granted in part and denied in part BD’s motion for a stay of the injunction. The Court held that, pending appeal, BD would not be required to send the corrective advertising notices to end-user customers, but only to employees, distributors and Group Purchasing Organizations. On January 15, 2015, the Court entered its Final Judgment in the case ordering that RTI recover $341 million for its attempted monopolization claim and $12 million for attorneys’ fees, and awarded pre and post-judgment interest and costs. On February 3, 2015, the Court of Appeals for the Fifth Circuit denied BD’s motion for a stay of the injunction pending the final appeal, and BD thereafter complied with the Court’s order. On April 23, 2015, the Court granted BD’s motion to eliminate the award of pre-judgment interest, and entered a new Final Judgment. BD thereafter appealed to the Court of Appeals challenging the entirety of the Final Judgment. On December 2, 2016, the Court of Appeals issued an opinion reversing the judgment as to RTI’s attempted monopolization claim and rendered judgment on that claim in favor of BD. As a result, the Company reversed $336 million of reserves associated with this judgment. The Court of Appeals affirmed the judgment for Lanham Act liability, and remanded the case to the district court to consider whether and if so how much profit should be disgorged by BD on that claim. The Court of Appeals vacated and remanded the injunction ordered by the Court. On January 31, 2017, RTI filed a petition for a writ of certiorari with the U.S. Supreme Court. On March 20, 2017, the U.S. Supreme Court denied certiorari, and the matter will now return to the district court for a ruling on RTI’s request for disgorgement.
On July 17, 2015, a class action complaint was filed against the Company in the U.S. District Court for the Southern District of Georgia. The plaintiffs, Glynn-Brunswick Hospital Authority, trading as Southeast Georgia Health System, and Southeast Georgia Health System, Inc., seek to represent a class of acute care purchasers of BD syringes and IV catheters. The complaint
9
alleges that BD monopolized the markets for syringes and IV catheters through contracts, theft of technology, false advertising, acquisitions, and other conduct. The complaint seeks treble damages but does not specify the amount of alleged damages. The Company filed a motion to dismiss the complaint which was granted on January 29, 2016. On September 23, 2016, the court denied plaintiffs’ motion to alter or amend the judgment to allow plaintiffs to file an amended complaint, and plaintiffs appealed that decision to the Eleventh Circuit Court of Appeals. The plaintiffs thereafter voluntarily dismissed their appeal, and the Court of Appeals dismissed the case on November 21, 2016.
The Company is also involved both as a plaintiff and a defendant in other legal proceedings and claims that arise in the ordinary course of business. The Company believes that it has meritorious defenses to the suits pending against the Company and is engaged in a vigorous defense of each of these matters.
The Company is a potentially responsible party to a number of federal administrative proceedings in the United States brought under the Comprehensive Environment Response, Compensation and Liability Act, also known as “Superfund,” and similar state laws. The affected sites are in varying stages of development. In some instances, the remedy has been completed, while in others, environmental studies are underway or commencing. For several sites, there are other potentially responsible parties that may be jointly or severally liable to pay all or part of cleanup costs.
Note 6 – Segment Data
The Company's organizational structure is based upon two principal business segments: BD Medical (“Medical”) and BD Life Sciences (“Life Sciences”). These segments are strategic businesses that are managed separately because each one develops, manufactures and markets distinct products and services. The Company evaluates performance of its business segments and allocates resources to them primarily based upon operating income. Segment operating income represents revenues reduced by product costs and operating expenses. As more fully discussed in Note 9, the Company sold a 50.1% controlling financial interest in its Respiratory Solutions business, a component of the Medical segment, in October 2016. This transaction did not meet the criteria established for reporting discontinued operations and as such, results for the three and six months ended March 31, 2016 included $213 million and $421 million, respectively, of revenues which did not occur in the current-year periods.
Financial information for the Company’s segments was as follows:
Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Revenues (A)
|
|||||||||||||||
Medical |
$ |
1,987 |
$ |
2,131 |
$ |
3,951 |
$ |
4,185 |
|||||||
Life Sciences |
982 |
936 |
1,940 |
1,869 |
|||||||||||
Total Revenues |
$ |
2,969 |
$ |
3,067 |
$ |
5,892 |
$ |
6,054 |
|||||||
Income Before Income Taxes |
|||||||||||||||
Medical |
$ |
537 |
$ |
513 |
$ |
1,085 |
$ |
978 |
|||||||
Life Sciences |
177 |
202 |
376 |
404 |
|||||||||||
Total Segment Operating Income |
714 |
715 |
1,461 |
1,381 |
|||||||||||
Acquisitions and other restructurings |
(76 |
) |
(104 |
) |
(163 |
) |
(225 |
) |
|||||||
Net interest expense |
(79 |
) |
(96 |
) |
(169 |
) |
(187 |
) |
|||||||
Other unallocated items (B) |
(197 |
) |
(139 |
) |
(76 |
) |
(328 |
) |
|||||||
Income Before Income Taxes |
$ |
362 |
$ |
376 |
$ |
1,054 |
$ |
642 |
(A) |
Intersegment revenues are not material. |
(B) |
Primarily comprised of foreign exchange, corporate expenses, and share-based compensation expense. The amount for the six months ended March 31, 2017 also included a $336 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 Note 5.
|
10
Revenues by geographic areas were as follows:
Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Revenues |
|||||||||||||||
United States |
$ |
1,627 |
$ |
1,719 |
$ |
3,257 |
$ |
3,410 |
|||||||
International |
1,342 |
1,349 |
2,635 |
2,644 |
|||||||||||
Total Revenues |
$ |
2,969 |
$ |
3,067 |
$ |
5,892 |
$ |
6,054 |
Note 7 – Share-Based Compensation
The Company grants share-based awards under the 2004 Employee and Director Equity-Based Compensation Plan (the “2004 Plan”), which provides long-term incentive compensation to employees and directors. The Company believes that such awards align the interests of its employees and directors with those of its shareholders.
The fair values of stock appreciation rights granted during the annual share-based grants in November of 2016 and 2015, respectively, were estimated on the date of grant using a lattice-based binomial valuation model based on the following assumptions:
2017 |
2016 |
||||||
Risk-free interest rate |
2.33 |
% |
2.17 |
% |
|||
Expected volatility |
20.00 |
% |
19.00 |
% |
|||
Expected dividend yield |
1.71 |
% |
1.76 |
% |
|||
Expected life |
7.5 years |
7.6 years |
|||||
Fair value derived |
$ |
33.81 |
$ |
27.69 |
The fair value of share-based payments is recognized as compensation expense in net income. For the three months ended March 31, 2017 and 2016, compensation expense charged to income was $39 million and $43 million, respectively. For the six months ended March 31, 2017 and 2016, compensation expense charged to income was $99 million and $119 million, respectively.
The amount of unrecognized compensation expense for all non-vested share-based awards as of March 31, 2017 was approximately $254 million, which is expected to be recognized over a weighted-average remaining life of approximately 2.2 years.
Note 8 – Benefit Plans
The Company has defined benefit pension plans covering certain employees in the United States and certain foreign locations. The Company also provides certain postretirement healthcare and life insurance benefits to qualifying domestic retirees. Other postretirement benefit plans in foreign countries are not material. The measurement date used for the Company’s employee benefit plans is September 30.
Net pension and postretirement cost included the following components for the three months ended March 31:
Pension Plans |
Other Postretirement Benefits |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Service cost |
$ |
27 |
$ |
20 |
$ |
1 |
$ |
1 |
|||||||
Interest cost |
18 |
18 |
1 |
1 |
|||||||||||
Expected return on plan assets |
(33 |
) |
(27 |
) |
— |
— |
|||||||||
Amortization of prior service credit |
(4 |
) |
(4 |
) |
(1 |
) |
(1 |
) |
|||||||
Amortization of loss |
28 |
19 |
— |
— |
|||||||||||
Settlements |
— |
1 |
— |
— |
|||||||||||
Net pension and postretirement cost |
$ |
35 |
$ |
27 |
$ |
1 |
$ |
1 |
11
Net pension and postretirement cost included the following components for the six months ended March 31:
Pension Plans |
Other Postretirement Benefits |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Service cost |
$ |
51 |
$ |
41 |
$ |
1 |
$ |
1 |
|||||||
Interest cost |
35 |
37 |
2 |
3 |
|||||||||||
Expected return on plan assets |
(63 |
) |
(55 |
) |
— |
— |
|||||||||
Amortization of prior service credit |
(8 |
) |
(7 |
) |
(2 |
) |
(2 |
) |
|||||||
Amortization of loss |
52 |
39 |
1 |
1 |
|||||||||||
Settlements |
— |
1 |
— |
— |
|||||||||||
Net pension and postretirement cost |
$ |
67 |
$ |
55 |
$ |
2 |
$ |
3 |
The amounts provided above for amortization of prior service credit and amortization of loss represent the reclassifications of prior service credits and net actuarial losses that were recognized in Accumulated other comprehensive income (loss) in prior periods.
Postemployment benefit costs were $10 million for the three months ended March 31, 2017 and 2016. Postemployment benefit costs were $20 million for the six months ended March 31, 2017 and 2016. Employee termination costs associated with the Company's restructuring activities are provided in Note 10.
Note 9 – Divestiture
Respiratory Solutions
On October 3, 2016, the Company sold a 50.1% controlling financial interest in its Respiratory Solutions business, a component of the Medical segment, to form a joint venture, Vyaire Medical. The Company retained a 49.9% non-controlling interest in the new standalone entity. The buyer will control the operations and governance of the new entity. The Company accounts for its remaining interest in the new entity as an equity method investment and, beginning on January 1, 2017, records its share of the new entity's earnings or losses on a one-quarter lag to Other income (expense), net. The Company has 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. The historical financial results for the Respiratory Solutions business, which included approximately $213 million and $421 million of revenues for the three and six months ended March 31, 2016, respectively, have not been classified as a discontinued operation.
Note 10 – Business Restructuring Charges
In connection with the Company's fiscal year 2015 acquisition of CareFusion and other portfolio rationalization initiatives, the Company incurred restructuring costs during the six months ended March 31, 2017, which were recorded as Acquisitions and other restructurings. Restructuring liability activity for the six months ended March 31, 2017 was as follows:
(Millions of dollars) |
Employee
Termination
|
Other |
Total |
||||||||
Balance at September 30, 2016 |
$ |
67 |
$ |
2 |
$ |
69 |
|||||
Charged to expense |
18 |
29 |
46 |
||||||||
Cash payments |
(28 |
) |
(17 |
) |
(45 |
) |
|||||
Non-cash settlements |
— |
(6 |
) |
(6 |
) |
||||||
Other adjustments |
— |
(7 |
) |
(7 |
) |
||||||
Balance at March 31, 2017 |
$ |
57 |
$ |
1 |
$ |
58 |
12
Note 11 – Intangible Assets
Intangible assets consisted of:
March 31, 2017 |
September 30, 2016 |
||||||||||||||
(Millions of dollars) |
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|||||||||||
Amortized intangible assets |
|||||||||||||||
Customer relationships |
$ |
3,374 |
$ |
451 |
$ |
3,360 |
$ |
339 |
|||||||
Developed technology |
3,417 |
879 |
3,409 |
754 |
|||||||||||
Product rights |
122 |
46 |
125 |
43 |
|||||||||||
Trademarks |
405 |
56 |
405 |
45 |
|||||||||||
Patents and other |
351 |
265 |
349 |
254 |
|||||||||||
Amortized intangible assets |
$ |
7,670 |
$ |
1,696 |
$ |
7,648 |
$ |
1,435 |
|||||||
Unamortized intangible assets |
|||||||||||||||
Acquired in-process research and development |
$ |
65 |
$ |
66 |
|||||||||||
Trademarks |
2 |
2 |
|||||||||||||
Unamortized intangible assets |
$ |
67 |
$ |
68 |
Intangible amortization expense for the three months ended March 31, 2017 and 2016 was $131 million and $138 million, respectively. Intangible amortization expense for the six months ended March 31, 2017 and 2016 was $268 million and $289 million, respectively.
The following is a reconciliation of goodwill by business segment:
(Millions of dollars) |
Medical |
Life Sciences |
Total |
||||||||
Goodwill as of September 30, 2016 |
$ |
6,688 |
$ |
731 |
$ |
7,419 |
|||||
Acquisitions |
— |
24 |
24 |
||||||||
Divestiture (A) |
(25 |
) |
— |
(25 |
) |
||||||
Currency translation |
(10 |
) |
(3 |
) |
(13 |
) |
|||||
Goodwill as of March 31, 2017 |
$ |
6,653 |
$ |
752 |
$ |
7,405 |
(A) |
Represents goodwill derecognized upon the Company's sale of a 50.1% controlling financial interest in the Respiratory Solutions business, as further discussed in Note 9.
|
Note 12 – Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate certain exposures. The effects these derivative instruments and hedged items have on financial position, financial performance, and cash flows are provided below.
Foreign Currency Risks and Related Strategies
The Company has foreign currency exposures throughout Europe, Greater Asia, Canada and Latin America. Transactional currency exposures that arise from entering into transactions, generally on an intercompany basis, in non-hyperinflationary countries that are denominated in currencies other than the functional currency are mitigated primarily through the use of forward contracts and currency options. Hedges of the transactional foreign exchange exposures resulting primarily from intercompany payables and receivables are undesignated hedges. As such, the gains or losses on these instruments are recognized immediately in income. The offset of these gains or losses against the gains and losses on the underlying hedged items, as well as the hedging costs associated with the derivative instruments, is recognized in Other income (expense), net. The total notional amounts of the Company’s outstanding foreign exchange contracts as of March 31, 2017 and September 30, 2016 were $1.8 billion and $2.3 billion, respectively.
In order to mitigate foreign currency exposure relating to its investments in certain foreign subsidiaries, the Company has designated $1.1 billion of euro-denominated debt, issued in December 2016, as net investment hedges. Accordingly, net gains or losses relating to this debt, which are attributable to changes in the euro to U.S. dollar spot exchange rate, are recorded as
13
accumulated foreign currency translation in Other comprehensive income (loss). Recognition of hedge ineffectiveness into earnings will occur if the notional amount of the euro-denominated debt no longer matches the portion of the net investments in foreign subsidiaries which underlie the hedges. The Company's balance of Accumulated other comprehensive income (loss) as of March 31, 2017 included a loss relating to these net investment hedges of $19 million. Additional disclosures regarding the Company's issuance of the euro-denominated debt in December 2016 are provided in Note 14.
Interest Rate Risks and Related Strategies
The Company’s primary interest rate exposure results from changes in U.S. dollar interest rates. The Company’s policy is to manage interest cost using a mix of fixed and variable rate debt. The Company periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Company exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated as either fair value or cash flow hedges.
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
Changes in the fair value of the interest rate swaps designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk) are offset by amounts recorded in Other comprehensive income (loss). If interest rate derivatives designated as cash flow hedges are terminated, the balance in Accumulated other comprehensive income (loss) attributable to those derivatives is reclassified into earnings over the remaining life of the hedged debt. The net realized loss related to terminated interest rate swaps expected to be reclassified and recorded in Interest expense within the next 12 months is $5 million, net of tax.
The total notional value of the Company's outstanding forward starting interest rate swaps, which were entered into to mitigate the Company's exposure to interest rate risk and were designated as cash flow hedges, was $500 million at March 31, 2017 and September 30, 2016.
The total notional amount of the Company’s outstanding interest rate swaps designated as fair value hedges was $375 million at March 31, 2017 and September 30, 2016. The outstanding swaps represent fixed-to-floating interest rate swap agreements the Company entered into to convert the interest payments on $375 million of the Company’s 3.125% notes due 2021 from the fixed rate to a floating interest rate based on LIBOR. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt. The gains (losses) recorded on these fair value hedges, which were offset by losses (gains) recorded to the underlying debt instruments, are provided below.
Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
(Losses) gains on fair value hedges |
$ |
(1 |
) |
$ |
11 |
$ |
(16 |
) |
$ |
24 |
Other Risk Exposures
The Company purchases resins, which are oil-based components used in the manufacture of certain products. Significant increases in world oil prices that lead to increases in resin purchase costs could impact future operating results. From time to time, the Company has managed price risks associated with these commodity purchases.
14
Effects on Consolidated Balance Sheets
The location and amounts of derivative instrument fair values in the consolidated balance sheet are segregated below between designated, qualifying hedging instruments and ones that are not designated for hedge accounting.
(Millions of dollars) |
March 31, 2017 |
September 30, 2016 |
|||||
Asset derivatives-designated for hedge accounting |
|||||||
Interest rate swaps |
$ |
7 |
$ |
23 |
|||
Asset derivatives-undesignated for hedge accounting |
|||||||
Forward exchange contracts |
6 |
3 |
|||||
Total asset derivatives (A) |
$ |
12 |
$ |
25 |
|||
Liability derivatives-designated for hedge accounting |
|||||||
Interest rate swaps |
4 |
18 |
|||||
Liability derivatives-undesignated for hedge accounting |
|||||||
Forward exchange contracts |
5 |
13 |
|||||
Total liability derivatives (B) |
$ |
8 |
$ |
31 |
(A) |
All asset derivatives are included in Prepaid expenses and other.
|
(B) |
All liability derivatives are included in Payables and accrued expenses.
|
Effects on Consolidated Statements of Income
Cash flow hedges
The amounts recognized in other comprehensive income during the three and six months ended March 31, 2017 and 2016 related to the previously discussed forward starting interest rate swaps.
Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
After-tax gains (losses) relating to cash flow hedges recognized in other comprehensive income (loss) |
$ |
1 |
$ |
(2 |
) |
$ |
25 |
$ |
(2 |
) |
The Company’s derivative instruments designated as cash flow hedges are highly effective. As such, there are no gains or losses, related to hedge ineffectiveness or amounts excluded from hedge effectiveness testing, recognized immediately in income relative to cash flow hedges outstanding in the periods presented.
Undesignated hedges
The location and amount of gains and losses recognized in income on derivatives not designated for hedge accounting were as follows:
Location of (Loss) Gain
Recognized in
Income on
Derivatives
|
Amount of (Loss) Gain Recognized in Income on Derivatives
|
Amount of (Loss) Gain Recognized in Income on Derivatives
|
|||||||||||||||
Derivatives Not Designated as Hedging Instruments |
Three Months Ended March 31, |
Six Months Ended March 31, |
|||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Forward exchange contracts (A) |
Other income (expense), net |
$ |
15 |
$ |
15 |
$ |
(7 |
) |
$ |
26 |
(A) |
The gains and losses on forward contracts and currency options utilized to hedge the intercompany transactional foreign exchange exposures are largely offset by gains and losses on the underlying hedged items in Other income (expense), net.
|
15
Note 13 – Financial Instruments and Fair Value Measurements
The fair values of financial instruments, including those not recognized on the statement of financial position at fair value, carried at March 31, 2017 and September 30, 2016 are classified in accordance with the fair value hierarchy in the following tables:
Basis of Fair Value Measurement |
|||||||||||||||
(Millions of dollars) |
March 31, 2017
Total
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
Significant Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
|||||||||||
Assets |
|||||||||||||||
Institutional money market investments |
$ |
20 |
$ |
20 |
$ |
— |
$ |
— |
|||||||
Interest rate swaps |
7 |
— |
7 |
— |
|||||||||||
Forward exchange contracts |
6 |
— |
6 |
— |
|||||||||||
Total Assets |
$ |
32 |
$ |
20 |
$ |
12 |
$ |
— |
|||||||
Liabilities |
|||||||||||||||
Forward exchange contracts |
$ |
5 |
$ |
— |
$ |
5 |
$ |
— |
|||||||
Interest rate swaps |
4 |
— |
4 |
— |
|||||||||||
Contingent consideration liabilities |
63 |
— |
— |
63 |
|||||||||||
Total Liabilities |
$ |
71 |
$ |
— |
$ |
8 |
$ |
63 |
Basis of Fair Value Measurement |
|||||||||||||||
(Millions of dollars) |
September 30,
2016
Total
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
Significant Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
|||||||||||
Assets |
|||||||||||||||
Institutional money market investments |
$ |
224 |
$ |
224 |
$ |
— |
$ |
— |
|||||||
Interest rate swaps |
23 |
— |
23 |
— |
|||||||||||
Forward exchange contracts |
3 |
— |
3 |
— |
|||||||||||
Total Assets |
$ |
249 |
$ |
224 |
$ |
25 |
$ |
— |
|||||||
Liabilities |
|||||||||||||||
Forward exchange contracts |
$ |
13 |
$ |
— |
$ |
13 |
$ |
— |
|||||||
Interest rate swaps |
18 |
— |
18 |
— |
|||||||||||
Contingent consideration liabilities |
54 |
— |
— |
54 |
|||||||||||
Total Liabilities |
$ |
86 |
$ |
— |
$ |
31 |
$ |
54 |
The Company’s institutional money market accounts permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions. The Company’s remaining cash equivalents were $528 million and $1.317 billion at March 31, 2017 and September 30, 2016, respectively. Short-term investments are held to their maturities and are carried at cost, which approximates fair value. The cash equivalents consist of liquid investments with a maturity of three months or less and the short-term investments consist of instruments with maturities greater than three months and less than one year.
The Company measures the fair value of forward exchange contracts and interest rate swaps based upon the present value of expected future cash flows using market-based observable inputs including credit risk, interest rate yield curves, foreign currency spot prices and forward prices.
Long-term debt is recorded at amortized cost. The fair value of long-term debt is measured based upon quoted prices in active markets for similar instruments, which are considered Level 2 inputs in the fair value hierarchy. The fair value of long-term debt was $9.5 billion and $11.3 billion at March 31, 2017 and September 30, 2016, respectively. The fair value of the current portion of long-term debt was $1.1 billion and $798 million at March 31, 2017 and September 30, 2016, respectively.
The contingent consideration liabilities were recognized as part of the consideration transferred by the Company for certain acquisitions. The fair values of the contingent consideration liabilities were estimated using probability-weighted discounted cash flow models that were based upon the probabilities assigned with regard to achievement of the contingent events. The
16
estimated fair values of the contingent consideration liabilities are remeasured each reporting period based upon increases or decreases in the probability of the contingent payments.
The Company’s policy is to recognize any transfers into fair value measurement hierarchy levels and transfers out of levels at the beginning of each reporting period. There were no transfers in and out of Level 1, Level 2 or Level 3 measurements for the three and six months ended March 31, 2017 and 2016.
Note 14 – Debt
In December 2016, the Company issued euro-denominated debt consisting of 500 million euros ($531 million) of 1.000% notes due December 15, 2022 and 500 million euros ($531 million) of 1.900% notes due December 15, 2026. The Company used the net proceeds from this long-term debt offering, together with other sources of liquidity, to fund the Company's repurchase of certain of its long-term senior notes outstanding. Under this cash tender offer, the Company repurchased the following aggregate principal amounts of its long-term debt at an aggregate market price of $1.764 billion:
Interest Rate and Maturity |
Aggregate Principal Amount
(Millions of dollars)
|
|||
1.450% Notes due May 15, 2017 |
$ |
226 |
||
1.800% Notes due December 15, 2017 |
250 |
|||
5.000% Notes due May 15, 2019 |
153 |
|||
6.375% Notes due August 1, 2019 |
338 |
|||
2.675% Notes due December 15, 2019 |
125 |
|||
3.875% Notes due May 15, 2024 |
221 |
|||
3.734% Notes due December 15, 2024 |
375 |
|||
Total notes purchased |
$ |
1,689 |
The carrying value of these long-term notes was $1.727 billion, and the Company recognized a loss on this debt extinguishment of $42 million, which was recorded in December 2016 as Other income (expense), net, on the Company’s condensed consolidated statements of income.
Note 15 – Subsequent Events
Definitive Agreement to Acquire C.R. Bard, Inc.
On April 23, 2017, the Company announced that it had entered into a definitive agreement under which BD will acquire C. R. Bard, Inc. ("Bard") for $317.00 per Bard common share in cash and stock, for a total consideration of approximately $24 billion. The combination will create a highly differentiated medical technology company uniquely positioned to improve both the process of care and the treatment of disease for patients and healthcare providers.
Under the terms of the transaction, Bard common shareholders will be entitled to receive approximately $222.93 in cash and 0.5077 shares of BD stock per Bard share, or a total of value of $317.00 per Bard common share based on BD's closing price on April 21, 2017. At closing, Bard shareholders will own approximately 15 percent of the combined company. The Company has secured access to $15.7 billion of fully committed bridge financing and expects to permanently finance the transaction with approximately $1.7 billion of available cash, as well as, subject to market conditions, approximately $10 billion of new debt, approximately $4.5 billion of equity and equity-linked securities issued to the market, and approximately $8 billion of BD common stock. The transaction is subject to regulatory and Bard shareholder approval and customary closing conditions, and is expected to close in the fall of 2017.
Amendment to Dispensing Equipment Leases
In April 2017, in conjunction with the implementation of a new “go-to-market” business model for the Company's U.S. dispensing business within the Medication Management Solutions (“MMS”) unit of the Medical segment, the Company amended the terms of certain customer leases for dispensing equipment within the MMS unit. The modification provided customers the ability to reduce its dispensing asset base via a return provision, resulting in a more flexible lease term. Prior to the modification, these leases were accounted for as sales-type leases in accordance with Accounting Standards Codification
17
Topic 840, "Leases", as the non-cancellable lease term of five 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 a result of the lease modifications, the Company is required to reassess the classification of the leases due to the amended lease term. Accordingly, most amended lease contracts will be classified as operating leases beginning in April 2017. The change in lease classification will require the derecognition of the net investment in sales-type leases and the recognition of the underlying leased assets on the Company’s balance sheet as of the effective date, and will result in an estimated non-cash, net charge to earnings of approximately $400-$500 million in the third quarter of fiscal year 2017. Beginning April 1, 2017 revenue associated with these modified contracts will be recognized on a straight-line basis over the remaining lease term, along with depreciation on the reinstated leased assets.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes. Within the tables presented throughout this discussion, certain columns may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts.
Company Overview
Becton, Dickinson and Company (“BD”) 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, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. The Company's organizational structure is based upon two principal business segments, BD Medical (“Medical”) and BD Life Sciences (“Life Sciences”).
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, in particular, China and India.
On April 23, 2017, we announced that we have entered into a definitive agreement under which BD will acquire C. R. Bard, Inc. ("Bard") for $317.00 per Bard common share in cash and stock, for a total consideration of approximately $24 billion. The combination will create a highly differentiated medical technology company uniquely positioned to improve both the process of care and the treatment of disease for patients and healthcare providers. BD has secured access to fully committed bridge financing and expects to permanently finance the transaction with available cash, new debt and equity securities. The transaction is subject to regulatory and Bard shareholder approval and customary closing conditions, and is expected to close in the fall of 2017. Additional discussion regarding this agreement is provided in Note 15 in the Notes to Condensed Consolidated Financial Statements
Overview of Financial Results and Financial Condition
For the three months ended March 31, 2017, worldwide revenues of $2.969 billion decreased 3.2% from the prior-year period. The decrease in revenues reflected an approximate 7% reduction in revenues due to the divestiture of the Respiratory Solutions business in October 2016. Second quarter volume growth of more than 5% for our continuing businesses was partially offset by an unfavorable impact of foreign currency translation of approximately 1%. Pricing did not materially impact second quarter revenues. Additional disclosures regarding our divestiture of the Respiratory Solutions business are provided in Note 9 in the Notes to Condensed Consolidated Financial Statements. Volume growth in the second quarter of fiscal year 2017 reflected the following:
• |
Medical segment volume growth in the second quarter was driven by the Medication and Procedural Solutions and Medication Management Solutions units. Second quarter revenues in the Diabetes Care and Pharmaceutical Systems units were unfavorably impacted by the timing of orders that were expected to occur in the second quarter but were received in the first quarter.
|
• |
Life Sciences segment volume growth in the second quarter was driven by the Preanalytical Systems and Diagnostic Systems units. Life Sciences segment volume growth in the second quarter was partially offset by the unfavorable timing of instrument orders and the impact of sales fulfillment delays in the Biosciences unit.
|
• |
Worldwide sales of safety-engineered products reflected growth that was attributable to both segments. Second quarter sales in the United States of safety-engineered devices of $459 million increased 3.7% and second quarter international sales of safety-engineered devices of $315 million grew 8.6% over the prior year’s period, inclusive of an estimated 1.7% unfavorable impact due to foreign currency translation.
|
We continue to invest in research and development, geographic expansion, and new product promotions 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 has generally stabilized, pricing pressures continue for some of our products. Healthcare utilization has stabilized and slightly improved in the United States; however, any destabilization in the future could adversely impact our U.S. businesses. Additionally,
19
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.
Our financial position remains strong, with cash flows from operating activities totaling $1.040 billion in the first six months of fiscal year 2017. At March 31, 2017, we had $0.6 billion in cash and equivalents and short-term investments. We continued to return value to our shareholders in the form of dividends. During the first six months of fiscal year 2017, we paid cash dividends of $312 million. We also repurchased approximately $220 million of our common stock under an accelerated share repurchase agreement during the first six months of fiscal year 2017. Additional disclosures regarding this share repurchase agreement are provided in Note 4 in the Notes to Condensed Consolidated Financial Statements.
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. The ongoing relative strength of the U.S. dollar resulted in an unfavorable foreign currency translation impact to our revenue and earnings growth during the second quarter of fiscal year 2017. 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 second quarter Medical revenues by organizational unit, as well as second quarter Medical sales of safety-engineered products:
Three months ended March 31, |
||||||||||||||||
(Millions of dollars) |
2017 |
2016 |
Total
Change (B)
|
Estimated
FX
Impact
|
FXN Change (B) |
|||||||||||
Medication and Procedural Solutions |
$ |
865 |
$ |
831 |
4.1 |
% |
(0.7 |
)% |
4.8 |
% |
||||||
Medication Management Solutions (A) |
567 |
533 |
6.3 |
% |
(0.7 |
)% |
7.0 |
% |
||||||||
Diabetes Care |
243 |
243 |
— |
% |
(0.5 |
)% |
0.5 |
% |
||||||||
Pharmaceutical Systems |
312 |
311 |
0.4 |
% |
(2.2 |
)% |
2.6 |
% |
||||||||
Respiratory Solutions (A) |
— |
213 |
NM |
— |
% |
NM |
||||||||||
Total Medical Revenues |
$ |
1,987 |
$ |
2,131 |
(6.8 |
)% |
(0.9 |
)% |
(5.9 |
)% |
||||||
Medical segment safety-engineered products |
$ |
485 |
$ |
465 |
4.3 |
% |
(0.4 |
)% |
4.7 |
% |
(A) |
The presentation of prior-period amounts has been revised to conform with the presentation of current-period amounts, which does not separately present an immaterial adjustment for the amortization of a deferred revenue balance write-down relating to the CareFusion acquisition. |
(B)"NM" denotes that the percentage is not meaningful.
The decrease in total Medical segment revenues in the second quarter of 2017 compared with the prior-year period reflected the divestiture of the Respiratory Solutions business, as previously discussed. Second quarter revenue growth from the Medical segment's continuing units was favorably impacted by the volume of dispensing capital placements in the Medication Management Solutions unit and the Medication and Procedural Solutions unit's growth from infusion disposables products. Sales of the Diabetes Care unit's pen needles and the Pharmaceutical Systems unit's self-injection systems were unfavorably impacted by the timing of orders that were expected to occur in the second quarter but were received in the first quarter.
20
Medical segment revenues and sales of safety-engineered products for the six-month period were as follows:
Six months ended March 31, |
||||||||||||||||
(Millions of dollars) |
2017 |
2016 |
Total Change |
Estimated FX Impact |
FXN Change |
|||||||||||
Total Medical Revenues |
$ |
3,951 |
$ |
4,185 |
(5.6 |
)% |
(0.7 |
)% |
(4.9 |
)% |
||||||
Medical segment safety-engineered products |
$ |
968 |
$ |
932 |
3.9 |
% |
(0.3 |
)% |
4.2 |
% |
Medical segment operating income for the three and six-month periods were as follows:
Three months ended March 31, |
Six months ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Medical segment operating income |
$ |
537 |
$ |
513 |
$ |
1,085 |
$ |
978 |
|||||||
Segment operating income as % of Medical revenues |
27.0 |
% |
24.1 |
% |
27.5 |
% |
23.4 |
% |
The Medical segment's operating income is driven by its performance with respect to gross profit margin and operating expenses. Gross profit margin was higher in the second quarter of 2017 as compared with the second quarter of 2016 primarily due to the divestiture of the Respiratory Solutions business, which had products with relatively lower gross profit margins. Gross profit margin also reflected lower manufacturing costs resulting from continuous improvement projects, which enhanced the efficiency of our operations, partially offset by unfavorable foreign currency translation. Selling and administrative expense as a percentage of revenues for the second quarter of fiscal year 2017 was lower as a result of 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 the second quarter of 2017 as compared with the second quarter of 2016, reflecting ongoing investment in new products and platforms.
Life Sciences Segment
The following summarizes second quarter Life Sciences revenues by organizational unit, as well as second quarter Life Sciences sales of safety-engineered products:
Three months ended March 31, |
||||||||||||||||
(Millions of dollars) |
2017 |
2016 |
Total
Change
|
Estimated
FX
Impact
|
FXN Change |
|||||||||||
Preanalytical Systems |
$ |
363 |
$ |
340 |
6.6 |
% |
(0.9 |
)% |
7.5 |
% |
||||||
Diagnostic Systems |
350 |
319 |
9.8 |
% |
(0.7 |
)% |
10.5 |
% |
||||||||
Biosciences |
269 |
277 |
(2.8 |
)% |
(1.0 |
)% |
(1.8 |
)% |
||||||||
Total Life Sciences Revenues |
$ |
982 |
$ |
936 |
4.9 |
% |
(0.9 |
)% |
5.8 |
% |
||||||
Life Sciences segment safety-engineered products |
$ |
289 |
$ |
268 |
8.0 |
% |
(1.0 |
)% |
9.0 |
% |
Life Sciences segment revenues in the second quarter reflected the Diagnostics Systems unit's influenza-related sales, sales of its core microbiology platform, including the BD BACTECTM blood culture system and KiestraTM, as well as sales of its BD MAXTM molecular platform. The segment’s second quarter revenue growth also reflected sales of the Preanalytical Systems safety-engineered products, primarily in emerging markets and in the United States. Life Sciences segment revenue growth in the current-year period was partially offset by sales fulfillment delays affecting the Biosciences unit, along with unfavorable timing of instrument orders in certain international markets, compared with the prior-year period.
21
Life Sciences segment total revenues and sales of safety-engineered products for the six-month period were as follows:
Six months ended March 31, |
||||||||||||||||
(Millions of dollars) |
2017 |
2016 |
Total Change |
Estimated FX Impact |
FXN Change |
|||||||||||
Total Life Sciences Revenues |
$ |
1,940 |
$ |
1,869 |
3.8 |
% |
(0.7 |
)% |
4.5 |
% |
||||||
Life Sciences segment safety-engineered products |
$ |
569 |
$ |
538 |
5.7 |
% |
(1.0 |
)% |
6.7 |
% |
Life Sciences segment operating income for the three and six-month periods were as follows:
Three months ended March 31, |
Six months ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Life Sciences segment operating income |
$ |
177 |
$ |
202 |
$ |
376 |
$ |
404 |
|||||||
Segment operating income as % of Life Sciences revenues |
18.0 |
% |
21.6 |
% |
19.4 |
% |
21.6 |
% |
The Life Sciences segment's operating income is driven by its performance with respect to gross profit margin and operating expenses. Gross profit margin in the second quarter of fiscal year 2017 was lower compared with the second quarter of 2016 primarily due to inventory reserves, which were required for damaged research reagents in the Biosciences unit, and unfavorable foreign currency translation. These impacts to gross profit margin in the second quarter were partially offset by lower manufacturing costs resulting from continuous improvement projects which enhanced the efficiency of our operations. Selling and administrative expense as a percentage of revenues in the second quarter of 2017 was higher compared to the prior-year period reflecting higher selling costs. Research and development expense as a percentage of revenues was relatively flat in the second quarter of 2017 as compared with the second quarter of 2016.
Geographic Revenues
BD’s worldwide second quarter revenues by geography were as follows:
Three months ended March 31, |
||||||||||||||||
(Millions of dollars) |
2017 |
2016 |
Total
Change
|
Estimated
FX
Impact
|
FXN Change |
|||||||||||
United States |
$ |
1,627 |
$ |
1,719 |
(5.4 |
)% |
— |
(5.4 |
)% |
|||||||
International |
1,342 |
1,349 |
(0.5 |
)% |
(2.0 |
)% |
1.5 |
% |
||||||||
Total Revenues |
$ |
2,969 |
$ |
3,067 |
(3.2 |
)% |
(0.8 |
)% |
(2.4 |
)% |
The Medical segment's U.S. revenues in the second quarter reflected the divestiture of the Respiratory Solutions business, as previously discussed. This impact was partially offset by the volume of the Medication Management Solutions unit's dispensing capital placements and the Medication and Procedural Solutions unit's sales of infusion disposables products. The Medical segment's U.S. revenue growth was unfavorably impacted by the timing of orders in the Diabetes Care unit. U.S. Life Sciences revenue growth in the second quarter of fiscal year 2017 was driven by the Diagnostic Systems unit's higher influenza-related sales as well as sales of its core microbiology platform. U.S. Life Sciences segment's revenue growth also reflected the Preanalytical Systems unit's sales of safety-engineered products.
The Medical segment's international second quarter revenues also reflected the divestiture of the Respiratory Solutions business, partially offset by the Medication Management Solutions unit's dispensing capital placements and the Medication and Procedural Solutions unit's sales of infusion disposables products. The Medical segment's second quarter international revenue growth was unfavorably impacted by the timing of orders in the Diabetes Care unit. The Life Sciences segment's second quarter international revenue growth was aided by the Diagnostic Systems unit's sales of molecular and microbiology platforms. International Life Sciences revenue growth in the current-year period also reflected the Preanalytical Systems unit's sales of safety-engineered products in emerging markets, partially offset by the previously discussed unfavorable timing of instrument orders in the Biosciences unit.
22
Emerging market revenues for the second quarter were $452 million, compared with $443 million in the prior year’s quarter, which included approximately $23 million of revenues associated with divested businesses, primarily the Respiratory Solutions business. Emerging market revenues in the current-year period also included an estimated $4 million unfavorable impact due to foreign currency translation. Second quarter revenue growth in emerging markets was driven by sales in China and Latin America.
Specified Items
Reflected in the financial results for the three and six-month periods of fiscal years 2017 and 2016 were the following specified items:
Three months ended March 31, |
Six months ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Integration costs (A) |
63 |
40 |
109 |
75 |
|||||||||||
Restructuring costs (A) |
11 |
64 |
46 |
149 |
|||||||||||
Transaction costs (A) |
8 |
— |
14 |
— |
|||||||||||
Purchase accounting adjustments (B) |
129 |
115 |
255 |
268 |
|||||||||||
Litigation-related item (C) |
— |
— |
(336 |
) |
— |
||||||||||
Loss on debt extinguishment (D) |
— |
— |
42 |
— |
|||||||||||
Total specified items |
211 |
218 |
130 |
492 |
|||||||||||
Tax impact of specified items |
54 |
85 |
27 |
164 |
|||||||||||
After-tax impact of specified items |
$ |
157 |
$ |
134 |
$ |
103 |
$ |
329 |
(A) |
Represents integration, restructuring and transaction costs substantially associated with our fiscal year 2015 acquisition of CareFusion and other portfolio rationalization initiatives. The integration and restructuring costs were recorded in Acquisitions and other restructurings. The transactions costs were recorded in Acquisitions and other restructurings and Other (expense) income, net.
|
(B) |
Primarily represents non-cash amortization expense associated with acquisition-related identifiable intangible assets. BD’s amortization expense is primarily recorded in Costs of products sold.
|
(C) |
Represents the reversal of certain reserves related to an appellate court decision recorded in Other operating income, as further discussed below.
|
(D) |
Represents a loss recognized in Other (expense) income, net upon our extinguishment of certain long-term senior notes, as further discussed below.
|
Gross Profit Margin
Gross profit margin for the three and six-month periods of fiscal year 2017 compared with the prior-year periods in 2016 reflected the following impacts:
Three-month period |
Six-month period |
||||
March 31, 2016 gross profit margin % |
48.4 |
% |
47.8 |
% |
|
Operating performance |
0.2 |
% |
1.0 |
% |
|
Impact of divestitures |
0.8 |
% |
0.8 |
% |
|
Foreign currency translation |
(1.2 |
)% |
(0.6 |
)% |
|
March 31, 2017 gross profit margin % |
48.2 |
% |
49.0 |
% |
Operating performance in the current-year periods primarily reflected lower manufacturing costs resulting from the continuous operations improvement projects discussed above, partially offset by the impact of inventory reserves which were required for damaged research reagents in the Biosciences unit, as previously discussed. Gross profit margin for the current-year periods was favorably impacted by businesses divestitures, primarily the divestiture of the Respiratory Solutions business, which as previously discussed, had products with relatively lower gross profit margins.
23
Operating Expenses
A summary of operating expenses for three and six-month periods of fiscal years 2017 and 2016 is as follows:
Three months ended March 31, |
Increase (decrease) in basis points |
Six months ended March 31, |
Increase (decrease) in basis points |
||||||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||
(Millions of dollars) |
|||||||||||||||||||||
Selling and administrative expense |
$ |
724 |
$ |
732 |
$ |
1,432 |
$ |
1,480 |
|||||||||||||
% of revenues |
24.4 |
% |
23.9 |
% |
50 |
24.3 |
% |
24.5 |
% |
(20 |
) |
||||||||||
Research and development expense |
$ |
187 |
$ |
182 |
$ |
368 |
$ |
369 |
|||||||||||||
% of revenues |
6.3 |
% |
5.9 |
% |
40 |
6.2 |
% |
6.1 |
% |
10 |
|||||||||||
Acquisitions and other restructurings |
$ |
76 |
$ |
104 |
$ |
163 |
$ |
225 |
|||||||||||||
Other operating income |
$ |
— |
$ |
— |
$ |
(336 |
) |
$ |
— |
Selling and administrative expense
Selling and administrative expense as a percentage of revenues in the current year’s three-month period reflected higher selling costs. Selling and administrative expense as a percentage of revenues in the current year’s six-month period was relatively flat compared with the prior-year period.
Research and development expense
Research and development expense as a percentage of revenues in the three and six-month periods of fiscal year 2017 increased compared with the prior-year periods in 2016 reflecting ongoing investment in new products and platforms primarily in the Medical segment.
Acquisitions and other restructurings
Costs relating to acquisitions and other restructurings in the three and six-month periods represented integration, restructuring and transaction costs substantially associated with our fiscal year 2015 acquisition of CareFusion and other portfolio rationalization initiatives. For further disclosures regarding the restructuring costs, refer to Note 10 in the Notes to Condensed Consolidated Financial Statements.
Other operating (income) expense, net
Other operating income in the current six-month period represented the $336 million reversal of certain reserves related to an appellate court decision which, among other things, reversed an unfavorable antitrust judgment in the Retractable Technologies, Inc. case. Additional disclosures regarding this legal matter are provided Note 5 in the Notes to Condensed Consolidated Financial Statements.
Nonoperating Income
Net interest expense
The components for the three and six-month periods of fiscal years 2017 and 2016 were as follows:
Three months ended March 31, |
Six months ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Interest expense |
$ |
(86 |
) |
$ |
(99 |
) |
$ |
(181 |
) |
$ |
(196 |
) |
|||
Interest income |
7 |
3 |
12 |
9 |
|||||||||||
Net interest expense |
$ |
(79 |
) |
$ |
(96 |
) |
$ |
(169 |
) |
$ |
(187 |
) |
The decreases in interest expense for the three-month and six-month periods of fiscal year 2017 compared with the prior year's periods primarily reflected lower levels of debt as certain senior notes matured in June and November 2016 and we repurchased certain senior notes in December 2016. Additional disclosures regarding this debt repurchase are provided in Note 14 in the Notes to Condensed Consolidated Financial Statements. The increases in interest income for the three-month and six-month
24
periods of fiscal year 2017 compared with the prior year’s periods primarily reflected higher investment gains on assets related to our deferred compensation plans. The offsetting movement in the deferred compensation plan liability was recorded in Selling and administrative expense.
Other (expense) income, net
The components for the three and six-month periods of fiscal years 2017 and 2016 were as follows:
Three months ended March 31, |
Six months ended March 31, |
||||||||||||||
(Millions of dollars) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Loss on debt extinguishment |
$ |
— |
$ |
— |
$ |
(42 |
) |
$ |
— |
||||||
Share of Vyaire Medical joint venture results, net of income from transition services agreements |
(9 |
) |
— |
5 |
— |
||||||||||
Gains (losses) on undesignated foreign exchange derivatives, net |
1 |
3 |
(3 |
) |
3 |
||||||||||
Other |
3 |
3 |
5 |
8 |
|||||||||||
Other (expense) income, net |
$ |
(5 |
) |
$ |
6 |
$ |
(35 |
) |
$ |
11 |
As discussed above, we repurchased certain senior notes in December 2016 and recognized a loss on this extinguishment of debt in the first quarter of fiscal year 2017. Additional disclosures regarding our divestiture of the Respiratory Solutions business and the Vyaire Medical joint venture formed with this business are provided in Note 9 in the Notes to Condensed Consolidated Financial Statements.
Income Taxes
The income tax rates for the three and six-month periods of fiscal years 2017 and 2016 are provided below.
Three months ended March 31, |
Six months ended March 31, |
||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||
Effective income tax rate |
4.9 |
% |
10.0 |
% |
14.1 |
% |
11.7 |
% |
|||
Favorable impact, in basis points, from specified items |
760 |
1,060 |
70 |
930 |
The decrease in the effective income tax rate for the three-month period of fiscal year 2017 largely reflected the tax benefit recorded, upon the settlement of share-based compensation awards, for the three months ended March 31, 2017 of $21 million, as well as a net favorable benefit of several tax audit settlements during the quarter. The share-based compensation-related tax benefit was 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 in the Notes to Condensed Consolidated Financial Statements. The favorable impacts to the effective income tax rate in the current-year quarter were partially offset by a less favorable tax impact in the current-year period, compared with the prior-year period, from specified items. The increase in the effective income tax rate for the six-month period of fiscal year 2017 reflected BD's geographical mix of income and the less favorable tax impact from specified items. The effective income tax rate for the six-month period ended March 31, 2017 was favorably impacted by the year-to-date tax benefits recorded upon the settlement of share-based compensation awards, as previously discussed, of $48 million.
Net Income and Diluted Earnings per Share
Net Income and Diluted Earnings per Share for the three and six-month periods of fiscal years 2017 and 2016 were as follows:
Three months ended March 31, |
Six months ended March 31, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
Net Income (Millions of dollars) |
$ |
344 |
$ |
338 |
$ |
905 |
$ |
567 |
|||||||
Diluted Earnings per Share |
$ |
1.58 |
$ |
1.56 |
$ |
4.15 |
$ |
2.62 |
|||||||
Unfavorable impact-specified items |
$ |
(0.72 |
) |
$ |
(0.62 |
) |
$ |
(0.47 |
) |
$ |
(1.52 |
) |
|||
Unfavorable impact-foreign currency translation |
$ |
(0.16 |
) |
$ |
(0.17 |
) |
25
Liquidity and Capital Resources
The following table summarizes our condensed consolidated statement of cash flows:
Six months ended March 31, |
|||||||
(Millions of dollars) |
2017 |
2016 |
|||||
Net cash provided by (used for) |
|||||||
Operating activities |
$ |
1,040 |
$ |
1,020 |
|||
Investing activities |
$ |
(155 |
) |
$ |
(170 |
) |
|
Financing activities |
$ |
(1,861 |
) |
$ |
(576 |
) |
Net Cash Flows from Operating Activities
Cash generated from operations, along with available cash and cash equivalents, is expected to be sufficient to fund our normal operating needs for the remainder of fiscal year 2017. Normal operating needs in fiscal year 2017 include working capital, capital expenditures, and cash dividends. The change 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 current period change in operating assets and liabilities was a net use of cash and primarily reflected higher levels of prepaid expenses and lower levels of accounts payable and accrued expenses. The current-year period also reflected the loss recorded upon our extinguishment of certain long-term notes in December 2016, which is included within Other, net.
Net Cash Flows from Investing Activities
Our investments in capital expenditures are focused on projects that enhance our cost structure and manufacturing capabilities, and support our strategy of geographic expansion with select investments in growing markets. Capital expenditure-related cash outflows of $272 million in the first six months of fiscal year 2017, compared with $258 million in the prior-year period, were offset by cash inflows in the current-year period of $165 million from business divestitures. The prior-year period's net cash flows from investing activities included $111 million of proceeds from the sale of a non-core asset.
Net Cash Flows from Financing Activities
Net cash used for financing activities in the first six months of fiscal year 2017 included cash inflows relating to the issuance of euro-denominated notes in December 2016 of $1,054 million. Net cash used for financing activities during the first six months of fiscal year 2017 also reflected $2,189 million of cash outflows associated with our repurchase of certain long-term notes in December 2016 and our repayment of 1.75% notes due on November 8, 2016. Cash outflows from financing activities also reflected a net reduction of our borrowings under our commercial paper program of $50 million. Additional disclosures regarding our issuance and repurchase of debt during the first quarter of fiscal year 2017 are provided in Note 14 in the Notes to Condensed Consolidated Financial Statements. Net cash used for financing activities in the first six months of fiscal year 2017 also reflected our repurchase of $220 million of common stock under an accelerated share repurchase agreement, as previously discussed. No further share repurchases are planned in 2017, as our share repurchase program has been suspended in connection with the announced agreement to acquire Bard. Net cash flows from financing activities in the first six months of fiscal year 2016 included a payment of $300 million to reduce the balance of our commercial paper program.
Certain measures relating to our total debt were as follows:
(Millions of dollars) |
March 31, 2017 |
September 30, 2016 |
|||||
Total debt |
$ |
10,306 |
$ |
11,551 |
|||
Short-term debt as a percentage of total debt |
11.9 |
% |
8.7 |
% |
|||
Weighted average cost of total debt |
3.5 |
% |
3.6 |
% |
|||
Total debt as a percentage of total capital* |
53.3 |
% |
57.2 |
% |
* Represents shareholders’ equity, net non-current deferred income tax liabilities, and debt.