10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 6, 2020
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2019
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer
Identification No.)
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(Address of principal executive offices) (Zip Code) |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Trading Symbol |
Name of Each Exchange on Which Registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 271,173,148 shares of Common Stock, $1.00 par value, outstanding at December 31, 2019.
BECTON, DICKINSON AND COMPANY
FORM 10-Q
For the quarterly period ended December 31, 2019
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
December 31, 2019 |
September 30, 2019 |
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Assets |
(Unaudited) |
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Current Assets: |
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Cash and equivalents |
$ |
$ |
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Restricted cash |
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Short-term investments |
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Trade receivables, net |
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Inventories: |
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Materials |
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Work in process |
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Finished products |
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Prepaid expenses and other |
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Total Current Assets |
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Property, Plant and Equipment |
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Less allowances for depreciation and amortization |
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Property, Plant and Equipment, Net |
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Goodwill |
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Developed Technology, Net |
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Customer Relationships, Net |
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Other Intangibles, Net |
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Other Assets |
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Total Assets |
$ |
$ |
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Liabilities and Shareholders’ Equity |
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Current Liabilities: |
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Short-term debt |
$ |
$ |
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Payables, accrued expenses and other current liabilities |
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Total Current Liabilities |
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Long-Term Debt |
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Long-Term Employee Benefit Obligations |
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Deferred Income Taxes and Other Liabilities |
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Commitments and Contingencies (See Note 5) |
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Shareholders’ Equity |
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Preferred stock |
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Common stock |
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Capital in excess of par value |
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Retained earnings |
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Deferred compensation |
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Common stock in treasury - at cost |
( |
) |
( |
) |
|||
Accumulated other comprehensive loss |
( |
) |
( |
) |
|||
Total Shareholders’ Equity |
|||||||
Total Liabilities and Shareholders’ Equity |
$ |
$ |
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 December 31, |
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2019 |
2018 |
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Revenues |
$ |
$ |
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Cost of products sold |
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Selling and administrative expense |
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Research and development expense |
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Acquisitions and other restructurings |
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Other operating income, net |
( |
) |
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Total Operating Costs and Expenses |
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Operating Income |
|||||||
Interest expense |
( |
) |
( |
) |
|||
Interest income, net |
( |
) |
|||||
Other income, net |
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Income Before Income Taxes |
|||||||
Income tax provision |
|||||||
Net Income |
|||||||
Preferred stock dividends |
( |
) |
( |
) |
|||
Net income applicable to common shareholders |
$ |
$ |
|||||
Basic Earnings per Share |
$ |
$ |
|||||
Diluted Earnings per Share |
$ |
$ |
|||||
Dividends per Common Share |
$ |
$ |
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 December 31, |
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2019 |
2018 |
||||||
Net Income |
$ |
$ |
|||||
Other Comprehensive Income (Loss), Net of Tax |
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Foreign currency translation adjustments |
( |
) |
|||||
Defined benefit pension and postretirement plans |
|||||||
Cash flow hedges |
|||||||
Other Comprehensive Income (Loss), Net of Tax |
( |
) |
|||||
Comprehensive Income |
$ |
$ |
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)
Three Months Ended December 31, |
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2019 |
2018 |
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Operating Activities |
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Net income |
$ |
$ |
|||||
Adjustments to net income to derive net cash provided by operating activities: |
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Depreciation and amortization |
|||||||
Share-based compensation |
|||||||
Deferred income taxes |
( |
) |
( |
) |
|||
Change in operating assets and liabilities |
( |
) |
|||||
Pension obligation |
( |
) |
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Gain on sale of business |
( |
) |
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Other, net |
( |
) |
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Net Cash Provided by Operating Activities |
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Investing Activities |
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Capital expenditures |
( |
) |
( |
) |
|||
Proceeds from divestitures, net |
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Other, net |
( |
) |
( |
) |
|||
Net Cash (Used for) Provided by Investing Activities |
( |
) |
|||||
Financing Activities |
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Change in credit facility borrowings |
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Payments of debt and term loans |
( |
) |
( |
) |
|||
Dividends paid |
( |
) |
( |
) |
|||
Other, net |
( |
) |
( |
) |
|||
Net Cash Used for Financing Activities |
( |
) |
( |
) |
|||
Effect of exchange rate changes on cash and equivalents and restricted cash |
( |
) |
|||||
Net increase (decrease) in cash and equivalents and restricted cash |
( |
) |
|||||
Opening Cash and Equivalents and Restricted Cash |
|||||||
Closing Cash and Equivalents and Restricted Cash |
$ |
$ |
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
December 31, 2019
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of Becton, Dickinson and Company (the "Company" or "BD"), include all adjustments which are of a normal recurring nature, necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and accompanying notes required for a presentation in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2019 Annual Report on Form 10-K. Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Note 2 – Accounting Changes
New Accounting Principle Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued a new lease accounting standard which requires lessees to recognize lease assets and lease liabilities on the balance sheet, as well as requires expanded disclosures regarding leasing arrangements. The Company adopted this standard on October 1, 2019 and elected certain practical expedients permitted under the transition guidance, including a transition method which allows application of the new standard at its adoption date, rather than at the earliest comparative period presented in the financial statements. The Company also elected not to perform any reassessments relative to its expired and existing leases upon its adoption of the new requirements. The Company's adoption of this standard did not materially impact its condensed consolidated financial statements. Additional disclosures regarding the Company’s lease arrangements are provided in Note 14.
New Accounting Principles Not Yet Adopted
In June 2016, the FASB issued a new accounting standard which requires earlier recognition of credit losses on loans and other financial instruments held by entities, including trade receivables. The new standard requires entities to measure all expected credit losses for financial assets held at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The Company is currently evaluating the impact that this new accounting standard will have on its consolidated financial statements upon its adoption on October 1, 2020.
In August 2018, the FASB issued a new accounting standard to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The standard is effective for the Company on October 1, 2020, but early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the impact that this new accounting standard will have on its consolidated financial statements upon its adoption.
7
Note 3 – Shareholders' Equity
Changes in certain components of shareholders' equity for the first quarters of fiscal years 2020 and 2019 were as follows:
Common
Stock Issued
at Par Value
|
Capital in
Excess of
Par Value
|
Retained
Earnings
|
Deferred
Compensation
|
Treasury Stock |
||||||||||||||||||
(Millions of dollars) |
Shares (in
thousands)
|
Amount |
||||||||||||||||||||
Balance at September 30, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
|||||||||||||
Net income |
— |
— |
— |
— |
— |
|||||||||||||||||
Common dividends ($0.79 per share) |
— |
— |
( |
) |
— |
— |
— |
|||||||||||||||
Preferred dividends |
— |
— |
( |
) |
— |
— |
— |
|||||||||||||||
Common stock issued for share-based compensation and other plans, net |
— |
( |
) |
— |
( |
) |
||||||||||||||||
Share-based compensation |
— |
— |
— |
— |
— |
|||||||||||||||||
Common stock held in trusts, net (a) |
— |
— |
— |
— |
( |
) |
— |
|||||||||||||||
Balance at December 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
Common
Stock Issued
at Par Value
|
Capital in
Excess of
Par Value
|
Retained
Earnings
|
Deferred
Compensation
|
Treasury Stock |
||||||||||||||||||
(Millions of dollars) |
Shares (in
thousands)
|
Amount |
||||||||||||||||||||
Balance at September 30, 2018 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
|||||||||||||
Net income |
— |
— |
— |
— |
— |
|||||||||||||||||
Common dividends ($0.77 per share) |
— |
— |
( |
) |
— |
— |
— |
|||||||||||||||
Preferred dividends |
— |
— |
( |
) |
— |
— |
— |
|||||||||||||||
Common stock issued for share-based compensation and other plans, net |
— |
( |
) |
— |
||||||||||||||||||
Share-based compensation |
— |
— |
— |
— |
— |
|||||||||||||||||
Common stock held in trusts, net (a) |
— |
— |
— |
— |
( |
) |
— |
|||||||||||||||
Effect of change in accounting principles |
— |
— |
— |
— |
— |
|||||||||||||||||
Balance at December 31, 2018 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
(a) |
Common stock held in trusts represents rabbi trusts in connection with deferred compensation under the Company’s employee salary and bonus deferral plan and directors’ deferral plan. |
8
The components and changes of Accumulated other comprehensive income (loss) for the first quarters of fiscal years 2020 and 2019 were as follows:
(Millions of dollars) |
Total |
Foreign Currency
Translation
|
Benefit Plans |
Cash Flow Hedges
|
|||||||||||
Balance at September 30, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Other comprehensive income before reclassifications, net of taxes |
|||||||||||||||
Amounts reclassified into income, net of taxes |
|||||||||||||||
Balance at December 31, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
(Millions of dollars) |
Total |
Foreign Currency
Translation
|
Benefit Plans |
Cash Flow Hedges
|
|||||||||||
Balance at September 30, 2018 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Other comprehensive (loss) income before reclassifications, net of taxes |
( |
) |
( |
) |
( |
) |
|||||||||
Amounts reclassified into income, net of taxes |
|||||||||||||||
Balance at December 31, 2018 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
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 December 31, |
|||||
2019 |
2018 |
||||
Average common shares outstanding |
|||||
Dilutive share equivalents from share-based plans |
|||||
Average common and common equivalent shares outstanding – assuming dilution |
|||||
Share equivalents excluded from the diluted shares outstanding calculation because the result would have been antidilutive: |
|||||
Mandatory convertible preferred stock |
Note 5 – Contingencies
Given the uncertain nature of litigation generally, the Company is not able, in all cases, to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which the Company is a party. In accordance with U.S. GAAP, the Company establishes accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). With respect to putative class action lawsuits in the United States and certain of the Canadian lawsuits described below relating to product liability matters, the Company is unable to estimate a range of reasonably possible losses for the following reasons: (i) all or certain of the proceedings are in early stages; (ii) the Company has not received and reviewed complete information regarding all or certain of the plaintiffs and their medical conditions; and/or (iii) there are significant factual issues to be resolved. In addition, there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class. With respect to the civil investigative demand served by the Department of Justice, as discussed below, the Company is unable to estimate a range of reasonably possible losses for the following reasons: (i) all or certain of the proceedings are in early stages; and/or (ii) there are significant factual and legal issues to be resolved.
9
In view of the uncertainties discussed below, the Company could incur charges in excess of any currently established accruals and, to the extent available, liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on the Company’s consolidated results of operations and consolidated cash flows.
Product Liability Matters
The Company believes that certain settlements and judgments, as well as legal defense costs, relating to product liability matters are or may be covered in whole or in part under its product liability insurance policies with a limited number of insurance carriers, or, in some circumstances, indemnification obligations to the Company from other parties, which if disputed, the Company intends to vigorously contest. Amounts recovered under the Company’s product liability insurance policies or indemnification arrangements may be less than the stated coverage limits or less than otherwise expected and may not be adequate to cover damages and/or costs relating to claims. In addition, there is no guarantee that insurers or other parties will pay claims or that coverage or indemnity will be otherwise available.
Hernia Product Claims
As of December 31, 2019, the Company is defending approximately 14,330 product liability claims involving the Company’s line of hernia repair devices (collectively, the “Hernia Product Claims”). The majority of those claims are currently pending in a coordinated proceeding in Rhode Island State Court, but claims are also pending in other state and/or federal court jurisdictions. In addition, those claims include multiple putative class actions in Canada. Generally, the Hernia Product Claims seek damages for personal injury allegedly resulting from use of the products. From time to time, the Company engages in resolution discussions with plaintiffs’ law firms regarding certain of the Hernia Product Claims, but the Company also intends to vigorously defend Hernia Product Claims that do not settle, including through litigation. Trials are scheduled throughout 2020 in various state and/or federal courts. The Company expects additional trials of Hernia Product Claims to take place over the next 12 months. In August 2018, a new hernia multi-district litigation (“MDL”) was ordered to be established in the Southern District of Ohio. The Company cannot give any assurances that the resolution of the Hernia Product Claims that have not settled, including asserted and unasserted claims and the putative class action lawsuits, will not have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity.
Women’s Health Product Claims
As of December 31, 2019, the Company is defending approximately 750 product liability claims involving the Company’s line of pelvic mesh devices. The majority of those claims are currently pending in various federal court jurisdictions, and a coordinated proceeding in New Jersey State Court, but claims are also pending in other state court jurisdictions. In addition, those claims include putative class actions filed in the United States. Not included in the figures above are approximately 1,010 filed and unfiled claims that have been asserted or threatened against the Company but lack sufficient information to determine whether a pelvic mesh device of the Company is actually at issue.
The claims identified above also include products manufactured by both the Company and two subsidiaries of Medtronic plc (as successor in interest to Covidien plc) (“Medtronic”), each a supplier of the Company. Medtronic has an obligation to defend and indemnify the Company with respect to any product defect liability relating to products its subsidiaries had manufactured. In July 2015, the Company reached an agreement with Medtronic in which Medtronic agreed to take responsibility for pursuing settlement of certain of the Women’s Health Product Claims that relate to products distributed by the Company under supply agreements with Medtronic. In June 2017, the Company amended the agreement with Medtronic to transfer responsibility for settlement of additional Women’s Health Product Claims to Medtronic on terms similar to the July 2015 agreement, including with respect to the obligation to make payments to Medtronic towards these potential settlements. As of December 31, 2019, the Company has paid Medtronic $141 million towards these potential settlements. The Company also may, in its sole discretion, transfer responsibility for settlement of additional Women’s Health Product Claims to Medtronic on similar terms. The agreements do not resolve the dispute between the Company and Medtronic with respect to Women’s Health Product Claims that do not settle, if any. The foregoing lawsuits, unfiled claims, putative class actions, and other claims, together with claims that have settled or are the subject of agreements or agreements in principle to settle, are referred to collectively as the “Women’s Health Product Claims.” The Women’s Health Product Claims generally seek damages for personal injury allegedly resulting from use of the products.
As of December 31, 2019, the Company has reached agreements or agreements in principle with various plaintiffs’ law firms to settle their respective inventories of cases totaling approximately 15,165 of the Women’s Health Product Claims. The Company believes that these Women’s Health Product Claims are not the subject of Medtronic’s indemnification obligation. These settlement agreements and agreements in principle include unfiled and previously unknown claims held by various plaintiffs’ law firms, which are not included in the approximate number of lawsuits set forth in the first paragraph of this section. Each agreement is subject to certain conditions, including requirements for participation in the proposed settlements by a certain
10
minimum number of plaintiffs. The Company continues to engage in discussions with other plaintiffs’ law firms regarding potential resolution of unsettled Women’s Health Product Claims, which may include additional inventory settlements.
Starting in 2014 in the MDL, the court entered certain pre-trial orders requiring trial work up and remand of a significant number of Women’s Health Product Claims, including an order entered in the MDL on January 30, 2018, that requires the work up and remand of all remaining unsettled cases (the “WHP Pre-Trial Orders”). The WHP Pre-Trial Orders may result in material additional costs or trial verdicts in future periods in defending Women’s Health Product Claims. Trials are anticipated throughout 2020 in state and federal courts. A trial in the New Jersey coordinated proceeding began in March 2018, and in April 2018 a jury entered a verdict against the Company in the total amount of $68 million ($33 million compensatory; $35 million punitive). The Company is in the process of appealing that verdict. The Company expects additional trials of Women’s Health Product Claims to take place over the next 12 months, which may potentially include consolidated trials.
During the course of engaging in settlement discussions with plaintiffs’ law firms, the Company has learned, and may in future periods learn, additional information regarding these and other unfiled claims, or other lawsuits, which could materially impact the Company’s estimate of the number of claims or lawsuits against the Company.
Filter Product Claims
As of December 31, 2019, the Company is defending approximately 2,650 product liability claims involving the Company’s line of inferior vena cava filters (collectively, the “Filter Product Claims”). The majority of those claims are currently pending in an MDL in the United States District Court for the District of Arizona, but those MDL claims either have been, or are in the process of being, remanded to various federal jurisdictions. Filter Product Claims are also pending in various state court jurisdictions, including a coordinated proceeding in Arizona State Court. In addition, those claims include putative class actions filed in the United States and Canada. The Filter Product Claims generally seek damages for personal injury allegedly resulting from use of the products. The Company has limited information regarding the nature and quantity of certain of the Filter Product Claims. The Company continues to receive claims and lawsuits and may in future periods learn additional information regarding other unfiled or unknown claims, or other lawsuits, which could materially impact the Company’s estimate of the number of claims or lawsuits against the Company. On May 31, 2019, the MDL Court ceased accepting direct filings or transfers into the Filter Product Claims MDL and, as noted above, remands for non-settled cases have begun and are expected to continue over the next three months. Federal and state court trials are scheduled throughout 2020. As of December 31, 2019, the Company entered into settlement agreements and/or settlement agreements in principle for approximately 6,400 cases. On March 30, 2018, a jury in the first MDL trial found the Company liable for negligent failure to warn and entered a verdict in favor of plaintiffs. The jury found the Company was not liable for (a) strict liability design defect; (b) strict liability failure to warn; and (c) negligent design. The Company has appealed that verdict. On June 1, 2018, a jury in the second MDL trial unanimously found in favor of the Company on all claims. On August 17, 2018, the Court entered summary judgment in favor of the Company on all claims in the third MDL trial. On October 5, 2018, a jury in the fourth MDL trial unanimously found in favor of the Company on all claims. The Company expects additional trials of Filter Product Claims may take place over the next 12 months.
In most product liability litigations (like those described above), plaintiffs allege a wide variety of claims, ranging from allegations of serious injury caused by the products to efforts to obtain compensation notwithstanding the absence of any injury. In many of these cases, the Company has not yet received and reviewed complete information regarding the plaintiffs and their medical conditions and, consequently, is unable to fully evaluate the claims. The Company expects that it will receive and review additional information regarding any remaining unsettled product liability matters.
In connection with the settlement of a prior litigation with certain of the Company's insurance carriers, an agreement with the Company's insurance carriers was reached to reimburse the Company for certain future costs incurred in connection with Filter Product Claims up to an agreed amount. For certain product liability claims or lawsuits, the Company does not maintain or has limited remaining insurance coverage.
Other Legal Matters
Since early 2013, the Company has received subpoenas or Civil Investigative Demands from a number of State Attorneys General seeking information related to the sales and marketing of certain of the Company’s products that are the subject of the Hernia Product Claims and the Women’s Health Product Claims. The Company is cooperating with these requests. Although the Company has had, and continues to have, discussions with the State Attorneys General with respect to overall potential resolution of this matter, there can be no assurance that a resolution will be reached or what the terms of any such resolution may be.
In July 2017, a civil investigative demand was served by the Department of Justice seeking documents and information relating to an investigation into possible violations of the False Claims Act in connection with the sales and marketing of FloChec® and
11
QuantaFloTM devices. The Company is cooperating with these requests. Since it is not feasible to predict the outcome of these matters, the Company cannot give any assurances that the resolution of these matters will not have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity.
The Company is a potentially responsible party to a number of federal administrative proceedings in the United States brought under the Comprehensive Environment Response, Compensation and Liability Act, also known as “Superfund,” and similar state laws. The affected sites are in varying stages of development. In some instances, the remedy has been completed, while in others, environmental studies are underway or commencing. For several sites, there are other potentially responsible parties that may be jointly or severally liable to pay all or part of cleanup costs. While it is not feasible to predict the outcome of these proceedings, based upon the Company’s experience, current information and applicable law, the Company does not expect these proceedings to have a material adverse effect on its financial condition and/or liquidity. However, one or more of the proceedings could be material to the Company’s business and/or results of operations.
The Company is also involved both as a plaintiff and a defendant in other legal proceedings and claims that arise in the ordinary course of business. The Company believes that it has meritorious defenses to these suits pending against the Company and is engaged in a vigorous defense of each of these matters.
Litigation Reserves
The Company regularly monitors and evaluates the status of product liability and other legal matters, and may, from time-to-time, engage in settlement and mediation discussions taking into consideration developments in the matters and the risks and uncertainties surrounding litigation. These discussions could result in settlements of one or more of these claims at any time.
In the second and fourth quarters of fiscal year 2019, the Company recorded pre-tax charges to Other operating expense, net, of approximately $331 million and $582 million, respectively, related to certain of the product liability matters discussed above under the heading “Product Liability Matters,” including the related legal defense costs. The Company recorded these charges based on additional information obtained during the second and fourth quarters of fiscal year 2019, including but not limited to: the nature and quantity of unfiled and filed claims and the continued rate of claims being filed in certain product liability matters; the status of certain settlement discussions with plaintiffs’ counsel; the allegations and documentation supporting or refuting such allegations; publicly available information regarding similar medical device mass tort settlements; historical information regarding other product liability settlements involving the Company; and the stage of litigation.
Note 6 – Revenues
The Company’s policies for recognizing sales have not changed from those described in the Company’s 2019 Annual Report on Form 10-K. The Company sells a broad range of medical supplies, devices, laboratory equipment and diagnostic products which are distributed through independent distribution channels and directly by BD through sales representatives. End-users of the Company's products include healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.
12
Measurement of Revenues
The Company’s estimate of probable credit losses relating to trade receivables is determined based on historical experience and other specific account data. Amounts are written off against the allowances for doubtful accounts when the Company determines that a customer account is uncollectible. Such amounts are not material to the Company's consolidated financial results.
The Company's gross revenues are subject to a variety of deductions which are recorded in the same period that the underlying revenues are recognized. Such variable consideration includes rebates, sales discounts and sales returns. The impact of variable consideration, including sales discounts and sales returns, is not material to the Company's revenues.
Capitalized contract costs associated with the costs to fulfill contracts for certain products in the Medication Management Solutions organizational unit are immaterial to the Company's condensed consolidated balance sheets. Commissions relating to revenues recognized over a period longer than one year are recorded as assets which are amortized over the period over which the revenues underlying the commissions are recognized. Capitalized contract costs related to such commissions are immaterial to the Company's condensed consolidated balance sheets.
Contract liabilities for unearned revenue that is allocable to performance obligations, such as extended warranty and software maintenance contracts, which are performed over time are immaterial to the Company's consolidated financial results. The Company's liability for product warranties provided under its agreements with customers is not material to its condensed consolidated balance sheets.
Remaining Performance Obligations
The Company's obligations relative to service contracts and pending installations of equipment, primarily in the Company's Medication Management Solutions unit, represent unsatisfied performance obligations of the Company. The revenues under existing contracts with original expected durations of more than one year, which are attributable to products and/or services that have not yet been installed or provided are estimated to be approximately $1.8 billion at December 31, 2019. The Company expects to recognize the majority of this revenue over the next three years .
Within the Company's Medication Management Solutions, Medication Delivery Solutions, Integrated Diagnostic Solutions, and Biosciences units, some contracts also contain minimum purchase commitments of reagents or other consumables and the future sales of these consumables represent additional unsatisfied performance obligations of the Company. The revenue attributable to the unsatisfied minimum purchase commitment-related performance obligations, for contracts with original expected durations of more than one year, is estimated to be approximately $2.7 billion at December 31, 2019. This revenue will be recognized over the customer relationship period.
Disaggregation of Revenues
A disaggregation of the Company's revenues by segment, organizational unit and geographic region is provided in Note 7.
Note 7 – Segment Data
The Company's organizational structure is based upon three principal business segments: BD Medical (“Medical”), BD Life Sciences (“Life Sciences”) and BD Interventional ("Interventional"). The Company's segments are strategic businesses that are managed separately because each one develops, manufactures and markets distinct products and services. Segment disclosures are on a performance basis consistent with internal management reporting. The Company evaluates performance of its business segments and allocates resources to them primarily based upon segment operating income, which represents revenues reduced by product costs and operating expenses.
13
Effective October 1, 2019, Life Sciences joined its former Preanalytical Systems and Diagnostic Systems organizational units to create a new Integrated Diagnostic Solutions organizational unit which focuses on driving growth and innovation around integrated specimen management to diagnostic solutions. The Integrated Diagnostic Solutions organizational unit consists of the following principal product lines:
Organizational Unit |
Principal Product Lines |
|
Integrated Diagnostic Solutions |
Integrated systems for specimen collection; safety-engineered blood collection products and 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 for testing of respiratory infections; microbiology laboratory automation and plated media for clinical and industrial applications. |
Revenues by segment, organizational unit and geographical areas for the three-month periods are detailed below. The Company has no material intersegment revenues.
Three Months Ended December 31, |
|||||||||||||||||||||||
(Millions of dollars) |
2019 |
2018 |
|||||||||||||||||||||
United States |
International |
Total |
United States |
International |
Total |
||||||||||||||||||
Medical |
|||||||||||||||||||||||
Medication Delivery Solutions (a) |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Medication Management Solutions (a) |
|||||||||||||||||||||||
Diabetes Care |
|||||||||||||||||||||||
Pharmaceutical Systems |
|||||||||||||||||||||||
Total segment revenues |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Life Sciences |
|||||||||||||||||||||||
Integrated Diagnostic Solutions |
|||||||||||||||||||||||
Preanalytical Systems |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Diagnostic Systems |
|||||||||||||||||||||||
Total Integrated Diagnostic Solutions |
|||||||||||||||||||||||
Biosciences |
|||||||||||||||||||||||
Total segment revenues |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Interventional |
|||||||||||||||||||||||
Surgery (b) |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Peripheral Intervention (b) |
|||||||||||||||||||||||
Urology and Critical Care (b) |
|||||||||||||||||||||||
Total segment revenues |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Total Company revenues |
$ |
$ |
$ |
$ |
$ |
$ |
(a) |
Prior-period amounts reflect the reclassification of U.S. revenues of $ |
(b)Prior-period amounts reflect the total reclassifications of $31 million of U.S. revenues and $14 million of international revenues associated with the movement, effective on October 1, 2019, of certain products from the Surgery unit and the Urology and Critical Care unit to the Peripheral Intervention unit.
14
Three Months Ended December 31, |
|||||||
(Millions of dollars) |
2019 |
2018 |
|||||
Income Before Income Taxes |
|||||||
Medical (a) |
$ |
$ |
|||||
Life Sciences |
|||||||
Interventional |
|||||||
Total Segment Operating Income |
|||||||
Acquisitions and other restructurings |
( |
) |
( |
) |
|||
Net interest expense |
( |
) |
( |
) |
|||
Other unallocated items (b) |
( |
) |
( |
) |
|||
Total Income Before Income Taxes |
$ |
$ |
(a) |
The amount for the three months ended December 31, 2019 included the estimated cost of a product recall of $ |
(b) |
Primarily comprised of foreign exchange, certain general and administrative expenses and share-based compensation expense. The amount for the three months ended December 31, 2018 included the pre-tax gain recognized on the Company's sale of its Advanced Bioprocessing business of approximately $ |
Note 8 – Benefit Plans
The Company has defined benefit pension plans covering certain employees in the United States and certain international locations. The measurement date used for these plans is September 30.
Net pension cost included the following components for the three months ended December 31:
Three Months Ended December 31, |
|||||||
(Millions of dollars) |
2019 |
2018 |
|||||
Service cost |
$ |
$ |
|||||
Interest cost |
|||||||
Expected return on plan assets |
( |
) |
( |
) |
|||
Amortization of prior service credit |
( |
) |
( |
) |
|||
Amortization of loss |
|||||||
Net pension cost |
$ |
$ |
Note 9 – Divestiture
15
Note 10 – Business Restructuring Charges
The Company incurred restructuring costs during the three months ended December 31, 2019, in connection with the Company's acquisition of C.R. Bard, Inc. ("Bard") and portfolio rationalization initiatives, which were largely recorded within Acquisitions and other restructurings. Restructuring liability activity for the three months ended December 31, 2019 was as follows:
(Millions of dollars) |
Employee
Termination
|
Other |
Total |
||||||||||||||||||||
Bard |
Other Initiatives |
Bard (a) |
Other Initiatives |
Bard |
Other Initiatives |
||||||||||||||||||
Balance at September 30, 2019 |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Charged to expense |
|||||||||||||||||||||||
Cash payments |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||||||
Non-cash settlements |
( |
) |
( |
) |
|||||||||||||||||||
Balance at December 31, 2019 |
$ |
$ |
$ |
$ |
$ |
(a) |
Note 11 – Intangible Assets
Intangible assets consisted of:
December 31, 2019 |
September 30, 2019 |
||||||||||||||
(Millions of dollars) |
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|||||||||||
Amortized intangible assets |
|||||||||||||||
Developed technology |
$ |
$ |
$ |
$ |
|||||||||||
Customer relationships |
|||||||||||||||
Product rights |
|||||||||||||||
Trademarks |
|||||||||||||||
Patents and other |
|||||||||||||||
Amortized intangible assets |
$ |
$ |
$ |
$ |
|||||||||||
Unamortized intangible assets |
|||||||||||||||
Acquired in-process research and development |
$ |
$ |
|||||||||||||
Trademarks |
|||||||||||||||
Unamortized intangible assets |
$ |
$ |
The following is a reconciliation of goodwill by business segment:
(Millions of dollars) |
Medical |
Life Sciences |
Interventional |
Total |
|||||||||||
Goodwill as of September 30, 2019 |
$ |
$ |
$ |
$ |
|||||||||||
Acquisitions (a) |
|||||||||||||||
Currency translation |
|||||||||||||||
Goodwill as of December 31, 2019 |
$ |
$ |
$ |
$ |
(a) |
Represents goodwill recognized relative to certain acquisitions which were not material individually or in the aggregate. |
16
Note 12 – Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate certain exposures. The Company does not enter into derivative financial instruments for trading or speculative purposes. The effects these derivative instruments and hedged items have on financial position, financial performance, and cash flows are provided below.
Foreign Currency Risks and Related Strategies
The Company has foreign currency exposures throughout Europe, Greater Asia, Canada and Latin America. Transactional currency exposures that arise from entering into transactions, generally on an intercompany basis, in non-hyperinflationary countries that are denominated in currencies other than the functional currency are mitigated primarily through the use of forward contracts. In order to mitigate foreign currency exposure relating to its investments in certain foreign subsidiaries, the Company has hedged the currency risk associated with those investments with instruments, such as foreign currency-denominated debt, cross-currency swaps and currency exchange contracts, which are designated as net investment hedges.
Certain of the Company's foreign currency-denominated long-term notes outstanding, which had a total carrying value of $1.4 billion as of December 31, 2019 and September 30, 2019, were designated as, and were effective as, economic hedges of net investments in certain of the Company's foreign subsidiaries. The Company has entered into cross-currency swaps, all of which are designated and effective as economic hedges of net investments in certain of the Company's foreign subsidiaries. The notional amounts of the cross-currency swaps were $3.0 billion and $2.3 billion as of December 31, 2019 and September 30, 2019, respectively.
Net gains or losses relating to the net investment hedges, which are attributable to changes in the foreign currencies to U.S. dollar spot exchange rates, are recorded as accumulated foreign currency translation in Other comprehensive income (loss). Upon the termination of a net investment hedge, any net gain or loss included in Accumulated other comprehensive income (loss) relative to the investment hedge remains until the foreign subsidiary investment is disposed of or is substantially liquidated.
Net (losses) gains recorded to Accumulated other comprehensive income (loss) relating to the Company's net investment hedges for the three-month periods were as follows:
Three Months Ended December 31, |
|||||||
(Millions of dollars) |
2019 |
2018 |
|||||
Foreign currency-denominated debt |
$ |
( |
) |
$ |
|||
Cross-currency swaps |
$ |
( |
) |
$ |
Interest Rate Risks and Related Strategies
The Company’s policy is to manage interest rate exposure using a mix of fixed and variable rate debt. The Company periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Company exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated as either fair value or cash flow hedges.
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
The total notional amount of the Company’s outstanding interest rate swaps designated as fair value hedges was $375 million at December 31, 2019 and September 30, 2019. The outstanding swaps represent fixed-to-floating interest rate swap agreements the Company entered into to convert the interest payments on certain long-term notes from the fixed rate to a floating interest rate based on LIBOR. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt. The amounts recorded during the three months ended December 31, 2019 and 2018 for changes in the fair value of these hedges were immaterial to the Company's consolidated financial results.
17
The total notional amount of the Company's outstanding forward starting interest rate swaps was $1.5 billion at December 31, 2019 and September 30, 2019. The Company entered into these contracts in the fourth quarter of fiscal year 2019 to mitigate its exposure to interest rate risk. The Company recognized an after-tax gain of $37 million in other comprehensive income relating to these interest rate hedges during the three months ended December 31, 2019.
Other Risk Exposures
The Company purchases resins, which are oil-based components used in the manufacture of certain products. Significant increases in world oil prices that lead to increases in resin purchase costs could impact future operating results. From time to time, the Company has managed price risks associated with these commodity purchases through commodity derivative forward contracts. The Company's outstanding commodity derivative forward contracts at December 31, 2019 and September 30, 2019 were immaterial to the Company's consolidated financial results.
Financial Statement Effects
The fair values of derivative instruments outstanding at December 31, 2019 and September 30, 2019 were not material to the Company's consolidated balance sheets.
Note 13 – Financial Instruments and Fair Value Measurements
The following reconciles cash and equivalents and restricted cash reported within the Company's consolidated balance sheets at December 31, 2019 and September 30, 2019 to the total of these amounts shown on the Company's consolidated statements of cash flows:
(Millions of dollars) |
December 31, 2019 |
September 30, 2019 |
|||||
Cash and equivalents |
$ |
$ |
|||||
Restricted cash |
|||||||
Cash and equivalents and restricted cash |
$ |
$ |
Cash equivalents consist of all highly liquid investments with a maturity of three months or less at time of purchase. Restricted cash consists of cash restricted from withdrawal and usage except for certain product liability matters.
The Company’s cash and equivalents include institutional money market accounts which permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions, which are considered Level 1 inputs in the fair value hierarchy. The fair value of these accounts was immaterial at December 31, 2019 and the fair value of these accounts at September 30, 2019 was $39 million. The Company’s remaining cash and equivalents, excluding restricted cash, were $560 million and $497 million at December 31, 2019 and September 30, 2019, respectively.
Short-term investments are held to their maturities and are carried at cost, which approximates fair value. The short-term investments consist of instruments with maturities greater than three months and less than one year .
Long-term debt is recorded at amortized cost. The fair value of long-term debt is measured based upon quoted prices in active markets for similar instruments, which are considered Level 2 inputs in the fair value hierarchy. The fair value of long-term debt was $18.1 billion and $19.2 billion at December 31, 2019 and September 30, 2019, respectively. The fair value of the current portion of long-term debt was $2.5 billion and $1.3 billion at December 31, 2019 and September 30, 2019, respectively.
All other instruments measured by the Company at fair value, including derivatives and contingent consideration liabilities, are immaterial to the Company's consolidated balance sheets.
18
Transfers of trade receivables
Over the normal course of its business activities, the Company transfers certain trade receivable assets to third parties under factoring agreements. Per the terms of these agreements, the Company surrenders control over its trade receivables upon transfer. Accordingly, the Company accounts for the transfers as sales of trade receivables by recognizing an increase to Cash and equivalents and a decrease to Trade receivables, net when proceeds from the transactions are received. The Company’s balance of Trade receivables, net at December 31, 2019 excludes trade receivables of $328 million that have been transferred to third parties under factoring arrangements. The costs incurred by the Company in connection with factoring activities were not material to its consolidated financial results. The Company’s transfers of trade receivables during the three months ended December 31, 2018 were not material to its consolidated financial results.
Note 14 – Leases
The Company leases real estate, vehicles and other equipment which are used in the Company’s manufacturing, administrative and research and development activities. The Company identifies a contract that contains a lease as one which conveys a right, either explicitly or implicitly, to control the use of an identified asset in exchange for consideration. The Company’s lease arrangements are generally classified as operating leases. These arrangements have remaining terms ranging from less than one year to approximately 25 years and the weighted-average remaining lease term of the Company’s leases is approximately 7.5 years. An option to renew or terminate the current term of a lease arrangement is included in the lease term if the Company is reasonably certain to exercise that option.
The implicit interest rates of the Company’s lease arrangements are generally not readily determinable and as such, the Company applies an incremental borrowing rate, which is established based upon the information available at the lease commencement date, to determine the present value of lease payments due under an arrangement. The weighted-average incremental borrowing rate that has been applied to measure the Company’s lease liabilities is 2.3 %.
The Company’s lease costs recorded in its consolidated statement of income for the three months ended December 31, 2019 were $34 million. Cash payments arising from the Company’s lease arrangements are reflected on its condensed consolidated statement of cash flows as outflows used for operating activities. The right-of-use assets and lease liabilities recognized on the Company’s condensed consolidated balance sheet as of December 31, 2019 were as follows:
(Millions of dollars) |
December 31, 2019 |
||
Right-use-assets recorded in Other Assets
|
$ |
||
Current lease liabilities recorded in Payables, accrued expenses and other current liabilities
|
$ |
||
Non-current lease liabilities recorded in Deferred Income Taxes and Other Liabilities
|
$ |
The Company’s payments due under its operating leases are as follows:
(Millions of dollars) |
|||
Remaining for 2020 |
$ |
||
2021 |
|||
2022 |
|||
2023 |
|||
2024 |
|||
Thereafter |
|||
Total payments due |
|||
Less: imputed interest |
|||
Total |
$ |
19
The Company’s future minimum rental commitments on non-cancelable leases at September 30, 2019, as disclosed in the Company’s 2019 Annual Report on Form 10-K, were as follows:
(Millions of dollars) |
|||
2020 |
$ |
||
2021 |
|||
2022 |
|||
2023 |
|||
2024 |
|||
Thereafter |
|||
Total |
$ |
Note 15 – Subsequent Event
On February 4, 2020, the Company initiated a voluntary recall of certain AlarisTM pump systems in order to address software errors and other alarm prioritization matters. The estimated cost of this recall of $59 million was recorded to Cost of products sold during the three months ended December 31, 2019. The Company may record incremental charges in future periods associated with this recall.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes presented in this report. Within the tables presented throughout this discussion, certain columns may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts.
Company Overview
Becton, Dickinson and Company (“BD”) is a global medical technology company engaged in the development, manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. The Company's organizational structure is based upon three principal business segments, BD Medical (“Medical”), BD Life Sciences (“Life Sciences”) and BD Interventional (“Interventional”).
BD’s products are manufactured and sold worldwide. Our products are marketed in the United States and internationally through independent distribution channels and directly to end-users by BD and independent sales representatives. We organize our operations outside the United States as follows: Europe; EMA (which includes the Commonwealth of Independent States, the Middle East and Africa); Greater Asia (which includes countries in East Asia, South Asia, Southeast Asia and the Oceania region); Latin America (which includes Mexico, Central America, the Caribbean, and South America); and Canada. We continue to pursue growth opportunities in emerging markets, which include the following geographic regions: Eastern Europe, the Middle East, Africa, Latin America and certain countries within Greater Asia. We are primarily focused on certain countries whose healthcare systems are expanding.
Overview of Financial Results an