ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2016
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
New Jersey | 22-0760120 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Large accelerated filer | Accelerated filer | ¨ | ||||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Class of Common Stock | Shares Outstanding as of March 31, | |
Common stock, par value $1.00 |
2016
Page Number | ||||||
Part I. | ||||||
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Item 1. | ||||||
Item 2. | ||||||
Item 3. | ||||||
Item 4. | ||||||
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Item 1. | ||||||
Item 1A. | ||||||
Item 2. | ||||||
Item 3. | ||||||
Item 4. | ||||||
Item 5. | ||||||
Item 6. | ||||||
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March 31, 2015 | September 30, 2014 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and equivalents | $ | 1,912 | $ | 1,861 | ||||
Short-term investments | 40 | 884 | ||||||
Trade receivables, net | 1,572 | 1,187 | ||||||
Current portion of net investment in sales-type leases | 177 | 5 | ||||||
Inventories: | ||||||||
Materials | 385 | 248 | ||||||
Work in process | 304 | 260 | ||||||
Finished products | 1,590 | 987 | ||||||
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2,278 | 1,495 | |||||||
Prepaid expenses, deferred taxes and other | 1,016 | 698 | ||||||
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Total Current Assets | 6,996 | 6,131 | ||||||
Property, Plant and Equipment | 8,130 | 7,765 | ||||||
Less allowances for depreciation and amortization | 4,138 | 4,160 | ||||||
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Property, Plant and Equipment, Net | 3,992 | 3,605 | ||||||
Goodwill | 7,663 | 1,090 | ||||||
Customer Relationships, Net | 3,562 | 8 | ||||||
Developed Technology, Net | 3,028 | 513 | ||||||
Other Intangibles, Net | 967 | 239 | ||||||
Capitalized Software, Net | 346 | 365 | ||||||
Net Investment in Sales-Type Leases, Less Current Portion | 1,044 | 9 | ||||||
Other Assets | 696 | 488 | ||||||
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Total Assets | $ | 28,293 | $ | 12,447 | ||||
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Liabilities and Shareholders’ Equity | ||||||||
Current Liabilities: | ||||||||
Short-term debt | $ | 1,710 | $ | 203 | ||||
Payables and accrued expenses | 2,787 | 2,031 | ||||||
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Total Current Liabilities | 4,497 | 2,235 | ||||||
Long-Term Debt | 12,128 | 3,768 | ||||||
Long-Term Employee Benefit Obligations | 996 | 1,009 | ||||||
Deferred Income Taxes and Other | 3,513 | 383 | ||||||
Commitments and Contingencies | — | — | ||||||
Shareholders’ Equity | ||||||||
Common stock | 333 | 333 | ||||||
Capital in excess of par value | 4,388 | 2,198 | ||||||
Retained earnings | 12,324 | 12,105 | ||||||
Deferred compensation | 18 | 19 | ||||||
Common stock in treasury - at cost | (8,281 | ) | (8,601 | ) | ||||
Accumulated other comprehensive (loss) income | (1,623 | ) | (1,001 | ) | ||||
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Total Shareholders’ Equity | 7,159 | 5,053 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 28,293 | $ | 12,447 | ||||
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March 31, 2016 | September 30, 2015 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Current Assets: | |||||||
Cash and equivalents | $ | 1,696 | $ | 1,424 | |||
Short-term investments | 15 | 20 | |||||
Trade receivables, net | 1,574 | 1,618 | |||||
Current portion of net investment in sales-type leases | 311 | 75 | |||||
Inventories: | |||||||
Materials | 314 | 384 | |||||
Work in process | 302 | 280 | |||||
Finished products | 1,229 | 1,295 | |||||
1,846 | 1,959 | ||||||
Assets held for sale | 618 | — | |||||
Prepaid expenses and other | 551 | 563 | |||||
Total Current Assets | 6,612 | 5,659 | |||||
Property, Plant and Equipment | 8,170 | 8,277 | |||||
Less allowances for depreciation and amortization | 4,390 | 4,217 | |||||
Property, Plant and Equipment, Net | 3,779 | 4,060 | |||||
Goodwill | 7,448 | 7,537 | |||||
Customer Relationships, Net | 3,128 | 3,250 | |||||
Developed Technology, Net | 2,721 | 2,977 | |||||
Other Intangibles, Net | 682 | 797 | |||||
Capitalized Software, Net | 346 | 362 | |||||
Net Investment in Sales-Type Leases, Less Current Portion | 826 | 1,118 | |||||
Other Assets | 694 | 717 | |||||
Total Assets | $ | 26,236 | $ | 26,478 | |||
Liabilities and Shareholders’ Equity | |||||||
Current Liabilities: | |||||||
Short-term debt | $ | 1,651 | $ | 1,452 | |||
Payables and accrued expenses | 2,527 | 2,930 | |||||
Liabilities held for sale | 202 | — | |||||
Total Current Liabilities | 4,380 | 4,381 | |||||
Long-Term Debt | 10,864 | 11,370 | |||||
Long-Term Employee Benefit Obligations | 1,146 | 1,133 | |||||
Deferred Income Taxes and Other | 2,181 | 2,430 | |||||
Commitments and Contingencies (See Note 5) | |||||||
Shareholders’ Equity | |||||||
Common stock | 333 | 333 | |||||
Capital in excess of par value | 4,600 | 4,475 | |||||
Retained earnings | 12,600 | 12,314 | |||||
Deferred compensation | 20 | 20 | |||||
Common stock in treasury - at cost | (8,240 | ) | (8,239 | ) | |||
Accumulated other comprehensive loss | (1,647 | ) | (1,738 | ) | |||
Total Shareholders’ Equity | 7,666 | 7,164 | |||||
Total Liabilities and Shareholders’ Equity | $ | 26,236 | $ | 26,478 |
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenues | $ | 2,051 | $ | 2,072 | $ | 4,102 | $ | 4,086 | ||||||||
Cost of products sold | 1,005 | 1,019 | 2,011 | 1,999 | ||||||||||||
Selling and administrative expense | 511 | 525 | 1,055 | 1,056 | ||||||||||||
Research and development expense | 129 | 147 | 258 | 273 | ||||||||||||
Acquisition-related costs | 113 | — | 136 | — | ||||||||||||
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Total Operating Costs and Expenses | 1,758 | 1,690 | 3,460 | 3,327 | ||||||||||||
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Operating Income | 293 | 381 | 642 | 759 | ||||||||||||
Interest expense | (91 | ) | (33 | ) | (167 | ) | (67 | ) | ||||||||
Interest income | 8 | 10 | 19 | 24 | ||||||||||||
Other income, net | 15 | 5 | 17 | 6 | ||||||||||||
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Income Before Income Taxes | 225 | 363 | 510 | 722 | ||||||||||||
Income tax provision | 9 | 76 | 58 | 164 | ||||||||||||
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Net Income | 216 | 287 | 452 | 558 | ||||||||||||
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Basic Earnings per Share | $ | 1.10 | $ | 1.48 | $ | 2.32 | $ | 2.88 | ||||||||
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Diluted Earnings per Share | $ | 1.08 | $ | 1.45 | $ | 2.28 | $ | 2.82 | ||||||||
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Dividends per Common Share | $ | 0.600 | $ | 0.545 | $ | 1.200 | $ | 1.090 | ||||||||
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Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues | $ | 3,067 | $ | 2,051 | $ | 6,054 | $ | 4,102 | |||||||
Cost of products sold | 1,584 | 1,005 | 3,162 | 2,011 | |||||||||||
Selling and administrative expense | 732 | 511 | 1,480 | 1,055 | |||||||||||
Research and development expense | 182 | 129 | 369 | 258 | |||||||||||
Acquisitions and other restructurings | 104 | 113 | 225 | 136 | |||||||||||
Total Operating Costs and Expenses | 2,601 | 1,758 | 5,236 | 3,460 | |||||||||||
Operating Income | 466 | 293 | 818 | 642 | |||||||||||
Interest expense | (99 | ) | (91 | ) | (196 | ) | (167 | ) | |||||||
Interest income | 3 | 8 | 9 | 19 | |||||||||||
Other income, net | 6 | 15 | 11 | 17 | |||||||||||
Income Before Income Taxes | 376 | 225 | 642 | 510 | |||||||||||
Income tax provision | 38 | 9 | 75 | 58 | |||||||||||
Net Income | 338 | 216 | 567 | 452 | |||||||||||
Basic Earnings per Share | $ | 1.59 | $ | 1.10 | $ | 2.67 | $ | 2.32 | |||||||
Diluted Earnings per Share | $ | 1.56 | $ | 1.08 | $ | 2.62 | $ | 2.28 | |||||||
Dividends per Common Share | $ | 0.66 | $ | 0.60 | $ | 1.32 | $ | 1.20 |
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net Income | $ | 216 | $ | 287 | $ | 452 | $ | 558 | ||||||||
Other Comprehensive Income (Loss), Net of Tax | ||||||||||||||||
Foreign currency translation adjustments | (497 | ) | 9 | (638 | ) | 15 | ||||||||||
Defined benefit pension and postretirement plans | 11 | 35 | 22 | 43 | ||||||||||||
Net unrealized gains (losses) on cash flow hedges, net of reclassifications | 2 | 1 | (6 | ) | 2 | |||||||||||
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Other Comprehensive (Loss) Income, Net of Tax | (484 | ) | 45 | (621 | ) | 60 | ||||||||||
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Comprehensive Income | $ | (267 | ) | $ | 332 | $ | (169 | ) | $ | 619 | ||||||
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Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net Income | $ | 338 | $ | 216 | $ | 567 | $ | 452 | |||||||
Other Comprehensive Income (Loss), Net of Tax | |||||||||||||||
Foreign currency translation adjustments | 179 | (497 | ) | 63 | (638 | ) | |||||||||
Defined benefit pension and postretirement plans | 12 | 11 | 24 | 22 | |||||||||||
Net unrealized gains (losses) on cash flow hedges, net of reclassifications | 1 | 2 | 4 | (6 | ) | ||||||||||
Other Comprehensive Income (Loss), Net of Tax | 193 | (484 | ) | 91 | (621 | ) | |||||||||
Comprehensive Income (Loss) | $ | 531 | $ | (267 | ) | $ | 658 | $ | (169 | ) |
Six Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Operating Activities | ||||||||
Net income | $ | 452 | $ | 558 | ||||
Adjustments to net income to derive net cash provided by operating activities, net of amounts acquired: | ||||||||
Depreciation and amortization | 277 | 272 | ||||||
Share-based compensation | 92 | 67 | ||||||
Deferred income taxes | (13 | ) | (24 | ) | ||||
Change in operating assets and liabilities | (255 | ) | (113 | ) | ||||
Pension obligation | (3 | ) | (19 | ) | ||||
Other, net | (37 | ) | 25 | |||||
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Net Cash Provided by Operating Activities | 514 | 768 | ||||||
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Investing Activities | ||||||||
Capital expenditures | (252 | ) | (214 | ) | ||||
Capitalized software | (17 | ) | (31 | ) | ||||
Proceeds from (purchases of) investments, net | 813 | (173 | ) | |||||
Acquisitions of businesses, net of cash acquired | (8,307 | ) | (40 | ) | ||||
Other, net | (66 | ) | (41 | ) | ||||
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Net Cash Used for Investing Activities | (7,829 | ) | (498 | ) | ||||
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Financing Activities | ||||||||
Change in short-term debt | 1,502 | (6 | ) | |||||
Proceeds from long-term debt | 6,164 | — | ||||||
Payments of debt | (2 | ) | — | |||||
Repurchase of common stock | — | (213 | ) | |||||
Excess tax benefits from payments under share-based compensation plans | 40 | 19 | ||||||
Dividends paid | (232 | ) | (211 | ) | ||||
Issuance of common stock and other, net | (79 | ) | (10 | ) | ||||
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Net Cash Provided by (Used for) Financing Activities | 7,392 | (422 | ) | |||||
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Effect of exchange rate changes on cash and equivalents | (26 | ) | (7 | ) | ||||
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Net increase (decrease) in cash and equivalents | 51 | (159 | ) | |||||
Opening Cash and Equivalents | 1,861 | 1,890 | ||||||
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Closing Cash and Equivalents | $ | 1,912 | $ | 1,731 | ||||
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Six Months Ended March 31, | |||||||
2016 | 2015 | ||||||
Operating Activities | |||||||
Net income | $ | 567 | $ | 452 | |||
Adjustments to net income to derive net cash provided by operating activities: | |||||||
Depreciation and amortization | 569 | 277 | |||||
Share-based compensation | 119 | 92 | |||||
Deferred income taxes | (112 | ) | (13 | ) | |||
Change in operating assets and liabilities | (194 | ) | (255 | ) | |||
Pension obligation | 40 | (3 | ) | ||||
Other, net | 30 | (37 | ) | ||||
Net Cash Provided by Operating Activities | 1,020 | 514 | |||||
Investing Activities | |||||||
Capital expenditures | (258 | ) | (252 | ) | |||
Capitalized software | (11 | ) | (17 | ) | |||
Proceeds from investments, net | 10 | 813 | |||||
Acquisitions of businesses, net of cash acquired | — | (8,307 | ) | ||||
Divestitures of businesses | 111 | — | |||||
Other, net | (22 | ) | (66 | ) | |||
Net Cash Used for Investing Activities | (170 | ) | (7,829 | ) | |||
Financing Activities | |||||||
Change in short-term debt | (300 | ) | 1,502 | ||||
Proceeds from long-term debt | — | 6,164 | |||||
Payments of debt | (1 | ) | (2 | ) | |||
Excess tax benefits from payments under share-based compensation plans | 51 | 40 | |||||
Dividends paid | (280 | ) | (232 | ) | |||
Issuance of common stock and other, net | (45 | ) | (79 | ) | |||
Net Cash (Used for) Provided by Financing Activities | (576 | ) | 7,392 | ||||
Effect of exchange rate changes on cash and equivalents | (2 | ) | (26 | ) | |||
Net increase in cash and equivalents | 272 | 51 | |||||
Opening Cash and Equivalents | 1,424 | 1,861 | |||||
Closing Cash and Equivalents | $ | 1,696 | $ | 1,912 |
2015 and as such, the condensed consolidated balance sheet as of September 30, 2015 reflects the reclassification of current deferred tax assets of $387 million as noncurrent amounts, after giving effect to jurisdictional netting requirements.
2019.
(Millions of dollars) | Total | Foreign Currency Translation Adjustments | Benefit Plans Adjustments | Unrealized Losses on Cash Flow Hedges | ||||||||||||
Balance at September 30, 2014 | $ | (1,001 | ) | $ | (270 | ) | $ | (705 | ) | $ | (26 | ) | ||||
Other comprehensive income before reclassifications, net of taxes | (647 | ) | (638 | ) | — | (8 | ) | |||||||||
Amounts reclassified into income, net of taxes(A) | 25 | — | 22 | 3 | ||||||||||||
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Balance at March 31, 2015 | $ | (1,623 | ) | $ | (908 | ) | $ | (683 | ) | $ | (32 | ) | ||||
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(Millions of dollars) | Total | Foreign Currency Translation | Benefit Plans | Cash Flow Hedges | ||||||||||||||
Balance at September 30, 2015 | $ | (1,738 | ) | $ | (961 | ) | $ | (741 | ) | $ | (36 | ) | ||||||
Other comprehensive income before reclassifications, net of taxes | 61 | 63 | (A) | — | (2 | ) | ||||||||||||
Amounts reclassified into income, net of taxes | 30 | — | 24 | 6 | ||||||||||||||
Balance at March 31, 2016 | $ | (1,647 | ) | $ | (899 | ) | $ | (717 | ) | $ | (32 | ) |
(A) | The |
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
(Millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Benefit Plans | |||||||||||||||
Reclassification of losses into income | $ | 19 | $ | 17 | $ | 37 | $ | 34 | |||||||
Associated tax benefits | (6 | ) | (6 | ) | (13 | ) | (12 | ) | |||||||
Amounts reclassified into income, net of taxes (A) | $ | 12 | $ | 11 | $ | 24 | $ | 22 | |||||||
Cash Flow Hedges | |||||||||||||||
Reclassification of losses into income | $ | 5 | $ | 2 | $ | 9 | $ | 5 | |||||||
Associated tax benefits | (2 | ) | (1 | ) | (3 | ) | (2 | ) | |||||||
Amounts reclassified into income, net of taxes (B) | $ | 3 | $ | 2 | $ | 6 | $ | 3 |
(A) | These reclassifications were not |
(B) | These reclassifications were recorded to |
The loss in foreign currency translation adjustments for the six months ended March 31, 2015 was primarily attributable to the weakening of the Euro, and of currencies in Latin America and Asia Pacific, against the U.S. dollar during the period.
The income tax benefits associated with the benefit plan-related reclassification adjustments for amortization of prior service credit and amortization of net actuarial losses for the three months ended March 31, 2015 and 2014 were $6 million and $4 million, respectively. The income tax benefits associated with the benefit plan-related reclassification adjustments for amortization of prior service credit and amortization of net actuarial losses for the six months ended March 31, 2015 and 2014 were $12 million and $9 million, respectively.
The income tax benefit recorded for losses recognized in other comprehensive income relating to cash flow hedges for the six months ended March 31, 2015 was $5 million. Additional disclosures regarding these losses are provided in Note 11. There were no amounts recognized in other comprehensive income relating to cash flow hedges for the three months ended March 31, 2015 and 2014 or in the six months ended March 31, 2014. The income taxes recorded for reclassification adjustments for realized amounts relating to cash flow hedges were immaterial for the three and six months ended March 31, 2015 and 2014.
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Average common shares outstanding | 196,085 | 193,609 | 194,447 | 193,909 | ||||||||||||
Dilutive share equivalents from share-based plans | 3,853 | 3,879 | 4,046 | 4,089 | ||||||||||||
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Average common and common equivalent shares outstanding – assuming dilution | 199,938 | 197,488 | 198,493 | 197,998 | ||||||||||||
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Upon closing the acquisition of CareFusion Corporation (“CareFusion”) on March 17, 2015, the Company issued approximately 15.9 million of its common shares as part of the purchase consideration. Additional disclosures regarding this acquisition are provided in Note 9.
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||
Average common shares outstanding | 212,469 | 196,085 | 212,077 | 194,447 | |||||||
Dilutive share equivalents from share-based plans | 4,069 | 3,853 | 4,618 | 4,046 | |||||||
Average common and common equivalent shares outstanding – assuming dilution | 216,538 | 199,938 | 216,695 | 198,493 |
On October 31, 2011, the Federal Circuit Court of Appeals denied RTI’s request for an en banc rehearing. In January 2013, RTI’s petition for review with the U.S. Supreme Court was denied. BD’s motion for further proceedings on damages was denied by the District Court on the grounds that the District Court did not have authority to modify the $5 million damage award. BD appealed this ruling to the Federal Circuit Court of Appeals, and on July 7, 2014, the Court affirmed the District Court ruling leaving the damages award intact. On September 19, 2014, the Federal Circuit Court of Appeals denied BD’s request for an en banc rehearing. On January 16, 2015, BD filed a petition for U.S. Supreme Court review of the Federal Circuit Court of Appeals decision leaving the damages award intact. On April 20, 2015, the U.S. Supreme Court denied BD’s petition.
patent cases are now concluded.
On October 5, 2014, CareFusion andalleged damages. The Company filed a motion to dismiss the Company entered into an Agreement and Plan of Merger (which we refer to as the merger agreement) that provides for the acquisition of CareFusion by the Company. Under the terms of the merger agreement, a subsidiary of the Company (“the merger subsidiary”) merged with and into CareFusion on March 17, 2015, with CareFusion surviving the merger as a wholly owned subsidiary of the Company. Several putative class action lawsuits have been filed against CareFusion, its directors, the Company and the merger subsidiary in the Delaware Court of Chancery and in the Superior Court of California, San Diego County. These lawsuits generally allege that the members of the board of directors of CareFusion breached their fiduciary duties in connection with the merger by, among other things, carrying out a process that plaintiffs allege did not ensure adequate and fair consideration to CareFusion stockholders. The plaintiffs in these actions further allege that CareFusion and the Company aided and abetted the individual defendants’ breaches of their fiduciary duties. The plaintiffs seek, among other things, equitable relief to enjoin consummation of the merger, rescission of the merger and/or rescissory damages, and attorneys’ fees and costs.
On December 30, 2014, the parties to the actions filed in the Delaware Court of Chancery (the “Delaware Actions”) entered into an agreement in principle to settle the Delaware Actions on the basis of additional disclosures made in a CareFusion Schedule 14A, filed with the SECcomplaint which was granted on January 5, 2015. The settlement terms are reflected in a Memorandum of Understanding (“MOU”). On December 31, 2014, plaintiffs’ counsel notified the Delaware Court of Chancery of the settlement and MOU. Pursuant29, 2016. Plaintiffs have sought to the MOU, the parties to the Delaware Actions have agreed to negotiate in good faith to execute a stipulation of settlement, and will present the proposed settlement to the Delaware Court of Chancery as soon as practicable. The actions filed in the Superior Court of California are not part of the proposed settlement and are still pending.
file an amended complaint, which BD has opposed.
Effective October 1, 2014, the Company’s
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
(Millions of dollars) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues (A) | ||||||||||||||||
Medical | $ | 1,106 | $ | 1,116 | $ | 2,177 | $ | 2,180 | ||||||||
Life Sciences | 945 | 956 | 1,925 | 1,907 | ||||||||||||
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Total Revenues | $ | 2,051 | $ | 2,072 | $ | 4,102 | $ | 4,086 | ||||||||
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Segment Operating Income | ||||||||||||||||
Medical | $ | 328 | $ | 317 | $ | 632 | $ | 611 | ||||||||
Life Sciences | 200 | 198 | (B) | 413 | 432 | (B) | ||||||||||
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Total Segment Operating Income | 528 | 515 | 1,045 | 1,043 | ||||||||||||
Unallocated Items (C) | (303 | )(D) | (152 | )(F) | (535 | )(E) | (321 | )(F) | ||||||||
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Income Before Income Taxes | $ | 225 | $ | 363 | $ | 510 | $ | 722 | ||||||||
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Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
(Millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Revenues (A) | |||||||||||||||
Medical | $ | 2,131 | $ | 1,106 | $ | 4,185 | $ | 2,177 | |||||||
Life Sciences | 936 | 945 | 1,869 | 1,925 | |||||||||||
Total Revenues | $ | 3,067 | $ | 2,051 | $ | 6,054 | $ | 4,102 | |||||||
Income Before Income Taxes | |||||||||||||||
Medical (B) | $ | 513 | $ | 328 | $ | 978 | $ | 632 | |||||||
Life Sciences | 202 | 200 | 404 | 413 | |||||||||||
Total Segment Operating Income | 715 | 528 | 1,381 | 1,045 | |||||||||||
Acquisitions and other restructurings | (104 | ) | (113 | ) | (225 | ) | (136 | ) | |||||||
Net interest expense | (96 | ) | (83 | ) | (187 | ) | (149 | ) | |||||||
Other unallocated items (C) | (139 | ) | (107 | ) | (328 | ) | (250 | ) | |||||||
Income Before Income Taxes | $ | 376 | $ | 225 | $ | 642 | $ | 510 |
(A) | Intersegment revenues are not material. |
(B) |
(C) |
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
(Millions of dollars) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues | ||||||||||||||||
United States | $ | 863 | $ | 826 | $ | 1,744 | $ | 1,675 | ||||||||
International | 1,188 | 1,246 | 2,358 | 2,412 | ||||||||||||
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| |||||||||
Total Revenues | $ | 2,051 | $ | 2,072 | $ | 4,102 | $ | 4,086 | ||||||||
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|
|
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
(Millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Revenues | |||||||||||||||
United States | $ | 1,719 | $ | 863 | $ | 3,410 | $ | 1,744 | |||||||
International | 1,349 | 1,188 | 2,644 | 2,358 | |||||||||||
Total Revenues | $ | 3,067 | $ | 2,051 | $ | 6,054 | $ | 4,102 |
2015 | 2014 | |||||||
Risk-free interest rate | 2.20 | % | 2.31 | % | ||||
Expected volatility | 19.00 | % | 19.00 | % | ||||
Expected dividend yield | 1.78 | % | 2.00 | % | ||||
Expected life | 7.6 years | 7.8 years | ||||||
Fair value derived | $ | 24.82 | $ | 19.90 |
2016 | 2015 | ||||||
Risk-free interest rate | 2.17 | % | 2.20 | % | |||
Expected volatility | 19.00 | % | 19.00 | % | |||
Expected dividend yield | 1.76 | % | 1.78 | % | |||
Expected life | 7.6 years | 7.6 years | |||||
Fair value derived | $ | 27.69 | $ | 24.82 |
Pension Plans | Other Postretirement Benefits | |||||||||||||||
(Millions of dollars) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Service cost | $ | 19 | $ | 18 | $ | 1 | $ | 1 | ||||||||
Interest cost | 21 | 23 | 2 | 2 | ||||||||||||
Expected return on plan assets | (30 | ) | (31 | ) | — | — | ||||||||||
Amortization of prior service credit | (4 | ) | (4 | ) | (1 | ) | (1 | ) | ||||||||
Amortization of loss | 17 | 12 | 1 | 1 | ||||||||||||
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| |||||||||
Net pension and postretirement cost | $ | 23 | $ | 18 | $ | 2 | $ | 2 | ||||||||
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|
|
Pension Plans | Other Postretirement Benefits | ||||||||||||||
(Millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Service cost | $ | 20 | $ | 19 | $ | 1 | $ | 1 | |||||||
Interest cost | 18 | 21 | 1 | 2 | |||||||||||
Expected return on plan assets | (27 | ) | (30 | ) | — | — | |||||||||
Amortization of prior service credit | (4 | ) | (4 | ) | (1 | ) | (1 | ) | |||||||
Amortization of loss | 19 | 17 | — | 1 | |||||||||||
Settlements | 1 | — | — | — | |||||||||||
Net pension and postretirement cost | $ | 27 | $ | 23 | $ | 1 | $ | 2 |
Pension Plans | Other Postretirement Benefits | |||||||||||||||
(Millions of dollars) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Service cost | $ | 38 | $ | 35 | $ | 2 | $ | 2 | ||||||||
Interest cost | 43 | 46 | 4 | 5 | ||||||||||||
Expected return on plan assets | (61 | ) | (62 | ) | — | — | ||||||||||
Amortization of prior service credit | (8 | ) | (8 | ) | (2 | ) | (2 | ) | ||||||||
Amortization of loss | 34 | 24 | 1 | 1 | ||||||||||||
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| |||||||||
Net pension and postretirement cost | $ | 46 | $ | 35 | $ | 4 | $ | 6 | ||||||||
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|
|
Pension Plans | Other Postretirement Benefits | ||||||||||||||
(Millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Service cost | $ | 41 | $ | 38 | $ | 1 | $ | 2 | |||||||
Interest cost | 37 | 43 | 3 | 4 | |||||||||||
Expected return on plan assets | (55 | ) | (61 | ) | — | — | |||||||||
Amortization of prior service credit | (7 | ) | (8 | ) | (2 | ) | (2 | ) | |||||||
Amortization of loss | 39 | 34 | 1 | 1 | |||||||||||
Settlements | 1 | — | — | — | |||||||||||
Net pension and postretirement cost | $ | 55 | $ | 46 | $ | 3 | $ | 4 |
11
.Acquisition
Overview of Transaction and Consideration Transferred
(Millions of dollars) | ||||
Cash consideration | $ | 10,085 | ||
Noncash consideration-fair value of shares issued | 2,269 | |||
Noncash consideration-fair value of stock options and other equity awards | 184 | |||
|
| |||
Total consideration transferred | $ | 12,538 | ||
|
|
The acquisition date fair value of the Company’s ordinary shares issued to CareFusion shareholders was calculated per the following (shares in millions):
(Millions of dollars, except per share data) | ||||
Total CareFusion shares outstanding | 205.3 | |||
Conversion factor | 0.0777 | |||
|
| |||
Number of the Company’s shares issued | 15.9 | |||
Closing price of the Company’s stock on March 16, 2015 | $ | 142.29 | ||
|
| |||
Fair value of the Company’s issued shares | $ | 2,269 | ||
|
|
Additional disclosures regarding the financing arrangements the Company entered into to fund the cash portion of the consideration transferred relative to this acquisition are provided in Note 13.
Allocation of Consideration Transferred to Net Assets Acquired
The Company is in the process of finalizing the allocation of the purchase price to the individual assets acquired and liabilities assumed. The preliminary allocations of the purchase price below as of March 31, 2015 provide a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. These provisional estimates will be adjusted upon the availability of further information regarding events or circumstances which existed at the acquisition date and such adjustments may be significant.
All of the assets acquired and liabilities assumed in this acquisition have been allocated to the Company’s Medical segment.
(Millions of dollars) | ||||
Cash and equivalents | $ | 1,903 | ||
Trade receivables, net | 486 | |||
Inventories | 822 | |||
Net investment in sales-type leases | 1,209 | |||
Property, plant and equipment | 496 | |||
Customer relationships | 3,550 | |||
Developed technology | 2,510 | |||
Trade name and trademarks | 450 | |||
Other intangible assets | 228 | |||
Other assets | 344 | |||
|
| |||
Total identifiable assets acquired | 11,998 | |||
|
| |||
Long-term debt | (2,181 | ) | ||
Deferred tax liabilities | (3,081 | ) | ||
Other liabilities | (760 | ) | ||
|
| |||
Total liabilities assumed | (6,022 | ) | ||
|
| |||
Net identifiable assets acquired | 5,976 | |||
Goodwill | 6,562 | |||
|
| |||
Net assets acquired | $ | 12,538 | ||
|
|
Net Investment in Sales-Type Leases Acquired
The fair value of the net investment in sales-type leases acquired was based upon a determination that the interest rate implicit in the lease contract portfolio represented a market interest rate as well as a determination that the residual value of the overall lease contract portfolio represents fair market value.
Identifiable Intangible Assets Acquired
The customer relationships asset acquired represented CareFusion’s contractual relationships with its customers.
The fair value of these customer relationships was determined based on the present value of projected cash flows utilizing an income approach with a risk-adjusted discount rate of 11%. The amortization period of the customer relationships was determined to be 15 years and this period corresponds with the weighted average of lives determined for the product technology which underlies the customer contracts.
The developed technology assets acquired represented CareFusion’s developed technologies in the areas of medication management, infection prevention, operating room and procedural effectiveness, and respiratory care. The technologies’ fair values were determined based on the present value of projected cash flows utilizing an income approach with a risk-adjusted discount rate of 11%. The technologies will be amortized over a weighted-average amortization period of 12 years, which is the weighted average period over which the technologies are expected to generate substantial cash flows.
The trade name and trademark assets acquired represented the value of registered trademarks protecting the intellectual property underlying CareFusion’s product technologies. The fair value of the trade name and trademark represents the present value of projected cash flows, specifically the estimated cost savings from not being required to pay royalties for use of these intellectual properties, utilizing an income approach with a risk-adjusted discount rate of 11%.
Other intangible assets acquired included $150 million relating to acquired in-process research and development assets representing development projects relating to various product technologies. The probability of success associated with the projects, based upon the applicable technological and commercial risk, was assumed to be 80% to 85%, depending upon the project. The projects’ fair values were determined based on the present value of projected cash flows utilizing an income approach with a risk-adjusted discount rate of 12%. The launches of the various projects are expected to occur from 2016 to 2022.
Other Liabilities Assumed
The balance of other liabilities assumed included a $36 million liability recorded due to a recall relating to AVEA® ventilators, which is one of CareFusion’s respiratory solutions products. The liability represents the costs expected to be incurred in connection with voluntary field corrections for a portion of the installed base of ventilators.
Goodwill
Goodwill typically results through expected synergies from combining operations of an acquiree and an acquirer, as well as from intangible assets that do not qualify for separate recognition. The goodwill recognized as a result of this acquisition includes, among other things, the value of combining the complementary product portfolios of the Company and CareFusion to offer integrated medication management solutions and smart devices. Synergies are expected from combining the two companies’ products to meet unmet needs in hospitals, hospital pharmacies and alternate sites of care to increase efficiencies, reduce medication administration errors and improve patient and healthcare worker safety. Synergies are also expected to result from solid positions in patient safety to maximize outcomes in infection prevention, respiratory care, and acute care procedural effectiveness. No portion of goodwill from this acquisition is currently expected to be deductible for tax purposes.
Financing, Transaction, Integration and Restructuring Costs
In connection with the acquisition, the Company incurred financing, transaction, integration and restructuring costs throughout the first six months of fiscal year 2015. The financing costs totaled $58 million and $102 million for the three and six months ended March 31, 2015, respectively, and were recorded asInterest expense. Transaction costs of $33 million and $43 million for the three and six months ended March 31, 2015, respectively, and integration costs of $18 million and $31 million for the three and six months ended March 31, 2015, respectively, were recorded asAcquisition-related costs, and consisted of legal, advisory and other costs. Restructuring costs were $62 million for both the three and six-month periods ended March 31, 2015. These costs were also recorded asAcquisition-related costs, and included $34 million of employee termination costs, $18 million of accelerated share-based compensation expense, and $10 million of other restructuring costs. See Note 8 for further discussion of the employee termination costs. The Company is in the process of executing its integration plans to combine businesses, sales organizations, systems and locations and, as a result, the Company is expected to continue to incur fairly substantial integration costs through to fiscal year 2016.
Unaudited Pro Forma Information
The acquisition was accounted for under the acquisition method of accounting for business combinations. The operating activities from the acquisition date through March 31, 2015 were not material to the Company’s consolidated results of operations. As such, CareFusion’s operating results will bewere included in the Company’s consolidated results of operations beginning on April 1, 2015.
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
(Millions of dollars, except per share data) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues | $ | 3,048 | $ | 3,040 | $ | 6,168 | $ | 5,976 | ||||||||
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| |||||||||
Net Income | $ | 273 | $ | 287 | $ | 644 | $ | 560 | ||||||||
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| |||||||||
Diluted Earnings per Share | $ | 1.27 | $ | 1.34 | $ | 3.00 | $ | 2.61 | ||||||||
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|
|
the beginning of the periods presented.
(Millions of dollars, except per share data) | Six Months Ended March 31, | |||||||
2016 | 2015 | |||||||
Revenues | $ | 6,063 | $ | 6,168 | ||||
Net Income | $ | 719 | $ | 640 | ||||
Diluted Earnings per Share | $ | 3.32 | $ | 2.98 |
Other Transactions
During the first quarter of fiscal year 2015,
(Millions of dollars) | Employee Termination | Share-based Compensation (A) | Other (B) | Total | |||||||||||
Balance at September 30, 2015 | $ | 62 | $ | — | $ | — | $ | 62 | |||||||
Charged to expense | 33 | 25 | 91 | 149 | |||||||||||
Cash payments | (52 | ) | — | (32 | ) | (84 | ) | ||||||||
Non-cash settlements | — | (25 | ) | — | (25 | ) | |||||||||
Other adjustments | — | — | (59 | ) | (59 | ) | |||||||||
Balance at March 31, 2016 | $ | 43 | $ | — | $ | — | $ | 43 |
(A) | Additional disclosures are provided in Note 7. |
(B) | Includes a non-cash charge of $28 million, after-tax, relating to the Company's agreement reached in December 2015 to sell a non-core asset. |
March 31, 2015 | September 30, 2014 | |||||||||||||||
(Millions of dollars) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||
Amortized intangible assets | ||||||||||||||||
Customer relationships | $ | 3,565 | $ | 2 | $ | 10 | 2 | |||||||||
Developed technology | 3,406 | 378 | 893 | 379 | ||||||||||||
Product rights | 126 | 31 | 148 | 31 | ||||||||||||
Patents, trademarks, and other | 791 | 186 | 259 | 182 | ||||||||||||
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| |||||||||
Amortized intangible assets | $ | 7,888 | $ | 598 | $ | 1,308 | $ | 594 | ||||||||
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| |||||||||
Unamortized intangible assets | ||||||||||||||||
Acquired in-process research and development | $ | 264 | $ | 44 | ||||||||||||
Trademarks | 2 | 2 | ||||||||||||||
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| |||||||||||||
Unamortized intangible assets | $ | 266 | $ | 46 | ||||||||||||
|
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|
|
Additional information regarding the increases to the intangible asset classes detailed above as a result of the CareFusion acquisition is provided in Note 9. The increase to developed technology assets additionally included $49 million of assets recognized upon the Company’s acquisition of CRISI in the second quarter of fiscal year 2015. The increase in acquired in-process research and development project assets additionally included $81 million of assets recognized upon the Company’s acquisition of Gen Cell in the first quarter of fiscal year 2015.
March 31, 2016 | September 30, 2015 | ||||||||||||||
(Millions of dollars) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||
Amortized intangible assets | |||||||||||||||
Customer relationships | $ | 3,361 | $ | 233 | $ | 3,370 | $ | 120 | |||||||
Developed technology | 3,355 | 635 | 3,487 | 510 | |||||||||||
Product rights | 131 | 40 | 128 | 35 | |||||||||||
Trademarks | 405 | 36 | 405 | 26 | |||||||||||
Patents and other | 338 | 241 | 333 | 212 | |||||||||||
Amortized intangible assets | $ | 7,590 | $ | 1,185 | $ | 7,723 | $ | 903 | |||||||
Unamortized intangible assets | |||||||||||||||
Acquired in-process research and development | $ | 124 | $ | 203 | |||||||||||
Trademarks | 2 | 2 | |||||||||||||
Unamortized intangible assets | $ | 126 | $ | 205 |
The increase in intangible amortization expense in the current-year periods is mostly attributable to identifiable intangible assets acquired in the CareFusion transaction.
(Millions of dollars) | Medical | Life Sciences | Total | |||||||||
Goodwill as of September 30, 2014 | $ | 482 | $ | 608 | $ | 1,090 | ||||||
Acquisitions | 6,569 | (A) | 64 | (B) | 6,632 | |||||||
Currency translation/other (C) | (44 | ) | (14 | ) | (58 | ) | ||||||
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| |||||||
Goodwill as of March 31, 2015 | $ | 7,006 | $ | 657 | $ | 7,663 | ||||||
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|
(Millions of dollars) | Medical | Life Sciences | Total | |||||||||
Goodwill as of September 30, 2015 | $ | 6,807 | $ | 730 | $ | 7,537 | ||||||
Purchase accounting adjustments/currency translation | (90 | ) | (A) | 1 | (89 | ) | ||||||
Goodwill as of March 31, 2016 | $ | 6,718 | $ | 731 | $ | 7,448 |
(A) |
2015.
instruments, are provided below.
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
(Millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Gain (loss) on fair value hedges | $ | 11 | $ | 6 | $ | 24 | $ | 16 |
2015, respectively.
(Millions of dollars) | March 31, 2015 | September 30, 2014 | ||||||
Asset derivatives-designated for hedge accounting | ||||||||
Interest rate swaps | $ | 16 | $ | 3 | ||||
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| |||||
Asset derivatives-undesignated for hedge accounting | ||||||||
Forward exchange contracts | 12 | 20 | ||||||
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| |||||
Total asset derivatives (A) | $ | 28 | $ | 23 | ||||
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| |||||
Liability derivatives-undesignated for hedge accounting | ||||||||
Forward exchange contracts | 80 | 14 | ||||||
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| |||||
Total liability derivatives (B) | $ | 80 | $ | 14 | ||||
|
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|
|
(Millions of dollars) | March 31, 2016 | September 30, 2015 | |||||
Asset derivatives-designated for hedge accounting | |||||||
Interest rate swaps | $ | 24 | $ | 19 | |||
Asset derivatives-undesignated for hedge accounting | |||||||
Forward exchange contracts | 22 | 13 | |||||
Total asset derivatives (A) | $ | 46 | $ | 32 | |||
Liability derivatives-designated for hedge accounting | |||||||
Commodity forward contracts | $ | 5 | $ | 10 | |||
Interest rate swaps | 3 | — | |||||
Liability derivatives-undesignated for hedge accounting | |||||||
Forward exchange contracts | 9 | 21 | |||||
Total liability derivatives (B) | $ | 16 | $ | 30 |
(A) | All asset derivatives are included inPrepaid expenses |
(B) | All liability derivatives are included inPayables and accrued expenses. |
periods presented. Derivatives Not Designated as Hedging Instruments Location of Gain (Loss) Recognized in Income on Derivatives Forward exchange contracts (A) Losseswere recognized inOther comprehensive income (loss) for the six months ended March 31, 2015. These losses2015 were attributable to interest rate swaps with a total notional amount of $2.3 billion that were entered into during the first quarter of fiscal year 2015 to partially hedge interest rate risk associated with the anticipated issuance of senior unsecured notes in connection with the Company’s acquisition of CareFusion. These swaps were designated as hedges of the variability in interest payments attributable to changes in the benchmark interest rate during the period preceding the Company’s issuance of the notes. The swaps were terminated at losses, concurrent with the pricing of notes issued in December 2014, and the realized losses will be amortized over the lives of the notes with an offset toInterest expense. There were no amounts recognized in other comprehensive income relating to cash flow hedges for the three months ended March 31, 2015 and 2014 or for the six months ended March 31, 2014. Additional disclosures regarding amounts recognized in the condensed consolidated statements of income for the three and six months ended March 31, 20152016 and 20142015 relating to cash flow hedges are provided in Note 3. Additional disclosures regarding3.acquisition of CareFusion are provided in Note 9 and additional disclosures regarding the Company’s debt issuance during the first quarter of fiscal year 2015 are provided in Note 13. Amount of Gain (Loss) Recognized in Income on Derivatives Three Months Ended
March 31, Six Months Ended
March 31, (Millions of dollars) 2015 2014 2015 2014 Other income (expense), net $ (94 ) $ (1 ) $ (96 ) $ 5 Derivatives Not Designated as Hedging Instruments Three Months Ended
March 31, Six Months Ended
March 31,(Millions of dollars) 2016 2015 2016 2015 Forward exchange contracts (A) Other income (expense), net $ 15 $ (94 ) $ 26 $ (96 ) (A)
Basis of Fair Value Measurement | ||||||||||||||||
(Millions of dollars) | March 31, 2015 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 | $ | 1,175 | $ | 1,175 | $ | — | $ | — | ||||||||
Interest rate swaps | 16 | — | 16 | — | ||||||||||||
Forward exchange contracts | 12 | — | 12 | — | ||||||||||||
|
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|
|
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|
|
| |||||||||
Total Assets | $ | 1,203 | $ | 1,175 | $ | 28 | $ | — | ||||||||
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|
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| |||||||||
Liabilities | ||||||||||||||||
Forward exchange contracts | $ | 80 | $ | — | $ | 80 | $ | — | ||||||||
Contingent consideration liabilities | 49 | — | — | 49 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Liabilities | $ | 129 | $ | — | $ | 80 | $ | 49 | ||||||||
|
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|
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|
|
Assets Institutional money market investments Interest rate swaps Forward exchange contracts Total Assets Liabilities Forward exchange contracts Contingent consideration liabilities Total Liabilities Basis of Fair Value Measurement (Millions of dollars) September 30,
2014
Total Quoted Prices in
Active Markets
for Identical
Assets (Level 1) Significant Other
Observable
Inputs (Level 2) Significant
Unobservable
Inputs (Level 3) $ 1,040 $ 1,040 $ — $ — 3 — 3 — 20 — 20 — $ 1,063 $ 1,040 $ 23 $ — $ 14 $ — $ 14 $ — 14 — — 14 $ 29 $ — $ 14 $ 14
Basis of Fair Value Measurement | |||||||||||||||
(Millions of dollars) | March 31, 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 | $ | 477 | $ | 477 | $ | — | $ | — | |||||||
Interest rate swaps | 24 | — | 24 | — | |||||||||||
Forward exchange contracts | 22 | — | 22 | — | |||||||||||
Total Assets | $ | 523 | $ | 477 | $ | 46 | $ | — | |||||||
Liabilities | |||||||||||||||
Forward exchange contracts | $ | 9 | $ | — | $ | 9 | $ | — | |||||||
Commodity forward contracts | 5 | — | 5 | — | |||||||||||
Interest rate swaps | 3 | — | 3 | — | |||||||||||
Contingent consideration liabilities | 57 | — | — | 57 | |||||||||||
Total Liabilities | $ | 73 | $ | — | $ | 16 | $ | 57 |
Basis of Fair Value Measurement | |||||||||||||||
(Millions of dollars) | September 30, 2015 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 | $ | 147 | $ | 147 | $ | — | $ | — | |||||||
Interest rate swaps | 19 | — | 19 | — | |||||||||||
Forward exchange contracts | 13 | — | 13 | — | |||||||||||
Total Assets | $ | 179 | $ | 147 | $ | 32 | $ | — | |||||||
Liabilities | |||||||||||||||
Forward exchange contracts | $ | 21 | $ | — | $ | 21 | $ | — | |||||||
Commodity forward contracts | 10 | — | 10 | — | |||||||||||
Contingent consideration liabilities | 77 | — | — | 77 | |||||||||||
Total Liabilities | $ | 108 | $ | — | $ | 30 | $ | 77 |
During the first quarter of fiscal year 2016, the Company reclassified $500 million of 1.75% notes due on November 8, 2016 from
Long-Term Debt to Short-term debt. During the third quarter of fiscal year 2015, the Company reclassified $750 million of floating rates due on June 15, 2016 from Long-Term Debt to Short-term debt. The fair value of reclassified notes was $1.3 billion and $750 million at March 31, 2016 and September 30, 2015, respectively.certain product development milestones.
Note 13 – Debt
As disclosed in Note 9, the Company acquired CareFusion on March 17, 2015. As part of its plan for financing the cash requirements relative to this acquisition, the Company issued senior unsecured notes in December 2014 with a total aggregate principal amount of $6.2 billion. Details regarding this debt issuance were as follows:
Interest Rate and Maturity | Aggregate Principal Amount (Millions of dollars) | |||
Floating Rate Notes due June 15, 2016 | $ | 750 | ||
1.800% Notes due December 15, 2017 | 1,250 | |||
2.675% Notes due December 15, 2019 | 1,250 | |||
3.734% Notes due December 15, 2024 | 1,750 | |||
4.685% Notes due December 15, 2044 | 1,200 | |||
|
| |||
Total long-term debt issued in connection with CareFusion acquisition | $ | 6,200 | ||
|
|
Also in December 2014, the Company entered into a 364-day term loan agreement that provides for a $1 billion term loan facility, the proceeds under which could only be used to pay the cash consideration due pursuant to the CareFusion acquisition agreement, as well as to pay financing fees, other related fees and other expenses associated with the CareFusion acquisition. Borrowings of $1 billion were outstanding under this term loan facility at March 31, 2015. In April 2015, the Company made a $650 million principal payment to reduce the outstanding balance of this term loan facility.
Concurrent with the execution of the agreement to acquire CareFusion, the Company secured $9.1 billion of fully committed bridge financing to ensure its ability to fund the cash portion of consideration due under the agreement, as well as to pay fees and expenses related to the acquisition. This bridge credit agreement was terminated upon the closing of the CareFusion acquisition in March 2015.
In January 2015, in anticipation of the closing of the CareFusion acquisition, the Company entered into a commercial paper program under which it may issue up to $1 billion in short-term, unsecured commercial paper notes. A former commercial paper program which had been in place to meet short-term financing needs was terminated in February 2015 and the outstanding borrowings of $200 million under the former program were rolled into the new commercial paper program. Borrowings of $700 million were outstanding under the current commercial paper program at March 31, 2015, of which $500 million has been used to finance the Company’s acquisition of CareFusion and to pay related fees and expenses.
Upon the closing of the CareFusion acquisition in March 2015, the Company assumed the indebtedness of CareFusion, including senior unsecured notes with an aggregate principal amount of $2 billion, which was recorded on the acquisition date at a fair value of $2.181 billion. In March 2015, subsequent to closing the acquisition of CareFusion, the Company commenced offers to exchange all validly tendered and accepted notes issued by CareFusion for notes to be issued by the Company. This offer expired in April 2015 and the aggregate principal amounts below of each series of the CareFusion notes were validly tendered and exchanged for notes issued by the Company. Following the exchange of the notes, the aggregate principal amount of CareFusion notes that remain outstanding across the five series is $51 million.
Interest Rate and Maturity | Aggregate Principal Amount (Millions of dollars) | Percentage of Total Outstanding Principal Amount of such Series of Existing Notes | ||||||
1.450% senior notes due May 15, 2017 | $ | 293 | 97.64 | % | ||||
6.375% senior notes due August 1, 2019 | 665 | 95.00 | % | |||||
3.300% senior notes due March 1, 2023 | 294 | 97.95 | % | |||||
3.875% senior notes due May 15, 2024 | 397 | 99.37 | % | |||||
4.875% senior notes due May 15, 2044 | 300 | 99.96 | % | |||||
|
| |||||||
Total senior notes issued under exchange offer | $ | 1,949 | ||||||
|
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Note 14 – Financing Receivables
As disclosed in Note 9, the net assets acquired in the Company’s acquisition of CareFusion included a $1.209 billion net investment in sales-type leases which primarily arose from the leasing of dispensing equipment. The methodology for determining the allowance for credit losses for these financing receivables is based on the collective population and is not stratified by class or portfolio segment. Allowances for credit losses on the entire portfolio are recorded based on historical experience loss rates and the potential impact of anticipated changes in business practices, market dynamics, and economic conditions. Allowances for individual balances are recorded based on the evaluation of customers’ specific circumstances. No interest is accrued on past due financing receivables, which are generally considered past due 30 days after the billing date. Amounts are written off against the allowance for credit losses when determined to be uncollectible.
India. segment. 2016. the inclusion of CareFusion’s costs in the current period’s results. Financing costs(A) Transaction costs(A) Integration costs(A) Restructuring costs(A) Purchase accounting adjustments(B) Research and development charges(C) Litigation-related charge(D) Other specified items, net(E) Total specified items Tax impact of specified items After-tax impact of specified items principally 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. Effective October 1, 2014, BD’sThe Company's organizational structure was realigned to better complement its customer-focused solutions strategy and is now based upon two worldwideprincipal business segments, BD Medical (“Medical”) and BD Life Sciences (“Life Sciences”). The composition of the Medical segment remained unchanged and the Life Sciences segment consists of the former BD Diagnostics and BD Biosciences segments. The commentary provided further below reflects this two-segment organizational structure and additional discussion regarding this organization realignment is provided in Note 6 in the Notes to Condensed Consolidated Financial Statements.EuropeEurope; 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 Brazil)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 particularlyprimarily focused on certain countries whose economichealthcare systems are expanding, in particular, China and healthcare sectors are growing rapidly, in particular: China, India, Brazil and Turkey. pursuant to a definitive agreement announced on October 5, 2014, BD acquired a 100% interest in CareFusion Corporation (“CareFusion”("CareFusion") for total consideration of approximately $12.5 billion to create a global leader in medication management and patient safety solutions. The operating activities of CareFusion from the acquisition date through March 31, 2015 were not material to BD’s consolidated results of operations and as such,. CareFusion’s operating results will bewere included in BD’s consolidated results of operations beginning on April 1, 2015.2015 and as such, the consolidated results of operations for the prior-year periods ended March 31, 2015 referenced in the commentary provided further below did not include CareFusion's results. CareFusion will operateoperates as part of our Medical segment, which will be realigned to include the following organizational units, in addition to the Diabetes Care and Pharmaceutical Systems units: Medication Management Solutions; Medication and Procedural Solutions, which will encompass BD’s former Medical Surgical Systems unit; and Respiratory Solutions. Additional discussion regarding this acquisition is provided in Note 9 in the Notes to Condensed Consolidated Financial Statements and disclosures regarding BD’s financing arrangements relating to this transaction are provided in Note 13 in the Notes to Condensed Consolidated Financial Statements.Second quarterdecreased 1.0%increased 49.6% to $2.051$3.067 billion from the prior year’s periodyear, which primarily reflected an impact of $1.017 billion from the inclusion of CareFusion revenues in the current quarter’s results. Revenue growth for BD's legacy operations was primarily driven by volume, and reflectedto a lesser extent price, but was offset by the impact of unfavorable foreign currency translation of approximately 5.9%, volume increases of approximately 5.0% and price decreases of approximately 0.1%. translation.solidthe following:both segmentsthe current-year period's results, as well as continued growth attributable to the segment's BD legacy products in the Medication and continued strong sales of safety-engineered products. MedicalProcedural Solutions, Diabetes Care and Pharmaceutical Systems units.wasdriven primarily by strong sales in the Medical Surgical Systems unit, reflecting strong internationalreflected growth in sales of safety-engineered products. Medical segment revenue growth in the quarter was partially offset by unfavorable comparisons to the prior year’s quarter for the Diabetes Care and Pharmaceutical Systems units. Revenue growth in the Life Sciences segment was primarily driven by strong sales in the Diagnostic Systems unit. Growth in the Preanalytical Systems unit’s sales was driven byand Diagnostic Systems units.and geographic expansion. Revenue growthreflected the inclusion of CareFusion's sales of safety-engineered products in the Life Sciences segment’s Biosciences unitcurrent year's quarter, as well as growth that was unfavorably impacted by delayed government funding in Japan. Revenue growth in emerging markets for the second quarter was unfavorably impacted by order timing and a weakening of the Brazilian economy.attributable to BD's legacy safety-engineered products. Second quarter sales in the United States of safety-engineered devices of $294$443 million increased 2.2% compared with the prior year’s quarter, reflecting growth in our Life Sciences segment’s safety-engineered sales. Second50.7% and second quarter international sales of safety-engineered devices of $256$290 million grew 5.2%13.1% over the prior year’s period, includinginclusive of an estimated 11.1%12.0% unfavorable impact due to foreign currency translation. International safety-engineered device revenue growth was driven by good performance in Western Europe and emerging markets.$514 million$1.020 billion in the first six months of fiscal year 2015.2016. At March 31, 2015,2016, we had $2.0$1.7 billion in cash and equivalents and short-term investments. We continued to2015,2016, we paid cash dividends of $232$280 million. No shares were repurchased during the first six months of fiscal year 2015 and no share repurchases are planned for the remainder of fiscal year 2015 as our share repurchase program has been suspended in connection with the CareFusion acquisition.strengtheningrelative strength of the U.S. dollar resulted in an unfavorable foreign currency translation impact to our revenue growth during the quarter, as discussed above.quarter. 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. From timeAs 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 time,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 purchase forward contractsnot be comparable to similarly titled measures used by other companies and optionsare not measures of performance presented in accordance with U.S. GAAP. Three months ended March 31, (Millions of dollars) 2016 2015 FXN Change Medication and Procedural Solutions $ 831 $ 565 47.2 % (6.0 )% 53.2 % Medication Management Solutions 536 — NM NM NM Diabetes Care 243 247 (1.3 )% (4.9 )% 3.6 % Pharmaceutical Systems 311 294 5.6 % (5.4 )% 11.0 % Respiratory Solutions 213 — NM NM NM (4 ) — NM NM NM Total Medical Revenues $ 2,131 $ 1,106 92.8 % (6.4 )% 99.2 % Medical segment safety-engineered products $ 465 $ 281 65.5 % (6.1 )% 71.6 % (A) In accordance with U.S. GAAP business combination accounting rules, CareFusion’s deferred revenue balance was written down to reflect a fair value measurement as of the acquisition date. The deferred revenue adjustment represents the amortization of this write-down which primarily relates to software maintenance contracts in the United States. Revenues for these contracts is typically deferred and recognized over the term of the contracts. Six months ended March 31, (Millions of dollars) 2016 2015 FXN Change Total Medical Revenues $ 4,185 $ 2,177 92.2 % (7.8 )% 100.0 % Medical segment safety-engineered products $ 932 $ 577 61.6 % (6.4 )% 68.0 % Three months ended March 31, Six months ended March 31, (Millions of dollars) 2016 2015 2016 2015 Medical segment operating income $ 513 $ 328 $ 978 $ 632 Segment operating income as % of Medical revenues 24.1 % 29.7 % 23.4 % 29.0 % partially protect against adverse foreign exchange rate movements. Gains or lossesgross profit margin and other operating expenses. Gross profit margin was lower in the current quarter as compared with the second quarter of 2015 primarily due to amortization of $116 million for intangible assets acquired in the CareFusion transaction. This unfavorable impact on our derivative instruments are largelygross margin was partially offset by lower manufacturing costs resulting from continuous improvement projects improving the gains or losses onefficiency of our operations. Selling and administrative expense for the underlying hedged transactions. We do not enter into derivative instruments for trading or speculative purposes. For further discussion, refersecond quarter of fiscal year 2016 was higher due to Note 11depreciation of fixed assets acquired in the NotesCareFusion acquisition. Research and development expenses for the quarter increased $57 million, or 148% above the prior year’s period, primarily due to Condensed Consolidated Financial Statements. Three months ended March 31, (Millions of dollars) 2016 2015 FXN Change Preanalytical Systems $ 340 $ 339 0.4 % (5.3 )% 5.7 % Diagnostic Systems 319 318 0.4 % (4.2 )% 4.6 % Biosciences 277 289 (4.1 )% (3.6 )% (0.5 )% Total Life Sciences Revenues $ 936 $ 945 (1.0 )% (4.4 )% 3.4 % Life Sciences segment safety-engineered products $ 268 $ 269 (0.5 )% (5.1 )% 4.6 % Six months ended March 31, (Millions of dollars) 2016 2015 FXN Change Total Life Sciences Revenues $ 1,869 $ 1,925 (2.9 )% (5.4 )% 2.5 % Life Sciences segment safety-engineered products $ 538 $ 547 (1.6 )% (5.9 )% 4.3 % Three months ended March 31, Six months ended March 31, (Millions of dollars) 2016 2015 2016 2015 Life Sciences segment operating income $ 202 $ 200 $ 404 $ 413 Segment operating income as % of Life Sciences revenues 21.6 % 21.1 % 21.6 % 21.5 % Three months ended March 31, (Millions of dollars) 2016 2015 FXN Change United States $ 1,719 $ 863 99.2 % — 99.2 % International 1,349 1,188 13.5 % (9.5 )% 23.0 % Total Revenues $ 3,067 $ 2,051 49.6 % (5.5 )% 55.1 % 20152016 and 20142015 are the following specified items: Three months ended March 31, Six months ended March 31, (Millions of dollars) 2015 2014 2015 2014 $ 58 $ — $ 102 $ — 33 — 43 — 18 — 31 — 62 — 62 — 9 19 27 37 — 20 — 20 — — 12 — — 2 — 2 180 41 277 60 77 14 108 19 $ 102 $ 28 $ 169 $ 40 Three months ended March 31, Six months ended March 31, (Millions of dollars) 2016 2015 2016 2015 Financing costs (A) $ — $ 58 $ — $ 102 Transaction costs (A) — 33 — 43 Integration costs (A) 40 18 75 31 Restructuring costs (A) 64 62 149 62 Purchase accounting adjustments (B) 115 9 268 27 Litigation-related charge (C) — — — 12 Total specified items 218 180 492 277 Tax impact of specified items 85 77 164 108 After-tax impact of specified items $ 134 $ 102 $ 329 $ 169 (A) acquisition.acquisition and portfolio rationalization. The financing costs were recorded inInterest expense. The transaction, integration and restructuring costs were recorded inAcquisition-related costsAcquisitions and other restructurings. For further discussion, refer to Note 9 in the Notes to Condensed Consolidated Financial Statements.(B) Includes thethe amortization of acquisition-related identifiable intangible assets.assets, including $116 million and $246 million in the current quarter and six-month period, respectively, related to CareFusion. BD’s amortization expense is primarily recorded inCosts of products sold. The adjustments in the three and six-month periods of fiscal year 2016 also include a net decrease in the fair value of certain contingent consideration liabilities of $22 million that was recognized in the second quarter. The adjustment for the three and six months ended March 31, 2015 alsoadditionally reflected a pre-tax acquisition-date accounting gain of $9 million on thea previously held investment in CRISI Medical Systems, Inc., a company BD fully acquired in March 2015.investment.(C) Represents a charge recorded by our Life Sciences segment for asset write-offs primarily resulting from the discontinuance of an instrument product development program. The asset write-offs were largely attributable to capitalized product software, but also included a lesser amount attributable to fixed assets.(D)RTI’splaintiff attorneys’ fees, recorded inSelling and administrative expense, associated with the unfavorable verdict returned in the antitrust and false advertising lawsuit RTI filed against BD. For further discussion, refer to Note 5 in the Notes to Condensed Consolidated Financial Statements.(E)Includes an $11 million charge recorded by our Life Sciences segment inSelling and administrative expense for contract termination costs that resulted from the early termination of a European distributor arrangement. Also includes a gain of $8 million inOther income (expense), net, resulting from the sale of a company in which we held a small equity ownership interest.
Results of Operations
Revenues
Refer to Note 6 in the Notes to Condensed Consolidated Financial Statements for segment financial data.
Medical Segment
The following is a summary of second quarter Medical revenues by organizational unit:
Three months ended March 31, | ||||||||||||||||
(Millions of dollars) | 2015 | 2014 | Total Change | Estimated FX Impact | ||||||||||||
Medical Surgical Systems | $ | 565 | $ | 551 | 2.5 | % | (5.0 | )% | ||||||||
Diabetes Care | 247 | 251 | (1.7 | )% | (5.8 | )% | ||||||||||
Pharmaceutical Systems | 294 | 314 | (6.4 | )% | (9.0 | )% | ||||||||||
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Total Medical Revenues | $ | 1,106 | $ | 1,116 | (0.9 | )% | (6.3 | )% | ||||||||
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Medical segment revenue growth reflected strong growth in international sales of safety-engineered products in the Medical Surgical Systems unit. Revenues for the Diabetes Care unit reflected solid growth in sales of pen
needles, partially offset by an unfavorable comparison due to relatively strong sales in the prior-year period. The Pharmaceutical Systems unit’s revenue growth reflected growth attributable to its self-injection system and syringe-based safety device products, which was partially offset by an unfavorable comparison due to relatively strong sales in the prior year’s quarter. Global sales of safety-engineered products were $281 million, as compared with $263 million in the prior year’s quarter, and included an estimated $13 million unfavorable impact due to foreign currency translation. Total Medical revenues for the six-month period ended March 31, 2015 decreased by 0.1% from the prior-year six-month period, including an estimated 4.9% unfavorable impact from foreign currency translation. For the six-month period ended March 31, 2015, global sales of safety-engineered products were $577 million, compared with $548 million in the prior year’s period, and included an estimated $21 million unfavorable impact due to foreign currency translation.
Medical operating income for the second quarter was $328 million, or 29.7% of Medical revenues, compared with $317 million, or 28.4% of segment revenues, in the prior year’s quarter.
Three-month period | Six-month period | ||||
March 31, 2015 gross profit margin % | 51.0 | % | 51.0 | % | |
CareFusion acquisition-related asset depreciation and amortization | (4.0 | )% | (4.4 | )% | |
Foreign currency translation | (0.2 | )% | (0.6 | )% | |
Operating performance | 1.6 | % | 1.8 | % | |
March 31, 2016 gross profit margin % | 48.4 | % | 47.8 | % |
Life Sciences Segment
The following is a summary of second quarter Life Sciences revenues by organizational unit:
Three months ended March 31, | ||||||||||||||||
(Millions of dollars) | 2015 | 2014 | Total Change | Estimated FX Impact | ||||||||||||
Preanalytical Systems | $ | 339 | $ | 342 | (1.0 | )% | (5.5 | )% | ||||||||
Diagnostic Systems | 318 | 311 | 2.2 | % | (5.6 | )% | ||||||||||
Biosciences | 289 | 302 | (4.5 | )% | (5.3 | )% | ||||||||||
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Total Life Sciences Revenues | $ | 945 | $ | 956 | (1.1 | )% | (5.5 | )% | ||||||||
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Life Sciences segment revenue growth for the quarter was primarily driven by growth in the Diagnostic Systems and Preanalytical Systems units. Revenue growth in the Diagnostic Systems unit reflected strong clinical microbiology sales. The Preanalytical Systems unit’s revenue growth was driven by strong sales of safety-engineered products as well as by emerging markets. Global sales of safety-engineered products in the Preanalytical Systems unit totaled $269 million, compared with $268 million in the prior year’s quarter, and included an estimated $14 million unfavorable impact due to foreign currency translation. The Biosciences unit’s revenue growth reflected strong growth in sales of instruments in the United States and Western Europe was unfavorably impacted by delayed government funding in Japan. Total Life Sciences revenues for the six-month period ended March 31, 2015 increased by 0.9% from the prior-year six-month period, including an estimated 4.6% unfavorable impact from foreign currency translation. For the six-month period ended March 31, 2015, global sales of safety-engineered products in the Preanalytical Systems unit were $547 million, compared with $540 million in the prior year’s period, and included an estimated $23 million unfavorable impact due to foreign currency translation.
Life Sciences operating income for the second quarter was $200 million, or 21.1% of Life Sciences revenues, compared with $198 million, or 20.7% of segment revenues, in the prior year’s quarter. Gross profit margin was lower in the second quarter of fiscal year 2015 compared with the second quarter of 2014 due to unfavorable foreign currency translation and other various immaterial items. Selling and administrative expense as a percentage of Life Sciences revenues in the second quarter of 2015 was lower compared with the second quarter of 2014, primarily due to a favorable comparison to the prior-year period which reflected the charge relating to the early termination of a distributor arrangement, as previously discussed, partially offset by a reversal of bad debt expense, which is further discussed below. A decrease in research and development expense in the second quarter of 2015 of $9 million, or 11%, primarily reflected a favorable comparison to the prior-year period which included the asset write-off charge resulting from discontinuing an instrument product development program, as previously discussed. This favorable comparison was partially offset by increased spending in the quarter due to project timing. Segment operating income for the six-month period was $413 million, or 21.5% of Life Sciences revenues, compared with $432 million, or 22.7%, in the prior year’s period.
Geographic Revenues
BD’s worldwide second quarter revenues by geography were as follows:
Three months ended March 31, | ||||||||||||||||
(Millions of dollars) | 2015 | 2014 | Total Change | Estimated FX Impact | ||||||||||||
United States | $ | 863 | $ | 826 | 4.5 | % | — | |||||||||
International | 1,188 | 1,246 | (4.7 | )% | (9.9 | )% | ||||||||||
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Total Revenues | $ | 2,051 | $ | 2,072 | (1.0 | )% | (5.9 | )% | ||||||||
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U.S. revenue growth in our Medical segment was attributable to strong growth in the Medical Surgical Systems unit. U.S. Medical segment growth was partially offset by unfavorable comparisons for the Diabetes Care and Pharmaceutical Systems units due to relatively strong sales in the prior-year period. U.S. revenue growth in our Life Sciences segment reflected strong growth across all of its units. Strong U.S. revenue growth in our Diagnostic Systems unit was driven by clinical microbiology sales. U.S. Life Sciences revenue growth also reflected strong sales of instruments and reagents in the Biosciences unit.
International revenue growth in the Medical segment reflected strong growth across all units and in safety-engineered product sales. International revenue growth in the Life Sciences segment reflected strong growth in the Diagnostic Systems unit which was partially offset by the unfavorable impact to its Biosciences unit’s revenues from delayed government funding in Japan. Emerging market revenues for the second quarter of $516 million represented an increase of 1.6% over the prior year’s quarter, including a 6.0% unfavorable impact due to foreign currency translation. Revenue growth in emerging markets for the second quarter was unfavorably impacted by order timing in China and other countries and a weakening of the Brazilian economy. Emerging market revenues accounted for approximately 25.2%efficiency of our total revenues in the second quarter of fiscal year 2015.
Gross Profit Margin and operations.
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
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Gross profit margin % | 51.0 | % | 50.8 | % | 51.0 | % | 51.1 | % | ||||||||
Selling and administrative expense | $ | 511 | $ | 525 | $ | 1,055 | $ | 1,056 | ||||||||
% of revenues | 24.9 | % | 25.3 | % | 25.7 | % | 25.8 | % | ||||||||
Research and development expense | $ | 129 | $ | 147 | $ | 258 | $ | 273 | ||||||||
% of revenues | 6.3 | % | 7.1 | % | 6.3 | % | 6.7 | % |
Gross profit margin
The increase in gross profit margin for the second quarter of 2015 compared with the prior-year period in 2014 primarily reflected a net favorable impact from operating performance of 20 basis points which was primarily driven by lower manufacturing costs from continuous improvement projects and favorable product mix, partially offset by higher pension costs. Gross profit margin for the second quarter of 2015 was not materially impacted by foreign currency translation.
The decrease in gross profit margin for the six-month period reflected an estimated unfavorable impact of 30 basis points relating to foreign currency translation. Operating performance was favorably impacted by approximately 20 basis points primarily due to lower manufacturing costs from continuous improvement projects and favorable product mix, partially offset by higher pension costs.
Three months ended March 31, | Increase (decrease) in basis points | Six months ended March 31, | Increase (decrease) in basis points | ||||||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
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Selling and administrative expense | $ | 732 | $ | 511 | $ | 1,480 | $ | 1,055 | |||||||||||||
% of revenues | 23.9 | % | 24.9 | % | (100 | ) | 24.5 | % | 25.7 | % | (120 | ) | |||||||||
Research and development expense | $ | 182 | $ | 129 | $ | 369 | $ | 258 | |||||||||||||
% of revenues | 5.9 | % | 6.3 | % | (40 | ) | 6.1 | % | 6.3 | % | (20 | ) | |||||||||
Acquisitions and other restructurings | $ | 104 | $ | 113 | $ | 225 | $ | 136 |
CareFusion acquisition. Selling and administrative expense as a percentage of revenues in the current year’sprior-year six-month period was favorably impacted by foreign currency translationreflected a charge of approximately $42 million. Aggregate expenses for the current year’s six-month period included increased spending of $34$12 million relating to the expansion of our business in emerging markets and the business information systems-related initiative,RTI litigation matter, as discussed above. Also as noted above, aggregate expenses in the prior-year period included the early termination charge as well as the favorable impact of a bad debt reversal.
previously discussed.
Acquisition-related costs
Acquisition-related costs were $113 millionother restructurings in the second quarter of fiscal year 2015, which reflectedthree and six-month periods represented transaction, integration and restructuring costs of $33 million, $18 millionassociated with the CareFusion acquisition and $62 million, respectively. Acquisition-related costs in the six-month period ending March 31, 2015 were $136 million which reflected transaction, integration and restructuring costs of $43 million, $31 million and $62 million, respectively.portfolio rationalization. The transaction and integration costs in both the three and six-month periods reflectedspecifically included advisory, legal, and other costs incurred in connection with the CareFusion acquisition. The restructuring costs in the current quarter reflected employee termination costs, accelerated share-based compensation expense and other restructuring costs relating to the acquisition. For further discussiondisclosures regarding thesethe restructuring costs, refer to Notes 7, 8 and 9
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
(Millions of dollars) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest expense | $ | (91 | ) | $ | (33 | ) | $ | (167 | ) | $ | (67 | ) | ||||
Interest income | 8 | 10 | 19 | 24 | ||||||||||||
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Net interest expense | $ | (83 | ) | $ | (23 | ) | $ | (149 | ) | $ | (43 | ) | ||||
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(Millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Interest expense | $ | (99 | ) | $ | (91 | ) | $ | (196 | ) | $ | (167 | ) | |||
Interest income | 3 | 8 | 9 | 19 | |||||||||||
Net interest expense | $ | (96 | ) | $ | (83 | ) | $ | (187 | ) | $ | (149 | ) |
March 2015.
jurisdictions.
Three months ended March 31, | Six months ended March 31, | ||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||
Effective income tax rate | 10.0 | % | 3.9 | % | 11.7 | % | 11.4 | % | |||
Favorable impact, in basis points, from tax benefits of specified items | 1,060 | 1,740 | 930 | 980 |
follows:
Three months ended March 31, | Six months ended March 31, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net Income (Millions of dollars) | $ | 338 | $ | 216 | $ | 567 | $ | 452 | |||||||
Diluted Earnings per Share | $ | 1.56 | $ | 1.08 | $ | 2.62 | $ | 2.28 | |||||||
Unfavorable impact-specified items | $ | (0.62 | ) | $ | (0.51 | ) | $ | (1.52 | ) | $ | (0.85 | ) | |||
Unfavorable impact-foreign currency translation | $ | (0.14 | ) | $ | (0.40 | ) |
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(Millions of dollars) | 2016 | 2015 | |||||
Net cash provided by (used for) | |||||||
Operating activities | $ | 1,020 | $ | 514 | |||
Investing activities | $ | (170 | ) | $ | (7,829 | ) | |
Financing activities | $ | (576 | ) | $ | 7,392 |
to fund our pension obligation.
Net Cash Flows from Financing Activities
Net cash provided by financing activities for the first six monthsbalance of fiscal year 2015 was $7.392 billion, compared with net cash used for financing activities of $422 million in the prior-year period.
Debt-related Activities
our commercial paper program. Net cash provided by financing activities in the currentprior-year period included the proceeds from $6.2 billion of notes issued in December 2014 as well as $1.5 billion total proceeds from net borrowings under commercial paper programs and a term loan facility. These proceeds were used to finance the completion of our acquisition of
CareFusion in March 2015. For additional
(Millions of dollars) | March 31, 2016 | September 30, 2015 | |||||
Total debt | $ | 12,515 | $ | 12,822 | |||
Short-term debt as a percentage of total debt | 13.2 | % | 11.3 | % | |||
Weighted average cost of total debt | 3.4 | % | 3.3 | % | |||
Total debt as a percentage of total capital* | 58.1 | % | 59.4 | % |
Certain measures relating to our total debt, which was $13.8 billion at March 31, 2015 and $4.0 billion at September 30, 2014, were as follows:
March 31, 2015 | September 30, 2014 | |||||||
Short-term debt as a percentage of total debt | 12.4 | % | 5.1 | % | ||||
Weighted average cost of total debt | 3.2 | % | 3.7 | % | ||||
Total debt as a percentage of total capital* | 58.0 | % | 43.4 | % |
Repurchase of Common Stock
There were no share repurchases during the first six months of fiscal year 2015 as our share repurchase program has been suspended throughout fiscal year 2015 in connection with our announced agreement to acquire CareFusion. For the first six months of fiscal year 2014, we repurchased approximately 2 million shares of our common stock for $213 million. At March 31, 2015, a total of approximately 9.1 million common shares remained available for purchase under the Board of Directors’ September 2013 repurchase authorization.
In January 2015 and
At March 31, 2015, subsequent to2016, which reflected a payment of $300 million during the completion of the CareFusion acquisition on March 17, 2015, borrowings outstanding under the current commercial paper program and the term loan agreement were $700 million and $1 billion, respectively. In April 2015, we made a $650 million principal payment to reduce the outstanding balance on the term loan facility. The $9.1 billion of fully committed bridge financing we secured in the firstsecond quarter of fiscal year 2015, concurrently with our execution of the agreement to acquire CareFusion, was terminated upon completion of the acquisition. Additional disclosures regarding BD’s financing arrangements relating to the CareFusion acquisition are provided in Note 13 in the Notes to Condensed Consolidated Financial Statements.
We have available a2016, as previously discussed.
CareFusion Debt Assumed
Upon the closing of the CareFusion acquisition in March 2015, BD assumed senior unsecured notes issued by CareFusion with an aggregate principal amount of $2 billion. Subsequent to closing the acquisition, BD commenced offers to exchange these CareFusion notes for notes issued by BD and this exchange offer expired in April 2015. Additional disclosures regarding this exchange offer are provided in Note 13 in the Notes to Condensed Consolidated Financial Statements.
Access to Capital and Credit Ratings
Subsequent to BD’s announcement regarding our acquisition of CareFusion, the two major corporate debt rating organizations, Moody’s Investors Service (Moody’s) and Standard & Poor’s Ratings Services (S&P), provided guidance that they expected to downgrade our debt ratings as a result of the anticipated increase in BD’s net leverage. In December 2014, S&P downgraded BD’s long-term debt and commercial paper ratings from A to BBB+ and from A-1 to A-2, respectively. Following our announced completion of the CareFusion acquisition on March 17, 2015, Moody’s converted its provisional downgrade of BD’s long-term debt rating, from A3 to Baa2, to a definitive downgrade. Concurrently with these downgrade actions, BD’s ratings with both S&P and Moody’s were removed from further review.
BD’s credit ratings remain investment grade after these downgrades. As such, we do not expect these downgrades to have a significant impact on our liquidity or future flexibility to access additional liquidity given our strong balance sheet, our syndicated credit facility, and our commercial paper program. While such downgrades in our credit ratings may increase the costs associated with maintaining and borrowing under our existing credit arrangements, the downgrades do not affect our ability to draw on these credit facilities, nor do they result in an acceleration of the scheduled maturities of any outstanding debt. We believe that given our debt ratings, our financial management policies, our ability to generate cash flow and the non-cyclical, geographically diversified nature of our businesses, we would have access to additional short-term and long-term capital should the need arise. A rating reflects only the view of a rating agency and is not a recommendation to buy, sell or hold securities. Ratings can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change.
Product efficacy or safety concerns regarding our products resulting in product recalls, regulatory action on the part of the U.S. Food and Drug Administration (FDA) or foreign counterparts, declining sales and product liability claims, particularly in light of the current regulatory environment, includingin which there has been increased enforcement activity by the FDA. As a result of the CareFusion acquisition, we are operating under a
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Retractable Technologies
Patent Infringement Action
On July 7, 2014, the Federal Circuit Court of Appeals affirmed the November 9, 2009 District Court ruling that awarded Retractable Technologies, Inc. $5 million in damages for patent infringement. On January 16, 2015, BD filed a petition for U.S. Supreme Court review of the Federal Circuit Court of Appeals decision leaving the damages award intact. On April 20, 2015, the U.S. Supreme Court denied BD’s petition.
Antitrust and False Advertising Action
On January 15, 2015, the Court entered its Final Judgment in the case. In the Final Judgment, the Court ordered that RTI recovers $341 million for its attempted monopolization claim and $12 million for attorneys’ fees, and awarded pre and post-judgment interest and costs. On April 23, 2015, the Court granted BD’s motion
Brazil
On April 30, 2015, the Brazilian Foreign Trade Board (“CAMEX”) issued a decision in the anti-dumping investigation of imports of vacuum plastic tubes for blood collection tubes into Brazil. The decision imposes the application of anti-dumping measures including, without limitation, the imposition of duties on such vacuum plastic tubes imported into Brazil of 45.3% for products from the United States of America and 86.5% for products from the United Kingdom of Great Britain and Northern Ireland. These anti-dumping measures, effective from April 30, 2015, will last for a minimum period of five years. Subsequent to the decision, CAMEX announced that it would initiate a proceeding to assess the duties from a public interest perspective. This proceeding could result in a suspension or modification of the CAMEX decision, although no assurance can be given in that regard. In any event, BD does not believe that the CAMEX decision will materially affect its results of operations.
opposed.
Except as discussed below and in Part I,
CareFusion acquisition
As a result of the acquisition, we are operating under a consent decree with the FDA that was entered into by CareFusion in 2009, related to our infusion pump business in the United States. Under the consent decree, the FDA maintains the ability to conduct inspections of our infusion pump facilities, and the costs associated with any such inspections, and any actions that we may need to take as a result, could be significant. In addition, we may be obligated to pay more costs in the future in the event, among other things, the FDA determines that we are not fully compliant with the consent decree and imposes penalties, and we may be subject to future proceedings and litigation relating to the matters addressed in the consent decree. Moreover, the matters addressed in the consent decree could lead to negative publicity that could have an adverse impact on our business. The consent decree authorizes the FDA, in the event of any violations in the future, to order us to cease manufacturing and distributing products, recall products or take other actions. Any of the foregoing matters could disrupt our business and have an adverse effect on our results of operations and financial condition.
In June 2014, CareFusion received a warning letter from the FDA related to our facility in Vernon Hills, Illinois. We are working with FDA to resolve this matter. Until the matters addressed in the warning letter are corrected, we may be subject to additional regulatory action by the FDA. Any such further action could, ultimately, be significant to our ongoing business and operations.
2016.
For the three months ended March 31, 2015 | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||
January 1 – 31, 2015 | 2,035 | 141.08 | — | 9,147,060 | ||||||||||||
February 1 – 28, 2015 | 702 | 140.15 | — | 9,147,060 | ||||||||||||
March 1 – 31, 2015 | — | — | — | 9,147,060 | ||||||||||||
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Total | 2,737 | 140.84 | — | 9,147,060 | ||||||||||||
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For the three months ended March 31, 2016 | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||
January 1 – 31, 2016 | 2,166 | $ | 144.66 | — | 9,147,060 | |||||||
February 1 – 29, 2016 | 966 | 145.41 | — | 9,147,060 | ||||||||
March 1 – 31, 2016 | — | — | — | 9,147,060 | ||||||||
Total | 3,132 | $ | 144.89 | — | 9,147,060 |
(1) | Represents |
(2) |
Exhibit |
Exhibit 10(b) | Five Year Credit Agreement, dated as of January 29, 2016, among Becton, Dickinson and Company, the banks named therein and Citibank, N.A., as administrative agent (incorporated by reference to Exhibit 10 of the registrant’s Current Report on |
Exhibit 31 | Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to SEC Rule 13a - 14(a). |
Exhibit 32 | Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a - 14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code. |
Exhibit 101 | The following materials from this report, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. |
Becton, Dickinson and Company | |||
(Registrant) |
/s/ Christopher Reidy | ||
Christopher Reidy | ||
Executive Vice President, Chief Financial Officer and | ||
(Principal Financial Officer) | ||
/s/ John Gallagher | ||
John Gallagher | ||
Senior Vice President, Corporate Finance, | ||
(Principal Accounting Officer) |
Exhibit Number | Description of Exhibits | |
| ||
10(a) | 2004 Employee and Director Equity-Based Compensation Plan, as amended and restated as of | |
10(b) | Five Year Credit Agreement, dated as of January 29, 2016, among Becton, Dickinson and Company, the banks named therein and Citibank, N.A., as administrative agent (incorporated by reference to Exhibit 10 of the registrant’s Current Report on Form 10-K dated February 4, 2016). | |
31 | Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to SEC Rule 13a - 14(a). | |
32 | Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a - 14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code. | |
101 | The following materials from this report, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. |
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