Overview of Financial Results and Financial Condition
For the three months ended June 30, 2022, worldwide revenues of $4.641 billion increased 0.7% from the prior-year period. This increase reflected the following impacts:
| | | | | | | |
| Increase (decrease) in current-period revenues | | |
Volume | 6.0 | % | | |
Period-over-period decline in revenues related to COVID-19-only testing | (4.8) | % | | |
Pricing | 2.6 | % | | |
Foreign currency translation | (3.1) | % | | |
| | | |
Increase in revenues from the prior-year period | 0.7 | % | | |
. Volume growth in the third quarter of fiscal year 2022 was driven by demand for our core products and reflected strong demand across all of the Medical segment’s units, particularly in the Medication Delivery Solutions and Pharmaceutical Systems units. Third quarter volume growth was also driven by strong demand for core products in both of the Life Sciences segment’s units and across all units in the Interventional segment.
As noted above, our third quarter fiscal year 2022 revenues reflected sales related to COVID-19-only diagnostic testing on the BD VeritorTM Plus and BD MaxTM Systems of $76 million, compared with revenues from testing products in the prior-year period of $300 million.
Our BD 2025 strategy for growth is anchored in three pillars: grow, simplify and empower. As we execute this strategy, we continue to invest in research and development, strategic tuck-in acquisitions, geographic expansion, and new product programs to drive further revenue and profit growth. Our ability to sustain our long-term growth will depend on a number of factors, including our ability to expand our core business (including geographical expansion), develop innovative new products, and continue to improve operating efficiency and organizational effectiveness. As further discussed above, current global economic conditions have been relatively volatile due to various macroeconomic factors. We are mitigating the inflationary pressures on our businesses through the various strategies discussed above. However, there can be no assurance that we will be able to effectively mitigate such inflationary pressures in future periods, and an inability to offset inflationary pressures, at least in part, through the strategies discussed above could adversely impact our results of operations.
Cash flows from continuing operating activities were $1.498 billion in the first nine months of fiscal year 2022. At June 30, 2022, we had $2.773 billion in cash and equivalents and short-term investments, including restricted cash. We continued to return value to our shareholders in the form of dividends. During the first nine months of fiscal year 2022, we paid cash dividends of $812 million, including $745 million paid to common shareholders and $68 million paid to preferred shareholders.
Each reporting period, we face currency exposure that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that fluctuate from the beginning of such period. A stronger U.S. dollar, compared to the prior-year period, resulted in an unfavorable foreign currency translation impact to our revenues during the third quarter of fiscal year 2022. The flow of foreign currency impacts to our earnings depends on various factors including our inventory turnover, our
ability to leverage our global supply chain and the current-period mix of our sales, from both a product and geographic perspective. These factors resulted in a favorable foreign currency impact to earnings during the third quarter of fiscal year 2022. We evaluate our results of operations on both a reported and a foreign currency-neutral basis, which excludes the impact of fluctuations in foreign currency exchange rates. As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a foreign currency-neutral basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. Foreign currency-neutral ("FXN") information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a foreign currency-neutral basis as one measure to evaluate our performance. We calculate foreign currency-neutral percentages by converting our current-period local currency financial results using the prior-period foreign currency exchange rates and comparing these adjusted amounts to our current-period results. These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. generally accepted accounting principles ("GAAP"). Results on a foreign currency-neutral basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Results of Continuing Operations
Medical Segment
The following summarizes third quarter Medical revenues by organizational unit:
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| Three months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | Total Change | | Estimated FX Impact | | FXN Change |
Medication Delivery Solutions (a) | $ | 1,061 | | | $ | 1,019 | | | 4.1 | % | | (2.3) | % | | 6.4 | % |
Medication Management Solutions | 607 | | | 597 | | | 1.6 | % | | (2.0) | % | | 3.6 | % |
Pharmaceutical Systems (a) | 523 | | | 475 | | | 10.0 | % | | (6.3) | % | | 16.3 | % |
Total Medical Revenues | $ | 2,191 | | | $ | 2,091 | | | 4.7 | % | | (3.2) | % | | 7.9 | % |
(a)Prior-period amounts were recast to reflect former intercompany transactions with Embecta.
The Medication Delivery Solutions unit’s revenue growth in the third quarter of 2022 reflected competitive gains for catheters and vascular care products, as well as improved healthcare utilization in the current-year period, particularly within the United States. Third quarter 2022 revenues in the Medication Delivery Solutions unit were unfavorably impacted by pandemic-related lockdowns imposed in China. In the Medication Management Solutions unit, revenue growth reflected momentum in global placements of dispensing systems. The Pharmaceutical Systems unit’s strong revenue growth in the third quarter of 2022 reflected our ability to meet the high demand for pre-filled devices through strategic capacity expansion investments.
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| Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | Total Change | | Estimated FX Impact | | FXN Change |
Total Medical Revenues | $ | 6,465 | | | $ | 6,116 | | | 5.7 | % | | (1.7) | % | | 7.4 | % |
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Medical segment income for the three and nine-month periods is provided below.
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| Three months ended June 30, | | Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | 2022 | | 2021 |
Medical segment income | $ | 573 | | | $ | 486 | | | $ | 1,587 | | | $ | 1,474 | |
| | | | | | | |
Segment income as % of Medical revenues | 26.1 | % | | 23.2 | % | | 24.5 | % | | 24.1 | % |
The Medical segment's income in the third quarter reflected higher gross profit margin and lower operating expenses as discussed in greater detail below:
•The Medical segment’s higher gross profit margin in the third quarter of 2022 compared with the third quarter of 2021 primarily reflected lower manufacturing costs resulting from continuous improvement projects which enhanced the efficiency of our operations, as well as favorable impacts from price management and foreign currency translation.
These favorable impacts to the Medical segment’s third quarter gross margin were partially offset by higher raw material and freight costs.
•Selling and administrative expense as a percentage of revenues was lower in the third quarter of 2022 compared with the third quarter of 2021, which reflected efforts to contain certain selling, travel and other administrative activities, partially offset by higher shipping costs.
•Research and development expense as a percentage of revenues was lower in the third quarter of 2022 compared with the third quarter of 2021, which reflected the timing of project spending.
•The Medical segment’s operating income in the third quarter of 2022 reflected non-cash asset impairment charges of $19 million, which were recorded to Acquisition-related integration and restructuring expense.
Life Sciences Segment
The following summarizes third quarter Life Sciences revenues by organizational unit:
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| | | | | | | | | |
| Three months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | Total Change | | Estimated FX Impact | | FXN Change |
Integrated Diagnostic Solutions | $ | 961 | | | $ | 1,117 | | | (14.0) | % | | (3.5) | % | | (10.5) | % |
Biosciences | 348 | | | 316 | | | 10.1 | % | | (4.1) | % | | 14.2 | % |
Total Life Sciences Revenues | $ | 1,309 | | | $ | 1,433 | | | (8.7) | % | | (3.6) | % | | (5.1) | % |
As previously discussed above, the Integrated Diagnostic Solutions unit’s revenues related to COVID-19-only diagnostic testing on the BD VeritorTM Plus and BD MaxTM Systems in the third quarter of 2022 were $76 million compared with revenues of $300 million in the prior-year period. The Integrated Diagnostic Solutions unit’s third quarter revenues were favorably impacted by continued adoption of our broader respiratory panel and our larger installed base of instruments. Revenues in the Integrated Diagnostic Solutions unit also reflected growth in specimen management products which was attributable to price management and improvements in production throughput. The Biosciences unit's revenue growth in the third quarter of 2022 was driven by strong demand for our research reagents and continued adoption of the unit’s e-commerce platform. Third quarter 2022 growth in the Biosciences unit's sales of instruments was enabled by the unit’s recent product launches and the strategic procurement of critical electronic components to meet the customer demand for our product offerings.
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| Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | Total Change | | Estimated FX Impact | | FXN Change |
Total Life Sciences Revenues | $ | 4,277 | | | $ | 4,998 | | | (14.4) | % | | (1.8) | % | | (12.6) | % |
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Life Sciences segment income for the three and nine-month periods is provided below.
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| Three months ended June 30, | | Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | 2022 | | 2021 |
Life Sciences segment income | $ | 414 | | | $ | 432 | | | $ | 1,366 | | | $ | 1,953 | |
| | | | | | | |
Segment income as % of Life Sciences revenues | 31.6 | % | | 30.1 | % | | 31.9 | % | | 39.1 | % |
The Life Sciences segment's income in the third quarter primarily reflected higher gross profit margin as discussed in greater detail below:
•The Life Sciences segment’s gross profit margin in the third quarter of 2022 compared with the third quarter of 2021 was higher primarily due to approximately $71 million of excess and obsolete inventory expenses in the prior-year period related to COVID-19 testing inventory. Higher gross profit margin in the current-year period also reflected lower manufacturing costs resulting from continuous improvement projects which enhanced the efficiency of our operations, as well as favorable impacts from price management, product mix and foreign currency translation. The Life Sciences segment’s gross profit margin in the third quarter of 2022 was unfavorably impacted by the decline in COVID-19-only testing revenues compared with the prior-period, as well as higher raw material and freight costs.
•Selling and administrative expense as a percentage of revenues in the third quarter of 2022 was relatively flat compared with the third quarter of 2021.
•Research and development expense as a percentage of revenues was higher in the third quarter of 2022 compared with the third quarter of 2021, primarily due to the current-period decline in revenues.
Interventional Segment
The following summarizes third quarter Interventional revenues by organizational unit:
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| Three months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | Total Change | | Estimated FX Impact | | FXN Change |
Surgery | $ | 352 | | | $ | 336 | | | 4.7 | % | | (1.7) | % | | 6.4 | % |
Peripheral Intervention | 463 | | | 436 | | | 6.3 | % | | (2.8) | % | | 9.1 | % |
Urology and Critical Care | 326 | | | 310 | | | 5.2 | % | | (2.5) | % | | 7.7 | % |
Total Interventional Revenues | $ | 1,142 | | | $ | 1,082 | | | 5.5 | % | | (2.4) | % | | 7.9 | % |
The Surgery unit’s third quarter 2022 revenues reflected strong global sales of our advanced repair and reconstruction platforms, as well as a benefit from the unit’s fiscal year 2021 acquisition of Tepha, Inc. Third quarter 2022 revenues in the Peripheral Intervention unit were driven by global market penetration of our RotarexTM system, the unit’s fiscal year 2022 acquisition of Venclose, Inc. and the relaunch of our VenovoTM system. The Peripheral Intervention unit’s current-period revenues also reflected its ability to meet end market demand from prior quarters despite supply chain constraints. The Urology and Critical Care unit’s revenue growth in the third quarter of 2022 was driven by strong demand for acute urology products, as well as the unit’s recovery from supply chain constraints from earlier in the fiscal year.
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| Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | Total Change | | Estimated FX Impact | | FXN Change |
Total Interventional Revenues | $ | 3,367 | | | $ | 3,168 | | | 6.3 | % | | (1.2) | % | | 7.5 | % |
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Interventional segment income for the three and nine-month periods is provided below.
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| Three months ended June 30, | | Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | 2022 | | 2021 |
Interventional segment income | $ | 293 | | | $ | 214 | | | $ | 826 | | | $ | 725 | |
| | | | | | | |
Segment income as % of Interventional revenues | 25.7 | % | | 19.8 | % | | 24.5 | % | | 22.9 | % |
The Interventional segment's income in the third quarter reflected higher gross profit margin and lower operating expenses as discussed in greater detail below:
•The Interventional segment’s higher gross profit margin in the third quarter of 2022 compared with the third quarter of 2021 primarily reflected price management and favorable foreign currency translation.
•Selling and administrative expense as a percentage of revenues was lower in the third quarter of 2022 compared with the third quarter of 2021, as the increase in current-period revenues outpaced spending for selling and other administrative activities.
•Research and development expense as a percentage of revenues was lower in the third quarter of 2022 compared with the third quarter of 2021, as the increase in current-period revenues outpaced the timing of project spending.
Geographic Revenues
BD’s worldwide third quarter revenues by geography were as follows:
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| Three months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | Total Change | | Estimated FX Impact | | FXN Change |
United States | $ | 2,643 | | | $ | 2,424 | | | 9.0 | % | | — | % | | 9.0 | % |
International | 1,998 | | | 2,182 | | | (8.4) | % | | (6.5) | % | | (1.9) | % |
Total Revenues | $ | 4,641 | | | $ | 4,607 | | | 0.7 | % | | (3.1) | % | | 3.8 | % |
U.S. revenue growth in the third quarter of 2022 benefited from high demand for combination influenza/COVID-19 testing assays in the Life Sciences segment's Integrated Diagnostic Solutions unit. U.S. revenues in the third quarter of 2022 also reflected strong sales in the Medical segment’s Medication Delivery Solutions and Pharmaceutical Systems units, as well as by strong sales in the Life Science’s segment’s Biosciences unit and the Interventional segment’s Urology and Critical Care unit.
The decline in international revenues in the third quarter of 2022 was primarily driven by an unfavorable comparison to the prior-year quarter, which substantially benefited from sales in the Life Sciences segment's Integrated Diagnostic Solutions unit related to COVID-19-only diagnostic testing, as further discussed above. This third quarter decline in international revenues was partially offset by strong sales in the Medical segment’s Pharmaceutical Systems unit, the Life Sciences segment’s Biosciences unit and the Interventional segment’s Peripheral Intervention unit.
Emerging market revenues were as follows and reflected growth in Latin America and EMA, as well as growth in China despite an unfavorable impact from pandemic-related lockdowns:
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| Three months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | Total Change | | Estimated FX Impact | | FXN Change |
Emerging markets | $ | 703 | | | $ | 679 | | | 3.7 | % | | (2.4) | % | | 6.1 | % |
Specified Items
Reflected in the financial results for the three and nine-month periods of fiscal years 2022 and 2021 were the following specified items:
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| Three months ended June 30, | | Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | 2022 | | 2021 |
Integration costs (a) | $ | 18 | | | $ | 27 | | | $ | 46 | | | $ | 94 | |
Restructuring costs (a) | 38 | | | (4) | | | 72 | | | 27 | |
Separation-related items (b) | 11 | | | — | | | 10 | | | — | |
| | | | | | | |
Purchase accounting adjustments (c) | 354 | | | 355 | | | 1,074 | | | 1,055 | |
European regulatory initiative-related costs (d) | 39 | | | 32 | | | 105 | | | 91 | |
Investment gains/losses and asset impairments (e) | 4 | | | — | | | 94 | | | — | |
Transaction gain/loss, product and other litigation-related matters (f) | 6 | | | (70) | | | 47 | | | 258 | |
Impacts of debt extinguishment | 2 | | | — | | | 2 | | | 30 | |
| | | | | | | |
Total specified items | 472 | | | 341 | | | 1,451 | | | 1,555 | |
Less: tax impact of specified items | 76 | | | 59 | | | 258 | | | 262 | |
After-tax impact of specified items | $ | 396 | | | $ | 282 | | | $ | 1,193 | | | $ | 1,293 | |
(a)Represents amounts associated with acquisition-related integrations and restructuring activities which are primarily recorded in Acquisition-related integration and restructuring expense and are further discussed below.
(b)Represents costs recorded to Other operating expense (income), net and incurred in connection with the separation of BD's former Diabetes Care business.
(c)Includes amortization and other adjustments related to the purchase accounting for acquisitions. BD’s amortization expense is primarily recorded in Cost of products sold.
(d)Represents costs incurred to develop processes and systems to establish initial compliance with the European Union Medical Device Regulation and the European Union In Vitro Diagnostic Medical Device Regulation, which represent a significant, unusual change to the existing regulatory framework. We consider these costs to be duplicative of previously incurred costs and/or one-off costs, which are limited to a specific period of time. These expenses, which are recorded in Cost of products sold and Research and development expense, include the cost of labor, other services and consulting (in particular, research and development and clinical trials) and supplies, travel and other miscellaneous costs.
(e)Primarily includes non-cash (gains) losses recorded within Other (expense) income, net relating to certain investments. The amount in the nine-month period of fiscal year 2022 also includes a non-cash asset impairment charge recorded in Cost of products sold of $54 million in the Medical segment.
(f)The amount in the three-month period of fiscal year 2022 represented a charge recorded to Cost of products sold to adjust the estimate of future product remediation costs. Total charges recorded to adjust this estimate in the nine-month periods of fiscal year 2022 and 2021 were $41 million and $37 million, respectively. The amount in the three and nine-month periods of fiscal year 2021 include a gain of $88 million on a sale-leaseback transaction. The amount in the nine-month period of 2021 additionally includes charges of $296 million in Other operating expense (income), net to record product liability reserves, including related legal defense costs.
Gross Profit Margin
Gross profit margin for the three and nine-month periods of fiscal year 2022 compared with the prior-year periods in fiscal year 2021 reflected the following impacts:
| | | | | | | | | | | |
| Three-month period | | Nine-month period |
June 30, 2021 gross profit margin % | 42.5 | % | | 45.8 | % |
Impact of purchase accounting adjustments and other specified items | — | % | | (0.6) | % |
Period-over-period decline in COVID-19-only testing profitability | 0.5 | % | | (0.9) | % |
Operating performance | 0.2 | % | | — | % |
Foreign currency translation | 1.3 | % | | 1.1 | % |
June 30, 2022 gross profit margin % | 44.5 | % | | 45.4 | % |
The impact of other specified items on gross profit margin in the nine-month period of 2022 included a non-cash asset impairment charge of $54 million in the Medical segment. Operating performance in the three and nine-month periods of 2022 largely reflected our efforts to mitigate higher raw material costs through leveraging our ongoing continuous improvement projects, optimizing our product mix and implementing price management. Operating performance in the three and nine-month periods of 2021 was unfavorably impacted by approximately $71 million of excess and obsolete inventory expenses related to COVID-19 testing inventory which were recognized by the Integrated Diagnostic Solutions unit.
Operating Expenses
A summary of operating expenses for the three and nine-month periods of fiscal years 2022 and 2021 is as follows:
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| Three months ended June 30, | | Increase (decrease) in basis points | | Nine months ended June 30, | | Increase (decrease) in basis points |
| 2022 | | 2021 | | | 2022 | | 2021 | |
(Millions of dollars) | | | | | | | | | | | |
Selling and administrative expense | $ | 1,149 | | | $ | 1,200 | | | | | $ | 3,527 | | | $ | 3,434 | | | |
% of revenues | 24.8 | % | | 26.1 | % | | (130) | | | 25.0 | % | | 24.0 | % | | 100 | |
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Research and development expense | $ | 315 | | | $ | 330 | | | | | $ | 956 | | | $ | 911 | | | |
% of revenues | 6.8 | % | | 7.2 | % | | (40) | | | 6.8 | % | | 6.4 | % | | 40 | |
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Acquisition-related integration and restructuring expense | $ | 55 | | | $ | 24 | | | | | $ | 118 | | | $ | 121 | | | |
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Other operating expense (income), net | $ | 11 | | | $ | (88) | | | | | $ | 7 | | | $ | 208 | | | |
Selling and administrative expense
Lower selling and administrative expense as a percentage of revenues in the three-month period of 2022 primarily reflected a decrease in our deferred compensation plan liability due to market performance and favorable foreign currency translation, partially offset by higher shipping costs. Higher selling and administrative expense as a percentage of revenues in the nine-month period of 2022 compared with the prior-year periods primarily reflected higher shipping and selling costs in the current-year period, partially offset by a decrease in our deferred compensation plan liability due to market performance and favorable foreign currency translation. The investment losses on deferred compensation plan assets were recorded to Other (expense) income, net.
Research and development expense
Research and development expense as a percentage of revenues in the three and nine-month periods of 2022 primarily reflected the timing of project spending. Spending in both the current and prior-year periods reflected our continued commitment to drive innovation and growth with new products and platforms.
Acquisition-related integration and restructuring expense
Acquisition-related integration and restructuring expense in the three and nine-month periods of 2022 included restructuring costs related to simplification and other cost saving initiatives, as well as system integration costs. Restructuring expenses in the three and nine-month periods of 2022 included non-cash asset impairment charges of $19 million, as noted above and further discussed in Note 12 in the Notes to Condensed Consolidated Financial Statements. Costs in the three and nine-month periods of 2021 included restructuring costs related to simplification and other cost saving initiatives, as well as integration costs incurred due to our acquisition of C.R. Bard, Inc. in the first quarter of fiscal year 2018. For further disclosures regarding restructuring costs, refer to Note 9 in the Notes to Condensed Consolidated Financial Statements.
Other operating expense (income), net
Other operating expense (income), net in the three and nine-month periods of 2022 included costs associated with the spin-off of BD's former Diabetes Care business. Other operating expense (income), net in the three and nine-month periods of 2021 included a gain of $88 million on a sale-leaseback transaction. The amount in the nine-month period of 2021 also included charges of $296 million to record product liability reserves, including related legal defense costs.
Nonoperating Income
Net interest expense
The components for the three and nine-month periods of fiscal years 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 | | 2022 | | 2021 |
Interest expense | $ | (99) | | | $ | (115) | | | $ | (294) | | | $ | (358) | |
Interest income | 5 | | | 2 | | | 9 | | | 7 | |
Net interest expense | $ | (94) | | | $ | (113) | | | $ | (285) | | | $ | (351) | |
Lower interest expense in the current-year periods compared with the prior-year periods primarily reflected lower overall interest rates on debt outstanding as a result of prior-year refinancing activities.
Income Taxes
The income tax rates for the three and nine-month periods of fiscal years 2022 and 2021 are provided below.
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| Three months ended June 30, | | Nine months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Effective income tax rate | 7.4 | % | | (7.5) | % | | 7.9 | % | | 5.9 | % |
| | | | | | | |
Impact, in basis points, from specified items | (460) | | | (1,180) | | | (490) | | | (550) | |
The effective income tax rates for the three and nine-month periods of fiscal year 2022 primarily reflected tax impacts from specified items that were less favorable compared with the benefits associated with specified items recognized in the prior-year periods.
Net Income and Diluted Earnings per Share from Continuing Operations
Net income and diluted earnings per share from continuing operations for the three and nine-month periods of fiscal years 2022 and 2021 were as follows:
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| Three months ended June 30, | | Nine months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net Income from Continuing Operations (Millions of dollars) | $ | 390 | | | $ | 407 | | | $ | 1,348 | | | $ | 1,450 | |
Diluted Earnings per Share from Continuing Operations | $ | 1.28 | | | $ | 1.32 | | | $ | 4.45 | | | $ | 4.72 | |
| | | | | | | |
Unfavorable impact-specified items | $ | (1.38) | | | $ | (0.97) | | | $ | (4.15) | | | $ | (4.41) | |
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Favorable impact-foreign currency translation | $ | 0.10 | | | | | $ | 0.30 | | | |
Liquidity and Capital Resources
The following table summarizes our condensed consolidated statements of cash flows:
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| Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 |
Net cash provided by (used for) continuing operations | | | |
Operating activities | $ | 1,498 | | | $ | 3,285 | |
Investing activities | $ | (1,215) | | | $ | (1,162) | |
Financing activities | $ | (187) | | | $ | (2,164) | |
Net Cash Flows from Continuing Operating Activities
Cash flows from continuing operating activities in the first nine months of fiscal year 2022 reflected net income, adjusted by a change in operating assets and liabilities that was a net use of cash. This net use of cash primarily reflected lower levels of accounts payable and accrued expenses and higher levels of inventory and prepaid expenses, partially offset by lower levels of trade receivables. Cash flows from continuing operating activities in the current-year period additionally reflected a discretionary cash contribution of $134 million to fund our pension obligation.
Cash flows from continuing operating activities in the first nine months of fiscal year 2021 reflected net income, adjusted by a change in operating assets and liabilities that was a net source of cash. This net source of cash primarily reflected lower levels of trade receivables and higher levels of accounts payable and accrued expenses, partially offset by higher levels of inventory and prepaid expenses.
Net Cash Flows from Continuing Investing Activities
Our investments in capital expenditures are focused on projects that enhance our cost structure and manufacturing capabilities, as well as support our BD 2025 strategy for growth and simplification. Net outflows from continuing investing activities in the first nine months of fiscal year 2022 included capital expenditure-related outflows of $658 million, compared with $742 million in the prior-year period. Net outflows from continuing investing activities in the first nine months of fiscal year 2022 also included cash payments of $450 million relating to various strategic acquisitions we have executed as part of our growth strategy, including our acquisitions of Scanwell Health, Inc, Tissuemed, Ltd., and Venclose, Inc. Net outflows from continuing investing activities in the first nine months of fiscal year 2021 included cash payments related to acquisitions of $283 million.
Net Cash Flows from Continuing Financing Activities
Net cash from continuing financing activities in the first nine months of fiscal years 2022 and 2021 included the following significant cash flows:
| | | | | | | | | | | |
| Nine months ended June 30, |
(Millions of dollars) | 2022 | | 2021 |
Cash inflow (outflow) | | | |
| | | |
Proceeds from long-term debt | $ | — | | | $ | 1,715 | |
Distribution from Embecta | $ | 1,266 | | | $ | — | |
Net transfer of cash to Embecta upon spin-off | $ | (265) | | | $ | — | |
Payments of debt | $ | (305) | | | $ | (1,999) | |
| | | |
Repurchases of common stock | $ | — | | | $ | (1,000) | |
Dividends paid | $ | (812) | | | $ | (789) | |
Additional disclosures regarding the spin-off of Embecta are provided in Notes 2 and 13 in the Notes to Condensed Consolidated Financial Statements.
Certain measures relating to our total debt were as follows:
| | | | | | | | | | | |
(Millions of dollars) | June 30, 2022 | | September 30, 2021 |
Total debt | $ | 16,365 | | | $ | 17,610 | |
| | | |
Weighted average cost of total debt | 2.7 | % | | 2.4 | % |
Total debt as a percentage of total capital* | 37.6 | % | | 41.1 | % |
* Represents shareholders’ equity, net non-current deferred income tax liabilities, and debt.
Cash and Short-Term Investments
At June 30, 2022, total worldwide cash and equivalents and short-term investments, including restricted cash, were approximately $2.773 billion. These assets were largely held in the United States. We regularly review the amount of cash and short-term investments held outside of the United States and our historical foreign earnings are used to fund foreign investments or meet foreign working capital and property, plant and equipment expenditure needs. To fund cash needs in the United States, we rely on ongoing cash flow from U.S. operations, access to capital markets and remittances from foreign subsidiaries of earnings that are not considered to be permanently reinvested.
Financing Facilities
We have a five-year senior unsecured revolving credit facility in place which will expire in September 2026. The credit facility provides borrowings of up to $2.75 billion, with separate sub-limits of $100 million for letters of credit and swingline loans. The expiration date of the credit facility may be extended for up to two additional one year periods, subject to certain restrictions (including the consent of the lenders). The credit facility provides that we may, subject to additional commitments by lenders, request an additional $500 million of financing, for a maximum aggregate commitment under the credit facility of up to $3.25 billion. Proceeds from this facility may be used for general corporate purposes. There were no borrowings outstanding under the revolving credit facility at June 30, 2022.
The agreement for our revolving credit facility contains the following financial covenants. We were in compliance with these covenants, as applicable, as of June 30, 2022.
•We are required to have a leverage coverage ratio of no more than:
◦4.25-to-1 as of the last day of each fiscal quarter following the closing of the credit facility; or
◦4.75-to-1 for the four full fiscal quarters following the consummation of a material acquisition.
We also have informal lines of credit outside the United States. We may, from time to time, access the commercial paper market as we manage working capital over the normal course of our business activities. We had no commercial paper borrowings outstanding as of June 30, 2022. Also, over the normal course of our business activities, we transfer certain trade receivable assets to third parties under factoring agreements. Additional disclosures regarding sales of trade receivable assets are provided in Note 12 in the Notes to Condensed Consolidated Financial Statements.
Access to Capital and Credit Ratings
In June 2022, Moody’s Investors Service (“Moody’s”) upgraded our senior unsecured rating to Baa2 from Baa3. Moody’s also updated BD’s commercial paper rating to P-2 from P-3 and revised its outlook on our ratings from Positive to Stable. Also in June 2022, Fitch Ratings (“Fitch”) upgraded our senior unsecured rating to BBB from BBB- and revised its outlook on our ratings from Positive to Stable. In addition, Fitch assigned us with a commercial paper rating of F2. Our corporate credit ratings with Standard & Poor's Ratings Services at June 30, 2022 were unchanged compared with our ratings at September 30, 2021.
Lower corporate debt ratings and downgrades of our corporate credit ratings or other credit ratings may increase our cost of borrowing. We believe that given our debt ratings, our financial management policies, our ability to generate cash flow and the non-cyclical, geographically diversified nature of our businesses, we would have access to additional short-term and long-term capital should the need arise. A rating reflects only the view of a rating agency and is not a recommendation to buy, sell or hold securities. Ratings can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change.
Concentrations of Credit Risk
We continually evaluate our accounts receivables for potential credit losses, particularly those resulting from sales to government-owned or government-supported healthcare facilities in certain countries, as payment may be dependent upon the financial stability and creditworthiness of those countries’ national economies. In addition to continually evaluating all governmental receivables for potential credit losses based upon historical loss experiences, we also evaluate such receivables
based upon the availability of government funding and reimbursement practices. We believe the current reserves related to all governmental receivables are adequate and that these receivables will not have a material adverse impact on our financial position or liquidity.
To date, we have not experienced a significant increased risk of credit losses in general as a result of the COVID-19 pandemic. No assurances can be given that the risk of credit losses will not increase in the future given the uncertainty around the duration of the pandemic and its economic impact.
Other Matters
Critical Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our 2021 Annual Report.
Regulatory Matters
FDA Warning Letter
On January 11, 2018, BD received a Warning Letter from the FDA with respect to our former BD Preanalytical Systems ("PAS") unit, citing certain alleged violations of quality system regulations and of law. The Warning Letter states that, until BD resolves the outstanding issues covered by the Warning Letter, the FDA will not clear or approve any premarket submissions for Class III devices to which the non-conformances are reasonably related or grant requests for certificates to foreign governments. BD has worked closely with the FDA and implemented corrective actions to address the quality management system concerns identified in the warning letter. In March 2020, the FDA conducted a subsequent inspection of PAS, which it classified as Voluntary Action Indicated, which means the FDA will not take or recommend any administrative or regulatory action as a result of the unit’s response to the observations associated with the quality management concerns in the inspection. BD continues to work with the FDA to generate additional clinical evidence and file 510(k)s as remaining commitments associated with the Warning Letter. In January 2022, BD received FDA clearance for its BD Vacutainer® ACD Blood Collection Tubes used in immunohematology. The FDA review of these remaining commitments is ongoing and no assurances can be given regarding further action by the FDA as a result of these commitments, including but not limited to action pursuant to the Warning Letter.
Ethylene Oxide/Consent Order — Covington, Georgia, USA
On October 28, 2019, BD entered into a consent order with the Environmental Protection Division of the Georgia Department of Natural Resources (the “EPD”), following the filing of a complaint and motion for temporary restraining order by the EPD seeking to enjoin BD from continuing sterilization operations at its Covington, Georgia facility. Under the terms of the consent order, which has been amended two times upon mutual agreement of BD and EPD, BD voluntarily agreed to a number of operational changes at its Covington and Madison, Georgia facilities, as well as at its distribution center in Covington, designed to further reduce ethylene oxide emissions, including but not limited to operating at a reduced capacity until successful implementation of fugitive emission control technology, ongoing ambient air monitoring and operational controls at such facilities. Following submission of data relating to the implementation of these operational changes, BD was permitted to return to normal operations in December 2021 at its facilities in Georgia in accordance with the operating conditions set forth in its permit applications, including a condition to continue ambient air monitoring. However, BD’s sterilization operations in Georgia remain subject to the EPD’s final approval of BD’s permit applications and could be subject to additional restrictions. BD has business continuity plans in place to mitigate the impact of any additional restrictions on our operations at these facilities, although it is possible that these plans will not be able to fully offset such impact, especially considering the reduced capacity of third-party sterilization service providers and the regulatory timelines associated with transferring sterilization operations for regulated products.
At a broader level, there is increased focus on the use of ethylene oxide, and several states have imposed, or may impose in the future, additional regulatory requirements associated with the use and emission of ethylene oxide, the most frequently used sterilant for medical devices and health care products in the U.S. This increased regulation could require BD or sterilization service providers, including providers used by BD, to temporarily suspend operations to install additional fugitive emissions control technology, limit the use of ethylene oxide or take other actions, which would impact BD’s operations and further reduce the available capacity of third-party providers to sterilize medical devices and health care products. A few states have filed lawsuits to require additional air quality controls and expand limitations on the use of ethylene oxide at sterilization facilities. For example, in December 2020, the State of New Mexico filed a lawsuit seeking a temporary restraining order and a preliminary and permanent injunction against a major medical device sterilizer, which sterilizes certain of our surgery products, to reduce ethylene oxide emissions associated with their sterilization process. On the federal level, in late 2019, the U.S. Environmental Protection Agency provided notice that it would be conducting rulemaking to reconsider federal regulations applicable to the use and emission of ethylene oxide, and there continues to be increased focus on the use of ethylene oxide on the federal level. If any such proceedings or rulemaking result in the suspension or interruption of sterilization operations at BD
or at medical device sterilizers used by BD, or otherwise limit the availability of third-party sterilization capacity, this could interrupt or otherwise adversely impact production of certain of our products or lead to civil litigation or other claims against BD. BD has business continuity plans in place to mitigate the impact of any such disruptions, although these plans may not be able to fully offset such impact, for the reasons noted above.
Consent Decree with FDA
As previously reported, our BD AlarisTM infusion pump organizational unit is operating under an amended consent decree entered into by CareFusion (the “Consent Decree”) that includes all infusion pumps manufactured by or for CareFusion 303, Inc., the organizational unit that manufactures and sells AlarisTM infusion pumps in the United States.
Following an inspection that began in March 2020 of our Medication Management Systems facility (CareFusion 303, Inc.) in San Diego, California, the FDA issued to BD a Form 483 Notice (the “Form 483 Notice”) that contains a number of observations of non-conformance with quality system regulations. In addition, in December 2021, the FDA issued to CareFusion 303, Inc. a letter of non-compliance with respect to the Consent Decree (the “Non-Compliance Letter”) stating that, among other things, it had determined that certain of BD’s corrective actions with respect to the Form 483 Notice appeared to be adequate, some were still in progress such that adequacy could not be determined yet, and certain others were not adequate (e.g., complaint handling and corrective and preventive actions (CAPA), design verification and medical device reporting). Per the terms of the Non-Compliance Letter, CareFusion 303, Inc. provided the FDA with a proposed comprehensive corrective action plan and has retained an independent expert to conduct periodic audits of CareFusion 303, Inc. infusion pump facilities over the next four years. CareFusion 303, Inc. will update its corrective action plan to address any observations that may arise during the course of these audits, and these updates, as well as the audit reports, will be shared with FDA in accordance with the terms of the Non-Compliance Letter. The FDA’s review of the items raised in the Form 483 Notice and Non-Compliance Letter remains ongoing, and no assurances can be given regarding further action by the FDA as a result of the observations, including but not limited to action pursuant to the Consent Decree, or that the corrective actions proposed by CareFusion 303, Inc. will be adequate to address these observations. Additionally, we cannot currently predict the amount of additional monetary investment that will be incurred to resolve this matter or the matter’s ultimate 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 infusion pumps, recall products and take other actions. We may be required to pay damages of $15,000 per day per violation if we fail to comply with any provision of the Consent Decree, up to $15 million per year. We may also be subject to future proceedings and litigation relating to the matters addressed in the Consent Decree, including, but not limited to, additional fines, penalties, other monetary remedies, and expansion of the terms of the Consent Decree.
We are undertaking certain remediation of our BD AlarisTM System, and are currently shipping the product in the United States, only in cases of medical necessity and to remediate recalled software versions. As previously disclosed, we submitted our 510(k) premarket notification to the FDA for the BD Alaris™ System in April 2021. The 510(k) submission is intended to bring the regulatory clearance for the BD Alaris™ System up-to-date, address open recall issues and provide other updates and features, including a new version of BD Alaris™ System software that will provide clinical, operational and cybersecurity updates. We will not be able to fully resume commercial operations for the BD Alaris™ System in the United States until BD’s 510(k) submission relating to the product has been cleared by the FDA. No assurances can be given as to when or if clearance will be obtained from the FDA.
For further discussion of risks relating to the regulations to which we are subject, see Part I, Item 1A, of our 2021 Annual Report.
Cautionary Statement Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of the federal securities laws. BD and its representatives may also, from time to time, make certain forward-looking statements in publicly released materials, both written and oral, including statements contained in filings with the SEC, press releases, and our reports to shareholders. Forward-looking statements may be identified by the use of words such as “plan,” “expect,” “believe,” “intend,” “will,” “may,” “anticipate,” “estimate” and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance (including volume growth, pricing, sales and earnings per share growth, and cash flows) and statements regarding our strategy for growth, future product development, regulatory approvals, competitive position and expenditures. All statements that address our future operating performance or events or developments that we expect or anticipate will occur in the future are forward-looking statements.
Forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events, developments and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate, or risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore,
we undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events and developments or otherwise, except as required by applicable law or regulations.
The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements. The Russia and Ukraine conflict may also heighten the impact of certain of these factors described below and the Risk Factors in our 2021 Annual Report. For further discussion of certain of these factors, see Item 1A. Risk Factors in our 2021 Annual Report and our subsequent Quarterly Reports on Form 10-Q.
•Any impact the COVID-19 pandemic, including resurgences in COVID-19 infections or new strains of the virus or additional or extended lockdowns or other restrictions imposed by government entities, may have on our business, the global economy’s recovery and the global healthcare system. This may include decreases in the demand for our products, disruptions to our operations or the operations of our suppliers and customers (including employee absenteeism) or disruptions to our supply chain.
•Factors such as the rate of vaccination, the effectiveness of vaccines against different strains, the rate of infections, and competitive factors that could impact the demand and pricing for our COVID-19 diagnostics testing.
•The impact of inflation and disruptions in our global supply chain on BD and our suppliers (particularly sole-source suppliers and providers of sterilization services), including fluctuations in the cost and availability of oil-based resins and other raw materials, as well as certain components, used in the production or sterilization of our products, transportation constraints and delays, product shortages, energy shortages or increased energy costs, labor shortages in the United States and elsewhere, and increased operating and labor costs.
•Weakness in the global economy and financial markets, which could increase the cost of operating our business, weaken demand for our products and services, negatively impact the prices we can charge for our products and services, or impair our ability to produce our products.
•The risks associated with the spin-off of our former Diabetes Care business, including factors that could adversely affect our ability to realize the expected benefits of the spin-off, or the qualification of the spin-off as a tax-free transaction for U.S. federal income tax purposes.
•Competitive factors that could adversely affect our operations, including new product introductions and technologies (for example, new forms of drug delivery) by our current or future competitors, consolidation or strategic alliances among healthcare companies, distributors and/or payers of healthcare to improve their competitive position or develop new models for the delivery of healthcare, increased pricing pressure due to the impact of low-cost manufacturers, patents attained by competitors (particularly as patents on our products expire), new entrants into our markets and changes in the practice of medicine.
•Risks relating to our overall level of indebtedness, including our ability to service our debt and refinance our indebtedness, which is dependent upon the capital markets and our overall financial condition at such time.
•The adverse financial impact resulting from unfavorable changes in foreign currency exchange rates.
•Regional, national and foreign economic factors, including inflation, deflation and fluctuations in interest rates, and their potential effect on our operating performance.
•Our ability to achieve our projected level or mix of product sales, as our earnings forecasts are based on projected sales volumes and pricing of many product types, some of which are more profitable than others.
•Changes in reimbursement practices of governments or third-party payers, or adverse decisions relating to our products by such payers, which could reduce demand for our products or the price we can charge for such products.
•Cost-containment efforts in the U.S. or in other countries in which we do business, such as alternative payment reform and increased use of competitive bidding and tenders, including, without limitation, any expansion of the volume-based procurement process in China or implementation of similar cost-containment efforts.
•Changes in the domestic and foreign healthcare industry or in medical practices that result in a reduction in procedures using our products or increased pricing pressures, including cost-reduction measures instituted by and the continued consolidation among healthcare providers.
•The impact of changes in U.S. federal laws and policies that could affect fiscal and tax policies, healthcare and international trade, including import and export regulation and international trade agreements. In particular, tariffs or other trade barriers imposed by the U.S. or other countries could adversely impact our supply chain costs or otherwise adversely impact our results of operations.
•Security breaches of our information systems or our products, which could impair our ability to conduct business, result in the loss of BD trade secrets or otherwise compromise sensitive information of BD or its customers, suppliers and other business partners, or of customers' patients, including sensitive personal data, or result in product efficacy or safety concerns for certain of our products, and result in actions by regulatory bodies or civil litigation.
•Difficulties inherent in product development, including the potential inability to successfully continue technological innovation, successfully complete clinical trials, obtain and maintain regulatory approvals and registrations in the United States and abroad, obtain intellectual property protection for our products, obtain coverage and adequate reimbursement for new products, or gain and maintain market approval of products, as well as the possibility of infringement claims by competitors with respect to patents or other intellectual property rights, all of which could preclude or delay commercialization of a product. Delays in obtaining necessary approvals or clearances from the FDA or other regulatory agencies or changes in the regulatory process may also delay product launches and increase development costs.
•The impact of business combinations or divestitures, including any volatility in earnings relating to acquisition-related costs, and our ability to successfully integrate any business we may acquire.
•Our ability to penetrate or expand our operations in emerging markets, which depends on local economic and political conditions, and how well we are able to make necessary infrastructure enhancements to production facilities and distribution networks.
•Conditions in international markets, including social and political conditions, civil unrest, terrorist activity, governmental changes, restrictions on the ability to transfer capital across borders, tariffs and other protectionist measures, difficulties in protecting and enforcing our intellectual property rights and governmental expropriation of assets. Our international operations also increase our compliance risks, including risks under the Foreign Corrupt Practices Act and other anti-corruption laws, as well as regulatory and privacy laws.
•Deficit reduction efforts or other actions that reduce the availability of government funding for healthcare and research, which could weaken demand for our products and result in additional pricing pressures, as well as create potential collection risks associated with such sales.
•Fluctuations in university or U.S. and international governmental funding and policies for life sciences research.
•Fluctuations in the demand for products we sell to pharmaceutical companies that are used to manufacture, or are sold with, the products of such companies, as a result of funding constraints, consolidation or otherwise.
•The effects of regulatory or other events that adversely impact our supply chain, including our ability to manufacture our products (particularly where production of a product line or sterilization operations are concentrated in one or more plants), source materials or components or services from suppliers (including sole-source suppliers) that are needed for such manufacturing (including sterilization), or provide products to our customers, including events that impact key distributors.
•Natural disasters, including the impacts of climate change, hurricanes, tornadoes, windstorms, fires, earthquakes and floods and other extreme weather events, global health pandemics, war, terrorism, labor disruptions and international conflicts that could cause significant economic disruption and political and social instability, resulting in decreased demand for our products, or adversely affecting our manufacturing and distribution capabilities or causing interruptions in our supply chain.
•Pending and potential future litigation or other proceedings asserting, and/or investigations concerning and/or subpoenas and requests seeking information with respect to, alleged violations of law (including in connection with federal and/or state healthcare programs (such as Medicare or Medicaid) and/or sales and marketing practices (such as investigative subpoenas and the civil investigative demands received by BD)), potential anti-corruption and related internal control violations under the Foreign Corrupt Practices Act, antitrust claims, securities law claims, product liability (which may involve lawsuits seeking class action status or seeking to establish multi-district litigation proceedings, including pending claims relating to our hernia repair implant products, surgical continence products for women and vena cava filter products), claims with respect to environmental matters, data privacy breaches and patent infringement, and the availability or collectability of insurance relating to any such claims.
•New or changing laws and regulations affecting our domestic and foreign operations, or changes in enforcement practices, including laws relating to trade, monetary and fiscal policies, taxation (including tax reforms that could adversely impact multinational corporations), sales practices, environmental protection, price controls, and licensing and regulatory requirements for new products and products in the post-marketing phase. In particular, the U.S. and other countries may impose new requirements regarding registration, labeling or prohibited materials that may require us to re-register products already on the market or otherwise impact our ability to market our products. Environmental laws, particularly with respect to the emission of greenhouse gases, are also becoming more stringent throughout the world,
which may increase our costs of operations or necessitate changes in our manufacturing plants or processes or those of our suppliers, or result in liability to BD.
•Product efficacy or safety concerns regarding our products resulting in product holds or recalls, regulatory action on the part of the FDA or foreign counterparts (including restrictions on future product clearances and civil penalties), declining sales and product liability claims, and damage to our reputation. As a result of the CareFusion acquisition, our U.S. infusion pump business is operating under a Consent Decree with the FDA. The Consent Decree authorizes the FDA, in the event of any violations in the future, to order our U.S. infusion pump business to cease manufacturing and distributing products, recall products or take other actions, and order the payment of significant monetary damages if the business subject to the decree fails to comply with any provision of the Consent Decree. We are undertaking certain remediation of our BD AlarisTM System, and are currently shipping the product in the U.S., only in cases of medical necessity and to remediate recalled software versions. We will not be able to fully resume commercial operations for the BD Alaris System in the U.S. until BD’s 510(k) submission relating to the product has been cleared by the FDA. No assurances can be given as to when or if clearance will be obtained from the FDA.
•The effect of adverse media exposure or other publicity regarding BD’s business or operations, including the effect on BD’s reputation or demand for its products.
•The effect of market fluctuations on the value of assets in BD’s pension plans and on actuarial interest rate and asset return assumptions, which could require BD to make additional contributions to the plans or increase our pension plan expense.
•Our ability to obtain the anticipated benefits of restructuring programs, if any, that we may undertake.
•Issuance of new or revised accounting standards by the FASB or the SEC.
The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. Investors should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties.