NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of Becton, Dickinson and Company (the "Company" or "BD"), include all adjustments which are of a normal recurring nature, necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and accompanying notes required for a presentation in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2019 Annual Report on Form 10-K. Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Note 2 – Accounting Changes
New Accounting Principle Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued a new lease accounting standard which requires lessees to recognize lease assets and lease liabilities on the balance sheet, as well as requires expanded disclosures regarding leasing arrangements. The Company adopted this standard on October 1, 2019 and elected certain practical expedients permitted under the transition guidance, including a transition method which allows application of the new standard at its adoption date, rather than at the earliest comparative period presented in the financial statements. The Company also elected not to perform any reassessments relative to its expired and existing leases upon its adoption of the new requirements. The Company's adoption of this standard did not materially impact its condensed consolidated financial statements. Additional disclosures regarding the Company’s lease arrangements are provided in Note 15.
New Accounting Principles Not Yet Adopted
In June 2016, the FASB issued a new accounting standard which requires earlier recognition of credit losses on loans and other financial instruments held by entities, including trade receivables. The new standard requires entities to measure all expected credit losses for financial assets held at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The Company is currently evaluating the impact that this new accounting standard will have on its consolidated financial statements upon its adoption on October 1, 2020.
In August 2018, the FASB issued a new accounting standard to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The standard is effective for the Company on October 1, 2020, but early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the impact that this new accounting standard will have on its consolidated financial statements upon its adoption.
Note 3 – Shareholders' Equity
Changes in certain components of shareholders' equity for the first two quarters of fiscal years 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued
at Par Value
|
|
Capital in
Excess of
Par Value
|
|
Retained
Earnings
|
|
Deferred
Compensation
|
|
Treasury Stock
|
(Millions of dollars)
|
Shares (in
thousands)
|
|
Amount
|
Balance at September 30, 2019
|
$
|
347
|
|
|
$
|
16,270
|
|
|
$
|
12,913
|
|
|
$
|
23
|
|
|
(76,260
|
)
|
|
$
|
(6,190
|
)
|
Net income
|
—
|
|
|
—
|
|
|
278
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common dividends ($0.79 per share)
|
—
|
|
|
—
|
|
|
(215
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued for share-based compensation and other plans, net
|
—
|
|
|
(32
|
)
|
|
—
|
|
|
1
|
|
|
758
|
|
|
(38
|
)
|
Share-based compensation
|
—
|
|
|
82
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock held in trusts, net (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
Balance at December 31, 2019
|
$
|
347
|
|
|
$
|
16,320
|
|
|
$
|
12,938
|
|
|
$
|
24
|
|
|
(75,514
|
)
|
|
$
|
(6,228
|
)
|
Net income
|
—
|
|
|
—
|
|
|
183
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common dividends ($0.79 per share)
|
—
|
|
|
—
|
|
|
(215
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued for share-based compensation and other plans, net
|
—
|
|
|
(91
|
)
|
|
—
|
|
|
(1
|
)
|
|
573
|
|
|
70
|
|
Share-based compensation
|
—
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock held in trusts, net (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
—
|
|
Balance at March 31, 2020
|
$
|
347
|
|
|
$
|
16,288
|
|
|
$
|
12,868
|
|
|
$
|
23
|
|
|
(74,911
|
)
|
|
$
|
(6,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued
at Par Value
|
|
Capital in
Excess of
Par Value
|
|
Retained
Earnings
|
|
Deferred
Compensation
|
|
Treasury Stock
|
(Millions of dollars)
|
Shares (in
thousands)
|
|
Amount
|
Balance at September 30, 2018
|
$
|
347
|
|
|
$
|
16,179
|
|
|
$
|
12,596
|
|
|
$
|
22
|
|
|
(78,463
|
)
|
|
$
|
(6,243
|
)
|
Net income
|
—
|
|
|
—
|
|
|
599
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common dividends ($0.77 per share)
|
—
|
|
|
—
|
|
|
(207
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued for share-based compensation and other plans, net
|
—
|
|
|
(97
|
)
|
|
—
|
|
|
2
|
|
|
851
|
|
|
9
|
|
Share-based compensation
|
—
|
|
|
92
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock held in trusts, net (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
Effect of change in accounting principles
|
—
|
|
|
—
|
|
|
68
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2018
|
$
|
347
|
|
|
$
|
16,174
|
|
|
$
|
13,018
|
|
|
$
|
24
|
|
|
(77,624
|
)
|
|
$
|
(6,235
|
)
|
Net income
|
—
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common dividends ($0.77 per share)
|
—
|
|
|
—
|
|
|
(208
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued for share-based compensation and other plans, net
|
—
|
|
|
(57
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
618
|
|
|
42
|
|
Share-based compensation
|
—
|
|
|
60
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock held in trusts, net (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
—
|
|
Balance at March 31, 2019
|
$
|
347
|
|
|
$
|
16,177
|
|
|
$
|
12,792
|
|
|
$
|
23
|
|
|
(76,955
|
)
|
|
$
|
(6,192
|
)
|
|
|
(a)
|
Common stock held in trusts represents rabbi trusts in connection with deferred compensation under the Company’s employee salary and bonus deferral plan and directors’ deferral plan.
|
The components and changes of Accumulated other comprehensive income (loss) for the first two quarters of fiscal years 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Total
|
|
Foreign Currency
Translation
|
|
Benefit Plans
|
|
Cash Flow Hedges
|
Balance at September 30, 2019
|
$
|
(2,283
|
)
|
|
$
|
(1,256
|
)
|
|
$
|
(1,005
|
)
|
|
$
|
(23
|
)
|
Other comprehensive income before reclassifications, net of taxes
|
63
|
|
|
26
|
|
|
—
|
|
|
37
|
|
Amounts reclassified into income, net of taxes
|
19
|
|
|
—
|
|
|
17
|
|
|
2
|
|
Balance at December 31, 2019
|
$
|
(2,202
|
)
|
|
$
|
(1,230
|
)
|
|
$
|
(988
|
)
|
|
$
|
16
|
|
Other comprehensive loss before reclassifications, net of taxes
|
(237
|
)
|
|
(125
|
)
|
|
—
|
|
|
(111
|
)
|
Amounts reclassified into income, net of taxes
|
19
|
|
|
—
|
|
|
17
|
|
|
2
|
|
Balance at March 31, 2020
|
$
|
(2,419
|
)
|
|
$
|
(1,355
|
)
|
|
$
|
(971
|
)
|
|
$
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Total
|
|
Foreign Currency
Translation
|
|
Benefit Plans
|
|
Cash Flow Hedges
|
Balance at September 30, 2018
|
$
|
(1,909
|
)
|
|
$
|
(1,162
|
)
|
|
$
|
(729
|
)
|
|
$
|
(17
|
)
|
Other comprehensive (loss) income before reclassifications, net of taxes
|
(32
|
)
|
|
(35
|
)
|
|
3
|
|
|
(1
|
)
|
Amounts reclassified into income, net of taxes
|
14
|
|
|
—
|
|
|
13
|
|
|
1
|
|
Balance at December 31, 2018
|
$
|
(1,927
|
)
|
|
$
|
(1,197
|
)
|
|
$
|
(714
|
)
|
|
$
|
(16
|
)
|
Other comprehensive income (loss) before reclassifications, net of taxes
|
74
|
|
|
76
|
|
|
—
|
|
|
(2
|
)
|
Amounts reclassified into income, net of taxes
|
14
|
|
|
—
|
|
|
13
|
|
|
1
|
|
Balance at March 31, 2019
|
$
|
(1,839
|
)
|
|
$
|
(1,121
|
)
|
|
$
|
(701
|
)
|
|
$
|
(17
|
)
|
The amounts of foreign currency translation recognized in other comprehensive income during the three and six months ended March 31, 2020 and 2019 included net gains (losses) relating to net investment hedges. The amounts recognized in other comprehensive income relating to cash flow hedges during the three and six months ended March 31, 2020 related to forward starting interest rate swaps. Additional disclosures regarding the Company's derivatives are provided in Note 12.
Note 4 – Earnings per Share
The weighted average common shares used in the computations of basic and diluted earnings per share (shares in thousands) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Average common shares outstanding
|
272,014
|
|
|
269,882
|
|
|
271,555
|
|
|
269,454
|
|
Dilutive share equivalents from share-based plans
|
3,023
|
|
|
—
|
|
|
3,618
|
|
|
4,975
|
|
Average common and common equivalent shares outstanding – assuming dilution
|
275,037
|
|
|
269,882
|
|
|
275,173
|
|
|
274,429
|
|
|
|
|
|
|
|
|
|
Share equivalents excluded from the diluted shares outstanding calculation because the result would have been antidilutive:
|
|
|
|
|
|
|
|
Mandatory convertible preferred stock
|
11,685
|
|
|
11,685
|
|
|
11,685
|
|
|
11,685
|
|
Share-based plans
|
—
|
|
|
4,405
|
|
|
—
|
|
|
—
|
|
In accordance with the terms of the Company's mandatory convertible preferred stock, on the mandatory conversion date of May 1, 2020, the 2.475 million mandatory convertible preferred shares that were issued in May 2017 in connection with the Company's acquisition of C.R. Bard, Inc. ("Bard") were converted into 11.703 million shares of BD common stock.
Note 5 – Contingencies
Given the uncertain nature of litigation generally, the Company is not able, in all cases, to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which the Company is a party. In accordance with U.S. GAAP, the Company establishes accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). With respect to putative class action lawsuits in the United States and certain of the Canadian lawsuits described below relating to product liability matters, the Company is unable to estimate a range of reasonably possible losses for the following reasons: (i) all or certain of the proceedings are in early stages; (ii) the Company has not received and reviewed complete information regarding all or certain of the plaintiffs and their medical conditions; and/or (iii) there are significant factual issues to be resolved. In addition, there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class. With respect to the civil investigative demand served by the Department of Justice, as discussed below, the Company is unable to estimate a range of reasonably possible losses for the following reasons: (i) all or certain of the proceedings are in early stages; and/or (ii) there are significant factual and legal issues to be resolved.
In view of the uncertainties discussed below, the Company could incur charges in excess of any currently established accruals and, to the extent available, liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on the Company’s consolidated results of operations and consolidated cash flows.
Product Liability Matters
The Company believes that certain settlements and judgments, as well as legal defense costs, relating to product liability matters are or may be covered in whole or in part under its product liability insurance policies with a limited number of insurance carriers, or, in some circumstances, indemnification obligations to the Company from other parties, which if disputed, the Company intends to vigorously contest. Amounts recovered under the Company’s product liability insurance policies or indemnification arrangements may be less than the stated coverage limits or less than otherwise expected and may not be adequate to cover damages and/or costs relating to claims. In addition, there is no guarantee that insurers or other parties will pay claims or that coverage or indemnity will be otherwise available.
Hernia Product Claims
As of March 31, 2020, the Company is defending approximately 16,815 product liability claims involving the Company’s line of hernia repair devices (collectively, the “Hernia Product Claims”). The majority of those claims are currently pending in a coordinated proceeding in Rhode Island State Court, but claims are also pending in other state and/or federal court jurisdictions. In addition, those claims include multiple putative class actions in Canada. Generally, the Hernia Product Claims seek damages for personal injury allegedly resulting from use of the products. From time to time, the Company engages in resolution discussions with plaintiffs’ law firms regarding certain of the Hernia Product Claims, but the Company also intends to vigorously defend Hernia Product Claims that do not settle, including through litigation. Trials are scheduled throughout 2020 in various state and/or federal courts, with the first trial currently scheduled for June 2020 in Rhode Island. The Company expects additional trials of Hernia Product Claims to take place over the next 12 months. In August 2018, a new hernia multi-district litigation (“MDL”) was ordered to be established in the Southern District of Ohio. The Company cannot give any assurances that the resolution of the Hernia Product Claims that have not settled, including asserted and unasserted claims and the putative class action lawsuits, will not have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity.
Women’s Health Product Claims
As of March 31, 2020, the Company is defending approximately 580 product liability claims involving the Company’s line of pelvic mesh devices. The majority of those claims are currently pending in various federal court jurisdictions, and a coordinated proceeding in New Jersey State Court, but claims are also pending in other state court jurisdictions. In addition, those claims include putative class actions filed in the United States. Not included in the figures above are approximately 1,005 filed and unfiled claims that have been asserted or threatened against the Company but lack sufficient information to determine whether a pelvic mesh device of the Company is actually at issue.
The claims identified above also include products manufactured by both the Company and two subsidiaries of Medtronic plc (as successor in interest to Covidien plc) (“Medtronic”), each a supplier of the Company. Medtronic has an obligation to defend and indemnify the Company with respect to any product defect liability relating to products its subsidiaries had manufactured. In July 2015, the Company reached an agreement with Medtronic in which Medtronic agreed to take responsibility for pursuing settlement of certain of the Women’s Health Product Claims that relate to products distributed by the
Company under supply agreements with Medtronic. In June 2017, the Company amended the agreement with Medtronic to transfer responsibility for settlement of additional Women’s Health Product Claims to Medtronic on terms similar to the July 2015 agreement, including with respect to the obligation to make payments to Medtronic towards these potential settlements. As of March 31, 2020, the Company has paid Medtronic $141 million towards these potential settlements. The Company also may, in its sole discretion, transfer responsibility for settlement of additional Women’s Health Product Claims to Medtronic on similar terms. The agreements do not resolve the dispute between the Company and Medtronic with respect to Women’s Health Product Claims that do not settle, if any. The foregoing lawsuits, unfiled claims, putative class actions, and other claims, together with claims that have settled or are the subject of agreements or agreements in principle to settle, are referred to collectively as the “Women’s Health Product Claims.” The Women’s Health Product Claims generally seek damages for personal injury allegedly resulting from use of the products.
As of March 31, 2020, the Company has reached agreements or agreements in principle with various plaintiffs’ law firms to settle their respective inventories of cases totaling approximately 15,220 of the Women’s Health Product Claims. The Company believes that these Women’s Health Product Claims are not the subject of Medtronic’s indemnification obligation. These settlement agreements and agreements in principle include unfiled and previously unknown claims held by various plaintiffs’ law firms, which are not included in the approximate number of lawsuits set forth in the first paragraph of this section. Each agreement is subject to certain conditions, including requirements for participation in the proposed settlements by a certain minimum number of plaintiffs. The Company continues to engage in discussions with other plaintiffs’ law firms regarding potential resolution of unsettled Women’s Health Product Claims, which may include additional inventory settlements.
Starting in 2014 in the MDL, the court entered certain pre-trial orders requiring trial work up and remand of a significant number of Women’s Health Product Claims, including an order entered in the MDL on January 30, 2018, that requires the work up and remand of all remaining unsettled cases (the “WHP Pre-Trial Orders”). The WHP Pre-Trial Orders may result in material additional costs or trial verdicts in future periods in defending Women’s Health Product Claims. Trials are anticipated throughout 2020 in state and federal courts. A trial in the New Jersey coordinated proceeding began in March 2018, and in April 2018 a jury entered a verdict against the Company in the total amount of $68 million ($33 million compensatory; $35 million punitive). The Company is in the process of appealing that verdict. The Company expects additional trials of Women’s Health Product Claims to take place over the next 12 months, which may potentially include consolidated trials.
During the course of engaging in settlement discussions with plaintiffs’ law firms, the Company has learned, and may in future periods learn, additional information regarding these and other unfiled claims, or other lawsuits, which could materially impact the Company’s estimate of the number of claims or lawsuits against the Company.
Filter Product Claims
As of March 31, 2020, the Company is defending approximately 1,785 product liability claims involving the Company’s line of inferior vena cava filters (collectively, the “Filter Product Claims”). The majority of those claims were previously pending in an MDL in the United States District Court for the District of Arizona, but those MDL claims either have been, or are in the process of being, remanded to various federal jurisdictions. Filter Product Claims are also pending in various state court jurisdictions, including a coordinated proceeding in Arizona State Court. In addition, those claims include putative class actions filed in the United States and Canada. The Filter Product Claims generally seek damages for personal injury allegedly resulting from use of the products. The Company has limited information regarding the nature and quantity of certain of the Filter Product Claims. The Company continues to receive claims and lawsuits and may in future periods learn additional information regarding other unfiled or unknown claims, or other lawsuits, which could materially impact the Company’s estimate of the number of claims or lawsuits against the Company. On May 31, 2019, the MDL Court ceased accepting direct filings or transfers into the Filter Product Claims MDL and, as noted above, remands for non-settled cases have begun and are expected to continue over the next three months. Federal and state court trials are scheduled throughout 2020. As of March 31, 2020, the Company entered into settlement agreements and/or settlement agreements in principle for approximately 7,300 cases. On March 30, 2018, a jury in the first MDL trial found the Company liable for negligent failure to warn and entered a verdict in favor of plaintiffs. The jury found the Company was not liable for (a) strict liability design defect; (b) strict liability failure to warn; and (c) negligent design. The Company has appealed that verdict. On June 1, 2018, a jury in the second MDL trial unanimously found in favor of the Company on all claims. On August 17, 2018, the Court entered summary judgment in favor of the Company on all claims in the third MDL trial. On October 5, 2018, a jury in the fourth MDL trial unanimously found in favor of the Company on all claims. The Company expects additional trials of Filter Product Claims may take place over the next 12 months.
In most product liability litigations (like those described above), plaintiffs allege a wide variety of claims, ranging from allegations of serious injury caused by the products to efforts to obtain compensation notwithstanding the absence of any injury. In many of these cases, the Company has not yet received and reviewed complete information regarding the plaintiffs and their
medical conditions and, consequently, is unable to fully evaluate the claims. The Company expects that it will receive and review additional information regarding any remaining unsettled product liability matters.
In connection with the settlement of a prior litigation with certain of the Company's insurance carriers, an agreement with the Company's insurance carriers was reached to reimburse the Company for certain future costs incurred in connection with Filter Product Claims up to an agreed amount. For certain product liability claims or lawsuits, the Company does not maintain or has limited remaining insurance coverage.
Other Legal Matters
Since early 2013, the Company has received subpoenas or Civil Investigative Demands from a number of State Attorneys General seeking information related to the sales and marketing of certain of the Company’s products that are the subject of the Hernia Product Claims and the Women’s Health Product Claims. The Company is cooperating with these requests. Although the Company has had, and continues to have, discussions with the State Attorneys General with respect to overall potential resolution of this matter, there can be no assurance that a resolution will be reached or what the terms of any such resolution may be.
In July 2017, a civil investigative demand was served by the Department of Justice seeking documents and information relating to an investigation into possible violations of the False Claims Act in connection with the sales and marketing of FloChec® and QuantaFloTM devices. The Company is cooperating with these requests. Since it is not feasible to predict the outcome of these matters, the Company cannot give any assurances that the resolution of these matters will not have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity.
The Company is a potentially responsible party to a number of federal administrative proceedings in the United States brought under the Comprehensive Environment Response, Compensation and Liability Act, also known as “Superfund,” and similar state laws. The affected sites are in varying stages of development. In some instances, the remedy has been completed, while in others, environmental studies are underway or commencing. For several sites, there are other potentially responsible parties that may be jointly or severally liable to pay all or part of cleanup costs. While it is not feasible to predict the outcome of these proceedings, based upon the Company’s experience, current information and applicable law, the Company does not expect these proceedings to have a material adverse effect on its financial condition and/or liquidity. However, one or more of the proceedings could be material to the Company’s business and/or results of operations.
On February 27, 2020, a putative class action captioned Kabak v. Becton, Dickinson and Company, et al., Civ. No. 2:20-cv-02155 (SRC) (CLW), was filed in the U.S. District Court for the District of New Jersey against the Company and certain of its officers. The complaint, which purports to be brought on behalf of all persons (other than defendants) who purchased or otherwise acquired the Company's common stock from November 5, 2019 through February 5, 2020, asserts claims for purported violations of Sections 10 and 20 of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder, and seeks, among other things, damages and costs. The complaint alleges that defendants concealed material information regarding AlarisTM infusion pumps, including that (1) certain pumps exhibited software errors, (2) the Company was investing in remediation efforts as opposed to other enhancements and (3) the Company was thus reasonably likely to recall certain pumps and/or experience regulatory delays. These alleged omissions, the complaint asserts, rendered certain public statements about the Company’s business, operations and prospects false or misleading, causing investors to purchase stock at an inflated price. The Company believes these claims are without merit and intends to vigorously defend this action.
On April 27, 2020, three putative stockholders, including the named plaintiff in the Kabak complaint, filed motions to be appointed lead plaintiff and for their counsel to be appointed lead counsel pursuant to the Private Securities Litigation Reform Act of 1995. Those motions remain pending.
The Company is also involved both as a plaintiff and a defendant in other legal proceedings and claims that arise in the ordinary course of business. The Company believes that it has meritorious defenses to these suits pending against the Company and is engaged in a vigorous defense of each of these matters.
Litigation Reserves
The Company regularly monitors and evaluates the status of product liability and other legal matters, and may, from time-to-time, engage in settlement and mediation discussions taking into consideration developments in the matters and the risks and uncertainties surrounding litigation. These discussions could result in settlements of one or more of these claims at any time.
In the second and fourth quarters of fiscal year 2019, the Company recorded pre-tax charges to Other operating expense, net, of approximately $331 million and $582 million, respectively, related to certain of the product liability matters discussed above under the heading “Product Liability Matters,” including the related legal defense costs. The Company recorded these charges based on additional information obtained during the second and fourth quarters of fiscal year 2019.
Accruals for the Company's product liability claims which are discussed above, as well as the related legal defense costs, amounted to approximately $2.3 billion at March 31, 2020 and $2.5 billion at September 30, 2019. These accruals, which are generally long-term in nature, are largely recorded within Deferred Income Taxes and Other Liabilities on the Company's condensed consolidated balance sheets. As of March 31, 2020 and September 30, 2019, the Company had $87 million and $53 million, respectively, in qualified settlement funds (“QSFs”), subject to certain settlement conditions, for certain product liability matters. Payments to QSFs are recorded as a component of Restricted cash. The Company's expected recoveries related to product liability claims and related legal defense costs were approximately $117 million and $150 million at March 31, 2020 and September 30, 2019, respectively. A substantial amount of these expected recoveries at March 31, 2020 and September 30, 2019 related to the Company’s agreements with Medtronic related to certain Women’s Health Product Claims. The expected recoveries at March 31, 2020 related to the indemnification obligation are not in dispute with respect to claims that Medtronic settles pursuant to the agreements.
Note 6 – Revenues
The Company’s policies for recognizing sales have not changed from those described in the Company’s 2019 Annual Report on Form 10-K. The Company sells a broad range of medical supplies, devices, laboratory equipment and diagnostic products which are distributed through independent distribution channels and directly by BD through sales representatives. End-users of the Company's products include healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.
Measurement of Revenues
The Company’s estimate of probable credit losses relating to trade receivables is determined based on historical experience and other specific account data. Amounts are written off against the allowances for doubtful accounts when the Company determines that a customer account is uncollectable. Such amounts are not material to the Company's consolidated financial results.
The Company's gross revenues are subject to a variety of deductions which are recorded in the same period that the underlying revenues are recognized. Such variable consideration includes rebates, sales discounts and sales returns. The impact of variable consideration, including sales discounts and sales returns, is not material to the Company's revenues.
Effects of Revenue Arrangements on Consolidated Balance Sheets
Capitalized contract costs associated with the costs to fulfill contracts for certain products in the Medication Management Solutions organizational unit are immaterial to the Company's condensed consolidated balance sheets. Commissions relating to revenues recognized over a period longer than one year are recorded as assets which are amortized over the period over which the revenues underlying the commissions are recognized. Capitalized contract costs related to such commissions are immaterial to the Company's condensed consolidated balance sheets.
Contract liabilities for unearned revenue that is allocable to performance obligations, such as extended warranty and software maintenance contracts, which are performed over time are immaterial to the Company's consolidated financial results. The Company's liability for product warranties provided under its agreements with customers is not material to its condensed consolidated balance sheets.
Remaining Performance Obligations
The Company's obligations relative to service contracts and pending installations of equipment, primarily in the Company's Medication Management Solutions unit, represent unsatisfied performance obligations of the Company. The revenues under existing contracts with original expected durations of more than one year, which are attributable to products and/or services that have not yet been installed or provided are estimated to be approximately $1.7 billion at March 31, 2020. The Company expects to recognize the majority of this revenue over the next three years.
Within the Company's Medication Management Solutions, Medication Delivery Solutions, Integrated Diagnostic Solutions, and Biosciences units, some contracts also contain minimum purchase commitments of reagents or other consumables and the future sales of these consumables represent additional unsatisfied performance obligations of the Company. The revenue attributable to the unsatisfied minimum purchase commitment-related performance obligations, for contracts with original expected durations of more than one year, is estimated to be approximately $2.7 billion at March 31, 2020. This revenue will be recognized over the customer relationship period.
Disaggregation of Revenues
A disaggregation of the Company's revenues by segment, organizational unit and geographic region is provided in Note 7.
Note 7 – Segment Data
The Company's organizational structure is based upon three principal business segments: BD Medical (“Medical”), BD Life Sciences (“Life Sciences”) and BD Interventional ("Interventional"). The Company's segments are strategic businesses that are managed separately because each one develops, manufactures and markets distinct products and services. Segment disclosures are on a performance basis consistent with internal management reporting. The Company evaluates performance of its business segments and allocates resources to them primarily based upon segment operating income, which represents revenues reduced by product costs and operating expenses.
Effective October 1, 2019, Life Sciences joined its former Preanalytical Systems and Diagnostic Systems organizational units to create a new Integrated Diagnostic Solutions organizational unit which focuses on driving growth and innovation around integrated specimen management to diagnostic solutions. The Integrated Diagnostic Solutions organizational unit consists of the following principal product lines:
|
|
|
|
Organizational Unit
|
|
Principal Product Lines
|
Integrated Diagnostic Solutions
|
|
Integrated systems for specimen collection; safety-engineered blood collection products and systems; automated blood culturing and tuberculosis culturing systems; molecular testing systems for infectious diseases and women’s health; microorganism identification and drug susceptibility systems; liquid-based cytology systems for cervical cancer screening; rapid diagnostic assays for testing of respiratory infections; microbiology laboratory automation and plated media for clinical and industrial applications.
|
Revenues by segment, organizational unit and geographical areas for the three and six-month periods are detailed below. The Company has no material intersegment revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(Millions of dollars)
|
2020
|
|
2019
|
|
United States
|
|
International
|
|
Total
|
|
United States
|
|
International
|
|
Total
|
Medical
|
|
|
|
|
|
|
|
|
|
|
|
Medication Delivery Solutions (a)
|
$
|
518
|
|
|
$
|
386
|
|
|
$
|
904
|
|
|
$
|
482
|
|
|
$
|
446
|
|
|
$
|
928
|
|
Medication Management Solutions (a)
|
449
|
|
|
119
|
|
|
568
|
|
|
499
|
|
|
118
|
|
|
617
|
|
Diabetes Care
|
142
|
|
|
137
|
|
|
278
|
|
|
137
|
|
|
133
|
|
|
270
|
|
Pharmaceutical Systems
|
91
|
|
|
309
|
|
|
400
|
|
|
93
|
|
|
273
|
|
|
366
|
|
Total segment revenues
|
$
|
1,200
|
|
|
$
|
951
|
|
|
$
|
2,151
|
|
|
$
|
1,211
|
|
|
$
|
969
|
|
|
$
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Diagnostic Solutions
|
|
|
|
|
|
|
|
|
|
|
|
Preanalytical Systems
|
$
|
208
|
|
|
$
|
192
|
|
|
$
|
400
|
|
|
$
|
171
|
|
|
$
|
195
|
|
|
$
|
366
|
|
Diagnostic Systems
|
206
|
|
|
228
|
|
|
434
|
|
|
180
|
|
|
209
|
|
|
389
|
|
Total Integrated Diagnostic Solutions
|
413
|
|
|
420
|
|
|
833
|
|
|
350
|
|
|
404
|
|
|
755
|
|
Biosciences
|
108
|
|
|
172
|
|
|
280
|
|
|
120
|
|
|
177
|
|
|
297
|
|
Total segment revenues
|
$
|
522
|
|
|
$
|
591
|
|
|
$
|
1,113
|
|
|
$
|
470
|
|
|
$
|
582
|
|
|
$
|
1,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interventional
|
|
|
|
|
|
|
|
|
|
|
|
Surgery (b)
|
$
|
249
|
|
|
$
|
63
|
|
|
$
|
312
|
|
|
$
|
242
|
|
|
$
|
66
|
|
|
$
|
308
|
|
Peripheral Intervention (b)
|
242
|
|
|
157
|
|
|
399
|
|
|
225
|
|
|
162
|
|
|
387
|
|
Urology and Critical Care (b)
|
202
|
|
|
76
|
|
|
279
|
|
|
193
|
|
|
75
|
|
|
268
|
|
Total segment revenues
|
$
|
693
|
|
|
$
|
297
|
|
|
$
|
990
|
|
|
$
|
659
|
|
|
$
|
303
|
|
|
$
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company revenues
|
$
|
2,415
|
|
|
$
|
1,839
|
|
|
$
|
4,253
|
|
|
$
|
2,341
|
|
|
$
|
1,854
|
|
|
$
|
4,195
|
|
|
|
(a)
|
Prior-period amounts reflect the reclassification of U.S. revenues of $2 million associated with the movement, effective on October 1, 2019, of certain products from the Medication Delivery Solutions unit to the Medication Management Solutions unit.
|
|
|
(b)
|
Prior-period amounts reflect the total reclassifications of $31 million of U.S. revenues and $13 million of international revenues associated with the movement, effective on October 1, 2019, of certain products from the Surgery unit and the Urology and Critical Care unit to the Peripheral Intervention unit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
(Millions of dollars)
|
2020
|
|
2019
|
|
United States
|
|
International
|
|
Total
|
|
United States
|
|
International
|
|
Total
|
Medical
|
|
|
|
|
|
|
|
|
|
|
|
Medication Delivery Solutions (a)
|
$
|
1,038
|
|
|
$
|
814
|
|
|
$
|
1,852
|
|
|
$
|
1,000
|
|
|
$
|
883
|
|
|
$
|
1,884
|
|
Medication Management Solutions (a)
|
912
|
|
|
231
|
|
|
1,143
|
|
|
1,007
|
|
|
236
|
|
|
1,242
|
|
Diabetes Care
|
281
|
|
|
266
|
|
|
547
|
|
|
282
|
|
|
261
|
|
|
544
|
|
Pharmaceutical Systems
|
174
|
|
|
525
|
|
|
699
|
|
|
161
|
|
|
485
|
|
|
646
|
|
Total segment revenues
|
$
|
2,404
|
|
|
$
|
1,836
|
|
|
$
|
4,241
|
|
|
$
|
2,450
|
|
|
$
|
1,865
|
|
|
$
|
4,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Diagnostic Solutions
|
|
|
|
|
|
|
|
|
|
|
|
Preanalytical Systems
|
$
|
410
|
|
|
$
|
388
|
|
|
$
|
798
|
|
|
$
|
371
|
|
|
$
|
387
|
|
|
$
|
758
|
|
Diagnostic Systems
|
390
|
|
|
446
|
|
|
835
|
|
|
355
|
|
|
416
|
|
|
771
|
|
Total Integrated Diagnostic Solutions
|
799
|
|
|
834
|
|
|
1,633
|
|
|
726
|
|
|
803
|
|
|
1,529
|
|
Biosciences
|
260
|
|
|
342
|
|
|
603
|
|
|
228
|
|
|
350
|
|
|
579
|
|
Total segment revenues
|
$
|
1,060
|
|
|
$
|
1,176
|
|
|
$
|
2,236
|
|
|
$
|
954
|
|
|
$
|
1,153
|
|
|
$
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interventional
|
|
|
|
|
|
|
|
|
|
|
|
Surgery (b)
|
$
|
505
|
|
|
$
|
133
|
|
|
$
|
638
|
|
|
$
|
488
|
|
|
$
|
130
|
|
|
$
|
618
|
|
Peripheral Intervention (b)
|
467
|
|
|
327
|
|
|
794
|
|
|
448
|
|
|
321
|
|
|
769
|
|
Urology and Critical Care (b)
|
409
|
|
|
161
|
|
|
570
|
|
|
388
|
|
|
158
|
|
|
545
|
|
Total segment revenues
|
$
|
1,381
|
|
|
$
|
621
|
|
|
$
|
2,002
|
|
|
$
|
1,323
|
|
|
$
|
609
|
|
|
$
|
1,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company revenues
|
$
|
4,845
|
|
|
$
|
3,634
|
|
|
$
|
8,479
|
|
|
$
|
4,728
|
|
|
$
|
3,628
|
|
|
$
|
8,355
|
|
|
|
(a)
|
Prior-period amounts reflect the reclassification of U.S. revenues of $3 million associated with the movement, effective on October 1, 2019, of certain products from the Medication Delivery Solutions unit to the Medication Management Solutions unit.
|
|
|
(b)
|
Prior-period amounts reflect the total reclassifications of $63 million of U.S. revenues and $28 million of international revenues associated with the movement, effective on October 1, 2019, of certain products from the Surgery unit and the Urology and Critical Care unit to the Peripheral Intervention unit.
|
Segment income for the three and six-month periods was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
(Millions of dollars)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Income Before Income Taxes
|
|
|
|
|
|
|
|
Medical (a) (b)
|
$
|
443
|
|
|
$
|
599
|
|
|
$
|
1,007
|
|
|
$
|
1,265
|
|
Life Sciences (c)
|
285
|
|
|
293
|
|
|
646
|
|
|
598
|
|
Interventional
|
213
|
|
|
231
|
|
|
455
|
|
|
441
|
|
Total Segment Operating Income
|
941
|
|
|
1,123
|
|
|
2,109
|
|
|
2,303
|
|
Acquisitions and other restructurings
|
(75
|
)
|
|
(101
|
)
|
|
(161
|
)
|
|
(191
|
)
|
Net interest expense
|
(132
|
)
|
|
(153
|
)
|
|
(266
|
)
|
|
(336
|
)
|
Other unallocated items (d)
|
(534
|
)
|
|
(866
|
)
|
|
(1,087
|
)
|
|
(1,058
|
)
|
Total Income Before Income Taxes
|
$
|
200
|
|
|
$
|
3
|
|
|
$
|
594
|
|
|
$
|
718
|
|
|
|
(a)
|
The amounts for the three and six months ended March 31, 2020 include a probable estimate of future costs within the Medication Management Solutions unit associated with remediation efforts related to AlarisTM infusion pumps of $199 million and $258 million, respectively, which were recorded to Cost of products sold. Based on the course of remediation efforts, it is possible that the estimate of future costs could increase over time.
|
|
|
(b)
|
The amounts for the three and six-month periods in 2019 included $65 million of estimated remediation costs recorded to Other operating expense, net relating to a recall of a product component, which generally pre-dated the Company's acquisition of CareFusion in fiscal year 2015, within the Medication Management Solutions unit's infusion systems platform.
|
|
|
(c)
|
The amounts for the three and six-month periods in 2020 include a charge of $39 million recorded to Cost of products sold to write down the carrying value of certain intangible assets in the Biosciences unit.
|
|
|
(d)
|
Primarily comprised of foreign exchange, certain general and administrative expenses and share-based compensation expense. The amounts for the three and six-month periods in 2019 include a pre-tax charge of $331 million related to certain product liability matters, which is further discussed in Note 5. In addition, the amount for the six months ended March 31, 2019 included the pre-tax gain recognized on the Company's sale of its Advanced Bioprocessing business of approximately $335 million, which is further discussed in Note 9.
|
Note 8 – Benefit Plans
The Company has defined benefit pension plans covering certain employees in the United States and certain international locations. The measurement date used for these plans is September 30.
Net pension cost included the following components for the three and six months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
(Millions of dollars)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Service cost
|
$
|
39
|
|
|
$
|
33
|
|
|
$
|
79
|
|
|
$
|
68
|
|
Interest cost
|
21
|
|
|
26
|
|
|
43
|
|
|
54
|
|
Expected return on plan assets
|
(48
|
)
|
|
(45
|
)
|
|
(97
|
)
|
|
(91
|
)
|
Amortization of prior service credit
|
(3
|
)
|
|
(3
|
)
|
|
(7
|
)
|
|
(7
|
)
|
Amortization of loss
|
25
|
|
|
19
|
|
|
50
|
|
|
39
|
|
Net pension cost
|
$
|
34
|
|
|
$
|
31
|
|
|
$
|
68
|
|
|
$
|
63
|
|
The amounts provided above for amortization of prior service credit and amortization of loss represent the reclassifications of prior service credits and net actuarial losses that were recognized in Accumulated other comprehensive income (loss) in prior periods. All components of the Company’s net periodic pension cost, aside from service cost, are recorded to Other income (expense), net on its condensed consolidated statements of income.
Note 9 – Divestiture
In October 2018, the Company completed the sale of its Life Sciences segment's Advanced Bioprocessing business. The Company recognized a pre-tax gain on the sale of approximately $335 million which was recorded as a component of Other operating expense, net in the first quarter of fiscal year 2019.
Note 10 – Business Restructuring Charges
The Company incurred restructuring costs during the six months ended March 31, 2020, in connection with the Company's acquisition of Bard and portfolio rationalization initiatives, which were largely recorded within Acquisitions and other restructurings. Restructuring liability activity for the six months ended March 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Employee
Termination
|
|
Other
|
|
Total
|
|
Bard
|
|
Other Initiatives
|
|
Bard (a)
|
|
Other Initiatives
|
|
Bard
|
|
Other Initiatives
|
Balance at September 30, 2019
|
$
|
22
|
|
|
$
|
31
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
23
|
|
|
$
|
34
|
|
Charged to expense
|
6
|
|
|
(2
|
)
|
|
23
|
|
|
14
|
|
|
29
|
|
|
12
|
|
Cash payments
|
(12
|
)
|
|
(23
|
)
|
|
(5
|
)
|
|
(12
|
)
|
|
(17
|
)
|
|
(35
|
)
|
Non-cash settlements
|
—
|
|
|
—
|
|
|
(16
|
)
|
|
(2
|
)
|
|
(16
|
)
|
|
(2
|
)
|
Balance at March 31, 2020
|
$
|
16
|
|
|
$
|
6
|
|
|
3
|
|
|
$
|
3
|
|
|
$
|
19
|
|
|
$
|
9
|
|
|
|
(a)
|
Largely represents the cost associated with certain pre-acquisition equity awards of Bard which, to encourage post-acquisition employee retention, were converted to BD equity awards with substantially the same terms and conditions as were applicable under such Bard awards immediately prior to the acquisition date.
|
Note 11 – Intangible Assets
Intangible assets consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
September 30, 2019
|
(Millions of dollars)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Amortized intangible assets
|
|
|
|
|
|
|
|
Developed technology
|
$
|
13,985
|
|
|
$
|
3,440
|
|
|
$
|
13,960
|
|
|
$
|
2,906
|
|
Customer relationships
|
4,606
|
|
|
1,345
|
|
|
4,608
|
|
|
1,183
|
|
Product rights
|
106
|
|
|
61
|
|
|
110
|
|
|
60
|
|
Trademarks
|
407
|
|
|
110
|
|
|
407
|
|
|
102
|
|
Patents and other
|
493
|
|
|
315
|
|
|
445
|
|
|
305
|
|
Amortized intangible assets
|
$
|
19,597
|
|
|
$
|
5,271
|
|
|
$
|
19,530
|
|
|
$
|
4,555
|
|
Unamortized intangible assets
|
|
|
|
|
|
|
|
Acquired in-process research and development (a)
|
$
|
46
|
|
|
|
|
$
|
1
|
|
|
|
Trademarks
|
2
|
|
|
|
|
2
|
|
|
|
Unamortized intangible assets
|
$
|
48
|
|
|
|
|
$
|
3
|
|
|
|
|
|
(a)
|
The increase in the carrying value of assets in 2020 was attributable to an immaterial acquisition which occurred during the second quarter of fiscal year 2020.
|
Intangible amortization expense for the three months ended March 31, 2020 and 2019 was $347 million and $376 million, respectively. Intangible amortization expense for the six months ended March 31, 2020 and 2019 was $693 million and $754 million, respectively.
The following is a reconciliation of goodwill by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Medical
|
|
Life Sciences
|
|
Interventional
|
|
Total
|
Goodwill as of September 30, 2019
|
$
|
9,989
|
|
|
$
|
772
|
|
|
$
|
12,615
|
|
|
$
|
23,376
|
|
Acquisitions (a)
|
10
|
|
|
58
|
|
|
—
|
|
|
68
|
|
Currency translation
|
(2
|
)
|
|
(1
|
)
|
|
(26
|
)
|
|
(29
|
)
|
Goodwill as of March 31, 2020
|
$
|
9,997
|
|
|
$
|
828
|
|
|
$
|
12,589
|
|
|
$
|
23,415
|
|
|
|
(a)
|
Represents goodwill recognized relative to certain acquisitions which were not material individually or in the aggregate.
|
Note 12 – Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate certain exposures. The Company does not enter into derivative financial instruments for trading or speculative purposes. The effects these derivative instruments and hedged items have on financial position, financial performance, and cash flows are provided below.
Foreign Currency Risks and Related Strategies
The Company has foreign currency exposures throughout Europe, Greater Asia, Canada and Latin America. Transactional currency exposures that arise from entering into transactions, generally on an intercompany basis, in non-hyperinflationary countries that are denominated in currencies other than the functional currency are mitigated primarily through the use of forward contracts. In order to mitigate foreign currency exposure relating to its investments in certain foreign subsidiaries, the Company has hedged the currency risk associated with those investments with instruments, such as foreign currency-denominated debt, cross-currency swaps and currency exchange contracts, which are designated as net investment hedges.
Hedges of the transactional foreign exchange exposures resulting primarily from intercompany payables and receivables are undesignated hedges. As such, the gains or losses on these instruments are recognized immediately in income. These gains and losses are largely offset by gains and losses on the underlying hedged items, as well as the hedging costs associated with the derivative instruments. The net amounts recognized in Other (expense) income, net, during the three and six months ended March 31, 2020 and 2019 were immaterial to the Company's consolidated financial results. The total notional amounts of the Company’s outstanding foreign exchange contracts as of March 31, 2020 and September 30, 2019 were $1.2 billion and $2.3 billion, respectively.
Certain of the Company's foreign currency-denominated long-term notes outstanding, which had a total carrying value of $1.4 billion as of March 31, 2020 and September 30, 2019, were designated as, and were effective as, economic hedges of net investments in certain of the Company's foreign subsidiaries. The Company has entered into cross-currency swaps, all of which are designated and effective as economic hedges of net investments in certain of the Company's foreign subsidiaries. The notional amounts of the cross-currency swaps were $3.0 billion and $2.3 billion as of March 31, 2020 and September 30, 2019, respectively.
Net gains or losses relating to the net investment hedges, which are attributable to changes in the foreign currencies to U.S. dollar spot exchange rates, are recorded as accumulated foreign currency translation in Other comprehensive income (loss). Upon the termination of a net investment hedge, any net gain or loss included in Accumulated other comprehensive income (loss) relative to the investment hedge remains until the foreign subsidiary investment is disposed of or is substantially liquidated.
Net gains (losses) recorded to Accumulated other comprehensive income (loss) relating to the Company's net investment hedges for the three and six-month periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
(Millions of dollars)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Foreign currency-denominated debt
|
$
|
44
|
|
|
$
|
(18
|
)
|
|
$
|
10
|
|
|
$
|
41
|
|
Cross-currency swaps
|
$
|
193
|
|
|
$
|
—
|
|
|
$
|
141
|
|
|
$
|
—
|
|
Interest Rate Risks and Related Strategies
The Company’s policy is to manage interest rate exposure using a mix of fixed and variable rate debt. The Company periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Company exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated as either fair value or cash flow hedges.
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
The total notional amount of the Company’s outstanding interest rate swaps designated as fair value hedges was $375 million at March 31, 2020 and September 30, 2019. The outstanding swaps represent fixed-to-floating interest rate swap agreements the Company entered into to convert the interest payments on certain long-term notes from the fixed rate to a floating interest rate based on LIBOR. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt. The amounts recorded during the three and six months ended March 31, 2020 and 2019 for changes in the fair value of these hedges were immaterial to the Company's consolidated financial results.
Changes in the fair value of the interest rate swaps designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk) are recorded in Other comprehensive income (loss). If interest rate derivatives designated as cash flow hedges are terminated, the balance in Accumulated other comprehensive income (loss) attributable to those derivatives is reclassified into earnings over the remaining life of the hedged debt. The net realized loss related to terminated interest rate swaps expected to be reclassified and recorded in Interest expense within the next 12 months is $6 million, net of tax.
The total notional amount of the Company's outstanding forward starting interest rate swaps was $1.5 billion at March 31, 2020 and September 30, 2019. The Company entered into these contracts in the fourth quarter of fiscal year 2019 to mitigate its exposure to interest rate risk. The Company recorded after-tax losses of $111 million and $74 million in Other comprehensive income (loss) relating to these interest rate hedges during the three and six months ended March 31, 2020, respectively.
Other Risk Exposures
The Company purchases resins, which are oil-based components used in the manufacture of certain products. Significant increases in world oil prices that lead to increases in resin purchase costs could impact future operating results. From time to time, the Company has managed price risks associated with these commodity purchases through commodity derivative forward contracts. The Company had no outstanding commodity derivative forward contracts at March 31, 2020 and the amount outstanding as of September 30, 2019 was immaterial to the Company's consolidated financial results.
Financial Statement Effects
The fair values of derivative instruments outstanding at March 31, 2020 and September 30, 2019 were not material to the Company's consolidated balance sheets.
The amounts reclassified from accumulated other comprehensive income relating to cash flow hedges during the three and six months ended March 31, 2020 and 2019 were not material to the Company's consolidated financial results.
Note 13 – Financial Instruments and Fair Value Measurements
The following reconciles cash and equivalents and restricted cash reported within the Company's consolidated balance sheets at March 31, 2020 and September 30, 2019 to the total of these amounts shown on the Company's consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
March 31, 2020
|
|
September 30, 2019
|
Cash and equivalents
|
$
|
2,351
|
|
|
$
|
536
|
|
Restricted cash
|
88
|
|
|
54
|
|
Cash and equivalents and restricted cash
|
$
|
2,439
|
|
|
$
|
590
|
|
Cash equivalents consist of all highly liquid investments with a maturity of three months or less at time of purchase. Restricted cash consists of cash restricted from withdrawal and usage except for certain product liability matters.
The Company’s cash and equivalents include institutional money market accounts which permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions, which are considered Level 1 inputs in the fair value hierarchy. The fair values of these accounts were $1.8 billion and $39 million at March 31, 2020 and September 30, 2019, respectively. The Company’s remaining cash and equivalents, excluding restricted cash, were $516 million and $497 million at March 31, 2020 and September 30, 2019, respectively.
Short-term investments are held to their maturities and are carried at cost, which approximates fair value. The short-term investments consist of instruments with maturities greater than three months and less than one year.
Long-term debt is recorded at amortized cost. The fair value of long-term debt is measured based upon quoted prices in active markets for similar instruments, which are considered Level 2 inputs in the fair value hierarchy. The fair value of long-term debt was $17.2 billion and $19.2 billion at March 31, 2020 and September 30, 2019, respectively. The fair value of the current portion of long-term debt was $2.4 billion and $1.3 billion at March 31, 2020 and September 30, 2019, respectively.
All other instruments measured by the Company at fair value, including derivatives and contingent consideration liabilities, are immaterial to the Company's consolidated balance sheets.
Nonrecurring Fair Value Measurements
In the second quarter of fiscal year 2020, the Company recorded a charge to Cost of products sold of $39 million to write down the carrying value of certain intangible assets in the Biosciences unit. The amount recognized in the second quarter of 2020 was recorded to adjust the carrying amount of assets to the assets' fair values, which were estimated, based upon a market participant's perspective, using Level 3 inputs, as values were estimated using the income approach.
Transfers of trade receivables
Over the normal course of its business activities, the Company transfers certain trade receivable assets to third parties under factoring agreements. Per the terms of these agreements, the Company surrenders control over its trade receivables upon transfer. Accordingly, the Company accounts for the transfers as sales of trade receivables by recognizing an increase to Cash and equivalents and a decrease to Trade receivables, net when proceeds from the transactions are received. The Company’s balance of Trade receivables, net at March 31, 2020 excludes trade receivables of $246 million that have been transferred to third parties under factoring arrangements. The costs incurred by the Company in connection with factoring activities were not material to its consolidated financial results. The Company’s transfers of trade receivables during the six months ended March 31, 2019 were not material to its consolidated financial results.
Note 14 – Debt
While the Company deemed its liquidity sufficient to fund its operations and meet its obligations, the Company has taken steps, as a precautionary measure, to preserve its financial flexibility in light of the uncertainty in the global markets resulting from the COVID-19 pandemic. In March 2020, the Company entered into a 364-day $1.4 billion senior unsecured term loan facility and later in March 2020, this agreement was amended to increase the borrowing capacity available under the facility to $2.0 billion. Borrowings outstanding under the term loan facility were $1.9 billion at March 31, 2020 and these proceeds are included in the Company's balance of Cash and equivalents at March 31, 2020.
In April 2020, the Company entered into a supplement to its existing $2.25 billion senior unsecured revolving credit facility which increased the revolving commitments available to the Company under revolving credit facility by $381 million. As such, the Company's senior unsecured revolving credit facility currently provides borrowings of up to $2.63 billion. Proceeds from this facility are used to fund general corporate needs and borrowings outstanding under the revolving credit facility at March 31, 2020 were $695 million.
Note 15 – Leases
The Company leases real estate, vehicles and other equipment which are used in the Company’s manufacturing, administrative and research and development activities. The Company identifies a contract that contains a lease as one which conveys a right, either explicitly or implicitly, to control the use of an identified asset in exchange for consideration. The Company’s lease arrangements are generally classified as operating leases. These arrangements have remaining terms ranging from less than one year to approximately 25 years and the weighted-average remaining lease term of the Company’s leases is approximately 7.5 years. An option to renew or terminate the current term of a lease arrangement is included in the lease term if the Company is reasonably certain to exercise that option.
The Company does not recognize a right-of-use asset and lease liability for short-term leases, which have terms of 12 months or less, on its consolidated balance sheet. For the longer-term lease arrangements that are recognized on the Company’s consolidated balance sheet, the right-of-use asset and lease liability is initially measured at the commencement date based upon the present value of the lease payments due under the lease. These payments represent the combination of the fixed lease and fixed non-lease components that are due under the arrangement. The costs associated with the Company’s short-term leases, as well as variable costs relating to the Company’s lease arrangements, are not material to its consolidated financial results.
The implicit interest rates of the Company’s lease arrangements are generally not readily determinable and as such, the Company applies an incremental borrowing rate, which is established based upon the information available at the lease commencement date, to determine the present value of lease payments due under an arrangement. The weighted-average incremental borrowing rate that has been applied to measure the Company’s lease liabilities is 2.3%.
The Company’s lease costs recorded in its consolidated statements of income for the three and six months ended March 31, 2020 were $32 million and $65 million, respectively. Cash payments arising from the Company’s lease arrangements are reflected on its condensed consolidated statement of cash flows as outflows used for operating activities. The right-of-use assets and lease liabilities recognized on the Company’s condensed consolidated balance sheet as of March 31, 2020 were as follows:
|
|
|
|
|
(Millions of dollars)
|
March 31, 2020
|
Right-of-use assets recorded in Other Assets
|
$
|
427
|
|
Current lease liabilities recorded in Payables, accrued expenses and other current liabilities
|
$
|
103
|
|
Non-current lease liabilities recorded in Deferred Income Taxes and Other Liabilities
|
$
|
345
|
|
The Company’s payments due under its operating leases are as follows:
|
|
|
|
|
(Millions of dollars)
|
|
Remaining for 2020
|
$
|
58
|
|
2021
|
102
|
|
2022
|
83
|
|
2023
|
55
|
|
2024
|
36
|
|
Thereafter
|
164
|
|
Total payments due
|
499
|
|
Less: imputed interest
|
50
|
|
Total
|
$
|
448
|
|
The Company’s future minimum rental commitments on non-cancelable leases at September 30, 2019, as disclosed in the Company’s 2019 Annual Report on Form 10-K, were as follows:
|
|
|
|
|
(Millions of dollars)
|
|
2020
|
$
|
122
|
|
2021
|
103
|
|
2022
|
83
|
|
2023
|
57
|
|
2024
|
56
|
|
Thereafter
|
123
|
|
Total
|
$
|
546
|
|