Becton, Dickinson and Company — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014; filed November 26, 2014. The filing is an annual report, not a standalone fourth-quarter report. FY2014 fourth-quarter revenue was $2.202 billion and diluted EPS from continuing operations was $1.53.
Business context and reporting period
BD is a global medical technology company serving healthcare providers, laboratories, researchers and pharmaceutical companies. FY2014 reporting covered three segments: Medical, Diagnostics and Biosciences. Effective October 1, 2014, Diagnostics and Biosciences were combined as BD Life Sciences; Medical was unchanged.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $8.446 billion | $8.054 billion |
| Gross profit / gross margin | $4.301 billion / 50.9% | $4.171 billion / 51.8% |
| Operating income | $1.606 billion | $1.254 billion |
| Income from continuing operations | $1.185 billion | $929 million |
| Net income | $1.185 billion | $1.293 billion |
| Diluted EPS from continuing operations | $5.99 | $4.67 |
| Operating cash flow from continuing operations | $1.746 billion | $1.717 billion |
| Capital expenditures | $592 million | $522 million |
| Cash and short-term investments | $2.745 billion | $2.608 billion |
| Total debt, including short-term debt | Approximately $3.971 billion | Approximately $3.970 billion |
Revenue increased 4.9%, driven mainly by 5.0% volume growth; acquisitions added 0.2%, while foreign-exchange translation reduced growth by 0.3%. International revenue rose 7.0% to $5.029 billion, with a 0.6% unfavorable currency impact; U.S. revenue rose 1.9% to $3.417 billion. Emerging-market revenue increased 9.3% to $2.123 billion.
Segment revenue and operating income were: Medical, $4.573 billion and $1.291 billion; Diagnostics, $2.713 billion and $585 million; Biosciences, $1.159 billion and $275 million. Medical revenue grew 6.2%, Diagnostics 2.5%, and Biosciences 5.2%. The current ratio was approximately 2.74x, based on current assets of $6.131 billion and current liabilities of $2.235 billion. Dividends paid were $421 million; BD repurchased $400 million of shares.
Material changes versus the prior year
- Continuing-operations diluted EPS increased to $5.99 from $4.67, while net income declined from $1.293 billion to $1.185 billion. FY2013 net income included $364 million of after-tax discontinued-operations income, principally associated with the Discovery Labware divestiture.
- FY2013 continuing results included $369 million of specified pretax items, primarily a $341 million charge related to the RTI litigation verdict and a $22 million antitrust settlement. FY2014 specified pretax items totaled $78 million, including workforce reductions, R&D program charges and asset write-offs, acquisition costs, and other items.
- Gross margin fell 90 basis points to 50.9%. Management cited foreign exchange, unfavorable product mix, quality remediation costs, higher start-up and raw-material costs, and workforce-reduction costs; continuous-improvement savings partly offset these effects.
- Diagnostics operating income declined to $585 million from $638 million, reflecting product mix, currency and plant-shutdown costs. Medical and Biosciences operating income increased, though their margins also eased.
- R&D expense rose to $550 million from $494 million. Operating cash flow increased modestly, while capital expenditures rose to $592 million.
Outlook, commentary, risks and contingencies
- BD provided no specific numerical FY2015 revenue or earnings guidance in the supplied filing text. Management described the healthcare environment as stable overall, while noting continued pricing pressure, ongoing European macroeconomic constraints, and dependence on government healthcare funding in emerging markets.
- On October 5, 2014, after year-end, BD agreed to acquire CareFusion for approximately $12.2 billion: $10.1 billion cash and $2.1 billion in BD stock and options based on the stated reference share price. Closing was expected in the first half of calendar 2015, subject to approvals and other conditions. BD estimated pro forma debt could reach as much as $14 billion, versus approximately $4 billion at year-end. It had secured access to $9.1 billion of bridge financing and expected to use cash and permanent financing; the share-repurchase program was suspended for 2015. Completion, integration, financing costs, dilution and potential regulatory conditions are material risks.
- RTI litigation remained a significant contingency. A 2013 jury awarded RTI $113.5 million on an attempted-monopolization claim, subject to trebling under antitrust law; BD recorded a $341 million pretax charge in FY2013 and planned to appeal. The court denied some requested relief and directed corrective advertising statements; the final attorneys’ fee amount was unresolved. BD also reported other litigation and Superfund matters, and said an adverse outcome could result in charges above recorded accruals.
- Other principal risks include foreign-exchange exposure (about 60% of FY2014 revenue came from international operations), reimbursement and healthcare reform, competition and pricing, sole-source supply interruptions, product quality and recalls, regulation, cyberattacks, manufacturing disruption, research funding changes, and ERP-system implementation.
- The U.S. medical-device excise tax increased selling and administrative expense by $14 million in FY2014 versus FY2013. BD reported no material impairment from its annual goodwill test. The company and auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- CareFusion closing status, final consideration, financing mix, post-deal leverage, credit ratings and integration-cost or synergy realization.
- Subsequent developments and expected exposure in the RTI case, including appeal prospects and attorneys’ fees.
- Whether revenue growth can continue, particularly in Diagnostics, given weaker Women’s Health and Cancer sales and share losses in certain systems.
- Margin recovery and the persistence of quality-remediation, plant-shutdown, currency and input-cost impacts.
- Cash generation, working-capital requirements, and the availability and tax consequences of foreign-held cash; $2.17 billion of year-end cash and short-term investments was held outside the United States.