Becton, Dickinson and Company — Q1 FY2011 10-Q
Reporting period: Three months ended December 31, 2010; balance-sheet figures are as of December 31, 2010. Comparisons are with the three months ended December 31, 2009, or September 30, 2010 for balance-sheet data. Amounts below are in U.S. dollars.
Financial performance
- Revenue: $1.842 billion, down 1.4% year over year. Management attributed substantially all of the decline to lower volume; comparison with the prior year’s flu-pandemic sales and U.S. stimulus-related orders reduced reported growth.
- Profit and EPS: Operating income was $413 million, down 3.9%; net income was $316 million, essentially flat. Continuing-operations income rose to $314 million from $304 million. Diluted EPS was $1.36 versus $1.30, including $1.35 versus $1.25 from continuing operations. The effective tax rate fell to 23.0% from 28.1%, primarily reflecting timing of tax benefits.
- Margins and costs: Gross margin improved to 53.0% from 52.1%; management cited foreign exchange and hedging benefits of about 70 basis points and operating performance benefits of 20 basis points. Consolidated operating margin was approximately 22.4%, versus 23.0%. R&D expense increased 17% to $116 million, or 6.3% of revenue.
- Segments: Medical revenue decreased 4.5% to $927 million and operating income fell to $276 million from $303 million. Diagnostics revenue increased 1.0% to $602 million, while operating income was $161 million versus $162 million. Biosciences revenue grew 3.7% to $314 million and operating income increased to $90 million from $85 million.
- Cash flow: Continuing operating cash flow was $470 million, up from $371 million. Continuing investing activities used $567 million, including $464 million net purchases of investments; capital expenditures were $80 million. Continuing financing activities provided $136 million. Cash and equivalents ended at $1.249 billion.
- Debt and liquidity: Total debt was approximately $2.720 billion, compared with $1.698 billion at September 30, 2010. Cash plus short-term investments totaled approximately $2.247 billion; current assets were $4.951 billion and current liabilities $1.612 billion. The current ratio was approximately 3.1. The company issued $700 million of 10-year notes at 3.25% and $300 million of 30-year notes at 5.00% in November.
- Capital returns: BD repurchased approximately 10.3 million shares for $837 million and paid $93 million in dividends. Dividends per share were $0.41, compared with $0.37.
Changes and management commentary
- Revenue declined despite growth in Diagnostics and Biosciences, as Medical sales weakened and the prior-year comparison included pandemic-related and stimulus-driven demand. International emerging-market growth partly offset those effects.
- Operating cash flow increased, partly because the prior-year quarter included approximately $175 million of discretionary pension contributions. Investment cash use rose primarily because certain liquid investments moved beyond the three-month maturity classification.
- Debt rose following the $1.0 billion note issuance; the proceeds were intended for general corporate purposes, potentially including working capital, capital expenditures, repurchases, and acquisitions. Management estimated full-year FY2011 repurchases of approximately $1.5 billion.
- Management stated available cash, operating cash flow, and debt proceeds were expected to cover normal operating needs. No specific earnings or revenue guidance was provided in the supplied filing text.
- On February 4, 2011, BD signed an agreement to acquire Accuri Cytometers, subject to regulatory approval, with closing expected in FY2011’s third quarter.
Risks, contingencies, and unusual items
- U.S. healthcare reform provides for a 2.3% excise tax on certain medical-device sales beginning January 2013; BD estimated affected products represented about 80% of FY2010 U.S. revenue.
- Material litigation includes antitrust class actions, a patent and other-claims dispute with Retractable Technologies, and patent claims by Gen-Probe. The RTI patent jury awarded $5 million and a permanent injunction was ordered, stayed pending appeal or for at least 12 months. Management stated it believed it had meritorious defenses; the filing warns future charges beyond established accruals could materially affect results or cash flows.
- BD identified collection risks associated with government healthcare customers, particularly payment delays in Greece, while stating existing reserves were adequate and the exposure was not expected to materially affect financial position or liquidity.
- Other cited risks include currency movements, raw-material and resin costs, product safety and regulatory matters, competition, pension assumptions, healthcare pricing and reimbursement, and business-system implementation. Foreign currency translation losses in other comprehensive income were mainly attributed to the stronger U.S. dollar against the euro.
- The quarter included a lower tax rate from the timing of tax benefits. Revenue recognition and variable-interest-entity accounting changes adopted in the quarter did not significantly affect the financial statements.
Important facts for investors to verify
- Whether revenue and segment trends improve after the prior-year flu and stimulus comparisons fade, particularly in Medical and Pharmaceutical Systems.
- How much reported earnings and gross-margin performance depends on currency and hedging benefits, and how raw-material, pension, and start-up costs evolve.
- The funding and balance-sheet implications of the planned $1.5 billion FY2011 share repurchases alongside higher debt and the Accuri acquisition.
- Developments in the RTI injunction and appeals, antitrust proceedings, and Gen-Probe patent litigation, including potential exposure beyond recorded accruals.
- Potential effects of the 2013 medical-device excise tax and collection delays from government healthcare customers.