Becton, Dickinson and Company — Q3 FY2010 Form 10-Q
Business context and period. BD is a global medical technology company with Medical, Diagnostics and Biosciences segments. This filing covers the quarter and nine months ended June 30, 2010; comparisons are with the corresponding 2009 periods. Unless otherwise noted, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $1,878 | $1,820 | $5,640 | $5,263 |
| Operating income | $440 | $432 | $1,317 | $1,211 |
| Income from continuing operations | $306 | $339 | $920 | $907 |
| Net income | $307 | $341 | $921 | $914 |
| Diluted EPS from continuing operations | $1.29 | $1.38 | $3.81 | $3.67 |
| Gross margin | 51.8% | 52.8% | 51.9% | 52.8% |
| Cash from continuing operations | Not provided for quarter | Not provided for quarter | $1,194 | $1,048 |
- Quarterly revenue increased about 3%; operating income rose about 2%, while continuing-operations income declined about 10% and diluted EPS declined about 7%.
- Nine-month revenue increased about 7%; operating income rose about 9%, continuing-operations income about 1%, and diluted continuing-operations EPS about 4%.
- Quarterly revenue growth reflected approximately 4% volume growth, partly offset by about 1% unfavorable foreign currency translation and price decreases of less than 1%.
- Q3 segment revenue: Medical $993 million, up 2.5%; Diagnostics $576 million, up 1.7%; Biosciences $309 million, up 8.4%. Medical and Diagnostics segment operating margins declined year over year; Biosciences’ improved.
- Gross margin fell 100 basis points in Q3. Management attributed an estimated 120-basis-point adverse effect to currency translation and hedging, partly offset by improved operating performance. Raw-material, start-up and pension costs also weighed on margins.
Liquidity, debt and capital allocation
- Nine-month operating cash flow was $1.194 billion. Continuing investing activities used $879 million, including $330 million of capital expenditures and $281 million of net cash for acquisitions. Continuing financing activities used $956 million.
- Cash and equivalents were $750 million at June 30, down from $1.394 billion at September 30, 2009; short-term investments were $695 million, up from $552 million.
- Short-term debt was $202 million and long-term debt $1.493 billion, or about $1.696 billion combined. BD reported debt at 24.4% of total capital, versus 26.8% at September 30, 2009.
- BD repurchased $550 million of shares and paid $260 million in dividends during the first nine months. Management estimated full-year FY2010 share repurchases of approximately $700 million; 10.4 million shares remained authorized at June 30.
- Management expected operating cash, available cash and equivalents to fund normal operating needs, including capital expenditures, dividends and repurchases in 2010. The $1 billion credit facility had no borrowings outstanding; the commercial-paper program had $200 million outstanding.
Changes, outlook, risks and unusual items
- Drivers and pressures: Medical growth benefited from Diabetes Care, including pen needles; Diagnostics faced softer U.S. and Western European testing demand and a difficult H1N1 comparison; Biosciences growth reflected Cell Analysis sales and Japanese government funding. Foreign exchange was an estimated $0.10 per share adverse to Q3 earnings and $0.27 adverse year to date.
- Tax and comparison items: Q2 FY2010 included an $8.9 million, or $0.04 per-share, non-cash charge related to healthcare reform’s Medicare Part D provision. The prior-year periods included a $20 million tax benefit ($0.08 per diluted share); FY2009 also included a $45 million antitrust settlement charge ($0.11 per diluted share). Q3 FY2010’s tax rate was 28.8%, versus 21.0% a year earlier.
- Healthcare reform: BD estimated that products representing about 80% of FY2009 U.S. revenue would be subject to the 2.3% medical-device excise tax beginning in January 2013.
- Acquisition and divestitures: BD acquired HandyLab in November 2009 for $277.6 million net of cash acquired, supporting its molecular diagnostics strategy. In May 2010, BD agreed to sell selected Medical assets for $270 million. It completed the Ophthalmic Systems and surgical blades sales on July 30; the critical care and extended dwell catheter sales were expected in Q4 FY2010. BD expected a gain upon completion; discontinued-operations classification had not been determined.
- Legal contingencies: In the RTI patent case, a jury awarded $5 million in damages and the court granted an injunction against sales of BD Integra products in their current form, stayed for at least 12 months or the duration of an appeal. BD appealed. The direct-purchaser antitrust settlement was subject to court approval; indirect-purchaser claims continued. Management warned that litigation charges could exceed accruals and adversely affect results or cash flows.
- Other risks: BD reported delayed payments from Greek government healthcare customers; related receivables, net of reserves, were approximately $34 million at June 30. It cited currency, raw-material prices, healthcare pricing and demand, regulation, product liability, competition, pension assumptions and execution of its enterprise systems upgrade among forward-looking risks.
- No formal earnings or revenue guidance is presented in the supplied filing text. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed direct-purchaser antitrust settlement receives court approval and the outcome of continuing indirect-purchaser claims.
- The status and potential commercial impact of the RTI appeal and stayed injunction affecting BD Integra products.
- Completion, proceeds and accounting treatment of the remaining Medical asset sales, including whether discontinued-operations treatment becomes applicable.
- The continuing effect of currency and hedging on revenue, margins and earnings, and the future impact of the U.S. medical-device excise tax.
- Collection trends for government receivables, particularly in Greece, and the effects of lower diagnostic testing demand and input-cost pressures.