Becton, Dickinson and Company — FY 2009 Form 10-K
Business context and reporting period: Global medical technology company with BD Medical, BD Diagnostics and BD Biosciences segments. The fiscal year ended September 30, 2009; the filing also reports unaudited fourth-quarter results. Figures below are in U.S. dollars.
Financial performance
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Revenue | $7.161 billion | $7.075 billion |
| Operating income | $1.650 billion | $1.537 billion |
| Net income | $1.232 billion | $1.127 billion |
| Continuing-operations diluted EPS | $4.92 | $4.42 |
| Total diluted EPS | $4.99 | $4.46 |
| Gross margin | 52.6% | 51.3% |
| Operating margin | 23.0% | 21.7% |
| Operating cash flow, continuing operations | $1.692 billion | $1.664 billion |
| Capital expenditures | $591 million | $602 million |
- Revenue rose 1%, reflecting approximately 5% volume growth and less than 1% price improvement, partly offset by 4% unfavorable currency translation after hedge gains. U.S. revenue increased 3% to $3.2 billion; international revenue was approximately flat at $4.0 billion.
- Segment revenue and operating income: Medical $3.731 billion and $1.110 billion; Diagnostics $2.226 billion and $607 million; Biosciences $1.204 billion and $362 million. Biosciences growth was restrained by weaker research-related spending, particularly in the U.S.
- Gross margin improved 130 basis points, with currency and hedging contributing an estimated 140 basis points and lower materials costs 20 basis points; manufacturing start-up costs offset about 30 basis points. The $45 million antitrust charge reduced operating margin by approximately 70 basis points.
- Fourth-quarter revenue was $1.898 billion versus $1.812 billion in 2008; continuing-operations income was $306 million versus $279 million, and diluted continuing-operations EPS was $1.25 versus $1.11.
- Cash and equivalents were $1.394 billion and short-term investments $552 million at year-end. Current assets were $4.647 billion against current liabilities of $1.777 billion. Management said cash, operating cash generation and available resources were expected to fund normal 2010 needs, including capital spending, dividends and repurchases.
- Total debt was approximately $1.891 billion, up from $1.155 billion; debt-to-capitalization rose to 26.8% from 18.8%. BD issued $750 million of 10- and 30-year notes in May; the weighted average debt cost was 4.9%. It had $200 million of commercial paper outstanding and no borrowings on its $1 billion credit facility.
Material changes and unusual items
- Revenue growth slowed sharply from 13% in FY 2008 to 1% in FY 2009, primarily reflecting unfavorable currency translation and the economic downturn. Diagnostics grew 3%, while Medical and Biosciences each grew about 1%.
- The effective tax rate fell to 26.0% from 27.5%. A $20 million benefit from tax settlements added approximately $0.08 to continuing-operations diluted EPS. The $45 million direct-purchaser antitrust settlement charge reduced it by approximately $0.11.
- BD sold certain Home Healthcare product assets for $51 million, recording an $18 million pretax gain; the related results were reported as discontinued operations. FY 2009 discontinued-operations income was $19 million.
- H1N1-related revenues were reported as $30 million in Medical Surgical Systems, $25 million in Pharmaceutical Systems and $22 million in Diagnostics.
- After year-end, on November 19, 2009, BD acquired HandyLab for $275 million cash to expand molecular diagnostics capabilities. This is a subsequent event, not part of FY 2009 operating results.
Outlook, risks and contingencies
- Management expected growth over the following three years from expansion across segments and regions and from new products; it gave no specific numerical revenue or earnings guidance in the provided filing text.
- Key risks include the uncertain economic recovery and its effect on customers’ demand and research budgets, foreign-exchange volatility, pricing pressure and healthcare reimbursement or reform, including potential medical-device excise taxes.
- BD also highlighted regulatory approval and product-development risk, product safety and recalls, sole-source raw materials and supplier disruption, manufacturing concentration, ERP-system implementation, pension funding exposure, and international political and operating risks.
- The direct-purchaser antitrust settlement for $45 million remained subject to court approval; indirect-purchaser claims continued. In a November 2009 patent trial, Retractable Technologies received a $5 million jury award; BD planned to appeal. Other disclosed matters include product-liability, patent, False Claims Act and environmental proceedings. Management said potential losses could exceed established accruals and could materially affect results or cash flows.
- BD received an FDA warning letter in May 2009 concerning website language about its EZ Flu A+B test and H1N1. It removed the material and implemented corrective actions; the FDA indicated in July it was satisfied with BD’s response to date.
- Management and the auditor concluded internal control over financial reporting was effective as of September 30, 2009; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Confirm the annual results and fourth-quarter figures against the audited statements and quarterly-data table; the filing presents both continuing-operations EPS and total EPS, which differ because of discontinued operations.
- Track whether the $45 million direct-purchaser settlement receives final court approval and the outcome of continuing indirect-purchaser claims.
- Review the RTI appeal and other material litigation, including the potential for losses beyond recorded accruals.
- Assess whether revenue growth can persist after currency effects, H1N1-related sales and weaker Biosciences research demand are considered.
- Monitor debt and liquidity following the 2009 borrowing increase, the $175 million discretionary pension contribution made in October 2009, and the $275 million HandyLab acquisition.