BDX

Business Context and Reporting Period

Company: Becton, Dickinson and Company (BD)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended June 30, 2008
Business Overview: BD is a medical technology company operating through three segments: BD Medical, BD Diagnostics, and BD Biosciences. The company develops and sells medical supplies, devices, laboratory equipment, and diagnostic products globally.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Q3 2008 revenues increased 14.5% year-over-year to $1.868 billion. Growth was driven by volume increases (~8%) and favorable foreign currency translation (~7%), partially offset by price decreases (~0.5%). International revenues rose 24%.
• Profitability: Net income increased 21.3% in Q3 and 34.1% for the nine-month period compared to the prior year. The prior year included significant non-recurring charges related to acquired in-process research and development (TriPath and Plasso acquisitions) totaling $122 million, which inflated the current year's comparative growth.
• Segment Performance:
  • Medical: Revenues up 15%; Operating income up 15%.
  • Diagnostics: Revenues up 13%; Operating income up 17% (excluding prior year acquisition charges).
  • Biosciences: Revenues up 16%; Operating income up 41% (excluding prior year acquisition charges).
• Margins: Gross profit margin decreased slightly to 50.9% in Q3 (from 51.5% prior year) due to increased raw material costs (resins) and manufacturing start-up costs. Selling and administrative expenses as a percentage of revenue decreased to 23.6% due to disciplined spending controls.

Guidance, Outlook, and Risks

• Outlook: Management expects gross profit margins to decrease by approximately 50 basis points in fiscal year 2008 compared to 2007 due to raw material costs and asset write-offs. Selling and administrative expenses are expected to decrease by 90 to 100 basis points as a percentage of revenue. R&D expenses are anticipated to increase by 10% to 11%.
• Capital Allocation: Capital expenditures for fiscal 2008 are expected to be approximately $650 million. The company repurchased $354 million of common stock in the first nine months of 2008.
• Legal Contingencies:
  • Antitrust: BD is a defendant in multiple class action suits alleging violations of federal antitrust laws regarding pricing of hypodermic products. Cases are consolidated in Multi-District Litigation (MDL).
  • Patent Litigation: Retractable Technologies, Inc. (RTI) alleges patent infringement regarding BD Integra syringes; trial scheduled for March 2009. Therasense, Inc. litigation regarding blood glucose monitoring patents is ongoing, though BD has secured summary judgment on two patents and invalidation of a third.
  • Product Liability: Pending suits regarding needlestick injuries and natural rubber latex gloves (ceased manufacturing in 1995).
• Regulatory/Other: BD-France was suspended from the UN Secretariat Procurement Division's vendor roster for a minimum of six months following an investigation into the Oil-for-Food Programme. BD states this will not have a material adverse effect.

Investor Verification Checklist

• Margin Pressure: Verify the sustainability of gross margins given the explicit guidance of a 50 basis point decline due to raw material costs (resins) and inflation.
• Legal Exposure: Monitor the status of the antitrust MDL and the RTI patent trial scheduled for March 2009, as outcomes could result in significant monetary damages.
• Currency Impact: Assess the sensitivity of future earnings to foreign exchange rates, as favorable translation contributed significantly (approx. 7%) to current period revenue growth.
• Acquisition Integration: Review the integration progress of the Cytopeia Inc. acquisition (completed May 2008) and its contribution to the Biosciences segment.
• UN Suspension: Confirm the duration and potential business impact of the UN vendor suspension for BD-France and BD AG.