Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 31, 2002 for Becton, Dickinson and Company (BD). BD operates through three principal segments: BD Medical Systems, BD Clinical Laboratory Solutions, and BD Biosciences. The company reported 254,700,573 shares of common stock outstanding as of January 31, 2003.
Key Financial Metrics
| Metric | Q1 2003 (Ended Dec 31, 2002) | Q1 2002 (Ended Dec 31, 2001) |
|---|---|---|
| Revenues | $1,051,648,000 | $944,946,000 |
| Net Income | $113,638,000 | $99,673,000 |
| Diluted EPS | $0.43 | $0.37 |
| Operating Income | $157,583,000 | $141,653,000 |
| Operating Margin | 15.0% | 15.0% |
| Gross Margin | 47.7% | 47.1% |
| Cash from Operations | $113,623,000 | $155,485,000 |
| Total Debt | $1,235,049,000 | N/A (Balance Sheet data only) |
| Cash and Equivalents | $226,427,000 | $153,544,000 (Closing Q1 2002) |
Note: Total Debt calculated as Short-term debt ($430,734,000) + Long-Term Debt ($804,315,000) as of Dec 31, 2002.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 11% year-over-year. Growth was driven by foreign currency translation (approx. 2% favorable impact) and organic growth in Medical Systems (14%) and Clinical Lab (13%).
- Segment Performance:
- Medical Systems: Driven by safety-engineered product sales ($100M vs $78M prior year) and prefillable drug delivery devices (+30%).
- Clinical Lab: Driven by safety-engineered products and diagnostic systems (respiratory/flu tests).
- Biosciences: Revenues were slightly ahead of last year, though flow cytometry instrument sales declined due to order backlog reduction and customer anticipation of a new product launch.
- Profitability: Gross margin improved to 47.7% due to higher sales of safety-engineered products with better margins. Operating margin remained flat at 15.0% despite margin expansion, offset by higher pension costs and increased selling/administrative expenses (27.0% of revenue vs 26.3% prior year).
- Cash Flow: Operating cash flow decreased to $114M from $155M, primarily due to working capital changes and a $100M pension contribution in both periods.
Guidance, Outlook, and Risks
- Subsequent Event (Supplier Explosion): An explosion at a supplier's (West Pharmaceutical Services) plant in Kinston, NC, on January 29, 2003, may cause short-term supply interruptions. Management estimates up to 2 cents of diluted EPS could shift from Q2 to the second half of fiscal 2003.
- Restructuring: The company continues to execute manufacturing restructuring programs initiated in fiscal 2002, 2000, and 1998. Savings from the 2002 program are expected to be fully offset by remaining costs in fiscal 2003, with net savings of approx. $15M expected beginning in fiscal 2004.
- Capital Allocation: Capital expenditures for fiscal 2003 are expected to be about $275 million. The Board authorized an additional repurchase of up to 10 million common shares in January 2003.
- Legal Proceedings: BD is involved in various litigation, including latex allergy claims (521 total claims, 241 closed with no liability) and antitrust claims (RTI Litigation). Management believes outcomes will not have a material adverse effect but notes uncertainty regarding potential charges exceeding reserves.
- IT Implementation: A nine-day warehouse shutdown in early Q2 to upgrade business information systems resulted in advanced inventory shipments to distributors. Revenue for this inventory will be recognized in Q2.
Investor Verification Checklist
- Verify the impact of the West Pharmaceutical Services explosion on Q2 supply chain and the accuracy of the 2-cent EPS shift estimate.
- Monitor the progress of the manufacturing restructuring programs and the realization of projected $15M annual savings starting in fiscal 2004.
- Track the resolution of pending litigation, specifically the RTI antitrust case (trial set for April 8, 2003) and latex allergy claims.
- Confirm the successful implementation of the new business information system and the recognition of revenue from advanced inventory shipments in Q2.
- Review the execution of the new 10 million share repurchase authorization and its impact on capital structure.