Becton, Dickinson and Company — Q1 FY2013 Form 10-Q
Reporting period: Three months ended December 31, 2012; comparative period is the three months ended December 31, 2011. BD is a global medical technology company with Medical, Diagnostics and Biosciences segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2013 | Prior-year quarter |
|---|---|---|
| Revenue | $1.900 billion | $1.832 billion |
| Operating income | $392.1 million | $336.8 million |
| Income from continuing operations | $270.2 million | $248.5 million |
| Diluted EPS from continuing operations | $1.35 | $1.14 |
| Net income, including discontinued operations | $625.4 million | $263.0 million |
| Diluted EPS, including discontinued operations | $3.13 | $1.21 |
| Gross margin | 52.9% | 50.8% |
- Revenue rose 3.7% as reported, reflecting approximately 5.9% volume growth, partly offset by 0.7% lower pricing and 1.5% unfavorable foreign exchange. Management said growth benefited from an early influenza season and favorable comparisons in some units.
- Segment revenue and operating income: Medical $983 million and $288 million; Diagnostics $652 million and $170 million; Biosciences $265 million and $65 million. Revenue growth was 3.5%, 5.0% and 1.7%, respectively.
- Gross margin improved 2.1 percentage points, primarily from manufacturing efficiencies, lower raw-material costs, favorable foreign exchange and a change in useful lives for certain equipment; pricing pressure and acquisition-related amortization were offsets. Operating income increased about 16%.
- Continuing-operations diluted EPS improved year over year; the prior-year quarter included an approximately $0.04 tax benefit from settlements. The current quarter’s continuing-earnings EPS included an estimated $0.03 favorable foreign-exchange impact.
Cash flow, liquidity and capital
- Cash from continuing operations was $225.9 million, versus $297.6 million. Management cited working-capital uses and pension contributions, including approximately $132 million of discretionary pension contributions in the current quarter.
- Continuing investing activities provided $391.3 million, including approximately $721 million of net proceeds from the Discovery Labware sale; the company also spent $123.7 million, net of cash acquired, on Safety Syringes. Capital expenditures were $80.4 million.
- At December 31, 2012, cash and equivalents were $1.917 billion and short-term investments were $594.6 million, totaling approximately $2.5 billion. About $1.8 billion was held outside the United States.
- Total debt was approximately $4.17 billion: $408.2 million short-term and $3.762 billion long-term. Debt represented 47.7% of total capital, compared with 49.7% at September 30, 2012. BD had $200 million of commercial paper outstanding and no borrowings under its $1 billion credit facility.
- BD repurchased approximately 3.9 million shares for $300 million and paid $96.8 million in dividends. The quarterly dividend was $0.495 per share. Management estimated approximately $500 million in full-year FY2013 repurchases, subject to market conditions.
Material changes, outlook and risks
- BD sold its Biosciences—Discovery Labware unit, excluding Advanced Bioprocessing, on October 31, 2012. The sale generated a $562.8 million pretax gain and a $349.4 million after-tax gain; the disposal group is presented as discontinued operations. The sale accounts for most of the sharp increase in reported net income and EPS.
- BD acquired Safety Syringes on December 24, 2012, for $124.1 million, adding passive anti-needlestick technology. Purchase-price allocations were provisional at quarter-end.
- The U.S. medical-device excise tax took effect in January 2013. BD estimated a $40–$50 million FY2013 impact, recorded in selling and administrative expense; fiscal 2013 is affected for three quarters.
- Management said operating cash and available cash were expected to fund normal FY2013 needs. No full-year revenue or EPS guidance is stated in the provided filing text. BD remained cautious on near-term Biosciences growth given uncertainty around U.S. government research funding.
- Key business risks cited include healthcare cost and pricing pressure, constrained utilization in parts of Europe, research-funding uncertainty, foreign-exchange exposure, competition, regulation and product safety, supply and raw-material costs, and execution of the ERP-system upgrade. Management estimated government receivables in Italy and Spain at $72 million and $44 million, respectively, and considered reserves adequate.
- Contingencies include a $45 million antitrust settlement placed in escrow, still subject to final court approval, with a hearing scheduled for March 2013. BD said it could not estimate possible losses from RTI’s pending antitrust and false-advertising claims; an adverse outcome could be material. The Gen-Probe patent case was settled, with payments and royalties described as not material. Management cautioned that litigation charges above accrued amounts could materially affect results and cash flows.
- Management attributed margin gains to operating improvements, including Project ReLoCo, and noted ongoing investments in R&D, emerging markets and new products. The filing states there were no material changes to the risk factors in BD’s 2012 Form 10-K.
Investor verification points
- Separate recurring continuing-operations performance from the Discovery Labware divestiture gain when assessing earnings and EPS.
- Track whether revenue growth persists after the early influenza season and favorable prior-year comparisons, particularly in Diagnostics and Biosciences.
- Compare the expected $40–$50 million device-tax impact and approximately $500 million share-repurchase plan with subsequent results and disclosures.
- Monitor cash conversion, pension contributions, overseas cash and any repatriation-related tax effects, as well as debt and liquidity.
- Check final court approval and funding of the $45 million settlement, and subsequent developments in RTI litigation and environmental matters.