Becton, Dickinson and Company — Q1 FY2012 10-Q
Reporting period: Three months ended December 31, 2011. BD is a global medical technology company operating through Medical, Diagnostics and Biosciences. Financial statement amounts below are in U.S. dollars; rounded figures are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,887.6 million | $1,842.0 million | +2.5% |
| Operating income | $358.6 million | $413.1 million | -13.2% |
| Income from continuing operations | $263.0 million | $314.3 million | -16.3% |
| Net income | $263.0 million | $315.9 million | -16.8% |
| Diluted EPS from continuing operations | $1.21 | $1.35 | -10.4% |
| Gross margin | 50.9% | 53.0% | -2.1 percentage points |
| Operating cash flow, continuing operations | $313.0 million | $469.7 million | -33.4% |
Revenue reflected approximately 3.7% volume growth, partly offset by 1.3% lower pricing; currency translation had minimal impact. International revenue rose 4.5% to $1,058.9 million, while U.S. revenue was essentially flat at $828.8 million. Dividends per share increased to $0.45 from $0.41.
Segment revenue and operating income were: Medical $950.4 million and $253.7 million; Diagnostics $620.7 million and $165.4 million; Biosciences $316.5 million and $83.0 million. Medical and Biosciences operating income declined year over year; Diagnostics operating income increased modestly.
Cash, debt and liquidity
- Cash and equivalents were $2,196.3 million and short-term investments were $497.4 million at December 31, 2011.
- Total debt was approximately $4.18 billion, versus $2.72 billion at September 30, 2011. Debt was 46.2% of total capital, up from 35.8%.
- BD issued $500 million of five-year notes at 1.75% and $1 billion of ten-year notes at 3.125% in November 2011. The company reported $200 million of commercial paper borrowings and no borrowings on its $1 billion credit facility.
- Operating cash flow was reduced by working-capital movements and approximately $100 million of discretionary pension contributions. Capital expenditures were $103.7 million. Financing cash flow included $399.9 million of share repurchases and $96.2 million of dividends.
- Management stated cash, operating cash generation and available resources were expected to fund normal fiscal 2012 operating needs.
Changes, outlook and management commentary
- Revenue growth did not translate into higher profit: gross margin fell 2.1 points, and operating income declined. BD attributed margin pressure to pricing, product mix, acquisition-related intangible amortization and higher raw-material costs; continuous-improvement savings partly offset these effects.
- Interest expense increased to $29.4 million from $15.6 million, reflecting higher long-term debt. Selling and administrative expense rose to 25.9% of revenue from 24.3%, including higher emerging-market, acquisition-related and legal costs.
- Management expected pricing pressure and constrained healthcare utilization in the U.S. and Western Europe to continue through fiscal 2012, alongside higher raw-material costs. It expected full-year R&D spending as a percentage of revenue to be comparable with fiscal 2011; Diagnostics R&D was expected to be slightly lower as a percentage of revenue.
- BD estimated approximately $1.5 billion of common-stock repurchases for fiscal 2012. This is a stated estimate, not a broader earnings or revenue forecast; the filing provides no clear full-year EPS or revenue guidance.
- A U.S. pension-plan amendment converts traditional defined-benefit benefits to a cash-balance plan effective January 1, 2013. The remeasurement was expected to reduce fiscal 2012 net pension cost by $40.2 million.
- The U.S. medical-device excise tax of 2.3% was scheduled to begin in January 2013; BD estimated products subject to it represented about 80% of fiscal 2011 U.S. revenue.
Risks, contingencies and unusual items
- BD disclosed antitrust class actions, patent and other claims by Retractable Technologies, patent litigation with Gen-Probe, and environmental matters. The company said it could not estimate possible losses for key unresolved matters; adverse outcomes could materially affect results or cash flows. A $45 million antitrust settlement accrual remained recorded, subject to continuing litigation and appeal developments.
- RTI indicated it intended to seek U.S. Supreme Court review of a patent ruling, with a filing deadline of March 26, 2012; related antitrust and false-advertising claims remained pending. BD stated it believed the claims were without merit.
- Other principal risks cited include healthcare spending and reimbursement changes, competition and pricing, product safety or recalls, regulation, foreign exchange, raw-material and supply disruption, emerging-market execution, pension assumptions, and litigation. Management reported no material change to the risk factors in its 2011 Form 10-K.
- Foreign currency translation reduced other comprehensive income by $48.1 million, mainly due to a weaker euro. A pension-plan remeasurement contributed a $143.7 million benefit-plan adjustment to other comprehensive income.
Important facts for investors to verify
- Whether revenue growth and international demand can offset U.S. weakness, pricing pressure and constrained healthcare utilization.
- Whether gross margins stabilize as acquisition amortization, product mix, input costs and cost-saving initiatives affect results.
- Whether operating cash flow recovers after pension contributions and working-capital uses, and how the higher debt balance affects interest costs and capital allocation.
- Progress and potential exposure in the antitrust, RTI and Gen-Probe litigation, including any changes to recorded accruals.
- The impact of the 2013 medical-device excise tax and the pace and amount of planned fiscal 2012 share repurchases.