Becton, Dickinson and Company — Q2 FY2011 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2011. Financial amounts are in U.S. dollars; income and cash-flow comparisons are against the corresponding 2010 periods. BD is a global medical technology company operating through Medical, Diagnostics and Biosciences.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Revenue | $1.922 billion | $1.799 billion | $3.764 billion | $3.668 billion |
| Operating income | $440 million | $414 million | $853 million | $843 million |
| Income from continuing operations | $311 million | $285 million | $625 million | $589 million |
| Net income | $312 million | $298 million | $628 million | $614 million |
| Diluted EPS, continuing operations | $1.38 | $1.18 | $2.72 | $2.43 |
| Diluted EPS, total | $1.38 | $1.24 | $2.74 | $2.53 |
- Q2 revenue increased 6.8%; management attributed growth to volume gains of just over 5% and favorable currency translation of 2%, partly offset by price decreases of less than 1%. The prior-year comparison included H1N1-related sales, Japan supplemental spending and U.S. stimulus orders; BD estimated this reduced Q2 growth by about 2 percentage points.
- Q2 gross margin was 52.1%, versus 52.0%; the six-month margin was 52.6%, versus 52.1%. Q2 operating income rose 6.5%, while operating expenses increased faster than revenue overall.
- Q2 income from continuing operations benefited from an estimated $0.07 per diluted share of favorable currency translation. The prior-year Q2 included a $0.04 per-share noncash healthcare-reform charge. Lower effective tax rates also supported comparisons: 27.4% versus 30.6% for Q2, and 25.3% versus 29.3% for the six months.
Segments and operating drivers
- Medical: Q2 revenue $981 million, up 6.5%; operating income $287 million, up from $263 million. Growth included Diabetes Care pen needles, Pharmaceutical Systems and international safety-engineered products. Six-month revenue increased 1%, while operating income was $563 million versus $566 million.
- Diagnostics: Q2 revenue $605 million, up 8.9%; operating income $156 million versus $144 million. Growth reflected safety-engineered products and infectious-disease platforms, including MRSA and C-Difficile. Six-month revenue rose 5% and operating income was $317 million versus $306 million.
- Biosciences: Q2 revenue $335 million, up 4.1%, including an estimated 3.7% currency benefit; operating income was $95 million versus $97 million. The comparison was affected by prior-year stimulus and Japan sales, and current-period Japan disruption. Six-month revenue increased 4% and operating income was $186 million versus $183 million.
- R&D expense increased 19% in Q2 to $119 million and 18% for the six months to $235 million, reflecting increased investment in products and platforms.
Cash flow, debt and liquidity
- Continuing operating cash flow for the six months was $707 million, versus $648 million. Working-capital changes used $285 million, primarily reflecting higher inventory and prepaid expenses and lower payables, partly offset by improved receivables collections.
- Continuing investing cash use was $1.024 billion, including $205 million for the Accuri acquisition and $567 million net purchases of investments. Capital expenditures were $194 million.
- Continuing financing cash use was $155 million. BD repurchased $1.058 billion of shares and paid $183 million in dividends. Management estimated full-year FY2011 repurchases of approximately $1.5 billion; 15.5 million shares remained authorized at March 31.
- Cash and equivalents were $749 million at March 31, down from $1.216 billion at September 30, 2010. Short-term investments rose to $1.110 billion from $528 million; BD said the increase in investment purchases reflected extending maturities beyond three months.
- Short- and long-term debt totaled approximately $2.726 billion, compared with $1.698 billion at September 30. Debt was 34.3% of total capital, versus 23.7%. The increase followed issuance of $700 million of 10-year notes at 3.25% and $300 million of 30-year notes at 5.00% in November 2010. Commercial paper outstanding was $200 million; the $1 billion credit facility had no borrowings. BD reported covenant coverage of 23-to-1 to 32-to-1 on the last eight measurement dates, against a minimum of 5-to-1.
- Management stated cash generation, available cash and debt proceeds were expected to fund normal operating needs, including capital expenditures, dividends and repurchases.
Outlook, risks and unusual items
- BD estimated the Japan earthquake and tsunami reduced Q2 revenue by less than $10 million and forecast an aggregate FY2011 revenue impact of $10 million to $20 million, or about $0.05 per diluted share from continuing operations. Japanese order volumes had returned to normal; the Fukushima facility’s prepared plated media lines had restarted, while BD Hypak prefillable syringe manufacturing was expected to resume in Q3.
- BD identified ongoing Japan disruption as a risk: Japan represented about 5% of revenue, and BD sourced some parts and products from Japanese suppliers. The company noted uncertainty around longer-term effects and insurance exclusions related to nuclear incidents.
- U.S. healthcare reform imposes a 2.3% excise tax on certain medical-device sales beginning January 2013. BD estimated affected products represented approximately 80% of FY2010 U.S. revenue.
- BD acquired Accuri Cytometers for $205 million net of cash acquired. Preliminary purchase accounting included $42 million of acquired in-process research and development and $94 million of goodwill, with the goodwill not tax deductible. Acquisition-related costs of $0.9 million were expensed; the acquisition was not material to consolidated results.
- Material legal matters include consolidated antitrust class actions, RTI patent and antitrust/false-advertising litigation, and Gen-Probe patent infringement suits. BD stated that it could not estimate reasonably possible losses for several matters; losses beyond existing accruals could materially affect results or cash flows. The RTI patent case had resulted in a $5 million jury award and an injunction stayed pending appeal; trial of RTI’s antitrust and false-advertising claims was scheduled for January 2012.
- Other stated risks include government receivable collection and sovereign-credit exposure, raw-material and resin costs, product safety and regulatory issues, competition and pricing, foreign exchange, pension costs, and execution of the enterprise-resource-planning upgrade. BD said Greece’s government settlement was received and related bonds were sold; it considered reserves for government receivables adequate.
- No broad full-year revenue or earnings guidance is stated in the supplied filing text. The company noted interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether operating cash flow and working-capital trends remain sufficient to support elevated buybacks and dividends.
- How the higher debt balance, interest expense and share repurchases affect leverage and future EPS.
- Whether Japan operations and supply chains recover as anticipated, and whether the estimated FY2011 impact changes.
- Progress and potential exposure in the RTI, antitrust and Gen-Probe litigation, including any changes to accruals or injunction status.
- The realization of Accuri’s strategic benefits and the assumptions underlying its acquired technology, in-process R&D and goodwill valuations.