Becton, Dickinson and Company — Q1 FY2010 Form 10-Q
Reporting period: Three months ended December 31, 2009, compared with the three months ended December 31, 2008. BD is a global medical technology company operating through BD Medical, BD Diagnostics and BD Biosciences. Financial amounts below are in U.S. dollars; millions are rounded.
Key financial results
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Revenue | $1,916.8 million | $1,717.9 million | +12% |
| Operating income | $446.0 million | $418.3 million | +7% |
| Continuing operations income | $316.0 million | $309.4 million | +2% |
| Net income | $316.4 million | $312.1 million | +1% |
| Diluted EPS from continuing operations | $1.30 | $1.25 | +4% |
| Gross margin | 52.0% | 53.6% | Down 1.6 percentage points |
| Operating cash flow from continuing operations | $394.6 million | $265.5 million | +$129.1 million |
Revenue growth reflected approximately 9% volume growth and 3% favorable currency translation, partly offset by price decreases of less than 1%. Management estimated that foreign exchange movements, including hedge losses, reduced current-quarter diluted EPS by $0.09. The effective tax rate was 28.1%, versus 26.6%.
Segments and material changes
- Medical: Revenue increased 16% to $1,018.6 million; segment operating income rose to $319.1 million. Flu-related products contributed about 7 percentage points of revenue growth. Segment operating margin increased to 31.3% from 29.6%, although gross margin faced currency, start-up cost and pension-cost pressure.
- Diagnostics: Revenue increased 10% to $595.5 million; segment operating income rose to $162.4 million. Flu-related products contributed about 2 percentage points of growth. Segment operating margin declined to 27.3% from 28.6%.
- Biosciences: Revenue was essentially flat at $302.7 million; segment operating income fell to $85.5 million from $99.7 million. Management cited constrained capital funding, a distributor’s inventory reduction, delayed customer purchases, and unfavorable currency effects. Segment operating margin declined to 28.2% from 33.0%.
- Consolidated operating income increased despite lower gross margin; management cited spending controls and lower raw-material costs, partly offset by currency and hedge effects, higher manufacturing start-up and pension costs, and higher selling and administrative expenses.
Cash, debt and liquidity
- Cash and equivalents were $1,182.3 million at December 31, 2009, down from $1,394.2 million at September 30; short-term investments were $276.1 million, down from $551.6 million.
- Continuing operating activities provided $394.6 million. Investing activities used $141.8 million, including $274.8 million paid net of cash acquired for HandyLab, partly offset by net investment proceeds. Financing activities used $466.7 million, including $191.1 million of share repurchases and $89.9 million of dividends.
- Total debt was approximately $1.7 billion, or 24.0% of total capital, compared with 26.8% at fiscal year-end. Short-term debt was $205.4 million and long-term debt $1,487.8 million. The company repaid approximately $200 million of short-term notes during the quarter.
- BD said operating cash generation and available cash were expected to fund normal 2010 needs, including capital expenditures, dividends and share repurchases. It had a $1 billion credit facility with no borrowings outstanding and $200 million outstanding under its commercial paper program. The disclosed covenant required interest coverage of at least 5-to-1; recent measurements ranged from 27-to-1 to 34-to-1.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or EPS guidance. Management said first-quarter R&D spending as a share of revenue was not indicative of expected full-year spending.
- BD acquired HandyLab on November 19, 2009, for consideration of $277.6 million. The acquisition added a molecular diagnostics platform; BD planned to combine it with GeneOhm assays and market the offering as the BD Max System. The preliminary allocation included $169.0 million of acquired in-process R&D and $148.1 million of goodwill. Acquisition-related costs of $2.5 million were expensed.
- A $5 million legal contingency was recorded in selling and administrative expense. In a patent case, a jury awarded Retractable Technologies $5 million and found infringement on most claims; BD planned to appeal, and the plaintiff sought a permanent injunction. A separate $45 million direct-purchaser antitrust settlement remained subject to court approval; indirect-purchaser claims continued.
- BD identified ongoing risks including foreign exchange and hedging, economic and healthcare-market conditions, pricing pressure, raw-material and resin costs, product development and regulatory approvals, litigation, pension funding, and acquisition integration. It noted that it does not hedge all resin exposures.
- Net receivables from Greek government-supported healthcare facilities were approximately $41 million, subject to significant payment delays. Management did not expect this concentration to materially affect financial position or liquidity, but warned collection could be affected by government funding changes.
- The company reported that disclosure controls were effective as of December 31, 2009, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether flu-related demand and the strong Medical and Diagnostics growth rates persist beyond the quarter.
- How currency movements and hedging affect reported revenue, gross margin and EPS in subsequent periods.
- HandyLab integration progress, the commercial outlook for the BD Max System, and the treatment and eventual outcome of acquired in-process R&D.
- Developments in the RTI patent case and the status and financial effect of the antitrust settlement and remaining claims.
- Cash generation after pension contributions, capital spending, dividends and buybacks, along with collection of Greek government receivables.