Becton, Dickinson and Company (BD) — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 31, 2013. Unaudited results; dollar amounts are in millions except per-share data. BD is a global medical technology company operating through Medical, Diagnostics and Biosciences segments.
Financial results
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $2,015 | $1,900 |
| Operating income | $378 | $392 |
| Continuing-operations income | $271 | $270 |
| Continuing-operations diluted EPS | $1.37 | $1.35 |
| Net income | $271 | $625 |
| Gross margin | 51.3% | 52.9% |
| Cash from continuing operations | $355 | $226 |
Revenue rose 6.0%, reflecting approximately 6.3% volume growth, including 0.8% from acquisitions, and 0.4% pricing; foreign exchange reduced growth by approximately 0.7%. Continuing-operations income was nearly flat, while operating income fell about 4%. The prior-year net income included $355 million of after-tax income from the Discovery Labware divestiture, so reported net income is not directly comparable.
Segment revenue and operating income: Medical, $1,064 and $300 (prior year $983 and $288); Diagnostics, $672 and $162 (prior year $652 and $170); Biosciences, $279 and $66 (prior year $265 and $65). Medical growth benefited partly from acquisition contributions and favorable order timing. Diagnostics benefited from an early influenza season and point-of-care gains; Biosciences growth included emerging-market sales and clinical reagents.
Cash, debt and liquidity
At December 31, 2013, cash and equivalents were $1,679 and short-term investments were $834, totaling approximately $2.5 billion; $2.0 billion was held outside the United States. Total debt was approximately $4.0 billion ($205 short-term and $3,764 long-term), equal to 42.9% of total capital. Current assets were $5,743 and current liabilities $1,997.
Continuing investing activities used $267 million, including $99 million of capital expenditures and $19 million for capitalized software. Financing activities used $298 million, including $189 million of share repurchases and $106 million of dividends. Cash decreased by $211 million during the quarter. Management said cash generated from operations and available cash were expected to fund normal FY2014 operating needs, including capital spending, dividends and repurchases. BD estimated approximately $450 million of share repurchases for FY2014, subject to market conditions.
Material changes, outlook and risks
- Gross margin declined 1.6 percentage points. BD attributed pressure to foreign exchange (about 130 basis points), higher start-up and acquisition-related amortization costs, raw materials and product mix; lower manufacturing costs, lower pension costs and pricing partly offset these effects.
- The U.S. medical-device excise tax reduced Q1 FY2014 results by $14 million, or $0.05 per diluted share. Management cited an estimated $0.09 per-share unfavorable foreign-exchange impact on continuing-operations earnings.
- BD reported continued growth in emerging markets and safety-engineered products, but noted pricing pressure, uncertain healthcare utilization and constrained European healthcare spending. Emerging-market growth depends partly on government healthcare funding. The filing provides no specific full-year revenue or earnings guidance.
- Litigation is a significant contingency. In September 2013, a jury awarded Retractable Technologies (RTI) $113.5 million on an attempted-monopolization claim; antitrust law provides for trebling damages and attorney fees. BD recorded a $341 million pretax charge in Q4 FY2013 and plans to appeal. The jury rejected several other RTI claims; possible equitable relief and the separate patent-damages appeal remain relevant. The filing does not state a final amount payable.
- A $22 million indirect-purchaser antitrust settlement fund payment was made in Q1; court approval remained pending. BD says additional litigation charges could materially affect results or cash flows, and it cannot estimate loss ranges in all cases.
- Other exposures include delayed government receivables (net of reserves: Italy $63 million; Spain $68 million), foreign exchange, raw-material costs and ordinary-course environmental proceedings. A Brazil anti-dumping investigation was expected to conclude by November 2014; BD did not expect a material operating impact.
- On January 6, 2014, BD acquired Alverix for $40 million to expand its point-of-care testing position. BD also announced changes to U.S. post-65 retiree medical coverage effective April 1, 2014, with an expected immaterial financial impact.
Important facts for investors to verify
- Developments in the RTI litigation, including the appeal, potential treble damages, attorney fees and equitable relief.
- Final court approval and any subsequent developments regarding the $22 million indirect-purchaser settlement.
- Whether revenue growth, margin recovery and operating cash flow are sustained, particularly after favorable order timing and seasonal influenza demand.
- Impact of foreign exchange, the medical-device excise tax, product mix and raw-material costs on earnings.
- Cash availability and tax consequences if overseas funds are repatriated, alongside planned repurchases and dividends.