Becton, Dickinson and Company — Q2 2013 Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2013. Unless otherwise noted, dollar amounts are in millions. Comparisons are with the corresponding 2012 period.
Business context and results
BD is a global medical technology company operating through Medical, Diagnostics and Biosciences. Q2 revenue increased 3.7% to $2,000.4, driven mainly by volume growth of approximately 4.3%; price declines and foreign exchange partly offset growth. International revenue grew 6.2%, while U.S. revenue increased 0.3%.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $2,000.4 | $1,929.0 | $3,900.6 | $3,760.7 |
| Operating income | $381.1 | $383.3 | $773.2 | $720.1 |
| Continuing-operations income | $276.1 | $275.1 | $546.4 | $523.7 |
| Diluted EPS from continuing operations | $1.39 | $1.31 | $2.74 | $2.45 |
| Net income | $275.6 | $291.0 | $901.1 | $554.0 |
| Gross margin | 50.9% | 51.2% | 51.9% | 51.0% |
Q2 operating margin was approximately 19.1%, versus 19.9% a year earlier. Q2 continuing income rose slightly despite lower operating income, with a lower quarterly tax rate contributing. Q2 net income declined as the prior-year quarter included income from discontinued operations. Six-month net income and EPS were substantially increased by the Discovery Labware divestiture; the six-month discontinued-operations result included a $346.6 after-tax sale gain.
Segments and material changes
- Medical: Q2 revenue rose 4.0% to $1,062.1; segment operating income increased to $290.8 from $285.3. Growth reflected new products, emerging markets and safety-engineered products. Margin benefited from manufacturing efficiencies and lower raw-material costs.
- Diagnostics: Q2 revenue rose 4.6% to $658.9, but operating income fell to $144.9 from $158.1. The filing cites Jaguar Plus amortization, foreign exchange, and higher selling and launch spending as pressures.
- Biosciences: Q2 revenue increased 0.6% to $279.4; operating income was essentially flat at $71.4. Weaker Western European sales and timing of Japanese government funding offset growth.
- Q2 gross margin fell 0.3 percentage points year over year. Efficiencies and lower materials costs were offset by pricing declines, acquired-intangible amortization and currency effects.
- BD recorded a $14 Q2 pre-tax medical-device excise-tax charge, or $0.05 per diluted continuing-operations share. Management estimated the fiscal 2013 tax impact at about $45.
Cash flow, balance sheet and capital allocation
Continuing operating cash flow for the first six months was $542.9, down from $574.4. The company cited working-capital cash use, including higher inventory and lower payables, and approximately $132 of discretionary pension contributions. Continuing investing activities provided $414.9, including about $720 of divestiture proceeds; financing activities used $500.1. Capital expenditures were $197.3. BD repurchased $356.5 of shares and paid $193.4 in dividends.
At March 31, cash and equivalents were $2,023.9 and short-term investments were $396.8. Total debt was approximately $4.17 billion: $407.4 short-term and $3,762.1 long-term. Debt was 47.2% of total capital, compared with 49.7% at September 30, 2012. Commercial paper borrowings were $200; the $1 billion revolving credit facility had no borrowings. A $200 million note matured April 15, 2013. Cash and short-term investments held outside the U.S. totaled about $1.8 billion; repatriation could have tax consequences.
Management said cash, operating cash flow and available resources were expected to fund normal fiscal 2013 operating needs. It estimated full-year share repurchases of approximately $500, subject to market conditions. No specific full-year revenue or EPS guidance is stated in the provided filing text.
Outlook, risks and unusual items
- Management described U.S. healthcare conditions as constrained but stable, and cited macroeconomic and utilization pressures in Europe. Sequestration-related government spending and research-funding cuts could weigh on demand, particularly in Biosciences.
- Other identified risks include pricing pressure and competition, foreign exchange, raw-material costs, product safety and regulatory matters, supply disruption, pension assumptions, acquisitions and ERP-system implementation.
- BD faces ongoing litigation. A $45 settlement with direct purchasers in the hypodermic-products antitrust matter received final court approval on April 12, 2013, subject to appeals. The company said it could not estimate a loss range for RTI’s antitrust and false-advertising claims; trial was expected in September 2013, and an adverse outcome could be material.
- BD sold its Discovery Labware unit, excluding Advanced Bioprocessing, in October 2012 for gross proceeds of approximately $724.1 and recognized a pre-tax gain of $561.7. The unit is reported as discontinued operations.
- Acquisitions included Safety Syringes for approximately $124.1 and Cato for approximately $23.3, including contingent consideration. BD also converted its U.S. traditional defined-benefit pension plan to a cash-balance plan effective January 1, 2013.
Key facts for investors to verify
- Separate recurring operating performance from the Discovery Labware sale gain when assessing six-month net income and EPS.
- Track Diagnostics’ operating-income decline and the extent to which acquired-intangible amortization and other cost pressures persist.
- Monitor operating cash conversion, inventory and payables, pension contributions, and the effect of the matured $200 million note.
- Confirm actual medical-device excise-tax expense and share repurchases against management’s fiscal-year estimates.
- Follow developments in the RTI litigation, the antitrust settlement appeals, government funding and receivables in Italy and Spain.