Becton, Dickinson and Company — Q3 FY2012 Form 10-Q
Business context and period. Global medical technology company with Medical, Diagnostics and Biosciences segments. The quarter and nine-month periods ended June 30, 2012; the comparable periods ended June 30, 2011. Dollar amounts below are U.S. dollars. Income-statement and cash-flow figures are in millions unless stated otherwise. Results are unaudited.
Financial results
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $1,980.5 | $1,951.9 | $5,741.2 | $5,595.9 |
| Operating income | $449.0 | $447.2 | $1,169.1 | $1,252.8 |
| Income from continuing operations | $311.6 | $321.5 | $835.2 | $915.8 |
| Net income, including discontinued operations | $326.9 | $343.1 | $880.9 | $971.0 |
| Diluted EPS from continuing operations | $1.52 | $1.44 | $3.95 | $4.02 |
| Total diluted EPS | $1.59 | $1.53 | $4.17 | $4.26 |
| Gross margin | 52.2% | 52.7% | 51.4% | 52.6% |
- Q3 revenue rose 1.5%, reflecting approximately 5.6% volume growth, partly offset by 0.7% lower pricing and 3.4% unfavorable foreign exchange. Nine-month revenue increased 2.6%.
- Q3 Medical revenue grew 2.4% and Diagnostics 1.7%; Biosciences declined 2.7%. Nine-month segment revenue increased 3.0% in both Medical and Diagnostics and 0.2% in Biosciences.
- Q3 operating income was nearly flat and continuing-operations income declined 3.1%; continuing-operations diluted EPS increased 5.6%, alongside a lower diluted share count. For nine months, operating income declined 6.7%, continuing income 8.8%, and continuing-operations diluted EPS 1.7%.
- Q3 gross margin declined 0.5 percentage points year over year; nine-month gross margin fell 1.2 points. The filing cites acquisition-related amortization, product mix, pricing and raw-material costs among pressures, partly offset by manufacturing efficiencies and a machinery-life estimate change.
Cash flow, liquidity and capital
- Continuing operating cash flow for the first nine months was $1,135.9 million, versus $1,117.8 million a year earlier. Continuing investing used $644.2 million; continuing financing used $56.4 million.
- Capital expenditures were $313.5 million. The company repurchased $1,250.0 million of stock and paid $280.3 million in dividends. Management estimated approximately $1.5 billion of repurchases for full-year FY2012.
- At June 30, cash and equivalents were $1,658.7 million and short-term investments $529.7 million, totaling $2.19 billion. Current assets were $5,284.7 million and current liabilities $1,889.7 million.
- Total debt was approximately $4.17 billion: short-term debt $410.7 million and long-term debt $3,760.6 million. Debt was 48.7% of total capital, up from 35.8% at September 30, 2011. The increase included $1.5 billion of notes issued in November 2011 and substantial share repurchases.
- Cash and short-term investments included $1.8 billion held outside the United States; repatriation may have tax consequences. Management said operating cash and available resources should fund normal needs for the remainder of FY2012.
Material changes, outlook and unusual items
- BD signed an agreement to sell Discovery Labware, excluding Advanced Bioprocessing, for expected gross proceeds of about $730 million, subject to adjustments and closing conditions. Closing was expected by calendar year-end 2012, with a gain anticipated. The disposal group was reported in discontinued operations; management forecast FY2012 revenue of about $237 million and diluted EPS of $0.29 for the affected assets.
- BD acquired KIESTRA Lab Automation for consideration valued at $59.5 million, including $50.9 million net cash and contingent consideration. The acquisition added $33.5 million of goodwill, allocated to Diagnostics.
- On June 29, 2012, BD agreed to acquire Safety Syringes, Inc.; closing was expected by fiscal year-end, subject to customary conditions.
- A prospective change in the estimated useful lives of certain production machinery from 10 to 13 years was expected to increase FY2012 operating income by approximately $19.9 million. Management attributed the change to updated assessment of expected asset utilization.
- The U.S. pension plan was amended to convert traditional defined-benefit benefits to a cash-balance plan effective January 1, 2013. The 2011 remeasurement was expected to reduce FY2012 pension cost by $40.2 million.
- Management expected FY2012 R&D spending to be comparable to FY2011 as a percentage of revenue; Diagnostics R&D was expected to be slightly lower as a percentage of revenue. No specific consolidated revenue or EPS guidance is provided in the supplied filing text.
Management commentary and principal risks
Management cited emerging-market growth, new products and safety-engineered products as supports to sales. Results faced currency headwinds, pricing pressure, constrained healthcare utilization, weak U.S. research funding and demand for Biosciences instruments, and competition affecting the GeneOhm healthcare-associated-infection platform. The company said the 2.3% U.S. medical-device excise tax was scheduled to begin in January 2013 and estimated that products subject to it represented about 80% of FY2011 U.S. revenue.
Risks discussed include economic and government-funding uncertainty, foreign exchange, healthcare reform and reimbursement changes, competition and pricing, product safety and regulatory matters, supply and raw-material disruption, product development and intellectual-property disputes, pension-plan assumptions, and execution of the enterprise resource planning upgrade. BD reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Contingencies and other notable matters
- In consolidated antitrust litigation, the Third Circuit ruled that distributor plaintiffs, rather than hospital plaintiffs, were direct purchasers. A previously agreed $45 million settlement remained subject to district-court fairness approval and other conditions; BD had accrued $45 million and could not estimate possible losses beyond that amount.
- Retractable Technologies’ patent, antitrust and false-advertising litigation remained unresolved. The filing says potential loss on the non-patent claims could be material if RTI prevailed, but BD could not estimate a range; BD stated it believed the claims lacked merit. RTI had petitioned the U.S. Supreme Court regarding the patent ruling.
- BD also reported Gen-Probe patent litigation and environmental proceedings. It could not estimate reasonably possible losses for the Gen-Probe matter; the filing warns that future charges beyond recorded accruals could materially affect results or cash flows.
- Foreign-currency translation reduced comprehensive income, particularly in Q3, mainly due to the weakening euro against the U.S. dollar. Spain government receivables were approximately $32 million net of reserves at June 30 after BD received about $63 million during the quarter; management considered reserves adequate.
Investor verification points
- Confirm continuing-operations performance and margins against the effects of foreign exchange, product mix, pricing, acquisition amortization and the machinery-life estimate change.
- Monitor whether Discovery Labware closes on expected terms and timing, and compare actual proceeds and gain with the stated expectations.
- Track debt, the scale of share repurchases, and the availability and geographic location of cash; assess potential tax implications of repatriation.
- Review the outcome and approval status of the $45 million antitrust settlement and developments in RTI, Gen-Probe and environmental matters.
- Assess the impact of the 2013 medical-device excise tax, continued research-funding constraints, European economic conditions and competitive pressure on future demand and pricing.