Becton, Dickinson and Company — Q2 FY2010 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2010; comparison is with the corresponding 2009 periods. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions. BD operates in Medical, Diagnostics, and Biosciences.
Financial performance
| Metric | Q2 FY2010 | Q2 FY2009 | Six months FY2010 | Six months FY2009 |
|---|---|---|---|---|
| Revenue | $1,844.9m | $1,725.0m | $3,761.6m | $3,442.9m |
| Operating income | $430.5m | $360.7m | $876.5m | $779.0m |
| Income from continuing operations | $297.7m | $259.2m | $613.7m | $568.6m |
| Net income | $297.6m | $261.3m | $614.0m | $573.4m |
| Diluted EPS from continuing operations | $1.24 | $1.05 | $2.53 | $2.30 |
| Gross profit margin | 51.9% | 51.9% | 52.0% | 52.8% |
- Q2 revenue grew 7%, driven by approximately 7% volume growth, with less than 1% favorable currency translation and less than 1% price declines. Six-month revenue rose 9%.
- Q2 segment revenue growth: Medical 10%, Diagnostics 3%, and Biosciences 6%. Diagnostics was affected by lower lab testing and a mild flu season; Medical growth included strength in pen needles and pharmaceutical systems.
- Q2 operating income increased 19%. Management cited improved product mix and lower raw-material costs, offset in part by currency and hedge effects, manufacturing start-up costs, and higher pension costs. Six-month gross margin declined, primarily reflecting currency and hedging impacts.
- Q2 income from continuing operations increased 15%; diluted EPS from continuing operations increased 18%. Current-period results included an $8.9m noncash healthcare-reform charge ($0.04 per diluted share) and an estimated $0.09 per-share unfavorable foreign-exchange impact. The prior-year quarter included a $45m antitrust settlement charge ($0.11 per share).
Cash flow, debt and liquidity
- For the six months, continuing operating cash flow was $687.6m, up from $522.5m. Continuing investing cash use was $472.3m, including $229.6m of capital expenditures and $281.4m of net acquisition spending. Continuing financing cash use was $777.6m, including $450m of share repurchases and $174.2m of dividends.
- Cash and equivalents were $830.7m at March 31, 2010, down from $1,394.2m at September 30, 2009; short-term investments were $427.4m, down from $551.6m.
- Total debt was approximately $1.69bn ($200.6m short-term and $1,490.3m long-term), versus approximately $1.89bn at September 30, 2009. Debt was 24.4% of total capital, down from 26.8%.
- BD reported $200m outstanding under its commercial-paper program and no borrowings under its $1bn credit facility, which expires in December 2012. The credit facility covenant requires interest coverage of at least 5-to-1; BD reported a range of 27-to-1 to 34-to-1 over the last eight measurement dates.
- Management expected operating cash, available cash, and equivalents to fund normal 2010 needs, including capital expenditures, dividends, and repurchases. This is liquidity commentary, not a quantified earnings forecast.
Material changes, outlook and risks
- BD acquired HandyLab in November 2009 for $277.6m net of cash acquired. The acquisition added molecular-diagnostics technology and $148.1m of goodwill; $169m was recorded as acquired in-process research and development. BD plans to integrate its assays with HandyLab’s platform for the BD MAX system.
- Healthcare reform enacted in March 2010 imposes a 2.3% excise tax on certain U.S. medical-device sales beginning in 2013. BD estimated that products subject to the tax represented about 80% of FY2009 U.S. revenue. The filing also describes possible indirect demand and pricing effects.
- Foreign exchange and hedging materially affected results: management estimated an unfavorable Q2 impact of $0.09 per share and an unfavorable six-month impact of $0.18 per share. BD also identified unhedged exposure to other oil-based resins as a risk if raw-material costs rise.
- Legal matters include a $5m jury award to Retractable Technologies in a patent case, with a permanent injunction requested and BD planning to appeal; separate Gen-Probe patent suits seeking damages and injunctive relief; and unresolved indirect-purchaser antitrust claims. The proposed $45m direct-purchaser settlement remained subject to court approval, and indirect plaintiffs had challenged its completion. BD settled a False Claims Act matter for $1.55m in April 2010.
- Other cited risks include healthcare pricing and reimbursement changes, competition, product development and regulatory approvals, supply disruption, pension-asset performance, and implementation of the enterprise resource planning system. Management stated that interim results are not necessarily indicative of full-year results. The filing provides no clear quantified full-year revenue or EPS guidance.
Important facts for investors to verify
- Whether Diagnostics growth improves as lab testing and flu-related testing normalize, and whether the BD MAX launch and HandyLab integration deliver expected benefits.
- The ongoing effect of foreign exchange, hedging, raw-material costs, and pension expense on gross margins and earnings.
- The final court treatment and financial exposure for the direct and indirect antitrust matters, RTI litigation, and Gen-Probe patent claims.
- The estimated financial impact of the 2013 medical-device excise tax and any related healthcare-reform effects on demand, pricing, and reimbursement.
- Cash and investment levels, continued share repurchases, and the company’s stated ability to fund normal 2010 needs.