BDX

Business Context and Reporting Period

This Form 10-Q covers Becton, Dickinson and Company (BD) for the quarterly and nine-month periods ended June 30, 2005. BD is a medical technology company operating through three principal segments: BD Medical, BD Diagnostics, and BD Biosciences. The company reported strong growth driven by the transition to safety-engineered devices and favorable foreign currency translation.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 11% year-over-year for the quarter and 9.6% for the nine-month period. Growth was driven by organic sales increases and a favorable foreign currency impact of approximately 3% for the quarter.
• Profitability: Net income rose significantly from $109.4 million to $189.7 million for the quarter. This improvement is largely attributable to the absence of a $100 million litigation settlement recorded in the prior year's third quarter and the absence of $45 million in blood glucose monitoring (BGM) charges recorded in the prior year's nine-month period.
• Accounting Change: Effective October 1, 2004, BD adopted SFAS No. 123(R), requiring fair-value measurement for share-based compensation. This resulted in a $16.9 million expense for the quarter and $45.0 million for the nine-month period, reducing diluted EPS by approximately 5 cents and 12 cents, respectively.
• Segment Performance:
  • Medical: Revenues up 13% (quarter) and 10% (nine months), driven by safety-engineered devices and Diabetes Care.
  • Diagnostics: Revenues up 10% (quarter) and 8% (nine months), with growth in Preanalytical and Diagnostic Systems.
  • Biosciences: Revenues up 8% (quarter) and 10% (nine months), though operating income declined slightly in the quarter due to one-time fees and software installation costs.

Guidance, Outlook, and Risks

• Outlook: Management expects full-year fiscal 2005 gross profit margins to be approximately 50.5% and selling/administrative expenses to be 26.8% of revenues. R&D expenses are anticipated to increase about 13% for the full year.
• Capital Allocation: The company repurchased $409.2 million of common stock during the nine-month period. Capital expenditures are expected to range between $300 million and $325 million for fiscal 2005.
• Divestiture: BD signed a definitive agreement on July 1, 2005, to sell its Clontech unit (reported as Discontinued Operations) for approximately $60 million, with closing expected in the fourth quarter of 2005.
• Tax Repatriation: Under the American Jobs Creation Act of 2004, BD is evaluating the repatriation of foreign earnings, potentially up to $1 billion, which could result in a one-time tax charge of 6% to 7% of the amount repatriated.
• Risks: Key risks include fluctuations in foreign currency exchange rates, raw material costs (specifically petroleum-based resins), potential FDA regulatory actions, and ongoing litigation including antitrust and product liability claims.

Investor Verification Checklist

• Verify the impact of the $45 million BGM charge and $100 million litigation settlement in the prior year to ensure accurate year-over-year earnings comparisons.
• Monitor the progress of the Clontech divestiture and the timing of the expected $60 million proceeds.
• Assess the potential financial impact of the proposed repatriation of foreign earnings and the associated one-time tax charge.
• Review the status of ongoing antitrust investigations (e.g., New York and Connecticut Attorney General inquiries) and product liability class actions.
• Track the adoption of SFAS 123(R) and its ongoing effect on share-based compensation expenses and EPS.