BDX

Business Context and Reporting Period

Company: Becton, Dickinson and Company (BD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2008
Business Overview: BD is a medical technology company operating through three segments: BD Medical, BD Diagnostics, and BD Biosciences. The company develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products globally.

Key Financial Metrics

Note: Total Debt calculated as Short-term debt ($408,900) + Long-Term Debt ($747,760) as of Dec 31, 2008.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 1.6% year-over-year, driven by volume increases of approximately 4% and price increases of less than 1%, partially offset by a 3% unfavorable impact from foreign currency translation.
• Profitability: Operating income rose 16.3% to $421.8 million. Gross profit margin improved by 220 basis points to 53.6%, aided by favorable foreign currency translation (260 bps) and productivity gains, offset by higher raw material costs.
• Cash Flow: Net cash provided by operating activities decreased significantly to $269 million from $473 million in the prior year. This decline was primarily due to discretionary pension contributions of approximately $115 million and a $50 million inventory build to mitigate supply chain concerns.
• Capital Allocation: The company repurchased $283 million of common stock, compared to $123 million in the prior year period. Dividends paid were $82 million.
• Segment Performance:
  • Medical: Revenues decreased 2% due to economic factors in Eastern Europe/Middle East/Africa and declines in Pharmaceutical Systems, offset by growth in Diabetes Care.
  • Diagnostics: Revenues increased 3%, driven by safety-engineered devices and infectious disease testing systems.
  • Biosciences: Revenues increased 11%, driven by clinical and research instruments.

Guidance, Outlook, and Risks

• 2009 Outlook:
  • Gross Margin: Expected to improve by approximately 80 basis points compared to 2008.
  • Selling & Admin Expenses: Expected to decrease by about 90 basis points as a percentage of revenue.
  • R&D Expenses: Anticipated to increase by about 7%.
  • Capital Expenditures: Projected at approximately $650 million for fiscal year 2009.
  • Tax Rate: Expected reported tax rate for 2009 is about 27.5%.
• Foreign Exchange: Management notes significant volatility in currency rates, particularly the strengthening U.S. dollar against the Euro. Future fluctuations could materially impact results.
• Legal Contingencies:
  • Antitrust: BD is a defendant in multiple class action suits alleging antitrust violations regarding pricing. These are consolidated in Multi-District Litigation (MDL).
  • Patent Litigation: Retractable Technologies, Inc. (RTI) alleges patent infringement regarding BD Integra syringes. Trial scheduled for October 2009.
  • Settlement: BD settled a suit with UltiMed, Inc. for $750,000 in January 2009.
  • Product Liability: Ongoing litigation regarding latex gloves (ceased manufacturing in 1995) and needlestick injuries.
• Risk Factors: Key risks include global economic slowdown, raw material cost fluctuations (specifically oil-based resins), regulatory changes, and the impact of pension plan asset valuations.

Investor Verification Checklist

• Foreign Currency Impact: Verify the sensitivity of future earnings to U.S. dollar strength, given the 3% revenue headwind and 260 bps margin benefit in Q1.
• Pension Contributions: Confirm the sustainability of operating cash flows given the $115 million discretionary pension contribution in Q1.
• Inventory Levels: Monitor the $50 million inventory build intended to mitigate supply chain risks and its impact on future working capital.
• Legal Exposure: Track the status of the RTI patent trial (Oct 2009) and the consolidated antitrust MDL proceedings.
• Debt Structure: Note the reclassification of $200 million in notes to short-term debt, increasing the short-term debt ratio to 35% of total debt.