Becton, Dickinson and Company — Q2 FY2014 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2014. Amounts are in millions of dollars except per-share data. BD is a global medical technology company with Medical, Diagnostics and Biosciences segments. The interim statements are unaudited.
Financial results
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $2,072 vs. $2,000; up 3.6% | $4,086 vs. $3,901; up 4.7% |
| Operating income | $381 vs. $381 | $759 vs. $773 |
| Continuing-operations income | $287 vs. $276 | $558 vs. $546 |
| Diluted EPS from continuing operations | $1.45 vs. $1.39 | $2.82 vs. $2.74 |
| Gross margin | 50.8% vs. 50.9% | 51.1% vs. 51.9% |
| Cash from continuing operations | $768 for six months vs. $543 |
Q2 revenue growth reflected volume growth of approximately 5.1%, partly offset by approximately 1.5% unfavorable foreign-exchange translation; pricing impact was immaterial. International revenue rose 5.9% in the quarter, while U.S. revenue was approximately flat. Prior-year six-month net income included $355 of after-tax discontinued-operations income from the Discovery Labware divestiture: reported net income was $558 in 2014 versus $901 in 2013, so continuing-operations comparisons are more informative.
Segments and material changes
- Medical: Q2 revenue of $1,116, up 5.1%; operating income was $317 versus $291. Growth included pen needles and favorable Pharmaceutical Systems order timing.
- Diagnostics: Q2 revenue of $653, down 0.9%; operating income was $131 versus $145. Preanalytical Systems grew, but Diagnostic Systems declined, including lower Women’s Health and Cancer sales and U.S. share losses.
- Biosciences: Q2 revenue of $302, up 8.2%; operating income was $67 versus $71. Growth included instruments, reagents and emerging markets, with some order-timing benefits.
Quarterly gross margin was nearly flat year over year; favorable manufacturing efficiencies, pension costs and product mix largely offset currency, start-up and raw-material pressures. Six-month gross margin fell 0.8 percentage points. R&D expense increased 20% in Q2 to $147, including a $20 charge for discontinuing an instrument development program. Diagnostics recorded an $11 distributor-termination charge. An $8 gain from selling a small equity investment partly offset these items.
Cash, debt and liquidity
At March 31, cash and equivalents were $1,731 and short-term investments were $895, totaling $2,626; total debt was approximately $4.0 billion ($202 short-term and $3,764 long-term). Debt was 41.8% of total capital, compared with 43.1% at September 30, 2013. Operating cash flow of $768 funded $214 of capital expenditures, $211 of dividends and $213 of share repurchases. Cash and investments held outside the U.S. totaled $2.2 billion; repatriation could have adverse tax consequences. Management said cash and operating cash flow were expected to cover normal FY2014 operating needs, capital spending, dividends and repurchases.
Outlook, risks and unusual items
- BD estimated approximately $450 of common-stock repurchases for FY2014, subject to market conditions. The filing does not provide a specific full-year revenue or EPS forecast.
- Management anticipated some less favorable pricing in the second half. Biosciences growth was expected to decelerate as timing-related order benefits faded.
- Key business risks include pricing pressure, healthcare utilization and government funding, foreign exchange, emerging-market conditions, raw-material costs, product and regulatory issues, competition, and collection delays on government receivables. BD cited the U.S. medical-device excise tax; its incremental first-half FY2014 impact was $14 of S&A expense.
- Litigation: BD paid $22 to settle indirect-purchaser antitrust claims, with final approval in March 2014. In the separate Retractable Technologies case, a 2013 jury awarded $113.5 for an attempted-monopolization claim; statutory trebling and attorneys’ fees could apply. BD had recorded a $341 pretax charge in FY2013 and planned to appeal. The filing says litigation losses may exceed recorded accruals and could materially affect results or cash flows.
- Brazil initiated an anti-dumping investigation concerning imported blood-collection tubes; BD was cooperating and did not expect a material effect. A $6 segment cost-allocation correction had no impact on consolidated results.
Most important facts for investors to verify
- Whether Diagnostics weakness and the expected Biosciences slowdown persist, and whether pricing becomes less favorable.
- Progress and potential financial exposure in the RTI litigation, including appeal outcomes and any additional damages or relief.
- Cash conversion, working-capital needs, and the level and collectability of government receivables, particularly in Italy and Spain.
- Execution of the FY2014 repurchase outlook and the impact of currency, raw-material costs and medical-device taxes on margins.