Business context and reporting period
Becton, Dickinson and Company (BD) is a global medical technology company operating through BD Medical, BD Diagnostics and BD Biosciences. This Form 10-K covers the fiscal year ended September 30, 2011, and was filed November 23, 2011; it is not a quarterly filing. The filing also provides fourth-quarter results.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $7.829 billion | $7.372 billion |
| Operating income | $1.763 billion | $1.677 billion |
| Income from continuing operations | $1.265 billion | $1.176 billion |
| Net income | $1.271 billion | $1.318 billion |
| Diluted EPS from continuing operations | $5.59 | $4.90 |
| Gross margin | 52.3% | 51.9% |
| Operating cash flow from continuing operations | $1.713 billion | $1.659 billion |
| Capital expenditures | $515 million | $537 million |
Revenue rose 6%, reflecting approximately 4% volume growth and 3% favorable foreign-exchange translation, partly offset by price decreases of just under 1%. Continuing-operations income and diluted EPS increased, while net income fell because income from discontinued operations declined substantially from 2010. Fourth-quarter revenue was $2.051 billion versus $1.873 billion; continuing-operations income was $301 million versus $293 million, and diluted continuing-operations EPS was $1.36 versus $1.24.
All three segments grew: Medical revenue was $4.007 billion (+5.6%), Diagnostics $2.480 billion (+7.0%), and Biosciences $1.341 billion (+6.7%). Segment operating income was $1.181 billion, $636 million and $376 million, respectively. U.S. revenue increased 2%; international revenue increased 9.5%, including 5.9% favorable currency translation. International sales represented over half of revenue.
At year-end, cash and equivalents plus short-term investments totaled approximately $1.563 billion, including $1.34 billion held outside the U.S. Current assets were $4.668 billion and current liabilities $1.823 billion. Long-term debt was $2.485 billion, compared with $1.495 billion in 2010; short-term debt was $235 million. Debt-to-capitalization increased to 35.8% from 23.7%. Dividends paid were $361 million; BD repurchased 18.4 million shares for $1.5 billion.
Changes, outlook and key developments
- Gross margin improved 0.4 percentage points, with productivity and product mix benefits partly offset by higher resin and other raw-material costs, pension costs and acquisition-related amortization. R&D expense rose to $476 million from $431 million.
- BD acquired Accuri Cytometers for $205 million and Carmel Pharma for $287 million, net of cash acquired. The acquisitions expand flow-cytometry and hazardous-drug handling offerings.
- Management expected pricing pressure and constrained healthcare utilization in the U.S. and Western Europe to continue into fiscal 2012. It anticipated longer-term growth from business expansion, emerging markets, new products and operating efficiency, but provided no specific consolidated revenue or earnings guidance in the presented text.
- BD planned approximately $1.5 billion of share repurchases in fiscal 2012, subject to market conditions. Subsequent to year-end, it issued $1.5 billion of notes; proceeds were intended for repurchases and other corporate purposes. Ratings actions followed the planned debt issuance: S&P lowered its senior unsecured rating to A+ and commercial-paper rating to A-1; Moody’s maintained A2/P-1 but changed its outlook to negative.
- Beginning in 2013, the U.S. medical-device excise tax was expected to be 2.3% on certain sales; BD estimated affected products represented about 80% of its FY2011 U.S. revenue. The Japan earthquake and tsunami reduced FY2011 revenue by an estimated $15 million and continuing-operations diluted EPS by about $0.05. A $9 million non-cash R&D impairment charge was recorded for a discontinued research program.
Risks, contingencies and controls
Principal risks include economic weakness, healthcare cost containment and reimbursement changes, pricing competition, foreign exchange, raw-material costs, reliance on some sole-source suppliers, manufacturing interruptions, regulatory approvals and compliance, product liability, intellectual-property disputes, research-funding variability, pension assumptions and ERP-system implementation. BD reported delayed collections in some Western European countries and monitors government receivables, including in Spain and Italy.
Material litigation includes antitrust class actions, RTI patent and related antitrust/false-advertising claims, and Gen-Probe patent claims. BD had accrued $45 million for the distributor antitrust settlement, whose approval was denied and remained subject to appeal. The company could not estimate potential losses for certain claims; an adverse RTI outcome could be material. Environmental proceedings also remain. BD stated it believed its defenses were meritorious. Ernst & Young issued unqualified opinions on the financial statements and internal control; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether revenue growth persists after separating volume, pricing and foreign-exchange effects, and whether weak U.S./Western European demand continues.
- Debt, cash use and credit-rating implications of the planned share repurchases and post-year-end note issuance.
- Actual impact of the 2013 medical-device excise tax and evolving healthcare reimbursement or spending measures.
- Developments, accrual adequacy and potential exposure in the antitrust, RTI and Gen-Probe litigation.
- Integration and returns from Accuri and Carmel, and execution of product launches, capacity investments and the ERP upgrade.