Becton, Dickinson and Company — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010; this is an annual report, not a standalone fourth-quarter filing. BD is a global medical technology company operating in Medical, Diagnostics and Biosciences.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $7.372 billion | $6.987 billion |
| Operating income | $1.677 billion | $1.590 billion |
| Operating margin | 22.7% | 22.8% |
| Income from continuing operations | $1.176 billion | $1.167 billion |
| Net income, including discontinued operations | $1.318 billion | $1.232 billion |
| Diluted EPS | $5.49 total; $4.90 continuing operations | $4.99 total; $4.73 continuing operations |
| Gross margin | 51.9% | 52.6% |
| Cash from continuing operating activities | $1.659 billion | $1.658 billion |
| Capital expenditures | $537 million | $585 million |
| Cash and equivalents at year-end | $1.216 billion | $1.394 billion |
| Total debt at year-end | $1.698 billion | $1.891 billion |
| Debt to capitalization | 23.7% | 26.8% |
Revenue increased 5.5%, reflecting approximately 6% volume growth, partly offset by 0.4% lower pricing and 0.1% unfavorable foreign exchange. U.S. revenue rose 5% to $3.3 billion; international revenue rose 6% to $4.1 billion. Interest expense was $51 million, versus $40 million. The effective tax rate increased to 29.2% from 26.1%.
| Segment | FY2010 revenue | Revenue growth | FY2010 operating income |
|---|---|---|---|
| Medical | $3.796 billion | 6.7% | $1.118 billion |
| Diagnostics | $2.319 billion | 4.2% | $607 million |
| Biosciences | $1.257 billion | 4.4% | $354 million |
Operating cash flow was essentially flat year over year. Higher receivables and inventory used cash; discretionary U.S. pension contributions were $175 million, compared with $75 million in FY2009. BD ended the year with $1.216 billion in cash and equivalents and $528 million in short-term investments. Commercial paper outstanding was $200 million; the $1 billion revolving credit facility had no borrowings, and BD reported compliance with its covenant.
Material changes and notable items
- Medical led segment growth, supported by safety-engineered products, prefilled flush syringes, diabetes pen needles and pharmaceutical systems. Diagnostics revenue grew, but operating income was nearly flat; Biosciences operating income declined to $354 million from $362 million.
- Gross margin fell 0.7 percentage points. Management attributed an estimated 90-basis-point unfavorable effect primarily to hedging, partly offset by 20 basis points of favorable operating performance. Operating margin eased 0.1 percentage points.
- BD acquired HandyLab for approximately $275 million in cash in November 2009 to expand molecular diagnostics capabilities. The acquisition included $169 million of in-process R&D and $147 million of goodwill.
- In the fourth quarter, BD completed divestitures of the Ophthalmic Systems unit and certain Medical product platforms. The transactions generated about $260 million net cash proceeds and a reported $139 million pretax gain overall; $121 million of the gain was in discontinued operations, while an $18 million gain on extended dwell catheters remained in continuing operations. Discontinued operations contributed $141 million net income in FY2010.
- BD repurchased 10.1 million shares for $750 million and paid $346 million in dividends. Annual dividends per share rose to $1.48 from $1.32.
- FY2010 continuing results included a $9 million noncash healthcare-reform charge (4 cents per diluted share). FY2009 included a $45 million antitrust litigation charge and a $20 million tax-settlement benefit.
Outlook, risks and contingencies
Management expected growth over the following three years from expansion across segments and geographies, new products and services, and continued investment in emerging markets, R&D and operating efficiency. The filing does not provide specific revenue or EPS guidance. Management planned share repurchases of $1.5 billion in FY2011 and $600 million in FY2012, funded by operating cash flows and debt issuance. After year-end, BD issued $700 million of 10-year notes at 3.25% and $300 million of 30-year notes at 5.00% for general corporate purposes.
- U.S. healthcare reform imposes a 2.3% excise tax on certain medical-device sales beginning in 2013; BD estimated affected products represented about 80% of FY2010 U.S. revenue. The law also prompted the $9 million retiree drug subsidy-related charge.
- Risks include weak economic conditions and healthcare demand, foreign currency movements, reimbursement and pricing pressure, competition, raw-material and sole-source supplier interruptions, product defects or recalls, regulatory changes, and execution of the ERP upgrade.
- BD had pending antitrust, patent and other litigation. A court denied approval of the proposed $45 million distributor antitrust settlement in September 2010; the settlement remained subject to termination provisions while the distributors pursued appellate review. RTI had obtained a $5 million patent verdict and a stayed injunction affecting BD Integra products; BD appealed. Gen-Probe also asserted patent claims. Management said it believed it had meritorious defenses, but could not estimate losses in all cases and warned that additional charges could materially affect results and cash flows.
- BD reported delayed Greek government receivables; net outstanding balances were approximately $38 million at September 30, 2010, and management did not expect this exposure to materially affect financial position or liquidity.
- BD-France remained connected to investigations arising from the UN Oil-for-Food Programme matter. BD reported no evidence of improper payments, said it was cooperating, and stated that a UN vendor suspension had not had and was not expected to have a material adverse effect.
Investor verification points
- Verify the reported continuing-operations results separately from discontinued operations and divestiture gains.
- Assess whether the gross-margin decline, foreign-exchange hedging effects and segment-level performance persist.
- Track the outcome and potential financial exposure of the antitrust, RTI and Gen-Probe proceedings.
- Evaluate the future earnings impact of the 2013 medical-device excise tax and changes in reimbursement or pricing.
- Monitor cash conversion, working-capital requirements, pension funding, planned buybacks and the effect of post-year-end debt issuance.
- Confirm progress and costs of the ERP upgrade and integration of HandyLab, including commercialization of the BD Max platform.
BD and Ernst & Young reported effective internal control over financial reporting as of September 30, 2010; the auditor issued unqualified opinions on the financial statements and internal controls.