Becton, Dickinson and Company — Form 10-Q
Business context and reporting period: Medical technology company operating through BD Medical, BD Diagnostics and BD Biosciences. This unaudited filing covers the quarter and nine months ended June 30, 2009; balance-sheet comparisons are with September 30, 2008. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Three months ended June 30, 2009 | Three months ended June 30, 2008 | Nine months ended June 30, 2009 | Nine months ended June 30, 2008 |
|---|---|---|---|---|
| Revenue | $1,820.3 | $1,849.3 | $5,263.1 | $5,262.8 |
| Operating income | $431.8 | $408.2 | $1,210.7 | $1,145.9 |
| Income from continuing operations | $338.7 | $296.0 | $907.3 | $836.9 |
| Net income, including discontinued operations | $341.0 | $297.1 | $914.4 | $844.8 |
| Diluted EPS | $1.39 | $1.18 | $3.70 | $3.34 |
| Gross margin | 52.8% | 51.0% | 52.8% | 51.2% |
- Quarterly revenue declined 1.6%; management attributed performance to volume growth of about 4.3% and price increases of about 0.7%, offset by a 6.6% unfavorable foreign-currency impact after hedging. Nine-month revenue was essentially unchanged.
- At June 30, cash and equivalents were $1,331.6 and short-term investments were $420.4. Current assets were $4,491.5 against current liabilities of $1,646.5.
- Total debt was approximately $1.9 billion, up from approximately $1.2 billion at September 30, 2008. Debt represented 26.5% of total capital, compared with 18.8%. Short-term debt was $405.7 and long-term debt $1,483.6.
- Continuing operating cash flow for the first nine months was $1,048.1, versus $1,205.3 a year earlier. Continuing investing cash outflow was $713.9; continuing financing provided $162.0. Cash increased by $501.1 from the fiscal-year opening balance.
- Capital expenditures were $354.1 for nine months. The company repurchased $371.4 of shares and paid $237.9 in dividends; the quarterly dividend was $0.33 per share.
Changes versus the prior comparable period
- Operating income and diluted EPS increased in both the quarter and nine-month period despite nearly flat or lower reported revenue. Gross margin improved, helped by foreign-exchange effects and lower resin prices.
- Quarterly segment revenue was lower in Medical (3% decline) and Biosciences (4% decline), while Diagnostics grew 2%. Medical and Diagnostics segment operating income rose; Biosciences operating income declined.
- Nine-month operating cash flow fell, principally reflecting increased working-capital use, including higher inventory, and pension-related cash outflows.
- In May 2009, BD issued $500 million of 10-year notes at 5% and $250 million of 30-year notes at 6%. Proceeds were intended partly to repay $200 million of 7.15% notes due October 1, 2009.
Outlook, management commentary, risks and unusual items
- Management expected 2009 gross margin to rise about 120–170 basis points versus 2008; reported selling and administrative expense as a share of revenue to fall about 10–40 basis points; R&D expense to be 5.6%–5.8% of revenue; and the reported tax rate to be about 25.4%. Fiscal 2009 capital spending was expected to be about $600 million.
- Management said cash from operations and available cash were expected to fund normal 2009 operating needs, capital spending, dividends and repurchases. A $1 billion credit facility, expiring in December 2012, had no borrowings outstanding; the company reported covenant coverage well above its 5-to-1 minimum.
- A $20 million tax benefit from settlements increased quarterly continuing-operations diluted EPS by $0.08. A $45 million charge for a proposed direct-purchaser antitrust settlement reduced nine-month continuing-operations income by $28 million, or $0.11 per diluted share.
- BD sold Home Healthcare product-line assets to 3M on July 8, 2009, after quarter-end, for $51.0 million subject to adjustments, and intended to exit the remaining product line. The filing anticipated a fourth-quarter discontinued-operations gain of about $0.05 per diluted share.
- Direct-purchaser antitrust claims were covered by a $45 million settlement subject to court approval; indirect-purchaser claims remained unresolved. Other proceedings include RTI patent and related claims, product-liability matters, latex-glove litigation, environmental proceedings and a False Claims Act matter. Management said potential charges beyond recorded accruals could materially affect results or cash flows, and loss estimates were not clear for all cases.
- BD identified risks from economic weakness and customer demand, currency and interest-rate movements, raw-material costs, competition, healthcare pricing and regulation, product development and safety, litigation, pension assets, and implementation of its enterprise-resource-planning upgrade. Greek government healthcare receivables were approximately $42 million net of reserves and subject to significant payment delays; management did not expect a material adverse effect on financial position or liquidity.
- The filing does not provide a clear overall fiscal-year revenue or EPS forecast. Management noted that additional projections were available on the company website, but stated that website information was not part of the 10-Q.
Most important facts for investors to verify
- Whether reported growth and margin improvement persist after separating currency and hedge effects, favorable resin prices, and the $20 million tax benefit.
- Conversion of earnings to cash, particularly working-capital and inventory trends and pension-related cash requirements.
- Debt repayment and refinancing plans, borrowing costs, and continued compliance with the credit-facility covenant.
- Final court approval and implementation of the direct-purchaser settlement, and outcomes or potential exposure from unresolved litigation and environmental matters.
- Completion economics of the Home Healthcare divestiture, including post-closing adjustments and the expected discontinued-operations gain.