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| BDX > SEC Filings for BDX > Form 10-Q on 9-Feb-2009 | All Recent SEC Filings |
9-Feb-2009
Quarterly Report
Company Overview
Becton, Dickinson and Company ("BD" or the "Company") is a medical technology
company engaged principally in the development, manufacture and sale of a broad
range of medical supplies, devices, laboratory equipment and diagnostic products
used by healthcare institutions, life science researchers, clinical
laboratories, industry and the general public. Our business consists of three
worldwide business segments - BD Medical ("Medical"), BD Diagnostics
("Diagnostics") and BD Biosciences ("Biosciences"). Our products are marketed in
the United States and internationally through independent distribution channels
and directly to end-users by BD and independent sales representatives.
Overview of Financial Results
BD reported first quarter revenues of $1.734 billion, representing an increase
of 1.6% from the same period a year ago, and reflecting volume increases of
approximately 4%, price increases of less than 1%, and unfavorable foreign
currency translation of approximately 3%. Sales in the United States of
safety-engineered devices of $269 million in the first quarter of 2009 grew 1%
above such sales in the prior year's period. Sales of safety-engineered devices
outside the United States of $134 million in the first quarter of 2009 grew 11%
above such sales in the prior year's period, which reflects an estimated impact
of unfavorable foreign currency translation of 8 percentage points. Overall,
first quarter international revenues were $925 million, representing an increase
of 1% above the prior year's period, after taking into account an estimated 5%
unfavorable impact due to foreign currency translation.
As further discussed in our 2008 Annual Report on Form 10-K, we face currency exposure that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that fluctuate from the beginning of the period. We purchase option and forward contracts to partially protect against adverse foreign exchange rate movements. Recently, there has been unusual volatility in foreign currency exchange rates. During the first quarter 2009, the U.S. dollar strengthened significantly against most foreign currencies, primarily the Euro. The resulting unfavorable impact of foreign currency translation on revenues in the first quarter of 2009 was mitigated to an extent by hedge gains associated with our hedging activities. In addition, the strengthening of the U.S. dollar during the first quarter of 2009 reduced the carrying value of inventory sold outside the United States, resulting in lower cost of goods sold, which had a favorable impact on gross profit margin for the quarter. Our financial projections for 2009 discussed below are based on our foreign exchange rate assumptions. Further fluctuations in foreign exchange rates during 2009 could have a material impact on our financial results.
Results of Operations
Revenues
Refer to Note 6 in the Notes to Condensed Consolidated Financial Statements for segment financial data.
Medical Segment
First quarter revenues of $891 million represented a decrease of $18 million, or
2%, from the prior year's quarter, after taking into account an unfavorable
impact due to foreign currency translation of $35 million, or 4%. Lower sales of
Medical Surgical Systems products, primarily due to economic factors in the
Eastern Europe, Middle East and Africa regions, and the decline, as expected, in
sales of Pharmaceutical Systems products in the United States were offset in
part by increased sales of insulin delivery devices in the Diabetes Care unit.
Global sales of safety-engineered products of $193 million grew 1% after taking
into account an estimated 2% unfavorable impact from foreign currency
translation.
Diagnostics Segment
First quarter revenues of $540 million represented an increase of $17 million,
or 3%, over the prior year's quarter, after taking into account an estimated $15
million, or 3%, unfavorable impact due to foreign currency translation. Sales of
safety-engineered devices, cancer diagnostics products and infectious disease
testing systems contributed to revenue growth. Global sales of safety-engineered
products of $210 million grew 7%, after taking into account a 3% unfavorable
impact from foreign currency translation. Revenues in the Diagnostic Systems
unit of the segment increased 4% and reflect growth our TriPath cancer
diagnostics products and infectious disease testing systems, driven by our BD
Probetec, BD Viper, BD Phoenix and BD GeneOhm instrument and reagent systems.
Biosciences Segment
First quarter revenues of $303 million represented an increase of $29 million,
or 11%, over the prior year's quarter. Clinical and research instruments were
the primary growth drivers. Revenue growth included an estimated $2 million, or
1%, favorable impact due to foreign currency translation. We hedge against sales
of U.S.-produced products that are sold outside the United States. Because all
Biosciences products are produced in the United States, a larger portion of our
hedge gains are allocated to the Biosciences segment than to our other two
segments. These hedge gains resulted in a favorable impact from foreign currency
translation for the quarter.
Segment Operating Income
Medical Segment
Segment operating income for the first quarter was $262 million, or 29.4% of
Medical revenues, compared with $262 million, or 28.9% of segment revenues, in
the prior year's quarter. Gross profit margin was higher in the current quarter
than the first quarter of 2008 due to favorable foreign currency translation,
increased sales of product with higher margins and productivity gains, partially
offset by increased costs of raw materials, asset write-offs, and manufacturing
start-up costs. See further discussion on gross profit margin below. Selling and
administrative expense as a percentage of Medical revenues in the first quarter
of 2009 was slightly higher than the comparable amount in the first quarter of
2008. Research and development expenses for the quarter increased $3.6 million,
or 14%, reflecting increased investment in new products and platforms.
Diagnostics Segment
Segment operating income for the first quarter was $155 million, or 28.6% of
Diagnostics revenues, compared with $127 million, or 24.3% of segment revenues,
in the prior year's quarter. Gross profit margin was higher in the first quarter
of 2009 compared to the prior year's quarter due to increased sales of products
with relatively higher margins and reduced startup costs, which were partially
offset by increased costs of raw materials. See further discussion on gross
profit margin below. Selling and administrative expense as a percentage of
Diagnostics revenues in the first quarter of 2009 was slightly lower than the
comparable amount in the first quarter of 2008, due to continued spending
controls. Research and development expenses in the first quarter of 2009
increased $1.7 million, or 5%, primarily due to investment in new instrument and
reagent products.
Biosciences Segment
Segment operating income for the first quarter was $100 million, or 33.0% of
Biosciences revenues, compared with $79 million, or 28.7% of segment revenues,
in the prior year's quarter. Gross profit margin increased due to the favorable
impact of foreign currency translation. See further discussion on gross profit
margin below. Selling and administrative expense as a percentage of Biosciences
revenues for the quarter decreased compared with the prior year's quarter, as a
result of continued spending controls. Research and development spending in the
quarter increased $1.1 million, or 6%, compared with the prior year period. This
increase reflects higher spending on new product development.
Gross Profit Margin
Gross profit margin was 53.6% for the first quarter, compared with 51.4% for the
comparable prior year period. Gross profit margin in the first quarter of 2009
as compared with the prior year's period reflected an estimated favorable impact
of foreign currency translation of 260 basis points from both the net favorable
impact from lower inventory costs and the hedging of certain foreign currencies,
in particular the Euro, as previously discussed above under "Overview of
Financial Results". In addition, increased sales of products with relatively
higher gross margins along with productivity improvements added an estimated 40
basis points to the gross margin. Partially offsetting these gains were
increases in certain raw material costs and manufacturing start-up costs
aggregating approximately 80 basis points. For the full fiscal year 2009, we
expect gross profit margin to improve by about 80 basis points compared to 2008.
Selling and Administrative Expense
Selling and administrative expense was 23.6% of revenues for the first quarter,
compared with 24.7% for the prior year's period. Aggregate expenses for the
current period reflect increases of $17 million which was more than offset by
favorable foreign exchange impact of $18 million. Selling and administrative
expense was also reduced by an $11 million reduction in the deferred
compensation plan liability, as discussed below. Selling and administrative
expense as a percentage of revenues is expected to decrease by about 90 basis
points in fiscal year 2009 compared to 2008.
Research and Development Expense
Research and development expense was $97 million for the first quarter, compared
with the prior year's amount of $92 million, an increase of 6%. Research and
development expense was 5.6% of revenues in the first quarter, compared with
5.4% of revenues in the prior year's period. The increase in research and
development expenditures reflect increased spending for new programs in each of
our segments for the three-month period ended 2009. We anticipate Research and
development expense to increase by about 7% for fiscal year 2009 above the prior year.
Non-Operating Expense and Income
Interest income was $2 million in the first quarter, compared with $14 million
in the prior year's period. The decrease resulted primarily from investment
losses in assets related to our deferred compensation plan. The related
reduction in the deferred compensation plan liability was recorded as a
reduction in selling and administrative expenses. Interest expense was $8
million in the first quarter, compared with $10 million in the prior year's
period, which reflects lower interest rates on floating rate debt. Other income
was $9 million in the first quarter, compared with $1 million in the prior
year's period, reflecting an increase in net foreign exchange gains of
approximately $4 million as well as approximately $3 million of income relating
to the completion of a collaborative research and development agreement.
Income Taxes
The income tax rate was 26.6% for the first quarter, compared with the prior
year's rate of 26.1% . The Company expects the reported tax rate for fiscal year
2009 to be about 27.5% .
Diluted Earnings Per Share from Continuing Operations Diluted earnings per share from continuing operations of $1.26 for the first quarter of 2009 increased 18% from diluted earnings per share from continuing operations of $1.07 for the first quarter of 2008. The current quarter's earnings reflect underlying performance as well as the overall impact of foreign exchange fluctuations, including foreign exchange hedge gains, as discussed above.
Liquidity and Capital Resources
Cash generated from operations, along with available cash and cash equivalents,
is expected to be sufficient to fund our normal operating needs, including
capital expenditures, cash dividends and common stock repurchases in 2009. Net
cash provided by continuing operating activities was $269 million during the
first quarter of 2009, compared with $473 million in the same period in 2008.
Net cash provided by continuing operations in the first quarters of the current
and prior year was reduced by changes in the pension obligation, resulting
primarily from discretionary cash contributions of approximately $115 million
and $23 million, respectively. The change in working capital from the prior
year's period reflects approximately $50 million related to an inventory build
to mitigate concerns regarding continuity of supplies, including resins.
Net cash used for continuing investing activities for the first quarter of the current year was $129 million, compared with $139 million in the prior year period. Capital expenditures were $95 million in the first three months of 2009 and $121 million in the same period in 2008. We expect capital spending for fiscal year 2009 to be about $650 million.
Net cash used for continuing financing activities for the first quarter of the current year was $368 million, compared with $101 million in the prior year period. For the first quarter of the current year, the Company repurchased $283 million of its common stock, compared with approximately $123 million of its common stock in the prior year period. At December 31, 2008, authorization to repurchase an additional 11.5 million common shares was in effect. The Company also transferred cash on December 31, 2008 to fund dividends payable on January 2, 2009.
As of December 31, 2008, total debt of $1.2 billion represented 19.4% of total capital (shareholders' equity, net non-current deferred income tax liabilities, and debt), versus 18.8% at September 30, 2008. Short-term debt increased to 35% of total debt at the end of December 31, 2008, from 17% at September 30, 2008, reflecting the reclassification of $200 million in 7.15% notes, due October 1, 2009, to short-term.
We have in place a commercial paper borrowing program that is available to meet our short-term financing needs, including working capital requirements. Borrowings outstanding under this program were $200 million at December 31, 2008. We have available a $1 billion syndicated credit facility with an expiration date in December 2012. This credit facility, under which there were no borrowings outstanding at December 31, 2008, provides backup support for our commercial paper program and can also be used for other general corporate purposes. This credit facility includes a single financial covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the most recent four consecutive fiscal quarters. On the last eight measurement dates, this ratio has ranged from 19-to-1 to 33-to-1. In addition, we have informal lines of credit outside the United States.
Adoption of New Accounting Standards
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133"
("SFAS No. 161"). SFAS No. 161 amends and expands the disclosure requirements of
Statement 133 ("SFAS 133"). The Statement requires qualitative disclosures
regarding how and why an entity uses derivative instruments as well as how these
instruments and related hedged items are accounted for under SFAS No. 133 and
its related interpretations. Entities are also required to provide tabular
disclosures that quantify the effects derivative instruments and hedged items
have on financial position, financial performance, and cash flows. This is a
disclosure-only standard and as such, the Company does not anticipate an impact
on the consolidated financial statements as a result of its adoption. This
Statement is effective for the Company beginning January 1, 2009.
Cautionary Statement Regarding Forward-Looking Statements BD and its representatives may from time-to-time make certain forward-looking statements in publicly released material, both written and oral, including statements contained in this report and filings with the Securities and Exchange Commission ("SEC") and in our other reports to shareholders. Forward-looking statements may be identified by the use of words like "plan," "expect," "believe," "intend," "will," "anticipate," "estimate" and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance, as well as our strategy for growth, product development, regulatory approvals, market position and expenditures. All statements that address operating performance or events or developments that we expect or anticipate will occur in the future -- including statements relating to volume growth, sales and earnings per share growth, cash flows or uses, and statements expressing views about future operating results -- are forward-looking.
Forward-looking statements are based on current expectations of future events. The forward-looking statements, are and will be, based on management's then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties
materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events and developments or otherwise.
Although we do not currently anticipate a significant weakening of demand for our products as a result of the global economic slowdown, this could change depending on the severity and duration of the slowdown. In addition, the following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements:
º Instability in the global financial markets and world economies and the potential adverse effect on liquidity and capital resources for BD or its customers and suppliers, the cost of operating our business, the demand for our products and services, or the ability to produce our products. This includes the impact on developing countries and their demand for our products.
º Regional, national and foreign economic factors, including inflation, deflation and fluctuations in interest rates and foreign currency exchange rates and the potential effect of such fluctuations on revenues, expenses and resulting margins, as well as competition in certain markets.
º Fluctuations in the cost and availability of oil-based resins and other raw materials, as well as certain sub-assemblies and finished goods, and the ability to maintain favorable supplier arrangements and relationships (particularly with respect to sole-source suppliers) and the potential adverse effects of any disruption in the availability of such items.
º We operate in a highly competitive environment. New product introductions by our current or future competitors (for example, new forms of drug delivery) could adversely affect our ability to compete in the global market. Patents attained by competitors, particularly as patents on our products expire, may also adversely impact our competitive position. Certain competitors have established manufacturing sites or have contracted with suppliers in low- cost manufacturing locations as a means to lower their costs. New entrants may also appear.
º We sell certain products to pharmaceutical companies that are used to manufacture, or are sold with, products by such companies. As a result, fluctuations in demand for the products of these pharmaceutical companies could adversely affect our operating results.
º Changes in domestic and foreign healthcare industry practices and regulations resulting in increased pricing pressures, including the continued consolidation among healthcare providers; trends toward managed care and healthcare cost containment; and government laws and regulations relating to sales and promotion, reimbursement and pricing generally.
º The effects, if any, of governmental and media activities regarding the business practices of group purchasing organizations, which negotiate product prices on behalf of their member hospitals with BD and other suppliers.
º Our ability to obtain the anticipated benefits of restructuring programs, if any, that we may undertake.
º Adoption of, or changes in, government laws and regulations affecting domestic and foreign operations, including those relating to trade, monetary and fiscal policies, taxation, environmental matters, sales practices, price controls, licensing and regulatory approval of new products, regulatory requirements for products in the postmarketing phase, or changes in enforcement practices with respect to any such laws and regulations. In particular, environmental laws, particularly with respect to the emission of greenhouse gases, are becoming more stringent throughout the world, which may increase our costs of operations or necessitate changes in our manufacturing plants or processes.
º Fluctuations in U.S. and international governmental funding and policies for life sciences research.
º Difficulties inherent in product development, including the potential inability to successfully continue technological innovation, complete clinical trials, obtain regulatory approvals in the United States and abroad, obtain coverage and adequate reimbursement for new products, or gain and maintain market approval of products, as well as the possibility of encountering infringement claims by competitors with respect to patent or other intellectual property rights, all of which can preclude or delay commercialization of a product.
º Pending and potential litigation or other proceedings adverse to BD, including antitrust claims, product liability claims, patent infringement claims and the availability or collectibility of insurance relating to such claims.
º The effects, if any, of adverse media exposure or other publicity regarding BD's business or operations.
º Our ability to achieve the projected level or mix of product sales. Our earnings forecasts are generated based on such projected volumes and sales of many product types, some of which are more profitable than others.
º The effect of market fluctuations on the value of assets in BD's pension plans and the possibility that BD may need to make additional contributions to the plans as a result of any decline in the value of such assets.
º Our ability to effect infrastructure enhancements and incorporate new systems technologies into our operations.
º Product efficacy or safety concerns resulting in product recalls, regulatory action on the part of the U.S. Food and Drug Administration (or foreign counterparts) or declining sales.
º Political conditions in international markets, including civil unrest, terrorist activity,
governmental changes, restrictions on the ability to transfer capital across borders and expropriation of assets by a government.
º The effects of natural disasters, including pandemic diseases, earthquakes, fire, or the effects of climate change on our ability to manufacture our products, particularly where production of a product line is concentrated in one or more plants, or on our ability to source components from suppliers that are needed for such manufacturing.
º Our ability to penetrate developing and emerging markets, which also depends on economic and political conditions, and how well we are able to acquire or form strategic business alliances with local companies and make necessary infrastructure enhancements to production facilities, distribution networks, sales equipment and technology.
º The impact of business combinations, including acquisitions and divestitures, both internally on BD and externally on the healthcare industry.
º Issuance of new or revised accounting standards by the Financial Accounting Standards Board or the Securities and Exchange Commission.
The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. Investors should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties.
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