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BDX > SEC Filings for BDX > Form 10-Q on 7-Feb-2012All Recent SEC Filings

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Form 10-Q for BECTON DICKINSON & CO


7-Feb-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

Becton, Dickinson and Company ("BD") is a global medical technology company engaged principally in the development, manufacture and sale of medical devices, instrument systems and reagents used by healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical 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 and Financial Condition

First quarter revenues of $1.888 billion represented an increase of 2.5% from the same period a year ago, and reflected volume increases of approximately 3.7%, partially offset by price decreases of approximately 1.3%. Foreign exchange translation had a minimal impact on revenue growth in the first quarter of 2012. During the quarter, we experienced weaker sales in the U.S. due to an uncertain research spending environment and increased pricing pressures compared to the prior year's period. International revenues reflected continued strength in emerging market sales and strong sales of safety-engineered products. Sales in the United States of safety-engineered devices in the first quarter of 2012 were $291 million, representing a 2.4% increase from the prior year's period. International sales of safety-engineered devices of $197 million in the first quarter of 2012 grew 16.4% over the prior year's period, including an estimated $1 million, or less than 1%, unfavorable impact due to foreign currency translation. International safety-engineered device revenue growth continues to be driven by strong growth in the Medical segment, with the largest growth in emerging markets, including China and Latin America.

The healthcare industry is facing a challenging economic environment. The current economic conditions and other circumstances have resulted in pricing pressures for some of our products, and we expect this pricing pressure to continue through fiscal year 2012. In addition, healthcare utilization in the U.S. and Western Europe remains constrained due to decreases in government and private healthcare spending, resulting in less demand for our products, and we also expect these conditions to continue through fiscal 2012. We are also experiencing increased raw material costs.

We continue to invest in research and development spending, geographic expansion, and new product promotions to drive further revenue and profit growth. Our ability to sustain our long-term growth will depend on a number of factors, including our ability to expand our core business (including geographical expansion), develop innovative new products across our business segments, and continue to improve operating efficiency and organizational effectiveness. In addition to the economic conditions in the United States and elsewhere, numerous other factors can affect our ability to achieve these goals including, without limitation, increased competition and healthcare reform initiatives. For example, the U.S. healthcare reform law contains certain tax provisions that will affect BD. The most significant impact is the medical device excise tax, which imposes a 2.3% tax on certain U.S. sales of medical devices, beginning in January 2013. Sales of BD products that we estimate to be subject to this tax represented about 80% of BD's total U.S. revenues in fiscal year 2011.


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Our financial condition remains strong, with cash flows from continuing operating activities totaling $313 million in the first three months of 2012. In November 2011, we issued $500 million of 5-year 1.75% notes and $1 billion of 10-year 3.125% notes, as discussed further below. Also, we continued to return value to our shareholders as we repurchased $400 million of our common stock and paid cash dividends of $96 million in the first quarter of 2012.

We face currency exposure each reporting period that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that fluctuate from the beginning of such period. We evaluate our results of operations on both an as reported and a foreign currency-neutral basis, which excludes the impact of fluctuations in foreign currency exchange rates. We calculate foreign currency-neutral percentages by converting our current-period local currency financial results using the prior-period foreign currency exchange rates and comparing these adjusted amounts to our current-period reported results.

From time to time, we may purchase forward contracts and options to partially protect against adverse foreign exchange rate movements. Gains or losses on our derivative instruments are largely offset by the gains or losses on the underlying hedged transactions. We do not enter into derivative instruments for trading or speculative purposes. As of December 31, 2011, we had not entered into contracts to hedge cash flows in fiscal year 2012 and revenues for the first quarter of fiscal year 2012 reflected a relatively immaterial favorable impact from foreign currency translation.

Results of Operations

Revenues

Refer to Note 5 in the Notes to Condensed Consolidated Financial Statements for segment financial data.

Medical Segment

First quarter revenues of $950 million represented an increase of $24 million, or 2.6%, compared with the prior year's quarter, including an immaterial impact due to foreign currency translation.


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The following is a summary of first quarter Medical revenues by organizational unit:

                                           Three months ended December 31,
                                                                           Estimated
                                                                            Foreign
                                                             Total         Exchange
      (millions of dollars)       2011          2010         Change         Impact
      Medical Surgical Systems   $   522       $   513           1.9 %           (0.2 )%
      Diabetes Care                  226           214           5.6 %            0.1 %
      Pharmaceutical Systems         202           200           1.1 %            0.5 %

      Total Revenues             $   950       $   927           2.6 %            0.0 %

Medical segment revenue growth was primarily driven by Diabetes Care, with continued strong sales of pen needles. The segment's revenue growth also reflected solid growth of safety-engineered product sales within Medical Surgical Systems. Pharmaceutical Systems revenue growth in the current year's period reflected strong U.S. sales due to biotech sampling. This growth was partially offset by adjustments in customer inventory levels and the unfavorable comparison to the prior year's period which included sales from the launch of a low molecular weight heparin product. These unfavorable impacts lowered Pharmaceutical Systems' revenue growth by approximately 3 percentage points. Global sales of safety-engineered products were $240 million, as compared with $213 million in the prior year's quarter, and included a relatively immaterial favorable impact due to foreign currency translation.

Medical operating income for the first quarter was $254 million, or 26.7% of Medical revenues, compared with $276 million, or 29.7% of segment revenues, in the prior year's quarter. Gross profit margin was lower in the current quarter than the first quarter of 2011 due to amortization of intangibles associated with the Carmel Pharma, AB ("Carmel") acquisition that occurred in the fourth quarter of fiscal year 2011, unfavorable pricing impacts on certain product lines and increases in certain raw material costs. These unfavorable impacts on gross profit margin were partially offset by lower manufacturing costs from Project ReLoCo, a global, cross-functional business initiative to drive sustained low-cost capability primarily benefitting Medical Surgical Systems. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Medical revenues in the first quarter of 2012 was higher than in the first quarter of 2011, primarily due to increased spending for expansion in emerging markets and higher expenses resulting from the Carmel acquisition as compared with the prior year's period. Research and development expenses for the quarter increased $2 million, or 4% above the prior year's period, reflecting ongoing investment in new products and platforms.


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Diagnostics Segment

First quarter revenues of $621 million represented an increase of $19 million, or 3.2%, over the prior year's quarter, including an estimated $1 million, or approximately 0.1%, unfavorable impact due to foreign currency translation.

The following is a summary of first quarter Diagnostics revenues by organizational unit:

                                          Three months ended December 31,
                                                                          Estimated
                                                                           Foreign
                                                            Total         Exchange
        (millions of dollars)    2011          2010         Change         Impact
        Preanalytical Systems   $   317       $   313           1.3 %           (0.4 )%
        Diagnostic Systems          304           289           5.2 %            0.2 %

        Total Revenues          $   621       $   602           3.2 %           (0.1 )%

Diagnostics segment revenue growth was primarily driven by sales of our Women's Health and Cancer platform, strong sales growth of our microbiology platform as well as sales of Preanalytical Systems safety-engineered products. Global sales of safety-engineered products in the Preanalytical Systems unit totaled $248 million, compared with $240 million in the prior year's quarter, and included an estimated $1 million unfavorable impact due to foreign currency translation.

Diagnostics operating income for the first quarter was $165 million, or 26.6% of Diagnostics revenues, compared with $161 million, or 26.8% of segment revenues, in the prior year's quarter. Gross profit margin was lower in the current quarter than in the prior year's quarter due to unfavorable pricing impacts on certain product lines and increases in certain raw material costs. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Diagnostics revenues in the first quarter of 2012 was higher than in the first quarter of 2011 primarily due to increased spending for expansion in emerging markets and spending for new product launches. Research and development expenses in the first quarter of 2012 decreased by $4 million compared with the prior year's period reflecting the timing of expenses. Diagnostics' research and development spending for the total fiscal year 2012 is expected to be slightly below, as a percentage of revenues, the spending in total fiscal year 2011.


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Biosciences Segment

First quarter revenues of $317 million represented an increase of $3 million, or 0.9%, over the prior year's quarter, including an estimated $2 million, or 0.6%, favorable impact due to foreign currency translation.

The following is a summary of first quarter Biosciences revenues by organizational unit:

                                           Three months ended December 31,
                                                                          Estimated
                                                                           Foreign
                                                            Total         Exchange
         (millions of dollars)    2011          2010       Change          Impact
         Cell Analysis           $   244       $   241         1.2 %             0.5 %
         Discovery Labware            73            73        (0.1 )%            1.1 %

         Total Revenues          $   317       $   314         0.9 %             0.6 %

Biosciences segment revenues in the current year's quarter were relatively flat compared with the prior year's period, reflecting reduced research funding in the U.S as well as reduced demand for high-end instruments.

Biosciences operating income for the first quarter was $83 million, or 26.2% of Biosciences revenues, compared with $90 million, or 28.8% of segment revenues, in the prior year's quarter. Gross profit margin, as a percent of Biosciences revenue, was lower in the current quarter than the first quarter of 2011 primarily due to amortization of intangibles associated with capitalized software and the Accuri Cytometers, Inc. ("Accuri") acquisition that occurred in the second fiscal quarter of 2011. These unfavorable variances from the prior year's period were partially offset by lower manufacturing start-up costs. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Biosciences revenues for the quarter was higher compared with the prior year's quarter and reflected increased spending for expansion in emerging markets and the effect of moderate revenue growth in the current year's period as compared with the prior year's period. Research and development spending in the quarter was relatively flat compared with the spending in the prior year's period.


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Geographic Revenues

Revenues in the United States for the first quarter of $829 million were flat as compared with the prior year's quarter. Growth in U.S. Medical revenues reflected strong sales of Pharmaceutical Systems and Diabetes Care products, which were partially offset as a result of pricing pressures for Medical Surgical products. U.S. Diagnostics revenue growth was affected by lower testing volumes impacting Preanalytical Systems. Biosciences revenue in the United States declined in the current year's quarter compared with the prior year's quarter due to reduced research funding for reagents as well as reduced demand for high-end instruments.

International revenues for the first quarter of $1.059 billion represented an increase of $45 million, or 4.5%, over the prior year's quarter, including an estimated $1 million, or 0.1%, favorable impact due to foreign currency translation. International revenues for the first quarter of 2012 reflected growth from all segments, including growth attributable to emerging markets and strong sales of safety-engineered products.

Gross Profit Margin

Gross profit margin was 50.9% for the first quarter, compared with 53.0% for the comparable prior-year period. The decrease in gross profit margin reflected estimated unfavorable impacts of 200 basis points relating to operating performance and 10 basis points relating to foreign currency translation. Operating performance was adversely affected by 190 basis points due to unfavorable pricing impacts on certain product lines, decreased sales of products with higher gross margins and amortization of intangibles associated with the fiscal year 2011 Accuri and Carmel acquisitions. Operating performance was also unfavorably impacted by 70 basis points due to increases in certain raw material costs. The unfavorable impacts on operating performance for the current year's period were partially offset by an estimated 60 basis points due to lower manufacturing costs from continuous improvement projects, such as Project ReLoCo, and lower manufacturing start-up costs.

Selling and Administrative Expense

Selling and administrative expense was 25.9% of revenues for the first quarter, compared with 24.3% for the prior year's period. Aggregate expenses for the first quarter reflected an increase in core spending of $41 million, primarily relating to expansion of our business in emerging markets and higher expenses resulting from the Carmel acquisition. Aggregate expenses for the first quarter also reflected an increase in legal costs.

Research and Development Expense

Research and development expense was $114 million, or 6.0% of revenues, for the first quarter, representing a decrease of 1.4% compared with the prior year's amount of $116 million, or 6.3% of revenues. This decrease in research and development expenses compared with the prior year's period reflected the timing of expenses. Research and development spending for the total fiscal year 2012 is expected to be comparable, as a percentage of revenues, with the spending in total fiscal year 2011.

Non-Operating Expense and Income

Interest income of $15 million in the first quarter of 2012 was flat compared with the prior year's period, reflecting no significant change in average interest rates and investment levels. Interest expense was $29 million in the first quarter, compared with $16 million in the prior year's period. This increase reflects higher levels of long-term fixed-rate debt, partially offset by lower average interest rates on this debt.


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Income Taxes

The income tax rate was 23.6% for the first quarter, compared with the prior year's rate of 23.0%. The income tax rate in the first quarter of 2012 reflected the favorable impact of various tax settlements in multiple jurisdictions. The income tax rate in the first quarter of 2011 reflected the favorable impact due to the timing of certain tax benefits resulting from the retroactive extension of the U.S. research tax credit and a European restructuring transaction.

Income from Continuing Operations and Diluted Earnings Per Share from Continuing Operations

Income from continuing operations and diluted earnings per share from continuing operations for the first quarter of 2012 were $263 million and $1.21, respectively. Income from continuing operations and diluted earnings per share from continuing operations for the prior year's first quarter were $314 million and $1.35, respectively. The current quarter's earnings reflected an estimated $0.01 unfavorable impact due to foreign currency translation.

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 in 2012. Normal operating needs in fiscal year 2012 include working capital, capital expenditures, cash dividends and common stock repurchases. Net cash provided by continuing operating activities was $313 million during the first three months of 2012, compared with $470 million in the same period in 2011. The current period change in operating assets and liabilities was a net use of cash and primarily reflected higher levels of inventory and lower levels of accounts receivable, accounts payable and accrued expenses. Net cash provided by continuing operating activities in the first quarter of 2012 was reduced by changes in the pension obligation resulting primarily from discretionary cash contributions of approximately $100 million.

Net cash used for continuing investing activities for the first three months of the current year was $252 million, compared with $567 million in the prior-year period. Capital expenditures were $104 million in the first three months of 2012 and $80 million in the same period in 2011. The increase in cash used for purchases of investments in the first quarter of 2011 reflected the extension of maturities of certain highly liquid investments beyond three months.

Net cash provided by continuing financing activities for the first three months of the current year was $959 million, compared with $136 million in the prior-year period. The current period's net cash provided by continuing financing activities includes the proceeds from $500 million of 5-year 1.75% notes and $1 billion of 10-year 3.125% notes issued on November 3, 2011. The net proceeds from these issuances are expected to be used for general corporate purposes, which may include funding for working capital, capital expenditures, repurchases of our common stock and acquisitions. The prior period's cash provided by continuing financing activities included the proceeds from $700 million of 10-year 3.25% notes and $300 million of 30-year 5.00% notes issued on November 8, 2010. For the first three months of the current year, we repurchased approximately 5.5 million shares of our common stock for $400 million, compared with approximately 10.3 million shares of our common stock for $837 million in the prior-year period. Aggregate common stock repurchases are estimated to be approximately $1.5 billion for the full fiscal year 2012. A total of approximately 22.7 million common shares remain available for purchase at December 31, 2011 under the Board of Directors' September 2010 and July 2011 repurchase authorizations, subject to market conditions.


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As of December 31, 2011, total debt of $4.2 billion represented 46.2% of total capital (shareholders' equity, net non-current deferred income tax liabilities, and debt), versus 35.8% at September 30, 2011. Short-term debt decreased to 5% of total debt at the end of December 31, 2011, from 9% at September 30, 2011.

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, 2011. 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, 2011, 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 16-to-1 to 27-to-1. In addition, we have informal lines of credit outside the United States.

Government Receivables

Accounts receivable balances include sales to government-owned or government-supported healthcare facilities. Because these customers are government-owned or supported, we could be impacted by declines in sovereign credit ratings or by defaults in these countries.

We continually evaluate other government receivables, particularly in Italy, Spain and other parts of Western Europe, for potential collection risks associated with the availability of government funding and reimbursement practices. We believe the current reserves related to government receivables are adequate and this concentration of credit risk is not expected to have a material adverse impact on our financial position or liquidity.

Cautionary Statement Regarding Forward-Looking Statements

BD and its representatives may from time to time make certain forward-looking statements in publicly released materials, both written and oral, including statements contained in filings with the Securities and Exchange Commission, press releases, and our reports to shareholders. Forward-looking statements may be identified by the use of words such as "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 statements.

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


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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 after the date they are made, whether as a result of new information, future events and developments or otherwise, except as required by applicable law or regulations.

The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements. For further discussion of certain of these factors, see Item IA. Risk Factors in our 2011 Annual Report on Form 10-K.

The current conditions in the global economy and financial markets, and the potential adverse effect on the cost of operating our business, the demand for our products and services, prices for our products and services due to increases in pricing pressure, or our ability to produce our products, including the impact on developing countries. Also, the increase in sovereign debt during the financial crisis as a result of governmental intervention in the world economy poses additional risks to the global financial system and economic recovery. In addition, deficit reduction efforts or other adverse changes in the availability of government funding for healthcare and research, particularly in U.S. and Western Europe, could result in less demand for our products and additional pricing pressures, as well as create potential collection risks associated with such sales.

The consequences of the healthcare reform in the United States, which implemented an excise tax on U.S. sales of certain medical devices, and which could result in reduced demand for our products, increased pricing pressures or otherwise adversely affect BD's business.

Future healthcare reform in the countries in which we do business may also involve changes in government pricing and reimbursement policies or other cost containment reforms.

Changes in domestic and foreign healthcare industry practices that result in a reduction in procedures using our products or increased pricing pressures, including the continued consolidation among healthcare providers and trends toward managed care and healthcare cost containment (including changes in reimbursement practices by third party payors).

Our ability to penetrate developing and emerging markets, which also . . .

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