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BDX > SEC Filings for BDX > Form 10-K on 21-Nov-2012All Recent SEC Filings

Show all filings for BECTON DICKINSON & CO

Form 10-K for BECTON DICKINSON & CO


21-Nov-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

FINANCIAL REVIEW

Company Overview

Description of the Company and Business Segments

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. References to years throughout this discussion relate to our fiscal years, which end on September 30.

Strategic Objectives

BD remains focused on delivering sustainable growth and shareholder value, while making appropriate investments for the future. BD management operates the business consistent with the following core strategies:

• To increase revenue growth by focusing on our core products that deliver greater benefits to patients, healthcare workers and researchers;

• To increase investment in research and development for platform extensions and innovative new products;

• To make significant investments in growing our operations in emerging markets;

• To improve operating effectiveness and balance sheet productivity;

• To drive an efficient capital structure and strong shareholder returns.

Our strategy focuses on four specific areas within healthcare and life sciences:

• Enabling safer, simpler and more effective parenteral drug delivery;

• Improving clinical outcomes through new, accurate and faster diagnostics;

• Providing tools and technologies to the research community that facilitates the understanding of the cell, cellular diagnostics and cell therapy;

• Enhancing disease management in diabetes, women's health and cancer, and infection control.

We continue to strive to improve the efficiency of our capital structure and follow these guiding principles:

• To maintain an investment grade rating;

• To ensure access to the debt market for strategic opportunities;

• To optimize the cost of capital based on market conditions.

In assessing the outcomes of these strategies as well as BD's financial condition and operating performance, management generally reviews quarterly forecast data, monthly actual results, segment sales and other similar information. We also consider trends related to certain key financial data, including gross profit margin, selling and administrative expense, investment in research and development, return on invested capital, and cash flows.

Summary of Financial Results

Worldwide revenues in 2012 of $7.7 billion increased 1.6% from the prior year and reflected estimated volume increases of 5.2%, which included growth from acquisitions of 1.1%, partially offset by estimated unfavorable foreign exchange translation of 2.7%, and estimated price decreases of 0.9%. Solid growth from our


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Medical and Diagnostics segments was primarily driven by new product launches and growth from recent acquisitions, safety-engineered products and emerging markets. Revenues in the United States in 2012 of $3.3 billion increased 1%, reflecting pricing pressures for certain Medical Surgical Systems products and an increasingly competitive market for microbiology products. In addition, Biosciences revenue in the U.S. declined due to reduced research funding and constrained demand for high-end instruments. International revenues in 2012 of $4.4 billion increased 2%, which reflected an estimated impact of unfavorable foreign currency translation of 5%. International revenues for 2012 reflected growth from all segments, including growth attributable to emerging markets, as well as strong sales of safety-engineered products. Sales in the United States of safety-engineered devices grew 3% to $1.15 billion in 2012 from $1.12 billion in 2011. International sales of safety-engineered devices were $834 million in 2012 compared with $755 million in 2011, or 10.5% growth which included an estimated 5% negative impact due to unfavorable foreign currency translation. International safety-engineered device revenue growth continues to be driven by strong sales in the Medical Segment, with the largest growth in emerging markets, including China and Latin America.

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 with higher gross profit margins across our business segments, and continue to improve operating efficiency and organizational effectiveness. The healthcare industry continues to face a challenging economic environment. The current economic conditions and other circumstances have resulted in pricing pressures for some of our products. As mentioned above, our Biosciences segment continues to be impacted by an uncertain research spending environment and lack of overall demand for instruments and research reagents. In other areas of our U.S. business, healthcare utilization is stable but constrained. Additionally, uncertainty in Europe due to continued macroeconomic challenges has resulted in constrained healthcare utilization in that region.

In addition to the economic conditions in the United States and elsewhere, numerous other factors can affect our ability to achieve our 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. We currently estimate that our fiscal 2013 excise tax (impacting only three quarters for fiscal year 2013) will be between $40 million to $50 million and will be recorded in selling and administrative expense.

Our financial position remains strong, with cash flows from operating activities totaling $1.7 billion in 2012. At September 30, 2012, we had $2.2 billion in cash and equivalents and short-term investments. Cash outflows relating to acquisitions included the purchase of KIESTRA Lab Automation BV ("KIESTRA"), a Netherlands-based company that manufactures and sells innovative lab automation solutions for the microbiology lab, for $51 million, net of cash acquired. The Company also paid $52 million, net of cash acquired, for Sirigen Group Limited ("Sirigen"), a developer of unique polymer dyes that are used in flow cytometry. Capital expenditures were $487 million in 2012 as we continue to invest in capacity across our segments to support future growth. 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 in the form of share repurchases and dividends. During 2012, we repurchased $1.5 billion of our common stock and paid cash dividends of $368 million.

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. For further discussion refer to Note 12 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.


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Divestiture

In April 2012, we signed a definitive agreement to sell Biosciences' Discovery Labware unit, excluding its Advanced Bioprocessing platform. The results of operations associated with this disposal group have been reclassified as discontinued operations for all periods presented in the accompanying Consolidated Financial Statements of Income and Cash Flows and related disclosures. We completed the sale on October 31, 2012. Gross proceeds from the sale were approximately $728 million, subject to post-closing adjustments, and we expect to record a gain on the sale within discontinued operations in the first quarter of fiscal year 2013. See Note 10 in the Notes to Consolidated Financial Statements for additional discussion.

Results of Continuing Operations

Comparisons of income from continuing operations between 2012 and 2011 are affected by the following items that are reflected in our financial results:

• During the fourth quarter of 2012, we recorded a pre-tax pension settlement charge of $20 million, or $0.06 diluted earnings per share from continuing operations, primarily associated with a non-cash charge due to lump sum benefit payments made from BD's U.S. supplemental pension plan. The charge also included settlement losses associated with certain foreign pension plans. For further discussion refer to Note 8 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

• During the fourth quarter of 2011, we recorded a pre-tax, non-cash charge of $9 million, or $0.03 diluted earnings per share from continuing operations, resulting from the discontinuance of a research program within the Diagnostic Systems unit.

Medical Segment

Medical revenues in 2012 of $4.1 billion increased 2.1% over 2011, which
reflected an estimated impact of unfavorable foreign currency translation of
3.0%.

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



                                                                             Estimated
                                                                              Foreign
                                                               Total         Exchange
                                  2012             2011        Change         Impact
                                 (Millions of dollars)
    Medical Surgical Systems   $     2,105       $  2,082          1.1 %           (2.5 )%
    Diabetes Care                      911            866          5.2 %           (2.3 )%
    Pharmaceutical Systems           1,074          1,059          1.4 %           (4.8 )%

    Total Revenues*            $     4,091       $  4,007          2.1 %           (3.0 )%

* Amounts may not add due to rounding.

Medical segment revenue growth, on a foreign currency-neutral basis, reflected solid growth in all units. Medical Surgical Systems revenue reflected solid growth of international safety-engineered product sales and growth from sales of the BD PhaSeal™ product resulting from the Carmel Pharma, AB ("Carmel") acquisition that occurred in the fourth quarter of fiscal year 2011. Diabetes Care revenue growth reflected continued strong sales of pen needles, including sales of the BD Ultra-Fine™ Nano. Pharmaceutical Systems revenue reflected the continued strong demand from companies producing biotech drugs and certain heparin products. Global sales of safety-engineered products were $966 million, compared with $885 million in the prior year, and included an estimated $14 million unfavorable impact due to foreign currency translation.

Medical operating income in 2012 was $1.2 billion, or 28.4% of Medical revenues, as compared with $1.2 billion, or 29.5%, of revenues in 2011. Gross profit margin was lower in the current year than in 2011 primarily due to amortization of intangibles associated with the Carmel acquisition, unfavorable pricing impacts on certain product lines and the unfavorable impact of decreased sales of products which have higher gross margins. These


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unfavorable impacts on gross profit margin were partially offset by favorable foreign currency translation and lower manufacturing costs resulting 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 percentage of Medical revenues in 2012 increased to 17.7% of revenues from 17.5% of revenues in 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, partially offset by continued spending controls and favorable foreign currency translation. Research and development expenses in 2012 increased $11 million, or 8%, and reflected continued investment in the development of new products and platforms, including new diabetes care and closed system transfer devices.

Diagnostics Segment

Diagnostics revenues in 2012 of $2.5 billion increased 2.3% over 2011, which
reflected an estimated impact of unfavorable foreign currency translation of
2.2%.

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



                                                                        Estimated
                                                                         Foreign
                                                          Total         Exchange
                                  2012        2011        Change         Impact
                                               (Millions of dollars)
         Preanalytical Systems   $ 1,301     $ 1,278          1.8 %           (2.5 %)
         Diagnostic Systems        1,237       1,203          2.9 %           (1.8 %)

         Total Revenues*         $ 2,538     $ 2,480          2.3 %           (2.2 %)

* Amounts may not add due to rounding.

Revenue growth in the Preanalytical Systems unit, on a foreign currency-neutral basis, was driven by sales of safety-engineered products. Sales of safety-engineered products grew 2% in the United States, driven by BD VacutainerTM Push Button Blood Collection Set sales, and 4% internationally, which included an estimated unfavorable foreign exchange impact of 5%. The Diagnostic Systems unit experienced growth in worldwide sales of its automated diagnostic platforms, including the molecular BD ProbeTecTM, BD ViperTM and BD AffirmTM systems, along with solid growth of its BD BACTECTM blood culture and TB systems and the BD PhoenixTM ID/AST platform and its SurePath products. Diagnostics revenues in 2012 also reflected a favorable comparison to the prior-year period due to new product launches and the KIESTRA acquisition.

Diagnostics operating income in 2012 was $653 million, or 25.7% of Diagnostics revenues, compared with $636 million, or 25.7% of revenues, in 2011. Gross profit margin in the Diagnostics segment was down as compared to the prior year and reflected unfavorable foreign currency translation, higher raw material costs, and the unfavorable impact of decreased sales of products which have higher gross margins. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Diagnostics revenues increased by 10 basis points in 2012 to 21.6%, primarily due to investments in emerging markets, partially offset by continued spending controls and favorable foreign currency translation. Research and development expense decreased $9 million, or 5% from 2011 reflecting a program termination in 2011. Current year R&D spending reflected our continued investment in the development of new products and platforms, including the BD MAX™ and new BD Viper™ platforms and menus.

Biosciences Segment

Biosciences revenues, which include the Cell Analysis unit and the Advanced Bioprocessing platform, of $1.1 billion in 2012 decreased 1.5% from 2011, and reflected an estimated impact of unfavorable foreign currency translation of 2.2%. Biosciences revenue growth, on a foreign currency-neutral basis, was primarily driven by instrument and reagent sales in emerging markets, partially offset by declines in the U.S. due to constrained research spending.


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Biosciences operating income in 2012 was $262 million, or 24.2% of Biosciences revenues, compared with $278 million, or 25.4%, in 2011. The Segment's operating income in 2012 reflected a lower gross profit margin than 2011 primarily due to the unfavorable impact of foreign currency translation and amortization of capitalized software as well as intangibles associated with the 2011 acquisition of Accuri Cytometers, Inc. ("Accuri"). The Segment's gross profit margin was also unfavorably impacted by increases in certain raw material costs. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Biosciences revenues was 24.4% in 2012 as compared with 24.5% in 2011 and reflected continued spending controls partially offset by unfavorable foreign currency translation. Research and development spending was relatively flat to prior year and reflects spending on new products and platforms, including next generation cell sorters and analyzers.

Geographic Revenues

Revenues in the United States in 2012 of $3.3 billion increased 1%. Growth in U.S. Medical revenues reflected strong sales of Pharmaceutical Systems and Diabetes Care products, which were partially offset by pricing pressures for certain Medical Surgical Systems products. Diagnostic Systems revenue growth in the U.S. was unfavorably affected by an increasingly competitive market for microbiology products and weak sales from our GeneOhm™healthcare-associated infections ("HAI") platform, also due to a challenging competitive environment. Biosciences revenues in the U.S. declined in the current year compared with the prior year due to reduced research funding, as we continue to experience constrained demand for high-end instruments due to continued funding concerns in the pharmaceutical and biotech research markets as well as in the academic markets.

International revenues in 2012 of $4.4 billion increased 2%, which reflected an estimated impact of unfavorable foreign currency translation of 5%. International revenues for 2012 reflected growth from all segments, including growth attributable to emerging markets, as well as strong sales of safety-engineered products.

Gross Profit Margin

Gross profit margin was 51.3% in 2012, compared with 52.2% in 2011. The decrease in gross profit margin reflected the estimated net unfavorable impact of 70 basis points relating to operating performance, an estimated 10 basis points relating to unfavorable foreign currency translation and an estimated 10 basis points relating to pension settlements. Operating performance was adversely affected by an estimated 50 basis points due to the impact of decreased sales of products which have higher gross margins. Operating performance also reflected the estimated impacts of 50 basis points due to unfavorable pricing impacts on certain product lines as well as 20 basis points due to increases in certain raw material costs. Operating performance was also adversely impacted by approximately 10 basis points due to amortization of intangibles associated with recent acquisitions, approximately 20 basis points due to Biosciences software amortization and approximately 30 basis points due to other unfavorable one-time impacts. The unfavorable impacts on operating performance for the current year were partially offset by an estimated 80 basis points due to lower manufacturing costs from continuous improvement projects, such as Project ReLoCo, and lower pension costs. Operating performance was also favorably impacted by approximately 30 basis points due to the change in useful lives of certain machinery and equipment assets. See Note 2 to the consolidated financial statements contained in Item 8 for additional discussion.

Operating Expenses

Selling and administrative expense in 2012 was $1.9 billion, or 25% of revenues, compared with $1.8 billion, or 24% of revenues in 2011. Aggregate expenses for 2012 reflected an increase in core spending of $105 million, primarily relating to expansion of our business in emerging markets, transactions costs relating to the KIESTRA acquisition and higher expenses resulting from the Carmel and KIESTRA acquisitions. Aggregate expenses for the current year also included increased spending of $23 million related to our global enterprise resource planning initiative to update our business information systems and $8 million related to pension settlements. Additionally, aggregate expenses in the current year included a $16 million increase in the deferred compensation plan liability, as further discussed below. These increases were partially offset by favorable foreign currency translation of $41 million and lower pension expense of $11 million.


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Research and development ("R&D") expense in 2012 was $472 million, or 6.1% of revenues, compared with $470 million, or 6.2% of revenues, in 2011. The increase in R&D expenditures includes spending for new products and platforms in each of our segments, as previously discussed. Current year expense also includes $2 million associated with pension settlements. R&D expense in 2011 included a non-cash impairment charge of $9 million resulting from the discontinuance of a research program within the Diagnostic Systems unit.

Non-Operating Expense and Income

Interest expense in 2012 was $135 million, compared with $84 million in 2011. The increase reflected higher levels of long-term fixed-rate debt, partially offset by lower average interest rates on this debt, as well as a reduction in the amount of capitalized interest. The reduction in capitalized interest was attributable to a lower average interest rate on the overall debt portfolio. Interest income was $50 million in 2012, compared with $43 million in 2011. The increase was largely the result of investment gains on assets related to our deferred compensation plan, offset partially by the impact of lower interest rates and lower investment levels in certain non-U.S. locations. The offsetting movements in the deferred compensation plan liability were recorded in selling and administrative expenses.

Income Taxes

The effective tax rate in 2012 of 24.6% was lower compared with the 2011 rate of 25.8%. The 2012 rate reflected the favorable impact of various tax settlements in multiple jurisdictions, while 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 and Diluted Earnings per Share from Continuing Operations

Income from continuing operations and diluted earnings per share from continuing operations in 2012 were $1.1 billion and $5.30, respectively. The charge related to pension settlements decreased income from continuing operations in 2012 by $13 million, or $0.06 per share. Earnings in 2012 also reflected an estimated overall net unfavorable impact of foreign currency fluctuations of $0.21 per share. Income from continuing operations and diluted earnings per share from continuing operations in 2011 were $1.2 billion and $5.31, respectively. The charge related to the discontinuance of a research program decreased income from continuing operations in 2011 by $6 million, or $0.03 per share.

Financial Instrument Market Risk

We selectively use financial instruments to manage market risk, primarily foreign currency exchange risk and interest rate risk relating to our ongoing business operations. The counterparties to these contracts are highly rated financial institutions. We do not enter into financial instruments for trading or speculative purposes.

Foreign Exchange Risk

BD and its subsidiaries transact business in various foreign currencies throughout Europe, Asia Pacific, Canada, Japan and Latin America. We face foreign currency exposure from the effect of fluctuating exchange rates on payables and receivables relating to transactions that are denominated in currencies other than our functional currency. These payables and receivables primarily arise from intercompany transactions. We hedge substantially all such exposures, primarily through the use of forward contracts. We also face currency exposure that arises from translating the results of our worldwide operations, including sales, to the U.S. dollar at exchange rates that have fluctuated from the beginning of a reporting period. From time to time, we purchase forward contracts and options to hedge certain forecasted sales that are denominated in foreign currencies in order to partially protect against a reduction in the value of future sales resulting from 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 did not enter into contracts to hedge cash flows in fiscal year 2012.


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Derivative financial instruments are recorded on our balance sheet at fair value. For foreign currency derivatives, market risk is determined by calculating the impact on fair value of an assumed change in foreign exchange rates relative to the U.S. dollar. Fair values were estimated based upon observable inputs, specifically spot currency rates and foreign currency prices for similar assets and liabilities. With respect to the derivative instruments outstanding at September 30, 2012, a 10% appreciation of the U.S. dollar over a one-year period would decrease pre-tax earnings by $8 million, while a 10% depreciation of the U.S. dollar would increase pre-tax earnings by $8 million. Comparatively, considering our derivative instruments outstanding at September 30, 2011, a 10% appreciation of the U.S. dollar over a one-year period would have decreased pre-tax earnings by $23 million, while a 10% depreciation of the U.S. dollar would have increased pre-tax earnings by $23 million. These calculations do not reflect the impact of exchange gains or losses on the underlying transactions that would substantially offset the results of the derivative instruments.

Interest Rate Risk

Our primary interest rate exposure results from changes in short-term U.S. dollar interest rates. Our debt and interest-bearing investments at September 30, 2012 are substantially all U.S. dollar-denominated. Therefore, transaction and translation exposure relating to such instruments is minimal. When managing interest rate exposures, we strive to achieve an appropriate balance between fixed and floating rate instruments. We may enter into interest . . .

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