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BDX > SEC Filings for BDX > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for BECTON DICKINSON & CO


9-May-2013

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

Second quarter revenues of $2.0 billion represented an increase of 3.7% from the same period a year ago, and reflected volume increases of approximately 4.3%, partially offset by price decreases of approximately 0.2% and unfavorable foreign currency translation of approximately 0.4%. Revenue growth in the second quarter of fiscal year 2013 was driven by our Medical and Diagnostics segments and reflected the benefits of new product sales. These benefits were partially offset by the unfavorable timing of orders in the Pharmaceutical Systems unit, and, in the Biosciences segment, by weaker Western European sales and the unfavorable timing of government funding in Japan. International revenues in our Medical and Diagnostics segments 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 second quarter of 2013 of $287 million increased 1.6% over the prior year's quarter. International sales of safety-engineered devices of $227 million in the second quarter of 2013 grew 10.6% over the prior year's period, including an estimated 0.5% 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 Western Europe and emerging markets.

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. Continued uncertainty in the research spending environment could adversely affect our Biosciences segment. 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. Patient Protection and Affordable Care Act contains certain tax provisions that will affect BD. The most significant


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impact is the medical device excise tax, effective January 1, 2013, that imposes a 2.3% tax on certain U.S. sales of medical devices. During the second quarter of fiscal year 2013, we recorded a pre-tax charge of $14 million, or $0.05 diluted earnings per share from continuing operations, in selling and administrative expense relating to the medical device excise tax. We currently estimate that our fiscal 2013 excise tax (impacting only three quarters for fiscal year 2013) will be about $45 million.

Our financial position remains strong, with cash flows from operating activities totaling $543 million in the first six months of 2013. At March 31, 2013, we had $2.4 billion in cash and equivalents and short-term investments. Cash outflows relating to acquisitions primarily represented the purchase of Safety Syringes, Inc. ("Safety Syringes"), a privately held California-based company that specializes in the development of anti-needlestick devices for prefilled syringes for $124 million, net of cash acquired. Cash flows relating to acquisitions also included the purchase of Cato Software Solutions ("Cato"), a privately held Austria-based manufacturer of a suite of comprehensive medication safety software solutions, for $14 million, net of cash acquired. Refer to Note 9 in the Notes to Condensed Consolidated Financial Statements for further discussion of these acquisitions. Cash inflows from divestitures of $720 million represented the sale of Biosciences' Discovery Labware unit, excluding its Advanced Bioprocessing platform. Refer to Note 10 in the Notes to Condensed Consolidated Financial Statements for additional information. Also, we continued to return value to our shareholders in the form of share repurchases and dividends. During the first six months of 2013, we repurchased $356 million of our common stock and paid cash dividends of $193 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 in the Notes to Condensed Consolidated Financial Statements.

Results of Operations

Revenues

Refer to Note 6 in the Notes to Condensed Consolidated Financial Statements for segment financial data.

Medical Segment

Second quarter revenues of $1.062 billion increased 4.0% over the prior year's quarter, which reflected an estimated unfavorable foreign currency translation impact of 0.2%.


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

                                             Three months ended March 31,
                                                                          Estimated
                                                                           Foreign
                                                            Total         Exchange
        (millions of dollars)       2013        2012        Change         Impact
        Medical Surgical Systems   $   539     $   519          3.8 %           (0.4 )%
        Diabetes Care                  232         219          5.9 %           (0.7 )%
        Pharmaceutical Systems         291         283          3.0 %            0.6 %

        Total Revenues             $ 1,062     $ 1,021          4.0 %           (0.2 )%

Medical segment revenue growth was driven by new products across all three organizational units. Revenue growth in the Diabetes Care unit reflected strong sales of pen needles, including the BD Ultra-Fine™ Nano and PentaPoint™ products. Solid revenue growth in the Medical Surgical Systems unit was largely attributable to sales in emerging markets and strong international sales of safety-engineered products, including the BD PhaSeal™ System. Revenue growth in the Pharmaceutical Systems unit was unfavorably impacted by the unfavorable timing of orders. Global sales of safety-engineered products were $256 million, as compared with $236 million in the prior year's quarter, and included an estimated $1 million unfavorable impact due to foreign currency translation. Total Medical revenues for the six-month period ended March 31, 2013 increased by 3.7% from the prior-year six-month period, including an estimated 1.0% unfavorable impact from foreign currency translation. For the six-month period ended March 31, 2013, global sales of safety-engineered products were $508 million, compared with $476 million in the prior year's period, and included an estimated $3 million unfavorable impact due to foreign currency translation.

Medical operating income for the second quarter was $291 million, or 27.4% of Medical revenues, compared with $285 million, or 27.9% of segment revenues, in the prior year's quarter. Gross profit margin was higher in the current quarter than the second quarter of 2012 primarily due to lower manufacturing costs resulting from Project ReLoCo, a global, cross-functional business initiative to drive sustained low-cost capability primarily benefitting Medical Surgical Systems. Gross profit margin was also favorably impacted by lower raw material costs and the Company's change in useful lives of certain machinery and equipment assets, which was effective January 1, 2012. These favorable impacts on gross profit margin were partially offset by price decreases on certain product lines and unfavorable foreign currency translation. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Medical revenues in the second quarter of 2013 was higher than in the second quarter of 2012. This increase reflected the medical device excise tax previously discussed as well as increased spending for expansion in emerging markets. Research and development expenses for the quarter increased $4 million, or 9% above the prior year's period, reflecting ongoing investment in new products and platforms. Segment operating income for the six-month period was $579 million, or 28.3% of Medical revenues, compared with $539 million, or 27.3%, in the prior year's period.


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Diagnostics Segment

Second quarter revenues of $659 million increased 4.6% over the prior year's quarter, which reflected an estimated unfavorable foreign currency translation impact of 0.3%.

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

                                           Three months ended March 31,
                                                                        Estimated
                                                                         Foreign
                                                          Total         Exchange
         (millions of dollars)    2013         2012       Change         Impact
         Preanalytical Systems   $   330       $ 323          2.1 %           (0.1 )%
         Diagnostic Systems          329         307          7.2 %           (0.6 )%

         Total Revenues          $   659       $ 630          4.6 %           (0.3 )%

Diagnostics segment revenue growth was primarily driven by new product sales and international expansion in the Diagnostic Systems unit. Global sales of safety-engineered products in the Preanalytical Systems unit totaled $258 million, compared with $252 million in the prior year's quarter, and included an immaterial unfavorable impact due to foreign currency translation. Total Diagnostics revenues for the six-month period ended March 31, 2013 increased by 4.8% from the prior-year six-month period, including an estimated 0.7% unfavorable impact from foreign currency translation. For the six-month period ended March 31, 2013, global sales of safety-engineered products in the Preanalytical Systems unit were $517 million, compared with $500 million in the prior year's period, and included an estimated $3 million unfavorable impact due to foreign currency translation.

Diagnostics operating income for the second quarter was $145 million, or 22.0% of Diagnostics revenues, compared with $158 million, or 25.1% 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 primarily due to amortization expense related to the Jaguar Plus Platform, an in-process research development project that was acquired in the Company's fiscal year 2010 acquisition of HandyLab, Inc. and completed in the fourth quarter of fiscal year 2012. Gross profit margin in the second quarter of 2013 was also unfavorably impacted by foreign currency translation. These unfavorable impacts to gross profit margin were partially offset by decreases 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 second quarter of 2013 was higher than in the second quarter of 2012. This increase reflected the medical device excise tax previously discussed as well as increased spending for expansion in emerging markets and spending for new product launches. Research and development expenses in the second quarter of 2013 increased by $2 million, or 4.5% compared with the prior year's period, and reflected increased investment in new products and platforms. Segment operating income for the six-month period was $315 million, or 24.0% of Diagnostics revenues, compared with $323 million, or 25.9%, in the prior year's period.


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Biosciences Segment

Second quarter revenues of $279 million increased 0.6% over the prior year's quarter, which reflected an estimated unfavorable foreign currency translation impact of 1.3%. Biosciences segment revenue growth was driven by increased instrument placements in the U.S. and favorable timing of Advanced Bioprocessing orders. Segment revenue growth was partially offset by weaker Western European sales due to austerity measures and the timing of government funding in Japan. For the six-month period ended March 31, 2013, total Biosciences revenues increased by 1.1% from the prior-year six-month period, including an estimated 1.5% unfavorable impact from foreign currency translation.

Biosciences operating income for the second quarter was $71 million, or 25.6% of Biosciences revenues, compared with $71 million, or 25.7% of segment revenues, in the prior year's quarter. Gross profit margin as a percent of Biosciences revenues, was lower in the current quarter than in the prior year's quarter primarily due to unfavorable foreign currency translation. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Biosciences revenues in the second quarter of 2013 was higher compared with the prior year's quarter. This increase reflected the medical device excise tax previously discussed as well as increased spending for expansion in emerging markets. Research and development expenses in the second quarter of 2013 were flat compared with spending in the prior year's period, reflecting timing of expenses and reduced headcount. Segment operating income for the six-month period was $136 million, or 25.1% of Biosciences revenues, compared with $132 million, or 24.6%, in the prior year's period.

Geographic Revenues

Revenues in the United States for the second quarter of $824 million represented an increase of 0.3% over the prior year's quarter. We view the environment in the U.S. as constrained, but stable. U.S. revenue growth reflected the unfavorable timing of orders in the Pharmaceutical Systems unit. In addition, sales growth in our Medical Surgical unit was impacted by an unfavorable comparison to the prior year period, which reflected strong sales of the BD PhaSeal™ product. In our Diabetes Care unit, revenue growth was unfavorably impacted by the timing of orders in our retail business. Diagnostics segment revenue growth in the United States reflected strong sales of the BD Veritor™ System, which was partially offset by unfavorable timing in the Preanalytical Systems unit. U.S. revenue growth in the Diagnostic Systems unit was unfavorably impacted by a decline in our Women's Health and Cancer platform sales due to guidelines providing for increased Pap smear testing intervals. Biosciences revenue growth in the United States was driven by increased instrument placements and the favorable timing of Advanced Bioprocessing orders. We remain cautious about the U.S. environment for this segment given the continued uncertainty around U.S. government research funding due to the impact of automatic U.S. government spending cuts, or sequestration that went into effect in March 2013.

International revenues for the second quarter of $1.177 billion represented an increase of 6.2% over the prior year's quarter, including a 0.7% unfavorable impact due to foreign currency translation. International revenues for the second quarter of 2013 reflected continued strength in emerging market revenues and strong sales of safety-engineered products for the Medical and Diagnostics segments. International Biosciences revenue growth was unfavorably impacted by weaker sales in Western Europe due to austerity measures and the timing of government funding in Japan.


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Gross Profit Margin

Gross profit margin was 50.9% for the second quarter, compared with 51.2% for the comparable prior-year period. The decrease in gross profit margin reflected estimated unfavorable impacts of 10 basis points relating to operating performance and 20 basis points relating to foreign currency translation. Operating performance was favorably impacted by approximately 90 basis points primarily due to lower manufacturing costs from continuous improvement projects such as Project ReLoCo and lower raw material costs. Operating performance was also favorably impacted by approximately 40 basis points due to the Company's change in useful lives of certain machinery and equipment assets, which was effective January 1, 2012. Operating performance was adversely affected by approximately 140 basis points primarily due to, among other items, pricing declines on certain product lines and amortization of intangibles associated with recent acquisitions.

Gross profit margin was 51.9% in the six-month period of 2013, compared with 51.0% for the comparable prior-year period. The increase in gross profit margin reflected estimated favorable impacts of 60 basis points relating to operating performance and 30 basis points relating to foreign currency translation. Operating performance was favorably impacted by approximately 90 basis points primarily due to lower manufacturing costs from continuous improvement projects and lower raw material costs. Operating performance was also favorably impacted by approximately 50 basis points due to the Company's change in useful lives of certain machinery and equipment assets. Operating performance was adversely affected by approximately 80 basis points primarily due to, among other items, pricing declines on certain product lines and amortization of intangibles associated with recent acquisitions.

Selling and Administrative Expense

Selling and administrative expense was 25.7% of revenues for the second quarter, compared with 25.3% for the prior year's period. Aggregate expenses for the second quarter reflected an increase in core spending of $19 million, primarily relating to expansion of our business in emerging markets and higher expenses resulting from recent acquisitions. Aggregate expenses for the second quarter of 2013 also reflected $14 million related to the medical device excise tax previously discussed, as well as increased spending of $2 million related to our global enterprise resource planning initiative to update our business information systems. These increases were partially offset by favorable foreign currency translation of $2 million and a decrease in deferred compensation expense of $2 million. This change in the deferred compensation liability is further discussed below. Selling and administrative expenses in the current year's period also reflected a favorable comparison to the prior-year period of $4 million due to the timing of litigation costs.

Selling and administrative expense was 25.9% of revenues for the six-month period of fiscal year 2013, compared with 25.8% for the prior year's period. Aggregate expenses for the second quarter reflected an increase in core spending of $59 million, primarily relating to expansion of our business in emerging markets and higher expenses resulting from recent acquisitions. Aggregate expenses for the second quarter of 2013 also reflected $14 million related to the medical device excise tax previously discussed as well as increased spending of $5 million related to our global enterprise resource planning initiative to update our business information systems. These increases were partially offset by favorable foreign currency translation of $9 million and a decrease in deferred compensation expense of $6 million. Selling and administrative expenses in the current year's period also reflected a favorable comparison to the prior-year period of $22 million due to the timing of litigation costs.


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Research and Development Expense

Research and development expense was $122 million, or 6.1% of revenues, for the second quarter, representing an increase of 4.8% compared with the prior year's amount of $117 million, or 6.1% of revenues. Research and development expense was $241 million, or 6.2% of revenues, for the six-month period in the current year, compared with the prior year's amount of $229 million, or 6.1% of revenues. The increases in research and development expense compared with the prior year's periods reflected increased investment in new products and platforms within the Medical and Diagnostics segments.

Non-Operating Expense and Income

Interest income was $12 million in the second quarter and $20 million in the six-month period of 2013, compared with $17 million and $32 million, respectively, in the prior year's periods. The decrease in the current year's periods compared with the prior year's period reflected the impact of lower rates on investments outside the U.S., as well as lower investment gains on assets related to our deferred compensation plan. The offsetting movements in the deferred compensation plan liability were recorded in selling and administrative expense. Interest expense was $35 million in the second quarter of both fiscal years 2013 and 2012. Interest expense was $70 million in the six-month period of 2013, compared with $65 million, in the prior year's period. The increase primarily reflected higher levels of long-term fixed-rate debt.

Income Taxes

The income tax rate was 23.4% for the second quarter, compared with the prior year's rate of 25.5%. The six-month tax rate was 24.8% compared with the prior year's rate of 24.3%. The tax rates for the quarter and year-to-date periods ending March 31, 2013 reflected the reinstatement of the U.S. research and development tax credit. The income tax rate in the first six months of 2012 reflected the favorable impact of various tax settlements in multiple jurisdictions.

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 second quarter of 2013 were $276 million and $1.39, respectively. Income from continuing operations and diluted earnings per share from continuing operations for the prior year's second quarter were $275 million and $1.31, respectively. The medical device excise tax decreased income from continuing operations for the second quarter of 2013 by $9 million, or $0.05 diluted earnings per share. The current quarter's earnings reflected an estimated $0.02 unfavorable impact due to foreign currency translation. For the six-month periods, income from continuing operations and diluted earnings per share from continuing operations were $546 million and $2.74, respectively, in 2013 and $524 million and $2.45, respectively, in 2012. The medical device excise tax decreased income from continuing operations for the six-month period of fiscal year 2013 by $9 million, or $0.05 diluted earnings per share. The current year-to-date period's earnings reflected an immaterial impact due to foreign currency translation.


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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 fiscal year 2013. Normal operating needs in fiscal year 2013 include working capital, capital expenditures, cash dividends and common stock repurchases. Net cash provided by continuing operating activities was $543 million during the first six months of 2013, compared with $574 million in the same period in 2012. 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 payable and accrued expenses, partially offset by lower levels of prepaid expenses. Net cash provided by continuing operating activities in the first six months of 2013 was reduced by changes in the pension obligation resulting primarily from discretionary cash contributions of approximately $132 million. Net cash provided by continuing operating activities in the prior-year period was also reduced by changes in the pension obligation resulting primarily from discretionary cash contributions of approximately $100 million.

Net cash provided by continuing investing activities for the first six months of the current year was $415 million, compared with net cash used for continuing investing activities of $223 million in the prior-year period. The current period's net cash provided by continuing investing activities included approximately $720 million of net proceeds from the sale of the Discovery Labware disposal group in the first quarter of fiscal year 2013. Cash outflows relating to acquisitions were $138 million in the first six months of the current year as a result of the Company's acquisitions of Safety Syringes and Cato in the first and second quarters of fiscal year 2013, respectively. Cash outflows relating to acquisitions were $51 million in the prior year's period as a result of the Company's second quarter 2012 acquisition of KIESTRA. Capital expenditures were $197 million in the first six months of 2013 and $211 million in the same period in 2012.

Net cash used for financing activities for the first six months of the current year was $500 million, compared with net cash provided by financing activities of $278 million in the prior-year period. The prior period's net cash provided by financing activities included 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.

For the first six months of the current year, we repurchased approximately 4.5 million shares of our common stock for $356 million, compared with . . .

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