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BDX > SEC Filings for BDX > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for BECTON DICKINSON & CO

Form 10-Q for BECTON DICKINSON & CO


5-Aug-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

Third quarter revenues of $2.053 billion represented an increase of 3.6% from the same period a year ago, and reflected volume increases of approximately 4.9%, and favorable price impacts, including product mix, of approximately 0.2%, partially offset by unfavorable foreign currency translation of approximately 1.5%. Revenue growth in the third quarter of fiscal year 2013 was driven by our Medical and Diagnostics segments and was attributable to new product sales, growth from acquisitions, sales of safety-engineered products and geographic expansion. Revenue growth also benefitted from the reversal of unfavorable order timing which affected revenues in the second quarter of fiscal year 2013. Revenues in our Biosciences segment benefitted from slight growth in instrument placements in the U.S., but were unfavorably impacted by continued softness in Western European sales due to austerity measures, the timing of government funding in Japan, and the unfavorable timing of Advanced Bioprocessing orders. This unfavorable timing of Advanced Bioprocessing orders, as well as ongoing softness in the Diagnostics segment's Women's Health and Cancer platform, unfavorably impacted U.S. revenue growth in the third quarter of fiscal year 2013. International revenues in our Medical and Diagnostics segments reflected continued strength in emerging market sales and strong sales of safety-engineered products. Sales of safety-engineered devices in the United States in the third quarter of 2013 of $301 million increased 5.6% over the prior year's quarter. International sales of safety-engineered devices of $237 million in the third quarter of 2013 grew 9.9% over the prior year's period, including an estimated 2.8% 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, we have experienced constrained healthcare utilization in Europe due to continued macroeconomic challenges in that region, although we currently view the environment as stable.


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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 the medical device excise tax that, effective January 1, 2013, imposes a 2.3% tax on certain U.S. sales of medical devices. The impact of this tax on our results for the three and nine-month periods ended June 30, 2013 are further discussed below. We currently estimate the full year fiscal 2013 impact from this excise tax (impacting only three quarters for fiscal year 2013) will be about $40 to $45 million.

Our financial position remains strong, with cash flows from operating activities totaling $989 million in the first nine months of 2013. At June 30, 2013, we had $2.3 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 $736 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 nine months of 2013, we repurchased $406 million of our common stock and paid cash dividends of $290 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.

Comparisons of income from continuing operations between the third-quarter and nine-month periods of fiscal year 2013 and the prior-year periods of fiscal year 2012 are affected by the following items that are reflected in our financial results:

• During the third-quarter and nine-month periods of fiscal year 2013, we recorded a pre-tax charge of $22 million, or $0.07 diluted earnings per share from continuing operations, in selling and administrative expense for the pending litigation settlement related to the indirect purchaser antitrust class action cases as disclosed in Note 5 in the Notes to Condensed Consolidated Financial Statements.


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• During the third quarter of fiscal year 2013, we recorded a pre-tax charge of $13 million, or $0.04 diluted earnings per share from continuing operations, in selling and administrative expense relating to the medical device excise tax discussed above. The pre-tax charge relating to this tax was $27 million, or $0.09 diluted earnings per share from continuing operations, for the nine-month period of fiscal year 2013.

Results of Operations

Revenues

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

Medical Segment

Third quarter revenues of $1.140 billion increased 6.6% over the prior year's quarter, which reflected an estimated unfavorable foreign currency translation impact of 1.3%.

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

                                             Three months ended June 30,
                                                                         Estimated
                                                                          Foreign
                                                            Total        Exchange
        (millions of dollars)       2013        2012       Change         Impact
        Medical Surgical Systems   $   561     $   532         5.5 %           (1.1 )%
        Diabetes Care                  250         233         7.3 %           (2.1 )%
        Pharmaceutical Systems         330         306         8.0 %           (1.2 )%

        Total Revenues*            $ 1,140     $ 1,070         6.6 %           (1.3 )%

* Amounts may not add due to rounding

Medical segment revenue growth was driven by strong international sales, strong sales of safety-engineered products and the reversal of unfavorable order timing which affected revenues in the second quarter of fiscal year 2013. 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 Diabetes Care unit reflected strong sales of pen needles, including the BD Ultra-Fine™ Nano and PentaPoint™ products as well as the BD AutoShield™ Duo Pen Needle. Revenue growth in Diabetes Care also reflected the favorable timing of orders. Revenue growth in the Pharmaceutical Systems unit benefitted from the favorable timing of orders and from revenue growth attributable to the acquisition of Safety Syringes in the first quarter of fiscal year 2013. Global sales of safety-engineered products were $268 million, compared with $240 million in the prior year's quarter, and included an estimated $3 million unfavorable impact due to foreign currency translation. Total Medical revenues for the nine-month period ended June 30, 2013 increased by 4.7% from the prior-year nine-month period, including an estimated 1.1% unfavorable impact from foreign


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currency translation. For the nine-month period ended June 30, 2013, global sales of safety-engineered products were $776 million, compared with $716 million in the prior year's period, and included an estimated $6 million unfavorable impact due to foreign currency translation.

Medical operating income for the third quarter was $334 million, or 29.3% of Medical revenues, compared with $324 million, or 30.3% of segment revenues, in the prior year's quarter. Gross profit margin was higher in the current quarter than the third 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 pricing on certain product lines. These favorable impacts on gross profit margin were partially offset by unfavorable foreign currency translation. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Medical revenues in the third quarter of 2013 was higher than in the third 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 $5 million, or 12% above the prior year's period, reflecting ongoing investment in new products and platforms. Segment operating income for the nine-month period was $913 million, or 28.7% of Medical revenues, compared with $863 million, or 28.4%, in the prior year's period.

Diagnostics Segment

Third quarter revenues of $655 million increased 2.0% over the prior year's quarter, which reflected an estimated unfavorable foreign currency translation impact of 1.6%.

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

                                            Three months ended June 30,
                                                                        Estimated
                                                                         Foreign
                                                           Total        Exchange
          (millions of dollars)    2013        2012       Change         Impact
          Preanalytical Systems   $   345     $   333         3.4 %           (1.2 )%
          Diagnostic Systems          310         309         0.5 %           (2.0 )%

          Total Revenues          $   655     $   642         2.0 %           (1.6 )%

Diagnostics segment revenue growth was driven by solid sales in the Preanalytical Systems unit. Revenues in the Diagnostic Systems unit were unfavorably impacted by the timing of lab automation system installations globally, as well as ongoing softness in the United States in the Women's Health and Cancer platform due to guidelines providing for increased Pap smear testing intervals. Global sales of safety-engineered products in the Preanalytical Systems unit totaled $270 million, compared with $261 million in the prior year's quarter, and included an estimated $3 million unfavorable impact due to foreign currency translation. Total Diagnostics revenues for the nine-month period ended June 30, 2013 increased by 3.9% from the prior-year nine-month period, including an estimated 1.0% unfavorable impact from foreign currency translation. For the nine-month period ended June 30, 2013, global sales of safety-engineered products in the Preanalytical Systems unit were $788 million, compared with $761 million in the prior year's period, and included an estimated $6 million unfavorable impact due to foreign currency translation.


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Diagnostics operating income for the third quarter was $159 million, or 24.2% of Diagnostics revenues, compared with $174 million, or 27.0% 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 third quarter of 2013 was also unfavorably impacted by foreign currency translation. These unfavorable impacts on gross profit margin were partially offset by pricing on certain product lines. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Diagnostics revenues in the third quarter of 2013 was higher than in the third 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 third quarter of 2013 were flat compared with the prior year's period, and reflected the timing of expenses in fiscal year 2013. Segment operating income for the nine-month period was $473 million, or 24.1% of Diagnostics revenues, compared with $497 million, or 26.3%, in the prior year's period.

Biosciences Segment

Third quarter revenues of $257 million decreased 4.2% over prior year quarter revenues of $268 million, which reflected an estimated unfavorable foreign currency translation impact of 1.7%. Biosciences revenues in the third quarter reflected slight growth in instrument placements in the U.S. but were unfavorably impacted by weaker Western European sales due to austerity measures, the timing of government funding in Japan, and unfavorable timing of Advanced Bioprocessing orders. For the nine-month period ended June 30, 2013, total Biosciences revenues decreased by 0.6% from the prior-year nine-month period, including an estimated 1.5% unfavorable impact from foreign currency translation.

Biosciences operating income for the third quarter was $58 million, or 22.6% of Biosciences revenues, compared with $67 million, or 25.0% 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 third 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 third quarter of 2013 increased by $2 million, or 8% above the prior year's period, and reflected increased investment in new products and platforms. Segment operating income for the nine-month period was $195 million, or 24.3% of Biosciences revenues, compared with $200 million, or 24.7%, in the prior year's period.

Geographic Revenues

Revenues in the United States for the third quarter of $848 million represented an increase of 1.3% over the prior year's quarter. We view the environment in the U.S. as constrained, but stable. U.S. revenue growth in the Medical segment was partially driven by the reversal of the unfavorable timing of orders in the Pharmaceutical Systems and Diabetes Care units which


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affected revenues in the second quarter of fiscal year 2013. U.S. revenues in the Medical segment also reflected growth attributable to the acquisition of Safety Syringes in the first quarter of fiscal year 2013. Diagnostics segment revenue growth in the United States 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 reflected slight growth in instrument placements that was more than offset by the unfavorable 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 third quarter of $1.205 billion represented an increase of 5.3% over the prior year's quarter, including a 2.6% unfavorable impact due to foreign currency translation. International revenues for the third 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.

Gross Profit Margin

Gross profit margin was 51.6% for the third quarter, compared with 52.2% for the comparable prior-year period. The decrease in gross profit margin reflected 60 basis points primarily relating to unfavorable foreign currency translation. Operating performance was favorably impacted by approximately 60 basis points primarily due to lower manufacturing costs from continuous improvement projects, such as Project ReLoCo, and pricing on certain product lines. These favorable impacts were offset by 60 basis points primarily due to, among other items, amortization of intangibles associated with recent acquisitions and higher start-up costs.

Gross profit margin was 51.8% in the nine-month period of 2013, compared with 51.4% for the comparable prior-year period. The increase primarily reflected operating performance. Gross profit margin was favorably impacted by approximately 80 basis points primarily due to lower manufacturing costs from continuous improvement projects and lower raw material costs. Gross profit margin was also favorably impacted by approximately 30 basis points due to the Company's change in useful lives of certain machinery and equipment assets. Gross profit margin was adversely affected by approximately 70 basis points primarily due to, among other items, amortization of intangibles associated with recent acquisitions and pricing pressures on certain product lines.

Selling and Administrative Expense

Selling and administrative expense was 26.0% of revenues for the third quarter, compared with 23.7% for the prior year's period. Aggregate expenses for the third quarter reflected an increase in core spending of $32 million, primarily relating to expansion of our business in emerging markets and higher expenses resulting from recent acquisitions. Aggregate expenses for the third quarter of 2013 also reflected the $22 million charge for the pending litigation settlement previously discussed and $13 million related to the medical device excise tax also previously discussed. Selling and administrative expenses in the current year's period also reflected an unfavorable comparison to the prior-year period of $5 million due to the timing of litigation costs in the current quarter. These increases were partially offset by favorable foreign currency translation of $7 million.


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Selling and administrative expense was 25.9% of revenues for the nine-month period of fiscal year 2013, compared with 25.1% for the prior year's period. Aggregate expenses for the nine-month period reflected an increase in core spending of $94 million, primarily relating to expansion of our business in emerging markets and higher expenses resulting from recent acquisitions. Aggregate expenses for the nine-month period also reflected the $22 million charge for the pending litigation settlement and $27 million related to the medical device excise tax. These increases were partially offset by favorable foreign currency translation of $16 million and a decrease in deferred compensation expense of $4 million. This change in the deferred compensation liability is further discussed below. Selling and administrative expenses in the current year's nine-month period also reflected a favorable comparison to the prior-year period of $17 million due to the timing of litigation costs. We expect such costs to increase in the fourth quarter of fiscal year 2013 in anticipation of the RTI trial in September 2013. For further discussion, refer to Note 5 in the Notes to Condensed Consolidated Financial Statements.

Research and Development Expense

Research and development expense was $121 million, or 5.9% of revenues, for the third quarter, representing an increase of 5.3% compared with the prior year's amount of $115 million, or 5.8% of revenues. The increase in research and development expense compared with the prior year's quarter reflected increased investment in new products and platforms primarily within the Medical and Biosciences segments. Research and development expense was $362 million, or 6.1% of revenues, for the nine-month period in the current year, compared with the prior year's amount of $344 million, or 6.0% of revenues. The current nine-month period's increase in research and development expense compared with the prior year's period reflected increased investment in new products and platforms primarily within the Medical and Diagnostics segments.

Non-Operating Expense and Income

Interest income and interest expense in the third quarter of fiscal year 2013 were comparable to the prior-year period's amounts. Interest income was $26 million in the nine-month period of 2013, compared with $38 million in the prior year's period. The decrease in interest income in the nine-month period of fiscal year 2013 compared with the prior year's period reflected the impact of lower rates on investments outside the U.S. and 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 in the nine-month period of fiscal year 2013 was $104 million, compared with $99 million in the prior year's period. The increase in interest expense in the nine-month period of fiscal year 2013 primarily reflected higher levels of long-term fixed-rate debt.

Income Taxes

The income tax rate was 23.0% for the third quarter, compared with the prior year's rate of 25.6%. The nine-month tax rate was 24.2% compared with the prior year's rate of 24.8%. The tax rate for the third quarter of fiscal year 2013 reflected the favorable impact of the reinstatement of the U.S. research and development tax credit on the annual tax rate whereas the tax rate for the prior year's quarter reflected other items that vary from year to year. The tax rate for the year-to-date period ending June 30, 2013 reflected the reinstatement of the U.S. research and development tax credit. The income tax rate in the first nine months of 2012 reflected the favorable impact of various tax settlements in multiple jurisdictions.


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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 third quarter of 2013 were $292 million and $1.47, respectively. Income from continuing operations and diluted earnings per share from continuing operations for the prior year's third quarter were $312 million and $1.52, respectively. The charge relating to the pending litigation settlement decreased income from continuing operations by $14 million, or $0.07 diluted earnings per share. The medical device excise tax decreased income from continuing operations for the third quarter of fiscal year 2013 by $9 million, or $0.04 diluted earnings per share. The current quarter's diluted earnings per share from continuing operations reflected an estimated $0.05 unfavorable impact due to foreign currency translation.

For the nine-month periods, income from continuing operations and diluted earnings per share from continuing operations were $838 million and $4.21, respectively, in 2013 and $835 million and $3.95, respectively, in 2012. The charge relating to the pending litigation settlement decreased income from continuing operations for the nine-month period of 2013 by $14 million, or $0.07 diluted earnings per share. The medical device excise tax decreased income from continuing operations for the nine-month period of fiscal year 2013 by $18 million, or $0.09 diluted earnings per share. The current nine-month period's diluted earnings per share from continuing operations reflected an estimated $0.05 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 fiscal year 2013. Normal operating needs in fiscal year 2013 include working capital, . . .

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