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BDX > SEC Filings for BDX > Form 10-K on 27-Nov-2013All Recent SEC Filings

Show all filings for BECTON DICKINSON & CO

Form 10-K for BECTON DICKINSON & CO


27-Nov-2013

Annual Report


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

The following commentary should be read in conjunction with the consolidated financial statements and accompanying notes. Within the tables presented throughout this discussion, certain columns may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying whole-dollar amounts. References to years throughout this discussion relate to our fiscal years, which end on September 30.

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.

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 2013 of $8.1 billion increased 4.5% from the prior year and reflected estimated volume increases of 5.5%, including growth from acquisitions of 0.8%, which were partially offset by estimated unfavorable foreign exchange translation of 0.9% and by estimated unfavorable price impacts, including product mix, of 0.1%. Solid growth from our Medical and Diagnostics segments was primarily driven by new product sales, growth from acquisitions, sales of safety-engineered products and geographic expansion. Biosciences


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revenue growth was primarily driven by instrument and reagent sales in emerging markets, partially offset by declines in Western Europe. Revenues in the United States in 2013 of $3.4 billion increased 2.0% over the prior year and reflected growth from all segments. Ongoing weaker demand in the Diagnostics segment's Women's Health and Cancer platform continued to unfavorably impact U.S. revenue growth in 2013. International revenues in 2013 of $4.7 billion increased 6.3%, which reflected an estimated impact of unfavorable foreign currency translation of 1.7%. International revenues for 2013 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 2.9% to $1.18 billion in 2013 from $1.15 billion in 2012. International sales of safety-engineered devices grew 10% to $917 million in 2013 compared with $834 million in 2012, which included an estimated 1.9% 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.

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, 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 impact 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.

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 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 2013 results is further discussed below.

Our financial position remains strong, with cash flows from operating activities totaling $1.7 billion in 2013. At September 30, 2013, we had $2.6 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. Net cash inflows from divestitures of $736 million represented the sale of Biosciences' Discovery Labware unit, excluding its Advanced Bioprocessing platform. Also, we continued to return value to our shareholders in the form of share repurchases and dividends. During 2013, we repurchased $450 million of our common stock and paid cash dividends of $386 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 consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.


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Results of Continuing Operations

Comparisons of income from continuing operations between 2013 and 2012 are affected by the following items that are reflected in our financial results:

• During the fourth quarter of fiscal 2013, we recorded a pre-tax charge of $341 million, or $1.06 diluted earnings per share from continuing operations, in selling and administrative expense relating to an unfavorable verdict in the lawsuit filed against BD by Retractable Technologies, Inc. ("RTI") as disclosed in Note 5 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

• During the fourth quarter of fiscal 2013, we recorded a pre-tax pension settlement charge of $6 million, or $0.02 diluted earnings per share from continuing operations, associated with a non-cash charge due to lump sum benefit payments made from BD's U.S. supplemental pension plan. For further discussion refer to Note 8 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

• During the third quarter 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 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

• In fiscal 2013, we recorded a pre-tax charge of $40 million, or $0.13 diluted earnings per share from continuing operations, in selling and administrative expense, relating to the medical device excise tax which was effective January 1, 2013 and therefore impacted our operations for only three quarters of the year.

• 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.

Medical Segment

Medical revenue in 2013 of $4.3 billion increased 5.3% over 2012, which
reflected an estimated unfavorable foreign currency translation impact of 0.7%.

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



                                                                          Estimated
                                                                           Foreign
                                                            Total         Exchange
                                    2013        2012        Change         Impact
                                                 (Millions of dollars)
        Medical Surgical Systems   $ 2,196     $ 2,105          4.3 %           (0.9 )%
        Diabetes Care                  969         911          6.3 %           (1.5 )%
        Pharmaceutical Systems       1,142       1,074          6.3 %            0.1 %

        Total Revenues             $ 4,306     $ 4,091          5.3 %           (0.7 )%

Medical segment revenue growth was driven by solid growth in all units. Medical Surgical Systems revenue growth was largely attributable to sales in emerging markets and strong international sales of safety-engineered products. Revenue growth in the Diabetes Care unit reflected strong sales of pen needles, including the BD Ultra-Fine™ Nano and BD PentaPoint™ products, as well as the BD AutoShield™ Duo Pen Needle. Revenue growth in the Pharmaceutical Systems unit primarily benefitted from the acquisition of Safety Syringes in the first quarter of fiscal year 2013. Global sales of safety-engineered products were $1.0 billion, compared with $966 million in the prior year, and included an estimated $8 million unfavorable impact due to foreign currency translation.


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Medical operating income in 2013 was $1.23 billion, or 28.6% of Medical revenues, compared with $1.16 billion, or 28.4% of segment revenues in 2012. Gross profit margin was higher in 2013 as compared to 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, as well as lower raw material costs, partially offset by manufacturing start-up costs. Gross profit margin was also favorably impacted by a change in useful lives of certain machinery and equipment assets, effective January 1, 2012. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Medical revenues in 2013 increased to 18.4% of revenues from 17.7% in 2012. Aggregate expenses in 2013 reflected the medical device excise tax previously discussed, increased spending for expansion in emerging markets and higher expenses associated with the Safety Syringes and Cato acquisitions. These increases were partially offset by favorable foreign currency translation. Research and development expenses in 2013 increased $17 million, or 11% from 2012, reflecting ongoing investment in new products and platforms.

Diagnostics Segment

Diagnostics revenues in 2013 of $2.6 billion increased 4.3% over 2012, which
reflected an estimated impact of unfavorable foreign currency translation of
0.9%.

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



                                                                        Estimated
                                                                         Foreign
                                                          Total         Exchange
                                  2013        2012        Change         Impact
                                               (Millions of dollars)
         Preanalytical Systems   $ 1,352     $ 1,301          3.9 %           (0.8 %)
         Diagnostic Systems        1,294       1,237          4.6 %           (1.3 %)

         Total Revenues          $ 2,646     $ 2,538          4.3 %           (0.9 %)

Diagnostics segment revenue growth was driven by solid growth in both units, particularly in emerging markets. Revenue growth in the Preanalytical Systems unit was driven by sales of safety-engineered products. Sales of safety-engineered products grew 1% in the United States, driven by BD VacutainerTM Push Button Blood Collection Set sales, and 7% internationally, which included an estimated unfavorable foreign exchange impact of 2%. The Diagnostic Systems unit experienced growth in worldwide sales of its automated diagnostic platforms, including BD MaxTM and BD AffirmTM systems, along with solid growth of its BD BACTECTM blood culture and TB systems and the BD PhoenixTM ID/AST platform. Diagnostics revenues in 2013 also reflected new product launches and a favorable comparison to the prior year due to a stronger flu season in 2013 as well as from the timing of the KIESTRA acquisition. Diagnostics segment revenue growth in the U.S. was unfavorably impacted by continued weaker demand in the Women's Health and Cancer platform due to guidelines providing for increased Pap smear testing intervals.

Diagnostics operating income in 2013 was $638 million, or 24.1% of Diagnostics revenues, compared with $653 million, or 25.7% of revenues, in 2012. Gross profit margin in the Diagnostics segment was down as compared to 2012 and reflected legal settlement costs, amortization expense related to the Jaguar Plus Platform, an in-process R&D project acquired with the HandyLab acquisition and completed in the fourth quarter of 2012, 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 120 basis points in 2013 to 22.8%. Aggregate expenses in 2013 reflected an increase in investments in emerging markets and higher expenses associated with the KIESTRA acquisition that occurred in the second quarter of 2012. These increases were partially offset by favorable foreign currency translation. Research and development expense increased $1 million, or 1% from 2012. R&D spending in 2013 reflected our continued investment in the development of new products and platforms, including the BD MAX™ and new BD Viper™ platforms and test menus.


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Biosciences Segment

Biosciences revenues of $1.1 billion in 2013 increased 2.0% over 2012, and reflected an estimated impact of unfavorable foreign currency translation of 1.6%. Biosciences revenue growth was primarily driven by instrument and reagent sales in emerging markets, partially offset by declines in Western Europe.

Biosciences operating income in 2013 was $269 million, or 24.4% of Biosciences revenues, compared with $262 million, or 24.2%, in 2012. The Segment's operating income in 2013 reflected a slightly higher gross profit margin as compared to 2012, primarily due to the favorable impact of increased sales of products which have higher gross margins, partially offset by lower pricing on certain product lines. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Biosciences revenues was 25.0% in 2013 as compared with 24.4% in 2012. Aggregate expenses reflected continued investments in emerging markets, partially offset by favorable foreign currency translation. Research and development spending increased $6 million, or 6% from 2012 and reflected spending on new products and platforms, including next generation cell sorters and analyzers.

Geographic Revenues

Revenues in the United States in 2013 of $3.4 billion increased 2.0% over 2012 and reflected growth in all segments. U.S. revenue growth in the Medical segment was primarily driven by Pharmaceutical Systems, which was aided by 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 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. 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 in 2013 of $4.7 billion increased 6.3% over 2012, which reflected an estimated impact of unfavorable foreign currency translation of 1.7%. International revenues in 2013 reflected continued strength in emerging market revenues and strong sales of safety-engineered products for the Medical and Diagnostics segments. Growth in the Diagnostics segment also benefitted from the KIESTRA acquisition. International Biosciences revenue growth was driven by growth in emerging markets, partially offset by weaker sales in Western Europe due to austerity measures as well as by lower levels of research funding in Japan.

Gross Profit Margin

Gross profit margin was 51.8% in 2013, compared with 51.3% in 2012. 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, such as Project ReLoCo, and lower raw material costs. Gross profit margin was also favorably impacted by approximately 20 basis points due to a change in useful lives of certain machinery and equipment assets, effective January 1, 2012, largely within the Medical segment. Gross profit margin was adversely affected by approximately 50 basis points primarily due to amortization of intangibles associated with recent acquisitions, lower pricing on certain product lines and manufacturing start-up costs.

Operating Expenses

Selling and administrative expense in 2013 was $2.4 billion, or 30.1% of revenues, compared with $1.9 billion, or 25.0% of revenues in 2012. As discussed earlier, Selling and administrative expense in 2013 included charges of $363 million relating to litigation matters and $40 million related to the medical device excise tax. Aggregate expenses for 2013 reflected an increase in core spending of $118 million, which included $61 million relating to expansion of our business in emerging markets as well as higher expenses resulting from recent acquisitions. These increases were partially offset by favorable foreign currency translation of $19 million and a decrease in deferred compensation expense of $3 million. This change in the deferred compensation liability is further discussed below.


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Research and development expense in 2013 was $494 million, or 6.1% of revenues, compared with $472 million, or 6.1% of revenues, in 2012 and reflected increased investment in new products and platforms in all three segments.

Non-Operating Expense and Income

Interest expense in 2013 was $138 million, compared with $135 million in 2012. The increase in interest expense in 2013 primarily reflected higher average levels of long-term fixed-rate debt. Interest income was $40 million in 2013, compared with $50 million in 2012. The decrease in interest income in 2013 compared with 2012 reflected the impact of lower interest 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.

Income Taxes

The effective tax rate in 2013 of 20.2% was lower compared with the 2012 rate of 24.6%. The impact of the 2013 charges relating to litigation matters and a pension settlement reduced the effective tax rate in 2013 by 430 basis points. The income tax rate in 2013 also reflected the favorable impact from various tax settlements in multiple jurisdictions and the reinstatement of the U.S. research and development tax credit, partially offset by a lower benefit on foreign earnings. The income tax rate in 2012, which was reduced by 20 basis points due to the 2012 pension settlement charge, reflected the favorable impact of various tax settlements in multiple jurisdictions.

Income and Diluted Earnings per Share from Continuing Operations

Income from continuing operations and diluted earnings per share from continuing operations in 2013 were $929 million and $4.67, respectively. The after-tax charges relating to the litigation matters decreased income from continuing operations in 2013 by $225 million, or $1.13 per share. The after-tax charge related to pension settlement decreased income from continuing operations in 2013 by $4 million, or $0.02 per share. Earnings in 2013 also reflected the unfavorable impact of the medical device excise tax of $0.13 per share, as well as an estimated net unfavorable impact of foreign currency fluctuations of $0.06 per share. Income from continuing operations and diluted earnings per share from continuing operations in 2012 were $1.1 billion and $5.30, respectively. The after-tax 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.

Discontinued Operations

In October 2012, we sold the Biosciences' Discovery Labware unit, excluding its Advanced Bioprocessing platform, and received gross proceeds of approximately $740 million and recognized a pre-tax gain on sale of approximately $577 million. For further discussion, see Note 10 to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

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


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rates that have fluctuated from the beginning of a reporting period. From time to time, we may purchase forward contracts and options to hedge certain forecasted transactions that are denominated in foreign currencies in order to partially protect against a reduction in the value of future earnings resulting from adverse foreign exchange rate movements. Gains or losses on 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 2013.

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, 2013, a 10% appreciation of the U.S. dollar over a one-year period would decrease pre-tax earnings by $31 million, while a 10% depreciation of the U.S. dollar would increase pre-tax earnings by $31 million. Comparatively, considering our derivative instruments outstanding at September 30, 2012, a 10% appreciation of the U.S. dollar over a one-year period would have decreased pre-tax earnings by $8 million, while a 10% depreciation of the U.S. dollar would have increased pre-tax earnings by $8 million. These . . .

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