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BDX > SEC Filings for BDX > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for BECTON DICKINSON & CO

Form 10-Q for BECTON DICKINSON & CO


4-Aug-2014

Quarterly Report


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

The following commentary should be read in conjunction with the condensed 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 amounts.

Company Overview

Becton, Dickinson and Company ("BD") is a global medical technology company engaged principally in the development, manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, life science researchers, clinical laboratories, 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.

BD's products are manufactured and sold worldwide. We organize our operations outside the United States as follows: Europe (which includes the Middle East and Africa); Greater Asia (which includes Japan and Asia Pacific); Latin America (which includes Mexico and Brazil) and Canada. We continue to pursue growth opportunities in emerging markets, which include the following geographic regions: Eastern Europe, the Middle East, Africa, Latin America and Asia Pacific (excluding Japan). We are particularly focused on certain countries whose economic and healthcare sectors are growing rapidly, in particular, China, India, Brazil and Turkey.

Overview of Financial Results and Financial Condition

Third quarter revenues of $2.2 billion represented an increase of 5.1% from the prior year's period and reflected volume increases of approximately 4.6% as well as favorable foreign currency translation of approximately 0.5%. Pricing had an immaterial impact on revenue growth in the quarter. Revenue growth in the current year's period was driven primarily by our Medical and Biosciences segments, as our Diagnostics segment's revenue growth was constrained by continued challenges in the United States. Medical segment growth was primarily driven by strong sales in the Medical Surgical Systems unit. Third quarter revenues in our Diagnostics segment reflected strong growth in the Preanalytical Systems unit which was partially offset by ongoing weakness in sales of the Women's Health and Cancer platform in the United States. Biosciences segment revenue growth was driven by solid instrument placements and a favorable comparison to the prior-year period, as discussed below. Third quarter revenues also reflected strong international safety and emerging markets sales as these areas continue to be key growth drivers for the Company. Third quarter sales in the United States of safety-engineered devices of $304 million grew 1.2% over the prior year's quarter. Third quarter international sales of safety-engineered devices of $265 million grew 11.6% over the prior year's period, including an estimated 0.8% unfavorable impact due to foreign currency translation. International safety-engineered device revenue growth was driven by good performance in Western Europe, Asia and Latin America.


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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. While the economic environment for the healthcare industry has stabilized, pricing pressures continue for some of our products. Healthcare utilization has continued to stabilize in the United States; however, any destabilization could adversely impact our U.S. businesses. Additionally, macroeconomic challenges in Europe continue to constrain healthcare utilization, although we currently view the environment as stable. In emerging markets, the Company's growth is dependent on government funding for healthcare systems.

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 affect BD. The most significant impact is the medical device excise tax that imposed a 2.3% tax on certain U.S. sales of medical devices. This tax became effective at the beginning of BD's second quarter of fiscal year 2013. As a result, this tax incrementally increases selling and administrative expense for the first nine months of fiscal year 2014 by $14 million.

Our financial position remains strong, with cash flows from operating activities totaling $1.207 billion in the first nine months of 2014. At June 30, 2014, we had $2.6 billion in cash and equivalents and short-term investments. Also, we continued to return value to our shareholders in the form of share repurchases and dividends. During the first nine months of 2014, we repurchased $400 million of our common stock and paid cash dividends of $316 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 11 in the Notes to Condensed Consolidated Financial Statements.

Comparisons of income from continuing operations between the third quarter of fiscal years 2014 and 2013 are affected by the following items that were reflected in our financial results:

• Our Medical segment results for the current year's quarter reflected a pre-tax charge of $9 million, or $0.03 diluted earnings per share from continuing operations, in Research and development, associated with the decision to terminate a research and development program. The charge relates to program asset write-offs and obligations.

• Our third quarter fiscal year 2013 unallocated corporate results reflected a pre-tax charge of $22 million, or $0.07 diluted earnings per share from continuing operations, in Selling


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and administrative, associated with the litigation settlement related to indirect purchaser antitrust class action cases. For further discussion, refer to Note 5 in the Notes to Condensed Consolidated Financial Statements.

Comparisons of income from continuing operations between the nine-month periods of fiscal years 2014 and 2013 are affected by the items discussed immediately above as well as by the following items that were reflected in our financial results:

• Our Biosciences segment results reflected the second quarter fiscal year 2014 pre-tax charge of $20 million, or $0.06 diluted earnings per share from continuing operations, in Research and development, for asset write-offs primarily resulting from the discontinuance of an instrument product development program. The charge is largely attributable to capitalized product software, but also includes a lesser amount attributable to fixed assets.

• Our Diagnostics segment results reflected the second quarter fiscal year 2014 pre-tax charge of $11 million, or $0.04 diluted earnings per share from continuing operations, in Selling and administrative, for contract termination costs that resulted from the early termination of a European distributor arrangement.

• Our unallocated corporate results reflected the second quarter fiscal year 2014 pre-tax gain of $8 million, or $0.03 diluted earnings per share from continuing operations, in Other income, net resulting from the Company's receipt of cash proceeds from the sale of a company in which it held a small equity ownership interest.

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 $1.2 billion increased 5.3% over the prior year's quarter, which reflected an estimated favorable foreign currency translation impact of 0.6%.

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)       2014        2013        Change         Impact

        Medical Surgical Systems   $   590     $   561          5.1 %           (0.9 )%
        Diabetes Care                  258         250          3.5 %           (0.1 )%
        Pharmaceutical Systems         353         330          6.9 %            3.5 %

        Total Revenues             $ 1,201     $ 1,140          5.3 %            0.6 %

Medical segment revenue growth was driven by strong emerging market and international safety sales particularly in the Medical Surgical Systems unit. The Diabetes Care unit's revenue


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growth reflected continued strong sales of pen needles, particularly the BD Ultra-Fine™ Nano product. This growth was partially offset by a delay in tender order timing as well as unfavorable comparison to the prior-year period due to a fluctuation in retailer ordering patterns that we experienced in the prior period. We expect this unit's revenue growth to normalize in the fourth quarter of fiscal year 2014. Revenue growth in the Pharmaceutical Systems unit in the current quarter was unfavorably impacted by the favorable timing of orders that occurred in the first half of fiscal year 2014. Global sales of safety-engineered products were $284 million, as compared with $268 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 nine-month period ended June 30, 2014 increased 6.1% from the prior-year nine-month period, including an estimated 0.3% unfavorable impact from foreign currency translation. For the nine-month period ended June 30, 2014, global sales of safety-engineered products were $832 million, compared with $776 million in the prior year's period, and included an estimated $8 million unfavorable impact due to foreign currency translation.

Medical operating income for the third quarter was $356 million, or 29.7% of Medical revenues, compared with $334 million, or 29.3% of segment revenues, in the prior year's quarter. Gross profit margin was higher in the current quarter than the third quarter of 2013 due to lower manufacturing costs resulting from continuous improvement projects, particularly Project ReLoCo, favorable pricing on certain product lines and lower pension costs. Gross profit margin in the current year's quarter also reflected the impact of a favorable product mix resulting from higher sales of products which have higher gross margins. These favorable impacts on gross profit margin were partially offset by higher start-up costs, higher raw material costs and costs to remediate a quality issue, including incremental investment in manufacturing processes, within the Pharmaceutical Systems unit. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Medical revenues in the third quarter of 2014 was lower as compared with the third quarter of 2013 primarily due to the favorable impact of higher sales growth in the current year's period. Research and development expenses for the quarter increased $9 million, or 21% above the prior year's period, reflecting the $9 million research and development program termination charge previously discussed. Segment operating income for the nine-month period was $968 million, or 28.6% of Medical revenues, compared with $913 million, or 28.7%, in the prior year's period.

Diagnostics Segment

Third quarter revenues of $679 million increased 3.7% compared with the prior year's quarter, which reflected an immaterial foreign currency translation impact.

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)    2014        2013       Change         Impact

          Preanalytical Systems   $   364      $ 345          5.6 %           (0.3 )%
          Diagnostic Systems          315        310          1.6 %            0.2 %

          Total Revenues          $   679      $ 655          3.7 %             -


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Diagnostics segment revenues for the quarter reflected strong sales in the Preanalytical Systems unit. Global sales of safety-engineered products in the Preanalytical Systems unit totaled $285 million, compared with $270 million in the prior year's quarter, and included an estimated $1 million unfavorable impact due to foreign currency translation. Diagnostic Systems revenue growth in the quarter was unfavorably impacted by continued weaker sales of the Women's Health and Cancer platform due to guidelines providing for increased Pap smear testing intervals in the United States. Total Diagnostics revenues for the nine-month period ended June 30, 2014 increased by 2.0% 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, 2014, global sales of safety-engineered products in the Preanalytical Systems unit were $825 million, compared with $788 million in the prior year's period, and included an estimated $7 million unfavorable impact due to foreign currency translation.

Diagnostics operating income for the third quarter was $155 million, or 22.8% of Diagnostics revenues, compared with $159 million, or 24.2% of segment revenues, in the prior year's quarter. Gross profit margin was lower in the third quarter of fiscal year 2014 compared with the third quarter of 2013 primarily due to the impact of an unfavorable product mix resulting from lower sales of products which have higher gross margins as well as unfavorable foreign currency translation. These unfavorable impacts on gross profit margin were partially offset by lower start-up costs, lower pension costs and lower raw material costs. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Diagnostics revenues in the third quarter of 2014 was lower compared with the third quarter of 2013 reflecting lower pension costs and other various immaterial items. Research and development expenses in the third quarter of 2014 decreased by $2 million, or 4% compared with the prior year's period. Segment operating income for the nine-month period was $448 million, or 22.4% of Diagnostics revenues, compared with $473 million, or 24.1%, in the prior year's period.

Biosciences Segment

Third quarter revenues of $277 million increased 7.7% over the prior year's quarter, which reflected an estimated favorable foreign currency translation impact of 1.1%. Biosciences segment revenue growth was driven by solid instrument placements, new platforms and continued stability in the U.S. research spending environment. Segment revenue growth also reflected a favorable comparison to the prior-year period, as further discussed below. For the nine-month period ended June 30, 2014, total Biosciences revenues increased 7.1% from the prior-year nine-month period, including an estimated 0.5% unfavorable impact from foreign currency translation.

Biosciences operating income for the third quarter was $66 million, or 23.9% of Biosciences revenues, compared with $58 million, or 22.6% of segment revenues, in the prior year's quarter. Gross profit margin as a percent of Biosciences revenues was flat compared with the prior year's quarter primarily reflecting favorable foreign currency translation, offset by unfavorable pricing on certain product lines and other various immaterial items. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Biosciences revenues in the third quarter of 2014 was lower compared with the third quarter of 2013 and reflected the favorable impact of higher sales growth in the current year's period and other various immaterial items. Research and development expenses in the third quarter of 2014 increased by $2 million, or 8% compared with the prior year's period, reflecting increased investment in new products and platforms. Segment operating income for the nine-month period was $205 million, or 23.9% of Biosciences revenues, compared with $195 million, or 24.3%, in the prior year's period.


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Geographic Revenues

Revenues in the United States for the third quarter of $871 million grew 2.8% compared to the prior year's period. U.S. revenue growth in our Medical segment was attributable to strong sales in the Pharmaceutical Systems unit and solid growth in the Medical Surgical Systems unit, partially offset by the unfavorable timing and prior-period comparison reflected in the Diabetes Care unit's revenues for the quarter, as previously discussed. U.S. Diagnostics growth was unfavorably impacted by the continued decline in Women's Health and Cancer platform sales, as previously discussed, as well as share losses. These unfavorable impacts to U.S. Diagnostics revenue growth in the quarter were partially offset by solid growth in the Preanalytical Systems unit. U.S. Biosciences revenues reflected solid instrument placements and growth in reagent revenues as well as a favorable comparison to the prior-year period, which was adversely impacted by unfavorable timing of Advanced Bioprocessing orders.

International revenues for the third quarter of $1.3 billion represented an increase of 6.7% over the prior year's quarter, including a 0.7% favorable impact due to foreign currency translation. International revenues for the third quarter of fiscal year 2014 reflected growth in all segments. Emerging market revenues for the third quarter of $530 million represented an increase of 4.9% over the prior year's quarter, including a 4.0% unfavorable impact due to foreign currency translation, and accounted for approximately 25% of our total revenues. International Medical and Diagnostics revenue growth was largely driven by emerging market growth as well as by strong sales of safety-engineered products. Biosciences international revenue growth reflected strong growth in Western Europe as well as a favorable comparison to the prior-year period, which was adversely impacted by weaker Western European sales due to austerity measures and the timing of government funding in Japan.

Gross Profit Margin

Gross profit margin was 51.5% for the third quarter, compared with 51.6% for the comparable prior-year period. Operating performance was unfavorably impacted by approximately 70 basis points primarily due to net unfavorable product mix resulting from lower sales of products which have higher gross margins. Operating performance was also unfavorably impacted by approximately 50 basis points due to higher start-up costs, higher raw material costs as well as costs to remediate a quality issue, including incremental investment in manufacturing processes, within the Pharmaceutical Systems unit. These unfavorable impacts on operating performance were partially offset by approximately 100 basis points due to lower manufacturing costs from continuous improvement projects and lower pension costs as well as an estimated 10 basis points relating to foreign currency translation.

Gross profit margin was 51.2% in the nine-month period of 2014, compared with 51.8% for the comparable prior-year period. The decrease in gross profit margin reflected an estimated unfavorable impact of 60 basis points relating to foreign currency translation. Operating performance was unfavorably impacted by approximately 60 basis points primarily due to net unfavorable product mix resulting from lower sales of products which have higher gross margins. Operating performance was also unfavorably impacted by approximately 30 basis points due to higher start-up costs and higher raw material costs. These unfavorable impacts on operating performance were substantially offset by approximately 90 basis points due to lower manufacturing costs from continuous improvement projects and lower pension costs.


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Selling and Administrative Expense

Selling and administrative expense was 24.5% of revenues for the third quarter, compared with 26.0% for the prior year's period. Aggregate expenses for the third quarter reflected an increase in core spending of approximately $18 million, including spending relating to the expansion of our business in emerging markets. Aggregate expenses for the third quarter of 2014 also reflected increased spending of $7 million related to our global enterprise resource planning initiative to update our business information systems as well as an increase in the deferred compensation liability of $5 million. This change in the deferred compensation liability is further discussed below. Selling and administrative expense in the current year's period was favorably impacted by lower pension costs of approximately $6 million, lower legal costs of approximately $7 million, favorable foreign currency translation of approximately $2 million and a favorable comparison to the prior-year period which included the $22 million litigation settlement charge previously discussed.

Selling and administrative expense was 25.4% of revenues for the nine-month period of fiscal year 2014, compared with 25.9% for the prior year's period. Aggregate expenses for the nine-month period of 2014 reflected an increase in core spending of approximately $68 million, including spending relating to the expansion of our business in emerging markets. Aggregate expenses for the nine-month period of 2014 also reflected the incremental first quarter fiscal year 2014 impact of $14 million related to the medical device excise tax and the $11 million early termination charge, as previously discussed. Aggregate expenses in the current year-to-date period additionally reflected an increase in the deferred compensation liability of $6 million and $3 million related to our global enterprise resource planning initiative to update our business information systems. Selling and administrative expense in the current year's period was favorably impacted by lower pension costs of approximately $17 million, favorable foreign currency translation of $14 million and lower legal costs of approximately $5 million. Aggregate expenses for the nine-month period of 2014 were also favorably impacted by a favorable comparison to the prior-year period, which included the $22 million litigation settlement charge, as well as a $6 million reversal of bad debt expense that was recorded in the second quarter of fiscal year 2014, as further discussed below.

Research and Development Expense

Research and development expense was $137 million, or 6.4% of revenues, for the third quarter, representing an increase of 13.5% compared with the prior year's amount of $121 million, or 5.9% of revenues. The increase in research and development expense for the third quarter compared with the prior year's third quarter primarily reflected the $9 million research and development program termination charge previously discussed. Research and development expense was $410 million, or 6.6% of revenues, for the nine-month period in the current year, representing an increase of 13.4% compared with the prior year's amount of $362 million, or 6.1% of revenues. Research and development expense for the nine-month period compared with the prior year's period reflected increased investment in new products and platforms within the Medical segment, in addition to the research and development program termination charge and the $20 million asset write-off primarily resulting from the discontinuance of an instrument product development program, as previously discussed.


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Non-Operating Expense and Income

Interest income was $12 million in the third quarter and $36 million in the nine-month period of 2014, compared with $6 million and $26 million, respectively, in the prior year's periods. The increases in the current year's periods compared with the prior year's periods primarily reflected the impact of higher investment gains on assets related to our deferred compensation plan and higher interest rates on investments outside the United States. The offsetting movements in the deferred compensation plan liability were recorded in selling and administrative expense. Interest expense was $33 million in the third quarter and $99 million in the nine-month period of 2014, compared with $35 million and $104 million, respectively, in the prior year's periods. These decreases were primarily due to lower levels of long-term fixed-rate debt and a reduction of interest payments through fixed-to-floating interest rate swap agreements. For further discussion regarding these swap arrangements, refer to Note 11 in the Notes to Condensed Consolidated Financial Statements.

Income Taxes

The income tax rate was 23.0% for the third quarters of fiscal years 2014 and 2013. During the third quarter of 2014, we made a decision to change our position of permanent reinvestment with respect to the unremitted earnings of Brazil and certain other Latin American jurisdictions. The impact of this change on the income tax rate was largely offset by the benefit of some discrete one-time items in the current quarter with respect to other non-U.S. operations. The current year's nine-month tax rate was 22.8% compared with the prior year's rate of 24.2%. The decrease in the income tax rate in the nine-month period of fiscal year 2014 was primarily attributable to geographic mix, the benefit of some discrete one-time items and a favorable comparison to the prior-year period which was unfavorably impacted by some discrete tax expenses. . . .

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