Becton Dickinson, also known as BD, is one of the largest international medical technology companies that develops, produces and sells disposable medical devices, device systems and reagents. BD supplies hospitals, health care facilities, life scientists, clinical laboratories and the pharmaceutical industry.
FORM 10-QUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedDecember 31, 2005
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________________________ to ________
Commission file number 001-4802
Becton, Dickinson and Company
(Exact name of registrant as specified in its charter)
New Jersey
22-0760120
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
1 Becton Drive, Franklin Lakes, New Jersey 07417-1880
(Address of principal executive offices)(Zip Code)
(201) 847-6800
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class of Common Stock
Shares Outstanding as of December 31, 2005
Common stock, par value $1.00
247,336,480
BECTON, DICKINSON AND COMPANYFORM 10-QFor the quarterly period ended December 31, 2005
TABLE OF CONTENTS
Page Number
Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Income
4
Condensed Consolidated Statements of Cash Flows
5
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
21
Item 4.
Controls and Procedures
Part II.
OTHER INFORMATION
Legal Proceedings
22
Item 1A.
Risk Factors
23
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
25
Item 6.
Exhibits
Signatures
26
27
2
ITEM 1. FINANCIAL STATEMENTSBECTON, DICKINSON AND COMPANYCONDENSED CONSOLIDATED BALANCE SHEETSThousands of Dollars
December 31,2005
September 30,2005
(Unaudited)
Assets
Current Assets:
Cash and equivalents
$
1,168,973
1,042,890
Short-term investments
88,375
86,808
Trade receivables, net
853,934
842,806
Inventories:
Materials
106,550
93,963
Work in process
144,246
139,772
Finished products
560,608
542,214
811,404
775,949
Prepaid expenses, deferred taxes and other
223,779
226,861
Total Current Assets
3,146,465
2,975,314
Property, plant and equipment
4,341,029
4,305,129
Less allowances for depreciation and amortization
2,413,557
2,371,411
1,927,472
1,933,718
Goodwill
471,121
470,049
Core and Developed Technology, Net
159,507
165,381
Other Intangibles, Net
101,292
101,558
Capitalized Software, Net
216,064
229,793
Other
208,835
196,156
Total Assets
6,230,756
6,071,969
Liabilities and Shareholders’ Equity
Current Liabilities:
Short-term debt
405,652
206,509
Payables and accrued expenses
1,146,584
1,092,866
Total Current Liabilities
1,552,236
1,299,375
Long-Term Debt
958,885
1,060,833
Long-Term Employee Benefit Obligations
185,196
301,933
Deferred Income Taxes and Other
129,039
125,876
Commitments and Contingencies
Shareholders’ Equity:
Common stock
332,662
Capital in excess of par value
687,536
615,846
Retained earnings
4,969,430
4,805,852
Deferred compensation
10,176
10,280
Common shares in treasury – at cost
(2,384,559
)
(2,297,493
Accumulated other comprehensive loss
(209,845
(183,195
Total Shareholders’ Equity
3,405,400
3,283,952
Total Liabilities and Shareholders’ Equity
See notes to condensed consolidated financial statements
BECTON, DICKINSON AND COMPANYCONDENSED CONSOLIDATED STATEMENTS OF INCOMEThousands of Dollars, Except Per-share Data(Unaudited)
Three Months Ended December 31,
2005
2004
Revenues
1,414,061
1,288,369
Cost of products sold
675,741
634,501
Selling and administrative
367,874
341,088
Research and development
69,325
62,083
Total Operating Costs and Expenses
1,112,940
1,037,672
Operating Income
301,121
250,697
Interest expense
(16,760
(14,327
Interest income
14,671
5,205
Other expense, net
(1,163
(2,861
Income From Continuing Operations Before Income Taxes
297,869
238,714
Income tax provision
80,009
44,316
Income From Continuing Operations
217,860
194,398
Income from Discontinued Operations, net
—
953
Net Income
195,351
Basic Earnings Per Share:
Income from Continuing Operations
0.88
0.77
Income from Discontinued Operations
Basic Earnings Per Share (A)
0.78
Diluted Earnings Per Share:
0.85
0.74
Diluted Earnings Per Share (A)
0.75
Dividends Per Common Share
0.215
0.18
(A): Total per share amounts may not add due to rounding.
BECTON, DICKINSON AND COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSThousands of Dollars(Unaudited)
Three Months EndedDecember 31,
Operating Activities
Net income
Income from discontinued operations, net
(953
Income from continuing operations
Adjustments to income from continuing operations to derive net cash provided by operating activities:
Depreciation and amortization
99,688
94,686
Share-based compensation
34,643
11,590
Change in working capital
(62,176
14,687
Pension obligation
(126,707
(47,835
Other, net
7,841
(3,234
Net Cash Provided by Continuing Operating Activities
171,149
264,292
Investing Activities
Capital expenditures
(64,330
(49,932
Capitalized software
(3,568
(5,042
Purchases of investments, net
(7,668
(18,254
(16,702
(6,233
Net Cash Used for Continuing Investing Activities
(92,268
(79,461
Financing Activities
Change in short-term debt
99,484
(44,953
Payments of long-term debt
(99
(357
Repurchase of common stock
(100,547
(112,460
Issuance of common stock from treasury
38,493
58,643
Excess tax benefit from stock option exercises
9,876
14,514
Dividends paid
(251
Net Cash Provided by (Used for) Continuing Financing Activities
47,207
(84,864
Net Cash Used for Discontinued Operations
(1,517
Effect of exchange rate changes on cash and equivalents
(5
4,209
Net increase in cash and equivalents
126,083
102,659
Opening Cash and Equivalents
719,378
Closing Cash and Equivalents
822,037
BECTON, DICKINSON AND COMPANYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSDollar and Share Amounts in Thousands, Except Per-share DataDecember 31, 2005
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of the Company, include all adjustments which are of a normal recurring nature, necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and footnotes required for a presentation in accordance with U.S. generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included or incorporated by reference in the Company’s 2005 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. Certain reclassifications have been made to prior year amounts to conform to current year presentation.
Note 2 – Comprehensive Income
Comprehensive income was comprised of the following:
Other Comprehensive (Loss) Income, Net of Tax
Foreign currency translation adjustments
(27,605
149,931
Unrealized (losses) gains on investments, net of amounts recognized
(1,779
1,360
Unrealized gains (losses) on cash flow Hedges, net of amounts realized
2,734
(5,665
Comprehensive Income
191,210
340,977
The amount of unrealized gains or losses on investments and cash flow hedges in comprehensive income has been adjusted to reflect any realized gains and recognized losses included in net income during the three months ended December 31, 2005 and 2004.
Note 3 - Earnings per Share
The computations of basic and diluted earnings per share (shares in thousands) were as follows:
Preferred stock dividends
(367
Income from continuing operations available to common shareholders (A)
194,031
Preferred stock dividends – using “if converted” method
367
Income from continuing operations available to common shareholders after assumed conversions (B)
Average common shares outstanding (C)
248,046
251,232
Dilutive stock equivalents from stock plans
7,805
8,309
Shares issuable upon conversion of preferred stock
2,429
Average common and common equivalent shares outstanding – assuming dilution (D)
255,851
261,970
Basic earnings per share – income from continuing operations (A/C)
.88
.77
Diluted earnings per share – income from continuing operations (B/D)
.85
.74
7
Note 4 - Contingencies
The Company is involved, both as a plaintiff and a defendant, in various legal proceedings and claims which arise in the ordinary course of business.
Given the uncertain nature of litigation generally, the Company is not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which it is a party. In accordance with U.S. generally accepted accounting principles, the Company establishes accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). In view of the uncertainties discussed above, the Company could incur charges in excess of any currently established accruals and, to the extent available, excess liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on the Company’s consolidated results of operations and consolidated net cash flows in the period or periods in which they are recorded or paid. Further discussion of legal proceedings is included in Part II of this report.
Note 5 – Segment Data
The Company’s organizational structure is based upon its three principal business segments: BD Medical (“Medical”), BD Diagnostics (“Diagnostics”), and BD Biosciences (“Biosciences”). The Company evaluates segment performance based upon operating income. Segment operating income represents revenues reduced by product costs and operating expenses. Financial information for the Company’s segments was as follows:
Medical
770,700
693,822
Diagnostics
443,854
413,783
Biosciences
199,507
180,764
Total Revenues (A)
8
Segment Operating Income
213,123
163,321
121,518
102,895
47,054
37,299
Total Segment Operating Income
381,695
303,515
Unallocated Items (B)
(83,826
(64,801
Income from Continuing Operations Before Income Taxes
Revenues by Organizational Units
BD Medical
Medical Surgical Systems
428,163
409,564
Diabetes Care
183,696
158,678
Pharmaceutical Systems
143,763
110,685
Ophthalmic Systems
15,078
14,895
BD Diagnostics
Preanalytical Systems
222,163
208,521
Diagnostic Systems
221,691
205,262
BD Biosciences
Immunocytometry Systems
112,852
100,100
Pharmingen
36,946
33,701
Discovery Labware
49,709
46,963
Total
(A)
Intersegment revenues are not material.
(B)
Includes primarily share-based compensation expense; interest, net; foreign exchange; and corporate expenses.
9
Note 6 – Share-Based Compensation
The Company grants share-based awards under the 2004 Employee and Director Equity-Based Compensation Plan (the “2004 Plan”), which provides for long-term incentive compensation to employees and directors. The Company believes such awards align the interest of its employees and directors with those of its shareholders and encourage employees and directors to act as equity owners of the Company.
Beginning with the annual share-based grant in November 2005 under the 2004 Plan, the Company granted stock appreciation rights (“SARs”) in addition to performance-based restricted stock units and time-vested restricted stock units, and discontinued the issuance of stock options. SARs vest over a four-year period and have a ten-year term, similar to the previously granted stock options. SARs represent the right to receive, upon exercise, shares of common stock having a value equal to the difference between the market price of common stock on the date of exercise and the exercise price on the date of grant.
Compensation expense relating to share-based payments is recognized in net income using a fair-value measurement method. Under the fair value method, the estimated fair value of awards is charged to income on a straight-line basis over the requisite service period, which is generally the vesting period.
Share-based compensation expense reduced the Company’s results of operations as follows:
Selling and administrative expense
25,002
9,108
5,852
1,548
Research and development expense
3,789
934
23,211
8,494
(A) Share-based compensation attributable to discontinued operations was not material.
10
The increase in share-based compensation is primarily attributable to higher expense associated with certain fiscal 2005 and fiscal 2006 grants. These grants reflect a shortened requisite service period resulting from such awards being recognized as of the earlier of the employees’ retirement eligibility date or the vesting date, whereas grants prior to the fiscal 2005 grant were recognized through the vesting date. In addition, these grants include a higher percentage of restricted stock units that have a shorter vesting period than previous grants.
The amount of unrecognized compensation expense for all non-vested share-based awards as of December 31, 2005 was approximately $182,200, which is expected to be recognized over a weighted-average remaining life of approximately 2.5 years.
The fair values of SARs granted during the first quarter of 2006 and stock options granted during the first quarter of 2005 were estimated on the date of grant using a lattice-based binomial valuation model based on the following assumptions: risk-free interest rates of 4.48% and 3.93%, respectively; expected volatility of 28% and 29%, respectively; expected dividend yield of 1.46% and 1.28%, respectively; and expected life of 6.5 years for both periods.
Note 7 – Benefit Plans
The Company has defined benefit pension plans covering substantially all of its employees in the United States and certain foreign locations. The Company also provides certain postretirement healthcare and life insurance benefits to qualifying domestic retirees. Other postretirement benefit plans in foreign countries are not material.
Net pension and postretirement cost included the following components for the three months ended December 31:
Pension Plans
Other Postretirement Benefits
Service cost
17,635
15,294
1,017
913
Interest cost
17,249
16,698
3,716
3,832
Expected return on plan assets
(19,143
(14,710
Amortization of prior service cost
45
83
(1,558
Amortization of loss
6,796
5,708
1,753
1,520
16
Net pension and postretirement cost
22,582
23,073
4,944
4,723
Net pension cost attributable to foreign plans included in the preceding table was $4,581 and $4,102 for the three months ended December 31, 2005 and 2004, respectively.
The Company made discretionary contributions to its U.S. pension plan of $150,000 and $50,000 during the three months ended December 31, 2005 and 2004, respectively. In addition, the Company made a discretionary contribution to a foreign pension plan of approximately $18,000 during the three months ended December 31, 2004.
11
Note 8 – Discontinued Operations
On August 31, 2005, the Company completed the sale of the Clontech unit of the Biosciences segment. Clontech’s results of operations are reported separately as discontinued operations.
Results of discontinued operations for the three months ended December 31 were as follows:
13,439
Income from discontinued operations
Before income tax provision
1,576
(623
Note 9 – Subsequent Event
On January 9, 2006, the Company entered into an agreement to acquire GeneOhm Sciences, Inc. (“GeneOhm Sciences”), a privately held company that develops molecular diagnostic testing for the rapid detection of bacterial organisms, including those known to cause healthcare-associated infections. The Company has agreed to pay $230 million, plus up to $25 million of additional contingent payments, for GeneOhm Sciences. The acquisition is expected to close during the fiscal quarter ending March 31, 2006.
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company OverviewBecton, Dickinson and Company (“BD”) is a medical technology company engaged principally in the 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, 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, directly to end-users and by independent sales representatives.
BD’s management operates the business consistent with the following core strategies:
•
to increase revenue growth by focusing on products that deliver greater benefits to patients, healthcare workers and researchers;
to improve operating effectiveness and balance sheet productivity; and,
to strengthen organizational and associate capabilities in the ever-changing healthcare environment.
In assessing the outcomes of these strategies and 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 and cash flows.
The results of our strategies are reflected in our first quarter 2006 financial and operational performance. BD reported first quarter revenues of $1.414 billion, an increase of 10% from the same period a year ago, and reflected volume increases of approximately 10%, a decrease due to unfavorable foreign currency translation of approximately 1%, and price increases of less than 1%. Sales in the United States of safety-engineered devices grew 8% to $228 million in the first quarter of 2006. International sales of safety-engineered devices grew 21% to $74 million in the first quarter of 2006. Overall, international revenue growth of 10% for the three-month period included a 2% unfavorable impact of foreign currency translation for the three-month period. As further discussed in our 2005 Annual Report on Form 10-K, we face currency exposure that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We purchase option and forward contracts to partially protect against adverse foreign exchange rate movements.
Our balance sheet remains strong with net cash provided by continuing operations at approximately $171 million for the three months ended December 31, 2005, and our debt-to-capitalization ratio (shareholders’ equity, net non-current deferred income tax liabilities, and debt) slightly increasing to 28.0% at December 31, 2005 from 27.3% at September 30, 2005.
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. Numerous factors can affect our ability to achieve these goals, including without limitation, U.S. and global economic conditions, increased competition and healthcare cost containment initiatives. We believe that there are several important factors relating to our business that tend to reduce the impact on BD of any potential economic or political events in countries in which we do business, including the effects of possible healthcare system reforms. These include the non-discretionary nature of the demand for many of our core products, which may reduce the impact of economic downturns, the international nature of our business and our ability to meet the needs of the worldwide healthcare industry with cost-effective and innovative products.
Our anticipated revenue growth over the next three years, excluding any impact relating to foreign exchange, is expected to come from the following:
Core business growth and expansion, including the continued transition to safety-engineered devices; and
Development in each business segment of new products and services that provide increased benefits to patients, healthcare workers and researchers.
On January 9, 2006, BD entered into an agreement to acquire GeneOhm Sciences, a privately held company that has developed molecular diagnostic testing for the rapid detection of bacterial organisms, including those known to cause healthcare-associated infections. The acquisition, which is expected to close in the fiscal quarter ending March 31, 2006, is expected to be dilutive to earnings per share by an estimated 1 cent for the second quarter and 7 cents for the full fiscal year 2006. Upon closing, the Company will also record, in that particular quarter, an in-process R&D charge, resulting in an estimated impact between 20 to 25 cents on diluted earnings per share from continuing operations in 2006.
Results of Operations
Refer to Note 5 in the Notes to Condensed Consolidated Financial Statements for segment financial data.
Medical Segment – First quarter revenues of $771 million represented an increase of $77 million, or 11%, from the prior year’s quarter, including an estimated $6 million or a 1% unfavorable impact due to foreign currency translation. Primary drivers of this growth were strong sales in the Diabetes Care and Pharmaceutical Systems units, combined with increases in sales of prefilled flush syringes and immunization products. Sales in the Diabetes Care unit were driven
14
by increases in sales of pen needles of $12 million and increases in blood glucose monitoring (“BGM”) sales of $8 million. Increases in sales of Pharmaceutical Systems products were partially driven by demand from pharmaceutical companies preparing for major product launches in the United States and Europe, as well as comparison to a weak prior year’s quarter. Medical revenues also reflect the continued conversion in the United States to safety-engineered products, which accounted for sales of $132 million, as compared with $126 million in the prior year’s quarter. In the prior year, Medical experienced inventory builds at a major distributor in the first quarter, which included safety-engineered products and resulted in inventory reductions by that distributor in the prior year’s second quarter. Included in Medical revenues were international sales of safety-engineered products of $22 million, compared with $18 million in the prior year’s quarter.
Diagnostics Segment – First quarter revenues of $444 million represented an increase of $30 million, or 7%, over the prior year quarter, including an estimated $6 million, or 1%, unfavorable impact due to foreign currency translation. The Diagnostic Systems unit of the segment reported revenue growth of 8%, due primarily to strong sales of flu diagnostic tests to distributors in Japan, which built inventory in anticipation of the flu season. Overall, flu product sales totaled $27 million, compared with $18 million in the prior year’s period. Solid sales growth from the BD ProbeTecand BD Phoenix instrument platforms also contributed to growth. The Preanalytical Systems unit of the segment reported revenue growth of 7 percent over the prior year’s quarter. U.S. sales of safety-engineered products totaled $96 million, compared with $86 million in the prior year’s quarter, due in large part to the continued success of the BD Vacutainer Push Button Blood Collection Set. International sales of safety-engineered products totaled $52 million, compared with $42 million in the prior year’s quarter.
Biosciences Segment – First quarter revenues of $200 million represented an increase of $19 million or 10% over the prior year’s quarter, including an estimated $4 million, or 2%, unfavorable impact due to foreign currency translation. Research instruments and reagent sales continued to be the primary growth contributors, driven by increased demand for both research analyzers and sorters.
Medical SegmentSegment operating income for the first quarter was $213 million, or 27.7% of Medical revenues, compared to $163 million, or 23.5%, in the prior year’s quarter. Operating income as a percentage of revenues in fiscal 2006 reflects gross profit improvement from increased sales of products that have higher overall gross profit margins, in particular insulin delivery and immunization products, and improved manufacturing efficiencies which more than offset higher raw material costs associated with resin-based products. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percent of Medical revenues in the first quarter of 2006 was slightly lower compared with the first quarter of 2005. Certain incremental investments to support the BGM initiative were more than offset by tight controls on base spending. Research and development expenses for the quarter grew 2.3% as the segment continues to invest in the development of innovative products, particularly in the areas of next generation safety-engineered products, diabetes care products, including BGM and other initiatives offset by reductions associated with discontinued and completed projects.
15
Diagnostics SegmentSegment operating income for the first quarter was $122 million, or approximately 27.4% of Diagnostics revenues, compared to $103 million, or approximately 24.9%, in the prior year’s quarter. The increase in operating income as a percentage of revenues, reflects gross profit improvement from increased sales of products that have higher overall gross profit margins, in particular, safety-engineered product, flu diagnostic tests, and the BD ProbeTec ET platform. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percentage of Diagnostics revenues in the first quarter of 2006 was slightly lower compared with the first quarter of 2005 primarily due to tight controls on spending. Research and development expenses in the first quarter of 2006 increased $1 million, or 5.6%.
Biosciences Segment Segment operating income for the first quarter was $47 million, or 23.6% of Biosciences revenues, compared to $37 million, or 20.6%, in the prior year’s quarter. The increase in operating income as a percentage of revenues reflects gross profit improvement from increased sales of products that have higher overall gross profit margins, in particular, research instruments and reagents. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percent of Biosciences revenues for the quarter was 26.2% versus 27.3% in the prior year’s quarter. This decrease was attributable to revenue growth as well as continued effective spending control. Research and development expenses in the prior year’s quarter increased $0.9 million, or 7.0%, reflecting spending on new product development, particularly in the Immunocytometry Systems unit.
Gross Profit MarginGross profit margin was 52.2% for the first quarter, compared with 50.8% for the prior year period. Gross profit margin in the first quarter of fiscal 2006 as compared to the prior period reflected an estimated 1.1% improvement relating to increased sales of products with higher margins, an estimated 0.7% improvement associated primarily with productivity gains, with the remaining 0.3% improvement resulting from stronger currency. These gross profit margin improvements were partially offset by an estimated 0.4% relating to higher raw material costs, primarily petroleum-based resins, and an increase in share-based compensation of 0.3%. We expect gross profit margin to improve, on a reported basis, by about 50 basis points in fiscal 2006 (before taking into account the impact of the anticipated acquisition of GeneOhm Sciences, Inc. (“GeneOhm Sciences”), as further discussed above).
Selling and Administrative ExpenseSelling and administrative expense was 26.0% of revenues for the first quarter, compared with 26.5% for the prior year’s period. Aggregate expenses for the current period reflect increases in share-based compensation expense of $16 million, in base spending of $15 million, in line with inflation, and in expenses related to the BGM initiative of $8 million. These increases in selling and administrative expense were partially offset by proceeds from an insurance settlement of $7 million and a favorable foreign exchange impact of $5 million. Selling and administrative expense as a percentage of revenues is expected to decrease, on a reported basis, by about 50 to 60 basis points in fiscal 2006 (before taking into account the impact of the anticipated acquisition of GeneOhm Sciences, as further discussed above).
Research and Development ExpenseResearch and development expense was $69 million, or 4.9% of revenues for the first quarter,
compared with the prior year’s amount of $62 million, or 4.8% of revenues. The increase in research and development expenditures reflects increased spending for new programs in each of our segments and an increase in share-based compensation of $3 million. We anticipate research and development expense to increase, on a reported basis, about 12% to 13% for fiscal 2006 (before taking into account the impact of the anticipated acquisition of GeneOhm Sciences, as further discussed above).
Non-Operating Expense and IncomeInterest expense increased to $17 million in the current quarter from $14 million in the prior year’s quarter and reflects higher debt levels and the impact of higher interest rates on floating rate debt and on interest rate swap transactions, consisting of fair value hedges of certain fixed-rate debt instruments, under which the difference between fixed and floating interest rates is exchanged at specified intervals. Interest income increased to $15 million in the current quarter from $5 million in the prior year’s period, and reflects higher interest rates and cash balances.
Income TaxesThe income tax rate was 26.9% for the first quarter, compared with the prior year’s rate of 18.6%. The prior year’s rate reflected an estimated 6.8% benefit due to the reversal of tax reserves in connection with the conclusion of tax examinations in four non-U.S. jurisdictions as well as certain tax-related events that caused the first fiscal quarter 2005 tax rate to vary from the then expected tax rate for fiscal 2005. The Company expects the reported tax rate for the full year to be approximately 26% (before taking into account the impact of the anticipated acquisition of GeneOhm Sciences, as further discussed above).
Income from Continuing Operations and Diluted Earnings Per Share from Continuing OperationsIncome from continuing operations and diluted earnings per share from continuing operations for the first quarter of 2006 were $218 million and 85 cents, respectively. Proceeds from an insurance settlement increased income from continuing operations by $4 million and diluted earnings per share from continuing operations by 2 cents. This compared with income from continuing operations and diluted earnings per share from continuing operations for the prior year’s first quarter of $194 million and 74 cents, respectively. The prior year’s quarter included the effect of the reversal of tax reserves, as described above, which increased income from continuing operations by $11 million and diluted earnings per share from continuing operations by 4 cents.
Liquidity and Capital ResourcesNet cash provided by continuing operating activities, which continues to be our primary source of funds to finance operating needs and capital expenditures, was $171 million during the first quarter of fiscal 2006, and $264 million in the same period in fiscal 2005. Net cash provided by operations was reduced by a change in the pension obligation of $127 million, which reflected a discretionary cash contribution of $150 million. BD’s funding policy for its defined benefit pension plans is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Security Act of 1974, plus any additional amounts that management may determine to be appropriate considering the funded status of the plans, tax deductibility, cash flows, and other factors.
Net cash used for continuing investing activities for the first quarter of the current year was $92
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million, compared to $79 million in the same period a year ago. Capital expenditures were $64 million in the first quarter of fiscal 2006 and $50 million in the same period in fiscal 2005. We expect capital spending for fiscal 2006 to be in the $400 million range.
Net cash provided by continuing financing activities in the first quarter of the current year was $47 million, compared to net cash used for continuing financing activities of $85 million in the prior year period. As of December 31, 2005, total debt of $1.4 billion represented 28.0% of total capital (shareholders’ equity, net non-current deferred income tax liabilities, and debt), versus 27.3% at September 30, 2005. Short-term debt increased to 30% of total debt at the end of the fiscal quarter, from 16% at September 30, 2005.
For the first quarter of the current year, the Company repurchased approximately $101 million of its common stock compared with approximately $112 million in the prior year period. At December 31, 2005, 2.6 million common shares remained available for purchase pursuant to a repurchase program for 10 million shares authorized by the Board of Directors (the “Board”) in November 2004. The Board authorized an additional repurchase program for 10 million shares on November 22, 2005. Stock repurchases were offset, in part, by the issuance of common stock from treasury due to the exercising of stock options by employees.
We have in place a commercial paper borrowing program that is available to meet our short-term financing needs, including working capital requirements. Borrowings outstanding under this program were approximately $299 million at December 31, 2005. We maintain a $900 million syndicated credit facility in order to provide backup support for our commercial paper program and for other general corporate purposes. This credit facility expires in August 2009 and includes a single financial covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the most recent four consecutive fiscal quarters. On the last eight measurement dates, this ratio had ranged from 18-to-1 to 21-to-1. The facility, under which there were no borrowings outstanding at December 31, 2005, can be used to support the commercial paper program or for general corporate purposes. In addition, we have informal lines of credit outside the United States.
BD’s ability to generate cash flow from operations, issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms could be adversely affected in the event there was a material decline in the demand for BD’s products, deterioration in BD’s key financial ratios or credit ratings or other significantly unfavorable changes in conditions. While a deterioration in the Company’s credit ratings would increase the costs associated with maintaining and borrowing under its existing credit arrangements, such a downgrade would not affect the Company’s ability to draw on these credit facilities, nor would it result in an acceleration of the scheduled maturities of any outstanding debt.
We will repatriate a total of approximately $1.3 billion of foreign earnings during fiscal 2006 pursuant to our approved plan under the American Jobs Creation Act of 2004.
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Cautionary Statement Pursuant to Private Securities Litigation Reform Act of 1995 -- “Safe Harbor” for Forward-Looking StatementsThe Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of BD. BD and its representatives may from time to time make certain forward-looking statements, both written and oral, including statements contained in this report and filings with the Securities and Exchange Commission (“SEC”) and in our other reports to shareholders. Forward-looking statements may be identified by the use of words like “plan,” “expect,” “believe,” “intend,” “will,” “anticipate,” “estimate” and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance, as well as our strategy for growth, product development, regulatory approvals, market position and expenditures. All statements which address operating performance or events or developments that we expect or anticipate will occur in the future -- including statements relating to volume growth, sales and earnings per share growth, gross profit margins, various expenditures and statements expressing views about future operating results -- are forward-looking statements within the meaning of the Act.
Forward-looking statements are based on current expectations of future events. The forward-looking statements are and will be based on management’s then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events and developments or otherwise.
The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements:
Regional, national and foreign economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates and the potential effect of such fluctuations on revenues, expenses and resulting margins.
We operate in a highly competitive environment. New product introductions by our current or future competitors could adversely affect our ability to compete in the global market. Patents attained by competitors, particularly as patents on our products expire, may also adversely impact our competitive position.
Recently, the U.S. Food and Drug Administration (“FDA”) and European authorities have approved a new inhaled form of insulin for adults, which could adversely impact sales of our insulin injection devices.
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Changes in domestic and foreign healthcare industry practices and regulations resulting in increased pricing pressures, including the continued consolidation among healthcare providers; trends toward managed care and healthcare cost containment and government laws and regulations relating to sales and promotion, reimbursement and pricing generally.
The effects, if any, of governmental and media activities relating to U.S. Congressional hearings regarding the business practices of group purchasing organizations, which negotiate product prices on behalf of their member hospitals with BD and other suppliers.
Fluctuations in the cost and availability of raw materials and the ability to maintain favorable supplier arrangements and relationships (particularly with respect to sole-source suppliers) and the potential adverse effects of any disruption in the availability of such raw materials.
Our ability to obtain the anticipated benefits of any restructuring programs, if any, that we may undertake.
Adoption of or changes in government laws and regulations affecting domestic and foreign operations, including those relating to trade, monetary and fiscal policies, taxation, environmental matters, sales practices, price controls, licensing and regulatory approval of new products, or changes in enforcement practices with respect to any such laws and regulations.
Fluctuations in U.S. and international governmental funding and policies for life science research.
Difficulties inherent in product development, including the potential inability to successfully continue technological innovation, complete clinical trials, obtain regulatory approvals in the United States and abroad, or gain and maintain market approval of products, as well as the possibility of encountering infringement claims by competitors with respect to patent or other intellectual property rights, all of which can preclude or delay commercialization of a product.
Pending and potential litigation or other proceedings adverse to BD, including antitrust claims, product liability claims, and patent infringement claims, as well as other risks and uncertainties detailed from time to time in our SEC filings.
The effects, if any, of adverse media exposure or other publicity regarding BD’s business or operations.
Our ability to achieve earnings forecasts, which are generated based on projected volumes and sales of many product types, some of which are more profitable than others. There can be no assurance that we will achieve the projected level or mix of product sales.
The effect of market fluctuations on the value of assets in BD’s pension plans and the possibility that BD may need to make additional contributions to the plans as a result of any decline in the value of such assets.
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Our ability to effect infrastructure enhancements and incorporate new systems technologies into our operations.
Product efficacy or safety concerns resulting in product recalls, regulatory action on the part of the FDA (or foreign counterparts) or declining sales.
Economic and political conditions in international markets, including civil unrest, governmental changes and restrictions on the ability to transfer capital across borders.
The effects of natural disasters, including hurricanes or pandemic diseases, on our ability to manufacture our products, particularly where production of a product line is concentrated in one or more plants, or on our ability to source components from suppliers that are needed for such manufacturing.
Our ability to penetrate developing and emerging markets, which also depends on economic and political conditions, and how well we are able to acquire or form strategic business alliances with local companies and make necessary infrastructure enhancements to production facilities, distribution networks, sales equipment and technology.
The impact of business combinations, including acquisitions and divestitures, both internally for BD and externally, in the healthcare industry.
Issuance of new or revised accounting standards by the Financial Accounting Standards Board or the SEC.
The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. Investors should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in information reported since the end of the fiscal year ended September 30, 2005.
Item 4. Controls and Procedures
An evaluation was carried out by BD’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of BD’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2005. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were, as of the end of the period covered by this report, adequate and effective to ensure that material information relating to BD and its consolidated
subsidiaries would be made known to them by others within these entities. There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2005 identified in connection with the above-referenced evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
We are involved, both as a plaintiff and a defendant, in various legal proceedings which arise in the ordinary course of business, including product liability and environmental matters. A more complete description of legal proceedings has been set forth in our 2005 Annual Report on Form 10-K (the “10-K”). Since the beginning of the quarter ended December 31, 2005, the following changes have occurred.
Antitrust Class ActionsOn January 17, 2006, Drug Mart Tallman filed a purported class action lawsuit against BD in the United States District Court in Newark, New Jersey (Drug Mart Tallman, Inc., et al v. Becton Dickinson and Company, Case No. 2:06-CV-00174). The complaint alleges that BD violated federal and various state antitrust laws, resulting in the charging of higher prices for certain BD products to plaintiff and other indirect purchasers of BD products. BD believes that it has meritorious defenses to this suit and intends to defend this suit vigorously. The above action is the seventh antitrust class action suit brought against BD by either direct or indirect purchasers of BD’s products. These antitrust class action lawsuits, including the above action, have been consolidated for pre-trial purposes in a Multi-District Litigation (MDL) in federal court in New Jersey.
SummaryGiven the uncertain nature of litigation generally, BD is not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which BD is a party. In accordance with U.S. generally accepted accounting principles, BD establishes accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). In view of the uncertainties discussed above, BD could incur charges in excess of any currently established accruals and, to the extent available, excess liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on BD’s consolidated results of operations and consolidated cash flows in the period or periods in which they are recorded or paid.
Not applicable.
The table below sets forth certain information regarding our purchases of common stock of BD during the fiscal quarter ended December 31, 2005.
Issuer Purchases of Equity Securities
For the three months ended December 31, 2005
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 – 31, 2005
4,033
50.68
4,344,914
November 1 – 30, 2005
600,639
58.65
600,000
13,744,914
December 1 – 31, 2005
1,115,117
59.42
1,100,000
12,644,914
1,719,789
59.13
1,700,000
(1)
Includes for the quarter 18,049 shares purchased in open market transactions by the trustee under BD’s Deferred Compensation Plan and 1996 Directors’ Deferral Plan. Also includes 1,740 shares delivered to the Company in connection with stock option exercises.
(2)
These repurchases were made pursuant to a repurchase program for 10 million shares announced on November 23, 2004 (the “2004 Program”). There is no expiration date for the 2004 Program. On November 22, 2005, the Board of Directors of BD authorized an additional repurchase program for 10 million shares.
Defaults Upon Senior Securities.
Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the fiscal quarter ended December 31, 2005.
Our Annual Meeting of Shareholders was held on January 31, 2006, at which the following matters were voted upon:
i.)
A management proposal for the election of three directors for the terms indicated below was voted upon as follows:
Votes
Nominee
Term
For
Withheld
Edward J. Ludwig
3 Years
208,868,737
6,905,452
Willard J. Overlock, Jr.
212,162,197
3,611,992
Bertram L. Scott
209,297,765
6,476,424
The directors whose term of office as a director continued after the meeting are: Basil L. Anderson, Henry P. Becton, Jr., Edward F. DeGraan,Gary A. Mecklenburg, James F. Orr, James E. Perrella, Alfred Sommer and Margaretha af Ugglas.
ii.)
A management proposal to ratify the selection of Ernst & Young LLP as independent registered public accounting firm for the fiscal year ending September 30, 2006 was voted upon. 211,302,059 shares were voted for the proposal, 2,964,216 shares were voted against, and 1,507,914 shares abstained.
iii.)
A shareholder proposal requesting that the Board of Directors publish a report evaluating the Company’s policies on brominated flame retardants and other toxic chemicals was voted upon. 14,393,882 shares were voted for the proposal, 150,699,713 shares were voted against, 26,390,342 shares abstained, and there were 24,290,252 broker non-votes.
iv.)
A shareholder proposal requesting that the Board of Directors take the necessary steps to provide for cumulative voting in the election of directors was voted upon. 74,079,013 shares were voted for the proposal, 97,376,269 shares were voted against, 20,028,655 shares abstained, and there were 24,290,252 broker non-votes.
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Other Information.
As was disclosed in BD's proxy statement for its 2006 annual meeting of shareholders (the "Proxy Statement"), on December 7, 2005, BD and Edward J. Ludwig, the Chairman, President and Chief Executive Officer of BD, entered into a time sharing agreement under which Mr. Ludwig will make lease payments to BD for his personal use of the BD corporate aircraft, up to the maximum amount permitted by Federal Aviation Administration regulations.
As was also disclosed in the Proxy Statement, during the period covered by this report, BD entered into change of control employment agreements with each of its executive officers and with other corporate officers that provide for the continued employment of such persons for a period of time following a change of control of BD.
The time sharing agreement with Mr. Ludwig and the forms of the change of control employment agreements described above were filed as exhibits to BD’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
Exhibit 10(a)
Stock Award Plan, as amended and restated as of January 31, 2006.
Exhibit 31
Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to SEC Rule 13a - 14(a).
Exhibit 32
Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a - 14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Dated: February 8, 2006
/s/ John R. Considine
John R. Considine
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ William A. Tozzi
William A. Tozzi
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
Exhibit Number
Description of Exhibits
10(a)
31
32