Becton, Dickinson and Company
Summary
Ten-Year Summary of Selected Financial Data
Years Ended September 30
Dollars in millions, except per-share amounts
2002 2001 2000 1999
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Operations
Revenues $4,033.1 $3,746.2 $3,618.3 $3,418.4
Research and Development Expense 220.2 211.8 223.8 254.0
Operating Income 675.7 637.8 514.8 445.2
Interest Expense, Net 33.3 55.4 74.2 72.1
Income Before Income Taxes and
Cumulative Effect of Accounting Changes 628.6 576.8 519.9 372.7
Income Tax Provision 148.6 138.3 127.0 96.9
Net Income 480.0 401.7(A) 392.9 275.7
Basic Earnings Per Share 1.85 1.55(A) 1.54 1.09
Diluted Earnings Per Share 1.79 1.49(A) 1.49 1.04
Dividends Per Common Share .39 .38 .37 .34
Financial Position
Current Assets $1,928.7 $1,762.9 $1,660.7 $1,683.7
Current Liabilities 1,252.5 1,264.7 1,353.5 1,329.3
Property, Plant and Equipment, Net 1,765.7 1,716.0 1,576.1 1,431.1
Total Assets 5,040.5 4,802.3 4,505.1 4,437.0
Long-Term Debt 803.0 783.0 779.6 954.2
Shareholders' Equity 2,488.0 2,328.8 1,956.0 1,768.7
Book Value Per Common Share 9.74 8.98 7.72 7.05
Financial Relationships
Gross Profit Margin 48.3% 48.9% 48.9% 49.9%
Return on Revenues 11.9% 11.7%(D) 10.9% 8.1%
Return on Total Assets(C) 13.6% 13.7% 13.6% 10.9%
Return on Equity 19.9% 20.3%(D) 21.1% 16.3%
Debt to Capitalization(E) 32.5% 34.1% 41.4% 47.2%
Additional Data
Number of Employees 25,200 24,800 25,000 24,000
Number of Shareholders 10,050 10,329 10,822 11,433
Average Common and Common
Equivalent Shares Outstanding-
Assuming Dilution (millions) 268.2 268.8 263.2 264.6
Depreciation and Amortization $ 304.6 $ 305.7 $ 288.3 $ 258.9
Capital Expenditures 259.7 370.8 376.4 311.5
(A) Includes cumulative effect of accounting change of $36.8 ($.14 per basic
and diluted share).
(B) Includes cumulative effect of accounting changes of $141.1 ($.47 per basic
share; $.45 per diluted share).
(C) Earnings before interest expense, taxes and cumulative effect of accounting
changes as a percent of average total assets.
(D) Excludes the cumulative effect of accounting changes.
(E) Total debt as a percent of the sum of total debt, shareholders' equity and
net non-current deferred income tax liabilities.
22
Becton, Dickinson and Company
1998 1997 1996 1995 1994 1993
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$3,116.9 $2,810.5 $2,769.8 $2,712.5 $2,559.5 $2,465.4
217.9 180.6 154.2 144.2 144.2 139.1
405.4 450.5 431.2 396.7 325.0 270.4
56.3 39.4 37.4 42.8 47.6 53.4
340.9 422.6 393.7 349.6 296.2 222.9
104.3 122.6 110.2 97.9 69.0 10.1
236.6 300.1 283.4 251.7 227.2 71.8(B)
.95 1.21 1.10 .92 .77 .22(B)
.90 1.15 1.05 .89 .76 .22(B)
.29 .26 .23 .21 .19 .17
$1,542.8 $1,312.6 $1,276.8 $1,327.5 $1,326.6 $1,150.7
1,091.9 678.2 766.1 720.0 678.3 636.1
1,302.7 1,250.7 1,244.1 1,281.0 1,376.3 1,403.1
3,846.0 3,080.3 2,889.8 2,999.5 3,159.5 3,087.6
765.2 665.4 468.2 557.6 669.2 680.6
1,613.8 1,385.4 1,325.2 1,398.4 1,481.7 1,457.0
6.51 5.68 5.36 5.37 5.27 4.88
50.6% 49.7% 48.4% 47.0% 45.3% 44.5%
7.6% 10.7% 10.2% 9.3% 8.9% 8.6%(D)
11.7% 15.9% 15.2% 13.3% 11.5% 9.2%
15.8% 22.1% 20.8% 17.5% 15.5% 13.3%(D)
41.4% 36.3% 34.3% 35.2% 36.1% 37.8%
21,700 18,900 17,900 18,100 18,600 19,000
9,784 8,944 8,027 7,712 7,489 7,463
262.1 259.6 267.6 280.4 298.6 313.2
$ 228.7 $ 209.8 $ 200.5 $ 207.8 $ 203.7 $ 189.8
181.4 170.3 145.9 123.8 123.0 184.2
23
Becton, Dickinson and Company
Financial Review
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Company Overview
Becton, Dickinson and Company ("BD") is a medical technology company that serves
healthcare institutions, life science researchers, clinical laboratories,
industry and the general public. BD manufactures and sells a broad range of
medical supplies, devices, laboratory equipment and diagnostic products. We
focus strategically on achieving growth in three worldwide business segments-BD
Medical Systems ("Medical"), BD Clinical Laboratory Solutions ("Clinical Lab")
and BD Biosciences ("Biosciences"). Our products are marketed in the United
States and internationally through independent distribution channels, directly
to end users and by sales representatives. The following references to years
relate to our fiscal year, which ends on September 30.
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Adoption of New Accounting Standards
Effective October 1, 2001, we adopted the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets," as more fully discussed in Note 2 of the
Notes to Consolidated Financial Statements. As a result of the adoption of these
Statements, we are no longer amortizing goodwill and indefinite-lived intangible
assets, and have reclassified certain assets to Goodwill, Net from Other
Intangibles, Net that did not meet the criteria for recognition apart from
goodwill.
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Revenues and Earnings
Worldwide revenues in 2002 were $4 billion, an increase of 8% over 2001 and
resulted primarily from volume increases in all segments. Sales of
safety-engineered devices grew 38% to $573 million. As more fully discussed in
Note 10 of the Notes to Consolidated Financial Statements, $8 million of hedging
costs relating to currency option contracts that were originally recorded in
Other Expense, Net in 2001 have been reclassified as a reduction of revenues to
conform to the current year presentation.
Medical revenues in 2002 of $2.2 billion increased 7% over 2001, or 8%
excluding unfavorable foreign currency translation. The primary growth drivers
were the conversion to safety-engineered devices, which accounted for $353
million in revenues compared with $253 million in the prior year. Also
contributing to the growth of this segment were sales of worldwide prefillable
drug delivery devices, which grew $48 million or 17%. Medical revenue growth was
partially offset by reduced sales of conventional devices in the United States
due to the transition to safety-engineered devices and, to a lesser extent, by
lower U.S. sales of consumer healthcare products, reflecting the impact of
redirecting promotional efforts toward branded insulin syringe sales at the
retail level. See discussion on revenue recognition in "Critical Accounting
Policies" below.
Medical operating income was $470 million in 2002 compared with $447
million in 2001. Medical operating income in 2002 was negatively impacted by
special charges and related manufacturing restructuring costs, as discussed
below. Excluding these charges, Medical operating income grew 8%, when compared
to 2001, adjusted to exclude goodwill amortization recorded in 2001 prior to the
adoption of SFAS Nos. 141 and 142, as discussed above. This increase reflects
the gross profit margin improvement resulting from continued conversion to
safety-engineered devices from conventional products. Medical operating income
was negatively impacted by economic conditions in Latin America and the
redirection of promotional efforts, as noted above.
Clinical Lab revenues in 2002 of $1.2 billion rose 7% over 2001, or 8%
excluding unfavorable foreign currency translation. Major elements comprising
this underlying revenue growth were the continued conversion to
safety-engineered products in the Preanalytical Solutions component of the
segment, which accounted for $220 million in revenues compared with $163 million
in the prior year. Clinical Lab revenue growth was partially offset by reduced
sales of conventional devices in the United States. Revenue growth was favorably
impacted by incremental BD ProbeTecET System sales of $19 million over 2001 in
the Diagnostic Systems component of the segment.
Clinical Lab operating income was $251 million in 2002 compared with
$213 million last year. Excluding goodwill amortization in 2001, Clinical Lab
operating income grew 14%. This increase reflects gross profit margin
improvement resulting from continued conversion to safety-engineered devices
from conventional products and the improved profitability of the BD ProbeTecET
platform.
Biosciences revenues in 2002 of $645 million increased 9% over 2001, or
10% excluding unfavorable foreign currency translation. This growth was led by
sales of immunocytometry products, particularly the BD FACS brand flow cytometry
systems, which contributed approximately 5% of the underlying revenue growth. In
addition, sales of discovery labware products and immunology/cell biology
reagents each contributed about 3% of the underlying revenue growth. Molecular
biology reagent revenues decreased about $6 million from the prior year due to
continued weakness in some portions of the molecular biology market, largely due
to a softness in pharmaceutical/biotech research and development spending, and a
shift in pharmaceutical focus from early stage drug target identification to
later stage drug development. As a result, we are refocusing our research and
development efforts in the area of molecular biology toward producing a product
portfolio aligned with changing customer focus, as well as streamlining our
operations.
Biosciences operating income in 2002 was $117 million compared with $97
million in 2001. Excluding goodwill amortization in 2001, Biosciences operating
income grew 6%. Profit margins on immunology/cell biology reagents and discovery
labware products improved due to lower manufacturing costs and shifts to sales
of products with higher gross profit margins than the mix of products sold in
2001. Biosciences operating income was negatively impacted primarily by lower
margins on molecular biology reagents due to the market weakness described above
and to a lesser extent by lower margins on flow cytometry products.
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Financial Review Becton, Dickinson and Company
On a geographic basis, revenues outside the United States in 2002
increased 8% to $1.9 billion. Excluding the estimated impact of unfavorable
foreign currency translation, underlying revenue growth outside the United
States was 9%. Revenues in Europe accounted for 5% of the underlying revenue
growth and were led by strong sales of prefillable syringes, BD FACS brand flow
cytometry systems and hypodermic products. Revenues in the Asia Pacific region
contributed 2% of the underlying revenue growth and were led by strong sales
growth of immunocytometry products and I.V. catheters. As indicated earlier,
revenues were adversely impacted by economic conditions in Latin America.
Revenues in the United States in 2002 of $2.2 billion increased 8%,
primarily from strong sales of safety-engineered devices. Revenue growth was
partially offset by lower sales of diabetes healthcare products and molecular
biology reagent revenues, as discussed above.
Gross profit margin was 48.3% in 2002, compared with 48.9% last year.
Excluding costs related to the restructuring program discussed below, gross
profit margin would have been 48.5% compared with 49% in 2001, adjusted to
exclude goodwill amortization. Higher gross margins from sales of our
safety-engineered products were more than offset by lower sales of products with
overall higher gross profit margins, including insulin syringes and molecular
biology products in the Biosciences segment, as discussed earlier.
Selling and administrative expense of $1 billion in 2002 was 25.6% of
revenues, compared to $983 million in 2001, or 26.2% of revenues. Excluding
goodwill amortization in 2001, the prior year's selling and administrative
expense as a percent of revenues would have been 25.4%.
Investment in research and development in 2002 was $220 million, or
5.5% of revenues, compared with $212 million, or 5.7% of revenues in 2001.
Incremental spending was concentrated primarily in the Biosciences segment and
in key initiatives, including blood glucose monitoring.
Included in the 2002 special charges were $26 million of charges
related to a manufacturing restructuring program in the Medical segment, as more
fully described in Note 5 of the Notes to Consolidated Financial Statements.
Special charges were net of the reversal of $4 million of fiscal 2000 special
charges, primarily due to lower-than-anticipated employee severance and lease
cancellation costs. Fiscal 2002 results also reflect $7 million of other
manufacturing restructuring costs, primarily accelerated depreciation, related
to the restructuring program that are included in cost of products sold. For
2003, we expect manufacturing restructuring costs to be fully offset by related
cost savings. For 2004, we expect to achieve total savings of approximately $8
million relating to this restructuring program.
Operating margin in 2002 was 16.8% of revenues, compared with 17% in
2001. Excluding the aforementioned impact of special charges and related other
manufacturing restructuring costs in the current year and goodwill amortization
in the prior year, operating margin as a percent of revenue would have been
17.5% in 2002 compared with 18% in 2001. This decline primarily reflects the
decrease in gross profit margin.
Net interest expense of $33 million in 2002 was $22 million lower than
in 2001. This decline is primarily due to lower interest rates, partially offset
by lower capitalized interest in 2002.
Other Expense, Net of $14 million in 2002 included net losses on equity
investments of $19 million, which reflect declines in fair values that were
deemed other than temporary. Also included in Other Expense, Net in 2002 were
foreign exchange gains of $16 million that were substantially offset by other
asset write-downs of $14 million. Other Expense, Net in 2001 of $6 million
included write-downs of equity investments to fair value of $6 million.
The effective tax rate in 2002 was 23.6% compared to 24% in 2001.
Net income and diluted earnings per share in 2002 were $480 million, or
$1.79, respectively, compared with $438 million, or $1.63 in 2001, before the
cumulative effect of accounting change, as described below. Excluding the impact
of special charges in 2002 and goodwill amortization in 2001, net income and
diluted earnings per share before the cumulative effect of accounting change in
2002 were $497 million, or $1.85, respectively, compared with $466 million, or
$1.73, in 2001.
We adopted the provisions of Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements,"("SAB 101") in the fourth quarter
of 2001 and, as a result, recorded the following accounting changes, described
below, effective October 1, 2000 (beginning of fiscal 2001). We changed our
method of accounting for revenue related to branded insulin syringe products
that are sold to distributors in the U.S. consumer trade channel. These products
were predominantly sold under incentive programs and we concluded that the
preferable method is to defer revenue recognition until such product is sold by
the distributor to the end customer. We also changed our accounting method for
Biosciences instruments to defer revenue from these products until completion of
installation at the customer's site. As a result of these accounting changes, we
recorded a total cumulative effect of change in accounting principle of $37
million, net of tax in 2001. See Note 2 of the Notes to Consolidated Financial
Statements for additional discussion of the accounting change. Net income and
diluted earnings per share in 2001 were $402 million, or $1.49 per share, after
reflecting the after-tax cumulative effect of accounting change of $.14 per
share.
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Financial Instrument Market Risk
We selectively use financial instruments to manage the impact of foreign
exchange rate and interest rate fluctuations on earnings. The counterparties to
these contracts are a diversified group of major financial institutions. We do
not have significant exposure to any one counterparty. We do not enter into
financial instruments for trading or speculative purposes.
Our foreign currency exposure is concentrated in Western Europe, Asia
Pacific, Japan and Latin America. We face transactional currency exposures that
arise when we enter into transactions in non-hyperinflationary countries,
generally on an intercompany basis, that are denominated in currencies other
than our functional currency. We hedge substantially all such foreign exchange
exposures primarily through the use of forward contracts and currency
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Financial Review Becton, Dickinson and Company
options. We also 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.
Gains or losses on our derivative instruments are largely offset by the losses
or gains on the underlying hedged transactions. For foreign currency derivative
instruments, market risk is determined by calculating the impact on fair value
of an assumed one-time change in foreign exchange rates relative to the U.S.
dollar. Fair values were estimated based on market prices, when available, or
dealer quotes. The reduction in fair value of our purchased option contracts is
limited to the option's fair value. With respect to the derivative instruments
outstanding at September 30, 2002, a 10% appreciation of the U.S. dollar over a
one-year period would increase pre-tax earnings by approximately $27 million,
while a 10% depreciation of the U.S. dollar would decrease pre-tax earnings by
approximately $15 million. Comparatively, considering our derivative instruments
outstanding at September 30, 2001, a 10% appreciation of the U.S. dollar over a
one-year period would have increased pre-tax earnings by approximately $34
million, while a 10% depreciation of the U.S. dollar would have decreased
pre-tax earnings by approximately $15 million. These calculations do not reflect
the impact of exchange gains or losses on the underlying positions that would be
offset, in part, by the results of the derivative instruments.
Our primary interest rate exposure results from changes in short-term
U.S. dollar interest rates. Our debt portfolio at September 30, 2002, is
primarily U.S. dollar-denominated, with less than 2% being foreign denominated.
Therefore, transaction and translation exposure relating to our debt portfolio
is minimal. In an effort to manage interest rate exposures, we strive to achieve
an acceptable balance between fixed and floating rate debt and may enter into
interest rate swaps to help maintain that balance. For interest rate derivative
instruments, market risk is determined by calculating the impact to fair value
of an assumed one-time change in interest rates across all maturities. Fair
values were estimated based on market prices, when available, or dealer quotes.
A change in interest rates on short-term debt is assumed to impact earnings and
cash flow but not fair value because of the short maturities of these
instruments. A change in interest rates on long-term debt is assumed to impact
fair value but not earnings or cash flow because the interest rates are fixed.
See Note 9 of the Notes to Consolidated Financial Statements for additional
discussion of our debt portfolio. Based on our overall interest rate exposure at
September 30, 2002 and 2001, a change of 10% in interest rates would not have a
material effect on our earnings or cash flows over a one-year period. An
increase of 10% in interest rates would decrease the fair value of our long-term
debt and interest rate swaps at September 30, 2002 and 2001 by approximately $27
million and $26 million, respectively. A 10% decrease in interest rates would
increase the fair value of our long-term debt and interest rate swaps at both
September 30, 2002 and 2001 by approximately $30 million.
See Note 10 of the Notes to Consolidated Financial Statements for
additional discussion of our outstanding forward exchange contracts, currency
options and interest rate swaps at September 30, 2002.
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Liquidity and Capital Resources
Cash provided by operations, which continues to be our primary source of funds
to finance operating needs and capital expenditures, was $836 million in 2002
compared to $779 million in 2001. In fiscal 2002, net cash provided by operating
activities was reduced by a $100 million cash contribution to the U.S pension
plan. An additional cash contribution of $100 million was made to the U.S.
pension plan early in fiscal 2003. We made these contributions because of the
decline in the market value of pension assets during 2001 and 2002. The increase
in cash provided by changes in working capital reflects lower trade receivables
and inventory levels in 2002.
Capital expenditures were $260 million in 2002, compared to $371
million in the prior year. This decline reflects an overall reduction of
spending from the peak period of capital expenditures relating to the conversion
of safety-engineered devices. Medical capital spending, which totaled $182
million in 2002, included spending for safety-engineered devices and capacity
expansion for prefillable syringes in Columbus, Nebraska. Clinical Lab capital
spending, which totaled $42 million in 2002, included spending for
safety-engineered devices and various capacity expansions. Biosciences capital
spending, which totaled $23 million in 2002, included spending on various
production expansions. Funds expended outside the above segments included
amounts related to our enterprise-wide program to upgrade our business
information systems, known internally as Genesis. We expect capital expenditures
to be approximately $275 million in 2003.
Net cash used for financing activities was $314 million in 2002 as
compared to $201 million during 2001. The increase in cash used for financing
activities was due primarily to the repurchase of 6.6 million shares of our
common stock for $224 million during 2002. At September 30, 2002, 3.4 million
shares remained under a September 2001 Board of Directors' resolution that
authorized the repurchase of up to 10 million common shares. Total debt at
September 30, 2002 remained virtually unchanged from the prior year. Short-term
debt was 35% of total debt at year-end, compared to 37% at the end of 2001.
Floating rate debt was 59% of total debt at the end of 2002 and 69% of total
debt at the end of 2001. Our weighted average cost of total debt at the end of
2002 was 4%, down from 4.8% at the end of last year due to lower short-term
interest rates. Debt to capitalization at year-end improved to 32.5% from 34.1%
last year, reflecting an increase in shareholder's equity, while debt remained
virtually unchanged. Cash and equivalents were $243 million and $82 million at
September 30, 2002 and 2001, respectively. We anticipate generating excess cash
in 2003, which could be used to repay debt and repurchase additional common
shares.
26
Financial Review Becton, Dickinson and Company
In August 2001, we negotiated a $900 million syndicated credit
facility, consisting of a $450 million five-year line of credit and a $450
million 364-day line of credit. In August 2002, the 364-day line of credit was
renewed and extended for an additional 364-day period. There were no borrowings
outstanding under this syndicated credit facility at September 30, 2002. It can
be used to support our commercial paper program, under which $415 million was
outstanding at September 30, 2002, and for other general corporate purposes. In
addition, we have informal lines of credit outside the United States. At
September 30, 2002, our long-term debt was rated "A2" by Moody's and "A+" by
Standard and Poor's and our commercial paper ratings were "P-1" by Moody's and
"A-1" by Standard and Poor's. We continue to have a high degree of confidence in
our ability to refinance maturing short-term and long-term debt, as well as to
incur substantial additional debt, if required.
Return on equity was 19.9% in 2002 compared with 18.7% in 2001 or
20.5%, excluding the cumulative effect of change in accounting principle and
goodwill amortization in 2001.
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Other Matters
We believe that our core products, our international diversification and our
ability to meet the needs of the worldwide healthcare industry with
cost-effective and innovative products will continue to cushion the long-term
impact on BD of potential economic and political disruptions in the countries in
which we do business, including the effects of possible healthcare system
reforms. In 2002, inflation did not have a material impact on our overall
operations.
On April 8, 2002, we entered into a non-binding letter of intent with
AorTech International plc ("AorTech") to sell our critical care product line.
During the fourth quarter of 2002, AorTech announced that it would not proceed
with the acquisition of this product line. We will, therefore, continue to
manage and support the critical care product line and, accordingly, will not
incur a loss on the sale, as originally anticipated. As of September 30, 2002,
we have no plans to divest any other product line.
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Litigation-Other than Environmental
In 1986, we acquired a business that manufactured, among other things, latex
surgical gloves. In 1995, we divested this glove business. We, along with a
number of other manufacturers, have been named as a defendant in approximately
519 product liability lawsuits related to natural rubber latex that have been
filed in various state and Federal courts. Cases pending in Federal court are
being coordinated under the matter In re Latex Gloves Products Liability
Litigation (MDL Docket No. 1148) in Philadelphia, and analogous procedures have
been implemented in the state courts of California, Pennsylvania, New Jersey and
New York. Generally, these actions allege that medical personnel have suffered
allergic reactions ranging from skin irritation to anaphylaxis as a result of
exposure to medical gloves containing natural rubber latex. Since the inception
of this litigation, 227 of these cases have been closed with no liability to BD
(166 of which were closed with prejudice), and 14 cases have been settled for an
aggregate de minimis amount. We are vigorously defending these remaining
lawsuits.
We, along with another manufacturer and several medical product
distributors, are named as a defendant in six product liability lawsuits
relating to healthcare workers who allegedly sustained accidental needlesticks,
but have not become infected with any disease. We had previously been named as a
defendant in five similar suits relating to healthcare workers who allegedly
sustained accidental needlesticks, each of which has either been dismissed with
prejudice or voluntarily withdrawn. Regarding the six pending suits:
o In Texas, Usrey vs. Becton Dickinson et al., the Court of Appeals for the
Second District of Texas filed an Opinion on August 16, 2001, reversing the
trial court's certification of a class, and remanding the case to the trial
court for further proceedings consistent with that opinion. Plaintiffs
petitioned the appellate court for rehearing, which the Court of Appeals
denied on October 25, 2001.
o In Ohio, Grant vs. Becton Dickinson et al. (Case No. 98CVB075616, Franklin
County Court), which was filed on July 22, 1998, the court issued a
decision on July 17, 2002, certifying a class. We have filed an appeal of
the court's ruling with the Ohio Court of Appeals for the 10th Appellate
Judicial District.
o In Illinois, McCaster vs. Becton Dickinson et al. (Case No. 98L09478, Cook
County Circuit Court), which was filed on August 13, 1998, the appeals
court issued a decision on March 6, 2002, denying plaintiff's petition for
review of the trial court's January 11, 2002 decision to deny class
certification. On July 30, 2002, the plaintiff filed a motion with the
trial court to reopen the issue of certification based on the Ohio decision
in the Grant case. On November 22, 2002, the court issued an order denying
plaintiff's renewed motion for class certification.
o In New York, Oklahoma and South Carolina, cases have been filed on behalf
of an unspecified number of healthcare workers seeking class action
certification under the laws of these states. Generally, these remaining
actions allege that healthcare workers have sustained needlesticks using
hollow-bore needle devices manufactured by BD and, as a result, require
medical testing, counseling and/or treatment. Several actions additionally
allege that the healthcare workers have sustained mental anguish.
Plaintiffs seek money damages in all of these actions, which are pending in
state court in Oklahoma, under the caption Palmer vs. Becton Dickinson et
al. (Case No. CJ-98-685, Sequoyah County District Court), filed on October
27, 1998; in state court in South Carolina, under the caption Bales vs.
Becton Dickinson et al. (Case No. 98-CP-40-4343, Richland County Court of
Common Pleas), filed on November 25, 1998; and in Federal court in New
York, under the caption Benner vs. Becton Dickinson et al. (Case No. 99Civ
4798[WHP]), filed on June 1, 1999.
We continue to oppose class action certification in these cases and
will continue vigorously to defend these lawsuits, including pursuing all
appropriate rights of appeal.
27
Financial Review Becton, Dickinson and Company
BD has insurance policies in place, and believes that a substantial
portion of the potential liability, if any, in the latex and class action
matters would be covered by insurance. In order to protect our rights to
additional coverage, we filed an action for declaratory judgment under the
caption Becton Dickinson and Company vs. Adriatic Insurance Company et al.
(Docket No. MID-L-3649-99MT, Middlesex County Superior Court) in New Jersey
state court. We have withdrawn this action, with the right to refile, so that
settlement discussions with the insurance companies may proceed. We have
established reserves to cover reasonably anticipated defense costs in all
product liability lawsuits, including the needlestick class action and latex
matters.
On January 18, 2002, Retractable Technologies, Inc. ("plaintiff") filed
a second amended complaint against BD, another manufacturer, and two group
purchasing organizations ("GPOs") under the caption Retractable Technologies,
Inc. vs. Becton Dickinson and Company, et al. (Civil Action No. 501 CV 036,
United States District Court, Eastern District of Texas). Plaintiff alleges that
BD and other defendants conspired to exclude it from the market and to maintain
BD's market share by entering into long-term contracts in violation of state and
Federal antitrust laws. Plaintiff also has asserted claims for business
disparagement, common law conspiracy, and tortious interference with business
relationships. Plaintiff seeks money damages in an as yet undisclosed amount. On
February 22, 2002, BD filed a motion to dismiss the second amended complaint. On
August 2, 2002, the court issued a Memorandum Opinion and Order denying that
motion. Discovery is proceeding, and a trial date has been set for April 8,
2003. We continue to vigorously defend this matter.
We also are involved both as a plaintiff and a defendant in other legal
proceedings and claims that arise in the ordinary course of business.
We currently are engaged in discovery or are otherwise in the early
stages with respect to certain of the litigation to which we are a party, and
therefore, it is difficult to predict the outcome of such litigation. In
addition, given the uncertain nature of litigation generally and of the current
litigation environment, it is difficult to predict the outcome of any litigation
regardless of its stage. A number of the cases pending against BD present
complex factual and legal issues and are subject to a number of variables,
including, but not limited to, the facts and circumstances of each particular
case, the jurisdiction in which each suit is brought, and differences in
applicable law. As a result, we are not able to estimate the amount or range of
loss that could result from an unfavorable outcome of such matters. While we
believe that the claims against BD are without merit and, upon resolution,
should not have a material adverse effect on BD, in view of the uncertainties
discussed above, we could incur charges in excess of currently established
reserves and, to the extent available, excess liability insurance. Accordingly,
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 net cash flows in the period or periods in which
they are recorded or paid. We continue to believe that we have a number of valid
defenses to each of the suits pending against BD and are engaged in a vigorous
defense of each of these matters.
- --------------------------------------------------------------------------------
Environmental Matters
We believe that our operations comply in all material respects with applicable
laws and regulations. We are a party to a number of Federal proceedings in the
United States brought under the Comprehensive Environment Response, Compensation
and Liability Act, also known as "Superfund," and similar state laws. For all
sites, there are other potentially responsible parties that may be jointly or
severally liable to pay all cleanup costs. We accrue costs for estimated
environmental liabilities based upon our best estimate within the range of
probable losses, without considering possible third-party recoveries. While we
believe that, upon resolution, the environmental claims against BD should not
have a material adverse effect on BD, we could incur charges in excess of
presently established reserves and, to the extent available, excess liability
insurance. Accordingly, 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 net cash flows in the period
or periods in which they are recorded or paid.
- --------------------------------------------------------------------------------
2001 Compared With 2000
Worldwide revenues in 2001 were $3.7 billion, an increase of 4% over 2000.
Unfavorable foreign currency translation impacted revenue growth by 3%.
Underlying revenue growth of 7%, which excludes the effects of foreign currency
translation, resulted primarily from volume increases in all segments.
Medical revenues in 2001 increased 2% over 2000 to $2.0 billion.
Excluding unfavorable foreign currency translation of an estimated 4%,
underlying revenue growth was 6%. The primary growth drivers were the conversion
to safety-engineered devices, which contributed approximately 4% to the
underlying revenue growth, and prefillable syringes and other related devices,
which contributed approximately 2%. Medical revenue growth also benefited from a
favorable comparison with 2000, which reflected the impact of the discontinuance
of U.S. medical surgical distributor incentive programs in that year. In
addition, revenue growth was offset by a $28 million decline in sales of
consumer healthcare products compared with 2000, primarily as a result of our
beginning to redirect promotional efforts in the United States toward branded
syringe sales at the retail level.
Clinical Lab revenues in 2001 rose 5% over 2000 to $1.2 billion.
Excluding unfavorable foreign currency translation of an estimated 3%,
underlying revenue growth was 8%. The conversion to safety-engineered products
in the United States was the primary growth driver, contributing approximately
3% to underlying revenue growth. In addition, increased worldwide sales of the
molecular diagnostic platform, the BD ProbeTecET System, contributed 1% to
underlying revenue growth. Clinical Lab revenue growth also benefited from a
favorable comparison with 2000, which reflected the impact of the discontinuance
of U.S. distributor incentive programs in that year.
28
Financial Review Becton, Dickinson and Company
Biosciences revenues in 2001 increased 7% over 2000 to $590 million.
Excluding unfavorable foreign currency translation of an estimated 4%,
underlying revenue growth was 11%. Such growth was led by sales of
immunocytometry products, particularly the BD FACS brand flow cytometry systems,
which contributed 5% of the underlying revenue growth. In addition, sales of
immunology/cell biology and molecular biology reagents contributed 4% of the
underlying revenue growth. We believe that the events of September 11 adversely
affected fourth quarter 2001 revenues by as much as $5 million due to
disruptions to air shipments and research and business activities at several
private and government sector customers.
Special charges of $58 million were recorded in 2000. These charges
included $32 million relating to severance costs and $6 million of impaired
assets and other exit costs associated with a worldwide organizational
restructuring plan to align our existing infrastructure with our projected
growth programs. The annual savings from the reduction in salaries and wages
expense were estimated to be $30 million. As anticipated, these savings,
beginning in 2001, offset incremental costs relating to programs, such as
advanced protection technologies, blood glucose monitoring, molecular oncology
and Genesis. Special charges in 2000 also included $20 million for estimated
litigation defense costs associated with our divested latex gloves business. See
"Litigation-Other than Environmental" section above for additional discussion.
We also recorded other charges of $13 million in cost of products sold in 2000
relating to the recall of certain manufacturing lots of the BD Insyte Autoguard
Shielded IV catheter. These charges consisted primarily of costs associated with
product returns, disposal of the affected product and other direct recall costs.
In 1998, we recorded special charges of $91 million, primarily associated with
the restructuring of certain manufacturing operations and the write-down of
impaired assets. For the 1998 restructuring plan, the estimated annual benefits
of $4 million related to reduced manufacturing costs and tax savings associated
with the move of a surgical blade plant are expected to be realized in 2003.
Beginning in 1999, we realized a reduction in amortization expense of $5
million, resulting from the write-down of certain assets, which offset
incremental costs associated with Genesis. For additional discussion of these
charges, see Note 5 of the Notes to Consolidated Financial Statements.
Gross profit margin was 48.9% in 2001. Excluding the unfavorable impact
of the previously discussed other charges in 2000, gross profit margin would
have been 49.3% in 2000. Gross profit margin in 2001 reflects the impact of
lower sales of consumer healthcare products and unfavorable foreign exchange,
offset largely by the higher gross margin from our safety-engineered products.
Selling and administrative expense of $983 million in 2001 was 26.2% of
revenues, compared to $974 million in 2000, or 26.9% of revenues. Incremental
spending for growth initiatives was offset, in part, by favorable foreign
currency translation and savings associated with the 2000 worldwide
organizational restructuring plan.
Investment in research and development in 2001 was $212 million, or
5.7% of revenues. Research and development expense in 2000 was $219 million, or
6% of revenues, excluding an in-process research and development charge of $5
million. This charge represented the fair value of certain acquired research and
development projects in the area of cancer diagnostics, which were determined
not to have reached technological feasibility and which do not have alternative
future uses. Incremental spending was primarily in the Biosciences segment and
in key initiatives, including blood glucose monitoring. Investment in research
and development in 2001 reflects lower spending than in 2000, which included
clinical trial costs for the BD Phoenix instrument platform and costs relating
to the transdermal business unit that was divested in the first quarter of
2001.
Operating margin in 2001 was 17% of revenues. Excluding special and
other charges and purchased in-process research and development charges in 2000,
operating margin would have been 16.3% in 2000. The increase in operating margin
reflects the revenue growth, along with the favorable effect of continued
control over costs.
Net interest expense of $55 million in 2001 was $19 million lower than
in 2000, primarily due to lower debt levels and lower short-term interest rates.
Other income, net in 2000 of $79 million included gains on investments
of $73 million relating to the sale of two equity investments, which are
described more fully in Note 8 of the Notes to Consolidated Financial
Statements. Other income, net in 2000 also included the favorable effect of
legal settlements and a gain on an investment hedge that more than offset
foreign exchange losses and net losses relating to assets held for sale.
The effective tax rate in 2001 was 24% compared to 24.4% in 2000,
reflecting a favorable mix in income among tax jurisdictions.
Net income and diluted earnings per share before the cumulative effect
of accounting change in 2001 were $438 million, or $1.63, respectively, compared
with $393 million, or $1.49 in 2000. Earnings per share in 2000 would have
remained about the same, excluding special and other charges, purchased
in-process research and development charges, investment gains and a favorable
tax benefit from the conclusion of a number of tax examinations in 2000.
As discussed above, we adopted SAB 101, effective October 1, 2000 and
recorded a cumulative effect of change in accounting principle of $37 million,
net of income tax benefit of $25 million. See Note 2 of the Notes to
Consolidated Financial Statements for additional discussion.
Net income in 2001 was $402 million, or $1.49 per share, after
reflecting the after-tax cumulative effect of accounting change of $.14 per
share.
29
Financial Review Becton, Dickinson and Company
Capital expenditures were $371 million in 2001, compared to $376
million in 2000, reflecting continued spending for safety-engineered devices.
Medical, Clinical Lab and Biosciences capital spending totaled $266 million, $62
million and $24 million, respectively, in 2001. Funds expended outside the above
segments included amounts related to Genesis.
Net cash used for financing activities was $201 million in 2001 as
compared to $219 million during 2000. During 2001, total debt decreased $180
million, primarily as a result of increased funds from operations that were used
to pay down short-term debt. Short-term debt was 37% of total debt at year end,
compared to 45% at the end of 2000. Our weighted average cost of total debt at
the end of 2001 was 4.8%, down from 7.0% at the end of 2000 due to the reduction
in interest rates of short-term borrowings and the impact of interest rate swaps
entered into in 2001.
Return on equity was 18.7% in 2001, or 20.3% excluding the 2001
cumulative effect of change in accounting principle, compared with 21.1% in
2000.
- --------------------------------------------------------------------------------
Future Impact of Currently Known Trends
Pension Plan Assets and Assumptions-We have experienced a reduction in the
market value of assets held by our U.S. pension plan primarily as a result of
the decline in the U.S. equity markets. Our pension plan assets also were
reduced by normally scheduled benefit payments to plan participants. As
previously discussed, because of these declines, we made a $100 million funding
contribution to the U.S. pension plan early in fiscal 2003, in addition to the
$100 million contribution made in fiscal 2002. The market value decline is
expected to negatively impact pension expense in 2003. In addition, based on an
annual internal study of actuarial assumptions, the expected long-term rate of
return on plan assets was reduced to 8.00% from 9.75%, the discount rate was
reduced to 6.75% from 7.50% and the salary rate was reduced to 4% from 4.25%. As
a result of these developments, the 2003 net periodic benefit cost for the U.S.
pension plan is anticipated to be approximately $24 million higher than in 2002.
Pending Adoption of New Accounting Standards-The Financial Accounting Standards
Board (FASB) issued, in August 2001, SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement requires that one
accounting model be used for long-lived assets to be disposed of by sale and it
broadens the presentation of discontinued operations to include more disposal
transactions.The provisions relating to long-lived assets to be disposed of by
sale or otherwise are effective for disposal activities initiated by a
commitment to a plan after the effective date of the Statement. We have adopted
the provisions of this Statement effective October 1, 2002, and do not expect
that the Statement will have a material impact on our consolidated financial
position or results of operations in 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Previous guidance had required that liabilities
for exit costs be recognized at the date of an entity's commitment to an exit
plan. We are required to adopt the provisions of this Statement for any exit or
disposal activities that are initiated after December 31, 2002, and do not
expect that this Statement will have a material impact on our consolidated
financial position or results of operations in 2003.
- --------------------------------------------------------------------------------
Critical Accounting Policies
The Financial Review discusses our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as the disclosure of contingent
assets and liabilities at the date of the financial statements. Some of those
judgments can be subjective and complex and consequently, actual results could
differ from those estimates. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. For any given estimate or assumption
made by management, there may also be other estimates or assumptions that are
reasonable. However, we believe that given the current facts and circumstances,
it is unlikely that applying any such alternative judgments would materially
impact the accompanying financial statements. Management believes the following
critical accounting policies affect the more significant judgments and estimates
used in the preparation of BD's consolidated financial statements.
Revenue Recognition-We recognize revenue for instruments sold from the
Biosciences segment upon installation at the customer's site, due to the fact
that a substantive installation effort is required and only we can perform the
service. We also defer revenue recognition related to branded insulin syringe
products that are sold to distributors in the U.S. consumer trade channel. These
products were predominantly sold under incentive programs and these distributors
have implied rights of return on unsold merchandise held by them. We recognize
revenue on these products upon the sell-through of the respective product from
the distribution channel partner to its end customer. In determining the amount
of sales to record each quarter, we rely on independent sales and inventory data
provided to us from distribution channel partners. Substantially all other
revenue is recognized when products are shipped to customers.
30
Financial Review Becton, Dickinson and Company
Investments-We hold minority interests in companies having operations or
technology in areas within or adjacent to BD's strategic focus. Some of these
companies are publicly traded for which share prices are available, and some are
non-publicly traded whose value is difficult to determine. We write down an
investment when management believes an investment has experienced a decline in
value that is other than temporary. Future adverse changes in market conditions
or poor operating results of the underlying investments could result in an
inability to recover the carrying value of the investments, thereby possibly
requiring impairment charges in the future.
Restructuring-During the current year, we recorded reserves in connection with
our Medical manufacturing restructuring program. These reserves include
estimates pertaining to employee separation costs. In fiscal years 2000 and
1998, we also recorded reserves related to restructuring programs. These
reserves included estimates pertaining to employee separation costs, as well as
litigation defense costs associated with our latex glove business, which was
divested in 1995. See "Litigation-Other than Environmental" section above and
"Contingencies" section below for further discussion. Although we do not
anticipate significant changes, the actual costs may differ from these
estimates. As discussed earlier, the accounting for certain restructuring costs
will change upon the future adoption of SFAS No. 146; however, it is not
expected to impact charges already recorded.
Contingencies-We are involved, both as a plaintiff and a defendant, in various
legal proceedings that arise in the ordinary course of business, including,
without limitation, product liability and environmental matters, as further
discussed in Note 13 of the Notes to Consolidated Financial Statements. We
assess the likelihood of any adverse judgments or outcomes to these matters as
well as potential ranges of probable losses. A determination of the amount of
reserves, if any, for these contingencies is made after careful analysis of each
individual issue and, when appropriate, is developed after consultation with
outside counsel. The reserves may change in the future due to new developments
in each matter or changes in our strategy in dealing with these matters.
Benefit Plans-We have significant pension and post-retirement benefit costs that
are developed from actuarial valuations. Inherent in these valuations are key
assumptions including discount rates and expected return on plan assets. We
consider current market conditions, including changes in interest rates and
market returns, in selecting these assumptions. Changes in the related pension
and post-retirement benefit costs may occur in the future due to changes in the
assumptions. See additional discussion above concerning our U.S. pension plan.
Stock-Based Compensation-As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," we currently account for stock options by the
disclosure-only provision of this Statement, and therefore we use the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for accounting for stock-based
compensation. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of our stock at the date of the
option grant over the exercise price. We have not incurred any such compensation
expense during the last three fiscal years.
If we had elected to account for our stock-based compensation awards
issued subsequent to October 1, 1995 using the fair value method, the estimated
fair value of awards would have been charged against income on a straight-line
basis over the vesting period. For the year ended September 30, 2002, our net
income and diluted earnings per share would have been lower by an estimated $35
million and 13 cents, respectively, under the fair value method. This effect may
not be representative of the pro forma effect on net income in future years.
- --------------------------------------------------------------------------------
Cautionary Statement Pursuant to Private Securities
Litigation Reform Act of 1995-"Safe Harbor" for
Forward-Looking Statements
The 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 in
publicly released materials, both written and oral, including statements
contained in this report and filings with the Securities and Exchange Commission
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 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.
31
Financial Review Becton, Dickinson and Company
The following are some important factors that could cause our actual
results to differ from our expectations in any forward-looking statements:
o 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.
o Competitive product and pricing pressures and our ability to gain or
maintain market share in the global market as a result of actions by
competitors, including technological advances achieved and patents attained
by competitors as patents on our products expire. While we believe our
opportunities for sustained, profitable growth are considerable, actions of
competitors could impact our earnings, share of sales and volume growth.
o Changes in domestic and foreign healthcare resulting in 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.
o 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.
o Fluctuations in the cost and availability of raw materials and the ability
to maintain favorable supplier arrangements and relationships.
o 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.
o 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, and 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.
o Significant litigation adverse to BD, including product liability claims,
patent infringement claims, and antitrust claims, as well as other risks
and uncertainties detailed from time to time in our Securities and Exchange
Commission filings.
o The effects, if any, of adverse media exposure or other publicity regarding
allegations made or related to litigation pending against BD.
o 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.
o 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.
o Our ability to effect infrastructure enhancements and incorporate new
systems technologies into our operations.
o Product efficacy or safety concerns resulting in product recalls,
regulatory action on the part of the Food and Drug Administration (or
foreign counterparts) or declining sales.
o Economic and political conditions in international markets, including civil
unrest, governmental changes and restrictions on the ability to transfer
capital across borders.
o 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.
o The impact of business combinations, including acquisitions and
divestitures, both internally for BD and externally, in the health-care
industry.
o Issuance of new or revised accounting standards by the American Institute
of Certified Public Accountants, the Financial Accounting Standards Board
or the Securities and Exchange Commission.
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.
32
Becton, Dickinson and Company
Report of Management
The following consolidated financial statements have been prepared by management
in conformity with accounting principles generally accepted in the United States
and include, where required, amounts based on the best estimates and judgments
of management. The integrity and objectivity of data in the financial statements
and elsewhere in this Annual Report are the responsibility of management.
In fulfilling its responsibilities for the integrity of the data
presented and to safeguard the Company's assets, management employs a system of
internal accounting controls designed to provide reasonable assurance, at
appropriate cost, that the Company's assets are protected and that transactions
are appropriately authorized, recorded and summarized. This system of control is
supported by the selection of qualified personnel, by organizational assignments
that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of written policies and procedures.
This control structure is further reinforced by a program of internal audits,
including a policy that requires responsive action by management.
The consolidated financial statements have been audited by Ernst &
Young LLP, independent auditors, whose report follows. Their audits were
conducted in accordance with auditing standards generally accepted in the United
States and included a review and evaluation of the Company's internal accounting
controls to the extent they considered necessary for the purpose of expressing
an opinion on the consolidated financial statements. This, together with other
audit procedures and tests, was sufficient to provide reasonable assurance as to
the fairness of the information included in the consolidated financial
statements and to support their opinion thereon.
The Board of Directors monitors the internal control system, including
internal accounting controls, through its Audit Committee which consists of five
outside Directors. The Audit Committee meets periodically with the independent
auditors, internal auditors and financial management to review the work of each
and to satisfy itself that they are properly discharging their responsibilities.
The independent auditors and internal auditors have full and free access to the
Audit Committee and meet with its members, with and without financial management
present, to discuss the scope and results of their audits including internal
control, auditing and financial reporting matters.
Edward J. Ludwig John R. Considine William A. Tozzi
Edward J. Ludwig John R. Considine William A. Tozzi
Chairman, President Executive Vice President Vice President
and Chief Executive Officer and Chief Financial Officer and Controller
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
Becton, Dickinson and Company
We have audited the accompanying consolidated balance sheets of Becton,
Dickinson and Company as of September 30, 2002 and 2001, and the related
consolidated statements of income, comprehensive income, and cash flows for each
of the three years in the period ended September 30, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Becton,
Dickinson and Company at September 30, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 2 to the financial statements, in fiscal year
2001 the Company changed its method of accounting for revenue recognition in
accordance with guidance provided in Securities and Exchange Commission Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
Ernst & Young LLP
New York, New York
November 6, 2002
33
Becton, Dickinson and Company
Financial Statements
Consolidated Statements of Income
Years Ended September 30
Thousands of dollars, except per-share amounts
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Operations
Revenues $4,033,069 $ 3,746,182 $ 3,618,334
Cost of products sold 2,083,669 1,913,292 1,848,332
Selling and administrative expense 1,032,043 983,296 973,902
Research and development expense 220,186 211,834 223,782
Special charges 21,508 -- 57,514
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Costs and Expenses 3,357,406 3,108,422 3,103,530
- ---------------------------------------------------------------------------------------------------------------------
Operating Income 675,663 637,760 514,804
Interest expense, net (33,304) (55,414) (74,197)
Other (expense) income, net (13,770) (5,596) 79,327
- ---------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 628,589 576,750 519,934
Income tax provision 148,607 138,348 127,037
- ---------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Change in Accounting Principle 479,982 438,402 392,897
Cumulative effect of change in accounting principle, net of tax -- (36,750) --
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 479,982 $ 401,652 $ 392,897
=====================================================================================================================
Basic Earnings Per Share
Before Cumulative Effect of Change in Accounting Principle $ 1.85 $ 1.69 $ 1.54
Cumulative effect of change in accounting principle, net of tax -- (0.14) --
- ---------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.85 $ 1.55 $ 1.54
=====================================================================================================================
Diluted Earnings Per Share
Before Cumulative Effect of Change in Accounting Principle $ 1.79 $ 1.63 $ 1.49
Cumulative effect of change in accounting principle, net of tax -- (0.14) --
- ---------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 1.79 $ 1.49 $ 1.49
=====================================================================================================================
See Notes to Consolidated Financial Statements
34
Statements Becton, Dickinson and Company
Consolidated Statements of Comprehensive Income
Years Ended September 30
Thousands of dollars
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $479,982 $401,652 $ 392,897
- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss, Net of Tax
Foreign currency translation adjustments 16,472 (38,704) (161,304)
Minimum pension liability adjustment (77,661) -- --
Unrealized gains (losses) on investments, net of amounts recognized 4,005 (3,616) 2,558
Unrealized losses on cash flow hedges, net of amounts realized (380) (4,013) --
- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss (57,564) (46,333) (158,746)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $422,418 $355,319 $ 234,151
===========================================================================================================================
See Notes to Consolidated Financial Statements
35
Statements Becton, Dickinson and Company
Consolidated Balance Sheets
September 30
Thousands of dollars, except per-share amounts and numbers of shares
2002 2001
- ---------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and equivalents $ 243,115 $ 82,129
Short-term investments 1,850 4,571
Trade receivables, net 745,998 768,047
Inventories 697,696 707,744
Prepaid expenses, deferred taxes and other 240,048 200,451
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 1,928,707 1,762,942
Property, Plant and Equipment, Net 1,765,730 1,716,023
Goodwill, Net 492,327 431,452
Core and Developed Technology, Net 283,166 304,688
Other Intangibles, Net 126,758 164,643
Capitalized Software, Net 284,109 231,123
Other 159,663 191,416
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 5,040,460 $ 4,802,287
===============================================================================================================
Liabilities
Current Liabilities
Short-term debt $ 434,642 $ 454,012
Accounts payable 224,645 205,046
Accrued expenses 310,238 352,589
Salaries, wages and related items 225,694 202,900
Income taxes 57,234 50,129
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,252,453 1,264,676
Long-Term Debt 802,967 782,996
Long-Term Employee Benefit Obligations 391,607 335,731
Deferred Income Taxes and Other 105,459 90,117
Shareholders' Equity
ESOP convertible preferred stock-$1 par value:
authorized-1,016,949 shares; issued and outstanding-639,262 shares
in 2002 and 686,922 shares in 2001 37,945 40,528
Preferred stock, series A-$1 par value: authorized-500,000 shares; none issued -- --
Common stock-$1 par value: authorized-640,000,000 shares;
issued-332,662,160 shares in 2002 and 2001 332,662 332,662
Capital in excess of par value 185,122 148,690
Retained earnings 3,514,465 3,137,304
Unearned ESOP compensation (7,847) (12,001)
Deferred compensation 8,496 7,096
Common shares in treasury-at cost-77,132,248 shares in 2002
and 73,425,478 shares in 2001 (1,137,583) (937,790)
Accumulated other comprehensive loss (445,286) (387,722)
- ---------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,487,974 2,328,767
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 5,040,460 $ 4,802,287
===============================================================================================================
See Notes to Consolidated Financial Statements
36
Statements Becton, Dickinson and Company
Consolidated Statements of Cash Flows
Years Ended September 30
Thousands of dollars
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 479,982 $ 401,652 $ 392,897
Adjustments to net income to derive net cash
provided by operating activities:
Depreciation and amortization 304,865 305,700 288,255
Pension contribution (100,000) -- --
Cumulative effect of change in accounting principle, net of tax -- 36,750 --
Non-cash special charges 6,526 -- 4,543
Deferred income taxes 57,202 37,400 37,246
Losses (gains) on investments, net 18,576 -- (76,213)
Change in operating assets (excludes impact of acquisitions):
Trade receivables 32,585 (34,063) 11,688
Inventories 21,112 (32,290) (64,663)
Prepaid expenses, deferred taxes and other (222) (18,652) (12,106)
Accounts payable, income taxes and other liabilities (1,241) 67,519 44,854
Other, net 16,648 14,629 (11,008)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 836,033 778,645 615,493
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (259,703) (370,754) (376,372)
Acquisitions of businesses, net of cash acquired -- (30,953) (21,272)
Proceeds (purchases) of short-term investments, net 3,054 (530) 1,299
Proceeds from sales of long-term investments 4,598 7,632 101,751
Purchases of long-term investments (3,397) (24,938) (9,273)
Capitalized software (81,376) (72,231) (50,397)
Other, net (24,297) (50,155) (49,135)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (361,121) (541,929) (403,399)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities
Change in short-term debt (18,819) (82,600) (98,496)
Proceeds of long-term debt 4,526 2,987 948
Payment of long-term debt (11,096) (103,104) (60,923)
Repurchase of common stock (223,961) -- --
Issuance of common stock 38,069 82,925 34,724
Dividends paid (102,459) (101,329) (95,749)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash (Used for) Provided by Financing Activities (313,740) (201,121) (219,496)
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and equivalents (186) (2,662) (3,334)
- --------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Equivalents 160,986 32,933 (10,736)
Opening Cash and Equivalents 82,129 49,196 59,932
- --------------------------------------------------------------------------------------------------------------------------
Closing Cash and Equivalents $ 243,115 $ 82,129 $ 49,196
===========================================================================================================================
See Notes to Consolidated Financial Statements
37
Becton, Dickinson and Company
Notes to Consolidated
Financial Statements
Thousands of dollars, except per-share amounts and numbers of shares
Index
Note Subject Page
1 Summary of Significant Accounting Policies 38
2 Accounting Changes 40
3 Employee Stock Ownership Plan/
Savings Incentive Plan 41
4 Benefit Plans 42
5 Special and Other Charges 43
6 Acquisitions 45
7 Income Taxes 45
8 Supplemental Financial Information 46
9 Debt 47
10 Financial Instruments 47
11 Shareholders' Equity 49
12 Comprehensive Income 50
13 Commitments and Contingencies 50
14 Stock Plans 52
15 Earnings Per Share 54
16 Segment Data 54
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Becton, Dickinson
and Company and its majority-owned subsidiaries ("Company") after the
elimination of inter-company transactions.
Reclassifications
The Company has reclassified certain prior year information to conform with the
current year presentation.
Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which approximates
market. The Company considers all highly liquid investments with a maturity of
90 days or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The Company uses the
last-in, first-out ("LIFO") method of determining cost for substantially all
inventories in the United States. All other inventories are accounted for using
the first-in, first-out ("FIFO") method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are principally provided on the
straight-line basis over estimated useful lives, which range from 20 to 45 years
for buildings, four to 10 years for machinery and equipment and three to 20
years for leasehold improvements. Depreciation expense was $201,558, $179,411,
and $168,846 in fiscal 2002, 2001, and 2000, respectively.
Intangibles
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective
October 1, 2001, as discussed in Note 2. As a result, goodwill is no longer
amortized, but instead is reviewed annually for impairment in accordance with
the provisions of the Statement. Core and developed technology continues to be
amortized over periods ranging from 15 to 20 years, using the straight-line
method. Both goodwill and core and developed technology arise from acquisitions.
Other intangibles with finite useful lives, which include patents, are
amortized over periods principally ranging from three to 40 years, using the
straight-line method. These intangibles are periodically reviewed to assess
recoverability from future operations using undiscounted cash flows. To the
extent carrying values exceed fair values, an impairment loss is recognized in
operating results. Other intangibles also include certain trademarks that are
considered to have indefinite lives, as they are expected to generate cash flows
indefinitely. Therefore, in accordance with the provisions of SFAS No. 142,
these trademarks are no longer amortized but are reviewed annually for
impairment.
38
Notes Becton, Dickinson and Company
Capitalized Software
Capitalized software primarily represents costs associated with our
enterprise-wide program to upgrade our business information systems, known
internally as "Genesis". The costs associated with the Genesis program will be
fully amortized by 2009, with amortization expense being primarily reported as
Selling and administrative expense.
Revenue Recognition
Revenue is recognized on the sale of instruments in the Biosciences segment upon
completion of installation at the customer's site. The Company also defers
revenue recognition related to branded insulin syringe products sold to
distributors in the U.S. consumer trade channel. Revenue is recognized for these
sales upon the sell-through of such product from the distribution channel
partner to the end customer. See Note 2 for additional discussion.
Substantially all other revenue is recognized when products are shipped to
customers.
Shipping and Handling Costs
Shipping and handling costs are included in Selling and administrative expense.
Shipping expense was $174,942, $164,401, and $148,571 in fiscal 2002, 2001, and
2000, respectively.
Warranty
Estimated future warranty obligations related to applicable products are
provided by charges to operations in the period in which the related revenue is
recognized.
Income Taxes
United States income taxes are not provided on substantially all undistributed
earnings of foreign subsidiaries since the subsidiaries reinvest such earnings
or remit them to the Company without tax consequence. Income taxes are provided
and tax credits are recognized based on tax laws enacted at the dates of the
financial statements.
Earnings Per Share
Basic earnings per share are computed based on the weighted average number of
common shares outstanding. Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions. These estimates or assumptions affect reported assets,
liabilities, revenues and expenses as reflected in the financial statements.
Actual results could differ from these estimates.
Derivative Financial Instruments
In accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended, all derivatives are recorded in the balance
sheet at fair value and changes in fair value are recognized currently in
earnings unless specific hedge accounting criteria are met. See Note 10 for
additional discussion on financial instruments.
Derivative financial instruments are utilized by the Company in the
management of its foreign currency and interest rate exposures. The Company
hedges its foreign currency exposures by entering into offsetting forward
exchange contracts and currency options, when it deems appropriate. The Company
also occasionally enters into interest rate swaps, interest rate caps, interest
rate collars, and forward rate agreements in order to reduce the impact of
fluctuating interest rates on its short-term debt and investments. In connection
with issuances of long-term debt, the Company may also enter into forward rate
agreements in order to protect itself from fluctuating interest rates during the
period in which the sale of the debt is being arranged. The Company also
occasionally enters into forward contracts in order to reduce the impact of
fluctuating market values on its available-for-sale securities as defined by
SFAS No. 115. The Company does not use derivative financial instruments for
trading or speculative purposes.
Any deferred gains or losses associated with derivative instruments,
which on infrequent occasions may be terminated prior to maturity, are
recognized in income in the period in which the underlying hedged transaction
is recognized. In the event a designated hedged item is sold, extinguished or
matures prior to the termination of the related derivative instrument, such
instrument would be closed and the resultant gain or loss would be recognized
in income.
Stock-Based Compensation
Under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for stock-based employee compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the exercise price.
39
Notes Becton, Dickinson and Company
2. Accounting Changes
Goodwill and Other Intangible Assets
Effective October 1, 2001, the Company adopted the provisions of SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141, among other things, changes the criteria for
recognizing intangible assets apart from goodwill. SFAS No. 142 stipulates that
goodwill and indefinite-lived intangible assets will no longer be amortized, but
instead will be periodically reviewed for impairment. Diluted earnings per share
for fiscal 2002 reflect an approximate ten-cent benefit from the adoption of
SFAS No. 142.
Upon adoption of these Statements, the Company reclassified
approximately $28,500 of assets from Other Intangibles, Net to Goodwill, Net,
primarily related to assembled workforce. These assets did not meet the criteria
for recognition apart from goodwill under SFAS No. 141. Of this amount,
approximately $18,400 related to the Biosciences segment and approximately
$10,100 related to the Medical segment. The Company also ceased amortizing
certain trademarks that were deemed to have indefinite lives as they are
expected to generate cash flows indefinitely. The following table reconciles
reported net income to that which would have been reported if the current method
of accounting for goodwill and indefinite-lived asset amortization was used for
the years ended September 30, 2001, and 2000:
2002 2001 2000
- ------------------------------------------------------------------------
Reported Net Income $479,982 $401,652 $392,897
Goodwill Amortization -- 25,943 25,590
Amortization of Indefinite-Lived
Intangible Assets -- 1,307 1,311
--------------------------------------
Adjusted Net Income $479,982 $428,902 $419,798
======================================
Basic Earnings Per Share $ 1.85 $ 1.55 $ 1.54
Goodwill Amortization -- .10 .10
Amortization of Indefinite-Lived
Intangible Assets -- .01 .01
--------------------------------------
Adjusted Basic Earnings
Per Share $ 1.85 $ 1.66 $ 1.65
======================================
Diluted Earnings Per Share $ 1.79 $ 1.49 $ 1.49
Goodwill Amortization -- .10 .10
Amortization of Indefinite-Lived
Intangible Assets -- -- --
--------------------------------------
Adjusted Diluted Earnings
Per Share $ 1.79 $ 1.59 $ 1.59
======================================
Intangible amortization expense was $37,753 in fiscal 2002. The
estimated aggregate amortization expense for the fiscal years ending September
30, 2003 to 2007 are as follows: 2003-$37,500; 2004-$36,900; 2005-$35,200;
2006-$32,200; 2007-$32,100.
Intangible assets at September 30 consisted of:
2002 2001
- -----------------------------------------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------------------------
Amortized intangible assets
Core and Developed Technology $370,044 $ 86,878 $ 370,044 $ 65,356
Patents, Trademarks, & Other 308,202 199,065 358,604 193,961
Goodwill -- -- 594,695 163,243
-----------------------------------------------------------
Total $678,246 $285,943 $1,323,343 $422,560
===========================================================
Unamortized intangible assets
Goodwill(A) $492,327 --
Trademarks(B) 17,621 --
-----------------------------------------------------------
Total $509,948 $ --
===========================================================
(A) Net of accumulated amortization of $175,903.
(B) Net of accumulated amortization of $6,175.
On March 31, 2002, the Company completed its goodwill impairment
assessment as required by SFAS No. 142. The adoption of this aspect of SFAS No.
142 did not result in a goodwill impairment and therefore had no impact on the
results of operations or financial condition of the Company.
Revenue Recognition
Effective October 1, 2000, the Company changed its method of revenue
recognition for certain products in accordance with Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements," ("SAB 101"). As a
result, the Company recorded the following accounting changes.
40
Notes Becton, Dickinson and Company
The Company changed its accounting method for revenue recognition
related to branded insulin syringe products that are sold to distributors in the
U.S. consumer trade channel. These products were predominantly sold under
incentive programs and these distributors have implied rights of return on
unsold merchandise held by them. The Company previously recognized this revenue
upon shipment to these distributors, net of appropriate allowances for sales
returns. Effective October 1, 2000, the Company changed its method of accounting
for revenue related to these product sales to recognize such revenues upon the
sell-through of the respective product from the distribution channel partner to
the end customer. The Company believes this change in accounting principle is
the preferable method. The cumulative effect of this change in accounting method
was a charge of $52,184 or $30,789, net of taxes.
The Company also changed its accounting method for recognizing revenue
on certain instruments in the Biosciences segment. Prior to the adoption of SAB
101, the Company's accounting policy was to recognize revenue upon delivery of
instruments to customers but prior to installation at the customer's site. The
Company had routinely completed such installation services successfully in the
past, but a substantive effort is required for the installation of these
instruments and only the Company can perform the service. Therefore, effective
October 1, 2000, the Company recognizes revenues for these instruments upon
completion of installation at the customer's site. The cumulative effect of this
change in accounting method was a charge of $9,772, or $5,961 net of taxes.
The total cumulative effect of these accounting changes on prior years
resulted in an after-tax charge to income of $36,750 for the year ended
September 30, 2001. Of the $80,700 of revenues included in the cumulative effect
adjustment, $44,300 and $28,500 were included in the restated revenues for the
first and second quarters of fiscal 2001, respectively, with the remainder
substantially recognized by the end of the third quarter. The adoption of SAB
101 increased Biosciences revenues for 2001 by approximately $3,400 and
decreased Medical Systems revenues for 2001 by about $3,100. Consequently, the
adoption of SAB 101 had an immaterial effect on revenues for the year ended
September 30, 2001.
As of September 30, 2002 and 2001, the deferred profit balances
recorded as Accrued Expenses were $10,807 and $62,100, respectively.
If the accounting change were made retroactively, the unau-dited pro
forma consolidated net income, basic earnings per share, and diluted earnings
per share for the year ended September 30, 2000, would have been $385,721,
$1.52, and $1.46, respectively.
Adoption of New Accounting Standards
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement requires that one accounting
model be used for long-lived assets to be disposed of by sale and it broadens
the presentation of discontinued operations to include more disposal
transactions. The provisions relating to long-lived assets to be disposed of by
sale or otherwise are effective for disposal activities initiated by a
commitment to a plan after the effective date of the Statement. The Company will
adopt the provisions of this Statement effective October 1, 2002, and does not
expect that this Statement will have a material impact on its consolidated
financial position or results of operations in 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Previous guidance had required that liabilities
for exit costs be recognized at the date of an entity's commitment to an exit
plan. The Company is required to adopt the provisions of this Statement for any
exit or disposal activities that are initiated after December 31, 2002, and does
not expect that this Statement will have a material impact on its consolidated
financial position or results of operations in 2003.
3. Employee Stock Ownership Plan/
Savings Incentive Plan
The Company has an Employee Stock Ownership Plan ("ESOP") as part of its
voluntary defined contribution plan (Savings Incentive Plan) covering most
domestic employees. The ESOP is intended to satisfy all or part of the Company's
obligation to match 50% of employees' contributions, up to a maximum of 3% of
each participant's salary. To accomplish this, in 1990, the ESOP borrowed
$60,000 in a private debt offering and used the proceeds to buy the Company's
ESOP convertible preferred stock. Each share of preferred stock has a guaranteed
liquidation value of $59 per share and is convertible into 6.4 shares of the
Company's common stock. The preferred stock pays an annual dividend of $3.835
per share, a portion of which is used by the ESOP, together with the Company's
contributions, to repay the ESOP debt. Since the ESOP debt is guaranteed by the
Company, it is reflected on the consolidated balance sheet as short-term and
long-term debt with a related amount shown in the shareholders' equity section
as Unearned ESOP compensation.
The amount of ESOP expense recognized is equal to the cost of the
preferred shares allocated to plan participants and the ESOP interest expense
for the year, reduced by the amount of dividends paid on the preferred stock.
Selected financial data pertaining to the ESOP/Savings Incentive Plan
follows:
2002 2001 2000
- --------------------------------------------------------------------------
Total expense of the
Savings Incentive Plan $ 2,737 $2,989 $3,442
Compensation expense
(included in total expense above) $ 1,863 $1,855 $2,017
Dividends on ESOP shares used
for debt service $ 2,553 $2,721 $2,916
Number of preferred shares
allocated at September 30 476,938 457,921 441,530
==================================
The Company guarantees employees' contributions to the fixed income
fund of the Savings Incentive Plan. The amount guaranteed was $105,879 at
September 30, 2002.
41
Notes Becton, Dickinson and Company
4. 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. Postretirement benefit plans in foreign countries
are not material.
In November 2001, the Company made a $100 million cash contribution to
the U.S. pension plan. The Company made an additional $100 million cash
contribution to this plan in the first quarter of fiscal year 2003. The Company
made these contributions because of the decline in the market value of pension
assets during fiscal years 2002 and 2001.
The change in benefit obligation, change in plan assets, funded status
and amounts recognized in the consolidated balance sheets at September 30, 2002
and 2001 for these plans were as follows:
Pension Plans Other Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
Change in benefit obligation:
Benefit obligation at beginning of year $707,392 $654,588 $200,011 $185,425
Service cost 35,702 33,121 2,609 2,418
Interest cost 49,095 46,344 14,419 13,841
Plan amendments 4,220 2,503 -- (2,500)
Benefits paid (41,064) (51,660) (18,497) (16,031)
Actuarial loss 84,547 25,914 23,832 16,858
Settlement -- (4,335) -- --
Other, includes translation 13,030 917 -- --
---------------------------------------------------------
Benefit obligation at end of year $852,922 $707,392 $222,374 $200,011
=========================================================
Change in plan assets:
Fair value of plan assets at beginning of year $490,913 $592,835 $ -- $ --
Actual return on plan assets (50,215) (62,126) -- --
Employer contribution 110,325 14,697 -- --
Benefits paid (41,064) (51,660) -- --
Settlement -- (4,335) -- --
Other, includes translation 9,202 1,502 -- --
---------------------------------------------------------
Fair value of plan assets at end of year $519,161 $490,913 $ -- $ --
=========================================================
Funded status:
Unfunded benefit obligation $(333,761) $(216,479) $(222,374) $(200,011)
Unrecognized net transition obligation 1,241 1,325 -- --
Unrecognized prior service cost 2,992 (1,646) (37,919) (44,084)
Unrecognized net actuarial loss 307,067 119,662 61,904 39,495
----------------------------------------------------------
Accrued benefit cost $ (22,461) $ (97,138) $(198,389) $(204,600)
==========================================================
Amounts recognized in the consolidated balance
sheets consisted of:
Prepaid benefit cost $ 13,258 $ 17,410 $ -- $ --
Accrued benefit liability (168,907) (114,548) (198,389) (204,600)
Intangible asset 2,918 -- -- --
Accumulated other comprehensive income,
before income taxes 130,270 -- -- --
----------------------------------------------------------
Net amount recognized $ (22,461) $ (97,138) $(198,389) $(204,600)
==========================================================
Foreign pension plan assets at fair value included in the preceding
table were $134,300 and $125,568 at September 30, 2002 and 2001, respectively.
The foreign pension plan projected benefit obligations were $189,066 and
$147,283 at September 30, 2002 and 2001, respectively.
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $771,060, $613,018, and $446,908,
respectively as of September 30, 2002, and $35,257, $29,653, and $18,349,
respectively as of September 30, 2001.
42
Notes Becton, Dickinson and Company
Net pension and postretirement expense included the following
components:
Pension Plans Other Postretirement Benefits
- --------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Components of net pension and postretirement costs:
Service cost $ 35,702 $ 33,121 $ 32,743 $ 2,609 $ 2,418 $ 2,237
Interest cost 49,095 46,344 43,213 14,419 13,841 13,505
Expected return on plan assets (52,560) (58,203) (58,880) -- -- --
Amortization of prior service cost (136) (282) (1,212) (6,233) (6,017) (6,017)
Amortization of (gain) loss 3,064 (268) (659) 1,626 363 694
Amortization of net obligation 12 22 (575) -- -- --
Curtailment gain -- -- (1,528) -- -- --
Special termination benefits -- -- 143 -- -- --
------------------------------------------------------------------------------
Net pension and postretirement costs $ 35,177 $ 20,734 $ 13,245 $12,421 $10,605 $10,419
==============================================================================
Net pension expense attributable to foreign plans included in the
preceding table was $8,478, $7,189, and $8,580 in 2002, 2001, and 2000,
respectively.
The assumptions used in determining benefit obligations were as
follows:
Other
Pension Plans Postretirement Benefits
- --------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Discount rate:
U.S. plans 6.75% 7.50% 6.75% 7.50%
Foreign plans (average) 5.18% 5.74% -- --
Expected return on plan assets:(A)
U.S. plans 8.00% 9.75% -- --
Foreign plans (average) 7.15% 7.37% -- --
Rate of compensation increase:
U.S. plans 4.00% 4.25% 4.00% 4.25%
Foreign plans (average) 3.17% 3.51% -- --
(A) Used in the determination of the subsequent year's net pension expense.
At September 30, 2002, the healthcare trend rates were 10% pre- and
post-age 65, deceasing to an ultimate rate of 5% beginning in 2008. At September
30, 2001, the corresponding healthcare trend rates were 7% pre-age 65, 6%
post-age 65 and an ultimate rate of 6% beginning in 2003. A one percentage point
increase in healthcare cost trend rates in each year would increase the
accumulated postre-tirement benefit obligation as of September 30, 2002, by
$10,455 and the aggregate of the service cost and interest cost components of
2002 annual expense by $710. A one percentage point decrease in the health-care
cost trend rates in each year would decrease the accumulated postretirement
benefit obligation as of September 30, 2002, by $9,009 and the aggregate of the
2002 service cost and interest cost by $611.
The Company utilizes a service-based approach in applying the
provisions of SFAS No. 112, "Employers' Accounting For Postemployment Benefits,"
for most of its postemployment benefits. Such an approach recognizes that
actuarial gains and losses may result from experience that differs from baseline
assumptions. Postemployment benefit costs were $13,599, $15,107, and $22,364 in
2002, 2001, and 2000, respectively.
5. Special and Other Charges
The Company recorded special charges of $21,508, $57,514, and $90,945 in fiscal
years 2002, 2000, and 1998, respectively.
Fiscal Year 2002
The Company recorded special charges of $9,937 and $15,760 during the second and
third quarters of fiscal 2002, respectively, related to a manufacturing
restructuring program in the BD Medical Systems ("Medical") segment that is
aimed at optimizing manufacturing efficiencies and improving the Company's
competitiveness in the different markets in which it operates. Of these charges,
$19,171 represented exit costs, which included $18,533 related to severance
costs. This program involves the termination of 533 employees in China, France,
Germany, Ireland, Mexico, and the United States. As of September 30, 2002, 268
of the targeted employees had been severed. The Company expects these
terminations to be completed and the related accrued severance to be
substantially paid by the end of fiscal 2003. Also included in current year
special charges were asset write-downs of $6,526. Included in this amount were
asset impairments in China of $5,109 that represented the excess carrying values
over the fair values of machinery and equipment, based on discounted cash flow
estimates. The depreciation of the remaining carrying value of these assets is
being accelerated over the period remaining until the completion of the exit
plan. The remaining asset write-downs recorded in the special charge included
machinery and equipment, which were written down to zero. These assets were
taken out of service immediately after the write-down occurred and will be
scrapped.
Offsetting special charges in the third quarter of 2002 were $4,189 of
reversals of fiscal 2000 special charges. These charges primarily related to a
manufacturing restructuring that took place in
43
Notes Becton, Dickinson and Company
Europe and includes excess reserves primarily related to severance and lease
cancellation costs. The lower severance costs were due to the ability to sever
individuals at a lower cost. The lower lease cancellation cost was due to the
decision not to exit a leased facility as originally planned. These changes
primarily resulted from further analysis of our European manufacturing structure
and a modified restructuring plan approved in the third quarter of 2002. These
reversals, the majority of which related to the Medical segment, were recorded
to Special Charges, consistent with the original accounting treatment.
A summary of the 2002 special charge accrual activity follows:
Severance Restructuring
- -----------------------------------------------------------------------
2002 Special Charges $18,500 $600
Payments (5,100) --
-----------------------
Accrual Balance at September 30, 2002 $13,400 $600
=======================
Fiscal Year 2000
The Company developed a worldwide organizational restructuring plan to align its
existing infrastructure with its projected growth programs. This plan included
the elimination of open positions and employee terminations from all businesses,
functional areas and regions for the sole purpose of cost reduction. As a result
of the approval of this plan in September 2000, the Company recorded $33,000 of
exit costs, of which $31,700 related to severance costs. As discussed earlier,
the Company reversed $4,189 of these charges in the third quarter of fiscal 2002
primarily related to severance and lease cancellation costs. Of the 600
employees originally targeted for termination under this plan, approximately 15
remained to be severed as of September 30, 2002. The remaining terminations and
related accrued severance are expected to be substantially completed and paid by
the first half of 2003.
Asset impairments relating to this restructuring plan totaled $4,514
and represented the write-down to fair value less cost to sell of assets held
for sale or disposal in the Medical Systems segment. Also included in special
charges in 2000 was $20,000 for estimated litigation defense costs associated
with the Company's latex glove business, which was divested in 1995. Further
discussion of legal proceedings is included in Note 13.
A summary of the 2000 special charge accrual activity follows:
Severance Restructuring Other
- -------------------------------------------------------------------------------
Accrual Balance at
September 30, 2000 $ 31,700 $ 1,300 $20,000
Payments (25,400) (100) (8,300)
----------------------------------------------
Accrual Balance at
September 30, 2001 6,300 1,200 11,700
Reversals (3,000) (1,200) --
Payments (2,600) -- (9,300)
----------------------------------------------
Accrual Balance at
September 30, 2002 $ 700 $ -- $ 2,400
==============================================
The Company recorded $13,100 of charges in Cost of products sold in
the second quarter of fiscal 2000, associated with a product recall. These
charges consisted primarily of costs associated with product returns, disposal
of affected product, and other direct recall costs.
Fiscal Year 1998
In an effort to improve manufacturing efficiencies at certain locations, the
Company initiated in 1998 two restructuring plans: the closing of a surgical
blade plant in Hancock, New York and the consolidation of other production
functions in Brazil, Spain, Australia and France. Total charges of $35,300 were
recorded in 1998 relating to these restructuring plans, primarily in the Medical
segment, and consisted of $15,400 relating to severance and other employee
termination costs; $15,400 relating to manufacturing equipment write-offs; and
$4,500 relating to remaining lease obligations.
The original anticipated completion date for the Hancock facility
closing was May 2000. The Company had estimated that approximately 200 employees
would be terminated and recorded a $9,900 charge relating to severance and a
$2,400 charge relating to other employee termination costs. Severance was
originally estimated based on the severance arrangement communicated to
employees in June 1998. The shutdown of the Hancock facility involved the
transfer of three major production lines to new locations. Two of these
production moves occurred in September 1999, as planned. At that time, a total
of 50 employees were terminated and severance was paid and charged against the
reserve. The move of the remaining production line for surgical blades has been
delayed due to the following events:
1. The original plan did not anticipate the need for safety stock to
serve the blade market during the move since the Company planned to
use a new blade grinding technology that would allow for parallel
production of blades during the eventual wind down and phase out of
the old technology in Hancock. Problems arose with this new technology
during fiscal 1999, which resulted in the Company's decision to
maintain the existing technology. In addition, the blade business
experienced a surge in demand for surgical blades around the world,
particularly in Europe, between October 1998 and June 1999. This
increased demand seriously hampered the Company's ability to build the
required inventory levels to enable a move by May 2000. As a result,
the Hancock closure date was revised to the latter part of fiscal
2001.
2. During the latter part of fiscal 1999 and early fiscal 2000, the U.S.
healthcare marketplace experienced increased activity in the area of
healthcare worker safety and sharp device injuries. In response to
this significant shift in the marketplace and the enactment of state
laws and the expected enactment of Federal law requiring the use of
safety-engineered products, the Company reprioritized its efforts to
deliver safety surgical blades to the marketplace. This decision
resulted in an extension of the timeline necessary to enable the blade
production move and the closure of the Hancock facility.
The severance estimates increased as a result of the extension of the
Hancock final closing date. The impact of the estimated increase in severance
costs was offset by savings from certain other factors, including lower actual
salary increases, and lower out-placement fees than were originally anticipated.
Production at the Hancock facility ceased in September 2002, and approximately
28 employees remain to be terminated upon completion of remaining shutdown
activities. The Company expects the accruals related to this restructuring plan
to be substantially paid by December 2002.
44
Notes Becton, Dickinson and Company
The Company originally scheduled to complete the consolidation of the
other production facilities within 12 to 18 months from the date the plans were
finalized. Approximately 150 employees were estimated to be affected by these
consolidations. Exit costs of approximately $23,000 associated with these
activities included $3,100 of severance costs, with the remainder primarily
related to write-offs of manufacturing equipment with a fair value of zero. At
the time, the Company expected to remove all such assets, with the exception of
Brazil and Spain manufacturing assets, from operations by September 1998. The
Company reversed $6,300 of the charges relating to the Brazil and Spain
restructuring plans in fiscal 1999 as a result of the decision not to exit
certain production activities as originally planned. The Company also recorded
a catch-up adjustment to cost of sales for depreciation not taken since the
initial write-off of assets relating to these locations. The remaining
consolidation activities in Australia and France were completed as planned,
with a total of approximately 30 employees terminated.
The Company also recorded $37,800 of special charges to recognize impairment
losses on other non-manufacturing assets. Approximately $25,600 of this charge
related to the write-down of goodwill and other assets associated with prior
acquisitions in the area of manual microbiology. The impairment loss was
recorded as a result of the carrying value of these assets exceeding their fair
value, calculated on the basis of discounted estimated future cash flows. The
carrying amount of such goodwill and other intangibles was $24,000. The balance
of the impairment loss of $1,600 was recognized as a write-down of related fixed
assets. Also included in the $37,800 charge was a $4,700 write-down of a
facility held for sale, which was subsequently sold in fiscal 2000 at its
adjusted book value.
The remaining special charges of $17,845 primarily consisted of
$12,300 of estimated litigation defense costs associated with the Company's
latex glove business, which was divested in 1995, as well as a number of
miscellaneous asset write-downs.
A summary of the 1998 special charge accrual activity follows:
Severance Restructuring Other
- ------------------------------------------------------------------------
Special Charges $13,000 $ 4,500 $15,100
Payments (500) (50) (2,400)
--------------------------------------------
Accrual Balance at
September 30, 1998 12,500 4,450 12,700
Reversals (1,500) -- --
Payments (1,700) (300) (6,600)
--------------------------------------------
Accrual Balance at
September 30, 1999 9,300 4,150 6,100
Payments (1,900) (2,400) (4,500)
--------------------------------------------
Accrual Balance at
September 30, 2000 7,400 1,750 1,600
Payments (500) (250) (300)
--------------------------------------------
Accrual Balance at
September 30, 2001 6,900 1,500 1,300
Payments (1,100) (1,100) (300)
--------------------------------------------
Accrual Balance at
September 30, 2002 $ 5,800 $ 400 $ 1,000
============================================
Other accruals of $15,100 primarily represented the estimated
litigation defense costs, as discussed above.
6. Acquisitions
In January 2001, the Company completed its acquisition of Gentest Corporation, a
privately held company serving the life sciences market in the areas of drug
metabolism and toxicology testing of pharmaceutical candidates. The purchase
price was approximately $29,000 in cash. Unaudited pro forma consolidated
results, after giving effect to this acquisition, would not have been materially
different from the reported amounts for either 2001 or 2000.
This acquisition was recorded under the purchase method of accounting
and, therefore, the purchase price has been allocated to assets acquired and
liabilities assumed based on estimated fair values. The results of operations of
the acquired company was included in the consolidated results of the Company
from the acquisition date.
7. Income Taxes
The provision for income taxes is composed of the following charges (benefits):
2002 2001 2000
- ------------------------------------------------------------------------
Current:
Domestic:
Federal $ 33,016 $ 49,053 $ 20,201
State and local, including
Puerto Rico 7,900 7,728 13,843
Foreign 50,489 44,167 55,747
--------------------------------------------
91,405 100,948 89,791
--------------------------------------------
Deferred:
Domestic 57,651 29,342 35,029
Foreign (449) 8,058 2,217
--------------------------------------------
57,202 37,400 37,246
--------------------------------------------
$148,607 $138,348 $127,037
============================================
In accordance with SFAS No. 109, "Accounting for Income Taxes,"
deferred tax assets and liabilities are netted on the balance sheet by separate
tax jurisdictions. At September 30, 2002 and 2001, net current deferred tax
assets of $71,362 and $64,121, respectively, were included in Prepaid expenses,
deferred taxes and other. There were no net non-current deferred tax assets in
2002 and 2001. Net current deferred tax liabilities of $4,635 and $744,
respectively, were included in Current Liabilities-Income taxes. Net non-current
deferred tax liabilities of $77,249 and $57,318, respectively, were included in
Deferred Income Taxes and Other. Deferred taxes are not provided on
substantially all undistributed earnings of foreign subsidiaries. At September
30, 2002, the cumulative amount of such undistributed earnings approximated
$1,614,000 against which substantial tax credits are available. Determining the
tax liability that would arise if these earnings were remitted is not
practicable.
45
Notes Becton, Dickinson and Company
Deferred income taxes at September 30 consisted of:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities Assets Liabilities
- -----------------------------------------------------------------------------------------------------
Compensation and benefits $161,574 $ -- $155,889 $ -- $158,167 $ --
Property and equipment -- 124,718 -- 118,223 -- 109,419
Purchase acquisition adjustments -- 70,656 -- 87,603 -- 98,472
Other 159,546 134,182 172,981 110,338 199,726 118,186
------------------------------------------------------------------
321,120 329,556 328,870 316,164 357,893 326,077
Valuation allowance (2,086) -- (6,647) -- (17,276) --
------------------------------------------------------------------
$319,034 $329,556 $322,223 $316,164 $340,617 $326,077
==================================================================
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate follows:
2002 2001 2000
- ------------------------------------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal tax benefit 1.2 .6 .9
Effect of foreign and Puerto Rican
income and foreign tax credits (9.3) (8.2) (8.7)
Research tax credit (1.4) (2.0) (1.6)
Purchased in-process research
and development -- -- .3
Adjustments to estimated liability
for prior years' taxes -- -- (2.0)
Other, net (1.9) (1.4) .5
---------------------
23.6% 24.0% 24.4%
=====================
The approximate dollar and diluted per-share amounts of tax reductions
related to tax holidays in various countries in which the Company does business
were: 2002-$40,860 and $.15; 2001-$43,275 and $.16; and 2000-$40,500 and $.15.
The tax holidays expire at various dates through 2018.
The Company made income tax payments, net of refunds, of $52,603 in
2002, $53,498 in 2001, and $51,010 in 2000.
The components of Income Before Income Taxes and Cumulative Effect of
Change in Accounting Principle follow:
2002 2001 2000
- ------------------------------------------------------------
Domestic, including
Puerto Rico $336,596 $340,073 $285,228
Foreign 291,993 236,677 234,706
------------------------------------
$628,589 $576,750 $519,934
====================================
8. Supplemental Financial Information
Other (Expense) Income, Net
Other expense, net in 2002 included net losses on equity investments of
$18,576. Included in these charges was a $9,725 loss on an equity investment in
a publicly traded company. This investment had been trading below its original
cost basis of $15,350 since the end of January 2002. As a result, the Company
has deemed this decline in value as being other than temporary and has written
down this investment to its fair value as of September 30, 2002. Other expense,
net in 2002 also included other asset write-downs of $14,149, which includes
$7,257 relating to assets held for sale. These charges were partially offset by
foreign exchange gains of $15,596, net of hedging costs.
Other expense, net in 2001 included foreign exchange losses of $8,762,
including net hedging costs, and write-downs of investments to market value of
$6,401. As discussed in Note 10, hedging costs of $8,121 related to option
contracts, originally recorded in other income, net, have been reclassified as a
reduction in revenues to conform with current year presentation.
Other income, net in 2000 included net gains on investments of $76,213
related primarily to transactions involving two equity investments. In fiscal
2000, the Company sold portions of an investment for net gains of $44,508 before
taxes and proceeds of $52,506. The cost of this investment was determined based
upon the specific identification method. The Company had entered into a forward
sale contract to hedge a portion of the proceeds. Also during fiscal 2000, the
Company received 480,000 shares of common stock in a publicly traded company
(parent) in exchange for its shares in a majority-owned subsidiary of the parent
company. The total value of the stock received by the Company was $50,820. Based
upon the fair value of the parent common stock at the date of the exchange and
the cost basis of subsidiary stock, the Company recorded a gain upon the
exchange of the shares. The Company also entered into forward sale contracts to
hedge the proceeds from the anticipated sale of the parent common stock. The
Company subsequently sold the parent common stock and settled the forward sale
contracts. As a result of these transactions, the Company recorded a net gain of
$28,810 before taxes.
46
Notes Becton, Dickinson and Company
Trade Receivables
Allowances for doubtful accounts and cash discounts netted against trade
receivables were $39,875 and $42,292 at September 30, 2002 and 2001,
respectively.
Inventories 2002 2001
- -----------------------------------------
Materials $137,688 $160,208
Work in process 132,051 115,257
Finished products 427,957 432,279
--------------------
$697,696 $707,744
====================
Inventories valued under the LIFO method were $440,994 in 2002 and
$422,805 in 2001. At September 30, 2002 and 2001, inventories valued under the
LIFO method approximated current cost.
Property, Plant and Equipment 2002 2001
- -------------------------------------------------------------
Land $ 61,756 $ 60,752
Buildings 1,071,799 1,022,908
Machinery, equipment and fixtures 2,430,456 2,278,919
Leasehold improvements 57,350 57,715
--------------------------
3,621,361 3,420,294
Less allowances for depreciation
and amortization 1,855,631 1,704,271
--------------------------
$1,765,730 $1,716,023
==========================
Supplemental Cash Flow Information
Noncash investing activities for the years ended September 30:
2002 2001 2000
- ---------------------------------------------------
Exchange of an investment
in common stock $ -- $ -- $35,800
Stock issued for
business acquisitions $241 $243 $ 212
9. Debt
The components of Short-Term Debt follow:
2002 2001
- -------------------------------------------------------------
Loans payable:
Domestic $415,131 $416,395
Foreign 9,280 25,836
Current portion of long-term debt 10,231 11,781
----------------------
$434,642 $454,012
======================
Domestic loans payable consist of commercial paper. Foreign loans
payable consist of short-term borrowings from financial institutions. The
weighted average interest rates for loans payable were 2.0% and 3.8% at
September 30, 2002 and 2001, respectively. In 2001, the Company put in place a
$900 million syndicated credit facility, consisting of a $450 million 364-day
line of credit expiring in August 2002 and a $450 million five-year line of
credit expiring in August 2006. In August 2002, the 364-day line was renewed and
extended for an additional 364-day period. The facility is available to support
the Company's commercial paper borrowing program and for other general corporate
purposes. Restrictive covenants include a minimum interest coverage ratio. There
were no borrowings outstanding under the facility at September 30, 2002. In
addition, the Company had unused short-term foreign lines of credit pursuant to
informal arrangements of approximately $267,000 at September 30, 2002.
The components of Long-Term Debt follow:
2002 2001
- -----------------------------------------------------------------
Domestic notes due through 2015
(average year-end interest rate:
4.8% - 2002; 5.6% - 2001) $ 17,923 $ 15,126
Foreign notes due through 2011
(average year-end interest rate:
4.8% - 2002; 4.6% - 2001) 9,965 9,897
9.45% Guaranteed ESOP Notes
due through July 1, 2004 3,715 10,810
6.90% Notes due October 1, 2006 104,945 98,977
7.15% Notes due October 1, 2009 225,686 211,075
8.70% Debentures due January 15, 2025 105,683 102,061
7.00% Debentures due August 1, 2027 168,000 168,000
6.70% Debentures due August 1, 2028 167,050 167,050
----------------------
$802,967 $782,996
======================
Long-term debt balances as of September 30, 2002 and 2001 have been
impacted by certain interest rate swaps that have been designated as fair value
hedges, as discussed in Note 10.
The Company has available $100,000 under a $500,000 shelf registration
statement filed in October 1997 for the issuance of debt securities.
The aggregate annual maturities of long-term debt during the fiscal
years ending September 30, 2004 to 2007 are as follows: 2004-$6,065;
2005-$6,075; 2006-$1,294; 2007-$101,357.
The Company capitalizes interest costs as a component of the cost of
construction in progress. The following is a summary of interest costs:
2002 2001 2000
- -----------------------------------------------------------------------
Charged to operations $40,269 $61,585 $ 86,511
Capitalized 17,952 28,625 24,946
-----------------------------------------
$58,221 $90,210 $111,457
=========================================
Interest paid, net of amounts capitalized, was $39,153 in 2002, $63,760
in 2001, and $78,272 in 2000.
10. Financial Instruments
Foreign Exchange Contracts and Currency Options
The Company uses foreign exchange forward contracts and currency options to
reduce the effect of fluctuating foreign exchange rates on certain foreign
currency denominated receivables and payables, third-party product sales, and
investments in foreign subsidiaries. Gains and losses on the derivatives are
intended to offset
47
Notes Becton, Dickinson and Company
gains and losses on the hedged transaction. The Company's foreign currency risk
exposure is primarily in Western Europe, Asia Pacific, Japan, and Latin America.
The Company hedges substantially all of its transactional foreign
exchange exposures, primarily intercompany payables and receivables, through the
use of forward contracts and currency options with maturities of less than 12
months. Gains or losses on these contracts are largely offset by gains and
losses on the underlying hedged items. These foreign exchange contracts do not
qualify for hedge accounting under SFAS No. 133.
In addition, the Company enters into option and forward contracts to
hedge certain forecasted sales that are denominated in foreign currencies. These
contracts are designated as cash flow hedges, as defined by SFAS No. 133, and
are effective as hedges of these revenues. These contracts are intended to
reduce the risk that the Company's cash flows from certain third-party
transactions will be adversely affected by changes in foreign currency exchange
rates. Changes in the effective portion of the fair value of these contracts are
included in other comprehensive income until the hedged sales transactions are
recognized in earnings. Once the hedged transaction occurs, the gain or loss on
the contract is reclassified from accumulated other comprehensive income to
revenues. The Company recorded hedge net gains of $3,502 and $12,368 to revenues
in fiscal 2002 and 2001, respectively.
Fiscal 2002 and 2001 revenues included hedging costs of $10,612 and
$9,861, respectively, related to the purchased option contracts. In April 2001,
the Company re-designated its cash flow hedges pursuant to Statement 133
implementation guidance released by the Derivatives Implementation Group of the
FASB. This interpretation allows changes in time value of options to be included
in effectiveness testing. Prior to the release of this guidance and the
re-designation of these hedges, the Company recorded the change in the time
value of options in Other expense, net. Hedging costs related to the option
contracts of $8,121 in 2001 that had been recorded in Other expense, net have
been reclassified as a reduction in revenues, to conform with current year
presentation. The Company continues to record to Other expense, net the premium
on the forward contracts, which is excluded from the assessment of hedge
effectiveness. This premium was $2,209 and $994 in fiscal 2002 and 2001,
respectively. All outstanding contracts that were designated as cash flow hedges
as of September 30, 2002, will mature by September 30, 2003.
The Company enters into forward exchange contracts to hedge its net
investments in certain foreign subsidiaries. These forward contracts are
designated and effective as net investment hedges, as defined by SFAS No. 133.
The Company recorded a loss of $1,071 in fiscal 2002 and a gain of $2,321 in
fiscal 2001, to foreign currency translation adjustments in other comprehensive
income for the change in the fair value of the contracts.
Interest Rate Swaps
The Company's policy is to manage interest cost using a mix of fixed and
floating debt. The Company has entered into interest rate swaps in which it
agrees to exchange, at specified intervals, the difference between fixed and
floating interest amounts calculated by reference to an agreed-upon notional
principal amount. These swaps are designated as either fair value or cash flow
hedges, as defined by SFAS No. 133. For fair value hedges, changes in the fair
value of the interest rate swaps offset changes in the fair value of the fixed
rate debt due to changes in market interest rates. For cash flow hedges, changes
in the fair value of the interest rate swap are offset by changes in other
comprehensive income. There was no ineffective portion to the hedges recognized
in earnings during the period.
As of September 30, 2002, other comprehensive income included an
unrealized loss of $4,393, net of tax, relating to cash flow hedges.
Fair Value of Financial Instruments
Cash equivalents, short-term investments and short-term debt are carried at
cost, which approximates fair value. Other investments are classified as
available-for-sale securities. Available-for-sale securities are carried at fair
value, with unrecognized gains and losses reported in other comprehensive
income, net of taxes. Losses on available-for-sale securities are recognized
when a loss is determined to be other than temporary or when realized. In
accordance with the provisions of SFAS No. 133, forward exchange contracts and
currency options are recorded at fair value. Fair values were estimated based on
market prices, where available, or dealer quotes. The fair value of certain
long-term debt is based on redemption value. The estimated fair values of the
Company's financial instruments at September 30, 2002 and 2001 were as follows:
2002 2001
- --------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------
Assets:
Other investments
(non-current)(A) $ 6,431 $ 6,337 $ 20,299 $ 13,627
Currency options(B) 6,878 6,878 6,833 6,833
Forward exchange contracts(B) 3,480 3,480 -- --
Interest rate swaps(B) 36,314 36,314 12,113 12,113
Liabilities:
Forward exchange contracts(C) -- -- 1,635 1,635
Long-term debt 802,967 855,331 782,996 806,337
Interest rate swaps(C) 1,677 1,677 -- --
==================================================================================================
(A) Included in Other non-current assets.
(B) Included in Prepaid expenses, deferred taxes and other.
(C) Included in Accrued Expenses.
Concentration of Credit Risk
Substantially all of the Company's trade receivables are due from public and
private entities involved in the healthcare industry. Due to the large size and
diversity of the Company's customer base, concentrations of credit risk with
respect to trade receivables are limited. The Company does not normally require
collateral. The Company is exposed to credit loss in the event of nonperformance
by financial institutions with which it conducts business. However, this loss is
limited to the amounts, if any, by which the obligations of the counterparty to
the financial instrument contract exceed the obligations of the Company. The
Company also minimizes exposure to credit risk by dealing with a diversified
group of major financial institutions.
48
Notes Becton, Dickinson and Company
11. Shareholders' Equity
Changes in certain components of shareholders' equity were as follows:
Series B,
ESOP Common
Preferred Stock Capital in Unearned
Stock Issued at Excess of Retained ESOP Deferred
Issued Par Value Par Value Earnings Compensation Compensation
- ----------------------------------------------------------------------------------------------------------------------
Balance at October 1, 1999 $46,717 $332,662 $ 44,626 $2,539,020 $(20,310) $5,949
Net income 392,897
Cash dividends:
Common ($.37 per share) (93,544)
Preferred ($3.835 per share),
net of tax benefits (2,465)
Common stock issued for:
Employee stock plans, net 29,581
Business acquisitions 189
Common stock held in trusts 541
Reduction in unearned ESOP
compensation for the year 4,155
Adjustment for redemption provisions (3,147) 679
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 43,570 332,662 75,075 2,835,908 (16,155) 6,490
Net income 401,652
Cash dividends:
Common ($.38 per share) (97,897)
Preferred ($3.835 per share),
net of tax benefits (2,359)
Common stock issued for:
Employee stock plans, net 72,745
Business acquisitions 215
Common stock held in trusts 606
Reduction in unearned ESOP
compensation for the year 4,154
Adjustment for redemption provisions (3,042) 655
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 40,528 332,662 148,690 3,137,304 (12,001) 7,096
Net income 479,982
Cash dividends:
Common ($.39 per share) (100,521)
Preferred ($3.835 per share),
net of tax benefits (2,300)
Common stock issued for:
Employee stock plans, net 35,679
Business acquisitions 198
Common stock held in trusts 1,400
Reduction in unearned ESOP
compensation for the year 4,154
Repurchase of common stock
Adjustment for redemption provisions (2,583) 555
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $37,945 $332,662 $185,122 $3,514,465 $ (7,847) $8,496
======================================================================================================================
Treasury Stock
----------------------------
Shares Amount
- ---------------------------------------------------------------------
Balance at October 1, 1999 (81,864,329) $ (997,333)
Net income
Cash dividends:
Common ($.37 per share)
Preferred ($3.835 per share),
net of tax benefits
Common stock issued for:
Employee stock plans, net 2,357,340 15,220
Business acquisitions 3,480 23
Common stock held in trusts (3,592) (541)
Reduction in unearned ESOP
compensation for the year
Adjustment for redemption provisions 341,393 2,468
- ---------------------------------------------------------------------
Balance at September 30, 2000 (79,165,708) (980,163)
Net income
Cash dividends:
Common ($.38 per share)
Preferred ($3.835 per share),
net of tax benefits
Common stock issued for:
Employee stock plans, net 5,423,069 40,564
Business acquisitions 3,630 28
Common stock held in trusts (16,346) (606)
Reduction in unearned ESOP
compensation for the year
Adjustment for redemption provisions 329,877 2,387
- ---------------------------------------------------------------------
Balance at September 30, 2001 (73,425,478) (937,790)
Net income
Cash dividends:
Common ($.39 per share)
Preferred ($3.835 per share),
net of tax benefits
Common stock issued for:
Employee stock plans, net 2,634,109 23,497
Business acquisitions 4,767 43
Common stock held in trusts (42,141) (1,400)
Reduction in unearned ESOP
compensation for the year
Repurchase of common stock (6,607,800) (223,961)
Adjustment for redemption provisions 304,295 2,028
- ---------------------------------------------------------------------
Balance at September 30, 2002 (77,132,248) $(1,137,583)
=====================================================================
49
Notes Becton, Dickinson and Company
Common stock held in trusts represents rabbi trusts in connection with
the Company's employee salary and bonus deferral plan and Directors' deferral
plan.
Preferred Stock Purchase Rights
In accordance with the Company's shareholder rights plan, each certificate
representing a share of outstanding common stock of the Company also represents
one Preferred Stock Purchase Right (a "Right"). Each whole Right entitles the
registered holder to purchase from the Company one eight-hundredths of a share
of Preferred Stock, Series A, par value $1.00 per share, at a price of $67.50.
The Rights will not become exercisable unless and until, among other things, a
third party acquires 15% or more of the Company's outstanding common stock. The
Rights are redeemable under certain circumstances at $.01 per Right and will
expire, unless earlier redeemed, on April 25, 2006. There are 500,000 shares of
preferred stock designated Series A, none of which has been issued.
12. Comprehensive Income
The components of Accumulated other comprehensive loss are as follows:
2002 2001
- --------------------------------------------------------------------------
Foreign currency translation adjustments $(363,300) $(379,772)
Minimum pension liability adjustment (77,661) --
Unrealized gains (losses) on investments 68 (3,937)
Unrealized losses on cash flow hedges (4,393) (4,013)
-------------------------
$(445,286) $(387,722)
=========================
Generally, the net assets of foreign operations are translated into
U.S. dollars using current exchange rates. The U.S. dollar results that arise
from such translation, as well as exchange gains and losses on intercompany
balances of a long-term investment nature, are included in the cumulative
currency translation adjustments in Accumulated other comprehensive loss.
The income tax provision recorded in fiscal year 2002 for the
unrealized gains on investments was $2,800, while in fiscal year 2001 there was
an income tax benefit of $2,500 on the unrealized losses on investments. The
income tax benefits recorded in fiscal years 2002 and 2001 for cash flow hedges
were $1,900 and $2,800, respectively. The income tax benefit amounts recorded in
fiscal year 2002 for the minimum pension liability adjustment were $52,600.
Income taxes are generally not provided for translation adjustments.
The unrealized gains on investments included in other comprehensive
loss for 2002 are net of reclassification adjustments of $8,000, net of tax, for
recognized losses as defined by SFAS No. 115. The tax expense associated with
these reclassification adjustments was $5,600. Reclassification adjustments
related to investments were not significant in fiscal 2001.
The unrealized losses on cash flow hedges included in other
comprehensive loss for 2002 and 2001 are net of reclassification adjustments of
$4,200 and $5,000, net of tax, respectively, for realized hedge gains recorded
to revenues. These amounts had been included in Accumulated other comprehensive
loss in prior periods. The tax expense associated with these reclassification
adjustments was $2,900 and $3,500, respectively.
13. Commitments and Contingencies
Commitments
Rental expense for all operating leases amounted to $52,600 in 2002; $49,600 in
2001; and $49,200 in 2000. Future minimum rental commitments on noncancelable
leases are as follows: 2003-$35,500; 2004-$31,500; 2005-$30,000; 2006-$18,900;
2007-$16,800 and an aggregate of $43,200 thereafter.
As of September 30, 2002, the Company has certain future capital
commitments aggregating approximately $84,400, which will be expended over the
next several years.
Contingencies
Litigation-Other than Environmental
In 1986, the Company acquired a business that manufactured, among other things,
latex surgical gloves. In 1995, the Company divested this glove business. The
Company, along with a number of other manufacturers, has been named as a
defendant in approximately 519 product liability lawsuits related to natural
rubber latex that have been filed in various state and Federal courts. Cases
pending in Federal court are being coordinated under the matter In re Latex
Gloves Products Liability Litigation (MDL Docket No. 1148) in Philadelphia, and
analogous procedures have been implemented in the state courts of California,
Pennsylvania, New Jersey and New York. Generally, these actions allege that
medical personnel have suffered allergic reactions ranging from skin irritation
to anaphylaxis as a result of exposure to medical gloves containing natural
rubber latex. Since the inception of this litigation, 227 of these cases have
been closed with no liability to the Company (166 of which were closed with
prejudice), and 14 cases have been settled for an aggregate de minimis amount.
The Company is vigorously defending these remaining lawsuits.
The Company, along with another manufacturer and several medical
product distributors, is named as a defendant in six product liability lawsuits
relating to healthcare workers who allegedly sustained accidental needlesticks,
but have not become infected with any disease. The Company had previously been
named as a defendant in five similar suits relating to healthcare workers who
allegedly sustained accidental needlesticks, each of which has either been
dismissed with prejudice or voluntarily withdrawn. Regarding the six pending
suits:
o In Texas, Usrey vs. Becton Dickinson et al., the Court of Appeals for the
Second District of Texas filed an Opinion on August 16, 2001, reversing the
trial court's certification of a class, and remanding the case to the trial
court for further proceedings consistent with that opinion. Plaintiffs
petitioned the appellate court for rehearing, which the Court of Appeals
denied on October 25, 2001.
50
Notes Becton, Dickinson and Company
o In Ohio, Grant vs. Becton Dickinson et al. (Case No. 98CVB075616, Franklin
County Court), which was filed on July 22, 1998, the court issued a
decision on July 17, 2002, certifying a class. We have filed an appeal of
the court's ruling with the Ohio Court of Appeals for the 10th Appellate
Judicial District.
o In Illinois, McCaster vs. Becton Dickinson et al. (Case No. 98L09478, Cook
County Circuit Court), which was filed on August 13, 1998, the appeals
court issued a decision on March 6, 2002, denying plaintiff's petition for
review of the trial court's January 11, 2002 decision to deny class
certification. On July 30, 2002, the plaintiff filed a motion with the
trial court to reopen the issue of certification based on the Ohio decision
in the Grant case. On November 22, 2002, the court issued an order denying
plaintiff's renewed motion for class certification.
o In New York, Oklahoma and South Carolina, cases have been filed on behalf
of an unspecified number of healthcare workers seeking class action
certification under the laws of these states. Generally, these remaining
actions allege that healthcare workers have sustained needlesticks using
hollow-bore needle devices manufactured by the Company and, as a result,
require medical testing, counseling and/or treatment. Several actions
additionally allege that the healthcare workers have sustained mental
anguish. Plaintiffs seek money damages in all of these actions, which are
pending in state court in Oklahoma, under the caption Palmer vs. Becton
Dickinson et al. (Case No. CJ-98-685, Sequoyah County District Court),
filed on October 27, 1998; in state court in South Carolina, under the
caption Bales vs. Becton Dickinson et al. (Case No. 98-CP-40-4343, Richland
County Court of Common Pleas), filed on November 25, 1998; and in Federal
court in New York, under the caption Benner vs. Becton Dickinson et al.
(Case No. 99Civ 4798[WHP]), filed on June 1, 1999.
The Company continues to oppose class action certification in these
cases and will continue vigorously to defend these lawsuits, including pursuing
all appropriate rights of appeal.
The Company has insurance policies in place, and believes that a
substantial portion of the potential liability, if any, in the latex and class
action matters would be covered by insurance. In order to protect its rights to
additional coverage, the Company has filed an action for declaratory judgment
under the caption Becton Dickinson and Company vs. Adriatic Insurance Company et
al. (Docket No. MID-L-3649-99 MT, Middlesex County Superior Court) in New Jersey
state court. The Company has withdrawn this action, with the right to refile, so
that settlement discussions with the insurance companies may proceed. The
Company has established reserves to cover reasonably anticipated defense costs
in all product liability lawsuits, including the needlestick class action and
latex matters.
On January 18, 2002, Retractable Technologies, Inc. ("plaintiff") filed
a second amended complaint against the Company, another manufacturer, and two
group purchasing organizations ("GPOs") under the caption Retractable
Technologies, Inc. vs. Becton Dickinson and Company, et al. (Civil Action No.
501 CV 036, United States District Court, Eastern District of Texas). Plaintiff
alleges that the Company and other defendants conspired to exclude it from the
market and to maintain the Company's market share by entering into long-term
contracts in violation of state and Federal antitrust laws. Plaintiff also has
asserted claims for business disparagement, common law conspiracy, and tortious
interference with business relationships. Plaintiff seeks money damages in an as
yet undisclosed amount. On February 22, 2002, the Company filed a motion to
dismiss the second amended complaint. On August 2, 2002, the court issued a
Memorandum Opinion and Order denying that motion. Discovery is proceeding, and a
trial date has been set for April 8, 2003. The Company continues to vigorously
defend this matter.
The Company also is involved both as a plaintiff and a defendant in
other legal proceedings and claims that arise in the ordinary course of
business.
The Company currently is engaged in discovery or is otherwise in the
early stages with respect to certain of the litigation to which it is a party,
and therefore, it is difficult to predict the outcome of such litigation. In
addition, given the uncertain nature of litigation generally and of the current
litigation environment, it is difficult to predict the outcome of any litigation
regardless of its stage. A number of the cases pending against the Company
present complex factual and legal issues and are subject to a number of
variables, including, but not limited to, the facts and circumstances of each
particular case, the jurisdiction in which each suit is brought, and differences
in applicable law. As a result, the Company is not able to estimate the amount
or range of loss that could result from an unfavorable outcome of such matters.
While the Company believes that the claims against it are without merit and,
upon resolution, should not have a material adverse effect on the Company, in
view of the uncertainties discussed above, the Company could incur charges in
excess of currently established reserves and, to the extent available, excess
liability insurance. Accordingly, 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. The Company
continues to believe that it has a number of valid defenses to each of the suits
pending against it and is engaged in a vigorous defense of each of these
matters.
Environmental Matters
The Company also is a party to a number of Federal proceedings in the United
States brought under the Comprehensive Environment Response, Compensation and
Liability Act, also known as "Super-fund," and similar state laws. For all
sites, there are other potentially responsible parties that may be jointly or
severally liable to pay all cleanup costs. The Company accrues costs for
estimated environmental liabilities based upon its best estimate within the
range of probable losses, without considering possible third-party recoveries.
While the Company believes that, upon resolution of such matters, the claims
against it should not have a material adverse effect on it, the Company could
incur charges in excess of presently established reserves and, to the extent
available, excess liability insurance. Accordingly, 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.
51
Notes Becton, Dickinson and Company
14. Stock Plans
Stock Option Plans
The Company has stock option plans under which options have been granted to
purchase shares of the Company's common stock at prices established by the
Compensation and Benefits Committee of the Board of Directors. The 1995, 1998
and 2002 Stock Option Plans made available 24,000,000; 10,000,000; and
12,500,000 shares of the Company's common stock for the granting of options to
employees, respectively. At September 30, 2002, shares available for future
grant under the 1995, 1998 and 2002 Plans were 545,119; 2,050,548; and
12,500,000, respectively. The Non-Employee Directors 2000 Stock Option Plan made
available 1,000,000 common shares for the granting of options, of which 924,719
remained available for future grant as of September 30, 2002. All stock plan
data has been retroactively restated to reflect the two-for-one stock splits in
prior years, where applicable.
A summary of changes in outstanding options is as follows:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
for Exercise for Exercise for Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------------
Balance at October 1 28,271,329 $23.80 30,516,315 $21.29 30,122,274 $20.33
Granted 5,460,162 32.45 4,635,232 31.90 3,727,955 27.94
Exercised (2,570,626) 13.53 (5,354,447) 15.34 (2,287,523) 15.09
Forfeited, canceled or expired (772,247) 31.98 (1,525,771) 28.20 (1,046,391) 30.80
------------------------------------------------------------------------------
Balance at September 30 30,388,618 $26.02 28,271,329 $23.80 30,516,315 $21.29
==============================================================================
Exercisable at September 30 19,682,329 $22.92 20,534,073 $21.30 26,641,132 $20.23
==============================================================================
Weighted average fair value of
options granted $ 11.59 $ 12.08 $ 11.53
==============================================================================
Available for grant at September 30 16,020,386 8,246,462 11,555,118
==============================================================================
The maximum term of options is ten years. Options outstanding as of September
30, 2002, expire on various dates from January 2003 through September 2012.
September 30, 2002
- -----------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Range Of Number Exercise Remaining Number Exercise
Option Exercise Price Outstanding Price Contractual Life Exercisable Price
------------------------------------------------------------------------------
$8.64-$12.55 4,481,658 $10.81 2.8 Years 4,481,658 $10.81
18.83- 25.63 8,255,582 22.63 5.0 Years 8,231,162 22.62
27.25- 34.96 15,281,174 30.89 8.5 Years 4,720,346 29.12
35.06- 41.56 2,370,204 35.19 7.4 Years 2,249,163 35.09
------------------------------------------------------------------------------
30,388,618 $26.02 7.2 Years 19,682,329 $22.92
==============================================================================
52
Notes Becton, Dickinson and Company
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has adopted the disclosure-only provision of the
Statement and applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock plans.
The 1990 Plan has a provision whereby unqualified options may be
granted at, below, or above market value of the Company's stock. If the option
price is less than the market value of the Company's stock on the date of grant,
the discount is recorded as compensation expense over the service period in
accordance with the provisions of APB Opinion No. 25. There was no such
compensation expense in 2002, 2001, or 2000.
Under certain circumstances, the stock option plans permit the optionee
the right to receive cash and/or stock at the Company's discretion equal to the
difference between the market value on the date of exercise and the option
price. This difference would be recorded as compensation expense over the
vesting period.
The following pro forma net income and earnings per share information
has been determined as if the Company had accounted for its stock-based
compensation awards issued subsequent to October 1, 1995 using the fair value
method. Under the fair value method, the estimated fair value of awards would be
charged against income on a straight-line basis over the vesting period, which
generally ranges from zero to four years. The pro forma effect on net income for
2002, 2001, and 2000 may not be representative of the pro forma effect on net
income in future years since compensation cost is allocated on a straight-line
basis over the vesting periods of the grants, which extend beyond the reported
years.
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- -------------------------------------------------------------------------------------------------------------------------
Net Income $479,982 $445,092 $401,652 $368,135 $392,897 $361,639
Earnings Per Share:
Basic 1.85 1.72 1.55 1.42 1.54 1.42
Diluted 1.79 1.66 1.49 1.37 1.49 1.38
=============================================================================================
The pro forma amounts and fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 2002, 2001, and 2000:
risk free interest rates of 4.50%, 5.57%, and 6.64%, respectively; expected
volatility of 33.0%, 32.8%, and 35.4%, respectively; expected dividend yields of
1.16%; and expected lives of 6 years for each year presented.
Other Stock Plans
The Company has a compensatory Stock Award Plan, which allows for grants of
common shares to certain key employees. Distribution of 25% or more of each
award, as elected by the grantee, is deferred until after retirement or
involuntary termination. Commencing on the first anniversary of a grant
following retirement, the remainder is distributable in five equal annual
installments. During 2002, 64,915 shares were distributed. No awards were
granted in 2002, 2001, or 2000. At September 30, 2002, 2,321,073 shares were
reserved for future issuance, of which awards for 219,685 shares have been
granted.
The Company has a compensatory Restricted Stock Plan for Non-Employee
Directors, which reserves for issuance 300,000 shares of the Company's common
stock. No restricted shares were issued in 2002, 2001, or 2000.
The Company has a Directors' Deferral Plan, which provides a means to
defer director compensation, from time to time, on a deferred stock or cash
basis. As of September 30, 2002, 155,801 shares were held in trust, of which
11,323 shares represented Directors' compensation in 2002, in accordance with
the provisions of the Plan. Under the Plan, which is unfunded, directors have an
unsecured contractual commitment from the Company to pay directors the amounts
due to them under the Plan.
53
Notes Becton, Dickinson and Company
15. Earnings Per Share
For the years ended September 30, 2002, 2001, and 2000, the following table sets
forth the computations of basic and diluted earnings per share, before the
cumulative effect of accounting change (shares in thousands):
2002 2001 2000
- ---------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change $479,982 $438,402 $392,897
Preferred stock dividends (2,553) (2,721) (2,916)
-----------------------------------------------
Income available to common
shareholders(A) 477,429 435,681 389,981
Preferred stock dividends-
using "if converted" method 2,553 2,721 2,916
Additional ESOP contribution-
using "if converted" method (613) (645) (689)
-----------------------------------------------
Income available to common
shareholders after assumed
conversions(B) $479,369 $437,757 $392,208
===============================================
Average common shares
outstanding(C) 258,016 257,128 252,454
Dilutive stock equivalents from
stock plans 6,076 7,309 6,059
Shares issuable upon conversion
of preferred stock 4,091 4,396 4,726
-----------------------------------------------
Average common and common
equivalent shares outstanding-
assuming dilution(D) 268,183 268,833 263,239
===============================================
Basic earnings per share before
cumulative effect of change
in accounting principle(A/C) $ 1.85 $ 1.69 $ 1.54
===============================================
Diluted earnings per share
before cumulative effect of
change in accounting principle(B/D) $ 1.79 $ 1.63 $ 1.49
===============================================
16. Segment Data
The Company's organizational structure is based upon its three principal
business segments: BD Medical Systems ("Medical"), BD Clinical Laboratory
Solutions ("Clinical Lab") and BD Biosciences ("Biosciences"). Fiscal 2000
information has been reclassified to conform to current year presentation.
The major products in the Medical segment are hypodermic products,
specially designed devices for diabetes care, prefillable drug delivery systems,
infusion therapy products, elastic support products and thermometers. The
Medical segment also includes disposable scrubs, specialty needles, and surgical
blades. The major products in the Biosciences segment are flow cytometry systems
for cellular analysis, reagents and tissue culture labware. The major products
in the Clinical Lab segment are clinical and industrial microbiology products,
sample collection products, specimen management systems, hematology instruments,
and other diagnostic systems, including immunodiagnostic test kits. This segment
also includes consulting services and customized, automated bar-code systems.
The Company evaluates performance based upon operating income. Segment
operating income represents revenues reduced by product costs and operating
expenses. The calculations of segment operating income and assets are in
accordance with the accounting policies described in Note 1. During fiscal 2001,
the Company refined its methodology for allocating indirect expenses for
purposes of reporting segment operating income to the chief operating decision
maker. The Company had previously allocated consolidated amounts using
reasonable allocation methods. These consolidated amounts are now reported
locally by the various regions, which allocate these expenses to the appropriate
operating segment. The Company believes this approach is a more preferable
method for allocating shared expenses as the allocations are being performed at
a more detailed level of reporting. As a result of this change in methodology,
fiscal 2000 segment operating income was restated to conform to current year
presentation.
Distribution of products is both through distributors and directly to
hospitals, laboratories and other end users. Sales to a distributor, which
supplies the Company's products to many end users, accounted for approximately
11% of revenues in 2002, 11% in 2001, and 10% in 2000, and included products
from the Medical and Clinical Lab segments. No other customer accounted for 10%
or more of revenues in each of the three years presented.
Revenues 2002 2001 2000
- ------------------------------------------------------------------------
Medical Systems $2,151,374 $2,004,626 $1,966,039
Clinical Lab 1,236,319 1,151,517 1,102,352
Biosciences 645,376 590,039 549,943
------------------------------------------------
Total(A) $4,033,069 $3,746,182 $3,618,334
================================================
Segment Operating Income(B)
- --------------------------------------------------------------------------------------------
Medical Systems $470,168(C) $446,940 $394,858(C)
Clinical Lab 251,004(D) 212,837 169,880(D)
Biosciences 116,926(E) 97,293 73,173(E)
----------------------------------------------------
Total Segment Operating Income 838,098 757,070 637,911
Unallocated Expenses(F) (209,509) (180,320) (117,977)
----------------------------------------------------
Income Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle $628,589 $576,750 $519,934
=====================================================
Segment Assets
- -----------------------------------------------------------------------------------
Medical Systems $2,537,185 $2,432,709 $2,289,304
Clinical Lab 1,190,382 1,093,735 1,059,144
Biosciences 938,641 830,550 811,081
-------------------------------------------------
Total Segment Assets 4,666,208 4,356,994 4,159,529
Corporate and All Other(G) 374,252 445,293 345,567
-------------------------------------------------
Total Assets $5,040,460 $4,802,287 $4,505,096
=================================================
54
Notes Becton, Dickinson and Company
Capital Expenditures 2002 2001 2000
- --------------------------------------------------------------------------
Medical Systems $182,479 $265,531 $246,928
Clinical Lab 41,774 62,009 66,270
Biosciences 22,747 24,083 33,881
Corporate and All Other 12,703 19,131 29,293
------------------------------------------
Total $259,703 $370,754 $376,372
==========================================
Depreciation and Amortization
- --------------------------------------------------------------------------------
Medical Systems $150,849 $145,702 $133,787
Clinical Lab 89,275 89,117 81,577
Biosciences 50,587 58,204 63,070
Corporate and All Other 14,154 12,677 9,821
------------------------------------------
Total $304,865 $305,700 $288,255
==========================================
(A) Intersegment revenues are not material.
(B) Restated, as described above.
(C) Includes $22,600 in 2002 and $39,844 in 2000 for special charges discussed
in Note 5.
(D) Includes $(468) in 2002 and $7,697 in 2000 for special charges discussed in
Note 5.
(E) Includes $(447) in 2002 and $4,576 in 2000 for special charges discussed in
Note 5.
(F) Includes interest, net; foreign exchange; corporate expenses; gains on
sales of investments; and certain legal costs. Also includes special
charges of $(177) in 2002 and $5,397 in 2000, respectively, as discussed in
Note 5.
(G) Includes cash and investments and corporate assets.
Geographic Information
The countries in which the Company has local revenue-generating operations have
been combined into the following geographic areas: the United States, including
Puerto Rico; and International, which is composed of Europe, Canada, Latin
America, Japan and Asia Pacific.
Revenues to unaffiliated customers are based upon the source of the
product shipment. Long-lived assets, which include net property, plant and
equipment, are based upon physical location. Intangible assets are not included
since, by their nature, they do not have a physical or geographic location.
2002 2001 2000
- --------------------------------------------------------------------------
Revenues
- --------------------------------------------------------------------------
United States $2,172,894 $2,016,523 $1,863,555
International 1,860,175 1,729,659 1,754,779
------------------------------------------------
Total $4,033,069 $3,746,182 $3,618,334
================================================
Long-Lived Assets
- --------------------------------------------------------------------------
United States $ 974,797 $ 956,138 $ 866,125
International 653,464 633,671 578,741
Corporate 137,469 126,214 131,192
------------------------------------------------
Total $1,765,730 $1,716,023 $1,576,058
================================================
Quarterly Data (Unaudited)
Thousands of dollars, except per-share amounts
2002
- -----------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Year
- -----------------------------------------------------------------------------------------------------------------------
Revenues $944,946 $1,012,971 $998,460 $1,076,692 $4,033,069
Gross Profit 445,184 489,838 484,389 529,989 1,949,400
Net Income 99,673 129,188 119,725 131,396 479,982(A)
Earnings Per Share:
Basic .38 .50 .46 .51 1.85
Diluted .37 .48 .44 .50 1.79
=================================================================================
2001
- -----------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Year
- -----------------------------------------------------------------------------------------------------------------------
Revenues $864,418 $950,949 $943,290 $987,525 $3,746,182
Gross Profit 410,500 464,211 468,399 489,780 1,832,890
Income Before Cumulative
Effect of Accounting Change 73,698 114,165 118,129 132,410 438,402
Net Income 36,948(B) 114,165 118,129 132,410 401,652(B)
Basic Earnings Per Share:
Income Before Cumulative Effect .29 .44 .46 .51 1.69
Net Income .15(B) .44 .46 .51 1.55(B)
Diluted Earnings Per Share:
Income Before Cumulative Effect .28 .42 .44 .49 1.63
Net Income .14(B) .42 .44 .49 1.49(B)
=================================================================================
(A) Includes $9,937 and $11,571 of special charges in the second and third
quarters, respectively.
(B) Includes an after-tax charge of $36,750, or $.14 per share, for the
cumulative effect of accounting change.
55
Becton, Dickinson and Company
Corporate Information
Annual Meeting
2:00 p.m.
Tuesday, February 11, 2003
Woodcliff Lake Hilton
200 Tice Boulevard
Woodcliff Lake, NJ 07675
Direct Stock Purchase Plan
The Direct Stock Purchase Plan
established through EquiServe
Trust Company, N.A., enhances
the services provided to existing
shareholders and facilitates
initial investments in BD shares.
Additional information may
be obtained by calling EquiServe
Trust Company, N.A. at
1-800-955-4743.
NYSE Symbol
BDX
Transfer Agent and Registrar
EquiServe Trust Company, N.A.
P.O. Box 2500
Jersey City, NJ 07303-2500
Phone: 1-800-519-3111
E-mail: equiserve@equiserve.com
Internet:www.equiserve.com
Shareholder Information
BD's Statement of Corporate
Governance Principles, BD's
Business Conduct and Compliance
Guide, the charters of BD's Audit,
Compensation and Benefits,
and Corporate Governance and
Nominating Committees of the
Board of Directors, and BD's
reports and statements filed
with or furnished to the Securities
and Exchange Commission, are
posted on BD's Web site at
www.bd.com/investors/.
Shareholders may receive,
without charge, printed copies
of these documents, including
BD's 2002 Annual Report to
the Securities and Exchange
Commission on Form 10-K,
by contacting:
Investor Relations
BD
1 Becton Drive
Franklin Lakes, NJ 07417-1880
Phone: 1-800-284-6845
Internet: www.bd.com
Independent Auditors
Ernst & Young LLP
787 Seventh Avenue
New York, NY 10019-6085
Phone: 212-773-3000
Internet: www.ey.com
The trademarks indicated by italics
are the property of, licensed to,
promoted or distributed by
Becton, Dickinson and Company,
its subsidiaries or related compa-
nies. All other brands are trade-
marks of their respective holders.
Certain BD Biosciences products
are intended for research use
only, and not for use in diagnostic
or therapeutic procedures.
'c' 2002 BD
Common Stock Prices and Dividends
- -----------------------------------------------------------------------------------
By Quarter 2002 2001
--------------------------------------------------------------------
High Low Dividends High Low Dividends
First $38.11 $32.02 $0.0975 $35.13 $26.56 $0.095
Second 37.72 32.15 0.0975 39.00 31.31 0.095
Third 38.47 33.66 0.0975 36.00 30.14 0.095
Fourth 33.78 25.01 0.0975 37.55 33.49 0.095
56