FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________________ to ______________ Commission file number 001-4802 Becton, Dickinson and Company ------------------------------------------------------ (Exact name of registrant as specified in its charter) New Jersey 22-0760120 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1 Becton Drive, Franklin Lakes, New Jersey 07417-1880 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) (201) 847-6800 ---------------------------------------------------- (Registrant's telephone number, including area code) N/A ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Common Stock Shares Outstanding as of July 31, 2004 ----------------------------- -------------------------------------- Common stock, par value $1.00 250,548,119
BECTON, DICKINSON AND COMPANY FORM 10-Q For the quarterly period ended June 30, 2004 TABLE OF CONTENTS
Page Number ----------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets......................... 3 Condensed Consolidated Statements of Income................... 4 Condensed Consolidated Statements of Cash Flows............... 5 Notes to Condensed Consolidated Financial Statements.......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 30 Item 4. Controls and Procedures.......................................... 30 Part II. OTHER INFORMATION Item 1. Legal Proceedings................................................ 30 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities............................................. 32 Item 3. Defaults Upon Senior Securities.................................. 33 Item 4. Submission of Matters to a Vote of Security Holders.............. 33 Item 5. Other Information................................................ 33 Item 6. Exhibits and Reports on Form 8-K................................. 34 Signatures.................................................................. 35 Exhibits.................................................................... 36
2 ITEM 1. FINANCIAL STATEMENTS BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS Thousands of Dollars
June 30, September 30, 2004 2003 ----------- ------------- (Unaudited) Assets Current Assets: Cash and equivalents $ 659,511 $ 519,886 Trade receivables, net 806,674 781,342 Inventories: Materials 124,961 129,958 Work in process 137,779 145,500 Finished products 505,276 519,556 ----------- ----------- 768,016 795,014 Prepaid expenses, deferred taxes and other 276,265 242,327 ----------- ----------- Total Current Assets 2,510,466 2,338,569 Property, plant and equipment 4,053,230 3,905,155 Less allowances for depreciation and amortization 2,207,504 2,060,384 ----------- ----------- 1,845,726 1,844,771 Goodwill, Net 543,442 536,788 Core and Developed Technology, Net 228,751 242,683 Other Intangibles, Net 104,179 111,713 Capitalized Software, Net 292,837 305,608 Other 193,093 192,121 ----------- ----------- Total Assets $ 5,718,494 $ 5,572,253 =========== =========== Liabilities and Shareholders' Equity Current Liabilities: Short-term debt $ 6,063 $ 121,920 Payables and accrued expenses 1,000,045 921,454 ----------- ----------- Total Current Liabilities 1,006,108 1,043,374 Long-Term Debt 1,149,173 1,184,031 Long-Term Employee Benefit Obligations 358,223 328,807 Deferred Income Taxes and Other 126,662 119,087 Commitments and Contingencies Shareholders' Equity: Preferred stock 31,736 34,448 Common stock 332,662 332,662 Capital in excess of par value 402,423 257,178 Retained earnings 4,235,345 3,950,592 Unearned ESOP compensation (3,708) (3,693) Deferred compensation 9,955 8,974 Common shares in treasury - at cost (1,721,362) (1,439,934) Accumulated other comprehensive loss (208,723) (243,273) ----------- ----------- Total Shareholders' Equity 3,078,328 2,896,954 ----------- ----------- Total Liabilities and Shareholders' Equity $ 5,718,494 $ 5,572,253 =========== ===========
See notes to condensed consolidated financial statements 3 BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Thousands of Dollars, Except Per-share Data (Unaudited)
Three Months Ended Nine Months Ended June 30, June 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Revenues $1,257,755 $1,165,369 $3,727,809 3,351,058 Cost of products sold 624,212 622,387 1,903,145 1,750,854 Selling and administrative 338,052 308,475 1,006,300 891,454 Research and development 60,800 60,042 184,007 179,921 Litigation settlement 100,000 -- 100,000 -- ---------- ---------- ---------- ---------- Total Operating Costs and Expenses 1,123,064 990,904 3,193,452 2,822,229 ---------- ---------- ---------- ---------- Operating Income 134,691 174,465 534,357 528,829 Interest expense, net (4,128) (9,658) (21,018) (26,944) Other expense, net (701) (2,036) (3,865) (3,799) ---------- ---------- ---------- ---------- Income Before Income Taxes 129,862 162,771 509,474 498,086 Income tax provision 20,466 32,753 109,516 112,390 ---------- ---------- ---------- ---------- Net Income $ 109,396 $ 130,018 $ 399,958 $ 385,696 ========== ========== ========== ========== Earnings Per Share: Basic $ .43 $ .51 $ 1.58 1.51 ========== ========== ========== ========== Diluted $ .41 $ .49 $ 1.51 1.46 ========== ========== ========== ========== Dividends Per Common Share $ .15 $ .10 $ .45 $ .30 ========== ========== ========== ==========
See notes to condensed consolidated financial statements 4 BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Thousands of Dollars (Unaudited)
Nine Months Ended June 30, --------------------- 2004 2003 --------- --------- Operating Activities Net income $ 399,958 $ 385,696 Adjustments to net income to derive net cash provided by operating activities: Depreciation and amortization 273,724 259,632 Pension contribution (18,000) (100,000) Impairment of intangible assets -- 30,089 BGM charges (Note 9) 38,551 -- Change in working capital 73,053 (90,857) Other, net 54,351 24,406 --------- --------- Net Cash Provided by Operating Activities 821,637 508,966 --------- --------- Investing Activities Capital expenditures (170,040) (168,181) Capitalized software (33,280) (47,286) (Purchases) sales of investments, net (8,179) 1,975 Other, net (47,552) (30,728) --------- --------- Net Cash Used for Investing Activities (259,051) (244,220) --------- --------- Financing Activities Change in short-term debt (104,408) (270,145) Proceeds of long-term debt -- 410,091 Payments of long-term debt (17,202) (1,230) Repurchase of common stock (350,002) (205,636) Issuance of common stock from treasury 163,697 81,481 Dividends paid (115,110) (78,839) --------- --------- Net Cash Used for Financing Activities (423,025) (64,278) --------- --------- Effect of exchange rate changes on cash and equivalents 64 11,634 --------- --------- Net increase in cash and equivalents 139,625 212,102 Opening Cash and Equivalents 519,886 243,115 --------- --------- Closing Cash and Equivalents $ 659,511 $ 455,217 ========= =========
See notes to condensed consolidated financial statements 5 BECTON, DICKINSON AND COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Dollar and Share Amounts in Thousands, Except Per-share Data June 30, 2004 Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of the Company, include all adjustments which are of a normal recurring nature, necessary for a fair presentation of financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and footnotes required for a presentation in accordance with generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included or incorporated by reference in the Company's 2003 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. Stock-based Compensation Under the provisions of Statement of Financial Accounting Standards ("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 No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Under the intrinsic value method, compensation cost of 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. Accordingly, no stock-based compensation cost relating to stock options has been reflected in the Company's net income for the three and nine months ended June 30, 2004 and 2003, as all options granted under the Company's stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Stock-based compensation cost recorded in the nine-month period ended June 30, 2004 related to performance-based and other stock awards granted under the Company's Stock Award Plan was not material. The following table illustrates the effect on net income and earnings per share if the Company were to have applied the fair value recognition provisions of SFAS No. 123, as amended, to account for stock-based compensation for the periods indicated. These pro-forma amounts may not be representative of the effects on net income in future years since options generally vest over several years and additional awards may be made each year. 6
Three Months Ended June 30, Nine Months Ended June 30, --------------------------- -------------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net income, as reported $109,396 $130,018 $399,958 $385,696 Less stock-based compensation expense, net of tax (7,854) (8,863) (24,175) (26,501) -------- -------- -------- -------- Pro forma net income $101,542 $121,155 $375,783 $359,195 ======== ======== ======== ======== Reported earnings per share: Basic $ .43 $ .51 $ 1.58 $ 1.51 Diluted $ .41 $ .49 $ 1.51 $ 1.46 ======== ======== ======== ======== Pro forma earnings per share: Basic $ .40 $ .47 $ 1.48 $ 1.40 Diluted $ .39 $ .46 $ 1.43 $ 1.37 ======== ======== ======== ========
The Company estimated the fair value of stock options using the Black-Scholes option-pricing model, modified for dividends and using certain assumptions for stock price volatility, risk free interest rates, dividend yields and expected terms until exercise. The value determined by the Black-Scholes option-pricing model is based on assumptions at the time of grant and subsequent modifications to such assumptions are not reflected in the value of prior grants. The Black-Scholes model is a trading option-pricing model that does not reflect either the non-traded nature of employee stock options or the limited transferability of such options. This model also does not consider restrictions on trading for all employees, including certain restrictions imposed on senior management of the Company. Therefore, if the Company had used an option-pricing model other than Black-Scholes, pro-forma results different from those shown above may have been reported. Note 2 - Comprehensive Income Comprehensive income for the Company is comprised of the following:
Three Months Ended Nine Months Ended June 30, June 30, ------------------- ------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net Income $109,396 $130,018 $399,958 $385,696 Other Comprehensive Income, Net of Tax Foreign currency translation adjustments (26,743) 119,524 29,141 201,099 Unrealized gains on investments, net of amounts recognized 348 4,081 1,111 6,929 Unrealized gains (losses) on cash flow hedges, net of amounts realized 9,096 (4,909) 4,298 (6,999) -------- -------- -------- -------- Comprehensive Income $ 92,097 $248,714 $434,508 $586,725 ======== ======== ======== ========
The amount of unrealized gains or losses on investments and cash flow hedges in comprehensive 7 income has been adjusted to reflect any realized gains and recognized losses included in net income during the three and nine months ended June 30, 2004 and 2003. Note 3 - Earnings per Share The following table sets forth the computations of basic and diluted earnings per share:
Three Months Ended Nine Months Ended June 30, June 30, ------------------- ------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net Income $109,396 $130,018 $399,958 $385,696 Preferred stock dividends (520) (578) (1,605) (1,779) -------- -------- -------- -------- Income available to common shareholders (A) 108,876 129,440 398,353 383,917 Preferred stock dividends - using "if converted" method 520 578 1,605 1,779 Additional ESOP contribution - using "if converted" method (2) (116) (33) (375) -------- -------- -------- -------- Income available to common shareholders after assumed conversions (B) $109,394 $129,902 $399,925 $385,321 ======== ======== ======== ======== Average common shares outstanding (C) 252,433 255,038 252,617 255,008 Dilutive stock equivalents from stock plans 8,461 6,239 7,949 5,176 Shares issuable upon conversion of preferred stock 3,442 3,811 3,442 3,811 -------- -------- -------- -------- Average common and common equivalent shares outstanding - assuming dilution (D) 264,336 265,088 264,008 263,995 ======== ======== ======== ======== Basic earnings per share (A/C) $ .43 $ .51 $ 1.58 $ 1.51 ======== ======== ======== ======== Diluted earnings per share (B/D) $ .41 $ .49 $ 1.51 $ 1.46 ======== ======== ======== ========
During the three and nine months ended June 30, 2004, 1,076 and 6,946 common shares, respectively were issued upon exercise of stock options. During the three and nine months ended June 30, 2003, 2,732 and 4,750 common shares, respectively were issued upon exercise of stock options. 8 Note 4 - Contingencies The Company is involved, both as a plaintiff and a defendant, in various legal proceedings and claims which arise in the ordinary course of business. Given the uncertain nature of litigation generally, the Company is not able to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which it is a party. In accordance with generally accepted accounting principles, the Company establishes reserves to the extent probable future losses are estimable. While the Company believes that the claims against it, 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 any 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 valid defenses to each of the suits pending against it and is engaged in a vigorous defense of each of these matters. Further discussion of legal proceedings is included in Note 11 in Notes to Condensed Consolidated Financial Statements, below, and Part II of this Report on Form 10-Q. Note 5 - Segment Data The Company's organizational structure is based upon its three principal business segments: BD Medical ("Medical"), BD Diagnostics ("Diagnostics"), and BD Biosciences ("Biosciences"). The Company evaluates segment performance based upon operating income. Segment operating income represents revenues reduced by product costs and operating expenses. Financial information for the Company's segments is as follows:
Three Months Ended Nine Months Ended June 30, June 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Revenues Medical $ 682,645 $ 648,428 $1,992,154 $1,821,884 Diagnostics 374,195 338,183 1,158,015 1,026,637 Biosciences 200,915 178,758 577,640 502,537 ---------- ---------- ---------- ---------- Total Revenues (A) $1,257,755 $1,165,369 $3,727,809 $3,351,058 ========== ========== ========== ==========
9
Three Months Ended Nine Months Ended June 30, June 30, ----------------------- ----------------------- 2004 2003 2004 2003 --------- -------- --------- -------- Segment Operating Income Medical $ 155,075 $150,218 $ 398,281(B) $402,827 Diagnostics 86,009 72,385 271,135 223,412 Biosciences 41,819 (318)(C) 117,247 46,896(C) --------- -------- --------- -------- Total Segment Operating Income 282,903 222,285 786,663 673,135 Unallocated Items (D) (153,041)(E) (59,514) (277,189)(E) (175,049) --------- -------- --------- -------- Income Before Income Taxes $ 129,862 $162,771 $ 509,474 $498,086 ========= ======== ========= ========
Three Months Ended Nine Months Ended June 30, June 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Revenues by Organizational Units BD Medical Medical Surgical Systems $ 389,231 $ 370,374 $1,147,554 $1,057,291 Diabetes Care 147,992 137,114 431,086 390,491 Pharmaceutical Systems 131,211 127,348 371,786 334,399 Ophthalmic Systems 14,211 13,592 41,728 39,703 ---------- ---------- ---------- ---------- $ 682,645 $ 648,428 $1,992,154 $1,821,884 ---------- ---------- ---------- ---------- BD Diagnostics Preanalytical Systems $ 201,945 $ 180,372 $ 582,868 $ 523,632 Diagnostic Systems 172,250 157,811 575,147 503,005 ---------- ---------- ---------- ---------- $ 374,195 $ 338,183 $1,158,015 $1,026,637 ---------- ---------- ---------- ---------- BD Biosciences Immunocytometry Systems $ 102,108 $ 84,081 $ 287,815 $ 231,613 Clontech 14,934 15,811 46,074 48,854 Pharmingen 36,123 32,217 102,565 90,160 Discovery Labware 47,750 46,649 141,186 131,910 ---------- ---------- ---------- ---------- $ 200,915 $ 178,758 $ 577,640 $ 502,537 ---------- ---------- ---------- ---------- Total $1,257,755 $1,165,369 $3,727,809 $3,351,058 ========== ========== ========== ==========
(A) Intersegment revenues are not material. (B) Current year amount includes $45,024 of charges related to blood glucose monitoring products as discussed further in Note 9 in Notes to the Condensed Consolidated Financial Statements. (C) Prior year amounts included $34,231 of charges for the quarter and nine months related to the write down of intangible assets and inventory. (D) Includes primarily interest, net; foreign exchange; corporate expenses; and certain legal costs. (E) Current year amounts include the litigation settlement of $100,000 as discussed further in Note 11 in Notes to Condensed Consolidated Financial Statements. 10 Note 6 - Special Charges In fiscal year 2002, the Company recorded special charges of $21,508 associated with a manufacturing restructuring program in the Medical segment that was aimed at optimizing manufacturing efficiencies and improving the Company's competitiveness in the different markets in which it operates. This program involved the termination of 533 employees in China, France, Germany, Ireland, Mexico and the United States. As of June 30, 2004, 525 of the targeted employees had been severed. The Company expects the remaining terminations to be substantially completed and the related accrued severance to be substantially paid in the first quarter of fiscal 2005. A summary of the 2002 special charge accrual activity during the first nine months of fiscal 2004 follows:
Severance Restructuring --------- ------------- Accrual Balance at September 30, 2003 $ 1,800 $100 Payments (1,000) -- ------- ---- Accrual Balance at June 30, 2004 $ 800 $100 ======= ====
Note 7 - Goodwill and Other Intangible Assets The components of intangible assets are as follows:
June 30, 2004 September 30, 2003 ----------------------- ----------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization -------- ------------ -------- ------------ Amortized intangible assets: Core and Developed Technology $353,414 $124,663 $352,372 $109,689 Patents, Trademarks, & Other 318,502 229,460 314,211 217,635 -------- -------- -------- -------- Total $671,916 $354,123 $666,583 $327,324 ======== ======== ======== ======== Unamortized intangible assets: Goodwill $543,442 $536,788 Trademarks 15,137 15,137 -------- -------- Total $558,579 $551,925 ======== ========
The change in the carrying amount of goodwill for the nine months ended June 30, 2004 relates to foreign currency translation adjustments. The estimated intangible amortization expense for the fiscal years ending September 30, 2004 to 2009 are as follows: 2004 - $35,200; 2005 - $34,600; 2006 - - $31,900; 2007 - $31,700; 2008 - $30,500; 2009 - $29,200. 11 During the third quarter of fiscal 2003, the Company decided to discontinue the development of certain products and product applications associated with the BD IMAGN'TM' instrument platform in the Biosciences segment. As a result, the Company recorded an impairment loss of $26,717 (a component of the total charge of $34,231 as discussed in Note 5 in Notes to Condensed Consolidated Financial Statements, above) in cost of products sold. This loss included the write-down of $25,230 of core and developed technology, $960 of indefinite-lived trademarks, and $527 of licenses. The impairment loss was calculated using estimated discounted future cash flows. Note 8 - Adoption of New Accounting Standards In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 significantly changes whether entities included in its scope are consolidated by their sponsors, transferors or investors. The Interpretation introduces a new consolidation model, "the variable interests model," which determines control based on potential variability in gains and losses of the entity being evaluated for consolidation. Under FIN 46, variable interest entities are to be consolidated if certain conditions are met. Variable interests are contractual, ownership or other interests in an entity that expose their holders to the risks and rewards of the variable interest entity. Variable interests include equity investments, leases, derivatives, guarantees and other instruments whose values change with changes in the variable interest entity's assets. The Company adopted FIN 46 in the second quarter of 2004, which had no impact on the Company's consolidated financial position, results of operations or financial disclosures. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act introduces a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare. Detailed regulations necessary to implement the Act have not yet been issued. Based upon preliminary analyses, the Company expects the impact of the Act to have a favorable, yet immaterial, impact on its consolidated financial position and results of operations. Note 9 - Blood Glucose Monitoring Charges The Company recorded a pre-tax charge of $45,024 to cost of products sold in the Company's results of operations for the three months ended December 31, 2003 related to its blood glucose monitoring ("BGM") products, which included a reserve of $6,473 in connection with the voluntary product recall of certain lots of BGM test strips and the write-off of $29,803 of certain test strip inventories. Based upon internal testing, it was determined that certain BGM test strip lots, produced by BD's manufacturing partner, were not performing within BD's specifications. As a result, the Company decided to recall the affected lots and dispose of the non-conforming product in inventory. In addition, the charge reflects BD's decision to focus its sales and marketing efforts on the BD Logic'TM' and Paradigm Link'TM' blood glucose meters in the United States, and to discontinue support of the BD Latitude'TM' system product offering in the United States, resulting in a write-off of $8,748 of related blood glucose meters and fixed assets. 12 Note 10 - 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. Net pension and postretirement expense included the following components for the three months ended June 30:
Pension Plans Other Postretirement Benefits ------------------- ----------------------------- 2004 2003 2004 2003 -------- -------- ------- ------- Components of net pension and postretirement costs: Service cost $ 14,033 $ 11,200 $ 875 $ 790 Interest cost 15,423 13,518 3,841 3,621 Expected return on plan assets (12,773) (11,798) -- -- Amortization of prior service cost 59 21 (1,559) (1,558) Amortization of loss 4,337 3,280 1,298 836 Other (76) (34) -- -- -------- -------- ------- ------- Net pension and postretirement costs $ 21,003 $ 16,187 $ 4,455 $ 3,689 ======== ======== ======= =======
Net pension expense attributable to foreign plans included in the preceding table was $3,713 and $3,326 for the three months ended June 30, 2004 and 2003, respectively. Net pension and postretirement expense included the following components for the nine months ended June 30:
Pension Plans Other Postretirement Benefits ------------------- ----------------------------- 2004 2003 2004 2003 -------- -------- ------- ------- Components of net pension and postretirement costs: Service cost $ 42,099 $ 33,600 $ 2,625 $ 2,370 Interest cost 46,269 40,554 11,523 10,863 Expected return on plan assets (38,319) (35,394) -- -- Amortization of prior service cost 177 63 (4,677) (4,674) Amortization of loss 13,011 9,840 3,894 2,508 Other (228) (102) -- -- -------- -------- ------- ------- Net pension and postretirement costs $ 63,009 $ 48,561 $13,365 $11,067 ======== ======== ======= =======
Net pension expense attributable to foreign plans included in the preceding table was $11,139 and $9,978 for the nine months ended June 30, 2004 and 2003, respectively. The Company contributed $18,000, on a discretionary basis, to increase the funding for the U.S. pension plan during the third quarter of 2004. 13 Note 11 - Litigation Settlement On July 2, 2004, the Company entered into an agreement to settle the lawsuit filed against it by Retractable Technologies, Inc. (RTI). The settlement was paid on July 6, 2004. The Company recorded the related pretax charge of $100,000 ($63,000 after taxes and approximately 24 cents per diluted share) in the Company's results of operations for the three and nine months ended June 30, 2004. Note 12 - Subsequent Event On July 1, 2004, the Company acquired the outstanding equity interest in Atto Bioscience, Inc., a privately-held company specializing in optical instrumentation, software, and reagents for real-time analysis of interactions taking place in living cells. The purchase price was approximately $25,300 in cash, subject to certain post-closing adjustments. The transaction will be recorded in the Company's financial statements during the fourth quarter of fiscal 2004. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Company Overview 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 ("Medical"), BD Diagnostics ("Diagnostics") and BD Biosciences ("Biosciences"). Our products are marketed in the United States and internationally through independent distribution channels, directly to end users and by sales representatives. BD's management operates the business consistent with the following core strategies: o to increase revenue growth by focusing on products that deliver greater benefits to patients, healthcare workers and researchers; o to improve operating effectiveness and balance sheet productivity; and, o to strengthen organizational and associate capabilities in the ever-changing healthcare environment. In assessing our implementation of these strategies and BD's financial condition and operating performance, management generally reviews quarterly forecast data, monthly actual results, segment sales and other similar information. We also consider trends related to certain key financial data, including gross profit margin, selling and administrative expense and cash flows, as further described below. The results of our strategies are reflected in our third quarter 2004 performance. BD reported third quarter revenues of $1.258 billion, an increase of 8% from the same period a year ago. After excluding the favorable impact of foreign currency translation, revenues for the quarter increased approximately 5%. For the nine-month period, reported revenues of $3.728 billion represented an 11% increase from a year ago, or approximately 6% at constant foreign exchange rates. Sales in the United States of safety-engineered devices grew 14% to $190 million in the third quarter of 2004. International revenue growth of 10% and 16% for the three and nine-month period, respectively, was favorably affected by foreign currency translation, primarily the Euro. After excluding the favorable impact of foreign currency translation, international revenues grew approximately 4% and 5% for the three and nine-month period, respectively. As further discussed in our 2003 Annual Report on Form 10-K, we face currency exposure that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We purchase option and forward contracts to partially protect against adverse foreign exchange rate movements. Our balance sheet remains strong with net cash provided by operations at approximately $822 million for the nine months ended June 30, 2004 and our debt-to-capitalization ratio (shareholders' 15 equity, net non-current deferred income tax liabilities, and debt) was reduced to 26.7% at June 30, 2004 from 30.4% at September 30, 2003. Our ability to sustain our long-term growth will depend on a number of factors, including our ability to expand our core business (including geographical expansion), develop innovative new products with higher gross profit margins across our business segments, and continue to improve operating efficiency and organizational effectiveness. Numerous factors can affect our ability to achieve these goals, including without limitation, U.S and global economic conditions, increased competition and healthcare cost containment initiatives. Our anticipated revenue growth over the next three years is expected to come from the following: o Core business growth and expansion, including the continued transition to safety-engineered devices; o Expanding the sale of our high quality products around the globe; and, o Development in each business segment of new products and services that have higher benefits to patients, healthcare workers and researchers. Results of Operations Revenues Refer to Note 5 in the Notes to Condensed Consolidated Financial Statements for segment financial data. Medical Segment - Third quarter revenues of $683 million represented an increase of 5% from the prior year's period, or 2% at constant foreign exchange rates. Medical revenues reflect the continued conversion in the United States to safety-engineered products which had sales of $110 million, as compared with $101 million in the prior year's quarter. The Medical sales growth rate in the current quarter was constrained by comparison to a particularly strong quarter in fiscal 2003. For the nine-month period, Medical revenue of $1.992 billion represented growth from the prior period of 9%, or 4% excluding the favorable impact of foreign currency translation. Diagnostics Segment - Third quarter revenues of $374 million represented an increase of 11% over the prior year period, or 8% excluding the favorable impact of foreign currency translation. Diagnostics revenues reflect the continued conversion in the United States to safety-engineered products which had sales of $80 million, as compared with $66 million in the prior year's quarter. Revenues for the Diagnostic Systems unit grew 9% to $172 million reflecting, among other things, solid worldwide sales of BD ProbeTec'TM' ET instrument platforms. For the nine-month period, Diagnostics revenues of $1.158 billion represented growth from the prior year period of 13%, or 8% excluding the favorable impact of foreign currency translation. Biosciences Segment - Third quarter revenues of $201 million represented an increase of 12% over the prior year period, or 9% excluding the favorable impact of foreign currency translation. Instrument revenue growth was driven by sales of the recently launched BD FACSCanto'TM' and BD FACSArray'TM' analyzers and continued strong performance of the BD FACSAria'TM' cell sorter. Sales of flow cytometry reagents were also strong in both the clinical and research 16 markets. Clontech revenues continue to be negatively affected by a slowdown in certain segments of the research market, as well as by competitive pressures. For the nine-month period, Biosciences revenues of $578 million represented growth from the prior year period of 15%, or 9% excluding the favorable impact of foreign currency translation. Segment Operating Income Medical Segment Segment operating income for the third quarter was $155 million, an increase of 3% when compared to $150 million in the prior year's third quarter, reflecting the fluctuations in revenues, as discussed above. In addition, investment spending associated with our blood glucose monitoring ("BGM") products was offset, in part by the benefits resulting from the 2002 Medical restructuring plan (see Note 6 in the Notes to Condensed Consolidated Financial Statements). Segment operating income for the nine-month period was $398 million (after taking into account $45 million of BGM charges as discussed in Note 9 in Notes to the Condensed Consolidated Financial Statements), compared to $403 million in the prior year period. Segment operating income growth for the nine-month period, excluding the BGM charges, reflects increased sales of products with higher gross profit margins and the benefits of the 2002 Medical restructuring plan. Diagnostics Segment Segment operating income for the third quarter was $86 million compared to $72 million in the prior year's third quarter and reflects fluctuations in revenues as discussed above, as well as solid operational performance. Segment operating income for the nine-month period was $271 million compared to $223 million in the prior year period, and reflected increased sales of products with higher gross profit margins, including safety-engineered products and the BD ProbeTec'TM' ET instrument platform. Biosciences Segment Segment operating income was $42 million for the third quarter compared to a small loss in the prior year's quarter which included non-cash charges of $34 million, as discussed below. Segment operating income for the nine-month period was $117 million compared to $47 million in the prior year nine-month period. Excluding the impact of the non-cash charges, segment operating income growth resulted from increased sales of flow cytometry products, including the BD FASCAria'TM' cell sorter and recently launched BD FACSCanto'TM' and BD FACSArray'TM' analyzers. In addition, segment operating income benefited from recent reductions in the number of employees of the Clontech and Pharmingen units. During the third quarter of the prior year, we recorded non-cash charges of $34 million in cost of products sold. The majority of these charges related to the third quarter decision to discontinue the development of certain products and product applications associated with the BD IMAGN'TM' instrument platform in the Biosciences segment. As a result, we recorded an impairment charge of $27 million for the related intangible assets and inventory. In addition, as the result of a review of under-performing portions of its molecular biology product line, the Biosciences segment also wrote down the value of related inventory and intellectual property by $7 million. See Note 7 in Notes to Condensed Consolidated Financial Statements for further discussion of the write down of the intangible assets. 17 Gross Profit Margin Gross profit margin was 50.4% for the third quarter and 48.9% for the nine-month period, compared with 46.6% and 47.8%, respectively, for the comparable prior year periods. Excluding the BGM charges (see Note 9 in the Notes to Condensed Consolidated Financial Statements) in the current year and the $34 million non-cash charges in the prior year, as described above, the increase in gross profit margin for the third quarter and nine-month period reflected increased sales of products with higher gross profit margins, including safety-engineered products, diabetes-related products and the BD ProbeTec'TM' ET instrument platform. In addition, gross profit margin benefited from the effects of the 2002 Medical restructuring plan, discussed above. Selling and Administrative Expense Selling and administrative expense increased to 26.9% of revenues for the third quarter and 27.0% of revenues for the nine-month period, compared with the prior year's ratios of 26.5% and 26.6%, respectively. Aggregate expenses were higher for these periods, reflecting increased investment in various strategic initiatives, in particular, blood glucose monitoring products. Litigation Settlement As discussed in Note 11 in Notes to Condensed Consolidated Financial Statements, BD recorded a pretax charge of $100 million (approximately $63 million after taxes and approximately 24 cents per diluted share) in its results of operations for the three and nine months ended June 30, 2004 related to the settlement of the litigation brought by Retractable Technologies, Inc. (RTI). Interest Expense, Net Interest expense, net, decreased to $4.1 million in the current quarter from $9.7 million in the prior year's quarter. This decrease was primarily due to the conclusion of certain tax examinations during the current quarter which resulted in the recognition of interest income. Income Taxes The reported income tax rate was 16% for the third quarter and 21% for the nine-month period in the current year. The prior year's tax rates were 20% for the quarter, and 23% for the nine-month period which includes the effect of the non-cash charges discussed above. We expect the tax rate for the 2004 fiscal year to be approximately 23%, which reflects a 1% benefit due to the BGM charges, and a 1% benefit due to the settlement of litigation. Net Income and Earnings Per Share Net income and diluted earnings per share for the third quarter were $109 million and 41 cents, respectively, compared with $130 million and 49 cents in the comparable prior year period. The litigation settlement in the third quarter reduced net income by approximately $63 million and diluted earnings per share by 24 cents. Non-cash charges in the prior year's quarter, as discussed above, reduced net income by approximately $20 million and diluted earnings per share by 8 cents. Net income and diluted earnings per share for the current nine-month period were $400 million and $1.51, respectively, compared with $386 million and $1.46 in the prior year. BGM charges in the first quarter of 2004 reduced net income by $28 million and diluted earnings per share by 11 cents. 18 Liquidity and Capital Resources Net cash provided by operating activities, which continues to be our primary source of funds to finance operating needs and capital expenditures, was $822 million during the nine-month period of fiscal 2004, and $509 million in the same period in fiscal 2003. Net cash provided by operations was reduced by $18 million and $100 million in discretionary cash contributions to the U.S. pension plan during the first nine months of fiscal 2004 and fiscal 2003, respectively. BD's funding policy for its defined benefit pension plans is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Security Act of 1974, plus any additional amounts that management may determine to be appropriate considering the funded status of the plans, tax deductibility, our cash flows, and other factors. As further discussed in our fiscal year 2003 Annual Report on Form 10-K, changes in pension costs may occur in the future due to changes in assumptions inherent in the actuarial valuations used, in part, to determine the Company's minimum funding obligations. The litigation settlement, referred to above, was paid in July 2004 and the payment will be reflected in the Consolidated Statement of Cash Flows during the fourth quarter of fiscal 2004. Net cash used for investing activities for the nine-month period of the current year was $259 million, compared to $244 million in the same period a year ago. Capital expenditures were $170 million in the first nine months of fiscal 2004 and $168 million in the same period in fiscal 2003. We expect capital spending for fiscal 2004 to be between $275 million and $300 million. Capitalized software in the nine-month period of fiscal 2004 included approximately $19 million of costs associated with a business information systems upgrade within our Biosciences segment in the United States, which was not within the scope of our "Genesis" worldwide systems implementation which was substantially completed in 2003. Similar to our accounting for the costs of Genesis, these costs are capitalized in accordance with the AICPA's Statement of Position 98-1 "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." Net cash used for financing activities in the nine-month period of the current year was $423 million, compared to $64 million in the prior year period, and included the repurchase of shares of our common stock for approximately $350 million, compared to approximately $206 million in the prior year period. As of June 30, 2004, authorization to repurchase an additional 6.2 million common shares remained under a January 2004 resolution of the Board of Directors. Stock repurchases were offset, in part, by the issuance of common stock from treasury due to the exercising of stock options by employees. In the current year, cash used for the repayment of debt was approximately $122 million while, in the prior year, proceeds from the issuance of debt were approximately $410 million, of which $270 million was used to repay short-term debt. As of June 30, 2004, total debt of $1.2 billion represented 26.7% of total capital (shareholders' equity, net non-current deferred income tax liabilities, and debt), down from 30.4% at September 30, 2003. We have in place a commercial paper borrowing program that is available to meet our short-term financing needs, including working capital requirements. There were no borrowings outstanding under this program as of June 30, 2004. As discussed in our fiscal year 2003 Annual Report on Form 10-K, we had in place two syndicated credit facilities totaling $900 million in order to provide backup support for our commercial paper program and for other general corporate purposes. These consisted of a $450 million 364-day Credit Agreement expiring in August 2004 and a $450 million Five Year Credit Agreement expiring in August 2006. In August 2004, we amended and restated the Five Year Credit Agreement, increasing the amount available from $450 million to $900 million and extending the expiration date from August 2006 19 to August 2009. At the same time, we terminated the $450 million 364-day Credit Agreement due to expire in August 2004. Therefore, total syndicated credit facilities continue to be $900 million. The amended and restated facility contains a single financial covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the most recent four consecutive fiscal quarters. For the last eight consecutive fiscal quarters, this ratio has ranged from 16-to-1 up to 20-to-1. Given the availability of this facility and our strong credit ratings, we continue to have a high degree of confidence in our ability to refinance debt maturities, as well as to incur substantial additional debt, if required. BD's ability to generate cash flow from operations, issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms could be adversely affected in the event there was a material decline in the demand for BD's products, deterioration in BD's key financial ratios or credit ratings, or other significantly unfavorable changes in conditions. While a deterioration in the Company's credit ratings would increase the costs associated with maintaining and borrowing under its existing credit arrangements, such a downgrade would not affect the Company's ability to draw on these credit facilities, nor would it result in an acceleration of the scheduled maturities of any outstanding debt. Critical Accounting Policies The preparation of financial statements in accordance with generally accepted accounting principles ("GAAP") requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements for the year ended September 30, 2003, which are incorporated by reference in our 2003 Annual Report on Form 10-K. Certain of our accounting policies are considered critical, as summarized in the Financial Review section of our 2003 Annual Report on Form 10-K, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by management, often employing the use of estimates about the effects of matters that are inherently uncertain. Estimation methodologies are applied consistently from year to year. There have been no significant changes in the application of the critical accounting policies since September 30, 2003. These critical accounting policies have been reviewed with the Audit Committee of the Board of Directors. 20 Use of Non-GAAP Financial Measures When discussing BD's financial performance, we at times will present certain non-GAAP financial measures, as follows: o BD presents its revenue growth rates at constant foreign exchange rates. Management believes that presenting growth rates at constant foreign exchange rates allows investors to view the actual operating results of BD and of its segments without the impact of fluctuations in foreign currency exchange rates, thereby facilitating comparisons to prior periods. o BD presents its earnings per share and other financial measures after excluding the impact of significant charges and the impact of unusual or non-recurring items. Management believes that excluding such impact from earnings per share and other financial measures allows investors to more easily compare BD's financial performance to prior periods and to understand the operating results of BD without the effects of these significant charges and unusual or non-recurring items. BD's management considers these non-GAAP financial measures internally in evaluating our performance for the reasons expressed above. Investors should consider these non-GAAP measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. 21 BECTON, DICKINSON AND COMPANY SUPPLEMENTAL REVENUE INFORMATION REVENUES BY BUSINESS SEGMENTS AND UNITS Three Months Ended June 30, (Unaudited; Amounts in thousands)
U.S. Revenues ------------------------------ 2004 2003 % Change ------------------------------ BD MEDICAL Medical Surgical Systems $200,407 $190,831 5.0 Diabetes Care 85,693 81,329 5.4 Pharmaceutical Systems 24,382 28,029 (13.0) Ophthalmic Systems 5,830 5,847 (0.3) - -------------------------------------------------------------------------------- TOTAL $316,312 $306,036 3.4 - -------------------------------------------------------------------------------- BD DIAGNOSTICS Preanalytical Systems $113,305 $102,869 10.1 Diagnostic Systems 93,537 88,019 6.3 - -------------------------------------------------------------------------------- TOTAL $206,842 $190,888 8.4 - -------------------------------------------------------------------------------- BD BIOSCIENCES Discovery Labware $ 26,353 $ 25,053 5.2 Immunocytometry Systems 39,871 34,960 14.0 Clontech 8,076 8,091 (0.2) Pharmingen 19,156 18,060 6.1 - -------------------------------------------------------------------------------- TOTAL $ 93,456 $ 86,164 8.5 - -------------------------------------------------------------------------------- TOTAL UNITED STATES $616,610 $583,088 5.7 - --------------------------------------------------------------------------------
22 BECTON, DICKINSON AND COMPANY SUPPLEMENTAL REVENUE INFORMATION REVENUES BY BUSINESS SEGMENTS AND UNITS Three Months Ended June 30, (continued) (Unaudited; Amounts in thousands)
International Revenues ---------------------------------------------------- % Change ------------------------------ FX 2004 2003 Reported FX Neutral Impact ---------------------------------------------------- BD MEDICAL Medical Surgical Systems $188,824 $179,543 5.2 0.2 5.0 Diabetes Care 62,299 55,785 11.7 5.2 6.5 Pharmaceutical Systems 106,829 99,319 7.6 0.4 7.2 Ophthalmic Systems 8,381 7,745 8.2 (0.1) 8.3 - ---------------------------------------------------------------------------------- TOTAL $366,333 $342,392 7.0 1.0 6.0 - ---------------------------------------------------------------------------------- BD DIAGNOSTICS Preanalytical Systems $ 88,640 $ 77,503 14.4 7.8 6.6 Diagnostic Systems 78,713 69,792 12.8 6.2 6.6 - ---------------------------------------------------------------------------------- TOTAL $167,353 $147,295 13.6 7.0 6.6 - ---------------------------------------------------------------------------------- BD BIOSCIENCES Discovery Labware $ 21,397 $ 21,596 (0.9) (7.4) 6.5 Immunocytometry Systems 62,237 49,121 26.7 20.0 6.7 Clontech 6,858 7,720 (11.2) (17.1) 5.9 Pharmingen 16,967 14,157 19.8 11.6 8.2 - ---------------------------------------------------------------------------------- TOTAL $107,459 $ 92,594 16.1 9.2 6.9 - ---------------------------------------------------------------------------------- TOTAL INTERNATIONAL $641,145 $582,281 10.1 3.9 6.2 - ----------------------------------------------------------------------------------
23 BECTON, DICKINSON AND COMPANY SUPPLEMENTAL REVENUE INFORMATION REVENUES BY BUSINESS SEGMENTS AND UNITS Three Months Ended June 30, (continued) (Unaudited; Amounts in thousands)
Total Revenues -------------------------------------------------------- % Change ------------------------------ FX 2004 2003 Reported FX Neutral Impact -------------------------------------------------------- BD MEDICAL Medical Surgical Systems $ 389,231 $ 370,374 5.1 2.7 2.4 Diabetes Care 147,992 137,114 7.9 5.3 2.6 Pharmaceutical Systems 131,211 127,348 3.0 (2.6) 5.6 Ophthalmic Systems 14,211 13,592 4.6 (0.2) 4.8 - -------------------------------------------------------------------------------------- TOTAL $ 682,645 $ 648,428 5.3 2.1 3.2 - -------------------------------------------------------------------------------------- BD DIAGNOSTICS Preanalytical Systems $ 201,945 $ 180,372 12.0 9.1 2.9 Diagnostic Systems 172,250 157,811 9.1 6.2 2.9 - -------------------------------------------------------------------------------------- TOTAL $ 374,195 $ 338,183 10.6 7.8 2.8 - -------------------------------------------------------------------------------------- BD BIOSCIENCES Discovery Labware $ 47,750 $ 46,649 2.4 (0.7) 3.1 Immunocytometry Systems 102,108 84,081 21.4 17.5 3.9 Clontech 14,934 15,811 (5.5) (8.5) 3.0 Pharmingen 36,123 32,217 12.1 8.5 3.6 - -------------------------------------------------------------------------------------- TOTAL $ 200,915 $ 178,758 12.4 8.9 3.5 - -------------------------------------------------------------------------------------- TOTAL REVENUES $1,257,755 $1,165,369 7.9 4.8 3.1 - --------------------------------------------------------------------------------------
24 BECTON, DICKINSON AND COMPANY SUPPLEMENTAL REVENUE INFORMATION REVENUES BY BUSINESS SEGMENTS AND UNITS Nine Months Ended June 30, (Unaudited; Amounts in thousands)
U.S. Revenues ---------------------------------- 2004 2003 % Change ---------------------------------- BD MEDICAL Medical Surgical Systems $ 595,344 $ 564,313 5.5 Diabetes Care 249,272 240,483 3.7 Pharmaceutical Systems 79,013 72,351 9.2 Ophthalmic Systems 17,118 18,109 (5.5) - -------------------------------------------------------------------------------- TOTAL $ 940,747 $ 895,256 5.1 - -------------------------------------------------------------------------------- BD DIAGNOSTICS Preanalytical Systems $ 329,396 $ 306,850 7.3 Diagnostic Systems 301,782 281,776 7.1 - -------------------------------------------------------------------------------- TOTAL $ 631,178 $ 588,626 7.2 - -------------------------------------------------------------------------------- BD BIOSCIENCES Discovery Labware $ 74,233 $ 71,399 4.0 Immunocytometry Systems 104,768 87,300 20.0 Clontech 23,163 24,353 (4.9) Pharmingen 53,638 50,994 5.2 - -------------------------------------------------------------------------------- TOTAL $ 255,802 $ 234,046 9.3 - -------------------------------------------------------------------------------- TOTAL UNITED STATES $1,827,727 $1,717,928 6.4 - --------------------------------------------------------------------------------
25 BECTON, DICKINSON AND COMPANY SUPPLEMENTAL REVENUE INFORMATION REVENUES BY BUSINESS SEGMENTS AND UNITS Nine Months Ended June 30, (continued) (Unaudited; Amounts in thousands)
International Revenues ----------------------------------------------------------- % Change --------------------------------- 2004 2003 Reported FX Neutral FX Impact ----------------------------------------------------------- BD MEDICAL Medical Surgical Systems $ 552,210 $ 492,978 12.0 2.6 9.4 Diabetes Care 181,814 150,008 21.2 9.0 12.2 Pharmaceutical Systems 292,773 262,048 11.7 (0.8) 12.5 Ophthalmic Systems 24,610 21,594 14.0 2.5 11.5 - ----------------------------------------------------------------------------------------- TOTAL $1,051,407 $ 926,628 13.5 2.7 10.8 - ----------------------------------------------------------------------------------------- BD DIAGNOSTICS Preanalytical Systems $ 253,472 $ 216,782 16.9 5.5 11.4 Diagnostic Systems 273,365 221,229 23.6 12.5 11.1 - ----------------------------------------------------------------------------------------- TOTAL $ 526,837 $ 438,011 20.3 9.1 11.2 - ----------------------------------------------------------------------------------------- BD BIOSCIENCES Discovery Labware $ 66,953 $ 60,511 10.6 (0.2) 10.8 Immunocytometry Systems 183,047 144,313 26.8 15.6 11.2 Clontech 22,911 24,501 (6.5) (15.5) 9.0 Pharmingen 48,927 39,166 24.9 11.7 13.2 - ----------------------------------------------------------------------------------------- TOTAL $ 321,838 $ 268,491 19.9 8.6 11.3 - ----------------------------------------------------------------------------------------- TOTAL INTERNATIONAL $1,900,082 $1,633,130 16.3 5.4 10.9 - -----------------------------------------------------------------------------------------
26 BECTON, DICKINSON AND COMPANY SUPPLEMENTAL REVENUE INFORMATION REVENUES BY BUSINESS SEGMENTS AND UNITS Nine Months Ended June 30, (continued) (Unaudited; Amounts in thousands)
Total ----------------------------------------------------------- % Change --------------------------------- 2004 2003 Reported FX Neutral FX Impact ----------------------------------------------------------- BD MEDICAL Medical Surgical Systems $1,147,554 $1,057,291 8.5 4.1 4.4 Diabetes Care 431,086 390,491 10.4 5.7 4.7 Pharmaceutical Systems 371,786 334,399 11.2 1.4 9.8 Ophthalmic Systems 41,728 39,703 5.1 (1.1) 6.2 - ----------------------------------------------------------------------------------------- TOTAL $1,992,154 $1,821,884 9.3 3.9 5.4 - ----------------------------------------------------------------------------------------- BD DIAGNOSTICS Preanalytical Systems $ 582,868 $ 523,632 11.3 6.6 4.7 Diagnostic Systems 575,147 503,005 14.3 9.5 4.8 - ----------------------------------------------------------------------------------------- TOTAL $1,158,015 $1,026,637 12.8 8.0 4.8 - ----------------------------------------------------------------------------------------- BD BIOSCIENCES Discovery Labware $ 141,186 $ 131,910 7.0 2.1 4.9 Immunocytometry Systems 287,815 231,613 24.3 17.2 7.1 Clontech 46,074 48,854 (5.7) (10.2) 4.5 Pharmingen 102,565 90,160 13.8 8.0 5.8 - ----------------------------------------------------------------------------------------- TOTAL $ 577,640 $ 502,537 14.9 8.9 6.0 - ----------------------------------------------------------------------------------------- TOTAL REVENUES $3,727,809 $3,351,058 11.2 5.9 5.3 - -----------------------------------------------------------------------------------------
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 Becton, Dickinson and Company ("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. 27 Forward-looking statements are based on current expectations of future events. The forward-looking statements are and will be based on management's then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events and developments or otherwise. The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements: 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, particularly 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 industry practices and regulations resulting in increased pricing pressures, including the continued consolidation among healthcare providers, trends toward managed care and healthcare cost containment and government laws and regulations relating to sales and promotion, reimbursement and pricing generally. 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 Our ability to obtain the anticipated benefits of any restructuring programs that we may undertake. 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 28 intellectual property rights, all of which can preclude or delay commercialization of a product. o Pending and potential litigation or other proceedings 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 BD's business or operations. 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 our ability to successfully 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 healthcare industry. o Issuance of new or revised accounting standards by the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board. 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. 29 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in information reported since the fiscal year ended September 30, 2003. Item 4. Controls and Procedures An evaluation was carried out by BD's management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of BD's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2004. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were, as of the end of the period covered by this report, effective and designed to ensure that material information relating to BD and its consolidated subsidiaries would be made known to them by others within these entities. There were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2004 identified in connection with the above-referenced evaluation that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings We are involved, both as a plaintiff and a defendant, in various legal proceedings which arise in the ordinary course of business, including product liability and environmental matters. A more complete description of legal proceedings has been set forth in our 2003 Annual Report on Form 10-K (the "10-K") and our Form 10-Q for the quarter ended March 31, 2004. During the quarter ended June 30, 2004 and subsequent thereto, the following changes have occurred. Litigation - Other than Environmental RTI Litigation The action entitled Retractable Technologies, Inc. ("RTI") vs. Becton Dickinson and Company, et al. (Civil Action No. 501 CV 036, United States District Court, Eastern District of Texas) was settled on July 2, 2004. Under the terms of the settlement, the Company paid $100 million to the plaintiff, in exchange for a general release of all claims (excluding certain patent matters) and a dismissal of the case with prejudice, which means that this case cannot be re-filed. Greiner Litigation In the suit brought by C.A. Greiner & Soehne GmbH ("Greiner") against BD UK Limited in the Patent Court of the Central London County Court in London, England, a trial date has been set for May 9, 2005. 30 Therasense Litigation On May 28, 2004, Therasense, Inc. ("Therasense") filed suit against BD in the U.S. District Court for the Northern District of California (Case Number: C 04-02123 WDB) asserting that BD's Blood Glucose Monitoring products infringe certain Therasense patents. On August 10, 2004, in response to a motion filed by Therasense in the U.S. District Court for the District of Massachusetts, the court transferred to the court in California an action previously filed by BD against Therasense requesting a declaratory judgment that BD's products do not infringe the Therasense patents and that the Therasense patents are invalid. BD believes that Therasense's infringement allegations are without merit and intends to vigorously defend the lawsuit. Qui Tam Lawsuit The Company has been informed by the Civil Division of the U.S. Department of Justice (the "Civil Division") that a private party has filed a qui tam complaint against the Company alleging violations of the Federal False Claims Act. Under the FCA, the Civil Division has a certain period of time in which to decide whether to join the claim against the Company as an additional plaintiff; if not, the private plaintiff is free to pursue the claim on its own. To the Company's knowledge, no decision has yet been made by the Civil Division whether to join this claim. As of this date, no complaint has been served upon the Company, and this matter is currently under seal by the Court. We believe that our business practices have complied with applicable laws. Other BD has been informed that the U.S. Attorney's Office is conducting an investigation of transactions between a company and certain of its suppliers, including BD and, in connection with this investigation, certain administrative subpoenas requesting BD documents have been issued. BD believes that its transactions with the other company have fully complied with the law and that BD is not currently a target of this investigation. BD intends to cooperate fully in responding to its subpoena. Summary Given the uncertain nature of litigation generally, we are not able to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which we are a party. In accordance with generally accepted accounting principles, BD establishes reserves to the extent probable future losses are estimable. 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 any 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 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 are also 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. 31 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. The table below sets forth certain information regarding our purchases of common stock of BD during the fiscal quarter ended June 30, 2004. Issuer Repurchases of Equity Securities
- ----------------------------------------------------------------------------------------------------------------- Total Number of Shares Total Number of Purchased as Part of Maximum Number of Shares For the three months Shares Purchased Average Price Publicly Announced Plans that may yet be Purchased ended June 30, 2004 (1) Paid per Share or Programs (2) Under the Plans or Programs - ----------------------------------------------------------------------------------------------------------------- April 1 - 30, 2004 402,959 $50.58 400,000 9,281,000 - ----------------------------------------------------------------------------------------------------------------- May 1 - 31, 2004 2,615,439 $49.29 2,615,000 6,666,000 - ----------------------------------------------------------------------------------------------------------------- June 1 - 30, 2004 505,704 $51.42 505,286 6,160,714 - ----------------------------------------------------------------------------------------------------------------- Total 3,524,102 $49.74 3,520,286 6,160,714 - -----------------------------------------------------------------------------------------------------------------
(1) Includes 3,816 shares purchased during the third quarter in open market transactions by the trustee under the Deferred Compensation Plan and the 1996 Directors' Deferral Plan. (2) These repurchases were made pursuant to a repurchase program for 10 million shares announced on January 27, 2004 (the "2004 Program"). There is no expiration date for the 2004 Program. 32 Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. 33 Item 6. Exhibits and Reports on Form 8-K. a) Exhibits Exhibit 3 By-Laws, as amended and restated as of July 27, 2004 Exhibit 10(a) 1996 Directors' Deferral Plan, as amended as of May 25, 2004 Exhibit 10(b) Deferred Compensation Plan, as amended and restated as of March 22, 2004 Exhibit 10(c) Stock Award Plan, as amended and restated as of May 25, 2004 Exhibit 10(d) Amended and Restated Five-Year Credit Agreement, dated as of August 13, 2004 among the registrant and the banks named therein. Exhibit 31 Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to SEC Rule 13a - 14(a). Exhibit 32 Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a - 14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code. b) Reports on Form 8-K During the three-month period ended June 30, 2004, we filed a Current Report on Form 8-K to report the declaration of our quarterly dividend. In addition, during the three-month period ended June 30, 2004, we furnished the following information pursuant to a Current Report on Form 8-K: (1) In a report dated April 22, 2004, we announced our results for the second quarter ended March 31, 2004. (2) In a report dated May 27, 2004, we furnished information regarding a change in beneficial ownership by an executive officer. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Becton, Dickinson and Company (Registrant) Dated: August 13, 2004 /s/ John R. Considine ---------------------------------------------------- John R. Considine Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ William A. Tozzi ---------------------------------------------------- William A. Tozzi Vice President and Controller (Chief Accounting Officer) 35 INDEX TO EXHIBITS Exhibit Number Description of Exhibits - -------------- ----------------------- 3 By-Laws, as amended and restated as of July 27, 2004 10(a) 1996 Directors' Deferral Plan, as amended as of May 25, 2004 10(b) Deferred Compensation Plan, as amended and restated as of March 22, 2004 10(c) Stock Award Plan, as amended and restated as of May 25, 2004 10(d) Amended and Restated Five-Year Credit Agreement, dated as of August 13, 2004 among the registrant and the banks named therein. 31 Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to SEC Rule 13a - 14(a). 32 Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a - 14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code. STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as............................ 'TM' The section symbol shall be expressed as.............................. 'SS'