10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 10, 2005
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 | March 31, 2005 |
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
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 
No 
Indicate
by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class
of Common Stock |
Shares
Outstanding as of March 31, 2005 |
|
Common stock, par value $1.00 |
252,518,394 |
BECTON, DICKINSON
AND COMPANY
FORM 10-Q
For the quarterly period ended
March 31, 2005
TABLE OF CONTENTS
ITEM
1. FINANCIAL STATEMENTS
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Thousands of Dollars
| Assets | March
31, 2005 |
September
30, 2004 |
||||||
(Unaudited)
|
||||||||
| Current Assets: | ||||||||
| Cash and equivalents | $ | 825,497 | $ | 719,378 | ||||
| Short-term investments | 53,394 | 32,119 | ||||||
| Trade receivables, net | 885,938 | 807,380 | ||||||
| Inventories: | ||||||||
| Materials | 101,377 | 96,020 | ||||||
| Work in process | 148,783 | 132,841 | ||||||
| Finished products | 557,068 | 509,917 | ||||||
| |
|
|||||||
| 807,228 | 738,778 | |||||||
| Prepaid expenses, deferred taxes and other | 260,754 | 279,985 | ||||||
| Assets held for sale | 60,362 | 63,694 | ||||||
| |
|
|||||||
| Total Current Assets | 2,893,173 | 2,641,334 | ||||||
| Property, plant and equipment | 4,239,215 | 4,104,222 | ||||||
| Less allowances for depreciation and amortization | 2,344,938 | 2,223,225 | ||||||
| |
|
|||||||
| 1,894,277 | 1,880,997 | |||||||
| Goodwill, Net | 487,591 | 473,211 | ||||||
| Core and Developed Technology, Net | 186,721 | 188,541 | ||||||
| Other Intangibles, Net | 87,570 | 93,466 | ||||||
| Capitalized Software, Net | 262,862 | 283,918 | ||||||
| Other | 191,270 | 191,112 | ||||||
| |
||||||||
| Total Assets | $ | 6,003,464 | $ | 5,752,579 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current Liabilities: | ||||||||
| Short-term debt | $ | 141,052 | $ | 49,289 | ||||
| Payables and accrued expenses | 985,820 | 986,612 | ||||||
| Liabilities held for sale | 12,091 | 14,181 | ||||||
| Total Current Liabilities | 1,138,963 | 1,050,082 | ||||||
| Long-Term Debt | 1,051,369 | 1,171,506 | ||||||
| Long-Term Employee Benefit Obligations | 302,002 | 374,222 | ||||||
| Deferred Income Taxes and Other | 93,799 | 88,906 | ||||||
| Commitments and Contingencies | ||||||||
| Shareholders' Equity: | ||||||||
| Preferred stock | - | 31,142 | ||||||
| Common stock | 332,662 | 332,662 | ||||||
| Capital in excess of par value | 549,731 | 414,515 | ||||||
| Retained earnings | 4,557,000 | 4,264,778 | ||||||
| Deferred compensation | 11,053 | 10,222 | ||||||
| Common shares in treasury - at cost | (1,982,243 | ) | (1,816,756 | ) | ||||
| Accumulated other comprehensive loss | (50,872 | ) | (168,700 | ) | ||||
| |
|
|||||||
| Total Shareholders' Equity | 3,417,331 | 3,067,863 | ||||||
| |
|
|||||||
| Total Liabilities and Shareholders' Equity | $ | 6,003,464 | $ | 5,752,579 | ||||
| |
|
|||||||
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
March 31, |
Six
Months Ended
March 31, |
|||||||||||||
|
2005
|
2004
|
2005
|
2004
|
|||||||||||
| Revenues | $ | 1,365,530 | $ | 1,253,633 | $ | 2,653,899 | $ | 2,438,753 | ||||||
| Cost of products sold | 678,018 | 629,516 | 1,312,519 | 1,263,771 | ||||||||||
| Selling and administrative | 366,339 | 334,363 | 707,427 | 658,460 | ||||||||||
| Research and development | 65,988 | 60,155 | 128,071 | 118,443 | ||||||||||
| |
|
|
|
|||||||||||
| Total Operating Costs and Expenses | 1,110,345 | 1,024,034 | 2,148,017 | 2,040,674 | ||||||||||
| |
|
|
|
|||||||||||
| Operating Income | 255,185 | 229,599 | 505,882 | 398,079 | ||||||||||
| Interest expense, net | (4,556 | ) | (7,960 | ) | (13,678 | ) | (16,888 | ) | ||||||
| Other expense, net | (2,242 | ) | (3,119 | ) | (5,103 | ) | (4,030 | ) | ||||||
| |
|
|
|
|||||||||||
| Income From Continuing Operations Before Income Taxes | 248,387 | 218,520 | 487,101 | 377,161 | ||||||||||
| Income tax provision | 61,878 | 54,437 | 106,194 | 88,153 | ||||||||||
| |
|
|
|
|||||||||||
| Income From Continuing Operations | 186,509 | 164,083 | 380,907 | 289,008 | ||||||||||
| Income from Discontinued Operations, net of income | ||||||||||||||
| taxes of $1,015, $616, $1,638 and $897, respectively | 1,641 | 1,077 | 2,594 | 1,554 | ||||||||||
| |
|
|
|
|||||||||||
| Net Income | $ | 188,150 | $ | 165,160 | $ | 383,501 | $ | 290,562 | ||||||
| |
|
|
|
|||||||||||
| Basic Earnings Per Share: | ||||||||||||||
| Income from Continuing Operations | $ | 0.74 | $ | 0.65 | $ | 1.51 | $ | 1.14 | ||||||
| Income from Discontinued Operations | $ | 0.01 | $ | - | $ | 0.01 | $ | 0.01 | ||||||
| |
|
|
|
|||||||||||
| Basic Earnings Per Share (A) | $ | 0.74 | $ | 0.65 | $ | 1.52 | $ | 1.15 | ||||||
| |
|
|
|
|||||||||||
| Diluted Earnings Per Share: | ||||||||||||||
| Income from Continuing Operations | $ | 0.71 | $ | 0.62 | $ | 1.45 | $ | 1.10 | ||||||
| Income from Discontinued Operations | $ | 0.01 | $ | - | $ | 0.01 | $ | 0.01 | ||||||
| |
|
|
|
|||||||||||
| Diluted Earnings Per Share (A) | $ | 0.72 | $ | 0.62 | $ | 1.46 | $ | 1.10 | ||||||
| |
|
|
|
|||||||||||
| Dividends Per Common Share | $ | .18 | $ | .15 | $ | .36 | $ | .30 | ||||||
| |
|
|
|
|||||||||||
(A): Total per share amounts may not add due to rounding.
See notes to condensed consolidated
financial statements
4
BECTON, DICKINSON
AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thousands of Dollars
(Unaudited)
Six
Months Ended March 31, |
||||||||
2005 |
2004 |
|||||||
| Operating Activities | ||||||||
| Net income | $ | 383,501 | $ | 290,562 | ||||
| Income from discontinued operations, net | (2,594 | ) | (1,554 | ) | ||||
| |
|
|||||||
| Income from continuing operations, net | 380,907 | 289,008 | ||||||
| Adjustments to income from continuing operations to derive net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | 193,042 | 181,429 | ||||||
| Share-based compensation (Note 7) | 28,145 | - | ||||||
| Pension contributions | (103,000 | ) | - | |||||
| BGM charges (Note 8) | - | 38,551 | ||||||
| Change in working capital | (94,660 | ) | (50,807 | ) | ||||
| Other, net | 45,983 | 22,206 | ||||||
| Net Cash Provided by Continuing Operating Activities | 450,417 | 480,387 | ||||||
| Investing Activities | ||||||||
| Capital expenditures | (108,178 | ) | (107,826 | ) | ||||
| Capitalized software | (10,433 | ) | (22,717 | ) | ||||
| Purchases of investments, net | (19,118 | ) | (3,638 | ) | ||||
| Other, net | (20,849 | ) | (17,133 | ) | ||||
| Net Cash Used for Continuing Investing Activities | (158,578 | ) | (151,314 | ) | ||||
| Financing Activities | ||||||||
| Change in short-term debt | 91,636 | (103,792 | ) | |||||
| Payments of long-term debt | (104,384 | ) | (17,046 | ) | ||||
| Repurchase of common stock | (224,934 | ) | (174,889 | ) | ||||
| Issuance of common stock from treasury | 97,811 | 134,006 | ||||||
| Tax benefit from stock option exercises | 38,396 | 39,047 | ||||||
| Dividends paid | (92,326 | ) | (76,318 | ) | ||||
| Net Cash Used for Continuing Financing Activities | (193,801 | ) | (198,992 | ) | ||||
| |
|
|||||||
| Net Cash Provided by Discontinued Operations | 3,836 | 7,792 | ||||||
| Effect of exchange rate changes on cash and equivalents | 4,245 | 2,710 | ||||||
| Net increase in cash and equivalents | 106,119 | 140,583 | ||||||
| Opening Cash and Equivalents | 719,378 | 519,886 | ||||||
| Closing Cash and Equivalents | $ | 825,497 | $ | 660,469 | ||||
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
March 31, 2005
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of the Company, include all adjustments which are of a normal recurring nature, necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and footnotes required for a presentation in accordance with 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 Companys 2004 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. Certain reclassifications have been made to prior year amounts to conform to current year presentation.
Note 2 Comprehensive Income
Comprehensive income is comprised of the following:
Three
Months Ended March 31, |
Six
Months Ended March 31, |
|||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||
| Net Income | $ | 188,150 | $ | 165,160 | $ | 383,501 | $ | 290,562 | ||||||
| Other Comprehensive (Loss) Income, Net of Tax | ||||||||||||||
| Foreign currency translation adjustments | (27,284 | ) | (12,514 | ) | 122,647 | 55,884 | ||||||||
| Unrealized (losses) gains on investments, | ||||||||||||||
| net of amounts recognized | (3,631 | ) | 2,043 | (2,271 | ) | 763 | ||||||||
| Unrealized gains (losses) on cash flow | ||||||||||||||
| hedges, net of amounts realized | 3,117 | (2,384 | ) | (2,548 | ) | (4,798 | ) | |||||||
| Comprehensive Income | $ | 160,352 | $ | 152,305 | $ | 501,329 | $ | 342,411 | ||||||
| |
|
|
|
|||||||||||
The amount of unrealized gains or losses on investments and cash flow hedges in comprehensive income has been adjusted to reflect any realized gains and recognized losses included in net income during the three and six months ended March 31, 2005 and 2004.
6
Note 3 - Earnings per Share
The following table sets forth the computations of basic and diluted earnings per share:
Three
Months Ended March 31, |
Six
Months Ended March 31, |
|||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||
| Income from continuing | ||||||||||||||
| operations | $ | 186,509 | $ | 164,083 | $ | 380,907 | $ | 289,008 | ||||||
| Preferred stock dividends | - | (535 | ) | (367 | ) | (1,085 | ) | |||||||
| Income from continuing | ||||||||||||||
| operations available to | ||||||||||||||
| common shareholders (A) | 186,509 | 163,548 | 380,540 | 287,923 | ||||||||||
| Preferred stock dividends - | ||||||||||||||
| using "if converted" method | - | 535 | 367 | 1,085 | ||||||||||
| Additional ESOP contribution - | ||||||||||||||
| using "if converted" method | - | (4 | ) | - | (17 | ) | ||||||||
| Income from continuing | ||||||||||||||
| operations available to | ||||||||||||||
| common shareholders after | ||||||||||||||
| assumed conversions (B) | $ | 186,509 | $ | 164,079 | $ | 380,907 | $ | 288,991 | ||||||
| Average common shares | ||||||||||||||
| outstanding (C) | 253,427 | 253,294 | 252,317 | 252,710 | ||||||||||
| Dilutive stock equivalents from | ||||||||||||||
| stock plans | 8,589 | 8,240 | 8,848 | 7,532 | ||||||||||
| Shares issuable upon conversion | ||||||||||||||
| of preferred stock | - | 3,521 | 1,228 | 3,521 | ||||||||||
| |
|
|
|
|||||||||||
| Average common and common | ||||||||||||||
| equivalent shares outstanding | ||||||||||||||
| - assuming dilution (D) | 262,016 | 265,055 | 262,393 | 263,763 | ||||||||||
| |
|
|
|
|||||||||||
| Basic earnings per share - income | ||||||||||||||
| from continuing operations (A/C) | $ | .74 |
$ |
.65 |
$ |
1.51 |
$ |
1.14 |
||||||
| Diluted earnings per share - | ||||||||||||||
| income from continuing | ||||||||||||||
| operations (B/D) | $ | .71 | $ | .62 | $ | 1.45 | $ | 1.10 | ||||||
During the three and six months ended March 31, 2005; 1,479 common shares and 3,691 common shares were issued upon exercise of stock options, respectively. During the three and six months ended March 31, 2004; 3,299 common shares and 5,870 common shares were issued upon exercise of stock options, respectively.
7
Note 4 - Contingencies
The Company is involved, both as a plaintiff and a defendant, in various legal proceedings and claims which arise in the ordinary course of business.
Given the uncertain nature of litigation generally, the Company is not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which it is a party. In accordance with accounting principles generally accepted in the United States, the Company establishes accruals to the extent probable future losses are estimable. While the Company believes 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, 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 BDs 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 BD 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 Part II of this report.
Note 5 - Segment Data
The Companys 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 Companys segments is as follows:
Three
Months Ended March 31, |
Six
Months Ended March 31, |
|||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||
| Revenues | ||||||||||||||
| Medical | $ | 731,665 | $ | 682,641 | $ | 1,425,487 | $ | 1,309,509 | ||||||
| Diagnostics | 429,769 | 382,875 | 843,552 | 783,820 | ||||||||||
| Biosciences | 204,096 | 188,117 | 384,860 | 345,424 | ||||||||||
|
|
|
|
|
|||||||||||
| Total Revenues (A) | $ | 1,365,530 | $ | 1,253,633 | $ | 2,653,899 | $ | 2,438,753 | ||||||
|
|
|
|
|
|||||||||||
8
Three
Months Ended March 31, |
Six
Months Ended March 31, |
|||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||
| Segment Operating Income | ||||||||||||||
| Medical | $ | 162,484 | $ | 151,260 | $ | 325,805 | $ | 243,206 | (B) | |||||
| Diagnostics | 116,779 | 87,491 | 219,675 | 185,126 | ||||||||||
| Biosciences | 46,178 | 44,630 | 83,477 | 73,773 | ||||||||||
|
|
|
|
|
|||||||||||
| Total Segment Operating | ||||||||||||||
| Income | 325,441 | 283,381 | 628,957 | 502,105 | ||||||||||
| Unallocated Items (C) | (77,054 | ) | (64,861 | ) | (141,856 | ) | (124,944 | ) | ||||||
|
|
|
|
|
|||||||||||
| Income from Continuing | ||||||||||||||
| Operations Before | ||||||||||||||
| Income Taxes | $ | 248,387 | $ | 218,520 | $ | 487,101 | $ | 377,161 | ||||||
|
|
|
|
|
|||||||||||
Three
Months Ended March 31, |
Six
Months Ended March 31, |
|||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||
| Revenues by Organizational Units | ||||||||||||||
| BD Medical | ||||||||||||||
| Medical Surgical Systems | $ | 402,292 | $ | 383,480 | $ | 811,856 | $ | 758,323 | ||||||
| Diabetes Care | 162,196 | 150,068 | 320,874 | 283,094 | ||||||||||
| Pharmaceutical Systems | 152,771 | 135,376 | 263,456 | 240,575 | ||||||||||
| Ophthalmic Systems | 14,406 | 13,717 | 29,301 | 27,517 | ||||||||||
| |
|
|
|
|||||||||||
| $ | 731,665 | $ | 682,641 | $ | 1,425,487 | $ | 1,309,509 | |||||||
| |
|
|
|
|||||||||||
| BD Diagnostics | ||||||||||||||
| Preanalytical Systems | $ | 204,835 | $ | 195,943 | $ | 413,356 | $ | 380,923 | ||||||
| Diagnostic Systems | 224,934 | 186,932 | 430,196 | 402,897 | ||||||||||
| $ | 429,769 | $ | 382,875 | $ | 843,552 | $ | 783,820 | |||||||
| BD Biosciences | ||||||||||||||
| Immunocytometry Systems | $ | 113,760 | $ | 103,460 | $ | 213,860 | $ | 185,546 | ||||||
| Pharmingen | 37,925 | 36,104 | 71,626 | 66,442 | ||||||||||
| Discovery Labware | 52,411 | 48,553 | 99,374 | 93,436 | ||||||||||
| $ | 204,096 | $ | 188,117 | $ | 384,860 | $ | 345,424 | |||||||
| Total | $ | 1,365,530 | $ | 1,253,633 | $ | 2,653,899 | $ | 2,438,753 | ||||||
| |
|
|
|
|||||||||||
| (A) | Intersegment revenues are not material. | |
| (B) | Includes $45,024 of charges related to blood glucose monitoring products as discussed further in Note 8 in Notes to the Condensed Consolidated Financial Statements. | |
| (C) | Includes primarily interest, net; foreign exchange; corporate expenses; fiscal 2005 also includes share-based compensation expense; and fiscal 2004 also includes legal costs relating to litigation with Retractable Technologies, Inc. |
9
Note 6 - Goodwill and Other Intangible Assets
The components of intangible assets are as follows:
March
31, 2005 |
September
30, 2004 |
|||||||||||||
Gross Carrying Amount |
Accumulated
Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||
| Amortizable intangible assets: | ||||||||||||||
| Core and Developed Technology | $ | 306,826 | $ | 120,105 | $ | 297,342 | $ | 108,801 | ||||||
| Patents, Trademarks, & Other | 315,103 | 238,364 | 311,682 | 229,047 | ||||||||||
| Total | $ | 621,929 | $ | 358,469 | $ | 609,024 | $ | 337,848 | ||||||
| Indefinite-lived intangible assets: | ||||||||||||||
| Goodwill | $ | 487,591 | $ | 473,211 | ||||||||||
| Trademarks | 10,831 | 10,831 | ||||||||||||
| Total | $ | 498,422 | $ | 484,042 | ||||||||||
The change in the carrying amount of goodwill and core and developed technology for the six months ended March 31, 2005 relates to foreign currency translation adjustments.
The estimated intangible amortization expense for the fiscal years ending September 30, 2005 to 2010 are as follows: 2005 - $33,700; 2006 - $30,300; 2007 - $30,000; 2008 - $28,700; 2009 - $27,500; 2010 - $27,400.
Note 7 Share-Based Compensation
Fair Value
Method Accounting
Historically, the Company
accounted for stock options using the intrinsic value method. This method measures
share-based compensation expense as the amount by which the market price of
the stock on the date of grant exceeds the exercise price. The Company has not
recognized any share-based compensation expense under this method in recent
years because the Company granted stock options at the stock price as of the
date of grant.
Effective October 1, 2004, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (SFAS No. 123 (R)). This Statement requires compensation cost relating to share-based payment transactions to be recognized in the financial statements using a fair-value measurement method. Under the fair value method, the estimated fair value of awards is charged against income on a straight-line basis over the requisite service period, which is generally the vesting period. In addition, the Company granted restricted stock awards in November 2004 under its new long-term incentive program, as discussed further below. The Company selected the modified prospective method as prescribed in SFAS No. 123 (R) and therefore, prior periods were not restated. Under the modified prospective application, this Statement was applied to new awards granted in fiscal 2005, as well as to the unvested portion of previously granted equity-based awards for which the requisite service had not been rendered as of October 1, 2004.
10
Share-based compensation expense reduced the Companys results of operations as follows:
Three
Months Ended March 31, 2005 |
Six
Months Ended March 31, 2005 |
|||||||
| Income From Continuing Operations | ||||||||
| Before Income Taxes | $ | (16,555 | ) | $ | (28,145 | ) | ||
| |
|
|||||||
| Income from Continuing Operations | $ | (11,963 | ) | $ | (20,457 | ) | ||
|
|
|
|||||||
| Net income | $ | (11,963 | ) | $ | (20,457 | ) | ||
| |
|
|||||||
| Basic Earnings Per Share: | ||||||||
| Income from Continuing Operations | $ | (.05 | ) | $ | (.08 | ) | ||
| Income from Discontinued Operations | $ | - | $ | - | ||||
|
|
|
|||||||
| Net income | $ | (.05 | ) | $ | (.08 | ) | ||
|
|
|
|||||||
| Diluted Earnings Per Share: | ||||||||
| Income from Continuing Operations | $ | (.05 | ) | $ | (.08 | ) | ||
| Income from Discontinued Operations | $ | - | $ | - | ||||
|
|
|
|||||||
| Net income | $ | (.05 | ) | $ | (.08 | ) | ||
|
|
|
|||||||
For the six months ended March 31, 2005, share-based compensation is net of a cumulative pre-tax adjustment of $1,799 recorded in the first quarter of 2005 resulting from a change to the estimated forfeiture rate, reflecting actual experience, for both current and prior period unvested stock option grants.
Long-Term
Incentive Plan
In November 2004, the Company
granted share-based awards under the 2004 Employee and Director Equity-Based
Compensation Plan (the 2004 Plan), which provides for long-term
incentive compensation to employees and directors. The November 2004 awards
consisted of stock options, performance restricted stock units and time-vested
restricted stock units. The Company believes that such awards align the interest
of its employees with those of its shareholders and encourage employees to act
as equity owners of the Company.
Stock options
All stock option
grants are for a ten-year term. Stock options issued after November 2001 vest
over a four-year period. Stock options issued prior to November 2001 vested
over a three-year period. The fair value of the November 2004 stock option grants
were estimated on the date of grant using a lattice-based binomial option valuation
model that uses the following weighted-average assumptions: risk free interest
rate of 3.93%, expected volatility of 29%; expected dividend yield of 1.28%
and expected life of 6.5 years. Expected volatility is based upon historical
volatility for the Companys common stock and other factors. The expected
term of options granted is derived from the output of the model, using assumed
exercise rates based on historical exercise patterns, and represents the period
of time that options granted are expected to be outstanding. The risk free interest
rate used is based upon the published U.S. Treasury yield curve in effect at
the time of grant for instruments with a similar life. The dividend yield is
11
based upon the most recently declared quarterly dividend as of the grant date. Stock options granted prior to October 1, 2004 were valued based on the grant date fair value of those awards, using the Black-Scholes option pricing model, as previously calculated for pro-forma disclosures under SFAS No. 123 Accounting for Stock-based Compensation.
Performance-Based
Restricted Stock Units
Performance-based
restricted stock units cliff vest after three years, and are tied to BDs
performance against pre-established targets, including its compound growth rate
of consolidated revenues and average return on invested capital, over a three-year
performance period. Under BDs long-term incentive program, the actual
payout under these awards may vary from zero to 250% of an employees target
payout, based on BDs actual performance over the three-year performance
period. The fair value is based on the market price of the Companys stock
on the date of grant and assumes that the target payout level will be achieved.
Compensation cost is adjusted for subsequent changes in the outcome of performance-related
conditions until the vesting date.
Time Vested
Restricted Stock Units
Time vested
restricted stock units cliff vest three years after the date of grant. For certain
key executives of the Company, such units generally vest one year following
the employees retirement and the related share-based compensation expense
is recorded over the requisite service period based on an assumed average retirement
age. The fair value of all time vested restricted units is based on the market
value of the Companys stock on the date of grant.
Pro-forma Disclosure
The following table illustrates
the effect on net income and earnings per share if the Company were to have
applied the fair-value based method to account for all share-based awards for
the three and six months ended March 31, 2004.
12
|
Three Months
Ended March 31, 2004 |
Six Months
Ended March 31, 2004 |
|||||||
| Net income, as reported | $ | 165,160 | (a) | $ | 290,562 | (a) | ||
| Less share-based compensation expense, | ||||||||
| net of tax | (7,882 | ) | (16,321 | ) | ||||
|
|
|
|||||||
| Pro-forma net income | $ | 157,278 | $ | 274,241 | ||||
|
|
|
|||||||
| Reported earnings per share: | ||||||||
| Basic | $ | .65 | $ | 1.15 | ||||
| Diluted | $ | .62 | $ | 1.10 | ||||
|
|
|
|||||||
| Pro-forma earnings per share: | ||||||||
| Basic | $ | .62 | $ | 1.08 | ||||
| Diluted | $ | .59 | $ | 1.04 | ||||
|
|
|
|||||||
| (a) | Includes $851 and $1,391 of share-based compensation expense recorded during the three and six months ended March 31, 2004, respectively, relating to restricted stock awards granted in November 2003. |
The pro-forma amounts and fair value of each option grant were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in all periods: risk free interest rates of 3.66% to 4.50%; expected volatility of 32.5% to 33.2%; expected dividend yield of 1.16% to 1.21%; and expected life of 6 years.
Note 8 Blood Glucose Monitoring Charges
The Company recorded a pre-tax charge of $45,024 to cost of products sold in the Companys 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 BDs manufacturing partner, were not performing within BDs 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 BDs decision to focus its sales and marketing efforts on the BD Logic and Paradigm Link blood glucose meters in the United States, and to discontinue support of the BD Latitude system product offering in the United States, resulting in a write-off of $8,748 of related blood glucose meters and fixed assets. As of March 31, 2005, the accrual for product to be returned related to this product recall has been fully utilized.
13
Note 9 Benefit
Plans The Company has defined benefit
pension plans covering substantially all of its employees in the United States and certain
foreign locations. The Company also provides certain postretirement healthcare and life
insurance benefits to qualifying domestic retirees. Other postretirement benefit plans in
foreign countries are not material. Net pension and postretirement
expense included the following components for the three months ended March 31: Net pension expense attributable to foreign plans included in the preceding table was $4,102 and $3,713 for the three months ended
March 31, 2005 and 2004, respectively. Net pension and postretirement expense included the following components for the six months ended March 31: Net pension expense attributable to
foreign plans included in the preceding table was $8,204 and $7,426 for the six months
ended March 31, 2005 and 2004, respectively. The Company contributed, on a
discretionary basis, approximately $50,000 and $18,000, to increase the funding for its
U.S. and foreign pension plans, respectively, during the first quarter of 2005, and an
additional $35,000 to the U.S. pension plan in January 2005. In April 2005, the Company
contributed, on a discretionary basis, an additional $33,000 to the U.S. pension plan. 14
Note 10 Employee
Stock Ownership Plan During the first quarter
of 2005, the Trustee of the Companys Employee Stock Ownership Plan (ESOP)
converted all of the outstanding shares of Series B ESOP Convertible Preferred
Stock (ESOP Preferred) into Becton, Dickinson and Company common
stock. This was done in response to the November 2004 dividend declaration,
which reflected a 20% increase in the common dividend versus the preceding quarter
and increased the difference between the common dividend and the fixed dividend
payable on the ESOP Preferred shares (on an equivalent share basis). Conversion
of the ESOP Preferred occurred at the rate of 6.4 common shares for each share
of ESOP Preferred. Note 11
Discontinued Operations On September 28, 2004, the
Companys Board of Directors approved a plan to sell the Clontech unit of the BD
Biosciences segment. As a result, Clontechs results of operations are reported as
Discontinued Operations for all periods presented in the accompanying Condensed
Consolidated Statements of Income. Clontechs statement of financial position is
classified as Assets held for sale and Liabilities held for sale, in the accompanying
Condensed Consolidated Balance Sheets for all periods presented. Results of Discontinued Operations
for the three and six months ended March 31 are as follows: Assets held for sale included the
following at: 15
Liabilities held for sale included
the following at: The components of Income from
Discontinued Operations Before Income Taxes are as follows: 16
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. BDs management operates the
business consistent with the following core strategies: In assessing the outcomes of these
strategies and BDs 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. The results of our strategies are
reflected in our second quarter 2005 financial and operational performance. BD reported
second quarter revenues of $1.366 billion, an increase of 9% from the same period a year
ago. This quarters growth rate includes an estimated $32 million or 3% favorable
impact from foreign currency translation, particularly with respect to the Euro. Sales in
the United States of safety-engineered devices grew 4.9% to $194 million in the second
quarter of 2005. International sales of safety-engineered devices grew 33% to $68 million
in the second quarter of 2005. International revenue growth of 14% for the three-month
period was favorably affected by foreign currency translation, primarily due to the Euro.
International revenue growth included 5% due to the favorable impact of foreign currency
translation for the three-month period. As further discussed in our 2004 Annual Report on
Form 10-K, we face currency exposure that arises from translating the results of our
worldwide operations to the U.S. dollar at exchange rates that have fluctuated from the
beginning of the period. We purchase option and forward contracts to partially protect
against adverse foreign exchange rate movements. Our balance sheet remains strong with
net cash provided by continuing operations at approximately $450 million for the six
months ended March 31, 2005 and our debt-to-capitalization ratio (shareholders
equity, net non-current deferred income tax liabilities, and debt) improved to 25.5% at
March 31, 2005 from 28.1% at September 30, 2004. 17
Our ability to sustain our long-term
growth will depend on a number of factors, including our ability to expand our core
business (including geographical expansion), develop innovative new products with higher
gross profit margins across our business segments, and continue to improve operating
efficiency and organizational effectiveness. Numerous factors can affect our ability to
achieve these goals, including without limitation, U.S and global economic conditions,
increased competition and healthcare cost containment initiatives. We believe that there
are several important factors relating to our business that tend to reduce the impact on
BD of any potential economic or political events in countries in which we do business,
including the effects of possible healthcare system reforms. These include the
non-discretionary nature of the demand for many of our core products, which may reduce the
impact of economic downturns, our international diversification and our ability to meet
the needs of the worldwide healthcare industry with cost-effective and innovative
products. Our anticipated revenue growth over
the next three years, excluding any impact relating to foreign exchange, is expected to
come from the following: Results of Operations Revenues Refer to Note 5 in the Notes to
Condensed Consolidated Financial Statements for segment financial data. Medical Segment Second
quarter revenues of $732 million represented an increase of $49 million or 7% from the
prior year quarter, including an estimated $17 million or a 2% favorable impact due to
foreign currency translation. Medical revenues reflect the continued conversion in the
United States to safety-engineered products, which accounted for sales of $115 million, as
compared with $110 million in the prior years quarter. The growth rate of U.S.
safety-engineered products for the three months ended March 31, 2005 was adversely
impacted by a major U.S. distributor reducing its inventory levels. Included in Medical
revenues were international sales of safety-engineered products of $21 million, compared
with $17 million in the prior years quarter. Also contributing to the growth of the
segment in the quarter were strong sales in the Diabetes Care unit of $162 million
compared with $150 million in the prior year quarter and in the international portion of
the Pharmaceutical Systems unit of $126 million compared with $105 million in the prior
year quarter. For the six-month period ended March 31, 2005, U.S. sales of
safety-engineered products totaled $241 million compared with $224 million in the prior
years period. For the six-month period ended March 31, 2005, international sales of
safety-engineered products totaled $39 million compared with $31 million in the prior
years period. For the six-month period ended March 31, 2005, the BD Medical segment
reported 9 percent revenue growth. 18
Diagnostics Segment
Second quarter revenues of $430 million represented an increase of $47 million or 12% over
the prior year quarter, including an estimated $10 million or a 2% impact due to favorable
foreign currency translation. The Preanalytical Systems unit of the segment reported
revenue growth of 5 percent for the quarter. This growth reflects the continued conversion
in the United States to safety-engineered products, accounting for sales of $79 million,
as compared with $75 million in the prior year quarter. The growth rate of U.S.
safety-engineered products for the three months ended March 31, 2005 was adversely
impacted by a major U.S. distributor reducing its inventory levels. For the six-month
period ended March 31, 2005, the Preanalytical Systems unit reported 9% revenue growth.
For the six-month period ended March 31, 2005, U.S. sales of safety-engineered products
totaled $165 million compared with $151 million in the prior years period.
Preanalytical Systems revenues also included international sales of safety-engineered
products of $47 million, compared with $34 million in the prior year quarter. For the
six-month period ended March 31, 2005, international sales of safety-engineered products
totaled $91 million compared with $64 million in the prior year quarter. Revenues for the
second quarter in the Diagnostic Systems unit of the segment increased 20% based,
primarily, on exceptionally strong sales in the quarter of flu diagnostic tests in Japan.
Additional growth was generated by instrument sales of both the BD ProbeTec ET and
BD Phoenix platforms. For the six-month period ended March 31, 2005, the Diagnostic
Systems unit of the segment reported revenue growth of 7%. For the six-month period ended
March 31, 2005, the BD Diagnostics segment reported 8% revenue growth. Biosciences Segment
Second quarter revenues of $204 million represented an increase of $16 million or 8% over
the prior year quarter, including an estimated $5 million or a 2% impact due to favorable
foreign currency translation. Instrument revenue growth continued to be the primary growth
contributor, driven by sales of the BD FACSCanto and BD LSR II flow
cytometers. Also contributing to revenue growth of the segment were increased sales in the
Discovery Labware unit. For the six-month period ended March 31, 2005, the BD Biosciences
segment reported 11 percent revenue growth, representing continued strong sales of flow
cytometry instruments and reagents. Share-Based
Compensation Historically, we accounted for stock
options using the intrinsic value method. This method measures share-based compensation
expense as the amount by which the market price of the stock on the date of grant exceeds
the exercise price. We have not recognized any share-based compensation expense under this
method in recent years because we granted stock options at the stock price as of the date
of grant. Effective October 1, 2004, we adopted
Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based
Payment (SFAS No. 123 (R)). This Statement requires compensation
cost relating to share-based payment transactions to be recognized in our financial 19
statements using a fair-value
measurement method. Under the fair value method, the estimated fair value of awards is
charged against income on a straight-line basis over the requisite service period, which
is generally the vesting period. For the three and six months ended March 31, 2005, we
recorded share-based compensation expense associated with the SFAS No. 123 (R) adoption
and the restricted stock unit awards as follows: Share-based compensation
expense is recorded in corporate unallocated expense for segment reporting purposes.
The expense for the six months ended March 31, 2005 is net of a cumulative pre-tax
adjustment of $1,799 recorded in the first quarter of 2005 resulting from a
change to the estimated forfeiture rate, reflecting actual experience, for current
and prior period unvested stock option grants. For the six months ended March 31,
2005, share-based compensation reduced diluted earnings per share from continuing
operations by 8 cents. Our full year fiscal 2005 share-based compensation expense,
including restricted stock unit awards, is estimated to reduce diluted earnings per share
from continuing operations by approximately 17 cents. The amount of unrecognized
compensation expense for non-vested awards as of March 31, 2005 is approximately $147
million, which is expected to be recognized over a weighted-average remaining life of 3.5
years. See Note 7 in the Notes to Condensed Consolidated Financial Statements for prior
period pro-forma data and additional discussion. Segment Operating Income Medical Segment Diagnostics
Segment 20
Biosciences
Segment Gross Profit
Margin Selling and
Administrative Expense Research and
Development Expense 21
Interest Expense,
Net Income Taxes Income from
Continuing Operations and Diluted Earnings Per Share from Continuing Operations Liquidity and
Capital Resources Net cash used for continuing
investing activities for the second quarter of the current year was $159 million, compared
to $151 million in the same period a year ago. Capital expenditures were $108 million in
the first six months of fiscal 2005 and fiscal 2004. We expect capital 22
spending for fiscal 2005 to be
between $300 million and $325 million. Net cash used for continuing
financing activities in the first six months of the current year was $194 million,
compared to $199 million in the prior year period, and included the repurchase of shares
of our common stock for approximately $225 million, compared to approximately $175 million
in the prior year period. As of March 31, 2005, authorization to repurchase an additional
10.2 million common shares remained. Stock repurchases were offset, in part, by the
issuance of common stock from treasury due to the exercising of stock options by
employees. As of March 31, 2005, total debt of $1.2 billion represented 25.5% of total
capital (shareholders equity, net non-current deferred income tax liabilities, and
debt), a reduction from 28.1% at September 30, 2004. We have in place a $900 million
commercial paper borrowing program that is available to meet our short-term financing
needs, including working capital requirements. There was approximately $140 million
outstanding under this program as of March 31, 2005. As discussed in our fiscal year 2004
Annual Report on Form 10-K, we have in place a syndicated credit facility totaling $900
million in order to provide backup support for our commercial paper program and for other
general corporate purposes. This credit facility expires in August 2009. The 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 measurement dates, this ratio has ranged from 18-to-1 up to
21-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 maturing debt ,
as well as to incur substantial additional debt, if required. During the first quarter of 2005, we
exercised the early redemption option available under the terms of our 8.7% Debentures,
due January 15, 2025. Redemption was for the full $100 million in outstanding principal
and occurred on January 15, 2005, at a price of 103.949%. We had utilized an interest rate
swap (designated for accounting purposes as a fair value hedge) to effectively convert the
fixed rate of interest under the Debentures to a floating rate. The swap was terminated
during the first quarter of 2005, which resulted in a gain, which largely offset the early
redemption premium on the Debentures. BDs 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 BDs products, deterioration in BDs key
financial ratios or credit ratings or other significantly unfavorable changes in
conditions. While a deterioration in the Companys credit ratings would increase the
costs associated with maintaining and borrowing under its existing credit arrangements,
such a downgrade would not affect the Companys ability to draw on these credit
facilities, nor would it result in an acceleration of the scheduled maturities of any
outstanding debt. The American Jobs Creation Act of
2004, which was signed into law on October 22, 2004, provides corporate taxpayers with an
election to claim a deduction equal to 85% of cash dividends in excess of a base-period
amount received from controlled foreign corporations if the dividends are invested in the
United States under a properly approved domestic investment plan. As a result of the
passage of the American Jobs Creation Act, we are currently revisiting our policy of
indefinite reinvestment of foreign earnings. The deduction is subject to a number of 23 limitations and, as of today, uncertainty remains as to how
to interpret certain provisions of this legislation. As a result, although we are likely to repatriate a portion of our foreign
earnings, we have not concluded as to whether, when, and to what extent, we
might repatriate foreign earnings that have not yet been remitted to the United
States. However, we currently expect that any such repatriation would be about
$500 million and that the tax cost would be approximately 6% to 8% of the amount
repatriated. Critical Accounting
Policies Cautionary
Statement Pursuant to Private Securities Litigation Reform Act of 1995
Safe Harbor for Forward-Looking Statements Forward-looking statements are based
on current expectations of future events. The forward-looking statements are and will be
based on managements 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. 24
The following are some important
factors that could cause our actual results to differ from our expectations in any
forward-looking statements: 25
The foregoing list sets forth many,
but not all, of the factors that could impact our ability to achieve results described in
any forward-looking statements. Investors should understand that it is not possible to
predict or identify all such factors and should not consider this list to be a complete
statement of all potential risks and uncertainties. Item
3. Quantitative and Qualitative Disclosures About Market Risk There have been no material
changes in information reported since end of the fiscal year ended September
30, 2004. 26
An evaluation was carried out by
BDs management, with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of BDs
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of March 31, 2005. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and operation of
these disclosure controls and procedures were, as of the end of the period covered by this
report, adequate and effective to ensure that material information relating to BD and its
consolidated subsidiaries would be made known to them by others within these entities.
There were no changes in our internal control over financial reporting during the fiscal
quarter ended March 31, 2005 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. 27
28
The table below sets forth certain
information regarding our purchases of common stock of BD during the fiscal quarter ended
March 31, 2005. Issuer Purchases
of Equity Securities 29
30
31
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. 32
33
Components
of net pension and
postretirement
costs:
Service
cost
$
15,294
$
14,033
$
913
$
875
Interest
cost
16,698
15,423
3,832
3,841
Expected
return on plan assets
(14,710
)
(12,773
)
Amortization
of prior service cost
83
59
(1,558
)
(1,559
)
Amortization
of loss
5,708
4,337
1,520
1,298
Other
(76
)
16
Net
pension and postretirement costs
$
23,073
$
21,003
$
4,723
$
4,455
Components
of net pension and
postretirement
costs:
Service
cost
$
30,588
$
28,066
$
1,826
$
1,750
Interest
cost
33,396
30,846
7,664
7,682
Expected
return on plan assets
(29,420
)
(25,546
)
Amortization
of prior service cost
166
118
(3,116
)
(3,118
)
Amortization
of loss
11,416
8,674
3,040
2,596
Other
(152
)
32
Net
pension and postretirement costs
$
46,146
$
42,006
$
9,446
$
8,910
March 31,
March 31,
Revenues
$
15,236
$
16,890
$
28,675
$
31,301
Income
from discontinued operations
before
income taxes
2,656
1,693
4,232
2,451
Income
tax provision
(1,015
)
(616
)
(1,638
)
(897
)
Income
from discontinued operations
$
1,641
$
1,077
$
2,594
$
1,554
2005
2004
Current
assets
$
24,979
$
26,676
Property,
plant and equipment
9,389
9,562
Core and
developed technology
15,256
15,256
Other intangible
assets
8,729
8,729
Other assets
2,009
3,471
Assets
held for sale
$
60,362
$
63,694
2005
2004
Current
liabilities
$
11,821
$
13,522
Long-term
liabilities
270
659
Liabilities
held for sale
$
12,091
$
14,181
March 31,
March 31,
Domestic,
including Puerto Rico
$
688
$
14
$
1,331
$
(951
)
Foreign
1,968
1,679
2,901
3,402
$
2,656
$
1,693
$
4,232
$
2,451
to
increase revenue growth by focusing on products that deliver greater benefits to
patients, healthcare workers and researchers;
to
improve operating effectiveness and balance sheet productivity; and,
to
strengthen organizational and associate capabilities in the ever-changing healthcare
environment.
Core
business growth and expansion, including the continued transition to safety-engineered
devices;
Expanding
the sale of our high quality products around the globe; and,
Development
in each business segment of new products and services that provide increased
benefits to patients, healthcare workers and researchers.
We believe stock
ownership and share-based incentive awards are the best way to align the interests
of employees with those of our shareholders. Historically, we have used stock
options as our primary form of incentive compensation. In November 2004, share-based
awards were granted to employees under a new long-term incentive program, which
consisted of both stock options and restricted stock unit awards.
March 31, 2005
March 31, 2005
Selling
and administrative expense
$
12,747
$
21,855
Cost of products
sold
2,360
3,908
Research
and development expense
1,448
2,382
Total
$
16,555
$
28,145
Segment operating
income for the second quarter was $162 million compared to $151 million in the
prior year second quarter. Segment operating income growth was in line with
revenue growth, as discussed above. Segment operating income for the six-month
period was $326 million compared to $243 million in the comparable period in
the prior year period which included $45 million of BGM charges. See Note 8
in the Notes to Condensed Consolidated Financial Statements for more information.
Segment operating income for the second quarter was $117 million compared
to $87 million in the prior year second quarter, reflecting an improvement in
gross profit margin of 18%, or $34 million. Segment operating income also reflected
reduced research and development spending of $2 million resulting from the completion
of our cancer biomarker discovery program in the third quarter of fiscal 2004.
Segment operating income for the six-month period was $220 million compared
to $185 million in the comparable prior year period, reflecting an improvement
in gross profit margin of 10%, or $41 million.
Segment operating income was $46 million for the second quarter compared
to $45 million in the prior year second quarter. Segment operating income was
$83 million for the six-month period compared to $74 million in the comparable
prior year period. Segment operating income in the second quarter and six-month
period included increased expenses related to the installation of an enterprise
software system in the United States of $4 million and $6 million, respectively.
Segment operating income was further impacted in the current year by increased
investment, primarily research and development, in the cell imaging business
of $2 million in the second quarter and $3 million in the six-month period as
a result of our acquisition of Atto Bioscience, Inc. which occurred in July
2004.
Gross profit margin
was 50.3% for the second quarter and 50.5% for the six-month period, compared
with 49.8% and 48.2%, respectively for the comparable prior year periods. Gross
profit margin in the current year included share-based compensation of $2 million
and $4 million for the three and six-month periods, respectively, which reduced
gross profit margin by 0.2% for both the three and six-month periods, respectively.
Gross profit margin in the six-month period of the prior year included BGM charges
of $45 million, which reduced gross profit margin by 1.8%. Gross profit margin
for the six-month period of the current year reflected an estimated 0.7% improvement
resulting from a weaker U.S. dollar, an estimated 0.3% improvement relating
to increased sales of products with higher margins, with the remaining 0.6%
improvement associated with, for the most part, productivity gains. These gross
profit margin improvements were partially offset by an estimated 0.9% relating
to higher raw material costs, primarily petroleum-based resins. On a reported
basis, we expect gross profit margin to be approximately 50.5% for fiscal 2005.
Selling and administrative
expense was 26.8% of revenues for the second quarter and 26.7% for the six-month
period, compared with 26.7% and 27.0%, respectively for the prior years
periods. As discussed above, $13 million and $22 million of share-based compensation
expense was recorded to selling and administrative expense for the three and
six-month periods ended March 31, 2005, which amounted to 0.9% for both periods
ended March 31, 2005. Aggregate expenses for the current six-month period reflect
base spending increases of $27 million, of which the rate of increase was in
line with inflation. On a reported basis, selling and administrative
expense is expected to be approximately 26.5% to 26.8% of revenues for fiscal
2005.
Research and development
expense was $66 million or 4.8% of revenues for the second quarter, compared
with the prior years amount of $60 million or 4.8% of revenues. Research
and development expense was $128 million or 4.8% of revenues for the six-month
period in the current year, compared with $118 million or 4.9% of revenues for
the comparable prior year period. As discussed above, $1.4 million and $2.4
million of share-based compensation was recorded to research and development
expense in the three and six-month periods of 2005, respectively. The increase
in research and development expenditures of $10 million for the six-month period
ended March 31, 2005 also reflects spending for new programs in each of our
segments, partially offset by reduced spending from molecular oncology diagnostics
following the completion of our cancer biomarker discovery program in the third
quarter of fiscal 2004. On a reported basis, we anticipate spending to increase
about 12% for fiscal 2005.
Interest expense,
net, decreased to $4.6 million in the current quarter from $8.0 million in the
prior years quarter. Interest expense, net, decreased to $13.7 million
in the six-month period of the current year from $16.9 million in the prior
years comparable period. The decrease was attributed to increased interest
income due to higher interest rates and cash balances, which was partially offset
by the impact of higher interest rates on certain interest rate swap transactions.
The reported income
tax rate was 24.9% for the second quarter. The six-month tax rate was 21.8%
which included an estimated 0.3% benefit relating to share-based compensation
and an estimated 2.3% benefit due to the reversal of tax reserves in the first
quarter in connection with the conclusion of tax examinations in four non-U.S.
jurisdictions. The Company expects the reported tax rate for the full year to
be approximately 24%.
Income from continuing
operations and diluted earnings per share from continuing operations for the
second quarter of 2005 were $187 million and 71 cents, respectively. Share-based
compensation expense decreased income from continuing operations by approximately
$12 million and diluted earnings per share from continuing operations by approximately
5 cents in the quarter. This compared with income from continuing operations
and diluted earnings per share from continuing operations for the prior years
second quarter of $164 million and 62 cents, respectively. For the six-month
periods, income from continuing operations and diluted earnings per share from
continuing operations were $381 million and $1.45, respectively, in 2005 and
$289 million and $1.10, respectively, in 2004. The net effect of share-based
compensation and the reversal of tax reserves described above decreased income
from continuing operations by approximately $9 million and diluted earnings
per share from continuing operations by approximately 4 cents for the six-month
period ended March 31, 2005. BGM charges reduced income from continuing operations
and diluted earnings per share from continuing operations in the prior six-month
period by $28 million and 11 cents, respectively.
Net cash provided
by continuing operating activities, which continues to be our primary source
of funds to finance operating needs and capital expenditures, was $450 million
during the first six months of fiscal 2005, and $480 million in the same period
in fiscal 2004. As discussed in Note 9, net cash provided by operations was
reduced by discretionary cash contributions to pension plans of $103 million.
BDs funding policy for its defined benefit pension plans is to contribute
amounts sufficient to meet the minimum funding requirement of the Employee Retirement
Income Security Act of 1974, plus any additional amounts that management may
determine to be appropriate considering the funded status of the plans, tax
deductibility, cash flows, and other factors. As further discussed in our fiscal
year 2004 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 Companys minimum funding obligations.
The preparation
of financial statements in accordance with U.S. 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, 2004, which
are incorporated by reference in our 2004 Annual Report on Form 10-K. Certain
of our accounting policies are considered critical, as summarized in the Financial
Review section of our 2004 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. Other than
the adoption of SFAS No. 123 (R), as discussed in Note 7 in the Notes to Condensed
Consolidated Financial Statements, there have been no significant changes in
the application of the critical accounting policies since September 30, 2004.
These critical accounting policies have been reviewed with the Audit Committee
of the Board of Directors.
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, 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, gross profit
margins, various expenditures and statements expressing views about future operating
results are forward-looking statements within the meaning of the Act.
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.
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.
Changes
in domestic and foreign healthcare industry practices and regulations resulting in
increased pricing pressures, including the continued consolidation among healthcare
providers; trends toward managed care and healthcare cost containment and government laws
and regulations relating to sales and promotion, reimbursement and pricing generally.
The
effects, if any, of governmental and media activities relating to U.S. Congressional
hearings regarding the business practices of group purchasing organizations, which
negotiate product prices on behalf of their member hospitals with BD and other suppliers.
Fluctuations
in the cost and availability of raw materials and the ability to maintain favorable
supplier arrangements and relationships (particularly with respect to sole-source
suppliers) and the potential adverse effects of any disruption in the availability of
such raw materials.
Our
ability to obtain the anticipated benefits of any restructuring programs, if any, that we
may undertake.
Adoption
of or changes in government laws and regulations affecting domestic and foreign
operations, including those relating to trade, monetary and fiscal policies, taxation,
environmental matters, sales practices, price controls, licensing and regulatory approval
of new products, or changes in enforcement practices with respect to any such laws and
regulations.
Difficulties
inherent in product development, including the potential inability to successfully
continue technological innovation, complete clinical trials, obtain regulatory approvals
in the United States and abroad, or gain and maintain market approval of products, as
well as the possibility of encountering infringement claims by competitors with respect
to patent or other intellectual property rights, all of which can preclude or delay
commercialization of a product.
Pending
and potential litigation or other proceedings adverse to BD, including 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.
The
effects, if any, of adverse media exposure or other publicity regarding BDs
business or operations.
Our
ability to achieve earnings forecasts, which are generated based on projected volumes and
sales of many product types, some of which are more profitable than others. There can be
no assurance that we will achieve the projected level or mix of product sales.
The
effect of market fluctuations on the value of assets in BDs 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.
Our
ability to effect infrastructure enhancements and incorporate new systems technologies
into our operations.
Product
efficacy or safety concerns resulting in product recalls, regulatory action on the part
of the Food and Drug Administration (or foreign counterparts) or declining sales.
Economic
and political conditions in international markets, including civil unrest, governmental
changes and restrictions on the ability to transfer capital across borders.
Our
ability to penetrate developing and emerging markets, which also depends on economic and
political conditions, and how well we are able to acquire or form strategic business
alliances with local companies and make necessary infrastructure enhancements to
production facilities, distribution networks, sales equipment and technology.
The
impact of business combinations, including acquisitions and divestitures, both internally
for BD and externally, in the healthcare industry.
Our
ability to successfully complete the divestiture of Clontech within the expected
timeframe.
The
structure of any transaction involving the divestiture of Clontech and the sales price
and other terms relating thereto.
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.
Item 4.
Controls and
Procedures
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 2004 Annual Report on Form 10-K (the 10-K).
For the quarter ended March 31, 2005 and subsequent thereto, the following
changes have occurred.
Litigation
Other than Environmental Matters
Louisiana Wholesale
Drug Company
As we reported on a
Current Report on Form 8-K filed on March 31, 2005, on March 25, 2005, Louisiana
Wholesale Drug Company, Inc., a Louisiana corporation, filed a purported
class action lawsuit against BD (Louisiana Wholesale Drug Company, Inc.,
et. al. vs. Becton, Dickinson and Company, Civil Action No. 05-1602, U.S.
District Court in Newark, New Jersey). The complaint alleges that BD violated
federal antitrust laws, resulting in the charging of higher prices for certain
BD products to plaintiff and other proposed class members. The plaintiff
seeks money damages in an as yet undisclosed amount. BD believes that the
plaintiffs allegations are without merit and intends to defend this
lawsuit vigorously.
Greiner Litigation
As we reported on a
Current Report on Form 8-K filed on March 31, 2005, on March 29, 2005, BD
and C.A. Greiner & Soehne GmbH (Greiner) executed an agreement
in connection with the patent infringement lawsuit filed by Greiner against
BD in January 2004 in the Patent Court of the Central London County Court
in London, England. The agreement resolves all outstanding claims in the
suit, and provides for, among other things, the grant to BD of a license
to certain Greiner patents.
Qui tam Lawsuit
As we reported
on a Current Report on Form 8-K filed on April 27, 2005, on April 15, 2005,
the U.S. District Court, Northern District of Texas, entered an order dismissing
without prejudice the proposed qui tam action against BD under the
Federal False Claims Act.
Dynovation Litigation
As we reported on a
Current Report on Form 8-K filed on April 27, 2005, on April 21, 2005, a
suit was brought by Dynovation Medical, Inc. (Dynovation) against
BD (Dynovation Medical, Inc., et al v. Becton Dickinson and Company,
Civil Action No. 505CV73, U.S. District Court, Eastern District of Texas).
The plaintiffs assert, among other things, that BD materially breached its
license agreement with Dynovation relating to BDs Insyte Autoguard
IVTM catheter product, and that BDs safety blood collection
sets infringe certain Dynovation patents. Plaintiffs seek monetary damages
and injunctive relief. BD believes that these allegations are without merit
and intends to vigorously defend this lawsuit.
Summary
Given the uncertain
nature of litigation generally, we are not able in all cases to estimate
the amount or range of loss that could result from an unfavorable outcome
of the litigation to which 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 BDs 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.
Litigation - 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 BDs consolidated
results of operations and consolidated net cash flows in the period or periods
in which they are recorded or paid.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds
March 31, 2005
Shares Purchased
(1)
Paid per
Share
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs (2)
of Shares that may
yet be Purchased
Under the Plans or
Programs
January
1 31, 2005
$
56.46
150,000
11,914,414
February
1 28, 2005
$
59.13
650,000
11,264,414
March
1 31, 2005
$
59.07
1,110,000
10,154,414
Total
$
58.88
1,910,000
10,154,414
(1)
Includes for the quarter 4,629 shares purchased in open market transactions by
the trustee under the Deferred Compensation Plan and the 1996 Directors
Deferral Plan, and 10,478 shares delivered to the Company in connection with
stock option exercises.
(2)
These repurchases were made pursuant to a repurchase program covering 10
million shares announced on January 27, 2004 (the January 2004
Program). There is no expiration date for the January 2004 Program. On
November 23, 2004, the Board of Directors of BD authorized an additional
repurchase program covering 10 million shares (the November 2004
Program). There is no expiration date for the November 2004 Program.
Item
3.
Defaults
Upon Senior Securities.
Not applicable.
Item
4.
Submission
of Matters to a Vote of Security Holders.
Our Annual Meeting of
Shareholders was held on February 1, 2005, at which the following matters
were voted upon:
i.)
A management proposal for the election of four directors for the terms indicated
below was voted upon as follows:
Withheld
Basil
L. Anderson
3
Years
Gary A. Mecklenburg
3 Years
James E.
Perrella
3 Years
Alfred Sommer
3 Years
The directors
whose term of office as a director continued after the meeting are: Henry
P. Becton, Jr., Edward F. DeGraan, Edward J. Ludwig, James F. Orr, Willard
J. Overlock, Jr., Bertram L. Scott and Margaretha af Ugglas.
The directors who retired
at the meeting pursuant to the Company's director retirement policy are:
Harry N. Beaty and Frank A. Olson.
ii.) A management proposal
to ratify the selection of Ernst & Young, LLP as independent registered
public accounting firm for the fiscal year ending September 30, 2005 was
voted upon. 197,102,490 shares were voted for the proposal, 13,994,856 shares
were voted against, and 1,682,042 shares abstained.
iii.) A management proposal
to approve the Performance Incentive Plan was voted upon. 199,374,590 shares
were voted for the proposal, 11,533,301 shares were voted against, and 1,871,497
shares abstained.
iv.) A
shareholder proposal requesting that the Board of Directors take the necessary
steps to provide for cumulative voting in the election of directors was
voted upon. 73,603,124 shares were voted for the proposal, 102,719,157 shares
were voted against, 13,862,128 shares abstained, and there were 22,594,979
broker non-votes.
Item
5.
Other
Information.
Not applicable.
Item
6.
Exhibits
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.
(Registrant)
Dated: May
10, 2005
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President and Controller
(Chief Accounting Officer)
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.